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

Good evening. I can see the attendees have now joined the meeting. Thank you for joining the Domino's Pizza Enterprises 2020 Investor Day, which is brought to you virtually this time and due to COVID and travel restrictions. This evening, our purpose is not to provide guidance or to provide a trading update. Instead, it's to answer the key themes and questions that we've been receiving since our last update to the market. I understand the attendees have been able to access the video this afternoon. I hope that's been a value to you. With that, I'm going to hand over to our group CEO and Managing Director, Dona Meij. But before I do so, just a reminder, if you're looking to lodge questions, because this is a Q&A session rather than a presentation session, please click on the Q&A down the bottom. We will see those, and we'll be able to answer those in turn. Over to you, Don.

Thank you, Nathan, and thank you to Josh and Andre and Michael and Nick for being here with me today to help answer some of these questions. I hope that you found the presentation this afternoon insightful, and Nathan, one of the benefits of, obviously, having a proper investment relations in Nathan is that we've been scouring the sort of major themes that we get every 6 months, and we try to do our best to answer in probably an increased amount of disclosure and transparency than in previous years. So I hope you found that quite helpful. I think from a business, we're clearly still in a very fluid COVID environment, where rising cases as we've seen in recent weeks in Europe and rising cases in Japan with what's happened in Auckland and Melbourne in this half. And even to some degree [indiscernible]. And so as a business, the same metrics that we talked a lot about at the full year and at the AGM are still in play that we are seeing a big driver across the business in digital delivery. In most of our business, whenever we see lockdowns and curfews, we are seeing a reduction in the carryout business with the exception of Japan. Japan has a very strong carryout delivery business and just to talk to the reason why because there's been some strategic things that have been implemented there in Japan. But yes, this is a fluid situation. We've had a lot of questions around the cost that we're seeing, increased costs, and we know now that some of our peers have talked about increased cost to their business. We're not seeing those increased costs in this half. The costs -- they're roughly $14 million in the last half of the last financial year have now appeared to be more one off. Of course, we're still fluid and things could change. But as we said today, we're not seeing the sort of material costs that we saw in that last half. I can also share that without a doubt, the 2 biggest outliers in our business have been Germany and Japan, and they have been quite significant outliers. A data point I can point to in Germany today is that Germany now has the highest average weekly unit sales in all of DPE. That may change over the Christmas period when Japan does its normal extra rally. But on a constant weekly basis, right now, Germany has -- is now the highest average unit sales in now around countries. Which is quite significant because it came on just 4-plus years ago at one of our lowest average weekly unit sales and so the integration has gone exceptionally well. And we're now well ahead of our long-term plan from a sales perspective. The store count at this point, as we look back 4 years ago, we thought we'd be a little more ahead than where we are. But as we've highlighted as being due to the franchisees in the business, buying up even other franchisees who maybe didn't buy into the Domino's vision. Now that's now changing, and you're starting to see the increase in store growth, and we do expect to have a strong year in Germany of store growth. In fact, we're going to see a strong year across the business for store growth, I'm sure the CEOs can talk to that. It's going to be material and material beyond just only the catch-up that we saw from the stores that did not open in the last part of last financial year. And the gear shift change there is largely out of Japan, Germany and France. Before I move over to Japan, we often have talked in our business that we service 340 million population approximately today. If we look at the last decade, a lot of the heavy lifting was done in that profit growth from Australia and New Zealand and the Netherlands, whereas today, whilst those businesses continue to perform well, the really big shift in earnings is coming from the Japanese, German and now even the French business as we're seeing the increase in store growth. I'm sure that Josh will talk a lot about Japan today. We really have seen a big shift in that business in like 34 years now, I haven't seen the sort of performances that we're seeing out of Japan. And both in Japan and Germany, because they're such large economies and large populations, we are taking a different approach than we would have had in the Australian business and the Dutch business where there are small populations, and we can easily run them from [indiscernible] or from Brisbane. But these businesses now -- we're definitely getting a lot more depth into the field. As a business we're developing a lot more development team members, like in Japan, Germany and France. So we've increased our development team as we expand more out into the regions. But there, there's just been a serious step change. And whilst we can't be absolute on how much of it is COVID and how much of its management, we do analyze with our Board that we do believe there's a significant, a number -- amount of the results are coming from management initiatives, and Josh can talk to at least 4 of the really big initiatives that are driving quite a big change that we're delivering in Japan. So we will see higher score growth. Japan will lead that, followed by France and Germany as a group. And at this point, I look forward to handing over now and answering some of the Q&A with the rest of the leadership we have today. So thank you.

