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

Thank you all for your patience. We're still having people all dialing in, might be a moment. And I can see a couple of people quick off the ball to put their hands up, so thank you for that. So just to say in advance that, yes, obviously, we'll be running a Q&A, an extensive Q&A. [Operator Instructions] I'm also going to highlight that if you're on mute, there will be a $50 donation to Domino's for Good, which is our important charity that we do a lot of work for. Sorry, it's now called Minds & Meals. I'm going to get in trouble from our charity manager there. So I can see the attendees have now populated into the meeting, as I hope I've met many of you. My name is Nathan Scholz, I'm the Chief Communications and Investor Relations Officer for Domino's Pizza Enterprises. And I'm delighted to welcome you to today's analyst call to introduce you to our Group CEO and Managing Director, Mr. Mark van Dyck. Now before I start, I just want to cover off a couple of things that I have been asked a few times over the past few days, and that relates in terms of both consensus and guidance. Now the first, as a policy, we don't comment on consensus. However, I've been asked a number of times, what does the commentary or lack of commentary in our AGM update mean in relation to guidance? And what I would say is that as we noted at the AGM, our same-store sales performance for the first 17 weeks is not where we want it to be, and steps are being taken to address our performance. So there is a number of moving parts. And once we have a clearer view on the outcome of this half, we'll obviously update at the February results. And then Mark will be able to provide you more information on the plan going forward for the medium and longer term for the Domino's business. With all of that said, I look forward to taking your questions shortly, and I'm delighted to hand over to his first introduction to our shareholders and our analysts, Mr. Mark van Dyck. Over to you, Mark.

Good morning, everybody. Just a quick check, you're hearing me, Nathan, right? So we're all good. So good morning. Really pleased to be talking to you all this morning. I've been looking forward to it. It's day 3 for me, which I'm excited about. I thought that I might just start, if I may, with some opening comments that might answer some of your questions. First thing I want to say is, obviously, I'm absolutely delighted to be the new CEO of DPE and excited to be the first CEO in 20 years or only the second in 22. I also wanted to say to you that I have a very high regard for this business, which is obviously why I was keen to take the role. I had the opportunity to work with the Board for 12 months prior to this and got a very, very good line of sight on the business in that respect. And my exposure to the business has told me that it's a really great business and a business that has got a set of really, in my view, irreplaceable assets. We've got a great global brand. I think it's 60 years in terms of international and particularly the U.S. The brand has been in Australia for 40 years. DPE has a really strong network of stores, 3,700 in 12 markets. And from my experience, I made it a priority during my time running up to this and particularly in the last few weeks to accelerate that, to get out to as many stores as I could in the 3 markets that I've been in to date for DPE. And I can tell you that I've encountered consistently an incredibly strong culture in the team of 130,000 kind of frontline team members that we have that deliver the Domino's experience and promise every day. We're also, in most of our markets, #1 in terms of brand, and that's a good position to be. And we obviously have a very strong franchisee network of 1,700 franchise partners who, of course, are absolutely fundamental to the business. And I'll talk a little bit more about some of my priorities in a moment. But obviously, those franchise partners are very critical to me. And perhaps most importantly for me, we have a very strong promise and a strong capability, which is to deliver quality hot food fast at affordable prices. I think that's an enduringly strong promise. I actually think that it's a particularly relevant promise right now, given what's going on globally. I think globally, families and consumers in general are doing it tough. The impact of inflation and other pressures on them makes it very evident that we deliver really what they need. And so that's a kind of strong obligation for us, I think. I'm personally excited about this because for those of you that have looked at my career, there's a few themes. Not to spend too much time on this, but I've always loved businesses that deliver to a higher purpose. Food is a pretty good one, and as I said before, I won't sort of reprosecute it. What we do particularly is very relevant in general and for the time. And I've always really loved people businesses and people businesses that create opportunities for people. And my previous business, Compass, I greatly enjoyed that opportunity to use our business to give our associates real opportunities in life. I focus very heavily in Australia, for example, on indigenous employment and got our Australian business to 7% indigenous employment. In the case of DPE, it's fantastic for me that you could literally start as a delivery driver and become an executive. And there are many examples of that in the leadership team that I've joined. And Don himself, who I commend greatly by the way, along with the team for the business that they have built, was a prime example of that. And secondly, I think it's also great that we get the opportunity to create so many SMEs. I think small, medium enterprises, which is really our franchisees, are the backbone of an economy. And certainly, as I've traveled around stores, I've been really impressed by the fact that you have franchisees. For many, this has been their first business experience, and they're building businesses and, in some cases, building multi-franchise store businesses. So that's exciting. The other thing I would say is when I looked at this business, I think the macros are pretty attractive. This doesn't detract from the fact that all consumer markets are under some pressure right now. Consumers are obviously pretty price conscious. But when you really look at it, pizza is still a relatively small proportion of the QSR market. So there's one opportunity for growing a greater share of that pie, if you'll excuse the pun. There's also quite a lot of white space in our countries geographically. What I mean by that is [ you've got to be ] intelligent about store openings and the levels of penetration. We are pretty underpenetrated, and there are actually some regions in places like Germany, where we still have white space. And then, of course, there is the opportunities that the team, I think, has been doing a good job of recently, which is can you create new occasions like snacking, new dayparts, and products like Meltzz that create new price points and new opportunities. In terms of my priorities, as I said, it is day 3 so I'm evolving this as we go along, of course, but I do have a clear plan in mind. I mean, first and foremost is to spend as much time as possible over the next 30 to 60 days around our operations particularly at the frontline, understanding what the teams are saying about how we operate, understanding the operating model because whilst I've obviously spent a considerable amount of time in foodservice, I don't assume for a moment I know intimately the Domino's operating model. And also, most importantly, they are the people that interact with our consumers daily, and I really want to hear from them what's going on. So that's a key priority. I'm not about -- I'm about learning and I'm not about changing everything, to be clear. I think that CEOs that come in with an agenda just to sort of change everything really tempt fate. I mean for me, there's a number of things that I've seen already that I certainly won't be changing, the great team culture that we have in the business, as I talked about, that promise of fresh food delivered fast at affordable prices and a focus on franchisee partnerships overall. If I have kind of 5 priorities, and I set these out at the AGM yesterday that I'm kind of working to, obviously, the first is to rebuild value and particularly value for our investors and shareholders. The second is to further strengthen the franchise partnerships. I learned in my considerable time at The Coca-Cola Company that even though that's a -- it's more of a master franchise model, if you're not aligned with your franchise bottler, the whole model does not work. And so I'm planning to invest, as I said before, a huge time in that. Thirdly, drive growth through customer value. I mean I think the current environment is both a pressure but a massive opportunity. We're in the right space of the market. And I think we've got to keep focusing on consumer understanding, understand what creates value for them or what represents value for them and continue to develop the business in that respect both from a product standpoint, a service delivery standpoint and so forth. And continue to build on the culture into what I call a really high-performance culture. It's something that I've always focused on in the businesses that I've run, particularly frontline businesses like Compass. And then lastly, as we develop as a team, a next phase plan which will, of course, be an evolution from where we've been, take really decisive action. I'm a great believer in taking an appropriate amount of time, putting yourself under the appropriate time frame to work out exactly what is fit for purpose for the next phase but then take action quickly. And obviously, I'll look forward to and plan to and will be keen to keep you briefed and in the loop on that as it evolves. I possibly should have said this a little bit earlier, but I'm sure many of you have kind of looked me up. In terms of background, obviously, I have spent decades in FMCG and foodservice largely, including The Coca-Cola Company and also Compass Group. In Coca-Cola, I worked both across Asia and Europe. And in fact, most of my career has been very international, but I have kind of centered more on those 2 regions, which are obviously very appropriate for this business. And then latterly, I ran Compass Group for -- and was the Region Managing Director for Asia. Compass isn't that well known, I'm sure many of you will be familiar. It's obviously a pretty high-rated and big stock in the U.K. and obviously, U.K.-listed, but it's the largest contract foodservice business in the world. And I've got to say that when I looked at this business and the Compass business, I was really struck by the huge similarities. I had 11 countries, 70,000 employees, and we did 400 million meals across Asia in probably the most complex market cluster for Compass because there were very different supply chain models and very diverse sectors. So the common denominator is we were serving also fresh, hot food fast to consumers with a large chunk of that retail or direct-to-consumer as well, but operating cafes, restaurants, retail stores, even a mix of sectors, which ranged massively from workplace sectors to hospitals, to mining villages, oil rigs, entertainment venues. So actually, at times, I have to be honest with you, we dreamt of having the sort of templated operating model that Domino's has. So I'm finding that very rewarding because our model was kind of like a mass customization model, so quite a challenge. So that is my background, but I've also really been in about 7 industries. So I'm not a stranger to learning a new industry, learning a new operating model and certainly not to resetting businesses and bringing kind of turnaround capability. So I think that's probably, without falling into the trap, I thought I'd do about 15-minute intro without falling into the trap of talking you too much. I might just hand back over to Nathan, and we'll very happily, between us, field questions that you have.

