Tim McIntyre - EVP, Communications, IR and Legislative Affairs Patrick Doyle - President & CEO Jeff Lawrence - CFO

Karen Holthouse - Goldman Sachs Brian Bittner - Oppenheimer & Co. John Glass - Morgan Stanley Alton Stump - Longbow Research Peter Saleh - BTIG Jeffrey Bernstein - Barclays Capital Matt McGinley - Evercore ISI Chris O'Cull - KeyBanc Capital Markets John Ivankoe - JPMorgan Stephen Anderson - Maxim Group Gregory Francfort - Bank of America Merrill Lynch Mark Smith - Feltl and Company

Good morning. My name is Jennifer, and I will be your conference operator today. At this I would like to welcome everyone to the Second Quarter 2016 Earnings Call. [Operator Instructions]. Thank you. And I'd like to turn the conference over to Mr. Tim McIntyre. Sir, you may begin.

Thank you, Jennifer, and good morning, everybody. Welcome to our second quarter 2016 earnings call. My first official one. This call is primarily for the investor audience, so we ask that all members of the media and others be in listen-only mode throughout the call. I also refer you to our Safe Harbor Statement, that’s in the press release and the 10-K in the event that any forward-looking statements are made this morning. We will follow the usual procedure of prepared comments from our Chief Financial Officer, Jeff Lawrence; and CEO, Patrick Doyle. And then we will open it up to your questions. With that, I’d like to kick off the call by introducing our Chief Financial Officer, Jeff Lawrence.

Thanks, Tim, and good morning, everyone. In the second quarter, our brand continue to deliver positive results, as we posted strong same-store sales in both our domestic and international businesses. U.S. comps grew by nearly 10% and international comps grew by more than 7%. We're thrilled with these results, particularly when you consider that same-store sales a year-ago were a robust 12.8% and 6.7%, respectively. We have now had 21 straight quarters of positive U.S. comps and 90 consecutive quarters of positive international comps. We also continue to increase our store count at a healthy pace and have now opened more than 1,000 net new stores over the trailing 12 months. All of this outstanding brand momentum helped us grow diluted EPS by 21% over the prior year quarter. With that broad overview, let's take a closer look at the financial results for Q2. Global retail sales, which are the total retail sales at franchise and company-owned stores worldwide, grew 11.7% in the quarter. When we exclude the adverse impact of foreign currency, global retail sales grew by 14.3%. The drivers of this retail sales growth include strong domestic same-store sales, which grew by 9.7% in the quarter. Broken down, our U.S franchise business was up 9.8%, while our company-owned stores in the U.S were up 9.1%. Both of these comp increases were driven by traffic or order count growth as consumers continue to respond positively to the overall brand experience we offer them. Our recently launched loyalty program contributed significantly to our traffic gains. Ticket was relatively flat during the quarter. On the unit count front, we are very pleased to report that we opened 29 net domestic stores in the second quarter consisting of 36 store openings and 7 closures. Moving to the international division, they had another very strong quarter as same-store sales grew 7.1% and also added 215 net stores during Q2, comprised of 228 store openings and 13 closures. Our growth continues to be strong and diversified across our international markets. Moving to revenues, total revenues for the second quarter were up $58.7 million or 12% from the prior year. This increase was primarily a result of three factors. First, higher supply chain center food volumes driven by strong U.S comp and store growth. Second, higher domestic same-store sales and store count growth resulted in increased royalties from our franchise stores and higher revenues at our U.S company-owned stores. And finally, higher international royalties again from increased same-store sales and store count growth, which were partially offset by the negative impact of foreign currency exchange rate. Currency exchange rates negatively impacted international royalty revenues this quarter by $1.8 million versus the prior year quarter due to the dollar strengthening against most of our foreign currencies. For the full fiscal year, we continued to estimate that foreign currency could have an $8 million to $12 million negative year-over-year impact on pre-tax earnings, and yet this does include a more recent estimate for the British pound post Brexit vote. As you know, there are many uncontrollable factors that drive the underlying exchange rates, which does make this a harder part of our business to predict. Now moving on to operating margin. As a percentage of revenues, consolidated operating margin for the quarter increased to 31.4% from 31.2% in the prior year quarter. Our franchise businesses positively impacted our margin as a greater percentage of our revenues this quarter came from both international and domestic royalties. As a reminder, our royalty income stream have no associated cost of sales. The supply chain operating margin increased to 11.1% for the quarter as higher volumes and lower fuel costs were partially offset by higher labor and insurance expenses. Commodity costs were relatively flat during the quarter, and food cost as a percentage of supply chain revenues decreased in the quarter. We still expect that commodities we use domestically will be largely consistent with our previous estimate of flat to up 2% in 2016 from 2015 levels. Company-owned store operating margin decreased to 24.6% from 25.6%, driven primarily by higher food and insurance expenses, as well as higher transaction related costs. These margin pressures were partially offset by the leveraging of certain expenses from increased sales and lower delivery costs during the quarter. Let's now shift to G&A. G&A increased by $7.7 million in the second quarter versus the prior year quarter due primarily to three factors. First, our planned investments in technology, primarily in e-commerce and other technological initiatives and the teams that support them. Please note that these investments are partially offset by fees that we received for digital and credit card transactions from our franchisees that are not included in this G&A number. Second, we continue to make planned investments to support the very strong growth of our international business. And third, our strong results led to higher performance based compensation expense. Based on our continued positive performance and our outlook for the rest of the year, we now expect that our G&A could be in the range of $305 million to $310 million for the full fiscal year, driven primarily by performance-based expenses and continued strategic investments. Keep in mind too, that our G&A expense for the year can and does vary up or down by among other things, our performance versus our plan, as that affect variable performance based compensation expense. Moving down the income statement, interest expense increased by $6.2 million in the second quarter, primarily as a result of increased net debt from our 2015 recapitalization. Our weighted average borrowing rate was 4.6% during the quarter, which is 70 basis points better than a year-ago. Our reported effective tax rate was 37.4% for the quarter. We expect that 37% to 38% will be our effective tax rate for the full fiscal year 2016. When you add it all up, our second quarter net income was up $3.4 million or 7.3%. Our second quarter diluted EPS was $0.98 versus $0.81 a year-ago, which was a 21% increase. Here is how that $0.17 increase breaks down. Lower diluted share counts primarily as a result of the accelerated share repurchase program completed in Q1, and our additional share repurchases in Q2 benefited us by $0.11. Higher interest expense, primarily as a result of our higher debt balance negatively impacted us by $0.07. FX negatively impacted us by $0.02. And most importantly, our improved operating results benefited us by $0.15. Now turning to the balance sheet, during the second quarter, we repurchased and retired approximately 1.8 million shares for $224 million, or an average purchase price of approximately $121 per share. Subsequent to quarter end, we repurchased an additional 85,000 shares for $11 million, or an average purchase price of approximately $126 per share. As previously disclosed, our Board of Directors approved an increase to the Company's share repurchase program. As of July 14, we had $214.5 million available under that most recent authorization for future share repurchases. During the quarter, we also returned nearly $19 million to our shareholders in the form of our quarterly dividend, and made $12.4 million of required principal payments on our long-term debt. As always, we will continue to evaluate the most effective means for deploying our excess cash to the benefit of our shareholders. Overall, our positive momentum continued and we're very pleased with our results this quarter. We do not take these results for granted and we're committed to driving the brand forward and providing value to our shareholders. Thanks for your time today. And now I will turn it over to Patrick.

