Final Results

RNS Number : 7360Y

Restaurant Group PLC

27 February 2013

 



The Restaurant Group plc

Final results for the 52 weeks ended 30 December 2012

The Restaurant Group plc ("TRG" or "the Group") operates 422 restaurants and pub restaurants.  Its principal trading brands are Frankie & Benny's, Chiquito and Garfunkel's and it also operates a Pub restaurant business as well as a Concessions business which trades on over 60 sites, principally at UK airports.

·      The Group had a strong performance in 2012:

*Results marked as adjusted are stated excluding non-trading items.

2012 results	Compared to 2011
-       Revenue increased to £533m (like-for-like sales +4.5%)	+9%
-       Adjusted EBITDA increased to £95.5m	+6.5%
-       Adjusted profit before tax increased to £64.6m	+7%
-       Adjusted EPS increased to 24.1p per share	+10%
-     Proposed full year dividend of 11.8p per share	+12%
-     Statutory profit before tax of £64.6m	+33%
-     Statutory EPS of 24.1p	+40%

·      Operations strongly cash generative and net debt further reduced, by £5.6m to £36m

·      Roll out continues

o  28 new sites opened in the period

o  28-35 new sites targeted for 2013

·      Over 700 new jobs created in 2012

·      Strong current trading, with total sales up 14% and like-for-like sales at 6.5% for the eight weeks to 24 February 2013

Andrew Page, Chief Executive, said:

"The Restaurant Group produced another strong performance in 2012 with all parts of our business in growth. Like-for-like sales were up 4.5%; we delivered a 10% increase in earnings per share and a 13% increase in free cash flow. Last year, 28 new restaurants were opened; these are trading well and are set to deliver excellent returns. We are fortunate to have an outstanding team at TRG and, yet again, they worked diligently to deliver these superb results.

2013 has started well, with like-for-like sales 6.5% ahead, and the TRG team is focused on building further on this to secure another year of profitable progress."

27 February 2013

Enquiries:

The Restaurant Group
Andrew Page, Chief Executive	020 7457 2020 (today)
Stephen Critoph, Group Finance Director	020 3117 5001 (thereafter)
College Hill
Matthew Smallwood Justine Warren	020 7457 2020

Chairman's statement

I am delighted to report that the Group delivered another strong performance in 2012, with growth in revenues, profits, cash flow and earnings per share. Like-for-like sales growth for 2012 was strong, rising 4.5% on the previous year. Building on a good first half performance, the Group saw an acceleration in like-for-like sales growth and roll out activity as we moved through the second half of the year. This momentum has continued with like-for-like sales for the first eight weeks of the year to 24 February 2013 6.5% ahead of the previous year. This represents a strong start and bodes well for 2013.

Although conditions for consumer-facing businesses were again tough in 2012, our consistent focus on our customers, standards of service and value for money meant that the Group has once again delivered a record level of profits and earnings. 

Our new development activity was busier than the previous year and, having opened eight new restaurants by the end of the first half, we saw a significant increase in pace during the second half, opening a further 20 new sites. Much of this development took place in the final eight weeks of the year when we opened 12 new restaurants. We are very pleased with the performance of our new restaurants and we are confident that they are set to deliver superb returns.

The performance of our new Coast to Coast restaurants gives us particular pleasure.  This brand has a distinct and scaleable offering, and represents the start of what we believe is a significant new leg to our Leisure business.

In 2012, the Group's revenues grew by 9.25% to £533m (2011: £487m), adjusted profit before tax grew by 7% to £64.6m (2011: £60.3m) and adjusted earnings per share increased by 10% to 24.1p (2011: 21.9p). This increase in adjusted earnings per share represents a compound annual growth rate of 10.5% over the five years to December 2012. This is a significant achievement, secured during the worst recession for generations, and demonstrates the broad appeal of our brands and the resilience and consistently positive performance of The Restaurant Group.

During 2012 we experienced a continuation of the input cost pressures from the previous year and household incomes also remained pressured. Despite these challenges, our team diligently managed our businesses to ensure that operating margins were maintained at a similar level to 2011 whilst also securing a significant uplift in revenue and profits.

As a result of this strong performance, the Board is recommending a final dividend of 7.3p per share giving a total for the year of 11.8p per share (2011: 10.5p) an increase of 12%. Subject to shareholder approval at the Annual General Meeting to be held on 15 May 2013, the final dividend will be paid on 10 July 2013 and the shares will be marked ex-dividend on 19 June 2013.

In 2013, we expect to open between 28 and 35 new restaurants and the composition and size of our new site pipeline is better than we have seen for a number of years. 

TRG has consistently demonstrated the resilient nature of its business model and this is another set of record results. The Group is managed in a disciplined and focused manner - growing both organically and also through a judicious and carefully executed roll out. By operating in this manner we are able to grow our estate, increase earnings and dividends and generate high levels of cash and returns on investment.

These excellent results are a product of the hard work, expertise and dedication of our Directors, senior management and staff, under the superb leadership of Andrew Page. On behalf of the Board I would like to record our thanks to all our teams across the country.

During 2013 we will be saying farewell to Trish Corzine and Robert Morgan (Executive Director, Concessions and Company Secretary respectively). Trish joined the Company almost 20 years ago and has served on the Board for nine years. Robert joined 11 years ago and has been Company Secretary for eight years. I would like to thank both of them, to wish Trish a long and happy retirement and Robert success in his next role.

