Collins Foods FY24 Earnings Call Transcript

Collins Food (ASX: CKF) earnings call for the full-year ended 28 April 2024.

Earnings Call

Thank you for standing by and welcome to the Collins Foods Limited FY 2024 Results Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session.

I'd now like to hand the conference over to Mr. Kevin Perkins, interim CEO. Please go ahead.

Kevin Perkins – Interim Managing Director and Chief Executive

Good morning, everybody. As I have just said, I'm Kevin Perkins, the interim Managing Director and CEO of Collins Foods. Joining me on the call today is our group, CFO, Andrew Leyden. And we will take you through Collins Foods' very pleasing results for the 2024 fiscal year, which was the 50 same 52 week period to the 28th of April 2024. We also have Helen Moore and Heinz Milling with us, who run our KFC business in Australia and Europe respectively, who will participate in the Q&A sessions after the presentation. For those of you who haven't met me prior to my interim appointment in February, I served on the board as a Collins Foods non-executive director for 13 years and was CEO of the business from 1985 to 2013.

Consequently, I have an in-depth understanding of the drivers of our business. And my other call to fame is I am probably the only one left in the business who's actually met Colonel Sanders. And I have been in this interim position for some time now. I've been very impressed by the bench strength of Collins Foods senior leadership team and the team, and I look forward to meeting many of our shareholders over the coming days. Please note as we take you through today's results, 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 appendices to the investor presentation. If I now refer you to Slide 1. In one of the most challenging consumer environments in recent years. We are very pleased with the results that Collins Foods maintained its positive momentum, delivering solid growth across revenue, same-store sales and earnings. The FY 2024 direct results highlights include record revenue of AUD 1,488.9 million, up 10.4% on the prior year, with a growth across all business units. Improved profitability with underlying EBITDA up 12% to AUD 9.8 million, driven by sales growth and cost efficiencies which helped mitigate inflation.

Statutory NOPAT of AUD 76.7 million, compared with AUD 12.7 million last year, with underlying NOPAT of AUD 60 million up 15.6%. Net operating cash flow was up AUD 30 million to AUD 176.4. And our network continues to grow, with 17 net new unit restaurants added across the group in FY 2024, bringing our total footprint to 381. As a result of our FY 2024 performance and strong balance sheet, the directors declared a fully franked final dividend of AUD 0.155 per share, AUD 0.01 ahead of the prior year, bringing the full year dividend to AUD 0.28 per share, up from AUD 0.27 in 2023. At fast generating characteristics and moderate deposition are a highlight of our business, leaving us with capacity to invest in attractive growth and moderate deposition are a highlight of our business, leaving us with capacity to invest in attractive growth opportunities moving forward. If I'd like to turn the slide 2 to operating highlights – highlights by business unit. Our stellar performance was supported by sales growth through digital channels, product innovation and value initiatives across all business units. Impressively, the team achieved this growth in a more challenging macro environment, with significant cost of living pressures impacting consumers and ongoing cost inflation across key input lines, especially labor. KFC Australia. Same store sales increased 3.8%, despite the challenging consumer backdrop driven by brand strength and strong digital growth, which accounted for 30.6% of sales in the second half. KFC is consistent approach to value is resonating with customers, and the brand has maintained market share at the same time, scale and operational efficiencies offset a higher cost environment, with margins up 57 basis points on prior year. And we continue to exceed our development agreement by opening nine new units across the financial year.

KFC, Europe continues to demonstrate its growth potential, delivering positive same store sales of 4.9% while cycling double digit increases in the prior to prior years. Same store sales were up 4.3% in the Netherlands and plus 6.4% in Germany. Value Marketing. Menu. Innovation and a growing network have contributed to record high brand metrics and market share gains in the Netherlands. While operational efficiencies and supply chain savings have helped protect margins.

Taco Bell Australia achieved same-store sales growth of 3.5% as improved food quality, value marketing campaigns and delivery expansion lifted brand awareness and supported consumer trial. We're continuing to optimize the brand's foundations across our network of 27 restaurants in metro suburban geographies in Queensland, Victoria and Western Australia.

I'll now hand over to Andrew, our group CFO, to take you through group and segment results. Andrew?

Andrew Leyden – Chief Financial Officer

Thank you, Kevin. And good morning, everybody. Let's start with an overview of our financial performance on slide 4. As Kevin mentioned, Collins Foods delivered solid growth across all key metrics, despite softer trading conditions and inflationary pressures. Group revenue grew 7.4% to a record AUD 1.5 billion, supporting double digit increases in underlying earnings. Underlying EBITDA from continuing operations increased 12% on the prior year to AUD 229.8 million. Underlying EBIT also increased 15% over the same period to AUD 124.1 million. On a statutory basis, net profit after tax was AUD 76.7 million, up from AUD 12.7 million last year. This result reflects a stronger underlying performance AUD 20.2 million of profit from the sale of Sizzler Asia in this financial year, and AUD 36.7 million relating to the impairments of Taco Bell in financial year 2023.

Statutory impact also benefited from a AUD 4.6 million depreciation saving due to the impairment of Taco Bell in the prior year. Underlying net profit after tax increased 15.6% over the prior year to AUD 60 million. And underlying basic earnings per share also increased 15.3% to AUD 0.51 per share. The real highlight of these results was the strong cash performance in the year with net operating cash flows of AUD 176.4 million. We also significantly reduced net debt over the year, down AUD 46.7 million to AUD 165.5 million, reflecting the similar age of sale and strong operating cash generation. A fairly frank dividend of AUD 0.15 per share was declared, with the full year dividend at AUD 0.28 per share, up AUD 0.01 on the prior year.

