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Morning Briefing for pub, restaurant and food wervice operators

Wed 17th May 2017 - Update: M&B LfLs hit 1.9%, Pat Val and C&C Group results
Mitchells & Butler reports 1.9% like-for-like growth in first 33 weeks: Mitchells & Butlers has reported continued like-for-like sales momentum with 1.6% growth in the half year to 8 April 2017. Like-for-like sales were up 1.9% in the first 33 weeks of year. It completed 178 return-generating capital projects with focus on premiumisation of the estate. It reported capital expenditure of £93m (H1 2016 £88m), including six new site openings and 172 conversions and remodels. Phil Urban, chief executive, said: “During the half year we have generated sustained sales growth, whilst consistently out-performing the market. This comes from the good progress we have made in our three priority areas: building a more balanced business; instilling a more commercial culture; and driving an innovation agenda. As previously announced, margins have been adversely impacted by increased costs, most notably from wage inflation, property costs and exchange rate movements. In order to partially mitigate these costs we have been working hard to encourage our guests to trade up and increase spend per head for a more premium experience whilst challenging our General Managers to run their businesses as cost effectively as possible. Overall, we are pleased with the turnaround in our sales trajectory and relative performance against the market. In a challenging cost and consumer environment we will continue to focus on our three priority areas.” The company added: “Over the last year, we have seen a steady improvement in our rate of like-for-like sales performance, both compared to where we were and relative to the wider market. Our like-for-like sales in the year-to-date, including Easter, have now increased by 1.9%. We have increased the level of capital investment in the estate, reducing the remodel life cycle closer to an average of six to seven years. This is clearly helping our sales growth. However, we have also seen a marked improvement in the trajectory of the uninvested business over this time, suggesting the many other initiatives we have been working on are also now starting to benefit the business. We believe that by working hard to make a large number of marginal improvements across all areas of the business, we will continue to improve our performance. We will continue to work on multiple fronts to maintain the good progress that we have achieved over the last twelve months.”

Of the external environment: It stated: “We operate in a challenging and uncertain environment, both in the economy as a whole and in our sector specifically. Consumer confidence has remained fragile throughout 2016 and 2017, whilst spending remains in growth, albeit at a slowing rate. There is clearly therefore some caution over future demand. However, this backdrop is not new and, encouragingly, we have still continued to improve our sales performance. In the UK we have seen headline inflation figures start to rise recently and, more specifically, wholesale food inflation has increased in recent months, up to 6.0% in March 2017. Overall however, our cost outlook for the year is unchanged from that set out in our full-year results last November and continues to present a challenge which we must mitigate. This inflationary environment clearly impacts on our own, and our competitors’, decisions on pricing. We have stated previously that we would expect some price to be taken in the sector, and we have seen recent indications of this. Nevertheless, there has also been evidence of aggressive discounting during quieter trading periods. We continue to monitor our own prices carefully, and have carried out some price adjustments, including both price increases and price reductions in local markets. We will continue to enable and encourage guests to premiumise and increase the level of spend per head through enhanced products and menus, although some movement on like-for-like prices is also likely to be necessary. The level of supply in our market has also changed significantly in recent years. We have commented previously on the high number of new casual dining restaurants opening, particularly up until the middle of 2015. Since then we have seen restaurant supply growth slow considerably, reducing to a small decline in the last four quarters, although clearly within the net position there are examples of segments and operators that are continuing to roll out. While we are not now seeing the same level of new openings as two years ago, our marketplace remains highly competitive.”

Building a more balanced business: The company stated: “Our priority continues to be to reach the optimal balance of brands and formats across our high-quality estate, of around 1,800 largely freehold sites. Last year we carried out a full review to identify the ideal brand for each site, and since then we have been working towards achieving this profile, aiming to premiumise where possible to take advantage of higher growth and more resilient markets, alongside improving the general level of amenity and shortening the cycle within which all of our sites are invested. We have made good progress against this plan. Our main growth focus has been Miller & Carter, our specialist steak format which continues to be a great success both for new openings and conversions of existing sites. We now have 67 Miller & Carter sites open and are on track to reach around 100 sites by the end of 2017. These investments perform very well for us, and offer possible growth opportunities even beyond the 100-site target. We have also continued our conversion of sites into the Stonehouse Pizza & Carvery format, now in 72 sites, and extended the Harvester Feel Good Dining concept, now in 55 sites. In all, we completed 172 remodels and conversions (H1 2016: 164) in the first half of the year, keeping us on track to achieve our aim of a 6 to 7 year cycle of reinvesting in each of our sites. We have opened 6 new sites, and expect to complete around 15 new openings in the full year, mostly in All Bar One, Alex and Miller & Carter. We also identified a number of sites for disposal last year. This followed several years of limited disposals, and was an output of the estate review outlined above. We are currently in negotiations to sell 78 sites which we would expect to complete before the end of the year. The annualised Ebitda of these disposals is around £5m.”

