Collins Foods Limited
Annual Report 2020

Plain-text annual report

23 July 2020 ASX Market Announcements Office 10 Bridge Street SYDNEY NSW 2000 Via ASX Online Dear Sir/ Madam ANNOUNCEMENT FOR RELEASE VIA MARKET ANNOUNCEMENTS PLATFORM Please find attached an announcement entitled, “Collins Foods Limited Annual Report” (Announcement) for release via the ASX Market Announcements Platform. The Announcement sets out contact details for queries relating to the Announcement. By Order of the Board Frances Finucan Company Secretary 2020 Annual Report COLLINS FOODS LIMITED COLLINS FOODS LIMITED ABN 13 151 420 781 Contents 01 Our Financial Performance 02 Our Year in Review 04 Our Brands 06 Sustainability 08 Chairman’s Message 09 CEO’s Report 11 Financial Report 13 Directors’ Report 25 Letter from the Chair of the Remuneration and Nomination Committee 26 Remuneration Report 47 Auditor’s Independence Declaration 49 Consolidated Income Statement 50 Consolidated Statement of Comprehensive Income 51 Consolidated Balance Sheet 52 Consolidated Statement of Cash Flows 53 Consolidated Statement of Changes in Equity 54 Notes to the Consolidated Financial Statements 112 Directors’ Declaration 113 Independent Auditor’s Report 119 Shareholder Information IBC Corporate Directory Key dates Tuesday, 30 June 2020 Full year results released Thursday, 16 July 2020 Final dividend record date Thursday, 30 July 2020 Final dividend payment date Sunday, 18 October 2020 FY21 Half-year end Tuesday, 1 December 2020 FY21 Half-year results released Tuesday, 8 December 2020 Interim dividend record date Friday, 18 December 2020 Interim dividend payment date Our Financial Performance Revenue 8.9% to $981.7m Statutory NPAT2 $31.3m (FY19: $901.2m) (FY19: $39.2m¹) Underlying EBITDA1 6.3% to $120.6m Underlying NPAT1 5.1% to $47.3m (FY19: $113.5m) (FY19: $45.0m) Net Operating Cashflow2 $149.3m Total FY20 Fully Franked Dividends 20.0cps (FY19: $97.5m) (FY19: 19.5cps) 1 Pre AASB 16. 2 Post AASB 16. ANNUAL REPORT 2020 COLLINS FOODS LIMITED 1 Our Year in Review We operate 295 restaurants in Australia, Germany and the Netherlands, and are the franchisor of 67 in Japan and Thailand. In FY20 we have opened 21 new restaurants. We are focused on operational excellence and the highest of health and safety standards for customers and our people. 2 ANNUAL REPORT 2020 COLLINS FOODS LIMITED We operate restaurants that resonate strongly with customers and where people are proud to work. The Group has continued to generate strong earnings growth, a testament to a great product, strong brands, and the commitment of our extraordinary team. The Company employs over 13,500 people in Australia, Germany, and the Netherlands. ANNUAL REPORT 2020 COLLINS FOODS LIMITED 3 Our Brands KFC Australia Innovations to delivery, digital and operations underpinned Same Store Sales growth as KFC Australia proved resilient through COVID-19 challenges. KFC Europe KFC Europe is focused on operational disciplines and routines to drive margin improvement, building sales momentum in Germany and driving sales through value-led offerings in the Netherlands. 1 Pre AASB 16. 4 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 240 Restaurants $791.5m Revenue 3.5% Same Store Sales growth 16.8% EBITDA margin¹ 40 Restaurants in the Netherlands and Germany PERMANENT value and snacking layers introduced in Germany $134.1m Revenue VALUE-LED focus resumed in the Netherlands Taco Bell 12 Restaurants 4-6 Restaurants planned for opening during FY21 Taco Bell continues to resonate strongly with customers, with delivery launched in 11 restaurants of the growing restaurant network. Locations: Australia Sizzler Sizzler Australia launched takeaway and home delivery services in response to dine-in restrictions of COVID-19. 9 Restaurants in Australia 1.2% Sizzler Asia royalty revenue growth 73 Restaurants in Japan and Thailand Locations: Australia, Japan, Thailand ANNUAL REPORT 2020 COLLINS FOODS LIMITED 5 Sustainability We are driven to put people at the heart of everything we do. That’s why we strive to support the communities in which we serve, be uncompromising on food quality, and improve the sustainability of our restaurants and our operations. Putting people at the heart Collins Foods is committed to a strong safety culture. Our safety management system has resulted in a reduction of LTIFR* by 36.1% across all Collins Foods’ brands since 2017. LTIFR 2017-18 20.66 2018-19 18.41 2019-20 13.20 Caring for our communities We are proud to be part of the communities we serve and our business and team members actively give back. Collins Foods’ Workplace Giving Program, Collins Foods Giving matches employee donations up to $150,000 annually. Workplace Giving Program (Contributions: 2019-20) 34% $321,000 Employee Employee Participation Rate Contributions $482,000 Total Funds $150,000 Collins Foods Contribution $11,000 Customers * LTIFR = (number of compensable lost time injuries/total hours worked) x 1,000,000. 6 ANNUAL REPORT 2020 COLLINS FOODS LIMITED We are uncompromising in our food safety practices, providing products that are both delicious and at the very highest level of quality control. We strive to consistently meet and exceed our customers' expectations. Delivering responsible and uncompromising food quality Creating sustainable restaurants We are mindful of the footprint we leave. That’s why Collins Foods, together with KFC Australia, are committed to sustainable supply relationships. KFC Australia achieved its 2020 commitment to source all fibre-based packaging from certified or recycled sources and removed all single use plastic straws mid-2020. ANNUAL REPORT 2020 COLLINS FOODS LIMITED 7 Chairman’s Message Dear Shareholders, I am delighted to report on the successful 2020 financial year (FY20), that saw Collins Foods deliver continued strong earnings and dividend growth despite the impact of COVID-19. KFC Australia restaurants performing well Collins Foods has once again shown that it operates safe and trusted brands that customers can rely on during uncertain times. This has allowed the KFC Australia business to quickly recover same store sales growth and continue its expansion into digital and delivery channels. The strength of the KFC Australia brand enabled overall same store sales growth of 3.5% despite the impact of COVID-19 in the last few months of the financial year. Throughout this challenging time, Collins Foods maintained an operational priority on the highest standards of hygiene and safety to ensure the health and well-being of customers and employees. KFC was also able to quickly pivot toward take-away channels such as drive-thru and delivery, accelerating customer shifts into those channels and recapturing lost sales from the dine-in channel. In Europe, sales were more severely impacted by COVID-19 restrictions than in Australia, but we continue to experience a steady recovery and focus on driving improved sales. During this challenging period, we have worked hard to support our teams and find innovative ways to provide value and convenience to our customers. Taco Bell sales are also recovering close to pre COVID-19 levels, and home delivery in that brand has been launched ahead of schedule in 11 of the 12 restaurants. The Taco Bell brand continues to resonate strongly with customers as we saw emphatically with our market entry into Victoria last December. We continue to make refinements to the menu, operations, and business model as we progress, and are confident the brand has a great future in Australia. As a full-service dine-in concept, Sizzler has been the brand in Collins Foods’ portfolio most impacted by the COVID-19 pandemic. Collins Foods continues to assess the non-core status of the Sizzler Australia business and closely monitor the pace of sales recovery. Sizzler Asia royalties continue to grow, but due to the impact of COVID-19 on the China restaurants, a decision was made to exit that market, leaving 67 restaurants operating in Thailand and Japan. Another record FY result Collins Foods generated another strong result in FY20. Revenue was up 8.9% to $981.7 million, reflecting further expansion of our restaurant footprint, positive same store sales growth in Australia, excellent product, ongoing marketing, and increased digital and delivery usage. A continued focus on operational excellence and efficiency improvements underpinned 6.3% growth in underlying EBITDA to $120.6 million and 5.1% growth in underlying NPAT to $47.3 million¹. Strong balance sheet We have also maintained a strong balance sheet in a turbulent environment, thanks to strong operating cashflows, effective cash management, and tight controls on capital and operational expenditures during the peak of the crisis. As a result, our Net Leverage Ratio has continued to reduce, as has our Net Debt, and we have more than ample headroom to support the payment of the final dividend, as well as to fund our exciting plans for continued growth in the years to come. The Board was pleased to declare a final FY20 fully franked dividend of 10.5 cents per share, with the total dividend for FY20 being 20.0 cents per share fully franked, up from 19.5 cents per share in FY19. 1 Pre AASB 16. 8 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Looking forward Across the KFC Australia business, we will continue to expand the delivery network and build on the consistent growth in app and e-commerce channels. In Europe, our focus for KFC is to quickly respond to the easing of restrictions and regain the pre COVID-19 sales momentum through value and snacking menu layers. At Taco Bell, we continue to focus on building the brand through new locations and bold marketing campaigns to drive top-line sales growth. Successful CEO transition I was very pleased with the orderly transition on 1 July to our new Chief Executive Officer, Drew O’Malley, that occurred as a direct result of the strong succession planning implemented at Collins Foods. Drew joined Collins Foods in 2017 as Chief Operating Officer, and has the experience and skillset required to continue driving our Group forward. The Board is confident that Drew will continue to build on the success achieved under the leadership of Graham Maxwell and the growth platform he has established. I would like to recognise and thank Graham Maxwell for his dedicated leadership of the Group over the last 6 years and congratulate him on the financial results he has driven for shareholders. During his time as Managing Director and CEO, the Group’s KFC restaurant network has grown to 240 in Australia and 41 in Germany and the Netherlands, and the Taco Bell brand has been reintroduced into Australia. We all wish Graham and his family the very best for the next chapter of their lives. New non-executive Director We also welcomed Christine Holman to the Board as an Independent Non-executive Director. She brings valuable skills and experience that complement and enhance the existing skills and experience of the Board. Collins Foods’ focus on corporate sustainability is a key underpinning of the results we have been able to achieve. It is based on four simple principles – putting people at the heart; caring for our communities; delivering responsible and uncompromising food quality; and creating sustainable restaurants. This Annual Report provides information on our sustainability initiatives and I encourage you to read about them. As indicated last year, the first modern slavery statement is on target for release during this calendar year. Thank you On behalf of the Board, I would like to thank all of our 13,500+ employees for their tremendous efforts and contributions during this challenging year. The results Collins Foods has been able to achieve, and continues to achieve, are testament to their energy, hard work and dedication to the business. I would like to thank my fellow Directors for their strategic contributions during the year and unwavering commitment and dedication during what has been an uncertain and unprecedented time. I would also like to thank all our shareholders for their support of Collins Foods over FY20, and their ongoing support. We are confident that the combination of our brands, our business model, and our people, will allow us to navigate the challenges ahead and continue to grow the business successfully. Robert Kaye SC Independent Non-executive Chairman CEO’s Report Dear Shareholders, I am both humbled and excited by the opportunity to lead the next chapter in Collins Foods’ outstanding growth story. I have been working closely with Graham Maxwell, our recently retired Managing Director and CEO, over the past 3 years, and we are in full alignment on the strategy and growth prospects of the business. Graham has done an excellent job in leading the Company over the past 6 years, and I look forward to leading the Company to new levels of growth in the years to come. FY20 was another successful year for Collins Foods, building on the momentum of previous years to deliver another strong FY result. Importantly, we have been able to do this in an incredibly challenging operating environment impacted by COVID-19, while continuing to deliver outstanding customer satisfaction, and maintaining positive employee engagement. KFC Over FY20, we continued to strengthen our position as the largest KFC operator in Australia, with our remodel and new restaurant program driving further growth. A total of 9 new restaurants were built and opened during the year, and 41 remodels completed across the network, with a capital spend of approximately $20.5 million. In Europe, we have continued to refine our KFC offering with a renewed focus on brand messaging and value to drive transactions. While sales in Europe have been impacted by COVID-19, given the lower starting base of takeaway and drive-thru channels, the pace of recovery has exceeded our expectations. Taco Bell FY20 was a year of continued expansion for the Taco Bell brand, and we continue to be encouraged by the reception of the brand amongst consumers and believe it has strong prospects for development in Australia. Financial performance In FY20, Collins Foods delivered another FY result with strong revenue and earnings growth despite the challenges of COVID-19. Our continued operational focus underpinned 8.9% growth in revenue to $981.7 million. Statutory EBITDA was up 63.5% to $175.6 million², and underlying EBITDA was up 6.3% to $120.6 million¹. Statutory NPAT decreased 7.8% to $31.3 million²; with Underlying NPAT increasing 5.1% to $47.3 million¹, reflecting growing sales volumes and cost controls that saw margins grow in KFC Australia. We have continued to generate strong cashflows, which are supporting growth initiatives, the payment of a growing dividend, and also allowing us to reduce gearing. In FY20, Net Operating cash flow was $96.4 million³, and Net Debt reduced by $9.3 million to $203.2 million, reducing our net leverage ratio from 1.87 to 1.69¹. Operational performance KFC AUSTRALIA KFC Australia continues to be a known and trusted brand – two key attributes that customers tend to favour during uncertain times. KFC Australia delivered strong results during the year, with revenue up 9.5% to $791.5 million, inclusive of the 3.5% same store sales growth as well as the addition of the 53rd week. Underlying EBITDA grew 10.6% to $132.7 million¹, with an overall EBITDA margin of 16.8%, up slightly from the prior year due to sales leverage as well as strong cost control. We built and opened 9 new restaurants during the year, bringing our restaurant count to 240. The flexibility of our operating model enabled us to pivot towards drive-thru and delivery channels efficiently during the COVID-19 dine in restrictions, providing great tasting food and great value in a contactless way to our customers . COVID-19 has accelerated the shift towards digital and delivery strategies. We currently have 137 of our 240 restaurants supporting delivery. Our digital initiatives are also well on track, with app orders nearly doubling since last year, and total e-commerce sales now at over 10% of overall sales. Investments into digital continued to improve the customer experience. We progressed the rollout of external digital menu boards for drive-thrus, an important step in maintaining the contemporary presence of our brand. We had 38 restaurants with external digital menu boards at year end and have continued to ramp this up since then. We have continued to build upon and focus on excellence in operational systems. Pleasingly, this continued to yield gains on core KPIs including guest satisfaction scores to levels well above the national average. KFC EUROPE At the end of FY20, we operated 40 restaurants in Germany and the Netherlands, with 3 net new restaurants opened during the financial year. This resulted in revenue growing by 8.3% to $134.1 million for the year. Overall same store sales for Europe were down -5.8% for the full year. Excluding the impact of COVID-19 in the last few months of the financial year, however, the same store sales growth for Europe was slightly positive at +0.1%, with Germany having continued to post positive same store sales growth for 12 consecutive months and the Netherlands market improving thanks to stronger value messaging. Overall underlying EBITDA was $6.8 million¹, at a 5.1% margin, only slightly down on the prior year, even after an incredibly challenging trading period towards the end of the second half due to COVID-19. As in Australia, we prioritised the health and wellbeing of customers and employees with operational actions, and also pivoted toward takeaway channels like drive-thru and delivery as dine-in restrictions were imposed. The key differences with Australia, however, were the lower relative strength of the brand and the lower starting base of the takeaway channels in Europe, both reflective of an earlier stage of brand development in Germany and the Netherlands. All the same, despite the still-negative same store sales numbers, the pace of recovery exceeded our expectations. As conditions improve, we expect to return to strong value and brand messaging in both countries, as well as expansion of digital and delivery efforts. We have 19 delivery restaurants across the two countries and continue to roll out digital initiatives such as kiosk and the forthcoming ‘click and collect’. 1 Pre AASB 16. 2 Post AASB 16. 3 FY20 statutory pre AASB 16. FY20 Statutory post AASB 16 Net Operating Cash Flow was $149.3 million. ANNUAL REPORT 2020 COLLINS FOODS LIMITED 9 CEO’s Report TACO BELL FY20 was a year of continued expansion for the Taco Bell brand, including a successful market launch into Victoria last December. As a relatively new brand on the market, Taco Bell does not yet have the deep roots with consumers as does KFC, and hence was more susceptible to a sales drop during COVID-19, especially the two inline restaurants in Melbourne, though the return of sales to near-pre COVID-19 levels has been encouraging. As a result of the COVID-19 crisis, we shifted our customers toward drive-thru and accelerated the launch of delivery. The launch of delivery in 11 of the 12 restaurants has been highly successful. The delivery partnership is with Menulog, leveraging the KFC relationship, and we are investigating other aggregators for expansion. To support delivery, we adapted the menu to include bigger family value meals. A couple of these value meals include the ‘Big Bell Box’ and the ‘Crunchtime deal’, and are proving a big hit with customers. We continue to be encouraged by the reception of the brand amongst consumers and believe it has strong prospects for development in Australia. SIZZLER Sizzler Australia had same store sales decline of -5.6%, with Sizzler revenues down 17.9% to $38.3 million, driven by the closure of 3 restaurants and the significant impact of COVID-19. Due to the dine-in restrictions imposed for the final few months of FY20, Sizzler was only allowed to trade on a take-away and delivery basis, which we were able to launch in just a matter of weeks. The restaurant count at the end of FY20 in Australia was 9. Overall underlying EBITDA including the Sizzler Asia business was down $1.5 million to $3.4 million, with a margin of 9.0%¹. We continue to monitor the easing of COVID-19 restrictions and the resulting performance of Sizzler restaurants closely. Royalty revenues in Sizzler Asia were up 1.2% on the prior year despite COVID-19 severely impacting royalties during the final few months of FY20. At the end of FY20, there were 73 restaurants operating in Asia. However, due to COVID-19 and since year end, all 6 remaining restaurants in China have been closed, and these are not expected to reopen. Putting people at the heart We are incredibly proud of our amazing team of managers and employees, and we work hard to make a difference in their lives. KFC encourages a heart-led culture through leadership programs like Heartstyles, offered to every restaurant manager in Australia. We are committed to a strong safety culture. Since 2017, our Safety Management System (SMS) has resulted in a reduction of the Lost Time Injury Frequency Rate (LTIFR) by 36.1% to 13.2 in FY20 across all Collins Foods’ brands. Delivering responsible and uncompromising food quality Our customers trust us to ensure that the food we serve in our restaurants is of the highest quality and in full compliance with the strictest standards of food safety. The supply chain for KFC Australia is managed by Yum! and Collins Foods is proud to support Australian manufacturers and service providers, purchasing Australian made products wherever possible. Collins Foods is committed to conducting business in an ethical, legal and socially responsible manner. The Company will release its first Modern Slavery statement later this year. Creating sustainable restaurants Collins Foods is also mindful of the footprint it leaves. That’s why we are focused on reducing our packaging and improving our recycling and waste management practices. KFC’s Global 2025 commitment is to make all customer facing plastic packaging recoverable or reusable. KFC Australia removed all single use plastic straws mid-2020, and has achieved its 2020 commitment to source all fibre-based packaging from certified or recycled sources. Key growth priorities Shareholders can expect consistency with our current strategy to maintain the health of KFC Australia, and to continue to establish KFC Europe and Taco Bell as long-term growth drivers for the business, even as we recover from COVID-19. Across the KFC Australia business, we will continue to expand the delivery network and build on the consistent growth in e-commerce channels. We are targeting 9 – 12 new restaurant builds in FY21 which will feature strengthened and streamlined operational systems and innovation to improve the customer experience. We will continue to look for ways to accelerate our growth through organic development and acquisitions wherever possible. In Europe, our focus will be to quickly respond to the easing of restrictions and regain the pre COVID-19 sales momentum in Germany, underpinned by value and snacking menu layers. At the same time, we need to quickly re-establish the value-driven pre COVID-19 campaigns in the Netherlands that saw pre COVID-19 sales trends gradually improving. We are targeting 3-4 new restaurants in Europe. At Taco Bell, we continue to focus on building the brand through new locations and bold marketing campaigns to drive top-line sales growth. We will remain flexible in the near-term around development builds in the shadow of COVID-19, however, are planning 4-6 openings in FY21, and are confident that Taco Bell will be another growth engine for Collins Foods in the years to come. Caring for our communities We are also proud to be part of the communities we serve, and our business and team members actively give back. Through our Workplace Giving program, we were able to donate $482,000 to the six charities we support – Children’s Hospital Foundation, Good Beginnings, Youngcare, Ardoch, Breast Cancer Network Australia, and Animal Welfare League Australia. Of this figure, employee donations totalled $321,000 with the remainder comprising customer donations of $11,000 and $150,000 donated by Collins Foods. I would like to thank all Collins Foods employees for their outstanding contribution this year. The results we have been able to achieve in incredibly challenging operating conditions are a testament to the passion and dedication of our extraordinary team. I am committed to ensuring that we continue to provide a great work environment to allow our people to develop and grow. Lastly, I would like to thank all of our shareholders for their support. I am excited by the opportunities I see for our businesses in Australia and Europe, with a strong KFC Australia business, and two long-term growth pillars in KFC Europe and Taco Bell in Australia. Collins Foods also partners with Yum! for the KFC Youth Foundation. Operated by Yum!, where over $2.9 million has been raised to assist the Foundation in helping build confidence among young Australians through mentorship, skills development, mental wellbeing and overcoming disadvantage. 1 Pre AASB 16. 