Punch Taverns PLC Interim Results 2017

PUNCH TAVERNS PLC

("Punch" or "the Group")

Interim Results for the 28 weeks to 4 March 2017

Corporate Developments:

Shareholders approved the sale of the Group to Vine Acquisitions Limited on 10 February 2017 for 180 pence per share. Completion of the sale is expected (subject to competition conditions) before the end of August 2017.

Financial highlights:

§ Like-for-like net-income1 decline of 1.2% in the leased and tenanted estate, including the Mercury division (H1 2016: 0.7% growth), but flat after adjusting for the impact of the previously flagged temporary slow-down in letting activity;

§ Underlying adjusted EBITDA1 of £88 million (H1 2016: £94 million); reflecting the impact of £53 million of disposals completed over the last 12 months;

§ Progress in reducing interest costs with the £65 million early repayment of junior notes in November 2016;

§ Strong liquidity, with £131 million of cash on the balance sheet, no short-term bank debt and low scheduled amortisation at c.£36 million per year until 2021;

§ Increased pub investment with £41 million of total capital expenditure (H1 2016: £25 million), supporting the roll-out of the Retail division;

§ Continued good progress in realising value from our extensive property portfolio with £18 million of net disposal proceeds (H1 2016: £100 million), £5 million above book value (H1 2016: £13 million);

§ Statutory loss before tax of £174 million (H1 2016: £55 million profit), includes £198 million of non-underlying charges, principally due to the write-down in goodwill and assets following shareholder approval on 10 February 2017 for the sale of the Group.

Operational progress:

§ Doubled the size of the Retail pub division since the August 2016 year end, with 171 pubs open and trading as at April 2017 (August 2016: 85 pubs);

§ Launch of a new innovative operating agreement, designed to be a simpler version of the Falcon Retail contract, targeted towards smaller drinks led pubs. We opened our first pub under this new agreement in April 2017;

§ Recent market uncertainty resulting from the sale of the Group has impacted letting activity, together with the previously reported impact of the new Pubs Code Regulations. Consequently, we now expect it to take up to 12 months to return to our long-term target of having a core estate of 93%-95% let on substantive agreements;

§ Continued progress with the Mercury pub division (management of lower profitability sites under a reduced cost operating model), on-track to deliver like-for-like net income growth in this division from the end of 2017;

§ Growing commercial free-of-tie lease division with 57 pubs in operation with an average rent of £71,000;

§ Tight control over central costs with short-term cost savings offsetting the previously announced cost increases from additional resource to support the execution of our strategy.

Duncan Garrood, Chief Executive Officer of Punch Taverns plc, commented:

"During the period, we have doubled the size of our Retail estate and continue to innovate our operating agreements. This has been achieved whilst managing through a period of significant change, ahead of the sale of the Group which is now expected to complete before the end of August 2017."

4 May 2017

1 In the reporting of financial information throughout the Interim Report, the Directors have adopted various Alternative Performance Measures (APMs). APMs are presented in order to supplement reported results by providing further clarity on the Group's underlying performance and to present additional information that reflects how the Directors monitor and measure the progress of the Group. Definitions of each of the APMs included in the Interim Report and how they reconcile to reported measures can be found on note 14.

Enquiries:

The interim results presentation and audio cast is available on our website, www.punchtavernsplc.com.

Forward-looking statements

This report contains certain statements about the future outlook for Punch. Although we believe our expectations are based on reasonable assumptions, any statements about future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

CHIEF EXECUTIVE'S REVIEW

APPROVAL OF RECOMMENDED CASH OFFER FOR PUNCH BY VINE ACQUISITIONS LIMITED

On 15 December 2016, Vine Acquisitions Limited and Punch announced that they had reached agreement on the terms of a recommended cash offer for the entire issued and to be issued share capital of Punch by Vine Acquisitions Limited (the "Offer") and the associated disposal of the Punch A Group to Heineken UK Limited. Under the Offer, each Punch shareholder shall be entitled to receive for each Punch share held 180 pence in cash. The Offer values the entire issued and to be issued ordinary share capital of Punch at approximately £402.7 million.

At the Court and General Meetings held on 10 February 2017, shareholders voted to approve the Offer.

Subject to the satisfaction or (if capable of waiver) waiver of the remaining conditions set out in the Scheme Document, including the Court sanctioning the Scheme at the Court Hearing, the Offer is expected to become effective before the end of August 2017.

