Collins Foods Limited (CKF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Collins Foods Limited FY '22 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Drew O'Malley, CEO and Managing Director. Please go ahead.

Thanks, Travis, and good morning, everyone. This is Drew O'Malley. And with me on the call, I have Nigel Williams, our Group CFO. I'm very pleased to be able to take you through Collins Foods results for the 2022 financial year which was the 52-week period to the 1st of May 2022. Please note, as we take you through today's results, financials are presented on a post-AASB 16 basis, unless stated otherwise. Let me preface my remarks by sharing our view that even with all of the current inflationary and supply challenges in the landscape right now, Collins Foods is coming into FY '23 from a position of strength. We've achieved an excellent result in FY '22 with double-digit growth in sales and earnings, sparked by strong performance in Europe. A few of the key FY '22 result highlights include, revenue was up 11.1% to $1.18 billion with growth delivered across all of our business units. Underlying EBITDA from continuing operations was also up 12.6% to $209.2 million with strong margin improvement in Europe, a key driver. On a pre-AASB 16 basis, EBITDA was up 10.4%. Reflecting the growth in revenue and earnings, underlying NPAT from continuing operations was up 25% to $59.7 million, noting the equivalent on a pre-AASB 16 basis was up 14.1%. The financial results show continuing operations that exclude Sizzler Australia, which was closed on the 15th of November 2020. During the year, there were also nontrading items, which had a $4.9 million impact on statutory NPAT from continuing operations. Nontrading items are presented in more detail on Slide 33. Additional financial highlights include net operating cash flow of $156.3 million, up $28.1 million. And with investments during the year funded out of operating cash flow, net debt reduced to $174.9 million and net leverage was down to 1.17. Underlying basic earnings per share from continuing operations was up 24.9% to $0.5116 per share. And lastly, given the strength of our financial results and balance sheet, combined with the company's attractive growth opportunities, the directors declared a fully franked final dividend of $0.15 per share. This brings the total dividend for FY '22 to $0.27 per share fully franked, up 17.4% on FY '21. Moving to the operational highlights on Slide 2. All business units have continued to grow top line sales and new store count in FY '22. KFC Australia achieved same-store sales growth of 1.4% for the full year, including 2.5% from the second half. We were very pleased with this result given that we were cycling 12.9% same-store sales growth in FY '21. 10 new restaurants were opened during the year, all of which are performing above expectations. Further, the brand metrics for KFC Australia have never been higher, which we will return to shortly. And digital and delivery channels have continued to exhibit strong growth, highlighted by our pilot launch of drone delivery. KFC Europe delivered exceptional same-store sales growth of 16.8%, which represented 11.2% growth on the pre-COVID FY '19 level. We acquired 15 restaurants in the Netherlands during the year to take our own stores to 55% of the total Netherlands market. The Netherlands' corporate franchise agreement, or CFA, was successfully executed, providing Collins Foods with control over such critical functions as marketing and development. With respect to the latter, we added 2 net new restaurants last year and have begun expansion of the new store pipeline, both for Collins Foods and other franchisees, increasing our confidence levels in meeting the overall CFA development targets. Taco Bell Australia, while coming in with a 8.1% same-store sales decline for the full year, did report an improved minus 5.5% number for the second half and a return to growth in Q4 with a plus 0.4% index in that quarter. Supporting this has been additional media spend to support core brand positioning on taste and value. 4 new Taco Bell restaurants opened in FY '22 with a further 3 openings since year-end, taking the current total to 23 restaurants. We have been pleased with the performance of the new stores, especially in Victoria and Western Australia as we continue to develop scale for the brand. In total, across the Collins group, 31 restaurants were added in FY '22, including 16 net new openings. Turning now to KFC Australia in more detail on Slide 4. Even on the back of unprecedented same-store sales growth in FY '21, KFC managed to deliver another positive full year same-store sales result in FY '22. Total revenue was up 6.1% to $955.5 million. As stated earlier, same-store sales grew by 1.4% for the full year, while cycling 12.9% growth in the prior year. This equates to a 2.5% same-store sales result in the second half. Underlying EBITDA margin was 21.6%. On a pre-AASB 16 basis, underlying EBITDA was 17.4%. This was, as anticipated, down 0.5 point on the prior year result from negligible sales leverage and 2 successive increases in minimum wage over the course of the year. Inflationary pressure only started to arise in the fourth quarter so there was a modest impact on the full year result. As noted earlier, 10 new restaurants were opened in FY '22, which is ahead of our development agreement target. Moving now on to Slide 5. KFC Australia's brand strength and value positioning will be key to supporting the business in navigating the inflationary challenges we are facing. Brand metrics are at record levels with purchase intent now in its seventh straight year of increase and brand consideration at its highest level ever. Further, KFC now leads McDonald's on both quality and value perception scores with market share continuing to increase, led by gains in delivery. The brand is therefore well positioned to manage cost inflation in FY '23 to FY '24 through 4 primary drivers. First, we have begun implementing targeted menu price increases above historic levels, noting this will remain consistent with KFC's strategy to grow transactions and win on value relative to our QSR peers. Secondly, we are able to leverage the long-term nature of our chicken supply partnerships. Here, I would point out that though contracts are technically locked in until the end of 2022, some concessions have had to be granted to suppliers given the significant increases in feed prices. Thirdly, over 95% of our input items are locally sourced, which minimizes the impact from high import and freight costs. And finally, our holistic approach to omnichannel margin management allows for greater flexibility to continue to gain share via the emerging delivery channel. Overall, we do believe that the brand's strength in value is a critical attribute during times like these where consumer confidence is declining and there is greater uncertainty and anxiety in the environment. Moving on to Slide 6. As you can see, convenience and customer experience at KFC Australia has soared to new heights, if you'll forgive us the pun. We have seen continued growth in digital and delivery with e-commerce sales, which includes delivery, web and app, accounting for now 16.9% of total sales in the second half of FY '22, up from 13.3% in the prior comparable period. The delivery via aggregator and delivery-as-a-service, or DaaS, as we call it, through the app is now in over 200 restaurants. App-based click and collect ordering increased nearly 60% year-on-year, a strong base to leverage going forward with an app upgrade expected in the first half of FY '23. We have also commenced a launch with Uber Eats across Queensland, which has performed above expectations and is expected to roll out nationally over the coming months. An exciting innovation in recent months has been a pilot launch of KFC's first drone delivery in partnership with Google Wing and Yum! Brands. Contactless drone delivery in an initial 5 Brisbane suburbs has been serviced by Collins Foods' first dark kitchen. This has enabled us to learn a great deal about the future prospects of delivery. And to date, we have seen end-to-end delivery times reduced by more than half. Now clearly, this is -- this area is subject to significant regulation. So whilst we are excited to be at the forefront of this opportunity, this channel is expected to take some time before becoming more mainstream. Notwithstanding this in the near term, as drone technology improves, we are likely to see increased carrying capacity and battery life, enabling larger delivery areas. Turning to Slide 7. We are fully on track with our new restaurant development for KFC Australia. 