Pizza Hut depresses Restaurant Brands result

A hefty writedown of its Pizza Hut operations in Victoria, Australia, depressed Restaurant Brands' September half year net profit to just $200,000.

That compared with $2.7 million for the same period last year.

Even excluding non trading items, net profit was own 49 per cent at $3.1m.

Pizza Hut Victoria was written down by $2.6m and there were other non-trading writedowns of $1.6m.

The fully imputed interim dividend was sliced to 2.5 cents per share from 4.5c last year. It will be paid on November 24.

The company said the cut was "recognising the difficult trading conditions in the pizza business and significant investment being undertaken in KFC".

The net profit excluding one-offs was slightly above the previous forecast range of $2.5m and $3.0m.

Chief executive Vicki Salmon said the length of time taken to complete the exit of Pizza Hut Victoria had adversely affected overall performance.

She said the company expected an enhanced trading performance in 2008 once the Pizza Hut Victoria exit was completed.

For the rest of the year, she said the KFC business was expected to continue to deliver strong sales and profit growth. While some improvement at Pizza Hut New Zealand was expected, the competitive environment and higher input costs meant this would be limited.

Starbucks Coffee would continue to see sales growth with a corresponding improvement in margin as some cost recoveries took effect.

Restaurant Brand shares were unchanged on $1.00 today. They have traded between 94 cents and $1.42 over the last year.

The company has paid $2.6m for its new KFC master franchise agreement lasting 10 years.

Ms Salmon said KFC continued to perform strongly with sales up 5.6 per cent and EBITDA (earnings before interest, tax, depreciation and amortisation) up 6.2 per cent to $15.5m.

As previously announced, sales at Pizza Hut New Zealand operations plunged 11.5 per cent and EBITDA earnings fell 53 per cent to $3.2m.

The company has agreed to sell 24 of its Pizza Hut Victoria stores, with settlement of the first 15 stores expected during November.

"Divestment of this business is proving to take longer and be more expensive than previously anticipated," Ms Salmon said.

The business has been classified as a discontinued operation.

The underlying trading position at Pizza Hut Victoria had declined since the announcement of the exit strategy and Restaurant Brands was doing everything to stem the bleeding, Ms Salmon said.

Total store earnings (EBITDA) showed a loss of $1.6m compared to a loss of $87,000 in the previous year.

The franchise's financial position meant the process of training new franchisees and obtaining approvals from the franchisor, Yum, was complicated and had taken longer than anticipated, Ms Salmon said.

Total group revenues from continuing operations for the first half were up 0.8 per cent to $156.4m.

KFC's EBITDA margin was 16.2 per cent up from 16.1 per cent.

Ms Salmon said the rise in KFC sales was particularly pleasing, given the tightening retail environment.

She said, however, Pizza Hut New Zealand had continued to encounter difficult trading conditions.

A significant increase in the size and aggressiveness of competitive activity, and the tightening economic climate contributed to a significant drop in Pizza Hut sales over prior year, she said.

Cost increases in labour (as with KFC) and raw materials were not immediately recoverable.

The company was putting the squeeze on its suppliers to improve margins which had dropped to 7.1 per cent from 13.4 per cent in the prior half.

Management restructuring, an increased focus on costs, improving in-store operations, and a targeted marketing programme were all being tried to rectify the position.

Store numbers were cut by two over the half year with the planned closure of three more non performing stores including a new "delco" in Hobson Street, Auckland.

The company's Starbucks Coffee unit increased sales 13.3 per cent but EBITDA fell to $1.8m from $2.2m. Margins slumped from 15.1 per cent to 10.8 per cent.

The unit was hit by increased labour costs together with higher lease costs and a stronger US dollar affecting coffee imports.

- NZPA