MARKET POSITIONING

Punch is a leading operator of pubs in the United Kingdom, with the second largest pub estate by number of pubs. As at 4 March 2017, the Punch estate comprised 3,227 pubs located across the UK, 96% of which are held on a freehold or long leasehold basis.

Punch operates its pubs predominantly under the tied leased and tenanted model, with a small but growing number of pubs operated under both a Retail operating model and as free of tie commercial leases.

Our model makes a pub business accessible to many more publicans than the purchase of a freehold, while also providing an extensive package of support to our publicans to help them build a successful pub business. The business model is simple and adaptable with no single pub or any single publican accounting for more than 1% of the Group's operating profit.

Under the tied leased and tenanted model, publicans lease pubs from the Group on agreements which provide a flexible split between rent and tied drink margin. There is a higher risk for the publican if they opt for an agreement with a higher rent and lower drinks price, as opposed to an agreement with a lower rent and higher drinks price which provides the publican with protection during periods of lower trading.

Under the Falcon Retail contract, Punch retains 100% of the revenue and cost of sales (like a traditional managed house operation) and pub costs (excluding staff costs), and pays the retailer (the publican) a percentage of the retail sales, out of which the retailer pays their staff costs. The retailer is free to focus on delivering an excellent consumer experience whilst Punch supports the back-of-house processes.

PERFORMANCE SUMMARY

In the 28 weeks ended 4 March 2017, Punch generated underlying adjusted EBITDA of £88.4 million (H1 2016: £94.0 million), which reflects the impact of £53 million of disposals completed over the last 12 months.

The leased and tenanted pub estate (including Core and Mercury divisions) saw like-for-like net income decline by 1.2%, which reflects the impact on letting activity following the introduction of the Pubs Code Regulations, coupled with the recent market uncertainty resulting from the announced sale of the Group.

The percentage of pubs available to let in the Core estate has increased to 10% (up 3.7pts on March 2016). After adjusting for this impact on letting activity, adjusted leased and tenanted like-for-like net income was broadly stable.  While we are confident in our plans to improve this position, we now expect it to take up to 12 months to return to our long-term target of having a core estate of 93%-95% let on substantive agreements.

We have doubled the size of the Retail pub division since the August 2016 year end, with 171 pubs open and trading as at April 2017. Building on our learnings of the Retail model, we have now created a new 'Front of House' agreement, which is targeted towards smaller drinks led pubs.

While the impact on letting activity, has impacted near-term trading, our expectations for the longer-term growth prospects of the business remain unchanged.

STRATEGIC AND OPERATIONAL REVIEW

Following my appointment as Chief Executive Officer in June 2015, I led a full review of our strategic priorities, which we communicated to the market in November 2015. Approximately 18 months on, I am pleased with the progress the business has made towards the delivery of this strategy which is recognised in the recommended cash offer for Punch by Vine Acquisitions Limited.

We will continue to develop innovative new Retail agreements and support a phased lower risk approach to capital investment. Our plans enable us to meet both publican and consumer needs in an evolving pub market by taking greater control of the property and retail offer, but without the added overhead that comes with directly employing pub staff. Our strategy enables us to maximise the value in our properties through a phased, lower risk approach to pub management, coupled with unlocking significant additional value from our property portfolio.

Development of the Punch model

1. Deliver a clear and consistent bespoke consumer offer, relevant to each pub

Over the last two years we have created an exciting portfolio of new concepts, which are being rolled out across the business in a measured way. To date we have 61 pubs operating under a retail concept, with five existing concepts ('Mighty Local' community drinks led pubs, 'Champs' sports bars, 'Village Pub & Kitchen' and 'Our Local' community food and drink led pubs, 'Punch Inns' accommodation led pubs and the soon to be launched 'Urban Oasis' high street pubs).

2. Broad range of operating models in line with an evolving market

While approximately 51% of the core Punch estate is leased to publicans on long-term leases, the majority of agreements will be coming to the end of their lease at their next rent review or have five or less years remaining on their lease at their next rent review. Only around 6% of the core Punch estate will have ten or more years remaining on their lease at their next rent review.

We continue to see a market shift away from long-term fully repairing leases towards shorter-term tenancy agreements where the external building repair obligations remain the responsibility of the pub company. There has also been a marked shift away from fixed rent agreements towards variable turnover linked agreements.

