Dominos Regulatory News (DOM)

LEI: 213800Q6ZKHAOV48JL75

6 August 2019

This announcement contains inside information

DOMINO'S PIZZA GROUP plc

INTERIM RESULTS FOR THE 26 WEEKS ENDED 30 JUNE 2019

Good UK & Ireland performance; International remains challenging

All commentary below is on an underlying basis unless otherwise stated

Financial headlines

·; Group system sales up 4.7%

·; Robust UK & Ireland performance:

o UK like-for-like excluding splits up 3.9% (1.8% including splits), with an improving trend through the half (LFL excluding splits Q1: 3.1%, Q2: 4.8%)

o ROI like-for-like excluding splits up 6.9% (5.4% including splits)

o UK & Ireland operating profit £51.6m, up 7.1%

·; International performance remains challenging:

o International system sales down 3.4%, up 0.4% on a constant currency basis

o International operating loss £6.4m, versus £1.8m loss in H1 2018

·; Net debt £238.8m, 2.2x Net Debt/EBITDA, impacted by a working capital build of £22m due to Brexit-related stock building and some timing issues which are expected to unwind

·; Interim dividend +3.7% to 4.20p

Strategic headlines and outlook

·; Active discussions with our UK & Ireland franchisees continue; new store openings and some working practices being impacted whilst these are ongoing. We remain committed to finding sustainable, win-win solutions but anticipate that resolution will take time, likely into 2020

·; 13 stores opened in H1, of which 7 are in the UK, taking the Group total to 1,272

·; Digital continues to drive customer engagement. Online now accounts for 82% of UK system sales

·; Emily Somers joining as Chief Marketing Officer; Emily was previously Vice President of Marketing and Food Development at McDonalds

·; International visibility remains limited and trading is challenging. Focused on improving operational capabilities and performance

·; Full year Net Debt expected to be between £220m and £230m. No further share purchases expected in the second half

·; David Wild, Group Chief Executive Officer, has informed the Board that he plans to retire. A process to recruit a successor is progressing and a further update is likely later this year.

Commenting on the results, Chief Executive Officer David Wild said:

"Our core UK and Republic of Ireland markets delivered a good performance, with system sales up 5.5% and underlying operating profit up 7.1%. Digital remains a key driver of customer engagement, with online now accounting for 82% of total sales in the UK. Although a small part of our business, we are delivering pleasing operational improvements in our London corporate store estate."

"The relationship with our UK and Ireland franchisees is very important to the long-term sustainable growth of the system. We are actively involved in detailed discussions and are giving these considerable focus and attention. Whilst dialogue is continuing, new store openings are being delayed and some of our working practices are being impacted. The situation is complex, and we expect resolution will take some time, likely into 2020. We are committed to working with our franchisees to agree sustainable win-win solutions."

"The performance of our International business is very challenging and trading visibility remains limited. The weakest performance was in Norway, although we also saw increasing losses in Sweden and Switzerland. Iceland profitability was impacted by the weak macro-economic backdrop. We are very focused on improving our operational capability across our International markets and will provide a further update at our full year results."

1 System sales represent the sum of all sales made by both franchised and corporate stores to consumers

2 Like-for-like sales performance is calculated against a comparable 26 week period in the prior year for stores that have not donated addresses to new stores within the previous 12 months

3 Underlying is defined as statutory performance excluding amounts relating to non-underlying5 items

4 Statutory revenues represent revenues directly attributable to the Group being derived from monies paid by franchisees for foodstuffs together with royalty payments for use of the Domino's brand, rental income from freehold and leasehold property, revenue relating to advertising and ecommerce funds, and corporate store sales in the UK, Switzerland and the Nordics

5 Non-underlying items are defined in the Alternative Performance Measures section and reconciled to statutory measures in note 5 to the accounts

6 2018 revenue, cost of sales and administrative costs have been restated following a review of the treatment of IFRS 15. This is discussed in detail in note 2 to the accounts

The person responsible for making this notification is David Bauernfeind, Chief Financial Officer.

For further information, please contact:

For Domino's Pizza Group plc:

Bethany Barnes, Head of Investor Relations: 07387 015695

Brunswick:

Tim Danaher, Samantha Chiene, 0207 404 5959

A presentation for investors and analysts will be held at 9.30am on 6 August 2019 at the offices of Numis Securities, LSE Building, 10 Paternoster Square, London EC4M 7LT .

The live webcast can be viewed at: https://www.investis-live.com/dominos/5d1631469add6d110097eddc/domi 

About Domino's Pizza Group

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 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 associate investments in Germany and Luxembourg. As at 30 June 2019, we had 1,272 stores across six markets, including 1,109 stores in the UK.

For photography, please visit the media centre at corporate.dominos.co.uk, contact the Domino's Press Office on +44 (0)1908 580757, or call Brunswick on 0207 404 5959 

Restatement of revenue, cost of sales and administrative costs

IFRS15 was implemented on 1 January 2018. At that time, the Group believed that the implementation of the new revenue recognition standard had no impact on the treatment of the revenue relating to the National Advertising Fund ("NAF") and eCommerce Fund. Subsequently, and in conjunction with the technical assessment undertaken by our new auditors, it has been concluded that it is appropriate to present the revenue and costs associated with these two funds on our income statement.