10 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Drew O’Malley Chief Executive Officer Financial Report For the reporting period ended 3 May 2020 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 11 Contents 13 25 26 26 Directors’ Report Letter from the Chair of the Remuneration and Nomination Committee Remuneration Report Persons covered by this Remuneration Report 26 Overview of Remuneration Governance Framework 34 34 35 and Strategy Company performance Statutory Remuneration disclosures for FY20 Performance outcomes for FY20 and FY19 including STI and LTI assessment 40 Employment terms for KMP Executives 40 Non-executive Director fee rates and fee limit 42 43 43 43 Changes in KMP held equity Group Securities Trading Policy Securities Holding Policy Remuneration consultant engagement policy 44 Other remuneration related matters 44 Most recent AGM – Remuneration Report comments and voting 44 44 45 External remuneration consultant advice Indemnification and insurance of officers Proceedings on behalf of the Company 45 Non-audit services 47 49 50 51 52 53 Auditor’s Independence Declaration Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity 54 Notes to the Consolidated Financial Statements 54 54 57 59 61 62 62 63 64 A/ Financial overview A1/ Segment information A2/ Business combinations A3/ Revenue A4/ Material profit or loss B/ Cash management B1/ Cash and cash equivalents B2/ Borrowings B3/ Ratios 12 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 65 66 66 70 73 75 75 75 77 78 78 79 80 80 81 82 83 85 89 93 94 95 96 99 B4/ Dividends C/ Financial Risk Management C1/ Financial risk management C2/ Recognised fair value measurements C3/ Derivative financial instruments D/ Reward and Recognition D1/ Key management personnel D2/ Share based payments D3/ Contributed equity E/ Related Parties E1/ Investments accounted for using the equity method E2/ Related party transactions F/ Other Items F1/ Commitments for expenditure F2/ Earnings per share F3/ Receivables F4/ Property, plant and equipment F5/ Intangible assets F6/ Leases F7/ Trade and other payables F8/ Provisions F9/ Reserves F10/ Tax F11/ Auditor’s remuneration 100 F12/ Contingencies 101 G/ Group structure 101 G1/ Subsidiaries and Deed of Cross Guarantee (Amended and Restated) 105 G2/ Parent entity financial information 106 H/ Basis of preparation and other accounting policies 106 H1/ Basis of preparation 108 H2/ Changes in accounting policies 110 H3/ Other accounting policies 111 111 I/ Events occuring after the reporting period I1/ Subsequent events 112 Directors' Declaration 113 119 Independent Auditor’s Report Shareholder information IBC Corporate Directory Directors’ Report 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 3 May 2020. Directors The names of the Directors of the Company during or since the end of the financial period are as follows: Name Date of appointment Robert Kaye SC Graham Maxwell Christine Holman Newman Manion(1) Bronwyn Morris AM Kevin Perkins Russell Tate(2) 7 October 2014 25 March 2015 12 December 2019 10 June 2011 10 June 2011 15 July 2011 10 June 2011 (1) Independent, Non-executive Director, Chair of Remuneration and Nomination Committee and member of Audit and Risk Committee until 13 February 2019, Non-executive Director 14 February 2019 to 13 June 2019, Executive Director 14 June 2019 to 20 April 2020, Non-executive Director 21 April 2020 to 3 May 2020. (2) Appointed as Chair of the Remuneration and Nomination Committee, effective 13 February 2019. 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. 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 240 franchised KFC restaurants in Australia, 17 franchised KFC restaurants in Germany, 23 franchised KFC restaurants in the Netherlands and 12 franchised Taco Bell restaurant in Australia, which all compete in the quick service restaurant market. The Group owns and operates nine 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 75 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. In the casual dining market, Sizzler competes with other casual dining concepts as well as taverns and clubs, fast food and home cooking. Coronavirus (COVID-19), was declared a world-wide pandemic by the World Health Organisation in March 2020. The number one priority for the Group has been and remains the health and wellbeing of our team members and customers. The Group has worked closely with the Government, Health Bodies and our franchisor, Yum! Brands to ensure we implemented all measures to safeguard our employees and customers at each and every stage. COVID-19 had a significant impact on the operations and the financial performance of our business during the final 9 weeks of the financial period ended 3 May 2020. However, as government restrictions were imposed, the KFC and Taco Bell brands which make up the vast majority of Group revenues, were quickly able to pivot towards more contactless provision of services via drive through and delivery channels. This has enabled Group revenues to recover to pre COVID-19 levels quickly since the start of the new financial period from 4 May 2020. This is described in further detail in the Review of Underlying Operations on page 3. page 15. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 1 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 13 Directors’ Report DIRECTORS' REPORT (CONTINUED) Operating and financial review (continued) 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 2020 $m 2019 $m Change Total revenue 981.7 901.2 Earnings before interest, tax, depreciation, amortisation and impairment (EBITDA) Earnings before interest and tax (EBIT) Profit/(loss) before related income tax expense Income tax (expense) Net profit attributable to members (NPAT) Net assets Net operating cash flow 175.6 85.4 53.7 (22.4) 31.3 357.8 149.3 112.1 69.8 59.3 (20.2) 39.1 350.6 97.5 80.5 63.5 15.6 (5.7) (2.2) (7.8) 7.2 51.8 Statutory financial metrics 2020 cents per share 2019 cents per share Change Basic earnings per share (EPS) Total dividends paid/payable in relation to financial period 26.82 20.00 33.57 19.50 (6.75) .50 (1) Dividends paid/payable is inclusive of dividends declared since the end of the relevant reporting period. The Group’s total revenue increased by 8.9% to $981.7 million mainly due to like-for-like sales growth and new restaurant openings. Compared to the prior financial year, statutory EBITDA increased by $63.5 million and statutory EBIT by $15.6 million, but statutory NPAT reduced by $7.8 million. This was partially due to the introduction of AASB 16 Leases, which was adopted by the Group this financial year. Further details on the impact of AASB 16 to the financial results are shown in notes A1 and F6. In addition to the effect of adopting AASB 16, EBITDA, EBIT, NPAT and EPS were impacted by the following non-trading items: Fair value gain on debt modification Netherlands development agreement fee Makegood expenses associated with equipment from a product exit Insurance money relating to material damages Marketing expenditure redirected to digital technology KFC Europe impairment costs Derecognition of prior year tax losses Unamortised borrowing costs expensed as a result of the refinancing The consolidated NPAT effect of these non-trading items was $5.1 million. EBITDA $'000 (770) 772 366 (1,605) (2,000) - - - (3,237) EBIT $'000 (770) 772 366 (1,605) (2,000) 5,473 - - 2,236 NPAT $'000 (539) 579 256 (1,123) (1,400) 4,896 2,286 97 5,052 14 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 2 of 109 DIRECTORS' REPORT (CONTINUED) Operating and financial review (continued) In summary, from the Statutory NPAT results of $31.3 million, excluding the impact of AASB 16 of $6.2 million, impairment of right-of-use assets of $4.7 million, and the non-trading items of $5.1 million (outlined in the table above), the Group achieved a result of Underlying NPAT of $47.3 million. Underlying financial metrics excluding non-trading items and the impact of AASB 16 which occurred in the current period are as follows: Underlying financial metrics (pre AASB 16) Total revenue Earnings before interest, tax, depreciation, amortisation and impairment (Underlying EBITDA) Net profit attributable to members (Underlying NPAT) Underlying financial metrics (pre AASB 16) 2020 $m 981.7 120.6 47.3 2019 $m Change 901.2 80.5 113.5 45.0 7.0 2.3 2020 cents per share 2019 cents per share Change Earnings per share (Underlying EPS) basic 40.60 38.60 2.00 The improvement in the underlying financial metrics shown above is a reflection of the revenue growth and strong cost controls despite the challenges of COVID-19 during the final nine weeks of the financial year. Management consider that adjusting the results for non-trading items and the impact of AASB 16 allows the Group to more effectively compare underlying performance against prior periods. During COVID-19 and the final nine weeks of the financial year, the Group implemented tighter controls on costs in order to preserve cash, placing all discretionary expenditure on hold and delaying capital expenditure. This assisted with strengthening the Group’s net operating cash flow position at the financial period end. Review of underlying operations KFC AUSTRALIA The overall performance across the KFC business in Australia has been positive, despite the impact of COVID-19 during the final nine weeks of the year. Revenue in KFC Australia was up 9.5% on the prior corresponding period to $791.5 million, driven by increased restaurant numbers, as well as same store sales growth of 3.5% for the full year. The final nine weeks KFC Australia had a same store sales decline of (0.3)% as a result of the impact of COVID-19. Same store sales growth for the 44 weeks prior to COVID-19 was 4.3%. KFC Australia underlying EBITDA grew by 10.6%, up from $120.0 million to $132.7 million, with an overall underlying EBITDA margin of 16.8%. Research has shown that customers gravitate towards known and trusted brands during uncertain times, attributes strongly associated with the KFC brand in Australia. Further, the flexibility of the operating model enabled KFC Australia to pivot towards drive-thru and delivery channels during dine in restrictions, providing customers with great tasting and great value food in a contactless way. The Group currently has 137 restaurants supporting delivery, with 55 of these covered by two aggregators (Deliveroo and Menulog). In order to support growth, $27.3 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!. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 3 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 15 Directors’ Report DIRECTORS' REPORT (CONTINUED) Review of underlying operations (continued) KFC EUROPE KFC Europe contributed revenue of $134.1 million and $6.8 million in underlying EBITDA. By the end of the period, 40 restaurants were in operation, with 23 restaurants in the Netherlands and 17 in Germany. Underlying EBITDA was the same as prior year despite the impact of COVID-19 during the last nine weeks of trading. Same store sales growth for the 44 weeks prior to COVID-19 was 0.1% KFC Europe’s priority remains providing customers with great value food in a friendly and safe way. Both Germany and Netherlands also saw a shift towards drive-thru and delivery. As a result, more of the restaurants were opened up for delivery. In order to support growth, $12.2 million was spent on new restaurants, remodels and maintenance during the year. TACO BELL At the end of the period, 12 Taco Bell restaurants were in operation. Ten are located in Queensland and two located in Victoria. Taco Bell also experienced a significant channel shift towards drive-thru and delivery. Delivery was launched as a result of COVID-19 in 11 of the 12 restaurants, through one aggregator (Menulog). In order to support delivery, the Group adapted the menu to include bigger, family bundle value meals. The brand continues to receive positive customer engagement and further restaurant openings are expected in the upcoming financial year as the Group continues to invest in the Taco Bell brand. SIZZLER Revenue in Sizzler was down 17.9% on the prior corresponding period to $38.3 million, driven by the closure of three restaurants in Australia as well as the impact of COVID-19 on the last nine weeks of trading. Same store sales declined by (5.6)% for the full year, while pre COVID-19 same store sales grew by 5.3%. Sizzler’s underlying EBITDA was $3.4 million. Sizzler’s revenue and underlying EBITDA was the most impacted of the Collins Foods brands by the dine-in restrictions of COVID-19. To combat the decline, Sizzler launched home delivery services and promoted take-away during COVID-19. No growth capital was allocated to the Sizzler Australia business in this reporting period. There were nine 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 1.2% in revenue over the prior corresponding period. The operations were significantly impacted by dining restrictions as a result of COVID-19. During the current reporting period there was one restaurant opening in Thailand. There were five restaurant closures 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 building new restaurants in KFC Australia growing the sales base and refining the economic model in KFC Europe and Taco Bell, while continuing to pursue KFC acquisition opportunities where possible to supplement organic growth. The Group will continue to drive growth across the business through great value offers, product innovation as well as delivery and digital channels. In addition, organisational capability is continually being strengthened to deliver on growth. KFC AUSTRALIA The plan for the core KFC Australia business is to further strengthen and digitise operational systems, expand the digital and delivery channels, elevate people capabilities, and deliver the targeted number of new builds. KFC EUROPE In Europe, the focus will be on driving sales growth with renewed focus on value, particularly in the Netherlands, building new restaurants, and elevating organisational capability and improving profitability. 16 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 4 of 109 DIRECTORS' REPORT (CONTINUED) Strategy and future performance (continued) TACO BELL Taco Bell will continue to drive sales growth through delivery, menu composition and increased local restaurant marketing. Taco Bell will focus on revising the economic model, particularly in relation to the build cost ahead of the opening of additional restaurants. SIZZLER The Sizzler Australia business will continue to be assessed on an ongoing basis, with no further growth capital allocated to the business. 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. COVID-19 emerged as a risk to the Group in March 2020. Since the start of the global COVID-19 crisis, Collins Foods further enhanced its procedures to ensure the health and safety of its employees and customers while at the same time implementing measures to maximise sales and tightly manage costs given the challenging operating conditions. We continue to monitor the impact of COVID-19 and business as usual activity on our risk profile. During March 2020, the Group’s crisis management team was deployed across all brands and jurisdictions as the COVID-19 crisis evolved. Daily meetings were held to review the evolving situation with resulting actions being immediately taken. Frequent updates to the Board were also provided by Management. Management continues to work closely with the Government and health bodies in the various jurisdictions we operate in and following their guidelines, along with working with our franchisor, Yum! to ensure we are best caring for the health and safety of our employees and customers. The key risks faced by the Group that have the potential to affect 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. International and national regulatory bodies maintain that there is no evidence that COVID-19 is transmitted through food. Re-enforcing stringent food safety and hygiene practices during this time is the priority with the focus on illness exclusion policies, hand washing practices and hygiene and cleaning standards; • 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 Since March, there has been an increased focus on health, hygiene and social distancing practices (front of and back of house) across all brands, with staff kept up to date on a regular basis. In Australia, a COVID-19 case management tool was implemented to manage employee conditions; • 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. As part of the COVID-19 response, the Group significantly increased the frequency of communications with both restaurant employees and support centre employees. Feedback through employee surveys has confirmed that the vast majority of our employees feel supported and well informed during this unprecedented and challenging time; Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 5 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 17 Directors’ Report DIRECTORS' REPORT (CONTINUED) Key risks (continued) • 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 obligations. Metrics around brand health as part of regular marketing tracking have continued to reflect KFC’s position as a strong, trusted brand in the Australian market. Performance during the COVID-19 crisis has reflected this strength as external research indicated that consumers gravitate toward trusted, safe brands in a time of crisis, KFC’s trading performance since the onset of the crisis is testament to the brand reputation being well-regarded; • 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. During COVID-19, supply chain continuity has been maintained; • 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. The outbreak of COVID-19 and the resultant “work from home” mobilisation has increased this risk. We are managing this risk by increasing network monitoring, the deployment of multi-factor authentication and increasing communication to employees to reduce the impact of potential phishing attacks; • inability to identify and react to consumer and competitive behaviour - during COVID-19, we have responded to all government imposed restrictions and the resultant changes in customer behaviour. This has been achieved by providing our KFC and Taco Bell customers with a contactless experience via the drive-thru and delivery services; • inability to adapt, innovate and change - there is a risk that the Group’s inability to adapt, innovate and manage change may negatively influence 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. Since the COVID-19 crisis evolved, significant changes have been put in place across restaurants and moving the restaurant support centre to a fully functional work from home model within a short amount of time. Teams have shown incredible resourcefulness and commitment to finding solutions. Both KFC and Taco Bell have been able to rapidly respond to all government restrictions and provide great tasting, great value food to customers in a contactless way. Both brands have increased the level of digital communications with customers and the number of restaurants offering delivery. Sizzler Australia has also developed takeaway and delivery options for their customers. 18 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 6 of 109 DIRECTORS' REPORT (CONTINUED) DIVIDENDS Dividends paid to members during the financial period were as follows: Cents per share Total amount $000 Franked/ Unfranked Date of payment Final ordinary dividend for the financial period ended 28 April 2019 10.5 12,241 Franked 25 July 2019 Interim ordinary dividend for the financial period ended 13 October 2019 Total 9.5 20.0 11,075 Franked 17 December 2019 23,316 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 10.5 cents per ordinary share ($12.2 million) to be paid on 30 July 2020 (refer to Note B4 of the Financial Report). MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL PERIOD Subsequent to year end, the Group has become aware of potential deficiencies in work permits for certain Netherlands-based employees. Once becoming aware, the Group suspended all employees potentially at risk from employment rosters and are currently investigating thoroughly. There could be fines and penalties associated with this matter, however, the Group, given their immediate actions in addressing this issue, does not believe this exposure will be significant. The Group is not aware of any other matters or circumstances that have arisen since the end of the financial year which have significantly or may significantly affect the operations and results of the Group. 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 (refer above). 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. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 7 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 19 Directors’ Report DIRECTORS' REPORT (CONTINUED) Information on directors Robert Kaye SC LLB, LLM Experience and expertise Other current listed directorships Former listed directorships in last 3 years 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 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), HT&E Limited (HT1) and Blue Sky Alternative Investments Limited (BLA). Magontec Limited (2013 - current) Blue Sky Alternative Investments Limited (2018 - 2019) HT&E Limited (2018) Spicers Limited (2012 - 2017) UGL Limited (2015 - 2017) Special accountabilities Independent Non-executive Chair Audit and Risk Committee member Remuneration and Nomination Committee member Relevant interests in share capital issued by the Company at the date of the report 31,605 shares Graham Maxwell Experience and expertise 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 current listed directorships Former listed directorships in last 3 years None other than Collins Foods Limited None other than Collins Foods Limited Special accountabilities Managing Director and CEO Relevant interests in share capital issued by the Company at the date of the report 330,382 shares and 379,078 performance rights 20 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 8 of 109 DIRECTORS' REPORT (CONTINUED) Information on directors (continued) Christine Holman PGDipBA, MBA, GAICD Experience and expertise Christine brings more than 20 years’ of extensive commercial and Board experience across a variety of areas including mergers and acquisitions, finance, sales, technology, digital transformations and marketing to Collins Foods. Currently, Christine serves on the Board of ASX companies, CSR Ltd and Blackmores Limited and the Boards of the Moorebank Intermodal Company and Moorebank Nominees Trust (Moorebank Precinct Nominees Pty Ltd), which are Federal Government Business Enterprises. In line with her passion for cricket and preserving the heritage and history of the game and our nation, Christine also sits on the Boards of the Bradman Foundation, the ICC T20 World Cup and the State Library of NSW Foundation. Christine was previously a director of WiseTech Global Ltd, HT&E Ltd and Vocus Ltd. In her previous executive capacity, as both CFO & Commercial Director of Telstra Broadcast Services, Christine brings a deep understanding of legacy and emerging technologies supported by a detailed knowledge of strategies related to growing businesses and digital transformations. During her time in private investment management, Christine assisted management and the Board of investee companies on strategy and corporate development, mergers & acquisitions, leading due diligence teams, managing large complex commercial negotiations and developing growth opportunities. Christine holds a Master’s in Business Administration and a Post Graduate Diploma in Management from Macquarie University and is a Graduate of the Australian Institute of Company Directors’ Company Directors Course. Christine is member of the Chief Executive Women (CEW). Other current listed directorships CSR Limited (Oct 2016 - current) Blackmores Limited (Mar 2019 - current) Former listed directorships in last 3 years WiseTech Global Ltd (Dec 2018 - Oct 2019) HT&E Ltd (Nov 2015 - Dec 2018) Vocus Ltd (Aug 2017 - Nov 2017) Special accountabilities Independent Non-executive Director Audit and Risk Committee Member Remuneration and Nomination Committee Member Relevant interests in share capital issued by the Company at the date of the report Nil holding Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 9 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 21 Directors’ Report DIRECTORS' REPORT (CONTINUED) Information on directors (continued) Newman Manion Experience and expertise Newman has significant experience in the food franchise industry, obtained over a period of more than 38 years gained over 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 current listed directorships Former listed directorships in last 3 years None other than Collins Foods Limited None other than Collins Foods Limited Special accountabilities Non-executive Director Audit and Risk Committee member* Remuneration and Nomination Committee member* *not for entirety of reporting period 21,820 shares Relevant interests in share capital issued by the Company at the date of the report Bronwyn Morris AM B. Com, FCA, FAICD Experience and expertise Bronwyn has extensive experience as a Non-executive Director and Chair. She 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. Bronwyn has served on the Boards of a broad range of companies and brings strong financial and commercial experience acquired from her professional services background and various governance roles. She has a particular interest in risk management and compliance, including in regulated entities. Bronwyn has served as Chair of, or a member of, the Audit and Risk Committees and Remuneration Committees with respect to a number of her Board roles. Bronwyn is currently President and Chair of the Royal Automobile Club of Queensland Limited, and chairs its wholly-owned subsidiaries RACQ Insurance Limited and RACQ Bank. She is also Chair of Queensland Urban Utilities and is a director of Menzies Health Institute Queensland. Other current listed directorships Former listed directorships in last 3 years None other than Collins Foods Limited Watpac Limited (2015 - 2018) Special accountabilities Independent Non-executive Director Audit and Risk Committee Chair Remuneration and Nomination Committee Member Relevant interests in share capital issued by the Company at the date of the report 13,456 shares 22 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 10 of 109 DIRECTORS' REPORT (CONTINUED) Information on directors (continued) Kevin Perkins Experience and expertise 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 40 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 75% 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 current listed directorships Former listed directorships in last 3 years None other than Collins Foods Limited None other than Collins Foods Limited Special accountabilities Non-executive Director Audit and Risk Committee member Remuneration and Nomination Committee member Relevant interests in share capital issued by the Company at the date of the report 7,621,484 shares Russell Tate B. Com (Econ.) Experience and expertise Russell has more than 33 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 Executive Chair of ASX-listed Macquarie Radio Network Limited from 2009 to 2019. He is also a Director of One Big Switch Pty Ltd (since 2012). None other than Collins Foods Limited Macquarie Media Limited (since 2008, Executive Chair 2009 to 1 July 2018, Non-executive Chair from 1 July 2018) Other listed current directorships Former listed directorships in last 3 years Special accountabilities Independent Non-executive Director Remuneration and Nomination Committee Chair Audit and Risk Committee member Relevant interests in share capital issued by the Company at the date of the report 21,820 shares Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 11 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 23 Directors’ Report DIRECTORS' REPORT (CONTINUED) Information on directors (continued) 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’ experience in legal, commercial and corporate governance has been gained whilst working in legal, regulatory and company secretarial roles in Australia over 17 years. MEETING OF DIRECTORS The numbers of meetings of the Company's board of Directors and of each board committee held during the FY19 and FY20 years, and the numbers of meetings attended by each Director were: BOARD AUDIT AND RISK COMMITTEE REMUNERATION AND NOMINATION COMMITTEE Robert Kaye SC Graham Maxwell Christine Holman Newman Manion(2) Bronwyn Morris AM Christine Holman Kevin Perkins Russell Tate FY20 meetings(1) Meetings attended FY19 meetings(1) Meetings attended FY20 meetings(1) Meetings attended FY19 meetings(1) Meetings attended FY20 meetings(1) Meetings attended FY19 meetings(1) Meetings attended 15 15 9 15 15 15 15 15 15 15 8 14 14 14 14 14 9 9 ^ 9 9 9 9 9 9 9 ^ 9 9 9 9 9 6 * 2 * 6 6 6 6 6 * 2 * 6 5 6 6 5 * ^ 4 5 5 5 5 5 * ^ 4 5 5 5 5 7 * 3 * 7 7 7 7 7 * 3 * 7 7 7 7 4 * ^ 3 4 4 4 4 4 * ^ 3 4 4 4 4 (1) FY20 and FY19 meetings represents the number of meetings held during the time the Director held office or membership of a Committee during the period. (2) Resigned role as Chair of Remuneration and Nomination Committee and member of Audit and Risk Committee on 13 February 2019. Returned as member of Audit and Risk Committee and Remuneration and Nomination Committee from 21 April 2020. * Not a member of the relevant Committee. ^ Appointed during FY20, not FY19. 