Marston's PLC (MARS) Earnings Call Transcript & Summary

Good morning, and welcome to this Marston's update on the Brains transaction with Ralph Findlay and Andrew Andrea. Ralph, over to you.

Good morning, everybody, and welcome to this presentation on the Brains transaction that we completed earlier on in February. This has been an important, if not critical, few weeks for our sector, with the road map to reopening now published and the budget coming out this week. So very critical. But this presentation is about the Brains transaction. We had intended and wanted to do this presentation earlier than today, but we were unable to do so because of the potential of a situation that then existed at the time that we completed the transaction. So I'll start the presentation now and move on to the first slide, please. Okay. This presentation is about the Brains deal that we completed in February. That pub on the first page was the old arcade in the center of Cardiff. Just to, first of all, put this presentation in the context of our strategy, we have got a very clear financial strategy, which has got a number of key points to it, one of which is the financial strategy, which was set out last year and principally is to reduce our borrowings to below GBP 1 billion by 2024, and that remains in place. Secondly, we've got clear organic growth plans. Just as a reminder, this is the first time in the company's history that it is able to set out its strategy and implement it as a purely focused pub operator. So back in December, we set out the broad outline of a strategy which had 3 key pillars, one of which was to be guest obsessed, the second was to raise the bar on our performance and our operations and the third was to set out how we grow the business. And we also said at that time that we would come back to that organic strategy at some point when we had trading data to demonstrate what progress we have made on it, and that also remains in place. But on the growth plans, that is where really this particular presentation comes in. Just some comments really about how we are looking at M&A and how we achieve M&A in this market. And I do think this is important because as a consequence of what's happened over the last year or so, I suspect that there will be further consolidation in the sector. There is clearly interest in the pub sector. It looks like an attractive asset class for money generally, and we think that, that is the case, too. And indeed, some examples of that being the case was the potential of the situation that existed for ourselves, for the fund that was raised -- has been raised by Rooney Anand investment in the sector, the setting up of a new investment vehicle by the ex fall guy. So how do we look at M&A in the context of that? The first point is that we think that in this market, for us to expand, it doesn't always need us to own the bricks-and-mortar of the business that we're acquiring. And this is a good example of that, which is essentially an opco/propco kind of structure. And what that means is that we will look to see where M&A can happen in what we call a capital-light way, i.e., where we're not having to put out a lot of capital, which might compromise that plan to reduce our borrowings to below GBP 1 billion by 2024. I think a second important point in that is if that is the case, what we really need to be clear about is if we're going to be the opco, how do we really set out our case for being the operating partner and first choice. And I do think that Marston's has several distinct and clear advantages over pretty much anyone else in the sector when it comes to looking at that position. So firstly, we operate across the entirety of the U.K. We operate across all business models: managed, tenanted pubs, franchised. We have all those. We've got a resource infrastructure to support those. We also operate across all segments of the market. So from premium pubs and bars to food-led pubs and community pubs. So I think if you look at that, there are some very clear areas where we can add value. And in thinking about it and in thinking about this transaction and the impact of COVID on it and what that meant, our view was and still is that a good pub pre-COVID is going to be a good pub after we're through this and when the road map gets us to that point of reopening. So those are just some points on our general view of how we look at M&A at this point in time. Next slide, please. So just coming to specifically the Brains transaction and a little bit of background about this. This was not a competitive situation in terms of the deal that we did. It did happen quite quickly, and there was no doubt that Brains needed to do something, and I think that was pretty well understood. And for all the reasons I've just described about our position in the market, we were actually in a pretty unique position to be able to do this deal and complete it in the time scale that was available and also in a way which made sense for them in the particular situation that they were in. And it's a business that we have known for a very long time. For those not familiar with it, the estate is pretty much all in South and West Wales. There are a few in North Wales, but mainly not. It is a mixture of managed and leased pubs. There are about 107 core pubs. Andrew will describe the breakdown of this estate shortly. But of the total estate, there's about 107 that we would call core, and 70 of those are managed. So looking at the mix of that, it is a mix of destination food and wet-led community pubs, really very complementary with our existing estate. Marston's had, before this transaction, 106 pubs in Wales. That's important, really, for 2 reasons. One is that it means that we know the Welsh market very well. Many of those pubs are in South Wales. And it takes us in total to north of 200 pubs in Wales altogether. In terms of the estate itself, I'd describe it as good quality. We'll come back to what that looks like in financial metrics. But in terms of where the pubs are, their position in the market, they're where we would want them to be. It is mainly not city center. It's mainly the kind of community locations or suburban locations that we really, really like. And overall, I would say it's well maintained and invested, although there are some opportunities to invest and improve that estate. And I think, in my mind, that is always a positive thing. And the final point is I think there is a brand opportunity for the business. We've agreed that we will continue to distribute the Brains beers and use the Brains brand on the pubs that we are taking on as part of this deal. But we can also use those things in our existing 106 pubs in Wales, and we'll be looking at that opportunity pretty closely. Just to comment on that mix of managed and tenanted pubs. Within managed, it's about a 30% food mix. And within the tenanted and leased estate, and I think this is quite a big point for us, there is an opportunity for conversion to franchise. The franchise model that we pioneered back in 2009 really has been very successful for us. We now have over 500 of those pubs across our estate. And we think that the development of that model continues really to demonstrate that it's a great asset to us and that it has attractions in the tenant and lease market. On people, there are about 1,300 people in the entire business, which will transfer across to Marston's employment. And that includes area managers. We're taking on their marketing head, food development heads, so some good people in that structure. And I think -- so in terms of the actual estate themselves -- itself, we see a good business with opportunities for growth, partly through investment, partly through conversion to franchise. Things like rooms, accommodation, there are really some good opportunities within that. So at that point, I'm going to hand over to Andrew.

