Domino's Pizza Group plc (DOM) Earnings Call Transcript & Summary

Our deputation of our annual results from 2019, I'd like to welcome you all here today. We're joined today by Ian Bull, our Interim Chairman; Elias Diaz, who joined our Board in the autumn is also here; and Bethany Barnes will present the financial results in a moment. We're also joined by the members of U.K. LT and a group from the U.K. finance team, who've done the most fantastic job in David's absence in getting these results delivered on time. So I'd like to pay tribute to them for their hard work to get us here with these results, good audit and so on. The agenda for today is that Ian will kick off with giving his perspectives on the business before Bethany takes through the numbers, and then I'll come back and look in some detail at the U.K. and Ireland business performance before the 3 of us take any questions that you may have, either as a result of the presentation or from the results. So with that, I'll hand over to Ian.

All right. Good morning, everybody. Thank you, David, and thanks for joining us today, both in London here and those online. So I wanted to spend a few minutes, if I may, just talking a little bit about why I was excited to join Domino's. We have a strong brand, strong sector dynamics. Food delivery market is growing year-on-year. The collection market is growing healthily double digits. We have a strong business model, vertical integration of food manufacturing, distribution and sales. We have some exceptional franchisees and pretty highly cash generative and pretty capital-light really. So a great business model. Yes. And despite some well-known challenges, Q4 and trading has been pretty encouraging, as I'm sure, you've seen. So let's not forget also the other attraction, I think, is the potential for growth, is capitalizing on both geography and fortressing opportunities. I think it's collection opportunities and daypart opportunities. It's technology-enablement at both customer and operational levels. And of course, a mutually beneficial relationship with franchisees so that we're all together growing the system. But I don't think there's any getting away from the fact, this has been a challenging year. And I just want to say a few words about where we are. There's a number of points on this chart that I'm showing -- wrong way. Still wrong way. That way, there. There's a few term – it's on the chart, a number of points there really. I'm not going to draw us through all of those because many of them are pretty self-evident. There's a couple I just wanted to pick out there, however. The performance of International has been pretty disappointing, and we have to acknowledge that. And David and Bethany will cover a little bit in more detail on that, but you've seen already what we've done in Norway. There's been a number of operational challenges, not least the tragic passing of David B. over the Christmas period. And the external expirement (sic) [ environment ], both for us and for franchisees is presenting its own challenges. But I repeat, despite all those challenges, the core businesses performed with a pretty solid 3.7% like-for-like sales growth in the year. So we will make progress, and that starts with some decisive actions. As you've seen, there's a huge amount of work going on behind the scenes. And trust me, there's a lot of work going on. The Norway transaction is the key example of some decisive action, but in a risk-adjusted orderly fashion, which is the way we want to do that. And I think it's what we hopefully indicated to you, and we will continue on the international transaction process in a similar, measured way. The Board is evolving. Over the last 10 months or so, we've had the departure of Stephen and Ebbe and the addition of Elias and Usman, I think -- and Elias is certainly with us this morning. We are reengaging with the franchisee community, and that's at all levels and out and about in their businesses. And we're making progress on attracting a Chair, and we'll update you in due course on this front. And I just want to say, what, this is all underpinned by 2 really important things. Firstly, strong support from our U.S. franchisee franchise holder. We're getting a lot of support from our friends. And secondly, we have some really great people back at the ranch. And I think David touched a little bit in terms of how we've dealt with a very difficult situation. So here are the 4 short to medium-term priorities that we as a Board are united behind and putting considerable effort into. Number one, and it won't be a surprise, is recruiting a world-class Chair, CEO and CFO and overseeing a managed Board succession. Secondly, reinforcing our U.K. and Ireland business with some ambitious plans to be the best master franchisor in the system. Now we recognize that there are some experience and capability gaps that is going to help us do that, and we are clearly getting on with some of those areas as well. But we've already started with a Strategy Insights Director and a new Interim CIO. Thirdly, rebuilding relationships with our important franchisee partners. Now we recognize that improving the relationship with franchisees is critical to moving forward at pace. And I have to say, this relationship building is best done out of public arena and without an external running commentary. But considerable time and energies are going into this so that it works for both parties. And clearly, the new leadership of a new Chair, new CEO will be instrumental in this. And the fourth area, finding the right owners for our brand in the international territories. So I hope you can see, on the one hand, we've got plenty to do, but with a renewed vigor, a clear set of priorities, and we're getting on with it. And with that, I'd like to hand over to Bethany.

