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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to the Domino's Pizza Group plc Q4 Trading Statement. My name is Joshua, and I'll be your conference coordinator for today. [Operator Instructions] I will now hand over to your host for today, David Wild, CEO. David, please go ahead.
Thanks very much, Joshua, and good morning, everybody. Thank you very much for joining us on our call. With me today, I have Bethany Barnes, our Head of Investor Relations, who will join me in the Q&A later in the call. Before we get into the statement itself, I did want to talk about David Valentine. I'm sure you know that we were deeply saddened by David's tragic death, and we've been doing everything we can at DPG to support his wife and daughter at this profoundly difficult time. Within the business, he's extremely missed by many colleagues. And in his relatively short time in the company, he made a huge contribution. His most important legacy in the business is a very high-quality finance team, who've shown remarkable resilience and continued to show great dedication in preparing for our year-end presentation on the 5th of March. We're hugely grateful for that. I'd also like to let you know that we're well advanced in our search for an interim CFO. I will update you on that as soon as we can. I'll now make a few comments about our quarter 4 performance, after which, as I said, Bethany and I will be happy to take questions. As you know, we have our full year results presentation on the 5th of March, just a month's time. So we'll have an opportunity to talk about our performance in much more detail then. This morning, we're reporting a continued solid performance in the U.K. and Ireland in quarter 4 with system sales up by 4.4% on the back of U.K. like-for-like of 3.9%. Once again, our performance was driven by online, with U.K. online sales growing at double the rate of total sales at 8.3%. Online now accounts for a record 91.3% of delivery sales. Apart from the online growth, the sales performance continues to demonstrate the expertise and commitment of our exceptional franchisee partners, who do a great job for us in managing the stores and looking after our customers. During quarter 4, 11 different franchisees opened stores. That was 12 stores in total. For the year as a whole, we saw 32 new stores in the U.K. and Ireland, of which 3 were corporate and 29 were franchised by 23 different franchisees. We've worked hard over the last few years to improve the support we give to franchisees when they're making a decision to open stores, both financially and in terms of advice and modeling. And we're pleased that so many have decided to expand their estate, and we'll provide more details at the prelim presentation on the performance of our new stores. Having said that, we continued to have a dispute with our U.K. franchisees, unfortunately. As we've said before, the situation in this is complex and it will take time to resolve. We don't propose to give a running commentary on these discussions because we're convinced that the best way to deal with these issues is in private. We remain absolutely determined to agree sustainable win-win solutions, which will endure not in the short or medium term but in the long term to fully exploit the potential of the Domino's brand in the U.K. As you know, we made a decision in October to dispose of our international businesses and find better owners to develop the Domino's brands in our 4 overseas markets. Again, we're not planning to provide a running commentary of the process, which is proceeding, but I would underline that the Board's priority is to agree a transaction for Norway in the short term given the significant operating losses we've incurred in the market and the continued sales challenges. We are focused on securing the best possible terms for shareholders to ensure that we find new owners, who will ensure that Domino's remains and thrive in all 4 markets. We've also taken the opportunity this morning to provide a fuller update to our 2019 guidance. The presentation of the full year results will be somewhat complicated by the accounting treatment of international markets, so we chose this morning to be quite detailed in the statement to ensure that the March 5 went smoothly. I'd just call out a few key guidance points. We do expect our U.K. and Ireland EBIT to be within the range of market expectations. We're expecting to report an operating loss of around GBP 20 million for our directly operated international markets. This will be excluded from underlying results given that we're exiting the operation. It does include an element of onerous lease charges in order to reduce future cash flows and enable a smooth transaction when we find appropriate deals for these assets. We're also guiding to some significant impairment charges in the year-end in the region of GBP 20 million for our London corporate stores and between GBP 20 million and GBP 40 million for international. As I'm sure you understand, we're at the start of the audit process, which will proceed for another month, so we are unable to be more precise today. I will share more details on both of these items at the 5th of March. So a solid Q4 in our core U.K. and Ireland markets, much to do both in terms of the relationship with our franchisees and exiting our international markets to find better owners of the businesses. With that, Bethany and I are happy to take any questions that you have. So Josh, place the first question.
[Operator Instructions] The first question on the line is from Richard Stuber from Numis.
