Domino Pizza : Reporting Document

Overview

Andrew Rennie

CEO, Domino's Pizza Group

Introduction

Okay. Good morning, everybody. Thanks for coming through this morning with this lovely weather, which we love because it is great for Pizza. We call them free vouchers from heaven. So, I appreciate you spending time with us this morning for our 2023 results.

My name is Andrew Rennie, I am the Chief Executive Officer of Domino's Pizza Group. And on my left here, I am also delighted to be joined by Edward Jamieson, our CFO, and Will MacLaren, our Head of IR.

Strategic progress and profitable growth

A system primed to accelerate growth

If you come with me on page two, very briefly, I will give an overview of our strategic progress so far, before I hand over to Edward to go through the numbers and then I will come back and talk about the greater business in more detail.

First of all, we are very proud of what the team and our franchise partners have been able to deliver, strong EBITDA growth again this year. Our franchisees are managing their stores incredibly well through. If you look back at the year that was 2023 and all the challenges with the utility and gas prices and commodity prices, etc., it was a tough start to the year.

They managed it exceptionally well and we are able to grow profitability for their stores above the 2019 numbers, which is quite impressive.

Not only that, they also delivered the best store growth in five years. And as you will hear more about later on, we intend to actually beat that again this year. So, the business really is in growth mode, which is what I am here for.

We have also upgraded our medium and long-term store targets. A lot of data, a lot of thought and a lot of work is going into that. So, it is a number that is driven on hard data. So, we are excited to talk a bit more about that today.

And also, we will be talking about the acquisition of 100% of the shares in Shorecal, which we are already a partner with over in Ireland, which has been a great partnership for us and we look forward to talking more about that a little bit later on.

So, all in all, we have got a clear plan to deliver earnings and cash flow growth for our shareholders, but it is a real team effort.

So, with that, I will pass over to one of my key team members, Edward, to talk more about that. Thanks. Edward?

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Financial Performance

Edward Jamieson

CFO, Domino's Pizza Group

Welcome

Thank you, Andrew, and good morning, everybody. It is a pleasure to be here this morning and to present the 2023 full year financial results and to update you on our outlook and guidance for 2024.

Financial Highlights

Sales and orders growth with increased returns to shareholders

Firstly, I am pleased to report that the successful execution of our strategy is clear in our headline financials.

2023 was another year of like-for-like sales growth, improved orders and increased returns to shareholders. 2023 was also a 53-week year, and as we go through the financial results, I will refer to 52-week growth rates for a better comparison with 2022.

Like-for-like sales excluding VAT were up 5.7% in the year, ahead of the prior year, with continued order count growth in an uncertain market. Our revenue increased 11.1% and we were pleased to report underlying EBITDA of £138.1 million, at the top of our guidance range.

Free cash flow increased by £18 million to £97 million, driven by good trading and working capital management. Underlying earnings per share declined to 18p, largely driven by an increase in the corporation tax rate and higher interest costs.

Finally, we have increased the full year dividend by 5% for the year, in addition to £90 million of share buybacks announced in 2023, which have now been completed. So, turning to the next slide.

Trading performance

Positive order count, driven by growth of collections

Let us go into system sales and order count in a little more detail. Starting on the left-hand side, we have split out the impact of sales and orders between collection and delivery.

System sales grew 5.8% with increased sales in both delivery and collection in the year. The 53rd week was strong, which reflects the inclusion of Boxing Day and New Year's Eve in the final week.

Overall, total orders were up 1% on prior year with the decline in delivery orders more than offset by the growth of our collection business. Collection orders were up 13.3% in the year and we continue to see a material opportunity to grow our collection business further, and as a reminder, in line with other international markets, we see the potential for this to be close to 50% of orders. Delivery order count was down 4.8% in the year and we are focused on returning our deliveries to growth.

Overall, our like-for-like sales increased by 5.7% last year, which is ahead of the prior two years.

