Good day, ladies and gentlemen. And welcome to the Second Quarter 2019 Domino’s Pizza Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Tim McIntyre, Executive Vice President of Communication. You may begin..

Thank you, Sonia, and hello, everyone. Thank you for joining us for our conversation today regarding the results of our second quarter 2019. The call will feature commentary from Chief Executive Officer, Ritch Allison; and Chief Financial Officer, Jeff Lawrence.

As this call is primarily for our investor audience, I ask all members of the media and others to be in listen-only mode. In the event that any forward looking statements are made, I refer you to the Safe Harbor statement you can find in this morning’s release, the 8-K and the 10-Q.

In addition, please refer to the 8-K to find disclosures and reconciliations of non GAAP financial measures that maybe used on today’s call. Our request to our analysts, we do -- we want to do our best to accommodate all of you today, so we encourage you to ask only one question on this call, if you would please.

And with that, I’d like to turn it over to Chief Financial Officer, Jeff Lawrence..

Thank you, Tim, and good morning, everyone. In the second quarter, our positive global brand momentum continued as we delivered solid results for our shareholders. We continue to lead the broader restaurant industry with 33 straight quarters of positive U.S. comparable sales and 102 consecutive quarters of positive international comps.

We also continued to increase our global store count at a healthy pace as we opened 200 net new stores in Q2. Our diluted EPS was $2.19, an increase of 19% over diluted EPS as adjusted in the prior year quarter, which excluded the impact of our recapitalization transaction completed in 2018.

With that, let’s take a closer look at the financial results for Q2. Global retail sales grew 5.1% as compared to the prior year quarter, pressured by a stronger dollar. When excluding the negative impact of FX, global retail sales grew by 8.4%.

This global retail sales growth was driven by both increases in same-store sales and the average number of stores opened during the quarter. Same-store sales for the U.S. grew 3%, lapping a prior year increase of 6.9% and same-store sales for our international division grew 2.4%, rolling over a prior year increase of 4%. Breaking down the U.S.

comp, our franchise business was up 3.1%, while our company-owned stores were up 2.1%. The comp this quarter was driven by ticket growth. We continue to experience pressure on the U.S. comp from our successful fortressing strategy, as well as from aggressive marketing of third-party aggregators.

On the international front our comp for the quarter was also driven by ticket growth. On the unit count front, we opened 42 net U.S. stores in the second quarter consisting of 45 store openings and three closures. Our international division added 158 net new stores during Q2 comprised of 171 store openings and 13 closures.

We are very happy with the rate and pace of our net store growth during the first half of 2019 and note that we have opened 50% more units globally then at the same point last year.

We have opened approximately 100 net units per month over the last 12 months, which we believe demonstrates the broad and enduring strength of our four-wall economics combined with the efforts of the best franchise partners in the restaurant industry.

Turning to revenues, total revenues for the second quarter were up $32.2 million or 4.1% from the prior year, resulting primarily from the following. First, higher U.S. franchise retail sales, resulting from both same-store sales and store count growth drove increased supply chain and U.S. franchise revenues.

Higher international retail sales resulted in increased international royalty revenues, but were partially offset by the negative impact of changes in foreign currency exchange rates. FX negatively impacted international royalty revenues by $3 million versus the prior year quarter due to the dollar strengthening against certain currencies.

These increases were partially offset by lower company-owned store revenues, resulting from the previously disclosed sale of the 59 corporate stores in our New York market to existing franchisees during the quarter.

As I mentioned during the Q1 call, this transaction will help us accelerate fortressing the New York market and further allows us to remain focused on fortressing our remaining corporate store markets.

Moving on to operating margin, as a percentage of revenues, consolidated operating margin for the quarter increased to 39% from 37.7% in the prior year quarter and was positively impacted by the New York sale.

Supply chain operating margin was up 0.6 percentage points year-over-year and was positively impacted by procurement savings and lower insurance costs, but was negatively pressured by higher labor costs. Company-owned store operating margin was up 0.9 percentage points year-over-year driven by the New York sales.

We continue to experience labor rate pressures in many of our remaining company owned store markets. G&A cost increased $2.7 million as compared to the prior year quarter, driven in part by a $2.4 million loss on the New York sales.

Interest expense decreased $2.2 million in the second quarter, driven by $3.3 million of incremental interest expense recorded in the prior year related to our 2018 recapitalization. Our reported effective tax rate was 12.9% for the quarter, down 2.2 percentage points from the prior year quarter.

The reported effective tax rate included a 9.2-percentage-point positive impact from tax benefits on equity-based compensation. We expect to see continued volatility in our effective tax rate related to equity-based compensation for the foreseeable future.

When you add it all up, our second quarter net income was up $15 million or 19.3% over the prior year quarter. Our second quarter diluted EPS was $2.19 versus $1.78 in the prior year, which was a 23% increase. As compared to our prior year diluted EPS as adjusted for the 2018 recapitalization of $1.84 our second quarter diluted EPS increased 19%.

Here is how that $0.35 increase breaks down. Our lower effective tax rate positively impacted us by $0.09, primarily related to higher tax benefits on equity-based compensation. Lower diluted share count resulting primarily from share repurchases over the past 12 months benefited us by $0.06.

