Domino’s Pizza - Q4 2023

Transcript

Operator (participant)

Thank you for standing by, and welcome to Domino's Pizza's fourth quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star one one on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star one one again. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Greg Lemenchick, Vice President, Investor Relations. Please go ahead, sir.

Greg Lemenchick (VP of Investor Relations)

Good morning, everyone. Thank you for joining us today for our fourth quarter conference call. Today's call will begin with our Chief Executive Officer, Russell Weiner, followed by our Chief Financial Officer, Sandeep Reddy. The call will conclude with a Q&A session. The forward-looking statements in this morning's earnings release and 10-K, both of which are available on our IR website, also apply to our comments on the call today. Actual results or trends could differ materially from our forecasts. For more information, please refer to the risk factors discussed in our filings with the SEC. In addition, please refer to the 8-K earnings release to find disclosures and reconciliations of non-GAAP financial measures that may be referenced on today's call. This morning's conference call is being webcast and is also being recorded for replay via our website.

We want to do our best this morning to accommodate as many of your questions as time permits. As such, we encourage you to ask one question only. With that, I'd like to turn the call over to Russell.

Russell Weiner (CEO)

Thanks, Greg. I thought you were gonna sing the opening as we discussed, but, I guess we'll let that pass today. Welcome to your first call here on Domino's, and good morning to everyone joining us. Our strong Q4 demonstrated that our Hungry for More strategy is already delivering results. Our positive U.S. same-store sales and transaction growth in both delivery and carryout underscore the strength and momentum that we're building in our business. These results and the initiatives that I'll cover today give me confidence in Domino's ability to continue to drive meaningful value for shareholders. We're excited to share an update on the business through the lens of our Hungry for More strategy.

Now, as a reminder, Hungry for More is our new strategy around what we're going to do to deliver over the course of the next five years, more sales, more stores, and more profits. We're gonna accomplish this through our four more pillars, M-O-R-E, that I'll share a brief update on. Let's start with M. M is for the Most Delicious Food. Now, we know we have the Most Delicious Food in the industry, but you know what? It's time to talk about it more. It's time to show it more, and we're already doing that. We're currently on the air with Pan Pizza advertising for the first time since 2014. We call Pan Pizza our best-kept secret. It's time to change that. Pan Pizza is a delicious product made with fresh, never frozen dough. It also showcases the variety of crusts we have to offer.

You're probably also noticing a shift in our advertising as we're beginning to romance the product more to showcase the deliciousness of our food. You can expect this to continue throughout the year. The O in Hungry for More stands for Operational Excellence, and this is how we're gonna deliver on our promise to have the Most Delicious Food, by consistently driving a great experience with our products. As we've noted before, we made meaningful strides operationally in 2023 with our Summer of Service program, which has resulted in service times being back to pre-COVID levels. But we're never satisfied, and we wanna continue to get better. Our operators and our franchisees, we are hungry for more. In 2024, we're rolling out a new service program. We're calling that More Delicious Operations.

This program will be a series of 3 product training sprints focused on our dough, how we build and make our products, and how we cook them. All of this is being done with a keen focus on driving more consistency in our food by providing the proper teaching, tools, and processes for our team members to succeed. Our third pillar is R, for Renowned Value. We've always been known as a premier value player, and we believe this can continue to be a differentiator for us in 2024 through our improved loyalty program, our national promotions, and our rollout on Uber. Domino's Rewards is off to a great start and was a key driver of our strong comp performance in the fourth quarter when we saw positive sales and transactions in both our U.S. delivery and carryout businesses. We've also seen the following: an uptick in active members.

We are up 3 million active members in 2023, with 2 million plus since our relaunch in September. Domino's Rewards ended the year with approximately 33 million active members. A big driver of the increase in active members, as well as the early success of the program, was our Emergency Pizza promotion, which was an innovative marketing initiative that drove increased order counts and acquisition of customers into Domino's Rewards. We're seeing more redemptions than ever before, and we're seeing them at those lower tiers that we implemented. And we know that this program has driven incremental profit dollars for our franchisees. So customers are getting more, and franchisees have earned more profits. Truly a win-win. Finally, we're seeing more carryout users and light users in the program than we were prior to the relaunch. So Domino's Rewards is working as we intended.

National promotions will be another way we'll drive renowned value in 2024, and, and right now, we're on air with our Perfect Combo promotion. We believe this is the best deal in the QSR industry to feed a family, and it highlights the depth we have in our menu. We also brought back our Carryout Special Boost Week in January for the first time since January 2020. Its performance exceeded my expectations. Clearly, customers want value, and we are driving it profitably for our franchisees. While providing value through our own channels is, is one part of our barbell strategy, tapping into the aggregator partner marketplace is the other. We're very excited about this new sales layer, which we believe is a different and largely incremental customer that we had not been able to reach in the past.

Our entrance into this marketplace with Uber is on track, as we are now fully rolled out across our U.S. system. We've gone live with the marketing and formally kicked off our one-year exclusivity period in Q1. Sales are building in line with increased marketing, which has been great to see, and we expect those orders to continue to grow throughout the year. Sandeep will share more about our sales expectations in 2024 for Uber in his comments. Now, everything we do at Domino's is enhanced by our best-in-class franchisees, the E in our Hungry for More strategy. In 2023, we continued to enhance our U.S. franchisee base by adding more than 60 new franchisees to the system, the most in 15 years. Every one of these new franchisees started with Domino's, either as a delivery driver or from within our system.

