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.
The Second Cup Ltd. (formerly Second Cup Income Fund) Announces 2010 Results
Mar 9, 2011
9:31am
MISSISSAUGA, ON, March 9 /CNW/ - The Second Cup Ltd.(TSX:SCU) (formerly Second Cup Income Fund) ("Second Cup" or "the Company") reported today financial results for the three months ended December 31, 2010 (the "Quarter") and year ended December 31, 2010, and other matters as discussed below. Second Cup's shares are traded on the Toronto Stock Exchange under the symbol "SCU". All amounts in this news release are presented in thousands of dollars, unless otherwise indicated.
Highlights
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- A 15.8% increase in distributable cash per unit from $0.9806 to
$1.1357 for the year.
- An 8.9% decrease in net earnings per unit from $1.0941 to $0.9971 for
the year excluding the future income tax recovery, the conversion
costs in 2010 and the transaction costs in 2009.
- Same Café Sales were flat for the year and down 1.5% in the Quarter.
- Conversion from an income trust structure to a public corporation on
January 1, 2011.
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Stacey Mowbray, President & CEO of Second Cup, commented, "Focus for 2010 was to grow transactions per café for the long term health of the brand and our franchise partners. We are satisfied that we improved the previous trend line and in a highly competitive category, maintained same store sales for the year. We are confident in the strength of the Second Cup brand. As the largest franchisor of specialty coffee in Canada, we have a unique position with our guests as the Trusted Coffee Expert. We value our unique relationships with our coffee growing estates and partners, our many local food partners and our franchise partners. I want to thank our many franchise partners who everyday provide our guests with high quality, unique offerings with the trust and thoughtfulness only an individual owner can consistently deliver."
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 was completed on January 1, 2011. Under the plan of arrangement, unitholders of Second Cup Income Fund (the "Fund") received, for each unit of the Fund held, one common share of Second Cup. As a result of this Conversion, the Fund was dissolved with its assets and liabilities assumed by Second Cup. The common shares of Second Cup commenced trading on the Toronto Stock Exchange on January 4, 2011 under the symbol "SCU".
Second Cup implemented a dividend policy for 2011 whereby it will initially pay a quarterly dividend of $0.15 per common share. The first quarterly dividend is anticipated to be declared in respect of the quarter ended April 2, 2011 and is expected to be paid on May 30, 2011 to shareholders of record at the close of business on May 16, 2011. The dividend policy was developed to continue to pay out a substantial portion of earnings while retaining a sufficient amount to adequately fund organic growth initiatives. The objective of the dividend policy is to reflect a payout ratio of approximately 75% to 85% of net earnings per share, on a normalized basis.
Year to Date Analysis
Analysis of Revenues
Revenues for the year were $25,171 compared to $14,079 in 2009. Revenue for 2009 includes royalty revenues from franchise partners, revenue from Company-operated cafés and other income after the acquisition date of June 27, 2009 and earnings and interest from the Fund's equity accounted investment in MarksLP of $5,425 earned prior to the acquisition date. Royalties for the year were $15,874 (2009 - $8,241 from the acquisition date). Excluding sales from Company operated cafés, the effective royalty rate was 8.5% (2009 - 8.5%).
Revenues from Company operated cafés were $3,388 (2009 - $2,819 from the acquisition date) for the year. Second Cup ended the year with five (2009 - seven) Company operated cafés.
Other income for the year was $5,909 (2009 - $3,019 from the acquisition date). 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 franchise partner enters into a new franchise agreement; transfer fees earned on the sale of cafés from one franchise partner 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 $5,415 in 2009 to $10,642 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 $3,258 (2009 - $2,730), are now included. Year to date, the Fund recorded amortization of $142 (2009 - $88) on property and equipment, amortization of $63 (2009 - $38) on software and amortization of $283 (2009 - $141) on franchise rights.
Other Income and Expenses
The Fund incurred interest expense of $718 (2009 - $708) and $185 (2009 - $150) in amortization of financing charges relating to the term loan. The Fund also recorded a non-cash charge of $33 (2009 - credit of $114) 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 interest expense of $5 (2009 - income of $1). The Company recorded a loss of $92 (2009 - $76) on the disposal of Company owned cafés. The Fund incurred $563 in expenses related to its Conversion as discussed above.
