- SC Investor: With a gross dividend yield of in excess of 10% would not shareholders be better off with a lesser dividend and the company engage in a share buy back programme?
Jim Collier: This option has and will continue to be considered subject to continued share price movements.
- SC Investor: I understand your company has regular presentations to brokers. Is it possible to share this information with existing shareholders? After all, we are the stakeholders in the company.
Jim Collier: Where any presentation contains market sensitive information, it is released to the Exchange and thence to shareholders. There are considerable transaction costs in communicating to shareholders by traditional means and to do so every time a broker presentation is undertaken is impractical. We are in the process of upgrading our website and may take the opportunity to incorporate presentations of interest into this upgrade.
- SC Investor: As a shareholder I am very disappointed in the share price having purchased shares at $1.60 earlier in the year. What steps is the company taking to provide additional value to shareholders?
Jim Collier: The company is focused on creating value through a 3-part strategy:
- Modernising KFC via new menu items and upgraded stores.
- Pursuing rapid growth on the home delivery pizza market through a complete change to the Pizza Hut store format. Pizza Hut is now the leading home delivery and takeaway pizza operator.
- Pursuing rapid growth in the cafe market through a rollout of the Starbucks Coffee brand.
KFC is providing consistently high cashflow with Pizza Hut and Starbucks delivering growth.
- SC Investor: Will the company consider implementing a dividend reinvestment plan?
Jim Collier: The company has been fortunate in that it has until now been able to fund growth from existing cashflows as well as maintaining a relatively high dividend payout ratio and retiring some debt without looking for any further shareholder re-investment. There has to date been no significant requirement or indeed investor interest in any such proposal. There is therefore no immediate intent to introduce such a plan.
- SC Investor: Do you expect the growth for the Starbucks side of the business to be similar to that which Starbucks has achieved overseas? Do you have an expectation of the number of cafes, and the proportion of the Restaurant Brands business that Starbucks will represent in, say, 5 years? Long term how many Starbucks outlets do you see in NZ?
Jim Collier: We plan to open 50 Starbucks locations by the end of 2003 and it is possible that more stores could open beyond 2003. At that point, Starbucks is expected to represent 10-15% of Restaurant Brands earnings.
There are currently more than 2000 cafes in New Zealand so the target of 50 stores is very achievable. There are currently 17 Starbucks stores open in New Zealand.
- SC Investor: In your prospectus you published full details of your 'Master Franchise Agreement' and 'Development Agreement' with Tricon. Have there been any changes to these agreements since float date, and do you have a similar agreement with Starbucks International?
Jim Collier: There have been no material changes to the Tricon agreements since their signing in 1997.
We have similar agreements in place with Starbucks.
- SC Investor: Under your licensing agreement with Starbucks would you be able to offer their product in Pizza Hut restaurants, perhaps on a limited basis i.e. just basic coffee drinks? Surely this would promote the brand without cannibalising sales at Starbucks stores.
Jim Collier: Our agreement with Starbucks does permit us to offer Starbucks Coffee in Pizza Hut. This is not under current consideration but is a strategy we may pursue in the future.
- SC Investor: Are there any plans to offer KFC delcos?
Jim Collier: Delcos (short for delivery/carryout) are primarily focused on home delivery which is the most convenient means of buying a pizza.
KFC already has a very convenient means of buying chicken - the drive thru. The drive thru fulfils many of the same customer needs as home delivery. Therefore there are no plans to build KFC delcos.
- SC Investor: Have the Eagle Boys outlets converted to Pizza Hut been able to maintain their market share?
Jim Collier: At the time of the Eagle Boys acquisition, the company said that it expected a one-time loss of about 10% of Eagle Boys sales from customers who would not convert to Pizza Hut.
The conversion of Eagle Boys stores was completed on time at the end of September 2000 and at the time of writing we have only four weeks sales from the fully converted system. We will report sales performance over a more extended period at the end of the year.
- SC Investor: I've forgotten the numbers but apparently your research shows that NZ'ers do not eat as many (or as often) pizzas compared to the USA (or other parts of the world). If RBD managed to convince NZers to eat as many pizzas on a comparable basis what impact would this have on RBD revenues, and what is RBD doing to increase the size of the market by getting NZers to eat more pizzas?
Jim Collier: Current estimates are that New Zealanders spend NZ$27 per person per year on pizza. Spending per head in Australia is nearly double at NZ$50. Spending per head in United States is nearly 6 times at NZ$170. We are unlikely to achieve US consumption levels due to a range of factors but believe it reasonable that the pizza market can grow to Australian levels of consumption. Therefore we believe that the home delivery and takeaway pizza market will grow at 5-10% per year for the next several years.
Our strategy for growing the pizza market is consistent with major pizza chains worldwide - affordabality and availability.
Affordability - Pizza has become more affordable in the last five years with prices reducing from $25 for a takeaway pizza in 1995 to $11 today. Today's low pizza prices mean that everybody can afford to eat pizza regularly.
Availability - with the acquisition of Eagle Boys, Pizza Hut has a store within 8 minutes drive time of 90% of New Zealand's population. With access through our 0800 phone system, pizza has never been easier or cheaper to buy.
- SC Investor: The price of pizza has increased a lot over the last 12 months (or at least I perceive that to be the case.) Has Pizza Hut been able to maintain or increase their sales while this has occurred?
