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Morning Briefing for pub, restaurant and food wervice operators

Mon 2nd May 2022 - Greene King results, Star Pubs & Bars to invest £42m in estate this year

Propel reports on Greene King’s full-year results and speaks to chief executive Nick Mackenzie

Financial overview: Greene King reported group revenue of £1.34bn for the 52 weeks ended 2 January 2022, up 41.6% on the previous year (2021: £0.95bn), with strong trading in the second half and growth in all five of its divisions. Adjusted operating profit stood at £18.6m (2021: loss of £186.9m) with statutory operating profit of £63.8m (2021: loss of £433m). The group said it returned to being cash generative from operating activities, with free cash flow of £7.2m due to strong trading in the second half and cash preservation measures put in pace during the pandemic. It said its capital structure remains resilient, with “balance sheet strength and flexibility maintained”, underpinned by financial support of both main backer CKA and bondholders. Group loss before tax and adjusting items was £113.8m in the period (£279.5m loss in the 36 weeks ending 3 January 2021). The group made a statutory loss before tax of £70.4m (36 weeks ending 3 January 2021: £248.6m loss). The company said: “During the year the group received government support totalling £151.3m – £141.0m of furlough grants for job retention, and £10.3m of State Aid grants, which were materially constrained due to state aid caps. The group also benefited from the temporary reduction in the VAT rate to 5% and subsequently 12.5% from 30 September 2021 for certain supplies in the hospitality sector. The group also repaid all the remaining deferred January to March 2020 quarterly VAT liability in the year, and on 31 March 2021 repaid the £300m borrowed under the Covid Corporate Financing Facility. Overall, the group’s net debt increased in the year by £116.4m to just under £3bn.” Nick Mackenzie, Greene King chief executive, said: “Greene King has delivered a resilient performance over the past year, against the backdrop of unprecedented disruption to our business. We managed to return to underlying profitability, in spite of our pubs being shut or restricted for long periods of time and our customers facing massive uncertainty and disruption to their lives. This performance is down to the concerted efforts of our 39,000 team members and I want to thank them all for their incredible hard work and resilience.”

Current trading: Mackenzie said: “While sales have broadly returned to 2019 levels, the underlying challenges of significant cost inflation, labour shortages and regulations will continue to impact the pace of recovery of the sector and we therefore look to the government for support through business rates and alcohol duty reforms. We at Greene King will be playing our part with our plans for significant investment to drive growth across our pub, hotel and brewing businesses. We are confident in our strategy, our brands and our people and continue to see huge long-term potential in the UK hospitality market.” He added: “We produced a resilient performance given the backdrop and I'm pretty pleased with where we ended up given where we started the year, as last January was the probably one of the darkest moments for the industry. All of our pub divisions had strong second halves of the year and I think you know, the momentum we had prior to Omicron, has definitely flowed through into the new year. The key points for us are posting £1.34bn of revenue and back to operating profit, and back to cash generation. It’s the team, our 39,000 team members, our tenanted partners and our customers who got us through it. I still believe the momentum that we got in the start of the year is still there, but it's fragile. We are taking a much more holistic sort of balanced approach to how we run the business. There is always pressure for like-for-like sales growth, but that isn't everything. Balancing off people, balancing off our customer scores, which are better than they've ever been, and obviously, the financial performance of the business is important. The strategy we've put in place that we are now really starting to implement, hopefully takes that sort of balanced approach. We’ve talked about this in the past, while sales are good and we've got momentum and we're happy with where we are relative to where we were, there is still this issue around volume. There are still a number of consumers, I think, who are yet to come back to the pub. And you know, we need to make sure they do come back. I think there are some people who perhaps changed change habits during covid. And while we've got really strong support from those customers who have come back and probably their frequency has gone up actually, there's still a proportion who the industry as a whole has got to focus on getting back into pubs. I think the VAT thing was a missed opportunity. I do think that business rates and duty have to be the long-term place to go to rebalance the sort of tax burden that is placed on our sector. And I think we got to keep pushing government to look at that because they aren't fair and we need that balancing back. We are seeing cost inflation come through the business. It is putting pressure on margin. We're lucky in some ways, because of our scale and longer-term contracts, we're to some degree hedged from it, but many aren’t and many of our tenants aren't. We as an industry, we're not out of the woods yet. But whilst sales look quite good now, we are very mindful that the consumer can react and probably will react and we just got to make sure we're flexible enough to deal with that. It has put pressure on price. We did take some price before Christmas through the sort of natural menu cycles and we're keeping a constant eye on the balance between what customers can afford, versus the sort of definite pressure that businesses including ours are getting on costs and that's going to be with us for some time in my view. I don't think it's a short-term phenomenon and I think we and others are going to have to adapt to that and pay very close attention to what our customers are saying and how they're feeling. And I don't think there's a one size fits all. Different consumers will act in different ways and our portfolio is quite broad. So, we have to look at it that way.”