We have had a strong start to the current year, with sales growth of 14% (like-for-like sales up 6.5%) for the first eight weeks of the year and we are looking to build further on this as we move through the year. We have an outstanding business with distinct and leading market positions, our brands are well recognised and we deliver superb value for money offerings which have wide appeal. I am confident that we are well placed to continue our further profitable progress.

Alan Jackson

Chairman

27 February 2013

Chief Executive Officer's review of operations

Introduction

The Restaurant Group made further profitable progress in 2012, building on the solid growth secured in the previous year. Although consumer-facing businesses continued to be adversely affected by the weak economic backdrop and the squeeze on household finances, the Group traded well with growth accelerating as we moved through the year.

The Group achieved like-for-like sales growth in 11 out of 12 months. The final quarter saw strong growth and this was particularly encouraging against tough prior year comparatives. I am pleased to report that this trend has continued into 2013 with like-for-like sales growth of 6.5% and total sales growth of 14% for the eight weeks to 24 February 2013.

As in 2011, all of the constituent parts of the Group saw growth and, despite having to contend with input cost pressures, the Group achieved strong growth in adjusted profits and margins were maintained at a similar level to the previous year. As in 2011, like-for-like profit growth was also very strong. Total sales in 2012 were £533m which was 9.25% ahead of the prior year (like-for-like sales were 4.5% ahead) and adjusted earnings per share increased by 10%; this represents a good result and augurs well for the future.  

Results*

*Results marked as adjusted are stated excluding non-trading items.

TRG's trading metrics performed well for the 52 week period to 30 December 2012:

·      Total sales increased by 9.25%

·      Like-for-like sales increased by 4.5%

·      42 million meals sold

·      Adjusted EBITDA increased by 6.5% to £95.5m

·      Adjusted operating profit increased by 8.6% to £66.4m

·      Adjusted operating profit margin was 12.5% (2011: 12.6%)

·      Adjusted pre-tax profit increased by 7% to £64.6m

·      Adjusted earnings per share increased by 10% to 24.1p

·      Cash flow generated from operations increased by £10.2m to £102.0m

·      Free cash flow increased by £7.8m to £69.2m

·      Net debt, at 0.38x Group adjusted EBITDA, fell by £5.6m to £36m

Our people and our business

Throughout TRG we aim continually to evolve and improve our offering - food, service, facilities and standards. Our menus are reviewed twice a year; our seasonal specials menus change quarterly and we pay close attention to the nutritional and calorific content of dishes to ensure that we have something to match all of our customers' requirements. We pay close attention to our children's offerings to ensure that they afford the opportunity to form part of a sensibly balanced diet. We are also committed to support the government's initiatives to encourage healthier lifestyles and, to this end, we have made a number of pledges including salt reduction and encouraging physical activities. As part of our ongoing health and safety assurance processes we conduct testing of products and facilities at our suppliers. We have, for a number of years, retained a firm of specialists to conduct much of this testing.  This testing is in addition to our suppliers' own testing.  In the light of the recent issues surrounding horsemeat we have, for the foreseeable future, decided to increase the frequency and extent of product testing.  To date we have not identified horsemeat contamination in the products supplied at our restaurants.

Our focus continues to be directed towards providing our customers with a great dining experience - plenty of choice across the price points, offerings geared towards specific parts of the day, good value and superb hospitality and service. We strive to employ the best people and to provide them with an opportunity to develop. Our staff benefit from a number of training programmes as soon as they join us and as they progress, providing the skill sets enabling them to be efficient and effective managers. In addition to our management training programmes, our staff at all levels have the opportunity to secure qualifications in several areas relevant to our industry, including food hygiene, health & safety, NVQ's and BII accreditations.

We employ more than 11,000 people throughout the UK and during 2012 more than 700 new members joined the TRG team. As we continue to open new restaurants, the opportunities for our people to progress and secure promotion increase and this helps TRG to attract and retain high quality team members.

Our brands

Frankie & Benny's (217 units)

Frankie & Benny's performed superbly in 2012, with strong performances across all the key metrics - like-for-like sales, revenues, margins and profits. We opened 12 new restaurants of which six were on cinema sites. Trade at the new openings has been strong and they are on track to deliver excellent returns. We anticipate opening between 13 and 17 new Frankie & Benny's restaurants in 2013. The enduring appeal and consistent success of the Frankie & Benny's brand gives us a great deal of confidence that the ongoing roll out potential for this brand is significant.

Coast to Coast (5 units)

The performance of our new brand, Coast to Coast, has been outstanding. Our first Coast to Coast restaurant opened alongside an existing Frankie & Benny's restaurant in Brighton at the end of 2011. During 2012 we opened four new Coast to Coast restaurants in Stevenage, Newcastle, Solihull and Gunwharf Quays in Portsmouth and four of our Coast to Coast restaurants now trade alongside existing TRG restaurants. We are very encouraged by the fact that not only are our Coast to Coast restaurants trading very well, and are set to deliver strong returns, but also that there has been no detrimental impact upon the adjacent existing TRG restaurants. We are planning to open four to six new Coast to Coast restaurants in 2013. We believe that the Coast to Coast brand could have significant roll out potential - it has broad appeal and is distinct from TRG's other brands meaning that it complements both Frankie & Benny's and Chiquito. We have identified several dozen locations where we are confident that a Coast to Coast restaurant would trade well and the process of building a new site pipeline is well in hand.

Chiquito (69 units)

Chiquito delivered a good performance in 2012 with sizeable increases in revenues, profits and margins. No new Chiquito restaurants opened during 2012, although we anticipate opening between four and six new restaurants in 2013.

