Domino's Pizza, Inc. (DPZ) Q4 2012 Earnings Report, Transcript and Summary

Good morning. My name is LaShondra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 and Year End Financial Results Earnings Call. [Operator Instructions] I will now turn the call over to Ms. Liddle. You may begin your conference.

Thanks to you, and good morning, everyone. We're excited to be here with you today. I'm just taking care of the little housekeeping items, such as making sure that you've all looked at our Safe Harbor statement in the event that we do make any forward-looking statements and also kindly ask the media to be in a listen-only mode this morning. With me today, we have our CEO, Patrick Doyle; and our CFO, Mike Lawton, who will make some prepared comments for you, and then we'll open it up to Q&A. So with that, I'm going to turn it over to Mike.

Thank you, Lynn, and good morning, everyone. We continued to build on the positive results we had in the first 3 quarters of 2012 and delivered another solid quarter for our shareholders. The international division led the way with both strong same-store sales and store comp growth, and our domestic stores also posted positive same-store sales and store comp growth. Our bottom line grew in the fourth quarter with 21.6% net income growth over the prior year, which provided additional free cash flow for share repurchases. Here's how the fourth quarter came together. Global retail sales, which are the total retail sales at franchise and company-owned stores worldwide, grew 9.4% when excluding the impact of foreign currency. When we include the impact of foreign currency in the quarter, our global retail sales grew by 9.7%. The drivers of this growth included domestic same-store sales, which were up 4.7% in the quarter, lapping a positive 6.8% in the prior year quarter. This was comprised of franchise same-store sales, which were up 4.9%, and company-owned stores, which were up 2.5%. Our Pan Pizza launch in the fourth quarter positively impacted our same-store sales and also drove an increase in order counts. Our international division had another good quarter, as same-store sales grew 5.2%, lapping a 4.7% increase in the fourth quarter of 2011. Now we opened 32 net stores domestically in the quarter, consisting of 51 store openings and 19 closures. For the full year, we opened 21 net domestic stores, and we remain focused on growing our store count in the United States. Our international division grew by 183 stores this quarter, made up of 223 openings and 40 closures. For the full year, we had a record international growth of 492 net new stores. Turning to revenues. Our total revenues for the quarter were up $37.9 million or 7.6% from the prior year. This increase was primarily a result of 3 factors: first, higher supply chain revenues resulting from both increased volumes from higher order counts and a change in the mix of products sold per order; second, higher international revenues due to increased same-store sales and store count growth; and third, higher domestic royalty revenues due the same-store sales growth and the impact of increased store count. Moving on to our operating margin. As a percentage of revenues, our consolidated operating margin for the quarter increased 0.9% from 28.9% to -- from 28.9% to 29.8%. This change was primarily driven by 3 factors: first, company-owned store operating margins increased as a percentage of revenues from the prior year quarter due to reduced utility and occupancy costs as well as adjustments in our self-insurance reserves; second, a change in our mix of revenues positively impacted our operating margin, as we now have fewer company-owned stores and more franchise royalty revenues; and third, our supply chain margin percentage increased slightly from 10% to 10.3% due to the positive impact to product mix and efficiencies at our facilities. On a separate note, commodities were up slightly during the fourth quarter, but ended fiscal '12 -- 2012 fairly flat, and the market basket in the stores was down 0.3% for the year. As I stated at our Investor Day in January, we currently expect to see a commodity increase of 3% to 4% in 2013, which we believe will be manageable in the overall context of our business. Turning to G&A expenses. G&A increased by $3.9 million or 5.7% quarter-over-quarter. The increase was due to investments we're making to feed our international growth engine and to continue our technological advantage. There was also additional expense from variable performance-based compensation. Our G&A for the full year 2012 was $219 million. As we look to 2013, we expect to have increases for international support personnel, e-commerce and technological support and other strategic initiatives. Additionally, we now expect 2013 G&A to be higher than previously communicated because of an increase in noncash compensation expense, which I will elaborate on shortly. The result is an expected increase of $9 million to $13 million over our 2012 reported levels. Keep in mind that G&A expense can vary up or down by, among other things, our performance versus plan, as that affects variable performance-based compensation expense. I'd also note that we charge franchisees for providing e-commerce and technological support, and we expect to have increased revenues of $1.5 million or $2 million in 2013 related to these services. Regarding income taxes, our reported effective tax rate was 37.7% for the quarter. We currently expect that 37.5% to 38.5% will be our normalized effective tax rate for the foreseeable future. Our fourth quarter net income, as reported, was up $6.7 million or 21.6%. This increase was primarily the result of our higher domestic and international same-store sales, international store growth and higher company-owned store and supply chain margins. Our fourth quarter diluted EPS was $0.64 versus $0.52 in the prior year quarter. $0.64 is a $0.12 or 23.1% increase from the $0.52 in the fourth quarter of last year. Here's how that $0.12 difference breaks down: Our improved operating results benefited us by $0.13. Our lower diluted share count, primarily due to our share repurchases, benefited us by $0.01, and a higher effective tax rate negatively impacted us by $0.02 due to a slightly lower effective tax rate in the prior year quarter when we had a lapsation of some federal and state statutes of limitation. Now turning to our use of cash. In the fourth quarter, we utilized some of our available cash to repurchase and retire approximately 1.1 million shares of our stock for $45.5 million or an average price of $40.05 per share. For the full year 2012, we repurchased approximately 2.5 million shares for $88 million, or an average price of 35.68 per share, and we ended the year with $54.8 million of unrestricted cash. Looking forward, we believe we have cash beyond what we need to reinvest in our business. When considering this excess free cash flow, we've got 3 options: we can pay down debt, we can buy back stock, or we can pay dividends. Given that we are comfortable with our level of debt, we currently do not plan to pay down debt any faster than the required amortization. Based on our evaluation of these options and our historical consistent free cash flow, the Board of Directors has initiated a quarterly dividend of $0.20 a share. We also plan to continue to use our excess free cash flow to repurchase stock. In recognition to the loss to economic data option holders as a result of the initiation of regular dividends and due to the board's desire to both reward and retain our proven management team, the Compensation Committee approved an additional grant of equity instruments. This additional grant does not take the place of our usual annual grant and is the reason we updated our G&A outlook. Further details will be disclosed in both our 10-K and our a proxy statement. In closing, our strong fourth quarter continued our consistent performance throughout 2012. Our focus remains on improving our operating performance, growing our global store base and utilizing our free cash flow to drive shareholder value. Thanks for your time today. And now, I'll turn it over to Patrick.