24 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 12 of 109 Letter from the Chair of the Remuneration and Nomination Committee DIRECTORS' REPORT (CONTINUED) ANNUAL REPORT 2020 COLLINS FOODS LIMITED 25 Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 13 of 109 Remuneration Report DIRECTORS' REPORT (CONTINUED) Remuneration report Persons covered by this Remuneration Report This Remuneration Report covers the remuneration of Non-executive Directors, the Managing Director and CEO and employees (KMP Executives) who have authority and accountability for planning, directing and controlling the activities of the consolidated entity (collectively, KMP). Further biographical information regarding KMP, is set out in either the “Director Information” section of the Director’s Report or www.collinsfoods.com. The roles and individuals addressed in this report are set out below. Name Title and Role Robert Kaye SC Independent, Non-executive Chair, Audit and Risk Committee member, Remuneration and Nomination Committee member Graham Maxwell Managing Director and CEO Christine Holman(1) Independent, Non-executive Director, Audit and Risk Committee member, Remuneration and Nomination Committee member Newman Manion(2) Executive Director, Non-executive Director, Audit and Risk Committee member and Remuneration and Nomination Committee member Bronwyn Morris AM Independent, Non-executive Director, Audit and Risk Committee Chair, Remuneration and Nomination Committee member Kevin Perkins Russell Tate Non-executive Director, Audit and Risk Committee member, Remuneration and Nomination Committee member Independent, Non-executive Director, Remuneration and Nomination Committee Chair, Audit and Risk Committee member Nigel Williams Group Chief Financial Officer (Group CFO) Drew O’Malley Chief Operations Officer, Australia (COO Australia) Dawn Linaker Chief People Officer (CPO) Mark van ‘t Loo CEO – Collins Foods Europe Ltd (CEO – CF Europe) (1) Appointed as Independent, Non-executive Director effective 12 December 2019. (2) Independent, Non-executive Director, Chair of Remuneration and Nomination Committee and member of Audit and Risk Committee until 13 February 2019, Non-executive Director 14 February 2019 to 13 June 2019, Executive Director 14 June 2019 to 20 April 2020, Non-executive Director 21 April 2020 to 3 May 2020. Overview of Remuneration Governance Framework and Strategy The performance of the Group is contingent upon the calibre of its Directors and executives. The Remuneration and Nomination Committee is accountable for making recommendations to the Board on the Group’s remuneration framework. The framework has been developed to support the following key principles: • a policy that enables the Company to attract and retain capable and experienced Directors and Executives who create value for shareholders; • rewards the achievement of both annual and long-term performance objectives appropriate to the Company's circumstances and goals; • transparency; • demonstrates a clear relationship between performance and remuneration; • motivates the KMP Executives to pursue sustainable growth and innovation aligned with shareholder’s interests; • has a key focus on prevailing market conditions; and • alignment of reward at all levels of staff, reflecting both equity of treatment and fairness to shareholders. 26 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 14 of 109 DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) In carrying out its accountabilities, the Remuneration and Nomination Committee is authorised to obtain external professional advice as it determines necessary. As at the end of the reported period, the Remuneration and Nomination Committee was comprised of Non-executive Directors only, with a majority being independent. The role and accountabilities of the Committee are outlined in the Remuneration and Nomination Committee Charter, available on the Company’s website together with other remuneration governance policies. The Board has ultimate accountability for signing off on remuneration policies, practices and outcomes. The Remuneration and Nomination Committee operated in accordance with the aims and aspirations of the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations (Principles and Recommendations) and seeks input regarding remuneration governance from a wide range of sources. These include 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. EXECUTIVE REMUNERATION The following outlines the policy that applies to KMP Executives whose remuneration is structured taking into consideration the following factors: • the Group’s key principles governing the remuneration framework and application; • the level and structure of remuneration elements offered to executives of other publicly listed Australian companies with similar financial and operational attributes; • the position and accountabilities of each KMP Executive; • market-based benchmarks reflecting the structure and level of reward and alignment to KMP performance; • the need to strike an appropriate balance between short term and long term incentives; • internal relativities and external market factors that require consideration having regard to individual contributions and shareholder expectations; • that fixed remuneration policy guidelines be set with reference to relevant market practices; • that remuneration should be reviewed annually and be made up of: - - - - - - Base Salary (BS) being salary and superannuation; Other Benefits being any cash benefits beyond Base Salary, allowances (such as car allowance), any applicable non-cash fringe benefits (such as the payment of health insurance premiums on behalf of the employee) and salary sacrifice arrangements, but excluding leave entitlements, short term and long term incentive rewards as below; Total Fixed Remuneration (TFR) the sum total of Base Salary and Other Benefits; short term incentive (STI) which provides a cash reward for performance outcomes compared to agreed annual objectives; long term incentive (LTI) which provides an equity-based reward reflective of meeting shareholder aligned reward by way of compound earnings per share growth over a three year performance period. Annual awards under the LTI program are not linked to the annual incentive; total reward (TR) which represents the sum of the above elements consisting of Total Fixed Remuneration, an annual incentive (STI) and a long term incentive (LTI) having regard to market practice, internal relativity and key drivers of shareholder returns; Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 15 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 27 Remuneration Report DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) • TR should be structured with reference to market practice and the setting in which the Company operates in various regional and global markets, having regard to both short and longer term economic and performance factors; • TR will be managed within a range that allows for the recognition of both company and individual performance while contributing to the organisation’s ability to retain and attract individuals with appropriate skills and experience to meet the organisation’s goals; • exceptions will be managed separately to ensure that individuals with particular expertise are retained in, and where required, attracted to, the business; • 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. REMUNERATION POLICY AND LINK TO PERFORMANCE The executive remuneration framework components and their links to performance outcomes are outlined below: Purpose Performance metrics Potential value Nil Positioned to reflect the market rate and individual attributes Considerations for FY 21 Reviewed in line with market positioning (comparison undertaken by independent third party). No changes for FY21. Managing Director and CEO: 50% of Base Salary for target performance, with a maximum opportunity up to 75% of Base Salary. Other KMP Executives: 40-50% of Base Salary for target performance, with a maximum opportunity up to 60-75% of Base Salary • EBITDA (pre AASB16) performance against a pre-determined target level and award scale, • improvement to Guest Experience Survey (GES) results against pre-determined target levels • weighting between the two metrics is 80% EBITDA performance and 20% GES Three year earnings per share growth performance Managing Director and CEO: 50% of Base Salary for target performance, with a maximum opportunity of 100% of Base Salary. Other KMP Executives: 25% of Base Salary for target performance, with a maximum opportunity of up to 50% of Base Salary Refer below to “Long Term Incentive Plan (LTIP)” “FY21 offers”. Remuneration component Total Fixed Remuneration STI LTI To provide competitive market salary including superannuation and Other Benefits Rewards for annual performance Reward for contribution to creation of shareholder value over the longer term FIXED REMUNERATION Total Fixed Remuneration consists of salary, superannuation contributions and Other Benefits. Fringe benefits tax on these benefits where required is incorporated in Total Fixed Remuneration. 28 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 16 of 109 DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) The Group aims to position KMP Executives generally in the third quartile of benchmarked companies’ remuneration levels and above market average, with flexibility to take into account capability, experience, and current and future value to the organisation. Fixed remuneration for KMP Executives is reviewed annually or on promotion and is benchmarked against market data for comparable roles in the market with entities of a similar size. There is no guaranteed increase to fixed remuneration included in any KMP Executive’s contract. The Company has deferred the review of Total Fixed Remuneration for KMP and senior management for FY21 until the second half of the 2020 calendar year when the Board will be in a better position to assess the ongoing social and economic impacts of COVID-19 on our business operations. VARIABLE REMUNERATION SHORT TERM INCENTIVE PLAN (STIP) Incentives under the Group’s STIP are at risk components of remuneration provided in the form of cash. The STIP entitles KMP Executives to earn an annual cash reward payment if predefined targets are achieved. The level of the incentive is set with reference to role accountabilities and Group performance. The Managing Director and CEO was offered a target based STI opportunity equivalent to 50% of Base Salary for target performance, with a maximum opportunity of up to 75% of Base Salary. Other KMP Executives were offered a target based STI equivalent to between 40% and 50% of their Base Salary for target performance with a maximum opportunity of up to 60 - 75% of the Base Salary. SHORT TERM INCENTIVE PERFORMANCE METRICS Two metrics are used to determine awards under the Company’s Short Term Incentive Plan (STIP) - EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) and GES (Guest Experience Survey). An overriding hurdle of greater than 95% of target EBITDA must be achieved to trigger any STI payment. EBITDA calculations for the purpose of calculating incentives payable under the STIP continue to be assessed on a pre-AASB16 basis. The GES measure was introduced as a secondary measure in FY19 reflecting the Group’s core belief that continued improvement in customer experiences with our brands and our people will underpin our potential for future growth. The Guest Experience Survey is the global KFC and Taco Bell measure of real customer experiences. It directly relates to the 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 two metrics, EBITDA and GES are calculated separately and have different targets, thresholds and award scales. The weighting between the two metrics for FY20 was 80% EBITDA performance and 20% GES. That weighting will continue to apply in FY21. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 17 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 29 Remuneration Report DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) Maximum opportunity: EBITDA result The award scale based upon the actual EBITDA result achieved is set out below: STANDARD % PAYOUT TABLE % EBITDA target achieved % target bonus earned 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 0 20 40 60 80 100 105 110 115 120 125 130 135 140 145 150 Maximum opportunity: GES result The award scale based upon the actual GES results achieved is set out below: STANDARD % PAYOUT TABLE % GES target achieved % target bonus earned 95 96 97 98 99 100 101 102 103 104 105 0 20 40 60 80 100 110 120 130 140 150 Delivery method for STI Calculations are performed and payments made following the end of the measurement period and the external audit of the Group’s annual audited financial report. Payments are made with PAYG deducted. Board discretion While the Board has discretion to adjust remuneration outcomes up or down to prevent any inappropriate award outcomes it chose not to exercise its discretion in respect of the 2020 financial year. 30 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 18 of 109 DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) Forfeiture STI is forfeited in the event of cessation of employment due to dismissal for cause, for reasons other than for cause and where the employee terminates their employment prior to the actual payment of the STI, fraud, defalcation or gross misconduct by the participant. LONG TERM INCENTIVE PLAN (LTIP) Currently, the LTIP is an annually offered at risk equity component of remuneration for KMP Executives and nominated senior Executives ensuring that their interests in enhancing the mid to longer term growth potential of the Company are aligned with the interests of shareholders. LONG TERM INCENTIVE PERFORMANCE METRICS Form of equity The LTIP is in the form of a performance rights plan. Rights awarded are subject to three year performance hurdles and service vesting conditions. The performance rights 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 separation). There is no entitlement to dividends during the measurement period. LTI value The Board retains discretion to determine the value of LTI to be offered each reporting period, subject to shareholder approval in relation to Directors. In prior years, the number of performance rights granted was based upon a dollar value divided by the VWAP for the five trading days prior to the date of offer which is typically after the AGM in August/ September. For performance rights to be granted in FY21 with a performance period including FY21, FY22 and FY23, the number of performance rights granted will be based upon a dollar value divided by the VWAP five trading days before and five trading days after the announcement of the Company’s audited financial results. This change was made considering independent advice, prevailing market practice and closer alignment with release of the Group financial results. Measurement Period The measurement period will include three reporting periods unless otherwise determined by the Board. 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 measurement period for FY20 offers commenced on 29 April 2019 and ends 1 May 2022 for the performance period of FY20, FY21 and FY22. The measurement period for FY21 offers commenced 4 May 2020 and ends 2 May 2023 for the performance period of FY21, FY22 and FY23. Vesting conditions The Board has discretion to set vesting conditions for each offer. Performance rights that do not vest will lapse. FY20 offers The following vesting scale applied to the performance rights offered in FY20: Performance Level Annualised EPS growth (CAGR) % of max/ stretch/ grant vesting Stretch/Maximum Between Target and Stretch Target Between Threshold and Target Threshold Below Threshold 22% >11%, <22% 11% >5.5%, <11% 5.5% <5.5% 100% Pro-rata 50% Pro-rata 25% 0% Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 19 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 31 Remuneration Report DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) FY21 offers With the assistance of an independent remuneration consultant, a review of market practice has been undertaken. To more appropriately reflect market conditions and hurdles adopted by others in similar consumer businesses, an adjustment to the Stretch/ Maximum performance level will be made for performance rights offered in FY21. The threshold and target EPS growth hurdles will not be adjusted. The following vesting scale will apply to the performance rights offered in FY21: Performance Level Annualised EPS growth (CAGR) % of max/ stretch/ grant vesting Stretch/Maximum Between Target and Stretch Target Between Threshold and Target Threshold Below Threshold 16.5% >11%, <16.5% 11% >5.5%, <11% 5.5% <5.5% 100% Pro-rata 50% Pro-rata 25% 0% EPS will be measured by calculating the compound growth in the Company’s underlying (pre AASB 16) basic EPS over the performance period. The underlying (pre AASB 16) basic EPS is disclosed in the Operating and Financial Review of the Directors Report within the Group’s annual audited financial reports. 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). Retesting The plan rules do not contemplate retesting and therefore retesting is not a feature of the Company’s current LTI offers. Amount payable for performance rights No amount is payable for performance rights. The value of rights is included in assessments of remuneration benchmarking and policy positioning. Conversion of vested performance rights Under the plan rules, the conversion of performance rights to shares occurs automatically upon vesting conditions being declared by the Board as having been met, except where the Board exercises its discretion to settle in the form of cash. Vesting is determined following receipt of the audited accounts for the relevant performance periods. No amount is payable by participants to exercise vested performance rights in respect of any grants. Disposal restrictions and other related matters 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 record 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. 32 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 20 of 109 DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) 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. Cessation of employment 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. Change of control of the Company 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. MIX OF BASE SALARY AND INCENTIVES BASED REMUNERATION AND PROPORTIONALITY The following table shows the anticipated range of remuneration mix that was offered for current KMP Executives during FY20, for target performance. Mix of remuneration (excludes Other Benefits) Managing Director and CEO Other KMP Executives Base Salary STI (at Target performance) LTI (at Target performance) 50% 25% 25% 57-61% 24-29% 14-15% The Board considers that the remuneration mix (Base Salary, STI and LTI) is appropriately weighted and: • 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 • manages the risk of short-termism inherent in 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. The same mix of Base Salary, STI and LTI is anticipated for FY21. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 21 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 33 Remuneration Report DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) 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: Short term change in shareholder value over 1 year (SP increase + dividends) Long term (cumulative) 3 years change in shareholder value FY end date Revenue $m FY20 FY19 FY18 FY17 FY16 $981.73 $901.22 $770.94 $633.56 $574.28 Profit after tax $m (2) $31.26 (3) $39.11 $32.49 $27.99 $29.12 Share price $6.94 $7.59 $5.35 $5.25 $4.02 Change in share price Dividends(1) $0.200 ($0.65) $2.24 $0.10 $1.23 $1.58 $0.180 $0.170 $0.160 $0.125 Amount ($0.450) $2.420 $0.270 $1.390 $1.705 % -6% 45% 5% 35% 70% Amount $2.24 $4.08 $3.37 $3.74 $2.47 % 43% 101% 138% 196% 130% (1) Dividends used are the cash amount (post franking). (2) Includes the impact of AASB16. (3) Excludes the impact of AASB16. Statutory Remuneration disclosures for FY20 KMP EXECUTIVE REMUNERATION The following table outlines the remuneration received by KMP Executives of the Company during FY19 and FY20 prepared according to statutory disclosure requirements and applicable accounting standards. KMP Executive remuneration for FY20 (with FY19 comparatives) is reported in four components being Base Salary (including superannuation), Other Benefits, awarded values of STI and awarded values of LTI remuneration. STI LTI(2) Name Role(s) Base Salary (incl super) Year Other benefits Total Fixed Remuneration Amount % of Total Reward Amount % of Total Reward Total Reward(5) Change in accrued leave(1) Termination benefits Managing Director and CEO Managing Director and CEO Graham Maxwell Mark van 't Loo(4) CEO - CF Europe CEO - CF Europe Group CFO Nigel Williams Group CFO Drew O’Malley COO Australia COO Australia CPO Dawn Linaker CPO 2020 $870,215 $80,541 $950,756 $352,526 27% $58,876 4% $1,362,158 $10,844 2019 2020 2019 2020 2019 2020 2019 2020 2019 $824,000 (3)$271,591 $1,095,591 $366,713 24% $52,723 $514,665 $485,551 $536,857 $474,287 $564,654 $456,308 $387,619 $382,000 - - $514,665 $485,551 - - $48,655 (3)$211,798 $46,382 $44,250 $45,971 $46,947 $585,512 $227,092 $686,085 $214,923 $611,036 $320,170 $500,558 $322,808 $433,590 $129,341 $428,947 $136,004 - - 28% 23% 34% 38% 23% 24% $16 $21,046 $17 $20,268 $15 $18,685 $11 $12,403 3% 0% 4% 0% 2% 0% 2% 0% 2% $1,515,027 $13,101 $514,681 $506,597 $812,621 $921,276 $931,221 $842,051 $562,942 $577,354 $240 $2,992 $3,093 $3,522 $2,349 $5,840 ($1,359) $12,587 - - - - - - - - - - (1) (2) The change in accrued leave includes negative amounts during the reporting periods. The negative amounts reflect leave that has been taken during the reporting period measured in accordance with AASB 119 Employee Benefits. 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 conditions, such as EPS, adjustments must be made to ensure the accounting charge matches the vesting. (3) Includes one-off discretionary cash payment approved by the Board, relating to the performance period ended 28 April 2019, paid during FY20. (4) FY20 salary converted at exchange rate of AUD $1: EURO €0.6088 (FY19: EURO €0.6323). (5) Excludes change in accrued leave balance. 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 KMP Executives. 34 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 22 of 109 DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) KMP EXECUTIVE REMUNERATION OPPORTUNITY FOR FY20 (NON-STATUTORY DISCLOSURE) The following table is provided to shareholders as an illustration of the remuneration that was offered to KMP Executives for target performance during FY20. 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. 