Domino’s Pizza - Earnings Call - Q1 2011

Transcript

Speaker 4

Good morning. My name is Carrie, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the conference over to Lynne Liddell, Investor Relations. Thank you. Ms. Liddell, you may begin your conference.

Speaker 0

Thanks, Carrie, and welcome, everyone. We appreciate your participation. We have a few prepared remarks from Michael Lawton, our CFO, and from Patrick Doyle, our CEO today, and then we'll open it up for questions. I'll also remind everybody of our safe harbor statement that you can find in our 8K in the event that we make any forward-looking statement. I also ask the media to be in a listen-only mode since this is primarily a call for our investment community. With that, I would like to turn it over to Mike, who has some opening remarks.

Speaker 5

Thanks, Lynne. Good morning, everyone. We are very pleased with our overall results for the first quarter, given the challenging domestic sales comp that we were rolling over from the prior year. Domestic same-store sales were down slightly at 1.4%, while our international division posted another outstanding quarter with 8.3% same-store sales growth. We continued to drive shareholder value this quarter as our adjusted EPS grew over 20% compared to the prior year. Starting with our global retail sales, which includes same-store sales plus store growth for all the Domino's stores around the world, they grew 6.2% during the quarter, excluding the impact of foreign currency. When including this positive impact, our global retail sales grew 8.2%. Looking at the different business units, as I mentioned, our domestic same-store sales declined 1.4% in the first quarter.

This was rolling over a positive 14.3% domestic same-store sales comp in the prior year, which had been one of the best quarters in our company's history. Broken down, franchisee same-store sales were down 1.3%, while company-owned stores were down 2.3%. We closed the net 20 stores domestically during the quarter, made up of nine store openings and 29 closures. Our overall store growth in the quarter was solely generated by our international division, which grew by a net 48 stores. International same-store sales were positive 8.3% on a constant dollar basis in the first quarter, rolling over a positive 4.2% a year ago. This marks the 69th consecutive quarter of positive same-store sales for this division. Now, our total revenues for the first quarter were $389.2 million, an $8.1 million or 2.1% increase from the prior year.

$7.3 million of the revenue increase was attributable to higher international revenues resulting from both same-store sales growth and store count growth, as well as the positive impact of foreign currency exchange rates. We experienced increased revenue in our supply chain division, largely due to higher commodity prices versus the prior year quarter, and our domestic franchisee revenues were increased by fees we collected related to the insourcing of online ordering and a call center. We also incurred a corresponding increase in general and administrative expenses for those initiatives. Note that this will be a break-even proposition as these are services we offer to help our franchisees gain incremental sales, and the company does not intend to profit from marking these services up. Instead, we hope to build profits for Domino's Pizza Inc. through increased volumes that will help the whole system.

Now, partially offsetting these revenue increases were lower domestic same-store sales and lower revenues because of the sale of 26 company-owned stores during the first quarter of 2011. More detail regarding our first quarter revenue by business unit can be found in our 10-Q that was filed this morning. Moving on to our operating margin. As a percentage of revenues, our consolidated operating margin increased 0.4% from 28.3% to 28.7% quarter over quarter, due primarily to our change in the mix of revenues. This was offset in part by lower company-owned store and supply chain margin percentages, which were both impacted by higher commodity prices. As a percentage of revenues, our company-owned store operating margin decreased 0.8% from the prior year quarter due primarily to commodity price inflation, including cheese and meats. This was partially offset by lower average labor rates.

Our supply chain margin decreased 0.6% from the prior year quarter, primarily due to lower volumes combined with the impact of higher commodity cost. With the pricing of commodities to our franchisees priced on a constant dollar markup, note that changes in commodity cost do not impact our supply chain dollar profit. They do, however, negatively impact our supply chain margin as a percent of revenues. Our top commodities, including cheese, increased versus the prior year quarter. The average cheese block price in the first quarter was $1.69 per pound versus $1.44 per pound last year, which drove an over 5% increase in our market basket in the first quarter. We expect that our market basket for 2011 will increase 3% to 5% over 2010 levels as we roll over higher prices in the latter part of 2010.

Turning to G&A expenses, G&A decreased by $4 million or 7.8% quarter over quarter. However, excluding a $1.8 million of gains from the sale of company-owned operations, which were outlined in our 8-K, G&A was down $2.2 million or 4.4%. This $2.2 million decrease versus the prior year quarter was due primarily to lower performance-based compensation combined with lower store awards and incentives versus our unusually strong operating performance during the first quarter of 2010. Offsetting these decreases in G&A expenses were the additional expenses that I mentioned earlier for insourcing online ordering and a call center.

