Retail Food Group Limited (RFG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Retail Food Group Limited Half Year 2025 Interim Results Call. [Operator Instructions]. I would now like to hand the conference over to Mr. Matt Marshall, Chief Executive Officer. Please go ahead.

Well, thank you, and good morning, and welcome to the results presentation for the half year. Our update will cover our interim financial performance, a major business update, and conclude with a Q&A session. On Slide 3, our performance during this first half of FY '25 has continued to enhance our network and deliver growth despite a challenging retail environment. Today, we also announced an exclusive major new brand launch in Australia, the fast-growing international brand, Firehouse Subs. We're thrilled to announce the partnership with Restaurant Brands International, or RBI, to bring Firehouse Subs to Australia. RBI, the powerhouse behind beloved brands like Tim Hortons, Burger King, Popeyes, and Firehouse Subs is joining forces with us to launch and build a new core brand for RFG in Australia. This collaboration is a significant investment and we'll have a dedicated team to plan, launch and manage the operation within the Retail Food Group business. Today's announcement represents both a significant milestone for Retail Food Group and the next phase of our growth strategy as well as a major disruption to the large growing sandwich market in Australia. Moving on to Slide 3 of the Firehouse presentation. In 2021, RBI acquired Firehouse Subs for USD $1 billion and has been rapidly expanding the brand globally. Today, it boasts over 1,300 restaurants across the U.S., Canada, Switzerland, Mexico, Albania, and the United Arab Emirates with plans to open its first restaurant in Brazil later this year. In Australia, the sandwich category is valued at over $1.7 billion and is growing with Subway holding an estimated 49% market share. Seeing a less competitive landscape compared to other food categories, RFG plans to introduce 165 Firehouse Subs restaurants in Australia over the next decade, with the first opening slated for late 2025 in Southeast Queensland. RBI's international growth demonstrates its strong capability in scaling and managing successful restaurant brands, and it sees a clear opportunity in Australia. By leveraging RBI's global expertise alongside our local market knowledge, we are developing another platform for sustained growth and success in line with our strategy of focusing on core brands. Firehouse Subs aligns perfectly with our strategic investment pillars. After rejecting other international brands, we spent over a year conducting due diligence, including multiple market visits to ensure Firehouse Subs' suitability for Australia. This new investment presents a clearly defined market opportunity that we can scale, starting with our initial 15 stores within 3 years and growing to 165 in 10. Firehouse Subs was founded in 1994 by former firefighters, Chris and Robin Sorensen in Jacksonville, Florida, with a mission to serve hearty flavorful subs whilst giving back to first responders. Over the years, the brand has expanded across the U.S. and beyond, staying true to its commitment to quality and community service. It is the superior products and evolved brand concept that sets Firehouse Subs apart from the competition. Firehouse Subs stands out from Subway and others by offering premium hot sandwiches packed with flavor and quality ingredients. Unlike Subway's assembly line approach, Firehouse Subs steams its meats and cheeses to enhance the taste and lock-in flavor, then piles them high on toasted bread for a more satisfying bite. With generous portions and a commitment to giving back to local communities, Firehouse Subs delivers not just a better sandwich but a brand customers can feel good about supporting. Firehouse Subs has a unique and evolved brand concept that differentiates from the competition in 2 key ways: one, the functional benefits of a fresh, great tasting, and high-quality product combined with a unique steaming process that delivers against the warmly crafted promise; and 2, an emotional brand driver that has an authentic founder story with a core operating philosophy of supporting local communities for public safety organizations. To ensure relevance to the Australian consumer, RBI conducted extensive research to determine the appeal of the concept across both functional and emotional drivers and the brand's value proposition in the Australian market. The outcome of 2 separate research studies in Australia validated what Australians like, that Australians like subs, firefighters and find the Firehouse Subs concept appealing. Our plan will embrace all the unique aspects of the Firehouse Subs value proposition whilst ensuring suitability for the local Australian customer. We see a huge opportunity for Firehouse Subs in Australia. The sandwich category valued at $1.7 billion in 2023, lacks a clear challenger of the subway, which holds an estimated 49% market share. Applying the ratio of outlets for the top QSR brands in other categories, there is a clear opportunity for a #2 challenger brand in the sandwich category to establish a significant presence in the market. The research indicates that approximately 95% of customers are interested in trying new fast-food sandwich restaurants and Firehouse Subs has been highly successful in the U.S. with higher sales per outlet than its nearest competitor. For the deal structure, RFG plans to open the first Firehouse Subs restaurant in Southeast Queensland in late 2025, following extensive brand and operational training, supply chain, and QA work. We've established a target of at least 165 new restaurants in Australia over the next decade, starting with the 15 company-owned restaurants in the first 3 years. RFG also has the right to sub-franchise the Firehouse Subs brand in Australia starting in year 4. RFG has committed to investing USD $4 million per year for the first 3 years, increasing to $5 million per year in years 4 to 6. The 20-year development term includes options to exit after year 3. The first year's investment will be funded through a debt drawdown of AUD 7.5 million with future investments expected to be funded from operating cash flows. In summary, we're thrilled to be working with RBI, a proven builder of global brands to create a new core brand for RFG in Australia. We've done our due diligence and are confident Australians are going to love Firehouse subs. We'll now move to cover our interim financial performance and conclude with the Q&A session. Moving to Slide 4 of the interim results. At the end of 2024, our trading performance for the full year reflected network sales growth of 0.3% and underlying revenue growth of 12.9%. We are pleased to announce that we've continued to deliver growth in the first half of FY '25 despite the well-documented difficult retail conditions, with network sales up driven by a strong performance in our core cafe coffee bakery brands. Our core brands within the CTV segment grew by 4.8%, which is a fantastic result. In addition, all core CTV brands delivered same-store sales growth in the first half. We've successfully opened 25 new domestic outlets that are significantly outperforming closures with a further 22 CIBO Espresso stores that joined the RFG portfolio on 31 December 2024. Our performance distilled to an impressive underlying EBITDA of $16 million, up 4.2% on the prior comparative period, supported by a range of initiatives that have offset the release of onerous lease provisions in FY '24. Rob will provide more details on the financial results shortly. Moving to Slide 5. Our key takeaways demonstrate that we are building momentum and continuing to deliver growth within a trading environment that requires a focus on delivering value and experience to the customer. Whilst these conditions are expected to improve in the near term, we remain focused on the health of our network and the quality of results to ensure our ability to scale core brands is well placed. This included the acquisition of CIBO Espresso to improve our retail footprint in South Australia. With AWS in the first half up 3.4% versus the prior comparative period and new trading outlets delivering an impressive 35% improvement when compared to closed core outlets, we continue to demonstrate that the quality of our operations is improving network health. This is a key metric for us, showing the clear financial benefits for RFG and our franchise partners of investing in new outlets. There have been an additional 48 franchise partner renewals in the first half on top of the 131 in FY '24 and our previously announced multisite operator or MSO program has delivered the first 6 new outlets from the program. We have a further MSO pipeline of 21 outlets underway with incentives that encourage our best operators to open more stores. The addition of Firehouse Subs, along with our focus on building scale within our existing core brands gives us a clear road map for growth. We continue to rationalize non-core brands and review the portfolio whilst providing conversion opportunities and support for our franchise partners. Our IT investment plan also remains on track to ensure we remain relevant and future-proof our brands. The next generation of customers is increasingly looking for personalization and a seamless experience across store environments and online. We're building a culture of innovation as we establish the foundation of technology infrastructure that will drive operational efficiency, unlock new revenue streams and attract our growth customers. Moving along to Slide 7. We remain committed to our strategy of building scale in our core brands across 2 key segments: Cafe Coffee bakery and quick service restaurants. And on Slide 8, further to my previous announcement, we're adding a new core brand. This exclusive agreement to launch Firehouse Subs in Australia provides RFG with a significant growth driver and offers Australian consumers a unique product that will elevate the sandwich experience in this market. On Slide 9, our purpose puts the customer at the heart of our strategy. This philosophy will guide the quality of our growth initiatives as we prioritize our efforts toward enhancing the customer experience. Our vision is to be the most accessible, easy-to-operate, and admired retail brand network. This is a unique point of difference for us relative to many of our QSR competitors, and we'll continue to build scale within this model. Whilst