Domino's Pizza Enterprises Limited (DMP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the FY '20 half year results investor briefing. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your first speaker today, Mr. Don Meij. Thank you. Please go ahead.

Good morning, everybody. It's Don Meij here. I'm the Group CEO and Managing Director of Domino's Pizza Enterprises. In Sydney today, we have with us Richard Coney, our Group CFO. We've also got Andrew Rennie, now our retiring European CEO. We've got Andre Ten Wolde, who is now our new European CEO. We've got Stoffel Thijs, our German CEO; Misja Vroom, who operates our Benelux business; Nick Knight, who operates Australia and New Zealand; and Josh Kilimnik, who operates Japan. I'm going to be working to the PowerPoint presentation that we put up on the ASX today. So if you come with me straight onto Slide 3, I'm happy to report today that we were able to achieve network sales up AUD 151 million for the half, plus 10.6%. This is driven through our strong online sales, up 18.8%. That's rolling a corresponding half for this same half last year at 16.5%, so strong online growth. We opened 85 organic stores in the half to be just under 2,600 stores. Our underlying EBITDA was up 10%; our EBIT, up 6%; our net CapEx for the half was $49.1 million; and our free cash flow was up 59.3%, with an additional $21.7 million. So if you come with me now onto Slide 4. As I mentioned, the growth of our business is largely coming from delivery, and that's online delivery. And if you look at the last 5 years as a business, we've doubled our network sales but more than tripled our online sales. In this particular half, we're really proud of the strong growth that we achieved in the European and Japanese operations. And when we look across the group, right now, year-to-date, we're at 96 stores organically opened as new stores, and we expect to be on track for a full year record. For any of the nervous Nellies that are watching our store count on a day-to-day basis, you can expect that, that will be a strong opening in June, right up to the last week. Now that we're so transparent in the way we show it, I think you can see that we opened a lot of stores in December and particularly in the last week. And that's the same in June, for whatever reason, every financial year. So just be aware of that as you're tracking our progress online. Our profit growth is in line with expectations with inside the group for the first half. And based on the recent sales that we are achieving in the first 7 weeks, we have a positive outlook for the group in this half. Margins have compressed as a group in the medium term due to the accelerated new corporate store investment in Japan where we're taking advantage of the progress, and we're opening more stores corporately and then refranchising them later. And we're also operating a larger corporate store portfolio in Australia. Both of these mean that, in the near term, we have the operating expenses of either opening or, in some cases, taking back a franchise store in Australia. And that has a pent-up profit in those stores, with profit on sale of future corporate stores to come. DPE will also benefit in the medium term as we realize that profit on sale, and it does mean that we are cycling a higher CapEx in this year. And you see the ebbs and flows and Richard and I will talk about that further in the presentation. If we come onto Slide 5, we want to reconfirm our 3- to 5-year outlook as an ongoing view that same-store sales in that 3% to 6% for the first half were up 4.1%, and the new organic stores to be in the range of 7% to 9%, and we're confident we're going to be well and truly within that range for the full year. If you come with me now onto Slide 6. What is, for those shareholders who have been following us for a long time, we're really reaping the benefits of those investments in Japan and Europe, where nearly $1 billion of our network sales for this half came from overseas. And as we've already achieved in previous years, where the momentum is quite strong, well more than half of our EBIT is now also coming from other global markets. We can also see the store growth is being predominantly in our international businesses, be it that Australia will open more stores in this half that are in the pipeline. And when we look at the CapEx, you can see that a significant proportion of our CapEx is recyclable, whether it be through opening a corporate store today and selling it later or whether we're funding a new manager into a franchise store. If you come onto Slide 7, it really illustrates the breakout. Now this is in Australian dollars as a percentage growth. We do break out further in a constant currency, the growth of our online business. But yes, I think it highlights just how strong online is. You can also see that the realm of 3% to 6% is well and truly live in our business with Australia in this half -- in the first half being on the lower end at 3% and Japan on the higher end at 6%, and Europe on the higher end at 5%. So that sits comfortably in the range. And when we see what we've already achieved in the first -- in the second half, it also gives us comfort that that's the right outlook to be giving shareholders. Fortressing continues to work. We live by example with that as well. You can see in Japan, where we're doing it predominantly with corporate stores because we know it's the right thing to do. And that's illustrated in this slide on Slide 8, where new stores opened since the full year F '15 now contribute 29.3% of group sales. If you come onto Slide 9, this is a slide that we're really proud to present today. In the first 7 weeks of trade, like-for-like sales are up 6.3% across the group. I want to highlight that Germany is, by far, the most outstanding performer in that and not too distantly followed by Australia, believe it or not, that Australia has actually had our highest like-for-like sales the last 2 months in 3 years. So we've even had a week over double digit, which has been quite exciting. So congratulations to Stoffel and the team and also Nick and the team in Australia and New Zealand. Network sales, as a result of that, are up 12.1%. We've opened 11 new stores in the first 7 weeks, which means we're now about 6 stores ahead of our run rate last year. And this brings our year-to-date sales as of -- to Sunday at like-for-likes now 4.6% as a group; group sales up 10.7% in network and 96 additional stores. If you come now onto Slide 10. I'm going to pass over to our Group CFO, Richard Coney, to talk about our financials in detail. Thank you.