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Sales performance

Strong growth in revenue while maintaining stable margins

As I mentioned on the previous slide, system sales were up 5.8% driven by new store openings, increased orders and price. Reported revenue increased 11.1%. This was driven by a 14.4% growth in our supply chain revenue with a smaller increase in royalties on system sales.

Corporate stores revenue declined 10.2%, primarily due to the sale of five corporate stores at the end of 2022. Our National Advertising Fund and ecommerce expenditure increased 11.2% in the year, like this is 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%.

Technology platforms

Investment to capture growth and drive further efficiencies

I am pleased that our technology platform projects are largely complete and that the costs were in line with guidance. Our new ecommerce platform will create significant capabilities for our digital channels, remove constraints for our franchise partners, and ultimately provide an enhanced experience for our customers. Importantly, it also results in a more secure and resilient platform to seamlessly scale for our next stage of growth. And cutover of the various channels is in progress. The ERP system will deliver efficiencies and will complete this year.

Now turning to the next slide.

Analysis of EBITDA

Good underlying performance

The majority of our EBITDA comes from the supply chain centre through procurement, manufacturing and the distribution of products to stores. In FY23 we maintained outstanding service levels with 100% availability and 99.9% accuracy. Once again, 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 increased 24.9% compared to the prior year. This increase was primarily driven by food costs and increased volume. Net overheads were around £11 million higher than the prior year, driven by expenditure on new store incentives, investment in talent and general cost inflation.

Corporate store EBITDA was lower, largely driven by the sale of five corporate stores towards the end of 2022. This resulted in underlying EBITDA before technology costs and Germany increasing by 8.3% in the year, with underlying EBITDA at the top of our guidance range of £132 million to £138 million.

Group EBITDA movement

Strong trading results

Let me briefly walk you through the year-on-year movement. Last year we reported underlying EBITDA of £130.1 million. Our underlying trading drove an increase of £12.8 million. We made a £2.3 million profit on the sale of a freehold property, which was more

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than offset by the lost contribution from corporate stores and the non-recurring nature of last year's sale.

The prior year EBITDA benefited from a £1 million revaluation of our Shorecal JV which did not repeat last year. You can then see from the chart the impact that no contribution from Germany and a £3.7 million increase in technology platform costs had on our EBITDA performance in the year. After taking into account a strong final week of trading, we reported underlying EBITDA of £138.1 million.

Income statement

EBITDA increase as a result of increased trading profits

Moving to the income statement. Depreciation and amortisation and finance costs were in line with guidance. Taxation was higher than the prior year due to an increase in the UK corporation tax rate from 19% to 25% in April 2023 and a one-off additional £1.5 million transfer pricing charge. This resulted in a 9.7% reduction in underlying profit after tax in the period, with underlying EPS down 4.3%, the difference being driven by share buybacks.

It is worth noting that based on the FY22 effective tax rate, underlying EPS would have been up 6%.

Free cash flow

Continued EBITDA growth and strong working capital management

Our asset light business model generates strong free cash flow. Trading from operations produced EBITDA of £138.1 million, and let me walk through how this flows through to free cash flow. We had a working capital inflow of £10.2 million compared to an outflow of £17.5 million in the prior year. This was primarily due to the timing of creditor payments and cash receipts.

Net interest was higher, driven by timing of payments on the £200 million private placement notes that are fixed at 4.26%. We also incurred a £11.9 million cash outflow relating to historical share-based compensation arrangements. These had been provided for in prior years. And so there was no impact on profit in 2023.

Overall, increased underlying EBITDA and effective working capital management drove an £18 million increase in free cash flow to £97 million, and let me run through how we use this, given our disciplined approach to capital allocation.

Capital allocation framework

Investment in core business, increased dividend and share buybacks in FY23

You will now be familiar with this slide as we first introduced it in March 2021 and update you every six months. We have an asset-light business which is highly cash generative. We have this framework to ensure that effective capital allocation can amplify the benefits and returns from the cash generated by the business.

