Trading & Investor Seminar - investors.dominos.co.uk · Domino’s Pizza Group plc Q4 Trading & Investor Seminar Tuesday, 29th January 2019 5 10-Year Cash Returns of £325 Million

Domino’s Pizza Group plc Q4

Trading & Investor Seminar

Tuesday, 29th January 2019

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Domino’s Pizza Group plc Q4 Trading & Investor Seminar Tuesday, 29th January 2019

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Opening Remarks

David Wild

Chief Executive Officer, Domino’s Pizza Group plc

Welcome

Good morning everyone and welcome to our Investor Seminar. A particular welcome to those

members of our Board. We have Helen Keays, our Senior Independent Director, and Steve

Barber, the Chair of our Audit Committee, here this morning, as well as a number of members

of the UK leadership team who can help me answer any difficult questions that you may have

in the Q&A later.

Q4 Update, FY 18 Out-Turn and Initial 2019 Outlook

As Peregrine said in his invitation, the major purpose of today is to look in detail at the UK

business, how it works and where the growth opportunities sit. However, we have timed the

event to coincide with the announcement of our Q4 trading statement. My first slide

summarises the detail of the RNS that we issued this morning.

We were delighted by the continued strong trading in the UK & Ireland through the fourth

quarter and also the fact that we were able to achieve 59 openings in those two markets, one

in Ireland and 58 in the UK. Those openings represented around 29 franchisees. We also, by

the way, had a record number of refits. We refitted 130 stores last year.

International was disappointing, both in the context of sales development in several markets

and some particular integration issues in Norway, post the conversion of the Dolly Dimple’s

stores to Domino’s. We are now, as a result of that disappointment in International,

predicting that underlying PBT, when we announce our prelims in about six weeks, will be

towards the lower end of the range.

We are active in the market at the moment with our £25 million buyback which was

suspended in the final three weeks of the calendar year. We signed an irrevocable

commitment to deliver that £25 million. We are looking forward to further growth in 2019,

both from like-for-like sales in the UK & Ireland and new and immature stores.

When we look at our store opening pipeline compared to where we were at this stage in 2018

we see a fairly similar picture. We are continuing now to recognise that we need to invest in

both management and infrastructure in our international businesses to support the growth.

However, we are expecting to break even in 2019 in those markets outside the UK & ROI.

The Purpose of Today

As I mentioned, the purpose of today is to brief investors on the nature of our UK franchise

model and the attractions of Domino’s to franchisees in this marketplace. What we would like

to do is explore in detail the forecast growth of the UK delivered food market, and explain

how we, as Domino’s, will take our fair share at least of that growth.

We also have the opportunity to hear from Scott Bush. Scott joined us in September last

year from DPE. He is an ex-franchisee, an ex-corporate officer within DPE and his most

recent job was as Country Manager of Domino’s in New Zealand.

Finally, I want to address three common misconceptions around BPG. The first is around the

size of the UK store base and the potential that remains for further growth. The second is to



explore in detail the returns that franchisees are making from new investment. The third is to

define the role of aggregators in our marketplace, and the complementarity of our

aggregators with a strong brand like Domino’s.

Agenda

Against those objectives, this is the agenda. I am going to talk about the investment

proposition before I hand over to David Bauernfeind, our new CFO, who was appointed at the

beginning of October and who will go through, in detail, how our franchise model works. I will

then come back and address both the UK market and the growth potential for Domino’s within

it; before Peregrine chats to Scott about his impressions, having been inside the system for

six months, and the contrast that he is able to see and the opportunities that he has identified

in his leadership of the Operations team. We will then take questions from the floor.

The Investment Proposition

David Wild


Investment Case: Markets

Food delivery: rapid growth

Let us start with the investment proposition. Food delivery is a rapid growth market. I am

going to explore this in more detail later but the drivers of this growth are the trend towards

convenience, the unparalleled quality of in-home entertainment and the value for money

relative to dining out that is offered by delivered food. What has happened since the

aggregators came into the market and we have seen the growth of delivery specialists is

more and more money has been spent marketing the attraction of food delivered direct to the

home. The new digital models that have come into the market have made it ever easier to

order delivered food. Our projection, which I will explore in more detail shortly, is that the UK

delivered-food market will grow on a compound basis between now and 2022 by 8% a year.

Pizza: popular and profitable

Within delivered food, pizza is both popular and profitable. It is the number one delivered

food choice. It is manufactured fresh and the flexibility of toppings means that customers

have infinite choice. Our pizzas are engineered to travel well. The doughy base means that

the pizza arrives at the home in excellent condition. It is also universally enjoyed. You never

see a picture of people eating pizza without the person smiling. Pizza is a food that brings

smiles to everybody’s face. Additionally, it has excellent economics because of its relatively

low protein content. That combination of high ticket, low protein and travelability are key

reasons why pizza has grown to be the number one delivered food and why we continue to

believe in the opportunity of further growth.

International: further growth

As this is about an investment case, the third column addresses our international

opportunities but, as I said in my introductory remarks, I really want to focus today on the

UK. Our plan, when we announce our prelims on 12th March, is to dive into international in

more detail.



Investment Case: Our Business Model

Integrated business model

We have an integrated business model. Between ourselves and our franchisees, we have

control of the customer experience from end to end, from flour in silos through to pizzas at

the front door. That vertical integration of food production and distribution means that we

and our franchisees together capture all the market.

Virtuous circle of scale, brand and growth

Due to our strength in the UK and the consistent growth over the last 30 years we enjoy the

virtuous circle of scale, and the brand that defines the category and the growth that we have

enjoyed. We have 1,100 stores in the United Kingdom, a very deep presence. Additionally,

we have brand recognition and our franchisees deliver great service and quality which is the

best way of building sales.

The sales growth drives higher marketing investment because our national advertising fund’s

structure means that for every £1 that a franchisee generates on his register, £0.04 comes

into build the brand further. As our growth has been so spectacular, what we have been able

to do over recent years is put more and more clear blue water between ourselves and our

direct competitors. In November 2016, we set the target of 1,600 stores in the United

Kingdom. We continue to believe that that target is well within our grasp and we are very

confident that that is where we should be aiming. I will explore that in more detail later.

Low capital, high returns

Additionally though, part of the investment proposition is the low capital requirement of our

business. We have just been through a period of step-change on our supply chain

infrastructure with the £38 million of capital investment into Warrington. That investment

gives us the capacity to move significantly towards the 1,600 store target. Our shared

investment model with franchisees means that we fund the supply chain and the IT

investment, and then we get from the franchisees fees that pay back on that IT investment.

As a brand and as a business, Domino’s Pizza Group has a very high return on invested

capital in the UK & Ireland.

Group 10-Year History: Strong & Consistent Growth

What this has done is lead to a very strong track record of growth in sales, profits and

importantly cash returns to shareholders. If we look at the ten-year history of Domino’s, we

can see in that ten years we have doubled our store count, we have more than tripled our

sales and our EBIT has grown from £23 million to £94 million. We can see particularly in the

last four years the strong success that ourselves and our franchisees have enjoyed, building

on the strength of the system that was created in the earlier years on the chart.

Driven by UK & ROI Performance

That has been driven by our performance in our home markets of the UK and Ireland where

we have seen sales go from £351 million in 2008 through to £1.1 billion in 2017, and EBIT

growing from £24 million to £95 million.

Significant & Growing Cash Returns

What this has enabled us to do, as I said in my investment proposition slide, is increase our

average dividend per share by a compound rate of 18% over the course of the last ten years.



10-Year Cash Returns of £325 Million

What that has meant is that this business has returned to its shareholders cash returns over

ten years of £325 million, roughly the level of our market cap in 2008. In 2018, we have

continued to return cash to shareholders through buybacks to the tune of a further

£75 million.

That is the model that Domino’s delivers as an investment proposition. I am now going to

hand over to David who will talk us through the franchise model in more detail.

The Domino’s Franchise Model

David Bauernfeind

Chief Financial Officer, Domino’s Pizza Group plc

Good morning everyone. I am delighted to be here, presenting on behalf of Domino’s, as the

CFO for the first time. For those that do not know me, I have a broad-based career covering

financial control and commercial transactions and I have been a plc CFO for eight years. I

have spent most of my career in a B2B environment consistent with the operating model of

Domino’s where the business provides services to a small group of customers, in this case

franchisees, in a long-term contractual relationship.

Over the next 25 minutes or so I am going to walk you through some quite basic information

about our business model. I am going to focus on some areas we think are sometimes

misunderstood in the market, covering how a generic QSR franchise business works, how the

Domino’s franchise business works and why this is such a successful business model.

What is a Restaurant Franchisor?

Let us start with the franchise business model. It is common for observers to lump franchise

businesses in with corporate businesses, in our case in the broader casual dining sector. Of

course, the drivers of our business are much the same as the casual dining sector but the

economics are very different. A franchisor manages a brand and a system. They grow

system sales by working with franchisees, typically local entrepreneurs, to maximise sales

and identify expansion opportunities. The franchisor makes money by selling services and

supplies to these entrepreneurs and charging a royalty fee. Franchisors do not make money

directly from selling products or services to consumers and they do not incur the same fixed

costs of bricks-and-mortar operators or the capital cost of store expansion.

The Franchisor Financial Model

What does that mean for the financial model of a restaurant franchisor compared to a

standard restaurant chain? Here we will focus on a market franchisor, such as DPG, rather

than a global master franchisor, such as DPI in the US. Firstly, the capital investment is

different and lower than a traditional restaurant chain. A franchisor invests in infrastructure

such as warehousing, logistics and IT. It delivers supplies and services to its franchisee

customers. It does not invest in new stores or refits. The franchisor primarily benefits from

an increase in the volume of products sold to the franchisee, rather than an increase in the

price paid by consumers. The franchisor will benefit from growth in sales-based royalty

income but in Domino’s case, this is a relatively small part of the profit stream.



The gross margin for a franchisor is lower, more of a wholesale gross margin, whereas a

restaurant chain will be targeting more of a typical retail margin of 70% on its sales to

customers. The operating leverage for a franchisor is much less pronounced than for a

restaurant chain. As a wholesaler with less infrastructure and fixed costs, as David said, the

vast majority of costs are variable. Changes to volume have little impact on the percentage

operating margin achieved. For a restaurant with more fixed cost, staff and property costs

the reverse is true and margins can be volatile.

Finally, both business models tend to have healthy ROICs, as David said, if you do not

capitalise restaurant leases. However, the ROIC of a franchisor is generally very strong and

relatively stable, if I can use those two words together.

Who does what in the Domino’s System?

Let us move on from the theory and begin to focus on the specifics of the Domino’s system.

