Like-for-like bar sales increased by 2.4% (2016: 2.9%), food by 5.1% (2016: 2.9%) and fruit/slot machines decreased by 2.1% (2016: decreased by 2.9%). Like-for-like room sales at our hotels increased by 14.8% (2016: 7.5%). Bar sales were 61.4% of the total, food was 34.8%, fruit machines were 2.6% and room sales were 1.0%.

Operating profit increased by 31.7% to £65.1m (2016: £49.4m). The operating margin was 8.1% (2016: 6.3%). Profit before tax and exceptional items increased by 42.8% to £51.4m (2016: £36.0m). The improved performance in the period was due mainly to lower utility and interest costs, relatively benign costs in other areas and the sale of some lower-margin pubs. In addition, the company saw little impact, in the period under review, from the 'living wage' legislation, having increased pay rates before the government announced its plans in this area.

Earnings per share, including shares held in trust by the employee share scheme, and before exceptional items, were 33.8p (2016: 22.3p).

As illustrated in the table in the tax section below, the company paid taxes of £331.6m in the period under review, approximately 33% higher than five years ago (2012: £250.1m).

Net interest was covered 4.6 times by profit before interest, tax and exceptional items (2016: 3.1 times). Total capital investment was £96.0m in the period (2016: £75.6m). £49.6m was spent on freehold reversions of properties where Wetherspoon was the tenant (2016: £15.5m), £28.4m on existing pubs (2016: £17.4m) and £18.0m on new pub openings and extensions (2016: £42.7m).

Exceptional items totalled £7.3m (2016: £4.3m). Twenty-three pubs were sold or closed in the period. There was a £6.6m (2016: £0.1m) loss on disposal and an impairment charge of £5.2m (2016: £0.1m) for closed pubs and pubs which are on the market.

During the period, the company received £0.4m in compensation in respect of a transfer of interest-rate swaps between two financial institutions; this has been treated as an exceptional item.

In addition, there were £4.1m (2016: £3.6m) of exceptional tax credits, as a result of a reduction in the UK average corporation tax rate, which has the effect of creating an exceptional tax credit for future years. The total cash effect of these exceptional items resulted in cash inflow of £8.9m (2016: £Nil).

Free cash flow, after capital investment of £28.4m in existing pubs (2016: £17.4m) and payments of tax and interest, was £49.2m (2016: £55.7m). Free cash flow per share decreased by 5.6% to 44.2p (2016: 46.8p). The decrease was due mainly to the increased expenditure on existing pubs and the timing of payments to suppliers.

Dividends

The board declared an interim dividend of 4.0p per share for the current interim financial period ending 22 January 2017 (2016: 4.0p per share). The interim dividend will be paid on 25 May 2017 to those shareholders on the register at 28 April 2017.

Corporation tax

We expect the overall corporation tax charge for the financial year, including current and deferred taxation, to be approximately 26.8% before exceptional items (24 July 2016: 29.4%).

As in previous years, the company's tax rate is higher than the standard UK tax rate owing mainly to depreciation which is not eligible for tax relief.

Financing

As at 22 January 2017, the company's net debt, including bank borrowings and finance leases, but excluding derivatives, was £696.0m, an increase of £45.2m, compared with that of the previous year end (24 July 2016: £650.8m). The net-debt-to-EBITDA ratio was 3.46 times at the period end (24 July 2016: 3.47). Unutilised facilities were £144.3m at the period end (24 July 2016: £189.6 m).

In November 2016, the Company issued a summary of its current views in respect of debt. The summary is as follows:

"The Company understands that debt always involves risk: the greater the debt, the greater the risk. As a rapidly expanding company, Wetherspoon has historically had higher debt levels than the conservatively financed 'family brewers', the debts of which have often been around 2 times EBITDA, but the levels have usually been lower than the large pub 'PLCs', where they sometimes rose to 5 to 8 times EBITDA, in recent years, often with unfortunate consequences.

"As well as expanding rapidly by opening new pubs, Wetherspoon has bought back approximately half of its shares in this millennium, at a cost of £400m and has spent approximately £140m on freehold reversions: freeholds of properties where Wetherspoon was the tenant. This level of expenditure and debt may be justifiable in an era of (a) low interest rates, (b) reasonable historic prices for shares and property and (c) an experienced board which is sceptical of dangerous fashions in the financial world. Even so, the Company's debt levels during this period, which have benefited shareholders, have clearly involved significant risk.

"As at 24 July 2016, the Company's net debt/EBITDA was 3.47 times. Over the past 15 financial year ends, this ratio has been:

"Weighing the level of debt and risk is a difficult job. Our aim is to be conservatively financed as the business matures, although a precise timetable depends on many factors. For the foreseeable future, it is intended that the Company's net debt/EBITDA will be around 3.5 times. The ratio may rise for a temporary period, for example, if there were a sudden deterioration in trading, in which instance the Company would seek to reduce the level in a timely manner. Insofar as it is possible to generalise, the board believes that debt levels of between 0 and 2 times EBITDA are a sensible long-term benchmark."

