Collins Foods Limited
Annual Report 2018

Plain-text annual report

COLLINS FOODS LIMITED 2018 ANNUAL REPORT Collins Foods Limited ABN 13 151 420 781 OUR FINANCIAL PERFORMANCE . 9 0 7 7 . 6 3 3 3 6 4 7 5 . N O I L L I M $ A 6 1 Y F 7 1 Y F 8 1 Y F REVENUE 21.7% TO $770.9m (FY17: $633.6m) 800 700 600 500 400 300 200 100 0 . 5 2 3 . 1 9 2 . 0 8 2 N O I L L I M $ A 6 1 Y F 7 1 Y F 8 1 Y F 9 . 8 3 3 . 4 3 1 . 0 3 N O I L L I M $ A 6 1 Y F 7 1 Y F 8 1 Y F 35 30 25 20 15 10 5 0 40 35 30 25 20 15 10 5 0 STATUTORY NPAT 16.1% TO $32.5m (FY17: $28.0m) UNDERLYING NPAT 13.3% TO $38.9m (FY17: $34.3m) OUR GROWTH TRAJECTORY CONTINUES AND WE ARE SUCCESSFULLY INTEGRATING OUR ACQUISITIONS. INSIDE THIS REPORT 02 OUR YEAR IN REVIEW 04 CHAIRMAN’S MESSAGE 05 MANAGING DIRECTOR & CEO’S REPORT 07 FINANCIAL REPORT 08 DIRECTORS’ REPORT 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 83 DIRECTORS’ DECLARATION 84 INDEPENDENT AUDITOR’S REPORT 92 SHAREHOLDER INFORMATION 93 CORPORATE DIRECTORY KFC AUSTRALIA SAME STORE SALES 1.0% (FY17: 0.7%) UNDERLYING EBITDA 16.4% TO $94.5m (FY17: $81.3m) NET OPERATING CASHFLOW 23.1% TO $74.5m (FY17: $60.6m) TOTAL FY18 FULLY FRANKED DIVIDENDS OF 17.0cps (FY17: 17.0cps) KEY DATES Tuesday, 26 June 2018 Full year results released Wednesday, 28 November 2018 Half-year results released Wednesday, 11 July 2018 Final dividend record date Friday, 7 December 2018 Interim dividend record date Thursday, 26 July 2018 Final dividend payment date Friday, 21 December 2018 Interim dividend payment due Sunday, 14 October 2018 FY19 half-year end Sunday, 28 April 2019 FY19 end ANNUAL REPORT 2018 COLLINS FOODS LIMITED 01 OUR YEAR IN REVIEW CORE PRODUCT INNOVATION PROVIDING NEW VARIATIONS ON EXISTING PRODUCTS, GREAT VALUE, GREATER GEOGRAPHIC DIVERSITY AND SCALE ADVANTAGE, CONTINUE TO DRIVE EARNINGS GROWTH. KFC The KFC Australia network achieved top line growth, and we are growing the KFC Europe footprint to drive scale. TACO BELL Our first Taco Bell restaurant has performed strongly and positively engaged customers. SIZZLER Sizzler continues to transition and deliver positive earnings. 02 ANNUAL REPORT 2018 COLLINS FOODS LIMITED NETHERLANDS GERMANY CHINA JAPAN THAILAND AUSTRALIA COLLINS FOODS HAS ENTERED AN EXCITING NEW PHASE WITH KFC RESTAURANT ACQUISITIONS IN AUSTRALIA AND EUROPE, AND THE LAUNCH OF OUR FIRST TACO BELL RESTAURANT IN AUSTRALIA. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 03 CHAIRMAN’S MESSAGE Collins Foods continues to build a platform for long-term shareholder growth, underpinned by the expansion of our footprint in Australia and Europe, and a focus on driving operational excellence across our network of restaurants. Through the completion of KFC acquisitions in Australia and Europe over the past 12 months, Collins Foods has successfully expanded its footprint in attractive growth markets. The acquired restaurants are performing to expectations and contributing to the Group’s growth profile. Complementing the Group’s expanded footprint, organic growth of the underlying business has continued due to our focus on driving operational efficiencies. Together this has resulted in another year of solid financial performance across the Group. In FY18, Group revenue increased 21.7% to $770.9 million, and translated to 16.4% growth in underlying EBITDA to $94.5 million. This was underpinned by vigilant cost control and a focus on continued operational efficiency improvements, while still investing for growth. As indicated in previous years, the Group remains committed to maintaining a strong balance sheet. There has been a sustainable increase in our level of gearing this financial year as we made accretive acquisitions to provide an additional foundation for long- term earnings growth. As Collins Foods continues to generate cash, the Company’s level of debt will decrease. As our business grows, we are delighted to share its success with our shareholders. Reflecting this, Collins Foods has paid shareholders a final fully franked dividend of 9 cents per share, bringing the full year FY18 dividend to 17 cents per share, fully franked. The final dividend will be paid on 26 July 2018 and is in line with the Board’s dividend policy to pay out 50% of full year net profit. Our Australian KFC network continues to perform well. As the largest franchisee of KFC in Australia, Collins Foods is committed to delivering the highest quality products, at great value, to our customers. Our European businesses acquired last year have also been tracking well, with the restaurants performing to expectations and contributing to earnings. We are confident the Group’s strategic decision to expand into Europe provides a significant upside and will continue to support an attractive long-term platform for growth. During the financial year, the Board took the strategic decision to launch the Taco Bell brand in Australia. The launch of this exciting brand provides a further growth channel for shareholders. The restaurant in Annerley, Queensland is the only Taco Bell in Australia and the initial customer reaction has been strong. We continue to successfully transition the Sizzler business, with no further growth capital allocated to this non-core business. We have maintained a positive EBITDA contribution from Sizzler Australia, with a reduced restaurant count. At the same time, the growth of Sizzler Asia continues with solid royalty revenue generated from restaurants in Thailand, Japan and China. Following a strategic review, Collins Foods exited the Snag Stand business during the financial year. Outlook With an expanded global footprint, organic growth across the restaurant network, and the introduction of the Taco Bell brand, the 2018 financial year has been another successful period for Collins Foods. The Board is confident the strategy we are executing will generate sustainable growth over the long-term for shareholders. We will work to continue our track record of successfully integrating our acquisitions, while driving operational excellence across our business. We are excited by the potential of Taco Bell, and look forward to establishing this brand across Australia. Serving the needs of our customers will continue to underpin our offering. To this end, Collins Foods remains focused on product innovation and offering great value to customers. I would like to thank each of my fellow directors for their contribution to the business, and our management team — led by Managing Director & CEO, Graham Maxwell — for their leadership. I also thank our staff for another year of hard work and their very important contribution to our success. Once again, I thank shareholders for their ongoing support of Collins Foods as we continue to execute our strategy to ensure we remain the market leader in our sector. Robert Kaye SC Independent Non-executive Chairman 04 ANNUAL REPORT 2018 COLLINS FOODS LIMITED MANAGING DIRECTOR & CEO’S REPORT During the 2018 financial year (FY18), Collins Foods continued to deliver growth across the Group. This was driven by recent acquisitions as well as improved underlying performance across our restaurant network. Building on our track record of successfully integrating acquisitions, the Company expanded its footprint with the addition of new restaurants in Australia and the Netherlands. At the same time, Collins Foods launched its first Taco Bell during the financial year. The restaurant is performing strongly, providing a foundation for the further roll out of additional restaurants. Expanded KFC footprint Collins Foods is the largest franchisee of KFC restaurants in Australia, with strategic acquisitions significantly expanding our overall KFC footprint. In FY18, 28 KFC restaurants were acquired from Yum! for cash consideration of $110.2 million. The acquisition was partly funded by debt and partly by a heavily oversubscribed $44.1 million, fully-underwritten, accelerated, non-renounceable entitlement offer. We have successfully completed the acquisition of 27 Australian restaurants as part of this transaction, with one restaurant yet to complete. The acquisition was complemented by five new restaurant builds and offset by three closures. The new restaurants provide the Group greater geographic diversity and scale advantages contributing to sustainable earnings growth. In Europe, the integration of acquired restaurants in the Netherlands and Germany has progressed well. At the year end, Collins Foods had a total of 33 KFC restaurants in Europe — 15 in Germany and 18 in the Netherlands. These restaurants complement our Australian portfolio, further expanding our geographic diversity and scale, and providing another attractive avenue for long-term growth. In the period ahead, Collins Foods plans further restaurant openings in Australia and Europe, and we are confident of our ability to continue growth momentum in all the markets we operate in. Financial performance FY18 has been another period of strong performance across the Group. Driven by same store sales growth and an expanded store footprint, revenue has increased 21.7% to $770.9 million when compared to the previous period. Statutory EBITDA has also risen 14.7% to $89.6 million; and underlying EBITDA increased 16.4% to $94.5 million. Underlying NPAT grew 13.3% to $38.9 million, driven by solid performance across the Group. Collins Foods continues to generate strong cash flows, with Net Operating cash flow up 23.1% to $74.5 million (FY17: $60.6 million). Net debt increased by $94.1 million to $227.2 million, reflecting the acquisition of 16 KFC Netherlands restaurants and 28 KFC restaurants in Australia. The net leverage ratio is up to 2.14, from 1.59. As Collins Foods continues to generate cash flows from operations, the net leverage ratio is expected to decrease. Operational performance KFC Australia The KFC Australia business has continued its strong growth trend, with newly integrated restaurants making contributions in line with expectations. Revenue from the KFC Australia business increased 13.6% to $624.1 million. EBITDA rose 10.5% to $99.3 million, with EBITDA margins contracting slightly to 15.9% (from 16.4% in FY17) mainly due to a promotional driven shift in product mix and reduced same store sales in Western Australia. However, Western Australia same store sales recovered to positive territory in the fourth quarter of the financial year. These strong financial results for the KFC Australia business reflects our continued focus on product innovation and offering customers high-quality products and great value. To improve the customer experience, we continue to invest in a range of initiatives including mobile technology and home delivery. There continues to be steady growth in our online ordering App, which now attracts more than 20,000 orders per week or more than double the level at the end of last financial year. Feedback from customers is positive and the average ticket is approximately 20% higher on the App compared to in-store orders. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 05 Following the recent successful trial of home delivery, we have expanded this service to 15 restaurants and expect this number to grow in the near term. We are working closely with Deliveroo in these restaurants, whilst continuing to trial our own delivery service at one restaurant in Queensland. Collins Foods builds strong links in the communities in which we operate by supporting local charity groups and organisations. We regularly partner with not-for-profit organisations and local sporting clubs to raise much needed funds to support their endeavours. We also support a number of charities through our employee giving program Collins Giving. This program creates a strong link between our Company, employees and the community as employees have a platform to give back to everyday Australians in need and make a real difference. During FY18, we donated over $500,000 to our employee-selected charities. During the same period, Collins Foods also contributed $70,000 to World Hunger, raised through in restaurant customer donations and staff fundraising initiatives. Conclusion The 2018 financial year has been particularly successful for our Company. We have successfully consolidated our acquired businesses, while continuing to drive operational efficiencies across our Australian and European footprint. We believe our strategic acquisitions, and focus on ongoing operational excellence, provides a platform for sustainable long-term earnings growth across the Group. In the year ahead, we will continue to drive organic growth in our KFC Australia business and offer our customers world- class quality products and great value. We will prioritise the expansion of technology across our KFC network and broaden our home delivery offering. Both initiatives improve our service offering to customers and provide a platform for transaction-led sales growth. We will leverage our experience in Australia to build our European business, which we believe offers great growth potential. Taco Bell offers an exciting new growth opportunity for Collins Foods and we plan to open further restaurants this year. In concluding, I would like to thank all of our employees for their hard work and commitment during the year. Together with the Board, I look forward to delivering sustainable long-term growth for our business. Graham Maxwell Managing Director & CEO KFC Europe Integration of the acquired European businesses is on track and the restaurants are performing in line with expectations. We are executing our German transformation plan and have seen an improvement in sales and margins. KFC Europe contributed revenue of $91.6 million and $6.6 million in underlying EBITDA. European same store sales growth was 0.8% after adjusting for the impact of cannibalisation following the opening of two new restaurants. We are focused on driving top line growth through innovation and value while improving operational effectiveness across the region to deliver sustainable earnings growth. To support this strategy and the continuation of the German transformation plan, we have appointed a Head of Operations for KFC, Europe. Taco Bell We were pleased to have launched the first Australian Taco Bell restaurant in Annerley, Queensland, during the year. This restaurant has been welcomed by consumers and is performing strongly. We plan to open further restaurants over the coming year. Sizzler The Sizzler business maintained EBITDA while revenue was down 22% to $50.8 million as a result of operating two fewer restaurants compared to last financial year. Sizzler Asia continues to perform well. Royalty revenue increased 9.7% due to new restaurant openings and the introduction of a strong value offering. We opened five net restaurants during the year, with Sizzler Asia’s restaurant count now numbering 73 across China, Japan and Thailand. Making a difference Collins Foods supports the well being of our young people in everything we do; from building their confidence and life skills, investing in their individual development, to creating a family environment which promotes safety and well-being. We are uniquely placed to make a big difference to the lives of the young people who choose to join us, and we take our responsibility seriously by going beyond what is required of us as an employer. We put our people first by investing in individual development to foster Australia’s future leaders. Recognising that no two people are the same, we constantly support and encourage our youth by celebrating uniqueness and individuality in the workplace. In doing so, we are consciously building their self-confidence and provide a supportive family environment embracing social inclusion and interaction. We are pleased with our ongoing progress towards Zero Harm in the workplace. While slightly higher than the previous year, our lost time injury frequency rate has fallen by 9.3% to 20.6 in the last two years. Food safety is paramount to Collins Foods which is why we ensure best practice approaches to storing, preparing and supplying our food. From the paddock to in-store, we ensure our supply chain partners have a strong reputation for quality. 06 ANNUAL REPORT 2018 COLLINS FOODS LIMITED COLLINS FOODS LIMITED ACN 151 420 781 FINANCIAL REPORT For the reporting period ended 29 April 2018 Contents 08 DIRECTORS’ REPORT 58 E/ RELATED PARTIES 15 LETTER FROM THE CHAIR OF THE REMUNERATION AND NOMINATION COMMITTEE 58 59 E1/ Investments accounted for using the equity method E2/ Related party transactions 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 45 45 A1/ Segment information A2/ Business combinations A3/ Revenue and other income A4/ Expenses 46 B/ CASH MANAGEMENT 46 47 47 48 B1/ Cash and cash equivalents B2/ Borrowings B3/ Ratios B4/ Dividends 49 C/ FINANCIAL RISK MANAGEMENT 49 52 53 C1/ Financial risk management C2/ Recognised fair value measurements C3/ Derivative financial instruments 55 D/ REWARD AND RECOGNITION 55 55 57 D1/ Key management personnel D2/ Share based payments D3/ Contributed equity 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 73 G1/ Subsidiaries and Deed of Cross Guarantee (Amended and Restated) 76 G2/ Parent entity financial information 77 H/ BASIS OF PREPARATION AND OTHER ACCOUNTING POLICIES H1/ Basis of preparation H2/ Other accounting policies 77 81 82 I/ SUBSEQUENT EVENTS 82 I1/ Acquisition of restaurants in Australia 83 DIRECTORS’ DECLARATION 84 INDEPENDENT AUDITOR’S REPORT 92 SHAREHOLDER INFORMATION 93 CORPORATE DIRECTORY ANNUAL REPORT 2018 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 29 April 2018. 