10 new restaurants were opened in FY '22 with performance considerably above expectations. In addition, 1 store was acquired in Griffith, New South Wales from a fellow franchisee on the 7th of June 2022 at an accretive multiple. For FY '23, we are targeting a build of 9 to 12 restaurants, which will remain ahead of our development agreement. New format innovations also continue to be trialed to reflect the shift towards digital channels, increasing per unit volumes and deeper penetration into new geographic areas. In line with our ESG strategy, solar panels are now installed in 103 locations with our remaining drive-thru estate to be completed during the first half of FY '23, subject to local conditions. Digital CapEx investments include external digital menu boards, which are now in 153 restaurants, and our kiosk trial, which has been extended to 22 restaurants. Now turning to our European business on Slide 9. KFC Europe had an impressive year with same-store sales growth of 16.8%, which represents 11.2% growth over pre-COVID FY '19 levels. This was comprised of Netherlands same-store sales growth of 18.8% or 7.1% over FY '19, and Germany same-store sales, up 11.7% or 17% on FY '19. Encouragingly, drive-thru, digital and delivery sales sustained their high sales levels post reopening from COVID lockdowns. Acquired restaurants during the year contributed $25.2 million of sales of the total $190.4 million in Europe for the year. The post-AASB 16 European EBITDA margin was 14.5%, up from 8.9% in FY '21, reflecting strong same-store sales performance. The equivalent EBITDA margin on a pre-AASB 16 of 6.5% was significantly above FY '21's 0.8% and also higher than the FY '19 level of 5.5%. It's also worth noting that the second half FY '22 margin through the quieter winter trading months was impacted somewhat by seasonality and the higher delivery mix. Moving to Slide 10. Our growth strategy in the region is underpinned by the Netherlands Corporate Franchise Agreement, or CFA, which commenced on the 31st of December of last year. In addition to financial incentives, the CFA ensures Collins Foods has primary operational control over this market, which includes a refined marketing strategy with a return to KFC's core value proposition; control over pricing; management of the market store development pipeline; and greater ability to drive innovation and pace of change. Other Netherlands franchisees have responded positively to the agreement, and we are working well together to further build the brand. The merging of the Collins and Yum! teams at the beginning of January has been completed with a single Collins Foods culture beginning to emerge. Delving further into the marketing strategy for Europe. Slide 11 lays out the tactics, which are being deployed to position the business to maintain sales momentum while mitigating significant margin headwinds. We have a renewed focus on core and have been shifting from disruptive value to everyday value, which has supported positive sales momentum in both Netherlands and Germany. As an example, recent advertising campaigns, which have leveraged the Colonel Sanders icon, have resonated well with consumers. This is evident in YouGov consumer research showing improvement in both brand buzz and advertising awareness measures. Clearly, the inflationary environment in Europe has been unprecedented with global pressures intensified by the nearby war in Ukraine. While the margin pressure is considerable, we have launched a robust series of initiatives to mitigate the impact as much as possible. This includes menu pricing, which is significant, that is still consumer-centric, by which we mean, conscious of price point elasticities. It also includes a continuation in our efforts to shift away from disruptive value to everyday value, a range of supply chain initiatives, which will leverage European-wide vendor relationships, careful management of channel mix as well as procurement initiatives aiming to retender and renegotiate long-standing contracts. Moving on to Slide 12, where we continue to see significant expansion opportunities in Europe despite the current volatility. During the year, we increased our footprint in the Netherlands to 45 of the total 82 restaurants in the market, which represents now 55%. This was achieved through the acquisition of 15 restaurants across actually 4 separate acquisitions if we include the 2 restaurants acquired in late FY '21, including a net 2 new restaurants inclusive of 1 closure. All acquisitions have been fully integrated into the Collins network and are performing in line with expectations. The Netherlands CFA is key to unlocking further development in the market. As you'll recall, we have a target of up to 130 net new restaurants over the 10-year period of the agreement. We are pleased with the expansion of the development pipeline, which is supported by other franchisees' increasing desire to grow on the back of the brand's current performance. And in Germany, we opened a drive-thru opening -- we opened a drive-thru restaurant in Goppingen, just outside of Stuttgart in Southern Germany, which has performed well over expectations and is helping to bolster our confidence for a potential ramp-up in that market. And finally, regarding our European strategy, we strongly believe that the underpenetration of KFC in Northern and Western Europe provides Collins Foods with an attractive long-term expansion opportunity. Moving now to Taco Bell on Slide 14, where we were pleased to have seen a return to same-store sales growth in the fourth quarter providing positive momentum into FY '23. Revenue was up 27.5% to $35.8 million. And while same-store sales growth was a negative 8.1% for FY '22, there was a noticeable improvement in the second half and the fourth quarter with H2 same-store sales of minus 5.5%. And as mentioned, a positive 0.4% in Q4 as we continue to work on the brand. Post-AASB 16 EBITDA profitability at the restaurant level, excluding new restaurant opening costs and brand G&A was $4 million, the equivalent pre-AASB 16 was maintained at $1.4 million with a restaurant level margin of 3.7%. Segment was marginally -- it was marginally underlying EBITDA negative post-AASB 16, though the pre-AASB 16 EBITDA result noted a loss of $3 million driven by start-up and overhead costs. 4 new restaurants were opened during the financial year with a further 3 new restaurants opened post year-end. Turning to Slide 15. Taco Bell's marketing efforts have been centered on establishing the brand's taste and value credentials. We have put in place a number of initiatives focused on improving both value and food quality, which are starting to generate positive results. These include some tweaks to the menu to increase portion size and value perception; leveraging our KFC expertise on promotions to improve efficiencies and margins; as well as new meal combos with effective price points. We continue to accelerate our test-and-learn strategy as we progress. And our efforts should only continue to strengthen with the appointment of both a new creative agency as well as a full-time dedicated brand Chief Marketing Officer for all of Australia from the beginning of July. Increasing top-of-mind awareness and trial of the brand will continue to be our top priority, and we have been willing to increase our media spend above even our contractual requirements in order to do so. Similar to KFC, Taco Bell continues to sell well through digital and delivery channels with these channels currently representing 15.6% of sales with opportunity for further growth and expansion in FY '23 with the rollout of Taco Bell into Uber Eats expected in the first half of FY '23. We continue to be bullish on the Taco Bell brand in Australia and plan to accelerate the store rollout as outlined on Slide 16. As shared earlier, FY '22 saw the successful opening of 4 additional planned restaurants. In FY '22, all drive-thrus despite COVID-related building, delays in Melbourne, which bumped a few additional ones into our current financial year. This resulted in a further 3 restaurants openings since year-end in Victoria and Western Australia, and we now have a total of 23 restaurants across the 3 states. We've taken an iterative approach to both real estate and design to ensure that we continue to apply learnings. The benefits of this approach can be seen over our last 8 openings where both average weekly sales and margins have been significantly higher than for the initial restaurants. We've developed a strong pipeline of tightly clustered locations in Southeast Queensland, greater Melbourne and Perth. 9 to 12 new restaurants are planned for opening in FY '23 with new build costs typically ranging between only $0.6 million and $1 million, thanks to employing a hot shell approach to reduce capital outlay. With the pipeline we have in place, Taco Bell is on track to reach scale within 3 years. Turning to Sizzler Asia on Slide 18, where a post-COVID recovery appears to be underway. Revenue grew 10.8% to $2.8 million, and EBITDA increased 4.3% to $1.7 million, noting the full year result includes the impact of major COVID-19 restrictions in the first half. Significant improvement has since been experienced throughout the second half in Japan and Thailand post those markets reopening. Sizzler Asia ended the year at 66 restaurants with a positive franchisee brand economics supporting the potential relaunch of new store development in FY '23. I will now hand over to Nigel to provide an overview of Collins Foods' FY '22 financial performance.

