Punch Taverns plc Preliminary Results 2012

PUNCH TAVERNS PLC

("Punch" or "the Group")

Preliminary Results for the 52 weeks to 18 August 2012

Underlying financial performance* - in line with expectations

·; EBITDA of £238 million (2011: £258 million)

·; Profit before tax of £64 million (2011: £76 million)

·; Basic earnings per share of 7.2p (2011: 8.6p)

·; Strong cash position; £264 million of cash reserves, of which £90 million held outside of the securitisations

·; Net debt decreased by £137 million

Operational KPIs* 

·; Average net income** per pub broadly flat across the year

·; Substantive agreements at 94%

·; Core substantive like-for-like net income** -1% (Partners on secure agreements for greater than 1 year)

·; Total core estate like-for-like net income** -3.7%

·; 475 pubs disposed together with other assets for £130 million, £1 million ahead of book value and at a multiple of 18 times EBITDA

Operational headlines

·; Continued progress on delivering our key strategic initiatives:

Core estate:

1. Invest to improve customer environment and increase food sales: record £38 million invested in 400 core pubs; food mix up 3 percentage points to 24%

2. Attract high quality Partners: 25% increase in applicant numbers, growing number of multiple operators

3. Drive sales: Additional 1,100 Partners in the Punch Buying Club, a 65% increase, 45% of drinks orders now online, up from 21% last year

4. Improve Punch support: Successful launch of the Punch Franchise Tenancy agreement, free WiFi to be rolled out across our estate in 2013

Non-core estate:

5. Disposal of non-core sites: Disposal programme on track to deliver a core estate of 3,000 pubs within the next 5 years

Capital structure review

·; The Board has completed a detailed review of the Group's Capital Structure

·; While the Group has continued to provide financial support to the securitisation structures, significant changes to the securitisations are necessary to protect the material financial and operational benefits that both enjoy as being part of the wider group

·; Discussions have been initiated with certain major shareholders and other significant stakeholders to seek their input on the range of possible options available to restructure the securitisations

·; At the appropriate time, we will be seeking to extend these discussions to the bondholders in both securitisations.

·; Following completion of this broad consultation with stakeholders the Board will provide a further update

Roger Whiteside, Chief Executive Officer of Punch Taverns plc, commented

"We have delivered profits for the year in line with our expectations and are on track with our disposal programme in extracting maximum value from our non-core assets.

We are making good progress towards our long term objective to become the UK's highest quality, most trusted and best value leased pub company, with record levels of investment in our core pubs and an additional 1,100 Partners joining the Punch Buying Club.

We have completed the review of our capital structure and have initiated discussions with certain major shareholders and certain other stakeholders. We will engage with our remaining stakeholders, including bondholders, at the appropriate time. While the options are complex and will take time to conclude we are confident that a consensual restructuring can be successfully implemented in a manner that delivers value for stakeholders"

24 October 2012

_______________________

* before non-underlying items and discontinued operations

** net income represents revenue less cost of drink sales (gross profit)

Enquiries

Goldman Sachs International, which is authorised and regulated in the United Kingdom by the FSA, is acting as financial adviser to Punch and for no one else in connection with the capital structure review and will not be responsible to anyone other than Punch for providing the protections afforded to clients of Goldman Sachs International nor for providing advice in relation to the capital structure review, the content of this announcement or any matter referred to herein.

The Blackstone Group International Partners LLP, which is authorised and regulated in the United Kingdom by the FSA, is acting as financial adviser to Punch and for no one else in connection with the capital structure review and will not be responsible to anyone other than Punch for providing the protections afforded to clients of The Blackstone Group International Partners LLP nor for providing advice in relation to the capital structure review, the content of this announcement or any matter referred to herein.

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.

The preliminary results presentation will be available on the Punch website www.punchtaverns.com from 9.30 BST. A live audio cast of the presentation will also be available.

PRELIMINARY RESULTS FOR THE 52 WEEKS TO 18 AUGUST 2012

CHIEF EXECUTIVE OFFICER'S REVIEW

OUR AIM: TO BE THE HIGHEST QUALITY, MOST TRUSTED AND BEST VALUE LEASED PUB COMPANY

MARKET AND STRATEGIC OVERVIEW

The combination of a long-term decline in drinking-out of approximately 3.5% per annum, changing customer behaviour, relative price positioning and the impact of regulation means that the number of pubs in the UK is expected to continue to decline. Whilst we believe the long-term growth in eating-out will continue to support the pub industry, we believe the benefit will favour the larger food led destination pubs and so a disproportionate number of the closures will be from smaller predominantly drinks led pubs.

Punch's stated strategy is therefore to focus on its high quality, well located core estate of approximately 3,000 pubs. These pubs are well positioned to outperform the broader market drinks volume declines and grow food revenues. While net income in the core estate remained in decline this year, and we anticipate a comparable decline in the short-term as we continue to rebalance rents in the coming year, we expect a return to growth the following financial year. In the medium term, we have a clear operational plan to return the core estate to growth of c.2% per annum in both Partner earnings and Punch net income.

