Domino's Pizza Group plc (DOM) Earnings Call Transcript & Summary

We don't disclose the mix, right? So I'm not going to disclose the mix. Why you sat next to me -- keep me honest. I know what the mix is, and it doesn't concern me. But I think the important thing, Katie, is actually the degree of incrementality that sits on those aggregator platforms. That is something that we are absolutely able to evaluate and analyze and that is under constant scrutiny. And we're on 2 aggregator platforms at the moment and both are delivering similar levels of incrementality. And we effectively know that there's substantial benefit from us being on those aggregator platforms just in terms of increasing our reach and sort of capturing the customer that otherwise wouldn't be able to speak to because they use that platform for all of their -- all of their purchasing -- food purchasing opportunities. So I think it's a channel that's very complementary. It's not growing in a way in terms of the mix of orders altogether, Katie, that give us any cause of concern whatsoever. And the incrementality is very, very high and would have to fall substantially from where it is for it to then hit point that says this is not a good place for us to be. So aggregator economics matter. They matter to us and they matter to franchisees. So we always evaluate the offset between the incrementality and the reach versus the cost of doing business. In terms of the customer behavior, I mean, the behavior is pretty much the same. And when we look at things like our average ticket, et cetera, Katie, there are variances, but they're not substantially different just in terms of the ticket and things like delivery charges. I think it's the consumer that is on there, we know is slightly different, typically a bit younger, a little bit more affluent. And therefore, again, that's why we see them as a really great customer access channel for us.

What we do know is that our -- what we call our champions, so our higher-quality customers, our higher frequency customers are still ordering through our app, the aggregators to, Nicola's point, are those people that buy less frequently, and you've got to be in it to win it, frankly. So those better quality customers, we do have that direct visibility. They stay loyal to the Domino's system.

Yes, absolutely. You asked a question about gift cards. We did talk about it in terms of the opportunity when we sat down in March. But I think if you think about the biggest execution risk to delivering our strategy when we're talking about more customers more often and more efficiently, it's losing focus and trying to do too much at once. And that's been something that I think as a business, we have been guilty of in the past. I think since Andrew joined the business in March, and we've been through a very robust integrated business planning process, as he's already alluded, we are going to focus on doing more -- less really well and then bring the next thing and then bring the next thing to you when these initiatives have a clear plan and some numbers that we're actually prepared to stand behind and bake into our numbers. So we have a very strong pipeline of things. The gift card market is still one of them. There are others as well, but we feel that we should concentrate in terms of making sure that we land the things that we want to land like Chicken, Loyalty, Aggregators now, then we will move on to the next thing, analyze that, bring that back. It's the same with some of the formats work in travel retail. I think we referenced that in March as well. So I'm not in a position to answer questions on those at the moment, but do know that we are working on those in the background. And when we believe that there is something here that we wish to then start investing in or to exploit, we'll then bake them into our numbers and put those into our -- the guidance, et cetera, that we give you all because I think that is a much more honest and transparent way for us to talk about how the business is performing.

What has built our model is chicken, we have a value ascribable to Chicken, a value ascribable to Loyalty, a value ascribable to Aggregators and a value ascribable to Supply Chain efficiency. That is what builds the math, the numbers we're guiding you on. The philosophical change is really simple. We're not going to come and say we're going to. We'll come and tell you when we have done and we've got confidence that those activities can meaningfully add value going forward. That is going to be the change in how we sort of report things to the market. So we're not thinking about it. It's -- we're not going to present false dawns to you because I think you're quite right to say, well, you said this, where is it? That sorts.

In terms of the organic growth strategy we set out in the presentation, the sort of structure of how we're looking at the business in terms of more. And underneath the gray on that slide, there's another sort of row after, row after row of what these initiatives are, but they all ultimately have to pass the sniff test against our North Star. So if it's not going to deliver more customers, if it's not going to make them more frequent and therefore, increase lifetime value, but it's not going to make us more efficient, why are we doing it? There might be good reasons to do it, but we need to be in a position then to explain to you all. But I think having that keeping ourselves honest and not making promises that we can't have certainty around delivery is the way we drive the value of this business forward. And then your final question was on product development. What is there beyond chicken and pizza in terms of menu expansion? And it's a multifaceted response in some respects, Katie, because chicken is a brand-new product, and it is way -- way off where I think chicken could be as a product proposition. So there's a lot of work going on at the moment on the existing proposition, particularly around dips and also around flavoring for the coating. But then one of the big areas that I think is complementary to both pizza and to chicken, what are we doing with our sides. And we're also cognizant around the healthy food agenda, which is something that is clearly -- it's not just a regulatory thing, but it's a consumer thing because some customers want healthier options, want smaller calorie options. And so a lot of the work that we're doing actually is exploring how do we expand the menu around some of the sides so that they are complementary to both chicken and to pizza. But effectively, we'll continue with the basket expansion that we're seeing chicken bring to the business. So that's roughly where we're going. Do I see us getting into something else completely different? Not at this stage because I think chicken has so much more left to offer. I think, again, it goes back to focus on doing less really well. And I think chicken is -- for us, is still an immature product largely. I think we've taken a lot of care to analyze it and go, are we back in the right horse here on the right hand in this case? And I think we've concluded, yes, we are. And so that's where the focus will be in terms of the evolution of that.