We have therefore adopted this treatment with effect from 2018 and have restated the 2018 comparatives accordingly. More information is contained in note 2. For H1 2018, revenue has been increased by £26.5m (FY 2018: £53.9m), cost of sales have been decreased by £0.5m (FY 2018: £1.1m) and administrative costs have been increased by £27.0m (FY 2018: £55.0m). The corresponding figures for H1 2019 are revenue £27.9m, cost of sales £0.7m and administrative costs £28.6m.

This change has no impact on the profits or cash flows of the Group, and does not reflect any change in the operation of the funds.

The change relates solely to the UK & Ireland business with no impact on International revenues or costs.

We continue to believe that system sales, rather than statutory revenue, is the most appropriate top line growth measure for the Group. Therefore, we will not be adopting an alternative performance measure to eliminate the revenue required by this adjustment, although we will disclose the revenue associated with the NAF and eCommerce funds going forward.

Performance overview

Total Group system sales increased 4.7% to £645.8m. UK system sales were up 5.3% and Ireland up 8.0%, with International system sales of £49.8m, down 3.4%, accounting for 7.7% of the Group total. Group statutory revenue increased 3.5% to £295.6m.

UK and Ireland delivered underlying operating profit of £51.6m, up 7.1%. International, including the contribution from our minority stake in the German associate, recorded an underlying operating loss of £6.4m, compared to a £1.8m loss in H1 2018. The primary driver of the decline was higher losses in Norway, although we saw a disappointing performance across our other international markets.

Group underlying profit before tax was £42.3m, a decline of 7.4% year-on-year, reflecting the increased losses from International and higher interest costs as a result of higher net debt. Underlying basic EPS declined 3.8% to 7.5p, with the decline in profitability partially offset by the reduction in shares in issue as a result of the share buyback programme. The Board has declared an interim dividend per share of 4.20p, an increase of 3.7%.

Free cash flow was £8.9m, and net debt increased by £35.6m to £238.8m as a result of the international losses, £17.4m of share purchases in H1, capex of £11.8m and the 2018 final dividend of £25.0m.

Board succession

David Wild, Group Chief Executive Officer, has informed the Board that he plans to retire from his role. David will continue with his responsibilities until a new CEO is in place and there has been an orderly transition. As part of the succession planning process noted in the 2018 Annual Report, a process to recruit a successor for the role of CEO is progressing and a further update is likely later this year.

Stephen Hemsley, Chair of the Board, will oversee the recruitment process of a new CEO and will thereafter step down once his successor as Chair has been appointed. The new Chair will then lead the Nomination Committee's process of refreshing the Board more generally. The Board will keep the market updated on progress with these appointments.

UK and Republic of Ireland

UK system sales in H1 were up 5.3% year-on-year, with LFL of 3.9% excluding splits, or 1.8% including splits. Q1 LFL (excluding splits) was 3.1% (0.9% including splits), with Q2 LFL of 4.8% (2.7% including splits).

Ireland local currency system sales increased by 8.5% in the period, and by 8.0% on a sterling basis to £32.5m. LFL sales increased by 6.9% excluding splits or 5.4% including splits. Q1 LFL (excluding splits) was 6.8% (5.3% including splits), with Q2 LFL of 7.0% (5.5% including splits).

Components of sales growth

Franchisees have control over menu pricing and discounts, and we continue to see a wide range of pricing strategies across franchisees. The majority of sales during a year are generated by local pricing, with around a fifth of sales generated based on national campaign pricing.

Going forward, in order to deepen external understanding of the drivers of UK LFL sales growth, we are expanding and refining our disclosure of the sales components. On an 'including splits' basis, LFL orders were down 3.4%, items per order were down 0.8%, product mix impact was up 2.9% and price up 3.0%. LFL orders improved through the half, with Q1 down 4.6% and Q2 down 2.1%. Total UK orders were 32.3m, up 0.2% year-on-year, with Q1 down 0.7% and Q2 up 1.2%.

We continue to see a broadly stable average discount on menu prices across the system, of 39%, although there is a wide range across franchisees driven by different pricing stances. The proportion of orders sold on discount stood at 89.6%, compared to 88.1% in H1 2018.

In H1 there were 8 new store openings, made up of 7 stores in the UK and one in Ireland, and one planned UK store closure. Two stores were corporate and six were franchised, from five different franchisees.

Against the backdrop of ongoing discussions with our franchisees, we are seeing franchisees delay opening new stores. This means that we are unable to give guidance on the number of new stores this year, although we continue to expect a materially lower number compared to 2018.

Discussions with franchisees

In the UK we have 63 franchisees, with a further 7 in Ireland. Our franchisees are amongst the best entrepreneurs and operators in the Domino's system worldwide, and they have been an important component of the success of the Group over several decades. The largest two franchisees account for 39% of stores, with the third largest accounting for a further 7%.