Higher net interest expense resulting primarily from slightly higher interest rates negatively impacted us by $0.02. Foreign currency negatively impacted royalty revenues by $0.05. And most importantly, our improved operating results benefited us by $0.27.

It is important to note that operating results do include a $0.04 negative impact from the loss recorded on the New York sale. Now turning to cash, I would like to take a moment to highlight the continuing strength of the Domino’s financial model, in particular our cash flow generation.

During the first half of 2019, we generated net cash provided by operating activities of more than $200 million. After deducting for CapEx, free cash flow generated for the first half of the year was more than $175 million. Over the past 12 months we have generated more than $330 million in free cash flow.

I highlight our cash flow story not only to demonstrate our outstanding financial model and performance, but also to remind folks of our long-term commitment to returning cash to shareholders.

During the second quarter, we repurchased and retired $3.3 million worth of shares at an average purchase price of $269 per share bringing our year-to-date total repurchases to $11.5 million and our total share repurchases over the past 12 months to more than $280 million.

We also returned $26.7 million to our shareholders in the form of a $0.65 per share regular quarterly dividend. As always we will continue to evaluate the most effective and efficient capital structure for our business, as well as the best way to deploy our excess cash to the benefit of our shareholders.

Overall, our solid consistent momentum continued and we are pleased with our results this quarter. We will remain focused on relentlessly driving the brand forward and providing great value to all of our stakeholders, including our customers, franchisees, team members and shareholders.

Thank you for joining the call today and now I will turn it over to Ritch..

Thanks, Jeff, and good morning, everyone. Overall, I am pleased with our second quarter performance. As we discussed the quarter, I will try to put things into context of what matters on our long game journey to drive profitable growth for the Domino’s brand and our franchisees.

We continue to lead the pizza category and we continue to gain share around the globe, but we are a work-in-progress in brand, there have been and always will be plenty of areas where we can improve. With that context, let’s talk about the quarter. Starting with the U.S.

business, our retail sales performance was once again driven by a balance of same-store sales and solid net unit growth.

Our same-store sales performance for the quarter came in toward the lower end of our three-year to five-year outlook, as we continue to navigate through headwinds related to aggressive activity from third-party delivery aggregator’s. I do not expect this activity to ease in the near-term.

We also continue to put some pressure on our comps through our own fortressing strategy. As we have discussed in the past, this is an investment that we and our franchisees are happy to make for the long-term growth and profitability of the business.

During the quarter our, comp was mostly ticket driven, which does not signal a shift in strategy away from driving order counts, but it does reflect the franchisee flexibility being utilized at the store level related to menu price and delivery charge, having more of an impact.

Make no mistake, we remain focused on utilizing data with our franchisees to drive transaction growth coupled with smart ticket opportunities where possible. It is the strategy that got us here, the strategy that is sustainable and the strategy that will help us navigate through challenges in the future.

Our Points for Pies promotion extended into the second quarter and while it was a solid sales driver, I am most pleased by the progress toward our additional objectives related to app downloads, awareness and reengagement tied to the Loyalty program. I continue to be pleased with the pace of unit growth in our U.S.

business, a solid quarter of 45 openings and only three closures, once again demonstrated our industry leading unit economics. Fortressing continues to be the right long-term answer for the brand and I am pleased with the strong support for this strategy within our franchise system.

Our data driven approach to territory assessment has created a meaningful educated conversation around how we can best continue to win the long game by establishing closer proximity to households, driving carryout, shrinking delivery areas, improving service and lowering cost per delivery for franchisees.

This approach is also creating meaningful opportunities for our franchisees to grow their enterprise profitability. We remain excited about this initiative and its positive impact on unit growth and retail sales for the remainder of 2019 and beyond.

Fortressing is a critical component of our efforts to improve service to our customers, but it is not the only component. Our operators must continue to push harder every day to improve service, getting to door consistently on time with great tasting pizza. As a brand we will also continue to invest in technology to help our franchisees and operators.

I am pleased to announce today that our GPS tracking technology will be launched by the end of 2019. This will be an innovation step that will bring even further transparency to the experience of tracking an order and I am pleased that we will be getting it off the ground very shortly.

During the quarter, we announced our new pilot program in partnership with Nuro, as we continue to expand the self driving delivery learnings that bring us closer every day to the technology that could truly revolutionize the way we do business. We will be testing this in the Houston area this fall.

We will also continue our multimarket testing of DOM voice order taking, now in over 40 company owned stores. Across these and other initiatives, rest assured that we will not slow down. We will continue to invest and innovate aggressively to stay at the forefront of our industry. For the U.S.

business as we look forward, we will remain focused on our long game approach to balanced growth via volume driven retail sales, strong unit economics and franchisee help. I want to thank our U.S. franchisees for continuing to dig in, during what has recently been a unique operating and competitive environment.

Beyond all other things, my top priorities remain your profitability, your long-term growth potential and staying aligned on what matters, as we head into the back half of 2019. Moving on to international, it was another very solid quarter for unit growth.

While near-term challenges continue in getting comps back to levels, we are used to, our retail sales performance showed a blend of units and comps leading to a healthy result.

