Collins Foods Limited ($CKF)

Thank you for standing by, and welcome to the Collins Foods Limited Investor Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Xavier Simonet, Managing Director and Chief Executive Officer. Please go ahead.

Thanks very much, Harmony. Good morning, everyone. My name is Xavier Simonet. I'm the Managing Director and CEO of Collins Foods. Together with me today in Sydney, I have Andrew Leyden, our Group CFO; and we also have Chris Johnson, our General Manager, Europe, who's on the call from Germany. We were very pleased last night to announce exciting news about Collins Foods' growth acceleration in Europe and particularly in Germany. We have previously communicated that Germany would become our second strategic growth pillar, and yesterday's ASX announcement reinforces this. If we turn to Slide 2. This is actually a slide we presented at our October Strategy Day in Brisbane. Today, we're specifically addressing the acceleration of scale in Germany, our second pillar of growth alongside our core Australian KFC business. We announced yesterday evening, firstly, the acquisition of 8 KFC restaurants in Bavaria for EUR 31.1 million. Bavaria includes the city of Munich and the stores we've acquired are in Munich or around Munich. Secondly, the expansion of our development agreements with Yum! Brands, our franchisor in the German market, where our organic store development targets have been expanded. Thirdly, the extension and restructuring of our corporate franchise agreements with Yum! Brands in the Netherlands. Turning to Slide 3. This slide provides more detail on the restaurant network we will acquire. We are buying a network of 8 restaurants, most of them in and around Munich, giving us an entry into the state of Bavaria, a state with the second highest population and the second highest GDP in Germany. It is a high-quality portfolio of restaurants in attractive locations with strong economics, superior to our existing German network. The acquisition consideration is EUR 31.1 million, equivalent to an acquisition multiple of just below 6x restaurant level EBITDA in our first year of ownership post completion and is expected to be immediately EPS accretive for shareholders. Please note that the EBITDA we're referring to here is on a pre-AASB 16 basis. The acquisition increases our German store network by 50%, creating presence and scale in 3 key German states, including big cities as well like Düsseldorf, Munich, Cologne and Stuttgart. It also unlocks restaurant development opportunities in Bavaria and positions Germany very well as Collins' second strategic pillar. I will now hand over to Chris Johnson, our General Manager, Europe, who will go through the reasons why Germany is an attractive market to invest in. Chris, over to you.

Thanks, Olivier. Thank you, and good evening, good morning from Munich. As you can see on Slide 4, from the chart on the top left, KFC is significantly underpenetrated in the German market compared to some of our major competitors. KFC has about 1/5 the number of restaurants of the market leader despite being well known and well regarded amongst consumers. From the chart on the bottom left, you can see that this underpenetration is even more pronounced in the states where Collins Foods is present. And the map on the right shows how we, once the acquisition is completed, are building a network across the southern part of Germany with Collins covering major cities of Munich, Düsseldorf, Cologne and Stuttgart, the most attractive parts of the German market. Turning to Slide 5. The graph on the left and right show both the population and GDP by state in Germany. Collins will operate in the leading 3 states in both measures. And together, these states represent over 50% of the total population and GDP of the country. This gives us significant runway for expansion when you consider the underpenetration compared to competitors mentioned on the earlier slide. I'll now hand over to Andrew, who will take you through some of the other aspects of what we announced yesterday. Over to you, Andrew.

