20th Nov 2007 07:01
Enterprise Inns PLC20 November 2007 20 November 2007 Enterprise Inns plc Preliminary announcement For the financial year ending 30 September 2007 Enterprise Inns plc (ETI), the leading specialist operator of leased andtenanted pubs in the UK, today announces its results for the year ending 30September 2007. Results highlights 2007 2006 Increase--------------------------------------------------------------------------------Pro-forma EBITDA * # £526m £507m 3.7%--------------------------------------------------------------------------------EBITDA* £528m £547m--------------------------------------------------------------------------------Profit before tax and exceptional items £301m £315m--------------------------------------------------------------------------------Earnings per share 53.4p 50.5p^ 5.7%--------------------------------------------------------------------------------Adjusted earnings per share + 39.6p 34.2p^ 15.8%--------------------------------------------------------------------------------Dividends 15.6p 13.5p^ 15.6%-------------------------------------------------------------------------------- * Earnings before interest, tax, depreciation, amortisation and exceptional items # Adjusted for the effects of the disposal of 769 pubs to Admiral Taverns in September 2006 and of the Scottish estate of 137 pubs in December 2006. See note 4. + Excludes exceptional items ^Restated for the sub-division of shares from 5 pence to 2.5 pence per share on 17 January 2007. Other highlights • At 30 September 2007 the estate comprised 7,763 pubs valued at £5.7 billion. • The quality of the pub estate has been improved through the acquisition and disposal of pubs and capital expenditure of £75 million. • Average EBITDA per pub has increased by 6.2% to £68,200. • 102.9 million shares were repurchased during the year for consideration of £658 million (excluding costs). Commenting on the results, Ted Tuppen, Chief Executive said: "In a challenging year for ETI and our licensees, the team has workedsuccessfully to improve the quality of the pub estate, grow licenseeprofitability and deliver substantial growth in earnings and dividends. The newfinancial year has started well, but we remain cautious about consumerconfidence and the impact through the coming winter of the smoking ban. In spiteof these uncertain conditions, we believe that the quality of our pub estatewill deliver performance ahead of the market and that the team will deliverfurther solid growth in shareholder value." Enquiries:Emma Baines, Investor Relations Manager 07990 550210Ted Tuppen, Chief Executive 0121 733 7700David George, Chief Financial Officer 0121 733 7700 The Preliminary Results presentation will be available on the company website atwww.enterpriseinns.com. A live video webcast of the presentation will beavailable on the investor zone section on the above website. Alternatively, alive recording of the presentation can be accessed at 9.30am GMT by dialling +44 (0) 20 7138 0835 or +1 718 354 1172 (USA callers) quoting passcode 9084120.A replay of the conference call will be available for 7 days on +44 (0) 20 78061970 , +1 718 354 1112 (USA) Replay Passcode:9084120#. RESULTS The year to 30 September 2007 has once again seen investment in enhancing thequality of the Enterprise Inns (ETI) estate and increasing earnings for ourlicensees and shareholders alike. On a like for like basis, which excludes the impact of batch disposals,pro-forma EBITDA increased by 3.7% to £526 million. Profit before tax andexceptional items of £301 million resulted in adjusted earnings per share of39.6p, an increase of 15.8% over the prior year. Accordingly, the Board isrecommending an increase of 15.6% in the dividend paid to shareholders, giving atotal for the year of 15.6 pence per share. Dividend cover based on adjustedearnings per share is 2.5 times. The final dividend of 10.4 pence will bepayable on 21 January 2008 to shareholders on the register on 28 December 2007. STRATEGY ETI remains focused on the two key pillars of its business strategy: to be theleading specialist operator of leased and tenanted pubs in the UK and to deliverlong term sustainable growth in shareholder value. Our licensees have had a tough year. After a reasonable Christmas and New Year,the summer brought with it the challenges of the ban on smoking, miserableweather and extensive flooding and, latterly, a general deterioration inconsumer confidence as a number of adverse economic factors created uncertaintyin the minds of many consumers. Through these testing times, the strength of the leased and tenanted partnershiphas continued to deliver steady results. We have worked closely with ourlicensees to create effective smoking solutions, sometimes through investmentand always with encouragement, advice and support. The majority of our estate isnow well positioned to manage the risks and opportunities that the ban hascreated, although we envisage that the ban will lead to a number of pub closuresacross the industry, particularly amongst lower quality, wet-led outlets. Thepoor summer weather was a disappointment for licensees, particularly those whoinvested heavily in gardens and outside spaces. The summer