The strategy for the non-core estate also remains consistent with a focus on maximising cash returns whilst the pubs are let, and then to deliver in excess of book value on the disposal of the pubs. The disposal programme remains on track and the Group expects to deliver c.£630 million from the disposal of the 2,278 pub non-core estate over the next five years of which £172 million has already been delivered from 683 pub disposals over the last 18 months, against a book value of £169 million. Whilst these pubs continue to have access to the same operational tools and infrastructure as the core estate, they are expected to continue to suffer volume declines materially greater than the broader market. As a result, we expect these pubs to continue to experience profit declines, albeit with an improving trend as we dispose of the worst performing pubs first.

BUSINESS REVIEW

We underwent a significant reorganisation of our field teams in 2011 with 73% of pubs having a change of Partnership Development Manager (PDM) following the transfer of c.550 leasehold pubs to Spirit at the time of the demerger and the transfer of pubs to the turnaround division. This disruption had an impact on our rate of letting and investment activity in the first half of the year as our field teams improved their understanding of their new areas and established strong relationships with their new Partners. I am pleased to report that this slowdown in activity has been more than compensated for by record levels of letting and investment activity in the second half of the year.

While our pubs had made strong plans to maximise the opportunities offered by the Jubilee and sporting events over the summer, these were outweighed by the impact of the wet weather on market demand. Notwithstanding these short-term challenges we continued to make good progress towards our long-term goal of growth in the core estate. This includes record levels of investment in over 400 core pubs and an additional 1,100 Partners joining the Punch Buying Club. We also benefited from a positive mix shift towards food during the year which was up 3 percentage points to 24% of Partner revenue.

We are committed to improving on the level of support we provide to our Partners and see this as being fundamental to returning the core estate to growth. We have successfully launched our new Punch Franchise Tenancy Agreement in a limited number of pubs and will roll this out nationally this year. We have strong plans in place to build on the progress we have made, including increasing the size of specialist field teams in the areas of investment, marketing and food development, the roll-out of free WiFi across our pub estate and the provision of non-tied goods and services through the Punch Buying Club. We intend to deliver these improvements without increasing the cost base of the business and will continue to focus on cost reduction as we downsize the non-core estate and improve back office efficiency.

Core estate

The core division comprising 2,934 pubs accounts for 79% of Punch outlet EBITDA. These pubs have a much higher average net income per pub than the turnaround estate at c.£75,000, and have experienced a decline in net income of 3.7% in the year.

Trading performance has been impacted this year by disruption following the demerger of Spirit combined with the wettest April to June period since records began. In line with the performance of the core division, market statistics confirm a sharp decline in beer sales during this period.

Underlying performance in the business continues to be robust with like-for-like net income in pubs that have been on full substantive agreements for more than one year being down just 1%. Within this, trading in the South of England continues to outperform the rest of the UK.

Despite the difficult market conditions the level of pub failures remains in line with last year. The majority of these pubs will receive investment to reposition their offering in their local marketplace and are currently in the process of being re-let on full substantive agreements. As at the year end date 94% of the pubs in the core estate were let on substantive agreements, leaving 183 core pubs (6%) available for letting of which 73 have new partners in place awaiting legal completion.

Throughout the year, management actions have been focused on delivering our four key

objectives:

i) Investing to improve the customer environment and increase food sales: We invested in over 400 core pubs during the year and increased our average spend per pub to £90,000, with the rate of investment having accelerated in the second half of the year. Our focus has been on new lets where there is an opportunity to invest to improve food participation and the consumer environment.

Alongside increased investment in the core estate, we are increasing the level of pub support, providing more influence over the customer offer. We are in the process of introducing dedicated Pub Launch Teams to help design and implement the full customer offer including product ranging, events planning, service delivery and promotional activity.

Food sales represent a significant opportunity for our Partners and we have a 5 year target to increase the food sales mix to 35% of Partner revenue. Our catering experts have performed 1,900 Partner visits in the year to develop the food offer, increasing the estimated food sales mix in our pubs by 3% to 24% of Partner revenue. Our strategy is to improve the food offering across our estate, using managed house principles and supporting our Partners with food specifications and menu costing.

ii) Attracting high quality Partners: The core estate remains stable with pub failures remaining in line with previous years and an average tenure of over 5 years. New applicant enquiries continue to be very strong at approximately 400 enquiries per month, representing a 25% increase compared to the prior year and we are experiencing a trend moving back towards long leases. We now have over 200 of our Punch Buying Club leases in place which reward our Partners for outperformance and our new agreements are attracting an increased interest from small multiple pub operators and micro brewers alike. Our recruitment website has been completely overhauled and will be re-launched in October with greatly enhanced CRM capabilities.

iii) Driving sales growth:  The use of the Punch Buying Club has doubled in the year with 45% of our drinks orders now being taken online, up from 21% as at August 2011. The Punch Buying Club now has 2,800 Partners and gives access to exclusive deals, and through the Punch Buying Club blog Partners can provide feedback on issues, seek advice, share best practice and access exclusive marketing and point of sale materials.

