Please see below M&C Report’s roundup of Marston’s full-year results for the year to 1 October 2011: Managed: new builds The new build expansion programme of 25 sites per year will continue “for the foreseeable future”, chief executive Ralph Findlay told M&C Report. Findlay said that at any one time the firm has about 100 sites under review and “it’s a question of us getting the better 25 or so at any one time”. “I don’t see at the moment there’s any particular limit in sites for investment.” Marston’s said the expansion will be “financed from cash flow and existing resources”. Nineteen new build sites were completed in the period. Average turnover per site is £27k per week, way ahead of its £20k per week target. Food now account for 62% of sales in the outlets, with profitability also strong - they generate an estimated return on capital of 18.6%, an investment multiple of 5.4x ebitda. The firm said around 50 new-build pub restaurants have been opened over the past five years, achieving an average ebitda return on capital of 18%. Each new site costs c.£2.5m, Marston’s added. Managed: brands and formats Sales growth was achieved in each of its three formats. Its 250-strong Destination sites includes 118 Two for One pub restaurants, which saw like-for-like sales growth of 7.2%. The Taverns division, made up of 210 traditional community pubs, saw like-for-like sales up 0.8%, “driven by a strong marketing and promotions programme, including an increased emphasis on traditional pub entertainment throughout the week”. Food sales increased slightly as a proportion of overall revenue, from 25% to 26%. Meanwhile, like-for-like sales growth at the 25 Pitcher & Piano high street bars was 3.6%. Marston’s invested in around half of the bars and introduced new food offers including a sharing platter menu. Managed: food Average food spend per head remained unchanged at £6.10, despite January’s VAT rise. Like-for-like food sales increased 5% and now represent 42% of sales, with Marston’s citing its “successful approach to value pricing”. “We can see that the consumer is interested in not only good value but the right price point,” said Findlay. “Although consumer confidence is relatively weak, spending on eating out held up remarkable well and pubs doing better than restaurants.” Twenty six million meals were sold across the managed division in total. Investment in staff training was increased and the customer feedback system Empathica was introduced in the period. The move towards table service contributed to a 17% growth in start and dessert sales. Retail Agreement Conversion to the franchise-style agreements continued in the year, with 337 in place at the year-end - the aim is to have 600 sites converted by the end of 2013, with around 200 planned in 2012. Once the conversion is completed, annual profit from the 600 pubs is expected to increase by at least £6m, against pre-conversion profit, to £14m. The average expenditure per conversion is around £50,000 per pub, with a minimum target ebitda return on incremental capital expenditure of 20%. Conversions to the Retail Agreement dented operating margin in the tenanted and leased arm by three percentage points to 43.1% - the Retail Agreement sites generate increased profit but lower operating margin. Retail Agreement: applications The Agreement, which achieved British Franchise Association accreditation during the year, attracts nearly three times more applicants than the traditional tenanted model, Marston’s said. In addition, 30% of licensees on the Agreement are from outside the industry. “We’ve had people from many different backgrounds [making applications], from banking to people who have been in the industry before as pub managers. We are getting applications that are looking at franchise as an option rather than the tenanted and leased model. There will compare what they got in franchise compared to other markets. Because they are looking at franchise opportunities they are knowledgeable about business and what they want from it.” Findlay said the company has had “one or two conversations” with licensees about taking on more than one site. Margins Marston’s said it achieved a 0.7% improvement in operating margin through improved drinks margins, tight labour cost control, fixed price purchasing contracts and flexibility in menu management, which mitigated the pressures of higher food costs. “We expect to mitigate cost increases of around £8 million in 2012 through similar measures,” the firm said. Capex Capital expenditure was £11.5m in the period (2010: £83.5m), including the construction of 19 new build sites (£45m) and £23m in the existing managed estate, including “major refurbishments” at 38 pubs. Capex in the tenanted and leased arm was £33m; £14m in the Retail Agreement pubs and £13m in maintenance