MISSISSAUGA, ON, March 7 /CNW/ - Second Cup Royalty Income Fund (the
"Fund") reported today financial results for the year ended December 31, 2005.
As the Fund went public on December 2, 2004, there are no year-over-year
comparables for the period. The Fund's units are traded on the Toronto Stock
Exchange under the symbol "SCU.UN".
Same cafDe sales growth, a key metric of growth for the Fund, was 4.6% for
the year. System sales were $177.5 million and benefited from a price increase
implemented in the first quarter. The increase was applied to certain product
offerings and accounted for approximately 3.0 percentage points of the same
cafDe sales growth for the year. System sales have also benefited from an
improvement in sales mix, driven by stronger premium beverage sales. In
addition, a high-volume cafDe situated in a major Toronto-area retail center
was temporarily closed during the second half of 2005 due to a major mall
renovation. This adversely impacted system sales by 0.3% for the year.
The source of revenue for the Fund is its subsidiary, Second Cup
Trade-Marks Inc. ("MarksCo") which, in turn, receives royalty income from The
Second Cup Ltd. ("Second Cup") under a Licence and Royalty Agreement (the
"Agreement"). For the year, MarksCo earned total royalty revenue of
$11,606,000 and paid $9,487,000 in interest and $575,000 in dividends up to
the Fund. The Fund incurred total operating expenses of $301,000, excluding
$441,000 incurred by MarksCo. Operating expenses of the Fund and MarksCo are
limited to general and administrative expenses, term loan interest expense,
and amortization of deferred financing fees, and were in line with
management's expectations. Net earnings of the Fund before any cash
distribution were $10,036,000 or $1.0473 per unit for the year.
Distributable cash, a non-GAAP measurement, represents net earnings of
the Fund adjusted for future income taxes and non-cash amortization expenses
of the Fund and its wholly-owned subsidiary, MarksCo, and was $10,242,000, or
$1.0688 per unit compared to distributions declared of $9,583,000 or $1.00 per
unit for the year. The tax treatment of 2005 distributions is 16.8% return of
capital and 83.2% income.
Highlights
The following table sets out selected financial information and other
data of the Fund and should be read in conjunction with the Fund's
consolidated income statements.
<<
Year ending Period ending
(in thousands of dollars except December 31, December 31,
cafDes and per unit amounts) 2005 2004(1)
-------------------------------------------------------------------------
Number of active cafDes in Royalty Pool
- end of period 343 349
(352 cafDes post the January 1, 2006
adjustment)
Same cafDe sales growth 4.6% 6.8%
System sales of Royalty Pool CafDes $ 177,527 $ 16,610
Net earnings for the period $ 10,036 $ 784
Basic and fully diluted earnings per unit $ 1.0473 $ 0.0818
Distributable cash per unit $ 1.0688 $ 0.0842
Distributions declared per unit $ 1.0000 $ 0.0821
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the period October 22, 2004 (date of commencement of the Fund)
to December 31, 2004.
The audited consolidated financial statements of the Fund, together with
its Managements Discussion and Analysis, will be available at www.sedar.com
and on the Fund's website at www.secondcupincomefund.com on or before
March 13, 2006.
Adjustment to Royalty Pool
On January 3, 2006, the Fund announced the first adjustment to the
Royalty Pool, effective January 1, 2006. Nine Second Cup cafDes were added to
the Royalty Pool, with estimated system sales of $4.06 million annually. These
were reduced by $2.91 million in actual system sales of eight cafDes closed
from the Royalty Pool since the Fund's inception. As a result of this
adjustment, the system sales of the Royalty Pool are expected to increase by
$1.15 million and the total number of cafDes in the Royalty Pool increased from
351 to 352 as at January 1, 2006. On January 1, 2006, the Fund issued 55,316
units to Second Cup, representing 80% of the estimated obligation on the
adjustment of the Royalty Pool. After a full year of performance of the new
cafDes, the Fund expects to issue additional units for the remaining
obligation.
Outlook
The Fund's "top line" structure means that its success and growth depends
primarily on Second Cup's ability to maintain and increase the overall system
sales of Royalty Pool CafDes. Growth in overall system sales is dependant upon
same cafDe sales growth, and adding net new cafDes to the cafDe network.
During 2005, Second Cup made significant progress in implementing its
previously announced strategies, aimed at increasing same cafDe sales growth
and expanding the number of Second Cup cafDes across Canada. This is evidenced
by same cafDe sales growth of 4.6% for the year, following the achievement of
5.8% same cafDe sales growth in the 40 week period ending January 1, 2005.
Subject to healthy economic conditions continuing across the Company's primary
markets, the Company expects to achieve same cafDe sales growth in the range of
approximately 3% to 5% for the 2006 fiscal year. To this end, the Company has
a number of ongoing initiatives aimed at strengthening the long-term success
of Second Cup and its franchise partners:
- In October 2005, Second Cup completed the rollout of its reloadable
payment card (the "Second Cup CafDe Card") across its major Canadian
markets. The card allows customers to load a dollar amount on the card
at a cafDe and redeem it not only for their daily purchases at
participating cafDes, but also at Cara Operations Limited restaurant
brands including Harvey's, Swiss Chalet, Kelsey's, Milestone's and
Montana's. During the Holiday periods of November and December alone,
over $2 million was loaded on to the cards. The Company intends to
benefit from a full year of the CafDe Card program by featuring it in
many of the promotions and themes planned for 2006, allowing the
Company significant opportunity for sales growth.
