2 August 2022                                                                                                                    LEI: 213800Q6ZKHAOV48JL75

DOMINO'S PIZZA GROUP PLC

Half Year results for the 26 weeks ended 26 June 2022

Continuing to gain market share in challenging conditions; well placed in this environment with clear value proposition and strong operating model.
Guidance for the year is unchanged.

All commentary below is on an underlying basis unless otherwise stated

Financial highlights

·    Like-for-like system sales (excluding the change in the VAT rate)³ grew by 2.4%, driven by order count which increased by 2.1%

o  Reported system sales of £710.5m, down 5.6% due to the change in the VAT rate

o Like-for-like system sales, excluding splits, down 6.4% (down 7.5% including splits) due to the change in the VAT rate

o  Group revenue, which is not significantly impacted by the change in the VAT rate, was up 0.2%

·    Profitability is expected to be second half weighted. During the first half, underlying profit before tax was £50.9m, down £9.9m. As is standard practice, we pass through food cost inflation to our franchisees on a lagged basis. We began passing on these increases during the first half of the year, but will not see the full impact until the second half

·     H2 marketing spend expected to be significantly higher than H1. In 2021 marketing spend was focused on the Q2 yodeling campaign, this year's focus will be on accelerating spend in Q3 and into Q4 campaigns

·    Statutory profit after tax of £42.1m, up £0.8m as a result of international losses and non-underlying items incurred in the prior year offsetting inflation and costs incurred in H1 22

·    Free cash flow of £36.8m (2021: £51.3m), lower than prior year largely due to a working capital outflow in the period related to the unwind of timing of cash receipts and payments for online sales in the final week of the 2021 year, and a change in the timing of creditor payments in support of our suppliers

·    Net debt of £236.4m resulting in a net debt / underlying EBITDA leverage ratio of 1.95x, within our target leverage range of 1.5x - 2.5x

·      £72.5m returned to shareholders in H1 22 through dividends and share buybacks

·      Interim dividend for H1 22 of 3.2p per share

·     New £20m share buyback programme, effective immediately, in line with capital allocation framework and commitment to distribute surplus capital to shareholders

·    Successfully refinanced existing bank debt facilities with new £200m revolving credit facility and £200m private placement facility

Operational and strategic highlights

·      Strong gain in UK takeaway market share, up from 6.0% in Q2 21 to 6.6% in Q2 22

·      Continued growth in total orders, up 2.1% in the first half

·   Delivery orders 8.3% lower than the Covid-impacted prior half year, Q2 declined 12.1% due to softness in the wider delivery market, a tough comparator in the prior and introduction of delivery charge nationally

·    Collections recovery continued, with 39.6% growth and collections were above 2019 levels in Q2 2022

·     As a result of the franchisee resolution, the business is on track to open at least 45 new stores in FY22 and had opened 17 new stores as at 1 August 2022 by 10 different franchisees

·     Launched trial with Just Eat in 136 stores to assess whether we can reach an incremental customer base with attractive economics for our business. Early results have been encouraging so trial is now being extended to nearly one third of the store estate and should represent a tailwind to growth going forward

·     Total active customer base up 2%, including a 5% increase in active app customers

·     Over 90% of sales now digital, app now accounts for 43.9% of system sales (+3.1pts vs. H1 21)

·   First national price campaign for several years launched in January with a strong value message and excellent traction in evolving consumer demand environment

·    Excellent service standards with value for money scores +4pts vs. H1 21 and average delivery times of around 25 minutes

·      Outstanding performance from our supply chain with 99.9% accuracy and 99.8% availability

·      Investment in Naas facility in Dublin and cross dock facility in the South-West of England

·     Strengthened franchisee engagement, with first UK rally since 2018 achieving record attendance by over 1,400 franchisee employees and colleagues

·     CEO, Dominic Paul announced his decision to leave the company to take up the role of CEO of Whitbread PLC. He will leave the business in December 2022, and a search for his replacement is underway

·    Leadership Team continues to be strengthened with new People Director in March. New Chief Financial Officer joining from Just Eat Takeaway Plc, starts in October 2022

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

"I'm proud that in the first half Domino's grew order count, attracted more customers, and increased underlying sales despite unusually challenging market conditions. This is testament to the hard work of our world-class franchisees and all our colleagues across the system, and I'd like to thank them all.