applying our strategic drivers, we're able to operate efficiently and leverage the strength of our support structure as a platform for growth. Our values reflect who we are and how we behave, specifically within a fast-moving retail business. We believe in delivering strong commercial outcomes for all our stakeholders whilst creating an environment for sustained success. Moving to Slide 10. To enhance our strategy, we're viewing our growth opportunities through 2 clear platforms, enhance and grow which will run in parallel. Enhancing our network is focused on modernizing our brands to build relevance for the customer through innovation, modern store design, operational execution standards, and investment in technology. As I mentioned earlier, new outlets delivered a marked increase in the average weekly sales, and we have a clear ambition to build scale in our core brands, targeting 200 stores for each brand. As we enhance the network, opportunities for growth emerge. A renewed focus on our international network will initially focus on the transformation of the supply chain, followed by expansion opportunities with trusted partners. I'll discuss this further shortly. Beefy's presents a growth opportunity, and we're setting a target of 50 stores in the next 3 years from 12 currently operating today. The anticipated launch of our first Firehouse sub-store in late 2025 will set the foundation for 165 stores within 10 years and provide major disruption within the $1.7 billion sandwich market. The strategic road map for growth and value creation is clear for Retail Food Group. I'd like to take a few moments to highlight some of the details behind this road map. On Slide 11 and since my first results presentation as CEO 18 months ago, we've been focused on executing a growth recipe that enhances the quality of our network to establish a platform. To enhance our network, we've made significant progress to ensure we can leverage common systems, technology platforms, and support team processes to underpin the quality of network expansion. Our 3-year innovation pipeline, the launch of Donut King occasions, our MSO incentive program, and our approach to franchise renewals are all evidence of this. Equally, we've been transparent in our approach to consolidating noncore brands and are working closely with franchise partners on conversion opportunities that can leverage the investment behind our core brands. In the second half of FY '25, we'll launch our first voice of customer platform to better provide tangible customer insights. This will inform timely decisions around our marketing and execution priorities, along with our franchise partner engagement as we pursue new customer growth opportunities and navigate ever-changing retail conditions. Embarking on a Store of the Future program and refurbishment strategy has commenced, and we work hand-in-hand with our investment in technology to seamlessly integrate the customer experience and meet the demands of our customers. All this focus is to drive revenue growth whilst maintaining a proactive approach to cost mitigation and support for our franchise partners to strengthen the unit economics of our brands. With this strong base, we can look to continue to grow. Over the last 12 months, we've delivered the initial acquisition milestones for Beefy's, 1 year on from acquisition with 12 stores now operating and a pipeline of stores being pursued. The CIBO Espresso acquisition has been completed, and we now turn our attention to the opportunity for growth under the Gloria Jeans brand, starting with franchise partner engagement and investment along with the conversion of 4 CIBO company stores this calendar year. Again, the announcement today regarding the launch of Firehouse Subs in Australia was a significant milestone after considerable diligence to ensure we understood the market opportunity and alignment to our strategy. From an international perspective, we now have a portfolio of core brands that could be grown in new markets at the right time. We've completed market visits and engaged trusted master franchise partners who are ready to pursue growth opportunities whilst commencing a transformation of our coffee supply chain to improve the cost and reliability of supply. Moving to Slide 12. Let's drill a bit deeper into the features of our enhanced strategy. Our focus on the customer is at the heart of our strategy as we focus on 4 key elements of success to build scale and relevance. We leverage market, customer, and franchise partner insights to drive success, innovate with new products, and embrace vertical integration where we have the capability. We're committed to innovating and enhancing the customer experience across all touchpoints, both in-store and online. By partnering with our franchise partners to drive brand standards, simplify operations, and manage costs, we aim to provide a relentless focus on network health that will, in turn, motivate store growth with existing and new partners. Our investment in technology is unlocking new revenue streams, protecting future growth channels, and enhancing our customer experience. On Slide 13, we've developed a 3-year pipeline of product innovation informed by customer-led insights with new products and menu upgrades already in the market. For example, the Piadena range was launched to unlock new growth during the lunchtime occasion at Crust. We've already seen a 10% increase in network sales during lunchtime trade versus the prior period with new trading hours unlocking both incremental Piadena and pizza sales. In the second half of '25, we'll be launching new high-protein bases in Crust and premium indulgence doughnuts in Donut King to begin the elevation of the product portfolio to align with core customer trends. More than just trending new products, we're using our market, customer, and franchise partner insights to target specific dayparting occasions and unmet needs that drive new customers into our stores and online platforms. On Slide 14, we've commenced work to deliver a bold refresh that clearly positions Gloria Jeans as a unique beverage destination, leveraging our hero orange color to reposition from the older brown design. Partnering with a global architectural design company that specializes in behavioral-led design principles for retail, we aim to provide cost-conscious practical designs that target new growth customers. A simplified in-store menu offering customer navigation, targeted product innovation, integration of digital technology and clear execution standards are all designed to provide a blueprint for the network refresh and refurbishment pipeline. Gloria Jeans is our first brand focus and case study in the second half of FY '25 with an intention to focus on all core brands. On Slide 15, we're committed to ongoing cost management and enhancing the quality of our network. Up to the end of January, we were able to keep average annual rent increases below 3% for the 55 lease renewals negotiated so far in FY '25, whilst also securing $1 million in landlord contributions for new sites and refurbishments. Additionally, our biannual price review process with suppliers has limited the annualized impact of price increases below 1%. This does not include the fact that we've held our coffee wholesale pricing to franchise partners since January 2023. During the period of high inflation, these types of efforts to mitigate costs demonstrate our ability to leverage scale on behalf of our network. From a franchise recruitment perspective, we've seen a 24% increase in franchise lead generation and a 20% improvement in lead conversion. We successfully delivered 25 new sites in the first half with strong new store performance as a positive indicator that improved recruitment systems and profiling tools are securing quality partners. On Slide 16, we're deploying all core elements of our technology road map across the network to drive customer experience and unlock new revenue streams. Our primary objective is to facilitate a seamless experience where the customer can easily engage with our brands to make a purchase. This includes upgrading apps to facilitate in-app purchasing, improving in-store navigation and kiosk ordering, integrating delivery platforms and providing new e-commerce solutions like Donut King occasions. All of this protects our future and enables a seamless experience for our customers. Moving to Slide 17, we turn our attention to the specific growth initiatives. We're pleased to report significant progress with Beefy's, delivering 3 new stores in the first half of FY '25, bringing the total to 12 trading outlets since our acquisition in December 2023. We're on track to achieve our initial goal of 15 stores by June 30, 2025. Our average weekly sales for Beefy's have reached $32,100, reflecting strong customer demand and a successful market penetration. The recent lease signing for Beefy's Palabar in Redlands, Queensland marks another milestone in our expansion strategy, and we've set an ambitious new target of 50 stores by 2028. On Slide 18 and after a review of our international master franchise business, we're embarking on a range of new initiatives to help drive our growth agenda. We're undergoing a global supply chain transformation, including the establishment of a new supply hub in Europe to meet increasing demand, reduce costs, and simplify the supply chain. Our master franchise partner in Turkey is experiencing significant growth, adding approximately 40 Gloria Jeans stores annually with a significant marketing focus on building appeal for the younger growth customer. After market visits and engagement with our network, we have trusted partners that are ready for expansion into new markets, starting with 4 existing Gloria Jeans master franchise partners exploring international expansion across Europe. Donut King is our next priority for international expansion with potential for growth within our existing Gloria Jeans master franchise network. Additionally, Crust and Beefy's can be grown internationally at the right time. Finally, and before handing to Rob for the overview of financial results, I would like to reiterate our excitement to be partnering with RBI to launch Firehouse Subs in Australia, a unique brand with a compelling market opportunity that fits neatly with the RFG strategic investment pillars. I look forward to providing updates as we move closer to this exciting launch in the coming months. Thank you, and I'll now hand it to Rob for more details on the financial results.