Thanks, Drew. Starting on Slide 20, I'll talk through the results on a post-AASB 16 basis. But just to remind everyone that there's no impact to overall net cash flow from the leasing standard. It's just a reallocation of leases from the operating cash flow to the financing activities section. Net operating cash flows were $156.3 million, up by $28.1 million on the prior year, principally due to higher year-on-year underlying EBITDA and some positive working capital. Cash generation again supported all the capital expenditures required to continue the business' growth trajectory, some new builds, digital and maintenance capital, to the acquisitions in the Netherlands and the dividend. A final fully franked dividend of $0.15 per share has been declared, bringing the total dividend for FY '22 to $0.27 per share fully franked, up 17.4% on FY '21. Turning to the balance sheet on Slide 21, which remains in healthy shape. The cash balance of $97.2 million was slightly higher than the prior year despite some repayment of borrowings. Property, plant and equipment was up $27.2 million, principally due to the ongoing spend on new restaurants and acquired restaurants less the relevant depreciation. The rights of use assets and corresponding liability are both also up due again to the rental elements inherent within the opening of new restaurants and the purchase of restaurants in the Netherlands. Net assets are also up to $393.5 million, a rise of $30.9 million on the prior year. Our balance sheet remains healthy. And therefore, our funding capacity is strong. This is further outlined on Slide 22. Our net leverage ratio improved further over the year from 1.34 at the end of FY '21 to 1.17 at the end of FY '22. We have significant headwind to the covenant maximum of 2.75x. Net debt also reduced to $174.9 million, resolving the reinvestment we have made in the business. Note here when we refer to the net leverage ratio, this is calculated on a pre-AASB 16 basis, consistent with the measurement criteria in our syndicated facility agreement. The current facility is approximately $380 million, so we have significant funding runway to support future growth. I'll now hand back to Drew to talk through our strategy and outlook.

