Dominos Regulatory News (DOM)

LEI: 213800Q6ZKHAOV48JL75

7 August 2018

DOMINO'S PIZZA GROUP plc

INTERIM RESULTS FOR THE 26 WEEKS ENDED 1 JULY 2018

Growth driven by UK; full year outlook confirmed

Financial highlights

· Group system sales up 12.8%

o UK system sales up 8.3%: 22 new stores, 5.9% like-for-like growth (Q2: 4.7% LFL); ROI sales up 2.5%

o Strong local currency international growth: Switzerland +13.0%, Iceland +5.5%, Domino's Norway +180.5%, Sweden +56.4%

· Underlying PBT up 2.5% and Underlying Basic EPS up 6.8%

· Statutory PBT down 9.7% and Basic EPS down 6.5%

· Non-underlying expenses of £4.0m relating to M&A integration and IT and supply chain transformation cash outflow

· Net debt £182.1m, 1.62x LTM EBITDA at period end

· Interim dividend +8.0% to 4.05p; £38.9m share purchases in H1 2018

Strategic progress

· Digital investments to support franchisee efficiency and drive customer engagement

o GPS in 603 UK & ROI stores: significant labour efficiencies; H1 franchisee store profitability up 5.3%

o Investment in new e-commerce and app platforms planned, to improve the customer experience further

· Strong operational focus in acquired businesses

o London: volume-driven growth, staff turnover down

o International: labour cost issues affected H1; actions taken now coming into effect'

· Warrington Supply Chain Centre operational, production ramped to 130 stores

· Full year Underlying PBT expected to be in line with current market expectations

o Around 60 new UK stores for 2018, of which several uncertain on timing; unchanged long term target of 1,600

o Total Group capex around £30m

o Completion of £50m share purchase programme

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

"It's been another good trading period for Domino's. In the UK, despite continued consumer uncertainty, we've achieved further like-for-like growth by maintaining our clear focus on product, service and value for customers. Our ongoing investments in supply chain infrastructure and our IT platform will support future growth and customer engagement. Domino's is proud to be one of the most successful franchise businesses in the UK, and we will continue to work with our franchisee partners to promote the brand and the strength of the system.

"Whilst our international businesses continue to make good progress with customers and sales, it has taken us some time to refine the operating model and cost base at store level, particularly in Norway. We are confident that the changes we have made will result in a better performance in H2, and believe that these businesses offer significant long term growth potential as we export our expertise in digital, supply chain and franchisee management.

"The Board expects that full year Underlying Profit Before Tax will be in line with current market expectations6. Our confidence in the future is underlined by continued growth in the dividend, and our ongoing investment in our own shares through the buyback programme."

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, and corporate store sales in the UK, Switzerland and the Nordics

5 Non-underlying items are defined as being items that are non-recurring, not part of the ordinary course of business or reduce understandability of business, and are disclosed separately as non-underlying items in note 5 to the accounts.

6 The range of current market expectations for 2018 Underlying Profit Before Tax is £95.9m - £101.4m, based on company-gathered consensus estimates

For further information, please contact:

For Domino's Pizza Group plc:

Peregrine Riviere 07909 907193

Maitland:

Clinton Manning 020 7395 0473 or 07711 972662

Sam Cartwright 020 7395 0415 or 07827 254561

A presentation for analysts and investors will be held at 9.00am on 7 August 2018 at Numis Securities Auditorium, LSE Building, 10 Paternoster Square, London EC4M 7LT.

The webcast can be viewed at: https://www.investis-live.com/dominos/5b3cae5f73e8551100780516/onbb

A dial-in is also available, with details as follows:

Participant dial-in numbers

Within United Kingdom (Local) 020 3936 2999

From all other locations + 44 20 3936 2999

Participant Access Code 324792

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, 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. As at 1 July 2018, we had 1,213 stores across six markets, including 1,067 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 Maitland on +44 (0)20 7379 5151.

Performance overview

Total Group system sales increased 12.8% to £616.6m and statutory revenue increased 22.6% to £259.1m, driven by strong store openings in 2017 and continued progress in H1, continued UK like-for-like growth and the impact of the Nordic acquisitions year-on-year. UK system sales were up 8.3% and ROI up 2.5% in local currency, with International operations recording system sales of £51.5m, or 8.4% of the Group total.

