Domino's Pizza, Inc. (DPZ) Q3 2013 Earnings Report, Transcript and Summary

Lynn M. Liddle - Executive Vice President of Communications, Legislative Affairs & Investor Relations Michael T. Lawton - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance J. Patrick Doyle - Chief Executive Officer, President and Director

Michael Kelter - Goldman Sachs Group Inc., Research Division Michael Tamas - Oppenheimer & Co. Inc., Research Division John S. Glass - Morgan Stanley, Research Division Alvin C. Concepcion - Citigroup Inc, Research Division Jeffrey Andrew Bernstein - Barclays Capital, Research Division Joseph T. Buckley - BofA Merrill Lynch, Research Division Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division Stephen Anderson - Miller Tabak + Co., LLC, Research Division Amod Gautam - JP Morgan Chase & Co, Research Division Mark E. Smith - Feltl and Company, Inc., Research Division Mitchell J. Speiser - The Buckingham Research Group Incorporated Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division

Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 financial results earnings call. [Operator Instructions] Thank you. Ms. Liddle, you may begin your conference.

Thank you so much. Welcome, everybody. As usual, we will begin with prepared comments from management followed by an open Q&A. We will ask, as always, for reporters to kindly be in a listen-only mode as we have fashioned this call primarily for investors. And now I will also turn everybody's attention to our Safe Harbor statement that is both in our 8-K and in our 10-Q in the event that any forward-looking statements are made. With us today, we have our Chief Financial Officer and our CEO, and we will begin first with comments from Mike Lawton, our Chief Financial Officer.

