Collins Foods Limited (CKF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Collins Foods Limited H1 FY '23 results. [Operator Instructions] I would now like to hand the conference over to Mr. Drew O'Malley, Managing Director and Chief Executive Officer. Please go ahead.

Thanks, Rachel. And good morning, everyone. I'm Drew O'Malley. And with me on the call is Nigel Williams, our group Chief Financial Officer. [ I am ] very pleased to be able to take you through Collins Foods' results for the first half of the 2023 financial year, which was the 24-week period to the 16th of October 2022. Please note, as we take you through today's results, financials are presented on a post-AASB 16 basis unless stated otherwise. Starting with a summary of our financial results on Slide 1 of the presentation, if you're following along. Overall, despite an extraordinarily challenging landscape, Collins Foods has been able to maintain strong sales momentum, particularly in KFC Europe and Australia. A few of the first half result highlights include revenue was up 15% to $614.3 million with growth achieved across all of our business units. Underlying EBITDA was up slightly, increasing 0.5% to $95.4 million. On a pre-AASB 16 basis, EBITDA was down 6.3% to $66.4 million, reflecting inflationary headwinds. Underlying NPAT was down 14.2% to $24.8 million, with the equivalent on a pre-AASB 16 basis down 11.6%. During the year, there were nontrading items that had a $13.8 million impact on statutory NPAT predominantly relating to the $11.9 million after-tax impairment of 8 Taco Bell restaurants. Detail on nontrading items is presented on Slide 33. Additional financial highlights include net operating cash flow of $69.1 million, a year-on-year reduction in net debt to $191.1 million and net leverage to 1.31x, underlying basic earnings per share from continuing operations of $0.212 per share. And lastly, the directors declared a fully franked interim dividend of $0.12 per share. Moving to Slide 2. As noted earlier, KFC same-store sales growth in our Australian and European operations was the key highlight in the first half of FY '23, as well as the addition of 7 restaurants across the group. KFC Australia delivered same-store sales growth of 5.1%, which was predominantly driven by growth in e-commerce, including the launch of Uber Eats, as well as increased ticket. With brand and value metrics continuing at all-time highs, e-commerce represented over 22% of total sales, up from 16% at the end of FY '22. 2 new restaurants were also opened, including our Queen Street Mall flagship store. And we acquired 1 restaurant from another franchisee. KFC Europe achieved same-store sales growth of 10.4%, reflecting a combination of increased ticket and growth in transaction volumes. The corporate franchise agreement or CFA in the Netherlands has enabled us to implement customer-centric price increases when necessary and improved marketing, underpinning same-store sales growth of 9.2% in that market. 2 additional KFCs were opened by other franchisees in the period. And with 3 more Collins Foods KFCs expected in December, we are on track to meet our first year development commitments under the CFA. Germany also performed strongly with same-store sales growth of 14.6%. Taco Bell Australia same-store sales growth was disappointing, declining 7.8%, as the brand works through the transition of a new marketing agency and a new Taco Bell international Chief Marketing Officer in Australia. 4 new restaurants were opened, 2 in WA and 2 in Victoria, bringing the Collins total for Australia to 24 restaurants. We have paused new Taco Bell restaurant builds beyond sites already committed to so that we can work with Yum! to regain traction on top line sales and profitability. Turning now to Slide 4 and KFC Australia in more detail, where solid top line growth mitigated margin headwinds. Total revenue was up 10.6% to $479.6 million, underpinned by 5.1% same-store sales growth; and the benefit of 3 new restaurants in the half, which was 10 additional restaurants versus 12 months prior. Our Australian footprint now stands at 264 restaurants for KFC. As I mentioned earlier, same-store sales growth was primarily driven by e-commerce, which was supported by the launch of Uber Eats, as well as an increased ticket. Transactions were broadly flat versus prior comparable period. Underlying EBITDA margin was 19.8%. On a pre-AASB 16 basis, underlying EBITDA margin was 15.8%, which was down on prior year but in line with internal forecast for the half. As called out at our FY '22 results earlier this year, significant input cost inflation and higher-than-normal minimum wage increases were the key items impacting margins for the half. Moving now to Slide 5. The KFC brand continues to be well positioned, retaining its leadership amongst KFC -- QSR brands in the critical value and quality metrics. Our value perception remains at historic highs. And brand consideration continues to improve, which is a key indicator of brand health. KFC's brand strength and heritage are critical for weathering times of economic anxiety and low consumer confidence. And our permanent value layer supports affordability and engagement with regular customers as well as less-frequent users. KFC's overall approach of maintaining pricing increases at or below CPI has reinforced KFC's value proposition, supporting consumer trust and perception of brand value. It is worth noting that more than 95% of our inputs are locally sourced, minimizing the impact of shipping costs, port disruption and foreign exchange. And KFC has worked to increase supply chain diversification to ensure continuity of supply and mitigate cost pressures more generally. As you can see from Slide 6, digital and delivery remain a key enabler of growth in our KFC Australia business. E-commerce sales, which include delivery, web and app, accounted for more than 22% of total sales in the half, a sizable increase from the 16% at the end of FY '22. Delivery sales, including delivery as a service, were up strongly, with the addition of Uber Eats in July extending the brand presence to all aggregators. On a related note, we have seen minimal impact from Deliveroo's exit from the Australian market. Click-and-collect ordering through the app and kiosk sales steadily increased as consumer adoption grew. New versions of the app, website and kiosk software were launched in September with strong activation campaigns, including our left-handed menu. And if you're wondering about the significance of 11: There are 11 KFC secret herbs and spices. And as it turns out, 11% of the population is left handed. KFC app has also continued its strong following, with current CRM efforts actually doubling revenue from personalized offers. Turning to