Collins Foods Limited (CKF) Earnings Call Transcript & Summary

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

Good. Thanks, Ashley, and good morning, everyone. I'm Drew O'Malley, and with me on the call is Nigel Williams, our Group CFO. I'm pleased to be able to take you through Collins Foods' results for the 2023 financial year, which was the 52-week period to the 30th of April 2023. Please note, as we take you through today's results, the financials are presented on a post-AASB 16 basis, unless stated otherwise. In FY '23, Collins Foods continued to grow the size and scale of the business in both Europe and Australia amidst a challenging environment. We continue to manage cost inflation across the group while prioritizing customer value to protect transactions and long-term brand health. Key FY '23 result highlights include the following: revenue increased 14.2% to $1.3495 billion, with growth across all business units. Underlying EBITDA decreased to $205.1 million on a pre-AASB 16 basis. EBITDA was down 4.6% to $141.4 million, reflecting inflationary headwinds. Underlying NPAT was down 12.1% to $51.9 million with the equivalent on a pre-AASB 16 basis, down 9.4%. Non-trading items during the year had a $36.7 million impact on statutory NPAT, primarily relating to a noncash accounting charge taken to impair the remainder of Taco Bell's asset value. Detail on nontrading items is presented on Slide 33 of the accompanying deck. Additional financial highlights include net operating cash flow decreased to $146.2 million, comfortable gearing with net debt of $212.2 million, and a net leverage ratio of 1.47. Underlying basic earnings per share from continuing operations of $0.443 per share. And lastly, taking into consideration Collins Foods' operating cash flows, strong balance sheet and growth opportunities, the directors declared a fully franked final dividend of $0.15 per share, consistent with prior year. Turning to operational highlights on Slide 2 of the deck. While both KFC businesses recorded solid top-line growth, our European operations were the standout performer in FY '23, delivering consistent double-digit revenue and same-store sales growth. We continue to grow the network with 22 restaurants added across the group in FY '23. KFC Australia same-store sales increased 5.8%, driven by robust e-commerce growth, the rollout of Uber Eats as well as higher ticket. Increased availability and brand strength saw nearly 25% of all sales come through digital channels in the second half of FY '23, up from 16.9% in the prior year period, even as inflationary pressures have continued to impact margins. 10 new restaurants were opened during the year, ahead of development agreement pace, and we acquired one restaurant from another franchisee. KFC Europe delivered impressive same-store sales growth of 13.9%, reflecting strong balanced growth in transaction volumes and increased ticket, Netherlands same-store sales increased 12.8% as our corporate franchise agreement, or CFA, in the region improved marketing, brand strength and product quality. 5 KFCs were open in Netherlands, inclusive of 2 by sub-franchisees, achieving our first-year development commitments under the CFA and earning the business Yum!'s Franchisee of the Year Award for Western Europe. Germany also performed strongly with same-store sales growth of 17.3%. Our European footprint now stands at 72 restaurants, an increase of more than 50% over the past 2 years. In Taco Bell, Australia, same-store sales improved a bit in the second half after the launch of Uber Eats. However, they remain negative, declining 4.8% for the full year. 8 new restaurants were opened across Victoria, WA in Queensland during the year, bringing Collins network to 26 restaurants. Value-led marketing and product quality initiatives are underway to return the business to growth, supported by additional Yum! resources. Moving to Slide 4 and KFC Australia. In FY '23, KFC Australia revenue surpassed $1 billion for the first time, up 10% over the prior corresponding period. Revenue growth was supported by a same-store sales increase of 5.8% and the benefit of 11 new restaurants, bringing our Australian KFC network to 272 restaurants. As I mentioned earlier, higher ticket sizes, significant e-commerce growth, and Uber Eats were the primary drivers of same-store sales growth. Transactions remained broadly flat on prior year period, in line with the overall Australian QSR market. Underlying EBITDA margin was 19.2% on a pre-AASB 16 basis, underlying EBITDA margin of 15% was within range of previous guidance given the full-year impact of inflationary pressures across labor and supply chains, more on the subject shortly. Turning to Slide 5. The KFC brand in Australia continues to be on a role, strengthening and modernizing with now nearly 1/4 of sales coming through digital channels. Brand strength is being supported by investment in proven advertising campaigns and innovative marketing initiatives such as KFC Couture, which are driving a broad mainstream appeal. Further to the point on digital, greater delivery and kiosk availability, combined with improved digital software has delivered that strong e-commerce growth. As seen in the accompanying graph, these channels are continuing their steady climb, up more than 7 percentage points on prior year to 24.3% in the second half. With the addition of Uber Eats, KFC is now available on all major delivery aggregators in Australia, and we note steady increases on our delivery as a service platform. KFC's use and effectiveness of personalized offers continues to grow and improve with time, ensuring that customers are getting the right offers at the right time to maximize redemption. On to Slide 6. We're working closely with Yum! on the KFC brand. We continue to start with the customer in mind. Value has always been a key tenet of KFC and is particularly important at a time like now, enhancing that value proposition to consumers while mitigating inflationary pressures on margins has been the principal challenge over the past year, a challenge, which we expect to continue. Value, of course, is not a single thing, and KFC has a sophisticated customer-centric approach to value, including entry-level value offerings, group bundles, and more price increases, while certainly unavoidable in a high inflation environment as we are in, are nonetheless meticulously attuned to consumer willingness to pay and overall pricing continues to be highly competitive versus other QSR brands. We believe the decision not to seek full offset and short-term cost pressures via menu pricing has been the right decision for the consumer and the long-term health of the brand. At the same time, we have been proactive in identifying initiatives to help mitigate those cost pressures. Some of those initiatives can be seen here, including innovating new menu bundles and increasing diversification in the supply chain base, including in chicken. Further, implementation of new technologies in our KFC kitchens has helped to increase freshness and decrease wastage, and in conjunction with extensive retendering, we are ensuring that we are realizing efficiencies wherever possible on the P&L. Slide 7 highlights our continued innovation in restaurant design and technology. As noted earlier, during the year, we opened 10 new restaurants, acquired 1, and remodeled a further 47. These restaurants feature modernized customer areas with dedicated delivery driver entrances and waiting areas to cater to our evolving order mix as well as innovative technology and software to enhance efficiency and speed. We're also embedding sustainability in our restaurant development with rooftop solar now installed in all 162 available drive-throughs, water tanks in 2 restaurants, and growing, and we have organic waste diversion and