On-premise establishments: how the economic backdrop and new economic policies are affecting the trade of local premises. The UK pub sector: Survival of the Fittest David Thompson Chairman Marston s PLC
Contents Page Contents Page Contents 2 Summary 3 Who are Marston s? 4 You need a clear plan for this environment 5 UK quoted pub sector market capitalization 6 Regulatory threats 7 Half the time we are working for the Government 8 Yet pubs employ thousands of young people 9 Consumers are being squeezed 10 UK income tracker highlights regional disparity 11 Green shoots 12 Eating and drinking out v. discretionary income 13 Eating out vs. other spend 14 Trends in eating vs. drinking on-premise 15 Pubs vs. restaurants 16 Average spend per head sterling 17 Average spend per head Euro 18 Pub demand for food vs. drink 19 Impact of tax 20 Volume shift to the off-trade 21 Leading to a reduction in pub numbers 22 Yet pubs employ thousands of young people 23 Machine income 24 Our view of the way forward 25 We have recognised and adapted to market trends 26 Investing in consumer preference 27 Map of a typical pub and road layout 28 Investment in returns 29 Integrated model 30 Franchising 31 How is Marston s performing? 32 Summary and conclusions Exchange rate: 1 = 1.25, 1 = 0.80 David Thompson: Whitbread 1976 1977 1 year Marston s 1977-35 years Anglia Maltings (Holdings) Ltd 2005-7 years Farmer 1977-35 years
2. Summary The UK pub sector was ill prepared for the economic downturn, and smoking ban Private equity encouraged balance sheet efficiency (sic); a cuckoo in the last decade, a swallow in this? Market trends will continue to marginalise smaller, wet-led pubs The Government is adopting an anti-pub, anti-brewer tax strategy Pub closures will continue for the foreseeable future The pub sector has an opportunity to capture share in eating out Service, standards and value will be key Investment capital will still be required ROC driven The integrated model is proving resilient Operating flexibility New models introduced eg. franchise Equity prices have stabilised but value will only return with: Increasing returns Growing profits Increasing dividends
3. Who are Marston s? National pub operator Marston s Inns and Taverns 550 managed and retail agreement pubs Marston s Pub Company 1,600 tenanted/leased pubs Situated across England and Wales National Brewer Marston s Beer Company Ale brewer; market leading position in premium ales Vertically integrated business Cost efficient More opportunities Reduced risk Leading pub operator and brewer with a flexible business model
4. You need a clear plan for the environment Five income streams: Macro/environment 1. On-trade managed liquor 2. On-trade managed food Discretionary spend under pressure Inflation above pay settlements Prolonged economic uncertainty 3. On-trade beer wholesaling 4. Rents 5. Gaming machines Consumers Value Service Quality Consistency Licensees Business building Financial assistance Access to buying power Strategy Relevant Focused and clear Consistent But the sector has been, and remains, under pressure
5. UK pub sector* market capitalisation 18.75bn 73% decline in equity value since pre-crash Biggest falls in tenanted pubcos 2009 equity raisings: Marston s, Greene King, Punch Dividends cut across sector Only Marston s and Greene King continued to fund dividend payments 5bn 2007 2012 Financing issues remain Sector is relatively highly geared - Punch: 10 x debt to EBITDA - Enterprise 8 x debt to EBITDA Significant changes to share registers M&B, Punch * Enterprise Inns, Greene King, Marston s, M&B, Punch, Spirit, JD Wetherspoon Shareholders have had no return from the sector 2008-12
6. Regulatory threats Licensing regime Police Reform and Social Responsibility Act 2011 Beer Tie New Industry Framework Code Responsibility Deal - commitments on food and drink Carbon Reduction Levy - 2k per managed pub Late Night Levy town centre bars, clubs Food regulation scores on doors, calorie information Taxation VAT to 20% in 2011 Duty +42% in 4 years Business rates - +5.6% 2012/13 Machine Gaming Duty a new tax; 20% of income Minimum pricing threat or opportunity? A rising tide of regulation and taxes
7. Half the time we are working for the Government 300 Marston s contribution to HM Treasury 250 m 200 150 100 50 0 2007 2008 2009 2010 2011 Direct tax Indirect tax 291m total - in a business with 650m turnover!
