MISSISSAUGA, ON, March 12 /CNW/ - Second Cup Royalty Income Fund (the "Fund") reported today financial results for the fourth quarter and year ended December 31, 2007, and other matters as discussed below. 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
- A 3.3% increase in monthly distributions to 9.4 cents per unit
from 9.1 cents per unit, on an annualized basis this represents an
increase in the distribution to $1.1280 per unit from
$1.0920 per unit
- Same Cafe Sales growth of 3.0% for the year, 0.7% in the
fourth quarter
- A one-time recovery of $450 by a subsidiary of the Fund pursuant
to reassessments received on prior year income tax returns as
discussed below
- A decrease in current income tax expense from $318 in 2006 to
$56 for 2007, as a result of the reorganization of the Fund's
structure on April 2, 2007
"The deceleration in the rate of growth in same Cafe sales during the fourth quarter while disappointing, is reflective of a similar trend in the industry and the sector in general for the period. The principal contributing factors to this were strong sales in the comparable quarter from a year ago; a marginal slow down in the Canadian economy; and the inclement weather experienced during the month of December which is our busiest month of the year," commented Gabriel Tsampalieros, Chairman and Chief Executive Officer of The Second Cup Ltd. ("Second Cup"), and the President and Chief Executive Officer of Second Cup GP Inc. ("GP Inc."). "That said, given the various sales growth initiatives underway and assuming a stable economy for the balance of this year, we are confident that our track record of 17 consecutive quarters of positive same cafe sales growth will continue. As always, I wish to thank our franchise partners and colleagues for their significant role in attaining and continuing this achievement," added Mr. Tsampalieros.
Distribution Increase Announcement
The Fund is pleased to announce that its Board of Trustees has approved a 3.3% increase to the monthly unitholder distribution effective for the February 2008 distribution which will be paid on March 31, 2008 to holders of record at the close of business on March 28, 2008. The change will increase the monthly distribution rate from 9.1 cents per unit to 9.4 cents per unit, or $1.1280 per unit on an annualized basis from $1.0920 per unit.
Year to Date Analysis
Same cafe sales growth, a key metric of growth for the Fund, was 3.0% for the year. System sales increased 3.4% to $195,750 from $189,287 in 2006. Same cafe sales for the year to date were positively impacted by price increases implemented in 2006 and Second Cup's promotional programs, which continued to shift the Company's sales mix to its higher priced blender and espresso-based beverages, and, in turn, resulted in higher average cheque amounts versus 2006. Same cafe sales were negatively impacted by approximately 1.0% due to the temporary closure of 40 cafes while under renovation.
The source of revenue for the Fund is through its 100% ownership in Second Cup Trade-Marks Limited Partnership ("MarksLP") and prior to the reorganization Second Cup Trade-Marks Inc. ("MarksCo"), which, in turn, receives royalty income from Second Cup under a Royalty and Licence Agreement (the "Agreement"). The earnings of MarksLP and MarksCo are recorded on an equity-accounted basis in the Fund's financial statements.
For the year, MarksLP and MarksCo earned total royalty revenue of $12,829 (2006 - $12,421), representing an increase of 3.3%. Total general and administrative expenses incurred by the Fund, MarksCo and MarksLP were $965 (2006 - $693). The increase is primarily due to additional costs incurred for external legal and accounting advisory charges in the third quarter. Net interest expense for the Fund, MarksCo and MarksLP amounted to $569 in 2007 compared to $587 in 2006. The Fund also incurred a non-cash charge of $143 relating to the movement in the fair value of its interest rate swap (2006 - $nil) which fixes the interest rate on the term loan. Non-cash amortization of deferred financing charges amounted to $173 (2006 - $86). During the year, the Fund incurred expenses of $312 (2006 - $407), or $0.0321 per unit (2006 - $0.0422 per unit), related to the reorganization of the structure of the Fund. For 2007, the Fund and its wholly-owned subsidiaries recorded a current income tax recovery of $394. In the fourth quarter of 2007, as a result of reassessments obtained subsequent to a federal income tax audit relating to its predecessor corporation, MarksLP recorded a recovery of $450 in current income tax. Excluding this one-time recovery of $450, the balance of current income tax expense was $56 and related to income tax expense incurred by MarksCo up to the reorganization of the Fund's structure in April 2007. Current income tax expense incurred by the Fund's subsidiary corporations in 2006 was $318. Primarily as a result of the reorganization and new legislation impacting income tax rates in 2011 and onwards, the combined entities recorded a non-cash future income tax charge of $2,865 in 2007 (2006 - $187).
