MISSISSAUGA, ON, July 25 /CNW/ - Second Cup Royalty Income Fund (the "Fund") reported financial results for the second quarter ended June 30, 2007. 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 cafe sales growth of 4.4% for the quarter and 5.2% year-to-
date.
- Distributable cash per unit, excluding reorganization costs and
changes in non-cash working capital, increased 6.4% on a per unit
basis compared to the second quarter of 2006.
- Basic earnings per unit, adjusted to exclude reorganization costs
and the impact of the reorganization and new tax legislation on non-
cash future income tax balances was $0.2787 for the quarter,
compared to $0.2644 for the comparable period a year ago,
representing a 5.4% increase on a per unit basis.
- Completion of previously announced reorganization of the Fund's
structure.
"We continue to be pleased with the same cafe sales performance of cafes in the Royalty Pool of 5.2% on a year to date basis. The achievement of 4.4% in the second quarter was particularly challenging given that we were lapping our menu board change, which moved many of our guests up one beverage size, and increases to the prices of our blender beverage line up, both of which occurred in mid May of last year," commented Bruce Elliot, President of The Second Cup Ltd. ("Second Cup"). "We expect to modernize between 22 and 27 cafes in the third and fourth quarter which will put some pressure on same cafe sales growth due to the temporary closure of these cafes for the period of the renovation. However, we continue to expect to achieve our previously stated range of 3 to 5% for the year on the strength of our summer, fall, and holiday programs."
Reorganization of the Fund
As previously announced, on April 2, 2007, the Unitholder-approved reorganization of the structure of the Fund effectively replaced its subsidiary corporations, including Second Cup Trade-Marks Inc. ("MarksCo"), with a newly formed trust (Second Cup GP Trust) and non-taxable limited partnership (Second Cup Trade-Marks Limited Partnership, or "MarksLP"). As a result of replacing MarksCo with a non-taxable limited partnership, $10,668 of future income tax liabilities inherent in the equity accounted investment in MarksCo by the Fund were eliminated, resulting in an increase to the Fund's equity accounted earnings of MarksCo and its equity investment in MarksCo on April 2, 2007.
Second Quarter Results
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 Cafes. Same cafe sales growth is of particular importance as it directly correlates to increased cash available for distribution and is a key indicator of brand health and franchise profitability.
Same cafe sales growth of cafes included in the Royalty Pool was 4.4% for the quarter, representing the tenth consecutive quarter of sales growth since the inception of the Fund. System sales were $48,149 in the quarter, as compared to $45,812 in the first quarter of 2006, an increase of 5.1%. For the six months ended June 30, 2007, system sales were $94,146 compared to $89,185 for the six months ended June 30, 2006, an increase of 5.6%, primarily due to the same cafe sales growth of 5.2% achieved year-to-date.
Same cafe sales for the second quarter and year to date were positively impacted by price increases implemented in 2006 and Second Cup's winter, spring and summer promotional programs, which continued to shift the company's sales mix to its higher priced blender and espresso-based beverages, which, in turn, resulted in higher average transaction amounts versus 2006. Same cafe sales growth was negatively impacted in the second quarter by the fact that Second Cup was lapping both a cup sizing change, which moved many guests up a size in drinks, and increased blender prices taken in early May of 2006. Furthermore, same cafe sales were impacted in the quarter and year to date by approximately 0.5% due to the temporary closure of 13 sites while they were under renovation.
The Fund reported a net loss of $2,171 or $0.2236 per unit for the second quarter, compared to net earnings of $2,160, or $0.2241 per unit in 2006. Excluding the impact of the $10,668 (2006 - $nil) future income tax amounts recorded in the equity earnings of the Fund's wholly owned subsidiary MarksCo as a result of the reorganization discussed below; a $15,545 (2006 - $nil) charge to earnings of the Fund related to the set up of a future income tax liability as discussed below; costs incurred for the reorganization of nil (2006 - $164); and a non-cash charge of $224 to the earnings of MarksCo in the second quarter of 2006 resulting from a reduction in federal income tax rates, net earnings for the second quarter would have been $2,706 or $0.2787 per unit compared to $2,548 or $0.2644 per unit for the second quarter of 2006.
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 is based on cash flows from operating activities of the Fund and its wholly owned subsidiaries, MarksCo and MarksLP. Cash flow from operating activities of the Fund is adjusted to include cash flow from operating activities of MarksCo and MarksLP. Excluding the impact of changes in non-cash working capital and reorganization costs, distributable cash would have been $2,786 or $0.2870 per unit compared to $2,599 or $0.2697 per unit, which represents a 6.4% increase in distributable cash per unit versus the comparable period.
New Income Tax Legislation
On June 12, 2007 new tax legislation was enacted that changes the rules applicable to publicly traded income trusts in 2011. In 2011, income taxes payable will reduce net earnings of the Fund. As the new trust tax legislation has been substantively enacted, the Fund is required to give accounting recognition to these new rules. As a result, on June 12, 2007 the Fund recognized a non-cash future income tax expense, and corresponding liability, amounting to $15,545. This liability represents the difference between the accounting values of the assets and liabilities of the Fund, primarily relating to the Canadian trademarks owned by MarksLP, and the tax basis of these same assets and liabilities.
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 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.
Subject to healthy economic conditions continuing across the company's primary markets, Second Cup maintains its expectation to achieve same cafe sales growth of approximately 3% to 5% for the 2007 fiscal year.