While G&A expenses can vary up or down quarter over quarter by, among other things, our performance versus plan, we continue to expect that our full year 2011 G&A expense, after excluding the previously discussed gains, will be up by approximately $5 million from 2010 levels, which was previously discussed in our fourth quarter earnings call. Regarding income taxes, in our first quarter, we had a 38% effective tax rate. This was at the low end of our stated range of 38% to 39% due to a reserve adjustment recorded during the quarter related to a state income tax matter. We continue to expect the 38% to 39% will be our normalized effective tax rate for the foreseeable future. Our net income, as reported, was up $2.6 million or 10.6% for the first quarter.

This increase was primarily the result of our strong international operating performance, lower general and administrative expenses, and lower interest expense. This was partially offset by the gains from our 2010 debt repurchases. Our first quarter diluted EPS, as reported on a GAAP basis, was $0.43 or $0.42 when adjusted for items affecting comparability. The $0.42 is a $0.07 or 20% increase from the $0.35 from the first quarter of 2010. Here's how the $0.07 difference breaks down. Our international operating results benefited us by $0.04. Our lower performance-based bonus expense benefited us by $0.02. Our lower interest expense, as a result of our lower average debt balances, benefited us by $0.02, and foreign currency exchange rates benefited us by $0.01. These were partially offset by a $0.02 negative impact resulting from our higher diluted share count, primarily due to our significantly higher average share price.

Now, turning to our financial position, we ended the quarter with $92.9 million of unrestricted cash and generated $23.9 million of free cash flow during the first quarter. In the first quarter, we utilized some of our available cash to repurchase and retire 357,605 shares of our common stock for $5.8 million or an average price of $16.31 per share. Our intention is to continue to opportunistically use our cash flow for the benefit of our shareholders, which may be in the form of debt buybacks or share repurchases. We continue to be comfortable with our debt levels and have the flexibility to extend our existing financing or give consideration to refinancing opportunities. In closing, we will continue to remain focused on driving shareholder value through both our operating performance and our use of our available cash flows.

Thanks for your time today, and now I'll turn it over to Patrick.

Speaker 2

Thanks, Mike. I might sound like a broken record on the call today, but I believe this quarter's financial results proved once again that the Domino's business model worked. The strong combination of a reinvigorated domestic business, a best-in-class international operation, and an efficient capital structure all contributed to an overall win in the quarter. Our work has not gone unrecognized within our industry either. On Tuesday, we announced that we had a back-to-back win, being named Pizza Chain of the Year for the second year running. It's a great honor for us, coming from our industry's leading trade publication, Pizza Today. As I've begun my second year as CEO of Domino's Pizza Inc., I couldn't be more proud to be leading this group of incredible franchisees and team members.

I appreciate the support and input of our shareholders and analysts as I've gotten to know all of you this past year. One observation I've made as I get out into the investment community, as recently as a couple of weeks ago, is that there is still some lingering misunderstanding out there that Domino's is largely a domestic company. This simply is not the case. We are truly a global brand with almost half of our retail sales and over a third of our profits coming from international. I'd like to punctuate that point by beginning with a discussion about our international business. The operative word is growth. We've been growing this business, driving the top line and the bottom line for over 17 straight years.

We've grown in the large markets, even those where other competitors have struggled, like the UK, and we've consistently added mid-size and emerging markets to our list of 70 markets. We've done this without substantial investments using the master franchise model. Our master franchisees have been successful, gaining the number one or number two position in pizza delivery in the majority of markets around the world. Our international operators are driving robust store returns. They run strong and focused operations and continue to build stores and drive sales growth at rates that are among the best in the restaurant industry. For the quarter, we posted a very respectable 8.3% sales comp, contributing to a 20% increase in royalties over last year. As we typically do, I'd like to highlight some specific markets. In Turkey, sales were strong due to value promotions as well as new products supported by TV.