Garfunkel's (25 units)

Garfunkel's traded well during 2012. Although the impact of the Olympic Games upon Garfunkel's trade was adverse, from late summer onwards the pick-up in trade was significant and this meant that the brand delivered like-for-like sales growth for the full year and a good level of profits. We opened two new Garfunkel's in 2012 which are expected to deliver good returns. 

Pub restaurants (45 units)

Our Pub restaurants business enjoyed a good year in 2012. With the conclusion of the programme of ex-Blubeckers site conversions behind them, the team has been able to capitalise on the opportunities to grow the business and this has produced a very good level of performance. Turnover, margins and profits were well ahead on the previous year and the four new openings are performing significantly ahead of our expectations and are set to deliver strong returns. We expect to open three to five new Pub restaurants this year and, looking forward, we believe that this business has the potential to grow significantly. This strong performance was capped off with the news that we had won the Good Pub Guide's "Pub Group of the Year" award for 2013 - a fitting testament to a dedicated crew.

Concessions (61 units)

Our Concessions business traded superbly during 2012 with good increases in revenues and profits. Although passenger numbers at UK airports were barely above 2011 levels our business delivered strong like-for-like sales growth as it increased market share and improved spend per passenger. During the year we opened six new units and these are set to deliver strong returns. We expect to open two to four new Concessions restaurants in 2013.

The TRG business model

Our core objective continues to be growth in shareholder value and our strategy to achieve this is to build a business capable of delivering long-term, sustainable and growing cash flows. Our touchstones are cash flow and return on investment. Our business model enables our shareholders to enjoy the benefits of high returns on capital, growth in profits and cash flow and sizeable income distributions from our progressive dividend policy. The Group has a consistent record of converting profits into cash at a very healthy rate and delivering increasing cash flows each year, and in 2012 this was again the case.

In 2012 the Group generated £102m of operating cash flow and having paid a corporation tax bill of £16.1m, interest payments of £0.9m and spending £15.8m on capital improvements to our existing estate the Group's free cash flow amounted to almost £70m. This was £8m ahead of the previous year and continued the Group's record of growing cash flow each year.

This cash is put to good use - in 2012 we spent almost £40m on opening new restaurants and acquiring the freeholds of four of our existing Pub restaurants which will, in turn, contribute to the continuing growth in the Group's profits and cash flows; we returned almost £22m to our shareholders by way of dividends and we reduced our bank debt by £5.6m.

This virtuous circle of rising profits being converted into higher levels of cash flow which is then invested in new restaurants which, in turn, deliver high levels of return on invested capital represents a highly efficacious and value-accretive model. TRG's business model enables the Group to grow in a predominantly organic and highly value-accretive way, funded from its internally generated funds. Our model delivers high returns, growth and of course, income in the form of dividends. The model is robust, resilient and rewarding for our shareholders.

TRG's capital structure

The Group's capital structure is framed in a sensible and prudent manner which enables shareholder value to grow and which recognises the operational and financial gearing inherent in our (predominantly) lease-based business model. In determining the appropriate capital structure, the key considerations which we keep under regular review are:

1.   The level of free cash flow generated and our expectation for this going forward;

2.   The level of capital investment required to fund our new openings (and our expectations with regard to the number of new openings over the medium-term);

3.   The maintenance of our progressive dividend policy and our intention to grow dividends in line with earnings;

4.   Ensuring that we have sufficient financial resources available to take advantage of opportunities to expand the business profitably;

5.   Ensuring that we have sufficient financial resources available to cope with a deterioration in trading conditions as a result of an economic downturn or other adverse factors; and

6.   Maintaining a good level of fixed charge cover as measured by the Group's ability to meet and service all of its financial obligations.

As a result of strong cash generation, the Group has continued to reduce its levels of debt significantly. In the five years since 2007, net debt has reduced from £77m to £36m. During this period the Group has invested £146m in opening 137 new restaurants and acquiring freeholds of our existing Pub restaurants, £63m (maintenance capex) has been invested in maintaining the existing estate and £89m has been paid out to shareholders in the form of dividends. During much of this period the economic backdrop has been poor (and at times very bleak). Against such a backdrop we believe that TRG's very prudent capital structure has been appropriate, safeguarding shareholders' interests whilst allowing the Group to grow profits and cash flow and for dividends to increase.

Although economic conditions have stabilised over the past 12 months the outlook, particularly in the UK, remains opaque. Forecasts for GDP growth have been subject to regular downward revisions over the past year and it is unclear whether 2013 will be a year of "low" or "no" growth. Whilst these economic conditions prevail, we intend to maintain our very prudent approach to capital structure. We will however keep this under regular review and, taking into account the key considerations set out above, determine what, if any, adjustments to the Group's capital structure are appropriate. Any changes which are made would be in line with our policy of maintaining a sensible and prudent capital structure, appropriate for a business which is characterised by operational gearing and financial gearing (primarily by virtue of our lease-based business model), whilst also continuing to grow shareholder value.

Capital expenditure and TRG opening programme

Our key criteria in determining where to invest our capital is to operate restaurants in locations with high barriers to entry, good growth prospects and where we are confident that we can secure high returns on investment. Our focus is on edge of town, out of town, rural, semi-rural and airport locations and we occupy leading market positions in these segments. The footprint that the Group occupies in edge and out of town leisure and airport locations is comprehensive and, from a market positioning perspective, very formidable. It would be virtually impossible to replicate this footprint from scratch and the Group is well placed to continue to roll out more restaurants.