Thank you, Don. Now moving to Slide 11. As highlighted by Don, our network sales is flowing into our revenue, but in addition, we're benefiting from the structural changes made to our Australian warehouse and distribution process, which is quite material from a financial sense, which we highlighted back on the ASX on the 6th of December. Our depreciation and amortization is actually higher than our EBITDA growth at 25%, as highlighted by Don, primarily due to operating a proportionally higher number of corporate stores, specifically in ANZ and Japan, noting corporate stores are actually 20% higher in numbers between H1 '19. This flowed right down to NPAT, which is up 6.4%, also noting that our statutory profit growth was up 29.8%. Our EPS growth, up 6.1%. And this year, our dividend at 6.4% is 100% fully franked. Moving across to Slide 12. This is just the -- a reconciliation of our underlying compared to H1 '20. Also though, we exclude the impact of the AASB 16 leasing standard, which is quite material, so we can -- you can see a like-for-like comparison. Moving on to Slide 13, our group numbers where we split out the geographies. As highlighted by Don, group EBITDA up 10%, but Europe was a standout performer at 17.9% with the strong network sales and driving the expansion of our margins, noting in addition, this is also absorbing the new market of Denmark in these results. ANZ, at 1.7%, is up. Again, our margins were impacted by decline -- or decline due to a mix of our corporate stores. We've highlighted before that 40 to 60 is our optimal level of corporate stores and so at 118, this will have a bit of a drag on our margins but as we -- until we refranchise these corporate stores. Japan, very strong growth of 21.6%, 10.6% on a constant currency, with some of our margins being offset by accelerating our corporate store openings in existing territories. And Josh will talk about that a little bit more. Our global cost increase, we've split this out for the first time, as previously highlighted to the market, noting that the majority of the increase is relating to -- you're -- probably across a lot of the D&O insurance costs are going up on a lot of listed companies today, and we're no exception. And as the market -- and we expect this actually to continue with the market hardening over the next 12 months at least. Moving across to Slide 14, we've broken out our nonrecurring costs. You can see they're a lot lower than the prior half, with Germany conversion and integration costs continuing at $3.4 million for the Hallo Pizza acquisition. We did have some costs also associated with the Denmark integration of $0.8 million. ANZ, as we've highlighted, we've got a class action relating to the Fast Food Industry Award, that's at $1.1 million. Also noting we expect to conclude the Hallo conversion with about another $5 million remaining for the second half. Moving to Slide 15, our group cash flow. This has been a good half for us, with our working capital improving $19.3 million. We do have some timing benefits of the seasonal -- seasonality in Japan, where we do a lot higher sales in Japan, which helps us. That's -- and in addition, the -- that's flowed into our operating cash flow, which is up 31.3% to $108.9 million. Our cash conversion continues to be maintained at over 100%. Again, our loan book continues to recycle out -- with -- predominantly out of Japan, where we've released a further $22 million. And our free cash flow, as highlighted by Don, is up 59.3%. Moving to Slide 16. This slide provides a lot more details, breaking out our CapEx. And we've done this so you understand that a large part of this CapEx is recyclable at $21.9 million. As you can see, from a gross CapEx perspective in the recycle section, we've spent $50.6 million investing in corporate stores, primarily in Japan, franchisee loans to new and existing stores and franchise acquisitions predominantly in Europe and ANZ. Offsetting this, though, is continuing to get cash inflows as highlighted with the franchise loan repayments and the sell-down of some of the corporate stores. Digital CapEx, we're continuing to invest in our digital platforms at $10.2 million, noting that our [ stay-in-business ] in the scheme of things is relatively small at $7.2 million. Also noting other investments include a significant investment in our Dutch commissary and head office, which will be coming live towards the end of June, I believe, to drive a lot of the benefits at the logistics end. Moving across to Slide 17 is our group balance sheet. For comparability, we've actually restated this, removing the leasing impact. As you can see, this is fairly material in terms of assets, up $700-odd million; and liabilities, a similar amount. Also noting, with the impact of the -- of our new warehousing model in Australia, as you would expect, our receivables, payables and inventories are higher purely due to this; and again in Japan, with the holiday trading period. Borrowings have reduced with repayments of $12.4 million. Moving to Slide 18, our group key financial ratios. Really not a lot to say here. Our ROCE remained strong, slightly reduced with investments that we're making in our international markets and our corporate stores. And we expect these earnings to be realized in future periods. Our net debt is down by $37.4 million. And then we continue, as highlighted, our cash conversion going from 101.9% to 104.9%. Finally, my favorite slide, the -- this graph just continues to highlight our 10-year track record on consistent growth in earnings. I'll now pass you on to Andrew Rennie.

Thanks, Richard. Come with me onto Page 20, guys. First of all, as you saw in the note released today, I'm officially retiring from DPE at the end of the financial year after 25 years to start the next chapter of my life. I've been extremely proud to be a part of the DPE story. I'm moving back to Oz, because a lot of speculation out there, but I'm definitely coming back to Australia. And the reason I can leave now at this point in time is because as you've seen from these results today, the business is in such great shape due to the depth of management we have, particularly in Europe. I mean having Andre as the COO, stepping up into my role, 3 great CEOs with Misja, Stoff and Andrew Bradley and also 2 country managers who are also in development as well in Belgium, with Misja; and Kelly in Denmark, it just gives me such great confidence to pass the baton on to these guys. I'm leaving a large portion of my wealth in the business because that's how much I believe in the long-term prospects of DPE. I honestly believe that. And our people ask about the moat of DPE, and it really is our people. The culture that we've built over 20, 30 years through Don's leadership, I'm very proud to have played a role in his -- part of this success. If you come with me onto Slide 21.

Andrew, I want to say a few words, if that's all right?

Yes.

Yes, just on behalf of the Board, on behalf of all of our peers throughout the world, all the leadership in DPE, on behalf of all the franchisees that you've helped become wealthy and successful in various parts of the world and even the team members that you inspire and influence, we want to say thank you. You've had -- played such an incredible role in our business. You're going to be greatly missed. But your legacy, I think, without a doubt, has been the ability that you've been able to grow the leaders, and not just only in Europe, although that's your most recent legacy, the outstanding leadership, but even here in Australia, you played a big role in influencing. So thank you for that. You put some incredible pillars in place. I remember back in 2006, when we announced that we were going to Europe, I think a lot of people thought we were a little bit crazy, and you [ picked up ] your family and made a lot of personal sacrifices to help build our business, and now we sit here today: Europe is, by far, the fastest, biggest growth part of our business. And that's your legacy. So thank you very much on behalf of everybody in the group. And I know that you'll be with us over the next couple of days, so shareholders can talk to you personally and hopefully, thank you as well on their behalf. So thank you.

