9th Nov 2006 07:02
Punch Taverns PLC09 November 2006 PUNCH TAVERNS PLC("Punch" or "the Group") Preliminary Results for the 52 weeks ended 19 August 2006 Further enhanced estate quality, strong performance, continued growth Punch Taverns plc, the UK's leading operator of over 9,200 pubs, today announcespreliminary results for the 52 weeks ended 19 August 2006. Highlights Financial Results (before non-recurring and exceptional items) • Group revenue up 101% to £1.5 billion (2005: £770 million) • EBITDA increased by 47% to £606 million (2005: £414 million) • Profit before tax up 21% to £250 million (2005: £207 million) • Basic earnings per share up 13% to 74.9p (2005: 66.4p) • Proposed final dividend of 9.0p, bringing the total dividend for the year to 13.4p, representing an increase of 19% (2005: 11.3p) Financial Results (after non-recurring and exceptional items) • Profit before tax up 48% to £281 million (2005: £191 million) • Basic earnings per share up 63% to 94.9p (2005: 58.1p) Operational • Continued growth in the leased estate (7,846 pubs as at 19 August 2006) - Like for like revenue growth +1.0% - 96 quality pubs acquired, 551 non core pubs sold - Investment continued with £78 million spent on enhancing over 950 pubs • 32 week contribution from the Spirit managed estate (1,410 pubs as at 19 August 2006) - Like for like revenue growth +3.6%, core estate +6.0% • Creation of managed estate of the highest quality - Disposal plans largely complete - 389 pubs now sold - Transfer to lease programme on track with 155 conversions completed and a further 175 agreed - Acquisition of 82 pubs from Mill House Inns for £164 million (completed 14 September 2006) • Trading in the current year is in line with expectations Giles Thorley, Chief Executive of Punch Taverns plc, commented: "This has been a year of excellent progress for the Group in which we haveconsolidated further our position as the UK's premier pub company whilstmaintaining the flexibility to maximise future returns for shareholders. "The shape and quality of our leased and managed estates has never been better.We continue to see further opportunities to both invest in and add to ourestates whilst at the same time managing our programmes of conversion anddisposal. "The results for the twelve months showed strong growth and trading in thecurrent year has started well." 9 November 2006 Enquiries: Punch Taverns plc Today: 020 7457 2020Giles Thorley, Chief Executive Thereafter: 020 7255 4002Robert McDonald, Finance Director College Hill Tel: 020 7457 2020Justine WarrenMatthew Smallwood Preliminary Results for the 52 Weeks to 19 August 2006 The financial year to 19 August 2006 was another successful period of progressand strong growth for Punch Taverns. Our core pub business has continued toperform well, whilst the acquisition of Spirit Group in January and various pubdisposals have further improved the quality of our estate, enhanced ourinfrastructure and provided capacity for further growth. Key results for the year, excluding non-recurring and exceptional items, were asfollows: • Revenue of £1,546m, up 101% • EBITDA of £606m, up 47% • Profit before tax of £250m, up 21% • Basic earnings per share of 74.9p, up 13% In recognition of these strong results the Board is recommending a finaldividend of 9.0p per ordinary share, taking the full year dividend to 13.4p, anincrease of 19% on last year. The final dividend will be payable on 26 January2007 to shareholders on the register on 29 December 2006. Our strategy continues to focus on enhancing our pub estate to providesustainable growth through the quality of our pubs and support for our retailersand managers. Our business model revolves around recruitment and extensivetraining of the best people, selection and development of the best pubs, andcreating the best conditions for growth. Through this, and our efficientfinancing structure, we are creating the best quality leased and managed estatesand consolidating our position as the UK's premier pub company, whilst retainingthe flexibility to maximise future returns for shareholders. The excellent results announced today, and the substantial advance in ourbusiness that has driven these results, are testament to the hard work andcommitment of all those people connected with Punch Taverns. We wouldparticularly like to congratulate and thank our pub tenants, lessees andmanagers, and all our colleagues, for their support during the year. Development of our pub estate A key focus of the year has been significant further enhancement in the qualityof our pub estate. On 19 August 2006 Punch owned and operated 9,256 pubs across the UK, an increaseof 12.5% in the year. Of these, 7,846 were operated under lease agreements byindependent retailers, with 1,410 operated under direct management. 