Thanks, good morning, everybody. Appreciate you all joining us for Endeavour Group's Financial Year 2022 results announcement. As mentioned, I'm Steve Donohue, and I'm the Group CEO and Managing Director for Endeavour Group, and I'm joined today by Shane Gannon, our Chief Financial Officer. I'd like to begin by acknowledging the Gadigal people of the Eora Nation as the traditional custodians of the land on which we gather today and pay my respects to their elders, past and present.
I also extend that acknowledgement and respect to any Aboriginal and Torres Strait Islander peoples listening in today. Before I step through some of the details of our results, I wanted to just take a moment to acknowledge that it was a really tough year, not just for us at Endeavour Group, but actually for everybody throughout Australia.
We had a continuation of the COVID-19 pandemic, which brought the challenges of further lockdowns and restrictions, and on top of that, we had devastating floods. For many Australians, this was also a time when they became, unfortunately disconnected from family, friends, and their communities.
That's part of the reason why we take our purpose of creating a more sociable future together so seriously. It's also why we're really excited to play our part in creating products and places and experiences that bring people back together. Something I'm happy to report we're seeing more and more of in our hotels right now. I'll step through to our group highlights for the 2022 financial year, which Shane will expand a bit later in the presentation.
Overall, the team delivered a strong financial result that reflected the resilience of our business and the natural hedge between our retail and hotel segments, as well as the tenacity of our team. Total sales were AUD 11.6 billion, which was broadly in line with the previous corresponding period. EBIT was AUD 924 million, up 2.8%, despite the inclusion of new corporate costs, which were not incurred in F2021. Profit after tax rose 11.2% to AUD 495 million. Importantly, the business continues to generate strong operating cash flow, which was AUD 949 million for the period, allowing us to continue to invest while also delivering a full-year dividend to our shareholders of AUD 0.202 per share.
The dividend payment equates to a full-year payout ratio of 73.1%, which is in line with our payout guidance of 70%-75%, which we provided at the F2021 annual general meeting. If you jump forward to the slide reflecting our first year as a listed business, and you'll see that, as it was our first year as an independently listed company, we did achieve a lot. Now, the team certainly achieved a lot throughout the course of the year, and I won't go through all the detail on that slide, but the key point is that despite the distractions of demerging and listing and everything else that happened throughout the course of the year, the team were able to maintain really positive momentum across the business.
A couple of things I'll call out, though, is that we've continued to enhance and expand our network, adding 32 net new retail stores and five new hotels. At the same time, we've renewed 81 retail stores and 40 hotels. We also maintained our trend leadership and met customers' evolving preferences through a commitment to innovation, supported by strong partnerships with our suppliers and the expansion of our Pinnacle Drinks portfolio. Perhaps most importantly, our team actually improved their customer engagement and satisfaction scores across all of our businesses, despite the challenges of lockdowns, rapidly changing restrictions, trading restrictions, team shortages, and supply chain challenges. We jump forward to the retail segment performance.
The retail business achieved sales of AUD 10.1 billion and EBIT of AUD 666 million, both broadly consistent with the strong COVID-affected performance experienced in the prior year. In the first half, our sales performance was assisted by the switch to at-home consumption, reflecting the various COVID restrictions that prevailed at the time. In the second half, we saw the normal seasonal sales shift, accentuated by the reopening of on-premise venues. We also experienced an increase in supply chain costs through the second half. Looking beyond the impacts of COVID, some themes were consistent throughout the year, such as customers continuing to embrace discovery and drinking better, driving the increasing popularity of craft and local ranges and the trend towards premiumization.
We also continued to build for the future, enhancing our digital customer engagement platforms and introducing new retail formats such as The Cellar by Dan Murphy's and Dan Murphy's new Neighborhood stores. As a final note in our retail segment, I'd add that throughout the year, our stores and online, I should say, we retained our focus on areas of profitable growth, despite an increase in competitive promotional activity, particularly in the second half. If you move forward to slide nine in the presentation pack and the drivers of our hotel performance, we delivered sales of AUD 1.5 billion and EBIT of AUD 315 million, up 20.7% on the prior pandemic-affected year.
Of course, the most significant influence on the performance of the hotel segment, as was the case for our retail segment, was the impact of COVID-19. Over the course of the first half, there were only about 30% of days where all of our hotels were open, and beyond impacting our financial performance in the half, this also placed extraordinary pressures on our team, with multiple closures and openings through the period. In the second half, after an initially slow start due to the Omicron outbreak, customers began enthusiastically coming back to our hotels, and this led to very strong sales and a financial outcome in the period, with solid contributions across gaming, beverages, food, and accommodation. This recovery was, however, not without challenges, particularly the continuing issue of team shortages.
Overall, it's been a tough but rewarding 12 months for the hotels team, which makes it particularly pleasing to see our voice of the customer measure improve on the prior year, an outcome that speaks volumes about the exceptional commitment of our frontline team members. Stepping forward to the slide talking to our digital business. A key part of investing for the future is building out our digital and data capabilities, which unlock efficiencies across the business and also drive significant new growth. When it comes to efficiency, we know there's an ongoing opportunity to enhance our pricing and promotions capability by leveraging data to help make better decisions. We equally think that there remains a great opportunity for us to unlock growth through expanding personalization.
In particular, we think there's opportunities to continue to drive online sales, unlock unique and accessible marketing opportunities, and diversify our revenue streams. These opportunities are underpinned by the strong foundation of our 4.5 million active My Dan's members and around 260,000 monthly active users of the BWS app, both of which pleasingly continue to grow. In F2022, online sales grew 17% to exceed AUD 1 billion for the first time. Importantly, online sales are increasingly profitable in F2022, driven by scale, operating efficiencies, and more premium baskets, which are being driven by more personalized offers. We also expanded our online customer offers in the year with the launch of Dan Picked, our new subscription offering, and the innovative Dan's Gifting Hub. Our investment in digital isn't limited to our retail business, though.
