Domino Pizza : Reporting Document

Domino's H1 Result 2022

Tuesday, 02 August 2022

Classification: Public

Introduction

Dominic Paul

CEO, Domino's

Welcome

Hello. Good morning, everybody. Thank you for taking the time to join us this morning for our half year 2022 Results Presentation.

I am joined today, by Matt Shattock, our Chair, David Surdeau, our interim CFO and Will MacLaren our Head of Investor Relations.

Agenda

So, let us turn to the agenda on slide two. I will give you a short overview of the half, before handing over to David, who will talk you through our financials in detail. I will then take you through the strategic progress we have made before we conclude with Q&A.

If you have questions for Matt, David, or me, please do enter them into the appropriate section on the webcast and we'll read them out.

You will all be aware that this will be my last set of results before I leave Domino's in December. I am hugely proud of the strategic progress that we have made in the last two years. This is testament to the hard work of our world-class franchisees and our colleagues who have worked tirelessly to produce excellent results. I'm leaving behind a refreshed, outstanding executive team, supported by a high calibre Board, who will continue executing the strategy and delivering value for our shareholders.

H1 Highlights

In the first half we grew order count, attracted more customers, and increased underlying sales despite unusually challenging market conditions.

We continued to gain market share, our value for money scores improved and we are well placed with a strong value proposition and strong operating model.

Following our franchisee resolution, we successfully restarted national price campaigns, and we are working with franchisees to build on the learnings from these campaigns as we accelerate our media spend in the second half.

We launched a trial with Just Eat which is showing encouraging early signs that it is giving us access to a new customer base, so we are now extending this trial to approximately one third of the store estate across the UK and Ireland.

Underlying like-for-like system sales grew 2.4% in the half and our asset-light cash generative model has allowed us to return £76 million to shareholders. Today we have announced a 6.7% increase in the interim dividend and an incremental £20 million buyback programme.

Our resilient business model gives us confidence that we are well-placed to navigate the current conditions and our full year guidance is unchanged.

And with that I'll hand over to David to talk you through the financials.

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Classification: Public

Financial

David Surdeau

CFO, Domino's

Financials Result

Thank you, Dominic and good morning, everybody. It is a pleasure to speak with you this morning and to present the financial results for the half.

Sales performance

As expected, driven by the change in the VAT rate in the UK, system sales declined 5.6% with a 5.9% decline in the UK being offset by 1.8% growth in Ireland.

Importantly when we adjust total system sales for the impact of the change in VAT, they grew 3.4%.

It is worth noting that system sales, excluding the impact of VAT in the half, were 15.4% higher than the comparable period in 2019, pre-pandemic.

Reported revenue was £278.3 million, a 0.2% increase on the first half of last year. This was driven by 4.2% growth in the supply chain revenue offset by lower royalties on system sales and lower National Advertising Fund and eCommerce expenditure. We expect an increase in NAF expenditure in the second half.

Looking at EBITDA margin as a percentage of system sales, this remained healthy at 8.7%, though down 50 basis points from the prior period last year due to inflation in the supply chain. As is standard practice, we pass through food cost inflation to our franchisees on a lagged basis. We began passing on these increases during the first half of the year but will not see the full impact until the second half. As a result, this year profitability is expected to be second half weighted.

Trading Performance

Let us go into system sales and order count in a little more detail.

Starting on the left-hand side, we've split out the impact of sales and orders between collection and delivery. Overall total orders were up 2.1% on the prior half year with the decline in delivery orders more than offset by the recovery of our collection business.

Collection orders were up 39.6% in the half as they continue their recovery from lockdown restrictions and in Q2 this year they were 102% of 2019 levels.

Delivery order count was down 8.3% in the half. Q1 was against a strong comparative quarter last year when there were strict lockdown restrictions in the UK. And as expected, given the lockdown comparator, delivery orders were 4.5% lower from the prior year.

Delivery orders declined 12.1% in Q2 due to softness in the wider delivery market and a tough comparative quarter last year which had three different lockdown restrictions. Furthermore, in March 2022, as previously announced, we launched the delivery charge nationally.

In the chart on the right-hand side, you can see the quarterly profiles of total system sales performance in blue and order count in red.