8. Yet pubs employ 000s of young people 60% Direct employment in pubs by age, UK, 2010/11 50% 40% 30% 20% 1m employed in pubs and brewing in UK Youth employment Areas where jobs are in short supply Pubs and brewers support the Rural Economy Malt, hops Rural pubs Pubs can create jobs quickly Marston s will create 3,000 jobs in 3 years 10% 0% Under 25 25-34 35-44 45-54 55-64 65+ Source: BBPA But we expect taxes to continue to rise
9. Consumers are being squeezed Monthly Income Tracker Income Tracker (LHS) Income Tracker annual % change (RHS) Source: Centre for Economics and Business Research 2012 Consumers are under pressure as income falls
10. UK income tracker highlights regional disparity Source: Centre for Economics and Business Research 2012 Discretionary income higher in London and the South
11. There are some small green shoots Discretionary post-tax income and credit growth forecast to rise From 1.2% growth rate (2011) to 3.0% (2012)* 1 Average earnings forecast* 1 to increase by 2.5% Hotel and restaurant spending* 2 to rise 3.5% in 2012 Olympics, Diamond Jubilee, Euro 2012 Inflation up, but commodity increases slowing CPI to March 2012 +3.5% UK employment remains stable Plans to cut public sector employment* 1 by 0.5m are 70% complete UK unemployment rate 8.3% UK savings ratio* 1 remains low at 4.0% Offsets some pressure on discretionary income *1 Longview Economics *2 Consensus estimates So, consumers remain under pressure but some cause for optimism
% change 12. Eating and drinking out vs. discretionary income 6 4 2 0 (2) 2004 2005 2006 2007 2008 2009 2010 2011 2012E (4) (6) (8) Discretionary income Eating and drinking out Savings ratio 7.5% *source: Longview Economics As discretionary income rises, eating/drinking out should increase
% change 13. Eating out vs. other spend 12% Eating Out 10% 8% Food Non-Food 6% 4% 2% 0% (2)% (4)% (6)% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2010 2011 Apr May Jun Jul Aug Sep Source: *BRC Tracker, Coffer Peach Tracker Eating out > food > non-food
14. Trends in eating vs. drinking on-premise 80 60 bn Eating out 27bn spent on drinking out 2010 11bn is alcohol with food* Influences Convenience Eating out is low ticket non-discretionary Expansion of value pub-restaurant brands Improving standards, service, range Value added by operators 20 Drinking out 2000 2012 Eating out spend growing faster than drinking out Pubs without food are in decline *Source: Numis Eating out = 2x cost of eating in; drinking out = 3.4x cost of drinking in
15. Pubs vs. restaurants 000 Food spend per outlet per year ( 000) 250 225 226 228 232 228 224 223 222 222 Restaurants 200 150 100 76 76 77 86 90 97 97 97 98 Pubs 50 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 *Source: Numis, Horizon, CGA Food sales remain relatively low in pubs = opportunity Eating out growth is stronger in pubs than restaurants value is key
16. Average pub spend per head* Food Managed Drink Tenanted Drink JD Wetherspoon 7.20 2.49 Marston s 7.32 2.76 2.48 M&B 8.04 2.87 Spirit 8.04 2.74 Greene King 8.40 2.65 2.88 Punch 2.52 Enterprise Inns 2.64 The Restaurant Group 11.30 2.87 Prezzo 12.70 *incl. VAT source: CGA, Numis Average cost of three course meal in a pub < 15 vs. 20 in restaurants
17. Average pub spend per head* Food Managed Drink Tenanted Drink JD Wetherspoon 9.00 3.11 Marston s 9.15 3.45 3.10 M&B 10.05 3.59 Spirit 10.05 3.43 Greene King 10.50 3.31 3.60 Punch 3.15 Enterprise Inns 3.30 The Restaurant Group 14.13 3.59 Prezzo 15.88 *incl. VAT source: CGA, Numis Average cost of three course meal in a pub < 18.75 vs. 25 in restaurants
18. Pub demand for food vs. drink 5.6% Food 3.5% 2.0% (0.9)% Drink (3.1)% (8.7)% 2003-7 2007-9 2009-15E Source: ONS, Mintel, E&Y, OC&C, Numis Trends in pub eating out expected to continue
19. Impact of tax on cost of drinking out Price of a pint Source: BBPA Impact: increasing gulf between on/off prices
20. Volumes shift to the off-trade* 000 brls per year On-trade Off-trade 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *Source: BBPA Total beer sales down >20% in just over a decade..
