M&C Report takes a closer look at the H1 results for Fuller’s for the 26 weeks to 28 September and talks to Simon Emeny, who became chief executive on 1 July.
H1 pub developments
Twelve significant investments occurred in the period and construction began on two pubs, incurring a total capital spend of £5.1m. The spend on repairs was £600,000 higher than in the previous period, the company said.
Emeny said: “For the right site we’re interested in new builds. We are continuing to look for new build opportunities.”
Developments in the period include: the Hereford Arms in Gloucester Road, which has been “stylishly redesigned to appeal to a wider market”, and the food-led Vintry in the City, which has received an “elegant refurbishment” including the addition of a cocktail bar.
Fuller’s said: “A continued focus of the period has been on enhancing outdoor areas and gardens for our customers. The White Horse, Richmond has undergone a transformation of the large terrace and garden, providing a leafy and refreshing haven for al fresco drinks and dining, featuring an ‘edible’ garden with flourishing fruits and herbs.”
H2 pub developments
This month Fuller’s completed its £1.7m investment in London’s Pride, its airside pub in the new Heathrow Terminal 2, which opens in June 2014. The company has concluded the £3.4m development of Cams Mill, “a striking freehold site overlooking the estuary in Fareham, Hampshire”. “Considerable thought and investment have been applied to make this pub sustainable and energy efficient, with smart ventilation, heat recovery and LED lighting,” the firm said.
In the new year Fuller’s will begin the final stages of a riverside pub, One Over the Ait, situated in a new development by Kew Bridge. Four function rooms will be added to the Parcel Yard at Kings Cross Station; the pub “already boasts both the highest takings and sales of cask ale throughout the entire Fuller’s estate”.
Acquisitions
Last week Fuller’s bought the Distillers in Hammersmith for its managed estate for £3.4m. As previously announced, the company also purchased the White Hart in Southwark for £2.6m.
Emeny said: “London is definitely buoyant so the London market is very competitive for acquisitions.
“We are still looking outside London as well. It’s competitive but we are seeing some opportunities cropping up.”
Managed Pubs and Hotels: trading
Like-for-like sales in Managed Pubs and Hotels increased 7.9%, a performance the company described as “industry-leading”. Fullers’s said its “considerable investment” combined with the good summer weather resulted in revenues growing 10% to £94.4m. Operating profits before exceptional items rose by 16% to £12.6m and EBITDA grew 11% to £17.4m. Meanwhile, H1 operating margins expanded from 12.7% to 13.3% as “improvements on food margin and payroll exceeded additional costs from refurbishments, performance related bonuses and incentive schemes”.
“Food, drinks and accommodation all performed well with excellent like for like sales growth of 11.8%, 6.9% and 7.8% respectively. Our focus on fresh food over recent years is being realised and the average food spend per cover increased 5% to £10.84, accompanied by a total increase of 7% in the number of main course covers during the period.”
Managed: food
Fuller’s said it has been “investing behind the scenes” to improve the design and layout of its kitchens and fitting them with “state of the art” ovens and equipment.
The company recently introduced a recipe management system “to increase the consistency of food quality, improve efficiency and aid our chefs with menu design”. It is being rolled out to all managed pubs in H2. Emeny said it alerts chefs to changes in the pricing of ingredients.
Managed: people
Fuller’s has recently introduced a number of new initiatives for its staff. These include its internal “Service Coaches”, who “promote our values, share new ideas and provide feedback to the business”.
Managed: customer feedback
Fuller’s introduced a Net Promoter Score programme in the year to provide insight into customer advocacy. “With the explosion of online peer reviewing, we are implementing a powerful new digital tool which will assist our pubs in following up these reviews across all the different media sources and provides valuable analysis on trends,” the company said.
“The new pub websites have increased our online and social media presence. Our own beer finder tool, an industry first, informs the customer in real time where they can find their favourite Fuller’s beer, as well as what an individual pub is stocking (including rotating and guest ales).”
Managed: rooms
Accommodation like for like sales increased 7.8% during the period following “strong growth in occupancy”, despite the comparison with the Olympics. “Accommodation continues to be a focus for the business and we currently have 610 bedrooms across 12 hotels and 16 pubs with rooms.” An additional 13 rooms will be added from developments at two sites this autumn: the White Buck in Burley, which will receive a £1.8m investment to develop eight rooms and refurbish the existing eight to its boutique design; and the Pilot in Greenwich, which will go from five to 10 rooms.
