Charles Wells profits hit as costs take their toll

Reorganisation costs and rising raw material prices combined to dent Charles Wells' profitability in 2007.

But despite a 17 per cent drop in pre-tax profits the group maintained it was positive when looking ahead to the rest of 2008.

"2007 was a very challenging year for everyone here," said chief executive Paul Wells, "with a huge number of projects and changes to the way we have worked in the past."

Factors that weighed heavily on the group in 2007 was the assimilation of Young's brewing operation into its own Havelock Street site, and the introduction of the Courage beer brands into its operation.

But, said Wells, "the company is well placed for the future, despite short term concerns about the consumer economy and the impacts of the smoking ban, and we are positive about this year's trading outlook".

In the year to the end of September last year Charles Wells' pubs were largely unaffected by the smoking ban, Wells said. "We were completely ready and in some places actually picked up trade after the ban kicked in [on July 1]," he added.

He was confident that trading profits "will improve in 2008". The first quarter of the current financial year was "very satisfactory", he added.

Wells' comments came as the group reported overall turnover for the year to September 29 2007 up 28 per cent at £210.9m.

However, rising raw material prices, including the price of malting barley and packaging material, together utility hikes and costs associated with creating Wells & Young's Brewing Company (W&YBC), dented group operating profits, which fell 37.7 per cent to £6.3m.

Total pre-exceptional operating costs rose 30 per cent to £202.1m, with a large chunk of this increase accounted for by a 29 per cent hike - £143.8m - in raw material costs.

Meanwhile exceptional costs related to establishing a new distribution set-up and resolving pension issues following the creation of W&YBC amounted to more than £2.3m.

Subsequently the group's pre-tax profits - after £4m-worth of property disposal gains - slid 17.3 per cent to £8.3m.

Post-tax profits of £7.9m - up 7.8 per cent - were boosted by a deferred tax credit relating to pension contributions.

Wells noted the group's 251-strong tenanted and leased pub estate had seen profits up two per cent, with like-for-like sales up four per cent.

However, W&YBC's profits of £3m "were lower than expected due to increased input costs, high production costs in the start up year, higher interest costs and the slowdown of Corona Extra's growth rate".

Wells said the group "suffered from indigestion" as it coped with brewing the Courage beer brands which it acquired from Scottish & Newcastle.

Other factors, such as high workloads, overtime costs and packaging inefficiencies also contributed to the profits dip, although the situation was "much more manageable now", he added.

"I can live with 2007, so long as we see improvements in 2008, 2009 and 2010. And the indications are we will."