Hotels, though earlier in their journey, have now seen more than 3.7 million order and pay at table transactions following the rollout of this service through the year. On to Pinnacle, and our F2022 highlights. As a reminder, of course, our Pinnacle team create, build, and manage a portfolio of drinks brands which are sold through Endeavour Group's channels and also through key strategic distribution partners. In the twelve months of the reporting period, we launched 479 high-quality new Pinnacle products, and I emphasize the word quality here, given our strategy to premiumize our portfolio in line with customers' increasing preference to drink less, but to drink better. The quality continues to be recognized by third parties. In F2022, Pinnacle Wines received over 560 awards, including 19 best-in-class trophies.
Some of our wines deserve special mention, and I'd like to call out a couple. Firstly, the Ethereal One Grenache 2020, which is only about AUD 15 a bottle and was the first Australian wine to win the International Grenache Trophy at the 2022 International Wine Challenge. Of course, one of our flagship wines, the Oakridge 864 Chardonnay 2019 vintage, which was awarded equal top-rated Chardonnay in the 2022 Halliday Wine Companion Awards. While those awards are great to receive, the most important thing is that customers love Pinnacle products. With over 70% of our customers having purchased something from the Pinnacle portfolio in F2022.
To further emphasize our commitment to the growth of this business, we expanded our premium wine footprint with the acquisition of Josef Chromy Wines in April 2022, and more recently, Shingleback Wine earlier this month. Just before I hand over to Shane to talk to the numbers, I just wanna touch on the update we've provided today on our sustainability journey, and we've got some good early progress to share. I think everybody knows that at Endeavour, we're committed to leaving a positive imprint on each other and on the communities we serve. In October last year, we launched our first sustainability strategy, which was central to our purpose of creating a more social future together. Today, we released our first sustainability report, which details our progress to date.
I won't read out all the examples of progress on that slide, but just to highlight a couple. In F2022, we established our own program of leading in responsibility training. We want all of our team members, whether they're frontline team or support team members, to do that sort of training, and this in particular, because it's a key part of embedding a deep culture of responsibility right across the group.
We're also placing greater importance on community engagement, whether that's through our ESG reviews of all acquisition opportunities or through the increased community consultation that we're generating with the help of groups like our new Darwin Community Advisory Committee, which is a panel of diverse community leaders that are working with us up in Darwin. I'd encourage you to read the report alongside our first modern slavery statement, which was also published today. Now I'd like to hand over to Shane, who's going to go through the financial aspects of the results in more detail. Over to you, Shane.
Okay. Thanks, Steve, and good morning, everyone. I'm very pleased to be able to share with you our F2022 financial results. Our first full year results as an independently listed business. Endeavour Group's financial results demonstrate our ongoing focus to ensure sustainable earnings and distribution growth, combined with maintaining a strong balance sheet. The balance sheet positions us for long-term stability and equally provides financial capacity to support our development and growth opportunities, both short and longer term. As you can see from the financial result highlights, we delivered strong results in F2022. Steve's already stated this is particularly impressive in light of the challenges we experienced trading through COVID and severe and disruptive weather events. I will not go through everything on the slide, but select as a group notable highlights.
First of all, the sales of AUD 11.6 billion, in line with the previous financial year's elevated levels, and is up 15% on financial year nineteen, the last non-COVID full year comparative period. Our earnings per share of AUD 0.276 per security, an 11.3% improvement on the prior period. We declared a AUD 0.77 per share final dividend. When you combine this with the interim dividend, it equates to AUD 0.202 per share distributed to our shareholders in the year. Our strong cash and capital position represented by operating cash flow of AUD 949 million in the year, and debt headroom of just under AUD 1 billion.
We continue to invest in the growth of our business, both short and long term, while achieving a return on funds of 11.4%. Turning now to the group profit outcomes. As mentioned earlier, we have delivered a strong group performance with net profit after tax up 11.2% on the prior year. Underlying this at a group level, EBIT AUD 924 million represents a 2.8% improvement on the prior period. Dissecting the three key segments of our operations. The strong performance was underpinned by the retail segment, where we maintained EBIT AUD 666 million, which is in line with a very robust F2021 result we achieved.
Our EBIT from the hotel segment, AUD 315 million, was AUD 54 million higher than F2021, primarily reflecting the recovery in the second half of the year as COVID restrictions were removed. Other EBIT segment result, which is predominantly corporate costs, was -AUD 57 million. This is in line with expectations set out at the time of the demerger from Woolworths Group and represents our first full year of trading independently. The finance costs were reduced by AUD 42 million, where we benefited from the lower interest rates we locked in at the time of the demerger. As we communicated at the time of the demerger, we intended to and we have continued to invest in line with strategy, including building a strong technology infrastructure to underpin the Endeavour business.
This investment, including enhancing our digital platforms and standalone technology, is increasingly expensed within the P&L. Turning to our next slide and focusing on the retail segment performance. Our retail sales in F2022 were broadly in line with F2021, with COVID impacting both years. Looking through the impacts of COVID, sales have grown strongly over the medium term and are up 19.3% on F2019, which was the last pre-COVID comparative period. Retail gross profit margin, 23.2%, represented an improvement of 89 basis points compared to F2021 and was underpinned by the premiumization, which we spoke of before, a shift to higher margin new products, the demand for Pinnacle Drinks products, and a lower level of promotional activity in the market.
The margin gains were strongest in the first half, driven by the lockdowns of hospitality venues, positive consumer trends, and reduced competitive promotional activity. The second half saw an increase in supply chain costs and an increase in promotional activity compared to the first half. Our cost of doing business as a percentage of revenue with 16.6% increased by 86 basis points when compared to F2021.
