Collins Foods Limited (CKF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Collins Foods Limited HY '24 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Drew O'Malley Managing Director and CEO. Please go ahead.

Yes. Thanks, [ Ashley ], and good morning, everyone. I am Drew O'Malley, I'm the CEO for Collins Foods. And with me on the call today is our Group CFO, Andrew Leyden. I am pleased to take you through Collins Foods results for the 2024 half year, which was the 24-week period to the 15th of October 2023. Please note, as we take you through today's results, the financials are presented on a post-AASB 16 basis, unless stated otherwise. For those of you more accustomed to pre-AASB 16 numbers, we have made them available in the appendix to the investor presentation, which I will be referring to on the call. In a challenging consumer environment, Collins Foods has demonstrated the resilience of its world-class brands, delivering growth in overall revenue, same-store sales and earnings across the group. Key first half result highlights include revenue increased 14.3% to $696.5 million, with strong growth across all business units. Underlying EBITDA increased 16.7% to $109.9 million. Underlying NPAT was up 28.7% to $31.2 million. Net operating cash flow increased $25.1 million to $82.2 million, reflecting strong organic performance and proceeds from the sale of Sizzler Asia. Net debt reduced by $18.2 million to $173 million at the end of the half with a comfortable gearing position and net leverage ratio of 1.12. Underlying basic earnings per share from continuing operations amounted to $0.265 per share. Given our strong performance and balance sheet position, the directors have declared a fully franked final dividend of $0.125 per share, slightly ahead of the prior year. Turning to operational highlights on the investor deck, Slide 2. Solid group performance was underpinned by the brand strength and value credentials of KFC and Taco Bell as well as robust e-commerce growth across all 3 business units. We continue to increase our store count, adding 5 new restaurants to our Australian network in the half. KFC Australia same-store sales increased 6.6%, supported by growing adoption of digital and delivery channels and improved operational efficiency. The KFC brand is strong, and it continues to lead the QSR market on key value and consideration metrics. E-commerce remains a growth driver, increasing over the period to account for 28.1% of sales. And while cost pressures remain a factor, we slightly increased margins through a range of mitigation initiatives across multiple lines on the P&L. We opened 4 new restaurants during the period and remain on track to build 9 to 12 new restaurants for the full financial year. KFC Europe maintained its growth trajectory with positive same-store sales of 8.8%, including Netherlands same-store sales growth of 7.9% and Germany, up 11.7%. Value marketing, digital expansion and operational efficiencies have all been important levers to offset considerable margin headwinds. Overall, our European network now stands at 72 restaurants, inclusive of our acquisition of 8 restaurants in the Netherlands at the start of this year. Taco Bell Australia had a strong start to FY '24 with same-store sales growth of 7.9% in the half. Growth was driven by improved product quality, value marketing campaigns and delivery expansion. Media investment in collaboration with Yum! is lifting brand awareness, engagement and consumer trial, and we are encouraged by the customer response to these initiatives. We opened 1 new restaurant and closed 2 in Queensland, bringing Collins Foods network to 27 across Queensland, Victoria and Western Australia. Moving to Slide 4 and a deeper look at KFC Australia. Our biggest business unit continues to deliver year-on-year growth with revenue increasing 9% over the prior corresponding period to $522.9 million. Higher revenue was driven by same-store sales growth of 6.6% and the addition of 11 new restaurants over the prior year, inclusive of 4 opened this half. Collins Foods Australian KFC network now stands at 275 restaurants. Underlying EBITDA increased 11.1% to $105.5 million with margin up 37 basis points to 20.2%. Again, that's post-AASB 16. Turning to Slide 5 and a focus on the brand. In the current challenging economic environment, KFC's brand strength and value credentials demonstrate remarkable resilience as consumers prioritize quality and affordability. KFC brand remains strong, leading the Australian QSR market on critical value, quality and consideration metrics, as shown in the graphs comparing KFC to the broader QSR market in the deck. While taste is still the primary feature of the brand, the value and attractive price points continue to feature heavily in KFC's marketing and media efforts and the conservative approach to menu pricing has maintained affordability for the brand. Successful brand and culture initiatives such as Fried Side Club and KFC [ Weddings ] have further enhanced the emotional engagement with consumers. So supply chain cost pressures have begun to ease, though most commodity prices remain historically high. We will need to continue to operate efficiently to allow our customers to continue to benefit from affordable prices. On to Slide 6. Convenience remains a growth driver with e-commerce representing 28.1% of sales in the first half, up 5.9 percentage points on the prior year. We're continuing to invest in these channels, rolling out kiosks across the network and new digital menu technology to improve the customer experience. KFC's personalized app-only offers are achieving high conversion rates, providing customers with the right offer at the right time. We remodeled 30 restaurants during the half, featuring more kiosks, streamlined kitchen efficiency and modernized customer areas. Supercharge kitchen remodels, which include dual-lane drive-thrus and new back-of-house operational alliance have significantly improved production capacity and are outperforming expectations. Rooftop Solar is leading our sustainability efforts to date, now installed in all 167 available drive-thrus with additional energy initiatives now in trial. And now turning to our KFC Europe business on Slide 8. The continued strong performance of our European operations has reaffirmed its potential to be a growth engine for Collins. KFC Europe generated strong growth in overall revenue, same-store sales and earnings despite pronounced inflationary pressures in the region. Revenue of $148.5 million, is up 36.5% over the prior year and was more than double in 3 years with growth supported by our expanding footprint and an overall same-store sales increase of 8.8%. Netherlands same-store sales increased 7.9%, while Germany was up 11.7%, with both markets cycling strong same-store sales growth in the prior comparable period. Underlying European EBITDA of $20.2 million was up 53% on prior year. Our margins improved 146 basis points to 13.6% as initiatives across supply chain, energy and labor, partially offset inflationary pressures. The next slide highlights strengthening brand fundamentals in the region, marketing and operational control in the Netherlands, under our corporate franchise agreement or CFA, continue to improve brand fundamentals and product quality perceptions. Brand awareness and consideration are both up over the prior period, and we are outperforming competitors and gain focus on core and everyday value resonates with price-conscious consumers. As in Australia, digital and delivery are a key pillar of our growth strategy with more than half of all sales in the Netherlands now coming through digital channels. Our newly launched menu app and digital platform will further improve engagement and personalization capability, enhancing the customer experience and accelerating click and collect sales. And finally, our veggie range continues to lead the way globally as a KFC market for plant-based alternatives. Turning now to Slide 10. During the half, we successfully integrated our 8 acquired KFCs in the Netherlands, increasing that market's restaurant footprint to 56. Investment in resources and capability is driving our long-term development pipeline in Europe with the 3 new Netherlands restaurants highlighted here. All expected to open in the coming months. This includes a battery-supported in-line restaurant in Den Bosch, which will help us counter our energy grid challenges and reflects our global leadership on innovative energy solutions. In Germany, an experienced operator has been appointed master franchisee for KFC, which will help this market develop and scale. Given our performance in Europe and ability to invest, Collins will be a key growth partner in this market. Our development team continues to monitor the landscape for expansion opportunities in existing and new European geographies and with the continent still underpenetrated, it remains a growth opportunity for Collins. Turning now to Taco Bell Australia on Slide 12. We are encouraged by Taco Bell's return to positive same-store sales in the first half of FY '24. Revenue increased 18.9% to $25.1 million, driven by same-store sales growth of 7.9% and the addition of 3 new restaurants over the prior year. We opened one new integrated Taco Bell in Underwood close to Brisbane, bringing our network to 27 restaurants across 3 metro clusters in Southeast Queensland, Victoria and Western Australia. Our 9 Victorian restaurants are performing the strongest of the group. EBITDA profitability at restaurant level, excluding new restaurant opening costs and brand G&A is trending positively at $1.4 million. Moving to Slide 13. Taco Bell's growth is being driven by improved product quality, successful marketing campaigns and a relentless focus on value. Higher quality and innovative new products are now meeting and exceeding consumer expectations on taste and value. Newly launched products include the $5 Jalapeno Crunch Burrito and the Crispy Chicken range, which features the Lava Crispy Chicken Burrito Meal at an attractive $10 price point. Chips are now accounting for a greater proportion of our sales mix following the national launch of McCain's super-premium Sure-Crisp franchise. Value and new product innovation are central to Taco Bell's enhanced marketing campaigns, which are being supported by strong media investment in collaboration with Yum! We are also leveraging collaborations with popular Aussie brands such as Vegemite with the Mitey G Taco to introduce Taco Bell to new consumers. This collaboration achieved Taco Bell's highest ever reach and engagement on social media in Australia. Taco Bell's performance has been encouraging, and we continue to focus on brand awareness, engagement and trial. I will now hand over to Andrew to provide an overview of Collins' first half financial performance.

