23% 50% 35% 27% 44% 20% 50% 42.6%
Incorporated in the Republic of South Africa Registration number 2000/002239/06 JSE code: TAS ISIN: ZAE000081162 (“Taste” or “the company” or “the group”)
Revenue
EBITDA
Operating profit
Headline earnings
to R113.4 million
to R14.0 million
to R10.7 million
to R5.3 million
Headline earnings per share
System-wide sales
Net tangible asset value per share
Operating costs as a % of revenue improved to
to 3.1 cents
to R416 million
to 29.4 cents
(2010: 48.3%)
23%
35%
50%
44%
27%
20%
50%
42.6%
UNAUDITED CONDENSED FINANCIAL RESULTS FOR THE SIX MONTHS ENDED 31 AUGUST 2011 AND FURTHER CAUTIONARY ANNOUNCEMENT
% change Revenue Gross profit(2) Other income Operating costs(3) Operating profit Fair value adjustment on derivative(4) Share option IFRS 2 charge(5) Interest income Finance costs(6) Profit before taxation Taxation(7) Profit for the period Other comprehensive income Total comprehensive income for the period Attributable to: Equity holders of the parent Minority interests Reconciliation of headline earnings: Earnings attributable to ordinary shareholders adjusted for: Impairment losses (Profit)/loss on sale of property, plant and equipment Headline earnings attributable to ordinary shareholders Weighted average shares in issue (‘000) Fully diluted shares in issue (‘000) Earnings per share (cents) Fully diluted earnings per share (cents) Headline earnings per share (cents) Fully diluted headline earnings per share (cents) (1)
Unaudited six months ended 31 August 2011 R’000
Unaudited six months ended 31 August 2010 R’000
CONDENSED GROUP STATEMENT OF CHANGES IN EQUITY
Audited 12 months ended 28 February 2011 R’000
113 416 58 706 241 (48 270) 10 677
92 546 51 762 358 (44 696) 7 424
233 751 121 904 771 (91 907) 30 768
– (216) 346 (2 640) 8 167 (2 819) 5 348 –
(195) – 358 (2 609) 4 978 (1 360) 3 618 –
– (176) 615 (5 925) 25 282 (7 245) 18 037 –
48
5 348
3 618
18 037
48
5 348 –
3 618 –
18 037 –
23 13 8 44
64 48
48
5 348 –
50
5 343
(5)
3 618 –
18 037 216
(58)
2
3 560
18 255
170 161
170 161
170 161
48
179 815 3.1
180 715 2.1
179 815 10.6
49
3.0
2.0
10.0
50
3.1
2.1
10.7
51
3.0
2.0
10.2
Unaudited 31 August 2011 R’000
Unaudited 31 August 2010 R’000
Audited 28 February 2011 R’000
98 353 11 284 66 632 18 654 581 1 202 1 749 118 928 69 428 32 524 5 092 2 190 6 476 3 218
92 871 10 552 62 921 16 321 1 725 1 352 4 941 94 581 62 955 23 594 4 257 1 970 1 270 535
102 182 11 813 67 570 18 654 3 150 995 1 749 112 553 62 221 33 493 1 933 755 1 097 13 054
Total assets EQUITY AND LIABILITIES Capital and reserves Issued capital Distributable reserve Share premium Share option reserve(5) Non-current liabilities Borrowings Long-term employee benefits Deferred tax Current liabilities Provisions Current tax payable Trade and other payables(11) Balances due to vendors Bank overdrafts Derivative at fair value(4) Current portion of borrowings
219 030
192 393
216 484
118 974 2 75 439 43 141 392 38 425 21 781 252 16 392 61 631 250 2 831 27 373 – 14 963 – 16 214
104 053 2 60 777 43 141 133 44 732 27 669 429 16 634 43 608 250 1 123 22 705 1 839 7 117 783 9 791
118 515 2 75 196 43 141 176 46 915 30 071 429 16 415 51 054 250 299 30 852 – 5 111 – 14 542
Total equity and liabilities Number of shares in issue (’000) Net asset value per share (cents) Net tangible asset value per share (cents)(12)