The product offers, marketing and promotional support we offer our Partners have proved extremely popular with 48% of our Partners attending our industry leading roadshows, a doubling in our design and print service and record participation in sales activities such as the UK's largest darts competition (up 12%), quiz nights (up 72%) and SIBA cask ale sales (up 40%).

iv) Effective Punch support:  Partnership Development Managers (PDMs) are key to driving the performance of our pubs. We have invested in industry leading training in partnership with the BII, piloting the first Level 4 qualification in Multiple Retail Management, which we expect all of our PDMs to complete by the end of this year.

The new Punch Franchise Tenancy agreement has been successfully launched, aimed at community local pubs and new entrants to the sector. This fully supported open book agreement provides more support to our partners and increases our influence over the customer offer. Initial results in the limited number of pubs with the new agreement have been encouraging and we aim to roll it out nationally this year.

In a drive to support our Partners to improve retail standards in our pubs we introduced a mystery visit programme this year providing independent feedback on the consumer experience and beer quality. The programme which has been well received and clearly demonstrates the link between high retail standards and pub performance will be rolled out across the core estate this year.

Building on the success of the Punch Buying Club, we are now extending the services and range of products we offer to include the roll-out of free WiFi across our pub estate and the provision of further non-tied goods and services. Through the Buying Club we are committed to simplifying the administrative burden for our existing and prospective Partners and to drive down the cost to our Partners of running a pub.

Turnaround estate

The turnaround division comprising 1,595 pubs with a book value of £469 million accounts for 21% of Punch outlet EBITDA. These pubs are predominiantly small, wet led and have a much lower average net income per pub at c.£36,000 and which have declined by 9% in the last financial year. Given the limited scope for investment, these pubs are more likely to be impacted by the long-term decline in drinking out and as a result are expected in time to generate more value through disposal than retention.

Since we created the turnaround division we have further refined our operating strategy, segmenting the division into two groups, 'sell now / sell later' and 'protect and grow'. The 'sell now / sell later' pubs (1,029 pubs) will be sold over the next 1-3 years while the 'protect and grow' pubs (566 pubs) will be held and operated over the near-term and sold over the next 3-5 years. This additional segmentation supports our objectives of maximising our profits for as long as we own the pub, including limited targeted investment in 'protect and grow' pubs and in optimising our disposal proceeds by selling at the right time.

Maximising short-term returns: While these non-core pubs remain in our portfolio, we remain committed to driving operating performance and maximising the profits from these outlets. Net income in non-core pubs on substantive agreements is broadly stable with all the decline coming from non-substantive pubs in the process of disposal.

Maximising value on disposal:  During the year we sold 475 pubs, together with other assets for proceeds of £130 million, £1 million ahead of book value.  The disposed pubs generated just £7.4 million of EBITDA over the last 12 months, equating to a disposal multiple of 18x, demonstrating the accretive nature of these disposals.

We are on track with our disposal programme in extracting maximum value from our non-core assets in line with book value and reducing our estate down to c.3,000 core pubs within the next 5 years. We aim to sell c.400 non-core pubs in the 2012-2013 financial year.

Matthew Clark joint venture

Matthew Clark, the 50% joint venture with Accolade, owned by Champ Private Equity, continues to perform satisfactorily in a very competitive market providing a post-tax contribution to Punch of £3.4 million for the year. Matthew Clark has significant scale in its marketplace as the largest independent drinks wholesaler and distributor to the UK leisure and hospitality industry, with gross annual turnover of c.£700 million and c.20,000 customers. Turnover increased by 9% in the joint venture's last financial year and the business has clear plans for continued growth in market share from which Punch will benefit.

Regulatory

Punch is committed to developing a responsible approach in working with our Partners and in the marketplace in which we operate. Our BIIBAS accredited Code of Practice is now firmly embedded in the business and lays out clearly what our Partners should expect from us when committing to a lease agreement. Our Code of Practice goes further than the requirements of the Industry Framework Code, which has been made legally binding in the year.

Further progress has been made towards self regulation with two complaint review bodies now available to licensees. PIRRS exists to provide low cost resolution for rent disputes and our Partners are now able to take complaints relating to any other part of our Code of Practice to PICAS.

Punch continues to play a full role in the pub sector through membership of the BBPA and support for the BII, ALMR and FLVA. Pubs play a vital role in the economy providing local employment particularly for young people and we continue to engage with Government on the need for investment in the sector as a key part of the wider growth agenda for the UK economy. We believe the economic case for reduction in VAT in the hospitality sector is compelling with the potential to create thousands of new jobs and have given our full support to the VAT Club campaign led by Jacques Borel.

Social Responsibility

Pubs play a vital role at the heart of the community and Punch continues to support key initiatives such as Pub is the Hub and work with the Licensed Trade Charity. Our pubs are significant contributors to local fund raising with many of them recording their achievements through PubAid. Our teams in our support centre in Burton are also involved in the local community providing help to local causes through the Punch Community Promise Scheme.