Okay. If we could move on to the next slide, please. Good morning, everybody. Just some pictures of a couple of pubs. We know people like to see pictures of pubs. So there are a few more in the appendices. And if we can move now on to the next slide, this sets out the composition of the public estate that we are operating on a mixture of short and long-term agreements. So 99 of the pubs, we are going to take on a 25-year lease with a 15-year break. And those pubs have been carefully selected. They had to demonstrate a stable revenue and earnings track record over the last 5 years or so. 62 of those pubs are managed, of which 21 we will convert to franchise. And it's worth noting that the pubs that remain managed have an average pro forma profit per pub of around GBP 220,000 per pub. And with 37 leased and tenanted pubs, our intention is to convert those to franchise in the medium term. In addition, we've identified 8 sites where current earnings are low, revenues are stable at around GBP 4 million per annum, but we actually see scope for both revenue and earnings growth. And we've agreed to purchase the freeholds of these pubs, 8 of them, for a consideration of GBP 4 million payable in July. 7 of those 8 managed pubs will convert to franchise. And in essence, there's a land underpin to us taking on those slightly riskier sites. So in totality, the core estate comprises 107 pubs, pro forma EBITDA of GBP 14 million at outlet level and an average EBITDA per pub of around GBP 130,000. In addition, it's worth noting from an accommodation perspective, we have 141 rooms in that core estate in 15 of the pubs. In addition, we're operating 30 pubs on a peppercorn rent for 18 months. These are turnaround sites. As you can see, the profit per pub is pretty low. And our intention is that for that 18-month period, we will review the extent to which any of those pubs could be converted into long-term arrangements. Alternatively, these would be pubs that would be earmarked for disposal by Brains. And then finally, we are operating 10 leasehold pubs on behalf of Brains on a management agreement for a period of 2 years in exchange for a management fee per year per pub. And clearly, as those exit, those will tail away. But the P&L risk for those pubs all sits with Brains. So what this demonstrates is that we have a core estate of 107 pubs on long-term agreements, and they're underpinned by a very stable earnings base. Next slide, please. So looking at the financials below outlet level. I've set this out in a pre-IFRS 16 basis because I think it's simpler. I've included in the appendices an IFRS 16 schedule. So at outlet level, as I've just described, core estate EBITDA of GBP 14 million. We've agreed a rent roll of GBP 5.5 million per annum. So that constitutes a 2.5x rent cover on that pro forma EBITDA. The incremental overhead is around GBP 1.5 million, driving a net EBITDA of GBP 7 million. And we expect depreciation to run broadly in line with maintenance CapEx at around GBP 2 million a year. With regard to upside, as Ralph just alluded to, the big opportunity is conversion to franchise. So at existing pro forma revenue and at our conversion rate, we'd expect to achieve a GBP 1 million upside by converting to franchise. But as we've seen over the course of the last 10 years, as that owner/driver mentality of the franchisee kicks in, revenues also tend to grow. So we're targeting a GBP 1 million to GBP 2 million upside on that pro forma from conversion to franchise. I think we can run more efficiently from an overhead perspective, and we're targeting a GBP 0.5 million shave on that GBP 1.5 million number. And we're targeting purchasing synergies of up to GBP 1 million. So in aggregate, therefore, we expect a GBP 2 million to GBP 3 million upside versus that pro forma position. And Ralph just alluded to the fact that within that estate, we think there are investment growth opportunities. But clearly, our immediate priority is, one, to get the pubs open; get them up to their run rate pro forma EBITDA; and then we can consider additional investments. But notwithstanding that, what this demonstrates is that this is a potential GBP 10 million EBITDA opportunity underpinned by a very strong rent cover. That 2.5x cover is very strong indeed. Next slide, please. So with regards to the cash flow dynamics of the deal. In order to provide the vendor with some liquidity, what we have agreed is to pay 2 years' worth of rent in advance. So year 1 was payable on completion in February. So it has been paid. The second year will be payable in April. And as I mentioned, we're purchasing the freehold sites for GBP 4 million in July. And that will be funded by the sale of our unlicensed property estates for GBP 8 million. That's due to complete in the next week or 2. And we've identified disposals in the second half year, which are mainly AUV and land carve-outs of GBP 7 million. As I mentioned, the annual maintenance CapEx is around GBP 2 million. And growth CapEx is to be confirmed, but just to reinforce the point, we must -- that investment must meet a strict return criteria of a 30% return on investment. But the key point to note from a cash perspective is that the initial cash outflows for this transaction are fully funded this year, so it's cash neutral in 2021, and the monthly cash rent doesn't commence until April 2023. So that's the key points on the financials. And now back over to Ralph.

