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Preliminary Results

Tim Martin's views on corporate governance....

RNS Number : 1677U

Wetherspoon (JD) PLC

13 October 2014

For immediate release

JD Wetherspoon plc

Press article

The following article first appeared in Propel on 13 October 2014 and is repeated to further its distribution. It represents the personal views of Tim Martin, chairman of JD Wetherspoon plc, and builds on comments he has made in the last two annual reports of JD Wetherspoon.

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Breaking News - Opinion Special: Tim Martin criticises corporate governance

The ruinous absurdity of corporate governance by Tim Martin

Woof, woof! What's that at the boardroom door? Why, it's the dog that hasn't barked - until now. This corporate governance dog has surreptitiously devoured our major banks and pub companies and has moved on to make mincemeat of our biggest supermarkets. Like Frankenstein, the carnivorous canine has outgrown its corporate governance creators and is munching its way hungrily through our finest companies.

The dog has been lucky so far: corporate mayhem has been blamed on others. Gordon Brown mendaciously blamed bankers' troubles on sub-prime American loans. Others have blamed "hot money", the Bank of England or greedy and incompetent executives, perhaps forgetting that they were appointed through the governance system, which created the dog in the first place.

The travails of our biggest pub companies, for example, beset in recent years by various corporate catastrophes, have been lain at the door of the smoking ban or changing consumer tastes, rather than the governance industry itself. Supermarket troubles have been blamed on aggressive foreign companies, the internet and high prices, but the dog had not been identified, until recently, as the main source of the devastation.

However, the Tesco fiasco may have let the cat out of the bag. One of the greatest absurdities of the governance system is that you can comply with the rules and have, as many companies do, only two executives on the PLC board. If they fall out, or one leaves for any reason, you only have one, and if you're unlucky you may, like Tesco, end up with none, a dangerous void for a major company. In fact, only two or three executive directors is a dangerous void.

The far more widespread malaise though, under the radar until now, is that so-called compliant PLC boards are, in reality, highly inexperienced and unstable. The unholy combination of a majority of part-time non-executives, including the chairman, with a maximum of nine years' tenure, and CEOs who average only four or five institutionalises these weaknesses. A board led by part-timers, with a short-term chief executive, which has very little real contact or knowledge of the worlds of executives and customers, is really a sitting duck in the business jungle.

These weaknesses are compounded by a raft of other governance shibboleths: excessive emphasis on the role of shareholders (the 2012 Code refers to shareholders 63 times, employees three times and customers not at all); performance-based pay, which encourages over-borrowing in order to enhance earnings per share targets; the discouragement of CEOs becoming chairmen, exacerbating the short-term mindset of the former; autonomous board committees, manned by non-execs, operating as remote and detached satellites, clogging up company accounts with jargon-filled reports; remuneration committees which have legitimised huge pay increases; and audit committees which have effectively removed power from executives and have presided over financial Armageddon at our banks and other major companies.

The key to understanding the current problems, pointed out by journalists like Chris Blackhurst and Anthony Hilton, is that the pendulum of governance, designed to prevent Maxwell and Enron-style debacles, has swung too far the other way. The composition of the board of the Financial Reporting Council, which oversees governance, mirroring the non-executives on PLC boards, consists almost entirely of "City" types, with little experience of civvy street, let alone pub or supermarket companies. This aspect is exemplified by the appointment to update the rules of Lord Sharman formerly head of Ernst and Young and Tony Blair's main advocate for Britain to join the euro, whose financial judgement on the big issues is transparently deficient. The great and the good, les énarques, as the French say, have their role to play , but too much power has been ceded to them, to the serious detriment of corporate performance.

The nature and the tone of governance urgently need to change: if you have top CEOs like Stuart Rose at M&S or Simon Wolfson at Next, they should be encouraged, in due course, to become chairmen, subject to appropriate checks and balances. Executives should be properly represented on boards and should form a majority: the tail should not wag the dog. Performance-based pay should be consigned to the dustbin of history. There is no evidence that it does any good, and it often encourages perverse behaviour.

