Domino's Pizza, Inc. (DPZ) Q2 2013 Earnings Report, Transcript and Summary

Good morning. My name is Tanisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Financial Results Earnings Conference Call. [Operator Instructions] Ms. Lynn Liddle, you may begin your conference.

Great. Thank you, Tanisha, and good morning, everybody. Thanks for joining us. We did file our 10-Q this morning, so any additional details you can find there. And of course, included in that is our Safe Harbor statement for any forward-looking statements that we had made in there or we will make today in this call. I'd also like to remind members of the media to be in listen-only mode since this is primarily a call for investors. We expect to keep it fairly short today to less than 1 hour. We have some prepared remarks, and we will follow that with the Q&A. And with us today, we have our Chief Financial Officer, Mike Lawton; and our CEO, Patrick Doyle. And we'll begin with some prepared comments from Mike.

Thank you, Lynn, and good morning, everyone. This quarter, our momentum continued as we posted strong same-store sales results in both our domestic and international businesses. Our international division opened a significant number of new stores, and our EPS grew 21.3% over the prior year. I'll start my review of the quarter by looking at our system-wide sales, also known as global retail sales, which are the total retail sales at franchise and company-owned stores worldwide. Global retail sales grew 10.4%, when excluding the impact of foreign currency. When we include the impact of foreign currency in the quarter, global retail sales grew by 9.3%. The drivers of this growth included domestic same-store sales, which rose 6.7% in the quarter, lapping a positive 1.7% in the second quarter of 2012. This was comprised of franchisee same-store sales, which were up 6.8%, and company-owned stores, which were up 5.7%. We opened at 9 net stores domestically in the quarter, consisting of 20 store openings and 11 closures. As we've mentioned previously, we expect to see modestly positive domestic store openings for the full year. Our international division had another solid quarter as same-store sales grew 5.8%, lapping a strong prior year quarter increase of 5.7%. Our international division grew by 101 stores this quarter, made up of 116 store openings and 15 closures. Turning to revenues. Our total revenues were up $37.9 million, or 10.1% from the prior year quarter. This increase was primarily a result of 2 factors: First, higher supply chain revenues resulting from increased volumes from higher order counts, a change in the mix of products sold per order and an increase in commodity prices. And second, higher domestic and international royalty revenues due to same-store sales growth and international store count growth. Moving on to our operating margin. As a percentage of revenues, our consolidated operating margin for the quarter was essentially flat at 30.4%, compared to 30.5% in the prior year quarter. Some of the related activity that occurred during the quarter included the following: Company-owned store operating margins decreased slightly as a percentage of revenues due to higher food cost, which were partially offset by higher volumes that leveraged labor and occupancy cost. Our supply chain margin percentage increased slightly from 10.8% to 11.1% due to the positive impact of product mix and higher volumes, offset in part by an increase in commodity cost. The average cheese block price in the second quarter was $1.77 per pound versus $1.52 last year, which contributed to a 3.9% increase in our overall market basket during the quarter. As a reminder, food commodities are generally priced on a constant dollar markup to our franchisees. Therefore, higher cheese prices do not impact our supply chain dollar profit. They do, however, negatively impact our supply chain margin as a percentage of revenues. Overall, we expect a commodity increase of 2% to 3% in 2013, which we believe will be manageable in the overall context of our business. Currency exchange rates have been slightly negative for us due to the dollar strengthening against most currencies, and could become a stronger headwind if the dollar remains at current levels. Turning to G&A expenses. G&A increased by $3.3 million or 6.8% quarter-over-quarter. The increase was primarily due to higher variable performance based and noncash compensation expense, as well as investments in the international and technology areas of our business. We have previously indicated that we estimate our full year G&A to increase an additional $9 million to $13 million over 2012, and at the current time, we expect to be at the high end of that range. This is due to planned investments to expand our international support team, e-commerce and technology support, and an increase in noncash compensation expense. Also, note that we charge franchisees for providing e-commerce and technology support, and we expect to have increased revenues of $1.5 million to $2 million in 2013 related to these services to partially offset the cost increases. 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, as well as the timing of hiring of the new team members. Regarding income taxes, our reported effective tax rate was 37.7% in the quarter. We continue to expect that 37.5% to 38.5% will be our effective tax rate for the foreseeable future. Our second quarter net income was up $5.2 million or 18.4%. This increase was primarily driven by higher domestic and international same-store sales, international store growth and higher supply chain profit. Our second quarter diluted EPS was $0.57, which is a $0.10 or 21.3% increase from the 47% EPS in the second quarter of last year. Here's how that $0.10 difference breaks down: Our improved operating results benefited us by $0.085, and our lower diluted share count, primarily due to share repurchases, benefited us by $0.015. Now turning to our use of cash. During the second quarter, we repurchased and retired approximately 655,000 shares for $38 million or an average price of $58.05 per share. We also returned over $11 million to our shareholders as part of our $0.20 per share dividend that was declared in the first quarter, and we ended the quarter with 48 -- $40.8 million of unrestricted cash. I'd also like to point out that subsequent to the quarter, we repurchased and retired approximately 189,000 shares for $10.9 million. In closing, we're pleased with the results this quarter as we continue to grow our business and drive strong EPS growth. We are committed to continue to drive improved results and return value to our shareholders. Thanks for your time today, and now I'll turn it over to Patrick.