75% of Base Salary). The maximum LTI is 100% of Base Salary for the Managing Director and CEO and 50% of Base Salary for KMP Executives. STI opportunity LTI opportunity Base Salary (incl super)(1) Base Salary as % of Total Reward Target % of Base Salary Target STI amount STI % of Total Reward Target % of Base Salary Target LTI amount LTI as % Total Reward Other Benefits Total Reward $860,000 48% 50% $430,000 24% 50% $430,000 24% $80,541 $1,800,541 Name Graham Maxwell Role (s) Managing Director Mark van 't Loo CEO - CF Europe Nigel Williams Group CFO Drew O’Malley COO Australia $554,000 Dawn Linaker CPO $394,415 €287,409 $554,000 57% 54% 55% 57% 50% €143,705 50% $277,000 50% $277,000 40% $157,766 29% 27% 27% 23% 25% €71,852 14% - €502,966 25% $138,500 14% $48,655 $1,018,155 25% $138,500 14% $46,382 $1,015,882 25% $98,604 14% $45,971 $696,756 (1) Base salary based on a 52 week period. FY20 is a 53 week period therefore actual remuneration may exceed this amount. Performance outcomes for FY20 and FY19 including STI and LTI assessment SHORT TERM INCENTIVES The tables below set out details of STI and LTI performance outcomes for FY20 and FY19 when compared to target. FY20 Company level KPI Summary Award outcomes FY20 paid FY21 Role (s) KPI Summary Weighting EBITDA (pre AASB16) Target % of target achieved Awarded Total STI award (EBITDA and GES) Managing Director and CEO EBITDA 80% $121,585,527 98.50% $239,780 $352,526 EBITDA EBITDA EBITDA EBITDA 80% $10,118,260 80% $121,585,527 80% $111,467,268 80% $121,585,527 - 98.50% 102.00% 98.50% - $154,463 $244,051 $87,975 - $227,092 $320,170 $129,341 Name Graham Maxwell Mark van ‘t Loo CEO - CF Europe Nigel Williams Group CFO Drew O’Malley COO Australia Dawn Linaker CPO Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 23 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 35 Remuneration Report DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) FY19 Company level KPI Summary Award outcomes FY19 paid FY20 Role (s) KPI Summary Weighting EBITDA Target % of target achieved Awarded Total STI award (EBITDA and GES) Managing Director and CEO EBITDA 80% $115,413,617 98.60% $219,918 $366,713 EBITDA EBITDA EBITDA EBITDA 80% $14,681,238 80% $115,413,617 80% $100,732,378 80% $115,413,617 - 98.60% 106.20% 98.60% - $128,890 $235,027 $81,562 - $214,923 $322,808 $136,004 Name Graham Maxwell Mark van ‘t Loo CEO - CF Europe Nigel Williams Group CFO Drew O’Malley COO Australia Dawn Linaker CPO The Board is of the view that EBITDA is the primary driver of value creation for shareholders in the short term. FY20 Company level KPI Summary Role (s) KPI Summary Weighting Average GES Target % of target achieved Awarded Award outcomes FY20 paid FY21 Total STI award (EBITDA and GES) Name Graham Maxwell Mark van ‘t Loo Managing Director and CEO CEO - CF Europe Nigel Williams Group CFO Drew O’Malley COO Australia Dawn Linaker CPO GES GES GES GES GES 20% 20% 20% 20% 20% 61% 67% 61% 60% 61% FY19 Company level KPI Summary 103% $112,746 $352,526 100% 103% 104% 103% - $72,629 $76,119 $41,366 - $227,092 $320,170 $129,341 Award outcomes FY19 paid FY20 Role (s) KPI Summary Weighting Average GES Target % of target achieved Awarded Total STI award (EBITDA and GES) Name Graham Maxwell Mark van ‘t Loo Managing Director and CEO CEO - CF Europe Nigel Williams Group CFO Drew O’Malley COO Australia Dawn Linaker CPO GES GES GES GES GES 20% 20% 20% 20% 20% 57% 64% 57% 56% 57% 104% $146,795 $366,713 105% 104% 105% 104% - $86,033 $87,781 $54,442 - $214,923 $322,808 $136,004 36 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 24 of 109 DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) LONG TERM INCENTIVES During the 2017 financial year grants under the long term incentive plan were made on 7 September 2016 and 29 September 2016 with performance period of FY17, FY18 and FY19 (FY17 Grant). These grants, subject to the Company’s compound EPS growth performance were capable of vesting in the 2020 financial year. Set out below is information on the securities which vested arising from the FY17 Grants made in September 2016: Name Role(s) Tranche Weighting Number eligible to vest in FY20 for FY19 completion Actual income % of max/ stretch/grant vested Number vested Vesting date VWAP $ Value of LTI that may vest (as per vesting date VWAP) Graham Maxwell Managing Director and CEO EPSG 100% 80,517 7.12% 42.4% 34,113 $8.402150 $286,623 Mark van ‘t Loo CEO - CF Europe EPSG Nigel Williams Group CFO EPSG Drew O’Malley COO Australia Dawn Linaker CPO EPSG EPSG 100% 100% 100% 100% - - - - - - 13,956 7.12% 42.4% 5,913 $8.402150 $49,682 - 8,588 - - - - - 7.12% 42.4% 3,639 $8.402150 $30,575 On 3 July 2019 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 $8.402150. The table below sets out the annualised compound EPS growth hurdles that were applicable to the FY17 Grants: Performance level Annualised EPS growth (CAGR) % of max/ stretch/grant vesting Stretch/Maximum Between Threshold and Stretch Threshold Below Threshold 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 during FY18 on 28 September 2017 and 29 November 2017 with a performance period of FY18, FY19 and FY20 (FY18 Grant), these will be eligible for vesting during FY21 after the completion of FY20. Name Role(s) Tranche Weighting Number of eligible to vest in FY21 for FY20 completion % of max/ stretch/grant vested Number eligible to vest Grant date VWAP $ Value of LTI that vested (as per grant date VWAP) Graham Maxwell Mark van ‘t Loo Managing Director and CEO CEO - CF Europe EPSG Nigel Williams Group CFO EPSG Drew O’Malley COO Australia Dawn Linaker CPO EPSG EPSG EPSG 100% 137,931 100% 137,931 $5.798228 $799,755 100% 100% 100% 100% 36,052 35,311 36,206 27,122 100% 100% 100% 100% 36,052 35,311 36,206 27,122 $5.798228 $209,038 $5.798228 $204,741 $5.798228 $209,931 $5.798228 $157,260 Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 25 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 37 Remuneration Report DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) The table below sets out the annualised compound EPS growth hurdles applicable to the FY18 Grants: Performance level Annualised EPS growth (CAGR) % of max/ stretch/grant vesting Stretch/Maximum Between target and stretch Target Below threshold and target Threshold Below Threshold 22% >11%, <22% 11% >5.5%, <11% 5.5% <5.5% LONG TERM INCENTIVE VESTING OUTCOMES FY20 (FY18 grants) 100% Pro-rata 50% Pro-rata 25% 0% Based upon the EPS growth achieved over the three year performance period (FY18-FY20), no vesting was achieved for FY18 Grants for the performance rights with a performance period commencing 1 May 2017 and ended on 3 May 2020 (Vesting Rights). VESTING RIGHTS FOR RETIRING MANAGING DIRECTOR AND CEO At the 2019 AGM, shareholders approved the granting of performance rights to the Company’s Managing Director and CEO of the last 5.5 years, Graham Maxwell, who had given 12 months’ notice of his intention to retire effective 1 July 2020. At the time, the Board had reserved it rights in relation to how these performance rights would be treated post Mr Maxwell’s employment in light of the fact that he would be working out the entire 12 months of his notice period. The Board considers Mr Maxwell to be an extremely “good leaver” having continued to demonstrate the highest levels of engagement and leadership through the entire 12 months of his notice period and at the same time being of great assistance in the transitioning of his successor, Drew O’Malley into the CEO role. Noting also that Mr Maxwell would not be eligible for any termination payment beyond accrued leave, the Board has decided that he will retain a pro-rata portion of the currently unvested performance rights he was previously granted. Those grants were: • • • 137,931 performance rights granted in FY18 for the performance period of FY18, FY19 and FY20. As noted above, the threshold performance level was not achieved over the performance period and these rights will automatically expire; 146,042 performance rights granted in FY19 for the performance period of FY19, FY20 and FY21. These rights are eligible for vesting in FY22 and Graham, having served as Managing Director and CEO for 26 months of the 36 months (72%) of the FY19-FY21 performance period will retain rights to 72%, or 105,150, performance rights; 95,105 performance rights granted in FY20 for the performance period of FY20, FY21 and FY22. These rights are eligible for vesting in FY23 and Graham, having served as Managing Director and CEO for 14 of the 36 months (39%) of the FY20 - FY22 performance period will retain rights to 39%, or 37,091, performance rights. There will be no acceleration to vesting of any of these rights. That is, in line with the position for all other holders of the above performance rights, vesting will not occur until the performance period has been completed, and only if vesting rights have been triggered. The Board also considered that in line with all other performance rights holders, a voluntary lock would not be applied to any shares issued if any performance rights are to vest in the future. 38 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 26 of 109 DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) OTHER PERFORMANCE RIGHTS INFORMATION All performance rights the vesting of which are subject to EPS growth over defined reporting periods ending in 2017 through to 2020 expire in July 2019 through to July 2022 as set out in the table below: Reporting period ended Expiry date Exercise price 3 May 2020 28 April 2019 29 April 2018 30 April 2017 26 July 2022 20 July 2021 24 July 2020 23 July 2019 Nil Nil Nil Nil There were two tranches of performance rights issued during the reporting period ended 3 May 2020. It should be noted that the fair value used for accounting purposes is not used to determine LTI allocations which adopt a volume weighted average price of the Company’s shares as described in the LTI summary above. Tranche Issue date Fair value Share price of issuance Term Dividend yield Risk free interest rate 11 12 2 October 2019 2 October 2019 $8.65 $8.65 $9.32 $9.32 3 3 2.44% 2.44% 0.74% 0.74% 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 FY21: Performance Level Annualised EPS growth (CAGR) % of max/ stretch/grant vesting Stretch/Maximum Between Target and Stretch Target Between Threshold and Target Threshold Below Threshold 22% >11%, <22% 11% >5.5%, <11% 5.5% <5.5% 100% Pro-rata 50% Pro-rata 25% 0% There were two tranches of performance rights issued during the reporting period ended 28 April 2019. The fair value at issuance date was determined using a discounted cash flow model incorporating the assumptions below. Tranche Issue date Fair value Share price of issuance Term Dividend yield Risk free interest rate 9 10 2 October 2018 3 October 2018 $5.65 $5.58 $6.19 $6.11 3 3 3% 3% 2.06% 2.06% Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 27 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 39 Remuneration Report DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) Employment terms for KMP Executives SERVICE AGREEMENTS A summary of contract terms in relation to KMP Executives is presented below: Period of Notice(1) Name Graham Maxwell Nigel Williams(3) Drew O’Malley(4) Dawn Linaker(5) Mark van 't Loo Position held at close of FY20 Duration of contract From Company From KMP Managing Director and CEO Open ended 12 months 12 months Group CFO Open ended 6 months 6 months COO Australia Open ended 12 months 12 months CPO Open ended 6 months 6 months CEO - CF Europe Open ended 6 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. (3) Increase during the reporting period from previous 3 months from both Company and KMP (4) Upon appointment as CEO, notice period changes to 12 months’ notice from either party, from 3 months from both Company and KMP. (5) Increase during reporting period from 3 months Company and 2 months from KMP 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. Non-executive Director fee rates and fee limit NON-EXECTIVE 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 accountabilities 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 accountabilities of each role fulfilled by a Director within the Board. The Company’s constitution allows for additional payments to be made to Directors where extra or special services are provided. Non-executive Director fees are managed within the current annual fees limit of $1,200,000 which was approved by shareholders at the 2019 Annual General Meeting. 40 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 28 of 109 DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) The following table outlines the Non-executive Director fee rates that were applicable during the reported period: Function Role Fee including super(1) Main Board Audit and Risk Committee; Remuneration and Nomination Committee (1) Fee is based on a 52 week period. FY20 is a 53 week period therefore actual remuneration exceeds this value. Committee Members Committee Chairs Chair (inclusive of committee memberships) Member $220,500 $105,000 $20,000 $10,000 The same fee policy rates are expected to apply for FY21, unless the Board determines to undertake a review during the period. Remuneration received by Non-executive Directors in FY19 and FY20 is disclosed below: Name Role(s) Year Committee fees Superannuation Other benefits Board and Termination benefits Total Independent, Non-executive Chairman Independent, Non-executive Chairman Independent, Non-executive Director (1) (2) (4) Executive Director, Non-executive Director Non-executive Director Independent Non-executive Director Independent Non-executive Director Non-executive Director Non-executive Director Independent Non-executive Director Independent Non-executive Director (6) Robert Kaye SC Christine Holman Newman Manion Bronwyn Morris AM Kevin Perkins Russell Tate 2020 $224,750 - 2019 $192,481 $17,518 2020 2019 $45,196 - 2020 $315,772 2019 $216,788 (3) (5) $4,255 - $8,872 $10,192 2020 $125,658 $11,937 2019 2020 2019 $116,438 $11,061 $116,350 $11,053 $105,023 $9,977 2020 $137,596 2019 $116,545 - - - - - - - - - - - - - - - - - - - - - - - - - $224,750 $209,999 $49,451 - $324,644 $226,980 $137,595 $127,499 $127,403 $115,000 $137,596 $116,545 (1) Appointed effective 12 December 2019. (2) Transitioned to the role of Executive Director effective 14 June 2019. Returned to Non-executive Director role effective 21 April. (3) Includes consulting fees of $216,910 converted at exchange rate of AUD $1: EURO €0.6088. (4) Effective 13 February 2019, Newman Manion commenced, at the request of the Board, additional duties overseeing the Group’s investment in KFC restaurants in Europe. Due to these additional duties, Mr Manion resigned from the role of Chair of the Remuneration and Nomination Committee and as a member of the Audit and Risk Committee. (5) Includes consulting fees of $109,500 for reasons referenced in (4) above. (6) Appointed as Chair of the Remuneration and Nomination Committee, effective 13 February 2019. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 29 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 41 Remuneration Report DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) Changes in KMP held equity The following table outlines the changes in the amount of equity held by KMP Executives over the reporting period: Name Security Shares Performance rights Shares Performance rights Shares Performance rights Shares Performance rights Shares Performance rights Graham Maxwell Mark van ‘t Loo Nigel Williams Drew O’Malley Dawn Linaker Total Number held at open 2020 Granted as compensation Shares issued on vesting of rights Disposal Number held at close 2020 416,269 364,490 - 75,707 14,370 92,063 - 73,425 11,378(1) 64,775 1,112,477 - 34,113 (120,000) 330,382 95,105 - 26,062 - 30,632 - 30,632 - (80,517) - - 5,913 (13,956) - - 3,639 - - - - - - - - 379,078 - 101,769 20,283 108,739 - 104,057 15,017 21,808 204,239 (8,588) (59,396) - (120,000) 77,995 1,137,320 (1) Includes 3,184 shares acquired in January 2019 which were not included in the FY19 closing balance. The following table outlines the changes in the amount of equity held directly or indirectly by Non-executive Directors over the reporting period: Name Security Number held at open 2020 Number held at close 2020 Robert Kaye, SC Christine Holman Newman Manion Bronwyn Morris AM Kevin Perkins Russell Tate Total Shares Shares Shares Shares Shares Shares 31,605 - 21,820 13,456 7,621,484 21,820 7,710,185 31,605 - 21,820 13,456 7,621,484 21,820 7,710,185 42 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 30 of 109 DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) 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: 2020 equity grants FY in which rights may vest Maximum value yet to vest Name Role Graham Maxwell Managing Director and CEO Mark van 't Loo CEO - CF Europe Nigel Williams Group CFO Drew O'Malley COO Australia Dawn Linaker CPO Group Securities Trading Policy 2021 2022 2023 2021 2022 2023 2021 2022 2023 2021 2022 2023 2021 2022 2023 ($) - $10,741 - - $18,659 - - $20,137 - - $17,513 - - $13,676 - 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. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 31 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 43 Remuneration Report DIRECTORS' REPORT (CONTINUED) Remuneration report (continued) 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 2019, 75.29% of votes cast at the meeting in favour of the adoption of the Remuneration Report. External remuneration consultant advice During the reporting period, the Board approved and engaged an external remuneration consultant 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: Egan & Associates Review of and advice on peer incentive practices evident in the market $14,700 (ex GST) Subsequent to the end of the reporting period, the remuneration consultant has also been engaged to assist with improving the remuneration report. Any fees charged in relation to this activity have been disclosed as part of the FY20 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: • as legally required, KMP remuneration recommendations may only be received from consultants who have been approved by the Board. 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. 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 satisfied include that it is confident that the policy for engaging external remuneration consultants is being adhered to and 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. 44 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 32 of 109 DIRECTORS' REPORT (CONTINUED) 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 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. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 33 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 45 Remuneration Report DIRECTORS' REPORT (CONTINUED) Non-audit services (continued) 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 Australia Firm Store sales certificates Agreed upon procedures for covenant calculations Whole Dollars 2020 $ 2019 $ 518,434 40,800 541,638 1,100,872 517,861 38,760 343,394 900,015 12,240 23,460 35,700 11,730 22,440 34,170 Total remuneration for other assurance services 1,136,572 934,185 TAXATION SERVICES PricewaterhouseCoopers Australian firm: Tax compliance services, including review of tax returns International tax consulting Network firms of PricewaterhouseCoopers Australia Tax compliance services, including review of company tax returns Total remuneration for taxation services OTHER SERVICES PricewaterhouseCoopers Australian firm Probity review of IT project Total remuneration for other services 57,000 6,324 5,665 68,989 70,466 97,351 5,587 173,404 - - 48,612 48,612 TOTAL REMUNERATION FOR SERVICES 1,205,561 1,156,201 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. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act page 48. 2001 is set out on page 36. 46 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 34 of 109 Auditor’s Independence Declaration DIRECTORS' REPORT (CONTINUED) 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 the 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 30 June 2020 Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 35 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 47 Auditor’s Independence Declaration As lead auditor for the audit of Collins Foods Limited for the period from 29 April 2019 to 3 May 2020 Auditor’s Independence Declaration (the reporting period), I declare that to the best of my knowledge and belief, there have been: As lead auditor for the audit of Collins Foods Limited for the period from 29 April 2019 to 3 May 2020 (a) (the reporting period), I declare that to the best of my knowledge and belief, there have been: no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) (a) no contraventions of any applicable code of professional conduct in relation to the audit. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and This declaration is in respect of Collins Foods Limited and the entities it controlled during the period. (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 Kim Challenor Partner PricewaterhouseCoopers Brisbane 30 June 2020 Brisbane 30 June 2020 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 PricewaterhouseCoopers, ABN 52 780 433 757 480 Queen Street, BRISBANE QLD 4000, GPO Box 150, BRISBANE QLD 4001 Liability limited by a scheme approved under Professional Standards Legislation. T: +61 7 3257 5000, F: +61 7 3257 5999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 48 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Consolidated Income Statement CONSOLIDATED INCOME STATEMENT For the reporting period ended 3 May 2020 Revenue Cost of sales Gross profit Selling, marketing and royalty expenses (1) Occupancy expenses (2) Restaurant related expenses (2) Administrative expenses (3) Other expenses (1) (4) Other income (5) Profit from continuing operations before finance income, finance costs and income tax (EBIT) Finance income Finance costs (6) Share of net profit of associates and joint ventures accounted for using the equity method Profit from continuing operations before income tax Income tax expense (7) Profit from continuing operations Notes A3 A4 A4 E1 F10 2020(8) $'000 2019(8) $'000 981,733 (465,214) 516,519 901,215 (426,444) 474,771 (208,550) (188,030) (76,449) (86,461) (55,322) (8,258) 3,952 (75,608) (86,756) (48,568) (8,381) 2,364 85,431 69,792 271 479 (32,252) (11,216) 200 53,650 278 59,333 (22,387) 31,263 (20,222) 39,111 Net profit attributable to members of Collins Foods Limited 31,263 39,111 Basic earnings Diluted earnings Weighted average basic ordinary shares outstanding Weighted average diluted ordinary shares outstanding Cents per share Cents per share 26.82 26.63 33.57 33.37 Shares Shares 116,581,244 116,504,037 117,407,285 117,190,780 F2 F2 F2 F2 (1) In the current period, certain items previously classified as other expenses, such as delivery related expenses, have been reclassified to Selling, marketing and royalty expenses. The comparative values have been reclassified to reflect this change. (2) Occupancy and restaurant related charges of $10,159,000 (2019: $4,944,000) relating to impairment of assets. In the prior reporting period, restaurant related expenses also includes $429,000 of additional depreciation due to a change in useful life on specific equipment that is associated with the exit of a product. (3) Administration expenses include fees and charges related to development agreements of $772,000 (2019: $nil). (4) Other expenses includes provisions for onerous leases and makegood expenses of $366,000 (2019: $1,310,000) and damage and expenses due to an insurance event of $76,000 (2019: $371,000). (5) Other income includes insurance recoveries of $1,681,000 (2019: $925,000) and a fair value gain on debt modification of $770,000 (2019: $nil) as a result of refinancing (refer note B2). (6) Finance costs include $21,198,000 of interest expenses relating to the application of AASB 16 (2019: $nil) (refer note H2) and $139,000 (2019: $nil) of unamortised borrowing costs, expensed as a result of refinancing (refer note B2). (7) In the current reporting period, income tax expense includes adjustments for changes in tax rates and net recognition / (derecognition) of deferred tax assets associated with tax losses of $2,286,000 (2019: $193,000). (8) The current reporting period is a 53-week period. The prior reporting period is a 52-week period. The above Consolidated Income Statement should be read in conjunction with the accompanying Notes. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 49 37 of 109 Consolidated Statement of Comprehensive Income CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the reporting period ended 3 May 2020 Net profit/loss attributable to members of Collins Foods Limited Items that may be reclassified to profit or loss Other comprehensive income / (expense): Exchange differences on translation of foreign operations Cash flow hedges Income tax relating to components of other comprehensive income Blank Other comprehensive income for the period, net of tax Notes 2020 $'000 2019 $'000 31,263 39,111 F9 F9 F10 4,963 (1,327) 398 1,039 (1,797) 539 4,034 (219) Total comprehensive income for the reporting period 35,297 38,892 Total comprehensive income for the period is attributable to: Owners of the parent 35,297 38,892 The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying Notes. 50 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 38 of 109 Consolidated Balance Sheet CONSOLIDATED BALANCE SHEET As at 3 May 2020 ASSETS Current assets Cash and cash equivalents Receivables Inventories Other assets(2) Total current assets Non-current assets Property, plant and equipment Intangible assets Right-of-use assets(3) Deferred tax assets Investments accounted for using the equity method Other assets(2) Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Lease liabilities(3) Current tax liabilities Derivative financial instruments Provisions Total current liabilities Non-current liabilities Borrowings Lease liabilities(3) Deferred tax liabilities Derivative financial instruments Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings Total equity Notes 2020(1) $'000 2019 $'000 B1 F3 F4 F5 F6 F10 F7 F6 C3 F8 B2 F6 F10 C3 F8 D3 F9 116,297 3,071 6,846 2,986 129,200 187,469 457,389 369,404 36,535 2,353 378 1,053,528 1,182,728 88,099 28,890 6,994 2,641 6,449 133,073 317,252 360,970 5,626 1,803 6,200 691,851 824,924 357,804 290,788 14,088 52,928 357,804 79,791 3,183 6,322 2,354 91,650 176,704 449,515 - 31,984 2,153 414 660,770 752,420 88,943 - 4,401 1,534 7,362 102,240 291,257 - 3,384 1,379 3,529 299,549 401,789 350,631 290,495 10,771 49,365 350,631 (1) The reporting period ended 3 May 2020 includes the impact of AASB 16. (2) In the current period, certain items previously classified as receivables, such as prepayments, have been reclassified to Other assets. The comparative values have been reclassified to reflect this change. (3) See note H2 for details about restatements for changes in accounting policies. The above Consolidated Balance Sheet should be read in conjunction with the accompanying Notes. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 39 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 51 Consolidated Statement of Cash Flows CONSOLIDATED STATEMENT OF CASH FLOWS For the reporting period ended 3 May 2020 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Goods and services taxes (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) Payments for property, plant and equipment Proceeds from sale of property, plant and equipment Payment for intangible assets Net investing cash flows Cash flows from financing activities Refinance fees paid Proceeds from borrowings - bank loan facilities Payments for lease principal Interest paid on leases 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 end of reporting period Notes 2020 $'000 2019 $'000 1,078,142 (846,000) (51,912) 312 (10,414) (20,809) 149,319 991,238 (819,891) (46,388) 437 (10,613) (17,298) 97,485 - (53,981) 479 (3,833) (57,335) (1,104) 21,219 (32,031) (20,872) (23,316) (56,104) 35,880 79,791 626 116,297 (7,534) (50,660) 15 (4,811) (62,990) - 5,534 - - (20,972) (15,438) 19,057 60,450 284 79,791 B1 A2 B2 F6 F6 B4 B1 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying Notes. 52 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 40 of 109 Consolidated Statement of Changes in Equity CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the reporting period ended 3 May 2020 2020 Contributed equity $'000 Reserves $'000 Retained earnings $'000 Total equity $'000 Notes Balance as at 28 April 2019 as originally presented 290,495 10,771 49,365 350,631 Change in accounting policy (AASB 16) H2 Restated total equity as at 29 April 2019 - 290,495 - 10,771 (4,384) 44,981 (4,384) 346,247 Profit for the reporting period Other comprehensive income Total comprehensive income for the reporting period Transactions with owners in their capacity as owners: Share based payments Dividends provided for or paid B4 - - - - - - 31,263 4,034 - 31,263 4,034 4,034 31,263 35,297 (424) - (424) - (23,316) (23,316) Performance rights vested End of the reporting period 293 290,788 (293) 14,088 - 52,928 - 357,804 2019 Notes $'000 $'000 $'000 $'000 Balance as at 29 April 2018 as originally presented Change in accounting policy (AASB 15) H2 Restated total equity at 30 April 2018 290,328 - 290,328 10,951 - 10,951 31,689 (463) 31,226 332,968 (463) 332,505 Profit for the reporting period Other comprehensive income Total comprehensive income for the reporting period Transactions with owners in their capacity as owners: Share based payments Dividends provided for or paid B4 Performance rights vested End of the reporting period - - - - - 167 - 39,111 (219) - 39,111 (219) (219) 39,111 38,892 206 - (167) - 206 (20,972) (20,972) - - 290,495 10,771 49,365 350,631 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying Notes. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 53 41 of 109 Notes to the Consolidated Financial Statements 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 combination A3/ Revenue A4/ Material profit or loss items 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 two reportable segments have been identified: KFC Restaurants Australia and KFC Restaurants Europe (competing in the quick service restaurant market). Other includes Shared Services which performs a number of administrative and management functions for the Group’s restaurants, as well as the operating segments of Taco Bell and Sizzler Restaurants, however they are not separately reportable, as they fall below the threshold requirements in the last reporting period. In the last Annual Report, Sizzler Restaurants was reported as a separate reportable operating segment, however upon review of the reporting requirements, was deemed not reportable for the 2020 reporting period, and has been grouped under Other for both the current and prior period. 54 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 42 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A1/ Segment information (continued) 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: 2020 Total segment revenue Underlying EBITDA (1) Depreciation, amortisation and impairment (excluding impact of AASB 16) (3) Finance costs - net Income tax expense KFC Restaurants Australia $'000 KFC Restaurants Europe $'000 791,496 132,780 28,167 134,112 6,791 13,176 209 -791,496 -134,112 Other (2) $'000 56,125 (19,012) 4,589 10,574 22,387 (56,125) Total $'000 981,733 120,559 45,932 10,783 22,387 -981,733 2019 $'000 $'000 $'000 $'000 Total segment revenue Underlying EBITDA (1) Depreciation, amortisation and impairment (excluding impact of AASB 16) (3) Finance costs - net Income tax expense (1) Refer below for a description and reconciliation of Underlying EBITDA. (2) Other includes: Shared Services, Sizzler and Taco Bell Restaurants. 722,572 119,984 27,767 123,801 6,801 11,554 86 54,842 (13,271) 901,215 113,514 3,058 10,651 20,222 42,379 10,737 20,222 -722,572 -123,801 (54,842) (901,215) (3) Refer below for a reconciliation to total depreciation, amortisation, and impairment of the Group. Refer to note F5 for information on impairment per asset class, per segment for the reporting period. LOCATION OF REVENUE AND NON-CURRENT ASSETS 2020 (1) Revenue Non-current assets (property, plant and equipment, intangibles, and right-of-use assets) 2019 Revenue Australia $'000 Europe $'000 Asia $'000 Total $'000 842,955 134,112 4,666 981,733 808,141 193,417 12,704 1,014,262 $'000 $'000 $'000 $'000 772,863 123,801 4,551 901,215 Non-current assets (property, plant and equipment, and intangibles) 480,667 133,076 12,476 626,219 (1) The reporting period ended 3 May 2020 includes the impact of AASB 16 (recognition of right-of-use assets) 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. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 43 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 55 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A1/ Segment information (continued) 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. Net finance costs (including the impact of derivative financial instruments) are not allocated to segments as this type of activity is driven by the central treasury function, which manages the cash position of the Group. A reconciliation of Underlying EBITDA to profit / (loss) from continuing operations before income tax is provided as follows: Underlying EBITDA (1) Finance costs - net (excluding impact of AASB 16) Depreciation (excluding impact of AASB 16) Amortisation Impact of AASB 16 Impairment of property, plant and equipment Impairment of intangible assets Impairment of right-of-use assets Share of net profit / (loss) of joint ventures accounted for using the equity method Net income from insurance claim - material damage Onerous lease Fair value gain on debt modification Other non-trading income Other one-off costs Profit before income tax from continuing operations 2020 $'000 120,559 (10,783) (37,033) (3,425) (8,945) (5,204) (270) (4,685) 200 1,605 - 770 861 - 53,650 2019 $'000 113,514 (10,737) (35,148) (2,287) - (4,576) (368) - 278 52 (1,176) - - (219) 59,333 (1) In the current reporting period, the Group elected to cease removing performance rights from Underlying EBITDA because it is no longer considered a one-off, non-trading type item. This change has been reflected in the prior reporting period comparatives. DEPRECIATION, AMORTISATION AND IMPAIRMENT The results regularly reviewed by the Board include the depreciation, amortisation and impairment expenses of Property, Plant and Equipment and Intangible Assets. These results exclude the impact of AASB 16. A reconciliation of Depreciation, amortisation and impairment (excluding the impact of AASB 16) to Total depreciation, amortisation and impairment of the Group is provided as follows: Depreciation, amortisation and impairment (excluding impact of AASB 16) Depreciation of right-of-use assets Impairment of right-of-use assets Total depreciation, amortisation, and impairment Notes A4 2020 $'000 45,932 39,517 4,685 90,134 2019 $'000 42,379 - - 42,379 56 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 44 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A2/ Business combination CURRENT PERIOD In the 2020 reporting period, there were no business combinations or adjustments to prior period business combinations. PRIOR PERIOD 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 29 KFC restaurants from Yum! Brands Inc. subsidiaries located in Western Australia, South Australia and Tasmania. 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. The restaurants were acquired across multiple accounting periods, as outlined below: • • acquisition of two restaurants in South Australia on 7 May 2018; and acquisition of one restaurant in South Australia on 6 August 2018. Details of the purchase consideration, the net assets acquired and goodwill are as follows: Purchase consideration: Cash paid $'000 7,542 The provisional fair values of the assets and liabilities of the business acquired as at the date of acquisition are as follows: Cash Inventories Property, plant and equipment Intangible assets Deferred tax asset, net Trade and other payables Net identifiable assets acquired Goodwill Net assets acquired Fair value $'000 8 40 1,508 200 276 (163) 1,869 5,673 7,542 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 Group's 2018 Annual Report, 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 Note A2 and I1 in the Group's 2018 Annual Report for further details of the acquisition related costs. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 45 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 57 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A2/ Business combination (continued) Purchase consideration - cash flow Cash consideration Less: Balances acquired Outflow of cash - investing activities As at acquisition date $'000 7,542 8 7,534 The acquired business contributed revenues of $8.6 million and Underlying EBITDA of $1.3 million to the Group for the period the stores were owned, up to 28 April 2019. If the acquisition had occurred on 30 April 2018, consolidated revenue and consolidated Underlying EBITDA for the reporting period ended 28 April 2019 would have been $902.4 million and $113.9 million respectively. ACCOUNTING POLICY The acquisition method of accounting is used to account for all business combinations regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued, or liabilities incurred or assumed at the date of exchange. Where equity instruments are issued in an acquisition, the value of the instruments is their published market price as at the date of exchange unless other valuation methods provide a more reliable measure of fair value. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Transaction costs arising from business combinations are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Consolidated Income Statement, but only after a reassessment of the identification and measurement of the net assets acquired. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. 58 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 46 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A3/ Revenue Revenue is recognised when performance obligations under relevant customer contracts are completed. Performance obligations may be completed at a point in time or over time. In the following table revenue is disaggregated by type and by timing of revenue recognition. No single customer amounts to 10% or more of the consolidated entity’s total external revenue. REVENUE TYPE 2020 Sale of goods Franchise revenue 2019 Sale of goods Franchise revenue TIMING OF REVENUE RECOGNITION 2020 At a point in time Over time 2019 At a point in time Over time ACCOUNTING POLICY Sale of Goods KFC Restaurants Australia $'000 KFC Restaurants Europe $'000 Other $'000 Total $'000 791,496 - 791,496 134,112 - 134,112 51,458 4,667 56,125 977,066 4,667 981,733 $'000 $'000 $'000 $'000 722,572 - 722,572 123,801 - 123,801 50,291 4,551 54,842 896,664 4,551 901,215 KFC Restaurants Australia $'000 KFC Restaurants Europe $'000 Other $'000 Total $'000 791,496 - 791,496 134,112 - 134,112 56,010 115 56,125 981,618 115 981,733 $'000 $'000 $'000 $'000 722,572 - 722,572 123,801 - 123,801 54,789 53 54,842 901,162 53 901,215 The Group operates a number of quick service and casual dining restaurants. The revenue from the sale of food and beverages from these restaurants is recognised when the Group sells a product to the customer. Payment of the transaction price is due immediately when the customer purchases the food and beverages. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 47 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 59 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A3/ Revenue (continued) Sale of Goods - Customer Loyalty Program The Taco Bell brand within the Group operates a loyalty program where retail customers accumulate points for purchases made, which entitle them to discounts on future purchases. Revenue from the award points is recognised when the points are redeemed or when they expire 12 months after the initial sale. A contract liability is recognised until the points are redeemed or expire. Critical judgements in allocating the transaction price The points provide a material right to customers that they would not receive without entering into a contract. Therefore, the promise to provide points to the customer is a separate performance obligation. The transaction price is allocated to the product and the points on a relative stand-alone selling price basis. Management estimates the stand-alone selling price per point on the basis of the discount granted when the points are redeemed and on the likelihood of redemption, which is based on industry knowledge given there is insufficient historical experience to draw upon at this stage of the brand in Australia. Franchise Revenue The Sizzler segment of the Group is the franchisor of the Sizzler brand in Asia. Franchise agreements are entered into where the Group allocates the right to external parties to use the Sizzler name and associated intellectual property. These contracts run for a 20-year period, with a right to renewal for an additional 20 years. Franchise agreements entitle the Group to two streams of revenue: • franchise fees: revenue relating to franchise fees is recognised over time. The transaction price allocated to these services is recognised as a contract liability at the time of the commencement of the contract and is released on a straight-line basis over the period of the contract; and • sales-based royalties: revenue relating to sales-based royalties is recognised as the subsequent sale occurs. Accounting for Costs to Fulfil a Contract Costs that relate directly to a contract with customers, generate resources used in satisfying the contract and are expected to be recovered are capitalised as costs to fulfil a contract. The asset is amortised at a pattern consistent with the recognition of the associated revenue. Other Income 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 has been established. Financing Components The Group does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust any of the transaction prices for the time value of money. 60 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 48 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A4/ Material profit or loss items The Group has identified a number of items which are material due to the significance of their nature and/or amount. These are listed separately here to provide a better understanding of the financial performance of the Group. Depreciation, amortisation and impairment Depreciation Property, plant and equipment Right-of-use assets (1) Total depreciation Amortisation Intangible assets Total amortisation Impairment Property, plant and equipment Intangible assets Right-of-use assets (1) Total impairment Notes 2020 $'000 2019 $'000 37,033 39,517 76,550 3,425 3,425 5,204 270 4,685 10,159 35,148 - 35,148 2,287 2,287 4,576 368 - 4,944 F5 Total depreciation, amortisation and impairment 90,134 42,379 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 (1) Inventories recognised as an expense Net (income)/expense on insurance claim: material damage Fair value gain on debt modification Performance rights Provision for onerous lease Costs of acquisitions expensed Net (recognition)/derecognition of tax losses and change in tax rates Net loss on disposal of property, plant and equipment (271) 32,252 31,981 (479) 11,216 10,737 242,832 20,632 14,733 278,197 - 318,623 (1,605) (770) (424) - - 2,286 170 219,178 18,879 15,641 253,698 49,624 287,561 53 - 206 1,176 59 (193) 801 (1) In the current reporting period, the Group adopted AASB 16. This resulted in leases no longer being classified as operating leases, and instead being recognised as right-of-use assets, which are depreciated, or short-term leases, which are expensed. As the Group adopted the modified retrospective method, prior period comparatives have not been restated. Refer to notes F6 and H2 for further details. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 49 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 61 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 in hand (1) 2020 $'000 2019 $'000 116,297 79,791 (1) Included in cash at bank is an amount of $2.0 million (2019: $1.7 million) that is held under lien by the bank as security for Europe lease agreements and are therefore not available to use by the Group. Reconciliation of profit after income tax to net cash inflow from operating activities Profit for the period Notes 2020 $'000 2019 $'000 31,263 39,111 Adjustments for non-cash income and expense items: Depreciation, amortisation and impairment (excluding the impact of AASB 16) Depreciation and impairment of right-of-use assets Franchise rights written off (Gain) / loss on disposal of property, plant and equipment (Gain) / loss on disposal of right-of-use assets Fair value (gain) / loss on debt modification Amortisation of borrowing costs Non-cash employee benefits expense share based payments expense Interest paid on leases classified as financing cash flows Provision for inventory write offs Provision for make good obligations Provision for employee entitlements A1 A1 F5 A4 Changes in assets and liabilities: Receivables Inventory Prepayments and other assets Share of profits of joint ventures Trade payables and accruals Income tax payable Deferred tax balances Fringe benefits tax payable Goods and services tax payable Net operating cash flows 45,932 44,202 409 774 39 (770) 641 (424) 20,872 (30) 224 590 112 (494) (1,318) (200) 5,937 2,593 (1,667) 40 594 149,319 42,011 - 368 901 - - 388 206 - 27 - (705) (507) (334) 1,648 (278) 10,649 3,369 (409) (20) 1,060 97,485 62 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 50 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) B1/ Cash and cash equivalents (continued) 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 2020 2019 Working Capital Facility $'000 10,859 26,116 36,975 Bank Loan Facility $'000 309,304 54,521 363,825 Working Capital Facility $'000 6,197 29,618 35,815 Bank Loan Facility $'000 286,704 42,372 329,076 Used (1) Unused Total (1) $674,000 (2019: $640,000) of the working capital facility has been used for bank guarantees rather than drawn down cash funding. 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 September 2019, the Group entered into a new Syndicated Facility Agreement for $265 million and €80 million, including working capital facilities. The new term of the facility is a blend of maturities with $180 million and €50 million expiring on 31 October 2022 and the remaining $85 million and €30 million expiring on 31 October 2024. 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 3 May 2020, 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. Borrowings Reconciliation This section sets out the movements in borrowings for each of the periods presented. Beginning of the reporting period Cash flows Foreign exchange adjustments End of the reporting period For further information on the Group's borrowings refer to notes C1 and C2. 2020 $'000 2019 $'000 292,261 21,219 6,009 319,489 287,650 5,534 (923) 292,261 Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 51 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 63 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) B2/ Borrowings (continued) 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 36% (2019: 38%). NET DEBT General cash at bank and on hand Borrowings Net debt NET LEVERAGE Net debt EBITDA per Syndicated Facility Agreement Net leverage 2020 $'000 2019 $'000 116,297 (319,489) (203,192) 79,791 (292,261) (212,470) 2020 $'000 2019 $'000 (203,192) (212,470) 120,562 113,531 1.69 1.87 64 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 52 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) B4/ Dividends DIVIDENDS 2020 $'000 2019 $'000 Dividends paid of $0.20 (2019: $0.18) per fully paid share 23,316 20,972 FRANKING CREDITS 2020 $'000 2019 $'000 Franking credits available for subsequent reporting periods based on a tax rate of 30.0% (2019: 30.0%) 105,751 92,309 The above amounts are calculated from 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 10.5 cents per ordinary share ($12.2 million) to be paid on 30 July 2020. 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 $12,241,031. 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. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 53 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 65 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) C/ Financial Risk Management This section provides information relating to the Group’s exposure to financial risks, how they affect the financial position and performance, and how the risks are managed. C1/ Financial risk management C2/ Recognised fair value measurements C3/ Derivative financial instruments C1/ Financial risk management The Board of Directors has delegated specific authorities to the central finance department in relation to financial risk management. The finance department identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The Board has provided written policies covering the management of interest rate risk and the use of derivative financial instruments. All significant decisions relating to financial risk management require specific approval by the Board of Directors. The Group's activities expose it to a variety of financial risks: market risk (including currency risk, interest risk and price risk), credit risk and liquidity risk. In addition, the Group manages its capital base. The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group’s activities expose it primarily to the financial risk of changes in interest rates and it utilises Swap Contracts to manage its interest rate risk exposure. The use of financial instruments is governed by the Group’s policies approved by the Board of Directors and are not entered into for speculative purposes. MARKET RISK Foreign Currency Risk During 2020 and 2019, 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. 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). Management has decided not to hedge the foreign currency risk exposure for Asia. 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 Euro 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 in Notes C1 and 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. 66 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 54 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) C1/ Financial risk management (continued) CREDIT RISK Credit risk arises from cash and cash equivalents, derivative financial instruments, deposits with banks, other trade receivables and receivables from related parties. The Group has adopted a policy of only dealing with creditworthy counterparties and in the situation of no independent rating being available, will assess the credit quality of the customer taking into account its financial position, past experience and other factors. Trade receivables consist of a small number of customers and ongoing review of outstanding balances is conducted on a periodic basis. The balance outstanding (disclosed in Note F3) is not past due, nor impaired (2019: nil past due). The credit risk on liquid funds and derivative financial instruments is limited as the counterparties are banks with high credit ratings assigned by international credit rating agencies. Related party transactions are conducted on commercial terms and conditions. Recoverability of these transactions are assessed on an ongoing basis. Credit risk further arises in relation to financial guarantees given to certain parties (refer to Notes B2 and G1 for details). LIQUIDITY RISK The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve banking facilities by continuously monitoring forecast and actual cash flows. This approach enables the Group to manage short, medium and long term funding and liquidity management as reported in Note B2. Non-interest bearing liabilities are due within six months. For maturities of interest bearing liabilities and Swap Contracts of the Group, refer to Notes C1 and C3. 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. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 55 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 67 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) C1/ Financial risk management (continued) 2020 Non-derivatives Trade payables Borrowings (excluding finance leases) Total non-derivatives Derivatives Net settled (Swap Contracts) 2019 Non-derivatives Trade payables Borrowings (excluding finance leases) Total non-derivatives Derivatives Net settled (Swap Contracts) Less than 1 year $'000 Between 1 and 2 years $'000 Between 2 and 5 years $'000 Total contractual cash flows $'000 Carrying amount (assets)/ liabilities $'000 88,099 11,184 99,283 - - 88,099 88,099 12,879 12,879 319,746 319,746 343,809 431,908 317,252 405,351 Note F7 B2 C3 2,674 1,240 623 4,537 4,444 Note $'000 $'000 $'000 $'000 $'000 F7 B2 88,943 10,273 99,216 - - 88,943 88,943 181,693 181,693 116,131 116,131 308,097 397,040 291,257 380,200 C3 1,569 1,126 296 2,991 2,913 INTEREST RATE RISK AND FOREIGN CURRENCY RISK The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk and foreign currency risk only, as the Group is not exposed to other market risks: Interest rate risk Foreign currency risk 2020 Financial assets Financial liabilities Total increase/ (decrease) -1% +1% -1% +1% Carrying amount $'000 Profit $'000 Equity $'000 Profit $'000 Equity $'000 Profit $'000 Equity $'000 Profit $'000 Equity $'000 119,368 (814) - 814 - 416,789 989 (3,020) (989) 3,020 403 (239) - 993 (403) 239 - (993) 175 (3,020) (175) 3,020 164 993 (164) (993) 68 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 56 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) C1/ Financial risk management (continued) Interest rate risk Foreign currency risk -1% +1% -10% +10% Carrying amount $'000 Profit $'000 Equity $'000 Profit $'000 Equity $'000 Profit $'000 Equity $'000 Profit $'000 Equity $'000 82,974 (559) - 559 - 388,518 831 (2,209) (831) 2,209 246 (112) - 767 (246) 112 - (767) 272 (2,209) (272) 2,209 134 767 (134) (767) 2019 Financial assets Financial liabilities Total increase/ (decrease) Interest Rate Risk Exposures - Non-Current Liabilities The following table summarises interest rate risk for the Group, together with effective interest rates as at the end of the reporting period. Floating interest rate $'000 Fixed interest maturing in: 5 years or less $'000 Non-interest bearing $'000 Notes Weighted average effective rate % Total $000 2020 Trade and other payables Borrowings - unhedged Borrowings - hedged (1) F7 B2 B2 - 141,304 - 141,304 - - 168,000 168,000 88,099 - - 88,099 88,099 141,304 168,000 397,403 - 2.4 1.0 3.4 Notes $'000 $'000 $'000 $000 % 2019 Trade and other payables Borrowings - unhedged Borrowings - hedged (1) F7 B2 B2 - 118,704 - 118,704 - - 168,000 168,000 88,943 - - 88,943 88,943 118,704 168,000 375,647 - 2.3 4.3 6.6 (1) Refer Note C3 for details of derivative financial instruments Interest Rate Risk Exposures - Current Asset Receivables The Group’s exposure to interest rate risk and the average interest rate by maturity period is set out in the following table: Trade and other receivables (non-interest bearing) CREDIT RISK 2020 $'000 2019 $'000 3,071 3,183 There is no concentration of credit risk with respect to external current and non-current receivables. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 57 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 69 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) C2/ Recognised fair value measurements FAIR VALUE HIERARCHY Judgements and estimates are made in determining the fair values of assets and liabilities that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified such assets and liabilities into the three levels prescribed under the accounting standards. 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: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; • Level 2: 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); and • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The Directors consider that the carrying amount of financial assets and financial liabilities recorded in the financial statements approximate their fair values. As at 3 May 2020, the Group has derivative financial instruments which are classified as Level 2 financial instruments. There are no Level 1 or Level 3 financial instruments. As at 28 April 2019, the Group had Level 2 financial instruments. There were no Level 1 or Level 3 financial instruments. LEVEL 2 FINANCIAL INSTRUMENTS 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. VALUATION PROCESS 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 2 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 2 inputs used by the Group are derived and evaluated as follows: • discount rates for financial assets and financial liabilities are determined using a capital asset pricing model to calculate a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the asset. Changes in Level 2 and Level 3 fair values are analysed at the end of each reporting period during the half-year valuation discussion between the Group CFO, ARC and finance department. As part of this discussion the finance department presents a report that explains the reason for the fair value movements. 