5th Mar 2008 07:01
Restaurant Group PLC05 March 2008 The Restaurant Group plcPreliminary results for the year ended 30 December 2007 The Restaurant Group plc operates 330 restaurants and pub restaurantspredominantly in leisure locations and airports. Its primary offerings areFrankie and Benny's, Chiquito, Garfunkel's, Blubeckers and Brunning & Price. • The Group had an excellent 2007: - 5.5% growth in like-for-like sales - Revenue up 17% to £367m - Adjusted EBITDA increased by 22% to £67.8m - Adjusted profit before tax increased by 24% to £43.5m - Adjusted EPS rose 27% to 14.6p - Proposed full year dividend of 7.25p up 21% - Statutory profit before tax increased by 98% to £42.8m - Statutory EPS rose 105% to 14.9p *Results marked as adjusted are stated excluding non-trading items (refer tonote 2) • Leisure and Concessions divisions continued to grow revenues and operating profit • Operations strongly cash generative (£74m of cash generated during the period) • Roll out continues o 36 new sites opened in the period - all self-funded o 30-35 new sites targeted for 2008 o Potential for over 250 Frankie and Benny's (currently 159) • Brunning & Price acquired for £32m and trading well • Solid current trading with like-for-like sales +4% • Targeting another year of progress in 2008 Andrew Page, Chief Executive, said: "The team delivered another impressive performance in 2007, with earnings up 27%and 36 new restaurants successfully opened and trading well. Whilst that is verypleasing, our attention is now firmly fixed on the current year which hasstarted well with like-for-like sales growth currently 4% ahead. With a tighterconsumer market still anticipated during 2008, we will continue to focus ongiving our customers great service and value, opening at least thirty newrestaurants and building further on our record of success." 5 March 2008 Enquiries: The Restaurant GroupAndrew Page, Chief Executive 020 7457 2020 (today)Stephen Critoph, Group Finance Director 0845 612 5001 (thereafter)College Hill Matthew Smallwood 020 7457 2020Justine Warren The Restaurant Group plc Full year results for the year ended 30 December 2007 Chairman's statement *Results marked as adjusted are stated excluding non-trading items (refer tonote 2) 2007 was another year of excellent progress for The Restaurant Group, withsubstantial increases in both revenue and profits. Against a more difficultbackground for consumer-facing businesses the Group grew like-for-like sales by5.5% following on from growth of 5% for the previous year. Our strong andresilient market positioning combined with affordable offerings enabled theGroup to produce a record set of results, with adjusted earnings per sharegrowth of 27%. We sold more than 30 million meals (including around four and ahalf million children's meals) during 2007, an increase of three million totalmeals on the previous year and also created approximately 1,000 full and parttime new jobs. 2007 was the second full year of trading in the Group's refocused form. You willrecall that we took the decision to direct our focus away from the increasinglycrowded high street marketplace and positioned TRG's business firmly in the outof town segments of the eating out market. This strategy has served us well asit affords us some protection in a more challenging economic environment. Building on a strong performance for the first half of the year the Group madefurther progress during the second half to produce an excellent set of full yearresults. Revenue increased by 17% to £367m, adjusted profit before tax increasedby 24% to £43.5m (2006: £35.0m) and adjusted earnings per share increased by 27%to 14.64p (2006: 11.50p). Following on from a 27% increase in adjusted earningsper share in 2006 this is a very strong performance and, as a result, the Boardis recommending a final dividend of 5.99p per share (2006: 4.95p) giving a totaldividend for the year of 7.25p (2006: 6.0p) per share, an increase of 21%.Subject to approval at the Annual General Meeting, the final dividend will bepayable on 9 July 2008 to shareholders on the register on 13 June 2008 and theshares will be marked ex-dividend on 11 June 2008. Both of our divisions, Leisure and Concessions, performed superbly during 2007with growth in like-for-like sales, revenue, profit and margins. We opened atotal of 36 new restaurants and pub restaurants during the year and we aredelighted with their performance. Our expansion plans are unchanged and we aretargeting a further 30-35 new openings for 2008. In October 2007 we acquired theBrunning & Price pub restaurant business which added 14 