Thank you, Drew. And it's a pleasure to be here this morning or this afternoon, depending on where you are, and I look forward to meeting many of our shareholders over the coming days. Turning to Slide 15, which reconciles underlying statutory profit and loss results. As Drew mentioned earlier, the group delivered growth in revenues, same-store sales, absolute earnings, margins and cash flow in a market where conditions remain challenging. Group revenue grew 14.3% to $696.5 million and underlying EBITDA from continuing operations of $109.9 million, was up 16.7% on the prior year, with margins improving 32 basis points. Underlying EBIT of $61.5 million, was up 23.1% over the prior year, while underlying NPAT increased 28.7% over the same period to $31.2 million. Underlying basic earnings per share was also up on prior year, increasing 28.3% to $0.265 per share. On a statutory basis, net profit after tax for the half year was $50.5 million, with basic earnings per share of $0.43 per share, up from $0.094 in the prior year. The major reconciling items between underlying and statutory results are outlined on the slide as follows: $21.1 million of NPAT relating to discontinued operations and primarily reflecting the gain on the sale of Sizzler Asia. Non-trading items amounting to $1.8 million, reflecting acquisition and refinancing costs with write-backs of onerous leases and impairment charges offsetting each other and $1.3 million of revenue classified as other income in the statutory accounts. So moving to Slide 16, the cash flow statement. The business remains highly cash generative in the half year with net operating cash flow up $25.1 million on the prior year to $82.2 million, representing a significant lift and these strong cash flows facilitated investment in new restaurants, remodels, in debt reduction and dividend payments. Investing cash flows were a $6.6 million outflow. Capital expenditure was $32.8 million, up 6% on the prior year, primarily reflecting investments in new and remodeled restaurants and in digital technology. This investment was offset by $22.8 million of proceeds from the sale of Sizzler Asia. Financing cash flows were an outflow of $57.3 million. $22 million was applied to reduce debt, which will cushion the business to some extent from higher interest rates moving forward. $18.7 million was used to repay lease principals and $16.4 million in dividends were paid to shareholders. Despite material debt reduction and dividend payments, net cash inflows were $18.3 million against an outflow of $4.8 million in the prior year. And as Drew reported earlier, a fully franked interim dividend of $0.125 per share has been declared by the Board, a slight increase on prior year, which reflects a strong half year results and balance sheet. Dividends will be fully franked. And turning to the balance sheet on Slide 17. Strong trading performance, cash generation and the sale of Sizzler Asia, all played a role in strengthening Collins Foods balance sheet in the period. Cash balances increased to $98.1 million. Other current assets were $24.7 million lower due to $12.2 million of Sizzler Asia assets held for sale and $13.3 million of acquisition deposits being discharged. The remaining balance consists of working capital and tax assets. Property, plant and equipment increased by $10.6 million on the prior period to $235.1 million, reflecting new restaurant builds and remodels and acquisitions in H2 financial year '23, less depreciation. Right of use assets of $469.3 million and lease liabilities of $563.5 million both rose on restaurant additions, other noncurrent assets consisting mainly of movements in intangibles. Our key balance sheet feature was the reduction in bank debt, which was $270.4 million at the period end, down $21.5 million on the prior corresponding period. Net debt was reduced to $173 million with a net leverage ratio sitting at a very comfortable 1.12. The Collins Foods balance sheet remains strong as we head into the second half of the year. And with that, I'll now hand back to Drew to talk through the outlook for the second half and financial year '24.