We believe that pubs provide a safe supervised environment for the consumption of alcohol and Punch is committed to the Alcohol Responsibility agenda providing support to Drinkaware and the Portman Group.

CAPITAL STRUCTURE REVIEW

Objectives

During the year, the Board appointed Goldman Sachs and Blackstone as advisors to assist in undertaking a detailed review of the options to optimise the Group's capital structure. This review examined (i) Punch's current business strategy in light of current and expected operating conditions; and (ii) Punch's current capital structure position.

The key objective of the review was to identify all options that could deliver shareholder and wider stakeholder value and to assess them against the following criteria:

n Creation of a sustainable capital structure; and

n Feasibility of successful execution.

Current capital structure

The Group is financed through two whole business securitisations, the Punch A Securitisation (£1,477 million of gross debt) and the Punch B Securitisation (£914 million of gross debt), as well as certain cash resources held across the Group. As at the year end, the Group held £264 million of cash resources (of which £90 million was held outside the securitisation structures), compared to loan amortisation due within 1 year of £57 million. In addition to cash resources held outside the securitisations, Punch also holds a 50% interest in the Matthew Clark joint venture.

The majority of the trading assets of the Group are held in the two securitisation structures, and whilst the securitisations generated underlying profits and positive net cash flow (before debt repayments and disposals) in the year, they required financial support through the use of cash resources held outside of the securitisations to maintain compliance with their DSCR (Debt Service Cover Ratio) covenants. Without this support, both the Punch A and Punch B Securitisations would have breached their respective DSCR covenant levels in the year.

Net support from cash resources held outside of the securitisations amounted to £21 million for the year, being £79 million of gross support less £58 million of cash payments from the securitisations to the wider Group during the year. Given expectations for the level of performance of the Group and the anticipated debt service requirements, it is expected that the level of support required will increase in the next financial year.

While this financial support provides valuable time to identify appropriate legal and capital restructuring options, it is not sustainable over the medium to long-term. A restructuring of both securitisations is therefore required in order to avoid a covenant default and deliver value to stakeholders.

Since the year end, the Group has continued to provide financial support to the securitisations to allow restructuring options to be developed. The continuation of that support into each securitisation will continue to be reviewed on a regular basis in light of all relevant circumstances.

Status of the review

The scope of the review undertaken by the Board has been extensive with a number of alternatives considered. While no decision has been taken as to the preferred solution to restructure the Group's capital structure, the following conclusions have been drawn from the review:

n Both securitisations are over levered and unsustainable in their current form;

n Significant amendments to each of the Punch A and Punch B securitisation structures are necessary, including one or more of a material reduction in debt, an increase in the maturities of the debt and changes to the financial covenants;

n Although both the Punch A and Punch B securitisations need to be restructured, given the differences in their stakeholder profiles, their legal and financial structures and the contractual linkages between them and the wider Group, the optimal restructuring solution and implementation timetable may differ for each securitisation;

n Proposed changes to the capital structure should be developed for both the Punch A and Punch B securitisation structures to protect the material financial and operational benefits that both enjoy as being part of the wider group;

n Operational covenant amendments are also required to allow the securitised businesses to continue to maximise returns through further investment in the core estate and the ongoing disposal of non-core assets;

n The Board believes that it is likely that a covenant default would have a material adverse impact on the value of the underlying businesses; and

n While the Group continues to maintain significant cash balances, providing time and optionality, it is preferable to work towards identifying a preferred solution as soon as practicable so that any uncertainty around potential changes to the legal and capital structure of the securitisations does not impact on the underlying performance of what is a very profitable and high quality pub business.

Given the adverse impact that a covenant default could have on all stakeholders, the Board believes that it is in the best interests of the stakeholders to pursue a consensual restructuring solution. On the basis of the dialogue with stakeholders to date, the Board remains confident that a restructuring can be successfully implemented.

Next steps and discussions with stakeholders

The Board is mindful that uncertainty around the Group's capital structure could have a negative impact on the Group's underlying business and that as a result it is likely to be in the best interest of all stakeholders to identify and implement a preferred solution to restructure the Group's capital structure as soon as practicable.

As part of the review process, the Board initiated discussions with certain of its major shareholders and other significant stakeholders to seek their input on the range of options under consideration. While these discussions have assisted the Board in reaching the conclusions set out today they remain ongoing. At the appropriate time, the Board will be initiating a process to identify debt holders in both the Punch A and Punch B securitisations and extending these discussions to the bondholders in both securitisations.

FINANCIAL REVIEW

Results for the 52 weeks ended 18 August 2012:

The underlying financial results have been impacted by the decline in on-trade drinks volumes, pub failures and negative rent reviews together with the ongoing strategic disposal programme. Despite the challenging UK consumer environment average net income per pub was broadly flat over the year, benefiting from the disposal of underperforming assets. 

Revenue declined by 6%. to £492 million with an 8%. decline in underlying EBITDA. This compares to a reduction in the average estate size of 8%.