94% of ourpubs are owned on a freehold or long leasehold basis. On 5 January 2006 we completed the acquisition of Spirit Group for £2.7bn,comprising 1,830 directly managed pubs with a skilled workforce and supportinginfrastructure. Our strategy is to rationalise the Spirit estate to focus onthe highest quality large outlets, by selling selected non-core pubs andconverting smaller pubs onto lease agreements with independent retailers. The disposal process is now largely complete. By the year end 351 Spirit pubshad been sold for £690m in cash, including a major package of 290 pubs to GIPartners. A further 38 pubs have been sold or contracted for sale since,including 31 Old Orleans pub restaurants to Regent Inns. The lease conversion programme is also progressing well. By year end 74 pubshad converted; that number has now increased to 155 with a further 175 at thelegal contract stage. The terms agreed for the lettings are in line with ourexpectations. We have recently released the third and final phase, comprising266 pubs, and we are on course to complete the programme next summer. Meanwhile we have restructured the managed house operation to focus on thehighest quality core estate, and since the year end we have added 82 furtherexcellent pubs through the acquisition of Mill House Inns for £164m. During the year we have also further enhanced our leased estate, acquiring 96high quality individual pubs whilst selling 551 smaller pubs which we believehave less sustainable prospects particularly in view of the smoking ban. Theprior year acquisitions of InnSpired and Avebury are now fully integrated intothe leased estate. In June, we sold our subsidiary GRS Inns, which primarilyran smaller pubs under temporary management. The overall impact of these changes has been to increase the average annualisedprofit per pub by 30% during the year. Organic growth The leased estate continues to trade well; with like for like revenue growth of1.0% and increasing rent leading to pub profit growth of 1.9%. Average profitper pub across the leased estate rose by 3.8%. Lessee profitability is alsostrong, and continues to increase. The retailer recruitment pipeline is solid, with an average of 129 applicationsa week being received. We have 2,300 screened applicants on our database, andin total let over 1,000 pubs onto substantive agreements in the reportingperiod. We continue to work in partnership with our independent pub retailers to enhancethe business, successfully introducing the new licensing changes and preparingfor a smoking ban. During the year almost 5,000 retailers attended our trainingprogrammes, and over 950 benefited from joint development schemes with Punchinvestment totalling £78m. We are grateful to the Publican newspaper for onceagain recognising our efforts through the award of Leased Pub Company of theYear. The Spirit managed house estate has also performed well, with like for likesales up 3.6% in the whole estate in the 32 weeks since acquisition. Within thecore managed estate, like for like sales growth has been stronger at 6.0%, andoutlet profit growth of 4.6% was achieved despite cost increases, notably inenergy costs and labour. In line with our plan at the time of acquisition, we have made real progress insimplifying the Spirit business. Having sold the pubs with weaker long termprospects, we have now restructured the operation to focus on the core estatewhilst retaining a separate and dedicated team to manage the transition ofselected pubs to lease. The core estate is now simplified into three divisionsof Value Food, Quality Dining and Quality Locals, and we have made excellentprogress with rationalising menus and support activities, and moving thebusiness forward. Whilst the leased and managed estates are operated separately we are able totake advantage of synergy benefits across the Group such as enhanced supplyagreements, information, management development, and a combined approach tocorporate governance and industry issues. Financial These are the first annual results to be prepared under IFRS. A detailedstatement of our revised accounting policies, differences from UK GAAP and theimpact on recently reported results was issued in April 2006 and is available onour website. The acquisition of Spirit, with a headline price of £2,679m, resulted ingoodwill of £235m after incorporating fixed assets valued at £3,061m. Fairvalues on acquisition reflect the net disposal values of pubs sold sinceacquisition; hence there is no profit or loss arising on disposal. The acquisition was funded through the retention of long term secured debt of£1.25bn, new short term banking facilities of £1.25bn, a convertible bond issueof £275m and the issue of £75m new equity. Our strong cash generation, togetherwith pub disposals, enabled us to reduce the short term element of this fundingto £621m by year end, and subsequently to £502m, with new debt used to fund the£164m acquisition of Mill House Inns. Overall net debt at year end of £4,878m was £675m lower than at the interimstage, and included cash of £562m. Debt held is entirely at rates of interestwhich are effectively fixed, and on average was covered 