Thank you, Andrew. Next slide, please. Thank you, Andrew. So I want to conclude with some comments on the future and the market. The first point is to say that we would look at opportunities like this in the market in the future. And I do think that is important because it seems to me very likely that the sector will consolidate and the various issues of the last year or so will cause people to look at how they do things and how they do things differently. And we have got a particular advantage that we can bring in the market, which is unique to ourselves. So I think the opportunity here to look at things which improve our return on investment, that are accretive to earnings, that reduce our operating leverage and are consistent with the strategy to reduce borrowings. Those are things which, provided we can tick those boxes, I think will be interesting. The second point is -- I really think it's important. The way you have got an advantage in the market, you push it as hard as you can. And this point I made earlier about being the operating partner of choice, I think, is a really important one. And I described some of those issues earlier on. The last bullet under, that section on the PLC covenant is also really quite a critical thing. Because if you think about this transaction that we've just done, the key to it in a way is how the propco values that GBP 5.5 million of rent that we are paying in over the 25-year period. And effectively, what that means is it depends on what the yield is that you can place on a Marston's cash flow. And the fact that we've got a PLC covenant and the fact that we have got established yields out in the market from the kind of deals that we did earlier on newbuilds and with the Aprirose deal a couple of years ago, again, that is an advantage to us in this sector. And when you're looking at valuing that GBP 5.5 million on that basis as a property yield, the kind of multiples that you attach to it will be significantly higher than standard pub multiples. And that is an opportunity to create value out of this kind of structure. I think having said all that, it's going to be critical to us that we remain disciplined in our view of estate expansion. So what we don't want to do is to dilute the quality of our pub estate. Profit per pub is part of that, but there are other metrics as well in terms of where pubs sit in the market. But quality is going to be, I think, one of the differentiators in the sector going forward. The second point is we need to see where we can create value over and above other people in the market. And I think in this context, the ability to convert to franchise is one of those. I think the 40% stake we have in Carlsberg Marston's Beer Company is another because Carlsberg Marston's Beer Company will win business as a consequence of this transaction. I think in looking at it in terms of where it sits in the market, we will look generally at more wet-led than food-led, and that's partly because of that point about where the franchise agreement really works best and where we can maximize that advantage. And the final point is on rental cover, and Andrew has really covered this earlier on. We are a predominantly freehold business, and we're not planning to change that. But clearly, in this deal, and potentially in others, we are looking at taking on business, which is not on a freehold basis, as I've described. So minimizing the financial risk of that is a very important component of it. And therefore, the rent cover part is pretty critical to it. So I think this deal is a good blueprint for -- it's a good deal in its own right, and it's a good blueprint for what we potentially might do in the future. So that concludes our presentation on the transaction and the structure. And I'd now like to hand back to take any questions, please. Thank you.

