21st Nov 2006 07:00
Enterprise Inns PLC21 November 2006 21 November 2006 Enterprise Inns plc Preliminary announcement For the financial year ending 30 September 2006 Enterprise Inns plc (Enterprise), the leading specialist operator of leased andtenanted pubs in the UK, today announces its results for the year ending 30September 2006. These are the first full set of results reported underInternational Financial Reporting Standards (IFRS) and comparatives have beenre-stated accordingly. Results highlights 2006 2005 IncreaseEBITDA* £547m £528m 3.6%Profit before tax and exceptional items £315m £290m 8.6%Earnings per share 100.9p 61.0p 65.4%Adjusted earnings per share + 68.3p 58.4p 17.0%Dividends 27.0p 18.0p 50.0% * Earnings before interest, tax, depreciation, amortisation and exceptional items + Excludes exceptional items • Average EBITDA per pub has increased by 5.2% to £64,200. • The quality of the pub estate has been improved through the acquisition and disposal of pubs and capital expenditure of £54 million. • At 30 September 2006 the estate comprised 7,809 pubs valued at £5.4 billion. • Cash generated after interest, tax, dividends and capital expenditure amounted to £107 million. • At 30 September 2006 underlying net debt was £3,166 million, an increase of £45 million on the prior year. • 42.3 million shares were repurchased during the year for consideration of £393 million (excluding costs). Commenting on the results, Ted Tuppen, Chief Executive said: "This has been another excellent year for the Enterprise Inns team, workingtogether with our licensees to improve the quality and profitability of our pubsand once again delivering substantial growth in shareholder value. The newfinancial year has started well and we look forward to another year of solidprogress." Enquiries:Emma Baines, Investor Relations Manager 07990 550210Ted Tuppen, Chief Executive 0121 733 7700David George, Chief Financial Officer 0121 733 7700 The investor presentation will be available on the company website atwww.enterpriseinns.com on Tuesday 21 November 2006. A live recording of thepresentation can be accessed at 9.30am GMT by dialling +44(0)20 7162 0125. Arecorded version will be available from 12 noon GMT on +44(0)20 7031 4064passcode 720623 (for European callers) or +1 954 334 0342 passcode 720623 (forUS callers). RESULTS The year to 30 September 2006 has once again seen continued improvements in thequality and profitability of the Enterprise Inns (ETI) estate and further growthin shareholder value. Group EBITDA before exceptional items increased to £547 million, equivalent to£64.2k per pub based upon the weighted average number of pubs (8,522) ownedduring the year, an increase of 5.2% in EBITDA per pub over the prior year.Profit before tax and exceptional items grew by 8.6% to £315 million andadjusted earnings per share increased by 17% to 68.3p. For the second consecutive year, the Board is recommending a 50% increase in therate of dividend paid to shareholders, giving a total for the year of 27.0p pershare. Dividend cover based on adjusted EPS is 2.5 times, in line with thepolicy described a year ago. The final dividend of 18.0p per share will bepayable on 22 January 2007 to shareholders on the register on 29 December 2006. STRATEGY The key strengths of the ETI business have been clarity and focus. From the daythat the business was created in 1991, our two Mission Statements have remainedunchanged: "to deliver long term sustainable growth in shareholder value" and"to be the leading specialist operator of leased and tenanted pubs in the UK". This clarity of purpose and consistency of application has delivered excellentresults over the years. Not only has our estate increased in size from the 368pubs that we purchased in 1991 to the 7809 at 30 September 2006 but, moreimportantly, we have seen a continuous increase in the quality, profitabilityand sustainability of the pubs. This is reflected in average EBITDA per pubhaving increased from £19.7k in 1992 to £66.7k today. We remain convinced that the leased and tenanted model, combining theentrepreneurial flair and commitment of independent licensees with theexperience and financial strength of a major company, offers the best formula tocreate ongoing success in the pub industry of the future. We never cease toadmire the ingenuity and professionalism of our licensees, whether it is theirgritty determination in the tough times or outstanding innovation and flair inexciting times. The clarity and simplicity of our operating model has also delivered outstandingreturns to our shareholders, with Total Shareholder Return (TSR) of some 2640%over the eleven years since our flotation on the London Stock Exchange in 1995,compared to 147% for the FTSE All-Share over the