Wetherspoon (JD) PLC- Half Year Report January 2021

CHAIRMAN'S STATEMENT AND OPERATING REVIEW

 

When Wetherspoon published its annual results on 16 October 2020, we criticised the constant changes of direction by the government, following the first UK lockdown.

 

The criticism fell on deaf ears- the government instigated a second national lockdown in November, followed by a reopening in December under changing “tier” systems, which closed two thirds of our pubs by Christmas. After Christmas, a third lockdown was instigated.

 

In recent weeks a beer-garden-only reopening has been decreed for April, followed by table-service-only for May, before a full reopening in June.

 

The hospitality trade has made strenuous efforts to comply with capacity, social distancing and hygiene regulations, with great success – there have been very few outbreaks of the virus in pubs, as many commentators have noted.

 

The conclusions of many studies are encapsulated in a comment from Councillor Ian Ward, leader of Birmingham City Council, who said on 11 September 2020:

 

“The data we have shows that the infection rate has risen, mainly due to social interactions, particularly private household gatherings. In shops and hospitality venues there are strict measures in place to ensure they are Covid-free, whereas it is much easier to inadvertently pass on the virus in someone's house, where people are more relaxed and less vigilant.”

 

Greg Fell, Director of Public Health, Sheffield City Council, in evidence to Parliament's Select Committee on Science and Technology (27 January 2021) said:

 

“Most of the transmission events are household-to-household transmissions. Hospitality does not crop up as a terribly big factor on our risk radar. When we look at the common exposures dataset, hospitality is not a huge risk”.

 

Dr Richard Harling MBE, Director of Health and Care, Staffordshire County Council, in evidence to the same committee said:

 

“Similarly, back in the summer and autumn, once you put transmission between household members aside, the next most important one was transmission between different households. The hospitality sector did feature, but much lower down the list”.

 

A study by Imperial College (27 November 2020) said that “…households showed the highest transmission rates”.

 

The evidence of Sweden v the UK and Florida v California perhaps suggests that draconian lockdowns can be counterproductive, whereas there is strong evidence that social distancing and hygiene measures work.

 

By the time pubs were closed by the government after Christmas, a total of 1,244 or 3.3% of 37,800 Wetherspoon employees had tested positive for Covid-19, from reopening in July. For the UK as a whole, 2.3 million people had tested positive by then, according to the UK government website (https://coronavirus.data.gov.uk/ ), 3.4% of the population. Since pub employees spend more time in pubs than anyone else, these statistics do not indicate that pubs are centres of transmission, which some commentators have suggested. There were no reported instances of the virus being transmitted from staff to customers in Wetherspoon pubs, or vice versa, since the reopening last July.

 

Wetherspoon recorded over 50 million customer visits to its pubs from reopening in July, to the year end, and there has been no evidence of even a single outbreak, as defined by the health authorities, during this time.

 

The main problem is that the government and SAGE have been unscientific in their approach- ignoring evidence, such as the evidence above, which contradicts their “narrative”. Rather than embracing, debating and investigating anomalies and counterintuitive information, as real scientists do, they have, instead, tried to discredit dissenters, as Wetherspoon News has pointed out. These tactics can work in an election campaign, but risk disaster in the day-to-day management of problems.

 

Examples of entirely unscientific initiatives include the introduction of a curfew, the requirement for a “substantial meal” with a drink and the wearing of face masks to visit the bathroom.

 

This approach has contributed to the UK having one of the biggest hits to the economy of any country, and the worst health outcomes of any large country, according to the Times (below).

 

Country*	Fatalities per million population
UK	1,854
Italy	1,695
US	1,604
Spain	1,549
Mexico	1,512

 

*Countries with populations greater than 20m

Figures as of 7pm, 17 March 2021

Source: WHO

US figures source: CDC

 

The government's response to Covid-19, and its effects on the hospitality industry, have been discussed, at some length, in the latest edition of Wetherspoon News (see link: https://www.jdwetherspoon.com/~/media/files/pdf-documents/wetherspoon-news/wetherspoon-news-spring-2021_single-pages.pdf ).

 

It remains to be seen whether the government will adhere to its reopening plan, following the successful vaccination programme – or whether the knee-jerk reaction to the latest news, which seems to have been the main generator of policy and regulations, will continue.

 

It is impossible to decipher a pattern in sales, given the lockdowns and changes in regulations. In the 26 weeks ended 24 January 2021, like-for-like sales decreased by 53.9%, with total sales decreasing by 53.8% to £431.1m (2020: £933.0m).

