Shepherd Neame : Interim Report '23

SHEPHERD NEAME LIMITED

INTERIM REPORT 2023

INTERIM STATEMENT

CONTENTS

Interim Statement 01

Group Income Statement 04

Group Statement of Comprehensive Income 04

Group Statement of Financial Position 05

Group Statement of Changes in Equity 06

Group Statement of Cash Flows 07

Notes to the Financial Statements 08

Company Advisors 19

2

SHEPHERD NEAME LIMITED - INTERIM REPORT 2023

Our Sharing Sunday Roast is among the latest additions to our award-winning food offer

REVENUE HAS RISEN TO RECORD LEVELS FOR THE FIRST HALF OF THE YEAR AND THE INTERIM DIVIDEND HAS AGAIN BEEN INCREASED

OVERVIEW

I am pleased to report a strong trading period for the Company in the six months to 23 December 2023 and, at last, the easing of some of the inflationary pressures the Company has faced in recent years.

Consumer demand has remained robust throughout the period. Our pubs, in particular, have performed well, with strong like-for-like sales growth in both tenanted and retail pubs. Revenue has risen to record levels for the first half of the year. Net debt, excluding lease liabilities, is broadly level even after a period of significant investment, and the interim dividend has again been increased.

An unseasonably damp summer in the key trading months of July and August temporarily hampered demand in our coastal sites over the holidays, before a late burst of sunshine in September and early October. We only experienced six days of rail strikes during the period, compared to the severe disruption in the prior year. Christmas trade was exceptional, as consumers celebrated their first uninterrupted Christmas since 2019, with many of our pubs achieving daily or weekly record sales.

Throughout the period, we have enjoyed the continued return to offices by city centre workers and in-bound tourism nearing pre-pandemic levels. Consequently, this has been a particularly strong period for our London pubs.

Whilst the cost-of-living crisis is still squeezing consumer pockets, hospitality has fared better than high street retail. Within that context, pubs have generally been performing better than casual dining, once again proving the resilience of the Great British pub.

Pleasingly, the inflation outlook for cost of goods is improving and pricing in food, raw materials, energy, and energy-related products is stabilising, albeit at a level around +10% higher than the prior year. Whilst we do face new inflationary challenges, such as the further rise to the National Living Wage which takes effect from 1 April 2024, hospitality businesses are potential beneficiaries of the additional discretionary spend this will put in consumers' pockets.

We are pleased to note that business rates relief for the majority of our tenanted pubs has been extended for one further year to the end of March 2025.

We have increased investment in our core business back to pre-pandemic levels. We have carried out some superb transformational projects during this period in the retail estate, with pleasing results so far. We have a great pipeline of transformational projects and an ambitious programme ahead.

This year is a 53-week financial year and we have taken the decision to reinvest the additional profit from this extra week in increased investment in the estate.

The performance in this half is only made possible thanks to the quality of our teams. We have strength in depth across our business. It is thanks to the hard work, dedication and skill of our brilliant team members and licensee partners that we can perform at such a high level when circumstances are right.

I am particularly delighted that we achieved our highest monthly net promoter score across our retail business during a very busy December. We scored well in The Licensee Index, an independent survey benchmarking us against our peer set. We have won a number of awards for our beers. We are also finalists in The Publican Awards for Best Partnership Pub Company and for Best New Site for our development at the Duke of Cumberland in Whitstable.

FINANCIAL RESULTS

Revenue was £89.0m (H1 2023: £85.3m), an increase of +4.3% on the prior year.

Underlying operating profit was £6.8m (H1 2023: £6.3m), an increase of +8.0%.

Underlying profit before tax1 was £3.8m (H1 2023: £3.5m), an increase of +9.9%.

Statutory profit before tax was £1.1m (H1 2023: £5.5m).

Underlying basic earnings per share2 were 18.3p (H1 2023: 18.7p). The benefit of the increase in underlying profit has been offset by the increase in the tax rate.

Net assets per share3 were £11.92 (H1 2023: £12.12).

DIVIDEND

The Board is declaring an interim dividend of 4.2p per share (H1 2023: 4.0p), an increase of +5.0%.

The dividend will be paid to those shareholders on the register as at 5 April 2024 and paid on 19 April 2024.

CASHFLOW, NET DEBT, AND INVESTMENT

Cashflow has remained robust. During the period, underlying EBITDA4 was £12.0m (H1 2023: £11.4m), an increase of +5.2%.