food recovery partnerships in various stages of trial and implementation as noted here. And now turning to KFC Europe on Slide 9. Overall, we've been very pleased with the performance of this business unit. Europe has managed to generate impressive same-store sales growth in both markets despite operating in one of the most challenging environments seen in years. Revenue increased 31% to $249.5 million, driven by overall same-store sales growth of 13.9% and the benefit of marketing and operational control under our Netherlands corporate franchise agreement or as we stated before, CFA. This same-store sales performance reflected a combination of increased transaction volumes and higher ticket with Netherlands up 12.8% and Germany up 17.3%. It is important to note that both markets were cycling strong same-store sales growth in the prior period of 18.8% and 11.7%, respectively. Underlying European EBITDA margins of 13.2% was in line with previous guidance and reflects the impact of record levels of cost inflation across labor utilities and all supply chain categories. As seen in the bottom right graph, however, EBITDA margin on a pre-AASB basis remained largely stable at 6.6%. The next slide highlights our improving brand fundamentals. Marketing and operational control in the Netherlands has strengthened brand and product quality perceptions in the region, and we are continuing to gain traction with consumers. Consideration and conversion are both up over prior year, and we are seeing positive indicators on value metrics versus competitors. Innovation continues to feature heavily in our product strategy with KFC Netherlands Veggie platform, one of the highest in the world for this brand. And importantly, as in Australia, digital is a key pillar of our convenience strategy with kiosk, delivery, and the new app, all elements of how we bring that to life. Turning now to Slide 11. As mentioned earlier, inflationary pressures in Europe have been significant over the past year with annual inflation more than tripling record-high energy costs and sizable increases in labor and food. Similar to Australia, we have prioritized customer value as our North Star during this difficult period, and this has helped lead to steady to the steady transaction and sales growth necessary to offset some of that margin pressure. Our pricing strategy there has also been conservative, emphasizing a fast-follower approach to our larger QSR competitors in those markets. Similar initiatives to Australia, such as innovative menu bundling as well as procurement and supply chain tenders have also been employed, and we have additionally identified some labor efficiency opportunities at restaurant level, which have been realized. Overall, our team has executed well under the circumstances and continues to aggressively identify margin improvement opportunities that don't compromise on the customers' value or experience. Moving on to Slide 12. Importantly, we achieved all first-year targets under our Netherlands corporate franchise agreement, opening 3 net new KFC restaurants in addition to 2 open by sub-franchisees. A further rate high-quality KFC restaurants were acquired in May of 2023 to bring our Netherlands network to now 56, representing a 64% share of all KFCs in that country. Our future development pipeline continues to build, and we are seeing a collective appetite for growth with sub-franchisees supportive of our leadership. As mentioned earlier, Collins Foods was recognized as Franchisee of the Year in Western Europe by Yum!, reflecting our reputation as a strong operator and growth partner. Our development team continues to monitor the landscape for expansion opportunities in Europe as the region remains a key growth driver for Collins and is still underpenetrated relative to competitors. Turning now to Taco Bell, Australia on Slide 14. Revenue increased 36.1% to $48.7 million, reflecting 8 new restaurants added over the year. Same-store sales improved over the second half due to the successful rollout of Uber Eats but remained down 4.8% on a full-year basis. EBITDA profitability at restaurant level, excluding new restaurant opening costs and brand, general, and administrative costs was $2.8 million, the equivalent on a pre-AASB 16 basis was negative $1.6 million. As I mentioned earlier, a noncash accounting charge has been taken to impair the remainder of the Taco Bell asset value even as we continue to work on the brand. New brands do often take time to gain traction, and we have continued to refine the marketing and enhance the product quality as we endeavor to drive transaction growth and return the business to sustainable positive same-store sales. Slide 15 shares more on these initiatives. We did see a bit of an improvement to same-store sales trends at the launch of Uber Eats in the second half and a correspondingly high 25% delivery mix. Overall, same-store sales were still a minus 2.8% for that period with same-store in-restaurant transactions still down over prior year. Nonetheless, we have undertaken an aggressive program of works with the support of Taco Bell International, which is part of Yum! to drive more consistent consumer trial and engagement. Taco Bell International has provided both resources and financial assistance to help increase media spend and accelerate the improvements needed to drive top-line same-store sales growth. Job #1 is on value. Second-half marketing efforts have featured iconic craveable Taco Bell products at memorable price points, such as the $5 Chipotle Crunch Burrito which has outperformed expectations. More broadly, we have looked at every aspect of product quality to look for enhancements and have worked extensively with Yum! Global and local suppliers to refine flavor profiles and consistency on core proteins like beef and chicken. One of our biggest changes and one of my personal favorites has been the introduction of McCain's super premium SureCrisp front rise in recent months to improve crispiness and hold time, particularly important given our high delivery mix. And finally, in-depth consumer research projects are in process to support even greater attunement to local Australian preferences. Moving on to our Taco Bell network on Slide 16. We opened 8 new restaurants over the year to bring our network to 26 restaurants in the 3 states of Queensland, Victoria, and Western Australia. We provided even more focus on our geographic cluster strategy around the key metro areas of Southeast Queensland, Melbourne, and Perth by closing 2 underperforming stores in Cairns and Townsville, and we will have one additional opening in the next few months in Underwood, which is not far from Brian. For now, further new store development following the Underwood opening has been paused, and we will reevaluate our development plans on a quarterly basis connected to progress on sales and brand metrics. Turning to Sizzler Asia on Slide 18, which rebounded as operating conditions normalized. Royalty revenue increased 45.8% to $4.1 million, generating EBITDA profit of $2.9 million. The Sizzler Asia business considered noncore to our strategy has now been sold for WD20.2 million to a subsidiary of listed Thai Company, Minor International. The sale is on a cash-free, debt-free, and working capital-neutral basis and is expected to complete in early July of 2023. The capital is effectively being redeployed to support investment in our high-growth European operations as evidenced by our recent acquisition of 8 restaurants in the Netherlands, which came into our portfolio from the 1st of May. The transaction will bring an expected book gain of at least AUD 10.2 million upon completion, together with additional accounting foreign currency gains. I will now hand over to Nigel to provide an overview of Collins Foods FY '23 financial performance.

