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TAS - Taste Holdings Limited - Unaudited condensed financial results for the six
months ended 31 August 2011 and further cautionary announcement
Taste Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 2000/002239/06)
JSE code: TAS ISIN: ZAE000081162
("Taste" or "the company" or "the group")
Unaudited Condensed Financial Results for the six months ended 31 August 2011
and further cautionary announcement
Salient Features
* Revenue up 23% to R113.4 million
* EBITDA up 35% to R14.0 million
* Operating profit up 44% to R10.7 million
* Headline earnings up 50% to R5.3 million
* Headline earnings per share up 50% to 3.1 cents
* System-wide sales up 27% to R416 million
* Net tangible asset value per share up 20% to 29.4 cents
* Operating costs as a % of revenue improved to 42.6% (2010: 48.3%)
Condensed consolidated statement of comprehensive income
Unaudited Unaudited Audited
six months six months 12 months
ended ended ended
31 August 31 August 28 February
% 2011 2010 2011
change R`000 R`000 R`000
Revenue(1) 23 113 416 92 546 233 751
Gross profit(2) 13 58 706 51 762 121 904
Other income 241 358 771
Operating costs(3) 8 (48 270) (44 696) (91 907)
Operating profit 44 10 677 7 424 30 768
Fair value adjustment on
derivative(4) - (195) -
Share option IFRS 2
charge(5) (216) - (176)
Interest income 346 358 615
Finance costs(6) (2 640) (2 609) (5 925)
Profit before taxation 64 8 167 4 978 25 282
Taxation(7) (2 819) (1 360) (7 245)
Profit for the period 48 5 348 3 618 18 037
Other comprehensive income - - -
Total comprehensive income
for the period 48 5 348 3 618 18 037
Attributable to:
Equity holders of the
parent 48 5 348 3 618 18 037
Minority interests - - -
Reconciliation of headline
earnings:
Earnings attributable to
ordinary shareholders
adjusted for: 48 5 348 3 618 18 037
Impairment losses - - 216
(Profit)/loss on sale of
property, plant and
equipment (5) (58) 2
Headline earnings
attributable to ordinary
shareholders 50 5 343 3 560 18 255
Weighted average shares in
issue (`000) 170 161 170 161 170 161
Fully diluted shares in
issue (`000) 179 815 180 715 179 815
Earnings per share (cents) 48 3.1 2.1 10.6
Fully diluted earnings per
share (cents) 49 3.0 2.0 10.0
Headline earnings per
share (cents) 50 3.1 2.1 10.7
Fully diluted headline
earnings per share (cents) 51 3.0 2.0 10.2
Condensed consolidated statement of financial position
Unaudited Unaudited Audited
31 August 31 August 28 February
2011 2010 2011
R`000 R`000 R`000
Assets
Non-current assets 98 353 92 871 102 182
Property, plant and equipment 11 284 10 552 11 813
Intangible assets(8) 66 632 62 921 67 570
Goodwill(8) 18 654 16 321 18 654
Other financial assets(9) 581 1 725 3 150
Deferred tax 1 202 1 352 995
Non-current assets held for 1 749 4 941 1 749
sale(10)
Current assets 118 928 94 581 112 553
Inventories 69 428 62 955 62 221
Trade and other receivables(11) 32 524 23 594 33 493
Taxation 5 092 4 257 1 933
Advertising levies 2 190 1 970 755
Other financial assets(9) 6 476 1 270 1 097
Cash and cash equivalents 3 218 535 13 054
Total assets 219 030 192 393 216 484
Equity and liabilities
Capital and reserves 118 974 104 053 118 515
Issued capital 2 2 2
Distributable reserve 75 439 60 777 75 196
Share premium 43 141 43 141 43 141
Share option reserve(5) 392 133 176
Non-current liabilities 38 425 44 732 46 915
Borrowings 21 781 27 669 30 071
Long-term employee benefits 252 429 429
Deferred tax 16 392 16 634 16 415
Current liabilities 61 631 43 608 51 054
Provisions 250 250 250
Current tax payable 2 831 1 123 299
Trade and other payables(11) 27 373 22 705 30 852
