Restaurant Brands Eighth Annual Meeting Wellington
16 June 2005
Restaurant Brands (Nz) Limited Eighth Annual Meeting Wellington, Chairman’s Address
Fellow Shareholders, Ladies and Gentlemen
I know you will all wish me to brief you on the Takeover Notice received by the Company on Tuesday evening, but before doing so, I would like to address the reports before you at this meeting, and some matters which arose during the year under review.
Performance for the Year Ending 28 February 2005
First, may I say that it is a pleasure to record that the company made a profit after tax for the year ending 28 February 2005 of $10.722 million, a 33 per cent increase on the $8.076 million achieved in the previous year.
This was on the back of a 3.6 per cent increase in sales to $315 million, leading to an EBIT of $19 million, 30 per cent ahead of the prior year.
In the circumstances the Board felt able to declare a final dividend of 5.5 cents a share, giving a total of 10 cents a share for the year, and maintaining the level of distribution to shareholders we have achieved over the past five years. The final dividend was paid last week.
Obviously the company achieved a much better performance in all areas of operations, across all four operating divisions, and, though there is still a way to go, the directors are pleased with the turnaround this represented. Vicki Salmon will provide you with details shortly.
I would specifically note however, the exciting brand refurbishment programme commenced last year in KFC, which has shown very encouraging results to date; and the very solid results achieved by Pizza Hut, with new menu and service initiatives, against increasing competition. Starbucks has become an established part of the New Zealand coffee scene, and a reliable earner for Restaurant Brands.
During the year we appointed three new directors – to build the business, strategic and leadership strength of the Board.
David Pilkington was appointed in July of last year. He is the former Managing Director of New Zealand Milk Limited, which is the global consumer food services business of Fonterra Group.
Ted van Arkel, was appointed last September. He is the former managing director of Progressive Enterprises, and brings more than 45 years experience in the retail sector to Restaurant Brands.
David and Ted filled the vacancies created by Vicki Salmon’s appointment as the company’s chief executive, and Rick Bettle’s resignation, foreshadowed at last year’s AGM.
Trevor Hall was appointed to the Board in February, specifically to add to its marketing expertise. He is the chief executive of the Lotteries Commission, and has extensive marketing experience in a number of sectors.
All three directors are independent. As they were appointed by the board during the course of the year past, they are required now to present themselves to shareholders for election, and this will occur later in our proceedings.
Notice of Takeover
Now let me turn to the Takeover Notice under the Takeovers Code received last Tuesday evening from NZ Restaurant Holdings, a company associated with CVC Asia Pacific Limited, an investment and advisory company which focuses on buy-out opportunities in the Asia Pacific region. CVC is a joint venture between CVC Capital Partners and Citigroup, one of the world’s largest financial institutions, and has a network of offices throughout the region.
Since 1999 it has acquired 127 companies in the region, for a total consideration of more than US$4.3 billion, and has supported a number of management buy outs including Pacific Brands, Amatek, Tech Pacific and Affinity Health.
Let me emphasis that the Notice was unsolicited – Restaurant Brands has never been on the market. However, interest in the company was engaged as a consequence of recent activity in the sector, including the float of Domino’s and the sale of World Wide Restaurants in Australia. The multiples of those transactions made Restaurant Brands look undervalued, and a number of intermediaries saw that as a potential opportunity.
CVC moved quickly however, and after they briefed the company on their broad expectations as to value, we concluded they should be permitted to undertake due diligence, which resulted in their Notice of Intent to Offer to purchase all of the company’s shares for $1.65 a share.
This is consistent with their earlier indications as to value. It is 29% above last Tuesday’s price, and 26% above the average for the last three months; and some 17 % ahead of the average of current analyst valuations. The Board considers that if an Offer is forthcoming at this price, it should be placed before shareholders.
CVC has indicated that there are a number of matters on which it requires to be satisfied before it submits an Offer to shareholders under the Code, and it has up to 30 days from 11 June to work these matters through. Principal amongst them is the ongoing relationship they may expect with our franchisors. As required by the Takeovers Code, the Board has appointed a Committee of independent directors to consider the Offer when it is made, comprising Trevor Hall, David Pilkington, Ted van Arkel and myself. And we have appointed Grant Samuel to prepare an Independent Adviser’s report on the merits of the offer, also as required under the Code.