same period. This commitment to shareholder value underlies our current strategy of returningcash to shareholders through our ongoing share buy-back programme. We believethat prices paid for pubs in some recent corporate transactions may in timeprove to be value destructive, particularly where the prices paid seem not to bedriven by the long term quality and sustainability of the pubs but by theavailability of large amounts of relatively cheap funding. In such a market, we prefer to take the opportunity to sell pubs which do notfit in with our long term quality objectives and to use the strength of thefinancial markets to optimise the performance of our balance sheet for thebenefit of our shareholders. It is of course possible that acquisitionopportunities at a sensible price may become available, in which case we wouldreview these in detail and pursue them with vigour if appropriate. TEAM Our strategy has been driven by a commitment throughout the organisation tointegrity, simplicity and empowerment. These values have enabled ETI to expandrapidly through acquisition, effectively integrating large numbers of pubs intothe organisation with minimum disruption. Rapid expansion does from time to timebring with it some inevitable inefficiencies and cultural differences and it hasbeen particularly rewarding in the past twelve months to enjoy a period ofstability where we were able to make some structural and organisational changes,not so much to reduce costs but primarily to streamline the business and improvethe quality of support that we give to our licensees. Ownership, commitment and reward are critical ingredients in the motivation andretention of key staff and we are delighted that 100% of senior managers at ETIhave some form of interest in the ownership of the business, through directshare ownership, share options, Share Incentive Plans or the Save as you Earnscheme. Indeed, 90% of all employees who have been with ETI for two years ormore have an interest in the shares of the company. Shareholders will be aware from the interim statement that Gordon Harrison,Operations Director had decided to retire from the business at the end ofSeptember this year. The Board, in reiterating its thanks for his tremendouscontribution wishes to record its appreciation of all that he has done for theCompany over fifteen years. ESTATE The quality, value and profitability of the ETI estate have continued to improveduring the year, reflecting our investment alongside licensees and astuteacquisitions and disposals. We invested £54 million of capital expenditure into the estate and, togetherwith a similar level of expenditure by our licensees, have improved 1390 pubs,either through major schemes or minor refurbishments. Much of this expenditurehas been focused on preparing our pub estate for the forthcoming ban on smoking,due to be introduced in Wales in April 2007 and England in July 2007. With 89%of our pubs having already developed outside trading areas and over 85% nowoffering food, we are confident that the majority of our licensees are wellplaced to benefit from the forthcoming ban which will, after all, make pubs moreattractive to the significant majority of pub goers and current non - users whodo not smoke. We continued to improve the quality of the estate through churn, buying 95excellent pubs for a total consideration of £80 million. Furthermore, we tookadvantage of a very strong market to sell those pubs which we had alreadyidentified as not fitting our quality and profitability profile for the future.During the year we sold 107 pubs in individual and small package transactions,generating proceeds of £48 million. In addition, in September 2006, we completedthe sale of 769 pubs to Admiral Taverns for total consideration of £318 million.Our total disposal programme delivered a net profit, accounted for as anexceptional item in the accounts, of £67 million above book value. This policy of investment and churn, plus an encouraging revaluation of 6.5% inthe underlying value of the estate, has seen average EBITDA per pub increase to£66.7k for the 7809 pubs which we owned at 30 September 2006. The book value ofthe pub estate at the year end, valued on an individual pub by pub basis, was£5.4 billion, equivalent to an average value per pub of £685k. Our independentvaluers advise us that the valuation would be some 15% higher if valuing theestate as a whole. As part of our annual estates review, we form a view of the quality andsustainability of every pub in the estate. Although inevitably somewhatsubjective, this process has provided a useful measure of the improving natureof the estate over time and we see strong correlations between pub quality andlicensee profitability. It is very satisfying to see