Marston's H2 2024 Earnings Call Transcript

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December 3, 2024

There are 7 speakers on the call.

Operator

Good morning, everybody. Thank you for joining us. Welcome to the Marston's preliminary results for the financial year ending September 24. My name is Justin Platt, CEO. And with me, I have Hayley Lupino, our CFO.

Operator

We will take you through our results today, and we will go through it in the following running order. I'll start with some quick headlines. Haley will then talk to the financial results. And then I will come back and give some color on our operational progress before wrapping up and taking any questions that you might have. 2024 has been a really seminal year for our company.

Operator

The sale of our stake in CNBC has really enabled us to focus on our sweet spot and build a future as a simplified and a focused hospitality business. And our results show that we're already making big strides and good progress towards that future. The trading has been strong at 4.8% like for like revenue. We're ahead of the market. And we've done that while expanding our margins, as you know, a key goal for us, terrific progress at 190 basis points versus the prior year.

Operator

And the combination of those things has enabled us to step up our cash flow delivery and return GBP 44,000,000 of free cash flow. So really good financial performance, but at the same time as delivering those financials, that's gone hand in hand with us giving our guests a great time in our pubs. Record delivery for us in guest satisfaction. So that reputation score of 800 is a record for us. We've never delivered a score that high before.

Operator

Really, really pleasing progress. So good financial performance and good operational performance. And as we said at our Capital Markets Day, we're now clearly focused on 5 key value drivers that will ensure delivery and sustained growth like that into the future. So overall, a strong year of delivery and a strong year of laying foundations for a successful future. So with that, I'll hand over to Hayley to take you through the financial results.

Speaker 1

Thank you, Justin. So this morning, I'm going to take you through the financial performance for FY 'twenty four. So if we start with the top line and we look at like for like sales versus FY 23, what you can see is a consistent outperformance of the market. And on the right hand chart, it shows you, quarter by quarter, how that's flown through the year. But overall, a 4.8% year on year like for like sales growth versus a market of 3.6%.

Speaker 1

That has then translated into strong earnings and operating profit growth with significant margin improvement. So overall revenue is up 3% versus FY 'twenty three to 899%, including the impact of disposals. EBITDA growth of 13% up to 1.93%. And as Justin pointed out, EBITDA margin growth of 190 basis points to 21.4%. That has led to a 17.9% increase in operating profit and operating profit margin of 16.4%, which is 210 basis points improvement.

Speaker 1

I'll come on to how we've been able to build that throughout the year on the next slide. We have interest costs of £105,000,000 which includes us amending our bank facility, amending our bank facility and that has dropped through to GBP 42,000,000 profit before tax, which is a 65% profit growth in the year and also a 49% growth in earnings per share to GBP 5.2 I said on the next slide, I will explain the operating margin and the improvement that we've made. So 14.3% in FY 'twenty three, a 1.2% improvement through our energy and property initiatives. So first of all, repairs is 0.2 of that. That is really generated by what we set out at the interim results around efficiencies to do with proactive and reactive maintenance.

Speaker 1

The remainder of that is through energy, with 80% of that being through rate, but 20% coming through 8% less usage year on year. Then we move on to our business simplification. We continue to build on menus that are focused on the guests, therefore, enabling us to make sure that we deliver improved profitability. Now that's 0.8. Our pub support center restructure last year has dropped through to this as a 0.4 for the full year impact.

Speaker 1

And then our focus on pub labor productivity means we've delivered 0.1 of margin. Throughout the year, we've also invested in demand driving marketing to drive people into pubs, which means we ended the year at 16.4%, which is a 210 basis points improvement, which we said we would do over a 2 to 3 year period, and we've done that in year 1. That has then dropped through to GBP 44,000,000 of recurring free cash flow. And what you can see on this slide is that GBP 194,000,000 of operating cash flow, significant improvement on the previous year. I've already spoken about interest costs.

Speaker 1

With regards to CapEx, we've spent £46,000,000 in the year. That's all been on maintenance. There's been not much transformational CapEx this year. We've focused on developing the strategy. But as set out at the CMD, we expect to start to move CapEx towards 7% to 8% of revenue.