Balances due to vendors - 1 839 -
Bank overdrafts 14 963 7 117 5 111
Derivative at fair value(4) - 783 -
Current portion of borrowings 16 214 9 791 14 542
Total equity and liabilities 219 030 192 393 216 484
Number of shares in issue (`000) 170 161 170 161 170 161
Net asset value per share (cents) 69.6 61.1 69.6
Net tangible asset value per share
(cents)(12) 29.4 24.4 28.6
Condensed consolidated statement of cash flows
Unaudited Unaudited Audited
six months six months 12 months
ended ended ended
31 August 31 August 28 February
2011 2010 2011
R`000 R`000 R`000
Cash flow from operating activities (8 208) 378 21 658
Cash generated by operating
activities 2 867 3 449 32 036
Interest income 346 358 615
Finance costs (2 640) (2 804) (5 925)
Dividends paid (5 105) - -
Taxation paid (3 676) (625) (5 068)
Cash flows from investing
activities (4 685) (2 615) (13 901)
Acquisition of property, plant and
equipment (1 073) (716) (1 755)
Acquisition of non-current assets
held for sale - (14) (60)
Proceeds of disposal of property,
plant and equipment 10 499 515
Proceeds on disposal of non-current
assets held for sale - 409 3 212
Acquisition of subsidiary(13) - - (9 461)
Loans advanced (2 810) (2 793) (4 045)
Acquisition of intangible assets (812) - (2 307)
Cash flows from financing
activities (6 795) (9 921) (5 390)
Decrease in long-term employee
benefits (177) (177) (177)
Loans (repaid)/raised(6) (6 618) (5 137) 1 233
Loans repaid to vendors - (4 607) (6 446)
Change in cash and cash
equivalents(14) (19 688) (12 158) 2 367
Cash and cash equivalents at
beginning of period 7 943 5 576 5 576
Cash and cash equivalents at end
of period (11 745) (6 582) 7 943
Condensed group statement of changes in equity
Total
Share Share share
capital premium capital
R`000 R`000 R`000
Balance 1 September 2010 2 43 141 43 143
Share option reserve
Profit for period - -
Balance 1 March 2011 2 43 141 43 143
Share option reserve
Distributions to shareholders
Profit for period
Balance 31 August 2011 2 43 141 43 143
Share
option Retained
reserve income Total
R`000 R`000 R`000
Balance 1 September 2010 133 60 777 104 053
Share option reserve 43 - 43
Profit for period - 14 419 14 419
Balance 1 March 2011 176 75 196 118 515
Share option reserve 216 - 216
Distributions to shareholders - (5 105) (5 105)
Profit for period - 5 348 5 348
Balance 31 August 2011 392 75 439 118 974
Condensed consolidated segmental report
Unaudited Unaudited Audited
sixmonths six months 12 months
ended ended ended
31 August 31 August 28 February
% 2011 2010 2011
change R`000 R`000 R`000
Segment revenue
Food(15) 59 40 906 25 782 63 160
Franchise(16) 21 858 16 506 37 688
Food services(17) 17 945 2 090 14 680
Retail(18) 1 103 7 186 10 792
Jewellery(19) 9 72 934 67 217 171 611
Franchise and wholesale 48 466 43 306 116 056
Retail(20) 24 386 23 204 52 347
Concession retail 82 707 3 208
Eliminations(20) (424) (453) (1 020)
Group revenue 23 113 416 92 546 233 751
Segment operating profit
Food 82 11 176 6 144 17 712
Franchise 10 073 7 272 17 810
Food services 1 399 (444) 690
Retail (296) (684) (788)
Jewellery (13) 5 562 6 414 24 248
Franchise and 3 514 4 972 17 292
wholesale(22)
Retail 2 088 1 836 7 265
Concession retail (40) (394) (309)
Corporate services(23) 18 (6 061) (5 134) (11 192)
Group operating profit 44 10 677 7 424 30 768
Notes to the financial information
1. Of the R20.9 million increase in revenue from 31 August 2010 ("the prior
period"), the food services division contributed R15.8 million, and the
sale of company-owned food outlets resulted in R6.0 million less revenue
than the prior period. All other divisions increased revenues.
