Shepherd Neame
Interim results for the 26 weeks to 24 December 2022
Shepherd Neame, Britain’s Oldest Brewer and owner and operator of 301 high quality pubs in Kent and the Southeast, today announces results for the 26 weeks ended 24 December 2022.
The period under review has seen continuing strong consumer demand, but is dominated by significant inflationary pressures which have impacted margins, with Brewing and Brands remaining challenging. Our investment programme has now resumed , with many projects that are essential for the future development of the Company underway.
This time last year, the Board restored the dividend for the first time post-pandemic and have increased it again.
Record revenue in H1, in spite of economic headwinds
· Revenue was £85.3m (H1 2022: £78.7m; H1 20201 restated: £79.0m), an increase of +8.4% vs H1 2022
· Statutory profit before tax was £5.5m (H1 2022: £5.4m; H1 2020 1 restated: £5.3m), an increase of +1.8% vs H1 2022
· Underlying profit before tax2 was £3.5m (H1 2022: £3.0m; H1 2020 1 restated: £6.0m), an increase of +15.5% vs H1 2022
· Cashflow has remained robust. Net debt, excluding lease liabilities3, is level at £82.8m (H1 2022: £82.4m; H1 2020 1 restated: £85.4m)
· Basic earnings per share was 28.9p (H1 2022: 28.9p; H1 2020 1 restated: 27.9p)
· Underlying basic earnings per share4 was 18.7p (H1 2022: 15.9p; H1 2020 1 restated: 32.4p)
· Net assets per share5 were £12.12 (H1 2022: £11.76; H1 2020 1 restated: £14.06)
· Interim dividend of 4.00p per share declared (H1 2022: 3.50p; H1 2020 1 restated: nil), an increase of +14.3% vs H1 2022
Operational performance
| PerformanceH1 2023 vs H1 2022 | PerformanceH1 2023 vs H1 2020 1 | |
| Retail like-for-like sales 6 | +11.9% | +1.2% |
| Like-for-like tenanted income7 | +7.1% | +1.5% |
| Total beer volume8 | -0.9% | +4.7% |
| Own beer volume9 | +12.7% | +8.2% |
· Retail Pubs and Hotels (67 pubs) revenue grew by +18.0%
· Total retail sales up +18.0% to £36.9m (H1 2022: £31.3m)
· Retail like-for-like sales 6 were +11.9% vs H1 2022 and +1.2% vs H1 2020 1
· Retail like-for-like sales 6 inside the M25 were up +39.1%, outside the M25 +3.4% vs H1 2022, reflecting increased footfall in London as people return to their offices
· Retail sales growth mainly driven by drink sales with like-for-like sales up +27.4% vs H1 2022
· Food like-for-like sales reduced by -3.3% vs H1 2022
· Accommodation like-for-like sales down -8.6% vs H1 2022. RevPAR was up +2.6% vs H1 2022 at £90
· Divisional operating profit was up +2.4% at £4.7m (H1 2022: £4.6m)
· Tenanted Pubs (229 pubs) remained resilient during the period
· Like-for-like tenanted pub income7 was +7.1% vs H1 2022 and +1.5% vs H1 2020 1
· Divisional revenue was £17.4m (H1 2022: £16.4m) and operating profit was £6.9m (H1 2022: £5.6m)
· Brewing and Brands: sales maintained, but margins impacted by exceptional inflationary pressures
· Total beer volumes8 were down -0.9% vs H1 2022 and up +4.7% vs H1 2020 1
· Own beer volumes9 were up +12.7% vs H1 2022 and +8.2% vs H1 2020 1
· Divisional revenue maintained at £30.3m (H1 2022: £30.6m), with an operating loss of £0.4m (H1 2022: £0.0m)
New long term financing put in place
· At the end of February 2023, we had total committed facilities of £114.3m and headroom of £32.8m. 69% of our committed facilities are at a fixed rate, with all debt medium and long term
Current trading and outlook
· For the 12 weeks to 18 March, retail like-for-like sales was +12.8% vs 202210 and +13.0% vs 202011
· Like-for-like tenanted pub income for the nine weeks to 25 February was +4.9% vs 202210 and +1.7% vs 202011
· Total beer volume for the 12 weeks to 18 March was -5.5% vs 202210 and -6.5% vs 202011. Own beer volume was -3.0% vs 202210 and -1.8% vs 202011
· Fundamentals of the business remain strong and the business is in good shape. Demand is encouraging but we expect further cost inflation in the second half and into next financial year.