 

Like-for-like bar sales decreased by 57.3% (2020: +4.2%), food by 48.4% (2020: +5.6%) and fruit/slot machines by 53.7% (2020: +20.3%). Like-for-like hotel room sales decreased by 51.8% (2020: -1.3%).

 

Pre-IFRS 16 operating profit decreased to -£20.7m (2020: £76.6m). The operating margin was -4.8% (2020: 8.2%). Loss before tax and exceptional items is £46.2m (2020: £57.9m profit), including property losses of £1.3m (2020: £0.2m).  Earnings per share, including shares held in trust by the employee share scheme, and before exceptional items, were -36.4p (2020: 43.3p).

 

Total capital investment was £19.0m in the period (2020: £135.8m). £1.4m was spent on freehold reversions of properties where Wetherspoon was the tenant (2020: £70.6m), £7.1m on new pub openings and extensions, mainly in respect of the Keavan's Port Hotel in Dublin (2020: £34.8m), and £9.6m on existing pubs (2020: £32.8m).

 

Post IFRS16 exceptional items totalled £12.4m (2020: £14.1m). There was a £0.1m (2020: £3.6m) loss on disposal and an impairment charge of £2.1m (2020: £12.3m), relating to the company's decision to vacate a leasehold pub on the 'break date'. The cash effect of the exceptional charges was an outflow of £7.5m. The cash outflow mainly relates to items such as pub screens between tables to improve social distancing, 'top ups' to furlough payments and associated taxes.

 

Free cash flow, after capital investment of £9.6m in existing pubs (2020: £32.8m), £6.8m for share purchases for employees (2020: £9.3m) and payments of tax and interest, was -£77.3m (2020: £49.0m). Free cash flow per share was -64.5p (2020: 46.7p).

 

 

Comment on IFRS 16

 

As indicated previously, I believe IFRS 16 to be confusing and misleading. Common sense suggests that rent should be regarded as a cost in the income statement. Instead, a complex formula disregards actual rent paid and substitutes a notional asset (the 'right to occupy'), which attracts a depreciation charge, and a notional interest charge based on the total rental liability for the lease term, even though the great majority of the rental liability does not crystallise, in almost all cases, for many years.

 

Part of the purpose may be to equate rent with debt. However, for companies like Wetherspoon at least, rent bears almost no resemblance to debt.

 

Debt is invariably for a fixed term, with the full amount repayable at the end of the term. Debt therefore carries a refinancing risk.

 

In contrast, Wetherspoon's leases, for example, carry no refinancing risk – there is just a liability to pay the rent when it falls due.

 

Of course leases carry a great risk – as so many restaurant companies and retailers have unfortunately demonstrated. However, it does not make sense to treat future liabilities in this way – why not treat future business rates or VAT liabilities in this way, if it's appropriate for rent?

 

The most important criticism of IFRS 16 is that the complexity which it creates means that it will be understood by only experts – in general, good for the experts, but bad for business efficiency, shareholders and the public.

 

For the period ended 24 January 2021, as a result of the new standard, operating profit has increased by £3.1m and finance costs by £10.8m. There will be no impact on cash flows.

 

 

Share buybacks

 

No shares were purchased by the company for cancellation in the period under review (2020: £6.5m).

 

The company raised c£93.7m new equity in January 2021.

 

 

Property

 

During the period, we opened two new pubs and closed or sold two, bringing the number open at the period end to 872. Following a review of our estate, in recent years, we placed around 100 pubs on the market, most of which have now been sold.

 

Ten years ago (FY11) our freehold/leasehold split was 43.4/56.6%. At the half year end, it was 64.4/35.6%.

 

 

Financing

 

As at 24 January 2021, the company's net debt, including bank borrowings and finance leases, but excluding derivatives, was £811.9m (2020: £817.0m).

 

Net debt plus 'trade and other payables' have remained at approximately the same levels from year end 2019, as shown in the table below:

 

	Half Year 2021	Year End 2020	Half Year 2020	Year End 2019
	£m	£m	£m	£m
Net Debt	812	817	805	737
Trade and other payables	197	268	315	308
Net Debt + Trade and other payables	1,009	1,085	1,119	1,045

 

 

As a result of the pub closures, the normal net-debt-to-EBITDA covenant has been waived by the company's lenders. The net-debt-to-EBITDA ratio has been replaced by a minimum liquidity covenant of £75m. As at 24 January 2021, the company had liquidity of £225.0m.

 

There has been an increase in total facilities to £1,041.3m (2020: £993.0m), following the addition of a CLBILS loan in August 2020.

 

Post period end, in March 2021, the company agreed a further £51.7m CLBILS loan.

 

The company previously stated that its intention to keep the net-debt-to-EBITDA ratio at around 3.5 times for the foreseeable future.

