Annual Financial Report

RNS Number : 7421H

Domino's Pizza UK & IRL PLC

26 February 2010

 



Domino's Pizza UK & IRL plc

26 February 2010

For immediate release

Domino's Pizza UK & IRL plc (the "Company")

2009 Annual Financial Report

The Company today announces that it has posted its 2009 Annual Report to those shareholders who have requested this, together with the notice of AGM, to be held on 30 March 2010, and Proxy Form. Copies of these documents have also been submitted to the UK Listing Authority (the "UKLA") and will shortly be available for inspection at the UKLA's document viewing facility which is situated at: The Financial Services Authority, 25 The North Colonnade, London, E14 5HS. A copy of these documents (with the exception of the Proxy Form) is also available on the Company's website www.dominos.uk.com.

The Company announced its preliminary results for the 52 weeks ended 27 December 2009 on 16 February 2010. The Company today provides the following additional regulated information, in relation to the Annual Report, in full unedited text as required to be made public under the Disclosure and Transparency Rules.  This announcement should be read together with the preliminary results announcement.

A condensed set of financial statements were attached to the Company's preliminary results announcement which included an indication of important events that occurred during the year.  The Annual Report also contains information regarding the Company's risks and uncertainties and a responsibility statement relating to its content; an extract of this information is provided below as is required under the Disclosure and Transparency Rules. 

Risks and uncertainties

Risk is an inherent part of doing business and the Board is fully committed to identifying, evaluating, managing and monitoring significant risks facing the business, as described in more detail in the Corporate Governance section of this Annual Report and Accounts. The main specific risks and uncertainties relating to the business of the Group at present are as follows:

Risks specific to the business of the Group

Key contracts

The Master Franchise Agreement (MFA) and the Know-How Agreement (pursuant to which Domino's Pizza Group Ltd (DPG) is granted the right by Domino's Pizza International Franchising Inc. (DPIF) to establish and operate the commissaries) are the two contracts that the Group is most dependent on. The term of the MFA continues indefinitely until all of the franchise agreements that DPG has with its franchisees have not been renewed or been terminated. Franchise agreements have an initial term of 10 years and can be renewed at the franchisee's option and the renewed franchise agreement will be subject to further renewal in accordance with the terms of the standard franchise agreement at that time. Therefore if all of the franchisees do not renew their franchise agreements and DPG cannot find replacement franchisees, there would eventually come a time when there are no franchise agreements in effect and therefore the term of the MFA (and related Know-How Agreement) would end. The chances of this situation arising are remote as, to date, all franchisees have renewed their agreements for a further term or sell their store to another franchisee who then commences a new 10 year term.  A large-scale refusal by existing franchisees to renew their franchise agreements and a related failure to find replacement franchisees could have a material adverse effect on the Group's future results.  One of the Group's key focuses is to ensure that franchisees are able to maximise the profitability of their stores, thereby making the stores themselves valuable assets that the franchisees want to keep for the long-term. Due to the financial attractiveness of the stores, franchisee demand for renewal is very high indeed and through its marketing of the brand to potential franchisees, there is a strong demand for new/existing stores from potential franchisees.

Continued expansion

DPG's right to grant franchises for new Domino's stores in the UK and the Republic of Ireland is dependent on the continuation of the development term of the MFA. The development term is a 10 year renewable term that was last renewed with effect from 1 January 2007. The current development term requires DPG to increase the number of stores in the territory by 27 stores per year over the next 10 years, from a base of 450 stores. The ability to open the target number of stores will depend on a number of factors (for example general economic conditions and the availability of adequate financing for franchisees), some of which are beyond the Group's control. If these targets are not met, DPG would not receive a royalty waiver which would mean that DPG would have to pay DPIF a higher annual royalty. If DPG has failed to open and maintain the minimum number of stores or is in material breach of the MFA, then DPIF is not obliged to renew the development term.  This would mean that although DPG would continue to serve as the franchisor to all existing stores, it would not be able to grant franchises for any new Domino's stores. An inability to expand the business by opening new stores could have a material adverse effect on the Group's future results.  Currently the Group has significant headroom and if it continues opening stores at the rate of 55 per year as it did in 2009, the full requirement of the current 10 year development term would be met in four and a half years. The store opening requirement is 27 per year. As mentioned above, the Group works very hard to ensure that new stores are financially attractive to existing and potential new franchisees and this is done by securing the best sites available and continuing to invest heavily in the brand in terms of marketing and operational excellence.

Termination of the MFA

The MFA may be terminated by DPIF if DPG breaches the agreement, although all potential breaches are within the direct control of DPG. Depending on the nature of the breach, DPG may have the right to cure the breach within an allocated time period.  On termination of the agreement by DPIF, DPIF has the right to require the sale or the assignment to it of any stores or franchise agreements at their fair value. This could have a material adverse effect on the Group's future financial condition.  The Board constantly monitors the Group's compliance with the material terms of the MFA various safeguards are in place meaning that there is very little possibility of termination.