Ralph, Andrew, thank you very much indeed. [Operator Instructions] And the first question comes from Douglas Jack.

Yes. Yes, I've got 3 quick questions, if that's okay. First of all, we know about the U.K. budget. How does the Welsh budget affect these sites over the next few months? The second one would be how much infrastructure have you got for more of these transactions in the future? Have you got a target in terms of how many sites you may add in the end? And then the last one is in terms of Marston's estate and the Brains estate, how many units do you think you'll open for outdoor trading on the 12th of April?

Okay. Doug, thank you for those questions. On the first point about the budget, if I think about the key elements of the U.K. budget, which are really 3 key points, VAT and furlough arrangements are common with the U.K. The key changes in relation to business rates where in Wales and as in Scotland, indeed, there will be a business rates holiday for the 12 months from the end of March '21 to the end of March '22. So 100% discount in its entirety. And clearly, that's a lesser amount in England, as we learned on Wednesday. On the infrastructure point, I'm going to hand over to -- sorry, on that second point on the Welsh budget, it's not a budget point, but it's a road map point. We don't have the same clarity on opening dates at this point in Wales as we do in England. We don't either have that clarity in Scotland. On the infrastructure point, how many sites we might look at, Andrew, I'm going to ask you to answer that one, please.

Yes. Well, in simple terms, on infrastructure, Doug, this transaction is simply adding area managers. Pub -- running pubs is all about pubs per man or women. So we don't actually have a constraint in that regard. If you've got the area managers, you can run pubs. But what is key are the quality control measures we're putting in place that Ralph described earlier. So it's got to be at least as good as what we can run. We've got to be confident that we can just add value to those pubs, not just simply land grab pubs. This takes us down to about 80-ish percent, low 80% freehold. I don't see any reason why we couldn't consider going for another 250-or-so pubs, which would take us to 70% freehold. And I think we'd still be perceived as a predominantly freehold business. And if we maintain that discipline on rent cover, that would be a per staging post. But I think it's about discipline and quality of what we look at rather than just simply land grabbing, Doug.

Thanks, Andrew. On the final point on the number of pubs that we may open in April. We're still running the numbers on this, and we're still looking at the long-range weather forecast in some detail. But I think that the specific points about the Marston's estate that are relevant to this are it's mainly a suburban estate, it's mainly an estate with beer gardens and outside trading areas. So reasonably well above 90% of our pubs have got outside trading areas. So we're in relatively good position on this. And I think that I'll be surprised if we're not more than half of our estate -- reasonably more than half of our estate open trading in outside areas from the 12th of April.

Yes. I would add, Ralph, that we did flag up in the premiums that we've invested GBP 2 million in inside-out spaces. Now that was in anticipation that there might be some form of restriction on trading to outdoors only for the winter months. Clearly, that puts us in a strong position with regards to April reopening relative to our competitors.

Yes. Yes, correct.

And sorry, just one last one. It's not entirely connected to brands, but your exposure to city centers in London, in particular. Can you just remind us how exposed you are to those areas of the market?

It's very small. It would be below 10% of our estate overall. London City center is really only 2 sites. So I mean, I think the point I would make about that is that the positioning of the Marston's estate with a more than 90% suburban positioning is going to be right. I do think that the city centers will recover over time. And I think bars, over time, will do well because the younger demographic, I think, is going to be wanting to get out and back socializing and doing all those things again. It's the impact of work and how city centers recover office traffic and how retail and city centers works that I think are the 2 things that are going to mean that it's going to be more uncertain and the less risky place to be is in the suburbs.

Yes. I mean, Ralph, I think if we define -- if we were to be really prescriptive at city center, a company with office accommodation, so London, Birmingham, Manchester, Leeds, it's less than 20 sites in those city centers.

Yes. Yes.

It's very small indeed.

The next question comes from Owen Shirley.

