Daniel Thwaites, the Lancashire brewer and pub operator, has reported a pre-tax loss of £8.9m in the year to 31 March despite an 8.3% increase in turnover after incurring an exceptional items bill of £15.6m, including £11.9m relating to interest rate swaps. Below, M&C Report looks at the headline figures, interest rate swaps, the tax burden, new brewery options, microbrewer partnerships and acquisitions. Pre-tax profit before exceptional items fell 4.3% to £6.7m. Turnover reached £137.2m and operating profit before exceptionals increased 1% to £12.4m. Turnover in the beer and pubs division increased by 8.7% to £98.6m due to a 14% increase in its free trade business as a result of its acquisition of rival Hydes’ free trade arm, alongside organic growth, an 18% rise in sales to national pub companies and a 2% uplift in its pub estate. Turnover in the Hotels and Inns division increased 7.2%, with hotels at +4% and Inns at +20%. Chief executive Rick Bailey told M&C Report: “This exceptional items bill aside, the underlying trading of the business is very robust. We have these growth plans and we are very clear about what these are.” Thwaites, which operates c.350 pubs, revealed that it’s in the process of renewing its banking facilities of £75m including debt. The process is at a “very advanced stage” and is expected to be completed “in the next couple of weeks”, said Bailey. The exceptional items bill also includes a £3.7m impairment charge following a property review - the overall book value of its assets fell by £14.7m (5%) to £274m. Meanwhile, Thwaites said it could take “up to four years” to move to a new brewery. It’s currently in the feasibility stage of the search for a new location and plans to sell its existing site in Blackburn to Sainsbury’s. Thwaites said: “We are pleased with the results we have achieved in the year ended 31 March 2012, in what continues to be an extremely challenging economic environment. “The current year has started well, with results in line with expectations, and we are cautiously optimistic about the impact of the various national events over this summer.” Chairman Ann Yerburgh said: “Many of our pub customers are suffering declining real incomes which means that discretionary spend remains under pressure. As a result we are finding that they are becoming more event and weather sensitive. In the hotels our corporate customers are continuing to control costs carefully. “Whilst we remain positive about our prospects over the medium term and the actions we are taking to underpin those, the on-going recession and continuing political uncertainty in Europe are likely to ensure that the trading environment will be tough in the coming year.” Earnings per share after exceptional items fell from 8.6p to a loss per share of 13p. Before exceptional items, EPS fell from 8.6p to 6.8p. An interim dividend of 1.1p has been paid and the board has recommended a final dividend of 3.36p, making a total of 4.46p for 2012, unchanged from the previous year. Interest rate swaps Thwaites said it’s committed to paying £75m of fixed interest rate swaps over 22 years, but in the past financial year the figure increased to £95m, with interest of £2.9m paid in the year. Thwaites said: “Due to the continued turmoil in the financial markets and the adverse impact upon the valuation of our swap contracts, we have undertaken a review of our longer term funding requirements, including the costs of the new brewery and have taken the decision to pay off swap contracts that are not highly likely to be used against future borrowings. We have therefore made a provision for the termination costs of £50m of our swap contracts for £11.9m before tax, which will be paid after the year end.” Bailey told M&C Report: “We have dealt with this now rather than have it overshadow the company going forward.” He said Thwaites took out these swaps in 2006. “The world was a very different place, pre-financial crisis. We were hedging our exposure. One of the consequences of the financial crisis is that interest rates have gone the other way.” Tax burden Thwaites paid £52m in tax last year, equivalent to 38% of its turnover, in the form of beer duty, VAT, corporation tax, PAYE and National Insurance. Yerburgh said: “Our industry continues to be impacted by government intervention in the form of increased regulation and taxes. The duty escalator introduced by the Labour Government has been supported by the current Coalition Government and is creating unsustainable pressures and causing long term damage to the pub industry. We are lobbying our politicians to do away with the duty escalator as well as supporting action for reduced VAT in the pub trade.” Property Thwaites undertook a revaluation of 20% of its properties and an impairment review of the rest of the estate in the period. This led to a reduction in the total value of its property portfolio of £14.7m, of which £11m was a reduction in the revaluation reserve and £3.7m was charged to the profit and loss account as an exceptional item. The 11 pubs sold in the period went for £4m, generating a loss against book value of £200,000. The acquisition of three pubs and an inn cost £3.2m. Tenanted: performance Year-on-year beer volumes in the estate fell 2%, against a decline of 9% in the previous year. Thwaites said