To view the PDF file, sign up for a MySharenet subscription.

TASTE HOLDINGS LIMITED - Unaudited Condensed Consolidated Results for the Six Months Ended 31 August 2015

Release Date: 13/10/2015 08:00
Code(s): TAS     PDF:  
Wrap Text
Unaudited Condensed Consolidated Results for the Six Months Ended 31 August 2015

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 CONSOLIDATED RESULTS FOR THE SIX MONTHS ENDED 31
AUGUST 2015

Salient features and highlights
   •     Core revenue increased by 51% to R455.9 million (2014: R302.2 million)
   •     Core EBITDA decreased by 25% to R17.5 million (2014: R23.3 million)
   •     Core operating profit decreased to R5.3 million (2014: R16.3 million)
   •     Core headline earnings decreased to R0.2 million (2014: R8.8 million)
   •     Core headline earnings per share decreased to 0.1 cents (2014: 4.3 cents)
   •     System-wide sales increased 7.2% to R800 million (2014: R746 million)
   •     Net tangible asset value per share increased to 95.2 cents (2014: 35.3 cents)
   •     Opened 53 Domino’s outlets
   •     Secured exclusive rights to develop Starbucks outlets

CONDENSED GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
                                                               Unaudited      Unaudited        Audited
                                                              six months     six months      12 months
                                                                   ended          ended          ended
                                                               31 August      31 August    28 February
                                                        %           2015           2014           2015
                                                   change          R'000          R'000          R'000


Revenue                                               62%       490,361        302,257        723,705
Cost of sales                                                  (307,948)      (189,268)      (439,260)
Gross profit                                          61%       182,413        112,989        284,445
Other income                                                         57            294            796
Operating costs                                      115%      (213,576)       (99,536)      (253,604)
Operating (loss)/profit                             -326%       (31,106)        13,747         31,637
Investment revenue                                                4,721          1,664          6,465
Finance costs                                                   (12,390)        (5,616)       (13,140)
(Loss)/profit before taxation                       -496%       (38,775)         9,795         24,962
Taxation                                                          9,072         (2,804)        (8,813)
(Loss)/profit for the period                        -525%       (29,703)         6,991         16,149
Other comprehensive income                                            -              -              -
Non-controlling interest                                           (213)             -           (531)
Total comprehensive (loss)/income for the period    -528%       (29,916)         6,991         15,618
Attributable to:
Equity holders of the company                       -528%       (29,916)         6,991         15,618
(Loss)/earnings per share attributable to equity
equity holders of the company
(Loss)/earnings per share (cents)                   -403%         (10.6)           3.5            6.9
Diluted (loss)/earnings per share (cents)           -412%         (10.6)           3.4            6.8
Dividends declared per share (cents)                                  -              -            6.5

CONDENSED GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION
                                                               Unaudited      Unaudited       Audited
                                                               31 August      31 August   28 February
                                                                    2015           2014          2015
                                                                   R'000          R'000         R'000


ASSETS
Non-current assets                                              453,213        235,266       349,596
Property, plant and equipment (14)                              146,513         35,084       105,369
Intangible assets (15)                                           98,112         94,391        91,924
Goodwill (16)                                                   112,090         87,216       112,090
Other financial assets (17)                                      82,851         17,047        26,566
Deferred tax                                                     13,647          1,528        13,647


Non-current assets held for sale (18)                             9,989              -         7,178

Current assets                                                  468,395        289,910       407,493
Inventories (19)                                                272,980        119,272       234,355
Trade and other receivables (20)                                 90,559        106,390        97,577
Current tax receivables                                             426          2,125         3,024
Advertising levies                                               10,255          6,749         8,255
Other financial assets (17)                                       3,957          4,951         1,399
Cash and cash equivalents                                        90,218         50,423        62,883

Total assets                                                    931,597        525,176       764,267

EQUITY AND LIABILITIES
Equity
Share capital                                                         3              2             3
Retained earnings                                                83,342        123,054       132,212
Share premium (23)                                              387,192        104,033       282,634
Equity-settled share-based payment reserve                        4,552          2,122         3,724
Equity attributable to holders of company                       475,089        229,211       418,573
Non-controlling interest (12)                                      (744)             -          (531)
Total equity                                                    474,345        229,211       418,042


Non-current liabilities                                         249,326        155,108       165,565
Borrowings (24)                                                 225,415        131,815       130,757
Lease equalisation (25)                                           2,117              -         2,117
Deferred tax                                                     21,794         23,293        32,691

Current liabilities                                             207,926        140,857       180,660
Current tax payable                                               3,241          4,440           751
Advertising levies                                                    -            625             -
Bank overdrafts                                                  18,917         14,408        18,142
Borrowings (24)                                                   5,315          3,527         3,568
Balance due to vendors                                                -          1,000         1,000
Lease equalisation (25)                                           3,819              -         1,312
Provisions                                                          250            250           250
Dividends payable                                                   118             87            84
Other financial liabilities (22)                                 11,754              -        15,000
Trade and other payables (21)                                   164,512        116,520       140,553

Total equity and liabilities                                    931,597        525,176       764,267
Number of shares in issue ('000) (13)                           301,858        202,968       263,464
Net asset value per share (cents)                                 157.1          112.9         158.7
Net tangible asset value per share (cents) (26)                    95.2           35.3          90.2

