Dominos Regulatory News (DOM)

LEI: 213800Q6ZKHAOV48JL75

11 August 2020

DOMINO'S PIZZA GROUP PLC

FIRST HALF RESULTS FOR THE 26 WEEKS ENDED 28 JUNE 2020

RESILIENT PERFORMANCE DURING UNPRECEDENTED TRADING CONDITIONS

All commentary below is on an underlying basis unless otherwise stated

Financial highlights:

· Resilient UK & Ireland performance:

o UK like-for-like sales excluding splits up 4.8% (3.7% including splits)Ireland like-for-like sales excluding splits down 3.6% (-4.9% including splits), against a strong comparative

o Switched off collection throughout Covid-19 lockdown period, resulting in Q2 collection orders down 87%. Q2 delivery orders increased by 22%  

· Underlying UK & Ireland EBIT of £49.5m, down £2.1m or 4.1%, including £6.2m of Covid-19 related costs

· Statutory profit, including loss from discontinued International operations, £19.0m (H1 2019: £22.4m)

· Net Debt down to £202.1m, 1.75x Net Debt/EBITDA on a continuing basis and 2.03x including EBITDA from discontinued operations

· Deferred FY19 dividend of 5.56p per share, amounting to £26m in total, will now be paid on 18 September 2020 to all shareholders on the register as at 21 August 2020. The Board will review the appropriate total dividend in respect of FY20 along with our preliminary results in March 2021

Strategic highlights:

· New management team focused on providing leadership through the Covid-19 lockdown period, establishing relationships with franchisees, and commencing work on the creation of long-term strategic plan

· Throughout the period the management team did everything it could to ensure the safety of our people, franchisees and customers, by adapting our operating procedures and customer offering

· Pleased to play a small part in recognising the dedication of key workers throughout the country by funding a key worker pizza giveaway

· Worked closely with our suppliers and maintained 99.9% availability and accuracy in our supply chain operations

· Our actions have been well received and resulted in customer satisfaction reaching an all-time high

· Accelerated our evolution to a digital business, with UK online sales up 15% and App sales up 19%. UK online sales now account for 93% of delivery sales

· Disposal of our Norwegian business successfully completed on 22 May; an important milestone in our ongoing International disposal process

Commenting on the results, Dominic Paul, Chief Executive Officer said:

"I am pleased to report a resilient first half performance. Throughout these unprecedented times we have focused on doing the right thing for our customers, colleagues, franchisees and communities. We view it as a privilege to have been able to stay open throughout the period. I have been hugely impressed by the hard work, dedication and agility of our colleagues and our franchisee partners to keep Domino's delivering, and I would like to say a big thank you to the entire team.

"We have an amazing brand, an exceptional supply chain, highly experienced franchisee partners and a dynamic and responsive model. The relationship with our franchisees is challenging and this situation dates back several years. Although I expect this to take some time to resolve, our performance during the period is a great demonstration of what we can achieve when we work together. Fundamentally our interests are aligned and I am hopeful that the long-term strategic plan we are currently working on will pave the way forward for a more constructive working relationship to the benefit of all parties.

"The macroeconomic, consumer and competitive backdrop for the second half of the year contain considerable uncertainties. Our system demonstrated responsiveness and agility in meeting the challenges presented through the lockdown period, although that did come at some inevitable and, in certain areas considerable, incremental costs. While trading in the first few weeks of the second half has been encouraging, it is too early to conclude on how consumer behaviour will evolve. We look forward to the remainder of the financial year, and to the long-term future of the business, with confidence in the strength of the brand and our operations."

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 52-week period in the prior year for stores that have not donated addresses to new stores within the previous 24 months

3 Underlying is defined as statutory performance excluding discontinued operations, and items classified as non-underlying which includes significant non-recurring items or items directly related to merger and acquisition activity and related instruments

4 Results for H1 2019 have been re-presented to exclude International operations of Norway, Sweden, Iceland and Switzerland which are treated as 'discontinued operations'

5 Excluding splits excludes the impact of split stores, by removing donor stores from the like-for-like calculation

6 Net Debt is defined as the bank revolving facilities, cash and cash equivalents and other loans, including balances held in disposal groups held for sale

7 Results for H1 2020 include the impact of IFRS 16. Comparatives have not been restated

For further information, please contact:

For Domino's Pizza Group plc:

Bethany Barnes, Head of Investor Relations: 07387 015695

Brunswick:

Tim Danaher, Samantha Chiene, 020 7404 5959

Results webcast

Dominic Paul, CEO, and Neil Smith, Interim CFO will be presenting the results and hosting a Q&A session. This will be webcast live at 9.30am, with an on-demand playback available soon afterwards.

To join the full webcast (live and on demand) of the presentation please register at:

https://www.investis-live.com/dominos/5f1ef3ac503c070c0010fd2c/dasd

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, Sweden, Iceland and Liechtenstein, and have associate investments in Germany and Luxembourg. As at 28 June 2020, we had 1,192 stores in the UK and Ireland.

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 020 7404 5959

CEO Dominic Paul's first impressions of the business

The strength of the system

Joining a business during such an unprecedented period is not without its challenges, however it has also given me the opportunity to quickly become fully immersed in the system. The strength of our supply chain and our franchisee operations are exceptional, and this has been demonstrated throughout the Covid-19 period. I have been impressed with how quickly our colleagues and our franchisees have adapted our new ways of working, and it has been a privilege to have remained open throughout.