Net debt, excluding lease liabilities, was £83.7m (H1 2023: £82.8m). Statutory net debt was £139.4m (H1 2023: £138.9m).

The cash and net debt position has supported an increase in core capital expenditure. In the first half, we invested £6.6m (H1 2023: £4.0m) in core capital expenditure and a further £0.8m on new site acquisitions (H1 2023: £6.7m). Total capital expenditure during the period was £7.4m (H1 2023: £10.7m).

TENANTED AND RETAIL PUB OPERATIONS

OVERVIEW

As at 23 December 2023, we owned 296 pubs (June 2023: 296), of which 219 (June 2023: 217) are tenanted or leased, 71 (June 2023: 72) are retail pubs and six (June 2023: seven) operated on a free-of-tie basis as investment properties. 85% of our pubs are owned freehold.

During the period we transferred one retail pub to tenanted. We sold one pub (H1 2023: three) and acquired one pub - the Ship Inn, Herne Bay - which will be operated under tenancy.

We have also agreed to buy the freehold of the Bishops Finger in Smithfield Market, to complete in July 2024. We believe that this site has excellent long-term potential as this area becomes the new cultural heart of the City of London, with the redevelopment of the market and relocation of the Museum of London.

Since the summer, we have carried out several major capital projects with the aim of further premiumising our retail estate. The Duke of Cumberland in Whitstable underwent a £1.7m transformation as it transferred to the retail estate. We have added eight superior bedrooms here. We have invested £0.7m at the Tom Cribb, near Leicester Square, and £1.3m at the Royal Crown in Rochester. We have carried out smaller schemes at the Windsor Castle in Carshalton and a bedroom refurbishment at the Royal Albion in Broadstairs. Since Christmas we have reopened the Crown at Blackheath where we have invested £0.7m.

We have an ambitious plan under development for further major schemes in our retail business.

RETAIL PUBS AND HOTELS

For the 26 weeks to 23 December 2023, our retail pubs achieved encouraging like-for-like sales growth of +6.2% (H1 2023: +11.9%).

Inside the M25, like-for-like sales were up +17.5% (H1 2023: +39.1%) and outside the M25 up +1.8% (H1 2023: +3.4%).

For the adjusted Christmas period, from 1 to 31 December, like-for-like retail sales were up +14.9%, driven by drinks sales at +18.9% and food sales at +11.6%, with accommodation sales softer at -7.3%.

For the 26 weeks, like-for-like drinks sales were up +8.9%, like-for-like food sales were up +3.7% and like-for-like accommodation down -2.2%.

At 23 December 2023, we operated 240 (H1 2023: 232) rooms in our retail estate. Occupancy was down at 73.4% (H1 2023: 81.6%), reflecting fewer staycations. Revenue per available room held up well at £86 (H1 2023: £90).

Divisional revenue in Retail pubs was up +12.3% at £41.4m (H1 2023: £36.9m). Underlying operating profit was up +13.3% at £5.3m (H1 2023: £4.7m). Divisional operating profit was down at £3.4m (H1 2023: £4.7m).

• 1 Profit before any profit or loss on the disposal of properties, investment property fair value movements and operating charges which are either material or infrequent in nature and do not relate to the underlying performance.

• 2 Underlying profit less attributable taxation divided by the weighted average number of ordinary shares in issue during the period. The numbers of shares in issue excludes those held by the Company and not allocated to employees under the Share Incentive Plan which are treated as cancelled.

• 3 Net assets at the reporting date divided by the number of shares in issue being 14,857,500 50p shares.

• 4 Underlying profit before interest, tax, depreciation, amortisation, and profit or loss on the sale of fixed assets (excluding property).

• 042 SHEPHERD NEAME LIMITED - INTERIM REPORT 2023

TENANTED PUBS

Trade in our tenanted pubs has remained resilient during this period. As in our retail pubs, trends are biased towards London and drink-led sites.

Our community pubs have done well and we continue to attract a steady flow of high-quality applicants for the small number of pubs where we are seeking a new partner.

In both the tenanted and retail pub estates we have increased our maintenance levels and number of external decoration projects.

Like-for-like net pub income was +5.1% (H1 2023: +7.1%).

Divisional revenue in Tenanted pubs was up +1.5% to £17.7m (H1 2023: £17.4m) and divisional operating profit was £6.6m (H1 2023: £6.9m).

BREWING AND BRANDS

This division continues to evolve in the face of challenges in the marketplace and a shift away from the historically strong categories of cask beer and premium bottled ales. Whilst we have continued to see lower volumes in these areas, we have seen a stronger performance in the on-trade (including our own pubs) and in keg beers.