that both the averagequality score and the quality profile of the estate have continued to improveover the year. On 20 November 2006 we entered into a binding agreement for the sale of ourentire Scottish estate of 137 pubs to Retail & Licensed Properties Limited for aconsideration of £115 million, generating a profit over book value of £13million. Whilst many of these pubs matched our normal retention criteria, thiswas a strategic sale reflecting our lack of critical mass in Scotland, a marketthat has many different characteristics to England and Wales and one where theleased and tenanted concept is not so well established. LICENSEES A top quality estate of pubs generates sustainable profits for shareholders andlicensees alike and it is the link between the quality of our pubs, theprofitability of our licensees and our operating profit which is critical to ourlong-term success. If we are to attract the best licensees, they must be able tosee the opportunity to achieve appropriate rewards for their hard work andinvestment. This is not just a function of pub quality but also, against abackdrop of increasing costs and bureaucracy, of the essential fairness of thepackage that we offer, particularly the level of rent charged and the help andsupport that we give. In what has been a year of rising costs for licensees, we are satisfied that wehave maintained our commitment to fair rents and once again we are pleased thatour estate leads the way in providing worthwhile returns for our hard workinglicensees. Based upon our annual review of the ETI estate, we estimate that theaverage level of licensee profitability in the 7809 pubs that we owned at 30September 2006 has increased by 7% to £45,000. There is of course a benefit ofestate churn in this average increase, but we nevertheless estimate that on alike for like basis, licensee profitability in our pubs has increased in linewith inflation. We are pleased that licensees recognise that the higher quality andprofitability of our estate, together with the essential fairness of the packagethat we offer, gives them real opportunities to be successful. This is onceagain supported by improvements in key performance indicators: > During the year we received more than 5,000 enquiries from licensees looking to take a pub with ETI, with more than 30% of these enquiries converting to formal applications. > We have 995 fully funded, fully screened licensees in our applicant database. > There have been 820 lease assignments during the year, at an average premium of £68k (£85k including licensee fixtures and fittings). > Rent concessions at 30 September 2006 remained consistent at less than 0.4% of the rent roll. > 1,317 rent reviews were completed during the year and these resulted in an average rental increase of 2.1% per annum. Just two rent reviews went to arbitration. > Adjusted for changes to licensee trading terms where appropriate, average rental income per pub increased by 2.6%, broadly in line with inflation. > Bad debt costs once again reduced and remain around 0.1% of turnover. We do not expect the coming year to be materially easier for the on-trade and itis clear that poorer quality pubs will struggle, particularly if they are unableto create opportunities from the forthcoming ban on smoking. Nevertheless, weare confident that our constant pursuit of quality, and the related improvementsin potential licensee profitability, will once again ensure that the majority ofour pubs continue to gain market share and to prosper. SHARE BUY BACK PROGRAMME Last year we announced our intention to commence a rolling share buy-backprogramme to return surplus cash to shareholders and to ensure that the balancesheet remains efficient. Market purchases totalling 42.3 million of our ordinaryshares were made for an aggregate consideration of £393m (excluding costs)which, together with £70m of dividends paid, resulted in a total of £463m beingreturned to shareholders in the year. In the absence of material pubacquisitions and subject to overall market conditions and shareholder approval,we expect that at least this level of returns will be made in the year to 30September 2007. Indeed, since the year end we have purchased a further 6.0 million shares at a cost of £65m. FINANCIAL STRUCTURE Cash inflow Free cash inflow during the year amounted to £107 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. In addition, net receipts from the purchase and sale of pubs in the yearamounted to £282 million, which included cash receipts of £316 million inrespect of the sale of 769 pubs to Admiral Taverns. Debt facilities In May, the Group agreed a refinancing of its syndicated debt facilities atattractive rates, increasing these facilities from £490 million to £1 billion.At the