Thanks, Mike, and good morning, everyone. Nothing makes me happier than reporting another great quarter and another terrific year. Really, everything went our way in the fourth quarter, and it capped off a very successful 2012. We maintained our store growth and sales momentum, we grew market share in the U.S. and in international markets, we increased EPS by 20%, and we reached 10,000 stores worldwide, putting us in a league with only a select few restaurant peers. We also hit over $2 billion in digital sales globally, making us a top technology brand around the world. And as Mike just mentioned, we're proud to have also just announced the initiation of a regular quarterly dividend. Domestically in the fourth quarter, we launched our Handmade Pan Pizza, a very high-quality, fresh-dough product that we believed would be a hit with consumers, and we were right. We helped drive higher sales as well as increase traffic into our stores, something that's a key metric for us. Early indications are that online customers were some of our best pan pizza customers, engaging strongly with this new product. Consumer feedback on the product has been very positive, and our theory is that consumers prefer a fresh-dough product over frozen alternatives. We now have a product competing nicely in this category, and we're gaining a meaningful foothold with lots of opportunity for future growth. Meanwhile, the net domestic unit growth we recorded in the fourth quarter means that we ended the year up 21 net new stores. Modest growth, but we consider it a hopeful sign for continued U.S. store development in the years to come. Promotions that increased store-level profits at our successful Pan Pizza launch, coupled with tame commodities, all led to a strong year for franchisee store profits, which ultimately leads to an energized franchise base. In fact, our franchisees recently voted to increase our national advertising spend going forward, upping it to 6% of top line sales from 5.5%. Through extensive market research and media modeling, we were able to make an informed and thoughtful recommendation for increased national advertising toward domestic franchise owners. This is expected to be a shift from local advertising into national advertising, and we think this is a positive vote of confidence from our franchisees. Our franchisees in the U.S. have a lot to feel good about, including our strong technology focus, which we believe is giving us the edge over smaller pizza players and garnering market share increases. Our best information so far indicates that our growth in 2012 was higher than the overall category and that our ability to continue to gain market share in the U.S. grows with our continued innovation around technology and the consumer experience. From store operations to direct marketing, technology was an important focus for us in 2012 and will remain an area of investment and leadership for us in 2013. Another area of leadership for our brand is in our international division, where we have once again produced excellent results. International store growth was robust all year, and the fourth quarter was no exception, as we ended the year up a net 492 stores, our best year ever for international store growth. That dynamic store count growth was matched by another remarkable year for same-store sales, up 5.2% in the quarter and for the year. For those keeping score, that is 76 consecutive quarters of positive same-store sales, which is 19 years of positive growth from this division. And the international franchisees did this in a year when the macroeconomic picture wasn't all rosy. But again, we drove good, steady results from a wide mix of countries. In large countries, small ones, new markets or established markets, our geographic diversity and long runway for growth has helped keep our international business vigorous. Our international business continues to be a growth engine for Domino's Pizza. Notable markets with good sales growth in the quarter included South Korea, Turkey and Brazil, and even an economically troubled market, like Spain, managed to have positive sales results in the quarter. Continued success in store growth in our international business has resulted in the change in our long-term outlook, as communicated in January. We now believe that we will drive 4% to 6% global net unit growth, which is an increase over our previous range of 350 to 400 net new units. This also led to an increase in our global retail sales range, which we now believe will fall in the plus 6% to plus 10% range. This change reflects the confidence we have in our international business and the tremendous growth potential that this division can drive growing forward. We believe investors have good reason to be happy with their investment in Domino's in 2012. We increased adjusted EPS 23% in the fourth quarter and nearly 20% for the full year. We used $88 million of cash to repurchase shares, we paid a $3 special dividend,, and the stock price rose 28% in 2012. And now, we're establishing a regular dividend, maintaining the ability to repurchase shares. In conclusion, 2012 was a tremendous year. I have the privilege of leading a great team here at Domino's. From committed and passionate franchise owners to strong visionary leaders in our management ranks and team members that bring positive energy to our stores, the success we drove in 2012 couldn't have happened without the commitment of all of them. I want to thank our shareholders for their trust and loyalty, and I look forward to strengthening your commitment to the brand in 2013. With that, operator, I'm ready for questions.