Our performance in the independent free trade has been strong with volume growth in many brands, particularly keg beers. Almost all our volume decline is in bottled beers in the off-trade, where prices have had to increase to offset the inflationary impact of glass, malt, CO2, packaging waste, and logistics. As a consequence of this volume drop, we have reluctantly made 10 roles redundant in our packaging operation.

During the period, we have also entered into a new contract with GXO Logistics. Under this agreement we will exit the national shared-user network that we have utilised for the last 10 years. From March 2024, we have transitioned to a dedicated operation with all warehousing and logistics based at our site in Faversham. This will deliver improvements in customer service levels and strengthen our proposition in our heartland. Investment in the new agreement will come at a higher cost, the full impact of which will not be felt until 2025.

The restructuring of our packaging and logistics operations gave rise to an exceptional cost of £0.8m in the first half.

We have refreshed the Spitfire Lager brand with new livery and glassware, as it continues to deliver good growth in our business. We have brewed some excellent beers with great taste and flavour from the Small Batch brewery.

To support our on-trade business, we have modernised our keg plant with an upgrade and new robot, at a cost of £0.5m.

In common with others in our industry, divisional revenue in Brewing and Brands was down -3.8% on lower volumes to £29.2m (H1 2023: £30.3m). Total beer volume was -10.5% vs H1 2023. Own beer volume was -16.7% vs H1 2023. The division has returned to profit at £0.2m (H1 2023: loss of £0.4m).

INVESTMENT PROPERTY

As at 23 December 2023, the Company owned investment property valued at £6.7m (H1 2023: £6.9m). We have sold one property during the period (2023: two). Much of the local development has stalled in the last year, as house building has slowed, but we continue to promote sites in the local area for potential development and remain convinced of their long-term merits.

OUTLOOK AND CURRENT TRADING

The strong Christmas trade has given everyone a boost. Demand is robust, cost trends appear to be improving, and recruitment of good talent - whilst never easy - is more stable.

However, the impact of higher interest rates is still feeding through into mortgages as some homeowners come off low fixed-rate deals and the impact for many is yet to be felt. On the other hand, real wages are starting to grow again. If this continues, and prices start to stabilise and interest rates fall, as many predict, then these factors should result in higher net disposable income in due course.

In terms of costs, the National Living Wage will increase by +9.8% in April to £11.44, making a total increase of 59% in the rate since 2016, and the eligibility age is to be reduced to 21. This increase will increase our costs by £1.8m on a full year basis and impact the last quarter of this financial year by £0.4m. As we renew our agreement with our logistics provider, the cost will rise materially throughout 2025.

We are encouraged by the performance to date of our recent development schemes. We continue to take a long-term view and remain focused on inward investment and have many great schemes to deliver.

For the 12 weeks to 16 March 2024, like-for-like sales in our retail pubs were +4.9% vs 2023. Like-for-like tenanted pub income for the nine weeks to 24 February 2024 was +3.3% vs 2023. Total beer volume was -11.8% vs 2023. Own beer volume was -16.9% vs 2023.

This has been, to say the least, a turbulent few years for the hospitality sector. There have been many challenges and pitfalls. We try to adapt to the short-term challenges, such as inflationary pressures, as best we can, whilst at the same time remaining alive to the great long-term opportunities which we uncover. The fundamental strengths of Shepherd Neame, as a well-balanced, well-invested, cash generative business, with great people operating at the heart of our communities, are intact. We remain confident in your Company's long-term prospects.

JONATHAN NEAME Chief Executive

GROUP INCOME STATEMENT

For the 26 weeks ended 23 December 2023

Audited
52 weeks ended
24 June 2023
Total statutory
£'000
-	166,267
(798)	(158,633)
(798)	7,634
(214)	(5,955)
195	195
(19)	(5,760)
2,639	3,002
136	72
1,958	4,948
(455)	(1,486)
1,503	3,462
23.5p
23.3p
All results are derived from continuing activities.
GROUP STATEMENT OF COMPREHENSIVE INCOME
For the 26 weeks ended 23 December 2023
Unaudited	Audited
26 weeks ended	52 weeks ended
24 December 2022	24 June 2023
£'000	£'000
4,260	3,462
1,389	2,019
(318)	(460)
1,071	1,559
5,331	5,021