Terrific. Thanks, Mark. The first question is from Shaun Cousins. So Shaun, go ahead.

I've got two questions. You've called out in your priorities a focus on making operations as efficient and simple as possible. Where are the biggest opportunities you see to reduce costs, particularly given -- and now given revenue growth has probably been a bigger focus for the company than cost-out? Do you have the right team to drive cost reductions? Or could different talent be brought in or be required to drive a cost saving program en masse within the business, please?

Yes. Good question, Shaun. And let me, first of all, caveat it necessarily with, it would be premature for me to have a kind of definitive answer for you on this right now. I mean I don't think it would be right having not seen all parts of the operations to give you a view on that. But I can give you a kind of broader view. I mean one, given the times that we're in and the importance of delivering the promise, I think the more that you can simplify what you're asking operations to do, and that's an enduring quest for us in this business, the better you are. I mean I think it was Tom Monaghan actually, the founder who said, "I believe in keeping businesses simple." We are, at the end of the day, sort of making pizza and delivering pizza. And whilst that's a very kind of simple concept, I think as much as you can keep it simple, it is good. Generally, in food businesses from my experience, there are a number of areas where there are focal efficiency opportunities. I mean clearly, procurement is one area. And obviously, I'm going to spend some time with the team looking at that. The second one that I think is particularly important in these kind of contemporary times is the whole area of labor management. I mean every market that I operated in, in my Compass time and every market we're in will be undergoing minimum wage increases, labor inflation. And I found that -- and these exist in the business already, by the way. I'm not suggesting that we don't have those. The question is how can we further optimize? But there is a very high payback in labor management models, not only because they use your labor most efficiently, but they actually give our operators a powerful and easy way to roster, which is really important. And that improves also service quality, which is a very critical part of our kind of whole NPS and offer. So those are my initial kind of thoughts on that. In terms of do you have the team, look, I've done this in a variety of situations. My general principle is that you may need experts to give you either benchmark views as to how good you are in the first instance, and you may need some expertise in specialist areas. But as much as you can do it with the existing team, the better because I'm not against consultancies in any way. But frankly, you can take an awful lot for them, time for them to learn the business, to find the solution, whereas often, I found that it's very impactful if you just empower the existing team to find the solution and make it happen because generally, they know their business very well. Does that answer your question?

Yes. No, it's fantastic. And my second question is just store growth. That's been a significant priority for the company over the decades with bold targets being set and then achieved. That's no longer the case at the moment, and we're in our second round of store closures. Have you reviewed the assumptions that underpin the 7,100-store milestone that was reiterated again yesterday? And will you retain that even as that -- the retention of that indicates a degree of intent regarding the prioritization of store growth possibly at the expense of cost there. So is the 7,100 still valid? And will you be sort of striving towards that in the same manner that prior management was very keen on 7,100, please?

Yes, sure. No, great question as well. Thanks for that, Shaun. Look, let me answer that in sort of 2 levels or in 2 ways. To answer your question very directly, I have looked at it. And going back to the point I made before about the macros, I think there's incredible growth potential in this business. And so I would plan to retain that as a goal, as an overall goal. I think the only question mark for me at the moment is around time frame because I think if you're going to grow, you need to make sure that you've got the right levels of profitability and scalability of the operating model and in your franchise network. And I think we've probably got some work to do on that. And as you've seen, in some cases, particularly in Japan, we've actually had to take a little bit of a step back to optimize the estate. But any way I look at it, and I won't reprosecute what I said before, there is lots of opportunity, geographic, occasion, share in this business. And so I'm still very committed. I see this as a growth business. And I've got interest -- got asked an interesting question the other day by a journalist who kind of said, "Oh, well, of course, the issue is young people not eating pizza anymore," which is like completely wrong. I mean we look at our research and the highest growth cohort, not surprisingly because it's really easy to buy and consume and consume together, is actually young consumer groups. So that was always the acid test in my Coca-Cola days, were you recruiting new young consumers, and we are. And so that also gives me the confidence that you can grow off this base. I hope that answers your question. And look, Shaun, if you've got a view, I'd love to hear that as well. You've probably been looking at this business -- well, I know you've been looking at this business a lot longer than me.

