(SPRT) Spirit Pub Co

18 April 2012

Press Release

Spirit Pub Company plc

("Spirit" or "the Group")

Unaudited Interim Results for the 28 weeks to 3 March 2012

Continued progress in transforming the business

Highlights

·      Earnings per share¹ up 12%

·      Market-leading performance in Managed pub business continues

·      Leased pub business in line with management expectations

·      Announcement of inaugural interim dividend of 0.65p per share

Group Financial Performance

·      EBITDA¹ up 3% to £70m (2011 - £68m)

·      Profit before tax¹ up 7% to £20m (2011 - £18m)

·      Earnings per share¹ up 12% at 2.2p (2011 - 2.0p)

·      Net cash outflow² of £60m, driven by front-loaded capital expenditure, seasonal trading profile and timing of supplier payments

·      Nominal value of net debt at £756m: net debt to EBITDA ratio of 5.3 times

Statutory Results (including non-underlying items)

·      EBITDA of £85m (2011 - £48m)

·      Profit before tax of £19m (2011: loss of £117m)

·      Net non-underlying pre-tax costs of £0m (2011: £135m)

·      Basic earnings per share of 2.6p (2011: loss of 8.4p)

Managed

·      Like for like sales up 5.6%, continuing to out-perform the market³

·      EBITDA¹ up 10% at £49m; EBITDAR¹ margin up 140 basis points

Leased

·      Like for like net income down 4.5%

·      EBITDA¹ of £21m (2011 - £23m)

1 Before non-underlying items (analysed separately in note 3 to the financial statements)

2 Before repurchase of debt

3 Comparison to the Coffer Peach Business Tracker

Mike Tye, Chief Executive Officer, commented:

"Spirit continues to make good progress in transforming and revitalising the business. We have delivered further strong growth in Managed sales and margins through continued investment in our brands, our estate and our people supported by strong cost control. The Leased business has performed in line with our expectations and we have built a strong management team to drive performance improvement. Today we have also announced our first dividend payment as a listed company and, while we are mindful of the ongoing economic uncertainty and consumer pressures, we remain on track to deliver our full year expectations."

Forward-looking statements

This report contains certain statements about the future outlook for Spirit Pub Company plc. 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 interim results presentation will be available on the company's website at www.spiritpubcompany.com

A live video webcast of the presentation (commencing at 9.30 a.m. today) will also be available on the investor section of the company's website at www.spiritpubcompany.com 

Overview

We remain pleased with progress in executing our strategy in the Managed business and we continue to develop our plans to drive performance in the Leased business. Profit before tax¹ increased by 7% to £20m despite the impact of our accelerated capital investment programme and some accounting "headwinds" (primarily the cessation of the onerous contract provision). Earnings per share¹ are up 12% and today we have also announced our inaugural interim dividend of 0.65p per share.

Managed Pubs

Performance in our Managed business remains strong with sales up 5.6% on a like for like basis driven by continued investment in our brands, our estate and our people. We closely monitor our performance against the competition using the Coffer Peach Business Tracker and, on this basis, we have consistently outperformed the market over the last 18 months.

Our investment programme continues to reposition the business and to deliver strong returns. During the first half of the year, we completed 156 refurbishments and we continue to achieve an average return on investment in excess of 25%.

76% of our estate has now been invested and branded and we have completed the refurbishment of our Chef & Brewer and Taylor Walker brands with Fayre & Square close to completion. Our remaining capital investment programme will be largely focused on our Flaming Grill, John Barras and Original Pub Company brands. We believe we now have a highly attractive stable of brands for our guests which cover a broad marketplace and range of occasions. This has been recently recognised externally with Fayre & Square winning "Best Pub Brand" at The Publican awards and Chef & Brewer winning "Best Branded Pub Restaurant" at the MIDAS awards.

Like the rest of the pub industry we have faced substantial cost pressures so far this year driven by beer duty, rising raw material costs, the minimum wage rise and increasing utility costs. We have, however, been able to mitigate a significant proportion of this cost inflation through re-negotiation of our contracts on demerger and long term supplier partnerships that allow us to share the benefits of innovation. Our improved estate quality has also allowed us to pass on reasonable price increases to our guests without damaging our volumes.

The combination of strong sales growth and high operational gearing resulted in EBITDA¹ being up 10% with a 140 basis point increase in EBITDAR¹ margin. This improvement will be supported going forward by our investment in pub infrastructure and new EPOS systems across our Managed estate. At 3 March 2012, 100 pubs had moved over to the new platform and we expect to complete the rollout by the end of the current calendar year. This will allow us to drive improvements in stock, labour and cash management and gives us much greater flexibility and insight with regard to promotional and pricing activity.

