Greene King, current trading, consumer confidence & other:

A DAY IN THE LIFE:

IT issues persist. On to the news:

GREENE KING FULL YEAR NUMBERS:

Greene King has this morning reported full year numbers for the 52wks to 30 April 2017 and our comments are set out below:

Headline numbers:

⦁ Greene King ‘record revenue, up 6.9% to £2,216.5m, and operating profit before exceptional and non-underlying items, up 4.9% to £411.5m.’

⦁ The group reports ‘strong free cash flow generation; £119.6m post core capex & dividends’

⦁ Debt is now 4.0x EBITDA & the group reports that it has long-term debt financing in place

⦁ The return on capital employed has been maintained at 9.4%.

⦁ Adjusted EPS is up by 1.3% at 70.8p and the full year dividend is +3.6% at 33.2p

⦁ Pub company LfL sales are +1.5% ‘ahead of the market, driven by a good Christmas, a stronger fourth quarter and a strong performance from Greene King Locals.’

⦁ Pub Partners LFL net profit is up 5.0%.

⦁ Brewing & Brands revenue is up 1.7% with own-brewed volume (OBV) down 2.8% (though the group says this is ‘beating the UK cask ale market’.

⦁ All LfL numbers have trended up towards the year end, suggesting that GNK had a very good Q4. 

Further trading comment:

⦁ GNK CEO Rooney Anand reports ‘Greene King has delivered another set of record results, generating full year EBITDA of over £500m for the first time.’

⦁ He adds that the group has created ‘a stronger, more competitive business with an industry-leading portfolio of brands.’

⦁ Mr Anand adds ‘our performance has been achieved against a demanding backdrop of increased costs, weaker consumer confidence and increasing competition.’

⦁ Tough markets: Mr Anand comments ‘while I expect these challenges to intensify over the next few years, Greene King has a very strong track record of delivery in tough market conditions.’

⦁ Overall, the group ‘will target further market outperformance, in a growing market, supported by additional cost efficiencies, a robust balance sheet and strong cash generation to deliver long-term growth and attractive returns for our shareholders.’

Cash flow, balance sheet, debt & strategy:

⦁ GNK reports ‘operating cash flows remained very strong.’ It says ‘we generated free cash flow (FCF) of £119.6m, ahead of our scheduled debt repayments of £55.0m and after our core capital expenditure and dividend payments.’

⦁  Group net debt at the year end was £2,074.5m, an increase of £26.1m from last year.

⦁ GNK adds ‘our credit metrics remain strong with 96% of our interest costs at a fixed rate and an average cash cost of debt of 6.3%. Fixed charge cover was maintained at 2.3x and net debt to EBITDA increased slightly to 4.0x from 3.9x last year.’

⦁ Re purchases & disposals, GNK comments ‘total capital expenditure during the year was £194.9m with a further £39.1m of expenditure relating to pub repairs’

⦁ It says ‘there were 11 new pub openings during the year. We also invested £33.0m in our brand conversion and IT integration programme.’

⦁ GNK says ‘we disposed of 65 pubs in Pub Company, 54 pubs in Pub Partners and three closed pubs, which led to a profit on disposal of £3.4m and raised proceeds of £88.6m.’

Outlook:

⦁ Greene King says ‘consumer confidence in the UK has softened over the last 12 months with nominal wage growth starting to fall behind rising levels of cost inflation leading to a squeeze on disposable household income.’

⦁ It says ‘we believe that affordable treats such as visits to the pub will continue to play an important role in consumer discretionary spending.’

⦁ GNK adds ‘we anticipate that this challenging environment will intensify over the next few years, partly due to the ongoing political and economic uncertainty in the UK.’

⦁ The group believes it is in a position to outperform.

⦁ Re trends, GNK says ‘consumers are raising their expectations for their eating and drinking out experiences, particularly in the value, quality, service and environment of the offer, while they are also increasingly seeking out healthier options in their food and drink options.’

⦁ Re current trading, GNK comments ‘in the first eight weeks of the year, Pub Company trading has been in line with our expectations, bearing in mind the tough comparatives from last year.’

⦁ The group says ‘Pub Partners has seen a slower start to the year but this was anticipated as we start to annualise the benefits from the Spirit integration.’

⦁ GNK adds ‘Brewing & Brands has returned to OBV growth with a strong start to the year in the take home, free trade and export channels.’

⦁ Langton Comment: Greene King has confirmed both that 1) it had a good Xmas & Q4 was strong, but has also 2) pointed to a more challenging market going forward.

⦁ Trading has slowed and the group remains ‘cautious but well-positioned’ etc.

⦁ The integration of Spirit has gone well.