- As part of its commitment to focus on premium products, Second Cup
launched its reformulated latte in the fourth quarter of 2005. The new
recipe was launched with significant print advertising and media
coverage in the fourth quarter of 2005 and consumer reception has been
positive. The Company intends to build upon this success by launching
a number of new premium beverages during 2006.
- In an effort to raise sales of non-beverage product categories, the
Company's promotional strategies for 2006 will feature complementary
pairings of seasonal foods and merchandise combined with a featured
premium beverage. Second Cup will also be selectively adding to its
offerings of ready-to-serve beverages, seasonal merchandise and snack
food items, including an expanded sandwich program in select cafDes.
- During 2006, Second Cup will also be investing significantly in
revamping the training and development it offers to its franchisees
and cafDe support staff. This will include an emphasis on leveraging
technology in delivering knowledge across the Second Cup cafDe network.
The increased focus on training and development is expected to raise
overall business capabilities and generate long-term value for the
Company and its partners.
The Company is projecting moderate price increases on select product
offerings later in 2006. The level of price increases will be dependant on
various competitive factors and is not expected to reach the level experienced
in 2005.
The Company completed the renovation of 15 existing cafDes and opened six
new cafDes in Canada during 2005. Newly-renovated cafDes typically experience
above-average same cafDe sales growth and the company has in excess of 70 cafDes
due for renovation in the next three years. Accordingly, development of the
Second Cup cafDe network has been and continues to be a strategic initiative
for the Company.
To that end, the Company expects to renovate and modernize approximately
20 cafDes during 2006. In terms of network expansion, Second Cup expects to
open approximately 15 to 20 new cafDes in Canada during the 2006 fiscal year.
However, as part of its ongoing efforts to raise the Company's competitive
position, Second Cup also expects to permanently close 12 to 15 cafDes during
2006, the majority of which have sales below the average performance of cafDes
in the Royalty Pool.
Overall, based on the Second Cup initiatives outlined above and others,
the anticipated economic environment and market conditions affecting the
specialty coffee industry, the Fund expects a successful year in 2006.
Distribution Announcement
The Fund has announced that its Board of Trustees has approved a cash
distribution of $0.0833 per unit for the month of February to be paid on
March 31, 2006 to unitholders of record at the close of business on March 29,
2006.
Forward Looking Information
Certain statements in this news release may constitute forward-looking
information within the meaning of applicable securities legislation. Forward-
looking information can be identified by words such as "may", "will",
"should", "expect", "anticipate", "believe", "plan", "intend" and other
similar words. Forward-looking information reflects current expectations
regarding future events and operating performance and speaks only as of the
date of this news release. It should not be read as a guarantee of future
performance or results and will not necessarily be an accurate indication of
whether or not those results will be achieved. Forward-looking information is
based upon a number of assumptions and is subject to known and unknown risks,
uncertainties and other factors, many of which are beyond the Fund's control,
that may cause the Fund's actual results, performance or achievements, or
those of MarksCo, Second Cup, Second Cup cafDes, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking information. The following are
some of the factors that could cause actual results to differ materially from
those expressed in or underlying forward-looking information: competition;
availability of premium quality coffee beans; the ability to attract qualified
franchisees; the location of Second Cup cafDes; the ability to exploit and
protect the Second Cup Marks; changing consumer preferences and discretionary
spending patterns; reporting of System Sales by franchisees; and the results
of operations and financial condition of Second Cup. The foregoing list of
factors is not exhaustive, and investors should refer to the Fund's filings
with securities regulators.
Although the forward-looking information contained in this news release
is based upon what management believes are reasonable assumptions, there can
be no assurance that actual results will be consistent with this forward-
looking information. Certain assumptions made in preparing forward-looking
information include the assumption that the Canadian economy will remain
stable or expand at a moderate pace in 2006 and that inflation will remain
relatively low. The Fund has also assumed that interest rates will gradually
increase in 2006 and that demand for specialty coffee will be comparable with
demand in 2005.
As these forward-looking statements are made as of the date of this news
release, the Fund does not undertake to update any such forward looking
information whether as a result of new information, future events or
otherwise. Additional information about these assumptions and risks and
uncertainties is contained in the Fund's filings with securities regulators.
These filings are also available on the Fund's website at
www.secondcupincomefund.com
About the Fund
The Fund is an open-ended trust established under the laws of the
Province of Ontario. It holds, through an indirect wholly-owned subsidiary,
the Canadian trade-marks and other intellectual property and associated rights
used by Second Cup in connection with the operation of Second Cup cafDes in
Canada. The trade marks are licensed to Second Cup for 99 years for which
Second Cup pays the Fund 6.5% of system sales of cafDes in the Royalty Pool.
For further information on the Fund, visit www.secondcupincomefund.com.
About Second Cup
Second Cup is Canada's largest specialty coffee cafDe franchisor and
second largest retailer of specialty coffee, as measured by number of cafDes.
For the ultimate on-line coffee experience, visit www.secondcup.com. Second
Cup is a wholly owned subsidiary of Cara Operations Limited, Canada's leading
integrated restaurant company.
>>
%SEDAR: 00021352E
