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Interim Results

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RNS Number : 1985F
Ei Group plc
16 May 2017
 

Ei Group plc

 

Unaudited Interim Results for the six months ended 31 March 2017

 

Trading performance and strategic evolution progressing well

 

Ei Group plc (EIG or Group), the largest owner and operator of pubs in the UK, today announces its interim results for the six months ended 31 March 2017.

 

Financial highlights

Ø  Business performing well with all operations maintaining like-for-like growth momentum and strategic evolution on track

Ø  Underlying EBITDA# of £140 million (H1 2016: £142 million), in line with expectations and reflecting the impact of planned disposals

Ø  Underlying profit before tax# of £57 million (H1 2016: £57 million) as interest savings from reduced debt offset reduction in EBITDA 

Ø  Statutory profit after tax reduced to £10 million (H1 2016: £33 million), primarily due to non-underlying finance costs of £30 million (H1 2016: £7 million) associated with, previously announced, partial refinancing of the 2018 corporate bonds which delivered smoother and extended debt maturity profile

Ø  Basic earnings per share of 2.1p (H1 2016: 6.6p) which, adjusting for non-underlying items, delivers underlying earnings per share# growth of 4%, at 9.6p (H1 2016: 9.2p)

      

Operational and strategic progress

Ø  Publican Partnerships - our reinvigorated tied leased and tenanted business

o   Continued momentum with like-for-like net income# up 1.6% (H1 2016: up 1.8%) and growth delivered across all geographic regions

o   Initial phases of implementation of the new Pubs Code progressing in line with expectations

 

Ø  Commercial Properties - our high quality commercial property portfolio  

o   Like-for-like net income# up 1.1% (H1 2016: 6.3%) reflecting changes in estate composition, with future like-for-like net income growth expected to normalise in line with inflation

o   Expanding portfolio with 304 commercial properties at 16 May 2017 at an improved average annualised rental income per property of £66,000 (H1 2016: £59,000)

o   Disposal of a package of 18 commercial properties on 16 March 2017 generating £20 million of net proceeds, representing a 15% premium to the prior year-end book value and a gross yield of 6.57%

 

Ø  Managed Operations - our directly managed house business Company

o   161 pubs trading within our 100% owned Managed Operations business at 16 May 2017 with 39 trading in the Bermondsey Pub Company and 122 in the Craft Union Pub

 

Ø  Managed Investments  - our innovative partnerships with expert managed house operators

o   24 pubs trading within our Managed Investments business unit at 16 May 2017, operating through trading agreements with seven managed partners

 

Ø  Capital allocation

o   Net cash inflows from operating activities of £117 million (H1 2016: £129 million)

o   Net proceeds from disposals of £65 million (H1 2016: £27 million)

o   Total capital investment of £35 million (H1 2016: £30 million) with 57% focused on growth-driving investment schemes (H1 2016: 50%). Average pre-tax returns on all such investment of 21% (H1 2016: 19%)

o   Repaid £38 million (H1 2016: £37 million) of securitised notes, in line with amortisation schedule

o   Completed share buyback programme of £25 million in respect of the issued share capital of EIG, with 24.1 million shares purchased for cancellation

 

Commenting on the results, Simon Townsend, Chief Executive Officer said:

 

"We are pleased to have maintained the growth momentum in our leased and tenanted estate while making significant progress in building our commercial property portfolio and managed businesses. Our transformation of the Group remains on track.

 

Trading in the first six weeks of the second half of the year has been strong, assisted by the timing of the Easter holiday period. We expect our trading performance to reflect more challenging comparatives in June and July as we benefited from the UEFA Euro football championship last year. We are mindful of the potential for continuing economic uncertainty over the coming months, and remain vigilant regarding possible headwinds from the Pubs Code depending upon its interpretation and application.

 

Whilst taking into account these factors, we are confident that we will continue to deliver positive like-for-like net income growth in our leased, tenanted and commercial estates for the full year, we are encouraged by the trading performance of our expanding portfolio of managed houses, and we remain committed to the successful implementation of our strategic plan to deliver long-term growth in shareholder value."

 

 

Enquiries:    Simon Townsend, Chief Executive Officer 0121 272 5000

                       Neil Smith, Chief Financial Officer 0121 272 5000

Tulchan Communications, Jonathan Sibun/Peter Hewer 020 7353 4200

 

 

The Interim Results presentation will be available on the Company website at www.eigroupplc.com.  A live video webcast of the presentation will be available on the investor zone section on the above website from 9.30am. Alternatively, a live conference call of the presentation can be accessed at 9.30am by dialling +44 (0) 20 3003 2666 or 1 866 966 5335 (USA callers).  A replay of the conference call will be available for seven days on +44 (0) 20 8196 1998 and 1 866 595 5357 (USA callers) using replay passcode 2686955#.

 

# Alternative Performance Measures (APMs)

In the reporting of financial information throughout the Interim Results, the Directors have adopted various APMs. These measures 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. Further details and definitions of the APMs included in the Interim Results, including reconciliation to reported measures can be found in notes 4, 5, 6 and 13.

 

Forward-looking statements

This announcement contains certain statements about the future outlook for EIG.  Although we believe that 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.

 

 

OPERATIONAL AND STRATEGIC REVIEW

 

Overview

We are pleased to report our interim results for the six months ended 31 March 2017, during which period we have delivered underlying EBITDA of £140 million, down £2 million on the comparative period primarily as a result of planned asset disposals. Underlying profit before taxation was unchanged at £57 million as lower interest costs, resulting from reduced levels of debt, have offset the decline in EBITDA.

 

With the continuing implementation of our strategic plan, the Group is evolving from a predominantly leased and tenanted operation to a portfolio of businesses which operate a variety of models and trading styles.

 

Publican Partnerships

Publican Partnerships is the trading name for our tied leased and tenanted business which is the largest part of our Group. Publican Partnerships contributed £162 million (H1 2016: £167 million) to the underlying EBITDA of the Group reported in the first half of the year.

 

As at 31 March 2017, we had 4,283 pubs trading within the leased and tenanted estate and have grown their like-for-like net income by 1.6% through the first six months of the financial year. The improvement in trading performance has been achieved across our estate and was delivered despite the benefit of an early Easter holiday period assisting the prior year comparative.

 

It is pleasing to see like-for-like net income growth being delivered across the country with pubs in the North sustaining the positive momentum that was achieved last year, with further growth (up 1.2%). We have maintained our like-for-like net income growth in the Midlands (up 1.4%) and delivered strong growth in the South (up 1.9%).

Location

No. of trading

pubs at

31 March 2017

Net income

H1 FY17

£m

% of total net income

FY17

Net income

H1 FY16

£m

Net income change

H1 FY17

%

North

1,206

42.5

26

42.0

1.2

Midlands

852

29.0

18

28.6

1.4

South

2,225

90.1

56

88.4

1.9

Total

4,283

161.6

100

159.0

1.6

 

 

An important driver of like-for-like net income growth in the leased and tenanted business is our capital investment in the estate, particularly where that capital investment is targeted at growth-driving initiatives. Whilst recent regulatory changes mean that it is unlikely we will invest significant capital in long-term leases, we will continue to work in partnership with our tenanted publicans to invest in our pubs to enhance the retail offer to improve trading performance. In the six months to 31 March 2017 we invested £11 million (H1 2016: £11 million) in growth-orientated schemes across 153 (H1 2016: 143) tied tenancies and have to date delivered an average pre-tax return on investment (ROI) of 23% (H1 2016: 19%).

 

We provide our tied leased and tenanted publicans with a broad range of services to help them grow sales and reduce costs, and to operate their pubs efficiently and effectively. Our growing managed house and managed investment partnership businesses are now providing us with additional insight, experience and best practice with which to further enhance the support we can provide to tied lessees and tenants in the Publican Partnerships business.

 

The proactive interventions of our regional managers to identify and then avoid potential business failures is a key driver of the consistent improvements achieved in our like-for-like net income and is a practice that we will continue as our publicans are likely to face increased inflationary pressures and tax burdens in the year ahead. As a consequence of the successful application of these initiatives to support our publicans we have further reduced the number of unplanned business failures, down 15% in the first half of the current year compared to the first half of last year. Where appropriate we will also provide direct financial assistance to tied publicans. In the first half of the year we provided £2 million (H1 2016: £3 million) of such assistance.