floods resulted inthe temporary closure of 207 pubs, some for several months and it is a tributeto our licensees and to our team that they "rolled up their sleeves" and got onwith sorting out and reopening their pubs. Consumer confidence appears to havebeen adversely affected by increases in taxation, interest rates, utility bills,food and fuel prices together with the uncertainties surrounding globalfinancial markets. It is difficult to tell how this will impact on consumerbehaviour over the next year, although caution would seem to be the watchword. The resilience of our operating model has delivered good trading results in thistesting year, with shareholder returns further enhanced by our commitment toreturning cash to shareholders through our ongoing share buy-back programme,which saw ETI purchase for cancellation some 102.9 million shares during theyear, representing 17% of the shares in issue (excluding treasury shares) at thebeginning of the year. TEAM There have been a number of structural and personnel changes during the year,providing ever-improving services to our licensees and strengthening the team atevery level to ensure that we are well positioned to meet the challenges of thebusiness. Our Associate Regional Manager programme has been particularly important,identifying and developing top quality candidates through a six month full timetraining programme to take on the key role of regional manager in the ETIestate. During the year, this award-winning programme has successfully trainedand promoted eight candidates who are adding a strong new dimension to our fieldbased teams. Commitment, ownership and reward are vital ingredients in the motivation andretention of key staff and we are delighted that all senior managers and 91% ofall employees with over two years service at ETI have some form of interest inownership of the business, through direct share ownership, share options, ShareIncentive Plans and Save As You Earn schemes. During the year, our ShareIncentive Plan won two awards, one for the Best New Share plan for a FTSE 100company, another for Best Communication Programme for a company with up to 1000employees. ESTATE The quality, value and profitability of the ETI estate have continued to improveduring the year. Investment of £75 million (2006: £54 million) alongside asimilar amount from our licensees, saw developments at almost 1,600 pubs, eitherthrough major schemes or minor refurbishments. Whilst much of this investmentwas initiated through business reviews addressing the challenges of the smokingban, the end results reflect real improvements in the overall quality andprofitability of the chosen pubs, whether through the creation of foodofferings, accommodation or simply upgrading existing facilities for the benefitof customers. In September 2006, we completed the sale of 769 pubs to Admiral Taverns, pubswhich we had identified as not fitting our quality and profitability profile forthe future. This was followed on 5 December 2006 by the sale of our entireScottish estate of 137 pubs to Retail and Licensed Properties Limited for aconsideration of £115 million which generated a profit over book value of £13million. In addition, we sold 17 pubs and some surplus land for £13 million,generating a further profit of £9 million. Our attention remained focused on the market for individual acquisitions, whereour estates team have found a steady supply of top quality pubs, allowing ETI topurchase 108 great pubs during the year for a total consideration of £91million. In the absence of value enhancing corporate transactions, we continueto view these individual acquisitions, generally at EBITDA multiples of around10 times, as the best route to creating value for shareholders. Core growth, complemented by our continuing policy of investment and churn hasseen EBITDA per pub increase to £68,300 for the 7,763 pubs which we owned at 30September 2007. The book value of the pub estate at the year end, valued on anindividual pub by pub basis, increased to £5.7 billion, equivalent to an averagevalue of £736,000 per pub. As in previous years, our annual estates review is designed to form a view ofthe quality and sustainability of every pub in the estate. The past two yearshave seen the number of pubs with outside trading areas increase from 83% to91%, pubs serving food increase from 81% to 88% and it is encouraging to seethat the team continue to rank more than two thirds of our pubs as 'very good'or 'excellent'. The review did however identify that a number of our pubs haveor may become unviable as a result of changing market conditions, notably thesmoking ban. Against this background we have identified, and put on the marketfor sale, 96 pubs. We expect to sell these pubs unlicensed, for alternative use,and are confident that we will achieve sale proceeds in excess of book value. LICENSEES As the quality of our estate improves, so do the opportunities for licensees tobuild and sustain a profitable business. As ETI seeks to attract the bestlicensees, it remains a priority to ensure that the package that we offer isfair, that rents are not excessive and that real help is offered, whererequired, to make the most of the business opportunities