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(1) Newman Manion Bronwyn Morris Russell Tate DATE OF APPOINTMENT 7 October 2014 25 March 2015 15 July 2011 10 June 2011 10 June 2011 10 June 2011 (1) Kevin Perkins was appointed as Non-executive Director from 19 December 2017. Principal activities during the period During the period, the principal activity of the Group was the operation, management and administration of restaurants in Australia, Europe and Asia. The Group entered into an agreement to acquire 28 KFC restaurants located in Tasmania, South Australia and Western Australia from Yum! Brands Inc. (Yum!) for cash consideration of $110.2 million and also purchased 16 KFC restaurants in the Netherlands. A 1:11 fully-underwritten, pro-rata, accelerated non-renounceable entitlement offer to raise $44.1 million was also completed. Following a strategic review, a decision to exit the Snag Stand business was also made during the period. The Group opened its first Taco Bell restaurant in November 2017. There were no significant changes in the nature of the Group’s activities this financial year. Operating and financial review GROUP OVERVIEW The Group’s business is the operation, management and administration of restaurants, currently comprising three restaurant brands: KFC, Taco Bell and Sizzler. At the end of the period, the Group operated 223 franchised KFC restaurants in Australia, 15 franchised KFC restaurants in Germany, 18 franchised KFC restaurants in the Netherlands and one franchised Taco Bell restaurant in Australia, which all compete in the quick service restaurant market. The Group owns and operates 14 Sizzler restaurants in Australia, which compete in the casual dining restaurant market. It is also a franchisor of the Sizzler brand in South East Asia, with 73 franchised stores predominantly in Thailand, but also in China and Japan. The KFC and Taco Bell brands are two of the world’s largest restaurant chains and are owned globally by Yum!. In Australia, the Group is the largest franchisee of KFC restaurants and currently the only franchisee of Taco Bell restaurants. In the casual dining market, Sizzler competes with other casual dining concepts as well as taverns and clubs, fast food and home cooking. GROUP FINANCIAL PERFORMANCE Key statutory financial metrics in respect of the current financial period and the prior financial period are summarised in the following table: STATUTORY FINANCIAL METRICS Total revenue ($m) Earnings before interest, tax, depreciation, amortisation and impairment (EBITDA) ($m) Earnings before interest and tax (EBIT) ($m) Profit before related income tax expense ($m) Income tax (expense) ($m) Net profit attributable to members (NPAT) ($m) Earnings per share (EPS) basic (cents per share) Total dividends paid/payable in relation to financial period (cents per share)(2) Net assets ($m) Net operating cash flow ($m) 2018 770.9 89.6 58.7 48.5 (16.0) 32.5 28.28 17.0 333.0 74.5 2017 633.6 78.1 51.9 44.0 (16.0) 28.0 (1)28.67 17.0 266.8 60.6 CHANGE 137.3 11.5 6.8 4.5 – 4.5 (0.39) – 66.2 14.0 (1) The comparative earnings per share have been restated for the bonus element of the 1:11 entitlement offer undertaken in July 2017. (2) Dividends paid/payable is inclusive of dividends declared since the end of the relevant reporting period. 08 ANNUAL REPORT 2018 COLLINS FOODS LIMITED The Group’s total revenue increased by 21.7% to $770.9 million mainly due to like-for-like sales growth, new restaurant openings and the acquisition of KFC restaurants. This increase in total revenue combined with strong business controls flowed through to increased EBITDA for the reporting period of $89.6 million, up 14.7% on the prior reporting period and significantly improved net operating cash flow of $74.5 million, up 23.1%. EBITDA, EBIT, NPAT and EPS were impacted by significant items totalling $4.9 million pre-tax, including acquisition costs of $3.9 million and $1.0 million relating to Snag Stand restructuring costs. In addition, EBIT, NPAT and EPS were impacted by $0.2 million pre-tax, non-cash impairment charges. Finally, NPAT and EPS were further impacted by non-cash write-offs of deferred tax assets totalling $1.1 million which were written off at the time of the Snag Stand closure and $0.7 million relating to the extinguishment of unamortised costs from previous refinancing. The consolidated NPAT effect of these significant items was $6.4 million. Underlying financial metrics excluding significant items which occurred in the current period are summarised as follows: UNDERLYING FINANCIAL METRICS Total revenue ($m) Earnings before interest, tax, depreciation, amortisation and impairment (Underlying EBITDA) ($m) Net profit attributable to members (Underlying NPAT) ($m) 2018 770.9 94.5 38.9 Earnings per share (Underlying EPS) basic (cents) (1) The comparative earnings per share have been restated for the bonus element of the 1:11 entitlement offer undertaken in July 2017. 33.84 2017 633.6 81.3 34.3 (1)35.13 CHANGE 137.3 13.2 4.6 (1.29) The improvement in the underlying financial metrics shown above is a reflection of the revenue growth and strong cost 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 AUSTRALIA The overall performance across the KFC business in Australia has been positive, with the Company expanding the national footprint following the acquisition of 28 restaurants from Yum!. Revenue in KFC Australia was up 13.6% on the prior corresponding period to $624.1 million, driven by increased restaurant numbers (including by acquisition), as well as same store sales growth. KFC Australia underlying EBITDA grew by 10.5%, up from $89.8 million to $99.3 million, with an overall EBITDA margin of 15.9%. 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 “Triple Bacon Burger” and “The Big Cheese” not only provided customers a great reason to visit our restaurants but showcased the brand, keeping perceptions high. The Group launched its own delivery service in KFC Indooroopilly (Queensland) in April 2018 in addition to the small group of trial delivery restaurants using Foodora as an aggregator. The number of delivery restaurants is expected to grow in the future and have a positive impact on the brand, sales and profitability. In order to support growth, $29.1 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 KFC Europe contributed revenue of $91.6 million and $6.6 million in underlying EBITDA. By the end of the period, 33 restaurants were in operation, with two new restaurants opening in the Netherlands since the acquisition as well as an additional two in Germany. Netherlands is performing to expectations with some softening of margins due to the cost of store openings. Germany is seeing improvements due to the transformation plan, albeit with some impact of new restaurant openings. In order to support growth, $12.1 million was spent on new restaurants, remodels and maintenance during the year. TACO BELL The Company’s first Taco Bell restaurant opened in Annerley (Queensland) in November 2017. The brand continues to have positive customer engagement and is trading well. The loyalty program has seen a strong uptake and product favourites include “The Cheesy Gordita Crunch” and “Pork Carnitas”. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 09 DIRECTORS’ REPORT SIZZLER Revenue in Sizzler was down 22.0% on the prior corresponding period to $50.8 million, driven by the closure of two restaurants in Australia. Same store sales declined in Australia to (0.5%) compared with 0.4% growth in the previous corresponding period. Sizzler’s underlying EBITDA was $4.6 million the same as the previous corresponding period. No growth capital was allocated to the Sizzler Australia business in this reporting period. There were 14 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 9.7% in revenue over the prior corresponding period. During the current reporting period there were five restaurant openings in Thailand. There was one restaurant opening and one restaurant closure in China, bringing the total restaurant count in Asia to 73 at the end of the period. Strategy and future performance GROUP The near term strategy involves focussing on the integration of the recent KFC restaurant acquisitions in Europe and Australia, building new restaurants and developing the Taco Bell brand. The Group will continue to drive growth across the business through new product innovation, as well as great value offers that keep customers coming back. In addition, organisational capability is continually being strengthened to deliver on acquisitions and organic growth. KFC AUSTRALIA The plan for the core KFC Australia business is firstly to focus on top line growth and disciplined operational management to maintain or improve margins. There is also activity to increase systematisation to ensure high quality, consistent customer experiences across all Collins Foods restaurants. A further eight new restaurants are expected to be built in Australia over the coming reporting period. KFC EUROPE The focus for the KFC Europe business will be to grow the value concept in order to drive transactions and sales growth. Additionally, the KFC Europe business will focus on margin improvement, whilst building a strong efficient back office function. The KFC Europe business is expecting to build seven to nine restaurants across Germany and the Netherlands in FY19. TACO BELL Taco Bell’s focus will be to introduce new products, great value and experiences that keep customer engagement high. The business will continue to build a strong customer following through a variety of online and in restaurant customer engagement tools including live music in store on Sunday afternoons. Further restaurants are scheduled to be opened prior to the end of the calendar year. 10 ANNUAL REPORT 2018 COLLINS FOODS LIMITED SIZZLER The Sizzler Australia business will continue to be assessed on an ongoing basis, with no further growth capital allocated to the business. Sizzler Asia is expected to open further restaurants during the coming financial year. KEY RISKS The Group’s risk management program has been designed to establish a sound system of risk oversight, management and internal controls by having a framework in place to identify, assess, monitor and manage risk. The key risks faced by the Group that have the potential to have an effect on the financial prospects of the Group, as disclosed above, and how the Group manages these risks, include: ´ food safety – there is a risk that the 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; ´ 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 key stakeholders; ´ culture and people – there is a risk that the Group’s culture and people are negatively impacted by new acquisitions and growth and/or are not aligned or sustainable to support strategic priorities. We address this risk through deploying contemporary people practices, reward and recognition programs, talent management strategies and designation of appropriate human resources; ´ brand growth and diversification (non-KFC) – there is a risk that the Group does not successfully grow emerging brands and/or acquire and integrate 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; ´ deterioration of KFC brand – there is a risk that the global KFC brand and reputation is damaged impacting the brand’s performance in Australian and European 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; ´ supply chain disruption – there is a risk that the Group’s 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;  ´ systems integrity and cyber security – there is a risk that 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; ´ inability to identify and react to consumer and competitive behaviour – there is a risk that the demand for the Group’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 ´ inability to adapt, innovate and change – there is a risk that the Group’s inability to adapt, innovate and manage change which negatively influences achievement of strategic and business priorities. We address this risk through having an experienced management team, robust fit for purpose project and change management practices involving pilots/trials and staged rollouts and regular strategic reviews. Additional key risk for the Group’s European operations include: ´ financial reporting and controls – there is a risk of material error in the management accounts that requires restatement at half or full year. We address this risk through the development and monitoring of key financial controls and testing them in conjunction with our external auditors. DIVIDENDS Dividends paid to members during the financial period were as follows: Final ordinary dividend for the financial period ended 30 April 2017 Interim ordinary dividend for the financial period ended 15 October 2017 Total CENTS PER SHARE 9.0 TOTAL AMOUNT $000 9,595 FRANKED/ UNFRANKED Franked DATE OF PAYMENT 20 July 2017 8.0 17.0 9,317 Franked 21 December 2017 18,912 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 ($10.5 million) to be paid on 26 July 2018 (refer to Note B4 of the Financial Report). MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL PERIOD On 7 May 2018 the Group acquired two KFC restaurants located in South Australia that were part of the Yum! acquisition announced on 26 June 2017. The details of this acquisition are referred to in Note I1 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 operating and financial review 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 2018 COLLINS FOODS LIMITED 11 DIRECTORS’ REPORT Information on Directors DIRECTOR Robert Kaye SC LLB, LLM Graham Maxwell Newman Manion EXPERIENCE, QUALIFICATIONS AND DIRECTORSHIPS Robert Kaye SC is a barrister, mediator and professional Non-executive Director. Recognised for his strategic and commercially focused advice, Robert has acted for various commercial enterprises – both public and private – across media, retail, FMCG, property development, mining and engineering sectors. Drawing on his experience as a senior member of the NSW Bar, including serving on the Professional Conduct Committee and Equal Opportunity Committee, Robert has a strong emphasis on Board governance and is well versed in Board processes. Robert has significant cross-border experience, including corporate restructuring and M&A across North America, Europe, Asia, and the Australia and New Zealand region. In addition to his role as Non-executive Chairman of Collins Foods Limited (ASX:CKF), Robert is a Non-executive Director of HT&E Limited (ASX:HT1) and Magontec Limited (ASX:MGL) and the Chairman of the Macular Disease Foundation Australia. He was formerly Non-executive Chairman of Spicers Limited (ASX:SRS) and Non-executive Director of UGL Limited (UGL). Other listed entity directorships – current or held within last three years: HT&E Limited (2018 – current) Magontec Limited (2013 – current) Spicers Limited (2012 – 2017) 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 more than six years working for Yum! Brands Inc (Yum!) in a number of capacities. His last position with Yum! 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 Newman has more than 33 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 SPECIAL RESPONSIBILITIES Independent Non-executive Chair Audit and Risk Committee member Remuneration and Nomination Committee member Managing Director & CEO Independent Non-executive Director Remuneration and Nomination Committee Chair Audit and Risk Committee member 12 ANNUAL REPORT 2018 COLLINS FOODS LIMITED DIRECTOR Bronwyn Morris B. Com, FCA, FAICD EXPERIENCE, QUALIFICATIONS AND DIRECTORSHIPS Bronwyn is a Chartered Accountant and a former partner of KPMG. Bronwyn worked with the firm and its predecessor firms in Brisbane, London and the Gold Coast. Kevin Perkins Russell Tate B. Com (Econ.) For more than 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, Chair since 2017), RACQ Insurance Limited (since 2014), QT Mutual Bank (since 2017), Gold Coast 2018 Commonwealth Games Corporation (since 2016), and Queensland Urban Utilities (since 2017). Other listed entity directorships – current or held within last three years: Watpac Limited (2015 to current) 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 33 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 Russell has more than 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 also a Director of One Big Switch Pty Ltd (since 2012). Other listed entity directorships – current or held within last three years: Macquarie Media Limited (since 2008, Executive Chair 2009 to 1 July 2018, Non-executive Chair from 1 July 2018) SPECIAL RESPONSIBILITIES Independent Non-executive Director Audit and Risk Committee Chair Remuneration and Nomination Committee member Executive Director (until 19 December 2017) From 19 December 2017 Non-executive Director Audit and Risk Committee member Remuneration and Nomination Committee member Independent Non-executive Director Audit and Risk Committee member Remuneration and Nomination Committee member ANNUAL REPORT 2018 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 Newman Manion Bronwyn Morris Kevin Perkins Russell Tate ORDINARY SHARES 29,913 PERFORMANCE RIGHTS – 480,761 21,820 8,456 7,621,484 21,820 251,764 – – – – COMPANY SECRETARY Frances Finucan LLB (Hons), BA (Modern Asian Studies), FGIA, MQLS, GAICD The Company Secretary, Frances Finucan, was appointed to the role on 17 July 2013. Frances has more than 16 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 29 April 2018, 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) 8 MEETINGS ATTENDED 8 NUMBER OF MEETINGS(1) 6 MEETINGS ATTENDED 6 NUMBER OF MEETINGS(1) 4 MEETINGS ATTENDED 4 8 8 8 8 8 7 8 8 8 8 * 2 6 6 6 * 2 6 6 5 * 1 4 4 4 * 1 4 4 4 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 2018 COLLINS FOODS LIMITED LETTER FROM THE CHAIR OF THE REMUNERATION AND NOMINATION COMMITTEE Dear Shareholder, Dear Shareholder I am pleased to present you with Collins Foods Limited’s Remuneration Report for the reporting period ended Collins Foods’ remuneration strategy is designed to be responsible and sufficiently competitive to attract and retain 30 April 2017. In structuring the remuneration framework for executives and directors, the Remuneration and valued executives and directors who create value for shareholders whilst maintaining alignment with the short term Nomination Committee has regard to the recommendations of the ASX Corporate Governance Council and and long term objectives of the Company. the expectations of Australian corporate governance stakeholders. An outline of the remuneration framework The Board continues to give diligent consideration to the introduction of appropriate additional performance incentives. and related governance documentation is available on the Company website at www.collinsfoods.com under As a result, an additional performance metric has been identified in the form of the Guest Experience Survey and Investors and we encourage shareholders to read the material available in here, in conjunction with this report. specifically, improvement in Overall Satisfaction scores. The remuneration policy for Collins Foods is designed to be responsible and appropriate, yet sufficiently The decision to add a Guest Experience Survey improvement metric reflects the Company’s core belief that world competitive to attract and retain the necessary high calibre of directors and executives, as the Company’s class customer experiences will grow the KFC and Taco Bell brands for the short term and long term benefits of circumstances evolve over time. This is supported by the 91.98% of votes cast at the 2016 Annual General all stakeholders. 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. The Guest Experience Survey is the global KFC and Taco Bell measure of real customer experiences. It directly relates to the real customer feedback targeting executional areas such as food quality, speed of service, hospitality, cleanliness and maintenance of facilities. The Guest Experience Survey program is the franchisor’s global barometer of executional excellence and is administered by an independent third party provider on a month by month basis. The Board considers the Guest Experience Survey performance metric is appropriately placed as a second metric As presented, the short term incentive (STI) and long term incentive (LTI) programs are subject to EBITDA and to the Collins Foods Short Term Incentive Plan that applies to KMP Executives and, that it will apply from the 2019 earnings per share (EPS) growth measures, respectively, which are regarded to be transparent and key drivers financial year. 