Speaker 1

And in FY 'twenty five, we expect to spend around £60,000,000 as we move through. That has led to a £44,000,000 recurring free cash flow. That also has the benefit of the timing of year end where we've had some weekly payroll and the payments for VAT flow after year end. So the underlying free cash flow is €30 plus 1,000,000 within the year. The overall cash flow has been helped by disposals, £47,000,000 of pubs and the £206,000,000 we received from the disposal of CNBC, leading to a net cash inflow of £310 €1,000,000 And on the next slide, you can see that, that has then flown all the way through to our debt, with net debt excluding IFRS 16 down to 884,000,000 ahead of our schedule of 2026 and a 27% reduction since 2022.

Speaker 1

Our debt position is predominantly long dated, if you look at the securitization date to 2,035 and our property leasing 30 to 40 years, so less reliance on a medium term bank facility. So overall, a strong financing position underpinned by £2,100,000,000 in assets, which is 83 percent freehold. And I'll come on to the property valuation in a couple of slides. But in terms of financing, the sale of CNBC has enabled us to right size an RCF. We're now at £200,000,000 facility that was extended and amended during the year out to July 26, but there is an option to extend that to July 2027.

Speaker 1

Previously, we had £120,000,000 of that hedged. With the new facility, we now have £60,000,000 and that's fixed at £3,450,000,000 for 2029. Our long dated securitization of £560,000,000 out to 2,035. We do have the £120,000,000 securitization liquidity facility, but that has not been utilized this year. And then the long term leases, which we expect to be last 30 to 40 years, are capped and collared at 1% to 4%.

Speaker 1

So although we have different pieces of debt, we have 100 percent of our medium to long term financing is hedged. And then with regards to our property, we disposed of £47,000,000 disposals in the year and since the year end, we have completed £4,000,000 The high quality 83 percent freehold pub estate was revalued in the summer. That's valued at £2,100,000,000 and within the property uplift, there's been £57,000,000 Net asset value per share of £1.03 an increase on FY23 and that is really underpinned by the performance of the business, leading to higher property valuations and also the debt reduction that has been achieved during the year. With regards to pensions, it's broadly stayed at around £13,000,000 year on year. But importantly, we highlighted previously our results, we have seized the £6,000,000 contribution towards the deficit from the end of 2024.

Speaker 1

So overall, we have high quality assets, which is a predominantly freeholder state and with stable valuations. And as we look out further into 2025 beyond, clearly at the CMD, we highlighted some targets and also there's been an autumn budget since then. But what we expect is through the execution of our operating model, we will offset the impact of the budget measures. So we are today reiterating our commitment to our stated Capital Markets Day targets, including the 200 to 300 basis points of EBITDA margin. So the chart at the bottom of the slide shows that we did expect £4,000,000 of increased wage inflation, around 7% for national minimum wage and other inflation.

Speaker 1

But with the autumn budget and the change to NI thresholds and the slightly higher than anticipated national living minimum wage, there is an additional employment cost in FY25 of £4,600,000 We expect to offset this through productivity, through energy. We have locked in electricity for, 25. We've also got gas locked until March 25, so pretty certain on those costs. And then other efficiencies alongside our focus on to drive spend per guest, we still expect some EBITDA margin expansion in 2025. And as part of our long term targets, then we also see an opportunity for significant organic NAV increase over that time.

Speaker 1

So the opportunity for debt to equity transfer, what we know is that over the next 3 years, we'll pay £139,000,000 of the securitization and amortization, which will also add around 22p per share. And then if we continue to grow ahead of the market or in line with the market on sales and our EBITDA margin, that should drop through to property valuations, which is around 23p per share. And then longer term, as we look to potentially refinance, although we don't need to, there could be some further unlock of value in the future. So this gives you an illustration of where we believe we can add value based on the strategy that was set out at the CMD. So in summary, we have had a good start to FY 'twenty five with like for like sales for the 1st 6 weeks at 3.9%.