capital. Disposals Twenty five sites were sold in the year, generating £15.2m. A further five pubs were sold to Fuller’s after the year end, generating £16m. Findlay said Marston’s expects disposals to total about £15m per year going forward. Tenanted estate: performance Total revenue increased 7.7% to £183.9m, reflecting the increased contribution from Retail Agreements, Marston’s said. Underlying operating profit was up 0.6% to £79.3m, with average profit per pub up 2.1%. Traditional tenanted estate Revenue in the c.1,200 sites increased 0.7%, with operating profit up 0.8%. Rent increased 1.6%, “supporting our long-held view that our rent setting process is fair with the clear objective of establishing sustainable rent levels,” the firm said. Tenant turnover was just 10%, with operating margins in these pubs similar to last year. Marston’s Beer Company: performance Total revenue increased 0.4% to £106.5m, with underlying profits up 0.6% to £16.3m. Overall ale volumes were up 2%, with premium cask ale volumes up 5% and bottled ale volumes up 6%. Its share of premium cask ale grew by a further three percentage points to 26%, and it has a 24% market share of premium bottled ale. Three quarters of its own-brew beers are sold to third parties. Cask ale sales to tenanted and managed operators increased 8%, with good progress in the managed sector in particular. Take-home volumes increased by 1%. Overall, operating margin remained static at 15.3%. It expects cost inflation of around £1m in the beer division, which will be mitigated through price increases and cost saving initiatives. Meanwhile, Fastcask, its cask ale dispense system aimed at outlets that usually don’t sell cask, now accounts for 20% of ale sales. Beer: free trade focus Marston’s said it has increased its resources in key geographical areas to target exploit opportunities in the free trade, which the company sees as a growth area with the increasing proportion of free-trade pubs. Its free trade account base increased by 7% to c.3,600 customers, and cask ale sales in this sector increased 4%. Structural change Marston’s implemented a major structural change from 2 October, which saw management of the Retail Agreement sites with its managed arm, with operations of Marston’s Pub Company and Marston’s Beer Company combined in one division, Marston’s Beer and Pub Company. Findlay said the most obvious benefit so far has come from merging the recruitment function for its managed, tenanted and franchise pubs. “That means we are getting more consistency and better screening,” said Findlay. Bank facility Marston’s signed a new bank facility after the year end, “removing any need for short-term refinancing”. The new £257.5m facility expires in May 2016 and replaces its existing £295, facility originally expiring in August 2013. The blended cost of debt remained unchanged in the period at 6.9%. Net debt at the year end was £1,100.8m (2010: £1,082.2m). The ratio of net debt to ebitda before exceptional items fell to 5.6 times (2010: 5.7 times). Government and pubcos Findlay was confident that pub companies and the wider industry would meet their deadlines for reform as agreed with the Government as an alternative to statutory regulation. The agreement gives pubcos until the end of 2011 to add 14 improvements to their codes of practice, covering issues from formerly stating that any upward-only rent review clauses will not be enforced to including a total rent assessment statement. When asked if he believed the timetable would be met, Findlay said: “I’m sure of it. Those proposals were not put to the Government without consultation with the industry.” He said the Coalition was “absolutely right to prefer self regulation”, adding that it was “really important to note that the Government has said it was not the place of Government to interfere in commercial relationships of landlords and tenants”. Analysts’ views Paul Hickman at Peel Hunt issued a Hold recommendation for the company and said: “Marston’s has finished the year on a strong trading note and is well prepared for what we believe will be a tougher 2012. We are forecasting only low earnings growth against the 11% just posted. But, having now refinanced to 2016, there are few concerns on the balance sheet, and the dividend, covered 1.9x, offers a healthy 6.2% yield with a modest FY12E PER of 8.3x.” Douglas Jack at Numis said: “We are holding our forecasts, which assume: 1.0% managed pub LFL sales growth in 2012E, implying a slowdown from early 2012E’s 3.0%; a 4% increase in leased average profits, which are building momentum (up 2% in early 2012E). The pick up in growth in H2 partly reflects returns from new builds and Retail Agreements exceeding expectations. We would buy for the yield and this step up in growth.” A target price of 130p was predicted.