[Operator Instructions] Your first question comes from the line of Brian Bittner of Oppenheimer. Brian J. Bittner - Oppenheimer & Co. Inc., Research Division: A quick, quick question on just kind of the industry dynamics and where you think your company sits right now. A lot has changed in the industry and the spending environment since your fourth quarter ended. You've had some softness across the industry. What are you guys seeing in the overall pizza space? And at the end of the day, do you think that your new Pan Pizza, the technology tailwind you have, all the things from a bottoms-up standpoint, do you believe you kind of are -- have the ability to negate these slowing trends that we're seeing across the industry?

Yes, Brian. I'm not going to get into kind of the first quarter, obviously, but I guess what I'd say is nothing that's been happening in terms of kind of the government and what's happening there has been a surprise. And we've been talking about value for a long time, we've been delivering value for a couple of years, and it's been delivering good results for us. So really no change on that front. And kind of what happened in January didn't come as a surprise. Pan Pizza clearly performed very, very well, I think even exceeded our expectations a little bit. And the technology has continued to move along nicely. So I'm not going to get into Q1, as I know you know I won't. But what I would say is that nothing that's happened in the first quarter has been a surprise in terms of what's happened with the government and all of that. So we were prepared for that, we were doing what we expected to -- that we needed to do to kind of meet that environment. Brian J. Bittner - Oppenheimer & Co. Inc., Research Division: Okay. I figured I'd take a stab at it there. As far as this dividend, how did you decide on the amount of the dividend? Was it that payout ratio as a percent of earnings? Or was it some other type of calculation? And at the end of the day, how are you going to think about growing this dividend into the future? Again, is it going to based on the payout ratio? Is there some type of just growth you want to sustain the rate at going forward? How are you thinking about that?

