Marston's (LSE:MARS) — Interim Results for the 26 weeks ended 2 April 2022

0:02 Good morning, ladies and gentlemen, and welcome to the MARSTON'S PLC interim results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the q and a tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all of the questions submitted today and publish responses where it is appropriate to do so. These will be available via your investor meet company

0:33 dashboard, and we will notify you by email when these are ready for your review. Before we begin, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. Like to hand you over to CEO, Andrew Andrea. Good morning, sir. Good morning. Thank you very much, and thank you all for attending the presentation today of our interim results that we presented to the market last week. By way of introduction, MARS PLC is a pub operator principally in England and Wales, but we've also got 20 pubs in Scotland, around 1,500 pubs overall. And we also have a 40% minority stake in the the Carlsberg MARSTON'S Beer Company having disposed of MARSTON'S Beer Company into that, venture during the pandemic. So first of all, I'd like to start with a sort of overview of how we've seen the last six months and, and the things we've been up to. And And the the first thing I would say is that trading has been pretty resilient throughout the six month period despite the clear disruption of Omicron impacting the very profitable and critical, December trading period.

1:40 Coming out of the other side of the half year, we are seeing trends continuing to improve from both the footfall and like for like perspective. From a cash perspective, excluding some one offs that we previously guided the market on, flows were an inflow. Typically, our business is a cash outflow in h one. Most of our profit is earned in the second half year. And from an inputs perspective, we made encouraging progress on guest standards engagement scores, which I'll touch on a little bit later. And during during the six month period, despite the impact of Omicron and that disruption, we've undertaken some significant change activity in the period underpinning the new strategy, which I will set set out to to you you a little bit later on.

2:26 And our key focus is on simplifying our business from a segmental perspective. So what segments do our pub sit in? And from a category manage management perspective, menus, drinks ranging, and so on and so forth. And very importantly, it's worth noting that pubs historically have been incredibly resilient and are well placed to meet those macro challenges going forwards. So looking at the market dynamics as we see them, there are three key elements. First of all, there is clearly some concern about the resilience and stability of the consumer in the current macro backdrop. Overall, footfall is in still still in decline in the sector. We're down around 15% or so, but those trends are slowly improving. And importantly, our older customers who understandably were most reticent to return to pub are starting to come back, whether that be the groups of elderly customers who come and have the mid midweek lunch or the old chaps that come and have five pints of cask ale a day, 11:00, seven days a week.

3:29 The sales trends overall are pretty stable, and the monthly sales cycle is also starting to become more predictable. And what I mean by that is the payday to payday dynamic of spending most when you've just been paid and that easing off ahead of being paid at the next payday is coming back with more certainty. We are seeing some discounting by some in the marketplace. We're seeing a return of the 50% offer. It's not something we necessarily are called with. That doesn't mean discounting is not relevant, but 50% is a a pretty pretty high level of discount. We believe the relationship relationship with the guest is is simply the deal rather than bringing them into coming and experience our pubs. And overall, the the insight tells us one very clear thing. Do not shortchange your customers.

4:18 Don't compromise the experience from a service product and standard perspective. From a cost and labor dynamic perspective, every company is is talking about a very challenging inflationary position, and that has been putting pressure on our food supply chain. We have long standing with our food suppliers. We've got through a pandemic, and we will get through this together. And we'll touch on on that a little bit later. From a labor market perspective, it's fiercely competitive. Supermarkets are paying 16 year olds outside London, £10 an hour to stack shelves. And that's putting pressure on overall supply and indeed cost pressures. And I'll touch on how we've addressed that a little bit later on. And from our perspective, you need three things in your back pocket to address and meet these challenges. The first of those is you need pricing, and the ability to take price, the ability to innovate, and demonstrate agility and nimbleness.

5:17 And finally, just reinforcing this point about the historical resilience of pubs, whilst it's clear that consumer confidence is falling, our insight is similarly showing that people still want to socialize. That demand to socialize is staying incredibly steady, not understandably post post coming out of the pandemic. And from our perspective, pubs are an affordable place to socialize. And importantly, from a MARSTON'S perspective, only 3% of our business is is in city centers. We're we're majority community pubs. And from that perspective, community pubs are far more resilient than city centers as city centers start to grapple with the unwinding of the work from home dynamic, and it does does appear appear that that the the three day three day week is increasingly becoming the norm.