Thanks, Drew. Turning to Slide 20. Collins Foods remained highly cash generative in FY '23, although with EBITDA down on prior year, the net operating cash flow did decrease to $146.2 million on a post-AASB 16 basis and $106.4 million on a pre-AASB 16 basis. Operating cash flow continues to facilitate investment in new restaurants, remodels, acquisitions and our dividend. Capital investment initiatives totaling $65.8 million included $20 million in new restaurants, $25.5 million in remodels, $3.5 million in digital and sustainability initiatives, and $16.8 million towards maintenance and other sustaining activities. A final fully franked dividend takes the total dividend for the year up to $0.27 per share, consistent with FY '22. Turning to our balance sheet on Slide 21. The cash balance of $80.2 million was down on the prior year, following the repayment of some drawn balances. Property, plants, and equipment of $224.5 million was up $8.4 million on the prior year, reflecting the ongoing spend on new restaurants and acquisitions, less development depreciation. The right-of-use assets and corresponding liability are both up on prior year due to building and acquiring more restaurants in FY '23 compared to FY '22. Net assets of $384.5 million was down from $393.5 million at the end of FY '22. Moving to Slide 22. We have significant capacity to fund our growth plans. Our net leverage ratio remained at comfortable levels, coming in at 1.47x for the year on a pre-AASB 16 basis, providing significant headwind to the covenant maximum of 2.75x. Net debt increased by $37.3 million to $21.2 million due to a net cash outflow of GBP 13.3 million and approximately $24 million due to the effect of foreign currency translation on net debt. However, we have comfortably continued to expand our network, pay the dividend, and afford M&A activity within our covenant, and our current facility at approximately $400 million provides significant headwind. On Slide 23, it talks about Collins's sustainability commitments, and we are continuing to work towards our 2026 targets. As you can see on the slide, over the past year, we've made progress across all 3 pillars of our ESG strategy. Our greenhouse gas emissions decreased 11.4% over the 2 years since FY '21. We have achieved this despite our expanding restaurant network. We've also diverted more waste from landfill at a rate of 19.5%. Importantly, we've retained our strong safety culture with lost time injury frequency rate down to 10.3%, and our recent appointment of a group ESG and sustainability manager will drive these initiatives going forward and ensure our growth remains sustainable. I'll now hand you back to Drew to talk through the outlook for FY '24.