Thanks, Mike, and good morning, everyone. I'm delighted to report another great quarter with excellent same-store sales growth in the U.S. and overseas, strong supply chain volumes, continued store growth and a healthy increase in earnings. Our brand continues to evolve and improve, and we're now about how we connect with consumers, leverage technology and deliver a great product for a good value to customers worldwide. As an example of this, in the U.S. this quarter, we posted strong sales, despite the fact that we didn't feature a new product. We did promote our Handmade Pan Pizza, continuing the momentum from its fourth quarter launch. While we were not lapping our toughest comps of last year, we're still pleased with the excellent domestic results in the quarter. As we've discussed before, we've got a new base of consumers and sales volume, backed by quality products, such as our new Pan Pizza, value offerings for consumers and great advertising and digital marketing. We've developed a bigger brand message around transparency and consumer engagement that we believe is carrying us to a different place. We believe this is part of why we don't need constant new pizza news or limited-time products to drive our business. We continue to be pleased with the positive traffic we're seeing, an indicator we monitor very closely. Our digital platform and Handmade Pan Pizza were both a big part of what drove this traffic. We were also able to hold our ticket fairly steady. We also continued to see some positive signs of store growth in the U.S. And in fact, on a trailing 12-month basis, we added a net 31 domestic units. We've got a top-notch team focused on store growth and store image, and all new stores built in the U.S. will carry this new store design rolled out last September, which is getting early positive customer reviews. We are also very pleased with the results in our international business, which continues its unprecedented track record of sales growth and robust store expansion. We again saw broad strengths among both developing and mature economies. The strength was due to the basics that we've been proven out over in country after country, offer great products at a good value and with excellent service. Our international business have been doing a great job of producing positive results now for 78 straight quarters. A few highlights include South Korea where great value promotions and a strong focus on driving volumes through digital channels paid off with double digit sales increases. And Brazil, where improved operations and better pricing have resulted in a strong quarter for them. And in Canada, we've seen some good results from the release of the Handmade Pan Pizza. Second quarter also brought more news on our commitment to staying on the cutting edge of technology and innovation with the launch of the Domino's Pizza app for Windows Phone 8. In a first for a Domino's mobile app, the Windows Phone release has voice capabilities. The app also takes advantage of the unique Windows Phone operating system by allowing customers to pin their current order directly to their start screen, allowing direct access to track an order using Domino's Tracker. Just like our iPhone, Android and Kindle Fire apps, Windows Phone 8 users will be able to get Domino's full national menu, do a coupon search and find their local store. The app is getting very good reviews from customers. So we are proud to say that we now have an app for 95% of the smartphones sold in the U.S. Our focus on technology and consumer access via digital ordering continues to give us an edge over our competition as we lead our pizza delivery competitors in digital ordering market share, particularly versus the smaller players that continue to lag behind. Even if the regionals catch up to the level of technology we currently offer, we're already several years ahead of them and expect to keep pushing to lead the industry on technological innovation. Lastly, we believe it's our strong free cash flow and the deployment of that cash to benefit shareholders that's helped to drive our share price. We produced over $2 million a week in free cash flow on average in the first half of the year, and we used that cash on both a recently established quarterly dividend and share repurchases. And we will, of course, continue to be open and flexible in the way we deploy cash to best benefit shareholders. So in conclusion, I want to congratulate our team on a great first half of the year. We're seeing good momentum, and I couldn't be happier with our performance. Operator, I'm now ready for questions. Operator?