And congratulations again on the deal. A couple of questions, please. Just firstly, how many assets do you think realistically there are to go after in this manner? What -- are there things of Brains size? Is it something you're pursuing actively? Or would it be opportunistic? That was question one. And the second one, please, just with the target to reduce borrowings below GBP 1 billion. Could you give us a reminder on what the marginal cost on the debt you'll be paying down is? And connected to that, how the dividend comes into how you balance that with debt reduction.

Thank you, Owen. Just on the general point about opportunistic nature of this kind of structure. The Brains deal was a particular set of circumstances, but it wasn't entirely opportunistic either. And it was a business we had thought about before it actually happened. And we had thought about it in the context of this capital-light structure because the issue of the propco/opco type structure is something we've been evaluating for some period of time. And it has become a strategic issue for us rather than just an opportunistic issue. And I think at this point of time, I don't think I can easily describe how many assets are there to go after. What I would say is that there is a significant amount of capital around, and I alluded to this earlier, with investors looking for investment in U.K. freehold property. But what they often don't have is a management team or operating infrastructure to go behind it. So I think this can come potentially from 2 directions. One, it can come from somebody who wants to look at the investment as a property investment in the U.K. and we are the opco that they work with. Or secondly, it is a more opportunistic event like the Brains deal, where things just happen to fall into line, and it works well for both parties. So I think it can happen either way. But in overview, a single deal has opportunistic characteristics, but it's a strategic issue for us. On the issue of borrowings, I'm going to ask Andrew to answer that question, please.

Yes. I think, Owen, the securitization, which is the most expensive debt in our debt structure, is going to form the bulk of that debt paydown. So I -- in answer to your question, the more expensive debt is getting paid down first, but it's also scheduled to be paid down. And then clearly, it would be the bank facility after that, which is also slightly better commercial terms than our securitization. And with regards the dividend, I'd just reiterate what we said at the prelims, which is the Board has not yet concluded on timing of recommencement of dividends. We recognize it is something that needs to form part of the investment case in the future. And whatever dividend policy we apply will be a cash-based policy, and dividends would have to be cash covered post repayment of the securitized principle.

The next question comes from Anna Barnfather.

I've got 3 questions, please. Firstly, the first question, just on pushing for a bit more detail on where this opportunity is going to arise. Are you seeing that as take advantage of regional operators who are in distress? Is that where it's coming from? Or is it that you think there's going to be a fundamental shift of a different asset class? So institutional asset owners wanting to partner with an operator. So that's the first question. The second question is just looking back to the funding of the deal on disposals. Is that disposals obviously within your Marston's existing estate? Is that extra? Or is that in line of your sort of longer-term guidance for annual disposal proceeds? And then the final question is just on reporting. I think it's quite important now with these different models of managed and owned and leased. And I know you've changed your reporting several times, but how are you going to report in the future, both the different business models, but also this division with Brains?

I think on the question about how we see where this opportunity arises, I think really, I'd just make the point again. I think it's potentially from both of those directions. So one is institutional funds and looking to deploy capital and looking at the U.K. pub sector as an attractive investment opportunity. And I think that description has been made by others in the market, too. And at this point, we're simply making the point that when those investors are looking at the U.K. market and who they partner up with, we have got some distinct advantages compared to other players in the sector to add value. And I think that's an important point. For regionals, I think that is a possibility. I mean there is a question for some about whether actually it may be more efficient for them to be a property company rather than to operate and own pubs, and there may be some further opportunity in that. But it's more difficult, I think, to be sure about where that would come from. As I said earlier, I think the Brains situation was something, an unusual one that they simply had to do something given the situation that, that business found itself. So I think that's the point I'll make on that. On the funding of the deal, I'm going to ask Andrew to comment on it in respect of the future whether it changes the guidance that we've given on disposals. But just to be clear, the deal hasn't got any particularly high capital elements to it. There are those 2 advanced rent payments, which Andrew has described, which will be funded by the disposal of the unlicensed estate. That's a deal that is in train at the moment and expected to complete in March and also some further disposals, smaller in nature, in the second half. But Andrew, I'm going to ask you to comment on that and also what we think of our reporting.