Thank you, Ian, and good morning, everyone. I will start with the income statement before moving on to investments and cash flow. I will then touch on franchisee profitability before handing to David. Before I walk through the financials, a quick reminder on the accounting treatment of international operations. Following the announcement that we will be exiting the markets, all 4 together with international central costs, have been classified as discontinued operations on the income statement and as disposal groups held for sale in the balance sheet. Comparatives have been represented accordingly. Although we, therefore, presented the operations as a single line on the income statement, we've also given you a breakdown of system sales and EBIT by country in case helpful for your modeling. But to reiterate, these are excluded from underlying results. This chart breaks down our U.K. and Ireland top line performance. System sales grew 4.8%, a solid result. The growth in corporate store revenue was driven by the full year contribution of the 6 Have More Fun stores we purchased at the start of the second half of 2018. As you know, we restated revenues to factor in NAF, the national advertising fund, and the e-commerce fund at the half year, which were previously not included. We administer these funds for franchisees, and the revenues are matched to costs incurred. EPG (sic) [ DPG ] earns no margin on this activity. The U.K. and Ireland, EBIT margin as a percentage of sales was 8.5%, in line with our long-term target. We were pleased to report U.K. like-for-like, excluding splits, above 3% for all 4 quarters. This is driven by our digital capabilities and the entrepreneurship and expertise of our franchisees, in particularly around local campaigns. In Ireland, we saw a strong first half followed by a weaker second. The relatively small size of our Irish business means sales here are inherently more volatile, and we also saw ongoing macroeconomic uncertainty weighing on sales. We continue to believe that the ex-splits basis gives the clearest indication of the underlying performance of the business. However, for completeness, the inc-splits figures are also shown on this slide for you. Now to run through the key components within U.K. and I EBIT. Our supply chain center revenue -- our supply chain center grew revenue by 3.5% and EBITDA by 6.8%. EBITDA grew ahead of revenue for the reasons we talked about at the half year, with a lack of ramp-up costs at Warrington, which were in last year's numbers, together with lower campaign support this year. Excluding these factors, EBITDA would have grown broadly in line with revenue. The increase in net overheads, realty and incentives was driven by a number of factors, the largest being the decision to contribute GBP 2.1 million to the e-commerce fund the historical chargeback costs. The profit of U.K. corporate stores declined due to a weaker second half and the short-term drag from 4 new stores. David will talk more on corporate stores later on. The increase in depreciation is made up of a number of factors, namely, accelerated amortization of the old web platform; increased depreciation due to corporate store refurbishments and the Have More Fun acquisition; and the full year impact of Warrington beginning to be depreciated. U.K. and Ireland EBIT, including our joint ventures, was, therefore, GBP 102.4 million, up 1.4%. We saw a disappointing performance across our 4 directly operated international markets, which are now classified as discontinued. The trading loss of GBP 20.8 million compares to GBP 6.6 million last year. Onerous leases and other related costs accounted for GBP 4.1 million of this 2019 loss. We incurred GBP 35.4 million in impairments and restructuring charges, which, together with GBP 0.3 million of tax charges drive the total loss in discontinued operations of GBP 56.5 million. For completeness, this table breaks down the impairment charge by country. Given we are disposing of the businesses, the impairment calculations are done on a fair value basis. The asset base of Iceland saw a GBP 2.5 million impairment charge. Iceland remains a good, profitable and cash-generative business and now has a carrying value of GBP 33.8 million. The asset base of Norway has been written off given the agreed transaction. We have taken a cautious approach to assessing fair value for both Sweden and Switzerland. Finally, on International, an update on the disposal process. On February 13, we announced we had agreed a transaction for Norway. Given the size of the impairments and the losses in 2018 as a proportion of group, the transaction is class 1 and is, therefore, subject to shareholder approval. We expect to publish the circular in early May with completion targeted for late May. The deal involves a maximum cash outlay of up to GBP 7 million, together with funding losses to completion. It will provide DPG a complete exit from the market. It also includes the transfer of the 29% minority stake in Sweden to us, which is important in order to progress a transaction for this market. From