Hello, everyone, and welcome to the Domino's Pizza Group third quarter trading statement conference call. My name is Daisy, and I'll be coordinating your call today. I would like to hand the call over to your host, Elias Diaz, the CEO, to begin. Elias, please go ahead.
Thank you, Daisy. Good morning, everyone. I really thank you for joining our conference call to discuss our Q3 results. I am Elias Diaz, the Chief Executive Officer on an interim basis, and I am delighted to be joined today by Edward Jamieson, our new Chief Financial Officer. By the way, this is week 4 and week 5 for both of us. Also in the room are Dominic Paul, our outgoing CEO, and David Surdeau, our outgoing CFO, as well as Will MacLaren, our head of investor relations. I would like to take this moment to personally thank Dominic and David for their tremendous contribution to Domino's and for helping both Edward and myself with such a smooth handover. Thank you, Dominic, and thank you, David.
I am extremely excited to be leading this business, having been at the board for the last three years, as well as having been a shareholder of this company for the same period of time. I was part of the board who helped create the current strategy, and I am looking forward to continuing to accelerate the execution of it alongside our franchise partners, our suppliers, and my colleagues at DPG. Turning to today's call. Edward and I will give a brief summary of the statement we have released today, and then we will answer the questions which have been submitted by all of you this morning. Let me turn to the statement we released this morning. Starting with our trading performance.
We are very pleased with how we traded in Q3, and the performance in Q4 to date reinforced that our view that we will continue to deliver market share gains and increase returns for shareholders. Q3 like-for-like system sales, excluding VAT, were up 2.4, and this compares with a 0.9% in Q2. If you compare our total system sales in Q3 to the same period in 2019, they were up 19.6%. We have made a strong start to Q4 with our like-for-like system sales, excluding VAT, up 10.4% in the first six weeks, with total orders up 2.6%.
This strong start has been driven by a focus on service from our franchise partners, our digital strategy, strong national value campaigns, collections growth, and the initial incremental benefit of being on the Just Eat platform. I would like to thank our franchise partners for their extraordinary effort in focusing on service and rolling out the Just Eat platform in our busiest quarter of the year. Thank you to all of you. We have grown our share of the UK takeaway market, increasing from 6.4% in Q3 last year to 7.2% in Q3 this year, despite the tough comparator period and the contraction in the overall market size. As expected, total orders were lower in July due to the tough comparator with the knockout stages of the men's Euro football tournament and were muted in August, given the staycation impact from the previous year.
September was a stronger trading month, and this momentum has continued in Q4, as I just explained. Delivery orders declined 12.7% in the quarter due to a tough comparative quarter last year. Collections performed strongly and increased 28.1% in the quarter, driven by our strong value message and our continued strategic focus on this channel. I would also like to highlight the continued digital progress we are making. Over the last year, we have significantly upgraded our internal digital team and capabilities. The team have made a phenomenal start, but there is a lot more to do. Our app now accounts for 45.7% of our system sales, an increase of 3.7 percentage points compared to the same period last year. In the same period in 2019, the app accounted for 34.8% of system sales.
We now have 5.6 million active app customers, and this is an increase of 5% over the last six months. As a reminder, app customers are important as they have higher order frequency and have a higher lifetime value. You would have also seen from our statement this morning two important strategic milestones for the business. Firstly, Domino's will be rolled out nationally on Just Eat following a very successful trial. We started the trial in May to assess whether we can reach an incremental customer base with similar economics for our business.
The early results were encouraging, so we extended the trial in August and as a result of the continued success of the trial, which saw us continue to attract incremental customers, we have decided to fully roll out on Just Eat in the U.K. and Ireland. As of today, 1,000 stores are now live, and we are targeting the completion of the rollout by the end of the year. Importantly, this lengthy data-led trial deliver incremental orders and customers to Domino's. We expect it to be a tailwind to growth in the next financial year. Secondly, we exercise our put option over our German associate investment, which will yield total cash receipts between GBP 80 million and GBP 90 million. We expect to receive these proceeds in the first half of the next year, and we will then flow the profits through our capital allocation framework.
