Dominos Pizza Group plc Preliminary Results Thursday, 5 th March - - PDF document

Domino’s Pizza Group plc Preliminary Results

Thursday, 5th March 2020

Transcript produced by Global Lingo London - 020 7870 7100 www.global-lingo.com

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Introduction

David Wild CEO, Domino’s Pizza

Today’s Agenda Good morning everyone. We are 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 are also joined by the members of UK LT and a group from the UK finance team, who have done the most fantastic job in David’s absence in getting these results delivered on time. So I would like to pay tribute to them for their hard work to get us here with these results, a 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 us through the numbers, and then I will come back and look in some detail at the UK and Ireland business performance before the three of us take any questions that you may have, either as a result of the presentation or from the results. So with that, I will hand over to Ian.

Perspectives on the Business

Ian Bull Interim Chairman, Domino’s Pizza

Welcome Good morning, everybody. Thank you, David, and thanks for joining us today, both in London here and those online. Strength of the Core Business Model 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. The food delivery market is growing year-on-year. The collection market is growing healthily double-digit. We have a strong business model, vertical integration of food manufacturing, distribution and sales. We have some exceptional franchisees and the model is pretty highly cash generative and pretty capital-light really. So it is a great business model. And despite some well-known challenges, Q4 and trading have been pretty encouraging, as I am sure you have seen. So let us not forget also the other attraction, I think, is the potential for growth, capitalising

• n both geography and fortressing opportunities. I think it is collection opportunities and day-

part opportunities. It is technology-enabled at both customer and operational levels, and, of course, the mutually beneficial relationship with franchisees so that we are all together growing the system. This has been a challenging year But I do not think there is 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 are a number of points there

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• n the slide. I am not going to draw us through all of those because many of them are pretty

self-evident. There is a couple I actually wanted to pick out 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 have seen already what we have done in Norway. There has been a number of operational challenges, not least the tragic passing of David B

• ver the Christmas period. And the external environment, both for us and for franchisees is

presenting same 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. Decisive action being taken So we will make progress, and that starts with some decisive actions. As you have seen, there is a huge amount of work going on behind the scenes. And trust me, there is a lot of work going on. The Norway transaction is the key example of some decisive action, but in a risk-adjusted

• rderly fashion, which is the way we want to do that, and I think it is 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 have had the departure of Stephen and Ebbe and the addition of Elias and Usman, and Elias is with us this morning. We are reengaging with the franchisee community, and that is at all levels and out and about in their

• businesses. And we are making progress on attracting a chair, and we will update you in due

course on this front. And I just want to say that this is all underpinned by two mainly important things. Firstly, strong support from our US franchise holder. We are 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 have dealt with a very difficult situation. Our four priorities So here are the four short to medium-term priorities that we, as a Board, are united behind and putting considerable effort into. Number one, and it would not be a surprise, is recruiting a world-class Chair, CEO and CFO and overseeing a managed Board succession. Secondly, reinforcing our UK and Ireland business with some ambitious plans to be the best master franchisor in the system. Now we recognise 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 have already started with a Strategy Insights Director and a new Interim CIO. Thirdly, rebuilding relationships with our important franchisee partners. Now we recognise 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

Domino’s Pizza Group plc Preliminary Results Thursday, 5th March 2020 www.global-lingo.com 4 for both parties. And clearly, the new leadership of a new Chair and a 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 have got plenty to do, but with a renewed vigour, a clear set of priorities. And we are getting on with it. And with that, I would like to hand over to Bethany.

Financial Performance

Bethany Barnes Head of Investor Relations, Domino’s Pizza

Welcome Thank you, Ian, and good morning, everyone. I will start with the income statement before moving on to investment and cash flow. I will then touch on franchisee profitability before handing to David. Treatment of international operations 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 four, together with international central costs, have been classified as discontinued operations

• n the income statement, and as disposal groups held for sale in the balance sheet.

