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

Good morning. I would like to welcome you all to the Domino's Pizza Group plc Q3 Trading Update. My name is Brika, and I will be your moderator for today's call. All lines are on mute for the presentation portion of the call today with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to your host, Andrew Rennie, CEO of Domino's to begin. So Andrew, please go ahead.

Thank you very much. Good morning, everybody, and thanks for joining the conference call. I just wanted to discuss Q3 results. As previously said, my name is Andrew, Chief Executive, and I'm joined today by Edward Jamieson, our Chief Financial Officer and also Will MacLaren, our Head of Investor Relations. For this call, we give a summary of the statement we have released this morning and then I'll turn it over to Q&A. Before I go into the details of the quarter, I'd like to give you some initial thoughts as I've now been with DPG for the last 3 months. As you all know, I've been with this brand almost 30 years next year will be. And this -- as we said pizza sauce [indiscernible] and of us really enjoy being part of these businesses in the last 3 months. It's clear to me that we really do have a strong platform here for franchisees, their teams, the leadership team, the team that have been developed at DPG really are strong and I must pay homage to those before me. They really have set this business up for growth and for success. And we've been traveling around the U.K. and Ireland for the last 100 days visiting every franchisee in the last 2 or 3, which I hope to knock over the next coming weeks. The several points I like to focus on the statement. Firstly, our franchisees are performing well in uncertain times as we know. And we're all benefiting from our line system. I really do feel that delivery times have continued to improve. GPS is there in every store and the franchisees are definitely excited about the future. And as you can see from our store growth, sitting at 45 by 20 different franchisees, we are now very confident that we'll be over 60 stores this year. Not only we opened more stores, but these stores are trading ahead of expectations. So as an example, one of our franchisees opened a store at a small village a couple of weeks ago. And after the first 2 weeks of trade, a testament to the brand, that store is still doing in excess of 2x the national average in sales. So it really shows the power of this brand in places that we haven't even got to yet. Secondly, our digital strategy is really powering ahead in Q3 and orders as a percentage of online orders was 79.4%, almost let's call it 80%, a 26-point increase on last year, [indiscernible] 73% higher, which is amazing versus last year, and a number of active customers reached 8.7 million. What's really important for us is moving those customers to that our online ecosystem. That's increased 55% compared to last year. As I said before, app is a key driver of our digital growth strategy because that customer yield higher sales, higher average order frequency, and those are only compared to those use the website. Our team has made great strides this year. We look forward to the benefit of the increased penetration in the future years, which will allow us to do many more things that we haven't been able to do in the past. Now what I would really like to do is I want to give a true 100-day update of my thoughts on the business and sort of looking forward, if you like, on the 11th of December, I think it's too far away until March. So I want to give a deeper, broader update on the initial outline of my thoughts on the 100 day on the 11th of December, which you will all be invited to. So let me turn to the statement we released this morning. We've continued to grow sales with like-for-like at 3.7%. We've maintained our focus on providing value. Total system sales are up 5.5%. Q3 total orders was GBP 16.7 million, down 1.2%. However, our total orders were up 1.5%. Collection orders were continuing to be strong or 8.4%. Delivery orders were down, which is the general trend in the U.K. market due to softer demand. Pleasingly, our total orders have returned to growth in Q4, up 1.2% with improved trajectory in delivery orders despite a tough comp last year. While the market and consumer backdrop remains uncertain, we are making strong strategic progress, and we continue to expect this year's EBITDA -- underlying EBITDA in the range of GBP 132 million to GBP 138 million. Third, I'm really pleased with the growth of the collections. We continue to see a good opportunity to grow collections over the coming years as they remain a lower percentage of total orders compared to other Domino's systems globally. We're also bringing exciting menu innovation to our customers, through fries, through wraps and other various things, which will give us the ability to drive things like lunch, et cetera. Finally, we're moving to the Domino's Inc. agreement with Uber Eats that trial starts early in '24, and we're working to take a data-led trial, just like what we just did -- just as we bring Uber Eats on board, which is highly likely. As we just see all deliveries will be made by Domino's drivers ensuring that we maintain our high standards of quality and service. So as you can see, we continue to make great strategic progress, sustainable growth. As we look forward to next year, we see inflation stabilizing. Our focus will be on continued customer and order growth. In fact, I would say that my biggest focus next year is an organic customer growth. And then with the franchisees had all together a couple of weeks ago, and they walked away clearly with that in mind. That's my main focus for next year, along with a continued store count growth, which actually looks to accelerate even further into next year. We remain confident that our resilient asset-light business model due to the further financial returns and strategic progress increased our returns to our shareholders. I'll go on pretty quickly there because I don't probably many of you have questions, you want to read statement anyway, but I might just sort of -- I suppose to finish off by saying this is that out of all the Domino's markets in the world, this is the market that I am happiest to be running. This is an incredible business, and I must say that I'm totally delighted to be running it, trillion, and I see so much opportunity. Yes, deliveries are down a bit. But strategically and tactically, that sort of fits into the strategy that the team had when I came on board, sort of saving our powder dry for Q4, which is definitely working. So -- and that's why guidance has been able to be maintained because it was actually part of the budgeting process. So with that, I'll throw it over to Q&A. I'm sure you've got questions. Thanks very much.

