Domino's Pizza, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2021 Domino's Pizza, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After this speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Chris Brandon, Director, Investor Relations. Thank you, and please go ahead.

Appreciate it, Samantha, and good morning, everyone. Thank you for joining us for our conversation today regarding the results of our first quarter 2021. Today's call will feature commentary from Chief Executive Officer Rich Allison and Chief Financial Officer Stu Leavies. As this call is primarily for our investor audience, I ask all members of the media and others to be in a listen-only mode. I want to remind everyone that the forward-looking statements in this morning's earnings release and 10-Q also apply to our comments on the call today. Both of those documents are available on our website. Actual results or trends could differ materially from our forecasts. For more information, please refer to the risk factors discussed in our filings with the SEC. In addition, please refer to the 8K earnings release to find disclosures and reconciliations of non-GAAP financial measures that may be referenced on today's call. Our request to our coverage analysts, we want to do our best this morning to accommodate as many of you as time permits. So we encourage you to ask only one one-part question on this call, if you would please. Today's conference call is being webcast and is also being recorded for replay via our website. With that, I'd like to turn the call over to our Chief Financial Officer, Stu Levy.

Thanks, Chris. Good morning, everyone. We're excited to share our strong first quarter results with you today. Overall, Domino's team members and franchisees around the world generated impressive operating results, leading to a diluted EPS of $3 for the first quarter. Global retail sales grew 16.7% in Q1 as compared to Q1 2020. As a reminder, global retail sales growth includes both comp growth and unit growth, which I'll break down for you in a moment. When excluding the positive impact of foreign currency, global retail sales grew 14%. Breaking down that global retail sales growth, our U.S. retail sales grew 15.3% and our international retail sales grew 18%. When excluding the positive impact of foreign currency, international retail sales grew 12.8%. We continue to see positive momentum in both our U.S. and international businesses in Q1, leading to both strong same-store sales performance and net unit growth. Turning to comps. During Q1, we continued to lead the broader restaurant industry with 40 straight quarters of positive U.S. comparable sales and 109 consecutive quarters of positive international comps. Same-store sales in the U.S. grew 13.4% in the quarter, lapping a prior year increase of 1.6%. Same-store sales for our international business grew 11.8%, rolling over a prior year increase of 1.5%. Breaking down the U.S. comp a bit further, our franchise business was up 13.9% in the quarter, while our company-owned stores were up 6.3%. We observed a larger spread than we've historically seen between the top-line performance of our franchise stores and our company-owned stores, which we believe was primarily a result of the heavily urban and higher income footprint of our company-owned stores relative to a more diverse mix across our franchise base. The corporate store comp was also disproportionately impacted by store splits resulting from our fortressing efforts as we opened more new corporate stores as a percent of the total corporate store base than we did franchise stores in 2020. The U.S. comp this quarter included a healthy mix of both ticket and order growth. The ticket growth was driven by both an increase in items per order and a higher delivery mix, which also includes a transparent delivery fee. The 11.8% international comp was driven by ticket growth. Similar to our U.S. business, that ticket growth was driven by a higher delivery mix and an increase in items per order. Shifting to unit count, we and our franchisees added 36 net stores in the U.S. during the first quarter, consisting of 37 store openings and the closure of one of our corporate stores. Our international business added 139 net stores comprised of 160 store openings and 21 closures. We're very pleased with our net unit growth during Q1, which was an increase over the prior year quarter. Turning to revenues and operating margins, total revenues for the first quarter were approximately $984 million and were up approximately $111 million or 12.7% over the prior year quarter. The increase was driven by higher global retail sales, which generated higher revenues across all areas of our business. Changes in foreign currency exchange rates positively impacted our international royalty revenues by $2.1 million in Q1 2021 as compared to prior year. Our consolidated operating margin as a percent of revenue increased to 39.6% in Q1 2021 from 39% in the prior year. due primarily to higher revenues from our U.S. franchise business. Company-owned store margin as a percent of revenues increased to 23.9% from 22.4%, primarily as a result of strong sales leverage. This was also up sequentially from 21.9% in Q4 2020, driven