Domino Pizza : Reporting Document

Domino's Pizza Group plc Full

Year Results 2022

Thursday, 9th March 2023

Classification: Public

Overview

Elias Diaz Sese

Interim Chief Executive Officer, Domino's Pizza Group plc

Well, hello and good morning, everybody. Thank you for joining us this morning for our Full Year 2022 Results Presentation.

My name is Elias Diaz Sese. I am the interim Chief Executive Officer at Domino's Pizza Group and I am delighted to be joined today with my partners, both Edward Jamieson, our 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 very short overview of the year, before handing over to Edward, who is going to be discussing with you more in detail the financials of the year. And then I will take you through the strategic progress that we have made in 2022, as well as outline what are the priorities for all of us in 2023 before concluding with a Q&A.

Strategic Progress, Strong Trading and Returns

Turning to slide three, 2022 was a year of strategic progress for all of us at DPG. Strong trading and continued shareholder returns.

Following the resolution of the dispute with our franchise partners back in December 2021, we have enjoyed a year of alignment when together, we have improved our service to customers and taken market share in what has been proven to be a very challenging market for all operators.

The benefits from the execution of our strategy and aligned system were particularly evident in the Q4 of last year where we increased our like-for-like sales by 13.9% and took further market share. I am pleased that the momentum has continued in 2023. And for the first ten weeks of 2023, our like-for-like sales are up 10.8% and our orders are up 2.5% for the first ten weeks of the year.

Our asset-light,cash-generative business model and continued execution of our strategy has allowed us to - or has enabled us to return £130m to our shareholders this year through dividends and buybacks.

We have an exciting year ahead with clear priorities, which I will talk to you a little bit later. But now, I'm going to be handing over to Edward who will be taking you through our financial performance and guidance in detail. Thank you very much. Edward.

Financial Performance

Edward Jamieson

Chief Financial Officer, Domino's Pizza Group plc

Thank you, Elias, and good morning, everybody. It is a pleasure to be here this morning and to present the 2022 financial results and to update you on our outlook and guidance for 2023.

Classification: Public

Financial Highlights

2022 was a year of like-for-like sales growth, improved orders and increased returns to shareholders.

Like-for-like sales, excluding VAT, were up 5.3% in the year, and with a strong Q4 in which sales increased 13.9%. We're also pleased to report order count growth in a challenging market and a 7% growth in DPG's revenue.

Underlying EBITDA was affected by the accounting treatment of investment in cloud-based technology platforms. This treatment has no impact on cash and is simply a reclassification from capital expenditure to operating expenditure. A lower contribution from our German associate, partly due to the put option exercised on the 10th of November to exit our investment, was offset by the profit on sale of five corporate stores.

And importantly, excluding all of these factors, underlying EBITDA would have been broadly flat compared to the prior year.

Statutory profit before tax was up 4.2% following the completion of exit of our loss-making international operations in the prior year.

And finally, we have increased the full year dividend by 2% for the year, in addition to £86 million of share buybacks that were announced in 2022 and have now been completed.

So, turning to the next slide.

Sales Performance

As expected, driven by the change in the VAT rate in the UK, system sales declined 2.8% with a 3.2% decline in the UK being partially offset by 4.8% growth in Ireland.

It is worth noting that system sales were 20.3% higher than the comparable period in 2019, pre-pandemic.

Reported revenue was £600.3 million, a 7% increase on last year. This was driven by 9.7% growth in our supply chain revenue, with smaller increases in royalties on system sales and corporate stores revenue.

National Advertising Fund and eCommerce expenditure increased 2.7% in the year. Our NAF represents a significant competitive advantage for the Domino's system as it gives us and our Franchise Partners real scale as we continue to strengthen the brand and offer our customers compelling value.

Looking at EBITDA margin as a percentage of system sales, this remained stable at 8.8% as we have passed through food cost inflation, albeit on a lagged basis.

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. I covered system sales on the previous slide so let walk you through our order performance.

Overall, total orders were up 1.6% on the prior year, with the decline in delivery orders more than offset by the growth of our collection business.

Collection orders were up 33% in the year as momentum grew throughout the year and are now at 111% of 2019 levels.