high quality pubrestaurants to this growing part of our Leisure division. We welcome theBrunning & Price team to TRG and we are delighted with the performance of thebusiness since its acquisition. Our Leisure division, which incorporates Frankie & Benny's, Chiquito,Garfunkel's and Pub Restaurants, enjoyed another successful year with a strongincrease in like-for-like sales growth, an improvement in adjusted operatingprofit margin and a 21% increase in adjusted operating profit. During the yearwe opened 34 new restaurants and pub restaurants within this division - theseare performing well and are set to deliver strong returns. The Concessions division also performed strongly with good growth inlike-for-like sales, an improvement in adjusted operating profit margin and a13% increase in adjusted operating profit. We opened two new sites within thisdivision in 2007 and both are performing well. Group-wide, this is another excellent set of results and is testament to thehard work and dedication of our directors, senior management team and all staff.We are fortunate to have a high quality and stable team at TRG and on behalf ofthe Board I would like to thank them all for their valued contribution over thepast year. Since our last year end we have welcomed two new non-executive Directors to theBoard. David Richardson who was previously Finance Director of Whitbread plc andTony Hughes who was until recently a director at Mitchells & Butlers plc havejoined our Board. Andrew Thomas retired from the Board in February 2008 and Iwould like to thank him for his contribution over the past seven years. 2008 has started well with like-for-like sales for the first nine weeks 4% aheadof last year and total revenue up 21%. This is very encouraging and, whilstrecognising that we face a challenging economic backdrop, I believe that itaugurs well for another year of progress. Alan JacksonChairman5 March 2008 Chief Executive's Review of Operations Introduction 2007 was another year of good progress for The Restaurant Group ("TRG") buildingon the strong performance of the previous year. Both divisions performed welland all of our key performance metrics improved. Revenue, EBITDA, profits andmargins all grew and this serves to highlight both the benefits of our strategyof focusing on the out-of-town marketplace and also the efficacy of our model.It is particularly encouraging that TRG was able to achieve these resultsagainst a more challenging economic backdrop and this demonstrates both thedefensive and resilient characteristics of our market positioning and thestrength of our operations and brands. As a result, the Group achieved a recordlevel of adjusted earnings per share at 14.64p representing growth of 27% on theprevious year. Considering that the "bar" had been raised significantly in 2006,when earnings per share grew by 27%, these results represent a very satisfactoryperformance. TRG Rationale Our core objective continues to be growth in shareholder value and our strategyto achieve this has been, and will continue to be, to build a business capableof delivering long-term, sustainable and growing cashflows. I am pleased toreport that, again, we have successfully converted our profits into cash at avery healthy rate. Strong growth in earnings per share has translated intostrong growth in cashflow per share. Our model enables the Group to continue itsgrowth in a predominantly organic and highly value accretive way, funded throughinternally generated funds. Where we deem it appropriate we are also able tosupplement this organic growth via targeted acquisitions, as we did during 2007with the acquisition of the Brunning & Price pub restaurant business. Ourtouchstones are cashflow and return on investment and, whether we are assessinga new site or an acquisition, our focus is on ensuring that the investment isvalue accretive. TRG's primary focus is on edge of town, out of town, rural, semi-rural andairport locations. These locations have significant barriers to entry, offergood growth prospects and enable us to generate consistently high returns oninvestment. We occupy leading market positions in each of these segments and weare well placed to continue to grow our business in these areas. Lookingforward, we have a strong pipeline of new sites for the next three years. Group Results *Results marked as adjusted are stated excluding non-trading items (refer tonote 2) All of our key performance metrics improved during 2007 with growth in both ofour divisions: - Building on the 5% increase in like-for-like sales in 2006, we grewthis metric by 5.5% in 2007. Approximately 