2. The gross profit increase of 13% is lower than the revenue increase due to
an expected decline in the gross margin from 56% in the prior period to 52%
for the six months ended 31 August 2011 ("the current period"). This
decline is in line with the gross margin at 28 February 2011, ("year-end")
and is due mainly to the higher contribution of the food services segment,
which has a lower gross profit margin.
3. Group operating costs as a percentage of revenue, a key measure for the
group, decreased from 48.3% in the prior period, to 42.6%. Each of the
group`s divisions improved on this measure. It is envisaged the group will
meet its full-year target range of 37% to 39%.
4. The fair value adjustment on derivative in the prior period relates to the
fair value charge arising out of an agreement to fix the interest rate on
the loan with Rand Merchant Bank ("RMB") for the acquisition of the NWJ
business ("NWJ"). This agreement ended on 30 November 2010.
5. The IFRS 2 charge relates to the Taste share option scheme.
6. These are mainly in respect of loans for the acquisition of NWJ and St
Elmo`s.
7. The effective taxation percentage is 34.5% due to the inclusion in the
current period of secondary tax on companies ("STC") relating to the maiden
dividend paid in July 2011.
8. The increase in intangible assets and goodwill from the prior period is due
to a combination of the acquisition of four Galaxy jewellery outlets and St
Elmo`s in November 2010.
9. The increase in other financial assets is a combination of:
* loans made by Taste to marketing funds of brands within the group. These
loans attract interest, and are repayable in monthly instalments over two
years; and
extended credit terms given by the jewellery division to NWJ franchisees.
10. The decline in non-current assets held for sale is as a result of the sale
of company-owned food outlets, ownership of which is not a core strategy.
11. The change in trade and other receivables and payables from the prior
period is due largely to the acquisition of St Elmo`s and the growth of the
food services division.
12. Net tangible asset value is calculated by excluding goodwill, intangible
assets, and the deferred taxation liability relating to intangible assets,
from net asset value.
13. On 1 November 2010, the Food division acquired St. Elmo`s. Shareholders are
referred to the 2011 annual report for details of the transaction.
14. The material differences in cash utilisation from the prior period are:
* R3.0 million more tax paid due to a refund in the prior period and STC
payable in the current period;
* Loan repayments increased by R2.1 million due to the loan raised for the
acquisition of St Elmo`s;
* The prior period included R0.9 million in respect of proceeds from the sale
of company-owned outlets;
* Inventories increased R7.0 million, being an expected increase in NWJ and
the food services division in line with their growth.
15. The food division consists of the core franchising division from which new
store and annuity income is generated; a retail division in which corporate-
owned stores are accounted for; and a food services division which
manufactures food products for the food division. The ownership of
corporate-owned stores is not a core strategy in this division.
16. St Elmo`s was acquired in November 2010. Excluding the effects of St
Elmo`s, revenue increased 16%.
17. The revenue in this division is not comparable to the prior period as the
division was in a start-up phase.
18. The significant decrease in revenue of retail outlets is due to the sale or
closure of corporate-owned stores during the period.
19. The jewellery division consists of two core divisions: 17 corporate-owned
stores ("Retail"); and franchise and wholesale. The latter division
manufactures, sources, and distributes stock to franchisees and earns new-
store and annuity revenue. Concession retail relates to two pilot projects
discontinued in April 2011.
20. Although total revenue growth increased 5%, same-store sales growth
exceeded 14%. The difference is due to there being fewer company-owned
outlets during the current period.
21. This refers to interdivisional revenues in the food division that are
eliminated on consolidation.
22. The decline in operating profit is due to two less stores being opened when
compared to the prior period and a reduced gross profit margin resulting
from a change in sales mix and more promotional activity. Costs as a
percentage of revenue improved when compared to the prior period.
23. The 18% increase in corporate services includes once-off costs associated
with the St Elmo`s acquisition and the recruitment of a senior information
technology ("IT") executive.
Commentary
Group overview
The directors of Taste present the unaudited financial results for the
six months ended 31 August 2011 ("the current period"). Taste is a South
African-
based management group, invested in a portfolio of mostly franchised, category
specialist, restaurant and retail brands, represented in over 324 locations
throughout South Africa.