· Measures announced in the budget to reduce alcohol duty on beer in pubs, are most welcome.
Jonathan Neame, CEO of Shepherd Neame, said:
“We have an excellent pub estate with considerable potential, well established brands, a loyal customer base, and a high profile within the individual communities we serve. All these factors will stand us in good stead as the cost of living crisis eases and the economy returns to growth.”
22 March 2023
INTERIM STATEMENT
OVERVIEW
The Company has made further good progress in this period, in spite of significant economic headwinds.
Our revenue is now at record level for the first half of the year. Net debt, excluding lease liabilities, is level year on year, even after investment in four new pubs, and the interim dividend is increased, albeit not yet returned to pre-pandemic levels.
This is our first half-year period since 2019 without any COVID-19 related restrictions. Consumer spending overall has remained strong. A long hot summer and a mild autumn helped our coastal sites and there has been a progressive return to offices within the City of London. Christmas trading was generally good, although we did not see quite as many large parties as we would have expected pre-pandemic, and the train strikes had a significant impact on what would have been the busiest week.
Profit levels are not yet back to pre-pandemic levels. Overall, our tenanted pubs have been strong, retail sales most encouraging, but with margins impacted by high costs, and brewing and brands remains challenging.
The inflationary surge in the wider economy has impacted our cost base in many areas, with huge increases in food, energy, glass, brewing raw materials, packaging waste and logistics. The root cause of these increases is the higher cost of energy and energy-intensive products. Inflation in the sector has generally been significantly higher than the headline rate of inflation.
In the brewery, we are fully fixed on gas and electricity prices through to September 2024; while in the retail pubs we are fully fixed through to March 2023, and fixed on two-thirds of our anticipated requirement through to September 2024.
The supply chain itself has become slightly more resilient and we have been able to source raw materials at all times. We have contracts in place in the brewery and retail pubs that protect us from further inflation from direct utility purchases, during the forthcoming year.
This period compares with the prior year during which we benefited from lower rates of VAT, set at 12.5% until March 2022. We value that benefit at £1.7m in the first half of last year. We also received business and furlough grants of £421k during that period. All Government support has now ceased except for the Energy Bills Relief Scheme and ongoing support for business rates, for some of our tenanted pubs.
We are optimistic that we are past peak inflation, and so we expect to see many, but not all, of our raw material and input costs start to stabilise in the second half. We will, however, see a further step-up in wage costs, as the National Minimum Wage increases by 9.7% in April. We pay ahead of the National Minimum Wage, but this increase will have a consequential impact across all employee grades.
Price increases have been necessary, and the impact of these will come through in the second half. We are mindful that our customers face similar cost pressures in their own businesses and consumers can only afford so much at a time when mortgages and energy costs are rising.
During the pandemic, we restrained investment and projects, but these have now resumed. We are re-commencing many projects that are essential for the future development of the Company.
We have invested £0.5m year to date in these projects and will carry out further projects in the second half. We have built up our People Team to support learning and development to develop our own talent, improve retention levels and focus on customer service. We have refocused our food team to support the introduction of a menu refresh across the business in the second half; we have re-designed our pub websites; we have strengthened our property and health and safety teams and restored our IT team to full complement.
FINANCIAL RESULTS
Revenue was £85.3m (H1 2022: £78.7m; H1 2020¹: £79.0m), an increase of +8.4% on the prior year.
Underlying operating profit was £6.3m (H1 2022: £5.9m; H1 2020¹: £8.5m), an increase of +5.6%.
Statutory profit before tax was £5.5m (H1 2022: £5.4m; H1 2020¹: £5.3m), an increase of +1.8%.
Underlying profit before tax was £3.5m (H1 2022: £3.0m; H1 2020¹: £6.0m), an increase of +15.5%.
Basic earnings per share was 28.9p (H1 2022: 28.9p; H1 2020¹: 27.9p).
Underlying basic earnings per share was 18.7p (H1 2022: 15.9p; H1 2020¹: 32.4p).
Net assets per share were £12.12 (H1 2022: £11.76; H1 2020¹: £14.06).
