RNS Number:4410S
Enterprise Inns PLC
25 November 2003
25 November 2003
ENTERPRISE INNS PLC
PRELIMINARY ANNOUNCEMENT
FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2003
2003 2002 Increase
Operating profit before exceptional items #293.2m #204.0m 44%
Profit before tax and exceptional items #173.2m #114.5m 51%
Adjusted earnings per share* 72.3p 59.0p 23%
Dividends 17.1p 14.1p 21%
*excludes exceptional items, goodwill amortisation and a one-off tax credit in
2003.
* Average operating profit per pub in the core estate increased by 8% in the
year.
* Cash generated after payments in respect of interest, tax, dividends and
capital expenditure amounted to #119 million which represented an increase
of 95% on the previous year.
* Total debt at year end was #1,395 million, 99% of which is fixed at a
weighted average interest rate of 6.9% for an average life of almost 16
years.
* The quality of the pub estate has been improved through the acquisition of
34 individual pubs at a cost of #16 million, the disposal of 213 pubs
generating proceeds of #41 million, and #22 million of capital expenditure
invested in the year.
* At 30 September 2003 the estate comprised 5,087 leased and tenanted pubs,
a decrease of 179 pubs in the year. The value of the estate rose to #2.5
billion.
Ted Tuppen, Chief Executive, commented:
"We are pleased with this excellent set of results which demonstrate the
strength and depth of the Enterprise team and the entrepreneurial skills of our
licensees. Our continued investment alongside licensees has once again raised
the quality, profitability and value of our estate.
The new financial year has started well and we are confident that we can
continue to generate growth in shareholder returns over the long term."
Enquiries:
Enterprise Inns plc
Ted Tuppen, Chief Executive 0121 256 3050
David George, Finance Director
Gavin Anderson & Company
Richard Constant 020 7554 1400
Rebecca Wyles
The investor presentation will be available on the company website at
www.enterpriseinns.com/presentation
NOTES TO EDITORS
Enterprise Inns is the leading quoted specialist operator of leased and tenanted
pubs in the UK with a nationwide estate of 5,087 leased and tenanted pubs.
CHAIRMAN'S STATEMENT
I am delighted to report on our results for the year to 30 September 2003 which
benefited from growth in our core estate and from the contributions made by our
major investments in 2002. In March 2002 the Company invested #75 million to
acquire a 16.8% share in the Unique Pub Company Limited (Unique) and in May 2002
the Company acquired an estate of 1,860 pubs from Laurel Pub Holdings (Laurel)
for a total consideration of #881 million.
Total operating profit before exceptional items increased by 44% to #293.2
million and profit before tax and exceptional items rose by 51% to #173.2
million. Interest cover was 2.8 times excluding the contribution from Unique.
Cash generated after payments in respect of interest, tax, dividends and capital
expenditure amounted to #119 million, which together with proceeds from the sale
of pubs, facilitated the repayment of #135.5 million of borrowings in the year.
Total debt at the year-end was #1.395 billion, 99% of which is fixed at a
weighted average interest rate of 6.9% for an average life of almost 16 years.
Unique continued to perform in line with expectations, achieving an operating
profit before exceptional items approaching #230m.
Adjusted earnings per share which has been calculated excluding exceptional
items, goodwill amortisation and a one-off tax credit in 2003, following
settlement of prior years' tax computations, increased by 23% to 72.3 pence.
The directors are recommending a final dividend of 11.4 pence per share, making
a total for the year of 17.1 pence per share, an increase of 21% over the prior
year. This increase is closely aligned to earnings growth which the directors
believe is appropriate given the Company's strong and stable cash flows. The
total dividend will be covered 4.3 times and will be payable on 26 January 2004,
subject to shareholder approval.
Average operating profit per pub increased by 8% over the prior year in the core
estate which averaged 3,324 pubs in the period. The core estate excludes Laurel
which was acquired in May 2002 and which has contributed just over #91 million
of operating profit in the year.
On 3 March 2003 the Company issued #250 million of secured bonds with interest
payable at 6.5% per annum until redemption in December 2018. Following strong
investor demand this issue was subsequently increased in October 2003 by #350
million to a total issue of #600 million. Total long-term debt issued by the
Company over recent years now amounts to #1,185 million.
These strong results, and those of our associate Unique, have been delivered in
a testing economic environment and reflect our continuing success in developing
a high quality leased and tenanted pub estate. Enterprise's commitment to
charging fair rents and to providing a full range of leading national, regional
and local brands continues to attract and motivate top quality licensees, who
are the key to our long-term success. We thank them and all our staff for their
contributions.