Thanks, Don. The first question is -- I've got two related questions, one from Sally; and one from Ben Gilbert. The first is what are the key impediments to rolling out stores by market? Is it good -- getting good management to run the stores? Or is it property constraints. And similarly, on the store rollout from Ben Gilbert, but how are you seeing the appetite for new stores from both new and existing franchisees, particularly for company-owned stores.

So I'll just give a macro answer, and then I'll hand over to Josh, Nick and Andre on this, is that in some of the markets, we are seeing distressed retail, but not all of the markets yet. So we haven't seen distressed retail yet flow through in Germany, although we expected to follow and there's been some government support there for the businesses that have kept them going so far, but that's now being wound back and Andre can add color to that. But in the rest of our business, we are seeing some distressed retail, so that's helping for location. We are also seeing really strong unit economics as a whole for our business, and that's motivating franchisees, whether it's in Australia or an existing franchisee looking to buy out another franchisee neighboring or buy some of their core stores or even open some stores or just the surge that you're seeing now we're, probably for the first time, watching Japanese franchisees open their own source rather than just buy our own stores. So we're seeing a combination going on there. But in more detail, I might even start with you, Josh, and then we'll go ahead Nick and Andre.

Yes, sure. So very similar to last time we chatted, yes, we talked about, well, what are the barriers, and you look at sites, and there's no problems with sites. In fact, there isn't distressed sites, but there's just a normal amount of sites available. We're not seeing that distressed sites coming our way just yet. We look at availability of staff to open those stores and what our pipelines are internally because we are a corporate business. And then we look at availability of franchisees and what they're doing in their business. And we don't see anything slowing us down at this point. In fact, I kind of liken it to the franchisees, as Don said, it's like starting another engine within the business. And there's actually appetite for both franchise and corporate stores. They're very keen to open more stores and sell our franchisees, and that's a nice balanced rollout plan for us. So we don't see any real reason why we can't keep expanding at the same cadence of what we are right now. I'll pass over to Nick or -- for comments on Australia.

All right. Thanks, Josh. Yes. So when it comes to new stores, there's a few moving pieces for us. And as Don mentioned, we've certainly seen improved unit economics for our franchisees. And that's inspiring them to take a lot of different opportunities. Some of those opportunities are quick wins, taking on corporate stores in our network. Taking out underperforming franchisees where franchisees are seeing opportunities in those stores and then obviously opening [indiscernible] pipeline attached to it. In many cases, it's not just one store that's been the territory being used to do another. There's many different pieces that are involved in that. And then that one -- from start to finish, that process is, in many cases, 6 to 8 months. So seeing a ramp-up of that kind of behavior across the network and good interest from not only franchisees expanding their networks, but managers becoming franchisees for the first time there, too. So when it comes to the new stores, I guess, just to reiterate, that it's more of a time and complexity of putting all those pieces together, finding the right site, and that's just a bit more time involved than franchisees taking other opportunities in the market. Andre Wolde Senior Key Executive Yes. For Europe, sort of everything has been said, the impediment is getting enough good managers and good franchisees to to grow. But fortunately, we're having a bigger and bigger base every time we talk. What we've seen is that there's been a delay in getting permits because local councils have work from home, and that hasn't really aided the process. And we've seen a delay in getting utilities because construction companies who have put the gas pipes in and getting us the electricity in stores have not been able to work as effectively as they have before. But looking at our pipeline in Europe has never been as big as it is today. And so it might take longer, but still, those stores will open. Distressed retail, we've not seen a lot of that, and that's because of a lot of government aids to business that are still running, but we're expecting more of that maybe in the second half year of our financial year. But so far, we expected that earlier, but it didn't really materialize until now.

And the last one I'd make on that is there's no exception this year that there will be a lot of stores that opened in Europe and ANZ in the last week of December as they will be in the last week of June. Japan is once again the exception, it seems to be able to open stores more consistently. But yes, if you're thinking what the store count is going to be, wait up right until the first few days of January before you decide, see the final number for the first half.