this demonstrates the results of its investment programme and support packages. Its WayInn revenue sharing agreement, launched last summer, has been rolled out to 10 pubs. Tenanted: acquisitions and disposals The company sold 11 bottom-end tenanted sites, and bought three, a process that’s set to continue this year. “We will continue to churn the tenanted estate. We will sell under-performing pubs,” said Bailey. “We hope to make some acquisitions in the tenanted estate as well. We are actively in discussions to buy some pubs.” The three sites bought in the period were the Anglers in Haverthwaite and the Kings Arms in Burton on Kendal, both in Cumbria, and the Malt Shovel in Barkby, Leicestershire. “Each of these pubs has been integrated successfully into our pub estate and is trading well,” the firm said. Tenanted: investments Thwaites completed 85 development projects in the year at a cost of £3.8m and Bailey said the firm is targeting 70 schemes in the current year. Returns on investments are ahead of its “hurdle rate” of 20%. New signage and branding has been introduced to 40% if its estate and this process is to be completed over the next three years. Tenanted: microbrewer partnership At the start of the year Thwaites signed its first pub operating partnership with a microbrewery, Wigan-based Prospect Brewery, that lets the smaller producer stock its own beers free-of-tie. Bailey said there are a “number of discussions on-going” with other small brewers about similar schemes. Hotels and Inns: acquisitions and investments “We are actively continuing to seek suitable properties to acquire and develop into our inns estate across a broad geographic area,” Thwaites said. The company bought its first site under its inns division Thwaites Inns of Character, which was formed in 2009, in the year with the acquisition of the Fleece in Circencester last April. It underwent a £1.1m refurbishment and was awarded the prestigious AA 5* status. Bailey said: “We’ve got plans to add two or three more over the next year or so - if we could buy more than that we would.” Hotels and Inns: disposals and transfers Thwaites transferred the Golden Lion in Settle from the pub estate back into the division, where it received a £0.5m investment - the company plans to transfer two more sites to the inns estate following refurbishments during 2012. In January Thwaites sold the Fernhurst and Star Lodge site in Blackburn as it “did not fit easily into Inns of Character”. Shire Hotels and Spas Sales at the six-strong division increased 4%, although Thwaites said: “It has been clearly evident that the rate of economic recovery has been faster in the south than the north of England.” Thwaites said: “With business confidence remaining at a low level the residential conference market has continued to be weak, therefore we have focused on the leisure sectors to improve room occupancy and have repositioned our food and drink offerings. We have developed our weddings business and seen a steady increase in bookings. At The Kettering Park Hotel and Spa we have constructed a new al fresco wedding feature which is proving very popular.” Spa membership increased by over 6,000 after Thwaites introduced a package of different membership options. Meanwhile, plans for 2012 include the launch of a revised restaurant offering, the implementation of new customer-facing IT systems and continued refurbishment of bedrooms. New brewery Bailey said a feasibility study is being undertaken at a number of sites. Thwaites said: “We expect this medium term project to take up to four years and that reinvestment in our brewing activities will underpin the long term growth in profitability of our Beer Company.” Bailey said: “In the next year we would like to know where we are going.” Sainsbury’s has agreed to buy its existing site in Blackburn, subject to planning permission, for a new supermarket. Beer performance Cask ale volumes in its Beer Company division increased 20%, with the Wainwright brand leading the growth with volumes up 80%. Plans for 2012 include bringing back its “quarterly favourites” range. Its Signature Ale range, first introduced in 2011, has been launched for the current year. This year the range was introduced in its small craft brewery called Crafty Dan, which was commissioned last November. Hydes freetrade acquisition Thwaites bought the business from Hydes in January, and the company said the acquisition lifted Thwaites’ free trade volumes by 11% year-on-year. “The sales and technical services team transferred across to us together with their customer accounts which have been successfully integrated into our existing free trade business.” Cashflow and financing Net borrowing increased by £5m to £45m at 31 March, which Yerburgh said was “well within our banking facilities”. Thwaites’ pension scheme deficit stood at £18.2m at the period end, up £8.5m in one year. Contributions to the pension scheme were £2.5m (2011: £2.7m). The company is in the process of renewing its existing bank facilities of £30m, or £75m including long-term debt. “These total facilities of £75m should be sufficient to meet the short term needs of the group, although further facilities will be required once the plans for the new brewery are finalised.”

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