Thank you, Lynn, and good morning, everyone. I'm pleased to report that we, once again, delivered solid results for our shareholders during the quarter. Our international and domestic divisions posted strong same-store sales growth, and our international division opened an impressive number of new stores, and adjusted EPS grew by 18.6% over the prior year. Overall, we are pleased with another quarter of strong results. I'll start my review of the quarter by looking at our systemwide sales, also known as global retail sales, which are the total retail sales at franchise and company-owned stores worldwide. Global retail sales grew 7.4%. When we exclude the adverse impact of foreign currency, global retail sales grew by 10.2%. The drivers of this growth included domestic same-store sales, which rose 5.4% in the quarter, lapping a positive 3.3% in the third quarter of 2012. This was comprised of franchisee same-store sales which were up 5.5% and company-owned stores which were up 4.6%. Although we don't give specifics of order count and ticket for competitive reasons, we did drive strong order count growth again this quarter. We opened 7 net stores domestically in the quarter, consisting of 12 store openings and 5 closures. On a trailing 12-month basis, we have opened a net 43 stores domestically, and we continue to expect to see modestly positive domestic store growth for the full year. Our international division had another solid quarter as same-store sales grew 5.0%, lapping a strong prior year quarter increase of 5%. Our international division grew by 119 stores this quarter, made up of 124 store openings and 5 closures. Turning to revenues, our total revenues were up $26 million or 6.9% from the prior year. This increase was primarily a result of 2 factors: first, higher domestic and international royalty revenues due to same-store sales growth and store count growth; and second, higher supply chain revenues resulting mainly from increased volumes from higher order counts, as well as an increase in commodity prices. Moving on to our operating margin. As a percentage of revenues, our consolidated operating margin for the quarter improved slightly to 29.9% from 29.5% in the prior year quarter. Some of the related activity that occurred during the quarter included the following. A change in our mix of revenues positively impacted our operating margin as we now have more franchise revenue from royalties, which have no cost of sales. Also, company-owned store operating margins improved slightly as a result of -- as a percentage of revenues due to higher volumes that leveraged labor and occupancy cost, as well as lower self-insured health insurance cost. These improvements were partially offset by higher food cost. Our supply chain margin percentage was relatively flat versus last year's third quarter at 10.3% as higher volumes were offset by an increase in commodity cost. I'd like to point out that from the first half of the year to this quarter, margin supply chain were down. You may recall that in the first half of 2012, we ran promotions primarily designed to raise franchisee profits through ticket, thus decreasing dough volumes through supply chain. This resulted in very favorable comparisons in the first half of 2013. Cheese costs were relatively flat this quarter versus the prior year, but our overall market basket increased 1.8% due primarily to increases in meats and boxes. As a reminder, food commodities are generally priced on a constant dollar markup to our franchisees. Therefore, higher commodity 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 commodities for the full year 2013 to remain tame and will come out in the 2% to 3% increase over 2012 levels. At this point, we expect that commodities we use in our system will be flat to down in 2014 versus 2013 levels. We plan to provide an estimate of our 2014 commodity price changes when we hold our Investor Day schedule for January 15 in Orlando, Florida. Despite the fact that we have diversified monetary risk, currency exchange rates negatively impacted us in the quarter by $1.3 million versus the prior year -- or prior year quarter due to the dollar strengthening against most currencies. And if the dollar remains at current levels, our comparisons in prior -- to prior periods will continue to be a headwind for us. Turning to G&A expenses. G&A increased by $4.1 million or 8.2% quarter-over-quarter. The increase was primarily due to investments to expand our international support team, e-commerce and technology support and an increase in noncash compensation expense. We have previously estimated our full year G&A to increase between $9 million and $13 million over 2012 for the full year for the same reasons I just mentioned. We are currently running slightly above that range after 3 quarters, but we expect Q4 to be fairly flat with last year. Also note that we charge franchisees for providing ongoing e-commerce and technology support, and our revenues related to reimbursement for these services will increase over $2 million for the full year to partially offset these G&A increases. Keep in mind that G&A expense can vary up or down by, among other things, our performance versus our plan as that affects variable performance-based compensation expense. Regarding income taxes, our reported effective tax rate was 34.1% for the quarter, which is below our normal range. We revised the calculation for a deduction related to our domestic dough production, which resulted in a $1.4 million benefit that we have adjusted out of EPS for comparability. Therefore, our adjusted tax rate, excluding that amount, our adjusted tax rate was 37% for the quarter. We continue to expect that 37.5% to 38.5% will be our effective tax rate for the foreseeable future. Our third quarter net income was up $4.7 million or 17.9%. This increase was primarily driven by higher domestic and international same-store sales, international store growth and the tax benefit that I just discussed. Our third quarter diluted EPS as reported on a GAAP basis was $0.53 versus $0.44 in the prior year quarter. On an as-adjusted basis, diluted EPS was $0.51 for the quarter versus prior year adjusted EPS of $0.43. The $0.51 is an $0.08 or 18.6% increase from the $0.43 as adjusted in the third quarter of last year. Here's how that $0.08 increase breaks down. Our improved operating results benefited us by $0.07. Our lower diluted share count, primarily due to our share repurchases, benefited us by $0.01. Foreign currency exchange rates negatively impacted us by $0.01, and a lower effective tax rate benefited us by $0.01. Turning to our use of cash, during the third quarter, we repurchased and retired approximately 351,000 shares for $21 million or at an average price of $59.34 per share. We also returned over $11 million to our shareholders in the form of dividends. We're now paying a $0.20 per share quarterly dividend. We also -- we did end the quarter with $32.1 million of unrestricted cash. Overall, we are pleased with the quarter and our consistent positive performance so far this year. Thank you 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 both a robust top and bottom line. With same-store sales in the U.S. and abroad having increased around 5%, we feel really good about our brand's popularity with consumers around the world. Our franchise model and engaged franchisees continued to provide highly effective, generating both strong free cash flow and a healthy profit line with an 18.6% increase in EPS. I'm very proud of our team, which has consistently outperformed many of our industry peers for the last few years. Summing it up, I'd say we've achieved this primarily in 2 ways: by innovating in both products and technology and by consistently and aggressively growing our global footprint. Domestically, we delivered strong sales, which were, once again, driven mostly by order counts. As I've said before, we look at this as a good indicator of consumer demand. Orders were driven by our improved menu, featuring a lot of variety, breakthrough advertising and a price point that clearly resonates with our customers. It's been a year since we introduced our handmade pan pizza, which has performed very well for us, and our research shows that consumers are giving us credit for the better overall taste of our food. As Mike noted, domestic store growth has been positive for the last 12 months, which also makes us feel good about our expectation of moderate store growth in the U.S. for the full year. As an aside, all new store builds are being done in our new image design, which franchisees are taking great pride in. We're getting some great feedback from both consumers and franchisees who like this new look, which is consistent with our new overall brand image. On the U.S. innovation front, I will remind you that we look at innovation beyond what you see on our menu. You may recall that last quarter, we reported that our technology is available to approximately 95% of the smartphone market after the introduction of our Windows 8 app. We followed that with our recent streamlining of our mobile ordering app, making it incredibly fast. While this may not sound like a huge accomplishment to those of you who aren't obsessed with pizza, like I am, but if you've ever ordered anything online, you know. Our customers can now create personalized profile, so they can save information, like credit card or address, as well as their favorite orders, letting them order in as little as 5 clicks or about 30 seconds. This is great news, particularly for our mobile users who want speed and convenience while using a small keyboard. We expect this to be a very popular feature and one we believe will give us a competitive advantage over a pizza company without this handy feature. We hope you all get a chance to give it a test drive soon, if you haven't already. As a result of our continued innovation and technology, digital sales have now reached about 40% of our total sales. Internationally, our franchisees are also gaining digital ground and innovating with technology. Our largest master franchisee, Domino's Pizza Enterprises, just reported that half of their sales are currently digital. They also have a stated goal of achieving 80% digital sales for their entire enterprise. Our U.K. master franchisee reported that digital sales accounted for more than 62% of its delivery sales in the third quarter, up from 58% during the third quarter a year ago. Sales from mobile devices more than doubled and were up 102% year-over-year. In India, where connectivity isn't always consistent or widespread, we've already reached 20% of orders online for delivery orders, which we're very pleased to see. And beyond progress and innovation, overall brand results continued to be strong in the third quarter for our international division, with positive results delivered, once again, in both same-store sales and store growth. We continued to see positive sales around the world, with particularly impressive results from Brazil and Turkey this quarter. We celebrated a couple of notable milestones as well with the opening of our 500th store in Australia and our 600th store in India. Speaking of India, the International Business Times reported that Domino's has the greatest market share of any foreign fast food operator there, about double that of McDonald's, KFC, SUBWAY and Pizza Hut. I want to note that our Japanese business, which has also been performing well, was recently acquired by Domino's Pizza Enterprises. DPE now operates in Australia, New Zealand, France, Netherlands, Belgium and Japan. Overall, our 79 consecutive quarters of positive same-store sales growth certainly demonstrates our past ability to drive international results over and over, and our track record of store growth outpacing the industry have reinforced our confidence and our ability to continue to grow. One of these quarterly calls wouldn't be complete without some commentary on our balance sheet. We've generated cash flow in excess of $2 million per week during the first 3 quarters of 2013, and we have continued to deploy it to the benefit of our shareholders. Through the end of the third quarter, we've spent $77 million on share repurchases and $23 million year-to-date on dividend payments. We're proud of our track record of returns for our shareholders and remain mindful of that objective all the time. With that, I'll turn over the call for questions.

