Company Announcements

Notes

Adjustments to statutory numbers

1. Where appropriate, the earnings/losses per share (EPS), as disclosed in the statutory accounts, have been recalculated to take account of share splits, the issue of new shares and capitalisation issues.

2. Free cash flow per share excludes dividends paid which were included in the free cash flow calculations in the annual report and accounts for the years 1995-2000.

3. The weighted average number of shares, EPS and free cash flow per share include those shares held in trust for employee share schemes for all years prior to 2022.

4. Before 2005, the accounts were prepared under UKGAAP. All accounts from 2005 to date have been prepared under IFRS.

5. Apart from the items in notes 1-4, all numbers are as reported in each year's published accounts.

6. From financial year 2020 data is based on post-IFRS 16 numbers following the transition from IAS17 to IFRS 16.

Background

To coin a Shakespeare phrase, "the multiplying villainies of nature do swarm upon" the hospitality industry, following the lockdowns and restrictions of the pandemic - and surprisingly perhaps, the aftermath has been just as difficult for many companies.

Most commentators, including most publicans, understandably predicted a post-lockdown boom, in which the public would react to enforced cabin fever by embarking on a celebratory spree, but the reality has, in contrast, been a painstakingly slow recovery in sales, for some but not all, accompanied by great inflation in costs.

A possible reason for the much slower-than-anticipated recovery has been an underestimation of the power of habit in determining human behaviour.

During lockdown, dyed-in-the-wool pub-goers, many for the first time, filled their fridges with supermarket beer - and it has proved to be a momentous challenge to persuade them to return to the more salubrious environment of the saloon bar.

Even so, Wetherspoon's trading performance in FY22 improved versus the annus horribilis of FY21, but was still markedly adverse to pre-pandemic FY19.

Although like-for-like sales decreased by 4.7% compared to FY19, sales trends improved in the financial year. In the first half, like-for-like sales were -7.4%; in the third quarter they were -4.0% and in the fourth quarter they were -0.6%.

Like-for-like sales have improved in the first 9 weeks of the current financial year (FY23) and are 10.1% ahead of the first 9 weeks of FY22.

In addition to the slowly improving sales trend, there was a significant turnaround of £105 million in free cashflow, which improved to an inflow of £21.9 million in FY22 compared to an outflow of £83.3 million in FY21.

Perhaps surprisingly, the Wetherspoon balance sheet is also stronger than before the pandemic, at the expense of some dilution to pre-pandemic shareholders.

Debt levels, combined with trade creditors (excluding notional IFRS 16 lease debt), have increased by £53 million since January 2020, just before the first lockdown, substantially less than a total of £158.3 million invested in freehold "reversions" and new pubs during the period.

Since January 2020, £70.5 million has been spent on freehold reversions (where Wetherspoon was previously the tenant) and £87.8 million on new pubs.

Two equity issues during the pandemic were, of course, key factors in this strengthening of the balance sheet.

On an IFRS 16 basis, which includes notional debt from leases, debt decreased from £1.45 billion to £1.29 billion between January 2020 and the end of FY22.

In this context, Wetherspoon has, as reported below, fixed £770 million of its debt until November 2031, at an average of 1.24%, excluding the banks' margin, a significant benefit at a time of rising interest rates.

Fortunately, the company was able to extend these swaps by 32 months in the first half of FY22 - before sharply rising inflation and interest rates were anticipated by the market.

The mark-to-market value of these swaps was £182.7 million, as of 2 October 2022.

Trading Summary

In the summary below we have compared sales and profits with FY19, but cash flow, debt and other areas are compared with FY21. To try to avoid confusion, we also provide a table, below, showing some key indicators referred to in this section of the annual report, for the last four financial years.

Total sales for FY22 were £1,740.5 million, a decrease of 4.3%, compared to the pre-pandemic 52 weeks ended 28 July 2019.

Like-for-like sales, as indicated above, compared to FY19, decreased by 4.7%. Like-for-like bar sales decreased by 6.5% and food sales by 3.2%. Slot/fruit machine sales increased by 12.3% and hotel room sales increased by 6.5%.

The operating profit, before exceptional items, was £25.7 million (2019: £131.9 million). The operating margin, before exceptional items, was 1.5% (2019: 7.3%).

The loss before tax and exceptional items was £30.4 million (2019: £102.5 million profit). This included property gains of £2.1 million (2019: £5.6 million).

The company sold, closed, or terminated the leases of 15 pubs, giving rise to a cash inflow of £5.9 million.

Losses per share, including shares held in trust by the employee share scheme, before exceptional items, were 19.6p (2019: earnings per share of 75.5p).

Total capital investment was £127.3 million (2021: £62.7 million). £58.8 million was invested in new pubs and pub extensions (2021: £24.1 million),

£42.8 million in existing pubs and IT (2021: £20.0 million) and £25.8 million in freehold reversions of properties where Wetherspoon was the tenant (2021: £16.9 million).

The company continued to increase investment levels, on the basis that the adverse effects of Covid-19 would eventually diminish.

IFRS 16 'Leases' replaced IAS 17 'Leases' for accounting periods beginning on or after 1 January 2019. IFRS 16 was adopted by the Company on 29 July 2019 using the 'modified retrospective approach'.

Sales, profits and cash flow FY19 to FY22

Exceptional items

There was a pre-tax exceptional gain of £56.7 million (2021: £27.5 million loss).

