Last checked at 19 Mar 2018 09:03
LEI: 213800Q6ZKHAOV48JL75
19 March 2018
DOMINO'S PIZZA GROUP PLC
ANNUAL FINANCIAL REPORT
Further to the announcement of its preliminary results on 8 March 2018 (the "Results Announcement"), Domino's Pizza Group plc (the "Company") announces that it has today posted to shareholders and has submitted to the National Storage Mechanism, copies of the following documents:
· Annual Report and Accounts for the 53 weeks ended 31 December 2017 (the "Annual Report and Accounts")
· Circular relating to the Annual General Meeting to be held on 19 April 2018
· Forms of Proxy for shareholders to vote at the AGM
These documents will shortly be available for inspection on the National Storage Mechanism
www.morningstar.co.uk/uk/nsm.
As required by DTR 6.3.5 R (3), the Company confirms that the Annual Report and Accounts and the Circular relating to the Annual General Meeting are now available to view or download in pdf format from the Company's corporate website, http://investors.dominos.co.uk.
The appendix to this announcement contains the following additional information which has been extracted from the Annual Report and Accounts for the purposes of compliance with DTR 6.3.5 R and should be read together with the Results Announcement, which can also be downloaded from the Company's corporate website:
· A statement on the principal risks and uncertainties
· A statement on related party transactions
Together these constitute the information required by DTR 6.3.5 R which is required to be communicated to the media in full unedited text through a Regulatory Information Service. Cross-references in the appendix refer to the Annual Report and Accounts.
Enquiries:
Adrian Bushnell, Company Secretary
Domino's Pizza Group plc
01908 580000
Notes to Editors:
Domino's Pizza Group plc is the UK's leading pizza brand and a major player in the Irish market. We hold the master franchise agreement to own, operate and franchise Domino's stores in the UK, the Republic of Ireland, Switzerland, Luxembourg and Liechtenstein. In addition, we have a controlling stake in the holders of the Domino's master franchise agreements in Iceland, Norway and Sweden, as well as an associate investment in Germany.
APPENDIX
Principal risks and uncertainties
The business faces a wide range of risks on a daily basis. The Board has undertaken a robust assessment of what it believes are the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The table overleaf summarises these principal risks and how they are being managed or mitigated.
The risks in this table have been assessed on a residual basis according to our current view of the potential severity (being the combination of impact and probability) and assume that existing controls are effective. We have linked the risks to the strategic pillars described on page 13. The environment in which we operate is constantly evolving; new risks may arise, the potential impact of known risks may increase or decrease and/or our assessment of these risks may change. The risks therefore represent a snapshot of what the Board believes are the principal risks and are not an exhaustive list of all risks the Company faces. In prior years we had included the implementation of our new ERP system as a principal risk. Following the successful implementation of the system the Board no longer considers this to be a principal risk.
The Board has again considered the risk posed by Brexit and has noted that there are likely to be risks associated with increases in the cost of raw materials and potential labour cost increases for franchisees. At the present time, the Board does not consider Brexit to be a principal risk to the business model, but will continue to monitor and evaluate this risk and reassess the exposure as necessary.
Strategic risks
People-related risks
Link to strategic pillars
1 2 5 8
Risk
The business is overly dependent on key individuals (either at Executive level or in relation to specialist skills), possibly exacerbated by a failure to attract or retain the skilled and experienced people it needs.
Potential impact
Medium
Probability
Medium
Mitigation
The Board considers succession planning on a regular basis and has set the CEO a personal objective of developing multiple potential successors. Contingency plans are in place which could be implemented on a short-term basis should we suddenly lose a key Executive.
Nature of threat
These risks could have some impact on future performance, for a limited time.
Change from 2016
No change
Commentary
There has been considerable work undertaken this year to improve the HR operating model to and establish more robust processes for talent management and succession planning.
Failure to respond to and overcome competitive pressures
Link to strategic pillars
1 2 3 5 6
Risk
The business faces strong competition from a range of players, including those exploiting emerging technologies or new food options and new entrants into the UK market.
Potential impact
High
Probability
Low
Mitigation
Management keeps the competitive landscape under continual review and the Board also monitors the markets in which it operates, as well as KPI data on the current business. Strategy is reviewed and developed by the Board on at least an annual basis.
