22nd Nov 2005 07:01
Enterprise Inns PLC22 November 2005 22 November 2005 ENTERPRISE INNS PLC PRELIMINARY ANNOUNCEMENT FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2005 2005 2004 Increase Operating profit before exceptional items £520.2m £402.7m 29% Profit before tax and exceptional items £305.6m £231.2m 32% Adjusted earnings per share * 63.2p 47.5p 33% Dividends 18.0p 12.0p 50% * Excludes exceptional items and goodwill amortisation. • Average operating profit per pub increased by 8% in the year over the proforma average for the prior year. • The quality of the pub estate has been improved through the acquisition of 21 individual pubs and the disposal of 158 pubs. In addition, the Group has invested over £50 million of capital and revenue expenditure into the pub estate. • At 30 September 2005 the estate comprised 8,590 pubs valued at £5.2 billion. • Cash generated after interest, tax, dividends and capital expenditure amounted to £137 million. • At 30 September 2005 proforma net debt was £3,121 million, a reduction of £157 million in the year. Ted Tuppen, Chief Executive, commented: This is an excellent set of results. We are pleased to have delivered anotheryear of strong growth from continuing to drive improvements in the profitabilityof our high quality pub estate. We have grown our market share and profitability in a market which remainshighly competitive. The team has successfully managed the integration of theUnique estate while coping with the additional workload imposed as a result oflicensing reform. I'm confident that the Enterprise estate continues to provide many opportunitiesfor profitable growth and strong cash generation and we expect further solidprogress in the coming year. Enquiries:Emma Baines, Assistant to Chief Executive 07990 550210Ted Tuppen, Chief Executive 0121 733 7700David George, Finance Director 0121 733 7700 The investor presentation will be available on the company website atwww.enterpriseinns.com on Tuesday 22 November 2005. A live recording of thepresentation can be accessed at 9.30am GMT by dialling +44 20 7162 0025. Arecorded version will be available from 1200noon GMT on +44 20 7031 4064passcode 698287 (for European callers) or +1 954 334 0342, passcode 698287 (forUS callers). RESULTS 2005 has been another good year of consolidation and progress for EnterpriseInns. Operating profit before exceptional items increased by 29% to £520.2million, driven by growth in average operating profit per pub of 8% and thesuccessful integration of the Unique business which was acquired in March 2004. Adjusted earnings per share increased by 33% to 63.2p, rounding off a ten yearrun since Enterprise floated on the London Stock Exchange in 1995 which hasdelivered compound annual growth in earnings per share of more than 30%. DIVIDEND The Directors are recommending a final dividend of 12.4 pence per share, makinga total for the year of 18.0 pence, an increase of 50% over the prior year withan adjusted EPS cover of 3.5 times. The final dividend will be payable on 23January 2006, to members on the register on 30 December 2005. The Board has reviewed the Company's dividend policy for 2005/6 and future yearsand believes that, taking account of the level of Group borrowings, it isappropriate to maintain future dividend cover of between 2.5 and 3.0 timesearnings. Consequently it envisages increasing dividend payments in 2005/6 tomove within these parameters and thereafter intends to increase dividendsbroadly in line with the growth in earnings per share. Free cash inflow after interest, tax, dividend payments and capital expenditureamounted to £137 million in the year. Along with proceeds from pub disposalsthis facilitated a reduction in gross borrowings, net of cash, of £157 millionin the year. At the year-end pro-forma net debt was £3.1 billion, with interestcosts 100% fixed at an average rate of 6.9% for an average life of 14 years. SHARE BUY-BACK PROGRAMME The Group's strategy remains focused on building shareholder value throughinvestment in the development of its licensed estate and the optimum use of thestrong and predictable cash flows which are generated from the predominantlyfreehold pub estate. The Board's policy is to maintain efficient leverage of thebalance sheet in the context of the level of profit generated and the valuationof the pub estate. It is intended to commence a rolling share buy-back programmeto return surplus cash to shareholders and to ensure that the balance sheetremains efficient. There is authority to purchase up to 14.99% of the issuedshare capital and the Board anticipates purchasing shares to the value of atleast £200 million during the current financial year. CONVERSION TO IFRS REPORTING As required by EC regulations and in common with all other listed companies,Enterprise will adopt International Financial Reporting Standards (IFRS) as thebasis of preparing its Group accounts from the financial year beginning in2005. As such, this will be the last set of results that are reported using UKaccounting standards. In April 2006 we plan to publish the opening transitionalIFRS balance sheet as at 1 October 2004 and the 2005 interim and full