Thanks, Matt. Good morning, everyone. I'll take you through the financial results for the 6 months ending 27th December 2024, and we'll start on Slide 20 of the slide deck. Network sales of $257.1 million for the period is a good result. It's up 3.2% in the second half of FY '24 and up about 1% on PCP. We continue to execute our growth strategy despite what remains a pretty challenging retail environment. We continue to see momentum in our core brands, our core CCB brands, in particular, namely Gloria Jeans, Donut King, Beefy's, and Brumby's, and that offset some ongoing challenges in the highly competitive QSR but smaller QSR segment. At its core, our business model is pretty simple. We franchise or operate trading outlets to retail customers. We focus on brands which have a clear consumer proposition, and they can grow to more than 200 domestic outlets. Brands that are simple to operate and that have a low capital investment requirement. And wherever possible, we integrate vertically integrate for key products such as coffee or pies because this allows us to control key variables such as quality, margins and innovation. Network sales convert to revenue a fairly consistent revenue conversion rates for each brand, but a substantial difference between revenue conversion for our CCB business, which has strong vertical integration and a significant number of corporately operated stores. We typically see 100% gross profit margins for our franchise business, about 65% for corporately operated stores and about 35% for our manufacturing business lines. The majority of our business is highly leverageable to increasing scale in network sales, particularly as we concentrate our capital into a smaller number of core brands at greater scale. During the half, we did close 17 low-performing core brand outlets, and that did cumulatively detract from the overall network sales result, but nevertheless, improved network quality as measured by average weekly sales. The outlets we've opened during the last 6 months traded 35% better than the outlets closed, which is in no small part driven by the number of outlets opened by multisite operators. Our MSO group consistently score better on our path to retail excellence program, and we're confident these new stores will continue to perform well in future periods. It bodes well for our growth plans that our MSO group continues to see growth in their own portfolios. Underlying revenue excludes restricted marketing funds and was up 24.7% on PCP, driven by growth in corporately operated stores, including Beefy's. We also benefited from insurance proceeds and debt recoveries in new revenue from rental revenue streams. Underlying EBITDA was up 4.2% as the core business and Beefy's earnings offset a material reduction in lease impairment provisions in the prior comparative period. We split the group into 2 segments. Firstly, Cafe Coffee bakery, that's the larger of our 2 segments, generates about 73% of network sales. And then secondly, our quick service restaurant segment, which is the remaining 27%. If we look at the CCB segment first on Slide 21, we saw network sales grow 3.5% on PCP to $187.2 million despite the net reduction of 1 store in trading outlet numbers, a significant improvement in network quality shown to an 8% increase in the average weekly sales for the segment. We didn't all go our way. We had one Beefy's site at Gympie that's particularly struggled with the opening of the Bruce Highway bypass. But excluding this anomalous store, Beefy's continues to be a standout performer, and it showed 5.7% same-store sales growth on the PCP. So we're very pleased with how that acquisition is continuing to grow. Although Michel's Patisserie made the news, shareholders will recollect we announced this plan over a year ago. We're continuing to engage with the remaining 19 franchise partners on suitable conversion opportunities to other brands, mostly Gloria Jean's, but in other cases, Donut King where possible. Michel's same-store sales declined 3.5% in the period, whereas our core brands were all up in positive same-store sales territory. There were no intangible assets on our balance sheet relating to Michel's and so there's no impairment associated with this. The CCB segment did see a slight deterioration in customer count. It was about 2.5% on PCP, which appears to be driven by lower foot traffic in shopping centers, but it was offset by an increase in ATV of 6.2% to $10.14. Moving to Slide 23. We announced the acquisition of CIBO espresso late last year, and that completed on the 31st of December, and therefore, is not consolidated into our first half results. We've held initial conversion discussions prior to completion, and we'll now start accelerating this to those businesses now that have gotten through their seasonal peak trading period over Christmas and early January. The transition of shared services from Retail Zoo to Retail Food Group is proceeding smoothly. Many thanks to both the teams on both sides for that. On Slide 24, we continue to see challenging trading conditions in QSR. Competitors continue to promote heavy discounts and that have impacted our customer count. We maintain the strategy not to participate in a price war with a premium product against discount competitors is the right decision. It wouldn't be a successful strategy and would strain the financial outcomes for our franchise partners. We focused on product innovation. We've opened up the lunchtime occasion during the last 6 months, and we've seen some encouraging signs from that decision with lunchtime trade increasing 10.4% and very positive customer feedback on the new sides range and the Piadena range. Moving to Slide 25. We accept we've got more work to do in the QSR segment, but we're encouraged by the pipeline of franchise partners, new franchise partners seeking to join the network and of our franchise partners seeking to grow their existing portfolios. And we're confident that the actions we're taking now will deliver long-term sustainable benefits. Revenue conversion from network sales is lower in QSR because we don't have any integrated product supply like we do in the brands that sell coffee or pies, and we only operate a very small number of outlets directly. If we move to the income statement on Slide 26 now. We've presented the past 3 periods for ease of comparison and because it demonstrates the progress we've made through a very difficult domestic retail recessionary period. Conversion of group network sales to revenues continued to improve over those periods. It was 25.9% for the first half of FY '25, up from 21.4% in the PCP and 24.6% in the second half of FY '24. And that's driven by a higher mix of CCB revenue relative to QSR, the additional company stores and the Beefy's acquisition. We're presenting