Slide 7. Innovation has played a key role in our development initiatives in KFC Australia. As mentioned earlier in the presentation, during the half, we opened 2 new restaurants and acquired another, with 2 additional restaurants opened so far in the second half. This puts us well on track to build 9 to 12 restaurants in FY '23, with this pace remaining ahead of development agreement requirements of 7 to 8 per annum. A particular highlight in the first half was the opening of our Queen Street Mall flagship KFC. This restaurant showcases enhanced consumer design, upgraded equipment efficiencies and sustainability initiatives supporting recycling and clean energy. Continuing with the theme of sustainability, solar installations are now complete across all available drive-thru rooftops in our network, representing a total of 145 restaurants. Digital CapEx investments continue, with all restaurants planned for external digital menu boards by year-end and 32 restaurants operating -- currently operating kiosks. Now turning to our KFC Europe business, on Slide 9, which generated impressive same-store sales growth over the first half. Revenue was up 32% to $111.8 million, underpinned by strong same-store sales growth of 10.4% as well as the benefit of acquisitions made in FY '22. The same-store sales performance reflected both price and transaction growth, up 9.2% in the Netherlands and 14.6% in Germany. European EBITDA margins of 11.8% on a post-AASB 16 basis or 5% on a pre-AASB 16 basis were impacted by unprecedented inflation throughout the first half with significant rises in labor and utility costs and across all supply chain categories. Moving to Slide 10. The focus on core products and everyday value is resonating with consumers and has underpinned growth in European sales which are now considerably above pre-COVID levels. In the Netherlands, a range of coordinated marketing tactics have underpinned top line growth, which has partially mitigated short-term inflation and labor challenges. In addition, we also successfully launched and sustained our new Veggie offering at one of the highest levels globally, providing a distinctive brand halo given growing consumer interest in plant-based products. [ And to address ] margin headwinds and consumer uncertainty, we have implemented a range of initiatives including focused price point promotions, pan-European supply tenders and an updated digital road map. Turning to the next slide. The Netherlands development potential is being unlocked under the CFA, with restaurant numbers increasing and pipeline building. 2 KFC restaurants were opened in the Netherlands by sub-franchisees, and Collins Foods will open a further 3 of our own in December. As a result, our expected total market growth of 6 in 2022 will unlock our CFA incentive. Additionally, we have worked to expand our development team's capability to support new restaurant openings in both the Netherlands and Germany and continue to monitor the franchisee landscape in Netherlands and Germany for possible acquisition opportunities. Slide 12 highlights some of the benefits that are already starting to show from the Netherlands CFA, underpinning Collins Foods' position as a KFC growth partner. These include the successful integration of Yum!'s and Collins Foods' support teams, under Collins' leadership; increased franchisee engagement and support; nimble marketing and pricing strategies to help cushion the impact of cost inflation; as well as innovations in restaurant design and e-commerce. Overall, we've had a positive response from Yum! on the results from the first year of the CFA, which has helped position Collins Foods as a leading partner for growth for Yum! in Europe. Moving now to Taco Bell Australia on Slide 14. Revenue was up 42.6% to $21.1 million, reflecting an increase in restaurant numbers from 17 to 24 year-on-year, including 4 openings during the half. However, with same-store sales declining 7.8%, our ability to translate revenue growth into earnings was challenging, with EBITDA below breakeven pre and post AASB 16. EBITDA profitability at the restaurant level, excluding new restaurant opening costs and brand G&A, was $1.2 million. The equivalent on a pre-AASB 16 basis was negative $0.2 million. And as I mentioned earlier, we have taken an $11.9 million noncash impairment for 8 Taco Bell restaurants in the half. Turning to Slide 15 and a closer look at sales in Taco Bell. After seeing some positive signs in same-store sales at the end of our last financial year, we witnessed a reversion to negative numbers in the first half. We attribute this result to a few factors. First, consumers do tend to shift back towards more well-known brands during times of economic uncertainty as we're experiencing now. Second, an increasingly competitive QSR landscape. And lastly, more internally, we have been managing through a transition to a new creative agency and Chief Marketing Officer on the brand. We are implementing a bold set of initiatives in the second half to regain traction in our sales momentum: first, by expanding Uber Eats after its successful pilot. It's worth noting that, in its first full week of launch, we noted significant positive same-store sales across the portfolio, which was encouraging. Secondly, a tighter focus on distinctive products and more traditional QSR price points. And further, we expect additional financial and marketing support from Yum! to help build the brand in Australia. And we continue to upgrade ingredient quality to further raise the bar on taste. The next slide covers our Taco Bell new restaurant development. 4 drive-thru restaurants were opened in the first half, increasing our total Taco Bell footprint to 24 restaurants overall across the 3 states of Queensland, Victoria and Western Australia. Notably, after the completion of our 6 -- 5 to 6 restaurants currently under development, we have made the decision to pause further development as we work with Yum! to strengthen the brand proposition and drive confidence particularly in top line sales. Our renewed development rollout will be connected with achieving quarterly sales and profitability targets. We do continue to believe in the potential of the Taco Bell brand in Australia, where Mexican food is the fastest-growing QSR category, and look forward to recommencing the rollout in due course. Turning to Sizzler Asia, on Slide 18, where we have seen a positive recovery post COVID. Royalty revenue of $1.8 million increased 100%, resulting in an EBITDA of $1.2 million. Strong results relative to the prior comparable period reflect the impact of COVID lockdowns in 2021 and positive momentum post reopening. We'll now hand over to Nigel to provide an overview of Collins Foods' first half FY '23 financial performance.

