Collins Foods Limited
Annual Report 2017

Plain-text annual report

COLLINS FOODS LIMITED 2017 ANNUAL REPORT C O L L I N S F O O D S L I M I T E D A N N U A L R E P O R T 2 0 1 7 Collins Foods Limited ABN 13 151 420 781 KEY DATES FOR 2016-2017 Tuesday, 26 June 2017 Full year results released Wednesday, 5 July 2017 Final dividend record date Thursday, 20 July 2017 Final dividend payment date Thursday, 31 August 2017 2017 Annual General Meeting Sunday, 15 October 2017 FY18 half-year end Wednesday, 29 November 2017 Half-year results released Thursday, 7 December 2017 Interim dividend record date Thursday, 21 December 2017 Interim dividend payment due Sunday, 29 April 2018 End of FY18 Unless expressly indicated, all dollar values noted are in AUD. NETHERLANDS GERMANY COLLINS FOODS HAS HAD A YEAR OF FANTASTIC GROWTH, ACQUIRING RESTAURANTS IN AUSTRALIA AND EUROPE. CHINA JAPAN THAILAND AUSTRALIA INSIDE THIS REPORT: 02 OUR YEAR IN REVIEW 03 OUR FINANCIAL PERFORMANCE 04 CHAIRMAN’S MESSAGE 05 CEO’S REPORT 08 DIRECTORS’ REPORT 35 AUDITOR’S INDEPENDENCE DECLARATION 36 CONSOLIDATED INCOME STATEMENT 37 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 38 CONSOLIDATED BALANCE SHEET 39 CONSOLIDATED STATEMENT OF CASH FLOWS 40 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 41 NOTES TO THE CONSOLIDATED FINANICAL STATEMENTS 81 DIRECTOR’S DECLARATION 82 INDEPENDENT AUDITOR’S REPORT 88 SHAREHOLDER INFORMATION 89 CORPORATE DIRECTORY OUR YEAR IN REVIEW CORE PRODUCT OFFERINGS, GOOD VALUE OFFERS AND PRODUCT INNOVATION, CONTINUED TO DRIVE STRONG SALES GROWTH ACROSS OUR KFC AUSTRALIA NETWORK. KFC There was a strong overall performance across the KFC business driven by increased restaurant numbers and same store sales growth. During the period, we: Ò completed the acquisition of 13 restaurants located around the Victorian/ New South Wales border region; Ò completed the acquisition of 12 restaurants in Germany; Ò opened our first new restaurant in Germany; Ò signed an agreement to acquire 16 restaurants in the Netherlands. SIZZLER Sizzler Australia delivered positive same stores sale growth and Sizzler Asia sales and earnings continue to grow. SNAG STAND Snag Stand is undergoing strategic review as it was unable to achieve an overall improvement in trading despite refining the menu and brand. 02 (a) Excluding the additional trading week in FY15, revenue up 2.4%. 2017 OUR FINANCIAL PERFORMANCE 6 . 3 3 6 6 . 1 7 5 3 . 4 7 5 3 . 4 3 1 . 0 3 6 . 4 2 N O I L L I M $ A 5 1 Y F 6 1 Y F 7 1 Y F REVENUE WAS UP 10.3% TO $633.6M (FY16: $574.3M) N O I L L I M $ A 5 1 Y F 6 1 Y F 7 1 Y F UNDERLYING NPAT WAS UP 14.1% TO $34.3M (FY16: $30.1M) KFC SAME STORE SALES UP TO 0.7% (FY16: 3.1%) STATUTORY NPAT DOWN TO $28.0M (FY16: $29.1M) UNDERLYING EBITDA UP TO $81.3M (FY16: $74.6M) TOTAL FY17 FULLY FRANKED DIVIDENDS UP TO 17.0CPS (FY16: 14.0CPS) NET OPERATING CASHFLOW UP TO $60.6M (FY16: $49.7M) RETURN ON CAPITAL EMPLOYED UP 10 POINTS TO 15.0% (FY16: 14.9%)(A)(B) WE CONTINUED TO DELIVER STRONG GROWTH ACROSS KEY FINANCIAL METRICS DURING THE YEAR. (A) Average Capital Employed, net debt and net leverage ratio have been adjusted to exclude the net proceeds from the equity raise to partially fund the acquisition of KFC restaurants in the Netherlands of $53.9m (B) Underlying EBIT/Average Capital Employed ANNUAL REPORT 2017 COLLINS FOODS LIMITED 03 CHAIRMAN’S MESSAGE The 2017 financial period was a transformational year for our company. Collins Foods executed a range of strategic growth objectives during the year that will deliver long term value growth for shareholders. With the acquisition of 12 restaurants in Germany and 16 in the Netherlands, Collins Foods began the international expansion of its KFC business. These were significant and value accretive acquisitions that lay the foundation for further expansion opportunities in Europe. Building on the success of previous years, the Group delivered encouraging financial performance as the largest KFC franchisee in Australia. Additionally, the successful integration of the acquired KFC restaurants in Victoria and NSW ensured the stores were performing consistent with expectations and were earnings accretive. Overall, revenue was up 10.3% to $633.6 million from same store sales growth, new store openings, continued marketing and the delivery of value to our customers. Strong cost controls and efficiency improvements saw the Group’s revenue growth translate into underlying EBITDA growth of 8.9% to $81.3 million, even as growth investments were being made. The Group remains committed to maintaining a strong balance sheet and a comfortable level of gearing. Due to the successful integration of our Victorian and NSW KFC restaurants, we have delivered healthy net operating cash flows during the year. This enabled us to invest in our network and purchase more restaurants while also keeping gearing at comfortable levels. Due to continued strong growth across key financial metrics, the Company has paid shareholders a final fully franked dividend of 9 cents per share, bringing the full-year dividend to 17 cents per share fully franked. The final dividend was paid on 20 July 2017. This 2017 dividend is in line with the Board’s dividend policy to pay out 50% of full-year net profit. The Group’s decision to expand into Europe via the acquisition of KFC restaurants in Germany and the Netherlands provides an attractive platform for future growth. Both markets are underpenetrated, with low country risk, and present a significant high-quality store growth opportunity over the medium to long-term. 04 ANNUAL REPORT 2017 COLLINS FOODS LIMITED To further diversify the geographic spread of our Australian network and build a national footprint, the Company recently announced the acquisition of 28 KFC restaurants in Tasmania, South Australia and Western Australia from Yum!. At completion, Collins Foods will have 223 KFC restaurants across Australia. During the year, despite being managed as a non core business, Sizzler Australia delivered positive same store sales growth and a positive EBITDA contribution. Sizzler Asia continues to grow, with increased royalty revenue and store count. The Snag Stand business model is under strategic review, with no further growth capital being allocated in the year ahead. Outlook With a strong platform established for growth across Australia and internationally, the Group is optimistic about the opportunities to deliver long-term sustainable earnings growth and shareholder value. Our priority will always remain on providing our customers with the highest quality products, in an innovative manner, that adapt to evolving consumer tastes and preferences whilst still offering great value. The Group will continue to progress organic growth via a disciplined approach to operational management and will also ensure the successful integration of its acquisitions to deliver value for shareholders. I would like to thank each of my directors for their dedication and strategic insights in pursuing this year’s growth objectives. I would like to thank our Managing Director and CEO, Graham Maxwell, for another year of leadership, and our fantastic staff, which now number over 10,000, for their hard work and commitment to ensuring that we are the biggest and best KFC franchisee in Australia. Finally, I would like to thank our shareholders for their continued support throughout the year as we grow from strength to strength. Robert Kaye SC Independent Non-executive Chairman This year has been significant for Collins Foods, with the successful acquisition of strategic, value accretive assets in Europe and Australia, and the continued strong performance of the Group. Building on the momentum of previous years, we have continued to deliver strong underlying earnings growth, positive same store sales across the network, and consistent margins. Throughout the year, we continued to focus on optimising operational performance and developing resilience within the business via continued investment into the network and building a platform for growth internationally. Growth of the KFC business During the financial period, Collins Foods announced the acquisition of 12 KFC restaurants in Germany and 16 in the Netherlands. We have also opened our first new KFC restaurant in Germany. The acquisitions are consistent with the Group’s long-term strategic growth objectives, and provide an offshore platform to expand further into their home markets and the wider European market. We were pleased with the significant level of shareholder support for our initiatives. To fund our acquisition in the Netherlands, we completed an oversubscribed Placement to institutional investors at an issue price of $5.25, raising approximately $54.5 million. This was complemented by a Share Purchase Plan to existing eligible shareholders that raised a further $1.9 million. Germany and the Netherlands are both underpenetrated markets and we are confident that they offer significant long-term growth potential. In the years ahead we intend to continue the growth momentum in these markets, with new restaurant openings planned. Our acquisition in July 2016 of 13 KFC restaurants around the NSW and Victoria border were successfully integrated into our Australian network. Already, the restaurants are performing to expectations and are making a positive earnings contribution to the Group. CEO’s REPORT We also recently announced the acquisition of a further 28 KFC restaurants across Australia from Yum!. Shareholders, via the associated Entitlement Offer again showed strong support. This acquisition provided geographic diversification and an attractive scale and entry into the Tasmanian and South Australian markets. At completion, our KFC restaurant count in Australia will be 223, with a further 29 restaurants in Europe which gives a total of 252 restaurants. Financial performance Continued strong business performance delivered statutory Net Profit After Tax of $28.0 million. Underlying Net Profit After Tax increased by 14.1% to $34.3 million compared to the prior period. Revenue increased by 10.3% to $633.6 million. EBITDA increased by 5.0% to $78.1 million, and underlying EBITDA increased 8.9% to $81.3 million. Underlying EBIT increased 9.2% to $57.2 million. The Group generated net operating cash flows of $60.6 million, up $10.9 million on the prior period due to higher EBITDA and working capital benefits from the acquisitions. Net debt increased to $133.1 million due to the German acquisition, with the Group’s net leverage ratio (net debt to EBITDA) increasing to 1.59 from 1.52 in the prior period. Return on capital employed increased slightly, to 15%, up from 14.9% in the prior period. To accommodate the acquisitions made during the financial period, Collins Foods completed an amendment adding a €33 million facility to the existing facilities. In addition to this, subsequent to the financial period, Collins Foods entered a new multi-currency syndicated facility agreement. The existing $200 million debt facility was increased to $270 million, and the European facility was increased to €60 million. Operational performance KFC Continuing the growth trajectory of previous years, KFC Australia delivered top line revenue growth of 9.5% to $549.5 million. The acquisition of 13 restaurants across NSW and Victoria contributed revenue of $26 million, performing in line with expectations. Same store sales growth was 0.7%, with second half growth of 1.7% as we continue to offer great value new products that engage customers. EBITDA increased by 9.7% to $89.8 million for the KFC Australia business. Our EBITDA margins remained consistent, up slightly to 16.4% due to our continued disciplined focus on operational management and efficiency. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 05 Investment into our Australian restaurants continued during the financial year, with 19 major restaurant remodels and 23 minor remodels undertaken to ensure that we continue to deliver the highest quality offering to our customers. Seven new restaurants opened – six in Queensland and one in Western Australia – while we closed two restaurants. A key focus remains to offer our customers quality new products at great value. We have continued to focus on initiatives across the business that increase the customer experience, including the introduction of an on-line ordering app across all Collins Foods’ KFC restaurants. The app increases opportunities for customer interaction and has had solid take up, with over 10,000 transactions per week. We are confident that our investment in innovation will continue to give us a competitive edge over our competitors. Sizzler Sizzler revenue declined 10.5% to $65.0 million due to the closure of six restaurants in Australia, bringing the Australian restaurant count to 16. Sizzler Australia remained EBITDA positive over the year due to same store sales growth. We continue to manage Sizzler Australia as a non-core business and closely monitor our remaining restaurants. Sizzler Asia had another strong year, with royalty revenue up 4%. Sales in Thailand were substantially impacted by the passing of the King and subsequent mourning period. We had five restaurants openings (and four closures) in Thailand, three new openings in China and one closure in Japan. We finished the financial year with a restaurant count of 68 across Thailand, China and Japan and plans for a further six openings in FY18. Snag Stand Despite refining the menu and brand, Snag Stand was unable to achieve an overall improvement in trading. Collins Foods’ has commenced a strategic review of the business, with no further growth capital being allocated in the financial year ahead. At the end of the period, total restaurant count was six which included one franchised stand. Health & Safety Collins Foods is committed to strict quality standards to ensure the highest level of food safety. We continue to reduce risk for our customers and employees through robust internal food safety and sanitation practices and building upon our occupational health and safety practices across our network of restaurants. Over the last 12+ months Collins Foods has had a strong focus on improving its Safety Management System aligned to Australian and International standards, across all brands. Integral to this is our focus on driving safety leadership and culture, improving engagement and capability, enhancing our systems and process, reducing incidents and injuries and proactive management of hazards and risk. Collins Foods is committed to the zero harm journey securing safe, healthy and productive workplaces for all employees, contractors, customers and visitors. We have implemented numerous additional initiatives and education programs to support our valued stakeholder groups, with a focus on preventative measures with enhanced dedicated support in high risk areas to ensure the wellbeing of our people is at the forefront. We are pleased with our ongoing progress toward zero harm with our Lost Time Injury Frequency Rate for 2017 falling by 26% to 16.91. Charitable support As a Group, Collins Foods is committed to our continued support of charitable and community organisations. In 2017, through our Workplace Giving program we were able to donate $483,497 to the five charities we support. Of this figure, employee donations totalled $300,235 with the remainder comprising customer donations of $83,262 and $100,000 donated by Collins Foods. During the same period, Collins Foods also contributed $118,697 to World Hunger, raised through in restaurant customer donations and staff fundraising initiatives. Conclusion Building on the success of previous years, we have continued to pursue growth opportunities and deliver increasing returns. With the successful acquisition of a European footprint, we look forward to leveraging our success in growing our Australian KFC network to build an overseas platform that offers the opportunity for further expansion. We remain committed to driving the organic growth of our core KFC Australia business through sound management. Moreover, we look forward to the further enhancement of our national network via the successful integration of our recent acquisitions from Yum!. Collins Foods will continue to deliver on initiatives that support our future growth platform, including building a strong and efficient back office to support the European business and strengthening the organisational capability of the Group via maximising operational performance. On behalf of the Board, I would like to thank all Group employees for their hard work in what has been a pivotal year for Collins Foods. I am excited for the year ahead and look forward to continued progress and growth across the business. Graham Maxwell Managing Director & CEO 06 ANNUAL REPORT 2017 COLLINS FOODS LIMITED A3/ Revenue and other income 73 G1/ Subsidiaries and Deed of Cross Guarantee Collins Foods Limited ACN 151 420 781 Financial report For the reporting period ended 30 April 2017 Contents 08 Directors’ Report 15 Letter to Shareholders 16 Remuneration Report 35 Auditor’s Independence Declaration 36 Consolidated Income Statement 37 Consolidated Statement of Comprehensive Income 38 Consolidated Balance Sheet 39 Consolidated Statement of Cash Flows 40 Consolidated Statement of Changes in Equity 41 Notes to the Consolidated Financial Statements 41 A/ Financial overview 41 42 46 46 A1/ Segment information A2/ Business combinations A4/ Expenses 47 B/ Cash management 47 B1/ Cash and cash equivalents 48 B2/ Borrowings 48 B3/ Ratios 49 B4/ Dividends 50 C/ Financial risk management 50 53 54 C1/ Financial risk management C2/ Recognised fair value measurements C3/ Derivative financial instruments 56 D/ Reward and recognition 56 D1/ Key management personnel 56 D2/ Share based payments 58 D3/ Contributed equity 59 E/ Related parties 59 59 E1/ Investments accounted for using the equity method E2/ Related party transactions 60 F/ Other information 60 61 61 62 64 67 67 68 69 71 72 F1/ Commitments for expenditure F2/ Earnings per share F3/ Receivables F4/ Property, plant and equipment F5/ Intangible assets F6/ Trade and other payables F7/ Provisions F8/ Reserves F9/ Tax F10/ Auditor’s remuneration F11/ Contingencies 73 G/ Group structure (Amended and Restated) 76 G2/ Parent entity financial information 77 H/ Basis of preparation and other accounting policies 77 H1/ Basis of preparation 79 H2/ Other accounting policies 80 I/ Subsequent events 80 80 I1/ Refinance of debt I2/ Acquisition of restaurants in Australia 81 Director’s Declaration 82 Independent Auditor’s Report 88 Shareholder information 89 Corporate directory ANNUAL REPORT 2017 COLLINS FOODS LIMITED 07 Directors’ Report Your Directors present their report on the consolidated entity (referred to hereafter as the Group) consisting of Collins Foods Limited (the Company) and the entities it controlled at the end of, or during, the period ended 30 April 2017. Directors The names of the Directors of the Company during or since the end of the financial period are as follows: Name Robert Kaye SC Graham Maxwell Kevin Perkins Bronwyn Morris Newman Manion Russell Tate Date of appointment 7 October 2014 25 March 2015 15 July 2011 10 June 2011 10 June 2011 10 June 2011 Principal activities During the period, the principal activity of the Group was the operation, management and administration of restaurants in Australia, Europe and Asia. During the period the Group entered the European market with no significant changes in the nature of the Group’s activities. Operating and financial review GROUP OVERVIEW The Group’s business is the operation, management and administration of restaurants, currently comprising three restaurant brands, KFC restaurants, Sizzler restaurants and Snag Stand outlets. At the end of the period, the Group operated 195 franchised KFC restaurants in Australia and 13 franchised KFC restaurants in Germany which compete in the quick service restaurant market. The Group owns and operates 16 Sizzler restaurants in Australia, which compete in the casual dining restaurant market. It is also a franchisor of the Sizzler brand in South East Asia, with 68 franchised stores predominantly in Thailand, but also in China and Japan. Snag Stand operates five corporate owned outlets and one franchised outlet. The KFC brand is owned globally by Yum! and is one of the world’s largest restaurant chains. The Group is the largest franchisee of KFC restaurants in Australia. In the casual dining market in which it operates, Sizzler competes with other casual dining concepts as well as taverns and clubs, fast food and home cooking. Sizzler is a small to modest sized market participant. Snag Stand operates in the fast casual dining market. Other operators in the fast casual dining market include Grill’d Burgers and Guzman Y Gomez. GROUP FINANCIAL PERFORMANCE Key statutory financial metrics in respect of the current financial period and the prior financial period are summarised in the following table: Statutory financial metrics Total revenue ($m) Earnings before interest, tax, depreciation, amortisation and impairment (EBITDA) ($m) Earnings before interest and tax (EBIT) ($m) Profit/(loss) before related income tax expense ($m) Income tax (expense) ($m) Net profit/(loss) attributable to members (NPAT) ($m) Earnings per share (EPS) basic (cents per share) Total dividends paid/payable in relation to financial period (cents per share)(1) Net assets ($m) Net operating cash flow ($m) (1) Dividends paid/payable is inclusive of dividends declared since the end of the relevant reporting period. 08 ANNUAL REPORT 2017 COLLINS FOODS LIMITED 2017 633.6 78.1 51.9 44.0 (16.0) 28.0 29.12 17.0 266.8 60.6 2016 574.3 74.3 50.8 42.2 (13.1) 29.1 31.31 14.0 189.7 49.7 Change 10.3% 5.0% 2.1% 4.2% 22.2% (3.9%) (7.0%) 21.4% 40.6% 21.9% The Group’s total revenues increased by 10.3% to $633.6 million mainly due to like-for-like sales growth, new restaurant openings and the acquisition of KFC restaurants. This increase in total revenues combined with strong business controls flowed through to increased EBITDA for the reporting period of $78.1 million, up 5.0% on the prior reporting period and significantly improved net operating cash flow of $60.6 million, up 21.9%. EBITDA, EBIT, NPAT and EPS were impacted by significant items totalling $3.2 million pre-tax. Of these items, there were acquisition costs of $5.0 million which were partially offset by a cash gain on the sale of land of $0.5 million and non-cash accounting gains relating to foreign exchange of $0.7 million and asset disposal of $0.6 million. In addition, EBIT, NPAT and EPS were impacted by further significant items totalling $2.1 million pre-tax, of these items there were non-cash pre-tax impairment charges relating to Sizzler Restaurant and Stag Stand outlet assets of $1.2 million and Snag Stand goodwill of $0.9 million. Finally, NPAT and EPS were further impacted by non-cash write-offs of deferred tax assets totalling $0.9 million which were written off at the time of Sizzler restaurant closures. The consolidated NPAT effect of these significant items was $6.3 million. Underlying financial metrics excluding significant items which occurred in the current period are summarised as follows: Underlying financial metrics Total revenue ($m) Earnings before interest, tax, depreciation, amortisation and impairment (Underlying EBITDA) ($m) Net profit attributable to members (NPAT) ($m) Earnings per share (EPS) basic (cents) 2017 633.6 81.3 34.3 35.68 2016 574.3 74.6 30.1 32.31 Change 10.3% 8.9% 14.1% 10.4% The notable increase in the underlying financial metrics shown above is a reflection of the revenue growth and strong business controls referred to above. These are discussed further in the review of underlying operations below. Management believe that adjusting the results for significant items allows the Group to more effectively compare underlying performance against prior periods. Review of underlying operations KFC RESTAURANTS There has been a strong overall performance across the KFC business. Revenues in KFC Australia were up 9.5% on the prior corresponding period to $549.5 million, driven by increased restaurant numbers (including by acquisition) as well as same store sales growth. KFC Australia underlying EBITDA grew by 9.7%, up from $81.9 million to $89.8 million, with an overall EBITDA margin of 16.4% up 0.1% from the previous corresponding period. Core product offerings, good value offers and product innovation continues to drive strong sales growth across our KFC Australia network. New products such as the Zinger Burger Family, Bacon Lovers Burger and the Tabasco Sauce Marinade were introduced and not only provided customers a great reason to visit our restaurants but also showcased the brand, keeping perceptions high. In order to support growth, circa $22.8 million was spent on new restaurants as well as the remodelling and maintenance program. This remains an important driver of traffic to our restaurants, in addition to supporting KFC to meet its restaurant refurbishment obligations with Yum!. KFC Europe contributed revenue of $14.8 million and $0.6 million in underlying EBITDA following the completion of the German acquisition on 1 December 2016. By the end of the period, 13 restaurants were in operation. The back office set up and integration has achieved important milestones and continues to progress. SIZZLER RESTAURANTS Revenues in Sizzler were down 10.5% on the prior corresponding period to $65.0 million, driven by the closure of six restaurants in Australia. However, same store sales stabilised with same store sales in Australia increasing by 0.4% compared to a decline of 11.4% in the previous corresponding period. Sizzler’s underlying EBITDA was down $0.7 million to $4.6 million (14.1%) on the previous corresponding period, driven by the decrease in revenue. No growth capital was allocated to the Sizzler Australia business. There were 16 Sizzler restaurants at the end of the period. The restaurants will continue to be assessed on an ongoing basis in relation to their individual performance and expiry of their leases. Sizzler franchise operations in Asia contributed an increase of $0.1 million in revenue over the prior corresponding period. During the current reporting period there were five restaurant openings and four restaurant closures in Thailand. There were three new restaurant openings in China and one restaurant closure in Japan bringing the total restaurant count in Asia to 68 by the end of the period. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 09 Directors’ Report SNAG STAND Snag Stand was unable to achieve an overall improvement in trading, despite refining the menu and brand. The business is undergoing a strategic review. We do not expect further growth capital to be allocated to Snag Stand. Strategy and future performance GROUP The near term strategy involves consolidating the recently announced acquisitions of KFC restaurants in Europe and Australia. The Group will continue to drive growth across the business through new product ideas and innovation, as well as great value offers that keep customers coming back. In addition, organisational capability is being strengthened to deliver on acquisitions and organic growth. KFC RESTAURANTS The plan for the core KFC Australian business is firstly to focus on top line growth and disciplined operational management to maintain or improve margins. The newly acquired KFC restaurants in Australia will be integrated, with a further eight to nine new stores expected to be built in Australia over the coming reporting period. The focus for the KFC European business will be to introduce the value concept into Germany to drive transactions and sales growth. We will integrate the Netherlands business and build a strong efficient back office function. The KFC European business is expecting to build eight to ten restaurants with four to five in Germany and four to five in the Netherlands. SIZZLER RESTAURANTS The Sizzler Australia business will continue to be assessed on an ongoing basis, with no further growth capital allocated to the business. In relation to the Sizzler Asia, a further six new restaurants are expected to be opened across our three markets – Thailand, China and Japan. MATERIAL RISKS The material risks faced by the Group that have the potential to have an effect on the financial prospects of the Group, disclosed above, and how the Group manages these risks, include: Ò food safety – health and safety of the public is compromised from food products. We address this risk through robust internal food safety and sanitation practices, audit programs, customer complaint processes, supplier partner selection protocols and communication policy and protocols; Ò workplace health and safety – there is a risk that the Group does not provide a safe working environment for its people, contractors and the community. We address this risk through robust internal work health and safety practices, the implementation of initiatives and education programs with a focus on preventative measures with enhanced dedicated support in high risk areas to ensure the wellbeing of our people; 10 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Ò culture and people – there is a risk that the Group’s culture and people are negatively impacted by new acquisitions and growth and/or is not aligned and mature to support strategic priorities. We address this risk through recognition and reward programs and designation of appropriate human resources; Ò brand growth and diversification (non-KFC) – there is a risk that the Group does not successfully grow emerging brands and/or acquire and integrate strategically identified new brands. We address this risk through having an experienced management team, robust project management processes involving trials and staged rollouts and regular strategic reviews; Ò deterioration of KFC brand – the global KFC brand and reputation is damaged impacting the brand’s performance in Australian markets. We address this risk through maintaining a close working relationship with the franchisor, having our team members sit on relevant KFC advisory groups and committees and monitoring compliance with obligations; Ò supply chain disruption – inability to source key food and consumable products in an ethical manner, at the quality required within the prescribed time frames. We address this risk through use of multiple suppliers where possible with a diverse geographic base with multiple distribution routes; Ò systems integrity and cyber security – key systems are not sufficiently stable, integrated and/or secure to support business operations and decision making. We address this risk through the increase of financial and human resources to the systems function and implementation of a systems and cyber security plan; Ò inability to identify and react to consumer and competitive behaviour – demand for the Company’s products declines as a result of a failure to understand and adapt to changes in consumer preferences or expectations and an inability to react to competitor activity and technological advances. We address this risk through keeping abreast of economic and consumer data/ research, innovative product development, broadening of the menu offering and brand building; and Ò inability to adapt, innovate and change – inability to adapt, innovate and manage change in the organisation which negatively influences achievement of strategic and business priorities. We address this risk through having an experienced management team, robust project management processes involving trials and staged rollouts and regular strategic reviews. DIVIDENDS Dividends paid to members during the financial period were as follows: Final ordinary dividend for the financial period ended 1 May 2016 Interim ordinary dividend for the financial period ended 16 October 2016 Total Cents per share 8.0 Total amount $000 7,440 Franked/ Unfranked Franked Date of payment 13 July 2016 8.0 16.0 7,670 15,110 Franked 15 December 2016 In addition to the above dividends, since the end of the financial period, the Directors of the Company have declared the payment of a fully franked final dividend of 9.0 cents per ordinary share ($9.6 million) to be paid on 20 July 2017 (refer to Note B4 of the Financial Report). SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS In the opinion of the Directors, the expansion of the Group into Europe constitutes a significant change in the state of affairs during the financial period under review (refer to Note A2 of the financial report). MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL PERIOD On 26 June 2017 the Group entered into a binding agreement to acquire 28 KFC restaurants located in Australia. On 26 June 2017 the Group undertook a refinance of its borrowing facilities and entered into a new Syndicated Facility Agreement. The details of these agreements are referred to in Notes I1 and I2, of the financial report. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS The Group will continue to pursue the increase of profitability of its major business segments during the next financial period. Additional comments on expected results of operations of the Group are included in the review of operations section of this Report. ENVIRONMENTAL REGULATIONS The Group is subject to environmental regulation in respect of the operation of its restaurant sites. To the best of the Directors’ knowledge, the Group complies with its obligations under environmental regulations and holds all licences required to undertake its business activities. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 11 Directors’ Report Information on Directors Director Robert Kaye SC Experience, qualifications and directorships Robert is the Independent, Non-executive Chair. He is also Chair of ASX listed Spicers Limited and a Non-executive Director of ASX listed Magontec Limited and Chair of the Macular Disease Foundation. Graham Maxwell Kevin Perkins In 1978, Robert was admitted to legal practice and prior to this, was employed as a solicitor at Allen Allen & Hemsley Solicitors. Thereafter, he pursued his legal career at the NSW Bar and was appointed Senior Counsel in 2003, practising in commercial law. He has been extensively involved in an array of commercial matters both advisory and litigious in nature and served on a number of NSW Bar Association committees including the Professional Conduct Committee. Other listed entity directorships – current or held within last three years: Spicers Limited (2012 – current) Magontec Limited (2013 – current) UGL Limited (2015 – 2017) Graham is an experienced senior executive of corporate and franchise businesses, predominantly in fast moving consumer goods and fast foods, both in Australia and internationally. He is a commercially astute management professional with proven success in leveraging and growing businesses through their brands. Prior to his current role, Graham spent over six years working for Yum! Brands in a number of capacities. His last position with Yum! Brands was as Managing Director for KFC Southern Africa. Other listed entity directorships – current or held within last three years: None other than Collins Foods Limited. Kevin is a highly experienced executive in the Quick Service Restaurant (QSR) and casual dining segments of the Australian restaurant industry. He has had more than 32 years’ experience with the Collins Foods Group, having overseen its growth both domestically and overseas over that time. Kevin is the Non-executive Chairman of Sizzler USA Acquisition, Inc. He holds approximately 55% of the common stock in Sizzler USA Acquisition, Inc. Sizzler USA Acquisition, Inc operates or franchises Sizzler restaurants across the United States and Puerto Rico. The operations of Collins Foods and Sizzler USA Acquisition, Inc are separate. Other listed entity directorships – current or held within last three years: None other than Collins Foods Limited. Special responsibilities Independent Non-executive Chair Audit and Risk Committee Member Remuneration and Nomination Committee Member Managing Director & CEO Executive Director 12 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Director Newman Manion Bronwyn Morris B. Com, FCA, FAICD Russell Tate B. Com (Econ.) Experience, qualifications and directorships Newman has over 32 years’ experience in the food franchise industry, including various roles with Yum! (Franchisor of KFC) since 1982. Previously, Newman served as a Board member of KFC Japan (from 2005 to 2008), General Manager of KFC operations in Australia and New Zealand (from 1995 to 2004), Development Director of PepsiCo restaurants (including KFC) in Australia (from 1990 to 1995) and General Manager of KFC New Zealand (from 1988 to 1990). Most recently Newman was Vice-President, Operations for Yum!’s Asian franchise business (from 2004 until 2010). Other listed entity directorships – current or held within last three years: None other than Collins Foods Limited. Bronwyn is a Chartered Accountant and a former partner of KPMG. Bronwyn worked with that firm and its predecessor firms in Brisbane, London and the Gold Coast. For over 20 years, Bronwyn has been a full-time Non-executive Director and has served on the Boards of a broad range of companies. She currently serves as Chair of, or a member of, the Audit and Risk Committees with respect to a number of her Board roles. Bronwyn is a Director of Watpac Limited (since 2015), Royal Automobile Club of Queensland Limited (since 2008), RACQ Insurance Limited (since 2014), Gold Coast 2018 Commonwealth Games Corporation (since 2016) and Care Australia (since 2007). Other listed entity directorships – current or held within last three years: Watpac Limited (2015 to current) Special responsibilities Independent Non-executive Director Remuneration and Nomination Committee Chair Audit and Risk Committee Member Independent Non-executive Director Audit and Risk Committee Chair Remuneration and Nomination Committee Member Russell has over 32 years’ experience in senior executive and consulting roles in marketing and media. He was CEO of ASX listed STW Group Limited, Australia’s largest marketing communications group, from 1997 to 2006, Executive Chair from 2006 to 2008 and Deputy Chair (Non-executive) from 2008 to 2011. He was Chair (Non-executive) of Collins Foods Limited from its listing in 2011 until March 2015 and has remained Executive Chair of ASX listed Macquarie Radio Network Limited, now Macquarie Media Limited, since 2009. He is currently a Director of One Big Switch Pty Ltd (since 2012) and a Director of ROKT Pty Ltd (since 2016). Independent Non-executive Director Audit and Risk Committee Member Remuneration and Nomination Committee Member Other listed entity directorships – current or held within last three years: Macquarie Media Limited (since 2008, Executive Chair since 2009) ANNUAL REPORT 2017 COLLINS FOODS LIMITED 13 Directors’ Report The relevant interest of each Director in the share capital issued by the Company, at the date of this report is as follows: Name Robert Kaye SC Graham Maxwell Kevin Perkins Newman Manion Bronwyn Morris Russell Tate Ordinary shares 10,000 356,088 7,444,692 20,001 5,001 20,001 Performance Rights – 206,134 – – – – COMPANY SECRETARY Frances Finucan LLB (Hons), BA (Modern Asian Studies), Grad Dip ACG, FGIA, MQLS, GAICD The Company Secretary is Frances Finucan who was appointed to the role on 17 July 2013. Frances has over 15 years’ experience in legal, commercial and corporate governance working in legal, regulatory and company secretarial roles in Australia. MEETINGS OF DIRECTORS The number of meetings of the Company’s Board of Directors and of each Board Committee held during the period ended 30 April 2017, and the number of meetings attended by each Director, were: FULL MEETINGS OF DIRECTORS AUDIT AND RISK COMMITTEE REMUNERATION AND NOMINATION COMMITTEE Number of meetings (1) 16 Meetings attended 16 Number of meetings (1) 6 Meetings attended 6 Number of meetings (1) 5 Meetings attended 5 16 16 16 16 16 16 16 16 15 16 * * 6 6 6 * * 6 6 5 * * 5 5 5 * * 5 5 5 Robert Kaye SC Graham Maxwell Kevin Perkins Newman Manion Bronwyn Morris Russell Tate (1) Number of meetings represents the number of meetings held during the time the Director held office or membership of a Committee during the period. * Not a member of the relevant Committee. 14 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Letter to Shareholders Dear Shareholder, I am pleased to present you with Collins Foods Limited’s Remuneration Report for the reporting period ended 30 April 2017. In structuring the remuneration framework for executives and directors, the Remuneration and Nomination Committee has regard to the recommendations of the ASX Corporate Governance Council and the expectations of Australian corporate governance stakeholders. An outline of the remuneration framework and related governance documentation is available on the Company website at www.collinsfoods.com under Investors and we encourage shareholders to read the material available in here, in conjunction with this report. The remuneration policy for Collins Foods is designed to be responsible and appropriate, yet sufficiently competitive to attract and retain the necessary high calibre of directors and executives, as the Company’s circumstances evolve over time. This is supported by the 91.98% of votes cast at the 2016 Annual General Meeting in favour of the adoption of the Remuneration Report for the prior reported period. In designing the short term and long term incentive arrangements for executives, the intended focus is upon driving long term, sustainable shareholder wealth creation. In reviewing variable pay outcomes during the reporting period, the Remuneration and Nomination Committee takes responsibility for ensuring that these payments remain aligned with the shareholder experience over the reporting period, and this is demonstrably the case in respect of 2017. As presented, the short term incentive (STI) and long term incentive (LTI) programs are subject to EBITDA and earnings per share (EPS) growth measures, respectively, which are regarded to be transparent and key drivers of shareholder wealth outcomes. We are therefore pleased that adjusted EBITDA increased 8.9% to $81.3 million and underlying EPS increased 10.4% to 35.68 cents in 2017, while delivering a total shareholder return of around 35% during the period. This indicates that the incentives are effectively driving shareholder value creation, as intended. The 2017 reporting period has confirmed the Company’s place as a high performing member of the S&P ASX300 Index, and the Board has recognised the responsibilities and expectations that fall upon boards that hold such a position. With regard to the evolving expectations of company stakeholders, the directors continually welcome feedback from shareholders around the remuneration framework applied by Collins Foods and remain open to discussing the appropriateness of the performance metrics and provisions applied. During the reporting period the Board sought feedback on both remuneration practices, and engagement/ communication with shareholders, from independent external experts regarding remuneration practices appropriate to these new circumstances in which the Company finds itself. As a result, the directors remain confident that the outcomes for 2017 demonstrate an alignment between remuneration outcomes, and the performance delivered by Collins Foods, though improvements will continue to be made into 2018 as the remuneration framework, and mix of remuneration, is continually refined. Yours sincerely, Mr. Newman Manion Independent Non-executive Director Chair of the Remuneration and Nomination Committee ANNUAL REPORT 2017 COLLINS FOODS LIMITED 15     Directors’ Report Remuneration Report Persons covered by this report The Remuneration Report sets out, in accordance with section 300A of the Corporations Act: Ò the Company’s governance relating to remuneration; Ò the policy for determining the nature and amount or value of remuneration of key management personnel; Ò the various components or framework of that remuneration; Ò the prescribed details relating to the amount or value paid to key management personnel, as well as a description of any performance conditions; and Ò the relationship between the policy and the performance of the Company. In addition, the Company has decided to set out such further information as shareholders may require for them to obtain an accurate and complete understanding of the Company’s approach to the remuneration of Key Management Personnel (KMP). KMP are the Non-executive Directors, the Executive Directors and employees who have authority and responsibility for planning, directing and controlling the activities of the consolidated entity. On that basis, the roles or individuals addressed in this report are set out below. DIRECTORS There were no appointments or resignations of Directors during the period. Details of the Directors’ appointment dates, Board and Committee membership and experience and qualifications are set out in the “Directors” and “Information on Directors” sections of the Directors’ Report. EXECUTIVES CLASSIFIED AS KMP OR OTHERWISE ADDRESSED IN THIS REPORT Name Nigel Williams Title Group Chief Financial Officer (since 2015) Martin Clarke CEO – KFC, Australia (since 1980) John Hands Chief Supply Officer performed the role of Acting Head of Country (Germany) for the equivalent of three months during the reporting period (1 December 2016 to 31 March 2017) Mark van ‘t Loo CEO – KFC, Europe (commenced 9 March 2017) Context of and changes to KMP remuneration for FY17 and into FY18 MATTERS IDENTIFIED AS RELEVANT CONTEXT FOR REMUNERATION GOVERNANCE IN FY17 AND INTO FY18 The KMP remuneration structures that appear in this report are largely those that prevailed during the reporting period. These structures were implemented as part of a decision making process, including benchmarking, that was undertaken in previous reporting periods. The Board has undertaken to make continuous improvements to remuneration governance, policies and practices applied to KMP of the Company, as well as other employees, to ensure appropriateness to the circumstance of the Company as it evolves over time. During FY16 and the current reporting period, the Board sought feedback from both stakeholders and independent consultants about KMP remuneration governance and practices. Market capitalisation is one of the factors that influences external assessments of the appropriateness of remuneration; and it is understood that external groups tend to see it as the primary indication of the size and status of the Company, and the field in which the Company is competing for talent. In this regard it should be noted that the increase to the Company’s market capitalisation during the reporting period was partly the result of a material capital raising of approximately $54.5 million (refer ASX Announcement released 24 March 2017). However, the majority was the result of improvement in the Share price and a Total Shareholder Return (TSR) of around 35% was delivered. When the Company most recently undertook independent benchmarking for a particular group of KMP (this was for the Non-executive Director roles in FY16), the market capitalisation of the Company was lower than at the date of this report. The Company is going through a significant period of integration and transition following acquisitions made in line with its strategy to pursue growth opportunities: Ò 13 KFC restaurants in the New South Wales/Victorian border area; Ò 11 KFC restaurants in Stuttgart and Dusseldorf Germany with one additional restaurant opening shortly after completion of the acquisition; and Ò 16 KFC restaurants in Amsterdam, Hague and Almere in the Netherlands. KEY REMUNERATION MATTERS IDENTIFIED AND ADJUSTMENTS MADE SINCE THE PREVIOUS REPORT During the reporting period, KMP remuneration related matters were identified as requiring consideration and action for FY17 and possibly into FY18. Opportunities to improve the structure, extent and quality of disclosure presented in the Remuneration Report were identified. The Board has acknowledged that the mix of the remuneration elements in the past indicates a need to increase the weighting on equity components of remuneration aligned with the interests of shareholders over the long term, particularly with regards to the Managing Director and Chief Executive Officer, so as to: Ò align executive remuneration practices with accepted market practices and current best-practices; Ò motivate executives to continuously grow shareholder value by aligning their interests with those of shareholders through equity ownership; and Ò manage the risk of short-termism inherent to fixed remuneration and short-term incentives by exposing a significant proportion of remuneration to the longer term consequences of decision making, through the ownership position that is achieved when executives participate in equity plans. 16 ANNUAL REPORT 2017 COLLINS FOODS LIMITED However, it is the view of the Board that deferral of STI does not achieve the above objectives, compared to the impact of a long term incentives (LTI) because STI deferral periods tend to be shorter than LTI measurement periods, and are not subject to performance testing. Therefore, the Board intends to transition the mixes of remuneration elements offered to senior executives towards a higher weighting on LTI, over time. The outcome of the transition process is intended to be, that for the Managing Director and Chief Executive Officer there will be a greater weighting on LTI than on STI at target and for other senior executives, there will be an equal weighting between STI and LTI at target. This will, in the Board’s view, provide the appropriate level of focus on both short and long term performance to manage risks, align interests and ensure that the Company can continue to attract, retain and motivate the appropriate calibre of executives to execute the Company’s strategy. It is generally considered too high a risk in terms of loss of talent to reduce cash remuneration in such circumstances. Therefore, the transition will be gradual as new incumbents join the executive team, or market benchmarking shows a need to increase incentive levels. Some groups identified that a single metric LTI provides an incomplete picture of company performance (generally either internal or external assessment, in isolation), and that the use of earnings as the primary driver of both the STI, and the only driver of the LTI, could be improved by introducing other measures to the LTI assessment. During the period, the Board engaged an independent expert to develop a comparator group of 18 listed entities, and to analyse the incentive practices of those entities to inform the Company’s approach to incentive design in the future. The research showed that approximately one half of the group used a single metric, and one half of the group used two metrics, in relation to LTI performance measures. TSR was the most common metric (relative TSR being dominant), followed by earnings per share growth (EPSG), indicating that the Company is applying market practice in utilising the EPSG measure, and that consideration could be given to introducing a TSR measure. The Board deeply considered the introduction of a relative TSR measure in relation to the LTI, and observed that it would be challenging to develop a statistically robust comparator group of entities that are similar enough to the Company for the measure to be meaningful. The Board has determined that the introduction of a TSR measure would potentially undermine the links between Company performance and the reward of executives, compared to the current approach, which is showing demonstrably good correlations between earnings and TSR. That earnings will continue to drive TSR for shareholders is the reason the earnings measure was selected originally, and will continue to be used for LTI purposes. The research also showed that the EPSG objectives (threshold, target and stretch) set by the Company appear to align well with those disclosed by comparator entities in the market, indicating that they are appropriate, robust and challenging. Other measures such as return on capital were also considered. However, the Group is not a capital intensive business and return measures were also discarded as inappropriate. The Board intends that in the future the stretch/maximum EPSG objective will be approximately double the target value, to ensure that the maximum outcome is sufficiently challenging as to be unlikely to be achieved, and therefore, create an incentive to continue to outperform should target performance be exceeded before the end of the measurement period. Consideration will also be given to introducing an explicit “target” level to incentive scales. From FY18 onwards, the Board will set discrete amounts of STI and LTI to be included in a competitive and appropriate target total remuneration package (fixed remuneration plus target STI plus target LTI) towards which to transition executive packages over time, as discussed above. This will result in annual grants of LTI that will not be linked to STI and which will be performance tested over a three year measurement period. The potential for the use of normalised earnings, or the Board’s power of discretion to modify LTI hurdles, to be used to advantage executives was noted by some external stakeholders. The use of normalised earnings has to date been applied to the assessment of the starting point for the award scale, rather than the end point, with the effect of increasing the difficulty of the hurdle for management, and not advantage management. It is the explicit intention of the Board to only exercise its discretion to modify incentive outcomes when the outcome would otherwise be considered inappropriate by shareholders. The further intention is to use reported earnings in assessing incentive outcomes wherever this approach may be applied without producing inappropriate outcomes. Any normalisation or applications of discretion that impacts incentive outcomes will be explained in the Remuneration Report for the reporting period to which they relate, so as to provide transparency in this regard. Performance calculated in respect of the short and long term incentives paid during the reporting period were not subject to any normalisation adjustments (no normalisation or underlying profit used). It is the view of the Board that it is important for the Board to have the ability to make adjustments, where appropriate, to ensure the alignment between Company performance and reward, and that this is not against the interests of shareholders. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 17 Directors’ Report Remuneration Report (continued) OVERVIEW OF COLLINS FOODS REMUNERATION GOVERNANCE FRAMEWORK AND STRATEGY The performance of the Group is contingent upon the calibre of its Directors and executives. The Group’s remuneration framework is based upon the following key principles: Ò a policy that enables the Company to attract and retain valued Directors and executives who create value for shareholders; Ò motivating executives and Executive Directors to pursue long term growth and success of the Group, aligned with shareholder’s interests; Ò demonstrating a clear relationship between performance and remuneration; Ò having regard to prevailing market conditions; Ò reflective of short term and long term performance objectives appropriate to the Company’s circumstances and goals; Ò transparency; and Ò fairness and acceptability to shareholders. The Company seeks input regarding the governance of KMP remuneration from a wide range of sources, including: Ò shareholders; Ò Remuneration and Nomination Committee members; Ò stakeholder groups including proxy advisors; Ò external remuneration consultants (ERCs); Ò other experts and professionals such as tax advisors and lawyers; and Ò Company management to understand roles and issues facing the Company. The following outlines a summary of Collins Foods’ remuneration governance framework. REMUNERATION AND NOMINATION COMMITTEE The role of the Remuneration and Nomination Committee is to ensure that appropriate remuneration policies are in place which are designed to meet the needs of the Company and to enhance corporate and individual performance. That is, the development, maintenance and application of the Remuneration Governance Framework for the purposes of making recommendations to the Board regarding KMP remuneration matters, as well as advising the Board on procedures that must be undertaken in relation to the governance of remuneration, and communicating such matters to the market (such as the calculation of grants of incentives, review of performance conditions and receipt of independent advice, etc.). More specifically, the Committee is responsible for making recommendations to the Board on: Ò the Group’s remunerations principles, framework and policy for senior executives and Directors; Ò remuneration levels of senior management executives and Executive Directors; 18 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Ò the operation of incentives plans and other employee benefit programs which apply to senior executives; and Ò remuneration for Non-executive Directors. In carrying out its responsibilities, the Committee is authorised to obtain external professional advice as it determines necessary. The Board has ultimate responsibility for signing off on remuneration policies, practices and outcomes. The Remuneration and Nomination Committee operated in accordance with the aims and aspirations of Principle 8 of the ASX Corporate Governance Principles and Recommendations (ASX Principles and Recommendations). The role and responsibilities of the Committee are outlined in the Remuneration and Nomination Committee Charter, available on the Company’s website. As at the end of the reporting period, the Remuneration and Nomination Committee was composed of all of the Company’s independent non-executive directors only. SECURITIES TRADING POLICY The Securities Trading Policy is available on the Company’s website. It contains the standard references to insider trading restrictions that are a legal requirement under the Corporations Act, as well as conditions associated with good corporate governance. The Securities Trading Policy also follows the recommendations set out in ASX Guidance Note 27, “Trading Policies”. The policy specifies “trading windows” during which Directors and restricted employees of the Company may trade in the securities of the Company. It also requires Directors and restricted employees to obtain prior written clearance for any trading in the Company’s securities, and prohibits trading at all other times unless an exception is granted following an assessment of the circumstances (for example financial hardship). Trading windows arise during the 30 day period commencing upon the trading day, the day after of each of the following events: Ò announcement to ASX of the Company’s full or half-year results; Ò Annual General Meeting; and Ò release of a disclosure document offering equity securities in the Company. The Board may suspend all dealings in the Company’s securities at any time, should it be appropriate. EXECUTIVE REMUNERATION CONSULTANT ENGAGEMENT POLICY The Company has adopted an executive remuneration consultant (ERC) engagement policy which is intended to manage the interactions between the Company and ERCs, so as to ensure their independence that the Remuneration and Nomination Committee will have clarity regarding the extent of any interactions between management and the ERC. This policy enables the Board to state with confidence whether or not the advice received has been independent, and why that view is held. The Policy states that ERCs are to be approved and engaged by the Board before any advice is received, and that such advice may only be provided to a non-executive director. Any interactions between management and the ERC must be approved and overseen by the Remuneration and Nomination Committee. Non-executive Directors’ remuneration comprises the following components: Ò board and committee fees; and Ò superannuation (compulsory contributions). Board fees are structured by having regard to the responsibilities of each position within the Board. Board committee fees are structured to recognise the differing responsibilities and workload associated with chairing the Board and each of the committees. The Company’s constitution allows for additional payments to be made to Directors where extra or special services are provided. Specific fee rates are presented elsewhere in the Remuneration Report. SHORT TERM INCENTIVE (STI) POLICY Incentives under the Group’s STI plan are at risk components of remuneration for executives provided in the form of cash. The STI plan entitles executives to earn an annual cash reward payment if predefined targets are achieved. The level of the incentive is set with reference to the accountabilities of the executive’s role and their ability to impact Group performance. STI deferral does not apply, as STI deferral is inferior to providing appropriate levels of LTI in achieving the purpose of STI deferral, and this is the focus of the Company’s policy regarding incentives for FY18 and beyond. LONG TERM INCENTIVE (LTI) POLICY Currently, the LTI plan of the Company is that an annually offered component of remuneration of executives should be at risk and based on equity in the Company to ensure that executives hold a stake in the Company, to align their interests with those of shareholders, and that executives share risk with shareholders. Further, the: Ò LTI should be based on performance rights that vest based on assessment of performance against objectives; Ò measurement period should be three years; and Ò measures of long term performance should be the measure or measures which best drives value creation for shareholders, given the specific circumstances of the Company. SECURITIES HOLDING POLICY The Board currently sees a securities holding policy as unnecessary since executives will receive a significant component of remuneration in the form of equity from FY18 onwards. The Company’s constitution states that Directors are not required to be a shareholder in order to be appointed as a director. All of the Directors hold equity in the Company voluntarily. EXECUTIVE REMUNERATION The following outlines the policy that applies to executive KMP (and does not apply to non-executive directors). The remuneration for executives is structured, taking into consideration the following factors: Ò Group’s remuneration principles; Ò level and structure of remuneration paid to executives of other publicly listed Australian companies of similar size; Ò position and responsibilities of each executive; Ò appropriate benchmarks and targets to reward executives for Group and individual performance; Ò remuneration should be reviewed annually and composed of: – base package (inclusive of superannuation, allowances, benefits and any applicable fringe benefits tax (FBT) as well as any salary sacrifice arrangements); – STI which provides a reward for performance against annual objectives; – LTI which provides an equity-based reward for performance against indicators of shareholder benefit or value creation, over a three year period; and – in total, the sum of the elements will constitute a total remuneration package (TRP); Ò both internal relativities and external market factors should be considered; Ò that the base package policy mid-points should be set with reference to relevant market practices; Ò that TRPs should be structured with reference to market practices and the circumstances of the Company at the time; Ò remuneration will be managed within a range so as to allow for the recognition of individual differences such as the calibre of the incumbent and the competency with which they fulfil a role (a range of +/- 20% is used, in line with common market practices); Ò exceptions will be managed separately such as when particular talent needs to be retained or there are individuals with unique expertise that need to be acquired; and Ò termination benefits will generally be limited to the default amount that may be provided for without shareholder approval, as allowed for under the Corporations Act, and will be specified in employment contracts. The Company’s Remuneration Policy can be obtained from the Company’s website. NON-EXECUTIVE DIRECTOR REMUNERATION The remuneration for Non-executive Directors is set, taking into consideration factors including: Ò the level of fees paid to Board members of other publicly listed Australian companies of similar size; Ò operational and regulatory complexity; and Ò the responsibilities and workload requirements of each Board member. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 19 Directors’ Report Remuneration Report (continued) VARIABLE EXECUTIVE REMUNERATION – THE SHORT TERM INCENTIVE PLAN Short Term Incentive Plan (STIP) ASPECT Purpose Measurement period Award opportunities PLAN RULES, OFFERS AND COMMENTS The STIP’s purpose is to give effect to an element of remuneration. This element of remuneration constitutes part of a market competitive total remuneration package and aims to provide an incentive for executives to deliver and outperform annual business plans that will lead to sustainable superior returns for shareholders. The STIP aims to reflect current trading conditions experienced by the Company. Target based STIs are also intended to modulate the cost to the Company of employing executives, such that risk is shared with the executives themselves and the cost to the Company is reduced in periods of poor performance. The Company’s reporting period. The Managing Director and CEO was offered a target based STI equivalent to 50% of total fixed remuneration for target performance, with a maximum opportunity of up to 75% of total fixed remuneration. Other KMP were offered a target based STI equivalent to between 50% and 60% of their total fixed remuneration for target performance with a stretch opportunity of up to 150% of the target. No changes are anticipated to be made in respect of FY18 offers. Comments While the Board has recognised that the FY17 STI opportunities may be viewed as high by some external stakeholders, a transition plan has been put in place to adjust the mix of remuneration elements to reduce the weighting on STI over time (as noted in the earlier sections of this report). It should also be recognised that total remuneration packages (the sum of fixed remuneration and incentives) are not high or excessive. Key Performance Indicators (KPIs), weighting and performance goals FY17 offers FY17 offers of STI were calculated on the achievement of underlying EBITDA performance objectives (100% weighting), and subject to the following award scale: % EBITDA target achieved (applies to Company or Division/Brand) % target bonus earned STANDARD % PAYOUT TABLE 100 101 102 103 104 105 106 107 108 109 110 0 15 30 45 60 75 90 105 120 135 150 With the exception of the Managing Director and CEO, of the STI, 75% of the outcome in relation to this measure is then awarded in relation to this aspect alone and the remaining 25% is subject to an individual performance modifier which scales this portion of the incentives up or down in relation to individual performance. If 150% of target is achieved in relation to the EBITDA aspect, the application of the individual scale cannot produce an outcome which exceeds 150% of the target award, as this is set as a cap. 20 ANNUAL REPORT 2017 COLLINS FOODS LIMITED FY18 offers FY18 sees changes to the STI scheme rules for KMPs as follows: Ò targets set equate to budgeted EBITDA plus bonus value; Ò reduction of the threshold required to trigger the bonus payment to 95% of the target with a linear scale to 100% of the target i.e. 95.5% of target equates to 10% of bonus payment; Ò 100% of target equates to 100% bonus payment; Ò overachievement is measured at increments of 1% point of target equating to an additional 5% of bonus payment i.e. 103% of target equates to 115% of bonus payment; and Ò maximum is consistent with prior years being 110% target equating to 150% of bonus payment. Comments The Board is of the view that EBITDA is the primary driver of shareholder value creation in the short term, and that the combination of this measure with individual performance assessments provides a fair and accurate assessment of performance in the context of a particular executive role. Calculations are performed following the end of the measurement period and the audit of Company accounts. Payments are made in cash with PAYG tax deducted, paid following the completion of the measurement period and audited financial report. Award determination and payment Cessation of employment during a measurement period In the event of cessation of employment due to dismissal for cause all entitlement in relation to the measurement period are forfeited. Plan gate and Board discretion Fraud, gross misconduct etc. Purpose In the event of cessation of employment for other reasons and the minimum term of three months of employment has not been satisfied, all entitlement in relation to the measurement period are forfeited, unless otherwise determined by the Board. No awards are paid on termination that would breach the default limit on termination benefits for managerial and executive officers, unless shareholder approval is obtained to do so. If the Company’s overall performance during the measurement period is substantially lower than expectations and resulted in significant loss of value for shareholders the Board may abandon the STIP for the measurement period or adjust STI payouts downward. The Board also has discretion to modify payouts, however, as noted earlier in this report, it has been determined that such discretion will only be applied in future when it would be substantially inappropriate not to do so, due to an anomaly during the measurement period, or because of exceptional circumstances, which would be explained in detail as part of the Remuneration Report. An earnings gate is effectively built into the award scale. If the Board forms the view that a participant has committed fraud, defalcation or gross misconduct in relation to the Company then all entitlements in relation to the measurement period will be forfeited by that participant. The LTIP’s purpose is to give effect to an element of executive remuneration. This element of remuneration constitutes part of a market competitive total remuneration package and aims to provide an incentive for executives to deliver Company performance that will lead to sustainable superior returns for shareholders. Another purpose of the LTIP is to act as a retention mechanism so as to maintain a stable team of performance focussed executives, to create alignment with the interests and experiences of shareholders and to modulate the cost to the Company of employing executives such that in periods of poor performance the cost is lesser (applies to non-market measures under AASB2). Currently the Company operates a performance rights plan. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 21 Directors’ Report Remuneration Report (continued) Form of equity The LTIP is in the form of a performance rights plan, which is based on rights that are subject to vesting conditions, which confer the right (following valid conversion) to the value of a share at the time, either: LTI value Ò settled in shares that may be issued; or Ò settled in the form of cash; at the discretion of the Board (a feature intended to ensure appropriate outcomes in the case of a termination). There is no entitlement to dividends during the measurement period. The Board retains discretion to determine the value of LTI to be offered each reporting period, subject to shareholder approval in relation to Directors, when the rights are to be settled in the form of a new issue of Company shares. The Board may also seek shareholder approval for grants to directors in other circumstances, at its discretion. FY17 offers In relation to the Managing Director/CEO, performance rights with a maximum value equivalent to 50% of the total fixed remuneration. For other executives (direct reports to the Managing Director/CEO) the LTI granted was equivalent to 30-40% of the previous reporting period’s STI award, and 20% of base packages at maximum. Approximately half of these grants are expected to be awarded for target performance outcomes, with the maximum/stretch outcome being considered unlikely by design. FY18 offers As noted elsewhere in this report, for FY18, LTI awards will no longer be linked to STI awards in the previous reporting period, and discrete STI and LTI opportunities will be set going forward. Comments Based on the CEO, the following example is given regarding how the number of performance rights to grant a participant in the LTIP are calculated. This involves dividing the maximum LTI percentage of the base package (as per the policy at the time) by the relevant volume weighted average price (VWAP) for shares. INDICATIVE FOR FY18 Base LTI Target LTI Max Share Price (VWAP) Number of Rights 50% 100% $5.18 $800,000 $800,000 154,440 Measurement period The measurement period will include three reporting periods unless otherwise determined by the Board. FY17 offers Beginning 2 May 2016 and ending 28 April 2019. FY18 offers Beginning 1 May 2017 and ending 3 May 2020. Comments Three year measurement periods combined with annual grants will produce overlapping cycles that will promote a focus on producing long term sustainable performance/value improvement and mitigates the risk of manipulation and short-termism. Some stakeholders have noted that the measurement period has at times been marginally less than three years due to issues related to when grants could be calculated and made, however, not materially so. It is trusted that such nuances will not be of concern to shareholders. 22 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Vesting conditions The Board has discretion to set vesting conditions for each offer. Performance rights that do not vest will lapse. FY17 offers Except as indicated below, a participant must remain employed by the Company for a minimum 12 month term from the date of grant and the performance conditions must be satisfied for performance rights to vest. The FY17 offers included a single EPSG vesting condition, assessable on the basis of the compound annual growth rate (CAGR) as follows: Annualised EPS growth (CAGR) % of max/stretch/ grant vesting Performance level Stretch/maximum 10% Between threshold and stretch >6%, <10% Threshold Below threshold 6% <6% FY18 offers FY18 offers had not been determined at the time of writing of this report. However, the Board has noted feedback regarding setting the difficulty of the EPSG objectives and will in future consider analyst forecasts in setting the target, and intends to set the stretch/ maximum level of performance at around double the target EPSG as noted elsewhere in this report. The Company’s business plans over the measurement period will also play a role. At the time of writing of this report, the following vesting scale was anticipated to apply for FY18: Annualised EPS growth (CAGR) % of max/stretch/ grant vesting Performance level Stretch/maximum 22% Between target and stretch >11%, <22% Target 11% Below threshold and target >5.5%, <11% Threshold Below threshold 5.5% <5.5% 100% Pro-rata 20% 0% 100% Pro-rata 50% Pro-rata 25% 0% Comments An earnings measure was selected as it is considered by the Board to be the primary driver of TSR over the long term, and this measure has shown good correlation with TSR outcomes for shareholders in the past. As noted elsewhere in this report, an appropriate relative total shareholder return comparator group could not be identified. EPS will be measured on an absolute basis, calculating the compound growth in the Company’s basic EPS attributable to ordinary equity holders of the Company over the performance period, with reference to the disclosed EPS in the Company’s annual audited financial reports. The plan rules do not contemplate retesting and therefore retesting is not a feature of the Company’s current LTI offers. Retesting Plan gate and Board discretion An effective gate of EPS needing to exceed a threshold level of growth is built into the design of the vesting scale. Amount payable for performance rights The Board retains a discretion to adjust the EPS performance condition to ensure that participants are not penalised nor provided with a windfall benefit arising from matters outside of management’s control that affect EPS (for example, excluding one-off non- recurrent items or the impact of significant acquisitions or disposals). Please refer to discussion regarding the application of such discretions, presented elsewhere in this report. No amount is payable for performance rights. The value of rights is included in assessments of remuneration benchmarking and policy positioning. This is standard market practice and consistent with the nature of performance rights. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 23 Directors’ Report Remuneration Report (continued) Conversion of vested performance rights Under the plan rules, the conversion of performance rights to shares occurs automatically upon vesting conditions being declared by the Board as having been met, except where the Board exercises its discretion to settle in the form of cash. Disposal restrictions etc. Cessation of employment Change of control of the Company No amount is payable by participants to exercise vested performance rights in respect of any grants. The Company may impose a mandatory holding lock on the shares or a participant may request they be subject to a voluntary holding lock. Performance rights are not entitled to receive a dividend. Any shares issued or transferred to a participant upon vesting of performance rights are only entitled to dividends if they were issued on or before the relevant dividend entitlement date. Shares issued or transferred under the LTIP rank equally in all respects with other shares on issue. In the event of a capital reconstruction of the Company (consolidation, subdivision, reduction, cancellation or return), the terms of any outstanding performance rights will be amended by the Board to the extent necessary to comply with the listing rules at the time of reconstruction. Any bonus issue of securities by way of capitalisation of profits, reserves or share capital account will confer on each performance right, the right: Ò to receive on exercise or vesting of those performance rights, not only an allotment of one share for each of the performance rights exercised or vested but also an allotment of the additional shares and/or other securities the employee would have received had the employee participated in that bonus issue as a holder of shares of a number equal to the shares that would have been allotted to the employee had they exercised those Incentives or the performance rights had vested immediately before the date of the bonus issue; and Ò to have profits, reserves or share premium account, as the case may be, applied in paying up in full those additional shares and/or other securities. Subject to a reconstruction or bonus issue, performance rights do not carry the right to participate in any new issue of securities including pro-rata issues. Performance rights will not be quoted on ASX. The Company will apply for quotation of any shares issued under the LTIP. In the event of cessation of employment within 12 months of the date of grant, unvested rights are forfeited unless otherwise determined by the Board, in which case any service condition will be deemed to have been fulfilled as at the testing date, and subjected to performance testing along with other participants. If in the opinion of the Board a change of control event has occurred, or is likely to occur, the Board may declare a performance right to be free of any vesting conditions and, if so, the Company must issue or transfer shares in accordance with the LTIP rules. In exercising its discretion, the Board will consider whether measurement of the vesting conditions (on a pro-rata basis) up to the date of the change of control event is appropriate in the circumstances. 24 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Non-executive Director fee policy rates for FY17 and FY18 and fee limit Non-executive Director fees are managed within the current annual fees limit (AFL or fee pool) of $900,000 which was approved by shareholders at the 2016 Annual General Meeting. The following table outlines the Non-executive Director fee policy rates that were applicable during the reported period: Function Main Board Audit and Risk Committee Remuneration and Nomination Committee Role Chair Member Chair Member Chair Member Fee including super $210,000 $100,000 $20,000 $7,500 $15,000 $7,500 The same fee policy rates are expected to apply for FY18, unless the Board determines to undertake a review during the period. Remuneration records for FY17 – statutory disclosures EXECUTIVE REMUNERATION The following table outlines the remuneration received by executives of the Company during FY16 and FY17 prepared according to statutory disclosure requirements and applicable accounting standards: Name Role(s) Year Salary Super- annuation Contributions Other benefits Base package Amount % of TRP Amount STI % of TRP Amount LTI (1) % of TRP Total Remuneration Package (TRP) Termination Benefits Change in accrued leave (2) 2017 $728,018 $21,982 $40,308 $790,308 83% – – $160,258 17% $950,566 2016 $610,581 $29,167 $40,426 $680,174 45% $487,500 32% $344,064 23% $1,511,738 2017 $222,849 $19,568 $31,795 $274,212 100% 2016 $281,531 $16,001 $31,832 $329,364 81% Group CFO 2017 $338,109 $19,568 $47,073 $404,750 86% – – – – – – – – $274,212 $78,029 19% $407,393 $68,192 14% $472,942 Group CFO 2016 $318,034 $18,016 $41,994 $378,044 57% $252,404 38% $33,113 5% $663,561 2017 $299,431 $19,568 $42,949 $361,948 85% – – $62,236 15% $424,184 2016 $282,838 $26,162 $42,402 $351,402 54% $238,289 37% $60,736 9% $650,427 2017 $78,037 $4,892 $2,834 $85,763 100% 2016 2017 2016 – – $65,208 $4,172 – – – – – – – $69,380 100% – – – – – – – – – – – – $85,763 – $69,380 – – – – – – – – – (1) The LTI value reported in this table is the amortised accounting charge of all grants that were not lapsed or vested at the start of the reporting period. Where a market based measure of performance is used such as TSR, no adjustments can be made to reflect actual LTI vesting. However, in relation to non-market condition, such as EPS, adjustments must be made to ensure the accounting charge matches the vesting. (2) The change in accrued leave includes negative amounts during the reporting periods. The negative amounts reflect leave that has been taken during the reporting period measured in accordance with AASB 119 Employee Benefits. (3) Short term role as Acting Head of Country for equivalent of three months during the reporting period (1 December 2016 to 31 March 2017). (4) Commenced 9 March 2017. Both target and awarded values of STI and LTI remuneration are outlined in the relevant sections of the Remuneration Report to assist shareholders to obtain a more complete understanding of remuneration as it relates to senior executives. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 25 Graham Maxwell Kevin Perkins Nigel Williams Martin Clarke John Hands (3) Mark van ‘t Loo (4) Managing Director/CEO Managing Director/CEO Executive Director Executive Director CEO – KFC, Australia CEO – KFC, Australia Acting Head of Country (Germany) – CEO – KFC, Europe – – – – – – – – – – – – $4,675 ($3,346) ($932) ($78,630) $2,771 $5,381 ($42,629) ($15,145) – – $6,270 Directors’ Report Remuneration Report (continued) NON-EXECUTIVE DIRECTOR REMUNERATION Remuneration received by Non-executive Directors in FY17 and FY16 is disclosed below: Name Robert Kaye, SC Newman Manion Bronwyn Morris Russell Tate Role(s) Independent, Non-executive Chairman Independent, Non-executive Chairman Independent Non-executive Director Independent Non-executive Director Independent Non-executive Director Independent Non-executive Director Independent Non-executive Director Independent Non-executive Director Year 2017 2016 2017 2016 2017 2016 2017 2016 (1) The total paid includes 52 weeks of fees and 53 weeks of superannuation. Board and Committee fees Superannuation $18,548 $191,781 Other Benefits – Termination Benefits – $180,000 $111,872 $100,000 $116,438 $105,000 $115,000 $95,000 $17,100 $10,628 – – – $30,000 $11,253 $9,975 – – – – – – – – – – – – – Total (1) $210,329 $197,100 $122,500 $130,000 (1) $127,691 $114,975 $115,000 $95,000 Planned executive remuneration for FY17 (non-statutory disclosure) The following table is provided to ensure that shareholders have an accurate understanding of the Board’s intention regarding the remuneration offered to executives during FY17, for target performance. It should be noted that the table presents target incentive opportunities for achieving a challenging but achievable target level of performance. In the case of STI, the maximum incentive may be up to 50% higher (i.e. 150% of the target). Incumbent Position Managing Director/CEO Graham Maxwell Base package including super STI opportunity LTI opportunity Fixed % TRP Target % of base package Target STI amount STI % TRP Target % of base package Target LTI amount LTI % TRP Total remuneration package at target performance $750,000 50% 50% $375,000 25% 50% $375,000 25% $1,500,000 Executive Director(1) Kevin Perkins $265,000 100% – – – – – – Group CFO Nigel Williams $360,500 60% 50% $180,250 30% 17% $60,083 10% $265,000 $600,833 CEO – KFC, Australia CEO – KFC, Europe Martin Clarke $319,000 56% 60% $191,400 33% 20% $63,000 11% $574,200 Mark van 't Loo €276,355 60% 50% €138,178 30% 17% €46,059 10% €460,592 (1) Includes director fees. The LTI presented in the table above represents the fair value of LTI granted during the FY17 period. 