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

Hello, everyone, and welcome to the Domino's Pizza Group Third Quarter Trading Statement Conference Call. My name is Daisy, and I'll be coordinating the call today. I would like to hand the call over to your host, Elias Sese, the CEO, to begin. Sir, Elias, please go ahead.

Thank you, Daisy, and good morning, everyone. I really thank you for joining our conference call to discuss our Q3 results. I am Elias Sese, the Chief Executive Officer on an interim basis, and I am delighted to be joined today by Edward Jamieson, our new Chief Financial Officer. And by the way, this is week 4 and week 5 for both of us. Also in the room are Dominic Paul, our outgoing CEO, and David Surdeau, our outgoing CFO; as well as Will MacLaren, our Head of Investor Relations. I would like to take this moment to personally thank Dominic and David for the tremendous contribution to Domino's and for helping both Edward and myself with such a smooth handover. Thank you, Dominic, and thank you, David. I'm extremely excited to be leading this business having been at the board for the last 3 years as well as having been a shareholder of this company for the same period of time. I was part of the Board who help to create the current strategy, and I am looking forward to continuing to accelerate the execution of it alongside our franchise partners, our suppliers and my colleagues at DPG. Turning to today's call. Edward and I will give a brief summary of the statement we have released today. And then we will answer the questions which have been submitted by all of you this morning. So let me turn to the statement we released this morning. Starting with our trading performance. We are very pleased with how we traded in Q3, and the performance in Q4 to date reinforced that our view that we will continue to deliver market share gains and increase returns for shareholders. Q3 like-for-like system sales, excluding VAT, were up 2.4%, and this compares with a 0.9% in Q2. If you compare our total system sales in Q3 to the same period in 2019, they were up 19.6%. We have made a strong start to Q4 with our like-for-like system sales, excluding VAT, up 10.4% in the first 6 weeks with total orders up 2.6%. This strong start has been driven by a focus on service from our franchise partners. Our digital strategy, strong national value campaigns, collections growth and the initial incremental benefit of being on the JUST EAT platform. I would like to thank our franchise partners for their extraordinary effort in focusing on service and rolling out the JUST EAT platform in our busiest quarter of the year. Thank you to all of you. We have grown our share of the U.K. takeaway market increasing from 6.4% in Q3 last year to 7.2% in Q3 this year. Despite the tough comparator period, the contraction in the overall market size. As expected, total orders were lower in July due to the tough comparative, with the knockout stages of the men's Euro football tournament and were muted in others, given the stay-cation impact from the previous year. September was a stronger trading month and this momentum has continued in Q4, as I just explained. Delivery orders declined 12.7% in the quarter due to a tough comparative quarter last year. Collections performed strongly and increased 28.1% in the quarter, driven by our strong value message and our continued strategic focus on this channel. I would also like to highlight the continued digital progress we are making. Over the last year, we have significantly upgraded our internal digital team and capabilities. The team has made a phenomenal start, but there is a lot more to do. Our app now accounts for 45.7% of our system sales, an increase of 3.7% points compared to the same period last year. In the same period in 2019, the app accounted for 34.8% of system sales. We now have 5.6 million active app customers and this is an increase of 5% over the last 6 months. As a reminder, app customers are important as they have higher order frequency and have a higher lifetime value. You would have also seen from our statement this morning, two important strategic milestones for the business. Firstly, Domino's will be rolled out nationally on JUST EAT following a very successful trial. We started the trial in May to assess whether we can reach an incremental customer base within our economics for our business. The early results were encouraging. So we extended the trail in August and as a result of the continued success of the trial, which sold -- we continue to attract incremental customers. We have decided to fully roll out on JUST EAT in the U.K. and Ireland. As of today, 1,000 stores are now live and we are targeting the completion of the rollout by the end of the year. Importantly, this lengthy data-led trial deliver incremental orders and customers to Domino's, and we expect it to be a tailwind to growth in the next financial year. Secondly, we exercise our put option over our German associate investment, which will yield the total cash received between GBP 80 million and GBP 90 million. We expect to receive these proceeds in the first half of the next year, and we will then flow the profits through our capital allocation framework. I will now hand over to Edward, who is going to talk through our guidance and some accounting changes.