Thank you, Drew. Turning to Slide 20. Net operating cash flow for the half was $69.1 million on a post-AASB 16 basis and $42.8 million on a pre-AASB 16 basis, slightly down on the prior half, in parts due to lower EBITDA but also due to a working capital outflow of about $5 million which was mostly connected to paying invoices for the construction of new restaurants built at the very end of our last financial year. The operating cash flow continues to support business investment and our dividend. Capital investment initiatives, totaling $30.9 million, included $14.5 million in new restaurants; $8.1 million in remodels; and $7.8 million towards digital, sustaining and other initiatives. An interim fully franked dividend of $0.12 per share has been declared. Turning to the balance sheet, on Slide 21, which reflects our growing restaurant footprint. The cash balance of $93.4 million was down slightly from the end of FY '22. Property, plant and equipment of $211.4 million reflects the ongoing spend on new restaurants and acquisitions, less the relevant depreciation. The right-of-use assets and corresponding liability are both up slightly due to the rental elements inherent within the opening of new restaurants. Net assets of $395.7 million was up slightly from the FY '22 balance date. With a healthy balance sheet, our funding capacity remained strong, as shown on Slide 22. Our net leverage ratio remained at comfortable levels, coming in at 1.31x for the half, providing significant headroom to the covenant maximum of 2.75x. Note here the net leverage ratio is calculated on a pre-AASB 16 basis, consistent with the measurement criteria in our syndicated facility agreement. Net debt has increased by $16.2 million to $191.1 million over the half, in part due to acquisition activities. However, as the cash flow shows, we've been able to continue to reinvest in the business, pay the dividend and afford M&A activity comfortably within our covenant boundaries. With a current facility headroom of up to $380 million, we maintain significant funding capacity to support future growth. I will now hand you back to Drew to talk through the outlook for the second half.