Revenue Operating charges Operating profit Net finance costs

Fair value movements on financial instruments charged to profit and loss

Total net finance costs

Profit on disposal of property

Investment property fair value movements

Profit before taxation Taxation

Profit after taxation

Earnings per 50p ordinary share

Basic Diluted

Note

2, 3 2, 4

2, 4

3

5

2 2

7

19 - 2,639

Unaudited 26 weeks ended 24 December 2022

Underlying underlying

Results results £'000 £'000

(2,779) (2,798)

247 - 136

4.4p 28.9p

4.3p 28.7p

Profit after taxation 642

Items that may be reclassified subsequently to profit or loss:

(Losses)/gains arising on cash flow hedges

during the period (400)

Income tax relating to these items Other comprehensive (losses)/gains Total comprehensive income

Note

5 100

Unaudited 26 weeks ended 23 December 2023 £'000

(300)

342

Items excluded fromTotal statutory £'000

85,330 (79,048)

85,330 (79,846)

6,282 (2,779)

5,484 (2,993)

-

195

3,503 (746) 2,757

5,461 (1,201) 4,260

GROUP STATEMENT 0F FINANCIAL POSITION

As at 23 December 2023

Unaudited	Unaudited	Audited
23 December 2023	24 December 2022	24 June 2023
Note	£'000	£'000	£'000
Non-current assets
Goodwill and intangible assets	242	2,320	597
Property, plant and equipment	8	282,093	277,590	279,810
Investment properties	6,712	6,887	7,166
Finance lease receivable	2,380	2,450	2,355
Right-of-use assets	9	40,091	45,850	41,922
331,518	335,097	331,850
Current assets
Inventories	7,504	8,042	8,001
Trade and other receivables	22,040	18,358	19,458
Cash and cash equivalents	409	691	1,444
Finance lease receivable	140	65	111
Assets held for sale	2,561	1,341	365
32,654	28,497	29,379
Current liabilities
Trade and other payables	(29,719)	(27,132)	(28,186)
Borrowings	(4,828)	(1,600)	(1,600)
Lease liabilities	9	(2,291)	(1,976)	(2,987)
(36,838)	(30,708)	(32,773)
Net current liabilities	(4,184)	(2,211)	(3,394)
Total assets less current liabilities	327,334	332,886	328,456
Non-current liabilities
Lease liabilities	9	(53,323)	(54,155)	(52,275)
Borrowings	(79,323)	(81,871)	(80,220)
Derivative financial instruments	(580)	(656)	(82)
Deferred tax liabilities	(16,952)	(16,173)	(16,909)
(150,178)	(152,855)	(149,486)
Net assets	177,156	180,031	178,970
Capital and reserves
Share capital	7,429	7,429	7,429
Share premium account	1,099	1,099	1,099
Revaluation reserve	31	31	31
Own shares	(1,042)	(1,045)	(1,042)
Hedging reserve	(230)	(418)	70
Retained earnings	169,869	172,935	171,383
Total equity	177,156	180,031	178,970

GROUP STATEMENT 0F CHANGES IN EQUITY

For the 26 weeks ended 23 December 2023

Share
Share	premium	Revaluation	Own	Hedging	Retained
capital	account	reserve	shares	reserve	earnings	Total
Note	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 24 June 2023	7,429	1,099	31	(1,042)	70	171,383	178,970
Profit for the period	-	-	-	-	-	642	642
Losses arising on cash flow hedges
during the period	-	-	-	-	(400)	-	(400)
Tax relating to components of other
comprehensive income	5	-	-	-	-	100	-	100
Total comprehensive income	-	-	-	-	(300)	642	342
Ordinary dividends paid	-	-	-	-	-	(2,388)	(2,388)
Accrued share-based payments	-	-	-	-	-	232	232
Balance at 23 December 2023	7,429	1,099	31	(1,042)	(230)	169,869	177,156
Balance at 25 June 2022	7,429	1,099	31	(660)	(1,489)	170,917	177,327
Profit for the period	-	-	-	-	-	4,260	4,260
Gains arising on cash flow hedges
during the period	-	-	-	-	1,389	-	1,389
Tax relating to components of other
comprehensive income	5	-	-	-	-	(318)	-	(318)
Total comprehensive income	-	-	-	-	1,071	4,260	5,331
Ordinary dividends paid	-	-	-	-	-	(2,227)	(2,227)
Accrued share-based payments	-	-	-	-	-	206	206
Purchase of own shares	-	-	-	(610)	-	-	(610)
Distribution of own shares	-	-	-	41	-	(37)	4
Unconditionally vested share awards	-	-	-	184	-	(184)	-
Balance at 24 December 2022	7,429	1,099	31	(1,045)	(418)	172,935	180,031

