Restaurant Brands First Half Operating Results

13 October 2005
News release

Restaurant Brands Reports First Half Operating Results

Restaurant Brands New Zealand Limited today announced an unaudited after tax profit for the half-year ended 12 September 2005 (excluding non trading items) of $5.2 million, compared with $5.4 million for the prior year.

Given the continued trading difficulties being experienced by the Pizza Hut Victoria business, directors re-assessed the carrying value of this investment and elected to write off the remaining $2.9 million in goodwill arising from the acquisition of the business in 2002. Including this and other non trading items, reported net profit after tax was $1.9 million, compared with $5.4 million for the prior year.

Chief Executive Vicki Salmon said the company was particularly pleased with the operating performance of KFC and Starbucks during the first half, which both delivered improved margins.

“At our largest business, KFC, we saw improving performance from both our existing stores as well as from those that have been through the brand transformation programme.

“This improvement was offset by increasing freight and labor costs across the company, as well as lower margins from the Pizza Hut businesses.”

Total sales for the first half year increased 1.7% to a new high of $170.6 million, with same store sales increasing 0.1%.

Directors approved the payment of an interim dividend of 4.5 cents per ordinary share, maintaining the same dividend level as for the past six years.

Brand Performance
/ KFC / PHNZ / SBUX / PHV
/ Current Last Year / Current Last Year / Current Last Year / Current Last Year
Total Sales ($m) / 90.8 92.3 / 49.9 46.4 / 14.3 12.8 / 15.6 16.3
Same store sales growth (%) / 0.1 -1.7 / (0.1) -1.3 / 2.1% 5.3 / (0.9%) 4.0
EDBITDA ($m) / 14.7 13.9 / 6.9 7.6 / 2.2 1.8 / (0.091) 0.189
EBITDA margin (%) / 16.2 15.1 / 13.9 16.4 / 15.1 13.9 / (0.6) 1.2
Store numbers / 86 87 / 103 95 / 40 36 / 50 51

KFC

“The KFC business delivered an improved performance in all operating KPI’s. We also experienced the benefits of a full half year under the new chicken contract in addition to other supply chain initiatives,” said Salmon.

“The brand transformation programme is progressing well and producing excellent results, with five stores now fully refurbished and all reporting sales increases after re-opening in excess of expectations.”

Based on these successful results, the company intends to continue to roll out the transformation programme with two more stores due to reopen in the next six months. In addition, two new KFC stores are planned to open in Taihape and Kaikohe during the second half.

Salmon said the slight decline in total sales during the first half was due to a number of factors including the removal of delivery service from nine stores, the brand transformation programme which require extended closure of some stores, and the permanent closure of one store when compared with last year.

Pizza Hut New Zealand

“As expected, Pizza Hut New Zealand did not maintain last year’s exceptional operating margin and came in slightly below our initial projections.

“This was largely the result of significantly higher cheese, freight and labour costs, which were only partially offset by some purchasing benefits, and the increasingly competitive environment.”

Salmon said the focus for the second half of the year will be on improving earnings from this business.

The trial of a significant store refurbishment and menu upgrade at the New Lynn Red Roof Restaurant has proved successful in driving sales and further major changes to the dine-in business are planned, she said. In addition, four new Pizza Hut stores are scheduled to open in the second half of the year.

Starbucks Coffee

“We are pleased to see the continuing success of the Starbucks Coffee business which delivered a significant improvement in sales and earnings in the first half.

“This was driven by a combination of sound store operations, a favourable exchange rate and sales leverage although there were some cost pressures in labour expense and store lease cost increases,” said Salmon.

Four new stores are targeted for opening over the balance of the year.

Pizza Hut Victoria

Salmon said continuing strong competitive activity and some poor promotions were the main drivers of the lower sales and earnings performance at Pizza Hut Victoria during the first half.

“While we have struggled to achieve a meaningful contribution from the Pizza Hut Victoria business, we are confident our recently announced store rationalisation programme will improve the sales and earnings performance of this business,” she said.

As previously announced, a number of stores will be re-franchised to individual franchisees over the next six months which will allow the company to exit a number of stores, that for reasons of volume or location, are not suitable for continued corporate operation.

Outlook

“During the remainder of the year, our focus will be on continuing the successful transformation programme for the KFC brand, and improving operating margins while expanding our store base at Pizza Hut New Zealand. In addition we will open further Starbucks locations in New Zealand while carrying out the rationalisation programme in Victoria.”

“Absent any significant economic downturn or change in competitor position, the company expects to deliver a trading result for the full year similar to the previous financial year.”

ENDS

Additional financial information is available in the company’s statement to the New Zealand Stock Exchange, available at www.nzx.com or www.restaurantbrands.co.nz.

13 October 2005
NZX

RESTAURANT BRANDS NEW ZEALAND LIMITED

Directors’ Report to Shareholders for the Half Year ended 12 September 2005

Key Points

Total sales for the half year were up 1.7% on prior period to $170.6 million, and up 0.1% on a same store basis.