"The system is now fully aligned following the franchisee resolution in December. This enabled us to restart national price campaigns offering customers compelling value and to accelerate market share growth. We have worked really constructively with our franchisees to learn from the first half campaigns. We will be increasing our media spend in the second half compared to the first half, amplifying our value message to customers as we head into key events such as the men's football World Cup. We are also continuing to acquire new customers by expanding our trial with Just Eat following positive initial results.

"Domino's scale and integrated supply chain are always key to our success. As inflation accelerates and consumer budgets tighten, these differentiators are more important than ever. Domino's is an asset-light, cash-generative, resilient business that is well-placed to navigate the current conditions, which is why we are able to maintain our existing guidance. Historically, Domino's has performed well in challenging environments, which demonstrates the resilience of our business. We remain focused on working with our franchisees to accelerate the sustainable growth of the system and delivering an improved second half profit performance."

Current trading, outlook and guidance

In the first half of the year, we increased our market share, order count was positive, collections grew past 2019 levels and we attracted more customers despite challenging market conditions.  As we move into the second half of the year, we expect to continue this momentum and grow our market share given our strong value message, planned second-half marketing activity, the men's football World Cup and our dynamic national price campaigns. As during prior periods and in line with our agreement, we pass through food cost inflation to our franchisees on a lagged basis. Due to the rapidly changing inflationary environment this year, we began passing through these increases during the first half of the year but will not recognise the full benefit until the second half. Profitability this year is therefore expected to be weighted towards the second half.

Despite the challenges in the market and the investments we are making this year related to the franchisee resolution, we remain confident in our prior guidance for underlying EBITDA and EPS, which we expect to be in line with current market expectations.

With the scale of our platform and the strength of our brand we have confidence in our asset-light, cash-generative business model and our value proposition underpins our strong positioning in the current environment.

FY 22 Guidance

For the current financial year:

·      We remain confident in our previously communicated guidance for underlying EBITDA and EPS, which we expect to be in-line with current market expectations

·      Underlying depreciation & amortisation of between £18m to £20m

·      Underlying interest (excluding foreign exchange movements) in the range of £9m to £11m

·      Estimated underlying effective tax rate of c.17% for the full year

·      Capital investment of c. £24m

·      Net Debt at year-end around £235m

Notes

¹ System sales represent the sum of all sales made by both franchised and corporate stores to consumers in UK & Ireland. These are excluding VAT.

² Like-for-like excluding splits system sales performance is calculated for UK & Ireland against a comparable 26-week period in the prior period for mature stores which were not in territories split in the current period or comparable period. Mature stores are defined as those opened prior to 27th December 2020.

³ An adjustment for the change in VAT rates described for system sales relates to the impact of changes in the VAT applied on hot takeaway food where the VAT inclusive price to customers did not change. The VAT rate in the UK decreased from 20% to 5% on 15 July 2020, increased to 12.5% on 1 October 2021 and reverted back to 20% on 1 April 2022. System sales are consistently reported on an exclusive of VAT basis. However, where the inclusive of VAT price of an order remained the same on a total basis to the customer, over the reduced VAT period the exclusive of VAT price reported in system sales increased. This leads to an increase in system sales from 15 July 2020 through to 31 September 2021 when the VAT rate reduced from 20% to 5%. From 1 October 2021, the rate increased from 5% to 12.5%. Where the inclusive of VAT price of an order remained the same on a total basis, this leads to a decrease in system sales compared to the period from 15 July 2020 and an increase in system sales compared to the period before 15 July 2020. With the increase in VAT from 1 April 2022 back up to 20%, where the inclusive of VAT price remained the same to the consumer, there has been a negative impact on system sales compared to the period from 15 July 2020 - 31 September 2021 and 1 October 21 - 31 March 2022, as the exclusive of VAT price of an order decreased.