70% of this increase represented "covers" growth with more people using our restaurants and in 2007 we sold morethan 30 million meals; - Revenue increased by 17% to £367m; - Adjusted EBITDA increased by 22% to £67.8m and adjusted operatingprofit increased by 23% to £48.2m; and - Margins improved at both divisional and Group levels with our Groupadjusted operating profit margin increasing by 60 basis points to 13.1% - a verysatisfactory result particularly against a tough hurdle of 140 and 90 basispoint improvements in 2006 and 2005 respectively. Again, the increase in profit was the product of three principal components -like-for-like profit increases from the existing estate, profitable contributionfrom new openings and further cost savings resulting from operationalefficiencies and purchasing initiatives. This combination represents a healthybackground to our continued profitable development. Divisional Results Leisure Total revenue: £285.2m Operating profit: £61.6m Operating margin: 21.6% Frankie & Benny's (159 units) Frankie & Benny's performed superbly with both EBITDA and operating profitincreasing by more than 20% and good growth in margins. During the year weopened 20 new restaurants of which 10 were on non-cinema sites. The results fromthe new openings have been excellent and they are set to deliver very strongreturns. This year we are aiming to open a similar number of new restaurantsand, having been busy in recent years building a high quality pipeline of newsites, we look forward to continued strong returns. Chiquito (53 units) Chiquito enjoyed another excellent year with growth in EBITDA and operatingprofit of almost 30% and operating profit margin up 90 basis points. Against abackground of very high growth in profits and margins in both 2006 and 2005,this represents an outstanding performance. Last year we challenged the Chiquitoteam to build on their terrific performance in 2006 and they did not let usdown. I am confident that they will be just as keen to repeat that feat in 2008!During the year we opened eight new restaurants and we are delighted with theirperformance. We expect to open 5-8 new Chiquito restaurants in 2008. As noted inmy report last year we are particularly pleased with the performance of ourrestaurants which are co-located with Frankie & Benny's and we are continuingwith our plans to pursue these dual roll-out opportunities. Garfunkel's (26 units) Garfunkel's performed well during 2007 and, notwithstanding that we lost 19weeks of trade during the first half whilst restaurants were closed forrefurbishment, the business delivered approximately the same level of profit asfor 2006. The refurbishments were completed by the end of the first half andduring the second half profits and margins increased significantly. Garfunkel'sis now in its 29th year and continues to deliver excellent profits and returns. Pub Restaurants (42 units) This business now comprises Blubeckers and, following its acquisition in October2007, the Brunning & Price pub restaurant business. Blubeckers performed solidlyduring 2007 and has good potential. During 2006 we embarked upon a moreambitious rollout programme for Blubeckers and this continued in 2007. Last yearwe opened six new Blubeckers pub restaurants and in the summer we strengthenedthe Blubeckers team by introducing senior management with a strong track recordwithin TRG of operational management and also good experience of executingsuccessful rollouts. The impact of this has been very positive. Following the acquisition of Brunning & Price ("B&P"), we added a further 14 newpub restaurants to our portfolio. We are delighted with the performance of the B&P pub restaurants since the acquisition and we intend to grow the business. TheB&P pub restaurants have a more relaxed feel compared with Blubeckers. AlthoughB&P's pubs are not branded they all share a similar type of fit out andoperating style. The quality of food is high - B&P won the Good Pub Guide's FoodPub of the Year Award for the third time in 2007 - and they attract a regularand loyal customer base. We are delighted to have retained all of theoperational management team at Brunning & Price. It is an experienced, talentedand successful team and we look forward to working with the team to furtherdevelop and grow our Pub Restaurant business. During 2008 we are expecting to open a total of 5-10 new pub restaurants and,longer-term, the Pub Restaurant business has the potential to become asignificant part of the Group. Concessions (50 units) Total revenue: £81.2m Operating profit: £12.5m Operating margin: 15.4% Our