Brewing up a storm

Underlying operating margin across the group is up despite the many
cost pressures that you’ve faced this year. How have you done that?

It’s a combination of excellent cost and margin management and the benefits
coming through from the synergies on our recent acquisitions. I think while it’s
true that we’ve seen some very significant cost increases in the national
minimum wage, energy and Sky TV, to name but a few, what we have seen on most of
the other cost lines is fairly static prices across the board. In particular,
our biggest buying-in prices ­ for food and drink ­ remained fairly constant
over the period.

And where do you expect costs to go throughout the rest of the

Very similar to what we’ve seen in the first half. We’ve already got some
very significant increases in energy in particular in the first half of the year
and that’s not going to change in the second-half. The national minimum wage
increases are already known. So I think we’ll see a very similar impact on
margins in the second half compared to the first half.

What impact has IFRS had on these results?

The adjustments that we’ve made are very much in line with expectations and
what we gave guidance on before. And they’re very similar to other companies in
the pub sector. What we’ve seen is a very minimal adjustment to our P&L
account. The greater changes have been on the balance sheet, where we’ve seen an
increased provision for deferred tax. And we’ve now booked the pension deficit
that we have on the balance sheet. So it’s had a reduction on net assets but it
is worth remembering that it doesn’t have any impact on the underlying
performance of the business.

What are your investment targets across each of the

We’ve got some very clear targets for what we aim to achieve and we’ve
delivered on those over a long period of time. In our managed and tenanted
division, for example, we target 12% returns on buying existing trading pubs or
on new-build developments in Pathfinder Pubs. For refurbishments, we’re looking
at EBIT returns in excess of 15% for both tenanted and managed refurbishments,
the equivalent of around 20% EBITDA cash return.

You have a strong balance sheet and a low cost of debt. What sort of
flexibility does that give you when it comes to making further acquisitions?

I think we are very well placed at the moment. We’ve got interest cover of
around three times, a very flexible financing structure, long debt maturity, and
average interest costs of less than 6%.

Given that we are comfortable with interest levels down to around about two
and a half times, I think that really gives us opportunities to make
acquisitions of between £400m to £500m without the need to raise further equity.

And do you favour buybacks or further acquisitions?

We would like to make further acquisitions if the opportunity comes up. I think
we have demonstrated over the last 18 months or so that value-adding
acquisitions can be extremely earnings enhancing and we would clearly like to
continue to do that. Having said that, we are very disciplined about our
investment approach and if we can’t find the right acquisitions at the right
price then I think it is a perfectly viable alternative for us to continue to
return cash to shareholders.

Don’t you need to keep making acquisitions if you are going to drive
underlying operating margin within the business?

I don’t think that is the case. We’ve got very well defined organic development
opportunities in each of our three trading divisions. There is a lot more to go
at there. I think opportunities are going to come up in this sector. It is a
vastly consolidating sector at the moment. I think we will see some of the
smaller operators struggling to cope with the regulatory costs and those s
ignificant cost increases that we have already talked about. We would like to be
in a position to do that [consolidate] but if those don’t come up we’ve got
plans in each of the businesses to take the business forward.

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