Emeny said: “We started investing in boutique pub bedrooms six or seven years ago. It’s been a big growth are for us over that period of time.”
He said accommodation is a “natural fit for our business” and it would look for opportunities in its existing estate and in acquisitions.
Managed: Brewer Street and breakfasts
Fullers’ coffee brand is now in place at half of its managed pubs, Emeny revealed. “It’s a great addition to what’s a broad offer in our pubs,” he said. Emeny added that “more and more” pubs are opening for breakfasts and there’s a market for opening earlier, particularly at village pubs where there are fewer rivals for breakfast trade. The Tap on the Line at Kew was recently transformed and now opens at 8am to serve coffee and breakfasts.
Tenanted: performance
Revenue in its Tenanted Inns arm increased 2% to £16m “in a trading period characterised by great weather but fewer one-off events”. Like for like profits were 1% higher than last year after increased investment in repairs during the period. Operating profit before exceptional items remained level at £6.2m and average EBITDA per pub was also level.
Tenanted: disposals, acquisitions, transfers
As well as acquiring the White Hart in Southwark, Fuller’s sold one “non-core” outlet. Fuller’s is to sell 10 tenanted pubs that “no longer meet our criteria” and since the end of H1 it has entered an agreement to sell two of them for a total exceptional profit of £1.4m.
Meanwhile, four pubs were transferred to tenanted from managed division, and two transferred the other way. “This reflects the continuous review of our portfolio to ensure we maximise the trading potential of each individual pub.”
Emeny said: “What this shows to us is the benefit of having a tenanted estate.” He said transfers will take place between the two divisions “from time to time”.
The four that transferred to the tenanted arm were “four country pubs that really need the benefit of an entrepreneurial tenant”.
Tenanted: licensee help
Seventy percent of its tenanted pubs have now taken part in the Tenanted Service Agreement, its bespoke package of compliance services. “The new extranet website for tenants launched in April this year has been designed to be a very user friendly one‐stop shop for financial and compliance information, ordering, news and offers. Initiatives of this kind lessen the administrative burden on our tenants, enabling them to invest their time on delivering the very best customer experience.”
Beer Company: performance
Total beer and cider volumes declined 1% in H1, with own beer and cider volumes down 2% and foreign beer volumes up 3%, “which was primarily the result of the particularly hot weather in July and August, which favours lager over ale”. Revenue increased 1% to £58.3m, operating profit reduced from £4.3m to £4m and EBITDA declined 5% to £5.5m, “reflecting increased expenditure”, including £200,000 on an “extensive” renovation of the brewery yard.
Exports continue to be a “key area of growth” and in the period Fuller’s increased its distribution and rate of sale in key markets. “As a result Sweden is now our number one export market and Russia has also performed particularly well. Sixty two percent of our sales volume comes from our six largest markets and one in five barrels brewed are exported. We continue to see growing interest in British craft beers around the world, especially in Northern Europe and this is enabling us to capitalise on Fuller’s impressive reputation and wide variety of ale styles.”
Drinks: new sales team
Fuller’s has created a new sales team called Westside Drinks, “to target those stylish bars and restaurants which seek exclusive and interesting products for their bar”. “The premium positioning of Fuller’s drinks portfolio, including Frontier, Cornish Orchards and our agency beers (such as Chimay and Veltins) is well placed to satisfy this demand.” The division is led by Simon Traynor, head of sales.
Beer: Frontier
Fuller’s said it achieved its target of making Frontier, the company’s ‘new wave’ craft lager, its second highest selling premium lager. It’s in 50 Fuller’s pubs at present and 49 free trade accounts. It’s now being introduced to a further 60 locations. There are plans to launch a 330ml bottled version in the new year.
Cornish Orchards
Fuller’s acquired the cider and juice maker in June. “This summer, as expected, demand has outstripped supply for these exceptional award‐winning ciders. We have already invested in six new tanks to increase capacity by 60% in time to take the juice from this year’s harvest, made from local apples pressed on site.”