As an example, for an order where the inclusive of VAT price is £27:

·      From 15 July 2020 to 31 September 2021, during the period where VAT was 5%, the reported system sale would be £25.71

·      From 1 October 2021 to 31 March 2022, during the period where VAT was 12.5%, the reported system sale would be £24.00

·      From 1 April 2022 onwards, where the VAT rate is 20%, the reported system sale would be £22.50

In Ireland, the VAT rate for hot takeaway food reduced from 13.5% to 9% on 1 November 2020 and remains in place. The system sales figures adjusted for VAT removes the impact on system sales of the lower VAT rates in the comparative periods to provide comparability. This is performed through adjusting the comparative figures over the reduced VAT period back to an equivalent system sales amount based on a 20% VAT rate where applicable. Group revenue is not significantly impacted by the change in the VAT rate as the aforementioned benefit only arose on hot takeaway food, and therefore only impacts the sales on the corporate stores revenue within overall Group revenue.

⁴ 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 as set out in note 5 to the financial information.

⁵ Net debt is defined as the bank revolving facilities, private placement facilities, cash and cash equivalents and other loans, including balances held in disposal groups held for sale.

Contacts

For Domino's Pizza Group plc:
Investor Relations

Will MacLaren, Head of Investor Relations +44 (0) 7443 192 118

Media:

Tim Danaher, Samantha Chiene - Brunswick +44 (0) 207 404 5959

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 +44 (0)207 404 5959

A results webcast and Q&A for investors and analysts will be held at 10:00 BST today. The webcast and presentation can be accessed through this link click here and will also be available on the Results, Reports and Presentations page of our corporate website.

Financial calendar

Domino's Pizza Group plc will publish a Q3 trading update in October 2022.

Cautionary statement

Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from any expected future events or results expressed or implied in these forward-looking statements. Persons receiving this announcement should not place undue reliance on forward-looking statements. Unless otherwise required by applicable law, regulation or accounting standard, Domino's does not undertake to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

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 and the Republic of Ireland, and have associate investments in Germany and Luxembourg. As of 1 August 2022, we had 1,243 stores in the UK and Ireland.

Strategic and operational review

Performance summary

Group revenue for the half was up 0.2% to £278.3m driven by increased supply chain revenue. However underlying profit before tax declined £9.9m to £50.9m from the prior half year. This decrease was largely driven by the timing lag in passing through higher costs to our franchisees. This timing lag is typical in our business and a function of our franchisee agreements.

Product quality, service standards and customer satisfaction remain high as we are focused on being the UK & Ireland's favourite food delivery and collection brand with pizza at our heart. Despite the challenging environment, we increased our market share in the UK takeaway market in Q2 from 6.0% to 6.6% compared to the same period last year. This is testament to the strength of the Domino's brand and the alignment we now have with our world-class franchisees.

Underlying EBITDA in H1 22 was £63.5m, down £8.2m compared to the same period last year. This was largely driven by the timing lag described above, as well as a lower contribution from JVs and associates.

Statutory profit after tax in the first half was £42.1m, up £0.8m on last year as a result of reduced costs and charges from our discontinued international operations offsetting the reduction in underlying profitability.

Free cash flow generated by the business was £36.8m, a decrease from £51.3m last year largely reflecting a working capital outflow in the half. This was primarily driven by the timing of cash receipts and payments for online sales following the strong trading performance in the final week of last year and a change in the timing of creditor payments in support of our suppliers.

Net Debt increased by £36.7m from £199.7m at the start of the year to £236.4m with Net Debt/EBITDA leverage increasing from 1.54x at the start of the year to 1.95x (excluding IFRS 16). The increase was driven by the payment of the FY21 final dividend and the share buyback programme.

The asset-light, cash-generative nature of the business means that in line with our capital allocation framework we are announcing an incremental £20m share buyback which is in addition to the previously announced share buyback programme of £46m which was completed on 1 July 2022. In addition, we have announced an interim dividend of 3.2p (£13.9m).