Thanks, Jeff, and good morning, everyone. There's really no shortage of adjectives. Adjectives I could use to describe our second quarter, but I will sum it up as best I can. Our top line performance and proven model once again drove remarkable results. I mentioned last quarter that the culture of our system is one that faces the challenge of sustained success head on and with passion and great energy. I’m very proud of the way our second quarter performance clearly put this on display. It was a tremendous quarter for our domestic business. And our international segment continues to do what it does best. Perform and grow at a high-level as the best international model in QSR. We have now reached 90 consecutive quarters of positive same-store sales growth, a streak that continues to amaze me. And for the first time on a trailing 12 month store growth basis, we surpassed 1,000 net global stores. This milestone took the efforts of both the international growth machine and our resurgent domestic growth to accomplish. I want to give a sincere thanks to our franchisees who just keep getting it done each and every day in the pursuit of from New York to New Delhi, and Istanbul to Brisbane, being number one in their neighborhoods. At our recent worldwide rally events, in Las Vegas, we brought together all time record attendance of over 8,000 franchisees, managers, and team members from across the globe, and their energy was a reminder that the excitement and morale within our system has never been higher. The strength of the Domino's business is evidence and I couldn't be more pleased with the top and bottom line results during the quarter. Our fundamentals and investments in the business have produced a continued sound steady strategy that puts us in an ideal position to execute, and deliver a high quality reliable and innovative experience to our customers worldwide, all at a very reasonable price. Nothing demonstrated this idea of sustaining success better than our domestic business. I am especially proud of this. Our 21st consecutive quarter of positive same-store sales and the efforts of our U.S franchisees and corporate team members including these phenomenal results on the board. Domestic store growth continues to progress in the right direction. Our 29 net domestic store openings was evidence of our solid efforts and is the strongest second quarter we've had in the past decade. Our franchise base has never been more efficient, more profitable, and has never felt stronger that the time to grow within Domino's is now. With record-setting store level EBITDA and unprecedented brand momentum, we clearly share this belief and I'm pleased with the progress we continue to make. Our store reimage initiative is coming along nicely with nearly 60% of total U.S stores now in the pizza theater image. Our stores are looking better, our food and pizza making is on full display, and our people are now at the forefront of the experience. The digital loyalty program had a meaningful positive impact in the second quarter. Our early objectives around simplicity and frequency are being met and while we may be keeping many program metrics close to the best, due to heavy competition within the space, I can say with certainty that the program is meeting the high expectations we had upon its launch. Continuing with digital, we announced something during Q2 that, frankly, I didn't even think was possible, Zero-click Ordering, I admittedly thought five clicks or less was pretty impressive as it was, but our forward thinking digital team as it does so well to things a step further. After linking the Zero-click to your pizza profile, simply open the app and as long as there is no change of heart during the 10 seconds -- before the 10 second timer ends, your easy order is placed without a single tap, swipe, or click. It is yet another creative and inventive ordering platform and an example of the unmatched innovation that continues to shape our branch. Our worldwide digital participation continues to ramp up with 22 international markets now utilizing our global online ordering platform and just over 60% of stores outside of the U.S using Domino's Pulse, our proprietary point-of-sale system. We continue to share best practices with our master franchisees worldwide and remain committed to technology growth as a true worldwide initiative, developing and maintaining digital leadership globally. And on the note of maintaining a global lead, our international business once again performed at a very high-level. It was yet another impressive quarter of same-store sales and we turned in our best ever Q2 to date for international store growth with 215 net store openings. We're making great headway on the conversions in South Africa, France, and Germany, and while it will take some time to see direct revenue impact from these markets, the progress in getting them opened and in a strong position to operate successfully is on track. Our public master franchisees continue to get it done. Alsea and Domino's Pizza group both recently reported double-digit same-store sales increases. Jubilant FoodWorks recently surpassed 1,000 Domino's stores and DPG isn't too far behind in the U.K. We expect the best international model in QSR coupled with the high-level of talent within our master franchise base to continue to be a winning combination. I’m very pleased that once again it produced outstanding results. To summarize, I'm extremely pleased with our second quarter. While our results speak for themselves, I am most proud of the passion and energy demonstrated by our entire system. We continue to deliver results not with the help of catalysts or short-term burst concepts, but truly relying on a model that is proven. Fundamentals that have never been stronger and a team that is never been more aligned. Thanks. And with that, I will open it up to questions.