CONDENSED GROUP CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
                                                                     Equity-
                                                                     settled                         Total
                                                                      share-                  attributable
                                                                       based                     to equity             Non-
                            Share        Share      Total share      payment      Retained      holders of      controlling
                          capital      premium          capital      reserve      earnings       the group         interest        Total
                            R’000        R’000            R’000        R’000         R’000           R’000            R’000        R’000
Balance at 31 August
2014                           2      104,033          104,035        2,122       123,054         229,211                -      229,211

Share issue                    1      178,411          178,412            -             -         178,412                -      178,412

Options exercised              -          190              190            -             -             190                -          190
Share based payment
reserve                        -            -                -        1,602             -           1,602                -        1,602
Comprehensive
income for the period          -            -                -            -         9,158           9,158             (531)       8,627
Balance at 1 March
2015                           3      282,634          282,637        3,724       132,212         418,573             (531)     418,042
 
Share issue (23)               -      101,377          101,377            -             -         101,377                -      101,377
0
Options exercised              -        3,181            3,181            -             -           3,181                -        3,181

Dividends paid                 -            -                -            -       (19,167)        (19,167)               -      (19,167)
Share based payment
reserve                        -            -                -          828             -             828                -          828
Comprehensive loss
for the period                 -            -                -            -       (29,703)        (29,703)            (213)     (29,916)
Balance at 31 August
2015                           3       387,192          387,195       4,552        83,342         475,089             (744)     474,345

CONDENSED GROUP CONSOLIDATED STATEMENT OF CASH FLOWS
                                                            Unaudited     Unaudited        Audited
                                                           six months    six months      12 months
                                                                ended         ended          ended
                                                            31 August     31 August    28 February
                                                                 2015          2014           2015
                                                                R'000         R'000          R'000


Cash flows from operating activities                         (49,906)       (3,525)        26,216
Cash (utilised)/generated by operating activities (27)       (26,331)       12,162         58,553
Investment revenue                                             4,721         1,664          6,465
Finance costs                                                (12,390)       (5,616)       (13,140)
Dividends paid                                               (19,133)      (12,529)       (12,532)
Taxation paid                                                  3,227           794        (13,130)


Cash flows from investing activities                        (124,496)      (37,671)      (211,175)
Acquisition of property, plant and equipment (28)            (51,992)       (8,836)       (75,036)
Proceeds of disposals of property, plant and equipment            13            80            270
Acquisition of non-current asset held for sale (18)           (2,811)            -         (7,178)
Acquisition of business (29)                                  (1,721)      (21,326)      (115,512)
Loans advanced (17)                                          (58,840)       (2,858)       (15,253)
Loans repaid                                                      -            -            6,429
Acquisition of intangible assets (15)                         (9,145)       (4,731)        (4,895)


Cash flows from financing activities                         200,962        69,563        236,223
Proceeds from issue of shares (23)                           104,558         9,488        179,590
Loans raised (30)                                             98,122       125,000        125,000
Loans paid (30)                                               (1,718)      (64,925)       (68,367)


Change in cash and cash equivalents                           26,560        28,367         51,264
Cash acquired from business acquisition                            -             -        (14,171)
Cash and cash equivalents at beginning of the period          44,741         7,648          7,648
Cash and cash equivalents at end of the period                71,301        36,015         44,741

CONDENSED GROUP CONSOLIDATED SEGMENTAL REPORT


                                            Food   Jewellery   Corporate     Inter-
Unaudited                               division    division    services    segment       Total
six months ended 31 August 2015            R’000       R’000       R’000      R’000       R’000
Revenue                                 285,770     232,557      10,500    (38,466)    490,361
EBITDA                                  (21,060)     13,858     (10,290)         -     (17,492)
Segment depreciation and amortisation    (9,600)     (3,175)       (839)         -     (13,614)
Operating profit/(loss)                 (30,660)     10,683     (11,129)         -     (31,106)
Investment revenue                        1,681         248      17,461    (14,669)      4,721
Finance costs                           (11,023)     (5,675)    (10,361)    14,669     (12,390)
Profit before taxation                  (40,002)      5,256      (4,029)         -     (38,775)
Segment assets                          438,247     389,363     103,987          -     931,597
Segment liabilities                     127,310     212,042     117,900          -     457,252
Segment capital expenditure              46,131       6,051          10          -      52,192

Unaudited six months ended 31 August
2014
Revenue                                 196,019     106,238       8,378     (8,378)    302,257
EBITDA                                   16,775      11,551      (7,555)                20,771
Segment depreciation and amortisation    (4,255)     (1,832)       (937)         -      (7,024)
Operating profit/(loss)                  12,520       9,719      (8,492)                13,747
Investment revenue                          499         166       2,402     (1,403)      1,664
Finance costs                            (2,925)     (2,112)     (1,982)     1,403      (5,616)
Profit before taxation                   10,094       7,773      (8,072)         -       9,795
Segment assets                          240,264     221,006      63,906          -     525,176
Segment liabilities                     119,186      60,533     116,246          -     295,965
Segment capital expenditure               4,796       4,728         160          -       9,684


Audited year ended 28 February 2015
Revenue                                 398,782     324,923      10,353    (10,353)    723,705
EBITDA                                   15,422      46,091     (14,808)                46,705
Segment depreciation and amortisation    (8,923)     (4,473)     (1,672)         -     (15,068)
Operating profit/(loss)                   6,499      41,618     (16,480)         -      31,637
Investment revenue                        2,596         403      12,317     (8,851)      6,465
Finance costs                            (7,924)     (5,900)     (8,167)     8,851     (13,140)
Profit before taxation                    1,171      36,121     (12,330)         -      24,962
Segment assets                          334,332     360,353      69,582          -     764,267
Segment liabilities                     142,278     180,748      23,199          -     346,225
Segment capital expenditure              72,441      12,791         300          -      85,532