Strategic delivery

We launched our new strategy in March 2021 with a vision to be the favourite food delivery and collection brand, with pizza at its heart. The Domino's brand is loved by customers and pizza is the perfect delivery and collection food. Our ambition is to deliver medium-term total system sales of at least £1.9bn with a strategy centred on five growth pillars:

1.   Nobody delivers like Domino's

Delivery is at the heart of our business and is what we are best known for - we have built a considerable following, with a brand that people love, enabling us to maintain a leading position in the UK delivery market. Whilst delivery sales were lower compared to the prior year we maintained excellent service standards with average delivery times of around 25 minutes.

Domino's is a digital business and we continued to demonstrate our digital-first approach in the period. Over 90% of system sales are through digital channels and the app now accounts for 43.9% of system sales, an increase of 3.1ppts compared to the same period last year. We now have 5.3m active app customers, an increase of 5% over the last 6 months. App customers have a higher lifetime value than other customers, primarily due to higher levels of ordering frequency.

In March 2022 we introduced a delivery charge. This allows our franchisees to offset some of the food and labour cost inflation which they are experiencing, and it is at the sole discretion of the franchisee whether they choose to use it. The delivery charge ranges between 99p and £2.50 and each franchisee decides which pricing level to use. The benefit flows through to our franchisees as it represents an increase in system sales, DPG enjoys a small benefit as the delivery charge incurs the standard royalty fee. Take-up has been widespread and in Q2, 90% of delivered orders incurred a delivery charge.

In May 2022 we began a trial with Just Eat to see whether this channel can attract incremental customers to Domino's. We started the trial with 136 Domino's stores across the UK and Ireland and following early encouraging results we are extending the trial to approximately one third of the store estate.

Following the integration of the CRM platform 'Braze' into our data warehouse, we have accelerated initiatives designed to improve our customer churn rate. Where we have started implementing personalisation into customer communications, such as 'Meat' vs. 'Vegetarian' preference we are seeing significantly higher customer engagement rates.

Our enhanced GPS solution, 2.0, has now been rolled out to 728 stores and we are targeting completing the roll out by the end of the year. This will help store managers manage labour through more efficient driver route planning and better integration with the store as well as allowing drivers to use their own device.

2.   Turbo-charge our collection business

Collection represents the most efficient labour channel, with delivery effectively outsourced to the customer. This is particularly important in an environment where there are pressures on labour availability and wage inflation. The various lockdown restrictions in 2020 and 2021 dampened the collection market significantly but collection volumes have recovered well. In Q1 volumes were 95% of 2019 levels and we are very pleased that in Q2 they were at 102% of 2019 levels.

Another lever to drive incremental sales is 'In Car Collection' a service we launched in 2021, this has been rolled out to 444 stores by the end of the period (FY21: 422 stores). We are aiming to roll it out to c.500 stores by the end of 2022. Customer feedback has been excellent, and we will continue to promote awareness of this new channel.

3.   Amplify our product quality and value

Our customers love our product, and we have re-ignited product innovation over the last year. Our 'Value for money' scores continued to improve this year, demonstrating our focus on customer value. Following the introduction of a Vegan pizza, 'The Chick Ain't' in 2021, this year we have launched 'Vegan PepperoNAY' and a new 'Grilled Vegi Pesto' pizza. Both of these have received positive customer feedback. Other examples of innovation delivered so far this year include Pesto Doughballs, twisted Doughballs and the return of 'Half & Half'. As we enter the important second half of the year with events such as Freshers Week and the men's football World Cup we expect to introduce further innovation to delight our customers.

Following resolution with our franchisees we were able to launch our first national price campaign in January and amplify our value message to the whole country, with a 50% discount for spending more than £30 on pizza. Alignment with our franchisees has also enabled us to market collection promotions which contributed to the strong Collection performance in Q2. We also undertook tactical events around Valentine's Day, Mother's Day, Easter and the Jubilee celebrations as well as specific App-only deals to target customers with a higher lifetime value. We are learning, alongside our franchisees, how to optimise our approach to national campaigns and we will apply these learnings to our campaigns in the second half of the year as we increase our media spend around key events such as the men's football World Cup to amplify our important value message to customers.

