MISSISSAUGA, ON, May 12 /CNW/ - Second Cup Royalty Income Fund (the "Fund") reported today financial results for the first quarter ended March 31, 2009, and the approval of the April distribution payment. 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 were down 3.0% in the quarter, with sales adversely
affected by the continuing downturn in the economy, increased
unemployment and consumer discretionary patterns.
- Basic earnings per unit increased by 2.7% to $0.2578 for the quarter,
up from $0.2511 in the comparable quarter a year ago.
- Basic earnings per unit, excluding non-cash expenses, decreased 7.0%
to $0.2574 per unit from $0.2769 for the comparable period in 2008
- Distributions declared in the quarter were $0.26467 per unit compared
to $0.2790 in 2008, a decrease of 5.1%
"Although we are disappointed in the same cafe sales, we are encouraged by the progress we are making in both the expansion of food and innovation in the beverage portfolio, as well as the absolute commitment of our individual owner operators to serve and delight our guests," commented Stacey Mowbray, President of The Second Cup Ltd. ("Second Cup").
First Quarter Analysis
The source of revenue for the Fund is through its 100% ownership in Second Cup Trade-Marks Limited Partnership ("MarksLP") which, in turn, receives royalty income from Second Cup under a Royalty and Licence Agreement (the "Agreement"). The earnings of MarksLP are recorded on an equity accounted basis in the Fund's financial statements.
System sales for the first quarter were $44,992 (2008 - $47,333), representing a decrease of $2,341 or 4.9%. This decrease was mainly the result of lower same cafe sales of 3.0% in the quarter and the extra day in February 2008 as a result of leap year, partially offset by the shift in Easter from Q1 in 2008 to Q2 in 2009. The softening of cafe sales continued from 2008 into the first quarter of 2009 across Canada's major markets resulting from lower customer traffic, which management of Second Cup believes is similar to the trend experienced in retail in general and reflective of the continuing downturn in the Canadian economy. Continuing to offset this decline is the improvement in average cheque as a result of the new food programs in the lunch and breakfast day-parts introduced last year and the bagel program launched in the first quarter 2009.
For the quarter, MarksLP earned total royalty revenue of $2,932 (2008 - $3,081), representing a decrease of 4.8% compared to 2008. Total general and administrative expenses incurred by the Fund and MarksLP were $207 (2008 - $179). Net interest expense for the Fund amounted to $176 in the quarter compared to $166 in 2008. The Fund also incurred a non-cash charge of $16 relating to the movement in the fair value of its interest rate swap (2008 - $171) which fixes the interest rate on the term loan. Non-cash amortization of deferred financing charges amounted to $13 (2008 - $13). A non-cash future income tax recovery of $33 was recorded in the quarter, compared to an expense of $71 in the comparable quarter of 2008.
The Fund's net earnings for the quarter were $2,553 or $0.2578 per unit, compared to $2,482, or $0.2511 per unit in 2008. Excluding the future income tax recovery of $33 (2008 - charge of $71), the non-cash movement in the fair value of the derivative interest rate swap and the amortization of deferred financing charges of $29 (2008 - $184), net earnings for the quarter were $2,549 or $0.2574 per unit compared to $2,737 or $0.2769 per unit in 2008, a decrease of 7.0% 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 and MarksLP. Distributable cash for the quarter was $2,412, or $0.2436 per unit compared to $2,781, or $0.2813 per unit in the first quarter of 2008, a decrease of 13.4% per unit. Non-cash working capital of the Fund and MarksLP for the quarter increased by $137 compared to a decrease of $44 for the comparable period. Changes in non-cash working capital are primarily due to the timing of payments from related parties. Excluding the impact of changes in non-cash working capital, distributable cash would have been $2,549, or $0.2574 per unit, compared to $2,737, or $0.2769 per unit for the first quarter of 2008, a 6.9% decrease in distributable cash.
Distributions
As previously announced on April 20, 2009, the Fund's Board of Trustees approved a reduction in the monthly unitholder distribution to $0.07667, or an annualized rate of $0.92.
Distributions by the Fund are not guaranteed and are dependent on the system sales of cafes in the royalty pool as well as other factors which the Board continues to monitor.
April Distribution Announcement
The Fund also announced that its Board of Trustees approved a cash distribution of $0.07667 per unit for the month of April, 2009 to be paid on May 29, 2009 to Unitholders of record at the close of business on May 27, 2009.