Thank you, Chris. And let's move to Slide 6. In addition to the acquisition, we're also very pleased to announce the expansion of our German development agreements with Yum! Brands. We've lifted the development target to 45 to 90 new stores over the next 4 years compared to the previous target of 40 to 70. This extends the organic growth runway, and we are confident that we will be able to invest the capital the business is generating into high-returning new developments in Germany. We also announced a revised corporate franchise agreement with Yum! Brands in the Netherlands, including an extension of 3 years to the end of 2029. Under the revised agreement, Yum! will resume product and marketing responsibilities from the 1st of January 2027, more in line with the market management structure in place in Australia and Germany and indeed many other markets around the world. Our marketing team members will transfer to Yum! before the 1st of January 2027. The service fee we receive will be adjusted to reflect these changes. However, we don't anticipate the changes will have a material impact on the profitability of the Dutch business. Importantly, these changes will enable us to focus fully on what we do best, and that is running great restaurants and of course, continuing to focus on improving the profitability of our Dutch operations. Now turning to Slide 7. This slide talks to the current trading, which reflects year-to-date trading through to the 8th of March 2026. Australia continued to grow in both total and same-store sales with both accelerating in the second half of financial year '26 to date, with total sales growth up 6.2% and same-store sales up 3.2%. Germany continued to see good momentum on total and same-store sales growth in H2 to date at 9.1% and 4.1%, respectively. In the Netherlands, total sales were up 4.1% in H2 to date, while same-store sales were slightly lower. And of course, our focus remains on operational profitability in the Dutch market. We are pleased with these results, especially given that both Germany and the Netherlands were impacted by severe snow conditions during January. Finally, the company has reaffirmed the previously provided guidance for the full year with Collins targeting mid- to high teens growth in group underlying net profit after tax in financial year '26 versus financial year '25. I'll now hand back to Xavier, who will round up.

Thank you, Andrew and Chris. On Slide 8, I would like to wrap up our presentation today by emphasizing the key investment highlights that Collins Foods represents for investors and existing shareholders. Our Australian business is resilient and highly cash generative. We are well established across multiple states in Australia, and our network of restaurants accounts for around 35% of the total number of KFC restaurants in Australia. Our second growth pillar in Germany represents a significant opportunity for profitable growth for Collins Foods. We also continue to be laser-focused on operational excellence, driving all key operations metrics and controls to optimize customer and team experience and financial value for our shareholders. We also have a long-term partnership with Yum! Brands, the owner of KFC and our franchisor. The announcement yesterday night is another milestone in what is now a very successful 50-year business relationship. As I said earlier, today's announcement or last night's announcement is all about our second growth pillar, Germany. The acquisition in Bavaria increases our German store network by 50%. We're accelerating building traction and driving profitable scale. We have now presence in the 3 most attractive German states with strong store economics in our existing store network and in the network we're acquiring. The acquisition unlocks development opportunities for Collins in Germany, and we are increasing our organic store development targets in Germany to 45 to 90 new restaurants over the next 4 years. Finally, as Andrew just mentioned, we have reaffirmed our targets for the year. So thanks again for joining the call, and we now invite questions. We've got probably about 20 minutes. Thank you, Harmony.

[Operator Instructions] Your first question comes from Tim Plumbe from UBS.

Congratulations. It looks like a good acquisition there. I've got a bunch of questions, but I'll just keep it to 2 and then jump back in the queue. So the first one, if that's all right, on Germany and the assets. So 18.8% EBITDA margin, do we compare that to your German portfolio that I think did about 21.3% EBITDA margins in FY '25? And if that is the case, how do we think about synergies at the store level or store level optimization that you can do? And also, how do we think about incremental costs coming in at the corporate level for this part of the portfolio, please?

Yes. I'll start, Tim. It's Andrew here. Yes, I think we previously issued store economics for -- on a post-AASB 16 basis. So we don't know what the post-AASB 16 numbers will look like for this acquisition because we have to do that work and obviously, we've got to do the acquisition accounting. On a pre-basis, though, this portfolio delivers superior economics to the German network. And I expect that will be the case on a post basis as well. And the driver of that is just the size of the restaurants. The average revenue of the restaurants is about just under AUD 6 million per unit, whereas our existing portfolio is around about that AUD 4.5 million mark. So because of the larger revenues coming through that, we get a bit -- we get better fixed cost coverage and we get better earnings as a percentage. So it's -- we're talking superior economics to the existing German portfolio. If you think about these restaurants, Tim, they are centrally located or located in central suburbs in Munich. And one of them in particular is right bang in the middle of Munich as well, so exposed to really high levels of traffic. So it's really a PSA-driven economic outcome.

