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

Good morning, all. Just waiting for all participants, and then we will get started. Okay. I can see the participants have now populated into our call. Good morning, and thank you for joining us. I'm Nathan Scholz, the Chief Investor Relations Officer for Domino's Pizza Enterprises. We're joined this morning by George Saoud, who's our Group Chief Operating Officer and Group Chief Financial Officer. We're going to start with some prepared remarks from George first, and then we will hand over to question and answers. As is our usual practice, we'll allow our analysts to unmute, ask follow-up questions, and ask people then to go to the queue just so everyone gets a go. George, over to you.

Thank you, Nathan. Welcome, and good morning, everyone, and thank you for joining us at short notice. I'll make some comments and then happy to take any questions. We've released an update last night to give the market a clear and complete picture of two things at the same time: the position of our underlying performance and the outcome of a comprehensive review of our balance sheet. Before I go further, one important point to note is that the numbers I'll refer to today are preliminary and unaudited. The audit is ongoing and will conclude ahead of our full year results. If I step back 12 months ago, we set clear priorities: fix the balance sheet and leverage ratio, take costs out, improve franchisee profitability, prove out changes to pricing in WA model and reduce our reliance on the high load discount. We have made significant progress to each of these positions. We took out $60 million to $70 million of annualized costs through headcount reductions, IT and supplier input savings. We refinanced the group at lower rates. We stepped up free cash flow. We improved franchisee earnings and the WA pilot has been positive as our trial. Let me start with what matters most, how the business is actually performing. Underlying NPAT is expected to be between $118 million and $122 million, consistent with the guidance we gave the market. Free cash flow is expected to be approximately $164 million, an improvement of around $117 million on the prior year. That is a step change in cash generation. We've reduced our net leverage to around 1.9x, in line with our target, and we completed a $1.05 billion refinancing that gives us staggered maturities, better pricing and real flexibility. And critically, franchisee profitability is up. Average franchisee EBITDA is $105,700 for the rolling 12 months to quarter 3 of FY '26, an increase of over 11% on a constant currency basis. The overall picture is that earnings are in line, cash flow materially stronger, debt down and our franchisee partners making more money, a solid foundation for the business. But I want to be direct about same-store sales, which were down 4.1% for the year. This reflects a deliberate decision to prioritize profitable, sustainable sales over headline volume. We have brought discipline to promotions and improved unit economics rather than chasing low-margin transactions. The proof is in the outcome. Sales moderated as expected, but franchisee profitability rose double digits. That is the trade we made. It's the right one for the long-term health of the network. Now let me turn to the balance sheet. We expect to recognize total write-downs of approximately $259 million, of which $246 million is noncash. This reflects a thorough, deliberate review of the carrying value of our assets. We have written down the France and Taiwan goodwill. We have completed a portfolio review of our IT projects, a detailed assessment of our corporate store assets and other balance sheet items. They are, in a large part, a reset of book values to reflect today's reality, but also our revised strategic priorities. They do not affect our cash generation, and they do not impact our banking covenants, which is assessed on an underlying EBITDA basis. This is review mirror work. We've done a comprehensive review of the balance sheet and the risks across the business. That work is now behind us, and we're moving forward with a cleaner, stronger platform. WA is the most important forward signal in today's update. In WA, average store EBITDA improved by around 30% over the five months to May, and it did that despite lower sales and order volumes. That tells you this is about quality of orders, product mix and operational execution, not just topline growth. We've seen the same principles work in New Zealand, where franchisee EBITDA is up over 22%. This gives us a proven blueprint, and we intend to progressively roll out the WA model across the rest of Australia through FY '27. The key question from here is how do we continue to grow franchisee profitability. Underneath all of this is a simple operating model built on three key segments that we are focused on: First, growing profitable order count, the right orders on the back of the right promotions. Second, and importantly, reducing supplier input costs, so more value flows to our franchise partners. And thirdly, driving store productivity, particularly through better labor rostering and makeline improvements. This is where management's attention is because a more profitable franchisee is the engine of our business, for network growth, for better customer service and shareholder returns. On technology, we've deliberately moved the business away from an agile operating model to set a clear enterprise-wide priorities, with IT firmly in service of the business. Our focus is on three things: removing customer friction and hygiene points across our markets, building out our CRM and personalization capability and supporting store productivity through rostering and makeline. The portfolio review that sits behind part of today's write-down is a direct reflection of that sharper focus. We are optimizing our corporate store portfolio with up to 60 stores expected to close, the majority across Australia and Europe. This is largely a rebalancing after the aggressive expansion through the COVID period, and it is concentrated in our more mature Western markets rather than Asia. These actions are expected to deliver around $11 million of annualized EBIT benefit. The reality is that the consumer is under real pressure. Cost of living and interest rates are weighing on households across our markets. Performance is mixed by region, and we have work to do. While we have our arms firmly around the issues, we have a proven model in WA to lift the markets that need it, and our focus is squarely on the levers we control, profitable orders, franchisee economics and store productivity. Finally, Andrew Gregory joins us as Group CEO next week. Having reset the balance sheet and delivered on our FY '26 commitments, Andrew's immediate priority will be building on the work underway to drive sales growth, franchisee profitability and long-term shareholder returns. So to sum up, underlying earnings are in line. Cash flow is strong, debt is down and our franchise partners are more profitable. The balance sheet is reset and behind us. We feel good at the progress and are focused on the future. We will provide a full detail, including the final dividend and a full reconciliation of our underlying statutory results with our FY '26 result on August 26. With that, I'll hand back to Nathan and happy to take your questions.