Concessions division enjoyed another year of good progress producing astrong increase in operating profit and an improvement in margin. Against a morechallenging operating background both logistically and cost-wise this is anoutstanding performance. We opened two new units during 2007 and these aregenerating strong returns. We expect a small net increase in the number ofConcessions units during 2008 in what will be a year of significant change giventhe developments at Heathrow airport. In late March we will open four new sitesat the new Terminal 5 and later in the year when Terminal 2 closes we will closeour restaurant there. During 2008 we are expecting some significant swings intrading patterns at Heathrow as passengers migrate from the existing terminalsinto the new T5. Going forward, we are confident that these new developmentsplace our Concessions business in a very strong position. Non-Core During the year losses from non-core activities decreased by £0.55m and we willcontinue to take steps to reduce these non-core losses. Corporate Activity In October 2007 we acquired Brunning & Price Limited for £32m in cash. Thebusiness comprises of 14 trading pub restaurants and one development site. B&Pis based predominantly in the North West and has a long history of profitablegrowth. We have retained B&P's operational management team, will continue tooperate the pub restaurants in the existing, highly successful style and we willgradually add new pubs to the B&P business. Together B&P and Blubeckers providea very attractive opportunity to grow our Pub Restaurant business. Market Dynamics and Economic Backdrop We are confident that prospects for the eating out market remain positive.Socio-economic factors such as an ageing population, more females in work andlevels of disposable incomes significantly higher than in previous generationsaugur well for our industry. Lifestyle changes are also positive with anincreasing propensity to spend on leisure activities. Eating out, particularlyat our popular price points (£10-£16 spend per head), has become a habitual partof most people's lives and is something many are reluctant to give up. During2007 the smoking ban came into effect in England and Wales, following the ban inScotland the previous year. Overall, we believe that TRG has benefited from thisas more families and those with an aversion to smoking have visited ourrestaurants. During most of 2007 and into 2008 much has been said and written about thedeteriorating economic backdrop and pressures on the consumer. A series ofsuccessive interest rate rises starting in 2006 and continuing through into 2007saw base rates rise by 125 basis points (in effect increasing the cost ofborrowing almost 30%). The cost of servicing an already high level of personaldebt therefore rose for much of the UK population. Compounding this we sawinflation rise, by varying amounts depending upon which particular index onechose to use, and the burden of taxation increase. Together this combination hasserved to make life more difficult for the UK consumer and looking forward into2008 we anticipate a continuation of these tighter conditions. Whilst we would not suggest that TRG is completely impervious to these economicfactors, we are very encouraged that our business has demonstrated aconsiderable level of resilience in the face of a slowing UK economy and atighter consumer market. We believe that this is the result of a number offactors including our popular price point and value for money, our focus onareas with higher barriers to entry (and thus lower supply-side risk), thestrength of our brands, consumers' reluctance to forego eating out and, veryimportantly, the skill and application of the TRG team. Restaurants which haveopened within the last few years have performed very well, delivering strongreturns and we intend to continue to open a similar number of new restaurantseach year for the foreseeable future. We believe that interest rates and employment levels are two key drivers ofconsumer spend which can potentially impact our marketplace. We have recentlyseen two reductions in base rates to the current level of 5.25% and we note thatemployment levels are, and are projected to remain, high. Whilst it is suggestedthat there is scope for further monetary relaxation during 2008 we believe that,in the light of current levels of inflation as measured by the CPI, it may takesome time before the base rate drops back below 5%. We are also mindful of therisks of further taxation pressures as a result of the level of the budgetdeficit. Furthermore, GDP growth is forecast