Good. Thanks, Nigel. Given the current environment, we thought we would try to share a bit more detail than usual around the outlook for FY '23. On Slide 24, we'd emphasize that our growth plans continue on track despite the current margin headwinds. KFC Australia has started the new year well, same-store sales growth of 4.1% in the first 7 weeks. On the margin side though, we do need to point out that we do expect some margin compression to occur especially in the first half of our financial year, though our target is to stay within the low to mid-part of our historic EBITDA margin range of 16% to 17% for the full year FY '23. And while there is significant unpredictability in the current environment, we do expect margin recovery to the higher end of that range in FY '24. The entire team is actively engaged in working to offset some of that pressure. And as noted, initiatives like menu price increases, supply chain partnerships and further procurement efforts will be our primary levers to do so. The business will continue to benefit from the expansion of digital and delivery, including our launch into Uber Eats. A further 9 to 12 new restaurant openings are planned for FY '23. KFC Europe has continued its strong performance with same-store sales growth in the first 7 weeks of 12.2% in the Netherlands and 19.4% in Germany. Europe is experiencing significant margin headwinds from unprecedented increases in cost of sales, energy and labor. Our expectation is to limit the overall impact to 1% to 2% for the full year, albeit higher in the first half, and we anticipate some potential softening of these cost pressures from the second half of FY '23. As in Australia, we plan to partially offset margin pressure through tactical menu pricing, the additional sales leverage, sourcing and procurement initiatives. We will continue to focus the brand on everyday value and the core KFC playbook, which is resonating so strongly with consumers. A further 2 to 5 new restaurants are planned for FY '23 with the pipeline expanding for future years. And as we have done over the past 2 years, we will continue to monitor the landscape for potential additional M&A opportunities, taking advantage of our strong balance sheet to do so. Taco Bell Australia has also started the year with positive same-store sales growth of 1.6% for the first 7 weeks. Moderate margin pressure is also expected for this brand, especially in key areas like beef, oil and labor, with our full year target here to maintain positive EBITDA at restaurant level. We will continue to increase media spend above contractual requirements with the assistance of Taco Bell International, and are planning to ramp up the development pipeline with 9 to 12 new restaurants expected in FY '23 across Southeast Queensland, Melbourne and Perth. While we continue to counsel patience for this new brand, we also continue to be long-term bullish on its prospects. And finally, I'd like to close on Slide 26 with a few thoughts to add some perspective in the current landscape. While there's clearly a lot of turbulence and uncertainty in the macro environment, I'd point out that Collins Foods' strengths are very well suited for precisely this type of scenario, namely, we have a healthy balance sheet, world-class scalable brands and we specialize in the quick service restaurant sector, which is very resilient and has defensive properties benefiting from trade down and value orientation during times of consumer anxiety. Further, we have a laser focus on operational excellence, very experienced and capable team and a proven track record in delivering growth for our customers, our people and our shareholders. That concludes the formal presentation. I would now like to open the call for questions.

