Domino Pizza : Reporting Document

Domino's Pizza Group Q3

Trading Update

Thursday, 10th November 2022

Classification: Public

Domino's Pizza Group Q3 Trading Update

Elias Diaz Sese

Interim Chief Executive Officer, Domino's Pizza Group

Welcome

Good morning everyone. I really thank you for joining our conference call to discuss our Q3 results. I am Elias Diaz, the Chief Executive Officer on an interim basis and I am delighted to be joined today by Edward Jamieson, our new Chief Financial Officer. By the way, this is week four and week five for both of us. Also in the room are Dominic Paul, our outgoing CEO and David Surdeau our outgoing CFO, as well as Will MacLaren our Head of Investor Relations. I would like to take this moment to personally thank Dominic and David for their tremendous contribution to Domino's and for helping both Edward and myself with such a smooth handover. Thank you, Dominic and thank you David.

I am extremely excited to be leading this business having been at the Board for the last three years as well as having been a shareholder of this company for the same period of time. I was part of the Board who helped create the current strategy and I am looking forward to continuing to accelerate its execution alongside our franchise partners, our suppliers, and my colleagues at DPG.

Turning to today's call, Edward and I will give a brief summary of the statement we have released today and then we will answer the questions which have been submitted by all of you this morning. Let me turn to the statement we released this morning.

Q3 Trading Performance

Let me turn to the statement we released this morning, starting with our trading performance. We are very pleased with how we traded in Q3 and the performance in Q4 to date reinforces our view that we will continue to deliver market share gains and increased returns for shareholders. Q3 like-for-like system sales excluding VAT were up 2.4% which compares with 0.9% in Q2. If you compare our total system sales in Q3 with the same period in 2019 they were up 19.6%. We have made a strong start to Q4 with our like-for-like system sales excluding VAT up 10.4% in the first six weeks, with total orders up 2.6%. This strong start has been driven by a focus on service from our franchise partners, our digital strategy, the strong national value campaigns, collections growth and the initial incremental benefit of being on the Just Eat platform. I would like to thank our franchise partners for their extraordinary effort in focusing on service and rolling out the Just Eat platform in our busiest quarter of the year. Thank you to all of you.

We have grown our share of the UK takeaway market, increasing from 6.4% in Q3 last year to 7.2% in Q3 this year, despite the tough comparator period and contraction in the overall market size. As expected, total orders were lower in July due to the tough comparator with the knockout stages of the men's Euros Football Tournament and were muted in August given the staycation impact from the previous year. September was stronger trading month, and this momentum has continued in Q4, as I just explained. Delivery orders declined 12.7% in the quarter due to a tough comparative quarter last year. Collections performed strongly and increased 28.1% in the quarter driven by our strong value message and our continuous strategic focus on this channel.

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Classification: Public

Digital Progress

I would also like to highlight the continuous digital progress we are making. Over the last year we have significantly upgraded our internal digital team and capabilities. The team have made a phenomenal start but there is a lot more to do. Our app now accounts for 45.7% of our system sales, an increase of 3.7 percentage points compared to the same period last year. In the same period in 2019 the app accounted for 34.8% of system sales. We now have 5.6 million active app customers, and this is an increase of 5% over the last six months. As a reminder, app customers are important as they have higher order frequency and have a higher lifetime value.

Strategic Milestones

Just Eat national rollout

You would have also seen from our statement this morning two important strategic milestones for the business. Firstly, Domino's will be rolled out nationally on Just East following a very successful trial. We started the trial in May to assess whether we can reach in incremental customer base with similar economics for our business. The early results were encouraging, so we extended the trial in August and as a result of the continued success of the trial where we saw we continued to attract incremental customers, we have decided to fully roll out on Just East in the UK and Ireland. As of today, 1,000 stores are now live, and we are targeting the completion of the rollout by the end of the year. Importantly this lengthy data-led trial delivered incremental orders and customers to Domino's and we expect it to be a tailwind to growth in the next year.

Put option exercised in Germany

Secondly, we exercised our put option over our German associate investment which will yield total cash proceeds of between £80 million and £90 million. We expect to receive these proceeds in the first half of the next year, and we will then flow the profits through our capital allocation framework. I will now hand over to Edward who is going to talk throughout guidance and some accounting changes.

Guidance

Edward Jamieson

Chief Financial Officer, Domino's Pizza Group

£20 million Share Buyback

Thank you Elias. Good morning everyone. I am Edward Jamieson the Chief Financial Officer of Domino's and I am delighted to be here today. I would also like to echo Elias's comments and reiterate my gratitude to Dominic and to David for the smooth and seamless handover. We are pleased that following our recent strong momentum and confidence in the future today we are announcing a new £20-million share buyback which is effective immediately. This is in line with our clear capital allocation framework and our commitment to distribute surplus capital to shareholders.