4.   Uphold our industry-leading scale economics for both the Group and our franchisees

Our vertically integrated supply chain is a key differentiator in the market and brings us significant competitive advantages. We can leverage our scale to realise operational and procurement-led efficiencies to help mitigate inflationary pressures in the market. We continue to collaborate closely with key suppliers to ensure we have optimal stock cover and to minimise cost inflation where possible. We have expanded our number of suppliers to ensure we secure best value for money for our system, along with providing resilience across our supplier base.

We remain pleased with the operational performance of our world-class supply chain, which maintained 99.9.% availability and 99.8% accuracy in a period of challenging market conditions. We continue to invest in our supply chain to enhance capacity and drive efficiency. A new 'cross-dock' facility was leased in Avonmouth which allows us to warehouse product there for more efficient distribution across the South-West. This will be particularly important to maintain our availability for Q4. We also commenced re-development of our Naas supply chain centre in the Republic of Ireland.

In our commitment to health and safety within our supply chain operations, we have now rolled out Cages and Dollies to 85% of stores and with full roll-out expected to be complete by the end of 2022.

5.   Model excellence as a franchisor

Our franchisees continue to work tremendously hard in challenging market conditions and their trading performance has been impressive. Based on the unaudited data submitted to us by franchisees, average store EBITDA for all UK stores for the year was approximately £94k, equivalent to a 16% EBITDA margin. This compares to £154k or 25% EBITDA margin achieved in H1 21. The reduction reflects the net benefit of VAT in the prior half year as well as the impact of higher food and labour costs in 2022.

Following the introduction of the new store incentive scheme last year, we have made good progress with our new store openings with 17 to 1 August 2022 compared to 14 in the comparable period last year. We continue to expect at least 45 new stores by the end of the year.

We have supported our franchisees throughout the period with an enhanced food rebate mechanism and the national roll out of the delivery charge and we were delighted to organise our first rally since 2018 in Harrogate for our franchisees and colleagues, of which over 1,400 joined.

Following resolution with our franchisees last year we have rolled out a new Operations forum and launched the Franchisee Performance Management framework. This framework is designed to assess store performance across the system and identify areas for improvement. In H1 22 half we rolled out the Domino's Training Academy which provides management training to team members using a balance of e-learning and classroom exercises. We also rolled out a new inventory android app to all stores which is now being widely used within stores for their counts on a day-to-day basis.

Capital allocation

We have a highly cash-generative, asset-light business model and in March 2021 we launched a clear capital allocation framework. Our first priority is to invest in the business to drive long-term organic growth. We will continue to maximise shareholder returns through a sustainable and progressive dividend policy and to operate a disciplined approach to assessing additional growth opportunities. Finally, operating within a target leverage range of 1.5x - 2.5x net debt to Underlying EBITDA, we aim to maximise returns with an annual allocation of surplus cash to shareholders.

In the first half of the year, we have generated £36.8m of free cash flow. We received £9.4m in relation to our investment in the German associate, £0.6m in relation to previous disposals, and have made a £7.5m capital investment in our core business to further enhance our supply chain and digital infrastructure leaving £39.3m of cash generated in the period before distributions. We have announced an interim dividend of 3.2p, which amounts to £13.9m, set at approximately one-third of the value of the prior year total dividend. In addition, following completion of the £46m share buyback announced in March, we are announcing an incremental £20m share buyback which will be returned to shareholders over the coming months.

As at 26 June 2022 the Net Debt/EBITDA ratio from continuing operations excluding IFRS 16 was 1.95x, within our target leverage range.

Delivering our sustainable future

Our business is guided by our ambition to deliver a better future through food people love. This ambition means our focus is not just on financial performance but on doing the right thing by bringing people together around the food they love and, by doing so, having a positive impact on everyone who interacts with us: our customers, colleagues, franchisees, investors, and the communities we serve.

Alongside our strategic plan, we have developed a comprehensive sustainability strategy which underpins our purpose and is based around our five core sustainability pillars: Our customer; Our environment; Our people; Our communities; and Responsible sourcing.

Our UK Leadership Team is supporting the delivery of our strategy with some members serving as executive sponsors for relevant areas. Additionally, part of the UK Leadership Team's 2022 bonus is now dependent on the delivery of certain sustainability targets by the end of 2022.