This blend may shift over time, but so long as there is balance coupled with our strong fundamentals related to unit economics and market share, I remain confident in our proven international model.

During the quarter, net unit growth of 158 stores was a strong improvement over Q2 of 2018, demonstrating the strength of our unit economics and the terrific commitment of our international master franchisees. Unit openings were strong across all regions.

Same-store sales were ticket driven and we continue to stress the importance of data analytics and insights with our master franchisees, and helping to make smart decisions related to pricing and promotional strategy.

During the quarter, we gathered our international master franchisees from around the world in Amsterdam for a week of best practice sharing and learning. We discussed many of the successful strategies and tools that have been developed in our leading markets around the world.

It is one example of how our various centers of excellence are engaging with and supporting our international partners. Our international model and our partners are very strong. However, it is not lost on me that our comp performance over the last three quarters has come up short of our three-year to five-year outlook.

While we may be near the low end of our target for a period of time, our international business remains healthy and poised to contribute meaningfully toward our 8% to 12% global retail sales outlook over time. All in all, as I look across the global Domino’s business, I am pleased with the first half of 2019.

I am as encouraged by our many successes as I am by our passion and our focus on addressing the areas where we can improve. We will never stop striving to get better. And with that, we are happy to take some questions..

Thank you. [Operator Instructions] And our first question comes from Lauren Silberman of Credit Suisse. Your line is now open..

Hi. Thanks for the question. Can you talk about where you see the greatest opportunity to drive same-store sales? Is that from your existing customer base, whether that would be higher ticket incremental orders or attracting new customers to the platform? Thanks..

Yeah. Lauren, it’s Ritch. Thanks for the question. We see opportunity honestly across both of those, both in terms of attracting new customers into the brand and also driving incremental sales with those existing customers. And during the second quarter, we continued our Points for Pies program which was all about continuing to do both of those things.

Number one, driving increased number of royalty program enrolments, resulting in additional customers coming in to the brand and purchasing for the first time, but also continuing to expand our engagement with our existing customer base, as we discussed back in January, we have got more than $20 million active members in that Piece of the Pie rewards program.

So as we look forward, we see opportunity on both of those fronts..

Thank you. And our next question comes from Brian Bittner of Oppenheimer & Co. Your line is now open..

Hi. Thanks. It’s Mike Tamas on for Brian. I think we are sort of all just kind of wondering, what changed in the same-store sales trajectory from last quarter. You mentioned third-party delivery headwind probably peaked last quarter and then you kind of said this quarter is keep going and you don’t see any let up there.

So is that -- did something change there or with the fortressing headwind that sort of changed the trajectory of your traffic or how do we think about that? And then how do you think about reaccelerating your traffic going forward just in your overall sales trends? Thanks..

Sure. So Mike as we take a look at Q2, no - no material differences in the pressures on our same-store sales in the U.S. business. We continued to progress forward with our fortressing strategy that we have been working on for a while and we have shared with you the range of downward pressure on the comp from that.

That honestly doesn’t fluctuate much on a quarter-to-quarter basis. And then we did during Q2 continued to see a significant amount of pressure in the part of third-party aggregators. There is a substantial amount of discounting out there as they drive to gain market share.

And second a lot of spending on advertising in the marketplace, which puts some downward pressure on our share of voice, so same -- really a very similar story in Q1 in terms of the pressures on the comp.

As I look forward and think about, how do we drive comps in the future and reaccelerate, there is -- the story is going to be fairly similar to what has gotten us here over the past several years. There are some things that are still going to matter a lot, even in this new competitive landscape.

We still got to bring great product to our customers each and every day. We are heavily focused on that.

We have got to remain intensely focused on value and while -- we certainly see same cost pressures into the business, we and our franchisees have been steadfast with our $5.99 mix and match, our delivery hero offer there and our $7.99 carry out offer, that’s still going to be important.

We have got to drive every day to provide consistent and great service, delivery service to our customers. We are working on that every day and we will continue to invest in technology. I mentioned some of those in my prepared remarks on the call.

I am particularly excited about our rollout of GPS coming later in the year, which will once again put some fantastic technology not only in the hands of our customers to get better transparency into their pizza order, but also in a lot of ways, I am even more excited about the additional information that it will give our restaurant operators as they manage the efficiency around their delivery operations..

Great. Thanks..

Thank you. And our next question comes from Chris O’Cull with Stifel. Your line is now open..

Yeah. Thanks. Ritch, I know you talked a lot about the several technology tests and initiatives later this year like the GPS tracking, but are you considering any menu or value messaging changes. I understand you might want to elaborate on it.

Is there anything else you’re considering in terms of the business to address the transaction declines and then I have a follow-up?.

So, we are going to stay consistently, Chris, focused on value without question. As we have talked about in the past, we very regularly use our research and our analytical tools to make sure that we fully understand what the right value offering in the marketplace is to drive transaction growth over the long-term.

We will continue to do that and the answer continues to come back that the platforms that we have out there and now the $5.99 and the $7.99 are still very strong and competitive value platforms in the marketplace. As it relates to menu, we don’t like a lot of other restaurant brands roll out LTOs on a regular basis.

