Annual Financial Report

RNS Number : 9818Z

Domino's Pizza Group PLC

20 March 2017

 

LEI: 213800Q6ZKHAOV48JL75

20 March 2017

DOMINO'S PIZZA GROUP PLC

ANNUAL FINANCIAL REPORT

Further to the announcement of its preliminary results on 9 March 2017 (the "Results Announcement"), Domino's Pizza Group plc (the "Company") announces that it has today posted to shareholders and has submitted to the National Storage Mechanism, copies of the following documents:

·      Annual Report and Accounts for the 52 weeks ended 25 December 2016 (the "Annual Report and Accounts")

·      Circular relating to the Annual General Meeting to be held on 20 April 2017

·      Forms of Proxy for shareholders to vote at the AGM

These documents will shortly be available for inspection on the National Storage Mechanism

www.morningstar.co.uk/uk/nsm.

As required by DTR 6.3.5 R (3), the Company confirms that the Annual Report and Accounts and the Circular relating to the Annual General Meeting are now available to view or download in pdf format from the Company's corporate website, http://investors.dominos.co.uk.

The appendix to this announcement contains the following additional information which has been extracted from the Annual Report and Accounts for the purposes of compliance with DTR 6.3.5 R and should be read together with the Results Announcement, which can also be downloaded from the Company's corporate website:

·      A statement on the principal risks and uncertainties

·      A statement on related party transactions

Together these constitute the information required by DTR 6.3.5 R which is required to be communicated to the media in full unedited text through a Regulatory Information Service. Cross-references in the appendix refer to the Annual Report and Accounts.

Enquiries:

Adrian Bushnell, Company Secretary

Domino's Pizza Group plc

01908 580000

Notes to Editors:

Domino's Pizza Group plc is the leading player in the fast-growing pizza market holding the exclusive master franchise to own, operate and franchise Domino's Pizza stores in the UK, Republic of Ireland, Switzerland, Liechtenstein and Luxembourg. Additionally it owns a strategic stakes in the largest pizza delivery business in Germany and in the holders of the Domino's master franchises in Iceland, Norway and Sweden. The first UK store opened in Luton in 1985 and the first Irish store opened in 1991. 

APPENDIX

Principal risks and uncertainties

The business faces a wide range of risks on a daily basis. The Board has undertaken a robust assessment of what it believes are the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The table overleaf summarises these principal risks and how they are being managed or mitigated.

The risks in this table have been assessed on a residual basis according to our current view of the potential severity (being the combination of impact and probability) and assume that existing controls are effective. We have linked the risks to the strategic pillars described on pages 14 and 15. The environment in which we operate is constantly evolving; new risks may arise, the potential impact of known risks may increase or decrease and/or our assessment of these risks may change. The risks therefore represent a snapshot of what the Board believes are the principal risks and are not an exhaustive list of all risks the Company faces.

The Board has considered the risk posed by Brexit and has noted that there are likely to be risks associated with increases in the cost of raw materials and potential labour cost increases for franchisees. At the present time, the Board does not consider Brexit to be a principal risk to the business model, but will continue to monitor and evaluate this risk and reassess the exposure as necessary.

Strategic risks

People-related risks

Link to strategic pillars

1 2

Risk

The business is overly dependent on key individuals (either at Executive level or in relation to specialist skills), possibly exacerbated by a failure to attract or retain the skilled and experienced people it needs

Potential impact

Medium

Probability

Medium

Mitigation

The Board considers succession planning on a regular basis and has set the CEO a personal objective of developing multiple potential successors. Contingency plans are in place which could be implemented on a short-term basis should we suddenly lose a key Executive. The business is considering whether to open a site away from Milton Keynes to assist in the recruitment and retention of specialist IT developers

Nature of threat

These risks could have some impact on future performance, for a limited time

Change from 2015

No change

Commentary

The overall risk rating remains unchanged. A new Human Resources Director was appointed during the year who is leading the development of the Group's HR operating model. There has been significant change of senior management during the year which has included the recruitment of a new Chief Financial Officer

Failure to respond to and overcome competitive pressures

Link to strategic pillars

1 2 3

Risk

The business faces strong competition from a range of players, including those exploiting emerging technologies or new food options and new entrants into the UK market

Potential impact

High

Probability

Low

Mitigation

Management keeps the competitive landscape under continual review and the Board also monitors the markets in which it operates, as well as KPI data on the current business. Strategy is reviewed and developed by the Board on at least an annual basis