Britain's most senior judge, Lord Neuberger, who has seen many dogs in his day, recently said that the reaction of the authorities to failed regulation is often to produce more regulation, when what is needed is different regulation. Inexperienced yet compliant boards were intimately involved in the collapse of our banks, our pubs and our supermarkets. We now need a new system of regulation, which takes account of these factors.

Tim Martin is chairman and founder of JD Wetherspoon

Interim Management Statement

Current trading

For the 13 weeks to 26 October 2014, like-for-like sales increased by 6.3%, and total sales increased by 11.3%. Sales were good through August and September, but like-for-like growth decreased in October.

The operating margin in the period was 7.7%, compared with 8.3% in the same period last year. In October, the Company increased pay for hourly paid staff by 5%, while utility costs increased by about 4%. In addition, during the period, there have been several cost increases from suppliers.


Property

The Company has opened two new pubs since the start of the financial year. We have 15 pubs under development and, in line with our last update, intend to open around 30-40 pubs in the current financial year.


Financial position

The Company has agreed on an additional five-year bank facility with Handelsbanken, increasing our overall facilities to £740 million.

There have been no other significant changes in the Company's overall financial position since the publication, on 13 October 2014, of the annual report and accounts for the year ended 27 July 2014.

Pub closures and stealth taxes

In recent budgets, the chancellor has announced heavily publicised and welcome cuts in beer duty. In contrast, in an initiative which achieved little recognition, changes were announced in 2012 to the VAT treatment of pub slot or 'gaming' machines. As a result, pubs were no longer to be allowed to set off all VAT charged by suppliers against VAT charged to customers.

This legislation has been interpreted by the tax authorities so that a proportion of VAT inputs for pub businesses is disallowed. For example, if gaming machine income is 4% of a pub's sales, 4% of the pub's input VAT, in respect of certain categories of supplies (even if unrelated to gaming machines), is disallowed. This new 'tax' cost Wetherspoon an additional £3.6m during February 2013-July 2014.

These sorts of tax increase penalise pubs, which are closing in great numbers, yet not supermarkets, which already benefit from a zero VAT rate on food, whereas pubs pay 20%. Supermarkets also pay far lower business rates per pint or meal than do pubs. Indeed, this government has presided over thousands of pub closures - perhaps more than any government in history. The pub industry recognises that governments need to balance the books, yet it is imperative for the future of pubs that political parties commit themselves to a sensible rebalancing of the tax system, so that there is fairness and equality between pubs and supermarkets - a rebalancing will produce more revenue for the government and more jobs in the economy. Stealth taxes, including the new treatment for gaming machines, are confusing and unfair for publicans and are very harmful to the industry.


Outlook

The biggest financial dangers to the pub industry continue to be the VAT and business rates disparity between supermarkets and pubs and the continuing imposition of stealth taxes, such as the late-night levy and the reduced allowances for gaming machine income.

As a result of the slowdown in sales growth in October, combined with the cost increases referred to above, the Company is currently anticipating an operating margin in the range of 7.2-7.8% for the current financial year. The Company is aiming for a satisfactory outcome for the current financial year.

Interim Management Statement

J D Wetherspoon plc ('J D Wetherspoon' or the 'Company'), announces an update on current trading, before entering its closed period for its interim results, for the six months ending 25 January 2015, which are expected to be announced on 13 March 2015.

Current trading

For the first 12 weeks of the second quarter (to 18 January 2015), like-for-like sales increased by 2.8% and total sales by 6.8%. Like-for-like sales slowed to approximately 2% in December and have slowed further in the last fortnight. In the year to date (25 weeks to 18 January 2015), like-for-like sales increased by 4.6% and total sales increased by 9.1%.

We expect the operating margin (before any exceptional items), for the half year ending 25 January 2015, to be around 7.3%, 0.9% lower than the same period last year. This reduction is mainly due to an above-inflation increase in pay for staff and an increase in utility and supplier costs. In addition, gross margins are under pressure as a result, we believe, of increased price competition from supermarkets.

Property

The Company has opened 11 new pubs so far this financial year and currently has 10 sites under development. In line with previous estimates, we intend to open approximately 30 to 40 pubs in the current financial year.