Thanks, Nigel. On Slide 24, let me provide some commentary by business unit concerning the outlook for the balance of the year and beyond. KFC Australia continues to trade well and has experienced 5.6% same-store sales growth for the first 6 weeks of the second half. Given additional supply cost pressure which materialized during the first half, we now expect FY '23 EBITDA margin pre AASB 16 to compress into the 15% to 16% range. Additional menu pricing and procurement initiatives are expected to mitigate further cost inflation into FY '24, though a full recovery of margin may extend into FY '25 and beyond. We do expect further growth in our digital and delivery channels, already at more than 23% of sales in the second half. And we remain on track for 9 to 12 new store developments this financial year. In KFC Europe, we have seen same-store sales growth of 14.8% in the first 6 weeks of the second half, including 15.1% in Netherlands and 13.9% in Germany. We do expect the significant margin headwinds to continue into FY '24 in this region, with some mitigation expected from menu pricing, sales leverage and procurement. In terms of new restaurant developments in the second half, as previously mentioned, 3 new restaurants will be delivered in December, with the development pipeline continuing to expand for future years. We also continue to monitor the landscape for additional M&A opportunities in both the European markets as well as in Australia. And in Taco Bell Australia, while the first 6 weeks have remained challenging with an 8.5% decline in same-store sales, as noted, we achieved positive same-store sales in the first week of the Uber Eats rollout and are encouraged about the months to come. We are focused on returning to sustainable positive same-store sales growth in the second half through the Uber Eats rollout, continued upgrades to product quality and enhanced marketing initiatives supported by increased commitment from Taco Bell international. We do expect continued margin pressure in the second half and are targeting to reestablish positive EBITDA at restaurant level in the half. We will also complete the build of the 5 to 6 additional restaurants already committed to prior to the pause in development. I'd like to close on Slide 26 (sic) [ 25 ] with a reiteration of Collins Foods' long-term success recipe, especially in the current environment. Most economic forecasting do anticipate that 2023 will be a challenging year for the consumer and most businesses. However, our strengths at Collins Foods are well suited to navigate turbulent environments, as we have seen in recent years. We have a healthy balance sheet. We have world-class, scalable brands. Our specialization is in the resilient, value-centric QSR sector. Our focus remains squarely on delivering operational excellence. We have an exceptional team of experienced QSR operators running our business. And lastly, we have a proven track record delivering growth by both M&A and new store builds. That concludes the formal presentation. I would now like to open the call for questions. Rachel, over to you.

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

Could I, first of all, ask about the margins in KFC Australia and your outlook commentary there? Can you provide a little bit more color on what the additional supply cost pressures are that you're seeing in that business?

Yes. James, yes, indeed we -- yes, as you will recall, on the full year, we had anticipated about a 1% to 1.5% decrease in margins in FY '23, with more impact in the first half. And indeed our current EBITDA percentage is in line with our internal forecasts. However, during the half, we did absorb some higher expected -- higher-than-expected increases on some of our key inputs; and so that's reflected in our new projection. Look. Like all businesses, we're certainly not immune to cost inflation. Some of the increases we've seen have been on core inputs such as chicken, french fries, oil, so some of the key ones in our top 5, that were above expectations in the first half. And look. I think, overall just kind of rounding back on the margin piece and supply, I think, as you know, our track record shows how disciplined we are around margins. And to be clear: We're committed to full margin recovery, but it's just difficult to put a precise time line on that in the current environment. One thing we can say for certain is we don't want to do it at the expense of the long-term trust we build up in our brands with consumers.

So following on from that. The -- I think you had -- 1 or 2 of your poultry suppliers were due for renewed contracts toward the end of this calendar year and probably fitting with what you were just saying a moment ago around poultry as a core input contributing to that higher margin impact or greater margin impact. With respect to the new contracts and the pricing in them, just can you put a bit of color around the quantum of increase in the underlying pricing relative to what sort of agreement KFC have reached around the implementation or ongoing surcharges that have been a feature of that arrangement for a while now?

Yes. Thanks, James. So look. We have indeed noted that most of our chicken contracts or several of our chicken contracts go to the end of this calendar year, so the renewal discussions are underway. And as you might imagine, especially now, we're not able to disclose any specifics given the sensitivity of those discussions. Bear in mind we're having those conversations with multiple suppliers, so we need to be particularly careful on that front. We can confirm that we have already taken some increases in chicken costs during the current calendar year simply to provide some relief to our chicken suppliers, and that should flow through into next year. I'd say additionally and probably encouragingly some commodities appear to have peaked and we're now seeing some of those costs starting to decline. And that may help to alleviate some of the pressure on input costs, but again the key around chicken prices is that right now is when we're looking at some of the renewal conversations, so there's a lot of sensitivity. And I need to be a bit careful on sharing too much.

Yes, understood. And last questions start around margins then. Have there been any changes to your revenue assumptions that will have influenced the margin guidance just given the interplay between the top and bottom line?