6:05 But overall, pubs are very well placed to weather these economic challenges ahead. Looking at the financials in the first instance, overall overall revenues were up on 2021. That simply reflects the fact that in '21, we had much more COVID impact, less so in '22, although we did lose December. Importantly, at a pub operating level, we have returned to pub profitability at an operating level. I've mentioned our 40% stake in Carlsberg MARSTON'S. They've had a challenging half year. They are exposed to the on trade. MARSON'S MARSON'S Beer Company had around 20 odd percent of the cask scale market, which has been a poorer performing category.

6:50 And as a consequence, we guided the market last week that the cash dividend that we were expecting from CNBC is not likely to be made this year, and we expect a gradual rebuild back to a normalized level of around £20,000,000 of per annum over the next two to three years or so. So at pub level, the key point to note is we're back in the black with an improvement in 2022 despite the impact of Omicron. And looking at trading over the last six months, in the first few weeks of the year, as you can see, like for like sales were up about 1%. That Christmas trading period significantly hit hit the eight weeks after that, Omicron driving a 9% decline as we reported in our January trading update.

7:39 Subsequent to that, that period up to the half year, we were down 1%. But it's worth noting that in the two two weeks of the February storms, which coincided with the critical half term weeks, we were we were down 8% in those two weeks. And in the and since the half year, despite the fact that the VAT on food and soft drinks has reverted back to 20% from 12 and a half, we are in positive like for like territory. It's worth noting that VAT was about a 4% contributor to like for like sales. But importantly, what we're seeing is slowly but surely those trends improving. Turning now to cash flow. Our operating cash flow was up in the year in in the half year. And importantly, before one offs, as I mentioned earlier, we achieved an underlying cash flow of £13,000,000 in the period versus a significant outflow last year, albeit that was omicron driven.

8:41 We we previously advised the markets that there were two one offs due to be paid. Deferral of duty duty and VAT from the pandemic was paid during the period of £50,000,000, and we received some deferred consideration for the brewing disposal of £28,000,000. So a net outflow of £22,000,000. It's worth noting noting that we have no residual hangovers now of of payables as a consequence of the pandemic. We're fully up to date with the VAT and tax man. So underlying cash flows were positive in the period. And it's worth noting that typically, we earn about two thirds of our profit in the second half year. And as such, one should expect an improvement in cash flow during h two.

9:28 With With regards to our debt structure, the majority of our debt is long term. As you can see on this chart, we have bank facilities out to 2024, so there's no immediate refinancing facility. One would expect that to be refinanced perhaps q '1 calendar of next year, and with $5,050,000,000 of of headroom on that facility. On a long term perspective, we have a securitization in about two thirds of our our estate. It amortization profile out to 2035, and it's fully hedged. So not not sensitive to any changes in interest rates. Importantly, that securitization, we didn't require any concessions from bondholders in the six month period despite Omicron.

10:14 We also have thirty five to forty year property leases. So in essence, these are sale and leaseback transactions where the freehold reverts back to us at the end of the term. And because of that reversion, it is classified as borrowings on the balance sheet. That is linked to inflation. But importantly, we have an RPI cap and collar of 14% on that that that those leases. As such, this high inflationary environment, we are we're pretty well protected against. So overall, our borrowings are 1,250,000,000. We have have a a very very clear clear plan to reduce borrowings to below £1,000,000,000 by financial year 2025. Turning now to property pensions and and NAV.

11:02 From a property perspective, it's worth noting that we impaired our property portfolio by around £380,000,000, as a consequence of the pandemic. And we are moving to a new valuation methodology whereby rather than having a three yearly external valuation, we are having an annual valuation of about a third of the estate on a rotational basis. And that first that first tranche will be valued in the second half year, and we are cautiously optimistic that that will drive an NAV upside overall. And it's worth noting disposals were 35% higher than book value in h one. Recently, CNC exited their, stakeholding admiral taverns at an 11 times multiple.

11:52 That gives us confidence that there is still underlying strong value in pub assets as we come out of the pandemic. From a pension perspective, we currently got an accounting surplus, and we contribute 6,000,000 a year of of of cash flow into the pension. The next triennial valuation is in 2023. Clearly, we have, again, cautious optimism. We're on track to clear the technical provision deficit in the pension scheme. And as such, that 6,000,000 call on our cash flow would fall away from 2024 onwards. And during the period, we saw a 7p increase in net net asset value per share.

12:36 Now not surprisingly, a lot of the noise and a lot of the talk on on my roadshow over the last week or so has been about inflation and and input cost inflation. And I I box these into three tranches, product, labor, and utilities. On food and drink, I'm I'm pleased pleased to to say say that we now have a handle at a at a degree of stability in our food inflation at around 7%. That was certainly far more volatile in February and March as Ukraine emerged. And then on our drinks contracts, we've got contracts out to 2024, which are which are CPI linked with that increase due in October. What we have done to to mitigate that is we've taken food and drink price increases in March.