[Operator Instructions] The first question on the line from Darragh O'Sullivan of Jefferies.

Firstly, are you able to play any commentary on consumer behavior? Has there been any noticeable change since the second quarter? Secondly, when can we expect the launch of the loyalty program in 2024? And are you able to provide any more details to what this might look like?

Thanks, Darragh. So first of all, I mean, it's pretty obvious, not just Domino's but everyone that delivery consumer is occupied. There's no doubt about that. However, collection customers are up. I mean we're still 7.1% up for the whole year. So there's no doubt. And I think the main big ones obviously doing it to slow inflation. They want consumers to be mindful of their spending. So the delivery customer is certainly feeling that more. And the value customer, the collection customer is actually responding and coming more to us. So I think we're fitting with the trend. As we look forward into next year, you see utilities coming off, et cetera. We think that softening will likely release. But we think it's more to do with how we spend our money, where we spend our money, where our focus is. So from our point of view, we're on track with where we thought the consumer would be. And your next question was around loyalty. I don't want to promise when and how and what loyalty we should look like because I don't want to flag it to my competitors. But more importantly, I want to change the focus a little bit about our loyalty program and focus more on frequency. I will be doing whatever I can to invest, to focus on to drive consumer frequency. Now that could be a loyalty program and invariably will be. But there's lots of other things that play into frequency at the end of the day. So yes, my teams are researching with loyalty programming going to. But at the same time, I don't want to just jump into a loyalty program because people expect to think it's going to change the world because of research loyalty programs around the world and quite often that could be quite expensive and maybe for short term, should we get and I'm focused on driving long-term shareholder and franchisee success and profitability. So I don't want to rush there. So we're researching, we're on to it. And we'll have more to update probably in March when we do our full year results on where we're going to go with that.

I think just to add to Andrew's point, importantly, the e-commerce platform, which we've talked for is the [ real state ] of foundation enables us to build products and features like loyalty and other and other releases on track and expected to complete by the end of 2023 as we have previously flagged. So that gives us that foundation to be able to develop.

Correct. The platform will be in place to add loyalty or other mechanisms that we may add they'll with consumer frequency. I hope that answers your question, Darragh.

We now have Douglas Jack of Peel Hunt.

So I've got a couple of questions. The first one really in terms of sales drivers, if you could just maybe talk a bit about national promotions, any activity there in terms of past and actually near future? And then secondly, in terms of that, what you're seeing in terms of franchisee looks for marketing. And then the second question was just about margins. And to what extent cheese prices and changing energy and fuel costs are supportive otherwise in terms of margins.

Yes. It was pretty hard to hear, but I'll try to crack it both. I think your first one was around national promotions in past and future. Look, I think talking about promotions really isn't something that's relevant to be fair. We'll always do promotions. They're an important part of innovation. They're an important part of bringing the consumer to us sure. But strategically, long term, it's actually what we do in the core part of the business. It's the basics right. It's a focus on the value that the consumer focus on the service, the consumer is focused on all those metrics that we're continually looking at. Promotions are a nice way to sort of help the consumers and bring them to us, but they're not the be all and end all. We'll continue to have innovation. We'll continue to work on new products. That's certainly an important thing. Things that we've launched like the Chocolate Cinnamon Dough Balls, great product, great consumer retention. fries been good, loaded fries, which we're launching now with C6, we think, will be quite nice well, but they're all add-ons, right. They're a little nice additions to our business that give us some yield. But at the end of the day, my focus is on the overall value to the consumer, right? And the value is provided not only by the price, the quality of the product and quality of the service. So that's what I'm really going to focus on. And your other point was around margins and going -- looking forward. Look, definitely, I think what everyone else is seeing, we're seeing the same thing. We're seeing utility pricing coming down. We're seeing food inflation coming down. We see margins looking quite healthy for our franchisees and saw level of profitability next year without a doubt. So 2024 looks good from where we're sitting. We're very positive on how it looks. And what's important for me is this year has been very important to make sure that franchisee profitability and health is in a good place. And it's -- we've got a good platform there. And it is a good place, I think, to rebound into next year to an even better place, which bodes well for more future store openings, which we're also seeing. So one thing leads to the next. So very positive on that plan. I hope that answers your question.