No, I think generally we're seeing a lot of what we expected to see. I think generally we try to be -- one of the things that, as you're aware, is really the lifeblood of this business is transactions. And any time you take pricing, you create risk around transactions, and so any decisions we make around areas like pricing need to keep this dynamic in mind. So we're certainly aware of keeping the top line healthy and, within that, keeping transaction growth strong given the fact that we've been broadly flat on same-store transactions, which is to say there is still transaction growth overall, but same-store transactions are relatively flat. We do want to be quite careful there. So margins are certainly something we're highly conscious of, but we do want to make sure that the customer is at the forefront of the equation and we keep top line growth healthy.

Yes. That's a good segue into my next question. You mentioned that, sort of on a like-for-like basis, transactions are flat in Australia. What was the trend rate sort of towards the back end of the half? And how is it trending early in the second half?

I think broadly you'll have to kind of look at we shared the first 6 weeks' sales results. And you're seeing pretty similar numbers to what you saw in the first half, so you can take some -- you can probably take some measure of understanding out of that. Generally, as I think we've also alluded to in terms of consumer shifts within the category, you do tend to see a bit more growth in the dinner and delivery occasions, lunch a little bit less so. So typically dinner would be a higher-ticket occasion than you'd see in earlier in the day. So there's a few of those dynamics going into effect, but generally speaking, you're seeing still strong continuity in same-store sales, which is encouraging.

So on Taco Bell. If I heard you correctly there, there's a new sort of Yum! appointed or Yum! employee Chief Marketing Officer in Australia. Did I get that language correct, or is this an employee of Collins Foods?

This is actually a Taco Bell international or Yum! more broadly in place. So his name is Andrew Howie. He's -- so he is fully employed and paid for by Taco Bell international. And we're very excited about Andrew. He's got a great background. It's not QSR per se but certainly in the digital space. He's former Amazon. And we think he's just got the -- absolutely the right approach to the brand. So again, he's been on the ground in the first half. I think we're seeing some real intriguing ideas and initiatives that we -- well, we expect to see in the second half. So that's Andrew Howie. And he is employed directly by Taco Bell international.

Okay. And just a quick one for Nigel, if I may: Nigel, just what your revised thoughts are around D&A, CapEx and corporate costs for the full year, please.

Yes, sure, James. Look. I think depreciation is going to be in and around $50 million. CapEx is probably going to be late 80s, early 90s. And central costs, I think you could probably assume there's a 5% to 10% year-on-year increase by the time we get to the end of the year.

Your next question comes from Alexander Mees with Morgans.

Drew and Nigel, just with regard to Europe, to start with. I wonder if I can just clarify if your previous guidance for margins in '23 is still valid, of a 1 to 2 percentage point headwind. And then we've got an incremental 2 to 3 percentage points on top of that in '24. And if that's correct, I'm just wondering what has happened to make it incrementally that much worse in '24 at this stage.

Yes, that's fine, Alex, yes. It's 2% to 3% down in the current year. And we're expecting that to continue consistently into FY '24...

So in terms of '24 and '23, flat.

Correct.

Okay, okay, cool. That makes more sense. And then just with regard to KFC Australia, I'm just trying to understand. If you have 5% same-store sales growth, which is very good, I'm just wondering what the ticket did during that period. And if by implication, volumes, I think, Drew, you referred to them being flat. Is that the right way to think of it, that 5% ticket increase and volumes flat?

Yes, that's exactly right. Look. We generally don't try to break it down too much. I think that's probably about as much guidance as we've given before, but it is the right way to think about it.

Okay. And that's including e-commerce, so presumably stores were a little negative.

I'm sorry...

Was that -- in terms of the flat volumes, is that across the piece, so e-commerce as well as stores?

That would be overall. I'd say that one further note to bear in mind is remember that we do [ wear ] some impact from cannibalization as we build new stores, which can be as much as 1 point or a bit over 1 point on same-store sales. So some of that does impact things like transactions as well. So overall transactions are up for the business, but on same store, they've been roughly flat.

Excellent. Just quickly on Taco Bell: How should we interpret the impairment of the 8 stores? Are they -- is that specific to these 8 stores? Or are there a reflection on where the brand is at this moment in time?

Yes, thanks, Alex. It's purely store assets impairment. There's no goodwill in the brand. So it's 8 restaurants that we've impaired.

Yes. And I'd say -- just going on a little bit more on Taco Bell. Look. We -- what we certainly witnessed in the first half was simply a bit more of a delta between our internal targets and actual brand performance that was a bit higher than we liked. And with the impairment of the 8 additional stores, I think pausing development was a bit of a pragmatic decision until we see more of the sustainable traction in key metrics like sales, but overall we still have strong belief in the brand and think that there's a great opportunity for Taco Bell in Australia.

Yes. I hope you're right. Just sort of finally, and I know you're not going to answer this, but how long is the pause likely to be? And I guess I'm going to assume that you'll open no Taco Bells in FY of '24, but any guidance would be helpful.