This remains the secret sauce to our success. We ended 2023 slightly ahead of our expectations on U.S. store growth and profits, adding 168 net new stores and finishing the year with estimated average franchisee profitability per store of $162,000. This highlights the momentum we expect to continue into 2024. I couldn't be more excited about 2024 and beyond for Domino's Pizza. Our foundation has never been stronger, and our ambition has never been greater. We made a ton of progress in 2023, and our strong start to 2024 gives me confidence in our ability to win with customers and drive return for Domino's franchisees and shareholders. Now, with that, I'll turn things over to Sandeep.

Sandeep Reddy (EVP, CFO)

Thank you, Russell, and good morning, everyone. As a reminder, in the third quarter, we closed the remaining 143 stores in the Russia market. The 2023 global retail sales growth measures exclude the Russia market and are calculated as a growth in retail sales, excluding the retail sales from the Russia market from both the 2023 retail sales and the 2022 retail sales base. Now for our fourth quarter financial results. Excluding the impact of foreign currency, global retail sales grew 4.9% due to positive U.S. comps and global net store growth. U.S. retail sales increased 4.5%, and international retail sales, excluding the impact of foreign currency, grew 5.2%. During Q4, same-store sales for the U.S. business saw an increase of 2.8%.

As Russell noted earlier, our strong comps in the quarter were driven by both delivery and carryout, as they were up 2% and 3.9%, respectively. For the year, delivery represented 48% of our transactions and 58% of our sales, while carryout represented 52% of our transactions and 42% of our sales. The weight of sales and transactions shifted slightly more to carryout in 2023. The increase in U.S. Q4 same-store sales was driven by transaction growth from our new loyalty program, inclusive of a benefit from Emergency Pizza, pricing of approximately 1%, and a 0.4% sales mix from Uber. It will take us some time to determine just how much of that Uber mix is incremental, so more to come on that as we move through 2024 and into 2025.

These tailwinds were partially offset by a slightly lower average ticket that was a result of higher carryout mix. Shifting to unit count, we added 92 net new stores in the U.S., bringing our U.S. system store count to 6,854 stores at the end of the year. For the year, we added 168 net new stores, which was a strong increase over the 126 net stores we opened in 2022. U.S. company-owned store gross margin decreased 1.6 percentage points in the fourth quarter of 2023. Excluding the impact from higher insurance costs and an increase in our loyalty liability due to the change in point structure following the relaunch of the Domino's Rewards program, margins would have expanded slightly. Domino's unit economics remains strong, with continued EBITDA growth for our U.S. franchisees.

We are expecting that our average franchisee profitability per store will come in at $162,000 in 2023, up $23,000 from the prior year. Shifting to international. Same-store sales, excluding foreign currency impact, increased 0.1%. The deceleration from the third quarter is being driven primarily by pressures in Europe and geopolitical tensions in the Middle East. Please note that the Middle East represents a relatively small portion of our profits, at less than 3% of our operating income. Our international store count increased by 302 net stores in the fourth quarter. For the year, our net store growth in international was 702 units, excluding the Russia closures. In total, for the year, we grew 870 net stores across the globe.

Income from operations increased $8.4 million, or 3.4%, in the fourth quarter, including the impact of the $21.2 million prior refranchising gain that we are lapping, income from operations would have been approximately would have been up approximately 13% in the fourth quarter and up approximately 10% for the full year. Now turning to our 2024 outlook, which remains in line with what we shared at Investor Day in December. Our guidance calls for the following in 2024: 7% or more global retail sales growth, excluding the impact of foreign currency. We are expecting our 2024 U.S. comp to be above the 3% long-term guide as a result of our expected outsized catalysts in Uber and loyalty.

As we have communicated previously, we expect our sales with Uber to increase throughout the year as marketing and awareness increases, and we are expecting to exit the year with an overall sales mix of 3% or more. We expect sales with Uber to start ramping up after Q1, which will have only a partial tailwind from marketing. In the U.S., we are planning for a modest price increase in the low single digits. This is inclusive of California, where we're expecting to take pricing above that to offset the wage impacts from AB 1228. We expect our international comps to remain soft in the first half of the year due to a continuation of the trends we saw in the fourth quarter, but expect them to accelerate to our 3% or more long-term guidance in the back half of the year.

Now, shifting to net stores, where we are expecting 1,100 or more, which will be driven by 175 in the U.S. and 925 in international. There was a meaningful uptick in our U.S. net store growth in the fourth quarter, which was slightly ahead of our expectations, and the franchise pipeline continues to build. We are expecting net unit growth in the U.S. to be relatively flat to 2023 in the first half of the year and to accelerate slightly in the back half based on current visibility. Internationally, we are expecting to increase net store growth each quarter over the prior year as we lap the one-time closures we had in 2023 and to step up significantly in the back half of the year. As previously communicated, we are expecting slightly less than half of our growth to come from China and India.

On profits, we are expecting an 8% or more year-over-year increase in operating income, excluding the impact of foreign currency. We do not expect the impact of foreign currency to have a material impact in 2024 based on current FX rates. A few additional points of color on some of the profit components. We are expecting our food basket to be up 1%-3%. This is being driven by continued moderation on cheese prices. From a guidance perspective, we expect the Q1 food basket to be deflationary as we lap the only quarter from 2023 when the basket increased, followed by moderate increases for the remainder of 2024. We are expecting our supply chain margins to be roughly flat for the year, barring any unforeseen shifts in the food baskets.