In addressing these changing market dynamics, we have introduced a number of new operating formats including:

§ Retail:

- Managed 'houses of excellence';

- 'Falcon' Retail contract;

- 'Front of House' Retail contract;

§ Flexible short-term tenancies;

§ Turnover leases; and

§ Commercial free-of-tie leases.

Retail:

The Falcon Retail contract has proved to be extremely popular with prospective and new publicans, enabling us to double the size of this division since the August 2016 year end.

The projected underlying pub EBITDA for the 171 pubs operating under the Falcon retail contract is between £90,000 and £105,000. The Falcon contract has proved to be extremely successful in the right pubs, with our highest earning pub projected to make c.£300,000 in underlying pub EBITDA this year, and we now have a much clearer picture of which pubs work best under this Retail model.

Building on these learnings, we have recently launched our new 'Front of House' agreement, which represents a much-simplified version of the Falcon Retail contract, and is targeted towards smaller drinks led community pubs, which represent the largest segment of our estate.

The 'Front of House' agreement operates along a similar financial model to that of the Falcon Retail contract, in that the retailer (the publican) is paid a percentage of the retail sales, out of which the retailer pays their staff costs. This agreement has been simplified in the areas of cash management, overhead and operational support requirements, management of pub consumables and flexibility on food (the publican retains the food business in pubs with limited food opportunity). These simplifications will allow this type of Retail model to become financially attractive for smaller turnover pubs, and allow a faster roll-out, without the need for separate specialist field team resource.

Flexible short-term tenancies:

Given the market preference for more flexible shorter-term tenancy agreements over that of long-term fully repairing leases, we expect the majority of new lettings to be on either short-term tenancies or Retail contracts ('Falcon' or 'Front of House').

Short-term tenancies can provide publicans with the benefit of having a six month notice term should they wish to reduce the term of their agreement, the added benefit of external building repair obligations residing with the pub company and the availability of greater operational support through our fully supported open book tenancy agreements.

Commercial free-of-tie leases:

We have continued to build a small but growing commercial free-of-tie operation with a number of fixed rent and variable turnover-linked leases in operation. As at April 2017 we had 57 such commercial pub leases in operation with an average gross rent of £71,000 (November 2016: 46 free-of tie leases at £73,000 average rent).

Our focus for this division is to work with expert operators, mainly in the premium and destination food led segments of our estate, with stronger covenants, in order that we can maximise both the level of rental income and the pub asset value.

3. Refocussing of management resources to drive improved support, innovation and operational delivery

We previously flagged, at the time of our full year results, that central costs were expected to increase in 2017, due to additional resource recruited to support the execution of our strategy, with efficiency savings expected to be made from 2018 onwards.

Having reviewed our operating structures, we are confident that the planned efficiencies can be realised from 2018, with a focus on minimising field employee drive-times and maximising time in-pub.

In addition to realising support cost efficiencies, we plan to change the profile of pub capital expenditure, which will in part, be supported by the roll-out of the new 'Front of House' Retail agreement. Turnover based agreements such as 'Front of House' provide the opportunity to implement a staged investment approach (as opposed to one single investment event at the point of letting), allowing for lower absolute spend levels, reduced risk, and ensuring building maintenance is regularly addressed.

4. Delivering value to our publicans through an enhanced Punch Buying Club

Punch leads the sector with the Punch Buying Club, which provides a real point of differentiation to our publicans. Approximately 75% of Punch's drinks orders are placed through the on-line buying club which compares to around 30% for the rest of the leased and tenanted sector.

In January of this year we launched a new and improved version of the Buying Club which enhances the publican journey through order to pay and enhances Punch's ability to provide cross-channel personalised offerings throughout the estate no matter which trading style, concept or agreement the outlet trades.

Through the Punch Buying Club, we leverage our Group buying power to provide a range of free services including commercial WiFi, publican and pub staff training, marketing materials and legal helplines, as well as access to cheaper goods and services.

5. Releasing significant additional value from our under-utilised property portfolio and land bank

Having completed our strategic disposal programme, we are now focussed on realising additional value from the non-trading parts of our extensive freehold property and land estate, which is not currently recognised in the external property valuation.