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 When the Company listed, performance was incentivised with a single metric short term incentive plan. Since listing, 35% during the period. This indicates that the incentives are effectively driving shareholder value creation, as the Collins Foods Executive and Employee Incentive Plan has been introduced and a decision made to revise the vesting intended. scale to reflect the growth of the business. For the performance rights that will be subject to vesting determination post the release of this report, the The 2017 reporting period has confirmed the Company’s place as a high performing member of the S&P Non-executive Directors have deemed it appropriate to exercise discretion. This is discussed in further detail in ASX300 Index, and the Board has recognised the responsibilities and expectations that fall upon boards that the report. 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 In combination with the existing remuneration structure, the Directors remain confident that the outcomes for 2019 and remain open to discussing the appropriateness of the performance metrics and provisions applied. demonstrate an alignment between remuneration outcomes, and the performance delivered by Collins Foods. This is supported by the 90.97% of votes cast at the 2017 Annual General Meeting in favour of the adoption of the Remuneration Report for the prior reported period. 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. On behalf of the Collins Foods Board, I commend this remuneration report to our investors. Yours sincerely, Yours sincerely, Newman Manion Mr. Newman Manion Independent Non-executive Director Independent Non-executive Director Chair of the Remuneration and Nomination Committee Chair of the Remuneration and Nomination Committee ANNUAL REPORT 2018 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: ´ the Company’s governance relating to remuneration; ´ the policy for determining the nature and amount or value of remuneration of key management personnel; ´ the various components or framework of that remuneration; ´ the prescribed details relating to the amount or value paid to key management personnel, as well as a description of any performance conditions; and ´ 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 Managing Director and CEO 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 On 19 December 2017, Kevin Perkins was appointed to the role of Non-executive Director. There were no 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 Drew O’Malley Dawn Linaker TITLE Group Chief Financial Officer (Group CFO): since 2015 Chief Operations Officer, Australia (COO Australia): since September 2017 Chief People Officer (CPO): since 2016, KMP from 2017 Mark van ‘t Loo CEO – Collins Foods Europe Ltd (CEO – CF Europe): commenced 9 March 2017 Martin Clarke CEO – KFC, Australia (CEO – KFC Aust): since 1980 to 2017. From 18 September 2017, Martin Clarke performed the role of Head of Operations Excellence and from that date, was no longer KMP Executive 16 ANNUAL REPORT 2018 COLLINS FOODS LIMITED KMP remuneration for FY18 The KMP Executive remuneration structures that appear in this report prevailed during the reporting period. These structures were implemented as part of a decision making process last financial year and included remuneration benchmarking. The Board continue to make ongoing improvements to remuneration governance, policies and practices applied to KMP Executives of the Company, as well as other employees, to ensure appropriateness to the circumstance of the Company as it evolves over time. The Board continues its approach to seek feedback from both stakeholders and independent consultants about remuneration governance and practices for all KMP. KEY REMUNERATION MATTERS IDENTIFIED AND ADJUSTMENTS MADE SINCE THE PREVIOUS REPORT During the reported period, activity focussed primarily upon the identification of additional, appropriate performance incentives. Mix of remuneration As confirmed in previous reported periods, the mix of remuneration elements offered to KMP Executives has been transitioned toward a higher weighting on Long Term Incentive (LTI). The Board considers that the remuneration mix is correctly weighted. Short Term Incentive performance metrics As indicated in the letter from the Chair of the Remuneration and Nomination Committee, the Board has approved the inclusion of a second performance metric to the Short Term Incentive (STI) plan as it relates to KMP Executives. The Board has introduced a second performance metric to the STI plan because improvements achieved as a result of this incentive are directly related to driving positive business performance. This has been introduced in consultation with shareholders for incentive conditions to be more tailored to the Company and to address a medium term strategic imperative to improve (not just maintain) customer service. Once the desired customer service outcomes are achieved, the use of this measure would be reviewed, and consideration given to making it a gate for other measures. Long Term Incentive performance metrics The Board continues to have regard to prior research to inform its approach to incentive design. For completeness, this research revealed that of 18 other ASX listed entities, 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. Consideration also continues to be given to commentary in relation to the use of a single metric LTI and use of earnings as the primary driver of STI, and the only driver of the LTI provides an incomplete picture of company performance. The Board considers that with the introduction of the second performance metric to the STI plan, that the current mix of remuneration:  ´ aligns executive remuneration practices with accepted market practices and current best-practices; ´ motivates executives to continuously grow shareholder value by aligning their interests with those of shareholders through equity ownership; and 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: ´ manages 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. Setting of Short Term Incentive and Long Term Incentive amounts From FY18, discrete amounts of STI and LTI were included in a competitive and appropriate target total remuneration package (fixed remuneration plus target STI plus target LTI). Annual grants of LTI are not linked to STI and will be performance tested over a measurement period of three years. Discretion 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. For the performance rights with a performance period commencing on 4 May 2015 and ended on 29 April 2018 (Vesting Rights), the Non-executive Directors have given detailed consideration to the method that vesting will be calculated. Pursuant to the LTI plan rules and letters of invitation, EPS growth is to be calculated with reference to the annual compound growth of the disclosed basic EPS in the Company’s annual audited financial reports for the base year and the final financial year of the performance period. In the base year for the Vesting Rights, the basic EPS was negative. This was due to a one-off pre-tax non-cash impairment of Sizzler Australia goodwill, brand and, property, plan and equipment (Impairment). One of the options available to the Non-executive Directors would be to not exercise any discretion other than the discretion to alter the base year as already documented. It was considered that the outcome would penalise participants as no performance rights would vest. The Impairment was a one-off with no further consequences for the FY18 results (i.e. the comparison would not be on a “like for like” basis). The adjustments proposed by management for the FY18 year accepted by the Board were unamortised costs associated with refinancing and costs associated with the Australian and Europe KFC acquisitions. The remaining adjustments associated with de-recognition of a deferred tax asset, impairment of two KFC restaurants and a smallwares write off were considered to be attributable to management and will not be included in the EPS adjustment relating to the vesting calculation for the Vesting Rights. Allowing for these adjustments, 35.91% of long term vesting incentives would be available to vest. The adjustments will be applied across all performance rights subject to vesting determination and to the one-off long term cash incentive disclosed on page 24 that presents the vesting of LTI that may occur during the next reporting period (i.e. in relation to the completion of FY18). ´ a policy that enables the Company to attract and retain valued Directors and executives who create value for shareholders; ´ motivating executives and the Managing Director and CEO to pursue long term growth and success of the Group, aligned with shareholder’s interests; ´ demonstrating a clear relationship between performance and remuneration; ´ having regard to prevailing market conditions; ´ reflective of short term and long term performance objectives appropriate to the Company’s circumstances and goals; ´ transparency; and ´ fairness and acceptability to shareholders. The Company seeks input regarding the governance of KMP remuneration from a wide range of sources, including: ´ shareholders; ´ Remuneration and Nomination Committee members; ´ stakeholder groups including proxy advisors; ´ external remuneration consultants; ´ other experts and professionals such as tax advisors and lawyers; and ´ Company management to understand roles and issues facing the Company. The Company’s Remuneration Policy can be obtained from the Company’s website. The information below 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: ´ the Group’s remunerations principles, framework and policy for executives and Directors; ´ remuneration levels of executives and Executive Directors; ´ the operation of incentives plans and other employee benefit programs which apply to executives; and ´ remuneration for Non-executive Directors. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 17 DIRECTORS’ REPORT Remuneration Report (continued) In carrying out its responsibilities, the Remuneration and Nomination 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 Corporate Governance Principles and Recommendations (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 Non-executive Directors only, with a majority being independent. EXECUTIVE REMUNERATION The following outlines the policy that applies to executives (and does not apply to Non-executive Directors). The remuneration for executives is structured taking into consideration the following factors: ´ Group’s remuneration principles; ´ level and structure of remuneration paid to executives of other publicly listed Australian companies of similar size; ´ position and responsibilities of each executive; ´ appropriate benchmarks and targets to reward executives for Group and individual performance; ´ 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, in total, the sum of the above elements will constitute a total remuneration package (TRP); ´ both internal relativities and external market factors should be considered; ´ that the base package policy mid-points should be set with reference to relevant market practices; ´ that TRPs should be structured with reference to market practices and the circumstances of the Company at the time; ´ remuneration will be managed within a range that allows for the recognition of individual differences such as the calibre of the incumbent and the competency with which they fulfil a role; 18 ANNUAL REPORT 2018 COLLINS FOODS LIMITED ´ 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 ´ 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. 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 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 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 remain open for 30 days. The first day of the trading window is the trading day after each of the following events: ´ announcement to ASX of the Company’s full or half-year results; ´ Annual General Meeting; or ´ 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. SECURITIES HOLDING POLICY The Board currently sees a securities holding policy as unnecessary since executives receive a significant component of remuneration in the form of equity. All of the Directors hold equity in the Company voluntarily. The Company’s constitution states that Directors are not required to be a shareholder in order to be appointed as a director. The Board continues to encourage executives to hold vested LTIs post vesting, to support ongoing alignment. REMUNERATION CONSULTANT ENGAGEMENT POLICY The Company has adopted a remuneration consultant (RC) engagement policy which is intended to manage the interactions between the Company and RCs. This is to support the independence of the Remuneration and Nomination Committee and provide clarity regarding the extent of any interactions between management and the RC. This policy enables the Board to state with confidence whether the advice received has been independent, and why that view is held. The Policy states that RCs are to be approved and engaged by the Board before any advice is received, and that such advice may only be provided to an independent Non-executive Director. Any interactions between management and the RC must be approved and overseen by the Remuneration and Nomination Committee. NON-EXECUTIVE DIRECTOR REMUNERATION The remuneration for Non-executive Directors is set, taking into consideration factors including: ´ the level of fees paid to Board members of other publicly listed Australian companies of similar size; ´ operational and regulatory complexity; and ´ the responsibilities and workload requirements of each Board member. Non-executive Directors’ remuneration comprises the following components: ´ board and committee fees; and ´ 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 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. VARIABLE REMUNERATION – 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 executives were offered a target based STI equivalent to between 40% and 75% of their total fixed remuneration for target performance with a stretch opportunity of up to 150% of the target. For FY19 the STI for other executives will fall between the range of 40% and 50% for on target performance with a stretch opportunity remaining as up to 150% of the target. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 19 DIRECTORS’ REPORT Remuneration Report (continued) Key Performance Indicators (KPIs), weighting and performance goals FY18 OFFERS FY18 saw changes to the STI plan rules for executives as follows: ´ targets set equate to budgeted EBITDA plus bonus value; ´ 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; ´ 100% of target equates to 100% bonus payment; ´ over-achievement is also rewarded, for example 1% point of target equating to an additional 5% of bonus payment i.e. 103% of target equates to 115% of bonus payment; and ´ maximum is consistent with prior years being 110% target equating to 150% of bonus payment. Comments For FY18, the Board was of the view that EBITDA was the primary driver of shareholder value creation in the short term, and that the combination of this measure with individual performance assessments provided a fair and accurate assessment of performance in the context of a particular executive role. That said, FY19 has seen the addition of a second metric. FY19 OFFERS Following independent external consultation, the Board considered and approved a change to the FY19 offers. This change has seen the introduction of a secondary measure against Guest Experience Survey (GES), with a focus on achieving Overall Satisfaction (OSAT) scores. The breakdown of the offer is consistent for all KMP Executives – EBITDA result: 75% and GES OSAT: 25%. Whilst the two measures have different targets and thresholds for payment, overarching hurdle criteria of >95% of EBITDA against budget must be achieved prior to any STI payment. The introduction of this measure has seen the removal of the individual performance (where it may previously have applied). All other STI plan rules apply as per the FY18 offers. 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. 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. 20 ANNUAL REPORT 2018 COLLINS FOODS LIMITED LONG TERM INCENTIVE 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: ´ LTI should be based on performance rights that vest based on assessment of performance against objectives; ´ measurement period should be three years; and ´ 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. VARIABLE REMUNERATION – LONG TERM INCENTIVE PLAN (LTIP) – PERFORMANCE RIGHTS PLAN ASPECT Purpose Form of equity LTI value PLAN RULES, OFFERS AND COMMENTS 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 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). 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: ´ settled in shares that may be issued; or ´ 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. FY18 AND FY19 OFFERS Comments Based on the Managing Director and 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 AND FY19 Base LTI Target LTI Max Share Price (VWAP) Number of Rights 50% 100% $5.18 $800,000 $800,000 154,440 ANNUAL REPORT 2018 COLLINS FOODS LIMITED 21 DIRECTORS’ REPORT Remuneration Report (continued) Measurement period The measurement period will include three reporting periods unless otherwise determined by the Board. FY18 OFFERS Beginning 1 May 2017 and ending 3 May 2020. FY19 OFFERS Beginning 30 April 2018 and ending 1 May 2021. Comments Measurement periods of three years 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. The Board has discretion to set vesting conditions for each offer. Performance rights that do not vest will lapse. FY18 AND FY19 OFFERS The following vesting scale applied to FY18 offers (and is anticipated to apply to future offers): PERFORMANCE LEVEL Stretch/maximum Between target and stretch Target Between threshold and target Threshold Below threshold ANNUALISED EPS GROWTH (CAGR) 22% % OF MAX/STRETCH/ GRANT VESTING 100% >11%, <22% 11% >5.5%, <11% 5.5% <5.5% Pro-rata 50% Pro-rata 25% 0% Comments 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. Vesting conditions 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 Conversion of vested 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. 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. No amount is payable by participants to exercise vested performance rights in respect of any grants. 22 ANNUAL REPORT 2018 COLLINS FOODS LIMITED Disposal restrictions etc. 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: ´ 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 ´ 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 performance rights are forfeited. In the event of cessation of employment after 12 months but before the conclusion of the vesting period, unvested performance rights are considered 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 the performance rights remain subject to performance testing along with other participants. It is noted that the Board has discretion to allow “Good Leavers” to retain their participation in the LTIP beyond the date of cessation of employment when deemed appropriate to the circumstances. 