MISSISSAUGA, ON, Nov. 1 /CNW/ - Second Cup Royalty Income Fund (the "Fund") reported financial results for the third quarter ended September 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.
Third Quarter Results
Same cafe sales growth of cafes included in the Royalty Pool was 1.2% for the quarter, representing the eleventh consecutive quarter of sales growth since the inception of the Fund. System sales were $47,202 in the quarter, as compared to $46,343 in the third quarter of 2006, an increase of 1.9%. For the nine months ended September 30, 2007, system sales were $141,348 compared to $135,528 for the nine months ended September 30, 2006, an increase of 4.3%, primarily due to the same cafe sales growth of 3.8% achieved year-to-date.
"Same cafe sales in the third quarter were particularly challenging given the comparably strong results from the third quarter of 2006, and the fact that we were modernizing significantly more cafes this year compared to last. In the third quarter alone, 17 cafes were modernized which negatively impacted same cafe sales by approximately 1.0% due to their temporary closure while under renovation. To date, we have renovated 30 cafes compared to only 11 in total in the prior year, and expect to renovate approximately 10 more cafes by year end," commented Bruce Elliot, President of The Second Cup Ltd. ("Second Cup"). "We recently began rolling out our new grilled sandwich program across our Montreal and Toronto markets, and have expanded our sandwich program in Alberta, which we believe will positively impact sales for the balance of year. We are also looking forward to another successful holiday program which will commence in November."
The Fund reported net earnings of $2,571 or $0.2648 per unit for the third quarter, compared to net earnings of $2,627, or $0.2726 per unit in 2006. Earnings were impacted in the quarter by additional general and administrative expenses, primarily due to additional legal and advisory costs incurred by the Fund. Excluding the reorganization costs and the impact of the non-cash future income tax adjustments recorded in the second quarter of 2007 and 2006, net earnings for the year-to-date were $7,860 or $0.8096 per unit compared to $7,623 or $0.7909 per unit in 2006, an increase of 2.4% on a per unit basis.
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 subsidiary Second Cup Trade-Marks Limited Partnership ("MarksLP"). Cash flow from operating activities of the Fund is adjusted to include cash flow from operating activities of MarksLP. Excluding the impact of changes in non-cash working capital and the reorganization costs, distributable cash for the third quarter was $2,614 or $0.2692 per unit compared to $2,684 or $0.2785 per unit. The decrease is mainly attributable to increased legal and advisory and other general and administrative expenses incurred by the Fund and its subsidiaries. For the year to date, excluding the impact of changes in non-cash working capital and the reorganization costs, distributable cash was $8,014 or $0.8255 per unit compared to $7,771 or $0.8063 per unit in 2006, an increase of 2.4% on a per unit basis.
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, and its expectation of another successful holiday season, Second Cup currently expects same cafe sales growth of approximately 3% to 4% for the 2007 fiscal year.
In terms of network expansion, Second Cup expects to open 14 to 15 new cafes in Canada during the 2007 fiscal year. Further, Second Cup expects it will permanently close between 8 and 10 cafes during the same period, all of which have sales below the average performance of cafes in the Royalty Pool. Second Cup also expects that renovations to approximately 39 to 41 of its cafes will be completed during the year, 30 of which have been completed to date.
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 third quarter.
(in thousands of dollars Three months ending Nine months ending
except cafes and September September September September
per unit amounts) 30, 2007 30, 2006 30, 2007 30, 2006
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Number of cafes in Royalty Pool 351 352 351 352
Number of active cafes -
end of period 344 345 344 345
Same cafe sales growth 1.2% 5.7% 3.8% 5.6%
System sales reported by the
cafes in the Royalty Pool $47,202 $46,343 $141,348 $135,528
Royalty revenue earned by
MarksLP $3,090 $3,046 $9,236 $8,870
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) $2,582 $2,637 $7,860 $7,623
Net earnings for the period $2,571 $2,627 $2,671 $7,032
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) $0.2659 $0.2736 $0.8096 $0.7909
Basic earnings per unit $0.2648 $0.2726 $0.2751 $0.7296
Diluted earnings per unit $0.2641 $0.2716 $0.2744 $0.7270
Distributable cash per unit
excluding reorganization
costs and changes in
non-cash working capital(2) $0.2692 $0.2785 $0.8255 $0.8063
Distributable cash per unit(2) $0.2696 $0.2783 $0.8225 $0.7907
Distributions declared
per unit $0.2730 $0.2601 $0.8147 $0.7702
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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 $11 for the three months
and $312 for the nine months ending September 30, 2007, and $10 for
the three months and $367 for the nine months ending September 30,
2006; net earnings exclude the non-cash recovery of future income
taxes relating to the reorganization of the Fund of $nil for the
three months and $10,668 for the nine months ended September 30, 2007
and a non-cash future income tax charge relating to the new tax
legislation enacted on June 12, 2007 of $nil for the three months and
$15,545 for the nine months ended September 30, 2007; and $nil for
the three months and $224 for the nine months ended September 30,
2006, net earnings exclude a non-cash income tax charge relating to a
reduction of future income tax rates recognized in the second quarter
of 2006.
(2) "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 the Fund's MD&A, and adding back costs
related to the reorganization of $11 for the three months and $312
for the nine months ending September 30, 2007 and $10 for the three
months and $367 for the nine months ending September 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 third 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 November 2, 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