Now turning to the income statement on Slide 5. Major reconciling items between underlying statutory profit and loss results include AUD 21.1 million of net profit after tax relating to discontinued operations, primarily reflecting the gain on the sale of Sizzler Asia and AUD 4.3 million in Non-Trading net profit after tax, comprising AUD 3.4 million and impairment charges for Taco Bell and one European store. AUD 2.1 million in acquisition and refinancing costs, offset by a AUD 1.2 million write back of Taco Bell leases from financial year 2023. Basic earnings per share of AUD 0.653 cents, including Sizzler Asia Sale profits, as I mentioned earlier, underlying EPS saw double digit growth in the same period last year.

Now let's move to the cash flow statement on Slide 6.

The business remains highly cash generated in financial year 2024 with net operating cash flow increasing by AUD 30 million on the prior year to AUD 176.4 million, facilitating reinvestment in new restaurants, in remodels and acquisitions, as well as enabling debt reduction and higher dividend payments. Investing cash outflows reduced AUD 40 million to AUD 53.6 million. Despite increased investment in capital expenditure to support portfolio additions and renovation, as well as investments in technology to enable continued growth in digital channels.

This investment was offset by ADU 23.1 million of proceeds from the sale of Sizzler, Asia. Financing cash outflows were AUD 118.9 million, inclusive of AUD 41 million of debt repayments, AUD 46.6 million used to repay leased principles and AUD 30 million in dividend payments to shareholders. The cash generated characteristics of our business continues to be a real highlight enabling investment in future growth opportunities. Now let's turn to the balance sheet on slide 7. We ended the financial year 2025 with a very strong balance sheet and significant investment capacity to support growth. Net debt was reduced by AUD 46.7 million to AUD 165 million. Cash balance increased AUD 24 million and the net leverage ratio materially improved to AUD 1.07 million. Other current assets were AUD 24.3 million lower due to AUD 12.2 million Sizzler Asia assets held for sale and AUD 13.3 million of acquisition deposits being discharged in the period.

Property, plants and equipment increased AUD 30.8 million on the prior period to AUD 255.3 million. Reflecting new restaurant builds, remodels and acquisitions, of course, less depreciation. Right of use assets of AUD 489.1 million and lease liabilities of AUD 586 million both rose on restaurant additions, as did other non-current assets, primarily reflecting movements and intangibles.

Moving now to the segment performance and starting with KFC Australia on slide 9. Our Australian KFC operations continued to scale with revenue up 6.6% over the prior year to AUD 1.1 billion. Higher revenue was driven by same-store sales growth at 3.8% and the addition of seven net new restaurants bringing our footprint to 279 restaurants nationally. Greater scale and efficiency improvements lifted profitability with underlying EBITDA of 9.8% to AUD 221.4 million, offsetting higher costs across many input lines. EBITDA margins improved 57 basis points to 19.8%, while EBIT margins improved 41 basis points to 13.4%.

Now turning to KFC, Australia's brand characteristics. On slide 10. In difficult economic environments, consumers sense the brands that they know and trust. And then the YouGov graphs on the slide, you can see that KFC is synonymous with great tasting food and affordability, and we continue to outperform competitors on these key metrics. We're investing in menu innovation. We're further contemporizing the brand through enhanced core products and limited time offers, such as hot rods and the double waffle to engage life's lapsed and engaged consumers. Branding culture initiatives and targeted only promotions such as Kentucky Fried Chicken are also enabling us to remain top of mind, providing consumers with relevant value offers at the right time.

Now moving on to Slide 11. Digital channels continue to improve accessibility to the brands which support sales growth. Digital accounts for just over 30% of total sales in the second half, up 6.3 percentage points on the same period last year, driven primarily by higher app adoption.

In addition to convenience, app acquisition supports future growth for the brand, improving engagement and facilitating the retargeting of opportunities. We're continuing to invest in these channels, including a more extensive kiosk rollout plan, dedicated delivery driver entrances and new customer listening tools to improve the experience at KFC. The brand's physical saliency is also improving, with KFC being the fastest growing QSR brand in Australia in 2023. In terms of net new builds, there's now a KFC located within 3 kilometres for 71% of Australians. We're continuing to modernise and increase customer capacity within our Australian network, with 70 restaurants remodelled in financial year 2024, leveraging dual line drive through us and C line kitchen layouts to improve production throughput which is key at peak times and really assists in terms of speed of service. This operational efficiency plays a key role in protecting margins.

Now turning to our growing European segment on slide 13.

Our KFC Europe business delivered another strong performance with growth in revenue. Same store sales and earnings despite cost of living and inflationary pressures impacting the broader QSR sector. Revenue increased 26% over the prior year to AUD 314 million, benefiting from 11 new restaurants and favourable currency translation. Same store sales in Europe increased 4.9%, an impressive achievement given we were cycling two consecutive years of double digit growth and a more challenging consumer environment. Netherlands, same store sales increased 4.3%, while Germany rose 6.6. 4%. Underlying European EBITDA of AUD 42.5 million was up 30% on the prior year, with margins stable as operational initiatives mitigated inflationary pressures across key inputs. EBIT was AUD 12.1 million, up 33% on the prior year.

Now moving to slide 14, which highlights the strength of our brand fundamentals. Marketing and operational controls in the Netherlands under our Corporate Franchise Agreement or CFA, has lifted brand awareness and consideration to record levels, and we've enjoyed share gains relative to our competitors. Product innovation has played an important role in increasing brand relevance for the successful launch of a KFC version of a cult product dish, new veggie options and higher welfare chicken choices on the menu.

Well, the fundamentals of KFC are the same in every market that is affordable, great tasting food. We understand the importance of meeting local consumer expectations. More than half of Dutch consumers are flexitarians and as a KFC market, the Netherlands is a global leader for plant-based alternatives. As in Australia, value is a key pillar of our strategy. And our approach to affordability has resonated with consumers feeling the pinch from significant cost of living pressures. Digital is another key growth driver for the business, accounting for more than half of all sales in both the Netherlands and Germany, with kiosks being a major contributor.