end of the financial year £575 million was available for drawdown. TheGroup has a flexible financial structure comprising these syndicated debtfacilities, a portfolio of corporate bonds and the Unique securitisation. At 30 September 2006 underlying net debt was £3,166 million, similar to thelevel of £3,121 million at the start of the year. Underlying net debt representsamounts repayable to banks and other lenders net of cash retained in thebusiness. Financial leverage The Board's policy is to maintain efficient leverage of the balance sheet in thecontext of the level of profit generated and the valuation of the pub estate. The two key metrics used to measure financial leverage are interest cover basedon EBITDA and the ratio of debt to EBITDA. Based on the current financingstructure, the Board considers optimal leverage ratios for the Group as a wholeto be around 2.2 times interest cover and approximately 6.6 times debt toEBITDA. At the end of the financial year interest cover was 2.4 times andunderlying net debt to EBITDA was 5.8 times. There is therefore scope toincrease leverage, providing significant headroom for continuing the sharebuy-back programme or for acquisitions should the opportunity arise. Balance sheet The net assets of the Group at year-end were £1,676 million which compares with£1,573 million as at 30 September 2005. The book value of the pub estate at year-end was £5.4 billion, which included acumulative revaluation surplus of £845 million. Tax charge The tax charge of £90 million represents 22% of profit before tax. Thepre-exceptional tax charge of £95 million equates to 30% of profit before taxand exceptional items. The £5m exceptional tax credit comprises a credit of £34m in relation toindexation on the tax base cost of certain properties together with a tax chargeof £29m which primarily relates to the movement in fair value of swaps andprofit on sale of property, plant and equipment. Cash outflow in respect of tax during the year was £69 million and represents22% 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 areclassified as those which are separately identified by virtue of their size ornature to allow a full understanding of the underlying performance of theGroup. Exceptional items are generally those which the Board does not considerto be part of the core operations of the Group. As a result, the Group focuseson 'pre-exceptional' performance measures in order to compare underlyingperformance year on year. The most significant exceptional items in the year are the profit on disposal ofproperty, plant and equipment of £67 million and the movement in fair value ofinterest rate swaps of £40 million. The profit on disposal is highlighted asexceptional as it is not considered to be part of the core business of theGroup. The profit of £67 million includes £51 million of profit arising on thebatch disposal to Admiral Taverns. The movement in fair value of interest rateswaps is classified as exceptional as it is a non-cash item which is driven byfactors outside of the control of the Group. The valuation of interest rateswaps in the year has led to a £40 million credit in 2006 compared to a £20million charge in the previous year. This volatility is largely due to changesin forecast interest rates which have increased this year, reducing the forecastcost of maintaining the swaps. INTERNATIONAL FINANCIAL REPORTING STANDARDS The new International Financial Reporting Standards (IFRS) apply for our 2005/6financial year, with our Group accounts presented accordingly. The restatedfinancial results under IFRS for the year ended 30 September 2005 and the 6months ended 31 March 2005 were published in May 2006. REAL ESTATE INVESTMENT TRUSTS (REITs) We continue to monitor the potential for creating shareholder value that REITsmay offer. Detailed legislation has now been issued, albeit subject to furtherguidance notes and the ability of government to change the rules withoutreference to further legislation. We therefore continue to review with ouradvisers the costs, benefits and risks of structuring the Group to takeadvantage of this potentially favourable tax regime and the potential increasein long term shareholder value that would result from any change. INDUSTRY ISSUES Licensing reform These results reflect almost a full year of trading under the new, more flexiblelicensing regime introduced in November 2005. Despite some early problems causedprimarily by lack of clarity in the detail of the legislation, the system hasnow settled down and can be seen as broadly positive. Although the additionaltrading hours have had only a minimal effect on pub profitability, the increasedflexibility in opening hours has benefited the consumer and helped to reducealcohol related disorder. We