We are actively involved in detailed discussions with our franchisees to agree a way forward sustainably to grow future system profits, in a way which benefits both the Group and our franchisees. We are giving considerable focus and attention to these discussions. Whilst they progress, some working practices continue to be affected, with the timing of store openings being delayed and joint activities such as national marketing campaigns also being impacted.

We are confident that we will ultimately agree long-term, sustainable, win-win solutions, however we need to allow sufficient time for these discussions to take place and for agreements to be reached. The situation is complex and we expect resolution to take some time, likely into 2020. Fundamentally our interests are aligned: we all benefit from increased scale, through the growing value of the brand, greater buying efficiency and the shared investment in new innovations to further improve the customer experience.

Customer experience

We continue to invest in our own digital platforms, making it increasingly easy for customers to find the best deal, place an order and pay for their meal. Online sales in the UK grew 9.3% year-on-year and now represent 81.7% of system sales, or 90.7% of total delivery sales.

Last year we announced £10.0m funding to invest in new platforms for e-commerce and app development. This will further improve the customer experience, whilst enabling us to introduce enhancements more quickly and flexibly. This project is now well underway and we are pleased with progress to date.

Collection remains an important growth area for Domino's and is a particularly important factor when considering the location and business case for new stores. Collection sales incur limited incremental labour cost, meaning they can make a significant difference to the overall profitability of a store. Total collection sales were up 3.6% in H1. Collection now accounts for 21% of system sales, or 30% of orders, so it remains a significant growth opportunity.

Brand

The strength of the Domino's brand is a key differentiator for us. Our brand strength is supported by great tasting pizza, excellent service and good value for money which drives store sales and profitability. Our brand recall in H1 2019 was 87%.

"The Official Food of Everything" platform continued to form the bedrock of our marketing activity, demonstrating its versatility through a range of broadcast and digital campaigns. A key focus was new product, with successful launches for the Cheeseburger and Catalan Chicken and Chorizo pizzas.

We solidified our dominance in Catch-up TV with new idents for ITV Hub, helping us to have presence around key summer TV such as Love Island. We further strengthened our ownership of Catch-up TV viewing, adding sponsorship of All 4 as well as our existing ITV Hub partnership. We've also grown our year-round presence, running TV campaigns in the summer months for the first time on top of these 365 days a year sponsorships.

We are pleased to announce that Emily Somers will join as Chief Marketing Officer in August following the recent departure of Tony Holdway. Emily's remit will cover Sales, Brand Marketing, New Product Development and Innovation. Emily previously worked at McDonalds as Vice President of Marketing and Food Development, as part of the UK and Ireland Executive team. During her time at McDonalds, she led the business through a time of unprecedented transformation of the customer experience, including McDelivery, Dynamic Digital Merchandising, Digital Ordering and Table Service and the Signature Collection. 

Corporate stores

We now directly operate 35 stores in the London area, having opened two in the first half of the year, in Mill Hill and Brentford. We are opening another new store, in Carshalton, in the coming month. London is an important part of our strategy for UK growth, as we are currently underpenetrated in London compared to the rest of the UK. Operating stores ourselves gives us scope to develop operational expertise and test innovations. The acquisition of Have More Fun, a portfolio of six stores in August 2018 gave us the opportunity to both strengthen our position further and acquire a relatively poor performing estate, improve operations and protect the brand.

Corporate store revenue was £15.5m in H1, with LFL sales up 4.4%. The EBITDA of corporate stores was £0.4m, compared to £0.6m in H1 2018, as we increased our investment in local marketing.

During the first half we have made good progress improving the operations of our corporate store network, particularly the six stores which made up the Have More Fun estate. There has been positive traction here with collection up 5 percentage points to 27% and orders per man hour seeing a steady improvement. For the first time, we included corporate store managers, area managers and the corporate stores office team in our annual colleague survey, and we were pleased with the results, with overall engagement at 84% and 91% proud to work for Domino's. The key priority for the remainder of the year is completing the integration and process alignment of our head office and store operations, together with further reinforcing our position as an employer of choice.

Supply chain and infrastructure

Our new supply chain centre in Warrington is now serving 449 stores and we are pleased with its performance and service levels. We are undertaking trials with our franchisees to assess moving to cages and dollies for the majority of our deliveries to stores, from the sack-barrow method we use now. In the coming 24 months we also plan to invest in extending and upgrading our supply chain centre in Naas in Ireland and opening a small facility in Scotland.

Franchisee profitability

We are working more closely with franchisees to gain more consistent financial data, at the level of both store and franchisee profitability. In the first half, average store EBITDA for all stores was approximately £68.9k, equivalent to a 13% EBITDA margin, and at the franchisee level, taking into account a franchisees' central costs, H1 EBITDA margin was 10%.