13:26 On menus, I'll come back to it. On drink, we were we recognized we were slightly behind our competition, so customers have accepted that drink price increase. It was, to some extent, expected. We've also simplified our menus significantly, driving an overall lower cost of our food. And as you can see, a fair proportion of our contracts are still are still fixed into the medium and longer term overall. From a labor perspective, we took the bold decision to increase the hourly wage rates of our younger workers to to well ahead of the minimum wage. So for example, 16 year olds, rather than four sixty three minuteimum wage, we're paying £5.50. Now that in aggregate costs, annualized cost is £3,500,000.1800000 additional costs in h two versus our previous guidance.

14:18 And overall, whilst one may look on this as a cost, I do see it as an investment. This should drive reduced level of staff turnover, lower recruitment fees, lower training fees. And instinctively, if we are more competitive in the marketplace, we should attract better people, which should feed through to the sales line. And finally, on energy, we are hedged on gas until April of next year, but we came out of our electricity hedge in March of this year. And the energy markets, as you are all probably aware, are incredibly volatile. And as a consequence, we've we've issued guidance that we expect incremental on cost of energy versus our previous expectation of around 5,000,000 for the second half year, £10,000,000 annualized.

15:07 And gas, we will we will make a call next year. Notwithstanding Notwithstanding that, although we've made great strides in becoming more energy efficient in recent years, we've introduced an energy saving initiative going green into our public state. And we know what good likes in a pub, and we can see like for like diversity in energy usage in our pubs. And we've an incentive scheme in place, which, as one would imagine, is very high returning. So overall, we've got a a grip on our on our food inflation. We're taking a very conscious decision on labor cost increases, and we are mitigating that through price. On energy, we're guiding that at this stage, we're not using price to mitigate that, and that will flow through to the bottom line.

15:55 And one thing we just set out for the analysts, and we were I won't go into this in much detail, is that since 2,019, there have been quite a few moving parts with MARSTON'S. Most notably on the right hand side, we disposed of MARSTON'S Beer Company into CNBC in 2019. That drove quite significant earnings and and cash flows. As I guided earlier, we're not expecting a cash dividend from CNBC in financial year 2022. Just worth noting, the original business plan had a cash dividend equivalent to our net cash flows overall. And from a MARS PUB's perspective, we disposed we made disposals in 2019 to the tune of around £8,000,000 of EBITDA.

16:41 In December 2020, we acquired the operations of the Brains pub estate in Wales on a CapEx light basis, equivalent to a 10,000,000 EBITDA uplift. Our IT strategy has changed. We're moving to a cloud based strategy. And as a consequence, we're redirecting 6,000,000 of cash that was sitting in CapEx across across to to the the OpEx line, and we've given that, h two energy cost guidance. And at the bottom there on the left hand side, the the nemesis to, I think, accountants and analysts alike, the impact of IFRS 16. So what we are now is very much a focused pub business with that minority stake in CNBC.

17:28 So moving on now to the strategy, and we launched this to the market. We have a very clear and quite simple vision, pubs to be proud of. Key elements of that are pub. That means we are not restaurants. We are not casual dining, and you should feel comfortable coming into any of our establishments to come to have a drink. And to be proud of, whilst underpinned by some objective goals at an emotional level, is this this a a place place where you would recommend to eat or recommend to work? And if the answer to no is that it is no in any of our pubs, we need to do something about that. Underpinning that vision are some core pub goals. Everything starts at pub level. Level. Are we loved by guests? I'll touch on our reputation insight platform in a moment.

18:14 But reputation, basically, say the gold standard is a score of 800 or more. Are we trusted? Are our standards right, defined as a five star EHO? And we seen as a great place to work? We have an engagement tool, PCOM, that is used globally in many organizations. And, again, their benchmark of good is is a score of eight or more. And underpinning that is driving a harder sales culture in our business defined as maximizing footfall and sales per guest visit. Importantly, it's worth noting that managers are are bonus on those first three, and that rolls up to my own personal bonus. That those core pub calls, therefore, are relevant top to bottom in the organization in a consistent manner. And I think that one voice, one focus approach is incredibly important.

19:03 And as you can see underneath that, we've made good progress in h one. Our reputation score, EHO scores have improved. And although Pecon retained might not look like progress, Omicron significantly reduced our employee engagement and the Pecon universe saw it generally speaking. So I'm really pleased to have got back to those pre Omicron levels of engagement as we came out of the half year. At corporate level, there are three quite simple goals. The first of those is better than the rest, and that's a consistent market outperformance in both our food led and wet led businesses. Just to be clear, I am focused on driving long term like for like sales growth. I'm not bothered about chasing the last five weeks. There's gotta be a consistent level of growth year in, year out. Back to a billion is a dual faceted target of getting our borrowings down below 1,000,000,000 by 2025 and improving the sales of the organization to back above £1,000,000,000.