The increase, primarily in the second half, reflects seasonal deleverage as fixed costs are fractionalized over a longer, lower sales base. The second half increase also reflects the higher levels of operating expenditure in the technology, which I called out in the previous slide. During the year, we also experienced other cost challenges due to COVID-19 impacts, staffing constraints, severe weather events, and normal salary and wages inflation.
Importantly, our efficiency initiatives, such as our successful Simpler for Stores program, were able to deliver productivity savings to mostly offset these cost challenges. Now moving on to our hotel segment. The hotels posted a strong result considering the extensive challenges encountered, particularly across the first half of the year. The key points to highlight here are sales for the hotel segment were AUD 1.5 billion, 6.6% ahead of F2021, and they reflected the more extensive COVID-related closures in F2021. The gross margin remained stable at 85.1%, and the cost of doing business as a percentage of sales, 64.2% improved by 236 basis points. That's just benefiting from higher sales and therefore improved operating leverage combined with some cost management programs.
The higher sales flowed through to deliver a much stronger EBIT at AUD 315 million, which was 20.7% higher than F2021. I should call out, looking forward, we expect hotels to continue to recover in F2023. Beyond normal operating costs, we remind investors that changes to the Victorian gaming taxes and gaming machine entitlements will have an impact on our P&L in F2023. We estimate this to be in the vicinity of AUD 20 million at an EBIT level. Looking at headline sales performance of our two trading segments side by side just demonstrates the natural hedge we have experienced across the pandemic and highlights the resilience of the group. Retail sales remain well ahead of pre-COVID, up 19.3% over three years, while hotels were down 7.9% over the same time frame.
Moving on to cash and liquidity. Endeavour is a highly cash-generated business. Our cash re-realization ratio in F2022 was 93%, reflecting the strong operating performance and disciplined approach to cost management. The cash realization ratio is lower than last year, but it's primarily due to payments relating to historical pay remediation and the timing of income tax payments made in F2022. We retain a strong funding position with net debt of AUD 1.2 billion, which is actually AUD 56 million lower than the end of F2021. As I mentioned before, we have significant headroom with undrawn debt facilities of AUD 985 million, as well as some material cash balances as well. Looking at the return to shareholders. We recently shared our capital management framework with the market. The slide updates it for our performance in F2022.
You may recall, as I described at our Investor Days in May, we are fortunate to start in a very good place with a well-capitalized balance sheet and a business that's delivering strong operating cash flow. The strength of the framework starts with a strong cash realization. This has allowed us to sustain our core business and invest in a range of short, medium, and longer-term growth opportunities, while at the same time maintaining our investment grade credit metrics. We also delivered substantial distributions to shareholders, equating to a payout ratio of 73.1% for the year.
In F2022, the business demonstrated its resilience in tough times, and its ability to sustain growth and create shareholder value. We're growing our EBIT ahead of sales, delivering a return on funds employed of 11.4%, earnings per share growth of 11.3%, and a dividend yield of 3%, which is fully franked. Now to capital expenditure. We invested AUD 349 million in capital expenditure in F2022, which is up AUD 37 million compared to F2021. We have continued our successful renewals program, completing renewal projects at 40 hotels and 81 retail stores. We made further investments in the electronic gaming machine fleet, reducing the average age of the portfolio to 6.8 years, which is significantly reduced from the 9.6 years at the beginning of F2021.
We have grown our network through 32 new retail stores, the acquisition of five hotels, and as Steve mentioned, we continue to invest in our Paragon Wine Estates business. This year we acquired Josef Chromy Wines in Tasmania, and after the balance date, we acquired the Shingleback Wine in McLaren Vale. We have also invested in our endeavourX and digital capabilities in line with our strategic priorities. This represents a smaller portion of our capital expenditure, but as I indicated earlier, a growing portion of technology and digital investments are operating expenses, forming part of our cost of doing business. Looking forward, our investment plans for F2023 and beyond remain consistent with the strategy we spoke to at our Investor Days in May. We will continue to invest and to enhance our leading customer offer in both our physical and digital networks.
We are in the early stages of unlocking the major property development opportunities. Progressively, we will keep you informed of our progress in this regard. We are accelerating our program to develop standalone technology platform, which is likely to increase both our capital and operating investment levels in F2023. In closing, I wanted to provide a case study of our renewal program and the return profile that we achieve with this type of investment program. We undertook the renewal of the Sunnybank Hotel, which is in Queensland, back in March 2021, and we completed the project in July of the same year. The total investment in the hotel renewal project was approximately AUD 3.1 million.
That renewal involved upgrading the dining room, patio, and sports bar, the renovation and extension of the gaming room, and transforming office and storage space into custom areas. At the same time, we coordinated upgrades to the co-located Dan Murphy's store and BWS drive-through. Since the renewal, we have seen food and bar sales increase by greater than 40%, and the gaming room is now one of the most successful in Queensland. Overall, the renewal has already demonstrated a return on investment which is well above our expected 15% hurdle rate, underlining the opportunity for organic, high-returning, relatively low-risk investments existing within the group. Before I pass back to Steve, in closing, I would also like to recognize and thank the Endeavour team for their achievements since the demerger.
In addition to continuing to manage and excel the core operations of Endeavour, we have also well-positioned the company for future success as an Australian publicly listed company. Thank you.
Thanks, Shane. I just wanna step us forward now to talk about how we're traveling so far in F2023. We're on slide 24. I think the first thing to recognize is that the growth rates on a year-on-year basis are going to continue to be distorted by the impacts of COVID in the prior year, and that's why we've got the F2020 comparisons on that slide for you. The key message here is that both businesses continue to grow strongly with sales for the first seven weeks in both hotels and retail up 13% when compared to the same corresponding period in F2020, which is the most recent pre-COVID comparative. We didn't have COVID at that time.