Net Profit after Tax (excluding non-trading items) was $5.2 million, marginally (4.6%) down on prior year.

The KFC transformation project continues to deliver strongly improved results. The five stores which have now completed transformation are all delivering sales increases ahead of expectations.

KFC and Starbucks Coffee earnings were both up on prior year by 5.2% and 21.8% respectively.

Pizza Hut New Zealand, despite growing sales by 7.5% saw a drop in EBITDA margin to 13.9% as a result of cost increases and increasing competitive activity.

Pizza Hut Victoria had a disappointing half, with same store sales down 0.9% and a small trading loss.

Directors have elected to write off all goodwill arising from the Pizza Hut Victoria acquisition resulting in a non-trading charge of $2.9 million for the period.

A fully imputed interim dividend of 4.5 cents per share, consistent with the previous 6 years will be paid in November.

Group Operating Results

Restaurant Brands New Zealand Limited unaudited profit after tax for the half year ended 12 September 2005 (excluding non trading items) was $5.2 million, compared with $5.4 million for the prior year.

Trading profit was impacted by lower earnings from both Pizza Hut businesses and increasing cost pressures, particularly in the areas of labour and freight, across all businesses.

Reported NPAT was $1.9m compared with $5.4 million in the prior year, being impacted by non trading items as the company elected to write off $2.9m goodwill associated with its Pizza Hut Victoria investment.

Starbucks Coffee and KFC performed satisfactorily, both growing their EBITDA against the prior year.

Total sales for the first half year increased 1.7% to a new high of $170.6 million, with same store sales increasing 0.1%.

KFC

The KFC business increased its EBITDA margin to 16.2%, compared with 15.1 % in the same period last year.

A consistent operational performance together with a full half year of reduced chicken prices and further supply chain initiatives were instrumental in delivering this improved profitability. However, these benefits were partly offset by higher wage and freight costs. In total the KFC business produced an EBITDA of $14.7 million for the first half compared with $13.9 million last year.

Total sales for the first half were slightly down on prior year at $90.8 million compared with $92.3 million. This reduction was due to a number of factors including the removal of delivery service from nine stores, the ongoing brand transformation programme, which requires extended closure of some stores, and the permanent closure of one store.

Same store sales for the half however increased 0.1 %

The brand transformation programme is producing excellent results, with five stores now fully refurbished and all reporting sales increases after re-opening in excess of expectations. Based on these successful results the company intends to continue the roll out of the store transformation programme with two more stores due to reopen in the next six months. In addition, two new KFC stores are planned to open in Taihape and Kaikohe during the second half.

Total KFC stores at the half year were 86 compared with 87 in the prior year.

Pizza Hut New Zealand

Despite achieving sound sales growth in an increasingly competitive environment, Pizza Hut New Zealand’s EBITDA margin declined from 16.4% to 13.9% compared with prior year. In dollar terms EBITDA declined from $7.6 million to $6.9 million in the first half.

As previously indicated, earnings were impacted by competitor activity, together with significantly higher cheese, freight and labour costs. These were partially offset by some purchasing benefits.

Sales grew by 7.5% on prior year to $49.9 million and were flat (-0.1%) on a same store basis.

The Board is pleased with this sales result given the rapidly growing store base and the increasingly intense competitive environment; however focus will now be made on improving earnings from this business.

The trial of a significant store refurbishment and menu upgrade at the New Lynn Red Roof restaurant has proved very successful in driving sales and further major changes to the dine-in business are planned.

Store numbers increased to 103 from 95 at the end of the first half last year. Four new stores are scheduled to open in the second half of the year.

Starbucks Coffee

The Starbucks Coffee business continues to grow from strength to strength with EBITDA margin increasing to 15.1% from 13.9% in the prior year. Total EBITDA for the half year was $2.2 million, an increase of 21.8%.

This result was driven by a combination of sound store operations, a favourable exchange rate and sales leverage. Cost pressures on the brand were largely in labour expense and store lease increases.

Total sales increased 11.9% for the first half to a new high of $14.3 million. Sales were also up 2.1% on a same store basis.

Starbucks Coffee store numbers increased by four on the same period last year and closed the first half at 40. Four new stores are targeted for opening over the balance of the year.

Pizza Hut Victoria

The Pizza Hut Victoria business had a disappointing first half as the loss of leverage from lower sales volume pushed the business to a small loss of $91,000, compared with a profit of $189,000 in the prior period. Margin declined from 1.2% last year to (0.6%) this year.

Total sales declined to $15.6 million compared with $16.3 million. Same store sales declined by 0.9%. Continuing strong competitive activity and some poor promotions for the brand were the main drivers of the lower sales performance.

Management has instituted a store rationalisation programme in Victoria which will see a number of stores sold to individual franchisees over the next six months. This will allow the company to exit a number of stores that for reasons of volume or location are not suitable for continued corporate operation.