[Operator Instructions] And our first question comes from the line of Karen Holthouse with Goldman Sachs.

Hi. Thank you for taking the question. Given the positive metrics around loyalty in the U.S., and you’ve a great track record of sort of exporting digital initiatives from the U.S-international, is there interest from international franchisees to adapt to that program or just copy it for their markets? Are there reasons, either technologically, or socially, that that wouldn't work, as well just thinking about the transferability of that platform?

Yes, Karen, its good question. The answer is absolutely there is interest. The market conditions differ around the world, and so the design of a program might be different in other places around the world based on relative market share and what you're trying to accomplish is as we talked about before, we designed our program to be about frequency to drive order counts and clearly we're feeling very good about that. But one of the things we’ve talked about before and I think are particularly proud of and believe has been a big part of our success is that we do a lot of things in a lot of different parts of the world. We have big master franchisees who are all working on the same issues that we are in the U.S., and so when somebody figure something out somewhere there is very quick best practice sharing around the world. And clearly we're happy with loyalty, clearly we're sharing results, and then markets will make decisions on whether they’re going to launch it. And if they do, when they’re going to launch it, based on kind of the priorities and the list of new initiatives that they want to take in their market and kind of how they're going to prioritize those. But absolutely the success that we're having has been well noted within our system, and it's certainly something that international markets are going to look at.

Great. Thank you.

Thanks, Karen.

Your next question comes from the line of Brian Bittner with Oppenheimer.

Thanks. Good morning, Patrick and Jeff. I just want to better understand what changed within your domestic business in 2Q versus 1Q because obviously the two-year trend actually accelerated at a time when the industry did the opposite. So, as you see it internally, was loyalty really at the end of the day the primary difference maker here? And if there is anything else you can add outside of loyalty, what you’re seeing impact the business, I appreciate it.

Yes, Brian. I think, first, we’re not going to kind of breakout the components of growth specifically. I mean you know we don't do that. What I would say, has changed on loyalty in the second quarter versus the first quarter is simply the amount of time that we've been able to watch the results, analyze the data coming in. We already talked about in the first quarter that we were seeing good results from loyalty and we're ready to say that, yes, it’s a success. A quarter later, we're just that much more confident that it is absolutely doing what we expected that it was going to do. So, I wouldn't necessarily say that it was a driver of the difference in results between second quarter and first quarter. And I guess the other thing I would say is we were pretty happy with first quarter results also, and we obviously like our second quarter very, very well. But we just feel like the overall momentum in the business is very strong. Lots of good things happen when you got this much momentum, and so we're seeing franchisees getting more and more excited about what's happening here, you're seeing that play through into increasing store growth. It seems as we grow that we've got more advertising dollars to spend as a brand overall. I mean just -- the momentum feeds upon itself. And I think that's really the broadest explanation for the second quarter and kind of the overall results we've had is that it just continues to build the energy in the system, continues to be terrific. I mean, we 8,000 people get in a room in Las Vegas last month from all over the world, virtually every market represented which was by far the largest turnout that we've ever had, and that energy and momentum is contagious.