Speaker 1

Our Christmas bookings are tracking ahead of last year with high levels of reservations. And then with regards to costs and margin, the autumn budget did place additional pressure on our costs, but we do expect to offset that and we are committed to our €200,000,000 to €300,000,000 EBITDA margin improvement over the medium term. Our cash flow in the year was supported by the CNBC sale, but importantly, we generated £44,000,000 of underlying free cash flow, and we are targeting that £50,000,000 in the near term. With regards to financing, we highlighted back in July that the sale of CNBC would reduce interest costs versus our expectations of around GBP 18,000,000 And also, we've been able to right size that short term finance facility with the banks out to July 2026. So overall, a good FY 'twenty four for the business.

Speaker 1

I'll now hand over back to Justin, so he can share with you some operational highlights.

Operator

Thank you, Hayley. So as Hayley says, I'll now give you some brief highlights from our year operationally. Before I do that though, I did just want to recap a little bit on what we said at the Capital Markets Day 6 or so weeks ago. And the first and very important thing to say is we sit in a very lucrative market and a market that has got significant opportunity. Pubs are right at the heart of U.

Operator

K. Socializing. And hence, that's why you see a market in excess of GBP 28,000,000,000 in value today and a market that's projected to grow at a sustained rate of 3% a year. So a big market and a growing market. And within that, local pubs are thriving.

Operator

So as you can see on the right hand side of the chart, in the last 12 months, the local pubs market segment has been growing at 4%. So a good market to be in for a number of reasons and one that we as Marston's are inherently well placed to capitalize on. We've got a locally based estate, 90% of our pubs are local pubs. They are based in the heart of British communities. And we also have a well balanced management model.

Operator

So the ability to flexibly adapt to changes in the wider world is in our gift as we manage the different management models that we have in our grasp. So real value opportunity in a good and growing market. And it's against that opportunity on the next slide that you see our approach to delivering on that position. We very much set out to have a high margin business, to have a highly cash generative business. And as I say, a local pub company that is based on a differentiated portfolio that seeks to meet the needs of a range of consumer segments.

Operator

That's the core strategy, and that's what we'll endure as we seek to capitalize on the pub market. But we will do that by executing against But we will do that by executing against

Speaker 2

5 key value drivers, and these 5

Operator

drivers will underpin all of our activity in the coming years. So we will seek to execute and have a market leading operating model, the balance between revenue, cost and guest satisfaction, Getting that balance right is key and is value driver number 1. In addition to that, we will use CapEx to create differentiated pulp formats against a range of consumer segments. Thirdly, we will use digital to transform our business and support what we do with our people to drive better service and better efficiency of business operation. Our 4th value driver is about expanding those managed and partnership management models that I talked about a moment ago to help support our business.

Operator

And finally, the 5th value driver that will support us is in leveraging those synergies that we create almost in value drivers 1 to 4 in targeted acquisitions. So 5 key value drivers to deliver on that strategy, and we will consistently manage our success against those with the key metrics that you can see on the right. So we'll seek to drive like for like revenue growth ahead of the market. We'll want EBITDA margin expansion on a sustained basis, so 200 to 300 basis points over the medium term. And any investment CapEx that we do go forward with, we'll always seek to deliver ROICs in excess of 30%.

Operator

So a big focus on growth and focus on those 5 value drivers to get us after that growth. And the good news, as you'll see on the next chart, is that some signs of early success in executing against this strategy in 2024. So I'll look on the next three slides on Value Driver 1, the market leading operating model. And you'll remember from the Capital Markets Day, very clear, this is about balancing the delivery of revenue, cost management and guest satisfaction. So this first chart talks specifically from a revenue perspective.

Operator

You can see from the graph on the left, we've consistently delivered revenue growth ahead of the market in 2024, and we've started very well in financial year 'twenty five on that same path. But the key to success in driving revenue is giving consumers a reason to visit your pubs. A constant stream of news that compels the guests to want to come and see us, to want to come and socialize with us. Cheers to Heroes was our first event of the new financial year this year. That is a partnership with the British Legion.

Operator

It was a month of events in our pubs to celebrate our heroes. And we executed on that really, really well. So it's just a good example of a demand driving event that we'll use to drive footfall into our pubs. So good news in terms of revenue. On the next slide, in terms of cost.