Trading safely through the Covid-19 pandemic

Our overarching priority was to ensure that we did everything possible to keep our colleagues, franchisees and customers safe, and we made difficult decisions in order to achieve this, for example switching off collection orders, rationalising our menu and changing how our supply chain services stores. Internally we united behind three priorities: 1) keep serving our customers and look after our people; 2) build brand preference and help our communities; and 3) come together with our franchisees. We made investments and incurred costs to ensure that we traded safely and supported our franchisees, and whilst that impacted our first half profitability it was undoubtedly the right thing to do. Our performance during this period is a great demonstration of what we can achieve when we work together and I am delighted to report that customer satisfaction is now running at an all-time high. We are also proud that no colleagues were furloughed and no UK government loan assistance was sought.

The relationship with our franchisees

It is well-publicised that we have a challenging relationship with our franchisee partners, and this situation dates back several years. Whilst we firmly believe that providing a running commentary on the situation is not in any stakeholders' interests, we do appreciate that this is at the forefront of many investors' minds. We are working hard to build constructive relationships with our franchisees to regain trust, through being open and transparent at all times. We firmly believe that it is in all parties' best interests to find a solution to this long-running situation. Aligning our way of working together will allow us to change our focus from our internal disagreements to instead driving growth and beating our competition.

Assessing the long-term strategy to re-ignite UK and Ireland growth

At the heart of aligning our ways of working together with our franchisees is the creation of a long-term strategic plan. We have commenced work on this and are involving franchisees throughout the process. The work is wide-ranging, assessing our future growth avenues, the optimal way to gain alignment with franchisees, our internal capabilities, our digital strategy, how we use data and insights in our decision making, and the optimal capital allocation for our business.

First half summary, outlook and returns to shareholders

First half summary

UK and Ireland underlying EBIT was £49.5m, down 5.6% from the prior year. This decline was primarily due to Covid-19 related costs of £6.2m to ensure we operated safely. The result also includes £0.9m of benefit from the implementation of IFRS 16. The contribution from our joint ventures in the UK was £1.9m (H1 2019: £1.2m), with UK and Ireland underlying EBIT before joint ventures and associates of £47.6m, down 5.7%. We reported an underlying profit of £1.9m from our minority stake in the German associate (H1 2019: £1.3m).

Following the decision in October 2019 to dispose of our directly operated International businesses, being Norway, Sweden, Switzerland and Iceland, the trading results of these businesses, together with International central costs, have been classified as discontinued operations and excluded from underlying results. Combined, our discontinued International businesses generated £37.5m system sales (H1 2019: £49.8m) and a trading loss of £7.3m (H1 2019: loss of £7.6m). This includes a trading loss of £3.3m in Norway prior to its disposal on 22 May 2020. The disposal of Norway incurred costs of £10.8m, including transaction costs, with cash costs of £6.4m.

Statutory profit after tax, including discontinued and continued activities, was £19.0m, down on £22.4m in the prior year primarily due to the loss on disposal of Norway. Underlying basic EPS decreased slightly from 8.8p to 8.7p as a result of the underlying EBIT decrease. Statutory EPS from continuing and discontinued operations declined to 4.4p from 5.3p, driven by losses from the discontinued International operations and the loss on the disposal of Norway.

Free cash flow was £46.9m (H1 2019: £20.7m), and net debt decreased by 15.4% from £238.8m to £202.1m, driven by both the reversal of the working capital outflow experienced at the end of 2019 and no dividend payments during the period.

Current trading and outlook

Trading in the first few weeks of the second half has been encouraging. This trading performance has been assisted by the vast majority of our estate now having reopened for contact-free collection, the return of Premier League football, an increase in UK staycations and more recently the VAT reduction on hot food, which has enabled our franchisees to sharpen their local deals. With lockdown restrictions easing, our incremental Covid-19 related costs are declining and we expect approximately £2m of such costs in the second half, all of which will be in the supply chain. This compares to £6.2m of Covid-19 related costs in the first half.

The macroeconomic, consumer and competitive backdrop for the second half of the year contain considerable uncertainties and it is too early to conclude on how consumer behaviour will evolve. We look forward to the remainder of the financial year, and to the long-term future of the business, with confidence in the strength of the brand and our operations.

Returns to shareholders

The Board recognises the importance of dividends to shareholders. In late March, we took the very difficult decision to suspend the proposed FY19 final dividend, given the significant uncertainty around the Covid-19 situation and its impact on our performance at that time. We have worked hard to ensure that we have remained open throughout this period, and the Board believes it is appropriate at this time to reinstate our planned payment. We will therefore pay the deferred FY19 final dividend, of 5.56p, equating to a total cost of £26m, on 18th September 2020 to all shareholders on the register as at 21st August 2020.

There remains considerable uncertainty ahead, including the risk of a second lockdown and an expected decline in consumer spending. Given this backdrop, the Board believes it is important to maintain balance sheet resilience and we are therefore not proposing an additional interim dividend payment at this time. The Board will review the appropriate total dividend in respect of FY20 along with our preliminary results in March 2021.

Operational changes necessary to trade through the Covid-19 period

Moving to contact free delivery only

At the start of the lockdown period, we moved quickly to ensure the business continued to trade safely, switching to entirely contact free delivery and stopping customer collections. These decisions were made in collaboration with franchisees in order to ensure that store colleagues could operate in a safe environment. For context, in 2019, collection accounted for 21% of sales and 31% of orders. The LFL sales figures reported have not been adjusted for stopping collection orders; the performance of our delivery business during lockdown was therefore significant, more than offsetting the lack of collection business at a sales level. At an order count level, although we saw a very significant acceleration of delivery orders, up 23% in the lockdown period, this did not fully offset the lack of collection orders, and total orders therefore declined by 11% in this period. For the first half of the year, delivery orders increased by 12% and collection orders declined by 44%, resulting in total orders declining 5%.

