M&C Report takes a closer look at the full-year results for Shepherd Neame, the Kent-based brewer and pub operator. Disposals, acquisitions and impairment Shepherd Neame has now disposed of 28 of the 35 community pubs that it plans to get rid of that “no longer fitted our requirements”. Eight were sold in the year to 25 June 2011, and two since then. At the year end the company operated 359 pubs and hotels, a net reduction of six. Of the 359, 322 are freehold, with 44 managed (2010: 45) and 315 tenanted or leased (2010: 320). It bought two pubs for its tenanted estate, the Cock in Boughton Monchelsea and the Parrot in Canterbury, for a total of £3.4m. In the period Shepherd Neame incurred an impairment charge of £1.9m on 13 pubs following a review of its sites. Cost hikes Cereal costs increased a huge 30% in the past year, said Neame. “A dry early summer, shortages of supply and various other factors have put wheat and therefore barley prices up.” There have also been “very significant” costs rises in energy and glass, along with the duty increase. Food development Shepherd Neame attributed the strong food sales in its managed arm - +11.1% compared to +4% last year - to improved menu design, menu engineering, recipe control and food presentation. Neame said: “We’ve focused a bit on the plate and how it’s presented. We’ve done a lot of changes in descriptions and in some cases invested in crockery, cutlery and place setting, and put in improvements in the quality and presentation of the dish itself. We haven’t given it this attention to detail in the past.” Last year the company appointed a head development chef for the first time. Neame said the rise in accommodation sales is also helping to boost sales of food. Hotels Accommodation sales soared in the period, with like-for-like sales in the managed estate up 9.7% from almost being almost static (+0.1%) in the previous year. The increase came despite adding no new hotels in the period. Revenue per available room increased 9.3% to £37.73 (2010: £34.53). Neame put the increase partly down to developments with on-line bookings. At the year end, the company operated 180 letting rooms in the managed arm and 204 in the tenanted estate. Since then, the firm has added two hotels: the Fayreness Hotel in Kingsgate (29 rooms, price: £4m) and the Bell Hotel in Sandwich (37 rooms, price: £3.6m). On the prospect of adding more hotels, Neame said: “The number of hotels of the quality we’ve acquired is very very few but clearly if the opportunity came we will be looking for them. I definitely don’t see a flood of these things, albeit we do have one or two in our site but wouldn’t expect anything to happen in the next year or so.” There are also “upgrade opportunities” at the hotels, Neame added. Tenancy incentive At the year end, the company introduced an incentive scheme in its tenanted estate, which sees discounts and rebates available for exceeding targets. Chief executive Jonathan Neame declined to give figures, saying the discounts and rebates “vary enormously”, but stated that “the benefits could be material”. Neame said the company can see “a very good opportunity” in its tenanted estate but “the offer needs to continue evolving and investment needs to go in”. Investments Neame said the company plans to spend more on CAPEX this year than in the last, when it undertook 81 small projects, of which 67 were external decoration or major repairs. An average spend of around £50k has been earmarked for projects in this coming year. CAPEX in the year to 25 June 2011 was £3.1m, against £3.8m in the previous year. Duty Shepherd Neame paid £28.5m in excise duty on its own-brewed beers in 2011, up from £19.5m in 2007. It means duty now accounts for 23.5% of the company’s total annual turnover. The firm said this difficult trading environment “is not helped by the Government continuing to put up excise duty by 2% above inflation every year. This is a highly damaging tax that reduces the potential for investment and growth and is a misguided policy”. Holsten and world beer The company is to cease production of Holsten Export and is switching its attention to world beers. “Since the year end we have concluded an agreement with the Boston Beer Company to jointly develop the market for Samuel Adams Boston lager in the UK and certain European markets,” said Neame. “We are also pleased that Asahi breweries have agreed to increase their level of direct marketing investment in the UK for a further five years to supplement our own investment and help build on the success of this brand.” Beer sales The company pointed out that the UK beer market fell 7.1% for the year to June 2011, and 17.1% between June 2007 and June 2011, or 25% for the on-trade. Shepherd Neame’s own beer volumes over the four year period increased 8.1%. Brands: performance For the year to 25 June 2011, the company attributed the success of Asahi Super Dry, which saw volumes rise 16.8%, to targeting “high-profile” on-trade accounts in London and other key cities. “We have gained a very good draught distribution and a high profile for the brand.” Spitfire volume growth (up 2.3%) has been driven by an uplift in sales to groceries, with national on-trade sales “less good as a result of the decline in the overall market and increased competition”. However, in the free on-trade, “where we have direct relationships with customers in our local region”, cask Spitfire sales grew 16.5%. Bishops Finger volumes grew 3.9%. Brands: marketing In the past year, Shepherd Neame appointed two brand managers, three digital marketing executives and established an in-house communications team. “Whilst this is an increase in overheads this team will enable us to be more effective at driving promotional activity and awareness of our beers and our pubs and maximise the benefit of the investment in our new website,” said Neame. Brewery development Shepherd Neame pointed to the improved efficiencies at its bottling line, which has been developed as part of the overall programme of modernisation of the brewery. The company said: “Our bottling line is now delivering 41% more output since commissioning in 2009 with higher quality of packaging and product. Our plant investments, generally, have also enabled us to achieve savings in utilities in an inflationary environment. We now have a modern brewery and logistics infrastructure. We are currently working on an integrated business planning process to develop our financial and demand forecasting and enable more new product development.” Loan The company said it has repaid and cancelled £5m of the £15m five year term loan taken out in 2009, which is due to mature in May 2014. “This was paid down in two tranches, £3.75m in August 2010 and £1.25m in May 2011. We retain substantial headroom on our committed facilities, of £20.1m at the year end.” MPs Neame was critical of last month’s damning report from the Business, Innovation & Skills Committee (BISC). He said the previous report from the Committee lead to “positive behaviour change throughout the industry”, but the recent one contained a “disproportionate” amount of “venom and vitriol” and, crucially for Shepherd Neame, made “no distinction” between pubco leases and brewery tenancies. He feared that an independent pubco code adjudicator, recommended by BISC, would mean “more costs and more uncertainty” for both licensee and landlord. Neame added: “I personally have no particular problem with the concept of an independent adjudicator because I would hope we are a good guy, and if not, I would expect to be called to account.”