I think the answer is we wanted it to be a meaningful dividend. It's kind of 35% to 40% of our net income for last year and roughly 1/3 or so of our free cash flow. I think free cash flow last year came in at about $146 million. So it still leaves us $100 million of free cash flow on last year's number that we can use flexibly. And so I think the answer was this is an environment where there are a lot of investors looking for yield. The consistency of our cash flow lends itself to being able to do this. We wanted to give people a material yield, but at the same time, maintain some flexibility with still incremental free cash flow to make decisions going forward on how we're going to spend it. So that's really the thought. And as to what the future is going to be, that's going to be decisions we're going to make in the future as we see how the business is growing and developing. Brian J. Bittner - Oppenheimer & Co. Inc., Research Division: Okay. And last question that you may or may not answer. As far as the Pan Pizza, are you able to give us an idea of what percent of the order mix that was in the fourth quarter and possibly what the effects on the average ticket were for the overall business?

What I can tell you is -- well, I'm not going to get into the specific mix, because I know our competitors would love that number, as I think you knew. The answer is, it did exceed our expectations a little bit, and we did finish the year -- after a first half where order counts have been down, we were strong enough on order counts in the second half of the year, and particularly in the fourth quarter, that we finished with modestly positive order counts for the year. So the overall effect was great. We definitely drove more customers into the franchise. I'm not going to give the specific number on mix, but I will tell you that it was a bit ahead of our expectations.

Your next question comes from the line of Michael Kelter with Goldman Sachs.

I wanted to ask about the switch from 5.5% national advertising to 6%. Can you give us an idea of how much your overall ad impressions in the U.S. might be up in 2013 as a result of the shift?

Yes, Michael. The answer is it will be up somewhat. You've still got media inflation to offset. You will see some of this going to digital, which -- as opposed to just mass media advertising. And importantly, as I said in my prepared remarks, our recommendation to our system is that this is a shift in spending, that this is not an incremental spend, but that they're taking basically an equal amount out of their local spend, which is mostly print, and moving it to the national level, because we're just simply seeing a better return on investment of those dollars. I think what's most important in it, frankly, is that our system had the confidence and the trust in what we're doing and the results that we've been driving to make that commitment to us. So I think the answer, Michael, is you're going to see some increase in mass; you'll see probably a little more increase in digital, where we continue to have a great return on investment. But it should be a shift in spending, not necessarily, in the totality of their advertising spend, a net increase.

And then on a different topic. Your franchisees in international opened 75, 80 new units -- net new units in 2012. And I'm curious, I mean, if you open many more than that in 2013, you'll be pushing through the upper limit of that 4% to 6% unit growth guidance that you just gave. And I ask partly because the public franchisees that are out there are all talking about growing more units for you next year, and at your Analyst Day, you talked about some of the secondary countries gaining speed and growing more units for you. So might that 4% to 6% range turn out to be almost antiquated before the year starts?

Yes, Michael, first of all, it's a long-term forecast. You said something about 75 stores that I didn't get at the beginning. We opened 492 net internationally for the year. You said something about 75 and I didn't...

That was for the fourth quarter. I wasn't clear, sorry. Or maybe I got it wrong. Either way, the question stands. I'm not sure if I got something wrong. But the question about the -- getting through the 6% number, it seems like it's something that you'll be able to do with relative -- maybe relative ease.

Well, we've got a bigger base. I mean, we finished the year at over 10,200. So you'd have to be -- we'd have to be well north of 600 net stores. And last year, we were just a little over 500. So that would be -- we were right in the middle of that range last year, where we were, and that is our best guidance for where we think we're going to be, is kind of that 4% to 6% on a long-term basis.