We are expecting an increase in year-over-year supply chain margins in Q1 due to the expected negative food basket, followed by slight moderation for the balance of the year. We expect supply chain margin dollars to grow in line with transaction growth throughout the year. We are estimating that labor rate inflation across the system, inclusive of California, will be in the mid-single digits, and this is being primarily driven by minimum wage increases. We are expecting our G&A as a percentage of retail sales to be approximately 2.4%, which is in line with 2023. We also wanted to provide an update on our technology fee for 2024. In Q2 2023, we increased this fee to $0.395 and temporarily lowered our advertising fund contribution percentage by 0.25% to 5.75% for a twelve-month period.

Starting at the beginning of Q2 2024, we are lowering the technology fee to $0.355 and increasing the ad fund back to 6%. As previously communicated, we are expecting operating income margins to be relatively flat compared to 2023. We do not expect to see cost leverage in 2024 due to investments we are making in consumer technology, store technology and supply chain capacity to support future sales growth in the U.S. We are expecting Q1 margin expansion due to lower inflationary pressures, as previously noted on our food basket, and we are expecting the Q2 margin rate to be down because of the timing of G&A spend, which will be partially driven by our Worldwide Rally, a gathering of our U.S. and international franchisees that takes place every two years.

We expect margins in the back half of the year to be flat. As I conclude, I wanted to note that we announced a 25% increase in our dividend and increased our share repurchase authorization by $1 billion. All of this is being done in line with our capital deployment priorities. Thank you. We will now open the line for questions.

Operator (participant)

Certainly. Ladies and gentlemen, as we'd like to remind you that please limit yourselves to one question. You may get back into the queue as time allows. One moment for our first question. Our first question comes from the line of Brian Bittner from Oppenheimer. Your question, please.

Brian Bittner (Managing Director and Senior Analyst of Restaurants)

... Thank you. Good morning. Clearly, your, your underlying core business is showing very nice signs of improvement, positive traffic in both the Carryout business and delivery business prior to any Uber benefits. And I understand improvements in the core business can continue moving forward, maybe even perhaps accelerate, and they remain important. But now you are fully rolled out with Uber, and our, our conversations with the investment community suggest the expectations for Uber mix currently is still relatively low, maybe that 1%-1.5% range. And you talked about getting to 3% by the end of the year. So can you talk about how this improvement should unfold as the year unfolds, and maybe unpack the marketing that's getting turned on? How, how is that bolstering your expectations for where the, the Uber mix will go? Thank you.

Russell Weiner (CEO)

Morning, Brian. How are you doing? Let me talk a little bit about what we're seeing as far as the cadence of the flow of orders from Uber. Sandeep talked about the 0.4 in Q4, and we're seeing a meaningful uptick in Q1. You know, we just turned the marketing on. And so essentially, and same with Uber. So essentially, what we expect to see as awareness grows is that percent of sales grow, and we feel like we're still on line for the 3% exit rate that we spoke about.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Lauren Silberman from Deutsche Bank. Your question, please.

Lauren Silberman (Director and Equity Research Analyst)

Thank you very much. Congrats on this quarter. I wanted to ask about value. In January, you ran the week-long carryout promo, which I haven't seen before. Can you talk about the rationale behind that, any commentary on how you saw that perform, and to the extent that you're willing to talk about January, just given a little bit of noise across the industry? And then more broadly, how you're thinking about value and any incremental value offers through 2024. Thank you very much

Russell Weiner (CEO)

Yeah, Lauren, you know, when you think about our Hungry for More strategy, and value is a big piece of it. And the carryout special isn't something new, it's something we brought back. I think the last time we ran it was 2020. You know, frankly, that's gonna be part of our portfolio moving forward, as well as 50% off, as well as our, you know, Mix & Match Deal. Value is a key component, not only price, but value from a loyalty standpoint and value in the, you know, aggregator space. So yeah, the week-long carryout wasn't anything new, but what I will tell you, it performed extraordinarily well. I'm really happy with the way it went.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Gregory Francfort from Guggenheim. Your question please.

Gregory Francfort (Managing Director and Equity Research Analyst)

Hey, hey, thanks for the question. Just looking at unit growth this quarter, the domestic side, really strong pickup in, in terms of openings, international, maybe a little bit on the softer side. As you guys look out to next year, can you maybe talk about your confidence in, that accelerating on a global basis next year? And then maybe what that looks like from a domestic and international standpoint? Thanks.

Russell Weiner (CEO)

Yeah, we still feel really strongly about the guidance we gave, you know, the 1,100+ stores and 5,500 over the next five years. You saw some really nice momentum at the end of the year in the US in 2023. We expect to see more at the end of the year in 2024. You know, internationally, I think we, we've got a lot of closures behind us. That was probably one of the things that was driving, you know, down the number this year. But those closures really focused on three areas: on Domino's Pizza Enterprises, and they talked about their number, you know, Russia and Brazil. Those three were over 80% of our closures, and no other market closed more than five stores.

And so as we look forward, we feel really confident about openings. And, you know, I'm sure someone will ask a little bit later, but when you look at the profitability of our, our US franchisees, you look at the fact that, for the... We, we, we had more new franchisees in 2023 than we have in the last 15 years. They're bullish about Domino's Pizza, and they, and they're spending their money that way.

Sandeep Reddy (EVP, CFO)

And Greg, I'm just gonna add something in terms of the international store openings in particular. I think we provided some milestones to say that every quarter, we expecting to actually grow against last year as we lap the closures and then significantly accelerate more in the back half of the year. So very confident in where we are with store openings international, and we've been talking to our master franchisees and have good visibility to our expectations there.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Andrew Charles from TD Cowen. Your question, please.

Andrew Charles (Managing Director and Research Analyst)

Great, thank you. Russell, within guidance for outsized 2024 or U.S. same-store sales, can you talk about your expectations for call it core traffic growth, or what 2024 same-store sales will look like when you exclude the 3% mix from Uber and the low single-digit pricing? What I'm trying to get at is that, do you believe, similar to 4Q, that you can drive positive carryout and delivery transactions, excluding the impact of Uber? Thanks.