Spain has done remarkably well since their conversion to Domino's in 2009. They drove excellent sales in the first quarter through smart value promotions and online sales. In Asia, a promising medium-sized but growing market for us is Malaysia. Our Domino's stores there had a tremendous quarter based on new product news. I'll continue to make it my mission to remind you of our global reach, which is actually not bad duty since I have the privilege of reporting such great results internationally. Turning to our U.S. business, I feel very proud of our team here as well. Although we will never be happy about posting a negative sales comp, we certainly had a tall mountain to leap over in order to lap our 14.3% from last year's first quarter. While we're not satisfied, we feel good about our two-year performance for the first quarter of 12.9% up.

We're pleased that the pizza and chicken promotions we featured during the quarter resonated with our consumers. We hadn't promoted chicken as a brand since 2002, and we're glad we came back to it as it performed well. Our new chicken did not cannibalize pizza sales but actually helped drive traffic from our larger base of existing consumers, as well as increasing order frequency. The consumer trends that began with our new pizza promotion in 2010, improved customer frequency and ordering trends, continued through the first quarter of this year. Our ongoing ability to retain customers with our better pizza, improving levels of execution by our franchisees and corporate stores, and marketing messages that continue to connect with our customers helped us nearly lap last year's big comp.

In addition, we continue to grow our carryout business, giving us a good opportunity to extend our value message to consumers and build lunch business while retaining our primary focus of pizza delivery. I'm pleased with where we stand today. Despite stubbornly high unemployment, as well as rising gas and grocery prices, we're still bringing customers in the door with a promise of better food quality, great service, and good value, and a message of transparency and honesty from our brand. Despite the world around us, we've worked hard to invest in our brand with new products and breakthrough advertising, as well as our focus on franchisee profitability and execution, and a big focus on the important area of technology.

We've done all of this in some of the toughest times possible and plan to continue to control and manage the things we can going forward, even if the macro environment continues to be difficult. While concerns of increasing commodity costs have struck fear in the hearts of many television pundits, we believe that we managed this area during the quarter very efficiently, along with our franchisees. As a system, we've become pretty adept at managing fluctuating food costs over the years, and our supply chain system has put us in a good position in terms of negotiating contracts. Of course, recently lowered cheese prices don't hurt either. I'll remind you that we're over 90% franchised domestically, so the only direct commodity cost impact you'll see is at our corporate stores.

We're very focused on store costs as they impact our entire system, and we continue to work to drive further improvements in the level of profitability for our franchisees' stores. Lastly, a brief word on our balance sheet. As Mike reviewed and as time has proven out, I believe we have a very efficient capital structure for our business, which is based on having appropriate leverage levels supported by the strong weekly free cash flows of franchise business. We like the position we're in, with the ability to use our free cash flow to maximize the returns for our shareholders and the flexibility to refinance our debt when we see the right opportunity. With that, I'd like to open it up to questions.

Speaker 4

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Joe Buckley with Bank of America.

Speaker 3

Thank you. Can you hear me OK? Can you hear me? Very good. I wanted to ask about the first quarter marketing. If you could talk a little bit about the media weights year over year. I think the chicken focus in the marketing was just the last month of the quarter, if I'm correct. Maybe talk about, as much as you can, the balance of the year from a media weight standpoint.

Speaker 2

Yeah. Joe, the answer is, you know, what we did in the first quarter in terms of media weights was very consistent with where we've been and very consistent with where we expect to be in the following quarters. Nothing unusual, higher or lower in the first quarter.

Speaker 3

OK. Can you talk a little bit about when you started featuring the chicken, if the chicken attachment rates went up, and also how the check fared during the quarter, given the chicken focus?

Speaker 2

We certainly sold more chicken. We hadn't been on air with chicken for nine years. Moving back to chicken and relaunching it, we definitely sold more chicken. We feel very pleased with kind of where it came out. I'm not going to go into the specifics on where we wound up with the ticket, except to say the chicken is clearly for the vast majority of the orders an add-on. It is certainly going to help in terms of raising the overall bundle. Overall, we were very, very pleased with how chicken performed.

Speaker 3

Can you say if the check was up or down year over year for the quarter?

Speaker 2

I don't think we get into the specifics on that. Again, it was kind of the last month or five weeks of the quarter, so most of the quarter, it wasn't out there.

Speaker 3

OK. Thank you.

Speaker 2

Thanks, Joe.

Speaker 4

Our next question comes from Jeffrey Bernstein with Barclays Capital.