Thank you for that. Just a follow-up question on that from Michael Simotas. You reiterated, aimed at store expansion targets and when do you expect store openings to resume at pace?

Yes. So I think I kind of touched on that before, but I'll just reiterate for that question, is we're seeing a little bit of consolidation now on franchisees taking on corporate stores and also underperforming franchisees that they see opportunity in. And then there's also great interest in new stores as well. But that takes a little bit of time to ramp up. I think you'll see a moderate increase in this half with a much bigger one in the next. And then I expect that to increase going into the next year. And the one caveat to that, of course, is one of the challenges right now is with the lockdowns. We haven't been able to get to a lot of sites. We haven't been able to get contractors and trades in to be able to start construction in sites in, say, Victoria and Melbourne. So those things do create temporary headwinds, but they're not changes to the strategy, just pauses.

Nick. Now just turning to a couple of questions from Japan. The first is, in relation to the store openings, are they coming from existing franchisees, taking multiple stores or more individual new franchisees. And on the same topic, what's the target? Or do you have a target for franchisee corporate mix of the network in Japan?

Okay. So to answer the first one, which is around what is the mix of -- are franchisees expanding themselves? Or is it new franchises? It's actually both. We're actually going to see a record number of new franchisees coming to the business this year or we've already hit that record. And then what you're also seeing is franchisees expanding their own portfolios. And it comes in and out. But we're -- at this point in time, we're sitting anywhere about 2.8, 2.9, which is a materially bigger like I suggest that might dilute as we bring on more franchisees and more stores, but at this point in time, we're seeing that growth from within, which is really exciting. And just to remind everyone, we do not go external. It all comes internally. So derisk is our store openings. And what we're seeing is that, that actually feeds into higher sales of the opening. And we continue with those sales because we've got experienced staff and franchises, new franchises in the business. In relation to the second one, it's a comment and a personally comes up a lot. And the standard response is, well, where it makes sense for our overhead structure to open more corporate stores, we will. And there's plenty of spaces we can do that even within the existing portfolio. But what we're seeing a lot of success with is some of these regional areas. And we don't really put a number on what franchise and what corporate is, it just got to make sense. Given the store unit economics that we we are running right now. An example, and I think last time we did this -- we did a Japan Investor Day, we had a discussion around Hokkaido and we didn't have the right model back then we were thinking about Hokkaido. But now, we opened Hokkaido last weekend, and we have the right model now. And Todd spoke about on the VO that the -- if the pricing models, those access points to the brands and different ways people can enjoy our brand and we've lowered all the risk. They can come get a delivery from us or a carry out, it doesn't matter. And then we've also got back a house, which enables us to do a cheaper supply chain. And all the other strategies that work in our favor and Project 3TEN is a big part of this. So it's not just one thing that we think about. I know you want to target on corporate and franchise. But overall, we'll explain where the -- wherever we can. We don't see a reason we can't go penetrate all the areas throughout Japan now. And with our new model, all areas are in play now. Where previously, we'd probably say, well, look, because we don't have a franchise model and because the overhead structure doesn't work through us out in these Northern regions or these Southern regions, we're not going to expand there. Now we don't see a reason that we have to hold back anymore.

Now just in terms of customer retention during this period, again, a couple of related questions. The first is from Michael Simotas. Our presentations highlighted the data that we were gathering. And what is the data telling us about the proportion of growth that's coming from existing customers versus new? Are we seeing signs that are likely to retain new customers? And as a follow-up to that is [ Ross Curran ] is asking about the outlook for home-delivered food. Essentially as a vaccine gets rolled out, does that see people eat more food out of home? And is that a headwind?

Yes. I'm going to start with the first one and then hand over to Andre, followed by Josh on this is that in our belief that we've literally fast forwarded the age of delivery. So the trends that we thought we might see in 2 or 3 years from now, we've been able to obtain these new customers that are trialing digital delivery for the first time. And we -- and I'll let Andre and Josh point to real evidence that we can see that we're attaining these new customers is that we think that that's quite fixed. And whilst we're still going to have carry up strategies, and we're going to go after pick up customers, our view is over the next decade, the pool for pick up customers is going to get lower and lower because the market is shifting to delivery. So there's still a big carrier market. So it's still worth going after that carrier market there, and I'm sure we'll still be chasing carryout customers in 10 years from now. But by far, the bigger driver is digital delivery. And even with the vaccine, we still believe that, that still is the momentum. That was the momentum pre-COVID and it will be the momentum post-COVID because we also are attaining a lot of these new customers. But maybe, Andre, you can give some evidence, importing from the video or other?