a modeling perspective, on completion, there will be a P&L loss due to both a cash outlay and the recycling of minority interests. These minority interests currently stand at GBP 10 million. Having agreed a deal for Norway, we will now progress transactions for Sweden, Switzerland and Iceland. We expect these processes to take some time. In the short term, we have taken some steps to reduce the cash impact of Sweden and Switzerland, namely the closure of 2 stores and a number of headcount reductions. Turning to the bottom half of the group income statement. EBIT of GBP 105.3 million is made up of GBP 102.4 million from U.K. and Ireland, together with GBP 2.9 million from our German associate. The net underlying interest cost of GBP 6.5 million is GBP 3 million higher than the prior year as a result of the planned higher-average debt position. The largest component of the nonunderlying items was an GBP 18.7 million impairment charge for corporate stores. This was due to the weaker performance in the second half, an updated view of the operating cost base, together with forecast for future cash flows and an increase in the discount rate. The forecast period used in calculating the impairment of 5 years is also shorter than our expected payback for store splits. Also in non-underlying is a GBP 7.1 million contribution to the e-commerce fund that we talked about at the half year, and this line also includes a GBP 9 million credit related to put option revaluation based on the forecast performance of the Sweden and Norway businesses. The full breakdown is in the appendix. Underlying basic earnings per share for the period was 17.6p, up 1% year-on-year as a result of the underlying profit increase and lower weighted average share count, partially offset by the higher interest cost. I just want to flag that the balance sheet is also in the appendix. Turning to cash flow. Our core U.K. and Ireland business generated GBP 68.2 million cash flows in the period, and we invested GBP 15 million in CapEx, resulting in total cash generation from U.K. and Ireland of GBP 53.2 million. We invested GBP 2.9 million in funding towards our German associates, spent GBP 44.3 million on dividends and GBP 17.4 million on share purchases. International trading losses and CapEx incurred a total cash outflow of GBP 19.5 million. The exercise of the Icelandic put options resulted in a cash outflow of GBP 2.7 million. Net debt-to-EBITDA stood at 2x on a continuing basis and 2.3x, including discontinued, both within our target leverage range of 1.75 to 2.5x. I shall now turn to review the cash flow in a little more detail. We had a GBP 23.3 million working capital outflow. This is the result of 2 items a GBP 7 million increase in inventory levels as part of Brexit planning and a GBP 21 million payment timing change, which reversed in early 2020. The CapEx breakdown is in the appendix. The key items being maintenance CapEx of GBP 5.3 million, covering SEC, head office, IT and corporate store refurbs, an e-commerce platform and NAF related CapEx of GBP 8 million. Before I turn to franchisee profitability, I wanted to highlight that within this morning's statement, we gave a number of guidance points, which are also included in the appendix. As we discussed at the half year results, we have been working with our franchisees to improve our processes to gain more consistent data on their profitability at both a store level and at franchisee enterprise level. We, again, aren't able to give comparatives and the figures we've given in the past are no longer comparable as they were submitted on a different basis. However, we can say that for the year overall, the average franchise -- franchisee enterprise margin was 10.6%, although there is a significant range across our franchisee base. For the avoidance of doubt, the franchisee enterprise level includes their allocation of their head office overheads and other operational costs, which are spread across their store estates. The table on this slide splits out store level profitability in the year for all stores, and separately, the mature inc and ex-split stores. Using all 3 methods results in an average EBITDA margin of around 14% at a store level. For the year ahead, labor costs remain a challenge, with inflationary pressures, for example, national living and minimum wage increases of between 5% and 6%. Labor costs typically account for around 30% of store sales. We expect food cost growth for franchisees to be around 3%, with the biggest driver being pork inflation due to the swine flu epidemic we saw in 2019. Against these cost headwinds, our focus is on supporting franchisees to ensure that we use data insights and digital capabilities to help grow existing store sales, provides technology to improve operational efficiencies as well as open new stores in the right locations at the right cost and at the right time. David will update you on the strong new store performance we saw in 2019 later on. With this section complete, I will now hand to David to discuss U.K. and Ireland performance in more detail. Thank you.