Earlier this month we announced the appointment of David Harding as an
independent non-executive director of the Company. He brings with him a wealth
of financial and management experience and will succeed Michael Garner as
Chairman of the Company's Audit Committee during the current financial year
ending September 2004.
The Company's estate and its investment in Unique provide many opportunities for
profitable growth and we look forward to another year of solid progress.
CHIEF EXECUTIVE'S REVIEW
Results
The year to 30 September 2003 has seen Enterprise Inns plc (Enterprise)
consolidate its position as the leading operator of leased and tenanted pubs in
the UK. Total operating profit before exceptional items has increased by 44% to
#293.2 million, driven by like for like growth of 8% in the core estate and
further enhanced by the effective integration of the Laurel acquisition made in
2002.
Estate management
In a year of consolidation, with no major corporate acquisitions, we have
continued to invest alongside licensees, spending more than #27 million on
maintaining and improving the quality and potential of our estate. Although it
is impossible to calculate how much has been invested in our outlets by
licensees themselves, we estimate that, in the past year, this figure has been
in excess of #40 million. This combined expenditure is proving to be highly
effective and has helped maintain and improve the condition of our pubs, at the
same time increasing average operating profit per pub to #49,300.
Our focus on consolidation and cash generation during 2003 has seen Enterprise
relatively subdued in the market for individual pub acquisitions. Some pubs were
however just too good to miss and we purchased 34 top quality outlets for #16
million. These pubs are already achieving an average income return on investment
in excess of 13%.
Our commitment to improving the overall quality of the estate has however seen
aggressive pruning of under-performing and high value alternative use outlets,
with a total of 213 pubs and surplus land sold for net proceeds of #41 million.
This disposal programme included the 60 pubs sold in order to comply with the
undertakings we gave to the Office of Fair Trading following our acquisition of
the Laurel estate in 2002.
Reflecting our commitment, alongside licensees, to invest in and improve the
quality of our pubs, it is no surprise that the independent valuation carried
out by Humberts Leisure shows once again a substantial increase in the
underlying value of our estate. At 30 September 2003, the estate comprised 5,087
pubs throughout the UK valued at #2.5 billion, including a revaluation surplus
of #283m. The average value per outlet increased by 16% during the year to
#490,000. The valuation excludes any lotting premium which, we are advised by
our independent valuers, would be in the region of 10%.
Leases and tenancies
Before the Beer Orders in 1989, 30,700 leased and tenanted pubs were in the
hands of the national, regional and family brewers. Tenancies in those days were
characterised by strong ties to the brewery owner, with the inevitable
restriction of consumer choice.
The decline of brewery ownership and the development of pub companies over the
past decade has resulted in many benefits for licensees and consumers alike.
A low cost business opportunity
A lease or tenancy represents a low-cost opportunity for entrepreneurial
licensees to run their own businesses. Not only is the initial cost of entry
substantially lower than buying a freehouse, but the on-going costs of ownership
are very fair. The average Enterprise Inns' rent, net of discounts given, of
#22,750 represents a rental cost of just 4.6% against the average value of the
pubs in our estate. It is of course the case that a true freehouse operator (not
necessarily one tied by loans to a particular brewer) could purchase beer and
cider in the open market at prices less than those charged by Enterprise.
However, even allowing for an estimate of the market discount foregone, the
total deemed rental cost to the licensee is still just #36,000, or 7.3% of
freehold value.
Recognising the vital importance of attracting good quality licensees,
Enterprise has led the way in developing a range of user-friendly agreements,
abandoning the unrealistic requirements of privity of contract and upwards-only
rent reviews. Our Retailers in Partnership philosophy in our dealings with
licensees recognises and promotes co-operation, respect and the pursuit of
mutual profitability. We are pleased to report that we currently have more than
800 fully-funded and screened applicants on our database, looking to take a pub
with Enterprise. This record figure is more than three times the number of pubs
we have available for let and reflects the attractive business opportunity that
taking a pub lease represents, especially with Enterprise.
Consumer choice
As major wholesalers and distributors of beer and other wet products, we are
able to secure for our licensees a wide range of products, including some 380
beers and 35 ciders.
Cask ale now represents 14% of our total beer sales, against a declining
national average of around 8%. Working closely with our supplying brewers, we
now offer our licensees an unrivalled choice of more than 110 cask ale brands
available on a permanent basis from 47 brewers, and a further 120 guest cask
ales which are made available at different times throughout the year, supplied
predominantly from small and regional breweries.