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. We generated £97 million of free cash flow in the year. And let me walk through how we used this cash.

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Firstly, we continue to invest in the core business to drive long-term sustainable growth. To that end we invested £20.8 million in capital expenditure in the year. We will maintain a sustainable and progressive dividend. We will pay a full year dividend of 10.5p which represents a 5% increase compared to last year, and which indicates our confidence in the business. The cost of the FY23 full year dividend is £42 million.

In the year we received the proceeds from the sale of Germany and returned £70 million to shareholders through a share buyback. From free cash flow generation, we also returned a further £20 million to shareholders through a separate share buyback programme.

Consistent with our growth plans and our capital allocation framework, we have today announced the acquisition of the remaining stake in Shorecal, which Andrew will talk to shortly.

We are confident that our business model will continue to deliver meaningful free cash flow growth over the medium-to-long term, and combined with our strategy to build a larger and more cash generative business, we remain committed to returning surplus cash to shareholders.

Net debt bridge

Increased returns to shareholders

Here you can see how our net debt has moved in the year, the sources of our cash inflows and our capital allocation framework in action So we started the year with £253.3 million net debt. As I have already explained, we generated £97 million of free cash flow in the year. We received a combined £79.6 million from the German associate.

And here you can see the cash outflows in the year. CapEx of £20.8 million, £41.9 million paid out in dividends, and £97.8 million in share buybacks and some purchases on behalf of the employee benefit trust. This resulted in year-end net debt of £232.8 million, giving leverage at the end of period of 1.77 times within our target range of 1.5 times to 2.5 times.

Investing to drive sustainable growth

CapEx this year to be c.£20m

Before I turn to our guidance, I would like to go through our 2024 CapEx in more detail. As I previously said when discussing our capital allocation framework, our priority will always be to invest in the core business. As guided, now spending on our technology platform projects is largely complete, we expect CapEx to be in-line with recent years. In 2024, we expect CapEx to be around £20 million as we continue to invest more in our system to drive sustainable and profitable growth.

There are three pillars to our CapEx in 2024:

• Firstly, within our supply chain we are investing in automation projects and the completion of the expansion of our capacity in Ireland;
• Secondly, having completed the development of our new ecommerce platform, we are now focusing on the cutover of channels and enhancing the customer experience; and
• Finally, our investment will also be focused on developing and continuing to improve our core franchisee operations technology and support office.

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So, turning to current trading and guidance

Current Trading & Guidance

We have maintained strong momentum against our key strategic priorities in the first quarter with a rapid deployment of the Uber Eats trial and seven new stores opened, with a further 33 with planning consent or under construction. We expect to see some food cost deflation this year, which, in line with our model, will be passed through to our franchise partners.

Last year we proactively took action to reduce our cost base, and this will partially offset the overall impact of inflation on our cost base in 2024. As a result, we look forward with confidence and expect to deliver FY24 underlying EBITDA in line with current market expectations, and hence delivering another year of further profit growth. The technical guidance is on the slide and we are happy to take any follow-up questions in due course.

Thank you. Now let me hand you back to Andrew.

Strategic & Operational Update

Andrew Rennie

CEO, Domino's Pizza Group

Accelerating growth

Value for franchise partners, customers and shareholders

Thanks, Edward. Okay. We come on to slide 18 now. I would like to talk about a few things here that has been achieved in this business in the last four years, things of note.

I think a couple of standouts for me were the fact that collection orders grew 18%. But the opportunity is still much bigger than that. Today, we said roughly 37% of our orders are collection. I was in the US only a couple of weeks ago. When I first started in this business almost 30 years to the day, collection in the US was about 2%. Today, it is 55%. And Russell said to me that he believes he can keep growing that.

That means we are 20% behind where the U.S. is today and I think the initiatives that I will talk about soon with our lunch, etc., will push us towards that 50% barrier.