[Operator Instructions] Your first question comes from the line of Michael Kelter.

Maybe I'll start kind of just going -- leading off with Patrick, what you just ended with, and then hoping to get an update from you guys on your views on re-levering the balance sheet possibly by, let's say, 1 turn, up to 5.5x, and then within that, how you think about share repurchase versus special dividend given where the stock is trading. Special dividend could be rather meaningful just doing kind of the pure math.

Yes, well, I think what I'd say, Michael, is we continue to be very focused on generating the best returns that we can. I am not going to talk about kind of going forward use of the cash, but I think the indication of how we're managing that is in what we've been doing. We've bought back a lot of stock this year at -- clearly, given where we're trading now have been favorable prices so far this year, and as well as paying out on the regular dividend. Beyond that, you know us. You know how we think about this, which is we are always looking at the opportunities and we're going to do whatever we believe is going to generate the best returns for the shareholders based on kind of all the circumstances in the market at the time. And I recognize that doesn't necessarily lead you to an absolute answer, and the reason is because it is going to depend on kind of the exact conditions for the debt market for all of the different options that are out there. And so it's something we focus on a lot, are going to continue to focus on a lot. But I think the guidance for you is to look at the way we've been managing it.

And then on G&A, which, as you said, is on pace to be up about $13 million this year, and I'm sure you'll address this more in detail in your Investor Day in January, but could you talk about an early read for 2014? Is it another invest year, with the international and e-commerce investments driving that figure up again quite a bit, or was that really isolated to a 2013 step-up?

Michael, we're really in the process of putting budgets together at this point in time, which obviously will lead us to much more clarity about what 2014 is. And we'll have to talk about that at our Investor Day.

Okay. And then maybe lastly, could you talk about the potential for any meaningful sales drivers on the horizon, new products or otherwise, that we should be thinking about, even if you're not ready to get into specifics at this point? And I ask partially in light of anniversary-ing the bump-up from the pan pizza launch last October.

Yes, well, if you look at what we've got out right now, it's innovation on the technology front with profiles, and it's -- we're running national television right now, talking about the speed and ease of ordering digitally from Domino's, which is not something we've really taken a head on like that before. And I think we've said many times, I think we already said this morning in our prepared comments that look for us to be driving innovation, both with products and with technology, and we continue to see great gains from both of those. So I guess what I'd say is, I think we've still got a very good pipeline of innovation out there. We are not in the product-of-the-month club anymore. You're not going to see us launching things every 6 or 8 weeks like we have in the past. We think that what we're doing is building overall brand momentum by focusing on fewer, bigger things that are truly improving the experience for our customers. And that's been pretty well borne out as a strategy with the results over the course of the past few years. So I guess what I'd say is we've definitely got the pipeline as we've slowed some of the pace of new product launches that actually has been a very positive thing for us. It helps with execution in the stores, and it helps us make sure that the things that we are launching, we've got right. And so it's kind of fewer, bigger, better on the innovation front. But we certainly have things out there that we can launch on both the product and the technology side as we deem it necessary.

Your next question comes from the line of Brian Bittner. Michael Tamas - Oppenheimer & Co. Inc., Research Division: This is Mike Tamas on for Brian. I'm just wondering if you can kind of talk about the stock buyback. I mean, it's meaningfully slow since the quarter ended. Are you just being price-sensitive here? And kind of going forward, should we expect more consistency or kind of some lumpiness going forward?