⦁ The performance of tenanted houses is good & beer has moved back into growth in the new financial year.

⦁ Overall, GNK remains concerned about the wider economy and mentions Brexit, input costs, rising wage inflation and consumer confidence issues.

⦁ Uncertainty is unavoidable. We believe that this is more likely to lead to a delaying of large-ticket rather than small ticket purchases – although the pub is not immune.

⦁ GNK is one of the UK’s better-positioned pub companies and, with its shares now trading at a single-digit multiple, it is not expensive. However, with a big acquisition under its belt, the group has to execute on its strategy and cautionary comments may put off would-be buyers in the short term.

PUBS & RESTAURANTS:

⦁ Hony Capital, owner of PizzaExpress, has said that it wishes to grow its global network of retail restaurants to 10,000 over the 10yrs from c850 now. In an interview with Reuters, the investor said that it wishes to be a top world food and beverages player.

⦁ Hony said ‘when we were working on the takeover of PizzaExpress in Britain, we struggled to find a nice Chinese restaurant at the time. Given the large Chinese population residing there and lack of authentic Chinese food chains, it’s a huge opportunity for us.’

⦁ Tommi’s Burger Joint is planning to open 30 sites across the UK. The Icelandic business expects to open 60-70% of the restaurants in the Greater London area.

⦁ The BBC has found bacteria from fecal matter in ice served in Costa, Starbucks and Caffe Nero. An expert on the matter, Tony Lewis said ‘These should not be present at any level – never mind the significant numbers found’, he went on to describe the bacteria as ‘opportunistic pathogens – the source of human disease’.

⦁ Vianet, the IoT pub beer flow monitoring company, is holding its AGM today. The group’s Chairman, James Dickson reported on recent trading ‘The Group’s trading in the first two months of the current financial year is in line with expectations and our business areas are progressing well’.

⦁ Neil Rankin is to open his second restaurant next month, following the success of the barbecue-based Temper in Soho. The second site will focus on curry cooked over an open fire pit, and will be located in Angel Court.

⦁ The owners of PizzaExpress, Hony Capital, plan to bring its Chinese restaurant concept Beijing Hehegu to London this year. The chain currently has 850 restaurants, and it plans to reach 10,000.

⦁ Brasserie Bar Co, the parent company of White Brasseries and Brasserie Blanc chains, has raised £20m in new funding from OakNorth. The 35-strong chain plans to use this cash to roll out a further 24 sites by 2022.

⦁ Meal delivery company Blue Apron’s IPO turned into a $1.9bn down round, writes the FT, after the do-it-yourself meal delivery service raised just $300m on concerns about profitability and competition. While net revenues in 2016 more than doubled to $795m, the company has yet to make a profit, with net losses increasing from $47m to $54.9m last year and the IPO prospectus itself warning that it ‘may incur significant losses for the foreseeable future’ due to the expense of technology, infrastructure and marketing investments.

⦁ Blue Apron’s prospectus also admits that competition in food sales and, more specifically, in food delivery, is expected to increase. The recent acquisition of Whole Foods by Amazon might have tempered investors’ enthusiasm, as it could signal the first steps of the tech giant into the DIY meal delivery market. All considered, Blue Apron  sold 30m shares at $10 a piece — significantly below the company’s desired $15-$17 range and pricing the company at less than the $2bn valuation in its last private funding round in 2015.

⦁ The healthy-eating, fast-food concept, Leon, is to open its first roadside venue as the group partners up with Roadchef, the MCA has reported. The restaurants will be opened on the M6 near Norton Canes.

⦁ Last week’s heatwave has caused English winemakers to be optimistic about this year’s harvest, helping mitigate the lingering effects of late Spring frosts. It was feared the frosts could affect yields by up to 80%, but winemaker Bob Lindo of Camel Valley, Cornwall, says the heatwave has ‘reset expectations to normal’.

⦁ The UK’s leading Supermarkets had their fastest yoy rise for the four-weeks to 17 June since July 2013, helped on by June’s heatweave. Sales were up 4.0% yoy, with sales up 5.7% for the final week of the period. Tesco enjoyed the biggest rise for the top four with 4.2% sales growth, whereas discounters Aldi and Lidl saw 16.6% and 16.0% growth respectively.

⦁ Kantar Worldpanel says own label products are booming throughout most of the grocery sector. Asda is the only retailer in which branded product sales outgrew own label for the 12 weeks ending June 18, but even then it’s own brand was performing steadily according to Kantar.

COSTS & CONFIDENCE:

⦁ UK foodservice inflation rose to 9.0% in May reports CGA Prestige. Highest rate in 9yrs. It reports that fruit & dairy costs are rising.