 

On 21 July 2016 the new Statutory Code of Practice introduced by the Small Business, Enterprise and Employment Act 2015 came into effect. The new legislation includes a tenant's right, under certain circumstances, to change the freely-negotiated commercial terms of their existing agreement to a new Market Rent Only (MRO) compliant agreement. This enables some occupational tenants to elect to opt-out of the supply tie at certain points or after certain exceptional events 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 tenant elected to invoke this option, whilst our income derived from the supply of tied drinks products would be partially offset by increases in rent, it is possible that our total income from that property would be adversely affected.

 

The impact of MRO is expected to take effect over many years, as MRO trigger events are largely expected to arise through the cycle of five yearly rent reviews and agreement renewals, which apply only to our leases. As such, since the concept of MRO agreements was first announced in November 2014, we have worked hard to reduce our exposure to such longer-term leases and increase the proportion of our tied business operating under tenancy agreements. As at November 2014 we had 3,035 long-term lease agreements and this has reduced by 851 to 2,184 as at 16 May 2017.

 

From the date of the implementation of the new Pubs Code, there have been 499 rent review or agreement renewal events which could potentially have triggered an MRO request. We have issued 171 MRO offers of which 59 have been concluded by way of mutually agreed tied deals, which we estimate will result in no significant change in our net income; 4 have been concluded with new mutually agreed free-of-tie agreements, which we estimate may result in a 18% reduction in our net income; two pubs have since been sold and one lease has been repurchased from the occupational tenant. The balance of 105 have yet to be concluded. Of these, 61 have been referred to the Pubs Code Adjudicator for determination. It is our working assumption that the majority of those cases which have been referred to the Adjudicator will ultimately lead to new, free-of-tie agreements being granted. We remain vigilant to the trends evolving and the impact on our business which has been limited to date.

 

 

Commercial Properties

Our Commercial Properties division contributed £9 million (H1 2016: £7 million) to the underlying EBITDA of the Group reported in the first half of the year, with sites that traded as commercial properties throughout both this year and the prior year delivering like-for-like net income growth of 1.1%.

 

We now have 304 commercial properties, the vast majority of which trade as pubs on a free-of-tie basis. These assets represent investment properties and are now sufficiently material to the Group that we report them separately on the balance sheet. They operate under open market commercial terms which typically attract a higher valuation multiple. These properties have an annualised rental income of £20.0 million and were valued at 30 September 2016 at £228 million, resulting in a gross yield of 8.8%. Excluding 50 leasehold sites, the gross yield on commercial property freehold sites was 7.8%.  

 

In addition to free-of-tie agreements arising from the MRO process we are expanding our high quality commercial property portfolio through open market negotiations with exceptional operators. In the last two years we have entered into 154 new free-of-tie agreements, on terms that are common in the market place for commercial free-of-tie leases, at an average rent of £79,000 over an average term of 19 years.    

 

On 16 March 2017 we sold a package of 18 commercial properties to investment clients of OLIM Property which comprised 13 pubs and 5 convenience stores geographically spread across England. The transaction generated £20 million of net proceeds, representing a 15% premium to the prior year-end book value and a 6.57% yield based upon the gross rental income of £1.33 million. This package disposal demonstrates the inherent realisable value of the portfolio.

 

Reflecting this value-led approach, and the lower than expected number of conversions to free-of-tie agreements from tied publicans exercising the MRO option, we now expect to be operating in the region of 350-375 commercial properties by 30 September 2017. This is lower than our previous estimate of 400-450. It is too early to assess whether the current MRO conversion rate will be repeated in the future and so at this point we continue to believe that our commercial property business will grow to be in the region of 1,000 assets by September 2020. In the short-term a smaller commercial property operation means a larger tied leased and tenanted business which is likely to be beneficial to Group net income.

 

Managed Pubs

Our managed pubs contributed £5 million (H1 2016: £1 million) to the underlying EBITDA of the Group reported in the first half of the year, with those sites that traded as managed pubs throughout both this period and the comparable period delivering like-for-like sales growth of 3.8%. Whilst currently a relatively small business we are building the capability to operate a significant managed house business and we are pleased with the progress made to date.

 

Utilising our segmentation model we have identified that our existing pub estate provides us with a robust pipeline for the future expansion of our managed retail formats and we are confident that the original target, set in May 2015, of a managed house estate comprising around 800 pubs by September 2020 is deliverable.

 

 

Profile of pubs under management

 

 

 

Actual as at 16 May 2017

Forecast as at

30 September

 2017

 

 

Indicative as at

30 September

2020

 

Craft Union Pub Company

 

 

 

122

 

165-175

 

 

 

500

Bermondsey Pub Company

 

 

39

45-50

 

 

200

Managed Operations

 

 

161

210-225

 

 

700

 

Managed Investments

 

 

 

24

 

30-35

 

 

 

100

 

Total Managed Pubs

 

 

 

185

 

240-260

 

 

 

800

 

 

Managed Operations: Craft Union Pub Company

Our largest managed house operation is the Craft Union business which operated 100 sites at 31 March 2017. It now operates 122 sites and we expect it to be operating around 165-175 sites by 30 September 2017. This business predominantly operates in the north of England, but has expanded into the Midlands and the south coast, and we expect its offer to appeal nationally. Currently, its offer is wet-led with quality beers, at affordable prices, served in local, well-invested, community pubs. The simplicity of the offer helps mitigate any execution risk and also improves the efficiency of our capital investment. We are in the process of trialling a very simple food offer within three Craft Union sites to assess the operational implications and the financial benefits of a more extensive consumer offer.

 

As at 31 March 2017, we had 57 pubs operating within the Craft Union business that had traded for more than six months. To date, these pubs are generating average annualised site EBITDA of £87,000, from an average capital investment of £134,000, and a ROI of 26%. As the estate matures and we further develop the consumer offer we would expect our Craft Union sites to generate average site EBITDA in the range of £80,000 to £100,000. After an average capital investment in the region of £100,000 to £120,000, we expect to deliver a ROI in excess of 20%.

 

Managed Operations:  Bermondsey Pub Company

At 31 March 2017 we operated 36 managed pubs within our Bermondsey business. As of today we operate 39 pubs and expect to have in the region of 45-50 pubs in this model by 30 September 2017. All of these Bermondsey pubs operate under our successful Meeting House format, an upper mid-market, mixed food and drink offer. During the last six months we have tailored the Meeting House format to satisfy three specific consumer occasions such that we now have three defined trading offers: City Social, Upbeat Urban and Modern Local. We expect these additional classifications of trading offer to enhance our future site selection and investment decision analysis.

 

At 31 March 2017 we had 17 pubs operating within our Bermondsey business that had traded for more than six months. To date, these pubs are generating average annualised site EBITDA of £123,000, from an average capital investment of £197,000, which delivers a ROI of 25%. As we enhance our offers within the Bermondsey business we would expect the average capital investment to be in the region of £200,000 with average site EBITDA expected to grow to be in the range of £125,000 to £175,000, which we expect to deliver a ROI in excess of 15%.

 

Managed Investments

Within our Managed Investments business we have developed a partnership model whereby we can work with carefully selected managed house operators to share in the benefits of trading in certain high quality and specialist retail segments.

 

We now have seven partnerships with the creation of: Hippo Inns, established with Rupert Clevely, founder of Geronimo Inns; Mash Inns, a venture with Laine Pub Group; Frontier Pubs, a venture with Food & Fuel; Hunky Dory Pubs in conjunction with Oakman Inns; Marmalade Pub Company, a venture with the Marylebone Leisure Group; Dirty Liquor, a venture with Hugh O'Boyle and Caroline Jones; and PubLove, a multi-site pub and boutique hostel operation.

 

As at 31 March 2017 we had 22 pubs and today we have a total of 24 pubs trading under our various relationships. We plan to expand this model in the coming year such that by 30 September 2017 we expect to be operating with around nine partners and trading in the region of 30-35 pubs. At 31 March 2017 we had seven pubs operating within our Managed Investments business that had traded for more than six months and these pubs are to date generating average annualised site EBITDA of £261,000, from an average site capital investment of £685,000, which delivers a ROI, excluding the minority interest, of 18%. As we evolve and grow the mix of operators within the Managed Investments business we would expect the average capital investment to be in the region of £400,000 to £500,000 with average site EBITDA to be in the range of £150,000 to £250,000, which we expect to deliver a ROI in excess of 20%.

