Marston : Interim results - 26 June 2020

26 June 2020

MARSTON'S PLC

INTERIM RESULTS FOR THE 26 WEEKS ENDED 28 MARCH 2020

COVID-19 impact on H1 earnings and improvement in cash flow

Transformational joint venture transaction provides strong platform for post-pandemic recovery

Underlying	Statutory
2020*	2019	2020*	2019
Revenue	£510.5m	£553.1m	£510.5m	£553.1m
Profit/(loss) before tax	£9.4m	£34.2m	£(33.2)m	£16.3m
Earnings/(loss) per share	1.2p	4.5p	(4.4)p	2.2p
Net cash flow	£3m	£(52)m

*2020 results reflect adoption of IFRS 16'Leases'

PERFORMANCE AND FINANCING

• Pre-COVID-19 revenues in line with last year

  -

  COVID-19 had a material impact on revenues estimated at c£40 million

• Net cash flow improvement of £55 million reflecting progress on debt reduction plans

  • -Achieved despite COVID-19 impact on earnings

  • -Includes £61 million disposal proceeds through sale of 168 pubs.

• Additional liquidity secured and covenants amended beyond end of financial year

  • -£70 million additional facility to November 2020; £118 million headroom on facilities

  • -Covenant amendments and waivers on all finance facilities

  • -Cash burn of £10m per month in closure period following swift action on cost reduction

  • -Cash flow supported by very strong off-trade sales-up 55% since half year

OUTLOOK

• Transformational joint venture transaction

  • -Long-term joint venture between Marston's Beer Company ("MBC")and Carlsberg UK

  • -Retain 40% stake in a high quality beer business with significant synergy opportunity

  • -Receive up to £273 million equalisation payment-valuing MBC at £580 million

  • -Proceeds used to further reduce debt, target ongoing cash flow broadly cash neutral

  • -Transaction approved by shareholders 25 June and expected to complete in Q3 2020, subject to competition clearance

• Well placed for post COVID-19 recovery in medium term

  • -Plans in place for pubs to reopen from 4 July, initial revenue and earnings profile uncertain

  • -Transaction significantly strengthens balance sheet

  • -Predominantly freehold pub estate, located outside city centres with 90% having outside space

  • -Well placed to benefit from likely supply contraction in sector and gain market share

  • -Management will have total future focus on operating its pubs and accommodation business

  • -Capital markets day in autumn to present pub strategy

Commenting, Ralph Findlay, CEO said:

"Our immediate priority is to prepare our pubs to reopen on 4 July.Whilst there is short term uncertainty as the sector emerges from lockdown, we are focussed on offering a great guest experience, synonymous with Marston's hospitality, to welcome our customers back into our pubs within a safe trading environment.

"The challenges facing the sector should not be underestimated and much rests on consumer confidence whichmay take time to rebuild. As the industry navigates its way out of lockdown, we will continue to urge Government for continued support for pubs and wider hospitality, through the reopening phase and thereafter through business rates relief and cuts to VAT, to protect jobs, the economy and the invaluable role the pub plays in communities nationwide.

Looking ahead, our transformational deal with Carlsberg positions the Company well for the future. Postcompletion, Marston's will be a focussed pub and accommodation business with a significantlystrengthened balance sheet, well placed to rebuild trading momentum and leverage the market opportunities available to usover the medium to longer term."

ENQUIRIES:

Marston's PLC	Tel: [phone]	Instinctif Partners
Ralph Findlay,	Chief Executive Officer	Justine Warren	Tel: [phone]
Andrew Andrea,	Chief Financial Officer	Matthew Smallwood	Tel: [phone]

NOTES TO EDITORS

• Marston's is a leading pub operator and independent brewer.

• It has an estate of around 1,400 pubs situated nationally, comprising managed, franchised and leased pubs.

• It is the UK's leading brewer of premium cask and packaged ales, including Hobgoblin, Wainwright, Marston's Pedigree and 61 Deep. The portfolio also includes beers brewed at Banks's, Jennings, Wychwood, Ringwood,and Eagle Breweries and also includes McEwan's, Courage, Bombardier, Brakspear and Mansfield beers.Tocomplement the UK portfolio, Marston's operates a number of brands under licence with global brand owners such as Estrella Damm, Erdinger, Shipyard and Kirin.

