TORONTO, July 28 /CNW/ - Priszm Income Fund (TSX: QSR.UN) ("Priszm" or the "Company") today reported its financial results for the second quarter of 2010.
"We have seen an improvement from the first quarter, while we have not turned this around completely, we are optimistic our new sales drivers will work," said John Bitove, Executive Chairman of Priszm Income Fund. "We are working with the franchisor, which is in the process of refining its promotions for the balance of the year to focus on a new Canadian KFC marketing strategy and introduce innovative products that have been successful in other international markets."
While restaurant sales were down, operational cost controls improved vastly from a year ago with restaurant controllable margins similar to last year despite the sales declines.
Restaurant sales from continuing operations of $99.1 million for the second quarter of 2010 were down $6.7 million from 2009 levels. This decrease was a direct result of a decline in same store sales and operating 11 fewer restaurants than at the end of the corresponding period of 2009. During the second quarter of 2010, same store sales growth ("SSSG") decreased by 5.1 per cent over the same quarter of 2009. As has historically been the case, SSSG for multi-branded restaurants was better by approximately 160 basis points over stand alone KFC restaurants.
Cost of Restaurant Sales and Restaurant Operating Expenses
Cost of restaurant sales in the second quarter of 2010 increased by 130 basis points to 59.7 per cent as a percentage of sales versus 58.4 per cent of sales in the prior year. Compared to results in the prior year the sale of the Company's salad production facility (recorded in the fourth quarter of 2009) resulted in the elimination of $0.5 million of gross profit which was previously recorded as an offset to food cost, and accounted for 50 basis points of the negative variance. The Company has not taken any price increases this year to offset this change, however, strict adherence to food cost controls at the restaurant level has resulted in a positive partial offset. Restaurant operating expenses, which include utilities, maintenance, advertising expense, operating supplies and services and certain other fixed costs, declined 70 basis points to 14.8 per cent of sales in 2010 compared to 15.5 per cent in the same quarter in 2009. This was a reflection of management's focus on controlling discretionary spending during periods of lower sales results and the disposal of certain locations during the prior year. Consistent with the first quarter, on a year to date basis the maintenance, repairs, operating supplies and utilities expense continues to benefit from being closely monitored by operations management during financial performance reviews.
Income from Restaurant Operations
As a result of the factors discussed above and a smaller restaurant base, income from restaurant operations decreased by $1.6 million versus the prior year, generating operating profits of $8.1 million in the second quarter versus $9.7 million in 2009.
General and Administrative Expense
General and administrative ("G&A") expense includes salary and benefit costs for management and support staff not directly employed in the Company's restaurants, occupancy costs associated with the restaurant support centres, professional fees (including public company related expenses), computer technology related costs and other administrative expenses and miscellaneous revenue. G&A expense was $4.1 million for the second quarter of 2010, $0.8 million lower than the prior year as a result of action taken by management at the end of 2009 to minimize corporate overhead, partially offset by additions to selective spending.
Net interest expense of $2.1 million in the second quarter of 2010 was flat versus the comparable quarter of 2009. On a year to date basis, and as disclosed in the 2009 year end consolidated financial statements, the Company made early principal repayments of $8 million on its long term debt. These principal repayments required the inclusion of interest yield maintenance amounts however these additional charges were offset by lower interest on the reduced long term debt balance.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
EBITDA for the second quarter 2010 was $7.3 million compared to $8.5 million in the second quarter of 2009.
The Company has started investing capital in their franchise renewal program with the franchisor, YUM! Canada and paying down its debt. At June 13, 2010, the Company had total cash on hand of $11.7 million, a decrease of $0.3 million during the quarter (2009 increase of $3 million). The net decrease in cash is a result of operating results, the purchase of assets, repayment of long term debt and working capital changes.
The Company amended its long-term loans effective March 12, 2010. This latest covenant amendment requires the Fund to repay $10 million of the long-term debt during the first three quarters of 2010. The Fund made the first two repayments of $4 million each on March 15 and May 31, 2010, as required, with the remaining $2 million to be repaid in August 2010. As at June 13, 2010 the Company is in compliance with the financial performance covenants of its long-term loan. Management's analysis of performance, projections and forecasts incorporating anticipated promotional activities indicate that the Company is expected to remain in compliance with these covenants for the balance of the year. During the first quarter, the Company engaged Canaccord Genuity to lead its refinancing activities. The requirement to make principal repayments in 2010 may cause the Company to redirect cash usage in the future.
The most recent amendment to the long term loan also required the Fund to deliver a fully executed letter of intent on or before June 30, 2010, from a bona fide lender, committing to refinance the outstanding amount on both tranches of long-term debt on or before December 31, 2010. While the Fund did not deliver a letter of intent by June 30, 2010, the Fund had received several expressions of interest from potential lenders that may be willing to take part in one or more refinancing alternatives. These alternatives are being assessed by the Fund and management remains in active discussions with both current and prospective lenders and continues to work diligently with its investment banker to identify additional opportunities.