Instilling a more commercial culture: It stated: “Instilling a more commercial culture is about the way in which the organisation operates and strives for profitable sales growth. We are pleased with the progress in this area. The four divisional structure is now embedded and working well. This year we will update our labour rostering system, which will enable us to operate time and attendance across the business, as well as giving our managers and team the ability to access the system from their own devices. Our use of social media is becoming increasingly important as a tool to interact with our guests, such that we are now generating more than 40,000 pieces of customer feedback every month. This provides a rich source of data as well as the opportunity for our managers to engage directly with our guests. We have installed a social media consolidation tool across all our brands, which enables our managers to see and respond to feedback from multiple social media channels. Data suggests a clear link between ‘scores’ achieved on social media and performance measures, including like-for-like sales, complaints per meal sold and net promoter score. Our commercial culture also extends to discipline around managing our cost base, as we strive to mitigate the substantial cost pressures that we, and the industry, face. Our scale clearly helps us in this regard. Our procurement teams have worked across our supplier base to, where possible, substitute or consolidate products and suppliers while maintaining the quality of product offered to guests. We have also been focusing on costs at an operational level and, whilst we feel that the organisation is already lean in the way it operates, we have given each of our sites a daily challenge to work towards in terms of cost savings – through challenging productivity, energy usage, and food and drink waste to name a few. This gives us a clear goal to work towards and engages the teams, whilst taking care not to take actions which will impact upon the guest experience. We are pleased with the progress we have made, both centrally and at an operational level, and expect to be able to mitigate an element of the full-year cost headwinds.”

Drive an innovation agenda: It stated: “We continue to drive our innovation agenda by working to improve our technological and digital capability, and developing new products and concepts. Innovation and technology are critical areas for us as a business, in terms of efficiency, attracting and interacting with guests and remaining competitive in our markets. We aim to use our technology to improve all aspects of the customer journey, which sometimes means making seemingly small adjustments to make a significant difference. Examples of our progress in this area include: Continuing to increase the level of online bookings, such that now around 90,000 bookings are made a week through our own websites and third-party partners; A new site-level website template which is being rolled out, now live across 170 sites, and provides us with a platform to easily and quickly replicate new websites for site or brand concepts as well as improving the online guest experience; Improvements to guest Wi-Fi, both through increasing the network speed and separating the back office usage; and trialling of alternative payment devices, which we expect to build on with a trial for guests to order at tables later this year. We have continued to extend our use of delivery, which is now live across more than 50 sites and in three of our existing brands, plus our two new concepts Chicken Society and Son of Steak. We are convinced that this is an area of the market which is here to stay, and the demand appears strong across towns and cities nationwide. On average we are still seeing delivery sales of around £300 per site per week, showing the strength of the offer as we continue to roll out. Certain individual sites trade well in excess of this amount, with the two new concepts being particularly strong on delivery sales. We currently partner with one provider, but are close to extending the offer into other regions through alternative suppliers and believe that a delivery offer may ultimately be applicable for up to a quarter of the estate. As well as using technology to enhance the guest experience, we are also using technology to improve the way we work. These improvements may appear small, but can make a significant difference to our teams. Based on feedback, we have issued all of our house managers with laptops to facilitate more flexible working on site. We have also introduced enhancements to our telephone system to allow bookings to be routed through a centrally operated telephone line, rather than the team having to manage phones directly at sites during peak trading periods. We have done much to improve our digital marketing in the last 18 months, by consolidating all of our customer information into one database, trialling flexible offers through email and other channels, and by developing apps for a number of our brands. We now have six brand apps (Harvester, Toby Carvery, All Bar One, Nicholson’s, Ember Inns and Browns), with an aggregate of 825k downloads so far. We have begun testing a loyalty function within some of these apps, and in the months ahead will develop this further to tailor rewards to guests based on their individual usage. This enables us to understand our guests’ preferences more clearly and therefore to have much more personalised interaction with them. Our work on innovation also extends to the ongoing development of new products and concepts. Existing brands are continuously looking to evolve their offers, with examples ranging from the introduction of a low calorie prosecco in a quarter of the estate and the development of vegan dishes, to exploring popup and partnership opportunities to expand the reach of our brands. As mentioned above we also opened two new concepts this financial year: Chicken Society and Son of Steak. Both are based on a simple but high-quality offer, with a focused concept aimed at millennials, who are arguably underrepresented as a customer base across our existing portfolio of brands. Chicken Society opened in Finchley in December, and Son of Steak in Nottingham in March. We are encouraged by the early trading in both and whilst we expect to open more sites in the months ahead, we will take time to assess the performance and the business model of each before deciding whether a scale rollout is appropriate. We have always been very clear that, whilst the concepts may end up being a future conversion opportunity for the estate, it is more important that they help us develop our own culture of testing and learning, and being able to innovate at pace – benefiting both future new trials and innovation within our existing brands.” 