Notes to the financial information
1.  Reconciliation of headline earnings
                                                                            31 August    31 August   28 February
                                                                      %          2015         2014          2015
                                                                  change        R'000        R'000         R'000
Reconciliation of headline (loss)/earnings:
(Loss)/earnings attributable to ordinary shareholders             -528%      (29,916)       6,991        15,618
Adjusted for:

Loss/(profit) on sale of property, plant and equipment and non-
current assets available for sale                                                200         (12)          (246)
Tax effect on headline (loss)/earnings adjustments                               (37)          2             46
Headline (loss)/earnings attributable to ordinary
Shareholders                                                      -526%      (29,753)       6,981        15,418
Adjusted for:
Legal fees (2)                                                                 2,856            -           676
Transaction and other once-off costs (2)                                       8,769            -         5,168
Once-off and upfront Domino's costs and prior period revenue
adjustment (2)                                                                27,433        1,829        21,955
Tax effect on core earnings adjustments                                       (9,099)           -        (7,036)
Core headline earnings                                             -98%          206        8,810        36,181
Weighted average shares in issue ('000) (13)                                 282,952      202,583       225,225
Weighted average diluted shares in issue ('000)                              283,312      206,339       230,879
(Loss)/earnings per share (cents)                                 -403%        (10.6)         3.5           6.9
Diluted (loss)/earnings per share (cents)                         -412%        (10.6)         3.4           6.8
Headline (loss)/earnings per share (cents)                        -408%        (10.5)         3.4           6.8
Diluted headline (loss)/earnings per share (cents)                -408%        (10.5)         3.4           6.7
Core headline earnings per share (cents)                           -98%          0.1          4.3          16.1


2.  Core earnings

As with previous years the Group discloses core/normalised earnings. The company uses this
core earnings measure to internally evaluate operating performance, to evaluate itself against its
peers and to determine future performance targets and long-range planning. Additionally, the
company believes that stakeholders covering the company’s performance also utilise a similar
measure. Taste will disclose this financial measure for as long as it is relevant to stakeholders.
The detail of the reconciliation to core earnings is disclosed with reference to note 2 and the table
below.

Once off and upfront Domino’s costs

Core earnings exclude once-off costs and revenues as well as Domino’s upfront costs relating to
the launching of the Domino’s brand, the establishment of dough production and distribution
facilities (including the temporary Domino’s ingredient subsidy as ingredient suppliers and
specifications are localised) and the conversion of the Scooters Pizza and St. Elmo’s stores to
Domino’s stores which includes opening corporate owned training stores required for the
conversion and the interest thereon. The significant categories of this expenditure are: [1]
international and local costs associated with establishing specialised national training teams for
the conversion of the stores (R7.0 million); [2] pre-opening expenses (R2.7 million); [3] ongoing
project management fees and other non-recurring costs (R4.6 million); [4] temporary ingredient
subsidy (R5.9 million); [5] lost income and bad debt provision as stores close for conversion (R3.2
million). Core revenue and costs of sales exclude the contribution made to franchisees for the
conversion of their stores to Domino’s.

The group anticipates that the once-off and up-front costs relating to the Domino’s project will
continue to be excluded from core earnings until the conversion of Scooters Pizza and St. Elmo’s
stores to Domino’s is complete and will not be material to the group for the year ending 28
February 2017.

Legal fees and finalisation of The Fish & Chip Co. litigation

The amount of R2.8 million relates to the final legal fees, write-off of monies due to Taste by the
vendor and includes a payment of R0.5 million by Taste to the vendor in respect of inventory.
See note 33).

Transaction and other once off costs

R2.4 million relates to the additional purchase consideration for Arthur Kaplan in terms of the sale
agreement. R2.2 million relates to a non-cash charge in terms of IFRS relating to the portion of
the additional purchase consideration discharged in shares as describe in note 22 below. R2.1
million relates to leases smoothing as described in note 25, while the balance relates to Starbucks
as described below.

Starbucks

With regard to launching and establishing the Starbucks brand in South Africa: the group
anticipates that it will incur once off costs relating to initial training and travel; employment costs of
a dedicated Starbucks team well in advance of the first store opening: pre-opening marketing and
market research; and establishing IT and other infrastructure. As with Domino’s, these costs will
be excluded from core earnings and it is anticipated that the exclusion from core earnings will not
be material beyond the year ended 28 February 2017. During the current period R2.0 million
costs were incurred relating to Starbucks.

CONDENSED GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
RECONCILIATION TO CORE EARNINGS
                                                                              Unaudited                               Unaudited           Unaudited
                                                                              six month                        six months ended    six months ended
                                                                                  ended       Core earnings           31 August           31 August
                                                              Core            31 August          adjustment       Core earnings       Core earnings
                                                          earnings                 2015                2015                2015                2014
                                                          % change                R'000               R'000               R'000               R'000