Yes, yes. What we've seen in Europe in between the 2 COVID areas basically over the summer, we saw that delivery remained a lot higher than it was pre-COVID, we also saw a lot of new customers that, in all fairness, that is hard because it might be a lot of previous Domino's pick-up customers that just were walk-ins that now ordered and that we started to know who these people are. So they are new for us for delivery. But they're not necessarily new Domino's customers. But we did add a lot of new customers to our business, too. So in between the 2 COVID moments, we didn't see a slowdown in delivery, which it's hard to look in the future. And it was a short period. But that makes us believe that we just brought the age of delivery forward, and people started to understand the convenience of delivery. We also shouldn't underestimate that we -- before COVID, we had issues staffing our stores. So we were -- in some markets like France, focused on delivery because it's less labor-intensive. But with COVID, we've managed to staff our stores and also offer more value to the customer on the delivery part. So I think the biggest reason for carryout is value. But now, we're offering that value, and just going to add to that how he's done some really big changes in his system to offer more value on both sides, pickup and delivery. But I think people will understand the convenience of getting the pizzas delivered at a great price and might not necessarily always going to pick up. So we'll keep that delivery. And we'll find ways to be very aggressive on pickup again to maybe tap into another customer base.

Josh, do you want to expand on that? Or you want me to go...

Over to you, Josh.

[Audio Gap] and I think with the vaccine and things like that, we've been able to convert the eyeballs that really came to us through that COVID period. And it still continues to some point and try to convert that into a way where we could play our own game and put in our own strategies and make sure that there is all the concerns that customers previously had, and we talked about our [ capital ] strategy and we talked about these access points for our brand and ways to educate people in Japan, even on pizza because pizza is not a staple. It's not something that people run out and get as much as they would a beef bowl or some sushi or something like that. So we feel that there's an opportunity to structurally change that pricing structure with no minimum delivery, which opens up [ middle of the task ]. It opens up all these different occasions that then lead on to other occasions because customers aren't one-dimensional, they're multidimensional and need us for multiple things. And we are going for -- we are executing against not only the delivery strategy and providing a lower access point for people to come in through that door, but we saw the need to lower our entry point for carryout. And that's through [indiscernible] which is half price carryout. And again, [ answers the middle of the task ]. It takes away the risk. And we were very high priced and now people come and enjoy us for a much lower price than what they previously could get in. And then that leads to other occasions and other things and other reasons to talk to them. And of course, we get their data, and then we can talk to them in different ways and ways they want to be heard from us. So really speaking, I don't see -- the vaccine is one thing. But I think structurally, we've got the right model in place to continue the growth that we have. And the customers are enjoying it. And the frequencies, it's showing in the frequency, it's showing in the new customers that are coming to experience the brand, and it's showing even the conversion, which is the first repeat purchase after they come to our brand for the first time. We're seeing all those metrics positively enhanced through this period. And as I said, structurally changed it. So COVID is now -- will come and go, but I believe we've got the right model to keep pushing through.

And anything else you want to add from Australia and New Zealand? You want me to go, Nick?

Yes, I'm just trying to support, Josh. I think we've covered off a lot and Australia isn't much different to what's been said. We're seeing a lot of people we now have clarity over that were potentially coming to us off-line that are now delivery customers, and we're now getting that richest of data and being able to communicate with them. And then, of course, with the very heavy value offering that we have, we traditionally would carry out. We may have seen a lot of those customers potentially shopping at supermarkets and cooking at home. So as things return to normal, and we're able to provide that value proposition for carryout, we see them return back to the business as well.

And reinforcing the delivery on what Nick's saying for Australia and New Zealand is that when you've got markets like Tasmania and Western Australia, Queensland that have had no COVID cases for long periods of time, we still see a constant digital delivery growth. That's still the engine for those markets without COVID in their markets.