Yes. Okay. I think -- and the best way to look at this is the disposals targeted for H2 probably reflect our view on disposals going forward. So over GBP 5 million to GBP 10 million opportunistic disposals churn of the estate. What is being disposed of in H2 is we've got some car park carve-outs. We've got some AUV car parks, including one site for a care home, interestingly. So going forward, I think having sort of GBP 5 million to GBP 10 million of disposals in the model is appropriate. I think we've guided that previously. But what that demonstrates is that our road and route to borrowings reduction is not contingent on a very large disposal package. We believe we've got assets that we can take forward. Now we've done the heavy lifting with the work that we did in the early part of 2020. With regards to reporting, clearly, we're not going to report Brains as a separate segment. But looking forward and certainly over the next year or 2, it's upon us to just set out how Brains is going. So I think you will see that come through in presentation. And then with regard to operating, how we report it, how we report, we will report as a pubco. But clearly, we will give detail about, I guess, managed and partnership. And the reason I say that, Anna, is that we are flexibly moving pubs between leased and tenanted across the franchise. I think the direction of travel ultimately is to have an estate which is predominantly turnover-based agreements. So a few at least in tenanted. But if we keep separating out those things, the reporting is going to become slightly confusing because the pub numbers are going to be moving fairly consistently. So I think it's upon us to just make sure that we're bringing out in the presentations that line of travel and how we're moving forward. But managed versus partnership is probably how we're thinking more generally. And in the appendices, when we look at pub numbers, actually, that's exactly how we described the estate.

And the next question comes from Mark Irvine-Fortescue.

Just one question left for me, please. You talked a little bit about brand with the Brains acquisition. And it seems some of that, at least, is sort of linked to the heritage of Welsh brewing. Can you make a comment on the Dragon Brewery at all, what the future might be for that? Whether there's any implications for the pubs that you will be operating and, god forbid, there'll be any Welsh pubs without Welsh beer. Is that brewing asset something that the CMBC joint venture might be interested? Just any thoughts on that brewing piece, please.

Yes. Mark, good question. I think the important point is just to note that the decisions on the Brains brewery or for the -- for that business, not for Marston's. So what we have said is that we will -- we want to use the Brains branding on pubs, including other pubs that we've got in Wales. And we have also agreed to distribute the Brains beers. We haven't given a volume commitment and we haven't given a distribution commitment either in terms of number of taps on a bar, but that's not the point. The key point is that we want to make sure that we are offering a range of beers that the guests want to buy. And in that part of the world, that has to include a Welsh beer, and the Brains brand is iconic in that region and country. And that's a really important part of it. I think is it likely that CMBC would be interested in buying it? I think probably not because they've got plenty of breweries already, and they're also engaged in the integration of the Marston's Beer Company and the Carlsberg U.K. business at the moment. So plenty to do with that and reopening coming up. So I think the issue will be -- is whether the Brains family continue to operate it, which is possible, or whether they find a buyer for it, which is also possible. But either way, we will continue to distribute Brains beers.

So is that still in progress as you understand it?

As I understand it, that is still work in progress. Yes.

And the next question comes from Sahill Shan.

Really useful presentation. I just got one quick question. And it's in the context of what you said, Ralph, in terms of you guys being all -- people being a lot more open to the opco/propco model going forward in the pub sector. And in the context of where your debt is and given what you've just said, how receptive are you to your own freehold model partially moving towards the opco/propco model and accelerating the reduction in debt from any disposal proceeds?

Yes. I think that is a very key question, Sahill. I think it is a key question. And I said -- as I went through the -- what we're not currently planning to do is to move away from the description of the business as a substantially freehold business and that -- so that is the case. But we are open to the idea that there will be a lower percentage of freehold in the mix than historically there has been. The key to that is really those 2 things. What is the financial risk that you're taking on and how much has that been pushed? And certainly, in this case, we were able to evaluate that very carefully and agree a level of rent cover that really made us comfortable with that risk. So provided we can do that on financial risk, I think that's the first point. And the second is the quality of what we're acquiring and whether that's accretive to the business overall and consistent with our strategy. Provided we can do those 2 things, we are open to the principle of increasing the proportion of businesses run under this kind of model. Andrew, would you add anything to that? Or is that -- are those the main points that we would...

No. I think they are the key points, Ralph. I think what you'll see is just the percentage -- what we're likely to do is just reduce the percentage by growing the business overall. The freehold underpin, there's no rush to do that. And all I would add, Sahill, is in the eyes of the accounting regulator, if we go to an opco/propco model, whereby we're mainly leasehold, we still got debt because IFRS 16 requires us to put that on balance sheet.