Good. Thank you, Andrew. So turning to Slide 19 in the deck and our outlook for the second half. Sales continued to grow in the first 6 weeks of the second half, despite consumer pressure is remaining challenging in both Australia and Europe. We continue to manage this business for the long term and are executing on our growth plans despite short-term headwinds. We continue to prioritize brand health by keeping value on the menu, harnessing the resilience of our world-class brands. In addition, margin support initiatives are in place for all 3 business units across energy, supply chain and operations. KFC Australia same-store sales increased 2.9% for the first 6 weeks of the year, and we are on track to open a further 5 to 8 restaurants before year-end. Given cost of living pressures for consumers, we will continue to prioritize value, digital expansion and supercharge remodels to drive revenue. Procurement and operational efficiency initiatives will remain in place to help manage margin headwinds, and we continue to target FY '24 EBITDA margins broadly neutral to prior year, an improvement from FY '25 coming closer to historical levels. KFC Europe had same-store sales growth of 8.1% in the Netherlands and 8.6% in Germany in the first 6 weeks of the half, and we expect to open 3 new restaurants in coming months as we work to expand our long-term pipeline. We are continuing to focus on everyday value and digital innovation to support sales in the region. Margins will continue to be impacted by a higher cost environment, including a 9.5% minimum wage increase coming into effect from the 1st of January in the Netherlands. There were a range of initiatives in supply chain, energy and operations should help to offset some of that pressure. We also continue to monitor the European landscape for additional M&A opportunities as well as potential new geographies. Taco Bell Australia has maintained sales momentum so far in the second half with same-store sales growth of 8.7% in the first 6 weeks. It should be noted that we are about to cycle the Uber Eats launch this time last year, which will impact the same-store sales result in the second half. However, sales will continue to benefit from product quality, digital and marketing initiatives. We do expect margin pressure for Taco Bell in the same areas as the other business units, although we remain on track for profitability at restaurant level. As we have previously communicated, restaurant development is currently paused. However, we are encouraged by recent results and we'll continue to review our development plans over the coming second half. Moving to Slide 21. Lastly, a reminder that Collins Foods as ever, is well positioned to navigate challenging market conditions, operating world-class brands within the remarkably resilient QSR sector. We have a proven track record, performance, strong balance sheet and deep operational capabilities to deliver our long-term plans. We remain confident that our best days are ahead of us and appreciate the support of all of our shareholders along the way. That concludes the presentation. I'm happy now to open up the call for questions.