Just in terms of we've been talking about carryout and delivery, a question from Craig Woolford. If you can clarify the approximate proportion of carryout versus delivery for key countries, Japan, Germany, France and Australia. I know we haven't provided that previously. But perhaps Don might be able to give some color to that.

Yes. Maybe -- sorry, Craig, to dance around on that one right now, but maybe we can consider that for the February announcement there. Very few markets that were -- used to be less than 50% delivery are now not getting close to 50% or more. So New Zealand, Australia, France, Belgium were all well below 50% 18 months ago, 12 months ago and so on. Now they're all encroaching on 50% more on delivery. So there's been a real genuine shift change. It should be noted that out in Germany, one of the reasons we think Germany has done so well is that it was already mostly delivery. And so it's just been -- it didn't lose any carryout that didn't have to lose and it's just net added -- just a big increase in delivery at the same time. But yes, we'll consider that and talk about the breakdowns for the full year result, where we can give it more accurate rather than talk about a month or 2 weeks or talk about a whole period.

And speaking of Germany, Grant Saligari is asking in terms of this comparison of brand awareness in Germany and the Netherlands, noting in the presentation the much higher awareness in the Netherlands. The question is how long did it take the Netherlands to get to its current level of brand awareness? And what were the factors that led to that? And does that give you an indicative time line for Germany?

Andre?

Yes. Hey there, it's still continuing in the Netherlands. It didn't stop. We want to get even, more brand awareness. But I think it's fair to say that we are expected to be a lot quicker in Germany, just not for the reason that we're smarter in what we're doing, and we're copying a lot of best practices into Germany. But also, we've invested heavily in media, so we'll see a quicker return. Our regional presence is increasing, and we've also adopted a different strategy in looking at Germany more like it's for Netherlands instead of one big country. And I think that in that way, we can aid the brand awareness a lot quicker than we used to do in really -- and even in France, we always look at it as paracentral, and we run everything out of there, and we started changing that as well to be more present regionally. So I think the short answer is we'll be a lot quicker than in the Netherlands. You saw the presentation from Nicky. All the great things that we've done in the Netherlands, and although there are 2 different markets, the learnings are sort of the same in the way we look at it. And we won't make the same mistakes as we did in the Netherlands. So I think it's going to be a lot faster and we'll ramp up store openings faster than we did in the Netherlands. So I'm thinking -- I'm hoping we could do it in half the time than we did it in the Netherlands.

A question from Ari from UBS. How has franchisee profitability performed globally? I know you're not happy with the level of profits.

Yes, we always have put ambition to -- we don't just [indiscernible] say, well, that's as good as it gets. I think we just continue to drive. And we know that it's a self-feeding fire that for the engines that the more you can make franchisees profitable. So we always continue to drive the ambition to get even better. But there has been double-digit shifts across the business. And for obvious reasons, Japan and Germany by a lot. I mean they have really, really changed in this year. We're talking very material numbers with the rest of the business showing strong improvements. Even when we've been in these lockdown periods and same-store sales haven't been as strong, profitability has typically been quite strong because we still got really good ticket averages. So for a leverage for franchisee, that's flowing through to good food and labor costs. So yes, metrics across the board have been pretty good. With the rare exception, we're talking averages in, there's the odd exception that we've talked already about Downtown Amsterdam or Paris or Melbourne CBD or Sydney CBD where the -- this doesn't have the audiences today. Or even for all the tourist locations in Australia because Queensland was rocked down. [indiscernible] CBD, for example, hasn't been as buoyant, whereas [indiscernible] was trading and [indiscernible] continues to trade [indiscernible] or so on. So you've got these sort of ships that are what we've already shared, and they're still constant today. But did I -- sorry, the second part of the question? Did I answer that question? Anything else?

Yes. I think we've covered that one. In terms of -- just in terms -- I think it's probably a related topic to profitability. Does the company expect to be utilizing the Australian government incentive programs such as JobMaker and instant asset write-off programs?

I'll hand over to Nick.

Yes. So certainly, we're not as DPE in our corporate stores or in our business planning on utilizing those things. However, our franchisees may, depending on their circumstances.

Just in terms of some of the promotions that have been mentioned, Johannes has asked whether the cost of the free pizzas for signing up to Domino's app is covered by DPE or shared with franchisees? And similarly in Japan is the elimination of the minimum order value, is that a franchisee paying the cost for less profitable delivery? Or is there a support from DPE?