Thanks, Nigel. Turning now to Slide 25 and our outlook for the year ahead. We've had an encouraging start to FY '24 with all 3 business units delivering positive same-store sales in the first 7 weeks. Inflation does continue to be a very real part of the operating environment, and we do expect margin pressures to remain for much of FY '24, that most commodities appear to be easing off their peaks. While we have a strong program of initiatives in place across energy, supply chain, and menu pricing, to support margins for all 3 business units, we continue to manage the business for the long term, prioritizing brand health and consumer perceptions of value. KFC Australia continues to perform well, delivering 8.8% same-store sales growth for the first 7 weeks of the year. While we expect cost pressures to begin to moderate, we are navigating higher energy and labor costs with minimum award wages increasing 5.75% plus superannuation from July. As mentioned, some commodities are stabilizing. However, there can often be a lag before this flows through to input costs. Given these ongoing headwinds, we are targeting FY '24 EBITDA margin to be broadly neutral with improvement in FY '25 towards historic levels. E-commerce is expected to account for a greater proportion of sales over the year as we continue to see strong growth in digital and delivery channels. We're continuing to grow our network with a further 9 to 12 restaurants -- new restaurants planned for FY '24. KFC Europe had a strong start to FY '24, positive same-store sales of plus 9% in the Netherlands and 12.4% in Germany. As Europe continues to experience unprecedented inflationary pressures across energy, labor, and cost of goods sold, margin headwinds are expected to continue for most of FY '24, with a potential softening in the second half of the year. We are targeting limited margin contraction in FY '24. 3 to 5 new restaurants are forecast in FY '24 with the pipeline building in line with CFA targets. And as I mentioned earlier, we continue to monitor the European landscape for additional M&A opportunities, including potential new geographies. Taco Bell Australia has had an encouraging start to the year with positive same-store sales growth of 2.1% in the first 7 weeks. As shared earlier, a host of product quality, e-commerce, and marketing initiatives are underway in partnership with Taco Bell International, which we will look to extend this early sales momentum. The margin pressures will also remain this year for Taco Bell. Our target is to reestablish profitability at restaurant level, that's pre-AASB 16 and improve upon the FY '23 result. Restaurant rollout has indeed been paused as we focus on sales traction. But despite the challenges, we still believe the brand has potential to ultimately be a growth platform for Collins Foods. Moving to Slide 26. As we like to rearticulate Collins Foods has a proven track record operating world-class brands and the resilient value-centric QSR sector. We remain well-positioned to navigate challenging conditions over the coming year and are confident that our best days are in front of us. And finally, I would like to say a special thank you to Nigel Williams, who will be leaving the business in mid-July. Nigel has been a valued part of our growth story over the prior 8 years, and we're very appreciative of all this great work during that time. As announced also this morning, we are pleased to welcome Andrew Leyden to Collins Foods later this year as our new CFO. That concludes the formal presentation. I would now like to hand back over to Ashley to open the call for questions.