Thank You George. The first question will be from Michael Simotas from Jefferies.

My first question is around the WA pricing trial or trial of the new pricing model. How much of a drag on same-store sales in that market was it? And as you roll that out more broadly, just mathematically, it looks like it would be an even bigger drag on overall group same-store sales. And in that context, can you maintain this stable level of earnings or grow earnings into next year? Or will that start to weigh on earnings given the impact on sales?

Thanks for your question, Michael. In fact, WA is the other way around. we're comping positive on pickup in WA and delivery is the focus point now in WA. It is not a drag on sales for Australia at all. We see the models working around pickup, and we're making changes to our pricing on delivery, and we're expecting delivery to come back into growth in the future.

Okay. So what's driven the sharp decline in same-store sales if it sounds like ASP is more than offsetting order count in the markets where you reset price?

We've dropped a lot of the promotions. So we had a lot of promotions on delivery, and they've gone away. And so when you take out the intensity of promotions in your market, a lot of the value customers, we've lost a lot of those value customers. What we've seen with WA is getting the right prices upfront in menu prices is driving pickup and driving our pickup business. And we're now doing that in our delivery model. So it's not, what's moving and what's changing is our promotions going forward. We will bring back promotions, but in the right way, so it does not impact franchisee profitability.

Okay. So the market has got a little bit of growth baked into numbers for next year. Do you think that's sensible at this stage?

That's what we'd like. We're not giving guidance on sales, Michael. But when I look at what we want to achieve, absolutely.

Then next up is Craig Woolford.

Just wanted to clarify the promotional plans across other countries. You talked about the success of the WA promotion trial, the change in promotions and the rollout to the rest of Australia. But what about the other countries? And as part of that, I read somewhere that you're moving the half price discount for pickup in Japan as well, for example.

Yes. So, when you look at the other countries, you look at Netherlands example, we're not changing Netherlands. Other markets have been doing okay. Japan, we've relooked at Japan, and there is a new pricing model in Japan. It's a project that we've undertaken. And we're focused on increasing order count in Japan. So, a lot of what we've done has been targeted to Australia. And then we've taken some of those principles in Japan. As an example, some of those promotions that we were doing in Japan were loss-making for our corporate stores and our franchisees, and we've pulled them out. And that's why we're seeing improvements in franchisee profitability, including in Japan. So, we are bringing back promotions that make sense for franchisees. But Japan has been one of those markets where we've just rolled out a new framework for pricing, and its early days to assess that.

