Transcript
Speaker: Hello, I'm Russell Poynton from Edison Group and once again I'm delighted to be speaking to Jonathan Neame and Mark Ryder of Shepherd Neame, which has released its full year 26 results today. Thanks for joining me again.
Speaker: Good to be here. ah Jonathan, we're we're sitting in the underground of the Jamaica Winehouse, which you've just closed for a little bit and refurbished a little bit. Could you just talk a little about where where we are?
Speaker: So we're just off Cornhill in the alleys and passageways between here and Lombard Street. um The Jamaica Winehouse is one of the most iconic pubs in the city. It's the home of the London Insurance Market, first ever coffee house in London, been in establishment since 1658, full of character and personality. We're downstairs, we've created the Jamaica Clubhouse and we try to inject here a very opulent, rich velvety design for functions, for events, for overspill and already it's proving very very popular.
Speaker: And in the results this morning I was expecting just comments on figures but you've you've made quite a big announcement about the brewing and but brands division. What can you say about that?
Speaker: Well, um the last two or three years, we've been signaling that the market is quite challenging for drinks and we're not the only ones. Everybody else is in the same sector. If anything, beer is doing rather better than spirits and and certainly than wine. um We highlight um three particular issues that we're dealing with. One is the high cost of logistics. um We did have a very favourable logistics agreement um for 10 years that expired.
Speaker: um The new agreement is more expensive and we've had a lot of inflation over a million pounds in the last year. um The second is declining volumes, and that's particularly acute in what we call national markets, so the off-trade, the on-trade, and in the category where we're most exposed, which is ale.
Speaker: So the combination of declining volumes and increased logistics costs ah has meant a margin squeeze in our profitability. So we've seen profits decline, which in part masks the very good performance in our pubs. The third issue is that a lot of our plant in in the brewery is um reaching end of life and needs investment.
Speaker: So these are the perfect circumstances in which a review needs to take place. So the review is ongoing. I'm not going to be drawn on the outcome of that review, but we do make the point because it's important that brewing is um integral to our identity and ultimately to our prosperity as as a company.
Speaker: But um so that review is ongoing. We will announce the results when it's concluded. The last few months have seen ah ah a bit of an an increase in consumer confidence after, you know, quite a tough time. um Some attribute that to the burn and bounce, but, the you know, there are troubles in the world.
Speaker: um That goes hand in hand-in hand with your, you've you've had quite good trading in the last few months as per the results. What do you attribute that to? is You know, how much of it is temporary versus what you think is a genuine underlying improvement?
Speaker: Yeah, it's a really good question. And of course, none of us will know accurately, but we have had good trading. Our retail like-for-likes were plus 6.7% for the last 13 weeks from the end of June to the end of September, which is great. um I think the most most interesting thing that I noticed in there is that trends which have been quite adverse to us for a while ah have started to improve. Specifically, there was a big gap in last year's performance between inner London, which has been strong throughout, and outer London, outside the M25. And in the last 13 weeks, that gap has closed. still Still a slight gap, but it's negligible.
Speaker: And the second thing is that um our food and particularly our accommodation trends have improved um and ah and are in positive territory. And I think we feel quite optimistic about both those sources of income. So prior to that, in the last year, it was a drinks led in a retail performance.
Speaker: And now it feels much more broad based. And that can only be related, I think, to a wider consumer. um There's plenty of people in London who've got disposable income, higher higher job rates and higher higher average earnings, et cetera. But if that sense of confidence spreads outside where the savings rate is very high, but people are willing to spend again, that's very good for our business.
Speaker: So one swallow, all that, but you know I think we should celebrate a shift that I don't think we've seen for the last five, six years. Yeah, that's interesting. And ah you you were quite vocal about business rates and you got so good results in in the last few months. Can i just ask you what what else you'd like to see the the new government and do that would probably potentially be helpful for Shepard Neame?
Speaker: Yeah. Well, I think the first thing to say is that the business rates announcement was almost the first thing that the new prime minister said, which I think is testimony to the to the power of the of the industry's lobby, the campaign we ran, and indeed testimony to the prime minister for recognising that this sector is chronically overtaxed.
Speaker: But it's important too. as a sector for jobs and so on. um So he announced a 20% reduction on it on top of an already 15% reduction from the business rates revaluation that came out just before Christmas last year.
Speaker: um He's also announced a further fundamental review in 2029. We need more clarity on that. He said lots of good things about supporting high streets pubs. We need certainty so businesses can plan, point one. Point two, we all dream of um success in a lower rate of VAT.
Speaker: Fascinatingly, Scotland has come out in favour of a 10% rate on VAT in the last few days. um England is the only country in Europe that has not supported a lower rate of VAT for hospitality. And the specific reason is that lower less VAT equals more jobs.
Speaker: um And so you know our trade is incredibly elastic at creating young people's jobs. 50% of the people we employ are under 25. Lower VAT will resolve the the NEAT crisis. It's as simple as that.