Jim Collier: The price of pizza has in fact been stable or reducing over the last 12 months. For most of 2000, the price of two delivered pizzas was $23.95. This has now been reduced to $22.95. Other pizza prices have similarly reduced.
- SC Investor: How much revenue growth do you estimate can be added to the Pizza Hut business if the beer and wine delivery trials in Auckland are successful and you implement them nationwide?
Jim Collier: We have been trialing the delivery of beer and wine in two stores on Auckland's North Shore for the last couple of months. It is too early to estimate the revenue effect. The trial will be expanded to a larger part of the Auckland region late in 2000.
- SC Investor: You have closed a number of Pizza Hut stores for underperformance. How many more stores in the chain are underperforming?
Jim Collier: All of the Pizza Hut restaurants we have retained are performing in that they have positive cashflow.
- SC Investor: pizzahut.co.nz is a pretty swept up web site. How much of your business is currently being ordered on-line?
Jim Collier: Our website currently receives 25,000 hits per week and a small but growing proportion of Pizza Hut home delivery sales are conducted on line. It is relevant to note that the telephone is efficient technology for taking pizza orders.
- SC Investor: Do an increasing number of orders on-line improve operating efficiencies?
Jim Collier: The cost of taking a pizza order on the internet is lower than a call centre due to the absence of labour costs on internet orders.
- SC Investor: What other e-things is RBD planning?
Jim Collier: Restaurant Brands is engaged in a range of e-commerce developments. Most of our major suppliers are on EDI (electronic ordering and payment). We are currently expanding the number of direct linked suppliers and have a vision of all suppliers direct linked inside 2 years.
We are current developing an e-procurement model which will seamlessly link all elements of the supply chain in a manner which will reduce overall costs.
We have a basic intranet in place and are seeking to expand its facility.
- SC Investor: Do you expect the low NZ dollar to have any effect on sales as inflation rises, and people tighten up their spending?
Jim Collier: There is no direct correlation between exchange rate movements and sales in the takeaway food category. However a rising cost of living puts pressure on disposable income and therefore on retail categories such as takeaway food.
- SC Investor: What macroeconomic factors have the most effect on your business?
Jim Collier: Sales in the takeaway food market are correlated to broader macro-economic factors such as retail sales, interest rates, consumer confidence and employment levels.
- SC Investor: RBD is highly leveraged, does the plunge in the NZ dollar effect you significantly, ie. do you have any debt denominated in $US, do you expect rolling over of current debt will be more expensive? Also has the plunge in the NZ dollar effect your input costs?
Jim Collier: All of Restaurant Brands debt is denominated in NZ$ and is at competitive interest rates.
Most of the items purchased by Restaurant Brands are New Zealand sourced and we are shielded from some of the effects of low NZ dollar. In some cases our suppliers use imported ingredients as part of items they make for us. The rising cost of fuel also adds to our costs. As a result, we expect some cost pressures in the next 6-12 months.
- SC Investor: Retaining existing business is vital to growing the business. Our family experiences from your new (revamped Eagle Boys) Adelaide Rd, Wellington Pizza Hut doesn't seem to make them want to return. No doubt customer satisfaction is top of mind in RBD. Does RBD use mystery shoppers (or something along those lines) to monitor customer satisfaction and product quality? What other measures does RBD take to ensure continuing improvement in customer satisfaction?
Jim Collier: Restaurant Brands uses a range of customer satisfaction measures to determine how individual stores and our total system is performing. We use a Mystery Shopper programme and crew and manager incentives are in part tied to results of the mystery shopper programme.
- SC Investor: Are royalties (for the use of your brands) related to $NZ turnover or a fixed $US amount?
Jim Collier: Royalties are paid in New Zealand dollars at a fixed percentage of sales.
- SC Investor: Is the company considering adding other 'brands'?
Jim Collier: Restaurant Brands is not considering adding any other brands at the current time.
- SC Investor: There has been speculation in ShareChat that RBD is taking an interest in the Cobb & Co brand, soon apparently to be divested by Wilson Neill Corporation as it positions to focus on wireless technology. Is there anything behind the speculation?
Jim Collier: Restaurant Brands has no interest in Cobb & Co.
- SC Investor: It would appear, IMHO, that the poor showing of RBD's share price is at least in part due to the fact that it is not perceived as a growth company, due to the fact that it has to all extents and purposes saturated its market. What are RBD's future growth prospects? Can the answer please be given in narrative terms (ie. what strategies are in place for growth?), and also, if possible, numerical terms (ie. what are the forecast percentage growth rates for sales, and for earnings before tax and extraordinary items over, say, the next five years?)
Jim Collier: The company's growth strategy is stated earlier in this Q&A session. We believe Restaurant brands has good growth prospects and the strategies in place will deliver that growth. We do not publish long term earnings growth forecasts.
- SC Investor: We all need to live a dream. Where do you see RBD in three years time?
Jim Collier: We have a vision statement which reads:
"We will become an enduring, innovative company respected as the leading operator of great brands.
This will be achieved with people and processes that replicate an experience that is loved by customers and envied by all."
When we have lived that vision, our dream will be on the way to being fulfilled.
- SC Investor: Now that Frucor owns the Pepsi franchise, what is the likelihood you will be selling V in your stores?
Jim Collier: Nearly all of the soft drink sold in our stores is in post-mix or fountain form. V is not currently made in a concentrated syrup form suitable for post mix. If Frucor makes this product available we would consider it.