It makes sense. I guess we're six years into that momentum and it's still going.

Yes, exactly.

The second and last question, just Jeff, on the G&A, it's about $15 million higher than the last guidance you gave I think. How much of this is just simply additional performance driven incentives and how much of it is incremental actual investments versus the last time you talked to us?

Yes. So, yes great question. I think the most important thing is that we also incorporated into this new guidance of 305 to 310 not only our performance, but also our outlook for the rest of the year. So it does express some confidence in the momentum we have. So we think some of that’s baked in. It’s more performance-based than it is strategic investments, but it's really both, Brian. As Patrick has talked about, we’re investing to win. If we see good ideas in IT or digital, if our international team has some investment they want to make to continue that train going down the tracks, we're saying yes to really good investments that have a good ROI. And it's not really a short-term focus for us on what the G&A number is if we believe it's going to create long-term value. So G&A as a percentage of revenues versus last year this quarter about the same and yes it’s a bigger number. But specifically to your original question, more performance-based than it is strategic investments, but it’s a little bit of both.

Okay. Thanks, guys.

Your next question comes from John Glass with Morgan Stanley.

Thanks very much. Patrick, if I look at the unit growth internationally over the last six months, first half this year versus first half last year, then I look at it versus the back half of last year versus the prior year, in other words kind of comparing the two six-month periods, there seems to be a pretty significant step up in unit growth, like the pace has almost doubled. And that’s maybe there is some timing, but where is that coming from I guess? Maybe some more detail about where you think that’s coming from. You are over 8% unit growth now, is that -- are we on a path now to 10% for example. Is there an upper boundary to what’s reasonable or is this -- some of that’s just maybe timing in the quarters?

No, I mean, we got off a lot of momentum in store growth. We do have the conversions that are happening in the three countries, in Germany, France, and South Africa. That's not a really big part of it yet, but that’s certainly is contributing. And that's something that is a little bit unusual. I wouldn't expect that. There just simply isn't the opportunity frankly for that many other conversions out there. But the vast majority is coming from just faster organic growth in a lot of countries around the world, and our unit economics are very strong when you get 90 straight quarters of positive same-store sales growth in your international business and with the pace of that same-store sales growth unit economics on the whole continue to get stronger and stronger. And so confidence in reinvesting into the brands and growing stores and believing that they’re going to generate a terrific return for the master franchisees continues to go up and that's really what is going on out there. And so feeling very good about it, feeling very good again about kind of the momentum in that area. There is a little bit of boost from the conversions, but it is mostly about unit economics driving a belief in the strength of investing into our brands and I would add, I remember there were some questions a couple of years ago about reimaging and relocating stores and whether or not that was going to have any effect on unit growth. And I think I expressed some confidence that it wouldn't and I think we're seeing that play out. I mean, there are seeing nice returns, we’re seeing momentum in the brand based on those reimages. And so despite the fact that there's pretty -- been pretty heavy investment into those reimages, which is now about 60% done, they’re also accelerating investment into new stores.

That’s great. That’s helpful. And then, Jeff, just a quick question. The buyback was relatively larger, I guess, versus our expectations, maybe took advantage of the decline in the share price in the first quarter. How do you think about that going forward? Your cash balance at least unrestricted is low and I don’t think you’ve got a lot left on the revolver. Is that just a function of maybe upping that or is this -- are you thinking of this more in the context of an earlier recapitalization of the Company so you don’t mind running those things down right now?

Yes, you know as far a future recapitalization, we’re not going to tip our hand on that obviously. You do know that our 2012 notes are callable at par about a year from now. As far as buyback, we’ve about $215 million left under the most recent authorization. With the last recap, obviously principal and interest is a little more than it used to be. We obviously have a pretty robust dividend, ongoing dividend program going on. So we viewed it as just a really good use of the last $200 million we had left over from the recap plus some organic cash that was sitting around. We're happy with the buybacks and going forward to the extent that we think that’s the best return of value to shareholders. We will continue to do that. We have the Board support, we’ve the Board authorization. If the opportunity is there, we will consider it and act accordingly.

Okay, great. Thank you.

Your next question comes from Alton Stump with Longbow Research.

Good morning. Great job once again on the quarter guys.