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. Cessation of employment Change of control of the Company Non-executive Director fee policy rates 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 FY19, unless the Board determines to undertake a review during the period. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 23 Graham Maxwell Kevin Perkins(3) Mark van ‘t Loo(4) Nigel Williams Drew O’Malley(5) Dawn Linaker(6) Martin Clarke(7) Group CFO Group CFO COO Australia – CPO CPO CEO - KFC Aust CEO - KFC Aust DIRECTORS’ REPORT Remuneration Report (continued) Remuneration records for FY18 – statutory disclosures KMP EXECUTIVE REMUNERATION The following table outlines the remuneration received by KMP Executives of the Company during FY17 and FY18 prepared according to statutory disclosure requirements and applicable accounting standards: NAME ROLE(S) YEAR SALARY CONTRIBUTIONS BENEFITS SUPER- ANNUATION OTHER CHANGE IN ACCRUED LEAVE(1) BASE PACKAGE STI TOTAL LTI(2) REMUNERATION PACKAGE TERMINATION AMOUNT % OF TRP AMOUNT % OF TRP AMOUNT % OF TRP (TRP) BENEFITS Managing Director & CEO Managing Director & CEO Non- executive Director Executive Director 2018 $780,018 $19,982 $13,699 $63,250 $876,950 79% 2017 $728,018 $21,982 $40,308 $4,675 $794,983 83% 2018 $149,721 $13,042 $11,443 ($10,620) $163,586 100% 2017 $222,849 $19,568 $31,795 ($932) $273,280 100% CEO - CF Europe 2018 $412,408 $29,734 CEO - CF Europe 2017 $65,208 $4,172 – – $12,211 $454,353 97% $6,270 $75,650 100% 2018 $384,891 $19,982 $18,838 ($3,447) $420,264 99% 2017 $338,109 $19,568 (8)$76,823 $2,771 $437,271 87% – – – – – – – – – – – – – – – – (11)$234,426 21% $1,111,376 $160,258 17% $955,241 $163,586 $11,193 – – – – $273,280 $16,256 3% $470,609 – – $75,650 $2,141 1% $422,405 $68,192 13% $505,463 2018 $244,229 $12,338 $7,980 $3,760 $268,307 85% $30,792 10% $16,326 2017 – – – – – – 2018 $294,634 $19,982 $16,325 $1,692 $332,632 93% 2017 – – – – – – – – – – – – – $25,233 – 2018 $122,775 $7,644 (9)$24,452 ($14,465) $140,407 94% $6,058 4% $3,403 5% – 7% – 2% $315,426 – $357,865 – $149,868 2017 $299,431 $19,568 (10)$73,699 ($42,629) $350,069 85% – – $62,236 15% $412,305 (1) 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. (2) 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. (3) KMP up until 19 December 2017 and then transitioned to Non-executive Director. (4) Commenced 9 March 2017. FY18 salary converted at exchange rate of AUD $1: EURO €0.6246 (FY17: EURO €0.7). (5) Commenced 18 September 2017. (6) KMP Executive from 1 May 2017. (7) From 18 September 2017 Martin Clarke transitioned to Head of Operations Excellence and from that date was no longer a KMP Executive. (8) Other benefits include a discretionary payment of $29,750. The EBITDA target for FY17 was not achieved, however there was a discretionary bonus pool that was approved by the Board. (9) Other benefits include a discretionary payment of $17,122. (10) Other benefits include a discretionary payment of $30,750. The EBITDA target for FY17 was not achieved, however there was a discretionary bonus pool that was approved by the Board. (11) Included in the LTI value is a one-off long term cash incentive of $68,865 that may be payable in FY19. Other than cash being the means by which the incentive is settled, all other terms and conditions (including vesting scale) of the one-off long term cash incentive are identical to the performance rights granted, with the FY15 as the base. 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 executives. 24 ANNUAL REPORT 2018 COLLINS FOODS LIMITED – – – – – – – – – – – – – NON-EXECUTIVE DIRECTOR REMUNERATION Remuneration received by Non-executive Directors in FY17 and FY18 is disclosed below: NAME Robert Kaye, SC Newman Manion Bronwyn Morris 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 Kevin Perkins(2) Non-executive Director Executive Director Russell Tate Independent Non-executive Director Independent Non-executive Director YEAR 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 BOARD AND COMMITTEE FEES SUPERANNUATION OTHER BENEFITS TERMINATION BENEFITS $191,781 $191,781 $111,872 $111,872 $116,438 $116,438 $38,334 – $115,000 $115,000 $18,219 $18,548 $10,628 $10,628 $11,061 $11,253 $3,642 – – – – – – – – – – – – – – – – – – – – – – – TOTAL $209,999 (1)$210,329 $122,500 $122,500 $127,499 (1)$127,691 $41,976 – $115,000 $115,000 (1) The total paid includes 52 weeks of fees and 53 weeks of superannuation. (2) Transitioned to Non-executive Director as at 19 December 2017. Non-executive Director fees represent period from 19 December 2017 to 29 April 2018. Refer to KMP Executive Remuneration table for remuneration during 2017. PLANNED KMP EXECUTIVE REMUNERATION FOR FY18 (NON-STATUTORY DISCLOSURE) The following table is provided to ensure that shareholders have an accurate understanding of the Board’s intention regarding the remuneration that was offered to KMP Executives during FY18, 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). The stretch/maximum LTI is 200% of target, as is typical practice for LTIs. INCUMBENT POSITION Graham Maxwell Managing Director & CEO 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 $800,000 40% 50% $400,000 20% 100% $800,000 40% $2,000,000 Kevin Perkins Executive Director(1) $265,000 100% Mark van 't Loo CEO – CF Europe Nigel Williams Group CFO Drew O’Malley COO Australia Dawn Linaker CPO Martin Clarke CEO – KFC Aust(2) €276,355 $410,000 $420,000 $315,000 $319,000 52% 50% 50% 53% 56% – 75% 50% 50% 40% 60% – €207,266 $205,000 $210,000 $126,000 $191,400 – 39% 25% 25% 21% 33% – 17% 50% 50% 50% 20% – €46,059 $205,000 $210,000 $157,500 $63,800 – 9% 25% 25% 26% 11% $265,000 €529,680 $820,000 $840,000 $598,500 $574,200 (1) Executive salary shown and includes director fees. From 19 December 2017 to 29 April 2018 Mr Perkins held the role of Non-executive Director. (2) KMP Executive salary shown. From 18 September 2017, Mr Clarke held the role of Head of Operations Excellence and from that date was no longer KMP Executive. The LTI presented in the table above represents the fair value of LTI granted during the FY18 period. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 25 DIRECTORS’ REPORT Remuneration Report (continued) Performance outcomes for FY17 including STI and LTI assessment COMPANY PERFORMANCE The Company’s performance during the reported period and the previous four reporting periods in accordance with the requirements of the Corporations Act follow: FY END DATE FY18 FY17 FY16 FY15 FY14 REVENUE ($M) $770.94 $633.56 $574.28 $571.59 $440.56 PROFIT AFTER TAX ($M) $32.49 $27.99 $29.12 ($10.36) $14.03 SHARE PRICE $5.35 $5.25 $4.02 $2.44 $1.91 (1) Dividends used are the cash amount (post franking). SHORT TERM CHANGE IN SHAREHOLDER VALUE OVER 1 YEAR (SP INCREASE + DIVIDENDS) CHANGE IN SHARE PRICE DIVIDENDS(1) AMOUNT $0.10 $1.23 $1.58 $0.53 $0.02 $0.170 $0.160 $0.125 $0.110 $0.100 $0.270 $1.390 $1.705 $0.640 $0.120 % 5% 35% 70% 34% 6% LONG TERM (CUMULATIVE) 3 YEARS CHANGE IN SHAREHOLDER VALUE AMOUNT $3.37 $3.74 $2.47 $1.61 % 138% 196% 130% 140% There was no STI paid under the STIP during the FY18 period relating to performance during the FY17 period. FY17 COMPANY LEVEL KPI SUMMARY NAME Graham Maxwell POSITION HELD AT REPORTING PERIOD END Managing Director & CEO Kevin Perkins(1) Executive Director Mark van ‘t Loo CEO – CF Europe Nigel Williams Group CFO Martin Clarke(2) CEO – KFC Aust KPI SUMMARY WEIGHTING EBITDA TARGET ACHIEVEMENT AWARDED EBITDA EBITDA EBITDA EBITDA EBITDA 100% 100% 100% 100% $82,029,965 – – $82,029,965 100% $95,520,588 – – – – – – – – – – AWARD OUTCOMES FY17 PAID FY18(3) TOTAL STI AWARD – – – – – (1) From 19 December 2017 to 29 April 2018 Mr Perkins held the role of Non-executive Director. (2) From 18 September 2017, Mr Clarke held the role of Head of Operations Excellence. (3) The EBITDA target for FY17 was not achieved, however, there was a discretionary bonus pool that was approved by the Board and made available to all employees based on their individual performance. 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 plan as part of remuneration for FY18 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. 26 ANNUAL REPORT 2018 COLLINS FOODS LIMITED During the reporting period, grants that were made on 13 November 2014, vested in relation to FY17 being completed, i.e. vesting during FY18 are noted below: INCUMBENT ROLE TRANCHE WEIGHTING NUMBER ELIGIBLE TO VEST IN FY18 FOR FY17 COMPLETION % OF MAX/ STRETCH/ GRANT VESTED ACTUAL OUTCOME NUMBER VESTED GRANT DATE VWAP $ VALUE OF LTI THAT VESTED (AS PER GRANT DATE VWAP) EPSG 100% 92,301 24.5% 100% 92,301 $2.166810 $200,000 Managing Director & CEO Executive Director EPSG 100% CEO – CF Europe EPSG 100% Group CFO EPSG 100% COO Australia EPSG 100% CPO EPSG 100% Graham Maxwell Kevin Perkins(1) Mark van ‘t Loo Nigel Williams(2) Drew O’Malley Dawn Linaker Martin Clarke – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – CEO – KFC Aust EPSG 100% 27,690 24.5% 100% 27,690 $2.166810 $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 11 July 2017 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 $5.72. 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) % OF MAX/STRETCH/GRANT VESTING 10% >6%, <10% 6% <6% 100% Pro-rata 20% 0% In relation to the completion of the reporting period, previous grants of equity made under the LTI plan are eligible to be tested for vesting in relation to grants that were made on 1 October 2015 and 22 December 2015 (i.e. will be eligible for vesting during FY19 in relation to the completion of FY18). 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 FY18. INCUMBENT ROLE TRANCHE WEIGHTING Graham Maxwell Managing Director & CEO Kevin Perkins(1) Executive Director Mark van ‘t Loo CEO – CF Europe Nigel Williams(2) Group CFO Drew O’Malley COO Australia Dawn Linaker CPO Martin Clarke CEO – KFC Aust EPSG EPSG EPSG EPSG EPSG EPSG EPSG 100% 100% 100% 100% 100% 100% 100% NUMBER ELIGIBLE TO VEST IN FY19 FOR FY18 COMPLETION % OF MAX/ STRETCH/ GRANT VESTED NUMBER ELIGIBLE TO VEST GRANT DATE VWAP $ VALUE OF LTI THAT VESTED (AS PER GRANT DATE VWAP) 33,316 100% 33,316 $3.248406 $108,225 – – – – – – – – – – 40,019 100% 40,019 $3.248406 $130,000 – – – – – – – – – – – – – – – (1) Eligible participant, however as announced via ASX, did not receive performance rights pursuant to the relevant executive services agreement. (2) Appointed to Group CFO role on 18 May 2015. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 27 DIRECTORS’ REPORT Remuneration Report (continued) All performance rights issued over the historical period ends have the following expiry dates and exercise prices: REPORTING PERIOD ENDED 29 April 2018 30 April 2017 1 May 2016 EXPIRY DATE 24 July 2020 23 July 2019 24 July 2018 EXERCISE PRICE Nil Nil Nil There were two tranches of performance rights issued during the reporting period ended 29 April 2018. The fair value at issuance date was determined using a discounted cash flow model incorporating the assumptions below. It should be noted that fair values are not used to determine LTI allocations, and a separate methodology appropriate to the purposes is used, as described in the LTI summary presented earlier. TRANCHE 7 8 ISSUE DATE 28 September 2017 29 November 2017 FAIR VALUE $5.30 $5.41 SHARE PRICE AT ISSUANCE $5.82 TERM 3 DIVIDEND YIELD 3.27% RISK FREE INTEREST RATE 2.16% $5.93 3 3.05% 2.16% The following outlines the vesting scale that was applicable to the performance rights issued to executives during the current reported period and as part of remuneration for FY19: PERFORMANCE LEVEL Stretch/maximum Between target and stretch Target Between threshold and target Threshold Below threshold ANNUALISED EPS GROWTH (CAGR) % OF MAX/STRETCH/GRANT VESTING 100% 22% >11%, <22% 11% >5.5%, <11% 5.5% <5.5% Pro-rata 50% Pro-rata 25% 0% There were two tranches of performance rights issued during the reporting period ended 30 April 2017. The fair value at issuance date was determined using a discounted cash flow model incorporating the assumptions below. TRANCHE 5 6 ISSUE DATE 7 September 2016 29 September 2016 FAIR VALUE $4.20 $4.13 SHARE PRICE AT ISSUANCE $4.58 TERM 3 DIVIDEND YIELD 2.83% RISK FREE INTEREST RATE 1.51% $4.50 3 2.83% 1.51% The following outlines the vesting scale that was applicable to the above outcomes applicable to the performance rights that have vested in respect of FY18 being completed: PERFORMANCE LEVEL Stretch/maximum Between target and stretch Threshold Below threshold ANNUALISED EPS GROWTH (CAGR) % OF MAX/STRETCH/GRANT VESTING 100% 10% >6%, <10% 6% <6% Pro-rata 20% 0% 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: ´ positioning Base Packages (the fixed element) around relevant market data benchmarks when they are undertaken; ´ 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. 28 ANNUAL REPORT 2018 COLLINS FOODS LIMITED 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 executives, 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. Employment terms for KMP SERVICE AGREEMENTS A summary of contract terms in relation to KMP Executives is presented below: NAME Graham Maxwell POSITION HELD AT CLOSE OF FY18 Managing Director & CEO Nigel Williams Group CFO Drew O’Malley COO Australia Dawn Linker CPO DURATION OF CONTRACT Open ended Open ended Open ended Open ended Mark van 't Loo CEO – CF Europe Open ended PERIOD OF NOTICE(1) FROM COMPANY 12 months FROM KMP 12 months 3 months 3 months 3 months 6 months 3 months 3 months 2 months 3 months TERMINATION PAYMENTS(2) Up to 12 months Up to 12 months Up to 12 months Up to 12 months Up to 12 months (1) 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 KMP Executive. (2) 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 O’Malley, there is a restraint of trade period of 12 months. 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. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 29 DIRECTORS’ REPORT Remuneration Report (continued) Changes in KMP Executive held equity The following table outlines the changes in the amount of equity held by KMP Executives over the reporting period: NUMBER HELD AT OPEN 2018 356,088 GRANTED AS COMPENSATION – SHARES ISSUED ON VESTING OF RIGHTS 92,302 PARTICIPATION IN RIGHTS ISSUE 32,371 NUMBER HELD AT CLOSE 2018 480,761 NAME Graham Maxwell SECURITY Shares Performance rights Kevin Perkins(1) Shares Performance rights Mark van ‘t Loo Shares Performance rights Nigel Williams Shares 206,134 7,444,692 – – – – Performance rights 53,615 Drew O’Malley Shares Performance rights Dawn Linaker Shares Performance rights Martin Clarke(2) Shares Performance rights – – 5,000 8,588 161,870 61,295 137,931 (92,301) – 251,764 – – – 36,052 – 35,311 – 36,206 – 27,122 – – – – – – – – – – – – 27,690 (27,690) 176,792 7,621,484 – – – – – – – – – – – – – 36,052 – 88,926 – 36,206 5,000 35,710 189,560 33,605 Total 8,297,282 272,622 – 209,163 8,779,068 (1) From 19 December 2017 Mr Perkins held the role of Non-executive Director. The number of securities reported is for the full reported period. (2) From 18 September 2017, Mr Clarke held the role of Head of Operations Excellence. The following table outlines the changes in the amount of equity held directly or indirectly by Non-executive Directors over the reporting period: NAME Robert Kaye, SC Newman Manion Bronwyn Morris Kevin Perkins(1) Russell Tate Total SECURITY Shares Shares Shares Shares Shares NUMBER HELD AT OPEN 2018 10,000 NUMBER HELD AT CLOSE 2018 29,913 20,001 5,001 7,444,692 20,001 7,499,695 21,820 8,456 7,621,484 21,820 7,703,493 (1) From 19 December 2017 Mr Perkins held the role of Non-executive Director. The number of securities reported is for the full reported period. 30 ANNUAL REPORT 2018 COLLINS FOODS LIMITED 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: 2018 EQUITY GRANTS NAME ROLE Graham Maxwell Managing Director & CEO Kevin Perkins(1) Executive Director Mark van 't Loo CEO - CF Europe Nigel Williams Group CFO Drew O'Malley COO Australia Dawn Linaker CPO FY IN WHICH RIGHTS MAY VEST 2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 MAXIMUM VALUE YET TO VEST ($) – 84,600 121,245 – – – – – 32,511 – 14,038 31,845 – – 32,653 – 8,867 24,459 (1) From 19 December 2017 Mr Perkins held the role of Non-executive Director. The number of securities reported is for the full reported period. 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 2017, 90.97% 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 (RC) 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 $18,500 Subsequent to the end of the reporting period, the RC 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 FY19 Remuneration 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: ´ 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 the consultant is independent of KMP; ´ as required by law, KMP remuneration recommendations are only received by non-executive directors, mainly, the Chair of the Remuneration and Nomination Committee; ´ 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. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 31 DIRECTORS’ REPORT Remuneration Report (continued) 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, executives and Company Secretary. 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: ´ 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 ´ 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 2018 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 2018 $ 2017 $ 392,202 45,169 352,142 789,513 11,258 22,096 – 33,354 822,867 88,774 – 11,316 11,822 111,912 – – – 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 54,580 934,779 1,665,644 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 2018 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 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 Directors’ Report. Amounts in the Directors’ Report have been rounded off in accordance with that Instrument 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 2018 34 ANNUAL REPORT 2018 COLLINS FOODS LIMITED AUDITOR’S INDEPENDENCE DECLARATION Auditor’s Independence Declaration As lead auditor for the audit of Collins Foods Limited for the reporting period ended 29 April 2018, 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 2018 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 2018 COLLINS FOODS LIMITED 35 CONSOLIDATED INCOME STATEMENT For the reporting period ended 29 April 2018 Revenue Cost of sales Gross profit Selling, marketing and royalty expenses(1) Occupancy expenses(1) Restaurant related expenses(1) Administration expenses(1)(2) Other expenses Other income(3) Profit from continuing operations before finance income, finance costs and income tax (EBIT) Finance income Finance costs(4) 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 2018 $000 770,936 (364,927) 406,009 (159,907) (62,445) (72,878) (46,948) (6,129) 1,004 58,706 347 (10,856) 301 48,498 (16,009) 32,489 32,489 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 28.28 cps (6)28.67 cps 28.17 cps (6)28.52 cps 114,864,101 97,622,731 115,350,131 98,123,170 (1) Selling, marketing and royalty, occupancy, restaurant related and administration expenses include charges of $1,200,000 (2017: $2,136,000) relating to impairment charges and Snag Stand restructuring costs. (2) Administration expenses include costs of acquisitions and European set up and integration costs of $3,934,000 (2017: $4,981,000). (3) Gain on disposal of land and building $nil (2017: $500,000); gain on disposal of property, plant and equipment of $nil (2017: $605,000); and realised foreign exchange gain of $nil (2017: $734,000). (4) Finance costs include $1,000,000 (2017: nil) in relation to the extinguishment of unamortised costs from previous refinancing. (5) Income tax expense includes $1,105,000 relating to a derecognition of a deferred tax asset (2017: reversal of deferred tax assets associated with restaurant closures $976,000). (6) The comparative earnings per share has been restated for the bonus element of the 1:11 entitlement offer undertaken in July 2017. The above Consolidated Income Statement should be read in conjunction with the accompanying Notes. 