Just click on unmute, Shaun, so we can hear you.

Sorry. Great. Yes, I think the issue around 7,100 is just sort of you've got to get your franchisee economics right and your franchisee profitability remains well low, very low relative to DPZ or Domino's plc level. So -- and in short, if you're closing stores and you're doing your second round, you've had a priority on store growth that has been wrong in terms of -- and it's hard to work out in the fog of war that was Japan. But ultimately, you opened far too many stores, I think, during that time. And it seems as though the store priority was the #1 focus rather than getting the balance right with franchisee profitability and overall, growing EPS, which has been a bit disappointing. But I'll pause it.

Well, this has been an expensive week, I've got to say. So sorry, we've had -- we've been hosting all-hands meetings with teams, and I think that's up to now $150 for our Minds & Meals charity. Okay. Our next question comes from Sam Teeger from Citi. I apologize, he has terrible reception, he's overseas. He submitted two questions in writing. The first question is, do you think Domino's has lost its way with more -- sorry, lost its way more with customers, franchisees, or investors?

That's an interesting question. And I'm not sure that I would say we've kind of completely lost our way with [indiscernible]. I think the work to be done right now is on consumers because there is, I think, an enormous amount of evolution going on in the consumer space. So honest answer is I'm focused on all 3. But I think my past experience has told me you've got to really understand where the consumer is going. I do agree with the point made before by Shaun that we have to make sure that we have got across-the-board franchise economics right as a solid base to grow the business from and to be able to grow franchisees to multi-franchises because, I mean, I think I'm right in saying that we probably have less of an incidence of larger-scale multi-franchise partners across our estate. And clearly, I absolutely, as I said at the AGM yesterday, hear it loud and clear that our investors feel that we need to up performance, and that is very evident. So that's my kind of answer on those 3 cohorts. I hope I've answered your question.

The next question from Sam Teeger from Citi is what stands out as low-hanging fruit that you can address in your first 6 months?

I think back to some of the points I made before, but what I would list is I have a very strong focus on France and a strong focus on Japan. Because when you look at our business overall, the nice thing is that we actually have some pretty good performance as well. We have Australia performing well. Germany has been strong. Benelux is a good kind of growth engine. Right now, if we could get France and Japan to the same sort of levels of performance, that would be extremely good. So I think that is a really important focus. I'm not sure that's necessarily, in every circumstance, a short-term thing, but there are short-term things we are doing and can do there overall. So I think that's kind of number one. I think the second point I made about making sure that we are remaining as efficient and low cost as possible. There'll be opportunities that sit within that. And we're already kind of discussing those because I think that, that is kind of fundamental. I still think also that there is a really interesting piece of work to be done. And we're doing it in a couple of the markets right now around how we continue to work to optimize our media impact and our kind of media mix overall. And clearly also, within that, how we continue to work with our franchisee partners to increase mutual contribution towards funding that. So those are some of the things on my mind. But I'm going to have to kind of reserve judgment on that a little bit and come back to you later on when I've had a chance to go around the rest of the business to really complete that answer.

Next question from Ben Gilbert from Jarden.

I appreciate it. Just first question for me is there's been a bit of a criticism potentially in the past just around maybe some of the financial discipline around metrics like return on invested capital within Domino's. It's a business and, in theory, should generate some pretty high returns. Just interested in sort of your approach and thinking around ability to drive higher returns. I appreciate earnings seem to move in the right way, but your focus on return on invested capital as you look forward.

I might take that one on notice, if I may, because I'd like to talk -- have the opportunity -- as I said, it's day 3. I'd like to have the opportunity to talk to Richard about that. Expand a little bit just for my benefit. Is your concern that we haven't been clear about the returns or haven't been delivering adequate? What's the -- just double-click a bit for me on the question.

I think it's both of those things and leading to a couple of questions we've had from Shaun as well just around potentially chasing stores for top line's sake and sort of losing [indiscernible] in terms of actually getting profitability tension within the group, a desire for franchisees to roll out stores and do it profitably for everyone's benefit. And it's -- I think it's been the detriment of returns. And being a franchise model, it should, in theory, be a very high-returning business, which obviously translates through to the multiple, if it's all working.

Exactly. No. Well, if that's -- if the question is, yes, am I committed to that as a philosophy? Yes, absolutely. As I said earlier on, I feel that we have to make sure that we have the solid base of franchise economics right to scale this business. I mean there's still a lot of scale opportunities. But you're not talking to somebody who wants to open stores for the sake of opening stores. I think, a, that has to be a really intelligent process even where you do have white space. And b, we've got to really work on profitability in the existing business right now. I mean I think 10 years at Compass, and that's a business -- I don't know how closely you've followed that, but that is a business that has really delivered sustainable growth. And we had a very high focus on getting the right pace of growth so that you're accretively maintaining and growing margin and return for everybody in that business as you grew. And I'm a strong advocate of that. So hopefully, that gives you a kind of indication and gives you an answer.

Yes, that's helpful. It seems like a real opportunity and obviously, it translates through to multiple.

Absolutely, yes.

The second one for me is just all regions, do you sit there? And sort of when you're putting your plan forward, do you decide, look, all regions are core? Or would you be open to potentially exiting it? You mentioned France, which has been a perennial disappointer, I think. I don't know, we're on our fifth or sixth turnaround of that in the last 10-odd years. Do you look at some of these regions to say, "Look, it's a distraction. Better off focusing all my time on Japan as opposed to splitting across Japan and France," since in your approach to potentially divesting or exiting regions as well?