It is fairly conventional in nature and this slide highlights who does what. We used it at the

Capital Markets Day back in 2016 and it still holds true. I will not go through it item by item

because it is self-explanatory. Basically, it underlines that all of the core parts of the business

– demand creation, the customer journey and the infrastructure – are a team effort with

franchisees working at a local level and DPG working at a national level. It is why we refer to

Domino’s as a system and refer to system sales as a KPI.

Over the next two slides I have outlined some of the specifics of our commercial agreements,

both with DPI and with our franchisees. They are quite straightforward terms and none are

unusual for a franchise system. However, these are absolutely crucial to understand so I still

step through them line by line.

Our Agreement with DPI – The MFA

Here are the key terms with DPI under our master franchise agreement. This is a ten-year

agreement but effectively renews into perpetuity. There are really only two quantitative

metrics, the royalty we pay as a proportion of system sales and the number of stores we

undertake to open. The royalty is 300bps gross but we receive a 30bps discount for staying

on track with our agreed store opening plan. As you can see, the store opening minimum for

2026 is some way below our rate of progress to-date and our ultimate goal of 1,600. DPI

regularly conduct inspections of the UK stores to ensure brand standards are maintained.

Obviously, this is something we do ourselves too under the agreements with franchisees. The

master franchise agreement has been highly successful for over 25 years with a strong

alignment around growth and brand enhancement.

Franchisees’ Agreements with Us – The SFA

Looking now at what we call the standard franchise agreements or SFAs. These drive a

similar level of security and alignment. A franchisee receives ten-year rights over a territory,

again with an assumed automatic renewal. We cannot take so much as a single address away

from the franchisee unless they are in breach of standards. This allows them to invest in their

business for the long-term with confidence. Royalty fees payable by franchisees are 5.5% of

system sales, and on the low side compared to both Domino’s globally and compared to other

franchise businesses. There is flexibility to change that should the market dynamics change.

The contribution to the national advertising fund is 4% but can go up to 5%. Similarly, they

pay a 75bps e-commerce fee on web and app sales that is capped at 1%. Franchisees buy all



but a couple of supplies from us. We make a lowest-cost provider commitment and

franchisees do not invest in their own supply chain.

There is a clear checklist to ensure brand standards are maintained. Finally, we do have a

number of area development agreements in place where we look to forge cooperation on

expansion and get visibility of future store openings. These are typically drawn up when

territories change hands.

System Profit Drivers

Now I will turn to look at the profit drivers that operate for the franchisor and the franchisee.

Over the long run these are clearly aligned. If the system grows then both franchisee and

franchisor will benefit, which is why system sales is a key performance indicator for both

businesses. However, for certain periods of time there may not be perfect alignment of the

profit drivers. This slide attempts to explain why that is.

Apart from royalty income, DPG is a cost-plus business. We buy or make supplies and sell

them on at a margin to franchisees. Our input costs are heavily dependent on the weather,

foreign exchange and world market prices for produce, with these cost changes being passed

on to franchisees. Labour is a relatively small part of our cost of sales. Franchisees on the

other hand run retail minus businesses. Their end prices to customers, which franchisees set

themselves, are driven by economic growth, competitive activity and brand value, rather than

by their input costs. This inevitably means that franchisees have more operational leverage

and greater volatility on margin.

If we take a period like 2014-2016, for example, franchisees enjoyed a fairy-tale period of low

input costs passed through by us and firm pricing supported by strong demand growth online.

They further benefitted indirectly from the marketing investment of Just Eat and Deliveroo,

helping to grow the market overall. More recently, input cost inflation has reverted to normal

levels and demand-driven growth has eased with UK consumer uncertainty. In any cyclical

business, it would be surprising if store level profitability just got better every year.

The final important point to make on this slide is that there is an inherent conflict between

volume and price for the counterparties. Simplistically, DPG would do best if franchisees

derived all of their growth from volume, since supplies are sold at a fixed margin.

Franchisees on the other hand might be thought to do better through price increases, rather

than through volume growth. £1 on the price of a pizza drops almost straight through to

their bottom line. However, of course we want profitable and successful franchisees and

franchisees in turn need to maintain a value-for-money reputation to grow. Over a long

period of time this has kept the system in balance with growth being driven by both volume

and price.

Why be a Domino’s Franchisee?

We have covered a lot of the theory and the legal and commercial arrangements. Now we

will turn to explain the attractions of being a Domino’s franchisee in the UK and Ireland.

Broadly speaking there are six, listed here, which I will address in a bit more detail. David

will cover the growth potential in his section.



Customers Rate our Brand Very Highly

First on the list, brand. When you become a Domino’s franchisee, you are gaining access to a

preeminent delivered food brand in the UK with a market share four times that of its nearest

branded pizza competitor. These charts and a number from David’s section are taken from

the annual market deep dive we commission, which uses survey data from 3,000 consumers.

On the chart on the left you can see that Domino’s scored highest for overall satisfaction in

2018, building a significant gap over the field. This was after a blip in 2017 where our

value-for-money perception suffered but we have recovered strongly. On the right, we

consistently score positively on net promoter score, while others are racking up heavily

negative scores.

Clear Number One for Brand Awareness

Still focusing on the brand, it will probably come as no surprise that Domino’s has significant

brand awareness. This chart shows the results of what we call wave surveys, which are

conducted every six months. This data goes back to 2012. It shows how consistently high

the brand’s unprompted awareness is. We are becoming as synonymous with pizza as

Hoover is for vacuum cleaners or Heinz is for baked beans. This is what franchisees are

benefitting from, the right to trade under the Domino’s brand with all the benefits of customer

demand and a degree of pricing power created by such strong brand values. It is also

interesting how aggregators are not really registering yet as a specific channel for pizza.

Business Model: Control of the End-to-End Customer Experience is a Key

Differentiator

Turning to the second reason to be a Domino’s franchisee: the business model. If you

believed everything you had read from the aggregators, you might think that food delivery

was a new concept. Our business in the UK has been built on it for over 30 years but unlike

the aggregators and delivery service companies, we control every aspect of the customer

experience, from brand to food quality to menu to cooking and delivery. Independent

restaurants rely on third parties to drive order volumes, chain restaurants rely on third parties

for delivery and aggregators rely on third parties for the timing and quality of the food they

deliver. We do not rely on anyone else and this is a differentiator, simplifying the supply

chain significantly and protecting the customer experience.

World Class Supply Chain

Ultimately, DPG is a branded food logistics business. We have a world-class supply chain in

the UK built around our two hubs in Milton Keynes and Warrington. Between them, they have

capacity to serve around 1,400 stores with fresh dough and other supplies 3-4 times a week.

We are constantly investing to drive down production and logistics costs, as our £38 million

investment in Warrington demonstrates. These benefits are shared with franchisees, both in

terms of cost and service. Our own financial model is to maintain a margin of around 8.5% of

system sales, with scale and efficiency benefits reinvested into franchisees.

Our supply chain value-add into our customers is second to none. We deliver with 99.9%

accuracy and we unload and stack all supplies into the right part of the store. No third-party

logistics provider can deliver this level of service, and we see this as a strong differentiator

and a big attraction for franchisees. We all saw what happened with a certain fried chicken

chain last year.



Highly Profitable System

Of course, as a franchisee you want to make money, creating both a regular cash flow and a

capital value. Over decades, running a Domino’s franchise has proven a great way to do this

and it is the fourth reason why our franchisees typically see their Domino’s franchise as the

best investment they ever made. As you can see, the overall UK system profitability, defined

as DPG EBITDA plus franchisee’s store level EBITDA, has grown by about 3.5x over the last

ten years. The split of profits between DPG and franchisees varies from year to year. This is

an inevitable consequence of the dynamics I walked through a few slides ago, with DPG and

franchisee profit drivers being out of synch from time to time. More importantly, profits for

franchisees have increased by a similar multiple over this period. It is a highly remunerative

system to be a part of.

These profits have been shared by franchisees that have been with us for some time. Also, in

2010 franchisees have consolidated into a smaller group of businesses, from 140 to just 67

over this period, creating further value in this process.

Strong Store Economics – Pro Forma P&L

How do these economics stack up at a store level? This is probably the single biggest area of

contention in the market over the last couple of years, with all the focus being on the

direction of profitability over the short-term. If you consider profitability as an absolute

metric at an enterprise level or you look at the trend over the longer term, it is clear what an

outstanding franchise opportunity Domino's is. I will explore these strong and defensive store

economics, the fifth reason for being a Domino’s franchisee, over the next few slides.

On this slide I have set out a pro forma P&L for a typical Domino’s store. Of course they are

averages. Some stores will perform much better, others rather worse, but they are

representative. A store level EBITDA of more than £125,000, even from a store with a

smaller catchment area, is comfortably achievable at maturity.

The ultimate test of store profitability is how many get closed. Apart from the occasional

store relocation, not a single store has been closed in the last three years and only 13 in the

last ten years. When we consider the record 95 openings in 2017, we do think that some of

the stores were opened a year or two early and we are working closely with franchisees to

use data to improve our new store opening process.

Fluctuation in Labour and Food over Time

If I dig into food and labour in a bit more detail, you can see that they have not moved

outside relatively tight bounds over the last few years, with both today being close to the long

run averages. Food has returned to [inaudible] cost levels while labour is showing some

structural upward pressure, as mentioned previously.

Strong Store Economics – Evolution over Time

If we now look at actual EBITDA per store and how it has evolved over time, you can see that

the period 2014-2016, as I mentioned earlier, was a fairy-tale era of super-normal profits for

stores. Between 2011 and 2015 profits per store rose by 59% to a peak of £145,000. All of

these figures are inclusive of new, immature and recently split stores. The mature store

EBITDA figures are higher and have also held up very well. Since the 2015 peak the overall



average has come down a little. The rate of like-for-like growth has eased, food costs have

reverted to the norm and inflation in other areas, such as labour, has picked up.

Importantly too, franchisees have a higher proportion of new and immature stores than a few

years ago. In 2017, this ratio hit 18.6% for the top ten franchisees, up from 12.9% in 2015.

If you add in the short-term dilution from donor stores, it is obvious why average profits per

store have declined. However, we see this as a short-term phenomenon.

Strong Store Economics – Payback and Value

Moving on, profit is just one aspect of a franchise business. Return on cash investment and

the creation of capital value are the other two pieces of the jigsaw. Paybacks on new store

openings continue to be excellent, even if not quite as good as a couple of years ago. The

running return on investment is 40% per annum. A virgin territory will pay back opening

costs in 3-4 years. A split territory store, which these days comprise nearly three-quarters of

all openings, can expect payback in 5-6 years, as these calculations show. Factoring in

normal levels of bank borrowings, in the right-hand column, and cash-on-cash return for a

split remains extremely attractive.