the business with 3 categories of revenue as we have done previously. We've got franchise-related income, which is principally franchise service fees and supplier rebates. This revenue stream has no COGS and therefore, converts to 100% margin. We've got the company store revenue, which includes beefy's and has the full product COGS sold to consumers, and that generates a GP margin of 63%. And then we have the coffee revenue, sales of coffee and ancillary products to franchisees and it is running at a GP margin of about 36%. Corporate stores made a small profit in the first half on a forward EBITDA basis, so the profit made in the store, which excludes management time, but includes marketing costs paid to the marketing funds. Our corporately operated Gloria Jean's stores are underperforming in comparison to Donut King and Beefy's pie in the portfolio, and we'll seek to exit 4 low-performing Gloria Jean's stores over the next 12 months to improve the division's profitability. We have seen improvements in labor costs in the first half but our expectations are for a significant profit contribution from this division and there's more work to do. Group payroll costs were slightly down in the period despite the impacts of wage inflation across the majority of roles, that was running at about 3% to 4% because we found productivity improvements to offset this, and we ran with a few open roles during the first half. Corporate overhead costs were below the prior period, the reduction in bad debt expense, corporate marketing, consultancies, insurance travel, the like. A more normalized run rate will be about $14 million annualized for that line. As we entered the first half, we did forecast pretty clearly that we expected a reduction in lease impairment releases in FY '25 relative to prior periods. We're equally clear that we are proactively focused on a large number of controllable actions that we could execute to mitigate this. And this included negotiation and receipt of insurance proceeds of $2.7 million in cash, which we received in the first half. Matt also ran through a number of items earlier in the presentation, which all contributed to delivering an underlying EBITDA for the 6 months of $16 million. That was up 4% on PCP. Delivering a strong result in the first half goes a long way towards reducing the risk for the overall result for the full year. Of course, we'll also benefit from the consolidation of CIBO Espresso in the second half, alongside growth in new stores and particularly in the beef's outlets. Whilst we incurred tax expense of $2.7 million in the first half, there were no cash tax outflows as the group retains significant tax losses available to shield profits for the foreseeable future. At the end of the period, we had $97.2 million of tax losses remaining on balance sheet to offset against future profits. Although our preferred measure is underlying EBITDA, it is worth calling out the strong statutory net profit after tax result of $7.3 million, which was up 73.8% on the PCP. We've already delivered an NPAT in the first 6 months of FY '25 that was bigger than the full year of FY '24 and with a minimal gap between underlying and statutory NPAT, which demonstrates our focus on a cleaner, simpler earnings profile moving forward. You can see that on Slide 27, which shows a reconciliation between the underlying and statutory earnings. Underlying EBITDA now also includes our U.S.A. operations following completion of Phase 1 of the restructuring. Underlying adjustments now restricted to the restricted marketing funds and business development or M&A costs. Looking at Slide 28 for the balance sheet, we have cash reserves of $21.4 million, of which $17.7 million is unrestricted. Against this, we have debt owed to our lender in Washington H. Soul Pattinson. Contemporaneously with the announcement of these results in the second half, we renegotiated further flexibility in covenants and other terms alongside the drawdown of $7.5 million to fund the Firehouse Subs investment. In consideration for these changes, we've agreed a placement with Soul Pat 625,000 shares and remain highly supportive shareholders and debt funders. The facility tenor has not changed with a committed remaining term to April 2026. Outside of the lease assets and liabilities and the intangible assets associated with acquired indefinite life brand and goodwill, it's a simple balance sheet and a capital-light business model. We continue to see success in reducing receivable balances in the first half and there are further opportunities, which we expect to be realized in the second half. Inventory increased $1.6 million in the period due to the timing of green bean receipts into the Roastery, and we had greater stock on hand at Beefy's for their seasonal peak in December. Whilst the increase in working capital impacted cash flow in the first half, we continue to have a smaller element of low-priced green bean stock, which will feed out through the remainder of FY '25. We took steps in Q2 to raise our recommended retail pricing to consumers across our brands and gave franchise partners early notice of roasted coffee bean price increases, which will pass through in the second half. Given this is a worldwide commodity price increase, we're able to keep pace with market pricing and don't see an issue in that regard. During the first half, we continued to simplify our business with the disposal of the Cafe New Zealand business, which we deemed non-core. In the second half, we signed contracts for the disposal of Cafe United Kingdom. Profit on disposal of these noncore businesses is expected to be about $0.5 million. Moving to cash flow on Slide 29. We saw underlying EBITDA to underlying operating cash flow conversion of 61% in the period. This was driven by the payment of short-term incentives related to the FY '24 year alongside the working capital invested in inventory for the seasonal peak. We expect the ratio to be substantially higher in the second half as these items won't recur in the second half of the year or will reverse in the case of the inventory working capital increase. Investment cash flow of $3.3 million related to capital expenditure to grow the Beefy's network, refurbishment of some company stores and reducing repairs and maintenance expenses through replacement of various bits of equipment in our company stores. So to summarize the superb first half, we exceeded expectations for our first half financial results. We continue to execute on our enhancement and growth strategy. We've delivered on our Beefy's post-acquisition milestones. We acquired CIBO Espresso, and we've signed a 20-year development agreement to introduce Firehouse Subs to the Australian market. Now I'll hand you back to the operator to open the session up for questions.