Tube
Emeny was upbeat about news that key parts of the London Underground will open for 24 hours on Fridays and Saturdays from 2015. “I think it can only be a benefit to London,” he said. “It’s long overdue and I’m delighted. I think having a Tube network that runs all night is part of the on-going modernisation of London.”
Current trading
Fuller’s said: “Good underlying momentum in the first half has continued over the last seven weeks, with growth in Managed Pubs and Hotels like for like sales of 7.8% over the 33 weeks to 16 November 2013, as we continue to invest in all aspects of our customer proposition to ensure the very best customer experience. Over the same period our Tenanted Inns like for like profits were up 2% and total beer and cider volumes have grown 1%.”
Analysts
Simon French at Panmure Gordon reiterated his Hold recommendation but increased his Target Price from 834p to 900p.
He said: “Fuller’s has announced H1 results in line with expectations reporting 8% growth to £18.1m PBT compared to our forecast of 7% growth. The interim dividend has been increased 8% to 5.8p.
“Current trading is strong with YTD LFL sales up 7.8%, implying LFL sales growth of c7.4% in the last seven weeks. We anticipate modest upgrades to FY 2014E consensus forecasts of £32.8m PBT (44.6p EPS) and have increased our forecast by £0.5m to £33.0m PBT. The stock trades on a CY 2014E adjusted EV/EBITDAR of 11.7x and yields 1.6%. We reiterate our Hold recommendation but increase our DCF-derived target price from 834p to 900p.”
French added: “Current trading is strong with YTD LFL sales up 7.8%, implying LFL sales growth of c7.4% in the last seven weeks. Tenanted LFL profit has accelerated from 1% at the HY to 2% after 33 weeks whilst Brewing total beer and cider volumes have moved from -1% at the HY to +1% after 33 weeks.
“The group continues to add pubs to the top of the estate such as The White Hart (tenanted) in Southwark and The Distillers (managed) in Hammersmith whilst disposing of pubs at the bottom including 10 in the Tenanted division. It is also reducing cost, primarily in the Brewing division which should result in a £0.5m cost saving from FY 2015E.”
Douglas Jack of Numis upgraded his pre-tax profit estimates for 2015 and 2016. He said: “H1 PBT is up 8% to £18.1m (we forecast £18.0m), driven by higher managed like-for-like sales. We are holding our 2014E forecast even though trading after 33 weeks is ahead with: managed LFL sales up 7.8% vs our 4.5% forecast; tenanted LFL profits up 2%, which is in line; and brewing volumes up 1% vs our flat full year assumption.
“We have upgraded 2015E and 2016E PBT by £0.5m to reflect cost savings.”
He pointed out that the 7.9% rise in managed like-for-likes in the first half was “driven largely by rising operational standards”.
“Food LFL sales rose 11.8% (volume +7%; spend +5%), with drink up 6.9% and accommodation up 7.8% (due to higher occupancy). LFL sales rose 7.7% over the last seven weeks and are up 7.8% after 33 weeks.
“Managed EBIT margins rose 69bps, or by 133bps before a £0.6m increase in P&L repair costs. The increase in margins is attributable to higher LFL sales, improvements in food gross margins and labour efficiency, offset by additional costs from refurbishments, performance-related bonuses and incentive schemes.”
On the tenanted estate, Jack said: “H1 LFL profits were up 1% in despite a £0.2m increase in external property repair costs (this increase is equivalent to 3% of H1 profits). LFL profits have accelerated in early H2 to be up 2% after 33 weeks. Fuller’s plans to sell 10 tenanted pubs, of which the company has already agreed to sell two for £2.0m (with a £1.4m exceptional profit).
“Brewing volumes fell 1% in H1 due to hot weather, particularly in July and August, which favours lager over ale. Exports, which account for c.20% of sales volumes, are growing strongly (they have doubled in five years). Fuller’s exports to 68 countries, yet 62% of export volumes are to just six countries, which implies that there is big potential to drive higher volumes through this channel, if the company chooses to.”
He added: “Overall, we believe forecasts have further upgrade risk, although the greatest potential upside would derive from faster expansion, which the company has brand, management and financial firepower to exploit. The company’s low gearing, high asset quality and leading track record in the sub-sector justifies the premium rating in our view.”