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Classification: Public

However, the most important indicator of the underlying performance of our business are the green bars which represent our like-for-like performance excluding the impact of VAT. Here you can see that our underlying sales grew 2.4% in the half.

Analysis of UK & Ireland EBITDA

A significant proportion of our EBITDA comes from the supply chain centre through procurement, manufacturing, and distribution of products to stores.

Our supply chain continues to maintain outstanding service levels and many thanks to all our colleagues who helped to deliver this outstanding performance

Our EBITDA from the supply chain in the half year was £50.4 million, a decline of £2.2 million compared to the prior half-year. This largely reflects the level of inflation we have seen, particularly in respect of labour costs alongside increased support to franchisees.

Lower system sales resulted in a £1.2 million decline in net royalties.

Net overheads increased due to increased investment in our people, franchisee events and new store incentives.

This resulted in UK & Ireland EBITDA declining by £7.8 million to £61.7 million in the half.

We have given guidance based on underlying Group EBITDA so let's turn to the next side to walk you through the movements in the half.

Analysis of underlying EBITDA

Last year we reported underlying EBITDA of £71.7 million.

This year we invested an additional £2.3 million as part of the resolution with our franchisees, not all these costs will recur in the second half.

We experienced labour and food cost inflation of £3.7 million within our supply chain and as is standard practice, there is a timing lag in passing the food costs through to our franchisees. Some of these costs will be passed through in H2.

In H1 last year we incurred £1.5 million of COVID costs and enjoyed a VAT benefit of £3.7 million - this gave us a net benefit of £2.2 million. This year we have incurred £0.2 million of COVID costs and a smaller VAT benefit of £1.2 million. This means that there is a £1.2 million reduction in the net benefit to EBITDA in this half.

The revaluation of Shorecal JV has a £1.1 million impact on EBITDA.

When all this is combined it results in underlying EBITDA declining £8.2 million to £63.5 million.

We are expecting improved second half profitability largely due to the recovery of costs incurred in the first half.

Income statement

Moving to the income statement. This slide refers to underlying numbers, so excludes non- underlying items and charges from our discontinued international activities, which I will cover later on.

As mentioned, the underlying UK&I EBITDA is £61.7 million.

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Classification: Public

There was also a lower contribution from the German associate and finance costs were £0.8 million higher in the period.

This resulted in a £9.9 million reduction in underlying profit before tax in the period, with underlying EPS down 11.2% to 9.5p.

Franchisee Trading

Let me touch on franchisee trading. As in the past, on this slide we have shared franchisee trading estimates in order to provide a view of the health of the entire system.

The numbers are extracted from submissions from our UK franchisees. We aggregate the submissions to derive these averages.

Our franchisees continue to work tremendously hard in challenging market conditions and their trading performance has been impressive. Average store EBITDA for all UK stores for the year was approximately £94,ooo equivalent to a 16% EBITDA margin. The reduction compared to the prior year reflects the net benefit of VAT in the prior half year as well as the impact of higher food and labour costs. It's worth noting that franchisee profitability in 2019, pre the pandemic, was £68,700 per store, equivalent to a 13.4% EBITDA margin.

Free cash flow

We have a business model that generates strong and consistent free cash flow. Trading from operations produced EBITDA of £63.5 million and let me walk through how this flows through to free cash flow.

The working capital outflow of £11.2 million primarily relates to the timing of cash receipts and receipts for eCommerce sales of £6 million and changing of timing of supplier payments of £5 million.

We expect the £6 million will largely reverse by the end of the year, and of the supplier payments timing around £2 million will reverse, with the remainder being a consistent difference for the year. Overall, with other movements, we are not expecting a significant working capital movement for the full year.

Dividends received of £3.9 million represent payment from our investments in Full House, West Country and Shorecal and net interest was broadly comparable with the prior half year.

So overall, this resulted in £36.8 million of free cash flow in the first half and let me explain how we use this given our disciplined approach to capital allocation.

Capital Allocation Framework

You will now be familiar with this slide.

When we announced our strategy in March 2021, we also updated our capital allocation framework to ensure that effective capital allocation can amplify the benefits and returns from the cash generated by the business.

We have an asset-light, high returns business, which is strongly cash generative.

We want to retain a sensible level of leverage, which we believe to be around 1.5 times to 2.5 times. And working within these parameters, we will allocate cash in a disciplined way.

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Classification: Public