[Operator Instructions] Your first question comes from Tim Plumbe from UBS.

Just 2 questions from me, and I'll jump back into the queue. Drew, the first question, if that's all right, just around the KFC Europe operations. At the FY '23 result, you were guiding to minimal margin contraction. Obviously, the first half margins were quite strong. Then my trapping suggests some pretty material pricing increases have been implemented in both August and September in the Netherlands. I was hoping you might be able to confirm those pricing increases. And then given the price increases, the wage headwinds and the margin performance in the first half, how are you thinking about European EBITDA margins in the second half of '24, please?

Yes. Look -- I'd say, very similar to the way we think about the brand and broad stroke. Some menu pricing, Tim, is certainly unavoidable in many of the markets. We've tried to maintain the same strategy of keeping affordability strong. But in that environment, certainly where cost input pressures have been even more acute than in Australia, some menu pricing has been necessary. We will continue to keep a very close eye on that. We do expect that some of the supply chain pressures and COGS pressure should certainly begin to ease, which will help. But I did -- we also called out the 9.5% increase in the minimum wage in Europe, in Netherlands at the beginning of the year. So look, we're going to continue to stay close to the consumer and be consumer-driven in Europe. Broadly speaking, you can see some of that pressure is still there and it's going to continue to be acute. And we always like to think of menu pricing as our last resort option. What was your second question, Tim, I'm sorry.

Yes, sure. So the second question is around debt. So maybe a question for Andrew. You paid down some debt. It looks like the bank interest was quite a bit lower than my expectations and kind of the guidance that Nigel talked to at the FY '23 results. Can you maybe talk to the hedging that's in place at the moment. How should we think about bank interest expense for FY '24? And then also the ramp-up as that fixed hedging starts to come off?

Yes. So our hedges run for another 11 or 12 months. So we've got that in place now for that period of time. But as they roll off, obviously, we'll be exposed to the market. So the interest cost will increase really depending where we're at with cash flow. So we are focusing very much on maintaining debt at the level that allows us to cushion interest in the overall and its impact in the P&L.

Got you. So I mean is it fair to kind of just double the first half bank interest expense?

I'll have to take that on note. So probably I have to do a little bit more work on the cash flows as well in terms of our projections, Tim, but I'll take that on notice.

Your next question comes from James Ferrier from Wilsons Advisory.

Good morning, Drew and Andrew. Thanks for your time, and Andrew, welcome to the business. First question is around the KFC Australia EBITDA margin. So it's a pretty impressive result there in the first half, certainly sequentially relative to second half '23. And notwithstanding some of the typical first half, second half seasonality that you do see it as a strong result. So just mindful, Drew, that the guidance for FY '24 margins hasn't changed. So what is it in the Australian market that you're anticipating that might see margins regress in second half '24?

Sure. Thanks, James. Always good to hear from you. And so then the question on margins. Look, we were pleased certainly with the first half results. I think as we look forward, there's probably a few dynamics to call out. One is energy prices. So we are rolling off of some favorable pricing on electricity at the end of this year. We're happy with the new contracts, but there's certainly an increase given that we had a multiyear very favorable rate for our restaurants, primarily in Queensland. The other thing I think that is our call out and our caution is same-store sales, as you've seen, certainly, it's something we want to keep a very close eye on 2.9% so far just out of the gate. And I think with the consumer under the pressure that they are, I think it's probable we might have to continue to be even more aggressive in terms of value offers in the market to make sure that we're keeping transactions at a healthy level. So I think those are 2 dynamics that we'd probably call out. Labor pressures, I think you're aware of, has tended to be what it's been the next increase would probably be sort of mid-next year. But I think energy and certainly, the need for value in a tough consumer environment, James, are probably the 2 of the big ones I would point to.