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

Nigel, just firstly, thanks to you and for your time and all your assistance over the last few years and best wishes the next stage of your career. First question for me is just around the like-for-like sales to start the new year, a pretty solid numbers there. And Drew, I was wondering if you could give us a little bit of color on the mix of transaction count versus ticket and price in that time period.

Yes. Always good to hear from you. Yes, listen, we -- as you can see, the number has ticked up. As you know, we don't typically split out the 2, but clearly, it's a higher increase in ticket is driving the proportion of that. Given operating conditions remain challenging, we certainly believe this reinforces the strategy of prioritizing brand health and making sure the transactions stay healthy. So we have seen evidence in recent months. The KFC is not just holding share, but actually gaining share, which is encouraging. So we do think that the strategy of staying customer-centric in terms of value is the right strategy for us going forward.

It's pleasing to hear. On the margin outlook comments for both Australia and Europe, you've sort of -- you've made some assumptions around benefits from various initiatives and offset there. Can you give us some color just around what actual assumptions you've made there? What's embedded in your margin guidance in terms of self-help benefit to margin?

Yes. Look, I think anything that we can do on our end, it doesn't compromise on the customer experience or customer value is something that we're going to take a look at. So we've highlighted a few initiatives in the deck around procurement on any services that we have in restaurant in areas of retendering that we think Yum! can do. And I'll tell you, James, we're looking at every single item we can down to delivery stickers on bags to give you a sense of the granularity we're looking at right now. So I think broadly speaking, as we've shared with you many times, we're continuing to prioritize the long-term brand health. So we're going to be very cautious around areas like menu pricing even as we continue to navigate some of these areas. So any lever that we can do without compromising on the customer is something that we're going to be continuing to look at.

Yes. Understood. And maybe, Nigel, if you could just help us with expectations on D&A and CapEx and corporate costs for FY '24, please?

Yes, sure. And thanks for your comment earlier, James. Very much appreciated. Look, I would say, depreciation for next year is probably going to be in the mid-50s. CapEx is going to be getting on for $80 million and corporate costs. I think you've probably got to assume probably close to a double-digit increase, plus or minus any movement on SBI incentive payouts.

Your next question comes from Tim Plumbe with UBS.

Congratulations on the results. I'll just leave it to 2 questions and then jump back into the queue. But the first one is a little bit of a follow-on from James' question, if possible. I appreciate you don't split things out. But if we backed out the pricing increases that are benefiting in terms of that first 7 weeks of trading, and we thought about transactions or basket size. Can you talk at all in terms of the movement that you've seen in the last 7 weeks relative to the fourth quarter of '23? And I'm just thinking against the backdrop of other retailers that noted that they've seen a pretty material drop off in terms of consumer spend.

Yes. Look, it's certainly an encouraging start to the year. Let's start with that being up close to 9%. I think it's certainly an encouraging start to the year. Obviously, with transactions is something we look at as one of the key indicators, and that's still an area that we want to keep healthy. So I can't give you the exact split out there. But certainly, what we are seeing is a shift in consumer that continues on to digital channels. We know that delivery and digital are 2 of the areas that we have certainly been big promoters of and or pillars of our growth strategy. So you're continuing to see shifts in that direction. Other than that, Tim, you got to be a bit careful because you have a lot of ships around different promos that we're doing that are lapping different years. So 7 weeks can be a little bit hard to extrapolate too broadly in terms of overall shifts. But I can say we're certainly pleased with a good start to the year.