⦁ CGA Prestige has foodservice inflation up from 5.8% (in April) to 9.0% (in May) in just one month. All ten sub-categories recorded higher prices year on year.

⦁ Dairy price inflation is 9.9% reports CGA Prestige. Fruit price inflation is 12.7%. Labour shortages may exacerbate the situation.

⦁ CGA Prestige reports a number of ‘factors have added to inflationary pressures in foodservice, including UK political uncertainty surrounding Brexit negotiations, the General Election and fluctuating oil prices’. The latter at least have been going down for some time.

⦁ CGA Prestige sees ‘sharp upswing in costs for the sector in 2017’. It says ‘there are few places to hide’.

⦁ Consumer confidence lower per YouGov poll. See Finance & Markets below.

⦁ Separately Bank of England governor Mark Carney has said that consumption may have to take a back seat to investment in the coming years.

HOLIDAYS, LEISURE TRAVEL & HOTEL:

⦁ PPHE Hotel Group has announced the sale and leaseback Park Plaza London Waterloo for £161.5m. The unit will be leased back on a 199yr agreement with an initial £5.6m rent. CEO Boris Ivesha comments ‘this sale and leaseback will unlock the capital invested in Park Plaza London Waterloo whilst allowing us to continue to benefit from the operation and associated profits. This transaction is in line with our strategy to realise shareholder value.’

⦁ Security in Tunisia has been ‘dramatically tightened’ in the two years since the Sousse massacre, but the country’s tourist office says tourism will only recover if British holidaymakers return. Sami Tounsi, trade manager at the Tunisian National Tourist Office, said: ‘The security has dramatically tightened on the borders and hoteliers are day by day embracing the new culture of security and safety within and outside hotels thanks to the tremendous and productive cooperation between the UK and Tunisian governments.’

⦁ Greece has been added to a growing list of countries where tourists making bogus holiday illness claims could face criminal charges. The Foreign and Commonwealth Office last week included Bulgaria and Turkey in a group already containing Spain and Portugal, which were highlighted in April and May, while Abta has stepped up its Stop Sickness Scams campaign by encouraging travel companies and consumers to lobby their MPs over the issue. Travel Weekly is also calling for industry support for our Fight Fake Claims. Supporters of these efforts include destination representatives and the UK’s major operators including Thomas Cook, Tui, Monarch and Jet2holidays.

⦁ The extended-stay hotel sector is on the rise in Europe and both international and local operators are adding dozens of such hotels to their portfolios across the continent. Big chains like Marriott International and AccorHotels are among those leading the charge, with the United Kingdom and Germany evolving as the prime target destinations for most brands. Andrew Harrington of London-based boutique investment bank AHV Associates said: ‘We are very behind in Europe in comparison with the United States, where the concept started decades ago largely because of greater labor mobility. In Europe, this is restricted because you have something like 28 different countries, plus there are language issues. In the United States, you have a cookie-cutter model that works in New York or Texas or Colorado, and the zoning laws and planning laws can be very similar, while in Europe these laws
differ a lot between Rome and London and Madrid.’

⦁ Scandic Hotel Group has agreed to buy the hotel assets and operations of Finnish group Restel for €114.5m ($129.8m) on a cash and debt-free basis. The move makes Scandic the largest player by hotels and room count in Finland — a feat that it has also achieved in Norway with its 2014 purchase of Rica Hotels. The Restel deal will add approximately 7,600 rooms in 43 hotels, all in Finland, to Scandic’s portfolio of 45,000 rooms.

⦁ Municipalities across the United States are seeking approvals, funding or public-private partnerships to develop or redevelop their convention centers with an attached, big-box hotel.

FINANCE & MARKETS:

⦁ Carney spooks market with rate hike talk. Tell it like it is, Mark?

⦁ Sterling & UK gilt yields up sharply on Carney comments re possible upcoming interest rate rises. Bank governor says ‘some removal of monetary stimulus is likely to become necessary’.

⦁ Bank deputy governor Sir Jon Cunliffe yesterday muddied the waters by saying that he did not think now is not the right time for a rise. Sir Jon said consumer spending ‘is slowing as households’ real incomes are squeezed by higher inflation, we expect some of that slowing to be offset by growth in business investment, growth in exports. And I want to see how that plays out.’

⦁ Bank of England governor Mark Carney says 80% of the world economy is now growing above potential. This has implications for interest rate trends. The governor spells it out, saying ‘If these intentions are realised, the global equilibrium interest rate could rise somewhat’.

⦁ Governor says ‘all expect that any changes [interest rate rises] would be limited in scope and gradual in pace.’