Group underlying profit before tax rose 2.5% to £45.7m, reflecting the UK's top line growth and stable margins, and an improved contribution from Germany year-on-year, offset by investments for the long term in Norway and Sweden, and rising interest costs as a result of higher net debt. Underlying basic EPS rose 6.8% to 7.8p, with growth in profitability further enhanced 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 4.05p, an increase of 8.0%.

Underlying operating cash flow was £35.0m, and net debt increased to £182.1m as a result of the Iceland and Germany investments completed in January 2018, the £38.9m of share purchases in H1, capex of £18.3m and the 2017 final dividend of £25.2m.

Organisation

We are making a number of changes in senior management team responsibilities, to reflect the growing importance of the International operations and the long term opportunity they represent. Simon Wallis, UK & ROI Chief Operating Officer, will from October 2018 become International Managing Director, with direct responsibility for Switzerland, Iceland, Norway and Sweden.

Tony Holdway, UK & ROI Marketing Director, will now report directly to David Wild, Group CEO. The UK & ROI team will be enhanced by the appointment of a new Operations Director, Scott Bush, who has fifteen years' experience with Domino's Pizza Enterprises, most recently as General Manager of Domino's New Zealand.

We have commenced our search for the new Group CFO, and are well advanced in the process to make an interim appointment. We will provide a further update in due course.

UK

The UK trading environment continues to be uncertain. Consumers' disposable incomes are flat, and operators in the casual dining sector continue to experience inflationary pressures from the national living wage, food costs and business rates. Domino's remains well placed to thrive in this market. The combination of our scale, brand, value proposition and service continues to resonate with customers, translating into sustained growth in sales and profitability.

System sales in H1 were up 8.3% year-on-year, with order growth of 8.1% and average ticket growth of 0.1%. Like-for-like growth, excluding the impact of new stores in split territories, was 5.9%. Like-for-like growth in Q2 at 4.7% reflected the prolonged period of hot weather. This was only partially offset by the benefits of the World Cup.

Franchisees opened 22 new stores in H1, taking the UK total to 1,067. The lower rate of store openings in H1 reflects the very strong performance in the latter part of 2017. We now expect around 60 openings in the UK this year, including several planned stores for which the timing is less certain. The slowdown in our expected rate of growth reflects an expansion strategy that is increasingly focused on the development of smaller and medium-sized franchisees, where we see strong demand for store openings, as we look to grow the next generation of Domino's entrepreneurs and broaden our long term growth platform.

Our progress under each of our areas of strategic focus is outlined below.

Customer value and experience

We operate in a competitive and rapidly-evolving marketplace. Demand for delivered food continues to grow, driven by the ease and convenience of digital ordering, the quality of home entertainment and the comparative costs of eating out. Despite the increasing breadth of choice provided by marketplace apps and delivery service companies, pizza remains the leading category, because it is a cuisine with universal appeal, is well suited to delivery and generates an attractive margin for operators while still representing excellent value for money for customers.

One of our primary areas of focus over the last 12 months has been to improve our value perception with customers, through clearer communication and more relevant offers. We have made excellent progress in this regard: in H1 2018, our customer survey Feed Us Back recorded 33.1% of customers rating us 5/5 for value, compared to 24.0% in the prior period. This has also been reflected in our trading performance: of our like-for-like sales growth of 5.9%, 4.9% was a result of like-for-like order volume growth. We have also held achieved discounts relatively steady, with the average discount on menu prices at 38.5%, compared to 37.9% in H1 2017.

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 14.0% year-on-year and now represent 78.7% of system sales - and 88.2% of total delivery sales. We have recently taken the decision to invest in new platforms for e-commerce and app development, which will further improve the customer experience while enabling us to introduce enhancements more quickly and flexibly.

Collection remains an important growth area for Domino's: every time our franchisees open a store, they are getting closer to customers and creating a new neighbourhood of potential take-away customers. Those 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 8.8% in H1.