On this chart, we break down the sales growth performance in a waterfall showing the impact of like-for-like sales in 2019 of GBP 36.9 million. The new stores opened in 2019 generated an extra GBP 8.5 million, coupled with the GBP 23.5 million rollover of those new stores that were opened in 2017 that were immature -- sorry, 2018 that were immature in 2019. That's offset by a split territory impact of GBP 16.5 million, leading to the GBP 1,144 million system sales number that we're reporting this morning for 2019. That sales performance was primarily driven by our continued strength in digital, and our digital business grew by almost 9% in the year compared to sales -- total sales growth of just under 5%. There are 3 elements of that growth that I want to pull out. Our app growth continues, and we saw a very strong performance in apps. We've now had 26.5 million app downloads overall in the lifetime of the app. But in 2019 alone, we had 4.1 million new downloads, over 4x more than our direct pizza competitors. Our app on the Apple App store receives a 4.7 out of 5 rating, and the number of active users of our app in 2019 grew by 11%. It also has a phenomenal conversion rate, and total sales grew very attractively in 2019. But our business online is not just about our app. As we mentioned at the earlier presentation last year, we've increasingly started to use artificial intelligence in our pay-per-click program, and this has been hugely successful, leading to revenue on pay-per-click in 2019 being 20% up overall for no incremental investments. And finally, the other component I want to draw out from our digital performance in 2019 is our success with affiliates, which have been completely refreshed over the course of the year. We've seen 25% order growth in affiliate link traffic and our conversion rate on affiliate link traffic is 7% higher than paid search, showing how much customers want to take advantage of affiliate offers. But most encouragingly, those customers we're recruiting through affiliate marketing, 1 in 5 of them is new to our system. On new stores, we saw a good performance in those new stores that were opened. We opened 29 franchised stores in the year, with 23 different franchisees choosing to invest in new outlets. It's worth bearing in mind that of our franchisee base, 83% of our franchisees have 20 stores or less, and there was a clear evidence of a desire on the part of the smaller franchisees to take advantage of the opportunities that new stores present, by 62% of our new store openings in 2019 coming from those franchisees with less than 20 stores. That compares with only 41% the previous year. But most encouragingly of all, the new store average weekly unit sales was 16% higher than that level that was achieved in 2018. So very encouraging performance of those stores we opened in 2019. We continue to invest in product development. Building on the success of our Cheeseburger pizza, which we sold in the autumn of 2018, we launched the ultimate Bacon Cheeseburger pizza in October. We also launched New York Hotdog pizza. And in sides, we launched Mango Habanero Wings. We remain committed to an ongoing program of product development and have exciting plans for this year ahead. I want to talk now about corporate stores because I know that the announcement of the impairment was something that has raised a number of questions in people's mind. And before I go into the detail of the performance of the business, I think it's worth just explaining the strategic rationale for why we're in corporate stores. There are 2 fundamental reasons. One of them is to walk the talk, to build the operational literacy within the DPG team and develop talent that is operational literate to help our business move forward. And secondly, by having skin in the game, we can both understand and learn the direct pressures of running stores as well as innovating under our own control, which then allows us to share that learning and pioneer new tools and techniques. Within that, clearly, we also want to make a financial return. The fact that we chose to open corporate stores in London was a significant part of the strategy because we've said for many years that London remains an opportunity for Domino's with less than 15% of our estate being in the capital, despite the fact that it represents 25% of consumer spending. And by owning stores in London, what we've been able to do is unlock opportunities, both for ourselves and by trading addresses with franchises or franchisees so that we can improve that current situation of under penetration. The specific of the second acquisition, which we now call Have More Fun was an important opportunity to acquire a poor performing estate in a high-profile area of Central West London and protect the brand as well as exploit the opportunity of excessive address counts in the legacy stores. We remain completely committed to corporate stores. The challenges, which Bethany touched on, are frankly that we're still learning how to optimize operations and maximize profitability. It does bring significant cost challenges. For example, all franchisees incur labor costs around 300 basis points higher in London than the rest of the U.K. and occupancy costs in London are around 100 basis points higher than they are in the rest of the U.K. So you're starting with a base of lower profitability. And our commitment to develop the estate and address the under-penetration in London has meant that 11 stores out of the 36 stores were impacted by splits since 2018. In the autumn of 2018, we made a change of leadership within our corporate store portfolio. And under Scott Bush's leadership, we're very confident that, that new team can see positive moves forward in 2020. We're collaborating with other franchisees in London on promotion activity. We're looking at building collection, not just through promotion and store environment, but through a tailored program of product development. We do identify opportunities to use digital marketing more skillfully, specifically in London, and we're learning every week about those deals which are relevant to particular store circumstances that allow us to drive sales, particularly collection more successfully. Costs are a challenge for every business in London, and we've invested in improving our driver welfare program to reduce the turnover of drivers as well as implementing a labor management tool, which may be applied to the rest of the system. It's important that we develop and upskill team members to deliver Domino's promise, and we're implementing efficiency processes across the network. Having opened so many stores and split so many territories in 2017 and '18, we're only planning one new store for 2020. And what we see is a period of estate stability going forward. One of the things we're most proud of in DPG is our supply chain, which by any measures is world-class. Our 2019 performance confirms this. We have accuracy and availability of 99.9%, and our Warrington facility, which began running in April 2018, is now supplying 457 stores. All sites have the Blue Ribbon food safety approbation of FSSC 22000. Continuity planning is a key part of our supply chain strategy, and for the first time in 20 years, we introduced a second flour supplier to derisk our supply chain as well as managing Brexit uncertainty through the increase in inventory levels. We've also implemented Paragon, which is a transport management system, which enhances route planning and monitors capability of drivers. That's now live, and that will bring further efficiency savings as well as better service to our franchisees. Looking forward to 2020, we continue to invest and have exciting plans ahead. Firstly, with our Cages & Dollies trial, which is a health and safety initiative as well as a driver efficiency initiative, and that trial is continuing in a number of stores, and we're optimistic that, that will be rolled out this year. We're also opening a facility in Scotland, where we've gained planning consent, and we're scheduling to open that in the autumn, which will again improve service and reduce transport costs. And finally, our long promised work in our Irish facility in Naas will begin in the second half of 2020. So summing up, what we're presenting this morning is a solid U.K. and Ireland performance, driven by our continued strength and growth in digital. We're very pleased with our 2019 new store performance with the AWUS numbers that I shared with you, and we're confident in our 2020 plans for corporate stores under the leadership of Scott Bush moving the needle forward on that. All of our efforts are underpinned by our world-class supply chain, which continues to receive capital investment to improve both efficiency and effectiveness. And of course, we continue to be focused on finding the right owners for our international businesses. With that, we're now happy to take questions.