[Operator Instructions] And your first question comes from the line of Michael Kelter with Goldman.

Yes, I wanted to just follow-up. You mentioned, first off, that the ticket was fairly steady in the quarter. Can you help us understand that a little better by just breaking out the 6.7% same-store sales between transactions and ticket? And I know you don't do it quantitatively, but can you at least help us with whether transactions was higher than the same-store sales and ticket lower from value-oriented promotions, or was ticket also up in the quarter?

No, it was all orders. It was all orders for the quarter. In fact, even a little bit more orders. I think ticket was slightly negative for the quarter.

And then labor, actually, the one of the surprises for me is that you only generated 10 basis points of labor leverage in the quarter, despite the 6.7% same-store sales and that's well below what you had been doing the last several years worth of quarters. Why not more leverage on labor in this particular period?

I mean, we're continuing to work on that. I think the numbers have even seen pretty good steady increase there. I think, as we continue to focus on kind of improving service and all those things, it's always about hitting that balance. I would have liked to have seen a little bit more in the quarter in terms of the labor line, but it's certainly something we're focused on. So I don't think it's more than that. It's just pure execution, and we could have used just a little bit more off that line, as you said.

And then maybe lastly, any update on your appetite for taking debt leverage up a little bit within your existing facility to enhance shareholder returns?

I think that the answer is we're in the range that we've kind of talked about before, kind of 3 to 6x leverage is where we think our weighted average cost of capital is kind of optimized. We are essentially in the middle of that range right now, so we look at it. But right now, I think we feel pretty good about where we are.

And your next question comes from line of Jeffrey Bernstein with Barclays.

A couple of questions. One, I know you don't give too much granularity in terms of comp sequentially or whatnot. But I'm just wondering if you can give some qualitative color because it does seem like, as an industry, things are doing okay at the start of the quarter, and then maybe there was somewhat of a pause or deceleration, the June and into July time frame. Just wondering if you could talk about kind of the trend line that you're seeing, and how much benefit you think you're getting from kind of greater value focus?

I mean, the value focus has been very consistent. I mean, we've been talking about really the same price points for a while, and it's clearly continued to work for us. And as I emphasized, I think the great learning for us and something we're very excited about is that we are able to do this without this kind of quarterly or monthly new product launches coming to support that. I mean, we just think we're in a very, very different place with our customer base than we have been in the past. And I mean, we're going to continue to have new product launches, but what we think is important is that we're driving these results with bigger individual launches that are meaningfully changing consumers' views about the quality of Domino's Pizza, as opposed to simply creating news for news' sake. And so we see this kind of building on itself. And as we bring new customers in, maybe with the Pan Pizza or through the digital side, they have a strong experience with kind of the core of the brands, as opposed to simply trying something that is new and they like it or not and then maybe don't come back after that. In terms of the quarter itself and how that's made-up, I mean, we don't get into kind of breaking out the quarter. All I can tell you is that 6.7%. And as I said that all being traffic, the answer is it was a really strong quarter, and I'm really happy with it. But I'm not going to break it apart more than that.

Absolutely. And then the online ordering. Obviously, it seems to be a huge driver. So I was just wondering, I think you've told us it's 35% to 40%. If I remember correctly, it's increased 5 percentage points per year over each of the last 5 years. So I'm just wondering, if it does drive a higher average check and drives higher margin, it seems like you'd want that to grow as fast. I'm more than wondering where you think that ultimately stops. Can it keep growing 5% per year? And is there anything you can do other than advertise it to incentivize people to use it even -- I mean it just seems like that's the desired end game. Is there a way to incentive people to use it via discounting or otherwise to kind of build even faster, or do we think we're close to a certain level that is not going to go above 50% or whatever it might be?

