Domino Pizza : Reporting Document

Domino's UK Half Year

Results 2023

Tuesday, 1st August 2023

Overview

Elias Diaz Sese

Interim Chief Executive Officer, Domino's Pizza Group

Introduction

Hello. Good morning, everybody, and thank you for joining us this morning for our half year 2023 results presentation.

My name is Elias Diaz Sese, I am the interim Chief Executive Officer at Domino's Pizza Group.

And I am delighted - he's sitting on the back, but I am delighted to be joined today by Andrew Rennie my partner and our new Chief Executive Officer. Today is Andrew's first day with us at Domino's. Welcome, Andrew. and he will formally take over as CEO on Monday, 7 August.

He has definitely pizza sauce in his blood. He has been in this business and this brand for the last 30 years. And most importantly, ten out of those 30 years, he was one of the most successful multi-year franchisees of the business over in Australia. So yeah, I guess we couldn't have found a better partner, Andrew, in order to be leading this brand, this business, moving forward into the business. So, welcome. And I know that he can't wait to get started. So, you will have the opportunity to meet him later on the coffee break.

I will then, obviously, be stepping down with mixed feelings, to be very frank, because I have had a great time from that perspective , but I will remain on the Board as a non-Executive Director, fully committed, as I have a significant family shareholding on this business. So, I am fully committed from that point of view, I'm not going anywhere, and with the business extremely well-positioned for future growth.

I am obviously also delighted to have my partner, Edward Jamieson, and CFO of the company, and Will MacLaren, our Head of Investor Relations.

Agenda

So, let us turn to the agenda of today, on slide two.

I will give you a short overview of the continued progress that we have been making this year, before handing over to Edward, who will talk you through our financial performance in detail.

I will then take you through the excellent progress, that I believe that the team has done with our 2023 strategic priorities, before we conclude with a Q&A with all of you.

Let me go to the next slide.

Acceleration of Strategic Initiatives

We have definitely, I believe, delivered a very strong first half of 2023 with continued growth in orders and in sales. I think that the momentum that we discussed back in March that we saw in Q4 last year, and definitely in Q1 this year, has accelerated. And this is the testament to two things. Number one, complete alignment with our franchise partners on the direction that we are taking and working and growing on the same direction. And second, this acceleration of our strategy that, if you remember, I was manically focused together with the team to get it done.

But before any other thing I would like, because I know that many of them are on the webcast, I would love to personally thank all of my partners, franchise partners, for a great collaborative work in my time as interim CEO with me and the whole Domino's Pizza Group. We will not be here without the great effort of them, their teams.

I laid out five clear strategic priorities at the start of the year, and these have been the ones that have delivered the growth that we have seen. I will talk about this later on in the presentation. But particularly, I would love to spend some time also later on, on the great and exciting acceleration that we've been taking in terms of store openings, where we have just had our best quarter in the last five years and the third quarter ever in the history of Domino's in the UK and Ireland.

With all of this and such a great leader taking over the role, I couldn't be more confident in the many opportunities that we have for the rest of this year and also for the years to come. And as we continue to be working towards our purpose, to deliver a better world through people - through food that people love.

Now I'm going to hand it over to my partner, Edward, who is going to be taking you through our financial performance in detail. Edward?

Financial Performance

Edward Jamieson

Chief Financial Officer, Domino's Pizza Group

Financial Highlights

Sales and orders growth with increased returns to shareholders

Thank you, Elias. And good morning, everybody. It's a pleasure to be here this morning and to present the 2023 half-year financial results and update you on our outlook and guidance for 2023.

So, if we can move to slide five, great.

So, the first half of this year saw 35.4 million orders, an increase of 2.8%, with like-for-like sales up 9.7%. In turn, this led to a 19.6% increase in our revenue, an 8.2% increase in our underlying EBITDA, and strong free cash flow in the half. This has enabled us to increase the interim dividend by 3.1%. And following the disposal of Germany, we will return the disposal proceeds of £70 million to shareholders through a new share buyback program.

Trading Performance

Positive order count, driven by growth of collection

Let me now go through our performance in more detail.

So, turning to the next slide, let me start with system sales and order count in more detail. So, starting on the left-hand side, we've split out the impact of sales and orders between collection and delivery. System sales grew 7.9% in the half, with both delivery and collection contributing to the growth. Overall, total orders in H1 were up 2.8% on last year, with the decline in delivery orders more than offset by the growth of our collection business.

Collection orders were up 20% in the half and are now at 120% of 2019 levels. Delivery order count was down 4.4% in the half. The trajectory has continued to improve from Q2 last year when deliveries were down 12.1%, and they were only down 3.9% in Q2 this year - a

marked improvement from Q2 and Q3 last year. We continue to target returning delivery orders to growth this year.

