At Second Cup, we know that in order to provide the best coffee for our Guests, we must continue to work in harmony with both the environment and people who provide us with the best quality coffee beans. To both our Guests and coffee producers, we pledge that our coffee growing environment is treated with the utmost respect and dignity. All of our coffee producers provide a safe and healthy work environment and employees are compensated in a fair and equitable manner. As well, Second Cup continues to provide financial remuneration for quality beans to directly benefit the farmers, workers and mills. This is our promise.
Second Cup Income Fund Announces Second Quarter Results and July Distribution
Aug 12, 2010
10:04am
MISSISSAUGA, ONTARIO--(Aug. 12, 2010) - Second Cup Income Fund (the "Fund") (TSX:SCU.UN) reported today financial results for the second quarter ended June 30, 2010, and the approval of the July distribution payment. The Fund's units are traded on the Toronto Stock Exchange under the symbol "SCU.UN". All amounts in this news release are presented in thousands of Canadian dollars, unless otherwise indicated.
| Highlights |
- Same café sales growth of 0.2% in the quarter, and 0.7% year-to-date.
- Basic earnings per unit were $0.2135 for the quarter vs. $0.2337 in the comparable 2009 period.
- Distributable cash per unit excluding changes in non-cash working capital was $0.2460 for the quarter vs. $0.2341 in the comparable 2009 period.
- Monthly distribution maintained at $0.07667 per unit.
"We are pleased with the return to same café sales growth over the last two quarters. Our focus has been in bringing guests back into the café and we have seen a marked improvement in our transaction trends. Alberta remains a challenge for us, however, we are working diligently with our local franchise partners to improve performance. This fall marks the 35th anniversary of Second Cup and we will be celebrating with the launch of "Blend 35", a Rainforest Alliance certified coffee with a unique blend of Kenyan and Central American beans. I would like to thank our many franchise partners who truly are "Trusted Coffee Experts", striving to delight our guests everyday," commented Stacey Mowbray, President and CEO of The Second Cup Ltd. ("Second Cup" or "Company").
Basis of Presentation
The unaudited interim consolidated financial statements include the accounts of the Fund and its wholly owned subsidiaries Second Cup Trade Marks Limited Partnership ("MarksLP"), Second Cup GP Trust, Second Cup GP Inc. and Second Cup.
Prior to the acquisition of Second Cup on June 27, 2009 (the "Acquisition"), the Fund's source of revenue was royalty income collected by MarksLP from Second Cup. Royalty income was equal to 6.5% of system sales of Second Cup cafés in the royalty pool. After the Acquisition, the Fund's revenues are made up of royalties and other franchise fees, revenue from Company-operated cafés and other income. The Fund's expenses now include the general overhead expenses of Second Cup. Therefore, the financial results of 2010 are not directly comparable to the corresponding period last year.
Conversion to a Corporation
At the annual and special meeting of unitholders held on June 2, 2010, the unitholders approved the proposed conversion from an income trust structure to a public corporation ("Conversion"). The Conversion is expected to be completed on or about January 1, 2011 at which time all the outstanding units of the Fund will be exchanged on a one-to-one basis for common shares of the new corporation, on a tax-deferred basis. The Conversion will be undertaken pursuant to a court approved Plan of Arrangement (the "Arrangement"), which is subject to customary commercial conditions and the receipt of regulatory approvals including The Toronto Stock Exchange. All current members of the Board of Trustees and senior management are expected to serve as directors and officers of the new corporation.
Analysis of System Sales and Same Café Sales Growth
System sales for the quarter were $46,353 compared to $46,474 for the royalty pool for the same quarter for 2009. This decrease was mainly the result of closing three under performing cafés in the quarter as well as the effect of café closures in 2009. During the quarter, Second Cup was also impacted by the G20 Summit in downtown Toronto. Same café sales growth was 0.2% in the quarter, with strong sales growth in Ontario and Quebec, however, Alberta continues to experience negative same café sales growth. Excluding Alberta, same café sales growth was 2.0% in the quarter.
Year to date, system sales were $91,693, compared to $91,466 for the royalty pool for the comparable six months of 2009, representing an increase of $227 or 0.2%. Year to date same café sales growth was 0.7%. The Company closed seven under performing cafés and opened five new cafés to date. The current economic situation in the Alberta market, which represents approximately 23% of system sales, remains a challenge. Excluding Alberta, year to date same store sales growth was 2.5% and same store transactions growth was 1.4%.