Right, and then just the other question also going to be a follow-on from James' question, but slight EBITDA margin for FY '24. In the [indiscernible] Australia. Obviously, you've had some pretty decent pricing increases in the second half of '23. Are you able to talk about how you're seeing EBITDA margins on an exit run rate basis bring your chance, please?

Look, I'll talk in broader strokes on that, Tim. But certainly, I think the way we're looking at the environment right now. First, I'd have to start by reinforcing the point that look, our strategy overall is to prioritize long-term brand health and consumer trust over the short-term margin pressures. And I think no one takes margins more seriously than we do, but KFC is a value brand, and we're managing this brand for the long term. I can say when you look at -- into the margin piece, certainly, it's encouraging that it does look like a fair number of commodities have peaked and seem to be plateauing and easing off. Nonetheless, there's still -- a lot of that is still going to be a bit of a headwind this year. Labor and electricity are 2 areas that we're continuing to see some headwinds on. So there are some encouraging signs for us, but it can take a bit of time on the supply chain side before some of that flows through to the P&L. We'll give you an example of something like cooking oil. You take cooking oil, we've seen Canola commodity prices drop down, but we contract out cooking oil a year in advance. So that is something we think will be an encouraging element for next year, but it's going to -- it's not going to go into our numbers for this calendar year. So there are a couple of moving parts there, Tim. I think that's why we feel confident that we're going to get margin recovery is it's a little bit difficult for us to be too precise in terms of -- with a couple of those indicators still out there in terms of exactly how and when, but we feel good about the outlook.

Your next question comes from Ben Gilbert with Jordan.

Just as one for me is a great result for the second-half margin outcome in Europe. Just wondering how big the CFA incentive that came through was if that had much of an impact to it. And you previously sort of talked to about a 200 to 300 basis point expectation impact of margin to fiscal '24, but it sounds like you think it's going to be much less than that now. Is that fair for Europe?

Yes. Look, Ben, I'll make some comments, and I think Drew wants to make some as well. But we've been pretty tight list about how much we share on the incentive. I'd say it's not a particularly material amount, but it is certainly a nice chunk of change. So we don't want to disclose it, but one, it gives us a bit of a margin benefit, you're right. But I think wider than that, it just gives us such a great strength in the relationship and opens up opportunities for us going forward. So I think there's more than just the P&L that benefits. And certainly, on the wider margin piece, that has been a contributory factor in the second-half margin holding up. But along with the great same-store sales that you've seen and a good, healthy balance between transaction and ticket, which as you all appreciate, helps us to keep the margin in check, but also with some transaction growth in there, we feel confident with doing the right thing for the consumer and the long-term health of the brand in Europe.

Maybe I could ask it another way. With the cost pressures or the margin pressures you saw did they ease into the second half for Europe? I'm just trying to -- I know I don't disclose it, but it's like it's probably somewhere in a couple of million bucks -- and then if you could just remind us how that incentive works going forward? Is it similar type opportunities for the next few years as you continue to its store targets?

Yes. Look, I mean some cost pressures did ease a little bit, but some are still very persistent. And I think, as I say, within the ticket growth within those overall numbers, we've been at a price sufficient to generate that margin result, which you can see. Going forward, the incentive is going to be on a similar basis. It has some operational metrics, but the big component is still the ability to open the relevant number of stores consistent with our development agreement.

And just one for me, just -- just how do we think about interest costs into next year is just sort of looking through -- you obviously got some flighting debt and you've got some you got hedged out for I think sort of 1 to 2 years at around that sort of 1.8%. How do we think about the ramped interest costs over the next sort of 12 to 24 months?

Yes. Look, I mean, I can give you an indication for the next fiscal, which is you're probably going to have to get reasonably close to doubling it. I think that you'll see our rates implicit within all the disclosure there. So I think we feel good about the fixed rates that we've contracted, which is mitigating it to actually a pretty decent extent. But yes, I think you're still going to have to price in close to a doubling for FY '21 compared to FY '23.

Okay. Fantastic. And just final one for me. I know you said you're sort of taking the fast approach, but do you still anticipate the opportunity to take more price across Europe and Australia through next year or so through this current fiscal year?