Just one question for Andrew, please. On interest costs, you've got debt facilities of GBP 600 million versus monthly average net debt of under GBP 300 million. I know you mentioned this in your part of the presentation, Andrew. But -- so obviously, I know you're looking at it. But just keen to understand, given the focus on deleverage that you've also talked about this morning in terms of capital allocation rather than say, buybacks. So what's the size of the prize here in terms of how much you can potentially reduce by without incurring costs to realize the USPP, it looks like one of them is due in July '27, you have to wait until then. So just sort of thoughts on how that could evolve over time? What are your thoughts on that and thoughts on interest costs in the out years would be welcome.

So it's a really good question, Richard, because we've got a lot of debt facility. And as we very clearly set out, our focus is on organic investments. So there's a lot of debt to support organic investments. So the -- if we take the USPP, that GBP 200 million tranche, I talk about the fact we are considering quantum and tenor. My view is if we just simply refinance the full GBP 200 million, why would you do that? Because you're fixing in an interest charge for 5 to 7 years depending on where the tenor lands, and you're not going to see any reward for reducing your debt and we'll be sitting on excess cash. So I think that number will be below GBP 200 million, and it will be a balance of USPP draw down some of the RCF. The RCF gets paid down and you are immediately rewarded for a lower level of debt overall because you're drawing down less. Will that be the full GBP 200 million? No. I think it's probably pushing it a bit. Probably in the middle feels like a sensible place, but we'll update that accordingly. To your point, then you get the requisite reduction in interest as we pay that debt down. And our target on that debt and leverage, looking at the modeling we've got, we'd expect to get to that 1.5x level within the next 2 to 3 years. Certainly expect at the end of this year to fall back a little bit. We knew we were investing in the supply chain center, and we're permitting ourselves a little spike up to 2.3x. That will nudge back this year, but I expect to see meaningful drop down over the course of the next couple of years or so. Clearly, if you just play the basic math on an EV/EBITDA basis, that should be rewarded through the equity value as you pay the debt down. What I'm keen to do, though, is that Nicola has mentioned these other opportunities that are not yet fully evaluated. Some of those may require CapEx. And what I don't want to do is limit our balance sheet and prohibit us from making organic investments by overtightening our liquidity facilities. So we've got the opportunity a little bit like we've done with SCC this year. If we say there's a GBP 20 million investment that's going to return us GBP 5 million plus, we should be doing that. So I don't want us to box ourselves into a corner inappropriately. But overall, just to reinforce that point on the capital allocation, this is really noddy. Invest in the business, run rate maintenance around GBP 20 million with a very, very strict 20% hurdle rate, maintain the dividends, keep the real value protected by that nod to inflation and whatever is left over, you pay down debt and reduce leverage. I think it's a really simple allocation framework. It is appropriate for a business of our nature operating in the U.K. equity market.

Richard Stuber from Deutsche Bank. Three questions, please. The first one, I thought it was really interesting, you talked about the market share of chicken going from 3.8% to 4.2%. Just that -- presumably, that means that even pre the CHICK ‘N’ DIP, your legacy chicken is still doing incredibly well. Could you talk about sort of interaction between sort of chicken orders of your legacy versus your sort of CHICK ‘N’ DIP and where you see that going? The second question is around marketing. I guess, given the launch of CHICK ‘N’ DIP and also the World Cup, were you slightly more 1H weighted in terms of marketing spend this year and just really what your sort of plans are for marketing over the course of the rest of the year? And my third question is on Ireland. I think your profitability increased nicely there. I know you're sort of moving away or standing back a little bit from your total store targets, but those stores there are kind of within your ability. So can you talk a little bit more about the growth plans in Ireland?

