Langton Capital – 2020-11-27 – PREMIUM – More from M&B & Fuller’s, Tiers, reaction, northern pubs etc.:
More from M&B & Fuller’s, Tiers, reaction, northern pubs etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, with Hull in the news as a coronavirus hotspot and many of its residents giving their views to various TV journalists, I’ve had a chance to freshen up my accent.
Much to the annoyance of whomever is in the room with me as I’d forgotten that ‘Gowie Nerm’ wasn’t the name of a local footballer but rather it meant ‘returning to my residence’ and that a ‘Kirker Curler’ wasn’t a device intended to change the shape of your hair that was often found in churches but was a can of Coke.
Anyway, with pubs closed in Hull – and in 40% or so of England including nearly 80% of the North – it might be a dryer run up to Christmas than we had wanted, hoped for or expected.
But the fat lady hasn’t sung yet. There’s certainly a bit of a backlash going on. Just verbal, at present. But there just might be a rebellion on Tuesday and rules could yet get changed on 16 December. On to the news:
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MITCHELLS & BUTLERS WEBINAR: Following the announcement of its FY numbers, Mitchells & Butlers hosted a webinar & our comments are set out below. 27 Nov 20:
Trading backdrop – brief history:
• M&B reports the FY ‘started well’ with operating profit growth c5%. Lockdown 1.0 lasted for 14wks with 99% of teams furloughed. It was ‘in great shape before the pandemic’.
• Reopening on 4 July went smoothly. Suburbs outperformed city centres. Nicholson’s was poor, Miller & Carter did well
• September saw rules tightened (10pm, table service etc.) and Lockdown 2.0 began on 5 Nov. Alex in Germany is closed
• England reopens 3 Dec with tighter restrictions. Hospitality ‘has been hard done by’.
• Xmas should be a profitable month. But it will not be ‘normal’. The group welcomes news of several vaccines.
• Not all bad. Click & collect and table service have grown sharply, video-conferencing should save costs and there will be fewer restaurants and pubs operating as competitors post Covid
• Will you retain cost cuts post Covid? Order at table has been rolled out. This is c30% of orders. Cuts queueing and may enhance orders as a result. It can increase order-size. Also, delivery is now seen ‘as a realistic sales channel’. Some of these sales will be incremental.
• Cash has been ‘resilient’ with capex down and debt unchanged on the year. The group has extended debt facilities & obtained covenant waivers
• Cash burn is £35-40m ahead of debt servicing.
• Part of the H1 asset write-down has been reversed. Assets are 390p per share.
• The group has not ‘come anywhere close’ to drawing down on all of its available debt facilities. Cash flow should be good over Xmas. The group will consider its facilities in the new year ‘and any other types of financing that the group may need’.
• Suburbs vs city centre? Nicholson’s down ‘several tens of percentage points’ whilst Miller & Carter has been ahead of last year at times
• This is uncertain and the co cannot give guidance other than to say it is well-positioned and that its customers want to come out and spend
• Prior to lockdown 2.0, pubs in Tier 1 were down ‘high single digits’ and pubs in Tiers 2 & 3 were both down ‘30% to 35%’
• Capex probably £100m to £135m depending upon how many units can open & for how long
• Cash burn is up a little. Furlough terms different (paying pension & NI).
• When can you get to pre-Covid levels? $64,000 question. Probably ‘during next year’.
• This has been a remarkable year. Storms Ciara and Dennis have been completely forgotten.
• The group will review its pension contributions later in the year.
• M&B says that it breaks even at 60% to 65% of LfL sales. This is pre any government support.
• M&B maintains that it is ‘well-positioned’ relative to the hospitality industry as a whole. It’s performance pre-Covid and in August suggests that this is the case
• Central London units (and city centres in general) have not been good. The company has not been specific but the gap in performance is likely to be very large. Suburbs have been strong.