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. 70 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 58 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) C2/ Recognised fair value measurements (continued) BORROWINGS The fair value of borrowings is as follows: 2020 2019 Carrying value $'000 Fair value $'000 Discount rate % Carrying amount $'000 Fair value $000 Discount rate % Bank Loan (net of borrowing costs) 317,252 276,473 6.9 291,257 257,687 6.9 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. ACCOUNTING POLICY FINANCIAL ASSETS Classification and Measurement The Group classifies its financial assets into the following categories: those to be measured subsequently at fair value (either through other comprehensive income or through the income statement) and those to be held at amortised cost. Further detail on each classification is outlined below. Classification depends on the business model for managing the financial assets and the contractual terms of the cash flows. Management determines the classification of financial assets at initial recognition. The Group’s policy with regard to financial risk management is set out in Note C1. Generally, the Group does not acquire financial assets for the purpose of selling in the short term. The Group’s business model is primarily that of ‘hold to collect’ (where assets are held in order to collect contractual cash flows). When the Group enters into derivative contracts, these transactions are designed to reduce exposures relating to assets and liabilities, firm commitments or anticipated transactions. (A) Financial Assets Held at Amortised Cost This classification applies to debt instruments which are held under a hold to collect business model and which have cash flows that meet the ‘Solely payments of principal and interest’ (SPPI) criteria. At initial recognition, trade receivables that do not have a significant financing component, are recognised at their transaction price. Other financial assets are initially recognised at fair value plus related transaction costs; they are subsequently measured at amortised cost using the effective interest method. Any gain or loss on de-recognition or modification of a financial asset held at amortised cost is recognised in the income statement. (B) Financial Assets Held at Fair Value Through Other Comprehensive Income (FVOCI) This classification applies to the following financial assets: • Debt instruments that are held under a business model where they are held for the collection of contractual cash flows and also for sale (‘Collect and sell’) and which have cash flows that meet the SPPI criteria. All movements in the fair value of these financial assets are taken through other comprehensive income, except for the recognition of impairment gains or losses, interest revenue (including transaction costs by applying the effective interest method), gains or losses arising on derecognition and foreign exchange gains and losses which are recognised in the income statement. When the financial asset is derecognised, the cumulative fair value gain or loss previously recognised in other comprehensive income is reclassified to the income statement. • Equity investments where the Group has irrevocably elected to present fair value gains and losses on revaluation in other comprehensive income. The election can be made for each individual investment however it is not applicable to equity investments held for trading. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 59 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 71 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) C2/ Recognised fair value measurements (continued) Fair value gains or losses on revaluation of such equity investments, including any foreign exchange component, are recognised in other comprehensive income. When the equity investment is derecognised, there is no reclassification of fair value gains or losses previously recognised in other comprehensive income to the income statement. Dividends are recognised in the income statement when the right to receive payment is established. (C) Financial Assets Held at Fair Value Through Profit or Loss (FVPL) This classification applies to the following financial assets, and in all cases, transactions costs are immediately expensed to the income statement: • Debt instruments that do not meet the criteria of amortised cost or fair value through other comprehensive income. Subsequent fair value gains or losses are taken to the income statement. • Equity Investments which are held for trading or where the FVOCI election has not been applied. All fair value gains or losses and related dividend income are recognised in the income statement. • Derivatives which are not designated as a hedging instrument. All subsequent fair value gains or losses are recognised in the income statement. Impairment of Financial Assets A forward looking expected credit loss (ECL) review is required for; debt instruments measured at amortised cost or held at fair value through other comprehensive income; loan commitments and financial guarantees not measured at fair value through profit or loss; lease receivables and trade receivables that give rise to an unconditional right to consideration. 72 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 60 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) C3/ Derivative financial instruments Current liabilities Interest rate swap contracts - cash flow hedges Non-current liabilities Interest rate swap contracts - cash flow hedges INSTRUMENTS USED BY THE GROUP 2020 $'000 2,641 1,803 2019 $'000 1,534 1,379 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 3 May 2020 the Group entered into the following Swap Contracts to hedge a designated portion of the interest rate exposure of the facility: • $75.0 million commencing on 31 October 2020, with a maturity date of 31 October 2022; and • $65.0 million commencing on 31 October 2020, with a maturity date of 31 October 2022. Swap Contracts currently in place cover approximately 80% (2019: 80%) of the Australian dollar denominated loan principal outstanding and are timed to expire as each loan repayment falls due. The variable rates are BBSY which at balance date was 0.29% (2019: 1.81%). 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 2020 2019 Weighted average fixed interest rate % 2.4 - 1.0 - - 3.4 $'000 140,000 - 168,000 - - 308,000 Weighted average fixed interest rate % - 2.4 - 2.2 - 4.6 $'000 - 140,000 - 28,000 - 168,000 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 3 May 2020, the Swap Contracts gave rise to payables for unrealised losses on derivative instruments of $4.4 million (2019: $2.9 million) for the Group. Management has undertaken these contracts with the Australia and New Zealand Banking Group Limited and National Australia Bank Limited which are AA rated financial institutions. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 61 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 73 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) C3/ Derivative financial instruments (continued) ACCOUNTING POLICY The Group enters into derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risks, including interest rate swaps. Derivatives are initially recognised at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. HEDGE ACCOUNTING The Group designates certain derivatives as hedging instruments in respect of foreign currency risk and interest rate risk in fair value hedges, cash flow hedges, or hedges of net investments in foreign operations as appropriate. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk, which is when the hedging relationships meet all of the hedge effectiveness requirements prescribed in AASB 9. If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio but the risk management objective for that designated hedging relationship remains the same, the Group adjusts the hedge ratio of the hedging relationship (i.e. rebalances the hedge) so that it meets the qualifying criteria again. CASH FLOW HEDGES The effective portion of changes in the fair value of derivatives and other qualifying hedging instruments that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve, limited to the cumulative change in fair value of the hedged item from inception of the hedge. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. The Group discontinues hedge accounting only when the hedging relationship (or a part thereof) ceases to meet the qualifying criteria. This includes instances when the hedging instrument expires or is sold, terminated or exercised. The discontinuation is accounted for prospectively. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in profit or loss. HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income and accumulated under the heading of foreign currency translation reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Gains and losses on the hedging instrument relating to the effective portion of the hedge accumulated in the foreign currency translation reserve are reclassified to profit or loss on the disposal or partial disposal of the foreign operation. Derivatives are only used for economic hedging purposes and not as speculative investments. However, where derivatives do not meet the hedge accounting criteria, they are classified as ‘held for trading’ for accounting purposes and are accounted for at fair value through profit or loss. They are presented as current assets or liabilities to the extent they are expected to be settled within 12 months after the end of the reporting period. 74 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 62 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 incentives Total KMP compensation Whole Dollars 2020 $ 2019 $ 4,969,845 4,892,951 17,664 153,778 58,935 5,200,222 15,419 162,878 125,125 5,196,373 Detailed remuneration disclosures are provided in the Remuneration Report included in the Directors' Report. D2/ Share based payments LONG TERM INCENTIVE PLAN - PERFORMANCE RIGHTS The Company has a Long Term Incentive Plan (LTIP) designed to provide long term incentives for certain employees, including executive directors. Under the plan, participants are granted performance rights over shares. The number of performance rights is calculated by dividing the dollar value of the participant’s long term incentive by the ASX volume weighted average price of the shares for the five trading days prior to the date of offer of the performance rights. Unless otherwise determined by the Board in its discretion, performance rights are issued for nil consideration. The amount of performance rights that will vest depends upon the achievement of certain vesting conditions, including the satisfaction of a minimum 12 month term of employment and the achievement of earnings per share (EPS) growth targets by the Company. In the event of cessation of employment within 12 months of the date of grant, unvested rights are forfeited. In the event of cessation of employment after 12 months but before the conclusion of the vesting period, unvested 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 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 LTI plan 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 (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; Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 63 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 75 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) D2/ Share based payments (continued) • 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. Set out below are summaries of performance rights issued under the LTIP: Balance at the beginning of the reporting period Vested and exercised Issued during the reporting period Lapsed during the reporting period Adjustments during the reporting period (1) Balance at the end of the reporting period (1) Adjustment to previously granted performance rights. 2020 2019 830,290 (69,589) 267,536 625,720 (44,018) 354,995 (101,239) (107,127) - 926,998 720 830,290 On 21 June 2019 following the satisfaction of the vesting conditions, 69,585 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 $8.40215. All performance rights issued during the reporting period ended 3 May 2020 have an expiry date of 26 July 2022 and were issued with an exercise price of nil. All performance rights issued during the reporting period ended 28 April 2019 have an expiry date of 20 July 2021 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 3 May 2020: • The assessed fair value of performance rights issued on 16 September 2019 was an average of $8.65. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $9.32, the term of the right, the expected dividend yield of 2.44% and the risk free interest rate for the term of the rights of 0.74%. • The assessed fair value of performance rights issued on 16 September 2019 was an average of $8.65. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $9.32, the term of the right, the expected dividend yield of 2.44% and the risk free interest rate for the term of the rights of 0.74%. There were two tranches of performance rights issued during the reporting period ended 28 April 2019: • The assessed fair value of performance rights issued on 2 October 2018 was an average of $5.65. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $6.19, the term of the right, the expected dividend yield of 3.00% and the risk free interest rate for the term of the rights of 2.06%. • The assessed fair value of performance rights issued on 3 October 2018 was an average of $5.58. The fair value at issuance date was determined using a discounted cash flow model incorporating the share price at issuance date of $6.11, the term of the right, the expected dividend yield of 3.00% and the risk free interest rate for the term of the rights of 2.06%. 76 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 64 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) D2/ Share based payments (continued) ACCOUNTING POLICY Equity settled share based payments are measured at the fair value of the equity instrument at the date of grant. The fair value of performance rights granted is recognised as an employee benefit expense with a corresponding increase in equity. The determination of fair value includes consideration of any market performance conditions and the impact of any non-vesting conditions but excludes the impact of any service and non-market performance vesting conditions. Non-market vesting conditions are included in assumptions about the number of performance rights that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of performance rights that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit and loss, with a corresponding adjustment to equity. D3/ Contributed equity EQUITY OF PARENT COMPANY Parent Entity Balance Number of ordinary shares - fully paid 116,511,655 Date 28 April 2019 Senior Executive Performance Rights Plan 3 July 2019 69,589 Balance 3 May 2020 116,581,244 ORDINARY SHARES Share capital $000 290,495 Total equity $000 290,495 293 290,788 293 290,788 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. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 65 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 77 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) E/ Related Parties This section provides information relating to the Group’s related parties and the extent of related party transactions within the Group and the impact they had on the Group’s financial performance and position. E1/ Investments accounted for using the equity method E2/ Related party transactions E1/ Investments accounted for using the equity method INTERESTS IN INDIVIDUALLY IMMATERIAL JOINT VENTURES Name of entity Place of incorporation Acronym % of ownership interest 2020 % 2019 % Sizzler China Pte Ltd Singapore SCP 50 50 Summarised Financial Information of Joint Ventures 2020 $'000 2019 $'000 Aggregate carrying amount of individually immaterial joint ventures 2,731 2,302 Aggregate amounts of the Group's share of: Profit from continuing operations Total comprehensive income ACCOUNTING POLICY 200 200 278 278 Under AASB 11 Joint Arrangements, investments in joint arrangements are classified as either joint operations or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. The Group has two joint ventures. Investments in joint ventures are accounted for using the equity method of accounting, after initially being recognised at cost in the Consolidated Balance Sheet. Under the equity method of accounting, the investments are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses of the investee in profit or loss, and the Group’s share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from joint ventures are recognised as a reduction in the carrying amount of the investment. When the Group’s share of losses in an equity accounted investment equals or exceeds its interest in the entity, including any other unsecured long term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the other entity. Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s interest in the entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of equity accounted investees have been changed where necessary to ensure consistency with the policies adopted by the Group. 78 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 66 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. OUTSTANDING BALANCES ARISING FROM SALES/PURCHASES OF GOODS AND SERVICES The following balances are outstanding at the end of the reporting period in relation to transactions with related parties: Current receivables Key management personnel TRANSACTIONS WITH RELATED PARTIES 2020 $ 2019 $ 47,911 - All transactions with related parties are conducted on commercial terms and conditions. Outstanding balances other than loans to key management personnel are unsecured and are repayable in cash. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 67 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 79 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F/ Other Items F1/ Commitments for expenditure F7/ Trade and other payables F2/ Earnings per share F3/ Receivables F8/ Provisions F9/ Reserves F4/ Property, plant and equipment F10/ Tax F5/ Intangible assets F11/ Auditor's remuneration F6/ Leases F12/ Contingencies F1/ Commitments for expenditure CAPITAL COMMITMENTS Significant capital expenditure contracted for at the end of the reporting period but not recognised as liabilities is as follows: Property, plant and equipment Right-of-use assets (1) Total commitments 2020 $'000 1,235 15,284 16,519 2019 $'000 5,648 - 5,648 (1) This represents any agreements for leases the Group has signed before year end, that have not yet proceeded to an executed lease agreement. This is the value repayable over the primary term of the lease. As there is not yet a commencement date, the values have not been discounted to present value. OPERATING LEASES The Group leases various land, buildings and motor vehicles expiring within six months to 20 years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. From 29 April 2019, the Group has recognised right-of-use assets for these leases, except for short-term and low-value leases, see note F6 and note H2 for further information. 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 2020 $'000 2019 $'000 - - - - - - 56,198 153,635 91,013 300,846 (19,930) 280,916 80 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 68 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F2/ Earnings per share 2020 2019 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 Weighted average number of ordinary shares for the purpose of diluted earnings 26.82 26.63 33.57 33.37 31,263 116,581,244 117,407,285 39,111 116,504,037 117,190,780 Weighted Average Number of Share Used As The Denominator 2020 Shares 2019 Shares Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 116,581,244 116,504,037 Adjustments for calculation of diluted earnings per share: Performance rights 826,041 686,743 Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted earnings per share 117,407,285 117,190,780 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. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 69 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 81 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F3/ Receivables Current Assets - Receivables Trade receivables Other receivables ACCOUNTING POLICY 2020 $'000 3,070 1 3,071 2019 $'000 3,142 41 3,183 Trade receivables are amounts due for goods or services performed in the ordinary course of business. They are generally due for settlement within 30 days and therefore are all classified as current. Trade receivables are recognised initially at the amount of consideration that is unconditional unless they contain significant financing components, when they are recognised at fair value. The Group holds the trade receivables with the objective to collect the contractual cash flows and therefore measures them subsequently at amortised cost using the effective interest method. IMPAIRMENT OF TRADE RECEIVABLES The Group applies the AASB 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. The expected loss rates are based on the payment profiles of receivables over a period of 36 months before 3 May 2020 or 28 April 2019 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The Group has identified the GDP and the unemployment rate of the countries in which it sells its goods and services to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors. 82 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 70 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F4/ Property, plant and equipment Land & Buildings $'000 Leasehold improvements $'000 Plant and equipment $'000 Construction in progress $'000 Total $'000 At 29 April 2019 Cost or fair value Accumulated depreciation 14,024 226,644 (259) (120,680) Net book amount at 29 April 2019 13,765 105,964 Additions Transfers Depreciation charge Impairment charge (1) Disposals Exchange differences Net book amount at 3 May 2020 At 3 May 2020 Cost or fair value Accumulated depreciation Net book amount at 3 May 2020 130,336 (80,589) 49,747 3,253 15,871 (15,327) (1,061) (197) 913 53,199 7,228 378,232 - (201,528) 7,228 176,704 45,707 (45,328) - - (623) 94 7,078 51,724 (210) (37,033) (5,204) (1,232) 2,720 187,469 - - (366) - (231) - 13,168 2,764 29,247 (21,340) (4,143) (181) 1,713 114,024 13,774 (606) 13,168 256,296 (142,272) 114,024 143,273 (90,074) 53,199 7,078 - 7,078 420,421 (232,952) 187,469 Land & Buildings $'000 Leasehold improvements $'000 Plant and equipment $'000 Construction in progress $'000 Total $'000 At 30 April 2018 Cost or fair value Accumulated depreciation Net book amount at 30 April 2018 6,735 (124) 6,611 199,096 (99,616) 99,480 119,485 (70,427) 49,058 9,638 141 9,779 334,954 (170,026) 164,928 Additions 1,329 8,571 7,086 34,934 51,920 Acquisitions through controlled entity purchased Transfers Depreciation charge Impairment charge (1) Disposals Exchange differences Net book amount at 28 April 2019 At 28 April 2019 Cost or fair value Accumulated depreciation Net book amount at 28 April 2019 (1) Included in Note F5 is the breakdown of impairments. - 5,996 (171) - - - 13,765 1,214 20,035 (19,640) (3,221) (221) (254) 105,964 294 10,557 (15,337) (1,355) (575) 19 49,747 - (37,552) - - (120) 187 7,228 1,508 (964) (35,148) (4,576) (916) (48) 176,704 14,024 (259) 13,765 226,644 (120,680) 105,964 130,336 (80,589) 49,747 7,228 - 7,228 378,232 (201,528) 176,704 Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 71 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 83 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F4/ Property, plant and equipment (continued) 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: Asset classes Method Buildings Leasehold improvements: Buildings Other leasehold improvements Plant and equipment Motor vehicles Straight Line Straight Line Straight Line Straight Line Straight Line Average Life 20 years 20 years or term of the lease(1) Primary term of lease(2) 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. 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. 84 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 72 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F5/ Intangible assets Goodwill $'000 Franchise rights $'000 Brand names $'000 Software $'000 Total $'000 At 28 April 2019 Cost Accumulated amortisation Net book amount at 28 April 2019 Additions Transfers Amortisation Impairment charge (1) Disposals 452,455 (28,070) 424,385 - - - - - Exchange differences Net book amount at 3 May 2020 6,776 431,161 16,425 (5,638) 10,787 1,757 77 (1,315) (270) (409) 175 10,802 29,058 (17,905) 11,153 - - 6,047 (2,857) 3,190 2,078 133 503,985 (54,470) 449,515 3,835 210 (955) (1,155) (3,425) - - 1,052 11,250 - (21) (49) 4,176 (270) (430) 7,954 457,389 At 3 May 2020 Cost Accumulated amortisation Net book amount at 3 May 2020 459,231 (28,070) 431,161 17,819 (7,017) 10,802 33,585 (22,335) 11,250 8,157 (3,981) 4,176 518,792 (61,403) 457,389 Goodwill $'000 Franchise rights $'000 Brand names $'000 Software $'000 Total $'000 At 30 April 2018 Cost Accumulated amortisation Net book amount at 30 April 2018 447,503 (28,070) 419,433 14,035 (4,245) 9,790 28,253 (17,016) 11,237 28 (28) - 489,819 (49,359) 440,460 Additions - 2,212 Acquisitions through controlled entity purchased Transfers Amortisation Impairment charge (1) Exchange differences Net book amount at 28 April 2019 At 28 April 2019 Cost Accumulated amortisation Net book amount at 28 April 2019 (1) Included in Note F5 is the breakdown of impairments. 