Destination Food Brands (652 pubs under the Chef & Brewer, Farmhouse Inns, Hungry Horse, Wacky Warehouse, Pub & Grill, Greene King Inns and Pub & Carvery brands): Total revenue for the full year was up 126.5% to £527.1m against FY20SY, and up 39.5% against 52-week 2020 proforma, which suffered from higher levels of restrictions. The company said that like-for-like sales versus 2019 were marginally down for the periods the pubs traded, which was broadly in line with the market. Excluding the impact of the last three weeks of the financial period that was distorted by the emergence of the Omicron variant, it said like-for-like sales for the second half of the year were slightly favourable versus 2019. The company said: “Despite the extended period of closure, the division was profitable in the year with an adjusted operating profit of £20.9m, which was £93.3m ahead of the 52-week 2020 proforma adjusted operating loss. Core development capital expenditure was £4.9m, of which £2.2m was on developing existing sites, £1.7m was on developing gardens to support trade during outdoor only trading restrictions and £1.0m was invested in transitioning two sites from the Pub Partners division into Destination Food Brands. Excluding these transfers from Pub Partners, 37 sites benefited from core capital expenditure in the year. A full engagement survey was completed across Destination Food Brands in September with 11,739 participants taking part in the survey. Our sustainable engagement result was 79% while business pride was 82%, both in line with the average across the wider Greene King group. While the first three weeks of trading in the current year have been impacted by the advice and restrictions implemented by the government and the devolved authorities to reduce the spread of Omicron, subsequent weeks of the new year have been much more robust, and we remain confident that our business is well-placed to bounce back in early 2022.” In August 2021, the company opened a new site that was acquired in the previous financial year, the Riverside in Shrewsbury, under the Chef & Brewer brand and to date it has delivered sales “ahead of expectations”. A further site was acquired in Portishead and is undergoing redevelopment before it also opens as a Chef & Brewer in the forthcoming year.

Chef & Brewer: Mackenzie said: “We are doing acquisitions and refurbishments when it comes to Chef & Brewer. There is a slightly more premium approach to the fit out across the board. We’ve converted a couple out of Pub Partners into Chef & Brewers, and they've done really well. We've transferred a number of our Pub and Dining sites into Chef & Brewer and they're doing very well. So yeah, I think we've been progressing with a new sort of design feel, and a higher level of investment but we've also been working incredibly hard on the customer offer in our existing businesses as well. We have started to set the sort of benchmark of what we're trying to achieve. So yeah, I'm really pleased where that's going. Chef & Brewer last year was probably the brand that bounced back better than the rest. An evolution and repositioning of that brand is high on our agenda.”

Local Pubs (599 pubs): Revenue for the Local Pubs division was up 139.7% to £315.9m against FY20SY and up 41.3% against 52-week 2020 proforma, which suffered from greater levels of lockdown. The company said: “Like-for-like sales against 2019 for trading pubs were down across the year, however, the Local Pubs division traded ahead of the Coffer Peach market over the year on a trading pub like-for-like basis. The division made an adjusted operating profit of £2.6m, which was £60.3m ahead of the 52-week 2020 proforma adjusted operating loss. A total of £4.8m of core development capital expenditure was spent on the estate in 2021, garden only investments saw most of the capital to support customer preferences during the pandemic and saw strong sales uplifts across the year. Core developments were centred around our new concept developments, Pub & Social, Pub & Kitchen and Proper Locals. A full engagement survey was completed across Local Pubs in September with 7,985 participants taking part in the survey. Our sustainable engagement result was 80%, one percentage point better than the average across the wider Greene King group, while business pride was 82%, in line with the wider Greene King group.” The company said building on from the re-evaluation of its propositions undertaken in 2021, a total of three core investment test and learn sites were completed in the year to establish the next generation template of investments across Pub & Social, Pub & Kitchen and Proper Locals. In 2022, further test sites of Pub & Social, Pub & Kitchen and Proper Locals are due to be developed ahead of a larger roll out programme over the next three years.