yearresults re-stated under IFRS. This will include a reconciliation from thepublished UK GAAP results and a full explanation of all the changes that havebeen made. The first set of results to be reported using IFRS will be theinterim results published in May 2006. There will be no impact on cash flows inthe business or on our debt covenants. PUB ESTATE The Future is all about Quality In a market where the pub goer is ever more discerning, where consumerdiscretionary spend is under pressure and where cheap alcohol is readilyavailable in supermarkets, it is quality and service that count as the decidingfactors in the long term success of any pub. At Enterprise, we are committed to improving the quality of our pubs, investingalongside our licensees to develop their businesses, gain market share andunlock additional profits. During the year we invested £55 million of capitaland revenue expenditure into the estate and, together with a similar level ofexpenditure by our licensees, have improved over 1,100 pubs, either throughmajor schemes or minor refurbishments. We continued to improve the quality of the estate through churn, buying 21 topquality pubs for a total consideration of £14 million and selling 158underperforming sites for £47 million, recording a profit on disposal of £3million. At 30 September 2005 our estate of 8,590 pubs was valued at £5.2billion, reflecting a 5% increase in underlying pub values. Since the beginning of the new financial year, we have purchased a further 34pubs for £36 million and sold 14 for £7 million. We continue to review allacquisition opportunities as they arise, judging them against our strictquality, risk and return criteria and their ability to deliver long termenhancement in shareholder value. Over the past year we have continued to see improvements in the quality, valueand earnings potential of our pubs, with average operating profit per pub up by8% to £60,100. Quality leads to Profitability A top quality estate generating sustainable profits for the benefit of ourlicensees and shareholders is clearly a long term aim of Enterprise and wecontinue to make steady progress along that route. It is the link between the quality of our pubs, our operating profit and ourlicensees' profitability which is the key to our long term success. Running apub is one of the most demanding jobs around, requiring great professional andpeople skills, boundless energy and enthusiasm and a willingness to work longhours. Against a backdrop of increasing underlying costs and the endless abilityof government to impose yet more regulation and bureaucracy, the best licenseeslook for quality outlets that give them a chance to make a good return for theireffort and investment. It is not just the quality of the pub itself which isimportant to the licensee, but the essential fairness of the overall packageoffered, especially the level of rent, the help and support given to licenseesand the range of products offered. In this latter regard, our licensees enjoy an unrivalled choice across the vastmajority of beer brands available in the UK and we were delighted this year toextend our Society of Independent Brewer's cask ale scheme across the wholeestate. Against a national decline in the availability and consumption of caskales, we have worked with local and regional brewers to grow cask ale sales yearon year, to a level where they now represent more than 13% of our beer volumes,against a national average estimated to be around 8%. These brands may notdeliver the highest level of unit margin to Enterprise but they offer ourlicensees the chance to develop their businesses and give their customers therange of products that they seek. As a result of our continuing commitment to ensuring that rental levels arefair, we are pleased that, once again, our estate leads the field in providingworthwhile returns for our hard working licensees. We estimate that the level oflicensee profitability has increased by 5% during the year to an industryleading average of £42,000. With input costs rising and consumer discretionary spend currently under somepressure, it is comforting to see that licensees recognise that the higherquality and profitability of our estate, together with the overall fairness ofthe package we offer, gives them the best possible chance to continue to besuccessful. As a result we are never short of good quality, fully fundedapplicants to take over pubs which become available for lease or tenancy. Onceagain, this is supported by improvements in certain key performance indicators: O Our database has more than 900 fully funded applicants, four times the number of pubs available to let. O An active lease assignment market has seen more than 600 businesses change hands during the year at an average lease premium of almost £70,000. O Rent concessions at 30 September 2005 amounted to just 0.4% of rent roll; O Over 1,100 rent reviews were completed during the year, with only two going through any form of arbitration, both of which were found in our favour; O Bad debt costs for the year reduced once again, and remain under 0.2% of turnover. We remain convinced that the leased and tenanted format