Turning now to Slide 15. We added 11 new restaurants to reach 59 restaurants in our Netherlands network over the year. Inclusive of three new bills shown here on the slide. Development and energy grid challenges have impacted the speed of progress in the Netherlands. However, we remain confident in the long-term opportunity and are finding innovative solutions to scale the brand in this market. We are locking new trade zones with smaller format drive-thrus known as Delco Drive. And we're first to market with a battery supported restaurant in Den Bosch, which is one of the restaurants on the slide.

Investment in energy resources has seen consumption reduce 3% across the network this year, with one location achieving a 15% saving. Despite some development setbacks over the past year, we see significant growth opportunities for Collins Foods in Europe, given this KFC brand remains underpenetrated relative to competitors across the continent. In addition to our growing pipeline in the Netherlands, our team is also actively evaluating M&A in Europe to accelerate growth. And turning now to Taco Bell on Slide 17. Taco Bell has marked a strong year of recovery, benefiting from significant, strengthened brand foundations, an improved food offering and higher marketing investment. Revenue was up 11.7% to AUD 54 million, despite a slightly smaller footprint than the same period last year. Driven improved brand perceptions, as well as the full year impact of the introduction of Uber Eats last year. EBITDA at a restaurant level, AUD 3.4 million was impacted by increased investment in media and marketing to support brand awareness and consumer trial. Development remains temporarily paused as we continue to optimise our network of 27 restaurants across Southeast Queensland, Victoria, which is our strongest performing states and Western Australia. The continued strong performance of Victoria again remains the highlights which is indicative of the quality of the locations we have in that state.

Now moving to slide 18. Taco Bell's growth was driven by higher value products, more effective marketing, and strong value credentials at a time when value really matters to consumers. We've improved the taste and quality of our products offering and introduced innovation at key price points, such as the AUD 5 Lava Crunch and AUD 10 Enchilada Burrito Meal, which has attracted new consumers to the brand. Successful collaborations with iconic brands such as Vegemite and (00:21:11) have lifted relevance and engagement, outperforming all previous brand campaigns. And our successful Uber Eats rollout has improved accessibility, supporting growth in digital and delivery. In the second half, these channels accounted for 30% of all sales. We're encouraged by Taco Bell's performance over the past year and are continuing to solidify its position as a genuine QSR proposition within the fast growing Mexican category.

And with that, I'll hand it back to Kevin. Kevin Perkins – Interim Managing Director and Chief Executive

Thank you, Andrew. I like now to move to slide 19 to our ESG credentials. Over the past year, we expanded our ESG program to focus on initiatives under the five key pillars of operations: people, communities, planet and governance. So FY 2024 progress is highlighted on the slide. We continue to reduce our environmental footprint with more than half of our restaurant network generating solar power. Environmentally conscious designs are being implemented for new builds and remodels and LED lighting is now in all Australian restaurants. New energy initiatives in Europe, such as battery supported restaurants and energy neutral buildings, have reduced energy consumption across the network. On the social and governance front. We are leading the way in gender equality with a gender pay gap of less than 5%. We are the first employer for many young people and they are continuing to upskill our talent with 95% of restaurant manager positions being filled by internal candidates.

Turning now to Slide 21 and our outlook for FY 2025. Collins' volatility in the first seven weeks of this Y 25 reflected the continuation of a weaker consumer environment in Australia and Europe, as well as lapping the very strong comparatives in the prior year. We expect significant cost of living pressures and a higher cost environment remain for much of the year ahead, impacting sales growth with ongoing margin pressures across our business. In this environment, maintaining brand health is essential for our mid and long term success and we will continue to prioritise everyday value to retain customer trust. The current environment has not dampened our enthusiasm for growth and we are confident margins will recover as trading conditions improve. The strong operational expertise of our management team will continue to find efficiencies across labor supply chain and energy. KFC Australia total sales increased 1.5% for the seven – first seven weeks of the year. Same store sales were down 0.8% over the same period, reflecting the cycling of a strong prior period. A more subdued customer sentiment and some planned cannibalization impact from the addition of new restaurants to the network and the early closure of some restaurants for major remodel work.

As consumers navigate cost of living pressures. We will continue to prioritise digital expansion and product innovation to drive revenue, we continue to expand our network with nine new builds expected in FY 2025. And we are very, very open to M&A opportunities as they present themselves. Operational efficiency and supply chain initiatives will remain in place to support margins. KFC Europe's performance in the first seven weeks of FY 2025 reflected the deteriorating consumer landscape and a very strong growth in the prior period with total sales broadly flat. Same store sales were down 2.3% in the Netherlands and 2.8% in Germany and Netherlands business also continues to be impacted by consumer reaction to the conflict in the Middle East.

In these challenging conditions, we will continue to focus on value, menu and digital innovation to support sales and market share. Commodities are stabilising however labor remains elevated and will exert pressure on the margins over the year ahead. Our development pipeline continues to build and we look forward to adding new restaurants to our network over FY 2025. We also are very actively evaluating M&A opportunities in Europe to accelerate growth and create greater scale. Taco Bell's positive momentum continued into the new fiscal year, with same store sales slightly up in the first seven weeks. We expect the brand will continue with the momentum, and that's FY 2025 benefiting from targeted digital marketing campaigns, strong value credentials and increased media and marketing investments from Collins and Taco Bell International. Like our KFC business units, a higher cost environment, a more challenging consumer environment will impact margins. Restaurant rollout is currently paused, and we will continue to review our development plans against performance milestones.