Yes. Look, everything is on the table and I don't want to rule anything out. And I don't want that to sound kind of too hedgy an answer, but I really do need to spend more time both on the challenged -- the more challenged regions, particularly France and Japan. And that's not me signaling anything to be clear. But obviously there, there where we need improvement. Look, the dilemma, I faced this dilemma in my old business. At any one time, you've always got a kind of set of growth engines, Australia or ANZ grows well. Germany is a strong market. Benelux is a strong market. But then you always also want to make sure that you are kind of growing future growth engines. And so in our case, I mean, clearly, I'd like to see France succeed because, again, when I look at the macros, it's a really big market. It's a really big market for pizza, and the Domino's formula should work there. My current thinking, and I think it's shared by the team, is that there's a couple of things that we've got to focus on in France. And that is, one, to sort of let French consumers see themselves more in the Domino's brand; and secondly, really focus on alignment with our franchise partners and be working together to kind of realize full potential. And so I think I'm committed to that, first and foremost. I'd like to see us succeed there. And then there's a cluster of smaller geographies, which you always face, and I faced this at Compass, which you want to be in those future high-growth consumer countries on the ground floor. But the facts of life are is initially, they tend to be smaller businesses. But my view is it's provided that they're actually kind of accretively growing and showing health, you kind of want to hold in there. But I'm going to obviously conduct a review of where we are as part of the whole exercise, and I'm keeping an open mind on it. And hopefully, that answers your question from sort of a day 3 perspective.

Yes, that's very helpful.

Thank you, Ben. The next question is from Richard Barwick from CLSA.

It would seem evident that certainly over the last 12 months, the Board has played a bigger and bigger role operationally in terms of the -- particularly in France. I think that's a fair comment to make. I'll be keen to know how much license and how much freedom have you been granted by the Board to get in and do what you see as fit? And particularly in France, where we know Jack has had a more of an involvement in that particular market. Or is that -- basically, is Jack in be continuing to be involved in France? Just where does the -- not the -- balance of power is not the right term, but where do you have the authority to extend?

Yes. Well, to answer that question directly, and you should ask Jack as well. I'd invite you to ask Jack as well. When I took this on, my understanding from the Board was that I had very clear empowerment to run this business. That doesn't mean that I don't welcome, by the way, Board involvement. I mean I think the areas that I've talked to the Board about having some -- what's the word, having kind of a line to the Board on is, clearly, I've spent a lot of time in foodservice but there's some very distinctive characteristics to this business. And it's actually great to have access to Jack, who obviously has many years of QSR experience, and Grant Bourke as well, who is a franchisee. But I have full authority to run this business, and that's the conversation I've had with the Board. Jack may stay involved for a little while on France only because he's built sort of relationships there. And I think overall, that can probably help. But hopefully, that answers your question, and I'd also urge you to ask him as well.

Yes. No, that does. And yes, I would love the chance to have another conversation with Jack. Second question is a little bit more around culture. I mean you are an outsider coming into a business that has long prided itself on developing people sort of literally from the ground up. And that's been a great sort of claim for staff and being able to fulfill their potential, et cetera. And I'm not fully aware but I suspect there's not a lot of people who've come in from outside the business, certainly in very senior roles. So again, in terms of your empowerment, do you feel, one, the need to bring in other people as well at this stage? Or are you sort of content coming in as an individual, the single outsider coming into an organization that doesn't have many?

Great question. I've done the latter a few times. And when I joined Compass Group, I had no knowledge of Compass. It was a similar business that kind of grew internally. But I do think that it's actually inevitable and virtuous that at times you bring in outsiders. And particularly, I think the thing that I thought hard about before joining was what was really needed. And you're right, there's a lot -- there's a great culture in this business. There's a lot of deeply experienced people. But when you look at the stage that we're at and what we need to do and some of those things we've just discussed, like how do you run now an international business of 12 markets? How do you make sure that you get fresh eyes to get the next level of efficiency in operations? How do you build good strategic relationships with your franchisee to make sure that their economics are strong? I think it's actually good to bring people in who have that experience. And obviously, I've done that fairly extensively. It doesn't mean that once you get into the plan and once you look at the structure, that you're not going to need to bring in some key talent, but I'm not flagging that to be clear. My preference has always been to work with the existing team. What I will tell you is, again, day 3, but I've had an extremely strong welcome from the team. And in a sense, it's been quite heartwarming actually that they've kind of gone, look, we've got all the QSR experience, we've got all the Domino's experience. Here is what we see in you and here's what we'd like to do. So, so far, so good. I'm also conscious, if that's the question, that when you enter a business with such a distinctive culture as this, you have clearly got to evolve it for the next phase but you've also got to handle it, you've got to act as a bit of a custodian of it and handle it as a precious asset because there's no need to change culture for the sake of culture.

No, that's good.

Yes. What do you think, Richard, [ if I can ask you for a comment ]?

Well, I think for an outsider coming in, the idea that you would not bring someone in, I'd be amazed at. And I think what I've seen in the past is good people coming in from the outside will attract other people from the outside. They'll want to bring in people that they know and trust. But on the flip side to that, I bet you there's some people in Domino's going, who is this guy? We don't know him. He's an outsider. What's he going to do? So that's the balancing act.

Yes, exactly. And look, that's why I've focused certainly in the first part of this term spending as much time as possible getting around our people and meeting as many of our people and our franchisees as possible. So we quickly get that kind of, what's the word, lack of familiarity out of the way.

Thanks, Richard. The next question comes from Craig Woolford from MST.

First question, there's a lot of discussion rightly about the franchisee economics. In the recent past, the view has been that, that can be fixed with more volume. It's a natural logic there. But what other levers do you see to improve franchisee economics? And how quickly do you think that can be solved?

Yes. Look, good question. I'm not sure based on the 3 days experience today, I can answer it fully for you. I mean clearly, one of the strong things about our model, as I understand it, is given the relatively low cost of store build, the whole marginal contribution thing does work pretty well, which is it doesn't take many extra orders sometimes to move franchisees to quite a superior profit level. And we've got some of our really high performers who are kind of operating at a 25% EBIT, which is good news. The facts are those, you've got to get everybody to an acceptable level. And I think our target has historically been about sort of 10% to 12% for franchise partners. I think -- so volume is helpful, but I think there are other levers to your point. I mean clearly, continued efficiency around food procurement and efficiency around labor in these sort of businesses are big levers. And my experience is that there is usually stuff that you can do quite quickly. I've not gone into -- I'm talking Compass experience now because I've not seen enough DPE stores to say this. But it was rare that I didn't walk into a site where there couldn't be improvements made around food cost management and particularly labor management, right? And the business is increasingly invested more in technology around that. And I think that's a kind of high priority. I think the other thing that has been interesting that I need to understand a little bit more, but the more virtuous relationship with some of the aggregators as a delivery vehicle as well, particularly for some of those periods where it's not necessary as economic to have your own bespoke delivery people. I'm not saying we should walk away from that because I think it's part of the experience. But I think those are some of the sort of opportunities that I think do exist. Does that make sense, Craig?