Two questions for me, please. First question for me is, could you give any color on the sort of split in terms of collection versus delivery? Are you finding for one is growing faster than the other? Any -- is there any tactical promotions between the 2? And a second one is that, historically, I think stores have been sold between franchisees at perhaps 60 times average weekly unit sales. In the context of your impairment on your London corporate stores, have you seen this multiple change in recent quarters?
I'll take the second, and Bethany will talk about collection. We haven't really seen a material change in the valuation of stores. We've -- it's still running around about 60 to 65 times weekly sales. So against that measure, the London stores, if [indiscernible] we've got 36 stores would take the write-down, that they'll look very cheap, indeed. And that's something we'll explore more at the prelims. Bethany?
Richard, yes, so on collections, so we've seen some improvement in collections both for Q4 and the year as a whole. There is a wide range, depending on individual franchisees pushing some -- who push it harder than others. There remains more to be done here. It's definitely a big opportunity, particularly because of the marginal profitability of collection versus delivery. So for both Q4 and the year as whole, and we'll share the details more fully at the prelims that should help, but to help for Q4 and the year as a whole, we saw a growth above the overall sales growth for collections, so a slight increase in terms of the proportion of sales.
I think the other thing that's interesting about collections is we do see a difference in that some franchisees have really embraced the opportunity, and others are still charging premium price for collection relative to other choices. So I think we've got a job to do to get that message home more aggressively with franchisees.
The next question on the line is from James Rowbury from Redmayne Bentley.
So just the one question [indiscernible]. So obviously, the group is planning on winding up the international division. So I was just thinking, what's the thought process behind the expansion in Sweden? Because obviously, you opened 3 new stores last quarter and another 2 opened in Q4. So I was just wondering how those 2 fuse together really.
So we started in Sweden in Malmö 3 or 4 years ago. And at the start of last year, we had made the decision to expand into Gothenburg, which is a better -- much better market than Malmö. So we've undertaken lease negotiations, and we were committed to opening these stores, which we have now done. And we're actually confident that they're value-enhancing because they're strengthening the Swedish business. So although probably it does look a little bit strange on the surface, in reality, those decisions were taken earlier last year. And as I say, we're confident that they're value-enhancing for the overall Swedish business.
The next question on the line comes from Anubhav Malhotra from Liberum.
I just had a question, if you had any guidance on the pipeline of store openings in the U.K. for next year. And secondly, I would like to ask, just on the international business, particularly in Norway, are you still continuing to invest in the conversion of stores of Dolly Dimple? And secondly, I mean, I'm just thinking because Norway is performing so badly at the moment, and you are trying to dispose it off first. Wouldn't it be better to maybe try to stabilize the performance of the business? And in that way, you can get probably more value for the shareholders out of it?
Well, I think that those are 2 great questions on Norway. Bethany will pick up the first one. As far as the -- yes, we are trying to stabilize the business, but we're probably -- we're not finding it very easy. So there's a lot of effort going in, in Norway because we don't want to be in this situation that we're in. On the Dolly Dimple's conversions, we're not doing any more Dolly Dimple's conversions, and we're putting absolutely bare minimum CapEx into the market until we have any sort of sign of stabilization. But I -- the absolute priority, it is that we find a buyer who can run that business more successfully than we have.
And on the store pipeline in the U.K. and Ireland, as you know, we don't give guidance on that, and we're going to maintain that stance. We've opened 3 in the U.K. year-to-date. So that -- those are opened, but we're not giving guidance. I think clearly, it's a franchisee decision, and we're pleased with the number of openings in 2019. We are very focused on supporting franchisees to open the right number of stores in the right locations at the right time, as opposed to arbitrarily focusing on a specific number in each particular year.
The next question on the line comes from Ned Hammond from Berenberg.
I just had a couple of questions on costs, firstly for yourselves and then secondly for franchisees. So just given the higher increase in the national living wage, just wondering whether that had any impact on your manufacturing margin this year. And then -- and secondly, what is the likelihood of knock-on impact for franchisees? What's the labor inflation looking like for them this year? And have you agreed to the food cost increase with them for this year yet?
