SPUR CORP. LIMITED INTERIM RESULTS 2015

RESULTS COMMENTARY

TRADING PERFORMANCE

Spur Corporation posted a highly competitive trading performance in the six months to December 2014 as total restaurant sales increased by 14.1% to R3.2 billion.

Sales in South African restaurants grew by 12.6% as Panarottis Pizza Pasta continued its strong recent growth trend and lifted sales by 25.4%. Spur Steak Ranches, which accounts for 80% of local restaurant sales, grew by 11.1% and John Dory’s Fish Grill Sushi by 10.6%.

The Spur Family Card continues to drive sales and customer loyalty, attracting over 16 000 new members each month. The loyalty programme now has 1.8 million active members who account for 41% of Spur’s restaurant sales.

Captain DoRegos sales, representing 2.4% of group restaurant turnover, declined 18.2% as lower income consumers remain cash strapped. Six redundant Captain DoRegos outlets were closed (FY 2014: 15 closures) as the post-acquisition consolidation of the brand nears completion. The brand now has a stable platform from which to expand.

The Hussar Grill, which was acquired with effect from 1 January 2014, performed in line with expectations in its first year in the group, and opened two new franchised outlets.

Trading over the all-important festive season was adversely impacted by load shedding, particularly in The Hussar Grill steakhouse chain. Management is engaging with franchisees across the group on the installation of generators to limit trading disruption.

International restaurant sales benefited from the depreciating rand and increased by 25.8%. Applying a constant exchange rate, international restaurant sales grew by a creditable 19.1%. Three additional Spur Steak Ranches were opened in Namibia, bringing the number of outlets in the country to 11, and a further franchised outlet opened in Perth, Australia. Trading in Africa has generally been strong and supported by new restaurant openings in the current and prior periods. The United Kingdom restaurant market remains fiercely competitive, while restaurant sales in Australia have been encouraging and benefited from the opening of two new outlets in the past 12 months.

Following the opening of five Spur, six Panarottis, one John Dory’s, five Captain DoRegos and two franchised The Hussar Grill outlets during the past six months, the group’s restaurant base increased to 503.

Restaurant footprint at 31 December 2014
Franchise brand South Africa International Total
Spur Steak Ranches 275 43 318
Panarottis Pizza Pasta 71 11 82
John Dory's Fish Grill Sushi 33 –  33
Captain DoRegos 60 2 62
The Hussar Grill 8 –  8
Total 447 56 503

FINANCIAL PERFORMANCE

Group revenue increased by 8.7% to R408.7 million, with revenue generated in South Africa 13.0% higher.

Franchise revenue in Spur increased by 11.8%, Panarottis 24.5%, John Dory’s 13.0%, while Captain DoRegos declined by 30.4%. Revenue from The Hussar Grill’s three company-owned restaurants and franchise division totalled R15.8 million.

Revenue in the manufacturing and distribution division was 9.0% lower owing to the impact of the closure of the Captain DoRegos warehouse and distribution centre in the previous financial year. Comparable revenue increased by 16.9%. Income from distribution increased by 17.8% due to the growth in the basket of goods distributed by Vector Logistics and increased volumes to restaurants.

International revenue, comprising franchise revenue and company-owned restaurant turnover, increased by 0.3%. The performance in the United Kingdom was disappointing as revenue was impacted by the high levels of competition and the closure of a company- owned store in the prior period. Profitability was impacted by higher labour costs, occupancy costs and food inflation. Trading in Australia has been encouraging, but revenue was impacted by the disposal of two Panarottis company-owned outlets in the past year, which were both converted to franchise stores. The disposal of the Panarottis in Blacktown in November 2014 realised a profit on disposal of R1.5 million. The improved profitability in the African franchise operation was largely in line with revenue growth.

The group’s performance for the period has been impacted by a share-based payment expense of R32.96 million relating to the broad-based black economic empowerment (“B-BBEE”) transaction with Grand Parade Investments Limited (“GPI”) effected on 30 October 2014. The transaction resulted in the issue of 10.848 million new ordinary shares which increased the weighted average number of shares in issue from 85.633 million in the previous comparable period to 89.178 million shares for the period to December 2014.

Profit before tax declined by 12.1% to R92.1 million. This includes the charge relating to the GPI transaction of R32.96 million, a net charge of R11.8 million (2013: R4.8 million) related to the long-term share-linked retention scheme, foreign exchange gains and losses and other one-off and exceptional items in the current and previous comparable periods.

Comparable profit before income tax, excluding exceptional and one-off items (including those listed above) and the impact of the GPI transaction, increased by 15.3%.

Headline earnings declined 25.2% to R54.5 million, with diluted headline earnings per share 28.2% lower at 61.2 cents per share. This is in line with the group’s trading statement released on SENS on 20 February 2015.

Excluding the impact of the share-based payment charge relating to the GPI transaction, diluted HEPS increased by 15.2%. Excluding the impact of the GPI transaction in its entirety, diluted HEPS increased by 17.0%.

The interim dividend was increased 8.8% to 62.0 cents per share. This equates to a dividend payment of R67.3 million, an increase of 20.9% on the prior period.

PROSPECTS

Consumer spending in the group’s middle-income target market is unlikely to improve markedly in the next 12 to 18 months. The financial pressures being experienced by the group’s customer base are being compounded by the current uncertainty in the country, which is weighing on consumer sentiment. This is particularly evident in the lower LSM customer market served by Captain DoRegos.

Protracted periods of Eskom load shedding locally are likely to impact restaurant turnover.

For the remainder of the financial year to 30 June 2015, the group plans to open 21 restaurants across its brands in South Africa, while international expansion will focus on Africa where five new franchised outlets will be opened. These are additional Spur stores in Nigeria, Zambia and Tanzania, a Panarottis in Tanzania and the first international John Dory’s which will be opened in Zambia.

Management continues to pursue its strategy of disposing of company-owned restaurant investments in Australia and to only operate the franchise model in future. In the United Kingdom, a smaller format Spur brand, known as RBW (Ribs Burgers Wings), is being developed and pilot sites have been identified.

Shortly after the end of the reporting period, the group concluded negotiations to purchase a 51% stake in RocoMamas, a trendy, niche brand offering hand-made “smash-style” burgers, ribs and wings through its chain of five franchised restaurants in Gauteng. Subsequent to the intended acquisition date of March 2015, the group plans to expand the RocoMamas brand nationally with capacity to extend the chain to 30 to 40 outlets in the next few years.