RBD
29/06/2012 11:00
ADDRESS
REL: 1100 HRS Restaurant Brands New Zealand Limited
ADDRESS: RBD: Chairman's Address
Chairman's Address to the 2012 Annual Shareholders' Meeting
29 June 2012
Fellow shareholders,
When I addressed the 2011 shareholders' meeting I commented that we were
awaiting meaningful signs of recovery in the economy. The Rugby World Cup
tournament was still ahead of us and we expected a level of sales uplift from
that event; however we remained somewhat cautious as to the flow through to
the wider retail environment.
That cautious view has been truly vindicated. As the European financial
crisis reaches new levels and bankers and politicians struggle to push
through long term rescue packages we see continuing evidence that the general
retail situation here in New Zealand still remains challenging. The most
recent BNZ Confidence Survey result states that the New Zealand economy has
yet to gain sustained firm upward momentum after exiting the global recession
in the first half of 2009.
Last Year's Results
However, despite all the uncertainties, the company delivered a solid profit
result in 2012. Although the result was below last year's record
performance, it remained well above the levels achieved 3 to 5 years ago.
Restaurant Brands' profit - or Net Profit after Tax excluding non-trading
items - for the 2012 financial year was a little over $18 million, down 27%
on last year's profit of around $25 million but driving a solid 23% compound
average growth rate since 2007 .
The latest result reflected a tough trading environment and higher input
costs - particularly with items such as chicken and cheese, of which the
Group is amongst the largest buyers in New Zealand.
Two other factors impacted our sales results in particular during the year.
The 22 February 2011 earthquake in Christchurch affected trading in the first
quarter of the 2012 financial year.
In addition the continued sale of Pizza Hut stores to franchisees during the
year saw 8 less stores under our ownership, reducing total sales for this
brand.
The impact of these factors was most evident in the first half, accounting
for some $5 million of the $7 million reduction in profit. In the second
half of the year we implemented a number of cost reductions and promoted more
profitable lines to address the negative year on year performance.
Total sales of $308 million were down 5% on the prior year. KFC held its own
but total sales for Pizza Hut and Starbucks Coffee declined 23% and 10%
respectively, mainly on the back of store closures (earthquake-related) and
in the case of Pizza Hut, sales of stores to independent franchisees.
Same store sales - which allow an "apples with apples" comparison between
periods - reversed the increase seen in 2011 and were down around 2.5%.
At year end we had 194 stores, down 14 on February 2011. In addition to the
sales of eight regional Pizza Hut stores to franchisees, one dine-in and two
Pizza Hut delivery stores were closed. There were also two Starbucks Coffee
stores closed at lease end. KFC lost one store, destroyed in the Christchurch
earthquake.
To summarise the effect of the 22 February earthquake on our sales for this
year, we saw KFC drop $2.9 million, Pizza Hut $0.5 million and Starbucks $2.5
million, a total of $5.9 million. Whilst these losses were substantial we
fortunately had full loss of profits insurance policies that minimized the
profit impact of these lost sales in the 2012 year.
Total store EBITDA (or earnings before interest, tax, depreciation and
amortization) dropped 17% to $51.4 million. KFC accounted for over half of
the reduction and Pizza Hut around one third.
Despite the slightly lower profitability and some negative working capital
movements, operating cash flows for the year were still a healthy $30
million. With some easing in capital expenditure as we slowed the KFC store
transformation, investing cash outflows reduced to around $14 million.
Consequently bank debt is up slightly to $13.6 million but we are utilising
less than 40% of the facility limit of $35 million.
The balance sheet remains very conservative with a gearing ratio of 19%
(2011: 17%).
Dividend
Given the company's strong cash flows and low debt levels we have decided to
keep the dividend close to that paid last year. Today a final fully-imputed
dividend of 9.5 cents per share will be paid to you, making the dividend for
the full year 16 cents per share, compared with 17 cents in 2011.
The payout ratio is around 92% of profit. This is relatively high for a
listed company but reflects the extremely strong cash generating nature of
the business, conservative borrowing levels and a limited need to retain cash
for reinvestment at the moment. For this reason the dividend re-investment
plan remains suspended.
As far as future dividends are concerned we would like to continue to
increase the payout in line with improvements in the company's profitability
but, as always, with an eye to retaining funds for reinvestment where this is
justified.
New brand opportunities
While it may look like we have been relatively slow bringing new brands to
the country let me assure you we have actively looked at a number. Last year
we commenced preliminary discussions with Yum on the possible introduction of
the Taco Bell brand. However, with Yum placing international development of
this brand on hold we have not proceeded with this opportunity for the time
being.
We believe we have the depth of expertise and experience to "plug in" new
franchises relatively quickly into the New Zealand market. There is the
opportunity to add three or four new brands to our portfolio in a relatively
short time. Rest assured we will only add new concepts where we are
confident of increased net returns.