We just -- we don’t like the economics and the operational complexity of doing that. That said, we do recognize that we are in the food business and menu innovation is important over the long-term. So we are constantly looking at new menu items and platforms that we might bring forward to our customers. We are testing those on an ongoing basis.

In fact I was personally in the test kitchen just about a week and half ago looking at the number of different items. And so as we develop and test and prove out those items with customers then we’ll launch them as the opportunities arise.

For a product to come onto our menu, it’s got to drive incremental, not only incremental transactions, but also we are very mindful of the profitability of those items to our franchisees P&L.

So we will not launch items just to drive short-term comp, we want to make sure that any new items are contributors over the long-term to our franchisees profitability..

Thanks. And then, historically, the pizza category struggled to raise prices without affecting transactions.

Do you think Domino’s has more pricing power now because of delivery fees being charged by aggregators or is it critical for the company to reverse transaction declines soon?.

So I think the pricing power in the category is in the hands of the customer. There are very few QSRs that have pricing power and I don’t see a lot of that in the pizza category.

A big part of our success over the last decade has been the fact that you can still get a Domino’s pizza for the same price you were paying nine years or 10 years ago and we don’t see any near-term signs of that changing.

It’s really kind of early to tell around what impact these third-party aggregators are having on kind of setting pricing in the marketplace.

There has been so much discounting that even though some of the stated fees for food delivery are quite high relative to the underlying cost of the product you probably get the same push notifications I get all of the time and e mails from these aggregators with significant discounting to try to entice you to order.

So we are keeping an eye not only on our traditional competitors as we always have with respect to their pricing practices but we are also keeping an eye on these new set of competitors, these third-party aggregators and we will see over time, but our experience has certainly shown that remaining focused on value is the way to drive long-term transaction growth in the business..

Great. Thank you..

Thank you. [Operator Instructions] And out next question comes from David Tarantino of Baird. Your line is now open..

Hi. Good morning. Ritch, just a follow-up on the last question. I think in the past you have talked about the third-party aggregators potentially creating a lot of trial with these offers that might not be sustainable. And I guess as you get further into what they are doing and see the trend.

Do you still have that view, do you think this is maybe a temporary phenomenon related to the discounting they are doing.

And then, I guess, secondly, you mentioned that you are not expecting the environment to change much in the near-term and I am just wondering if you would comment on your degree of confidence in maintaining comps kind of near or above the low end of your 3% to 6% target, given this environment? Thanks..

Got it. So, David, it’s still a bit early to tell how sustainable the trial driving activities are. There still remains a heavy degree of discounting in the marketplace by the third-party aggregators and also heavy degree of advertising spend as well.

That group of aggregators has taken a fairly significant share of voice out there in terms of the advertising landscape around food delivery. So we expect that behavior to continue for some period of time. I think these players while the economics of the business are still I think open to question for the long-term.

The near-term activity certainly indicates that investors are very willing to lose a lot of money in the near-term to try to drive trial and market share in those businesses. So we remain attentive and watchful of everything that’s going out and certainly analyzing our own data to better understand what our customer’s behavior is over time.

But don’t see any signs that activity is going to slow down in the short-term. When I take a look at our business, our three-year to five-year outlook, 3% to 6% same-store sales, no changes to the outlook for us, I still see significant opportunities in our business to continue to drive solid transaction growth.

We have got -- we continue to produce terrific advertising industry-leading advertising that drives awareness of the brand. That advertising is fueled by without question the largest and most powerful advertising budget in the pizza industry.

We continue to develop fantastic technologies to put into the hands of our customers and into our stores to better drive operations and we are pushing, I think very importantly, very hard on service within our system, because a critical element, as we look forward into this new world where you can get anything delivered, well, we not only have to be the most economical and lowest cost delivery provider, but we have also got to be the best, getting to the door on time every time.

And so, we have got a pretty aggressive push internally to take service to the next level and we have got fabulous operators within the U.S.

and around the world that are really setting new standards for how great we can be in terms of our on time delivery performance and the fortressing strategy is really helping us to drive that over the long-term, as well as we tighten down these delivery areas continuing to allow us to get great service, but also improve the underlying economics of each of those deliveries..

Thank you. And our next question comes from Matthew DiFrisco of Guggenheim Securities. Your line is now open. .

Thank you. Just wanted something clarified then I do have a question.

I think there was a mention early on about the same-store sales being driven not by traffic but by check in within that context some delivery charges, was there a change in the quarter as far as franchisees on aggregate taking up delivery charges, just curious if that had an effect on the traffic? And then, I just want to know, if you could speak a little bit more about the change in your tone about the respect that you are hearing now or we hear now more for the third-party guys.

What changed, is it the additions of the fast food brands on those platforms, is it their new regional expansion, is it the level of discounting that they are doing, so maybe that’s temporary and when that goes away it goes away, just want to understand better sort of the anatomy of how their competitive intrusion is impacting the Domino’s brand? Thank you.

.

Sure, Matt. So, on your first question, the increase in ticket in the second quarter, it was a combination both of some of the delivery charges going up and also some menu price increases that some franchises have taken during the quarter.