And to answer the second part of your question, Tim, our immediate focus in Germany is twofold. The first one is to be able to build up the pipeline of great sites and open great restaurants that are going to hurdle, and we've got strong and disciplined financial metrics that we need to meet. So we're building up capability in the German market to be able to identify those sites and be able to accelerate our growth as quickly as possible in a disciplined manner. So that's one focus. The second focus is to make sure we've got the right structural place to operate the network of restaurants. And there's a format that is established in the Yum! KFC system that we're going to follow to make sure that we follow processes and are able to deliver operations excellence.

Great. And the second question, just on the Australian business. It looks like it's holding up quite nicely. Can you talk about the operating environment from a discounting perspective? Have you had to do more discounting than you did in the first half? And how do we think about the flow-through to that in terms of the GP margin? I think you did like 51.6% GP margins across the whole group in the first half '26.

Yes. Thanks, Tim. Yes, I mean, the profitability of our Australian business is as we predicted when we gave the guidance. So we normally do see a bit of a -- just by virtue of public holidays primarily, we normally see a slightly lower margin coming through the business in the second half, exactly what we predicted when we communicated to the market at the full year.

Great. But no material change from a discounting perspective?

Well, I think there's always been a focus on providing value for consumers. That's not changed. Some good innovation, providing value to consumers. It's an important part of the brand's architecture.

Your next question comes from Caleb Wheatley from Macquarie.

Wondering if you might give us a bit more detail in terms of exactly how this acquisition came about, particularly sort of the intent from the seller and what you sort of see as Collins being able to bring to the 8 restaurants rather than another owner, please?

Chris, do you want to answer that question?

Caleb, so the German franchise community is about 2 dozen strong, and Collins is well regarded. We're the only franchisee I've shared in the past that sits across all 3 of the Yum! boards, the ad Board, the ops Board and the business model committee. And we're in constant dialogue with a lot of franchisees, and we've just established good relationships. And we had dinner with the seller this evening, and he got a bit emotional in giving his almost farewell speech to his restaurant general managers who joined us for the dinner. And it came about through relationships, Caleb. And we're -- as I shared before, we're always on the lookout for portfolios that would be accretive or strategic or both in the market. So we're well pleased, well chuffed and as is the seller as they see Collins as the ideal buyer to take his restaurants and his portfolio to the next level.

If I can add one dimension, which is the relationship with Yum! Brands, our franchisor. As we mentioned, it's a 50-year relationship. We've been operating KFC restaurants in Australia for a long time. Our partnership in Europe is growing, and we want to support, of course, Yum! and KFC in the acceleration of their development in Germany, but also they're supporting us. So it's a great partnership we're enhancing and strengthening.

Okay. That's helpful. And then just a second question, if I could. You spoke to the 6x multiple from a restaurant level EBITDA point of view. Can you just give us a bit of a feel for sort of what typical transaction multiples might look like in Germany or Europe more broadly, if possible? And if I could, if we should be thinking about some incremental costs from an overhead point of view? Or is this sort of purely just sort of bolting the restaurants on, please?

I'll go first, and Chris, if you want to complement with any responses, please do. Yes, I'd say this is a typical transaction. There haven't been that many transactions historically. So arguably, we're setting a bit of a precedent, but we think it represents good value for the seller and good value for Collins shareholders. So I'd see it as relatively typical. The multiple changes when there's competition for assets. But as Chris outlined earlier, we have a good relationship with our franchisees, and we've ended up where we've ended up, and we're very happy with it. Chris, I don't know if there's anything you wanted to add to that.