DIVIDEND
This time last year the Board restored the dividend for the first time post-pandemic. We feel sufficiently confident to increase it again in spite of the economic headwinds.
The Board is declaring an interim dividend of 4.00p per share (H1 2022: 3.50p; H1 2020¹: nil), an increase of +14.3%.
The dividend will be paid on 17 April 2023 to those shareholders on the register as at 31 March 2023.
CAPITAL EXPENDITURE, NET DEBT AND CASH FLOW
Cashflow has remained robust. During the period, we have achieved underlying EBITDA (earnings before interest, tax, depreciation and amortisation) of £11.4m (H1 2022: £11.3m; H1 2020¹: £14.4m), an increase of +0.5%.
Statutory net debt fell to £138.9m from £139.8m in the prior year. Net debt, excluding lease liabilities, was level at £82.8m (H1 2022: £82.4m; H1 2020¹: £85.4m).
The robust cash and net debt position have supported an increase in capital expenditure, as we restore more normalised levels of investment. In the first half, we invested £10.7m (H1 2022: £2.7m; H1 2020¹: £8.1m). The larger part of this investment was the acquisition of four retail pubs in July 2022, as previously announced, for £6.7m.
FINANCING
The Company has put in place a new long-term financing facility. This provides certainty of funds to the Company, a reduction in exposure to interest rate rises and an improved debt maturity profile.
Specifically, we now have a four-year revolving credit facility of £40m that matures in 2026, and a second private placement tranche of £20m with BAE Systems Pension Funds Investment Management Ltd at a fixed interest rate of 5.47% for 10 years. This is in addition to the 20 year private placement arranged with the same party in October 2018 at a fixed interest rate of 3.99%. The new facilities sit alongside the existing term loan which remains in place until December 2026, with the repayment of £1.6m payable on 31 December each year.
At the end of February, we had total committed facilities of £114.3m. 69% of our committed facilities are at a fixed rate, with all debt medium and long term. This provides a financing platform from which to take advantage of any opportunities that may arise in the next few years.
TENANTED AND RETAIL PUB OPERATIONS
As at 24 December 2022, we owned 301 pubs (June 2022: 300), of which 229 (June 2022: 231) are tenanted or leased, 67 (June 2022: 63) are retail pubs and five (June 2022: six) operated on a free-of-tie basis as investment properties. 85% of our pubs are owned freehold.
During the period we have transferred one tenanted pub to retail, and one retail pub to investment property. We have sold three pubs and have acquired four. These disposals have realised £0.9m of net proceeds (H1 2022: £8.0m).
Since the half year, we have recommenced major capital projects. The Crown at Chislehurst is underway and will complete by Easter, and the Tom Cribb near Haymarket will commence at the year end. We plan to undertake a transformational development at the Duke of Cumberland in Whitstable in the summer. We have carried out minor schemes at the Jamaica Winehouse, London, the Minnis Bay, Birchington and the garden at the Botany Bay, Kingsgate.
We are building a pipeline of substantial projects to carry out over the next three years as we transfer some pubs from tenancy and look to exploit the full potential of our estate, in line with our medium term goal to have 100 retail sites. In the second half we will transfer five pubs from tenanted to retail. We expect to incur transitional costs of £0.5m as these sites await transformational development.
RETAIL PUBS AND HOTELS
For the 26 weeks to 24 December 2022, our retail pubs achieved encouraging like-for-like sales growth on the prior year and on pre-pandemic levels, at +11.9% vs H1 2022 and +1.2% vs H1 2020¹. All individual months were in growth on the prior year, with the strongest growth in July and December, since these periods were affected by COVID-19 restrictions in the prior year. However, December was below expectations as we lost an estimate of £250k of sales due to the rail strikes.
Within the M25, like-for-like sales are +39.1% vs H1 2022 and -5.6% vs H1 2020¹. Outside the M25, like-for-like sales are +3.4% vs H1 2022 and +4.4% vs H1 2020¹.
This growth has been mainly driven by drinks sales, with like-for-like sales +27.4% vs H1 2022, driven by the recovery of our London pubs as people return to their offices. Like-for-like food sales were -3.3% vs H1 2022 and like-for-like accommodation sales -8.6% vs H1 2022. Food and accommodation benefited from VAT reduction in the prior year to 12.5%, which has now normalised to 20%.