Yes, it does. It does. It's certainly a precursor to further improvement for the whole business in my view, so interesting. My second one, I'm going to sort of weave in almost a technical question around the LTIs with essentially a fairly blunt question of, does the company need to go backwards before it goes forward? So that's the sort of context of the question. But in the LTIs, there's a minimum 6% EPS CAGR up to 15%. What's the starting year for that? Is it FY '24 or is it the year that we're currently in?

Maybe, Mark, if I jump in on that one?

Sure, sure.

Yes. So Craig, the starting year for the LTIs is FY '24, so it's an underlying EPS of $1.338 per share. Certainly, and it's probably not necessarily appropriate for Mark to answer questions on his own remuneration. But I can tell you in discussions with the Board, that the Board's feedback is that there is two aspects to the LTIs, one both being the EPS CAGR growth and the second being an absolute total shareholder return. And so the Board's view is that Mark only gets his incentives if shareholders are in the money. And the second is that the Board, given the business performance more recently, the Board felt that a broader EPS CAGR range was appropriate. And that the -- it's also important to note that whilst the 6% is a lower hurdle than the previous rem report put to shareholders initially and subsequently withdrawn on the retirement of Don, but the vesting percentage also is reduced with the new targets as well. So the previously at 8%, 30% vested, under this approach, only 20% vest at that 6% hurdle. So hope that gives you some more color there.

Yes, and that's clear. And what do you say to the broader question, Mark? Is it...

Is your question does it need to go backwards before forwards?

Sorry, say it again.

Do you want me to go -- yes, do you see the business needing to go backwards first to go forward? Is there investment that's needed?

I honestly can't answer that yet, Craig, because I think what it requires me to do is to do the work I'm going to do over the next couple of months at least, which is work with the team to decide what the plan is. As I said, I think there's high growth potential in the business. There's a need to grow profitability on the current estate. I don't have a line of sight on what the investment requirements of that are right now. So I'm going to take that one on notice, if I may.

I understand.

Yes. That's right. And we'll obviously stay in touch through the process.

Absolutely. Look forward to it.

Thank you, Craig. The next person is Michael Simotas from Jefferies.

Nice to meet you, Mark. The first question I've got has a couple of parts. Hopefully, that's okay, Nathan, but if it costs me $50, it costs me $50.

There we go, Michael. Go ahead.

Do you have a view yet, Mark, on what the right vertical margin for the system is? And the reason I ask is because in the past, one criticism of this business made by some is that it made too much money at the expense of franchisees. But now it looks like there's just not enough economics going around. So interested in what you think the right vertical margin is, and then also how you think those economics should be split between the franchisee and the franchisor. And just to pick up a couple of things you said. The Coca-Cola system, yes, is a very large franchise system, and my understanding is always had a view of split of profit pools. And then the second one is, you touched on Australia being a high-performance business. Is the split of the economics right in that business? And are franchisees making enough money in Australia?

Yes. Okay. Look, good question, and thank you for that, Michael. And I'm going to obviously sort of condition this by saying, I'm going to kind of review this as I go through it. I mean I think the algorithm or the equation that notionally, we've tried to work to, as I understand it, is that in terms of the kind of 25% that's available, we should be at about 8% to 10% in terms of the warehouse and kind of net royalty piece. Obviously, there's 3% that goes to the master franchisee in the U.S., and I doubt that's negotiable. And I think actually the opportunity there is to make sure that we're working as collaboratively to get the value out of that. But to answer your question, the franchise partners should be at around 10% to 12%. And my understanding, happy to be challenged on that, that is I'm led to believe that globally, that's a healthy position to be. And as we grow, I think the goal is to make sure that the franchisees are getting a greater share of the upside, right? We don't want to be taxing them because I think that, that doesn't lead to a healthy aligned and franchise system that's going to be really fit for purpose for the future. So that's what's notionally in my head. I welcome any comment on that. And as I said, I am caveating that, of course, by once I've got a fuller plan for this business in place to kind of reassess that perhaps with a bit more fine-tuning.

Okay, so that helps. So just to sort of wrap that up a little bit, so you're sort of saying 25% available, some goes to master franchisee -- sorry, the brand owner, and then what's left, it sounds like roughly half split between franchisee and franchisor is what you think?

Well, we're at sort of 8% to 10%. It's a total pie of about 25%. 3% goes to the franchise in the U.S. We should be in the sort of 8% to 10% range and the franchise partner should be in the 10% to 12%. It's not necessarily 50-50. I think the point is that this is a franchise business, and it only works obviously in a number of respects if it's profitable for franchisees, both in terms of the sustainability of the business and the ability to get new franchise partners to take on stores.

Okay. And then the second question I've got is you've been involved in this business and advising the Board for a while. Can you give us any examples of advice that you have provided to the company and whether that has been put in place yet or the upside from that is still to come?

Yes. So the engagement with the Board focused in a number of areas. And what I want to make sure that I've stressed is that it didn't give me a full panoramic view across the business because we basically, between Don, Jack and I, chose some kind of high focus areas. One of those was latterly Japan, and so I was involved in the sort of reassessment of Japan. But a lot of it was also more broadly around how we kind of set ourselves up for the future. I think the attraction for Don and Jack was to have somebody who had run a large-scale multi-geography business and kind of post foundation, how we need to operate and structure it. And then I was also providing advice, and Don would tell you this to him individually and also to a couple of geography leads. So hopefully, that answers your question. I don't assume, just so you know, that it equips me fully to have a 360-degree view on this business yet. So that's why I'm taking some time now. I mean it's great to have worked in parallel with the Board, and it did give me some insight into the business. It's pretty different once you cross over as CEO, and you're actually right in the depths of the business, if that makes sense. So I want to take the time to make sure I fill that view out.

Thanks, Michael. I'm just going to -- I'm going to count those as just on two questions, so we've skated away from that one. Next question just from [ Nathan Chan from Toroa ], who's asked, given you're speaking about Japan, what is the primary issue with Japan? We've tried maintaining pricing, cutting pricing, menu innovation. This is Nathan's words, nothing has worked. What is the real underlying issue here?