offers an excellentlow-cost opportunity for entrepreneurial licensees to run their own businesses.The Trade and Industry Select Committee looked at working practices within thetied-pub sector and concluded that, on the whole, they are fair and work well inthe interest of all parties. In particular, we are pleased that the industrystandard Code of Practice, recently issued by the British Beer and PubAssociation, reflects practices and recommendations that have been the norm atEnterprise for a long time. Legislative background Licensing reform The past year has seen the industry get to grips with the substantial costs andworkload arising from implementation of the Licensing Act 2003. The Enterpriseteam worked hard throughout the year to help licensees to develop their businessoperating plans and submit their applications. In the end, some 7500 of our pubsapplied to extend their existing opening hours and the majority have beenapproved without difficulty. We do not anticipate a material increase inturnover and profitability arising from the additional hours, simply a greaterflexibility to allow responsible licensees better to serve the needs of theircustomers. Flexible opening hours have, however, become part of the debate surroundingbinge drinking and anti social behaviour. Whilst it is convenient for governmentto point the finger of blame at pubs, in a few cases with justification, this isa debate which has far wider implications including education and personalresponsibility, sensible advertising and promotions, the pricing and control ofthe sale of alcohol in supermarkets and effective policing and control of rogueoutlets and individual drinkers. The vast majority of pubs are responsibly runby well trained and professional licensees. It is essential that the governmentand the police recognise that the problems are associated with a small minorityof the population and continue to target those outlets and individuals whoencourage or engage in anti social behaviour. Smoking in public places The government's approach to the control of smoking in pubs is causinguncertainty and concern across the industry. Whilst most would agree thatsmoking is unacceptable where food is being consumed, the key issue in thisdebate should be maintaining choice for consumers, whilst giving dueconsideration to health and safety and the protection of staff. The reforms as currently proposed will force many pubs to choose between sellingfood in a smoke free environment or abandoning food and simply supplying drinkto customers who would then be allowed to smoke. Furthermore some 20,000 clubs,many of which operate in direct competition to pubs, are to be exempt from thelegislation under proposals that appear to take little account of the health andwelfare of bar staff and club stewards. The legislation as currently proposed will undoubtedly change and potentiallydamage the traditional British pub, often in rural or community surroundings,which survives by providing an all round service to its customers, a socialmeeting place to have a drink with friends and at the same time an excellentlocation for a good meal out, complementary activities vital both to thecommunity and to the financial viability of the pub.The industry had been working towards the same rules applying to all, with theobjective being the cessation of smoking at the bar and the steady reduction inthe space available for smokers in pubs, culminating in separately definedsmoking rooms or outside spaces designated for customers who wish to smoke. Wehope that through the consultation process we will return to a solution which issensible for employees and consumers and which will not put many small communityand rural pubs under pressure, with the resulting loss of jobs, tax revenues andamenity. CONCLUSION & OUTLOOK This has been another great year for Enterprise. Working alongside ourlicensees, we have seen growth in market share and profitability in a marketwhich remains highly competitive and where rising costs and weakness in consumerconfidence have presented special challenges. The Enterprise team has successfully managed the integration of the Uniqueestate while coping with the additional workload imposed as a result oflicensing reform. We have once again delivered substantial growth in earningsand dividends and we are now in a position to return surplus cash toshareholders through a rolling share buy back programme. The new financial year has started well but we expect to see the opportunitiesarising from flexible opening hours tempered by continuing pressure on consumerdiscretionary spend. However, great pubs will always do well, whatever theeconomic backdrop. The Board is confident that the Enterprise estate continuesto provide many opportunities for profitable growth and strong cash generationand we look forward to another year of solid progress. GROUP PROFIT AND LOSS ACCOUNTFor the year ended 30 September 2005 2005 2004 £m £m---------------------------------- --------- ----------Turnover 919.9 712.7Cost of sales (387.3) (315.0)---------------------------------- --------- ----------Gross profit 532.6 397.7---------------------------------- --------- ---------- Administrative