Douglas Jack of Peel Hunt. I've got 3 quick questions, if that's all right. Can you just talk about the cost of new stores, both in London and outside? Second one would be, obviously, you mentioned store splits and the impact in London. What's the number of households per store in London versus outside London now for Domino's? And final question. Yes, in terms of the new openings, obviously, doing extremely well. Is that implying that the payback on store splits is less than what you previously said it was?

I'll take all of these. The cost of new stores are plus/minus GBP 300,000. So that hasn't really changed. We've done some value engineering, which is broadly gets to the same level. The specific of London is that from time to time in London to get the site, we have to pay a lease premium, which would normally be no more than GBP 150,000, but that does increase the cost, which in turn slows back the return. The store splits question, the key to store splits is whether you can get incremental addresses. And the most profitable store splits are where you open a store that not just -- doesn't just take addresses from an existing store but opens up the opportunity to service new territories as well. And that's one of the things that we're really trying to focus on outside London. In London, because all the addresses are allocated, the reality is that the splits are just the splits because there are no new addresses to allocate in London. Your question about address count in London. The address count in London is about 15% higher than the address count in the rest of the estate. So it's typically about 26,000, while across the estate, I think, it's about 23,000. So there's a big difference. Now of course, the issue in London is that there's more density of population. So in terms of the lag times in London, they're not unattractive, but the household count is high, and the key to making splits work is to get that collection business. And we're doing that in some of our new investments, but we're not doing it as well as we need to, to make those splits work Because going back to your opening question about the profitability of splits, the 2 key things that make splits work are incremental addresses and collection, and that has to be our focus. Now what we've seen with the splits we opened in 2019 was that we got it right more often than we got it wrong. And one of the things that Scott and his team are focused very clearly on with franchisees, and it's also a marketing priority, is how we can coach them and help them to exploit that potential on collection and how we can prioritize those stores that open up the most new addresses.

Wayne Brown from Liberum. Three, but I'll take them one at a time, if I may. Firstly, on London and the corporate stores. I think London has always been a market with huge opportunity, as you quite rightly said, and I think all the factors impacting London, labor costs, et cetera, I think these are all well-known before you bought into London and well-known market factors, but prices, menu pricing in London is also much higher than the rest of the market. What I'm just trying to understand is reading through all the RNSs last year and how bullish you were about the prospects and about London, and clearly, totally acknowledging the pressures that those stores are facing, and not surprised to see EBITDA margins down from 7% to 4% in that corporate estate, but why is it okay for the plc to write-down the London estate and yet, the negotiations with the franchisees are supposedly 2 years into process, but not much going on there, but the Board as a whole, have said that you're not going to negotiate the strategy and the pricing model with franchisees?

Sorry. So the question is, I think, Bethany has explained why we've written down [indiscernible] stores.

No, no, no. I get that. But I'm just talking -- if I refer that back to the negotiation with the franchisees, I think in the past, it's been stated that you aren't going to be negotiating the model, the pricing model, the food cost model, with the franchisees. And clearly, food costs and labor are 2 of the biggest issues. So my question is, is the Board's view around negotiations, becoming more open minded, considering the same pressures that the plc is facing in London are exactly the same as what the franchisees are facing? The direction of travel of margins is the same irrespective of the magnitude being maybe slightly different.