to slow in 2008 to a below trendlevel but, looking further ahead, there is the prospect of a pick-up, backtowards trend, in 2009. As a result, we have factored a less favourablemacro-economic backdrop into our planning for 2008 than we have experienced overthe last five years. Despite this we believe that TRG is well-placed to weather these tighterconditions. Recent trading has been solid and we continue to see excellentresults from our new openings. Cost pressures have been an issue for some time.We identified the risk of inflationary cost pressures with respect to our inputcosts two years ago and, during 2006 where we were able to, we took steps toremove or minimise that risk through taking out longer term (typically threeyears) fixed or capped price contracts. This approach served us well during 2007and we will continue to benefit from this in 2008 and 2009. However, we arestill exposed in some areas where currently cost pressures are being felt(mainly fresh meats and dairy/milk products). In these areas we would normallyfix prices for 6-12 months but at present we are, in most cases, eschewing fixesof more than three months as our purchasing team anticipate a reasonablepossibility of prices softening later in the year. We have also kept our menucontent under regular review so as to try to mitigate the impact of costinflation through careful menu engineering. In the light of the current tighterconsumer market and, we believe, the importance of value for our customers weare likely to hold off increasing menu prices in the short term but we will becarefully reviewing this during the second quarter with the prospect of someincreases later in the year. Future Prospects 2007 was another year of good progress for the Group with both divisionsachieving growth. The current year has started well with like-for-like salesgrowth during the first nine weeks at +4% (of which covers growth represents70%) and total revenue for the same period up 21% (a 16% increase excluding B&P). At this stage last year, like-for-like sales growth was +5% (of which coversgrowth represented 75%) and total revenue was 16% ahead. Whilst we areencouraged by this, we recognise both the ongoing impact of a continuation of atighter consumer marketplace and also the fact that our comparativelike-for-like hurdles, at +8.3% and +7.3% in quarters two and three, aredemanding. We have made a solid start to the year and, providing there is not asignificant further deterioration in the UK economy, we are confident ofcontinuing our progress in 2008. Andrew PageChief Executive Officer5 March 2008 Group Finance Director's Review Results *Results marked as adjusted are stated excluding non-trading items (refer tonote 2) As described in the Chairman's statement the Group has had another excellentyear. Total Group revenue increased by 16.5% to £366.7m. Revenue of theprincipal trading brands increased by 18.7% to £366.4m. Adjusted Group EBITDA was £67.8m, up 21.9% compared to the prior year. Afteradding back pre-opening costs and the IFRS non-cash share option charge,adjusted Group EBITDA in the year was £72.1m. Adjusted Group operating profitgrew by 23.0% to £48.2m. In terms of margins we made further good progress,adjusted Group EBITDA at 18.5% showed an improvement of 80 basis points on theprevious year, while adjusted Group operating profit margin at 13.1% was 60basis points ahead of 2006. Total interest costs in the year of £4.0m were 22.2% higher than the previousyear. This reflects the higher levels of average net debt during 2007 (followingpayment of the £35m special dividend in March 2006 and the £32m acquisition ofBrunning & Price in October 2007). Total adjusted profit before tax excluding Living Ventures was £44.2m, anincrease of 23.1% on the prior year. After taking into account TRG's share ofthe losses of Living Ventures total Group profit before tax and non-tradingitems was £43.5m, an increase of 24.2% on the prior year. Non-Trading Items The full year results include a net non-trading charge of £0.7m before taxation.This consists of the following items: • A provision of £1.7m against the carrying value of the Group's investment in Living Ventures as previously announced and detailed in the Interim Results for 2007, • A credit of £1.0m recognised in respect of outstanding loan note interest received from Living Ventures at the time of the sale of the Living Room business in June 2007 as also previously announced and detailed in the Interim Results, • A net charge of £0.2m in respect of the revaluation of the interest rates swap at the year end, and • A net credit of £0.2m