that exist in anyparticular market. Based upon our annual review of estate profitability, we estimate that theaverage level of licensee profitability in the 7,763 pubs that we owned at 30September 2007 has increased by around 4% to £47,000. This increase reflects tosome extent the benefit of churn in the estate, but we nevertheless estimatethat on a like for like basis licensee profitability, despite continuing costand margin pressures, has increased by 2.6%, broadly in line with inflation. The ETI estate continues to be attractive to licensees, who recognise thequality of the pubs in our portfolio and the essential fairness of our package.This is once again supported by key performance indicators: • During the year, some 85,000 visitors used our internet pub search facility, resulting in more than 1,500 formal applications, of which 80% were received on line. • With 84% of the estate let on long term, assignable leases, most changes take the form of lease assignments. During the year there have been 790 assignments, at an average premium of £69,000 (£86,000 including fixtures and fittings). • Rent concessions at 30 September 2007 increased marginally to £1.5 million, around 0.5% of rent roll. • 1,457 rent reviews were completed during the year, with an average rental increase of 2.7% per annum. Just three rent reviews went to arbitration, two of which were found in favour of ETI. • Overdue balances are at similar levels to last year and bad debt costs remain around 0.1% of turnover. Market conditions will continue to test our licensees and we believe that manypoorer quality pubs across the industry are likely to close. Nevertheless, giventhe quality and profitability of the ETI estate, we are confident that our pubsand licensees will continue to meet the challenges, gain market share andprosper. SHARE BUYBACK PROGRAMME During the year we continued to return cash to shareholders through acombination of our share buy-back programme and dividend payments. We purchased102.9 million shares in the year at a cost of £658 million (excluding associatedcosts). In addition, we paid £79 million of dividends and therefore returned atotal of £737 million to shareholders during the year. At the preliminaryresults presentation in November last year we announced that we intended toreturn at least the same level of cash to shareholders as we did in the year toSeptember 2006. The total returned this year of £737 million compares to a totalreturn in the previous year of £463 million, representing an increase of 59%.Taking into account the cash flow needs of the business, we expect to continuethe share buy-back programme in the current financial year. Since 30 Septemberwe have purchased 3.5 million shares at a cost of £21m. FINANCIAL STRUCTURE Cash flow Free cash inflow during the year amounted to £75 million, based on operatingcash inflow and after deduction of mandatory payments in respect of interest andtax and discretionary payments in respect of capital expenditure and dividends. Debt facilities The Group has a flexible financing structure including a syndicated bank debtfacility of £1 billion, corporate bonds and securitised bonds. At 30 September2007 underlying net debt was £3,716 million compared to £3,166 million at thestart of the year. Underlying net debt represents amounts owed to banks andother lenders net of cash retained in the business. During the year we repaid£81 million of securitised bonds from the proceeds of the sale of pubs and drewdown the remaining balance of our syndicated bank facility. Financial leverage The two key metrics the Group uses to measure financial leverage are interestcover based on EBITDA and the ratio of underlying net debt to EBITDA. At 30September 2007, interest cover was 2.4 times and underlying net debt to EBITDAwas 7 times. The Board considers this to be the optimal leverage level for the Group based onthe current financing structure. We announced at our interim resultspresentation in May that we expected, subject to market conditions, therefinancing of the Unique securitisation to be completed by the end of thecalendar year. However, to avoid pricing new long term debt at a time ofuncertainty in the debt markets, we consider that a delay into 2008 isappropriate. We believe that there is scope to increase the leverage in the Group to aroundeight times underlying net debt to EBITDA in a revised financing structure andthe proposed refinancing of the Unique securitisation next year will aim tobring the Group closer to this level. Balance Sheet The book value of the pub estate is £5.7 billion which includes a revaluationincrease in the year of £312 million. The net assets of the Group at year-endwere £1,483 million which compares to £1,602 million as at 30 September 2006.Notwithstanding profit generation and an increase in the value of our pubs, thereduction in net assets arises as a result of the share buy-back programme. Tax charge The pre-exceptional tax charge of £85 million represents 28% of profit beforetax and exceptional items. The total tax charge of £46 million is 14% of profitbefore tax. The exceptional tax credit of £39 million comprises two significant deferred taxcredits partially off-set by an