When compared to the six months ended 31 August 2010 ("the prior period"),
the group acquired the St Elmo`s Woodfired Pizza brand; made substantial
progress against its vertical integration strategy; and grew system-wide sales
in both its jewellery and food divisions through a combination of new stores
and same-store sales growth. While consumer spend in the food division continues
to be robust, jewellery spend has continued to be unpredictable as the jewellery
segment faces the challenge of combating substantial input cost inflation.
System-wide sales across the group increased 27% to R416 million (2010: R327
million), that combined with the increased revenue from the newly-formed food
services division to increase group revenue by 23% to R113.4 million (2010:
R92.5 million). While gross margin was lower than the prior period, it was
unchanged from 28 February 2011 ("year-end"). This change from the prior period
was expected as the food services division carries more weighting within the
group. Continued focus on operating costs saw these increase just 8%, and
operating costs as a percentage of revenue declined from 48.3% to 42.6%, a
substantial improvement. Consequently, operating profit margin increased from
8.0% to 9.4%, translating into a 44% increase in nominal operating profit to
R10.7 million (2010: R7.4 million). These increases, combined with unchanged
financing costs, resulted in a headline earnings increase of 50% to R5.3 million
(2010: R3.6 million).
The group`s focus during the current period has been on integrating the St
Elmo`s acquisition; increasing the basket of goods manufactured for the food
division`s brands; and actively managing the changes in consumer spending being
experienced in the jewellery division. Notwithstanding a sound set of financial
results, the group remains focused on growing the number of brands in its food
division; extending its vertical integration strategy; and improving franchisee
profitability, within its key financial objectives of margin improvement and
cash conversion.
Divisional overview
Food
The Food division consists of the Maxi`s, Scooters Pizza and St Elmo`s Woodfired
Pizza brands, as well as the new food services division manufacturing selected
products for the group`s food brands. All three brands target consumers in the
broad middle market and are underpinned by strong value-for-money propositions;
contemporary store designs; and convenience through either service offerings or
locations.
During the current period, the division focused on its vertical integration
strategy; the conversion of St Elmo`s stores to Scooters Pizza outlets in
the Gauteng region; and launching the repositioned St Elmo`s brand and menu.
The division ended the period with 246 outlets, that, combined with continued
positive same-store sales, resulted in an increase of 36% in system-wide sales
to R307 million (2010: R226 million). The greatest medium-term challenge
facing this division is the squeeze on franchisee profitability due largely
to escalating high energy costs. Costs as a percentage of revenue improved
across this division, driven largely by the substantial improvement in revenue
in the food services segment.
During the current period, the food services division focused on extending
the range of the unique products it manufactures for the food brands,
particularly from its HACCP accredited sauce and spice facility. The division
has the capability to produce specialised sauces, spices, dough premixes, and
value-add meat products. As this is largely a new division, prior periods
are not comparable. Even within the current period, production volumes and
therefore revenue are not representative of future volumes as the full
production of sauces and spices for the food brands was only achieved from
August 2011 onwards.
Scooters Pizza and Maxi`s have both been nominated as finalists in the
prestigious Franchise Association of Southern Africa ("FASA") Brand Builder
of the Year award, an award which Scooters Pizza has already won three times.
Scooters Pizza is also a finalist in the FASA Franchisor of the Year award,
an award Maxi`s won in 2010. The winners will be announced in late October
2011.
Jewellery
NWJ is the third-largest jewellery brand in South Africa, with 82 outlets
nationally. As the only vertically-integrated franchise jewellery chain in
South Africa, it owns and operates approximately 20% of the total outlets;
provides franchising and merchandising services to its franchise network;
manufactures certain products sold by the NWJ outlets; and sources and
distributes the items not manufactured by its manufacturing facility. The
franchise services are comparable to the Taste food franchise division in
that they offer their franchisees operational and marketing support, project
management, new site growth and development, and national brand-building
strategies in return for a royalty. The distribution division distributes all
of the goods sold through the NWJ outlets. Of these goods sold, approximately
40% is manufactured by the manufacturing facility in Durban, 22% is imported,
and the remaining 38% sourced locally. This model provides in-house innovation
capacity, fast routes to market, and reduces input costs to franchisees through
purchasing economies of scale. A further benefit of owning the manufacturing
facility is that slow-moving or returned stock can be either re-worked with
negligible yield loss or transferred to another location where there is
known demand for the item.