Great question. I'll take a bit of it on notice, obviously. But from my involvement in Japan, a few perspectives. I mean one, obviously, it's interesting that Japan as a market is quite different from a number of our other markets in that the frequency and consumer adoption of pizza is lower. I mean on average, consumers will consume pizza twice a year. So you don't have the same frequency. And so I think the strategy needs to be very much geared towards that. And it is possible that we, in the past, took slightly more of a mature market strategy or a developed market strategy and tried to implement that. Clearly also, COVID was an incredible following wind or incredible boost for the business. And as I think was said before, fair enough, the indicators at the time possibly led the team to slightly overdue stores. I'm hoping we've adjusted that back now and we can now focus on this base of stores to kind of grow from there. And then thirdly, I actually think that what is also unique about Japan is whilst inflation has been a characteristic across all consumer markets, the Japanese, certainly, I learned this from my business, were genuinely not used to inflation. I mean I had to teach my whole leadership team in Japan to go to clients to ask for price increases, and they haven't had to do that for probably about 10 years previously. This is over the last 2 to 3 years. And they haven't had to do that previously because of such a period of continued sort of deflation in Japan. That has had a real impact on price points, I think, and consumer behavior. And so we have a project that we kicked off a while ago underway right now, which is to take a new look at the menu, the offer and the pricing and the promotional strategy in relation to that and the frequency of the market. And I believe those are the core issues right now. So obviously, a bit of a caveat as a 3-day-in CEO. But obviously, I've spent some time on Japan already, and that's where I see it out. Does that answer your question?

Nathan submitted that. Next question from Bryan Raymond from JPMorgan. Bryan?

Mine is a bit of a follow-on on Japan. And actually, just trying to get a bit more background on what you achieved at Compass there. I couldn't see much in the printed material that Compass is a very big business, but Japan, I think it's about 3% of revenue there. So just trying to understand what -- essentially, what you did to turn around that Japanese business at Compass. Was it a cost -- was it cost management? Was it customer wins? Was it supply chain? It could be a number of things. And then what does that mean for Domino's and your ability to leverage that experience into what's going on now in Japan?

Yes. Okay. So let me just sort of, as briefly as possible, give you the Compass credentials. In terms of Compass overall, one of the challenges is because it's such a large business and because the U.S. is such a large part of the profit base, you don't necessarily get detailed reporting on the other parts of the world. I started at Compass by leading the Australia business and I reset that. That was one of the most profitable regions in the world at about a 9.5% operating margin, group average, 7.5%. Took over the business with spectacularly bad timing when the iron ore price collapsed and 40% of our business was in offshore remote. So took about $140 million of cost out of that business and grew it and kept it at a 9.5% margin. And then I had to take -- I then was asked to take over Asia. Japan was the second biggest country in Asia. But what I had to do obviously was to -- Asia would have been a collection of markets before with sort of individual strategies. I did the bit that I think is always important in these businesses, which is work out what you do transversely because it's high impact everywhere and it's kind of economic to do so and then what you did locally. Japan was a business that we had bought, I think, somewhere around about 10 years before. It had been a restaurant business, has been converted into a foodservice business, which was pretty interesting. And the key levers, I think if I summarized on Japan was, I took us out for 2 sectors. We had 2 sectors. So actually sold about 20% of the business initially because they were not sectors that were global sectors for Compass. And I saw them as being, how would I say it, less productive for the future. Delighted I did, by the way, because whilst it was a very tough job persuading the Japanese team that we needed to exit, they were disastrous during COVID. I then focused the team on being equipped. It was actually a pretty good business. I mean we had a lot of sites and we had a multi-sector business, but the clear threats that I saw were around operational excellence. There wasn't really adequate sort of standard operating processes and a high level of operational excellence, I mean, consistently across the business. There was no inability or a limited inability to take price in terms of capability, and we then hit a period of inflation. And I'm pleased to say that Japan went from really almost 0 price increase capability to full recovery of inflation in terms of client contracts within about 2 years. And then thirdly, a bit of a re-templating of the consumer offer. And then lastly, a lot of work on supply chain. Our supply chain in Japan and our procurement approach was definitely not optimal. I did make quite a lot of management change in Japan, pretty much overall, over a period of time, recruited almost an all-new leadership team. And that wasn't disrespect to the previous team. But when we looked at the size of the market potential and we looked at the opportunities and what it was going to take, the team did not have that leadership. Hired a great CEO who actually ran Metro previously in Japan. I'm a great believer in local CEOs. That's not -- I'm not giving any signs on the Domino's business, but it's certainly in our sort of business. I had an all-local leadership team and really hired a kind of new generation of leader that was kind of fit for the future, and he is still running that business. And that business has been growing consistently both in terms of margin and top line for the last 2 to 3 years despite the step back that we had to take in losing those sectors. But I think it's a far better business for it. Does that give you a bit of a sense of the Japan story? And then your question was, I mean, hopefully, the transfer value of that is reasonably evident.

That's great insight. It certainly helps us piece together your background there. And then just sort of following on from that, your involvement with the Board and you mentioned you're involved with the Japan -- recent Japan decisions. Just first of all, just confirming that, that included the larger round of store closures of late that you were sort of advising on and whether you think -- whether your advice was that, that is all you need to do. I think there's some in the market, including myself, I think that there is the potential there to close a lot more stores than what's been announced so far in order to reset that business to the right footing. Just keen to understand whether you're involved in that decision and whether that was sort of consistent with your view that, that's all you need to do at this point.

Yes. I had the opportunity to participate in there. And I did believe that whilst regretful, the store closures were the right thing to do. We took a very kind of empirical approach to that and sort of triaged the kind of site tiers in Japan. And that tier looked as though it was going to be really hard, given the change in market, new dynamics, et cetera, for those to ever be or in a reasonable time frame to be successful. And you don't want to leave franchisees or even company stores in locations where you really can't be successful. I don't think it's all. As I set out before, I think it's a more holistic strategy that's needed in Japan and the key elements that I set out. But I did believe that it was important, and I'm going to keep a watch on that. But my focus now is to hopefully bookend that and grow from there. But kind of more news follows on that as I transition from being a little bit in parallel to the business to being at the heart of it.

Great. Just sorry, confirming when you said bookend, does that mean that you're happy with the store closures to date and there's no more to do? Just to confirm what you meant by that.