Brand

'The Official Food of Everything' campaign, launched in September 2017, has gone from strength to strength with increased levels of customer awareness and engagement. The World Cup was a very successful engagement platform for Domino's. The campaign saw the launch of a new 'Meatfielder' pizza which has swiftly become a menu bestseller (mixing at up to 7% of orders), and a broad media plan across digital outdoor (reacting to the match action as it happened), radio, sponsorship of Sky Sports News, and content through social media.

Our collaboration with SportsBible saw the Domino's content viewed and shared over 9.5m times - the most engaging content in the site's history. In addition to being one of the best performing football related videos globally, one of the executions has been viewed nearly 500,000 times and was the sixth most watched video on YouTube in June.

Subsequent to the period end, we announced our multi-year strategic partnership with Gfinity, a leading e-sports solutions provider. This deal, alongside our sponsorship of the ITV Hub, shows how our innovative marketing mix is evolving in line with customer viewing and activity habits.

Franchisee profitability and alignment

Our franchisees remain some of the best entrepreneurs and operators in the Domino's system worldwide. Our interests are aligned: we all benefit from increased scale, through the growing value of the brand, greater supply chain efficiency and the shared investment in new innovations to improve the customer experience continuously.

One of our key strategic imperatives is to maintain or grow franchisee profitability per store, to allow a rapid payback on new store opening investments, and very strong returns from mature stores. Our franchisees are facing the same inflationary pressures as other operators in the casual dining market, but the enduring popularity of the offer and the strength of store level economics provide significant insulation from these headwinds.

In H1, EBITDA per mature store (excluding the short term impact of stores affected by splits) rose 5.3% to approximately £68,000. At this level, franchisees continue to achieve a very attractive return on their investment, whether in a virgin territory or a split territory. Good like-for-like growth, as well as efficiencies achieved through GPS, offset rising food and labour costs. We have now deployed GPS to 588 stores in the UK and a further 15 in ROI, with franchisees typically achieving labour efficiencies of 80-90 basis points of sales against a 30 basis point cost of operation.

Corporate stores

After our acquisition of a 75% stake in Sell More Pizza, the largest London franchisee, last year, we now directly operate 25 stores in the London area. Like-for-like sales growth was above the average for London, as we trialled new menu pricing and focused on driving order volume growth. We have also implemented a number of operational changes to reduce employee turnover, enhance efficiency and improve customer service. We will open two new stores in 2018 in these territories, and have also facilitated a further three openings in the pipeline through address swaps with neighbouring franchisees. In addition, we have entered into agreements to sell on three stores to neighbouring franchisees to allow more effective territory development.

Just after the period end, we entered into an agreement to buy a portfolio of six stores from another franchisee in London. These stores will be managed as part of Sell More Pizza, and provide us with an opportunity to strengthen our position in London.

Supply chain and infrastructure

In May we completed our single biggest ever investment, our new £38m supply chain centre in Warrington in the North West of England. By the end of the period, it was delivering dough and other food and non-food supplies to 130 stores, and this will continue to ramp up in H2. The Warrington facility gives us significant additional capacity and operating efficiencies as we head towards our target of 1,600 stores across the UK.

The opening of Warrington and consideration of our longer-term plans resulted in a review of our manufacturing and distribution operations elsewhere in the UK, allowing us to remain streamlined and competitive. Subsequent to the period end, we have closed activities at a third-party distribution centre in Highbridge, and are in consultation with colleagues at our supply chain centre in Penrith, with a proposal to scale down operations from September, potentially closing the site in March 2019.

We have also been reviewing our customer IT environment, to make sure that we are making the most effective use of our investment and developing the tools to keep us nimble and innovative in the future. As a result, we plan to build new platforms for the app and for ecommerce, to maintain our lead in digital and further enhance the customer journey. This will not lead to an increase in planned investment, as existing spend will be diverted to the new infrastructure, but it will result in accelerated depreciation, reflected in non-underlying results, of approximately £5.9m over the next two years as the current platforms are replaced.