Net underlying financing costs decreased by 3%. to £161 million primarily due to the net repayment of £70 million of debt, of which £14 million was ahead of schedule. The weighted average interest rate for the Group's borrowings, including the impact of interest rate swaps, at the balance sheet date is 6.9%. Underlying profit before tax was £64 million, a decrease of 16%. on last year. The tax charge before non-underlying items of £16 million equates to an effective tax rate of 25%.

Non-underlying items

There is a net non-underlying profit after tax of £3 million. This reflects a £11 million charge arising from the movement in the fair value of certain interest rate swaps, a £3 million charge for asset write-downs, a £1 million goodwill charge and a £4 million charge for restructuring costs. These charges were offset by a £1million profit on disposal of properties, a £2 million credit for the buy back of debt at below par prices and a £4 million credit relating to share schemes. The tax effect of all of these items, together with the resolution of prior year tax matters, gave rise to a tax credit of £15 million

Earnings per share

Underlying basic earnings per share have decreased by 16%. to 7.2p. The basic earnings per share of 7.7p has been impacted by the non-underlying items detailed above.

Dividends

The Board is not proposing to recommend a final dividend for the year, and it is unlikely that the Board will be able to recommend any distributions to shareholders prior to the implementation of a restructuring. In the current climate it remains prudent to retain its cash reserves and to further strengthen the balance sheet.

Capital structure and cash flow

The nominal value of net debt decreased by £137 million, 6% in the year to £2,126 million. Net borrowings at the year end comprise:

In addition to the £264 million of cash resources as at 18 August 2012, the Group also held £315 million of restricted cash (cash drawn against liquidity facility agreements following a credit rating downgrade in June 2012 to the liquidity facility provider, The Royal Bank of Scotland Group plc). The restricted cash is ring fenced from an operational perspective and cannot be utilised for any activities other than their original purpose and matches a corresponding cash-backed borrowings liability.

The Group has been cash generative across the year. Strong cash generation of £216 million at the operational level has enabled the Group to continue to invest in the Punch estate with £42 million of capital investment. Cash flow has been further enhanced by £130 million of cash generated from disposals.

Going concern

In determining the appropriate basis of preparation of the Annual Report, the Directors are required to consider whether the Group can continue as a going concern for the foreseeable future; that is for at least 12 months from the date of signing of this Report. After making enquiries, and considering the matters which are described in note 1 to this announcement, the Directors have concluded that it is appropriate to prepare the Financial Statements on a going concern basis. However, the Directors are making full disclosure, as required by accounting standards, to indicate the existence of material uncertainties facing parts of the business. Further details are set out in the note 1 to this announcement.

Current trading and outlook

Trading in the first eight weeks of the new financial year has been in line with management expectations. While the UK consumer environment is likely to remain challenging in the short-term, we have a clear operational plan to return the core estate to growth in the medium-term and extract maximum value from our non-core assets.

Roger Whiteside

Chief Executive Officer

CONSOLIDATED INCOME STATEMENT

for the 52 weeks ended 18 August 2012

1 EBITDA represents earnings before depreciation and amortisation, impairment, goodwill charge, profit on sale of non-current assets, finance income, finance costs, movement in fair value of interest rate swaps and tax of the Group.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the 52 weeks ended 18 August 2012

CONSOLIDATED BALANCE SHEET

at 18 August 2012

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the 52weeks ended 18 August 2012

CONSOLIDATED CASH FLOW STATEMENTfor the 52 weeks ended 18 August 2012

1. ACCOUNTING POLICIES

Basis of preparation

The audited consolidated financial statements of Punch Taverns plc for the 52 weeks ended 18 August 2012 have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006. These preliminary financial statements have been prepared on a consistent basis using the accounting policies set out in the Punch Taverns plc Annual Report and Financial Statements for the 52 weeks ended 20 August 2011. The following new standards, interpretations and amendments are effective for the Group for the financial year beginning 21 August 2011:

Amendments to IFRIC 14 'Prepayment of a minimum funding requirement'

Amendments to IAS 1 'Presentation of Financial Statements'

Amendments to IAS 24 'Related Party Disclosures'

Amendments to IFRS 7 'Financial Instruments: Disclosures'

Amendments to certain IFRSs and IASs arising from the April 2010 Annual Improvements to IFRS by the IASB

The above amendments to published standards have had no material impact on the results or the financial position of the Group for the 52 weeks ended 18 August 2012.

The preliminary statement of results was approved by the Board on 23 October 2012. The preliminary statement is derived from but does not represent the full Group statutory financial statements of Punch Taverns plc and its subsidiaries which will be delivered to the Registrar of Companies in due course. The financial information for the 52 weeks ended 20 August 2011 has been extracted from the Annual Report and Financial Statements 2011, as filed with the Registrar of Companies. The audit reports for both periods presented were not modified, and did not contain statements under section 498(2) or (3) Companies Act 2006 or equivalent preceding legislation. However in the 2012 Annual Report & Accounts, the auditor will include an emphasis of matter paragraph in their audit report relating to the uncertain outcome of the directors' intention to restructure the securitisation facilities. No such matter was included in the 2011 Annual Report and Accounts.