The biggest challenge for franchisees remains the cost and availability of labour, particularly delivery drivers. 2019 food cost inflation for franchisees remains between 3% - 3.5%. There remains a headwind for some franchisees from donor stores from recent store splits, which are seeing longer profit recovery periods than has previously been the case. There is a wide range of EBITDA margins achieved both at a store and franchisee level, and we are focused on working with franchisees to optimise store and franchisee level profitability.

International

We own or control Domino's operations in Switzerland, Iceland, Norway and Sweden, and are a minority shareholder in Germany. The performance of our directly controlled operations has been challenging in the first half, with EBIT losses increasing significantly versus H1 2018 and Q2 losses higher than Q1. The weakest performance was seen in Norway, however we also saw increasing losses in Sweden and Switzerland, and Iceland profitability was impacted by the weak macro-economic backdrop. We have new management in Norway, Sweden and Switzerland, and have clear plans in place focused on improving our operational capability and financial performance. However, trading visibility remains weak, and we are therefore not in a position to provide quantitative guidance on the FY 2019 operating loss.

Total system sales from consolidated international operations were £49.8m in H1, down 3.4% year-on-year. On a constant currency basis system sales were up 0.4%. We made an underlying EBIT loss of £6.4m, compared to £1.8m in H1 2018. The breakdown of system sales and EBIT by country is shown on the table below.

At the start of the year, associated with the appointment of an International Managing Director and the creation of a small dedicated International management team, we started to treat International central costs separately. This includes the International management team and central functions such as International finance, IT and HR. Prior to 2019, central costs for International were attributed across both the UK & Ireland operations and individual international markets.

In Iceland we currently have 25 stores (25 at the end of 2018) and our ownership currently stands at 95.3%. Total system sales in Iceland were down 1.6% in local currency and down 10.7% on a reported basis. We generated an EBIT of £1.1m, compared to £1.8m in H1 2018. The biggest driver of this decline was the macro-economic background, which currently represents a significant trading headwind. Against this backdrop, our second half initiatives are primarily focused on labour productivity. During the period we relaunched the website, with encouraging early indications. Since the period end the Group has received a put option exercise notice in relation to the remaining 4.7% minority interest. Further information is contained within note 18.

In Norway we currently have 47 Domino's branded stores (42 at the end of 2018) and 10 Dolly Dimple's stores (12 at the end of 2018). We opened 3 Domino's branded stores in H1 and converted 2 Dolly Dimple's stores. We currently own 71% of Norway. Local currency system sales growth in Domino's branded stores was up 13.7%, driven by the 8 store openings and 5 conversions year-on-year. Total system sales in Norway were flat in local currency, and down 1.5% on a reported basis. Norway recorded an EBIT loss of £4.1m, compared to £2.6m in H1 2018.  

We have developed a comprehensive turnaround plan for our business in Norway, which we have started to implement. This includes colleague training to improve the quality of pizza making, a new pricing structure and marketing activity plan, and improved labour scheduling. We will assess the performance of this first phase at the end of this year before deciding our next steps in this market.

In Switzerland we currently have 21 stores (20 at the end of 2018) and we own 100% of the business. Local currency system sales in H1 were up 1.9%, with like-for-like sales down 5.7%. On a reported basis, system sales were up 5.2%. Switzerland recorded an EBIT loss of £1.7m, compared to £0.9m in H1 2018. While the store performance in Zurich has improved, Geneva remains challenging and this is a focus area for us in the second half. We have reengineered the product recently and are focused on driving a turnaround through a combination of this and improved labour efficiency.

In Sweden we currently have 9 stores (9 at the end of 2018; 6 stores at the end of H1 2018) and our ownership currently stands at 71%. Local currency system sales in H1 were up 17.5%, with like-for-like sales down 17.9%. On a reported basis, system sales were up 12.3%. Sweden recorded an EBIT loss of £1.8m, compared to £1.3m in H1 2018. We launched the Dominos global online ordering platform ("GOLO") in the first half, with early signs on the improvement in conversion rate encouraging.

Our share of post tax underlying profits from our German associate was £1.2m (H1 2018: £1.2m).

FY19 Guidance

We are today providing the following guidance for FY 2019:

• Underlying Depreciation & Amortisation c.£16m

• Underlying Interest (excluding foreign exchange movements) c.£6m

• Underlying Effective Tax rate c.22%

• Non-underlying items - no further cash non-underlying charges expected in H2

• Capital expenditure £25m - £30m for 2019, including £8m on International

• No further share buyback programme planned in FY19

• Net debt £220m - £230m

Financial review

* - See Note 2 to the financial information for details around the revenue restatement

System sales and Revenue

Group system sales increased 4.7% to £645.8m. System sales in UK & ROI increased 5.5% to £596.0m, while in the International segment they decreased 3.4% to £49.8m.

Group revenue grew by 3.5% to £295.6m. UK & ROI revenue increased 4.5% to £249.6m, including corporate store sales of £15.5m, offset by the associated supply chain centre sales. International revenue decreased 1.5% to £46.0m, with a disappointing performance across all markets. Group revenue has been restated to reflect the change in treatment of income and expenses relating to the NAF and eCommerce revenue, as set out in note 2 to the financial information. This restatement has had no impact on profits, cash flows or the balance sheet position and does not reflect any change in the commercial relationship with franchisees.