36 ANNUAL REPORT 2018 COLLINS FOODS LIMITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the reporting period ended 29 April 2018 Net profit attributable to members of Collins Foods Limited Items that may be reclassified to profit or loss Other comprehensive income: 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 NOTE F8 F8 F9 2018 $000 32,489 5,608 2,281 (685) 7,204 2017 $000 27,988 771 977 (293) 1,455 Total comprehensive income for the reporting period 39,693 29,443 Total comprehensive income for the reporting period is attributable to: Owners of the parent 39,693 29,443 The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying Notes. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 37 CONSOLIDATED BALANCE SHEET As at 29 April 2018 Current assets Cash and cash equivalents Receivables Inventories Total current assets Non-current assets Property, plant and equipment Intangible assets, net Deferred tax assets Receivables Investments accounted for using the equity method Derivative financial instruments 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 Deferred tax liabilities 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 C3 F6 C3 F7 C2 C3 F9(b) F7 D3 F8 2018 $000 60,450 6,455 5,975 72,880 165,260 438,361 31,922 523 1,874 63 638,003 710,883 77,132 1,033 1,216 6,146 85,527 2017 $000 104,751 4,241 5,076 114,068 103,380 282,470 28,585 6 1,571 – 416,012 530,080 61,863 4,648 1,773 5,298 73,582 286,258 183,022 – 2,631 3,499 292,388 377,915 332,968 290,328 10,951 31,689 332,968 1,684 1,901 3,098 189,705 263,287 266,793 245,260 3,420 18,113 266,793 The above Consolidated Balance Sheet should be read in conjunction with the accompanying Notes. 38 ANNUAL REPORT 2018 COLLINS FOODS LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS For the reporting period ended 29 April 2018 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 (Netherlands and Germany KFC acquisitions) Payment for asset 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 Cash and cash equivalents at the end of the reporting period NOTE 2018 $000 2017 $000 843,260 (702,787) (39,113) 347 (8,528) (18,656) 74,523 694,202 (573,356) (37,009) 358 (8,044) (15,588) 60,563 (99,744) (15,322) (94,121) (4,150) – 53 (1,526) (43,823) (243,311) 113,518 (16,000) – (1,841) 46,065 (1,827) (18,913) 121,002 (47,786) 104,751 3,485 60,450 (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 1,447 104,751 B1 A2 A2 B3 B3 D3 D3 B4 B1 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying Notes. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 39 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the reporting period ended 29 April 2018 NOTE CONTRIBUTED EQUITY RESERVES RETAINED EARNINGS TOTAL EQUITY 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 2018 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 (net of share issue costs) $000 182,098 – – – – – 798 62,364 245,260 $000 245,260 – – – – – 283 44,785 B4 B4 $000 2,364 – 1,455 1,455 399 – (798) – 3,420 $000 3,420 – 7,204 $000 5,235 27,988 – $000 189,697 27,988 1,455 27,988 29,443 – (15,110) – – 18,113 $000 18,113 32,489 – 399 (15,110) – 62,364 266,793 $000 266,793 32,489 7,204 7,204 32,489 39,693 611 – (283) – – (18,913) – – 611 (18,913) – 44,785 332,969 End of the reporting period 290,328 10,952 31,689 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying Notes. 40 ANNUAL REPORT 2018 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 judgements 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 three reportable segments have been identified: KFC Restaurants Australia and Europe (competing in the quick service restaurant market) and Sizzler Restaurants (competing in the full service restaurant market). Other includes Shared Services which performs a number of administrative and management functions for the Group’s KFC and Sizzler Restaurants, as well as Taco Bell and Snag Stand trading activities. This reporting period, Shared Services has been grouped with Other as it is not considered a reportable operating segment as it does not generate its own revenues and a support function of the group. 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: 2018 Total segment revenue Underlying EBITDA(1) Depreciation, amortisation and impairment Finance costs – net Income tax expense 2017 Total segment revenue Underlying EBITDA(1) Depreciation, amortisation and impairment Finance costs – net Income tax expense KFC RESTAURANTS AUSTRALIA SIZZLER RESTAURANTS KFC RESTAURANTS EUROPE $000 624,095 99,260 23,094 (4) $000 549,472 89,849 20,349 (5) $000 50,762 4,560 1,329 – $000 65,049 4,575 1,538 (4) $000 91,561 6,635 4,652 50 $000 14,806 633 616 8 OTHER(2) $000 4,518 (15,907) 1,213 10,463 $000 4,235 (13,799) 3,329 8,072 TOTAL $000 770,936 94,548 30,288 10,509 16,009 $000 633,562 81,258 25,832 8,071 16,018 (1) Refer below for a description and reconciliation of Underlying EBITDA. (2) Other includes: Shared Services; Snag Stand; and Taco Bell. LOCATION OF NON-CURRENT ASSETS 2018 Revenue Non-current asset (property, plant and equipment, and intangibles) 2017 Revenue Non-current asset (property, plant and equipment, and intangibles) AUSTRALIA EUROPE ASIA TOTAL $000 675,260 459,908 $000 615,006 352,068 $000 91,561 131,597 $000 14,806 21,047 $000 4,114 12,116 $000 3,749 12,735 $000 770,936 603,621 $000 633,562 385,850 ANNUAL REPORT 2018 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, Sizzler and Taco Bell Restaurants, and franchise fees and royalties from Sizzler Asia Restaurants. 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 from continuing operations before income tax is provided as follows: Underlying EBITDA Finance costs – net Realised foreign exchange gain Performance rights Costs of acquisitions expensed Depreciation Amortisation Impairment of property, plant and equipment Impairment of KFC franchise rights Impairment of Snag Stand goodwill Write-off of restaurant smallwares Other one-off costs 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 2018 $000 94,548 (10,509) – (611) (3,933) (28,307) (1,746) (191) (44) – – (1,010) – 301 48,498 2017 $000 81,258 (8,071) 734 (399) (4,981) (22,150) (1,546) (1,212) – (924) (25) – 1,105 217 44,006 A2/ Business combinations KFC RESTAURANTS (AUSTRALIA) – SUMMARY OF ACQUISITION On 26 June 2017, Collins Foods South Pty Ltd, a wholly owned subsidiary of Collins Foods Limited entered into binding agreements to acquire 28 KFC restaurants from Yum! Brands Inc. subsidiaries located in Western Australia, South Australia and Tasmania. The following acquisitions were completed: ´ acquisition of five restaurants in Western Australia on 9 October 2017; ´ acquisition of five restaurants in South Australia on 23 October 2017; and ´ acquisition of 14 restaurants in Tasmania on 4 December 2017. The remaining restaurants are to be completed in FY19. 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. As part of the Group’s ongoing franchisee relationship with Yum!, there were other agreements entered into. 42 ANNUAL REPORT 2018 COLLINS FOODS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Details of the purchase consideration, the net assets acquired and goodwill are as follows: Purchase consideration – cash paid The fair values of the assets and liabilities of the business acquired as at the date of acquisition are as follows: Cash Prepaid expenses Inventories Property, plant and equipment Intangible assets Deferred tax asset, net Trade and other payables Provisions Net identifiable assets acquired Goodwill Net assets acquired $000 99,826 FAIR VALUE $000 82 115 322 26,698 1,518 3,616 (17) (1,739) 30,595 69,231 99,826 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 $2.9 million have been recognised in the Consolidated Income (other expenses) and in operating cash flows in the Consolidated Statement of Cash Flows (payments to suppliers and employees). PURCHASE CONSIDERATION – CASH FLOW Cash consideration Less balances acquired Inflow of cash – investing activities AS AT ACQUISITION DATE $000 99,826 82 99,744 The acquired business contributed revenues of $39.1 million and underlying EBITDA of $6.7 million to the Group for the period the stores were owned by Collins Foods, up to 29 April 2018. KFC RESTAURANTS (NETHERLANDS) – SUMMARY OF ACQUISITION On 31 August 2017, Collins Foods Netherlands Limited, a subsidiary of the Company, acquired 16 KFC Restaurants located in the Netherlands from subsidiaries of Yum! Brands Inc. The purchase price was €62.3 million plus franchise fees and adjusted down for employee liabilities accrued prior to completion. The acquisition provides a strategic entry into the KFC Netherlands market which further support the growth platform for Collins Foods’ KFC operations outside of Australia. Details of the purchase consideration, the net assets acquired and goodwill are as follows: Purchase consideration – cash paid $000 94,224 ANNUAL REPORT 2018 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 Net identifiable assets acquired Goodwill Net assets acquired FAIR VALUE $000 103 393 15,230 1,005 16,731 77,493 94,224 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 $0.7 million have been recognised in the Consolidated Income Statement (other expenses) and in operating cash flows in the Consolidated 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 94,224 103 94,121 The acquired business contributed revenues of $48.8 million and an underlying EBITDA of $7.2 million to the Group for the period 31 August 2017 to 29 April 2018. If all of the acquisitions had occurred on 1 May 2017, consolidated revenue and consolidated Underlying EBITDA for the reporting period ended 29 April 2018 would have been $841.7 million and $106.6 million respectively. At the time the financial statements were approved and issued, the Group has not yet completed the accounting for the acquisition. In particular, the property, plant and equipment have been determined provisionally as the valuation has not yet been finalised 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. 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. 44 ANNUAL REPORT 2018 COLLINS FOODS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 2018 $000 2017 $000 766,822 629,813 4,114 770,936 3,749 633,562 15 – 80 909 1,004 837 734 143 681 2,395 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 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 Performance rights Write-off of restaurant smallwares Bank transaction fees Loss on disposal of property, plant and equipment 2018 $000 2017 $000 28,307 1,746 235 30,288 (347) 10,856 10,509 186,072 15,735 13,811 215,618 43,793 250,879 3,933 611 – 3,251 240 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 – ANNUAL REPORT 2018 COLLINS FOODS LIMITED 45 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(1) 2018 $000 60,450 2017 $000 104,751 (1) Included in cash at bank and on hand is an amount of $1.4 million (2017: $0.8 million) that is held under lien by the bank as security for Europe lease agreements and are therefore not available for use by the Group. 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 Loss/(gain) on disposal of property, plant and equipment Amortisation of borrowing costs Non-cash employee benefits expense share based payments expense Transfer to/(from) provisions: Provision for inventory write-offs Provision for employee entitlements 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 Movement in: Income tax payable Deferred tax balances – costs associated with acquisitions Fringe benefits tax payable Goods and services tax payable Net operating cash flows 46 ANNUAL REPORT 2018 COLLINS FOODS LIMITED 2018 $000 32,489 30,288 225 1,407 611 (52) 19 (250) (91) (2,346) (301) 2017 $000 27,988 25,832 (226) 238 399 43 (829) (1,305) (200) 2,826 (217) 15,032 4,731 (3,506) 844 (54) 208 517 (81) 33 814 74,523 60,563 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. B2/ Borrowings AVAILABLE FINANCING FACILITIES Used Unused Total 2018 2017 WORKING CAPITAL FACILITY $000 640 35,370 36,010 REVOLVING BANK LOANS $000 287,650 42,402 330,052 WORKING CAPITAL FACILITY $000 807 14,193 15,000 REVOLVING BANK LOANS $000 183,981 63,838 247,819 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 26 June 2017, the Group entered into a new Syndicated Facility Agreement of $270 million and €60 million, including working capital facilities. 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 €60 million expiring on 31 October 2022. 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 29 April 2018, 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 41% (2017: 23%). NET DEBT Cash at bank and on hand Borrowings Net debt NOTE B1 B2 2018 $000 60,450 287,650 227,200 2017 $000 104,751 183,981 79,230 ANNUAL REPORT 2018 COLLINS FOODS LIMITED 47 B3/ Ratios (continued) RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES Borrowings Total liabilities from financing activities NET LEVERAGE Net debt EBITDA per Syndicated Facility Agreement Net leverage 2017 $000 183,981 183,981 CASH FLOWS $000 97,518 97,518 FX $000 6,151 6,151 2018 $000 287,650 287,650 2018 $000 227,200 106,114 2.14 2017 $000 79,230 83,932 (1)0.94 (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. B4/ Dividends DIVIDENDS Dividends paid of $0.17 (2017: $0.16) per fully paid share FRANKING CREDITS Franking credits available for the subsequent reporting period based on a tax rate of 30% 2018 $000 18,913 2018 $000 80,414 2017 $000 15,110 2017 $000 74,199 The above amount represents the balance of the franking account as at the end of the reporting period, adjusted for: ´ franking credits that will arise from the payment of income tax payable as at the end of the reporting period; ´ franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and ´ 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 ($10.5 million) to be paid on 26 July 2018. 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 $10,482,087. 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. 48 ANNUAL REPORT 2018 COLLINS FOODS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 CURRENCY RISK Foreign exchange risk During 2018 and 2017, 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. Hedge of net investment in foreign entity As at 25 August 2017, €48.3 million of the Euro denominated loan of €48.5 million was designated as the hedging instrument of a net investment hedge for the foreign currency risk exposure of €48.3 million of the equity invested in Collins Foods Europe Limited (and subsidiaries). As at inception this hedge was considered to be completely effective. 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 Contracts) 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 below and in C3. 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. 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. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 49 C1/ Financial risk management (continued) 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 (2017: 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 below and in C3. MATURITIES OF FINANCIAL LIABILITIES The tables below analyse the Group’s financial liabilities into relevant maturity groupings based on their contractual maturities for: ´ all non-derivative financial liabilities; and ´ 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 2018 Non-derivatives Trade and other payables Borrowings Total non-derivatives Derivatives F6 C2 Net settled (Swap Contracts) C3 2017 Non-derivatives Trade and other payables Borrowings Total non-derivatives Derivatives F6 C2 $000 $000 $000 77,132 10,638 87,770 1,219 $000 61,863 9,207 71,070 – 9,739 9,739 316 $000 – 69,823 69,823 – 298,193 298,193 (405) $000 – 130,927 130,927 Net settled (Swap Contracts) C3 1,814 1,227 545 TOTAL CONTRACTUAL CASH FLOWS CARRYING AMOUNT (ASSETS)/ LIABILITIES $000 $000 OVER 5 YEARS $000 – – – – $000 – – – – 77,132 318,570 395,702 1,130 $000 61,863 210,002 271,865 77,132 286,258 363,390 1,153 $000 61,863 183,022 244,885 3,586 3,457 50 ANNUAL REPORT 2018 COLLINS FOODS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 market risks: INTEREST RATE RISK AND FOREIGN EXCHANGE RISK CARRYING AMOUNT $000 63,126 366,968 $000 107,177 253,949 INTEREST RATE RISK FOREIGN CURRENCY RISK –1% +1% –1% +1% PROFIT EQUITY PROFIT EQUITY PROFIT EQUITY PROFIT EQUITY $000 (423) 838 415 $000 (733) 415 (318) $000 – (1,545) (1,545) $000 – (2,350) (2,350) $000 423 (838) (415) $000 733 (415) 318 $000 – 1,545 1,545 $000 – 2,350 2,350 $000 205 (61) 144 $000 668 (16) 652 $000 – – – $000 – – – $000 (205) 61 (144) $000 (668) 16 (652) $000 – – – $000 – – – 2018 Financial assets Financial liabilities Total increase/(decrease) 2017 Financial assets Financial liabilities Total increase/(decrease) INTEREST RATE RISK EXPOSURES – LIABILITIES The following table summarises interest rate risk for the Group, together with effective interest rates as at the end of the reporting period. WEIGHTED AVERAGE EFFECTIVE RATE 2018 Trade and other payables Borrowings – unhedged Borrowings – hedged(1) 2017 Trade and other payables Borrowings – unhedged Borrowings – hedged(1) NOTES F6 B2 B2 F6 B2 B2 FLOATING INTEREST RATE $000 – 119,650 – 119,650 $000 – 59,231 – 59,231 FIXED INTEREST MATURING IN: 5 YEARS OR LESS MORE THAN 5 YEARS NON-INTEREST BEARING $000 – – 168,000 168,000 $000 – – 124,750 124,750 $000 – – – – $000 – – – – $000 77,132 – – 77,132 $000 61,863 – – 61,863 TOTAL $000 77,132 119,650 168,000 364,782 $000 61,863 59,231 124,750 245,844 (1) Refer Note C3 for details of derivative financial instruments. 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: 2018 Trade and other receivables 2017 Trade and other receivables NOTES F3 F3 FLOATING INTEREST RATE $000 – – $000 – – FIXED INTEREST MATURING IN: 5 YEARS OR LESS MORE THAN 5 YEARS NON-INTEREST BEARING $000 – – $000 – – $000 – – $000 – – $000 3,199 3,199 $000 2,432 2,432 2.1% 4.6% 2.7% 4.9% TOTAL $000 3,199 3,199 $000 2,432 2,432 ANNUAL REPORT 2018 COLLINS FOODS LIMITED 51 C2/ Recognised fair value measurements CREDIT RISK There is no concentration of credit risk with respect to external current and non-current receivables. 