Nature of threat
These risks have the potential to compromise our future performance or, in an extreme scenario, even the business model.
Change from 2016
Increase
Commentary
This risk has increased during the year due to increased market pressure and evidence of increased 'value for money' awareness driving consumer choice. A number of initiatives have been undertaken during the year to maintain product competitiveness.
Inability to react to changes in the health debate and public desire for healthier food
Link to strategic pillars
1 3 9
Risk
As society's expectations evolve, and governments act on public health concerns, we may need to change the products we offer and our approach to marketing.
Potential impact
Medium
Probability
Low
Mitigation
Management keeps consumers' purchasing preferences under continual review and adjusts menus in response to these. We also engage, appropriately, with the government on the public health debate to ensure that our views are understood by policy makers and influencers.
Nature of threat
These risks have the potential to compromise our future performance or, in an extreme scenario, even the business model.
Change from 2016
No change
Commentary
The Group is continually reviewing its products to ensure they meet governmental guidelines. Improvements are being made to make product nutritional information more accessible and certain products may undergo reformulation to reduce sugar levels.
Failure to achieve UK growth through new store openings
Link to strategic pillars
1 2 3 4
Risk
Failure to meet store growth targets would be a breach of our Master Franchise Agreements. Our ability to open new stores depends on our ability to lease or buy suitable premises, obtain the necessary planning approvals and identify a suitable franchisee to run the store.
Potential impact
High
Probability
Low
Mitigation
Board approval is needed for the targets contained within the MFAs, and the Board monitors the pipeline of proposed store openings on a continual basis. Franchisee development programmes are run and we employ surveyors to identify and secure appropriate premises.
Nature of threat
These risks could have an impact on future performance. In an extreme case an unremedied breach of the MFA could threaten the Company's business model and liquidity.
Change from 2016
No change
Commentary
The overall risk remains the same as last year. The MFA targets have been agreed for the next 10 years and are set 350 new stores over the period (on a net basis).
Commercial leverage of large franchisees
Link to strategic pillars
1 2 3 4 5 6
Risk
The Group has a number of franchisees whose businesses run large numbers of stores, and so enjoy some commercial leverage. The Group may be unable to persuade these franchisees to implement our preferred strategies, or to pass on cost increases in full or in part.
Potential impact
High
Probability
Medium
Mitigation
Open and transparent relationships with multi-site franchisees are managed at senior levels of the Group. We also explain the profit-sharing model to all franchisees, so that they understand that success is mutual. Numbers of stores managed by the large franchisees are monitored.
Nature of threat
These risks have the potential to compromise our future performance for a period of time.
Change from 2016
Increase
Commentary
The assessed level of risk has increased during the year, largely particularly due to some pressure on franchisee profitability. There is regular and ongoing dialogue with the franchisee community to mitigate this risk.
Operational risks
Food safety
Link to strategic pillars
1 3 3 7 9
Risk
There is the risk of contamination in either the pre-proved dough we produce at the Group's Supply Chain Centres, or in the pizza topping ingredients we distribute to our franchisees' stores. Where we operate corporate stores, and are responsible for finished products, this risk is exacerbated.
Potential impact
High
Probability
Medium
Mitigation
The business has implemented a rigorous regime of standards and food safety checks, working with the appropriate government regulator.
Nature of threat
If this risk materialised, it could have a significant impact on future performance and potentially liquidity, for a limited time. The reputational impact could have a longer-term effect on performance and, in an extreme case, threaten the business model.
Change from 2016
No change
Commentary
This risk has not changed materially during the year. The risk is monitored on a regular basis by a qualified in-house resource. The Board routinely receives reports on "food safety" risk controls.
Interruption of raw material supplies
Link to strategic pillars
1 2 3 5 7 9
Risk
The business relies on a number of third-party suppliers for pizza toppings, some of whom provide the sole source of an ingredient. These suppliers must make a commercial return to stay in business and reinvest in their operations. The Group would be vulnerable if a supplier decided to cease trading, suffered a major interruption or food safety incident, or was responsible for an ethical breach of such severity that the Group would no longer trade with them.
