Tough at the top

Whenever managed pubco JD Wetherspoon announces its results you can bet your last beermat the group's founder and chairman Tim Martin will pop up somewhere on the nation's airwaves to offer his views on the state of the industry.

The group's recent half-year numbers announcement was no exception.

Martin fumed fulsomely at the government's regime of high taxes and burdensome regulation, a regime which would only increase pub closures.

"Even the closure of one small pub results in a far greater loss of revenue to the government than it does to the publican or pub owner," he said. "Costs of taxes and regulations have gone too far."

The Wetherspoons chairman argued the increase in alcohol duty would cost his company an additional £14m in the current financial year, while new holiday entitlement legislation would add £4m to its wages bill.

Taxes and red tape needed to be reduced or to stay at current levels "for a considerable number of years", he added.

Meanwhile his chief executive John Hutson and finance director Keith Down were over in the Square Mile, busy reassuring City analysts over the group's debt position, pointing to gross margins "broadly unchanged" and highlighting a programme of doing "lots of little things" to protect profitability.

The group said at the time of its last full-year results, in December 2008, that it needed like-for-like sales growth in 2009 of three per cent to maintain its financial performance. Hutson remained hopeful this could be achieved - what with like-for-like sales in the first eight weeks of the second half up 1.9 per cent - but that it would take a lot of hard work.

Better-than-anticipated bar sales in the six months to January 25, 2009 - up 2.7 per cent - were countered by a continuing decline in machine income, down nearly eight per cent, although Hutson partly attributed that to a change in machine supplier.

Hitting the headlines

Hutson acknowledged that the 99p-a-pint promotion was "headline grabbing", but he stressed that the group offered good value across its whole range.

"Price competition is tough and on average we're cheaper. We'll keep the promotions we currently have for as long as we need to," he said.

Higher year-on-year utility costs hit the group's like-for-like profits, down four per cent, and reduced pub operating profit to 18.9 per cent from 19.2 per cent. But energy-saving policies were reducing energy consumption by 13 per cent.

Around £5m of exceptionals included £1.4m in legal fees arising from Wetherspoons' court action against a former property adviser, Van de Berg, as well as £1.8m in aborted property transactions.

Rising staffing costs were being offset by "manning efficiencies", while repair spending - £13m - was in line with the previous year.

One of the City's more pressing issues was the group's debt profile. First in line to be paid is a private placement in the US of $140m (£87m), due this coming September.

Finance director Keith Down stressed this could be paid from existing facilities - boosted by a £20m "bridging loan" from Abbey Santander - and free cashflow.

But the big question still hovered over Wetherspoons' £415m UK bank debt, due for renewal in December 2010. Down was in a similarly confident mood.

"There is no huge rush to deal with this," he said. "It's the best part of two years away and although time will fly, with financing deals generally done on three-year terms, if we were to do something about it now we'd only get an extra year."

Cash generation, savings being implemented across the business, a reduction in capital expenditure and the dividend suspension were "good news" for the facility's 10 lenders, Down said, pointing to a reduction in the group's net debt-to-pre-tax earnings ratio from 3.6 times to 3.2 times.

"We're working towards getting this down to below three times by the year end, although 2.5 times is ideal," he added.

And what of Wetherspoons' traditionally buoyant opening programme? The group was turning its attention to the distressed pub market, Hutson said, as well as taking a more, shall we say, robust attitude to dealing with property landlords throughout the 58 per cent of its estate where it operates leased premises.

Adapting to circumstance

Many second-hand pubs were being offered with nil premiums, while the ability to secure lower rents meant the cost of opening a new Wetherspoons venue per square foot fell by 36 per cent.

"We previously didn't bother buying existing pubs because the premiums being demanded and the cost of refurbishing them didn't make economic sense, so we've traditionally gone for revamping existing retail units," Hutson said.

"But in the current market we can get a pub for next to nothing and with all its facilities already in place we just have to spend on upgrading the customer areas," he added.

Wetherspoons opened 21 new pubs in the first half of the current financial year, compared with 10 sites unveiled in the same period last year.

It plans to open 35 over the course of the year, split evenly between new sites and second-hand pubs.

On rents, some sites have seen no increase in recent times, although Hutson said the group's pub on George Street in Edinburgh witnessed a "double-digit" hike, thanks to the relative health of the local economy.

Ironically, many might be happy to see such rent uplifts, if they meant business was booming once again.

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JD Wetherspoons' numbers, six months to January 25, 2009:

Turnover: £468.7m (up 6.5%)

Like for like sales: up 1.9%

Operating profit*: £46.8m (up 1.3%)

Operating margin*: down 0.5%

Pre-tax profit*: £30.8m (up 2.0%)

Earnings per share*: 16p (up 15.1%)

Exceptionals: £5.2m (up 196%)