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 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: ´ quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); ´ 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 ´ inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). As at 29 April 2018, 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 30 April 2017, 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) CARRYING AMOUNT $000 286,258 2018 FAIR VALUE $000 261,904 DISCOUNT RATE % 5.6 CARRYING AMOUNT $000 183,022 2017 FAIR VALUE $000 175,892 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 discount rates for financial assets and financial liabilities that 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 finance department. As part of this discussion the finance department presents a report that explains the reason for the fair value movements. 52 ANNUAL REPORT 2018 COLLINS FOODS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 intend 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 Non-current assets Interest rate swap contracts – cash flow hedges Current liabilities Interest rate swap contracts – cash flow hedges Non-current liabilities Interest rate swap contracts – cash flow hedges 2018 $000 63 1,216 – 2017 $000 – 1,773 1,684 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 29 April 2018 the Group entered into the following Swap Contracts to hedge a designated portion of the interest rate exposure of the facility: ´ $15.25 million commenced on 4 December 2017, with a maturity date of 31 October 2018; ´ $28.0 million commenced on 4 December 2017, with a maturity date of 31 October 2022; and ´ $65.0 million commencing on 31 October 2018, with a maturity date of 31 October 2020. Swap Contracts currently in place cover approximately 80% (2017: 80%) of the Australian dollar denominated loan principal outstanding and are timed to expire as each loan repayment falls due. The variable rates are Bank Bill Swap Bid Rate (BBSY) which at balance date was 1.90% (2017: 1.675%). 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 2018 WEIGHTED AVERAGE FIXED INTEREST RATE 2.9% – 2.4% – 2.2% 2018 $000 140,000 – 140,000 – 28,000 308,000 2017 WEIGHTED AVERAGE FIXED INTEREST RATE – 3.1% – 2.7% – 2017 $000 – 124,750 – 75,000 – 199,750 ANNUAL REPORT 2018 COLLINS FOODS LIMITED 53 C3/ Derivative financial instruments (continued) 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. CREDIT RISK EXPOSURES At 29 April 2018, the Swap Contracts gave rise to payables for unrealised losses on derivative instruments of $1.2 million (2017: $3.5 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. 54 ANNUAL REPORT 2018 COLLINS FOODS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 Long term employee benefits Post employment benefits Long term incentive (share based payments and long term cash incentive) Total KMP compensation Note: FY17 Short term employee benefits includes discretionary payments. 2018 $ 3,094,277 49,792 166,254 297,785 WHOLE DOLLARS 2017 $ 2,520,372 (58,016) 130,179 290,686 3,608,109 2,883,221 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 Australian Securities Exchange (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. In the event of cessation of employment within 12 months of the date of grant, unvested performance rights are forfeited. In the event of cessation of employment after 12 months but before the conclusion of the vesting period, unvested performance rights are considered 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 the performance rights remain and subject to performance testing along with other participants. It is noted that the Board has discretion to allow “Good Leavers” to retain their participation in the LTIP beyond the date of cessation of employment when deemed appropriate to the circumstances. 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 and is a date that is no later than 5.00pm (Brisbane time) on the day that is four weeks after the public release of the audited financial report of the Company for the final year of the three year performance period (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: ´ the expiry date; ´ the vesting conditions not being satisfied by the Vesting Determination Date; ´ 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. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 55 D2/ Share based payments (continued) Set out below are summaries of performance rights issued under the LTIP: Balance at the beginning of the reporting period Vested and exercised during the reporting period Issued during the reporting period Lapsed during the reporting period Balance at the end of the reporting period 2018 446,105 (149,527) 329,412 (270) 2017 803,548 (531,163) 176,403 (2,683) 625,720 446,105 On 11 July 2017, following the satisfaction of the vesting conditions, 149,527 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 $5.72. All performance rights issued during the reporting period ended 29 April 2018 have an expiry date of 26 July 2020 and were issued with an exercise price of nil. 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. FAIR VALUE OF PERFORMANCE RIGHTS ISSUED There were two tranches of performance rights issued during the reporting period ended 29 April 2018: ´ The assessed fair value of performance rights issued on 28 September 2017 was an average of $5.27. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $5.82, the term of the performance right, the expected dividend yield of 3.27% and the risk free interest rate for the term of the performance rights of 2.16%. ´ The assessed fair value of performance rights issued on 29 November 2017 was an average of $5.41. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $5.93, the term of the performance right, the expected dividend yield of 3.05% and the risk free interest rate for the term of the performance rights of 2.16%. 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 performance right, the expected dividend yield of 2.83% and the risk free interest rate for the term of the performance 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 performance right, the expected dividend yield of 2.83% and the risk free interest rate for the term of the performance rights of 1.51%. 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 benefits 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. 56 ANNUAL REPORT 2018 COLLINS FOODS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS D3/ Contributed equity EQUITY OF PARENT COMPANY Balance Share purchase plan Institutional Entitlement Offer Senior Executive Performance Rights Plan Retail Entitlement Offer Less capital raising costs Balance (1) Net of tax effect. PARENT ENTITY NUMBER OF ORDINARY SHARES – FULLY PAID 106,251,049 371,145 5,681,930 149,527 4,013,986 – SHARE CAPITAL $000 TOTAL EQUITY $000 245,260 245,260 1,949 25,853 283 18,264 (1)(1,281) 1,949 25,853 283 18,264 (1,281) DATE 1 May 2017 5 May 2017 5 July 2017 11 July 2017 18 July 2017 18 July 2017 29 April 2018 116,467,637 290,328 290,328 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. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 57 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 % OF OWNERSHIP INTEREST NAME OF ENTITY Sizzler China Pte Ltd PLACE OF INCORPORATION Singapore ACRONYM SCP 2018 50 INDIVIDUALLY IMMATERIAL ASSOCIATES Aggregate carrying amount of the investment of individually immaterial associates Aggregate amounts of the Group's share of: Profit from continuing operations Total comprehensive income 2018 $000 2,064 301 301 2017 50 2017 $000 1,766 217 217 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. 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. 58 ANNUAL REPORT 2018 COLLINS FOODS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 WHOLE DOLLARS 2018 $ 2017 $ Interest received or receivable Related entity – joint venture – 38,000 ANNUAL REPORT 2018 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: 2018 $000 2017 $000 Aggregate capital expenditure contracted for at balance date but not recognised as liabilities, payable 2,330 8,307 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 2038. 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 52,436 153,749 93,143 299,328 (19,723) 279,605 40,598 117,615 60,963 219,176 (22,482) 196,694 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 2018 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) 2018 28.28 28.17 2017 (1) 28.67 (1) 28.52 32,489 27,988 114,864,101 97,622,731 115,350,131 98,123,170 (1) The comparative earnings per share has been restated for the bonus element of the 1:11 entitlement offer undertaken in July 2017. WEIGHTED AVERAGE NUMBER OF SHARES USED AS THE DENOMINATOR Weighted average number of ordinary shares used in the denominator in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Performance rights Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 2018 2017 114,864,101 97,622,731 486,030 500,439 115,350,131 98,123,170 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 Trade receivables Prepayments NON-CURRENT ASSETS – RECEIVABLES Security deposits 2018 $000 2,676 3,779 6,455 2018 $000 523 523 2017 $000 2,426 1,815 4,241 2017 $000 6 6 ACCOUNTING POLICY Trade and other 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 other 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 2018 COLLINS FOODS LIMITED 61 F4/ Property, plant and equipment LAND & BUILDINGS LEASEHOLD IMPROVEMENTS PLANT & EQUIPMENT CONSTRUCTION IN PROGRESS $000 $000 $000 $000 At 2 May 2016 Cost Accumulated depreciation 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 5,475 (1,710) 3,765 13 – (23) – (1,620) 1,620 – – 127,458 (80,164) 47,294 1,254 17,376 (12,315) (667) (5,060) 5,006 5,698 32 87,459 (60,674) 26,785 3,396 8,204 (9,812) (545) (6,217) 5,875 5,903 39 10,156 – 10,156 22,775 (25,580) – – (13) – 41 – TOTAL $000 230,548 (142,548) 88,000 27,438 – (22,150) (1,212) (12,910) 12,501 11,642 71 Net book amount at 30 April 2017 3,755 58,618 33,628 7,379 103,380 At 1 May 2017 Cost Accumulated depreciation (including impairment) Net book amount at 1 May 2017 Additions Transfers from construction in progress Depreciation expense Impairment charge Net disposals – cost Net disposals – accumulated depreciation Acquisition through controlled entity purchased Adjustment to purchase accounting relating to prior period(1) Exchange differences 3,868 146,726 98,745 7,379 256,718 (113) 3,755 2 2,882 (28) – (17) 17 – – – (88,108) 58,618 6,263 16,400 (15,801) (75) (3,335) 3,288 (65,117) 33,628 6,099 9,230 (12,478) (116) (6,895) 6,685 33,484 12,420 (71) 1,080 99,851 (153) 599 49,019 – 7,379 30,792 (28,512) – – (21) – – – 141 9,779 (153,338) 103,380 43,156 – (28,307) (191) (10,268) 9,990 45,904 (224) 1,820 165,260 Net book amount at 29 April 2018 6,611 At 29 April 2018 Cost (including purchase accounting adjustment) Accumulated depreciation (including impairment) Net book amount at 29 April 2018 6,735 199,467 119,446 9,638 335,286 (124) 6,611 (99,616) 99,851 (70,427) 49,019 141 9,779 (170,026) 165,260 (1) This adjustment relates to a change in the provisional fair value at acquisition date for the KFC Germany acquisition completed in FY17. 62 ANNUAL REPORT 2018 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: Buildings METHOD Straight line 2018 AVERAGE LIFE 20 years 2017 AVERAGE LIFE 20 years Straight line 20 years or term of the lease(1) Primary term of lease Other leasehold improvements Straight line Primary term of lease(2) Primary term of lease Plant and equipment Motor vehicles Straight line Straight line 8 years 4 years 8 years 4 years (1) Estimated useful life is the shorter of 20 years or the full term of the lease including renewal periods that are intended to be exercised. (2) If primary term of the lease differs significantly from the estimated useful life of the asset, judgement is applied to the estimated useful life and an individual rate is applied. 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. REVISION OF USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT During the reporting period, the estimated useful lives of leasehold improvements were revised. The net difference to the depreciation expense for all assets held in prior financial period was a decrease in the depreciation expense of ($531,000). Assuming the assets are held until the end of their estimated useful lives, the depreciation expense for the next five years in relation to these assets will have the following net (decrease): PERIOD ENDED APRIL 2019 2020 2021 2022 $000 (403) (261) (261) (261) 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 2018 COLLINS FOODS LIMITED 63 F5/ Intangible assets GOODWILL FRANCHISE RIGHTS SIZZLER BRAND AUSTRALIA SIZZLER BRAND ASIA $000 $000 $000 $000 OTHER $000 TOTAL $000 At 2 May 2016 Cost 257,087 7,789 11,261 16,795 Accumulated amortisation (including accumulated impairment losses and foreign currency translation) Net book amount at 2 May 2016 (27,146) 229,941 Purchase of controlled entities 34,721 Additions Amortisation Impairment charge Net foreign currency translation – cost Net foreign currency translation – accumulated – – (924) 186 – (2,565) 5,224 1,160 658 (685) – – 10 Net book amount at 30 April 2017 263,924 6,367 (11,261) – – – – – – – – (4,008) 12,787 – – (857) – 292 (67) 12,155 – – – 28 – (4) – – – 292,932 (44,980) 247,952 35,909 658 (1,546) (924) 478 (57) 24 282,470 At 1 May 2017 Cost 291,994 9,607 11,261 17,087 28 329,949 Accumulated amortisation (including accumulated impairment losses and foreign currency translation) Net book amount at 1 May 2017 (28,070) 263,924 Purchase of controlled entities 146,390 Additions Amortisation Impairment charge Adjustment to purchase accounting relating to prior year(1) Net foreign currency translation – cost Net foreign currency translation – accumulated Net book amount at 29 April 2018 At 29 April 2018 Cost Accumulated amortisation (including accumulated impairment losses and foreign currency translation) Net book amount at 29 April 2018 (3,240) 6,367 2,655 1,526 (891) (44) – 247 (70) 9,790 (11,261) – – – – – – – – – (4,932) 12,155 – – (831) – – (95) 8 11,237 (4) 24 – – (24) – – – – – (47,503) 282,470 149,045 1,526 (1,746) (44) 334 6,838 (62) 438,361 – – – 334 6,686 – 417,334 445,404 14,035 11,261 16,992 28 487,720 (28,070) 417,334 (4,245) 9,790 (11,261) – (5,755) 11,237 (28) – (49,359) 438,361 (1) This adjustment relates to a change in the provisional fair value at acquisition date for the KFC Germany acquisition completed in FY17. 64 ANNUAL REPORT 2018 COLLINS FOODS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IMPAIRMENT TEST FOR GOODWILL Allocation of goodwill CASH GENERATING UNIT KFC RESTAURANTS AUSTRALIA KFC RESTAURANTS EUROPE SIZZLER ASIA Carrying value 2018 $000 319,564 2017 $000 250,332 2018 $000 96,542 2017 $000 12,357 2018 $000 1,228 2017 $000 1,235 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 is recorded at nil balance as a result of accumulated impairment. The allocation of goodwill to cash generating units (CGUs) was revisited in the current year. Following the appointment of the COO Australia to manage the KFC Australia Restaurants, the KFC business is no longer monitored on a regional basis, but on a national basis for KFC Australia as a whole. Furthermore, as franchise acquisitions in recent years have been predominantly at a national level rather than a regional level, the synergies and cash generating activities associated with the acquisitions benefit the KFC business at a national level and it is no longer possible to allocate goodwill to a regional level on a non-arbitrary basis. Consequently, management have determined that it is now appropriate to allocate goodwill to KFC Australia as a whole for impairment testing purposes. During the reporting period ended 29 April 2018, the above CGUs were tested for impairment in accordance with AASB 136. During the reporting period ended 29 April 2018, 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 KFC franchise rights Restaurants: Sizzler Australia Leasehold improvements Plant and equipment KFC Australia Leasehold improvements Plant and equipment 2018 $000 – 44 41 49 34 67 235 2017 $000 924 – 24 158 643 387 2,136 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 2019 through to the end of the 2023 reporting period which average 2.5% (2017: 2.9%). The year one projections have been aligned to the division’s specific cash flows reflected in the 2019 budget. Management believe that these growth percentages are reasonable considering the growth that has been seen in this operating segment during the 2018 and prior reporting periods. A pre-tax discount rate of 14.7% (2017: 12.0%) has been applied to the cash flows. An indefinite terminal cash flow calculation has been applied for cash flows beyond 2023, using that year’s cash flow as a base. The growth rate of 2.50% (2017: 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 2018 COLLINS FOODS LIMITED 65 F5/ Intangible assets (continued) KFC Europe Restaurants The cash flows by restaurant have been estimated after applying growth rates from the commencement of 2019 through to the end of the 2023 reporting period which average 4.0%. The year one projections have been aligned to the division’s specific cash flows reflected in the 2019 budget. Management believe that these growth percentages are reasonable considering the growth that has been seen in this operating segment together with initiatives intended to improve operating margins. A pre-tax discount rate of 8.4% has been applied to the cash flows. An indefinite terminal cash flow calculation has been applied for cash flows beyond 2023, using that year’s cash flow as a base. The growth rate of 2.5% 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. Sizzler Australia Restaurants The cash flows for the Sizzler Australia Restaurants from the beginning of 2019 to the end of the 2023 reporting period have been estimated at an average decline of 5.0% (2017: 5.0%) reflecting the recent trends experienced in this operating segment together with initiatives intended to improve operating margins. The projection for 2019 has been aligned to the division’s specific cash flows reflected in the 2019 budget. A pre-tax discount rate of 22.2% (2017: 20.0%) has been applied to the cash flows. An indefinite terminal cash flow calculation has been applied for cash flows beyond 2023, 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 2019 through to the end of the 2023 reporting period which average 3.0% (2017: 4.0%). The year one projections have been aligned to the cash flows reflected in the 2019 budget. Management believe that these growth percentages are reasonable considering the growth that has been seen in this cash generating unit during the 2018 and prior reporting periods. A pre-tax discount rate of 14.0% (2017: 13.9%) has been applied to the cash flows. An indefinite terminal cash flow calculation has been applied for cash flows beyond 2023, using that year’s cash flow as a base. The growth rate of 3.0% (2017: 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. 