DP Poland Plc (DPP) Earnings Call Transcript & Summary

Good afternoon. Welcome to this DP Poland webinar covering the strategic acquisition as announced this morning. Before we start, I am just going to go through a few admin points. [Operator Instructions] With us today are Nils Gornall, the CEO; and Edward Kacyrz, the CFO. And I'm now going to hand over to Nils to start today's presentation.

Thanks, Alex. Much appreciated. Good afternoon, and thanks for joining, everyone. I'm Nils, CEO of DP Poland. With me today is Edward, our CFO. Look, very exciting day for DP Poland. Today, we purchased Pizzeria 105, fourth largest pizza brand in Poland. It has 90 stores, which are 100% franchised, with 76 franchisees. Total consideration, GBP 8.5 million. And the good news is the seller is reinvesting 1/3 of the consideration, GBP 2.8 million into newly issued shares. The issue price was 11.4 pence. [ EBITDA ] of the business is GBP 1 million an acquisition price of about 9.1x EBITDA. So we think we've got a really good deal. This puts us on a path to reach our 200 stores, positioning us to become the leading pizza QSR brand in Poland. The acquisition supports our move to a franchise business with more than half of our stores run by franchisees. Compelling top line marketing and cost synergies and immediately earnings enhancing. About Pizzeria 105. Pizzeria, it was established in 1998. Pizzeria 105 is a capital-light business with 10 employees. The founder today became a large DPP shareholder and remains in his role to support the business conversion, advise to myself and the Board and the founder has over 25 years of experience in the pizza market. So he comes with a wealth of knowledge, and we're certainly going to be utilizing his skills. Pizzeria 105 , like I said, fourth largest pizza brand in Poland, 90 franchised stores owned by 76 franchisees. Main sources of revenue is resale of raw materials to its franchisees and collecting income from the royalties. So revenue for last year 2024 was GBP 1.7 million, with pre-IFRS EBITDA of GBP 1 million. Website sales for the business is 16%. In the comparison, Domino's were over 50%. So a big difference there. The AWOC, this is the average weekly order count or the store sales for 2024 is estimated at 530, which is about the same levels as we were here in Domino's about 3 years ago. So our Domino's stores are currently over 50% busier than the Pizzeria 105. Next slide, thanks, Alex. The 2 businesses are a great fit. Pizzeria 105 is a delivery-focused business just like Domino's. They have a strong presence where Domino's is weak. Traditionally, the Pizzeria 105 business focused on smaller cities and smaller towns. So the overlap is minimal. Probably one of the best examples of that is the third biggest city in Poland, [ Lódz, ] Pizzeria 105, they have 17 locations. We have a whole 2. So very complementary business. The 2 businesses also have a very similar look and feel, which is going to make the rebrand easier and simple. Customer behaviors are also very, very similar, both being a delivery-focused business. 105 has about 56% delivery and -- of its sales and delivery, Domino's is about 69%. So the main difference or the only difference is an extra 10% of dine-in for the Pizzeria 105 brand. Next slide. Thanks, Alex. So what's the rationale behind the acquisition? Look, we want to be the leading pizza brand in Poland, and we know what benefits that can bring. And secondly, we want to be a franchised, capital-light business. Growing Domino's market share, strengthening brand awareness and maximizing scale advantages. We will capitalize on pricing power, marketing opportunities and supply chain efficiencies. This acquisition increases brand visibility, including additional presence in 31 new Polish towns for our business. So why am I so bullish? It's the additional franchisees. With the 76 from the newly acquired brand, plus our 5 we have 81 franchisees. So future organic growth will be franchisee-led and selling down our corporate stores now accelerate. We anticipate no obstacles in rebranding. Most of the Pizzeria 105 brand, there is 30% territory overlap, but this can be addressed by merging the 105 stores with our corporate stores. So luckily, we are a corporate business, mainly corporate business. So we can merge these 2 stores together where there is an overlap and produce a mega store. Market share in Poland. So after the merge, Domino's will be a clear second in order count -- in store count and most likely #1 in volume. Integration and store growth. The biggest opportunity here is to increase store sales and customer count. Currently, Domino's average store volumes are over 50% more than the Pizzeria 105. We believe that we can increase sales through increased marketing investment. So the current business does very, very, very minimal investment. Their spend on marketing is minimal. On the other hand, Domino's, we spend a lot on our marketing. With our marketing strategies and the utility of our e-commerce platform, our online ordering platform and our mobile platform. Not only does the extra stores -- not only does it benefit the newly come stores, but it also strengthens the national [ ad fund ] supporting all locations. So I mentioned before that the online sales Pizzeria 105 is 16% compared to the Domino's at over 50%. So when we start bringing our e-commerce platforms into the newly acquired business, this is where we think we're going to get most of the uplift. Domino's store evolution with a combination of organic and Pizzeria 105 converted stores, we aim to end the year with 150 stores, 20 more than previously communicated. In early 2027, we predict we will pass the 200 store mark and then accelerate from there. Expected investment in store refurbishments of the new business is around GBP 2.6 million, funded from existing cash. And there will be minimal onetime integration costs, expansion of our training team, expansion of our franchise conversion team, IT team. And initially, we will also invest more money in marketing to ensure a smooth integration of both brands. Edward, if you want to take the slide on the synergies?