share the government's determination to tackleirresponsible drinking and continue to work hard with our colleagues in theon-trade to tackle underage drinking and irresponsible promotions. Ban on smoking in pubs Our experiences in Scotland, where the ban on smoking was introduced in Aprilthis year, confirmed that good quality pubs continued to perform well,particularly where licensees had prepared for the ban, taking advantage ofavailable outside areas and developing their pub to reflect the changedcircumstances. The smoking ban will become effective in Wales and in England in April and July2007 respectively and we are confident that our licensees are in a position tomake the most of this evolution in pub going. CONCLUSION AND OUTLOOK This has been another exciting year for ETI, working alongside our licensees togrow market share and profitability. The team has once again deliveredsubstantial growth in earnings and dividends and we have made excellent progresswith our ongoing share buy back programme. The new financial year has startedwell and we look forward to our pubs continuing to perform ahead of the marketand to the team delivering further solid growth in shareholder value. Group Income StatementFor the year ended 30 September 2006 2006 2005 re-stated # Pre- Pre- Notes exceptional Exceptional Total exceptional Exceptional Total items items items items £m £m £m £m £m £m------------------------------------------------------------------------------------------------------ Revenue 970 - 970 952 - 952Cost of sales (387) - (387) (385) - (385)------------------------------------------------------------------------------------------------------Gross profit 583 - 583 567 - 567------------------------------------------------------------------------------------------------------ Administrative expenses (36) (2) (38) (39) - (39)------------------------------------------------------------------------------------------------------EBITDA + 547 (2) 545 528 - 528------------------------------------------------------------------------------------------------------ Depreciation andamortisation (8) - (8) (10) - (10)------------------------------------------------------------------------------------------------------Operating profit 539 (2) 537 518 - 518------------------------------------------------------------------------------------------------------ Net profit on sale ofproperty, plant andequipment - 67 67 - 14 14Movements fromrevaluation ofpub estate - (2) (2) - (4) (4) Interest receivable 6 - 6 9 - 9 Interest payable (230) - (230) (237) - (237)Write off of unamortisedissue costs - (3) (3) - (5) (5)Movement in fair value ofinterest rate swaps - 40 40 - (20) (20)------------------------------------------------------------------------------------------------------Total finance costs (230) 37 (193) (237) (25) (262)------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Profit before tax 315 100 415 290 (15) 275------------------------------------------------------------------------------------------------------ Taxation 4 (95) 5 (90) (90) 24 (66)------------------------------------------------------------------------------------------------------Profit after tax andattributable to members ofthe parent company 220 105 325 200 9 209------------------------------------------------------------------------------------------------------ Earnings per ShareBasic 5 100.9p 61.0pDiluted 5 100.1p 60.3p Adjusted * 5 68.3p 58.4pAdjusted diluted * 5 67.8p 57.7p Dividends 6 Dividends paid per share in respect of the year 9.0p 5.6pDividends proposed pershare in respect of theyear 18.0p 12.4p ------- ------- 27.0p 18.0p ------- -------# see note 2 + Earnings before interest, tax, depreciation and amortisation* Excludes exceptional items Group Statement of Recognised Income and ExpenseFor the year ended 30 September 2006 Re-stated # 2006 2005 £m £m--------------------------------------------------------------------------------Unrealised surplus on revaluation of licensed estate 323 273Movement in deferred tax liability related torevaluation of licensed estate (91) (74)Deferred tax related to share schemes recogniseddirectly in equity 5 7Write down of non-current assets held for sale (see note 2) - (4)Actuarial gain on defined benefit pension scheme - 1--------------------------------------------------------------------------------Net income recognised directly in equity 237 203 Profit for the year 325 209 --------------------------------------------------------------------------------Total recognised income and expense for the yearattributable to members of the parent company 562 412-------------------------------------------------------------------------------- # see note 2 Group Balance SheetAt 30 September 