Canada Dividend Investor: SCU - Second Cup announces third quarter results and quarterly dividend (CAD 0.085)

Company: The Second Cup Ltd.
Stock Name: SCU
Amount: CAD 0.085
Announcement Date: 05/11/2012
Record Date: 14/11/2012

Dividend Detail:

MISSISSAUGA, ON, Nov. 5, 2012 /CNW/ - The Second Cup Ltd. ("Second Cup"
or the "Company") reported financial results today for the third
quarter ended September 29, 2012 (the "Quarter" or "Q3"). The Company's
shares are traded on the Toronto Stock Exchange under the symbol
"SCU".�� All amounts in this news release are presented in thousands of
Canadian dollars, unless otherwise indicated.

Highlights

System sales relatively flat at $46.4 million in the Quarter and up by
1.2% year to date.

Same caf�� sales decline of 2.8% in the Quarter and 1.2% year to date.

Basic and diluted earnings per share of $0.08 for the Quarter compared
to $0.17 in the comparable quarter a year ago.

Declared a quarterly dividend of $0.085 per share.

Stacey Mowbray, President & CEO of Second Cup commented, "We and our
Franchise Partners continue to experience the increasing competitive
pressure on our same caf�� sales through Q3. Our net profit in Q3 was
adversely affected by the same caf�� sales decline, provisions on two
leases we plan to sublet as well as research and innovation
expenditures for future growth initiatives and brand enhancements. We
have started and will continue to invest in our loyalty and customer
communications capability, fully convinced that we will see the
benefits of both in future sales and profitability. We have also
started to invest in a new caf�� design to further differentiate the
brand, impacting on this year's profitability. We plan to make further
strategic payments towards these upgrades in the near future.

In late September, we started selling Second Cup branded TASSIMO T-Discs
in caf�� and in select grocery chains through a newly formed partnership
with Kraft Canada Inc. This important partnership enables our Franchise
Partners to participate in the growing single serve category to further
drive in-caf�� sales. As well, the distribution and sale of Second Cup
branded T-Discs in grocery and mass merchandise channels provide a new
revenue stream for Second Cup."

Dividend

Management has, after extensive analyses and research, recommended
continued and expanded investment in the Second Cup brand to rebuild
sales, revenues and profitability for the Company and its Franchise
Partners.��During the prior two years and to date in 2012, Second Cup
invested approximately $6.2 million in capital assets and
software.��Approximately one-half of this investment was for the system
wide POS system, which is now producing valuable information for the
Company and its Franchise Partners.��Second Cup has maintained a steady
stream of distributions and dividends while making these
investments.��To strengthen the Second Cup brand and to enhance the
profitability and viability of its Franchise Partners in the increased
competitive marketplace, additional expenditures are being pursued to
develop and implement new initiatives and leverage new and growing
commercial opportunities.��To finance this strategy��the Board of
Directors��approved a reduced quarterly dividend of $0.085 per common
share, payable on November 30, 2012 to shareholders of record at the
close of business on November 16, 2012. The previous quarterly dividend
declared and paid over the previous five quarters since the Conversion
was $0.15 per common share. The dividend will be considered an eligible
dividend for income tax purposes.

FINANCIAL HIGHLIGHTS

The following table sets out selected International Financial Reporting
Standards ("IFRS") financial information and other data of the Company
and should be read in conjunction with the unaudited condensed interim
financial statements of the Company for the 13 and 39 weeks ended
September 29, 2012.

��

13 weeks ended

��

39 weeks ended

(in thousands of dollars, except number of caf��s and per share amounts)

��

Sept. 29,

2012

��

Oct. 1,

2011

��

Sept. 29,

2012

��

Oct. 1,

2011

��

System sales of caf��s¹

��

$46,389

��

$46,369

��

$140,872

��

$139,256

��

Number of caf��s - end of period

��

358

��

359

��

358

��

359

��

Same caf�� sales¹

��

(2.8%)

��

(0.1%)

��

(1.2%)

��

(0.6%)

��

Total revenue

��

$6,378

��

$6,138

��

$18,561

��

$17,638

��

Gross profit

��

$5,407

��

$5,564

��

$16,185

��

$16,175

��

Operating expenses

��

$4,274

��

$3,202

��

$11,447

��

$9,783

��

Operating income

��

$1,133

��

$2,362

��

$4,738

��

$6,392

Amortization of property and equipment and intangible assets

��

306

��

219

��

843

��

545

Loss on disposal of property and equipment

��

Impairment of property and equipment

��

Earnings before interest, tax, depreciation and amortization ("EBITDA")¹

��

$1,468

��

$2,590

��

$5,616

��

$6,953

��

Income before income taxes

��

$1,017

��

$2,095

��

$4,363

��

$5,771

��

Current income tax charge

��

275

��

511

��

1,048

��

633

��

Deferred income tax (recovery) charge

��

(4)