The board is required to send shareholders a Target Company Statement, containing, inter alia, a copy of the independent report to be prepared by Grant Samuel and the independent directors’ recommendations to shareholders on the Offer. This statement will be sent out either with CVC’s offer or shortly after the offer has been sent to shareholders.
It would clearly be more convenient to shareholders if they could receive the Independent Appraiser’s report and the Target Company Statement with the Offer, and we shall be working to this end. Obviously a different outcome could arise if a Notice of Intent were received from another party in the interim.
We will keep you informed of any developments. In the meantime, it is the recommendation of the independent directors that you take no action on your shares until the Offer has been received, and you have been able to examine the Grant Samuel Report and the Target Company Statement.
Returning now to today’s business, may I conclude by saying that based on early performance this year, directors expect the company to maintain the current rate of sales growth for this financial year, barring any unforeseen changes to the economic or competitive landscape. We expect to see continued pressure on margins as a result of various costs increases, and our KFC refurbishment programme will result in increased capital expenditure. But we believe these can be managed and that the company can deliver an improved profit in the current year.
Can I thank you for your interest and support during the year and take this opportunity to thank a very dedicated management team and my colleagues on the board for their work in moving the company forward last year. I would like to make special reference to Rick Bettle who retired during the year and was great value to the Board over the previous five years.
I now hand over to our Chief Executive Officer, Vicki Salmon.
Restaurant Brands New Zealand Ltd 2005 Annual Meeting
Chief Executive’s Address
16th June 2005
It gives me great pleasure to be presenting to you today, after a year in which we enjoyed substantial improvements across all areas of our company.
I’d like to introduce to you the our loyal and dedicated Management Team of Restaurant Brands;
Grant Ellis - our Chief Financial Officer who has been with the company since its inception. He provides financial advice to us all and is also the Board Secretary. Rod De Vries – General Manager of KFC. Rod has been with Restaurant Brands for 15 years and 18 months ago took on the role of General Manager for KFC. He has been instrumental in settling KFC and improving the operations, and also leading the store transformation project. Russel Creedy – General Manager of Pizza Hut New Zealand. Russel has been leading Pizza Hut now for nearly 2 years and has been with the company for 4 years. He has brought new energy to the Pizza Hut business and is focused on the continued expansion.
Others who are not here for various good reasons Alan Brookbanks – General Manager People and Performance has been with us for a year. Alan has done some excellent work on people strategies, retention and training. Steve Montgomery – Operations Manager of Starbucks Coffee has been with us for 14 years and has been involved in the Starbucks Coffee business since inception. He recently took on the role of Operations Manager and has made some strong improvements already in the business. Jason Ball – Operations Manager of Pizza Hut Victoria. Jason has been with us for 6 years, was an integral part of the Eagle Boys expansion and has made substantial improvements in the Pizza Hut Victoria operations.
When I addressed you at the last annual meeting, we had faced one of the most challenging periods in our corporate history. In particular, KFC had struggled to achieve its sales and earnings targets and we were facing increasing competition in the pizza market.
What a difference this year has been! I am pleased with what we have achieved over the past 12 months. We had sales and margin growth in all four of our businesses, especially in the second half of the year, and we resumed store development across the company.
We also kept our overheads steady despite the increased activity within the company.
I would like to show you the difference in my snapshot overview of the company.
In 2004, we looked like this, negative sales, profit down or flat in most of the business and no store development. Not great.
In 2005, at year end the face of the company had significantly changed. All businesses were positive in sales and margins and both Pizza Hut NZ and Starbucks Coffee significantly so. With store development started across all brands. An improvement with further work still to come.
The highlights of the year are undoubtedly the considerable improvement in sales and profit performance at KFC, and the continued performance of Pizza Hut in New Zealand, which continues to be the number one place for Pizza.
We achieved these results by working closely with our customers and listening to you, our shareholders; we have made major changes to our operations.
This has delivered improvements in Key Performance Indicators across all areas of our business, not just our financial results.
This year, we reached an all time high in many of our independent customer satisfaction surveys and have seen a marked drop in customer complaints.
For the first time since I took on the role of Chief Executive in December 2003, I’m pleased to say that I am now receiving positive customer comments.
In addition, in a very tough labour market, staff turnover has reduced but will remain a key area of focus for us.