Well, we'll provide more color at prelims. I mean the 6.2% increase in living wage in April is going to put pressure on franchisee profitability and demand. But labor management is as tight as it can be because that's clearly a big rise in the context of the prevailing retail price index. And within our own business, it won't have a material effect on our labor costs because we run a pretty capital-intensive, labor-light manufacturing model, and the living wage increase won't particularly influence the compensation levels of our own employees. So that's how we view that. In terms of food inflation, generally, food inflation would be benign with one major exception, which is pork, where as a result of the issues in China with pig flu, we've seen a massive spike in the cost of pork. So we're managing that very carefully. That really is the only major inflationary pressure on food for franchisees. Everywhere else, we're either seeing stability or modest declines. But we'll provide a much better outlook on franchisee profitability when we do the prelims, but those are the headlines.
The next question on the line comes from Ross Broadfoot from Investec.
Just a few questions for me, if I may. So first of all, trying to understand if there's been any impact on the like-for-like from wet weather. I know previously, it's been appreciated that wet weather is positive for delivery sales, so curious on that front. And second of all, do you think we will still get a resolution of the dispute in 2020? Or do you think that may slide to the right slightly?
I don't really want to speculate on the franchisee situation. We are absolutely determined to find the right solution for the long-term health of the brand. And we've said consistently that we don't want to get into public discussions about timing or specifics, and I think we've got to hold to that. As far as the weather is concerned, I don't really think it has much effect, to be honest. I think you get ups and downs on the weather. We haven't seen any extreme weather, certainly not in the last 3 or 4 months, either one way or the other. So I wouldn't say there was any evidence of a material weather effect in our sales performance.
The next question comes from Heidi Richardson from UBS.
So just 3, please. Firstly, on the kind of performance. Obviously, your like-for-like growth looks good in the U.K. for Q4. But the same sort of kind of beat didn't come through at the system sales line. I just wanted to kind of get your view on the new stores that you're opening, how are they performing versus sort of the new stores you've opened in the past? Or there are any issues there that is just -- meaning that there's a slightly lower contribution? Secondly, just some color maybe on the ongoing impact of the kind of franchisee disputes that happened. You talk about disruptions. Can you provide a bit of color there? Is it still sort of marketing where there are some issues you have along with the store opening side of the business? And finally, just related to the impairment for your London store. Is there anything that's particularly challenging about operating in London? Is it the sort of cost side or the sort of competitive demand side that you're seeing that's maybe making it more challenging? Or is there nothing we should be reading into there?
Bethany will pick up the question on -- the first question. As far as London is concerned, the big challenge in London is labor. And we looked at labor as a percentage of sales across the system, it's higher in London than anywhere else. We also have -- we've expanded very rapidly in London. Since we owned the stores, we've split 5 of the territories, and we'll go into more detail on this at the prelims. We're happy with many aspects of our performance in London, but we -- remember, we don't have a lot of experience in running corporate stores. And it's taken us longer to get to grips with the corporate stores than we would have hoped. And we're taking a prudent view on the impairment. As far as the question about franchisee dispute is concerned, the thing I would say is that our promotion in the run-up to Christmas was less strong than it has, and we're still running national deals. But if you look year-on-year, our promotions in the lead-up to Christmas was less strong this year than it has been the previous year. And what we're actually seeing is many franchisees are compensating with more aggressive local promotions, which is great for customers and also in propping up the sales line. So we're finding national deals are less powerful, but franchisees are compensating with local deals, which is keeping the buoyancy of the total sales line going forward. So Bethany?
Yes. So Heidi, in terms of U.K. system sales, I think it will just be -- so we've had -- the new stores have seen quite a decent performance, actually. So it's nothing -- not driven by that. I think it will more be around the timing of when they came on because clearly, new store openings in 2019 were very H2- and, in fact, very Q4-weighted, so a lot in Q3 and Q4. So you're not going to get the full year contribution to system sales that you might have got in previous years, when it wasn't quite so backend-weighted. So it will just be a timing thing, Heidi.
The next question comes from Richard Taylor from Barclays.
A question on the impairment. I think you paid GBP 24 million for that business or your stake in the London business a few years ago, and it's profitable in the first half. So trying to understand how the impairment's so big at GBP 20 million versus what you paid for it when it's still profitable. And secondly, you split out the depreciation charge in the release of GBP 12 million, which I assume is for the U.K. business. Is that GBP 12 million inclusive of the impairments? Or will the depreciation charge come down again after the impairments?