Yes, I don't think we've put a specific time line on it. The way we do think about it, Alex, is we have quarterly milestones that we've crafted. And every quarter, I think we're going to evaluate where we are and look at performance in line with those targets. And I think, as soon as we see results that, I think, meet our criteria and we believe in the sustainability of those results, then we would unlock growth again. So we can't put a specific time line on it, but we're hoping it's in the near future.

[Operator Instructions] Your next question comes from Ross Curran with Macquarie.

I think I'll just focus on one question sort of just around Taco Bell. Can we just go into again the write-off? [ And I think some people did ]. Can you help us understand the 8 restaurants versus the portfolio of 24, why the write-down was limited to those 8? And is there anything specifically that those 8 restaurants were doing that the other ones weren't [ that's sort of leading to an outcome ] in terms of the way you assess the value there?

Yes. Look. Thanks, Ross. Look. I'll give a preliminary answer and then -- and Drew might want to make some extra comments. Effectively the majority of those 8 were kind of earlier-built restaurants, so I think there are some learnings that have been put into later restaurants that have contributed to some of those earlier restaurants and are not necessarily being, yes, precisely where we'd like them. But I think overall it's just that those 8 haven't gained the traction that we expected them to, whereas the balance of the portfolio have probably performed a little bit more closely in line with what we expected, so it's purely a -- specific to those assets [ and those trade terms ].

So they've reached a level of maturity where you can [ say how ] we thought it's going to be at X instead of Y. And is that the right way to think of it?

Yes, that's right. That's right...

Yes...

If I take the current -- sorry. If the current trajection of same-store sales continues, is there a risk that the remaining part of the portfolio has additional write-downs?

Yes. Look. I think there is a risk, Ross. We've called it out in the accounts. We've put some pretty fulsome disclosure in the financial statements towards the back end, in the section where we talk about asset value, so you'll be able to draw your conclusions if you scale through that note. We've been pretty clear on what we've assumed and what would happen if those assumptions don't turn out to be fully true.

The next question comes from Elijah Mayr with CLSA.

Just a couple of questions from me. Maybe just on KFC Australia, just on the price increases that the FY '23 results back in June noted, there was, I think, 1% to 2% in January, 1% to 2% in June and then another 4% in the year ahead. Can you just talk about if that's gone through and how much that price rise was and how you're sort of thinking about price increases going into calendar year '23?

Yes. Look. I'd say generally we've got to be a bit careful. We try not to disclose specific percentages on pricing too much, for competitive reasons. I would say certainly any decisions made along these lines have been very thoughtfully done with the customer in mind. As a number of you are aware, we do a lot of consumer-centric pricing studies to really understand how consumers perceive the brand, willingness to pay, et cetera, so we keep a close eye on how -- where customers are. We're certainly in this landscape where you see, you've certainly seen inflation across the landscape. We do those pricing studies with increasing frequency. We keep a close eye on how customers are impacted by changes in cost of living. We want to keep the brand affordable and we want them to be able to come in and get a great-quality meal at a reasonable price. And that's our north star, especially at a time like this, where I think most accounts would have next year looking to be challenging. We just want to be very, very thoughtful around keeping our brand and our value metrics high.

And maybe just on the digital side of the business, are you able to sort of quantify, I guess, the contribution from Uber? I think previously you stated [ it was ] expecting to generate around 2 percentage points of same-store sales growth. Are you sort of able to quantify that and maybe the contribution from the kiosks that you've rolled out to date as well?

Yes. I think that Uber Eats' performance has been broadly in line with expectations. Kiosks have done well. It's still on a relatively small percentage of the portfolio. Having said that, we do have 12 kiosks in our location in Queen Street Mall, which will be the highest number in a restaurant in Australia. And we're very pleased with the performance, so yes, it is a part of the business that we think is important as we build the digital credentials for the brand, but generally speaking, we see it as another digital means by which consumers can interact with the brand.

Yes, understood. And maybe just one final one, just around acquisitions [ in ] the pipeline. Are you able to talk to if there's anything, I guess, in the KFC franchise in Australia or Europe or if there's any sort of acquisition of brands outside of KFC brand that you're looking at as well?

Look. I think it's fair to say we're always keeping our eyes on the landscape. Certainly KFC would be the sweet spot of what we'd be looking for. I think it's fair to say that we certainly keep our eyes open in the geographies of Germany and Netherlands as well as Australia. Australia, typically you've seen too much activity given the strength of the brand. Europe, you'll have noted in recent years we have done some acquisitions there. And we do think there could be further opportunity in front of us, especially in an environment like this one. So that's kind of our sweet spot and that's probably what we're going to continue to put most of our M&A attention on.