In comparison to F2022, though, what we are seeing is the retail sales moderating from F2022 COVID elevated levels and customers returning to a more normal pattern of in-store purchasing, along with a shift back to local convenience. That means that we're seeing some short-term moderation in our online penetration, and our BWS stores are slightly outperforming Dan Murphy's at the moment and cycling through the past COVID demand spikes, where Dan's actually got the bigger lift. Of course, hotels are continuing their strong recovery consistent with their performance in the second half of F2022, as thankfully, Australians are able to embrace the opportunity for social reconnection in the pub, which is a great thing. If I step forward onto our priorities for F2023.
Well, firstly, we'll continue to maintain our disciplined approach to cost management and look for opportunities to optimize the group operations to offset the impact of the well-known inflationary pressures. Secondly, we'll continue, as we spoke about at our recent Investor Days, to unlock value from our property network via renewals and redevelopments, and Shane's touched on that. We'll remain focused on improving customer experiences through our ongoing investments in the digital data spaces. We'll also continue to work on our technology transition across from Woolies, as we set up our own standalone capabilities. Most importantly, we'll continue to embed the Endeavour culture.
Focused on our purpose and our values, we'll keep progressing on our sustainability ambitions, and we'll always try to strive to leave a positive imprint on the communities we serve. Just to wrap up, in summary on the last slide, we've delivered a strong F2022 financial result built on a resilient business and an adaptable and agile team. The performance of our retail businesses matched the strong performance of the prior year. While the hotel performance was as expected, severely impacted by COVID-19 lockdowns and restrictions before it recovered strongly in the second half. During the year, we continued with disciplined investments for the future, focusing on expanding and renewing our retail and hotel networks, enhancing our standalone technology capabilities, and improving our digital platforms. In the current context, it's been hugely encouraging to see the return of people seeking social connection and celebrating social occasions again.
It really does feel like things are getting back to normal. When we look forward, we know that the operating environment is not without its challenges, particularly the increasing cost of living pressures for our customers. We're yet to see how that plays out fully, but we remain focused on delivering great experiences, great value, convenience, and choice for everybody. For us specifically, things returning to normal means that COVID-led elevated retail sales will continue to moderate from the recent highs, and the positive recovery in hotels is expected to continue. That's it from us. Thanks for joining us. I'd now like to open up to any questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. As a reminder, please limit yourself to one question with a single follow-up. Today's first question comes from Michael Simotas with Jefferies. Please go ahead.
Good morning. My question is on the operating deleverage in the retail business in the second half. I think sales were down about 1% year-on-year, but EBIT down about 18%. I'll let someone else ask about gross margin, but I'd like to focus on the costs if we can. I think cost growth was about 5.5% in the second half on a cash basis. How do we think about that as a base for the go forward for the business? That looks like you've got a couple more challenges coming. Next year, you've got an elevated wage increase from July, plus you've got additional OpEx associated with the system development. How should we think about that flowing through into 2023, please?
Yeah, thanks, Michael. It's a good, probably big question, I suppose. I know it's one on a lot of people's minds. Shane touched on the way we've been allocating technology costs, and that's certainly played through the CODB line in H2. There was more OpEx than CapEx previously, so there's a bit of a swing in that. It's hard to actually exclude gross profit. I know you're talking about CODB, but the place where our supply chain costs manifest is in the gross profit line, and we've called out that we've had elevated costs there. There's, as you point out, too, a variety of other things impacting the CODB line.
We're obviously out in the market with the appropriate adjustment we took to team wages and that'll also impact salaried team members as well to a somewhat different extent, but nonetheless. Yes, you're right. We do have those cost side challenges. To your point, though, about how we're going to manage it, there is movements in retail pricing off the back of CPI increases that have flowed through. We've seen those price changes relatively well accepted, I would say, across both the market and customers. It's a pretty you know, regular feature of the drinks industry that CPI price increases flow through twice a year, once in August and once in February. We've just had the August ones flow through.
I guess the way we're feeling about the half ahead is that yes, it will be challenging because primarily of the cycling of COVID from last year. We do feel well-placed to navigate those challenges with the variety of levers that we'll continue to manage for. Yeah, I'll stop there. Did you wanna add something, Shane?
Michael, just, you know, just to underline a bit of what Steve's saying. To put you know, we are challenged with some of these, cost increases like, the wages that, Steve referred to. I think, Endeavour has had a good success in terms of its, efficiency programs or optimization programs, and that will continue. A lot of our planning is around looking for, efficiency in that space. Equally, we have to recognize that we are committed to our digital and our technology transformation, and we make no apology of that. We, not only for our standalone reasons, but we think longer term benefits. The incremental, cost on the technology in the 2022, transformation was AUD 10 million. We expect that to be higher in 2023.
The order of magnitude at this stage is in the AUD 20 million-AUD 30 million of additional costs in terms of that transformation. That's just to give you a bit of a steer of that challenge. What I would say, a lot of this is being programmed on the basis that we'll be able to find the ongoing benefits of savings to offset that level of expenditure. That's a work in progress.
Thanks for that color. Can I just ask a quick follow-up on flood costs? I think you called out AUD 9 million previously. Has any of that been either recovered from insurance or a provision raised against it?
Yeah. We've recovered a small portion of it. There's still outstanding claims, which we're very confident we will receive. At this stage, we've taken a conservative position, just flagged the AUD 9.
Okay. You've taken that through the P&L. Thank you.
Thanks, Michael.
Our next question today comes from Bryan Raymond at JP Morgan. Please go ahead.
Good morning. I might ask one on the hotels. I'm sure there'll be plenty on retail today. Just interested in the components of hotel performance in the second half. Obviously, it's very strong result. Just wanna get a feel for where food and beverage sales are versus pre-COVID levels. Is that EGM mix still a bit under 50% of sales or certainly less than 50% of sales? And if there was any material cost benefits in the period. Just trying to understand that operating leverage is very strong in hotels. Thanks.