On the delivery charges, a lot of that is -- those are more pronounced and as of the menu price increases, they are more pronounced in areas where we have seen a significant increases in wages, primarily driven by minimum wage increases, which continue to go up in states and in municipalities across the country.

The second -- your second question around, our tone around the third-party aggregators. We still have the same questions that we have always had about the economic viability of the model.

Certainly, there is still a heavy amount of investor subsidy that is going into the discounting to the customer and to the -- and into the incremental advertising spend. We also still have significant questions about the viability of that business model from the standpoint of the restaurants or the franchisees that are using third-party delivery.

If you take a look at the growth rates and transactions in the restaurant industry and even in sales overall, there has not been a significant change in the growth rate of the restaurant industry with the entry of these delivery aggregators.

So there is certainly some shift in how customers are receiving their food, more are getting delivery as opposed to going into the restaurants or picking it up themselves. But there is no real indication that there is an overall growth in demand.

We also still continue to hold the belief that ultimately this is extracting profitability out of the restaurant industry for those players that are going on to these third-party platforms. Now for the brands that are going on, you can take a look at the topline sales growth, which will contribute royalties to brands.

But I think the ultimate question about the viability will lay with the franchises of those brands and are they in fact making more or less money because they have gone on Board with these platforms. So we still hold a lot of the same questions around the overall business model.

When I talk about the fact that we don’t expect the pressure from these third-party aggregators to subside in the near-term that is really driven by the fact that we haven’t seen any slowdown in the pace of discounting or in the pace of their investment in marketing and advertising.

And when you think about it, while the behavior at first watch may seem irrational, it is actually quite the rational behavior on their part.

These -- there are going to be some survivors in this business and some of these aggregators will not be around in the future, would be my hypothesis and I suspect that the desire to spend to drive share is irrational behavior in the near-term to try to be as each of these players tries to become one of those that will ultimately emerge.

Thank you. Thank you very much for that answer..

Thank you. And our next question comes from Gregory Francfort of Bank of America. Your line is now open. .

Hey. Thanks for the question. I am -- maybe going to shift to OpEx a little bit. Can you maybe address the store level margin performance in the quarter and the New York City benefiting to help frame up either what that means for lost EBITDA or what that means for margin benefit on a go-forward basis for the next few quarters.

However, you maybe want to frame it up? And then the proceeds were a lot less than I guess I’d expected, does that mean that the profitability of these stores were very low or any help on framing up that sort of multiple pay for the business and profitability change going forward that would be helpful?.

Hey, Greg. It’s Jeff. On the New York sale, we got market price for those assets. I am really excited to get those into the hands of those franchisees who have committed not only to run those stores but also to continue to fortress that market.

We are going to take that money and continue to look at the best opportunities for that, but we are definitely all-in on fortressing and that includes the remaining corporate store markets where we compete and what markets those are.

When you think about the operating margin change quarter-over-quarter for the corporate stores that we reported, we were up almost a 100 basis points year-over-year, all that in New York, while New York was certainly a good and profitably market, the operating margin percentages there weren’t quite as high as some of our other even better performing market.

So a little bit of a math problem there. As we continue to move forward, as Ritch mentioned earlier, labor pressures continue to persist regardless of where you are operating in the U.S. franchise versus corporate East Coast versus West Coast versus the Heartland, whether government mandated or just economically mandated.

We are paying more to really attract and retain great team members who continue and not to be missed we continue to take material share in the USP of business in ‘19 just as we have for this decade or so.

As we look forward, our operators, we do have the right operator, we have the right business partners, we are getting technology into their hands to allow them to better compete with both the traditional and the upstart competitors. And how money they will make for 2019, we will report to you in early 2020.

But what I would tell you is, there is every opportunity in the last six months of the year just as they have had six months in the bag already to put up hopefully another record year and dollar profitability. That’s up to us and our operators to go and execute. But we have all the opportunity in the world.

It’s the best economic model out there and we feel good about where the brand is going. .

Thank you. And our next question comes from Will Slabaugh of Stephens Incorporated. Your line is now open..

Hey, guys. This is actually Niall on for Will. Thank you for taking the questions. So, regarding unit growth internationally, as you mentioned opening growth nicely year-over-year.

Could you give us a little more detail there in terms of what markets seem to be accelerating at this point or if there any market that could be stolen a bit to me a little more attention?.

Niall, it’s Ritch. Yeah. We are very pleased with unit growth in our international business. The 158 net units was a really nice increase over the second quarter last year and trailing four-quarter net store growth in the international business at 939 we are very pleased with that.

When we take a look across, we had strong unit growth across all of our regions around the world and in particular really pleased to see terrific unit growth in our BRIC markets, which have continued to accelerate back in January. At Investor Day, we spoke with you some about the potential that we see in the business in the BRIC markets.

We had strong growth there. But then we also saw some very strong growth in some of our more mature and established markets as well. As a number of those markets are also implementing some similar fortressing strategies that we have been working on in the U.S. business as well. So, all in all, I am very pleased.