As you know, stores have a tradable value among franchisees, which varies quite widely

across the system and over time, but is currently around 60x average weekly unit sales or

AWUS. This makes even a store with an AWUS of £15,000, 25% below the average, worth

nearly £1 million against an upfront investment of £300,000. We have been doing a lot of

work on reducing costs and a store in Chester has recently been opened for around £200,000.

We are always looking at all sides of the equation.

DPG Supports Franchisees in Numerous Ways

If franchisees are not successful and profitable, DPG suffers too. While I have outlined the

points of difference in value drivers, we invest in many other ways to support returns for

franchisees. Here I have listed just some of these but one or two are worthy of particular

mention.

Our IT investment was something we talked about at the interims but it is worth reiterating

the significance. Historically, investments in IT have been recouped via the e-commerce fee

or the national advertising fund, but we are funding £10 million of this investment ourselves.

The consequence of this £10 million of additional funds available in the NAF over a three-year

period are brand and advertising activities. On store opening incentives we provide royalty

rebates, rent-free periods and opening fee waivers which together deliver a cash benefit of

around £75,000 over the first three years.

The Domino’s Store Model is Capital-Light and Defensive

We have looked at the Domino’s financials in isolation. How does it stack up against other

investment opportunities open to franchisees? In the branded pizza sector in the UK, there is

no comparison. On our estimates, our direct competitors make roughly half the sales per

store of a Domino’s, which means EBITDA is only a quarter to a third of a Domino’s store.

With similar opening costs, this leads to a pretty meagre annual profit and a very long and

uncertain payback. Looking at other brands, there are certainly players like McDonalds and

KFC that can generate higher levels of EBITDA from mature stores. But the setup costs are

significantly higher, typically 2-3 times what it costs to open a Domino’s. That level of capital

investment is not for everyone.



Looking on the right-hand side of the table, the Domino’s store model is much more defensive

than a standard, high-street, casual dining brand. There are three main reasons for this.

Firstly, property costs are much lower because our outlets are located in low rent areas and

have a much smaller footprint because they are not designed for dining. Secondly, roughly

half of store labour costs vary with delivery volumes, whereas a restaurant has almost

entirely fixed labour costs. Thirdly, our very strong digital sales base, combined with local

pricing flexibility means that we can respond to changes in market demand very quickly,

something that cannot be replicated by most of our competitors.

These three differences make our franchisees model much less volatile. This is particularly

relevant when the industry as a whole faces material cost pressures, notably from labour and

business rates. Our franchisees are much less geared to these factors than a high-street,

casual dining restaurant.

How Have Franchisees Progressed over Time?

Before I close and hand back to David, I would like to move back up a level to show you how

our biggest and most successful franchisees have built their businesses over time. We have

compared their store numbers and system sales in 2017 with the equivalent data from 2008.

The progress and rates of growth are remarkable and have driven significant wealth creation

for themselves and for DPG shareholders, provided employment for tens of thousands of

people and material tax per government. Further down the list the stories are similar, albeit

from lower bases. If stores are worth a little more than £1 million each, the value created for

franchisees is self-evident. Domino’s is a fantastic entrepreneurial story.

Summary

To wrap up then, Domino’s is a globally-successful brand and franchise, which has its most

successful, profitable and high-return business here in the UK. The terms of business with

the US and with our franchisees create an environment of long-term collaboration at all three

levels of the business model. The model differentiates us from the rest of the casual dining

sector and helps to insulate us and franchisee from sector pressures. Profits from existing

businesses are strong and the payback on new investment remains good.

I will now hand back to David who will take you through the excellent growth prospects for us

in the UK.

The UK Market and Growth Potential

David Wild


UK Delivered Food Market is worth £6.7 Billion Today

I am going to talk about the growth potential that remains in the UK. I want to start by

taking a step right back and looking at the £200 billion food and drink market in the UK. The

estimated growth of the food and drink market in the UK in 2018 is around 3%. If we then

move to the right-hand side, we can see the delivered market, which is around £6.7 billion,

and that is estimated to grow in 2018 by 9%, three times the rate of food and drink in

general.



Multiple Drivers of Long-Term Growth

If we now look at the reasons why and think about the outlook of those input factors, the first

is the growth in population. All the data that we have suggests that the population is

expected to grow at a similar rate in the next three or four years to the ones that we have

seen in the immediate recent past. Importantly, however, the cohort maturity is another

component of our growth ingredient because the truth is that the average Domino’s customer

is younger than the population in general. Once you have become a customer for delivered

food, then you stay with it as you mature.

The variety offered by aggregators and the marketing spend that they put into the market are

two other contributory factors to the growth in delivered food, as well as the benefits that

come from ease of ordering, from improved digital customer journeys and the long-term

trend to convenience which shows no sign of slowing. Finally, all the data would suggest that

the growth in the market would mean that ticket and price will grow broadly in line with cost

inflation.

Sizing the Market & Its Growth

Looking at what that means, we can see the four key components of growth that give us the

confidence in the delivered food market. The first is the number of households which

contributes about 0.9% in our growth projection between 2018 and 2022. The penetration of

ordering delivery, a further 1.3%, and the biggest component, which is linked to the digital

journey and marketing, is the increased frequency that those customers who enjoy delivered

food are participating in the market. That contributes about 4.5%. Then, the average spend

reflects the inflation projection of around 1.7%.

UK Delivery Market Forecast to Grow at 8% CAGR

What that means is that the delivered food market we believe will grow to around £9.3 billion

in 2022, and move from this position at the moment of around 4% of the market to 4.6% in

2022. Taking a longer-term perspective back to 2014, the market was 2.3%. What we are

saying is over an eight-year period, we will see a doubling of the share of the delivered food

market, growing at a compound rate of 8%.

Pizza Remains the Clear Favourite

Within delivered food, pizza remains the clear favourite. It is around 28% of the delivered

food market. And what you can see on here is 77% of customers who order delivered food

will order pizza. It is the most popular delivered food and that is not changing.

Strength of Pizza Brands Influences Customers’ Purchasing Process

This is an interesting chart because what it explores are the drivers of cuisine choice and

channel for ordering delivered food. The pizza column, which is second from the left, shows

that pizza has the highest element of brand choice in the reasons why customers choose that.

The aggregator participation in pizza is the lowest of any of the cuisine choices. In summary,

what customers do, they think pizza, they think brand. That is the fact. With other cuisines,

they might think restaurant or they might think aggregator. With pizza, think pizza, think

brand. Domino’s as the leading brand in the market is in a very strong position to take

advantage of this trend.



Why is Pizza Enduringly Popular?

Why is pizza so enduringly popular? Looking at it through a customer lens, it is made fresh, it

is infinitely customisable, it is engineered to travel well and retains the heat. It can be eaten

flexibly with hands out of the box. It is also great value, especially if it is ordered for groups.

For restaurants, it is easy to make from a limited number of ingredients. It is very simple to

transport in a box. It is high margin. And because it is so often part of family occasions or

group occasions, then it is high ticket. This combination of physics in terms of travelability

and economics in terms of margin and ticket, make it very compelling.

UK Growth Avenues

When we look at our business, what do we see as the growth avenues? Clearly, there are

two. One of them is like-for-like and the other one is new stores. Like-for-like breaks into

using our capacity at store level, the deployment of technology and potentially new channels.

New stores look at virgin territories that are as yet unserved by Domino’s. What we have

called hybrids, which are where we split an existing territory but extend that territory by

taking in addresses that cannot be delivered to from the existing store. That is a mix of split

territory and some virgin addresses that cannot be reached from the existing store. Also pure

splits, where a territory is so large and successful it needs to be served by two stores.

Dominant #1 Creates a Virtuous Circle

Domino’s brand goal is to win in every neighbourhood. What this does is create a virtuous

circle because it drives the best unit economics for franchisees. That is what will attract more

investment. It also leverages our scale at the enterprise level by using our investment in

supply chain profitably and, as a result, generating best-in-class return for our shareholders.

LFL – Significant Capacity to Grow

Looking at like-for-like, I want to explore some numbers in some detail. ASPA is average sale

per address. Essentially, we size a territory on the basis of the address count within that

territory. When we look at the 2018 mature store cohort, we see we have an average sale

per address of just under £1. However, when we look at the best stores, we have an average

sale per address of almost £3. There is a massive range from £0.19 an address in our

weakest territories up to £2.90. If we could get all our stores just up to the average, that

would be an extra £200+ million of sales and if we could get all the stores up to £3, the

figures are eye-watering.

The other part of our view on like-for-like is the extent to which we can use other avenues of

getting customers to buy pizza. The first one is collection. At Domino’s globally, the UK has a

fairly low collection participation of only 21%. However, within the UK we have some stores

that are over 50% collection. In a tightening labour market, this is a key opportunity for

franchisees, as well as an opportunity for growth, to use those ovens that are sitting in the

store more regularly.

We also have opportunities on midweek sales where the best is significantly ahead of the

average, and lunch is another area where the best is double the size of the average in terms

of participation. All of these things, household penetration, collection, midweek and

lunchtime sales provide platforms for growth for our franchisees and ourselves.



Driving LFL – A Technology Leader

However, the other opportunity is the use of technology. I would say DPG is the most

successful bricks-to-clicks story in the UK, with more than 85% of our delivered sales now

being ordered online from a number of less than half five years ago. GPS is rolling out, which

gives further attraction to customers to understand the journey of their pizza. As David said,

we are not standing still. We are investing in the complete re-platforming of our e-commerce

website and a brand new app. We are also investing in data because we do perceive that

there is a huge opportunity in customer relationship management to increase frequency.

Driving LFL – Menu and Offers

At the end of the day, we should never forget we are a food business. People order from us

to eat food and we need an active product development programme which continues to

refresh the menu. Trading off the complexity that we want to avoid at store level to ensure

that our stores operate efficiently and customers receive their pizzas promptly. Our aim is to

keep the menu simple but fresh and to maintain newness through the insertion of limited time

offers, like the Meatfielder offer which we did in June for the World Cup and the hugely

successful Cheeseburger Pizza that we launched via social media and radio campaign in

November of last year.

Our offers are continuing to target the magic £20 price point which we see as critical. We are

seeing however more and more customers taking advantage of the trade-up offer that we

have which provides more food at even better value. We are also determined to introduce

consistent collection offers, take advantage of that opportunity, midweek specials, take

advantage and build on Two-For-Tuesday deal with the other days of the week.