Thanks, Richard. Look, I think in terms of chicken market share, we did already offer chicken, you're absolutely right. And so some of that market share was already there. But we're not separating out old chicken from new chicken. It's just chicken. And so we're bringing the old products into the range, and it's effectively available as part of the broader CHICK ‘N’ DIP proposition. So I think we may evolve the product. We may look to retire some of them potentially over time. It will all depend on the mix and what's selling. But I think that a lot of the market share that we enjoyed from our existing chicken would probably have been more for the younger palate as part of the family and also as consumed as a side. The CHICK ‘N’ DIP proposition is more consumed as a meal and therefore, is as far as we can tell, I mean, you don't know who's actually eating the food when it lands at the customer's door, but it seems to be an older palate and more of a family food. So we're not getting focused on which is old and which is new chicken. It's just chicken, Richard, and the intention is to grow our share of that market with whichever product mix is well and is appealing to the customer. In terms of marketing, we haven't particularly changed around the weighting of our marketing profiling. We have changed the mix of it. So we did do a lot of spend on chicken over pizza at certain points of the year, particularly you would have seen that in the first few weeks and months following the chicken launch. But in terms of the quantum of the total spend and the profile of that year-on-year, it hasn't changed fundamentally. We always protect Q4 on a fish when the fish are biting basis because as soon as you get into that golden quarter, it's really important that you're present. So no real changes to marketing strategy. I think what is interesting, Richard, is despite the sort of repurposing of marketing towards chicken in terms of the total spend, we didn't see that have a significant impact on the pizza sales. And in fact, to say what we do see in the chicken sales that we're enjoying is a significant proportion of them have incremental pizza added into their basket. So I think some of it is a brand as long as you're out there talking about the brand, you're still speaking to customers even the ones that just want pizza when it may not be a pizza product. And despite sort of that headline stuff, there's always a drumbeat of local offers and local marketing that the franchisees do themselves. The national deal for pizza has been running price rise now for almost 12 months. That proposition, I think, screens value and has been doing a lot of the heavy lifting work for ourselves and for the franchisees as a result. So again, I think that consistency of message around the core value proposition in pizza, the real focus and emphasis on chicken and really talking about the Domino's brand as I think we've got quite a lot of bang for our buck out of the marketing spend this first half. And then, Andrew, do you want to talk about Ireland profitability?

Yes. I mean Ireland profitability has improved. I mean the important point, taking outside the Victa consolidation play through, underlying performance in Ireland has been pretty strong this year. And given we had the impairment last year, that's encouraging. So we're seeing positive progress, slightly different operational setup. The current plan with Ireland is to expand through the store base as corporate stores, and then we can evaluate what the makeup of the Irish map ultimately looks like. But taking direct control of that expansion agenda is the right strategic way to progress Ireland. There's an opportunity there. The end game is still to determine that. But we're taking advantage of the white space opportunity now from a corporate perspective rather than a franchise perspective.

It does go back, though, Richard, to -- we're not -- we're focused on sales and the store numbers will be what the store numbers will be. It's the most underpenetrated market in terms of Ireland versus U.K. from a concentration point of view in terms of our stores. But we think we'll focus on the end results, which is what drops through the sales and other account lines rather than store counts.

[indiscernible] in terms of CapEx guidance.

So there's a possible CapEx churn piece, you're absolutely right, which is you invest in the corporate store and then ultimately, that could be a franchise store down the track. Yes, currently in the CapEx guidance, yes.

Sorry, a follow-up Richard Taylor from Barclays again. Your comments on the price, Nicola wanted me to ask about any further thoughts you might have had on sort of everyday low price pricing versus current situation where sort of relatively high headline price and then significant money for offers. Do you think the current price architecture is there to stay? Or do you think it can be tweaked to it?

It's a good question, and it's something that is an open and live conversation with franchisees, Richard. So it's not really something I'm in a position to comment about in any detail. But I think there is a recognition that the price proposition as a headline is what draws people in. But then when you look at the mix of sales and orders through the system, the bundled deals and other propositions that you're referring to are also still very popular. So we need to be really careful about any changes that we do make. And clearly, some of those changes could have an impact on franchisee profitability, too. So it's a live consideration. It's something that we effectively work with the franchisees to the Marketing Advisory Committee, and these are live topics of conversation. But you're not going to see a sudden wholesale shift in strategy. Whatever we do will be done incrementally and thoughtfully to protect both the customer and the franchisees.

Just 2 last questions for me. Are you seeing any change in terms of levels of local store marketing with the franchisees? Are they holding that up? And the last one was in terms of the market you're seeing growth in delivery at the expense of collection? Are you seeing that within your business?

Probably quite quick answers to both, Doug. Not seeing any substantial changes in the local marketing by franchisees. They're committed to growing the pie as we talk about it. And so local marketing absolutely complements the work that we do with the MAC around the national advertising campaign. So not seeing any fundamental changes. It's certainly not where they are going in order to make savings in their own P&Ls. And they, like us, recognize you can't save yourself rich and actually not talking to your customers is probably the last thing that you want to do. So no real changes there. In terms of growth in delivery, it's not something that we're seeing, to be honest. I think the performance in both our channels is pretty balanced. And I don't think there's much else to say on that, to be fair.