When lockdown restrictions began to ease, we started to reintroduce collection orders, on a contact free basis. This was driven by each individual store and franchisee. Our stores in Ireland reopened relatively quickly for collection, with all stores offering the service by the beginning of July. In the UK we saw a more gradual re-adoption of collection, with the vast majority of stores now open for contact free collection. As expected and previously guided, collection demand is currently running below prior levels as consumers and businesses have yet to return to pre-lockdown habits.

Menu rationalisation

Working together with our franchisees, we rationalised our menu, to enable store colleagues to work safely and maintain appropriate social distancing in store. Pizza customisation, stuffed crust and other products with operational complexity were removed from the menu. This rationalisation was the right thing to do but will have dampened demand and also had some negative impact on our margins. We experienced a change in customer behaviour, with a higher proportion of sides and desserts sold resulting in more items per delivered order being sold. These generated additional sales but did impact the margin achieved through our supply chain.

With lockdown easing we have been gradually reintroducing menu items, and are pleased to now have stuffed crust, the cheeseburger pizza and chicken wings back on our menus.

Adapting our supply chain operations

Our supply chain is the backbone of the Domino's system in the UK and Ireland, delivering fresh dough and ingredients to every store three or four times a week. We were very pleased with the performance of our supply chain operations throughout the Covid-19 period, and through the first half we achieved 99.9% availability and accuracy. We worked very closely with our supplier base to maintain service levels and rapidly sourced new items from new suppliers such as masks, perspex screens, store signage and contact free delivery boxes.

We made significant changes across our supply chain operations, in order to keep our colleagues safe and maintain our service levels to stores. These changes include re-routing all store deliveries to stop two-person deliveries, changing our supply chain shift patterns to ensure all stores were closed during restocking and social distancing could be maintained at our supply chain centres, and paying salary premiums. Combined, the cost of the changes to our supply chain operations in the first half was £2.1m, the vast majority of which was incurred in Q2.

The monthly run rate of Covid-19 related costs have declined since we entered the second half, however we still expect to incur some incremental costs through the remainder of the year; this assumes no further national lockdowns. We are working hard to drive efficiencies in our processes to mitigate these costs but our internal planning assumption is that we may incur up to £2.0m in additional Covid-19 costs in our supply chain operations in the second half.

Supporting our franchisees

Throughout the Covid-19 period we worked closely with our franchisees, demonstrating the inherent strength of our system when we all work together. We significantly increased communication with franchisees, running a number of working groups to enable us to quickly make decisions, and hosting a weekly webinar with all franchisees in order to share best practice and information.

As the master franchisor we chose to incur the costs for some items needed to ensure safe operations, including initial orders of face masks and contactless boxes. The cost to our business from these actions was £3.4m in the first half. We expect to incur minimal incremental Covid-19 related costs in this area in the second half. We also reduced the National Advertising Fund ("NAF") fee from 4% to 2%, for a ten-week period, to further support franchisees.

Our franchisees also benefited from cash flow timing changes, as we took quick action to accelerate payment dates and defer some property rents. Outside of the system, franchisees benefited from the national business rate freeze and the deferral of VAT payments.

Community support

Throughout the lockdown period we have viewed remaining open as a privilege and not a right and it has been an important priority for us to support our colleagues and our communities through this difficult time. We launched a Partners Foundation, which will provide grants to any colleague, either working directly for us or for our franchisees, in times of hardship. We made a direct contribution to this fund, and all Board members also donated 20% of their salaries for a three-month period into the fund.

To support our communities we ran a pizza giveaway for key workers across the country, in addition to many franchisees' individual activities. The cost to us, together with the launch of our Partners Foundation, totalled £0.7m. We expect to incur minimal incremental Covid-19 related costs in this area in the second half.

Sales performance

As we entered the Covid-19 lockdown period, at the end of Q1, we saw our sales performance from delivery grow rapidly with an increase in delivery order count and a growth in items per order and therefore average ticket. This increase in sales from delivery, of 30% in Q2, more than offset the impact of switching off collection, with total LFL sales growing by 4.2% in Q2, an acceleration from 2.2% in Q1. At an order count level however we saw an overall decline in Q2, of 11.3%, with the 22.4% increase in delivery orders more than offset by the lack of collection orders. Items per order grew strongly in Q2, by 18.6%, due to both a 7.6% increase in delivery items per order and the lack of collection orders, which on average have fewer items per order than delivery. These dynamics are clear to see in the table shown below, which has been included to help understanding of the pattern of trading during the period.

Our UK business, which accounts for 95% of system sales, performed strongly driven by delivery order count and ticket growth, particularly in Q2, as described above. Our business in Ireland is a much smaller part of the Group, accounting for 5% of system sales, and the relatively small size of our Irish business means that sales are inherently more volatile. We saw a weaker performance in Ireland, against a strong comparative. Ireland entered lockdown earlier than the UK and we saw a more pronounced impact on consumer spending. Ireland was also disproportionately impacted by stopping cash payments and, outside of Dublin, by the switch off of collection. When lockdown restrictions eased, we quickly reintroduced collection, including car-side collection, and we have seen an improvement in trading as a result.

The LFL performance of both our UK and Ireland businesses are shown in the table below.

Digital performance

The Covid-19 lockdown period has accelerated our evolution to a truly digital business, in our ways of working, our decision making and our customer engagement. Online sales in the UK grew 15% in H1 to represent 89% of system sales, or 93% of total delivery sales. Our App continues to be the driving force of our digital efforts. During the half, sales generated through the App grew 19% year-on-year, and the App now represents 39% of system sales, or 44% of all online sales. Our online performance was particularly strong during Q2, which effectively represented the Covid-19 lockdown period. In Q2, online sales were up 22% and App sales growth was 26%.