It is worthy of note that in the 837 former Scottish & Newcastle and Whitbread
managed houses which we purchased in May 2001, we have facilitated the
introduction of cask ales supplied by small and regional breweries. These cask
ales have now grown to represent 13% of total ale sales in these estates.
Whilst this commitment to a wide range of products reduces the average level of
wholesale margin that we can achieve across our estate, we consider that this is
a worthwhile investment in the long term quality and potential of our pubs.
Licensee profitability
Following some high profile failures in the branded managed house sector, most
notably in high street locations, questions are sometimes raised about the
profitability of pubs in general and tenants and lessees in particular.
Whilst Enterprise does not have direct access to the detailed financial
statements of our individual licensees, we have been able to analyse the
theoretical "fair maintainable trade" profit and loss accounts which are
produced for every pub, providing the basis for business development reviews and
rental negotiations. These have been independently verified by professional
valuers on a random sample basis.
The results are encouraging, showing that the average individual Enterprise
licensee is likely to be earning a profit before tax of around #37,000, including
an allowance of #8,000 for free living accommodation and essential amenities.
Just 167 pubs in our estate have earnings potential of less than #15,000 and the
majority of these outlets are on our list of planned disposals. However, 165
licensees are likely to be earning in excess of #75,000 per year and, most
encouragingly, 63% of our outlets have potential earnings of more than #30,000
per annum.
Based upon the regular contact between Regional Managers and our licensees we
are confident that, on average, pub performance is in line with expectations and
improving. There will of course be some licensees who are falling short of their
own expectations and there are without doubt some pubs which are massively
over-performing thanks to the excellence of their licensees.
Statistically however, we can take comfort from certain key performance
indicators:
* Almost 93% of our pubs are let on substantive leases and tenancies.
* Bad debt costs for the year were just 0.3% of sales turnover, down from 0.4%
last year.
* Rent concessions given at 30th September 2003 amounted to just #650,000,
only 0.5% of the rent roll and down from #775,000 at the same time last year.
* Over the past year we have completed 718 rent reviews, with just two
going through any form of independent arbitration process before being agreed.
* Dilapidations claims issued to departing licensees amounted to below #1.0
million during the year, with 80% of the remedial work being completed by the
licensees themselves, confirming that our licensees are able to comply with
their repairing obligations and keep the pubs in good order.
Hence we believe that our existing lease and tenancy terms are fair and provide
significant opportunities for good quality licensees to develop and grow
profitable businesses.
Unique Pub Company
In March 2002, working alongside a consortium of venture capitalists, we created
a special purpose vehicle to acquire the Unique and Voyager estates of some
4,200 pubs. In September 2002, the Unique and Voyager estates were combined into
Unique Pub Company and the level of securitised debt in the combined business
was increased to #1.80 billion, with a further issue of up to #170 million
approved in principle by the bondholders.
During the year to 30 September 2003, Unique continued to perform in line with
expectations, achieving an operating profit before exceptional items approaching
#230 million.
The entire Voyager estate has now been converted from managed houses to some
form of lease or tenancy agreement and at 30 September 2003 over 95% of the
combined estate of 4,056 outlets has been let on long term substantive
agreements.
Despite spending some #28 million on capital improvements to the pub estate,
Unique was able during the year to increase cash reserves by #26.7 million and
repay #61.8 million of securitised bonds, where repayments are currently #52.6
million ahead of schedule. The balance of securitised debt at 30 September 2003
stands at #1.74 billion and the Company believes that it is on track to meet the
criteria that will allow the further issue of up to #170 million of bonds during
2004.
Enterprise has a fixed price call option to acquire, from the venture capital
consortium, the balance of 83.2% of the equity that Enterprise does not already
own. This option may be exercised at any time between January and November 2004
at a price which is fixed at #608 million up to 31 March 2004 and which
increases slightly over time thereafter.
Following a year of strong cash generation within Enterprise and Unique, further
helped by successful bond issues, our discussions with several major banks have
indicated that, should we decide to exercise the option during 2004 and subject
to market conditions remaining favourable, it may well be possible to raise the
funds required without recourse to the equity market.
Legislative background
The licensed trade is faced with some uncertainty as the new licensing act 2003
becomes a reality during 2004/5. On balance this change in legislation offers a
tremendous opportunity for well-run pubs in the hands of responsible licensees
to improve the profitability and potential of their businesses.
With law and order high on the government's agenda and binge drinking in the
headlines, there should be no place in the industry for irresponsible low
pricing and promotions. This is the time when the pub industry must demonstrate
that a well run pub represents a controlled environment able to promote
responsible, sociable drinking, more often than not accompanied by great food
and entertainment.
Equally, the pub industry must take the lead with the issue of smoking.
