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

Good morning, all. I can just see the attendees starting to populate now. So I'll just give it just a few moments until all of those attendees have joined on the web call. For those seeking to ask questions, if you could just add that into the Q&A button, and I'll be able to answer those when we get to the Q&A session, which will be shortly. Okay. I can see all of our attendees are in there. For those who I haven't met, my name is Nathan Scholz, I'm the Chief Communications and Investor Relations Officer for Domino's Pizza Enterprises. I'm joined this morning by our Group CEO and Managing Director, Mr. Don Meij. As you would be aware, we've published a trading update last night, which is that Domino's H1 preliminary NPBT is expected to be between $87 million and $90 million. This is below the prior corresponding period, but higher than the preceding half which was H2 '23. The preliminary results for the 26 weeks ending 31st of December 2023 is based on underlying earnings and remains subject to audit review and finalization. With that, I will hand over to our group CEO and Managing Director, Don Meij, for some introductory comments before we go to Q&A.

Yes. Thank you, Nathan, and thank you for the huge interest that's come on the call today. Clearly, it's quite humbling to sit in front of you and to be able to share the disappointing results in part of our business today, and it really shows the rollercoaster, I'm currently in Australia, and we just announced our new -- internally a new charity which is [ taking us for a tiny ] walk, talking about some of the things that we're doing in the Australian business and then the reality that, yes, these elements of our business that are clearly disappointing. And hence, why we did an update yesterday, and I'm looking forward to answering all of your questions as best as I possibly can. Thank you, Nathan.

Okay. Thank you. Don, I'll just start with some of the questions that we've received this morning. And just to highlight, I've spoken or have inquires from a number of investors and analysts this morning and taking their feedback, which is why we're hosting this call this morning. Don, I guess one of the first questions I would have is in relation to the timing of the announcement as to why yesterday and why specifically last night.

Yes. We needed to make sure that we did complete an adequate analysis so that we could give sufficient certainty when you're doing an announcement as it is. Yes, we need to make sure we do the proper work and then get that out as efficiently as we could and as quickly as we could.

Okay. And can you provide some commentary on the balance sheet at the moment?

Yes. So one of the things I want to really make very clear is that we have full support of our 8 banks at this point in time, and they've given us that reassurance. And we're still quite confident that we have a strong balance sheet. And that we're going to continue to trade well within those EBITDA models.

Moving on, obviously, from the results, potential sales H1 '24 in Asia were negative 8.9%. And it was the only market that hadn't delivered network sales growth versus H2 '23. Could you provide some commentary on what's going on in Asia and where the issues are?

Yes, there's 2 elements there. One of them largely has been Japan. And at this point in time, Japan still isn't trading the performance that we would like. We're really disappointed with the results. We did have a strong week in the Christmas week and New Year, but the trading around that is where we are today and the results that we've talked about. But I'd also like to highlight that it's well publicized that American brands in Asia, and I largely talked to Malaysia in this case, have been affected by what's happening in the Middle East right now. And so that's playing a piece as well from a Malaysian perspective.

Okay. Diving into more questions from Craig Woolford. The time frame for Domino's, what is the time frame to see reductions in COGS across the business. So the most recent comment at the AGM that we said we would see modest benefits for franchisees. What's -- will we see more in FY '25?

Yes. So when we look at all of the inflation that we were taking in food, and in the '22 period, that's come well off now in some parts of our business, where we are trading in USD for some of our commodities. Whilst the commodity may be coming down, sometimes we still have some currency taking some of the benefit out of that. But when we look at the actual input costs in places like Australia and New Zealand, as an example, we're seeing the food cost is running better than it has in recent history. In fact, what's really interesting, too, with productivity that's coming from some of the sales growth where we're getting sales growth, we're also seeing labor costs come in despite the fact that we've had inflation and labor. Where the -- we're seeing the opposite to be true. Obviously, when we're not getting the leverage of sales. And that's where what we're doing in Australia and New Zealand and what's working in Germany and Singapore and places like that, we're trying to get into Japan and France largely.

Okay. A question from Tom Kierath. What was the cause of the weak same-store sales growth performance across November and the first 3 weeks in December and Asia? Are December sales outside of Christmas down 25% to 30% in Japan?