Revenue(2) (3) (4)                                             51%             490,361             (34,500)            455,861             302,257
Cost of sales                                                                 (307,948)             34,500            (273,448)           (189,268)
Gross profit (5)                                               61%             182,413                   -             182,413             112,989
Other income                                                                        57                   -                  57                 294
Operating costs (2) (6)                                        83%            (199,962)             35,056            (164,906)            (89,947)
EBITDA (7)                                                    -25%             (17,492)             35,056              17,564              23,336
Amortisation and depreciation (8)                                              (13,614)              1,369             (12,245)             (7,027)
Operating (loss)/profit                                       -67%             (31,106)             36,425               5,319              16,309
Investment revenue (9)                                        184%               4,721                   -               4,721               1,664
Finance costs (10)                                             74%             (12,390)              2,633              (9,757)             (5,616)
(Loss)/profit before taxation                                 -98%             (38,775)             39,058                 283              12,357
Taxation (11)                                                                    9,072              (9,099)                (27)             (3,537)
(Loss)/profit for the period                                  -97%             (29,703)             29,959                 256               8,820
Other comprehensive income                                                           -                   -                   -                   -
Minority shareholders (12)                                                        (213)                  -                (213)                  -
Total comprehensive (loss)/income for the period             -100%             (29,916)             29,959                  43               8,820
Attributable to:
Equity holders of the company                                -100%             (29,916)             29,959                  43               8,820
(Loss)/earnings per share attributable to equity
the company
(Loss)/earnings per share (cents)                            -100%               (10.6)               10.6                 0.0                 4.4
Diluted (loss)/earnings per share (cents)                    -100%               (10.6)               10.6                 0.0                 3.8
Dividends declared per share (cents)                                                 -                   -                   -                   -



Reconciliation of headline earnings:
(Loss)/earnings attributable to ordinary shareholders        -100%             (29,916)             29,959                  43               8,820
Adjusted for:
Loss/(profit) on sale of property, plant and equipment
and non-current assets available for sale                                          200                   -                 200                 (12)
Tax effect on headline earnings adjustments                                        (37)                  -                 (37)                  2
Headline (loss)/earnings attributable to ordinary
shareholders                                                  -98%             (29,753)             29,959                 205               8,810


Weighted average shares in issue ('000) (13)                                   282,952             282,952             282,952             202,583
Weighted average diluted shares in issue ('000)                                283,312             283,312             283,312             206,339
(Loss)/earnings per share (cents)                            -100%               (10.6)               10.6                 0.0                 4.4
Diluted (loss)/earnings per share (cents)                    -100%               (10.6)               10.6                 0.0                 4.3
Headline (loss)/earnings per share (cents)                    -98%               (10.5)               10.6                 0.1                 4.3
Diluted headline (loss)/earnings per share (cents)            -98%               (10.5)               10.6                 0.1                 4.3



CONDENSED GROUP CONSOLIDATED SEGMENTAL REPORT OF CORE EARNINGS

                                                                   31 August       31 August      28 February
                                                    %                   2015            2014             2015
                                               change                  R'000           R'000            R'000
Core revenue
Food                                              28%               251,270         196,019          398,782
Jewellery                                        119%               232,557         106,238          324,923
Corporate Services                                25%                10,500           8,378           10,353
Inter-segment revenues (31)                      359%               (38,466)         (8,378)         (10,353)
Group core revenue                                51%               455,861         302,257          723,705
Core EBITDA (7)
Food (7)                                         -58%                 7,837          18,538           36,076
Jewellery (7)                                     66%                19,199          11,551           49,055
Corporate Services (32)                           42%                (9,472)         (6,653)         (11,972)
Group core EBITDA (7)                            -25%                17,564          23,336           73,159
Core operating profit
Food                                            -103%                  (394)         14,180           27,153
Jewellery                                         65%                16,024           9,719           44,582
Corporate Services                                36%               (10,311)         (7,590)         (13,644)
Group core operating profit                      -67%                 5,319          16,309           58,091



3.  As Taste includes franchisee marketing funds received in its revenue, with matching cost of
    sales, its margins may not be directly comparable to other franchise companies that do not
    account for franchisee marketing funds in the same manner.
   
4.  The 51% increase in group core revenue for the period ended 31 August 2015 (“the current
    period” or “2015”) is attributable mainly to the increase in corporate store ownership across both
    divisions. The group now operates 51 additional corporate stores (17 jewellery stores and 34
    food outlets) than it did at 31 August 2014 (“the prior period” or “2014”).
   
5.  The core gross profit margin improved to 40% when compared to the margin in the prior period
    of 37%. This increase is due to the increased weighting of corporate stores in the food division.
    At 28 February 2015 this margin was 39%.
   
6.  Both divisions contributed equally to the nominal increase in core operating costs although the
    luxury goods division’s costs as a percentage of its revenue declined 4 percentage points to
    32%, with the inclusion of Arthur Kaplan. The increase in costs in the food division is
    consequent to the establishment of the two dough manufacturing facilities which are not
    comparable to the prior period, the move to a new food distribution facility in Midrand and 34
    additional corporate stores (26 of which are Dominos stores), when compared to the prior
    period. Owning the Domino’s stores is an essential requirement of the conversion to Domino’s
    and to date over 1 600 people have been trained in these stores. This training requirement has
    had the consequence that operational controls and efficiencies in these corporate stores have
    been less than optimal and this has contributed to the material increase in costs during the
    current period.

7.  The company uses core earnings before interest, taxation, depreciation and amortisation
    (“EBITDA”) as a key internal measure to evaluate performance; for peer group comparisons; for
    performance targets and to determine long-range planning. For the current period core EBITDA
    decreased by 25% to R17.5 million (2014: R23.3 million).
    • The 66% increase in the luxury goods division core EBITDA is attributable to the Arthur
      Kaplan acquisition. Arthur Kaplan currently trades at a lower EBITDA margin than the
      NWJ business.
    • The decline in the core EBITDA of the food division is due to the increase in costs as
      outlined in note 6 above.