Yes, I certainly think that we'll see it above 50% out into the future. We've got 3 or 4 countries that are now at that level. Our corporate stores in the U.S. were on online ordering, all of the stores about a year or so earlier than our franchise stores and they continue to run nicely ahead of the overall franchise system on digital ordering. And so I don't see any reason why we're not going to be able to get of this number north of 50% over time. And clearly, from our perspective, based on all the reasons, Jeff, you just said, around ticket and order profitability and customer satisfaction, the faster we can push that, the better. So we continue to invest in that area. The one thing I would say is you'd mentioned the 35% to 40% range. That's still the right answer. To give you a little bit of color, we tend to get gains on the that in the fall and winter, and then it tends to go a little bit flat in the summer each year. So we're still up kind of that 5% year-over-year, but it's an interesting pattern. When people head back indoors, we tend to see the growth in the digital mix, and when they go back outdoors in the summer, it tends to kind of flatten out for a bit during the summer. And so probably the answer is we stay in this range kind of through the summer, and then hopefully, we continue to see it move up. So that's the short answer. We're continuing to focus very hard on it. It's why we launched the Windows 8 platform, the app this quarter. And you're going to continue to see a lot of innovation from us in this area.

Got it. And just lastly, on the international side. Obviously, it's hard to find anything to question about those results of 78 straight quarters. And you talked about markets that are surprise exceeding expectations. But the fact that most of your peers are having a tough time posting with like modest positive comps and you're doing these mid-single digits. Are there any markets that you're seeing that are seeing the pain and suffering that others are facing? I know -- we had heard Germany might have had tougher times whether for Domino's or for the broader market. Just wondering if you'd size up seeing any signs of slowing trend, Germany or otherwise, outside the U.S.?

Not in the material markets, no. I mean, they're always going to be quarters here and there that's a little bit, off but it is broad geographically and it's broad when you split it by kind of more developed economies and more developing economies. And so overall, it's awfully good. You mentioned Germany. Germany is still very early in its development. Sales growth has actually been pretty good there. What I think you may be referring to is Germany is owned by our master franchisee out of the U.K., and they gave a little bit of an earnings warning around it in terms of just the amount of resources they had to put into it to get it going. But from a pure sales perspective and sales growth perspective, it's still looking good. So it clearly -- it's working. I'm seeing the same numbers that's, obviously, you're looking at from some of our peers in the industry, and we feel awfully fortunate that we're continuing to drive these kinds of results. But there just are no really material pockets of weakness out there to speak to.

And your next question comes from the line of Joe Buckley with Bank of America Merrill Lynch.

Just wondering if you can elaborate a little bit on your comments about the U.S. marketing. The numbers have been outstanding, and clearly, you were in a sweet groove or sweet mode. But I guess I'm curious that you're describing it as kind of a material change from the product news and maybe some of the pricing news of the past. I don't perceive as being that dramatically different, so could you just talk a little bit more about that?

Well, the first thing you said from kind of the pricing, I'll hit that. I mean, the pricing has been fundamentally the same for a few years now. And so we're not bringing new news on the pricing front. We've got something that's clearly been working. It's been connecting with the consumers. And so on that front, it's been working. If there was news in the second quarter around the -- our Handmade Pan Pizza, it was just a different way of talking about it, which was the fact that this brand that is known for speed had actually sacrificed a little bit of speed to make a higher quality product. But we were still talking about a product that had launched 6 or 9 months before, and continued to drive very strong results from it. And first quarter was really the same thing. We were talking about the 2 mediums for $5.99 and it worked. So I guess the answer is, Joe, I think what's different, and I guess I'd say not that different for the last 3 or 4 years since kind of our brand relaunch, but really previous to that. And we've been watching it very, very carefully. We've got a strong pipeline of new products that we can still use as we move forward. But what we've been finding is very effective is talking about the things that are differentiating the brands on an ongoing basis in the minds of the consumer, as opposed to just hitting them with a lot of the specific new news items in any given quarter. And overall, it's worked.

Okay. And are the national media -- I know you shifted more to national media effective January, is there any lumpiness in the year-over-year advertising rates that we should think about?

No, not materially. No. No.

And your next question comes from the line of John Glass with Morgan Stanley.

I was struck by your U.S. numbers versus what the industry has been experiencing, specifically McDonald's has talked very specifically about real retrenchment in the consumer. And I guess my question therefore is, Patrick, do you have a view on -- is it the pizza category or how much of what you're seeing is experienced in the category in general versus idiosyncratic to you? Do you have either qualitative, or do you actually have numbers on where you think the pizza category growth was in the second quarter?