Of course. Yes. So investment in 105 gives us a lot of opportunities to grow this business further, especially from the top line and EBITDA side. For the post acquisition, we expect the revenue to grow mainly because of the conversion of 105 stores to Domino's and also running the business with those stores that are unconverted for some time. And thanks to that, joint power of both brands will also reduce the competition power on the market. So we should be one of the more often chosen brands on the market. On the other hand, we also have a good track record of the activities, what we did with the high-volume mentality for the Domino's store. And looking at the pattern and the growth that we were able to realize on the Domino's stores, we think, we can repeat the same strategy for 105 stores, delivering similar double-digit growth over the coming years and bring the turnover of those stores closely to the Domino's ones. With the use of additional funds in the marketing, we can also advance with our digital platforms with direct access to the consumers, optimize our conversion [ funnel ] and generate a higher turnover from the base of the consumers that the Domino's and 105 together have. On the commissary side, the revenue and margin should grow as well for 2 reasons. We have more stores, so the commissary sell more products to the partners. But on the other hand, the margins will improve. That is somehow connected with the cost synergies because of the purchase power that grows almost twice comparing to the pre-merger position. Marketing investments or the funds that will be generated, thanks to this merge will let us approach the areas of communications that we've never been or we were just for a while, like radio and TV campaigns. We have proofs from the other markets, well developed that this works for the long-term newcomers. And we should be soon in the same position to repeat the strategy further. On the cost side, definitely the trading terms is something that we will be looking for some synergies, especially of the growing volume on the supply chain. On the other hand, the distribution patterns and the road to market should simplify and be much better covered by the transport so the cost per delivery should drop. HQ due to the fact that we take over the 105 with the franchise business. The cost of the headquarters for the joint businesses should not grow in a leaner way versus the top line. They should rather stay stable. And this is one of the areas that we looked for the synergies for the future. And of course, the operating costs should be optimized because combining the businesses will give us the advantage of running one platform for different touch points with the consumers not 2 as the current businesses are running. So in the long term, that should also bring the effect of scale or create more sophisticated tools. Nils over to you.

Thanks, Edward. Yes, okay. So next slide. So look, it is -- this deal is -- the acquisition is absolutely game changer DPP, but it's also a very exciting opportunity for the Pizzeria 105 franchisees. We are confident with the compelling offer that we have that they will rebrand. Moving from a local Polish brand to the #1 global brands in the world, we have over 20,000 stores worldwide, significant potential to apply the high-volume mentality that we love at Domino's, and grow the Pizzeria 105 sales. We believe we can increase our sales, as Edward said, over 50% in the next 2, 3 years and match the sales seen by Domino's stores that they're doing today. With using our online and mobile platforms, increased investments in and brand visibility, we can really drive their sales and our profitability. Integrated supply chain will bring food savings compared to what they pay today. Franchisees will receive training support and incentives to rebrand. Our advanced tech and equipment IT systems will also bring many benefits to our new franchise partners to their operations, reducing delivery times and improving the overall customer value proposition. So since I started at DP 3 years ago, we've been on executing our strategy for growth. We've improved the customer value proposition. This is down in stage 1. I don't have my cursor, but I'm sort of talking about Stage 1, we came along. We increased the customer value, we increased the quality of our pizzas. We started delivering pizzas faster and became very competitive on pricing. We've improved our customer retention and now we have many, many loyal customers. Then we moved into Stage 3, and we started improving the store sales dramatically, 50% in the last 3 years. And then we're into Stage 4. We are improving profitability. Now our franchisees can make a great return on investment. Now Stage 5. This is where it's exciting and it really kickstarts our franchising. Like I said with this transaction, we'll have over 80 franchisees and that really sets us up for the future. That will move us into Stage 6, where we'll be a capital-light business, making consistent products and the organic growth will move us past the 200 and then ultimately, 500 plus where we need to be. Our strategy remains on track with the combined 2 brands our AWOC falls to approximately 700. So the Pizzeria 105 brands at low 500s, the Domino is at low 800s, come to an average of about 700 weekly orders per store with our goal set at above 850 by the end of 2027. Our store count, like we've been promising. We expect to reach 200 Domino's stores in early 2027, and accelerate from there. By the end of 2027, we expect 220 Domino stores. And then with our franchise side. So Domino's franchisees owned stores should be over 50% in 2027, with our ultimate goal of 90%. So we're well on track, and this acquisition certainly puts us in the right direction. Edward, if you want to talk about where we've been spending -- investing our cash?