Yes. Okay. That makes sense. And that's probably a nice segue into my second question then. You sort of touched on the same-store sales growth for KFC Australia, it's probably moderated about 5 percentage points since June. And obviously, menu prices have done what they've done. So just some color if you could help us here around what's driving that slowdown? Is it competitive intensity? Are there some effectiveness of KFC promotional schedule type issues? Or have they been great? Is it just the tightening in the underlying consumer environment? Any extra color you could give us on what you're observing around that slowdown would be great.

Yes, thanks. It's -- look, a few thoughts. We're certainly pleased with the overall results for the half. And as you sort of point out, the increase is indeed largely coming from ticket and a greater proportion of e-commerce sales. It's clear coming into the fourth quarter of the calendar year that the consumer is under enormous pressure. So overall, it signals at a value. The value and affordability are more critical now than ever and KFC has a strong proposition in the category in those dimensions. So it is a good place to be in a challenging environment. As you noted, and I think it's fair to point out, transactions overall are broadly flat for Collins. But on a same-store basis, transactions have been slightly down in the first half and for this recent 6-week period. Though we do believe that to be consistent with the category. We're also lapping strong tourism levels in the prior year following the borders reopening post-COVID that may play into the numbers a little bit. But overall, our numbers have shown KFC continuing to either hold or increase share, which we think is a positive. So we've been pleased in recent weeks to the consumer response to some additional value offers we put out. And we do believe that those types of efforts are going to be very important in the next 6 to 12 months or more.

Your next question comes from Ross Curran from Macquarie.

Can I just ask a question. You talked about in Germany, the master franchise that you're partnering there and you yourselves of a master franchise in place in the Netherlands. In your discussions with Yum!, is -- are they warming to the concept of country-level master franchises? And is that something that potentially is an option for Australia?

So there are now -- you pointed out the master franchise in Germany, which is broadly similar to the corporate franchise agreement or CFA, which we have in Netherlands. Yum! Is now done. Yum! as the franchisor has now done 3 of these in Europe. So there's one in Italy, there's one in Netherlands, another one in Germany. So I think it's fair to say that Yum! has certainly done a number of those structures and is certainly keeping an eye on whether that arrangement may be a good way to go forward in Europe. I'd say in Australia, that's really not been something under any kind of active discussion. Australia is one of the 5 equity markets for Yum! where they maintain equity presence. They have strong capability and strong support for the brand here. So we don't anticipate any changes -- dramatic changes to that structure in Australia on the horizon.

I would talk about Yum! Can you just help us understand what capabilities they brought to Australia to help with Taco Bell? And how long that you expected to run for?

Yes. So it's been certainly one of the areas that we've been really pleased with the partnership and the way they've responded to some of the challenges we've had in the brand. So the Chief Marketing Officer for Taco Bell by the name of Andrew Howie, he's Australian, he's been fantastic, and he's been in place for, I guess, just over a year and has done a really good job of bringing some fresh thinking to the brands. So Taco Bell has been supporting him being in the market. They've added some additional marketing capability. And they've also supported out of Irvine, California, which is our headquarters, with expertise in product quality, supply chain, et cetera. So those would be some of the resources we'd call out. And I think it's really helped to just bring some real clarity and some real forward direction of the brand. And the last thing I'd point out is they have a global marketing agency that's under their structure, which is called Collider. And they funded -- fully funded a very deep consumer research project over the last 6 months, which really helped us, I think, in terms of positioning the brand and thinking about the brand from a consumer perspective. So that will give you a flavor for the type of support and investment that they've put so far, and we do expect that support to continue as we move forward.

Your next question comes from Ben Gilbert from Jarden Group.

Just the first question for me. And so I have had a question that's really just on the margin in Australia. For the last couple of results, you sort of continued to surprise on the upside for margin. And historically, there hasn't been a lot of seasonality aside from last year some margin in Australia, and I appreciate commentary on energy, but I think energy is not a few percent, and then Queensland obviously, it's not a portion of sales. So are you just trying to sort of be cautious in your comments around margin because to get to flat, it implies a decline year-on-year into the second half? And given pricing, given the benefits of getting a kiosk, you're obviously starting to cycle through rates, which thought it's going to be modestly down to margin. I would have thought you probably got a few tailwinds in the second half as you work through some of these initiatives?