Russell Weiner (CEO)

Yeah, Andrew, absolutely. You know, when I think about 2023, it was kind of a tale of two stories for us. The first part of the year was all about addressing the base... and fixing things like, you know, delivery times and getting delivery times back to where they needed to be, and getting franchisee profitability back where it needed to be, so that in Q4, we were able to really lean into the Hungry for More strategy. And you saw it all in action. You saw Most Delicious Food with innovation. You know, you saw renowned value from a promotional standpoint with loyalty. And so all of those things are gonna be able to continue throughout 2024 with this, you know, improved base that we've got.

So yeah, I expect both carryout and delivery orders to be positive.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Dennis Geiger from UBS. Your question, please.

Dennis Geiger (Executive Director and Restaurants Equity Research Analyst)

Great, thanks. Good morning, guys, and thanks for all of the color on the loyalty program. Wondering if you could just talk a little more about loyalty in the U.S. and sort of expectations for the program looking ahead. I think recently you've kind of talked about that as being the, the biggest contributor to U.S. same-store sales growth this year. Curious if that, if that expectation still holds. Thank you.

Russell Weiner (CEO)

Yeah, Dennis, you know, the loyalty program is off to a great start. I'll just repeat numbers that we had in the opening remarks because I just like them so much. You know, we added 3 million folks last year, 2 million of them came with a new program. And so it's important to note, because I'll talk about Emergency Pizza in a second, and the effect on loyalty there. But the loyalty program out of the gate before even Emergency Pizza was doing exactly what we needed it to do, which was engage lower frequency users, engage Carryout users.

Then we brought in this powerhouse of, you know, Emergency Pizza that, you know, continued to inflect those numbers, and we have ideas like that in the future that will be able to drive. There will be advantages, and there are advantages to being a Domino's Rewards customer. I'll give you a little bit more color about the users. It's doing exactly what we thought it would, which is, you know, driving frequency, especially among the lower frequency customers, as I said before, also the carryout customers. Even though we have these lower tier levels, you know, we went-- we're down to two purchases now can get you a free item. Because of the food costs at these various tiers, it's actually a positive for the franchisees.

Really, as I said, a win-win, a better program that's more engaging to customers and more profitable for our franchisees.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of David Palmer from Evercore ISI. Your question, please.

David Palmer (Senior Managing Director and Head of Restaurants and Food Producers Equity Research Team)

Thanks. Good morning. A great update. Oh, I'm getting some feedback as I'm asking, so I'll try to get through this. Wanted to ask you about a couple profit drivers for this upcoming year, that being company-owned stores and supply chain. In the company store line, you know, is probably the only area of the P&L that was slightly disappointing on the quarter. But for the year, it looked like the company stores' profitability was down maybe 10%. Your franchisees did a lot better than that. They were up double digits this last year. So any sort of call-outs you would make in the quarter and for the year? More importantly, you know, how are you thinking about margins for company stores long term? They had been as high as 23.5% or so.

Consensus for 2024 is more like 18%. So I'm just wondering how you're thinking about company operated and then supply chain. You know, any comments there? Obviously very strong on the supply chain in the fourth quarter, how you're thinking for 2024? Thanks, sir.

Sandeep Reddy (EVP, CFO)

Thanks for the question, David. So I think on the company stores, in the prepared remarks, I actually called out a couple of impacts in the fourth quarter that actually impacted our margins. One of them really was insurance costs, and the other one was the accrual because of the points that actually got generated with the new loyalty program. And I think when you take out those two impacts, our margins actually expanded. So, the good thing about this is, I think the loyalty program has worked extremely well from a transaction perspective for company stores, and we expect this to be significantly driving profit dollars, and we expect to revert to margin expansion in 2024.

Frankly, I think we expect to continue to build on our margins as we move forward, even beyond 2024. So and then I would go to the supply chain profit. We're really happy about our supply chain profitability that we generated in the fourth quarter. A big driver of supply chain profitability all year was the productivity improvements that we saw, specifically driven by procurement and food costs. And I think that was a big element of what we saw. As we pivot to 2024, the expectation on supply chain is it's going to be supply chain profit dollars; it's going to be driven by our transaction growth.

And as Russell talked about earlier, we're expecting to see transaction growth before and after the impact of Uber, and all of that is gonna fly through the supply chain P&L, and expect that to actually drive a significant profit dollar growth for the supply chain business.

Russell Weiner (CEO)

Yeah, I'd just add those same transactions also add up to OLO fees, online ordering fees as well.

Sandeep Reddy (EVP, CFO)

Correct.

Russell Weiner (CEO)

Um, yeah.

Operator (participant)

Thank you. One moment for our next question. And our next question comes from the line of David Tarantino from Baird. Your question, please.

David Tarantino (Senior Analyst of Restaurants and Director of Research)

Hi, good morning. Very nice to see the order counts up in both delivery and carryout. But I wanted to ask specifically about the Emergency Pizza promotion and whether you could try to frame up how much of a lift that might have caused for the transaction growth? And I know there's a component about customer acquisition in there, so just wanting to sort of get a sense for how you're thinking about the trend coming out of that promotion, which ended, I think recently. Thanks.