[Operator Instructions] The first question today comes from James Ferrier from Wilsons.

Drew and Nigel, first question is just on that store you acquired in Australia, where you issued scrip as consideration payment for it. Was that your decision? Or was that the vendor's decision to take scrip?

That was actually a mutual agreement. We've done a similar deal in the past in the Albury-Wodonga region. And we do actually think that, as you know, we're always on the lookout for acquisitions in any landscape. In Australia, there's not been as many opportunities. We actually think that that's potentially a lever that we think is an inherent benefit of Collins Foods. So it has a -- that's a similar structure of deal that we've done before.

Okay. That's good to know. Second question is on KFC Europe and just thinking about margins in the second half of FY '22. In the presentation, you talked about the impact of delivery mix. Previously, Drew, you've highlighted the opportunity or you are looking for ways to neutralize that margin delta that exists within the delivery channel. Have you made any changes to that pricing to close that gap? Or is it still an ongoing issue?

Yes. So we have taken pricing, James, on delivery in Europe. There may be additional opportunity there. I would stress that we are not looking to be margin neutral in that channel, either in Australia or in Europe. As you may know, in Australia, we used to have a margin neutral policy. I think we've shifted away from that and looked at the P&L more holistically as we want to make sure that we're capturing the market share and delivery that we need to. But in Europe, yes, we have taken some pricing in the delivery channel, and we anticipate that there may be further menu pricing required.

Okay. And last question, perhaps for Nigel. Can you give us some color on what expectations you have for FY '23 in relation to the shared service, cost line, CapEx and also D&A?

Yes. Sure, I can, James. So I think that in terms of D&A, it's probably early 50s. CapEx is 90 plus a little bit. And then corporate costs -- I think there's a couple of things to say on corporate costs. So first of all, this year's number has been flattered a little bit by a one-off gain on the sale of a property that you'll see somewhere else in the accounts by a couple of millions. So you got to bear that in mind that that's a one-off benefit to the corporate cost line this year. And then also you got to factor in corporate costs probably going to rise by similar levels to what we've seen in the past, given that pay rises are a little bit elevated due to inflation, and things like travel costs are being incurred again back towards pre-pandemic levels.

So just to clarify on that item, the one-off benefit in '22 in relation to a disposal, that's in the underlying or is that on Slide 33, again on disposal of land which went through on the nontrading items?

Yes, it's the latter, James, yes. It's, again -- we had some land -- a property up in KFC Gladstone, which we sold this year and made again.

The next question comes from Tim Plumbe from UBS.

Congratulations on a strong start to FY '23. Just 2 questions from me, if I can. Firstly, around pricing and the second one around costs. Just Drew, if we think about the first 7 weeks like-for-like in Australia, 4.1%, can you give us a feel for how much of that was volume versus how much of that was pricing? On my analysis, it looks like you only just recently put through pricing increases. So further to that, how do we think about the blended price increase that you've just put through in Australia and maybe Europe?

Yes, I've seen your detailed analysis on that too. We are pretty impressed how quickly you pulled that together. So a few things, maybe start with the broader picture on menu pricing, Tim, and then I'll try to get more granular to your question. Look, I think it's really important to note when it comes to menu pricing, the KFC, over the past decade, as you know, taken pricing well below CPI or below CPI. And it's important to note that it's worked. We've been able to increase the brand attributes on value even as both sales and margins have improved. So while we are planning a higher level of menu pricing than historically given the margin pressures, I always need to take pains to point out that this is exactly the environment where we want to be winning on value. And we've got to be careful on not getting too far out in front of our consumer to erode the work that's been done over the past decade. And on that principle, we're very much in alignment with the [ element ] that our pricing strategies continue to be consumer-driven. So typically, for KFC, you'd see pricing in sort of that 1% to 2% pricing in a year. In 2022, already, we took 1% to 2% in January. As you noted, we took another 1% to 2% a few weeks ago, closer to 2% than 1%, if that's helpful for you. And we're likely to see another round or rounds in the year ahead. But we do want to be careful. We're certainly oriented and mindful of the long-term health of the brand. So we want to be very careful there. We also want to recognize that some cost increases don't reverse like labor, but some will. Things like energy, petrol, maybe some of the commodities like wheat and canola, we expect may come down a bit. So we got to blend all that into the way we think about menu pricing. The other part of your question there was on, I think, transactions versus ticket, I'm sort of extrapolating. I think it's fair to say that more of that was on the ticket side, Tim, in the first 4 weeks. But certainly, keeping transaction growth is a strategic priority for the brand. One of the things that's relevant to point out is there has been a shift in the QSR landscape towards occasions like dinner. So what you tend to see is that group size is increasing, and that may mean that transaction growth is more muted even as you see ticket increase. So all those dynamics sort of play in into the way we think about same-store sales. But in broad strokes, yes, we're getting more out of ticket than transactions in the first 7 weeks, and we're still quite comfortable with where we are.