Colleagues and franchisee partners have been updated, and we have also recently communicated our sustainability ambitions to all our major food and non-food suppliers along with details of how they can support our work to achieve our targets.

While we are still in the early stages of implementing our refreshed approach to sustainability, we are making good progress in many areas, for example our decarbonisation targets were recently approved by the Science Based Targets Initiative (SBTI). We recognise we have more work to do in some areas, have established teams focused on ensuring we achieve all our 2022 sustainability targets, and anticipate providing an update on our progress in the 2022 Annual Report.

Operational review

Reported revenue

Revenues from sales to external customers included within our income statement are summarised above. The most significant element of our revenue is derived from products sold through our supply chain to our franchisees which has grown by 4.2% in the first half of the year driven by increased food costs, which are passed through to franchisees.

Royalty, rental and other revenue is primarily the royalty revenue we receive from our franchised stores based upon a percentage of their system sales. This declined in the first half as a result of lower system sales. Corporate stores revenue is the sales made by the stores we directly operate and was broadly flat year-on-year.

Revenue relating to the National Advertising Fund ("NAF") and eCommerce funds is recognised based on costs incurred, and has decreased by 11.9% due to lower marketing and IT spend in the period.

System sales performance

System sales represent all sales made by both franchised and corporate stores to consumers. Like-for-like system sales across UK & Ireland declined by 6.4%, excluding split stores, or by 7.5% including splits. The increase in the VAT rate in the period compared to the same period last year drove this decline. Like-for-like system sales excluding split stores increased by 2.4% or by 1.2% including splits excluding the change in the VAT rate.

The quarterly analysis of this performance as well as the VAT rate for each period is in the table below. This shows that the strong like-for-like growth in the first half of 2021 was primarily driven by the reduction in the rate of VAT from 20% to 5% which was in effect from 15 July 2020 in the UK and continued to apply throughout the first half of 2021. The rate of VAT increased from 5% to 12.5% on 1 October 2021 and returned to 20% on 1 April 2022.

The VAT rate reduction was on hot takeaway food and therefore applicable to the system sales made by stores to consumers. If the sales price to the consumer was unchanged, then the VAT rate reduction effectively delivers an increased system sales value, which flows through to like-for-like system sales growth. The benefit of the VAT rate reduction therefore primarily accrued to our franchisees, helping them to continue to trade throughout the pandemic period and to drive growth and increase the level of discounts they offered to consumers.

The sales and order count performance for the first half is illustrated below. Like-for-like sales declined in the first half by 7.5% with volumes down 3.6% and price declining by 3.9%. Total order count grew in the first half by 2.1% largely driven by the continued recovery in collections.

In the first quarter, total order count grew 5.5% in the quarter despite a strong comparative quarter last year when there were strict lockdown restrictions in the UK. Collections continued their recovery and grew 45.4% in the quarter. As expected, given the lockdown comparator, delivery orders were 4.5% lower than the prior year.

In the second quarter, total order count declined 1.3%. Delivery orders declined 12.1% in the quarter due to softness in the wider delivery market and a tough comparative quarter last year which had 3 different lockdown restrictions. In March 2022, in line with market norms, we launched the delivery charge nationally. Together with our franchisees we have learnt that now we have a delivery charge in place we need to give our customers compelling value. The 34.7% growth in collections was not able to fully offset the decline in delivery orders.

Data & Insights

The Data & Insights team aims to ensure all business decisions are being led by the rich customer data Domino's holds. In the last 6 months, the team has been actively involved in the evaluation process for menu innovation, putting consumers at the heart of the process to ensure that we only launch the best products to market. The team has also worked with Kantar to give us a deeper understanding of the UK takeaway market, evolving market dynamics and how we can continue to gain market share. It has proved crucial in the 'cost of living' crisis to analyse how consumer spending is changing and how Domino's responds to the increased need for value. Currently the team is involved in supporting the Just Eat trial, to ensure it delivers incremental sales, orders and crucially franchisee profitability.