Our philosophy regarding capital expenditure remains consistent - we focus on cash generation and on securing a return on invested capital at rates ahead of TRG's weighted average cost of capital. We continue to apply the same levels of analytical rigour, commercial analysis, experience and risk adjustment to each capital project that we undertake.

This approach has served TRG well and we do not intend to deviate from it. This disciplined and consistent approach has also ensured that our new openings continue to deliver strong returns. It is particularly encouraging that returns from our openings in recent years have been at some of the highest levels achieved in the past decade.

Our free cash flow generation is sufficient to enable the Group to accelerate the openings programme whilst maintaining maintenance capital expenditure at an appropriate level and pursuing a progressive dividend policy. There are a significant number of new schemes in developers' pipelines and, at some point, these are likely to be activated. We are now starting to see projects which had been kept on the "back burner" by developers, coming on stream. Although these are mainly the smaller, edge of town, schemes we view this as a positive development and this suggests an improving trend in new development activity.

The economic downturn, whilst presenting formidable trading challenges, has also afforded to us several new opportunities and we intend to continue to identify and pursue these where we are confident that they will meet our returns criteria. Over the past three years, many of our new restaurant opportunities have been secured from a variety of differing sources and the work that we are doing in this regard has had the benefit of widening the potential paths to further roll out growth for the Group. 

During 2013 we are expecting to open between 28 and 35 new restaurants and we are also successfully adding to our potential pipeline for the next two to three years.

Market dynamics and the economy

Companies operating in the retail environment have found conditions tough in recent years and this seems to have become a persistent theme. A deep recession followed by rising taxes, household inflation, a fiscal squeeze with lower government spending and higher levels of unemployment (with the equally corrosive, concomitant, fear of unemployment) and negative changes in year-on-year real wages, have placed significant pressures on many consumer-facing businesses. This has proved particularly problematic for businesses with poor market positioning, weak business models and high levels of financial leverage. Attempts at stimulating the economy through expansionary monetary stimuli have had some success, but the economic backdrop remains quite tough. Selling goods and services to the UK consumer remains quite a challenge.

In addition to consumers being squeezed as a result of the difficult economic backdrop, other factors are also at work and some distinct trends, both operationally and behaviourally, have been evident. Those companies that have established strong market positions, with offerings that are accessible, attractive, convenient, well understood, trusted and are seen by their customers to offer good value have tended to outperform. Customers have become more selective about what, and how, they purchase and it is noteworthy how important a strong and clear online offering and communication platform has become for many parts of the retail marketplace. The ability to read and quickly adapt to customer trends is increasingly important.

With many households experiencing a squeeze on funds available for discretionary spend, harder choices between competing consumption wishes are having to be made. A propensity to save (or pay down debt) replaced the urge to buy on credit that was so prevalent just a few years ago. Consumer-facing businesses have had to work harder to claim a share of this smaller cake.

Those companies that operate in the dining out sector have approached these challenges in different ways. Many have chosen to compete for customers largely on price and this has often manifested itself via heavy promotions and deep discounting. "Buy one get one free" and other similar, deep discounting, offers have been rife, and still are. Our Group has adopted a different approach, focusing on value, choice and consistency of service and standards. Last year, the proportion of TRG's revenues which were driven by promotions was, as in the previous year, very modest. We have also increasingly harnessed digital media to broaden awareness of our brands and what we can offer. These tactics have served TRG well, enabling it to continue to grow profits and protect margins.

Eating out has become habitual in the UK and it is an activity that many people are reluctant to give up. At our price point it represents a "small ticket" item or, to put it another way, "an affordable treat". In times of fiscal restraint and stretched finances, it is a pleasure in which many people still feel able to indulge.

Growth in eating out is a secular trend, driven largely by socio-economic factors (ageing population, busy lifestyles, more women in the workplace etc.) and this is set to continue over the longer term. Despite the current climate TRG has been able to secure good levels of like-for-like sales growth in both 2011 and 2012 and, as conditions improve and particularly when people feel more confident about their jobs and incomes, this is likely to accelerate.

Economic conditions over the past 12 months have continued to be tough with periods of significant uncertainty. The first six months of 2012 were characterised by significant swings in confidence which in part were driven by the recognition that the correction of countries' imbalances was likely to require radical and potentially very severe actions. This was particularly apparent within the Eurozone which, for much of the first half of 2012, was subject to considerable volatility. 

In July 2012, the President of the ECB, Mario Draghi, announced that the ECB was ready to "do whatever it takes" to preserve the Euro. This had a rapid and sustained positive impact upon confidence within the Eurozone; together with subsequent US and developing economies' initiatives this seems to have illuminated a way forward. Although much remains to be done, this willingness to acknowledge and adapt presents an opportunity to rebalance and provides a foundation towards improving global prosperity.

The UK has benefited from these developments and, although sustained economic growth remains elusive, there are some positive signs. In particular, levels of employment are holding up well and this is very encouraging against the challenge of replacing public sector jobs with jobs in the private sector. Inflation has abated a little from the high levels seen in recent years and although pressures on household finances remain significant, the benefits of ongoing low interest rates should have a positive impact upon households' finances, consumer confidence and the propensity to spend.

Currently, the outlook for UK GDP growth in 2013 remains uninspiring and regular downward revisions in recent months indicate that a measure of caution is appropriate. At this stage, we anticipate that the economic backdrop is likely to remain similar to that experienced over recent months and accordingly we will look to manage our business to continue to deliver profitable growth against this backdrop.