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 are 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 2018 COLLINS FOODS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F6/ Trade and other payables Trade payables and accruals – unsecured Other payables Total payables 2018 $000 62,015 15,117 77,132 2017 $000 48,167 13,696 61,863 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(1) Make good provision Total current liabilities – provisions NON-CURRENT LIABILITIES Employee entitlements(1) Make good provision 2018 $000 5,549 597 6,146 2018 $000 3,247 252 2017 $000 4,626 672 5,298 2017 $000 2,873 225 3,098 Total non-current liabilities – provisions (1) Provision for employee entitlements includes long service leave. Annual leave is classified under trade and other payables as it is a guaranteed settlement. 3,499 ACCOUNTING POLICY Employee entitlements Provision has been made 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 12 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 2018 COLLINS FOODS LIMITED 67 F8/ Reserves Hedging – cash flow hedges Share based payments Foreign currency translation Movements in hedging reserve – cash flow hedges: Opening balance Revaluation – gross Transfer to net profit – gross Net deferred tax (Note F9) Closing balance Movements in share based payments reserve: Opening balance Valuation of performance rights Performance rights vested Closing balance Movements in foreign currency translation reserve: Opening balance Exchange fluctuations arising on net assets of foreign operations Exchange fluctuations arising on net investment in hedge Closing balance 2018 $000 (736) 970 10,717 10,951 (2,332) 2,304 (23) (685) (736) 643 611 (284) 970 5,109 11,727 (6,119) 10,717 2017 $000 (2,332) 643 5,109 3,420 (3,016) 974 3 (293) (2,332) 1,042 399 (798) 643 4,338 1,157 (386) 5,109 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 of foreign operations and of a hedge of the net investment in foreign operations are recognised in other comprehensive income and accumulated in a separate reserve within equity. 68 ANNUAL REPORT 2018 COLLINS FOODS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F9/ Tax A) INCOME TAX EXPENSE Income tax expense Current tax Deferred tax (Over) provided in prior reporting periods Income tax expense is attributable to: Profit from continuing operations Aggregate income tax expense Deferred income tax expense included in income tax expense comprises: Increase in deferred tax assets (Increase)/decrease in deferred tax liabilities Numerical reconciliation of income tax expense 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 Difference in foreign taxation rates Provision transfers Non-assessable income received Carried forward capital losses Amounts (over)/under provided in prior reporting periods Income tax expense Tax expense relating to items of other comprehensive income Cash flow hedges (Note F8) Tax losses Unused revenue tax losses for which no deferred tax asset has been recognised Unused capital tax losses for which no deferred tax asset has been recognised Potential tax benefit @ 30% 2018 $000 15,280 889 (160) 16,009 16,009 16,009 (1,210) 2,099 889 48,498 14,549 2,114 (139) 634 (869) (120) 16,169 (160) 16,009 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) 16,018 685 293 3,283 65,090 20,512 – 64,892 19,468 ANNUAL REPORT 2018 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 Other Total deferred tax assets Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax assets All movements in DTA were recognised in the Consolidated Income Statement and the Consolidated Statement of Comprehensive Income Deferred tax liabilities (DTL) The balance comprises temporary differences attributable to: Inventories Intangibles Prepayments Total deferred tax liabilities Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax liabilities All movements in DTL were recognised in the Consolidated Income Statement 2018 $000 2017 $000 25,532 5,447 2,354 1,478 1,252 313 56 36,432 (4,510) 31,922 752 6,387 2 7,141 (4,510) 2,631 22,186 4,863 1,920 1,160 614 998 – 31,741 (3,156) 28,585 637 4,417 3 5,057 (3,156) 1,901 ACCOUNTING POLICY Income tax The income tax benefit 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 2018 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 2018 $ 2017 $ 392,202 45,169 352,142 789,513 11,258 22,096 – 33,354 822,867 88,774 – 11,316 11,822 111,912 – – – 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 54,580 934,779 1,665,644 ANNUAL REPORT 2018 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 2018 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 29 April 2018 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 Europe Finco Limited Collins Foods Germany Limited Collins Foods Netherlands Limited NOTES (b) PLACE OF INCORPORATION Australia ACRONYM CFGF 2018 100 2017 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) (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 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 CFEFL CFGL CFNL 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 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. This company was dissolved on 24 May 2017 in Australia and 6 June 2017 in Nevada. (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 Limited Liability Company (LLC) became registered in Delaware. ANNUAL REPORT 2018 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 CONSOLIDATED STATEMENT OF COMPREHENSIVE 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 2018 $000 675,261 (323,296) 351,965 (139,330) (53,278) (60,901) (38,660) (5,240) – 367 353 (10,812) 44,464 (15,196) 29,268 CLOSED GROUP 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 29,268 26,347 2,281 (685) 1,596 30,864 977 (293) 684 27,031 30,864 27,031 16,472 29,268 (18,913) 26,826 (376) 26,347 (9,499) 16,472 74 ANNUAL REPORT 2018 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 Derivative financial instrument 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 Total equity 2018 $000 41,173 3,461 5,196 49,830 132,731 325,187 31,589 225 63 134,302 624,097 673,927 64,822 1,129 1,216 6,145 73,312 CLOSED GROUP 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 70,230 286,258 183,022 – 3,499 289,757 363,069 310,858 290,328 (6,296) 26,826 1,684 3,098 187,804 258,034 259,650 245,260 (2,082) 16,472 310,858 259,650 ANNUAL REPORT 2018 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 2018 $000 2017 $000 139 391,082 391,221 1,344 50,945 52,289 338,932 123 330,192 330,315 4,857 31,725 36,582 293,733 336,659 291,588 967 1,306 338,932 18,716 18,716 642 1,503 293,733 14,477 14,477 (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 $270 million and €60 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 29 April 2018. 76 ANNUAL REPORT 2018 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 2018 reporting period comprised the fifty-two weeks which ended on 29 April 2018 (2017 was a fifty-two week reporting period which ended on 30 April 2017). 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: ´ assets and liabilities at the exchange rate at the end of the reporting period; ´ income and expenses at the average exchange rates for the reporting period; with ´ 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 2018 COLLINS FOODS LIMITED 77 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: ´ Note A2 Business combinations ´ Note F4 Property, plant and equipment ´ Note F5 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. NEW AND AMENDED STANDARDS ADOPTED BY THE GROUP The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that are relevant to their operations and effective for the first time for their annual reporting period commencing 1 May 2017. Outlined below are the new and revised Standards and amendments and interpretations effective for the current reporting period that are relevant to the Group, and the impact of their application: AASB 1048 Interpretation of Standards The Group has applied the new principal version of AASB 1048 providing an up-to-date listing of Australian Interpretations, including Interpretation 22 Foreign Currency Transactions and Advance Consideration and Interpretation 23 Uncertainty over Income Tax Treatments. The application of these amendments has had no impact on the Group’s consolidated financial statements as this is a service standard that ensures there is no difference between the status of Interpretations in the hierarchy between IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. 78 ANNUAL REPORT 2018 COLLINS FOODS LIMITED AASB 2016-1 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses The amendments clarify AASB 112 Income Taxes in regard to: ´ Unrealised losses on debt instruments measured at fair value and measured at cost for tax purposes give rise to a deductible temporary difference regardless of whether the debt instrument’s holder expects to recover the carrying amount of the debt instrument by sale or by use. ´ The carrying amount of an asset does not limit the estimation of probable future taxable profits. ´ Estimates for future taxable profits exclude tax deductions resulting from the reversal of deductible temporary differences. ´ An entity assesses a deferred tax asset in combination with other deferred tax assets. Where tax law restricts the utilisation of tax losses, an entity would assess a deferred tax asset in combination with other deferred tax assets of the same type. The application of these amendments has had no impact on the Group’s consolidated financial statements as the Group already assesses the sufficiency of future taxable profits in a way that is consistent with these amendments. AASB 2016-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107 Amends AASB 107 Statement of Cash Flows to require entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. The Group’s liabilities arising from financing activities consist of borrowings (Note C2). A reconciliation between the opening and closing balances is provided in Note B3. Consistent with the transition provisions of the amendments, the Group has not disclosed comparative information for the prior period. Apart from the additional disclosure in Note B3, the application of these amendments has had no impact on the Group’s consolidated financial statements. AASB 2017-2 Amendments to Australian Accounting Standards – Further Annual Improvements 2014-2016 Cycle Amends AASB 12 Disclosure of Interests in Other Entities to clarify that an entity need not provide summarised financial information for interests in subsidiaries, associates or joint ventures that are classified (or included in a disposal group that is classified) as held for sale. The amendments clarify that this is the only concession from the disclosure requirements of IFRS 12 for such interests. The application of these amendments has had no effect on the Group’s consolidated financial statements as none of the Group’s interests in these entities are classified, or included in a disposal group that is classified, as held for sale. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED Certain new accounting standards and interpretations have been published that are not mandatory for 29 April 2018 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below. At this stage the Group does not intend to adopt any of the following standards before the effective dates. Standards and Interpretations effective from the 2019 reporting period onwards: AASB 9 Financial Instruments This standard and the related subsequent amendments replaces AASB 139 Financial Instruments: Recognition and Measurement and applies to the classification, measurement and derecognition of financial instruments. The standard includes a single approach for the classification and measurement of financial assets, based on cash flow characteristics and the business model used for the management of the financial instruments. It introduces the expected credit loss model for impairment of financial assets which replaces the incurred loss model used in AASB 139. Lastly, the standard amends the rules on hedge accounting to more closely align the accounting treatment with the risk management practices of the business. The Group has conducted a detailed assessment of the impacts of the new standard, and the results of the impact are: ´ There is no change to the financial assets falling under the scope of AASB 139 and subsequently under the scope of AASB 9. These assets are classified as amortised cost under both standards, therefore there is insignificant impact the classification and measurement of the Group’s financial assets. ´ The financial liabilities at fair value through profit and loss currently held by the Group are almost fully designated as hedge instruments, therefore any impact of the new standard on financial liabilities is minimised by the hedge accounting treatment. ´ As a general rule, under the new standard more hedge relationships may be eligible for hedge accounting. Existing hedge relationships within the Group appear to qualify as continuing hedge relationships upon adoption of the new standard. ´ The new impairment model requires the recognition of impairment provisions based on expected credit losses rather than incurred credit losses. The assets impacted by this change are immaterial to the Group and are disclosed in Note F3. In the future this change may result in earlier recognition of credit loss provisions, however the impact when the new standard is first adopted is expected to be insignificant due to the nature of the Group’s trade receivables, the business relationship with the debtors, and having a solid history of minimal credit losses. AASB 15 Revenue from Contracts with Customers AASB 15 establishes a comprehensive framework for determining the timing and quantum of revenue recognised. It replaces existing guidance around revenue recognition requirements, including those set out in AASB 118 Revenue. The core principle of AASB 15 is that an entity shall recognise revenue when control of a good or service transfers to a customer. The standard permits either a full retrospective or a modified retrospective approach for the adoption. The Group is in the final stages of completing the assessment of the impact on its consolidated financial statements as a result of the application of the new standard. Of the total revenue disclosed in Note A3, the following impact is expected: ´ Sale of goods: The new standard will not result in a change of the timing of recognition of sale of goods revenue. ´ Franchise revenue from external parties: This revenue stream is made up of sales-based royalties (FY18: 97.5%) and franchise fees (FY18: 2.5%) payable for acquiring or renewing a franchise agreement. ´ Under the new standard, sales-based royalties will continue to be recognised over time based on when the sales occur that the royalties are derived from. This is not a change from the existing treatment. ´ Franchise fees are currently recognised in full at the commencement of a franchise agreement or renewal of an agreement. Within a franchise agreement there are several separate performance obligations throughout the term of the agreement. As revenue is required to be allocated to each performance obligation and recognised on transfer of control, the allocation of this revenue will result in a change of the timing of revenue recognition to various points across the term of the agreement. The impact of the standard will alter the timing of revenue recognition of 2.5% of the franchise revenue from external parties and less than 1% of the Group’s total revenue, resulting in an immaterial impact to revenue and the financial statements of the Group. The new standard requires certain additional disclosures in relation to revenue derived from contracts, key judgements and future revenue expected to be granted. The Group expects to adopt the modified retrospective approach to implementation, where the cumulative impact of the adoption will be recognised in retained earnings at the date of implementation of the standard (the first day of the 2019 reporting period), and comparatives will not be restated. The new standard will only be applied to contracts that remain in force at the transition date. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS H1/ Basis of preparation (continued) AASB 2016-5 Amendments to Australian Accounting Standards – Classification and Measurement of Share based Payment Transactions The amendments clarify the following: In estimating the fair value of a cash-settled share based payment, the accounting for the effects of vesting and non- vesting conditions should follow the same approach as for equity-settled share based payments. Where tax law or regulation requires an entity to withhold a specified number of equity instruments equal to the monetary value of the employee’s tax obligation to meet the employee’s tax liability which is then remitted to the tax authority, i.e. the share based payment arrangement has a ‘net settlement feature’, such an arrangement should be classified as equity- settled in its entirety, provided that the share based payment would have been classified as equity-settled had it not included the net settlement feature. A modification of a share based payment that changes the transaction from cash-settled to equity-settled should be accounted for as follows: ´ The original liability is derecognised. ´ The equity-settled share based payment is recognised at the modification date fair value of the equity instrument granted to the extent that services have been rendered up to the modification date. ´ Any difference between the carrying amount of the liability at the modification date and the amount recognised in equity should be recognised in profit or loss immediately. The application of the amendments in the future are not anticipated to have a significant impact on the Group’s consolidated financial statements as the Group does not have any cash-settled share based payment arrangements or any withholding tax arrangements with tax authorities in relation to share based payments. Interpretation 22 Foreign Currency Transactions and Advance Considerations This interpretation clarifies how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of an asset, expense or income, when consideration for that item has been paid or received in advance in a foreign currency which resulted in the recognition of a non-monetary asset or non-monetary liability. (e.g. Non- refundable deposit or plant and equipment). The Interpretation specifies that the date of transaction is the date on which the entity initially recognises the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the Interpretation requires an entity to determine the date of transaction for each payment or receipt of advance consideration. Entities can apply the Interpretation either retrospectively or prospectively. Specific transition provisions apply to prospective application. The Group is currently in the process of evaluating the impact of this pronouncement. Standards and Interpretations effective from the 2020 reporting period onwards: AASB 16 Leases The introduction of AASB 16 will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised, with the exception of short-term and low-value leases, which are instead recognised on a straight-line basis as an expense in the Income Statement. The liability recognised will initially be measured at present value of future lease payments for the lease term. Where a lease contains an extension option, the lease payments for the extension period will be included in the lease liability if the Group is reasonably certain that it will exercise the option. The liability includes variable lease payments that depend on an index or a rate, but excludes other variable lease payments, such as payments contingent on the performance of the asset e.g. Payments based on percentage of sales of the store. The right of use asset reflects the lease liability, initial direct costs and any lease payments made before the commencement date of the lease less any lease incentives and, where applicable, provision for dismantling and restoration. Depreciation of the right of use assets and interest on the lease liabilities will be recognised in the Income Statement over the lease term. The total amount of cash paid relating to leases will be separated in the Statement of Cash Flows into a principal portion (within cashflows from financing activities) and an interest portion (within cashflows from operating activities). The net increase/decrease in cash and cash equivalents will remain the same. The Standard will primarily affect the accounting for the Group’s operating leases. The majority of these leases are expected to fall under the scope of AASB 16. This will result in higher assets and liabilities on the Balance Sheet. Information on the amount of the Group’s non-cancellable operating lease commitments is disclosed in Note F1. The disclosed amounts are not discounted and do not include amounts payable for renewal options not yet exercised. It is anticipated that more than 80% of the Group’s leases will have reasonable certainty that the renewal options will be taken up. Underlying EBITDA, as disclosed in Note A1 (Segment Note) will increase as the current lease treatment under AASB 117 Leases results in the operating lease cost being charged against EBITDA, while under AASB 16 the charge will be included in depreciation and interest which are excluded from EBITDA (although included in profit before income tax). The standard must be implemented retrospectively, either with the full retrospective approach where comparatives are restated, or with the modified retrospective approach where the cumulative impact of application is recognised as at the first date of the financial year the standard is applied to. The Group expects to use the modified retrospective approach and will not restate comparative amounts for the year prior to first adoption. 