• Marston's employs around 14,000 people.

GROUP OVERVIEW

The first half-year results have been significantly impacted by the COVID-19 outbreak in March 2020. However, following the transformational Beer Company transaction outlined below, we will have a significantly strengthened balance sheet, and a high quality freehold pub estate well placed to recover from the impact of the current position.

Generally, underlying trading was solid over the first few months, after which we saw an adverse trading impact from the storms in February and subsequently a material impact on trading in the latter half of March as the impact of COVID-19 took hold. Sales in the period to the end of February were broadly in line with the prior year and the circa £40 million shortfall in sales arose in March.

Encouragingly, despite this, we made good progress on cash generation in the period, demonstrating our commitment to our previously stated debt reduction plans, which were ahead of schedule, with net cash flow up £55 million on last year including £61 million proceeds from the disposal of 168 pubs in the period.

Overall, underlying trading prior to 16 March was solid, including strong Christmas and New Year trading, despite the impact of the severe and widespread flooding in November, and again in February. Like-for-like sales in pubs for the 24 weeks to 14 March were down 1% and beer volumes were in line with expectations. After 16 March, trading deteriorated sharply and all pubs were closed in line with Government guidance.

In addition, the results for the period reflect the adoption of IFRS 16'Leases'for the first time, details of which are set out in note 16 of the accounts. In summary, as previously guided, this change to the accounting rules has visibly reduced reported earnings, and net debt has increased to reflect lease liabilities not previously recognised as debt on the balance sheet.

Total revenue of £510.5 million was below last year (2019: £553.1 million), principally reflecting the impact of COVID-19 on both Pubs and Bars as well asMarston's Beer Company.Group underlying operating margins at 11.3% were 2.0% behind last year, principally reflecting this reduced revenue. Underlying operating profit was £57.8 million (2019: £73.3 million). At the end of February revenues were broadly in line with last year. The revenue impact of COVID-19 is therefore estimated to be circa £40 million.

Underlying profit before tax was £9.4 million (2019: £34.2 million). Basic underlying earnings per share for the period were 1.2 pence per share (2019: 4.6 pence per share).

On a statutory basis, the Group generated a loss before tax of £33.2 million (2019: £16.3 million profit). The difference between the statutory and underlying profit principally reflects around £26 million of non-cash items (which were disclosed at the time we announced the disposals) relating to losses on the disposal of certain non-core assets and interest rate swap fair value adjustments, as well as approximately £16 million of COVID-19 related costs including debt provisions and stock valuation adjustments. The basic loss per share was 4.4 pence per share (2019: 2.2 pence earnings per share).

Net cash flow for the period of £3 million was £55 million higher than in 2019, this improvement reflects reduced capital expenditure and disposals as part of our longer-term debt reduction plans. Operating cash flow of £58 million is below last year (2019: £67 million) reflecting reduced earnings.

Net debt excluding lease liabilities of £1,379 million has improved and is £39 million lower than last year. Additionally, lease liabilities of £295 million have been recognised on adoption of IFRS 16.

Joint venture with Carlsberg UK

On 22 May 2020, the Group announced that it had entered into an agreement to contribute its brewing business, valued at up to £580 million on a debt free/cash free basis, to a new UK brewing jointventure with Carlsberg, the Carlsberg Marston's Brewing Company,in return for 40 per cent of the equity in the joint venture. Under the agreement, Carlsberg will also contribute its UK brewing assets, valued at £200 million on a debt free/cash free basis, in return for 60 per cent of the equity in the joint venture.

On completion, the Group will realise up to £273 million in the form of a cash equalisation payment, which is subject to adjustment in respect of: (i) customary working capital and debt/cash adjustments, and (ii) £5 million of other adjustments. Of the up to £273 million equalisation payment, £34 million will be deferred for 12 months from completion with the amount payable contingent on the extent of the recovery of the share price performance of a pre-agreed basket of companies to pre-COVID-19 levels.

The cash proceeds will provide the Group with significant liquidity to materially reduce debt in line with its stated strategy whilst at the same time the Group will retain a significant stake in the joint venture.