Store numbers finished the half at 50, down one on the prior year with the closure of one store at lease end at the end of the half.

Other Items

Higher staffing costs resulted in an increase in G&A (above-store overhead) of $0.7 million on prior year. Staff numbers in above store roles increased as vacant positions were filled and three new Area Manager positions were created as store numbers expanded.

Higher depreciation reflects the higher levels of capital expenditure, particularly in the KFC refurbishment programme and Pizza Hut new store roll out.

Non-trading Items

Given the continued trading difficulties being experienced by the Pizza Hut Victoria business, directors have re-assessed the carrying value of this investment and have elected to fully write off the remaining $2.9 million in goodwill arising from the acquisition of the business in 2002.

Other non-trading costs of $547,000 largely comprise non-cash asset write offs arising from substantial store refurbishments or relocations in New Zealand.

Cash Flow and Balance Sheet

Total assets at half year were $109.2 million, funded by $29.1 million in borrowings. Both were up $2.9 million and $0.8 million respectively on prior half balances. Fixed assets increased from the beginning of the year by a net $5.3 million as a result of new store rollouts and KFC transformation expenditure.

Balance sheet ratios remained satisfactory with gearing ratio of 37.7% (36.2% 2004/5) and interest cover of 8.1 (9.5 2004/5) times.

Operating cash flows of $13.4 million were $2.8 million up on prior year, although mainly as a result of working capital movements with the timing of balance date. Investing cash flows of $9.5 million (up from $7.0 million for the prior year) reflect the higher tempo of capital expenditure from Pizza Hut store roll outs and KFC transformation.

Dividend

The Directors have approved the payment of an interim dividend of 4.5 cents per ordinary share, maintaining the same dividend level as for the past six years.

The dividend will be fully imputed and paid on Friday, 18 November 2005 to all shareholders on the register at 5.00 pm, Friday, 4 November 2005. For overseas shareholders a supplementary dividend of 0.79411 cents per ordinary share will also be payable on that date.

Directors have considered the dividend reinvestment plan for this dividend payment and have suspended the plan for the time being.

Takeover Offer

On 14 June 2005 the company received a Notice of Takeover Offer from New Zealand Restaurant Holdings Limited, a subsidiary of CVC Asia Pacific, a large Australian-based private equity fund. The intended offer, which valued the company’s shares at $1.65 was subject to a number of conditions.

CVC, as a condition to filing a formal offer, requested a number of undertakings from Yum! Restaurants International (the franchisor of the KFC and Pizza Hut brands) in respect of the terms of franchise agreements that would apply under their ownership of Restaurant Brands. CVC have been unsuccessful in their requests.

Whilst there has been some interest from other parties, the company is not considering any other offers for the company at this stage.

Outlook

The successful transformation programme for the KFC brand is expected to continue producing a significant improvement in sales and profit for the transformed stores. Pizza Hut New Zealand and Starbucks Coffee will see further store development and an increased focus on improving and maintaining operating margins will be made at Pizza Hut. The company’s Victorian operations will also see improved operating capability together with some initial facility rationalisation.

Absent any significant economic downturn or change in competitor position the company expects to deliver a trading result for the full year similar to the previous financial year.

RESTAURANT BRANDS GROUP
Consolidated Statement of Financial Performance

1st Half 2006 12 September 2005 Unaudited (NZ $000's) / vs Prior % / 1st Half 2005 6 September 2004 Unaudited (NZ $000's)

Sales
KFC 90,758 / (1.7) / 92,282
Pizza Hut 49,869 / 7.5 / 46,389
Starbucks Coffee 14,348 / 11.9 / 12,821
Pizza Hut Victoria 15,627 / (4.1) / 16,288
Total Store Sales 170,602 / 1.7 / 167,780

EBITDA
KFC 14,673 16.2 / 5.2 / 13,947 15.1
Pizza Hut 6,921 13.9 / (9.2) / 7,625 16.4
Starbucks Coffee 2,167 15.1 / 21.8 / 1,779 13.9
Pizza Hut Victoria (91) (0.6) / n/a / 189 1.2
Total EBITDA 23,670 / 0.6 / 23,540

General & Administration (7,394) / (10.9) / (6,670)
Depreciation (5,881) / (5.1) / (5,594)
Non Trading - Other (547) / n/a / 39

EBITA 9,848 / (13.0) / 11,315

Amortisation (1,528) / 2.9 / (1,574)
Non Trading – Write off of Goodwill (2,893) / n/a / 0

EBIT 5,427 / (44.3) / 9,741

Interest Income 116 / 1,189 / 9
Interest Expense (1,212) / (17.7) / (1,030)
Net exchange gain/(loss) 167 / n/a / (1)

Net Profit Before Tax 4,498 / (48.4) / 8,719

Taxation Expense (2,591) / 21.0 / (3,279)

Net Profit After Tax 1,907 / (64.9) / 5,440

NPAT excluding Non Trading Items 5,166 / (4.6) / 5,413

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