I'm happy with the store closures to date because I think they were the right decision. I hope there's no more to do because my focus really now is trying to pull the other levers so we can return that business to better franchisee profitability and better growth. But I'm keeping my options open because at the end of the day, I want to make sure we do the right thing long term in Japan for shareholders overall. So I can't definitely rule out but I'm not indicating that there is a plan afoot on that. I'm just keeping my options open.

Thank you, Bryan. Mike, I appreciate we've come up against the scheduled time, but we do have a number of other questions. Do you -- are we able to continue going through?

Sure, sure. Yes.

Thank you. So the next question is from Tom Kierath.

Mark, nice to meet. Lots of big-picture questions have been covered already. I actually wanted to ask one on the trading. And Nathan, I think you said at the start there that the guidance of $100 million to $108 million should no longer be relied on. I just wanted to clarify that was the case. And then secondly, I'd be just interested in what's gone wrong in trading since you last spoke to the market in the past couple of months?

So are you talking in terms of the first half being -- first half '25 being higher than '24?

Yes, the first half '25 EBIT, I think that the implied range from the guidance was $100 million to $108 million of EBIT?

So yes, sorry. My commentary wasn't that, that was withdrawn. It's just simply that in terms of our previous guidance, it's that same-store sales performance for the first 17 weeks haven't been where we want it to be and that we were still reviewing the performance in light of those circumstances, including the same-store sales performance. Obviously, the trading at Christmas in Japan will be a key factor on that, but yes. So that's probably all the color I can give on that, but not that we're withdrawing any guidance on that. Just simply that obviously, the same-store sales is not where we want it to be.

Right. Is there no color you can provide on what's not been as strong as you would have liked or where the sales had been weaker?

Yes. Well, the same-store sales at negative 1.2% as we provided in the trading update. We're not in the kind of business that wants to be delivering negative same-store sales. And as we outlined yesterday, particularly Japan and France, some have not delivered us the turnaround that we're looking for so far. We've just launched the advertising campaign in Japan -- sorry, in France, which is 17 days into that additional advertising but we haven't yet changed the trajectory of sales there. And Japan, we've -- as we've previously advised, we've got positive customer count so far calendar year-to-date, but we still need to turn that around into positive same-store sales for the benefit of the overall business. So that's -- as we've said, that's the areas of weakness at the moment, but that's why we've got a negative 1.2% on the group's same-store sales so far. Follow-up question from Mark or we've covered off those?

That's it.

Okay. I'll hand over to Lisa Deng. Lisa, go ahead.

Mark, lovely to meet you. Two questions from me. First one is about the franchisees engagement and influence, right? We've talked about your previous time at Coca-Cola and you understand how important having a partnership with the bottler is. Now you've got over 1,000 franchisee partners. How do you plan to quickly engage and also influence them into more of a positive trajectory to work collaboratively with the agenda forward?

Yes. No, thanks for that, Lisa. Great. You're right. It's more plural than the past. I mean number one is you get out there and meet them. Number two is the good news is we actually have some structures already around that, which is franchisee councils. And in a couple of our countries, for example there, we've just done a kind of changeover. So they're a whole new group, which is great. And they're sort of a council that provides insights and a kind of a peer group for franchisees. So that's a very effective way. We also have events like, for example, the rally, which if I remember right, is in November for Australia, for example, which is a great opportunity. I did that last year. That's a great opportunity to meet lots of franchisees and then make sure that, obviously, I communicate. They're a very important stakeholder group for me during this period. We've already made communications to franchisees. They actually jump on our kind of town hall sessions. When you do a town hall session here, you'll have a mix of DPE folk and also franchisees as well. It's kind of seamless, which is quite nice. So those are some of the ways. Hopefully, that answers your question.

Yes. The second one is more about going from, I guess, a B2B business to a B2C business and especially a very valuable consumer brand. Do you -- in your opinion, and knowing it's third day, have we done enough in terms of engaging with the consumer via the multiple channels, be it the user experiences on the website, the app, the lack of a loyalty program, for example, the in-store experience, the digitalization of that potential as you talk about labor management? Like have we done enough in terms of consumer engagement? And what do you plan to do there?

Yes, good question. So in terms of the B2B, B2C thing, I mean, the obvious thing I'd just highlight to you is that 16 years at The Coca-Cola Company was all B2C. And at Compass, there was a quite high proportion of the business. There's a sort of misunderstanding around foodservice that everybody is subsidizing food and its institutional meals. It's actually not. The bulk of clients actually want you to get their employees or their communities to pay for it. So there's a pretty high retail part to our business, I think I highlighted before. In terms of do I think -- look, I think there is -- having again, spent 3 days, Lisa, I met some of the marketing team. I think there is very good resource in the business. I do, like you, question given the current environment and shifts in consumer, ask whether we have got optimal mix, be that above the line, below the line, be that online, off. And clearly, things like loyalty programs, which have been run by peer businesses, are very attractive. And so I think all of those are on the table for evaluation as the team and I think hard over the next while about what it's going to take to be successful in the next phase. Hopefully, that answers your question.

Next question is from Phillip Kimber from E&P.

I was really just following up on some of the answers that you gave before around franchisee profitability. And based on the data that Domino's has released to date it's, in round numbers, probably 30% below at the group level where it needs to be, this sort of magical 3-year payback number. As franchisor, you have the levers to very quickly get that franchisee profitability up. And I'm just interested in your thoughts conceptually about that. You can add rebates and do things to get their profitability up quite quickly. Would that be something that you think might be an important way, get their franchise profitability up quickly and then we can work on growing the pie and rebalancing later? I just sort of wanted to get some conceptual thoughts around that.

I mean the short answer, Phillip, is both are options or both are levers. When we've actually done some of that, foundation was undertaken fairly recently and about 1/3 of those -- of the savings that we generated there were actually passed through to franchisees. And so there has been -- even though you're right, there's a gap between where we ideally want to be and where we are, we have seen increases in franchisee profitability. So there is an example that we have shared savings with franchisees. Ultimately, I think, to be sustainable and healthy, we have to grow the pie. But you're right, there are ways to sort of work together. I mean I think what's another good sign, just to give you some reasons to be cheerful is, again very early on, as I say. What's a good sign is that in 2 of our key countries, we've already seen franchisees sign up to increasing contribution to the ad funds, which I think is, to my second point, a really healthy indicator, a, around where they feel they're sitting; and b, their confidence that it's going to drive top line growth and grow the pie.