• With no guidance possible as to trading, forecasts are not meaningful. Provided a path to normality is established, and we believe that it should be, we agree with M&B that it is well-positioned relative to its competitors
• There will be less units across the industry as a whole and, despite economic difficulties, we believe that consumers will want to spend
FULLER, SMITH & TURNER: Following the announcement of its H1 numbers, Fuller’s also hosted a webinar & our comments are set out below. 27 Nov 20:
• The pattern is a familiar one. Pre-March, good. March declining ahead of lockdown. Lockdown & zero trading. Then re-opening & a steady build towards a good August with EOTHO (suburbs > city centres & London tough) then tougher regulations, sticky October & another shutdown.
• Fuller’s maintains that the restrictions brought in in Sept & Oct, ahead of lockdown 2.0, were ‘unnecessary’ and against the ‘clear evidence that hospitality was operating safely’.
London vs provinces – Cotswolds, etc.
• London was particularly impacted by the ban on gathering of more than one household. Ex-London has performed well. Some 56% of total units are outside the M25. Recent acquisitions have been outside the capital but the co remains positive on London longer term.
• Staycations have benefitted units such as those bought with Cotswold Inns & Hotels. The group has supported its tenants via rent holidays and a tapered reintroduction of rents.
• LfL sales since reopening have been 75.2% of last year. This was ‘dragged down’ by Central London units. The company made money in August-September despite restrictions becoming more onerous during the period.
• Urban London units were at 45.1% of last year. Pubs outside the M25 were 91.5% of last year. Rural pubs were 103.3%.
• Q&A: How did London trade in Tier 2 last time? Last time, no household mixing, business meetings were OK, and you could simply have a drink. This time, you need to have a meal. Last time, sales improved over time. They believe they will reopen in suburbs but, if offices remain empty, they will think twice about reopening in Tier 2 areas.
• The group is maintaining its investment in pubs & people.
Debt & balance sheet:
• The group needs to refinance in 2021 due to the pre-existing maturity of its debt and discussions are underway. The group is 92% freehold.
• Outlook. The company is beginning to see a way through. The group hopes to operate without restrictions some time after the beginning of its next financial year from April 2021. It believes it is well-positioned to return to growth.
• Q&A: How will you decide which units to reopen? They will open for choice. But they need to know which pubs are in which areas. Every pub is different. Ranging between 30% of normal revenues to around 50%.
• Are you passing the VAT cut on? No, the company is keeping it.
• They have an Order & Pay facility. Web-based rather than an app. Co says it ‘was never there to replace people’. Customers seem to ‘prefer to be served by a person’. Nor does the company believe that click & collect ‘is a natural fit for Fuller’s’.
• Re the market as a whole. It feels as though the casual diners came into the pandemic is poor shape. The pub companies, as a whole, were in a much better position.
• Post 2 Dec, will you be able to increase capacity in each pub? Yes, internally, perhaps a little. The new Tier 2 restrictions apply outdoors as well as indoors.
• This would appear to be a primarily northern issue.
• The measures are set to be voted on next Tuesday. It is likely the government will be able to push them through but, with c70 MPs in the Coronavirus Recovery Group pushing for more normalisation, that cannot be taken for granted.
• The regions within the tiers will be reviewed every 14dys. Hence, it is possible that some cities and regions will move from Tier Three down to Tier Two on 16 December. The rules within each tier will be reviewed four-weekly.
PUBS & RESTAURANTS:
Trade very much out of love with the Government #4 – Tiers announced.
• The government yesterday allocated regions to Tiers. Matt Hancock told the Commons that more regions would be in the top two tiers, and he wasn’t kidding. Only 1% or so of the population of England is in Tier One.
• A brief reminder as to the rules.
• Tier One. Rule of Six. As Poppleston Allen says, ‘businesses must not accept a table booking for a group of more than 6 individuals or admit a group of more than 6 people, unless there is a qualifying exemption.’ Last orders 10pm, close 11pm.
• Tier Two. Meet only other members of your own household. And venues must close unless they operate as if they were a restaurant. They may only serve alcohol as part of a ‘substantial’ meal. Last orders 10pm, close 11pm. Alcohol can be served at breakfast.