Thanks, Don. Thanks for the kind words. We've come on -- get back to work now. It's Page 21. Obviously, the growth here is very impressive. 5% like-for-likes in Europe, and I think that momentum will definitely continue. I think the strong online sales, again, I think this answers those questions about people having fears, aggregators at 26%. And I think perhaps some people don't realize that Netherlands has actually been on the aggregators for over 15 years. We were using aggregators before we had our own OneDigital system. So it's not as if this is a flash in the pan, this is something that we've been working with for many, many years, for over a decade. So we've never been fearful of those guys, we work with them. So obviously, the 37 new stores, and the first half is always our slower half with stores because of the summer months, et cetera. But very promising in France. Andrew Bradley is doing a great job. We've already achieved the entire last financial year's openings already in this first half. So it just shows the momentum is back there in France, which is a market that's obviously dear to my heart after spending many years there. I think the other points -- the thing to point out is that Germany is just a powerhouse at the moment due to the great leadership of Stoffel and the whole team there, which is being driven by having the franchisees with one brand, one focus, which has been perpetuated by great operations and great marketing and great value offering. And I think that's just only going to get stronger. And 1,000 stores in Germany, in my mind, is just not a question. In fact, I think they'll run through that number very, very easily in the future. If you look at things like the rest of the region, France continues to have excellent growth. And I think small market like Denmark, which is a little bit of a drag in our earnings today, but it's driven operationally extremely well by Kellie Taylor, I think he's going to become a great part of that addition over the future. Obviously, a 5-year growth, I'm very proud of there at 492% of the EBITDA there. And if you go onto Slide 22. We've added circa 1,000 stores in Europe since 2006, since we moved to that market and took those markets on. And back then, it was a negative profit. And as Don said, people were very nervous about us going to Europe, and we have had a lot of naysayers over the years and rightly so. But if you look at the current half year, we are on track to exceed $100 million EBITDA in this financial year, which makes me extremely proud. So with that, I'm very happy to pass the baton on to the guys I'm leaving behind, and the person I'm about to pass on to now, Stoffel, I've known for probably close to 20 years when he was a single store franchisee, ended up being a multiunit franchisee. And like Nick and many of the others, we brought him into the business and now he's running one of the most exciting markets in our business. And he's had a lot to do with our success there. So on that point, I'd like to pass over to Mr. Stoffel Thijs.

Thank you, Andrew, and good morning to everybody listening. Before I tell you about Germany, I do want to take a little moment to recognize my mentor, Andrew Rennie. Thank you, Andrew, and I want to wish you all the best. I want to thank you, not just on my behalf, but on behalf of the whole European team. And strong leadership in building the business and the last years mentoring us to the next level has been great for all of us, and all the best in your endeavors. So as Andrew would say, back to business. 2020 March -- marked my 23rd year at Domino's. And I can't remember a more exciting time to be part of this family. In the previous meetings, we have spoken about our 3-step approach to the German conversion of Hallo Pizza and Joey's Pizza. Step 1 was the favorable conversion of the stores; Step 2, converting the mindset of the franchisees and the people in our team to HVM, high volume mentality; and Step 3 would be organic store growth. So if you look at the top left of your slide, you can see the size of the market. And I just want to say on that, that Germany is about 3x the size of Australia and New Zealand combined. And Germans eat more pizza per capita than the Aussies do. To put it in perspective, from the 10 biggest cities, only Hamburg has a reasonable penetration with one store for every 50,000 people. The other towns are way behind on that. And this shows how much we've got to grow in the future. Following the successful integration of Joey's and Hallo, we are now focused on one single brand, which marks the first step of conversion done. In September last year, we have started our first national television campaign, which has been the key driver behind record sales growth and the remarkable increase in our brand awareness. The brand awareness surged from only 20% 3 years ago to around 40% today, showing both a very positive trend as well as enormous potential to grow. Our OneDigital platform has allowed for our business to grow from under 1/3 of our business, back in 2016 when we bought Joey's, to over 75% in the last half year. And I'm very proud to announce that the hard work that has been put in by our franchisees, the team members in store and our corporate team in the office has resulted in record sales growth and profits for both the franchisee as well as DPE, marking step 2 of the conversion well on its way. I'm confident that the increased store profits paves the way to step 3 of our conversion, organic store growth. Looking at the bottom left of the page, you can see that over 60% of our franchisees have only one store. So we have a big number of operators with whom we can grow into the future. Having said that, I will hand over to Misja to tell you more about our Benelux business.

Thank you, Stoffel. My name is Misja Vroom, or Vroom, the fast guy, you can call me. I'm around for 26 years within Domino's. I remember starting in the Netherlands when we only had 4 stores, and we've come a long way. I've worked on the corporate side and on the franchise side. I've been a franchisee for 13 years. I was a franchisee when Don and Andrew came and took us along on a successful journey. And lately, I've been building stores in Belgium from actually 0 to nearly 100. And today, I'm the CEO for the Benelux. I want to take you through Slide 24. And as far as sales, we have strong sales growth in Belgium, and the Netherlands is also increasing in delivery counts and sales. In fact, we are in our 40th quarter of positive same-store sales in the Netherlands. And despite the headwind of VAT rates in the Netherlands, which has been challenging for all the countries that have been suffering the VAT [ raise ], we are still managing to have positive same-store sales. In the Netherlands, which is typically a low frequency market, we've introduced our loyalty program. And this is designed to increase frequency. If you consider that we have a frequency of only 4 times a year for the average Dutch customer, then you can imagine what potential we have there. Our digital has been continuing to grow, and we have the highest online penetration within the DPE network with more than 85% of our sales coming in digitally. We are currently testing additional aggregator platforms, and this is on top of the aggregator that we've been working with since we started in the Netherlands in 2000 with aggregators, which is Takeaway.com. And we think that adding those aggregator platforms can bring us additional customers. So it's on top. We opened 15 organic new stores in the first half. And that's all been opened through existing franchisees or managers grown from within the system, and that's making us really proud. And we also opened the first store in Luxembourg. It's a little small country down below Belgium. Luxembourg is leveraging on both our Bene -- or yes, our Belgium and Netherlands teams, so we don't have to add extra overhead for them. And it's been -- the first store was opened by a Belgian franchisee. So we will open our 400th store in the second year half, and we forecast to have over 600 stores within the next 5 years. And if you consider that the Benelux has the same population as ANZ, then you can imagine what potential we still have there. And in order to service all that growth, we are currently building a new commissary which will bring us a lot of efficiencies, and it's very necessary to facilitate the growth. Okay. So now I would like to pass on to Andre Ten Wolde.