Russell Weiner (CEO)

David, I'll start, maybe Sandeep, you can give some color to this one, too. You know, Emergency Pizza was a resounding success. It really was. When I look back and just again, giving compliments to our marketing team, this is your traditional buy one, get one free that has been marketed in such a way that, you know, it really breaks through. We've done buy one, get one frees before. They've done nothing like this. When I think about Emergency Pizza, what I like is not only what it did to order count, it also drove people into the loyalty program, because you need to be a loyalty member in order to get your Emergency Pizza. I think last, we have a new thing in our arsenal now.

You know, Boost Weeks have worked really well for us. We've got this Emergency Pizza piece now, and, and I expect this, I mean, it's ownable from our perspective, and, and so this is something we'll be able to use in the future as well. Sandeep, do you want to add some color?

Sandeep Reddy (EVP, CFO)

Yeah, no, I think Russell is exactly right. And I think the thing about what's happening with Emergency Pizza is it's a brilliant marketing innovation from our marketing team. But I think the broader construct of it is thinking about Domino's Rewards, the loyalty program. And that essentially creates a key platform to our third pillar, renowned value. So at the beginning of the quarter, in the fourth quarter, we had Pepperoni Stuffed Cheesy Bread, which was a special offer that was actually being connected to the loyalty program. Then after that, we got Emergency Pizza. And there's a number of different promotions that we can continue to bring along onto Domino's Rewards.

So the driver, rather than looking at Emergency Pizza by itself, is really Domino's Rewards and how much it can drive transaction growth for us. This is a significant pillar of how we're gonna drive transaction growth in 2024, both in delivery as well as carryout.

Russell Weiner (CEO)

Yeah, that was a big learning from us for the first loyalty program we had. You know, with Piece of the Pie Rewards, we advertised on TV, "Hey, we have a rewards program." And what we learned over time is, actually, the best way to tell people that you have a rewards program is have a really compelling promotion, whether it's a new product or something like, you know, Emergency Pizza, that the only way you can get it is if you sign up for the program. And once you sign up for the program, you're in this flywheel of frequency driving point levels that we've never had before. And so I think Emergency Pizza was a highlight, but as Sandeep talked about, that type of mechanism, driving people into the loyalty flywheel, is something we're gonna continue to, a play we'll continue to run.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of John Ivankoe from JP Morgan. Your question, please. John, you might have your phone on mute.

John Ivankoe (Restaurant Equity Research Analyst)

Apologize. Can you hear me now?

Operator (participant)

Yes.

John Ivankoe (Restaurant Equity Research Analyst)

Okay, perfect. All right, you're on speaker, but all right, this will work. You know, at first, in terms of the slowdown that we saw, the brand saw in continental Europe, was there any learning lessons that you could apply there, perhaps as Europe potentially being as a leading indicator to the U.S. of how you could get in front of some economic changes that would actually allow the brand to perform better in the U.S. than perhaps it has in Europe, at least in the last quarter, is the first question. And then secondly, you know, obviously there's no direct P&L impact in advertising allocation, but there is a direct P&L impact in terms of the online ordering fee.

In terms of reducing that online ordering fee or, you know, cutting it at least marginally relative to what it was in 2023, I mean, what was the reasoning behind that? Was that really franchise driven? Obviously, you know, the economics at the franchise level, you would suggest that they could bear that higher fee, but just wanted to have a sense of, you know, why you felt that that reduction was necessary to make. Thank you so much.

Russell Weiner (CEO)

Morning, John. I'll take the first question, maybe Sandeep, you'll take the second one. You know, our European business is really strong, and we believe some of the pressures we're seeing there are generally, you know, transitory in nature. If you listen to the call from DPE, Domino's Pizza Enterprises, our master franchisee over several markets, but especially France, there have been some challenges there, and that's one of our larger markets in Europe. We're partnering closely with them right now on those challenges. What I'd point to for DPE in general, there are green shoots in a lot of the markets where they're really leaning in on. And so, you know, for example, Australia and New Zealand, the numbers there have been fantastic.

One of the reasons why is they're leaning into the end, the most delicious food part of Hungry for More. I mean, I don't think anyone's doing it better than they are right now. They give a little insight into Japan, into the first kind of six, seven weeks of the second half, and how that seems to have turned a corner. Germany is positive, so we're working on France together, and that's certainly a business that needs to turn.

Sandeep Reddy (EVP, CFO)

Yeah, and I'll just finish off on what Russell just said, and if you remember what I talked about in the prepared remarks, we expect to see pressure in the first half of the year on international business. But exactly why we expect to see an improvement at the back half is because of all the more initiatives. Australia is one example, but taking those learnings and applying them across the international markets should enable us to offset any other headwinds that we have as we go into the back half and revert to our long-term guidance. And then specifically to your question on the advertising fund and the online fee. Now, let's go back to about a year ago. And I think about a year ago, where we were was franchisee profitability was not in the best place.

We had come off of a big decline in franchisee profits in 2022, and we saw an opportunity because of the buildup in the reserves of the ad fund to essentially take a 25 basis point, twelve-month hiatus from the advertising fund contributions, but we did want to continue investing in our technology solutions. And so we did take up the technology fee by $0.08. View that as a temporary increase and a kind of an offset between the ad fund contribution and the technology fee. Now that we've actually come to the point where we think it needs to it's time to restore the ad fund to the 6%, we have actually adjusted the technology fee to $0.355.

Another way to look at it is we actually went up from $0.315 to $0.355. And if you look back at our history, we've consistently increased our technology fee because we're making investments on technology for our franchisees, which drives the flywheel of their growth, and eventually drives global retail sales and our royalty dollars as well. And that is the rationale. I think, where we are, all of this is included in the $170,000 or more in franchisee EBITDA that we're expecting for 2024, and we feel very good about it.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Chris O'Cull from Stifel. Your question, please.