⦁ Governor sees less spending, more investment. He says ‘after an expansion that has relied overly on consumption, the rotation to other components of demand, particularly investment, will be important to sustain momentum.’

⦁ Strong & Stable Theresa signals end to public sector pay freeze is possible. Apparently unconnected to 6ppt Labour poll lead.

⦁ YouGov & CEBR report consumer confidence has collapsed following Theresa May’s General Election gamble. YouGov reports ‘consumer confidence has been generally ticking downward since last autumn but the events of the past month have placed it under greater pressure. The hung parliament seems to have further dampened consumers’ spirits, which were already sinking following the continued squeeze on household finances.’

⦁ UK house prices bounced back in June per Nationwide to an annual growth rate of 3.1% (from 2.1% in May)

⦁ Oil up to $47.52

⦁ Sterling higher at $1.2952 and Euro 1.1357

⦁ UK 10yr gilt up to 1.16% from 1.09%. It was 1.01% earlier in the week

⦁ World markets: UK, Europe down yesterday. US up and Far East up in Thursday trade

YESTERDAY’S LATER TWEETS:

⦁ BBC reports ice from Costa, Starbucks & Caffe Nero contained bacteria from faeces. Programme Watchdog airs at 8pm

⦁ Overcapacity issues raised as number of shops converted into F&B outlets is on the rise

⦁ Northgate says UK van hire disappointing in 6mths to April. White van hire a portential lead indicator?

⦁ The Independent reports consumer confidence ‘has collapsed following Theresa May’s General Election catastrophe’

⦁ YouGov & CEBR report “pronounced collapse” in confidence following election (from 109.1 to 105.2)

RETAIL NEWS WITH NICK BUBB:

⦁ JD Sports: Ahead of today’s JD Sports AGM trading update the high-flying share price has been under a bit of pressure, as if something might be amiss in terms of current trading and the news is mixed. The bears will seize on JD’s unwillingness to give any cumulative LFL sales figures, because of the calendar shift of Eid and the tough Euro 2016 comps. But the bulls will point to the comment that “nevertheless, we are pleased to confirm that growth to date in Group LFL store sales and further significant growth in the Group’s Online sales have been in line with our expectations”. And JD boss Peter Cowgill goes on to say “Whilst we have faced some anticipated margin pressure in achieving the sales growth, the Board considers that the Group is currently on track to deliver a result for the full year in line with market expectations”. So all will be revealed when the group announces its
interim results (for the period to 29 July) on 12 September and it will be interesting to see how the City reacts this morning.

⦁ Tesco/Booker: The wretched CMA has agreed to “get on with it” and fast-track the inevitable decision to go to a full Phase 2 inquiry into the Tesco/Booker deal, at the request of the two companies.

⦁ Dixons Carphone: At the Dixons Carphone analysts meeting yesterday, the CEO Seb James, wasn’t pressed to explain his comment in the final results statement that “the UK consumer environment seems to be holding up for us”, but he did go to great lengths to emphasise how the core UK Retail business had changed for the better since the merger and the oddly named Feilim Mackle, the CEO of Services at Dixons Carphone, was called out several times as the man of the moment (he is presumably behind the re-branding of the Knowhow service operation as Team Knowhow). Seb even went so far as to argue that Dixons Carphone isn’t really a retailer any more, as over half of profits now come from services and recurring income rather than from transactions…The FD Humphrey Singer was less convincing when pressed in the Q&A to explain the £50m P&L benefit to the core UK business from “an in-year
benefit of £28m from changes in the cost profile of services provided under long-term customer support agreements” and “changes in contractual terms for the sale of third party insurance contracts of £22m”, blustering that there’s “a lot going on in the business”, given the store refit programme and the upheaval in the mobile phone market…The share price soon boiled over once the messy P&L accounting became clear (which included a one-off £5m benefit to the interest line from a loan note repayment from the ill-fated UniEuro business in Italy).

⦁ Grocery Market Share Watch: We flagged on Tuesday that Nielsen said that over the 4 weeks to June 17th the whole grocery industry grew by 4.0%, but the rival Kantar monthly grocery market share data was not quite so bullish, reporting 3.7% growth from its “Total Till” panel over those 4 weeks, with Aldi and Lidl growing by as much as 17.3% on a combined basis, although the “Big 4” were up  by 2.7% overall: Tesco was up by 3.7%, in gross terms, Asda was up by 1.5%, Sainsbury was up 2.2% and Morrisons was up by 3.2%, whilst M&S Food was up by “only” 4.2%.

⦁ News Flow This Week: With the end of the month fast approaching now, the widely-followed monthly GFK Consumer Confidence survey is out first thing tomorrow.