• Tier Three. Pubs & restaurants shut except for delivery, takeaway and click & collect. Thankfully, the government says that you can order food or drink ‘by post’. Customers are not allowed to enter premises.
• Major cities in Tier Three, such as Manchester, Sheffield, Birmingham, Stoke, Newcastle, Middlesbrough, Sunderland, Hull, Leeds, Bradford, Derby, Leicester, Lincoln and Bristol will have shut pubs until at least 16 December
• Liverpool, York & London are in Tier Two and virtually nothing (apologies to the Isles of Wight & Scilly and to Cornwall) is in Tier One.
• ‘Bad’ might sum it up.
• The BBPA says ‘over 30,000 pubs in England will either be forced to remain closed or be rendered unviable due to 99% of the country being placed under tighter tier two and tier three restrictions.’
• It says ‘16,454 pubs will be forced to close as they are in tier three regions. Of the 21,091 pubs that are in regions classified as tier two, 13,920 pubs will either remain closed because they don’t serve substantial meals, or will be financially unviable due to the impact on revenue of the additional restrictions, including no household mixing and only serving alcohol with meals.’
• The BBPA says ‘despite the perilous position pubs find themselves in, the Government is not providing sufficient support to them, the trade association says. At present, grants for pubs are as low as £1,300 a month – not even enough to cover basic fixed costs. This, the BBPA says, means many will be forced to close unless the Government changes its approach, or provides them with the level of grants they need, like it did during the first lockdown.’
• Emma McClarkin says ‘with 99% of the country under tighter tier two or tier three restrictions, there will be carnage unless the Government acts immediately. Pubs face full closure if they are drinks led or in tier three. We need the Government to recognise the impact of these restrictions and urgently provide more financial support.’
• She says ‘we cannot overstate how serious the situation is currently facing our staff, communities and businesses. The future of hundreds of breweries, thousands of pubs and tens-of-thousands of jobs hangs in the balance. The focal point of countless communities in every region of the UK could be lost forever, the social consequences of that do not bear thinking about.’
• Pubs singled out without supporting data?
• JD Wetherspoon has updated on trading saying that ‘it has 13 pubs in England which are classified as tier one. In addition, there are 51 pubs in Wales, where the regulations approximate to tier one in England.’ It adds ‘tier two comprises 435 pubs. This tier includes 17 pubs in Scotland where the regulations approximate to tier two in England.’
• JDW adds it ‘has 366 pubs which will remain closed. 315 of these pubs are in tier three in England. 51 are in Northern Ireland and Scotland. These 51 pubs have similar restrictions to tier three in England. This group of pubs will remain closed, since opening for takeaways, for example, is unlikely to be a realistic proposition.’
• Chairman Tim Martin says ‘the government has extended a form of lockdown, by stealth, in large swathes of the country.’ He highlights the JDW magazine, in which he says the company illustrates ‘the errors of judgement made by the government and SAGE.’
• UKH has said that many hospitality businesses will operate under ‘crippling conditions in the run up to Christmas’. It says the trade could see £7.8bn of revenue wiped out compared to last year if the new regulations last for all of December.
• A substantial meal is deemed to be at table. Alcohol may only be served with such a meal. The regulations say that a ‘table meal’ is one ‘eaten whilst seated at a table or at a counter or other structure which serves the purpose of a table and is not used for the service of refreshments’ (i.e. not at the bar). Some operators are suggesting that a knife and fork may need to be involved.
• Conservative MPs have called on the government to publish more evidence to justify areas of England being put into the higher tiers of Covid restrictions when the lockdown ends next week.
Tory rebellion brewing?
• The BBC reports that several Tory MPs have criticised the introduction of the stricter measures. The Covid Recovery Group, made up of Tory backbenchers, said it was “authoritarianism at work”. The government has promised to publish an impact assessment early next week before MPs get a chance to vote on the new rules on Tuesday. Presumably the delay is because either a) it doesn’t exist yet or b) the government does not want to allow much time for study.
• The BBC reports Labour is expected to decide early next week whether to back the plans after consultation with government coronavirus experts.