Chris O'Cull (Managing Director)

Thanks. Sandeep, could you break down how much of the $23 million of the year-over-year supply chain profit dollar growth came from the productivity improvement versus the volume growth? And do you expect any productivity improvements to continue in that segment into 2024?

Sandeep Reddy (EVP, CFO)

Thanks, Chris. Thanks for the question. A significant portion of the profit dollar growth that we saw in 2023 came from the productivity improvement that we saw. It was pretty outsized, and I think it was probably a function of where the markets were, especially after the outsized inflationary period in 2022, that we were able to get such significant improvements in 2023. And as we move forward in 2024, this is definitely gonna be a focus, but it's not gonna be as outsized as it was in 2023. We do expect to get some benefits, but I think we also have to make investments in capacity, like I talked about both at Investor Day and earlier on the call today.

That's why I think as we look at 2024, really expect profit dollar growth to be driven by transaction growth. Productivity improvements that we can see, if anything, should be an offset of some of the investments that we're making in the business.

Russell Weiner (CEO)

But the nice thing about what our supply chain team has done, you know, the productivity we've gained in 2023, it's not going back. And so I would think about that as kind of accruing forward. So well done by Sandeep and our team.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Peter Saleh from BTIG. Your question, please.

Peter Saleh (Managing Director and Restaurants and Food Distribution Analyst)

Great. Thanks for taking the question. I want to come back to the loyalty conversation. Russell, I think you mentioned 2 million+ new loyalty members since launch, and I think at the Investor Day in early December, you had mentioned there was about 1 million incremental. So just curious if you could comment, was there a meaningful acceleration in new loyalty members in December? Do you expect that trend to continue in 2024? And then is there any way to parse out how many of those are coming... are more carry-out customers versus traditional delivery?

Russell Weiner (CEO)

Yeah, Peter, there are, I'd say, a couple of meaningful moves in the loyalty program. First was just the launch of the loyalty program, right? We saw a meaningful increase, and that's what we talked about when we were with you in December. And then building on top of that, we had some more momentum, you know, driven by Emergency Pizza. So I'd say loyalty program on its own did well, is doing very well. We have added a little bit more gas on the fire with Emergency Pizza. And as we continue into Q1, now with Emergency Pizza behind us, we're still very happy with the way that's growing, and we've got programs like Sandeep talked about earlier, that you know will continue to drive that business.

The other thing, and you talked about this, that I'm really happy with is, you know, the big objective here was to engage carryout customers and to engage light users, and we are absolutely doing that with the program. And we can see that even out of the gate so far.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Sara Senatore from Bank of America. Your question, please.

Sara Senatore (Managing Director and Senior Research Analyst)

Thank you. I have a clarification and then a question. I guess the clarification is, you know, Sandeep, you said company margins would have been up slightly, excluding insurance and loyalty liability. I guess, given transaction growth and lower commodity costs, and the shift to carryout, which I think is typically higher margin rate, I would have thought up more than slightly. So I guess, you know, as we think about that business, we should be focused now, I guess, increasingly on profit dollar growth as opposed to margin rate expansion, sort of similar to how you think about supply chain? Or maybe my interpretation of up slightly is not quite right. And then-

... The question is about the industry and the pizza segment. And so, you know, you often have better insights into the competitive dynamic than I do. Was any of this category improvement? You know, we're finally, I think, back to maybe normalization in terms of sales mix, but anything you can say about, you know, what to what extent was share gains by Domino's versus, you know, finally seeing perhaps a green shoots in the category? Thank you.

Sandeep Reddy (EVP, CFO)

Thanks, Sarah. So I'll take the first one, and Russell will take the shared question. So, look, in terms of company margins, we specifically called out the impacts of those two and then margins expanding slightly outside of that. And I think it's been consistent. If you look at the first three quarters, our margins expanded, and I think in the fourth quarter, excluding the impact of those two items that we called out, insurance and the loyalty liability, margins expanded. So the great thing about the loyalty liability adjustment is it's because we expect to have incremental transactions or redemptions on the loyalty program. So, you're right. Look for profit dollar growth on the supply chain, sorry, on the company stores.

But I think we also do believe that there is an opportunity to expand margins in addition to driving profit dollar growth as we leverage the fixed cost structure of the company stores. So look for both on company stores is my answer.

Russell Weiner (CEO)

Thanks. Yeah, and you know, on the state of the industry, I think you know, and this is really even looking forward to 2024, a lot of what we expect is QSR, there to be real pressure on orders and transactions. You know, we don't expect that to be the case with Domino's, and I think we'll be unique in that area in 2024.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Brian Harbour from Morgan Stanley. Your question, please.

Brian Harbour (Equity Analyst and Executive Director of Restaurants & Food Distribution)

Yeah, thanks. Good morning. I wanted to ask about just your international sales outlook as well. How, you know, how much of this do you think is kind of market-specific execution issues? And I'm referring to just some of the countries that have been a little bit slower versus kind of macro pressures. And as you, you know, have that outlook for kind of improvement through the year, does that depend on some of those macro pressures easing? Like, for example, if you think about India, or could you maybe comment on some of the other markets that you didn't address before?

Russell Weiner (CEO)

Yeah, well, actually, maybe I'll start out talking about India, because I was speaking over the weekend to Hari Bhartia, who's the chairman of Jubilant. I mean, that's a great example of both the dynamics you talk about. And so, you know, obviously, you know, they're pushing the business there. It's some headwinds. But, you know, what Hari talked about is what's going on in the rest of the industry and why he's bullish and why he's looking for the future. And while, you know, they're talking about, you know, 200 stores to grow in 2024, is because he's growing share.