Got it. And just a second question on costs. Obviously, you gave us that guidance in terms of the EBITDA margin range that you guys are anticipating. Maybe can you just give us a bit of a sense if we thought about the cost growth during those first 7 weeks relative to the 4.1% like-for-like in Australia, and then how does that change in the upcoming months given the changes to wage inflation, et cetera?

Yes, that's exactly right. Some of the -- so I think when you think about some of the major cost categories, obviously, on the labor standpoint, that hasn't kicked in yet, that's a July 1 increase. Though the headline, I think, is in the environment, it's been 5.2%. On minimum wage for us, that's more like a 4.7% because of the award that we're on. But then you've got to add on to that the superannuation. So you're actually around about 5%, 5.1% all in. So that has not yet rolled in. That's a July 1 increase. On the other standpoint, from a COGS perspective, some of that is -- we start with poultry, which is our biggest input. And as you're aware and as I mentioned, we're locked into the end of the year. We have given some concessions because of feed price increases. There may be a bit more of that required. Suppliers aren't super happy with some of the input prices that they're seeing right now. That is a negotiation. So look, in broad strokes, some of it is -- some of that has already been put through. But we do expect, certainly on the labor side, more to come. So that's, again, broadly speaking, where we are.

Got it. So I mean, is it fair to us to think cost growth relative to that 4.1%, somewhere in the order of about 5%, 6%?

Yes, I'm going to probably have to steer away from a specific percent. But look, you'll -- we do -- we'll probably stick to the headlines of we're looking for menu price increase, again, to stay below CPI. And our long-term targets on margins, you can see sort of flow through from that, that we expect it to be a bit of a bumpy first half on the margin standpoint, and we expect the full year impact to be 1% to 1.5%.

The next question comes from Alexander Mees from Morgan (sic) [ Morgans ].

Firstly, just a clarification on the Slide 24 with regard to the margin headwinds you referred to. I just wanted to be clear with the 1% to 2% in Europe, if that's post- or pre-AASB 16, whether it makes much of a difference?

Yes. Alex, it's -- we look at the business on a pre basis. But when -- even when you factor in all the leasing stuff, it's not too dissimilar on a post basis.

That's helpful. And then just sticking with margins. You referred, I guess, I'm talking with Tim just now about the margin pressures, I suppose, easing into the second half and into FY '24. I suppose, given that chicken supply contracts are going to reset to the end of this calendar year and you've got the labor cost increases coming through, just wanted to be sure what your assumptions are in expecting margins to start to bolster in the second half of the current year.

Right. So I think what -- there's probably a couple of levers there that I'd point out. One is the fact that as you take pricing, that pricing starts to flow through, depending on when you put it into place. So that's the first lever. The second is the fact that, as I noted, when you see some of the commodities increasing and starting to ease off, I've used wheat probably as an example, but it's probably indicative of some of the commodities. So you've seen wheat go up globally. It's gone up. I think it went from about $600 a bushel to $1,300, and that's already come back to $1,000. So you've seen some of those cost pressures start to ease off. We do expect that to happen in oil as the year progresses. And by that, I mean cooking oil, not petrol. So those, we do -- in both Europe and Australia, we do think that some of those commodities should start to come back, and that should take a bit of the pressure off as well. The third one is probably something that I'd probably want to extrapolate from what I shared earlier. The most important thing we can do for the brand right now is to keep it healthy and keep value at the center of the equation. We -- if you grow top line in this business, it absolutely helps on the margin side. And one of the highlights I'd probably build on from the deck is we launched Uber Eats a few weeks ago in Queensland. And this is something -- Uber Eats is the biggest aggregator in the delivery category. It's about half of the total delivery market. And we expect that, long term, to be around a 2-point bump to same-store sales. We've actually seen above that, so -- in the short term. So again, it's early days, and it's just in Queensland, but we're very encouraged by what we see. And again, as we get additional volume into this business, it does help to leverage and protect margins. So those are probably the 3 things I'd point out that gives us a bit of optimism going forward there, Alex.

That's great. And just one more if I can squeeze it in. Just with regard to consumer demand and you referred to being resilient in times of increased consumer anxiety. And obviously, Drew, you've been in the QSR and the restaurant game for a long time. What has been your experience through previous periods of economic slowdown and inflation?