5,673 - - - (721) 424,385 200 - (1,025) (368) (22) 10,787 - - - (889) - 805 11,153 2,599 4,811 - 964 (373) - - 3,190 5,873 964 (2,287) (368) 62 449,515 452,455 (28,070) 424,385 16,425 (5,638) 10,787 29,058 (17,905) 11,153 6,047 (2,857) 3,190 503,985 (54,470) 449,515 Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 73 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 85 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F5/ Intangible assets (continued) IMPAIRMENT TEST FOR GOODWILL ALLOCATION OF GOODWILL KFC Restaurants Australia KFC Restaurants Europe Sizzler Asia Carrying value 2020 $'000 2019 $'000 327,005 102,707 1,449 431,161 327,005 96,061 1,319 424,385 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. During the reporting period ended 3 May 2020 the above cash generating units and the individual restaurant assets were 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. KFC Restaurants Australia KFC Restaurants Europe Sizzler Australia 2020 $'000 2019 $'000 2020 $'000 2019 $'000 2020 $'000 2019 $'000 Leasehold improvements Plant and equipment Franchise rights Right-of-use assets Total - - - - - 28 43 67 - 138 4,143 1,061 270 4,526 10,000 3,004 1,256 301 - 4,561 - - - 159 159 189 56 - - 245 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 2021 through to the end of the 2040 reporting period which average 2.5% (2019: 2.5%). The value-in-use calculations were adjusted up to 2040 due to the analysis required to conform with the AASB 16 Leasing standard. The year one projections have been aligned to the division's specific cash flows reflected in the 2021 budget. The FY2021 budget includes the impact of COVID-19 for the first half of the year, after which management have assumed the restaurants will be performing without the impact of COVID-19. Management believe that these growth percentages are reasonable considering the growth that has been seen in this operating segment during the 2020, prior to COVID-19, in prior reporting periods, and in the weeks since year-end. A pre-tax discount rate of 14.7% (2019: 14.7%) has been applied to the cash flows. An indefinite terminal cash flow calculation has been applied for cash flows beyond 2040, using that year's cash flow as a base. The growth rate of 1.5% (2019: 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. 86 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 74 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F5/ Intangible assets (continued) KFC EUROPE RESTAURANTS The cash flows by restaurant have been estimated after applying growth rates from the commencement of 2021 through to the end of the 2040 reporting period which average 2.5% (2019: 2.5%). The value-in-use calculations were adjusted up to 2040 due to the analysis required to conform with the AASB 16 Leasing standard. The year one projections have been aligned to the division's specific cash flows reflected in the 2021 budget, with certain restaurants having additional growth expectations due to a number of transaction driving initiatives that have been launched across these restaurants. The FY2021 budget includes the impact of COVID-19 for the first half of the year, after which management have assumed the restaurants will be performing without the impact of COVID-19. Management believe that these growth percentages are reasonable considering the growth that has been seen in this operating segment, prior to COVID-19 and in the weeks since year-end, together with initiatives intended to improve operating margins. A pre-tax discount rate of 7.8% (2019: 7.1%) has been applied to the cash flows. An indefinite terminal cash flow calculation has been applied for cash flows beyond 2040, using that year's cash flow as a base. The growth rate of 1.5% (2019: 1.5%) 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. A change in one of the assumptions could result in a higher level of restaurant impairments. SIZZLER AUSTRALIA RESTAURANTS The cash flows for the Sizzler Australia Restaurants from the beginning of 2021 to the end of the 2025 reporting period have been estimated at an average growth of 2.5% (2019: (5.0)%) reflecting the recent trends experienced in this operating segment, prior to COVID-19 and in the recent weeks since COVID-19 restrictions have started to ease, along with initiatives intended to improve operating margins. The projection for 2021 has been aligned to the division's specific cash flows reflected in the 2021 budget. The FY2021 budget includes the impact of COVID-19 for the first half of the year, after which management have assumed the restaurants will be performing without the impact of COVID-19. A pre-tax discount rate of 22.2% (2019: 22.2%) has been applied to the cash flows. SIZZLER ASIA The cash flows for the Sizzler Asia cash generating unit have been estimated after applying growth rates from the commencement of 2021 through to the end of the 2025 reporting period which average 3.0% (2019: 3.0%). The year one projections have been aligned to the cash flows reflected in the 2021 budget. The FY2021 budget includes the impact of COVID-19 for the first half of the year, after which management have assumed the restaurants will be performing without the impact of COVID-19. Management believe that these growth percentages are reasonable considering the growth that has been seen in this cash generating unit during the 2020, prior to COVID-19 and prior reporting periods. A pre-tax discount rate of 14.0% (2019: 14.0%) has been applied to the cash flows. An indefinite terminal cash flow calculation has been applied for cash flows beyond 2025, using that year’s cash flow as a base. The growth rate of 3.0% (2019: 3.0%) has been used in determining the terminal rate which does not exceed the long term average growth rate for the casual dining industry segment. SIGNIFICANT ESTIMATE: IMPACT OF POSSIBLE CHANGES IN KEY ASSUMPTIONS Sensitivity analysis on reasonably possible changes in discount rates or growth rates would impact the restaurant asset impairments recognised in the financial statements as follows: • 0.5% reduction in growth rate: additional impairment of $1.62m; • 0.5% increase in pre-tax discount rate: additional impairment of $0.35m. Management have considered the likelihood of these possible changes and believe that strong revenue growth achieved in the operating segments historically supports the growth percentages applied in the cash flows and that the discount rates applied are appropriate having assessed against current market factors. The recoverable amount of the Group’s goodwill currently exceeds its carrying value. Management does not consider that a reasonably possible change in any of the key assumptions would cause the carrying value of any of the cash generating unit levels to exceed their recoverable amounts. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 75 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 87 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F5/ Intangible assets (continued) 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. FRANCHISE RIGHTS Costs associated with franchise licences which provide a benefit for more than one reporting period are amortised over the remaining term of the franchise licence. Capitalised costs associated with renewal options for franchise licences are 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. SOFTWARE Software consists of both externally acquired software programmes and capitalised development costs of internally generated software. The Group amortises software using a straight-line method over 3-8 years. Costs associated with maintaining software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Group are recognised as intangible assets where the criteria within AASB 138 is met. Directly attributable costs that are capitalised as part of the software include employee costs, installation costs and associated expenditure. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for us. OTHER INTANGIBLES – SIZZLER BRAND Sizzler brand intangibles which are owned and registered by the Group are considered to have a useful life of 20 years and are amortised accordingly. These intangibles will be tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Sizzler brand intangibles are carried at amortised cost less impairment losses. 88 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 76 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F6/ Leases This note provides information for leases where the Group is a lessee. AMOUNTS RECOGNISED IN THE BALANCE SHEET The balance sheet shows the following amounts relating to leases: Right-of-use assets Property Motor vehicles 2020 $'000 368,167 1,237 369,404 29 April 2019(1) $'000 355,319 1,347 356,666 (1) This column represents the opening balances of the adoption of AASB 16, which is the first day of the current reporting period. In the previous reporting period, the Group would only recognise leased assets and lease liabilities if there were leases that were classified as 'finance leases' under AASB 117 Leases. Opening balances have changed from those reported at HY2020. For all adjustments recognised on adoption of AASB 16 on 29 April 2019, and reasons for their change from HY2020, refer to note H2. Lease liabilities Current Non-current 28,890 360,970 389,860 26,859 337,795 364,654 Additions to the right-of-use assets during the 2020 financial period were $55,746,000. AMOUNTS RECOGNISED IN THE INCOME STATEMENT The income statement shows the following amounts relating to leases: Notes 2020 $'000 2019 $'000 Depreciation charge of right-of-use assets Property Motor vehicles Impairment charge of right-of-use assets Properties Interest expense (included in finance costs) Expense relating to short-term leases (included in selling marketing and royalty, occupancy, and administrative expenses) Expense relating to variable lease payments not included in lease liabilities (included in occupancy expenses) The total cash outflow for leases in 2020 was $57,228,000 (2019: $50,665,000). 38,830 687 39,517 4,685 4,685 21,198 2,764 2,490 - - - - - - - - Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 77 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 89 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F6/ Leases (continued) Lease Liabilities Reconciliation This section sets out the movements in lease liabilities for each of the periods presented. Beginning of the reporting period Lease additions and modifications Interest for the period Disposals Cash flows Foreign exchange adjustments End of the reporting period 2020 $'000 2019 $'000 364,654 54,042 21,198 (867) (52,903) 3,736 389,860 - - - - - - - THE GROUP’S LEASING ACTIVITIES AND HOW THESE ARE ACCOUNTED FOR The Group leases various restaurant sites, offices, and motor vehicles. Rental contracts, particularly for restaurants, are typically made for fixed periods of 5 to 15 years, but may have extension options as described further below. Contracts may contain both lease and non-lease components. The Group allocates the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes. Until the 2020 financial period, leases of property, plant and equipment were classified as either finance leases or operating leases. From 29 April 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • fixed payments (including in-substance fixed payments), less any lease incentives receivable • variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date • amounts expected to be payable by the Group under residual value guarantees • the exercise price of a purchase option if the Group is reasonably certain to exercise that option, and • payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option. Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the lessee’s incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. To determine the incremental borrowing rate, the Group: • where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in financing conditions since third party financing was received • uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by the Group, which does not have recent third party financing, and • makes adjustments specific to the lease, eg term, country, currency and security. 90 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 78 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F6/ Leases (continued) The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset. Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Right-of-use assets are measured at cost comprising the following: • the amount of the initial measurement of lease liability • any lease payments made at or before the commencement date less any lease incentives received • any initial direct costs, and • make good obligation costs. Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. While the Group revalues its land and buildings that are presented within property, plant and equipment, it has chosen not to do so for the right-of-use buildings held by the Group. Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of office furniture. VARIABLE LEASE PAYMENTS Some property leases contain variable payment terms that are linked to sales generated from a store. For individual stores, up to 80% of lease payments are on the basis of variable payment terms with a wide range of sales percentages applied. Variable payment terms are used for a variety of reasons, including minimising the fixed costs base for newly established stores. Variable lease payments that depend on sales are recognised in profit or loss in the period in which the condition that triggers those payments occurs. EXTENSION AND TERMINATION OPTIONS Extension and termination options are included in a number of leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group’s operations. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. Critical judgements in determining the lease term In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). For leases of restaurant sites, the following factors are normally the most relevant: • If there are significant penalties to terminate (or not extend), the Group is typically reasonably certain to extend (or not terminate). • If any leasehold improvements are expected to have a significant remaining value, the Group is typically reasonably certain to extend (or not terminate). • Otherwise, the Group considers other factors including historical lease durations and the costs and business disruption required to replace the leased asset. Most extension options in offices and motor vehicles leases have not been included in the lease liability, because the Group could replace the assets without significant cost or business disruption. More than 90% of the Group's leases are of stores or restaurant sites. These leases range in primary terms of 5 - 20 years, with multiple 5 - 10 year options available, anywhere up to a total available lease term of 50 years. The Group has applied the below lease term assumptions to the store and restaurant lease portfolios of each segment, as it is considered representative of the Group's reasonably certain position. Specific leases are considered on a case-by-case basis when additional knowledge is available that would result in a different lease term to these assumptions. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 79 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 91 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F6/ Leases (continued) Segment Lease Term Assumption KFC Australia KFC Europe Other Primary term of the lease, plus options, to an upper limit of 20 years. Primary term of the lease, plus next option term where renewal process has commenced. Primary term of the lease, plus next option term where renewal process has commenced. The lease term is reassessed if an option is actually exercised (or not exercised) or the Group becomes obliged to exercise (or not exercise) it. The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this assessment, and that is within the control of the lessee. During the current financial period, the financial effect of revising lease terms to reflect the effect of exercising extension and termination options was an increase in recognised lease liabilities and right-of-use assets of $7,939,000. MATURITIES OF LEASE LIABILITIES The table below shows the Group's lease liabilities in relevant maturity groupings based on their contractual maturities. The amounts disclosed in the table are the contractual undiscounted cash flows. 2020 Lease liabilities Less than 1 year $'000 Between 1 and 2 years $'000 Between 2 and 5 years $'000 Over 5 years $'000 Total contractual cash flows $'000 Carrying amount $'000 48,762 48,962 131,599 323,705 553,028 389,860 ACCOUNTING POLICY APPLIED UNTIL 28 APRIL 2019 As explained above, the Group has changed its accounting policy for leases where the Group is the lessee. The impact of the change is described in note H2. Until 28 April 2019, leases of property, plant and equipment where the Group had substantially all the risks and rewards of ownership, were classified as finance leases. Finance leases were 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, were included in other current and non-current payables. Finance lease payments were 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 were 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 were retained by the lessor, leased assets were classified as operating leases and were not capitalised. Rental payments were charged to the Consolidated Income Statement on a straight line basis over the period of the lease. 92 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 80 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F7/ Trade and other payables Current liabilities Trade payables and accruals - unsecured Other payables Total payables ACCOUNTING POLICY 2020 $'000 2019 $'000 70,069 18,030 88,099 71,839 17,104 88,943 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. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 81 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 93 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F8/ Provisions 2020 Current $'000 Non- current $'000 Total $'000 Current $'000 6,009 321 - 119 6,449 3,682 2,518 - - 6,200 9,691 2,839 - 119 12,649 5,731 570 1,061 - 7,362 2019 Non- current $'000 3,367 162 - - 3,529 Total $'000 9,098 732 1,061 - 10,891 Employee entitlements Make good provision Onerous contract provision Other provisions Total provisions ACCOUNTING POLICY Employee Entitlements Provision has been made in the accounts for benefits accruing to employees up to balance date, such as long service leave and incentives. The current portion of this liability includes the unconditional entitlements to long service leave where employees have completed the required period of service. The provisions are measured at their nominal amounts using the remuneration rates expected to apply at the time of settlement. 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. Onerous Contracts Each reporting period, the Group assesses whether any of their contracts are considered to be onerous. The present obligations arising under any onerous contracts identified are recognised and measured as provisions. An onerous contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. 94 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 82 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F9/ Reserves Hedging - cash flow hedges Share-based payments Foreign currency translation Movements: Cash flow hedges Opening balance Revaluation - gross Deferred tax Transfer to net profit - gross Deferred tax Closing Balance Share-based payments Opening balance Valuation of performance rights Performance rights vested Closing Balance Foreign currency translation Opening balance Exchange fluctuations arising on net investment in hedge Exchange fluctuations arising on net assets of foreign operations Closing Balance NATURE AND PURPOSE OF RESERVES Hedging Reserve - Cash Flow Hedges 2020 $'000 (2,923) 292 16,719 14,088 2019 $'000 (1,994) 1,009 11,756 10,771 Notes 2020 $'000 2019 $'000 F10 F10 (1,994) (1,531) 459 204 (61) (2,923) 1,009 (424) (293) 292 11,756 (5,602) 10,565 16,719 (736) (1,760) 528 (37) 11 (1,994) 970 206 (167) 1,009 10,717 941 98 11,756 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 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. Refer to note C3 for details on the Group's accounting policy for hedge accounting. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 83 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 95 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F10/ Tax INCOME TAX EXPENSE Income tax expense Current tax Deferred tax (Over) / under provided in prior reporting periods Income tax expense is attributable to: Profit from continuing operations Aggregate income tax expense Deferred income tax expense / (benefit) included in income tax expense comprises: Increase / (decrease) in deferred tax assets Decrease / (increase) in deferred tax liabilities Numerical reconciliation of income tax expense / (benefit) to prima facie tax payable Profit from continuing operations before income tax expense Tax at the Australian tax rate of 30.0% (2019: 30.0%) 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 Changes in tax laws and / or tax rates Carried forward losses brought to account Derecognition of previously recognised carried forward tax losses Current year tax losses for which no deferred income tax was recognised Amounts (over) / under provided in prior reporting periods Income tax expense 2020 $'000 2019 $'000 20,825 1,469 93 22,387 19,668 807 (253) 20,222 22,387 22,387 20,222 20,222 13,295 (11,826) 1,469 3,410 (2,603) 807 2020 $'000 53,650 16,095 2,285 (58) 19 (81) (190) - 2,662 1,562 22,294 93 22,387 2019 $'000 59,333 17,799 706 (607) - - - (992) 718 2,851 20,475 (253) 20,222 Tax expense relating to items of other comprehensive income Cash flow hedges F9 398 (539) (76,037) (79,555) Notes 2020 $'000 2019 $'000 96 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 84 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F10/ Tax (continued) 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 @ 30.0% DEFERRED TAX BALANCES Deferred tax assets (DTA) The balance comprises temporary differences attributable to: Depreciation Employee benefits Provisions Lease liabilities Carried forward revenue losses Capitalised costs Cash flow hedges Other 2020 $'000 2019 $'000 33,241 65,961 29,760 15,122 65,961 24,325 2020 $'000 2019 $'000 27,087 5,001 4,994 110,153 2,468 357 1,333 - 151,393 25,175 5,675 2,424 - 3,087 966 854 158 38,339 Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax assets (114,858) 36,535 (6,355) 31,984 All movements in the 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: Right-of-use assets Inventories Intangibles Financial assets at fair value through profit or loss Other 2020 $'000 2019 $'000 107,775 867 11,119 391 332 120,484 - 787 8,952 - - 9,739 Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax liabilities (114,858) 5,626 (6,355) 3,384 All movements in the DTL were recognised in the Consolidated Income Statement and the Consolidated Statement of Comprehensive Income. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 85 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 97 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F10/ Tax (continued) ACCOUNTING POLICY Income Tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted in the respective jurisdiction. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and liabilities are offset where the entity has a legally enforceable right to offset and intends to settle on a net basis. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Tax Consolidation The Company, as the head entity in the tax consolidated group and its wholly-owned Australian controlled entities continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand-alone taxpayer in its own right. 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. 98 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 86 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F11/ 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 firm of PricewaterhouseCoopers 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 Whole Dollars 2020 $ 2019 $ 518,434 40,800 541,638 1,100,872 517,861 38,760 343,394 900,015 12,240 23,460 35,700 11,730 22,440 34,170 Total remuneration for assurance services 1,136,572 934,185 TAXATION SERVICES PricewaterhouseCoopers Australian firm Tax compliance services, including review of tax returns International tax consulting Tax compliance services, including review of company tax returns Total remuneration for taxation services OTHER SERVICES PricewaterhouseCoopers Australian firm Probity review of IT project Total remuneration for other services 57,000 6,324 5,665 68,989 70,466 97,351 5,587 173,404 - - 48,612 48,612 TOTAL REMUNERATION FOR SERVICES 1,205,561 1,156,201 It is the Group's policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where PricewaterhouseCoopers's expertise and experience with the Group are important. These assignments are principally tax advice, due diligence reporting on acquisitions and capital raising, 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. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 87 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 99 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F12/ 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. 