Yes. Our best guess, John, is that the category is flattish to maybe up. This is mostly share gains that we're seeing right now. And those numbers are, I think, as you know, they're not perfect on kind of the category. But that's our best sense is that we're kind of in that range. And I guess what I would say is our overall take on the consumer is that the consumer is continuing to slowly get better. There's -- it is still more of a headwind than a tailwind for us. You probably heard me say it many times, but the best driver, best indicator from an economic standpoint of growth for us is employment levels more than anything else. Employed people buy more pizza than unemployed people. And so you're seeing that slowly getting better. But I think that's leading to a category that's not moving a lot right now. And so really, I mean, we're feeling pretty fortunate, but it appears that it is mostly share gains for us right now.

And just a follow-up on that, is the share gains -- for many quarters it's been versus the regionals and independents, is the shift now becoming that you believe your share shift is now coming maybe at the expense of your 2 or 3 other largest competitors? Has that changed?

I think the broad dynamic is still going to be more from smaller players and regionals. We haven't seen Papa John's number yet for the second quarter, Pizza Hut has released and they were a little bit a negative. I think they've been a little bit negative for a couple of quarters in a row now. But overall, I think the basic thesis is still intact, which is larger players are probably going to be growing a little bit better than the smaller players and the regionals, that's mostly as a result of technology. And there are some pretty special things that are going on with our brand and business right now that are causing us to grow a little faster even than our national peers. But overall, I think the basics of the thesis are intact, which is larger players are going to continue to take some share from the smaller players.

That's great. And then just lastly, as it relates to a recapitalization event. You have an existing securitization. I think, previously, I had the sense that you were thinking more of adding to that, given the rate environment and you sort of -- it seems today that you are saying we're happy where we are. What has changed? I mean, perhaps, my perception was wrong, or is it really just the rate environment is shifting and now the attractiveness of adding leveraging just isn't as -- isn't there as it was maybe a couple of months ago?

As you know, I mean, interest rates have gone a little bit but they're still -- gone up a little, but they're still very, very attractive, and we will continue to assess -- whether this is something that we want to do. I don't think that Patrick was trying to say that there's no opportunity for us. It's just not something that we're planning on in the near term.

And your next question comes from the line of Brian Bittner with Oppenheimer. Michael Tamas - Oppenheimer & Co. Inc., Research Division: This is Mike Tamas on for Brian. I was just wondering, can you talk about G&A over the next 18 months? I know you said you'd be at the high end of the range for this year. What opportunities are there for maybe that not to be at the high end of the range? And then, any initial thoughts on '14, and maybe any investments or costs that don't repeat next year that you can kind of call out for us?

I don't think there's a lot of opportunity that we won't be at the high end. We're -- we've been making -- one of the things that has an impact on the G&A is the rate and pace at which we are able to attract the right people that we wanted to add into international and into our IT group. So over the last 18 months or so, we've been trying to add people and it came at a slower rate than we had wanted. We have filled many of those positions now, so we've got a pretty good idea of what we're going to spend on those. We really have not figured out where for sure we're going to be in 2014, so it's a little early to comment on that. At our Investor Day in January, I'm sure that we'll be giving you more information.

Yes. I guess that the only thing I'd add to that is, fundamentally, the investments we're making are working. You look at the investments we're making in people and the international side of the business, as well as in the technology side of the business, they're clearly driving results. And so it's not -- we're not trying to figure out how to scale that back. If we're getting a good return on those investments, we're going to continue to make them.

And your next question comes from the line of Mitch Speiser with Buckingham Research.

Can you comment on the online ordering growth in the quarter? I think you gave us some metrics for 2012 a few months back. But is online -- I'm sure online orders are probably growing quicker than the comp, but any particular data would be great?

Yes. Mitch, I think the answer is we're still in that kind of 5% of mix up year-over-year. And the color I was giving before is the way that chart kind of looks for us, and we track it fairly, fairly obsessively. The answer is you get an increase in the fall and into the winter, and then it kind of flattens out spring and summer, and then you get an increase again in the fall and the winter. Year-over-year, that means you're continuing to get kind of that 5% mix growth that we've talked about before and we're continuing to see that. We'd love to drive it even faster, and that's why you continue to see some investments from us there. But that's kind of the rate and pace of growth on that.

Okay. And separately, just with carryout. It's about 40% of your sales, if you can confirm that number. And with the new -- and I believe carryout is growing quicker than the overall pizza delivery category if you can maybe comment on some of the dynamics behind that? And if this new store design, which you're now building, is changing the mix of carryout or delivery, or any interesting dynamics to point out from the new store prototype that you're developing?