Underlying operating profit

In the UK & ROI, underlying operating profit increased 7.1% to £51.6m, slightly ahead of system sales growth. Our international businesses made an underlying operating loss of £6.4m compared to a £1.8m loss in the prior year period. Norway recorded the highest loss, at £4.1m (H1 2018: £2.6m), however we also saw increasing losses in Sweden and Switzerland, and Iceland profitability declined year-on-year. Group underlying operating profit decreased 2.6% to £45.2m.

Interest

Net underlying interest expense in the period was £2.9m, a £2.2m increase year-on-year. This primarily relates to £1.6m interest costs on the revolving credit facility, due to the higher debt position, and £0.6m from foreign exchange losses and other interest movements.

Taxation

The underlying effective tax rate was 22.2%, higher than 19.7% in the prior year due to tax losses in the international segment not subject to Group tax relief and the impact of disallowable expenses. Excluding these impacts, the UK & ROI underlying effective tax rate is 20.7%, which is higher than the UK statutory rate of 19% due to disallowable expenses and the impact of capital allowances.

Earnings per share

Underlying basic earnings per share for the period was 7.5p, down 3.8% year-on-year, reflecting the decline in profit partially offset by the lower weighted average share count year-on-year following the share buyback programmes. Underlying diluted earnings per share for the period was 7.5p, down 2.6% on the prior year.

Statutory basic earnings per share for the period was 5.3p, down 26.4% on the prior year. Statutory diluted earnings per share for the period of 5.3p was down 25.4% on the prior year.

Non-underlying

Net non-underlying items for the period totalled £10.5m (H1 2018: £3.4m). These costs are itemised in full in note 5 and summarised below:

·; £7.1m of costs (H1 2018: £0.7m; FY 2018: £2.9m) has been recorded associated with our contribution into the eCommerce fund for the development and build out of new web and app platforms which are scheduled to go live in the second half of 2019. This consists of £1.1m of accelerated amortisation (H1 2018: £0.7m) and a £6.0m commitment into the fund through reduction of the existing fund deficit. This cost represents the finalisation of our £10.0m commitment made to franchisees to contribute towards the development of the platform.

·; £2.2m of impairments have been recorded over our operations in Norway (£1.2m) and Switzerland (£1.0m) due to the performance of the businesses and the movements in asset base. This is following the impairments recorded in FY 2018 of £10.2m for Norway and £1.2m in Switzerland.

·; Amortisation of £0.5m (H1 2018: £0.4m) relates to the amortisation of the SFA ('Standard Franchise Agreement') intangible asset recognised on the corporate store acquisitions of Sell More Pizza in 2017 and Have More Fun in 2018.

·; A gain of £0.9m has been recorded in EBIT relating to revaluation of the put options over our investments in Norway, Sweden and Iceland as a result of the performance of the underlying businesses. Interest expense of £0.7m relates to the unwinding of the discount used in the valuation of the options.

·; A cost of £2.5m (H1 2018: £1.4m) has been recorded in relation to our share of the store conversion costs for the German associate.

Free cash flow and Net Debt

Overall Group net debt increased from £203.2m at 30 December 2018 to £238.8m, with dividends and share buybacks greater than the free cash flow generated in the period.

Underlying EBITDA was £52.4m (H1 2018: £53.4m).

Free cash flow was an inflow of £8.9m (H1 2018: £12.2m), which consists of an inflow of £19.1m in our UK business and an outflow of £10.2m in our international business.

Funding to our German associate of £1.4m (H1 2018: £10.8m) represents our continued contribution following the Hallo Pizza acquisition in 2018.

The Group experienced a working capital outflow of £22.2m (H1 2018: £8.8m) in the period which primarily consisted of £7m increase in inventory levels for Brexit planning, £7m of reduction in creditors as a result of seasonal fluctuations, £2m in timing of tax payments, £3m movement in accruals and £2m in international working capital movements. Of these working capital movements, we expect c.£9m to unwind in H2 2019. We expect the increased inventory level related to Brexit to be maintained into 2020.

Capital expenditure in the period was £11.8m (H1 2018: £18.3m), with the year-on-year decrease primarily due to spend on the Warrington Supply Chain Centre in H1 2018. Overall capital expenditure in the UK & Ireland was £7.5m (H1 2018: £13.6m), of which £0.7m was considered strategic capital expenditure on corporate stores and IT systems, £2.5m is considered maintenance capital expenditure and £4.3m in capital expenditure on the new IT platform. International capital expenditure was £4.3m, primarily on new corporate store openings.

Dividends received relates to amounts received from our UK joint venture and associates. The net interest cash outflow of £2.9m (H1 2018: £0.8m), has increased year-on-year due to the increased borrowings.