Thank you, Elias. Good morning, everyone. I'm Edward Jamieson, the Chief Financial Officer of Domino's, and I'm delighted to be here today. I'd also like to echo Elias' comments and reiterate my gratitude to Dominic and to David for the smooth and seamless handover. We're pleased that following our recent strong momentum and confidence in the future, today, we're announcing a new GBP 20 million share buyback, which is effective immediately. This is in line with our clear capital allocation framework and our commitment to distribute surplus capital to shareholders. At the end of last year, we agreed a new growth investment framework with our franchise partners. At the time, we committed to invest an additional GBP 20 million across areas such as technology, digital acceleration and the e-commerce development. As a result, we've recently started projects to develop and implement 2 new cloud-based IT systems, a new e-commerce platform and a new enterprise resource planning or ERP system. These projects will enable us to capture growth and drive efficiencies in the future, and they will impact the 2022 results as follows. For the e-commerce platform, circa GBP 1.5 million of costs, which have previously been expected to be capitalized in 2022 will now be expensed. In addition, an impairment of GBP 1.5 million will be taken over assets, which will no longer be useful following the implementation of the e-commerce platform. On the ERP, circa GBP 3 million of costs, which had previously been expected to be capitalized in 2022 will now be expensed. Furthermore, the introduction of the ERP system will result in a further GBP 0.5 million of accelerated depreciation in 2022. Now turning to our guidance for this year. We expect underlying EBITDA to be in the range of GBP 125 million to GBP 135 million, in line with current market expectations. This is despite the investments we're making related to the growth investment framework that we agreed with our franchise partners, including the project costs I've just talked to you about. Excluding the impact of the investment project costs I've just outlined above and underlying EPS is also expected to be in line with current market expectations. Now moving to modeling guidance. Underlying depreciation and amortization and impairment is expected to be circa GBP 22 million. Underlying interest, excluding foreign exchange movements in the range of GBP 9 million to GBP 11 million. Estimated underlying effective tax rate of circa 17% for the full year. Capital investment of circa GBP 21 million, which now reflects the updated treatment of project costs. Net debt at year-end around GBP 255 million, reflecting the new buyback program, which we announced today. I look forward to meeting you all in person soon, and I'll now hand back to Elias.

Thank you very much, Edward. Great to have you here as my partner at Domino's. As we look ahead of next year, notwithstanding the macro challenges, we remain confident that our resilient asset-light business model, our focus with our franchise partners and service, our digital platform and strategy, national value campaigns, collections growth combined with our new store openings. The benefit of the JUST EAT platform and our products, together with the alignment we have with our franchise partners will deliver market share gains and increased returns from our shareholders -- for our shareholders. So we'll now turn to the Q&A. And yes, Will, could you please have the first question for us?

Thanks, Elias. So the first question comes from Wayne Brown of Liberum. He's got 3 questions here, so I'll read them out one by one, so you can answer them. First question is, if you are gaining share, when orders are strongly down and like-for-like of double-digit down and consumers were not yet feeling the pinch in Q3. Q4 will be fine due to the World Cup. But surely, this means the outlook for next year is worthful. Please can you give me your thoughts.

Thank you, Wayne, for the question. Well, the answer to this question is that the results pre-World Cup in the last 6 weeks, have been very promising. Indeed, 3%, of course, almost 3% of customer growth. So I believe that what is starting to be happening is that the strategy that the team has put together is giving success and it's starting to be giving the right results. And let me explain the reasons why -- or the basis of this. Number one, has been the focus of the team on digital. Number two, has been the promotions, the national value promotions that have been executed together with our franchise partners. The focus on service, as I said before, collections and the incrementality that we are getting from the JUST EAT implementation. So look, I believe that, yes, the growth that we are seeing in Q4 is very promising is the result of the success of the strategy and is going to be the momentum that we are going to be getting into next year.