The ratio might rise for a temporary period, if there were, for example, a sudden deterioration in trading, in which instance the company would seek to reduce the level in a timely manner. Insofar as it is possible to generalise, the board believes that debt levels of between 0 and 2 times EBITDA are a sensible long-term benchmark. A higher level of debt may be justifiable – at times when interest rates are low and other factors are favourable.

 

Since 2003, the company has bought back 116.8m shares at a cost of £515.9m. In addition, since 2011, the company has bought the freeholds of 159 pubs at a cost of £379.8m.  In the last 12 months, the company has issued 24.1m shares to raise £235m.

 

 

Dividends

 

In the current circumstances, the board has not recommended the payment of an interim dividend (2020: £0).

 

Corporation tax

 

Owing to the losses sustained in the period, and expected for the rest of the year, we expect the overall corporation tax charge for the financial year, including current and deferred taxation, to be 12.1%.

 

 

Contribution to the economy

 

Wetherspoon Tax Payments In Financial Years 2011 To 2020

 

	2020	2019	2018	2017	2016	2015	2014	2013	2012	2011
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
VAT	244.3	357.9	332.8	323.4	311.7	294.4	275.1	253.0	241.2	204.8
Alcohol duty	124.2	174.4	175.9	167.2	164.4	161.4	157	144.4	136.8	120.2
PAYE and NIC	106.6	121.4	109.2	96.2	95.1	84.8	78.4	70.2	67.1	65.2
Business rates	39.5	57.3	55.6	53.0	50.2	48.7	44.9	46.4	43.9	39.8
Corporation tax	21.5	19.9	26.1	20.7	19.9	15.3	18.1	18.4	18.2	21.2
Corporation tax credit (historic capital allowances)	–	–	–	–	–	-2.0	–	–	–	–
Fruit/slot machine duty	9.0	11.6	10.5	10.5	11.0	11.2	11.3	7.2	3.3	2.9
Climate change levies	10.0	9.6	9.2	9.7	8.7	6.4	6.3	4.3	1.9	1.6
Stamp duty	4.9	3.7	1.2	5.1	2.6	1.8	2.1	1.0	0.8	1.1
Sugar tax	2.0	2.9	0.8	–	–	–	–	–	–	–
Fuel duty	1.7	2.2	2.1	2.1	2.1	2.9	2.1	2.0	1.9	1.9
Carbon tax	–	1.9	3.0	3.4	3.6	3.7	2.7	2.6	2.4	0.8
Premise licence and TV licences	1.1	0.8	0.7	0.8	0.8	1.6	0.7	0.7	0.5	0.4
Landfill tax	–	–	1.7	2.5	2.2	2.2	1.5	1.3	1.3	1.1
Furlough Tax Rebate	-124.1	–	–	–	–	–	–	–	–	–
TOTAL TAX	440.7	763.6	728.8	694.6	672.3	632.4	600.2	551.5	519.3	461.0
TAX PER PUB (£000)	533	871	825	768	705	673	662	632	617	560
TAX AS % of  NET SALES	34.9%	42.0%	43.0%	41.8%	42.1%	41.8%	42.6%	43.1%	43.4%	43.0%

 

 

*Source: J D Wetherspoon plc Annual Reports and Accounts 2012 – 2020

 

Wetherspoon is proud to pay its share of tax and, in this respect, is a major contributor to the economy. Wetherspoon, its customers and employees have paid £6.1 billion of tax to the government in the last 10 years.

 

The table below shows the tax generated by the company in its financial years 2011-20. During this period, taxes amounted to about 42 per cent of every pound which went 'over the bar', net of VAT – about 11 times the company's profit.

 

 

VAT equality

 

As we have previously stated, the government would generate more revenue and jobs if it were to create tax equality among supermarkets, pubs and restaurants. Supermarkets pay virtually no VAT in respect of food sales, whereas pubs pay 20%.

 

This has enabled supermarkets to subsidise the price of alcoholic drinks, widening the price gap, to the detriment of pubs and restaurants.

 

Pubs also pay around 20 pence a pint in business rates, whereas supermarkets pay only about 2 pence, creating further inequality.

 

Pubs have lost 50% of their beer sales to supermarkets in the last 35 or so years.

 

It makes no sense for supermarkets to be treated more leniently than pubs, since pubs generate far more jobs per pint or meal than do supermarkets, as well as far higher levels of tax. Pubs also make an important contribution to the social life of many communities and have better visibility and control of those who consume alcoholic drinks.

 

Tax equality is particularly important for residents of less affluent areas, since the tax differential is more important there – people can less afford to pay the difference in prices between the on and off trade.

