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 Third Quarter Results and October Distribution
Nov 11, 2010
8:00am
MISSISSAUGA, ON, Nov. 11 /CNW/ - Second Cup Income Fund (the "Fund") reported today financial results for the third quarter ended September 30, 2010, and the approval of the October 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 0.3% in the quarter, and 0.7% year-to-date.
- Basic earnings per unit were $0.2682 for the quarter vs. $0.2519 in
the comparable 2009 period, an increase of 6.5%.
- Distributable cash per unit excluding changes in non-cash working
capital was $0.2877 for the quarter vs. $0.2593 in the comparable 2009
period, an increase of 11.0%.
- Monthly distribution maintained at $0.07667 per unit.
"We are pleased with the return to same café sales growth over the last three quarters. Our focus has been in bringing guests back into the café and we have seen a marked improvement in our transaction trends as a result. Alberta remains a challenge for us, however, we are starting to see improvements in this market. We are also pleased to report net new growth of cafés in 2010. 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 year to date 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 regulatory approvals including approval from 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 $45,583 compared to $45,706 for the same quarter for 2009. Same café sales growth was 0.3% in the quarter, with sales growth in Ontario and Quebec, however, Alberta continues to experience negative same café sales growth. Excluding Alberta, same café sales growth was 1.4% in the quarter.
Year to date, system sales were $137,276, compared to $137,172, including $91,466 for the royalty pool for the first two quarters of 2009, representing an increase of $104 or 0.1%. Year to date same café sales growth was 0.7%. The Company closed seven under performing cafés and opened eight new cafés to date. The Alberta market, which represents approximately 23% of system sales, remains a challenge. Excluding Alberta, year to date same store sales growth was 2.3% and same store transactions growth was 1.3%.
Third Quarter
Analysis of Revenues
Revenues for the quarter were $6,687 (2009 - $6,589) and consisted of royalties and other franchise fees, revenue from Company-operated cafés and other income.
Royalties for the quarter were $3,828 (2009 - $3,717). Excluding sales from Company-operated cafés, the effective royalty rate was 8.56% (2009 - 8.43%).
Other franchise related income for the quarter was $1,944 (2009 - $1,332), 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.
Company-operated cafés
Revenues from Company-operated cafés were $915 for the quarter (2009 - $1,540). The operating costs and expenses of Company-operated cafés amounted to $1,013 (2009 - $1,607) in the quarter, resulting in a net loss of $98 (2009 - net loss of $67) from company operated cafés.
Second Cup ended the quarter with eight (2009 - 17) Company-operated cafés.
Operating, Administrative and Amortization 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 $2,611 (2009 - $2,244) in the current quarter. The increase of $367 is mainly due to inventory obsolescence, higher employee costs and higher franchisee recruitment expenses. The Fund also recorded amortization of $51 (2009 - $51) on property and equipment and amortization of $70 (2009 - $56) on franchise rights in the quarter.
Other Income and Expenses
The Fund incurred interest expense of $268 in the quarter (2009 - $186) consisting of $184 (2009 - $177) related to its term loan and $49 (2009 - $52) in amortization of financing charges also relating to the term loan. The Fund also recorded a non-cash charge of $36 (2009 - credit of $46) 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 earned other net interest income of $1 in the quarter (2009 - expense $3). During the quarter, the Fund recorded a loss of $29 (2009- $14) on the disposal of café assets. The Fund expensed $3 in conversion costs during the quarter relating to the Arrangement discussed above.
Income Taxes
No income taxes were recorded in the quarter. A recovery related to prior years of $47 was recorded in 2009.
Net Earnings
The Fund's net earnings for the quarter were $2,642 or $0.2682 per unit, compared to $2,478 or $0.2519 per unit in 2009, an increase of 6.5%.
Year to Date
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 also include the general overhead expenses of Second Cup. Therefore, the year to date financial results for 2010 are not directly comparable to the corresponding period for last year.
Analysis of Revenues
Revenues were $18,681 compared to $12,204 in 2009 which includes royalty revenues from franchisees, revenue from Company-operated cafés and other income from the acquisition date of June 27, 2009 plus 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) for the period from January 1, 2009 to the acquisition date. Excluding sales from Company-operated cafés, the effective royalty rate was 8.53% (2009 - 8.43%).
Year to date, other income was $4,545. Other income 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.