Growth Investment Framework

At the end of last year, we agreed a new growth investment framework with our franchise partners. At the time we committed to invest an additional £20 million across areas such as

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Classification: Public

technology, digital acceleration, and the e-commerce development. As a result, we have recently started projects to develop and implement two new cloud-based IT systems, a new e-commerce platform and a new enterprise resource planning or ERP system. These projects will enable us to capture growth and drive efficiencies in the future and they will impact the 2022 results as follows. For the e-commerce platform, circa £1.5 million of costs which had previously been expected to be capitalised in 2022 will now be expensed. In addition, an impairment of £1.5 million will be taken over assets which will no longer be useful following the implementation of the e-commerce platform. On the ERP, circa £3 million of costs which had previously been expected to be capitalised in 2022 will now be expensed. Furthermore, the introduction of the ERP system will result in a further £0.5 million of accelerated depreciation in 2022.

Guidance

Now turning to our guidance for this year. We expect underlying EBITDA to be in the range of £125-135 million in line with current market expectations. This is despite the investments we are making related to the growth investment framework that we agreed with our franchise partners, including the project costs I have just talked to you about. Excluding the impact of the investment project costs I have just outlined above, underlying EPS is also expected to be in line with current market expectations.

Now moving to modelling guidance. Underlying depreciation, amortisation and impairment is expected to be circa £22 million. Underlying interest excluding foreign exchange movements is in the range of £9 million -11 million. Estimated underlying effective tax rate is circa 17% for the full year. Capital investment of circa £21 million now reflects the updated treatments of project costs. Net debt at year-end is around £255 million reflecting the new buyback programme which we announced today. I look forward to meeting you all in person soon and I will now hand back to Elias.

Closing Remarks

Elias Diaz Sese

Interim Chief Executive Officer, Domino's Pizza Group

Thank you very much Edward, great to have you here as my partner at Domino's. As we look ahead at next year, notwithstanding the macro challenges, we remain confident that our resilient asset-light business model, our focus with our franchise partners on service, our digital platform and strategy, national value campaigns, collections growth combined with our new store openings, the benefit of the Just Eat platform and our products together with the alignment we have with our franchise partners will deliver market share gains and increase returns for our shareholders.

We will now turn to the Q&A. Will, could you please have the first question for us?

Q&A

Will MacLaren (Head of Investor Relations, Domino's Pizza Group): Thanks Elias. Our first question comes from Wayne Brown at Liberum. He has got three questions here so I will read them out one by one so you can answer them. First questions is, 'If you are gaining share when orders are strongly down and like-for-like double-digitdown, and consumers were

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Classification: Public

not yet feeling the pinch in Q3, Q4 will be fine due to the World Cup but surely this means the outlook for the next year is woeful. Please can you give me your thoughts?'

Elias Diaz Sese: Thank you Wayne for the question. The answer to this question is that the results pre-World Cup during the last six weeks have been very promising. Indeed almost 3% customer growth, so I believe that what is starting to happen is that the strategy that the team has put together is seeing success and starting to give the right results. Let me explain the reason why. Number one has been the focus of the team on digital. Number two has been the promotions, the national value promotions that have been executed together with our franchise partners. The focus on service, as I said before. Collections and incrementality that we are getting from the Just Eat implementation. The growth that we are seeing in Q4 is very promising, is the result of the success of the strategy and is going to be the momentum that we are going to be getting into next year.

Will MacLaren: Thanks Elias. The second question is, 'Where are franchisee margins now? We estimated these were at mid-single digit at the exit of H1, so it must be worse now. Declining order count and deep discounting will impact franchisee margins further. Please can you give me your thoughts?'

Elias Diaz Sese: Sure, Wayne. Like any other business the cost pressures are in all of our P&Ls. From a restaurant perspective our franchise partners obviously are suffering them; and that is why I think that the strategy that the team took together with our partners to bring a delivery charge was the right thing to do in order to be supporting and helping the margins. Let me remind you of a couple of points. Number one, the franchise profitability at a store level is ahead of the franchise profitability in 2019. That is the first point that I would say. Coming from the industry and many other businesses that I have been working with in the market, I have to say that the margins in this business are excellent. I am extremely excited by the market share that we are starting to see because this is going to be definitely helping from that perspective all our franchise partners.

Will MacLaren: Then finally, this is actually two questions here but, 'If you gained market share in a market despite your like-for-likes of circa 10% and a very poor market, what are your thoughts on outlook and if delivery is just too expensive?' Then linked to that delivery point, 'Has the delivery charge hurt volumes in Q3?'

Elias Diaz Sese: Thank you Wayne again. Look, as we expected, there were going to be tough comparatives for everyone post-Covid impact. That was something that everyone expected. On top of that, as I said in the introduction, tough comparators both in July and August, July because of the impact of the Euros tournament last year and August because of the staycation impact that you have seen also in many other earnings calls from other competitors in the business. I have to say that after the situation normalises, we really believe that we are very competitive. Two main reasons for that. The first one is value. Overall, we really believe that we are very competitive from a value perspective. The strategy that my partners, Sarah Barron and the marketing team are working together with the franchise partners is extremely strong also on value campaign messaging. Both of them together I believe that makes us very competitive. Number two, service. We are the only ones delivering our product directly to our customers. We feel extremely strongly that the experience of our partners in delivering this product is putting us in a much more

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Classification: Public