219 030 170 161 69.6
192 393 170 161 61.1
216 484 170 161 69.6
29.4
24.4
28.6
Cash flow from operating activities Cash generated by operating activities Interest income Finance costs Dividends paid Taxation paid Cash flows from investing activities Acquisition of property, plant and equipment Acquisition of non-current assets held for sale Proceeds of disposal of property, plant and equipment Proceeds on disposal of non-current assets held for sale Acquisition of subsidiary(13) Loans advanced Acquisition of intangible assets Cash flows from financing activities Decrease in long-term employee benefits Loans (repaid)/raised(6) Loans repaid to vendors Change in cash and cash equivalents(14) Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period
(8 208) 2 867 346 (2 640) (5 105) (3 676) (4 685) (1 073)
Unaudited six months ended 31 August 2010 R’000 378 3 449 358 (2 804) – (625) (2 615)
2
43 141
43 143
Share option reserve Profit for period Balance 1 March 2011
2
133
60 777 104 053 –
43 14 419
–
43 141
43 143
176
75 196 118 515
216 –
–
2
43 141
43 143
392
216
(5 105)
(5 105)
5 348
5 348
–
Profit for period
Total R’000
14 419
–
Distributions to shareholders
Group overview
43 –
Share option reserve
Balance 31 August 2011
Share option Retained reserve income R’000 R’000
75 439 118 974
CONDENSED CONSOLIDATED SEGMENTAL REPORT
% change Segment revenue Food(15) Franchise(16) Food services(17) Retail(18) Jewellery(19) Franchise and wholesale Retail(20) Concession retail Eliminations(20) Group revenue Segment operating profit Food Franchise Food services Retail Jewellery Franchise and wholesale(22) Retail Concession retail Corporate services(23) Group operating profit
59
9
23 82
(13)
18 44
Unaudited six months ended 31 August 2011 R’000
Unaudited six months ended 31 August 2010 R’000
Audited 12 months ended 28 February 2011 R’000
40 906 21 858 17 945 1 103 72 934 48 466 24 386 82 (424) 113 416
25 782 16 506 2 090 7 186 67 217 43 306 23 204 707 (453) 92 546
63 160 37 688 14 680 10 792 171 611 116 056 52 347 3 208 (1 020) 233 751
11 176 10 073 1 399 (296) 5 562 3 514 2 088 (40) (6 061) 10 677
6 144 7 272 (444) (684) 6 414 4 972 1 836 (394) (5 134) 7 424
17 712 17 810 690 (788) 24 248 17 292 7 265 (309) (11 192) 30 768
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 companyowned 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.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited six months ended 31 August 2011 R’000
Balance 1 September 2010
Total share capital R’000
NOTES TO THE FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
ASSETS Non-current assets Property, plant and equipment Intangible assets(8) Goodwill(8) Other financial assets(9) Deferred tax Non-current assets held for sale(10) Current assets Inventories Trade and other receivables(11) Taxation Advertising levies Other financial assets(9) Cash and cash equivalents
Share Share capital premium R’000 R’000
Audited 12 months ended 28 February 2011 R’000 21 658 32 036 615 (5 925) – (5 068) (13 901)
(716)
(1 755)
–
(14)
(60)
10
499
515
– – (2 810) (812) (6 795)
409 – (2 793) – (9 921)
3 212 (9 461) (4 045) (2 307) (5 390)
(177) (6 618) –
(177) (5 137) (4 607)
(177) 1 233 (6 446)
(19 688)
(12 158)
2 367
7 943
5 576
5 576
(11 745)
(6 582)
7 943
COMMENTARY
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.