When I take a look at what drives that growth, it’s the same thing that has driven our growth in the U.S. and has driven what is remarkably low number of store closures both in the international business and in the U.S. business and that is that we have terrific unit economics. The four-wall economics in these Domino’s Pizza boxes in the U.S.

and around the world remains incredibly strong. So, I am really pleased with the unit growth and the very healthy contribution that gave us to our global retail sales growth, which ex-FX was 8.4% for the quarter, 9.8% in the international business. So very pleased with that 9.8%..

Perfect. Thank you..

Thank you. And our next question comes from John Ivankoe of JPMorgan. Your line is now open..

Hi. Thank you.

We have talked a lot about competition for customers or acquiring customers on this call, but I wanted to see kind of how you felt right now about the competition for drivers, if there are any markets that are particularly competitive for drivers and you felt that that’s impeded your execution levels in anyway and I think it’s completely related to this, but some of your third-party competition has begun to separate delivery fees from service fees, do you think that is an opportunity and whether -- and if so whether the economics because they franchisees maybe there could be potentially some enhancements for the drivers themselves?.

Thanks John. I will take that one. Absolutely, there is a lot of competition for delivery drivers out there in the marketplace. Record low levels of unemployment in the U.S. and the rise of third-party delivery not only in the restaurant business but in grocery and other areas is definitively heated up the competition for drivers.

And we are working with our franchisees everyday to continue to improve our service. And having the right scheduling and staffing is critically important. So we don’t talk a lot about the technologies that we are working on that aren’t customer facing, those technologies in the stores.

But we have been working really hard on our store scheduling algorithms, for example, and have started to see some really nice success in our corporate store business around better service, because simply with the labor that we have available we are making sure that they are on the clock at the right times and the right days, and our franchisees are also working very hard in this area as well.

There are a couple of other things that we are working on to try to help us mitigate some of the driver challenge. The U.S. market is actually fairly unique in the context of Domino’s globally and that we send the almost all of the pizzas they go out in the U.S. market go out in the passenger automobile.

That’s not how we do business most of the other places around in the world. So we take -- we are looking at other alternative delivery methods in the U.S. as well and in a number of cities, we are not delivering on bicycles and then also we have got some E-bikes that we have deployed in some markets, including some of our corporate stores.

Now the interesting thing about those is not only is the lower cost way to deliver food, but also it opens up some additional workforce to us, because not everyone has an automobile and increasingly young people and that kind of 18-year to 28-year-old range fewer of them seem to have cars. So we are looking at those types of methods as well.

The testing that we are going to do in October with Nuro, another round of autonomous delivery testing as yet another step forward to try to get us to a place where we can reduce the dependency on the labor market and also lower our cost to delivery.

When you -- the second part of your question asked about the third parties and their separating delivery fees from service fees, et cetera. We are taking a look like the fees that they charge in the marketplace just as we regularly take a look at the delivery fees that our pizza competitors charge.

We take all of that data and use that to inform where we think our delivery fees should be on a market-by-market basis around the country.

So we are constantly keeping an eye on that and adjusting the dials with the mindset that we want to make sure that we are not just taking short-term price or profit at the expense of long-term transaction growth over time, that’s always the balance that we try to strike..

Thank you..

Thank you. And our next question comes from of Sara Senatore of Bernstein. Your line is now open..

Thanks. I wanted to ask about the international markets use that there were near-term challenges for comps to continue.

I think in the past Domino’s has may be disagreed with the licensees about what the source of those challenges might be with respect to whether it’s value proposition or something more pervasive regarding aggregators and the fortressing.

Do you have any I guess color or any update on your thinking or the changes that there are being made, because it feels like it is taking some time and I would have thought that if they show value that could be lever you could push pretty quickly.

So if you could talk a little bit about what the sources and whether there is any risk to unit growth if those comps do not improve? Thanks..

There is -- Sarah, thanks for the question. There is no real -- there is no one answer around the short-term challenges we have had over the last three quarters or so with respect to the international comps. The issues are different market-by-market.

What we have been trying to do and it just takes times to get there is working hand-in-hand with our markets to help make sure that we are driving good fact-based decision making around things like products and pricing, et cetera, a lot of those efforts do take some time to ultimately flow through the results in the business.

We gathered all of our international master franchisees just last month, where we brought a significant portion of our leadership team and our subject matter experts from Ann Arbor to meet with our master franchisees from around the world over an Amsterdam and had a terrific week of best practice sharing where we are taking tools from the U.S.

and our other leading markets to make sure that we are using the best of Domino’s IP around the globe as we think about how we grow the business. Now, with all of that said, the comps which have come in below the 3 to 6 range for the last three quarters, yes, we absolutely need to improve those.

The retail sales growth overall has still been quite healthy and at 9.8% in the quarter we continue to gain significant market share around the globe in the pizza category and the unit growth strength that you saw during the quarter, 171 international openings against 13 closures, once again demonstrates the strength of the four-wall economics in the international business.

So while we have had some challenges with the comp over the previous three quarters, I do want to reiterate that I still have an incredible amount of confidence in our master franchise business partners, our four-wall economics, our strong, we have got leading market share positions in the majority of the big and attractive pizza markets around the world.

And so we will work through the challenges that we have had together with our master franchisees, but the health of that business is still incredibly strong..

Okay..