GROUP STATEMENT OF CASH FLOWS

For the 26 weeks ended 23 December 2023

Note

Cash flows from operating activities 10a Cash generated from operations

Income taxes paid

Net cash generated by operating activitiesCash flows from investing activities

Proceeds from disposal of property, plant and equipment

Proceeds from disposal of assets held for sale

Purchases of property, plant and equipment, and lease premiums

Customer loan redemptions Acquisition of subsidiaries Cash acquired on acquisition

Net cash absorbed by investing activities

Cash flows from financing activities

Dividends paid 6

Interest paid

Payments of principal portion of lease

liabilities 9

(Repayment of)/proceeds from borrowings 10c

Issue costs of new long term loans 10c

Purchase of own shares

Share option proceeds

Net cash used in financing activities

Net decrease in cash and cash equivalents

Cash and cash equivalents at beginning of the period

Cash and cash equivalents at end of the period

Consisting of:

Cash and balances held at banks Bank overdrafts1

1 Bank overdrafts are disclosed within current borrowings totalling £4,828,000.

Unaudited 26 weeks ended 24 December 2022

Audited 52 weeks ended

24 June 2023

£'000

£'000

£'000

8,822 (114)

20,818 (199)

8,708

20 869

61 2,267

(5,446)

(10,465)

1 (5,221)

1 (6,271)

766

766

(9,011) (13,641)

(2,227) (2,811)

(2,073) (4,241)

(2,081) (4,099)

3,000 1,400

(598) (756)

(610) (610)

£'000

20,619

4

4

(4,585) (11,113)

(4,888)

(4,135)

5,579

5,579

691

1,444

691 - 691

1,444 - 1,444

NOTES TO THE FINANCIAL STATEMENTS

23 December 2023

1 ACCOUNTS

General information and basis of preparation

The consolidated interim financial statements, which are unaudited, do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. Statutory accounts for the 52 weeks ended 24 June 2023, upon which the auditors issued an unqualified opinion and did not make any statement under section 498 of the Companies Act 2006, have been filed with the Registrar of Companies. The financial information comprises the results of Shepherd Neame Limited (the "Company") and its subsidiaries (the "Group").

The consolidated interim financial statements have been prepared in accordance with international accounting standards, in conformity with the requirements of the Companies Act 2006 (UK-adopted International Accounting Standards). These standards are applied from 25 June 2023, with no changes to the accounting policies set out in the statutory accounts of Shepherd Neame Limited for the period ended 24 June 2023, except for those noted below. The financial statements have not been prepared (and are not required to be prepared) in accordance with IAS 34 Interim Financial Reporting, with the exception of note 5, Taxation, where the tax charge for the 26 weeks to 23 December 2023 has been calculated using an estimate of the full year effective tax rate, in line with the principles of IAS 34. The accounting policies have been applied consistently throughout the Group for the purposes of preparation of this financial information.

The interim financial statements are presented in pounds sterling and all values are shown in thousands of pounds (£'000) rounded to the nearest thousand (£'000), unless otherwise stated.

The financial information for the 52 weeks ended 24 June 2023 is extracted from the statutory accounts of the Group for that year.

New accounting standards and accounting policies

The accounting policies adopted in the preparation of the interim financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the 52 weeks ended 24 June 2023. The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.

Amendments to accounting standards applied from 25 June 2023 were as follows:

Amendments to IAS 1 and IFRS Practice Statement 2 - Disclosure of Accounting Policies; Amendments to IAS 8 - Definition of Accounting Estimates;

Amendments to IAS 12 - Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction;

Amendments to IAS 12 - International Tax Reform - Pillar Two Model Rules. The amendments include a temporary mandatory exception to the accounting for deferred taxes arising from the implementation of the Pillar Two model rules. The temporary mandatory exception is applicable immediately and retrospectively and requires further disclosure for the financial period beginning 25 June 2023. Where the Group has no current or deferred taxes arising from the implementation of the Pillar Two model rules, no additional disclosure is required.

The adoption of these amendments has not had a material impact on the interim financial statements of the Group.

IFRS 17 'Insurance Contracts' is a new accounting standard, effective for periods beginning on or after 1 January 2023. The Group does not conduct any activities within the scope of this standard.

08 SHEPHERD NEAME LIMITED - INTERIM REPORT 2023