Thanks, Elias. The second question is where are franchisee margins now? We estimated these were at mid-single digit, we exited H1. So it must be worse now declining order counts and deep discounting will impact franchisee margins further. Please, can you give me your thoughts.

Sure, Wayne. Look, like any other businesses, the cost pressures are in all of our P&Ls from a restaurant perspective. And our franchise partners obviously are suffering it. And that's why I think that the strategy that the team took together with our partners to bring a delivery charge was the right thing to do in order to be supporting and helping the margins. Now let me remember a couple of points. Number one, the franchise profitability from a store level is ahead of the franchise profitability in 2019. That's the first point that I would say. And yes, coming from the industry and many other businesses that have been working with in the market, I have to say that the margins in this business are excellent. And I am, yes, extremely excited by the market share that we are starting to be seen because this is going to be definitely hoping from that perspective to our franchise partners.

And then finally, it's actually 2 questions here. But if you gained market share in the market despite your like-for-likes is 10%, talks about a very poor -- thinks about a very poor market. What are your thoughts on outlook and if delivery is just too expensive? And then linked to that delivery point, has the delivery charge help volumes in Q3?

Thank you, Wayne. Again look, as we expected, right, there that were going to be tough comparatives for everyone post-COVID impact. That was something that everyone expected. And on top of that, as I said in the introduction, right, tough competitors both in July and August, right, July because of the impact of the euro tournament last year and August because of the stay-cation impact that you have seen also in many other earnings calls from other competitors in the business. Now I have to say that when we -- when this situation normalizes or after this situation normalized, we really believe that we are very competitive 2 main reasons for that. The first one is value. Overall, we really believe that we are very competitive from a value perspective, the strategy that my partner, Sarah Barron and the marketing team are working together with the franchise partners is extremely strong also on the value campaign messaging. So both of them together, I believe that make us very competitive. And number two, service. We're the only one delivering our product directly to our customers and we feel extremely strong that the experience of our partners delivering this product is going to be putting us in a much more competitive advantage situation than many others. So yes, they are tough. We expected them to be tough, but we believe that once they normalize, we will be competitive. The other part of the question that you had, I believe, was around the delivery charge. And on this point, look, again, as I said before, Wayne, I really believe that it was the right thing to do by the team in alignment and working together with our franchise partners. And by the way, one of the many examples that I have seen of this breakup that the team has done in order to be making sure that there is a good collaborative work with our partners. But I would say it was the right thing to do because it's supporting our franchise partners from a P&L perspective. Look, the delivery charge is very aligned with what is happening in the market. And indeed, I believe now, it's relatively a small vis-à-vis others, it's around GBP 2. And yes, being cheaper than many of our competitors, I really believe that it was the right thing to do from any strategic point of that. And it's helping us to really bring our value message in a very strong way. And by the way, it's pushing collection. If you see the numbers. Yes, we are 28.1% growth on collection, which is very important and is going to be very critical for us from a strategic perspective next year as the value proposition considering the environment for our customers. So overall, the right thing to do is supporting us from a value message perspective and is pushing collection, which is a very strategic pillar that Dominic, David and the rest of the team have been working hard over the last 2 years and that is starting to be delivering results. Thank you, Wayne.

Thanks, Elias. The next question comes from Richard Taylor of Barclays. And it is, please, can you break down the reasons for the improvement in like-for-likes in Q4 to date? Would the largest part of this improvement be the partnership with JUST EAT? Or are there other areas such as marketing.