 

Optimising capital allocation to enhance returns

We generate significant cash flows from trading activities supplemented by the proceeds of disposals, predominantly of under-performing assets. We have established a returns-based approach to the utilisation of our future cash flows which seeks to continue to reduce the level of our outstanding debt but also provides a balance between additional value enhancing investment opportunities and more immediate returns to shareholders.

 

Our capital allocation framework first seeks to ensure that all priority calls upon cash flows are satisfied, including corporation tax, interest, scheduled debt amortisation and other debt refinancing objectives, followed by on-going investment in our business. We are committed to gradually reducing our leverage over the medium-term and, assuming we are on track to satisfy this objective, then any "excess" cash flow can be assessed for alternative use, including in particular, further investment in the estate or the return of capital to shareholders.

 

Capital investment is a value-enhancing use of cash generated by the business as it makes an important contribution to maintaining and improving like-for-like net income within our leased and tenanted business. It is also an essential element of the strategic evolution of the business as we invest in the conversion of pubs to our managed businesses.

 

Total capital investment in the first half of the year was £35 million (H1 2016: £30 million), of which 57% (H1 2016: 50%) was directed toward income growth opportunities. We target a ROI in excess of 15% on our growth-oriented capital expenditure and have achieved an average ROI of 21% (H1 2016: 19%) on all such schemes delivered over the last twelve months.

 

Allocation of excess cash

During the year to 30 September 2016 we generated £48 million of excess cash flow. Applying our capital allocation framework, the Board decided to utilise this excess cash flow to fund the cost and premium associated with the redemption of £250 million of the secured corporate bonds due in 2018 and, in order to optimise shareholder returns, to fund a £25 million share buyback of EIG shares for cancellation. This share buyback programme was initiated on 31 March 2016 and completed on 31 January 2017 with EIG having purchased 24.1 million shares at an average price of 104p per share.

 

The Board is committed to demonstrating tangible returns to shareholders when it is appropriate to do so. At this time, the Board believes the best use of excess cash generated in the current financial year is to ensure that we have sufficient capacity to repay, at par, the remaining corporate bond due in December 2018 of £100.5 million. The Board recognises that recent bond refinancing activity, necessary to smooth and extend the maturity profile, has come at a cost and we wish to ensure that near-term debt maturities are repaid at par to enhance shareholder value. The Board regularly reviews the utilisation of excess cash flows and will provide the next update in November 2017 based upon projected cash flows for the coming year.

 

OUTLOOK

 

Trading in the first six weeks of the second half of the year has been strong, assisted by the timing of the Easter holiday period. We expect trading performance to reflect more challenging comparatives in June and July as we benefited from the UEFA Euro football championship last year. We are mindful of the potential for continuing economic uncertainty over the coming months, and remain vigilant regarding possible headwinds from the Pubs Code depending upon its interpretation and application.

 

Whilst taking into account these factors, we are confident that we will continue to deliver positive like-for-like net income growth in our leased, tenanted and commercial estates for the full year, we are encouraged by the trading performance of our expanding portfolio of managed houses, and we remain committed to the successful implementation of our strategic plan to deliver long-term growth in shareholder value.

 

 

FINANCIAL REVIEW

 

Income statement

 

 

Underlying

31 March

2017

£m

Underlying

31 March

2016

£m

Revenue

310

305

Operating costs before depreciation and amortisation

(170)

(163)

EBITDA

140

142

Profit before tax

57

57

Earnings per share

9.6p

9.2p

 

 

We delivered underlying EBITDA of £140 million, down £2 million compared to the prior half year primarily due to our disposal programme. Leased and tenanted estate like-for-like net income, the primary component of our underlying EBITDA, is derived from our rental income and our net income from the sale of beer and other products to our publicans. Adjusted for the effect of disposals we saw our like-for-like leased and tenanted net income grow to £162 million (H1 2016: £159 million). In the first six months of the year our like-for-like net income from rents has been in line with last year, primarily assisted by growth at rent reviews and the reduction in unplanned business failures, whilst our net income from beer supply has grown by £2 million as pricing and mix benefits, net of discounts, have offset volume decline. In addition we saw a £1 million saving for the half-year on the discretionary support provided to publicans.

 

Underlying administrative costs in the first half were £21 million (H1 2016: £19 million), reflecting the recruitment of additional capability to assist in the delivery of our strategic objectives and additional administrative costs arising from the introduction of the Pubs Code including the associated cost of the Adjudicator's office. We expect current year underlying administrative costs to be in the region of £42 million.

 

Underlying net finance costs of £75 million were £2 million lower than the comparative period as a result of our planned debt reduction.

 

Total pre-tax non-underlying charges were £44 million (H1 2016: £17 million) comprising £30 million (H1 2016: £7 million) in respect of debt refinancing costs; £9 million (H1 2016: £10 million) in respect of property charges and £5 million (H1 2016: nil) of other charges. The property charges were made up of £8 million (H1 2016: £6 million) arising from the revaluation of assets on transfer to non-current assets held for sale, a profit on the disposal of property, plant and equipment (before goodwill allocation) of £6 million (H1 2016: £1 million loss) and a £7 million (H1 2016: £3 million) charge relating to goodwill allocated to those disposals. The other charges in the period related to £3 million of surrender premiums paid to publicans to recover control of our pub assets and £2 million of restructuring costs incurred as we have reorganised the business to meet our future needs.

 

Total tax in the period was a charge of £3 million (H1 2016: £7 million), representing a charge of £11 million (H1 2016: £11 million) on the underlying trading profit and a credit of £8 million (H1 2016: £4 million) relating to the tax on non-underlying items. The effective tax rate on the underlying trading profits arising in the period was 18.5% (H1 2016: 20.0%), being our estimated effective tax rate for the full financial year.

 

Underlying earnings per share (EPS) of 9.6p, was up 0.4p on the comparative period. Basic EPS was 2.1p compared to 6.6p in the prior half year, primarily due to higher non-underlying charges incurred in respect of debt refinancing.

 

 

Cash flow

Net cash flow from operating activities at £117 million (H1 2016: £129 million), was lower than the comparative period primarily as a result of tax payments in the comparative period being £7 million lower than the current period due to repayments from HMRC in respect of prior year overpayments and capital allowance claims.  

 

Net cash flows from investing activities created an inflow of £30 million compared to an outflow of £3 million in the prior half year, primarily due to higher disposal activity. We reinvest our net disposal proceeds into capital investment in the estate, with the net proceeds received from disposals of £65 million (H1 2016: £27 million) funding the £35 million (H1 2016: £30 million) invested in the period. Disposal proceeds in excess of our capital investment requirements were used to reduce net bank debt.

 

Financing cash flows of £138 million (H1 2016: £109 million), primarily reflect interest paid of £78 million (H1 2016: £77 million), net loan repayments of £13 million (H1 2016: £32 million), net share repurchases of £15 million (H1 2016: £nil) and £32 million (H1 2016: £nil) relating to refinancing costs.

 

 

Balance sheet

Our balance sheet remains strong with a total net asset value of £1.45 billion (H1 2016: £1.39 billion), primarily represented by £3.58 billion (H1 2016: £3.66 billion) of property assets offset by net debt of £2.17 billion (H1 2016: £2.27 billion). The property asset valuation is based upon the valuation undertaken as at 30 September 2016. We have been advised by our external valuers that there is no market evidence to suggest that these property valuations would be materially different as at 31 March 2017. A revaluation of the property assets will be completed for the year end accounts as at 30 September 2017.

 

The share price at 31 March 2017 of £1.36 (H1 2016: £0.95), which equates to an equity value of £653 million (H1 2016: £478 million), compares to a net asset value per share of £3.01 (H1 2016: £2.79). We believe that the successful execution of our strategic plan, which will optimise the use and value of our asset portfolio, should lead to a significant reduction of this value differential.