Republic of Ireland

ROI local currency system sales increased by 2.5% in the period, and by 5.4% as reported to £30.1m. Our first campaign of the year impacted on value perception, which has not yet been recovered. In addition, prolonged periods of adverse weather have also affected sales. Online continues to grow strongly, with sales up 15.1% in H1, and the market remains highly profitable for the Group and our franchisees. Subsequent to the period end, we opened our 50th store in ROI at Ringsend.

International

We own or control Domino's operations in Switzerland, Iceland, Norway and Sweden, and are a minority shareholder in Germany. All of these businesses offer attractive growth opportunities in markets where pizza is popular and average sales per store are already, with the exception of Germany, at levels it took the UK many years to achieve. However, establishing and developing the right operating model for each market, and building the infrastructure and scale to generate attractive profitability, takes time. These are investments for the long term, and the promotion of Simon Wallis to International Managing Director underlines the importance of these markets to the Group.

Total system sales from our consolidated international operations were £51.5m in H1, up 116.4% year-on-year. We made an underlying operating loss of £1.8m, with growing underlying profits in Iceland and Germany offset by losses in Switzerland, Norway and Sweden. The share of losses attributable to non-controlling interests in Norway and Sweden mitigates the impact on the Group's share of net profits.

In Switzerland, local currency system sales in H1 were up 13.0%, with like-for-like sales up 6.8%. Online sales continue to make good progress, rising 49.8% year-on-year. We opened one new store in H1, taking the total to 19, and plan to open around five more in H2.

In Iceland, local currency system sales were up 5.5%, with like-for-like sales up 2.9%. In January 2018, we increased our ownership of Domino's Iceland to 95.3%.

In Norway, we continue to make progress with the conversion of Dolly Dimple's stores, with strong sales uplifts on conversions. We now operate 34 stores under the Domino's brand, and 49 stores in total. Total Domino's system sales were up 180.5% in local currency, with 5.0% like-for-like growth. Losses were higher than anticipated in H1, with labour cost ratios above budget. A recovery plan is now in place and labour costs were reducing by the end of the period.

In Sweden, our six stores are trading well, and we recorded system sales growth of 56.4%. During H1 we installed a small commissary. We expect to open around five stores in H2.

Our German associate is benefiting from increased scale after the Hallo Pizza acquisition completed in January 2018, with integration progressing well. The business remains on target for 500 stores by 2022. Aside from the increase in our share of profits from the associate, we also recognised £2.5m of non-underlying income as a result of the increase in likely future value from the Market Access Fee.

Outlook and guidance

The first half of the year has been in line with the Board's expectations, we expect the full year Underlying Profit Before Tax to be in line with current market expectations, and we remain confident of the long term growth prospects for the Group. As outlined above, we now expect to open around 60 stores in the UK this year, with some uncertainty as to the timing of several of these openings. We still expect capex for 2018 to be around £30m.

Finally, we will continue to balance the long-term needs of the business with returns of excess capital to shareholders. We made £38.9m of share purchases in H1, and plan to complete our £50m programme for 2018 in the coming weeks.

Financial review

The Group operates across a number of territories. The key performance indicators shown below relate to continuing operations.

System sales and Revenue

Group system sales increased 12.8% to £616.6m. System sales in UK & ROI increased 8.1% to £565.1m, while in the International segment they increased to £51.5m.

Group Revenue grew by 22.6% to £259.1m. UK & ROI revenue increased 13.3% to £212.4m, including corporate store sales of £11.1m in the segment as a result of the acquisition in October 2017, offset by the associated supply chain centre sales. International revenue increased 96.2% to £46.7m, which reflects the Nordic acquisitions being consolidated for the full period in the current year versus the comparative which was the period of acquisition.

Underlying operating profit

Underlying operating profit increased 4.7% to £46.4m, due to system sales growth in UK & ROI, offset by an increased loss in International.

In the UK & ROI, underlying operating profit increased 8.1% to £48.2m, in line with the system sales growth, also of 8.1%. Our international businesses made an underlying operating loss of £1.8m compared to a £0.3m loss in the prior year period.

Interest

Net interest expense in the period was £0.7m, a £1.0m increase year-on-year.

Taxation

The underlying effective tax rate was 19.7%, higher than 19.6% in the prior year due to tax losses in the international segment not subject to Group tax relief, partly offset by the decrease in the UK Corporation tax rate in April 2017.