exceptional deferred tax charge. The Finance Act2007 reduced the rate of UK corporation tax to 28% with effect from April 2008.A one-off credit of £23 million arises as a result of a reduction in deferredtax balances due to this change. A second credit of £28 million arises inrelation to indexation on the tax base cost of certain properties. A deferredtax charge of £12 million has been recognised in relation to the movement infair value of interest rate swaps and profit on sale of property. Cash outflow in respect of tax for the year was £71 million, equivalent to 24%of profit before tax and exceptional items. Exceptional items The Group has elected to classify certain items as exceptional and present themseparately on the face of the Income Statement. Exceptional items are thosewhich are separately identified by virtue of their size or nature to allow afull understanding of the underlying performance of the Group. As a result, theGroup focuses on 'pre-exceptional' performance measures in order to compareunderlying performance year on year. The most significant exceptional items in the year are profit on disposal ofproperty, plant and equipment of £22 million and movements relating to the fairvalue of financial instruments of £16 million. As discussed above, there is alsoa significant exceptional tax credit in the year of £39 million. REAL ESTATE INVESTMENT TRUSTS (REITs) The Group is involved in ongoing discussions with HMRC regarding a potentialconversion to REIT status. HMRC has expressed the view that the Group, ascurrently structured, does not meet the qualifying criteria for admission as aREIT. We are, however, currently exploring with HMRC whether an internalrestructuring of the Group's activities, currently being considered by the Boardand designed to enhance shareholder returns and optimise the benefits of ourproposed refinancing, would result in the Group becoming eligible for admissionto the REIT regime. HMRC is considering various aspects of this proposedrestructuring and we will update shareholders when there are significantdevelopments to report. INDUSTRY ISSUES Ban on smoking in pubs There is now a total ban on smoking in pubs throughout the UK and there has beenan almost universal level of acceptance amongst pub-goers. Many people whoavoided pubs because of the smoky atmosphere are now potential customers andforward-looking licensees are capitalising on this opportunity. Often, theseopportunities arise through the provision of good quality food, and we estimatethat food revenues across the ETI estate have risen by 13% in the past year, nowrepresenting at least 20% of average pub turnover. With standards of pub foodconstantly improving, there is a risk that the market place for "value formoney" food may become overcrowded so our advice to licensees tends towards "doit really well or not at all", focusing above all on the key strengths of eachindividual pub, and always trying to make sure that their pub is the best ineach locality. The coming year will be difficult for some pubs and we remaincautious about the next six to nine months. However, we are confident of apositive outcome as the smoking ban becomes an accepted part of pub-going andlicensees and customers alike enjoy the benefits of the more pleasant,healthier, smoke free regime. Responsible drinking The pub industry, through its trade bodies working with Government and thepolice, has made real progress over the past couple of years tackling the issuesof under age drinking and irresponsible promotions. Proof of Age cards are now aregular and accepted part of pub-going for under 21s, with the result that thenumber of under- age drinkers being served in pubs has been significantlyreduced. Furthermore, and without the need for legislation, industry selfregulation has resulted in a marked reduction in irresponsible promotions thatencourage excessive drinking, such as happy hours or "two for one" offers. The pub is a highly regulated, professionally run environment, which should, andgenerally does, live up to its reputation as "the home of responsible drinking".Unfortunately, drink (and drug) fuelled anti social behaviour remains a seriousproblem to be tackled at all levels in society. In this regard, one mustquestion the pricing policies of the major supermarkets and some other off tradeoutlets which sell alcohol, which is generally consumed in an unregulatedenvironment, at very low prices. Not only do they, on occasion, sell alcohol atprices below cost but they have cheap alcohol at the heart of promotionspolicies, particularly in the run up to Christmas. When it comes to theimportant issue of tackling irresponsible drinking, it is up to all stakeholdersto face up to their share of responsibility. CONCLUSION AND OUTLOOK In a challenging year for ETI and our licensees, the team has workedsuccessfully to improve the quality of the pub estate, grow licenseeprofitability and deliver substantial growth in earnings and dividends. The newfinancial year has started well, but we remain cautious about consumerconfidence and the impact through the coming winter of the smoking ban. In spiteof these uncertain conditions, we believe that the quality of our pub estatewill deliver performance