Domino's Pizza Enterprises Limited

Thank you for joining the Domino's Pizza Enterprises limited half-year earnings call. I'm just going to wait a few moments while the attendees populate. Okay, well, thank you. I can now see the attendees are now on the call. My name is Nathan Scholes. I'm the Chief Communications and Investor Relations Officer for Domino's Pizza Enterprises. On the call today, Mark Van Dyke, Group CEO and Managing Director, and Richard Coney, Group CFO. At the end of today's presentation, we'll move to a Q&A, at which point we'll take questions in turn by unmuting and hearing from you directly. As previously, we'll take a question and a follow-up, and then you'll rejoin the queue. Thank you very much, and over to you, Mark.

Thank you, Nathan. Good morning, and thank you all for joining us today. The plans I outlined for you earlier this month have not changed. So today, in addition to a discussion on our first half results, I'll reiterate some of the key elements around our approach to our strategic review, and I'll outline how we intend to get value creation model back delivering returns for all stakeholders, particularly shareholders, and the work that will help us achieve that. Domino's is one of the world's great brands with decades of experience serving our customers, providing opportunities for franchise partners and delivering returns for shareholders. First, I'd like to run through our top line results and provide an update on the work that we're doing to return to sustainable growth. Let me assure you, this is not business as usual. Richard, our CFO, will then provide an update on our financial performance. I'll come back to summarize, and we'll open it up for Q&A. Less than three weeks ago, we announced we were closing 205 loss-making stores, mainly in Japan, and mostly opened during COVID-19. This was to sharpen focus on stores and regions with the greatest potential, improving profitability and support our broader turnaround. Because of disclosure obligations, we updated you then because we are moving at pace. I want to be clear that those recent closures in Japan do not reflect and should not be interpreted as a statement on our long-term opportunity to grow, including new store openings. The fact is, good stores create great value, and you can see that by the improvement in unit economics of our franchise partners we have achieved over the past 12 months. We'll provide a detailed update and a strategy day in Brisbane to be held in this fiscal half. Today, I'll outline a little more of how we intend to get back to the virtuous cycle that delivers for all stakeholders, particularly our shareholders and the work that will help us achieve that. You'll hear more on the financial results from Richard, but let me provide you with my key takeouts for our half. Firstly, network sales were 2.9% lower because of lower same-store sales, currency translation, and because of store closures that occurred in the half. When you look at same store sales, which shows the underlying performance, H1 same store sales was really a story of two quarters. We started the first half behind aspiration with Malaysia and Taiwan cycling some external factors and Germany, as we reported at the August update, cycling the incredibly successful Doner Kebab promotion in the prior year and lower than expected. At the August update, same-store sales were minus 1.3%, but we ended the half at minus 0.6% in the second quarter. Germany returned to growth in the flat, and Malaysia and Taiwan cycled those external factors. That means same-store sales for the half were mostly positive, but affected by France and Japan, two markets where we have shared our strong focus on turnaround actions. As you know, I started as CEO three months ago. What I share with you comes from visiting six countries, visiting dozens of stores, and speaking with hundreds of team members and franchise partners. Everything I've seen and heard tells me we have significant strengths to build upon. This is despite cost of living forcing consumers to make difficult choices regarding their spending, including on QSR. We operate in large, attractive markets for QSR and QSR Pizza. And in most of those markets, we are the leader with well-recognized and valued brand and with strong franchisee networks. We sell high quality food and the flexibility of our menu offering and our product development means that we can meet the times with great value for customers, whether individually, in families, or in other groups. For example, today in Australia, you can purchase a Domino's meal for your family with three value pizzas and three sides starting from $37 delivered. It's quality food, a great experience and great value that rivals anything in our industry. We have a terrific team of passionate dominoids, as we call them, more than 120,000 strong, including more than 1500 franchise partners who are invested in our shared success. We have a proven value creation model or flywheel as we call it. If we deliver for our customers, we grow sales and increase profits for our franchise partners and earnings for our shareholders. And the model leverages strongly once you get beyond threshold weekly sales levels. What is also clear is we have significant opportunities in front of us in both the short and the long term. I highlight again the attractive markets we're operating in, such as Germany, one of the largest pizza consumption markets in the world, worth more than 4 billion euros annually. And we have the leadership position with a share three times our nearest competitor and still cover just one third of the geography. Benelux has a track record of success with 95% brand awareness and a store footprint larger than McDonald's and any other QSR competitor. And of