Earnings per share

Underlying basic earnings per share for the period was 7.8p, representing 6.8% growth over last year and reflecting the growth in Profit before tax, and the lower weighted average share count year-on-year. Underlying diluted earnings per share for the period was 7.7p, up 6.9% on the prior year.

Statutory basic earnings per share for the period was 7.2p, down 6.5% on the prior year. Statutory diluted earnings per share for the period of 7.1p was down 6.6% on the prior year.

Non-underlying

The Group has presented non-underlying items separately to provide additional information to investors about the Group's performance. The classification of non-underlying items is shown in the table below and explained in note 5.

Underlying free cash flow

Underlying operating profit was £46.4m. Capex in the business, excluding the new supply chain centre in Warrington, was £8.8m and there was a £8.8m working capital outflow as a result of timing of the corresponding inflow at year end. Underlying operating cash flow was £35.0m giving a conversion rate from underlying operating profit of 75%.

Group free cash flow excludes significant growth capex and is defined in the alternative performance measures section of the financial statements.

Net Debt

Net debt and leverage

Overall Group net debt increased from £89.2m in 2017 to £182.1m, with the free cash flow offset by planned organic and strategic investments and returns to shareholders through dividends and share purchases.

Investment in the business consisted of £18.3m in capex and £41.0m acquiring a further shareholding in Iceland, funding of Daytona to acquire Hallo Pizza and the remaining working capital payment for London Corporate Stores. Returns to shareholders of £64.1m in the period consisted of £25.2m in dividend payments and £38.9m in share purchases.

Last 12 months net debt/EBITDA ratio increased from 0.6x to 1.6x as a result of this continued investment.

Group income statement

26 weeks ended 1 July 2018

Group statement of comprehensive income

26 weeks ended 1 July 2018

Group balance sheet

At 1 July 2018

Group statement of changes in equity

26 weeks ended 1 July 2018

Group cash flow statement

26 weeks ended 1 July 2018

Notes to the Group interim report

26 weeks ended 1 July 2018

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 1 July 2018 and the comparatives to 25 June 2017 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 53 weeks ended 31 December 2017 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 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.

The comparatives within note 4 to the interim accounts have been restated to consistently allocate goodwill, the gross put option liability and the market access fee between segments.

Discontinued operations

In the Group's financial statements, the results and cash flows of discontinued operations are presented separately from those of continuing operations. An operation is classified as discontinued if it is a component of the Group that (i) has been disposed of, or meets the criteria to be classified as held for sale, and (ii) represents a separate major line of business or geographic area of operations or will be disposed of as part of a single coordinated plan to dispose of a separate major line of business or geographic area of operations. The discontinued operations results and cash flows relate to the sale or closure of the Group's directly managed German stores.

Accounting policies and new standards

The consolidated accounts for the 53 weeks ended 31 December 2017 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 53 weeks ended 31 December 2017, except for those that relate to new standards and interpretations effective for the first time for the reporting period and will be adopted in the current period financial statements.

§ Initial adoption of IFRS 9 Financial Instruments

IFRS 9 has replaced IAS 39 Financial Instruments: Recognition and Measurement, covering the classification, measurement and derecognition of financial assets and financial liabilities, together with a new hedge accounting model and the new expected credit loss model for calculating impairment. The standard has an effective date of 1 January 2018.

The new standard has had the following effects on the Group's financial statements:

The Market Access Fee, a derivative instrument relating to the underlying performance of the associate company Daytona JV Limited, was classified as an available-for-sale financial asset under IAS 39 and previously classified as being at Fair Value through Other Comprehensive Income (FVTOCI). Under IFRS 9 this derivative instrument is now classified as Fair Value through Profit or Loss (FVTPL). There have been no changes in the fair value of the instrument in previous periods and therefore there is no change to opening balances within equity.

The Group's impairment provision on financial assets measured at amortised cost (such as trade and other receivables) have been calculated in accordance with IFRS 9's expected credit loss model, which differs from the incurred loss model previously required by IAS 39. The Group's history of low credit losses as a result of strong franchisee profitability and cash sales for corporate store sales has resulted in no change to the provision value previously recorded and there is no change to the opening balances within equity.