Premium, Urban And Venture (364 pubs): Revenue for the division was up 49.2% to £235.8m versus the 52-week 2020 proforma basis, which Greene King said was primarily due to a variation in covid-19 restrictions between years (up 181.7% versus FY20SY). The company said: “Like-for-like sales measured for open sites only and against 2019 sales were materially down due to the performance of the central London estate that was particularly hard hit by covid-19 restrictions. Our London estate recovery was supported by an innovative media investment programme that we will continue into 2022. The division made an adjusted operating profit of £6.8m, which was £46.4m ahead of the 52-week 2020 proforma adjusted operating loss. Core development capital expenditure amounted to £7m as Premium, Urban and Venture continued to invest to take full advantage of the reopening of the pub industry.” The Venture side of the division is driven primarily by Metropolitan Pub Company, which incorporates more than 60 pubs. The company said: “We invested £2.3m through 2021 by continuing the growth strategy and refurbishing some core sites including garden trading space. The Fountain House in Manchester was also acquired in the period and refurbished to trade as the first Metropolitan pub in northern England. Crafted Pubs is our new premium pub concept within the Venture side of the division. It connects two key parts of our strategy, growth through compelling brands and asset optimisation. We launched the concept after listening carefully to customers, who told us what they want from a premium pub. As a result, Crafted Pubs is designed to not just meet, but exceed those expectations. In 2021 we opened our first Crafted Pub, The Boat in Solihull, it has been a huge success, trading well above expectations and achieving record-breaking sales, and in December 2021, we opened our second Crafted Pub, The Watermill in Dorking. 2022 is expected to see a continuation of the division’s recovery from the covid-19 pandemic alongside a focus on key areas of strategic priorities. Crafted Pubs will open its third site, with further expansion to come thereafter. We anticipate growth in our Metropolitan estate as we continue to focus on premiumisation, in line with our anticipation of market demand.” Mackenzie said the conversions to the Metropolitan concept outside London have been well received. “We were doing it in a balanced way as ever, but actually we've got plenty of future conversions of assets in the pipeline for Metropolitan,” he said. “Part of our model is how do we drive long term value from these assets by putting the right customer proposition in there and Metropolitan I think represents a really good opportunity.”

Pub Partners (1,002 tenanted and leased pubs): Total revenue in the year was £109.6m, with circa 70% of this delivered in the second half and of the £46.7m of Ebitda delivered in FY21, circa 80% was delivered in the second half. The company said: “In line with the rest of the hospitality sector, all of our pubs were closed for the majority of the first half of the year as a result of covid-19 and we supported our tenants through this period financially, providing a 90% concession on their rent. Once pubs were able to reopen with restrictions, we continued to support partners with a 40% concession until mid-July when all trading restrictions were removed. We also provided survival and recovery initiatives including beer returns, free personal protective equipment/screens, 24-hour advice, free British Institute of Innkeeping membership, the launch of our well-being and recovery hubs and a ‘Pub Power’ toolkit, which directs tenants to a broad range of support options. We further supported partner cashflows by arranging repayment plans for debt existing pre-pandemic rather than expecting immediate payment on commencement of trading. This debt has reduced from circa £10m to circa £5m. In total we provided financial support to our tenants worth circa £18m in FY21, mainly through rent concessions, and this is in addition to the £26m support we provided in FY20SY. Investing in our pubs is a critical part of our strategy and despite the impact of the pandemic we continued to invest in our estate and our partners with total capital expenditure of £11.5m in FY21. Within this £6.4m of development capital was invested to drive income growth across 120 pubs. Despite the tough trading conditions, this capital investment continued to deliver a strong return, with FY21 projects delivering an average blended return on investment of 32%. Innovation continues to be an important part of our strategy and in FY21 we launched a new market leading franchise agreement that complements our existing portfolio of agreements and better reflects the needs of our partners during these changing times. Incoming costs for partners are low, while there is a guaranteed income plus further performance related incentives available. Our rigorous site criteria will enable us to open more than 100 franchise pubs over the next five years.”

Delivery: Mackenzie said: “We went out post covid on the rebound, coming out first time getting delivery and takeaway into as many sites as we could. While that was really good on one level, and we got some sales out of it, I think when we've really looked at it, we've got into a position that if we want take delivery forward, we have to have a really clear delivery proposition. That is predominantly with Farmhouse Inns, because the carvery and the roast is something different. From a clear sort of pub proposition, it's quite difficult to put fish and chips and burgers across in a way that competes with some of the others that are doing a great job on burgers, etc. So, I think our view now is very much where there is a clear and differentiated proposition like carvery then that's where we'll go with delivery and takeaway. We've taken it out of the sites where we really can't make that clear customer proposition.”

Acquisitions: Mackenzie said: “We are definitely out there now in the single-site acquisition market, and for packages, and CKA will give us the backing for that. We won't overpay, we want to do the right deals, but we'll do them if they strategically fit. We've got a team out there now looking at sites and looking at packages. We've got quite a lot of geographic gaps that we can fill. So, we're not big in the south west, for example, there's parts of the north east where we're not strong because the way the portfolio has to come together. We've got hot spots, but there are some gaps there, and that gives us an opportunity to fill up. In terms of the bigger M&A piece, I'll never say never and it's opportunistic, but again it has to be a strategic fit for us and I'm not just going to buy for scale. I think there will be opportunity in the next 12-18 months, because there will be pressure on some businesses around cost and around cost of living that may be an opportunity for us.”

