Company Interview / Domino's key overseas businesses need to make dough

Don Meij, from Domino's (ASX: DMP), highlights the key driver for their business - digital online sales. He emphasises the effectiveness of the restructuring within the company specifically with the establishment of centres of expertise such as their digital centre. The restructuring aims to utilise their global platforms for online ordering and media, while local teams handle brand execution in various markets. The result is a brand that caters to local market specifics, leading to record profits in Australia and New Zealand, which are the best same-store sales in seven years. The future focuses of the company are improving performance in their Japan and France units.

While the business has faced a shaky start with same store sales lower than anticipated in fiscal year 25, Don is confident about growth. He thinks that the seven weeks reported do not reflect the core performance of the business. He mentions the importance of both France and Japan in contributing to the 3 to 6% same store sales growth. The reasons for performance variations are changing promotions influencing sales numbers. To achieve growth, the company has strategies including higher media spins for France and Japan, rebranding for France, and switching towards unique Domino's products in Japan.

Don is optimistic on addressing geopolitical issues and inflation affecting operations. He believes in the innovative response to these challenges, which include exciting product lines and a focus on smaller, protein-filled meals closely matching consumer trends. The pipeline of new product developments will be building on consumer segments of lunch and snacking. They are also venturing into new areas such as beverage purveying. Focussing on earnings growth, the company plans to get back to profitability and return to franking dividends. The company is strongly positioned for growth with emphasis on unit performance, store growth and new product development.

Full unedited transcript below:

0:00

Yeah. So the core driver of our business was still our digital online sales, which were up 7.5%. One of the things we did this year, we restructured the business. Um, we set up a, uh, what we call centers of expertise, trying to leverage our global network. One of those examples is our digital center of expertise, and they've performed very, very well. So, you know, using the global media platforms and then using our global online ordering platform and coupling those passing that back to the local teams where we have country management and then those country management are executing against product. Um, and the brand itself in markets so that the brand, whether it's French or German or Japanese or Australian, um, that, you know, has the look and feel that's relevant to that market

0:43

specifically in that the great performance came from a record profit in Australia and New Zealand, where we had our best same store sales in seven years. We had strong performance in Germany, strong performance in our Singapore business. We had small, um, and we had a really good return to good growth in our Benelux business in the last quarter. The two business units that we need to perform better on is in Japan and in France. And what we've shared with shareholders today is our plan of how we plan to get back to growth in both those two businesses and their scalable businesses. They've already at 1500 of our 3800 stores. So we need those businesses to start contributing to our profit and our sales. Yeah. How crucial is that, Don, given you have had a shaky start to full year 25 with same store sales lower than you were anticipating? Yeah, that's one of the interesting things about reporting seven weeks out of your normal 52 weeks in a year is that, you know, we in one period of seven weeks, we might be trying to hose down expectations. We might have had a blip that was

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unique. For example, this time last year, the Matildas performance in the Australian New Zealand business, I mean, we had all these record days that came out of nowhere because the whole of Australia was just captured by, you know, the getting on television and watching the Australian team perform so well. That was a one off occasion and now we're rolling that. Earlier this year we've said, look, these numbers in Japan that we just reported for the first seven weeks, please know that they are inflated by a unique promotion and performance. That is not the. So in some cases we're doing that. And then in other cases, like now we're saying, look, this seven weeks does not reflect the core performance of the business. Um, and uh, and so, um, yeah, we still expect a return to 3 to 6% same store sales growth. We do need France and Japan to contribute to those both markets that are moving into higher media spins coming into the second quarter and beyond, and have launched a relaunch of the brand, in particular in France and, uh, and change to some of our pricing models, more or less discounting in Japan, which didn't work in

2:42

the low frequency market, and focusing more on unique products to Domino's and then putting good media behind that to then activate the customer. Is there a deadline if you don't see a turnaround in the French and Japanese businesses.