ahead of the market and that the team will deliverfurther solid growth in shareholder value. Group Income StatementFor the year ended 30 September 2007 2007 2006 Pre- Pre- exceptional Exceptional Total exceptional Exceptional Total Notes items items items items £m £m £m £m £m £m--------------------------------------------------------------------------------------------------------Revenue 921 - 921 970 - 970Cost of sales (359) - (359) (387) - (387)--------------------------------------------------------------------------------------------------------Gross profit 562 - 562 583 - 583-------------------------------------------------------------------------------------------------------- Administrative expenses (34) - (34) (36) (2) (38)--------------------------------------------------------------------------------------------------------EBITDA + 528 - 528 547 (2) 545-------------------------------------------------------------------------------------------------------- Depreciation andamortisation (7) - (7) (8) - (8)--------------------------------------------------------------------------------------------------------Operating profit 521 - 521 539 (2) 537-------------------------------------------------------------------------------------------------------- Net profit on sale ofproperty, plant andequipment - 22 22 - 67 67Movements fromrevaluation of pub estate - (2) (2) - (2) (2) Interest receivable 8 - 8 6 - 6 Interest payable (228) - (228) (230) - (230)Write off ofunamortised issue costs - - - - (3) (3)Movement in fair value of financialinstruments - 16 16 - 40 40--------------------------------------------------------------------------------------------------------Total finance costs (228) 16 (212) (230) 37 (193)----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Profit before tax 301 36 337 315 100 415-------------------------------------------------------------------------------------------------------- Taxation 5 (85) 39 (46) (95) 5 (90)--------------------------------------------------------------------------------------------------------Profit after tax andattributable to members of the parentcompany 216 75 291 220 105 325-------------------------------------------------------------------------------------------------------- Earnings per Share ^Basic 6 53.4p 50.5pDiluted 6 53.0p 50.0p Adjusted * 6 39.6p 34.2pAdjusted diluted * 6 39.3p 33.9p Dividends^ 7Dividends paidper share inrespect of theyear 5.2p 4.5pDividends proposed per share inrespect of the year 10.4p 9.0p ------ ------ 15.6p 13.5p ------ ------ + Earnings before interest, tax, depreciation and amortisation * Excludes exceptional items ^Restated for the sub-division of shares from 5 pence to 2.5 pence per share on 17 January 2007. Group Statement of Recognised Income and ExpenseFor the year ended 30 September 2007 2007 2006 £m £m--------------------------------------------------------------------------------Unrealised surplus on revaluation of licensed estate 312 323Movement in deferred tax liability related to revaluationof licensed estate (75) (91)Tax related to share schemes recognised directly in equity 3 5Gains on cash flow hedges 6 -Deferred tax relating to gains on cash flow hedges (2) -Actuarial gain on defined benefit pension scheme 2 -Deferred tax relating to gain on defined benefit pension scheme (1) -Reduction in deferred tax balances for change in UK tax rate 24 ---------------------------------------------------------------------------------Net income recognised directly in equity 269 237 Profit for the year 291 325--------------------------------------------------------------------------------Total recognised income and expense for the yearattributable to members of the parent company 560 562-------------------------------------------------------------------------------- Group Balance SheetAt 30 September 2007 Re-stated# 2007 2006 £m £m--------------------------------------------------------------------------------Non-current assetsGoodwill 417 417Investments - 2Intangible assets: operating lease premiums 19 24Property, plant and equipment 5,710 5,343Pension scheme 2 -Financial assets 4 1-------------------------------------------------------------------------------- 6,152 5,787 Current assetsAssets held for sale 8 6Trade and other receivables 91 94Cash 90 111Financial assets 4 1-------------------------------------------------------------------------------- 193 212 Non-current assets held for sale 11 10--------------------------------------------------------------------------------Total assets 6,356 6,009-------------------------------------------------------------------------------- Current liabilities Trade and other payables (200) (210)Current tax payable (59) (52)Financial liabilities (77) (128)Provisions - (1)-------------------------------------------------------------------------------- (336) (391)Non-current liabilitiesFinancial liabilities (3,819) (3,316)Accruals and deferred income (4) (4)Provisions (3) (4)Deferred tax (711) (692)-------------------------------------------------------------------------------- (4,537) (4,016)--------------------------------------------------------------------------------Total liabilities (4,873) (4,407)----------------------------------------------------------------------------------------------------------------------------------------------------------------Net Assets 1,483 1,602-------------------------------------------------------------------------------- EquityCalled up share capital 14 16Share premium account 486 486Revaluation reserve 1,096 845Capital redemption reserve 11 9Merger reserve 77 77Treasury share reserve (227) (227)Other reserve (31) (42)Cashflow hedge reserve 4 -Profit and loss account 53 438--------------------------------------------------------------------------------Enterprise Inns shareholders' equity 1,483 1,602-------------------------------------------------------------------------------- # see note 2 Group Cash Flow StatementFor the year ended 30 September 2007 2007 2006 £m £m-------------------------------------------------------------------------------- Cash flow from operating activitiesOperating profit 521 537Depreciation and amortisation 7 8Share-based expense recognised in profit 3 3Decrease/(increase) in receivables 6 (10)Decrease in payables (10) (2)Decrease in provisions (2) (3)(Increase)/decrease in current assets held for sale (2) 1-------------------------------------------------------------------------------- 523 534Tax paid (71) (69)--------------------------------------------------------------------------------Net cash flows from operating activities 452 465 Cash flows from investing activitiesPayments to acquire public houses (91) (80)Payments made on improvements to public houses (75) (54)Payments to acquire other property, plant and equipment (3) (7)Receipts from sale of property, plant and equipment 128 362Receipts from sale of investments 1 ---------------------------------------------------------------------------------Net cash flows from investing activities (40) 221 Cash flows from financing activitiesInterest paid (228) (234)Interest received 8 7Issue costs of long-term loans - (4)Equity dividends paid (79) (70)Payments to acquire shares held in employee benefit trust - (17)Payments to acquire own shares (667) (388)Receipts from exercise of share options 5 5Re-structuring of interest rate swaps (1) (30)Debt due in less than one year- new short term loans 75 -- repayment of short term loans (40) -Debt due beyond one year- new long term loans 685 602- repayment of long term loans (191) (542)--------------------------------------------------------------------------------Net cash flows from financing activities (433) (671) Net (decrease)/increase in cash (21) 15Cash at 1 October 111 96--------------------------------------------------------------------------------Cash at 30 September 90 111-------------------------------------------------------------------------------- Notes 1. Status of information The financial information contained within this announcement does not constitutestatutory accounts as defined in section 240 of the Companies Act 1985. Thefigures for the year ended 30 September 2006 are based on the statutory accountsfor that year. These accounts, upon which the auditors issued an unqualifiedopinion, have been delivered to the Registrar of Companies. The informationcontained in this announcement was approved by the Board on 19 November 2007. 2. Accounting policies and basis of preparation These results have been prepared in accordance with the International FinancialReporting Standards (IFRS) which applied at 30 September 2007. The 2006 Balance Sheet has been adjusted with respect to the treatment ofcontingent agreements entered into regarding share buybacks during the closeperiod. In accordance with IAS 32 'Financial Instruments: Presentation' afinancial liability has been recognised as the Company has entered into acontingent agreement with a third party which requires the Company to purchaseshares acquired during the close period. The Balance Sheet has been re-statedfor the comparative period to recognise the financial liability estimated tohave existed at that date of £74 million. 3. Exceptional items The Group has elected to classify certain items as exceptional and present themseparately on the face of the Income Statement. Exceptional items are classifiedas those which are separately identified by virtue of their size or nature toallow a full understanding of the underlying performance of the Group andinclude the following: Exceptional administrative costs The exceptional item shown within administrative costs in 2006 relates torestructuring costs. Net profit on sale of property, plant and equipment Net profit arising from the sale of property, plant and equipment. Movements from revaluation of pub estate Under IFRS any revaluation that causes the book value of a pub to fall belowhistoric cost will lead to a charge in the Income Statement. If that same publater recovers in value so that its book value exceeds historic cost, theincrease in value is credited to the Income Statement to the extent that a debitwas previously recognised. Where pubs identified for disposal are written downto 'fair value less costs to sell', this write down is also recognised in thisline. Most of the impact of the annual revaluation exercise is accounted for inequity and recognised in the Statement