Yes. So first off, the 40% is kind of orders. Sales are a little bit lower than that because the ticket's a bit lower on carryout. So you're more in the 1/3 to 35% range of sales. Third -- I mean 1/3 on sales and you're more high 30s to 40% on orders. And we've still got just over what 100, I think, of the newly reimaged stores. And so we're still kind of reading that, but we like what we're seeing. Clearly, the biggest change on that is a better kind of carryout experience, in-store experience for our customers without any sacrifice on our efficiency around the delivery side of the business. In terms of the overall dynamics, I -- there was a point over the last few years -- our business, if you go back kind of 10 or 15 years, carryout has clearly become a bigger part of our business over kind of a long-term trend. And there was a little more weakness on the delivery side of the business back a few years ago than kind of the overall. But right now, I think from an overall category perspective, it's pretty flat plus or minus a bit in both of those areas right now. I don't think, from a category perspective, that there's a lot of movement on either side.

Okay. And my last question is for Mike. Just on the balance sheet, can you give us where the debt -- net debt-to-EBITDA ratio stands in terms of how you calculate it? And I believe that under 4.5x, don't you -- you don't need to make principal payments and maybe if you can just go through those dynamics, I think you're kind of close to that level. And how much cash you'll save once you hit that trigger?

Okay. The way that, that is calculated, it takes into -- assumes that we would actually draw upon the VFN. So you add about 0.10 of leverage compared to just looking at the debt-to-EBITDA off the balance sheet. So we are currently in the 4s -- roughly the 4.6, 4.7 range, depending on how you round. We have to get under 4.5, which could happen as early as the fourth quarter of this year, and probably a little more likely, it could be in the first quarter of next year. And when we get to that, you're looking at a $26 million a year cash savings, roughly.

And your next question comes from the line of John Ivankoe with JPMorgan. John W. Ivankoe - JP Morgan Chase & Co, Research Division: I guess, at this point, just the remaining question for me is on your supply chain business which is obviously having a great first half of the year. I mean, do you just attribute that to product mix? I mean, things like Pan and your continued success with the 2 mediums, or is there something else that's kind of going on in that business to allow such strong growth to continue in the future?

The vast majority of what's going on in the first half of the year has to do with the order count and the mix that we have. You may recall that last year, in the first half of the year, some of what we were doing was promoting side items, primarily Stuffed Cheesy Bread and Parmesan Bread Bites, which was really good for franchisee profitability, but really wasn't very good for our commissary. It would be one way to describe it. This year, Pan Pizza is helping us. I would also say that the operational metrics in the commissary have been very good. Even if we -- even as we pushed up our volumes significantly, they've done a really good job of maintaining cost. So we haven't been hurt at all as they pushed the volumes up.

John, the only thing that I was going to say is the other thing kind of the flip side to that is with the volume growth. Franchise profitability, store level profitability continues to improve year-over-year. And that's a really big positive. So I think the biggest thing driving supply chain, other than they're doing a very nice job of running it, the team running it, is we're just getting a lot of order growth and that volume gets us some nice leverage on that. But flip side is the franchisee profitability continues to improve, and that's why you're seeing that kind of modest net store growth domestically that we've been talking about for a while.

And your next question comes from the line Alvin Concepcion with Citi.

I was just wondering, the quarter had unusually wet weather domestically. Did this have any impact on your results at all?

No.

Okay, great. And you talked about a strong pipeline of products coming up. I know you can't say much. But are these pretty broad innovations across your menu, or would you expect them to be more focused on side items to help drive ticket? And will those mostly be coming this year, or are you sort of saving it for next year?

No. I mean, look the answer is as we have kind of slowed the pace of introductions, it means that our R&D team has the chance to work on things that we think are going to be meaningful. And I'm going to get into kind of specifics on launches and all that. I think the real take away from that shouldn't be is there something really near-term coming. I think the takeaway on that should be when you're spreading out the pace of these, it means that the R&D team, as opposed to coming up with 5 or 6 products a year, is working on a couple maybe a year that we hope are going to materially improve the overall experience for customers. And frankly, when you're not launching 1 or 2 a quarter, it takes a little bit of the pressure off on having just so many in that pipeline.

