M&C Report takes a closer look at the H1 results from Greene King, the brewer and pub operator: Managed growth: sites and jobs Thirty five sites were added to the managed division - 40 acquired or transferred and five disposed of - with 950 sites at the period end. Greene King said growth in the division - revenue increased 11.8% to £367.5m, with ebitda per site up 3.7% - was due to three factors: growing organic sales by focusing on value, service and quality; maintaining investment in existing brands such as Hungry Horse and Old English Inns and investing in food provision and amenity in its Local Pubs; acquiring additional sites and transferring outlets from Pub Partners. Greene King expects to add 3,000 jobs over the next three years in its managed pubs as the estate grows nears the target of 1,100 sites. Managed: make-up The Retail division currently makes up 40% of the estate, with leading brands being Hungry Horse (166 sites), Old Englsih Inns (114), Loch Lyne Restaurants (42) and Eating Inn (37). The other sites, mainly in the Local Pubs arm, fit into six segments including premium, mainstream, community and high street. The company said it has focused on having clearer and more consistent Greene King branding across its sites. Managed: food Food now represents 40% of total sales, and chief executive Rooney Anand said he expects the figure to grow to 45% in the “mid term”. Overall, around 50% of Greene King’s revenue is currently food-driven; Anand said the proportion could rise to 65-70%. Total food sales increased 16.3 in the period%, with like-for-likes up 4.9%. The biggest rise, 30%, was in the Local Pubs division due to the acquisition of Realpubs and Capital Pub Company, along with greater investment in value offers and kitchen facilities. “Most of our food sales growth is cover growth and we will continue to grow sales through covers going forward,” the firm said. “We are increasing freshness and upgrading quality every year and we are using our increasing scale to mitigate inflationary cost pressures each year.” An example of menu innovation includes introducing hand-pressed burgers and homemade pies at Eating Inns. Annualised food sales are now more than £300m. Managed: drinks World beer volumes grew c.40% in the Local Pubs sites, where premium draught lager and cider ranges were also extended. Meanwhile, the illy coffee offer has now been rolled out to almost 700 sites. Managed: innovations and developments Key innovations in the period include extending the January lunch time meal deal to the rest of the year in mainstream and premium sites, a ‘two courses for £7.99’ offer at Eating Inn, plus more entry-point dishes and more emphasis on value in Hungry Horse. Innovations in service include introducing a “service transformation programme” into Old English Inns, which has led to complaints falling 13% and complements up 120%, plus lower staff turnover. The scheme is to be rolled to other retail brands. Scores in Greene King’s internal customer service programme have hit an all-time high, the firm said, helped by more stable teams and better team incentivisation schemes. Managed: recruitment and apprenticeships The retail manager recruitment programme has led to turnover among managers in the Local Pubs falling 12 percentage points and the average length of vacancies in Destination Pubs falling from around 40 to 15 days in the past 12 months. Meanwhile, internal appointment rate increased 57% across the managed division. There are currently more than 800 employees on the Discovery Apprenticeships scheme, with retention rates higher than those not on the scheme. Managed: Cloverleaf, Realpubs and Capital Two further sites were added to the Cloverleaf business, taking it to 13 outlets. Like-for-like sales growth in Cloverleaf is up 5% and “comfortably beating its target profit”. Greene King plans to open a further nine Cloverleaf sites by April 2013. Like-for-like sales growth in Realpubs was up 3%. Initial trading at the first Greene King conversion to the format, the Maynard Arms in Crouch End, has been “encouraging”, the firm said. Capital Pub Company, the 33-string group acquired in September, saw like-for-like sales growth up 12%. “We will start capturing the anticipated £2m of synergies in the second half of this year, with the full benefit by April 2013,” the company said. Estate investment, acquisitions and disposals Investment in the existing estate increased to £37.6m, up from £28.6m in H1 2011, with 194 projects completed (H12011: 170). In addition to the £96m acquisition of the 33-strong Capital Pub Company, Greene King spent a further £7.1m in single-site acquisitions and £9.9m on previously acquired sites. In total 47 sites were disposed of, generating £12.8m against a book value of £12.9m. Pub Partners: innovation Greene King aims to build an estate of 300 sites under new agreements Local Hero, Love Your Local and Business Builder - currently 193 sites operate under such agreements. The sites are located in “more competitive locations” and require more overhead support. Pub Partners: franchises Greene King aims to have 40 sites operating on the Meet & Eat franchise agreement at the year end. Up to 100 sites could eventually operate under the agreement, the firm said. Fourteen outlets were operating under Meet & Eat, launched at the British Franchise Association