 

 

Capital structure

We have a long-term, secure, flexible and tax-efficient financing structure comprising bank borrowings, securitised notes and corporate bonds. We are a cash generative business and have, over the past few years, used excess cash flows to reduce debt. During the first half of the current financial year we have used cash generated by the business to meet the scheduled amortisation of securitised notes leaving total net debt at £2.17 billion (H1 2016: £2.27 billion).

 

Corporate and convertible bonds

As at 31 March 2017 we had £1,125 million (H1 2016: £1,125 million) of secured corporate bonds outstanding which are non-amortising, secured against ring-fenced portfolios of freehold pubs and attracting fixed interest rates averaging approximately 6.4% (H1 2016: 6.5%).

 

On 4 November 2016, we completed a partial refinancing of our corporate bonds. Prior to the refinancing, £350.5 million of secured corporate bonds due in 2018 were outstanding with a coupon of 6.5%. We repurchased £250 million of these bonds at a cash purchase price of 111% of their principal amount, resulting in a cash payment of £27.5 million, which has been recorded as a non-underlying finance charge in the period. The repurchase was financed by the issue of a new £250 million secured corporate bond due in February 2022 at a coupon of 6.375%. The result of the transaction is a reduction of the principal amount of the corporate bonds due in 2018 to £100.5 million.

 

In addition to the corporate bonds, we have unsecured seven year convertible bonds that were issued in September 2013 for gross proceeds of £97 million. The convertible bonds have a coupon rate of 3.5% and are convertible at a share price of £1.91 into 50.8 million ordinary shares at any time up to 2020.

 

Bank borrowings

At 31 March 2017 our drawn bank borrowings net of Company cash were £46 million (H1 2016: £62 million). On 24 October 2016 the Group replaced its existing £138 million revolving credit facility (RCF) with a new £120 million facility. Furthermore, on 14 March 2017, the £120 million non-amortising RCF was increased in size to £140 million on the same terms. The facility is available through to August 2020 and attracts a coupon rate of 3% above LIBOR applicable to any drawn portion of the facility.

 

Securitised notes

During the period we have used operational cash generated from the business to repay, in accordance with scheduled amortisation, £38 million (H1 2016: £37 million) of the Unique A3 and A4 securitised notes, which leaves £1.0 billion (H1 2016: £1.1 billion) outstanding at 31 March 2017. The notes amortise over a period to 2032 and attract interest rates of between 5.7% and 7.4%. At 31 March 2017 the Group was £78 million (H1 2016: £72 million) ahead of the amortisation schedule of the "class A" securitised notes through early repayment and market purchases.

 

 

 

 

W S Townsend

16 May 2017

 

 

Group income statement

 

 

Unaudited

Unaudited

Audited

 

 

Six months ended

31 March 2017

Six months ended

31 March 2016

Year ended

30 September 2016

 

Notes

£m

£m

£m

Revenue

 

310

305

632

Operating costs before depreciation and amortisation


 


(175)


(163)


(343)

EBITDA *

 

135

142

289

 

 

 

 

 

Depreciation and amortisation

 

(8)

(8)

(16)

Operating profit

 

127

134

273

 

 

 

 

 

Profit/(loss) on sale of property, plant and equipment

 

6

(1)

5

Goodwill allocated to disposals

 

(7)

(3)

(9)

Net loss on sale of property, plant and equipment

4

(1)

(4)

(4)

 

 

 

 

 

Movements in valuation of the estate and related assets


4


(8)


(6)

(33)

 

 

 

 

 

Finance costs

 

(105)

(84)

(161)

 

 

 

 

 

Profit before tax

 

13

40

75

Taxation

5

(3)

(7)

(4)

Profit after tax attributable to members of the Parent Company

 

10

33

71

 

 

 

 

 

Earnings per share

6

 

 

 

Basic

 

2.1p

6.6p

14.2p

Diluted

 

2.1p

     6.4p

13.7p

 

 

 

 

 

* Earnings before finance costs, taxation, depreciation and amortisation

 

 

Group statement of comprehensive income

 

 

Unaudited

Unaudited

Audited

 

Six months ended

31 March 2017

Six months ended

31 March 2016

Year ended

30 September 2016

 

£m

£m

£m

Profit for the period


10


33


71

Items that will not be reclassified to the income statement:

 

 

Unrealised surplus on revaluation of pub estate

-

-

21

Movement in deferred tax liability related to revaluation of the estate

3

-

-

Revaluation of assets on transfer to non-current assets held for sale

(2)

(1)

(1)

Restatement of deferred tax liability related to movements in valuation of the estate and related assets for change in UK tax rate


-


20

 

 


24

Other comprehensive income for the period net of tax


1


19


44

Total comprehensive income for the period attributable to members of the Parent Company


11


52


115

 
Group balance sheet

 

 

 

Restated*

Restated*

 

 

Unaudited

Unaudited

Audited

 

 

31 March 2017

31 March 2016

30 September 2016

 

 

£m

£m

£m

Non-current assets

 

 

 

 

Goodwill

 

314

327

321

Intangible assets: operating lease premiums

 

10

9

9

Property, plant and equipment

 

3,376

3,486

3,434

Investment properties

 

205

170

196

Trade receivables

 

3

3

3

 

 

3,908

3,995

3,963

Current assets

 

 

 

 

Inventories

 

2

-

1

Trade and other receivables

 

52

46

45

Cash

 

154

144

145

 

 

208

190

191

 

 

 

 

 

Non-current assets held for sale

 

30

28

21

 

 

 

 

 

Total assets

 

4,146

4,213

4,175

 

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

 

(178)

(184)

(183)

Current tax payable

 

(3)

(10)

(8)

Financial liabilities

 

(79)

(81)

(82)

Pension

 

(2)

(2)

(2)

Provisions

 

(1)

-

-

 

 

(263)

(277)

(275)

Non-current liabilities

 

 

 

 

Financial liabilities

 

(2,245)

(2,333)

(2,261)

Provisions

 

(4)

(4)

(4)

Deferred tax

 

(182)

(200)

(185)

Pension

 

(2)

(5)

(2)

 

 

(2,433)

(2,542)

(2,452)

 

 

 

 

 

Total liabilities

 

(2,696)

(2,819)

(2,727)

Net assets

 

1,450

1,394

1,448

 

 

 

 

 

Equity

 

 

 

 

Called up share capital

 

13

14

14

Share premium account

 

486

486

486

Revaluation reserve

 

739

748

748

Capital redemption reserve

 

12

11

11

Merger reserve

 

77

77

77

Treasury share reserve

 

(227)

(227)

(227)

Other reserve

 

19

11

10

Profit and loss account

 

330

274

328

Equity attributable to members of the Parent Company

1,449

1,394

1,447

Non-controlling interests

 

1

-

1

Total equity

 

1,450

1,394

1,448

           

*The figures at 31 March 2016 and 30 September 2016 have been restated for the reclassification of investment properties, as detailed in note 2 to this interim statement.

 

Group statement of changes in equity

 


Share

capital

Share premium account


Revaluation reserve

Capital redemption reserve


Merger reserve

Treasury share

reserve


Other reserve

Profit and loss account

Equity attributable to members of the Parent Company

Non-controlling interests

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

At 1 October 2016

14

486

748

11

77

(227)

10

328

1,447

1

1,448

Profit for the period

-

-

-

-

-

-

-

10

10

-

10

Other comprehensive income

-

-

1

-

-

-

-

-

1

-

1

Total comprehensive income

-

-

1

-

-

-

-

10

11

-

11

Transfer of realised revaluation surplus

-

-

(12)

-

-

-

-

12

-


-


-

Share option entitlements exercised in period

-

-

-

-

-

-

10

(9)

1


-


1

Purchase of own shares into Employee Benefit Trust

-

-

-

-

-

-

(1)

-

(1)


-


(1)

Share-based expense recognised in operating profit

-

-

-

-

-

-

-

1

1


-


1

Change in share buyback commitments

-

-

-

-

-

-

-

5

5


-


5

At 31 March 2017

13

486

739

12

77

(227)

19

330

1,449

1

1,450

 

 

 

 

 

 

 

 

 

 

 

At 1 October 2015

14

486

730

11

77

(227)

9

246

1,346

-

1,346

Profit for the period

-

-

-

-

-

-

-

33

33

-

33

Other comprehensive income

-

-

19

-

-

-

-

-

19

-

19

Total comprehensive income

-

-

19

-

-

-

-

33

52

-

52

Transfer of realised revaluation surplus

-

-

(2)