Your next question comes from Tim Plumbe with UBS.

Just 3 questions from me, if possible, please. Just, the first one, Drew, around chicken pricing and associated pricing increases. I appreciate you're in the process of negotiating those, but at that lower 15% EBITDA margin, can you give us a bit of a sense in terms of what you're factoring into that guidance range? Are you assuming that you can kind of absorb half of the chicken pricing cost increases, or 75% or all of it?

Yes. Look. I'd love to share more on that. I, we absolutely can. I can't tell you enough that we are absolutely in the middle of these conversations right now. And I know Michael Clark, who runs supply chain for Yum!. And we've really got to respect the sensitivity of that. So I think to share [ sort of backwards looking ] forward-looking information right now, I think, would put them at a disadvantage, so we need to respect that.

Understood, understood, okay. Second question around pricing. I think I've done this right, but our analysis suggested some pretty material pricing increases going through in Netherlands in November in terms of burgers, boxed meal deals, combo meal deals. Can you confirm if you have -- I understand if you don't want to talk about percentages but if you have put through some material pricing increases in November or if my analysis is wrong?

Yes. Look. I think it's fair to say Europe has seen even more inflationary pressure than Australia, and certainly a lot of supply chain pressure to go along with it, so look. We -- the same principles apply in terms of pricing in Australia and Europe, but certainly that's been a lever to a large degree that's been unavoidable in Europe. So without quoting, as you say, the specific percentages, what we can say is, because of the size of the market and because of the position we're in as managing the corporate franchise agreement, we can be a little bit quicker, a little bit more nimble on pricing. I think it's also fair to say that, given the relative size disparity of KFC -- it's still pretty small versus some of the larger chains. We tend to be a bit more of a fast follower, if you will, around pricing versus, I think, in Australia where we really kind of run our own race. So I'd say those principles apply in Europe, but overall again it starts with the consumer in mind, really making sure that -- in a period like this where there's a lot of economic anxiety that we are being very thoughtful, very deliberate, very careful about price increases because we want to respect the trust of the consumer for the brand.

Got it. And then just the last question, maybe one for Nigel, just in terms of interest costs. Nigel, how should we be thinking about FY '23? And given where interest rates are, maybe if you can give us a sense of run rate interest costs at the current interest rates.

Yes. Look. Well, you're right. I mean we're not immune to that either. We do have a few fixed-price deals in to insulate us a little bit over the next 18 months or so, so you will see an increase but perhaps not quite as much as the market has gone up recently. Because we do have some fixed deals in place.

Okay. Any chance of getting kind of quantum or...

Well, look. I would say it's probably a couple of million higher than it's been. It's probably $2 million or $3 million.

Sorry. Second half...

No. I'm talking year-on-year.

Okay, run rate, not FY '23.

Correct.

Your next question comes from Peter Marks with Barrenjoey.

Can I just clarify the European margin guidance? So if I'm understanding it correctly now, you're expecting margins to be about 4% in FY '23 and FY '24. Because I was -- or during the presentation, I thought there's going to be another step down into FY '24. Just to clarify that.

Yes, the description you just gave of those percentages is correct.

Yes, okay, great. And then within that, is there any major differences between Germany and the Netherlands in those margins?

Look. I mean Netherlands has always been the stronger market, as we've probably described many a time on calls like this, and that still remains the case. It's the one that's closer to scale than Germany, and a variety of reasons like that, so there was a disparity between the 2 margins, with the Netherlands one being the stronger one.

Peter, just to add on there, I think also anytime -- we've certainly tried over the last couple of calls to provide as much kind of forward-looking information, which is a bit atypical for us given the landscape, but we do have to always put the caveat on it that we're still in a very uncertain environment. So going forward, we're giving you kind of our view based on the information we have today, but we'll always have to stress that there's still a lot of uncertainty out there in terms of forward-looking projections.

Yes, makes sense. And then have -- how are the other franchisees in the Netherlands looking like? Obviously you're the biggest player over there, so you should have the -- I assume you have the best margins. Is there any distress within the other franchisees in the Netherlands?

No. We're not aware of any distress from other franchisees in Netherlands. We're -- I'd say, quite to the contrary, they've been quite pleased with Collins now being in charge of the market or -- they're very big fans of Hans Miete, who's our CEO, who's Dutch, over there; and I think the way that he's -- the transparency with which he's worked with them. So we've got a good relationship with them. We obviously encourage the other franchisees to build. You've seen some evidence of that in the current year. It benefits the brand and all of us if all partners continue to build in the landscape. So, so far, we're quite encouraged and they are as well. And even in the difficult landscape, we think that the partnership is working well.