Major food safety scares

The Group purchase a large range of food products from across the world. Food is under increasing scrutiny from government-led monitoring programmes around the world looking at microbiological or chemical standards, as well as from consumer groups. It is possible that a food type that is a component part of basic pizza (e.g dough base, tomato sauce or cheese) may become subject to a national or international food safety scare. Even if the food product type the Group uses is not itself at the centre of the food scare, by association there may be a consumer boycott of all types of that food product.  Consumers may refrain from purchasing the Group's products if there is a food safety scare relating to a product strongly related with pizza, which is based either on scientific findings or media speculation. If this consumer behaviour was to continue for an extended period of time and no acceptable substitute food products were available for use by the Group, there could be a material adverse impact on the Group's operating results for the periods affected.  The Group has a stringent supplier assurance programme in place to ensure the products it purchases are safe. Suppliers have contingency plans in place should their usual methods of production or raw materials become threatened. All suppliers are communicated with regularly to ensure the business is aware of any emerging food safety scares. The Group also has an efficient communications network through which it will be able to inform franchisees about food safety so that customers can be reassured as appropriate.

Franchisee concentration

Certain franchisees already individually account for approaching 10% of the total franchise system, so there could be a significant impact on the Group should such a franchisee's business get into financial difficulties and cease trading. Alternatively, the concentration of such a large number of stores in the hands of a very small number of franchisees could mean that such franchisees seek to renegotiate certain elements of the current franchise arrangements (for example fees and royalties) or seek to open their own commissaries.  The financial failure of a major franchisee could lead to unpaid bills for goods supplied, unpaid royalty income and closed stores (which could deter banks from lending to potential franchisees in future), all of which could have a material adverse affect on the future financial performance of the Group's business. The Group's commissary operations are a major source of its income and profitability, therefore franchisees setting up their own commissaries could have a material adverse affect on the Group's future results of operations and financial condition.  The Group maintains especially close working relationships with its largest franchisees and undertakes regular business reviews to ascertain their financial health and funding position. The Group also ensures that the commissaries continue to deliver excellent quality, service and value to negate any temptation on the part of the largest franchisees to open their own commissaries.

Damage to the brand

The Group depends, in large part, on the Domino's brand. The vast majority of stores are owned and operated by franchisees who are responsible for delivering the high standards of the Domino's brand to customers. Whilst franchisees are required to operate within the Group's standards for store operation, they are given a degree of autonomy to ensure they operate in a way that suits their local area.  A franchisee could fail to operate to the required standard and as a result attract adverse local and national publicity, which if the failings were of a sufficiently material nature, could lead to lasting damage to the brand with customers of the Group's stores choosing not to buy from Domino's again. A material loss in sales caused by brand damage could adversely affect the Group's future results of operation and financial condition.  The Group provides that franchisees must adhere to strict quality, safety and image regulations that the Group enforces through the implementation of training and careful monitoring, funded by both the franchisees and the Group, and through store visits and frequent appraisals.

Commissary production issues

One of the key functions of the Group's business is the manufacture of dough and the distribution of all food and packaging items used in the stores by the Group's own commissaries based in Milton Keynes (UK), Penrith (UK), and Naas (Republic of Ireland). One or more of the commissaries could suffer an interruption to production or distribution caused by factors such as mechanical failure, fire, failure of a key supplier, adverse weather preventing production or deliveries or staff unavailability on a large scale.  There could be a material decrease in the volume of sales of the Group if there were repeated failures in the Group's dough production and distribution of food and packaging materials which prevented stores from trading for regular or prolonged periods.  The Group works in partnership with its suppliers to manage the risk of any delays or interruptions in the supply chain, which may affect franchisees' trade. The Group has the ability to increase production at its other facilities if one of its commissaries has to reduce or stop production for any reason and this resilience will be strengthened further when the new commissary in Milton Keynes opens in the second half of 2010.

IT infrastructure

The success of the Group's sales through channels of e-commerce is highly dependent on the ability of the Group to maintain operational and efficient IT systems in order to facilitate online sales and orders made via SMS. Furthermore, the Group's stores utilise IT systems to place delivery orders to the Group's commissary sites and the Group also uses the same IT systems to calculate the royalties payable by each of the stores.  If the website fails for an extended period of time, there could be a material loss of resultant orders and this would adversely affect sales for the day(s) in question, which if this occurred on a regular basis may adversely affect the Group's business and results of operations. A failure of the Group's IT system could lead to an inability to accurately calculate royalty payments and for franchisees to place food orders which could, if prolonged or repeated on a regular basis, adversely affect the financial performance of the Group.  The Group's business continuity plan contains an IT disaster recovery plan in which every potential point of failure has been analysed and measures put in place to mitigate these risks.

Market driven risks

Detrimental economic spending/consumer spending

Changes in the general economic climate, such as those caused by a UK and Irish recession, can have a detrimental effect on consumer expenditure and therefore Group revenues.  Higher levels of unemployment, increased taxes and general pessimism about the economic outlook for the future could lead to a reduction in consumers' willingness to spend disposable income on buying home delivery food. This could adversely affect the Group's business and results of operations.  The Group believes that a number of prevailing trends actually benefit the Group's business, including a population with increasingly greater disposable incomes who are cash-rich and time-poor and an increased trend of busier and more hectic lifestyles leaving less time for home cooking. The Group constantly works with its franchisees to ensure that the Domino's proposition for customers is the most compelling in the home delivery pizza market in terms of quality and value. In terms of marketing power and therefore brand awareness, each store contributes between 4 and 5% of net sales to a national advertising fund which gives significant marketing spending power (£19m in 2009) in a currently deflationary media market.