of Recognised Income and Expense. Movement in fair value of financial instruments Under IFRS interest rate swaps are re-valued to fair value at each Balance Sheetdate and the movement is recognised in the Income Statement unless hedgeaccounting is adopted. The movement in the fair value of swaps where hedgeaccounting is not applied is shown as an exceptional item and in 2007 thisamounted to a credit of £19 million. The other item included in this line is anyIncome Statement impact of the un-wind of the share buy back liability. In 2007this was a debit of £3 million. The total 'movement in fair value of financialinstruments' in 2007 is therefore a credit of £16 million. Taxation Under IFRS, a deferred tax liability has been recognised on the Balance Sheetrelating to the pub estate. On transition to IFRS, the Group elected to applyIFRS 3 retrospectively to acquisitions from 1 January 1999. This led to anincrease in goodwill in respect of this deferred tax. As this pre-acquisitionliability reduces due to capital gains indexation relief, a credit is recognisedin the Income Statement. This credit of £28m has been classified as anexceptional item. A further one off credit has been recognised to reflect the changes in deferredtax balances arising from a reduction in corporate tax rates in the UnitedKingdom which have been substantively enacted at the Balance Sheet date. Thiscredit of £23m has been classified as an exceptional item. A deferred tax charge of £12 million has been recognised in relation to themovement in fair value of interest rate swaps and profit on sale of property.The total exceptional tax credit is therefore £39m. 4. EBITDA - impact of disposals of pubs The Group disposed of 769 pubs to Admiral Taverns on 6 September 2006 and itsScottish estate of 137 pubs to Retail and Licensed Properties Limited on 5December 2006. The pubs disposed of generated a total of £2m of EBITDA beforeexceptional items in the year ended 30 September 2007 and £40m in the year ended30 September 2006. EBITDA has been revised for the effects of these disposals toallow a like-for-like comparison of the results of the Group. --------------------------------------------------------------------------------Year ended 30 September 2007 As reported Disposals Pro-forma £m £m £m--------------------------------------------------------------------------------RevenueBeer and cider sales 602 (2) 600Wines, spirits and minerals sales 33 - 33Rents receivable 261 (1) 260Income from amusement and other machines 25 - 25-------------------------------------------------------------------------------- 921 (3) 918Cost of salesBeer and cider cost of sales (326) 1 (325)Wines, spirits and minerals cost ofsales (26) - (26)Leasehold charges (3) - (3)Repairs and maintenance (4) - (4)-------------------------------------------------------------------------------- (359) 1 (358) Administrative expenses (34) - (34)--------------------------------------------------------------------------------EBITDA before exceptional items 528 (2) 526-------------------------------------------------------------------------------- --------------------------------------------------------------------------------Year ended 30 September 2006 As reported Disposals Pro-forma £m £m £m--------------------------------------------------------------------------------RevenueBeer and cider sales 635 (47) 588Wines, spirits and minerals sales 36 (3) 33Rents receivable 270 (15) 255Income from amusement and other machines 29 (4) 25-------------------------------------------------------------------------------- 970 (69) 901Cost of salesBeer and cider cost of sales (349) 26 (323)Wines, spirits and minerals cost ofsales (28) 2 (26)Leasehold charges (4) 1 (3)Repairs and maintenance (6) - (6)-------------------------------------------------------------------------------- (387) 29 (358) Administrative expenses (36) - (36)--------------------------------------------------------------------------------EBITDA before exceptional items 547 (40) 507-------------------------------------------------------------------------------- 5. Taxation The pre-exceptional tax charge of £85m for the year equates to an effective taxrate of 28.2%. This effective tax rate does not include the effect ofexceptional items. 2007 2006 Pre- Pre- exceptional Exceptional Total exceptional Exceptional Total items items items items £m £m £m £m £m £m--------------------------------------------------------------------------------------------Current tax 83 - 83 79 (1) 78Deferred tax 2 (39) (37) 16 (4) 12--------------------------------------------------------------------------------------------Total 85 (39) 46 95 (5) 90-------------------------------------------------------------------------------------------- 6. Earnings per Ordinary Share The calculation of basic earnings per ordinary share is based on earnings of£291m (2006: £325m) and on 545.0 million (2006: 644.2 million^) shares being theweighted average number of equity shares in issue during the year afterexcluding shares held by trusts relating to employee share options and sharesheld in treasury. Adjusted earnings per share, which the directors believe reflects the underlyingperformance of the Group, is based on earnings adjusted for the effects ofexceptional items, net of tax, of £216m (2006: £220m) and on 545.0 million(2006: 644.2 million^) shares being the weighted average number of equity sharesin issue during the year after excluding shares held by trusts relating toemployee share options and shares held in treasury. Diluted earnings per share is based on profit for the year of £291m (2006:£325m) and adjusted profit of £216m (2006: £220m) and on 549.1 million (2006:649.4 million^) ordinary shares being the weighted average number of equityshares in issue during the year adjusted for dilutive ordinary shares relatingto employee share options. ^Restated for the sub-division of shares from 5 pence to 2.5 pence per share on17 January 2007. 