Comparatives have been represented accordingly. Although we therefore presented the

• perations as a single line on the income statement, we have also given you a breakdown of

system sales and EBIT by country in case helpful for your modelling. But to reiterate, these are excluded from underlying results. UK & Ireland performance This chart breaks out our UK 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 six Have More Fun stores we purchased at the start of the second half of 2018. As you know, we restated revenues, the 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. DPG earns no margin

• n this activity. In UK and Ireland, EBIT margin as a percentage of sales was 8.5%, in line

with our long-term target. UK & ROI LFL sales growth We were pleased to report UK like-for-like, excluding splits, above 3% for all four 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

• f 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

Domino’s Pizza Group plc Preliminary Results Thursday, 5th March 2020 www.global-lingo.com 5 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. Analysis of UK & ROI P&L and margin drivers Now to run through the key components within UK and Ireland EBIT. Our supply chain centre 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, royalty and incentives was driven by a number of factors, the largest being the decision to contribute £2.1 million to the e-commerce fund for historical chargeback costs. The profit of UK corporate stores declined due to a weaker second half and the short-term drag from four 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 amortisation 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. UK and Ireland EBIT, including our joint ventures, was therefore £102.4 million, up 1.4%. International performance (discontinued) We saw a disappointing performance across our four directly operated international markets, which are now classified as discontinued. The trading loss of £20.8 million compared to £6.6 million last year. Onerous leases and other related costs accounted for £4.1 million of this 2019 loss. We incurred £35.4 million in impairments and restructuring charges, which together with £0.3 million of tax charges, drives the total loss in discontinued operations of £56.5 million. International impairments 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 £2.5 million impairment charge. Iceland remains a good, profitable and cash-generative business, and now has a carrying value of £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. International disposal process Finally, on International, an update on the disposal process. On 13th February, 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 £7 million, together with funding losses to

• completion. It will provide DPG a complete exit from the market. It also includes the transfer

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• f the 29% minority stake in Sweden to us, which is important in order to progress a

transaction for this market. From a modelling perspective, on completion, there will be a P&L loss due to both cash outlay and the recycling of minority interests. These minority interests currently stand at £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

• f two stores and the number of headcount reductions.

Group P&L Turning to the bottom half of the Group income statement. EBIT of £105.3 million is made up

• f £102.4 million from the UK and Ireland, together with £2.9 million from our German
• associate. The net underlying interest cost of £6.5 million is £3 million higher than the prior

year, as a result of the planned higher average debt position. The largest component of the non-underlying items was an £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 five years - is also shorter than our expected payback for store splits. Also in non-underlying is a £7.1 million contribution to the e-commerce fund that we talked about at the half year, and this line also includes a £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

• f 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. Net debt bridge Turning to cash flow. Our core UK and Ireland business generated £68.2 million cash flows in the period, and we invested £15 million in capex, resulting in total cash generation from UK and Ireland of £53.2 million. We invested £2.9 million in funding towards our German associate, £44.3 million on dividends and £17.4 million on share purchases. International trading losses and Capex incurred a total cash outflow of £19.5 million. The exercise of the Icelandic put options resulted in a cash outflow of £2.7 million. Net debt to EBITDA stood at 2 times on a continuing basis and 2.3 times including discontinued, both within our target leverage range of 1.75 to 2.5 times. Group cash flow I shall now turn to review the cash flow in a little more detail. We had a £23.3 million working capital outflow. This is the result of two items: a £7 million increase in inventory

Domino’s Pizza Group plc Preliminary Results Thursday, 5th March 2020 www.global-lingo.com 7 levels as part of Brexit planning and a £21 million payment timing change, which reversed in early 2020. The Capex breakdown is in the appendix. The key items being maintenance Capex of £5.3 million, covering SEC, head office, IT and corporate store refurbs, an e-commerce platform and net related Capex of £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. Franchisee profitability 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, are not able to give comparatives and the figures we have 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 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 three methods, results in an average EBITDA margin of around 14% at a store level. For the year ahead, labour costs remain a challenge, with inflationary pressures, for example, national living and minimum wage increases of between 5% and 6%. Labour 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, provide 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 UK and Ireland performance in more detail. Thank you.