The transaction constitutes a Class 1 transaction under the Listing Rules and was approved by shareholders at a general meeting of the Company on 25 June 2020. The transaction is subject to clearance by the competition authorities and completion is expected in Q3 2020.

Outlook and dividend

As previously guided, given the ongoing uncertainty, we are unable to quantify the impact of COVID-19 on our financial and trading performance at this stage, however we naturally anticipate a reduction in our expectations for financial year 2020.

In response to the temporary closure of pubs mandated by Government, our focus has been to minimise the level of cash-burn within the organisation, which currently stands at approximately £10 million per month. Actions include:

• -Reducing all expenditure, including capital spend, to essential spend only

• -Taking advantage of the Government furlough scheme with 93% of employees being furloughed and remaining employees taking a 20% reduction in salary

• -We have managed to retain all employees and maintain a mental well-being programme to support affected employees

• -Accessed government grants and reliefs, including supporting our tenants in assisting them to gain access to those reliefs

In addition, as previously announced, the Board believes that given the uncertainty surrounding COVID-19 it would be prudent to plan for no dividends to be paid in respect of financial year 2020. We recognise that the dividend is important to many of our shareholders and we plan to revisit the payment of dividends only when the business is generating sufficient cash flow to cover the dividend and it is appropriate to do so.

We are encouraged that there is now confirmation from Government that pubs are allowed to reopen on 4 July and the operational guidelines we will be required to adhere to. In advance of reopening, we have prepared comprehensive plans for our employees to be able to operate safely within the guidance, and for our pubs to trade efficiently and profitably given restrictions still in place. We look forward to welcoming our customers back into our pubs, albeit the trajectory of both revenue and earnings in this initial period are uncertain. As previously announced, we will not be proposing dividends in respect of financial year 2020 given the uncertainty that still exists.

The Financing section below describes the additional bank facilities and covenant waivers put in place with our banks and bondholders, which provide us with sufficient flexibility to manage through an unanticipated period of pub closure which extends significantly beyond current expectations of re-opening. In addition, as part of the work underpinning the circular for the joint venture transaction with Carlsberg UK described above, the Board has considered a'reasonable worst case scenario'which assumes a period of pub closures to the end of September 2020.In this 'reasonable worst case scenario', if the transaction were not to happen,the Board would be required to seek alternativefunding or develop alternative plans for the Group's future financing. Even if the transaction doescomplete then in this scenario the Group would need to obtain further covenant waivers from its bondholders. Both these matters represent material uncertainties over the Group's ability to continue to trade as a going concern over the foreseeable future being a period of at least 12 months from the date of the interim financial information. The Board are confident however that in this worst case scenario we would be able to pursue mitigating strategies, including the potential to access funds from a range of sources, underpinned by the significant freehold tenure of the pub estate.

Looking forward, it is clear that there will be contraction of supply in the eating and drinking out market as a consequence of COVID-19. Our predominately freehold pub estate is less exposed than many of our peers to city centres where we believe the long-term impact of COVID-19 may be more pronounced. Given the composition of our pub estate, together with a significantly strengthened balance sheet arising from the proceeds from the Beer Company transaction, we are well placed to fully exploit the recovery of trade over the longer term.

It is our intention to hold a capital markets day in the autumn to set out our operational strategy and financial plans for our pubs and accommodation business going forward.

PERFORMANCE AND FINANCIAL REVIEW

Underlying OperatingRevenue

operating profit margin

2020	2019	2020	2019	2020	2019
£m	£m	£m	£m	%	%
Pubs and Bars	343.3	369.9	62.7	71.7	18.3	19.4
Brewing	167.2	183.2	10.7	14.5	6.4	7.9
Group Services	-	-	(15.6)	(12.9)	(3.1)	(2.3)
Group	510.5	553.1	57.8	73.3	11.3	13.3
Pubs and Bars

Total revenue decreased by 7.2% to £343.3 million principally reflecting the adverse impact of COVID-19 in March. Underlying trading ahead of this was solid in the first 19 weeks of the period, with strongChristmas and New Year trading offset by the adverse impact of significant and widespread flooding in November and February, together with the impact of disposals. Underlying operating profit of £62.7million was behind last year reflecting these factors.