[Operator Instructions] The first question comes from Larry Gandler with Shaw and Partners.

Well done on the great result in signing the Firehouse deal, must have been lots of work many months. I've got a few questions. I guess, to start with more mundane matters. Can you guys just talk to how trading has gone perhaps in the first quarter of the calendar year?

Yes, we can certainly talk to that. I'll maybe get Rob just to talk through some of the numbers in the first 5 weeks. I mean, essentially, we've seen a continuation of strong core CCB brands with some stabilization in QSR. But perhaps, Rob, you can talk to a couple of the first 7 weeks.

Yes, no problem at all. I mean, CCB, as Matt said, it remains in growth through the first 7 weeks. The brands are in same-store sales growth as well. Beefy's is going particularly well. It's up about 20% in the first 7 weeks. So we're still really pleased with how that's going and how the new stores are performing, which is why we'll continue to invest in that. QSRs were fairly flat in the period. It was down about 3%, which is better than we've seen. So we're sort of starting to see something come through. But yes, 7 weeks of trading. I think it's important not to get sort of too excited about 7 weeks. I think we're happy with how it's going, and we look forward to putting some more results out when we get to the end of the quarter probably.

Well, while we're on QSR there, just in terms of pizza and the category, can you talk about store closures in the half, how you are faring relative to the competitive landscape? And what sort of movements in QSR openings closures can we see over the next 6 months?

Thanks, Larry. I think in the presentation, we did speak to our multisite operators, in particular, have a strong desire to continue to grow their crust network, and they form part of that MSO incentive program. From a broader market perspective, we have seen recent industry reports on movements where out of the 3 pizza players, the large pizza players in the market, we do have a net store increase, albeit small compared to the other 2 who are in net decline. So that gives us a lot of confidence that we continue to have operators that have healthy businesses and continue to want to invest in that business while we continue to invest in product innovation and experience. So yes, overall, I think we're still stabilizing that result. It's certainly not delivering growth at the moment, but it is, from a store number point of view, positive and we continue to back that business, absolutely.