Yes. Look, we'll give further update when we get into February with all of the details around that sort of stuff, but largely, it's been executional that we just didn't execute to what we thought we could do. And that's the learning. It's one of the reasons that we set up the centers of expertise. Now if you reflect back on Project Foundation, the core of foundation is to, a, we were going to be -- we become inefficient in the way that we've been operating in business as we expanded relatively quickly around the world. So it was to bring in efficiency but it was also to bring back the reality that Australia was a Petri Dish. It was a Petri Dish for most of our life until recent years. Things like One Digital and most of our innovation came out of the ANZ business. And then where it can be applied globally, we are. And today, you've got to remember that approximately 80% of our sales are now digital. Most of our consumers purchase today through an iPhone or an Android product, an Apple product or an Android product. And then they're mostly buying through global digital networks, things like TikTok, things like Meta, things like Google, things like Uber and Takeaway the Netherlands and so on, even grab and really kind of many of these are multinational businesses or global businesses using the same algorithms, and the centers of expertise they've done an exceptional job. All of the same drivers that are in Australia and New Zealand are the same drivers in Germany, and we're doing very well in Germany. By -- just by the nature of timing because it was a smaller market, we're seeing the success in Singapore as we rolled out of technology. It's not material. So that's why we haven't made a big deal out of Singapore, but the reality is it's showing us what can happen. Now we need to get those centers of expertise to be fully implemented with these learnings throughout Japan and Europe. We talked about the modest performance right now because some of that is already starting to work, but we still haven't got all of it in at this point and still time to see that, that takes place and works.

Staying on Japan for a while. We've got a number of questions on that. The question in terms of what are the key initiatives in place to turn around Japan. I think you've already just covered that. But has there been a misstep on pricing? And what can you pinpoint as being the key issues that are currently being rectified there?

Yes. So I suppose the best analysis is to say, what's working in the markets that are firing and are firing quite well, is that, one, is being product-led, and we talked about this a lot at the AGM and at the full year that when we get those inspired products right, we get the margins right and they flow straight through. Things like -- and I'm talking to Australian shareholders mostly I imagine. So when I talk about the MyDomino's Box, that's very, very rarely discounted. It's priced right, it's high margin. When we talk about Meltzz, they're priced right, they're high margin, they're very, very rarely added into a discount. So first of all, getting that product right, building out a product menu and testing that takes longer, especially in markets with longer buy cycles as parts of Asia are. Second thing is our mission is to be the dominant sustainable delivery QSR in every market. And areas that we need to dominate and include the aggregators are some of the biggest delivery lakes for customers that we can access. And we're doing some of the biggest parts of our growth in Germany and Australia and New Zealand are coming out of the aggregators. And then also triggering that using our digital assets, right, to get maximum conversion, get the right media mix so that where we're spending our funds for those that are observing Australia, we've put a lot of money out of television and we're applying a lot of those money against these global digital assets. Now they are global algorithms, but they still have to be treated because on one end, you've got the media buy. On the other end, you've got the offer and then the third thing is creative. Creative is local and offer is often local. And so that's why we still got to customize those things to maximize the yield in these results. And because you've got longer buy cycles, it just takes longer to work those through. But what we've illustrated in Germany, Australia, New Zealand, we have our pricing right, we're the fastest growth pizza company in those markets, we're above QSR growth in those markets for both customer count and for ticket. So we're showing strong margin growth. Our franchise partners are enjoying much stronger profitability than they have in recent years. And we now need to replicate that largely in Japan and France for our business.

You just mentioned in terms of Japan and France, how much of the underperformance in Japan, Malaysia and France is due to poor execution of strategic direction versus industry-wide factors?

In one of the realities of Japan is that we have -- if we look at last year, we have seen that our category has shrunk in the last 12 months, but it's still a large category. So we have been running against some headwinds. We -- that was last year falling into now. Is that going to roll with more structural headwinds in Japan? We don't know that yet. We don't have the answers to that. Put that aside, it's a large market. It's a large delivery market. And so when we have just over 1,000 stores, we can still access that and get great growth. So we still need more time to be able to prove through the product and to execute against these digital items. In the case of France, yes, it's been a lot more executional and that we've got new management in the area, and it's very clear, we haven't had success in France. That's the one area of our business that we've really showed any bright light. So I'm not going to overpromise. We did not promise at the full year or at the AGM on France. It's still work in progress, and we have a lot of work to do.