 

As a result, in these less affluent areas, there are often fewer pubs, coffee shops and restaurants, with less employment and increased high-street dereliction.

 

Tax equality would also be in line with the principle of fairness in applying taxes to different businesses.

 

On 3 March 2021, the chancellor, Rishi Sunak, announced a six-month extension to the temporary reduction of VAT to 5% in respect of food and non-alcoholic drinks sales. In July 2020, when this reduction was first announced, the company lowered its pricing on a wide range of products, including food, soft drinks and real ale. If the chancellor decides to make these VAT reductions permanent, the company intends to retain these lower prices indefinitely.

 

 

Further progress

 

As previously highlighted, the company's philosophy is to try continuously to upgrade as many areas of the business as possible.

 

The Food Standards Agency, in association with local authorities, regularly inspects licensed and other food businesses in the UK and awards marks from zero to five, according to the standards it finds.

 

Currently, 97% of our pubs have obtained the maximum five rating (2020: 97%), under the FSA scheme, with 99% receiving a rating of four or above (2020: 99%). This record reflects extremely hard work by our central catering, audit and operations team, as well as by the excellent teams in our pubs.

 

In addition, the company runs a government-approved apprenticeship scheme and participates in a professional management diploma and degree course, in conjunction with Leeds Beckett University.

 

 

Corporate governance

 

In the 2019 annual report, the company made a number of criticisms of the corporate governance system, which can be found in appendix 1.

 

ESG

 

There is an increasing focus from investors on ESG matters.  We have provided commentary in numerous previous press announcements on the company's moves over many years on these matters, which were driven by our desire to do what was best for our employees, customers and, as a result, the company. Our initiatives have included pay increases, bonuses and free shares, improved staff training, internal promotion, recycling initiatives and, we believe, appropriate governance arrangements.

 

Bloomberg

 

In the immediate aftermath of the first lockdown, in early 2020, a number of inaccurate statements regarding Wetherspoon appeared in the media.

 

When media organisations were made aware of the inaccuracies, in line with normal journalistic principles, corrections and/or apologies were published by the BBC, SKY, the Times, the Independent, the Sun, the Daily Mail, the Daily Star, the Mirror, Forbes and others.

 

The corrections and apologies have been published in Wetherspoon News, a magazine for pub customers (see link: https://www.jdwetherspoon.com/~/media/files/pdf-documents/events-2021/press-corrections-180321.pdf ).

 

However, Bloomberg Businessweek, a weekly magazine, published an article recently, containing many inaccuracies, which, apart from a few points, it has refused to correct.

 

Some of the inaccuracies may seem minor, but they have been used as a “factual” base, which creates an unfavourable impression of Wetherspoon.

 

For example, the article says that Wetherspoon is “sacrificing worker pay for affordable prices”.

 

However, Wetherspoon pays at or above the rates of its main, publicly-quoted, pub competitors and at or above the rates of McDonald's, for example. Since our prices are substantially lower than pub competitors, it is untrue, and illogical, to say that there has been a “sacrifice”, as Bloomberg has asserted.

 

In addition, Wetherspoon has awarded bonuses and free shares to employees, equivalent to 55% of its profits after tax, in the last 15 years (see table below). Approximately 83% of the awards have been to employees working in pubs. 15,032 employees own shares in the company. Since the share scheme was introduced, Wetherspoon has awarded 20.6 million free shares to employees, approximately 16% of the shares in issue today. Few companies in any industry match this record, which further undermines the Bloomberg allegation of a “sacrifice”.

 

 

Wetherspoon: bonuses and free shares vs profits, 2006 – 2020

 

	Bonus and free shares	(Loss)/Profit after tax	Bonus etc as % of profits
Financial Year	£m	£m
2020	33	-30	–
2019	46	80	58%
2018	43	84	51%
2017	44	77	57%
2016	33	57	58%
2015	31	57	53%
2014	29	59	50%
2013	29	65	44%
2012	24	57	42%
2011	23	52	43%
2010	23	51	44%
2009	21	45	45%
2008	16	36	45%
2007	19	47	41%
2006	17	40	41%
Total	428	777	55%

 

 

*Source: J D Wetherspoon plc Annual Reports and Accounts 2006 – 2020

 

The article also says that Wetherspoon “took advantage of a beer supply surplus to secure cheap contracts”. This is pure fiction. Wetherspoon beer contracts usually run for five to ten years and beer is brewed in short cycles of a few weeks, reflecting current demand. It is therefore nonsense to claim that Wetherspoon secured “contracts” due to an imaginary, short-term “beer supply surplus”.