UK & Ireland Performance

David Wild CEO, Domino’s Pizza

UK Performance On this chart, we break down the sales growth performance in a waterfall showing the impact

• f like-for-like sales in 2019 of £36.9 million. The new stores opened in 2019 generated an

extra £8.5 million, coupled with the £23.5 million rollover of those new stores that were

• pened in 2018 that were immature in 2019. That is offset by a split territory impact of

Domino’s Pizza Group plc Preliminary Results Thursday, 5th March 2020 www.global-lingo.com 8 £16.5 million, leading to the £1,144 million system sales number that we are reporting this morning for 2019. Continued strength in digital 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 total sales growth of just under 5%. There are three elements of that growth that I want to pull out. Our app growth continues, and we saw a very strong performance in apps. We have now had 26.6 million app downloads overall in the lifetime of the app. But in 2019 alone, we had 4.1 million new downloads, over four times more than our direct pizza competitors. Our app on the Apple App store received a 4.7 out of 5 rating, and the number of active users

• f 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 have increasingly started to use artificial intelligence in our Pay-Per-Click programme, and this has been hugely successful, leading to revenue on Pay-Per-Click in 2019 being 20% up overall for no incremental investment. And finally, the other component I want to draw out from our digital performance in 2019 is

• ur success with affiliates, which have been completely refreshed over the course of the year.

We have 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

• f affiliate offers. But most encouragingly, those customers we are recruiting through affiliate

marketing, one in five of them is new to our system. Good performance of new stores Our new stores. We saw a good performance in those new stores that were opened. We

• pened 29 franchise stores in the year, with 23 different franchisees choosing to invest in new
• utlets. It is 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 via 62% of our new store openings in 2019 coming from those franchisees with less than 20 stores, that compares with only 41% for 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

• pened in 2019.

New product development We continued 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 inside, we launched Mango Habanero Wings. We remain committed to an ongoing programme of product development and have exciting plans for this year ahead. Corporate stores – strategic rationale 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 minds. But

Domino’s Pizza Group plc Preliminary Results Thursday, 5th March 2020 www.global-lingo.com 9 before I go into the detail of the performance of the business, I think, it is worth just explaining the strategic rationale for why we are in corporate stores. There are two 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 literacy, 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 have said for many years that London remains an opportunity for Domino’s with less than 15% of our space being in the capital, despite the fact that it represents 25% of consumer spending. And by owning stores in London, what we have 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

• pportunity of excessive address counts in the legacy stores. We remain completely

committed to corporate stores. Corporate stores performance and plans The challenges, which Bethany touched on, are frankly that we are still learning how to

• ptimise operations and maximise profitability. It does bring significant cost challenges. For

example, all franchisees incur labour costs around 300 basis points higher in London than the rest of the UK, and occupancy costs in London are around 100 basis points higher than they are in the rest of the UK. So you are 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

• f 2018, we made a change of leadership within our corporate store portfolio. And under

Scott Bush's leadership, we are very confident that that new team can see positive moves forward in 2020. We are collaborating with other franchisees in London on promotion activity. We are 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 are 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 have invested in improving our driver welfare programme to reduce the turnover of drivers as well as implementing a labour management tool, which may be applied to the rest of the system. It is important that we develop and upskill team members to deliver Domino's promise, and we are implementing efficiency processes across the network.

Domino’s Pizza Group plc Preliminary Results Thursday, 5th March 2020 www.global-lingo.com 10 Having opened so many stores and split so many territories in 2017 and 2018, we are only planning one new store for 2020. And what we see is a period of estate stability going forward. World class supply chain One of the things we are most proud of in DPG is our supply chain, which by any measure 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 ribboned 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 have also implemented Paragon, which is a transport management system, which enhances route planning and monitors capability of drivers, that is 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

• ur 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 are optimistic that that will be rolled out this year. We are also opening a facility in Scotland, where we have gained planning consent, and we are 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. Summary So summing up, what we are presenting this morning is a solid UK and Ireland performance, driven by our continued strength and growth in digital. We are very pleased with our 2019 new store performance with the AWUS numbers that I shared with you, and we are 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 are now happy to take questions.