Thanks, Alton.

It is pretty impressive. Quarter-to-quarter, you guys continue to beat on the comp front in particular. I guess, just looking at the U.S comps and sort of the environment, I’ve heard from some others that we're starting to see competitive pressure ease a little bit in the QSR pizza category in 2Q versus the first quarter, in particular. Have you seen any of that on your end?

Honestly we haven't seen a big difference in the competitive activity overall. And as you've heard me say before, just given that the fairly fragmented market shares within pizza, the individual actions of really any player including us in the category just don’t have that much effect in the near-term on the other players. And so I think what I would say is that the overall trends have kind of continue to be the same, which is you continue to see the large players taking share from the independence and happily we’ve taken more than our fair share of that. But overall, it still continues to be really about the national players taking share from the smaller players and some growth in the category, but certainly not robust.

That’s helpful. Thanks Patrick. And then, one quick follow-up just on the cheese costs front. Cheese costs obviously, on spot market anyway have come back up recently. Is there any chance you think as you kind of crystal ball the back half of the year that we'll see some smaller mom-and-pops which are probably buying predominantly, if not entirely, on spot, get a bit more rational because of cheese moving up higher?

I think you're right. It certainly put some pressure on them, but we're looking at cheese that in today's trading in kind of the normal range of cheese. I guess, maybe the only thing I would say is extending that forward a little bit in markets where there is more wage pressure, they may have seen that offset a bit by lower cheese costs, with cheese costs moving back into kind of the more normalized range they may feel that a bit more. Clearly for us, we made more money in the second quarter in our corporate stores and we did a year-ago, so we're feeling good about our performance. But you I think they certainly will feel the pressure a little bit more. We obviously do some more forward buying than they’re able to do, which takes a little bit of the volatility out of it for us.

Great. Thanks again.

Your next question comes from Peter Saleh with BTIG.

Great. Thanks and congrats on the quarter. I just wanted to ask about, I know first quarter there were some issues on the labor side. Did you guys do anything different in terms of labor scheduling in 2Q versus 1Q or anything you guys can comment on the labor front that may have changed in the second quarter?

Yes, I think we got a little bit more efficient. You saw some of that in supply chain and some in our corporate stores as well. And honestly it's -- we have the high quality problem of keeping up with volume. And as strength continued in the second quarter, I think the teams did a nice job of doing a little bit more efficiently than we did in the first quarter, and I think that's really it.

And then, I know you guys don’t want to give too much detail on the loyalty program, but how significant or how important were -- is the pizza profiles in terms of getting your sign-ups for this loyalty program?

Very important. You know the pizza profile has been fundamental for us on a lot of things. It has allowed a lot of the extensions that we've done on digital ordering, because we already have all of the information there. And for people to join our loyalty program, all they got to do is click a box. And so, the ease with which people can sign up for our loyalty program is clearly been part of the strength and our ability to drive penetration in that program has been part of the strength of the results. It's very much within the range of what our team predicted it to be and that number was predicted to be pretty high based on what we thought was a very attractive program, but then also, importantly, the fact that it is very easy for them to join the program. So, I think your question is dead on and it certainly has played into it.

Great. Thank you very much and congrats on the quarter.

Thank you.

Your next question comes from Jeffrey Bernstein with Barclays.

Great. Thank you very much. A Couple of questions. One, just on the delivery side, maybe just bigger picture on delivery, I’m just wondering how you think about a couple of things. One, whether there is any potential for you to maybe provide some of your delivery service for others within retail or whatnot. And two the potential on the flipside that maybe you could see some pressure as third -- all these third-party services deliver more, whether they’re delivering for traditional QSR or casual dinners, whether that could work against you. Just wondering how you think about those two things?

Yes, we are the most efficient delivery system out there for food. We’ve got scale. We’ve been approached by virtually every one of the players at some point, and we like our competitive position. And so, I would not expect that you will see us doing that. We are very, very good at this. We’ve got critical math of volume in our delivery business. We’ve been perfecting efficiencies around it for 56 years, and that is certainly not something that we are going to lend to other parties. And overall I think what you’re seeing is, a lot of people who are trying different things within this space taking different approaches, some around food, some around packages, obviously people moving people around, and they are still getting I think their arms around the variable economics of doing that for kind of each of those three categories, moving people, moving food and moving items. And some of my learning that it is far more about people and logistics and managing a very large distributed group of people making those deliveries that it is about kind of the technology behind it. And so, we love our position in delivery. We do it awfully well, and we’re going to continue to do it ourselves.

Go it. And then just one other thing on the outlook as we look to the back half. I’m wondering if you’ve looked over time in terms of election years and Olympics and whatnot. I’m just wondering whether you’ve seen any correlation in terms of benefit to sales if consumers are glued to the television or maybe on the flipside whether your advertising spend spikes because spot prices are elevated. Just wondering how either of those events could impact you both on sales and the cost of advertising?