I will now hand over to Edward, who is going to talk through our guidance and some accounting changes.
Thank you, Elias. Good morning, everyone. I'm Edward Jamieson , the Chief Financial Officer of Domino's, and I'm delighted to be here today. I'd also like to echo Elias' comments and reiterate my gratitude to Dominic and to David for the smooth and seamless handover. We're pleased that following our recent strong momentum and confidence in the future, today we're announcing a new GBP 20 million share buyback, which is effective immediately. This is in line with our clear capital allocation framework and our commitment to distribute surplus capital to shareholders. At the end of last year, we agreed a new growth investment framework with our franchise partners. At the time, we committed to invest an additional GBP 20 million across areas such as technology, digital acceleration, and e-commerce development.
As a result, we've recently started projects to develop and implement two new cloud-based IT systems, a new e-commerce platform, and a new enterprise resource planning or ERP system. These projects will enable us to capture growth and drive efficiencies in the future, and they will impact the 2022 results as follows. For the e-commerce platform, circa GBP 1.5 million of costs, which have previously been expected to be capitalized in 2022, will now be expensed. In addition, an impairment of GBP 1.5 million will be taken over assets, which will no longer be useful following the implementation of the e-commerce platform. On the ERP, circa GBP 3 million of costs, which had previously been expected to be capitalized in 2022, will now be expensed.
Furthermore, the introduction of the ERP system will result in a further GBP half a million of accelerated depreciation in 2022. Now, turning to our guidance for this year. We expect underlying EBITDA to be in the range of GBP 125 million-GBP 135 million, in line with current market expectations. This is despite the investments we're making related to the growth investment framework that we agreed with our franchise partners, including the project costs I've just talked to you about. Excluding the impact of the investment project costs I've just outlined above, an underlying EPS is also expected to be in line with current market expectations. Now moving to modeling guidance. Underlying depreciation and amortization and impairment is expected to be circa GBP 22 million. Underlying interest, excluding foreign exchange movements, in the range of GBP 9 million-GBP 11 million.
Estimated underlying effective tax rate of circa 17% for the full year. Capital investment of circa GBP 21 million, which now reflects the updated treatment of project costs. Net debt at year-end around GBP 255 million, reflecting the new buyback program, which we announced today. I look forward to meeting you all in person soon, and I'll now hand back to Elias.
Thank you very much, Edward. Great to have you here as my partner at Domino's. As we look ahead of next year, notwithstanding the macro challenges, we remain confident that our resilient asset-light business model, our focus with our franchise partners on service, our digital platform and strategy, national value campaigns, collections growth, combined with our new store openings, the benefit of the Just Eat platform and our products, together with the alignment we have with our franchise partners, will deliver market share gains and increase returns from our shareholders, for our shareholders. We'll now turn to the Q&A. Yes, Will, could you please have the first question for us?
Thanks, Elias. We've got, so the first question comes from, Wayne Brown at Liberum. He's got three questions here, so I'll read them out one by one, so you can answer them. First question is, if you are gaining share when orders are strongly down and like-for-like double-digit down, and consumers were not yet feeling the pinch in Q3, Q4 will be fine due to the World Cup, but surely this means the outlook for next year is woeful. Please, can you give me your thoughts?
Thank you, Wayne, for the question. Well, the answer to this question is that the results pre-World Cup in the last six weeks have been very promising. Indeed, almost 3% customer growth. I believe that what is starting to be happening is that the strategy that the team has to put together is, yeah, is giving success and is starting to be giving the right results. Let me explain the reasons why or the basis of this. Number one has been the focus of the team on digital. Number two has been the promotions, the national value promotions that have been executed together with our franchise partners. The focus on service, as I said before, collections and incrementality that we are getting from the Just Eat implementation.
Look, I believe that, yeah, the growth that we are seeing in Q4 is very promising, is the result of the success of the strategy, and is gonna be the momentum that we are going to be getting into next year.
