2017 was a year of investment for Adnams that included:
· Transformation of the Swan Hotel, Southwold into an iconic destination.
· Completion of a three year investment project in the brewery, giving us the capacity, flexibility and adaptability to deliver the demands of today's beer market.
· Commencement of a project to install equipment to make low alcohol beer and pave the way for the introduction of an alcohol free version of Ghost Ship in May 2018
· An IT systems upgrade that will continue into 2018.
Commenting on the performance Jonathan Adnams OBE, Chairman said: “2017 was a year of huge investment. We saw some inevitable disruption, but we delivered substantial change. We continue to focus on what matters most. To deliver a service and product which allows us to stand out from the crowd. To grow the business when and where appropriate, answering increasing market demand. And above all to delight our new and loyal customers in everything we do.”
The Adnams Report & Accounts headlines include:
· Adnams beer volumes up 9.1%
· Online sales up 15%
· Sales of £74.8m (2016: £70.2m) +6.4%
· Investment of £9.3m
· Operating profit before highlighted items £2.2m (2016: £3.9m) -45%
· Full Year Dividend £2.28 (2016: £2.26) +0.9%
Our operating profit, before highlighted items, in 2017 was £2.2 million. This was well down on our 2016 result of £3.9 million. In a year of exceptional investment, there was inevitable disruption in our business. Most notably we lost over £1 million of income from The Swan Hotel being closed for the majority of the year. On top of this we incurred extra costs in the brewery from changes and disruptions as the three year investment project concluded and the new equipment was brought on stream. Computer system changes during the year, and which will continue into 2018, have also driven extra cost ahead of our being able to fully migrate to the new system. Our depreciation charge in 2017 was £358,000 higher than in 2016 as we started to depreciate our new investments. This will be higher again in 2018, though we will also be starting to benefit from the investments that we have made.
Chairman's Report
The markets in which Adnams competes have changed radically in recent years and it is essential that we invest appropriately to grow our business. We invested £9.3 million in 2017, an exceptional amount by Adnams' historic standards. This spend, which was focussed in our brewery and in transforming The Swan Hotel, was flagged in recent reports and discussed at our 2017 AGM. I am pleased to be able to tell shareholders that these plans have been delivered and we are delighted with the results. Two other projects are in train, the installation of dealcoholisation equipment in the brewery and new core computer systems for the company. The former will be complete by the time you read this report and the latter will finish later this year.
Such substantial change within a single year has had an inevitable impact on our results. Though turnover rose 6.4% to £74.8 million, operating profits of £2.2 million, before highlighted items, were substantially lower than the £3.9 million earned in 2016. We are highlighting £721,000 of extra costs most of which were the unexpected price of needing to remove asbestos from the Swan building.
Overview
There are still many who view Adnams as being a representative of a traditional group classed as 'regional brewers'. The category is seen as comprising family-owned businesses, with several generations of history, they own pubs which they supply with beer brewed by themselves, this beer is probably also sold to a wider group of pubs within their region.
The truth is that few still fit this image. Many have been sold over the years, particularly in the wave of consolidations that took place ten to 15 years ago. The majority of those that remain have tended to focus on pub ownership and have become pub owners who brew, whilst Adnams has become a brewer that owns pubs. Beyond this, Adnams has become a distiller and is evolving to be a high quality branded drinks producer.
Beer
A variety of trends can be discerned in the UK beer market. One long-term trend is for reduced consumption. Since 2004 this has been true for alcohol as a whole, though reduction in beer drinking goes back to the late 1970s. Another key trend is the switch from drinking in pubs to drinking at home. The crossover point was recently reached at which more than half of beer produced is drunk at home. In 2017 the off-trade grew by 3.6% whilst the on-trade declined by 2.4%. Adnams has reacted well to this trend with strong growth in its take home business in recent years.
A trend that was very strong between the 1970s and the early 2000s was the growth of lager as a proportion of UK beer consumption. This has since flattened-out and one of the most interesting aspects of the current market is the merging of beer styles. The days when beer was sharply delineated between lager, ale and stout are fading and beers are being produced that cross these divides. Adnams was one of the most innovative companies in this movement, producing the chilled and filtered kegged ale Spindrift in 2006. We well remember the challenge of trying to explain to consumers that it was neither a cask ale, nor a lager. Today there are many such beers and Adnams is producing a growing selection, including products such as Mosaic Pale Ale, Dry Hopped Lager, Blackshore Stout and Ease Up IPA.
From the 1970s whilst lager grew, cask ale shrank, and for many years Adnams was one of the mainstays of cask ale production and much lauded by the Campaign for Real Ale. Cask ale has had a rocky ride in recent years with a few false dawns, and 2017 saw a strongly negative trend with sales falling 5.1%, more than twice the rate of decline of total on-trade volumes. Whilst Adnams remains very supportive of cask ale and more of our beer is produced in cask than in any other form, we have needed to produce what the consumer is demanding and increasingly this has been beer in kegs, bottles and cans. This fact is at the heart of the recent £7 million three year investment project that has just concluded in the brewery. We have needed to move beyond the equipment of a traditional cask ale brewery and add capacity to chill, filter, condition and keg our beers. Investing in adaptability and flexibility to secure growth opportunities has been a cornerstone of our investment strategy.