Speaker 1

Great. Thank you. Just a couple of questions. Patrick, maybe first on the comp trends. It seemed like when you guided us last quarter, which I know you don't normally do, but you kind of implied or said negative trends. It seems like trends improved for the industry and perhaps for yourself as well throughout the quarter. Maybe a down 1.4% was better than you were thinking. I'm just wondering whether you can give any color in terms of the directional trends through the quarter and whether you'd be willing to make a similar stab in terms of the second quarter, because I know two-year trends would represent a return to a solid positive comp in the second quarter based on the trajectory you've been on.

Speaker 2

Yeah. I think, Jeff, it was unusual in the first quarter for us to do that, as you know. We just felt like, given that we knew it was going to be negative when we were having the conference call last time, we really felt like we needed to get that out there. I think you're going to see us now return to quiet unless there's something material that we feel like we need to disclose. I guess I'd say go back to looking at our long-term guidance for where we think this brand is going to be domestically. That's kind of where we are over the medium to long term. Obviously, there's going to be fluctuations around that quarter to quarter, but that's the right long-term answer. Within the quarter, I'm definitely not going to get into kind of splitting up how that was going month to month.

What I would tell you is I'm encouraged by the overall category. I think we were all a little bit discouraged when we saw Pizza Hut's results, and we were all pretty encouraged when we saw Papa John's results. It's pretty consistent with what we're seeing in the overall category, that the category is clearly getting healthier again. We think we've had an awful lot to do with that. We feel better about where the category has been from a kind of sales and traffic standpoint versus where it was for quite a few years prior to the last 18 months or so.

Speaker 1

Got it. On the commodity side, I guess you guys put in the prepared remarks, Mike, I guess 3% to 5% basket of inflation for 2011. I know you had previously been saying like 3% to 4%. I guess we were surprised only because cheese prices since the last call when it was pushing $2 have come down pretty meaningfully. I'm just wondering if you could talk about perhaps what's working in the other direction and whether you've gotten any pushback as you're trying to promote some products above the $5.99 price point to perhaps cover some of that inflation.

Speaker 2

Yeah. I think what I'd say, Jeff, is on our last call, we actually said 3% to 4%, and it was based on an assumption that cheese was actually going to go down from where it was at that point. It did go down. We're maybe typically not going to do quite that well on calling it exactly where it came out. We got that one right. I would tell you the slight increase you're seeing there in the range is actually that cheese settled in a little bit higher than we thought it was going to be for the rest of the year. We're kind of, as we look at the overall, while it did go down as we expected, I think we're looking at maybe $0.05 more on a per pound basis for the year than we had previously been looking at.

I think the overriding thing on commodities is, first of all, I would re-stress with everybody, we're pretty comfortable with where commodities have been. It's been in line with our expectations. We're not getting pressure on labor costs. Kind of a 3% to 5% number on food when labor is relatively flat is really a very manageable thing at the store level. Add to that the fact that we are overwhelmingly franchised. I think it's part of why you saw results that may be surprised a bit on the upside. The other thing I'd say is the commodity costs that we had in the first quarter are pretty consistent with what we're seeing for the rest of the year. It'll continue to be higher than it was versus the previous year.

From kind of an absolute sequential basis, we're seeing commodities being pretty much flattish from here on out for the year.

Speaker 1

OK. Just lastly, I think you mentioned consideration to refinancing opportunities. That's how it was kind of phrased in the release. I know you guys have until likely until 2014, year one year extensions. I think you mentioned last quarter that it really wouldn't be likely or prudent to do any kind of refinancing before early 2012 due to kind of prepayment penalties. Is that still fair to say, or is that a change in language or thought process where you'd consider refinancing before that?

Speaker 2

I don't know if that was exactly what I said the last time. I think it's really more that we've got to take into consideration the fact that there is a prepayment penalty. That's really not a change in posture for us. The markets are clearly open for us. The markets are pretty attractive right now. If we go before January 2012, we're going to have to cut a check. That comes into the calculations as we look at what the right timing would be, whether it's prior to next January or even past that point. As we look at it today, we think the market's pretty attractive. Clearly, Domino's Pizza Inc. would have no problem going out and doing it right now.

We just have to take into account that if we move prior to next January, there's a payment that's going to have to be made, and that's going to continue to work down over the course of the year.

Speaker 1

Got it. Thank you very much.

Speaker 4

Our next question comes from Alvin Concepcion with Citigroup.