Yes, sure. So a year ago, you showed us a lot of trust. Thank you for your trust and privilege to work with you. You invested in our company, GBP 20.5 million just for the development and expansion. And at that time, we said that we will use it for the rollout of the stores of almost half of the money, then we were looking for the potential acquisition of the companies. There were also on the list the store upgrades, optimization projects and also a reduction of the debt to Malaccan to zero, thanks to which the company will become debt free. And I will say we are much on the road of what we committed to. The opened number of stores is 16 till now. We spent for that almost GBP 3 million of the budget. Then we found the target, which is 105, and we are happy with this, and we invested into this company right now. Then we -- do not forget about the store upgrades, 7 of them were completed. There are other stores in the pipeline for the conversion for the coming months. We do not forget, of course, about the commissaries where -- about the commissary project where we need to triple our supply chain for the growing number of stores and higher expectations of the network to deliver high-quality products. And we also closed the Malaccan loan for the company. So we are currently debt-free profitable business. Looking forward for further expansion, the organic growth will be slightly slowed down. But on the other hand, we will have a lot of things to do with the proper conversion of 105 Pizzerias towards the Domino standard. And we will be consciously reinvesting the money that the business will generate towards delivering the step 6 that was presented by is Nils, which is organic growth in the mid- to long term and approaching the dominant position in the market.

Thanks, Edward. Okay. Next slide, Alex, thank you. So in summary, look, I'm really excited about this acquisition and especially in the next few years. So a lot of -- it's going to be a lot of heavy lifting, but it really is an exciting time for this business. Pivotal moment for the company, and it also greatly benefits the franchise partners from Pizzeria 105 as they rebrand to Domino's. Pizzeria 105 is profitable, cash generating and comes with post-acquisition synergies. It advances our strategic plan to expand to 200 stores and ultimately 500-plus in the Polish market becoming the dominant player and allows us to leverage our entire infrastructure and become the pricing leader. Lastly, this acquisition jump-starts Stage 5 with experienced franchisees entering the system, bringing opportunities for organic growth and corporate store sell-downs. So that's our presentation today. Plenty of time for questions. We've ran through that nice and quickly. So any questions, please hands up and we'll be happy to answer.

[Operator Instructions] The first question is from [ David Seaman ]. How do 105 franchisee terms vary versus DP and does the GBP 2.6 million include cost of harmonizing the franchise agreements?

Okay. So yes. So they have their own franchise agreement. So yes, they have their franchise agreement, just like a Domino's agreement. They have a term and they have a territory and allocation that they are allowed to deliver to. The investment that we're putting in is for the rebranding. And then they will be going and -- so they can stay with 105, we can rebrand into a Domino's and then we come along, and we will give them incentives. We will help with the rebranding of the shop and they'll go on to a new sub-franchise agreement with Domino's.

The next question we have is from Katie Cousins. Could you provide more information on the franchisees from a quick look on the website, it doesn't seem like you need restaurant experience or have the same work your way up approach that you have at DPP, how can you ensure standards and motivation match DPP standards?

Look, we did a lot of due diligence on this company. It's a great brand. Their stores are new, in great locations. The founder is an amazing man. Today, we spent half the day with the franchisees and the staff. They are a good bunch of people. So we have our standards. We have our audits and we have a good training team. So these guys are from a pizza shop. They do have pizza experience. So it's not just people walking off the street. So these guys are experienced franchisees. They're business owners in their own right. And it's a successful brand. It's the fastest growing by store count, brand in Poland. So the business has been growing. They have good franchisees. They have a great leader, and they're just a good business.