Company-operated cafés
Revenues from Company-operated cafés were $2,659 (2009 - $1,602) for the period and the operating costs and expenses of the Company-operated cafés amounted to $2,558 (2009 - $1,669), resulting in a net contribution of $101 (2009 - net loss of $67).
Second Cup ended the period with eight Company-operated cafés.
Operating, Administrative and Amortization 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 $2,581 in 2009 to $8,030 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 $2,558 (2009 - $1,669), are now included. Year to date, the Fund recorded amortization of $149 (2009 - $51) on property and equipment and amortization of $212 (2009 - $56) on franchise rights.
Other Income and Expenses
The Fund incurred interest expense of $834 (2009 - $568) consisting of $538 (2009 - $530) related to its term loan and $137 (2009 - $96) in amortization of financing charges also relating to the term loan. The Fund also recorded a non-cash charge of $151 (2009 - credit of $57) 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 $8 (2009 - income $1). The Company recorded a loss of $28 (2009 - $14) on the disposal of café assets. The Fund expensed $315 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 - $47). 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 nine month period to September 30, 2010 were $6,660, or $0.6761 per unit, compared to $7,345, or $0.7433 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 the seasonality of system sales; the timing of initial franchise fees, renewal fees and transfer fees; the timing of purchasing coordination fees; operating and administrative expenses; and opening and closing of cafés.
Café Network
During the quarter, 13 cafés were renovated (2009 - ten); there were three café openings (2009 - four) and there were no café closures (2009 - nine), with 345 cafes open at September 30, 2010. Year to date, 27 cafés (2009 - 20) have been renovated; there have been eight openings (2009 - seven) and seven closures (2009 - 22).
Distributable Cash
Distributable cash for the quarter was $2,043, or $0.2074 per unit compared to $1,984, or $0.2016 per unit in the third quarter of 2009, an increase of 2.9% per unit. This increase is primarily due to the improvement in profitability offset by changes in non-cash working capital, which for the quarter increased by $791 compared to an increase of $567 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 $2,834, or $0.2877 per unit, compared to $2,551, or $0.2593 per unit for the third quarter of 2009, an increase of 11.0%.
Distributable cash year to date was $7,523, or $0.7637 per unit compared to $6,974, or $0.7057 per unit in 2009, an increase of 8.2% per unit. This increase is primarily due to the changes in non-cash working capital, which on a year to date basis decreased by $335 for the Fund compared to an increase of $444 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 $7,188, or $0.7297 per unit, compared to $7,418, or $0.7507 per unit for the first nine months of 2009, a decrease of 2.8%.
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 nine month periods ended September 30, 2010.
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(in thousands of dollars, except Three months ended Nine months ended
number of cafés and per unit September 30 September 30
amounts) 2010 2009 2010 2009
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System sales of cafés(1,3) $45,583 $45,706 $137,276 $137,172
Number of cafés - end of period(1) 345 346 345 346
Same café sales growth(1,3) 0.3% (4.5%) 0.7% (4.1%)
Total revenue(2) $6,687 $6,589 $18,681 $12,204
Net earnings for the period $2,642 $2,478 $6,660 $7,345
Basic and diluted earnings
per unit $0.2682 $0.2519 $0.6761 $0.7433
Distributable cash per unit
excluding changes in non-cash
working capital(3) $0.2877 $0.2593 $0.7297 $0.7507
Distributable cash per unit(3) $0.2074 $0.2016 $0.7637 $0.7057
Distributions declared per unit $0.2300 $0.2300 $0.6901 $0.7247
Payout ratio excluding changes in
non-cash working capital(3,4) 80.0% 88.7% 94.6% 96.5%
Payout ratio(3,5) 110.9% 114.1% 90.4% 102.7%
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(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 November 11, 2010.
October Distribution Announcement
The Fund also announced that its Board of Trustees approved a cash distribution of $0.07667 per unit for the month of October, 2010 to be paid on November 30, 2010 to Unitholders of record at the close of business on November 26, 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 as the "Trusted Coffee Experts".
In terms of 2010 network expansion, Second Cup has opened eight new cafés to date and expects to open six new cafés in Canada in the fourth quarter resulting in an expected total of 14 new cafés for 2010. Second Cup has closed seven cafés to date, the majority of which have sales below the average performance of cafés with one additional closure anticipated in the fourth quarter. The expected net new growth in 2010 is six cafés resulting in 350 cafés at December 31, 2010. In terms of renovations, 27 cafés have been renovated to date, and a further ten to twelve are expected to be renovated in the fourth quarter.
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.