Just on the incremental piece, Caleb, I'll just reiterate Xavier's comment from earlier, which is we're being incredibly deliberate around ensuring that the headcount that is going into the German market is not as a consequence of one acquisition, but as a consequence of our broader strategic intent, which is to build that pipeline of high-quality sites and ensure that we can train and then run them to the standards that we set. So I wouldn't necessarily attribute significant incremental G&A because of this acquisition at all.

And Caleb, maybe one final point. The acquisition, yes, it's accretive at an EPS level. It's 8 restaurants, highly profitable. So we're very happy with that. Clearly, the bigger opportunity is development and having presence in the state of Bavaria now and the other 2 states that we've outlined, which contain the most populous attractive cities is the big prize. That's why we're doing what we're doing. The development pipeline is the thing that we're very interested in. And clearly, we'll be disciplined about where we invest, but that's the really sizable opportunity.

Your next question comes from Sean Xu from CLSA.

Congratulations. Can I just follow up on this new development agreement target, 45 to 90 new restaurants is still a very wide range. What are the key gating factors we should consider here? Is the consumer environment in Germany, site availability or anything else we can consider here, please?

Yes, I'll start, Sean. Thanks for your question. Yes, look, we've left the range wide because clearly, we'd like to target the higher end of that scale. The key thing that we're going to find as we go through this journey around development is making sure that we find sites that meet our financial hurdles. And put simply, that's why we have a wide range. We want to make sure that we're investing in good locations that deliver really, really strong economics. And we'll do the work necessary to achieve that. And that's really understanding the demographic profile of locations, competition, potential cannibalization, all the things that you'd expect us to look at. And we want to make sure that we're developing good restaurants. We want to make sure they are high quality. The acquisition is a great start for that because the economics are really strong. But we want to make sure we're delivering high-quality returns for shareholders, that means picking great sites. So we've got the range intentionally wide for that reason.

Our core message, Sean, is that we announced the strategy last year, and we're executing on that strategy through accelerated development in Germany, but also the acquisition of this network that complements our existing geographies. But we're still very focused on making sure that we're doing that in a very disciplined way and delivering a strong return to shareholders.

Great. Second question, just a very quick one. Could you please tell me what's the blended comp sales growth in Europe for second half today?

I mean we'd rather give the numbers out by country, Sean, and then you know how many restaurants we have in the Netherlands and how many we have in Germany. I think it's important to do that because the countries are operating differently at the moment. Germany has been growing strongly. The Netherlands, as you're aware, has been a challenging market for a while for different economic reasons, mostly macroeconomic. So we'd rather keep them separate. But if you want to blend them, feel free. But I think as a rule of thumb, you can use the number of restaurants that we have in the market to get that blended average.

And strategically, Sean, our objective is different as well. In Germany, it's all about accelerated growth, of course, based on strong metrics and strong returns, so it's about acceleration. In the Netherlands, the focus is more on making sure we turn the business around and drive profitability through our existing network of stores, and then we'll start again growing when we're ready.

Your next question comes from Mac Ross from Morgan Stanley.

Maybe just one. So do you have further appetite for acquisitions? Or is this it for now? Or do you still -- are you open to inorganic growth opportunities in Germany? If so, do you have enough capital? And then how do you balance future acquisitions against the pipeline that you signed up to?

Thank you, Mac. So our immediate focus is to integrate the networks we've acquired and make sure we continue accelerating on development. We're building up a strong pipeline of stores in Germany that meets a hurdle and then it takes time and effort to execute and build those stores and start operating them. So that's our immediate focus. Of course, as we've always said, we remain open to opportunities to acquire a business and other businesses and other networks of restaurants in Germany, but that's not an immediate focus for us.

There was a question on capital allocation there as well. Yes, I mean, clearly, this acquisition is one that we can absorb based upon our current capital structure. I think if we were to do other things, then we think about what the best way of allocating capital would be and what the right capital structure would be. But yes, clearly, this one is something we can embrace within the constraints of our current funding requirements. So no concerns around that. I think philosophically, we just want to invest where we can deliver a good return to shareholders. That's our goal, and we'll allocate capital accordingly.

