Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
200. Bull, Bear & Beyond – Shepherd Neame: executive interview
10 Plays8 days ago
In our interview, Shepherd Neame CEO Jonathan Neame and CFO Mark Rider explore what sets the business apart in the pub and brewing landscape. They highlight how the group is navigating structural industry pressures such as declining beer volumes and pub closures, while driving long-term improvements in revenue and profitability across its estate. Next, they discuss the strategic value of Shepherd Neame’s vertically integrated model, owning both a brewery and pubs, and how this differentiates it from peers that have exited brewing. They address the margin pressures from recent cost inflation and plans to rebuild profitability, and how the capital allocation policy should help to close the valuation gap between the company’s market valuation and underlying asset value. Finally, they highlight the key takeaways from the H126 results.
Shepherd Neame is Britain’s oldest brewer, founded in 1698 and based in Faversham. The company operates as a vertically integrated pub and brewing business, combining beer production with an extensive portfolio of pubs, hotels and inns across the South East of England, particularly in London and Kent. At its core, Shepherd Neame brews a range of traditional ales and lagers, both its own brands and licensed international beers, while also owning and operating just under 300 pubs. This dual model allows it to control product quality, distribution and the customer experience, which is a key differentiator compared to many UK peers that have sold their brewing operations.
**************************************************************************************
About ‘Bull, Bear & Beyond’
Bull, Bear & Beyond': features candid conversations with senior executives and from our own team of experts from across industries, exploring strategy, innovation, and the opportunities shaping their markets and 60-second pieces are a compressed summary of content designed to convey our message in a single, easily shareable hit.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
Recommended
Transcript
Introduction of CEO and CFO at the Hoop and Grapes Pub
00:00:08
Speaker
Hello, I'm Russell Poynton from Edison Group and today I'm speaking to the management team from Shepherd Neame. With me I have Jonathan Neame, who's the CEO, and Mark Ryder, who's the CFO.
00:00:19
Speaker
We're in the heart of the city at the recently refurbished and reopened Hoop and Grapes, which is a fabulous pub. Thank you for joining me, Mark and Jonathan.
Overview of Shepherd Neame's Business Model
00:00:29
Speaker
Great to see you.
00:00:30
Speaker
Glad you're in one of our great new pubs. So sir Jonathan, why don't we talk but why don't give an overview of the group and perhaps talk about the Hoop and Grapes because I think it's a good example of what the group is doing.
00:00:42
Speaker
Sure. um So the group is 286 pubs, are tenanted, managed, this is a managed site. We tend to manage the bigger sites or um or the hotels, the inns. um Within our managed group, we we've got a group of what we call city bars. We've got some food destination sites. We've got inns and hotels.
00:01:07
Speaker
This is a city bar. all of our pubs, whether they're tenanted or managed, we are looking for unique buildings, unique locations, and we are looking to invest in them to a very high standard to bring out all the individual characteristics of the the site.
00:01:24
Speaker
This is 1721, surrounded by amazing new office blocks. It's a real little gem. It's got off to a flying start, and I think it really shows what the company can do when we invest well.
Integration of Brewing and Pubs
00:01:39
Speaker
We also have a brewery. We're unusual. We're virtually integrated. And that link between beer and pubs is kind of part of our DNA. And everybody knows that there's there's some structural issues facing the industry in terms of declining beer consumption and pubs are closing on ah on a weekly basis. But over the long term, you've actually done very well in actually for every pub, you're getting a higher revenue and profit for each of those pubs. So you can just talk about the strategy that's driving that, please, and you know what what you're doing to get those results. Yeah. So um actually, where we're getting volume growth in London at the moment, interestingly. There is a volume decline in the overall sector.
00:02:20
Speaker
There are structural issues. um Smaller pubs are really finding the inflationary environment very difficult to to manage. Small pubs which are complicated with a complex food offer and a high labour are finding it most difficult.
Challenges Facing the Pub Industry
00:02:36
Speaker
The real impact on the sector in the last few years has been the inflationary impact on energy and the inflationary impact on labour. That has impacted sites with a very high labour proportion which tend to be the more food-led sites.
00:02:52
Speaker
Sites like this is much more wet-led, a conventional drinks-led pub, and therefore is more able to withstand those particular pressures. On top of that, the sector has faced what I like to call tax saturation.
00:03:06
Speaker
Whether it's business rates, excise duty, VAT, we are absolutely maxed out, more so than any other country in the world. Something will change. There has been some relief recently on business rates, which is very welcome, and a commitment from government to address that fundamentally for the long term.
00:03:25
Speaker
But most other countries in Europe see hospitality as a way of dealing with the employment crisis for young people and of cut VAT. And I'd be reasonably hopeful that that's going to happen here in the medium term.
00:03:38
Speaker
So, um but against that, people really need a third place to socialize. They absolutely, it's fundamental to the human condition that there is a great third place.
00:03:50
Speaker
And dwell time is going up in pubs, which is very interesting, particularly in pubs where there are unique features, unique characteristics, amazing buildings, beautiful views, great locations. And I think what's special about Shepherd Neame is that of our 285 pubs,
00:04:07
Speaker
um at least three quarters of them are either the dominant pub in their community, the go-to place for its community, or in a really special location where people are going to congregate at weekends or after work or whatever.
00:04:22
Speaker
And we built that estate bit by bit over many, many years. So we've got an exceptional um um ah portfolio of authentic, genuine, quite often historic pubs that we mainly own Freehold um that will bring people together when they want to socialise.
Competitive Advantage of Owning a Brewery
00:04:44
Speaker
And you've already mentioned that you're vertically integrated by owning the brewery. Now, it's interesting that a lot of your ah peers, that they've disposed of their brewers over recent years. So what is the competitive advantage that owning the brewery still gives to you?