A further trend that has affected beer and other drinks is the increasing focus on healthy living, which is producing a growing interest in low alcohol, or alcohol free drinks. Pubs and drinks suppliers have generally not catered well for this market. Alcohol free beers are far from recent, however many would agree that the historic quality of these products has not been high. This market, though still fairly small, is growing and changing. We are already using a process of restricted fermentation to produce Sole Star, a 0.9% alcohol beer, however we see an opportunity to make an alcohol free version of Ghost Ship that carries the full flavour of our most popular beer and we are investing in the equipment to enable this to happen.
Our investments have been partly about capacity, flexibility and focus, though also about quality. We are building a premium brand in a crowded market. No brand can last for long without delivering matching underlying quality and we have installed the highest grade equipment to deliver the highest grade drinks.
Spirits
Adnams' move into spirits production, over seven years ago, was a natural extension of what we do. We make high quality alcohol and that forms the base of high quality spirits and we have won the awards to prove the value of true 'grain to glass' production. In contrast, the vast majority of today's gin distillers buy their alcohol from third parties.
We were able to build this business through our established links with on-trade and off-trade retailers, and, very importantly, using our estate of shops. This allowed us to quickly achieve a core volume of production. According to industry data published during 2017 by Nielsen, Copper House Gin has grown to be within the top 25 UK gins. This is a market with continuing growth opportunities and beyond gin we have been maturing whisky. We are developing our strategy to gain a good foothold in what we foresee as being a strong market for English whisky.
The Swan Hotel
Our largest investment in 2017 was in transforming The Swan. We have received many wonderful reviews of the new hotel both for the excellent food of our new chef, Ross Bott, and for the beautifully refurbished rooms. We appreciate that the extent of the transformation surprised some of our established regulars and change is never universally popular, however we believe that we have created a hotel to be proud of and one that will continue to grow its reputation as an East Anglian destination.
Our hotels, pubs and shops are a key part of building our brand. In The Swan Hotel we have an opportunity to show visitors the very best of Adnams and given that the hotel and brewery are immediately adjacent, it gives us the ideal opportunity to cement the link between the two. We have built our new visitor centre in the Cygnet Room building, one side of which faces the hotel, whilst the other abuts the brewery, and the new tours tasting room has been built into the corner of the hotel courtyard.
Leased and Tenanted Pubs
Our strategy with pubs has been to own those that add value to Adnams whilst Adnams adds value to them. The need to have a consistent brand, and a consistently high brand presence, is important. We have seen a lot of change in our pub estate in recent years and have sold many of the smaller outlets. We have some excellent properties in our portfolio and whilst further change will happen, we feel that we are close to achieving the shape of estate that meets our aims.
Managed Pubs and Hotels
One important change in our approach to pubs has been the growth in our managed estate, which now numbers seven properties. Whilst we appreciate the excellent job that many of our tenants and lessees do in promoting the Adnams brand, managing properties gives us full freedom to present, promote and enhance our brand in a way that suits the property concerned.
Retail
On the retail side, our shops have grown our reputation, have raised our visibility, and have given Adnams products a valuable outlet. In parallel we have been developing our online order businesses. A shift of retail businesses towards online sales is of course a well-established trend, though one that is starting to increase its momentum. Bricks and mortar retail is moving towards providing customer experience and this is exactly what we have done at our new shop in Norwich where we have created a 'gin experience room'. We plan a gradual evolution of the Adnams retail estate towards this type of model.
Marketing and Sponsorship
Our marketing focus for a number of years has been on sponsorships, both local East Anglian and, with the Boat Races and Tour of Britain, further afield. These have been very important for us and have helped greatly in raising our name and profile. Nonetheless, we are keen to ensure that we raise our online presence too, and take advantage of digital marketing opportunities, and we envisage a migration of our marketing focus more towards these areas in future periods.
Dividend
We are recommending an unchanged final dividend of £1.50 per 'B' share and it is proposed that this will be paid on 1 June 2018, about a month later than has previously been the norm. This allows for a proper gap between the date of approval and the date of payment.
Outlook
2017 was a challenging and busy year for Adnams, though one that it was imperative to face to orientate ourselves for the future. Our beer business has for a few years been adapting to the growing market for bottles, cans and kegs. We have invested to allow for our continued growth in these areas. A further move is happening in terms of an increased interest in low alcohol and alcohol-free beers, here too we are investing. The holiday hotel market has been challenged by cheaper competition and by a fast-expanding business in rental properties. Nonetheless, premium hotels offering unique experiences are much prized and we have invested to make The Swan such a destination.
These changes and investments position us well for the future, however they have inevitably had an impact on our day-to-day operations. They have also made clear the need to have up-to-date systems to help us cope with a changing environment. Our investment in a new central system is focussed on this end.
Our turnover is growing strongly, Ghost Ship continues its rise, Copper House Gin is cementing its position as a premium product, The Swan is looking at its very best and we believe that we are well positioned to take advantage of the investments that we have made. I would like to thank you for your support.
Jonathan Adnams OBE
Chairman