Online traffic to our sites doubled at the start of the lockdown period. This increase in traffic, combined with significant changes in our operations, meant that we needed to quickly mobilise our technology teams to ensure updates could be developed and implemented, and customer demand serviced. As an example, our teams completed over 40 system releases in just ten days.

In addition to supporting and improving our online experience, we have continued to develop the next iteration of our App and remain on track to trial this in the Autumn. This will make it even easier for customers to find deals, further simplify the navigation and enhance the look and feel.

Brand

The strength of the Domino's brand is a key differentiator for us. We increased the frequency in which we measure customer regard for the brand through market and customer surveys during the Covid-19 period. We saw customer satisfaction increase to all-time highs and are pleased this performance has continued since restrictions have eased. We also saw that brand reputation has been further enhanced through the half because of the actions we have taken.

Throughout the crisis we acted swiftly to demonstrate the increased steps we had taken to ensure colleague and customer safety. We ensured that we aligned messaging to the prevailing environment and pulled planned new product development that would have increased store level complexity. Very soon after the announcement of the UK lockdown, we advertised on TV to communicate the enhanced hygiene steps we had implemented, including contact free delivery. We made increased use of social media channels and email to provide further customer reassurance. 

As lockdown restrictions have begun to lift we have focused marketing activity on the re-opening of contact free collection and the reinstatement of key menu items. We have also positioned the brand around the return of the Premier League and have launched a new TV campaign targeted at the increased number of people expected to stay at home this summer enjoying a Staycation.

In June we launched a trial of two Vegan-friendly pizzas, Vegan Vegi Supreme and Vegan Margherita, across 46 stores. This followed a year of development work on a new vegan dough and our own vegan cheese alternative. Initial customer response has been very encouraging, and we therefore plan to launch these two new products in the Autumn.

New store openings

In the first half there were eight new store openings, all in the UK. All of these stores were franchised, by seven different franchisees. One store opened during the lockdown period itself. In total the store estate at the end of the first half stood at 1,192 (UK: 1,138; Ireland: 54).

Corporate stores

We directly operate 36 stores in the London area, with no new stores opening in the first half, in line with our plans at the start of the year. London, where our corporate store estate is located, was disproportionately affected by the Covid-19 lockdown, with a significant reduction in footfall and greater bias towards collection orders. This resulted in corporate store revenue in the first half of £15.4m, down 0.1%, with LFL sales excluding splits down 6.5%. LFL sales excluding splits were up 0.6% in Q1 and down 12.7% in Q2. The EBITDA of corporate stores was £0.3m, compared to £0.4m in H1 2019. EBITDA has been impacted significantly by lost sales during the Covid-19 period along with additional labour costs incurred as we made the decision to pay our store teams a salary supplement whilst working during the height of the lockdown period. Outside of this Covid-19 impact, costs have been well controlled and in line with our expectations.

We benefited from running our own stores both during the lockdown period and as restrictions eased, as it allowed us the chance to trial operational changes in our own stores first, before sharing our learnings with our franchisees. Trials included optimal ways to ensure social distancing for store colleagues and the launch of both contact free delivery and collection.

Franchisee profitability

Based on the unaudited data submitted to us by franchisees, average store EBITDA for all UK stores in the first half was approximately £85k, equivalent to a 16% EBITDA margin. This compares to £69k or 13% in the first half of 2019. At the franchisee level, taking into account a franchisees' total store estate together with their central costs, average EBITDA margin was c.12%, compared to c.10% in the first half of last year. There continues to be a wide range of EBITDA margins achieved both at a store and franchisee level.

Franchisees have worked exceptionally hard to keep serving customers through the period and have also benefitted from a ten-week reduction in NAF contributions from 4% to 2%, as we tactically chose to reduce marketing spend over the short-term. NAF contributions have now reverted to their previous level, which allows us to invest in the brand in order to compete and drive growth in the second half of the year.

International - German associate (continuing activity included within underlying results)

Our share of post-tax underlying profits from our German associate was £1.9m (H1 2019: £1.3m). Performance has improved versus last year driven by profit from the commissary and lower head-office costs, which more than offset lower profit from franchising.

International - Discontinued operations

In October 2019, the Board announced that we would exit these markets in an orderly manner and seek different owners for these businesses. Following this decision, the trading results of these businesses, being Norway, Sweden, Switzerland and Iceland, together with International central costs, have been classified as discontinued operations and excluded from underlying results.

The Covid-19 pandemic has impacted the performance of our international businesses, and is also likely to result in the disposal processes taking more time than previously anticipated. Our focus is to minimise and, wherever possible, prevent the drain on cash flow from our international businesses.

In February, we announced that we had agreed a disposal of our Norwegian business, with the minority shareholders taking full ownership of this business. This transaction was a significant milestone as Norway represented our most troubled market and the largest cash drain on the Group. As part of the transaction, the minority stake in Sweden was transferred to us. The cash consideration to the buyers on completion of the transaction was £6.4m. Shareholder consent was given at a general meeting on 22 May, with completion occurring the same day.

Total non-underlying charges arising from international operations were as follows.

Total system sales from consolidated discontinued International operations were £37.5m, compared to £49.8m in the first half last year. On a constant currency basis system sales were down 10%. We made a trading loss of £7.3m, compared to £7.6m in H1 2019. This includes a trading loss from Norway prior to its disposal of £3.3m.

The Norway transaction resulted in a loss on disposal of £10.8m, including £1.6m of other costs associated with the Norway disposal. These costs, together with the trading losses of all international operations, resulted in a total loss from discontinued operations of £19.3m (H1 2019: £9.8m loss).