��

(68)

��

695

��

(5,811)

Net income

��

$746

��

$1,652

��

$2,620

��

$10,949

Deferred income tax recovery due to Conversion²

��

(36)

��

(6,707)

Adjusted net income¹

��

$746

��

$1,616

��

$2,620

��

$4,242

��

Basic and diluted earnings per share as reported

��

$0.08

��

$0.17

��

$0.26

��

$1.11

��

Adjusted basic and diluted earnings per share¹

��

$0.08

��

$0.16

��

$0.26

��

$0.43

��

��
¹	��	"System sales of caf��s", "Same caf�� sales", "EBITDA", "Adjusted net income" and "Adjusted basic and diluted earnings per share" are not recognized performance measures under IFRS and, accordingly, may not be comparable to similar computations as reported by other issuers.
²	��	At the annual and special meeting of unitholders held on June 10, 2010, the unitholders approved the proposed conversion from an income trust structure to a public corporation ("Conversion"). The Conversion was completed on January 1, 2011.

Analysis of System Sales and Same Caf�� Sales Growth

System sales for the 13 weeks ended September 29, 2012 were $46,389,
compared to $46,369 for the 13 weeks ended October 1, 2011,
representing an increase of $20. The total number of caf��s at the end
of the Quarter was 358 compared to 359 caf��s at the end of the third
quarter of 2011.

Year to date system sales for the 39 weeks ended September 29, 2012 were
$140,872, compared to $139,256 for the 39 weeks ended October 1, 2011,
representing an increase of $1,616 or 1.2%.

Same caf�� sales decreased 2.8% in the Quarter, compared to a decrease of
0.1% in the comparable quarter of 2011. The year to date same caf��
sales decline was 1.2% (2011 - 0.6% decline).

Third Quarter Analysis

Analysis of Revenue

Total revenue for the Quarter was $6,378 (2011 - $6,138) consisting of
royalty revenue, revenue from sale of goods and services revenue.

Royalty revenue for the Quarter was $3,532 (2011 - $3,741). The
reduction in royalty revenue of $209 was mainly due to a reduction in
the effective royalty rate (excluding sales from Company-operated
caf��s) from 8.2% in 2011 to 7.8% in the current quarter, as a result of
the revised royalty structure for new caf��s, as well as caf�� specific
arrangements in place during the Quarter.

Revenue from the sale of goods, which includes revenue from
Company-operated caf��s and the sale of coffee through wholesale and
retail channels, was $1,235 (2011 - $750) for the Quarter. The increase
in revenue from the sale of goods was mainly due to an increase in the
number of Company-operated caf��s from eight in 2011 (two of which
became corporate at the end of the quarter) to ten at the end of the
current quarter.

Services revenue for the Quarter was $1,611 (2011 - $1,647). Services
revenue includes initial franchise fees, renewal fees, transfer fees
earned on the sale of caf��s from one franchise partner to another,
construction administration fees, product licensing revenue, purchasing
coordination fees and other ancillary fees (IT support and training
fees). The $36 decrease in services revenue is mainly due to a decrease
in initial franchise fees, renewal fees and construction administration
fees offset by increases in transfer fees, product licensing revenue
and other ancillary fees. Second Cup entered into a new partnership
with Kraft Canada Inc. to produce, market and sell Second Cup signature
blend coffees and lattes across Canada using the TASSIMO T-Disc
on-demand beverage system. The partnership marks Second Cup's official
entry into the at home single serve coffee market. Product licensing
revenue is recognized when goods are shipped from the distributor.

Operating Expenses

Operating expenses include the head office expenses of Second Cup and
the overhead expenses of Company-operated caf��s. Total operating
expenses amounted to $4,274 (2011 - $3,202). Salaries, wages and
benefits decreased by $142, primarily due to a reduction in incentives
earned to date. Occupancy and lease costs increased $524, largely due
to accruing lease costs for two caf��s closed during the Quarter, a
lease termination fee and an increased provision for vacant properties.
Bad debt expense increased by $127 as a result of an increase in the
allowance for doubtful accounts and a provision for a promissory note.
Research and innovation costs during the Quarter were $140 (2011 -
$nil) and are related to test concepts and new initiatives to build the
brand and drive growth. A markdown of inventory of $113 (2011 - $nil)
was recorded in the Quarter. Corporate caf�� lease costs increased $108
primarily due to an increase in the number of Company-operated caf��s
and a reduction in the amortization of lease liabilities arising from
an acquisition in 2009.