Net earnings of the Fund were $8,196 or $0.8442 per unit for the year, compared to $10,143, or $1.0524 per unit in 2006. Excluding the impact of the $10,668 (2006 - $nil) non-cash future income tax recovery as a result of the reorganization in the second quarter and non-cash future income tax expense of $29 in MarksCo prior to the reorganization (2006 - $187) recorded in the equity earnings of MarksCo; the $13,504 non-cash charge to earnings of the Fund related to the set up of a future income tax liability as a result of the income tax legislation described above; reorganization costs of $312 (2006 - $407); the current income tax recovery of $450 relating to prior years as described above (2006 - $nil); the non-cash movements in the fair value of the interest rate swap of $143 (2006 - $nil) and amortization of deferred financing charges of $31 (2006 - $nil) in the Fund and $142 in MarksCo (2006 - $86), net earnings for the year-to-date were $11,239 or $1.1576 per unit compared to $10,823 or $1.1229 per unit in 2006, an increase of 3.1% on a per unit basis.
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 is based on cash flows from the combined operating activities of the Fund, MarksLP and MarksCo. Distributable cash was $11,025, or $1.1356 per unit compared to $10,600, or $1.0998 per unit for the prior year. Excluding the impact of changes in non-cash working capital of the Fund, MarksCo and MarksLP, the reorganization costs and the one-time recovery of income taxes relating to prior years, distributable cash would have been $11,239, or $1.1576 per unit, compared to $10,823 or $1.1229 per unit in 2006, which represents a 3.1% increase in distributable cash per unit.
Fourth Quarter Analysis
System sales for the fourth quarter of 2007 were $54,402 (2006 - $53,759) and same cafe sales growth was 0.7% (2006 - 7.8%) for the same period. The poor weather across Canada in the month of December, compared to a very mild December the year before, also had a negative impact on sales during the most important sales period of the year. Same cafe sales were also negatively impacted by approximately 0.5% due to the temporary closure of 10 cafes while under renovation.
For the quarter, MarksLP earned total royalty revenue of $3,593 (2006 - $3,551), representing an increase of 1.2% compared to 2006. Total general and administrative expenses incurred by the Fund and MarksLP were $229 (2006 - $180). Net interest expense for the Fund and MarksLP amounted to $138 in the quarter compared to $148 in 2006. The Fund also incurred a non-cash charge of $179 relating to the movement in the fair value of its interest rate swap (2006 - $nil) which fixes the interest rate on the term loan. Non-cash amortization of deferred financing charges amounted to $12 (2006 - $17). During the fourth quarter of 2006, the Fund incurred expenses of $40 or $0.0042 per unit (2007 - $nil), related to the reorganization of the structure of the Fund. In the fourth quarter of 2007, as a result of reassessments obtained subsequent to a federal income tax audit relating to its predecessor corporation, MarksLP recorded a recovery of $450 in current income tax. Excluding this tax recovery, current tax expense for MarksLP was $nil, compared to current income tax of $171 incurred by MarksCo in the fourth quarter of 2006. Primarily as a result new legislation reducing future income tax rates commencing in 2011 and onwards, the combined entities recorded a non-cash future income tax recovery of $2,041 in the quarter (2006 - $116).