The greatest challenge this division faced during the current period was
managing the increasing price of gold and the impact this had on gross margin
maintenance, especially in the context of price-sensitive consumers.
Promotional activity increased from the prior period, as competitors,
especially independents, increased their level of markdowns. Additionally,
the prior period`s performance included the impetus of the Soccer World Cup.
Despite these challenges and five store closures, system-wide sales increased
7.9% to R109 million (2010: R101 million) with same-store sales remaining
marginally positive (+0.5%). The 17 (2010: 20) company-owned retail outlets
performed remarkably well with same-store sales growth exceeding 14% for the
six months. Despite lower gross margins compared to the prior period as a result
of more promotional activity, these same-store sales increases also translated
into an increase in operating profit of 14% to R2.1 million (2010: R1.8
million).
The manufacturing and franchising division`s lower operating profit on the
back of higher revenues was due to two less stores being opened and a gross
margin reduction due to increased promotional activity and a changed sales
mix, compared to the prior period. As with the group`s other divisions,
costs as a percentage of revenue improved. Towards the end of the current
period the group extended increased stock credit to franchisees and the sales
increases have been remarkably positive and in line with the corporate store
performances. A revitalised house brand strategy has gained traction and
12 revamps will be completed by the end of the year.
Basis of preparation of the interim results
Statement of compliance
The condensed financial statements have been prepared in accordance with the
recognition and measurement criteria of International Financial Reporting
Standards ("IFRS") and the presentation and disclosure requirements of IAS
34: Interim Financial Reporting, the AC 500 standards as issued by the
Accounting Practices Board, or its successor, the JSE Listings Requirements
and the South African Companies Act.
The accounting policies and standards applied in the preparation of these
interim results comply with IFRS and are consistent with those applied in the
prior comparative period, except for statements, amendments and interpretations
that came into effect during the current financial year that have no impact
on the group.
Prospects
The directors anticipate that the group will continue to grow the contribution
of the food services division as well as maintain current growth rates within
the food brands in the near term. The closure of non-performing corporate-owned
retail outlets in the jewellery division has increased the quality of earnings
and recent increases in spend per transaction are contributing positively to
sales. Despite these positive drivers, the group is cautious with regard to
the potential negative effects of global financial concerns on local consumer
confidence and the impact this could have on new store openings and consumer
spending.
In line with the group`s stated intent, management is evaluating potential
acquisitions in the food division as well as the implementation of a
distribution capability.
Dividend to shareholders
The group currently envisages it will continue to pay a final dividend, but not
an interim dividend. As such no interim dividend is declared for the current
period.
Further cautionary announcement
Shareholders are referred to the cautionary announcement, dated 20 September
2011, and are advised to continue exercising caution when dealing in the
company`s securities until a further announcement is made.
On behalf of the board
C F Gonzaga E Tsatsarolakis
Chief Executive Officer Financial Director
12 October 2011
Corporate information
Non-executive directors: R L Daly (Chairperson), K Utian, J B Currie,
A Berman, H Rabinowitz, W van der Merwe
Executive directors: C F Gonzaga (CEO), D J Crosson, L Gonzaga,
ETsatsarolakis (FD)
Registered address: 2nd Floor, The Wanderers, The Campus, 57 Sloane Street,
Bryanston
Postal address: PO Box 7833, Sandton City, 2146
Company secretary: E Tsatsarolakis
Telephone: (010) 500 1122
Facsimile: 086 274 3438
Transfer secretaries: Computershare Investor Services (Pty) Limited
Designated adviser: Vunani Corporate Finance
These results and an overview of Taste are available at:
www.tasteholdings.co.za
Date: 12/10/2011 07:54:13 Supplied by www.sharenet.co.za
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