Alleged anti-northern bias worries ‘blue wall’.
• Northern pub leaders have complained that their regions are being ‘disproportionately targeted by new Tier System.’ They say ‘pubs, livelihoods, employment and communities will be destroyed by Mr Gove and Mr Hancock’s shameful targeting of them in the new tier system.’ They say that ‘Tier 3 is a lockdown through stealth and deceit.’
• The northern leaders say ‘Mr Gove, Mr Hancock and Mr Johnson are wilfully dealing out certain economic ruin to our pubs and the North. The North’s community pubs will suffer disproportionate hardship as the North has more drinks led community pubs than other parts of the country as a result of its industrial heritage.’ They add ‘in Tier 2 and above most pubs in the North (and elsewhere) are unviable, have been given insufficient financial support and will fail. There is no comparison to the current treatment of the pub industry – the lack of logic and inexplicable scapegoating of these community assets is a total disgrace when set against the context of what else is now allowed.’
• The leaders, including Thwaites, Joseph Hold, Hydes, JW Lees and Robinsons say ‘the government needs to be balanced and rational – in Tier 2 pubs either need the mixing of 2 households and to be able to serve alcoholic drinks without food or more financial support at this critical time.’
• S4labour has lowered its forecasts for the recovery of the on trade. It says originally, its research ‘showed a relatively optimistic outlook, factoring in the pre lockdown bounce indicating strong consumer confidence, however the recent announcements regarding a toughened of trading conditions for the majority of operators has significantly dampened the forecast.’
• S4labour says, using Wales as a model, ‘we could expect to see a circa 60% uplift in sales across England on pre lockdown trading. However, as Wales came out of lockdown in conditions that loosely looked like England’s tier 1, much of this analysis will be redundant in as many operators will exit lockdown and move straight in to toughened tier restrictions. During any normal December, we would factor in a circa 40% month on month uplift in sales, however, for the majority of operators, the work parties and general public splurge requires a significant down forecast.’
• S4labour says ‘the few operators in tier 1 could forecast a December that is 150% up on October, yet still down 25% on last year. Those in tier two, which seems to be the most part of the UK, whose trading conditions are much like those in the previous tier 3, can forecast sales that are 110% up on October yet down 45% on December 2019, with tier 3 operators trading in conditions that are similar to lockdown 2.0, and sales all but evaporated.’
Other trade comment:
• CEO of Marston’s, Ralph Findlay, says ‘in early July, we were credited for having opened safely and responsibly. Since the end of September, the UK Government has leaked, launched, and layered a labyrinth of legislation on pubs, and pubgoers and our employees are paying a heavy price. This latest plan smacks of the fog of politics, and the Prime Minister has lost his way.’
• Nick Mackenzie, CEO of Greene King says ‘the winter plan is another crushing blow for pubs and we have been unfairly singled out with punishing and unjustified restrictions that will make pubs across the country unviable through the most important month of the year. There is no clear evidence to show why it’s safe to have a meal and a drink in a restaurant, or mix socially behind closed doors at home over Christmas, but you can’t have a pint in a pub.’
• MD of JW Lees, William Lees-Jones, says ‘we are feeling very disappointed by the government’s current attitude towards pubs, especially when we have made our pubs safe places to be with investment and training. We are bearing the financial brunt of the Winter Plan, with all of JW Lees tenants paying no rent, beer stocks built up ready for Christmas and pubs ready to re-open next week.’
• Mr Lees Jones says ‘we expect reasonable compensation from government since the current grants and furlough support in no way make up for the pub sector being sacrificed at our busiest time of the year. We estimate that the current proposed measures will cost JW Lees around £2 million which is 1/3 of a normal year’s annual profits owing to the timing of the restrictions.’
• CAMRA says the new measures are “devastating” given their timing.
• Michael Kill, the CEO of the Night Time Industries Association, says ‘the Government must compensate these businesses for the period of time they have been closed, and the loss of business suffered due to restrictions through the festive period.’ He adds ‘the sector has suffered horrendously since the start of the pandemic and is bearing the burden, so that other sectors are able to open during the festive period.’