Progress has already been made in unlocking value with £6 million of additional value having been realised in the half year (in addition to the £11 million of value realised in FY16), having identified upwards of £100 million of potential additional value (post planning and net of development expenditure), of which a further £9 million is subject to due diligence and exchange of contracts.

REGULATORY CHANGES

The Pubs Code Regulations, which form part of the Small Business, Enterprise and Employment Act 2015, came into effect on 21 July 2016. The legislation has three key aspects, a statutory code, the appointment of an independent adjudicator and a Market Rent Only (MRO) option.

The MRO option enables some occupational lessees to elect to opt-out of the drinks supply tie at certain points during the term of their lease agreement and therefore occupy the premises on a standard commercial property lease, paying rent only. In the event that a lessee elected to invoke the MRO option, whilst our income derived from the supply of tied drinks products would be partially offset by increases in rent, our total income to be adversely affected.

Publicans lease pubs from the Group under a wide variety of agreements ranging from short-term tenancies (less than 5 years), tied leases (10 to 30 years) and free-of-tie commercial leases. Approximately 70% of Punch's Core estate pubs do not have a rent review MRO trigger event before the end of their agreement. Tied leases with five years remaining on their lease at the next rent review represent c.23% (c.590 pubs) of the Core estate, while tied leases with ten or more years remaining on their lease represent a further c.6% (c.140 pubs) of the Core estate.

Since the new regulations came into effect on 21 July 2016, 90 publicans have requested MRO comparison figures, of which 3 MRO leases have been concluded, 29 are currently under review with the publicans, with the remainder having been either concluded under a tied rent review or renewal, or lapsed.

Our expectations, and early indications are, that the majority of publicans will continue to operate under, and enjoy the benefits of the tied drinks model, noting however that it remains relatively early days with the new legislation still less than 12 months old.

FINANCIAL REVIEW - Results for the 28 weeks to 4 March 2017:

Average outlet profit per pub across the entire estate of 3,227 pubs declined by 0.3% (note 14). The combined underlying results of the Core and Mercury divisions (before central costs) were down 4.6% on last year at £107.0 million, reflecting the impact of a 4.3% reduction in the size of the estate, having realised net proceeds of £53 million over the last 12 months.

Like-for-like net income (which reflects rental income and net income from the sale of drinks and other products to our publicans) in the Core leased and tenanted division, after adjusting for the impact of disposals, was 1.2% down on last year.

Profits in the Core division have declined by £3.7 million, of which £0.5 million is due to the disposal programme, £1.3 million due to the decline in like-for-like net income in the leased and tenanted estate (reflecting the increased number of pubs on temporary agreements), £1.0 million due largely to periods of closure ahead of conversion of pubs to the Falcon Retail division, and £0.9 million increase in leased and tenanted pub operating costs.

Profits in the Mercury division have declined by £1.5 million, the majority of which, £0.8 million, is due to the disposal programme. Excluding the impact of disposals, the underlying profit decline of £0.7 million largely relates to reduced profits in the non-core pubs either currently on the market for disposal, or planned for disposal in FY18.

We have continued to maintain a tight control on costs, with central costs broadly in line with that of the prior period as short-term cost savings have offset the previously flagged increase in additional resource recruited to support the roll-out of the Retail division.

Underlying net finance costs reduced by £3.6 million to £58.5 million, reflecting the benefit of the prepayment of £65.0 million junior notes in November 2016, combined with the ongoing amortisation of securitisation debt.

Underlying taxation:

The underlying taxation charge is based on an estimated full year effective tax rate of 19.6% (H1 2016: 19.3% before post-tax earnings from joint ventures). This compares with the UK corporation taxation rate of 19.6% for the financial year ending August 2017.

The availability of sizeable capital allowance pools amounting to c.£300 million (generated from our investment programme in community pubs) at the half year, together with other tax assets is expected to result in limited corporation tax payments being due in the current year.

Non-underlying items:

A number of non-underlying items were recognised during the period amounting to a net charge of £202.3 million, resulting in a net loss after tax of £183.0 million. This was principally due to the accounting impact of recognising impairments of goodwill and assets crystalized by the sale of the Group.