Okay. And just for clarity, the 75 to 80 units was how many more new units they built for you this year versus the prior.

Okay, it was the net increase. Got it. Got it. No, I mean, look, it was a terrific year for us on store growth. And part of that is what led us to increasing the range on net openings to kind of the 4% to 6% range. But -- so now I get it on 75, that was the net increase in the openings versus the prior year. But no, that would be a pretty big increase to get us over the top of that 6%.

Your next question comes from the line of Jeff Bernstein of Barclays.

Just a couple of questions. First, on the U.S. business with the new menu that you've implemented over the past couple of years, it's obviously there's been an evolution, and it seems like it's perhaps changing the mix of customers. I'm just wondering if you could talk about your delivery business versus your takeout business in terms of the growth rates of both, how do you think about profitability for both, just kind of thoughts in terms of the different ways people use your brand?

Yes. So carryout has grown a little bit faster than delivery over the last few years, but we're getting growth from both sides of the business. But in the overall category, particularly going back even a little bit longer term, carryout has clearly been a little stronger than delivery, if you go back kind of 3 to 5 years. From a profitability standpoint, the ticket on a carryout customer is lower than the ticket on a delivery customer, but your costs are also lower because you're not delivering to them. So net-net, we're relatively agnostic between -- from a profit standpoint on carryout or delivery. They're both nicely incremental for us when we pick up new orders on either side. So -- but yes, I think the one thing in there is carryout has definitely been a little healthier than delivery over the last few years.

Got it. And then just in the advertising spend that you talked about. Just to clarify, I know you had said it's going up from 5.5% to 6%. But you're saying the -- so what does the franchisee spend in total? Presumably it's well above that major shifting in their -- first, I want to figure out what the franchisee paid in total, because it sounds like you're saying they're not going to increase their spend, it's just moving 50 basis points to you.

Yes, typical is that they're spending a couple of percent more. So they've got 2% or so more that they're spending on -- mostly on print. So the coupons that you're seeing showing up in the Sunday papers and in your mailbox. And we're simply seeing a better ROI on the activities that we're doing at a national level than we've seen on some of the local. We did a lot of research around it, kind of media mix modeling, and went back to them with a recommendation and said, "We think you should keep your overall spend consistent with what it's been, but the shift 0.5% out of your local into the national."

And that was approved across the board? So now everybody does the same thing?

Yes.

Got it. And then just lastly, the international -- obviously a very impressive run, and you mentioned that it's obviously not all rosy outside the U.S., and you highlighted some of the markets that surprised you to the upside. I'm wondering, just because you have a better view of the world, perhaps, than we do, and maybe the 2-year trend slid a little bit, I'm wondering whether there were any markets where they're starting to see increased pressure or slowing trends?

What I'd tell you is what we've been most worried about -- and I think you've heard me say this before, has been Europe. And it just hadn't been showing up in the numbers. And I think you've seen in the restaurant industry, you've seen a little bit more pressure there than the other regions, and it hasn't shown up in our numbers. And this was another quarter where we were watching it carefully. And as I mentioned in our prepared remarks, Spain actually finished positive in the fourth quarter, which was a bit of a turn for us. So that's the -- that's it. I mean, there are some smaller markets that have been negative. I've talked about Greece in the past, and there are certainly a few others out there. But overall, geographically, it's been pretty strong everywhere.

Your next question comes the line of John Glass of Morgan Stanley.

Just going back to the Pan Pizza introduction. The idea was this was a new product platform for you, and maybe there were some customers you hadn't reached before. And you also said a lot of the orders came from online, which maybe suggested the existing user base was using it. So maybe directionally, how many do you think you got new customers that came in to the brand? They were lapsed users, or were you just really getting your existing base excited about a new product, and they were buying more of it?