Nature of threat

These risks have the potential to compromise our future performance or, in an extreme scenario, even the business model

Change from 2015

No change

Commentary

This risk has not changed materially during the year

Inability to react to changes in the health debate and public desire for healthier food

Link to strategic pillars

1 3

Risk

As society's expectations evolve, and governmental acts on public health concerns, we may need to change the products we offer and our approach to marketing

Potential impact

Medium

Probability

High

Mitigation

Management keeps consumers' purchasing preferences under continual review and adjusts menus in response to these. We also engage, appropriately, with the government on the public health debate to ensure that our views are understood by policy makers and influencers

Nature of threat

These risks have the potential to compromise our future performance or, in an extreme scenario, even the business model

Change from 2015

Decrease

Commentary

The Group has developed a "food philosophy" which includes structured objectives, action plans and governance structure. We are working towards meeting the childhood obesity requirements detailed on page 26

Failure to achieve UK growth through new store openings

Link to strategic pillars

1 3

Risk

Failure to meet store growth targets would be a breach of our Master Franchise Agreements. Our ability to open new stores depends on our ability to lease or buy suitable premises, obtain the necessary planning approvals and identify a suitable franchisee to run the store

Potential impact

High

Probability

Low

Mitigation

Board approval is needed for the targets contained within the MFAs, and the Board monitors the pipeline of proposed store openings on a continual basis. Franchisee development programmes are run and we employ surveyors to identify and secure appropriate premises

Nature of threat

These risks could have an impact on future performance. In an extreme case an unremedied breach of the MFA could threaten the Company's business model and liquidity

Change from 2015

No change

Commentary

This risk has not changed materially during the year. The Group opened an additional 82 stores in the year and we remain confident of our ability to continue opening new stores to meet the requirements of the MFA

Commercial leverage of large franchisees

Link to strategic pillars

1

Risk

The Group has a number of franchisees whose businesses run large numbers of stores, and so enjoy some commercial leverage. The Group may be unable to persuade these franchisees to implement our preferred strategies, or to pass on cost increases in full or in part

Potential impact

High

Probability

Medium

Mitigation

Open and transparent relationships with multi-site franchisees are managed at senior levels of the Group. We also explain the profit-sharing model to all franchisees, so that they understand that success is mutual. Numbers of stores managed by the large franchisees are monitored

Nature of threat

These risks have the potential to compromise our future performance for a period of time

Change from 2015

No change

Commentary

This risk has not changed materially during the year

Operational risks

Food safety

Link to strategic pillars

1 3 4

Risk

There is the risk of contamination in either the pre-proved dough we produce at the Group's Supply Chain Centres, or in the pizza topping ingredients we distribute to our franchisees' stores. In Switzerland, we operate corporate stores, and are responsible for finished products, which exacerbates this risk

Potential impact

High

Probability

Medium

Mitigation

The business has implemented a rigorous regime of standards and food safety checks, working with the appropriate government regulator

Nature of threat

If this risk materialised, it could have a significant impact on future performance and potentially liquidity, for a limited time. The reputational impact could have a longer-term effect on performance and, in an extreme case, threaten the business model

Change from 2015

No change

Commentary

This risk has not changed materially during the year. The risk is monitored on a regular basis by a qualified in-house resource. The Board routinely receives a presentation on "food safety" risk controls

Interruption of raw material supplies

Link to strategic pillars

1 3 4

Risk

The business relies on a number of third-party suppliers for pizza toppings, some of whom provide the sole source of an ingredient. These suppliers must make a commercial return to stay in business and reinvest in their operations. The Group would be vulnerable if a supplier decided to cease trading, suffered a major interruption or food safety incident, or was responsible for an ethical breach of such severity that the Group would no longer trade with them

Potential impact

High

Probability

Low

Mitigation

Suppliers who are selected through competitive tendering and appropriate due diligence processes supply the Group under long-term contracts. The economics of their businesses are kept under review and their performance against their obligations monitored. We assess their compliance with acceptable business standards

Nature of threat

These risks have the potential to compromise our future performance for a limited time

Change from 2015

No change

Commentary

This risk has not changed materially since 2015

Supply Chain Centres are unable to supply the stores

Link to strategic pillars

1 3 4

Risk

We distribute both the pre-proved dough we produce and third-party pizza toppings to our franchisees' stores. In the event of physical damage to, or loss of, a Supply Chain Centre we would need to make urgent contingency arrangements wherever possible. However, the space required to hold dough whilst proving forms a critical constraint to our business