20:00 For that is having disposed of the beer company on a run rate pro form a basis, sales ran at around 800,000,000. So there's a 200,000,000 sales growth challenge there. And finally, we are committed to doing business the right way, committed to being a responsible, sustainable business underpinned by a strong ESG agenda. And there are three core pillars under underpinning that strategy, guest obsession, raise the bar, and we will grow. And I'll touch on some elements of that in a moment. But But in in achieving these goals, what we're doing is giving it creating a business that is growing earnings, reducing debt, improving returns, improving cash flow that enables us to consider the reintroduction of dividends or reducing debt, increasing returns. We're clearly creating shareholder value into the future.

20:46 So quite a simple strategy. The key some of the key pillars underpinning that guest obsession is all about asking the question, does it matter to guests? Everything we do has to start with a customer relevance. And if it's not relevant to customer, why are we doing it? I'm gonna touch on the segmentation of the estate shortly. It's a key element of our strategy, and similarly, similarly, the category overhaul. And finally, from a guest perspective, we're we've we've introduced a new booking booking system in the six month period, and we're trialing various call handling tools to find an efficient and cost effective way of capturing customers that are trying to contact us by phone at a time when the pub is busy and unable to capture capture that call.

21:34 So if I start with category management and the menu overhaul, I it won't surprise you that food quality is the number one driver of guest satisfaction, conversely dissatisfaction, however you want to cut that cookie. And we had quite simply too many menus, too too many many dishes, too many ingredients, no real alignment to our our formats and segments, and internal advocacy was low. Our chefs were saying these menus are quite difficult to cook. Now we brought in as one of several new recruits, and I'll touch on this in a moment, a new director of category management, and he oversaw a menu relaunch project. And before I get into the results, the behavioral facets of this were absolutely critical. And the first of those is that from meeting one to launch was a three month turnaround.

22:23 We launched these these menus at the end of March. Importantly, commercial operations and finance had equal voice in in coming to the conclusions on what dishes went on, menus, and so on and so forth. Underpinning all of that project, though, was no compromise on quality. I mentioned earlier, if shortchange you customers, they will notice. So the team had permission to remove things on our menus that weren't important to guests. An example would be we had tomato salsa on our curry dishes. Funnily enough, we had a lot of return tomato salsa. It had no place on the dish. It wasn't important. We just whipped it off. That was worth several pence per dish. But similarly, reinvest where where appropriate. So that chicken burger in the top right hand corner, the hash browns were in addition to that burger. It is going gangbusters at the moment.

23:15 And underpinning all of that is a comprehensive training and digital spec book program. We closed for half a day. We The the chefs could all cook off. All teams were in to taste the menu, and that enables to launch the menus in a more positive manner than I've seen probably in my time at MARSTON'S. The outcome of that, as you can see, was a very focused and efficient category outcome, the number of menus, significantly reducing the number of dishes and SKUs. And because we were serving better quality food to a better specification, that enabled us to take price over and above the VAT reversion. And in net net cost terms, we saved £1,000,000. But at gross level, that number was £2,500,000.

24:01 We reinvested £1,500,000 back into enhancing the dishes and indeed the crockery. And the feedback has been pretty positive. Guest scores are improving. Importantly, very minimal, comment on price. And internally, our chefs love it. Our front of house teams love the menu, and our sort support teams are shouting about our menus from the rooftop. So a really successful exercise, and the great news is there's more to go at. I think we've only achieved perhaps 70% of what we initially intended. With regards to the raise the bar platform, this is all about plat all about people. Our our we employ over 12,000 people. Our team members ultimately drive our success.

24:47 And in this challenging labor market, there are three facets to our HR agenda, recruit, reward, and retain. From a recruitment perspective, during the period, we've entered we have we have recruited five external hires, directors of recruitment and resourcing from Green King, director of category management ex Whitbread Pizza Hut, director of digital. She's joining us in July from a national competitor. And we brought two senior directors of operations into our food led business, both with ex Whitbread and M and B experience. And underpinning my executive committee, there is a leadership group that is 30 strong. We've changed a third of that group. So five of those were those external hires, five promoting some of the bright young things within our organization.