And so, you know, what I love about our franchisees is that they're future-focused, and I think you see a lot of folks doing what they're doing in India. That's why we think the second half is gonna return to that 3% that we talked about. Anything to add?

Sandeep Reddy (EVP, CFO)

No, I think, Russell is exactly right. We think it's all tied back to the Hungry for More strategy is being applied across the entire system with the international markets. Learnings from markets like Australia being applied, across DPE, and essentially all of the other markets as well have embraced Hungry for More, and, that's really what we're looking to drive.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Danilo Gargiulo from Bernstein. Your question, please.

Danilo Gargiulo (Senior Analyst of US Restaurants)

Thank you. I have a quick clarification and then a question. The clarification is, Russell, you mentioned that you're expecting some real pressures in the industry, but not for Domino's. Can you clarify whether the increase in transactions that you've seen in the fourth quarter is across all the income cohorts? And then the question is, can you talk about the speed of delivery in the Uber Eats channel versus your own channel, understanding that you're using your own drivers anyway? And, maybe how does the delivery timing compare versus your peers today?

Russell Weiner (CEO)

You know, on the transactions piece, you know, we believe that our transactions being positive is something that's, like I said, is unique in the industry. We'll get more share information as that comes out, and we'll certainly, you know, share that with you. On speed of delivery, you know, the biggest comparison we have is versus ourselves, and every day, you know, we expect to get better than the day before. So we're happy that we're back to 2019 levels. We're now moving, you know, more volume into that, you know, delivery network.

And, we're doing everything we can, not only to make sure that the delivery times are where they need to be, but more importantly, we haven't talked a lot about this, is that the quality is there. And so when you think about our Hungry for More pillars, the first M is about most delicious food. And so just delivering a pizza, you know, on time is one thing, it's gotta be great. And, you know, Danilo, one of the things I talk about, hopefully, there are no Boston Red Sox fans on the call today. I'm a Yankee fan, and there's a famous player, Joe DiMaggio, who there's a quote. Somebody asked him one time, you know, why he plays so hard every game.

What he said was, "You know, there's gonna be someone who sees me for the first time in that game, and so I'm playing for them." And that is how we need to approach making our pizza. You know, every pizza you're making is for your mom, right? And that's what some of these sprints are all about with more delicious operations. We're making promises in our advertising. We need to deliver it, and it's more than just time, it's quality, it's consistency, and all of those. And, you know, we like to say at Domino's, we don't sell 1 million pizzas a day. We, our goal is to sell one pizza a day, 1 million times, and that's kind of the new thinking behind delicious operations.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Jeff Bernstein from Barclays. Your question, please.

Jeffrey Bernstein (Equity Research Analyst)

Great. Thank you very much. Just following up from the Investor Day, you guys talked about your, I guess, Pulse 2.0 technology, and I think you mentioned there'll be a complete overhaul throughout 2024, and in conjunction with your Microsoft partnership, talking about AI tools and whatnot, which are clearly very topical. So I'm wondering if you could talk a little bit about the greatest changes, or the most likely incremental benefits to the front or the back of the house and maybe the timeframe to see those benefits. Obviously, it's been, like you said, a long time coming with this major overhaul, so just trying to get a sense for what we're gonna see as we look through 2024. Thank you.

Russell Weiner (CEO)

Yeah, thanks for the question. Yeah, it's a good time for me to clarify that. I think the future of the benefits of Pulse is actually now, right? We talked about DomOS and accelerating the areas within the circle of operations that make the biggest difference in our business. And so, yeah, you know, next generation Pulse is in stores now. Some stores in the U.S. will be rolling out to a bigger degree, you know, later on in 2024. But the most important elements, the ones that are going to drive the operational efficiencies, the more delicious food, the, you know, improved atmosphere, working atmosphere for our team members, those are out in the DomOS tools, and DomOS tools work with current Pulse and the next generation Pulse.

So hopefully that clarifies it. The answer to your Microsoft question is, you know, we're working really in two areas with Microsoft and generative AI. One is on the consumer ordering side. We are not waiting for the new website to come in to see something on that. So you'll see something on that in 2024. And then also on the store side, and what can we do with generative AI to make the experience better on our team members in store? And so we'll have more to talk about both of those in 2024.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Andrew Strelzik from BMO Capital Markets. Your question, please.

Jared Garber (Lead Equity Research Analyst)

Hi, this is Jared on for Andrew Strelzik. Thank you for taking the question. So I'm curious how you would characterize the current competitive environment and what you're seeing from a promotional standpoint, and was wondering if you could provide any incremental details regarding product innovation and the two new products that you are planning to launch this year? Thank you.

Russell Weiner (CEO)

Yeah, sure. You know, I don't really like to talk a lot about competitors. I mean, the competitor we have is ourselves, and we try to get better than ourselves, you know, every day, and I think you see that in our Q4 results. I talked in general about it probably being a year that's less about order counts, and we'll see how folks adjust to that, you know, and when they do, we'll be happy to comment on that, you know, through the year. I didn't quite hear your second question. Can you repeat the second? Even though we are only supposed to ask one. I'm joking.

Jared Garber (Lead Equity Research Analyst)

Products.

Russell Weiner (CEO)

Oh, yeah, products. Thank you very much. Yeah, on the product side, a couple things. One is, we're really happy that we've got our Pan Pizza out there now, but that's not a new product, and you should know that is not counted among the kind of 2+ new products we're gonna have, this year. But what you do see with that is, you know, we haven't talked about Pan Pizza since 2014. So while I'm not counting it on my list of new products, it's something that's new to a lot of people and something that, you know, is really shot, if you look at the way we shot that commercial, in the new way of kind of romancing the deliciousness of our pizza.