Thank you, Misja. What a great run to help the business grow from 4 stores to 400 stores in the time you've been there. And I know you've been very material in that growth. Let me take you to Page 25 and before that, for people that don't know me, my name is Andre Ten Wolde, I'm the current COO of Europe. I've been with Domino's for 15 years now. And looking around the table that makes me sort of the henchman which is great to say if you have 15 years experience in the business. And I'm happy to announce some pleasing results in France. It's -- we're still growing fast in France, and it's been really good to see that the tough strategic decisions we made in financial year '19 have delivered some really improvement in our performance. If you recall, we did some targeted support to our franchisees to increase alignment and get back to a growth path. And I'm happy to inform you that that's definitely working. Also we've talked a lot about adding aggregators in France. And we are now on the bigger aggregators on France for the stores that are in areas where the aggregators are active, and we're seeing some promising results from that. Besides that, our online business is still growing fast through our online OneDigital system, which helps us to get more customers on our system and also grow the business with our own media because we have more information about our customers that's helping us to be more out there to increase the brand presence and grow sales. As a result of all those actions, franchisees are in a way better place, and it does deliver them higher results in their stores, making them positive to open more stores. And on the point of opening more stores, we opened 12 in the first half year, which is with the same amount that we did 12 months before that. And I'm still really positive we'll open a record number of stores in France based on our current pipeline. And as Don said, it's skewed to the end of the financial year. And I wish it was a cadence that we opened 2 stores every week, but it just doesn't work that way. We are highly reliant on permits and finding the right sites and finding the right franchisees. Let me take you to Page 26, about Denmark. Most of you know that we [ brought ] the business out of liquidation the beginning of last calendar year. Since then, we've been lucky enough to open 6 stores, and I can tell you that it's still a tough market because lots of customers remember the old Domino's, and we counter that by saying that, that was the old Domino's, we are the real Domino's. And customers are slowly finding their way back to our stores. And that's based on the excellent product sales and image that the team over there is doing. I can assure you that the PSI in Denmark is the best within DPE currently. And that's the way we're winning back customers, one customer at a time. Also very lucky that we've increased our team with a new head of corporate stores coming here from Australia, hitting the ground running. Thank you, Nick, for sharing your talent with us. I know talent is scarce and it's really good that we can get talent out of our bigger DPE group to grow our business in Europe. The key difference for the Domino's compared to the old Domino's, but also compared to the lots of independents that are there because, believe me, with 6 stores, we are the only chain in Denmark, is that our product sales image is so much better and our service, we deliver in less than half the time that the customer is used to in Denmark. And that makes me positive that we'll grow more stores in Denmark in the near future and grow our success over there. It's not lost on me that Denmark is -- in number of people, is bigger than New Zealand, so 6 stores is not where we want to be. And -- but we have a lot of potential to grow when we fix the consumer perspective on the brand. Let me take you to Page 27, looking forward. With Germany -- and enough said about Germany, we have fantastic momentum driven by Stoffel and his team over there. We are very successful using the -- of course, the Benelux playbook, but then adapted to the German market in marketing, in operations, and very happy with the results in Germany. And I don't see why that wouldn't continue over the next years. We're still a small brand over there as you look at the total potential market and still a lot of growth to be had and results to be had there. In France, positive momentum as well, and we can get more out of that. We will still work with aggregators and do all the right things that we've done previously in Germany and in the Benelux. We will roll out the loyalty program. Also there, we have some gains in the frequency if we do the right thing with loyalty. And we're doing something, very interested in taking the Paris market a program we call Project Reset. And I'm sure, in August, when we're back talking to you, that Andrew Bradley will share our results of that, but it looks really promising. Benelux, like Misja said, we're opening our new commissary that will deliver some operational benefits and savings. Very, very excited about going on TV in Belgium for the first time ever with a good offer. And based on the learnings out of France and the Netherlands, I'm expecting same-store sales to increase even more over there. And we're opening our 100th store in Belgium in 2 months, which is very exciting. And in Denmark, we'll just continue to rebuild the brand and invest in opening more stores. So before I hand over to Nick, lots has been said about Andrew Rennie, but let me finish that. I want to take the opportunity to thank him for his leadership and friendship, or mateship as you would call it may be here in Australia. It's no doubt that his positive attitude and his think-big attitude has rubbed off, and we've taken some of this DNA about thinking big and positive definitely in our team. And I want to thank him for his great leadership over the last lots of years. Over to you, Nick.