The Group has chosen not to restate comparatives on adoption of IFRS 9 and, therefore, any changes would have been processed at the date of initial application and presented in the statement of changes in equity for the 26 weeks to 1 July 2018.

§ Initial adoption of IFRS 15 Revenue from Contracts with Customers

IFRS 15 has replaced all existing revenue requirements in IFRS and applies to all revenue arising from contracts with customers unless the contracts are within the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard has an effective date of 1 January 2018.

The Group has applied the standard using the modified retrospective method in accordance with paragraph C3 (b) of the standard, requiring any cumulative impact to be recognised as an adjustment to the opening balances within equity.

The Group's revenues that are applicable for IFRS 15 are royalties, franchisee fees, sales to franchisees and corporate store sales. The Group has performed the five-step model on each of these elements, identifying the contracts, the performance obligations, transaction price and then allocating this to determine the timing of revenue recognition. For each of these there is no impact on the timing of transfer of control and therefore no impact on the timing of recognition of revenue.

The Group considered the accounting policy for the National Advertising Fund (NAF) on adoption of IFRS 15. The Group operates the NAF on behalf of the franchisees, with the NAF designated for marketing and advertising. The Group acts as agent for the NAF and any short-term timing surplus or deficit is carried in the Group balance sheet within working capital. There is no impact on the Income Statement, which is consistent with prior years.

The Group's profit before tax remains unchanged and no adjustments to any line items have been made to the opening balances within equity.

Rental income on leasehold and freehold property falls outside of the scope of IFRS 15.

§ Other standards adopted

The following standards adopted in the current period have not had a significant impact on the financial statements of the Group:-

• Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions

• Amendments to IAS 7 Disclosure Initiative

• Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses

• IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration

§ 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.

IFRS 16 is expected to have a significant impact on the amounts recognised in the Group's consolidated financial statements. On adoption of IFRS 16 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. Where the Group operates as lessor the rental income will continue to be recognised on the same basis.

The Group operates as intermediate lessor for a significant proportion of its leases. Where the sublease is substantially all of the right of use head lease, the right of use asset will be derecognised and recorded as a lease receivable, with interest income recognised in the income statement. 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 standard will also impact a number of statutory measures such as operating profit and cash generated from operations, and alternative performance measures used by the Group. The full impact of IFRS 16 is currently under review, including understanding the practical application of the principles of the standard. It is therefore not practical to provide a reasonable estimate of the financial effect until this review is complete.

Derivative financial assets

Following the adoption of IFRS 9, the Market Access Fee is classified as a derivative financial asset, initially recognised and subsequently measured at fair value, with changes in fair value recognised in profit or loss as other income. Associated foreign exchange gains and losses and the interest income are recognised in the profit or loss as finance income or expense.

Trade and other receivables

Trade receivables, which generally have seven to 28-day terms, are recognised and carried at their original invoiced value net of an impairment provision of expected credit losses calculated on historic default rates. Balances are written off when the probability of recovery is considered remote.

The Group provides interest-free loans to assist franchisees in the opening of new stores. These are initially recorded at fair value, with the difference to the cash advanced capitalised as an intangible asset.

Revenue

The group's revenue arises from the sale of products and services to franchisees, the charging of royalties, fees and rent to franchisees, and from the sale of goods to consumers from corporate stores.

Royalties, franchise fees and sales to franchisees

Contracts with customers for the sale of products generally include one performance obligation. The group has concluded that revenue from the sale of products should be recognised at a point in time when control of the goods are transferred to the franchisee, generally on delivery. Revenue is recognised at the invoiced price less any estimated rebates.

The performance obligation relating to royalties is the use of the Domino's brand. This represents a sales-based royalty, as defined in IFRS 15, with revenue recognised at the point the franchisee makes a sale to an end consumer.

Franchise fees are revenue for initial services associated with the opening of stores. They are non-refundable, and no element of the franchise fee relates to subsequent services. Revenue from franchisee fees is recognised when a franchisee opens a store for trading as this is the point at which all performance obligations have been satisfied.