Speaker 1

Hey, good morning. Sorry, I apologize if I missed the first part of the call, but I just wanted to get some more color on the drivers of the same-store sales performance in the U.S. It came in a bit better than a lot of people were expecting. I guess what I'm trying to get at is the carryover from momentum on the new core pizza from last year, or is it more related to some innovative marketing or other products?

Speaker 2

Yeah. First of all, I mean, we feel pretty good about where the sales came in, but they're down. I'm never going to be happy with a negative quarter. That said, the biggest thing affecting kind of the percentages was the fact that there was a lot of trial in the first quarter last year. After that, kind of the second through fourth quarters last year had far more to do with higher retention of customers and higher frequency from our customers. We saw that continue into the first quarter. The first quarter was mostly, just from a sheer time standpoint, about the continuation of the two medium, two topping for $5.99 into January and I think most of February. The end of it was chicken relaunch. We felt good about the chicken relaunch as well.

I think what you're seeing in our numbers is a continuation of the trend we've talked about for the last four or five quarters, which is consumers like our pizza better than they used to. We're executing at a higher level, so we're keeping more of them in the franchise, and those who are in the franchise are buying more often.

Speaker 1

Great. I apologize for the background noise. Just one more question on the new core pizza as well. I mean, I believe it wasn't a major driver for international markets, and it wasn't launched in most markets. I wanted to see if you could give us an update on what markets currently have the new core pizza and how it's been received there.

Speaker 2

Yeah. The only market that's really relaunched exactly the same way we did is Mexico. Mexico has, at least of the major markets, done well with that relaunch. The reason why Mexico is really the only one is they were the only ones that were making fundamentally the exact same pizza that we were here. When you go outside of the U.S., mozzarella cheese as kind of the best example is pretty different outside of the U.S. versus inside the U.S. Inside the U.S., cows eat grain. Outside of the U.S., they eat grass, and you wind up with a reasonably different flavor profile and color to the cheese outside of the U.S. versus inside the U.S. The exact same kind of relaunch hasn't happened outside of the U.S.

What you're seeing from the international business, as you kind of pointed out, with the exception of Mexico, isn't about the relaunch on the pizza. It's really a continuation of now 69 straight quarters of doing just a great job out of international. I'll say it every single quarter, we just really believe we've got a best-in-class international business. Consumers and our position with consumers is absolutely terrific. The store-level economics are strong, and that's driving store growth. It was another in a long string of really, really positive international performance. It was geographically diverse. It was really hitting in virtually all of our markets.

Speaker 1

Great, thank you very much.

Speaker 2

Yep.

Speaker 4

Our next question comes from John Glass with Morgan Stanley.

Speaker 1

Thanks very much. My question revolves around gas prices, and two parts to it. One is, while logic would tell you higher gas prices would curb demand, there isn't a lot of good data out there from restaurant chains that actually suggest there's that direct relationship. As you look at your daily or weekly sales and you compare them to gas prices, have you seen any change in behavior as gas prices have gone up? That's part one. Part two is, have you implemented or do you think you might need to implement a delivery surcharge now, or what's the right level of gas prices before you need to do that or your franchisees start doing that? Thanks.

Speaker 2

Yeah. Yeah, John, I think the answer is we have not seen really any change from a consumer behavior standpoint. That's not showing up in our business from at least where gas prices are today, though I see oil is down pretty aggressively today. We haven't seen that in the business. We will pass through when there are increases in gas prices, then we're going to wind up reimbursing our delivery drivers at a higher rate, and that happens kind of over time. We have an ability to take an increase in our delivery charge. We certainly don't see doing kind of a separate surcharge on top of the delivery charge. That's what the delivery charge covers. It's possible that we could take an increase there if gas prices continued to move up from here, and that's a likely place where we would do it.

You saw where our margins were in the first quarter, and the direct impact of gas prices on our store-level P&L just isn't that big.

Speaker 1

Just so I understand the mechanics of it, the delivery charge goes into the comp store sales base, correct? You have not changed it recently?

Speaker 2

It does go into the comp sales base. Our franchisees control their delivery charge and their delivery pricing. I'm sure some of them have taken a little bit, but from an overall standpoint, it certainly hasn't been a big move.

Speaker 1

Thank you very much.

Speaker 2

Yep.

Speaker 4

Our next question comes from Peter Saleh with Kelsey Advisory.

Speaker 6

Great, thanks. Just wondering where we stand on just, I guess, accelerating unit growth in the U.S.

