M&C Report takes a closer look at the H1 results to 28 December for Shepherd Neame, and speaks to chief executive Jonathan Neame about the company’s approach to investments, which of its additional services are proving most popular with tenants, plus insights into acquisitions, disposals and coffee.
State of trade
Neame described festive period as “quite strong”. “I think it’s fair to say that Christmas, in our world, has been the most resilient peak in recent years, so it’s difficult to get strong growth on that, but none the less it was a pretty satisfactory Christmas.” The storms have had “some impact in individual locations”. “There’s a handful of key pubs that were shut or flooded and we received some property damage or repair elsewhere.”
Regarding trading in 2014, he said: “Everybody cited that the first quarter last year was very challenging. Whilst we’ve continued to have storms, we’ve continued to have been better for trading this time.”
Neame cited growth in beer volumes across the industry in Q3 and Q4 of 2013 and said the sector has come “a very low way” since the “dark days” of 2007 to 2009, “both in terms of its mind set, the clarity of direction, and general sense of optimism”. “This definitely feels like a sector in recovery,” he stated.
Tenanted estate (301 sites): investments
During the period it invested £1.4m (2012: £1.2m) in the tenanted estate. “Notable investments during the period include the final stage of the redevelopment of the Shakespeare in Canterbury with the opening of the Wine and Coffee House on the Buttermarket, the Prince of Wales, Reigate, Prince Albert, Bexleyheath, Kings Head, Shadoxhurst and Hop Pole, Wandsworth.” Most investments cost in excess of £100,000, Neame said.
The company will provide pre- and post-opening trading support in addition to physical changes as part of what it calls “turn-key” investments. “We have been doing this for a while now but I would say the rate of growth has accelerated a lot in the last 18 months and we’ve got good momentum, a good programme for the second half.”
The company has also carried out more matching-spend investments, where Shepherd Neame will commit capital and work to the licensee’s instructions. The money invested by the company is less but “you still have a transformational result”. So far c15 investments of this type have been carried out. Those undertaken in H1 include the Prince Arthur in London’s Shoreditch and the Castle in Eynsford, Kent.
Total capex across the managed and tenanted sites in the period was £4.6m (2012: £8.3m). The lower capex spend, in addition to favourable working capital movements, helped reduce net debt by £4.6m to £73.8m
Tenanted: additional services
Last year the company said it had introduced a series of new services for tenants at no extra charge, including an enhanced guest beer portfolio, improved procurement packages, enhanced digital marketing support and an improved property help desk. Neame said the food package has been the most popular. It offers support across a range of areas, including buying, menu pricing, presentation, and marketing.
“It’s the full range of offers. There are a great number of licensees out there with great natural skills but very few with the full skills set, from being a great buyer to a great pricer to a great marketeer as well as a great chef. Our job is to fill in the gaps. We’ve had great take up in that area and it is making a difference.”
Neame added: “I hate the expression support packages because it sounds like welfare. This is added value. These are specialists who are helping to drive things forward.”
Tenanted: coffee package
Shepherd Neame’s dedicated branded coffee offer for tenants, Coffee & Ale House, has been introduced to 40 pubs to date. “We don’t have a target but I would expect the take up to accelerate from here,” said Neame. Asked if it’s having a positive impact so far, Neame said: “Yes, and frankly I’d be extremely disappointed if they weren’t because it means they can provide better quality coffee for a lesser price, make more money for themselves and provide a better product for the consumer.”
Managed (47 sites): investments
The company said the Marine Hotel in has performed “above expectations” since the major redevelopment in 2013.
“Refurbishment of the restaurant and bar at The Bell Hotel, Sandwich completed in December and the redevelopment of The Fayreness Hotel, Kingsgate is nearing completion and will re-open before Easter under its new name, the Botany Bay Hotel.” The latter represents an investment of £1.5m. Neame said: “At that point we would have carried out a number of major investments and we would have what we believe would be a very high quality and hopefully very successful hotel estate.”
Neame said: “We’ve been very conscious of the fact that 2008-2012 was a one-off opportunity to acquire great quality pubs. That period has probably come to an end, at great prices. Now we’re into a development phase to make sure they’re all up to scratch.”
The company incurred a final exceptional charge of £526,000 following the transfer of warehousing and distribution activities to Kuehne and Nagel Drinkflow Logistics in October, resulting in a total exceptional charge arising from the business and board reorganisation of £1.8m. “Broadly speaking it’s going in line with our expectations,” said Neame.
Disposals and acquisitions
The company secured one pub in the period, taking a lease on the George in Wardour Street, central London, where c£200,000 has been invested to date. It disposed of three pubs and other assets, raising proceeds of £1.8m (2012: £1.9m), realising a profit of £200,000.
Neame pointed out that the company sold c50 pubs between 2007 and 2013 and acquired 26 as it looked to improve the overall quality of the estate. “I think for anyone who has a portfolio of pubs, there will always be a handful of pubs that don’t fit your needs, but we’re certainly not anticipating many disposals going forward.”
Neame said the industry “needs to know where the Government is planning to go” regarding plans for a statutory code in the tenanted sector.
“The duty cut last year gave the sector a great boost of confidence. It feels like a sector that is well into the recovery mode, and whatever the outcome, we get certainty, and we get a platform that enables us to invest with our partner licensees.
“We think we’re doing all the right things: we’re putting more capital in, we’re providing more services to drive our businesses forward. I think our trading results speak for themselves because if we’re growing, our tenants are growing too. We want to do more of it, faster, and we don’t want either a long period of uncertainty going forward or such a fundamental change that it undermines our confidence in investing in improving our pubs. Ultimately it’s about giving a better experience for the consumer and we think we’ve got the skills at the head office to do that, to help our tenants.”
The firm sold 151,000 brewers’ barrels of beer (43.5m pints) in the period, including 132,000 brewers’ barrels of own brewed and packaged beer (38m pints). Most were in the UK although the company also exports to more than 20 countries including Sweden, Italy and Ireland.
Total company beer volume grew by 4.1% (2012: -4%). “The original contract to brew Kingfisher beer terminated in October 2013 at which point we ceased production of the bottled beer. We will continue to produce the keg beer until December 2014. Excluding Kingfisher, our core own and licensed beer portfolio grew by 11.1%,” the firm said.
Shepherd Neame said marketing spend has been increased “to support core and licensed brand growth”. “In July 2013, we launched a multimedia advertising campaign with comedy duo, Armstrong and Miller to support Spitfire Ale. Both Spitfire and Bishops Finger have enjoyed good periods and the launch of the Whitstable Bay range has been very well received with new stockists above expectations to date.”
Water treatment plant
The firm said its new water treatment plant will become operational in March 2014. “This plant will minimise the consumption of extract well water by enabling us to recycle 40% of our water for re-use in boilers and cleaning. This investment is necessary as we near the end of a long term agreement with our local water company. The transition from the old arrangement to the new plant is a major project for the business with costly environmental compliance.” The company said it anticipates that ongoing annual charges will be £1m higher than the previous arrangement, “but this investment will help us to offset the materially higher costs that would have been incurred if we did not pre-treat our water prior to discharge”.