Driving LFL – New Channels

Turning now to the new channels. What is clear to us from the data is that younger

generations are bigger users of aggregator apps than the older generation. We can see from

this chart that around 50% of food delivery for 25-34 year olds comes from an aggregator.

We also see from the chart that there is a possibility that by being listed on an aggregator we

could increase frequency. We have been engaged this trial with Just Eat for five months, and

what we have learned from that trial is that up to 40% of customers on the trial are new.

What we have to manage now is the value offer and the cash margin for franchisees. We are

extending the trial, it is currently in about 80 stores, and we are sharpening the value

proposition because we want to recognise the fact that younger customers are using

aggregators, but at the same time protect the economics of the brand for franchisees.

Confidence in 1,600 Store Potential

Turning now to new stores, I have already said that we continue to have confidence in the

1,600-store target that we announced in November 2016. When we look at our new and

immature stores, we see the average weekly unit sales as broadly being flat for the last three

years at just under £15,000. That is despite the fact that we have progressively reduced the

address count in the new stores that we have opened. The consequence of that is the

average sale per address is higher. What that means is there is more productive use of

marketing and a lower labour cost for franchisees. As David said, whilst we may have opened

a few stores a year or two early, we see a very low failure rate with zero stores closed in the

last three years and a very modest number in the last ten.



Smaller Address Catchments Working Very Well

Let us look at some specifics of smaller address catchments where we enter a market and

dominate. This is part of the opportunity because we can go into markets that none of our

direct competitors could ever dream of making money in. If we look at two examples from

December 2015 and September 2014, one in Somerset where from an address count of 9,260

we are achieving £1.67 an address and a profitable sales level of almost £15,500. The Welsh

town in west Wales is even better where the average sale per address is £2.14.

What we can see as well is that in these smaller towns where people have to travel less far to

collect the pizza, collection is higher. The collection percentage in Somerset is 43%, in west

Wales it is 51%. That contrasts with the 21% average. The benefit of that is on store labour

costs because again with average store labour cost of 29.7% in 2017, these small towns are

achieving labour costs of 24.7% and 22.1%, partly by the balance of collection and delivery.

Small towns provide a significant opportunity.

Additionally, with the growth target of new homes, which is 300,000 a year, we can see the

opportunity for more stores. Some of the areas that are not viable today will become viable

over the course of the next two or three years.

Hybrids and Splits – Benefits for All Stakeholders

If we turn now to hybrids and splits, remember hybrids are stores where we take some

addresses from an existing store and bolt that on to new addresses that cannot be reached

from the existing store in an adjacent territory. These are good news for customers because

they improve the service and therefore the food quality. They reach new customers by

making delivery available to customers who could not order from the original store. Because

we have two stores, we could have twice as many customers in golden miles which is where

most of our collection business comes from. They are good news for customers.

The consequence of that is they are good news for franchisees and DPG. They provide labour

and marketing efficiency for the franchisee. They grow the system which puts more product

through our plant. Importantly as well, they are in line with Domino’s global fortress strategy

which is about saying, how do you protect your most profitable territories? Fortressing is a

concept which DPI talked about in their Capital Markets Day two weeks ago and it essentially

recognises the vulnerability of the brand in peripheral areas on the edge of a territory. If you

are looking at a territory and saying, ‘Where can I open a pizza store?’ you want to open on

the edge of the territory served by the brand leader because that is where the brand leader’s

service will be most challenged, purely as a result of distance. The way to resolve that issue

is to fortress the territory and open on the edge of the territory before the competitor does

so.

Splitting is an Economically Rational Choice

This chart explores in detail the economics of splitting and the reality of potential competitive

incursion in territories that are currently highly profitable for the franchisee. I am going to go

through it in quite some detail because there is quite a lot of information here. On the left-

hand side, we can see a mature store which cost £300,000 which is generating a level of

EBITDA +/- £150,000 with a steady-state return on invested capital.

In the middle graph, where the scale is slightly different, what you can see is the impact of

competitor incursion. This is one of the examples where the territory needs to be fortressed.



The competitor comes in and immediately, the return on invested capital goes down sharply

because the EBITDA for the store drops by 30+%. Because the territory is now being shared

with a competitor who has spotted the opportunity on the edge of a territory to encroach into

that area.

On the right-hand side is our recommended approach. Again, the scale has changed with the

figure of £700,000 reflecting the higher scale of operating two stores. What this does is it

increases the EBITDA. It also softens the return on invested capital because of the extra

capital that is put in to open the store. However, in the longer term, the cash EBITDA moves

forward to over £250,000 from that territory, and the ROIC is better – and more sustainable

– than in the competitor incursion scenario. This is a long game but by fortressing a territory

in this way and opening a second store, the franchisee is creating long-term value. As David

said, it is not just long-term value in the sense of cash flow, it is also long-term value in

terms of asset value.

Exeter

These are two examples where this strategy has worked well. The first is in Exeter where we

had one very profitable store doing £2.4 million sales in 2013. We have doubled our sales in

Exeter from £2.4 million to £5 million over the course of the last four years and that is

because we opened two extra stores. Our sales in Exeter are now 106% higher than they

were in 2013 and our average sale per address has improved by over 59%.

However, when we look at the bottom, we see the impact for customers and franchisees. The

delivery time for customers in Exeter has dropped from 28 minutes to 26.2 minutes and the

leg-time, which is the amount of time the driver is on the road delivering that pizza, has

dropped by almost 20% from 8.4 minutes to seven minutes. That is a direct illustration of

the labour cost benefit of managing smaller territories.

Nottingham

Another example is Nottingham where, over the course of three years from 2013 to 2015, we

moved from six stores to ten. Sales in 2018 were 77% higher than 2013 and our average

sale per address in Nottingham increased by 51%. We see a similar pattern on a shorter

delivery time for customers and a lower leg-time for drivers on the bottom of that chart.

Significant Fortressing Effect on AWUS

What we can see in both of these examples is that the average weekly unit sales per store in

fortress towns outperformed the UK as a whole, once that fortress has been built. It is much

harder in a well-fortressed town or city for competitors to make incursions.

Summary

Let me sum up. The UK delivered food market has grown strongly over the last few years but

we continue to believe and are confident that it will grow in the next three or four years at

around 8%. As a brand we have plenty of room to grow, both in the context of like-for-like

and the expansion of the estate. Our technology has been a real differentiator and the moves

that we are making through this year, through direct investment in both platform and app,

will mean that we can differentiate further compared to our direct competitors. We do believe

that aggregators could help us to reach new customers, and we are trialling thoughtfully and

carefully how our relationship with an aggregator can protect our profit and take advantage of



that growth. As we have demonstrated in the slides, fortressing towns preserves returns for

franchisees, giving the brand strength for longer periods.

Thank you very much. I am now going to hand over to Peregrine and Scott who are going to

take us through the next stage of the meeting.

Ops Director Interview

Scott Bush

Operations Director, Domino’s Pizza Group plc

Peregrine Riviere (Investor Relations, Domino’s Pizza Group plc): Hello everyone.

Scott Bush: Morning everybody.

Peregrine Riviere: Scott joined us about six months ago. As David mentioned in his

introduction, he has been a Dominoid for a long, long time. We thought we would introduce

him via a more informal session of Q&A with me. Then he will join the two Davids for the

Q&A panel from the audience after that. Maybe the best things is, Scott, if you just start off

by giving us a bit of background to your Domino’s life.

Scott Bush: Sure, Peregrine, yes. I started my Domino’s journey back in 2003 as a driver

and progressed very quickly into an Assistant Manager and a Store Manager. I then had a

number of operational roles in the Australian business obviously, as Peregrine said, in many

different forms until I finally became a franchisee towards the end of 2004. I held that

position for almost nine years in the business in Australia. Then an opportunity came up

again to venture back into the corporate side of the business and jump the fence, as I

affectionately put it, and start my career in what has been one hell of a journey. I sold out of

the stores that I was involved in. I co-owned a number of stores obviously in the Australian

market across a couple of the states there, totalling some 18/19 stores. I started this

wonderful journey in the business of corporate life.

After about 12 months of being involved in Operations in Australia, I took up the opportunity

to become the General Manager of the New Zealand business, which was very, very exciting.

I think that is what started the learning curve in this business in terms of what opportunities

lie before us. The market at that point in New Zealand was at around about 82-odd stores.

When I left the business September last year, we just touched 121 stores so the business had

grown 50%-odd. And it was well on its way to a number that I had identified early on of

some 200 stores in New Zealand, which will make it probably one of the most dominant

Dominoid markets in the world. I guess the opportunity then came to come over this side of

the globe.

Peregrine Riviere: Sure. What attracted you to the UK?

Scott Bush: It was not the bloody weather.

Peregrine Riviere: You have taken off your face warmer, I see.

Scott Bush: Yes, I had it on for a couple of weeks to stay warm but respectfully, I think it

was a matter of being able to add some value. Personally, there are two parts to a criteria for

me. One is being able to add that value and secondly to be challenged enough. The desire to

be continually challenged I think has led through the journey that I have had in the business



over the past 16 years in the different roles that I have held. The UK and Irish business

certainly presented me with all the challenges in terms of ticking those boxes and left plenty

of runway and plenty of opportunity in front of us.

Peregrine Riviere: What are the strengths of the UK and Irish businesses, as you see them?

Scott Bush: I think a lot of it has been alluded to already. In the last hour and ten minutes

we have heard from both the Davids in terms of the success of the business. It is an

outstandingly successful business, one of the most successful Domino’s businesses on the

planet. To be a part of that is more of an honour and a privilege than in terms of coming and

being involved in some of the heavy lifting that I think needs to take place.

When you look at the average age of our franchisees, which I worked out only a couple of

weeks ago, it is almost 16 years in the business. That in itself has almost doubled the

average globally of a franchise lifetime in any one brand. The success of the business

definitely was an attraction and then the runway, the opportunity. I personally think it is the

tip of the iceberg. As David alluded to, there is plenty to do around carry-out. There is plenty

to do still around tech. Yes, there is so much yet to do in this business and the wonderful

thing is that everyone seems super-engaged to be able to get it where it needs to be.

Peregrine Riviere: Okay. Enough of the gloss and you are a competitive guy. What can the

UK business learn from Australia and New Zealand, operationally, in terms of ambition and

commercially? What are the big differences?