8.  The increase of R5.2 million in depreciation and amortisation is due to the assets in the
    additional 51 corporate stores operated by the group (see note 4) as well as the capital
    investment incurred in the new food distribution facilities in Midrand and Cape Town, which
    began operating in 2015.

9.  The increase in investment revenue is consequent to R94.7 million cash raised via a specific
    issue and a general issue of shares for cash in April 2015. Shareholders are referred to the
    SENS announcement released on 21 April 2015 for further details.

10. As part of its R1 billion Domestic Medium Term Note (“DMTN”) programme, Taste issued further
    notes to the value of R75 million during the current period. This and the inaugural issue of R125
    million on 30 July 2014 is the reason for the higher finance costs in this period over 2014. A
    further R25 million was issued subsequent to 31 August 2015. This capital raised is
    complementary to the capital raised through the equity issue as detailed in note 9.

11. The group’s effective tax rate for the current period is 23% due to the loss as well as the non-
    deductible expenses related to the various capital projects during the current period. The tax on
    the core earnings adjustment is calculated only on expenses that are deductible for taxation
    purposes.

12. This relates to a shareholding by the luxury goods division of 58% in a company that owns four
    NWJ stores.

13. The change in the weighted average number of shares in issue is as a result of:
    • 60 052 514 shares issued in terms of the rights offer to shareholders effective
      29 September 2014.
    • 31 073 773 shares issued during the period at R3.05 per share on 21 April 2015, partially
      by way of a general issue of shares for cash and partially by way of a specific issue of
      shares for cash. Shareholders are referred to the SENS announcement released on 21
      April 2015 for further details.
    • 1 726 727 shares issues in the current period to the Arthur Kaplan vendors at R3.33 per
      share as part payment of the additional purchase price consideration in terms of the
      purchase and sale agreement (see note 22).
    • Share options exercised by participants of the Taste Holdings Limited share option
      scheme.

14. The increase of R111.4 million in property, plant and equipment over the prior period relates to
    the following capital expenditures:
    • Acquisition and construction of corporate stores opened in the food and luxury goods
      divisions. As stated in note 4, the group now operates 51 more outlets (17 jewellery
      stores and 34 food outlets) than it did in the prior period.
    • Establishing the new distribution and dough manufacturing facilities in Midrand and Cape
      Town.

15. The increase in intangible assets over the prior period relates to:
    • The securing of a 25-year exclusive development agreement to develop Starbucks Coffee
      Company (“Starbucks”) outlets in South Africa.
    • Contributions made to Scooters and St. Elmo’s franchisees for the conversion of their
      stores to Domino’s. (See note 17 below).

16. The increase in goodwill over the prior period is mainly attributable to the acquisition of NWJ
    corporate stores and the acquisition of Arthur Kaplan.

17. Other financial assets consist of:
    • Loans made to marketing funds of brands within the group, including pre-funding the
      Domino’s marketing fund through a loan. These loans attract interest and are repayable.
    • Extended payment terms given to franchisees of the group, including the majority of the
      contributions made to Scooters and St. Elmo’s franchisees for the conversion of their
      stores to Domino’s. As at 31 August 2015, 33 stores had been converted.

18. Periodically the group will operate outlets where the short term intention is to sell them to
    franchisees. Currently the group operates 11 such outlets.

19. The increase of R154 million in inventories comprises of:
    • R132 million of jewellery and watch inventory, R113 million of which relates to Arthur
      Kaplan inventory.
    • R17 million of equipment inventory required for the Domino’s store conversions. This
      inventory is imported and is secured in advance due to the lead time required to
      manufacture and deliver this inventory to South Africa.
    • R5 million increase in inventory in the food services business in line with its increased
      contribution to the food segment.

20. Included in trade receivables in the prior period is a receivable amounting to R20 million that
    pertains to the Fish & Chip Co. litigation.

21. The trade and other payables in the prior period includes a payable amounting to R17.2 million
    that relates to the Fish & Chip Co. litigation. This litigation has been fully settled in the current
    period. Excluding this R17.2 million, the increase over 2014 is due to a combination of Arthur
    Kaplan and Domino’s payables. Such trade payables did not exist in the prior period as Arthur
    Kaplan was acquired in November 2014 and no Domino’s stores were open.

22. In terms of the Arthur Kaplan purchase and sale agreement an additional purchase
    consideration was payable to the Arthur Kaplan sellers if the profit after tax of Arthur Kaplan for
    the period from 1 July 2014 to 30 June 2015 exceeded R12.386 million. This additional
    consideration is calculated by multiplying R4.21 for every R1.00 with which the profit after tax
    exceeds R12.386 million, up to a total additional amount of R35 million. This additional purchase
    consideration amounted to R17.4 million, R15 million of which was raised as a financial liability
    at 28 February 2015. In terms of IFRS, this difference has been expensed in the income
    statement and has been included in the core earnings adjustment. R5.8 million of the additional
    purchase consideration was discharged by the issue of 1 726 727 Taste shares to the Arthur
    Kaplan vendors at R3.33 per share in accordance with the purchase and sale agreement and
    the remainder was settled in cash in September 2015. In terms of IFRS the difference between
    the agreed price of R3.33 and the price on the date the shares were issued has been expensed
    to the income statement, amounts to R2.2 million and has been included in the core earnings
    adjustment.

23. The increase in share premium from the prior period is consequent to the shares issued per
    note 13.

24. The increase in borrowings from the prior period is due to the additional notes issued under the
    DMTN programme (see note 10).

25. With the substantial increase in additional corporate store ownership across both divisions,
    lease rentals are now a material expense to the group and the lease smoothing charge in terms
    of IAS17 is disclosed for the first time. This is a non-cash item and is excluded from core
    earnings.