1 Before non-underlying items (analysed separately in note 3 to the financial statements)

Leased Pubs

Like for like net income in the Leased business was down by 4.5% in the first half. This performance was in line with our expectations with the decline driven by rent re-basing and pressure on beer volumes.

Over a quarter of our Leased estate will undergo a rent review during this financial year. As these reviews are typically on a five year cycle, the initial rents were set at the peak of the market in 2006/7 and there has thus been a significant downward revision on many of the current rent settlements. This has been exacerbated by the cessation of rent premia on those leases which were amortised across the initial five year term.

EBITDA¹ for the Leased business declined 9% to £21m, in the context of a 3% reduction in pub numbers. Operating cash flow, however, remains strong.

Our current focus is on stabilising income within the Leased business.  During the first half of the year the estate was operated on a transitional basis under a management services arrangement with Punch Taverns plc; in the second half of the year we will have assumed full control of the estate and we are already instigating new sales, marketing and pricing programmes to drive income.

Through a pub by pub asset review we have identified up to 80 underperforming pubs that we plan to dispose of. We have converted seven Leased pubs to our Managed brands and we will continue to monitor their performance closely. Conversions will continue where they are earnings accretive.

We are building a strong team under the leadership of Chris Welham and, over the next 12 months, we will explore alternative routes within our Leased operating model to drive further performance and value.

Our People

We remain focused on being an "employer of choice" in order to attract high calibre applicants.  Our new recruitment website has enabled us to hire directly all but the most senior roles, at lower costs.

Apprentices are a key part of our proposition to improve both the performance of our employees and their retention by offering a meaningful career path.  The apprentice scheme has recently been extended to include junior management positions.

Our November 2011 Engagement Survey showed higher response rates and improved scores on most measures.

These strong levels of engagement combined with focus on high management calibre have resulted in significant improvements on our key performance metrics.

1 Before non-underlying items (analysed separately in note 3 to the financial statements)

Capital Expenditure and Property Valuation

Capital expenditure for the first half of the year was £64m with £56m invested in our Managed brands, £2m in our Leased estate and £5m in infrastructure projects. We also spent £1m acquiring a pub for conversion to our Chef & Brewer brand.

Given the strong returns achieved to date we have accelerated our investment programme into our Managed brands and expect the full year spend to be between £85m and £90m.

We will be commissioning a report in the second half of the year on the open market valuation of our properties and will consider moving to accounting for our properties at a market valuation following receipt of this report.

Capital Structure and Cash Flow

Cash outflow for the first half was £88m driven by front-loaded capital expenditure, bond repurchases of £28m (nominal value £36m) and a working capital unwind due to our seasonal trading pattern and the timing of payments to suppliers.

At 3 March 2012, nominal value of net debt was £756m, with a net debt to EBITDA¹ ratio of 5.3 times.

Within the Spirit Debenture, net debt was £837m and the DSCR was 1.76 times at half year, giving us significant headroom against our financial covenants. Although unable to upstream cash at the end of the March quarter due to our seasonal trading pattern, we are confident of being able to upstream cash in the second half of the year.

Group cash and bonds, held by Group companies outside of the Debenture structure, were £83m at half year. These resources will continue to be used to fund plc cash outflows, invest in the growth of the business, make dividend payments to shareholders consistent with the policy set out at the time of the demerger, and potentially to fund further market repurchases of bonds.

A key longer term objective for the Group is to reduce the Group net debt to EBITDA¹ ratio and to further improve the DSCR within the Debenture. In this context, our target remains to be cash neutral in the current financial year after funding further capital expenditure and dividend payments, but before any bond repurchases. This will require a continuation of the successful non-core disposal programme across both the Managed and Leased estates.

1 Before non-underlying items (analysed separately in note 3 to the financial statements)

Non-underlying items

A number of non-underlying items were recognised in the period resulting in a net credit of £2m. The principal items are set out below:

·      Recognition of £19m VAT on gaming machines, repaid by HMRC in the prior year, following a ruling by the European Court of Justice in November 2011.

·      £23m charge for the mark-to-market of interest rate swaps

·      £9m gain on the repurchase of debt

·      £6m costs of restructuring post demerger

Net pension income relating to our defined benefit schemes is a non-cash item and has been classified as non-underlying with prior period presentation being adjusted accordingly.

The tax effect of these items gave rise to a non-underlying tax credit of £2m.

Taxation

The effective taxation charge for the period was 25.7%¹ . The comparable rate for the prior year was 28.2%.

We have not paid any cash tax in the period and do not expect to pay any for the full financial year.

Corporate Social Responsibility

We remain committed to responsible retailing and ensuring that our pubs are at the heart of the communities they serve.

Our CSR Strategy is focused on understanding our impact on the environment, maximising recycling, supporting local communities and sourcing sustainable products. This is driven both within our Support Centre and across our pub estate.