Going Concern

The financial statements have 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 for the foreseeable future to meet its liabilities as they fall due.

The Group is financed through two whole business securitisations, the Punch A Securitisation

(£1,477 million of gross debt) and the Punch B Securitisation (£914 million of gross debt), as

well as certain cash resources held across the Group. At 18 August 2012, the Group's liquidity

position was strong with £264 million of cash resources (of which £90 million was held outside

of the securitisation structures), compared to loan amortisation due within 1 year of £57

million. The Group is currently in full compliance with the financial covenants contained in its securitisation arrangements.

Whilst the securitisations generated underlying profits and positive net cash flow (before debt

repayments and disposals) in the year, they required financial support through the use of cash resources held outside of the securitisations to maintain compliance with their DSCR (Debt Service Cover Ratio) covenants. Without this support, both securitisations would have breached their respective DSCR covenant levels in the year. Net support from cash resources held outside of the securitisations amounted to £21 million for the year, being £79 million of gross support less £58 million of cash payments from the securitisations to the wider Group during the year.

The ability of the Group's securitisations to continue to comply with their DSCR covenants in

the near term is dependent on either the continuation of group support or reaching agreement with the relevant stakeholders to amend the terms of the financial covenants.

The Group continues to engage in discussions with certain of its major shareholders and other significant stakeholders to review a range of restructuring options in respect of the securitisations. Following a process which will be initiated at the appropriate time to identify debt holders in both the securitisations, the Group will be seeking to engage in discussions with those debt holders ahead of recommending a proposal to restructure each of the securitisations in a consensual way, so as to allow them to continue to comply with their financial covenants (including the DSCR covenants) without the need for ongoing group support.

The Directors of Punch Taverns plc are of the opinion that it is in the best interests of stakeholders to agree to a consensual restructuring of both of the securitisations and the Directors are of the view that a consensual restructuring can be achieved. However, given the differences in their stakeholder profiles, their legal and financial structures and the contractual linkages between them and the wider Group, the restructuring solution and implementation timetable may differ for each securitisation.

If a consensual restructuring of the Group's securitisations is not achieved and a covenant breach were to occur in a securitisation then this could lead to circumstances in which the lenders to that securitisation may be able to request early repayment of all outstanding borrowings. Were this to occur the relevant securitisation may have insufficient cash resources to repay all of its borrowings, and cease to be a going concern which in turn would result in a significant reduction in the Group's operations. These circumstances represent a material uncertainty that casts significant doubt on the ability of a significant part of the Group to continue as a going concern and, in such circumstances, part of the Group may be unable to realise its assets and discharge its liabilities in the normal course of business. 

2. SEGMENTAL ANALYSIS

The Punch business consists of a core estate and a turnaround estate, each having its own clear strategy. Each of these strategic business units consists of a number of cash generating units (CGUs), which are individual pubs. These CGUs generate their own revenues, which are consolidated to give the Group revenue and as a result, Group revenue is not reliant on one significant customer.

The Chief Operating Decision Maker, represented by the Board, reviews the performance of the core and turnaround divisions separately, at an EBITDA level, as included in the internal management reports.

The Group operates solely in the United Kingdom.

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

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

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. In addition, the results of the leased pubs that formed part of the Spirit business that was demerged in the prior period are shown as non-underlying. Included in the income statement are the following non-underlying items:

1 Represents the goodwill relating to those core pubs disposed of in the period and the £72.4m write down of goodwill relating to the apportioned value of goodwill allocated to those pubs transferred to the turnaround division in the prior period and subsequently impaired.

2 Represents profit on the purchase of securitised debt together with the write-off of related deferred issue costs.

3 Represents movement in fair value of shares held to settle future share schemes and release of provision for share schemes.

4 Represents movement in fair value of shares held as an investment.

5 Represents the movement in the fair value of interest rate swaps which do not qualify for hedge accounting. Whilst the interest rate swaps are considered to be effective in matching the amortising profile of existing or planned floating rate borrowings, they do not meet the definition of an effective hedge due to changes in expected future maturity profiles.

4. TAXATION

The effective rate of tax is different to the full rate of corporation tax. The differences are explained below:

Details of the non-underlying tax credits and charges are included in note 3.

5. 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 and weighted average number of shares are set out below:

The impact of dilutive ordinary shares is to increase weighted average shares by nil (August 2011: 28,000) for employee share options.

6. NET DEBT

(a) Analysis of net debt

(b) Analysis of changes in net debt

Net debt incorporates the Group's borrowings, cash-backed borrowings, derivative financial instruments and obligations under finance leases, less cash and cash equivalents and restricted cash.

Non-cash movements relate to amortisation of deferred issue costs and premium on loan notes and fair value movement in derivative financial instruments and profit on the purchase of securitised debt.  

7. OUR KEY RISKS AND UNCERTAINTIES

Market and economic risks

Economic Climate

The recent recession and continued uncertain outlook for the UK economy has affected consumer confidence and discretionary spending across both the retail and leisure industries. Delays in economic recovery or further challenges such as further duty increases could affect consumer expenditure, our Partners' businesses and Punch's revenue.