In the US, which continues to lead the world in QSR development and usage,
the average number of visits to a restaurant per capita is 195 per annum.
New Zealand is well behind this at 53 per annum.
Pies, sushi, steakhouses, beverage bars and ice cream are all possible areas
of interest where strong franchises exist overseas. We have a small team
that monitors these opportunities and, should we commit to proceeding with
the New Zealand franchise for any of these, our strategy would be a gradual
introduction and test of any such opportunity rather than "betting the farm".
Carl's Jr
Having said that, let me tell you about an area where we have seen an
excellent opportunity to invest.
As you would have seen from the theme of our annual report, Restaurant Brands
is a company of multiple dimensions, both in its inherent competencies and in
the scope of its brands. The depth of our business was amply demonstrated by
the acquisition last year of the rights to an exciting new burger brand -
Carl's Jr., which both expands our brand stable and increases the diversity
of our earnings.
In December 2011 the company entered into franchise and development
agreements with CKE Restaurants Inc. in the U.S., giving Restaurant Brands
the exclusive rights to the Carl's Jr brand throughout New Zealand and shared
rights to develop stores in the Auckland region.
Carl's Jr has in excess of 1,000 stores in the United States and is
commencing international expansion in earnest. It specialises in offering
best-in-class premium-quality burgers targeting youthful demographics.
Carl's Jr restaurants offer unique service attributes focusing on 'partial
table service', with a 'made-to-order' menu, 'all-you-can-drink' beverage
bars, and a strong breakfast offering.
We expect to open the first and up to four new Carl's Jr. stores in the
second half of this financial year. All stores are expected to be
immediately profitable, but some set up costs at the general and
administrative expenses (G&A) level will be incurred in establishing the
business.
Suffice to say Carl's Jr is an exciting addition to our business of managing
multi-site branded food retail chains. Russel will tell you a little more
about this in his address.
Strategy
To update you on strategy with our other brands ...
KFC's strategy is to maintain and build on the transformation process that
has delivered so well the results for KFC, and indeed Restaurant Brands, over
recent years.
With a little over 2/3 of our KFC stores now transformed and a further eight
planned for this year, we are starting to work on the next phases of this
development. One of these is a further iteration of the transformation
process - Project Fusion. The prototype for this is our new Lower Hutt store
which Russel will also elaborate on in his address.
Despite the trading difficulties this year, Pizza Hut's focus remains on
returning profitability to our pizza business whilst at the same time
continuing to progressively reduce the numbers of our smaller regional stores
through a controlled sell down process. These stores, which generally have
smaller sales volumes can produce a stronger result when operated by an
independent franchisee with a more personal approach to running the store.
We have now sold 16 stores to independent franchisees and expect to have more
stores operating on this model by the end of the financial year. We continue
to focus on rebuilding sales and margins on our residual core stores in the
major urban centres.
The Starbucks Coffee strategy continues to be building profitable sales as it
did this year and our intention is to continue to support this strategy
through new menus, possible new sites and a continued focus on operational
excellence.
Outlook
Looking forward we don't expect any let-up in the challenging economic
conditions or competitive nature of the marketplace. Despite the continuing
soft retail environment, directors believe that current levels of
profitability will be maintained through a continued focus on efficiency and
cost reductions, together with new marketing initiatives.
Even though the 2012 underlying profit was down on 2011's stellar result,
Directors consider the 2012 profit performance to have been satisfactory
given the continuing tough economic environment. We believe that these new
levels of profitability are sustainable.
Our expectations for 2013 are for a result of at least the same level in the
year ahead. Restaurant Brands reports to the market six times a year - four
quarterly sales reports together with the interim and annual results - and we
will provide a further update at the time of the release of the 2nd quarter's
sales result in mid to late September.
Board
Before I hand over to Russel for his update, I would like to acknowledge the
support of my fellow directors for their continued commitment to Restaurant
Brands.
We continue to operate with a small and effective board of four who work well
together and with management in the governance of the company.
Last year we indicated that we were looking to appoint an additional director
to the board. While we have elected not to proceed with a new appointment
for the time being we remain on the look out for the right skills to add
value around our board table.
Staff and Management
One of the strengths of Restaurant Brands is its depth of people resource and
capability. The board acknowledges the exceptional skill and hard work of
our staff at all levels and thanks each and every member of the team for
their outstanding contribution, and their families for their support.
Conclusion
In concluding I would like to thank you, our shareholders, for your continued
support of the company and our brands over the past year. It has not been an
easy year but we trust that the results you have seen continue to provide
some assurance of a solid ongoing return on your investment.
ENDS
End CA:00224442 For:RBD Type:ADDRESS Time:2012-06-29 11:00:09