Thank you, Andre. Good morning, everybody. Nick Knight here and -- CEO for Australia and New Zealand. And while we're all sharing, today is -- or not today, but this year is my 24th year in the Domino's business. And at 14 years of old -- of age, in Tamworth, all those years ago, it was doubted I even had the talent to make a pizza, let alone stand here and be able to lead this amazing team that's driving the Australia and New Zealand result right now. And it was largely Andrew who placed a lot of faith in me to help me on that journey. So thank you, Andrew. So if you move with me now here on to Slide 29. ANZ performance was a positive one in the last half, 3.5% network sales, 3.3% on a same-store basis. Inside of that result, 6.4% coming on online, and that's just speaking to the extraordinary momentum we have in delivery right now and how strong that platform is performing for us. We added 6 new stores to the network and a positive EBITDA result as well, largely driven from those network sales increase with a couple of headwinds inside of that. And that's namely being the value proposition that we hadn't got quite right in the business in that half that we're working on reversing. And also, we're carrying an extra few corporate stores that is factoring into that result. I'm really proud that the stores that we are taking on are showing improved sales and operations performance. They're a shining light for the business, and that gives us good heart at being able to then look through into this next half. As I step back, and as a reminder of what we said we were setting out to achieve in this half was to fix that carryout value layer, which we've done now, lift the bench strength of our franchisees through Operations 360, and that program is well underway; focus on store profits, and we alluded also that we were really happy with how the delivery business was progressing. And I'm really happy to say that, that has continued into this half. If you move now on to Slide 30. I won't go through all of these graphs, just highlight really quickly on the bottom right-hand side, that graph there. And what that does show is just how incremental the new stores that we are opening have been to the business but also how the existing stores just continue to grow. If you move with me now on to Slide 31. As I've mentioned, getting the layers right, the core layers in place in this business is key to our success. And I really do feel that we have those core layers in place. But I think it would be a drastic oversimplification to say it was just on price. We have taken some calculated risks, namely around our working media strategy. That's how we look at our TV and also print. And as a result of that and some -- challenging the team with some new creative ideas, we've seen a marked step up in same-store sales. In fact, we've had the 2 higher sales weeks since those changes in the ANZ business in the first double-digit weeks of hopefully many more to come for many years. There is a slight lift in corporate stores, and we expect that refranchising will accelerate based on, as we've highlighted many times in the past, the operating leverage that sales delivered helps our franchisees to have faith and be able to take those opportunities as they arise and also managers becoming franchisees for the first time. And I'm really proud to say that, of the stores we have refranchised, that has been the case, they've been internal candidates. If you move with me now on to Slide 32. Really excited about the recent changes to our layers, and I'm very pleased with sales, cautiously optimistic that we can continue this cadence, which is above our 3- to 5-year outlook for the ANZ business, so 3% to 6%. I want to stress that our main focus in the refranchising of our corporate business is making sure we have the right franchisees. That's been one thing that hasn't changed over time and, in my mind, won't change. The quality of [ orator ] inside our business is the biggest factor for long-term success. And that's our vested interest to make sure that we're putting the right franchisees into the system and allowing them to be successful over many, many more years to come. I want to highlight that we are seeing a material increase in soft committee -- commodity prices in this half. I'm pleased to be able to say that because of the momentum in the business right now, from what we can see, we are able to mitigate those costs well. And we do expect those costs to moderate into the second -- into the next half. I mentioned at the last update that we were investing in a new app, and we are still progressing along that. But we have decided to slow down the development of this, given firstly how strong the current platform is performing, but also so we can invest in some operational projects that will allow our stores to become more efficient and deliver on some of this increased volume that we are seeing. Finally, before I sign off, I want to just thank the teams out there in stores, the team members who work really hard every day, our store managers, our franchisees for their hard work and faith in the model and my team who has really worked hard in this last half to get a lot of work done that is now translating into this really exciting start to the year. So I'll hand over to Josh now to talk on Japan.

Good morning, everyone. Josh Kilimnik here. While we're all sharing, it's my 23rd year here with Domino's. And I want to say a few words about Andrew as well because Andrew and I actually crossed paths when I was running the New Zealand market, and he became a great mentor and friend through that time, has continued, and appreciate his leadership all the way through there. So thanks, Andrew. Great to be back here reporting on the Japanese business, it's my -- the second year, full year, that I've been in Japan. And as I reflect on the half and the whole year, really pleased with the Japan results. We've been pretty consistent in our strategies, and that's delivered strong top line, same-store and digital across the half with a respective 12.2% increase in network sales, 6.1% on a same-store basis, and the engine room which is our digital business, is 17.1%. Furthermore, and in line with our long-term strategy of 1,000 stores in the market, we've had a record half, 42 stores we've been able to put on the ground across Japan. And if you look at the calendar year, that's actually 92 stores for the calendar year. We've also worked hard to balance and grow our sales and profit outside our busy Christmas period. It did become a bit of a focal point for these meetings, and I'm pleased to say that we've been able to reorientate the business and achieve profit and sales across many of the months -- all the months across the year, taking the emphasis off Christmas. That said, Christmas was actually very successful, for those who are wondering, and that's despite losing a key public holiday, which was the old Emperor's birthday. And for those that are interested, the new Emperor's birthday is actually this Saturday. EBITDA has grown. I think the 2 main factors: higher sales through more relevant marketing and really renewed brand strategy; secondly, we benefited from the sell-down of corporate stores as we look to grow our franchise partners in regional locations where, in most cases, where our overhead structure doesn't actually make a lot of sense. We're growing at a really fast pace and it's been mentioned before that some of our profit has been partially offset by the investments in our new corporate stores. I'll add a little bit more color on this, if you come along with me to the next page, Page 35. Just to orientate you then, if you look at the bottom right here, the exciting cadence of store growth that we have achieved, and as I mentioned on the Investor Day last October, for those of you who could attend, we've been accelerating store builds through our fortressing strategy across key areas in Japan, like Tokyo, Osaka and Nagoya, in which we operate the majority of our corporate stores. We do expect sales to continue, to improve, as our local store marketing plans, our print strategy and just overall better delivery times gain momentum and the stores naturally mature in each newly defined territory. If you look above this chart, this acceleration has really bolstered up our online engine room, as I said before, 17.1%. And really meaningful, if you go over to the left, as that has an impact on our total network sales as well. Coming over to the next page, Page 36, a little bit more detail about how we're performing from a marketing, operational franchisee perspective. The growth in store sales, our stores [ in South ] have led to an increased marketing exposure, not only just with print, but across many of our channels, including search, owned and some of our -- even our owned media channels. But TV, being a very big driver of sales has -- we've been investing a lot on there as well. Now one way to think about that, if you think about 2017, we're about 50% more TV and reach, in terms of frequency and reach, than we were in 2017. We're still committed to fortressing and Project 3TEN. We've seen ADT, average delivery time, drop by 1.2 minutes since this time last year. And furthermore, our franchisee base has really seen the biggest improvements in ADT as they really embrace this long-term strategy. Speaking of franchisees, we've seen really renewed demand for our new stores as well as our existing corporate stores. And whilst it is 43% of the system, and that number hasn't materially changed, we did add 21 stores to the franchise network, which actually means that we've got 276 franchise stores. You will see that this is all internal. We do not go external for franchisees, and you see the biggest growth has come in from the 3- to 5-store franchisees or the 6 or more as you look half-on-half. Finally, if you come to me to my final slide, which is 37. Like last time, yes, we're really committed to the Barbell Strategy as we look to access more of this single household and this 2-person house, which actually makes up 50% to 60% of the population right now. We will continue to open more stores and continue to invest in platforms, both globally and locally, where it makes sense. We'll also look to leverage the existing channels that we have. We've got over 1 million users, active users, on our Coupon Apps and some of the other assets that we have. That said, operations, it really is the heart of our business, and we're going to also spend some time investing in some of the operational technologies. Our predictive ordering is actually now in Phase 2, and that gives us a lot better accuracy, which means that we can dispatch orders faster to the customer. We're trialing Uber Eats. We've been on aggregators for 7 or 8 years now. And Uber Eats is the new player in the market. They don't cover all our restaurants, but we will trial them just to understand how this will work. And as they grow, we'll grow with them as well. Finally, we're bolstering up our leadership in the market, especially as we grow and franchise. We've got a seasoned 15-year leader from the Australian market who's run a number of markets -- key markets quite successfully here in Australia. So we thank you to Nick, for again giving up another person. Hopefully, we'll be able to pay you back pretty soon. From a business point of view, we've continued focusing on females in the workplace. That's not a new strategy, that's been going on for some years now. But we are trying to look for ways to embrace the plus 60-year-old market, which is now going to be one of our largest employment pools as the aging population naturally gets older. But this is also in light of the proposed changes by the now government to raise the retirement age from 60 to 65 to 70 over the next 3 years. So that's it from me. Thanks, everyone. I'll now pass it back to Don for closing comments.