Thanks, Elias. The second question is, where are franchisee margins now? We estimated these were at mid-single digit at the exit of H1, so it must be worse now. Declining order counts and deep discounting will impact franchisee margins further. Please, can you give me your thoughts?
Sure, Wayne. Look, like any other businesses, the cost pressures are in all of our P&Ls from a restaurant perspective, and our franchise partners obviously are suffering it. That's why I think that the strategy that the team took together with our partners to bring a delivery charge was the right thing to do in order to be supporting and helping the margins. Now, let me remember a couple of points. Number one, the franchise profitability from a store level is ahead of the franchise profitability in 2019. That's the first point that I would say. Yeah, coming from the industry and many other businesses that I've been working with in the market, I have to say that the margins in this business are excellent.
I am, yeah, extremely excited by the market share that we are starting to be seeing because this is gonna be definitely helping, from that perspective to our franchise partners.
Finally, it's actually two questions here, but if you gained market share in a market despite your like-for-likes of -10, so 10%, that talks about a very poor market, what are your thoughts on outlook and if delivery is just too expensive? Linked to that delivery point, has the delivery charge hurt volumes in Q3?
Thank you, Wayne, again. Look, as we expected, there were gonna be tough comparables for everyone post-COVID impact. That was something that everyone expected. On top of that, as I said on introduction, tough comparables both in July and August. July because of the impact of the Euro tournament last year, and August because of the staycation impact that you have seen also in many other earnings calls from other competitors in the business. Now, I have to say that when this situation normalize or after the situation normalize, we really believe that we are very competitive. Two main reasons for that. The first one is value.
Overall, we really believe that we are very competitive from a value perspective. The strategy that my partner, Sarah Barron, and the marketing team are working together with the franchise partners is extremely strong also on the value campaign messaging. So both of them together, I believe that make us very competitive. Number two, service. We're the only one delivering our product directly to our customers, and we feel extremely strong that the experience of our partners delivering this product is gonna be putting us in a much more competitive advantage situation than many others. Yes, they were tough. We expected them to be tough, but we believe that once they normalize, we will be competitive.
The other part of the question that you had, I believe, was around the delivery charge. On this point, look, again, as I said before, Wayne, I really believe that it was the right thing to do by the team in alignment and working together with our franchise partners. By the way, this one of the many examples that I have seen of this great job that the team has done in order to be making sure that there is a good collaborative work with our partners. I would say it was the right thing to do because you're supporting our franchise partners from a P&L perspective. Look, this delivery charge is very aligned with what is happening in the market.
Indeed, I believe no, it's relatively small vis-à-vis others. It's around GBP 2. Being cheaper than many of our competitors, I really believe that it was the right thing to do from a strategic point of view. It's helping us to really bring our value message in a very strong way. By the way, it's pushing collection. If you see the numbers, we have 28.1% growth on collection, which is very important, and it's gonna be very critical for us from a strategy perspective next year as a value proposition considering the environment for our customers.
Overall, the right thing to do is supporting us from a value message perspective, and it's pushing collection, which is a very strategic pillar, that Dominic, David, and the rest of the team have been working hard over the last two years, and it is starting to be delivering results. Thank you, Wayne.
Thanks, Elias. We've got the next question comes from Richard Taylor at Barclays, and it is, Please, can you break down the reasons for the improvement in like-for-like in Q4 to date? Would the largest part of this improvement be the partnership with Just Eat, or are there other areas such as marketing?
Thank you, Richard. Appreciate it. Obviously, Just Eat has had an impact on these results, and it will continue to be delivering these results. That's why it's been very important for the team and for our franchise partners to work again in collaboration. A tremendous effort to be implementing Just Eat in 1,000 stores in such a short period of time. I couldn't be prouder from the team, right? Ty and the rest of the team have been working extremely hard to make this happen, and our franchise partners have been doing this in the most busy time of the year. Very excited for that. Yes, obviously it's delivering results, and it's going to continue to be delivering results.