Patisserie Valerie report pre-tax profit up 15.7% in First Half: Patisserie Holdings has reported group revenue of £55.5m up by 11.0% (2016: £50.0m) in the six months to 31 March. Gross profit was £43.3m, up by 10.6% (2016: £39.2m). Gross margin was 78.0% (2016: 78.3%) and Ebitda was £12.2m up by 15.6% (2016: £10.6m). Pre-tax profit was £9.7m, up by 15.7% (2016: £8.4m). It reported strong balance sheet position with net cash at 31 March 2017 of £16.2m (2016: £8.9m). Ten new stores opened to date all funded from operating cash flow with a strong pipeline of further new sites – it is now trading from 192 stores. Interim dividend rose 20% to 1.20 pence per share (2016: 1.00 pence per share). Luke Johnson, executive chairman, said: “We have delivered another strong set of results with growth in both revenues and profit and excellent cash conversion despite the challenging market conditions and the current inflationary environment. We have opened ten new stores including our first international store in the Republic of Ireland, and the pipeline to the end of the year to achieve our target of 20 new store openings is on track. With a strong balance sheet and an experienced management team, we remain operationally focused on the organic delivery and continue to assess acquisition opportunities. Accordingly I am confident of delivering a successful second half of the year and beyond.” Chief executive Paul May added: “In the first half of the year, we have delivered another strong performance, both financially and operationally, due to our robust operating model, strong management team and appealing brands. Revenue for the period is £55.5m, an increase of £5.5m or 11.0% (2016: £50.0m). Ebitda is £12.2m, an increase of £1.6m or 15.6% (2016: £10.6m) and pre-tax profit is £9.7m, an increase of £1.3m or 15.7% (2016: £8.4m). Basic earnings per share is 7.95 pence per share (2016: 6.68 pence per share) and diluted earnings per share is 7.88 pence per share (2016: 6.61 pence per share), an increase of 19.0% and 19.2% respectively. Revenues from our principal brand, Patisserie Valerie are £40.4m, up £5.5m or 15.7% (2016: £35.0m) and revenues from our other brands are £15.9m, up £0.1m or 0.6% (2016: £15.8m). Revenue from our website continues to grow with digital sales in the period of £1.6m, up £0.2m or 14.3% (2016: £1.4m). Our Cakeclub membership increased by 22,000 members in the period, up to 383,000, with an ever increasing social media following. Our seasonal ranges performed particularly well in the period with sales from our winter menu up over 160%, we sold over 103,000 mince pies and our new festive afternoon tea range sold over 26,000 units. Earlier this year we ran a competition, inviting customers to design a custom gateau. We received over 11,000 entries and the chosen winner was named the Madame Valerie Gateau. The Gateau contains chocolate layers, caramel cream and honeycomb pieces and was launched for general sale in January 2017. The Madame Valerie Gateau has become our best-selling online eight inch gateau with the corresponding slice becoming our fifth best seller instore. In April, we entered into a 12 week supply only trial with Sainsbury’s. The arrangement is to supply 12 nationwide Sainsbury’s stores with Patisserie Valerie product which is being sold in-store from Patisserie Valerie branded counters at Patisserie Valerie price points. In the first half of the period, inflation on food costs was high, however, we are now seeing prices stabilise with the majority of core ingredients now at normalised levels. We have actively mitigated inflationary pressures resulting in only a minor impact of 0.3% on our gross profit margin which was 78.0% for the period (2016: 78.3%). We are continually working on our supply chain to ensure we buy at the best market prices and have fixed price contracts on a number of key lines. With further improvements in our supply chain and operational gearing from the growing group, we expect our gross margin to be broadly constant to the end of the year. Pay rates continue to increase from the impact of both National Minimum and National Living Wage. However, with more effective rostering in stores, as well as making some minor central changes, we have limited the impact of pay pressures whilst maintaining an excellent customer experience. Additional wage increases implemented in April 17 with the next stage of the National Living Wage increase will have an impact of approximately £0.5m on our wage bill. Again with more effective rostering and other areas of scale benefits that will come through in the second half of the year, we would hope to mitigate much of this increase. Other costs have remained relatively benign with no material rent increases and the change in Business Rates from April 2017 likely to be neutral across our nationwide estate. We continue to target 20 new store openings per year and in the period to the date of our results announcement have opened ten new stores, which are trading strongly, and two closures due to leases expiring. The openings are a mixture of counter and full menu offerings with locations ranging from high-streets, retail parks and concession arrangements. In the prior year we opened our first store in Belfast, Northern Ireland, and trading to date has been excellent. The store is fitted with a bakery to support at least a further ten store openings. Following the success of the Belfast store, in the period we opened one additional store at Castle Lane, Belfast. We have also opened our first International store in Blanchardstown, Republic of Ireland and the encouraging, albeit early, success in this market has highlighted to management that the brand has international potential. In the period we opened our first store under our Philpotts brand since its acquisition in 2014. The store is located in Manchester’s financial and professional services hub at Spinningfields. Sales to date have been promising. Other notable openings in the period include Dundee, which is our 11th store in Scotland, and Ashford Kent which is located on the McArthur Glenn designer complex. Performance at all of our designer outlet centres continues to remain strong. All of our new openings are profitable from the first week of trading and are all funded from operating cash flows. The new store pipeline is healthy giving confidence on our target of opening a total of 20 new stores for the full year. We continue to believe there is considerable scope to expand the footprint of our estate and remain confident of the large addressable market in the UK and Ireland.”

