Group Overview

"In 2011 we have continued to make good progress . . . offering value for money with high service standards, investment in a quality pub estate and a wide range of local and premium beers."

We have a clear strategy to generate sustainable growth, to improve return on capital, and to reduce leverage ratios. We are pleased to report that we have made good progress on all of these measures.

Revenue was 4.8% up on last year, with improvement in all three trading divisions. Operating margin was 0.3% below last year, predominantly as a result of the increasing number of Retail Agreements. These generate increased profit at a lower operating margin percentage. Margins improved in Marston's Inns and Taverns and were maintained in Marston's Beer Company reflecting our continuing focus on tight cost control.

Underlying operating profit increased by 3.8% to £154.3 million, with underlying profit before tax of £80.4 million up 9.4% (2010: £73.5 million). Underlying earnings per share have grown strongly, up 12.0% to 11.2 pence per share (2010: 10.0 pence per share).

These good results have been achieved despite the well-documented challenging consumer environment, which has seen downward pressure on consumers' discretionary spending and significant inflationary pressures. Our strategy has focused on offering consumers consistent value for money in a quality pub environment. To improve both stability in and returns on our leased estate and to help our licensees remain competitive in today's market, we offer them business-building advice and access to our Group buying power.

In 2011 we have continued to make good progress in executing the key operational components of our strategy, offering value for money with high service standards; investment in a quality pub estate; and a wide range of local and premium beers.

New-build development

Our new-build development programme remains the key driver of growth for Marston's Inns and Taverns.

These investments are targeted at the eating-out market and are positioned in areas of high traffic flow such as retail parks and other prominent sites with easy access to population centres. The total cost of each new pub-restaurant, including the site, is in the region of £2.5 million. Over the past five years we have opened around 50 new pub-restaurants, achieving an average EBITDA return on capital of 18%. We have maintained an extensive site pipeline but remain very selective about the sites we invest in. From 2012 onwards, we aim to open around 25 new sites each year, financed from cash flow and existing resources, in line with previously stated plans.

The 'F-Plan'

Since 2005 our organic development plans have been underpinned by the 'F-Plan' – a focus on food, families, females and forty/fifty somethings – which recognises the longer-term growth trends in the eating-out market. Over that period, this focus has seen our food sales mix increase from 28% to 42% of turnover in our managed pubs. The number of meals served has nearly doubled to around 26 million meals each year, and in 2011 we achieved double-digit volume growth in children's meals, starters, desserts and coffee. Over the last three years, consumers have increasingly demanded value for money, a trend which we expect to continue for the foreseeable future.

Retail Agreement

In 2011 we gained British Franchise Association accreditation for our innovative Retail Agreement, helping us to attract entrepreneurs from a wider market. It remains our intention to have at least 600 pubs converted to Retail Agreement by the end of 2013, increasing annual profit from these pubs by at least £6 million, compared to the pre-conversion profit, to £14 million. In line with our targets, we have now converted 337 pubs to the new agreement, with post-conversion profits up £1.3 million compared with last year. We are currently planning around 200 conversions for 2012. The average expenditure per conversion is around £50,000 per pub with a minimum target EBITDA return on incremental capital expenditure of 20%.

Traditional tenanted model

In the medium term we will have around 1,000 pubs operating under the traditional tenanted model. We continue to develop the model, offering licensees choice in rent and discount models, including free-of-tie options. In 2012, we plan to invest around £5 million in the estate to help our quality licensees further improve their businesses. Our innovative and flexible approach to the tenanted model was recognised this year with Marston's winning the 'Tenanted Pub Company of the Year' award at the 2011 Publican Industry Awards.

'Localness' and premium ale strategy

We aim to grow our ale brands by focusing on offering consumers a broad range of brands with genuine local provenance and meeting the increasing consumer demand for premium cask and bottled ale. We remain market leaders in both of these growth segments of the ale market, and through our outstanding range of ales we are in a strong position to exploit opportunities in the independent free trade, in the off-trade, and with other pub operators.

Customer service

Earlier this year we announced plans to transfer the management of our Retail Agreement sites to Marston's Inns and Taverns, and to combine the commercial operations of Marston's Pub Company and Marston's Beer Company in one trading division: Marston's Beer and Pub Company. These changes took effect on 2 October 2011. Our objective is to promote 'best in class' service to consumers visiting our managed and Retail Agreement pubs; to our tenanted and leased licensees; and to independent customers. For the purpose of financial reporting, we will continue to report separately the performance of our tenanted and leased pubs (including Retail Agreements) and our brewing operations in 2012.

Dividend

The proposed final dividend of 3.70 pence per share is the same as last year and will provide a total dividend for the year of 5.80 pence per share, which is also unchanged. Dividend cover increased to 1.9 times in 2011 (2010: 1.7 times). It remains our policy to build dividend cover to around 2 times earnings in the medium term.

Current trading

We have seen an encouraging start to the new financial year. In managed pubs, like-for-like sales in the eight weeks to 26 November increased by 3.0%, with food sales growth of 3.0%, and wet sales improving by 3.0%. In our tenanted, leased and franchise business, profit trends continue to improve gradually and are estimated to be up 2.0%. Our beer brands are performing in line with our expectations.