Yes. I think that's very similar to what we've seen before. And you're right, I've been in this industry for a long time, let's not talk about how long. But yes, generally, what you're going to see, we absolutely expect to see a lot more deals, a lot more value offerings. And this is what the brand's designed for. So you're going to see a lot more $5, $10 price points in the landscape. This is a familiar train for us in KFC. This is where the brand excels. Consumer confidence has been down for about 6 or 7 straight months. People are going to be tight right now as mortgage and petrol prices take a bigger cut. So you are going to see a lot more of that, and you do see trade down from other categories into QSR. So we do want to stay aggressive. We think it's an opportunity to steal share. This is exactly why we've worked on value as a strength for this brand over the past 10 years, is for times like these. So we're optimistic on how we can weather it.

The next question comes from Peter Marks from Barrenjoey.

I just wanted to check, is there anything in the numbers that might suggest you've experienced a bump in trading to the $250 stimulus checks that hit bank accounts in May?

Look, it's -- we go through a lot of those discussions internally as well. It is interesting. It's always an imprecise science, Peter, because you're always trying to figure out exactly when it flows through, when people are spending. I will say it's realistic to think that there has been some positive impact. Generally, consumers, especially in our target demographic, when they get extra cash in, they may be more inclined to spend it. So we do see benefit from that. Nonetheless, we do think that there's stronger foundations to the solidity of the brand. And I'd probably point to what I just shared on Uber Eats as being one of the things that we think will help carry us forward into -- over the course of the year. So the short answer is yes, but it's hard to put a precise number on it.

Great. That's helpful. And then just on Europe, and with the guidance to FY '23 and '24, is there a significant difference between the profitability in the Netherlands and Germany? And that's the first bit. And then the second bit is, obviously, things are really tough there. There's been a tough couple of years in the Netherlands. What's your sense of how other franchisees are feeling particularly in the Netherlands?

Sure. So let me break that apart a little bit, and Nigel can chime in as he wishes. I think when it comes to the difference between Netherlands and Germany on the margin side, typically, Netherlands has been a very, historically, strong margin business. And I'd say that's why we still think that there's room to further recover our margins in Netherlands. There are -- one of the stores in that market, it was a flagship store of Damrak that some of you have heard us talk about, that's been our flagship store. That's still down 20% from pre-COVID and has a disproportionate impact on margins. So Netherlands is one that typically has historically been quite robust. And while we're recovering, we think there's more to be gained. I think Germany is a very intriguing one for us because Germany typically has been a lot more sort of single digit, mid-single-digit EBITDA-type business. But we've been very, very encouraged with what we've seen over the past few years. And actually, the drive-thru business there is a healthy business. So I think as we kind of relook and rethink about Germany and the opportunity to build there, we're bullish. The drive-thru that we opened in Goppingen has obviously performed incredibly well. We're encouraged by that, too. So we do think that Germany can play a bigger role in our expansion opportunities. And again, we do think that the drive-thru asset type is the right to use. The second part of the question, Peter, I'm sorry, was on? I lost Peter, okay.

Apologies. Peter's line has disconnected.

I was boring, Peter, my monologue there. Anyway, look, I think that's probably a decent synopsis of the markets out there, but yes, encouraging long term for sure.

The next question comes from Elijah Mayr from CLSA.

Congrats on the solid results. Just maybe just first on Uber Eats and you sort of made some comments before which were helpful. But there's obviously been discussions for quite a while. Can you sort of maybe give us a bit more detail in terms of what sort of got them over line? Did you sort of meet their expectations in terms of costing? Or did they sort of come to meet you in terms of getting KFC brand onto the platform?

Well, we've been talking to them for ages, you're right. I probably won't go too much into the contractual details that we struck. I think we're probably both pretty comfortable with where we got to. I think any of those deals and conversations with the aggregators are likely to morph over time. But I think with where we've gotten to on Uber Eats, we're pretty happy. So it's just -- it was a very, very lengthy negotiation. I think we recognize that it's important to try to get the right terms so that we are getting profitability into this channel. But we need to make sure that those guys are, obviously, need to make money as well. So just a very long negotiation.

Yes. Understood. And I guess you made comments around Europe specifically being -- acknowledging that it's not going to be margin neutral and, in effect, sort of margin dilutive with some of the aggregators. Can you sort of comment, I guess, on to the extent that's the case in Australia and perhaps how margin dilutive it is increasing sales through the aggregators?

Yes. Probably -- so a few years ago, when we launched -- it is, stepping back, remarkable to reflect that this is a channel that didn't exist a few years ago and now it's north of -- or it's 17% of our sales. We went into the delivery channel with a margin-neutral approach, which was make sure that we fully offset the commission from a margin perspective so that we can be agnostic in terms of which channel customers want to go down. I think where we looked at more recently, and we've had a lot of conversations with Yum!'s marketing team down in Sydney on this is, you got to be a little bit careful about, if you cling too strictly to margin neutral, then you're sacrificing share. And I think what we've recognized is we probably need to be -- ensure that we look at the margin for the business holistically and not get too narrowly focused on the channel being margin neutral. So it is -- it does operate at a lower margin. I probably won't share specifically how much lower, Elijah. Nonetheless, when you look at how well positioned this brand is for delivery, we think our market share is below what it can be. So we do want to be more aggressive in this channel, but we do want to recognize that the margins are not going to be fully neutral. But overall, we want to make sure that we manage the margins for the business.