John, I think the -- really, what we saw is there were occasions -- I mean, we brought in some new customers, but I don't know that it brought in any more than we are typically bringing in. I think what we saw more was customers who already did business with Domino's that would take their pan business elsewhere started giving us some of those occasions. And I think that was -- I think what that was really the primary thing that was going on.

Got you. Okay. And then just a couple of -- Mike, just a couple of questions for you. One is, the distribution business grew a lot. You explained that was the variance there. But relative to the first 3 quarters, distribution revenues grew substantially more. And there was a comment about mix, I think. What was -- was there something specific? Was it the pan that drove more distribution mix, or what else was in the quarter that may have driven that unusual amount of growth?

The Pan Pizza drove a lot -- we measure volume in our commissaries in pounds, and the Pan Pizza volume drove a lot of pounds through our commissaries.

Okay. Pan Pizzas are just heavier than normal pizzas?

It's heavier. You're also -- there's more toppings on it, you're selling a little more cheese. You're...

We had very nicely positive order counts, too. I mean, we just simply had more traffic, whereas we were kind of fighting traffic earlier in the year.

But your comps were -- I mean, was your traffic above your comps, then, for the fourth quarter?

Our traffic above our comps?

In other words, did -- it was traffic growth in excess of the total comp growth.

Yes, it was in that range. It was in that range. We had very strong order count growth in the fourth quarter.

Okay. Interesting. And then just on the change in the compensation expense. I understand it this year, but it sounds like it's a permanent or at least 3- or 4-year phenomenon where you've got expense of this incremental compensation, noncash compensation, over a period of time. Would that be right? And would it be about this order of magnitude in future years?

It's -- because we've changed the vesting period on both this grant and on future grants from 3 years to 4 years, it will be spread over 4 years, and it would probably be the same, or slightly lower, in the next 3 years. We'll also have slightly lower noncash comp on the grants that would be given on the typical basis because it will also be spread over 4 years in the future instead of 3.

Okay. And then just one last one is the shift from that -- local and national advertising you cited, sort of couponing or the print as being a reduction. Are you actually able to coupon less now because of the strength of brand new products, you're actually able to reduce the amount of couponing? Or is just -- is that a false read-through from what you said about the shift?

It's all about mix. So it's not that we necessarily can promote less or be out there with less activity. It's just simply we've gotten pretty good at reading the return on investment for the dollars that are being spent, and the return that we're seeing from activities that are being directed nationally are better than the returns we were seeing from local activities, which are mostly about the print. And so we shifted the dollars that way. So it's not necessarily that you can be less promotional or that we're sending out less deals, it's just about how you communicate them and how the customer reacts to them, and we're simply getting a better return from kind of nationally-driven activities, read: mass media and digital, for the most part, versus the print.

Your next question comes in the line of Mitch Speiser of Buckingham Research.

The 2 company stores that you opened in the U.S., were they the new prototypes? And can you talk about how they're performing in terms of carryout versus delivery or any differences you're seeing in the customer experience?

Yes. So I think one of them was a reopen of a store that had burned down, but we did do it in the new image. But the answer is, we're now up to something in the range of 100 stores that have gone through a reimaging process or were new stores that opened in the new image. We're not ready to kind of give conclusions around that. We need to kind of see how those stores perform over a period of time. We think there is going to be a need to reimage at some point. But we're trying to -- we're trying to watch these for -- and get a couple of quarters under our belts before we draw a conclusion from it. So early read, customers are happy, we like what we're seeing, but it's still too early to kind of draw a conclusion.

Okay. And with the business going well in the U.S., and it looks like U.S. units are beginning to uptick a bit, but still, as you noted, modest. Have you begun to rethink franchisee incentives at any level to drive more accelerated U.S. unit growth?

I mean, we've got targeted incentives out there. And they're targeted at some specific franchisees that have been willing to commit to kind of strategically growing their businesses with us, as well as some individual markets. We've always had incentives out there. We've shifted them around some, and we're kind of happy with the early returns on that. But it's kind of early on. As you say, at 21, it's still relatively modest. I think longer term, what's important is we think we had another year -- we know we had another year where franchise level profitability was up, and that's ultimately what's going to drive increased store growth is their confidence in a strong return on investment. So we're spending a lot of time there on how do we increase profitability even more, how do we make their return on investment even stronger? And that's ultimately really what's going to drive the store growth for us.