Future prospects

Over the past five years, our business has experienced some difficult trading conditions and during that period sales, profits and cash flow increased every year. Also within that period we have devised and developed our new brand, Coast to Coast, and executed its initial roll out very effectively, further widening TRG's roll out path.

TRG's businesses command strong market positions in each of our chosen segments and our brands are well recognised for the quality, breadth and value of their offerings. We have a well proven business model, a strong balance sheet and are well positioned to continue our expansion. Just as we did in 2012, during 2013 we will continue to:

·      Stick to our areas of expertise;

·      Focus on our customers by providing excellent value, choice and service;

·      Maintain high standards of operational efficiency and execution;

·      Carefully control our costs and seek to mitigate and minimise the impact of inflationary input costs;

·      Add high quality new restaurants that meet our investment criteria to our portfolio; and

·      Focus on cash flow, returns and growing shareholder value.

Our aim is to continue to strengthen our market positions, to judiciously roll out our brands and deliver long-term and sustainable profitable growth. The Group has demonstrated its resilience and we expect to benefit significantly from the upturn in consumer confidence that will, in due course, prevail.

2012 presented TRG with some big challenges. As always, our team rose to those challenges and produced a superb performance. All of our people will be working towards replicating this again in 2013. The first two months of 2013 have started well with total sales 14% ahead of last year (like-for-like sales up 6.5%), and we will be looking to build further on this as we move through the year.

Andrew Page

Chief Executive Officer

27 February 2013

Group Finance Director's report

Results*

*Results marked as adjusted are stated excluding non-trading items.

2012 turned out to be another challenging year for consumer-facing businesses. Notwithstanding this, The Restaurant Group plc delivered another record set of financial results as follows:

£million	2012	2011	% change
Revenue	532.5	487.1	+9.3%
Adjusted operating profit	66.4	61.2	+8.6%
Margin %	12.5%	12.6%
Adjusted interest	(1.8)	(0.9)
Adjusted profit before tax	64.6	60.3	+7.1%
Adjusted EPS (pence)	24.08	21.86	+10.2%

Total revenues increased by 9.25% reflecting a 4.5% increase in like-for-like sales and a strong contribution from new openings. Total adjusted EBITDA for the year was £95.5m, and Group adjusted operating profit was £66.4m, an increase of 8.6% on the prior year. Group adjusted operating profit margin of 12.5% was marginally down on the prior year by 10 basis points. This was as a result of inflationary cost pressures and the large number of new units which opened in the final weeks of the financial year.

Adjusted net interest costs were £1.8m (2011: £0.9m). In 2011 the Group benefitted from a £0.8m payment of historical interest in respect of an outstanding loan note from Living Ventures Limited. This accounted for most of the outstanding amount and the historical loan note interest received from Living Ventures Limited during 2012 was significantly less. This, combined with the slightly higher funding costs under the new banking facility put in place at the end of 2011, account for the increased level of net interest charges.

Adjusted profit before tax of £64.6m showed an increase of over 7% compared to the prior year. Adjusted post-tax profits of £48.2m showed a 10% increase on the prior year resulting in adjusted earnings per share of 24.08p, also up 10% compared to the prior year.

Statutory profit before tax of £64.6m (2011: £48.6m) was 33% higher than the prior year and statutory earnings per share of 24.08p (2011: 17.19p) was 40% higher than the prior year.

Cost inflation

Input cost inflation continues to be an issue. As has been widely commented on, food and utility costs in particular increased well ahead of the general rate of UK inflation in 2012. Although we take sensible steps to mitigate the impact of inflation (e.g. with fixed or capped price contracts on many of our key inputs), we are not immune to these pressures.

Looking forward we do not anticipate any abatement in the inflationary pressures on food input costs. Most of our key utility contracts are fixed through until October 2013. Over the next few months we expect to enter into further forward contracts on utilities.

On labour costs the key driver is the national minimum wage which increased by 1.8% in October 2012. This is one area of cost where inflationary pressures remain at relatively benign levels compared to earlier years. Rental cost inflation has also been running at lower levels compared to the situation up until 2008. We are now starting to see some small increase in the level of rent reviews, although this continues to be at low levels compared to those experienced prior to 2009.

Cash flow

Cash generation was once again extremely strong. Net cash flow from operations increased to £102.0m (2011: £91.8m). After tax, interest and maintenance capital expenditure, free cash flow was £69.2m, an increase of 13% compared to the prior year. This free cash flow generation financed all of the Group's development capital expenditure and dividend payments. Net debt fell by £5.6m to £36.0m. Set out below is a summary cash flow statement for the full year:

	2012	2011
	£m	£m
Adjusted operating profit	66.4	61.2
Working capital and non-cash adjustments	6.5	2.1
Depreciation	29.1	28.5
Cash flow from operations	102.0	91.8
Net interest paid	(0.9)	(0.3)
Tax paid	(16.1)	(15.7)
Maintenance capital expenditure	(15.8)	(14.4)
Free cash flow	69.2	61.4
Development capital expenditure	(39.2)	(29.3)
Dividends	(21.7)	(22.3)
Disposals	0.1	(2.8)
Net cash flow from share issues	0.1	1.0
SWAP termination payment	-	(0.4)
Purchase of shares for employee benefit trust	(2.9)	(3.1)
Other	-	0.8
Reduction in net debt	5.6	5.3
Net bank debt at start of year	(41.6)	(46.9)
Net bank debt at end of year	(36.0)	(41.6)

Capital expenditure 

During the year the Group invested a total of £55.0m in capital expenditure (2011: £43.7m). £15.8m of this was spent on refurbishment and maintenance expenditure (2011: £14.4m).