SUBSEQUENT EVENT
Acquisition of Second Cup by MarksLP
On May 1, 2009, the Fund announced that its wholly owned subsidiary (MarksLP) had entered into an agreement to acquire all of the outstanding shares of Second Cup for nominal consideration effective June 27, 2009. Following closing of the acquisition, Second Cup will become an indirect wholly owned subsidiary of the Fund and will be accounted for accordingly.
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. Please also see the Fund's Press Release of May 1, 2009 relating to the announced acquisition of Second Cup by the Fund's wholly owned subsidiary.
Given the continuing uncertainty in the retail and economic environment across Canada and Second Cup's dependence on consumer discretionary spending, management is not providing specific guidance on same cafe sales for 2009. Management believes the balance of fiscal 2009 will be challenging and therefore, a number of initiatives are planned and/or underway to strengthen the long-term success of the Second Cup brand and its franchisees.
- Second Cup will continue its focus on operational excellence at the
cafe level, which it believes will yield increasing consistency
across the chain and improve the overall guest experience.
- In an effort to drive loyalty among specialty coffee customers,
Second Cup's promotional strategies will focus on targeted branding
initiatives promoting and innovating around its premium priced
specialty beverages, brewed coffees, tea, food and merchandise. Value
added offers will also be a core part of the promotional calendar.
- Second Cup will also be taking selective price increases on several
of its products during the year.
- 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 continuing its
concentration on the delivery of cost savings to franchisees.
In terms of 2009 network expansion, Second Cup expects: (1) to open 10 to 15 new cafes in Canada; (2) to close 15 to 20 cafes, the majority of which have sales below the average performance of cafes in the Royalty Pool; and (3) approximately 24 of its cafes will be renovated.
FINANCIAL HIGHLIGHTS
The following table sets out selected pro forma and non-GAAP financial information and other data of the Fund and its wholly owned subsidiaries, and should be read in conjunction with the unaudited consolidated financial statements of the Fund for the three months ended March 31, 2009.
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(in thousands of dollars,
except number of cafes and Three months ended
per unit amounts) Mar. 31, 2009 Mar. 31, 2008
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System sales of cafes in the Royalty
Pool(3) $44,992 $47,333
Number of cafes in Royalty Pool 359 357
Number of active cafes - end of period 350 355
Same cafe sales growth(3) (3.0%) 1.4%
Royalty revenues earned by MarksLP(1) $2,932 $3,081
Earnings before items noted below (2) $2,549 $2,737
Non-cash movement in fair value of the
derivative interest rate swap and
non-cash amortization of deferred
financing fees(1) $29 $184
Non-cash future income tax expense
(recovery)(1) ($33) $71
Net earnings for the period $2,553 $2,482
Earnings per unit before non-cash movement
in fair value of the derivative interest
rate swap, non-cash amortization, and
non-cash future income taxes(3) $0.2574 $0.2769
Basic earnings per unit $0.2578 $0.2511
Diluted earnings per unit $0.2578 $0.2502
Distributable cash per unit excluding
changes in non-cash working capital(3) $0.2574 $0.2769
Distributable cash per unit(3) $0.2436 $0.2813
Distributions declared per unit $0.2647 $0.2790
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(1) "Royalty revenues earned by MarksLP", "Non-cash movement in fair
value of the derivative interest rate swap and non-cash amortization
of deferred financing fees", and "Non-cash future income tax expense
(recovery)" represent the combined amounts of the consolidated Fund
and its wholly owned subsidiary, MarksLP, which is consolidated with
the statements of Second Cup for reporting purposes in accordance
with GAAP. The Fund accounts for the earnings of MarksLP on an equity
accounted basis in its consolidated financial statements, in
accordance with GAAP.
(2) "Earnings before items noted below" is a non-GAAP measure and
represents the earnings, before non-cash movements in fair value of
the derivative interest rate swap, non-cash amortization of deferred
financing fees and non-cash future income taxes, of the consolidated
Fund and its wholly owned subsidiary, MarksLP, which is consolidated
with the statements of Second Cup for reporting purposes in
accordance with GAAP
(3) "System sales of cafes in the Royalty Pool", "Same cafe sales
growth", "Earnings per unit before non-cash movement in fair value of
the derivative interest rate swap, non-cash amortization and non-cash
future income taxes", "Distributable cash per unit excluding changes
in non-cash working capital" and "Distributable cash per unit" are
non-GAAP measures.
The unaudited interim consolidated financial statements of the Fund, together with its Management's 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 May 15, 2009.
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.
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