In the chart on the right-hand side, you can see the quarterly profiles of our like-for-like sales performance, excluding the impact of VAT in blue, and secondly, order count in green. I'm still referring to an ex-VAT number, as Q1 last year still had a reduced rate of VAT.

Here, you can see our performance over the half. Trading was strong as a result of effective national value campaigns, operational service excellence from our franchise partners, growth in collections and the incremental benefit of being on the Just Eat platform.

Sales Performance

Strong sales growth across the system and DPG

Let me walk through system sales and our revenue in more detail. As I've just said, system sales increased 7.9% in the half, but if you adjust for the lower rate of VAT in Q1 last year, system sales were up 11.2%. Our revenue was £332.9 million, a 19.6% increase on H1 last year. This was primarily driven by a 23.6% growth in our supply chain revenue as a result of increased volume, new store openings and the pass-through of food costs.

National Advertising Fund and e-commerce expenditure was up by £7 million in the half, driven by an increase in system sales and increased marketing spend in the period. Our NAF represents a significant competitive advantage for the Domino system, as it gives us and our franchise partners real scale, as we continue to strengthen the brand and to offer our customers compelling value.

Analysis of EBITDA

Strong underlying performance

EBITDA margin as percentage of system sales increased by ten basis points in the half. The majority of our EBITDA comes from the supply chain centre through procurement, manufacturing and distribution of products to stores. In H1, we maintained outstanding service levels with 99.9% availability and 99.8% accuracy. This is due to the commitment of our supply chain colleagues working collaboratively with our franchise partners, and I would like to thank all those who helped deliver this outstanding performance.

Our EBITDA from the supply chain in the half was £66.7 million, an increase of £16.3 million compared to the prior half year. Royalties increased by £1.5 million, driven by an increase in system sales. Net overheads increased £2.8 million. This was driven by investment in store growth through incentives as well as investment in talent. Corporate store EBITDA reflects the disposal of five stores towards the end of last year. This resulted in underlying EBITDA before technology costs increasing by 16.5%. I'll come back to touch on the technology platform costs in a couple of slides.

German Associate

Disposal completes exit from all international markets

So, in June, we received the proceeds from our disposal of our German associate. This was the final act of our exit from international markets. Let me walk you through the impact.

Firstly, we received £79.9 million, which comprised £70.6 million of disposal proceeds and £9.3 million repayment of a loan. As we received this in June, net debt at the end of the half

was £171.4 million, giving leverage of 1.33x, which is below our target range of 1.5-2.5x. The profit on disposal was £40.6 million. In the presentation of our results. We have removed this from underlying measures. To give a better indication of the performance of the business. We include the £40.6 million in our statutory profit disclosure. Finally, as a reminder that following the exercise of the option on the 9 November 2022, we no longer receive a contribution from Germany to our EBITDA.

Group EBITDA

+16.5% excluding technology platform costs

In the first half of last year, we received an EBITDA contribution of £1.8 million, which was then £2.4 million for the full financial year.

Let me walk you through the movement on EBITDA. The net effect of increased volumes, pricing growth in our supply chain and franchisee investment such as new store incentives was an increase of £11.6 million. We made a £2.3 million profit on the sale of a freehold property. The £1 million revaluation of our Shorecal joint venture in the first half of 2022 did not repeat in the first half of this year, and as I just mentioned, we did not receive any contribution from Germany. This resulted in underlying EBITDA before technology platform costs of £74 million. When the one-off technology platform costs are taken into account, underlying EBITDA was up 8.2% to £68.7 million.

Technology Platform Costs

As previously guided - one-off expenditure to drive growth

So, before I go into the income statement, I want to update on our technology platform investments. As I laid out earlier this year, in 2022 we started investment projects to develop and implement two new cloud-based IT systems, an e-commerce platform and an ERP system. As we've previously communicated, both systems are part of our investment in growth and the e-commerce platform is part of our growth investment framework announced with our franchise partners in December 2021. The accounting treatment of these costs is simply a reclassification from capital expenditure to operating expenditure. Therefore, this treatment has no impact on cash.

The total costs recognised in underlying profit before tax relating to these investments was £6.3 million in the first half of this year. Within EBITDA, costs of £5.3 million have been recognised, of which £3.7 million relates to the ERP and £1.6 million relates to the e-commerce platform. These represent costs spent on the 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 and the half. For the e-commerce platform, this relates to the percentage spent on the cloud-based element of the project. An additional £2.9 million has been recorded in capital expenditure relating to the e-commerce platform.

Within amortisation, a total further cost of £1 million is recognised. These implementation costs are one-off in nature, and when the e-commerce platform and the ERP system are complete, there will be no more technology platform implementation costs impacting EBITDA.