Importantly, whilst there are short-term headwinds, we remain excited and enthusiastic about our growth potential. We have a strong, experienced management team and operate some of the strongest QSR brands globally. We expect revenues and margins to improve as short term pressures dissipate, and we look forward to creating greater brands, greater scale in our network organically and inorganically. On slide 22, Collins Foods remains well positioned to deliver sustainable long-term Growth, operating World class value brands with the resilient, within the resilient QSR sector, a consistent approach to affordability and long-term performance has enabled us to weather the challenging macro environment better than many of our peers, and we are well positioned to quickly take advantage of market conditions as they improve. We are leveraging our strong balance sheet to expand our network with a proven growth strategy based on everyday value, product innovation and greater flexibility. Finally, I would like to sincerely thank our many stakeholders and especially team members and shareholders, of which I am one and possibly the largest for their continued support. That concludes the presentation. I will now open the call for questions.

Question and Answer

Operator

Thank you. Your first question comes from Peter Marks from Barrenjoey. Please go ahead.

Peter Marks – Barrenjoey

Good morning, guys. Just wanted to touch on the increasing prominence of you guys discussing M&A in both Australia and Europe. Can you just talk through, if that is an actual step change in your intentions? And then just on each of the markets like in Australia, would you look at buying KFCs or perhaps consider a different brand? And then Europe, are you looking at different countries or is it again just focused on KFCs in Netherlands and Germany?

Kevin Perkins – Interim Managing Director and Chief Executive

Well, we're focusing very heavily on KFC at this stage. We're always open to new brands, but we don't see anything much out there that strikes our fancy. So heavily looking at KFC looking for opportunities in Australia and looking for stores that may be up for sale where we can basically buy and build, which have excess capacity to build new stores and we are exploring other opportunities in Europe, in other countries where we see the same sort of situation where we can buy a group of stores and then rapidly expand in those territories. So we're not restricting our thinking to the Netherlands and Germany at the moment, so we are exploring opportunities in neighboring countries.

Andrew Leyden – Chief Financial Officer

Peter, I think just to add to Kevin's comments, just further to our conversation earlier this morning. You know, if you look at Europe, you know, we consider all business in Europe to be subscale. And therefore, we have an opportunity to scale up business profitably. And therefore, I think, you know, if you want to read into that a probably more proactive stance from us. So I think that might be appropriate. Australia remains opportunistic. I think, you know, it's we have scale in Australia, we're on a very profitable business and clearly there are opportunities to add to our portfolio, leverage the DNA that we have supporting that business and that clearly makes the launch of Salesforce.

Peter Marks – Barrenjoey

Great. And then maybe I can just make it another short term question in like I think in the in the outlook commentary you just provided, you talk to the Australian comp being impacted by some planned cannibalization additions of new stores and some early closures of stores. I want to quantify just what that impact was. I know it's only seven week trading period, but it'd be interesting to get like a bit of an underlying read on what the comps doing for the remainder of the network.

Kevin Perkins – Interim Managing Director and Chief Executive

Yeah. Peter, I'm going to invite Helen just to answer that. Why don't you go Helen. Helen Moore – Chief Operating Officer

Hi, Peter. We're seeing a very normal cannibalization profile for our business, so basically we'd expect about 1% each year of impact from cannibalization of new restaurants. We're continuing to see that this year as we continue to expand the network. So that's not uncommon or different. In terms of remodels, we have launched a new program called Supercharged Remodels with reference in the deck. And effectively what we're doing is taking a small number of stores that are undergoing a major remodel and adding additional items like two lanes, three lanes and such like to those restaurants. That program of works. It's slightly different in timing to what it was last year. So in -- in the current seven week period, we have more major stores closed for remodel than we did in the same seven week period the prior year. So that was just a little bit of colour to help you understand the periods of equating that.

Yeah. And so that's -- that's flowing through to that negative 0.8 that's in that, that's not excluded.

Peter Marks – Barrenjoey

Got it. I haven't seen that. Helen Moore – Chief Operating Officer

It's in that number.

Peter Marks – Barrenjoey

Yeah. Andrew, can you quantify it or is it too hard?

Andrew Leyden – Chief Financial Officer

It's probably a bit hard to do that, but it's certainly a different price than the previous year. I mean, the other thing to bear in mind is that they're promotional campaigns for that particular window were obviously also different to last year as well.

Peter Marks – Barrenjoey

Okay. Great. Thanks very much, guys. Kevin Perkins – Interim Managing Director and Chief Executive

Thanks, Peter.

Operator

Thank you. Your next question comes from Sean Thayer from CLSA. Please go ahead.

Sean Thayer – CSLA

Morning, Drew and team. First of all, well done. Great result. Congratulations. My first question is around KFC Australia EBITDA for FY 2025. I think your previous guidance was say expecting improvement in FY 2025. But given the margin pressure you are facing at the moment does not meet the previous guidance will be difficult to achieve. How do we think about these place? Thank you.

Andrew Leyden – Chief Financial Officer

Yeah. Thanks for your question. Look, I think we've been relatively imprecise with guidance because gazing into the future is often difficult. But what I would say about margins moving forward is that if you think about where the consumer's at the moment, the consumer is under a lot of pressure from a discretionary spending perspective. And in that environment, it is difficult to leave a price as a – as a value creator. So we want to make sure that our products remain affordable and other brands protected longer term. And I think you've seen just from the comments that we've made about commodities, that whilst we have a more favourable commodity environment than we had six months ago, there is still less inflation in commodities, despite the fact that some commodities are falling. So oil, for example, is lower, but other commodities remain in a net inflation position, albeit inflation rates are falling, and I would characterise commodities as stable.

So yeah, I think I'll let you do your own Maths on that. But clearly it is very difficult to price in an environment like this. It wouldn't be in the interests of our customers. We want to make sure that we protect our brands for the longer term. So yes, I guess what that means is some short-term headwinds.

Sean Thayer – CSLA

Yeah. Thank you. That's very useful context. Thank you. I think my question is around your digital sales still achieve a very, quite significant growth for KFC Australia you're sitting at 30% now? I mean Europe, that's about 60%. I'm just curious to know what sort of a realistic number you can grow for Australia and what sort of the margin implication associated with these place.