The principal items are set out below:

· £224.3 million impairment of goodwill and assets relating to the Group disposal (note 4);

· £3.0 million operating charge, of which £1.4 million is advisor fees incurred relating to the sale of the Group, and £1.6 million on the conversion of pubs to the Retail division (one-off lessee compensation and launch costs);

· £5.0 million profit on disposal of properties;

· £0.3 million goodwill charge on the disposal of Core pubs;

· £24.6 million credit on the mark-to-market movement in value of interest rate swaps; and

· £0.5 million charge for refinancing costs.

The tax effect of all of these items, together with the resolution of prior year tax matters, gave rise to a tax charge of £3.8 million.

Cash flow:

Cash flow before the benefit of the strategic activities amounted to an outflow of £7.5 million for the half year, reflecting the seasonal working capital movement and the acceleration in capital expenditure. For the last 12 months, there was an equivalent cash inflow of £20.3 million.

Note: Underlying adjusted EBITDA, non-underlying operating and finance costs, working capital and other cash movements form net cash from operating activities and other financing costs as set out in the Group's cash flow.

Net cash flow available for debt reduction, after including the benefit of the strategic activities amounted to £32.4 million for the last 12 months, and includes a working capital outflow of £7.5 million largely relating to disposed pubs and a reduction in employee compensation accruals.

Capital expenditure has increased with £41 million of spend (LTM: £76 million) in the half year, as we have accelerated the roll-out of the Retail division. The rate of capital expenditure is expected to slow into the second half of the year, with an expected full year spend of c.£60 million.

Total cash balances reduced by £103 million in the period from £234 million at the August 2016 year end to £131 million at March 2017. The reduction in cash balances in the period is largely due to £65 million early repayment of junior debt, seasonal working capital outflow in the first half of the year, and the increase in capital expenditure to support the accelerated roll-out of conversion of pubs to the Retail division.

A small proportion of the annual interest charge is in the form of payment-in-kind (PIK) interest, which accrues and is then capitalised at each quarter end. The PIK interest amounted to £5.6 million for the half year and £12.5 million for the last 12 months.

Financing and capital structure

We have an extensive largely freehold property and land portfolio, benefit from £131 million of cash on the balance sheet, have no short-term bank debt, and have long-term securitised debt with low scheduled amortisation at c.£36 million per year until 2021.

The nominal value of net debt (excluding the mark-to-market of interest rate swaps) increased by £13 million in the period to £1,195 million, reflecting the cash outflow in the period and the capitalisation of payment-in-kind interest.

CONSOLIDATED CONDENSED INCOME STATEMENT

for the 28 weeks ended 4 March 2017

1 Adjusted EBITDA represents earnings before depreciation and amortisation, profit on sale of property, plant and equipment and non-current assets classified as held for sale, profit on disposal of joint venture, impairment, movement in valuation of properties, goodwill charge, finance income, finance costs, movement in fair value of interest rate swaps and tax of the Group.

CONSOLIDATED CONDENSED INCOME STATEMENT continued

for the 28 weeks ended 4 March 2017

1 Adjusted EBITDA represents earnings before depreciation and amortisation, profit on sale of property, plant and equipment and non-current assets classified as held for sale, profit on disposal of joint venture, impairment, movement in valuation of properties, goodwill charge, finance income, finance costs, movement in fair value of interest rate swaps and tax of the Group.

CONSOLIDATED CONDENSED STATEMENT OF COMPREHENSIVE INCOME

for the 28 weeks ended 4 March 2017

CONSOLIDATED CONDENSED BALANCE SHEET

at 4 March 2017

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN EQUITY

for the 28 weeks ended 4 March 2017

CONSOLIDATED CONDENSED CASH FLOW STATEMENT

for the 28 weeks ended 4 March 2017

NOTES TO THE FINANCIAL STATEMENTS

for the 28 weeks ended 4 March 2017

1. ACCOUNTING POLICIES

Basis of preparation

This condensed set of interim financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU. The Group's Annual Report and Financial Statements are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. As required by the Disclosure and Transparency rules of the Financial Conduct Authority, this condensed set of financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the Group's Annual Report and Financial Statements 2016, and which are expected to apply at 19 August 2017.

This condensed set of interim financial statements has been prepared on a going concern basis. The Directors have prepared detailed operating and cash flow forecasts, which cover a period of more than 12 months from the date of approval of these financial statements. These show that the Group has adequate funds to be able to operate within its agreed facilities and covenants for the foreseeable future.