26. Net tangible asset value per share is calculated by excluding goodwill, intangible assets and the
    deferred taxation liability relating to intangible assets, from net asset value.

27. Cash generated from operating activities for the current period includes the costs and working
    capital associated thereto in terms of the core adjustment (see note 2). It also includes a further
    R14 million (2014: R2.6 million) of Domino’s marketing trade payables relating to the pre-funding
    of the brands marketing fund. Excluding the effect of the two factors above the group core cash
    conversion ratio is 55% of core EBITDA. (2014: 92%).

28. Property, plant and equipment purchased during the current period pertains mainly to capex
    incurred to open Domino’s outlets as well as the capital investment made in establishing the
    new distribution and dough manufacturing facilities in Midrand and Cape Town.

29. During June 2015, a subsidiary of NWJ acquired the assets of an NWJ store. The rationale for
    this acquisition is consistent with the brands strategy of:
    • expanding its corporate store ownership; and
    • retaining key strategic sites.

    No goodwill arose on the acquisition. The fair value of assets and liabilities acquired is set out
    below:

                                                                                                   R'000
    Property, plant and equipment                                                                   200
    Inventory                                                                                     1,520
    Fair value of assets acquired                                                                 1,720
    Consideration paid                                                                           (1,720)
    In cash                                                                                      (1,316)
    Balance owed by vendors                                                                        (0,4)
    Goodwill acquired                                                                                 -

    During the period that this store was owned it contributed R0.8 million to revenue and R0.01
    million to operating profit. The revenue and operating profit as if this store was owned for the full
    year cannot be disclosed, as complete and compliant financial records of this store prior to the
    date that it was acquired could not be obtained. The purchase price allocation has been
    disclosed as provisional, as permitted by IFRS3 Business Combinations and will be finalised
    within 12 months of acquisition date.

30. See note 10. With the proceeds of its R125 million inaugural note issue under the Taste DMTN
    programme in the prior period, the group settled R61 million of term debt.

31. This refers to interdivisional revenues in the food and corporate services divisions that are
    eliminated on consolidation.

32. Corporate services includes costs associated with listing, corporate activity, fund raising, non-
    executive fees, group CSI activities and salaries of the CEO, CFO, group commercial executive
    with ancillary payroll costs.

33. As announced on SENS the litigation with the vendors of The Fish & Chip Co. was amicably
    settled on 5 August 2015 and all actions between the parties have been withdrawn. The net
    trade receivable relating to this litigation, which was included in the prior period trade
    receivables and trade payables (see notes 20 & 21), equates to R2.8 million, was written off in
    the current period and has been included in the core earnings adjustment.

COMMENTS FROM THE CEO
The last 18 months have been transformative for the group. We have secured the exclusive rights to
two of the world’s largest quick service restaurants (“QSR”) and coffee brands in their categories:
Starbucks and Domino’s, acquired Zebro’s Chicken and built two world-class dough manufacturing
and food distribution facilities. None of this would have been possible were it not for the re-alignment
of the food division, in both structure and executive capacity, to the requirements of licensing global
brands. In the same period, through the acquisition of Arthur Kaplan, Taste is also the leading retailer
of luxury Swiss watch brands in Southern Africa, being custodian of some of the world’s most
recognisable premium watch brands.

The growth opportunities afforded by Domino’s, Starbucks, Zebro’s Chicken and Arthur Kaplan are
significant. It is not often in the journey of a company that such significant, long-run opportunities
occur at the same time, or even at all. These opportunities will, in the next 24 months, require capital
and launching Starbucks and Domino’s within 18 months of each other will negatively impact short-
term earnings, as is evident in these results of the food division. As a board and management team
we are resolute that these opportunities are significant enough to warrant: [1] the capital required; [2]
management focus to the exclusion of other acquisitive opportunities in the short term; and [3] short-
term earnings pressure in favour of the long term benefit to the company and its shareholders. The
inherent uncertainty when launching new “mega” brands has meant that historically this is often
executed by private companies, out of public scrutiny, but therefore also out of reach of public equity
holders. We are committed to affording our shareholders the opportunity to participate in the long-
term value creation prospects that we have together secured.

The learnings from the Domino’s rollout to date have been instructive in how we plan to rollout
Starbucks. The plan to rollout Starbucks in a measured and considered manner will mitigate much of
the execution risk associated with a new brand launch, as will the experience and increased capacity
in the food division. At the time of our annual report in May 2017, we will hold ourselves accountable
in respect of Starbucks to having: [1] established the first hand-full of Starbucks outlets in their full
brand representation; [2] built store-level human capability for future growth; and [3] established a
robust store economic model. With these building blocks in place we will start to capitalise on the 150
to 200 store market opportunity that we believe exists.
Weak consumer sentiment, low disposable income growth (real and forecast) and rising inflation are
ever-present economic headwinds. The next six months will have seen us laying the foundation for
launching Starbucks next year, shifting gear in Domino’s from conversion to new-store and sales
growth, executing some of the Arthur Kaplan opportunities and continuing with efficiency
improvements in our new facilities in food services.

GROUP OVERVIEW

The board of directors of Taste (“the Board”) present the unaudited condensed consolidated financial
results for the six months ended 31 August 2015 (“the current period”). Taste is a South African
based management group that owns and licenses a portfolio of franchised and owned, category
specialist and formula driven QSR, coffee and luxury retail brands housed within two divisions: food
and luxury goods. The group is focussed on leveraging existing capabilities across both divisions to:
[1] license leading global brands in consumer segments where the brand is an important part of how
customers make their purchasing decision; [2] improve scale among our ‘low cost’ food brands,
including through acquisition; [3] increase ownership of corporate owned stores across both divisions;
and [4] support this growth through a leveraged shared resources platform and accessing selected
vertical integration opportunities.