Capex: The company said that during the year core capital expenditure was limited to that of a maintenance nature, investment in some development of outside space in managed sites and investment in digital transformation projects. No dividend has been proposed or paid. Net disposal proceeds of £0.6m were generated from 12 non-core pubs. The group purchased the freehold of 30 sites that were previously leased via a company share acquisition for £95.4m consideration. In addition, £19.3m was spent on four single site acquisitions including subsequent development spend on these sites and the freehold reversion of three further sites. Mackenzie said: “We spent circa £95m in the latter half of the year on buying in 30 freeholds and we'll continue to do that. Our freehold percentage is up to around 90%. We also made some single site acquisitions and invested in those as well.”

People: To thank team members for their hard work during the year, the group rewarded them with a circa £6m Christmas bonus scheme, including £300 cash bonus, extra holiday, an uplift in hourly rates, increased discount, and a meal per shift. Agile working was also introduced, allowing office-based staff to spend part of their working week away from the office. During the period, 920 team members undertook apprenticeships, with 740 completing their apprenticeship. The company said: “Following the launch of our Team Member Support Fund in the first lockdown in 2020, we set up a second fund in January 2021 and provided £500,000 for our team members in most financial need. This takes the total amount provided to £1,160,000 since the start of the pandemic. We partnered with the Licensed Trade Charity to administer this on our behalf. The fund was partly paid for by salary sacrifices from our executive board and senior leaders in the business.”

Strategy going forward: Mackenzie said: “Greene King remains confident in its strategy to deliver outstanding customer experiences through a balanced portfolio of high growth, consistently profitable brands. The business plans to increase investment in its businesses in 2022 to drive future growth, with focus on investing in proven concepts as well as continuing the development of exciting new innovative opportunities accelerating digital transformation across all areas of the business particularly on customer-facing areas and strengthening internal systems. While demand is recovering, Greene King is mindful of the inflationary pressures impacting its customers alongside the continued recruitment challenges in hospitality. To ensure the quick recovery of the sector and assist in its ability to invest and drive economic growth, further government support is needed, particularly with business rates and alcohol duty reforms.”

Star Pubs & Bars to invest £42m in estate this year, 660 venues set to benefit with focus on suburban sites: Heineken-owned Star Pubs & Bars will invest £42m in upgrading more than a quarter of its estate in 2022, with 660 venues set to benefit. This follows the £62m the company spent on pandemic rent reduction as it strives to help its pubs build back from the lockdowns and restrictions. The move, which will creating more than 700 jobs, brings Star Pubs & Bars’ total investment in pub improvements to £115m since covid hit and to £300m since 2014. With more people hybrid working, the investment will focus on suburban pubs and those on high streets near residential neighbourhoods. The revamps will also reflect the trends for premiumisation and outdoor socialising. These will include kitchen refits and new bars, extended outdoor seating areas, festoon lighting, heaters and covers. Lawson Mountstevens, managing director, Star Pubs & Bars, said: “People have stayed closer to home over the last two years due to the pandemic and have turned to their local for the kind of experience they’d previously have travelled to a city centre, restaurant or bar to find. They don’t want to turn back time: they expect better quality, including food and specialty drinks – such as cocktails – that are harder to recreate at home. It’s the same with gardens. Sitting outside at the pub has become a new occasion and, if the outside space is good enough, customers will wrap up to enjoy it even in the winter months. Outdoor facilities also remain important for those who are still cautious about going out as the UK learns to live with covid. The cost-of-living squeeze is magnifying these trends. People are looking for a really great experience when they go out. These are challenging times, but we are confident that well-invested pubs that adapt to market changes will have a bright, long-term future.” Among those to have already benefited are The White Bear in Knutsford (£200,000 joint refurbishment with licensees Jamie Whittaker and Kelly Vickers); The Cambria in Camberwell (£600,000-plus upgrade with new multiple operators Prospect Pubs & Bars); and The White Swan in Ockbrook (joint £120,000 investment with licensees Joanne Kershaw and Michael Lewis). Mountstevens told Propel: “There continues to be strong interest from multiple operators in undertaking joint investments with Star Pubs & Bars and in increasing and improving their estates. The change in pub-goers habits over the last two years has opened up more opportunities for multiple operators. We have some great, well located neighbourhood pubs that resonate with their expansion plans. Together our investments address the increasing desire for top quality food and drink enjoyed nearer to home in a great environment.”

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