Non-underlying cash payments of £0.5m relate primarily to cash costs of restructuring provisions recognised in the prior year. The H1 2018 non-underlying cash of £4.0m relates primarily to the SCC restructuring programme and the Dolly Dimple's conversions in Norway.

Acquisitions in H1 2018 of £30.2m related to the cash paid on the acquisition of the further shareholding in Iceland of £26.8m and the settlement of the working capital adjustment on the Sell More Pizza corporate stores acquisition in 2017.

Share buybacks of £17.4m (H1 2018: £38.9m) represents the completion of the share buyback scheme announced in 2018 of £16.0m and £1.4m of EBT share purchases.

Capital Employed and Balance Sheet

Intangible assets have decreased from £106.7m to £102.7m during H1 2019 as a result of foreign exchange movements, amortisation of the eCommerce platform and £0.8m of impairments of intangibles in Norway and Switzerland (£0.8m of the overall £2.2m impairment discussed in the non-underlying section). The decrease from 1 July 2018 to 30 June 2019 is as a result of the impairment recorded in H2 2018 over our international business, offset by additions to goodwill for the Have More Fun acquisition and other intangible assets for the eCommerce platform.

Property, plant and equipment has increased during H1 2019 from £107.6m to £110.1m largely as a result of capital additions in UK & ROI as explained in the capital expenditure section above in excess of depreciation, offset by £1.4m of impairments in Norway and Switzerland (£1.4m of the overall £2.2m impairment discussed in the non-underlying section).

Investments, associates and joint ventures represents our investment in the German associate and our investment in Full House and West Country in the UK, which are treated as associates and joint ventures respectively. This also represents our investment in Shorecal during H2 2018. There have been no significant movements in the investment balances in H1 2019, with the largest movement being foreign exchange.

The market access fee asset, representing the fee receivable following our disposal of the German MFA ('Master Franchise Agreement') in 2016, has increased in H1 2019 from £8.9m to £9.3m as a result of the unwind of the discount for the future amounts receivable.

Deferred consideration represents the amounts owed to the Group following our disposal of the Shayban joint venture in H2 2018.

Working capital has decreased during H1 2019 from a £8.6m liability to an £8.9m asset as a result of the factors outlined in the cashflow section above. A reconciliation of the movement in working capital is provided in note 20 to the financial information.

The put option liability of £11.6m has decreased from £11.8m as a result of revaluation decreases of £0.9m as described above in the non-underlying section, partially offset by unwind of the discount of £0.7m.

Tax liabilities have increased from £11.8m to £14.9m as a result of timing of cash payments.

During H1 2019 the Group completed the previously announced share buyback programme and therefore no ongoing obligation remains.

Total equity has reduced by £6.5m from £2.5m to £(4.0m) due to the recognition of total comprehensive income for the period of £19.5m and favourable other reserve movements of £0.6m, offset by net share buyback impacts of £1.6m and dividends paid of £25.0m.

Group income statement

26 weeks ended 30 June 2019

Group statement of comprehensive income

26 weeks ended 30 June 2019

Group balance sheet

At 30 June 2019

Group statement of changes in equity

26 weeks ended 30 June 2019

Group cash flow statement

26 weeks ended 30 June 2019

Notes to the Group interim report

26 weeks ended 30 June 2019

1. General information

Domino's Pizza Group plc ('the Company') is a public limited company incorporated in the United Kingdom under the Companies Act 2006 (registration number 03853545). The Company is domiciled in the United Kingdom and its registered address is 1 Thornbury, West Ashland, Milton Keynes, MK6 4BB. The Company's ordinary shares are listed on the Official List of the FCA and traded on the Main Market of the London Stock Exchange. Further copies of the Interim Report and Annual Report and Accounts may be obtained from the address above.

2. Basis of preparation

This interim report has been prepared in accordance with IAS 34 'Interim Financial Reporting'. The financial information contained in this interim report does not constitute statutory accounts as defined by Section 435 of the Companies Act 2006.

The interim results for the 26 weeks ended 30 June 2019 and the comparatives to 1 July 2018 are unaudited but have been reviewed by the auditors. A copy of their review report has been included at the end of this report.

The financial information for the 52 weeks ended 30 December 2018 has been extracted from the Group financial statements for that period. These published financial statements were reported on by the auditors without qualification or an emphasis of matter reference and did not include a statement under section 498(2) or (3) of the Companies Act 2006 and have been delivered to the Registrar of Companies.

The interim financial information has been prepared on the going concern basis. This is considered appropriate, given the financial resources of the Group including the current position of the banking facilities, together with long-term contracts with its master franchisor, its franchisees and its key suppliers. The Group has considered the overall business risks but has not identified any risks that could impact the financial performance or position of the Group as at 30 June 2019. The Group has sufficient headroom to conform with covenants on its existing borrowings and sufficient undrawn facilities to service its operating activities and ongoing capital requirements.