 

The article says that Wetherspoon plays “host to drunken students”. “Playing host”, which infers a premeditated strategy, would be unlawful, since pubs have a legal obligation, strictly enforced by the licensing authorities, to prevent drunkenness. Pub liquor licences can be lost if legislation is not adhered to. Wetherspoon has never, in its history, lost a licence on these grounds – or on any other grounds, although many companies have.

 

The Bloomberg article says that Wetherspoon “unlike traditional pubs … divides its pubs into gridlike seating plans…reducing the frequency of chance interactions”. This claim is completely nonsensical. There is no observable difference between Wetherspoon seating layouts and those of many competitors. Indeed, since Wetherspoon normally converts unlicensed buildings, which vary in size and shape, into pubs, there is a vast difference in the type of seating layouts that are used. Implying some sort of strategy to reduce “chance interactions” is absurd.

 

The article says that Wetherspoon is “Most-loved, Most-hated”. “Most-hated” is tribal and sectarian, and is untrue. An independent market research survey by CGA BrandTrack of 5,000 consumers in 2018, for example, reported that Wetherspoon is “the preferred brand to eat out at”. A similar survey in 2019, also by CGA BrandTrack, found that Wetherspoon was the “standout choice for branded drinking occasions”.

 

The article says that I (Tim Martin) am a “lifelong skeptic of the EU” and that I “began in the 1990s to push for Britain to prune its ties with Brussels, then to sever them entirely”. This is complete cobblers.

 

My first opposition to EU policy, which was NOT opposition to the EU itself, was when it was proposed that the UK join the euro in around 2000, following the failure of the euro's predecessor, the exchange rate mechanism, in the early 1990s.

 

I did not vote in the 2014 European elections, won by UKIP, which precipitated a referendum, nor did I ever personally campaign for there to be a referendum on the issue.

 

I only decided to “vote leave”, as did millions of others, following the then Prime Minister's difficulty in obtaining the “fundamental (EU) reform” he had sought in early 2016.

 

It is obviously ridiculous to describe someone as a “lifelong skeptic” of the EU, if they decide to “vote leave” at the age of 60.

 

The article repeats the myth, since corrected by, for example, the Times, that I said “go work at Tesco”. I never said those words, as reputable news organisations have now acknowledged. In fact, I said, at a time of high anxiety about empty supermarket shelves, with Tesco alone seeking 45,000 extra workers, “if you think it's a good idea (to work at a supermarket), do it, I can completely understand it. If you've worked for us before I promise you, we'll give you first preference if you want to come back”. Bloomberg appears to be unaware that hospitality workers are entitled to earn a second income from supermarkets, in addition to their furlough payments.

 

The article says that Wetherspoon “leverage[ed] its scale to beat out smaller competitors”. This is misleading. The main historical competitors to Wetherspoon, as is clearly obvious, have been large pub and restaurant companies, and supermarkets. Many smaller pub competitors, trading in close proximity to Wetherspoon, like Loungers, Fuller's, Young's and St Austell have grown substantially.

 

As a final example, the article incorrectly said that Wetherspoon “brought in” workers from Europe and “staff were as likely to be from Warsaw or Sofia as Wiltshire or Suffolk”. In fact, Wetherspoon did not “bring in” anyone – and only 8% of our workforce, invariably excellent employees, have European passports.

 

The article contains too many other errors to correct, without boring shareholders – including basic errors as to the number of pubs the company has operated at various stages.

 

Bloomberg is not a member of the Independent Press Standards Organisation (“IPSO”), the UK's press regulatory body, which can compel corrections to inaccuracies. However, Bloomberg's own code (“The Bloomberg Way”) says, “Show, don't tell: back up statements with facts…”. It also says:

 

“Be accurate: there is no such thing as being first if the news is wrong”.

 

“The Bloomberg Way” was written by Bloomberg News Editor-in-Chief emeritus, Matthew Winkler. A possible explanation for the errors is that the UK journalist, who wrote the article, contacted HENRY Winkler, known as “The Fonz”, by mistake. This may be unlikely, since The Fonz frequently intoned “exactamundo” and “correctamundo” – not a creed that is evident in the article.

 

Outlook

 

As indicated above, Wetherspoon and its employees, along with the hospitality industry, have worked very hard to comply with ever-changing government guidelines. It is disappointing that so many regulations, implemented at tremendous cost to the nation, appear to have had no real basis in common sense or science – for example, curfews, “substantial meals” with drinks, and masks for bathroom visits.

 

The future of the industry, and of the UK economy, depends on a consistent set of sensible policies, based on scientific evidence, rather than on political expediency.