In Iceland we currently have 24 stores (25 at the end of H1 2019), however only 22 have been open since the outbreak of the pandemic. Iceland's performance was significantly impacted by Covid-19, which reduced local demand and affected the Icelandic economy given that it is highly dependent on tourism.

In Switzerland we currently have 20 stores (21 at the end of H1 2019). Covid-19 led to a significant reduction in average weekly orders, which was partially offset by an increase in average ticket as carry out and dine-in were temporarily stopped. Seven stores were closed during the lockdown and two have since been permanently closed.

In Sweden we currently have 14 stores (9 at the end of H1 2019). Following completion of the Norwegian transaction we now own 100% of this business. Performance in Sweden has also been affected by Covid-19 although our mature stores recorded year-on-year sales growth throughout the first half.

FY20 Guidance

For the year as a whole, we expect:

• Underlying Depreciation & Amortisation of £15m to £16m, including a c.£5m increase as a result of IFRS 16

• Underlying Interest (excluding foreign exchange movements) of £6m to £7m

• Underlying Effective Tax rate of c.19% for the full year

• UK and Ireland capital expenditure of £20m to £25m. This is lower than the initial level guided at the start of the year, as the Covid-19 lockdown resulted in needing to pause our major capex projects. We have since recommenced the building of our Scottish supply chain facility and our extension to our facility in Naas in Ireland

Financial review

Classification of International businesses as discontinued

In October 2019, the Group announced a programme to dispose of the International operations in Norway, Sweden, Switzerland and Iceland. Accordingly, the operations have been classified as assets held for sale and discontinued operations.

The results of these operations have therefore been removed from underlying results and are presented as a single 'discontinued operations' line net of tax in the income statement. The income statement for H1 2019 has been re-presented accordingly, together with underlying earnings per share and earnings per share from continuing operations. The impact of the re-presentation has been outlined in note 4 to the financial information.

Our share of profit or loss of our German associate remain presented in underlying results.

The balance sheet items relating to these operations have also been reclassified into two lines on the balance sheet, assets held for sale and liabilities held for sale. In line with the requirements of IFRS 5: Non-Current assets held for sale and discontinued operations, the balance sheet for H1 2019 has not been reclassified.

IFRS 16

During the period, the Group has adopted IFRS 16 Leases for the first time. The Group has adopted a modified retrospective approach to application, and therefore comparatives have not been restated.

IFRS 16 impacts the treatment of our property and equipment leases, and our lease receivables with franchisees. The impact of the change in accounting standard on the income statement for H1 2020 for our continuing operations in UK and Ireland is set out below:

Overall EBIT has increased by £0.9m as a result of the implementation, with a benefit to profit before tax of £0.2m. Across the income statement, the movements are more significant. Statutory revenue has decreased as income on property lease agreements has been de-recognised, and the increases in cost of sales and other cost categories represent the removal of lease charges and replacement with depreciation.

Within finance costs, whilst the net impact is an increase of £0.7m, there is a significant gross increase to both finance income and expense. The finance income represents the interest unwind of our lease receivables with franchisees, and the expense represents the interest unwind of the liability under our lease contracts.

At an EBITDA level, the increase of £3.6m is as a result of the treatment of directly leased assets being depreciated through EBIT rather than recognised as rental costs.

Given the small size of the impact at an EBIT level, movements are discussed including the impact of IFRS 16 in the H1 2020 figures, compared to excluding the impact of IFRS 16 in the H1 2019/FY 2020 numbers. Where impacts are considered significant these have been explained.

IFRS 16 has also been adopted in our discontinued operations, and the impact on profit before tax is an increase of £0.2m.

Group revenue

Group revenue, consisting of UK and Ireland revenues following the reclassification of the International business, decreased by 1.1% to £246.9m, including a £12.5m reduction due to the impact of IFRS 16. If the impact of IFRS 16 is excluded, revenue increased by 4%. The drivers of revenue growth continued to be sales growth within the franchisee system, which drives increased food and royalty revenues.

Profit before interest and taxation

UK and Ireland underlying EBIT was £49.5m, down 4.1% from the prior year, driven by Covid-19 related costs. The contribution from our joint ventures in the UK was £1.9m (H1 2019: £1.2m), with UK and Ireland underlying EBIT before joint ventures and associates of £47.6m, down 5.6%. As a percentage of system sales, total underlying UK and Ireland EBIT margin as a percentage of system sales was 7.9% (H1 2019: 8.7%).

Statutory profit before interest and tax from continuing operations was £49.7m, up from £43.6m in the first half of 2019. Underlying profit before interest and tax was £51.4m (H1 2019: £52.8m), with net non-underlying items totalling a loss before interest and tax of £1.7m, compared to a loss in H1 2019 of £9.2m. These costs are itemised in full in note 5 and are summarised below:

Net non-underlying items for the period before interest and tax excluding discontinued operations totalled £1.7m. These costs are itemised in full in note 4 and summarised below:

· International disposal costs: In the 26 weeks ended 28 June 2020, costs of £0.6m were incurred in relation to the disposal of other international operations, consisting mainly of professional fees paid to advisors in ongoing marketing of the operations. The costs related to the disposal have been treated as non-underlying as the purchase and sale of subsidiaries is not considered to be part of our ordinary course of business.

· UK & Ireland strategic review: Costs of £0.2m have been incurred in relation to professional fees in relation to our long-term strategy to re-ignite UK and Ireland growth. We expect these fees to continue in the second half of the year.