Net earnings of the Fund were $5,525 or $0.5691 per unit for the period, compared to $3,111, or $0.3228 per unit in 2006. Excluding the non-cash future income tax recovery of $2,041 (2006 - $116) related to the revision to the future income tax liability as a result of the income tax legislation described above; reorganization costs of $nil (2006 - $40); the one-time current income tax recovery of $450 (2006 - $nil) relating to prior years; and the non-cash movements in the fair value of the interest rate swap $179 (2006 - $nil) and amortization of deferred financing charges of $12 (2006 - $17 in MarksCo), net earnings for the quarter were $3,225 or $0.3322 per unit compared to $3,052 or $0.3167 per unit in 2006, an increase of 4.9% on a per unit basis.
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 is based on cash flows from the combined operating activities of the Fund, MarksLP and MarksCo. Distributable cash was $3,040, or $0.3131 per unit compared to $2,979, or $0.3091 per unit for the comparable period. Excluding the impact of changes in non-cash working capital of the Fund, MarksCo and MarksLP, the reorganization costs and the recovery of income taxes relating to prior years, distributable cash would have been $3,225, or $0.3322 per unit, compared to $3,052, or $0.3167 per unit for the fourth quarter of 2006, which represents a 4.9% increase in distributable cash per unit.
Tax Treatment of Distributions
The tax treatment of the 2007 distributions is approximately 15.5% return of capital, 82.6% other taxable income (equivalent to interest income), and 1.9% from non-eligible dividends.
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 Fund's "top line" structure means that its success and growth depend primarily on Second Cup's ability to maintain and increase the overall system sales of cafes in the Royalty Pool. Growth in overall system sales is dependent on same cafe sales growth and adding new cafes to the cafe network.
Second Cup has now achieved 17 consecutive quarters of positive same cafe sales dating back to the fourth quarter of 2003. Subject to stable economic conditions across Second Cup's primary markets, Second Cup expects to achieve same cafe sales growth of approximately 2% to 4% for the 2008 fiscal year. To achieve this growth, Second Cup has planned a number of growth initiatives to strengthen the long-term success of the Second Cup brand and its franchisees:
- In 2008, Second Cup will put an even stronger focus on operational
excellence at the cafe level, which it believes will yield even
better consistency across the chain and in doing so improve the
overall guest experience and help drive same cafe sales growth.
- In an effort to drive loyalty among specialty coffee customers,
Second Cup's promotional strategies will focus on targeted
branding initiatives leveraging its premium priced specialty
beverages, food and merchandise innovations, and value added
offers. Second Cup will also selectively enhance the nutritional
quality of its grab and go food, and beverage offerings, including
the launch of a beverage platform with lower fat and calorie
claims in mid-2008.
- Second Cup will continue to improve upon in-cafe food offerings,
and will be launching a premium hot breakfast sandwich in its
Ontario and Quebec markets in early 2008.
- Second Cup will also be taking selective price increases on
several of its products throughout the year, which is expected to
have an impact of 1% to 2% on same cafe sales growth, depending on
the timing and amount of pricing taken.
- Second Cup will continue to develop and build neighbourhood cafes
with a focus on expansion in key urban markets utilizing a
disciplined cafe development process, and the delivery of cost
savings to franchisees in the build out of their new and
renovated cafes.
In terms of network expansion, Second Cup expects to open 12 to 18 new cafes in Canada during the 2008 fiscal year. Second Cup also expects to close 10 to 14 cafes during 2008, the majority of which have sales below the average performance of cafes in the Royalty Pool. Furthermore, Second Cup expects that approximately 35 of its cafes will be renovated during 2008. Accordingly, development of the Second Cup cafe network has been and continues to be a strategic initiative for Second Cup.
Overall, based on the initiatives outlined above and others, the anticipated economic environment and market conditions affecting the specialty coffee industry, the Fund expects a successful year in 2008.
Financial Highlights
The following table sets out selected financial information and other data of the Fund and its wholly-owned subsidiaries, MarksLP and MarksCo, and should be read in conjunction with the Fund's consolidated income statements.