25:37 At a pub level, there are two key drivers in addition to all of the other app based work we're doing to get to to recruit team members that are starting to pay dividends. So our apprenticeship program is key key to to our our future talent pipeline. We're just under 300 apprenticeships. We're extending it to a broader chef program. And importantly, we retain about 80% of those that come through our program. So great pipeline to future talent. And secondly, we've launched something that we internally call Latitude. We're working alongside Novus and only a pavement away, whereby Novus are training offenders about to come back into society. They've got got quite quite a a big big pipeline of trained kitchen staff. We're dealing with that with kid gloves, and we expect to appoint our first person into pub in the course of the next month or so.

26:28 From a reward perspective, I've mentioned the hourly rate investment, but but we've we've addressed reward right through the organization. The eight hundred club, and I mentioned the reputation platform earlier, is a is a an an incentive whereby on a quarterly basis, if you have a reputation score of 800 and an EHO score of five star, the licensee gets a bonus of £500. It's gone down incredibly well. People can see it. They are motivated by money. Importantly, it is a use it or lose it incentive, though. If you fall below either of those two measures, you lose the incentive. So it ensures sustainability of that top level performance that we're after. And I do believe believe more work on that variable pay element for our licensees is the way forward to ensure we are getting great success from great managers.

27:23 And from an equity perspective, we've we've we've we've reintroduced the share save scheme. We removed it in 2019. So any employee can save from £10 up to £500 a month at a discounted share value based on the share price at the end of this week. And we've extended the LTIP to that 30 strong leadership group, so they've now got equity skin in the game. And from a retention perspective, I mentioned the peak on engagement platform. This ensures we have monthly communications with our teams. We're constantly listening. It enables us to respond quickly. We've simplified the online the monthly and quarterly review system into an online system. Gone are the days of days of the big showpiece and set piece annual review.

28:12 We want continuous conversations on performance and development. We've introduced two online training platforms. Atensee is a gamified sales platform. I play it myself occasionally. And campus is very much, intended for those more governance and solid, solid static, training programs overall. And well-being is incredibly important to us. They are it isn't just a word. It is incredibly important. We've signed up to the burnt chef project, the meta the menopause pledge. We have a a very comprehensive well-being program to ensure that our teams have access to support in in the event that they require it. So a very clear agenda on the people front.

28:58 From a growth perspective, I mentioned segmentation of our pub mistakes a little bit earlier. And what we did last at the back end of our last financial year was concluded on a much simpler segmentation of the business into three tranches. Community, good value pubs at the heart of the community, and I'll touch on these with pictures in a moment. An elevated experience, what I would call premium mainstream, a timeless country pub atmosphere, and revere our most aspirational offer, many in many cases for a special occasion. And what what what does the clear blue water like? Typically, a food dish will be £2 more expensive from community to signature and ditto up to Revere, and drink will be between 50 and a pound a pint, for example, as a gap between the three segments.

29:49 We completed a food led review in September. We presented that as our preliminary results, the headline of which was to shift from 80% value food to about a third into those signature and Revere formats, but also into community wet,

30:05 which I will touch on in a moment. We're targeting, conversion, returns of around 30% on a blended basis. We completed completed ten ten in h one, eight in the second half year. We're ramping that up to 50 per annum as of next year. In addition, we have a two for one format in around 75 of our pubs. And interestingly, that despite being our deepest value format was our weakest performer coming out of the pandemic. So back in the autumn, we trialed six pubs, three with single price point menus and just just removing the two for one signage, three with a bit of very low level CapEx overall. But in all six, we've seen an uplift. Two for one continues to lag our food led estate by around 10% in LFL sales terms.

30:54 And as a consequence, in spite of the strategic shift over the next few years, we are exiting two for one by the end of September of this year. We simply can't sit on our hands and watch that that lag continue for another year or two. And we've extended that segmentation to our wet led pubs, management franchise pubs, and around 10% of those will convert to signature. At the moment, we really only directly retail to the value part of the market. We have some beautiful pubs in affluent villages. The right thing to do is elevate the overall experience. And we're targeting one to two by the end of this year, ramping that up to five to 10 next year and even further the year after that. These require slightly less CapEx than our food led because we're using the building. The building is effectively something that just needs enhancing at a similar level of return.

31:45 And we're in the process of extending that review to our 300 strong tenant in leased pub estate. So a very clear segmental plan to evolve the pub estate in a much simpler manner overall. And what does that look like? This is community wet. So this is the king's arms at Killingworth, a pub previously that was a cavalry called the Shire Horse. As you can see, pre CapEx, it was taking 17,000 a week. We spent just under £300,000. And even despite it being h one and the impact of the pandemic, the average weekly take of this pub has significantly increased. And important to note here that of that £7,000 increase, about five is drink. And the reason we we are seeing this in our conversions is in many of our pub restaurants, I think we lost the drinker.