Corporate stores

We directly operate 35 stores in the London area. Corporate store revenue decreased by 0.6% to £17.6m compared to the prior year. The EBITDA of corporate stores was £1.1m, compared to £2.1m in H1 21. EBITDA, adjusted for the change in the VAT rate, was broadly in-line with expectations and declined from £1.2m to £0.9m as an improved underlying trading performance was not enough to offset food and labour inflation.

German associate

Our share of post-tax underlying profits from our German associate was £1.8m (H1 21: £2.2m). Our investment in the German associate is held on our balance sheet at an aggregate value of £30.8m. We have a put option exercisable from 1 January 2021 to 31 December 2023. As the exercise price of the option is at fair value, there is no value of the put option recorded on our balance sheet, in accordance with the requirements of IFRS. In total, we believe that exercising our put option and disposing of our interest in the associate could yield total cash receipts of £70m - £80m depending on EBITDA performance of the associate and the timing of exercise, which will generate profit of between £40m - £50m. The majority shareholders, Domino's Pizza Enterprises Limited, have a call option exercisable from 1 January 2023 on the same valuation basis.

Financial review

The results for the Group are summarised below

Underlying performance

Group revenue increased by 0.2% to £278.3m driven by growth in supply chain revenue from product sales to franchisees, offset by lower royalty income and decreased revenue recognised related to marketing expenditure incurred on behalf of franchisees, as discussed in the performance review section above.

UK and Ireland underlying EBIT was £53.0m, a decrease of 14.1% from the prior year. The main drivers were inflationary pressures on supply chain and distribution costs of £3.7m and £2.3m investment associated with the franchisee resolution. Contributions from investments have decreased by £2.1m, due to a lower revaluation increase recognised on the Shorecal investment of £1.0m (H1 21: £2.1m), and £1.1m lower contributions from associates and joint ventures largely due to the trading impact of the change in the VAT rate.

Our associate investment in Germany contributed £1.8m (H1 21: £2.2m), which leads to an overall Group underlying EBIT of £54.8m, a decrease of 14.2%.

Net underlying finance costs in the period were £3.9m, an increase from £3.1m in H1 21 as a result of an increase in average Net Debt during the period as well as increased base interest rates. Overall underlying profit before tax was £50.9m, a decrease from £60.8m in the prior period.

The underlying effective tax rate for H1 22 was 17.3% (H1 21: 18.1%), which is lower than the UK statutory rate mainly due the contribution of the joint ventures. This has decreased largely due to the prior period impact on the deferred tax charge of the rate change from 19% to 25% announced in H1 21.

Underlying profit after tax was £42.1m (H1 21: £49.8m). As disclosed in the 2021 annual report and accounts the Group no longer classifies items as non-underlying. Following the final completion of the disposals of international operations in 2021 no loss from discontinued operations has been recognised.

In H1 21, non-underlying items totaling a loss of £0.9m were recognised. These items largely related to £1.1m of professional fees associated with the establishment of our long-term strategy in the early part of the year and further marketing costs related to the disposal of our international operations. A loss from discontinued operations of £7.6m was recognised in H1 21, which consisted of a trading loss of £0.6m and loss on disposals of £7.0m.

Statutory profit after tax was £42.1m (H1 21: £41.3m).

Earnings per share

Underlying basic EPS decreased to 9.5p from 10.7p as a result of the decreased underlying profit performance. Statutory EPS increased to 9.5p from 8.9p, largely due to a reduced loss from discontinued operations.

Free cash flow and Net Debt

Net debt increased by £36.5m during the period, as free cash inflow of £36.8m was offset by increased returns to investors through dividend payments of £30.0m together with £42.5m of the £46m share buyback programme announced in March 2022.

Free cash flow is an inflow of £36.8m, a decrease of £14.5m from H1 21. Underlying EBITDA decreased by £8.2m to £63.5m for the reasons outlined above. The working capital outflow of £11.2m (H1 21: inflow of £3.5m) was largely as a result of the unwind of timing of cash receipts and payments for online sales following the strong trading performance in the final week of the 2021 year of £6.0m, and a change in the timing of creditor payments in support of our suppliers of £5.0m.