Have you discussed what the cost of the new prototype is versus a legacy type of store?

Yes. It's somewhat more expensive than the previous kind. If you build in kind of the same footprint with roughly the same kind of layout as we have today, which is the lobby kind of at the front of the store, it's relatively in line with existing costs. If you do kind of what we're calling the Pizza Theater, which is very open, and the lobby is kind of going down the side of the store and is likely going to be a somewhat bigger footprint, that's going to be somewhat more expensive. And as we do more of them, we drive more efficiencies in those costs, so we would hope to see those costs come down, but as we're doing them now, they are certainly a little bit more expensive than our past design.

Okay. I think my last question. Just on national media, in general, does that include any national couponing?

No.

Your next question comes from the line of John Ivankoe of JPMorgan. John W. Ivankoe - JP Morgan Chase & Co, Research Division: It's interesting to see, as your business migrates more to online and mobile ordering, what have you, and there's more funds allocated to national media, that there's increasingly the likelihood that you can really begin to take some people out of the stores, or maybe just reallocate some people away from things like answering the phones and what have you. So I mean, are you kind of getting to that point of critical mass where you're actually going to be able to lower labor hours or just reallocate labor hours very specifically, even on an increase in order counts?

Yes. I've worked -- we are definitely in that range. We're -- and I will tell you that early on, John, we didn't see as much of it as we would've expected, early. It did take some critical mass. When we were at kind of at 10% or 15%, we thought we were going to see labor efficiencies, and we really weren't. As we've gotten up to the level where we are now, kind of north of 35% in sales, we definitely see that now. Interestingly, one of the things that Mike mentioned from a margin standpoint at our corporate stores was around utilities. Part of that is phone lines. We've gone through and gone back and realized, as we're taking fewer orders in the stores, we don't need as many order-taking stations and we don't need as many phone lines into the stores. And it's about $30 a line, and if you take a couple of those out and spread that out over a year, it's 1/10 or 2/10 [ph] . And so there's just a number of ways where it shows up over time. But yes, at this level, we're certainly in the range where you start to see some labor efficiency. John W. Ivankoe - JP Morgan Chase & Co, Research Division: And is there significantly more to do go? I mean, I know you do have a national call center, which kind of acts as a rollover from what I understand. But the combination of that and online, I mean, is it still like a hundreds of basis point opportunity over, I don't know, the next 5 or 10 years?

No. From a labor perspective, it's not going to be that much. It's not going to be that much. There's still certainly more, and there still are stores that are below the average, clearly, and as they ramp up more, you'll get some more savings there. But it's not going to be hundreds of basis points on the labor line. John W. Ivankoe - JP Morgan Chase & Co, Research Division: Okay. And then secondly -- and I apologize if I just didn't understand this. The increased incentive comp in 2013, I mean, was that just more or less an award for what you guys have achieved over the last 3 years? I mean, was it something about retention or what have you that happened? Or I think to an answer to a previous question, was it just around the timing of what -- of the way these options are going to be vested?

I think there are a couple of things. I think, number one, it was a reward to the management team for performance and to retain us over the medium and long term. At the same time, we did move from a 3-year vesting to a 4-year vesting, which I think is also healthy from a retention standpoint. But it is also something that's -- we had a DER policy, a dividend equivalent rights policy, in effect in our option plan. It doesn't tie directly because the IRS had rulings on DERs and kind of how those are treated. So it's looking at initiation of a regular dividend and the effect of that on the value of stock options, and it's also just around kind of rewarding and trying to retain and incent the management team. John W. Ivankoe - JP Morgan Chase & Co, Research Division: But this at least -- some component of this should be kind of viewed as an isolated 2013 event that may or may not recur in 2014?

