DP Eurasia NV

LSE:DPEU

Earnings Call Analysis

Earnings Call Transcript 2022-Q4

[Operator]

Good day and welcome to the DP Eurasia Full Year Results Presentation. Please note this call is being recorded. [Operator Instructions]

I will now hand over to Aslan Saranga, CEO. Please go ahead.

[Aslan Saranga, executive]

Good morning, everybody. Welcome to the preliminary results for the period ended 2022. I have my colleagues with me: our Group CFO, Neval Korucu; and our Head of Investor Relations, Ilknur Kocaer with me.

First of all, I would like to start with the horrible earthquake in Turkey. We are deeply saddened by the earthquake that devastated prominent cities of Turkey on February 6, 2023. We regret to disclose that 4 of our colleagues lost their lives, 50,000 people in Turkey lost their lives. We extend our condolences to all grieving families who lost their loved ones. In order to alleviate the impact of the horrible disaster, we have organized donation campaigns in the form of cash, food, clothing with our employees, suppliers and aggregators. In order to better understand the urgent needs, an Emergency Helpline has been designated. Domino's Pizza International also organized a separate campaign as a part of Partners Foundation program.

We'll continue to stand in solidarity with our employees, business partners and community in this difficult time. Now I want to also give an update on our Russia situation. We retain a fundamental commitment to the safety and welfare of our employees and customers. As of now, the group continues to evaluate its presence in Russia and, as previously announced, is considering various options which may include the divestment of its Russian operations. In the meantime, the group continues to limit investment in Russia and remains focused on optimizing the existing store coverage. Following the closure of 29 stores over the course of 2022, the number of Russian stores stood at 159 as of 31 December 2022. We'll continue to communicate in the same transparent and consistent manner as this matter progress.

All the group figures that we are going to present here excludes Russian business, which is now classified as a discontinued operation but in the appendix of the presentation, you have the Russian numbers. Now in today's agenda, I'm going to present the group highlights in the beginning and then will give overview about Domino's and COFFY and then some financial overview and management guidance. And after the conclusions, we will be happy to get your questions and the answers. Now about the group highlights for 2022. Having worked extremely hard to combat the high levels of financial volatility in the regions we operate, I am pleased to be reporting solid results.

There are 3 important positive developments in our business in 2022. I'm also happy to say that we have seen further improvements in this area into the first quarter of 2023. We had a solid store expansion in Turkey. We had opened 48 new store openings of Domino's. This is number one.

Number two, EBITDA growth was solid with 93% growth and the inflation adjusted growth is 5.3% and we had a promising improvement in the leverage ratio. Last time I spoke to you, our leverage ratio was 4x by the end of June 2022. It dropped to 2.5x by the end of 2022. And in this number, all Russia related debt is included. Number three, of course COFFY. COFFY continues to represent an excellent growth opportunity to the group. COFFY network increased by 21 stores to reach 29 thanks to solid ongoing demand.

Our presence in COFFY reached 40 stores as of today and this is the highest. For 2022 we have opened 71 stores. This is the highest net store opening since 2013 for the group. Now about our group key indicators. As I mentioned earlier, we have now 700 stores and we have 159 stores in Russia also and we have opened 48 Domino's Pizza, 21 and 2 Domino 's pizza in Georgia. That makes 71 stores. And with 48 Domino's Pizza, we have performed better than our guidance.

In COFFY, we are in line with our guidance. Our like-for-like is in line with our guidance, which was 62% and when we look at the inflation adjusted figure, it's minus 5.3%. I would like to remind you that from January to September we had a VAT reduction from the government, which is 7%. So if we add the 7%, our like-for-like is 1% or 2% positive. Our online delivery is still increasing, it's 5 percentage points more than 2021. So 81% of our sales is through online delivery. Our system sales have increased 1.5%, our revenue has increased 7.6% and our EBITDA came to TRY 311 million and the increase is 5.3%. And our adjusted net income of TRY 214 million, this is 50% increase inflation adjusted. That is driven by a tax benefit write-off of Russia debt in Turkey accounts. Next page you can see the comparison of preinflation adjusted and post inflation adjusted. So if we go [ through the breakdown ]. Net system sales is 76% preinflation adjusted, post inflation adjusted it's 1.5%.