Yes. Look, I appreciate the question, and we take margins quite seriously within Collins and we try to maintain a pretty consistent track record in that regard. It is fair to say that there -- while you look at commodities and a lot of them are off their peaks. There are quite a few that are still high by historical standards, right? So even when you think about areas like chicken, most of our contracts are at this point are kind of locked in for the next year or 2, while you're still in the short term, you're still in -- a lot of the inputs are still under short-term pressure. You think about some of the -- while you're seeing some relief in areas like Canola, and I think we've called out before as being an area that we see actually seeing price decrease. You'll also see areas in the P&L like French fries, where the global potato market for -- the global potato market is still under enormous pressure, and we think that there's going to be continuing headwinds in that regard. So we're certainly not out of the woods from a supply chain perspective. We are seeing relief in certain areas, but we are still seeing pressure in a number of other areas. So are we being cautious? I mean, to some degree, yes, but we also need to make sure that we're keeping very focused on the consumer and the transactions for us on brand health is always our #1 priority. And that's the area that I think we need to -- as we go into the second half is going to be our -- where our primary efforts lie.

You talked about, I think, the work you've done [indiscernible] of the brand research and put some good steps in the back around perception. In terms of your value perception in market, has that been a function, do you think or just around how you position the menu? Or do you think you've increased prices at a slow rate in your peer group? And I suppose is that where you're really focused on not pushing price too much again in the next sort of 3, 6, 9 months to close that gap on peers? Or just how do you think about the pricing as well?

Yes. Look, I give Yum! a lot of credit. Remember, the marketing is done out of Sydney for KFC and the team there, Kristi -- and Tami is the new CMO for Yum! has done a remarkable job on some very broad thinking about the brand. Look, I don't think we've seen the consumer under this much pressure in Australia for quite some time. Given everything from interest rate increases to energy price increases to just an extraordinary level of low consumer confidence. So our ability to maintain affordability has always been the most critical for us. And those metrics continue to stay strong, which we think is good. So overall, there's different ways to approach value from entry-level value to affordable value. And there's a very sophisticated nuanced approach to the way we think about willingness to pay from our customers in Australia. So that will absolutely continue to be our focus for the second half. And I think Yum! has done a good job on that so far. But it is certainly an area that we recognize the sensitivity on and menu pricing for us is always tends to be the last resort in terms of the way we maintain margin.

The only thing I'd add to that was -- through some of the issues in pricing, product cost, but clearly, labor inflation remains elevated in all markets, including Australia. So that remains a feature and that continues to put a little bit of pressure on margins.

And just final one for me. Just on Europe and Germany with a new master franchise there. As I understand you've got some pretty aggressive ambitions around stores. To what extent, I think have you guys been sort of participated in engaging with them and [ don't ] understand what kind of concentration with the sub-franchisees because that position you? And what's your appetite to accelerate your rollout plans in Germany?

Yes. Look, I was up in Europe just a few weeks ago and met with [ Elkom Sahimi ] he's the new master franchisee for Germany, and he's out of Turkey. The company is called IS Holdings. And look, he's a dynamic, ambitious guy, and they certainly have big growth ambitions for Germany. So look, overall, we think it's good news for the market. One of the biggest challenges in Germany over the past few decades, it's just been a lack of scale. And if we can work together with somebody who's willing to invest deeply in that market, I think it's a good thing for us. So there's still some questions, I think, to be answered and still some sort of territory on regional structures that we want to make sure we have clarity on specifically the role we play. But overall, we're encouraged, and we think that Germany is going to be a good market for us and a rising tide lifts all boats. So I think additional scale for the brand in whatever form can only be a good thing.

Your next question comes from Peter Marks from Barrenjoey.

Just maybe a quick follow-up on Europe there. I noticed you're talking to the potential for new acquisitions or I guess, acquisitions into new markets as well as Netherlands and Germany. Can you just talk us through your high-level thinking there, like what you're looking for in terms of new markets and I guess, the size of the potential acquisition that you might do? Is it going to be pretty incremental? Or could you put a big chunk of capital to work in a new market over there?

Yes. Look, I think it's one that we've got a good relationship with [ Elna ] We continue to keep an eye on the landscape. I will say as Collins, we're not flag planters where we need to be a dozen different countries at the same time. We want to be quite intentional if we're going to consider new geographies, and that will continue to be the case. Most for the M&As at this stage, I think it's fair to say it would broadly be incremental in nature. But geographies, given the challenges that we've had in Netherlands and I think we called out in the deck that the energy grid is a continuing challenge in Netherlands and has made it harder for us to build new stores. And that's something we obviously see as a headwind for our development in Netherlands. So the importance of ensuring that we've got adequate room to grow organically is definitely our #1 priority. So we are very bullish on Europe. We're going to be quite intentional in the way we think about geographic opportunities. But if there's M&A that suit us, and we think we can pick up along the way that support our strategy, we'll certainly be open to doing so.