Net IFRS 16 lease payments decreased in the period from £5.0m to £3.8m largely due to the international lease payments included in the comparative year.

Dividends received increased to £3.9m from £2.6m, benefitting from a dividend received from our investment in Shorecal of £2.2m and £1.7m from our investments in associates and joint ventures.

Net interest payments of £2.2m in line with H1 21, despite higher finance costs, as a result of the timing of interest payments under the RCF.

In H1 21 non-underlying cash outflows related to the international disposal costs and the payment of costs associated with the establishment of the long-term growth strategy during the first half H1 21.

Capital expenditure in H1 22 was £7.5m, which is broadly in line with the £7.4m spend in H1 21 relating to the UK & Ireland business (H1 21: disposed international business capex spend £0.4m).

In March 2022, the Group received the final instalment of the Market Access Fee of £8.6m, relating to the performance of the German associate in the 2021 calendar year.

Disposals cash inflows of £0.6m relates to £1.8m receipt of deferred consideration for the disposal of the DP Shayban Limited joint venture in 2018, offset by the final payments on the disposals of international operations of £1.2m.

The share buyback cash outflow of £42.5m represents the settled amount of the £46.0m of the share buyback programme announced in March 2022. The remaining obligation has been satisfied in July 2022.

Capital employed and balance sheet

Intangible assets have increased by £2.4m as a result of increased spend on IT software relating to the eCommerce platform. Property, plant and equipment is in line with prior year.

Investments, associates and joint ventures represents our investment in the German associate and our investments in Full House, West Country and the Northern Ireland JV in the UK, which are treated as associates and joint ventures, as well as our investment in Shorecal. This has increased by £1.9m during the year, due to the trading performance of the associates and joint ventures in excess of dividends received, and includes an increase in the Shorecal investment of £1.0m net of dividend received of £2.2m. During the period the Market Access Fee was settled.

Right of use assets of £20.9m represents the lease assets for our corporate stores, warehouses and equipment leases recognised under IFRS 16 in the current period. The net lease liability is £23.2m (26 December 2021: £21.4m). There have been no significant changes in the lease portfolio during the period.

The net working capital liability has decreased from £37.1m to £28.4m as a result of the factors outlined in the cash flow section above.

The share buyback obligation of £3.7m represents the remaining amounts committed under the £46m share buyback programme announced in March 2022.

Total equity has decreased by £37.0m, to a net liability position of £95.6m, largely due to the dividend payments and share buybacks in excess of the profit generated in the year. There are sufficient distributable reserves in the standalone accounts of Domino's Pizza Group plc for the proposed dividend payment and announced share buyback.

Treasury management

At 26 June 2022, the Group held an unsecured multi-currency revolving credit facility of £350m to December 2023. The total undrawn facility at 26 June 2022 was £73.2m.

The Group successfully refinanced the existing revolving credit facility in July 2022, and entered into a new unsecured multi-currency revolving credit facility of £200m, expiring in July 2027, together with the issuance of sterling-denominated private placement loan notes of £200m, with a due date for repayment in July 2027.

The new unsecured multi-currency revolving credit facility incurs interest at a margin over SONIA of between 185bps and 285bps depending on leverage, plus a utilisation fee of between 0bps and 30bps of the aggregate amount of the outstanding loans.

The private placement loan notes incur interest at a fixed rate at 4.26%.

The financial covenants under both new financing agreements are consistent. These covenants relate to measurement of adjusted EBITDAR against consolidated net finance charges (interest cover) and adjusted EBITDA to net debt (leverage ratio) measured semi-annually on a trailing 12 month basis at half year and year end. The interest cover covenant under the terms of both agreements cannot be less than 1.5:1, and leverage ratio cannot be more than 3:1. Figures used in the calculation of both covenants exclude the impact of IFRS 16.

We ended the period with Net Debt of £236.4m, and last 12 months Net Debt/EBITDA ratio on a continuing basis excluding the impact of IFRS 16 increased to 1.95x from 1.36x, as a result of decreased EBITDA performance in the year and a higher Net Debt level.

Group income statement

26 weeks ended 26 June 2022