• CEO of Fuller’s, Simon Emeny, tweets ‘these decisions regarding the tier system are clearly being taken by ministers whose idea of a Great British Pub is a restaurant with Draught beer that they go to for dinner with their partner.’
• Jonathan Downey tweets the tier system ‘means 99% of us can no longer go to the pub just for a pint. These restrictions will last well into the new year and possibly for the next 4 months.’
• Charlie Gilkes, joint founder of The Inception Group, tweets ‘half the nation’s pubs, bars and restaurants have just lost their most important four trading weeks of the year and the rest will make a tiny proportion of their usual take. Urgent increased support needed for this sector to survive until April.’
• Trade journal Global Capital reports that the ‘Greene King securitisation faces default as bondholders face a choice’. Speaking of the Spirit Issuer bonds, it says the bondholders ‘declined to waive potential covenant breaches in the same way they did for other pubcos, including the company’s larger, whole business securitisation.’
• Reuters points out that Fuller, Smith & Turner Plc said on Thursday it had cut 20% of jobs since the start of this financial year
• The Drinks Trust has partnered with Spectrum.Life, a leading corporate health and wellbeing provider, to provide enhanced wellbeing support to the drinks industry across the UK.
• M&S says that up to 15% of its food product lines could be unavailable in its Northern Ireland shops in January.
HOTELS & LEISURE TRAVEL:
• IATA says London has suffered a 67% decline in airline connectivity in the last year. A year ago, it was the ‘most connected’ city in the world but, by September 2020, it had fallen to number eight.
• IATA says world airlines could lose around US$118.5 billion this year.
• Eurostar says it has seen a 95% drop in traffic. It has called on the UK government to provide similar financial support to that recently announced for England’s airports and for the airline sector as a whole.
FINANCE & MARKETS:
• The Guardian says the government will need to find up to £27bn worth of spending cuts or tax rises by 2024 to put the public finances on a sustainable footing. The Telegraph says it is £30bn.
• The OBR says that house prices could drop by 8% next year before recovering somewhat in 2022.
• Sterling a little lower at $1.3375 and €1.1211. Oil down at $47.84 and UK 10yr gilt yield down 3bps at 0.28%. World markets broadly lower yesterday with London set to open down 1pt or so.
RETAIL WITH NICK BUBB:
• Today’s News: Today is the culmination of the annual Online discount jamboree called BLACK FRIDAY, so you might see the occasional email offering some unrepeatable deal…The Hotel Chocolat AGM is at 10am today, but no trading update has been issued (yet). There was no news from ASOS yesterday at their AGM, but there was a noteworthy 18% shareholder vote against the Director’s remuneration resolution. And ahead of the Mothercare EGM yesterday, at about 8.30am, the company pushed out its interim results (for the 28 weeks to 10 October): the statement was headlined “Emerging as a sustainable, capital light, international franchise brand”, but sales fell 40% in H1 and Mothercare did well to limit the first half loss to £4.4m (versus a £4m profit last year). In terms of guidance, Mothercare said that the group expects to make a small EBITDA loss for the full-year, despite the apparent
• BDO High Street Sales Tracker: The BDO High Street Sales Tracker today for medium-sized Non-Food chains flags that things stayed positive yet again in w/e Sunday Nov 22nd, despite the non-essential store lockdown, helped by more Online promotions pre-Black Friday: BDO Fashion LFL sales were down, as usual, but by only c6% (even though Store Fashion sales were down by as much as c76%), but Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as the Fashion retailers) were up by c5% (down c66% in Store sales, but up c152% in Online sales).
• News Flow Next Week: The Online discount jamboree continues with the ghastly CYBER MONDAY, but after that consumers will be hopefully flooding back into the High Street, after the re-opening of non-essential shops on Thursday. Before that, Tuesday brings the Topps Tiles finals, whilst the latest quarterly FTSE index review is announced on Wednesday evening. The B&M EGM is on Thursday, along with the Signet Q3 results in the US, whilst the ABF/Primark AGM update is on Friday.