I'll ask Ian to come in, in a minute, but what we said this morning is we recognize that getting the right relationship with franchisees and the right profit framework to exploit the potential of the system requires a long-term plan. And the best creator of that long-term plan is a new management led by the new Chairman and the new CEO. So that's the work that's ongoing. Ian, I don't know if there's anything you want to add?

No, I think you've already pretty accurately cover it, David, just to reinforce it, is that the basis of whatever the relationship is going to be, is going to be around like what does the long-term plan look like, okay? And that long-term plan has to recognize, whether it's corporate stores or whether it's franchisee stores, what the headwinds look like from labor cost, et cetera, et cetera, et cetera. We will develop thoughts along the way. We're not sitting here doing nothing to wait. But I think the primary drivers of that conversation will be the new leadership.

And on that front, we were obviously hoping for franchisees negotiations for some resolution in 2020. I know that you haven't put a time line on that now. Obviously, you are looking for new leadership. I think considering the time that these factors take, it's probably unlikely, fair to say, that there will be any major progress on that front this year?

We're not putting a time line on it. People can draw their own conclusions. We're determined to find the right long-term framework to exploit the potential of Domino's brand in our market. And as Ian said, there's a lot of support from DPI. It's not something that we're working on, on our own. We're debating with them what that structure needs to look like.

On advertising and e-commerce strategy. Just some comment and obviously, the CMO left, having been in the business for about 6, 7 months, so just a comment on that. And also, there isn't really a time line that's been placed on the go-live of the new platform that was, I think, also expected in late '19. And there isn't a date set for 2020, though, there is a trial in October for the app, but not necessarily the platform. So just where we are with regards to the e-commerce development in that investment, why the CMO left and what the plans are around a holistic digital strategy, please.

We're not commenting on the CMO's departure at all beyond what's already been said. As far as the new platform development and the app development, that is ongoing. There are a number of areas that have been done successfully. There's further work that needs to be done. As Ian mentioned, we've just appointed a new CIO, somebody whom Ian worked with previously, who came into business 3 weeks ago. He is in the process of looking at the whole program in detail, and we'll be bringing recommendations forward to the Board.

And sorry, just one last one on strategy. Clearly, international hasn't worked and corporate stores are struggling. The dispute with franchisees are ongoing. So I think that will obviously hold back performance during the course of the year. Margins have gone backwards at the center. So I'm just curious as to what the overriding strategy is. I know that in your statement today, Ian, you said capital allocation, there's a clear framework. Can you maybe give us an idea of what that allocation looks like? Because that maybe give us some insights as to what the future strategy of the business would entail.

You want to take it?

Yes, sure. So look, in terms of strategy development, I mean, clearly, we have some Board changes that are going on, and we're going to take a little time to make sure we settle that down. We look forward enormously to new leadership joining. In a classic sense, it's not really the Board's role to devise and develop strategy. That really belongs to the Chief Executive and his or her leadership team, really. So you might say, "Well, that's going to take a little bit of time. Isn't it?" Yes, it probably is actually, it probably is going to take a little time, but we're absolutely, absolutely clear in our minds that whatever the structure becomes, it will be designed, developed and owned and fantastically executed by the new leadership team.

It's Chris Wickham from Equity Development. Just 3 things. You talked about a range on those franchisee EBITDA margins. I was wondering if you could give us an indication of what that range is. And then secondly, I was wondering perhaps if you could elucidate a bit more about the competitive dynamics in the overall delivered sector. Because, I mean, we do see some quite significant changes there, in particular with people aggregating. And then thirdly, sort of slightly following on from Wayne's question, and then I take on board a new CIO, a new team. But things do tend to move very quickly in technology. And I was wondering really what your -- perhaps your not so much richly imagined future is, but richly imagined sort of present plus is with regards to technology and how that will affect the competitive dynamics of the industry, in particular, where you've got people who are aggregating things like instant cash backs.