Very clear. Maybe just one more, if I may. Just on German penetration as a whole. You guys have called out that KFC is underpenetrated relative to McDonald's, Burger King and Domino's. So what level of penetration do you and Yum! believe KFC can get to in time? How do you guys think about that internally?

Chris, do you want to answer that question?

With pleasure. Mac, I think the primary focus for the Western European team is setting a multiyear goal to overtake Burger King. So that's a whole country effort, and that's not a Collins-only effort. I think we've said it before that having multiple franchisees developing the market across Europe's biggest economy is what we need to nourish the advertising board to create more brand awareness to in turn drive sales. So the Yum! team are targeting those, I think it's 750 is in their sights to become the solid #2 in the market over the, call it, the medium term. And for us, to repeat, we've got this wide range of 50 to 90 (sic) [ 45 to 90 ] over the next 4 years. And my team in Germany with support of the Dutch team, we're hard at work in building that quality pipeline.

Your next question comes from James Ferrier from Canaccord Genuity.

First question is in relation to the higher unit economics for these 8 stores that you're acquiring. When you compare it to the existing stores that Collins Foods operates in Germany, some of those are legacy sites that were coming from a much lower starting point some time ago. So is it your view that these acquired stores and the unit economics that they're delivering right now, is that more indicative of where you see new store opening potential unit economics and perhaps future acquisitions? Is that the sort of unit economics we should be using? Or should we be reverting to what the existing store network is delivering and then what you've referenced in previous updates?

Yes, I'll start, James. And Chris, if there's anything I don't cover them, please jump in. I think in reality, James, it will be site by site that will determine what the economics are going to be. So if we find great locations in the middle of Cologne, for example, that's one city that we're very interested in. Then yes, I mean, I think it will all be dependent upon the PSAs that we predict, PSA being average weekly revenue from a restaurant. So we may get better outcomes there. Clearly, we've been looking outside of the city centers as well in high-traffic locations or high pass-through locations where there's a lot of car traffic, but clearly drive-through is a channel that's important to us as well. So I think it will be dependent on the sites, the availability of great locations. That will determine what the economics are going to be. That said, we're not unhappy with our current German economics. As you know, they are -- at a gross margin level, they are comparable at an EBIT level, they're slightly lower than Australia, but still very strong. I wouldn't be unhappy if we developed at that level. But I think clearly, if we can lift our aspirations towards where the acquisition economics are then all well and good for shareholders. So I think time will tell. We'll continue to update the market. But clearly, site selection is a very important part of determining where our economics will end up. Chris, anything you wanted to add to that?

No, Andrew, I think you've nailed it. It is site by site. And the -- again, I think we said it 5 or 6 times on the call now, it's just being incredibly deliberate in these early stages to be sure that the first restaurants that go from pipeline to execution hit those hurdles so that we just gain -- continue to gain confidence in our ability to execute against the plan.

And then second question for me is the additional exclusivity and right of first refusal rights that you have in those 2 initial markets. Has that been extended to Bavaria or parts of Bavaria?

Chris?

Thanks, Xavier. James, so in the state of Bavaria, it's what you call open territories. So there is no exclusivity or right of first refusal. The ones that we've referenced in the past are maintained in Baden-Württemberg and North Rhine-Westphalia.

So if I can add, James and Chris, I think the important thing is that there's a lot of white space because there's such a big gap between KFC and the number of stores of KFC in Germany and the other brands that there's a lot of white space. And we want to try to be the first mover and be able to open early as many restaurants as possible, of course, within constraints, great sites, profitable, great return, but there's a lot of white space.