Yes. Just connected to that, obviously, the franchisees are expanding. Are they also investing in local store marketing as well as much as before?

Yes, definitely. Look, it's -- you can't put a pin on it because some weeks, some months is higher and lower based on a lot of different factors. But I would say on the whole, franchisees are investing in local store marketing, where appropriate. And like ourselves, Q3 is always the softest quarter of the whole year. And we have to say you got to fishing with the fisher binding, you tend to sort of not overspend sometimes in Q3 and say over Q2 because this is where all the rolling hits the road and you get a much better bang for your buck when you're marketing. So they're no different to us.

We now have Richard Stuber of Numis.

I have 3 questions, please, if that's okay. The first one is you gave some really helpful color on the new store openings mentioning that one franchisee had sort of doubled the turnover of your average state. Can you also on that particular franchisee. Can you talk about that the address count for that one? And more generally, any sort of anecdotes about the -- of the average address counts on new store openings. The second question is, again, just as a follow-up point you just made now in terms of the profile of marketing spend, typically in Q4, is it a similar profile as you had last year? And the third question is, do you have any -- when you think that delivery like-for-like sales will return to growth.

Yes. Good question. First things first, your first point was about address count. So that store I referred to only had 6,000 addresses. The average store count in the U.K. is 21,000, they are over 21,000. And look, it's a very patch on store. We have some stores that are split and they are 15,000, some stores of split they are 18,000, some stores are very generic 6,000 or 7,000. It's a varied bag. So you can't draw the conclusion from averages. But it's certainly -- yes, when you see 6,000 addresses doing over double the national average, it just shows the strength of the brand, right? That's what makes me so darn happy is that when you do it right, people are calling up for this product, and we're still only 85% of the households in the U.K. with our read so far. So more opportunity there. Your next question was around on the marketing spend. But I would say it's a little bit hard to give a like-for-like there because obviously you had the football last year, we had [indiscernible], but I would say it's fairly similar to last year because it's quick Q3 is always a softer period. Edward any more to add?

I think the first point just to make to remind everyone is that we will -- across 2023, we spent more on marketing than we did in 2022. As you guys know, marketing is funded for us through the contribution of franchisees make as a percentage of system sales. and system sales great fits more into the past. So as we got that far though, obviously, it gives us significant benefit to scale. And then to just sort of a Andrew's point, yes, our spend in Q4 marketing will be broadly similar to our spend on Q4 last year.

And your third question, Richard, about when do we expect delivery growth back to positive territory. Look, I think from what I'm seeing so far, I think definitely, we should see that into Q4 definitely into 2024 with the strategies that we're starting to pull together since I've been here now over the last 100 days. So I feel a positive momentum going into Q4. And realistically, I think 2024 is when we'll see more of that will apply more pressure into that growth again. To me that this year was more about making sure the franchisee profitability health was in a good place. That was the first priority.

[Operator Instructions] We have had no further questions. I would like to hand it back to the management team for any final closing remarks.

First of all, thanks for joining today. I hope it was informative. We're going to give that my sort of broader view on outlook on the business and the way forward on the 11th of December, you could all join. As I said, there's no other Domino's [indiscernible], I'd rather be running by now. I really do feel very lucky to be part of his team and this business. A lot of people ask me, so what's really going on, what are the [indiscernible] what you found out and I honestly say a bloody loved every day, and I only found good things, really good things. And I think particularly in the franchisee base, [Technical Difficulty] these guys have got kids from the 20-year to 35 years of age at [Technical Difficulty] inside the Domino's business that want to grow, makes me very, very glad to grow this business. So I'm very excited and look forward to catch up with all of you soon.

Thank you, everyone, for attending today's call. Call has concluded, and have lovely rest of your day, and you may now disconnect your lines.