Thank you, Richard. Appreciate it. Obviously, JUST EAT has had an impact on these results. I mean it will continue to be delivering these results. And that's why -- it's been very important for the team and for our franchise partners to work again in collaboration and a tremendous effort to be implementing JUST EAT in 1,000 stores in an effective short period of time. I couldn't be prouder from the team, whereas the rest of the team have been working extremely hard to make this happen. And our franchise partners have been doing this in probably not in the most busy time of the year. So very excited for that. And yes, obviously, it is delivering result and it's going to continue to be delivering results. Now Richard, remember the strategy that we have put together over the last 2 years. And if you see that strategy, it was very clear from the very beginning that there were going to be other pillars that needed to continue -- that needed to deliver these results, and it's happening. Number one, value, the strong value messaging that the franchise partners of our team are putting together is extremely strong. Collection as an asset pillar that it is very important for this year, but will be even more important for next year and 2024. And digital, if you think about the efforts that our partner, Nick Bamber and the rest of the team have been doing during the last 11 months has been extremely strong, as I said before, right, it's already 45.6% of our sales. I say growth of 5% during the last 6 months. And as you know, from a lifetime value perspective and from a frequency point of view, this customer is much stronger than the one coming through the app. So very, very important. But then remember what Dominic and David communicated on the last earnings call, right, that we were going to be investing much more on marketing, and that's exactly what we have done. And that's exactly what is starting to be delivering those results and we'll continue to be doing so in the rest of Q4 and coming into 2023. So obviously, yes, JUST EAT has been very important that the bigger marketing expenditure collection platform, digital value. And as I said at the very beginning of this call, the incredible focus of our partners on service and service has been very important. Thank you, Richard.

Thanks, Elias. The next question comes from Ross Luckman of Panmure Gordon. Given the slower store openings in 2022, what gives you confidence in opening 17 new stores by the end of next year?

Thank you, Ross. I appreciate it. Look, a couple of comments on this one. Let me go through the facts and then my impressions, right? Because I've been already for 5 weeks in this role, and I've been probably in all around the country and meeting my franchise partners. But let me start by saying, number one, the new stores are performing very well. As I think that, that's the most important thing. A fact that the stores that we are opening are performing very well is the most important thing for our franchise partners. And it's what needs to continue to be happening. So that, I'm very excited about it. Number two, the underlying business is also performing very well, which is also very important from that perspective. And the franchise partners and coming back to the point that I've been traveling and meeting them are willing to open the stores. Yes, there has been a little bit of delay from a planning and timing perspective by the end of the year, but you will see that we will have a very strong Q1 as a consequence of this from an opening perspective. Now another element that I have to say that is very important is that 24 franchise partners are going to be opening these stores. That's 1/3 of our franchise partners willing to open stores as a consequence of the framework that the team has put together with the franchisees. So again, I feel confident, yes, there has been a delay. It will come in Q1 next year, but I am very excited to have seen that these openings are happening. They are spread across the system, 1/3 of our franchise partners are opening restaurants today in this environment with confidence for the business. And yes, traveling and visiting all of them, I see willingness and they are keen on continue to be doing this in 2023 and 2024. So excited for these new store openings. Thank you, Ross.

Thanks, Elias. Next question will come from Doug Jack of Peel Hunt. There are 4 questions here, I think, a split across yourself and Edwards. So first question is, to what extent has advertising and local store marketing accelerated?

Thank you, Doug. So look, our franchise partners have a step up the investment from a local store marketing perspective. There are local deals happening across the country. And there is a very strong strategy by them on messaging our customers exactly in order to, the top customers into the business. So yes, step-up on investment, lots of local deals and messaging to our customers. I think that these combined, as I said before, with the strategy that Sarah Barron and the team are having national point of view, both from a brand, digital and also value messaging, yes, becomes a very strong partner.

Thanks. And then the second question is what is the likely tax liability from the German JV sale?

Doug, let me take that one. So we're not currently expecting a tax liability for the sales. We expect to receive a substantial shareholding exemption. So we're going to HMRC at the moment for early clearance on that. And so it's subject to that confirmation. But as I said, and just to reiterate, we're not currently expecting a tax liability for sale.

And second sort of follow-up question from Doug is how high is input cost inflation? And are there supply issues.

So clearly, this is a sort of a market and a macro sort of factor question given the dynamics that we've seen. So we've certainly seen inflation, and that's similar to the levels that we've talked to you about previously. I think it's worth emphasizing a few points on this. So we are sort of a very significant purchaser in the categories in which we buy. We have very established relationships with our suppliers and our opportunities work very closely with these suppliers to ensure the continuity of supply. We also have efficient production facilities to ensure that we sort of going to minimize the impact of cost inflation and produce as efficiently as possible. And let's also bear in mind that our model is that we pass through costs to franchisees.