annual exhibition in September, at the end of H1. Average turnover per site increased from £3.2k to £8.3k, Greene King said, and annual earnings for licensees who hit targets could be £40-45k. Pub Partners: recruitment Licensee turnover has fallen 18% this year, with all new licensees having to attend three mandatory training courses and the BII’s Pre-Entry Awareness Training course. Greene King’s on-line recruitment programme now generates more than 50% of all new licensees. Pub Partners: disposals At the end of H1 there were 1,493 sites, down from 1,700 three years ago. The disposals helped improve the overall quality of the estate, so ebitda per pub increased 3.3%. Roughly half of the disposals are for alternative use, with the other half remaining as pubs - a “high proportion” of those are being bought by existing tenants and lessees, Anand said. Greene King plans to dispose c.50 sites in H2 and reach 1,200 by 2014. The segment earmarked for disposal currently comprises around 300 sites. Brewing & Brands: categories and performance Overall volumes were up 2% in a UK ale market down 6%, Greene King said. Revenues increased 8.5% to £83.1m with operating profit up 4.5% to £16.3m. The company pointed to data from CGA and Nielsen to show that owns the market leading brands in cask ale (Greene King IPA), premium ale (Old Speckled Hen), premium cask ale (Abbot Ale) and in the Scottish ale sector (Belhaven Best). Off-trade volumes of IPA grew 14%, with the company citing its sponsorship with England rugby and the Rugby World Cup this Autumn. Old Speckled Hen sales by value grew 7% to £35m. Volumes of Belhaven Best increased 7%. Brewing & Brands: new launches and investments The Old Golden Hen brand, a variation of Old Speckled Hen, has already gained a listing with Spirit Pub Company since its launch in August. Belhaven IPA was launched in the Scottish market and Greene King credited it with increasing cask ale sales by 400%. Tolly English Ale, its 2.8% ABV brand was launched in the managed estate to coincide with the reduced tax rate for lower ABV beers. The company said that during the trial, overall cask sales increased by 5% when it was put on the bar by encouraging new drinking occasions such as lunchtimes and early evening. Takeup of the Greene King IPA Revolution font, offering drinkers the option of smooth and creamy or clean and crisp, increased more than 50% to 903. Two new font styles were introduced for different segments of the Local Pubs estate. Greene King expects investment in core brand marketing to rise 7.1%. Other changes in the period include increase cold storage capacity at the brewery by 14,000 casks. Pensions Net pension liabilities was £56.7m against £45.7m under the previous balance sheet. Greene King said cash contributions of £10.6m are being made available to address the deficit; the cash can be “comfortably funded” from its free cash flow. Current trading In the six weeks since 16 October, like-for-like sales in the managed estate increased 4.4%, with food up 6%. After 28 weeks, ebitda per pub in Pub Partners was “comfortably ahead of last year”, while core own-brewed volumes were up 1.8% after 30 weeks of the year. Christmas bookings have increased 12% on last year. Outlook The company said: “Looking ahead, weak consumer confidence and discretionary spending power will ensure another tough trading environment in 2012. However, our focus on delivering excellent value, service and quality to our customers, even more critical in an uncertain consumer environment, continues to deliver growth. We therefore believe we can continue to grow the business through maintaining our market outperformance and our investment in our Retail expansion strategy to deliver another record financial year.” Government and pubcos Anand said Greene King had separate meetings with the Government prior to its announcement that it won’t be implementing a statutory code on the pubco/tenant relationship, along with separate meetings with other brewer/pub operators. He said Greene King would adhere to the agreement with the Government “constructively and wholeheartedly”. 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. Anand criticised other operators who failed to stick to the previous timetable for reforming codes of practices, saying they “fuelled the fire that Fair Pint and other detractors who have a different opinion to ours”. Shares Company shares fell 3.52% to 465.7p on Thursday. Analysts’ reaction Geof Collyer of Deutsche Bank issued a Buy recommendation at a target price of 635p and said: “We have maintained our top of the range forecasts. The outlook statement maintains the CEO’s positive view on company prospects as well as his gloomy view of the state of the UK economy. “More self help here moving more of the profits into areas which management can directly control and influence consumer behaviour, and all divisions gaining share in tough markets.” Issuing a Hold recommendation, Paul Hickman at Peel Hunt said: “Although we remain cautious on consumer demand in calendar 2012, these results show Greene King’s strong place in its market. The company is well placed to continue winning market share, boosted by acquisitions despite headwinds. “The shares are undemandingly priced at 8.8x FY12E, should appreciate modestly towards our TP, and are underpinned by a 5% yield.”