00:04:56
Speaker
So the product range itself is a footfall driver. That's probably more the case in rural and community areas where people really associate with their local brewer.
00:05:09
Speaker
um We are Britain's oldest brewer, so there is sort of an embedded loyalty to us in that respect. The value creation of brewing your own beer and then retailing it at high price points in your own pubs is significant, notwithstanding the excise duty.
00:05:28
Speaker
um And that's really what we're trying to do, is to brew our own beer and sell it in our own pubs and have a point of difference. That's the heart of it.
00:05:38
Speaker
Now, on top of that, we have a production facility where we try and defray the costs by selling to other customers in the supermarkets and into our heartland. And ah some of that has been very challenging recently.
00:05:53
Speaker
But it doesn't mean that the core of what we do, the DNA of the business, the differentiator in our product range, or the core purpose of that vertically integrated model ah is still very valid in my view.
Post-COVID Profitability and Margin Improvement
00:06:07
Speaker
And earlier you referred to the rampant cost inflation you've had over the last year. So it's been ah it's been a very challenging few years, generally with at COVID, and you've had this cost inflation, but your your revenues have recovered to pre-COVID levels whilst the profits haven't. So do you think that the profitability of the company is structurally lower now than it was before COVID? And perhaps how how could that improve going forward?
00:06:31
Speaker
um Margins across the whole sector have been impacted, there's no question about that. um And a key driver for that really is the cost of labour, which has increased in the last 10 years through national minimum wage and through um national insurance most recently by something like 60%, which has a big impact at the the outlet level, but also in things like logistics, supply chain and of course elsewhere in the company.
00:06:59
Speaker
um And i everybody in the sector is is suffering from the from the same thing. If we can get to a stable cost environment, ah then our whole focus is to drive margins and to drive margin improvement.
00:07:12
Speaker
In the short term, we've made some efficiencies. We've obviously had to use price and everybody will be aware the price of a meal, the price of going out has gone up.
00:07:24
Speaker
um ah But if we can get to a stable environment, there will be other ways that we can find to drive margin improvement and to recover that lost ground in the last five years.
00:07:36
Speaker
And the great thing about Shepard Neame is there's there's quite a high net asset value with this this treehold backing, and which has typically gone up over the long term. um But your share price stands at quite a large discount that net asset value. Are there ways that you can think of unlocking that value?
Capital Allocation and Investment Strategies
00:07:53
Speaker
um the so so So we've just ah announced our capital allocation strategy and try to clarify that that. The principal ways we can drive earnings is investing in high returning opportunities. And what the business does have is a lot of high a lot of opportunities.
00:08:14
Speaker
um So expansionary capital, we're targeting more than 15%. And that is probably the best use of capital for us. We ah will periodically consider share buybacks as well, um ah which is is earnings enhancing.
00:08:32
Speaker
And over the medium term, we expect our cash flow to grow, our leverage to come down and our ah debt levels and therefore the cost of ah cost of debt to reduce.
00:08:45
Speaker
We've recently refinanced and that is on improved terms. So the cumulative impact of all of that should be a trajectory to drive earnings over the medium term.
00:08:59
Speaker
Switching to Mark. um Now, the company has got great freehold backing, but also operates with quite a high level of debt. and Would you just talk a little about the level of debt you're comfortable with, please?
Debt Strategy and High-Value Investments
00:09:12
Speaker
Yes, Russell, yeah. And so we have historically always had a sort of target of our non-lease leverage at or around three times over medium term.
00:09:25
Speaker
We went through the COVID period and actually um our debt went up as we were closed. And we were one of the only businesses in the sector that didn't raise equity to help offset the impact ah of that net debt increase. We really sort fought hard to keep our debt and as minimised as possible through cutting back investing in a business through that period.
00:09:49
Speaker
So coming out of the COVID episode, we have got to a point where we've allowed debt and leverage to go up a bit as we've recovered and reinvested back into the business.
00:09:59
Speaker
Donathan's talked a little bit about the capital allocation exercise and the business's cash generative. And where where we don't invest that free cash flow into either share buybacks or capital in the business, we will see net debt come down. And the business is still committed to a leverage level of about three times X leases over the medium gym term. And that's how tart we get.
00:10:24
Speaker
Worth just noting, most of our lease debt actually is central London sites such as the Hoop and Grapes, some of our prime city bar pubs that we have. So we're we we're not ah targeting extra lease debt and that is in place that supports these these these very good London pubs. um But we're looking for net debt, leverage X leases to be as for around three times over that medium term again.
00:10:50
Speaker
Thanks.
Interim Results and Financial Growth in 2026
00:10:51
Speaker
And today you've you've just released your interim results for financial year 2026. What do you think are the key highlights in those results? um So on most metrics we are level with the prior period. um Some measures up a little bit, some down a fraction.
00:11:08
Speaker
um But fundamentally our cash flow is up 0.8%, which is actually very robust after having absorbed all the additional costs of labour, in particular the national insurance and national minimum wage that came in in October 24.
00:11:22
Speaker
On top of that, we've absorbed um an incremental logistics cost, which has been coming for some time off the back of a new agreement. If you strip that out, the actual underlying business is up 10% in this period.
00:11:35
Speaker
And that' that really shows that I think that we're investing well. um that even for for some of the challenges that we've got in the beer business, there is still good um ah but momentum in gross margins, et cetera.
00:11:52
Speaker
um So that's the overall position. Great. Thank you. Well, Mark and Jonathan, thank you very much for your time to today. Thank you. Thank you, Russell.