In the last six months the group made further advances against its strategy through: [1] securing the
exclusive development rights to develop Starbucks outlets in South Africa; [2] progressing conversion
of Scooters Pizza and St. Elmo’s to Domino’s such that an additional 53 Domino’s stores were added
to the 6 stores trading at 1 March 2015; [3] extending vertical integration in the food services business
through commencing dough manufacturing for Domino’s in Midrand and Cape Town, as well as
extending the range of products that are manufactured for Zebro’s Chicken; [4] augmenting the
position of Arthur Kaplan as the leading retailer of luxury Swiss brands through the introduction of
Montblanc writing instruments and accessories in two of the ten Arthur Kaplan outlets; and Longines
in an additional outlet.

Group system wide sales increased 7.2% to R800 million which, combined with the acquisition of
Arthur Kaplan, additional corporate stores and increases in the food services business saw an
additional R153 million of core revenue added, an increase of 51% to R455 million (2014: R302
million). An improved core gross margin to 40% (2014: 37%) saw nominal core gross profit increase
by 61%. Core EBITDA decreased 25% consequent to the start-up of the corporate store ownership
program in the food division more fully described in the food division note below. The cost of capital
raised (through increased borrowings and additional shares in issue through equity raised) in addition
to depreciation relating to the launch of Domino’s in November 2014, have seen core headline
earnings per share decline to 0.1 cents (2014: 4.3 cents) for the current period.

SEGMENTAL OVERVIEW

FOOD

The food division licences the world’s leading coffee retailer and roaster - Starbucks, the world’s
largest pizza delivery chain - Domino’s, and owns South Africa’s leading fish take away brand (by
outlets) - The Fish & Chip Co, in addition to Zebro’s Chicken and Maxi’s. (Scooters Pizza and St.
Elmo’s Woodfired Pizza outlets will be converted to Domino’s outlets in due course). Taste’s food
brands are spread across a diversified portfolio of product categories (coffee, chicken, pizza, fish,
burgers and breakfasts) that appeal to middle and upper income consumers (Starbucks, Dominos,
Maxi’s) as well as lower income consumers (The Fish & Chip Co., Zebro’s Chicken).

During the period of conversion to Domino’s, sales in the food division are not directly comparable
due to stores being closed during the conversion, initial launch promotions after conversion and
relocations. In the interim the group will disclose specific sales measures that are meaningful to
shareholders. Same store sales in Maxi’s decreased 2.6% impacted in part by load-shedding during
the current period. Similarly, but exacerbated by the price of fish in this segment, same-store sales in
The Fish & Chip Co. continued to be under pressure at -20%, although average store sales declines
have finally started to slow as lower turnover stores are closed, leaving a stronger system. We
estimate a system of approximately 200 outlets in the medium term. Still the market leader in store
numbers, The Fish & Chip Co. was voted number one fish brand (QSR) in the Star Readers’ Choice
awards and was in the top 10 in the Sunday Times best QSR brands in SA. Zebro’s Chicken same
store sales increased 9.5% for the current period, during which it also opened 11 new outlets.

Domino’s

The change in core earnings in the food division when compared to the prior period is predominantly
due to the Domino’s conversion and brand establishment, which commenced 11 months ago. Having
launched the first Domino’s store in October 2014, the brand now has 63 stores trading under the
Domino’s brand. We anticipate having between 85 and 100 outlets at the end of the conversion. Of
the 63 outlets, 26 are corporate owned. Owning these stores is an essential requirement of
conversion and to date over 1 600 people have been trained in these stores. This training
requirement has had the consequence that operational controls and efficiencies in these corporate
stores have been less than optimal and this has contributed to the decline in food division earnings
from the prior period and consequently group earnings. We anticipate that these controls will improve
materially as the training load on these stores diminishes during the next six months and the stores’
management gains the requisite experience. Sales in converted stores continue to be, on average,
more than 60% higher than prior to conversion. The capital expenditure on the food distribution and
dough manufacturing facilities in Midrand and Cape Town is now complete with both facilities having a
combined capacity to service in excess of 400 Domino’s outlets nationally in addition to the existing
outlets of the other food brands. Taste now supplies Domino’s stores in excess of 95% of their
ingredient and consumable requirements, which has converted to approximately double the per-store
sales to stores from the distribution facility, when compared to a Scooters Pizza outlet. As planned,
Domino’s launched its online ordering capability on 1 September, with a website and mobile
applications for iOS and Android mobile platforms.

Starbucks

On 14 July 2015 Taste announced on SENS that, through a wholly owned subsidiary, it had signed an
exclusive development agreement to develop Starbucks outlets in South Africa. In an update
released on SENS on 23 September 2015 Taste disclosed that it had identified an initial market
opportunity of more than 150 outlets and that notwithstanding this material market opportunity, Taste
envisages establishing 12 to 15 outlets being built in the first 24 months from the first store opening,
which store is still scheduled for the first half of 2016 and will be located in Gauteng. Initial indications
are that product pricing will be aligned with that of current premium coffee offerings in the South
African market.