The interim financial information is presented in sterling and all values are rounded to the nearest tenth of million pounds (£0.1m), except when otherwise indicated. The financial statements are prepared using the historic cost basis with the exception of the derivative financial assets, contingent consideration and gross put option liabilities which are measured at fair value in accordance with IFRS 13 Fair Value Measurement.

Restatement of National Advertising Fund and eCommerce funds

During the period, the Group has changed the accounting policy around the treatment of the National Advertising Fund ("NAF") and eCommerce fund (together "the Funds").

Stores within the Domino's Pizza system contribute into the Funds which are designed to build store sales through increased public recognition of the Domino's Pizza brand and the development of the eCommerce platform on which customers place orders. The Funds are managed with an objective of operating to a break-even position.

In the 52 weeks ended 30 December 2018, following the implementation of IFRS 15, the Group considered the treatment of the Funds. All Fund income is designated for specific purposes therefore the Group was considered to act as agent for the Funds. All the income and expenses of the Fund were not included in the Group income statement. Any short-term timing surplus or deficit of the fund was carried in the Group balance sheet.

During the period, the Group has reconsidered the contractual arrangements around the operation of the Funds in conjunction with the new auditors of the Group. Whilst commercially and through past practice, the use of the Funds are directed by franchisees through the operation of the Marketing Advisory Committee ("MAC"), the terms of the SFA ("Standard Franchise Agreement") allow the Group to control the Funds. The Group monitors and communicates the assets and liabilities on a separate basis, however from a legal perspective under the franchise agreement these assets and liabilities are not legally separated.

As a result, for the purposes of accounting under IFRS 15 we consider that we are principal over the operation of the Funds. For this reason, contributions by franchisees into the Funds will be treated as revenue, and expenses which are incurred under the fund will be treated as administrative expenses by the Group. This results in an increase to statutory revenue and administrative expenses of the Group. Revenue and cost of sales related to intercompany transactions from our corporate stores in the UK are eliminated in the Group result.

Accounting policy around revenue recognition for NAF and eCommerce funds

In assessing the nature of the revenue we have considered the performance obligations stated under the franchise agreement. Franchisees contribute a percentage of their system sales into the Funds. For both the NAF and eCommerce sections of the SFA, the Group is committed to use these funds to provide advertising and marketing services for the NAF contributions, and to provide development and maintenance of the eCommerce platforms, together with other ancillary services such as merchant credit card services for our franchisees.

The Group provides these services to franchisees at cost and the overall objective is to manage the funds to reach nil surplus or deficit. Each of these revenue streams is considered to be a performance obligation.

The overall transaction price of the contract is the variable revenue received from the franchisees as a percentage of system sales. Revenue is then recognised on a franchisee portfolio basis, based on the satisfaction of the performance obligation over time, and is measured based on an input basis, being the costs incurred.

The result of the above treatment is that revenue is recognised in line and equal to the costs we incur over both funds. Any timing differences relating to the revenue received compared to the costs incurred is held as a contract asset or liability on the balance sheet. As both arrangements are under the same franchise agreement, these funds are held on a net basis, and presented within trade and other receivables or trade and other payables based on the net position of the funds.

Restatement of income statement

Total NAF and eCommerce revenues recognised in the 26 weeks ended 30 June 2019 were £27.9m (26 weeks ended 1 July 2018: £26.5m, 52 weeks ended 30 December 2018: £53.9m), and therefore revenue in the current period and comparative periods has been increased by these amounts. Cost of sales has been decreased by £0.7m (26 weeks ended 1 July 2018: £0.5m, 52 weeks ended 30 December 2018: £1.1m) and administrative costs has increased by £28.6m (26 weeks ended 1 July 2018: £27.0m, 52 weeks ended 30 December 2018: £55.0m). There is no impact on operating profit, profit before interest and taxation or on cash flows.

The revenues, cost of sales and administrative expenses are recognised in underlying results. The impact of the restatement on the Group income statement in comparative periods has been set out below:

Segmental reporting

The restatement relates solely to UK & Ireland, and therefore the impact has been allocated to the appropriate segment. If the change in accounting policy was not applied, the segmental revenue for UK & Ireland for the current period would be £221.7m. The restatement of segmental results for the 26 weeks ended 1 July 2018 and the 52 weeks ended 30 December 2018 is set out below:

Other disclosures

In accordance with the policy as set out above, there have been no restatements made to the Group balance sheet, Group statement of comprehensive income, Group statement of changes in equity or Group cash flow statement.

Contract asset and liability position

The timing difference, being the difference between the amounts received under the contract and expenditure incurred, is held on the balance sheet and presented in trade and other receivables or trade and other payables on a net basis across both funds. As the relevant performance obligations are under the same contract with the customer, it is appropriate to present the contract assets or liabilities on a net basis.

The Group has the right to vary the charges for either fund to recover any deficits on a prospective basis, and for that reason there is no concern over the recoverability of amounts. The Group also has the ability to recover any deficit through decreased future charges into the fund. Surpluses or deficits naturally arise because of timing differences between cash flows of the NAF and eCommerce expenditure and contributions received from the franchisees.