26 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Performance outcomes for FY17 including STI and LTI assessment COMPANY PERFORMANCE The market appears to have had a mixed response to the Company’s new strategy and progress during FY17, as indicated by the relatively high volatility in the share price during the reporting period, though as at the end of the reporting period the market response seems to be positive. During the reporting period, the Company acquired KFC restaurants in New South Wales and Victoria in Australia, Germany and the Netherlands. The Company’s performance during the reported period and the previous four reporting periods in accordance with the requirements of the Corporations Act follow: FY end date FY17 FY16 FY15 FY14 FY13 Revenue ($m) $633.56 $574.28 $571.59 $440.56 $423.89 Profit after tax ($m) Share price $5.25 $27.99 $29.12 ($10.36) $14.03 $16.37 $4.02 $2.44 $1.91 $1.89 (1) Dividends used are the cash amount (post franking). Change in share price Dividends(1) $0.160 $1.23 $1.58 $0.53 $0.02 $0.125 $0.110 $0.100 Short term change in shareholder value over 1 year (SP increase + dividends) Long term (cumulative) 3 years change in shareholder value Amount $1.390 $1.705 $0.640 $0.120 % 35% 70% 34% 6% Amount $3.74 $2.47 $1.61 % 196% 130% 140% LINKS BETWEEN PERFORMANCE AND REWARD The remuneration of KMP is intended to be composed of three parts as outlined earlier, being: Ò base package, which is not intended to vary with performance but which tends to increase as the scale of the business increases; Ò STI which is intended to vary with indicators of annual Company and individual performance, including a deferred component which will vary with exposure to the market; and Ò LTI which is also intended to deliver a variable reward based on long-term measures of Company performance. The STI paid during the FY17 period related to performance during the FY16 period. The weighted average of 145% of the target STI amount was paid on 10 July 2016. This level of award was considered appropriate under the STI scheme that was in place during FY16, which is summarised in the table below. Therefore, there were strong links between internal measures of Company performance and the payment of short term incentives. Name Graham Maxwell Managing Director/CEO Position held at reporting period end Kevin Perkins Executive Director Nigel Williams Group CFO Martin Clarke CEO – KFC, Australia FY16 Company level KPI summary KPI summary EBITDA Weighting EBITDA Target 100% $69,444,000 Achievement 150% Awarded $487,500 Award outcomes FY16 paid FY17 Total STI award $487,500 EBITDA EBITDA EBITDA 100% – 100% $69,444,000 100% $75,910,000 – 150% 129% – – $252,404 $252,404 $238,289 $238,289 There was no STI achieved under the STIP for the reported period. As noted elsewhere in this report, the Board is of the view that EBITDA is the primary driver of value creation for shareholders in the short term. During the reporting period grants of equity were made in relation to the LTI scheme as part of remuneration for FY17, but did not vest due to the presence of the long-term measurement period and vesting conditions that are yet to be completed/assessed. Details are given elsewhere in this report in relation to changes in equity interests. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 27 Directors’ Report Remuneration Report (continued) During the reporting period, grants that were made to Kevin Perkins on 18 September 2013 and all other grantees on 1 October 2013, vested in relation to FY16 being completed, i.e. vesting during FY17 are noted below: Role Tranche Weighting Number eligible to vest in FY17 for FY16 completion % of max/ stretch/ grant vested Actual outcome Number vested Grant date VWAP $ Value of LTI that vested (as per grant date VWAP) Managing Director/CEO EPSG 100% 356,088 21.2% 100% 356,088 $1.684976 $600,000 Executive Director EPSG 100% 103,859 21.2% 100% 103,859 $1.684976 $175,060 Incumbent Graham Maxwell Kevin Perkins(1) Nigel Williams(2) Group CFO EPSG 100% – – – – – – Martin Clarke CEO – KFC, Australia EPSG 100% 35,608 21.2% 100% 35,608 $1.684976 $60,000 (1) Relates to performance rights granted whilst still performing the role of Managing Director and CEO. (2) Appointed to Group CFO role on 18 May 2015. On 18 July 2016 following satisfaction of the vesting conditions the performance rights previously granted under the LTIP converted to fully paid ordinary shares. Each participant was issued with shares based on the volume weighted average price of $4.15. The following outlines the vesting scale that was applicable to the above outcomes: Performance level Stretch/maximum Between threshold and stretch Threshold Below threshold Annualised EPS growth (CAGR) 10% % of max/stretch/grant vesting 100% >6%, <10% 6% <6% Pro-rata 20% 0% In relation to the completion of the reporting period, previous grants of equity made under the LTI scheme are eligible to be tested for vesting in relation to grants that were made on 13 November 2014 (i.e. will be eligible for vesting during FY18 in relation to the completion of FY17). However, as at the date of drafting of this report, vesting was yet to be determined. Therefore, the table below presents the vesting of LTI that may occur during the next reporting period i.e. in relation to the completion of FY17. Incumbent Graham Maxwell Role Managing Director/CEO Tranche Weighting 100% EPSG Kevin Perkins(1) Executive Director Nigel Williams(2) Group CFO Martin Clarke CEO – KFC, Australia EPSG EPSG EPSG 100% 100% 100% Number eligible to vest in FY18 for FY17 completion 92,301 – – % of max/ stretch/ grant vested 100% Number eligible to vest Grant date VWAP 92,301 $2.166810 – – $ Value of LTI that vested (as per grant date VWAP) $200,000 – – 27,690 100% 27,690 $2.166810 $60,000 (1) Eligible participant, however as announced via ASX, will not receive performance rights pursuant to current executive services agreement. (2) Appointed to Group CFO role on 18 May 2015. All performance rights issued during the reporting period ended 30 April 2017 have an expiry date of 23 July 2019 and were issued with an exercise price of nil. All performance rights issued during the reporting period ended 1 May 2016 have an expiry date of 24 July 2018 and were issued with an exercise price of nil. All performance rights issued during the reporting period ended 3 May 2015 have an expiry date of 26 July 2017 and were issued with an exercise price of nil. There were two tranches of performance rights issued during the reporting period ended 30 April 2017. The assessed fair value of performance rights issued on 7 September 2016 was an average of $4.20. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $4.58, the term of the right, the expected dividend yield of 2.83% and the risk free interest rate for the term of the rights of 1.51%. The assessed fair value of performance rights issued on 29 September 2016 was an average of $4.13. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $4.50, the term of the right, the expected dividend yield of 2.83% and the risk free interest rate for the term of the rights of 1.51%. 28 ANNUAL REPORT 2017 COLLINS FOODS LIMITED There were two tranches of performance rights issued during the reporting period ended 1 May 2016. The assessed fair value of performance rights issued on 1 October 2015 was an average of $2.77. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $3.22, the term of the right, the expected dividend yield of 4.88% and the risk free interest rate for the term of the rights of 2.06%. The assessed fair value of performance rights issued on 22 December 2015 was an average of $4.14. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $4.61, the term of the right, the expected dividend yield of 3.65% and the risk free interest rate for the term of the rights of 2.02%. The assessed fair value of performance rights issued on 12 November 2014 was an average of $1.89. The following outlines the vesting scale that was applicable to the above outcomes: Performance level Stretch/maximum Between threshold and stretch Threshold Below threshold Annualised EPS growth (CAGR) 10% % of max/stretch/grant vesting 100% >6%, <10% 6% <6% Pro-rata 20% 0% At no time during or in relation to reported period did the Board exercise its discretion to increase the vesting of any equity that was subject to such discretion. LINKS BETWEEN COMPANY STRATEGY AND REMUNERATION The Company intends to attract the superior talent required to successfully implement the Company’s strategies at a reasonable and appropriately variable cost by: Ò positioning Base Packages (the fixed element) around relevant market data benchmarks when they are undertaken; Ò supplementing the Base Package with at-risk remuneration, being incentives that motivate executive focus on: – short to mid-term objectives linked to the strategy via KPIs and annual performance assessments; and – long term value creation for shareholders by linking a material component of remuneration to those factors that shareholders have expressed should be the long term focus of executives and the Board. The executive remuneration framework components and their links to performance outcomes are outlined below: Remuneration component Fixed remuneration Vehicle Base pay and benefits including superannuation Short Term Incentive Plan (STIP) Cash bonus payment Purpose To provide competitive fixed remuneration set with reference to position and responsibilities in the context of the market Rewards executives for their contribution to the achievement of Group and/or divisional outcomes Link to performance Group and individual performance assessments are considered in an annual remuneration review, and market capitalisation plays a role in benchmarking EBITDA targets must be met in order for bonus to be paid Long Term Incentive Plan (LTIP) (approved by shareholders at the 2013 and 2016 Annual General Meetings) Awards in the form of performance rights Rewards executives for their contribution to the creation of shareholder value over the longer term Earnings per share (EPS) targets over three year period must be met in order for rights to vest The Group’s aim is to reward executives with an appropriate level and mix of remuneration to attract, retain and motivate them to build long term value for the Group and its shareholders. The introduction of the LTIP has changed the remuneration mix for KMP, resulting in a higher proportion of an executive’s target pay being at risk. The effect of the introduction of the LTIP is that a percentage of the executive’s remuneration is directly linked to Group performance in both the short and longer term. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 29 Directors’ Report Employment terms for KMP SERVICE AGREEMENTS A summary of contract terms in relation to executive KMP is presented below: Name (1) Graham Maxwell Position held at close of FY16 Managing Director/ CEO Duration of contract Open ended From Company 12 months From KMP 12 months Termination Payments (3) Up to 12 months Period of Notice (2) Kevin Perkins Executive Director Open ended Nigel Williams Group CFO Open ended Martin Clarke CEO – KFC, Australia Open ended Mark van 't Loo CEO – KFC, Europe Open ended 3 months 3 months 3 months 6 months 3 months 3 months 1 month 3 months Up to 12 months Up to 12 months Up to 12 months Up to 12 months (1) The contract term for John Hands related to his role as Chief Supply Officer and did not change for the time that he performed the role of Acting Head of Country (Germany). (2) Provision is also made for the Group to be able to terminate these agreements on three months’ notice in certain circumstances of serious ill health or incapacity of the executive. (3) Under the Corporations Act the Termination Benefit Limit is 12 months average Salary (last 3 years) unless shareholder approval is obtained. The treatment of incentives in the case of termination is addressed in separate sections of this report that give details of incentive design. With regards to Mr Maxwell, Mr Williams, Mr van ‘t Loo and Mr Perkins there is a restraint of trade period of 12 months, excluding Sizzler, USA, in the case of Mr Perkins. On appointment to the Board, all Non-executive Directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the Board policies and terms, including compensation relevant to the office of the director. Non-executive Directors are not eligible to receive termination payments under the terms of the appointments. Changes in KMP held equity The following table outlines the changes in the amount of equity held by executives over the reporting period: Name Graham Maxwell Security Shares Performance rights Kevin Perkins Shares Performance rights Nigel Williams Shares Performance rights Martin Clarke Shares Performance rights Mark van 't Loo Shares Performance rights Number held at open 2017 – Granted as compensation – Shares issued on vesting of rights 356,088 481,705 7,340,833 103,859 – 40,019 126,262 83,307 – – 80,517 – – – 13,596 – 13,596 – – (356,088) 103,859 (103,859) – – 35,608 (35,608) – – – Number held at close 2017 356,088 206,134 7,444,692 – – 53,615 161,870 61,295 – – 8,283,694 Total 8,175,985 107,709 30 ANNUAL REPORT 2017 COLLINS FOODS LIMITED The following table outlines the changes in the amount of equity held by Non-executive Directors over the reporting period: Name Robert Kaye, SC Newman Manion Bronwyn Morris Russell Tate Total Security Shares Shares Shares Shares Number held at open 2017 10,000 20,001 5,001 20,001 55,003 Number held at close 2017 10,000 20,001 5,001 20,001 55,003 The maximum value of performance rights yet to vest has been determined as the amount of the grant date fair value of the performance rights that is yet to be expensed: 2017 equity grants Name Role Graham Maxwell Managing Director/CEO Kevin Perkins Executive Director Nigel Williams Group CFO Martin Clarke CEO – KFC, Australia Mark van 't Loo CEO – KFC, Europe FY in which rights may vest 2018 Maximum value yet to vest ($) – 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 26,127 90,240 – – – – 46,911 14,973 – 23,455 14,973 – – – Other remuneration related matters There were no loans to Directors or other KMP at any time during the reporting period, and no relevant material transactions involving KMP other than compensation and transactions concerning shares and performance rights as discussed in this report. Most recent AGM – Remuneration Report comments and voting At the most recent AGM in 2016, 91.98% of votes cast at the meeting in favour of the adoption of the Remuneration Report. External remuneration consultant advice During the reported period, the Board approved and engaged an external remuneration consultant (ERC) to provide KMP remuneration recommendations and advice. The consultants and the amount payable for the information and work that led to their recommendations are listed below: Godfrey Remuneration Group Pty Limited Review of and advice on peer incentive practices evident in the market $14,190 Subsequent to the end of the reporting period, the ERC has also been engaged to assist with improving the remuneration report. Any fees charged in relation to this activity will be disclosed as part of the FY18 Remuneration Report. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 31 Directors’ Report So as to ensure that KMP remuneration recommendations were free from undue influence from the KMP to whom they relate the Company established policies and procedures governing engagements with external remuneration consultants. The key aspects include: Ò KMP remuneration recommendations may only be received from consultants who have been approved by the Board. This is a legal requirement. Before such approval is given and before each engagement the Board ensures that that the consultant is independent of KMP. Ò As required by law, KMP remuneration recommendations are only received by non-executive directors, mainly the Chair of the Remuneration and Nomination Committee. Ò The policy seeks to ensure that the Board controls any engagement by management of Board approved remuneration consultants to provide advice other than KMP remuneration recommendations and any interactions between management and external remuneration consultants when undertaking work leading to KMP remuneration recommendations. The Board is satisfied that the KMP remuneration recommendations received were free from undue influence from KMP to whom the recommendations related. The reasons the Board is so satisfied include that it is confident that the policy for engaging external remuneration consultants is being adhered to and is operating as intended, the Board has been closely involved in all dealings with the external remuneration consultants and each KMP remuneration recommendation received during the reporting period was accompanied by a legal declaration from the consultant to the effect that their advice was provided free from undue influence from the KMP to whom the recommendations related. Indemnification and insurance of officers The Company’s Constitution provides that it must in the case of a person who is or has been a Director or Secretary of the Group, and may in the case of an officer of the Company, indemnify them against liabilities incurred (whilst acting as such officers) and the legal costs of that person to the extent permitted by law. During the period, the Company has entered into a Deed of Indemnity, Insurance and Access with each of the Company’s Directors, Group CFO, CEO, KFC – Australia and Company Secretary. Subsequent to the period end, a Deed of Indemnity, Insurance and Access was entered into with the CEO, KFC – Europe. No Director or officer of the Company has received benefits under an indemnity from the Company during or since the end of the period. The Company has paid a premium for insurance for officers of the Group. The cover provided by the insurance contract is customary for this type of insurance policy. Details of the nature of the liabilities covered or the amount of the premium paid in respect of this insurance contract are not disclosed as such disclosure is prohibited under the insurance contract. Proceedings on behalf of the Company No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. Non-audit services During the period, the Company’s Auditor (PricewaterhouseCoopers) performed other services in addition to its audit responsibilities. Whilst their main role is to provide audit services to the Company, the Company does employ their specialist advice where appropriate. The Board of Directors has considered the position and, in accordance with advice received from the Audit and Risk Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: Ò all non-audit services have been reviewed by the Audit and Risk Committee to ensure they do not impact the impartiality and objectivity of the auditor; and Ò none of the services undermine the general principles relating to auditor independence, including not reviewing or auditing the auditor’s own work, not acting in a management or a decision making capacity for the Company, not acting as advocate for the Company, or not jointly sharing economic risk or rewards. 32 ANNUAL REPORT 2017 COLLINS FOODS LIMITED During the period the following fees were paid or payable for non-audit services provided by the auditor of the parent entity, its related practices and non-related audit firms Audit and other assurance services Audit services: PricewaterhouseCoopers Australian firm Audit and review of financial reports and other audit work under the Corporations Act 2001 Audit and review of financial reports and other audit work for foreign subsidiary Network firms of PricewaterhouseCoopers Australia Audit and review of financial reports and other audit work for foreign subsidiary Other assurance services: PricewaterhouseCoopers Australian firm Store sales certificates Agreed upon procedures for covenant calculations Due diligence services relating to European and domestic acquisitions Total remuneration for assurance services Taxation services PricewaterhouseCoopers Australian firm Tax compliance services, including review of company tax returns International tax consulting and tax advice on acquisitions Network firms of PricewaterhouseCoopers Australia Tax compliance services, including review of company tax returns International tax consulting and tax advice on acquisitions Total remuneration for taxation services Other services PricewaterhouseCoopers Australian firm Accounting advice Business process review Total remuneration for other services Total remuneration for services WHOLE DOLLARS 2017 $ 2016 $ 346,678 34,145 26,532 407,355 10,930 21,452 575,074 607,456 1,014,811 37,700 521,268 4,785 32,500 596,253 29,580 25,000 54,580 311,567 33,476 26,845 371,888 10,716 21,032 – 31,748 403,636 36,000 – 4,378 – 40,378 – – 1,665,644 444,014 It is the Group’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where PricewaterhouseCoopers’ expertise and experience with the Group are important. These assignments are principally tax advice, due diligence reporting on acquisitions and capital raisings, or where PricewaterhouseCoopers is awarded assignments on a competitive basis. It is the Company’s policy to seek competitive tenders for all major consulting projects. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 33 Directors’ Report Auditor’s Independence Declaration A copy of the Auditor’s Independence Declaration as required under section 307C of the Corporations Act 2001 is set out on page 35. ROUNDING OF AMOUNTS The Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the Directors’ Report. Amounts in the Directors’ Report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. AUDITOR PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of Directors. Robert Kaye SC Chairman Brisbane 26 June 2017 34 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Auditor’s Independence Declaration Auditor’s Independence Declaration As lead auditor for the audit of Collins Foods Limited for the year ended 30 April 2017, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Collins Foods Limited and the entities it controlled during the period. Kim Challenor Partner PricewaterhouseCoopers Brisbane 26 June 2017 PricewaterhouseCoopers, ABN 52 780 433 757 480 Queen Street, BRISBANE QLD 4000, GPO Box 150, BRISBANE QLD 4001 T: +61 7 3257 5000, F: +61 7 3257 5999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 35 Consolidated Income Statement For the reporting period ended 30 April 2017 Revenue Cost of sales Gross profit Selling, marketing and royalty expenses(1) Occupancy expenses(1) Restaurant related expenses(1) Administration expenses(1)(4) Other expenses(2) Other income(3) Profit from continuing operations before finance income, finance costs and income tax (EBIT) Finance income Finance costs Share of net profit/(loss) of joint ventures accounted for using the equity method Profit from continuing operations before income tax Income tax expense(5) Profit from continuing operations Net profit attributable to members of Collins Foods Limited Basic earnings per share Diluted earnings per share Weighted average basic ordinary shares outstanding Weighted average diluted ordinary shares outstanding Note A3 A3 A4 A4 F9(a) F2 F2 F2 F2 2017 $000 633,562 (301,250) 332,312 (128,946) (50,946) (59,277) (39,224) (4,454) 2,395 51,860 357 (8,428) 217 44,006 (16,018) 27,988 27,988 2016 $000 574,284 (270,943) 303,341 (118,217) (45,264) (53,721) (33,115) (5,323) 3,111 50,812 746 (8,949) (381) 42,228 (13,113) 29,115 29,115 29.12 cps 28.97 cps 31.31 cps 31.06 cps 96,118,304 93,000,003 96,611,031 93,732,586 (1) Impairment charges included in expenses are as follows: selling marketing expenses $31,000; occupancy expenses $667,000; restaurant related expenses $514,000; and administration expenses $924,000 (2016: selling marketing expenses $21,000; occupancy expenses $537,000; restaurant related expenses $750,000). (2) Other expenses include restaurant smallwares write-off of $25,000 (2016: onerous lease $1,250,000; and restaurant smallwares write-off $740,000). (3) Other income includes a gain on disposal of land and building of $500,000; a gain on disposal of property plant and equipment of $605,000; and realised foreign exchange gain of $734,000 (2016: gain on disposal of land and building $1,746,000). (4) Administration expenses include costs of acquisitions of $4,981,000. (5) Income tax expense includes the reversal of deferred tax assets associated with restaurant closures of $976,000. The above Consolidated Income Statement should be read in conjunction with the accompanying Notes. 36 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Consolidated Statement of Comprehensive Income For the reporting period 30 April 2017 Net profit attributable to members of Collins Foods Limited Items that may be reclassified to profit or loss Other comprehensive income/(expense): Exchange difference upon translation of foreign operations Cash flow hedges Income tax relating to components of other comprehensive income Other comprehensive income for the reporting period, net of tax Total comprehensive income for the reporting period Total comprehensive income for the reporting period is attributable to: Note F8 F8 F9 2017 $000 27,988 771 977 (293) 1,455 29,443 2016 $000 29,115 185 211 (64) 332 29,447 Owners of the parent 29,443 29,447 The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying Notes. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 37 Consolidated Balance Sheet As at 30 April 2017 Current assets Cash and cash equivalents Receivables Inventories Total current assets Non-current assets Property, plant and equipment Intangible assets, net Deferred tax assets, net Receivables Investments accounted for using the equity method Total non-current assets Total assets Current liabilities Trade and other payables Current tax liabilities Derivative financial instruments Provisions Total current liabilities Non-current liabilities Borrowings Derivative financial instruments Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity Note B1 F3 F4 F5 F9(b) F3 F6 C3 F7 C2 C3 F7 D3 F8 2017 $000 104,751 4,241 5,076 114,068 103,380 282,470 26,684 6 1,571 414,111 528,179 61,863 4,648 1,773 5,298 73,582 2016 $000 52,464 9,008 4,398 65,870 88,000 247,952 25,234 11 1,243 362,440 428,310 58,035 4,131 1,726 4,541 68,433 183,022 164,240 1,684 3,098 187,804 261,386 266,793 2,705 3,235 170,180 238,613 189,697 245,260 182,098 3,420 18,113 2,364 5,235 266,793 189,697 The above Consolidated Balance Sheet should be read in conjunction with the accompanying Notes. 