Thank you. And our next question comes from Jon Tower of Wells Fargo. Your line is now open..

Great. Thanks. I just wanted to go back to the comments earlier on the Points for the Pies program. Ritch I think you had mentioned that you are pleased with the reengagement in the loyalty program and how it’s having a positive impact on the business. But in aggregate the order counts didn’t contribute to comp growth in the U.S. during the period.

So can you discuss what you are seeing with those members coming in through the Points for the Pies program -- Points for Pies program into the loyalty platform and are they using the brand as you expected when you launched this program back earlier in the year? Thank you..

Yeah. Thanks, Jon. Yes. So I will start my answer to your question, just to kind of once again reinforce the purpose of that program, Points for Pies, when we established it back in late 2015 we went through a lot of different iterations as to how we might build that program.

And if you look at loyalty programs across brands, some are designed to drive spend, some are designed to drive transactions and engagement. Ours is absolutely designed to drive transaction growth over time. It is why it’s very simple that if you order from us basically 6 times you are going to get a free pizza.

So, taking that then to Points for Pies, we entered the year with an active member base and loyalty program of over 20 million active users. We know that those members order more often than the average customer. So the goal of Points for Pies really do a couple of things.

Number one, once again raise awareness of that program, if they do it in a kind of, oh, yes, we did kind of manner, because nobody gives points for buying things from a competitor, right, only Domino’s would do that. So it was a great message out there in the marketplace, great advertising that raised awareness.

Then gave us an opportunity to engage and get more customers to come in and download our app, which we know once we give that app on the customer’s phone that real estate is incredibly valuable going forward.

Then the enrolment in the program, getting folks in the program for the first time and then ultimately orders coming after that and we have seen nice movement across all of those metrics, across awareness, across downloads, across enrolments and then across customers ultimately ordering ones and then twice and going forward.

And a loyalty program like ours is something that you do have to feed over time. So there is a need to periodically have news in the marketplace and something interesting to kind of refuel those enrolments over time..

Okay. Thank you..

Thank you. And our next question comes from Dennis Geiger of UBS. Your line is now open..

Thanks for the question. Ritch, wondering if you could talk a bit more about the U.S. carryout business given the increased focus there in recent quarters and then given I assume it could be better insulated from the aggregate risk, at least at a high level.

Can you at least talk about the performance of carryout, how it has trended perhaps, maybe just beyond fortressing, any opportunities to support that business over the near- and longer term? Thanks..

Thanks Dennis. Yes. The carryout business is still a critical component of our strategy over time and as we have talked about it we effectively operate two businesses inside the same box. We have got a delivery business and a carryout business, and as we look at them, we designed pricing, promotion, advertising for each of those individual businesses.

We have seen healthy growth in our carryout business. Fortressing does play an important part of that, when we open new units the vast majority of that carryout business is incremental and its business that we weren’t getting before.

So when I think about how we drive carryout going forward that will continue to be a component of it, but also you will continue to see, you know our carryout advertising on TV. We are going to continue to support that platform on an evergreen basis.

And we do look at it as a piece of the business that is more insulated relative to some of the new competition in the marketplace. So, no slowdown in focus or let up on the carryout business going forward..

Thank you..

Thank you. And our next question comes from Jeffrey Bernstein of Barclays. Your line is now open..

Great. Thank you. Just a broader question maybe on the global unit growth, I know, Ritch, you have been encouraged about the strong first half growth, but that it is more difficult to read these numbers on a quarterly basis and I know you therefore focus on annual.

So does your bullish comment indicate you except up to full year unit growth guidance for I guess the 6% to 8% long-term, I suppose your both the U.S. and international comps seem to be below plan, and I guess, I asked that question more so focused on the U.S.

I am just wondering whether you think your smaller mom-and-pop franchisees are more motivated by the long-term franchise profit that keeps increasing every year versus maybe they will be more cautious by the directional short-term comp trends, any color on that broader unit growth will be great?.

On the global unit growth, Jeff, we don’t give full year outlook or guidance but our 6% to 8% unit growth outlook over the three-year to five-year timeframe, we still feel very positive there.

And we -- based on a couple of different things, first and foremost, it comes back to the underlying unit level economics and at $141,000 per unit in EBITDA in 2018, you combine that with the low cost of getting a Domino’s Pizza store opened, the incentives that we have in place for franchisees, this is a really attractive investment for our franchisees in the U.S.

And so we -- therefore we have seen really nice performance over the last couple of years in growth and lot of optimism as we look forward about franchisees continuing to want to invest in the business.

And really the same dynamics hold true on the international front, while things may ebb and flow across individual markets, when we look at our portfolio of over 85 countries around the world, very healthy unit economics.

And as I said last month, I was with our international master franchisees the vast majority of them and I can tell you that the optimism around the brand remains incredibly strong..

Thank you..

Thank you. And our next question comes from Alton Stump of Longbow Research. Your line is now open.

Yes. Thank you. Actually I just had a question for Jeff just on the buyback front, obviously, of course the pace of buyback has slowed here, and of course, first half versus what you had done over the prior 12 months to 18 months period. Could you just remind us how opportunistic you are with that program i.e.

would you use and move like today’s downward move as an opportunity to bolster up your buyback program just maybe not so much what guys are doing today but just kind of in theory as to what your thoughts are behind that?.