1.94x by EBITDA in theyear. A net exceptional credit of £52m was recorded in the year. Actual expenditureof £8m was incurred on licensing and the reorganisation of Spirit, butsignificant credits totalling £40m were recognised on the mark to market ofcertain interest rate swaps. The tax effect of these items, together with therelease of various tax provisions which are no longer required, gave rise to anexceptional £21m tax credit. The effective tax charge in the year before non-recurring and exceptional itemswas 22%, compared to 19% in the previous year, and included the benefit ofongoing indexation allowance taxation credits. Tax paid in the year was £32m,an effective rate of 13%. Overall profit before tax before non-recurring and exceptional items was £250mwhich gave rise to basic earnings per share of 74.9p on the enlarged shareregister, a growth of 13%. Industry issues Punch Taverns is well placed to actively respond to market driven andlegislative challenges and harness the experience of over 9,200 individualleased, tenanted and managed pub operators. We fully supported the introduction of the new Licensing Act which has providedgreater flexibility of opening hours for our pubs and their customers. Asexpected, extended hours have had little impact on overall trading, but byrelieving the pressure point at closing time, they have helped reduce the numberof alcohol related crime incidents. As the largest operator of pubs in the UK we recognise our responsibility tolead on issues such as anti-social behaviour and under-age drinking and wecontinue to work alongside industry trade bodies to bring about positive change.For example, the Challenge 21 initiative from the British Beer and PubAssociation is being actively promoted to our licensees as a means of combatingthe threat of under aged drinking. We have been recognised for our efforts withthe accolade of Responsible Retailer of the Year from the Morning Advertiser. The forthcoming smoking ban in England and Wales will further evolve the pubexperience, and we have the benefit of learning from the extensive knowledgegained from our 493 strong Scottish pub estate. In Scotland we found that byplanning and preparing for the ban we were able to minimise any adverse impactby providing smoking solutions in our pubs. The introduction of outside smokingareas and better pub amenities, often including a quality food offer, can notonly negate the impact of the ban, but create new trading opportunities. Since the ban in Scotland was introduced, overall sales have been littlechanged, and whilst we remain cautious on the initial impact until a full yearhas elapsed, we are confident that overall quality of trading will ultimatelyimprove. We are well advanced in our preparations for the extension of the smoking baninto England and Wales, where planning regulations are simpler and the marketprimed to a greater degree. 95% of our pubs have usable outside space,awareness is high, and we have an action plan for each pub. A specific smokingsolutions capital fund of £18m has been created. Moreover our ongoinginvestment programme will continue to improve the overall quality of the Punchpub estate for the benefit of all our customers. Board composition We are today announcing a number of changes to the composition of the Board,which are planned to take effect from after the AGM on 24 January 2007. Phil Cox, Chairman, has decided to retire. Phil has overseen the Group througha phenomenal period of growth, first as deputy Chairman, then as Chairman sinceJanuary 2003. We wish Phil all the best in the future. We are pleased toannounce that Phil's position will be taken by Peter Cawdron. Peter has been aNon-Executive director since May 2003 and brings a wealth of experience from anexecutive career including Grand Metropolitan and SG Warburg, and non-executivepositions including Compass Group, Capita Group, Arla and the chairmanship ofGCap Media plc. Following the successful acquisition of Spirit, we have decided to appointAndrew Knight to the Board. Andrew has worked closely with the seniormanagement on the refocusing of Spirit and was appointed Managing Director ofthe Spirit business in February 2006. No information is required to bedisclosed in respect of Andrew Knight pursuant to Listing Rule 9.6.13R (1) to(6). Finally, Martin Glenn has decided to step down as Non-Executive directorfollowing his appointment as Chief Executive of Igloo-Birds Eye. We wish himwell in his new role. We will announce a successor to Martin shortly. Current trading and outlook The new year has started well and the positive trends are continuing, with solidperformance across all areas. We have a very high quality pub estate and a talented management team, and wecontinue to see good opportunities to develop the business further bothorganically and via selective transactions. Our extensive experience means weare well prepared to benefit from the evolution of pub trading, which willaccelerate on the introduction