Well, one thing to always keep in mind is there are a lot of closed periods. So after a quarter ends, we don't necessarily have opportunities to buy whether we want to or not, so it's not necessarily an indicator of anything. But the only thing I can keep pointing back to is we've bought back a significant amount of stock so far this year. And as Patrick said, we'll continue to evaluate whether that's what we think the right thing to do or to return cash to shareholders in other forms or anything else we may consider. Michael Tamas - Oppenheimer & Co. Inc., Research Division: Great. And then just a quick question on the overall environment. I mean, obviously, you've had a great pipeline of products that's helped the comps. You have a great momentum going. But if the consumer environment sort of stays the way it is now, what sort of strategies do you have in place to kind of keep your momentum going? Obviously, with innovation, it's a big thing.

Yes, Mike, I think the answer is the consumer environment right now is pretty consistent with what it's been over the course of the past year or 2, so -- which is to say, not great. I mean, if you look at the overall restaurant industry growth for the whole category, it hasn't been terrific. I think consumers are still cautious. I think that's going to continue. I think I've said it before, but right now, I think consumers are still relatively cautious based on kind of the government getting long-term deals in place. And that's continued to be the case for the last couple of years. And so I think you're seeing a consumer environment that's very consistent with what we've seen the last couple of years. And so I guess what I'd say is in terms of changes in how we're going to operate, we're seeing an environment that is still very similar. And so I think what we've been doing the past couple of years is really what you should expect going forward. If consumers -- I see more upside than downside from the consumer. I think it can still get better out there, and it could turn into tailwinds, but it hasn't been. For the past couple of years, it's clearly been more headwinds than tailwinds.

Your next question comes from the line of John Glass.

I just want to go back to the notion as you shift to more -- less about promotional activity and more about brand-building and momentum. First of all, I presume that doesn't mean you're not going to be innovative, right? There's still new products coming, just maybe they're not going to be limited time or something. So maybe you can just frame the difference between innovation and promotion. And then what drives, within the digital loop, right, as people order on digital, what really drives or what metrics can you point to that says your incremental traffic's coming from more orders in the same household? When you look at it, are you -- is there any way you can publicly frame for us what the benefits you're getting as people use the app and use the new app, which is easier, and what kind of incrementality from an existing order base you're getting?

Sure. Yes, John, so taking the first question, I think actually, you answered the question, which is our focus has been on launching things that are going to be permanent additions to our menu. That doesn't mean that from time to time, you won't see us do something that's more promotional. But overall, our strategy is very much to launch bigger, better things that are going to be on the menu, that are going to build overall brand equity for us, and that should continue. And one of the big enablers for that is our digital platform. In the past, when we would launch new products, often, we'd look at them and say, we hope this is something that can be permanent. But as soon as we go off air, people didn't have the reminder when they were ordering of that great new product that we had. We'd see the mix drop off a lot after we took it off television, and we'd eventually pull it off of the menu. With the digital platform, with people having a menu in front of them when they're ordering, it allows us to build on the menu, to add things that are going to stay there. And that's a big change for us. It's a very big change for us because it has allowed us to keep these things going -- to have incrementality after they have launched by keeping them on the menu. So that's a big change for us in the way our customers are accessing the brand that has allowed us to change some of our strategy around how we manage our menu and our product innovations. In terms of the digital orders, basically, all of the customer metrics are better with digital orders. And most importantly, the retention of those customers is higher because their customer satisfaction is higher and the frequency of those customers is higher. So it is primarily about order counts. Ticket is a little bit higher. But the most important thing is kind of the customer reaction to it, which is higher satisfaction, which is driving better retention and better frequency.

And just one other question on the Japanese acquisition by the Australian franchisee. Do you renegotiate royalty rates when that occurs or did you? Number one. And number two, is there a significant opportunity for incremental store growth in Japan, or do you view it -- and therefore, this gets catalyzed by a new owner, puts more capital into the business? Or do you not see that as a real opportunity in this case?

Yes, so first answer is no, royalty rates did not change as part of that deal. And second, they are clearly looking at it as a growth vehicle. We've actually gotten pretty good growth, store growth, out of Japan the last couple of years. I will tell you from a company standpoint, the store growth has been offset by the yen having devalued the past couple of years. So from a retail sales standpoint, pretty darn good store growth has been pretty fully offset by the weakening of the yen. But going forward, I mean, DPE is clearly looking at it as a growth vehicle for them, and we're pretty optimistic about the medium and longer term in Japan.

Your next question comes from the line of Alvin Concepcion.

I was just wondering if you could let us know how the U.S. pizza category did in the quarter and what you're seeing in terms of share shifts. I mean, are the regionals still -- smaller regionals still losing share to the larger chains? And if you are gaining share, which I'm pretty sure you are, I mean, are they coming primarily from the regionals or the larger chains or maybe it's both?