Development capital expenditure in the year was £39.2m (2011: £29.3m). This includes the 28 new sites opened in the year (three of which were freeholds). In addition we acquired the freeholds of four pubs which we previously operated as tenancies from Enterprise Inns. The 28 sites opened during the year are performing very satisfactorily, generating average levels of turnover and financial return significantly ahead of our feasibility requirements.

We continue to be focused on ensuring that all of our new sites generate very high levels of financial return. All potential new sites are subject to a thorough due diligence process before we commit to a project. This process includes detailed financial modelling, sensitivity analysis, demographic analysis, a detailed review of competitors and a review of planned or potential developments in the area. We also identify other existing sites with similar characteristics both in terms of demographics and location to further inform our decision making process. We conduct regular post-investment appraisals and these confirm that we are continuing to achieve levels of return ahead of our high hurdle rates.

The table below summarises opening and closures in the year:

	Year end 2011	Opened	Closed	Year end 2012
Frankie & Benny's	207	12	(2)	217
Coast to Coast	1	4	-	5
Chiquito	69	-	-	69
Garfunkel's	23	2	-	25
Pub restaurants	42	4	(1)	45
Concessions	58	6	(3)	61
Total	400	28	(6)	422

Financing and key financial ratios

As detailed in last year's annual report we have a £140m five year facility in place which runs until October 2016. There are two covenants under this facility which are summarised in the table below, together with other financial ratios:

	Banking covenant	2012	2011
Banking covenant ratios
EBITDA / interest cover	>4x	41x	47x
Net debt / EBITDA	<3x	0.38x	0.48x
Other ratios
Fixed charge cover	n/a	2.6x	2.6x
Balance sheet gearing	n/a	20%	26%

As can be seen from this table the Group has substantial headroom against both of the banking covenants and is in a very strong financial position. This strong financial position means that we are able to accelerate the new openings programme while at the same time investing in the existing estate, a very important factor in maintaining a strong and successful business going forward.                        

Tax

The total tax charge in the year was £16.3m, analysed as follows:

	2012			2011
	Trading	Non-trading	Total	Trading	Non-trading	Total
	£m	£m	£m	£m	£m	£m
Corporation tax	18.1	-	18.1	18.0	(1.1)	16.9
Deferred tax	(1.8)	-	(1.8)	(1.4)	(1.3)	(2.7)
Total	16.3	-	16.3	16.6	(2.4)	14.2
Effective tax rate	25.3%			27.5%

The effective tax rate of 25.3% has reduced compared to the prior year, primarily reflecting the reduction in UK headline corporation tax rates. We expect our effective tax rate to continue to fall in 2013 and 2014 in line with the government's planned reduction in corporation tax rates. The Group's effective tax rate will continue to be higher than the headline UK tax rate, primarily due to significant levels of disallowable expenditure in our capital expenditure investments.

Stephen Critoph 

Group Finance Director

27 February 2013

Consolidated income statement
		52 weeks ended 30 December 2012								52 weeks ended 1 January 2012
		Trading			Non-					Trading			Non-
		business			trading		Total			business			trading		Total
	Note	£'000			£'000		£'000			£'000			£'000		£'000
Revenue	2	532,541			-		532,541			487,114			-		487,114
Cost of sales:
Excluding pre-opening costs	3	(435,276)			-		(435,276)			(397,782)			(7,544)		(405,326)
Pre-opening costs	3	(2,217)			-		(2,217)			(1,948)			-		(1,948)
		(437,493)			-		(437,493)			(399,730)			(7,544)		(407,274)
Gross profit / (loss)		95,048			-		95,048			87,384			(7,544)		79,840
Administration costs		(28,613)			-		(28,613)			(26,199)			(192)		(26,391)
Trading profit / (loss)		66,435			-		66,435			61,185			(7,736)		53,449
Loss on disposal of fixed assets		-			-		-			-			(4,169)		(4,169)
Earnings before interest, tax, depreciation and amortisation		95,540			-		95,540			89,741			(8,405)		81,336
Depreciation		(29,105)			-		(29,105)			(28,556)			(3,500)		(32,056)
Operating profit / (loss)		66,435			-		66,435			61,185			(11,905)		49,280
Interest payable	4	(2,527)			-		(2,527)			(1,818)			230		(1,588)
Interest receivable	4	653			-		653			916			-		916
Profit / (loss) on ordinary activities before tax		64,561			-		64,561			60,283			(11,675)		48,608
Tax on profit / (loss) from ordinary activities	5	(16,334)			-		(16,334)			(16,575)			2,344		(14,231)
Profit / (loss) for the year		48,227			-		48,227			43,708			(9,331)		34,377
Earnings per share (pence)
Basic	6	24.08					24.08			21.86					17.19
Diluted	6	24.05					24.05			21.84					17.18

Consolidated statement of comprehensive income
		52 weeks ended 30 December 2012	52 weeks ended 1 January 2012
		£'000	£'000
Profit for the year		48,227	34,377
Exchange differences on translation of foreign operations		-	(488)
Total comprehensive income for the year		48,227	33,889