Okay. That makes sense. And then maybe just coming back to Australia. One of the things Yum! talking about in its quarterly results is the growth in kiosk sales in Australia. Could you just talk us through where you're up to in terms of rolling those digital kiosks out across your restaurants? I'd be interested in like how you think about the incrementality of those sales and the cost savings that you're getting from those kiosks. And also knows like the Netherlands business, the digital sales are well ahead of Australia. So do you think like Australia is heading towards that level of digitalization?

Yes, it's a great question. Kiosks are certainly quite top of mind. When it comes to Australia, we have kiosks in about 1/4 of our restaurants, so just over 60 of our restaurants have kiosks today. We have been expanding that. We have a very rigorous process when it comes to capital allocation. And what we've typically seem to be true in the past in Australia is that you will tend to see a higher ticket out of kiosks. But what we've noticed is also that often you see a corresponding decrease in transactions that are going through the front counter that sort of offsets it. So we've been keeping a close eye on that. And I think more recently, we've seen encouraging results on net ticket through that -- through the overall front counter channel, so -- or dine-in channel. So I think we're relooking at the numbers on that and seeing if it supports a more aggressive rollout for kiosks. So that's something right now that is under active consideration. We're certainly speaking a lot with Yum!. But overall, we think it's a good channel for consumers, the more digital channels and the more the consumer can gravitate towards the channels that they feel most comfortable ordering in, we think the better for the brand and the experience. So that's for us certainly under active consideration.

Your next question comes from Alexander Mees from Morgan.

Just on the comments you made around the challenging cost of living pressures in your outlook comments around KFC Australia. I'm just wondering, given your value credentials and where you sit in the market, do you see that as a help or a hindrance?

Sorry, Alex, I missed that. What is help or hindrance?

The fact that we're expecting to see challenging consumer conditions in Australia.

Excuse me, yes, sorry. Look, it's a bit of both. So certainly, we do believe the category benefits from some trade down. It's hard to put a number on that. I don't have any data I could share with you in terms of the scale and quantum of the trade down. Nonetheless, you also need to consider that there are a fair chunk of our consumers largely blue collar in nature that may simply decrease frequency or drop out of going out altogether. So you do see different shifts within consumer behavior, some benefits, some don't benefit at the bottom end. Nonetheless, overall, I think it's fair to say that the category itself is attractive from a value standpoint, but it's certainly not immune to some severe pressures that consumers under right now. We've seen consumers have spent down a lot of their savings from COVID. We recognize that was going to be the case this year. We do think that is impacting their ability to dine out. And regardless of affordability, some of those consumers just may opt not to dine out at all. So those are the dynamics we keep an eye on. It doesn't change our strategy in terms of accessibility, affordability for the consumer and providing great taste, but it is something that we see as more acute in terms of pressure than we've seen in quite some time.

And one for Andrew. Just wondering if you can quantify the effect of FX movements on the income statement.

We haven't had material foreign exchange impacts on the income statement in the period. So it's relatively neutral.

Great. And as that was a quick answer, maybe one more. Just with regard to Taco Bell, you referred to reviewing the development during the current half. I'm just wondering what you need to see to be confident that you want to resume development.

So we certainly would want to see a continuation of some of the trends that we've seen. So we do think that on the back of the collateral research that, again, working with Yum!, we've gotten a number of things right or improve for the brand that has enhanced the consumer proposition. And that, we think, has supported the numbers that we shared in the deck. From a development perspective, look, we just impaired the entire Taco Bell network on the full year. So I think it's fair to say we want to be certainly very thoughtful around putting new capital into the brand. But we are encouraged. We look -- we have a close eye on Melbourne -- excuse me, and just Victoria more broadly as a market that's been performing well, especially from a freestanding drive-thru perspective, and if we feel like the sales volumes that we're seeing and the margins that we're seeing would support a business case for investment, we would certainly actively consider it. So those are -- that's where we are on the brand right now. Ultimately, we do believe scale is necessary to really bring the brand to its full potential and we'd like to do that as soon as we think it's financially sensible to do so. So that's behind our thinking right now.

Well done on the great result.

Your next question comes from Mitchell Hawker from Bank of America.

Just wondering if you could talk through the initiatives you have around cost. You talked to supply chain entity and operations. I was wondering if you could provide some color there and just some magnitude of the savings that you're expecting to see.

And the question was around Australia, Mitchell. Is that correct?

Yes, Australia.