expenses (44.6) (40.3)Exceptional administrative expenses - (14.8)Other operating income 32.2 26.3---------------------------------- --------- ----------Group operating profit 520.2 368.9Share of operating profit of associate - 19.0---------------------------------- --------- ----------Total operating profit 520.2 387.9Net profit on disposal of tangible fixed assets 2.7 1.4Profit on sale of associated undertaking 0.2 ----------------------------------- --------- ----------Profit on ordinary activities before interest and taxation 523.1 389.3Bank interest receivable 8.9 9.5Interest payable and similar charges (223.5) (181.0)Exceptional interest payable and similar charges (4.6) (4.6)---------------------------------- --------- ---------- (219.2) (176.1)---------------------------------- --------- ----------Profit on ordinary activities before taxation 303.9 213.2Tax on profit on ordinary activities (92.1) (65.7)---------------------------------- --------- ----------Profit on ordinary activities after taxation andattributable 211.8 147.5to members of the parent company Ordinary dividends on equity shares (61.4) (41.2)---------------------------------- --------- ----------Retained profit for the year 150.4 106.3---------------------------------- --------- ---------- Earnings per shareBasic 61.9p 43.0pAdjusted+ 63.2p 47.5pDiluted 61.1p 42.3p---------------------------------- --------- ----------+ excludes exceptional items and goodwill amortisation. GROUP BALANCE SHEET At 30 September 2005 2005 2004 £m £m--------------------------- --------------- ---------------Fixed AssetsIntangible assets 75.3 79.6Tangible assets 5,217.2 4,931.8Investments in associated undertakings - 0.2--------------------------- --------------- --------------- 5,292.5 5,011.6--------------------------- --------------- ---------------Current AssetsAssets held for resale 7.1 4.6Debtors 81.4 85.7Cash at bank and in hand 95.5 146.7--------------------------- --------------- --------------- 184.0 237.0 Creditors: amounts falling due within one year (331.1) (309.4)--------------------------- --------------- ---------------Net current liabilities (147.1) (72.4)--------------------------- --------------- --------------- Total assets less current liabilities 5,145.4 4,939.2 Creditors: amounts falling due after more thanone year (3,304.5) (3,509.2)Provision for liabilities and charges (99.9) (73.7)--------------------------- --------------- ---------------Net assets excluding pension liability 1,741.0 1,356.3Pension liability (0.1) (2.7)--------------------------- --------------- --------------- 1,740.9 1,353.6--------------------------- --------------- --------------- Capital and reservesCalled up share capital 17.5 17.5Share premium account 485.5 485.5Revaluation reserve 810.0 541.8Capital redemption reserve 7.6 7.6Merger reserve 77.0 77.0Other reserve (55.6) (28.1)Profit and loss account 398.9 252.3--------------------------- --------------- ---------------Equity shareholders' funds 1,740.9 1,353.6--------------------------- --------------- --------------- GROUP STATEMENT OF CASH FLOWSFor the year ended 30 September 2005 2005 2004 £m £m------------------------------ --------------- --------------Net cash inflow from operating activities 522.9 403.2 Return of investments and servicing of financeInterest received 8.9 13.1Interest paid (244.0) (171.4)Issue costs of long-term loans (1.9) (9.9)------------------------------ --------------- -------------- (237.0) (168.2)------------------------------ --------------- -------------- Taxation (52.8) (36.3)------------------------------ --------------- -------------- Capital expenditure and financial investmentPayments to acquire public houses (14.3) (12.9)Payments made on improvements to public houses (48.8) (50.9)Payments to acquire other fixed assets (0.8) (1.8)Receipts from sales of tangible fixed assets 47.0 110.5Payments to acquire shares held in employee (22.6) (24.3)benefit trustsReceipts from exercise of employee options 3.3 ------------------------------- --------------- -------------- (36.2) 20.6 Acquisitions and disposalsPurchase of subsidiaries - (247.4)Net cash acquired with subsidiaries - 191.3Expenses of acquisition paid - (2.6)------------------------------ --------------- -------------- - (58.7) Equity dividends paid (47.9) (31.8)------------------------------ --------------- -------------- Cash inflow before financing 149.0 128.8------------------------------ --------------- -------------- FinancingIssue of ordinary share capital - 51.5Share issue costs - (0.3)Debt due within one year - new short-term loans - 30.0- repayment of short-term loans - (160.0)Debt due beyond one year - new long-term loans 770.9 1,028.2- repayment of long-term loans (971.1) (573.9)Repayment of Deep Discount Bonds - (361.5)------------------------------ --------------- -------------- (200.2) 14.0 (Decrease)/increase in cash (51.2) 142.8------------------------------ --------------- -------------- NOTES TO THE ACCOUNTSAt 30 September 2005 1. Accounting Policies Basis of preparation The accounts are prepared under the historical cost convention as modified to include the revaluation of properties and have been prepared in accordance with applicable accounting standards. This is the same basis as used in last year's annual accounts. 