Yes. That's right. And it's just -- the reason you talked about recurring is, as they vest over 4 years, you're going to have some expense here. But no, that's absolutely right. I mean, this is going to be an unusual grant, it will be -- get expensed over a period of 4 years. But it's certainly not something you should expect on a recurring basis in terms of more new incremental grants like this.

Your next question comes from the line of Mark Smith of Feltl.

First off, just wondering if you can give us any insight into the health of the franchisees domestically, what they're seeing in financing? And then internationally, outside of the public guys, any insight you can give us into the health and desire to continue to grow?

This is Mike. On the U.S. side, right now, franchisees that have a desire to grow that have got experience are in great shape in terms of their access to financing. If you don't have a store and you want your first store, still real tough. If you've got a lot of stores, a lot of experience, most of our big franchisees are in very good shape. They have great access to money fairly cheaply. In the in-between guys that have got 3, 4, 5 stores and maybe up to 20, over the last few months, their access to financing has become a lot better than it was 1.5 years or 2 years ago. We've certainly seen a lot more opportunities for them grow if they desire. Outside the U.S., we've seen, obviously, great growth last year. We had 492 net stores. We haven't seen any indication that there are many franchisees that were part of that growth that are -- intend to slow down.

Okay. And then secondly, it's maybe too anecdotal. But yesterday, I was in California, bought gas for $4.69. Can you just walk us through, historically, with gas price spikes, what you've seen from the consumer? Also the impact on distribution and at the store level from delivery?

Historically, we have not seen a lot of change in the consumer behaviors as gas price spiked. And we also haven't had -- when you think of the gas prices going up and you think of us as a delivery company, typically, the first thought is, well, that means a lot more reimbursement to drivers, that means expenses go under a lot of pressure. There is more reimbursement to drivers, but it's not a huge additional cost at the stores. And when we see the gas price spikes, we typically have, from our history, a little more concern about how, over time, that can feed into the overall cost of the food supply, our ingredient cost. We've been -- we just provided information earlier in my comments that with what we see out there right now, it's still looking at 3% to 4% for the year, and we aren't seeing a change to that at this point based on the ag economists and the people that we use for inputs into our estimates.

So, yes, that's the big deal. I mean, we saw that in 2007 when gas prices spiked up a lot, it started to flow through into -- into commodities. And that's honestly where our biggest concern is when you look at gas prices. Consumer behavior, reimbursements, they're just -- we just haven't seen that much in the past that it's -- that's that material. The bigger issue is if it starts to flow through commodities.

Your next question comes from the line of Peter Saleh of Telsey Advisory Group.

I just wanted to ask if you guys could just take us back a step. I believe in 2010 there was a shift as well on the advertising from more local to national. So if you could remind us what that shift was and kind of just relate it to what's going on today?

Yes. In 2010, we went from 4% to 5.5% nationally. There was -- there had been, at that point, kind of a 2% minimum required local co-op spend. So it was money that was being collected at DMA by DMA and would be spent largely on kind of local television and some radio. So in 2010, what we did was we eliminated that 2% requirement on DMA-level spend or co-op spend, as we called it. So there were kind of 3 buckets then, and we went from 3 buckets to 2 buckets. We eliminated the 2% requirement. They could still do it if they chose, but we've eliminated the 2% requirement and added 1.5% to the national level. So the requirement for them actually went from 4% plus 2% down to 5.5%. So it was actually a reduction in the requirement of 0.5%. We were comfortable doing that then because we could see the efficiencies that we were going to get by making that shift, and we saw those. And 2010 was a clearly a very, very strong year for us with the relaunch at the same time. But yes, you've got that exactly right. So we had to shift back then. It increased the national at that time from 4% to 5.5%, offset by the 2% requirement going away at the co-op level. What we've just done is moved from 5.5% to 6%. So actually, the requirement was returning to kind of where it had been then, but with the recommendation to them that they'd probably fund that by a commensurate reduction in their local spend.

That was the last question. Are there any closing remarks?

No. I just want to thank you for joining us today, and we look forward to reporting our first quarter results to you on April 30. Thank you, everyone.

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