Domino's Pizza Inc (DPZ)

DPZ 
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Domino's Pizza, Inc. (DPZ)

2013 Consumer & Retail Conference

March 13, 2013 10:30 am ET

Executives

J. Patrick Doyle - Chief Executive Officer, President and Director

Analysts

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Presentation

Joseph T. Buckley - BofA Merrill Lynch, Research Division

[Audio Gap] continue with the restaurant portion of our consumer conference with Domino's Pizza. Domino's Pizza is run by CEO, Patrick Doyle. And I find myself sitting in my living room very often watching television saying, "I know that guy." I envision being CEO has become a primary spokesman for their advertising campaign. With that, I'd like to turn it over to Patrick. Thank you for joining us.

J. Patrick Doyle

Thanks, Joe. Or I can give the facts presentation. Good morning, everybody. Thank you for joining us. I'm going to start with giving you kind of the broad overview of the Domino story. And, I mean, we'll sit with Joe and we'll take you through some Q&A. Standard forward-looking statements.

So investment thesis on Domino's. Fundamentally kind of 4 areas that I'm going to talk about today. First is the domestic part of the business, a kind of dramatically improved brand over the course of the last couple of years since we relaunched at the beginning of 2010. We are over 90% franchised in the U.S. So very little CapEx going back into the business as a result of that. And a supply chain that we sell all the food product out to our stores. Great value-added opportunity. We continue to drive value for our franchisees there. I'm going to talk about each of these in more detail. The international business, 100% franchised, now a little bit bigger than our domestic business. It is a master franchise model. So in general, 1 entity, 1 person, 1 company will have the rights to 1 market. There are some small exceptions to that, but overall, 100% franchised. So a pure cash flow business.

We have had 76 straight quarters in a row of positive same-store sales in our international business. That's 19 years without a negative comp, something that we are very proud of. And to hit my quota with my communications team, I have to say that at least 5 times while I'm up here today, but very, very strong same-store and store growth.

Third part of the story has really been around technology, and that's been relatively a new part of the story over the last 3 to 5 years. It's now over 35% of our business, both domestically and internationally. Very important part of the story, and I'll talk about that a bit more. And then finally, our balance sheet. Because we are generally working off of the top line because we're drawing royalties, very consistent cash flow in the business, not a lot of operating leverage. So we believe the right answer is to operate with meaningful financial leverage, and have for very long time. And then cash used in the way that we think is going to generate the best return for our shareholders. And there's been some news on that front with an initiation of a dividend here just recently.

So first overall, we are now a little bit bigger outside of the U.S. than we are inside the U.S. As I said, we own just under 400 stores domestically. So over 90% franchised. We also own 19 supply chain centers where we are making the dough balls and basically cross-stocking the pepperoni and the cheese and all the rest of it and delivering that out to the stores. On the international side, 100% franchised. We don't own any company stores. We do own the supply chain centers in Canada. Everywhere else outside of the U.S. and Canada, the supply chain centers are owned and operated by our master franchisees.

On the domestic side of the business, they say a franchise model generates very good returns. Very focused model on delivering carryout footprints are relatively small, so the investment in the stores is relatively low, which generates a strong return for our franchisees.

Our cash flow from those stores has been kind of in the 50 to 80 range. We're now near the high end of that and had a very nice improvement in store-level profits over the course of the last 3 or 4 years.

On a unit, that costs, kind of, $200,000 to $300,000 to build new, a very nice return on investment for our franchisees and something that we're very focused on continuing to improve.

And domestically, really kind of 2 ways to look at this. The answer is still relatively low market share, and market share gains domestically is where we think a lot of our growth has come and is going to continue to come from. So about 11% of the total pizza category in the U.S., kind of 22%, 23% on the delivery side of the business, which is kind of the core of our business, has been for a long period of time, but we think a real opportunity to continue to take share. And an important part of all this plays over in technology. You've seen some share gains not only for us but also for our other national competitors over the course of the last couple of years, and we think technology is a big part of what's driving those share gains against the smaller players who don't have kind of the same technology platforms that we do.

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