Second Cup Announces 2011 Results

MISSISSAUGA, ON, March 2, 2012 /CNW/ - The Second Cup Ltd. ("Second Cup" or the "Company") reported financial results today for the 13 weeks ended December 31, 2011 (the "Quarter") and year ended December 31, 2011 (the "Full Year"). The Company's shares are traded on the Toronto Stock Exchange under the symbol "SCU".  All amounts in this news release are presented in thousands of Canadian dollars, unless otherwise indicated.

Highlights

• System sales increased 2.8% in the Quarter and increased 1.8% for the Full Year.
• Same café sales increased 1.2% in the Quarter and decreased 0.1% for the Full Year.
• EBITDA of $3,647 for the Quarter, up 27% from $2,881 in the comparable quarter a year ago.
• Fourth quarter earnings per share $0.23 for the current year vs. $0.26 in the comparable quarter last year.
• Earnings per share $1.34 for the current year vs. $0.94 last year.
• Declared dividend of $0.15 per share.
• Net growth of 10 cafés.

On January 1, 2011 the Second Cup Income Fund (the "Fund") converted from an income trust structure to a public corporation (the "Conversion"). As a result of the Conversion, Second Cup is now subject to corporate income tax and therefore, the results of 2011 will not be directly comparable to 2010.

Stacey Mowbray, President and CEO of Second Cup commented, "Given the continued intense competition in our category, the growth in same café sales of 1.2% in the fourth quarter and 1.8% system sales growth for the year was a satisfactory result. I am pleased with the opening of 22 new cafés during the year, giving us net growth of 10 cafés to the system. Earlier this year I announced that 80% of our Second Cup coffees and 100% of our espresso beverages have been Rainforest Alliance certified. We are proud of our continued leadership and commitment to sustainability through third party certifications. With our recent innovation in our tea offerings, I am proud to report that all of our teas and tisanes have also received Rainforest Alliance certification. This commitment to quality and sustainability in our beverage products coupled with the commitment and passion of our franchise partners supports Second Cup's unique position in the market as The Coffee Company that Cares."

FINANCIAL HIGHLIGHTS

The following table sets out selected International Financial Reporting Standards ("IFRS") financial information and other data of the Company and should be read in conjunction with the audited financial statements of the Company for the 13 and 52 weeks ended December 31, 2011, which are expected to be released on or before March 9, 2012.

¹ "System sales of cafés", "Same café sales growth", "EBITDA", "Adjusted net income" and "Adjusted basic and diluted earnings per share/unit" are not recognized performance measures under IFRS and, accordingly, may not be comparable to similar computations as reported by other issuers.

Analysis of System Sales and Same Café Sales Growth
System sales for the 13 weeks ended December 31, 2011 were $54,404 compared to $52,921 for the three months ended December 31, 2010, representing an increase of $1,483 or 2.8%. The total number of cafés at the end of the Quarter was 359 compared to 349 cafés at the end of the fourth quarter of 2010. Same café sales increased by 1.2% in the Quarter.

System sales for the 52 weeks ended December 31, 2011 were $193,660, compared to $190,197 for the twelve months ended December 31, 2010, representing an increase of $3,463 or 1.8%, primarily due to the net growth in the number of cafés from 349 to 359 at the end of 2011. For the Full Year same café sales declined by 0.1%.

Fourth Quarter Analysis

Analysis of Revenues
Total revenues for the Quarter were $7,363 (2010 - $6,490) and consisted of royalty revenue, revenue from sale of goods and services revenue.

Royalty revenue for the Quarter was $4,346 (2010 - $4,397). The reduction in royalty revenue of $51 was mainly due to a reduction in the effective royalty rate (excluding sales from Company-operated cafés) from 8.4% in 2010 to 8.1% in the Quarter as a result of the revised royalty structure for new cafés as well as café specific arrangements in place during the period.

Revenue from the sale of goods, which includes revenue from Company-operated cafés and the sale of coffee through wholesale and retail channels, was $1,042, compared to $782 for the three months ended December 31, 2010. The increase in revenue from the sale of goods was mainly due to operating five Company-operated cafés in 2010 compared to nine for most of the fourth quarter in 2011. The Company franchised two cafés late in the Quarter, ending the Quarter with seven Company-operated cafés.

Services revenue for the Quarter was $1,975 (2010 - $1,311). Services revenue includes initial franchise fees, renewal fees, transfer fees earned on the sale of cafés from one franchise partner to another, purchasing coordination fees and other ancillary fees (IT support and training fees). The $664 increase in services revenue is mainly due to an increase in purchasing coordination fees, initial franchise fees and other ancillary fees.

Cost of Goods Sold
Cost of goods sold represents the product cost of goods sold in corporate cafés and through retail and wholesale channels plus the cost of direct labour to prepare and deliver the goods to the customers in the cafés. Cost of goods sold as a percentage of revenue from the sale of goods was 73% in the Quarter, unchanged from the three months ended December 31, 2010.