relating to various property disposal items. Capital Expenditure During 2007 the Group invested a total of £47.4m (2006: £40.8m) in capitaladditions. This consisted of the following: • £37.8m invested in 36 new sites (20 Frankie & Benny's, eight Chiquito, six Blubeckers and two Concession outlets). This includes two freehold developments and the Heathrow Terminal 5 fit out costs. • £9.6m on refurbishment and maintenance expenditure. As we have highlighted previously, the Group is very focused on ensuring thatour investments generate excellent returns on investment. In order to ensurethat this is achieved, we adopt a rigorous approach to capital investmentappraisal. All new site proposals are subject to this process which includesdetailed financial evaluations and demographic analysis, as well as localcompetitor and market analysis. All significant projects are subject to approvalby the Group Board and we conduct post completion reviews on a regular basis.These confirm that we are continuing to achieve the excellent expected levels offinancial return on a very consistent basis. Cash Flow Set out below is a summary cash flow statement for 2007. This demonstrates onceagain the very strong cash generation characteristics of TRG, and the verytransparent conversion of reported operating profit into cash. Cash flowgenerated from operations at £73.8m showed an increase of 16% on the prior year.After interest, tax and maintenance capex, free cash flow of £50.6m grew by 19%compared to 2006. This level of free cash flow means that, once again, theGroup's expanding development programme as well as a significantly increasedlevel of ordinary dividend was entirely financed out of internally generatedcash flow. £ million 2007 2006 Adjusted operating profit 48.2 39.2Working capital & non-cash adjustments 6.0 7.7Depreciation 19.6 16.5 Cash flow from operations 73.8 63.4Interest paid (3.4) (2.8)Tax paid (10.2) (9.7)Maintenance capex (9.6) (8.5) Free cash flow 50.6 42.4New build capex (37.8) (32.3)Ordinary dividends paid (12.2) (9.5) Underlying net cash flow 0.6 0.6Disposals and integration (including Living Room) 8.6 (2.0)Acquisition of Brunning & Price (32.9) -Cash proceeds from issue of shares 1.1 1.1Special dividend - (34.8)Purchase of shares for employee benefit trust (7.2) -Financing costs offset against bank debt 0.7 - Change in net debt (29.1) (35.1)Net debt at start of the year (47.5) (12.4) Net debt at end of the year (76.6) (47.5) Other points to note on the cash flow are as follows: • Total ordinary cash dividend payments to shareholders at £12.2m increased by 28% compared to 2006. • Disposals include £7.8m in respect of the Living Room disposal announced in June, with the balance relating to various property disposals. • The Group invested a total of £32.9m (including costs) acquiring the Brunning & Price business, as announced in October. • The Group invested £7.2m acquiring shares for the Employee Benefit Trust. This was in two tranches: 1.5m shares acquired on the 29 June 2007 for a total consideration of £5.0m; 1m shares acquired on 27 November 2007 for a total consideration of £2.2m. The Group ended the year with net debt of £76.6m compared to £47.5m at the startof the year. Financing In December 2007 the Group completed new financing arrangements. This consistsof a new committed £120m facility for five years until December 2012. In allrespects this is on terms at least as good as the previous facilities. The Group also has interest rate hedging instruments in place to fix interestcosts on a significant proportion of the overall net debt position. £30m isfixed at a rate of 4.695% until January 2009. A further £25m is fixed at 4.92%until January 2011. The Group is therefore in a strong financial position with substantial head roomagainst covenants and available facilities, which will enable us to maintain thenew site development programme. Balance Sheet & Key Financial Ratios Total Group net assets increased in the year from £65.2m to £77.2m. The detailof this movement is set out in the consolidated statement of changes in equity.The main movements are an increase of £29m, representing the retained profitsfor the year, less dividend payments of £12.2m and a £7.2m charge to reserves inrespect of the acquisition of shares for the Employee Benefit Trust. The key financial ratios during the year were as follows: Covenant 2007 2006 EBIT interest cover 12.1x 12.0xEBITDA interest cover >4x 17.0x 17.1x Fixed charge cover 2.4x 2.3xBalance sheet gearing 99% 73%Net debt / EBITDARelated Shares:
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