Yes. So look, it's -- when it comes to supply chain. I don't think we've left any stone unturned. Certainly, there's been, as we called out a bit earlier, some positive movement in areas like canola, which is certainly one of the leading items in our SKUs in our supply chain. But we've gotten to an incredible level of granularity. And again, I give Yum! credit for this. as we're on the supply council, but the job Michael Clark and his team have done, I think, has been exemplary. And to give you, I guess, a bit of color as you've asked for, one of the initiatives to give you a sense of the detail that we get into was around the stickers that we put on our delivery bags. And it doesn't sound like a big item, but there was some reasonable chunk of savings that came out of that from just shifting and retendering delivery stickers, but at the same time, allowed us -- will allow us to actually put handles on the bag, which is a consumer convenience win. So that's the way we think about this brand that we don't want to get so aggressive on just looking for cost savings that we compromise on quality and customer experience and in areas like that where we can do both, we'll certainly take the win. So look, overall, the COGS for KFC is obviously, the big categories in areas like chicken and chips and oil have varying degrees of pressure on it. But certainly, having a fourth chicken supplier in the network for KFC has been a good thing. Golden Cockerel. They're a Queensland-based supplier. We've been extremely impressed with their performance so far. It's close to home for us, which we think is a good thing. And it should just bring additional capacity to the supply chain, which we think can help in the longer term. So look, net-net, there's not a lot of categories outside of canola that I could point to you and say we're seeing dramatic decreases in, there are still significant headwinds in multiple areas. But anything that we can do without compromising and customer experience as in some of the areas I mentioned are going to be the ones that we're going to continue to go after.

Great. And just a follow-up question on the new KFC app and digital platform, the menu platform. How does that differ to what's currently in place? And what kind of benefits are you expecting to see from it?

So yes, it's a different provider. Typically, KFC has done a lot of work with Cognizant globally. Netherlands is a relatively small market, and we had an app. It was doing okay. It was just -- we found there was a lot of friction and a lot of failures from a consumer perspective. So we went and we discussed that with Yum! and have pioneered work with a bit of a white label vendor in Europe called menu. And we've been pretty pleased with the performance so far. It's been only in recent months that we've launched it, but it's a more stable platform and nothing is worse in that space than a customer that's ordering and the order doesn't go through or God forbid, their money goes through and the order doesn't. So this platform has been much more encouraging, and we think it's a good grounding for more work that we can do similar to Australia in space like personalization of offers a more seamless experience for the customer. So that's the platform. Again, early days but encouraging results so far.

You have a follow-up question from James Ferrier from Wilsons Advisory.

I wasn't sure if we have time for this, but the store openings in Europe looks like it's tracking a little behind the previous target. And I'm just conscious of what that -- what impact that has, if any, on how Collins is performing relative to the CFA targets and expectations from Yum!?

Yes, it's a great question, James. So this has been an area, when you think about Europe, expanding our development capability has been our biggest priority. So we've greatly increased the capacity of that team. We have, I think, 15 people now in the development team up from about 3 or 5 a year or 2 ago. It does take time to build pipeline in Netherlands. And as we shared a little bit earlier, the energy grid challenges that we face in Netherlands has really come into play in the last 12 months and has made expanding our pipeline more challenging, not impossible but more challenging. So I'd say it's -- for the target for this year on the CFA, the development target that is, we're likely to come a bit short of the full number reached by December. The full stores will still open in the next couple of months. So it won't necessarily impact our long-term development targets, but it will likely impact the incentive that we received for 2023. I just want to call that out. Overall, however, we do think that in partnership with Yum! and with a lot of support that we're putting into the market, we believe that our long-term development commitments in Netherlands are still quite achievable.

And maybe one for Andrew. The AASB 16 impact on NPAT relative to where it's been in the last few results, shrunk quite significantly in this first half '24 period. Any color you could give us on what the delta is going to look like going forward from here?

Yes, the delta between pre and post tends to depend on the tenure of the leases that apply and how they impact the P&L. I think it's fair to say just after the time I've been in the business, it's heartening to predict that moving forward at this stage. I can probably add a bit more color as to how to look at the lease book, but it does tend to be impacted by tenure. So that's probably the major issue that impacts the movements between pre and post AASB 16. So again, I'll take your question on nose and have look at that moving forward.

Yes. And James, just -- because you and I have talked about that before, it's so important for us that our investors do understand our financial results, which is why we have made pre available for now in the appendix. It's certainly becoming more stable in terms of the delta that we see year-on-year. And I think as long as that continues to be the case, that bodes well for post, which is where the market has gone. But we do want to make sure that investors are clear on the results and what's underlying it. So that's probably the most critical thing for us.

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