Okay. I'm going to ask Bethany to answer the question on franchisee margins. I'll pick up the competitive dynamics and the technology. The competitive dynamics, you're absolutely right, are changing. It does appear that our direct competitors are feeling the pressure quite sharply, but the market is still growing. And we're still growing as well. So there's a lot that we can learn in terms of systems and you hinted at one of those things from the aggregators. But we're very confident in our position and Domino's remains a very strong brand in the customer's mind. And our unit economics, as Bethany said, are far stronger than our direct competitors who, in many cases, are closing stores. The technology point, we've shown this morning some of the things that we've done well over the course of the last year. The app continues to be the fastest growing, highest converting transaction model that we have with customers. Customers are still very happy to download it. And we're also -- we think we're very confident there's more that we can have from both affiliates and pay per click. In the background, there's a huge amount of work going on to develop both the customer-facing aspects of the new technology and at the same time, the underpinning forming, which will be -- which needs to be changed, given the changing time. So I don't want to give the impression that we're sitting doing nothing, but we want to get it right. Bethany, do you want to talk about the margin?

Yes, of course. So taking the store averages, looking at that range is probably less meaningful because, clearly, you have some new stores in there, and you have a very wide range of the demographics that the stores are located in. So if I take the franchisee enterprise EBITDA margin of 10.6%, the large majority would be within kind of 6%, 7% and 16%. So that kind of by EBITDA size. And just to note, that 10.6% isn't skewed by the largest franchisees, so that 10.6% is a mean of the 70 franchisees in their enterprise EBITDA margin. If I took a median instead, which effectively takes out those largest, it's a very, very similar number. So that isn't skewed by size.

It's Julian Easthope from RBC. I've got some -- also some further questions of franchisees. You've obviously redone the numbers and came to the GBP 145,000 EBITDA figure that you reported, which actually to be fair, isn't too dissimilar from what we've seen as a range over the last couple of years anyway. So when you take a look at the splits, I think you gave some payback periods for new stores and splits, last year of 2 to 3 years and 3 to 4 years, depending on where they are, et cetera. So presumably, that hasn't changed. And ultimately then with GBP 300,000 store costs, the underlying return per store is still nearing up 50%. So I just want to just clarify that. And the second thing, you've got all this new information in terms of EBITDA per store. And have you got any further information in terms of the financial health of the franchisees? Because as far as I can see, the only way your model really breaks is if the franchisees goes bust and they hand back the keys. So I just wondered if across the whole franchisee network, if you are worried about any of the franchisees under the current circumstances? And just sort of technical on the last one. The GBP 2 million recharge, is that just a one-off? And next is, so the underlying for next year is GBP 104 million rather than GBP 102 million? Or is that an ongoing recharge will happen every year?

I'll ask Bethany to deal with the GBP 2 million charge. The split economics overall are not that different to where they were. I think the thing that we've learned over recent times is, as I mentioned, the criticality of extra addresses on a split and the extent to which it's almost -- we call it internally a hybrid, where it's a split, but with new virgin addresses, that's really important. And that requires us to prioritize those opportunities. The second component is collection. And the third component is what we call donor store recovery. So ensuring that the 2 stores are marketed aggressively to get the donor store back up to its old level of sales as quickly as possible. So I think whilst the macro numbers are not that different in terms of average within the average, we understand a lot more about what makes them successful. As far as the financial health of the franchisees are concerned, as far as we're aware, and we do maintain regular contact with the lending institutions, there are no franchisees that are in danger going bust in terms of the classic signs that you would see, which is missed standing orders, not paying bills. We don't see any evidence of that at all that would give us any concerns about franchisees being about to go bust. Bethany, do you want to pick up the GBP 2 million part?

Yes. So the GBP 2 million -- GBP 2.1 million charge backs, that relates to historical charge backs really relating to 2018. But yes, effectively, you can think of it as a one-off, but we -- so in there is a one-off contribution we made to the e-commerce fund because we chose to put that money into the e-commerce fund, but we chose to take it within underlying. But yes, you could effectively adjust for it, should you choose to.

Tim Barrett from Numis. I just had 2 things, please. Could you talk a little bit more about the phasing of board recruitment? You touched on it in the statement, but -- and is the interim CFO role likely to be finalized soon? And then one on Slide 22, just to check I'm reading it properly. Are you saying that there are around 11 new openings from the majors with over 20 stores? And can you clarify were any of the top 3 biggest franchisees included in that pool?

Do I take the -- attempt the first question?

Yes.

