Second Cup Royalty Income Fund announces first quarter results and April distribution



    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 café 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 café 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 café 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 café 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 cafés 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 café 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
        café 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 cafés
        with a focus on expansion in key urban markets utilizing a
        disciplined café 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 cafés in Canada; (2) to close 15 to 20 cafés, the majority of which
have sales below the average performance of cafés in the Royalty Pool; and (3)
approximately 24 of its cafés 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.

    
    -------------------------------------------------------------------------
    (in thousands of dollars,
     except number of cafés and                       Three months ended
     per unit amounts)                         Mar. 31, 2009   Mar. 31, 2008
    -------------------------------------------------------------------------

    System sales of cafés in the Royalty
     Pool(3)                                         $44,992         $47,333

    Number of cafés in Royalty Pool                      359             357

    Number of active cafés - end of period               350             355

    Same café 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
    -------------------------------------------------------------------------

    (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 cafés in the Royalty Pool", "Same café 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 cafés, 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 cafés 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 café franchisor and
second largest retailer of specialty coffee, as measured by number of cafés.
For the ultimate on-line coffee experience, visit www.secondcup.com.

    %SEDAR: 00021352E




For further information:

For further information: Robert Masson, Chief Financial Officer, (905)
362-1824 or investor@secondcup.com

Organization Profile

SECOND CUP INCOME FUND

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