Great. And then just one more for me. You talked about domestic company restaurant margins declining, and it sounds like it's mostly due to higher commodity costs. But as you look towards the rest of the year, I believe you mentioned commodity costs are going to be manageable, and you're working on improving your labor on leverage. So would you expect margins to improve year-over-year from these levels for the rest of the year?

So yes. First of all, the answer on margins. From the corporate stores in the second quarter, it was about food, it was about commodities. And so definitely felt that a little bit in the second quarter. We do expect that that's going to be a little more modest through the balance of the year. You didn't ask this specifically, but I'll add it. The offset to that is exchange rates, as they stand today, are looking, right now, worse for the balance of the year than in the first half of the year. If we stay in the range that we're in today, and consensus is kind of in that range. That's going to be a little bit of a negative offset in the second half of the year. So commodities, we expect to ease a bit. And if things stay where they are right now, FX probably goes the other way.

And your next question comes from the line of Peter Saleh with Telsey Advisory Group.

I wanted to ask about the remodels. Are you doing anything on the back of the house in terms -- on the remodel side, or all the remodels really happening on the front of the house?

The focus is on the front of the house, and there are really kind of a couple of different versions, I guess, of how we do it. But front of the house is certainly the focus. We're not changing -- there aren't like specific equipment changes back of the house or anything like that. Our cooking platform remains pretty straightforward. We got big ovens back there, and I wouldn't anticipate a change in that. Then you get into a question of is it a relocation, is it a reimage and are they completely taking everything out, and some of that just depends on the age of the back of the store. If the back of the store is looking good, then you may be able to just do the lobby and it looks good. But as you are opening it up, if the back of the store is particularly old, it means the customers are going to see that. And so I think the answer is there's been a little bit of a mix on that in the early reimages.

Great. And then can you give us an update on where you stand with China, and the initiatives to move forward there?

Yes, I mean, it's continuing to proceed. It's still relatively small. We like the results we're getting. We're getting nice same-store sales growth in China. It's -- it is -- so it's something that's continuing to progress. And obviously, given the size of the opportunity, it's something we're going to continue to focus on. Still not a big driver of results yet, as the base that we're growing from is still relatively small.

And your next question comes from line of Stephen Anderson with Miller Tabak. Stephen Anderson - Miller Tabak + Co., LLC, Research Division: Just one quick question on the newer stores that you have open, and I don't know if you have any metrics to compare the new store format versus the older stores. And what kind of a comp lift you're seeing from comparable locations? What kind of the change you're seeing in mix?

Yes. I mean, it’s still too early to kind of get into specifics around that. That's why we're kind of watching that. I mean, obviously, I said I think in my prepared remarks that the customer reaction to it is positive. But it's still little early on with the store base, the store counts that we've got reimaged to kind of get into specifics around that. Stephen Anderson - Miller Tabak + Co., LLC, Research Division: Now would you say with those stores, you are trying to aim for the new fast casual pizza entrance because that's a category that's seen a lot of growth in the last couple of years?

We want to give our customers a better in-store and carryout experience, and I don't know that it's specifically geared towards anybody, it's just -- other than our customers. I mean, we're doing what our customers are leading us to do, and they want a better looking store. They want to see the stores opened up so that they can see the food prepared, and that's what's driving it more than kind of any specific reaction to competition.

And your next question comes from the line of Mark Smith with Feltl and Company.

Cher [ph] on for Mark Smith. Just one quick question. Can you talk about the health of your domestic franchisees, in particular, their ability to reinvest in stores and their capital for growth?

Yes, so their -- I mean, their cash flow continues to improve. I think, as I mentioned, we are continuing to see their cash flow per store numbers get better, that's going to be kind of a -- what I think, we're into a fifth year of that trend. And so that's good news. The answer is the credit markets for larger franchisees, for those who may be borrowing $1 million or more, those markets are very attractive right now. For smaller players they're still not where it needs to be in terms of the credit markets opening back up. Now at some level, if you're talking about a 1 or 2 store franchisee, if their sales are good enough and their cash flows are continuing to progress, they're going to be able to potentially do it out of cash flow, and may not need to tap into those markets. But overall, the answer is credit markets are very attractive for those looking to borrow at a significant level, and they're still relatively restricted for those looking for smaller amounts of debt.

And there are no further questions.

All right. Listen, I appreciate everybody's interest, and look forward to sharing third quarter results with you here in a couple of months. Thanks, everybody.

And this does conclude today's conference call. You may now disconnect.