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(in thousands of dollars, Three months ended Year ended
except number of cafes and Dec. 31, Dec. 31, Dec. 31, Dec. 31,
per unit amounts) 2007 2006 2007 2006
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Number of cafes in
Royalty Pool 351 352 351 352
(357 cafes post the
January 1, 2008 adjustment)
Number of active cafes
- end of period 342 340 342 340
Same cafe sales growth(3) 0.7% 7.8% 3.0% 6.2%
System sales of cafes in
the Royalty Pool(3) $54,402 $53,759 $195,750 $189,287
Royalty revenues earned by
MarksLP and MarksCo(1) $3,593 $3,551 $12,829 $12,421
Earnings before reorganization
expense, non-cash movements in
interest rate swap, amortization
of deferred financing fees and
income taxes(2) $3,225 $3,223 $11,295 $11,141
Reorganization expense - $40 $312 $407
Non-cash movement of interest
rate swap and amortization of
deferred financing fees(1) $191 $17 $316 $86
Current income tax (recovery)
expense(1) ($450) $171 ($394) $318
Non-cash future income tax
expense (recovery)(1) ($2,041) ($116) $2,865 $187
Net earnings for the period $5,525 $3,111 $8,196 $10,143
Earnings per unit excluding
reorganization costs, recovery
of income taxes relating to
prior years, non-cash
amortization and movements
in the interest rate swap
and non-cash future
income taxes(3) $0.3322 $0.3167 $1.1576 $1.1229
Basic earnings per unit $0.5691 $0.3228 $0.8442 $1.0524
Diluted earnings per unit $0.5672 $0.3216 $0.8414 $1.0485
Distributable cash per unit
excluding reorganization
costs, changes in non-cash
working capital, and
recovery of income taxes
relating to prior years(3) $0.3322 $0.3167 $1.1576 $1.1229
Distributable cash per unit(3) $0.3131 $0.3091 $1.1356 $1.0998
Distributions declared per unit $0.2730 $0.2601 $1.0877 $1.0303
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(1) "Royalty revenues earned by MarksLP and MarksCo", "Non-cash movement
of interest rate swap and amortization of deferred financing fees",
"Current income taxes" and "Non-cash future income tax expense
(recovery)" represent the combined amounts of the consolidated Fund
and its wholly-owned subsidiaries, MarksLP and MarksCo which are
consolidated with the statements of Second Cup for reporting purposes
in accordance with GAAP. The Fund accounts for the earnings of
MarksLP and MarksCo on an equity-accounting basis in its consolidated
financial statements, in accordance with GAAP.
(2) "Earnings before reorganization expense, non-cash movements in
interest rate swap and amortization of deferred financing fees and
income taxes" is a non-GAAP measure and represents the earnings,
before reorganization costs, non-cash movements in interest rate
swap, non-cash amortization of deferred financing fees and all income
tax expenses or recoveries, of the consolidated Fund and its wholly-
owned subsidiaries, MarksLP and MarksCo which are consolidated with
the statements of Second Cup for reporting purposes in accordance
with GAAP.
(3) "Same cafe sales growth", "System Sales of cafes in the Royalty
Pool", "Earnings per unit excluding reorganization costs, recovery of
income taxes relating to prior years, non-cash amortization and
movements in the interest rate swap and non-cash future income
taxes", "Distributable cash per unit excluding reorganization costs,
changes in non-cash working capital, and recovery of income taxes
relating to prior years" and "Distributable cash" are non-GAAP
measures.
The audited consolidated financial statements of the Fund, together with its Managements 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 March 14, 2008.
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 cafes, 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 an indirect 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 cafes in Canada. For more information on the Second Cup Royalty Income Fund please visit www.secondcupincomefund.com.
About Second Cup
Second Cup is Canada's largest specialty coffee cafe franchisor and second largest retailer of specialty coffee, as measured by number of cafes. For the ultimate on-line coffee experience, visit www.secondcup.com.