Yes. I think the dynamics have stayed relatively the same. I think you're still seeing flat to a little bit up in the category. We are clearly taking share. I would say it has been more from the regionals and the smaller players, although our largest competitor, I think, has now had 4 slightly negative comps in a row in the U.S. And so we've clearly taken a little bit from there as well. But overall, the dynamic of the larger players taking share from the medium-size and smaller players, I think, has continued. And certainly, our growth is still more about share growth than it is about the category starting to grow more.

Great. And then I just wanted to talk a little bit more about the pan pizza. You've now lapped the 1 year anniversary, I think, on October 1, and you'll be lapping some strong growth from the initial launch last year. It's a good problem to have, but would you expect growth to continue after lapping a launch based on what you're seeing?

Yes, I guess what I'd say is we've got a lot of momentum, and there are a lot of different things that have been contributing to growth. Pan has certainly performed very, very well for us over the course of the past 12 months since its launch last year at the beginning of October. But digital has also been driving growth, and improved store operations have been driving growth. And I think there are a lot of things that have been contributing to it. But certainly, pan performed very well over the course of the past year, and certainly, we would hope that it's going to continue to perform well for us. But you're right. I mean, we're starting to roll over that initial launch from a year ago now, but I'm not going to get into the specifics, obviously, of the fourth quarter. I guess what I'd say is, we think we've got pretty rock-solid momentum right now.

Good to hear. And then lastly, on the technology front, are you seeing competitor step-up with innovations in digital or ordering apps or anything on that front?

I think there are certainly some things that they're doing out there, but I think the most important thing to look at is the gap between the 3 national players with platforms, so us and Papa John's and Pizza Hut, versus where the regionals and smaller players are. And so we think we've got the best platform out there, but I'm sure some of our national competitors would believe that they do as well. And I think what's more important is the dynamic of the national players with these platforms and how we're effectively competing against smaller players that either don't have digital ordering or certainly don't have the same kind of robust platform that we're operating on. So we're certainly seeing some things from our national competitors, but in terms of how that's going to affect our overall sales, I think the more interesting dynamic continues to be the competitive advantage that we're building versus the smaller players in the category.

Your next question comes from the line of Jeffrey Bernstein.

Great. A couple of questions. One just on maybe the current promotional environment. One, I'm just wondering how you assess it today versus where it's been over the past year. And it was kind of interesting, maybe if you can layer in a comment about inflation because I know you mentioned that you're going to be in that 2% to 3% range. And next year, I think you mentioned flat to down in terms of a commodity basket. So I'm just wondering, one, with the promotional environment's like now and how you think the players yourself and the competitors respond whether you typically would see a big uptick in discounting with the basket going more to deflation than inflation? Or what you might be seeing or thinking you might be seeing going forward?

Yes. I think that, first, Jeff, the answer is that the competitive environment, I think, has been pretty consistent over the course of the past, really couple of years. And so no real change there. And in Mike's comments, he did say that our early expectation, our early read on 2014 is kind of flat to down on commodities. Corn prices are very low. And corn tends to flow through everything else. And so I think you're right on that front. That said, there are other pressures out there. And so I don't know that I'd see the environment changing enough next year that I would really expect pricing to materially adjust. Obviously, that could change, but I think you're going to tend to see more kind of a steady as she goes category-competitive environment. That'd be my guess.

Got it. And then just from a unit growth perspective, obviously the international is still very strong. We're obviously hearing about various macro headwinds globally. But do you see the international interest accelerating from a unit growth perspective? Or do you think maybe the macro's containing it? I'm just wondering what you're seeing in terms of pipeline of future growth. I guess if you could address that domestically as well, whether or not we could see a ramp-up in U.S. franchise growth in '14 with the strength you're seeing fundamentally.

Sure. I think on the international side, we changed our long-term forecast, our long-term guidance on store growth from being an absolute number to a percentage range back in January. And there was a reason for that. As we looked at the capacity of our markets to grow, frankly, as they get larger and a little bit more mature in some of these markets, and they've got a little bit more infrastructure in place, their ability to support more growth grows with their business. It's easier to add 50 stores in a market when your base is 200 than to add 50 when your base is 100, just the number of stores that have to produce a new manager and kind of covering your overall fixed cost with the master franchisee level, et cetera. So from a percentage standpoint, our overall global guidance of kind of 4% to 6% growth stands, which from an absolute number means our expectation is that, that number will go up over time as the base continues to grow. And I think the macro environment outside of the U.S. also continues to be relatively consistent. Although I think we may be seeing some signs of a few places starting to get a little bit better than they were. But overall, I think you're looking at a pretty consistent environment out there. And we think that our growth guidance is the right one for the long term, which is kind of a percentage-based growth. So on the domestic side, clearly, we're pleased that we have gotten to kind of that moderate growth that we've been talking about. On a trailing 12-month basis, we are up on a net basis in the U.S. Our profits at the store level continue to improve year-over-year. So the macros on that are pretty good. And what we know is that stores get built because they should be built, that they get built when they're going to generate a good return for the franchisee. And you may be able to pull growth forward in the short term doing some things, but the real answer is over the medium to long term, good unit economics are what are going to drive growth. And as our unit economics get better in the U.S., that gives us more optimism about our ability to continue to generate some modest growth in the U.S.