Revenue; preinflation 86%, post inflation 7.6%. EBITDA; preinflation 93% increase, post inflation 5.3% increase. Net income increase; preinflation 156%, post inflation 50% increase. As said earlier, these are quite strong results. Now here you can see the breakdown of our sales. Domino's Turkey sales is TRY 3.4 billion, Azerbaijan TRY 79 million, Georgia TRY 49 million, COFFY TRY 59 million and Russia TRY 1.1 billion. Now here you can see the breakdown of our stores. We have 700 stores in Turkey and 29 of them is from COFFY; 16 Azerbaijan and Georgia. So we have 10 stores in Azerbaijan, 6 stores in Georgia and we have opened 2 more stores in Georgia on 2022. And total number in Turkey is 655. So breakdown of corporate and franchise, going forward we mainly open franchise stores. So 86% of our store count is franchise, 601; 14% of our stores are corporate, which is 99 stores.

So let's get into the details of our Domino's Pizza business in Turkey. In Turkey, you see on the left side of the page nice image of our stores. So there's a big demand for store openings in Turkey through our franchisees. This year we opened 48 stores, all of them are franchise openings. So 86% of our Domino's stores in Turkey are franchise, 14% is corporate stores so we have 89 corporate stores in Turkey.

In this page I would like to talk about the earthquake impact. Domino's Pizza Turkey has 50 stores in the affected 10 cities. 38 stores were operational within 15 days following the devastating disaster. 12 of our total 655 Domino's stores in Turkey are still damaged and not operational, which are predominantly franchise owned stores. Here I would like to say that these 12 stores is not a significant number for our business and it will not impact our overall year-end results. So we are working on several options for these stores, including moving to other cities.

I expect by the end of the year all these 12 stores will be opened. And still in this pictures, you see a specific project that we are working on is opening prefabric stores in the affected regions. Government especially is incentivizing the opening of the factories in this region. So we are building prefabric stores in these areas. This is the first time. Probably we'll open it in the coming weeks and I would like to thank my team also here who have been [indiscernible] on opening these stores.

About the online share. As you know, the online share of our business is increasing, frequency of our customers are increasing. So the share of online sales in Turkey delivery system reached 81%. This corresponds to a 5 percentage point increase over the last 12 months so it's also 65% of our overall sales. Takeaway share improved last year, it improved from 21% to 26%. But delivery share is still above the pre-pandemic due to shift of consumer preferences.

Right now 74% of our sales is through delivery, 26% is through takeaway. So as I said earlier, we had a resilient performance despite the inflation challenge. Our like-for-like performance was minus 5.3%, but that includes the positive impact of last year's VAT reduction of 7%, which makes our like-for-like 1% to 2% for this year. And our growth performance has started very well this year also. Our group system sales in the first several weeks of 2023 is up 18.2% and our like-for-like in Turkey is 11%. I would like to remind again this is inflation adjusted numbers. We had one of the highest inflations in Europe and how Domino's Turkey managed inflation in 2022. I believe inflation is a challenge, also is an opportunity for our business because there are lot of customers coming down to our foods both in COFFY and Domino's and we have a lot of experience on managing that. So we have successfully implemented our targeted action plan to overcome macro factors largely outside of our concern.

Our clear and targeted strategy focuses on 3 areas: number one, strategic pricing and product innovation; number two, continuous digital innovation for better customer experience; number three, operational efficiency to enhance store profitability. About strategic pricing and product innovation: in my last presentation I have told you that we have come up with a product called Pizzetta, which is more or less around $1 for 1 person -- to feed 1 person.