Andrew Leyden – Chief Financial Officer

I may tell you here, we're not going to show margins by channel. But I would highlight that the significant difference between the European and Australian numbers largely reflects the scale of the kiosk network, and we have highlighted it in the presentation and we have highlighted it in the presentation. That's something we're looking to expand in Australia. We also have a much happier reliance on drive-thru, of course in terms of our format in Australia too. And one thing I would say in terms of the acquisition of customers and the adoption of the digital channel, much of that has been driven by our own plans and campaigns, but also by consumer behaviour, where they are realising that being part of the app is the equivalent of being part of a loyalty program and obviously they get really great value offers through the app. So part of what you're saying here is as consumers are feeling more challenged, they're finding ways to get better value from KFC.

Operator

Thank you. Your next question comes from Tim Plumbe from UBS. Please go ahead.

Tim Plumbe – UBS

Hi, guys. Can you hear me?

Kevin Perkins – Interim Managing Director and Chief Executive

Yes. All good, Tim.

Tim Plumbe – UBS

Yeah. Great. Great. Just two questions for me, if possible. The first one, just in relation to chicken pricing and thinking about the input costs for chicken and obviously putting bird flu risk aside, how are you thinking about the outlook in terms of chicken pricing for the next 12 months? And I guess I'm just thinking about, if I remember correctly, you guys renegotiated contracts earlier to help out the chicken producers when things were a bit tough there. So how should – how were you guys thinking about the next 12 months?

Kevin Perkins – Interim Managing Director and Chief Executive

Yeah. I'll jump in on this one. So, I mean, obviously, when prices are high, we tend to go short; when prices are low, we tend to go long. So I'll start with that and say that there's an opportunity for us to work with suppliers on some longer term relationships right now. Commodities are in our favour. We've recently added a fourth chicken supplier to our supply base, and they're performing really well. And in addition to that, a couple of our longstanding chicken suppliers have also invested in additional capacity, which will be coming on board in the next few months so a net result of all of that is we're feeling quite comfortable about our outlook for chicken prices, but obviously that's probably as much as I can share in this environment.

Tim Plumbe – UBS

Got it. That's Kevin, just with respect to Europe alone, we have a lot of focus on the Australian market. But with respect to Europe, I characterise commodities as probably even more favourable than they are in Australia at the moment. Coming off extreme highs I guess post-COVID. So energy prices are lower, some commodity prices are in deflation, others are in moderate inflation but falling. So I think we have an even more favourable environment in Europe notwithstanding some of the consumer pressures that are impacting on sales. So Hans ultimate, there's anything else that you wanted to expand on

Kevin Perkins – Interim Managing Director and Chief Executive

No, I think that's correct, Andrew. We've seen chicken come down to a reasonable level after we also faced bird flu pandemics in Europe. So that's going to be normalised over the next year, probably all the rest. I think it's also oil that comes down quite a lot. On the other hand, our wages have increased quite, quite significantly over the past two years, with above 20% in both territories. So this is something that will be continuing to influence our margins. But yeah, on the – on the quality line, we are getting back on track.

And I guess we're fortunate in the bird flu was only in the flocks bred for eggs. They're not in flocks set for chicken meat. So it's not in that category yet.

Tim Plumbe – UBS

Yeah. That's great. Thanks, guys. And just the other question in relation to newbuilds, I think you mentioned nine newbuilds in Australia. Is there a number that we can think of is targeted in Europe? I think you said doubling in Netherlands. So that puts it at a minimum of six. But how should we think about the rollout in Germany?

Kevin Perkins – Interim Managing Director and Chief Executive

Yeah. So, Tim, I think about mid-single digits probably where we're aiming for. I think you're aware of some of the challenges of developments in the Netherlands in particular. The approval process is longer than we'd like and getting energy is a bit of a challenge. So if you think in the mid-single digit range, you're probably not far off.

Tim Plumbe – UBS

Got it. And just confirming that's mid-single digits for Europe.

Kevin Perkins – Interim Managing Director and Chief Executive

Yes.

Tim Plumbe – UBS

Got it. Great. Thanks, guys.

Thank you. Your next question comes from Ross Curran from Macquarie. Please go ahead.

Ross Curran – Macquarie

Hi, team. First, I just want to say how sorry I was to hear about Chris and his family. And Kevin, I want to thank you for stepping into the role at short notice under difficult circumstances. Can I come back right to the start, to Peter's question around M&A and just flesh that out a little bit, perhaps? Can we frame it around your experience as a master franchise operator in the Netherlands and how that might have coloured your views on M&A and potential for a master franchise structure in Australia if you've had the conversations with your team around that.

Kevin Perkins – Interim Managing Director and Chief Executive

Yeah. So I'll take that one initially and then, you know, feel free to chime in Kevin. Look, irrespective of the market structure, we, you know, we like building restaurants when the returns on those restaurants are favourable. So, you know, whether that's a structure like the CFA or, you know, the DA structure that we enjoy in Australia, if a market is profitable and it has characteristics that are attractive, we're prepared to invest in it. So I wouldn't necessarily determine a desire to build based on market structure. I think we'll do that based upon the attractiveness of the market and the relative competition. So that's the way we're thinking about it. I think I'd characterise our stance as a little bit more proactive than it previously was. Obviously it's opportunistic in Australia. In Europe we have a probably a bit more of an intent to extend our footprint given that we consider ourselves subscale. And all of that we have to do with our partners, of course, and make sure that work that we are doing to build out our footprint aligns with their plans as well. So I think that's the way to think about M&A activity both in Australia and Europe.