Q&A

Douglas Jack (Peel Hunt): I have got three quick questions, if that is all right. Can you just talk about the cost of new stores, both in London and outside? Second one would be,

• bviously, you mentioned store splits and the impact in London. What is the number of

households per store in London versus outside London now for Domino's? And final question. 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?

Domino’s Pizza Group plc Preliminary Results Thursday, 5th March 2020 www.global-lingo.com 11 David Wild: I will take all of these. The cost of new stores are plus or minus £300,000. So that has not really changed. We have done some value engineering, which is broadly kept at 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 £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, the way you open a store that does not just

take addresses from an existing store but opens up the opportunity to service new territories as well. And that is one of the things that we are 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 typically across the estate, I think, it is about 23,000, London is about 26,000. So there is a big difference. Now, of course, the issue in London is that there is more density of population. So in terms of the lag times in London, they are not unattractive, but the household count is high. And the key to making splits work is to get that collection business. And we are doing that in some of our new investments, but we are 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 two key things that make splits work are incremental addresses and

• collection. And that has to be our focus.

Now what we have 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

• n with franchisees, and it is also a marketing priority, is how we can coach them and help

them to exploit that potential on collection and how we can prioritise those stores that open up the most new addresses. Wayne Brown (Liberum): Three, but I will 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

• pportunity, as you quite rightly said, and I think all the factors impacting London labour

costs, etc., I think, these are all well-known before you bought into London and well-known market factors. But menu pricing in London is also much higher than the rest of the market. What I am just trying to understand is, 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 two years into process, but not much going on there, but the Board as a whole, have said that you are not going to negotiate the strategy and the pricing model with franchisees? David Wild: Sorry. So the question is, I think, Bethany has explained why we have written down our corporate stores. Wayne Brown: No, no, I get that. If I refer that back to the negotiation with the franchisees, I think in the past, it has been stated that you are not going to be negotiating the model, the pricing model, the food cost model with the franchisees. And clearly, food

Domino’s Pizza Group plc Preliminary Results Thursday, 5th March 2020 www.global-lingo.com 12 costs and labour are two 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? David Wild: I will ask Ian to come in, in a minute. But what we said this morning is we recognise 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 is the work that is ongoing in. Ian, I do not know if there is anything you want to add to? Ian Bull: No, I think you have pretty accurately covered it, David. Just to reinforce it, is that the whatever basis the relationship is going to be, it is going to be around what does the long-term plan look like? And that long-term plan has to recognise, whether it is corporate stores or whether it is franchisee stores, what the headwinds are looking like from labour cost, etc. We will develop thoughts along the way. We are not here doing nothing and just

• waiting. But I think the primary drivers of that conversation will be the new leadership.

Wayne Brown: And on that front, we were obviously hoping for franchisees negotiations, for some resolution, in 2020. I know that you have not put a timeline on that now. Obviously, you are looking for new leadership. I think considering the time that these factors take, is it probably likely fair to say that there will not be any major progress on that front this year? David Wild: We are not putting a timeline on it. People can draw their own conclusions. We are determined to find the right long-term framework to exploit the potential of Domino's brand in our market. And, as Ian said, there is a lot of support from DPI. It is not something that we are working on, on our own, we are debating with them what that structure needs to look like. Wayne Brown: On advertising and e-commerce strategy, just some comment and obviously the CMO left having been in the business for about six, seven months. So just a comment on

• that. And also there is not really a time line that is being placed on the go-live of the new

platform that was, I think, also expected in late '19. And there is not 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? David Wild: We are not commenting on the CMO’s departure at all beyond what is already been said. As far as the new platform development and the app development, that is

• ngoing. There are a number of areas that have been done successfully. There is further

work that needs to be done. As Ian mentioned, we have just appointed a new CIO, somebody whom Ian worked with previously, who came into business three weeks ago. He is in the process of looking at the whole programme in detail and we will be bringing recommendations forward to the Board. Wayne Brown: And sorry, just one last one on strategy. Clearly, international has not 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 centre. So I am just curious as to what the overriding strategy is? I know that in your statement today, Ian you said capital allocation, there is a clear framework.