In terms of network expansion, Second Cup expects to open 14 to 16 new cafes in Canada during the 2007 calendar year. Further, Second Cup expects it will permanently close between 8 and 12 cafes during the year, the majority of which have sales below the average performance of cafes in the Royalty Pool. Second Cup also expects that renovations to approximately 35 to 40 of its cafes will be completed during the year, 13 of which have been completed to date.
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 continues to expect a successful 2007 fiscal year.
Financial 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 unaudited interim consolidated income statements for the second quarter.
(in thousands of dollars Three months ending Six months ending
except cafes and June 30, June 30, June 30, June 30,
per unit amounts) 2007 2006 2007 2006
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Number of cafes in Royalty Pool 351 352 351 352
Number of active cafes -
end of period 348 348 348 348
Same cafe sales growth 4.4% 4.7% 5.2% 5.5%
System sales of cafes in the
Royalty Pool $48,149 $45,812 $94,146 $89,185
Royalty revenue earned by
MarksCo and MarksLP $ 3,147 $ 2,999 $ 6,146 $ 5,824
Net earnings for the period
excluding reorganization
costs and the impact of the
reorganization and new tax
legislation on non-cash
future income tax balances(1) $ 2,706 $ 2,548 $ 5,278 $ 4,986
Net (loss) earnings for
the period ($ 2,171) $ 2,160 $ 100 $ 4,405
Basic earnings per unit
excluding reorganization
costs and the impact of the
reorganization and new tax
legislation on non-cash
future income tax balances(1) $0.2787 $0.2644 $0.5436 $0.5173
Basic (loss) earnings per unit ($0.2236) $0.2241 $0.0103 $0.4570
Diluted (loss) earnings
per unit ($0.2236) $0.2234 $0.0103 $0.4556
Distributable cash per unit
excluding reorganization
costs and changes in
non-cash working capital(2) $0.2870 $0.2697 $0.5562 $0.5278
Distributable cash per unit $0.2771 $0.2409 $0.5546 $0.5124
Distributions declared
per unit $0.2730 $0.2601 $0.5417 $0.5101
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(1) "Net earnings for the period excluding reorganization costs and the
impact of the reorganization and new tax legislation on non-cash
future income tax balances" and "Basic earnings per unit excluding
reorganization costs and the impact of the reorganization and new tax
legislation on non-cash future income tax balances" represent
non-GAAP measures and are calculated by adding back to net earnings
expenses relating to the reorganization of $nil for the three months
and $301 for the six months ending June 30, 2007, and $164 for the
three months and $357 for the six months ending June 30, 2006; for
the three months and six months ended June 30, 2007, net earnings
exclude the non-cash recovery of future income taxes of $10,668
relating to the reorganization of the Fund, and a non-cash future
income tax charge of $15,545 relating to the new tax legislation
substantially enacted on June 12, 2007; and for the three months and
six months ended June 30, 3006, net earnings exclude a non-cash
income tax charge of $224 relating to a reduction of future income
tax rates recognized in the second quarter of 2006.
(2) "Distributable cash", "Distributable cash per unit" and
"Distributable cash per unit excluding reorganization costs and
changes in non-cash working capital" represent non-GAAP measures.
"Distributable cash per unit excluding reorganization costs and
changes in non-cash working capital" in 2007 and 2006 are calculated
by taking the Distributable cash calculated as described in the
Fund's MD&A, and adding back costs related to the reorganization of
$nil for three months and $301 for six months ending June 30, 2007
and $164 for three months and $357 for six months ending June 30,
2006 and excluding changes in non-cash working capital balances of
the Fund and MarksLP.
The unaudited interim consolidated financial statements of the Fund, together with its Management's Discussion and Analysis for the second quarter of 2007, are expected to be available at www.sedar.com and on the Fund's website at www.secondcupincomefund.com on or before July 30, 2007.
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.
Non-GAAP Terms
In addition to using financial measures prescribed by GAAP, non-GAAP financial measures and other terms are used in this news release. These terms include "system sales", "same cafe sales growth", "net earnings for the year excluding reorganization costs and the impact of the reorganization and new tax legislation on non-cash future income tax balances", "basic earnings per unit excluding reorganization costs and the impact of the reorganization and new tax legislation on non-cash future income tax balances", "distributable cash per unit excluding reorganization costs and changes in non-cash working capital" and "distributable cash". These terms are not financial measures recognized by GAAP and do not have any standardized meaning prescribed by GAAP and therefore may not be comparable to similar terms and measures presented by other similar issuers. These non-GAAP measures and terms are intended to provide additional information on the Fund's performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
System sales and same cafe sales growth are presented in reference to the sales performance of the Royalty Pool Cafes. The Fund believes they are useful measures as they provide an indication of the top-line sales on which the royalty that is the Fund's indirect source of income is based. Distributable cash is presented in reference to the Fund's distribution policy. The Fund believes distributable cash is a useful measure as it provides investors with an indication of cash available for distribution. Management believes, in addition to net income, distributable cash is a useful supplemental measure in evaluating the Fund's performance as it provides investors with an indication of cash available for distributions and working capital needs. Investors are cautioned, however, that distributable cash should not be construed as an alternative to the statement of cash flows as a measure of liquidity and cash flows. The method of calculating distributable cash for the purposes of this news release may differ from that used by other issuers and, accordingly, distributable cash in this news release may not be comparable to distributable cash used by other issuers.
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 further information on Second Cup, visit www.secondcup.com.
%SEDAR: 00021352E