Consolidated statement of changes in equity
						Foreign currency
		Share		Share		translation			Other		Retained		Total
		capital		premium		reserve			reserves		earnings
		£'000		£'000		£'000			£'000		£'000		£'000
Balance at 2 January 2012		56,319		23,982		-			(7,115)		84,096		157,282
Profit for the year		-		-		-			-		48,227		48,227
Exchange differences on translation of foreign operations		-		-		-			-		-		-
Total comprehensive income for the year		-		-		-			-		48,227		48,227
Issue of new shares		15		45		-			-		-		60
Dividends		-		-		-			-		(21,682)		(21,682)
Share-based payments - credit to equity		-		-		-			2,233		-		2,233
Employee benefit trust - purchase of shares		-		-		-			(2,855)		-		(2,855)
Current tax on share-based payments taken directly to equity		-		-		-			-		1,354		1,354
Deferred tax on share-based payments taken directly to equity		-		-		-			-		(771)		(771)
Balance at 30 December 2012		56,334		24,027		-			(7,737)		111,224		183,848
Balance at 3 January 2011		56,101		23,234		488			(6,302)		71,192		144,713
Profit for the year		-		-		-			-		34,377		34,377
Exchange differences on translation of foreign operations		-		-		(488)			-		-		(488)
Total comprehensive income for the year		-		-		(488)			-		34,377		33,889
Issue of new shares		218		748		-			-		-		966
Dividends		-		-		-			-		(22,337)		(22,337)
Share-based payments - credit to equity		-		-		-			2,237		-		2,237
Employee benefit trust - purchase of shares		-		-		-			(3,050)		-		(3,050)
Current tax on share-based payments taken directly to equity		-		-		-			-		1,178		1,178
Deferred tax on share-based payments taken directly to equity		-		-		-			-		(314)		(314)
Balance at 1 January 2012		56,319		23,982		-			(7,115)		84,096		157,282

Consolidated balance sheet
		At 30 December 2012	At 1 January 2012
	Note	£'000	£'000
Non-current assets
Intangible assets		26,433	26,433
Property, plant and equipment		293,785	269,141
		320,218	295,574
Current assets
Stock		4,872	3,925
Trade and other receivables		6,476	7,382
Prepayments		15,940	15,158
Cash and cash equivalents	9	12,879	10,242
		40,167	36,707
Total assets		360,385	332,281
Current liabilities
Corporation tax liabilities		(9,173)	(8,542)
Trade and other payables		(93,845)	(87,198)
Other payables - finance lease obligations		(328)	(326)
Provisions		(2,089)	(3,282)
		(105,435)	(99,348)
Net current liabilities		(65,268)	(62,641)
Non-current liabilities
Long-term borrowings	9	(48,853)	(51,835)
Other payables - finance lease obligations		(2,844)	(2,806)
Deferred tax liabilities		(15,712)	(16,733)
Provisions		(3,693)	(4,277)
		(71,102)	(75,651)
Total liabilities		(176,537)	(174,999)
Net assets		183,848	157,282
Equity
Share capital		56,334	56,319
Share premium		24,027	23,982
Other reserves		(7,737)	(7,115)
Retained earnings		111,224	84,096
Total equity		183,848	157,282

Consolidated cash flow statement
		52 weeks ended30 December 2012	52 weeks ended 1 January 2012
	Note	£'000	£'000
Operating activities
Cash generated from operations	8	102,000	91,745
Interest received		653	916
Interest paid		(1,551)	(1,612)
Tax paid		(16,141)	(15,722)
Net cash flows from operating activities		84,961	75,327
Investing activities
Purchase of property, plant and equipment		(54,945)	(43,648)
Disposal of fixed assets		98	(2,754)
Net cash flows used in investing activities		(54,847)	(46,402)
Financing activities
Net proceeds from issue of ordinary share capital		60	966
Employee benefit trust - purchase of shares		(2,855)	(3,050)
Net (repayments of) / proceeds from loan draw downs		(3,000)	3,000
Dividends paid to shareholders		(21,682)	(22,337)
Net cash flows used in financing activities		(27,477)	(21,421)
Net increase in cash and cash equivalents		2,637	7,504
Cash and cash equivalents at the beginning of the year	9	10,242	2,738
Cash and cash equivalents at the end of the year	9	12,879	10,242

1 Segmental analysis
The Group trades in one business segment (that of operating restaurants) and one geographical segment (being the United Kingdom).
2 Revenue
			2012	2011
			£'000	£'000
Income for the year consists of the following:
Revenue from continuing operations			532,541	487,114
Other income not included within revenue in the income statement:
Rental income			3,211	3,583
Interest income			653	916
Total income for the year			536,405	491,613

3 Profit for the year
			2012	2011
			£'000	£'000
Cost of sales consists of the following:
Continuing business excluding pre-opening costs			435,276	397,782
Pre-opening costs			2,217	1,948
Non-trading charge			-	7,544
Total cost of sales for the year			437,493	407,274
			2012	2011
Profit for the year has been arrived at after charging / (crediting):			£'000	£'000
Depreciation and impairment			29,105	32,056
Purchases			121,898	111,015
Staff costs			168,240	153,048
Minimum lease payments			54,207	51,012
Contingent rents			7,590	7,034
Total operating lease rentals of land and buildings			61,797	58,046
Rental income			(3,211)	(3,583)
Net rental costs			58,586	54,463

4 Net finance charges
			2012	2011
			£'000	£'000
Bank interest payable			1,489	1,084
Other interest payable			352	375
Facility fees			320	-
Interest on obligations under finance leases			366	359
Change in fair value of interest rate swaps			-	(230)
Total borrowing costs			2,527	1,588
Bank interest receivable			(8)	(3)
Other interest receivable			(3)	(10)
Loan note interest receivable			(642)	(903)
Total interest receivable			(653)	(916)
Net finance charges			1,874	672
5 Tax
			2012	2011
The tax charge comprises:			£'000	£'000
Current tax
UK corporation tax at 24.5% (2011: 26.5%)			18,046	17,221
Adjustments in respect of previous years			80	(318)
			18,126	16,903
Deferred tax
Origination and reversal of timing differences			(464)	(1,145)
Adjustments in respect of previous years			118	(56)
Credit in respect of rate change			(1,446)	(1,471)
			(1,792)	(2,672)
Total tax charge for the year			16,334	14,231

The Budget 2012 introduced a reduction in the main rate of corporation tax from 1 April 2012 from 26% to 24% resulting in a blended rate of 24.5% being used to calculate the tax liability for the 52 weeks ended 30 December 2012.