Domino’s Pizza Group plc Preliminary Results Thursday, 5th March 2020 www.global-lingo.com 13 Can you maybe give us an idea of what that allocation looks like, because that maybe give us some insight as to what the future strategy of the business would entail? Ian Bull: Sure. So, look, in terms of strategy development, I mean, clearly, we have some Board changes that are going on, and we are 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 is 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 is going to take a little bit of time. Isn't it?” Yes, it probably is

• actually. It probably is going to take a little bit time, but we are 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. Chris Wickham (Equity Development): Just three 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? Does it mean, we do see some quite significant changes there, in particular with the aggregators? And then thirdly, sort of slightly following on from Wayne’s question, and 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 is 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

• f the industry, in particular, where you have got people who are aggregating things like

instant cash backs? David Wild: Okay. I am going to ask Bethany to answer the question on franchisee margins. I will pick up the competitive dynamics and the technology. The competitive dynamics, you are 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 are still growing as well. So there is a lot that we can learn in terms of systems and you hinted at one of those things from the aggregators. But we are very confident in our position and Domino's remains a very strong brand in the customers’ 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 have shown this morning some of the things that we have done well

• ver 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 think we are very confident there is more that we can have from both affiliates and pay per click. In the background, there is 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, which needs to be changed, given the changing times. So I do not want to give the impression that we are sitting doing nothing, but we want to get it right. Bethany, do you want to talk about the margin? Bethany Barnes: 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

Domino’s Pizza Group plc Preliminary Results Thursday, 5th March 2020 www.global-lingo.com 14 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 majority would be within kind of 6%, 7% and 16%. So that kind of plus or minor 5% range. And just to note, that 10.6% is not skewed by the largest franchisees. So that 10.6% is a mean of the 70 franchisees, their enterprise EBITDA margin. If I took a median instead, which in fact adjusts for the largest, it is a very, very similar number. So that is not significantly skewed by size. Julian Easthope (RBC): I have got also some further questions of franchisees. You have

• bviously redone the numbers and came to the £145,000 EBITDA figure that you reported,

which actually, to be fair, is not too dissimilar from what we have seen as a range over the last couple of years anyway. So when you take a look at the splits, I think that you gave some payback periods for new stores and splits, last year of two to three years and three to four years, depending on where they are, etc. So presumably, that has not changed. And ultimately then with £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, you have got all this new information in terms of EBITDA per store. 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 across the whole franchisee network, if you are worried about any of the franchisees under the current circumstances? And just sort of technical one in the last one. The £2 million recharge, is that just a one-off? And so the underlying for next year is £104 million rather than £102 million or is that an

• ngoing recharge will happen every year?

David Wild: I will ask Bethany to deal with the £2 million charge. The split economics,

• verall, are not that different to where they were. I think the thing that we have learned over

recent times is, as I mentioned, the criticality of extra addresses on the split and the extent to which almost, we call it, internally a hybrid, where it is a split but with new virgin addresses. That is really important. And that requires us to prioritise those opportunities. The second component is collection. And the third component is, what we call, donor store

• recovery. So ensuring that the two 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 are aware and we do maintain regular contact with the lending institutions, there are no franchisees that are in danger of going bust in terms of the classic signs that you would see, which is missing standing orders, not paying bills. We do not 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 £2 million? Bethany Barnes: So the £2.1 million of chargebacks that relates to historical chargebacks really relating to 2018. But yes, effectively, you can think of it as a one-off. So in there is a

• ne-off contribution we made to the e-commerce fund because we chose to put that money