Yes. Look, I don't think in an environment -- a high inflationary environment, you can never rule out pricing. However, it does tend to be the last lever we look for, and I just reinforce that we always start with how do we win on value. And to be clear, KFC is winning on value right now, and that's certainly an advantage that we want to retain. So that will continue to be our North Star since we want to be very cautious in that area. And we recognize the consumer is under a lot of pressure right now, especially with all those increases in interest rates that we've alluded to. So we want to make sure that the affordability is top of mind.

Next question comes from Ross Curran with Macquarie.

It's Ross Curran from Macquarie. Again, very simple to Ben's comments before, the European margin in the second half, it was a lot better than I was expecting to be. Can you -- just to ask Ben's question in a slightly different way. Is there a significantly different margin outcome in Europe and the Netherlands at the moment?

Look, I think that the Netherlands remains the strongest market loss. But I would say the gap has probably closed a little bit. Germany has seen its margin pick up a little bit, perhaps a little bit more than we expected. But the overall dynamics of the Netherlands being the stronger one being closer to scale and all those components haven't particularly changed. We're seeing good holdup of margins in both markets.

And how should we think about the seasonality of margins then in Europe?

Look, I think in a benign inflationary environment, there might be a level of seasonality that we'd probably point to and talk about. But given the high level of inflation and the timing at which cost pressures come through and the way we take pricing, it's probably very much the secondary factor in how the first second-half margin plays out at the moment loss.

Okay. And can I then just ask about Taco Bell in Australia. Can we just confirm that this is the last of the write-downs that there's no more stores you're waiting to read to maturity before you wrap them off? This clears the deck there?

That's correct.

And what sort of -- what are you looking for on this brand on a 2-, 3-year basis that you'll keep investing in it? At what point do you say, how this hasn't worked and were out?

Look, I think when it comes to Taco Bell, it's important to point out that new brands can take time to gain traction. We are encouraged by the fact that with Taco Bell, we have seen similar trends in other geographies in the early years where the brand is now thriving today. I think when we look at Taco Bell, for any brand in QSR, you've got to start with value and taste. And anything we can do to double down on those attributes is going to be something we're going to work towards as we refine it. So what are our success metrics? As you might expect, consumer trial engagement in the form of sales and same-store sales for us is going to be probably the most important one. So that's the way we look at it. We do believe that there is room in the Australian market for a value-centered QSR offering in the Mexican space. And despite some of the challenges we've had, we still believe that Taco Bell is the right brand at the right time for that.

Your next question comes from Peter Marks with Barrenjoey.

Just a quick question on Germany. Have you closed a few stores there? And were they -- if you have, were they loss-making stores? And I guess what's the outlook for that market? It doesn't look like you're really growing your store count there since FY '18 on my numbers or have I got something wrong there?

Yes. We have closed the odd challenging store over the last couple of years. And you're right, we haven't been growing significantly either. So your analysis of the actual store count pieces right. But certainly, with the same-store sales growth as it's been this year and indeed last year, that is certainly encouraging us to continue to look at Germany and whether we can build a few more stores than we have done in the past, certainly with that same-store sales strength coming through and continuing.

Yes. Just to add on to that. We certainly are very encouraged with Germany. Any time you see the double-digit same-store sales growth over a period of time, it is an indicator that something is going in the right direction. The brand is still well underpenetrated. We do think -- believe there's opportunity on the new build as well as the M&A front. So Germany is an intriguing landscape for us and certainly something that we do believe could be a potential growth platform for us in the future.

Okay. Great. And then just to clarify, it looks like you've added back about $3.5 million of acquisition costs in Europe into the normalized profits. Does that relate to the acquisition you did after the balance date? And like are they cash costs? Or can you just talk us through why you've added goes back?

Yes. They were -- effectively, there's a bit of acquisition and sort of integration costs entirely due to acquisitions. There was -- obviously, we bought 1 store in Australia and Griffith in the first half. And the rest of it is to do with the European acquisitions. And as you say, we haven't completed that bundle of 8 that we're buying or we have completed it since the year-end, but the costs were largely already incurred in the financial year. So that's why we booked them there and called them out.

Your next question comes from Elijah Mayr with CLSA.