Now people quite often do not understand that actually collection is actually a very profitable part of our business, and it is a different customer. So, you are not stealing from a delivery customer. It is a totally new customer. So, I am very excited about that. And the business I came from previously in my past life, we had a much higher carryout percentage than we have today. So, I think huge opportunity to keep that growth and accelerate that growth.

I think the other one, too, is 11% of store growth, which is admirable. But based on what we achieved last year and based on what we already have in the pipeline this year, we have complete confidence in hitting over 70%. So, hitting that number of last year, which was double the previous five-year run rate, which gave us complete confidence we had to come out and talk about the fact that 1,600 stores in the next few years, 2,000 stores.

And it does not stop there. That does not mean we are capped out at 2,000 stores. That means we have a clear line of sight to 2,000 stores. So even at 2,000 stores, we are still 15%

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or 20% under-penetrated of other large Domino's markets around the world where they are today and they are still growing.

As an example, the US has been going, the brand has been going 64 years. This business next year will be 40 years old. The US is still growing, and they are 24 years older than us. It just goes to show that through technology and different dayparts, we can continue to grow this business for a lot longer yet.

Stronger position in a competitive market

Driven by collections and continued store openings

So, I will move on to the next slide. I think the other thing, too, is that we continue to grow market share. And we have not really gone after it yet. This daypart that we are going after is not an area that we have typically gone after. It is an underutilised part of our business. So, the franchisees are fully supportive behind us in really going after this lunch strategy, which I think will really help us take more market share. So, we feel very confident about that.

If we move on to the next slide.

Long-term sustainable growth

Clear medium and long-term targets

This, for me, is sort of the, I suppose, takeaway slide for a lot of people. I know that a lot of analysts in their numbers, the growth target in the marketplace was around 1,600, 1,650, 1,675 depending on who you spoke to. We make it very clear. We have put a lot of research into this. We had a third-party company with 32,000 data points. We use all our own data of our own stores plus I went around and met with every franchisee.

The number one thing that franchisees wanted for me was more growth. They said, Andrew, we have got the team, we have got the desire, we have got the balance sheet. Help us find more stores. So that is what we have done. And Nicola and her team have done a fantastic job plotting where these stores are. So, they are not just plucked out of the sky numbers, they are stores that we can see are really already with villages, with fortressing. We have got stores that are so busy now they have to open a second store, which is fantastic because it is a win-win for not only our franchisees because we are able to have better labour metrics, but that is a win for our customers because they are able to get better service, faster delivery of pizzas, and faster is not about the speed, it is about the temperature and the quality of the pizza, with frequency, etc.

And then on top of that, the number one reason people choose you is proximity for collection, so we get closer to our customers as well. So, for me, this slide here is very important, is that it is a well, it is a data-driven number. It is a hard number and gives both medium and long term and we feel very confident about that.

Now please note the plus signals behind the 1,600 and the 2,000, the £2 billion and the £2.5 billion, we do not expect to get to those numbers and stop. They are minimum targets from our point of view. They are not caps, they are minimums. So, we do have a lot of confidence in going after those numbers.

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Shorecal acquisition - unique opportunity

Transaction details

Next, come with me on slide 21. Really proud of being able to buy this business. This business has notoriety globally. The job that Adrian and Charles Caldwell have done in that business has been fantastic. They have been great ambassadors for the brand. We truly wish them well. They have been great partners to deal with. And we feel like we have a legacy to perpetuate here. We have got an incredible team led by George on the other side in Ireland and Northern Ireland.

We really find it is important to help drive the strategy in that country, that we put our money where our mouth is. So, we are really confident of taking our shareholding from 15% to 100%. We have also got obviously Stoffel Thijs who came from Germany. He has been a 27- year-old Dominoid who knows how to help drive these businesses. So, he is tasked to start with, as part of that project, to drive this business forward. Attractive multiple. It is going to be accretive, but it is more about 2025 because we want to get the business. We want to do some investments to set the whole country up for success, not just this one investment.