So these kind of product helps us when the prices are increasing to acquire new customers with a lower budget. And in the first quarter we have also come up with side items of Pizzetta like some desserts, some garlic breads which is $0.50. So it's also working very well for the business. In the digital side, we are focusing especially on apps because our frequency in apps is higher than rest of the digital sales and we have App Only offers and we have also recommendation engines.

We can personalize our offer and we can offer personal offers to our customers, which is also helping to increase the frequency. About operational efficiency, we are fanatically focusing on franchise profitability. As you see from the numbers, it's working very well. Last year we opened 48 stores. And we have long-term partnership with our cheese suppliers, tomato suppliers and Coca-Cola, which is helping our cost. And by the flexible labor management also, our efficiency in store helping to combat inflation.

Now let's talk about COFFY little bit. This is literally a very exciting business for us. Coffee business -- espresso-based coffee business is growing very fast in Turkey. In the last 8, 10 years, our competition has opened more than 1,000 stores. Starbucks is in Turkey, it's one of their biggest markets. So with this big coffee market, we believe we can use our expertise from Domino's with our digital infrastructure, with our logistic infrastructure, with our franchise network.

We believe we can be one of the biggest players in coffee business in Turkey. So our COFFY, our own brand strengthened its presence in the Turkish market with accelerated expansion progress. Here you see the 3 years' timeline story of COFFY. So we opened our first store in October 2019, which reached a breakeven point in the third month. In 2020 we started delivery, around 20% of our sales are through delivery in COFFY. And then by the end of -- by the beginning of 2021 we first opened our franchise stores, which became profitable.

We opened our first stores outside of Istanbul in Ankara. We launched our app in 2021 and 10% of our sales are through our app and we believe it's an important competitive edge. February 2022 we opened our 10th store and then in 2022 we accelerated the growth. So we are now in 6 cities as of today. We have 40 COFFY shops, different coffee concepts, we have kiosk in the universities, takeaway units and big COFFY shops. So the pipeline is really very strong.

One of the other big advantage of our COFFY business is the synergy that we are using the franchise network, we are using the online infrastructure, we are using our head office. As COFFY business grows, the overall DPU business will be more efficient in terms of head office costs and commissary costs and also it also helps -- logistics infrastructure, franchise network, online infrastructures helps us to grow very fast in different cities for COFFY.

So on this page, Page 22, you see there our pipeline. We have a solid store growth plan for COFFY. So by the end of first half, we are planning to be minimum 50 stores and by the end of 2023, we are targeting minimum 80 stores for COFFY. And so this page you see one of our latest offering, the big COFFY shop around 300 meters square so it reaches the new city in Sakarya. So how do we keep our value promise? So it's very clear that right now COFFY is a strong business model. And what is this business model about?

There are 3 important value promise for COFFY. One of them is the simplicity, single price for different choices. You enter into our COFFY shops and you have single price strategy and you have 20 variety of coffee and different varieties of sandwiches, desserts and you can buy them with a single price. Second one is the value for money. We have more attractive pricing thanks to our purchasing power and good infrastructure. We continue to position ourselves at 30% to 40% more attractive prices than the competition. And I would like to tell you that last year we were able to increase our prices by 70%, which is parallel to inflation in Turkey.

The third one is the convenience. We continue to improve our app experience, it's a very easy and fast app experience and we improve it. For example one of the latest one. A structure to place their orders via app before the customer arrives at the stores because nobody wants to wait in the line in the COFFY shop.

So when you come to the stores once you arrive, you push the I Arrived button and customer can receive their order without any delay. We have a very good loyalty program. And as I mentioned earlier, our share of app in total sales is 10%. Now a small reminder about our strong financial performance maintained. With 40 shops, we still have the same good financial performance.