· German associate store conversion costs: Included in the share of post-tax profits/losses of associates and joint ventures are acquisition and store network conversion costs of £0.3m (H1 2019: £2.5m, FY 2019: £2.8m) which relate to the conversion of the Hallo Pizza stores which were acquired by the German associate in January 2018. The costs incurred by our German associate on converting Hallo Pizza stores have been reported to us as non-underlying. We consider the treatment to be consistent with the treatment we have previously adopted for Dolly Dimple's stores in Norway.

· Amortisation of London corporate stores: During the period amortisation of acquired intangibles of £0.6m (H1 2019: £0.5m, FY 2019: £1.0m) was incurred in relation to the Standard Franchise Agreement ("SFA") recognised on the acquisition of the London corporate stores in 2017 and Have More Fun (London) Limited in 2018. This is considered to be non-underlying as the Group has a policy of franchise agreements having an indefinite life, however the SFA is deemed to be a re-acquired right under IFRS 3 which requires such rights to be amortised.

Interest

Net underlying interest expense in the period was £3.8m, a £0.9m increase year-on-year. This primarily relates to £0.7m interest costs due to implementation of IFRS 16. There were also additional interest costs on the revolving credit facility, due to an additional draw down of the facility at the start of the Covid-19 period, to provide us with additional flexibility should this be required. This additional draw down was partially repaid at 28 June 2020, and has now been fully repaid. Statutory interest expense was £3.9m (H1 2019: £3.3m) after non-underlying interest and foreign exchange movements relating to income on the Market Access Fee of £0.1m (H1 2019: £0.4m) and charges relating to the put options in H1 2019 of £0.7m.

Taxation

The underlying effective tax rate for the first half was 16.2%, which is lower than the UK statutory rate due to the impact of prior year adjustments. Excluding these items, the UK and Ireland underlying effective tax rate is 18.4% (H1 2019: 18.7%). The statutory effective tax rate excluding discontinued operations is 16.4% (H1 2019: 20.0%). The effective tax rate figures have been re-presented to exclude the International operations classified as discontinued.

Profit after tax

As a result of the above, profit after tax from continuing operations was £38.3m, an increase from £32.2m in H1 2019. After inclusion of the loss from discontinued operations of £19.3m (H1 2019: £9.8m), the overall profit for the period was £19.0m (H1 2019: £22.4m).

Earnings per share

Underlying basic EPS decreased to 8.7p from 8.8p as a result of the underlying profit decrease, partially offset by a reduction in corporation tax and increased finance costs. Statutory EPS declined to 4.4p from 5.3p, with an increase in profit after tax more than offset by losses from discontinued operations, including £10.8m related to the loss on disposal of Norway.

Free cash flow and net debt

The above table represents the cash flows and the net debt of the Group and includes both continued and discontinued operations. The net debt of continued operations is £(206.5)m and discontinued operations is £4.4m.

Free cash flow in the table above has been restated for the 26-week period ended 30 June 2019 from £8.9m to £20.7m due to the removal of capex from the free cash flow definition. Capex is now shown as a utilisation of free cash flow.

Overall Group net debt decreased from £232.6m at 30 December 2019 to £202.1m, primarily due to the suspension of the FY 2019 dividend, together with favourable working capital movements of £17.2m due to timing changes, as previously guided, partially offset by higher tax payments of £11.3m and payment on disposal of Norway of £6.4m.

Underlying EBITDA was £59.5m (H1 2019: £57.6m) with discontinued operations EBITDA of a loss of £4.3m (H1 2019: £5.2m).

Free cash flow was an inflow of £46.9m (H1 2019 £20.7m), which consists of an inflow of £51.8m in our UK business and an outflow of £4.9m in our International business.

The Group experienced a working capital inflow of £17.2m (H1 2019: £22.2m outflow) in the period which primarily consisted of an inflow of £21m due to a change in a payment timing at the end of 2019, a £1.2m reduction in inventory levels and improved international working capital of £1.8m. This was partially offset by a £7.0m reduction in creditors as a result of seasonal fluctuations, in line with the usual pattern at the half year. These seasonal fluctuations and timing of rent payments are expected to largely reverse in the second half of the year.

Dividends received relates to amounts received from our UK joint venture and associates. The net interest cash outflow of £1.2m (H1 2019: £2.9m) has decreased year-on-year due to the timing of drawdowns and related interest payments.

Non-underlying cash paid of £2.1m relates mainly to international business disposal costs.

Capital expenditure in the period was £7.1m, lower than both previous guidance and the prior year as the Covid-19 lockdown meant that we needed to pause some of our major capex projects. Work and spending on these projects have now largely resumed.

Funding from our German associate of £1.6m (H1 2019: payment of £1.4m) represents the return of funding in 2020; we do not expect any further funding requests in the second half.

The disposal of our 71% interest in Norway resulted in a £6.4m cash outflow, this consisted of £3.0m cash remaining in the company and an additional £3.4m paid on disposal.

Capital employed and balance sheet

Intangible assets have increased from £34.5m to £35.3m as a result of additions of £3.7m partially offset by amortisation of £3.0m. There have been no further impairments since the 2019 year end.

Property, plant and equipment has increased from £84.8m to £85.2m, largely as additions of £2.3m offset by depreciation of £3.0m.

Right of use assets of £19.7m represents the lease assets for our corporate stores, warehouses and equipment leases recognised under IFRS 16 in the current period. Lease receivables of £205.9m represents a financial receivable for the leases we hold with franchisees, where we are the lessor.

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, as well as our investment in Shorecal. There have been no significant movements in the investment balances in the year, with the largest movement being foreign exchange and an increase in the share of profits of our UK joint venture and associate in excess of dividends received.

The Market Access Fee asset, representing the fee receivable following our disposal of the German MFA ('Master Franchise Agreement'), has increased from £7.1m to £7.9m as a result of the net of the unwind of the discount for the future amounts receivable and foreign exchange movements.