Yes. And James, maybe just to complement Xavier's comments around white space. So clearly, there is a lot of white space, and we don't think that exclusivity is necessary, frankly, in some of the regions that we're operating in. And there are other franchisees, of course, that I think Yum! would want to encourage development with as well. So yes, we're not worried about that. I think this is a high-quality opportunity. It's down to us to be disciplined about where we select our sites.

Your next question comes from Elijah Mayr from Goldman Sachs.

I'll be quick. Just a couple. Can you give us, I guess, an update in the current market of what the time line is from identification to opening of a site? Like how long does that take in Germany?

Chris, as the guy in Germany right now, do you want to take that one?

Elijah, it's -- yes, we're not being evasive, but that really is site dependent. So live examples would be we target an existing restaurant in a city center that has a permit or a zone for the specific use. We could open the site in under 100 days, all dependent on how quick we can get contractors activated to be on site. Maybe other more complex greenfield or rezoned projects might be multi-quarter or even multiyear long-term strategic projects. Of course, we're targeting more of the former and not the latter. So it really depends on the specific micro site. And it's why we're building pipeline multiyears out to be sure that we've got the balance of sites that we can convert quickly, but also ensure that we're giving ourselves the breathing space and enough time to convert slightly more tricky but also more strategic sites that take longer to convert from a permitting perspective.

I guess following on from that, can you actually give us a number of the sites that are within the pipeline just to give investors confidence that the organic store growth will come through just after, I guess, the experience we've had in the Netherlands. Can you kind of give us a number of like what is sitting in that pipeline at the moment? Like is there enough to reach the bottom end of that range given it is kind of a 4-year period and some of the rollout can take a couple of years? Just any idea of like how much is actually in process or in the pipeline at the moment?

We're not sharing the specifics of the pipeline, Elijah, but we've got -- the pipeline is multiyear across 4. And yes, we're hard at work to be sure that we don't just meet the base, but achieve as we can when we find the sites that hurdle. But we're not going to share a specific number tonight.

Elijah, I'll just add a comment on top of Chris'. I mean, suffice it to say that the pipeline is building all the time. And we're confident we'll find good sites. I think that what we'll do is prosecute those sites to make sure they're going to deliver good returns for shareholders. Your comment in relation to the Netherlands is not about not being able to find sites. We've intentionally held back on development to resolve some of the economic challenges that the macroeconomic situation in the market has forced upon the QSR sector. But that's intentional. It's -- we could go out and find sites tomorrow, but we've made a decision in the interest of shareholder value to focus on profitability. And at the right time, I think the Netherlands will be an attractive market. I just don't see that happening in the short term. Germany conversely is a highly -- a high-quality shareholder value creation opportunity, and that's why we're grabbing it with both hands. So yes, I think we just need to make sure that we're delivering good returns to shareholders. I just want to make that point again and again because it's not just about store numbers, it's about the profitability of the locations we select. So -- but yes, look, we're confident in the pipeline and the pipeline continues to build.

To come back to the point we've made before, Elijah, in terms of resources, this is our key focus in Germany, investing in resources that drive development and acquisition to be able to continue building up a good pipeline of profitable restaurants and be able to execute on that as quickly as we can. Yes, go ahead, Elijah.

I said no problem. I was just going to say if I could just quickly squeeze in to see if you guys could quantify the impact of weather in Gera on the same-store sales growth.

I haven't done the math, Elijah, if I'm really honest. I mean we did have severe weather events, particularly in the Netherlands. But as you've seen from our numbers, we've been able to absorb that impact and we've ended up delivering, I think, reasonably good same-store sales numbers and reasonably good total sales numbers year-to-date. So I couldn't tell you what the maths were, but clearly, in the days of the impact, I mean, that impact was material. But obviously, once the weather dissipated, we were able to recover our position.

Harmony, I'm not sure if we have more questions, but we're probably going to have to wrap up.

Thank you. Not a problem. I will just hand back to Mr. Simonet for closing remarks.

Just to say thank you to investors and analysts for joining the call. We look forward to continuing to work with you, and have a great day.

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