by lower labor costs as a percent of revenue in Q1 2021. Supply chain operating margin as a percent of revenues decreased to 10.5% from 11.5% in the prior year quarter. As a reminder, in 2020, we opened two new supply chain centers in South Carolina and Texas, respectively, as well as a new pressed product line in New Jersey, which increased our overall fixed operating costs as a percent of revenue. G&A expenses increased approximately $2.8 million in Q1 as compared to Q1 2020, resulting from a combination of higher advertising expenses and labor costs partially offset by travel. Net interest expense increased approximately $0.9 million in the quarter, primarily the result of lower interest income. As previously disclosed, in Q1 2021, we invested an additional $40 million in Dash Brands, our master franchisee in China, following their achievement of previously established performance conditions. Accordingly, we remeasured the original $40 million investment we made in Q2 of last year due to the observable change in price from the valuation of the additional investment. This $2.5 million gain was recorded in other income in the first quarter of 2021. Our effective tax rate was 21.3% for the quarter as compared to a negative 3.7% in Q1 2020. The effective tax rate in Q1 2021 includes a 0.6 percentage point positive impact from tax benefits on equity-based compensation as compared to a 26 percentage point positive impact in Q1 2020. This decrease was due to significantly fewer stock option exercises in Q1 of this year. and we expect to see continued volatility in our effective tax rate related to these equity-based compensation tax benefits. Combining all of these elements, our first quarter net income was down 3.8 million, or 3.2 percent, versus Q1 2020. On a pre-tax basis, income before provision for income taxes was up 32.3 million, or 27.6 percent. Our diluted EPS in Q1 was $3 versus $3.07 in the prior year, a decrease of 2.3%. Breaking down that $0.07 decrease, most notably, our improved operating results benefited us by $0.61. The gain on the Dash Brands investment benefited us by $0.05. Net interest expense negatively impacted us by $0.02. A lower diluted share count, driven by share repurchases over the trailing 12 months, benefited us by 3 cents. And finally, our higher effective tax rate, resulting from lower tax benefits on equity-based compensation, as I mentioned previously, negatively impacted us by 74 cents. Shifting to cash. Our economic model continued to generate significant cash flow throughout the quarter. During Q1, we generated net cash provided by operating activities of approximately $153 million. After deducting for CapEx, we generated free cash flow of approximately $136 million. Regarding our capital expenditures, we spent approximately $17 million on CapEx in Q1, primarily on our technology initiatives. As previously disclosed, during Q1, we also repurchased and retired approximately 66,000 shares for $25 million. As a reminder, in February, our board approved a new $1 billion authorization for future share repurchases. We also paid a 94-cent quarterly dividend on March 30th. Subsequent to the end of the quarter, our board of directors declared a quarterly dividend of 94 cents per share to be paid on June 30th. As it relates to our capital structure, on April 16th, we refinanced our debt to keep pace with our growing business. We're very pleased with our gross issuance of $1.85 billion, which includes $850 million of 7.5-year 2.662% fixed rate notes and $1 billion of 10-year 3.151% fixed rate notes. We used a portion of the proceeds to retire our 2017 floating rate notes and our 2017 five-year fixed rate notes, to pre-fund certain interest payable, and to pay transaction fees and expenses. We expect to use the remaining proceeds for general corporate purposes, which may include distributions to holders of our common stock, other equivalent payments, and or stock repurchases. This recapitalization will reduce our weighted average borrowing rate from 3.9% as of the end of the first quarter to approximately 3.7%, and it will return our leverage to approximately six times EBITDA, consistent with our leverage model following previous recapitalizations. Additional information on this transaction is included in our Form 10-Q, which was filed this morning. Since the onset of the pandemic, in previous earnings calls, we've provided updates on the impact of COVID-19-related expenses, including safety and cleaning equipment, enhanced sick pay and other compensation for our team members, and support for our franchisees and our communities. The estimated impact of these items in the first quarter of 2021 was not material. In closing, our business continued its strong performance during the first quarter, and while we continue to closely monitor all aspects of our operations in these ever-changing times, We're confident in the strength and resilience of the Domino's brand and of the Domino's franchisees, their team members, and our corporate teams worldwide. Our results would not be possible without their tireless efforts each and every day, and we sincerely appreciate them. Thank you again for joining the call today, and I'll now turn it over to Rich.