-

-

-

-

2

-


-

-

Transfer of deferred tax

-

-

1

-

-

-

-

(1)

-

-

-

Share option entitlements exercised in period

-

-

-

-

-

-

2

(2)

-


-

-

Share-based expense recognised in operating profit

-

-

-

-

-

-

-

1

1


-

1

Share buyback commitments

-

-

-

-

-

-

-

(5)

(5)

-

(5)

At 31 March 2016

14

486

748

11

77

(227)

11

274

1,394

-

1,394

 

 

 

Group statement of changes in equity

 

 


Share

capital

Share premium account


Revaluation reserve

Capital redemption reserve


Merger reserve

Treasury share

reserve


Other reserve

Profit and loss account

Equity attributable to members of the Parent Company

Non-controlling interests

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 October 2015

14

486

730

11

77

(227)

9

246

1,346


-

1,346

Profit for the year

-

-

-

-

-

-

-

71

71

-

71

Other comprehensive income

-

-

44

-

-

-

-

-

44

-

44

Total comprehensive income

-

-

44

-

-

-

-

71

115

-

115

Transfer of realised revaluation surplus

-

-

(19)

-

-

-

-

19

-

-

-

Transfer of deferred tax

-

-

4

-

-

-

-

(4)

-

-

-

Reclassification of deferred tax

-

-

(11)

-

-

-

-

11

-

-

-

Share option entitlements exercised in the year

-

-

-

-

-

-

2

(2)

-

-

-

Share-based expense recognised in operating profit

-

-

-

-

-

-

-

2

2

-

2

Purchase of own shares into Employee Benefit Trust

-

-

-

-

-

-

(1)

-

(1)

-

(1)

Issue of subsidiary share capital to non-controlling interests

-

-

-

-

-

-

-

-

-

1

1

Share buybacks

-

-

-

-

-

-

-

(10)

(10)

-

(10)

Share buyback commitments

-

-

-

-

-

-

-

(5)

(5)

-

(5)

At 30 September 2016

14

486

748

11

77

(227)

10

328

1,447

1

1,448

 

 

 

 
Group cash flow statement

 

Unaudited

Unaudited

Audited

 

Six months ended

31 March 2017

Six months ended

31 March 2016

Year ended

30 September 2016

 

£m

£m

£m

 

 

 

 

Cash flow from operating activities

 

 

 

Operating profit

127

134

273

Depreciation and amortisation

8

8

16

Share-based expense recognised in profit

1

1

2

Increase in receivables

(7)

(6)

(5)

(Decrease)/increase in payables

(3)

(4)

1

Increase in inventories

(1)

-

(1)

Increase in provisions

1

-

-

 

126

133

286

Expenditure associated with capital structure review

-

(2)

(6)

Tax paid

(9)

(2)

(11)

Net cash flows from operating activities

117

129

269

 

 

 

 

Cash flows from investing activities

 

 

 

Payments made on improvements to public houses

(32)

(28)

(70)

Payments to acquire other property, plant and equipment


(2)


(2)


(4)

Receipts from sale of property, plant and equipment

65

27

98

Acquisition of subsidiary undertaking

(1)

-

-

Net cash flows from investing activities

30

(3)

24

 

 

 

 

Cash flows from financing activities

 

 

 

Interest paid

(78)

(77)

(155)

Interest received

-

-

1

Debt extinguishment costs

(30)

-

-

Debt restructuring costs

(2)

-

(7)

Payments to acquire own debt

-

-

(10)

Payments to acquire own shares

(16)

-

(11)

Receipts from exercise of share options

1

-

-

Proceeds from issue of subsidiary share capital to non-controlling interests


-


-


1

New loans

475

45

75

Repayment of loans

(488)

(77)

(169)

Net cash flows from financing activities

(138)

(109)

(275)

 

 

 

 

Net increase in cash

9

17

18

Cash at start of period

145

127

127

Cash at end of period

154

144

145

 

 
Notes
 
1.     Publication of non-statutory accounts

The financial information contained in this half-yearly financial report, which is unaudited, does not constitute statutory accounts in accordance with the Companies Act 2006. The financial information for the year ended 30 September 2016 is extracted from the statutory accounts for that year which have been delivered to the Registrar of Companies, on which the auditors issued an unqualified opinion that did not include an emphasis of matter reference or statements under section 498(2) or (3) of the Companies Act 2006.
 

2.  Accounting policies

This interim report has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 'Interim Financial Reporting' and reflects, other than as noted below, the accounting policies set out in the notes to the 30 September 2016 Annual Report and Accounts which have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).

 

The Group leases some properties on commercial leases within the commercial property segment.  As this segment expands the Group recognises that the value attributed to these assets is now a material balance and has consequentially reclassified this balance from property, plant and equipment to investment properties in the balance sheet. The impact of this change is that all revaluation movements on investment properties are recognised in the income statement, rather than impacting the revaluation reserve.  Although the balance sheet amounts have been reclassified for comparative periods, the impact on the income statement has been assessed as not material and it has therefore not been restated.

The Directors have considered the Group's financial resources including a review of the medium-term financial plan, which includes a review of the Group's cash flow forecasts for the period of at least 12 months from the date of approval of this statement and the principal risks facing the Group.

Based on the outcome of the above considerations the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the period of the review. For this reason the Directors continue to adopt the going concern basis of accounting in preparing the financial statements.

 

3.  Segmental analysis

The Group has five distinguishable operating segments being Publican Partnerships, Commercial Properties, Bermondsey Pub Company, Craft Union Pub Company and Managed Investments which reflect the different nature of income earned, types of property and profile of customers.  The five segments have been identified because the Chief Operating Decision Maker (CODM) regularly reviews discrete financial information relating to them.

 

Operating segments are aggregated when they have similar economic characteristics and therefore Bermondsey Pub Company, Craft Union Pub Company and Managed Investments have been combined as they represent income earned from the direct operation of pubs albeit through differing trading styles.  This results in three reportable segments being Publican Partnerships, Commercial Properties and Managed Businesses. As the Group progresses with the reallocation of pubs between these segments it is now considered appropriate due to materiality to disclose segmental information. 

 

The CODM reviews the financial results by segment to underlying EBITDA and this therefore provides the basis for the disclosures below. The prior period results have also been analysed on a consistent basis to show comparative information for the reportable segments.

 

All of the Group's revenue is generated in the United Kingdom and is not further segmented based on location, therefore no geographical segmental analysis has been provided. The balance sheet is not reviewed by the CODM on a segmented basis and therefore no disclosure has been made in relation to segmental assets and liabilities.

 

 

Publican Partnerships

Commercial Properties

 

Managed

 

Central

 

Total

Six months ended 31 March 2017

£m

£m

£m

£m

£m

Revenue

270

9

31

-

310

Operating costs before depreciation and amortisation

 

(108)

 

-

 

(26)

 

(36)

 

(170)

Underlying EBITDA

162

9

5

(36)

140

Non-underlying operating costs before depreciation and amortisation

 

 

 

 


(5)

Depreciation and amortisation

 

 

 

 

(8)

Net loss on sale of property, plant and equipment

 

 

 

 

 

(1)

Movements in valuation of the estate and related assets

 

 

 

 

 

(8)

Net finance costs

 

 

 

 

(105)

Profit before tax

 

 

 

 

13

Taxation

 

 

 

 

(3)

Profit after tax

 

 

 

 

10

 

 

 

Publican Partnerships

Commercial Properties

 

Managed

 

Central

 

Total

Six months ended 31 March 2016

£m

£m

£m

£m

£m

Revenue

289

7

9

-

305

Operating costs before depreciation and amortisation

 

(122)

 

-

 

(8)

 

(33)

 

(163)

Underlying EBITDA

167

7

1

(33)

142

Non-underlying operating costs before depreciation and amortisation

 

 

 

 


-

Depreciation and amortisation

 

 

 

 

(8)

Net loss on sale of property, plant and equipment

 

 

 

 

 

(4)

Movements in valuation of the estate and related assets

 

 

 

 

 

(6)

Net finance costs

 

 

 

 

(84)

Profit before tax

 

 

 

 

40

Taxation

 

 

 

 

(7)

Profit after tax

 

 

 

 

33

 

 

 

Publican Partnerships

Commercial Properties

 

Managed

 

Central

 

Total

Year ended 30 September 2016

£m

£m

£m

£m

£m

Revenue

588

16

28

-

632

Operating costs before depreciation and amortisation

(245)

(1)

     (24)

(70)

 (340)

Underlying EBITDA

343

15

4

(70)

292

Non-underlying operating costs before depreciation and amortisation

 

 

 

 

(3)

Depreciation and amortisation

 

 

 

 

(16)

Net loss on sale of property, plant and equipment

 

 

 

 

(4)

Movements in valuation of the estate and related assets

 

 

 

 

(33)

Net finance costs

 

 

 

 

(161)

Profit before tax

 

 

 

 

75

Taxation

 

 

 

 

(4)

Profit after tax

 

 

 

 

71

 

 

 

4.  Non-underlying items

 

The Group uses adjusted figures as key performance measures in addition to those reported under IFRS, as management believe these measures enable them to assess the underlying trading performance of the business.  Adjusted figures exclude non-underlying items which comprise exceptional items, non-recurring items and other adjusting items.