course, Australia, where we're more than half of the pizza category, but we're still less than 5% of total QSR. So the fundamentals are there and we do have room to grow. So to build out our long-term potential, we know we need to do things differently. We need to improve unit economics. We need to enable our franchise partners to build their wealth and reinvest in expanding their businesses. We need to simplify our business and reduce complexity. For example, the number of packaging SKUs we order will flow through to better operations and lower costs, boosting margins for our franchise partners and returns for shareholders. We're working with urgency on immediate top-line and bottom-line initiatives. We've already announced decisive actions we're taking to remove costs that would otherwise be barriers to returning to growth. For example, the closure of the unprofitable stores that were unlikely to reach profitability in the near term, delivering 15.5 million in network benefits on an annualized basis. refocusing our spend on IT, marketing, ingredients and packaging to deliver immediate and ongoing savings, including 18.6 million in network benefits annualised. There is no doubt consumers are under pressure globally with sustained cost of living pressures affecting QSR broadly and, of course, businesses generally. But where we're getting the customer proposition right, we're growing share, including in large markets such as Australia. We do have some short-term challenges post COVID in general, and with the addition of four new DPE markets, Taiwan, Malaysia, Singapore, and Cambodia, complexity crept into our business from support offices to the cut bench in our stores. Two of our markets, Japan and France, have been particularly challenged and require an individual and carefully considered response to each. We're working on those in parallel as a necessary part of reaching our long-term potential. So that's the environment that we're working in. So what is the plan? We have a proven value creation model. This flywheel has delivered phenomenal growth and strong returns for all of our stakeholders. But clearly, we need a better focus on execution. Things need to change. We need to get that flywheel back to being a strength for Domino's, where we consistently deliver for customers. Our franchise partners grow their sales and profits with high contribution margins after break-evens. Our franchise partners are then hungry for more, expanding their store network to reach more customers efficiently and profitably, which helps DPE leverage our supply chain, marketing teams, and other support services to grow earnings and margins. The work we are focused on, short-term and long-term, all comes back to this flywheel, starting with the customer at the center of the business. You'll see the benefits of this approach in our franchise partner profitability, which lifted across all major geographies, excluding France and Japan, as a result of the high contribution margins of additional sales. I've been frequently asked, are we saving enough to return to the sustainable growth we want to achieve? The simple answer is no. Cost reductions plus sales growth is the powerful formula for our growth in our business. And on a rolling 12 months, you can see that formula in action with average EBITDA plus 13.7% higher than the prior corresponding period. Those increases came from a reduction in costs as we pass through the benefits of earlier savings programs in the form of reduced ingredient and packaging costs, as well as an increase, of course, in sales. The further question I receive is how do you deliver the meaningful uplift to unit economics required? The nature of our model is that our sales have a very high contribution margin in excess of 30% once our stores have passed the break-even point. To achieve an additional 30,000 of profit, we need an additional 100,000 in sales. Talking averages, that's on a store likely to have a turnover of more than 1 million already. It's not a small task, but we understand the opportunity, what needs to change, and the need to focus on execution to deliver it. Let me talk about growth. And I don't mean short term sugar hits. I'm talking about sustainable growth. If I had to boil this down, it's not about a change in strategy, but a change in execution. Some of our markets simply aren't delivering at the same level as our top markets are showing is possible. We, of course, need to change that. What we're doing is creating a simpler, more consistent dominoes. It's not a window dressing, but a strategy to create sustainable shareholder value over the next three years, backed by a meticulous focus on execution. And it has two parts that contribute, cost efficiency and strategic growth. Let me start on the right-hand side of this slide. We're working at pace to define the strategy and growth plan that will allow us to build out the full opportunity for this great business and our franchise partners. While we will share the details of that at our strategy day to be scheduled in Brisbane later this fiscal half, it's my view we can make considered choices on where to prioritize capital to profitably rebuild our store footprint. Importantly, our share of QSR and the pizza category through building frequency and, of course, new occasions. Network growth is important for our future, but so is same-store sales growth that outperforms in contributing to our earnings. We need to deliver both because there is no point in growth that is not profitable. To reach that long-term potential, we will keep a single-minded focus on our goal. But we aren't waiting for that. We also need the venture capital, of course, to reinvest in growth. As we've shared, we've taken rapid action, including closing loss-making