Scott Bush: Sure, the big difference is that it is a completely different product. Here, in the

UK and Ireland, we use a hand-stretched product. Australia and New Zealand uses a pre-

made product, all made fresh in store as well in Australia and New Zealand. Here obviously it

comes in through the commissary. However, in terms of the lesson I really believe there is

an opportunity around volume and how we chase a volume. One thing I know about this

business is that you cannot save yourself to prosperity. You cannot save yourself rich so you

have to continue to grow. And at the top of everybody’s list of priorities realistically needs to

be like-for-like sales growth. If that number is not healthy, if that number is not moving in a

direction where we should all agree that it needs to move in, then we collaboratively need to

get our heads around the table and make that happen. Then everything else will flow through

from there. I think there is a real opportunity around that in terms of a comparison.

One of the things that amazes me about this business is that we only have one pizza – or you

look at the success of the Cheeseburger Pizza which does have a drizzle on it, the New

Zealand business has 12 drizzles, if I can make that comparison, and a collection business of

some 60% and 70% there in New Zealand. At 30%, as David said, there is plenty of

opportunity yet around collection and the positive impact that is going to have on labour.

I think everything else can be quite incremental. Even though I am not an incremental type

of person, I think everything else collaboratively can be brought together. We must be

careful without being careless or reckless. However, I think the business could also take

some risks. I really believe that we could throw a small amount of caution to the wind around

some of the things that we test and trial and probably pay a little bit more attention to the

customer, if I can say that.



Peregrine Riviere: Okay. You talked about volume. As David Bauernfeind was pointing out

in his presentation, maybe volume is great for the franchisor, maybe it is arguably a mixed

blessing in the short term for franchisees. Long-term I think there is an alignment. How do

you get over that potential conflict?

Scott Bush: The good news is that there is not much of a misalignment with

franchisee/franchisor in terms of volume. The conversations that I have had with franchisees

have been very positive around everyone wants to be busier. Everyone understands we need

to sell more pizza. Everyone understands that we have got to pull on the heartstrings of the

customer and the consumer. The brand awareness in this country is amazing. In a taxi here

in May I was amazed at the amount of people that said, ‘I love a Domino’s.’ In most

countries around the world people say, ‘I love a pizza’ but in this country and definitely in

Ireland as well it is, ‘I love a Domino’s.’ I think in some cases they might not even buy a

Domino’s. It is just that Hoover moment as David alluded to. I think there is a real

opportunity there in terms of pushing the product and pushing the opportunity as much as we

physically can.

There are going to be some challenges because you can have both ends of the spectrum.

From an ASPA perspective, in terms of the address point data that we look at, you can see

that there is a varying degree of stores that are at £0.19 and there are stores that are at £3.

The same is with order count. Stores can handle huge volume and other stores cannot. I

think it is a part of my role in the business to educate everybody around the power of possible

in relation to that and take the heroes and hero them.

Peregrine Riviere: Now, I am sure everyone is going to ask later so I may as well ask now.

You have been out on the road I imagine talking to franchisees. How are those conversations

going?

Scott Bush: Fantastically, in a word. In fact, if you were to ask me what my biggest surprise

is in the business in the four and a half months I have been here, it is those conversations.

They are unbelievably positive, if I can say that, in terms of what we need to do with the

business. Is there some friction and some tension or some rub? Of course there is.

However, of course there should be and I think if I can revert back to what I said earlier

about what motivates me, it is being able to add that value and to be presented with a

challenge. There is definitely all those opportunities around franchisee engagement.

Outstanding number of well-qualified, well-experienced franchisees that have my unbelievable

huge level of respect. Does that mean that everyone that is here currently will be staying or

should stay? No, it does not. I think the health check of a brand is always the bottom 10%

and what we do with them. Will it be a situation of improve or remove? It most certainly will

be.

To your point, yes, the place I love to have a conversation with franchisees is over a cut table

or over a stretch table or over a crate of coke that is stacked in the back of a store. Not in an

office, not in a café and most definitely not in a restaurant. I have had a number of those

interactions already. It has been hard in the four and a half months because I have wanted

to meet as many of the 67 franchisees as possible in the shortest space of time. I am proud

to say that tonight in Ireland will finish that road trip for me. After today, I would have met

every franchisee in the business and the feedback has just been overwhelming. It really has.

The runway in front of us is quite exciting.



Peregrine Riviere: What can we do better for them? What do they want?

Scott Bush: Yes, I think in some aspects, if I can put my franchisee hat on for a moment, we

could probably be better listeners. From time to time we could be better listeners but then I

think, as much as we could be better listeners, we could probably stop asking as many

questions. One thing I learned very early on as a franchisee is that you do belong to a brand

and you belong to a system. Of course, you cannot expect to have that brand or system

engineered to suit yourself so there is a lot of allowances made. Even though I was eight

when I made my first pizza in an independent pizza restaurant that my family ran –

Peregrine Riviere: Is that legal in Australia?

Scott Bush: Well, it was just playing with dough and as a result we have not finished doing

that. It became evident for me over all my years of growing up in and around family-run

businesses that there was this myth in my mind that the only person in a brand or a system

that made any money was the brand and the system itself. For me the last 16 years has

been a very interesting journey. However, how do we get our heads around exactly what

needs to be done? How do we get our heads around pushing the business forward with the

level of respect that it deserves? As I say, I am quite excited about those future

conversations. I do not expect them to ever be a walk in the park. I do not expect them to

ever be something that is seamless because it should not be. To that point, very exciting.

Peregrine Riviere: What do they say to you are the main risks to their business? Is it

competitors? Is it cost? Is it just us not moving fast enough?

Scott Bush: I think it is a number of things. Even amongst themselves, I think the better

operators would like to see the weaker operators dealt with in terms of where do we go from

here? Which is a great thing. They do want to be heard more and that is how we can have

that conversation. I think in some aspects they do not want to be asked as many questions.

They would like to have a level of faith that everything is right at the top and with the brand.

Peregrine Riviere: Yes, so to explore that a bit more, how does that happen? How do we

interact with franchisees day to day? Is that something that we control well enough?

Scott Bush: I think we will. A part of my passion or my belief is the relationship that you

hold with the franchisee. Part of the success that I had in the New Zealand business was

taking franchisees on the journey. I think there is an opportunity to do that here but it can

only be done through one channel. While there is many different departments or touch points

in the business that operate the business, they at some stage need to be the function of what

happens when the rubber hits the road. What is it the rubber that hits the road? It is selling

pizza. It is engaging with the consumer. That touch point to that, the pin in the hinge that

keeps it all together, if you like, is the Operations team. It is very hard to have a

conversation with a franchisee if you operate in any of those other functions within the

business. However, once you involve a member of the Operations team, whether it is a

Business Partner or someone that is the head of that department, I think therein lies a real

opportunity to be able to streamline the process and to make this a little bit less siloed, if I

can use that phrase. I think that is what is important. Alignment is very, very important.



Is there a huge opportunity? I do not think it is massive but there is a genuine opportunity

around what the Operations team does and the framework that gets nailed together in the

background to give franchisees what they want and want they deserve, more importantly.

Peregrine Riviere: Sorry, I interrupted you. I was asking you about the risks and threats

that they see.

Scott Bush: Yes, so there is any number of risks and threats. Do we see aggregators as an

opportunity? Of course we do. Do we see them as a risk or a threat? Yes. They are trying

to crack the code in a business that we have been relatively good at for 60 years. We are

already here and as I phrase it to franchisees, it is almost a case of us being on the inside

looking out and they are on the outside looking in. For us, we are here. We are already here.

We have to continue to outstrip the numbers, as David showed before.

For them, it is a little tougher. It is almost like eating the elephant. How do they do that?

Again, there is a real opportunity around the carry-out, relatively-speaking. There are risks

there. I think employment there is a risk, if you wanted to talk about what we are facing into

in the next 12-18 months. We have to remain relative to what we are doing with tech. We

always, always have to be faithful to quality and loyal to value. They are very concerned in

terms of what happens if we just keep driving prices or we do not reinvent ourselves. There

is definitely not an appetite to do that.

Peregrine Riviere: However, that is in their gift ultimately. You talked about value a couple

of times. It is something that investors talk about a lot. How do we unite or unify around

that?

Scott Bush: I think leadership is a big part of it. We get round the table. And I am not

saying it has not happened but we definitely sit down and collaboratively engineer a position

to agree on. There is no doubt that one direction and one thought process is better than half

a dozen. The wonderful thing is that everybody wants that. They also understand and

appreciate that there will be a part of the plan down at the bottom right-hand side of the

whiteboard that will have two or three points that we are just never going to agree on. I

think it is important that those two or three points do not step in the way of progress and

definitely do not do the handbrake. We cannot allow them to be the handbrake and slow

down the business at all.

Peregrine Riviere: Changing tack a bit, corporate stores. Obviously, we have in the last

couple of years run some of our own stores. That is a model you are very familiar with from

Australia. What does that bring to a franchisor?

Scott Bush: Opportunity. It really does. The first rule of business is to stay in business so

they have to show a healthy return. We know that, we accept that. However, it should be

the test bed. It should be the test bed to trial all sorts of different things. One area in the

business that I think is an opportunity is our speed of service. We currently have a delivery

time of that 23, 24, 25 minutes. I am very passionate about getting it under 20 minutes. I

am even more passionate about getting it under 15 minutes. I think there is a journey in

process there. And a part of that will be what we do in those corporate stores and how we

test it up. One thing that we do need to do in the business is remove a little bit of the

emotion that is involved. There is a lot of emotional connectivity here. We need more data-

rich, data-driven conversations and the way to prove that up is through 30-odd corporate



stores. ‘Here are the results. What does everybody think? Thank you for your feedback. Let

us move forward accordingly.’

Peregrine Riviere: Great. Maybe a final question. If you were going to look back in, say,

three years’ time, what would success look like for you for the UK business?

Scott Bush: Interesting question because I think there are two or three touch points.

However, evolution. Continue to evolve. We cannot stay still. We cannot stand still for 30

seconds, let alone 30 days. We must continue to be market leaders. We also need to

probably remove some of our blinkers and without being reckless or careless, test a few

things up and see exactly where we can take this business. It is a wonderful business.

Peregrine Riviere: Very good. Scott, thank you very much.

Scott Bush: Thank you, Peregrine.

The Common Misconceptions

David Wild


Misconception: The UK Store Base is Near Maturity

I thought it would be helpful before we go into Q&A just to address three common

misconceptions about DPG. The first is the UK store base is near maturity. As I talked about

what has been happening with store openings, both in the context of splits and hybrids, and

indeed virgin territories, it confirmed my view and our view that the UK store base is nowhere

near maturity. We see in our new stores a significantly higher average sale per address than

we have in the core chain. Our AWUS for the last four years in new stores has been

consistently around £15,000.

We see big market share opportunities. Last year we opened 59 stores. Pizza Hut were net

closer of stores in 2018. With the delivered food market growing in the way that it will, we

see more and more opportunity, particularly with the 300,000 new houses a year. More and

more catchments will be viable and there will be more and more opportunities for us to drive

towards that 1,600 number.