Operating Expenses
Operating expenses include the head office expenses of Second Cup and the overhead expenses of Company-operated cafés. Total operating expenses amounted to $3,393 (2010 - $3,228), an increase of $165. Head office expenses of Second Cup decreased by $124 (4.2%) from $2,981 in 2010 to $2,857. In 2010 the Fund expensed $248 in conversion costs relating to the Conversion discussed above. The overhead expenses of Company-operated cafés increased by $289 from $247 in 2010 to $536, mainly due to operating five Company-operated cafés in 2010 compared to nine for most of the fourth quarter in 2011.

Other Income and Expenses
The Company incurred interest expense of $177 (2010 - $180), and $18 (2010 - $48) in amortization of financing charges relating to the term loan. The Company also recorded a non-cash credit of $86 (2010 - $118) for the movement in the fair value of the derivative interest rate swap that fixes the interest rate on the Company's term loan. The Company earned other interest income of $20 (2010 - $10) primarily due to interest earned from short-term highly liquid bank investments with original maturities of three months or less and from notes receivable.

Income Taxes
Current income taxes of $894 (2010 - $nil) were recorded in the Quarter. A deferred tax recovery of $130 (2010 - $28) was recorded in the Quarter. As previously stated, Second Cup is subject to corporate income tax as of January 1, 2011.

EBITDA
EBITDA for the Quarter was $3,647 (2010 - $2,881). The increase in EBITDA was due to an increase in gross profit of $685 offset by an increase in operating expenses of $165.

Net Income
The Company's net income for the Quarter was $2,352 or $0.23 per share, compared to $2,611 or $0.26 per unit in 2010. The reduction in net income of $259 was mainly due to income taxes of $764 in 2011 offset by an increase in operating income.

Full Year

Analysis of Revenues
Revenues were $25,001 compared to $25,171 in 2010 and consisted of royalty revenue, revenue from sale of goods and services revenue.

Royalty revenue was $15,631 (2010 - $15,874). The reduction in royalty revenue of $243 was mainly due to a reduction in the effective royalty rate (excluding sales from Company-operated cafés) from 8.5% in 2010 to 8.2% as a result of the revised royalty structure for new cafés as well as café specific arrangements in place during the year.

Revenue from the sale of goods, which includes revenue from Company-operated cafés and the sale of coffee through wholesale and retail channels, was $3,006 compared to $3,489 for the 12 months ended December 31, 2010. The reduction in revenue from the sale of goods was mainly due to a reduction in the weighted average number of Company-operated cafés from eight in 2010 to six for 2011. The Company ended the year with seven (2010 - five) Company-operated cafés.

Services revenue was $6,364 (2010 - $5,808). Services revenue includes initial franchise fees, renewal fees, transfer fees earned on the sale of cafés from one franchise partner to another, purchasing coordination fees and other ancillary fees (IT support and training fees). The $556 increase in services revenue is due to an increase in initial franchise fees of $285, increases in transfer fees of $128 and increases in other ancillary fees of $405, a decrease in purchasing coordination fees of $71 and a decrease in renewal fees of $197.

Cost of Goods Sold
Cost of goods sold as a percentage of revenue from the sale of goods was 74% compared to 75% for the twelve months ended December 31, 2010.

Operating Expenses
Operating expenses include the head office expenses of Second Cup and overhead expenses of Company-operated cafés. Total operating expenses amounted to $13,176 (2010 - $12,446), an increase of $730. Head office expenses of Second Cup increased by $423 (3.7%) from $11,585 in 2010 to $12,008. Overhead expenses of Company-operated cafés increased by $307 from $861 in 2010 to $1,168, mainly due to operating more Company-operated cafés in 2011 compared to 2010.

Other Income and Expenses
The Company incurred interest expense of $717 (2010 - $718), and $72 (2010 - $185) in amortization of financing charges relating to the term loan. The Company also recorded a non-cash credit of $29 (2010 - charge of $33) for the movement in the fair value of the derivative interest rate swap that fixes the interest rate on the Company's term loan. The Company earned other interest income of $67 (2010 - $26) primarily due to interest earned from short-term, highly liquid bank investments with original maturities of three months or less and from notes receivable.

Income Taxes
The income tax recovery of $4,414 (2010 - $150) consists of:

• recovery of $6,943 due to the Conversion;
• current tax expense of $1,527 (2010 - $83 recovery); and
• deferred tax expense of $1,002 (2010 - $67 recovery), excluding the impact of the Conversion.