Speaker 2

I mean, I think what we've said is last year we wanted to get back to flat, and we got all the way to plus 2%. Our growth story from a store growth standpoint is going to come overwhelmingly from international, at least in the near term. We would hope to have a modest growth in the U.S. this year. I certainly don't want to go backwards. In terms of building out models, model the majority of our store growth coming from our international business.

Speaker 6

Given where current foreign exchange rates are, what do you guys think the impact would be on the full-year earnings?

Speaker 5

First, last year, we are certainly in a better position. We saw approximately $0.01 addition to earnings in this quarter. We could continue to see an impact like that or higher on slightly higher throughout the rest of the year.

Speaker 6

Great. Thank you.

Speaker 4

Our next question comes from Mitch Spicer with Buckingham Research.

Speaker 1

Great. Thanks very much. First, on the food cost outlook, you indicated 3% to 5% for the year. It was up 5% in the first quarter. That does imply less year-over-year growth for the remainder of the year. Could you talk about what assumptions are behind that?

Speaker 2

Yeah. I think, Mitch, the overall answer is plus or minus a little bit on things. You're going to see the food costs stay pretty consistent through the rest of the year. You're right from a pure math standpoint. The 5% up in Q1 on a year-over-year basis will probably be at the high end of what we'll see for the year. We've got a lot of things locked in through the end of the year. Really, the one to watch, as always, is cheese. Our best bet right now is that it's going to stay relatively close to where it is right now. Cheese is the one that often gives the biggest surprises, up or down. That's the one to kind of watch.

Assuming cheese stays relatively flat from here on out, the absolute food costs through the rest of the year are probably going to stay pretty consistent with where they were in Q1, which to your point means the percentage year-over-year increase will probably ease a little bit over the course of the year.

Speaker 1

OK. Thanks. Separately, you mentioned growth in carryout. Does that imply that in the first quarter, your carryout business comp was up year over year?

Speaker 2

Yeah. I'm not going to cut it apart quite that finely, but what I'd tell you is we've seen nice movement in our carryout business over the course of the last couple of years. We continue to see that. It's been a good-performing part of the business overall, and it's an area that we continue to focus on, probably more than we have in the past.

Speaker 1

OK. Great. On e-commerce or online ordering in the U.S., can you give us a sense? Has that percentage moved at all? I believe it's running around 25%.

Speaker 2

Yep. That's exactly right, which is up a little bit. I think we were kind of saying 20% to 25% before, and now it's pretty much right on top of the 25% of sales level.

Speaker 1

Is there any reason why that hasn't moved up? It seems like in a lot of your international markets, it has, and even just in general with people online more and using smartphones more.

Speaker 2

Yeah. I think you're going to continue to see it move. Our experience in the past is that it actually dips just slightly, usually in the summer, or at least the upward trend may slow down just a little bit in the summer. I think people are just spending more time outdoors and maybe students going back home. I think overall, we're going to continue to see the trend move up. We are higher in a number of markets outside of the U.S., in some cases significantly higher, pushing up towards the 50% level. We continue to believe that that number is going to move up.

Speaker 1

Great. Last quarter, you did indicate some online ordering news is coming. Can you maybe comment a little bit more? Of course, that word "app" always strikes a chord. Is there any reason why you wouldn't want to release an app in the U.S.?

Speaker 2

Absolutely. There is no reason we would not want to. I think that's a double negative. Do I think there will be an app coming? Yes.

Speaker 1

Great. Thanks. On the refi, or I should say on the May call, it was $50 million. Can you just give us a sense what that is, and because it does go down every week, what number are we at, whether beginning of the second quarter or as of today?

Speaker 2

Yeah. Actually, we're at about 50 right now, so you're looking at about $1.5 million a week downward. It moves around just a little bit with the treasuries. I think we're right around 50 right now. It has to get to zero by next January, so the average is going to be about $1.5 million a week, and you'll see it'll fluctuate around a little bit week to week based on treasury.

Speaker 1

OK. Great. That's all I need to know. Thank you very much.

Speaker 2

Thanks, Mitch.

Speaker 4

Our next question comes from Mark Smith with D.A. Davidson & Co.

Speaker 6

Hey, guys. First, Mike, just a clarification question. I jumped on a little late. You were talking about G&A for 2011. Was that number about $5 million higher?

Speaker 5

Excluding the gains that we booked in the first quarter, the increase that we expect for the year over last year is approximately $5 million. That'd be correct.