32:35 They didn't feel comfortable coming in to drink. Hence, the the the focus on pub in our vision and our strategy. And as you can see, the returns are quite significant. Important point to note on on our CapEx program and returns and driving outperformance. Number one, our managers have uncapped bonuses. So this manager will be rewarded very well for achieving this level of performance. And secondly, in appraising our CapEx, although there is a hurdle rate for the money we are spending, CapEx appraisal, we are also setting out what we expect that pub to do from a fair maintainable trade perspective. What should this pub be capable of getting to? So the in the event the example of the king's arm, this should be a £30,000 a week pub.

33:23 And what we're trying to drive is a desire and passion to to exceed the appraisal, take the pub to a level well over and above that CapEx return. And And that that in in turn turn will ensure that we don't drift back to the original 17 and then reinvest and start that cycle all over again. The next pub is a signature pub. This used to be the Poppy Fields, a rotisserie pub on outskirts the outskirts of Maidstone. It's now been converted called the Fields of Aylesford to signature. And as you can see, a far more enhanced spend. You can see that there's a very clear place to drink. That there are barsels. There's a wood burner at one end. Go and drink there. You can eat to the right. The garden and the outside area has been enhanced, and we're seeing a change of customer.

34:11 It's increasing number of drinkers, increasing number of females, both drinking and eating. And this pub at the moment actually is is is throwing out over 35,000 a week. And importantly, on a warm day, we'll do fifty fifty, food and drink. Again, the drinkers are coming back to this pub. And then finally, from a revere perspective, as our director of proposition and formats calls it, these are more waggy. These pubs are more blingy, attracting a more affluent customer. This is the curious cow in Harrogate. It used to be a rotisserie called the Old Spring Well. And, again, we're very pleased with the initial performance of of this pub overall. In addition to that, another key element of our growth plan is franchiser.

34:57 It's a model we introduced back in 2009. And for those of you not familiar with the franchise model, in essence, what we do is we supply all the products, pay all the bills, to all of the marketing for a pub, and the franchisee simply needs to sell. And in return, they get a percentage of the turnover That model operates in over 600 of our pubs now. You get that owner driver mentality driving sales and earnings growth with very, very minimal failures in that regard. We introduced an evolution of that model called the pillar agreement, which enabled a franchisee to own their own food agenda, but put that onto our EPOS system. We're going to take that to 60 sites

35:40 by the end of this year and then evaluate how we can improve that further. And importantly, we've now trialed for we are now trialing franchise in four of our new build pubs that are due to become community wet over time, but we put the community wet menu in there with a franchisee, and the early early signs signs are are encouraging with double digit sales growth. So the continued evolution of franchise, in our view, is a core driver of future growth. And from an inorganic perspective, I mentioned the Brains transaction to set out what we did there. Brains operated a 150 or so pubs. We did a desktop exercise. Wells was shut at that time. And we said we would run a 100 of the or so of those pubs on a long term lease, and a proportion of those pubs we would run for for brains on their behalf for a couple of years.

36:33 So a CapEx light acquisition, and it's performing well. Brains has outperformed the MARS as well the MARS is called Welsh estate. We're converting to franchise and seeing growth. And one of the big challenges was was kitchens. They have different kitchen equipment. We're in the process of rolling out the MARSERS menu, which represents further margin opportunity. We've converted a couple of the sites in the first half of this year, four for next year, and we've identified further opportunities looking forwards. And a couple of the sites that we're going to be which we were going to stop managing in a couple of years' time, we've actually decided to take them on board. They will come across to MARSON'S in the course of of the the next next couple of months or so. And as a fair framework for future m and a, therefore, we've got a platform whereby we've got property partners who want to own the freeholds and will simply buy be the pub operator driving EBITDA growth in in that that regard.

37:33 Now we sorry. Now we were challenged at the last results, about the road map to getting to 200,000,000 sales growth, and and and rightly so. Sets out is, in essence, about a half of that growth will come from the repositioning of the public state. About a quarter will come from opportunities within franchise expansion and brains. And now with those direct interventions, what left what's left is a sales task which requires around 2% like for like sales growth. And whilst I accept the consumer environment is challenging, as we came out of the financial crisis, pubs typically grew like for like sales by three to 5%. So I don't think it's an over demanding l off LFL target over and above that £140,000,000.