We do -- we have a sort of collection perfection deal, which incentivizes coming to collect, but it hasn't moved the mix.

Anubhav Malhotra from Panmure Liberum. I want to just dig deeper into the loyalty scheme, if you don't mind. Just on the new features that you mentioned that you'll have once the full rollout happens, which is around personalization and recruitment. Have any of those been tried in the trial phase? Or will they just come in when new launch happens? Has the trial phase been just a simple buy 5, get 1 free? And if not, why not? And then secondly, on the take rate, 27% take rate at the moment, that suggests to me you have 2.2 million customers. So probably you have marketed it to more than 8 million customers already, and there are 14 million in total. So how much more is there to go for in terms of actual sign-ups? Do you expect that 27% rate to tick up to a higher number? And lastly, just on the economics of the loyalty scheme, the cost of implementation with the new partner that you're working with in terms of the central cost line, the overhead line and also how will the cost be shared between you and the franchisees?

I'll let Andrew talk to the cost question potentially. Look, the new features haven't been tested because the solution that we put in place was very basic. And so we've not had the functionality to be able to test it in the real world, so to speak. which is one of the reasons we've worked really closely in terms of modeling what the impact of that might be on our customer base. So it will be rolled out with full features, but we will still be undergoing a period of testing and learning around what works, what doesn't. But that's no different effectively using the existing CRM capability to analyze and understand what works and when. So that's why not because they are -- although in the way we look at loyalty in the business, we -- I keep doing that, I don't like that. We see it as a continuation of a program or an extension of the program, but the reality is there's a hard stop on the old scheme and a transition to the new one. So it's a very different solution. In terms of your estimates on the -- one of the reasons we're at 2.2 million actually is a capacity issue, which goes back to the fact that this is not a fully fledged program. And so this has been invitation only, and it's been rolled out around specific cohorts. So the take-up rate has probably been higher than you might model for a typical scheme. So we still think there's a big chunk of the database that we've not even spoken to yet about loyalty. And I think the third thing is just really to remind you that this scheme is not about the existing customer -- this is about the existing customers because it is also then about a future customer database as well, which is where we have no functionality currently to be able to invite people to join Domino's loyalty in order to become a customer, which is the reverse of how we do it currently.

On the economics, honest answer, it's a bit of both. So there's a bit of cost from us, there's a bit of cost from franchisees. The way we model it out, we're very transparent when talking to franchisees, what do we think we're going to make? What do we think you're going to make? Does that look about right? They have to be behind this. So they're not behind it. This isn't going to happen. They are behind it. They recognize it's not something you can just say 6 months down the line, we don't like it. So we've got a longer-term commitment. But both parties coming back to Nicola's point, this grows the pie for both parties, so it works, but it does need a little bit of costs on both sides. That's incorporated into our guidance already.

Sorry, one last question for me. Are you seeing much variability in the performance between the franchisees vis-a-vis the larger franchisees versus the smaller ones? And if there is variability in that performance, assuming that scale really matters in today's world, do you expect franchisee consolidation to be a theme in the future relative to where we are today?

There is always franchisee variability, Wayne. It does have a relationship to size to some extent, but it's not a hard-coded rule. There are certain points as you grow your scale where you need to invest more in capability like such as training and other central capabilities that a smaller franchisee doesn't need. So effectively, you can see small franchisees with really strong profitability, the big ones with scale, and then it's the group in the middle that are building to the capabilities that they need. So it's not a linear matter at all. The system, though, you're talking about consolidation, I think, is already heavily consolidated in some respects. And I think a lot of our franchisees are groups of 10 stores or more, and they're able to really optimize their cost and therefore, their profitability. The real variation, the main variation we see actually is more regional than it is necessarily franchisee-based. And that's how we look at it. Now some of those franchisees in those regions, again, we'll start -- so London is a very competitive market, very, very difficult in London for franchisees. So they are the areas that are really a focus for us making sure that we support those franchisees with some good marketing and it's another consideration when we're talking about aggregators as to why that's quite important because in the London market, it's probably a higher concentration of customers that would typically use that type of platform as opposed to a native one.

But the way we assess, Wayne, and this is very important, we look at the store, the economics and performance of the store and then there's who's the franchisee. So you're looking at the unit performance and it so happens when it might be -- one might belong to a bigger franchisee, one might belong to a smaller franchisee. But a consistency in how we approach the store challenge is the really important point because it means that regardless of how big or small you are, you're all treated equally when presented with the same challenge.

Well, I just wanted to say thank you all very much for making the time and effort to come and talk to us today and for your questions. I hope we've given you the answers to all of them. But if there's anything else, I'll point you to Michael. And if there's any follow-up questions, then he will do his best to make sure that we help you with that. But yes, thank you.

Thanks very much.

See you all in 6 months.