38 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Consolidated Statement of Cash Flows For the reporting period ended 30 April 2017 Note 2017 $000 2016 $000 Cash flows from operating activities: Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) GST paid Interest received Interest and other borrowing costs paid Income tax paid Net operating cash flows Cash flows from investing activities: Payment for acquisition of subsidiary, net of cash acquired (Australia KFC acquisition) Payment for acquisition of subsidiary, net of cash acquired (Germany KFC acquisition) Net cash acquired upon acquisition of subsidiary (Snag Stand acquisition) Proceeds from sale of property, plant and equipment Purchase of franchise rights Payments for plant and equipment Net investing cash flows Cash flow from financing activities: Proceeds from borrowings – bank loan facilities Repayment of borrowings and other obligations Loans advanced – related parties Refinance fees paid Proceeds from share placement Share issuance and placement costs Dividends paid Net financing cash flows Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the reporting period Effects of exchange rate changes on cash and cash equivalents 694,202 (573,356) (37,009) 358 (8,044) (15,588) 60,563 (15,322) (19,250) 282 635 (668) (30,609) (64,932) 28,592 (10,000) (200) (437) 54,484 (2,120) (15,110) 55,209 50,840 52,464 1,447 B1 A2 A2 A2 D3 D3 B4 Cash and cash equivalents at the end of the reporting period B1 104,751 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying Notes. 630,571 (524,205) (35,886) 749 (8,404) (13,137) 49,688 – – – 3,173 (639) (27,642) (25,108) – – (1,840) (839) – – (11,625) (14,304) 10,276 42,234 (46) 52,464 ANNUAL REPORT 2017 COLLINS FOODS LIMITED 39 Consolidated Statement of Changes In Equity For the reporting period ended 30 April 2017 NOTE CONTRIBUTED EQUITY RESERVES 2016 Beginning of the reporting period Profit for the reporting period Other comprehensive income Total comprehensive income for the reporting period Transactions with owners in their capacity as owners: Share-based payments Dividends provided for or paid B4 End of the reporting period 2017 Beginning of the reporting period Profit for the reporting period Other comprehensive income Total comprehensive income for the reporting period Transactions with owners in their capacity as owners: Share-based payments Dividends provided for or paid Performance rights vested Shares issued End of the reporting period B4 $000 182,098 – – – – – 182,098 $000 182,098 – – – – – 798 62,364 245,260 (ACCUMULATED LOSSES)/ RETAINED EARNINGS $000 (12,255) 29,115 – TOTAL EQUITY $000 171,289 29,115 332 29,115 29,447 – (11,625) 5,235 $000 5,235 27,988 – 586 (11,625) 189,697 $000 189,697 27,988 1,455 $000 1,446 – 332 332 586 – 2,364 $000 2,364 – 1,455 1,455 27,988 29,443 399 – (798) – – (15,110) – – 3,420 18,113 399 (15,110) – 62,364 266,793 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying Notes. 40 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements A/ FINANCIAL OVERVIEW This section provides information that is most relevant to explaining the Group’s performance during the reporting period, and where relevant, the accounting policies that have been applied and significant estimates and judgments made. A1/ Segment information A2/ Business combinations A3/ Revenue and other income A4/ Expenses A1/ Segment information Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing the performance of the operating segments, has been identified as the Managing Director & CEO. DESCRIPTION OF SEGMENTS Management has determined the operating segments based on the reports reviewed by the Managing Director & CEO that are used to make strategic decisions. Hence four reportable segments have been identified: KFC Restaurants Australia and Europe (competing in the quick service restaurant market), Sizzler Restaurants (competing in the full service restaurant market), Shared Services which performs a number of administrative and management functions for the Group’s KFC and Sizzler Restaurants and other which primarily includes Snag Stand trading activities. SEGMENT INFORMATION PROVIDED TO THE MANAGING DIRECTOR & CEO The following is an analysis of the revenue and results by reportable operating segment for the periods under review: 2017 Total segment revenue Underlying EBITDA(1) Depreciation, amortisation and impairment Finance costs – net Income tax expense 2016 Total segment revenue Underlying EBITDA(1) Depreciation, amortisation and impairment Finance costs – net Income tax expense KFC RESTAURANTS AUSTRALIA SIZZLER RESTAURANTS SHARED SERVICES KFC RESTAURANTS EUROPE $000 549,472 89,849 20,349 (5) $000 501,638 81,898 18,398 (1) $000 65,049 4,575 1,538 (4) $000 72,646 5,323 3,218 (3) $000 – (13,184) 995 8,073 $000 – (13,045) 1,419 8,208 $000 14,806 633 616 8 $000 – – – – OTHER $000 4,235 (615) 2,334 (1) $000 – 407 11 (1) TOTAL $000 633,562 81,258 25,832 8,071 16,018 $000 574,284 74,583 23,046 8,203 13,113 (1) Refer below for a description and reconciliation of Underlying EBITDA. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 41 A1/ Segment information (continued) OTHER SEGMENT INFORMATION Segment revenue There are no sales between segments. The revenue from external parties reported to the Board is measured in a manner consistent with that in the Consolidated Income Statement. Revenue from external customers is derived from the sale of food in KFC and Sizzler Restaurants and Snag Stand outlets. Underlying EBITDA The Board assesses the performance of the operating segments based on a measure of Underlying EBITDA. This measurement basis excludes the effects of costs associated with acquisitions (refer to Note A2), additionally, impairment of property, plant, equipment, franchise rights, brand assets and goodwill are also excluded to the extent they are isolated non-recurring events. Net finance costs (including the impact of derivative financial instruments) are not allocated to segments as this type of activity is driven by the central treasury function, which manages the cash position of the Group. A reconciliation of Underlying EBITDA to profit/(loss) from continuing operations before income tax is provided as follows: Underlying EBITDA Finance costs – net Realised foreign exchange gain Long term incentive provision Performance rights Costs of acquisitions expensed Depreciation Amortisation Impairment of property, plant and equipment Impairment of Snag Stand goodwill Write off of restaurant smallwares Provision for onerous lease Gain on disposal of land and building Share of net profit/(loss) of joint ventures accounted for using the equity method Profit from continuing operations before income tax 2017 $000 81,258 (8,071) 734 – (399) (4,981) (22,150) (1,546) (1,212) (924) (25) – 1,105 217 44,006 2016 $000 74,583 (8,203) – 105 (586) – (20,304) (1,434) (1,308) – (740) (1,250) 1,746 (381) 42,228 A2/ Business combinations SNAG STAND – SUMMARY OF ACQUISITION On 15 June 2016, Collins Foods Group Pty Ltd, a subsidiary of the Company, acquired the remaining 50% share of Snag Holdings Pty Ltd for a nominal sum to take full ownership. The primary reason for acquiring the remaining 50% of Snag Stand was to bring the brand under the guidance of Collins Foods management, with the view to refining the brand and economic model to position it for growth. Details of the purchase consideration, the net assets acquired and goodwill are as follows: Cash paid Effective settlement of pre-existing loan receivable from Snag Holdings Pty Ltd Total purchase consideration $000 – 3,377 3,377 42 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements The provisional fair values of the assets and liabilities of the business acquired as at the date of acquisition are as follows: Cash Receivables Inventories Property, plant and equipment Intangible assets Deferred tax asset, net Trade and other payables Provisions Net identifiable assets acquired Goodwill Net assets acquired Fair Value $000 282 38 72 1,230 28 1,388 (314) (271) 2,453 924 3,377 The goodwill is attributable to the workforce and access to an established market with opportunities for future expansion. Acquisition – related costs Acquisition related costs of $40,000 have been recognised in the statement of profit or loss and other comprehensive income (other expenses) and in operating cash flows in the statement of cash flows (payments to suppliers and employees). Purchase consideration – cash flow Balances acquired Less cash consideration Inflow of cash – investing activities As at acquisition date $000 282 – 282 The acquired business contributed revenues of $4.2 million and an underlying EBITDA of ($0.9) million to the Group for the period 15 June 2016 to 30 April 2017. If the acquisition had occurred on 2 May 2016, the contributed revenue for the reporting period ended 30 April 2017 would have been $5.1 million with a corresponding underlying EBITDA of ($1.1) million. 13 KFC RESTAURANTS (AUSTRALIA) – SUMMARY OF ACQUISITION On 26 July 2016, Collins Foods Group Pty Ltd, a subsidiary of the Company, acquired 13 KFC Restaurants for $25.3 million from a franchisee of KFC Restaurants around the New South Wales and Victoria border. The primary reason for the acquisition was to expand operations in the quick service restaurant market, and consolidate the Company’s position as the largest KFC franchisee in Australia. Details of the purchase consideration, the net assets acquired and goodwill are as follows: Cash paid Share consideration Total purchase consideration $000 15,346 10,000 25,346 ANNUAL REPORT 2017 COLLINS FOODS LIMITED 43 A2/ Business combinations (continued) The provisional fair values of the assets and liabilities of the business acquired as at the date of acquisition are as follows: Cash Inventories Property, plant and equipment Intangible assets Deferred tax asset, net Trade and other payables Provisions Net identifiable assets acquired Goodwill Net assets acquired Fair Value $000 24 169 3,422 367 312 (251) (301) 3,742 21,604 25,346 The goodwill represents the value of markets with an established business name that has a strong reputation and market presence. Acquisition – related costs Acquisition related costs of $1.2 million have been recognised in the statement of profit or loss and other comprehensive income (other expenses) and in operating cash flows in the statement of cash flows (payments to suppliers and employees). Purchase consideration – cash flow Cash consideration Less balances acquired Outflow of cash – investing activities As at acquisition date $000 15,346 24 15,322 The acquired business contributed revenues of $26.0 million and an underlying EBITDA of $3.3 million to the Group for the period 26 July 2016 to 30 April 2017. If the acquisition had occurred on 2 May 2016, the contributed revenue for the reporting period ended 30 April 2017 would have been $34.2 million with a corresponding underlying EBITDA of $4.7 million. 12 KFC RESTAURANTS (GERMANY) – SUMMARY OF ACQUISITION On 1 December 2016, Collins Foods Germany Limited, a subsidiary of the Company, acquired 11 KFC Restaurants situated in Stuttgart and Dusseldorf, and on 19 December 2016 a further store was purchased. These 12 restaurants were acquired from the franchisor Kentucky Fried Chicken (Great Britain), German Branch for a total purchase price of Euro €13.5 million. The acquisition provides a strategic entry into the KFC Germany market which has substantial growth opportunities and a growth platform for Collins Foods’ KFC operations outside of Australia. Details of the purchase consideration, the net assets acquired and goodwill are as follows: Cash paid Total purchase consideration The provisional fair values of the assets and liabilities of the business acquired as at the date of acquisition are as follows: Cash Inventories Property, plant and equipment Intangible assets Trade and other payables Provisions Net identifiable assets acquired Goodwill Net assets acquired 44 ANNUAL REPORT 2017 COLLINS FOODS LIMITED $000 19,318 19,318 Fair Value $000 68 280 6,991 793 (118) (889) 7,125 12,193 19,318 Notes to the Consolidated Financial Statements The goodwill, once finalised, will represent the value of markets with an established business name that has a strong reputation and market presence. Acquisition – related costs Acquisition related costs of $2.3 million have been recognised in the statement of profit or loss and other comprehensive income (other expenses) and in operating cash flows in the statement of cash flows (payments to suppliers and employees). Purchase consideration – cash flow Cash consideration Less balances acquired Outflow of cash – investing activities As at acquisition date $000 19,318 68 19,250 The acquired business contributed revenues of $14.8 million and an underlying EBITDA of $0.8 million to the Group for the period 1 December 2016 to 30 April 2017. If the acquisition had occurred on 2 May 2016, the contributed revenue for the reporting period ended 30 April 2017 would have been $35.7 million with a corresponding underlying EBITDA of $1.9 million. 16 KFC RESTAURANTS (NETHERLANDS) – SUMMARY OF PROPOSED ACQUISITION On 23 March 2017, Collins Foods Netherlands Limited entered into a binding agreement to acquire 16 KFC Restaurants located in the Netherlands. These restaurants are being purchased from subsidiaries of YUM! Brands Inc. Collins Foods will pay Euro €62.3 million for the acquisition of the assets relating to the 16 restaurants plus transaction costs, funded by a fully underwritten institutional placement to raise $54.5 million and an extension of Company’s existing debt facility. The price will be adjusted up for inventory and available cash at each restaurant, and adjusted down for employee liabilities accrued prior to completion, which are assumed as part of the acquisition. Completion is subject to a number of usual conditions precedent regarding the entry into applicable franchise agreements, leases or subleases, service and supply agreements and employee retention arrangements relating to the 16 restaurants, and is expected to be achieved in the first half of FY18. ACCOUNTING POLICY The acquisition method of accounting is used to account for all business combinations regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Where equity instruments are issued in an acquisition, the value of the instruments is their published market price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Transaction costs arising from business combinations are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Consolidated Income Statement, but only after a reassessment of the identification and measurement of the net assets acquired. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 45 A3/ Revenue and other income Revenue from continuing operations Sales revenue: Sale of goods Other revenue: Franchise revenue from external parties Total revenue Other income Net gain on disposal of property, plant and equipment Realised foreign exchange gain Traineeship income Other Total other income 2017 $000 2016 $000 629,813 570,639 3,749 633,562 3,645 574,284 837 734 143 681 2,395 1,485 – 411 1,215 3,111 ACCOUNTING POLICY Revenue is measured at the fair value of the consideration received or receivable. Revenue from the sale of goods is recognised when the Group has passed control of the goods to the customer, interest income is recognised on a time proportion basis using the effective interest method and traineeship income is recognised as revenue when the right to receive payment is established. A4/ Expenses Profit/(loss) from continuing operations before income tax includes the following specific expenses: Depreciation, amortisation and impairment Depreciation Amortisation Impairment Total depreciation, amortisation and impairment Finance income and costs Finance income Finance costs Net finance costs Employee benefits expense Wages and salaries Defined contribution superannuation expense Employee entitlements Total employee benefits expense Operating lease rentals Inventories recognised as an expense Costs of acquisitions expensed Long term incentive provision Performance rights Write off of restaurant smallwares Provision for onerous lease Bank transaction fees 46 ANNUAL REPORT 2017 COLLINS FOODS LIMITED 2017 $000 2016 $000 22,150 1,546 2,136 25,832 (357) 8,428 8,071 151,628 11,559 10,780 173,967 35,290 209,243 4,981 – 399 25 – 2,393 20,304 1,434 1,308 23,046 (746) 8,949 8,203 139,707 10,542 9,794 160,043 31,400 187,818 – (105) 586 740 1,250 2,079 Notes to the Consolidated Financial Statements B/ CASH MANAGEMENT Collins Foods Limited has a focus on maintaining a strong balance sheet with the strategy incorporating the Group’s expenditure, growth and acquisition requirements, and the desire to return dividends to shareholders. B1/ Cash and cash equivalents B2/ Borrowings B3/ Ratios B4/ Dividends B1/ Cash and cash equivalents Cash at bank and on hand Reconciliation of profit from continuing operations to net cash inflow from operating activities Profit from continuing operations Adjustments for non-cash income and expense items: Depreciation, amortisation and impairment (Gain)/loss on disposal of property, plant and equipment Amortisation of borrowing costs Non-cash employee benefits expense share-based payments Transfer to/(from) provisions: Reversal of provision for diminution in value of inventory Provision for employee entitlements Movement in: Income tax payable Deferred tax balances Fringe benefits tax payable Goods and services tax payable Changes in assets and liabilities: (Increase)/decrease in assets: Receivables Inventory Prepayments and other assets Share of profits of joint ventures Increase in liabilities: Trade payables and accruals Net operating cash flows 2017 $000 104,751 2016 $000 52,464 2017 $000 27,988 25,832 (226) 238 399 43 (829) 517 (81) 33 814 (1,305) (200) 2,826 (217) 4,731 60,563 2016 $000 29,115 23,046 (1,587) 529 586 (103) (1,280) 493 (512) 55 (1,078) 816 363 (281) 381 (855) 49,688 ACCOUNTING POLICY For the purposes of the Consolidated Statement of Cash Flows, cash includes cash on hand, at call deposits with banks or financial institutions, and other short-term, highly liquid investments in money market instruments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 47 B2/ Borrowings AVAILABLE FINANCING FACILITIES Used Unused Total 2017 2016 Working Capital Facility $000 807 Revolving Bank Loans $000 183,981 Working Capital Facility $000 910 Revolving Bank Loans $000 165,000 14,193 15,000 63,838 247,819 14,090 15,000 35,000 200,000 A subsidiary of the Company, CFG Finance Pty Limited, is the primary borrower under a Syndicated Facility Agreement (Syndicated Facility) and a Working Capital Facility Agreement (Working Capital Facility). On 15 December 2015 the Group completed an amendment to these existing facilities including an increase in the syndicated facility to $200 million and an increase to the working capital facility to $15 million. On 23 March 2017 the Group completed an amendment adding a Euro €33 million facility to the existing facilities. The Syndicated Facility includes a $65 million tranche which expires 31 October 2018. All other borrowing facilities expire on 31 October 2020. Facilities The Syndicated Facility and Working Capital Facility are subject to certain financial covenants and restrictions such as net leverage ratios, interest coverage ratios and others which management believe are customary for these types of loans. During the reporting period ended 30 April 2017, the Group maintained compliance with the financial covenants and restrictions of these facilities. The Company and its subsidiaries (other than subsidiaries outside of the Closed Group) were registered guarantors of all the obligations in respect of these loan facilities. ACCOUNTING POLICY Bank loans are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the Consolidated Income Statement over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities, which are not transaction costs relating to the actual draw-down of the facility, are capitalised and amortised on a straight-line basis over the term of the facility. Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed. B3/ Ratios CAPITAL MANAGEMENT The Group manages its capital by maintaining a strong capital base. The Group assesses its capital base by reference to its gearing ratio, which it defines as net debt divided by total capital. Net debt is calculated as borrowings (excluding capitalised fees) less cash and cash equivalents. Total capital is calculated as total equity as shown in the balance sheet plus net debt. At balance date, the gearing ratio was 23% (2016: 37%). NET DEBT General cash at bank and on hand Borrowings – non-current Net debt NET LEVERAGE Net debt EBITDA per Syndicated Facility Agreement Net leverage Note B1 2017 $000 104,751 183,981 79,230 2017 $000 79,230 83,932 0.94(1) 2016 $000 52,464 165,000 112,536 2016 $000 112,536 74,102 1.52 (1) The net proceeds raised from the share placement of ordinary shares to partially fund the acquisition of KFC restaurants in the Netherlands is included in net debt. Excluding these proceeds the net leverage ratio is 1.59. 48 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements B4/ Dividends DIVIDENDS Dividends paid of $0.16 (2016: $0.125) per fully paid share FRANKING CREDITS Franking credits available for the subsequent reporting period based on a tax rate of 30% 2017 $000 15,110 2017 $000 74,199 2016 $000 11,625 2016 $000 65,129 The above amount represents the balance of the franking account as at the end of the reporting period, adjusted for: Ò franking credits that will arise from the payment of income tax payable as at the end of the reporting period; Ò franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and Ò franking credits that may be prevented from being distributed in the subsequent reporting period. The consolidated amounts include franking credits that would be available to the parent entity if distributable profits of subsidiaries were paid as dividends. Since the end of the reporting period, the Directors of the Company have declared the payment of a fully franked final dividend of 9.0 cents per ordinary share ($9.6 million) to be paid on 20 July 2017. The aggregate amount of the dividend to be paid on that date, but not recognised as a liability at the end of the reporting period is $9,595,997. ACCOUNTING POLICY Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the Company, on or before the end of the reporting period but not distributed at balance date. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 49 C/ FINANCIAL RISK MANAGEMENT This section provides information relating to the Group’s exposure to financial risks, how they affect the financial position and performance, and how the risks are managed. C1/ Financial risk management C2/ Recognised fair value measurements C3/ Derivative financial instruments C1/ Financial risk management The Board of Directors has delegated specific authorities to the central finance department in relation to financial risk management. The finance department identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The Board has provided written policies covering the management of interest rate risk and the use of derivative financial instruments. All significant decisions relating to financial risk management require specific approval by the Board of Directors. The Group’s activities expose it to a variety of financial risks: Market risk (including currency risk, interest risk and price risk), credit risk and liquidity risk. In addition, the Group manages its capital base. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group’s activities expose it primarily to the financial risk of changes in interest rates and it utilises Swap Contracts to manage its interest rate risk exposure. The use of financial instruments is governed by the Group’s policies approved by the Board of Directors, and are not entered into for speculative purposes. MARKET RISK Foreign exchange risk During 2017 and 2016, the financial instruments of the Group and the parent entity were denominated in Australian dollars apart from certain bank accounts, trade receivables and trade payables in respect of the Group’s Asian operations and European operations which were denominated in foreign currencies at the Group level. Management has decided not to hedge the foreign exchange risk exposure for Asia. In respect of its European operations the group aims to reduce balance sheet translation exposure by borrowing in the currency of its assets (Euro €) as far as practical (disclosed in Note B2). The Group’s exposure to foreign currency risk is disclosed in the tables below. Cash flow and interest rate risk The Group’s main interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk while borrowings issued at fixed rates expose the Group to fair value interest rate risk. It is the policy of the Group to protect a designated portion of the loans from exposure to increasing interest rates. Accordingly, the Group has entered into interest rate swap contracts (Swap Contract) under which it is obliged to receive interest at variable rates and to pay interest at fixed rates. Information about the Group’s variable rate borrowings, outstanding Swap Contracts and an analysis of maturities at the reporting date is disclosed in Notes C1 and C3. 50 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Price risk The Group manages commodity price risk by forward contracting prices on key commodities and by being actively involved in relevant supply co-operatives. Hedge of net investment in foreign entity As at 23 November 2016, Euro €19.8 million of the Euro denominated loan of Euro €20 million was designated as the hedging instrument of a net investment hedge for the foreign currency risk exposure of Euro €19.8 million of the Euro equity invested in the Collins Foods Europe Limited (and subsidiaries). As at inception this hedge was considered to be completely effective. CREDIT RISK Credit risk arises from cash and cash equivalents, derivative financial instruments, deposits with banks, other trade receivables and receivables from related parties. The Group has adopted a policy of only dealing with creditworthy counterparties and in the situation of no independent rating being available, will assess the credit quality of the customer taking into account its financial position, past experience and other factors. Trade receivables consist of a small number of customers and ongoing review of outstanding balances is conducted on a periodic basis. The balance outstanding (disclosed in Note F3) is not past due, nor impaired (2016: nil past due). The credit risk on liquid funds and derivative financial instruments is limited as the counterparties are banks with high credit ratings assigned by international credit rating agencies. Related party transactions are conducted on commercial terms and conditions. Recoverability of these transactions are assessed on an ongoing basis. Credit risk further arises in relation to financial guarantees given to certain parties, refer to Notes B2 and G1 for details. LIQUIDITY RISK The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve banking facilities by continuously monitoring forecast and actual cash flows. This approach enables the Group to manage short, medium and long term funding and liquidity management as reported in Note B2. Non-interest bearing liabilities are due within six months. For maturities of interest bearing liabilities and Swap Contracts of the Group, refer to Notes C1 and C3. Notes to the Consolidated Financial Statements MATURITIES OF FINANCIAL LIABILITIES The tables below analyse the Group’s financial liabilities into relevant maturity groupings based on their contractual maturities for: Ò all non-derivative financial liabilities; and Ò net and gross settled derivative financial instruments for which the contractual maturities are essential for an understanding of the timing of the cash flows. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. For Swap Contracts the cash flows have been estimated using forward interest rates applicable at the end of each reporting period. CONTRACTUAL MATURITIES OF FINANCIAL LIABILITIES NOTE LESS THAN 1 YEAR BETWEEN 1 AND 2 YEARS BETWEEN 2 AND 5 YEARS 2017 Non-derivatives Trade and other payables Borrowings Total non-derivatives Derivatives F6 C2 Net settled (Swap Contracts) C3 2016 Non-derivatives Trade and other payables Borrowings Total non-derivatives Derivatives F6 C2 $000 $000 $000 61,863 9,207 71,070 (1,814) $000 58,035 8,183 66,218 – 69,823 69,823 (1,227) $000 – 7,951 7,951 – 130,927 130,927 (545) $000 – 178,502 178,502 Net settled (Swap Contracts) C3 (1,748) (1,509) (1,463) OVER 5 YEARS $000 TOTAL CONTRACTUAL CASH FLOWS CARRYING AMOUNT $000 $000 – – – – $000 – – – – 61,863 210,002 271,865 61,863 183,022 244,885 (3,586) $000 (3,457) $000 58,035 194,636 252,671 58,035 164,240 222,275 (4,720) (4,431) The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk and foreign exchange risk only, as the Group is not exposed to other price risks: Interest Rate Risk and Foreign Exchange Risk INTEREST RATE RISK FOREIGN EXCHANGE RISK CARRYING AMOUNT $000 107,177 253,949 $000 56,836 231,597 –1% +1% –20% +20% PROFIT EQUITY PROFIT EQUITY PROFIT EQUITY PROFIT EQUITY $000 (733) 527 (206) $000 (390) 305 (85) $000 – (2,350) (2,350) $000 – (3,144) (3,144) $000 733 (527) 206 $000 390 (305) 85 $000 – 2,350 2,350 $000 – 3,144 3,144 $000 668 (16) 652 $000 60 (1) 59 $000 – – – $000 – – – $000 (668) 16 (652) $000 (60) 1 (59) $000 – – – $000 – – – 2017 Financial assets Financial liabilities Total increase/(decrease) 2016 Financial assets Financial liabilities Total increase/(decrease) ANNUAL REPORT 2017 COLLINS FOODS LIMITED 51 C1/ Financial risk management (continued) Interest rate risk exposures – non-current liabilities The following table summarises interest rate risk for the Group, together with effective interest rates as at the end of the reporting period. FIXED INTEREST MATURING IN: FLOATING INTEREST RATE NOTES 5 YEARS OR LESS MORE THAN 5 YEARS NON-INTEREST BEARING 2017 Trade and other payables Borrowings – unhedged Borrowings – hedged(1) 2016 Trade and other payables Borrowings – unhedged Borrowings – hedged(1) F6 C3 C3 F6 C3 C3 $000 – 59,231 – 59,231 $000 – 43,500 – 43,500 $000 – – 124,750 124,750 $000 – – 121,500 121,500 $000 – – – – $000 – – – – $000 61,863 – – 61,863 $000 58,035 – – 58,035 (1) Refer Note C3 for details of derivative financial instruments. WEIGHTED AVERAGE EFFECTIVE RATE 2.7% 4.9% 3.9% 5.3% TOTAL $000 61,863 59,231 124,750 245,844 $000 58,035 43,500 121,500 223,035 Interest rate risk exposures – current assets receivables The Group’s exposure to interest rate risk and the average interest rate by maturity period is set out in the following table: FIXED INTEREST MATURING IN: FLOATING INTEREST RATE NOTES 5 YEARS OR LESS MORE THAN 5 YEARS NON-INTEREST BEARING 2017 Trade and other receivables 2016 Trade and other receivables Related party receivables F3 F3 F3 $000 $000 $000 – – $000 – 3,289 3,289 – – – – $000 $000 – – – – – – $000 2,432 2,432 $000 1,094 – 1,094 WEIGHTED AVERAGE EFFECTIVE RATE 7.6% TOTAL $000 2,432 2,432 $000 1,094 3,289 4,383 CREDIT RISK There is no concentration of credit risk with respect to external current and non-current receivables. 52 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements C2/ Recognised fair value measurements FAIR VALUE HIERARCHY Judgements and estimates are made in determining the fair values of assets and liabilities that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified such assets and liabilities into the three levels prescribed under the accounting standards. The fair values of derivative instruments are determined as the estimated amount that the Group and the Company would receive or pay to terminate the interest rate swap at the end of the reporting period, taking into account the current interest rate. The Directors consider that the carrying amount of financial assets and financial liabilities recorded in the financial statements approximate to their fair values. Financial instruments that are measured subsequent to initial recognition at fair value are grouped into Levels 1 to 3, based on the degree to which the fair value is observable. The different levels have been identified as follows: Ò quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); Ò inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and Ò inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). As at 30 April 2017, the Group has derivative financial instruments which are classified as Level 3 financial instruments. There are no Level 1 or Level 2 financial instruments. As at 1 May 2016, the Group had derivative financial instruments which were classified as Level 3 financial instruments. There were no Level 1 or Level 2 financial instruments. DISCLOSED FAIR VALUES The Group also has assets and liabilities which are not measured at fair value, but for which fair values are disclosed in the notes to the financial statements. Receivables Due to the short term nature of the current receivables, their carrying amount is assumed to be the same as their fair value. For the majority of non-current receivables, the fair values are not materially different to their carrying amounts, since the interest on those receivables is close to current market rates. Trade and other payables Due to the short term nature of the trade and other payables, their carrying amount is assumed to be the same as their fair value. Borrowings The fair value of borrowings is as follows: Bank Loan (net of borrowing costs) 2017 Carrying amount $000 183,022 Fair value $000 175,892 Discount rate % 5.8 Carrying amount $000 164,240 Fair value $000 156,409 2016 Discount rate % 5.8 The fair value of non-current borrowings is based on discounted cash flows using the rate disclosed in the table above. They are classified as Level 3 values in the fair value hierarchy due to the use of unobservable inputs, including the credit risk of the Group. VALUATION PROCESSES The finance department of the Group engages a third party expert valuation firm to value the derivative financial instruments that are required to be measured, recognised and disclosed in the financial statements, at fair value. This includes Level 3 fair values. The finance department reports directly to the Group CFO and the Audit and Risk Committee (ARC). Discussions of valuation processes and results are held between the Group CFO, ARC and the finance department at least once every six months, in line with the Group’s half-year reporting periods. The main Level 3 inputs used by the Group are derived and evaluated as follows: Ò discount rates for financial assets and financial liabilities are determined using a capital asset pricing model to calculate a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the asset. Changes in Level 2 and Level 3 fair values are analysed at the end of each reporting period during the half-year valuation discussion between the Group CFO, ARC and the finance department. As part of this discussion the finance department presents a report that explains the reason for the fair value movements. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 53 C2/ Recognised fair value measurements (continued) ACCOUNTING POLICY Investments and other financial assets The Group classifies its financial assets in the following categories: loans and receivables, held-to-maturity investments and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluates this designation at each reporting date. All investments and other financial assets with the exception of held-to-maturity investments and loans and receivables are measured at fair value. Held-to-maturity investments and loans and receivables are measured at amortised cost. At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Changes in fair value are either taken to the Consolidated Income Statement or an equity reserve. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting date which are classified as non-current assets. Loans and receivables are included in current receivables (Note F3) and non-current receivables (Note F3) in the Consolidated Balance Sheet. Available-for-sale financial assets are included in non-current assets unless management intends to dispose of the investment within 12 months of the end of the reporting period. Investments are designated as available-for-sale if they do not have determinable payments and management intends to hold them for the medium to long term. C3/ Derivative financial instruments Current liabilities Interest rate swap contracts – cash flow hedges Non-current liabilities Interest rate swap contracts – cash flow hedges 2017 $000 1,773 1,684 2016 $000 1,726 2,705 INSTRUMENTS USED BY THE GROUP The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest rates in accordance with the Group’s financial risk management policies. INTEREST RATE SWAP CONTRACTS – CASH FLOW HEDGES During the reporting period ended 1 May 2016 the Group entered into the following Swap Contracts to hedge a designated portion of the interest rate exposure of the facility: Ò $48.75 million commenced on 31 October 2016, with a maturity date of 31 October 2018; and Ò $75 million commencing on 31 October 2018, with a maturity date of 31 October 2020. Swap Contracts currently in place cover approximately 80% (2016: 74%) of the Australian dollar denominated loan principal outstanding and are timed to expire as each loan repayment falls due. The variable rates are BBSY which at balance date was 1.675% (2016: 2.14%). The notional principal amounts, periods of expiry and fixed interest rates applicable to the Swap Contracts are as follows: Less than 1 year 1–2 years 2–3 years 3–4 years 4–5 years 2017 Weighted average fixed interest rate 3.1% 2.7% 2017 $000 – 124,750 – 75,000 – 199,750 2016 Weighted average fixed interest rate 3.2% 3.1% 2.7% 2016 $000 45,500 – 124,750 – 75,000 245,250 The Swap Contracts require settlement of net interest receivable or payable each month. The settlement dates coincide with the dates on which interest is payable on the underlying debt. The Swap Contracts are settled on a net basis. The derivative financial instruments were designated as cash flow hedges at inception. 54 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements CREDIT RISK EXPOSURES At 30 April 2017, the Swap Contracts gave rise to payables for unrealised losses on derivative instruments of $3.5 million (2016: $4.4 million) for the Group. Management has undertaken these contracts with the Australia and New Zealand Banking Group Limited which is an AA rated financial institution. ACCOUNTING POLICY Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured to their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. At the start of a hedge relationship, the Group formally designates and documents the hedge relationship, including the risk management strategy for undertaking the hedge. This includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness. Hedge accounting is only applied where effective tests are met on a prospective basis. The Group utilises interest rate swap contracts which are designated as cash flow hedges. The effective portion of changes in the fair value of swap contracts is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in the Consolidated Income Statement. Changes in fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the Consolidated Income Statement. Amounts accumulated in equity are recycled in the Consolidated Income Statement in the periods when the hedged item will affect profit or loss. The Group will discontinue hedge accounting prospectively only when the hedging relationship, or part of the hedging relationship no longer qualifies for hedge accounting, which includes where there has been a change to the risk management objective and strategy for undertaking the hedge and instances when the hedging instrument expires or is sold, terminated or exercised. For this purpose, the replacement or rollover of a hedging instrument into another hedging instrument is not an expiration or termination if such a replacement or rollover is consistent with our documented risk management objective. When hedge accounting is discontinued any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the Consolidated Income Statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the Consolidated Income Statement. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 55 D/ REWARD AND RECOGNITION These programs also result in changes to the Group’s contributed equity. D1/ Key management personnel D2/ Share based payments D3/ Contributed equity D1/ Key management personnel KMP COMPENSATION Short term employee benefits Post-employment benefits Share-based payments Change in accrued leave(1) 2017 $ 2,431,702 130,179 290,686 (29,845) WHOLE DOLLARS 2016 $ 3,137,831 116,421 515,942 (91,740) (1) The change in accrued leave includes negative amounts reflecting leave that has been taken during the reporting period measured in accordance with AASB 119 Employee Benefits. Detailed remuneration disclosures are provided in the Remuneration Report included in the Directors’ Report. D2/ Share based payments LONG TERM INCENTIVE PLAN – PERFORMANCE RIGHTS The Company has a Long Term Incentive Plan (LTIP) designed to provide long term incentives for certain employees, including executive directors. Under the plan, participants are granted performance rights over shares. The number of performance rights is calculated by dividing the dollar value of the participant’s long term incentive by the ASX volume weighted average price of the shares for the five trading days prior to the date of offer of the performance rights. Unless otherwise determined by the Board in its discretion, performance rights are issued for nil consideration. The amount of performance rights that will vest depends upon the achievement of certain vesting conditions, including the satisfaction of a minimum 12 month term of employment and the achievement of earnings per share (EPS) growth targets by the Company. The EPS growth targets must be achieved over a three year performance period. Performance rights will automatically vest on the business day after the Board determines the vesting conditions have all been satisfied (Vesting Determination Date). The performance rights will automatically exercise on the Vesting Determination Date unless that date occurs outside a trading window permitted under the Company’s Securities Trading Policy, in which case the performance rights will exercise upon the first day of the next trading window. Upon exercise of the performance rights, the Company must issue or procure the transfer of one share for each performance right, or alternatively may in its discretion elect to pay the cash equivalent value to the participant. Performance rights will lapse on the first to occur of: Ò the expiry date; Ò the vesting conditions not being satisfied by the Vesting Determination Date; Ò unless the Board otherwise determines, by the cessation of the employment of the employee to whom the offer of performance rights was made. The Board determination will depend upon the reason for employment ceasing (resignation, dismissal for cause, death or illness). Performance rights when issued under the LTIP are not entitled to receive a dividend and carry no voting rights. 56 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements Set out below are summaries of performance rights issued under the LTIP: Balance at the beginning of the reporting period Vested and exercised Issued during the reporting period Lapsed during the reporting period Balance at the end of the reporting period 2017 803,548 (531,163) 176,403 (2,683) 2016 680,960 – 122,588 – 446,105 803,548 On 18 July 2016 following the satisfaction of the vesting conditions, 531,163 performance rights previously granted under the LTIP converted to fully paid ordinary shares. Each participant was issued with shares based on the volume weighted average price of $4.15. All performance rights issued during the reporting period ended 30 April 2017 have an expiry date of 23 July 2019 and were issued with an exercise price of nil. All performance rights issued during the reporting period ended 1 May 2016 have an expiry date of 24 July 2018 and were issued with an exercise price of nil. FAIR VALUE OF PERFORMANCE RIGHTS ISSUED There were two tranches of performance rights issued during the reporting period ended 30 April 2017. The assessed fair value of performance rights issued on 7 September 2016 was an average of $4.20. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $4.58, the term of the right, the expected dividend yield of 2.83% and the risk free interest rate for the term of the rights of 1.51%. The assessed fair value of performance rights issued on 29 September 2016 was an average of $4.13. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $4.50, the term of the right, the expected dividend yield of 2.83% and the risk free interest rate for the term of the rights of 1.51%. There were two tranches of performance rights issued during the reporting period ended 1 May 2016. The assessed fair value of performance rights issued on 1 October 2015 was an average of $2.77. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $3.22, the term of the right, the expected dividend yield of 4.88% and the risk free interest rate for the term of the rights of 2.06%. The assessed fair value of performance rights issued on 22 December 2015 was an average of $4.14. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $4.61, the term of the right, the expected dividend yield of 3.65% and the risk free interest rate for the term of the rights of 2.02%. ACCOUNTING POLICY Equity settled share based payments are measured at the fair value of the equity instrument at the date of grant. The fair value of performance rights granted is recognised as an employee benefit expense with a corresponding increase in equity. The determination of fair value includes consideration of any market performance conditions and the impact of any non-vesting conditions but excludes the impact of any service and non-market performance vesting conditions. Non-market vesting conditions are included in assumptions about the number of performance rights that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of performance rights that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit and loss, with a corresponding adjustment to equity. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 57 D3/ Contributed equity EQUITY OF PARENT COMPANY Balance Senior Executive Performance Rights Plan Shares issued during the period Less capital raising costs Shares issued during the period Less capital raising costs Balance Date 1 May 2016 18 July 2016 26 July 2016 26 July 2016 23 March 2017 23 March 2017 30 April 2017 Ordinary shares – fully paid Share capital $000 93,000,003 182,098 531,163 2,341,921 – 10,377,962 – 798 10,000 (21) 54,484 (2,099) PARENT ENTITY Total equity $000 182,098 798 10,000 (21) 54,484 (2,099) 106,251,049 245,260 245,260 ORDINARY SHARES Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy is entitled to one vote. Upon a poll each share is entitled to one vote. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. ACCOUNTING POLICY Debt and equity instruments are classified as either liabilities or equity in accordance with the substance of the contractual arrangement. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from proceeds. 58 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements E/ RELATED PARTIES This section provides information relating to the Group’s related parties and the extent of related party transactions within the Group and the impact they had on the Group’s financial performance and position. E1/ Investments accounted for using the equity method E2/ Related party transactions E1/ Investments accounted for using the equity method INTERESTS IN INDIVIDUALLY IMMATERIAL JOINT VENTURES Name of entity Sizzler China Pte Ltd Snag Holdings Pty Ltd % OF OWNERSHIP INTEREST Place of incorporation Singapore Australia Acronym SCP SNG 2017 50 – 2016 50 50 ACCOUNTING POLICY Under AASB 11 Joint Arrangements, investments in joint arrangements are classified as either joint operations or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. The Group has two joint ventures. Investments in joint ventures are accounted for using the equity method of accounting, after initially being recognised at cost in the Consolidated Balance Sheet. Under the equity method of accounting, the investments are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses of the investee in profit or loss, and the Group’s share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from joint ventures are recognised as a reduction in the carrying amount of the investment. When the Group’s share of losses in an equity accounted investment equals or exceeds its interest in the entity, including any other unsecured long term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the other entity. Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s interest in the entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of equity accounted investees have been changed where necessary to ensure consistency with the policies adopted by the Group. E2/ Related party transactions PARENT ENTITY The parent entity and ultimate parent entity within the Group is Collins Foods Limited. KEY MANAGEMENT PERSONNEL Disclosures relating to the compensation of KMP are included in Note D1 and in the Remuneration Report included in the Directors’ Report. SUBSIDIARIES The ownership interests in subsidiaries are set out in Note G1. Transactions between entities within the Group during the reporting period consisted of loans advanced and repaid, interest charged and received, operating expenses paid, non-current assets purchased and sold, and tax losses transferred. These transactions were undertaken on commercial terms and conditions. TRANSACTIONS WITH RELATED PARTIES All transactions with related parties are conducted on commercial terms and conditions. Transaction type Loans to related parties Class of related party Loan advanced to a related party Related entity – joint venture Interest received or receivable Related entity – joint venture WHOLE DOLLARS 2017 $ 2016 $ – 3,300,000 38,000 189,000 ANNUAL REPORT 2017 COLLINS FOODS LIMITED 59 F/ OTHER INFORMATION F1/ Commitments for expenditure F2/ Earnings per share F3/ Receivables F7/ Provisions F8/ Reserves F9/ Tax F4/ Property, plant and equipment F10/ Auditor’s Remuneration F5/ Intangible assets F6/ Trade and other payables F11/ Contingencies F1/ Commitments for expenditure Capital commitments Property, plant and equipment: Aggregate capital expenditure contracted for at balance date but not recognised as liabilities, payable Operating Leases Operating leases relate to land, buildings and equipment with lease terms ranging from 1 to 20 years and expire on varying dates through 2036. The Company has the right to extend many of these leases and many contain market review clauses. Certain leases require contingent rent, determined as a percentage of sales, when annual sales exceed specified levels. Operating lease commitments: Aggregate lease expenditure contracted for at balance date but not recognised as liabilities, payable: Not later than 1 year Later than 1 year but not later than 5 years Later than 5 years Less recoverable Goods and Services Tax Minimum lease payments 2017 $000 2016 $000 8,307 3,116 44,600 136,249 78,786 259,635 (26,158) 233,477 33,806 92,348 44,857 171,011 (15,545) 155,466 ACCOUNTING POLICY Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other current and non-current payables. Finance lease payments are allocated between interest expense and reduction of lease liability over the term of the lease. The interest expense is determined by applying the interest rate implicit in the lease to the outstanding lease liability at the beginning of each lease payment period. Finance leased assets are depreciated on a straight line basis over the shorter of the asset’s estimated useful life and the lease term. Where the risks and rewards of ownership are retained by the lessor, leased assets are classified as operating leases and are not capitalised. Rental payments are charged to the Consolidated Income Statement on a straight line basis over the period of the lease. 60 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements F2/ Earnings per share Basic earnings per share (cents) Diluted earnings per share (cents) Earnings used in the calculation of basic and diluted earnings per share from continuing operations ($000) Weighted average number of ordinary shares for the purpose of basic earnings per share (number) Weighted average number of ordinary shares for the purpose of diluted earnings per share (number) 2017 cents 29.12 28.97 2016 cents 31.31 31.06 27,988 29,115 96,118,304 93,000,003 96,611,031 93,732,586 ACCOUNTING POLICY Basic earnings per share is calculated by dividing the profit attributable to owners of the Company by the weighted average number of ordinary shares outstanding during the financial period. Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. F3/ Receivables CURRENT ASSETS – RECEIVABLES Loan to related party – joint venture Allowance for doubtful receivable Trade receivables Interest receivable Prepayments NON-CURRENT ASSETS – RECEIVABLES Security deposits 2017 $000 – – – 2,426 – 1,815 4,241 2017 $000 6 6 2016 $000 3,300 (11) 3,289 1,081 2 4,636 9,008 2016 $000 11 11 ACCOUNTING POLICY Trade and related party receivables are recognised initially at fair value and subsequently measured at amortised cost, less any provision for doubtful debts. Trade receivables are generally due for settlement no more than 30 days from the date of recognition. Collectability of trade and related party receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off. A provision for doubtful debts is raised when there is objective evidence that the Group will not be able to collect all amounts due. The amount of the impairment loss is recognised in the Consolidated Income Statement within other expenses. When a receivable for which an impairment allowance has been recognised becomes uncollectable in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in the Consolidated Income Statement. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 61 F4/ Property, plant and equipment At 4 May 2015 Cost Accumulated depreciation Net book amount at 4 May 2015 Additions Transfers from construction in progress Depreciation expense Impairment charge Disposals – cost Disposals – accumulated depreciation Acquisition through controlled entity purchased Exchange differences LAND & BUILDINGS LEASEHOLD IMPROVEMENTS PLANT & EQUIPMENT CONSTRUCTION IN PROGRESS $000 $000 $000 $000 6,800 (1,714) 5,086 24 – (34) – (1,349) 38 – – 113,337 (71,891) 41,446 1,424 15,945 (10,933) (537) (3,248) 3,197 – – 82,092 (55,001) 27,091 3,450 6,548 (9,337) (771) (4,631) 4,435 – – 5,854 – 5,854 26,823 (22,493) – – (28) – – – TOTAL $000 208,083 (128,606) 79,477 31,721 – (20,304) (1,308) (9,256) 7,670 – – Net book amount at 1 May 2016 3,765 47,294 26,785 10,156 88,000 At 2 May 2016 Cost Accumulated depreciation (including impairment) Net book amount at 2 May 2016 Additions Transfers from construction in progress Depreciation expense Impairment charge Disposals – cost Disposals – accumulated depreciation Acquisition through controlled entity purchased Exchange differences Net book amount at 30 April 2017 At 30 April 2017 Cost Accumulated depreciation (including impairment) Net book amount at 30 April 2017 5,475 127,458 87,459 10,156 230,548 (1,710) 3,765 13 – (23) – (1,620) 1,620 – – 3,755 (80,164) 47,294 1,254 17,376 (12,315) (667) (5,060) 5,006 5,698 32 58,618 (60,674) 26,785 3,396 8,204 (9,812) (545) (6,217) 5,875 5,903 39 33,628 – 10,156 22,775 (25,580) – – (13) – 41 – (142,548) 88,000 27,438 – (22,150) (1,212) (12,910) 12,501 11,642 71 7,379 103,380 3,868 146,726 98,745 7,379 256,718 (113) 3,755 (88,108) 58,618 (65,117) 33,628 – 7,379 (153,338) 103,380 62 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements ACCOUNTING POLICY All property, plant and equipment is recorded at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Property, plant and equipment, excluding freehold land, is depreciated at rates based upon the expected useful economic life as follows: Buildings Leasehold improvements Plant and equipment Motor vehicles Method Straight line Average life 20 years Straight line Primary term of lease Straight line Straight line 8 years 4 years Leasehold improvements are depreciated over the unexpired period of the primary lease or the estimated life of the improvement, whichever is the shorter. The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. The Group reviews annually whether the triggers indicating a risk of impairment exist. The recoverable amounts of cash generating units have been determined based on value-in-use calculations. These calculations require the use of estimates (refer Note F5). An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The gain or loss on disposal of all non-current assets is determined as the difference between the carrying amount of the asset at the time of disposal and the proceeds on disposal, and is included in the Consolidated Income Statement of the Group in the reporting period of disposal. IMPAIRMENT OF ASSETS Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the Consolidated Income Statement for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the reversal of the previously recognised impairment loss is recognised in the Consolidated Income Statement. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 63 Net book amount at 1 May 2016 229,941 5,224 GOODWILL FRANCHISE RIGHTS SIZZLER BRAND AUSTRALIA SIZZLER BRAND ASIA $000 $000 $000 $000 OTHER $000 TOTAL $000 257,062 7,150 11,261 16,443 (27,146) 229,916 (2,007) 5,143 – – 25 – 639 (558) – – (11,261) – – – – – – (3,102) 13,341 – (876) 352 (30) 12,787 257,087 7,789 11,261 16,795 (27,146) 229,941 (2,565) 5,224 34,721 – – (924) 186 – 263,924 1,160 658 (685) – – 10 6,367 (11,261) – – – – – – – (4,008) 12,787 – – (857) – 292 (67) 12,155 – – – – – – – – – – – 28 – (4) – – – 291,916 (43,516) 248,400 639 (1,434) 377 (30) 247,952 292,932 (44,980) 247,952 35,909 658 (1,546) (924) 478 (57) 24 282,470 291,994 9,607 11,261 17,087 28 329,977 (28,070) 263,924 (3,240) 6,367 (11,261) – (4,932) 12,155 (4) 24 (47,507) 282,470 F5/ Intangible assets At 4 May 2015 Cost Accumulated amortisation (including accumulated impairment losses & foreign currency translation) Net book amount at 4 May 2015 Additions Amortisation Foreign currency translation – cost Foreign currency translation – accumulated At 2 May 2016 Cost Accumulated amortisation (including accumulated impairment losses & foreign currency translation) Net book amount at 2 May 2016 Purchase of controlled entities Additions Amortisation Impairment charge Foreign currency translation – cost Foreign currency translation – accumulated Net book amount at 30 April 2017 At 30 April 2017 Cost Accumulated amortisation (including accumulated impairment losses & foreign currency translation) Net book amount at 30 April 2017 64 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements IMPAIRMENT TEST FOR GOODWILL Allocation of goodwill CASH GENERATING UNIT Carrying value KFC RESTAURANTS QLD/NSW KFC RESTAURANTS WA/NT KFC RESTAURANTS NSW/VIC KFC RESTAURANTS EUROPE SIZZLER ASIA 2017 $000 2016 $000 2017 $000 2016 $000 2017 $000 2016 $000 2017 $000 2016 $000 2017 $000 2016 $000 183,529 183,529 45,199 45,199 21,604 – 12,357 – 1,235 1,213 Goodwill is tested for impairment at a cash generating unit level. The recoverable amount of a cash generating unit is determined based on value-in-use calculations. Management recognises that there are various reasons that the estimates used in the assumptions may vary. For the KFC and Sizzler Asia cash generating units, there are no reasonable and likely changes in assumptions which would result in an impairment. Goodwill relating to Sizzler Australia Restaurants and Snag Stand is recorded at nil balance as a result of accumulated impairment. During the reporting period ended 30 April 2017, the above cash generating units were tested for impairment in accordance with AASB 136. As at 30 April 2017, due to declining revenues and profitability in Snag Stand the recoverable amount of goodwill was assessed to be nil. Accordingly, an impairment charge was recognised for this asset relating to this cash generating unit. During the reporting period ended 30 April 2017 individual restaurant assets were also tested for impairment in accordance with AASB 136. In the event that the carrying value of these assets was higher than the recoverable amount (measured as the higher of fair value less costs to sell and value in use) an impairment charge was recognised in the Consolidated Income Statement as set out in the table below. Impairment of assets recognised during the reporting period Goodwill allocated to Snag Stand Sizzler Australia Restaurants Leasehold improvements Plant and equipment Snag Stand Restaurants Leasehold improvements Plant and equipment 2017 $000 924 24 158 643 387 2,136 2016 $000 – 537 771 – – 1,308 KEY ASSUMPTIONS USED FOR VALUE-IN-USE CALCULATIONS KFC Australia Restaurants The cash flows by restaurant have been estimated after applying growth rates from the commencement of 2018 through to the end of the 2022 reporting period which average 2.9%. The year one projections have been aligned to the division’s specific cash flows reflected in the 2018 budget. Management believe that these growth percentages are reasonable considering the growth that has been seen in this operating segment during the 2017 and prior reporting periods. A pre-tax discount rate of 12.0% has been applied to the cash flows. An indefinite terminal cash flow calculation has been applied for cash flows beyond 2022, using that year’s cash flow as a base. The growth rate of 2.75% has been used in determining the terminal value, which does not exceed the long term average growth rate for the industry segment in which the restaurants operate. KFC Germany Restaurants The cash flows by restaurant have been estimated after applying growth rates from the commencement of 2018 through to the end of the 2022 reporting period which average 2.9%. The year one projections have been aligned to the division’s specific cash flows reflected in the 2018 budget. Management believe that these growth percentages are reasonable considering the growth that has been seen in this operating segment during the 2017 and prior reporting periods. A pre-tax discount rate of 14.0% has been applied to the cash flows. An indefinite terminal cash flow calculation has been applied for cash flows beyond 2022, using that year’s cash flow as a base. The growth rate of 2.75% has been used in determining the terminal value, which does not exceed the long term average growth rate for the industry segment in which the restaurants operate. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 65 F5/ Intangible assets (continued) Sizzler Australia Restaurants The cash flows for the Sizzler Australia Restaurants from the beginning of 2018 to the end of the 2022 reporting period have been estimated at an average decline of 5.0% reflecting the recent trends experienced in this operating segment together with initiatives intended to improve operating margins. The projection for 2018 has been aligned to the division’s specific cash flows reflected in the 2018 budget. A pre-tax discount rate of 20.0% has been applied to the cash flows. An indefinite terminal cash flow calculation has been applied for cash flows beyond 2022, using that year’s cash flow as a base. No growth has been used in determining the terminal value, which is less than the long term average growth rate for the industry. Sizzler Asia The cash flows for the Sizzler Asia cash generating unit have been estimated after applying growth rates from the commencement of 2018 through to the end of the 2022 reporting period which average 4.0%. The year one projections have been aligned to the cash flows reflected in the 2018 budget. Management believe that these growth percentages are reasonable considering the growth that has been seen in this cash generating unit during the 2017 and prior reporting periods. A pre-tax discount rate of 13.9% has been applied to the cash flows. An indefinite terminal cash flow calculation has been applied for cash flows beyond 2022, using that year’s cash flow as a base. The growth rate of 4.0% has been used in determining the terminal rate which does not exceed the long term average growth rate for the casual dining industry segment. Snag Stand The cash flows by restaurant have been estimated after applying nil growth rates from the commencement of the 2018 reporting period through to the end of the 2022 reporting period. The year one projections have been aligned to the division’s specific cash flows reflected in the 2018 budget. A pre-tax discount rate of 25.0% has been applied to the cash flows. An indefinite terminal cash flow calculation has been applied for cash flows beyond 2022, using that year’s cash flow as a base. No growth has been used in determining the terminal value, which is less than the long term average growth rate for the industry. ACCOUNTING POLICY Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Goodwill is allocated to cash generating units for the purpose of impairment testing. The Group determines whether goodwill with indefinite useful lives are impaired at least on an annual basis. This requires an estimation of the recoverable amount of the cash generating units to which the goodwill with indefinite useful lives relate. Deferred franchise rights Costs associated with franchise licences which provide a benefit for more than one reporting period are deferred and amortised over the remaining term of the franchise licence. Capitalised costs associated with renewal options for franchise licences are deferred and amortised over the renewal option period. The unamortised balance is reviewed each balance date and charged to the Consolidated Income Statement to the extent that future benefits are no longer probable. Other intangibles – Sizzler brand Sizzler brand intangibles which are owned and registered by the Group are considered to have a useful life of 20 years and are amortised accordingly. These intangibles will be tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Sizzler brand intangibles are carried at amortised cost less impairment losses. 66 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements F6/ Trade and other payables Trade payables and accruals – unsecured Other payables Total payables 2017 $000 48,167 13,696 61,863 2016 $000 46,015 12,020 58,035 ACCOUNTING POLICY These amounts represent liabilities for goods and services provided prior to the end of the reporting period and which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. F7/ Provisions CURRENT LIABILITIES Employee entitlements Make good provision Total current liabilities NON-CURRENT LIABILITIES Employee entitlements Make good provision Total non-current liabilities 2017 $000 4,626 672 5,298 2017 $000 2,873 225 3,098 2016 $000 4,006 535 4,541 2016 $000 3,080 155 3,235 ACCOUNTING POLICY Employee entitlements Provision has been made in the accounts for benefits accruing to employees up to balance date, such as annual leave, long service leave and incentives. Annual leave and incentive provisions that are expected to be settled wholly within twelve months after the end of the reporting period are measured at their nominal amounts using the remuneration rates expected to apply at the time of settlement and are classified in provisions. Long service leave, annual leave and incentive provisions that are not expected to be settled wholly within twelve months after the end of the reporting period are measured as the present value of expected future payments to be made in respect of services provided by employees up to reporting date. Long service leave provisions relating to employees who have not yet completed the required period of service are classified as non-current. All other employee provisions are classified as a current liability. All on-costs, including superannuation, payroll tax and workers’ compensation premiums are included in the determination of provisions. Make good provision Provisions for legal claims and make good obligations are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognised for future operating losses. The Group is required to restore the leased premises of certain retail stores to their original condition upon exit. However, as leases are traditionally renewed, the Group only recognises a provision for those restaurants where make good costs will result in a probable outflow of funds. An annual review of leased sites is conducted to determine the present value of the estimated expenditure required to remove any leasehold improvements and decommission the restaurant. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 67 F8/ Reserves Hedging – cash flow hedges Foreign currency translation Share-based payments Net investment hedge Movements in hedging reserve – cash flow hedges: Opening balance Revaluation – gross Deferred tax (Note F9) Transfer to net profit – gross Deferred tax (Note F9) Closing balance Movements in foreign currency translation reserve: Opening balance Exchange fluctuations arising on net assets of foreign operations Closing balance Movements in share-based payments reserve: Opening balance Valuation of performance rights Performance rights vested Closing balance Movements in net investment hedge reserve: Opening balance Exchange fluctuations arising on net investment hedge Closing balance 2017 $000 (2,332) 5,495 643 (386) 3,420 (3,016) 974 (292) 3 (1) 2016 $000 (3,016) 4,338 1,042 – 2,364 (3,163) 203 (61) 8 (3) (2,332) (3,016) 4,338 1,157 5,495 1,042 399 (798) 643 – (386) (386) 4,153 185 4,338 456 586 – 1,042 – – – NATURE AND PURPOSE OF RESERVES Hedging reserve – cash flow hedges The hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised in other comprehensive income. Amounts are recognised in profit and loss when the associated hedged transaction affects profit and loss. Share-based payments reserve – performance rights The share-based payments reserve is used to recognise the issuance date fair value of performance rights issued to employees under the Long Term Incentive Plan but not yet vested. Foreign currency translation reserve Exchange differences arising on translation are recognised in other comprehensive income and accumulated in a separate reserve within equity. Net investment hedge Exchange differences arising on the translation of a hedge of a net investment are recognised in other comprehensive income and accumulated in a separate reserve within equity. 68 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements F9/ Tax A) INCOME TAX EXPENSE Income tax expense Current tax Deferred tax (Over)/under provided in prior reporting periods Income tax expense is attributable to: Profit from continuing operations Aggregate income tax expense Deferred income tax expense/(benefit) included in income tax expense comprises: Increase in deferred tax assets Decrease in deferred tax liabilities Numerical reconciliation of income tax expense/(benefit) to prima facie tax payable Profit from continuing operations before income tax expense Tax at the Australian tax rate of 30% Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Other non-deductible expenses Non-deductible accounting loss on impairment of goodwill Withholding tax credits not brought to account Non-assessable income received Carried forward capital losses Amounts (over)/under provided in prior reporting periods Income tax expense 2017 $000 16,286 (62) (206) 16,018 16,018 16,018 (43) (19) (62) 44,006 13,201 3,179 – 597 (753) – 16,224 (206) 16,018 2016 $000 13,572 (514) 55 13,113 13,113 13,113 (71) (443) (514) 42,228 12,668 756 – 562 (722) (206) 13,058 55 13,113 Tax expense relating to items of other comprehensive income Cash flow hedges (Note F8) Tax losses Unused capital tax losses for which no deferred tax asset has been recognised Potential tax benefit @ 30% 293 64 61,276 18,383 60,591 18,177 ANNUAL REPORT 2017 COLLINS FOODS LIMITED 69 F9/ Tax (continued) B) DEFERRED TAX BALANCES Deferred tax assets (DTA) The balance comprises temporary differences attributable to: Depreciation Employee benefits Provisions Carried forward revenue losses Capitalised costs Cash flow hedges Deferred tax assets All movements in DTA were recognised in the statement of profit or loss and other comprehensive income Deferred tax liabilities (DTL) The balance comprises temporary differences attributable to: Inventories Intangibles Prepayments Deferred tax liabilities All movements in DTL were recognised in the statement of profit or loss Deferred tax assets Deferred tax liabilities Deferred tax assets, net 2017 $000 2016 $000 22,186 4,863 1,920 1,160 614 998 31,741 637 4,417 3 5,057 22,249 4,487 2,088 – 157 1,291 30,272 579 4,382 77 5,038 31,741 (5,057) 26,684 30,272 (5,038) 25,234 ACCOUNTING POLICY Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted in the respective jurisdiction. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and liabilities are offset where the entity has a legally enforceable right to offset and intends to settle on a net basis. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Tax consolidation The Company, as the head entity in the tax consolidated group and its wholly-owned Australian controlled entities continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand-alone taxpayer in its own right. 70 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements In addition to its own current and deferred tax amounts, the Company also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets or liabilities arising under the tax funding agreement with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group. The entities in the Tax Consolidated Group entered into a tax sharing agreement which, in the opinion of the directors, limits the joint and several liability of the wholly-owned entities within the Tax Consolidated Group in the case of a default by the Company. The entities in the Tax Consolidated Group have also entered into a Tax Funding Agreement under which the wholly-owned entities of that group fully compensate the Company for any current tax payable assumed and are compensated by the Company for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to the Company under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. F10/ Auditor’s remuneration During the reporting period the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: Audit and other assurance services Audit services: PricewaterhouseCoopers Australian firm Audit and review of financial reports and other audit work under the Corporations Act 2001 Audit and review of financial reports and other audit work for foreign subsidiary Network firms of PricewaterhouseCoopers Australia Audit and review of financial reports and other audit work for foreign subsidiary Other assurance services: PricewaterhouseCoopers Australian firm Store sales certificates Agreed upon procedures for covenant calculations Due diligence services relating to European and domestic acquisitions Total remuneration for assurance services Taxation services PricewaterhouseCoopers Australian firm Tax compliance services, including review of company tax returns International tax consulting and tax advice on acquisitions Network firms of PricewaterhouseCoopers Australia Tax compliance services, including review of company tax returns International tax consulting and tax advice on acquisitions Total remuneration for taxation services Other services PricewaterhouseCoopers Australian firm Accounting advice Business process review Total remuneration for other services Total remuneration for services WHOLE DOLLARS 2017 $ 2016 $ 346,678 34,145 26,532 407,355 10,930 21,452 575,074 607,456 1,014,811 37,700 521,268 4,785 32,500 596,253 29,580 25,000 54,580 311,567 33,476 26,845 371,888 10,716 21,032 – 31,748 403,636 36,000 – 4,378 – 40,378 – – – 1,665,644 444,014 ANNUAL REPORT 2017 COLLINS FOODS LIMITED 71 F10/ Auditor’s remuneration (continued) It is the Group’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where PricewaterhouseCoopers’ expertise and experience with the Group are important. These assignments are principally tax advice, due diligence reporting on acquisitions and capital raisings, or where PricewaterhouseCoopers is awarded assignments on a competitive basis. It is the Company’s policy to seek competitive tenders for all major consulting projects. F11/ Contingencies The parent entity and certain controlled entities indicated in Note G1 have entered into a Deed of Cross Guarantee (Amended and Restated) under which the parent entity has guaranteed any deficiencies of funds on winding up of the controlled entities which are party to the Deed. At the date of this statement there are reasonable grounds to believe that the Company will be able to meet any obligations or liabilities to which it is, or may become, subject by virtue of the Deed. As described in Note B2, CFG Finance Pty. Limited (a subsidiary) and several other related entities entered into Syndicated and Working Capital credit facilities. As a consequence of this, the Company and its subsidiaries (other than subsidiaries outside the Closed Group) became registered guarantors of all the obligations in respect of these loan facilities. 72 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements G/ GROUP STRUCTURE G1/ Subsidiaries and Deed of Cross Guarantee (Amended and Restated) G2/ Parent entity financial information G1/ Subsidiaries and Deed of Cross Guarantee (Amended and Restated) The Consolidated Financial Statements at 30 April 2017 include the following subsidiaries. The reporting period end of all subsidiaries is the same as that of the parent entity (a). Name of controlled entity CFG Finance Pty Limited Collins Foods Holding Pty. Limited Collins Foods Finance Pty. Limited Collins Foods Group Pty. Ltd. Collins Restaurants Queensland Pty. Ltd. Collins Restaurants NSW Pty. Ltd. Collins Restaurants West Pty. Ltd. Fiscal Nominees Company Pty. Ltd. Sizzler Restaurants Group Pty. Ltd. Collins Restaurants Management Pty. Ltd. Collins Restaurants South Pty. Ltd. Collins Foods Subsidiary Pty Ltd Snag Stand Leasing Pty Ltd Snag Stand Corporate Pty Limited Snag Stand Franchising Pty Ltd Snag Stand International Pty Ltd Snag Holdings Pty Ltd Collins Property Development Pty. Ltd Club Sizzler Pty. Ltd. Collins Foods Australia Pty. Ltd. Collins Finance and Management Pty. Ltd. Sizzler South Pacific Pty. Ltd. SingCo Trading Pte Ltd Sizzler International Marks LLC Sizzler Asia Holdings LLC Sizzler South East Asia LLC Sizzler New Zealand LLC Sizzler Restaurant Services LLC Collins Foods Europe Limited Collins Foods Europe Services Limited Collins Foods Germany Limited Collins Foods Netherlands Limited Notes (b) Place of incorporation Australia Acronym CFGF 2017 100 2016 100 % OF SHARES HELD (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (c) (d) (d) (d) (d) (e) (d) (e) (d) (e) (d) (d) (d) (d) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Nevada, USA Singapore Delaware, USA Delaware, USA Delaware, USA Delaware, USA Delaware, USA United Kingdom United Kingdom United Kingdom United Kingdom CFH CFF CFG CRQ CRN CRW FNC SRG CRM CRS CFS SSL SSC SSF SSI SNG CPD CSP CFA CFM SSP SingCo SIM SAH SSEA SNZ SRS CFEL CFESL CFGL CFNL 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 50 50 50 50 50 100 100 100 100 100 100 100 100 100 100 100 – – – – (a) Collins Foods Limited is domiciled in Brisbane, Australia. The Registered office is located at Level 3, KSD1, 485 Kingsford Smith Drive, Hamilton Queensland 4007. (b) These companies have entered into a Deed of Cross Guarantee (Amended and Restated) dated 27 April 2017 with Collins Foods Limited which provides that all parties to the deed will guarantee to each creditor payment in full of any debt of each company participating in the deed on winding up of that company. As a result of the new ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (ASIC Instrument 2016/785) which has replaced ASIC Class Order CO 98/1418, these companies are relieved from the requirement to prepare financial statements. (c) Sizzler South Pacific Pty. Ltd. is a company with no net assets. The directors have resolved to liquidate this company. This company is not an Australian registered company and is not covered by the ASIC Instrument 2016/785. (d) These companies are not Australian registered companies and are not covered by the ASIC Instrument 2016/785. (e) Originally incorporated in Nevada, upon conversion to a LLC became registered in Delaware. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 73 G1/ Subsidiaries and Deed of Cross Guarantee (Amended and Restated) (continued) The Consolidated Income Statement, Consolidated Statement of Comprehensive Income and summary of movements in consolidated retained profits of the entities in the ASIC Instrument 2016/785 ‘Closed Group’ are as follows. As there are no other parties to the Deed of Cross Guarantee (Amended and Restated), that are controlled by Collins Foods Limited, the below also represents the ‘Extended Closed Group’. CONSOLIDATED INCOME STATEMENT Sales revenue Cost of sales Gross profit Selling, marketing and royalty expenses Occupancy expenses Restaurant related expenses Administration expenses Other expenses Share of net profit of joint ventures accounted for using the equity method Other income Finance income Finance costs Profit from continuing operations before income tax Income tax expense Profit from continuing operations INCOME Profit from continuing operations Other comprehensive income: Cash flow hedges Income tax relating to components of other comprehensive income Other comprehensive income for the reporting period, net of tax Total comprehensive income for the reporting period Total comprehensive income for the reporting period is attributable to: Owners of the parent SUMMARY OF MOVEMENTS IN CONSOLIDATED RETAINED EARNINGS/(ACCUMULATED LOSSES) Retained earnings/(accumulated losses) at the beginning of the reporting period Profit for the reporting period Dividends provided for or paid Retained earnings/(accumulated losses) at the end of the reporting period 2017 $000 615,007 (294,341) 320,666 (125,609) (49,489) (57,226) (36,333) (4,378) (112) 2,395 362 (8,428) 41,848 (15,501) 26,347 CLOSED GROUP 2016 $000 570,639 (270,943) 299,696 (118,217) (45,264) (53,721) (31,492) (5,345) (583) 3,111 744 (8,949) 39,980 (12,635) 27,345 26,347 27,345 977 (293) 684 211 (64) 147 27,031 27,492 27,031 27,492 (376) 26,347 (15,110) 10,861 (16,096) 27,345 (11,625) (376) 74 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements The Consolidated Balance Sheet of all entities in the ASIC Instrument 2016/785 ‘Closed Group’ as at the end of the reporting period is as follows: Current assets Cash and cash equivalents Receivables Inventories Total current assets Non-current assets Property, plant and equipment Intangible assets, net Deferred tax assets, net Receivables Other financial assets Total non-current assets Total assets Current liabilities Trade and other payables Current tax liabilities Derivative financial instruments Provisions Total current liabilities Non-current liabilities Borrowings Derivative financial instruments Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings/(accumulated losses) Total equity 2017 $000 38,257 3,822 4,793 46,872 95,536 254,504 28,983 6 91,783 470,812 517,684 58,515 4,644 1,773 5,298 70,230 CLOSED GROUP 2016 $000 46,796 8,705 4,398 59,899 87,996 232,856 27,595 11 9,827 358,285 418,184 57,858 4,131 1,726 4,541 68,256 183,022 164,240 1,684 3,098 187,804 258,034 259,650 245,260 (2,082) 16,472 2,705 3,235 170,180 238,436 179,748 182,098 (1,974) (376) 259,650 179,748 ANNUAL REPORT 2017 COLLINS FOODS LIMITED 75 G2/ Parent entity financial information SUMMARY FINANCIAL INFORMATION The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Shareholder’s equity: Issued capital (1) Reserves Retained earnings Profit for the reporting period Total comprehensive income 2017 $000 2016 $000 123 330,192 330,315 4,857 31,725 36,582 293,733 112 251,603 251,715 5,139 14,973 20,112 231,603 291,588 228,426 642 1,503 293,733 14,477 14,477 1,041 2,136 231,603 14,014 14,014 (1) Represents share capital of the parent entity. This differs from the share capital of the Group due to the capital reconstruction of the Group treated as a reverse acquisition in the 2012 reporting period. GUARANTEES ENTERED INTO BY THE PARENT ENTITY The parent entity has provided unsecured financial guarantees in respect of bank loan facilities amounting to $200 million and Euro €33 million as stated in Note B2. In addition, there are cross guarantees given by the parent entity as described in Note G1. All controlled entities will together be capable of meeting their obligations as and when they fall due by virtue to the Deed of Cross Guarantee (Amended and Restated) dated 27 April 2017. No liability was recognised by the parent entity in relation to these guarantees, as their fair value is considered immaterial. CONTINGENT LIABILITIES OF THE PARENT ENTITY Except as described above in relation to guarantees, the parent entity did not have any contingent liabilities as at 30 April 2017. 