Yes, so there are really two questions in there. One is, within the overall of a quarter, it won't make that much difference and really never has. There will be some days or some nights that might be particularly busy, but within the overall context of quarter I wouldn’t be looking at, at a material move one way or the other. We’re a national advertiser. That actually, your second part of the question that has been an issue in the past. In election years they’re doing local buys and that when we were buying locally it used to be a real issue in Election Years. Because cost do go up, availability gets pretty constraint, and we used to have to spend a fair amount of time working around Election Years as a local buyer. While the answer is, we’re almost entirely a national ad buyer now and as the advertising buys for campaigns are not national typically that vast, vast majority of spend goes into swing states, and so for us it won't be an effect. For those who are buying locally they’re probably spending time trying to figure out how to work around the political buys.

Understood. Thank you very much.

Your next question comes from Matt McGinley with Evercore ISI.

Good morning. I guess I have a quick follow up on the advertising as well, and primarily relates to the advertising fund asset you have on the balance sheet, that’s up quite a bit year-over-year and its up relative to revenue, it's up relative to stores. Can you give me some context to why that would be so high? Did the sales surge later in the quarter or it’s just the function that you have a bigger plan queued up for the back half?

The short answer is high sales. And remember a decent amount of that is actually against advertising that has already been spent, and the bills haven’t come through yet. So there is a little bit of an asset that gets carried there. But it is higher than average right now. We make our commitments for the majority of our spent in the upfront and that is generally the most efficient place to be buying advertising. So when sales and store growth are particularly strong, you may see that number build. And then we’ll make higher commitments in upfront based on both that asset kind of building up and then kind of expectations of sales going forward. So that's really primarily why that has built up at this point.

Got it. And a quick one on insurance, your casual insurance rates have been pretty lumpy on a quarter-to-quarter basis, and I guess that's more of a common to what happened last year in the third quarter. But for the past two quarters it's been higher relative to the trend. Should we assume that the insurance line item on that company owned store is just kind of structurally higher on a go forward basis?

Yes, Matt, it's Jeff. Good question. As we talked about last year third quarter when we kind of had the unexpected actuary of -- unexpectedly large actuarially adjustment, we committed to start doing it twice a year which is what you’re seeing in this quarter. A little bit higher in team USA, a little bit higher in supply chain, probably within a reasonable band, plus or minus, what you can expect when you have a $43 million liability sitting on the balance sheet and certainly materially less than what we did in Q3 last year. So, very Q2 and Q4 you’re going to see that adjustment being flowed through whether it's good, bad or sideways. I think the important thing -- so to answer your question, it could be a little lumpy in those quarters good or bad. I think the important thing for us is, safety teams are in place working hard every day making sure our team members are safer. And yes, I think that will help drive the number and hopefully manage the number better over time, but feel good about where the safety teams are. As you know actuarial studies are -- have a tail off. They have a long memory, then you have to prove to them you are materially better before they give you credit for it. That's what we’re working on right now. And we think long term it won't be as big of an issue certainly as it was in Q3 last year.

Thank you.

Thanks, Matt.

Your next question comes from Chris O'Cull with KeyBanc. Chris O'Cull: Thanks. Good morning. Congratulations on a great quarter.

Thanks, Chris. Chris O'Cull: I had a follow-up on the global unit development. I think Jeff, you mentioned or Patrick you mentioned that the conversions did not have a meaningful impact on unit openings in the second quarter. But when do you think they will have a more meaningful impact on the rate of growth? And do you think you could a point or two to the 8% to 9% rate you just showed this quarter?

Well, the number on the conversions in total is, you’re looking at about 200 stores in Germany. You’re kind of in the 75’ish range in France, and kind of a similar number in South Africa. Most of the stores are already converted in South Africa and that's been happening over the last year or 18 months and it's still relatively early, it's still quite early in Germany and we’re kind of mid way through or so in France. So, and that's -- so in terms of it adding a point over time, I mean the answer is it's going to add a total of kind of call it 300 stores over the starting 18 months ago until kind of a year or two from now. And then those are done and then we’ve got a base to grow off of in those markets. We were already in France and big in France. But this is really more an entry strategy in South Africa, it was -- our first store there was a conversion of actually the first one was a new build that they’re basically better conversion of those stores there. In Germany we had a very small presence and this conversion of Joey’s is really what’s getting us scale. So, that's kind of more in the onetime events, sort of a category I guess on doing those conversions. So over the long-term as we give long-term guidance on store growth, it won't have any real effect over a three, five, ten year basis. It's going to be a nice onetime bump-up, but it necessarily accelerate on kind of a percentage basis, the store growth level over a long-term. Chris O'Cull: That's helpful. And just as a follow-up to that, the -- what’s the unit potential in Germany and South Africa compared to where you are today?