Yeah. Thanks, Alton. So we have $150 million of Board authorization left on the current buyback program. You guys know just as well as we do our long and consistent history of getting our fantastic free cash flow back to shareholders in both buybacks and through dividends after of course we invest in the business.

I wouldn’t read too much into the rate and pace of the first six months. We had other things bouncing around. We had -- we paid off our revolver for $65 million bucks year-to-date. The balance sheet -- more than $1 billion balance sheet, you have balance sheet things that move around.

So -- and also I will just remind you that year-to-date last year we had about $135 million of buybacks from our recap processed, which of course, we didn’t do a recap this year so.

Again, I wouldn’t read too much into the rate and place, we remain committed to generating best-in-class free cash flow and getting it back to you folks the best way we can..

Okay. Thanks, Jeff..

Thank you. And our next question comes from Peter Saleh of BTIG. Your line is now open..

Great. Thanks. I just wanted to ask about the commitment to the $5.99 price point. I recognize you are still committed to value. But in the past you said that the $5.99 platform really only works if you are driving a positive transaction growth and it seems like this quarter your comp has really been driven by ticket.

So are you seeing or hearing pushback from the franchisees at that price point and do you expect that you may change that price point if they start pushing back on that level given it has been the same price for the past decade?.

Hey, Pete. It’s Ritch. We still got strong commitment in the system to the $5.99 price point and I would not read a single flat quarter on traffic as any more than it is which is a quarter.

If you take a look at our performance over any period of time since we launched that $5.99 platform we have driven significant and sustained transaction growth in the business and there is no slowdown on our part relative to the commitment to continuing to drive transactions.

Our franchisees understand that that is a long-term healthy way to grow their businesses and to grow their profitability. We have looked at time and time again and proven that sales and profits over the long-term are co related with transaction growth so the commitment remains..

All right. Thank you very much..

Thank you. And our next question comes from Jeremy Scott of Mizuho. Your line is now open..

Hey. Thank you. If I could just follow up on the third-party question, and hopefully, I will ask it a different way. Ritch, you mentioned all the discounts push notifications, e mails that we all see the same thing.

I think what is still unclear at this time is when those third party campaigns level out, they dry up or just become less marginally impactful, how that market resets or how quickly customers revert.

I know you mentioned Ritch that you don’t expect it anytime soon, but the customer response the e mail number 100 is likely not the same as e-mail one or two.

So I wonder if you could share some insight on comp trends in those higher trade areas that have been battling against promotions for two years or more versus those in restaurants and trade areas that have been battling third parties for about six months, maybe you can talk about the life cycle if you see one of the customer response and what would convince you that the playing field in delivery is more permanently worked?.

Yeah. Sure. Jeremy a good question. I will try to talk a little bit about kind of what we see to-date but then there is also some uncertainty around how it unfolds going forward. So let me try and describe.

I think there is a cycle around the third-party penetration where I think at least from what we see in places where these third parties have been in the market for an extended period of time it does tend the level off a bit. I think your point is a valid one that the 100 coupon you get is probably less effective than the second.

So there is certainly some of that dynamic that we observe and we track across the many DMAs that we operate in in the U.S.

But we still don’t know yet though is what the ultimate demand will be once the customer has to pay a price for the service that exceeds the cost of providing the service and that is still an unknown, as long as this discounting continues in a fairly heavy way where we are continuing to watch and learn, but I suspect it will be a little while before we know what the true customer demand will be.

And then, secondly, I don’t think we yet know what supply is going to ultimately be in the marketplace as well, because there has certainly been a big rush of brands large and small to sign on with these third-party aggregators.

But ultimately there -- the brands are going to have to see and their franchisees are going to have to see that there is some incrementality or profitability from using those services.

And I think there are a lot of questions out there among restaurant operators as to how truly incremental this is or are they just trading a higher margin transaction for a lower margin transaction.

So there are questions still in my mind around both the demand and the supply, and until we see how some of this shakes out the true equilibrium around how much business there actually is to be had through those third-party apps I think it’s still uncertain..

Thank you..

Thank you. And our next question comes from Stephen Anderson of Maxim Group. Your line is now open..

Yes. Just wanted to go take a little different track and discuss your new point of sale system.

I know this has been something that has been under test and so I wanted to ask for an update on this test and whether you still see next year as a possible implementation date?.

Yeah. Stephen, it is Ritch here, we are still -- we are working hard on our next-generation point-of-sale system and our -- with the goal of having a test or up and running by the end of the year.

And then will see -- the rollout will take -- we have got more than 13,000 stores on our common point-of-sale system today, but the rollout is going to take some time. So I don’t have an update for you yet on that, but that’s something that periodically as the project unfolds will be sure to brief you all on..

All right. Thank you..

Thank you. And ladies and gentleman, this does conclude our question-and-answer session. I would now like to turn the call back over to Ritch Allison for closing remarks..

Listen, thanks to everybody. We certainly look forward to discussing our third quarter 2019 results with you on Tuesday, October 8th..

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day..