(YNGA) Young & Co's Brewery

Preliminary results for the 26 weeks to 3 October 2011

The combination of last December's Geronimo acquisition and good trading from our existing estate has resulted in a very encouraging set of interim results. Revenue was up 33.6% and operating profit was up 21.2% once adjusted for exceptional items. Profit before tax and exceptional items was up 10.5% at £12.5 million.

We continue to focus on our premium strategy, primarily in London and the south of England. With this in mind, we have invested £12.2 million in our estate, part funded by disposals and cash generated from operations. At the period end we had an estate of 245 pubs: 152 managed and 93 tenanted. 

During the summer, our estate was revalued by Colliers (Chartered Surveyors) at £497.4 million, resulting in a large net uplift of £174.0 million to its book value. Individual uplifts in value are reflected in the revaluation reserve in the balance sheet; individual falls in value are accounted for through the income statement (as required under current accounting standards). We therefore now have a revaluation reserve of £203.1 million (£157.5 million when net of deferred tax) and have made an exceptional £29.1 million non-cash fair value adjustment via our income statement. The result for the period is a loss before tax of £16.1 million.

Net debt at the period end was £124.5 million, interest cover was 5.2 times and our gearing, following the large increase in value resulting from the revaluation, was 40.1%.

In August we sold our stake in Wells & Young's for £15.1 million. The disposal was in line with our strategy of focusing on our core trade of managed houses, and will enable Wells & Young's to continue developing its brewing interests, including Young's ales.

After another good trading perfomance, and in light of our strong financial and strategic position, the board has decided to raise the interim dividend for the 15th consecutive year. A dividend of 6.68 pence per share, an increase of 5.0%, is expected to be paid on 16 December 2011 to shareholders on the register at the close of business on 2 December 2011.

Business review

Managed houses

The managed operation, which comprises 106 Young's pubs, 16 hotels and 30 Geronimo pubs, had a very successful six months. This was against a mixed backdrop of excellent weather at the start and end of the period, the Royal Wedding weekend festivities in April, the London riots in August and the continued challenging economic conditions.

Total managed house revenue was up 37.9% and operating profit was up 23.1%, driven by the Geronimo acquisition and the good performance of the underlying business. Managed house like for like sales, which exclude Geronimo, were up 4.0%. Geronimo like for like sales, which will not form part of our total like for like sales until the next financial year, were up 12.6% compared with the corresponding period which pre-dated our ownership. Overall sales growth, combined with tight cost control, has mitigated some of the additional rates and utility cost burden, and raw material inflation which increased our cost of goods.

During the period, we invested £11.6 million in our managed houses. £3.2 million was spent on three new outlets: the Cow in the new Westfield shopping centre in Stratford, and the Lion and Unicorn, a freehold in Kentish Town, were both opened under our Geronimo offer while the Plough at Clapham Junction, a new design format, was added to the Young's estate. The early success of the Plough is further proof, alongside the development of the Dial Arch in Woolwich and the Riverside in Vauxhall, of our ability to introduce creative and effective formats specifically geared to different localities and demographics. We disposed of the George in Fulham, as it was not achieving an appropriate return. The Half Moon in Putney, which was transferred from our tenanted operation at the end of the period, is due to reopen under our Geronimo offer next week. The Jones Gang will relaunch this iconic music pub in their inimitable style on 6 December.

£8.4 million was invested in the existing estate - £3.5 million being allocated to Young's and £4.9 million to Geronimo. The Home Cottage in Redhill, a Young's pub, underwent a transformational development. The major expenditure within Geronimo was the acquisition of the freehold interest in the Clarence, Whitehall.

Liquor and food sales were both comfortably ahead of last year on a like for like basis and the hotel business saw strong growth during the six months, with the Alma, where 23 beautifully designed hotel rooms were added last year, being the highlight. Coupled with the rebranding of our hotelsas a discrete but complementary component of the Young's proposition, the investment in a new booking system and improvements in our links to third party sites helped increase revenue by 21.9% and RevPAR (revenue per available room) by 14.3% to £52.79.

The strongest growth in the pub estate was in the City of London which, as a result of the increased tourist trade over recent years, has meant that Young's pubs have been able to trade successfully on weekends as well as weekdays. Another pub showing an impressive performance on the Young's side is the Alexandra in Wimbledon, a pub in which we invested last year and which has had an excellent six months. Within the Geronimo estate, the Betjeman Arms, St Pancras and the Northcote, Clapham Junction have shown particularly strong growth. The White Horse in Exchange Square near Liverpool Street, which opened last autumn, has also proven a phenomenal success.