Yeah. Thanks, Bryan. I think the thematic that we're trying to talk to is things returning to normal. We're really seeing a very balanced performance across what we describe as the drivers of hotel performance. That is gaming, beverages, food, accommodation, and events too. You know, we're seeing a really solid return in, thankfully, live music and entertainment and those sorts of things.
Yeah, it's kind of getting back to normal levels, which means that the parameters that we've talked to the market about before in terms of mix and contribution and so on are pretty well as they were. I think it's really encouraging actually to see a balanced approach in hotels because they are a multifaceted entertainment venue, and we like them to be in a degree of balance, if you like.
Okay. Just thanks for that. Just to follow up then, I mean, second half earnings in hotels were AUD 194 million to H1 2019, albeit it was pre-AASB numbers at AUD 100 million. It's been very messy the last few years. Just trying to work out if the second half run rate, given we are getting back to normal, thankfully, is that something we should be using going forward or is there something we should be mindful of when modeling out hotel earnings contributions to the group going forward?
Yeah. I think we've called out the impact that we're going to experience in F2023 of the Victorian gaming taxes that'll be paid. So I think we've been clear about that, and you should be conscious of that. But yeah, look, we are saying broadly it's getting back to normal. But normal is, you know, pre-COVID. So you've got to cast your mind quite a ways back to see that. You know, yeah. I wouldn't add anything actually. I think it's normality is what we're experiencing. But just note that gaming tax impact in F2023.
Sure. All right. Thanks guys.
Our next question today comes from Shaun Cousins with UBS. Please go ahead.
Thanks. Good morning all. Just a question on retail gross margins. Can you just talk a little bit about where you're seeing the benefits of ongoing Pinnacle penetration, ongoing premiumization? Some of those seem to be offset by promotions. I'm keen to sort of dig into those. Do you think premiumization will continue, when the consumer faces a higher cost of living and promotions back to where they were pre-COVID or is there still some work to do, please?
Yeah, look, I tend to think over the 30-odd years I've been around the retail business that it's considered to be an affordable luxury for customers no matter what the economic cycle. It seems to be continuing to play out that way, Shaun, but we're not seeing a dramatic shift back in the growth of premiumization, pursuit of craft, pursuit of new, pursuit of better for you. We're not talking about particularly expensive items at a unit price. It continues. Whether it will continue is a good question for us to ask ourselves, but that's been an ongoing feature certainly of recent times, and we're somewhat heartened by the continuation of that through August in context of what I talked about earlier.
That continues to be the case. In terms of your question on Pinnacle, yeah, we've you know, we're privileged to continue to be able to produce products that customers seem to love. We talked about seven out of 10 customers actually enjoying a Pinnacle product through the course of the year. We know that our right with Pinnacle to invest behind Pinnacle is very much linked to the level of quality that we're able to produce, so we're very focused on that. You asked the question about promotions in the market. We have called out that there has been you know, increased promotional activity in H2, but it's not as pronounced as it was in a pre-COVID environment. I think there's a degree of rational behavior generally out there.
There is, I think, a bit of a pursuit of customers in the e-com space that hasn't sort of existed perhaps pre-COVID. We've been, I think, very lucky to have capitalized on the investments we've made in our digital platforms throughout COVID. We've come out the other side. You know, we kind of went into COVID with digital penetration at about 6%. We're coming into F2023 with it not quite at the 10% we saw in F2022, but pretty close to 9%.
We've on the back of pretty considerably increased sales, increased a lot of penetration, and more importantly, learnt a lot about customers on the way through, if you think about the number of people that use their My Dan's card, the number of app users we've got in BWS, which gives us the opportunity to really improve our service and personalization and so on to those customers. I think those things have paid off. We've got that, and I think there's others out there that are probably trying to chase those customers.
Great. Maybe just to follow up on the cash flow. Has all of the pay remediation cash outflow that weighed on your cash conversion in fiscal 2022, has all of that been paid out or could that impact reported or impact your operating cash flows for fiscal 2023, please?
Yeah, it could. The provision balance at the end of June is circa AUD 70 million. I think it's AUD 71 to be precise. There's still some cash payments to be made t o completely resolve that the remediation issue.
I think I'd just add on that for the benefit of our team for whom this money is owed. We've made some payments in F2023, considerable amount, and we're very focused on getting that money to our team members present and past as quickly as possible. No interest in us hanging onto that money. We're very keen to return it to those that have earned it.
That should weigh on cash flow in first half 2023.
I think it's AUD 62 million.
AUD 60-odd million is what we're forecasting for the current financial year, F2023.
50 in fiscal 2023. Fantastic. Thanks so much.
Our next question today comes from David Errington at Bank of America. Please go ahead.
Hi, Steve. Hi, Shane. Steve, look, and Shane, I'm a little bit still nonplussed despite the questions. I still can't quite get my head around. As you know, I'm not a smart person, so I need it really dumbed down, if you wouldn't mind. If we can talk it really simplistic, and this is the gross margin and the cost of doing business, 'cause as I said, the stock's getting hammered today pretty much on the retail margin performance, not the sales. It's the margin. Your gross margin in the first half increased by 141 basis points. Your cost of doing business only increased by 62. But in the second half, your gross margin was pretty flat, and your cost of doing business was up over 100 basis points.
Clearly, I'm trying to get my head around. I mean, there's been a couple of questions that had a go at it, but I still don't really, based upon, I haven't got the handle on what's actually gone on. You basically mentioned that it wasn't promotions. Promotions are still pretty rational. You mentioned that there were some supply chains, there were some elevated costs that go into that gross profit line, but there's some other stuff there. Can you have a go? 'Cause you're probably about AUD 30 million shy in the gross margin line. I'd like to get an understanding 'cause we're all trying to work out those costs. Are they gonna be sustained? Are they one-off? Are they forward investments?