80 ANNUAL REPORT 2018 COLLINS FOODS LIMITED 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: ´ 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 ´ 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. The Standard contains a number of practical expedients, one of which permits the retention of the classification of existing contracts as leases under current accounting standards instead of reassessing whether existing contracts are or contain a lease at the date of initial application of the new standard. At this stage in the impact assessment, the Group intends on applying this practical expedient. AASB 16 is expected to be the most significant of the new accounting pronouncements for the Group in terms of impact on the primary statements and on systems and processes. To date, work has focused on understanding the provisions of the standard, how it will impact the Group, establishing the population of lease contracts that will extend beyond the first date of adoption, and a review of system requirements. In FY2019, a detailed impact analysis will be completed, along with discount rate determination, and system and accounting process updates required will be addressed. Interpretation 23 Uncertainty over Income Tax Treatments Interpretation 23 clarifies the accounting for uncertainties in income taxes. The interpretation is to be applied to the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates (‘tax amounts’), when there is uncertainty over income tax treatments under AASB 112 Income Taxes. The Interpretation requires an entity to: ´ Use judgement to determine whether each tax treatment should be considered independently or whether some tax treatments should be considered together. ´ Assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so. ´ Determine tax amounts on a basis that is consistent with the tax treatment included in its income tax filings if an entity concludes that it is probable that a particular tax treatment will be accepted by the taxation authorities. ´ Determine tax amounts using the most likely amount or expected value of the tax treatment (whichever provides better predictions of the resolution of the uncertainty) If an entity concludes that it is not probable that a particular tax treatment will be accepted by the taxation authorities. The Group does not anticipate that the application of the Interpretation will have a material impact on the Group’s consolidated financial statements. There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS I/ SUBSEQUENT EVENTS I1/ Acquisition of restaurants in Australia I1/ Acquisition of restaurants in Australia On 7 May 2018 the Group acquired two KFC restaurants located in South Australia that were part of the Yum! acquisition announced on the 26 June 2017. The acquisition further strengthens the growth platform of the Group as it provides a footprint from which to grow in these new areas. The financial effects of this transaction have not been recognised at 29 April 2018. The operating results and assets and liabilities of the acquired company will be consolidated from 7 May 2018. Purchase consideration – cash paid $000 4,267 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 Provisions Net identifiable assets acquired Goodwill Net assets acquired FAIR VALUE $000 5 21 921 133 299 (67) 1,312 2,955 4,267 The goodwill is attributable to the workforce and access to an established market with opportunities for future expansion. Acquisition – related costs The acquisition related costs have been recognised in the Consolidated Income Statement (other expenses) and in operating cash flows in the Consolidated Statement of Cash Flows (payments to suppliers and employees). Refer to the KFC Australia acquisition for details of the acquisition related costs. At the time the financial statements were approved and issued, the Group has not yet completed the accounting for the acquisition. In particular, the fair values of the assets and liabilities disclosed above have only been determined provisionally as property, plant and equipment and the associated DTA are based on a draft valuation. 82 ANNUAL REPORT 2018 COLLINS FOODS LIMITED DIRECTORS’ DECLARATION In the Directors’ opinion: ´ the financial statements and notes set out on pages 36 to 82 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 29 April 2018 and of its performance for the period ended on that date; ´ 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 ´ 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 2018 ANNUAL REPORT 2018 COLLINS FOODS LIMITED 83 INDEPENDENT AUDITOR’S REPORT Independent auditor’s report To the members of Collins Foods Limited INDEPENDENT AUDITOR’S REPORT 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 29 April 2018 and of its financial performance for the reporting period then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises:        the consolidated balance sheet as at 29 April 2018 the consolidated statement of comprehensive income for the reporting period then ended the consolidated statement of changes in equity for the reporting period then ended the consolidated statement of cash flows for the reporting period then ended the consolidated income statement for the reporting period then ended 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. 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. 84 ANNUAL REPORT 2018 COLLINS FOODS LIMITED 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 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 KFC Restaurants in Australia and Europe, and Sizzler Restaurants in Australia and Asia. The Group has a corporate accounting function based in Brisbane. Materiality of the Group  For the purpose of our audit we used overall Group materiality of $2.4 million, which represents approximately 5% of the Group’s profit before tax.  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 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. Audit scope of the Group  Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events.   In establishing the overall approach to the Group audit, we determined the type of audit work that needed to be performed. Full scope audit procedures were performed over the Australian operations and the Collins Foods Europe business, assisted by local component auditors in the Netherlands. Site visits were conducted at KFC and Sizzler Restaurants in Queensland, Western Australia, Germany and the Netherlands. To be satisfied that sufficient audit evidence has been obtained on the Collins Foods Europe business for our opinion on the Group financial report as a whole, the group audit engagement team had active dialogue throughout the reporting period with the local component auditors, including issuing written ANNUAL REPORT 2018 COLLINS FOODS LIMITED 85 INDEPENDENT AUDITOR’S REPORT instructions, receiving formal interoffice reporting, as well as attending final audit clearance meetings with management and the board in the Netherlands and United Kingdom respectively.  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. 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  Carrying value of other non-current assets  Accounting for business combinations  These are further described in the Key audit matters section of our report. 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) [$417.3m] We performed a number of audit procedures in relation to goodwill, including: Collins Foods Limited recorded goodwill of $417.3m as at 29 April 2018, allocated between 3 cash generating units (‘CGUs’) being KFC Restaurants Australia, KFC Restaurants Europe and Sizzler Asia. As noted in Note F5 to the financial report, goodwill previously allocated to individual states for KFC Australia has since been aggregated at the KFC Restaurants Australia CGU level. As required by Australian Accounting Standards, at 29 April 2018, 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 Note F5, for details of the impairment test and assumptions.  Assessing the appropriateness of the Group’s determination of cash generating units (CGUs) following the reassessment performed.  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 the reporting period ending 28 April 2019 (‘FY2019’) in the calculations to the Board approved budget for FY2019. We focused on this area due to the size of the goodwill balance which has increased substantially due to business acquisitions during the period, the restructure  Comparing the actual results for the reporting period ending 29 April 2018 (‘FY2018’) with prior year forecasts to assess the historical 86 ANNUAL REPORT 2018 COLLINS FOODS LIMITED Key audit matter How our audit addressed the key audit matter in CGUs during the period and because the directors’ assessment of the ‘value in use’ of the Group’s CGUs involved judgement about the future results of the Group and the discount rate and long term growth rates applied to future cash flows. 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 comparing the cost of capital for the Group 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 models by adopting other assumptions which we viewed as reasonably possible for the FY2019 cash flow forecasts, the long term growth rate and the discount rate. We also compared the Group’s net assets as at 29 April 2018 of $332.97m to its market capitalisation of $617.3m as at 29 April 2018. Carrying value of other non-current assets (Refer to note F4 and F5) [$165.3m] Our audit procedures in relation to management’s review of each restaurant included the following procedures amongst others: Collins Foods Limited recorded fixed assets of $165.3m as at 29 April 2018. 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 $0.2m was recorded in the financial report for KFC and Sizzler Australia stores. 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  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 FY2019 in the calculations to the Board approved budget for FY2019.  Comparing the FY2018 actual results with prior year forecasts to assess the historical accuracy of the Group’s forecasting processes. ANNUAL REPORT 2018 COLLINS FOODS LIMITED 87 INDEPENDENT AUDITOR’S REPORT Key audit matter How our audit addressed the key audit matter associated risk of impairment.  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 calculations by comparing the cost of capital for the Group to market data and industry research. Accounting for business combinations (Refer to note A2) Our procedures in relation to the accounting for the business combinations included, amongst others: Collins Foods Limited completed a number of acquisitions during the period, which included:  Acquisition of 16 Netherlands Restaurants which completed on 31 August 2017, for purchase consideration of $94.2m. The provisional fair value of the net assets acquired was $16.7m and goodwill of $77.5m was recognised as part of the acquisition.  Acquisition of 5 KFC Restaurants in Western Australia, 5 KFC Restaurants in South Australia, and 14 KFC Restaurants in Tasmania which completed on 9 October 2017, 23 October 2017 and 4 December 2017 respectively for purchase consideration of $99.8m. The provisional fair value of the net assets acquired was $30.6m and goodwill of $69.2m was recognised as part of the  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 allocation of goodwill to the cash generating unit and consideration of operating and reporting segments.  Assessment of the accuracy and completeness of business combination disclosures in the financial statements. This included consideration of the aggregation of the completion of individual tranches in the one disclosure. We found that the disclosures provided the users with appropriate information to understand the nature of the 88 ANNUAL REPORT 2018 COLLINS FOODS LIMITED Key audit matter How our audit addressed the key audit matter acquisition. acquisitions. To assist in funding, a share capital raising and debt refinance occurred. We also note per note I1 that 2 additional KFC Restaurants were acquired subsequent to period end and settled on 7 May 2018. 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 any provisional accounting updates processed during the period since acquisition. Our procedures in relation to the share capital raising and debt refinance were as follows:   Testing the inputs in the retrospectively adjusted basic and diluted Earnings per Share (‘EPS’) for all financial reporting periods presented in the period end financial statements. Testing a sample of equity raising costs recognised in equity net of tax to supporting documents including invoices, and share capital raising proceeds to bank statements.  Assessment of the treatment of the refinance in light of the Australian Accounting Standards, and giving consideration to the newly signed loan agreement.  Assessment of whether previously capitalised costs were expensed in the P&L upon refinance, and tested a sample of debt refinance costs newly capitalised to supporting documents including invoices. Other information The directors are responsible for the other information. The other information comprises the information included in the Group's annual report for the reporting period ended 29 April 2018, but ANNUAL REPORT 2018 COLLINS FOODS LIMITED 89 INDEPENDENT AUDITOR’S REPORT does not include the financial report and our auditor’s report thereon. Prior to the date of this auditor's report, the other information we obtained included the Directors' Report, Shareholder Information and the Corporate Directory. We expect the remaining other information to be made available to us after the date of this auditor's report, including CEO's Report, Letter to Shareholders and Chairman's Message. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or 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 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 as identified above, 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 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. 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: 90 ANNUAL REPORT 2018 COLLINS FOODS LIMITED http://www.auasb.gov.au/auditors_responsibilities/ar1.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 33 of the directors’ report for the reporting period ended 29 April 2018. In our opinion, the remuneration report of Collins Foods Limited for the reporting period ended 29 April 2018 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 29 April 2018 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 2018 ANNUAL REPORT 2018 COLLINS FOODS LIMITED 91 SHAREHOLDER INFORMATION Shareholder information not 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 22 June 2018. 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 2,363 NUMBER OF HOLDERS OF PERFORMANCE RIGHTS – 2,964 746 516 45 6,634 14 - 8 1 23 There were 195 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: ORDINARY SHARES NUMBER HELD 550,000 480,761 478,801 473,076 414,196 412,268 405,741 85,673,600 PERCENTAGE OF ISSUED SHARES % 0.47 0.41 0.41 0.41 0.36 0.35 0.35 73.56 Brazil Farming Pty Ltd Graham Maxwell Heather Lynnette Grace UBS Nominees Pty Ltd CS Third Nominees Pty Limited Aust Executor Trustees Ltd AMP Life Limited TOTAL 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: ORDINARY SHARES PERCENTAGE OF ISSUED SHARES % NUMBER HELD BT Investment Management Limited Kevin Perkins ORDINARY SHARES NUMBER HELD PERCENTAGE 7,639,366 7,621,484 6.56 6.54 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited Kevin Perkins BNP Paribas Noms Pty Ltd BNP Paribas Nominees Pty Ltd Chrikim Pty Ltd Leendert Hoeksema and Aaltje Hoeksema BNP Paribas Noms (NZ) Ltd Hooks Enterprises Pty Ltd Chrikim Pty Ltd Ecapital Nominees Pty Limited 24,503,084 21,537,862 9,482,726 9,138,142 7,146,715 2,898,017 2,530,177 1,477,580 920,000 863,086 840,000 569,421 551,947 21.04 18.49 8.14 7.85 6.14 2.49 2.17 1.27 0.79 0.74 0.72 0.49 0.47 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 65,181 fully paid ordinary shares, if they are issued, upon the vesting of 65,181 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. 92 ANNUAL REPORT 2018 COLLINS FOODS LIMITED CORPORATE DIRECTORY DIRECTORS Robert Kaye SC, Chairman Graham Maxwell, Managing Director & CEO Newman Manion Bronwyn Morris Kevin Perkins 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 Level 1, 200 Mary Street Brisbane QLD 4000 Australia Telephone number: 1300 850 505 Outside Australia: +61 3 9415 4000 AUDITOR PricewaterhouseCoopers 480 Queen Street Brisbane QLD 4000 SECURITIES EXCHANGE LISTING Collins Foods Limited shares are listed on the Australian Securities Exchange. (ASX:CKF) WEBSITE ADDRESS www.collinsfoods.com ANNUAL REPORT 2018 COLLINS FOODS LIMITED 93 

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