Congrats on the results. Just a couple of quick follow-up ones from me. Maybe just looking at the margin-neutral target for FY '24 for Australia. Can you give any color on, I guess, what to expect on a half-on-half basis, I guess, on the first half '24 to be down and then maybe accelerate into the second half? Or how are you guys thinking about that on a half-on-half basis?

Yes. We really haven't split out the guidance a lot. It's a fair question, but I think at this point, we are looking more broadly at the year to come and just recognizing that while we've seen some of the peaks and commodities in the past and the environment from a supply chain perspective is more encouraging or certainly more stable. There are potentially still some moving parts to come in areas like labor and electricity. So we haven't given a half-on-half forecast. It is still something that, obviously, as soon as we're able to share information, we will. But we do recognize that we think margin neutral is the right target for this year, and there are still quite a few headwinds to navigate in this landscape.

And then maybe just a quick second one. What is the state of the kiosk rollout in Australia? How many stores have you got kiosks operating in as of the end of FY '23?

That's a great question, a lot just. The actual number is -- forgive me, I think I'm going to say somewhere around 20 to 30. It is going to be something we're going to continue to expand. It is just something that enhances the convenience aspect for customers. So we think it is the right thing to do. We build it into a lot of remodels. Any new store that we have continues to have it. You may be aware that in Europe, all of our restaurants have it. So that will continue to be part of our convenience strategy going forward. Apologies, I don't have the precise number, but directionally, it's still a relatively low number in the portfolio.

Your next question comes from Alexander Mees with Morgans.

I'd like to add my thanks to Nigel. Good luck back in the U.K. Just my 2 questions. Firstly, with regard to the growth in digital and delivery, which has been the standout performances in the year. What effect does that have on your margins, please?

Yes. Look, I think you got to start by saying long term, this is absolutely part of the pillars of our growth strategy. We see today this 25% or near 25% of sales that are coming out of these digital channels, these are channels that didn't exist 5 years ago. So we do think this is part of where the customer wants us to be. This is part of where we think our accessibility and convenience strategy needs to play as well. From a margin standpoint, you may recall, Alex, that in the early days, we took a bit of a margin-neutral approach to these channels, meaning try to operate within the same margin by channel. I think today, over the last couple of years, we've recognized that we don't want to be a little bit too precious on that front and that we're willing to take margin that we think is appropriate for each channel and manage the P&L more holistically. So we don't say that delivery is margin-neutral today to the other channels. Nonetheless, we looked for an aggregate to stay with healthy margins and ultimately, margin recovery.

And then just sticking with the feel of margins. With regard to your comments earlier that some commodities are peaked are starting to ease off, I just wonder specifically what you're seeing with chicken, please?

Right. So let's talk a little bit about chicken. So I think we shared typically that we had a number of contracts that were going to the end of last year, and several of our contracts did indeed roll off at the end of last year. Look, a few things. One, we have great long-standing relationships with our chicken suppliers and we really needed to work closely with them, especially given the inflationary environment we're in. I can say a good chunk of the pricing that we've taken on chicken has already been baked in. We don't disclose specifics around terms and contracts for competitive reasons, as I'm sure you're aware. Look, clearly, in the landscape like this, it's not advantageous to lock in fixed contracts for extended periods of time. So we have different terms and different mechanisms in place depending on the supplier and their situation. What I can say and I'd certainly point out is Yum! is also working to diversify the supply chain and has added a fourth chicken supplier in Australia, which is called Golden Cockrell, who is a Queensland-based supplier and just doing an exceptional job that was added in FY '23. So we think that that's the right move for the supply chain base. And again, the emphasis is on the long-standing partnerships that we have across these chicken suppliers.

Your final question today comes from Mitchell Hawker with Bank of America.

In regards to Taco Bell, could you please talk to when you expect to achieve store-level profitability on a pre-AASB 16 basis?

So our target is to get there this year. I think what we're certainly looking for is an improvement in the EBITDA overall EBITDA result. So that's probably first and foremost. But I want to be clear that the primary metric that we're looking at for this brand is around consumer trial and acceptance as measured by sales. So I think that's going to be our guiding principle this year, not to say that obviously, profitability isn't important. But I think in the short term, it's more important for us that we see that the brand is resonating with consumers, and that means that the actions that we're taking around things like product quality and value-based marketing are resonating.

That is all the time we have for questions today, and that does conclude our conference. Thank you for participating. You may now disconnect.