Property

During the period, we opened two new pubs and closed 22 pubs, bringing the number of pubs open at the period end to 906. Following a review of our estate, we have placed around 100 pubs on the market in the last two years or so. Eighty-three of these pubs have now been sold, are under contract or have been closed.

UK taxes and regulation

Pubs and restaurants pay far higher levels of UK tax than do supermarkets. The main disparity relates to VAT (value added tax), since supermarkets pay no VAT in respect of their food sales, whereas pubs pay 20%, enabling supermarkets to subsidise their alcoholic drinks prices. Pubs also pay approximately 18p per pint in respect of business rates, while supermarkets pay less than 2p per pint.

In addition, the government has, in recent years, introduced both a 'late-night levy' and additional fruit/slot machine taxes, further reducing the competitive position of pubs in relation to supermarkets.

The tax disparity with supermarkets is unfair. Pubs create significantly more jobs and more taxes per pint or per meal than do supermarkets and it does not make social or economic sense for the UK tax régime to favour supermarkets. We acknowledge the need for companies to pay a reasonable level of taxes, but hope that legislators will make prompt progress in creating a level playing field for all businesses which sell similar products.

The taxes paid by Wetherspoon in the period under review were as follows:

Further progress

As previously highlighted, the company's philosophy is to try continuously to upgrade as many areas of the business as possible. An example is IT, where we have introduced a new 'mobile ordering app' -soon available in all pubs. We are continuing to work with our suppliers and customers to improve the range and quality of real ales and craft beers, and a new menu was introduced in almost all of our pubs on 8 March 2017, offering both new and upgraded dishes. 262 Wetherspoon pubs were recommended in CAMRA's 2017 Good Beer Guide - more than any other company.

In November 2015, the government's Food Standards Agency (FSA) issued a report which named Wetherspoon equal top of the largest 20 food chains for hygiene standards over the preceding five years. 92% of our pubs have obtained the maximum five rating, under the FSA scheme. This exceptional record reflects extremely hard work by our central catering, audit and operations team, as well as by the teams in our pubs.

We have now been recognised as a 'Top Employer UK' by the Top Employers Institute for 14 consecutive years. 99% of our pubs have achieved approval from Cask Marque, an independent brewery-run scheme which encourages high standards in ale quality.

We also allocated £18.8m in bonuses and free shares to employees, 97% of which was paid to those below board level and 79% of which was paid to those working in our pubs.

Current trading and outlook

The biggest danger to the pub industry is the continuing tax disparity between supermarkets and pubs, in respect of VAT and business rates.

As previously indicated, we understand the need for the government to raise taxes. However, there should be a sensible rebalancing of the taxes paid by pubs and supermarkets, if the pub industry is to survive in the long term.

Last Wednesday's budget was presented by the Chancellor as providing tax relief of approximately £1,000 per pub, for pubs with a rateable value of less than £100,000.

In fact, that sum is dwarfed by tax and regulatory increases. For example, costs to Wetherspoon will increase by approximately the following amounts in the next year:

-       business rates:                   £7m

-       electricity taxes:                   £4m

-       excise duty:                           £7m

-       Apprenticeship Levy:           £2m

In addition, the proposed sugar tax will cost approximately £4m from April 2018 and there will be further electricity tax increases of around £5m by 2020.

Companies like Wetherspoon, on examination of the fine print of the budget, are not, in fact, eligible for the £1,000 per annum decrease in business rates, in any event.

The company has previously emphasised the far-higher taxes per meal or per pint that pubs pay compared to supermarkets. For example, supermarkets pay less than 2p per pint for business rates, whereas pubs pay around 18p per pint.

The increase in business rates per pint for pubs from next month will be around 2p, further exacerbating the tax gap.

Pubs also pay VAT of 20% in respect of food sales, but supermarkets pay almost nothing, enabling supermarkets to subsidise the price of alcoholic drinks. An article written for the trade press on this subject can be found below.

Wednesday's budget will weigh far more heavily on pubs than supermarkets, especially since wage costs per pint or meal are approximately 10 times higher in pubs.

The Chancellor was less-than-frank in his budget speech*, since he did not spell out the duty increases, giving the impression to many that there would be no increase.

In effect, this was a budget for dinner parties, no doubt the preference of the Chancellor and his predecessor - dinner parties will suffer far less from the taxes outlined above, whereas many people prefer to go to pubs, given the choice.

In the six weeks to 5 March 2017, like-for-like sales increased by 2.7% and total sales decreased by 0.2%.

As previously announced, the company intends to increase the level of capital investment in existing pubs from £34m in 2015/6 to around £60m in the current year.

As outlined above, the company also anticipates significantly higher costs in the second half of the financial year. In view of these additional costs and our expectation that like-for-like sales will be lower in the next six months, the company remains cautious about the second half of the year. Nevertheless, as a result of modestly better-than-expected year-to-date sales, we currently anticipate a slightly improved trading outcome for the current financial year, compared with our expectations at the last update.

Tim Martin

Chairman

9 March 2017

* The Chancellor said, "I can also confirm that I will make no changes to previously planned upratings of duties on alcohol and tobacco."