Yeah, and I think the master franchise agreement for Australia is probably a long, long way off if ever. It is a market that does build and operate company stores to maintain some of their operational expertise and talent within the organisation. And it's a very important market for them, so I don't think that would be an option in the next 10 years to 20 years. So I think we – at the M&A opportunities Australia was some of the franchisees probably ready to retire and when they are we're ready to grab them. And in Europe I think it's more targeted as and it was just saying is we need to build scale in Europe and buying and building in the appropriate markets. We will accelerate that.

Ross Curran – Macquarie

Sure. Sure. But actually you've given yourself a lot of balance sheet flex today versus, say six months ago. When we're thinking about the size of M&A, given you do have that balance sheet flexibility now. Are we talking about a handful of stores of time or are we talking about something transformational?

Kevin Perkins – Interim Managing Director and Chief Executive

Look, it depends on the structure of the market. There are certain markets where you have franchisees, franchisees that may want to exit and there are a handful. There are other markets where you have franchisees that are running more developed networks. And I think it really more developed networks. And I think it really just depends on the markets that we want to penetrate so that the structures are very different market by market.

But you're right, we have got the structure ready to go as we explore these opportunities.

Ross Curran – Macquarie

Terrific. Thank you very much.

Operator

Thank you. Your next question comes from Ben Gilbert from Jordan. Please go ahead.

Ben Gilbert – Jarden

Good morning. Kevin and Andrew. This was the first one for me. Just I don't want to get to sort of short term, week to week, but you've obviously put a lot of sort of fixed price points or sub AUD 10 out and probably stepped up promotional intensity, as is McDonald's over the last couple of months. And anecdotally, I just came on if you say consumers respond to that. Do you feel that we're starting to see a bit more life coming back to us? Are you getting more value positioning, right market and share starting to lift again? Because it seems like there's been quite a good consumer response in the last couple of months.

Kevin Perkins – Interim Managing Director and Chief Executive

Ben is your question specific to Australia or

Ben Gilbert – Jarden

Sorry, specifically to Australia, but interested in Germany as well – as well?

Kevin Perkins – Interim Managing Director and Chief Executive

Ben I mean certainly in Australia I would say consumer behaviour is constantly changing and quite challenging to predict. So what we tend to see is that our promotional campaigns are performing very well. But what we also see at times is that it's causing some trade down from our existing consumers into those promotions. And whilst we seek to offset everyday great seem its many prices with it reach the of throwing that behaviour and see much of that based on campaign Came at that campaigns so we got already strong plan a year ahead, and that's really focused on that cooperate support the everyday value where we remain one of the most affordable QSR player in the market, and combined with great value promotion to obviously bring new customers in. And also innovation, which we're saying is increasingly appealing to consumers in the current environment. So you'll see more of that coming through in our plans too.

So it answer your question.

But yeah. Does it feel like it. So it sounds like it's still quite volatile week to week depending on whether the promotions and the people try to down. And the focus is just around consistent innovating across categories.

Yeah about a lot of the consumer is definitely under pressure. And you know, there is volatility week to week, but the consumer is under pressure. You know, whichever macroeconomic statistics you look at, I think that's confirmed. And I think consumers are looking to secure value. Well, whatever their purchases, I'm not opposed to give us a [Technical Difficulty]

I think one of the opportunities we're exploiting says that KFC has an advantage in abundance value. Working class families have been hit and we think we can put together packages. We can feed a lot of food to a family in an bundle manner where it's not that much expensive per person, feed the kids and stuff. So I think it's much harder for our competitors to play in that market. Will be exploiting that a little bit more, I think. But is one of our distinct advantages. But generally speaking, you could say the transactions are stable and I think that people are spending less.

Ben Gilbert – Jarden

That's very helpful. Just a second one for me if I could. Just around the relationship with Yam, obviously very strong global relationships, but they control the pricing obviously in consultation with yourselves and the other partners in Australia. How much visibility does that give you around your gross margins? Like they're obviously up. How much visibility does that give you around your gross margins? Like they're obviously up about 30 basis points for this period, but does it take a lot of that volatility and risk around discounting because you're making a step into support? And really the big focus to GUP is more empathy that they try to understand the visibility you've got around your gross margins and pricing the next 6 to 12 months. Kevin Perkins – Interim Managing Director and Chief Executive

Yeah. Well then I think, we've probably got a better visibility than if we didn't have that support from Yaminar. So they do share how inputs are moving. They do share the pricing environment that we're operating in, how customers are feeling. And we -- we obviously have those conversations in collaboration with them around how we should react to that. So yeah, we do get reasonable visibility, probably visibility about call share on this call. But yes, I think it's fair to say that we do get good visibility and see how that may impact margins. Clearly so uncertain the way consumers reacts, as Helen pointed out, changes from periods of period, particularly when things are tight. So, yes, we get good insights, but, you know, it allows us to have a view into the future. But as Helen pointed out, it is quite difficult to predict how margins will move.

Operator

Thank you. Your next question comes from Sam Teeger from Citi. Please go ahead.

Sam Teeger – Citi

Hi there. Good boarding, Kevin, Andrew and team, thank you for the presentation. Just a question on the new small format in the Netherlands, how many of the openings you're planning in 2025 will be in this smaller format? And how do the key metrics such as CapEx sales per store and margins compared to an average store?

Kevin Perkins – Interim Managing Director and Chief Executive

And you're up. Yeah, well, I think it still is a low number of those new store openings in the Netherlands. It's a trial. I think it's showing signs of success. Building costs are obviously a little bit lower, but not very much. I think it's more the operating costs of those stores that make a difference. So we're still testing in cooperation with .

So I'm not sure we're going to open one in the next year, but I think we can say that it is a successful model for the future as we struggle to get bigger trade zones, get to life in the Netherlands, or for smaller trade zones, this might be a good solution for the future.