Well certainly the potential in Germany is very big, and then you’re looking at a market of what 80, 85 million people. And by the time this conversion is done we’ll be the leader in the market. And so you’re looking at a market that's kind of the same size and scale of call it the UK, maybe even a bit bigger. And so, certainly the potential there is very, very large. We’ve got to get our arms around this conversion and make it work and we’ve got a lot of learning to do there. The team who built Joey’s that we’re converting is still the team running this business. I spent some time with them together within the last month and will be over there I am sure within the next year or so and then our team is over there on the ground, and we feel very good about it. But it's going to take some time to kind of get it where we want to be. Early signs are all positive. France little different, because they’ve already got a scale business there and this is really an acceleration of our path towards kind of full potential. But Germany absolutely could be a big market. It has typically been a tougher market. It's taken us some time to make progress there, and we love the team that's there now. We love DPE and DPG having joint ownership. DPE has brought a team in to work with them. So over time I think it's going to be terrific, but it's certainly going to take some time. Chris O'Cull: Great. Thank you.

Your next question comes from John Ivankoe with JPMorgan.

Two I think pretty short questions if I may? First on the pizza theatre in the United States, I think you mentioned 60% were on the new format, obviously 40% to go. How much has the experience shown to lift sales in the units that have been converted maybe on a one and two year basis? And is that a potential substantial driver for your comps as well?

Yes, John, I think it's really been more. It's really more driver of the comps you’re seeing and that gives us some confidence going forward. The numbers have continued to stay in the range we talked about before which is an initial conversion or an initial reimage the store gets you a fairly minimal bump in the short-term, call it a point or two maybe three, but really more in the point or two range. But what we see is kind of the catalytic effect. Which is as more and more stores are reimaged for a brand that has aspirations to do everything well and a growing carryout business, we’ve got to have a great experience for people in stores we didn’t before. And what we always talked about is that we think that this conversion is not going to be really compelling on a short-term basis store-by-store, but that it's going to be part of what builds the momentum around the brand overall, and for once I think we got it right. So I think that's exactly what we’re seeing play-out which is, the overall momentum playing into the brand as it was an area of weakness. Our stores just didn’t look great. It wasn’t a great experience when people came in for a carryout pizza, and with this it is a terrific experience.

Agreed. Thank you. And then secondly, you’ve mentioned in a couple of different conversations cost of labor. I wanted to talk about availability of labor and not just your labor going at other types of third-party delivery but other careers that they may have what have you. So, are there any kind of issues as you’ve been through a few different economic cycles in your career. Are there any markets that are kind of bubbling up where you say, it's not that the stores can’t handle the capacity, just you’re having a hard time finding the quality people that you need to execute your brand?

Yes, so I’ve been at Domino’s now 19 years and when I talk to the system, we are always talking fundamentally about one of two things. It is either top-line sales or it's staffing. And clearly top-line sales are terrific. So we’re all spending a lot of time talking about staffing in our stores. And it is the better of the two things to be talking about. So our franchisees are doing what they do best, which is adapting to their individual market conditions. There are certainly markets where labor is tighter than others, but in general you are clearly seeing a healthy demand for labor out there, for people in the stores. Our growth gives us ability to -- and profitability in our stores gives us an ability to compete effectively for those people. And -- so yes, the unemployment rate in the USA is down to 4.7%. It has gotten tougher to hire people into the stores. Our reimaging program frankly pays -- plays too bad of the fact that it's a better environment for people to work in, makes it easier for us to hire great people into those stores. When the stores were frankly uglier, it was harder to hire them into those stores. So a great bright fun winning environment makes it easier for us to hire people and the right people and keep the stores staffed and give great service to our customers. But the reimage program absolutely plays into that as well.

Thanks, Patrick.

Yes. Thank you, John.

Your next question comes from Stephen Anderson with Maxim Group.

You had answered most of my -- just about all my questions I had on the call, but thank you.

All right. Thank you.

Your next question comes from Joseph Buckley with Bank of America.

Hi, guys. This is Greg. Just two questions. First is on average ticket. I know you talked about it being relatively flat year-over-year during the quarter. How does the average ticket today stack-up to where it was five years ago? It doesn’t seem to me like you’ve taken a lot of pricing on your base pizza, and there might be an opportunity to raise prices going forward that you may have gotten into a better value position. Can you just address, that is my first question and then I have one other.