Speaker 2

For the year?

Speaker 5

For the year.

Speaker 6

For the year, can you walk us through any of the pieces on that maybe we should be looking at or paying more attention to?

Speaker 5

OK. The biggest change from last year in terms of decrease would be the variable compensation. Last year was obviously a blowout year for us. We had higher than normal accruals for variable comp. That came down. Offsetting that are some increases as we continue to add some people in the international business to support our growth, as well as the fact that we brought our call center and our online ordering in-house. As a result of that, we're booking additional revenue, and we'll also have an offset in G&A that is significant. As a result of that, for the year, we'll be up about $5 million.

Speaker 6

Second, just going back to some of the unit growth, looking at this quarter, we saw fewer domestic openings than we've seen for a little while and more international closures. Is there anything that we should read into that, or was that just kind of a timing issue here in Q1?

Speaker 2

Yeah, it's just a little bit of a timing issue. Wouldn't read into that.

Speaker 6

OK. Perfect. Thank you.

Speaker 2

Yep.

Speaker 4

Our next question comes from Chris O'Cull with SunTrust Bank.

Speaker 1

Good morning, guys. Patrick, my question relates to rising gas and commodity prices. What's your comfort with your ability to raise the check average if we see further inflation? Specifically, will you continue to use the $5.99 two medium Pies promotion if we continue to see a lot of inflation in gas commodity prices?

Speaker 2

Look, we need to manage the balance between traffic and doing what our consumers need us to do from a value perspective with the margins in the business. I think what you saw in the first quarter was some indication that we were doing pretty well managing labor, while at the same time, there was some pressure on the food front. It is more than just kind of a simple equation of food goes up, then you've got to figure out how you're going to cover for food going up. We did that despite the fact that we liked the momentum in the first quarter. We did have a negative comp year over year, and we managed those margins within that. Do we have the ability to take up price if we needed to? Yes. Taking price, you're always going to affect demand.

The elasticity curve works in this business like every other one. Our job is to manage the whole P&L, including pricing, as carefully as we possibly can and try to do it in a way that's smarter than our competitors and use it as a way to gain share and to grow the bottom line at the store level. I know that's maybe not as clean an answer as you'd like, but it's really the reality of it. We are constantly looking at it, looking at the volumes coming into the stores, looking at how consumers are reacting to promotions that we've got out there, looking at smart ways to take a little bit of margin here and there if we can. At the end of the day, I think what you saw in the first quarter is we managed it pretty darn well.

Speaker 1

Yeah. That's fair. Just as a follow-up, Mike, and I apologize if I missed this in your script, but in the queue, it said that labor costs were down quite a bit because of lower average wage rates. Is that referring to less overtime in the stores?

Speaker 5

There's a little bit less overtime. There's also application of tip credit in some states for drivers. While our franchisees have often used tip credit, which of course would be very customary in the restaurant industry, our corporate stores generally did not until last year. We are lapping some benefit on that, as well as the fact that we had lower overtime. Last year, when we had the plus 14.3%, we certainly were out very aggressively trying to staff up our stores, but we did incur more overtime last year for that too.

Speaker 1

I figured that was good. When did the stores really get their arms around the labor schedule? Given the comp growth you had last year, when do you feel like they started to manage overtime a lot better?

Speaker 2

Yeah, after the first quarter.

Speaker 1

OK. Great. Thanks, guys.

Speaker 2

Yep. We didn't correctly call the 14.3% last year either.

Speaker 4

Our next question comes from Michael Wallaben with Sidoti & Company.

Speaker 6

Good morning. Thanks. Just quickly here, can you give us your thought process walking through on the amount of share repurchases that you did during the quarter? You're certainly seeing a lot of options be exercised given the share price, and you built some cash on the balance sheet. Any thoughts on accelerating those repurchases, or are you looking to build that cash balance moving forward?

Speaker 5

The real key, as you point out, was yes, we built some cash, but we had a very short window for buying back stock in the first quarter. We reported our fourth quarter earnings late into the open trading period, so we were really limited on what the opportunities were. That'd be the key takeaway.

Speaker 6

Moving forward, could you give us a better idea of how to think about the share count? Are you going to be looking just to offset dilution or maybe a little more aggressive than that?

Speaker 5

I think what we've said and that we're sticking with is that we're continuing to look at whether or not we might buy back some debt. We're continuing to look at buying back shares based on pricing. We've got a lot of flexibility in our situation right now, and we're going to take advantage of that.