Sure. And just while we're on Europe, can you please help us understand how the outlook has changed for you to book the AUD 2 million impairment? I'm conscious that despite the company increasing its longer term revenue growth assumptions in the impairment testing this year, the audit still wanted an impairment, which suggests there's not a lot of headroom between a carrying value and recoverable value going forward.

Yeah, I can say that one. Yeah. So look, we test at an individual restaurant level for impairment. So it's a fairly punitive test. And there is one restaurant that was operating in the Netherlands that now has a lot more competition around it than they previously had. And the cash flows that come from that restaurant once we discount than we thought it was appropriate to impair that restaurant. So it's a very it's a very isolated issue. It's certainly not indicative of conditions in the Netherlands more generally, specific conditions that relies on one particular restaurant.

Okay. And then just kind of just finishing off with, you know, you touch it a little bit, but maybe just we can flesh it out a bit more. One more strategic question. thinking about how you're going to go into 2025, given the consumer is still under a lot of pressure, as you mentioned, is now the time to use your scale, invest a lot harder into price and cause some pain to take some share from your smaller competitors. So longer term, the competitive landscape is a lot more favorable?

Sorry. Just confirming your question relates to taking price to take share from smaller competitors?

Sam Teeger – Citi

No. Invest in user scale, invest harder into price, which then translates to taking share from some of your smaller competitors.

Kevin Perkins – Interim Managing Director and Chief Executive

Yeah. Look, it's a good question. I mean, we always try and maintain that balance between being affordable for consumers and having an offer that resonates. And I think you can see in our strength in holding and gaining share across Australia, in Europe. We are leveraging our scale to enable that position at this stage.

Yeah, but we don't want to get into a price war and race to the bottom either.

Operator

Thank you. Your next question comes from James Ferrier from Wilsons Advisory. Please go ahead.

James Ferrier – Wilsons Advisory

Thank you. Firstly, well done on your outstanding cash flow performance. I probably should get in that.

Kevin Perkins – Interim Managing Director and Chief Executive

Thank you, James.

Andrew Leyden – Chief Financial Officer

Thank you, James.

James Ferrier – Wilsons Advisory

First question is around FY 2025 margin comments. So noting the change from six months ago where you were expecting improvement into FY 2025 versus today expecting that margin pressure to persist. You commented earlier that price increases are unlikely in the current consumer environment, but has there been any change in your view for cost line like labor, et cetera., going into FY 2025 again relative to your expectations six months ago? And perhaps if we could get a comment on both Australia and Europe, please.

Andrew Leyden – Chief Financial Officer

And in relation to Australia, the cost base of our business is pretty much in line with what we expect, if you will obtain the minimum wage increase. That was broadly in line with what we expected and from a commodity perspective we have a very detailed and comprehensive model and the vast majority of our commodity prices are in line with what we expected as well. The real volatility in margins is coming from the top line, as you would have seen in our first seven weeks performance where the consumer environment is increasingly challenged and whilst for holding share, the entire category is challenged right now and that's what's causing the compression.

Andrew Leyden – Chief Financial Officer

Yeah. And James, I think similar conditions in Europe, albeit their commodity environments, definitely are more favourable in that market. Yeah, I think, you know, we're probably seeing a more sustained level of pressure on consumer spending than we probably conversed on six months ago. So that is lasting longer. I think it was probably an expectation that we might get some relief through things like interest rates, which has clearly slipped back towards the back end of the year. So the consumer is under pressure. They've been under pressure for longer than we had expected. And as Helen pointed out, that's really more of a top line issue than it is about custom.

James Ferrier – Wilsons Advisory

Yeah. Okay. Thanks. And Andrew, to confirm, when you talk about KFC Europe being relatively more favourable on commodities, are you comparing that to the view that management had six months ago or are you comparing that to KFC Australia?

Andrew Leyden – Chief Financial Officer

Well, arguably it's a little bit of both. I mean, I think we definitely have seen some favourable movements in commodities relative to where they were and I think, you know, if you think about commodities in Australia. They are stable whereas we've seen some deflation in Europe. It's probably smarter and more favourable but then you have as Hans pointed out earlier in some of the other inputs, like labor, which is obviously a very large line for us. We've endured a 20% increase over two years on minimum wages in the Netherlands, for example. So yeah, you know, puts and takes I guess is probably the best way to describe it. But we've had better movement in cost of sales and clearly we've had unpredictable movements in

James Ferrier – Wilsons Advisory

Yeah. Understood. On the M&A front, perhaps taking a slightly different tack here. You've got a master franchise in place now and not columns that there's a separate master franchisee in place in Germany. And that's been in place now for a little while. I'm just wondering how your thoughts have evolved around opportunities to reconsider new store openings alongside that master franchisee and just how that dynamics is evolving.

Andrew Leyden – Chief Financial Officer

Yeah. So I think I made my hands in a second, but I think it is taking some time for plans to form, I guess in Germany in terms of how that market is going to be operated by the master franchise partner and we were continuing to work with that partner in terms of development opportunities for that market. But I think look, I think it's fair to say it is taking longer for plans to be -- to solidify and really that, you know, until that happens, it's very difficult for us to determine exactly how we will, you know, participate in the development of that market. We still really like the market. It's a really attractive market from a fundamentals perspective. But I think it's going to take us some time to understand the role that we play in collaboration with the partner.

I don't have anything else Andrew you want to add.

No, I don't think so. Bottom line is west rest restaurants need to build restaurants in these parts to build with them.

So at some point, probably there will be more opportunities for us as well to sit at a table.

So there is nothing changed in terms of our appetite for the market, I guess, but probably fair to say that it's taking longer for us to establish exactly how we're going to play within that market.

James Ferrier – Wilsons Advisory

Yeah, understood. Thanks, Andrew. Just one last one if I can sneak it in while you've got the floor to Andrew. Maybe just your expectations for FY 2025 around some of the line items like DNA, CapEx, interest expense.