Second Quarter
Analysis of Revenues
Revenues for the quarter were $6,065 and consisted of royalties and other franchise fees, revenue from Company-operated cafés and other income. In 2009 revenue consisted of earnings and interest from the equity accounted investment in MarksLP amounting to $2,597 (net of transaction costs totalling $480 relating to the acquisition of Second Cup) plus royalty revenues from franchisees and revenue from Company-operated cafés of $128 and $62 respectively for the period June 28 to June 30, 2009.
Royalties for the quarter were $3,870. Excluding sales from Company-operated cafés, the effective royalty rate was 8.5%. Revenues from Company-operated cafés were $830 for the quarter. Second Cup ended the Period with eight Company-operated cafés.
Other franchise related income for the quarter was $1,365, which includes initial franchise fees; renewal fees; transfer fees earned on the sale of cafés from one franchisee to another; purchasing coordination fees earned; and other income earned by Second Cup on the sale of its coffee through alternate channels.
Operating, Administrative and Corporate Café Operating Expenses
Operating and administrative expenses include the general overhead expenses of Second Cup, as well as the public entity costs. Operating costs and administrative expenses amounted to $2,511 in the current quarter. In addition, the operating costs and expenses of Company-operated cafés amounted to $729 in the quarter. The Fund also recorded amortization of $48 on property and equipment and amortization of $71 on franchise rights in the quarter.
Other Income and Expenses
The Fund incurred interest expense of $177 in the quarter (2009 - $174) related to its term loan and $49 (2009 - $31) in amortization of financing charges also relating to the term loan. The Fund also recorded a non-cash charge of $134 (2009 - credit of $27) for the movement in the fair value of the derivative interest rate swap which fixes the interest rate on the Fund's term loan. The Fund incurred other net interest expense of $2 in the quarter (2009 - income $1). During the quarter, the Fund recorded a loss of $12 on the disposal of Company-owned cafés. The Fund expensed $312 in conversion costs during the quarter relating to the Arrangement discussed above.
Income Taxes
An income tax recovery related to prior years of $83 was recorded in the quarter. No income taxes were recorded in the comparable 2009 quarter.
Net Earnings
The Fund's net earnings for the quarter were $2,103 or $0.2135 per unit, compared to $2,314 or $0.2337 per unit in 2009. Prior to the Acquisition, the Fund's indirect source of revenue was royalty income collected by MarksLP from Second Cup. Royalty income was equal to 6.5% of system sales of Second Cup cafés in the royalty pool. As a result, same café sales growth was the key performance indicator for the Fund. Following the Acquisition, the Fund's quarterly net earnings will also fluctuate based on items that include but are not limited to seasonality of system sales; timing of initial franchise fees, renewal fees and transfer fees; timing of purchasing coordination fees; operating and administrative expenses; and opening and closing of cafés.
Year to Date
Analysis of Revenues
Revenues were $11,994 compared to earnings and interest from equity accounted investment in MarksLP of $5,425 (net of transaction costs totalling $480 relating to the acquisition of Second Cup) plus royalty revenues from franchisees and revenue from Company-operated cafés of $128 and $62 respectively for the period June 28 to June 30, 2009. Excluding sales from Company-operated cafés, the effective royalty rate was 8.51%. Revenues from Company-operated cafés were $1,744 for the period. Second Cup ended the period with eight Company-operated cafés.
Year to date, other income was $2,601. Other income includes: initial franchise fees, which are recognized as income when the new cafés are opened; renewal fees, which are recognized when an existing franchisee enters into a new franchise agreement; transfer fees earned on the sale of cafés from one franchisee to another; construction administration fees; purchasing coordination fees earned; and other income earned by Second Cup on the sale of its coffee through alternate channels.
Operating, Administrative and Corporate Café Operating Expenses
Operating and administrative expenses include the general overhead expenses of Second Cup, as well as professional fees and public entity costs. Operating costs and administrative expenses increased from $337 in 2009 to $5,419 in 2010, mainly as a result of the acquisition and consolidation of Second Cup. In addition, the operating costs and expenses of Company-operated cafés, amounting to $1,545, are now included. Year to date, the Fund recorded amortization of $98 on property and equipment and amortization of $142 on franchise rights.