Thanks, Edward. And then the final question from Doug is, can you expand on the costs and benefits of the JUST EAT trial?

Sure, I'll take this one. But let me remark on this last question, but let me remark another point, right, which is that we are at 99.9% of availability right now in the system. That's world-class standard within the industry. And kudos to be friendly and the team doing this even with the growth that we are seeing in sales. So very strong from that point of view. Now on JUST EAT, look, we have seen incrementality. So we see customer growth, and we see incrementality. That's why in partnership with our franchise partners, we have taken the decision to expand this test and launch it in the market and partnering right now with the JUST EAT. So we see a very important and relevant incrementality from a customer growth perspective. And look, obviously, JUST EAT has been a great partner, but also after COVID, they have been growing their customer base, and that's going to be helping us a lot in order to continue to be bringing this growth, not only in the short term, but most importantly, in the medium long term, definitely 2023 and 2024 are going to be very good evidences of this partnership.

And let me just comment further on of a cost question within that. So to be clear about the model that there are no costs for us as DPG. There's a commission that's paid by franchisees to just beat on every order taken.

Correct. Thanks, Edward. So moving on to the next sort of questions here from Richard Stuber of Numis. There are 3 questions here. The first question is, what benefit you get from the IT spend? And what will the impact be for this year and from next year onwards? And then specifically, will this additional GBP 4.5 million OpEx recur in 2022?

Okay. So look, as previously communicated in the growth investment framework agreed with our franchisee partners we're investing in IT within the additional GBP 20 million investment and the like. The e-commerce platform will provide a scalable world-class e-commerce back-end hosted in the cloud, which enables us to deliver improvements quickly and more cost efficiently than our current platform. And future-proof our e-commerce platform for future developments. The new ERP system enables us to standardize our operating practices, drive efficiencies across the business and to enhance our overall control environment. So those systems are part of the foundation for our next stage of growth. As I've covered earlier, in 2022, we'll see an impact on profit before tax of circa GBP 6.5 million. This is GBP 4.5 million of cost expense that were previously expected to be capitalized this year. And this is largely due to a guidance around the accounting treatment costs associated with cloud platforms. And this guidance affects a number of companies developing solutions and new cloud platforms. This reduces capital expenditure, increases operating costs above EBITDA. Separately, the circa GBP 2 million in noncash accelerated depreciation and impairments. So the cloud computing costs for both the ERP and the platform will continue through 2023 and guidance will be provided at our full year results next year. In future years, there will be an ongoing annual financial benefit from the lower amortization charge because we have expensed the greater portion in 2022 and 2023.

Thanks, Edward. Next question is, if the JUST EAT trial has been a success, would you consider extending this to other aggregators, i.e., Uber Eat and Deliveroo? Or does your partnership with JUST EAT preclude this?

Thank you, Richard. Look, we are focused right now on maximizing the partnership with JUST EAT. That's where we are focused and that's the effort that we owe internally and with our franchise partners are putting together right now. That's the priority. May we look into this in the future, yes, we may look into this, but right now is focusing on making sure that our partnership with JUST EAT is continuing to be having the success that is having right now.

And then, Richard's final question is, given the cost headwinds facing franchisees, where do you see franchisee profitability heading this year and next? And will you provide any support over and above what has been agreed in the franchisee resolution?

Thank you, Richard. Look, the framework that we have aligned with our partners and the team and the leadership of Dominic have along with our partners will continue and is delivering the results that we wanted to have, and that's what we're going to be continuing to be doing, which is maintaining the collaboration with the spread that has been created and working together with them under the same framework next year and the following years to come and continue to be growing this business, thanks to that partnership together with them as we are starting to be seen. And again, once more, a big thank you from that perspective for the leadership of Dominic, David and the rest of the team to making this happen and to our franchise partners to work with us in order to make it happen.