Now, Richard, remember the strategy that we have put together over the last three years, and if you see that strategy, it was very clear from the very beginning that there were gonna be other pillars that need to deliver these results, and it's happening. Number one, value. The strong value messaging that the franchise partners and our team are putting together is extremely strong. Collection as a pillar that it is very important for this year but will be even more important for next year and 2024. Digital. If you think about the efforts that our partner, Nick Bunker, and the rest of the team have been doing during the last 11 months, it's been extremely strong. As I said before, right, it's already 45.6% of our sales.
It's a growth of 5% during the last six months. As you know, from a lifetime value perspective and from a frequency point of view, this customer is much stronger than the one coming through the app, so very, very important. Remember what Dominic and David communicated on the last earnings call, right? That we were going to be investing much more on marketing, and that's exactly what we have done. That's exactly what is starting to be delivering those results and will continue to be doing in the rest of Q4 and coming into 2023.
Obviously, yes, Just Eat has been very important, but the bigger marketing expenditure, collection platform, digital, value, and as I said at the very beginning of this call, the incredible focus of our partners on service, and service has been very important. Thank you, Richard.
Thanks, Elias. The next question comes from Ross Luckman at Panmure Gordon, and it is, "Given the slower store openings in 2022, what gives you confidence in opening 70 new stores by the end of next year?
Thank you, Ross. Appreciate it. Look, couple of comments on this one. Let me go through the facts and then my impressions, right? Because I've been now very close five weeks in this role, and I've been traveling all around the country and meeting my franchise partners. Let me start by saying, number one, the new stores are performing very well, and I think that that's the most important thing. The fact that the stores that we are opening are performing very well is the most important thing for our franchise partners, and it's what needs to continue to be happening. That, I'm very excited about it. Number two, the underlying business is also performing very well, which is also very important from that perspective.
The franchise partners, coming back to the point that I've been traveling and meeting them, are willing to open the stores. Yes, there has been a little bit of delay from a planning and a permitting perspective, by the end of the year, but you will see that we will have a very strong Q1 as a consequence of this from an opening perspective. Now, another element that I have to say that is very important is that 24 franchise partners are going to be opening these stores. That's 1/3 of our franchise partners willing to open stores as a consequence of the framework that the team has put together with the franchisees. So again, I feel confident. Yes, there has been a delay.
It will come in Q1 next year, but I am very excited of seeing that these openings are happening. They are spread across the system. 1/3 of our franchise partners are opening restaurants today in this environment with confidence for the business. Yes, traveling and visiting all of them, I see willingness, and they are keen on continue to be doing this in 2023 and 2024. Excited for these new store openings. Thank you, Ross.
Thanks, Elias. Next question to come from Douglas Jack at Peel Hunt. Four questions here, I think, are split across yourself and Edward. First question is, "To what extent has advertising and local store marketing accelerated?
Thank you, Doug. Look, our franchise partners have a step up in their investment from a local store marketing perspective. There are local deals happening across the country, and there is a very strong strategy by them on messaging our customers directly in order to attract customers into the business. Yes, step up in investment, lots of local deals and messaging to our customers. I think that these combine, as I said before, with the strategy that Sarah Barron and the team are having from a national point of view, both from a brand, digital, and also value messaging. That becomes a very strong partner.
Thanks. The second question is, "What is the likely tax liability from the German JV sale?
Hi, good morning, Doug. Let me take that one. We're not currently expecting a tax liability for the sales. We expect to receive a substantial shareholding exemption. We're going to HMRC at the moment for early clearance on that, and so it is subject to that confirmation. As I said, and just to reiterate, we're not currently expecting a tax liability for the sale.
Thanks. Second, sort of follow-up question from Doug is how high is input cost inflation, and are there any supply issues?
Clearly this is a sort of market and a macro sort of factor question given the dynamics that we've seen. Look, we've certainly seen inflation and that's similar to the levels that we've talked to you about previously. I think it's worth sort of emphasizing a few points on this. We are a very significant purchaser in the categories in which we buy. We have very established relationships with our suppliers and our procurement teams work very closely with those suppliers to ensure you know the continuity of supply. We also have efficient production facilities to ensure that we sort of you know minimize the impact of that cost inflation and produce as efficiently as possible.