7. Dividends 2007 2006Paid during the year £m £m--------------------------------------------------------------------------------Equity dividends on ordinary shares:Final dividend relating to prior year 52 42Interim dividend for current year 27 28-------------------------------------------------------------------------------- 79 70-------------------------------------------------------------------------------- Proposed for approval by shareholders at the AGMFinal dividend for current year * 52 52 * For 2007 this represents an estimate of the cash outflow that will be incurredwhen the final dividend is paid in January 2008. For 2006 this represents theactual cash outflow incurred. Proposed dividends are not accounted for until they are approved at the AGM. Thefinal dividend of 10.4 pence per share will be paid on 21 January 2008 tomembers on the register on 28 December 2007. 8. Statement of changes in equity Re-stated# 2007 2006 £m £m--------------------------------------------------------------------------------Total equity at start of year 1,602 1,573Total recognised income and expense for the year 560 562Equity dividends paid (79) (70)Consideration paid for purchase of own shares - (230)Cancellation of ordinary shares (661) (166)Change in provision for share buy-backs * 53 (74)Employee share option entitlements exercised in the year 5 4Share-based expense recognised in operating profit 3 3--------------------------------------------------------------------------------Total equity at end of year 1,483 1,602-------------------------------------------------------------------------------- # see note 2 * The 2006 Balance Sheet has been re-stated to include a provision for share buybacks (see note 2). The provision of £74m was set up at 30 September 2006 asthis was the first date at which such a liability existed. The provision at 30September 2007 is £21m and the change in provision during the year is therefore£53m. 9. Additional cash flow information a) Reconciliation of net cash flow to movement in net debt Re-stated# 2007 2006 £m £m--------------------------------------------------------------------------------(Decrease)/increase in cash in the year (21) 15Cash inflow from change in debt (529) (30)Issue costs of new long term loans - 4--------------------------------------------------------------------------------Change in net debt resulting from cash flows (550) (11) Amortisation of issue costs and discounts/premiums onlong-term loans (2) (2)Amortisation of securitised bonds 5 5Change in fair value of interest rate swaps 26 40Change in provision for share buy-backs 53 (74)Change in finance lease payables 1 -Write off of unamortised issue costs - (3)--------------------------------------------------------------------------------Movement in net debt in the year (467) (45) Net debt at start of year (3,331) (3,286)--------------------------------------------------------------------------------Net debt at end of year (3,798) (3,331)-------------------------------------------------------------------------------- b) Analysis of net debt Re-stated# 2007 2006 £m £m--------------------------------------------------------------------------------Corporate bonds (1,185) (1,185)Syndicated bank borrowings (1,035) (425)Securitised bonds (1,586) (1,667)--------------------------------------------------------------------------------Gross debt (3,806) (3,277)Cash 90 111--------------------------------------------------------------------------------Underlying net debt (3,716) (3,166) Capitalised debt issue costs 18 20Fair value adjustments on acquisition of bonds (62) (67)Fair value of interest rate swaps (13) (39)Provision for share buy-backs in close period (21) (74)Finance lease payables (4) (5)--------------------------------------------------------------------------------Net debt (3,798) (3,331)-------------------------------------------------------------------------------- Balance sheet:Current financial assets 4 1Non-current financial assets 4 1Current financial liabilities (77) (128)Non-current financial liabilities (3,819) (3,316)Cash 90 111--------------------------------------------------------------------------------Net debt (3,798) (3,331)-------------------------------------------------------------------------------- Underlying net debt represents amounts repayable to banks and other lenders netof cash retained in the business. # see note 2 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
EI Group