Do you think store numbers will decline in the next 6 months?

No, I don't.

One other question, and then I'll leave it, but I have a few more after that. Just on coffee, the price increases that you've given notice, it sounds like for 2H, will that cover, say, where the commodity cost of coffee is today? How does that sort of relate your price increase to the commodity price?

Yes, it will, Larry. I think people remember that the $0.01 increase per cup, it's only one part of the price of a coffee cup. Probably the bigger component is really rent and labor going into that. We're fortunate is we've got decent scale across our business because we're sort of combining all the volumes across most of our brands sell coffee. So I mean, overall, I mean, it's very hard to pick where the commodity price is going. I think the last I've heard is that the crop in Brazil is looking pretty good and they're actually expecting some kind of price release as it's falling back over the next 6 months. But we're not in the business of trading as a commodity. What we're really trying to do with our strategy is to minimize shocks to the system. Retail pricing, we've got sufficient sort of power to get that into the market. What we're trying to do is make sure we don't have to do it too quickly. And so our strategy is mostly about minimizing the sort of the shocks to the system versus we don't try and trade it to make money out of it.

So in that 1H '25, your coffee GP looks like it expanded for the full year and then maybe into '26, should we assume you can protect that GP?

I think it will probably gradually fall back to sort of historical levels. It was slightly higher in the half. It's due to the timing of when we had sort of lower pricing beams coming in. But I think it probably normally would be slightly lower than that. But typically, we're not looking to make excessive price gauge on coffee. That's just not the strategy. And that's why we've held it to franchise partners for such a long time because that's the benefit they get from being part of a bigger system and accessing the economies of scale that we can provide them.

But it sounds like it's not going to collapse that GP margin sounds like.

The next question comes from Chamithri Ratnapala with Bell Potter Securities.

Well done on the results and mostly on the Firehouse agreement with RBI, done on that. Maybe to start off with there, given that there were some other questions asked about the underlying business at present. The investment per store looks obviously higher for obvious reasons than the usual portfolio within your corporate stores, given that the start I think the commencement of strategy will be via corporate stores. Just keen to hear the observations which have come out of the due diligence process as well on the return metrics that you expect for these brands.

Yes. No problem, Chami. I mean I've personally been to multiple markets and visited the stores, seen their operations. And one of the things that really attracted us to this is it fits within our capital-light easy to operate success made simple principle. And these formats will be flexible. The capital will be lower than you would expect versus a traditional QSR in a big format store. So we think we can access sites. It's got a simple operation, and we think the unit economics are really strong. So our ability to reinvest back into the brand through the company store model will be aimed at really proving up that model in the first 3 years before we start sub-franchising in year 4 and beyond. So that was one of the key reasons we were attracted to this along with the category and the market opportunity, obviously, in the sandwich category, not crowded. There's one competitor, and we think we can deliver a really strong unit economic model to take on that segment. So hopefully, that answers your question.

That's great. And then after year, I think, 3, what sort of -- what basically has to be satisfied to go in the franchisee part because from there, I think it looks like maybe 20 stores or store openings per year under that franchise model if things they all expect?

Yes, we'll have a 15 company stores in the first 3 years. We then have a minimum company store commitment ongoing and beyond that unlimited sub-franchising opportunity. So that ratio will depend on, obviously, how successful and how successful we can sub-franchise. But from year 4, that commences.

Yes. I think it's important to remember, it's unusual to have the ability to sort of exit after 3 years. We've negotiated that. That gives us a lot of downside protection. We're very confident in this. We've done a lot of work in it. RBI are incredibly confident in how they see this brand performing. They spent USD $1 billion buying it, buying the global rights to it, and they've expanded it very, very quickly. They announced Brazil in January, got Australia in February. They're very much on a very rapid growth trajectory for this brand. So you'll see it popping up.

And what you'll also see is a real customization of this brand as it rolls out to other global markets. I've been to the home of it in Jacksonville, seeing from its founder stores to the difference in the launch in Switzerland in Zurich and the evolution of the brand and the tailoring to the local market gives us great confidence we've got a partner that understands how to execute locally.

And then secondly, coming to the underlying business, just staying in CCB. Is there anything to call out in the second quarter? I mean, very slow, I mean, very small changes here, but it sounds like or seems like the second quarter growth slightly slowed down despite the actual number of stores being looking pretty good and not too many closures there. Anything to call out here?

Probably just reiterate that our core strategy and core brand strategy continues to deliver growth, and that's what we're focused on in renovating these brands. The refurbishment example I've given for Gloria Jeans is part of that store improvement plan alongside our technology plan to integrate that seamlessly. The next generation of customer doesn't see the difference between ordering on an app or ordering in store and getting that seamless experience where our brands are modern and fresh is the focus in CCB. The results to date and where we are have still continued to deliver growth. So we see upside in as we roll that out and working with franchise partners to protect their unit economics and mitigate costs. So I'm reiterating the points in the presentation, but that really is the point to reiterate in that, that is our core investment strategy to grow these brands, and it's working.

And I think, Robert, you said that January CCB was in growth. Was the growth better than the second quarter? Or any sort of its quantification, but yes, go ahead.

Yes, it's fairly flat. I mean I don't think it has been a booming retail environment for anybody in the domestic market at the moment. I think we're all pretty happy to see an interest rate reduction yesterday and what that will do sort of to macroeconomics and improving the retail conditions. Yes, we're pretty happy with how it's going. We'd love to see more money in the economy. Obviously, that makes it easier to have a bit of a tailwind. And I think we're starting to see that a bit more support from the macroeconomics, which will be helpful. So all the things we've been doing on all of these actions will sort of be amplified as the retail environment improves.

