SPUR CORP. LIMITED INTEGRATED REPORT 2014

Operational reports

International operations

The international operations comprise 52 restaurants – 39 Spur Steak Ranches, 11 Panarottis Pizza Pasta outlets and 2 Captain DoRegos outlets. These restaurants are located in Africa, Australia, the UK and Ireland, and Mauritius.

All eight Spurs in the UK and Ireland are retail outlets. Three of the outlets in Australia are retail outlets and five are franchised. The other international outlets are all franchised.

Total restaurant turnover in the international division increased 20.2% to R612.1 million (2013: R515.7 million), supported by the weakening of the rand against major currencies. Total sales in local currencies increased by 6.6% and by 1.4% in existing outlets. The UK environment remains highly competitive and challenging due to the protracted economic recovery of the region. Trading conditions in Western Australia were positive, although New South Wales still remains subdued. We are cautiously optimistic about the growth potential in Africa.

Revenue (comprising franchise fees and sales from company-owned retail outlets) increased 20.0% to R251.9 million (2013 restated: R209.9 million).

Profit before income tax from the international divisions, excluding foreign exchange differences, impairments and other one-off and exceptional items in the current and prior years, increased from R3.0 million (restated) to R4.5 million.

The UK and Ireland

It is positive that the UK region maintained total restaurant turnover in local currency despite pressure on turnover from increased competition and a decline in footfall resulting from the general economic conditions prevailing in the region. The added impact of occupancy cost increases has put pressure on the restaurants’ operating margins.

Following a sustained period of losses, the Golden Gate Spur in Gateshead, which had previously been impaired, was closed on 31 October 2013. Persistent losses in the Mohawk Spur in Wandsworth, has resulted in further write-offs of intangible assets and leasing costs of R3.5 million during the year. Management is assessing the sustainability of this outlet, but it is likely that it will cease trading in the near future. We opened our first hotel test site in the UK, the Soaring Eagle Spur in the Leicester Holiday Inn Express in December 2013 and the outlet is trading in line with expectations. Pending the conclusion of this pilot project, we may consider expanding our presence in hotels in the UK.

The design and launch of our new high street model, Spur RBW (Ribs Burgers Wings), is in the final stages of development. This counter service concept will have a trimmed down menu and reduced size to ensure low set-up costs, manageable rentals and reduced labour costs. The model appears to be a more attractive franchising opportunity than our existing full service restaurants and could be a good platform from which to relaunch our franchising business in the UK.

Australia

The trading environment remained tough, with food and labour costs affecting profitability in an increasingly competitive sector. Turnover increased by 6.7% in Australian dollars. All restaurants are operationally sound and well managed. Weekday specials at Panarottis and Spur have been well received. All restaurants continue to be involved in local community events, providing assistance and sponsorship to charities and local schools.

The main challenge remains high labour costs, with government minimum wage increases, payroll taxes and other mandatory employment costs continuing to place margins under pressure. While we had planned to introduce handheld point of sale devices during the year in an effort to reduce labour costs, we were unable to implement the project due to IT challenges. We will continue to pursue this option.

The group disposed of its investment in the Panarottis outlet in Tuggerah, the assets of which had been impaired in full in previous years, with effect from 1 January 2014 to the former operating partner. The sale realised a profit of R2.2 million during the year.

Subdued turnover and increasing occupancy costs led to the group impairing the assets of the Panarottis outlet in Blacktown, which resulted in an impairment loss of R2.5 million charged to profit before income tax for the year.

The Apache Spur in Southlands, a franchised outlet, opened in April 2014 and further franchise openings are planned for Western Australia in the year ahead.

Our intention is to dispose of our remaining retail investments in Australia to focus our resources on expanding the franchise business.

Africa and Mauritius

We opened five Spur Steak Ranches, one each in Namibia, Nigeria, Swaziland, Tanzania and Zambia. We also reopened two of our Botswana outlets with new franchisees. At least eight outlets are due to open in 2015 including additional outlets in Tanzania, Zambia, Namibia and Nigeria with a pipeline of exciting opportunities in several other countries including Angola, Ethiopia, Mozambique and Ghana. Planned restaurant locations are assessed against demographic and spending data to ensure viability. We are particularly excited about expanding Panarottis into Africa through both sit-down and Express formats, which we believe will be well received by consumers. We are also considering expanding Captain DoRegos and, if the pilot proves successful in the UK, the Spur RBW model in Africa where we believe these brands could be particularly suitable for the trading conditions in the region.

We have entered into negotiations with an international private equity group with the intention to establish an offshore investment fund to provide finance to franchisees for growth in Africa.

We have applied new focus and further resources on marketing – specifically in regions where we now have a substantial presence. This has contributed to the improved trading of outlets in these regions.

Our strategy remains to grow in territories where we already trade to support the development of improved logistics, pricing, raw material and operating efficiencies. We have added resources to our African operations management team to support growth into the future. We continue to review our traditional models to adapt these to the higher set-up costs, occupancy costs and other challenges we encounter in certain countries in Africa. In addition to opening new outlets, we are also planning extensive revamps in some of our African restaurants to re-energise the brand and assist in increasing turnover.