Let's also bear in mind that our model is that we pass through costs to franchisees.
Thanks. The final question from Doug is, can you expand on the costs and benefits of the Just Eat trial?
Sure. That, I'll take this one. Let me remark another point, right? Which is that we are at 99.9% of full availability right now in the system. That's world-class standard within the industry. Kudos to big family and the team doing this even with the growth that we are seeing in the sales. Very strong from that point of view. Now, on Just Eat, look, we are seeing incremental. We see customer growth and we see incrementality.
That's why, in partnership with our franchise partners, we have taken the decision to extend this test and launch it in the market, and partnering right now with Just Eat. We see a very important and relevant incrementality, from a customer growth perspective. And look, obviously, Just Eat has been a great partner, but also after COVID, they have been growing their customer base, and that's gonna be helping us a lot in order to continue to be bringing this growth, not only in the short term, but most importantly, in the medium long term. Definitely 2023 and 2024 are gonna be very good evidences, of this partnership.
Let me just comment further. I think there was an element of a cost question within that. To be clear about the model, there are no costs for us as DPG. There's a commission that's paid by franchisees, you know, to Just Eat on every order taken.
Okay. Thanks, Edward. Moving on to the next set of questions there from Richard Stuber at Numis. There are three questions here. The first question is what benefit will you get from the IT spend, and what will the impact be for this year and from next year onwards? And then specifically, will this additional GBP 4.5 million OpEx recur in 2022?
Okay. Look, as previously communicated in the growth investment framework agreed with our franchisee partners, we're investing in IT within the additional GBP 20 million investment envelope. The e-commerce platform will provide a scalable world-class e-commerce back-end hosted in the cloud, which enables us to deliver improvements quickly and more cost-efficiently than our current platform, and future-proofs our e-commerce platform for future developments. The new ERP system enables us to standardize operating practices and drive efficiencies across the business and to enhance our overall control environment. Both systems are part of the foundation for our next stage of growth. As I've covered earlier, in 2022, we'll see an impact on profit before tax of circa GBP 6.5 million. This is the GBP 4.5 million in costs expense that were previously expected to be capitalized this year.
This is largely due to revised guidance around the accounting treatment costs associated with cloud platforms. This guidance affects a number of companies developing solutions on new cloud platforms. This reduces capital expenditure and increases operating costs above EBITDA. Secondly, there's been circa GBP 2 million in non-cash accelerated depreciation and impairments. The cloud computing costs of both the ERP and the platform will continue through 2023, and guidance will be provided at our full-year results next year. In future years, there'll be an ongoing annual financial benefit from the lower amortization charge because we've expensed a greater portion in 2022 and 2023.
Thanks, Edward. Next question is, if the Just Eat trial has been a success, would you consider extending this to other aggregators, i.e., Uber Eats and Deliveroo, or does your partnership with Just Eat preclude this?
Thank you, Richard. Look, we are focused right now on maximizing the partnership with Just Eat. That's where we are focused and that's the effort that we all internally and with our franchise partners are putting together right now. That's the priority. May we look into this in the future? Yeah, we may look into this, but right now it's focusing on making sure that our partnership with Just Eat is continuing to be having the success that it's having right now.
Richard's final question is, given the cost headwinds facing franchisees, where do you see franchisee profitability heading this year and next? Will you provide any support over and above what has been agreed in the franchisee resolution?
Thank you, Richard. Look, the framework that the team and the leadership of Dominic have aligned with our partners will continue. It's delivering the results that we wanted to have, and that's what we're going to be continuing to be doing, which is maintaining the collaboration with the spirit that has been created, working together with them under the same framework next year and the following years to come, and continue to be growing this business thanks to that partnership together with them as we are starting to be seeing.
Once more, a big thank you from that perspective for the leadership of Dominic, David, and the rest of the team to making this happen and to our franchise partners to work with us in order to make it happen.
Thanks, Elias. Next question comes from Harry at Deutsche Bank. I think we've covered some of this, but I'll read it out because there are some additional points here. What is driving the 10.4% like-for-like in Q4 to date? And what explains the huge difference versus +2.4 at Q3? And any indication on price versus volumes here would be helpful.