Perfect. And lastly, just QSR seems like it's finally bottoming out. Would that be a fair observation, just looking at the second quarter growth and hearing the January update as well, I mean, more qualitatively?

Yes. I think from a market point of view, the foodservice segment has seen declines in foot traffic. And we've certainly seen that as well. But I would agree, we've started to stabilize that segment of our business. We continue to invest in things like Rack and Bones to offset any decline in pizza directly. Obviously, the Pizza Capers brand has seen declines, which contribute to that as well. And our focus now on crust with innovation and rolling out better technology and support, along with our MSOs who continue to want to grow stores. I think it's probably safe to say we are starting to level out that business with more work to do.

The next question comes from Larry Gandler with Shaw and Partners.

Just following up with company-owned stores, looking at the numbers there, it was positive in gross profit and then your OpEx was, I think, only $5 million or so. So it looks like company stores contributed nicely. I remember having discussed with you guys that there were a few loss-making company stores that you thought might be better run by franchisees and yet you still opened up more company stores. So just wondering where you're taking that? Are you divesting company stores? Have you turned the corner there? What's happening?

Yes. Rob can probably back up some of the numbers, if you like. But the openings have largely been focused on Beefy's as we continue to deliver against those acquisition milestones. And we'll continue to do that in the near-term. And we just announced, obviously, our 50-store target over the next 3 years. So that becomes a really clear focus. Our Donut King portfolio continues to be the strength of our existing kind of other brand, core brand focus. And Gloria Jeans, we've got a number of those problematic stores that you mentioned. The approach on those is very much to set the tone of our refurbishment strategy and brand refresh through the sites we believe have the future in them. And then those problematic sites that are either regional, hard to support and operate as company stores or in bad locations, we would either close if we don't believe the future of the site is the right location or move it into a franchise partner that can operate it better because it is in a great center, but just needs a local owner. So that's really kind of the shape of how company stores are playing out. I don't know if you want to add anything, Rob?

No, it's a good summary.

And is that an FY '26 sort of manifestation on the P&L when we see the benefit of those stores moving off your books?

We're definitely focused on the second half to move some of those on and some are already in progress, either closing or in a process of franchisee sale. So that's underway. Obviously, the annualization of that goes into FY '26.

Okay. And you have the MSO initiative. This is now turning to store count. You've indicated that in QSR, you don't think there'll be net closures next year. You still have some going to CCB, you still have some Michel's. With the MSO initiative and some of the sort of focused on core brands, where do you think store counts will move in CCB? It will be positive? Or do you think they'll see a drag on store count?

Yes. I would think they're positive. We continue to focus on those when you think about all the growth initiatives we've just mentioned and the investment we're putting behind. We've seen our first multisite owner go from a Donut King to open a Gloria Jeans in this half. That's really exciting because we haven't seen a lot of that before. And that means those operators have now got access to support systems that means they can operate 2 brands in their own local community. That previously wasn't something that we've looked at, and we think that's a really important driver. But overall, as we focus on the MSO program, these are our best operators, and we know they operate our best stores. So it just makes complete sense for us to continue to invest in them.

Okay. So positive momentum in store openings. And last question for me is just on the Donna King occasions. I see you've got a metric there in the presentation. Where are we at in sort of that road map? When does that start contributing meaningfully to your P&L?

Yes. It's a good question. We're seeing all the metrics that you would expect for an e-commerce business to continue to perform above expectation in terms of cart fallouts, access to the occasions when we launched Valentine's Day or Christmas, we've seen real peaks in trade during those periods. The overall contribution of that business isn't significant yet, but we think it's very much future-proofing us, and it will continue to grow. And the platform we've built can be leveraged in other ways beyond banking occasions as we move into other growth initiatives. So I don't have a date when that will be material. It's not far off becoming a meaningful contributor to how we incrementally grow. It's on its path that it should be on.

The next question comes from Charlie Kingston with K Capital.

Just a few questions from me, please. Firstly, on the cash flow, and I know you said some of it relates to timing and working capital, et cetera, but there is a very big gap between, say, your underlying NPAT of $7 and a bit relative to your free cash flow, just your operating cash flow, your CapEx and all financing costs, which is in the 1s. Just what should we expect going forward? When should that start to reflect more of a when should cash flow be more consistent with the underlying NPAT? Because it does seem like generally, there is quite a large gap. And I suppose you're focused on underlying EBITDA, I mean, clearly, there's a lot that comes out below EBITDA. So maybe if you could just provide a comment around free cash flow and how much you think this business can generate going forward? How much is sort of growth CapEx, that $3.5 million of CapEx because free cash flow, I suppose. I would think it's a more fair metric for what this business can deliver going forward.

Yes, it depends on the way you want to look at it. I mean I think the reason we focus on underlying EBITDA to underlying cash flow as a percentage is because it's kind of the cleanest measure and it's irrespective of financing movements and CapEx investments. We're definitely focused on investment for growth in Beefy's. We've put a target out there of 50 stores, that will be part company and probably look at franchising in the foreseeable future. We've obviously announced the investment into Firehouse, so we'll have store builds going through there. So that's why we typically focus on the sort of the underlying EBITDA to underlying cash flow conversion. It can be a bit misleading when you look at an individual half because you've got $2.5 million of bonus payments relating to the FY '24 year. They go out in the first half of the year, but they're obviously not in the profit number. So you put that back in, that changes it. You put back in the working capital shift, and you're getting back close towards 100% EBITDA conversion when you look at the lease movement. So really the way of looking at it, it is a cash changer business. It's made a huge swing in the last couple of years to delivering cash flows. We're just choosing to invest in them for growth at the moment. So I think from the underlying EBITDA to underlying cash flow, you see that improve in the second half. Our expectations over the course of the year, that should be running at least 80% to 100%, somewhere in that kind of ballpark year-on-year. And then the investment will just depend on where we're focused and recycling capital from some places back into our growth drivers.