of further smoking legislation, and we remainconfident about the prospects for rest of the year. CONSOLIDATED INCOME STATEMENTfor the 52 weeks ended 19 August 2006 52 weeks to 19 August 2006 52 weeks to 20 August 2005 Non- Before Non- Before recurring non- recurring non- and recurring and recurring exceptional and exceptional and items exceptional items exceptional Total (note 3) items Total (note 3) items Notes £m £m £m £m £m £mRevenueOngoing operations 801.5 - 801.5 782.9 12.8 770.1 Acquisitions(1) 744.6 - 744.6 - - -Revenue 2 1,546.1 - 1,546.1 782.9 12.8 770.1Operating costs before (948.0) (8.2) (939.8) (372.2) (15.6) (356.6)depreciation andamortisationEBITDA(2)Ongoing operations 431.3 (3.4) 434.7 410.7 (2.8) 413.5 Acquisitions(1) 166.8 (4.8) 171.6 - - -EBITDA 2 598.1 (8.2) 606.3 410.7 (2.8) 413.5Depreciation and (46.1) - (46.1) (13.5) - (13.5)amortisationOperating profitOngoing operations 416.0 (3.4) 419.4 397.2 (2.8) 400.0 Acquisitions(1) 136.0 (4.8) 140.8 - - -Operating profit 552.0 (8.2) 560.2 397.2 (2.8) 400.0Profit on sale of 1.4 - 1.4 - - -non-currentassetsFinance income 19.1 - 19.1 11.1 0.3 10.8Finance costs (331.2) (0.1) (331.1) (217.8) (13.8) (204.0)Movement in fair value of 3 39.7 39.7 - - - -interest rate swapsProfit before taxation 281.0 31.4 249.6 190.5 (16.3) 206.8UK income tax (charge) / 4 (34.2) 20.6 (54.8) (44.2) (4.6) (39.6)creditProfit for the financial 246.8 52.0 194.8 146.3 (20.9) 167.2period attributable toequity shareholders Earnings per share 5Basic (pence) 94.9 74.9 58.1 66.4Diluted (pence) 92.4 73.6 56.9 65.1 Dividend per share paid or 6 13.4 11.3proposed in respect of theperiod (pence) Total dividend paid or 6 35.3 29.4proposed in respect of theperiod (£m) 1 Relates to the acquisition of Spirit Group Holdings Limited, ultimate parentof the Spirit trading companies. The income statement in the current periodincludes 32 weeks of results relating to the acquired Spirit companies. 2 EBITDA represents earnings before depreciation and amortisation, profit onsale of non-current assets, finance income, finance costs, movement in fairvalue of interest rate swaps and UK income tax. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEfor the 52 weeks ended 19 August 2006 52 weeks to 52 weeks to 19 August 20 August 2006 2005 £m £mIncome and expense recognised directly in equity:Actuarial gains on defined benefit pension schemes 33.8 1.5Gains on cash flow hedges 48.8 -Tax on equity component of convertible bond (9.0) -Tax credit related to indexation on revalued properties 5.9 2.4 79.5 3.9Transfers to the income statement:On cash flow hedges (13.3) - 66.2 3.9Tax on items taken directly to equity (20.8) (0.5)Net gain recognised directly in equity 45.4 3.4Profit attributable to shareholders 246.8 146.3Total recognised income for the period attributable to equity 292.2 149.7shareholders Effects of changes in accounting policy attributable to equityshareholders:Net loss on recognition of derivative financial instruments at fair (68.6) -value on first-time application of IAS 39 (68.6) - CONSOLIDATED BALANCE SHEETat 19 August 2006 Notes 19 August 20 August 2006 2005 £m £mAssetsNon-current assetsProperty, plant and equipment 6,506.0 4,293.8Goodwill 503.4 268.8Intangible assets 163.3 27.5Receivables 1.4 11.7Deferred tax assets 175.4 66.2Derivative financial instruments 5.8 - 7,355.3 4,668.0 Current assetsInventories 12.2 -Trade and other receivables 107.4 78.5Cash deposits used as security for loan notes 15.8 202.8Cash and cash equivalents 562.4 245.7 697.8 527.0Non-current assets classified as held for sale 28.5 6.4 Total assets 8,081.6 5,201.4 LiabilitiesCurrent liabilitiesTrade and other payables (444.9) (206.3)Obligations under finance leases (6.5) (1.1)Interest-bearing loans and borrowings (78.6) (247.5)Current income tax liabilities (15.8) (38.3)Provisions (22.5) (7.0) (568.3) (500.2) Non-current liabilitiesObligations under finance leases (20.3) (9.3)Interest-bearing loans and borrowings (5,108.2) (3,203.3)Convertible bonds (242.5) -Derivative financial instruments (189.8) -Deferred tax liabilities (428.8) (321.3)Retirement benefit obligations (24.7) (7.6)Provisions (60.6) (25.7)Other liabilities (11.8) (11.3) (6,086.7) (3,578.5) Total liabilities (6,655.0) (4,078.7) Net assets 1,426.6 1,122.7 Shareholders' equityCalled up share capital 0.1 0.1Share premium 452.4 373.0Equity component of convertible bonds 21.0 -Hedge reserve (37.6) -Other reserve 4.3 1.9Retained earnings 986.4 747.7Total shareholders' equity 7 1,426.6 1,122.7 CONSOLIDATED CASH FLOW STATEMENT Notes 52 weeks to 52 weeks to 19 August 2006 20 August 2005 £m £mCash flows from operating activitiesOperating profit 552.0 397.2Depreciation and amortisation 46.1 13.5Decrease in inventories 0.9 -Decrease in trade and other receivables 47.2 0.6(Decrease) / increase in trade and other payables (32.8) 0.4Difference between pension contributions paid and amounts (34.0) (0.6)recognised in the income statementDecrease in provisions