Should I take both of those? So the depreciation charges, clearly, doesn't take into account the impairment. So I think that, that would be an impact on future depreciation because you'll be -- you'll have less assets to depreciate. It doesn't take -- it doesn't have an impact for this year. In terms of corporate stores, they're on the books for around GBP 41 million. So you're [indiscernible] in terms of your first number. We obviously made 2 different acquisitions for 2 different charges of stores, and then we've also clearly made investments as we open new stores. So your asset base is GBP 41 million. The company has 36 corporate stores, just in terms of the store numbers.
Understood. That's useful. So it's halved in value. I mean, just sort of can you share the assumptions as to why the value has moved so much? I realize it's a bit -- the 50% is much less than I anticipated from my initial calculation, but that's quite a big move. Has profit deteriorated significantly in the second half? Or what exactly has happened there?
So clearly, we'll be in a much easier position to share more details at the prelims, Richard, so apologies if I don't give a full answer today. We called out at the half year that there was effectively no headroom within that, so it was an impairment risk at the half year. Clearly, impairment calculation is driven by a wide variety of accounting judgments and assumptions, for example, discount rates, terminal growth, et cetera. But we had a softer H2 in corporate stores, but that is also against a very strong comp. And by far, the biggest headwind, as you would expected, is within the labor costs, given we are operating in the London market. So I think that's probably all I can say for now. Hopefully, that sheds some light, but we'll be in a much better position to share more at the prelims.
The next question comes from Julian Easthope from RBC.
First of all, in terms of looking at the numbers, it was very much driven by pricing again. I think the American -- your -- the franchise holder has commented about the fact that they're sort of getting a bit worried about pricing-driven growth rather than volume-driven growth. I just wondered if you could sort of comment about that as to whether or not you're happy with the way that the revenue is split. Second question, just a quick one on Ireland. Like-for-likes are down again, having been up 6% for the previous 6 quarters or whatever. So I just wondered if there was anything to call out in Ireland? And lastly, the euro-sterling has been all over the place over the last year at various different stages. Can you just remind me of your hedging policy? Are there really sort of variabilities coming through in terms of the goods you purchase, from your mozzarella or whatever? And how important the hedging is? And how that pans out during the year?
We're actually reviewing our hedging policy. We've appointed a new Treasurer. David found a new Treasurer about a year ago, and we're reviewing it. As things stand at the moment , we don't hedge, but I think we will in the future. But you're right, and I think one of the interesting things in the context of food cost is, if sterling continues to strengthen relative to the euro, then that will produce a more benign food cost environment, which will be good for franchisees and, therefore, good for us. On Ireland, we've found over -- all the years I've been in the business that Irish sales are more volatile than the U.K. because it's a smaller market. We were disappointed with the sales in the last 3 months of the year. But on the other hand, we're very pleasantly surprised with the sales in the first half. So I think it's just a natural volatility. We have to remember that Irish VAT went up at the start of the year by 4.5%. So the customers are having to pay 4.5% more, plus any sales growth that we enjoy, but it's still only 5% of our total core business. On your first question about the health of the brand, you're right, and we absolutely share the view of the U.S. business, that a positive order count is more important than price inflation. But the trade-off is inevitably at franchisee profitability. And that takes me back to the discussion about the euro and food cost inflation. I think we're more -- slightly more optimistic about food cost inflation, which takes the pressure off. And we've certainly seen a -- some softening through the year on ticket growth, but it's something that we watch very carefully. And really, we do absolutely buy the U.S. view that the health of the brand is shown by the order count.
Yes. Just a final thing to add. There is a bit of noise that we've previously talked about. I know we talked about Q1 in terms of effectively a free pizza promotion last year. So there is a bit of noise that's slightly skewing that ticket and order count as well. So for Q4, if you look at ticket, which is mix and price combined, just under half of that for Q4 was skewed by the deal last year. And similarly, order count was hindered by about 2 percentage points in Q4 because of the comparative. For the year as a whole, it had less of a skew, so it was a particular skewing factor in Q1, and then it was slightly less in Q4. So we haven't chosen to split that out because we tried to give you the kind of clean numbers on the face of it. But just a caution, there is a little bit of noise within those numbers as well.
[Operator Instructions] It would appear that we currently have no further questions registered. So David, I'll hand back to you.
Thanks very much, Joshua, and thanks very much to everybody else. Thanks for the continued interest in Domino's. Have a great day.
Thank you.
Bye.
Ladies and gentlemen, this does now conclude today's call. Thank you for joining and have a wonderful day. If you've missed any part of this call and would like to hear it again, a replay will be ready shortly.