So I think in terms of phasing, I think we made it quite clear, I think, in the autumn that we were going to concentrate on the Chair recruitment first, and then the Chair will then have a strong hand in the CEO recruitment, and nothing's changed in that respect. That's the exactly how we're progressing. Sadly, we have to look for an interim CFO. What I would say, though, is we need to find the right people to come in. I just want to echo what David said, 10 weeks ago or so, we sat down in David's office, first week of January, to just take on board the difficult situation with -- that arose with about the tragic loss of David B. And we sat down with the teams there about what fit state where we are going to be and then to deliver as our prelims in the 10 weeks. And here we are. I think we've done an ace job, really ace job. So we need to think very carefully about what we want to do by way of interim because [ the interim-cy ] have got to be complementary to a bunch of people who have risen to the challenge and frankly, done a great job, really. So I think it's finding the right person rather than any person to come in. And that mantra exists for everything we do. We're going to find A grade players. And it takes time to find A grade players. And we'd rather take a little bit more time to find A grade than rush in, get it wrong. So, okay?

Ross from Investec. Three questions...

Bethany?

Sorry. Can I just answer this? Sorry, Ross. And on your second question, the easiest way of answering that is Slide 34 in the appendix. I'm sure you can look at -- everyone has Slide 34. It gives you the breakdown in terms of number of openings by each group of franchisees. You've got all the underlying data there. To your specific question of the largest franchisees, one of the largest franchisees opened 2 stores, which you'll see on the pie on the right on that, in the period.

Ross?

Okay. Attempt two. So 3 questions. The first one, you've said a few times, different people, that you're receiving a lot of support from the U.S. Just wondering if you could elaborate what that might be. The second is on new store incentives. I believe last year, it was about GBP 75,000 per store. If you could give us an update, that would be helpful. And the third, is there a process for a new CMO? And is this an example of the intransigence of the franchisee relationship actually driving quality people out of the business?

I'll get Bethany to answer the middle question. The process for the CMO, I'm not going to make any comment on the departure of Emily as I said, and the process for the CMO is something we're still discussing. On the question of the U.S., there's a whole range of stuff that we're looking at with the U.S. The one that's most advanced is strategy and insights, which is something that the U.S. have used for a number of years. And they've been helping us with the recruitment of Michael Von Geldern who joined us on Monday as well as looking at processes and tools and techniques that we can apply to get value from strategy and insights, in the same way that they've done. The second area where we're working with the U.S. is around technology because, as you would expect, with both the new platform project and the new app project, which are ongoing, there's a lot of learning that we can take from the U.S. in terms of the journey they've been on to build their website capabilities and so that's very active. They were involved in the recruitment of Mark Grimes. And already, there's a very good relationship, frankly, a better relationship than we've ever had with their CIO Mark Grimes. So they will be the 2 things that I would highlight. I know the new members of the Board visited Michigan earlier in the year, and there was a very wide-ranging discussion about the qualities needed to run the business and the challenges around our franchisees. So I don't know Ian, if there's anything you want to add, but there's a very good rapport there.

All I would add, David, is I think there's an extreme willingness from the U.S. side to help us. We can go back to Wayne's earlier question, in terms of strategy formulation development, we can have lots of wonderful ideas, wonderful rich ideas, but where there are -- there's already existing capability, expertise and benchmarks around the world, why wouldn't we go have a look at them really and they're extremely, extremely, extremely helpful in terms of helping us understand what's worked and equally what hasn't worked. So we've got opportunities there really to road test in a fairly quick way, ideas that we might have.

And on your incentive, so it's slightly higher, the average in 2019 versus 2018. I would say it's a very wide range. So clearly, there's some stores that there's relatively low incentives if it's a virgin address territory. And then for splits, we redid the incentive scheme last year to effectively have tiers based on the -- and that's -- the tiering is based on the proportion of donor store addresses that's being given up, and that's a quite a wide range.

But is there an average I can compare to the GBP 75,000 or?

It's slightly higher. It's 85-ish.

It's quite a lot higher.

Sorry, Wayne again. One last question. Last year, the franchisees weren't taking part in tactical promotions towards the end of the year. So can you firstly give us a view as to how those discussions are ongoing now? Are they taking part in -- or have they committed to any of the 6 nationals this year? And trading did improve in Q4 last year regardless of the fact that they didn't take part in tacticals, which shows that there are good operators on the ground. So I suppose 2 questions flowing from that is, are you going to start refunding the franchisees, any of the NAF that's not being spent? And secondly, should we start thinking about more broader alliances between local store marketing and NAF? And is the plc the best placed institution to be running the NAF in the future?

There are no plans to refund any national advertising funds. I think there's plenty that we can advertise even if we're not doing national promotions. I think one of the things that we've seen in recent weeks is much more purposeful efforts by franchisees around local activity, which allows them to tailor the activity to the local needs of their particular stores, and there will always be a balance between local and national. But in terms of refunding money, no, there's no plan to do that. Okay. Thank you very much, everybody. Have a great day.

Thank you.