2:58

I think it's very dangerous for any leader to just go out there and and put those sort of expectations on a team. What we're really looking for is forward momentum and actions. And and so, you know, this business has four corners today. And it should be a fifth one when France comes on. But if you look at the history of this business, it's made all of its profit out of Australia and New Zealand, the Benelux, Germany and Japan. And out of those four units today, it's only Japan that's been underperforming in recent times. Um, so, you know, we have great expectations that Japan will return and then France should be adding to that. Now it markets like Singapore and Malaysia and Taiwan do contribute to the business. But they're not the big four corners right now. Three of the four are firing looking for number four with Japan to kick in and France to then add to that again. You did mention Malaysia though, and that was affected by some geopolitical issues. Just tell us more broadly how the Asian business is faring. Yeah. So we roll the events, the geopolitical events, um, by October. So then we have a like for like year where we're not seeing,

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um, the, the effects of those global political events get worse. In fact, we've actually seen a performance improve, um, against that. So when we roll those, we expect to be back into positive, uh, performance in the Malaysian business. Fortunately, when we acquired the Malaysia, Singapore, Cambodia business, um, we had some really large structural plans we put in place which then delivered. We highlighted today 21% same store sales growth in the Singapore business, putting in our new tech stack, moving to making dough in store, cutting vegetables and store. So important to have those sort of fresh ingredients. Um, both from an ESG point of view, but from a quality and a margin point of view put into store. Because we did that, it also safely netted our profitability in Malaysia, and that we didn't get quite the impact we would have had from the deleverage of sales because of all of those initiatives. So we're looking forward to rolling in October. And, um, no one can, you know, can really see into a crystal ball of what might happen in those geopolitical, uh, things, but from a like or like point of view. We start rolling off that in October specifically for Malaysia.

4:57

Taiwan's actually had really good growth for the last six months. And then Japan needs to add.

5:02

What about your Australian business? You mentioned the impact of the Matilda effect, Matilda's effect last year, but you have said yourself the fastest growth is the single ITR. How are you faring amongst your competitors and the aggressive growth of Guzman Gomez? Yeah, so Domino's historically in Australia is no exception. So every second pizza in fact it's now grown to 53% market share. We took two more extra market share points this year. So we're the fastest growth in pizza and in some quarters the fastest growth by customer count in QSR of the major QSR, which we see as our direct competition. And so, you know, when we look at our business historically for all of that success, we've predominantly been a dinner and shared meal occasion. So to get growth in lunch, uh, snacking, which is in afternoon early mornings and late night, we've pursued melts the my Domino's box and we've got more products coming. We just launched Pizza Dogs only earlier this week. We've also launched them a month ago in the Netherlands, which is a new consumer, a smaller price point. You know, mum after school, a $3 pizza dog, great protein fix, straight after school

6:03

and still indulgent and suits all of the Domino's. Um, the way we like to think of how we design our product, we as a result of that, we're the fastest growth lunch brand out of all the major access in Australia in the last year, fastest growth in delivery over the full year, and we had great growth in snacking, um, performance in those areas. So we really overperformed in areas we haven't typically got a consumer. Hence, um, having a stronger sales in seven years even though it's our largest business. So talking of those cost points and of course, for, for lower, uh, consumers as well, consumer wallets, particularly amongst the high cost of living. What's the plan there to try and lure more customers in. Yeah. So we've got a very exciting product pipeline. So when we came out of Covid, um, we didn't I give our performance in the first year of inflation, you know, quite terrible. Um, we've just I've been in this business now 37 years, 35 at that point. And the inflation we saw in Europe, you know, we've not only all of the effects of coming out of Covid and the way governments behaved and the digital political events that happened around the