Great. Can I ask a second question just around the Domino's system? In the U.K., I understand they've had some changes and to their agreement to encourage store growth. I mean have you looked at that? And is that something that might be of interest to bring to the DMP business?

I might hand the U.K. bit, if I don't put him on the spot, to Nathan because I have to be honest with you, I'm not familiar. I do plan to meet with the U.K. team, because I think they've done some stuff really well, on a future European trip. And look, one of the things I learned just shortly at the Coke company is when you have a global business, it is really important to tap into best practice. So I am absolutely up for ideas that come from outside of our network and our geographies. And by the way, also, I've spoken already to quite a number of the key people in DPI, who obviously the master franchisee because I also learned at The Coca-Cola Company that the folks who are at the center who have a global view are invaluable because usually, an issue you face has been seen in 3 other markets and they can fast-track you to a solution rather than you have to always work it out yourself. But I have to be honest, I'm not familiar with the specifics of what the U.K. has done. I'm not sure, Nathan, whether you have a lens on that.

Yes. Perhaps if I speak broadly about incentives, Phillip, I think DPE has historically had a level of incentives in place to incentivize store openings. In some markets, that can be in the order of $150,000, and that's historically been in place. But I think as Mark has spoken about and I think everyone on this call is aligned on, that the core average franchisee profitability needs to increase to get to a position where an incentive gets people off the fence. The incentive alone is not necessarily enough there unless the core, that average profitability is strong enough and hasn't been strong enough. That's obviously what everybody is aligned on improving performance on. Thanks, Phillip. And we'll hand over to the last questioner, who's been very patient, is Caleb Wheatley from Macquarie, who I will point out has just taken coverage of Domino's Pizza Enterprises this week. And Caleb, what a week to take over. So Caleb, over to you.

What an introduction, no pressure. Nice to meet you, Mark. First question, just on sort of the structure of the business globally. Just keen to get some of your early thoughts, if you have any, just around how to structure what has now become clearly a very broad business. Even if we take Asia as an example, there's a whole suite of different markets at different points of maturity and different consumption cycles. Just keen to hear how you're thinking about sort of the global business structure to make sure some of these country-specific issues might not come up again necessarily.

Yes. Look, great question, and I'll be frank with you because I'm almost as new as you, Caleb. So we're both kind of newbies to this. But philosophically, from kind of where I've been before, obviously, given the nature of our business, the geographical structure makes some sense just for overall kind of intelligent economic management reasons. From experience, though, there are two things that I tend to focus on. I mean obviously, I'll revisit that. I've seen other models that existed before where you might move some of the smaller markets into a fast-growing category, which might require a sort of different, more of an incubator approach. But I don't have a definitive view on that yet, but there are alternatives to that model. It's a model we did employ at one phase in my Compass days and it worked quite well. It also means that the folks that are running the big countries aren't too distracted by the sort of up-and-comings. But I think what's really important actually is two things: one, deciding what you're going to do across the whole business so you get economies and efficiencies and you don't let kind of cost blowout and everybody trying to invent the same thing, and then also what you're going to give full empowerment for locally. I think the second thing that's equally important is the informal networks. You don't have to change your full hardwire structure to put a group of leaders together that have got a common problem and get them to solve it. In fact, I found that it's the informal networks that are more important and they can be more dynamic and they can be adjusted more quickly towards the kind of emerging needs in the business. So sorry that, that's a bit of a kind of principles answer, but I can't give you more at this point because I need to spend a little bit more time in some of the geographies that you're kind of thinking about. Does that make sense?

That's helpful. And my second question, perhaps following on from that a little bit. But just around sort of your earlier comments on initiatives like creating new occasions, I guess other opportunities that you're looking at in terms of driving that sales turnaround. Is there anything from what you've seen, conscious again that it is early days, but is there any sort of investment required? Or do you think there's been an element of underinvestment that maybe hasn't seen these ideas communicated as good as they had have been so far?

I mean look, I think from an investment standpoint, the kind of store models are pretty good. There's always a continuous need to upgrade. And my understanding there is that, that's more of an issue about you have to close a store for a while and so there's an opportunity cost to that. I'm not seeing anything that requires at the moment, and I'm really going to take this one a bit on notice, big quantums of investment. Because I think the mindset has always been one of the enduring success factors is that we've grown this business within a kind of accepted operating model, if that makes sense. So the way that our people work on developing new products, I mean, I'm literally sitting on a floor where down the road, we've got a full model kitchen where the exec chefs make 100% sure that anything that goes out works on existing equipment within stores. And so they kind of design to that effect, and I think that's a great strength. And I'd like to see that keep going because I think where you get into trouble is if the creativity overrides the pragmatics.

That's great. Really helpful.

No worries. Good to meet you.

Thanks, Caleb. Now I just wanted, before we've completed all the questions, however, I just want to go back to that previous question from Tom Kierath because I think that's a really critical one that was on guidance. And I just want to make really clear my earlier comments. Tom's question was in terms of we previously provided guidance, the full year pack, that our first half of '25 would be greater than the second half of '24. And so that provided, I think, a bottom end to that range in terms of that guidance we provided. My earlier comments were that our group same-store sales are down 1.2%, trading year so far to date. And that's obviously not where we want them to be. And that weakness has been because we haven't yet seen an uplift in our performance from France and from Japan. All of that said, at this stage, while there is a number of moving parts and we want to have a clearer view on what that first half performance happens to be, at this stage, we don't have any basis on which we need to remove that guidance that we've previously provided to the market. And so I want to make that clear. Obviously, the Japan Christmas trading performance is important. But again, to stress that this is not a removal of what we've previously said because we have no basis on which to do so. So I hope that clarifies the comments. I'm not sure if I can be any clearer than that, but I'm happy to take any other questions on notice. But I think from a perspective of have we removed it, let me be crystal clear, we have not. We have no basis on which to do so. So the previous comments at the full year are still in place. So thank you all for your attendance. Mark, maybe if I just hand to you to say any final words.

Yes. No, thank you. It's been a good session. Hopefully, I've given you best line of sight on thinking to date. Look forward to staying in touch. I appreciate you making the time, and we'll see each other again.

Okay. Thank you all. We'll talk very soon. Thank you. Have a great day. Bye.