Mitigating actions and controls

·; We carry out regular reviews of the impact of economic conditions on our budget and strategic plans.

·; We provided circa £1.2m per period to support our Partners during the difficult conditions last year resulting in 94% of our core estate pubs now being on a substantive agreement.

·; We continue to monitor the financial health of our Partners via a Partner Support Tool, together with analysis to highlight potential failures, and the new Partnership Development Manager roles launched last year have helped grow and diversify our Partners' businesses.

Property valuations

Fluctuations in the UK property market as well as the current uncertain market conditions could impact the value of Punch's property portfolio and our ability to dispose of pubs at an appropriate value.

Mitigating actions and controls

·; We have conducted full estate reviews and regularly update these to allow us to assess the future strategy for pubs within the estate.

·; This has allowed us to invest where appropriate; consider possible alternative use; or dispose of those which no longer fit our future strategy.

·; We invested £42m on developing and improving the quality of our estate during the year.

·; We carry out an annual review for any indicators of impairment.

Increasing costs

Increases in any of our key supply costs due to availability of products, the economic climate or inflationary price increases is an ongoing risk to our business.

Mitigating actions and controls

·; We continue to negotiate supplier contracts to protect us against significant increases in drink costs.

·; Careful cost control processes ensure that costs are budgeted, closely monitored and subject to appropriate authorisation.

Financial

Liquidity risk

Punch's capital structure is made up of debt, issued share capital and reserves.

Punch is financed through two whole business securitisations, the Punch A Securitisation (£1,477 million of gross debt) and the Punch B Securitisation (£914 million of gross debt), as well as certain cash resources held across the Group. As at the year end, the Group held £264 million of cash resources, of which £90 million was held outside the securitisation structures.

The key short-term liquidity risk is the requirement to meet scheduled debt service costs as they fall due. The secured loan notes which make up the majority of our financing have an average weighted life of 15 years, with approximately 83% (August 2011: 85%) of the capital balance on these loan notes being repayable after more than five years.

Mitigating actions and controls

·; Cash flow forecasts are regularly produced to assist management in identifying liquidity requirements and are stress-tested for possible scenarios.

·; Cash balances are invested in short-term deposits such that they are readily available to settle short-term liabilities or fund capital additions.

There are a number of options available to the Group to help meet debt service costs, including the acceleration of the disposal of non-core pubs (with disposal proceeds being used to repay debt) and a reduction in capital expenditure on the securitised estate (with surplus cash being used to repay debt).

Financial covenant and refinancing risk

Both of Punch's securitisation structures have a Debt Service Cover Ratio (DSCR) and Net Worth financial covenant.

While there was significant headroom in the two Net Worth financial covenants as at the year end, both securitisations required financial support through the use of cash resources held outside of the securitisations to maintain compliance with their DSCR covenants. Without this support, both securitisations would have breached their respective DSCR covenant levels in the year.

Net support from cash resources held outside of the securitisations amounted to £21 million for the year, being £79 million of gross support less £58 million of cash payments from the securitisations to the wider Group during the year.

The ability of the securitisations to continue to make cash payments to the wider Group and to comply with their DSCR covenants in the near-term is dependent on either continuing to receive financial support from the Group or agreeing with the relevant securitisation stakeholders to amend the terms of the DSCR covenants.

If a DSCR covenant breach were to occur, this could lead to circumstances in which the securitisations' lenders may be able to request early repayment of all outstanding borrowings. Were this to occur, the securitisations may have insufficient cash resources to repay all of their borrowings.

Mitigating actions and controls

·; Covenants are closely monitored and stress-tested to ensure we are able to generate sufficient returns to service our debt and meet our covenant requirements.

·; A Group support mechanism has been in place throughout the year, whereby cash resources held outside of the securitisations have been used to lower the cost of drinks purchased by the two securitisations to maintain compliance with their DSCR covenants.

·; Additional options available to the Group to improve the securitisations' DSCR covenant performance include the prepayment of debt using proceeds from the disposal of the non-core estate and the reduction of capital expenditure on the securitised estate, with surplus cash being used to repay debt.

·; The Board has recently completed a review of the Group's capital structure and has commenced discussions with certain major shareholders and other significant stakeholders on a range of possible options available to restructure the securitisations in a consensual way, so as to enable the securitisations to continue to comply with their financial covenants (including the DSCR covenant) without the need for ongoing Group support.

·; The Board are of the opinion that it is in the best interests of stakeholders to agree to a consensual restructuring of the securitisations and the Directors are of the view that a consensual restructuring can be achieved.

Interest rate risk

Punch is exposed to interest rate risk from loan notes and borrows at both fixed and floating rates of interest.

The use of fixed rate borrowings and derivative financial instruments exposes Punch to fair value interest rate risk such that Punch would not benefit from falls in interest rates and would be exposed to unplanned costs, such as breakage costs, should debt or derivative financial instruments be restructured or repaid early. As at the year end, the fair value liability of interest swap agreements was £331m.