stores and driving other cost efficiencies. These are simply the first steps. what is required to simplify our business, our cost base, our operations in stores, and our customer proposition. For example, by simplifying the amount of packaging options, we make space in stores for our team members, reduce the amount of deliveries through our supply chain, and reduce costs at the manufacturer's end. We've worked with select expert advisors to help our teams look at our business with completely fresh eyes and to challenge our existing views. Simplifying does not mean a reduction of quality, quite the opposite. Simplification means we can focus on making every customer experience as positive as it can be. Think back to that packaging example. Simplification means a higher accuracy of stock deliveries to store. It means our team members spend less time trying to select the right package for each product. And it means it's easier for our delivery experts to ensure they have the correct items when heading to a customer's home. It's my first view that every great food business is built on quality, value and experience. The evidence is clear at Domino's, where we deliver for our customers with high product quality scores, as voted by our customers at the end of their order. We see higher net promoter scores. People then tell their friends and family how good Domino's is. They buy again, and this leads directly to higher same-store sales growth. We believe there's more that we can do in the short term to deliver on this commitment for our customers and franchise partners to give ourselves the lift in unit economics, coupled with reinvestment from savings initiatives to restart the virtuous cycle. To be clear, short-term initiatives are not about a silver bullet. It's about a focus on doing small and big things better. It's about execution and ensuring all of our markets raise their results to our leading markets, from product quality to digital conversion, for example. And for example, we can see a stark difference between conversion rates from store to store, whether it's because of our local pricing and promotions, their product quality and local NPS scores, or simply their opening hours aren't meeting the need of their customers. Again, with the same tools at the franchise partner's hand, the same brand recognition, the same menu, and yet the difference between our top performing stores and our bottom can be greater than 8% for same store sales growth. We have to close that gap with greater consistency. The measure of these initiatives will be higher profitable same-store sales growth across our markets, which will drive franchisee profitability and profitable network growth. At the same time, we're working to lower costs for our franchise partners while we work on the medium and long-term roadmap. Savings are only one side to the equations. We have to deliver top-line growth built on more customers more frequently in all markets. As I mentioned earlier, every great food business is built through value and experience, with quality food the capstone of this offering. If you don't deliver high quality food, value and experience are no substitute, which is why our teams are building out a pipeline of high quality menu items. These products need to be accretive and they need to be scalable. In short, we're developing products that customers and franchise partners love, lower cost of goods sold without overcomplicating store operations. It can be delivered. For example, we've recently brought back our highly popular thick shakes back to the menu in Australia. They're mixing well and accretive. But before we focus, and that's even before we focus our marketing efforts on them. But importantly, they're being delivered in a more operationally simple and more consistent method than previous iterations, which is a direct result of the engagement between Kerry Heyman's team and our franchise partners. In the Netherlands, our Honor the Crave campaign has delivered double-digit same-store sales focused on the great products we sell, including our pizzas, including the new Detroit pan and shakes, all designed to be delivered. These examples show there's headroom for us to grow order counts by reaching more customers on more occasions and higher margins in every one of our markets. Our team are working on delivering value without being in any way detrimental to customers. We know customers value transparency. What we see, what they see is what they get. As just one example, across the group, we're trialing menu pricing that more accurately reflects the average price paid without coupons. This allows us to remove the need for hundreds of coupons that make the ordering experience more daunting for new customers and more difficult, frankly, for loyal customers to know if they're really getting the best deal. I don't want us to get ahead of ourselves, but some of this testing has shown a small reduction in the menu price can deliver a larger basket because customers are getting great value without needing a coupon to secure it. We're working across the full customer experience from first entering our online ordering platforms to accelerating conversion thereafter. For example, our team already working on changing the order flow on our digital platforms to half the number of clicks required to place an order to lift conversion from our existing customer set. And in Germany, through the integration and improved system for customers to select their delivery address, we were able to lift conversion by more than 4%. When I joined the business in November, I set out five areas of focus. Rebuilding value, making operations as efficient and as simple as possible. Strengthening franchise partnerships. Delivering growth through customer value. Leveraging