Misconception: Franchisees Are Not Making a Return from New Investment

The second misconception is that franchisees are not making a return from new investments.

As David talked about, the recent high level of opening, particularly in 2017, has diluted

average profitability and roughly 20% of our top ten franchisees’ stores were new and

immature in 2017. However, that is just a short-term issue. Returns remain market-leading

by any absolute measure. If you run a Domino’s store, the best thing you can do with your

money to make money is open another one because there are no comparable businesses that

deliver the same sort of return for franchisees as Domino’s does. We are encouraged by the

fact that we are now seeing broad-based growth of 30 franchisees opening stores rather than

having an over-reliance on the very largest franchisees to deliver our opening programme.

Misconception: Aggregators Will Erode Domino’s’ Market Position

The third misconception is about aggregators. When I joined the Domino’s board in

November 2013, the big concern was the pending Just Eat IPO and the prospect that what



that would lead to was a renaissance in independent pizza stores. Because it would give to

independent pizza operators the technology which historically had only been available to us.

However, what we have been able to do at Domino’s is build the brand so that customers who

want pizza will look for a brand first. That is truer in pizza than any other cuisine. We do see

aggregators as an acquisition channel and we do respect the possibility that they could

provide an opportunity for us to target a younger cohort. That is why we are doing the trial

that we are at the moment with Just Eat, to balance the economics in the right way.

However, fundamentally, no one in the marketplace can compete with our end-to-end offer,

controlling in partnership with our franchisees the entire supply chain from the flour in the silo

through to the knock on the door when the pizza arrives.

I think it is important to recognise those three misconceptions and set the scene for Q&A.

Q&A

Wayne Brown (Liberum): Thank for the CMD today. Clearly a lot of focus on the franchisee

business model, not the PLCs. Whilst it has been quite a big focus on the historical numbers,

there has not really been a focus on what the model is going to look like for the next 600

stores, which is invariably quite different to the previous 1,000. I do have follow-up

questions on some of the EBITDA numbers but I will leave that for a second. Clearly there is

a friction between PLC and franchisees. On the basis that the growth of the business is

hinged quite tightly on new openings, why are there no franchisees here today to give them

their view or to extol what they see as the issues or at least representatives thereof?

David Wild: You have heard from Scott his perspective. He is here to represent the views of

franchisees.

Wayne Brown: Okay. Then on the PLC model, clearly the majority of the profits, excluding

royalties which covers the central costs, you are pretty much buying a lot of products from A,

adding a margin on to commodity products and selling it on to the franchisees. That is a very

different model to what happens to the product thereafter. Can we get some sort of a sense

as to labour efficiencies, asset utilisations within the commissaries themselves? Particularly

Warrington because if we look at the Q4 statement today and you try and back out the like-

for-likes from including splits perspective, it looks like volumes have gone backwards 2-3% on

an overall mature basis. If that is the case, one can assume that there is negative

operational gearing within the UK. And if we are going to look forward at the next 600 stores,

how does that unfold?

David Wild: If we take Warrington as an example, Warrington is currently servicing 314

stores. Milton Keynes services about 650. We are eight months into Warrington. We are at

half the servicing level of Milton Keynes. We have a facility in Penrith which we decided to

keep open over Christmas to give us some protection in case Warrington stubbed its toe.

That is probably servicing 85 stores, something like that. Once we close Penrith which is

scheduled for the end of March, Warrington will then be servicing 400 stores. For a plant that

is a year old to be servicing two-thirds of the number of stores that Milton Keynes is, is a very

good level of utilisation.

Now, we will balance the stores between Milton Keynes and Warrington to minimise transport.

But we are not at all concerned about the extent of utilisation at Warrington, given the scale



of the plant and also of the balance of risk profile because we are producing dough fresh

every day. If we do not get the dough to the stores, we have no pizza. I am actually very

happy with the way that has gone.

In terms of total dough volume, dough volume was up last year and we will disclose the full

number at the prelim presentation in March. However, the ticket increase is of the order of 2-

3% and our total sales were up by over 6%. Dough volume continues to be increasing. As

Scott said, we do see the opportunity for further volume pushes in the business but there is

no question of negative operational gearing in our supply chain facility. Quite the opposite,

we are actually moving very nicely towards the level of utilisation of the facilities that we

would have expected.

Peregrine Riviere: Wayne, if I can just add on where we gave a like-for-like ticket figure of

3.6%, that was made up 2.3% from items per basket and 1.3% from average price. Actually,

if you look at the volume growth inherent even in the ticket like-for-like you can see that

volumes are already growing.

David Wild: What we do not want to do, and Pete is very strong with me on this, is we do

not want to plan to be 100% utilised. Whenever we can, he always presents me with a graph

with a line at 85% and he tells me how many weeks we have been in danger of nudging

above the 85% because that is when the risk profile rises. That is the balance that we seek

to achieve.

Wayne Brown: Then one last question and I will hand the mic over. Clearly average AWUS

of about £15,000, which means that at about a 12% EBITDA margin, a store is going to make

about 90k EBITDA. I do not know how that correlates with the £1 million value that was

placed on one of the slides. Then secondly, it looks like the EBITDA numbers do not include

central costs for the franchisees. On slide 24 or 25, are we comparing site EBITDA for the

franchisees with Group EBITDA at the plc level which includes central costs? If we looked at

the PBT to system sales percentage, it looks like PBT profit has shifted majorly towards the

plc over the years from franchisees when you start taking into account all those other

dynamics.

David Wild: The £15,000 is the new store average weekly unit sale. The mature store

average unit weekly sale continues to rise. There is obviously a journey from a store’s

performance in its first year and actually its second year. What we see with the store is its

year of new store and the second year when it is an immature store, the sales are similar. In

fact, in some cases immature is a bit below new because there is a fascination when Domino’s

comes to town.

Wayne Brown: Then what is that impact on the cannibalisation on the mature store?

David Wild: The mature store number continues to rise and it is north of £20,000. Now,

what David talked about is the traditional way of measuring a store, which is in the low 60s of

AWUS. A 60x AWUS on a new store sale of £15,000 is £900,000 and that is where we get to

the £1 million.

On the point about the EBITDA at store level, what most franchisees do is charge head office

costs for the store. They will charge a cash amount per month for the store so that the head

office that they run is broadly breakeven. Now, the data that we have on franchisee



profitability is the data that they provide. It is not perfect data and one of the things that we

are working on is making it easier for them to provide us with better data. However, it is the

best data that we have and it is provided by the franchisees. In most cases, I think it does

include an allowance for their head office.

David Bauernfeind: It also goes without saying that if you took their enterprise EBITDA,

including all their overheads, then actually the marginal contribution from a new store is

greater because you are going to keep a relatively fixed overhead. You are just adding

overall EBITDA to that and in percentage terms, it would increase more.

Ross Broadfoot (Investec): This is Ross Broadfoot, Investec. Just to reiterate, thanks for

putting on the show today. My first question relates to a comment both the Davids made,

that the 2017 stores opened perhaps a year or two early. Could you clarify for us what was

meant by that comment and should we take that to mean the most recent new store cohort is

not performing quite as expected?

David Wild: I think in any multi-site business, there’s always a risk when you make a new

investment, and no leader of a multi-site business has a perfect model. I worked for Tesco

for nearly 20 years and we had a model that was generally within 10% on sales forecasting,

but actually, occasionally, you just get one completely wrong, in both directions. Sometimes

you might be 30% off on the downside, sometimes you might be 50% up on the upside.

What we have done over the course of the last year and a half – and Robin may want to come

in in a minute – is invest in modelling tools to get us to a more accurate view on what a new

store is going to generate in terms of sale. But there is no perfect model and those two

examples I quoted – of the small Somerset town and particularly the Welsh town – far

exceeded our estimate. For that town in West Wales, we never would have predicted and no

model would have predicted that we would do £2 an address. It just would not have

happened. What we can do and what we have done is invest in technology to give the best

forecast that we can. But there will always be occasions where, for whatever reason, we get

it wrong, in both directions. Robin, I do not know if there is anything you want to add.

Robin Caley: We worked with an organisation called Geolytix to build a sales model which,

using the analysis of our existing store estate, made predictions on how much new stores are

going to take. What I would also say in terms of the comment that we have opened stores

early, they are principally split stores, where we have fortressed a territory. So, the debate

is, is that too early? And as a consequence of opening it, have we kept out a competitor?

However, I think overall we are not concerned about the performance of the big programme

that we did in 2017.

Speaker: And then there was that one in Scotland that broke a record, was there not?

Robin Caley: Yes, we set the world-opening record in one. I think it was in early 2017. We

did £80,000-odd in the first week, which was out of about 14,000 addresses.

Ross Broadfoot: Scott referred to franchisee conversations as unbelievably positive. This is

not reflected by what’s written in the press, nor the reports that the DFA are sending what

The Times called an ultimatum in December. Can you shed any more light on the situation,

because the reports from both sides seem to be quite different?



David Wild: Scott can come in in a second with his observations. As far as the DFA’s

concerned, having read the letter, I would not describe it as an ultimatum and I would be

very confident if the DFA officials were sitting here that they would not describe it as an

ultimatum. It was not threatening in tone. It talked about being more conservative in

assessing openings, which links in with what Robin was saying, but it certainly would not be

described by me as an ultimatum. I cannot comment whether The Sunday Times has seen

the actual letter, but I know I have and I would not describe it as an ultimatum.

Do you want to talk…?

Scott Bush: Yes, I can jump in there. When I say ‘unbelievably positive,’ I think from the

aspect of 90% of the business, which whether we like it or not happens to be Operations.

The operational conversations that I have had with franchisees have been exactly that. Does

it mean that a conversation starts in a certain place and does not end up in a completely

different area of the business? Of course, it does not mean that. However, 90% of the

conversations, or 92% of the conversations I have had if you really want to quantify, have

been amazingly positive. I alluded to it before: everyone just wants to sell more pizza.

David Wild: I think the other thing that is true, and Scott mentioned the 16-year average

tenure of franchisees, is that when franchisees get together, they are so proud of what has

been achieved by Domino’s and how they have contributed to it. In fact, this is again

something that the DFA consistently reaffirm: the pride that Domino’s franchisees have in

Domino’s.

Also, David talked about going down from 140 franchisees in 2010 to 67 now. We have

actually, over the last five years, gone down by about 50. All of those stores have been

acquired by existing franchisees and we have not brought in a new franchisee for over five

years. You can argue that is a weakness, but if you look at it through a franchisee lens, they

are paying high multiples of average weekly unit sales to buy out other franchisees. That is a

real belief in the system.