£52.9 million of the gain related to the fair value movement of interest rate swaps, which the company has in place for approximately the next 9 years, as reported above, at an average rate of 1.24%, excluding the banks' margin. In addition, there was a gain of £27.8 million in relation to an HMRC claim, regarding the historic VAT treatment of slot/fruit machines. There was also a gain of £1.4 million in respect of government support grants, associated with the pandemic. Finally, there was a £24.4 million property impairment charge, in respect of pubs which were deemed unlikely to generate sufficient cash flows, in the future, to support their carrying value.

Free Cash Flow

There was a free cash inflow of £21.9 million (2021: £83.3 million outflow), after capital payments of £45.9 million for existing pubs (2021: £22.3 million), £12.8 million for share purchases for employees (2021: £7.7 million) and payments of tax and interest. Free cash inflow per share was 17.3p (2021: 67.8p outflow).

Dividends and return of capital

The board has not recommended the payment of a final dividend (2021: £0). There have been no share buybacks in the financial year to date (2021: £0).

Financing

As at 31 July 2022, the company's total net debt, excluding derivatives and lease liabilities, was £891.6 million (2021: £845.5 million), an increase of £46.1 million.

The company has an agreement in place with its lenders which waives debt covenants until October 2023 and replaces them with a minimum liquidity requirement of £100 million in the first half of FY23, followed by relaxed leverage covenants in the second half of the year.

There has been no change in the total available finance facilities of £1,083.0 million during the period.

During the year, as reported above, the company has extended the period of its interest rate swaps, in respect of £770 million, from March 2029 to November 2031. The swap rate currently being paid, excluding the banks' margin, is 1.61%. The total cost of the company's debt, in the year under review, including the banks' margin was 4.46%. The cost of the swaps is illustrated in the table below:

Property

The company opened seven pubs during the year and sold, closed or terminated the leases of 15 pubs. The company had a trading estate of 852 pubs at the financial year end.

The company is currently marketing 32 pubs, most of which are within a close radius of other pubs we own. The strategy of opening larger pubs, at a considerable distance from each other, reflects a long-term strategy, rather than a reaction to trading difficulties in the Covid era, as some commentators have incorrectly said.

The full-year depreciation charge, excluding depreciation of "right-of-use" assets (a new charge to the profit and loss account, post-IFRS 16) was £74.6 million (2021: £76.4 million).

The company has increased the percentage of freehold pubs it owns in the last 11 years.

As at 24 July 2011, the company's freehold/ leasehold ratio was 43.4%/56.6%. As at 31 July 2022, as a result of investment in freehold reversions and freehold pub openings, the ratio was 68.8%/31.2%.

As at 31 July 2022, the net book value of the property, plant and equipment of the company was £1.4 billion, including £1.1 billion of freehold and long-leasehold property.

The properties have not been revalued since 1999.

Taxation

The current corporation tax charge for the year is £7.0 million (2021: £17.6 million credit). The 'accounting' tax credit, which appears in the income statement, is £5.6 million (2021: £20.7 million credit).

The accounting tax credit comprises two parts: the actual current tax credit (the 'cash' tax) and the deferred tax credit (the 'accounting' tax). The tax losses arising in the financial year will be carried forward for use against profits in future years, meaning that the cash tax benefit will be received in future years. Therefore, a 'deferred tax' benefit is created which will reverse in future years when the cash tax benefit of the losses is realised.

The company is seeking a refund of historic excise duty from HMRC, totalling £524k, in relation to goods sent to the Republic of Ireland, when Wetherspoon pubs first opened in that country. The company has been charged excise duty on the same goods twice, as they were purchased in the UK, and excise duty was paid in full. Irish excise duty was then paid in addition.

Owing to a paperwork error, in the early days of our business in the Republic, which the company has sought to rectify, it has, to date, been unable to reclaim this duty, even though it is transparently clear that the duty has been paid.

Scotland Business Rates

Business rates are supposed to be based on the value of the building, rather than the level of trade of the tenant. This should mean that the rateable value per square foot is approximately the same for comparable pubs in similar locations. However, as a result of the valuation approach adopted by the government "Assessor" in Scotland, Wetherspoon often pays far higher rates per square foot than its competitors.

This is highlighted (in the tables below) by assessments for the Omni Centre, a modern leisure complex in central Edinburgh, where Wetherspoon has been assessed at more than double the rate per square foot of the average of its competitors, and for The Centre in Livingston (West Lothian), a modern shopping centre, where a similar anomaly applies.

As a result of applying valuation practice from another era, which assumed that pubs charged approximately the same prices, the raison d'être of the rating system - that rates are based on property values, not the tenants trade- has been undermined.

Similar issues are evident in Galashiels, Arbroath, Wick, Anniesland - and indeed most Wetherspoon pubs in Scotland. In effect, the application of the rating system in Scotland discriminates against businesses like Wetherspoon, which have lower prices, and encourages businesses to charge higher prices. As a result, consumers are likely to pay higher prices, which cannot be the intent of rating legislation.

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 derelication. Tax equality would also be in line with the principle of fairness - the same taxes should apply to businesses which sell the same products.

How pubs contribute to the economy

Wetherspoon and other pub and restaurant companies have always generated far more in taxes than are earned in profits. Wetherspoon, it's customers and staff, generated total taxes in FY19, before the pandemic, of £763.6 million. This equated to one pound in every thousand of UK government revenue.

In the financial year ended 31 July 2022, the company generated taxes of £662.7 million.

The table below shows the £5.8 billion of tax revenue generated by the company, its staff and customers in the last 10 years. Each pub, on average, generated £6.5 million in tax during that period. The tax generated by the company, during this 10-year period, equates to approximately 20 times the company's profits after tax.

Note - this table is prepared on a cash basis.