Thank you very much, Josh. Thank you very much, gentlemen. So if you come with me now on to Slide 39, just reconfirming our future outlook of store growth, the various timings just from the maturity of different markets, hitting different targets. And so we still strongly believe we're on track for more than 5,000 stores in that window of 2025 to '30. It's not lost that we now have a group that services 340 million population around the world. The GDP of those nations exceed that of China. So we just have so much capacity, and it's so amazing to also watch the more recent countries to our group, like Japan and Germany, being such extraordinary performers. We will continue to leverage the efficiencies. There will be some ebbs and flows, as you've seen in this half with our -- with the corporate store density. We do intend to be a majority franchise system, although at any time if it's appropriate, then we'll have a higher corporate store element as we continue to pursue the growth. We do remain active in acquisitions. They're all Domino's acquisitions, so whether they be another country, and we have a number of those that we're working on; and in some cases, it can still be, as we've seen in Germany more recently, conversions. And they're both underway in conversations, and that will continue. We look -- if you come with me on to Slide 40, I want to also reconfirm that 3- to 5-year outlook, be it that will be on the higher end and may even get to the point of exceeding that higher end in our CapEx and depending on the timing of recycling some loans that Mr. Coney is working on in our group. If you come with me now on to Slide 41. We want to talk to the environmental social governance of our business. Running as hard as we do, we often don't give enough communication to the market on what we're doing in this space. We want to get better at that. We are recruiting somebody to be now a head of this area for our business so that we can bring more focus to sharing with shareholders the work that we're doing, and also bring the metrics to market that could be consistent, that we can measure with complete accuracy for disclosure of what things we're doing. And just some of the highlights of some of the projects we have been working on. We're continuing to increase the electric vehicles, including electric bikes throughout the network. That's quite significant. We're adopting smart load controllers in our Australian stores for better energy usage here. We're using smarter ovens in our stores for better energy usage, which is something we're working hard on. We're improving, on an ongoing basis, the quality and the health of our ingredients, reducing artificial flavors, preservatives and colors in all markets. And we are also engaging external consultants to make sure that we can improve our efforts in this communication as well. So I hope with some strength in the leadership in this space that we can be better, and our communities and our shareholders are expecting that of us and we will deliver in that area. So in conclusion, on Slide 42. Management is really looking forward to this next stage of our future growth. We really thank you, Andrew, once more, and glad that you're here on this roadshow to be talking with shareholders. And we've got an experienced team across the board here, very committed to this business, including myself. I celebrate 33 years this coming month and love the passion and the energy in this business as much as ever. The Japanese business continues to be strong, with significant investment being made by both our own investment and our franchisees. So some really heavy lifting in our store count along with Europe and even Australia and New Zealand contributing this half. We will have a record organic growth full financial year. Please be aware that June is that strong month that will flow through. Online is a power house. It will continue to be a strong growth layer in our business. We are both investing in further adding to the current platforms, but also investing heavily now in operational technology to improve our service for our customers and make our stores more efficient. We do expect that profit momentum will also continue in this half. The high-volume mentality, the DNA that has been the large driver of our business is going to be continued to be driven in our business. The demand from our customers for affordable, high-quality food delivered fast and safely is our model and will continue to be a strong driver. And we'll be -- we continue to work with our franchisees on the execution and also our store managers and team members. As a result of increased franchise engagement, we are seeing the adaptation of these operational efficiencies and that's strengthening our business into the future and we believe it's creating competitive edges as we roll out this technology. Accordingly, due to the investment in our stores and franchise acquisitions and the new commissary, there will be a higher investment in CapEx this year, either at the higher end or just slightly over. And we're reconfirming our outlook. It's not a guidance. It's an outlook. It gives some sort of perspective of how we think that we can deliver a double-digit top line. And then that -- with the timing of corporate stores, that should flow through to improved margins to deliver the returns to our shareholders. So yes. Finally, we will continue to look at other acquisitions. We're enjoying a really strong relationship with DPZ today. Some of you will probably get to meet Mr. Ritch Allison, who's coming to Australia in the next couple of weeks. So we're going to have some exposure to shareholders with Ritch and myself hosting some shareholder meetings here in Australia. And hopefully, you get to see the strength of our relationship as we build Domino's network globally. So thank you very much. At this point of time, I'll now hand over to the moderator and -- for any Q&A.