I've got 3 questions here from [ Mark Brumby ]. So I'll ask them one at a time. I'll let you answer each one and then come to the next one. So the first question, with 76 franchisees and 90 stores, some are presumably multiples will they take on more sites under the DPP flag, but will the franchise terms be in line with existing DPP franchisees and will Pizzeria 105 franchisees be okay with that?

Yes, correct. So we will have incentives for them to rebrand to a Domino's. We will be coming with incentives on royalties and we'll be contributing to the rebranding as well. So we're confident in the offer that we have for the franchisees. What was the other part of the question, Alex?

It was about the stores, whether they can grow. So if I can take it?

Yes. Yes. Look, I mean the Domino's model is set up for scale. So that's the good news. You can run multiple Domino's stores, and that's how franchisees become very wealthy in this business. So we're confident that with the right training that these franchisees can expand and grow. There's absolutely no doubt about it. We've got 100 corporate stores and like I said, we do have a small overlap with corporate stores and the 105 franchisees. So we'll be able to merge these stores together, creating -- you mix 2 store sales into 1, you have a mega store. So we will be able to offload our corporate stores and like all the way around the world, the Domino's system, it allows you to scale and operate more than one location.

The second question here from [ Mark ] is, will the 40 units mentioned to open in FY '24 be mostly Pizzeria 105 conversions, I suspect you might mean FY '25. But...

Yes, so we're allowing ourselves 24 months for the rebranding. So we've put 30 in the first year, 30 in the second year and then the rest in Q1 2027. So we are taking the foot off organic growth slightly while we do the transition. So yes, out of the -- stores being out of this year, most of them will be 105 rebranded, correct.

And maybe I will add one sentence on top of that, namely, we will be looking very carefully on our cash flow, just to be sure that we will not overinvest as one parameter, why we concentrate more on the conversions and not the organic growth. The second thing is that we simply cannot run 2 battlefields at the same time. And we want to be sure that if we start the conversions, we do it right. So we want to focus on it. We want to succeed here and prove that the franchisees, the new franchisees of Domino's are also successful. And when it's working, there will be our sponsors and our partners in further expansion. So this is the main goal to make 80 people, 80 franchisees happy with the match and not going for -- to distracting to each other, contradicting to each other strategies.

Yes, exactly. When you have 80 franchisees, you can just imagine in the next 2 years, if just half of those franchisees build a second store, buy one of our corporate stores, it's really, really puts us on track to be a successful Domino's market.

Final question here from [ Mark ] is EBITDA of GBP 1 million from 90 stores is somewhat modest. What's the realistic target?

So like we said, it's 100% franchised. So they're only getting income from sale of food, which is done through a third party. So it's not a commissary through that they're operating. So the margins are less because they're sharing it with a third party and then they're charging royalties. Their royalty percent is a lower percent, and that's why the business has been growing so fast. So yes, we believe as we increase their sales that we'll be able to increase their profits as well.

And that is a very important element, what just Nils mentioned. Yes, we take over the company, delivering around 500 AWOC for a store and the goal is that we want them to follow our pattern from the last 3 years that we've been delivering on Domino's stores. So growing the top line, training them how to do the digital as we are doing and also searching for some synergies and changing the business model because we have our own commissary, they just go through the different third parties -- partners. Than the profitability of them and us should improve.

There are apparently no further questions. [Operator Instructions] We certainly have got time to take some more questions if you'd like to ask them. Nils, Edward, we've had no further questions come in. So perhaps I could hand back to you, Nils, to give us a few closing remarks.

Awesome. Thank you very much. Yes, thank you very much for attending today. If you do have any more questions, which I'm sure you will, please contact me. You can go through Alex, you can come directly through to myself. And yes, like I said, just really excited about this acquisition. We've been in the market looking for a while. We haven't just jumped at the first opportunity. We spent a lot of time on this, and we feel that it's just such a perfect match for our business, especially where we are today. We've done a lot of work in the last 3 years, and this just sets us up for -- it's just perfect timing. It just sets us up for the rest of what I need to achieve and then we're a franchise business and we are just growing. So couldn't be happier, couldn't be prouder. Very exciting day for the company. And yes, I am one very tired man today as I think the next few weeks is going to be pretty crazy and pretty exciting as we move forward. So thank you very much for your time today.

Thank you. And as a reminder, as you exit today, there is a feedback form. If you've got time to complete that, please do. And if you leave your e-mail address on any outstanding questions you have there, it will enable us to come back to you.

Thanks, everybody. Have a great day.

Thank you very much.