Ross Broadfoot: My final question is regarding incentives. Correct me if I’m wrong but I

believe the absolute number spent on incentives is flat in 2018 on 2017 at about £4 million,

and you have also said that incentives per store are also flat at about £75,000. Can you give

us some insight into this, given we had 95 store openings in 2017 and 58 in 2018?

David Bauernfeind: Sure. There are a couple of things going on. One is we have changed

the incentive structure, so we have moved from what I have described as £75,000 being very

much an average. A couple of things have happened. One is we have changed the structure

so that we provide stronger incentives for stores that are a little bit more marginal, so to give

a little bit of a cushion in the first part of the period where a store is being opened. And really

to target those incentives in places where they are needed, as opposed to just simply saying

‘We will offer a royalty waiver for a period for every single store,’ even though it is obviously

going to become a very high return very, very quickly. That is the first thing that’s happened.

The other thing is that the incentives are over a period, so we will record the rebates in the

year in which the store gets its rebate or its waiver, etc., rather than the year it opens.

Inevitably, what happens is you have a lag of cost as those stores open. It is a combination

of those two things that are driving that.



Ross Broadfoot: Given the lag then, if 58 stores opened this year, would we expect to see

them come down in 2019?

David Bauernfeind: If nothing else happened, yes. It obviously depends on the number of

store openings this year.

Ross Broadfoot: Thank you.

Julian Easthope (RBC): Hi. Yeah, good morning, everyone. You talked a lot about the

profitability of the franchisees. Do you also monitor the balance sheets and the financial

health of them?

David Wild: We do. We do that formally for the largest franchisees, but we have very good

links with the lending institutions and we are able to keep a pretty good eye on what is going

on in terms of debt levels. Also, because we have been at it for so long, we are usually a

pretty good judge of whether a franchisee is under strain or not. We do not formally review

all franchisee’s balance sheets, but we get a pretty good idea. We do look at the largest, and

we get a pretty good idea from the behaviour of franchisees and the feedback we get. If the

lending institution wants to check something out with us, then they will often give us a call,

and that gives us a good view.

Julian Easthope: As a second question, do you have an idea how many of the 60 sites or

thereabouts you are planning this year are actually committed currently, i.e. you have

commitments from people to open?

David Bauernfeind: Of the 60, broadly, first of all, they are broken into two groups of 30,

where the first 30 are committed in the sense that we are past all the planning consent stage

and have completed all of that. Of those, half – 15 – the franchisee is actually in the store.

It does not mean the store has been fitted out, etc., but they are in the store. They are

paying rent, rates, etc. They are in that position. The other 15 are in a position where it is

effectively lease-committed, and the other 30 are in some form of planning consent stage.

If you were to talk about in terms of where are we with business cases for delivering in-year,

the number is 60. It then breaks down into the level of progress, as it normally would be in

the pipeline, through to, we are ready for fit-out, which are the obviously most committed,

through to, we are in the planning consent stage.

Julian Easthope: Lastly, on the franchisees, you showed some interesting slides about the

average sales per address and the differences between them. What can you do to

encourage? What do you do to actually help educate some of the worst performers to

actually start to get towards the mean?

Scott Bush: I think what you have to do is tap into some data so that you can have a data-

rich conversation around, ‘This is what historically has happened when you behave in a

certain way.’ The wonderful thing about this business is that if you are having a quiet day,

you can almost pick up a sign and walk out on the street, if the council permits it, and shake

the sign around at a certain price point and generate sales and generate customers. I guess

it starts there, right through to different tacticals: how you approach the competition and

what you do locally.

As a franchisee myself, I love involving myself specifically in certain sponsorships within the

community and so on and so forth. So, there are varying degrees of results based on the



input, but it is definitely a case of the more you put in, the more you get out. And it is just a

journey that we need to take those franchisees on. It does not surprise me at all that that is

the number. We just have to drag them along and have the conversations.

Julian Easthope: Do the franchisees themselves actually share best practices?

Scott Bush: Yes, they do. Yes, absolutely.

David Wild: That has been one of the positive things from the DFA, actually.

David Bauernfeind: They are not competing with each other. That is the thing. They do do

that – exactly.

Julian Easthope: Thank you.

David Wild: I was with a franchisee the other day who was really struggling in a particular

part of the country and I said to him, ‘Why do you not phone Mike? Because he does not

have the problems you have.’ Then a couple of days later, I spoke to Mike and said, ‘Did you

hear from this franchisee?’ He said, ‘Yes, he rang me mid-morning.’ That is what they do. I

think one of the things that the DFA has done is actually open up that communication more to

share best practice in a franchisee-to-franchisee way. It is entirely constructive for the

system.

Richard Stuber (Numis Securities): Morning. I have three questions, please. First of all,

could you give us some idea of what the franchisees’ EBITDA margins for the year are? I

know on slide 26 you give an indication that they have gone backwards a little bit, but if you

can give the absolute number that would be great.

The second question is on food-cost inflation for this year. Do you have any guidance in

terms of what is happening there?

The third question, I know we have not spoken about it much at all, but given the Q4 trading

update, do you have any update in terms of Norway and what you are doing to address the

cost overruns there? Thank you.

David Wild: I will pick up the last two and David can pick up the first one.

David Bauernfeind: I am sorry. Can you just repeat specifically? I heard EBITDA.

Richard Stuber: Sorry. It is in terms of what has happened to franchisees’ EBITDA per store

in 2018. Can you give some indications?

David Bauernfeind: Sure. We have all the data. As David said earlier, we get submissions

from all the franchisees at a store level every month. That is one of the things they submit to

us, so we are compiling P12 but we have the first 11 months. It is broadly pretty flat on

2017. I think there is not a lot of movement, when we look at that data per store.

Peregrine Riviere: It is pretty much as we indicated it was up H1 on H1 but we were going

to have the full impact of the National Living Wage in H2 and it has played out pretty much

exactly as we said.

David Wild: I think on the question of food inflation, we issued guidance to franchisees in

September of around 3% food inflation, on the basis of weak sterling, poor harvest because

of the hot summer and where the dairy market was. We said the risk is actually on the

upside – it could be more than 3% - because at that stage, we were quite concerned about



what was happening to wheat prices. And that links into feed prices for livestock, which

ultimately leads into both the cost of protein and the cost of cheese. If you had asked me

that question in December, I would have said 3% but the risk is probably on the downside.

In fact, we have reduced the cheese price in January unexpectedly, because of the milk price.

In terms of the outlook now, I am afraid that dreaded word has to come into play, because

our commodity costs are influenced by the exchange rate. And with all the uncertainty

around Brexit, we do not know where that is going. Actually, we are pretty well bought

through the end of Q3 on everything apart from cheese, and we are sub-3%, so my position

would probably be 2.5-3%, unless something horrible happens with the EU.

As far as Norway is concerned, we made a number of changes in Norway. We significantly

strengthened the financial team over there. We have a new head of finance who joined us in

September, who has a great track record in franchise businesses and he is very high calibre.

We have also asked Simon Wallis, who was our Chief Operating Officer in the UK and Ireland,

to take the job of International Managing Director, and he is spending a lot of time in Norway

as well.

The good news about Norway is that sales are actually not too bad. They are not where we

want them to be, but they are not too bad. We just have to get the operating model right.

Labour costs are well controlled, food costs appear to be well controlled. Therefore, it is very

early stages. Domino’s UK business lost money for ten years. We have a good estate of

stores in Norway. We just need to get the right disciplines in place and let that management

that we have put in place operate the company.

Richard Taylor (Barclays): My first question is about the Just Eat model, please. Are the

franchisees indifferent regarding where the orders are coming from, from a cash-margin

perspective between your own system or Just Eat’s? What proportion of the sales do you

think are incremental from this and what is stopping you from rolling this out from the 100 or

so now to the rest of the estate?

David Wild: The positive thing about Just Eat is a significant percentage of the customers

that we are serving through Just Eat are new to us. That is the positive thing. The difficulty

is there are not that many of them. And what we have not yet got right – and that is the

reason why we have extended the trial – is the right value offer, given Just Eat’s hardware

and software, to get the right return for our franchisees. Because we are paying a higher

commission to Just Eat. They have a lower level of functionality in terms of promotions than

our site does, which provides an opportunity for us to protect the cost of the additional

discount, but we need to do that in a way that works on the Just Eat site. That is the key

thing that we need to get right.

So, I am very happy that we are doing a thorough trial and I am very happy with the process

that we are in to learn. We think there may be an opportunity because of that research I

showed you, but we do not know yet whether it is going to make money. It is also, quite

honestly, a bit clunky at store level, so we have not found a way yet of plugging it into our

system. It is not quite a fax that comes in from Just Eat, saying, ‘Deliver a pizza down the

street,’ but it is not far off, is it, Tony? This is because they are not used to dealing with

people with the developed systems that we have that integrate with their own. The data that

we will get in terms of customer response will give us both the confidence to move forward or



not and I do not think there is any rush. I think we will do it in the right way, but that we

have to protect profitability.

Richard Taylor: Thank you. I have a follow-up. I think one of the slides implies that 20% of

agreements for franchisees, they can theoretically build up their own commissary should they

want to. Why are there some different contracts, in terms of is this at all a realistic

possibility?

David Wild: It is something that the DFA have never mentioned. The reason why there are

two different contracts is because we changed it. Do you know when we changed it, Robin or

Adrian? Was it 10 or 12 years ago? We had a contract which we used probably way back

before the Halperns’ bought the business. And then in the late 1990s or early part of this

century, it was changed to deal with that particular commissary point. However, I know that

with all the experience – and David talked about our performance – there is not a supply-

chain infrastructure that is as integrated as ours or that is run as ours is. We have keys to

the store, we put the product away, the ordering system is linked to our point-of-sale system.

It would be a major thing for a franchisee to take on, running their own commissaries, and it

is not something that has ever seriously been threatened by the DFA. It has never come up

in discussion with the DFA, actually.

Michael Goltsman (Citigroup): On the capital intensity, can you remind us what scale of

investment and when you are going to be ready to pull the trigger on a further supply-chain

investment in Europe? As my second question, Scott, I think I understood your accent, but

given your earlier comments around corporate stores, are you more incentivised to increase

the targets for corporate stores in the UK?

Scott Bush: I do not know about increasing the target. Do you mean from a store-count

perspective? I think the real answer is we will do whatever we need to do. The wonderful

position that we are in is that we can now run corporate stores if we have to. I could pull a

team of people together overnight and go and run three or four stores if needed. In terms of

a business plan, no, there is not one really in place, but ultimately, if we need to step in at

any point, we can do that now. We have the leverage to do that.