and other liabilities (12.0) (9.0)Cash generated from operations 567.4 402.1Income tax paid (32.3) (13.5)Net cash from operating activities 535.1 388.6 Cash flows from investing activitiesAcquisition of subsidiary, net of cash acquired (205.5) (69.2)Purchase of property, plant and equipment- acquisitions (65.1) (65.1)- investments (139.0) (74.0)Proceeds from sale of property, plant and equipment 348.7 29.0Proceeds from sale of other non-current assets 479.5 170.6Purchase of intangible assets (2.0) (0.8)Proceeds from sale of joint venture 6.8 -Net cash generated from / (used in) investing activities 423.4 (9.5) Cash flows from financing activitiesNet proceeds from issue of ordinary share capital 79.4 6.3Proceeds from issue of new loans and borrowings 1,216.0 1,063.9Issue costs paid (20.9) (11.0)Proceeds from issue of convertible bonds 275.0 -Costs of issuing convertible bonds (9.3) -Net proceeds from issue of derivative financial instruments 50.0 -Repayment of borrowings (1,966.5) (974.3)Interest paid (319.1) (211.5)Interest received 19.4 9.0Repayments of obligations under finance leases (4.6) (0.4)Interest element of finance lease rental payments (1.6) (0.7)Costs of terminating financing arrangements1 (115.1) (25.5)Decrease / (increase) in cash deposits used as security for loan 187.0 (129.8)notesDividends paid 6 (31.5) (24.7)Net cash used in financing activities (641.8) (298.7) Net increase in cash and cash equivalents 316.7 80.4 Cash and cash equivalents at beginning of period 245.7 165.3 Cash and cash equivalents at end of period 562.4 245.7 for the 52 weeks ended 19 August 2006 1 In the current period, costs of terminating financing arrangements includeoutflows of £114.6m on the redemption of swaps following the repayment of£525.0m of bank loans on the acquisition of the Spirit group. These costs havebeen reflected in the fair value of assets acquired at the date of acquisition. Cash and cash equivalents comprises cash at bank and in hand. NOTES TO THE ACCOUNTS For the 52 weeks ended 19 August 2006 1. BASIS OF PREPARATION The figures for the 52 weeks ended 19 August 2006 have been extracted from theaudited financial statements of Punch Taverns plc which have been prepared inaccordance with International Financial Reporting Standards ("IFRS") as adoptedby the European Union. The summary of results does not constitute the fullfinancial statements within the meaning of s240 of the Companies Act 1985. The Group's financial statements were previously prepared under UK GenerallyAccepted Accounting Principles ("UK GAAP"), which differs in a number of areasfrom IFRS. Therefore it has been necessary to amend certain presentation,accounting, valuation and consolidation methods previously applied under UKGAAP, in order to comply with IFRS for these financial statements. The Grouphas previously prepared a separate, detailed description of the transition toIFRS and the nature of reconciling items from UK GAAP at the date of transition(being 22 August 2004), and this is available on the website atwww.punchtaverns.com. All comparative figures have been restated to reflectthese changes, except for the adoption of IAS 32 and IAS 39, which only appliedfrom 21 August 2005. The effect of adopting IAS 32 and IAS 39 is shown in theanalysis of changes in shareholders' equity (see note 7). 2. SEGMENTAL ANALYSIS The primary segmental reporting format is determined to be business segments asthe Group's risks and rates of return are affected predominantly by differencesin the products and services provided. The Group operates in two business segments; a leased estate and a managedestate. The managed estate was acquired on 5 January 2006, through theacquisition of the Spirit group of companies. Between 5 January 2006 and 19August 2006, 74 pubs with a fair value of £93.2m have transferred from themanaged to the leased estate. The Group operates solely in the United Kingdom and therefore has only onegeographical segment. Business segment analysis 2006 2005 Leased Managed Unallocated Total Leased £m £m £m £m £mRevenue(1) 803.3 742.8 - 1,546.1 770.1Operating costs(1) (367.6) (572.2) - (939.8) (356.6)EBITDA(1) 435.7 170.6 - 606.3 413.5Depreciation and amortisation (15.3) (30.8) - (46.1) (13.5)Operating profit before non-recurring and 420.4 139.8 - 560.2 400.0exceptional itemsNon-recurring and exceptional items (3.4) (4.8) - (8.2) (2.8)Operating profit 417.0 135.0 - 552.0 397.2(Loss) / profit on sale of property, plant and (0.1) 2.4 - 2.3 -equipmentSegment result 416.9 137.4 - 554.3 397.2Loss on disposal of subsidiaries and joint - - (0.9) (0.9) -venturesNet finance costs - - (312.1) (312.1) (206.7)Movement in fair value of interest rate swaps - - 39.7 39.7 -UK income tax expense - - (34.2) (34.2) (44.2)Profit attributable to shareholders 416.9 137.4 (307.5) 246.8 146.3 Assets and liabilitiesSegment assets 4,735.9 2,586.4 - 7,322.3 4,686.7Unallocated assets - - 759.3 759.3 514.7Total assets 4,735.9 2,586.4 759.3 8,081.6 5,201.4Segment