We have received the European Environmental Award for Supply Chain Excellence in recognition of our reverse supply chain solution.

Current Trading and Outlook

Our Managed business continues to trade strongly and outperform the market³. We are not, however, providing comparatives for the six weeks following the half year end due to the artificial uplift created by the movement of the Easter holidays. Our Leased business continues to trade in line with management expectations.

Looking ahead, we are mindful of the ongoing economic uncertainty and consumer pressures but we believe that we are well placed to drive continued improvement in the second half of the year and remain on track to meet our full year expectations.

1 Before non-underlying items (analysed separately in note 3 to the financial statements)

3 Comparison to the Coffer Peach Business Tracker

Notes to Editors

Spirit Pub Company plc is a leading pub company in the UK with over 1,300 Leased and Managed pubs nationwide. It was formed in August 2011 following demerger from Punch Taverns plc.

Our Managed business is a high quality, well located estate of around 800 pubs with attractive exposure to London and the South East and areas with high population densities. The business operates a portfolio of market leading brands such as Chef & Brewer, Fayre & Square, Flaming Grill and Taylor Walker.

Our Leased estate of around 530 pubs is one of the highest quality in the UK. These well located pubs, the majority of which were formerly Managed sites, have an average annual net income of £91k.

CONDENSED CONSOLIDATED INCOME STATEMENT

for the 28 weeks ended 3 March 2012

¹EBITDA 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.

CONDENSED CONSOLIDATED INCOME STATEMENT continued

for the 28 weeks ended 3 March 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.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the 28 weeks ended 3 March 2012

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 3 March 2012

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the 28 weeks ended 3 March 2012

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

for the 28 weeks ended 3 March 2012

NOTES TO THE FINANCIAL STATEMENTS

for the 28 weeks ended 3 March 2012

1.      ACCOUNTING POLICIES

Basis of preparation

Spirit Pub Company plc (the 'Company') is a public limited company incorporated in England and Wales. The consolidated condensed financial statements as at and for the 28 weeks ended 3 March 2012 comprise the half year results for the Company and its subsidiaries (together referred to as the 'Group') and the Group's interests in jointly controlled entities. The Group's main trading activities are divided into two divisions: a Managed pub business and a Leased pub business.

This condensed set of interim financial statements has been prepared in accordance with International Financial Reporting Standard (IFRS) IAS 34 'Interim Financial Reporting' as adopted by the EU.  The Group's Annual Report and Financial Statements are prepared in accordance with International Financial Reporting Standards as adopted by the EU (IFRS as adopted by the EU). These interim financial statements do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group for the 52 week period ended 20 August 2011.

As required by the Disclosure and Transparency Rules of the Financial Services Authority, this condensed set of financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the Group's Annual Report and Financial Statements for the 52 week period ended 20 August 2011.

The financial information contained herein is unaudited and does not constitute statutory accounts as defined by section 435 of the Companies Act 2006. The comparative figures for the 52 weeks to 20 August 2011 presented in these interim financial statements are not the Group's statutory accounts for that financial period.  Those accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies.  The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. These are the first set of consolidated condensed interim financial statements of the Company.  The financial statements have been presented as a continuation of the Spirit Pub Company business, which was previously wholly owned by the Punch Taverns plc group. 

The condensed consolidated interim financial statements have been prepared on a going concern basis.  In determining the appropriate basis of preparation of the financial statements, the Directors are required to consider whether the Group can continue in operational existence for the foreseeable future.  The Directors are of the opinion that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future, and feel it appropriate to adopt the going concern basis in preparing these condensed consolidated interim financial statements.

The following new standards, interpretations and amendments to published standards are effective for the Group for the financial year beginning 21 August 2011:

·      IAS 24 - Related Party Disclosures (revised 2009)

·      Amendments to IFRIC 14 - Prepayments of a Minimum Funding Requirement

·      Amendments to IFRS 7: Disclosures - Transfers of Financial Assets

In addition to the above, amendments to a number of standards under the 2010 annual improvement project to IFRS, which are mandatory for the 52 week period ending 18 August 2012, have been adopted in the year. None of these amendments have had a material impact on the results or the financial position of the Group for the 28 weeks to 3 March 2012.

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 3 March 2012

2.      SEGMENTAL ANALYSIS

¹ Before non-underlying items.

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 3 March 2012

2.       SEGMENTAL ANALYSIS CONTINUED

With the exception of the transfer of pubs, there are immaterial sales between the business segments.

Segment assets include property, plant and equipment, operating leases, goodwill, other intangible assets, inventories, receivables and non-current assets classified as held for sale, and exclude centrally held cash and amounts due from related parties; while segment liabilities comprise operating liabilities and exclude amounts owed to related parties, corporate borrowings and related derivatives and retirement benefit liabilities.