and building a high performance culture. And of course, taking decisive action. Where change is required, we will move quickly and transparently. Strong unit economics are at the core of our business. We have to make a meaningful change in the near term, finding the venture capital to reinvest in our business. The insights I've shared are being implemented in the immediate actions, and we understand the urgency of this task. Some of the early wins include, as you know, closing 205 loss-making stores, including 172 in Japan, to deliver an annualized benefit of $15.5 million, whilst also lifting surrounding stores by retaining some of those orders in the neighborhood. Additional annualized cost efficiencies of $18.6 million through initiatives such as simplifying and focusing our IT and marketing spend. As an example of that marketing work, we've already delivered savings and an improved use of our marketing spend in APAC through a partnership on media mix modeling. We're expanding that partnership to Europe in this half with the intention to deliver improved returns on a much more focused investment. This is not the end of the cost efficiencies, but some of these efficiencies will take time to secure and to translate to our earnings and those, of course, of our franchise partners. I will keep you updated as we proceed. In the first seven weeks of this half, we've achieved same-store sales of plus 1.5% versus the prior corresponding period of plus 3%. I'd like to return to my comments just a few weeks ago where the timing of seasonal holidays in Asia had flattered that update simply because those holidays fell in that short window in which we were reporting. Sales for those holidays can be extraordinary, providing 50 to 100% plus swings from week to week. So today's update of 1.5% more actively reflects how we started this half. When we look at the year to date, this represents a continuing improvement, given we started the year reporting in August that we were minus 1.3%, largely due to factors I mentioned, including Germany and Malaysia. It's worth noting these results are in an environment where QSR is under pressure. As I mentioned previously, we're generally outperforming the market. I'm pleased as we sit here today that the majority of our markets are reporting consistent same store sales growth, but we are certainly not resting on our laurels and we're working on the initiatives I've outlined here to improve the results. So in summary, before I hand over to Richard, This is a great brand and business, but we need to do things differently. We need to be better with our execution, and that work is underway. The first half showed we can improve our sales performance focusing on our product, experience, and value. Our plan is to reinvigorate Domino's, simplify the business, drive stronger financial returns, and create value for customers, franchise partners, team members, and most importantly, our shareholders. Let me assure you that we really understand the urgency of this task. Richard will now speak to this half's financial results.

Thank you, Mark. Moving to slide 13. As Mark mentioned, our network sales of 2077.9 million is 2.9% down on prior year, but 1.4% up on the preceding half. Our EBIT is also slightly ahead of the preceding half, up 0.7%, but negative 6.7% versus prior year. Our underlying net profit before tax came in at the higher end of the February trading update guidance of 85.6 million. We have declared an unfranked dividend of 55.5 cents per share with a fully underwritten DRP in place. Moving across to the geographic summary, as you can see here, ANZ was clearly the strongest performer with EBIT up 7.6% to 67.7 million, with margins of 17.1% versus 15.1% in the prior year. This was primarily due to a significantly stronger performance in our corporate stores this half. Europe was 11.1% down on prior year with trading conditions in France continuing to be challenging with Germany also rolling a very strong prior half performance as Mark alluded to. Asia was down 19% largely due to declining sales and margins in Japan. If we move across to slide 15, our non-recurring items, Here I provide a breakdown of our non-recurring costs totaling $115.6 million, of which $92.2 million relates to store closures and our franchise optimisation program. Also noting that we expect a further $16.5 million to come through in the second half. If we now move to slide 16, our free cash flow, you can see Our net operating cash flow remains strong at 95.4 million, noting the reduction versus prior year of 47.4 million is largely explained by tax paid normalizing from a 16.5 million inflow versus the current half outflow of 32.3 million. Net investing activities reduced by 9.8 million, predominantly due to significantly lower new store openings. Moving to slide 17, here we've got our CapEx. You can see our CapEx which recycles is now for the first time a net inflow of 1.5 million with investment in stores being more than offset by repayment of franchisee loans and sale of stores. We continue our investment in digital CapEx And although prioritised, it now makes up two thirds of our total capex spend and quite a large part of our investment moving forward will be in this space. If we move now to slide 18, our capital management. As highlighted on this slide, DPE maintained a robust liquidity position backed by $404 million in cash and underworn committed facilities. Our net leverage and interest coverage remains well inside covenants, however, noting that we are still targeting a net leverage of two times, and as such, we will continue with the plan fully underwritten DAP, along with other capital management initiatives. Thank you, and I'll now pass you over back to Mark to talk about the future outlook.