 

Non-underlying items include reorganisation costs, assignment premiums paid to a publican in order to take the assignment of a lease or to break a lease at any point other than at renewal during the period of our strategic review, the profit/loss on sale of property, plant and equipment, the movement in valuation of the estate and related assets and costs incurred in respect of refinancing.

 

 

 

 

The adjusted figures are derived from the reported figures under IFRS as follows:

 

 

 

 

Unaudited

Six months ended 31 March 2017

Unaudited

Six months ended 31 March 2016

Audited

 Year ended 30 September 2016

 

 

 

 

Underlying items

Non-underlying items

Total

Underlying items

Non-underlying items

Total

Underlying items

Non-underlying items

Total

 

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

Revenue

 

310

-

310

305

-

305

632

-

632

Operating costs before depreciation and amortisation


 


(170)


(5)


(175)


(163)


-


(163)


(340)


(3)


(343)

EBITDA

 

140

(5)

135

142

-

142

292

(3)

289

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortisation

 

(8)

-

(8)

(8)

-

(8)

(16)

-

(16)

Operating profit/(loss)

 

132

(5)

127

134

-

134

276

(3)

273

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) on sale of property, plant and equipment

 

-

6

6

-

(1)

(1)

-

5

5

Goodwill allocated to disposals

 

-

(7)

(7)

-

(3)

(3)

-

(9)

(9)

Net loss on sale of property, plant and equipment


 

-

(1)

(1)

-

(4)

(4)

-

(4)

(4)

Movements in valuation of the estate and related assets


 


-


(8)

 

(8)


-


(6)


(6)


-


(33)


(33)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance costs

 

(75)

(30)

(105)

(77)

(7)

(84)

(154)

(7)

(161)

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) before tax

 

57

(44)

13

57

(17)

40

122

(47)

75

 

 

 

 

 

 

 

 

 

 

 

Taxation

 

(11)

8

(3)

(11)

4

(7)

(25)

21

(4)

Profit/(loss) after tax attributable to members of the Parent Company

 

46

(36)

10

46

(13)

33

97

(26)

71

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying^

 

9.6p

 

 

         9.2p

 

 

19.6p

 

 

Underlying diluted^

 

9.5p

 

 

8.7p

 

 

18.5p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

^ Excludes non-underlying items

 

 

 

 

 

 

 

 

 

 

 

 

 

Those items identified as non-underlying are explained further below:

 

a) Operating costs

 

A charge of £5 million (31 March 2016: £nil, 30 September 2016: £3 million) has been incurred in respect of assignment premiums paid and reorganisation costs. These have been incurred following the strategic review and are not considered to be part of the underlying performance of the business as they are not expected to recur once the strategic realignment of properties has been completed.

 

b) Net loss on sale of property, plant and equipment

 

 

Unaudited

Unaudited

Audited

 

Six months ended

31 March 2017

Six months ended

31 March 2016

Year ended

30 September 2016

 

£m

£m

£m

Profits on sale of property, plant and equipment


 

6

1

10

Losses on sale of property, plant and equipment

(2)

(5)

Profit/(loss) on sale of property, plant and equipment

6

(1)

5

Goodwill allocated to disposals

(7)

(3)

(9)

Net loss on sale of property, plant and equipment

(1)

(4)

(4)

         

 

During the period, 139 properties (31 March 2016: 100 properties, 30 September 2016: 226 properties) and various other plots of land with a book value of £59 million (31 March 2016: £27 million, 30 September 2016: £91 million) were sold generating gross proceeds of £69 million (31 March 2016: £29 million, 30 September 2016: £104 million) which, after taking account of disposal costs, resulted in an overall profit of £6 million (31 March 2016: loss of £1 million, 30 September 2016: profit of £5 million).

 

In accordance with IAS 36, purchased goodwill is allocated to pubs disposed of, based on the relative value of the disposal to pubs retained.  Accordingly, goodwill of £7 million (31 March 2016: £3 million, 30 September 2016: £9 million) has been allocated to the 139 properties (31 March 2016: 100 properties, 30 September 2016: 226 properties) disposed of during the period.

 

c) Movements in valuation of the estate and related assets

 

 

Unaudited

Unaudited

Audited

 

Six months ended

31 March 2017

Six months ended

31 March 2016

Year ended

30 September 2016

 

£m

£m

£m


Movements in property, plant and equipment from revaluation of the estate



-



-



(18)

Revaluation of non-current assets held for sale

(8)

(6)

(15)

 

(8)

(6)

(33)

 

In respect of assets revalued on transfer to non-current assets held for sale, a total net write-down of £10 million (31 March 2016: £7 million, 30 September 2016: £16 million) has been recorded. Of this net write-down, £2 million (31 March 2016: £1 million, 30 September 2016: £1 million) has been debited to other comprehensive income and £8 million (31 March 2016: £6 million, 30 September 2016: £15 million) has been charged to the income statement. At 31 March 2017, there are 88 properties (31 March 2016: 80 properties, 30 September 2016: 68 properties) included within non-current assets held for sale which have been recorded at the lower of carrying value on transfer to non-current assets held for sale, as assessed at the time of transfer, and fair value less costs to sell.

Following discussions with our external valuers, corroborated by market evidence and after considering the potential effect of the MRO legislation, there is no indication that values recorded in property, plant and equipment in respect of the estate would be materially different as at 31 March 2017.  A full valuation of the total pub estate is undertaken at the end of each financial year.

 

d)    Finance costs

On 24 October 2016 the Group replaced its existing £138 million revolving credit facility (RCF) with a new £120 million facility. Furthermore, on 14 March 2017 the £120 million non-amortising RCF was increased in size to £140 million on the same terms. The facility is available through to August 2020 and attracts an interest rate of 3% above LIBOR applicable to any drawn portion of the facility.

On 4 November 2016 the Group completed a partial refinancing of the 2018 corporate bond. The partial refinancing results in a lower interest coupon and an extended debt maturity.  Prior to the refinancing £350.5 million of 2018 secured corporate bonds were outstanding with a coupon of 6.5%. The Group received and accepted tender instructions for £250 million of these bonds at a cash purchase price of 111% of their principal amount. In connection with this partial refinancing the Group issued new £250 million secured corporate bonds, due in February 2022, at a coupon of 6.375%, resulting in a reduction of the corporate bonds maturing in 2018 to £100.5 million. The new issue benefits from a security package on substantially the same terms as the 2018 bonds.

The total cash outflow arising from the bank and bond refinancing was £32 million, being £28 million in respect of the repurchase premium on the extinguished bond, which has been charged to the income statement, and total fees and disbursements of £4 million, of which £2 million has been charged to the income statement and £2 million arising on the new bank facility has been deferred over the life of the new debt instrument.

During the prior year the Group completed a full strategic and legal review of our capital structure to ensure that it did not constrain our ability to execute our operational strategy.  A significant output of this review was the consent solicitation approved by the noteholders of the Unique securitisation voting in favour of proposals to amend certain aspects of the documentation to permit increased numbers of managed houses within the securitisation. Of the total fees incurred in this strategic review, £7 million was recognised in the income statement and £7 million was deferred over the remaining life of the Unique securitised notes.