LUXURY GOODS

The division consists of retail outlets branded under NWJ, Arthur Kaplan and World’s Finest Watches.
Through Arthur Kaplan and World’s Finest Watches, it is the leading retailer (by number of outlets) of
luxury Swiss watches in the region, with brands like Rolex, Omega, Breitling, Hublot, TAG Heuer,
Longines and Rado, among its custodian brands. Its brands appeal to a diversified customer base
ranging from premium watch and jewellery buyers (Arthur Kaplan and World’s Finest Watches) to
entry level jewellery and fashion watches buyers (NWJ).

The luxury goods division is the only vertically integrated and partly franchised jewellery business in
South Africa. It owns and operates approximately 60% of the total outlets. The franchise services are
comparable to those of the Taste food franchise business 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 all the outlets. Approximately 40% of NWJ jewellery is manufactured by the
group, with the remainder sourced through a combination of local and global supply chains. This
model provides in-house innovation capacity, fast routes to market and reduces input costs 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.

Despite continued volatility in sales as described in the group’s last results announcement (26 May
2015) the division posted a same-store sales increase of 4% for the current period (including annual
Arthur Kaplan same-store sales). This increase, combined with the Arthur Kaplan acquisition, saw
system-wide sales increase 100% to R249 million. The number of corporate owned stores increased
to 55 (out of a total of 90) and the division plans to open two new stores in the coming six months. It
has further secured a premium watch and jewellery site for Arthur Kaplan due to open in April 2016.
This will effectively increase the Arthur Kaplan footprint by 10% with little associated costs and is
expected to contribute positively to its overall profit and margins. In the last 18 months two Arthur
Kaplan outlets have been refurbished and both these stores have increased sales above
expectations, in excess of 50%. Arthur Kaplan has three refurbishments planned in the next 12
months and anticipates introducing two more premium watch brands into existing stores during the
next three months. Revenue increased 119% to R232 million (2014: R106 million) which combined
with satisfactory margin and cost control yielded a core EBITDA increase of 66% to R19.1 million.
(2014: R11.5 million). The luxury goods division historically produced 70% to 75 % of full year profits
in the second half of the year, which trend is expected to continue with Arthur Kaplan.


BASIS OF PREPARATION OF THE INTERIM RESULTS

Statement of compliance
Basis of preparation and accounting policies
The unaudited condensed consolidated results have been prepared in accordance with the
recognition and measurement requirements of International Financial Reporting Standards (“IFRS”),
the presentation and disclosure requirements of IAS 34 - Interim Financial Reporting, the SAICA
Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting
Pronouncements as issued by Financial Reporting Standards Council, the Listings Requirements of
the JSE Limited and in the manner required by the South African Companies Act 71 of 2008, as
amended.

Accounting policies, which comply with IFRS, have been applied consistently by all entities in the
group and are consistent with those applied in the previous financial year except for amendments and
interpretations that came in to effect during the current financial year that have no impact to the group.

The condensed consolidated results have not been reviewed or audited by the group’s auditors and
were prepared under the supervision of Mr. E Tsatsarolakis, the Chief Financial Officer of the group.


EVENTS SUBSEQUENT TO PERIOD END

Issue of notes
In terms of the DMTN programme explained in note 10 above, Taste has issued further notes to the
value of R25 million on 8 September 2015.

Purchase of property
During October 2014 Buon Gusto Cuisine (Pty) Ltd, a wholly owned subsidiary of Taste, purchased a
property in Midrand for R19 million for the establishment of a pizza dough manufacturing facility as
well as for expanding its current food distribution facilities. Transfer of this property took place on 25
September 2015.

The directors are not aware of any other material matter or circumstance arising since the current
period end up to the date of this report.

DOMINO’S MASTER FRANCHISE AGREEMENT UPDATE

Shareholders are referred to the SENS announcement dated 26 May 2015 in which shareholders
were advised that Taste Food Franchising Proprietary Limited ("TFF"), a wholly owned subsidiary of
Taste Holdings Limited, had been joined as a third party to the interim application between Taste and
Domino's Pizza International (on the one hand) and certain aggrieved parties (on the other) in relation
to the rights secured by TFF as announced by Taste and Domino's on 10 April 2014. The interim
application was heard in March 2015. The parties are still awaiting judgment.

The other parties instituted an action for final relief against, inter alia, Taste and TFF on 25 November
2014. Pleadings have closed in the action and the plaintiffs have applied for a trial date, which date
has not yet been allocated. Shareholders will be updated in due course.

DIVIDEND TO SHAREHOLDERS

In line with previous years the group has only paid a final dividend. As such no interim dividend is
declared for the current period.


On behalf of the Board

C F Gonzaga                                                                 E Tsatsarolakis
Chief Executive Officer                                                     Chief Financial Officer
13 October 2015


CORPORATE INFORMATION

Non-executive directors: R L Daly (Chairperson)*, K Utian*, A Berman*, H R Rabinowitz, S Patel*,
W P van der Merwe*, G M Pattison*
*Independent
Executive directors: C F Gonzaga (CEO), D J Crosson, J B Currie, E Tsatsarolakis (CFO)
Registration number: 2000/002239/06
Registered address: 12 Gemini Street, Linbro Business Park, Sandton 2065
Postal address: PO Box 1125, Ferndale, Randburg, 2160

Company secretary: iThemba Corporate Governance and Statutory Solutions Proprietary Limited
Telephone: (011) 608 1999
Facsimile: 086 696 1270
Transfer secretaries: Computershare Investor Services Proprietary Limited

Sponsor: Merchantec Capital

These results and an overview of Taste are available at www.tasteholdings.co.za

Date: 13/10/2015 08:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
 the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, 
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
 information disseminated through SENS.

Share This Story