Operator

Haley talked earlier on the progress we've made on driving our margin, made really, really good progress this year on margin. And there's a number of initiatives that we focused on and we'll continue to focus on in our goal and our programs to drive a lean and a flexible cost model. From a labor point of view, there's a lot of work going on with scheduling and rotors using AI and a whole raft of technology to ensure we crucially have the right staff at the right time, to serve our guests. From a food point of view, continued efforts to simplify our offer. And what we do here is we listen very carefully to our consumer insight, and we adapt our food and drink offers accordingly.

Operator

And some of that is about adding menu items. But crucially, it's about learning the areas where we can reduce complexity and take menu items out. So A, you improve the guest offer, but B, you drive efficiency in your supply chain. So really good progress on food and drink. And Haley talked earlier about the work we've done on energy and property.

Operator

It's a core competency in the business now to drive energy efficiency. I'm really pleasing to show that in 'twenty four, we've driven an 8% usage efficiency in our use of energy. So great progress on revenue, really, really good progress on cost. And as I said earlier, you'll see on the next slide, that hasn't been at the cost of reputation. Absolutely delighted that in the context of driving that efficiency, we've still delivered great satisfaction for our guests.

Operator

The feedback in our pubs continues to be very positive. And this is demonstrated by these are record reputation scores for us at 800. We've never scored that high before and a real testament to our pub teams. Day in, day out, delivering really engaging service, being obsessed about meeting the needs of our guests all across the estate, all across the country, really, really good performance. And of course, this is the key indicator of revenue growth in the future is if you give guests a good time, guess what, they'll come back.

Operator

So we'll continue to be a key focus for us is driving that satisfaction. That balance of the satisfaction for guests, your cost efficiency and your revenue is what executing a market leading operating model is. And yes, good progress in 'twenty four, but still more for us to go for in future years of the plan. And it's not really having outlined the drivers for the future and the strategy, it's not really that progress against that at the early stages that leaves us feeling very encouraged for the year ahead. We've got a big and a sustained events program planned throughout the year.

Operator

As I say, giving guests real reasons to come and spend their time with us to come and socialize with us. In quarter 1, it was Cheers to Heroes and it will soon be Christmas. As you would expect, we are now very much engaged in the run up to Christmas. And through quarter 2 to quarter 4, you'll see a constant stream of news encouraging people to come and spend their time with us. But on the right hand side of the chart, remember the other value drivers within the strategy, a key one was about the launch of new formats.

Operator

And you'll see in 2025, our key focus here is on launches of the 2 room pub. This is a pub that is designed to drive appeal with both family diners and pub regulars. It's a format that we've piloted quite extensively. And in all our pilot launches, we've been very successful in driving incremental demand for those locations. So a big focus for our format launches this year will be the 2 room, and we've got high hopes that alongside the events that will augment our revenue delivery and set us up for a very strong and a very positive 25%.

Operator

So as I summarize that on one page, a very strong and a very important year for Marston's, strong financial and operational performance, good early progress against our value drivers, and that's what allows us to confidently reaffirm the targets that we set at the Capital Markets Day. And in turn, as a growing company in a growing market, that will ensure that we really can be reliable deliverers of recurring free cash flow. And with that, I can hand over for questions. Thank you.

Speaker 3

And our first question comes from Douglas Jack of Peel Hunt. Please go ahead.

Speaker 4

Yes, good morning. Thanks very much. Just a quick one. I mean looking at slide 12, which is very encouraging, the offsetting the budget slide, I mean you're really not looking to do an awful lot on price it seems because the component, which is revenue growth initiatives, is quite small compared to the minimum wage impact bar. Is it fair to conclude within that and you're not really looking to do an awful lot of price in the year ahead to offset that?

Speaker 4

That was the first question. Second one was about disposals and how much more do you think you might sell during 2025? And the third one is your leverage is now down to the lowest level since 2006. Is the plan to sort of continue on that trajectory? Or how soon do you think you might be tempted to become acquisitive if the right opportunity arises?

Speaker 4

Thank you.

Speaker 2

Thanks, Doug.

Operator

I'll take the first couple, and then Haley will come to the third one.