Speaker: In the same vein, the third thing we want is amendments to the national insurance changes which came in two years ago. And I think the evidence now is overwhelming that it's created the NEAT crisis.
Speaker: Simple amends such as raising the threshold or indeed ah having a targeted car back for under 21s or twenty five s would create more jobs. And fourthly, we would like to see the differential between draft beer duty and package duty increase because if you drink in pubs, it's much better for the economy and the country and society. Well, thank you. I thought that might be the longest answer of the question today. Thank you for doing that.
Speaker: so So Mark, the results were released today and the the word that stood out to me was satisfactory. but So what do you think are the two or three key things that come out of the results for investors?
Speaker: Yeah, thanks, Russell. I think I'll probably focus on three things actually in this set of results. First one is the strength of our pub results across the board. So we've seen our retail estate with like-for-like sales of 3.8%, our like-for-like income in our tenitist state at plus 2.7%, and profit growth over 4% across both those pub estates.
Speaker: Second point I probably come to is our bringing in brands division. And we've seen volume decline in that area and profits down in that area. And that area has a ah review of strategy underway, which we'll report back to um when it's complete.
Speaker: And then the third piece I'd focus on is our strong free cash flow generation in the year. So free cash flow up to £20.2 million and what we've done there is invested in growing dividends at 3%, investing in the existing estate of £14.1 million on projects like the Jamaica here and bringing net debt down from £83.7 million to £82 million.
Speaker: Thanks, Mark. And um so there's a lot going on in the world, you know lots of conflicts. We've had a very hot summer. So you know there's ah it looks as though the inflationary pressures are potentially building up. So could you just talk about what your outlook is for cost inflation for the business, please?
Speaker: You know, inflation for us and and most people in the sector has been quite a challenge over over recent years and the results we've just announced, and we've sort of signalled the kind of the label level of labour inflation that we've had and the level of logistics inflation we've had as we've transitioned to a new a new agreement. So those two elements added up to £2.8 million in the results we've we've announced.
Speaker: kind of Looking forward, that logistics inflation we've seen over the last two years, we don't see going forward as we're now fully transitioned to this new agreement. But going forward, i think our three key areas of focus are energy costs, labour costs, and the follow-on effect into interest rates that come come from that.
Speaker: And how we're set up, kind of on energy costs, we're very well hedged going into the new financial year. We're nearly largely fully hedged 100% across the brewery. So we're well positioned to withstand some of those direct energy inflation pressures.
Speaker: We'll have also be keeping an eye on some of the indirect ones as that energy fan feeds through you into things such as food coming forward. terms of labour, we're kind of well versed now in labour inflation. It's been coming through year to year.
Speaker: and We don't have guidance forward guidance as yet, but we would expect the government would continue at similar levels to what we've seen. Broadly, that equates to between about a million pounds and one and a half million pounds of extra labour cost each year, depending on where the national living wage gets set. And we've got a number of ways of dealing with that and mitigating that as we've tried to do over recent years.
Speaker: Going through to an interest rates, clearly the bank is signalling some uplift in the interest rates in response to this inflation. Again, we're pretty well set. So we've got a net debt of £82 million pounds at the year end. £55 million pounds of that is on fixed interest rates that are long-term dated. So we've got a little bit of exposure um on the balance of that going into the next year if rates do go up.
Speaker: ah The one cost you didn't mention there was diesel. um It's obviously hit the headlines at start this week where it's at an all-time high, I think, now. So how does diesel affect the business? and Well, it'll it will affect us directly in one way and and indirectly in other ways. So and directly we have a distribution to our customers and to our pubs. And so there's an element of lorry cost that will go with that where we will see an element of diesel. It's part of the cost base. It's not all of it. Clearly we will have to look to try and offset that with other cost savings across the supply chain.
Speaker: But the other way it kind of will start to feed in over time. It's one of these indirect impacts of energy where we'll start to see delivered product increasing and and anything that's linked to diesel kind of coming up as it goes through the year. But I see that phasing in through the year rather than from the start of the year that we're narrowing.
Speaker: And um Mark, when when you announced the full year trading update, there was the some other importance there were some other important news with the the change of the The names of the management, you know, Jonathan's but going to become executive chairman, you're going to become managing director. What do you think are going to be the key changes as a result of that?
Speaker: Yeah, that's right, Russell. So um clearly it's an area of continuity going forwards. I think how, as these results are showing, our strategy around our pub estate is very strong. It's given us continued growth across the piece.
Speaker: And I think we the idea is to continue to ah to to make that strategy happen. So continuing to upgrade our pubs, invest in our pubs, and recruit the across the best team across those pubs and deliver and deliver growth. Clearly the brewing and brands business, the strategy is under review and you know as we will come back to that as we've completed that review later on this year.
Speaker: Well, Jonathan and Mark, thanks for speaking to us again today and we shall look forward to speaking to you again in six months' time. Thank you very much, Russell.