The Group is financed through two whole business securitisations, the Punch A Securitisation (£774m of gross debt secured against 1,868 pubs) and the Punch B Securitisation (£553m of gross debt secured against 1,309 pubs), as well as certain cash resources held across the Group. Further details of the debt structure of the Punch A and Punch B Securitisations can be found on the Punch website (www.punchtavernsplc.com).

The Directors cannot anticipate the actions of Vine Acquisitions Limited and Heineken UK Limited subsequent to the acquisition as set out in note 4. Consequently, the Directors' going concern assessment cannot take into account the actions of those acquirers. As such, the going concern assessment has been made on an "as is" basis.

The comparative figures for the 52 weeks to 20 August 2016 presented in these interim financial statements are not the Group's statutory accounts for that financial period. Those accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain statements under section 498(2) or (3) Companies Act 2006.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 

On an ongoing basis, management evaluates its estimates and judgements including those relating to income taxes, deferred tax, financial instruments, property, plant and equipment, goodwill, intangible assets, valuations, provisions and post-employment benefits.

Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions and conditions.

At present, there are no new standards, amendments to standards or interpretations mandatory for the first time for the year ending 19 August 2017. 

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 4 March 2017

2. SEGMENTAL ANALYSIS

1 Unallocated underlying operating costs represent corporate overheads that are not allocated down to the divisional performance.

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 4 March 2017

There are no sales between the segments. Segment assets include property, plant and equipment and non-current assets held for sale and exclude other intangible assets, inventories, receivables, cash and taxation whilst all liabilities are unallocated.

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 4 March 2017

3. NON-UNDERLYING ITEMS

In order to provide a trend measure of underlying performance, profit is presented excluding items which management consider will distort comparability, either due to their significant non-recurring nature or as a result of specific accounting treatments. Included in the income statement are the following non-underlying items:

1 £1.4m in advisor fees incurred relating to the sale of the Group (H1 2016: £nil; FY 2016: £nil), £1.6m on the conversion of pubs to the Retail division (one-off lessee compensation and launch costs) (H1 2016: £nil; FY 2016: £0.1m) and £nil of redundancy costs (H1 2016: £0.3m; FY 2016: £0.4m).

2 The movement in valuation of properties of £10.5m comprises a downward valuation of £58.9m where the fair value of an asset is less than the net book value, offset by a credit of £48.4m where the fair value of an asset is greater than the net book value and the credit reverses a previous charge to the income statement for impairment.

3 Represents the goodwill relating to those Core pubs disposed of in the period and also the goodwill relating to pubs transferred to Mercury in the prior period.

4Relates to refinancing costs from the redemption of the prepayment of junior notes in November 2016 and the 2014 capital restructuring.

5 Represents the movement in the fair value of interest rate swaps which do not qualify for hedge accounting.

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 4 March 2017

4. IMPAIRMENT

The impairments recognised in the current and prior periods are as follows:

Property, plant and equipment

When any indicators of impairment are identified, property, plant and equipment and operating leases are reviewed for impairment based on each cash generating unit (CGU). The cash generating units are individual pubs. The carrying values of these individual pubs are compared to the recoverable amount of the CGUs, which is the higher of value-in-use (VIU) and fair value less costs to sell (FVLCS).

In the 28 week period to 4 March 2017 the FVLCS of the assets transferring into the assets classified as held for sale category have been reviewed and an impairment of £0.6m has been identified. In addition, the FVLCS of assets already classified as held for sale were reviewed and an impairment of £0.1m was identified. During the 52 week period to 20 August 2016, the FVLCS of the non-current assets classified as held for sale were reviewed, and an impairment of £4.6m was identified, of which £2.2m had been recognised during the 28 week period to 5 March 2016.

Sale of the Group

On 10 February 2017, there was a court meeting and general meeting held for shareholders to consider and approve a recommended cash offer by Vine Acquisitions Limited to acquire the entire issued and to be issued share capital of Punch Taverns plc. Following implementation of the scheme of arrangement which will effect the acquisition, Vine Acquisitions Limited will sell the Punch A securitisation to Heineken UK Limited. Punch shareholders voted to pass the Special Resolution to implement the scheme of arrangement at the general meeting and scheme shareholders voted to approve the scheme of arrangement at the court meeting.