Remaining on Japan. Can we clarify our comment that Japan SSS are flat for the half post-Christmas? Do we mean including January? And yes, that is correct. So the January this half to date has been flat for Japan. Question then is what has happened since Christmas in Japan to bring SSS growth back to flat from that negative trend? And is this sustainable?

Yes. Look, it's a mixture of factors. Some of it's softer comps versus last year. Some of it is that we are seeing, for example, it's very early days. So please take this in the context of the question that you're asking. These short windows of time. But seeing things like aggregated growth in some of our digital performance, and we've started to launch new product. But there's lots of learning. We're still in -- as I mentioned earlier, there's one thing to get the media right and have their centers of expertise working on those level algorithms in the digital side, still getting the creative execution and the offer right, we still need more time to prove that out.

Just had a few questions regarding our commentary in the trading update that any previous guidance for FY '24 performance de facto otherwise is no longer in effect. And the question has been whether that refers to the 3- to 5-year outlook. Just confirming that this is in relation not that 3- to 5-year outlook. At this stage, we're looking at the short-term announcement.

Yes, there was some commentary that we made around -- at the full year and at the AGM, and that could be considered a pseudo guidance, and so we're just removing some of those comments. Specifically, they referred to Japan. But no, 3- to 5-year outlook are outlooks, not guidance. And at this point in time, to still be reviewed and constantly reviewed that still stand.

You've mentioned quite a lot about aggregators. Have the Uber Eats volume cannibalize direct orders through the app or web in markets where it's been introduced?

No, it's been almost full net add in Australia and New Zealand to where we're applying those. What's really interesting, and I want to highlight is that Uber is a very small player in Germany, for example. So Germany is having really strong aggregated growth without the new Uber deal. It has a new Uber deal, but that -- it's not the largest driver. Lieferando, which is still -- has the [ logo] Takeaway.com out of the Netherlands, is still the leading platform in that market and where we're seeing the biggest part of our growth. And that's an example where it's not only just that one particular global platform, but it's also what we're doing with the creative and the offer and understanding those algorithms and going after it. So this is -- we think that there's a lot of a similar learning which we can apply throughout the business.

A number of questions on the strategy in Japan and the expansion plans. The -- have you acquired too many regions in Asia too soon? And would you divest any more markets?

Yes. Look, hindsight is a wonderful thing, and one would argue that taking on the most recent -- most more markets, when we stumbled in Japan, and we've still got [ delayed ] in France was bad and poor timing. I don't think that they're the wrong decisions for the long term, but in the near term, yes, there have been obviously further management attention. One would argue that therefore, that's destruction against some of the core for the return. And I think that's fair criticism in the near term. In the long term, there are markets that we should own, they're appropriate for our regions. But yes, in the near term, yes, we didn't time them so well.

Would you consider more restructuring on store closures in Asia given the softer sales?

Be very marginal. These are areas we should be, and it's really our own macro performance, which rising tides lifts or boats. It would be -- these are structurally where they should be. And so at this point in time, for all the knowledge we have today is that the stores that should exist and we just need to look the performance overall of the business.

Two different questions in terms of store openings from 2 different people. Firstly, was, will we now consider pause in corporate store growth in Japan? And the second one is, why not release the pressure on store targets given DMP is still in a turnaround phase in a number of geographies, differentially profitability is still somewhere away from target, even in Australia. One of pause is store roll out, abandon the long-term targets and get profitability restored before reassessing them.