76 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements H/ BASIS OF PREPARATION AND OTHER ACCOUNTING POLICIES H1/ Basis of preparation H2/ Other accounting policies H1/ Basis of preparation COMPLIANCE These financial statements have been prepared as a general purpose financial report in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. The Consolidated Financial Statements of the Group comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). MEASUREMENT Collins Foods Limited is a for profit entity for the purpose of preparing the Consolidated Financial Statements. The financial statements have also been prepared under the historical cost convention, as modified by the revaluation of financial assets and liabilities (including derivative instruments). GOING CONCERN The financial report has been prepared on a going concern basis. The Directors are of the opinion that the Group will be able to continue to operate as a going concern having regard to available non-current debt facilities and the Group’s internally generated cash resources. CONSOLIDATION The Consolidated Financial Statements include the financial statements of the parent entity, Collins Foods Limited (the Company) and its subsidiaries (together referred to as the ‘Group) (see Note G1 on subsidiaries). All transactions and balances between companies in the Group are eliminated on consolidation. Subsidiaries are all those entities over which the Company has the power to govern the financial and operating results and policies and often accompanies a shareholding of more than one-half of the voting rights. The results of subsidiaries acquired or disposed of during the reporting period are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Consistent accounting policies are employed in the preparation and presentation of the consolidated financial statements. REPORTING PERIOD The Group utilises a fifty-two, fifty-three week reporting period ending on the Sunday nearest to 30 April. The 2017 reporting period comprised the fifty-two weeks which ended on 30 April 2017 (2016 was a fifty-two week reporting period which ended on 1 May 2016). FOREIGN CURRENCIES Items included in the financial statements of each of the Group entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The Consolidated Financial Statements are presented in Australian dollars, which is the functional and presentation currency of the Company. Transactions in foreign currencies are converted at the exchange rates in effect at the dates of each transaction. Amounts payable to or by the Group in foreign currencies have been translated into Australian currency at the exchange rates ruling on balance date. Gains and losses arising from fluctuations in exchange rates on monetary assets and liabilities are included in the Consolidated Income Statement in the period in which the exchange rates change, except when deferred in equity as qualifying cash flow hedges. The foreign currency results and financial position of foreign operations are translated into Australian dollars as follows: Ò assets and liabilities at the exchange rate at the end of the reporting period; Ò income and expenses at the average exchange rates for the reporting period; with Ò all resulting exchange differences recognised in other comprehensive income and accumulated in equity. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the exchange rate at the end of the reporting period. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 77 Shareholder information H1/ Basis of preparation (continued) SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances. The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are included in the following notes: Ò Note A2 Business combinations Ò Note F4 Property, plant and equipment Ò Note F5 Non-Current Assets – Intangible Assets ROUNDING OF AMOUNTS The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. COMPARATIVES AND RESTATEMENTS OF PRIOR YEAR BALANCES Comparatives have been reclassified where appropriate to enhance comparability. STANDARDS ISSUED BUT NOT YET EFFECTIVE Certain new accounting standards and interpretations have been published that are not mandatory for 30 April 2017 reporting periods. Unless stated otherwise below, the Company is currently in the process of assessing the impact of these standards and amendments and at this stage does not intend to adopt any of the following standards before the effective dates. AASB 9 Financial Instruments (effective from 1 January 2018) The new standard simplifies the model for classifying and recognising financial instruments and aligns hedge accounting more closely with common risk management practices. Changes in own credit risk in respect of liabilities designated at fair value through profit or loss shall now be presented within OCI; this change can be adopted early without adopting AASB 9. This new standard will be effective from 1 January 2018. 78 ANNUAL REPORT 2017 COLLINS FOODS LIMITED AASB 15 Revenue from contracts with customers (effective from 1 January 2018) The AASB has issued a new standard for the recognition of revenue. This will replace AASB 118, which covers contracts for goods and services, and AASB 111, which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards. At this stage there is not expected to be a significant impact from this accounting standard, however the group will make a more detailed assessment of the effect over the next twelve months. AASB 16 Leases (effective from 1 January 2019) AASB 16 will primarily affect the accounting by lessees and will result in the recognition of almost all leases on the balance sheet. The standard removes the current distinction between operating and financing leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for almost all lease contracts. As at the reporting date, the group has non-cancellable operating lease commitments of $233.4 million, see Note F1. However, the group has not yet determined to what extent these commitments will result in the recognition of an asset and a liability for future payments and how this will affect the group’s profit and classification of cash flows. AASB 2016-1 Issues narrow scope amendments to AASB 112 Income taxes (effective from 1 January 2017) The amendments to AASB 112 clarify the accounting for deferred tax where an asset is measured at fair value and that fair value is below the asset’s tax base. They do not change the underlying principles for the recognition of deferred tax assets. AASB 2016-2 IASB issues narrow scope amendments to IAS 7 Statement of cash flows (effective from 1 January 2017) The amendment to AASB 107 introduces additional disclosures that will enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendment requires disclosure of changes arising from: Ò cash flows, such as drawdowns and repayments of borrowings, and Ò non-cash changes, such as acquisitions, disposals and unrealised exchange differences. AASB 2016-5 Classification and Measurement of Share-based Payment Transactions (effective from 1 January 2018) Amendments were made to AASB 2 Share-based Payment which clarify how to account for cash-settled share-based payments with performance conditions, modifications that change a cash-settled arrangement to an equity-settled arrangement, and equity-settled awards that include a ‘net settlement’ feature which requires employers to withhold amounts to settle the employee’s tax obligations. H2/ Other accounting policies GOODS AND SERVICES TAX Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST) except: Ò where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or Ò for receivables and payables which are recognised inclusive of GST. The net amount of GST payable to the taxation authority is included as part of trade and other payables (see Note F6). Cash flows are included in the Consolidated Statement of Cash Flows on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. COST OF SALES For the purposes of the Consolidated Income Statement, cost of sales includes the carrying amount of inventories sold during the reporting period and an estimated allocation of labour incurred in relation to preparing those inventories for sale. OCCUPANCY EXPENSES Occupancy expenses include: fixed rentals, contingent rentals, land tax, outgoings and depreciation relating to buildings and leasehold improvements. RESTAURANT RELATED EXPENSES Restaurant related expenses include: utilities, maintenance, labour and on-costs (except those allocated to cost of sales), cleaning costs, depreciation of plant and equipment (owned and leased) located in restaurants and amortisation of KFC franchise rights. INVENTORIES Inventories are valued at the lower of cost and net realisable value. Cost is assigned on a first-in first-out basis and includes expenditure incurred in acquiring the stock and bringing it to the existing condition and location. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 79 I/ SUBSEQUENT EVENTS I1/ Refinance of debt I2/ Acquisition of restaurants in Australia I1/ Refinance of debt On 26 June 2017 the Group entered into a new Syndicated Facility Agreement of $270 million and Euro €60 million which is subject to customary conditions precedent, the usual terms and conditions, and to a successful capital raise (noting that the Offer is fully underwritten). The new term of the facility is a blend of maturities with $175 million expiring on 31 October 2020 and the remaining $95 million together with the Euro €60 million expiring on 31 October 2022. I2/ Acquisition of restaurants in Australia On 26 June 2017 the Group entered into a binding agreement to acquire 28 KFC restaurants located in Tasmania, South Australia and Western Australia. These restaurants are being purchased from a subsidiary of Yum! Brands Inc. for cash consideration of $110.2 million. The acquisition further strengthens the growth platform of the Group as it provides a footprint from which to grow in these new areas. The acquisition and associated equity raising costs will be funded via a fully underwritten, pro-rata accelerated non-renounceable entitlement offer of $46.2 million and debt of $67.3 million from new enlarged facilities (refer to Note I1). Approval from the franchisor has been received subject to customary conditions. Completion is subject to a number of standard conditions precedent and is expected to be achieved by the end of the calendar year 2017. 80 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Notes to the Consolidated Financial Statements Directors’ Declaration In the Directors’ opinion: Ò the financial statements and notes set out on pages 36 to 80 are in accordance with the Corporations Act 2001, including: – complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and – giving a true and fair view of the consolidated entity’s financial position as at 30 April 2017 and of its performance for the period ended on that date; Ò there are reasonable grounds to believe that Collins Foods Limited will be able to pay its debts as and when they become due and payable; and Ò at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group identified in Note G will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the Deed of Cross Guarantee (Amended and Restated) described in Note G. Note H confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Officer and the Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. This report is made in accordance with a resolution of Directors. Robert Kaye SC Chairman Brisbane 26 June 2017 ANNUAL REPORT 2017 COLLINS FOODS LIMITED 81 Independent Auditor’s Report Independent auditor’s report To the shareholders of Collins Foods Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Collins Foods Limited (the Company) and its controlled entities (together, the Group) is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the Group's financial position as at 30 April 2017 and of its financial performance for the period 2 May 2016 to 30 April 2017 b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group’s financial report comprises:        the consolidated balance sheet as at 30 April 2017 the consolidated statement of comprehensive income for the reporting period ended 30 April 2017 the consolidated statement of changes in equity for the reporting period ended 30 April 2017 the consolidated statement of cash flows for the reporting period ended 30 April 2017 the consolidated income statement for the reporting period ended 30 April 2017 the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if PricewaterhouseCoopers, ABN 52 780 433 757 480 Queen Street, BRISBANE QLD 4000, GPO Box 150, BRISBANE QLD 4001 T: +61 7 3257 5000, F: +61 7 3257 5999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 82 ANNUAL REPORT 2017 COLLINS FOODS LIMITED individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. The Group operates across Australia, Asia and Europe. Its key segments are Sizzler Restaurants in Australia and Asia and KFC Restaurants in Australia and Europe. The Group has a corporate accounting function based in Brisbane. Materiality Audit scope Key audit matters   Amongst other relevant topics, we communicated the following key audit matters to the Audit and Risk Committee:  Assessment of the carrying value of goodwill  Assessment of the carrying value of other non-current assets  Accounting for business combinations These are further described in the Key audit matters section of our report.  For the purpose of our audit we used overall Group materiality of $2.3 million, which represents approximately 5% of the Group’s profit before tax, adjusted for impairment charges.  We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole.  We chose Group profit before tax from continuing operations adjusted for impairment charges because, in our view, it is the benchmark against which the performance of the Group is most commonly measured.  We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds.     Our audit focused on where the directors made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. Our audit procedures were mostly performed at head office in Brisbane, with site visits conducted at Sizzler and KFC Restaurants in Brisbane and Perth, and the German office. Due to the nature of the Group’s business, our IT systems specialists assisted us with developing our understanding of the Group’s IT systems and complex revenue generation processes. As part of our audit, we also utilised the expertise of our Valuations experts and Tax specialists to assist with our audit procedures on the Group’s impairment models and tax calculations. ANNUAL REPORT 2017 COLLINS FOODS LIMITED 83 Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. Key audit matter How our audit addressed the key audit matter Assessment of the carrying value of goodwill (Refer to Note F5 – Intangible Assets) We performed a number of audit procedures in relation to goodwill, including the following: Collins Foods Limited recorded goodwill of $263.9 million as at 30 April 2017, allocated between six cash generating units (“CGUs”), being KFC Restaurants QLD/NSW, KFC Restaurants WA/NT, KFC Restaurants South, KFC Germany, Sizzler Asia and Snag Stand. As required by Australian Accounting Standards, at 30 April 2017 management performed an impairment assessment over the goodwill balance by calculating the value in use for each CGU using a discounted cash flow model. Refer to page 49, note F5, for details of the impairment test and assumptions. We focused on this area due to the size of the goodwill balance and because the directors’ assessment of the ‘value in use’ of the Group’s CGUs involves judgement about the future results of the Group and the discount rate and long term growth rates applied to future cash flows. We note that an impairment of $0.9 million has been recognised in the current year for the Snag Stand CGU. The directors have concluded that a reasonably possible change in any of the key assumptions would not give rise to an impairment in the other CGUs.    Evaluating the cash flow forecasts including assessing the assumptions they were based on and testing the mathematical accuracy of the underlying calculations. Comparing the cash flow forecasts for FY2018 in the models to the Board approved budget for FY2018. Comparing the FY2017 actual results with prior year forecasts to assess the historical accuracy of the Group’s forecasting processes. With assistance from our Valuations experts, we also evaluated:  Key assumptions for long-term growth rates in the forecasts by comparing them to historical results and economic and industry forecasts; and  The discount rate used in the models by assessing the cost of capital for the Group by comparing it to market data and industry research. We found that the long-term growth rate assumptions were consistent with historical results adjusted for the economic outlook and industry forecasts. We performed a sensitivity analysis on the model by adopting other assumptions which we viewed as reasonably possible for the FY2018 cash flow forecasts, the long term growth rate and the discount rate. We found that headroom still remained between the carrying value of each operating segment’s goodwill and the calculated values adopting these alternative assumptions. We also compared the Group’s net assets as at 30 April 2017 of $267.0 million to its market capitalisation of $563.1 million as at 30 April 2017 and noted the $296.1 million of implied headroom was consistent with the results of our testing. 84 ANNUAL REPORT 2017 COLLINS FOODS LIMITED Key audit matter How our audit addressed the key audit matter Carrying value of other non-current assets (Refer to Note F4 – Property, Plant and Equipment and Note F5 – Intangible Assets) Our audit procedures in relation to management’s review of each restaurant included the following procedures amongst others: Collins Food Limited recorded fixed assets of $103.3 million as at 30 April 2017. Management have followed their formal policy to prepare a value-in-use calculation for all restaurants and consider them for fixed asset impairment at an individual restaurant level. Following Management’s assessment, a fixed asset impairment of $1.2 million was recorded in the 30 April 2017 financial report for both Sizzler Australia and Snag Stand Restaurants. We focused on this area due to the size of the fixed asset balance, the judgement involved in determining the value in use calculations for each restaurant and the associated risk of impairment.      Evaluating the cash flow forecasts in the models for each individual restaurant including assessing the assumptions they were based on and testing the mathematical accuracy of the underlying calculations. Comparing the cash flow forecasts for FY2018 in the models to the Board approved budget for FY2018. Comparing the FY2017 actual results with prior year forecasts to assess the historical accuracy of the Group’s forecasting processes. Performing sensitivity analysis on assumptions within the detailed calculations. Evaluating the adequacy of the disclosures made in note F5, including those regarding the key assumptions and sensitivities to changes in such assumptions, in light of the requirements of Australian Accounting Standards. With assistance from our Valuations experts, we also evaluated:  Key assumptions for long-term growth rates in the forecasts by comparing them to historical results and economic and industry forecasts; and  The discount rate used in the models by comparing the cost of capital for the Group to market data and industry research. Accounting for Business Combinations (Refer to Note A2 – Business Combinations) Our procedures in relation to the accounting for the step acquisition included, amongst others: Collins Foods Limited completed three acquisitions during the period, which included: - Acquisition of Snag Stand (Step Acquisition) Collins Foods Limited completed the acquisition of the remaining 50% share of Snag Stand Holdings Pty Ltd on 15 June 2016, for purchase consideration of $3.4 million. The provisional fair value of the net assets acquired was $2.5 million and goodwill $0.9 million was recognised as part of the acquisition. - Acquisition of 13 NSW/VIC KFC Restaurants The acquisition of the NSW/VIC KFC Restaurants completed on 26 July 2016, for purchase consideration of $25.3 million. The provisional fair    Assessment of fair value adjustments of assets and liabilities performed by management against a third party valuation, taking into consideration the methodology utilised, expertise and independence of the third party valuation expert; Assessment of the initial fair value of the previously owned equity interest in Snag Stand by considering the historical performance; Assessment of the business combinations in light of the Australian Accounting Standards, including the Snag Stand step acquisition accounting; ANNUAL REPORT 2017 COLLINS FOODS LIMITED 85 Key audit matter How our audit addressed the key audit matter value of the net assets acquired was $3.7 million and goodwill of $21.6 million was recognised as part of the acquisition. - Acquisition of 12 German KFC Restaurants The acquisition of the Germany Restaurants completed on 19 December 2016, for purchase consideration of $19.3 million. The provisional fair value of the net assets acquired was $7.1 million and goodwill of $12.1 million was recognised as part of the acquisition. We focused on each of these acquisitions because they are material, the accounting is considered to be complex and because of the judgements made by management with respect to the allocation of fair value to the assets and liabilities acquired.     Consideration of the completeness of the recognition of intangible assets by evaluating the assets purchased on acquisition Testing of the consideration paid for the acquisitions to bank statement, loan documents and the purchase agreement; Assessment of the allocation of goodwill to the cash generating unit and consideration of operating and reporting segments, including consideration of the acquisition of stores in Germany Assessment of the accuracy and completeness of business combination disclosures in the financial statements. We found that the disclosures provided the users with appropriate information to understand the nature of the acquisitions. Other information The directors are responsible for the other information. The other information comprises the Directors’ Report, Shareholder Information and the Corporate Directory included in the Group's annual report for the reporting period ended 30 April 2017 but does not include the financial report and our auditor’s report thereon, which will be obtained prior to the date of this auditor’s report, and the CEO’s Report and Chairman’s Message, which is expected to be made available to us after that date. Our opinion on the financial report does not cover the other information and accordingly we will not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. 86 ANNUAL REPORT 2017 COLLINS FOODS LIMITED In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf This description forms part of our auditor's report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 16 to 32 of the directors’ report for the reporting period ended 30 April 2017. In our opinion, the remuneration report of Collins Foods Limited for the reporting period ended 30 April 2017 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Matters relating to the electronic presentation of the audited financial report This auditor’s report relates to the financial report of Collins Foods Limited for the reporting period ended 30 April 2017 included on Collins Foods Limited's web site. The directors of the Company are responsible for the integrity of Collins Foods Limited's web site. We have not been engaged to report on the integrity of this web site. The auditor’s report refers only to the financial report named above. It does not provide an opinion on any other information which may have been hyperlinked to/from the financial report. If users of this report are concerned with the inherent risks arising from electronic data communications they are advised to refer to the hard copy of the audited financial report to confirm the information included in the audited financial report presented on this web site. PricewaterhouseCoopers Kim Challenor Partner Brisbane 26 June 2017 ANNUAL REPORT 2017 COLLINS FOODS LIMITED 87 Shareholder information Shareholder information that has not been stated elsewhere in the Annual Report is set out below. The shareholder information set out below was applicable as at the close of trading on 21 June 2017. Distribution of equity securities Analysis of numbers of equity security holders by size of holding: Holding 1–1,000 1,001–5,000 5,001–10,000 10,001–100,000 100,001 and over Total Number of shareholders of ordinary shares 2,318 Number of holders of performance rights – 3,056 791 512 43 6,720 – 14 6 2 22 ORDINARY SHARES Percentage of issued shares % 0.45 0.34 0.33 0.32 0.30 0.28 Number held 479,401 366,700 356,088 340,000 315,014 300,000 Mrs Heather Lynnette Grace UBS Nominees Pty Ltd Graham Maxwell Michael Kemp Pty Ltd Adrian Mark Argent Perkins Family Investment Corporation Pty Ltd Substantial holders Substantial holders (including associate holdings) in the Company, based on the most recent substantial holder notices lodged with the Company and ASX, are set out below: There were 98 holders of less than a marketable parcel of ordinary shares. Equity security holders The names of the 20 largest holders of the only class of quoted equity securities are listed below: Kevin Perkins BT Investment Management Limited ORDINARY SHARES Number held 7,444,692 Percentage 6.98% 6,095,331 6.36% Restricted Securities and share buy-backs There are no restricted fully paid shares on issue in the Company. A voluntary holding lock will be applied in relation to 59,874 fully paid ordinary shares, if they are issued, upon the vesting of 59,874 performance rights in accordance with the rules of the LTIP. The Company is not currently conducting an on-market share buy-back. Voting rights FULLY PAID ORDINARY SHARES On a show of hands every member present at a meeting in person or by proxy shall have one vote. Upon a poll, each share shall have one vote. PERFORMANCE RIGHTS The performance rights do not have any voting rights. The fully paid ordinary shares to be allotted on the exercise of the performance rights will have the voting rights noted above for fully paid ordinary shares. ORDINARY SHARES Percentage of issued shares % Number held 23,014,523 21.59 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited Mr Kevin Perkins National Nominees Limited BNP Paribas Nominees Pty Ltd 14,679,546 10,854,552 7,000,833 6,594,976 2,549,189 BNP Paribas Noms Pty Ltd 1,789,383 Chrikim Pty Ltd Chrikim Pty Ltd Brazil Farming Pty Ltd Aust Executor Trustees Ltd Hooks Enterprises Pty Ltd Mr Leendert Hoeksema + Mrs Aaltje Hoeksema HSBC Custody Nominees (Australia) Limited – A/C 3 1,468,200 1,147,421 934,844 820,382 770,000 760,000 601,049 88 ANNUAL REPORT 2017 COLLINS FOODS LIMITED 13.77 10.18 6.57 6.19 2.39 1.68 1.38 1.08 0.88 0.77 0.72 0.71 0.56 Corporate directory DIRECTORS Robert Kaye SC, Chairman Graham Maxwell, Managing Director & CEO Kevin Perkins Newman Manion Bronwyn Morris Russell Tate COMPANY SECRETARY Frances Finucan PRINCIPAL REGISTERED OFFICE IN AUSTRALIA Level 3, KSD1, 485 Kingsford Smith Drive Hamilton QLD 4007 SHARE REGISTER Computershare Investor Services Pty Ltd 117 Victoria Street West End QLD 4101 Australia Telephone number: 1300 458 215 Outside Australia: +61 3 9415 4245 AUDITOR PricewaterhouseCoopers 480 Queen Street Brisbane QLD 4000 SECURITIES EXCHANGE LISTING Collins Foods Limited shares are listed on the Australian Securities Exchange WEBSITE ADDRESS www.collinsfoods.com CORPORATE GOVERNANCE INFORMATION www.collinsfoods.com/investors ANNUAL REPORT 2017 COLLINS FOODS LIMITED 89 C O L L I N S F O O D S L I M I T E D A N N U A L R E P O R T 2 0 1 7 

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