2. Group statement of total recognised gains and losses 2005 2004 £m £m --------------------------------- ---------- ----------- Profit for the financial year excluding share of 211.8 143.7 associated undertakings Share of profit in associated undertakings for the - 3.8 financial period --------------------------------- ---------- ----------- Profit for the financial year attributable to members 211.8 147.5 of the parent company Unrealised surplus on revaluation of licensed 268.0 133.3 estate Share of unrealised surplus on revaluation of - 4.7 licensed estate in associate Actuarial gain/(loss) recognised in the defined 1.3 (0.7) benefit pension scheme Movement of deferred tax asset related to pension (0.4) 0.1 scheme deficit --------------------------------- ---------- ----------- Total recognised gains and losses relating to the 480.7 284.9 year --------------------------------- ---------- ----------- 3. Reconciliation of net cash flow to movement in net debt 2005 2004 £m £m --------------------------------- ---------- ----------- (Decrease)/increase in cash in the year (51.2) 142.8 Cash outflow from change in net debt 200.2 37.1 Issue costs of new long-term loans 1.9 9.9 --------------------------------- ---------- ----------- Change in net debt resulting from cash flows 150.9 189.8 Acquired with subsidiaries - (2,171.0) Amortisation of issue costs and discounts/premiums on (4.3) (4.0) long-term loans Amortisation of interest rate swaps 17.7 7.7 Provision against interest rate swaps - (2.5) Write off of unamortised issue costs (4.6) (4.6) --------------------------------- ---------- ----------- Movement in net debt in the year 159.7 (1,984.6) Net debt at 1 October (3,389.4) (1,404.8) --------------------------------- ---------- ----------- Net debt at 30 September (3,229.7) (3,389.4) --------------------------------- ---------- ----------- NOTES TO THE ACCOUNTSAt 30 September 2005 4. Reconciliation of shareholders' funds 2005 2004 £m £m Total recognised gains and losses 480.7 284.9 Dividends (61.4) (41.2) ------------------------------------- ------- ------- 419.3 243.7 New share capital subscribed - 0.5 Premium on issue of shares - 50.7 Consideration paid for purchase of own shares (37.6) (24.3) Proceeds received from exercise of employee share 3.3 - options ------------------------------------- ------- ------- Share-based expense recognised in operating profit 2.3 1.6 1.6 ------------------------------------- ------- ------- Net addition to shareholders' funds 387.3 272.2 ------------------------------------- ------- ------- Opening shareholders' funds 1,353.6 1,081.4 Closing shareholders' funds 1,740.9 1,353.6 ------------------------------------- ------- ------- 5. Dividends 2005 2004 ------------------------------------- ------- ------- £m £m ------------------------------------- ------- ------- Ordinary dividends on equity shares: Interim paid 5.6 pence (2004 - 3.6 pence ) 19.2 12.5 Final proposed 12.4 pence (2004 - 8.4 pence) 42.2 28.7 61.4 41.2 ------------------------------------- ------- ------- It is proposed that the ex-dividend date will be 28 December 2005. 6. Earnings per share The calculation of basic earnings per ordinary share is based on earnings of £211.8m (2004 - £147.5m) and on 342,456,660 (2004 - 342,806,374) shares being the weighted average number of equity shares in issue during the year after excluding shares held by trusts relating to employee share options. Adjusted earnings per share, which the directors believe reflects the underlying performance of the Group, is based on earnings adjusted for the effects of exceptional items, net of tax and goodwill amortisation of £216.4m (2004 - £163.0m) and on 342,456,660 (2004 - 342,806,374) shares being the weighted average number of equity shares in issue during the year after excluding shares held by trusts relating to employee share options. NOTES TO THE ACCOUNTSAt 30 September 2005 7. Operating profit Reconciliation of operating profit to net cash inflow from operating activities: 2005 2004 £m £m ----------------------------------- ------- --------- Operating profit 520.2 368.9 Depreciation and amortisation 7.9 6.1 Share-based expense recognised in operating profit 2.3 1.6 Decrease/(increase) in debtors 5.3 (7.3) (Decrease)/increase in creditors (12.0) 25.5 Increase in provisions 1.7 6.0 (Increase)/decrease in assets held for resale (2.5) 2.4 ----------------------------------- ------- --------- Net cash inflow from operating activities 522.9 403.2 ----------------------------------- ------- --------- 8. Status of Information The above financial information does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The comparative financial information is based on the statutory accounts for the financial year ended 30 September 2004. Those accounts, upon which the auditors issued an unqualified opinion, have been delivered to the Registrar of Companies. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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