Got it. And just lastly, I know you addressed the balances or always looking at the share purchase versus dividend and whatnot. But just from the leverage standpoint, I think the framework you have mentioned in the past was you kind of want to stick to it within that 3 to 6x range. And if that's still the case, I don't know whether in the short term, you're ever contemplating going outside or above that range, whether rates are still compelling or whether maybe that's kind of fleeting at this point. So just kind of your thoughts in terms of the framework is 3 to 6 still the range you're looking at?

Yes. And that's going to depend on interest rates and the environment out there for -- in the debt markets. But I think something in that range is about right. We have gone above that range in the near term -- in the short term in the past. I don't know that we've been below it for quite some time. But I think that is a reasonable range for expectations over time. And we continue to look at it. We continue to look at the markets. And we're going to run the numbers very much the way you would run the numbers. And if we see opportunities, we'll take advantage of those opportunities. And that's really all I can say on that front.

Your next question comes from the line of Joe Buckley.

Could you talk about the national mix of amortizing? It went up this year in 2013. Is it set at that same level? Or maybe can you remind us what level that is for 2014? Or is there any chance you'll see that medium mix shift again?

No. I mean, we're spending -- our national ad fund is 6%. And we would expect that to stay in place. I think what you're seeing is -- so we had some shift from local market advertising to national spend. We think that's been effective for the system. We think franchisees P&L's are healthier. So we think it's been the right move. And it's generating growth and profits for them. So we feel good about it. And then I guess the other thing that's been happening within that is some shift towards digital which has continued to have a good ROI. Fourth, and probably some shift away from local print over the course of the past couple of years, which hasn't quite gotten the same level of ROI as in the past for us. But I think in terms of anything material changing in the near term, probably not. You'll see some subtle shifts as we kind of fine-tune things, but I don't think you'll see a significant change in the near-term.

Your next question comes from the line of Chris O'Cull.

How do you expect the new digital profiles will change digital usage?

The easier we make it for people to order pizza, the more pizza they're going to order. And I think it's as simple as that. So -- and I think if you look at how people like Amazon have shifted over time, they've tried to make it easier and easier for consumers. You're always looking at conversion rates on your site. The simpler you can make it, the more you're going to drive orders out of it and the happier your customers are going to be. And so we focus very hard on how we can make that process easier and simpler for our customers. And we think this was a nice move forward for us with the profiles, the ability of that customer to get through the process faster. And kind of in general, in restaurant industry terms, when you're improving your service times, good things happen in your business. And I think you could look at the ability of customers to get through that process no different than you would look at how we've driven service in the past with our delivery, how a lot of folks look at very carefully at their drive-through times at the restaurants. We look at how easy it is for our customers to access the brand and to order from the brand. And this speeds things up. And that's a good thing.

Do you think it will make it more difficult to upsell or get people to try new products?

There will still be some upselling going on even with this kind of streamlined process. But when you get somebody to sign up and fill out a profile and to enter their credit card that goes into a token so that they can access that again, once somebody's gone to the trouble of doing that, and it's kind of put the trust and commitment into the brand that they're going to fill all of that out, you've kind of upped the relationship with that customer. And that's going to have a good effect on sales, we hope.

Any color in terms of just what percentage of users have created profiles or how this has been accepted by consumers?

Yes. I'll tell you, we track that to the 0.1% and are not going to release it because I know our competitors would love to get that information.

Your next question comes from the line of Steve Anderson. Stephen Anderson - Miller Tabak + Co., LLC, Research Division: Somebody questioned on the new prototype. He said that the new -- all new bills will feature elements from the prototype. How many units do you have under the new design? And if it's at all possible, can you show what kind of a delta between the new stores -- newer prototype versus the older type with regard to average unit volumes?

Yes. We've got a couple hundred stores that are in the new image. And it's still relatively early in that process, to kind of get into specifics around list. I guess what I'd say is the franchisee's reaction and the customer reactions are positive. And as we get a little further into it at some point, we're going to be in a position to talk about that a little bit more, but for now, a little too early to try to be giving specific numbers around that. Stephen Anderson - Miller Tabak + Co., LLC, Research Division: Do you still feel confident that this will be the way to build new units going forward?

Yes. I mean, we're building -- all new units we're building now are in this new design.