These improvements results are the direct result of our ‘back to basics’ approach, which is reflected in this year’s annual report. Its attention to detail that matters the most and we have taken a fresh look at all of our businesses to ensure we are disciplined and focused.
Nowhere is this more evident than at KFC. Following an extremely challenging and difficult period for this brand, we took this disciplined approach to our operations under the leadership of Rod De Vries.
KFC improved sales, earnings by 8.5%, improve margin and had a plan to transform the brand and we opened our first transformed store.
First, we felt that we could improve the quality of our food by focusing on the way in which it is prepared and cooked. We have now retrained all our KFC cooks, reinforcing compliance with the correct techniques and improving their skills to ensure our chicken is cooked to perfection at all times of the day. I’m not sure how many of you are aware that our chicken is cooked from fresh every hour at every one of our 87 stores. Certainly our mystery shopper indicators have shown a marked improvement in this area from a product score of 82% to 97%. Benchmarking against other global KFC markets, we are now near the top. We monitor this closely and will not be complacent in this area again.
The impact from this one simple initiative alone has been outstanding in both customer feedback and retention of chefs and we will continue to make upskilling an integral part of our employee training programme.
Restaurant Brands received industry recognition for the quality of it’s in-house training, winning the Hospitality Industry’s “Excellence in Training” award for 2004. I am delighted that we are finalists for the 2005 award for the 4th consecutive year.
KFC New Zealand out-performed all of Australia in the mystery shopper programme. A very significant achievement in one year. Moving our rating from a very poor 89% to 95.4%.
Another change we’ve made to the KFC business is to ensure we are operating at full capacity in every store during peak dinner time hours in order to provide the quickest/best service possible for customers, Again, this is a common sense initiative that I’m sure most of you assumed was already happening. The truth is we didn’t have enough trained staff to operate the check outs or to cook the chicken to meet customer demand during peak hours.
Now we do, and all of our stores are able to operate at full capacity with all checkouts open during the peak dinner time hours meeting customer expectations.
All these initiatives have assisted in stabilising sales.
We have introduced a new Lighten Up menu with two new items added. The Crispy Chicken Salad and our Chicken Honey Roast Burger. We will continue to keep a close eye on product developments by our franchisor, Yum Brands, which is making a significant investment in development with extensive testing of contemporary KFC which will be a complete launch of a new menu.
Our core customers at KFC are families and groups and we will continue to offer a wide range of menu choices so that we can meet the taste profile of all family members.
But the biggest news at KFC is our store refurbishment programme, which combines a major store redesign with menu changes and staff retraining. We now have three rebranded KFC stores open, in Frankton, Hamilton East and Mangere East.
I’d like to show you the before and after shots of these stores and more importantly discuss what customers are telling us.
Our first store we opened in the new look was Frankton in Hamilton. It opened in December last year, so now operating for nearly 6 months. This was the before look. A very old store and internally not as welcoming. We knew that we needed to upgrade these this building and we came up with this design.
In fact, our franchisor, Yum brands, has been so impressed with the store redesign concept, they came down from Dallas Headquarters, USA, to take a look and now they are making it a prototype for global KFC stores.
And this is the actual store.
It was a brave step as our first prototype store and we wanted to see what customers would say and how they would respond. The response has been outstanding. Since re-opening, we have had on average weekly same store sales in excess of 20% on the prior year. From the independent research we carried out with customers, comments came through such as “It’s the talk of the town”, “its got a holiday feel, like you have gone somewhere nice and fresh”, “a place like no other”, “The upgrade is absolutely brilliant”.
Some of the team at the Frankton store.
This gave us the confidence to trial another store at Mangere East, which re-opened in early March. Again informal feedback has been positive with sales rebounding to again on average above 20% same store sales on prior year.
We have carried onto our next store, Hamilton East which opened on June 3rd. We wanted to see what an entire discrete market would look like overall. During this time, Hamilton has outperformed the rest of the market. So far these stores are doing well and we are about to close our Balmoral store in Auckland for a significant upgrade.
As we continue this refurbishment programme, we will see some short term drop in KFC sales as a result of the necessary store. We experienced this in our first quarter of this year.
In summary, the results achieved at KFC over the past 12 months, and the transformation of the brand at our three new stores, give us confidence that we will achieve growth in this brand. We are excited about the future growth potential of KFC.