Classification: Public

Delivery order count was down 8.5% in the year. The first half of 2022 was against a strong comparative period in the prior year when there were strict lockdown restrictions in place in the UK. We finished the year with a recovery in delivery which was only down 5.1%, a marked improvement from Q2 and Q3.

In the chart on the right-hand side, you can see the quarterly profiles of, firstly, our like-for- like sales performance excluding the impact of VAT in blue; and secondly, order count in green.

Here, you can see our strong finish to the year with like-for-like sales growth of 13.9% and order count growth of 4.1%. As expected, trading was strong as a result of effective national value campaigns, operational service excellence from our franchise partners, growth in collections and the initial incremental benefit of being on the Just Eat platform as well as the Men's Football World Cup, an event which only occurs once every four years.

Technology Platform Costs

Before I go into the profit performance for the year, I want to take some time to explain in detail and give you clarity on our technology platform costs. These costs will support the long-term growth of the system and Elias will touch on this shortly. But I want to explain the accounting treatment of these costs and the corresponding impact on profit and cash.

During the year, we started investment projects to develop and implement two cloud-based IT systems, an eCommerce platform and an ERP system. As we've previously communicated, both systems are part of our investment in growth, and the ecommerce platform is part of our growth investment framework agreed with our franchise partners in December 2021.

The accounting treatment for these costs is simply a reclassification from capital expenditure to operating expenditure. And therefore, this treatment has no impact on cash.

The total costs recognised in underlying profit before tax relating to these investments was £7.6 million in 2022. Within EBITDA, costs of £5.2 million have been recognised, of which £2.7 million relates to the ERP, and £2.5 million relates to the eCommerce platform. These represent costs spent on development of these assets which are expensed through the income statement rather than capitalised as intangible assets, as they relate to cloud platforms.

For the ERP, this represents the full spend on the project in the year.

For the eCommerce platform, this relates to the percentage spent on the cloud-based element of the project. An additional £1.9 million has been recognised in capital expenditure relating to the eCommerce platform.

Within amortisation, a further total cost of £2.4 million is recognised. And I'll explain the impact of the technology platform cost in FY23 shortly.

Analysis of EBITDA

The majority of our EBITDA comes from the supply chain centre through procurement, manufacturing and distribution of products to stores.

In FY22, we maintained outstanding service levels, with 99.9% accuracy and 99.8% availability. This is due to the commitment of our supply chain colleagues working

Classification: Public

collaboratively with our franchise partners, and I would like to thank all those who helped to deliver this outstanding performance.

Our EBITDA from the supply chain in the year was £108.9 million, an increase of £3.7 million compared to the prior year. This increase was driven by increased volume and pricing growth.

Lower system sales, driven by the reduced VAT rate in the prior year, resulted in a £3.1 million decline in net royalties.

Net overheads decreased 2.9% as expenditure on new store incentives and franchise partner events was more than offset by a continued focus on support office efficiencies.

And corporate store EBITDA increased 25%, largely driven by the sale of five corporate stores towards the end of the year. This resulted in underlying EBITDA before technology costs and Germany increasing by £1.3 million to £132.7 million in the year.

The contribution from the Germany associate was £2.4 million lower in the year due to the exercise of our put option on the 10th November and the underlying performance of the German business in the year.

Group EBITDA Movement

Let me briefly walk you through the year-on-year movement. Last year, we reported underlying EBITDA of £136.4 million.

The net effect of pricing growth, offset by our supply chain inflation and franchisee investment, such as new store incentives, was broadly flat at £0.3 million.

As I have already mentioned, we made a £2.1 million profit on the sale of five corporate stores.

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

And you can then see from the chart, the impact that a lower contribution from Germany and the accounting of technology platform costs had on our EBITDA performance in the year.

This resulted in EBITDA for the year of £130.1 million.

Income Statement

Moving to the income statement. Depreciation and amortisation increased to £20.3 million in the year. This includes £2.4 million of amortisation and impairment as a result of the technology platform costs I talked about earlier.

Finance costs were higher in the year due to higher levels of interest rates and a higher average net debt.

In July 2022, we successfully refinanced existing bank facilities at favourable rates with a £200 million private placement facility fixed at 4.26% and a £200 million revolving credit facility. Both of these are in place until July 2027.

This resulted in a 13.2% reduction in underlying profit before tax in the period, with underlying EPS down 7.4% to 18.8p.

Classification: Public