Following shareholder approval of the transaction at the general meeting and court meeting held on 10 February 2017, the sale of the Punch A Group to Heineken UK Limited has been deemed to be highly probable and as such, the Punch A Group has been classified as held for sale from that date.

Prior to 10 February 2017 there was significant uncertainty surrounding any sale of the Punch A Group. In particular, on 14 December 2016, Emerald Investment Partners Limited ("Emerald") made a proposal to Punch regarding a possible cash offer for the entire issued and to be issued share capital of Punch. Emerald subsequently confirmed on 1 February 2017 that it did not intend to proceed to make a binding offer for the Punch Group.

Given the uncertainties surrounding the final value of any competing offer for the Punch Group, the disposal or retention of the Punch A Group, and whether the cash offer by Vine Acquisitions Limited would be approved at the general meeting and court meeting, no assets were reclassified as held for sale and no impairments were booked prior to the 10 February 2017 trigger event date.

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 4 March 2017

Goodwill

Goodwill created on the formation of the Group through historic mergers and acquisitions represents the synergistic benefits of operating a large pub estate and is allocated to groups of CGUs. As a result of the approved sale of the Group to Vine Acquisitions Limited, and the subsequent sale of the Punch A Group to Heineken UK Limited and classifying the Punch A Group as a disposal group held for sale, explained in further detail in note 10, a review of the carrying value of the disposal group compared to the FVLCS identified an impairment of the disposal group of £168.2m. The impairment is first to be applied to any goodwill associated with the disposal group, being £93.9m.

The Directors have performed an impairment review of the goodwill association to the ongoing Punch Group and concluded that the level of goodwill is no longer supported by synergistic benefits. As such, all goodwill associated to the ongoing Punch Group of £55.4m has been impaired.

Punch A disposal Group property, plant and equipment

In line with IFRS 5, the impairment of the Punch A disposal Group of £168.2m, once applied to the goodwill associated with the disposal Group, is then to be applied to the carrying amount of the non-current assets in the disposal Group. This has resulted in an impairment of £74.3m to the property, plant and equipment of the Punch A disposal Group.

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 4 March 2017

5. FINANCE INCOME AND COSTS

6. TAXATION

The effective taxation charge before non-underlying items and share of post-tax profit from the joint venture is 19.6% (H1 2016: 19.3%; FY 2016: 21.1%)

The total tax charge of £8.5m (March 2016: credit of £3.7m; August 2016: credit of £5.2m) includes a non-underlying tax charge of £3.8m (March 2016: credit of £8.9m; August 2016: credit of £16.3m).

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 4 March 2017

7. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, excluding those held in the employee share trust, which are treated as cancelled.

Diluted earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year adjusted for the effects of dilutive options.

Reconciliations of the earnings used in the calculations are set out below:

The impact of dilutive ordinary shares is to increase weighted average shares by 1,221,160 (March 2016: 609,261; August 2016: 836,807) for employee share options.

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 4 March 2017

8. PROPERTY, PLANT AND EQUIPMENT

9. GOODWILL

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 4 March 2017

10. ASSETS HELD FOR SALE

On 10 February 2017, there was a court meeting and general meeting held for shareholders to consider and approve a recommended cash offer by Vine Acquisitions Limited to acquire the entire issued and to be issued share capital of Punch Taverns plc. Following implementation of the scheme of arrangement which will effect the acquisition, Vine Acquisitions Limited will sell the Punch A securitisation to Heineken UK Limited. Punch shareholders voted to pass the Special Resolution to implement the scheme of arrangement at the general meeting and scheme shareholders voted to approve the scheme of arrangement at the court meeting.

As at 4 March 2017, the disposal of the Punch A Group was deemed to be highly probable and as such, the assets and liabilities of the Punch A Group have been presented as held for sale. The assets and liabilities of the Punch A Group are held at the lower of carrying amount and fair value less costs to sell. The impairment recognised in this regard is presented in note 4, being £93.9m to goodwill and £74.3 to property, plant and equipment.

Further information on the scheme of arrangement can be found on the company's website www.punchtavernsplc.com

The major classes of assets and liabilities of the Punch A disposal group as at 4 March 2017 are as follows:

In addition to the Punch A disposal Group above, there is also £4.4m of non-current assets classified as held for sale relating to the ongoing Punch Group.

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 4 March 2017

11. NET DEBT

(a) Analysis of net debt