EBITDA

EBITDA for the Quarter was $1,468 (2011 - $2,590).The decline of $1,122
in EBITDA was due to a decrease in gross profit of $157 and an increase
in operating expenses of $985 (excluding amortization), as discussed
above.

Net Income

The Company's net income for the Quarter was $746 or $0.08 per share,
compared to $1,652 or $0.17 per share in 2011. The reduction in net
income of $906 was mainly due to the decline in EBITDA and the
increased amortization expense of $87, offset by a reduction in net
interest expense of $151 and a reduction of $172 in total income taxes.

Year to Date

Analysis of Revenue

Revenue was $18,561 compared to $17,638 in 2011 and consisted of royalty
revenue, revenue from sale of goods and services revenue.

Royalty revenue was $10,910 (2011 - $11,285). The reduction in royalty
revenue of $375 was mainly due to a reduction in the effective royalty
rate (excluding sales from Company-operated caf��s) from 8.2% in 2011 to
7.9% as a result of the revised royalty structure for new caf��s, as
well as, caf�� specific arrangements in place during the period.

Revenue from the sale of goods, which includes revenue from
Company-operated caf��s and the sale of coffee through wholesale and
retail channels, was $3,101 (2011 - $1,964). The increase in revenue
from the sale of goods was mainly due to an increase in the number of
Company-operated caf��s from eight (two of which became corporate at the
end of the quarter) in 2011 to ten at the end of the Quarter.

Services revenue of $4,550 (2011 - $4,389) includes initial franchise
fees, renewal fees, transfer fees earned on the sale of caf��s from one
franchise partner to another, construction administration fees, product
licensing revenue, purchasing coordination fees and other ancillary
fees (IT support, tuition and construction black line drawings). The
$161 increase in services revenue is due to an increase in product
licensing revenue, purchasing coordination fees and increases in other
ancillary fees, offset by decreases in initial franchise fees, renewal
fees and construction administration fees.

Operating Expenses

Operating expenses include the head office expenses of Second Cup and
the overhead expenses of Company-operated caf��s. Operating expenses
amounted to $11,447 (2011 - $9,783), an increase of $1,664 including
research and innovation costs of $361, head office occupancy and lease
costs of $472, corporate caf�� lease costs of $277 and a markdown of
inventory of $241.

Income Taxes

Income tax expense of $1,743 (2011 - recovery $5,178) consists of:

current income tax expense of $1,048 (2011 - $633);

deferred income tax expense of $458 (2011 - $nil), due to the income tax
rate change discussed below;

deferred income tax recovery of $nil (2011 - $6,707), due to the
Conversion; and

deferred income tax expense of $2237 (2011 - $896), excluding the impact
of the Conversion.

The increase in current income tax expense in 2012 is a result of
utilizing tax losses from prior years in 2011. The Ontario 2012 budget
was substantively enacted on June 20, 2012, freezing corporate tax cuts
with the effect that the income tax rate would remain at 11.5% until
the province can achieve a balanced budget. Previously, the corporate
income tax rate was slated to decrease to 10.0% by 2014. The impact of
the income tax rate change is estimated to be a future income tax
increase of $458.

EBITDA

EBITDA was $5,616 (2011 - $6,953). The decline in EBITDA of $1,337 was
due to an increase in operating expenses of $1,366 (excluding
amortization), partially offset by an increase in gross profit of $10.

Net Income

The Company's net income was $2,620 or $0.26 per share, compared to
$10,949 or $1.11 per share in 2011. Excluding the deferred income tax
recovery of $6,707 in 2011, as a result of the Conversion referred to
above, adjusted net income for 2011 was $4,242 or $0.43 per share.
Adjusted net income for 2012 is the same as reported net income of
$2,620 or $0.26 per share. The reduction in adjusted net income of
$1,622 was mainly due to an increase in operating expenses of $1,664,
an increase in deferred income tax expense of $458 due to the income
tax rate change discussed above, offset by an increase in gross profit
of $10 and a decrease in net interest expense of $246.

CAF�� NETWORK

To accelerate the growth of new caf��s, Second Cup introduced a revised
royalty structure for new caf��s. New caf��s that open in 2011 and 2012
are permitted to pay a royalty rate of 3% in the first year, a rate of
6% in the second year and, thereafter, an ongoing rate of 9%.

