Financial Analytics for Managerial Decisions

Food Franchisors Ltd

It was March 2019, and Victor Fernandez sat at his desk and contemplated the work in front of him. Victor had graduated from RMIT University in December 2018, and had been hired by an investment fund company as a junior analyst. His company provides financial consulting services to clients, and Victor's new job required him to review the financial performance of a client and make recommendations to the client. The senior analyst to whom he reported would arrange for him to meet with the client. The first company Victor had been tasked to review was Food Franchisors Ltd, known as Food Franchisors.

As Victor looked over Food Franchisors annual reports of past four years (see Tables 1-3 for financial information), he considered how to approach his analysis. He needed to thoroughly assess Food Franchisors' past financial performance; this would affect the recommendations that he gave to the client. His boss was planning to arrange for him to meet with Food franchisors' Chief Operating Officer (COO), Kim Lee. Victor's senior analyst told him that Kim had a very busy schedule and she didn't like people wasting her time.

Background

Food Franchisors1 Ltd, known as Food Franchisors, is a global food and beverage company with its headquarters in Queensland. Its business model is as a franchisor and, as such, operates nine franchises. Today, network of franchisors spans over 2,400 outlets across Australia and internationally which over 15,000 employees.

The franchises that are part of this company are all within either the cafe and coffee shops industry or the fast food and takeaway food services industry. Food Franchises also runs. some central services providing coffee and bakery products to the various franchisees as well as procurement, warehousing and distribution operations.

Industry Outlook

Revenue for the Cafes and Coffee Shops industry has grown moderately over the past five years, supported by Australia's vibrant coffee culture. Industry revenue is expected to grow at an annualised 2.5% over the next five years to $9.9 billion, and after that at 1.7% per annum. Despite the industry's positive revenue performance over the past five years,

1

A franchisor is a person or company that grants the license to a third party for the conducting of a business under

the franchisor's marks. The franchisor owns the overall rights and trademarks of the company and allows its franchisees to

use these rights and trademarks to do business.

1

competitive pressures have pushed profitability down over the period. Australia's coffee culture and its growing number of speciality cafes and coffee shops have contributed to high industry competition, low barriers to entry and low industry concentration.

Regarding the Fast Food and Takeaway Food Services Industry, consumer health awareness has transformed this area industry over the past five years. Increased awareness of fast food's nutritional content and a conscious effort by consumers to choose healthier options have affected industry demand. Industry operators have responded by introducing a range of healthier, premium choices with less fat, sugar and salt. The change in consumer preferences has also prompted an influx of new operators offering higher quality fast food options. Whilst revenue is expected to rise at an annualised 3.3% over the next five years, traditional fast food has declined as a share of industry revenue, while revenue from premium and healthy categories has grown. Competition among industry players has been intense over the past five years, as traditional operators have fought for market share while new establishments offering healthier options have reduced demand for existing players.

Food Franchisors' operational issues

2018 was not a good year for Food Franchisors. Early in the calendar year, there was a concerted public campaign by franchisees who had been forced to walk away from their businesses because they could not find a buyer and for a multitude of reasons, some financial and some personal, could not remain in these businesses. These franchisees argued that the quality of foods provided by Food Franchisors had deteriorated, but prices had gone up, causing customers to flee and revenues to fall.

The share price reflected the general turmoil.

On December 31 2017 the share price was $2.50 but by 30 June 2018, it had dipped to $0.46

For the 2017/2018 year, Food Franchisors reported a $307 million loss after booking $427 in

asset impairments and costs associated with closing 250 stores, representing 17% of its

Australian network. Whilst revenue for the year was up by 7% when compared to the

2016/2017 results, the company had been forced in June 2018 by its lenders to restructure

its debt. However, despite this negative situation, the share price rose to $0.51 by mid-

September 2018.

The evaluation

The COO, Kim Lee, would like some advice on how to improve the company's financial performance and how to win back shareholder and franchisee confidence. Assume you are Victor Fernandez. Are you able to complete his tasks: (1) interview Food Franchisors Chief Operating Officer, Kim Lee, and (2) prepare written advice and submit to the senior analyst within 2 weeks after the interview?

2

Please note: you are required to conduct a thorough financial analysis based on the financial statements using the tools learned from the course.