The Company's capital investments of $2.7 million during the quarter comprised of $0.7 million of maintenance capital expenditures in the normal course of business and $2 million in facility development investment. The maintenance expenditures are representative of historical levels while facility development relates to the Company's upgrade program for franchise renewal and the one new multi-branded restaurant opened during the second quarter. All capital expenditures are funded by cash from operations and cash on hand balances.
Commencing in November 2009, the majority of the Company's franchise agreements, which cover the use of the KFC, Taco Bell and Pizza Hut trademarks, expire over a period of five years. Under the terms of the franchise agreement the Company is able to extend its rights for an additional 10 years upon payment of a renewal fee. In the fourth quarter of 2009 the Company renewed the franchise agreements for the first group of restaurants, covering 69 locations and paid a renewal fee of $2 million. In addition, the Company undertook to upgrade 75 restaurants in 2010 for a planned cost of between $15 million and $16.5 million, with the individual location amounts varying depending on the scope of work required for individual assets to meet the franchisor requirements. Under the terms of the renewal agreement the Company was required to complete upgrades to 34 of its restaurants by July 15, 2010. The Company has retained a major Canadian construction manager to oversee its upgrade program and continues to work with the franchisor to complete the restaurant upgrades. While some of the upgrades have been completed, others are behind schedule due to management's focus on debt refinancing, liquidity and cash preservation, as well as some development related, logistical issues. As such, the July 15, 2010 requirement has not been met.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
EBITDA is defined by management as earnings before net interest income/expense, income taxes, depreciation and amortization and other items as noted in the table below. EBITDA is not a recognized measure under GAAP in Canada and may not be comparable to similar measures used by other companies. The Company believes that EBITDA is a useful supplementary measure of operating performance as it provides investors with an indication of cash available for distribution prior to debt service and capital expenditures. Investors should be cautioned, however, that EBITDA should not be construed as an alternative to net earnings determined in accordance with GAAP or to cash flows from operating, investing and financing activities.
About Priszm Income Fund
Priszm Income Fund (TSX: QSR.UN) holds approximately a 60 per cent interest in Priszm Limited Partnership, which owns and operates more than 400 quick service restaurants in seven provinces across Canada. The KFC, Taco Bell and Pizza Hut restaurants under Priszm serve more than one million customers a week and employ approximately 7,300 people. Approximately 100 locations are multi-branded, combining two or more of the Fund's restaurant concepts.
A staunch supporter of S'Cool Life Fund - a non-profit organization dedicated to providing grants to Canadian non-tuition elementary schools - Priszm Income Fund has raised more than $2 million to help make DREAMS - Drama, Recreation, Extracurricular, Arts, Music and Sports - come true.
To find out more about Priszm Income Fund (TSX: QSR.UN), visit our website at http://www.priszm.com.
Certain information in this document may constitute forward-looking statements within the meaning of securities laws that involve known and unknown risks, uncertainties, future expectations and other factors with respect to industry sector performance, business plans, activities, trends and events anticipated by the Priszm Income Fund (the "Company") and which may cause the Company's future performance and results to be materially different from those implied by the forward-looking information. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue," or the negative of these terms or other comparable terminology concerning matters that are not historical facts. Forward-looking information is based on certain factors and assumptions regarding, among other things, the number of restaurants, the renewal of the franchise agreements, ability to meet capital expenditure requirements, the industry sector performance, business plans, activities, success of refinancing on commercially viable terms, trends and events anticipated by the Company. Although the Company believes that the assumptions underlying such statements are reasonable, any of the assumptions may prove to be inaccurate and, as a result, the forward-looking information may prove to be incorrect. The forward-looking information, assumptions and statements reflect the views of the Company's management with respect to future events and outcomes as of the date of this document and there should be no expectation that such information will be updated, revised and/or supplemented whether as a result of new information, changing circumstances, future events or other cause. Actual events or outcomes may be materially different and cause the performance of the Company to differ materially from any forward-looking statement.
The following selected financial information, with the exception of EBITDA, Distributable Cash and Distributable Cash Per Unit, has been derived from and should be read in conjunction with the second quarter 2010 unaudited financial statements and the MD&A in the Company's annual report for the year ended December 27, 2009. Additional information can be found at www.sedar.com.
RECONCILIATION OF NET LOSS TO EBITDA
The following table reconciles net loss from the Company's consolidated statement of operations, which includes the results for both continuing and discontinued operations, to EBITDA:
Second Quarter Year to Date
(in thousands of dollars) 2010 2009 2010 2009
Net income (loss) for the period 1,430 1,761 (3,350) (837)
Income tax (recovery) expense (364) (320) 105 (533)
Interest income (3) (1) (6) (8)
Interest expense (including
accretion and amortization of
deferred financing charges) 2,073 2,097 4,225 4,189
Non-controlling interest 717 978 (2,189) (928)
Amortization and impairment 3,419 4,059 6,725 7,142
Unit-based compensation - 33 - 118
EBITDA 7,272 8,541 5,510 9,143
SOURCE PRISZM INCOME FUND
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