Our average investment per store in COFFY is TRY 1.5 billion to TRY 2 million, which is around $75,000 to $100,000. The average weekly unit sales reached TRY 89,000. This is around also $4,500 and we do weekly 3,000 orders for COFFY and so this is 2.5 years average return on investment. So you put $100,000 and you take an investment on that in 2.5 years. These are the numbers for the franchises and franchisee store margin is 12% to 13%. And last year we have increased our sales to TRY 60 million, which is 430% increase. Hopefully, we'll have a more solid business by the end of this year.

So some financial numbers about our business. This year our net system sales has increased 1.5% inflation adjusted to TRY 3.5 billion. I would like to remind you that last year our increase was 34%. And it is very difficult to keep the margins in an inflationary environment and we have succeeded that also. Last year our margin was 15.1%, more or less the same number like the previous year and our CapEx and cash conversion is still very high, 70% of our cash -- is converted to cash.

Now the promising improvement in leverage ratio with good results helped us to decrease our leverage ratio. Our leverage ratio including the Russian loan is down from 2.9x to 2.5x. You might remember in June 22 our leverage ratio was 4x. And for only Turkey business, our leverage ratio is 1.6x so 1.9x down to 1.6x. So you can see the cash.

Now let's look into our management guidance for the year 2023. Strong store openings momentum in Turkey anticipated to continue for both Domino's and COFFY stores driven by solid franchisee demand and driven by big market of 81 million in Turkey. On top of an outstanding year of growth in a challenging year, 2023 will be another year of increasing the coverage to cater customer needs in a fast and seamless manner. Solid sales momentum will be maintained in 2023 along with sustained network growth. The group is committed to deliver like-for-like growth through the year with the volume expansion and targeted price adjustments.

New customer acquisition and increasing the order frequency of our existing customers will contribute to improve our volumes. The group is mindful of the fact that '23 will be another year of trading in a volatile environment with the potential for further economic uncertainties.

Inflation risks persist this year as well, which could impact overall growth levels. Nevertheless, we'll continue to manage the risk carefully as we successfully did last year. We have 3 strategic priorities for 2023: one, focus on sustainable profitability; number two, improve leverage ratios, reduce indebtedness; number three, continue to invest in digital and people.

So the like-for-like growth rates we are targeting to beat inflation with high single digits this year. So that means preinflation our target will be around 60% to 70% and we expect inflation to be around 50% this year. but it might change. Domino's Pizza net store openings will be 35 to 40. I would like to remind you that we have 655 stores and we believe the potential in Turkey for Domino's is 1,200 stores. So we still have a lot of room to grow. And coffee, as I said earlier, is a very big market. We are planning to open 50 to 60 stores this year for COFFY and most of this growth will come by franchisee openings.

We might open some strategical corporate openings, but not something really big. And our capital expenditure will be TRY 160 million. So as a conclusion, if we conclude all the presentation. Our strategic actions have effectively alleviated the impact of inflation. This is number one. Number two, we delivered inflation adjusted growth in profitability year-on-year despite unprecedented cost pressures across the board. Number three, we opened 71 net stores during the year, which is a record year after 2013 including COFFY and Azerbaijan and Georgia.

Our commitment to keeping the store profitability at healthy levels will drive further store expansions. Number four, high growth potential from COFFY business, which has delivered solid unit economics. As openings continue at full speed in 2023, we expect to reach a solid scale of business at the end of this year. For Russia, we'll continue to communicate in same transparent and consistent manner as this matter progress.

Thank you for listening to us and if you have any further questions, we'll be happy to answer. I think we'll start first with the floor.

[Unknown Analyst]

I just wanted to understand how regularly are you updating prices now given inflation had at least from what I see on the reported numbers. And then second on the CapEx distribution, you're telling me that most of the stores are going to open. What is driving the CapEx? And in last weeks, competition I mean few are quite recognizing [indiscernible]. Are you happy to manage the 78% inflation that you have seen, but how has competition fared? Have you taken share?

