SPUR CORP. LIMITED INTEGRATED REPORT 2014

Chairman's Statement

Allen Ambor

South Africa is a country with great potential and has made significant progress in improving the lives of the majority of its people in the past 20 years. Unfortunately, it also faces challenges that continue hindering the nation’s trajectory to the prosperity of which it is capable. These include poor service delivery, persistently high unemployment, labour unrest (including the impact of mining strikes) and issues with the education system.

The full commitment of private enterprise will be critical in ensuring the success of the country’s future. I believe that business leaders owe it to the country to be open and frank and to continue investing in the future sustainability of their businesses. A successful, growing business creates value for customers and shareholders, creates employment and uplifts employees through skills development initiatives, career opportunities and the security of regular remuneration. A business run with a conscience uplifts the surrounding communities and is mindful of the impact it has on the environment. These are the fundamentals upon which Spur Corporation continues to expand its franchise network.

Over the past year, the South African consumer has been dealt a number of blows including the introduction of e-tolls, above inflation increases in energy, fuel and occupancy costs, high food inflation, and the prospects of higher interest rates ahead. This has led to lower disposable incomes in our target markets and general negative consumer sentiment. In this environment, the market players in the restaurant industry (both sit-down and quick service) are scrambling to offer the best value proposition to secure “share of stomach”. This has resulted in increasing levels of competition from existing market players in addition to new entrants into the market.

Highlights for 2014

Against the backdrop of the challenging economic environment, the group produced a satisfactory financial performance with the group’s flagship brands demonstrating consistent resilience. This is best seen in the strong restaurant sales growth of 13.5% and total revenue growth of 9.1%. Sales from existing restaurants increased 9.8%. Comparable profit – which strips out non-recurring items, foreign exchange gains/losses, abnormal and exceptional items – grew 9.9% to R218.3 million (2013: R198.6 million).

Headline earnings were flat at R135.2 million and diluted headline earnings per share increased 0.5% to 157.9 cents. The board approved a dividend of 121 cents for the full financial year, an increase of 9.0% on last year’s dividend.

The acquisition of The Hussar Grill chain in January 2014 adds a premium grill house brand and accesses a higher LSM market for the group. The group acquired 30% of Braviz Fine Foods in March 2014 to ensure sustainability of supply and quality in ribs – one of the core products across our restaurants.

The Broad-based Black Economic Empowerment (“B-BBEE”) ownership deal with Grand Parade Investments Ltd announced after year-end, and approved by shareholders on 3 October 2014, is a strategically significant transaction. It partners Spur Corporation with a like-minded entrepreneurial business that has excellent B-BBEE credentials and we believe this will add value over time. The transaction is a key component to delivering on our stated transformation strategy.

Marketing has always been my passion, so I was pleased by Spur being recognised again as the “Coolest Place to Eat Out” in the 2014 Sunday Times Generation Next survey. I was also pleased to see our strapline “People with a taste for life” placing second among some big brands with much greater marketing muscle behind them.

Managing the group’s social media presence is a strategic necessity and we have been pleased with the rapid growth in the followers of the group’s brands and website visits. We have dedicated resources into the marketing and customer care centre functions to ensure this area receives the necessary priority.

We built our core brands around family, creating an environment where children are welcome and where they can have fun. This approach has been taken to the next level with the introduction of digital birthday songs, the Spur Tribe Dash game, in-store Secret Tribe character costumes and interactive front of house digital screens. The new “Colour me 3D” augmented reality colouring in sheets that animate through a smartphone or tablet are unique and have to be seen to be believed!

Challenges

Our UK, Ireland and Australian operations produced subdued results in tough economic circumstances. However, the development pipeline in Australia (focusing on Western Australia) looks promising and we expect to expand franchise operations in that region in the new financial year. We are set to launch a new Spur RBW (Ribs Burgers Wings) counter service concept in the UK in the new financial year and we believe that the lower set-up cost model of such an operation could make this a more appealing franchising opportunity than our existing model.

We were disappointed with the results produced by Captain DoRegos. The lower LSM market, which the brand targets, has been hardest hit by the economic slowdown and is characterised by fierce competition. We have made the necessary adjustments to the business model and are confident that we will be rewarded by an improved performance once these have settled in and the business has matured.

Governance and sustainability

The group’s governance structures continue to mature and are guided by the principles of King III. The changes to our board and committees, as reported in the governance reports, have further developed the collective effectiveness of the board. The board is characterised by robust and informed debates that take place in an environment of trust and respect.

The activities of the Spur Foundation support the nutrition and provision of basic services to children from disadvantaged communities. The donation of 500 000 treasury shares over five years, approved by shareholders on 3 October 2014, will provide annuity income and guarantee the long-term sustainability of the Foundation and its activities.

I am pleased with the progress shown in the transformation of our group, as evidenced by the improvement in our B-BBEE score to level 6 from level 8 last year.

The group continues implementing environmental initiatives at corporate level, including energy retrofits and recycling projects. We also try to raise environmental awareness in our customers and to influence a positive environmental approach in our supply chain through continuous engagement. We ensure that our franchisees remain environmentally friendly through our green operations assessment.

Outlook

We expect South Africa and our developed market operations to generate solid growth in the medium term. However, we believe markets in the rest of Africa hold the most promise for future growth in the long term and we will continue to expand cautiously where opportunities make strategic sense. We also continue to look for ways to improve efficiencies by capitalising on existing infrastructure in territories in which we already trade.

We aim to increase the size of the procurement basket and supply more outlets. Opportunities to integrate supply chain elements into the group will be investigated as they present themselves.

Future growth will be dependent on socio-economic realities in the countries in which we operate. For example, in a slow economy, people are cautious about spending money and reticent to open new businesses.

Thanks

Firstly, I would like to thank our executive directors for the value they add to the group’s strategic development and for their support of management.

There are many other individuals working in the company that bring their drive, intelligence and ability to the sustainable growth of the company. I continue to be inspired by the performance of so many of our people who have flown higher and higher in the organisation as they are given more freedom to express themselves. These people eat, sleep, drink and love this group and I thank them for their incredible contribution.

I would also like to thank our loyal shareholders, franchisees, suppliers, business partners and advisors. Special thanks go to our advertising agencies – thank you for your loyalty and commitment to our brands.

Finally, I thank our customers. I visit our restaurants regularly and always enjoy seeing people young and old enjoying themselves with their families. Thank you for choosing us.

Allen Ambor EXECUTIVE CHAIRMAN