C&C Group reports volume growth across core brands: C&C Group has reported operating profit of €95 million in the year to 28 February 2017, in line with the prior year. There was volume growth in core brands (Bulmers, Magners, Tennent’s) of +2.6%. Its premium and craft portfolio is growing rapidly, up +60%. It made a significant increase in brand investment, up +12% across its core brands. Campaigns included a “Hold True” campaign for Magners, a new fount programme for Tennent’s, Outcider launch and a “100% Irish” campaign in Bulmers. Stephen Glancey, C&C Group chief executive, said: “FY2017 has been a period of significant activity for the group. While trading remained tough, we invested in and delivered volume growth across our core brands; completed a major rationalisation of our production foot print; drove efficiencies across the business; continued to grow our Premium portfolio and Export business; and secured an important new long-term distribution arrangement with AB InBev. After this year of consolidation, we are in materially better shape to meet the ongoing challenges and opportunities within our industry. The impact of the devaluation of sterling following the Brexit vote had a material (€8 million) negative impact on the group’s reported numbers. However, on a constant currency basis, the group returned to operating profit growth in the second half and was flat year-on-year at €95 million. The results reflect the increased investment behind our core brands, which returned to volume growth of 2.6% and the €15 million efficiency benefits arising from our production rationalisation programme. The double-digit volume momentum behind the Magners brand in the UK provided the right foundation to extend our distribution partnership with AB InBev. The rationale for expanding the relationship is compelling for both parties, allowing each other to play to our route to market strengths, backed by a combined high quality beer & cider portfolio. This partnership has the potential to drive volume and value in Magners for years to come as the category rationalises and distribution synergies are delivered. We made further progress during the year in growing and developing our portfolio of Premium and Craft beers and ciders. Heverlee, our authentic Belgian lager, grew +41% to over 20kHL and is now the fastest growing World beer in Scotland and the No.#1 import lager in Northern Ireland. We launched Pabst into the Millennial market in GB and Menabrea, our authentic Italian imported lager, secured UK-wide listings with major supermarket and casual dining groups. Our investment partnerships with some of the most exciting craft breweries across the UK and Ireland, such as Five Lamps in Dublin, Whitewater in Northern Ireland and Drygate in Glasgow, all had a good year. FY2018 has started in line with expectations but we do remain cautious given the outlook for the consumer across our markets. Political uncertainty continues into the current year making forward predictions on trading patterns and consumer behaviour particularly challenging. However, our core brands of Bulmers, Magners and Tennent’s are well positioned to convert their volume momentum in FY2017 into revenue and value growth in FY2018. Our increase of €4 million in investment behind the Bulmers brand and NPD in Ireland is on-track. We have commenced our planning for Brexit, particularly in respect of trading on both sides and across the border in Ireland. A lot of uncertainties remain, but we are encouraged by the initial determination on both sides to minimise the potential economic and political friction of a hard land border on the Island of Ireland. C&C is a resilient business with strong local brands that have stood the test of time and a growing Premium and Craft portfolio. We are confident that the combination of our strong market positions, well-invested brands, flexible low cost production assets and expanded partnership arrangements will deliver value for shareholders over the longer term. Our balance sheet remains strong at 1.55x Net Debt/Ebitda and we anticipate moving towards our medium term target of 2.0x during FY2018 through a combination of acquisitions and/or share buybacks.”

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