2006 Re-stated # 2006 2005 £m £m--------------------------------------------------------------------------------Non-current assetsGoodwill 417 417Investments 2 -Intangible assets: operating lease premiums 24 27Property, plant and equipment 5,343 5,157Financial assets 1 --------------------------------------------------------------------------------- 5,787 5,601 Current assetsAssets held for sale 6 7Trade and other receivables 94 81Cash 111 96Financial assets 1 --------------------------------------------------------------------------------- 212 184 Non-current assets held for sale 10 36 --------------------------------------------------------------------------------Total assets 6,009 5,821--------------------------------------------------------------------------------Current liabilitiesTrade and other payables (210) (217)Current tax payable (52) (46)Financial liabilities (54) (122)Provisions (1) (1)-------------------------------------------------------------------------------- (317) (386)Non-current liabilitiesFinancial liabilities (3,316) (3,260)Accruals and deferred income (4) (5)Provisions (4) (7)Deferred tax (692) (590)-------------------------------------------------------------------------------- (4,016) (3,862) --------------------------------------------------------------------------------Total liabilities (4,333) (4,248)----------------------------------------------------------------------------------------------------------------------------------------------------------------Net Assets 1,676 1,573-------------------------------------------------------------------------------- EquityCalled up share capital 16 17Share premium account 486 486Revaluation reserve 845 667Capital redemption reserve 9 8Merger reserve 77 77Treasury share reserve (227) -Other reserve (42) (56)Profit and loss account 512 374--------------------------------------------------------------------------------Enterprise Inns shareholders' equity 1,676 1,573--------------------------------------------------------------------------------# see note 2 Group Cash Flow StatementFor the year ended 30 September 2006 2006 2005 £m £m--------------------------------------------------------------------------------Cash flow from operating activitiesOperating profit 537 518Depreciation and amortisation 8 10Share-based expense recognised in profit 3 3(Increase)/decrease in receivables (10) 5Decrease in payables (2) (12)(Decrease)/increase in provisions (3) 2Decrease/(increase) in current assets held for sale 1 (2)-------------------------------------------------------------------------------- 534 524Tax paid (69) (53)--------------------------------------------------------------------------------Net cash flows from operating activities 465 471 Cash flows from investing activitiesPayments to acquire public houses (80) (14)Payments made on improvements to public houses (54) (49)Payments to acquire other property, plant and (7) (1)equipmentReceipts from sale of property, plant and equipment 362 47--------------------------------------------------------------------------------Net cash flows from investing activities 221 (17) Cash flows from financing activitiesInterest paid (234) (244)Interest received 7 9Issue costs of long-term loans (4) (2)Equity dividends paid (70) (48)Payments to acquire shares held in employee benefit trust (17) (23)Payments to acquire own shares (388) -Receipts from exercise of share options 5 3Re-structuring of interest rate swaps (30) -Debt due beyond one year- new long term loans 602 771- repayment of long term loans (542) (971)--------------------------------------------------------------------------------Net cash flows from financing activities (671) (505) Net increase/(decrease) in cash 15 (51)Cash at 1 October 96 147--------------------------------------------------------------------------------Cash at 30 September 111 96-------------------------------------------------------------------------------- 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 2005 have been derived from the UK GAAPstatutory accounts, which have been filed with the registrar of companies and onwhich the auditors gave an unqualified opinion, as restated to comply withInternational Financial Reporting Standards (IFRS). 