Speaker 2

In terms of our revenue and EBITDA drivers for the year, you're right, there will be a mix of if you go back to our operating model triangle, there will be a mix of revenue initiatives and cost initiatives. Productivity is very important, as you can see from that chart, and we will continue with that. And whilst I don't see headline price as the key tactic, as I talked about at the Capital Markets Day, driving revenue through, A, getting more people in, but B, increasing revenue per guest through a whole raft of things is certainly the way we see it. So I think your assumption is fair in terms of our overall approach. I think on the second one on disposals,

Operator

as you can see, this

Speaker 2

is a growth plan. It's not a selling plan. So any per company, there's always some of your businesses that you consider, but I would say that is not in our line of sight at the moment. Disposals are not part of this plan and not a means of us delivering on the cash flow goals that we've got.

Speaker 1

On leverage, Doug, clearly, you've got to the Capital Markets Day that's sort of growth is number one priority. Number 2 is to continue to delever and we expect to be about 4x next 18 months to 2 years. And value driver number 5 is around acquisitions. Clearly, you can never time those acquisitions. So we would always look in the round if there was an appropriate acquisition that supported the 4 value drivers that we've got previous to that.

Speaker 3

Thank you. And we now take our next question, which comes from Fintan Ryan of Goodbody. Please go ahead.

Speaker 5

Thank you. Good morning, Justin. Good morning, Heather. Fintan Ryan from Goodbody here. Just one major main question for me, please.

Speaker 5

Firstly, in terms of your free cash generation for FY 'twenty five, do you think appreciate your midterm ambition is to get to over $50,000,000 for FY 'twenty four, as CapEx spend goes up, would you expect to be able to deliver that free cash flow for FY25?

Speaker 1

When we set that target of £50,000,000 Finturn, we said that was the near term, which 1 to 2 years. Clearly, yes, there is an improvement in CapEx, but that's offset by interest saving and interest as well.

Speaker 5

Okay.

Speaker 3

Thank you. And we now have a question from Anna Berenfrader from Panmure Liberum. Please go ahead.

Speaker 6

Thanks very much. Looking sort of longer term out and your securitization, I know that sort of costs of early redemptions are pretty punitive and associated costs. But it is something I think you look at from time to time. So can you give us a sort of a view, I guess, on where you think the costs are or what conditions interest rates could be to sort of loosen up the penalties of refinancing or paying down some of that debt faster, please?

Speaker 1

So I think it's a balancing act for all of these. And one of the compromises clearly is interest rates have gone up. The value of that swap has come down over time. I think previously it was up at £250,000,000 so it's now a lot lower than that. But overall interest rates going up means that any cost of new finance is a little bit more expensive.

Speaker 1

So we are constantly reviewing it in line with strategy. At the moment, we've set out that we can deliver the strategy that's set out at the Capital Markets Day, but we will keep an eye on the sort of markets to what's an appropriate instrument and when it's appropriate to refinance. And I guess that's all we can sort of say as it is today. We were focused on delivering the strategy that was set out.

Speaker 6

Okay. Thanks very much.

Speaker 3

Thank you.

Speaker 5

Particularly within the on trade. Wondering, does this change for you and anything with relation to your relationship with your ex JV and with the CosCare company? And could you consider some alternatives firing particularly within that cask ale segment? Mike, would you turn the Yes,

Speaker 2

that's Vincent. If you just go on mute, sir. Thanks. So obviously, we exited CNBC in the middle of the year. So Arnt and weren't party to those decisions.

Speaker 2

One of the good things about our arrangement when we did exit was we continued with our partnership agreements. And that what that allows us to do is keep a really strong relationship with CNBC and the distribution contracts we have. But we do also have freedom to work with the other big vehicles, which we do in addition. So we have the flexibility across our pubs to consider a range of different CASKEG and Lager brands.

Speaker 3

As there appears to be no further questions at this time, I'd like to hand the call back over to you, Duncan, for any additional or closing remarks.

Speaker 2

Just to say thanks, everybody, for joining us. Really appreciate you taking the time. Best wishes to everybody for the festive season. And there's still a few slots available if you want to book a lunch in at Marston's Pub. Thank you very much.

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