Other Income and Expenses
The Fund incurred interest expense of $354 (2009 - $352) related to its term loan and $88 (2009 - $44) in amortization of financing charges also relating to the term loan. The Fund also recorded a non-cash charge of $115 (2009 – credit of $11) for the movement in the fair value of the derivative interest rate swap which fixes the interest rate on the Fund's term loan. The Fund incurred other net interest expense of $9 (2009 - income $2). The Company recorded a gain of $1 on the disposal of Company-owned cafés. The Fund expensed $312 in conversion costs relating to the Arrangement discussed above.
Income Taxes
Year to date, a current income tax recovery related to prior years of $83 was recorded (2009 - $nil). In 2009, the Fund recognized a future income tax recovery of $33 related to changes in the impact of the future tax applicable in 2011.
Net Earnings Year to Date
The Fund's net earnings for the six month period to June 30, 2010 were $4,018, or $0.4079 per unit, compared to $4,867, or $0.4915 per unit in 2009. Prior to the Acquisition, the Fund's indirect source of revenue was royalty income collected by MarksLP from Second Cup. Royalty income was equal to 6.5% of system sales of Second Cup cafés in the royalty pool. As a result, same café sales growth was the key performance indicator for the Fund. Following the Acquisition, the Fund's quarterly net earnings will also fluctuate based on items that include but are not limited to seasonality of system sales; the timing of initial franchise fees, renewal fees and transfer fees; timing of purchasing coordination fees; operating and administrative expenses; and opening and closing of cafés.
Café Network
During the quarter, nine cafés were renovated; there were three café openings and three café closures, with 342 cafes open at June 30, 2010. Year to date, 14 cafés have been renovated; there have been five openings and seven closures.
Distributable Cash
Distributable cash for the quarter was $1,899, or $0.1928 per unit compared to $2,678, or $0.2704 per unit in the second quarter of 2009, a decrease of 28.7% per unit. This decrease is primarily due to the changes in non-cash working capital, which for the quarter increased by $524 compared to a decrease of $360 for the Fund and MarksLP in the comparable 2009 period. Changes in non-cash working capital are primarily due to the timing of payments and receipts. Excluding the impact of changes in non-cash working capital, distributable cash would have been $2,423, or $0.2460 per unit, compared to $2,318, or $0.2341 per unit for the second quarter of 2009, an increase of 5.1%.
Distributable cash year to date was $5,480, or $0.5563 per unit compared to $5,090, or $0.5140 per unit in 2009. This increase is primarily due to the changes in non-cash working capital, which on a year to date basis decreased by $1,126 for the Fund compared to a decrease of $223 for the Fund and MarksLP in the comparable period in 2009. Changes in non-cash working capital are primarily due to the timing of payments and receipts. Excluding the impact of changes in non-cash working capital, distributable cash would have been $4,354, or $0.4420 per unit, compared to $4,867, or $0.4915 per unit for the first six months of 2009, a decrease of 10.1%.
FINANCIAL HIGHLIGHTS
The following table sets out selected pro forma and non-GAAP financial information and other data of the Fund and its wholly owned subsidiaries, and should be read in conjunction with the unaudited consolidated financial statements of the Fund for the three and six month periods ended June 30, 2010.