Potential impact
High
Probability
Low
Mitigation
Suppliers who are selected through competitive tendering and appropriate due diligence processes supply the Group under long-term contracts. The economics of their businesses are kept under review and their performance against their obligations monitored. We assess their compliance with acceptable business standards.
Nature of threat
These risks have the potential to compromise our future performance for a limited time.
Change from 2016
Decrease
Commentary
A detailed review of suppliers has been undertaken and is ongoing and steps have been taken to reduce supplier dependency and improve security of supplies through dual sourcing.
Supply Chain Centres are unable to supply the stores
Link to strategic pillars
1 2 3 5 7
Risk
We distribute both the pre-proved dough we produce and third-party pizza toppings to our franchisees' stores. In the event of physical damage to, or loss of, a Supply Chain Centre we would need to make urgent contingency arrangements wherever possible. However, the space required to hold dough whilst proving forms a critical constraint to our business.
Potential impact
High
Probability
Medium
Mitigation
In the event of the loss of a Supply Chain Centre, third-party ingredients could be delivered to stores direct, at an additional cost. The Group is considering developing additional dough proving facilities, which would mitigate this risk significantly. Loss of our dough production facilities would be more difficult to overcome, but contract production of dough would be possible, at an additional cost.
Nature of threat
These risks could have a significant impact on future performance and potentially liquidity, for a limited time.
Change from 2016
Decrease
Commentary
The level of risk has reduced since 2016 following the development of the Group's new production facilities. Additionally, enhancements to the business continuity plan are expected to be implemented during 2018.
Failure of online ordering systems for a prolonged or critical period
Link to strategic pillars
1 2 3 5 6 9
Risk
Over 75% of delivered sales are now placed online, around half of which are using apps for mobile devices. As well as the reliance on data centres and our own software developed in house, there is also a risk from malicious denial of service attacks.
Potential impact
High
Probability
Medium
Mitigation
Cyber-risk appears on the Board agenda and Audit Committee agenda on a regular annual basis and management reviews the performance of its IT infrastructure on a continual basis. Our systems are hosted by third-party specialists, with parallel processing across multiple sites and real-time replication and appropriate protection from malicious attempts to disrupt the availability of our sites.
Nature of threat
These risks could have some impact on future performance, for a limited time.
Change from 2016
No change
Commentary
On the whole, the level of risk has remained constant. The Group has maintained its compliance with PCI level 1 and continues to enhance its technical capability and resilience.
Loss of personal data relating to customers, employees or others; loss of corporate data
Link to strategic pillars
1 2 3 6 9
Risk
For ease of use, our online ordering systems hold some customer data, the loss of which (whether accidental or following hacking) would cause disruption and cost to the Group. In addition, the Group's own data on employees and suppliers is exposed to the same risks of loss.
Potential impact
High
Probability
Medium
Mitigation
Cyber-risk appears on the Board agenda on at least an annual basis and management keeps the security of data under its ownership or control under continual review. We do not hold customer credit card data on our systems. Franchisees are trained in their obligations in respect of personal data and are required to train their staff appropriately. Appropriate IT security is in place and kept under continual review.
Nature of threat
These risks have the potential to compromise our future performance. In an extreme scenario, the reputational damage could possibly threaten the business model if we suffered a total loss of consumer confidence.
Change from 2016
No change
Commentary
Cyber risk remains a major threat. The cyber-security systems are regularly reviewed by the Group's management and external advisers. Regular updates on cyber-security are provided to the Audit Committee.
Related party transactions
During the period the Group entered into transactions, in the ordinary course of business, with related parties. For details of loan balances due from associates please refer to note 18. Transactions entered into, and trading balances outstanding with related parties, are as follows:
|
Sales to related party £000 | Amounts owed by related party £000 |
Related party |
|
|
Associates and joint ventures |
|
|
31 December 2017 | 32,975 | 1,884 |
25 December 2016 | 28,178 | 2,300 |
Terms and conditions of transactions with related parties
Sales and purchases between related parties are made at normal market prices. Outstanding balances with entities are unsecured and interest free and cash settlement is expected within seven days of invoice. The Group has not provided for or benefited from any guarantees for any related party receivables or payables. During the financial period ended 31 December 2017, the Group has made a provision of £nil for doubtful debts relating to amounts owed by related parties (2016: £nil).