As at 30 June 2019 the gross amounts of the NAF and eCommerce fund were as follows:

Accounting policies and new standards

The consolidated accounts for the 52 weeks ended 30 December 2018 were prepared in accordance with IFRS as adopted by the EU. The accounting policies applied by the Group are consistent with those disclosed in the Group's Annual Report and Accounts for the 52 weeks ended 30 December 2018, except for as described in the restatement section above. There is no impact from new standards and interpretations effective for the first time for the reporting period.

New standards and interpretations not applied

The following standards and interpretations that are relevant to the Group, which have not been applied in these financial statements, were in issue but not yet effective:

IFRS 16 Leases (not yet adopted)

IFRS 16, replacing IAS 17, provides a single lessee accounting model, requiring lessees to recognise right of use assets and lease liabilities for all applicable leases. The standard has an effective date of 1 January 2019. Due to the current period commencing on 31 December 2018, the first period for which the standard will be effective will be the year ended 27 December 2020.

IFRS 16 will impact on the amounts recognised in the Group's consolidated financial statements. On adoption of IFRS 16, for leases where we are the lessee, and there is no sub lease to a third party, the Group will recognise within the balance sheet a right of use asset and lease liability for all applicable leases. Within the income statement, rent expense will be replaced by depreciation and interest expense. This will result in a decrease in cost of sales and an increase in finance costs. There is no impact on cash flows or commercial operations for the Group.

The above applies to our corporate stores in the UK and international businesses, together with our leased equipment in the UK and international, largely in the distribution and supply chain area. In the year ended 30 December 2018, the total rental expense for corporate stores across UK & Ireland and International operations was £6.0m, and equipment lease charges was £5.1m.

Across the UK & Ireland franchise business, the Group operates as intermediate lessor for a significant proportion of the franchisee store leases, and holds both the head lease with the landlord and the sub lease with the franchisee. The payments for the majority of these leases are 'back to back' (e.g. the head lease and sub lease payments made and received are the same), however the length of contractual lease may differ. The annual payments under such leases are between £20m and £25m on the head leases consistent with the receipts on the sub leases.

Under IFRS 16, where the sublease to the franchisee represents substantially all of the right of use head lease to the landlord which we hold, a lease receivable will be recognised from the franchisee and a lease payable will be recognised to the landlord. Where the sublease is not substantially all of the right of use head lease, but management judges that it is likely the sublease will be renewed to become substantially all of the right of use asset then the same treatment will be applied. This will result in lease receivables and lease liabilities being recorded on the balance sheet with interest income and expense recognised separately in the income statement, replacing revenue and cost of sales.

The key judgement around the treatment outlined above is the assessment of the extension terms of the contracts. Franchisees enter into a franchise agreement with us for a period of 10 years, with extension options beyond the initial term. Under the agreement, franchisees must enter into a separate lease agreement with the Group for the trading store (with a low number of exceptions where stores are directly held by the franchisee).

The usual length of a lease with a landlord is between 10 and 20 years. The sub lease with the franchisee is usually 10 years, as it is limited by the length of the franchise agreement. There are therefore a large number of leases where the term is not 'back to back'.

The franchise agreement contains options around extension, and by nature of the agreements being linked through the franchise agreement requirements, we have considered that the extensions to the SFA should be considered when assessing the sub lease length.

If this judgement were to differ, then a high proportion of leases, where the term differs by up to 10 years, would be treated as an 'operating lease', with lease income recognised in earnings and no receivable shown. On the head lease, depreciation charges and interest would be recorded in the income statement and an asset and liability recorded on the balance sheet. This would lead to volatility in the income statement and an asset position of the group which is not consistent with the commercial substance of the agreements.

We currently consider, for a significant majority of the leases, that we can determine the length of the leases to be coterminous based on the franchise agreements in place and the likelihood of sub lease extension, and therefore expect a majority of these leases to be considered 'back to back' with limited income statement impact.

We are currently concluding on the assessment of the judgements above, and the overall impact of the standard. The impact will be communicated in the December 2019 Annual Report.

3. Revenue

Revenue recognised in the income statement is analysed as follows:

4. Segmental information

For management purposes, the Group is organised into two geographical business units based on the operating models of the regions: the United Kingdom and Ireland operating more mature markets with a sub-franchise model and limited corporate stores; and International whose markets are at an earlier stage of development and which operate predominantly as corporate stores. The International segment includes Switzerland, Germany, Iceland, Norway and Sweden. These are considered to be the Group's operating segments as the information provided to the chief operating decision makers, who are considered to be the Executive Directors of the Board, is based on these territories. Revenue included in each segment includes all sales made to franchise stores (royalties, sales to franchisees and rental income) and by corporate stores located in that segment.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss. Group financing (including finance costs and finance revenue) and income taxes are managed on a Group basis and are not allocated to operating segments.

Unallocated assets include cash and cash equivalents and taxation assets. Unallocated liabilities include the share buyback obligation, bank revolving credit facility and taxation liabilities.

Operating segments results