Your next question comes from the line of Amod Gautam. Amod Gautam - JP Morgan Chase & Co, Research Division: I'm filling in for John. You made a few comments on the solid momentum of the business. And it's looking like this might be the fourth consecutive year where comps are above the long range, 1% to 3%. So can you just kind of frame 2014 for us within that context? Is that still -- is the 1% to 3% still the fair range you want people to think about? Or is there something about continued growth in technology or incrementality in pan pizzas that makes you feel more positive about continuing share gains, possibly above the 1% to 3%?

It's a fair question. And I think the answer is we're looking at that. I mean it's -- clearly, we're very happy with the momentum in the business and pretty optimistic about where we are. And so you're right, we've noticed the same thing. And clearly, we're pleased. And I think the past few years have exceeded our expectations on where we thought we were going to be. I guess what I'd say is this is a long-term guidance. We've kind of been looking at 10 years looking back at where we've been and trying to project out where we're going to be. But you're correctly pointing out, we've been slightly above to strongly above, certainly in 2010. And this year, it's been developing very nicely for us as well. So I guess that's really all I'd say right now. Your observation is correct. We have been above it. Though each of the last 2 years, we were only a couple of tenths above that range. So we're still awfully close to it. This year has been a little bit stronger. Amod Gautam - JP Morgan Chase & Co, Research Division: Okay, that's helpful. The other question's a little bit shorter. Just in terms of the supply chain side, you made some comments about why supply chain margins were kind of flat this quarter, relative to the first half of the year. So I mean some of that, I think, presumably in the first half of the year was driven by leverage as well. So I was curious going forward, is the right expectation -- assuming cheese prices are stable, will the right expectation be basically that there's not going to be a whole lot of leverage going forward? Or is there something else driving potential margin expansion in the supply chain?

No. We've said before that the kind of margins that you should expect out of that business are good. We have a very good return on our assets. We're very happy to be in that business. But it's not one to expect a really big increase in the amount of profit margin that's there. We get some leverage when we run a lot of builds through the facility like we had in the first couple of quarters. But it's not one that's going -- that you're going to -- that you can expect to see continued big increases on a gross -- on the operating margin percentage.

Your next question comes the line of Mark Smith.

I just want to ask a couple of quick questions more on the online. Just confirm, you're close to 40% domestic. If we look international and global, is that number pretty similar?

Yes, it is. It's probably just slightly lower than that on average outside of the U.S. But that's with a very broad mix. So going from 50%-plus in Japan and Korea and our DPE business to some markets that still don't have digital. And so it's still a pretty broad range. India, I mentioned, it's about 20% of their delivered sales, which is about half of their business. You're looking at kind of 10%-ish on their overall sales. So very broad range out there. We think it is a real opportunity as much or more of an opportunity for us outside of the U.S. as it is inside the U.S. because we have been earlier on the curve in international than we probably were in domestic. And from an overall standpoint, I would tell you it is less developed, I think, in a lot of markets than it is in the U.S. So our ability to go after that leverage that for growth in international has been part of the driver for us on the international business for the last few years, and I'm pretty confident will continue to be a driver for us.

Okay. Now as we look at the changes you've gone from 20 to 30 to nearly 40, what has been the delta on labor levels? And is there still opportunity to maybe reduce labor costs in the restaurant and improve franchisee profitability as online or digital continues to grow?

Yes. There is a little bit of leverage. It's not a big number. You're talking about orders that take maybe 3 minutes to take on average over the phone. So there is a little bit of labor leverage. And we have seen that. And as the percentage continues to go up, we would expect that we will see a little bit more. But it's not a big number. It's definitely there. We can definitely see it and measure it. But I think the real gains from digital orders are far more how it's affecting customers' retention and frequency and driving orders than it is necessarily on the margin front. It's there, but it's order of magnitude, the order of growth that it's driving is a far bigger driver of value creation for us than savings on the labor front.

Your next question comes from the line of Mitch Speiser.

Great. My first question is about the income statement, one particular line item. The international margin, which is, I don't have supply chain, some supply chain in there, was down over 100 basis points year-over-year, if I got my numbers right, and now with the first margin decline in that segment in several quarters, I'm just wondering if you can just explain some of the dynamics? Was ForEx a factor or something with the Canadian supply chain? Yes, the international margin, down about 100 bps year-over-year?

The margin you're looking at is the Canadian supply chain margin down a little. But that's probably -- the business in Canada is actually doing very well. Just like in the U.S., you've got issues with as prices go up, as commodity prices are up, sometimes your margin percentage changes. But that business is performing very well. And I think all pan -- it's got more to do with price, with commodity prices than anything else.

Okay. And a separate question if we can move to the balance sheet. And I know you made some comments earlier on the conference call that if you can just give us a sense of where your debt to EBITDA is today and maybe talk about some of the thresholds to look forward to, like when the amortization could be postponed. And if what it looks and just separately, what the prepayment penalty outlook looks like over the next couple of years.