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 Chief Executive Officer
E Tsatsarolakis Financial Director
12 October 2011
Corporate information
These results and an overview of Taste are available at: www.tasteholdings.co.za
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, E Tsatsarolakis (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
Midnight Star
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Revenue
EBITDA
Operating profit
Headline earnings
to R113.4 million
to R14.0 million
to R10.7 million
to R5.3 million
Headline earnings per share
System-wide sales
Net tangible asset value per share
Operating costs as a % of revenue improved to
to 3.1 cents
to R416 million
to 29.4 cents
(2010: 48.3%)
23%
35%
50%
44%
27%
20%
50%
42.6%
UNAUDITED CONDENSED FINANCIAL RESULTS FOR THE SIX MONTHS ENDED 31 AUGUST 2011 AND FURTHER CAUTIONARY ANNOUNCEMENT
% change Revenue Gross profit(2) Other income Operating costs(3) Operating profit Fair value adjustment on derivative(4) Share option IFRS 2 charge(5) Interest income Finance costs(6) Profit before taxation Taxation(7) Profit for the period Other comprehensive income Total comprehensive income for the period Attributable to: Equity holders of the parent Minority interests Reconciliation of headline earnings: Earnings attributable to ordinary shareholders adjusted for: Impairment losses (Profit)/loss on sale of property, plant and equipment Headline earnings attributable to ordinary shareholders Weighted average shares in issue (‘000) Fully diluted shares in issue (‘000) Earnings per share (cents) Fully diluted earnings per share (cents) Headline earnings per share (cents) Fully diluted headline earnings per share (cents) (1)
Unaudited six months ended 31 August 2011 R’000
Unaudited six months ended 31 August 2010 R’000
CONDENSED GROUP STATEMENT OF CHANGES IN EQUITY
Audited 12 months ended 28 February 2011 R’000
113 416 58 706 241 (48 270) 10 677
92 546 51 762 358 (44 696) 7 424
233 751 121 904 771 (91 907) 30 768
– (216) 346 (2 640) 8 167 (2 819) 5 348 –
(195) – 358 (2 609) 4 978 (1 360) 3 618 –
– (176) 615 (5 925) 25 282 (7 245) 18 037 –
48
5 348
3 618
18 037
48
5 348 –
3 618 –
18 037 –
23 13 8 44
64 48
48
5 348 –
50
5 343
(5)
3 618 –
18 037 216
(58)
2
3 560
18 255
170 161
170 161
170 161
48
179 815 3.1
180 715 2.1
179 815 10.6
49
3.0
2.0
10.0
50
3.1
2.1
10.7
51
3.0
2.0
10.2
Unaudited 31 August 2011 R’000
Unaudited 31 August 2010 R’000
Audited 28 February 2011 R’000
98 353 11 284 66 632 18 654 581 1 202 1 749 118 928 69 428 32 524 5 092 2 190 6 476 3 218
92 871 10 552 62 921 16 321 1 725 1 352 4 941 94 581 62 955 23 594 4 257 1 970 1 270 535
102 182 11 813 67 570 18 654 3 150 995 1 749 112 553 62 221 33 493 1 933 755 1 097 13 054
Total assets EQUITY AND LIABILITIES Capital and reserves Issued capital Distributable reserve Share premium Share option reserve(5) Non-current liabilities Borrowings Long-term employee benefits Deferred tax Current liabilities Provisions Current tax payable Trade and other payables(11) Balances due to vendors Bank overdrafts Derivative at fair value(4) Current portion of borrowings
219 030
192 393
216 484
118 974 2 75 439 43 141 392 38 425 21 781 252 16 392 61 631 250 2 831 27 373 – 14 963 – 16 214
104 053 2 60 777 43 141 133 44 732 27 669 429 16 634 43 608 250 1 123 22 705 1 839 7 117 783 9 791
118 515 2 75 196 43 141 176 46 915 30 071 429 16 415 51 054 250 299 30 852 – 5 111 – 14 542
Total equity and liabilities Number of shares in issue (’000) Net asset value per share (cents) Net tangible asset value per share (cents)(12)
219 030 170 161 69.6
192 393 170 161 61.1
216 484 170 161 69.6
29.4
24.4
28.6