In terms of improving the result, yes, absolutely. It is a moving target and there is a lot of

factual drift involved with that, if I can use that phrase, in terms of where the target lies.

However, the end is very clear – we need the results.

David Wild: On the supply-chain centres, in Norway we had a supply-chain centre when we

bought into the business, and when we bought Dolly Dimple’s, they had a supply-chain

centre. Therefore, we have put a little bit of money into tidying up Dolly Dimple’s supply-

chain centre, but there is no requirement for further SCC investment in Norway.

In Sweden, we opened one last year, which was low cost. It was a redundant bakery, which

was the perfect design for what we needed. It cost us around £350,000-400,000 I think,

Clive, to open that, and that is now serving our stores in Sweden and has a lot of headroom

for growth. We only have nine stores in Sweden, so it was absolutely the right thing to do.

We are debating about opening a supply-chain centre in Switzerland, where we buy dough

from a baker, so the dough margin, which is obviously so important to our business here, is

not with us in Switzerland. I think the most likely thing is we will open it next year. We want



to focus the management in Switzerland on running the stores, rather than the distraction of

opening a supply-chain centre. But that is a live discussion at the moment, is it not, Simon?

Douglas Jack (Peel Hunt): This is Douglas Jack at Peel Hunt. What are the running costs of

Penrith’s supply-chain centre at the moment, annualised? I think it is due to close quite

soon?

David Wild: Do you want to ask me one while he is thinking?

Douglas Jack: The CAPEX requirements going forward, outside the £10 million of IT spend,

and if you look at your average spend by head – I know you do a lot of bundle deals – what is

that averaging and how would that compare to Deliveroo?

David Wild: David, do you want to pick that up?

David Bauernfeind: Yes. On the investment piece, I think we are in two areas of

investment. Regarding the technology, I said we are making a contribution essentially of £10

million over three years – it started in 2018, and 2019 and 2020 – towards the re-platforming

of the business, both the app and the web. This will make the future running of the app and

the web quicker, faster and cheaper. We are making that contribution ourselves, but that is

not the entire re-platforming and we will continue with the process under which we typically

spend a few million pounds a year on developing the app and the web. Obviously, we have a

handover period from the existing, current platform into the new one over the next couple of

years. I think on the technology side therefore, I would not expect to see big step changes.

It is this £10 million investment spread over three years we talked about.

On supply chain, I will let Pete chip in with anything more if you want, but I think one of the

things we are looking at, having bedded down now Warrington, is what further cost

improvements we can make in the supply chain, both in Milton Keynes and Warrington and

our other centres. There are certainly many other things that we can do to be able to

improve cost-efficiency. The focus for the last year or so has been very much in putting in

this £38 million facility in Warrington – a huge project for the group – to make sure we had

the capacity for growth. However, we are now in a position to be able to move on and look at

some other areas of efficiency in logistics in particular, so that is what we are looking at.

That is all about being able to make savings, which we can share with franchisees, obviously

depending on how we are investing in that. It is the next level down really of that. As I said

earlier, we are constantly looking for that. Essentially, we are a cost-plus business and

beyond that, we will pass on benefits to franchisees.

Pete Trundley: The costs excluding the delivery costs, which will obviously transfer to

Warrington when we service that network, they will be able to take out £600,000 per annum.

Peregrine Riviere: On the ticket, the delivery ticket we think has come down a bit, because

obviously they are doing more marketplace activity now. They are not just doing branded

restaurant delivery. Ours has stayed pretty stable. It is roughly £21 or £22, but again, we

are feeding typically a family of four for that, so on price per head we are still considerably

lower.

David Wild: That is ex VAT, is it not?

Speaker: Our figure is inc VAT. It is what customers are paying.



Rob Joyce (Goldman Sachs): I have three questions. The first is on the market size

estimate. Within that on the monthly frequency, is that based on your own internal data or is

that a broader market frequency number you have there? My second one is on the

relationship with Just Eat, on the trials have gone so far. Do you have any idea of what level

of commission you think works for you on that model? The final one is on the third-party

delivery operators. Have you any interest in working with any of those? Thank you.

David Wild: We are not interested in letting anybody else do delivery. It is critical that we

retain delivery. The answer to the middle question is as low as it can be. We would say we

are a great catch for Just Eat, because there is not a brand in the market with the delivery

capability that we have, that can open up opportunities for Just Eat. That is an ongoing

negotiation, but it has to be balanced with what the customer is paying, because at the end of

the day, as I said, the capacity to do the same promotions on Just Eat as we do on the

Domino’s site is not there. And we sell over 80% of our product on the Domino’s site on

promotion. Therefore, constructing the right model for the Just Eat promotion capability gives

us the flexibility to mitigate the cost of commission. However, if you are asking me whether

we would like to pay less, absolutely we would like to pay less. The fourth question was

about the market size.

Rob Joyce: On the frequency data, is it based on your own frequency data or is it a broader

market frequency?

David Wild: It is on the market frequency data.

Peregrine Riviere: Shall we just take two more because I do not want the pizza to get cold.

Rachel, are you still waiting to ask a question?

Rachel Fox (Goodbody Stockbrokers): You have spoken about the growth rate for the

overall food-delivery market, but what is expected for the delivery pizza market, specifically?

Then, in terms of the trial stores using Just Eat, what has been happening with margins on

those stores relative to what they were like before?

David Wild: The margins are very similar actually, because as I say, whilst the exciting thing

is the number of new customers, the number of orders is very low, so the impact on the

margin is very low. On your question about the pizza market, we are looking at Domino’s and

saying that we see no reason why we cannot grow in line with the market. What we have

seen over the course of the last couple of years is that relative to other cuisine types that

have now become available through the delivery specialists, pizza’s growth in general has

slowed relative to the overall market, just because of the extra choice that you can get from

Uber and Deliveroo. However, as far as Domino’s is concerned, our goal is to grow in line

with the market and we are very confident that we can achieve that.

Wayne Brown: I have just two quick last questions. Historically, this has been an amazingly

successful business and one of the mantras, to repeat your chairman who has probably been

in the business for pretty much forever, has been that two-thirds, one-third profitability split

between plc and franchisees. I think that has kept the system, in all cyclical times, in robust

balance. Scott, you have been speaking to the franchisees. What discussions have you had

with them on profit share and what have they said to you about that, if there is an interesting

comment on that front?



Scott Bush: It is a very good question, especially from an operations perspective and the

conversation has definitely been had. As much as it is physically possible from my early

introduction into the business, that all those conversations for me have to go back to an

operations perspective. I think I touched on it earlier. My insight now is that I potentially

feel we could resolve 90% of the problems that is a list of eight or ten or whatever that list

happens to be. And it is up to me to try and engineer a situation where that is possible.

Are they relevant? In some aspects, yes. Is the conversation being had? Of course the

conversation is being had. However, I think it is well above my remit in terms of the overall

response. And I come back to that comment I have made a couple of times now: we just

need to sell more pizza. There are plenty of ways to do that. It is up to the Operations team

to take everybody on that journey, because there is a real appetite, if I can use that phrase,

to do so, and we will keep pushing that agenda.

Peregrine Riviere: I think the evidence is clear that for the last five years it has been plus or

minus 60%, which has been a period of record growth in store investment by franchisees. So

I think they are very happy with that and we do not see the share as being a core metric.

David Wild: No, the statement two-thirds, one-third I think Stephen made 15 years ago and

I think it is 10 or 12 years ago since it actually applied. Certainly, when we have looked back

at the data, it is not indicating that. And as David described, the dynamics of the business

are such that different things create value for ourselves and franchisees, particularly as over

the course of the last six or seven years, we have invested in large-scale plants to produce

dough. The truth is that the best-performing franchisees take a lot more than two-thirds of

the profit and some others take less, but we are very clear that that is not a helpful metric.

We can manage the inputs, but the outputs are down to the franchisee, and the way in which

they address issues like labour cost, sales opportunity and the extent to which they run their

business. Whilst that may have been appropriate 15 years ago, it is not a metric that either

the board or the management are wedded to today. What we have to do is take advantage of

our opportunities. Hopefully, what we have been able to demonstrate this morning is what

the scale of those opportunities are.

David Bauernfeind: What has happened in the last ten years is that the pie has got an awful

lot bigger and we have both benefited from that, plus the employment benefits and all the

rest. That is what has happened and our objective is to keep doing that. What we have not

been doing is playing games, either ourselves or the franchisees, in trying to move profits

within the system because we are different businesses. The focus has been on, in the past –

and we and franchisees want it to be in the future – on how do we grow the total for everyone

and be as constructive in how we work together to do that.

Wayne Brown: I have one last question. There is more CAPEX going into IT. Clearly,

Norway needs more CAPEX. You are reaching your debt targets that you set. Does this

assume no more buybacks next year?

David Wild: We will talk about buybacks in March. I think actually, we are not planning to

put more CAPEX into Norway. The challenges in Norway are more operational than they are

capital. As I mentioned, we have two supply-chain centres there. There may be some

capital, but we have seven franchised Domino’s stores in Norway and our goal in Norway is to



move to an 80% franchise model. Therefore, I do not see Norway being a capital drain in the

medium term.

Ross Broadfoot: I have a quick one regarding the future-proofing of the business. Public

Health England guidelines are potentially due at some point this year. Can you comment on

how the company is getting ready for the potential calorie cap, for the ban on pre-Watershed

advertising and perhaps restrictions on bundle deals, effectively?

David Wild: We are engaged with Public Health England to understand their priorities. One

of the things that we have done over the course of the last five years is to significantly

diversify our channels to market. We talked about social media in the context of

Cheeseburger. We are not a narrow TV-based brand marketing brand. I would be very

confident that any restrictions that come into place, we would be able to move money around,

using our technology and the established new channels that we have been successful, to

continue to build the brand going forward.

On the question of bundled deals, again, we can show flexibility in the deals that we put

together, to ensure that we are offering the right thing that engages customers. We have

done some internal work already on what that might look like in terms of, for example, were

something like Two for Tuesday to be outlawed under the PHE regulations, what would we do,

how would we replace that? We have done some customer research and we are doing work

behind the scenes, but I think the strength of the brand and the diversity of our marketing

channels mean that we are very confident we will be able to continue to engage constructively

with customers through modern media.

Thank you very much. Enjoy the pizza.

[END OF TRANSCRIPT]

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Trading & Investor Seminar - investors.dominos.co.uk · Domino’s Pizza Group plc Q4 Trading & Investor Seminar Tuesday, 29th January 2019 5 10-Year Cash Returns of £325 Million