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 3 March 2012

3.       NON-UNDERLYING ITEMS

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

¹ Represents release of provision on disposal of properties. In the prior year, represents provision for rent payments following the reversion of onerous leases to the Group.

² Represents recognition of £18.9m of VAT on machine income repaid from HMRC in the year to 20 August 2011, now recognised following a ruling of the European Court of Justice in November 2011.

³ Represents profit on the purchase of securitisation debt at a discount to nominal value together with the write off of related fair value premium.

⁴ Represents pension finance income and pension finance cost related to the defined benefit schemes which are non-cash items.

⁵ Subordinated loan interest payable is capitalising interest expense on related party borrowings. Due to the size and nature of this interest, being interest on related party instruments, it has been presented separately in order to provide a clearer presentation of the interest expense of the Group. As a result of the group reorganisation undertaken prior to the demerger from Punch, this interest expense is £nil ongoing.

⁶ Represents the movement in the fair value of interest rate swaps that are classified as fair value through profit or loss.

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 3 March 2012

4.       IMPAIRMENT LOSSES

Property, plant and equipment and operating leases

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

When a pub is being actively marketed for disposal, it is written down to fair value less costs to sell, when this is lower than carrying value, and transferred to assets held for sale.   

During the 28 week period to 3 March 2012, no indicators of impairment were identified.

At the Punch Taverns plc interim reporting date of 5 March 2011, an impairment review was performed, triggered by a strategic review of the business, which resulted in a number of Leased pubs being identified as non-core to the Punch group and their carrying value being written down to the higher of their fair value less costs to sell and their value in use.  In addition, an impairment charge was made against the Spirit Managed estate, representing the write-down in asset values on pubs included in the onerous lease provision.  This resulted in a total impairment charge of £65m being recognised at 5 March 2011.

Cash flows used in the value in use calculation of the Leased non-core pubs were based on earnings before interest and taxation. Since these non-core pubs had been identified as not having a viable future to the Punch group as a pub, their value in use was calculated by extrapolating the earnings of these pubs for a period of three years, and then using the fair value less costs to sell at that time as the terminal value at the end of year three. The cash flow forecasts used assumed an ongoing trading decline for these pubs. The pre-tax risk adjusted discount rate applied to the cash flow projections is 9.0%. In practice, due to the projected decline in profits in the non-core estate, the majority of pubs were written down to their fair value less costs to sell as their value in use was below this level. Estimates of fair value less costs to sell were based on valuations undertaken by Punch group's in-house property valuation experts.

The impairment charges recognised in the prior periods in both the Managed and Leased estates were:

At 21 August 2011, and after the demerger from the Punch Taverns group, the Group performed a further review of indicators of impairment.  There were no indicators of impairment and therefore no further impairment was identified, with the exception of £10.4m relating to pubs identified for disposal and held as assets held for sale at 20 August 2011.

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 3 March 2012

4.       IMPAIRMENT LOSSES CONTINUED

Goodwill

Goodwill is allocated to groups of cash generating units (CGUs) based on the benefits to the Group that arise from each business combination. The two groups of CGUs are identified by their pub operating format (Managed or Leased) and this is the lowest level at which goodwill is monitored by the Group. During the period ended 21 August 2010, and whilst the Group was part of the Punch group, the Leased estate was reorganised from one group of CGUs to separate core and non-core reporting structures. The allocation of Leased goodwill between core and non-core indicated that no goodwill should be allocated to the non-core estate given the low value of the properties in the estate and the low level of synergistic benefits.

During the year to 20 August 2011, and prior to the demerger from the Punch group, a further 98 pubs were transferred in to non-core and at that stage goodwill of £10.1m was reallocated to the non-core estate.  The intention to dispose of these properties in the medium term triggered an impairment review and an impairment charge of £10.1m was taken against this goodwill.  No further impairment was identified at 20 August 2011.

The goodwill impairment reviews were performed by means of comparing the recoverable amount of the CGUs to the carrying value of the unit including goodwill.  The recoverable amount of the CGUs was determined based on value in use calculations.  These value in use calculations are based on earnings before interest and tax and extrapolated for a period of 50 years using a multiple of ten as the terminal value.  The pre-tax risk adjusted discount rate applied to cash flow projections is 9.0%.  The growth rate applied to cash flows over the 50 year period is 2.25%.  Based on this review no impairment of goodwill has been identified.  Neither a reduction in the growth rate to 0.25% in each of the next five years nor an increase in the discount rate to 10.0% would have led to an impairment of goodwill.

No indication of impairment was identified at 3 March 2012.  During the 28 week period to 3 March 2012, £0.5m of goodwill was disposed of as a result of disposals from the Leased estate.

NOTES TO THE FINANCIAL STATEMENTS continued

for the 28 weeks ended 3 March 2012

5.       FINANCE INCOME AND COSTS