Deferred consideration largely represents the amounts owed to the Group following our disposal of the Shayban joint venture in H2 2018 and deferred consideration recognised on the Have More Fun investment in H2 2018.

The lease liability of £227.7m represents the amounts payable under leases, either for our own leases or for franchisee leases where we lease the property from the landlord, and then sub lease to a franchisee.

Working capital has increased from an asset of £16.5m to a liability of £2.2m as a result of the factors outlined in the cashflow section above.

The put option liability of £0.9m has been extinguished on the disposal of the Norway business in H1 2020.

Tax liabilities have decreased from £6.9m to £2.2m this is mainly as a result of the change in legislation over timing of corporation tax payments.

Total equity has improved by £23.4m from a net liability position of £41.3m to £17.9m largely due to the profits for the period not being offset by any dividend payment. There are sufficient distributable reserves in the standalone accounts of Domino's Pizza Group plc for the proposed dividend payment.

Treasury management

The Group holds an unsecured multi-currency revolving credit facility of £350m to December 2023 with a syndicate of seven lenders. An option for the Group to extend the facility by a further 12 months to December 2024 has been deferred by nine months with all lender consent. The facility's lower range remains at a margin of 75bps above LIBOR rising to 185bps with increased leverage, plus a utilisation fee of between 0bps and 30bps of the aggregate amount of the outstanding loans. A commitment fee in the base currency computed at 35% of the margin is payable for the undrawn loan amount. The Group monitors its overall level of financial gearing on a regular basis to ensure that it remains well within its targets and banking covenants. The Group monitors its cash resources centrally through short, medium and long-term cash forecasting. Surplus cash in the UK is swept into interest bearing accounts or placed on short-term money market deposits.

We ended the half year with net debt of £202.1m, giving us a leverage ratio of 1.75x from continuing operations, and 2.03x including the trading EBITDA of our International operations classified as discontinued. Both of these ratios are within our target leverage ratio of 1.75x - 2.5x net debt/EBITDA. Underpinning treasury management is a robust Treasury Policy and Strategy that aims to minimise financial risk. Foreign exchange movement arising from transactional activity is reduced by either agreeing fixed currency rates with suppliers or pre-purchasing the currency spend.

Group income statement

26 weeks ended 28 June 2020

* Results for the 26 weeks ended 30 June 2019 have been restated to reflect the re-presentation of International operations as discontinued as set out in note 4.

Group statement of comprehensive income

26 weeks ended 28 June 2020

Group statement of changes in equity

26 weeks ended 28 June 2020

Group cash flow statement

26 weeks ended 28 June 2020

Notes to the Group interim report

26 weeks ended 28 June 2020

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 28 June 2020 and the comparatives to 30 June 2019 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 29 December 2019 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 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.

Going concern

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 banking facilities, together with long-term contracts with its master franchisor, its franchisees and its key suppliers.

The Directors of the Group have performed an assessment of the overall position and future forecasts for the purposes of going concern in light of the current environment. The overall Group has continued trading in the UK & Ireland, and international markets, throughout the Covid-19 period. In the UK & Ireland, sales growth has been strong during the first half of the year, especially over the initial lockdown period. This increase in sales growth has been offset with additional costs incurred in ensuring the Group continued to trade safely. Performance of the international operations has been mixed, however given the relative size does not cause a significant risk to the ongoing position of the Group from a going concern and cash flow perspective.

The Directors of the Group have considered the future position based on current trading and a number of potential downside scenarios which may occur, either through further Covid-19 related impacts, general economic uncertainty or other risks. This assessment has considered the overall level of Group borrowings and covenant requirements, the flexibility of the Group to react to changing market conditions and ability to appropriately manage any business risks. The Group has a £350.0m multicurrency syndicated revolving credit facility which matures in October 2023, of which £63.7m was undrawn at 28 June 2020. The Group had cash funds of £82.7m as at 28 June 2020.

The scenarios modelled are based on our current forecast projections out to the end of 2021. The first scenario considers the downside impact of economic uncertainty over the forecast period, reflected in sales performance, with a c.5% reduction in LFL sales compared to forecast for a sustained period through the remainder of 2020 and into 2021, and base 2021 system sales being flat to our 2020 budget without Covid-19 related sales increases. This scenario also includes the impacts of Brexit related tariffs without any pass through in pricing. The second scenario, considered severe but plausible, includes these economic impacts and also includes further Covid-19 related risks, including two potential local outbreaks within our SCC centres impacting our ability to supply stores for a period of three weeks each, further restrictions in the UK and Ireland leading to similar levels of costs experienced in the first half of 2020 and disruption to one of our key suppliers impacting our supply chain over a period of five weeks whilst alternate sourcing is secured. Mitigating actions are included in the form of delayed capital expenditure and future dividends, together with cost reductions. Under all scenarios there remains significant cash headroom on the revolving credit facility, with more restricted headroom under the covenant requirements of the facility.

Based on this assessment, the Directors have formed a judgement that there is a reasonable expectation the Group will have adequate resources to continue in operational existence for the foreseeable future.

Accounting policies and new standards

The consolidated accounts for the 52 weeks ended 29 December 2019 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 29 December 2019, except for new standards and interpretations effective for the first time for the reporting period.

New standards and interpretations - IFRS 16 Leases

The Group has adopted IFRS 16 Leases from 30 December 2019, the first day of the 52 week financial period ending 27 December 2020. IFRS 16 replaces IAS 17, and provides a single lease accounting model. For leases where the Group is a lessee, IFRS 16 eliminates the classification of leases as either operating leases or finance leases. Right-of-use assets and lease liabilities are recognised, with the depreciation of right-of-use assets presented separately from the unwinding of discount on lease liabilities. For leases where the Group is lessor and the freehold is also held within the Group, rental income continues to be recognised as before.