So really happy to be part of that acquisition. Again, this goes back to the framework we spoke about in December, about focusing on the core first. This is an important part of that first step of that core, and really proud to be able to bring this to you today.

Shorecal acquisition - unique opportunity

Strategic rationale

If you come with me on the next slide, 22. Why did we buy it? I mean one of the first reasons is that Ireland is 50% less penetrated than the UK today in terms of Domino's stores per capita. So, we think that having our full investment in Ireland and having our focus not only helps this business, but helps the other franchisees as well. The Domino's brand is very strong in Ireland, some of the most busy stores in the world, some of the most profitable stores in the world.

We think we can multiply that, possibly doubling that business over in the very short term. So, we have invested in our commissary out there. So, this is another way that we are leveraging shareholders' investment over these last years. We are going to synergise those investments, along with the technology, of course. So, we feel really, really positive about where we are going with that investment and why we have done it. I think it validates, again, we are focusing on the core first.

Driving long term growth in core business

Number one priority is to continue investing in and growing in the UK & Ireland

Again, this is our framework here. I look at this every day. It is actually the screen saver of my phone. That is how important it is to me. And the number one thing for me, I wake up every day thinking about how do we make sure our franchisees, and I can show you the phone to prove it, if you like. There it is there, is franchisee profitability. Having been an ex- franchisee, it is so important. We are in a partnership here.

Our franchisee profitability leads to more stores. And guess what? You are seeing more stores opened last year, double the amount. You are seeing even more stores opening this year. The reason is that franchisees' profitability is in a good place. But we are never happy, right? So,

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we are continually pushing that. And one of the things that gives me great confidence is that we all know the minimum wage is a steep curve this year for every retailer.

We embrace that. We have got a strategy behind that. We have got technology behind that, that will not only roll over that, but I also think that we will actually improve profits again this year for franchisees even taking that into account. And we have got to remember, too, a lot of those people that are benefiting from that are our employees. That makes us very happy. They are also Domino's Pizza customers. So, we also benefit from that as well.

Value for money, as I will talk a little bit later on about, but as an example, for the first time in the history of this business, we have been going out with a £4 price point. Never happened before. So, £4 at lunch. We have got our Cheeky Little Pizzas, which are under 600 calories. We have got our Wraps under 450 categories. We've got fries. We've got our incredible cookies, and who has not heard about our cookies lately? These are the great Creme Egg story, of course, but our everyday cookies as well, you can buy two of those. You can buy a small box of chicken.

We have never had those things on offer before ever. So that is quite exciting for our customers and our consumers, of course. Particularly in this market, I think our consumers need value and we are supplying the value, but in a very profitable way because by going after this daytime segment we have not done before, it actually sweats our assets much better for our franchisees.

Our digital platform is now constructed. We now have the ability, we are able to start rolling out a few of the exciting ideas and projects that we have had on the sort of back burner for some time now. So, I will be able to report more about those and their success come in August.

And convenience. One of the biggest things for convenience is proximity to the customer not only in terms of collection that we are closer to them. But when we get closer to them, we can deliver in a faster way and give a much better product. And I really do believe that we have the best delivery business of food bar none in the UK and it is only getting better, as shown by our better delivery times last year.

Franchisee profitability

Focus on improving franchisee profitability

So, franchisee profitability, as I said, was ahead of 2019, which is the best comparable with an apples-for-apples, 9% ahead. We would like to do that again this year. We have some initiatives in place that if everything goes in our favour, we think we can do that or maybe even better that.

We think they did a fantastic job. As I said before, the utility costs, etc., that we all faced down with, the team worked really hard. And I give a little bit of credit here to our training department. They trained and trained and trained, trained thousands of employees throughout the year how to be more efficient, how to give better service and they paid off in spades. They really did.

It is hard to describe to some people about what it means to be a Dominoid, but in Tom Monaghan's speak, it is about saving seconds, it is about saving steps inside the store. Every

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