Prior to the Conversion in 2011, the Fund was an unincorporated open-ended trust and was not subject to income taxes to the extent that its taxable income was distributed to unitholders. As a result of new tax legislation substantively enacted on June 12, 2007, the Fund would have paid tax on distributions declared subsequent to January 1, 2011. As a result of this legislation, the Fund had provided for the future tax effect of existing temporary differences between the accounting and tax bases of assets and liabilities that were expected to reverse subsequent to January 1, 2011 at the specified investment flow through ("SIFT") entity tax rates under Canadian GAAP. Under IFRS, the taxation rate to apply to temporary differences of the Fund that were expected to reverse after 2010 was the highest marginal tax rate of 46.41% rather than the lower SIFT tax rate used previously of 28.25%. On the IFRS Transition Date, this IFRS adjustment resulted in an increase of $7,495 to the deferred tax liability and a corresponding decrease to equity. As a corporation, the deferred tax liability is measured using the corporate tax rate of 28.16% and resulted in a reduction in the deferred tax liability of $6,943 and a corresponding non-cash credit to income in the first quarter.

EBITDA
EBITDA was $10,600 (2010 - $10,681). The decline in EBITDA was due to an increase in operating expenses of $730 offset by an increase in gross profit of $231.

Net Income
The Company's net income was $13,301 or $1.34 per share, compared to $9,310 or $0.94 per unit in 2010. Excluding the deferred income tax recovery of $6,943 referred to above and Conversion costs of $563 in 2010, adjusted net income was $6,358 (2010 - $9,873). The reduction in adjusted net income of $3,515 was mainly due to an increase in gross profit of $231, an increase in operating expenses of $730 (including an increase in severance costs of $426) as well as the fact that Second Cup is now subject to corporate income tax, which resulted in a deferred tax expense of $1,002, excluding the impact of the Conversion (2010 - $563) and a current tax expense of $1,527 (2010 - $83 recovery).

Capital Expenditure
In January 2011, the board of directors approved capital expenditure of $2,100 for the implementation of a new café technology platform, which includes new point of sale systems ("POS") to be installed in substantially all cafés. The implementation is expected to be completed in early 2012 and will provide improved management information, improved customer service and will simplify administration. The franchise partners will pay a monthly fee to cover the support and maintenance of the system.

Café Network
In order to accelerate the growth of new cafés, Second Cup introduced a revised royalty structure for new cafés that opened in 2011. New cafés that opened in 2011 are permitted to pay a royalty rate of 3% in the first year, a rate of 6% in the second year and thereafter a rate of 9%.

During the Quarter, six cafés were renovated (2010 - six), there were seven café openings (2010 - five) and seven café closures (2010 - one) with 359 cafés open at December 31, 2011. For the Full Year, 25 cafés (2010 - 33) were renovated; there were 22 café openings (2010 - 13) and twelve café closures (2010 - eight).

Dividend

On March 1, 2012 the board of directors of Second Cup approved a dividend of $0.15 per common share, payable on March 30, 2012 to shareholders of record at the close of business on March 16, 2012. The dividend will be considered an eligible dividend for income tax purposes.

Annual General Meeting of Shareholders

The board of directors has set a record date of April 2, 2012 for the Annual General Meeting of shareholders. The Annual General Meeting will be held at 2:00 p.m. on Thursday, May 3, 2012 at the offices of Stikeman Elliott LLP, 53rd Floor, 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario.

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 marketplace and a challenging consumer environment. For 2012, 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 operational excellence, training and promotion of the brand's quality credentials as The Coffee Company that Cares.

In terms of 2012 network expansion Second Cup has targeted to open 30 new cafés. In addition, Second Cup expects to close approximately 15 cafés, the majority of which have sales below the average performance of its cafés and to renovate approximately 20 of its cafés.

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 Second Cup'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.

NON-IFRS TERMS

In addition to using financial measures prescribed by IFRS, non-IFRS financial measures and other terms are used in this press release. These terms include "system sales of cafés", "same café sales growth", "EBITDA", "adjusted net income" and "adjusted basic and diluted earnings per share/unit". These terms are not financial measures recognized by IFRS and do not have any standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar terms and measures presented by other similar issuers. These non-IFRS measures and terms are intended to provide additional information on the Company's performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

System sales of cafés and same café sales growth are presented in reference to the sales performance of all cafés in Canada. The Company believes they are useful measures as they provide an indication of the top-line sales on which the royalty that is Second Cup's direct source of income is based.

Additional information relating to the Company, including the Company's Annual Information Form, is on SEDAR at www.sedar.com.

About Second Cup®

Founded in 1975, Second Cup® is Canada's largest specialty coffee franchisor, operating more than 350 cafés across the country.  As a proudly Canadian company, Second Cup celebrates its franchisees' local ownership, and prioritizes the support of local businesses through daily deliveries from neighbourhood partners.  Committed to caring for every guest, all 5,000 associates of Second Cup are Trusted Coffee Experts™ who sell 1,000,000 coffee and tea beverages every week.  For more information, please visit www.secondcup.com.