Andrew Leyden – Chief Financial Officer

Yes. So. I think with this release, I think we've probably given the market a little bit more colour on interest. Interest is obviously a big line within the P&L, given that we now have lease interests running through that caption as well. And I think hopefully our release has given the market a bit more clarity on what lease interest looks like and what bank interest looks like. G&A look, we have invested in G&A for a couple of reasons. You know, we thought we were a little underweight in terms of some capability that we wanted to inject into our particular support structure. And of course, we've put the resources into our European business in anticipation of scaling that market. So most of those investments are now made and we can continue to leverage those investments moving forward with scale. The other line that you mentioned was a combination of CapEx and DNA.

Yeah. So CapEx look, DNA is a function of obviously leases and the CapEx that we invest, our CapEx has been relatively stable. I expect it to be relatively stable in the coming year. We have seen some inflation I expect to be relatively stable into the coming year. We have seen some inflation in construction costs. Obviously, that's been a feature of life in Australia for a little while now since COVID. But overall our CapEx I expect will be within a similar balance to the last couple of years, possibly a little higher, it's really driven by the number of remodels that we initiated in both Australia and Europe. Clearly coupled with the new builds that we put in place and I think we've given some guidance there.

James Ferrier – Wilsons Advisory

Yeah. Understood. Thanks very much for your time.

Operator

Thank you.

Operator

Your next question comes from James from Morgan Stanley. Please go ahead.

James – Morgan Stanley

Hi.

Kevin Perkins – Interim Managing Director and Chief Executive

Good morning, James.

James – Morgan Stanley

Hi. Good morning. So I'd just like to understand a little bit about the plans on leadership succession. Can you maybe update us on progress there, what the plans are, what sort of characteristics or background you're looking for in the next leader for Collins,

Kevin Perkins – Interim Managing Director and Chief Executive

Well, it's a good question. I – the board is actively going to start the process now that we've got finality on what crew's intentions were, because we always assumed they would come back. But unfortunately we can't. So they're going to do both an internal search. Well, we've got a couple of good candidates as well as explore what's out in Australia and globally. You know, I could probably, you know, obviously experience leadership, understanding strategic plans, good leadership, a balance of probably operating experience as well as strategic experience. What else to go on? That's a tough question. But, you know, they'll do it given the major responsibility to support is to hire and fire the CEO. So they're going to do a pretty thorough search. I mean, we've got a good team working on it. I know there's outside advisers. I think applications have started flowing in already from different interested people. But undoubtedly, it's obvious if the decision is an outside candidate that will probably be currently employed, which means you might be stuck with me for a few months longer than we would. But we would all like that, but that's kind of where it's just a normal process. And they'll be very thorough.

James – Morgan Stanley

Perfect. And then maybe just one other one. It seemed like the messaging on Taco Bell was a little more open to future deploying of capital into that brand. Can you maybe help us understand what hurdles you have to achieve, especially in markets where, like Victoria, where you said that it's gone much better than average in order to put the next dollar of capital to work?

Kevin Perkins – Interim Managing Director and Chief Executive

Yeah. I think we're working closely with Taco Bell International, both at the Irvine level, head office level as well as in the regional level. And we're working on maybe a closer partnership to try and develop the brand here. We're not ready to say go yet, and I'm not going to announce what those particular milestones are. But we think when we reach a certain level where we have much more confidence in the brand itself that we will start to open up to build stores again. We're not at that point yet, but we're very confident we'll be able to get it there. but we're very confident we'll be able to get it there.

James – Morgan Stanley

Perfect. Thanks, Guys.

Operator

Thank you. Your next question comes from Natasha Wensley from Paradise. Please go ahead.

Natasha Wensley – Paradise

Hi. So you have noted both an increase in the price of chicken and also an increase in the demand, especially in the Netherlands, for vegetarian products. These two trends seem to coincide to suggest your menus, at least in Europe, should have more vegetarian options. So say, for argument's sake, entertain vegetarian based menu in the future. Would you anticipate this posing any risk to your brand image being one built on fried chicken?

Kevin Perkins – Interim Managing Director and Chief Executive

You might have to just repeat the first part of the question. I was just trying to work out what the implication of the first part of your question was. Could you just repeat that?

That was possibly just the reason why you would think go forth with a vegetarian based menu would be that there's an increase in the price of chicken. And also the people in Netherlands is known to demand this vegetarian offering.

Okay, Lindé handle the second. So we haven't introduced vegetarian options because of the economics of chicken. We've in that market. I mentioned earlier, there's a lot of flexitarians who want choice and want to have access to some broader options on the menu. And we provided them. But it isn't it isn't driven by chicken pricing in any way, shape or form. It's more about providing choice. And you might just want to make some comments on vegetarian options in the Netherlands and consumer preferences.

Yes. I think I think it's fair to say that vegetarian options are increasingly important for consumers. So we are always looking at more options going forward. We are actively looking at more varieties on our -- on our vegetarian layer right now. So, yes, we are exploring more options. We are following before, of course, the consumer trends and also competition on that.

So, yes, we are exploring more options. We are following before, of course, the consumer trends and also competition on that. I think it's fair to say as well that we still the mix of vegetarian products relative to our core menu is still relatively low. So is the choice that is available, but it doesn't dominate the mix in any way.

But it is important for the brand as we represented.

Yeah. Sometimes those sort of products help in the veto vote. There's one person that is a vegetarian. Then they say, I want something for me to eat so that the group doesn't go. It does help a lot in that category.

That it's never been a mainstream product for us.

Kevin Perkins – Interim Managing Director and Chief Executive

So that's it. Well, thank you very much for the quality of the questions this morning. Thank you very much for your support and thank the shareholders for their support over the last year. And we look forward to meeting many of you over the next few days. Thank you. Operator

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.