Pizza Hut New Zealand, continued its outstanding performance during the past year. While our sales have slowed in the first quarter of this year, this is largely due to the exceptionally warm weather we had over the period, and we have seen sales rebound as the weather has become colder.
Over the past year, Pizza Hut delivered total sales increase of 7.7% to $87.6 million. Earnings in this business grew by 10.8%. We opened ten new outlets and passed the important century milestone when we opened our 100th store in Cambridge.
You will also note that when we open new stores in existing Pizza Hut areas, we take some customers from existing stores which go to the closer new store and we add in new customers at the same time. Although same store sales for the old store are affected negatively, the customer experiences are significantly enhanced with a better more timely response from the new store. Overall total sales have grown.
Our General Manager, Russel Creedy and his team have also made significant improvements to our store operations, which resulted in a record independent customer service score (Champs) of 96.7% up from 92.3% the prior year. This result is particularly pleasing given the rapid store and sales expansion that we undertook during the period. Our CHAMPS scores for Pizza Hut in New Zealand outperformed all of Australia and most other international markets.
This year, we plan to continue this store expansion programme and maintain our position as the leading pizza delivery brand in this country.
There’s been a lot of discussion around the heightened competition and consolidation in this market with Domino’s takeover of a competitor and the growth of smaller regional chains. We are closely monitoring the actions of these competitors, but a positive impact has been the growth of the pizza market in New Zealand with more customers coming into the sector.
As the largest player in this market, Pizza Hut is in a strong position to capitalize on new segments that are identified. An example is the development of our new Gourmet range of pizzas.
The gourmet range was trialled successfully in Hamilton and we are now have a national roll-out of this exciting new product extension.
I’d like to play for you the television commercial that will be on air shortly. We are all very excited about Gourmet, delicious.
In addition to the launch of gourmet, this year we will open our first refurbished Red Roof dine-in Pizza Hut in New Lynn, Auckland in late June.
As I’m sure most of you are aware, a large driver of the growth at Pizza Hut over the past few years has been the rise of the takeaway and delivery business. This has been our major focus of investment and has delivered excellent returns.
However, we still have 21 dine in restaurants, or Red Roofs as we call them, around the country. While they are all in very good locations, some of them are quite tired and in need of refurbishment, as has been noted to me by many of you.
Red Roofs are an important part of our brand heritage and are a point of differentiation for us as a family food business. We do not intend to abandon the Red Roof concept all together. We are now embarking on a trial refurbishment programme to determine if the investment required in these restaurants will provide the necessary returns. This refurbishment programme will also include a detailed review of the entire Dine-in menu.
In Victoria, Australia, our Pizza Hut stores delivered a breakeven performance at store EBITDA level for the first time since we took over operations. This is by no means a satisfactory result for us, but is an improvement on the prior year. Sales grew by 5.6% and we also saw an improvement in customer service scores. Staff turnover stabilised and we believe that we will continue to see an improvement in profitability as we achieve leverage from increased sales volumes.
We have continued to have sales growth throughout this time.
However, Victoria is a very tough environment for us. We are committed to making the investment work for our shareholders and we have a detailed focus on this business in order to speed up the turnaround process.
Finally, the shining star in our portfolio for the year was Starbucks Coffee. I know many of you in the past have questioned us about our investment in this brand and the returns it is delivering to shareholders. I think the performance over the past year should quell many of those concerns.
Starbucks Coffee is now delivering margin performance that is reaching the same levels of our two bigger brands, despite its relatively small size to 14.9%. We have had 6 quarters of same store sales growth. It is a great brand and a great concept which delivers steady, solid returns. We will continue with our store development programme this year.
Starbucks Coffee was recently voted the number one coffee brand in New Zealand in a New Zealand Herald reader survey. On behalf of the management team, I would like to extend our thanks to all of our 7,000 employees at Restaurant Brands. The results we have achieved over the past 12 months is truly a reflection of the work they have all put in to making sure they give 100% attitude every day to ensure every one of our customers has an enjoyable experience.
I would also like to thank you our shareholders for your continued support. As I’ve outlined today, we have made many changes to our businesses, some from the result of your suggestions and comments. We value your feedback.
I hope that you share our excitement for the coming year. We will focus on implementing our strategies and improve our operations while at the same time introducing new initiatives.