§ Corporate store sales

Contracts with customers for the sale of products to end consumers include one performance obligation. The group has concluded that revenue from the sale of products should be recognised at a point in time when control of the goods are transferred to the consumer, which is the point of delivery or collection. Revenue is measured at the menu price less any discounts offered.

§ Rental income on leasehold and freehold property

Rental income arising from leasehold properties is recognised on a straight-line basis in accordance with the lease terms. Deferred income compromises lease premiums and rental payments. Lease premiums are recognised on a straight-line basis over the term of the lease. Rental payments are deferred and recognised over the period which it relates.

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 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.

The comparative period at 25 June 2017 has been restated for derivative financial asset and gross put option liabilities. The comparative period at 31 December 2017 has been restated for allocation of segmental goodwill.

Goodwill on consolidation of £20.8m as at 31 December 2017 has been reallocated to the International segment as this is the segment in which the assets have been generated.

The Market Access Fee of £8.5m has been restated to a UK & Ireland Asset from Assets relating to discontinued operations as at 25 June 2017, due to the proceeds being receivable in the UK & Ireland segment when they become due.

Put option liabilities of £36.9m have been re-allocated to the UK & Ireland operating segment from International as at 25 June 2017. This is due to the options being payable by the UK & Ireland segment when they become due.

There has also been a reallocation of a £2.4m liability from UK & Ireland segment to Unallocated liabilities at 25 June 2017.

Operating segments

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

5. Items excluded from non-GAAP measures

Non-underlying items included in financial statements

UK supply chain transformation - £(1.9)m

In April of this year the Group opened a new supply chain centre in Warrington as part of a transformation of the production and distribution network in the UK. As part of this transformation the Group has incurred commissioning and ramp up costs of £1.9m included in Cost of sales.

Conversion of Norway acquisition - £(2.1)m

Store conversion costs in Cost of sales of £2.1m have been recognised in relation to the Dolly Dimple's stores, which are being converted to Domino's as required under the Master Franchise Agreement ('MFA') held with Domino's Pizza, Inc. (DPI).

Non-underlying amortisation - £(1.1)m

In the period there has been amortisation on acquired intangibles of £0.4m relating to the SFA recognised on acquisition of the London corporate stores. This is considered to be non-underlying as Domino's Pizza Group has a policy of franchise agreements having an indefinite life, however as the SFA is deemed to be a reacquired right, IFRS 3 requires the asset to be amortised. In addition the Group is upgrading its mobile app and web platforms and accelerated amortisation of £0.7m has been incurred. The Group has not recharged the NAF for this amount, which it would ordinarily. These amounts are included in Other operating costs.

German joint venture store conversion - £(1.4)m

Included in Share of post-tax profits/(losses) of associates and joint ventures are acquisition and store network conversion costs of £1.4m which relate to the rebranding and associated costs to execute the conversion of the Hallo Pizza stores in Germany, acquired in January 2018, to comply with Domino's international brand standards.

Market Access Fee fair value uplift - £2.5m

During the period the fair value of the Market Access Fee increase of €2.8m (£2.5m) has been recognised in the income statement in Other income. This increase is a reflection of the underlying performance of Daytona JV Limited and the expected future returns as a result of the acquisition of Hallo Pizza in January 2018.

Non-underlying tax - £0.6m

The tax credit of £0.6m relates to the non-underlying expenses.

The non-underlying items in the period have resulted in a net cash outflow of £4.0m.

There has been no movement in the provision made in 2017 for the reversionary share plan.

6. Finance income and expense

7. Taxation

(a) Tax on profit on ordinary activities

There is no tax impact in relation to the foreign exchange differences in the statement of comprehensive income.

8. Earnings per share

Basic earnings per share amounts are calculated by dividing profit for the period attributable to ordinary equity holders of the parent by the weighted average number of Ordinary shares outstanding during the period.

Diluted earnings per share is calculated by dividing the profit attributable to ordinary equity holders of the parent by the weighted average number of Ordinary shares outstanding during the period plus the weighted average number of Ordinary shares that would have been issued on the conversion of all dilutive potential Ordinary shares into Ordinary shares.

Earnings