| (in thousands of dollars, except number of cafés and per unit amounts) | Three months ended June 30 | Six months ended June 30 | ||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||
| System sales of cafés1,3 | $ | 46,353 | $ | 46,474 | $ | 91,693 | $ | 91,466 | ||||
| Number of cafés – end of period1 | 342 | 346 | 342 | 346 | ||||||||
| Same café sales growth1,3 | 0.2 | % | (4.7 | %) | 0.7 | % | (3.9 | %) | ||||
| Total revenue2 | $ | 6,065 | $ | 2,787 | $ | 11,994 | $ | 5,615 | ||||
| Net earnings for the period | $ | 2,103 | $ | 2,314 | $ | 4,018 | $ | 4,867 | ||||
| Basic and diluted earnings per unit | $ | 0.2135 | $ | 0.2337 | $ | 0.4079 | $ | 0.4915 | ||||
| Distributable cash per unit excluding changes in non-cash working capital3 | $ | 0.2460 | $ | 0.2341 | $ | 0.4420 | $ | 0.4915 | ||||
| Distributable cash per unit3 | $ | 0.1928 | $ | 0.2704 | $ | 0.5563 | $ | 0.5140 | ||||
| Distributions declared per unit | $ | 0.2300 | $ | 0.2300 | $ | 0.4601 | $ | 0.4947 | ||||
| Payout ratio excluding changes in non-cash working capital3,4 | 93.5 | % | 98.3 | % | 104.1 | % | 100.7 | % | ||||
| Payout ratio3,5 | 119.3 | % | 85.1 | % | 82.7 | % | 96.2 | % | ||||
| 1 "System sales of cafes", "Number of cafes – end of period" and "Same café sales growth" refer to active cafes in the royalty pool for periods prior to June 28, 2009, and refer to all Canadian cafes for all subsequent periods. |
| 2 "Total revenue" represents the combined amounts of the consolidated Fund and its wholly owned subsidiary, MarksLP, which was prior to June 28, 2009, consolidated with the statements of Second Cup for reporting purposes in accordance with GAAP. Prior to June 28, 2009, the Fund had accounted for the earnings of MarksLP on an equity accounted basis in its consolidated financial statements in accordance with AcG-15 relating to variable interest entities ("VIEs"). |
| 3 "System sales of cafés", "Same café sales growth", "Distributable cash per unit excluding changes in non-cash working capital", "Distributable cash per unit", "Payout ratio excluding changes in non-cash working capital" and "Payout ratio" are not recognized performance measures under GAAP and accordingly, may not be comparable to similar computations as reported by other issuers. |
| 4 "Payout ratio excluding changes in non-cash working capital" is calculated as "Distributions declared per unit" as a percentage of "Distributable cash per unit excluding changes in non-cash working capital". |
| 5 "Payout ratio" is calculated as "Distributions declared per unit" as a percentage of "Distributable cash per unit". |
The unaudited interim consolidated financial statements of the Fund, together with its Management's Discussion and Analysis, are expected to be available at www.sedar.com and on the Fund's website at www.secondcupincomefund.com on or before August 12, 2010.
July Distribution Announcement
The Fund also announced that its Board of Trustees approved a cash distribution of $0.07667 per unit for the month of July, 2010 to be paid on August 31, 2010 to Unitholders of record at the close of business on August 27, 2010.
OUTLOOK
The information contained in this "Outlook" is forward-looking information. Please see "Forward-looking Information" below for a discussion of the risks and uncertainties in connection with forward-looking information.
Management expects to continue growth with positive same café sales and the addition of net new cafés. The focus will be on driving traffic into cafés through external messaging, sampling and product news. In café, the focus will be on operating excellence, training and promotion of the brand's quality credentials.
In terms of 2010 network expansion, Second Cup expects: (1) to open 18 to 24 new cafés in Canada; (2) to close approximately 15 cafés during 2010, the majority of which have sales below the average performance of cafés; and (3) approximately 30 of its cafés will be renovated.
Forward Looking Information
Certain statements in this news release may constitute forward-looking statements. Forward-looking statements include words such as "may", "will", "should", "expect", "anticipate", "believe", "plan", "intend" and other similar words. These statements reflect current expectations regarding future events and operating performance and speak only as of the date of this release. These forward-looking statements should not be read as guarantees of future performance or results and will not necessarily be accurate indications of whether or not those results will be achieved. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the Fund's actual results, performance or achievements, or those of Second Cup cafés, or industry results to be materially different from any future results, performance or achievements expressed or implied by those forward-looking statements.
About the Fund
The Fund is an open-ended trust established under the laws of the Province of Ontario. It holds, through a direct wholly-owned limited partnership, the Canadian trade-marks and other intellectual property and associated rights used by Second Cup in connection with the operation of Second Cup cafés in Canada. The fund also owns, indirectly, Second Cup. For more information on the Second Cup Income Fund please visit www.secondcupincomefund.com.
FOR FURTHER INFORMATION PLEASE CONTACT:
Second Cup Income Fund
Robert Masson
Chief Financial Officer
(905) 362-1824
investor@secondcup.com