Self-regulated, with proper provision for smokers and non-smokers alike, plus
effective protection for members of staff, there should be no need for a total
ban on smoking in public places which would be as unwelcome as it would be
unnecessary.
I am pleased that in all these key areas the industry, acting through its trade
associations, is proactively working with Government to try and ensure that
sensible conclusions are reached.
Conclusion
This has been another successful year for Enterprise, consolidating the high
quality acquisitions that we have made in previous years and demonstrating our
ability, alongside our licensees, to grow earnings in a highly competitive and
regulated market.
The key to future success lies in the quality of our pub estate and the
profitability of our licensees. In this regard, we have demonstrated during the
year not only that the quality and value of our pub estate has continued to grow
but also that the vast majority of our licensees are able to make good returns
for their efforts and investment.
The head office and field-based teams at Enterprise continue to perform above
expectations, enthusiastically taking on leading edge technology across the
whole business, enabling us to achieve our goal of providing top quality support
to our pub estate in the most efficient and cost effective way possible.
We have again demonstrated our ability to deliver increasing returns to
shareholders through appropriate operating disciplines and steady growth in the
core business, enhanced by the effective use of the strong cash flows that the
business generates.
The new financial year has started well and the team looks forward with
confidence to another exciting year of continued success and long term growth in
returns for shareholders.
Group Profit And Loss Account
for the year ended 30 September 2003
2003 2003 2003 2002 2002 2002
Continuing Share of Total Continuing Share of Total
Operations Associate Operations Associate
#m #m #m #m #m #m
-------- -------- ------- -------- -------- ------
Turnover 480.6 - 480.6 368.9 - 368.9
Cost of sales (217.7) - (217.7) (181.5) - (181.5)
-------- -------- ------- -------- -------- ------
Gross Profit 262.9 - 262.9 187.4 - 187.4
-------- -------- ------- -------- -------- ------
Administrative
expenses (29.7) - (29.7) (24.2) - (24.2)
Exceptional
administrative
expenses - - - (8.5) - (8.5)
Other
operating
income 21.0 - 21.0 24.0 - 24.0
-------- -------- ------- -------- -------- ------
Group
Operating
Profit 254.2 - 254.2 178.7 - 178.7
Share of
operating
profit in
associate - 39.0 39.0 - 16.8 16.8
-------- -------- ------- -------- -------- ------
Total
Operating
profit 254.2 39.0 293.2 178.7 16.8 195.5
Net
profit/(loss)
on disposal of
tangible fixed
assets 0.1 (0.2) (0.1) (0.2) 0.2 -
-------- -------- ------- -------- -------- ------
Profit on
Ordinary
Activities
Before
Interest and
Taxation 254.3 38.8 293.1 178.5 17.0 195.5
Interest
receivable and
similar income 10.1 - 10.1 5.1 - 5.1
Interest
payable and
similar
charges (102.1) (28.0) (130.1) (80.2) (14.4) (94.6)
Exceptional
interest
payable and
similar
charges - - - (7.6) (6.1) (13.7)
-------- -------- ------- -------- -------- ------
(92.0) (28.0) (120.0) (82.7) (20.5) (103.2)
-------- -------- ------- -------- -------- ------
Profit on
Ordinary
Activities
before
Taxation 162.3 10.8 173.1 95.8 (3.5) 92.3
Tax on Profit
on Ordinary
Activities (45.6) (3.0) (48.6) (28.9) 0.7 (28.2)
-------- -------- ------- -------- -------- ------
Profit on
Ordinary
Activities
after Taxation
and
Attributable
To Members of
the Parent
Company 116.7 7.8 124.5 66.9 (2.8) 64.1
-------- -------- ------- -------- -------- ------
Ordinary
dividends on
equity shares (29.0) - (29.0) (20.5) - (20.5)
Retained
Profit for the
Year 87.7 7.8 95.5 46.4 (2.8) 43.6
-------- -------- ------- -------- -------- ------
Earnings
per - basic 73.7p 46.7p
share
- adjusted* 72.3p 59.0p
- diluted 72.9p 46.2p
-------- -------- ------- -------- -------- ------
*excludes exceptional items, goodwill amortisation and a one-off tax credit in
2003.