The Finance Act 2012 introduced a reduction in the main rate of corporation tax from 24% to 23% effective from 1 April 2013 and this rate is required to be used in calculating deferred tax provisions at the balance sheet date. This has resulted in a deferred tax credit in the income statement of £1.4m.

The Government has also indicated that it intends to enact a further reduction in the main corporation tax rate of 1% reducing the main tax rate to 22% from April 2014. The future 1% main tax rate reduction is expected to have a proportionally similar impact on the underlying trading tax rate as the current year 2% reduction (from the previously announced rate of 25%), however the actual impact will be dependent on the Group's deferred tax position at the time.

6 Earnings per share 2012 2011 a) Basic earnings per share: Weighted average ordinary shares in issue during the year 200,261,245 199,956,884 Total profit for the year (£'000) 48,227 34,377 Basic earnings per share for the year (pence) 24.08 17.19 Total profit for the year (£'000) 48,227 34,377 Effect of non-trading items on earnings for the year (£'000) - 9,331 Earnings excluding non-trading items (£'000) 48,227 43,708 Adjusted earnings per share (pence) 24.08 21.86 b) Diluted earnings per share: Weighted average ordinary shares in issue during the year 200,261,245 199,956,884 Dilutive shares to be issued in respect of options granted under the share option schemes 235,567 189,903 200,496,812 200,146,787 Diluted earnings per share (pence) 24.05 17.18 Adjusted diluted earnings per share (pence) 24.05 21.84 The additional non-statutory earnings per share information for 2011 has been provided as the Directors believe it provides a useful indication as to the underlying performance of the Group. Diluted earnings per share information is based on adjusting the weighted average number of shares in issue in respect of notional share awards made to employees in respect of share option schemes.  No adjustment is made to the reported earnings for 2012 or 2011.

7 Dividend
					2012		2011
					£'000		£'000
Amounts recognised as distributions to equity holders during the year:
Final dividend for the 52 weeks ended 1 January 2012 of 6.50p (2010: 7.46p) per share					12,812		14,525
Interim dividend for the 52 weeks ended 30 December 2012 of 4.50p (2011: 4.00p) per share					8,870		7,812
Total dividends paid in the year					21,682		22,337
Proposed final dividend for the 52 weeks ended 30 December 2012 of 7.30p (2011 actual proposed and paid: 6.50p) per share					14,392		12,812
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting to be held on 15 May 2013 and is not recognised as a liability in these financial statements.  The proposed final dividend payable reflects the number of shares in issue on 30 December 2012, adjusted for the 3.1m shares owned by the employee benefit trust for which dividends have been waived.
8 Reconciliation of profit before tax to cash generated from operations
					2012			2011
					£'000			£'000
Profit before tax					64,561			48,608
Net finance charges					1,874			672
Loss on disposal of fixed assets					-			4,169
Share-based payments					2,233			2,237
Depreciation and impairment					29,105			32,056
Increase in stocks					(947)			(295)
Decrease / (increase) in debtors					124			(3,426)
Increase in creditors					5,050			7,724
Cash generated from operations					102,000			91,745

9 Reconciliation of changes in cash to the movement in net debt
					2012	2011
					£'000	£'000
Net debt:
At the beginning of the year					(41,593)	(46,924)
Movements in the year:
Repayments of / (proceeds from) loan draw downs					3,000	(3,000)
Non-cash movements in the year					(18)	827
Cash inflow					2,637	7,504
At the end of the year					(35,974)	(41,593)

Represented by:	At 3	Cash flow		Non-cash		At 1 and 2		Cash flow		Non-cash		At 30
	January	movements		movements		January		movements		movements		December
	2011	in the year		in the year		2012		in the year		in the year		2012
	£'000	£'000		£'000		£'000		£'000		£'000		£'000
Cash and cash equivalents	2,738	7,504		-		10,242		2,637		-		12,879
Bank loans falling due after one year	(49,662)	(3,000)		827		(51,835)		3,000		(18)		(48,853)
	(46,924)	4,504		827		(41,593)		5,637		(18)		(35,974)

10 Basis of preparation

The Group's preliminary announcement and statutory accounts in respect of 2012 have been prepared on a going concern basis. The financial information set out above does not constitute the Group's statutory accounts for the years ended 30 December 2012 or 1 January 2012 but is derived from those accounts. Statutory accounts for 2011 have been delivered to the Registrar of Companies and those for 2012 will be delivered following the Company's Annual General Meeting. The 2012 statutory accounts are prepared on the basis of the accounting policies stated in the 2011 statutory accounts. The auditors have reported on those accounts; their reports were unqualified and unmodified and did not contain statements under s498 (2) or (3) of the Companies Act 2006.

 

END

 

 

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