[Operator Instructions] The first question we have on the line is from Andrew McLennan from Goldman Sachs.

Congratulations on the results. My question is in relation to the operating leverage in Europe. It was very strong. And I know historically, you've mentioned that the potential to drive operating leverage was going to be very strong out of France. But based on your commentary, it sounds like Germany might be the driver here. Can you just sort of speak to what is actually driving some of this operating leverage within the region over this half?

Yes, sure. It's actually been across the board. So when we look at all of the units, we talk about the Benelux, Germany and France, all of them have contributed. Actually, from a percentage point of view, France still was the largest because of the wind-back of some of the support that we're unwinding in France. So that flowed through. But yes, Germany has the -- well, it's growing, like we've talked about today, incredibly. We do have the step-up of royalties that we were given from DPZ when we acquired the market. So that's a little bit of a tax against the really strong performance and just the continual work of -- that Stoffel and Andre and the team are doing to lift the knowledge and skillset of franchisees. So we make sure we're investing some of this at the same time. But yes, the genuine view is -- or the general reality is, all 3 areas are growing. Andre, anything to add to that?

No. No. From a store count perspective, we see that there is a hunger in Germany for existing franchisees to open stores, but there's also a possibility for them to take over stores that we converted out of the Hallo and Joey's systems. So organically, France will open more stores, but growth in Germany is exceptional, driven by the playbook that we've used in the Benelux.

Okay. And again on margin, just noting the pretty dramatic change in Japan, very strong comp store sales growth, which should have drive -- driven operating leverage. You've noted corporate stores as a factor. Was there anything else? You mentioned a lot of advertising spend that has been taking place. I'm just wondering, have you invested ahead of the curve or have corporate stores actually diluted the performance that materially?

No. Look -- it's Josh here. Actually, it is actually just all corporate stores. There's a number of start-up costs that go into that, that takes us time to get all the training down, find people, get them trained well ahead before we open the stores. So it's really just related to those start-up costs for corporate stores.

The next question is from the line of Richard Barwick from CLSA.

I just -- obviously, you've talked about record store openings, and I'm pretty sure you said you clarified or at least you're confident hitting that 7% to 9% growth in store numbers for the full year. That's obviously store openings. I mean, one of the surprises a little bit, at least for me, was the number of store closures in the first half. Can you talk to expectations around store closures for the second half so we can get a clearer idea of what you're expecting in terms of net store openings? And also, I'd love to hear a bit more of an explanation. I mean you talked about it time and time again about how you end up with store openings heavily skewed to December and June. Why is that? And is that just a reflection of people being, I don't know, leaving things till the last minute, being disorganized? Does it encourage the wrong behavior, everyone's scrambling to open stores in the last weeks of the period? And how do you actually -- or how can you mitigate that?

Yes. So a number of different things there. We don't expect any notable store closures in this half. That was really -- the majority of those were Hallo that didn't convert in the last half. So yes, we do expect to be able to have -- we always give an outlook to organic, but you're going to see that, that's going to still be reflective also in net for this full financial year. But coming back to -- as long as I've been around, it's been a December-June business. That's not just exclusive to DPE, that's what happens globally in Domino's, with the rare exception. So when there's a heavy corporate growth market like Japan, you'll see Japan is, by far, the most consistent. And the rest of the businesses, which are more franchise, are half to half. The only things we can continue to point to is that the franchisees do also think in halves. The banks seem to think that way in the way we close things out. So it's not a -- it's a Domino's factor. And because now we're breaking it out, it's a little bit more obvious for you to see that. I don't expect it will change because it's been that way as long as I can ever remember. And ultimately, we're still getting them open, and we're growing the business.

Okay. And can I just ask, your average stores per franchisee fell in both France and ANZ. And ANZ as the -- is sort of the big mature market. You seem to be having trouble budging that number. I get what you're doing in terms of the Project 360 and taking on more corporate stores, but I also thought you -- we might have started to see that flow through in terms of actual lift in the number of stores per franchisee. How do you expect that to unfold over, not just the second half, but over the next year or 2?

Yes. Nick here, to answer that one. You'll see that there was a material lift in the 2 store category and the 3-plus. And whilst there was a slight decrease in the 6-plus category, I still believe firmly that, over time, performance and operator passion in stores will be able to drive that number upwards. And just because you own a number of stores doesn't necessarily mean that you're still fully engaged and still passionate about the business, and our focus is making sure that, that is the primary focus. But I just want to reiterate that we still believe, over time, that, that target is achievable.

Okay. No, I'm watching that as much as anything as a sense of franchisee -- strengthened franchisee support. Do they want to be taking on more stores? So to me, that's a bit of a proxy for -- maybe it's a too strong term, but some sort of proxy for franchisee strengthen and commitment to it. And so that's why...

Yes, the other thing to weigh into that -- sorry Richard, it's that a lot of the growth is also coming from managers becoming franchisees for the first time. So obviously, they start with one store, that dilutes into those numbers, too.

Yes. And you heard all of the tenure of the leadership around the room, and that continues even in other markets where we've just brought on a new corporate guy in Germany, for example. He was one of our largest franchisees. He had 10 stores -- sorry, 8 stores. So that, unfortunately, sometimes dilutes that other number at the other end, but it's the right strategy. The tenure, the experience, the way to lead with empathy. So from time to time, you'll see that little indent come from the 5 category because that's where we source our best leadership.