[Aslan Saranga, executive]

Yes. Now about the price increases, we are increasing prices almost every month, sometimes every 15 days as well. It's a very targeting prices and we don't take one price for all of our stores. We have different pricing strategy for different cluster of stores depending on competition and income levels. So it's a very complicated job for us, but we are doing it. About the CapEx, we have some -- there will be no corporate openings in Domino's Pizza. But in order to accelerate the store growth, we might open some stores in COFFY. The idea is to accelerate the growth because we see the market, we see the opportunity and so we want to go really fast with that. So other than that in the CapEx, we have most of our CapEx, some COFFY investment.

[Neval Alpagut, executive]

IT investment. The biggest part comes from the IT team development.

[Aslan Saranga, executive]

I can say half of it comes from the ongoing security team and development to the online ordering platform. Of course there is the maintenance of commissaries, the maintenance of our existing corporate stores. These are the main items. About the competition, look, I mean, one of the -- our area is a challenging area, but on the other hand it's a huge opportunity. [ 82 million ] still growing economy, a very young economy. And total inflation, people are taking down to factor let's say. So all the market is growing by the way. We are still very -- I mean when you look at all the markets, the food market is around TRY 100 billion now, but we are doing around TRY 3.5 billion so we are like 3.5%. So the short answer, competition is growing well so we see that and I think it's going to grow next 5, 10 years, but it will happen.

[Unknown Analyst]

[Technical Difficulty]

[Aslan Saranga, executive]

Look, I mean buying and selling stores doubles when you look at last 10 years is a part of our ongoing business so we buy and sell stores and that's mainly the decision-making is about which one brings us more value. For example if a corporate store makes more money than the franchise store, why should I sell. So I always try to keep some number of corporate stores because that gives us a muscle. We understand the franchisees. So it's not part of my strategy plan whether I need to sell it or buy it. So if there is an opportunity and if we can sell it at a better price, to sell is smart. All the stores in COFFY are making money so I don't have a drive for that. My only drive for COFFY is to grow. About attachment rate in COFFY, do you have the numbers?

[Neval Alpagut, executive]

I know the mix is around 66% comes from drinks -- I think it hit around 20%, 25%.

[Aslan Saranga, executive]

Yes, we try to check with the competition. It seems that to me is a good number. That's what I've been told. About the performance stores now. We have 10 cities, which the government called like affected cities. Now except 3 cities, in the 7 cities that is more prominent. But 3 cities are really gone. I mean I don't think next 1 or 2 years; this is Hatay, Adiyaman and Kahramanmaras; like in those cities. And as I said earlier, there is -- they are trying to put the factories working and to put some prefabricated houses for the workers to live there and we'll put prefabric stores. But is it a big part of our business? I don't think so. Maybe we might get 5, 10 stores at best.

[Ilknur Kocaer, executive]

Should we take questions from the conference call line?

[Operator]

[Operator Instructions] There are no questions on the phone at this time.

[Unknown Analyst]

Can I just ask one more on sustainable profitability that's part of our focus for this year. Can you give us some more color on what do you think is the sustainable profitability levels of your business? And maybe on free cash flow objective whether you think this year will be free cash flow positive for you, the amount of CapEx and your thoughts around [indiscernible]?

[Aslan Saranga, executive]

Yes. I mean about -- we have shown financial order on Page 26. So this our EBITDA margin more or less now is 0.5% so we try to pick it up. For me, the most important thing is the franchisee will get his payback. This is normally around -- in Domino is around 3 years to 3.5 years. So if you can manage it for the franchise, we can make our profit also. So this I believe is very important. The second -- what was the second question?

[Unknown Analyst]

Free cash flow for this year? Do you think you would be free cash flow generative?

[Neval Alpagut, executive]

For 2023? We are expecting to get a free cash flow.

[Unknown Analyst]

[indiscernible]

[Neval Alpagut, executive]

Yes. Therefore, our expectation to decrease our leverage ratio again.

[Ilknur Kocaer, executive]

Okay. I think we now can conclude the call.

[Aslan Saranga, executive]

Thank you. Thank you for listening to us. See you next presentation.

[Operator]

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.