We're about AUD 30 million short as to what would've been expected by us, and we're all trying to work out just what's going on, what are they, what's impacting it, so then we can make forward predictions. As you said, I'm not real smart. I need it done. Can you have a go at dumbing it down as to what the components were toward that miss was, please?
Thanks, David. Yep, I'll do my best. I'm probably with you on the keeping it simple side of things. But we were probably impacted by supply chain costs a little bit later than perhaps some others in the market, would be fair to say. It was relatively acute for us in H2 relative to H1. It's lumpy in that respect. The other lumpiness that you need to be conscious of is the very high performance in H1, given the operating environment, COVID affected and all the rest of it. We had a somewhat abnormally high result in H1 and a contrast to historical performance, abnormally lower performance in H2. When you net that out across the year, the numbers have been explained. Supply chain would be the first one.
The impact of promotions, yes, that's right. It's not as acute as it was pre-COVID, but they are coming back. You know, we are seeing some more activity in the market in the second half, and that's prevailed somewhat into the current financial year. We talked about the technology investments. You know, they have been not insignificant, and they continued in the second half. They're continuing somewhat in 2023. We're being very careful about the way we place those investments, but that is true. There's not a huge amount more to add. You know, there's always a few different things that go on with mix and those sorts of things. Premiumization's continued as I said before to Shaun.
I can't give you precision, you know, numbers on your 30 that you've talked about, but it certainly starts with supply chain costs in the second half. Now, your valid question obviously is what does that mean going forward? We're taking a really prudent approach to managing supply chain costs in H2, but in H1 of the new financial, the current FY. We're probably gonna need to push some stock into our stores a bit earlier than we did last year. Last year, it kind of all flowed through just in time. There's all sorts of risks associated with supply chain this year, when it comes to driver availability, pallet availability, you know, team availability in DCs and those sorts of things.
Of course, you know, we procure our services from Primary Connect, part of Woolies in that regard. Big efforts going into making sure we're well prepared to capitalize on the H1 opportunity this year, and it's so important for retail, as you know, through managing our inventory in our stores. There are some supply chain impacts in that H2 result that you're referring to. Anyone want to-
Sorry, Shane. I cut you off.
No, no, you go, mate. I'll just talk about CODB in a bit more detail.
How much are we talking? Was it the guys at Woolies that got a bit more greedy, that charged you a bit more trying to boost their profit? I mean, is it something like that, or what is that supply chain? What is it? I mean, how much and what is it actually?
It's definitely not as you described it, David, for clarity.
It was a bit tongue-in-cheek, that one, Steve. Sorry.
That's okay. Look, it's just legitimate operating costs that are flowing through in supply chain costs. I mean, there's I don't think there's anybody out there that's not experiencing higher fuel costs, higher various impacts on costs, you know. We don't think of ourselves as unique in that respect. These are all COVID impacts that have continued in that half and are somewhat in this half affecting our supply chain costs.
It's not peculiar to our provider. We are operating in a market that has been dramatically affected, not just in Australia but globally. I think the point I really wanted to land with you, David, is that we are building in protections from the downside risk of not having stock in H1 this year, which is so important for retail. It's a balancing act as ever. You know, things will get back more to normal, although H1 for retail this year is gonna be a bit lumpy, to put it mildly.
Mm.
Given what's been cycled.
Sorry, Shane, you were talking about CODs. Is CODB like yours?
Yeah. Look, it might be something to sort of have a bit more deeper analysis later this afternoon when we catch up. Just, you know, when I look at the costs from the year, first of all, and look at the increase, it's about AUD 60 million-AUD 70 million. Close to AUD 70 million. There's a raft of points, but, you know, we shouldn't forget the store network, the increase that comes with expanding our store network. There are some additional costs as part of the partnership and the standup function that we incurred. Some of these are more weighted to the second half, but they're not that sort of, you know, the, they're rats and mice, but the sum of it has an impact.
There's certainly the CapEx to OpEx, which is this technology point we keep talking about. Most of that is in the second half, which has had a so-called material impact. It's not one point. What I wanna leave with is it's not that this is accepted as the final result. We're certainly investing in technology, and I'm not shying away from that. The other cost of operations, we are looking for initiatives to offset those inflationary pressures.
Yeah. Okay. Thanks, Steve. Thanks, Shane.
Cheers.
Thanks, David.
Our next question today comes from Craig Woolford with MST Marquee. Please go ahead.
Morning, Steve. Morning, Shane. I think I'll continue on about the gross margin perhaps. If we can understand the seasonality expected in gross margins? I know things are not back to normal, but you are talking about higher supply chain costs in the first half. Should the underlying gross margin, if it's normal operating conditions, be fairly even between both halves? When you talked about, you know, promotional activity, I guess second half sounds like it was higher or more promotional than the first half, just to be clear about that?
Yeah. I think the short answer is yes. I mean, I've talked a lot about the structural resilience that we've built into gross margin over time. We've not seen a deterioration of that, whether it be from a step away from customers wanting to drink better, whether it be the appetite for Pinnacle products, and I've talked a bit about the nature of the market as it relates to promotional activity. Certainly, those things can change, and we've got this bigger picture macroeconomic situation playing out as it relates to customer purchasing power, and their propensity to wanna continue in their purchasing patterns as it was historically. As I touched on before, my experience has been that these are relatively affordable indulgences, if they are even considered indulgences by customers.
You know, what it really does do, that is, the drinks business and the hotels business, is underpin sociability, which is such a strong theme that's come through the other side of COVID-19. People wanna get back together, whether it be at home or in a pub or elsewhere, and enjoy that social connection with one another. Effectively, what these businesses do is enable that. That's the big overriding theme. There's not going to, in my opinion, be a big shift in our ability to maintain that structural resilience in our GP line, but we operate in a very fluid environment, and the market is a competitive one.