Domino’s Pizza Group plc Preliminary Results Thursday, 5th March 2020 www.global-lingo.com 15 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 (Numis): I just had two things, please. Could you talk a little bit more about the phasing of Board recruitment? You touched on it in the statement. But is the interim CFO role likely to be finalised soon? And then one on slide 22. Just to check I am 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 three biggest franchisees included in that pool? Ian Bull: Do I take the first question? David Wild: Yeah. Ian Bull: So I think in terms of phasing, I think we have 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 has changed in that

• respect. That is the exactly how we are 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 that arose with the tragic loss of David B. And we sat down with the teams there to talk about what fit state we were going to be in and to deliver a set of prelims in 10 weeks. And here we are. I think the team has done an ace job, a really ace job. So we need to think very carefully about what we want to do about where we are with an interim because the interim you have has 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 is finding the right person rather than any person to come in. And that mantra exists for everything we do. We are going to find A-grade players. And it takes time to find A-grade players. And we would rather take a little bit more time to find A-grade then rush and get it wrong. Bethany Barnes: On your second question, the easiest way of answering that is slide 34 in the appendix. It gives you the breakdown in terms of number of openings by each group of

• franchisees. You have got all the underlying data there. To your specific question of the

largest franchisees, one of the largest franchisees opened two stores, which you will see on the pie on the right on that, in the period. Ross Broadfoot (Investec): So three questions. The first one, you have said a few times that you are receiving a lot of support from the US. Just wondering if you could elaborate what that might be? The second is on new store incentives. I believe last year, it was about 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? David Wild: I will get Bethany to answer the middle question. The process for the CMO, I am not going to make any comment on the departure of Emily, as I said. And the process for the CMO is something we are still discussing. On the question of the US, there is a whole

Domino’s Pizza Group plc Preliminary Results Thursday, 5th March 2020 www.global-lingo.com 16 range of stuff that we are looking at with the US. The one that is most advanced is strategy and insights, which is something that the US have used for a number of years. And they have 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 have done. The second area where we are working with the US is around technology because, as you would expect, with both the new platform project and the new app project, which are

• ngoing, there is a lot of learning that we can take from the US in terms of the journey they

have been on to build their website capabilities, and so that is very active. They were involved in the recruitment of Mark Grimes. And already, there is a very good relationship, frankly a better relationship than we have ever had. So they would be the two 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 do not know, Ian, if there is anything you want to add but there is a very good raport there. Ian Bull: All I would add, David, is I think there is an extreme willingness from the US side to help us. If you 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 is already existing capability, expertise and benchmarks around the world, why would we go have a look at them really and they are extremely helpful in terms of helping us understand what has worked and equally what has not worked. So we have got opportunities there really to road test in a fairly quick way, ideas that we might have. Bethany Barnes: And on your incentive, so it is slightly higher, the average, in 2019 versus

• 2018. I would say it is a very wide range. So clearly, there are relatively low incentives if it

is a virgin address territory. And then for a split, what we did with the incentive scheme last year was to effectively have tiering based on the proportion of donor store addresses that are being given up, and that is a quite a wide range. Ross Broadfoot: But is there an average I can compare to the 75,000 or? Bethany Barnes: It is slightly higher. It is 85-ish. Wayne Brown: One last question. Last year, the franchisees were not 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? Have they committed to any of the six nationals this year? And trading did improve in Q4 last year regardless of the fact that they did not take part in tacticals, which shows that there are good operators on the ground. So I suppose two questions flowing from that is, are you going to start refunding the franchisees any of the NAF that is 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? David Wild: There are no plans to refund any national advertising funds. I think there is plenty that we can advertise even if we are not doing national promotions. I think one of the things that we have seen in recent weeks is a much more purposeful efforts by franchisees around local activity, which allows them to tailor the activity to the local needs of their

Domino’s Pizza Group plc Preliminary Results Thursday, 5th March 2020 www.global-lingo.com 17 particular stores, and there will always be a balance between local and national. But in terms

• f refunding money, no, there is no plans to that.
• Okay. Thank you very much everybody. Have a great day.

Bethany Barnes: Thank you. [END OF TRANSCRIPT]