 

5.  Taxation

a)    Underlying tax

The underlying tax charge of £11 million (31 March 2016: £11 million, 30 September 2016: £25 million) equates to an effective tax rate of 18.5% (31 March 2016: 20.0%, 30 September 2016: 20.1%).  The effective tax rate does not include the effect of non-underlying items.

 

b)    Non-underlying tax

The items below are classified as non-underlying due to their size and either because they do not relate to any income or expense recognised in the income statement in the same period or because they relate to non-underlying items.

 

Under IFRS, a deferred tax liability has been recognised on the balance sheet relating to the estate. On transition to IFRS, the Group elected to apply IFRS 3 retrospectively to acquisitions from 1 January 1999 which led to an increase in goodwill in respect of this deferred tax of £330 million. As this pre-acquisition liability changes due to capital gains indexation relief and changes in the rate of UK tax, the movement is recognised in the income statement. The impact of capital gains indexation relief is calculated based on the movement in the Retail Price Index (RPI).  A credit of £1 million (31 March 2016: £nil, 30 September 2016: £1 million) has been recognised in the income statement as non-underlying due to its size and because it does not relate to any income or expense recognised in the income statement in the same period.  

 

The current rate of corporation tax is 19%, however the UK Government announced in March 2016 a reduction in the rate of corporation tax to 17% by 1 April 2020 which was enacted during the prior year.  Where appropriate, deferred taxation was recalculated based on the current substantively enacted rate of 17% (31 March 2016: 18%, 30 September 2016: 17%) resulting in a tax credit of £nil (31 March 2016: £3 million, 30 September 2016: £9 million).

 

A deferred tax credit of £nil (31 March 2016: £nil, 30 September 2016: £4 million) relating to the movements in valuation of the estate and related assets and net profit/(loss) on disposal of properties has been recognised in the income statement.

 

A non-underlying tax credit of £7 million (31 March 2016: £1 million, 30 September 2016: £7 million) has been recognised in relation to all other non-underlying items in the income statement. The total non-underlying tax credit is therefore £8 million (31 March 2016: £4 million, 30 September 2016: £21 million).

 

c)     Tax recognised in other comprehensive income

A charge of £3 million (31 March 2016: £nil, 30 September 2016: £nil) has been recognised in other comprehensive income related to the tax on the revalued estate.

 

In addition, a credit of £nil (31 March 2016: £20 million, 30 September 2016: £24 million) has been recognised in other comprehensive income following the restatement of the deferred tax liability for the change in UK tax rate.

 

6.     Earnings per share

 

The calculation of basic earnings per share is based on the profit/(loss) attributable to Ordinary Shareholders for the period divided by the weighted average number of equity shares in issue during the period after excluding shares held by trusts relating to employee share options and shares held in treasury.

 

Underlying earnings per share, which the Directors believe reflects the underlying performance of the Group, is based on earnings attributable to Ordinary Shareholders adjusted for the effects of non-underlying items net of tax, divided by the weighted average number of equity shares in issue during the period after excluding shares held by trusts relating to employee share options and shares held in treasury.

 

The dilution adjustments for share options and the convertible bonds are reviewed independently and where they are anti-dilutive to the calculation of diluted earnings per share they are not included in the calculation of both diluted and underlying diluted earnings per share.

 

For the period ended 31 March 2017, the adjustment for share options is assessed as being dilutive (31 March 2016: dilutive, 30 September 2016: dilutive) which has resulted in an adjustment to the weighted average number of equity shares in issue during the period of 2.6 million shares (31 March 2016: 6.1 million shares, 30 September 2016: 7.3 million shares).

 

For the period ended 31 March 2017, the adjustment for the convertible bonds is assessed as being anti-dilutive (31 March 2016: dilutive, 30 September 2016: dilutive) which has resulted in an adjustment to profit in the calculation of diluted earnings per share of £nil (31 March 2016: £2.6 million, 30 September 2016: £5.2 million) for the post tax interest cost associated with the convertible bonds and an adjustment to the weighted average number of equity shares in issue during the period of nil shares (31 March 2016: 50.8 million shares, 30 September 2016: 50.8 million shares).

 

 

 

 

Unaudited

 

Unaudited

 

Audited

 

 

Six months ended

31 March 2017

 

Six months ended

31 March 2016

 

Year ended

30 September 2016

 

 

 

Earnings

Per share

amount

 

 

Earnings

Per share amount

 

 

Earnings

Per share amount

 

 

£m

 

p

 

£m

 

p

 

£m

 

p

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic profit per share

 

10.2

 

2.1

 

33.0

 

6.6

 

70.7

 

14.2

Diluted profit per share

 

10.2

 

2.1

 

35.6

 

6.4

 

75.9

 

13.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying profit per share

 

46.2

 

9.6

 

45.8

 

9.2

 

97.4

 

19.6

Underlying diluted profit per share

 

46.2

 

9.5

 

48.4

 

8.7

 

102.6

 

18.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No. of shares

 

 

 

No. of shares

 

 

 

No. of shares

 

 

 

 

 m

 

 

 

 m

 

 

 

m

Weighted average number of shares

 

 

 

483.5

 

 

 

500.0

 

 

 

496.8

Dilutive share options

 

 

 

2.6

 

 

 

6.1

 

 

 

7.3

Dilutive convertible bonds shares

 

 

 

-

 

 

 

50.8

 

 

 

50.8

Diluted weighted average number of shares

 

 

 

486.1

 

 

 

556.9

 

 

 

554.9

                             

 

7.         Additional cash flow information

 

a)    Reconciliation of net cash flow to movement in net debt

 

 

 

 

 

Unaudited

Unaudited

Audited

 

Six months ended

31 March 2017

Six months ended

31 March 2016

Year ended

30 September 2016

 

£m

£m

£m


Increase in cash in the period


9


17


18

Cash outflow from change in debt

13

32

104

Issue costs of new debt

2

-

7

Change in net debt resulting from cash flows

24

49

129

Non-cash movement in debt costs and discounts/premiums on long-term loans

Amortisation of the fair value adjustments of

securitised bonds

Convertible bonds effective interest

Change in commitment for share buybacks


(2)

2
(1)
5


5

2
(1)

 (5)


(3)

 

4
(3)
(5)

Movement in net debt in the period

 

Net debt at start of period

28

(2,198)

50

(2,320)

122

(2,320)

Net debt at end of period

(2,170)

(2,270)

(2,198)

 
b)    Analysis of net debt

 

 

 

 

 

Unaudited

Unaudited

Audited

 

Six months ended

31 March 2017

Six months ended

31 March 2016

Year ended

30 September 2016

 

£m

£m

£m


Bank borrowings


(80)


(80)


(55)

Corporate bonds

(1,222)

(1,222)

(1,222)

Securitised bonds

(1,028)

(1,113)

(1,066)

Gross debt

(2,330)

(2,415)

(2,343)

Cash

154

144

145

Underlying net debt

(2,176)

(2,271)

(2,198)

 

 

 

 

Capitalised debt issue costs 

16

17

16

Fair value adjustments on acquisition of bonds

(19)

(23)

(21)

Convertible bonds effective interest

(9)

(6)

(8)

Convertible bonds reserve

21

21

21

Finance lease payables

(3)

(3)

(3)

Commitment for share buybacks

-

(5)

(5)

Net debt

(2,170)

(2,270)

(2,198)

 

 

 

 

Balance sheet:

 

 

 

Current financial liabilities

(79)

(81)

(82)

Non-current financial liabilities

(2,245)

(2,333)

(2,261)

Cash

154

144

145

Net debt

(2,170)

(2,270)

(2,198)

 

Cash balances within the Group include £65 million held within a securitised reserve account, withdrawals from which can only be made with the consent of the Security Trustee.

8.     Financial instruments

All financial assets and liabilities are carried at amortised cost.  The fair values of all financial instruments are either equal to, or not materially different from their book values, with the exception of corporate bonds and securitised bonds. The book values and fair values of these financial instruments are summarised below:

 

 

Unaudited

Six months ended
31 March 2017

Unaudited

Six months ended
31 March 2016

Audited

Year ended
30 September 2016

 

Book value

Fair value

Book value

Fair value

Book value

Fair value

 

 

£m

£m

£m

£m

£m

£m

 

Corporate bonds

1,204

1,304

1,200

1,188

1,202

1,251

 

Securitised bonds

1,038

1,119

1,126

1,084

1,078

1,077

 

 

9.     Related party transactions
 

There have been no related party transactions requiring disclosure during the period or prior periods.