Okay. First half and second half should be, you know, theoretically fairly similar. There's not a, like, a Christmas skew product mix benefit in first half?
Not really. The big thing that shifts one half to the other is the sales, you know. In particular, our Dan Murphy's business is a massive destination for customers through both November and December. That's the big opportunity that's always existed.
I'm gonna jump in, Craig, and just say, look, everything being normal, you know, there'll be a consistency of the gross margin, but the obvious thing is.
Sure
the EBIT because of the seasonality of that first half versus second half.
It was an abnormally big H1 last year.
It was.
Yeah. Got it. Thanks, guys.
Thanks, Craig.
Our next question today comes from Ben Gilbert at Jarden. Please go ahead.
Good morning, guys. Just on the hotels side of things, Shane, if we'd looked pre-COVID, your CODB margin used to run around 48%, 48% and change. Is that sort of what we should think about as a normal base? The context I'm asking there is obviously all the work you've done around EGMs. There's a decent amount of uplift that comes through there. I'm just trying to understand how we think about that cost side of things moving forward.
I can't give you the bridge between the F2019 and current, because I think there's a lot of sort of cost of operation that's flowed through since we F2019.
Sorry, I just wanna check, Ben, you said 49%, did you, for CODB?
About 48%. I think in 2019 it was at 48.3%.
Back to 2019. Yeah.
In some ways, different business in terms of the overlays of the sort of costs that have been flowing through to hotels to support our publicly our public company representation. Mate, I'll have to take that offline to give you a waterfall that gives you from that sort of low percentage. I haven't seen that before, so I just need to check that.
I'm not sure. I'll have to go back and check that number. What I can say about costs in hotels is they've been particularly well managed through COVID, and we expect that to continue through the current financial. We've actually been able to generate results off the back of much lower operating costs, generally speaking. I don't think that. We don't expect to see a big shift in that. If you're wondering whether the CODB rate for hotels in the current year is gonna be near that level, no, I don't think so. I'll go back and check your math.
Look, I would just add, we'll answer that question, Ben. The more salient point for me is that I think the structure, the cost structure that we've got in place for the hotels well supports its growth. Moving back to our thoughts around long, medium to longer term, the renewals program and improving our earnings profile there, plus acquisitions, we can leverage off the infrastructure that we've built in terms of that cost base.
I mean, stand back from the pub. You wanna make sure you're continuing to invest in the place, and that includes the gaming fleet, the technology that underpins the customer experience and the environment. Those investments are gonna continue to be a factor in the future. I'm not gonna walk away from the question, but we'll answer it.
We'll come back on that specific at F2019.
No problem at all. It's helpful. Thanks, guys.
Thanks, Ben.
Our next question today comes from Ross Curran with Macquarie. Please go ahead.
Hi, team. Thanks for taking my question. Just a quick question about the remuneration report. The board has failed you on customer VOC, citing issues with deliveries and distribution in the first half. It seems that it's improved in the second half, but is that extra investment in the second half partly to explain why the margins varied between first and second half?
It's an interesting bridge you've built there. No, I don't think I could necessarily link the two. Let me talk to the specifics of your point. We were, as I just said in my opening remarks, very proud of the efforts that the team went to on achieving growth in voice of the customer across both our all of our businesses, I should say, BWS, Dan Murphy's and our hotels collectively. We had pretty aspirational targets coming into the year, and what obviously wasn't able to be anticipated was the impact of Omicron. Omicron really did tighten up driver availability and the delivery experience for customers through December and January, which are, of course, peak trading periods.
Now, understandably, our customers marked us down on their experience because perhaps things took longer or whatever the case might be in terms of that customer experience. I think, you know, with all of the puts and takes in the performance of the year, the remuneration report describes the approach that the board took, and I obviously, as both a member of the board and management, thought that that was an appropriate outcome for the team. But it takes nothing away from the level of pride we've got in the achievements of the team under the circumstances to actually improve their customer scores. We just had pretty tough targets for ourselves in the year. Whether it links back to the cost side of things is a good point.
I hadn't sort of linked the two in my mind, as I said before, but certainly, we were paying more for drivers. You know, we had to pay more for drivers because there was a tightening of availability. It wasn't the single biggest impact on the CODB side of things in H2, but it certainly did play out. Now, pleasingly, there has been something of a shift in driver availability, actually in the relatively short term. That's a positive. We're seeing it play through to both customer experience and costs at the moment. From the cost side of things, it is very, very small in the scheme of things.
Thanks. Just on VOC and just as a follow-up, are you able to talk through staff absenteeism through July and August, how that's looked?
Yeah, it's gotten considerably better, thankfully. You know, I think we all know that there's been obviously the COVID impacts, but there's been a variety of other, you know, flu and so on that has affected people. We really kinda did it quite tough actually through sort of April, May. June and July have gotten considerably better. We are still suffering somewhat from team availability impacts, which of course are all, you know, for the most part legitimate. You know, people not well shouldn't come to work, so respect that. It does put a bit more pressure on the team that are there. We're very thankful for those efforts. Yeah, it's gotten better. It's about half the impact that it was back in April now that we're in August. Still a thing, though.
Thank you very much.
Thanks, Ross.
Our next question today comes from Richard Barwick with CLSA. Please go ahead.
Okay, thanks guys. I had a question on CapEx. If you think back to the Investor Day, you were talking about total CapEx being in the range of AUD 320-AUD 460, but at that time, I think there's a bit of a question mark. Some of the technology transition stuff was detailed as a bit of a work in progress.
Yeah.
Given some of your comments today, I mean, obviously a lot of that investment seems like it's falling into OpEx. Just be keen to hear any updates you might have on FY 2023 CapEx, and it would sort of look like you've spelled out this technology transition in a bit more detail. What the flow on effects would then be into 2024, 2025, given it's quite a long-term project?