38:26 From an ESG perspective, in the in the preliminary results we set out on net zero plans in some detail, in the appendices to this presentation, that road map is clearly set out. I mentioned, though, that the going green campaign has been introduced. I think there's an immediate quicker win to drive further reductions in energy usage. A second environmental consideration, which we are evaluating and and finalizing at the moment, is a reduction in food food wastage. It is important to me that in any environmental challenge, we're clear about the targets we want to achieve and when by, and we will set those out at the preliminary results at the end of November. From a social perspective, we are all about being local. Pubs the the the the affinity with the pub and relationship with the the pub is the dog and duck down the road. It's not necessarily with national brands.

39:18 And we're in the process of of filing filing local and national charity commitments. I mentioned well-being programs earlier. And importantly, we are a very important local employer, and I mentioned apprenticeships and ex offenders earlier. And from a perspective, we have a draw strong governance framework embedded throughout the organization. And from a gender perspective, over half of our board and exec is female and around 40% of the leadership group. So this is a very strong, clear ESG focus. ESG are not simply three letters. We live, eat, and breathe this day in, day out. So to summarize, from an outlook perspective, trading has been positive. The guest standard engagement scores encouraging. We have been able to use price to mitigate the majority of inflation without compromising our guest experience.

40:07 And just to remind you, we are confident that pubs remain the resilient, affordable place to socialize overall. Our strategy is focused on creating a simpler, more efficient business, and we are focused on creating a high quality business that is sustainable for the long term. Don't just chase the sales for the next four to five weeks. And in in achieving that delivering that strategy, we have some very clear financial targets underpinned by a strong ESG agenda. So a very resilient business with very clear plan to create sustainable growth and shareholder value going forwards. Is the end of the presentation. So I will now open this up to questions. Andrew, thank you very much indeed for your presentation this morning. And if I may, I will just bring back up your camera.

40:54 Ladies and gentlemen, please do continue to submit your questions just by by using the q and a tab that's situated in the right hand corner of your screen. But just while Andrew takes a few moments to review those questions submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. Andrew, as you can see, we've received a number of questions throughout today's presentation, and, may I take the opportunity to thank all the investors for submitting their questions? If I could please just hand back to you to run through that q and a tab, and where appropriate to do so, if you could just read out the questions response, and then I'll pick up from the end. Thank you. Sure. Sure. Okay. There are a couple of questions loosely linked. So one is can can you give a clear idea of the plan on how the company maintains margins in the face of high inflation and raw materials, labor, transport.

41:42 And then one is how are you managing inflationary pressure, and what trends are you seeing from discretionary spend? So if I start with the the the plan to maintain margins in the face of high inflations yeah, high inflation, this has to be about sales generation. And I think the the important thing is in driving that 200,000,000 sales growth, that will start reinstating and and and ensuring we get margins back to those pre pandemic levels. In the short term, however, whilst we have taken price, I still believe there is further price we can take. So if I give an example, in many of our pubs, we move from a £2.80 entry point pint up to £3. The insight tells us the psyche of the customer is I want to buy three points for £10.

42:30 What that tells us, therefore, is we probably got the ability to move up to £3.30. You certainly wouldn't do that in one go, but you wouldn't wouldn't be be breaching breaching that that psychological KVI point. And we adopt similar mindsets of things like fish and chips and burger and chips, for example. So I think we've got scope to continue to mitigate in the next couple of years. But, ultimately, the margin build will be born out out of of the the fact fact that we've got conversions that are high returning driving sales feeding through to a higher EBITDA percentage overall. And then with regards the the managing of inflationary pressure, I'm I think the food is stabilizing at around 7%.

43:15 The drink, we got visibility out to 2024. I can't really talk about beyond 2024. On food, we're working with suppliers. As I said, it looks to have stabilized. And from energy energy at at the the moment in the in the short term, it's about using using less energy overall. With regards to trends, unlike the financial crisis, we have much more visibility to customer data than than we've ever had. Back then, all we did was look at the like for like sales, and we got a little bit of customer feedback. Now we have a database. We have social media platforms. We are able to listen to our customers from many, many angles, and that's what reputation does for us. As it stands at the moment, the trends are that that football is slowly improving. Sales are stable.

44:03 There isn't a step change up, but, similarly, there isn't a step change down. So that where would that be in three months time? Clearly, I'm not a I've not got a crystal ball. The bears would say the consumer's gonna fall off a cliff. The bulls would say, well, actually, it's holding up okay because the saving ratio is high. But we we'll we'll adopt the the, you know, the the modus operandi back in the financial crisis. Every three months, we'll report on the market and tell you as we see it. But as things stand from what customers are saying, we're not seeing any significant easing off of spend. Another question was would we consider the sale and leasebacks sale would we consider sale and leasebacks from the freehold estate? I think it's a really good question. Clearly, one of the questions is, does the equity market value us being a freeholder or not? And if the answer is no, then say the leaseback from a cost of capital perspective might be an option. So it's certainly not a door slammed shut and and something that we we keep on the table. But but, clearly, at 83% freehold, our desire would be to be predominantly freehold in in any regard.