[Operator Instructions] The next question we have is from the line of Michael Simotas from Jefferies.

The first question for me, I was just hoping we could talk a little bit more about the Project 360-related corporate stores that you're carrying in ANZ. Are they profitable for DMP at the EBITDA and the EBIT line at the moment?

Michael, Nick here. Well, many of them are, but as -- I mean, I guess the best analogy I can share is that we're running a bit of an orphanage, and no different to what you're seeing in Japan in terms of opening a new store, it requires a lot of investment in training and initial marketing. When you take on an existing store, especially if it's been under an operator, it does require an initial level of investment. So depending on where they are in that cycle, it depends on sort of to what extent they do contribute to EBIT or EBITDA. But what is true is that as we continue to improve the performance of those and, like I said in the presentation, they do continue that group of stores to be a shining light for the group in terms of sales and operations. And what happens is we refranchise those out. And inevitably, that becomes profit on sale.

Yes. Yes. Okay. I guess, the reason I ask, and I mean you can just talk in aggregate, that's fine. If they're not profitable for DMP at the moment in aggregate and you continue to do the work on them, get to a point of profitability and then fill them on, you obviously get the profit from the store sale, but then you didn't lose anything relative to the base currently. But if they are generating EBIT and EBITDA, you get the profit on store sale, but that's a kind of onetime benefit, and then you lose the ongoing contribution. So I'm just trying to understand whether that ongoing contribution is actually positive or negative at the moment?

Yes. So I might even jump in there, because this happens globally. So as Nick said, you bring it on, you spend on training, you spend on marketing, you spend on refurbing. And in that window, you're growing it. By the time we hand it to a franchisee, we do hand it over in a profitable state. Sometimes, that may even be still with some minor support if we believe that, rather than -- if we've been driving it with some extra marketing and we should give it some extra marketing to hand it over. But in most of the cases, we're handing it over in a profitable state. And when you look at the portfolio, we sometimes even keep a couple of them. Some of the ones that we took back last year have become such rock star stores and a field for us to grow our people that we actually even hold on to them longer because they became a nice farm for growing more store managers and so on because they're so successful. So our portfolio moves around a little bit. We want to have a mixture between stores that are stable. The one underneath our head office in Brisbane and Hamilton is a high-performing store, and it's a growing ground and so forth. So we look at that in each market, whether it be Sydney, Melbourne, Brisbane as our major corporate markets, and we keep some of those; and the others are basically what we are refurbing to bring back out into the market.

Yes. Okay. That helps. And then that sort of brings me now to the next question. It looks like you've made about $11 million during the half on profit on store sales. Just like to sort of get into the detail on that a little bit, if we can. Is that a function of refranchising some stores? Because, obviously, we only get to see this start and endpoint. We don't know what the moving parts are in the middle. Or is it just a function of the heavy store rollout that happened in the half?

Yes. So predominantly, that's just business as usual for us. And it is sort of split across our globe in Japan, Europe and ANZ, and it's refranchising and selling those, let's call, turned around corporate stores, or in the case of Japan, what happens in Japan, and Josh can jump in, but the Japanese franchisees prefer us to open the store and then sell to them as a turnkey. And then, obviously, we do make a little bit of goodwill on that because we've done -- taken that big risk, and they're buying a store that's already got a track record. So yes, there's a -- but this is not a one-off-type offer. It comes about through our growth of new stores and building new stores, building corporate stores along with -- in Australia, selling down some of the stores we've taken back from franchisees.

Yes. Can you give us some color on what we should expect going forward, because it's a much bigger number than what it was in the PCP, but it's more in line with what we saw in the second half of '19? Is it -- [ has this got a ] run rate we should see?

Yes. It ebbs and flows depending on what's happening in market conditions, but we expect this to continue for a very long time, if not...

When we say that we've got pent-up, our balance sheet can't say that because we can't value the -- on our balance sheet the real value of the store when we're going to sell it. So that goodwill is sitting there. Yes, so what you're seeing is, because we are holding so many corporate stores in Japan, Australia right now, that is pent-up profit that we're going to release in the next 18 months. But in Japan, and as Richard said, we're putting our foot to the floor right now because we're getting such good momentum. There's never been 1-000 store brand in Japan for pizza. And 1,000 stores seems to be the breakaway where you watch all the brands go to another level. So we're pushing hard with that. And that just means that we've got a bigger weight in our portfolio. But that could ebb and flow, too, because unemployment is quite low in Japan. And if we get under pressure with staffing those stores, we'll slow it down because it's still about operating successful stores. And -- but yes, that's all pent-up property in our balance sheet right now.

From a financial sense, speeding up growth in corporate stores in Japan does impact our margins.

In the short term.

In the short term. Yes. So it's just a, you're going from a store that's on the ground new, it's got to get customer acquisition and it takes a little while.

The next question we have is from the line of Craig Woolford from Citi.

I just want to step back to the announcement in December about the decision to in-source food purchases for Australia. Can you just provide some more rationale for that decision and what implications we could see for the Australian business?

Yes. It's basically for better efficiencies. There's a little tiny bit of margin in there for -- that we can pass-through the stores and just being in more control of that, which is similar to what we've got in Europe. So that was the main motivation, is the transparency that we're seeing all of what happens between the business partner that we do a contract with and our distributors to make sure that we're in tighter control of that and own that destiny. So it's been something we've been thinking about for a while and then we saw a window of opportunity to pass-through some efficiency to franchisees. It's very small on a per-store basis, but it's still margin. It's still margin worth going after. And the bigger we get, some of these small incremental things still mature enough to add up to the group, so we pursue them.

We make the admin a lot more efficient and effective for our -- both ends, from our end and also our suppliers and distributors using a lot of our back-end technology, our ERP platforms.

Okay. So there is definitely a cost saving at the back end for the business? But that wasn't an issue about, let's call it, compliance for franchisees and their own food purchases?