100 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 88 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 3 May 2020 include the following subsidiaries. The reporting period end of all subsidiaries is the same as that of the parent entity (a). Name of entity Notes Place of business/ country of incorporation Acronym % of shares held 2020 % 2019 % 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 (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) Collins Property Development Pty. Ltd (b) Club Sizzler Pty. Ltd. Collins Foods Australia Pty. Ltd. Collins Finance and Management 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 (b) (b) (b) (c) (c) (c) (c) (d) (c) (d) (c) (d) (c) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Singapore Delaware, USA Delaware, USA Delaware, USA Delaware, USA Delaware, USA United Kingdom Collins Foods Europe Services Limited (c) United Kingdom Collins Foods Europe Finco Limited Collins Foods Germany Limited Collins Foods Netherlands Limited (c) (c) (c) United Kingdom United Kingdom United Kingdom CFGF CFH CFF CFG CRQ CRN CRW FNC SRG CRM CRS CFS SSL SSC SSF SSI SNG CPD CSP CFA CFM SingCo SIM SAH SSEA SNZ SRS CFEL CFESL CFEFL CFGL CFNL 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 89 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 101 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) G1/ Subsidiaries and Deed of Cross Guarantee (Amended and Restated) (continued) (a) Collins Foods Limited is incorporated and domiciled in 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) These companies are not Australian registered companies and are not covered by the ASIC Instrument 2016/785. (d) Originally incorporated in Nevada, upon conversion to a Limited Liability Company (LLC) became registered in Delaware. The Consolidated Income Statement, Consolidated Statement of Comprehensive Income and Summary of Movements in Consolidated Retained Earnings 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 Closed Group 2020 $'000 2019 $'000 842,955 (399,762) 443,193 772,863 (365,581) 407,282 Selling, marketing and royalty expenses (182,305) (163,097) Occupancy expenses Restaurant related expenses Administration expenses Other expenses 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 period, net of tax Total comprehensive income for the period (55,984) (68,844) (42,523) (6,822) 4,208 272 (29,038) 62,157 (19,417) 42,740 (59,458) (68,038) (38,376) (7,387) 3,616 479 (11,130) 63,891 (18,109) 45,782 Closed Group 2020 $'000 2019 $'000 42,740 45,782 (1,327) 398 (929) 41,811 (1,796) 538 (1,258) 44,524 Total comprehensive income for the reporting period is attributable to: Owners of the parent 41,811 44,524 102 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 90 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) G1/ Subsidiaries and Deed of Cross Guarantee (Amended and Restated) (continued) SUMMARY OF MOVEMENTS IN CONSOLIDATED RETAINED EARNINGS Retained earnings at the beginning of the reporting period Change in accounting policy – adoption of AASB 16 Profit for the period Dividends provided for or paid Retained earnings at the end of the reporting period Closed Group 2020 $'000 2019 $'000 51,637 (130) 42,740 (23,316) 70,931 26,827 - 45,782 (20,972) 51,637 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 Other assets Total current assets Non-current assets Property, plant and equipment Intangible assets Right-of-use assets Deferred tax assets Receivables Other financial assets Total non-current assets TOTAL ASSETS Current liabilities Trade and other payables Lease liabilities Current tax liabilities Derivative financial instruments Provisions Total current liabilities Closed Group 2020 $'000 2019 $'000 78,305 745 5,792 1,288 86,130 150,452 339,476 318,215 36,453 - 134,244 978,840 56,551 1,759 5,492 564 64,366 142,348 338,319 - 31,981 1,104 134,302 648,054 1,064,970 712,420 74,442 20,396 6,994 2,641 6,409 74,139 - 4,387 1,534 6,193 110,882 86,253 Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 91 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 103 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) G1/ Subsidiaries and Deed of Cross Guarantee (Amended and Restated) (continued) Non-current liabilities Borrowings Lease liabilities Derivative financial instruments Provisions Total non-current liabilities TOTAL LIABILITIES NET ASSETS Equity Contributed equity Reserves Retained earnings TOTAL EQUITY Closed Group 2020 $'000 2019 $'000 290,092 308,958 1,803 5,366 606,219 285,700 - 1,379 3,532 290,611 717,101 376,864 347,869 335,556 290,788 (13,850) 70,931 347,869 290,495 (6,576) 51,637 335,556 104 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 92 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 (1) Non-current assets (1) Total assets Current liabilities (1) Non-current liabilities (1) Total liabilities Net assets Shareholders' equity Issued capital (2) Reserves Retained earnings Profit or loss for the period Total comprehensive income 2020 $'000 2019 $'000 440,023 412,699 305 440,328 104,171 45 104,216 336,112 (336,112) 337,119 292 (1,299) 336,112 379 413,078 74,438 36 74,474 338,604 (338,604) 336,826 1,009 769 338,604 21,248 20,435 21,248 20,435 (1) In the current period, certain items previously considered non-current, such as receivables and payables from/to subsidiaries, have been reclassified to current. The comparative values have been reclassified to reflect this change. (2) 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. 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. The parent entity has guaranteed to financially support a number of it's international subsidiaries until July 2021. 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 3 May 2020 (2019: nil). Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 93 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 105 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) H/ Basis of Preparation and Other Accounting Policies H1/ Basis of preparation H2/ Changes in accounting policies H3/ 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. Collins Foods Limited is a for-profit entity for the purpose of preparing the financial statements. 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. In the current reporting period, the Group has a net current liability position of $3.9 million. The predominant reason for this net current liability position is the introduction of AASB 16 Leases, where the 12 months of lease payments, payable in the next financial year, are now recognised as a current liability. The Group does not deem this to be a risk to its’ going concern, as without the introduction of AASB 16 the Group would be in a net current asset position of $25.0 million. The Group’s loan covenants are based on results excluding the impact of AASB 16. The current covenant ratios have significant headroom at current performance and there are sufficient undrawn facilities available, both within the Working Capital Facility and Bank Loan Facility, should the Group require access to additional funds, all repayable beyond 12 months (refer to note B2). 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 2020 reporting period comprised the fifty-three weeks which ended on 3 May 2020 (2019 was a fifty-two week reporting period which ended on 28 April 2019). 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. 106 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 94 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) H1/ Basis of preparation (continued) 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. 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 combination; • Note F4 Property, plant and equipment; • Note F5 Intangible assets; • Note F6 Leases; and • Note F8 Provisions. 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 the 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 applied the following standards and amendments for the first time for their annual reporting period commencing 29 April 2019: • AASB 16 Leases; and • Interpretation 23 Uncertainty over Income Tax Treatments. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 95 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 107 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) H1/ Basis of preparation (continued) The Group had to change its accounting policies as a result of adopting AASB 16. The Group elected to adopt the new rules retrospectively but recognised the cumulative effect of initially applying the new standard on 29 April 2019. This is disclosed in note H2. The other amendments listed above did not have any impact on the amounts recognised in prior periods and are not expected to significantly affect the current or future periods. NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED Certain new accounting standards and interpretations have been published that are not mandatory for 3 May 2020 reporting periods and have not been early adopted by the Group. The Group's assessment of these new standards and interpretations is that the impact to the Group is immaterial. At this stage the Group does not intend to adopt any of the standards before the effective dates. H2/ Changes in accounting policies This note explains the impact of the adoption of AASB 16 Leases on the Group’s financial statements. The Group has adopted AASB 16 Leases retrospectively from 29 April 2019 but has not restated comparatives for the 2019 reporting period, as permitted under the specific transition provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 29 April 2019. The new accounting policies are disclosed in note F6. On adoption of AASB 16, the Group recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of AASB 117 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 29 April 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on 29 April 2019 was 5.45%. PRACTICAL EXPEDIENTS APPLIED In applying AASB 16 for the first time, the Group has used the following practical expedients permitted by the standard: • the use of a single discount rate to a portfolio of leases with reasonably similar characteristics; • reliance on previous assessments on whether leases are onerous; • the accounting for operating leases with a remaining lease term of less than 12 months as at 29 April 2019 as short-term leases, and therefore outside of the scope of AASB 16; • the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and • the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease. The Group has also elected not to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made applying AASB 117 and Interpretation 4 Determining whether an Arrangement contains a Lease. 108 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 96 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) H2/ Changes in accounting policies (continued) MEASUREMENT OF LEASE LIABILITIES Operating lease commitments disclosed as at 28 April 2019 Discounted using the lessee’s incremental borrowing rate at the date of initial application (Less): short-term leases recognised on a straight-line basis as expense (Less): low-value leases recognised on a straight-line basis as expense (Less): non-lease components Add/(Less): adjustments as a result of a different treatment of extension and termination options Lease liability recognised as at 29 April 2019 (transition date) Of which are: Current lease liabilities Non-current lease liabilities 29 April 2019 $'000 280,916 229,927 (3,593) (14) (2,745) 141,079 364,654 26,859 337,795 364,654 MEASUREMENT OF RIGHT-OF-USE ASSETS The associated right-of-use assets for property leases were measured on a retrospective basis either: • as if the new rules had always applied; or • at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments recognised in the balance sheet as at 28 April 2019, relating to that lease. The measurement basis was determined on a lease-by-lease basis. Motor vehicle right-of-use assets were all measured at the amount equal to the lease liability. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application. ADJUSTMENTS IN THE BALANCE SHEET ON 29 APRIL 2019 (TRANSITION DATE) The change in accounting policy affected the following items in the balance sheet on 29 April 2019: • right-of-use assets - increase by $356.7 million; • deferred tax assets - increase by $0.4 million; • prepayments - decrease by $0.7 million; • lease liabilities - increase by $364.7 million; • accruals - decrease by $5.7 million; and • make-good provisions - increase by $1.7 million. The net impact on retained earnings on 29 April 2019 was a decrease of $4.4 million. Upon refinement of the Group's AASB 16 calculations this reporting period, the opening balances of right-of-use assets, deferred taxes and retained earnings have altered slightly from those reported at HY2020. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 97 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 109 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) H3/ 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 F7). 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 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. GOVERNMENT GRANTS Grants from Australian and overseas governments are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in profit or loss over the period necessary to match them with the costs that they are intended to compensate. The grant is recognised under the profit or loss by deducting the value from the related expense the grant was received for. Previously the Group recognised traineeship grants as other income. However management now consider that grants are more appropriately accounted for as a reduction of the related expense and have been treated accordingly in the financial statements. Government grants were received by the Group in the current year for traineeships and support in relation to the impacts of COVID-19, the latter being received by both Australian and overseas governments, amounting to $2.5 million. 110 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 98 of 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) I/ Events occurring after the reporting period I1/ Subsequent Events I1/ Subsequent Events Subsequent to year end, the Group has become aware of potential deficiencies in work permits for certain Netherlands-based employees. Once becoming aware, the Group suspended all employees potentially at risk from employment rosters and are currently investigating thoroughly. There could be fines and penalties associated with this matter, however, the Group, given their immediate actions in addressing this issue, does not believe this exposure will be significant. The Group is not aware of any other matters or circumstances that have arisen since the end of the financial year which have significantly or may significantly affect the operations and results of the Group. Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 99 of 109 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 111 Directors’ Declaration DIRECTORS' DECLARATION In the Directors' opinion: • the financial statements and notes set out on pages 37 to 99 are in accordance with the Corporations Act 2001, including: pages 49 to 111 - - 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 3 May 2020 and of its performance for the financial period ended on that date, and • 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 G1 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 G1. Note H1 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 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 the Directors. Robert Kaye SC Chairman Brisbane 30 June 2020 112 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 100 of 109 Independent auditor’s report To the members of Collins Foods Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Collins Foods Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group's financial position as at 3 May 2020 and of its financial performance for the period from 29 April 2019 to 3 May 2020 (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 3 May 2020 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 (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in 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 2020 COLLINS FOODS LIMITED 113 aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. Key audit matters 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. Materiality Audit scope Key audit matters ● Our audit focused on where the ● Amongst other relevant topics, we communicated the following key audit matters to the Audit and Risk Committee as outlined in the Key audit matters section of our report. 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, Asian and the European operations, assisted by local team auditors in the Netherlands. Site visits were conducted at selected KFC, Sizzler and Taco Bell Restaurants in Queensland, Western Australia, Germany and the Netherlands. ● For the purpose of our audit we used overall Group materiality of $3.2 million, which represents approximately 5% of the Group’s profit before tax adjusted for the impairment charge recognised in the reporting period. ● 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 adjusted it for impairment as they are unusual or infrequently occurring items impacting profit and loss. ● We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. 114 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 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 Our procedures relating to impairment assessment of (Refer to note F5) $431.2m goodwill included, amongst others: Collins Foods Limited recognised goodwill of $431.2 million as at 3 May 2020, allocated to KFC Restaurants Australia ($327.0m), KFC Restaurants Europe ($102.7m) and Sizzler Asia ($1.5m). As required by Australian Accounting Standards, at 3 May 2020, the Group 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 tests and assumptions. Given the significance of the goodwill balance to the Consolidated Balance Sheet and the judgement involved in estimating the assumptions in the impairment model including forecast cash flows, growth rates and discount rate, this was determined to be a key audit matter. No impairment charge was recorded by the Group in respect of Goodwill in the current reporting period. CGUs. models. FY2021. ● Assessing the appropriateness of the Group’s determination of cash generating units (CGUs), including the allocation of assets to ● Testing the mathematical accuracy of the ● Comparing the cash flow forecasts for FY2021 in the calculations to the Board approved budget and COVID impact reforecast for ● Comparing the FY2020 reporting period and FY2021 reporting period to date actual results with corresponding reporting period forecasts to assess the historical accuracy of the Group’s forecasting processes. ● Evaluating the reasonableness of the discount rate, short term and long term growth rate assumptions in the models with the support of PwC valuation specialists by comparing them to historical company data and market observable inputs. ● Evaluated the adequacy of the disclosures made in Note F5 to the financial report, in light of the requirements of Australian Accounting Standards. Carrying value of non-current assets We performed the following audit procedures, on a Property plant & Equipment $187.5m (Refer to note sample basis, in relation to the Group’s review of each F4), Franchise rights $10.8m (Refer note F5) and restaurant, amongst others: Right of Use asset $369.4m (Refer note F6) ● Testing the mathematical accuracy of the underlying calculations in the discounted cash flow valuation models. 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) $431.2m Our procedures relating to impairment assessment of goodwill included, amongst others: Collins Foods Limited recognised goodwill of $431.2 million as at 3 May 2020, allocated to KFC Restaurants Australia ($327.0m), KFC Restaurants Europe ($102.7m) and Sizzler Asia ($1.5m). ● Assessing the appropriateness of the Group’s determination of cash generating units (CGUs), including the allocation of assets to CGUs. As required by Australian Accounting Standards, at 3 May 2020, the Group 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 tests and assumptions. Given the significance of the goodwill balance to the Consolidated Balance Sheet and the judgement involved in estimating the assumptions in the impairment model including forecast cash flows, growth rates and discount rate, this was determined to be a key audit matter. No impairment charge was recorded by the Group in respect of Goodwill in the current reporting period. ● Testing the mathematical accuracy of the models. ● Comparing the cash flow forecasts for FY2021 in the calculations to the Board approved budget and COVID impact reforecast for FY2021. ● Comparing the FY2020 reporting period and FY2021 reporting period to date actual results with corresponding reporting period forecasts to assess the historical accuracy of the Group’s forecasting processes. ● Evaluating the reasonableness of the discount rate, short term and long term growth rate assumptions in the models with the support of PwC valuation specialists by comparing them to historical company data and market observable inputs. ● Evaluated the adequacy of the disclosures made in Note F5 to the financial report, in light of the requirements of Australian Accounting Standards. Carrying value of non-current assets Property plant & Equipment $187.5m (Refer to note F4), Franchise rights $10.8m (Refer note F5) and Right of Use asset $369.4m (Refer note F6) We performed the following audit procedures, on a sample basis, in relation to the Group’s review of each restaurant, amongst others: ● Testing the mathematical accuracy of the underlying calculations in the discounted cash flow valuation models. ANNUAL REPORT 2020 COLLINS FOODS LIMITED 115 The Group have an accounting policy to prepare value in use calculations for all restaurants to consider them for asset impairment at an individual restaurant level. Following the Group’s assessment, a pre-tax impairment of $10.2m was recorded ($5.2 for Property Plant & Equipment, $0.3m for Franchise Rights and $4.7m for Right of Use Asset). We considered this a key audit matter given the significant level of judgements and estimates involved in determining the value in use calculation for each restaurant as well as the materiality of the asset balances on the Group’s financial position. ● Comparing the cash flow forecasts for FY2021 in the calculations to the Board approved budget and COVID impact reforecast for FY2021. ● Comparing the FY2020 reporting period and FY2021 reportin period to date actual results with corresponding reporting period forecasts to assess the historical accuracy of the Group’s forecasting processes. ● Evaluating the reasonableness of the discount rate, short term and long term growth rate assumptions in the models with the support of PwC valuation specialists by comparing them to historical company data and market observable inputs.; ● Evaluated the adequacy of the disclosures made in the financial report, in light of the requirements of Australian Accounting Standards. Adoption of new accounting standard AASB 16 Leases Right of Use Asset $369.4m, Lease liabilities $389.9m (Refer to note F6). The Group adopted Australian Accounting Standard AASB 16 Leases (AASB 16) from 29 April 2019. The new policy and related transition impact are disclosed in Note F6 and H2. This was key audit matter due to the: ● Significance of the impact on transition to the financial report We performed the following audit procedures, amongst others: ● Assessed whether the Group’s new accounting policies are in accordance with the requirements of AASB 16. For a sample of lease agreements, we: ● Evaluated the lease calculations against the terms of the lease agreement and the requirements of Australian Accounting Standard ● Tested the mathematical accuracy of the lease ● The critical judgements used in determining calculations the lease term ● Assessed the evidence to support critical judgements made, including historical practices of the company to support judgements around option renewals. ● Evaluated the adequacy of the disclosures made in Note F6 and H2 in light of the requirements of Australian Accounting Standards. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the reporting period ended 3 May 2020, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information 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. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report. 116 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the reporting period ended 3 May 2020, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information 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. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report. ANNUAL REPORT 2020 COLLINS FOODS LIMITED 117 Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 14 to 32 of the directors’ report for the reporting period ended 3 May 2020. In our opinion, the remuneration report of Collins Foods Limited for the reporting period ended 3 May 2020 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. PricewaterhouseCoopers Kim Challenor Partner Brisbane 30 June 2020 118 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Shareholder Information SHAREHOLDER INFORMATION Shareholder information that has not been stated elsewhere in the Annual Report is set out below. The shareholder information set out below was applicable as at the close of trading on 25 June 2020. Distribution of equity securities Analysis of numbers of equity security holders by size of holding: Holding 1 - 1000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over TOTAL TOTAL ORDINARY SHARES ON ISSUE TOTAL UNQUOTED PERFORMANCE RIGHTS ON ISSUE Number of shareholders of ordinary shares Percentage of total ordinary shares on issue % Number of holders of performance rights Percentage of total performance rights on issue % 4,643 3,406 697 416 40 9,202 - - 1.77 7.05 4.32 8.38 78.48 100.00 .00 .00 - 8 9 3 4 24 - - - 2.39 5.85 16.93 74.83 100.00 116,581,244 926,998 There were 275 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: Name J P Morgan Nominees Australia Pty Limited HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited National Nominees Limited Mr Kevin Perkins BNP Paribas Nominees Pty Ltd BNP Paribas Noms Pty Ltd Chrikim Pty Ltd Mrs Heather Lynnette Grace Chrikim Pty Ltd UBS Nominees Pty Ltd Perkins Family Investment Corporation Pty Ltd Warbot Nominees Pty Ltd ORDINARY SHARES Percentage of issued shares % Number held 25,037,205 24,235,743 12,242,285 9,402,868 7,250,574 3,375,628 2,396,984 722,580 439,801 369,421 358,783 327,273 304,952 21.48 20.79 10.50 8.07 6.22 2.90 2.06 0.62 0.38 0.32 0.31 0.28 0.26 Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 ANNUAL REPORT 2020 COLLINS FOODS LIMITED 119 107 of 109 Shareholder SHAREHOLDER INFORMATION Information (CONTINUED) Equity security holders (continued) Name Michael Kemp Pty Ltd BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd DRP ECapital Nominees Pty Limited Citicorp Nominees Pty Limited Ms Deborah Lee Chow + Mr Edward Chow Adrian Mark Argent Michele Taylor Pty Ltd TOTAL Substantial holders ORDINARY SHARES Percentage of issued shares % Number held 300,910 285,091 280,059 276,975 272,703 270,000 261,819 88,411,654 0.26 0.24 0.24 0.24 0.23 0.23 0.22 75.85 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: Kevin Perkins Vinva Investment Management Vanguard Group Restricted Securities and share buy-backs ORDINARY SHARES Number held Percentage % 7,621,484 5,853,013 5,837,433 6.54 5.02 5.01 A voluntary holding lock will be applied to 68,720 fully paid ordinary shares for a period of 24 months, 21,808 fully ordinary shares for a period of 36 months and 24,221 fully paid ordinary shares for a period of 48 months, if they are issued, upon the vesting of 114,749 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. Collins Foods Limited ACN 151 420 781 I 120 ANNUAL REPORT 2020 COLLINS FOODS LIMITED Financial Report - for the reporting period ended 3 May 2020 108 of 109 Corporate CORPORATE DIRECTORY Directory Directors Secretary Principal registered office in Australia Share and debenture register Auditor Stock exchange listings Robert Kaye SC Chairman Graham Maxwell Christine Holman Newman Manion Bronwyn Morris AM Kevin Perkins Russell Tate Frances Finucan Level 3, KSD1, 485 Kingsford Smith Drive Hamilton QLD 4007 +61 7 3352 0800 Computershare Investor Services Pty Ltd Level 1, 200 Mary Street Brisbane QLD 4000 Telephone number: 1300 850 505 Outside Australia: +61 3 9415 4000 PricewaterhouseCoopers 480 Queen Street Brisbane QLD 4000 Collins Foods Limited shares are listed on the Australian Securities Exchange. Website address www.collinsfoods.com The Collins Foods Corporate Governance Statement is located at www.collinsfoods.com/investors/corporate-governance/ Collins Foods Limited ACN 151 420 781 I Financial Report - for the reporting period ended 3 May 2020 109 of 109 

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