 

10.   Commitments for the purchase of property, plant and equipment

At 31 March 2017, the Group had entered into contractual commitments to purchase £7 million (31 March 2016: £7 million, 30 September 2016: £5 million) of property, plant and equipment.

 

11.   Seasonality of operations

The business is subject to seasonal fluctuations dependant on public holidays and the weather.

 

12.   Share buybacks

During the period to 31 March 2017 the Group purchased 13.0 million shares at an average price of £1.14 (31 March 2016: 100,000 shares at an average price of £0.96, 30 September 2016: 11.1 million shares at an average price of £0.91).

 

This completed a share buyback programme, initiated in March 2016, which in total resulted in the purchasing of 24.1 million shares at an average price of £1.04.

 

These shares were immediately cancelled.

 

13.   Alternative Performance Measures (APMs)

14. 

Like-for-like Publican Partnerships net income

 

Publican Partnerships like-for-like net income of £162 million (31 March 2016: £159 million) represents underlying EBITDA of £140 million (31 March 2016: £142 million), stated before property costs of £15 million (31 March 2016: £14 million), central administrative costs of £21 million (31 March 2016: £19 million) and excluding £14 million (31 March 2016: £8 million) of net operating profit relating to commercial properties and managed houses, £1 million (31 March 2016: £6 million) of income in respect of disposals and £1 million of net cost (31 March 2016: £2 million of net income) relating to other non-like-for-like net income/(costs).

 

Like-for-like commercial properties net income

 

Commercial properties achieved like-for-like net income growth of 1.1% in the 6 months to 31 March 2017 and relates to £4.9 million (31 March 2016: £4.8 million) of net income from the 170 commercial properties that traded as commercial properties throughout the current and prior periods.

 

Total commercial properties net income in the period to 31 March 2017 was £9 million (31 March 2016: £7 million) which includes income derived from properties that converted to commercial properties during the current and prior periods. The commercial properties net income in the period represents underlying EBITDA of £140 million (31 March 2016: £142 million), stated before property costs of £15 million (31 March 2016: £14 million), central administrative costs of £21 million (31 March 2016: £19 million) and excluding £167 million (31 March 2016: £168 million) of net operating profit relating to publican partnership properties and managed houses.

 

Excess cash flow

 

Excess cash flow in the period was £30 million (31 March 2016: £12 million) and is derived from net cash flows from operating activities of £117 million (31 March 2016: £129 million) plus net cash flows from investing activities of £30 million (31 March 2016: outflow of £3 million) less net interest paid of £78 million (31 March 2016: £77 million) less debt restructuring costs of £2 million (31 March 2016: £nil) less scheduled debt amortisation of £38 million (31 March 2016: £37 million) plus receipts from exercise of share options of £1 million (31 March 2016: £nil).

 

EBITDA

 

EBITDA represents earnings before finance costs, taxation, depreciation and amortisation.

 

Underlying EBITDA

 

Underlying EBITDA represents earnings before finance costs, taxation, depreciation and amortisation excluding non-underlying items. Non-underlying items that are excluded from underlying EBITDA include reorganisation costs and assignment premiums paid to a publican in order to take the assignment of a lease or to break a lease at any point other than at renewal during the period of our strategic review.

 

Underlying profit before tax

 

Underlying profit before tax excludes non-underlying items. Non-underlying items excluded from profit before tax include reorganisation costs, assignment premiums paid to a publican in order to take the assignment of a lease or to break a lease at any point other than at renewal during the period of our strategic review, the profit/loss on sale of property, plant and equipment, the movement in valuation of the estate and related assets and costs incurred in respect of refinancing.

 

Underlying earnings per share (EPS)

 

Underlying EPS is based on profits after tax excluding non-underlying items as explained above.

 

Growth driving capital investment


Growth driving capital investment is discretionary capital cash spend on the Group's assets which is intended to generate incremental income at returns ahead of our target return on investment.

 

Maintenance and letting capital investment


Maintenance and letting capital investment is all capital cash spend that is not growth driving capital investment, typically focused on maintaining the quality of our assets and supporting the letting programme.

 

Return on investment

 

Return on investment is measured as the incremental income delivered as a result of the investment divided by the value of the capital investment.

 

Unplanned business failures

 

Unplanned business failures are all lease and tenancy agreements that do not reach their full term, where failure is not through the mutual agreement of ourselves and the departing publican. For example, through publican abandonment or via legal proceedings.

 

Statement of Directors' responsibilities

The Directors confirm to the best of their knowledge that this condensed set of financial statements has been prepared in accordance with IAS 34, as adopted by the EU, and that the interim management report herein includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8.

 

The Directors of EIG are as listed in the Ei Group plc Annual Report and Accounts for the year ended 30 September 2016.

 

 

By order of the Board

 

 

W S Townsend                                                          N R Smith

Chief Executive Officer                                               Chief Financial Officer

15 May 2017                                                               15 May 2017

 

 

ADDITIONAL INFORMATION

Principal risks and uncertainties

The Board retains ultimate responsibility for the Group's risk management framework, including the on-going monitoring and review of its effectiveness, and continues to formally review these material risks to ensure that they are being appropriately managed by the executive management team.

 

Whilst the principal risks and uncertainties facing the Group during the period under review, and going forward for the remainder of this year, have not materially changed from those set out on pages 34 to 38 of the 2016 Annual Report and Accounts, we have summarised them below, including any additional information where relevant:

Regulation of the tied pub model

The new Statutory Code of Practice came into effect on 21 July 2016 and includes a tenant's right, under certain circumstances, to seek a new MRO compliant contract that will enable some occupational tenants to elect to opt-out of the supply tie and therefore occupy the premises on a standard commercial property lease, paying rent only.  As a consequence of this it is possible that our total income from that property would be adversely affected. MRO applications by tenants have started to take effect in the period, however the full impact is expected to arise over the next five years. There also remains a lack of clarity around some areas of the Code, leaving elements open to interpretation.

Implementation of strategy

There is a risk that the successful execution of the strategy could be impacted by there not being enough expertise, resource or time to build the necessary support infrastructure or by assets not being allocated to the optimum segment.  Whilst this remains a risk to the business, the Group has continued to implement the strategy in line with expectations.

General economic conditions

There is an increased risk to the Group's business operations as they are sensitive to economic conditions and the general economic outlook remains uncertain.  This could impact publican profitability, through reduced consumer spending or increased costs, and our profitability or the carrying value of assets. The Group continues to monitor the impact of these factors and carefully considers the requirement for operational and financial support as well as the investment decisions relating to the development of our pubs.

Property valuations

There is a risk that future changes in the UK property market and general economic conditions could impact the value of our portfolio or the realisations from property disposals.  Our external valuers have confirmed that there is no indication of any material change to values as at 31 March 2017.

Liquidity risk

Whilst the Group continues to have a flexible financing structure, comprising of bonds and bank borrowings, the primary liquidity risks are the requirements to meet all on-going finance costs, repay the principal amounts as they fall due, fund the cash flow requirements of the business and comply with financial covenants. This includes the risk that amounts may not be able to be refinanced, if required, due to adverse market conditions. On 4 November 2016, we reduced the short-term refinancing risk by repurchasing £250 million of the £350 million outstanding 2018 corporate bonds, financed by the issue of a new £250 million secured corporate bond due in 2022.

Other principal risks and uncertainties

·      Litigation

·      Health and safety

·      People

·      Supply chain management

·      Systems failure

·      Cyber risk

 

Independent Review Report to Ei Group plc

Introduction

 

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2017 which comprises the Group income statement, Group statement of comprehensive income, Group balance sheet, Group statement of changes in equity, Group cash flow statement, and the related notes 1 to 13. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements (UK and Ireland) 2410  "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

 

Directors' Responsibilities

 

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

 

Our Responsibility

 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

 

Scope of Review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2017 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

Ernst & Young LLP

Birmingham

15 May 2017


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