Let me tackle the CapEx question. Clearly, you know, it's gonna be, it'll fluctuate based on our success of acquisitions, and we're very focused on looking for new opportunities, particularly in the hotel space. As we've demonstrated, we're taking a sensible approach in terms of acquisitions given certain valuations. We're encouraged that, you know, there are opportunities emerging. Over this next 12 months, I'd like to see us acquire more hotels.
The renewals program, probably similar numbers at this stage, so no dramatic change in that. Over time, what you're probably gonna see is probably the average spend for each renewal sort of might improve as we sort of look at each hotel and how we can enhance even further the value of those hotels. They'll be only on the basis of meeting our hurdle rates. In substance, I would say our CapEx for next year is going to be in the order of AUD 350-AUD 400. That's where I would sit today based on the landscape we're looking at. I underline the point, we see opportunities that can enhance the value of this organization in hotels and in retail, and we're certainly gonna look at it. To answer your question.
On the technology side, yep, so what we've tried to do at the moment is just give you a bit more of a profile about the timing of the projects, and we are. Some of those projects have been more moving into F2024, a bit of planning in F2023, but I did give you a steer that from an OpEx point of view, the spend would be about AUD 30 million in F2023. What we will be doing is, as we increase that spend, it'll only be on the basis of a clear business case, which we will share with the market when we make those investment decisions. Yeah, still very fluid. Hope that answers the question.
Thank you. Thank you. Our next question today comes from Tom Kierath with Barrenjoey. Please go ahead.
Morning, guys. Just looking at the disclosure on your payments to Woolies. It looks like it's up about AUD 80 million in the year. Can you just give us a breakdown of how that compared first half versus second half in terms of the growth rate? Just trying to understand this uptick in the supply chain costs, and you know, where that's kinda going to. Yeah. Thanks, Tom. The majority of that's not supply chain. Most of that's the acquisition that Woolies made of PFD, which are our largest food supplier in hotels, so that's been a big tick up there. There's not a big H1, H2 swing, I don't think either.
We'll have to go back and check the timing, but I think it was all the way through the financials. No, I think the comments we made earlier on the impacts of supply chain costs in H2 stand.
Thank you. Our next question comes from Lisa Deng with Goldman Sachs. Please go ahead.
Hi. Just two quick questions. One is actually on the technology investment of around AUD 30 million next year. I think Shane made a comment that it's going to be sort of recuperated with cost savings of the same magnitude. Is it in-year cost savings, or are we talking about future cost savings? That's number one. The second one is, can we please get guidance on the magnitude of the price increase in August across the portfolio and a potential outlook on the February round of price increases? Thanks.
Yeah. Yeah. Thanks, Lisa. Appreciate those questions. Let me just bring some specificity to what Shane touched on earlier. He said there was about AUD 20 million-AUD 30 million in incremental OpEx costs in F2023. The reason that number's such a broad, or those numbers are in such a broad range is that there's still a lot of work to bring determination to exactly what we're going to do. What he was also saying was that when we make those calls, they're underpinned by very strong business cases which deliver value, if not over the short term, certainly over the medium to long term. We'll keep the market abreast of that.
I think it's more likely to be at the lower end of that range than the upper end, based on my experience of our capacity to execute those sorts of programs. Hopefully that answers your first question. On the second question, the CPI increase that came through, I think it was about 4.4%. As I said, you've got an August and a February excise increase that comes through, and that's indexed against inflation, and it came through around that 4.4% mark. That flowed through to a similar number, actually, in terms of retail sales prices. It's got lumpiness in it too. Spirits are a bit higher than beer, and wine's generally the lowest 'cause it doesn't have the direct link to excise. That's sort of around about the level of price appreciation that's going on post-August at the moment.
Thank you. Our next question today comes from Phillip Kimber with E&P Capital. Please go ahead.
Hey, guys. Just a question back on the hotel business and regarding seasonality. Historically, the business had a 60%/40% split first half, second half, so I just wanted to check. That was earnings split. I just wanted to check whether, you know, anything's significantly changed in that business to make that no longer relevant. Then outside of the AUD 20 million increase or impact from higher Victorian taxes, is there anything that we should be aware of in that second half? I mean, I think there might've been some flight costs. There was Omicron issues, you know, just that we should be aware of when we're thinking about that sort of seasonality and trying to get some sort of run rate on the hotel business.
Phil, sorry, just for clarity, you are talking about hotels in terms of that mix you just described, yeah? 'Cause it-
Yeah, hotels only and just, earnings mix was 60%/40% first half, second half historically.
Yeah. My recollection is we're pretty flat on earnings mix half to half, but I'll have to go back. In hotels. It's different in retail. Retail's got a much bigger indexation to H1, sorry. It's sort of 60%/40% in retail. But hotels is pretty consistent. Yeah, I mean, maybe we can unpack that question in a bit more detail. I think the other part of your question was, separately I should say, the gaming entitlements cost in the current financial. I think we touched on that before, so it's in the vicinity of AUD 20-odd million in the F2023 year. Happy to unpack your question in a bit more detail offline, Phil, in relation to the split of earnings H1 to H2 in hotels.
Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Steve Donohue for closing remarks.
Yeah. Well, thank you all for joining us today. I would underscore our presentation by saying we really do appreciate the efforts of all of the team right across Endeavour Group to deliver what I would consider to be a very strong result under very challenging circumstances that presented throughout the year. We feel as though we're well placed to achieve a good result again in F2023. We're very focused on managing the volatility that lies ahead. We're rapt to have people back in the pubs and engaging in those social occasions again. I hope you've been out to one yourself, and if you haven't, get to one soon. Thanks for joining us today and look forward to speaking to you all again soon. Cheers.