The Company opened its second pub in the Republic of Ireland in December in Dun Laoghaire. We have completed on a further three sites in Swords, Cork and Dublin.

Financial position

In the period under review, the Company bought back 196,500 shares for cancellation, at a total cost of £1.5million, at an average price of £7.96 per share. There have been no significant changes in the Company's overall financial position since the publication, on 13 October 2014, of the annual report and accounts for the year ended 27 July 2014.

Commentary on current trading

Tim Martin, Chairman of Wetherspoon, makes the following comments on the pub industry:

"Wetherspoon has had significantly better sales growth in the last couple of years than our main competitors, reflecting a pattern that has continued since our flotation. Even Wetherspoon, however, has seen flat bar sales in the last two months, when food sales have continued to rise. Inevitably, bar sales in the industry as a whole, especially where pubs have not benefited from Wetherspoon's level of investment, will have fared less well. This situation reflects the dire need for the pub industry to campaign for equal tax treatment for pubs and supermarkets. It is certain that the current wave of pub closures, which continues at a high level, will accelerate when economic growth slows or reverses.

The majority of investment in larger pub companies has been in "food-led" businesses, which have very low levels of bar sales, apart from those which are consumed with meals. Fewer and fewer customers, outside pockets of affluence, in an accelerating trend, are using pubs for "drinking occasions", which do not involve eating. The main reason behind this trend is not that people prefer to drink at home, for example, but relates to the huge and growing price differential between pubs and supermarkets. This differential has been created and increased by the fact that business rates per pint are far higher in pubs and that supermarkets pay no VAT in respect of food, whereas pubs pay 20% - enabling supermarkets to subsidise the price of beer and other products.

A number of major pub companies believe that they can avoid the resulting malaise by investing in out-of-town pubs which are really "quasi-restaurants". Unfortunately, these businesses too are already starting to suffer the effects of the tax disparity with supermarkets and they will clearly, in our view, be unable to escape the consequences of an unequal tax system.

Neither these businesses nor the main pub industry newspaper, the Publican Morning Advertiser (PMA), have campaigned for tax equality with supermarkets. In the case of the PMA, the editor has questioned the financial motives of the leader of the tax equality campaign, Jacques Borel, but has utterly failed to campaign himself or through his newspaper for tax equality, which would help to ensure the future of pubs.

The pub industry is in a strange position, whereby market research clearly shows that almost 100% of individual licensees believe their companies should support a campaign for tax equality, yet several major pubcos and the main trade newspaper have not actively done so. Following chaos at our banks, the supermarkets themselves have recently witnessed a situation where the tectonic plates of the industry moved, even though the boardrooms at the major industry players were oblivious to this fact. That is the position now in the pub industry and the companies that do not speak out about the dangers of tax inequality are likely to be those that suffer most in the future".


Outlook

As we have previously stated, the biggest financial dangers to the pub industry continue to be the VAT and business rates disparity between supermarkets and pubs and the continuing imposition of stealth taxes, such as the late-night levy and the reduced allowances for gaming machine income.

Although the reduction in sales growth may have an impact on our operating margin if the trend continues, the company is aiming for a broadly satisfactory outcome in the current financial year.

SP all over the place, interim results on Friday 13th let's hope traders are not to suspicious. Bearing in mind final paragraph above:-

As we have previously stated, the biggest financial dangers to the pub industry continue to be the VAT and business rates disparity between supermarkets and pubs and the continuing imposition of stealth taxes, such as the late-night levy and the reduced allowances for gaming machine income.


So with that in mind and the Budget on the following Wednesday is there a slim chance that our George may give a boost here? Answers on a postcard. Watching.

StockMarketWire.com

Pub group JD Wetherspoon's revnues rose 9% to £744.4m in the 26 weeks to 25 january with like for like sales up 4.5%.

Operating profits fell by 1.1% to £55.1m and profits before tax and exceptional items were 0.9% lower at £37.5m.

Diluted earnings per share before exceptional items rose by 2.3% to 22.6p and the dividend is maintained at 4.0p per share.

Pre-tax profits after exceptional items rose by 4.1% to £37.5m.