Cash flow from operating activities Cash generated by operating activities Interest income Finance costs Dividends paid Taxation paid Cash flows from investing activities Acquisition of property, plant and equipment Acquisition of non-current assets held for sale Proceeds of disposal of property, plant and equipment Proceeds on disposal of non-current assets held for sale Acquisition of subsidiary(13) Loans advanced Acquisition of intangible assets Cash flows from financing activities Decrease in long-term employee benefits Loans (repaid)/raised(6) Loans repaid to vendors Change in cash and cash equivalents(14) Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period
(8 208) 2 867 346 (2 640) (5 105) (3 676) (4 685) (1 073)
Unaudited six months ended 31 August 2010 R’000 378 3 449 358 (2 804) – (625) (2 615)
2
43 141
43 143
Share option reserve Profit for period Balance 1 March 2011
2
133
60 777 104 053 –
43 14 419
–
43 141
43 143
176
75 196 118 515
216 –
–
2
43 141
43 143
392
216
(5 105)
(5 105)
5 348
5 348
–
Profit for period
Total R’000
14 419
–
Distributions to shareholders
Group overview
43 –
Share option reserve
Balance 31 August 2011
Share option Retained reserve income R’000 R’000
75 439 118 974
CONDENSED CONSOLIDATED SEGMENTAL REPORT
% change Segment revenue Food(15) Franchise(16) Food services(17) Retail(18) Jewellery(19) Franchise and wholesale Retail(20) Concession retail Eliminations(20) Group revenue Segment operating profit Food Franchise Food services Retail Jewellery Franchise and wholesale(22) Retail Concession retail Corporate services(23) Group operating profit
59
9
23 82
(13)
18 44
Unaudited six months ended 31 August 2011 R’000
Unaudited six months ended 31 August 2010 R’000
Audited 12 months ended 28 February 2011 R’000
40 906 21 858 17 945 1 103 72 934 48 466 24 386 82 (424) 113 416
25 782 16 506 2 090 7 186 67 217 43 306 23 204 707 (453) 92 546
63 160 37 688 14 680 10 792 171 611 116 056 52 347 3 208 (1 020) 233 751
11 176 10 073 1 399 (296) 5 562 3 514 2 088 (40) (6 061) 10 677
6 144 7 272 (444) (684) 6 414 4 972 1 836 (394) (5 134) 7 424
17 712 17 810 690 (788) 24 248 17 292 7 265 (309) (11 192) 30 768
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 companyowned 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.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited six months ended 31 August 2011 R’000
Balance 1 September 2010
Total share capital R’000
NOTES TO THE FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
ASSETS Non-current assets Property, plant and equipment Intangible assets(8) Goodwill(8) Other financial assets(9) Deferred tax Non-current assets held for sale(10) Current assets Inventories Trade and other receivables(11) Taxation Advertising levies Other financial assets(9) Cash and cash equivalents
Share Share capital premium R’000 R’000
Audited 12 months ended 28 February 2011 R’000 21 658 32 036 615 (5 925) – (5 068) (13 901)
(716)
(1 755)
–
(14)
(60)
10
499
515
– – (2 810) (812) (6 795)
409 – (2 793) – (9 921)
3 212 (9 461) (4 045) (2 307) (5 390)
(177) (6 618) –
(177) (5 137) (4 607)
(177) 1 233 (6 446)
(19 688)
(12 158)
2 367
7 943
5 576
5 576
(11 745)
(6 582)
7 943
COMMENTARY
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.
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 Chief Executive Officer
E Tsatsarolakis Financial Director
12 October 2011
Corporate information
These results and an overview of Taste are available at: www.tasteholdings.co.za
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, E Tsatsarolakis (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
Midnight Star
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