The Group operates as an intermediate between landlords and franchisees for the majority of Domino's sites in the UK & Ireland. In the majority of cases terms agreed with landlords are mirrored in terms agreed with franchisees in a "back to back" sub-lease arrangement, but in certain cases the terms of sub-leases with franchisees do not mirror the head-lease with landlords. Where the sub-lease covers substantially all of the right-of-use head-lease, the right of use asset the Group would usually recognised as lessee is derecognised and replaced by a lease receivable from the franchisee sub-lease, with interest income recognised in the income statement and depreciation of a right-of-use asset as lessee no longer recorded. This results in a lease receivable for the Group as lessor and a lease liability for the Group as lessee, with interest income and expense recognised separately. This same treatment is applied where the current sub-lease does not cover substantially all of the right-of-use head-lease, if management judges that it is reasonably certain the sub-lease will be renewed to cover substantially all of the right-of-use head-lease. The contractual extension periods are within the SFA (Standard Franchise Agreement) which each of the stores enter into, which relates solely to the property address. As the sub-lease and the SFA are entered into at the same time, the contracts have been linked for the purposes of assessing extension periods.

The Group performed an impact assessment of adopting IFRS 16, which involved collating information on lease obligations and contractual arrangements across the Group. This data was then used to compare the impact of the new standard under its different transitional options. The Group decided to select the modified retrospective approach to transition. The Group has elected to apply the transition exemptions proposed by IFRS 16 for leases of low value assets. For certain right-of-use asset categories, primarily our equipment leases, the Group has also elected to apply the transition exemptions for leases with terms ending within 12 months of the date of initial application. Under the modified retrospective approach, comparative information is not restated and the impact of adopting IFRS 16 is presented as an opening retained earnings adjustment as at 30 December 2019. There are two options for measuring right-of-use assets under the modified retrospective approach: by measuring the asset as if IFRS 16 had been applied since lease commencement; or by measuring the asset at an amount equal to the lease liability on the date of transition, adjusted by the amount of any prepaid or accrued lease payments. The Group has elected to measure the asset at an amount equal to the lease liability on the date of transition.

A methodology for determining incremental borrowing rates has been developed in order to calculate lease liabilities under IFRS 16. This methodology incorporates three key elements: risk-free rate (reflecting specific country and currency), credit spread (reflecting the specific risk for each subsidiary within the Group) and an asset class adjustment (reflecting the variation risk between asset categories). The discount rates determined are between 4.9% and 7.9% dependent on the asset location and nature.

The transitional impact on the balance sheet as at 30 December 2019 is as follows:

The impact on the income statement from continuing operations is as follows:

Under IFRS 16, the Group's profit before interest and tax has increased, while its interest expense has also increased, leading to a net increase in profit after tax. Under the transition approach selected, comparative information in the income statement has not been restated. We estimate the impact on the 2019 results to be broadly consistent with the impact in 2020.

Earnings per share includes the impact of IFRS 16 in the current period. This has increased underlying EPS measures for continuing operations, both basic and diluted, by 0.1p. On a statutory basis from continuing operations, basic EPS has increased by 0.1p, with no impact on diluted EPS. Including both continuing and discontinued operations, basic EPS has not been impacted however diluted EPS has increased by 0.1p.

Under IFRS 16, the Group's net debt and cash flow statement are impacted as follows:

- With the exception of back to back head leases, depreciation of right-of-use assets is added back to operating profit to arrive at operating cash flows, which increases the Group's EBITDA

- Lease liabilities are treated as financial liabilities however are not included in net debt

- Payment of the principal amount of leases and receipts on lease receivables are treated as financing cash flows within the cash flow statement

- In the free cash flow, EBITDA is presented including the impact of IFRS 16, and the lease payments and receipts on lease receivables are included in the free cash flow

In applying IFRS 16 for the first time, the group has used the following practical expedients:

- Reliance on previous assessments on whether leases are onerous

- The exclusion of initial direct costs for the measurement of right-of-use assets on initial application;

- The use of a single discount rate to a portfolio of leases with characteristics which are reasonably similar;

- The accounting for leases with a remaining lease term of less than 12 months at the date of transition as short-term leases where these leases are unlikely to be renewed on a case-by-case basis

In the year ended 29 December 2019, the Group disclosed minimum lease commitments under IAS 17 of £360.9m. Of this amount, £332.8m related to our continuing businesses. The difference between the lease liability recognised on transition of £228.7m is primarily relating to discounting of the lease obligations.

In order to provide comparability, the EBITDA to Net Debt multiples used do not include the EBITDA benefit of IFRS 16. The net debt to EBITDA ratio for covenant testing purposes for the Group's revolving credit facility remains on a frozen GAAP basis.

3. 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 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 profit before interest and tax.

Following the presentation of the International operations in Norway, Sweden, Switzerland and Iceland as discontinued under IFRS 5: Non-current assets held for sale and discontinued operations, the presentation of the segments has been modified accordingly and prior periods re-presented. During the year, the Board continued to monitor the trading performance of the businesses and therefore are still considered an operating segment. The results of the German associate remain in continuing results and therefore remains separately reported.

Unallocated assets include cash and cash equivalents and taxation assets. Unallocated liabilities include the bank revolving facility and taxation liabilities.

Segment assets and liabilities

Non-current assets, current assets and liabilities in the International segment in 2020 include the assets and liabilities of the disposal groups held for sale.

Segmental performance for the 26 weeks 28 June 2020

Segmental performance for the 26 weeks ended 30 June 2019 (restated)