Chairman Tim Martin said: "The first half of the financial year resulted in a reasonable sales performance and free cash flow, although our profit was under pressure from areas which included increased competition from supermarkets and increased pay and bonuses for pub staff.

"As previously highlighted, the biggest danger to the pub industry is the continuing tax disparity between supermarkets and pubs. Thanks mainly to the work of Jacques Borel's VAT Club, there is a growing realisation among politicians, the media and the public that pubs are overtaxed and that a level tax playing field will create more jobs and taxes for the country. "In the six weeks to 8 March 2015, like-for-like sales increased by 1.6%, with total sales increasing by 5.6%."





Story provided by StockMarketWire.com

Still watching, come on George over to you. :0)

Not sure knocking a penny off a pint helps them much, but nice bounce so far today.

Wetherspoons have just exchanged contracts on the White Hart Downham Market and I look forward to participating in a beverage or two along with a curry on Thursday evenings!

Don't forget 2p off a pint of cider CC. Should keep the teenagers happy!

True Harry LOL!

My local pub is like a petrol company - they pass on the rises straight away, but any reductions.......

Still watching, maybe should have gone short. When or if it decides to bounce plenty of scope to ride it back up.

Interim Management Statement

Current trading

For the 13 weeks to 26 April 2015, like-for-like sales increased by 1.7%, and total sales increased by 5.8%. In the year to date (39 weeks to 26 April 2015), like-for-like sales increased by 3.6% and total sales increased by 7.9%.

The operating margin in the 13 weeks to 26 April 2015 was 7.5%, compared with 8.0% in the same period last year. At this stage we expect the full-year margin to be in the region of 7.3% to 7.7%.


Property

The Company has opened 20 new pubs and disposed of 4 since the start of the financial year. We have 12 pubs under development and, in line with our last update, intend to open around 30 pubs in the current financial year. It is our present intention to open a similar number of pubs in the following financial year.


Financial position

The company has bought back 1,621,163 shares, at a total cost of £12.5 million, since the start of the financial year.

There have been no other significant changes in the Company's overall financial position since the publication of the interim accounts on 13 March 2015.


Outlook

The Late Night Levy, combined with higher business rates per pint and a huge VAT disparity, mean that pubs continue to trade at a great disadvantage to supermarkets.

As previously stated, the second half of the last financial year was strong, which will make it difficult to improve on that performance in the current year. Our expectations for this full financial year remain unchanged.

For the next financial year, there are a number of factors which are likely to influence our trading performance, although they are difficult to quantify at this stage. Positive aspects include an increase in our pub numbers, stable utility prices and slightly lower interest rates. Other trends include increased competition from supermarkets and restaurant groups, together with additional staff and repair costs. We will provide updates, when appropriate, on these, as next year progresses.

PRE-CLOSE STATEMENT

StockMarketWire.com
Pub group JD Wetherspoon's like-for-like sales increased by 2.4% and total sales increased by 6.1 in the 13 weeks to 25 October.

The group says sales have been slightly higher in the last 6 weeks, which has coincided with the Rugby World Cup.

The operating margin in the 13 weeks to 25 October was 6.2%, compared with 7.7% in the same 13 weeks last year. The lower margin was due to increases in the starting rates for hourly paid staff in October 2014 and August 2015, which totalled approximately 13%.

The company has opened 3 new pubs since the start of the financial year and has sold 1. It intends to open approximately 15 pubs in the current financial year.

It adds: "Following a review of our pubs, as previously reported, the company offered 20 leasehold pubs for sale and is now considering a small number of freehold disposals in the course of the financial year."

Peel Hunt cuts JD Wetherspoon to sell from hold, target cut from 711p to 700p.

along with other companies, JDW doesn't like paying "living wage" ...... hard cheese! i thoroughly concur with the argument that it should not be for the taxpayer to subsidise what are effectively underpaid employees

JD Wetherspoon said like-for-like sales improved in the first 12 weeks of the second quarter but that operating margins would be 1.1% lower than the same period last year due to increased labour costs. "Our current view is profits for this year are likely to be towards the lower end of analysts' expectations," said chairman Tim Martin.

The local JDW I use you never see the same staff the staff turnover is incredible.