��	��	13 weeks ended			��	39 weeks ended
��	��	Sept. 29, 2012	��	Oct. 1, 2011	��	Sept. 29, 2012	��	Oct. 1, 2011
��	��	��	��	��	��	��	��	��
Number of caf��s - beginning of period��	��	356	��	350	��	359	��	349
Caf��s opened��	��	7	��	10	��	14	��	15
Caf��s closed��	��	(5)	��	(1)	��	(15)	��	(5)
��	��	��	��	��	��	��	��	��
Number of caf��s - end of period��	��	358	��	359	��	358	��	359
��	��	��	��	��	��	��	��	��
Number of caf��s renovated��	��	6	��	6	��	13	��	19

During the Quarter, according to plan, five caf��s were closed (2011 -
one), the majority of which were underperforming caf��s at the end of
their lease term. On a year to date basis, 15 caf��s were closed (2011 -
five).

Term Loan, Operating Credit Facility and Interest Rate Swap

On June 12, 2012, the Company renegotiated its term loan and operating
credit facilities, including an extension of the maturity of the credit
facilities to May 31, 2015 and a decrease in interest rates. The credit
facilities bear interest at the bankers' acceptance rate plus 2.75%
(December 31, 2011 - 3.50%). The Company has an interest rate swap
agreement maturing on April 1, 2013, which fixes the interest rate on
the Company's non-revolving term credit facility at 3.04% per annum
plus the margin noted above, which results in a fixed effective
interest rate of 5.79% (December 31, 2011 - 6.54%).

OUTLOOK

The information contained in this "Outlook" is forward-looking
information. Please see "Forward-looking Information" below for a
discussion of the risks and uncertainties in connection with
forward-looking information.

The Second Cup business continues to operate in a highly competitive
marketplace and a challenging consumer environment. Management expects
lower net earnings in the fourth quarter compared to last year, based
on this highly competitive environment, the need for continued and
expanded re-investment in the business to develop new caf�� initiatives
and leverage new and growing commercial opportunities in 2012 and the
near future. The focus in the future quarters will be on further
developing these initiatives, while driving traffic into caf��s through
sampling, product news, and media support of the newly introduced
Second Cup signature coffees and lattes using the TASSIMO T-Disc on
demand beverage system. In caf��, the focus will be on operational
excellence, training and promotion of the brand's quality credentials,
to ensure the consistent delivery of "a little love in every cup".
��Second Cup expects to increase its product licencing revenue from the
sale of Second Cup coffees and lattes using the TASSIMO T-Disc system,
which are also available in broad distribution beyond the caf��s.��

The Company intends to improve the caf�� network through opening new
caf��s and proactively closing underperforming caf��s.

FORWARD LOOKING INFORMATION

Certain statements in this news release may constitute forward-looking
statements. Forward-looking statements include words such as "may",
"will", "should", "expect", "anticipate", "believe", "plan", "intend"
and other similar words. These statements reflect current expectations
regarding future events and operating performance and speak only as of
the date of this release. These forward-looking statements should not
be read as guarantees of future performance or results and will not
necessarily be accurate indications of whether or not those results
will be achieved. Forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that may cause Second
Cup's actual results, performance or achievements, or those of
Second��Cup caf��s, or industry results to be materially different from
any future results, performance or achievements expressed or implied by
those forward-looking statements.

NON-IFRS TERMS

In addition to using financial measures prescribed by IFRS, non-IFRS
financial measures and other terms are used in this press release.
These terms include "system sales of caf��s", "same caf�� sales growth",
"EBITDA", "adjusted net income" and "adjusted basic and diluted
earnings per share". These terms are not financial measures recognized
by IFRS and do not have any standardized meaning prescribed by IFRS
and, therefore, may not be comparable to similar terms and measures
presented by other similar issuers. These non-IFRS measures and terms
are intended to provide additional information on the Company's
performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
IFRS.

System sales of caf��s and same caf�� sales growth are presented in
reference to the sales performance of all caf��s in Canada. The Company
believes they are useful measures as they provide an indication of the
top-line sales on which the royalty that is Second Cup's direct source
of income is based.

Additional information relating to the Company, including the Company's
Annual Information Form, is on SEDAR at www.secondcup.com.

About Second Cup��

Founded in 1975, Second Cup�� is Canada's largest specialty coffee
franchisor operating more than 350 caf��s across the country.�� All 4,000
Second Cup�� associates are trained coffee experts who handcraft over
1,000,000 coffee and tea beverages every week, and are committed to
ensuring "there's a little love in every cup.��"�� For more information,
please visit www.secondcup.com or find us on Facebook and Twitter.

��

SOURCE: The Second Cup Ltd.

For further information:

please contact Robert Masson, Chief Financial Officer, (905) 362-1818 ext. 1824 or��investor@secondcup.com

Canada Dividend Investor

Monday, November 5, 2012

SCU - Second Cup announces third quarter results and quarterly dividend (CAD 0.085)

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