Yes. So let me make it really clear and you can see that in the numbers. We're not aggressively chasing the store growth in this window. We made it very clear when we announced Project Foundation that this was a moment to fix the core to energize the core and to become more efficient and that we would not be aggressively chasing store growth and hence, why we gave a much lower direction than what would happen in this 12 months. So the stores you see opening are happening from existing franchisees by and large, who are opening those stores or that we may still have had a legacy site that could have been a 2-year construction or something like that. So there's very few parts of our business where we are aggressively chasing store openings. And so by -- to answer your question, that is what's actually happening in the business right now, with the Australia and New Zealand business performance and the German performance, Singapore performance as examples, and there's other parts of the business that are early signs of recovery. Then yes, if we continue that for the next 6 months and then that would -- my assumption is that will flow into reopening more stores. The demand in Australia and New Zealand has been strong in recent months because when you can imagine we share averages and when you see the top end of our performance, the core Australian business is far healthier than it's been in a number of years, and that's leading to demand to either acquire other franchise partners or to buy some of our existing store network and open few stores as well.

Is the business too difficult to manage now that you have 12 markets? Are you better off exiting smaller markets and focusing on Japan and France, which is where the bigger opportunities lie?

So these are questions that we've been asked over many years. And these -- many of these smaller markets are hosted by a large market. So when we -- a lot of what we learn and do in the Japanese business where we can apply to Taiwan. So at this point in time, I don't think so. Of course, that's an open question based on performance. But at this point in time, I don't think that that's what we should be doing. We still have high talent in Andre and Josh to be and many other key people in our business and Michael Gillespie. And we need to give some time for our new Project Foundation, as we call it internally to roll through our business and get the benefits of these centers of expertise. Now if we were sitting here with longer periods of time and they weren't delivering that, that may be a different question for a different time.

Well, there's a donation to our new charity that's going to be costly. Down the way you're describing some of these issues across markets, it sounds like market differences effectively create dis-synergies and that in one solution doesn't fit all, but you're constantly hoping it does. And perhaps if you could answer that, Don, I know you mentioned something about Singapore as well.

Yes. So there's more things that were similar in than we're differentiated in. So I'm not sure if I'm giving that impression. But from a -- so just imagine, we started the rollout of Project Foundation in the last half in Australia and New Zealand. So we need to -- before we exported these models, we need to prove that they were working. We needed to get the results on the Board. As we got the results on the Board, noting that Europe was definitely a lag behind that because we have to go through some regulatory processes, which we're still finishing off in largely in France, but still parts of the rest of Europe. So that by its nature, we couldn't even implement if we wanted to, some of the centers of expertise because they were restructurings that are required. And I won't get into all the legal and technicality on this call about that, but that needed to -- we needed to take time to do that. So a mixture of, first of all, we had to implement, build that knowledge and actually prove it out and then export. And that's what we're in the process of. What are some of the differences? And this is a good question, creative. It may be inspired. So there's some inspiring things. The MyDomino's Box has launched by different names in almost every market now. Products like Meltzz is launching in many of our markets. There are -- we are -- in Australia right now, we're currently selling our new signature cheese. That's an APAC product and is now inspiring production in Europe. That's a tastier, stretchier and already marketing better for the plan and soon will be a lot better for the planet product. So those are products that's global. But then when it's interpreted and there are tastes that are different and sometimes the way menus work or the offers are different. But the offer testing and analysis is similar with different windows. So I would argue that there's more things that are the same, but you still need to have that time and market to work through these processes and these tools.

Just moving to capital management for a moment. Has there been any significant working capital or other cash flow one-offs to drive to the $770 million net debt outcome?

Yes. There is little bits and pieces of timings that often happens at the end of the financial year with the times of our -- largely in places like Asia and so on. So there is a little -- there are parts of it that is that. But that's could happen in June, just as likely. So yes, that happens from time to time in our business. We're very confident with our balance sheet, and we have the full support. Richard's been in constant communication and our banks are showing that will support all 8 banks.

In terms of capital management, do we consider removing the dividend and focus on share buybacks given the current share price levels? And also, would we consider keeping the DRP in place permanently?

Yes. Look, the DRP permanently is a long time. I don't think that's the question, but the DRP is up for consideration. That's probably the only conversation that's taking place in the businesses around the near-term DRP. But we're about creating value. And I think that with our plans that we have in place as long as we execute against those, and I know that, that's in question on a day like today, but I'm pretty confident with where we're heading with our balance sheet at this point in time that we shouldn't have to do that. Share buybacks to be material in that. It hasn't been a conversation at this point in time.