liabilities (179.7) (320.0) - (499.7) (212.9)Unallocated liabilities - - (6,155.3) (6,155.3) (3,865.8)Total liabilities (179.7) (320.0) (6,155.3) (6,655.0) (4,078.7)Net assets 4,556.2 2,266.4 (5,396.0) 1,426.6 1,122.7 1 Pre non-recurring and exceptional items. Capital expenditure 2006 2005 Leased Managed Total Leased £m £m £m £mAcquisition spend(2) 65.4 2,484.1 2,549.5 506.1Investment spend 103.2 41.3 144.5 71.3Total capital expenditure 168.6 2,525.4 2,694.0 577.4 2 Excludes the transfer of pubs from the managed segment to the leased segment. With the exception of the transfer of pubs, there are immaterial sales betweenthe business segments. In the prior year there was only one segment, being theleased estate. In the current year, segment assets include property, plant andequipment, goodwill, intangible assets, inventories and receivables, and excludecash, while segment liabilities comprise operating liabilities and excludetaxation and corporate borrowings. Capital expenditure comprises additions toproperty, plant and equipment and intangible assets, including additionsresulting from acquisitions through business combinations. In the period from the acquisition of the Spirit group to 19 August 2006, 351managed pubs have been disposed. These contributed £121m to revenue and £30m toEBITDA in the period. 3. NON-RECURRING AND EXCEPTIONAL ITEMS In order to provide a trend measure of underlying performance, profit isadjusted to exclude items which management consider will distort comparability,either due to their significant non-recurring nature or as a result of specificaccounting treatments. Included in the income statement are the followingnon-recurring and exceptional items: 52 weeks to 52 weeks to 19 August 20 August 2006 2005 £m £mOperatingProfits generated from pubs identified for disposal1 - 4.7Licensing reform costs, redundancy, costs to integrate acquisition of (8.2) (7.5)subsidiary and other related one-off costs (8.2) (2.8)Finance incomeOther(2) - 0.3 Finance costsSecured loan interest(3) (0.1) (1.3)Bank loan interest(4) - (3.2)Cost of terminating financing arrangements(5) - (9.3) (0.1) (13.8)Movement in fair value of interest rate swaps(6) 39.7 - Total non-recurring and exceptional items before tax 31.4 (16.3)TaxTax impact of exceptional items (9.4) 6.2Adjustments to tax in respect of prior periods(7) 15.0 -Tax charge on terminating financing arrangements(8) - (10.8)Release of tax provision(9) 15.0 - 20.6 (4.6)Total non-recurring and exceptional items after tax 52.0 (20.9) 1 Profits generated from pubs identified for disposal arise from the 545 pubswhich were identified for disposal on acquisition of InnSpired Group Limited on10 September 2004 which were disposed of on 28 January 2005. 2 Funds were held in an escrow account to fund the cost of acquisition ofInnSpired Group Limited. The exceptional interest receivable relates to theproportion of funding relating to the 545 pubs of the total 1,064 pubs acquiredon 10 September 2004 that were subsequently disposed of on 28 January 2005. 3 In the current period interest represents break costs incurred on theredemption of bank loans which were required to be repaid following theacquisition of the Spirit group. In the comparative period interest wasincurred on the secured loan notes acquired through the acquisition of InnSpiredGroup Limited, from the date of acquisition to their subsequent redemption on 21October 2004. The exceptional secured loan note interest charge represents theportion of the loan relating to the 545 of the total 1,064 pubs acquired thatwere subsequently disposed of on 28 January 2005. 4 A bank facility was drawn down to fund the acquisition of InnSpired GroupLimited. 545 of the 1,064 pubs acquired were subsequently sold on 28 January2005 with the receipts used to repay a portion of the facility drawn down. Theexceptional bank loan interest represents the interest and fees incurred on theportion of the loan relating to the 545 pubs from acquisition to 28 January 2005when that portion was repaid. 5 In comparative periods the cost of terminating financing arrangementsrepresents premiums paid to redeem secured loan notes acquired through theacquisition of InnSpired Group Limited, break costs incurred to cancel swaparrangements associated with these loans and premiums incurred to redeem securedfloating rate notes as part of the debt restructure on 1 August 2005. 6 Represents the movement in the fair value of interest rate swaps which do notqualify for hedge accounting. Whilst the interest rate swaps are considered tobe effective in matching the amortising profile of existing or planned floatingrate borrowings, they do not meet the definition of an effective hedge due tothe relative size of the mark to market difference of the swap at the date ofacquisition or inception. 