Yes, I mean, I’m not going to get into the specifics on tickets, but ticket is higher clearly than it was five years ago not a lot higher but it is certainly higher. The interesting thing is there are kind of four things I guess, that broadly that play into the ticket. One is, digital ordering, and ticket is higher on digital orders than phone orders, a little bit. I mean it depends on kind of the service method but it is a little bit higher, and so that plays into it. Ticket is higher on delivery than it is on carryout by quite a bit. And carry out has become a bigger and bigger part of our business over the course of the last decade. So you almost need to pull it apart and look at when we’re looking at it, we’re looking at what are the tickets doing in carryout versus what is tickets doing in delivery. And the fact that carryout has been growing a little faster over the past decade and so that is overall percentage of sales it means our overall ticket growth winds up looking a little bit more muted. Then there is ticket based on how much you are selling. So how much food people are taking in the basket and that, some of that plays back to digital ordering because people have the full menu in front of them. They’re going to wind up buying some things that they might not have bought if they were just doing it over the phone. And then really the fourth part is pricing, and what’s happening within specific pricing and pricing moves, and all four of those things kind of factor into that overall ticket number. And then there has been a reasonable amount of move in all of those, so that often I think price kind of gets translated directly as what’s happening with ticket. And there are some other big components that kind of play into what’s happening within ticket other than simply the price part of it. So the answer overall is ticket movement has been there. It's been relatively modest, but there’s an off a lot of different things that kind of play into it.

Got it. That's really helpful. Maybe just to the follow-up, do you think the pizza industry or category has underpriced maybe other segments in QSR?

I think the pizza category gives great value based on kind of a per-eater basis versus other parts of the category. I think there was a time 10 years ago when frankly the pizza category had gotten too aggressive on price and it was hurting order count in the industry. I think we’ve done a much better job overall of giving great value to consumers and that's clearly part of why the pizza category has probably been a little bit better on overall growth versus the overall QSR category. So I think it's a question of discipline around pricing and making sure that we’re doing right by the consumer and then you watch what’s happening with our overall level with store profitability, we’re making that work in a way that's also very compelling for our franchisees.

That's really helpful perspective. And just my second question, on G&A and not looking for necessarily a next year target. But as we look at how you think about the variability to the sales, is this a -- been a line that you can leverage or maybe how much leverage can you get on there as sales increase over the next few years?

Yes, it's Jeff. As you look at G&A gross versus revenues, you kind of get a bellwether as to how that bounces around, call it 12%, 13% over time. But even that metric is a little goofy, because our revenue is based on FX and supply chain pricing can sway that, it really doesn’t give you a true sense of how it's benchmarking. I think the more important thing is a couple of things. The G&A that we show you is stuff and the increase -- there is stuff that's really driving the business, and it's an inseparable part of these kind of comps, these kind of retail sales growth and these kind of economics for our franchisees. And the other thing is, we don’t show a net G&A, the regulators don’t let us show you that. But there is a non-immaterial amount of franchise contribution sharing the critical investments with us particularly around digital, they’ve always done them on advertising of course, but it's a new world, so they’re contributing on digital as well. We’re not able to really net those two together to show you kind of a true economic picture of how the investments net roll through our P&L, but they’re all in there when you look at EPS and it's just one of the things that gets us comfortable with the investments we’re making, it's in digital, it's in technology, it's in international. And we’re going to continue to make the investments. So I can tell you it's not back office stuff, its stuff that's really driving the results just you’re seeing, and we’re not going to shy away from being aggressive on these investments.

Thank you very much.

Go ahead.

Sorry. No, I cut you off.

No, I was just going to say, the other things that mean just kind of thinking about some of the dynamics within G&A and as you think about it and kind of the performance of the business, advertising for our corporate stores is in G&A. When sales go up a lot because they are contributing to our national ad funds, G&A goes up because sales have gone up. So, strong performance top line and in total our corporate stores are kind of with -- a little bit of store growth plus comp. Second quarter you’re kind of looking at 10% overall growth in sales. On a $400 million business, at a 6% ad spend it's actually a pretty significant increase in G&A year-over-year. So if there are a lot of different things that are in there, some of which actually get tied directly to volume.

Got it. Thank you.

Your next question comes from Mark Smith with Feltl and Company.

Hi, guys. Real quick, can you just talk about the profitability of carryout order versus a delivery order? And if this is -- it's been a contributor to the higher margins that you’ve seen as you talked, Patrick, over this grow in the last decade?

Yes. So, lower ticket but also lower cost, because you’re not performing the delivery for them. And so overall well I am not going to give the specifics. In terms of dollar profitability, I wouldn’t think about them as being dramatically different. The components of it will look at little different. Food cost will be a little bit higher, labor cost will be lower, ticket will be lower. But at the end of the day what we worry about at the dollars that you take to the bank, and all of that nets out reasonably at the end of the day.

Thank you.

And we have no other questions in queue at this time. And I would like to turn the conference back over to our presenters.

All right. Well listen, thank you all for joining us today, and we look forward to discussing our third quarter earnings with you on October 18. Thanks everyone.

Thank you for your participation. This does conclude today’s conference call, and you may now disconnect.