Great. And then just on -- just quickly on Taco Bell: If you try and turn that business around, is it possible for you to exit it completely? And would that -- if you were to want to go down that path, the economics just weren't stacking up, does that impact any of the other agreements that you have with Yum!, say, in the Netherlands or Australia?

Yes, there's no interplay. There's no interconnection. There's no development agreements we have in place at the moment around Taco Bell, to be clear, but look. We're a long way away from even going down that road. We're still quite positive on the brand. We've got some great short-term initiatives in the second half to help us get the traction that we want. We've got a massive commitment from Taco Bell international that they see Australia as a strategic market, so we're fully committed to making that work. So that's the way we're looking at the brand right now in Australia.

Your next question comes from Wilson Wong with Jarden.

What -- sorry. It's Ben Gilbert here. Probably -- apologies. I put the wrong name in there. Just first question from me was just around the Uber Eats side of things, just how you've seen that in terms of the margin impact.

On KFC...

Yes, on KFC. Has it been dilutive to margin, or not?

Look. I think the only thing we'd say, we're happy overall with the way that the deal is working. I think, in terms of margins, one thing that we've shared in the past, that we started in the delivery space as looking at it being margin neutral. I think the way we look at the business today is we do want to make sure that we're getting our fair share of market share within the delivery segment. So we do look at margins for the business holistically, so overall I think, from a margin perspective, we can say we're seeing what we expected to see on Uber. It is a profitable channel. And it fits well into, I think, the sales channel portfolio we have for the brand.

All right. And just second one from me. And I apologize if you might have had a few questions on this, but just in terms of the headwinds that you're facing from a cost perspective in Europe, I suppose what we're seeing at the moment is you're hearing things like utilities have -- going from sort of 2% to 3% of sales, up closer to sort of 10%. [ And it's also had ] a pretty big minimum wage increase in Germany. Given that you're sort of expecting steady margins into '24, are you sort of, of the view that you are going to be able to recover that in price? Or are you assuming quite a big normalization, particularly around energy?

This is where I'd start with that caveat on forward looking, but what I will say is, to a couple of the points that you raised, yes, utilities has been significant pressure in Europe. And the quantum of increase is 2 to 3x what we saw last year. The percentages that you've quoted don't apply to our business. Nonetheless, there's been significant pressure. Having said that, Germany, the government, I think, has supported to some degree some price relief for businesses and consumers. We haven't seen as much of that yet in Netherlands, so it's still a bit of a volatile picture. Nonetheless, when -- what I shared earlier, if there's anything encouraging, I think, on the supply costs headwinds, it is that some of the supply costs appear to have peaked. The energy cost pieces obviously have a lot to do with -- to Russia and the conflict or the war in Ukraine. From a supply cost perspective, it's encouraging that the ports in Ukraine, Odesa, are reopened. And that certainly takes a bit of pressure off of things like grain prices and sunflower, which is a big part of what comes out of that part of the world. So you're right. There's further pressure still to come on the wage side. It's still a volatile environment, but again we still feel good about where we are. And as hard as it is to project where the business is going to be going forward, we do anticipate that we can continue to keep the top line strong. And for the long term, that's the most important piece of the business.

Great. Just final one for me, just on that last point that you made. When you sort of look back over the last sort of 10, 15, 20-plus years, sort of through these tougher macro backdrops, how do you sort of feel that KFC, whether it's Australia or globally, and the Yum! network performs in the QSR category more broadly? I suppose what I'm getting at is do you feel that you should be able to deliver that sort of GDP-plus-type growth even in tougher macro. Because it is a bit more of a value treat yourself, people trade down into that category.

You're doing my work for me. That's exactly right. We use the word resilience a lot to describe the sector, which is we do -- we can see trade down of people who want to dine out; and who trade down from other concepts, into QSR. And so we do think that affordability piece and the value piece allows the sector to be resilient. KFC is especially strong and within that segment. And it's been -- one of the areas I think Yum! has done a very, very good job globally with KFC is developing a very nuanced strategy around value; and thinking about different approaches to abundant value, low-price-point value, et cetera to ensure that, again, you're relevant for the customer during difficult times. And we're seeing a bit of that this year. And I think there's -- it's fair to say that we're expecting to see more of it next year, so we do like the positioning of the brand in a time like this.

Thank you. There are no further questions at this time. That does conclude the conference for today. Thank you for participating. You may now disconnect.