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world, for example, the invasion in Ukraine. I mean, we saw some really incredible inflation at one point in Germany. You know, inflation for us was 21% in one quarter. So quite significant. We didn't know how to respond. And we had to rebuild our muscle memory and product development. You know, we've been such a digitally driven business the decade before in Covid. We were just trying to keep up with our supply chains. So getting back an investment in our chefs, investment in our research and development. And now you're seeing the benefits of that, and you're going to see that accelerate into this year where we've got a lot of new exciting products once again, mostly built around new segmentation. So we highlight that on slide three in our investor deck today, lunch snacking. But there's other areas you'll see on their drinks. Um, you would never have thought of Domino's really as a drink purveyor. A few years ago, we launched premium thick shakes. There are some of our highest performing products in Japan, the Netherlands, Belgium, Germany for an NPS score, a really good margin designed to be delivered. Thick shake -14°C.

8:02

All natural, quite indulgent product. And so that's given us an excitement into the booming business where many consumers around the world are changing their dietary behavior, whether that's through going via zoom or just through just, you know, wanting to eat more frequent, smaller meals. And we're building those smaller meals for consumers that are very high protein base as well, which is also a big key driver when someone's indulging. I was going to say, you worried about the impact of those weight loss drugs on your future. Bottom line?

8:33

Not at all. You know? I've been here 37 years and I don't I can't remember how many of those sort of events that we've faced. But, you know, what do you monitor with the kinds of people that are now moving into that sort of health choice, uh, smaller meals and needing to put more protein into those meals? That's very much the core focus of our business, our products, every one of them are launching has that core mind, including some of those consumers also moved to using liquid drinks as a as a meal solution. And we're also pioneering and working really hard and designed to be delivered drinks. So you can expect a lot of new innovation for Domino's, by the way, mainly chasing an existing customer that already exists. But the bonus is that it also is, you know, individuals that choose that lifestyle choice still want to treat themselves, and Domino's providing a treat that suits their meal occasion well. Don. Well, let's talk about your dividend payments. So 54.4 cents per share interim UN franked. What is the potential growth that you are seeing for full year 25 dividends. Yeah.

9:33

So it's obviously always based on earnings growth. And and you know from the franking perspective it's where those earnings are made. You know we are a very proud Australian company. And as a result um you know we like to bring our profits home and pay Australian tax. And that's when we get our franking credits. Um, unfortunately, because we've had some restructuring costs, um, we haven't paid the tax that we typically pay in years because of the write downs. Um, but we plan to get straight back into profitability, a lot less need for restructuring costs and therefore, you know, return to franking to our dividends. And with earnings currently we have an 80% payout ratio. Um, we've historically ranged between 70 and 80% and there's no indication that that would change. Um so earnings Australian based and and how we repatriate those earnings that is you know, because of the IP that we ship all over the world with all of our technology, our product innovation and so on. Um, we're very proud Australian company. And in terms of when you might see shareholders kind of come back and show you some love, I know you can't control the market, but

10:32

your thoughts on whether or not you're sitting below fair value at the moment? Yeah. Look, we never comment on share price, but my job and my team's job, the leadership team, is to execute against growth. We need to return back to a growth company that shareholders expect to get to the 7100 stores and beyond. Um, and that means that we need each of our business units to get back to the sort of growth you've seen in Australia, New Zealand, Germany, Benelux. We're seeing out of Singapore and Taiwan. But we need the other big engines, too, of France and Japan to contribute to that growth. Um, and when we wind up store growth again, so you can imagine when, uh, the earnings were the way that were the last 24 months, um, we weren't opening the store accounts, which means that we didn't have a pipeline of sites, but Germany, the Benelux, Australia, New Zealand, Taiwan, even Malaysia right now were out actively pursuing sites. Now that happens pretty quickly with growth in Malaysia, Australia, New Zealand, when Japan comes back online or happen quickly in Japan, the European pipeline typically takes 9 to 18 months to fill. It's a much more, um, structural

11:32

model that we have to work through there. So the sites we're finding today will open in 9 to 18 months. And, uh, and Germany and the Benelux are already going to contribute to that. I can't wait for France to add to that as well.