3

Revenue from sale of goods Cost of sales

Gross Profit

Other revenue

Other gains and losses

Selling expenses

Marketing expenses

Occupancy expenses

Administration expenses

Operating expenses

Depreciation and amortisation expense Impairment loss on intangible assets Impairment loss on trade receivables

Write down on property plant and equipment Other expenses

Earnings before Interest & Tax (EBIT)

Finance costs

Profit before tax

Income tax benefit / expense

Profit for period

Basic earnings per share Diluted earnings per share

Table 1

Food Franchisors Ltd

Income statement for year ending 30 June

2018 2017 $'000 $'000

297,719 245,873 (218,832) (167,772)

78,887 78,101 76,315 103,422 (1,705) 6,102

(11,095) (10,167) (6,565) (2,501) (32,521) (7,952) (40,645) (25,680) (44,977) (25,660) (13,073) (9,338) (306,152) 0 (29,089) (2,462) (17,498) (189) (19,235) (6,503)

(367,353) 97,173 (12,877) (9,560)

(380,230) 87,613 73,537 (25,686)

(306,693) 61,927

(169.5) 35.7 (169.5) 35.7

Cents

2016 $'000

164,840 (97,675)

67,165 110,257 (25) (15,530) (3,755) (7,595) (20,197) (26,858) (6,584) 0 (2,086) 0 (8,635)

86,157 (9,574)

76,583 (23,620)

52,963

32.3 32.3

2015 $'000

120,768 (75,310)

45,458 126,477 279 (17,552) (27,269) (10,984) (17,882) (26,161) (3,707) (2,950) (2,056) 0 (9,970)

53,683 (7,299)

46,384 (14,165)

32,219

22.1 22.1

4

Trade and other receivables,

Table 2

Food Franchisors Balance Sheet as at 30 June

2018 2017 2016 2015

$'000 $'000 $'000 $'000

Assets

Current Assets

Cash & cash equivalents

Trade and other receivables,

Inventories

Other financial assets

Current tax assets

Assets classified as held for sale

Other current assets

Total Current Assets

Non-current Assets

Property, plant & equipment

Intangible assets

other financial assets

deferred tax assets

Total Non-current Assets

Total Assets

Liabilities

Current Liabilities

Trade and other payables

Provisions

Borrowings

Current tax liabilities

Other current liabilities

Liabilities classified as held for sale

Total Current Liabilities

Non-Current Liabilities

Borrowings

Provisions

Derivative financial instruments

Deferred tax liabilities

Other

Total Non-Current Liabilities

Total Liabilities

Net Assets

Equity

Issued capital

Retained Earnings

Reserves

Total Equity

15,871 50,325 24,568 16,266

7,337 9,362 6,719

130,448

785 64,625 364,063 8,334 32,255 470,062

600,510

71,352

18,443 264,207

3,980

3,769 361,751

49 13,245 1,547 64,187 1,691 80,719

442,470 158,040

428,640 -270,609 9 158,040

9,583 83,392 28,451 10,167

0

0 3,215 134,808

2423 95,554 668,926 14,260 13,657 794,820

929,628

69,816 7,422 722 2,546 10,747

91,253

249,248 393 1,810 119,433 2,319 373,203

464,456 465,172

402,472 62,594 106 465,172

16,956 41,012 15,655

6,018 4,455

2,210

86,306

3429 51,106 595,524 9,646 7,394

667,099

753,405

22,373 3,518 165

18,911

44,967

205,735 307

115,908 10,366

332,316

377,283 376,122

324,072 50,555 1,495

376,122

14,395 41,077 20,453

5,215 8,550

2,338 92,028

2832 42,927 594,101 4,391 7,779 652,030

744,058

29,768 5,558 50,475

9,724 95,525

156,169 272

115,908 22,185 294,534

390,059 353,999

315,051 38,882 66 353,999

5

Cash flows from operating activities

Cash receipts from customers

Cash paid to suppliers and employees Interest paid

Income taxes paid

Net cash from operating activities

Cash flows from investing activities

Purchase of property, plant and equipment Payments for intangible assets

Proceeds from sale of property and plant Interest received

payments for business

amounts advanced to other entities

repayments of advances previously made to other entities

Net cash used in investing activities

Cash flows from financing activities

Ordinary dividends paid

proceeds from issue of ordinary shares payments for share issue costs payment for debt issue cost

Proceeds from borrowing

Repayment of borrowings

Net cash used in financing activities

Net increase(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

565,701 456,000 (535,203) (361,329) (9,603) (9,416) (10,051) (21,460) 10,844 63,795

(22,856) (30,650) (668) (537) 6,867 163 968 801 (7,631) (67,195) (469) (5,696)

2,106

(21,683) (103,114)

(21,980) (42,888) 21,973 35,600 (472) (543) (894) (223) 145,500 189,500 (127,000) (149,500) 17,127 31,946

6,288 (7,373)

9,583 16,956 15,871 9,583

332,754 (239,623) (9,036) (19,298) 64,797

(14,429) (575) 131 486 (6,953) (8,719)

(30,059)

(31,456)

(47) (802) 148,500 (148,372) (32,177)

2,561 14,395 16,956

263,555 (198,447) (7,242) (23,166) 34,700

(6,551) (465) 197 265 (194,280) (10,086)

(210,920)

(24,122) 68,280 (1,657)

(445) 205,000 (68,000) 179,056

2,836 11,559 14,395

Table 3

Food Franchisors Ltd

Statement of Cash Flows for year ending 30 June

2018 2017 2016 2015

$'000 $'000 $'000 $'000