Income Taxes
The Fund recorded a non-cash future income tax recovery of $33 in 2010 related to timing differences. A future income tax recovery of $1,144 was recorded in 2009 related to changes in future tax rates. In addition in 2009, an income tax recovery related to prior years of $150 was recorded, including $103 included in the equity accounted income of MarksLP.
Net Earnings
The Fund's net earnings for the year were $9,303, or $0.9433 per unit, compared to $11,464 or $1.1614 per unit in 2009. Excluding the non-cash future income tax recovery of $33 and Conversion costs of $563, net earnings for the year would have been $9,833 or $0.9971 per unit. Excluding the transaction costs of $480 and the non-cash future income tax recovery of $1,144, net earnings for 2009 would have been $10,800 or $1.0941 per unit. 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.
Contributed Surplus
During 2010, the Fund recorded a gain of $160 from the sale of 63,914 treasury units that were held by Second Cup on June 27, 2009. The gain has been recorded as contributed surplus in the Consolidated Statements of Unitholders' Equity.
Café Development
In terms of 2010 network development, Second Cup opened 13 cafés and closed eight cafés for 2010 resulting in net café growth of five units. Second Cup ended the year with 349 cafés open. In terms of renovations, 33 cafés were renovated. The number of cafés directly impacts sales, royalties and advertising. Second Cup focuses on increasing the net number of cafés and management's decision to close unprofitable Company operated cafés is designed to improve the overall earnings.
Distributable Cash
Distributable cash is not an earnings measure recognized by generally accepted accounting principles ("GAAP") and therefore may not be comparable to similar measures presented by other issuers. Distributable cash for the year was $11,200, or $1.1357 per unit compared to $9,680, or $0.9806 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 $1,301 for the Fund compared to an increase of $910 for the Fund and a decrease of $76 for MarksLP up to the acquisition date in 2009. Changes in non-cash working capital are primarily due to the timing of payments. Excluding the impact of changes in non-cash working capital, distributable cash would have been $9,899, or $1.0037 per unit, compared to $10,514, or $1.0651 per unit for 2009, a decrease of 5.8%.
Fourth Quarter Analysis
Analysis of revenues
Revenues for the Quarter were $6,490 (2009 - $7,300) and consisted of royalties, revenue from Company operated cafés and other income.
Royalties for the Quarter were $4,397 (2009 - $4,396). Excluding sales from Company operated cafés, the effective royalty rate was 8.4% (2009 - 8.5%).
Revenues from Company operated cafés were $729 compared to $1,217 for the same quarter in 2009. Second Cup ended the Quarter with five (2009 - seven) Company operated cafés.
Other income for the Quarter was $1,364 (2009 - $1,687). 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 franchise partner enters into a new franchise agreement; transfer fees earned on the sale of cafés from one franchise partner to another; purchasing coordination fees earned; and other income earned by Second Cup on the sale of its coffee through alternate channels. The $323 reduction in other income is mainly due to higher coffee prices, not all of which were passed onto the franchise partners, thereby impacting purchasing coordination fees.
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 decreased to $2,612 from $2,834 in the Quarter, mainly as a result of Second Cup recovering monies previously written off as unrecoverable. In addition, the operating costs and expenses of Company operated cafés amounted to $700 (2009 - $1,061) in the Quarter due to the reduction in the number of Company operated cafés. The Fund also recorded amortization of $38 (2009 - $53) on property and equipment, amortization of $18 (2009 - $22) on software and amortization of $71 (2009 - $85) on franchise rights in the Quarter.
Other Income and Expenses
The Fund incurred interest expense of $180 (2009 - $178) and $48 (2009 - $54) in amortization of financing charges relating to the term loan. The Fund also recorded a non-cash credit of $118 (2009 - $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 earned other net interest income of $3 (2009 - $nil) in the Quarter. During the Quarter, the Fund recorded a loss of $64 (2009 - $62) on the disposal of Company operated cafés. The Fund incurred $248 in expenses related to its conversion from an income trust structure to a public corporation.
Income Taxes
The Fund recorded a non-cash future income tax recovery in the Quarter of $33 (2009 - $1,111), mainly due to timing.
Net Earnings
The Fund's net earnings for the Quarter were $2,643 or $0.2671 per unit, compared to $4,119 or $0.4186 per unit in 2009. Excluding the non-cash future income tax recovery of $33 and Conversion costs of $248, net earnings for the Quarter would have been $2,858 or $0.2888 per unit. Excluding the non-cash future income tax recovery of $1,111, net earnings for the comparable 2009 quarter were $3,008 or $0.3057 per unit.