Okay. But below EBITDA comes leases, which is obviously a real cost and ongoing cost. But how much of that $3.5 million in CapEx would you say is for opening new stores as opposed to maintenance? And what's the ongoing CapEx requirement for this business? And then looking forward, yes, you've got some big ambitions, and we know what the new franchise sandwich shop is likely to cost, but Beefy's, I mean, how much does this business need to spend to grow to reach your ambitions over the next few years?

Yes. I mean, look, the beef store is typically around that kind of $300,000 to $400,000 mark to put a new one on the ground. So the majority of the $3.5 million, certainly about 60%, 70% of it was tied up in new store openings. We've also been investing in IT quite heavily to try and get ahead on that tech front. The actual R & M replacement kind of ongoing CapEx is a relatively small part of it, sort of under $500,000. It depends on the pace of refurbs, et cetera. So we're not certainly, that CapEx line at the moment is elevated because we're investing for growth. But that's controllable, we can choose and change the pace of that as we need to.

And then just across. I don't think you disclosed franchisee profitability metrics or company store profitability metrics. But clearly, you've mentioned it's highly competitive out there and you're replacing Michel's, Gloria Jean's, et cetera. But from the franchisees' perspective, can you shed some light as to their profitability metrics? I know you've got lots of different brands. But yes, I mean, just looking forward, I mean, beefy's, you want to expand a lot, but from the franchisees' perspective, what's the pitch for them re payback? Because clearly, there's a huge amount of options out there, Guzman and Domino's. I think Domino's disclosed their franchisee profitability metrics. So just that would help us benchmark and I suppose, get a gauge as to how compelling that or how realistic that expansion opportunity for you is across your various brands, please?

Yes. No problem. I mean going back to certainly our core brand strategy, and we're seeing that network improve through measures that we can see, average weekly sales up across the network and same-store sales in our core brands. It's obviously been a period of high inflation and costs. And so if you spoke to a franchise partner, they would certainly tell you that it's been a difficult trading period. What we take great confidence in is these brands have been around a long time and the economic cycle will come back the other way as well. So I would say there's been some pressure on the financial performance of franchisees, but we know through things like our MSO programs that our best operators continue to want to build more stores. So that's very encouraging. We did the work last year around our lending as well where we had the P&Ls of a number of franchisees that we collected benchmark and bell curve, and we know that our benchmarks sit favorably from a lender's perspective, so some of that work gives us more confidence as well. We do collect P&Ls from our franchisees. We'd love more transparency to some of that across the whole network, and we continue to work on doing that. But from what we can see on the measures we can control through sales, rent and theoretical COGS because we push the menu out, they're our focus on the things we can control to continue to strengthen it. And I mentioned some of those things in the update as well. So yes, we have a lot of faith if these core brands continue to strengthen and can be grown, evidenced as well by our franchise pipeline and interest in our brands that's continuing to improve.

Okay. And then just a tough question, but given the new shareholder, United and all the press that has been surrounding that shareholding, is there any comment that you could provide? Is there any sort of synergy across their network of petrol stations? Are you working closely with them? Is that an opportunity for retail food groups going forward? Or just any comment that you could provide would be great.

Yes, sure. Yes. We don't really have any comment at the moment because there's nothing that we have to disclose. I mean it's a very known placement that they've got on the register. But yes, we don't have any active engagement around that to comment on.

The next question comes from Liam Cummins with Petra.

Congratulations on the result given the difficult macro environment. Look, I jumped on a little bit late, so apologies if you've sort of touched on this already, but just back on Firehouse, can you give us a feel for sort of what sort of early on marketing support you'll get and then how I guess, that coordinated marketing goes with the master franchiser going forward? Maybe then what sort of interest you might be seeing for the sub-franchising space in that sort of beyond the 3-year mark with your existing MSOs in particular, noting that you said that you've got a bit of cross-pollination between MSOs and brands at the moment. And then finally, maybe sort of using some of the established offshore markets as an example of what the store economics look like once the brands are up and running?

Yes. Start with marketing. I mean, we've got a deal in place here with a big global partner and a deal that reinvests our investment back into the market, leveraging their insights from around the world. And as I said, I've been to some of these markets and seen the launch programs in various markets. So that will become more evident as we get closer to launch later in the year. It's fair to say that will be significant, and we'll be able to leverage global into local really well. In terms of interest to sub-franchising, it's probably too early to say. I think the points you raised around MSOs and our existing network are interesting because if we've got great operators, why not consider them. It gives us access to growth really quickly. But probably too soon to say that sort of year 4, will prove up the model. And the offshore unit economics were part of the business case to give us give us the confidence that this is the right brand to translate into other markets. So again, we'll be able to talk more about as we get closer to launch. But we know that the unit sales in the U.S., for example, are stronger than their competitors over there. So a lot of due diligence in that, a lot of confidence in the brand and a lot of confidence in our ability to translate it to the Australian customer.

There are no further questions at this time. I will now hand the call back over to Mr. Marshall for closing remarks. Please go ahead.

Yes. Thank you. I'm conscious of time, so I'll be brief and reiterate that we've continued in the first half to enhance our network and deliver growth. That gives us a lot of confidence as we move into the second half and beyond and more so as our growth initiatives continue to develop and announcing, obviously, our new partnership with Firehouse Subs. So really exciting time for us. Thank you for your attention. And I thank all of our team and franchise partners for their ongoing support, in particular, as we've come through and continue to go through what's been difficult trading conditions whilst delivering great results. So thank you.

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