45:16 So what why do you think the market has not responded to the developments of the business? The share price doesn't reflect the operational improvements. I I think if if I look at the markets generally, consumer stocks are being being hit pretty hard. Although I'm really pleased with the internal progress we've made, if we're gonna be honest with ourselves, the half year did have Omicron. I think the market needs to see normalized uninterrupted trading. So regard, I think h two is absolutely critical. If we're delivering that like for like sales momentum, even if it's only slightly ahead, given the concerns about the consumer, in my view, that will reflect that would that will start coming through in the price. But at the at the moment, my observation from my roadshow so far is that there's a lot of concern about what is going to happen to the consumer, especially in the autumn given the news of the increase in the in the energy cap to £2,800.

46:20 What have you learned about the business over the last couple of years which must have been very testing? First of all, we have a brilliant team. We lost very few. We quickly acted. We we anchored down where we needed to. And importantly, we're we were self help. We sold the beer company, which means we didn't have to tap the equity market. But the one thing that we've learned is that well, well, that's really the two things we've learned. One is simplifying your business and making it more efficient is the right way to go. I think we you know, we're demonstrating that through our strategy. Secondly, I think there's been a lot of talk about the emergence of tech, so order and pay apps.

47:05 We are looking at tech very closely, but we will only use we will only only use use tech where it's very relevant to customer and improves the customer journey. So if I use order and pay as an example, we actually removed it from inside our community pubs in the winter because we had a scenario where a customer would come in on a on a busy Friday night, sit down, order at the table, the bars the bars queuing up people ordering drinks. The person who's ordered at the table wants to drink now. Who do you serve first? So, actually, actually, that that that proved quite challenging. However, we do see big opportunity for order and pay in outside spaces. And virtually all of our pubs have got all of our pubs have got outside spaces. And in the last couple of weeks where we've had sunny days, we've seen sales and and garden sales improve quite materially.

47:59 The next one is how does increasing prices compact the fact that that the customers have less money due to inflation? Is discouraging customers a good plan? I think this is about balance. I think the insight tells us customers want to go out. They want to socialize. That's what we saw in the last financial crisis. At the same time, I'm not prepared to compromise quality. So we could sell a cheap place of food, but I don't think customers will come back. So encouraging customers to come and have a good good experience means that price falls down the ladder. And just to be clear, when we're taking price, we are taking we're taking 50 p to a pound. We're not taking £23 a dish.

48:50 Our fish and chips in our community pubs is still around £9. It goes up to £12 or so in signature up to £14 in Revere. Similar sort of price points for for for burgers. So I think keeping an eye on the KVIs is how you ensure that you're you're generating value overall. And then finally, I've got a final question I've got is where is where is the shareholder value? A very poor share price, no dividend expected, privileged card removed, no discount for accommodation. Well, we have a privileged card has replaced been by vouchers, which is similar to similar to most of our competitors. The share price, we have a plan to drive shareholder value.

49:35 And with regards to dividends, we have made it clear that it's our it's our intention to reintroduce the dividend at some point in future when we've got normalized trading and more predictable cash flows. What is what I have made clear to the market, though, is that the connection between the billion pounds borrowings borrowings target and the dividend are separate. If we've got predictable cash flows, we will reintroduce the dividend, and we recognize that is important to many of our shareholders. And that concludes the q and a overall. Andrew, thank you very much indeed for taking the time to address all of those questions that came in from investors this morning. And, of course, if there are any further questions submitted today, we'll make these available to you immediately after the presentation has ended for your review. And ladies and gentlemen, we'll publish all those responses where it's appropriate to do so on the investment company platform.

50:25 Andrew, perhaps we'll redirect in the investor on the call to provide you with their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments to wrap up with, that'd be great. Yeah. Thank you. Look. I hope we've set out here that we have a very clear plan, a very clear strategy. We are cognizant of the challenges to the consumer, but we are back in the black. We're making profits again despite Omicron. We expect to make profits in h two. And as long as as long as we stick to that plan and and pursue that conversion overall, I'm very confident we will create long term shareholder value overall. That's great. Andrew, thank you very much indeed for taking the time to update investors today. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in in order that the management team can better understand your views and expectations.

51:19 This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of MARSON'S PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all. Thank you.