2. Accounting policies and basis of preparation With effect from 1 October 2005, Enterprise Inns plc moved to reporting itsGroup financial results in accordance with IFRS as required by European UnionLaw. These results have therefore been prepared in accordance with IFRS. Theresults for prior periods have been re-stated using IFRS so that propercomparison can be made with the results for the current period. The Group's IFRS accounting policies along with reconciliations of the resultsfor the periods to 31 March 2005 and 30 September 2005 from UK GAAP into IFRSwere published on 4 May 2006. The document 'Re-statement of financialinformation under International Financial Reporting Standards' is available onthe company's website at http://www.enterpriseinns.com/investor_zone/ Since the publication of the 'Restatement of Financial Information under IFRS'released in May 2006, the Group has amended the 2005 Income Statement andBalance Sheet in respect of the application of IFRS 5 'Non-current assets heldfor sale and discontinued operations'. This amendment relates to the treatmentof the write-down of property on classification as 'held for sale' under IFRS 5.The write down to fair value less costs to sell is first recognised in theRevaluation Reserve, to the extent of any existing surplus for the asset. It isthen recognised in the Income Statement within the line 'movements fromrevaluation of pub estate'. Previously, the entire write down was recognised inthe Income Statement within the line 'Net profit on sale of property, plant andequipment'. The impact of this amendment is as follows: • Net profit on sale of property has been increased by £11 million being the amount previously recognised on write down of pubs identified for sale. • The first £4 million of these write downs has been recognised in the Revaluation Reserve against surpluses that existed for the individual pubs concerned. • The remaining £7 million of write downs has been recognised within the line 'movement from revaluation of pub estate', reducing the previously reported credit to a £4 million charge. • Profit before tax has been increased by £4 million, being the combination of the amendments above • The tax credit within exceptional items as been reduced by £1 million being the deferred tax impact of the amendments made. • Profit after tax is therefore increased by £3 million being the post-tax impact of the amendments made. In addition to the above amendment, the 2005 Balance Sheet has been reclassifiedin respect of the application of IAS 1 'Presentation of financial statements'and IAS 39 'Financial instruments: recognition and measurement'. The interactionof these two standards means that all derivatives that are not part of adesignated and effective hedging relationship should be classified as currentassets or liabilities. The Group has therefore re-classified the fair value ofall interest swaps as current liabilities in 2005. Previously, the fair value ofthe swaps was allocated between 'current' and 'non-current' liabilities. £86m offair value was previously classified as non-current and this amount hastherefore been re-classified as current. 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 relates to restructuringcosts. Net profit on sale of property 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 interest rate swaps Under IFRS the interest rate swaps are re-valued to fair value at each BalanceSheet date 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 Tax 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 £34m has been classified as anexceptional item. All other movements in respect of this deferred tax liabilityare accounted for in equity and recognised in the Statement of Recognised Incomeand Expense. The tax charge relating to other exceptional items of £29m is also included inexceptional items. The total exceptional tax credit is therefore £5m. 4. Taxation The pre-exceptional tax charge of £95m for the year equates to an effective taxrate of 30.2%. This effective tax rate does not include the effect ofexceptional items. 2006 2005 re-stated # Pre- Pre- exceptional Exceptional Total exceptional Exceptional Total items items items items £m £m £m £m £m £m-----------------------------------------------------------------------------------------Current tax 79 (1) 78 71 (1) 70Deferred tax 16 (4) 12 19 (23) (4)-----------------------------------------------------------------------------------------Total 95 (5) 90 90 (24) 66-----------------------------------------------------------------------------------------# see note 2 5. Earnings per Ordinary Share The calculation of basic earnings per ordinary share is based on earnings of£325m (2005: £209m) and on 322.1million (2005: 342.4 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 £220m (2005: £200m) and on 322.1 million(2005: 342.4 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 £325m (2005:£209m) and adjusted profit of £220m (2005: £200m) and on 324.7 million (2005:346.6 million) ordinary shares being the weighted average number of equityshares in issue during the year adjusted for dilutive ordinary shares relatingto employee share options. 