21. Leading to a reduction in pub numbers 61,000 000 pubs 51,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1. Demographic and socio-economic trends 2. On-trade vs. off-trade pricing (taxation) 3. Regulation (smoking ban) 4. Financial stresses on landlords 5. Increasing competition managed pubs, restaurants 6. More discerning customers 7. Inability to provide food in scale (tenanted pubs) Source: CGA, BBPA Pub numbers will continue to fall
22. Managed pubs vs. tenanted pubs 1,000 Sales per pub pa 000 500 0 Wet-led Town Centre Food-led Success factors scale, position, investment, range and service Food-led residential managed pubs favoured Tenanted/leased pubs more wet-led Source: CGA, Numis Market trends, complexity, competition and scale favour managed
Profit m 23. And machine income has fallen sharply 16 15 Smoking ban (England) 14 13 12 11 10 9 8 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Marston s Year After 5 years: the category is only now showing signs of recovery
24. Our view of the way forward Improved consumer insight Offer Trends into attractions Format range Flexible approach We are focused on return on capital New-build programme Major projects format change Design innovation Estate refurbishment Maintenance programme Investment Design innovation Estate refurbishment Maintenance Disciplined allocation Service Customer services Standards Investment in people Stable team All three have equal importance in driving returns Growth not driven by capex alone
25. We have recognised and adapted to market trends F-Plan : Food, Families, Females, Forty/Fifty somethings 2005 2010 2011 28% Food sales mix: trends, strategy, development 40% 42% 14m Meals served: 70% of visits are food-led 24m 26m 11k AWT per pub: investment, churn 15k 16k 5.70 Spend per head on food: value increased 6.06 6.10 62% Food margins: Every Day Value 66% 66% Positive food and drink sales momentum
26. Investing in consumer preference Cobblestones, March Blue Jay, Derby Running Horse, Fakenham The Orchard, Amesbury Attractive pubs in hand-picked locations
27. Running Hare, Ewloe
28. Investment must be supported by high returns * New-build effective acquisition multiple 5.4 x EBITDA 2009 target Pre 2010 sites Post 2010/11 sites Revenue per week 20k 21k 27k EBITDA conversion 30% 32% 32% Food mix 55% 57% 62% Food spend per head c. 6.00 c. 6.00 c. 6.50 EBITDA ROI* 15% 17.3% 18.5% Positive food and drink sales momentum
29. The integrated model provides greater flexibility Operating Model Tenanted Franchise Bespoke offer Higher food mix Entrepreneur taking risk More skilled operator driving stability Standardised consumer proposition Every day value Lower risk for licensee Turnover focused operator Flexibility ensures right pub, right operator, right model
YOY Reported EBIT (%) 30. Franchising reduces risk, with control and profits 2 1 0 (1) (2) (3) (4) (5) (6) (7) 2009 2010 2011 H1 2011 H2 2012 H1 (3.7) (7.0) +3.1 +1.0 +0.3 Return to absolute EBIT growth, trends improving
Revenue and profit growth, dividend cover improving 31. How is Marston s performing in this environment? 26 weeks 2012 2011 vs. LY Revenue 342.1m 317.9m +7.6% EBITDA 88.6m 86.8m +2.1% Operating Profit 67.6m 66.4m +1.8% Profit before tax* 33.5m 29.2m +14.7% Adjusted EPS* 4.7p 4.1p +14.6% Interim Dividend 2.2p 2.1p +4.8% Dividend Cover 2.1x 1.9x +0.2x
32. Summary and conclusions The UK pub sector was ill prepared for the economic downturn, and smoking ban Private equity encouraged balance sheet efficiency (sic); a cuckoo in the last decade, a swallow in this? Market trends will continue to marginalise smaller, wet-led pubs The Government is adopting an anti-pub, anti-brewer tax strategy Pub closures will continue for the foreseeable future The pub sector has an opportunity to capture share in eating out Service, standards and value will be key Investment capital will still be required ROC driven The integrated model is proving resilient Operating flexibility New models introduced eg. franchise Equity prices have stabilised but value will only return with: Increasing returns Growing profits Increasing dividends