So we're out with product news, news on a product for the first time in a long time, but that's not part of our two new product scheme for this year.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Chris Carril from RBC Capital Markets. Your question, please.

Chris Carril (Senior Equity Research Analyst of Restaurants)

Hi, thanks, good morning. So, Russell, you mentioned the U.S. system added more than 60 new franchisees. I think that was the most in 15 years, you said. On the back of this, how are you thinking about the evolution of the domestic franchisee base and just the balance of openings coming from new franchisees versus longer-tenured franchisees going forward? Thanks.

Russell Weiner (CEO)

Yeah, thanks a lot for the question. You know, when we have calls like this, and what I tell people is, if you're ever wondering how the Domino's Pizza brand is gonna do in the future, you look at what your franchisees are doing. And franchisees right now, from a profit standpoint, obviously really positive versus where they were the year before. We opened up more stores, really heavy towards the end of the year when things became clear there. Yet we're still, you know, very positive that we're gonna beat that number in 2024 and hit our 175-plus algorithm.

60 to me means that we've got younger incomers within our system, that for the first time in 15 years, it's bigger than, or bigger than we have had in 15 years, which just means they see a really positive future. And the cool thing is, as you look into 2024, what I can tell you is two things. One is we already have 170 new potential franchisees that are either in or have graduated our franchise management school, which is the last step you do before you either build a store or buy a store. And we have 50 already waiting on opens or transfers within the system.

You know, we're in February, and so I think some of the momentum you saw is gonna continue, and you know, that just shows what they are feeling about the brand and where they want to invest.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Meredith Jensen from HSBC. Your question, please.

Meredith Jensen (Senior Consumer Research Analyst)

Yes. Hi, I know we've spoken about it a number of times in terms of the loyalty program, but given the mention of the liability, the loyalty liability from the relaunch, is there a way, or how would you suggest we sort of track that and look at the breakage levels and sort of see where that may be going in the future and how we should sort of map that out? Obviously, as you mentioned, it's a positive thing, so thank you.

Sandeep Reddy (EVP, CFO)

Yeah, Meredith, thank you for the question. And look, I mean, I think the way to look at this is, it's the appropriate accounting treatment if we're gonna expect to see more redemptions, and that's the adjustment to the breakage accrual. But I think the whole point with this is our Domino's Rewards program is working as we intended. More transactions are expected to come in, more redemptions are expected to come in. And I think Sarah asked the question earlier: Look for profit dollar growth in addition to margin expansion as we move forward, especially on the company stores, in 2024, and we'll continue to provide disclosure as we move forward, but that's how I would actually measure performance on this.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Brian Mullan from Piper Sandler. Your question please.

Brian Mullan (Restaurant and Food Distribution Analyst)

Hey, thank you. Just to follow up on the topic of Domino's advertising on Uber. Understanding it's just getting started, it'll ramp throughout the year. Could you just discuss any learnings you've had here? You know, is it going how you would have thought? Has anything with the effectiveness surprised you, either positively or negatively? And, you know, I ask in the context of just it's a new activity for Domino's, but I know you've been preparing to get ready for it. So just any thoughts on that strategy?

Russell Weiner (CEO)

Yeah. Thanks, Brian. You know, there's two advertisings now for Domino's on, on Uber. One is Domino's, and the other is Uber. And I think what we're seeing on that platform is, you know, it's very promotionally driven. And the nice thing is when you think of marketplaces and excelling on marketplaces, that's what we do, you know, whether it's the, a Google marketplace or, you know, in, in, in this case, Uber. And so it's, it's responding how you would think. It's very much promotionally driven, but we know how to excel in those areas, which is why we are confident that our percent of sales from Uber is gonna increase to that 3% exit rate we talked about.

Operator (participant)

Thank you. One moment for our next question. Our final question for today comes from the line of Jon Tower from Citi. Your question, please.

Jon Tower (U.S. Restaurant Analyst)

Great, thanks. I appreciate it. Quick clarification, then a question. Clarification, the loyalty liability, I'm assuming that was just a one-time true up, but if you can clarify, that'd be great. And then the question is on the frequency shifts you're seeing in the loyalty program. Any way you can give us some sort of, you know, benchmarks as to where some of the more loyal customers were spending, either frequency last year and, and what it's looking like so far since you made these shifts in, in late 2023?

Sandeep Reddy (EVP, CFO)

So I'll take the first part of the question, Jon, and it is a one-time thing, because I think the significance of the change of the new program was what was the trigger. But that doesn't mean it's never gonna happen also, because I think you always have to continue to monitor your breakage, and if you do need to make a true up, you will make a true up. But given the new program launching, I think this was much more of a one-time event because of the new program launching. And I think on the-

Russell Weiner (CEO)

Yeah.

Sandeep Reddy (EVP, CFO)

On the frequency shifts, Russell will take the question.

Russell Weiner (CEO)

Yeah. Well, what I can tell you, macro, you know, we're still just at a couple months into this thing, is what we thought we would see with regards to carryout customers and lighter user engagement, we are seeing. What we will do, John, is make sure throughout the year, when we got more information under our belt and we're able to give perspective. Because remember, loyalty programs are not just about the first use or the second use, it's about lifetime value and use over time. And so as we get more color on that, you know, we'll share.

Greg Lemenchick (VP of Investor Relations)

Thanks, Jon. That was our last question of the call. I want to thank you all for joining our call today, and we look forward to speaking with you all soon. You may now disconnect. Have a great day.

Operator (participant)

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.