6. Dividends 2006 2005Paid during the year £m £m--------------------------------------------------------------------------------Equity dividends on ordinary shares:Final dividend relating to prior year 12.4 pence(2005 - 8.4 pence) 42 29Interim dividend for current year 9.0p (2005 - 5.6 pence) 28 19-------------------------------------------------------------------------------- 70 48--------------------------------------------------------------------------------Proposed for approval by shareholders at the AGMFinal dividend for current year 18.0 pence (2005 - 12.4 pence) 54 42 Proposed dividends are not accounted for until they are approved at the AGM. Thefinal dividend of 18.0 pence per share will be paid on 22 January 2007 tomembers on the register on 29 December 2006. 7. Proposed share split The Company will be seeking shareholder approval at the Annual General Meetingon 16 January 2007 for the subdivision of each ordinary share of 5 pence (issuedand un-issued) into two ordinary shares of 2.5 pence. If approved, this sharesplit will be implemented as soon as practicable after the Annual GeneralMeeting. The directors believe that this share split should be attractive toshareholders by improving liquidity in the Company's shares. 8. Statement of changes in equity Re-stated # 2006 2005 £m £m--------------------------------------------------------------------------------Total equity at start of year 1,573 1,240Total recognised income and expense for the year 562 412Equity dividends paid (70) (48)Consideration paid for purchase of own shares (230) -Purchase of shares to be held in trust - (37)Cancellation of ordinary shares (166) -Employee share option entitlements exercised in the year 4 3Share-based expense recognised in operating profit 3 3--------------------------------------------------------------------------------Total equity at end of year 1,676 1,573--------------------------------------------------------------------------------# see note 2 Note - the cost of the shares re-purchased during the year was £393m and inaddition £3m of costs were incurred. Of this total, £388m was paid in cash whichcan be seen in the cash flow statement. The remaining £8m was accrued at theyear end as the shares had been re-purchased but the cash was not yet paid at 30September. 9. Events after the balance sheet date On 20 November 2006 the Group entered into a binding agreement to sell itsentire Scottish estate of 137 pubs to Retail & Licensed Properties Limited forconsideration of £115m. 10. Additional cash flow information a) Reconciliation of net cash flow to movement in net debt 2006 2005 £m £m--------------------------------------------------------------------------------Increase/(decrease) in cash in the year 15 (51)Cash (inflow)/outflow from change in debt (30) 200Issue costs of new long term loans 4 2--------------------------------------------------------------------------------Change in net debt resulting from cash flows (11) 151 Amortisation of issue costs and discounts/premiums onlong-term loans (7) (4)Amortisation of securitised bonds 10 5Change in fair value of interest rate swaps 40 (20)Write off of unamortised issue costs (3) (5)--------------------------------------------------------------------------------Movement in net debt in the year 29 127 Net debt at start of year (3,286) (3,413)--------------------------------------------------------------------------------Net debt at end of year (3,257) (3,286)-------------------------------------------------------------------------------- b) Analysis of net debt 2006 2005 £m £m--------------------------------------------------------------------------------Corporate bonds (1,185) (1,185)Syndicated bank borrowings (425) (260)Securitised bonds (1,667) (1,772)--------------------------------------------------------------------------------Gross debt (3,277) (3,217)Cash 111 96--------------------------------------------------------------------------------Underlying net debt (3,166) (3,121) Capitalised debt issue costs 20 27Fair value adjustments on acquisition of bonds (67) (77)Fair value of interest rate swaps (39) (109)Finance lease payables (5) (6)--------------------------------------------------------------------------------Net debt (3,257) (3,286)-------------------------------------------------------------------------------- Balance sheet:Current financial assets 1 -Non-current financial assets 1 -Current financial liabilities (54) (122)Non-current financial liabilities (3,316) (3,260)Cash 111 96--------------------------------------------------------------------------------Net debt (3,257) (3,286)-------------------------------------------------------------------------------- Underlying net debt represents amounts repayable to banks and other lenders netof cash retained in the business. 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