Nick, on the first one?

Yes. So franchisees cover the cost of the free pizza in the app. And now on that point, I can say our franchisees are really eager to support initiatives where they can see that incrementality. And when you look at a promotion like that one, we're getting a free pizza to -- for the first time user on the app. Now it's really clear for franchisees to be able to see that acquisition and they know how valuable it is, and they're very eager, for the most part, to help when it comes to covering those costs.

And Josh, on the minimum delivery?

Yes, sure. So the minimum delivery, I mean, there's always this fear that people had when we originally went into this, and we try all these things and make sure that these things don't have a material effect on the business and have a positive effect on the business long-term because we don't -- the question sort of framed here in a snapshot sort of view, but we don't see a customer as a onetime purchaser of pizza. We see him as a long-term customer, in fact, we track through the customer lifetime value. So when that customer comes in, it's very rare that someone just orders a Pepsi or a Coke from us. In fact, the average ticket on those orders are actually quite high. But what it does is it enables that consumers that previously wouldn't have looked at us, look at us in a different way, and it becomes -- they become receptive to our marketing and to the things that we have on offer. So I wouldn't say there's a material impact. And remember, we wouldn't put our corporate stores, our 400-plus corporate stores on the line for this either. So there is definitely a positive flow-on effect to our business here.

Question in relation to M&A from Ben Gilbert, just given the strength of sales through COVID across Domino's globally, has the availability of new regions for DPE reduced? That is -- have profits gone up -- sorry, have prices gone up and not as attractive for us? Similarly, Craig Woolford has asked, do we see any territory expansion that's now more likely given the success in Germany and strong performance throughout COVID?

Yes. I think the best way to put this is that very, very clearly, we're looking at Domino's acquisitions, whether that be new master franchises or conversions of existing businesses. And from -- the other way to look at this is that Germany and Japan were also not for sale initially, and we created a position for that to be a sale. So what has shifted in the last 2 years is that DPZ has given us approval on more [indiscernible] than we've ever had in recent years. And then what we -- and our Board has also given us approval to have a look at these, and then what we have to do then is basically bring them to a sale. And that can either be in a full sale or a joint venture like you've seen in Germany and Japan because our business cases, what we can do with one digital, with our -- we think Domino's globally is one system, but it's not all invested in one technology. It's not all invested in one lot of buying as a group. And it's all invested in the one leadership team. It has different pools of leadership, skill base, technology, for example, our OneDigital platform. And so what we can point to, and we can very clearly highlight that in all of the acquisitions, specifically right now in Japan and Germany, the most recent ones, and we can highlight the 1 plus 1 in these cases is worth materially more. So an investor may tell us 51%, 70%, 66% and their last third may be worth even more in 5 or 10 years from now than their first 2/3 that they sold for us because of what we'll bring to that party. So yes, we're still quite active. But it's opportunistic. It's one of those sort of things that saw the timing to pull it through.

Speaking of opportunistic, the question is in terms of distressed media. That there was distressed inventory available to us through the start of COVID. Has that changed? And will marketing spend continue to rise faster than network sales?

We are still seeing distressed media but does come in various forms. So from a buying power -- I mean, gentlemen, Josh, Andre, what it looks the very latest?

Well, in Japan, we saw some initial -- to deliver longer, there's different buying cycles around media and where distressed media comes in. So we have seen some more available slots. It comes in a different ways. So we get -- sometimes we get some cheaper media for TVCs. But then, the other side of it is you actually get more access to some different slots that you previously wouldn't have. So we're seeing both of those. But it is -- we're not seeing it as much as so we were back in September, October. It's all pretty much back to normal now.

Andre?

Yes. Same in Europe. Different media, different situations. Outdoor is still very distressed, and we have to take an advantage of that. TV was -- media was pretty distressed in the first wave, less so in the second because a lot of bigger companies are taking advantage of this as well, it's not just us. So different for different markets and different media, but we're still taking some advantage of distressed media.

Nick?

Yes. In Australia and New Zealand, we obviously saw some pretty good opportunities early on, but those things have now returned back to normal for the most part, barring some smaller opportunities in market.

The next question is how we think about operating leverage. Given a few halves of softer leverage, what's the look?