Whilst revenue on food and drink is up on a like-for-like basis on pre-pandemic levels, the volume of meals and pints sold remains below. Rooms sold are +6.7% up.
At 24 December 2022, we operated 232 rooms in our retail estate, 14 rooms more than at the year-end. Occupancy has been strong in this half at 82% (H1 2022: 77%) and RevPAR excellent at £90 (H1 2022: £84). The current economic conditions indicate that 2023 will be another staycation year.
Divisional revenue in Retail Pubs was up +18.0% at £36.9m (H1 2022: £31.3m), divisional operating profit was up +2.4% at £4.7m (H1 2022: 4.6m).
TENANTED PUBS
Trade in our tenanted pubs has remained resilient during this period. As in our retail pubs, most have benefited from the warm summer weather, and have seen demand remain robust during the autumn. Some pubs however have experienced material increases in their energy bills, depending on the specific terms of their utilities contract. The Government Energy Bills Relief Scheme has been most welcome but is currently due to expire at the end of March. Unless the lower market rate for energy starts to feed through to customers, this may cause a substantial challenge for individual licensees. Measures announced in the budget to reduce alcohol duty on beer in pubs are most welcome.
Like-for-like net pub income was +7.1% vs H1 2022 and +1.5% vs H1 2020¹.
Divisional revenue in Tenanted Pubs was £17.4m (H1 2022: £16.4m) and divisional operating profit was £6.9m (H1 2022: £5.6m).
BREWING AND BRANDS
Total beer volume was -0.9% vs H1 2022 and +4.7% vs H1 2020¹. Own beer volume was +12.7% vs H1 2022 and +8.2% vs H1 2020¹.
We have all seen higher inflation in the last year, but the degree of inflation experienced in this area is quite exceptional. Inflation has been particularly acute in glass, CO ₂ , packaging waste and logistics. Our customers have been generally supportive but the price increases we have been able to pass on so far are short of these particular cost increases. As such we will need to pass on further price increases in the coming months, whilst exploring every avenue to contain cost inflation.
Divisional revenue in Brewing and Brands was £30.3m (H1 2022: £30.6m) and divisional operating loss was (£0.4m) (H1 2022: £0.0m).
INVESTMENT PROPERTY
As at December 2022, the Company owned investment property valued at £6.9m (2022: £6.2m). We have sold two properties during the period (2022: five). We continue to promote sites in the local area for potential development. We remain confident one or two of these schemes will be approved in the near term, but recent changes in Government policy make others less likely.
OUTLOOK AND CURRENT TRADING
Consumer spending has remained good throughout this period – and better than many had expected – albeit the underlying volumes of food and drink are still down on pre-pandemic levels. Costs are up in all channels, some significantly above the prevailing rate of RPI, with further costs to be absorbed.
The extraordinary rises in costs in the brewing business, in particular, are likely to impact margins in the short term. The second half will present further challenges to our cost base, but it seems likely that the specific energy and Ukraine-war related factors that have driven this inflation will start to abate in the next financial year. The consumer cost of living squeeze may also start to ease as wage increases close the gap.
For the 12 weeks to 18 March, retail like-for-like sales was +12.8% vs 2022 and +13.0% vs 2020². Like-for-like tenanted pub income for the nine weeks to 25 February was + 4.9% vs 2022 and +1.7% vs 2020². Total beer volume for the 12 weeks to 18 March was -5.5% vs 2022 and -6.5% vs 2020². Own beer volume was -3.05% vs 2022 and -1.8% vs 2020².
This has been a tough time for anyone in the hospitality sector, with one crisis rolling in to the next. The events of the last few years demonstrate how unpredictable such things can be, and we remain flexible and agile to respond to further events.
The fundamentals, though, for the business remain good. With a strong balance sheet, and a cash generative business, we are now focused on maximising growth potential through delivering our investment and project plans.
We have an excellent pub estate with considerable potential, well established brands, a loyal customer base, and a high profile within the individual communities we serve.
All these factors will stand us in good stead as the cost of living crisis eases and the economy returns to growth.
JONATHAN NEAME
Chief Executive
1. H1 2020 is the first half of the financial period of the 52 weeks to the 27 June 2020. The first half equated to the 26 weeks ended 28 December 2019.
2. The periods referred to are the comparative periods during the financial years 52 weeks to 27 June 2020.