Mitigating actions and controls

·; Punch employs derivative financial instruments such as interest rate swaps to generate the desired interest rate profile.

·; Punch has taken out derivative financial instruments such that 100% of all external debt (August 2011: 100%) was either at fixed rates or was converted to fixed rates as a result of swap arrangements, reducing our exposure to changes in interest rates

·; Future debt requirements are closely monitored to assist management in identifying the appropriate strategy for interest rate hedge arrangements.

Pension contributions risk

Punch has a defined benefit pension scheme which must be funded to meet required benefit payments. The value and funding of the scheme is subject to risk of changes in life expectancy, actual and expected price inflation, changes in bond yields and future salary increases. The difference in value between scheme assets and scheme liabilities may vary resulting in an increased deficit being recognised on our balance sheet.

Mitigating actions and controls

·; The defined benefit pension scheme is closed to new members; and instead we operate defined contribution schemes for our employees.

·; We maintain a close relationship with the trustees of the pension scheme.

Internal financial control

Punch is committed to maintaining a robust internal control environment. A lack of control could result in financial fraud or material error in our financial statements.

Mitigating actions and controls

·; Robust internal controls operate over all key processes including general controls such as segregation of duties and authorisation of contracts and expenditure.

·; The Internal Audit function reviews and reports on strengths and weaknesses in the internal control environment.

Operational and people

Change Management

Punch is reliant on the successful implementation of change programmes to deliver both day-to-day operational improvements and our strategic plan.

Mitigating actions and controls

·; Formal project management processes are used across the business to prepare project objectives and plans and to ensure progress is tracked and results measured.

·; Major projects are well communicated across the business so that a joined up approach is maintained.

Information systems, technology and security

Punch is reliant upon information systems and technology for many aspects of its business, which could cause damage if they were to fail for any length of time.

Mitigating actions and controls

·; An incident management and business continuity plan is in place for critical business processes to ensure the business is able to continue operating in the event of a major incident.

·; We have an off-site disaster recovery facility if access to our support centre, or its systems, is affected.

Product quality

Punch is exposed to product quality risk in relation to food and drink which is supplied to us and sold on to our Partners.

Mitigating actions and controls

·; Safety measures are in place to ensure that product integrity is maintained and that food and drink products are fully traceable.

·; Our incident management plan is designed so that products can be recalled quickly if required.

Supply chain management

Punch places reliance on our key suppliers and distributors to ensure continuous supply of food, drink and other products into our pubs. Punch is exposed to the risk of interruption or failure of suppliers or distributors, resulting in our products not being delivered on time or to our required standards.

Mitigating actions and controls

·; Punch has reviewed the disaster recovery and business continuity plans of our key distributors.

·; We monitor product quality closely and consider action which may be required to provide substitute products or suppliers if required.

People risks

Failure to recruit, train and successfully retain successful partners, and high calibre employees for our support teams may impact the ability to deliver our strategic five-year plan and operational objectives.

Mitigating actions and controls

·; We provide industry leading induction training and coaching programmes for our new Partners.

·; We have improved our succession planning at all levels to ensure we attract and retain high calibre people.

·; We carry out an annual Employee Engagement Survey and regular listening groups to obtain direct feedback from our employees.

·; We have a remuneration strategy to ensure our teams are paid fairly and competitively.

Regulatory

Health and safety

A health and safety accident or incident could lead to serious illness, injury or even loss of life to one of our Partners, employees or visitors and significantly impact Punch's reputation.

Mitigating actions and controls

·; A health and safety management committee meets to consider all aspects of health and safety across Punch and to report to the Board of Directors on the status of health and safety.

·; We have formally documented and briefed health and safety policies for our support centre and field-based teams and carry out annual risk assessments in key areas.

Changes in legislation

Punch is subject to many different areas of regulation, many due to the high level of control over the sale of alcohol. Increasing focus in areas such as binge drinking, underage drinking, and health impacts over recent years also means that the Government may introduce further regulation which may significantly affect our business.

Mitigating actions and controls

·; Punch works closely with our Partners and the rest of the industry to address the key issues facing the pub sector.

·; We actively participate in consultation processes and have attended consultation meetings discussing the Government's "Rebalancing the Licensing Act" initiative.

·; We work closely with the BBPA and other industry bodies and have provided input into the Institute of Licensing's response to the Government's "Rebalancing the Licensing Act" initiative.

·; We ensure that our training covers all aspects of licensing requirements and have due diligence in place to confirm that our pubs meet relevant licensing legislation.

·; Punch works closely with local Licensing Boards, to ensure individual pub licensing requirements are met and any issues are highlighted as soon as possible.

·; Punch's Code of Practice exceeds the requirements of the Pub Industry Framework Code (Version 5 Dec 2011), with the 3rd edition being accredited by the British Institute of Innkeeping in April 2012. Any amendments to the Code of Practice will be in line with the Pub Industry Framework Code and will not fall below those standards. The Punch Code of Practice clearly sets out the promises we make and exactly how we intend to honour them.