Yes. Understood. And then maybe just on the acquisition front. There's obviously sort of interest and sort of statement released regarding Retail Zoo. Can you maybe give me a bit of color around, I guess, what kind of business and potentially even location you would be open to look at? Or has Yum! perhaps approached you regarding maybe Pizza Hut which looks to be up for sale as well? Maybe just a little bit of more color around your expectations on the acquisition front.

Sure. Well, look, our growth strategy to reiterate is absolutely focused on our 3 core brands, KFC Australia and then turbocharging Taco Bell and KFC Europe. Having said that, look, we're restaurant operators in the QSR sector, and we always want to keep our eyes on the landscape. So look, it's our job to make sure that we're evaluating anything that's on the landscape. I won't say too much about Retail Zoo. I think it's a fabulous business. I think Nishad is a first rate CEO. We just felt that the opportunity and timing wasn't right for us. So that's probably all I'd say on that one. But we're going to continue to keep our eyes open. But certainly, QSR is a segment that we feel strongly about. We know how to operate. And I probably won't comment on other additional brands specifically from that. I just realized what Peter's second question was in Europe. So if he's still on, I'll try to answer it. I think the question was about the other franchisees in the Netherlands and how they feel about us and the growth. So I think it is worth probably touching on that, that we've acquired a number of franchisees in Netherlands at what we consider to be attractive multiples. There's not too many franchisees left. We'd always be open to acquiring them. I do think one of the ironic things is they've been very, very happy with Collins now operating the market. And they're actually more bullish now than they probably were a couple of years ago about the prospects for the brand in the market. So look, we've got a great relationship with them. I think we always keep our eyes open if there's other acquisition opportunities in Europe that we think suit us. But that's probably where I'd respond to Peter's earlier question. So hopefully, that answers your question as well, Elijah.

Yes, no worries. I just had one that was actually just kind of follow on in terms of the Netherlands and the franchisees. Maybe if you could give some, I guess, comments on the state of the pipeline and sort of if you've been able to secure any sites, I guess, for expansion unless the franchisees that are left have shown indication of participating in the store expansion over in the Netherlands?

Yes, that's right. Look, we really -- our intent would be that any franchisee that remain in the market, build, right? I mean having franchisees that are sticking around with 4 or 5 stores, I don't think it is necessarily great for the brand. We want to make sure that we're optimizing the opportunity. So the other franchisees, especially given the performance they've seen, do tend to be more bullish about potentially developing. The one caution we always have to make on Netherlands is the amount of time it takes to get stores built. So specifically drive-thrus, which is still the sweet spot of where we want to open or asset type-wise can take 18 to 24 months or more. So we've been engaging in earnest to develop the pipeline. We're happy with it with the way it's expanding. Nonetheless, it will take time for those stores to come to fruition. The good news is the development agreement that we have with Yum! is back-end weighted to reflect that. So our development targets are more reasonable in the early years and then they ratchet up. So overall, we're on track. The other franchisees are on board. And we think those numbers should continue to increase as we progress.

The next question comes from Sriharsh Singh from Bank of America Securities.

One question from my side. Can you talk about your solar panel initiatives? You've installed it in over 100 stores. Where could that number be in a 1 years' time? And what kind of utilities cost saving could that entail in the medium to long term?

Yes. Thank you for the question. We're -- look, solar is a big part of our ESG strategy. And obviously, it's got benefits in the history primarily, but not only. So our intent is to install solar panels on any drive-thru asset where it's possible. So we're at 100 of them today. To be clear, we've got over 200 drive-thru restaurants in Australia. Of the 260 KFCs, only 38 of those are food courts, another handful of in-line. So it is predominantly drive-thrus. The one caveat I've got to put on that is because very often we have landlords, we don't own the property or the shell. We have to get landlord approval for putting solar panels on. And that's been -- sometimes that's more tricky than you'd like to believe. So we're going to progress as quickly as we can. We've got a plan against every asset where we don't yet have it. But to be clear, we're never going to get the full estate, but we are the largest company of our type in Australia that's made a commitment like this. So we're excited about that from an ESG perspective. The second part of your question was on the margin side. Look, there is some margin benefit from gains in solar panels. The business case in -- for solar is actually one of the most promising energy initiatives from a financial payback perspective. So it's single digits in terms of decrease or savings on energy. It's not the only reason we do it. But we are pretty pleased with what we've seen so far. And again, we're going to install as many as we can in Australia.

At this time, we're showing no further questions. That does conclude our conference for today. Thank you for participating. You may now disconnect.