Thanks, Elias. Next question comes from Hari at Deutsche Bank. I think we've covered some of this, but I'll read it out as an additional point here, but what is driving the 10.4% like-for-like in Q4 to date? What explains a huge difference versus plus 2.4% in Q3. And any indication of price versus volumes here would be helpful.

Sure. Thank you, Hari. Let me start by the first one. And I think that we have already share this across these questions and also on the statement. But I will go through them, right? I think that, again, the strategy that the team has put together is delivering the results. It's starting to be delivering those results, both from a frequency growth perspective and a convenience point of view. Number one, the focus of our partners from a service point of view. That's critical. It has been critical, and it's going to continue to be very important moving forward. Number two, the value messaging in order to attract more customers into our stores and to increase that frequency. The digital strategy that has been put together by Sarah, Nick and the team, really important, right? If you think about that being already at almost 46% of our sales on the app. And then taking that into consideration that those customers bring more frequency and that the lifetime value is higher, is important. The results that the collection platform is starting to be delivering very strong work by the team. And by the focus that has been placed in this one, how this will be important for next year as a value platform or a value messaging to our customers. The higher expenditure from a marketing point of view. On the second half of the year, as was communicated in previous calls and last, but not least, I'm obviously excited because it will continue to be delivering results in next year, our partnership with JUST EAT and the platform that we have increased. So those are the elements, service, value messaging, digital, collection, more marketing expenditure and JUST EAT. Yes, sorry. And the second question was between talking about price and volume. Look, I'll tell you, the results are a combination of the 2, price and volume. Where I am very excited to see is that we are seeing customer growth at almost levels of 3%. And I think that that's the result of what I just said or more importantly, 3 elements of what I just said, 4 elements, sorry, service, digital, value and the fit. So I think that yes, it's a combination of both of them, that definitely excited by seeing growth in terms of customers at almost 3%.

Thanks, Elias. And the second question is, how is the marketing campaign for the World Cup progressing? And would you expect Q4 like-for-like to trend higher than the 10.4% on the back of the World Cup?

Sorry, could you repeat it?

So the first one is, how is the marketing campaign for the World Cup progressing? And would you expect Q4 like-for-like to trend higher than the 10.4% at the back of the World Cup?

No. The campaign, as I said before, the campaign is going very well. The team is getting ready from an operational perspective and are ready in order to be executing this campaign. And yes, I think that the results that you are seeing right now are going to be continuing on the rest of the year and we're going to be continuing in Q1 of next year. So strong campaign ready to continue to be executing, and I believe that we are going to continue to be delivering the results that we are seeing.

Then the final question is from Roberta at Investec. And it is, could you give us more color on the 10,000 hires planned for the World Cup Christmas season? How many are expected to be permanent? And in general, how do you expect the World Cup to impact your business this year given it's a winter rather than summer event?

Thank you, Roberta. This question is interesting, right? It's very linked to -- I think it was the last question of Richard before, and this is the collaboration with our franchise partners. And I think that, that's the -- this is another evidence of great success of us working together to have the team at DPG putting together and strategy to support the franchise partners and the franchise partners working with us on that. Why? Because the recent recruitment initiative that we've been -- I mean, has been a tremendous success. And we have seen a significant bigger pipeline of colleagues coming into our stores from a driver, from a sheet monitor, from a runner and from a store manager perspective, and that's extremely important. And that, together with the fact that my partner, Nicola Frampton, and the rest of the team from an operational point of view have been delivering excellent workshops with our franchise partners in the field in order to get ready to what is going to be a very successful World Cup, I am completely sure has been very important. So again, extremely excited about that. September and October have been record numbers from our recruitment perspective. So that means that, yes, the initiative that both of us have been working together has been very successful. And quite honestly, I am very excited about the World Cup. and the fact that happened in December, which is in November and December, which is obviously our busiest time of the year. So yes, very excited about that and focusing every day on making sure that we are ready from that point of view. Thank you, Roberta.

There are no further questions at this stage.

Thank you. Thanks a lot, Will, for everything and getting everything very and thank you very much for dialing into the call this morning. And for your questions, this concludes the call today, and goodbye, and have a good day to everyone.

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.