Consumer relevance

Food service businesses are affected by changes in consumer tastes, national, regional and local economic conditions, local and national competition and demographic trends. Any material change in market perception of the home delivery and convenience food industry, or the Domino's brand in particular, could adversely affect the business of the Group. In addition, increasing government and media initiatives to create greater awareness of healthy eating could impact on the public's perception of the convenience food industry.  If the Group fails to anticipate and respond to a change in consumer demand for home delivery pizza, then this could have a material adverse affect on the Group's future results of operations and financial performance.  The Group recognises the link between a balanced diet, lifestyle and health and therefore provides nutritional information on its website to allow customers to make an informed choice and also offer a reduced fat mozzarella cheese. The Group works relentlessly to reflect changes in consumer tastes and improve its offering by investing in price, quality and service in order to deliver the optimum home delivery pizza service to its customers.

Regulatory risks

Compliance

The Group's operations are subject to a broad range of regulatory requirements, particularly in relation to planning, health and safety, employment, advertising and licensing laws and in terms of regulations over the Group's products and services.  Non-compliance with legal and regulatory requirements can lead to the imposition of fines, damage to the brand and business interruption. In certain cases, for example a material breach of Health and Safety legislation in one of the Group's commissaries, this could lead to loss of life as well as significant damage to the Company's brand. This could have a material adverse affect on the Group, future results of operation and financial condition.  The Group monitors regulatory developments and has a strong training and compliance regime to ensure all risks are identified and properly assessed and that relevant regulation is adhered to. A Health and Safety Committee is in place in order to oversee the operation of the Group's numerous health and safety policies and procedures.

Additional risks and uncertainties currently unknown to the Group, or which the Group currently deems immaterial, may also have an adverse financial effect on the financial condition or business of the Group.

Statement of Directors' responsibilities

The 2009 Annual Report contains a responsibility statement signed on behalf of the Board by the Chief Executive Officer Chris Moore and the Chief Financial Officer Lee Ginsberg. As stated above, this statement is repeated here to comply with the provisions of the Disclosure and Transparency Rules.  

Directors' responsibility statement

The Directors are responsible for preparing the Annual Report, the Report on Directors' Remuneration and the financial statements (Group and Company) in accordance with applicable UK laws and regulations. UK company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and applicable UK law.  Further, they have elected to prepare the Company financial statements in accordance with UK accounting standards (UK GAAP) and applicable UK law.

In preparing the Group financial statements the Directors are required to:

·      select suitable accounting policies in accordance with IAS 8: Accounting Policies, changes in accounting estimates and errors and then apply them consistently;

·      present information, including accounting policies, in a manner which presents relevant, reliable, comparable and understandable information;

·      provide additional disclosures when compliance with the specific requirements  in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and financial performance; and

·      state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements.

In preparing the Company financial statements, the Directors are required to:

·      select suitable accounting policies and apply them consistently;

·      make judgments and estimates that are reasonable and prudent;

·      state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

·      prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the Annual Report and financial statements comply with the Companies Act 2006 and with regard to the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for the system of internal control for safeguarding the assets of the Company and the Group and hence for taking reasonable steps to prevent and detect fraud and other irregularities.

A copy of the financial statements of the Company is posted on the Company's website. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the website. Information published on the Company's website is accessible in many countries with different legal requirements. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

DTR 4.1 statement

Each of the Directors, the names and functions of whom are set out on page 29 of the Annual Report confirms that to the best of his or her knowledge, they have complied with the above requirements in preparing the financial statements in accordance with applicable accounting standards and that the financial statements give a true and fair view of the assets, liabilities and financial position and profit of the Group and the Company and of the Group's income statement for that period. In addition, each of the Directors confirms that the management report represented by the Directors' Report includes a fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that it faces.

Directors

Stephen Hemsley, Executive Chairman

Colin Halpern, Non-Executive Vice Chairman

Chris Moore, Chief Executive Officer

Lee Ginsberg, Chief Financial Officer

Nigel Wray, Non-Executive Director

John Hodson, Non-Executive Director

Peter Klauber, Non-Executive Director

Michael Shallow, Non-Executive Director

Dianne Thompson, Non-Executive Director

Adam Batty, Company Secretary

Related party transactions

As announced on 16 December 2009, the Company purchased 170,618 ordinary shares of 1.5625 pence in the issued share capital of the Company at a price of 292 pence per ordinary share from HS Real Company LLC, (a company owned by a discretionary trust, the beneficiaries of which are the adult children of Colin Halpern, the Non-Executive Vice Chairman of the Company, and Gail Halpern).  There are no other related party transactions requiring disclosure.

Enquiries:
Domino's Pizza UK & IRL plc Adam Batty, Company Secretary	[phone]

 

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