Moving to Europe briefly. Is the [ joint ] business benefiting in the second half from the reinstatement of a restaurant service VAT, which was increased from 7% to [ 9% ]?

Not as yet. So not -- that's still to flow. So in the windows that we're talking about the German performance, the German performance we're referring to last half and as we sit here today, and that's a more recent conversations taking place in that market. Now the team has done an exceptional job and they've done an exceptional job on product. We talked a lot. One of the things that's different to Australia and Germany is that we're a much more immature chain business. Chain businesses are not as large in Germany. So we're one of the first really leading scalable chains of this size. And therefore, our campaigns have lasted longer and the [indiscernible] campaign new product was highly profitable and high growth, and that's inspired more work in that same vein. And then what's happening with their digital performance, the aggregator performance, almost strategic to what we've seen in Australia, some of the platforms are different.

Can we expand what's exactly not working in France and given it's been a challenging market for some time now?

Yes. Look. One of the things that is driving our business today where it's -- where we're thriving is delivery growth. And we need to be a lot stronger on our focus on delivery growth. We need to be a lot stronger in our product innovation. They are 2 leading elements. And then the third one is implement these digital platforms and learnings in France. So the centers of expertise now have a larger influence than we've had in the past. And in fact, right now or in the last few weeks and still today, we've had our senior executives of the centers of expertise based in Europe, largely France, working through this implementation as we speak. And why now, it's because we're still being -- it's taken us this long to work through the regulatory process of the restructuring foundation.

Still a number of questions in terms of the future of some of the markets that have currently negative comps. Would we consider exiting Japan? And also, would we consider changing the 2,000 store target for Japan?

We constantly will evaluate the numbers as they -- and that will -- and if there's a change -- a structural change, then we would update the market. No, there's been no conversation about exiting Japan. It's -- we're very proud to have that in our portfolio. And we think it's going to be a long, high performer for our business. We need to execute better than we have been in recent times.

Can we talk briefly in terms of the savings initiatives that have been place? How much of the cost-out benefit was realized? And we've said, obviously, that we are well progressed on that program. And we're expecting the full amount to be realized in the FY '24 year.

Remember, we gave 2 years. So the first phase is literally being the restructure and in some cases, some of our peers have left the business. And so we've gone through that phase, and that's almost completely finished. It's been finished in Australia, New Zealand now for a number of months. So we get the full benefits of that into the second half. And then in the second year, it's the rollout of shared services. We've appointed our Head of Shared Services now in Malaysia. We're underway with [ crick out ] in Poland. And so now it just needs time to recruit and train for these new shared services in these parts of the business. And that's for the second year. But yes, we expect to meet our targets, and we're well developed on year 1 and expect to meet those.

And obviously, we'll provide a detailed update on those savings initiatives at the half year later in February. Can we comment some on franchisee profitability? How are we seeing franchisee health by market, a key concern is Japan franchisees? And are you seeing less willingness to take on stores? And how does that compare across the regions? Can you provide any color on that?

Yes. From a macro perspective, and I'll give more color at the half year announcement. But from a macro perspective, if you're seeing same-store sales that are negative, our chances are that's hurting our business and our franchise partners. We've been sharing that mutually and that we, in some cases, have had to support our franchise partners. Where our business is now showing strong same-store sales growth, then we're pulling back from the amount of support that we need to do, and that's where you get that decoupling and you get that better leverage in our margins. So that's the 2 dynamics. And with that, as I highlighted earlier, you see a higher demand for store growth, which initially may be buying out some existing franchisees who may have struggled in the recent period and have lost faith in our business and some of our corporate stores. As we shared in the whole charters that we announced to the market that we were going to be discounting some of our stores. We've been doing that in the second half, and we've been selling some of those stores. But where essential sales is underperforming, you can pretty well relate that to underperformance in -- for our franchise partners and for ourselves and vice-versa.

Okay. In terms of guidance that we've advised that when removing de facto guidance or any other guidance in the market. In November, the trading update was that earnings are expected to be materially higher than H2. So the question has been raised from 2 people that the earnings would be higher than the preceding half in H1 and give us a sense of what we're expecting in November? And also, does this mean that we think the full year will be higher or lower than the previous?