Distributable Cash
Distributable cash for the Quarter was $3,677, or $0.3716 per unit compared to $2,706, or $0.2750 per unit in the fourth quarter of 2009. This increase is primarily due to the changes in non-cash working capital, which for the Quarter decreased by $966 compared to an increase of $390 for the Fund and MarksLP in the comparable 2009 quarter. Changes in non-cash working capital are primarily due to the timing of payments. Excluding the impact of changes in non-cash working capital, distributable cash would have been $2,711, or $0.2740 per unit, compared to $3,096, or $0.3147 per unit for the fourth quarter of 2009, a decrease of 12.9%.
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 audited consolidated financial statements of the Fund.
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(in thousands of dollars, Three months ended Year ended
except number of cafés December 31 December 31
and per unit amounts) 2010 2009 2010 2009
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System sales of cafés(1)(4) $52,921 $53,234 $190,197 $190,406
Number of cafés - end of period(1) 349 344 349 344
Same café sales growth(1)(4) (1.5%) (1.3%) 0.0% (3.2%)
Total revenue(3) $6,490 $7,300 $25,171 $19,504
Earnings before items noted
below(2) $2,858 $3,008 $9,833 $10,800
Conversion costs(3) $248 - $563 -
Transaction costs(3) - - - $480
Non-cash future income tax
recovery(3) ($33) ($1,111) ($33) ($1,144)
Net earnings for the period $2,643 $4,119 $9,303 $11,464
Earnings per unit before
conversion costs, transaction
costs and non-cash future
income tax recovery(4) $0.2888 $0.3057 $0.9971 $1.0941
Basic and diluted earnings
per unit $0.2671 $0.4186 $0.9433 $1.1614
Distributable cash per unit
excluding changes in non-cash
working capital(4) $0.2740 $0.3147 $1.0037 $1.0651
Distributable cash per unit(4) $0.3716 $0.2750 $1.1357 $0.9806
Distributions declared per unit $0.2300 $0.2300 $0.9200 $0.9547
Payout ratio excluding changes in
non-cash working capital(4)(5) 84.1% 73.1% 91.7% 89.6%
Payout ratio(4)(6) 62.0% 83.6% 81.0% 97.4%
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(1) "System sales of cafés", "Number of cafés - end of period" and "Same
café sales growth" refer to active cafés in the Royalty Pool for
periods prior to June 28, 2009, and refer to all cafés for all
subsequent periods.
(2) "Earnings before items noted below" is a non-GAAP measure and
represents the earnings, before conversion costs, transaction costs,
and non-cash future income tax recovery of the consolidated Fund and
its wholly owned subsidiaries, including Second Cup since June 27,
2009, which are consolidated with the statements of Second Cup for
reporting purposes in accordance with GAAP.
(3) "Total revenue", "Conversion costs", "Transaction costs", and
"Non-cash future income tax recovery" represent 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").
(4) "System sales of cafés", "Same café sales growth", "Earnings per unit
before conversion costs, transaction costs, and non-cash future
income tax expense recovery", "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 non-GAAP measures.
(5) "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".
(6) "Payout ratio" is calculated as "Distributions declared per unit" as
a percentage of "Distributable cash per unit".
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The audited 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 Second Cup's website at www.secondcupincomefund.com on or before March 9, 2011.
Tax Treatment of Distributions
The tax treatment of the 2010 distributions is approximately 9.1% return of capital, and 90.9% other taxable income (equivalent to interest income).
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.
The Second Cup business continues to operate in a highly competitive market place and a challenging consumer environment. For 2011, management is targeting to regain 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 Expert".
In terms of 2011 network expansion, Second Cup expects: (1) to open 25 to 30 new cafés in Canada; (2) to close five to 10 cafés during 2011, the majority of which have sales below the average performance of its cafés; and (3) approximately 30 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 Second Cup
Second Cup is Canada's largest specialty coffee café franchisor and second largest retailer of specialty coffee, as measured by number of cafés. For the ultimate on-line coffee experience, visit www.secondcup.com.
For further information: Robert Masson, Chief Financial Officer, (905) 362-1824 or investor@secondcup.com