Exclusive: Tuppen on steering Enterprise through the storm

Enterprise Inns chief executive Ted Tuppen provided City analysts with his state-of-the nation perspective last week as the company reported "hard-won stability". Below, the Morning Advertiser​ provides an abridged version of his views on key aspects of the company's performance.

On improving the quality of the estate​

Despite all of these challenges we have continued to look at improving the overall quality of our business. It is vitally important that we didn't just hunker down and focus on getting through stuff, getting the finances right, doing all the things that might be very important on the surface.

We have massively improved the quality of our estate, we've improved the relationship that we have with our licensees, we've introduced a new suite of agreements that are very appropriate to the market in which we're operating and our Code of Practice encapsulates all that. So, there has been a vast amount of work going on within our business to just make sure that we continue to be the very best.

On the Enterprise business model​

We started back in 1991 and floated in 1995 and we've enjoyed 17 years of between 15% and 30% earnings per share (EPS) growth. So that worked pretty well. What was the key to that? Constantly improving our estate, trying to get, from our core pubs, average growth per pub close to inflation or around inflation.

If we could do that we would then generate a lot of cash, some of which we could invest in the business, through either capital expenditure in the core estate or by making acquisitions. And that would turn our, say, 3% inflation growth into 5%, the gearing impact would grow that to 10%. Then we would still have some cash left over to pay down debt or buy back shares — we bought back £1.2bn of shares.

So we were able to deliver, through a period of growth, very substantial returns for shareholders and our net asset per share grew steadily through that time.

When we have gone into economic reverse in difficult trading circumstances we have not had the benefit of core growth. But we have continued with our core model. Without the need for a rights issue or anything like that we have sailed through this storm. We have continued to grow net asset value for our shareholders and we have improved the quality of the business.

I can see us soon getting back to a stage where, having experienced 8% decline in average income per pub last year, we cut that down to just 3% through the first half and we've now got to flat. Flat is the 'new up'. and before you grow, you have to go through flat.

We are there and I hope you recognise that and the improving trends. If we can maintain that stability through the next six months we will be very well placed to begin to grow the business again. Once we grow our like-for-like EBITDA across the business, we return to where we were.

We are generating extra cash, we are investing it in our business. We are continuing with our disposal programme but investing that cash into acquisitions.

I'd like to think we could return to a place where not only are we growing EPS but we are returning to paying dividends and then increasing those dividends on a regular basis at least in line with the growth in EPS.

We are confident that having done this for 12 years since we floated successfully, we are weathering a storm and we are getting ourselves to a position where we can return to the business model that works for the benefit of our shareholders. So, yes, we think our business model is still working. It's just been in a period of real turbulence.

On the benefit of the tie to licensees​

We now offer a wide variety of extra discounts, virtually free-of-tie in a whole range of areas.

The fact is that despite a huge amount of background noise that we have been experiencing over the past two to three years, the model that we operate is very attractive.

It is not tie like a franchise where you have to buy absolutely everything from your owner — your McDonald's or your Costa Coffee or whoever it may be — but you are committed to buy certain things.

However, you are not tied at all for food, and only 30-odd per cent of our licensees are tied for wines, spirits and minerals.

The fact is that the model we operate is a very loose tie, which does work when it is properly managed by both parties for the benefit of our pubs.

On the Office of Fair Trading's verdict on the tie​

We've been subjected to substantial criticism by politicians and others but, the OFT (Office of Fair Trading) has now had a forensic look at our industry and has concluded, not only that the tie does not work against the interests of the consumer, but also that it found no evidence that it works against the interests of licensees.

Those were statements made in their report that went way beyond their remit — [The OFT] took it upon [itself] to confirm that [it] saw no reason for the relationship between the landlord and licensees to be criticised. These are all very encouraging things.

We can see how our business model works very well for the benefit of shareholders and we can see how this business model works very well for the benefit of licensees and so we are comfortable.

This model works very well and will return to growth and the delivery of shareholder value in the fullness of time.

On the coming year​

We're not quite sure when the end is coming and our outlook is, not surprisingly, cautious for the coming year. But the confidence that we have is that our licensees have worked out how to operate in this environment. I'm not saying it'll all be alright next year because the economy's going to get better.

I'm saying we delivered flat in the second half because we and our licensees are doing [things] better despite very difficult circumstances. They will continue to do things better in the same difficult circumstances that we expect for the next year or so.

At its simplest, think of your favourite pub. It's a great pub and it's always busy despite all of the economic circumstances and difficulties that might be surrounding it.

Think of a bad pub and no matter what the economy's doing, it won't have any people in it. So think about the micro skills of licensees and their ability to run good pubs. Good pubs are surviving.

On pub valuations​

Pub valuations was a big challenge for us and there were those of you who were, quite rightly, concerned that we may be bumping into difficulty with our bond covenants and that sort of thing, I think that we have taken a very prudent writedown of the estate last year.

One of the nice things about an annual re-valuation is that you know you're always up-to-date. You're not having to worry about what values might be lurking around in the back of the estate. We value every pub every year and the result in the past year has been that conservatively we have taken some writedowns totalling about 2% (of the value of the estate). We were very conservative last year and that helped us to make a profit in the pubs that we sold. Let's not celebrate that profit too much — it is merely recognising the fact that we're writing down pubs to the correct level.

Then it's very nice when we sell them for a bit more. We are expecting to sell between 500 and 600 pubs in the coming year. I would be very surprised if we made a loss. If we do make a loss it would be because we haven't done our year-end valuation very well. But there's no magic to it. As I say, we value every pub individually and we try to get the value right. Great pubs — and most of them, frankly — are delivering the same income as they did last year.

Great pubs won't have gone down in value. Why should they have done? The stuff at the bottom that's going nowhere has gone down in value and we've taken that writedown.

So they are stabilising, but again, it's all about good pubs and bad pubs.

On trading in a recession​

I think recession is an interesting and sometimes misleading excuse. What we've actually been through is a very diff