Potential impact

High

Probability

Medium

Mitigation

In the event of the loss of a Supply Chain Centre, third-party ingredients could be delivered to stores direct, at an additional cost. The Group is considering developing additional dough proving facilities, which would mitigate this risk significantly. Loss of our dough production facilities would be more difficult to overcome, but contract production of dough would be possible, at an additional cost

Nature of threat

These risks could have a significant impact on future performance and potentially liquidity, for a limited time

Change from 2015

No change

Commentary

The level of risk remains as last year but will reduce as new facilities in ROI and Warrington become operational

Failure of online ordering systems for a prolonged or critical period

Link to strategic pillars

1 2 3 4

Risk

Over 75% of delivered sales are now placed online, around half of which are using apps for mobile devices. As well as the reliance on data centres and our own software developed in house, there is also a risk from malicious denial of service attacks

Potential impact

High

Probability

Medium

Mitigation

Cyber risk appears on the Board agenda on at least an annual basis and management reviews the performance of its IT infrastructure on a continual basis. Our systems are hosted by third-party specialists, with parallel processing across multiple sites and real-time replication and appropriate protection from malicious attempts to disrupt the availability of our sites. The business is considering whether to open a site away from Milton Keynes to assist in the recruitment and retention of specialist IT developers

Nature of threat

These risks could have some impact on future performance, for a limited time

Change from 2015

No change

Commentary

The overall level of risk has remained unchanged during the year. The IT function has continued to increase the technical capability to improve resilience and has recently achieved Level 1 PCI compliance status

Loss of personal data relating to customers, employees or others; loss of corporate data

Link to strategic pillars

2 3

Risk

For ease of use, our online ordering systems hold some customer data, the loss of which (whether accidental or following hacking) would cause disruption and cost to the Group. In addition, the Group's own data on employees and suppliers is exposed to the same risks of loss

Potential impact

High

Probability

Medium

Mitigation

Cyber risk appears on the Board agenda on at least an annual basis and management keeps the security of data under its ownership or control under continual review. We do not hold customer credit card data on our systems. Franchisees are trained in their obligations in respect of personal data and are required to train their staff appropriately. Appropriate IT security is in place and kept under continual review

Nature of threat

These risks have the potential to compromise our future performance. In an extreme scenario, the reputational damage could possibly threaten the business model if we suffered a total loss of consumer confidence

Change from 2015

Increase

Commentary

Cyber risk remains a significant threat across all industries and we have raised the risk profile to reflect the current industry-wide exposure. The Board received regular updates on the cyber security controls that operate within the business and our IT security infrastructure has continued to evolve and mature during the year

Implementation of enterprise resource planning ('ERP') system

Link to strategic pillars

1 4

Risk

The Group implemented an ERP system during 2016. The new system is expected to improve the internal control environment, though the migration from legacy IT systems creates continuity risks. The implementation of new operating practices and culture needed to bring the ERP system into full effect creates further risk to the Group's business

Potential impact

High

Probability

Medium

Mitigation

The business had planned the implementation of ERP for 2½ years and selected a product with a good track record on ease of installation supported by an experienced consultancy for the implementation

Nature of threat

These risks have the potential to compromise our future performance, for a limited time

Change from 2015

Decrease

Commentary

The Group's ERP system became operational during Q4 of 2016. The new systems will take time to become embedded fully but initial indicators are showing that the platform is stable. We have therefore concluded that the overall level of risk has reduced

Related party transactions

During the period the Group entered into transactions, in the ordinary course of business, with related parties. For details of loan balances due from associates please refer to note 18. Transactions entered into, and trading balances outstanding with related parties, are as follows:

	Sales to related party £000	Amounts owed by related party £000
Related party
Associates and joint ventures
25 December 2016	28,178	2,300
27 December 2015	24,390	844

Terms and conditions of transactions with related parties

Sales and purchases between related parties are made at normal market prices. Outstanding balances with entities are unsecured and interest free and cash settlement is expected within seven days of invoice. The Group has not provided for or benefited from any guarantees for any related party receivables or payables. During the financial period ended 25 December 2016, the Group has made a provision of £nil for doubtful debts relating to amounts owed by related parties (2015: £nil).

 

END

 

 

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