7 Adjustments to tax in respect of prior periods represent adjustments tocurrent tax of £8.6m and deferred tax of £6.4m. 8 The creation of deferred tax assets on the fair value of swaps and loansacquired on the acquisition of InnSpired Group Limited was reversed on thetermination of these financing arrangements, resulting in a non-recurring taxcharge of £10.8m in the prior period. 9 During the period the tax treatment of an onerous contract has been clarifiedand the associated tax provision has been released. 4. TAXATION (a) Tax on profit on ordinary activities Tax charged in the income statement 52 weeks to 52 weeks to 19 August 20 August 2006 2005 £m £mCurrent taxUK corporation tax - current year 33.9 28.6UK corporation tax - adjustments in respect of prior years (23.6) (6.3) 10.3 22.3Deferred taxOrigination and reversal of temporary differences 23.9 21.9 Total tax charge in the income statement 34.2 44.2 Tax on items charged to equity In addition to the amount charged to the income statement, tax movementsrecognised directly in equity were as follows: 52 weeks to 52 weeks to 19 August 20 August 2006 2005 £m £mDeferred taxGain on actuarial valuation of pension liability 10.1 0.5Deferred tax on effective element of cash flow hedges 10.7 -Deferred tax on equity component of convertible bond 9.0 -Tax credit related to indexation on revalued properties (5.9) (2.4)Deferred tax charge / (credit) recognised directly in equity 23.9 (1.9) Tax relating to implementation of IAS 39 (29.4) - (b) Reconciliation of the total tax charge The effective rate of tax is lower than the full rate of corporation tax. Thedifferences are explained below: 52 weeks to 52 weeks to 19 August 20 August 2006 2005 £m £mProfit on ordinary activities before tax 281.0 190.5Tax at current UK tax rate of 30% (2005: 30%) 84.3 57.2 Effects of:Adjustments to tax in respect of prior periods (0.2) (6.3)Net effect of expenses not deductible for tax purposes and non-taxable (0.5) (8.1)incomeDeferred tax credit on indexation of properties (20.1) (10.8)Short-term temporary differences upon which deferred tax is not 0.7 1.4recognisedExceptional tax (credits) / charges (30.0) 10.8Total tax expense reported in the income statement 34.2 44.2 Details of the exceptional tax credits and debits are included in note 3. 5. EARNINGS PER SHARE Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary sharesoutstanding during the year, excluding those held in the employee share trust,which are treated as cancelled. For diluted earnings per share, the weighted average number of ordinary sharesin issue is adjusted to assume conversion of all dilutive potential ordinaryshares. The Group has two types of dilutive ordinary shares: those shareoptions granted to employees where the exercise price is less than the averagemarket price of the Company's ordinary shares during the year and thecontingently issuable shares under the Group's incentive plans. At 19 August2006, the performance criteria for the vesting of the awards under the incentiveschemes had been met and hence the shares have been included in the diluted EPScalculation. The equity portion of the convertible bond has been assessed and its impact isdilutive on basic earnings and anti-dilutive on adjusted earnings. Reconciliations of the earnings and weighted average number of shares used inthe calculations are set out below: 52 weeks to 19 August 2006 52 weeks to 20 August 2005 Weighted Weighted average average number of Per share number of Per share Earnings shares amount Earnings shares amount £m m pence £m m pence Continuing operations Basic earnings per share 246.8 260.0 94.9 146.3 251.6 58.1Effect of dilutive options - 4.6 - 5.4Effect of dilutive convertible 12.3 15.9 - -bondsDiluted earnings per share 259.1 280.5 92.4 146.3 257.0 56.9 Supplementary earnings per sharefigures:Basic earnings per share 246.8 260.0 94.9 146.3 251.6 58.1Effect of:Non-recurring and exceptional (52.0) - 20.9 -itemsBasic earnings per share before 194.8 260.0 74.9 167.2 251.6 66.4non-recurring and exceptionalitemsDiluted earnings per share 259.1 280.5 92.4 146.3 257.0 56.9Effect of:Non-recurring and exceptional (52.0) - 20.9 -itemsReverse impact of convertible (12.3) (15.9) - -bondsDiluted earnings per share 194.8 264.6 73.6 167.2 257.0 65.1before non-recurring andexceptional items 6. DIVIDENDS 52 weeks to 52 weeks to 19 August 20 August 2006 2005 £m £mDeclared and paid during the year:Final dividend for 2005 for the 52 weeks ended 20 August 2005 of 7.6p 20.0 15.3(2004: 6.1p)Interim dividend for the 52 weeks ended 19 August 2006 of 4.4p 11.5 9.4(2005: 3.7p) 31.5 24.7 In addition, the Directors are proposing a final dividend in respect of thefinancial year ended 19 August 2006 of 9.0p per share which will absorb anestimated £23.8m of shareholders' funds. Subject to approval at the AGM, itwill be paid on 26 January 2007 to shareholders who are on the register ofmembers on 29 December 2006. These financial statements do not reflect thisdividend payable, which has still to be approved by the Company's shareholders. 