Yes. Just one other point about this, Sahill, is -- we've probably talked about this before, but it's been a long contention of mine that we've never really been able to have the freehold nature of our ownership reflected in valuation. So if you compare valuations of freehold businesses in the market to leaseholds, historically, you would say that, that hasn't really come through. What this structure does is to sort of crystallize that point and sharpen the focus on what is the value being attributed to operations and what is the value being attributed to the property.

The next question has been submitted by Paul Ruddy . Could you give us a reminder of some of the key economics of franchisee model versus managed/leased? And what are the attractions of converting the Brains units?

Okay. Just very briefly on this. I think there is quite a lot written about it in various reports that we've done over time. The key point about the franchise model is that its sweet spot is in relatively smaller, relatively wet-led pubs, which, in many models, would be run as tenanted and leased. And the particular advantage that it brings is that the primary issues that people have with tenanted and leased pubs is, number one, they don't like paying rent. And number two, they think they pay too much for the beer, wines and spirits that they buy. And whether you agree with that analysis or not, it's the sort of bone of contention between landlord and tenant and has been for a long time. What the franchise model does is to replace that structure with a model, whereby the licensee earns their income by earning a percentage of the turnover that runs through the pub. They don't pay rent. They don't buy beer. They don't buy wines and spirits. It's just that the more they sell, the more they earn, and it's sort of simple as that. And we provide the infrastructure, the tills, the products, the menus, whatever they need to run that particular pub as judged by Marston's to be the right way to run that pub. And the whole thing is derisked from a licensee perspective. The only cost really that they bear is people cost, the people they run within the -- that they use to run the pub. But the rest of it is -- their income depends on their entrepreneurial ability to drive top line, and that's really the model. And when we look at the Brains estate, as indeed when we look at our own estate, we think that the trend in the market within our estate for tenanted and leased pubs is that more pubs will go across to that franchise model over time because it's lower risk and the incentives are there for the licensee to drive the business.

Yes. Ralph, if I could add. Just to put this into effectively what would you pump into a spreadsheet as a model, the OPSAT of a managed pub and the OPSAT of a franchised pub are almost identical. So effectively, we have sales, cost of sales, margin, there is a labor line in both. One, we -- if you're managing the pub, you have a labor line. Clearly, as the sales go up, that labor percentage falls. In franchise, that labor percentage is fixed. That's the only difference between the 2 profit and loss accounts. And clearly, in a leased and tenanted model, what you have got is rental income and the wholesale income from selling drink into the leased and tenanted pub. So typically, that -- you're not realizing or recognizing the retail sales so the margin percentage of leased and tenanted pub tends to be circa 50%, give or take in very, very simplistic terms.

And the final point, Paul , I'd make on it is that you reduce political risk significantly. The tenanted and leased model has been subject to political intervention many times over the years. It probably will continue to be so. And this reduces that risk very, very significantly. We don't have any tenants in leased pubs in Scotland at the moment. But if you do, you will be looking at the political intervention up there really with some discomfort because of what's happening with the tie in Scottish tenanted and leased pubs. This kind of model would reduce that risk and remove it, in fact.

Ralph, Andrew, thank you very much indeed. That was, in fact, the final question. So Ralph, I'll hand back to you just for your final word.

Thank you very much, everybody, for attending this presentation. Just a final couple of comments from me really about where we currently sit and how we're viewing things. We're pleased that we've got a date for reopening, and we view the budget overall as having been pretty fair to the pub sector and I'd say, in particular, to our kind of business. So I don't have any strong points to make about that, except that we probably got as much out of it as we think we could have done. So our focus at this point is going to be around opening as many outside areas profitably as we can on the 12th, then getting into May, bringing people inside. A really important point, though, is then when we get to the 21st of June, what do things then look like? And I'm going to leave you with this point because I think it's an important one. When the Prime Minister stood up and gave the 21st of June date, he said -- and at that date, we expect to remove restrictions. And clearly, there's then a question mark about what that actually means. And I put a minister on the spot on this last week and said, "Can we just clarify on 21st of June what we're thinking about in that context? So we imagine that people will be back standing at the bar, that the euros will be playing on the television and that's what we're aiming for. And he said, "Yes, that's what we're aiming for." So with that positive and optimistic thought, we conclude our presentation. Thank you.