Okay. Under the way that the debt-to-EBITDA ratio is calculated for our covenants, which includes the kind of the idea that all of our BFN is drawn down. We're currently up 4.6. When we go below 4.5, we have the opportunity to seize amortization. And we're obviously making progress toward rep and progress towards that number. In terms of the ability to refinance with the make-whole premiums, there's a fairly steep make-whole that's in place for the first 3 years of the debt. And the debt was placed a year ago, this past March. After that point in time, we do continue to have significant make-whole penalty, but we'll have the opportunity to buy back about 1/3 of the stock -- or repay about 1/3 of the debt, rather, without a make-whole if we chose to. So a complete refinancing in the next 2 years is a fairly unlikely scenario.

Okay. And if I can ask one last question, more on the product pipeline and really the product portfolio. And just a big picture, Patrick, can you maybe talk about what areas of opportunity or what holes in the product portfolio that you see that could, over time, be an opportunity for some product news?

I could, but I won't, I'm sorry. Yes, we think there are definitely opportunities out there, but we'd like to keep ourselves focused on those and not help our competitors focus on those more. So I think I'm going to pass on that one.

And perhaps just one follow-up on that and just a different way to ask, the late night date part is something that's very -- it's a strong part of overall fast food. Obviously, pizza at late night seems to be a nice fit. How do you look at the late night business? Have you done any marketing around late night? Do any of your stores, are they open 24 hours? Do you see any opportunities for the late night date part?

Yes, I think there is opportunity there. We have not promoted it a lot kind of directly. Certainly, I know from personal experience that Domino's fueled me through college and in late night. And I think a lot of people are the same way and have the same experience. So we think there are opportunities there. I think we've got a couple of stores open 24 hours a day in the world. That's a pretty low percentage out of over 10,000 stores. So I think there are opportunities there. And to-date, we haven't gone after it terribly aggressively. And so I think that opportunity is there.

Your final question comes from the line of Paul Westra. Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division: Just another question or 2 on the online ordering or digital ordering, and specifically in the U.S., and I was curious if you can comment on maybe on what the maybe market distribution of online ordering is? In other words, is there a lot of -- are there some markets perhaps well over 50% already in the U.S.? And maybe just talk about maybe what is often the tipping point to convert a market or maybe even a specific user? And just trying to ultimately gauge on the pace of online ordering, whether you expect the pace to pick up as you move from 40% to 50% as opposed to 30% to 40%?

Yes, I think the -- so there are a couple of ways to answer that. First, there are certainly regional variations and market variations in terms of kind of the overall percentages. I think our highest stores today in the U.S., I think we've got a couple that are over 70% digital orders. And there are certainly some markets that are over 50%. But it's growing pretty well everywhere. And in fact, the markets that have had the lower percentages have actually been growing faster than those that had the higher percentages. And so overall, it's pretty strong everywhere. There aren't any markets anymore that are really significantly lower than kind of our overall averages. I guess the other thing I'd say is last year until 2012, I believe the industry was either 12% or 13% total digital orders. And so from a level of development standpoint in the category, you're still looking at the category being relatively lower from a -- or actually quite a bit lower from a development standpoint. So that's presumably up this year. I would guess now is going to be, for 2013, probably in the 14%, 15%, 16% range, something like that. But with us now being at 40%, clearly the vast majority of that overall category sales are coming from us and Papa John's and Pizza Hut. And that continues to be why we're very excited about it because even though it's a -- getting to be a very large part of our business, the overall category development is still relatively low. And so that's why we're pretty confident it can be a continued driver of growth for us. The other thing I'd say is that our corporate stores, because they were all on earlier than our franchise stores, and we had the whole platform up and running, our corporate stores are pretty significantly higher on their overall mix than our franchise system at this point. So lots of reasons that we continue to be very optimistic. I think the most important one, though, is looking at that overall category development. It's still pretty low. And our expectation is that's just going to keep growing over time. And as the majority of that is going to us and Papa John's and Pizza Hut, it's part of what gives us confidence about the future. Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then just maybe just one other question on that. And once customers do start ordering online, it's obviously safe to assume that 100% of their ongoing purchasers have gone online, then?

Actually, it's not. There actually is some mix, which is, I would tell you, is a little bit surprising. First of all, I'll remind you about 10% or just under 10% of our orders are walk-in customers. So right now, if you look at our overall business, you're looking at about 50% of people calling on the phone, about 40% accessing the brand ordering digitally and about 10% walking into the store to order. And there is some mixing on that. Some people order digitally and then they'll walk into the store or they'll pick up the phone and call. It may be different people within the same household who are ordering off of the same account, who are accessing it differently. But no, there actually is some mix on that.

There are no further questions.

Well, thank you, everybody. All in all, I think the third quarter was yet again very solid. I'd like to thank our great franchisees and team members for all their efforts and very effective results and our shareholders for their continued support. I look forward to seeing many of you in January for our annual Investor Day in conjunction with the ICR Conference in Florida. Thank you.

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