7. ANALYSIS OF CHANGES IN SHAREHOLDERS' EQUITY Share Share Other Retained capital premium reserves earnings Total £m £m £m £m £mAt 21 August 2004 0.1 366.7 0.9 622.7 990.4Total recognised income and expense for - - - 149.7 149.7the periodExercise of share options - 6.3 - - 6.3Share based payments - - 1.0 - 1.0Equity dividends - - - (24.7) (24.7)At 20 August 2005 0.1 373.0 1.9 747.7 1,122.7Effect of implementing IAS 32 / 39 - - (62.5) (6.1) (68.6) At 21 August 2005 0.1 373.0 (60.6) 741.6 1,054.1Total recognised income and expense for - - 15.9 276.3 292.2the periodShares issued - 74.1 - - 74.1Exercise of share options - 5.3 - - 5.3Share based payments - - 2.4 - 2.4Equity dividends - - - (31.5) (31.5)Equity component of convertible bond - - 30.0 - 30.0At 19 August 2006 0.1 452.4 (12.3) 986.4 1,426.6 8. CHANGES IN NET DEBT At At 20 August Non-cash 19 August 2005 Acquisitions Cash flow movements 2006 £m £m £m £m £mCurrent assetsCash at bank and in hand 245.7 234.1 82.6 - 562.4Cash deposits 202.8 - (187.0) - 15.8Cash and cash deposits 448.5 234.1 (104.4) - 578.2 DebtBank loans (1.4) (850.0) 250.4 (11.9) (612.9)Secured loans (3,418.7) (1,360.9) 211.9 9.6 (4,558.1)Guaranteed loan notes (30.7) - 14.9 - (15.8)Vendor loan notes - (294.2) 294.2 - -Debt component of - - (265.7) 23.2 (242.5)convertible bonds (3,450.8) (2,505.1) 505.7 20.9 (5,429.3)Obligations under finance (10.4) (17.3) 4.6 (3.7) (26.8)leasesNet debt per balance (3,012.7) (2,288.3) 405.9 17.2 (4,877.9)sheet Net debt incorporates the Group's borrowings, bank overdrafts and obligationsunder finance leases, less cash and cash equivalents and cash deposits. Thecash deposits are used as security for loan notes. 9. BUSINESS COMBINATIONS On 5 January 2006 the Group acquired the entire share capital of Spirit GroupHoldings Limited, on a cash and debt free basis for £2,695.3m, includingacquisition costs of £16.3m resulting in a total consideration paid of £439.6m.The Spirit group operated a managed estate of 1,830 pubs at the date ofacquisition. From the date of acquisition to the year end, the Spirit group contributed£744.6m to Group revenues and £171.6m to EBITDA. If the acquisition had beencompleted on the first day of the financial year, Group revenues for the yearwould have been £480m higher and Group EBITDA would have been £106m higher. Allintangible assets were recognised at their respective fair values. The residualexcess over the net assets acquired is recognised as goodwill in the financialstatements. The provisional adjustments applied to the book values of the assets andliabilities of the Spirit group in order to present the net assets at fairvalues in accordance with Group accounting principles were £421.1m, details ofwhich are as follows: 2006(1) 2005(2) Pre- Provisional acquisition fair value Provisional IFRS values adjustments fair values Fair values £m £m £m £mGoodwill 65.7 (65.7) - -Intangible fixed assets 147.6 1.0 148.6 5.5Property, plant and equipment 2,277.7 57.8 2,335.5 430.8Assets held for resale - 569.8 569.8 170.7Investments in joint ventures 6.8 - 6.8 -Inventories 15.9 - 15.9 -Taxation- Current 0.6 - 0.6 (0.9)- Deferred 14.6 (13.7) 0.9 (5.3)Receivables 80.8 - 80.8 7.1Cash and cash equivalents 234.1 - 234.1 72.2Payables and provisions (434.8) (21.6) (456.4) (51.6)Loans (2,398.6) (106.5) (2,505.1) (484.5)Derivative financial instruments: (226.5) - (226.5) (16.7)interest rate swapsNet assets acquired (216.1) 421.1 205.0 127.3Goodwill 234.6 34.0Consideration 439.6 161.3 Consideration satisfied by:Cash 439.6 145.6Loan notes issued - 15.7Total consideration 439.6 161.3 1 2006 fair values relate to the acquisition of Spirit Group Holdings Limited on5 January 2006. 2 2005 fair values relate to the acquisitions of InnSpired Group Limited on 10September 2004 and Avebury Holdings Limited on 8 August 2005. In the current year, the provisional fair value adjustments primarily relate tothe revaluation of freehold and leasehold trading properties, the mark to marketvaluation of derivative financial instruments, the recognition of deferred taxliabilities on revalued properties, which gives the opportunity to roll overtaxable gains on the acquisition of properties, and the revaluation of pensionscheme liabilities at the date of acquisition. Fair values are provisional at 19 August 2006 to enable the final assessment ofpotential tax and other liabilities. The fair values presented in the interim statements were provisional due to theproximity of the acquisition to the interim date. The fair values have beenadjusted from those provisional fair values disclosed in the interim statementsdue to the disposal of 290 pubs on 25 June 2006, which has given betterinformation on the fair value of those pubs on their initial acquisition. Included in the £234.6m of goodwill recognised above are certain intangibleassets that cannot be individually separated and reliably measured due to theirnature. These items include infrastructure, an assembled workforce andoperating synergies. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Punch Taverns PLC