GROUP BALANCE SHEET
at 30 September 2003
----------- -----------
2003 2002
#m #m
----------- -----------
----------- -----------
Fixed Assets 46.3 48.8
Intangible assets 2,524.8 2,243.4
Tangible assets 0.9 1.4
Investments 121.3 94.6
Investments in associated undertakings
----------- -----------
2,693.3 2,388.2
----------- -----------
Current Assets 4.3 7.7
Assets held for resale 39.5 51.3
Debtors 3.9 0.9
Cash at bank and in hand
----------- -----------
47.7 59.9
Creditors: amounts falling due within one year (306.4) (223.6)
Net Current Liabilities (258.7) (163.7)
----------- -----------
Total Assets Less Current Liabilities 2,434.6 2,224.5
Creditors: amounts falling due after more than one
year (1,276.1) (1,482.6)
Provisions for liabilities and charges (76.2) (48.4)
----------- -----------
1082.3 693.5
----------- -----------
Capital and reserves 17.0 17.0
Called up share capital 434.8 432.3
Share premium account 402.3 101.6
Revaluation reserve 7.6 7.6
Capital redemption reserve 77.0 77.0
Merger reserve 143.6 58.0
Profit and loss account
----------- -----------
Equity Shareholders' Funds 1,082.3 693.5
----------- -----------
Group Statement of Cash Flows
for the year ended 30 September 2003
2003 2002
#m #m
Net Cash Inflow from
operating activities 269.0 193.1
-------- --------
Return on investments and servicing of finance
Interest received 0.5 0.3
Interest paid (84.0) (84.7)
Issue costs of
long-term loans (1.9) (15.0)
-------- --------
(85.4) (99.4)
Taxation (16.5) (8.3)
-------- --------
Capital expenditure and financial investment
Payments to acquire
public houses (16.2) (17.7)
Payments made on
improvements to public
houses (22.0) (16.5)
Payments to acquire
other fixed assets (2.5) (10.6)
Receipts from sales of
tangible fixed assets
and properties held for
resale 40.8 25.0
Payments to acquire
investments (2.1) -
Loans to associated
undertakings - (73.6)
-------- --------
(2.0) (93.4)
-------- --------
Acquisitions and disposals
Purchase of
subsidiaries - (34.4)
Net cash acquired with
subsidiaries - 8.8
Expenses of
acquisitions paid - (3.1)
Equity payment in
associated undertakings - (0.2)
-------- --------
- (28.9)
-------- --------
-------- --------
Equity dividends paid (25.5) (12.4)
-------- --------
-------- --------
Cash inflow/(outflow)
before financing 139.6 (49.3)
-------- --------
Financing
Issue of ordinary share
capital 1.4 300.1
Share issue costs - (5.6)
Debt due within 1 year - new short-term loans 130.0 60.0
- repayment of short-term (60.5) (879.7)
loans
Debt due beyond 1 year - new long-term loans 307.5 1,676.9
- repayment of long-term (515.0) (1,111.0)
loans -------- --------
(136.6) 40.7
-------- --------
Increase/(decrease) in
cash 3.0 (8.6)
-------- --------
Notes to the Accounts
at 30 September 2003
1 Accounting Policies
Basis of preparation
The accounts are prepared under the historical cost convention as modified to
include the revaluation of properties and have been prepared in accordance with
applicable accounting standards.
2 Dividends
2003 2002
#m #m
Equity dividends on ordinary shares:
Interim paid 5.7 pence (2002 - 4.7 pence) 9.6 4.5
Final proposed 11.4 pence (2002 - 9.4 pence) 19.4 16.0
29.0 20.5
3 Proposed Share Split
The company will be seeking shareholder approval at the Annual General Meeting
on 22nd January 2004 for the subdivision of each ordinary share of 10 pence each
(issued and unissued) into two ordinary shares of 5 pence. If approved, this
share split will be implemented as soon as practicable after the Annual General
Meeting. The directors believe that this share split should be attractive to
shareholders by improving liquidity in the Company's shares.
4 Earnings per ordinary share
The calculation of basic earnings per ordinary share is based on earnings of
#124.5m (2002 - #64.1m) and on 168,993,570 (2002 - 137,229,769 ) shares being
the weighted average number of equity shares in issue during the year after
excluding shares held by trusts relating to employee share options.
Adjusted earnings per share, which reflects the underlying performance of the
Group, is based on earnings adjusted for the effects of exceptional items, net
of tax, goodwill amortisation and a one off tax credit in 2003 of #122.2m (2002
- #81.0m) and on 168,993,570 (2002 - 137,229,769) shares being the weighted
average number of equity shares in issue during the year after excluding shares
held by trusts relating to employee share options.
5 Annual Report and Accounts
Copies of our Annual Report and Accounts will be posted to shareholders in
December 2003 and copies will be available from the Company Secretary,
Enterprise Inns plc, 3 Monkspath Hall Road, Solihull, West Midlands, B90 4SJ.
This information is provided by RNS
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