Sure. Thank you. Thank you, Harry. Let me start by the first one. I think that we have already shared this across these questions and also on the statement, but I will go through them, right? I think that again, the strategy that the team has put together is delivering the results. It's starting to be delivering those results, both from a frequency growth perspective and a convenience point of view. Number one, the focus of our partners from a service point of view. I think that's critical. That has been critical and is going to continue to be very important moving forward. Number two, the value messaging in order to attract more customers into our stores and to increase that frequency.
The digital strategy that has been put together by Sarah, Nick, and the team, really important, right? If you think about that, being already at almost 46% of our sales on the app and taking that into consideration that those customers bring more frequency and that their lifetime value is higher, is important. The results that the collection platform is starting to be delivering through very strong work by the team and by the focus that has been placed in this one, how this will be important for next year as a value platform and a value messaging to our customers. The higher expenditure from a marketing point of view on the second half of the year, as was communicated in previous calls.
Last but not least, and obviously excited because it will continue to be delivering results next year, yeah, our partnership with Just Eat and the platform that we have increased. Those are the elements, service, value messaging, digital, collection, more marketing expenditure, and Just Eat. Oh, yes, sorry. The second question was between talking about price and volume. Look, I'll tell you, the results are a combination of the two, price and volume. Where I am very excited to see is that we are seeing customer growth at almost levels of 3%. I think that that's the result of what I just said. More importantly, three elements of what I just said. Four elements, sorry. Service, digital, value, and Just Eat.
I think that, but yes, it's a combination of both of them, but definitely excited by seeing growth in terms of customers at almost 3%.
Thanks, Elias. The second question is, how is the marketing campaign for the World Cup progressing? Would you expect Q4 like-for-likes to trend higher than the 10.4% on the back of the World Cup?
Sorry, could you repeat it?
The first one is, how is the marketing campaign for the World Cup progressing?
Yeah.
Would you expect Q4 like-for-like to trend higher than the 10.4% on the back of the World Cup?
Look, the campaign, as I said before, is going very well. The team is getting ready from an operational perspective and is all ready in order to be executing this campaign. I think that the results that you are seeing right now are going to be continuing on the rest of the year and gonna be continuing in Q1 of next year. Strong campaign, ready to continue to be executing, and I believe that they are going to continue to be delivering the results that we are seeing.
The final question is from Roberta at Investec. It is, could you give more color on the 10,000 hires applying for the World Cup Christmas season? How many are expected to be permanent? In general, how do you expect the World Cup to impact your business this year, given it's a winter rather than summer event?
Thank you, Roberta. This question is interesting, right? It's very linked to, I think it was the last question of Richard before, and this is the collaboration with our franchise partners. I think that that's the. This is another evidence of the great success of us working together. To have the team at DPG putting together a strategy to support the franchise partners and the franchise partners working with us on that front. Why? Because the recent recruitment initiative that we've been having has been a tremendous success. We have seen a significantly bigger pipeline of colleagues coming into our stores, from a driver, from a shift manager, from a runner, and from a store manager perspective, and that's extremely important.
That together with the fact that, you know, my partner, Nicola Frampton, and the rest of the team from an operational point of view have been delivering excellent workshops with our franchise partners in the field in order to get ready to what is gonna be a very successful World Cup, I am completely sure, has been very important. Again, extremely excited about that. September and October have been record numbers from a recruitment perspective. That means that, yeah, the initiative that the both of us have been working together has been very successful.
Quite honestly, I am very excited about the World Cup and the fact that it's happening in December, which is in November and December, which is obviously our busiest time of the year. Yeah, very excited about that and focusing every day on making sure that we are ready from that point of view. Thank you, Roberta.
There are no further questions, Elias, at this stage.
Thank you. Thanks, Will, for everything and getting everything ready. Thank you very much for dialing into the call this morning and for your questions. This concludes the call today, and goodbye and have a good day to everyone.
Thank you everyone for joining today's call. You may now disconnect your lines and have a lovely day.