Okay. I guess I'm sure there'll be lots of questions on this. I guess what we're wrestling with is trying to understand how to interpret the sales results. Japan got Asia, sorry, got worse. Is that a reflection of the change in tactics? Or is it a sign of market demand?

No. So the changes we've made in Japan have only started from July. They haven't started prior to that. We have tinkered slightly with Japan in taking out some of those promotions that were not accretive to earnings for any party or for the network. So we started to do that in the second half, and that's part of the numbers that you see in the HS sales position, and that's purely for Japan.

The next up is Bryan Raymond.

Just trying to unpick a few of the numbers. So the negative 4.1% like-for-like, I understand we've already had a few questions on the change in promotional approach in WA. Just trying to understand the degree to which that's driving the overall number because a few have called out already, some of the weakness that we've seen in like-for-like is in areas where perhaps we haven't seen as much of a shift in promotional tactics. So is that a meaningful driver of that negative 4% in terms of you pulling back on promotions? Or have there been other factors that have been contributing to that post the weather events you called out in February?

Yes. No, so WA is not dragging down our sales position at all. I just want to make that clear. A large part of the negative 4.1% sales and in particular, in the Australian market is because we pulled a lot of those promotions. So as an example, we used to do half price or to do delivery to the home, and that was one of the key order counts that we had on weekends. We pulled that promotion that had delivery to the home. And so we've lost a lot of those customers. We're still seeing pickup in WA is growing, cycling positive comps. But what we haven't seen is the growth in the delivery channel that we would expect. And that's the one that we're focused on at the moment.

Okay. Okay. And then just as a follow-up, the alignment with DPZ on some of this is something. I mean we obviously follow their quarterly calls and they have indicated in the last two calls, they have a strong preference for order count growth. And you guys are sort of obviously flagging more store closures next year with that provision. You're focusing on profitability over sales orders. How much patience do you think DPZ have? And is there any sort of second order effects we need to be mindful of there?

We have a great relationship, Bryan, with DPZ. I speak to Sandeep every other week, if not two, three times a week. So the relationship is very strong. We would love order count growth. We want to get order count growth, but we want to do it in the right way. So part of that has been doing a lot of those promotions that were negative or lower margins for our franchisees and substituting them with higher profitable margins on through promotions. And that's what you will see in Australia. So starting in August, September, we've got promotions that are coming through, and you'll start to see that in the market in Australia, which are expected to drive order count growth over last year.

I'm just trying to get my head around the profitability piece. I can see you've said NPAT $118 million to $122 million, but there's no kind of commentary on EBIT or EBITDA other than those couple of kind of country comments. And you haven't said what network sales is as well. Can you maybe just give us a bit of color on those three metrics just so that we can understand what's kind of going on through the P&L?

Yes. It's a high level, Tom. And because we haven't got complete audited numbers, we've sort of defined it down to NPAT, and we've left it at that. Over the next couple of weeks, obviously, as we present to the market, we will have a complete analysis of EBIT and EBITDA. But at this stage, we've left it at NPAT, and then we'll do a full reconciliation of those numbers into the future.

The next up is Thomas Kierath.

And I think you're saying that with the write-offs, there's $9 million less amortization coming through in the future. Was there any, I guess, benefit in this half from lower amortization or like a lower tax rate or anything? Just like is there anything we should kind of be cognizant of then, I guess, when we look at the NPAT numbers?

With amortization, there's been ins and outs. So we've actually accelerated some of the things that we ordinarily would have capitalized we've expensed and then we've got some accelerated depreciation going through in those numbers. From an effective tax rate, there is a benefit from effective tax rate. It's probably around 0.5%, 0.6%, around that magnitude.