Speaker 6

All right, thanks.

Speaker 4

Our next question comes from John Ivankoe with J.P. Morgan.

Speaker 1

Thanks. Hi, guys. This is Ahmed Gautam on for John. I guess historically, you've taken leverage to about 3 times and then leveraged up. I just wanted to know what your thoughts are about taking leverage up again and whether you could do it at a, you feel like you could do it at a higher level than maybe in the past.

Speaker 2

Yeah. First, the answer to could we is clearly yes. In this market, there would not be a problem for us to increase leverage should we choose to do that. I think if you look at the history, we've gone up to the 6 range and down to the 3 range and then back up again. The last time around, we went up to the 7 range, probably a little higher than was entirely comfortable. We've just never had a problem managing that level of leverage, and we think it's appropriate given the fact that we are very CapEx light and that our cash flow is very, very consistent. We continue to believe that a nicely levered balance sheet is the best way to generate good returns for our shareholders.

What that means in terms of when we do a refinance, exactly where we wind up in terms of our leverage, I don't know, because it's going to depend on when we do it and the rates then and the exact conditions in the marketplace when we decide to pull the trigger on that. If you ask your question specifically, could you go up today, the answer is clearly we could go up today. No, we would, but we clearly would have the ability to if we chose to.

Speaker 1

In terms of your interest rate, if you were to simply roll the debt forward that you have now, would it stay the same, rise, or drop?

Speaker 2

It would depend on how we did it, if we stuck with the ABS structure or if we went back to bank bonds. Bank bond is higher still than the ABS. The ABS market is still open. I think you'd see things, bank bond probably being a little higher, ABS right now. It depends on kind of what we do with leverage levels out there. There have been some deals done that were even lower than where we are.

Speaker 1

OK, thanks, guys.

Speaker 2

Yep.

Speaker 4

We have a follow-up question from Mitch Spicer with Buckingham Research.

Speaker 1

Great. Thanks. Can you give us your gross debt to EBITDA and net debt to EBITDA as you calculate it?

Speaker 2

Yes, we are going to have to look. The papers we are shuffling are looking.

Speaker 1

OK. While I have you on the line, just on the labor topic, you did leverage your labor in the first quarter. Given all the things you mentioned, do you expect labor leverage throughout the remainder of the year?

Speaker 2

First of all, it's going to depend on what our volume is.

Speaker 1

Sure.

Speaker 2

That's the best way to leverage it. I think the kind of efficiencies that you saw in the first quarter are something that we can continue to do. I would remind you, though, that the first quarter does tend to be a little bit higher on sales, on weekly sales, than the other four quarters. Typically, it's a little lower on labor than the other periods. It depends on volume in those periods and depends on exactly what we're promoting, etc.

Speaker 5

The answer on leverage levels is, we really don't look at gross and net so much as we're focused on our total debt excluding, without capitalizing operating leases. We're looking at a 5.4 times divided by our trailing EBITDA.

Speaker 1

On gross.

Speaker 5

Yeah. We don't really, we haven't calculated the net when you look at the higher than normal cash balance, which you could net against that, could choose to. We haven't done that because we don't typically look at it that way.

Speaker 2

You're looking at, I mean, if you did, you're looking at $0.3, $0.4 off of that, something like that.

Speaker 1

Got it.

Speaker 2

be down in the 5.0%, 5.1% range if it was net.

Speaker 1

OK, just using that 5.4, can you just remind us?

Speaker 2

Yeah.

Speaker 1

I hear you. Can you remind us just versus the 5.4 number, which is the gross debt number, what it was in the fourth quarter and what it was in the first quarter last year?

Speaker 5

At year end, it was 5.5. First quarter of last year, we'll have to look up.

Speaker 2

Back to the books.

Speaker 1

OK, I could follow up with you on that.

Speaker 5

OK.

Speaker 1

OK. Thanks.

Speaker 4

At this time, there are no further questions. Are there any closing remarks?

Speaker 2

I want to just thank all of you for participating in today's call. We're pleased to report a great quarter. With a new base to grow from domestically, our best-in-class international business, and an optimized capital structure, we're really pleased with where we came out for the quarter. I look forward to sharing our second quarter results with you on July 26. Thanks, everybody.

Speaker 4

This concludes today's conference. You may now disconnect.