The Geronimo estate, with its large central London managed houses, has played an important part in increasing our average EBITDAR (earnings before interest, tax, depreciation and rent) per managed house, which was up 9.1% at £182,300.

Cask beer continues to outperform the market and our pubs are well positioned to continue to benefit from this trend. Our beer and cider festivals offer customers a diverse range of quality cask ales, bringing new and younger drinkers into the category. We are also introducing some additional London craft beers, such as Meantime, to offer discerning customers their beers of choice; an increased number of world lagers and premium spirits have also been introduced as consumers become more brand aware.

Our premium food strategy with its focus on local provenance continues to play an important part in our success. This strategy coupled with the acquisition of Geronimo has increased food sales as a proportion of the whole by 2.5 percentage points to 28.5%.

The Peach Report's analysis of the eating and drinking out market shows that despite the wider economic uncertainty, the eating out market continues to grow with pubs outperforming the restaurant sector over the six months. Our strategy remains focused on capturing this growth by providing restaurant quality food in a relaxed pub environment, prizing individuality, authenticity and quality.

Young's pubs have always been integral to their local communities. In April this year, we celebrated the Royal Wedding with a commemorative brew, Young's Prince of Ales, and held local "street parties" in many of our pubs. This autumn, we have proudly celebrated 180 years of Young's with birthday parties across the estate and a specially brewed 1831 Anniversary Ale on sale at £1.80 between the hours of 18:31 and 20:11.

Our sales and marketing initiatives, and particularly our e-marketing strategies, have continued to focus on building loyalty and communicating directly with customers, rather than simply buying custom through discounting.

Tenanted houses

Like for like sales in our tenanted division were flat in the period. With four fewer pubs, total sales were down 1.1% but operating profit was up 5.2%. This division, accounting for just 8.0% of our total revenue, forms a considerably smaller part of our trading operations than our managed estate.

In line with our competitors, our tenanted pubs have faced difficult trading conditions over recent years and this has resulted in us taking a long-term, strategic look at the future of the tenanted estate. We believe that a smaller and better invested estate is the way forward. As a result, we sold the Bricklayers Arms in Sydenham, the Charlie Butler in Mortlake and the Castle in Battersea for a total of £2.5 million. There will be additional disposals in the second half of the year.

We have never lost sight of the fact that our success is based on the partnership developed with our tenants. Investment is an essential part of attracting and nurturing entrepreneurial talent. This summer, we have invested £0.6 million, with developments at the Grand Junction Arms in Willesden and the Waggon & Horses in Surbiton.

We have hosted an array of training courses focusing on customer service, marketing and social media, product knowledge, and compliance with the ever-changing regulatory environment in which we operate. Attendance on these courses has never been better.

Last year, we were one of the first pub companies to introduce its own code of practice, one that builds on our partnership principle. In September, the Business, Innovation and Skills Committee published its report into pub companies' relationships with their tenants. We do not believe our code for the operation of traditional three year tenancies needs any further strengthening and we would welcome and support a statement by the select committee that settles this uncertainty once and for all.

At the end of the period we had 93 tenanted pubs and an improving profit stream. For the six months, the average EBITDAR per pub was £37,300.

Investment and finance

The 21.2% increase in operating profit before exceptional items was driven by the acquisition of Geronimo, the continuation of the strong run in our hotels' performance and the very encouraging performance from our pub estate.

Profit before tax on continuing operations once adjusted for exceptional items was up 10.5% at £12.5 million. These results are severely distorted by exceptional items and in particular the decision to take account of the recent estate revaluation by changing our accounting policy. This revaluation has increased the balance sheet value of our assets by £174.0 million, made up of a £203.1 million balance sheet revaluation credit for the property values that have increased and a £29.1 million exceptional charge to the income statement where they have fallen. This is a non-cash positive fair value adjustment but due to the requirement to split it into two parts it has had a large negative impact on our income statement. Without adjusting for exceptional items, we recorded a loss before tax of £16.1 million. The adjusted basic earnings per share was up 10.7% at 18.73 pence but the exceptional items resulted in a basic loss per share of 30.09 pence.

Net cash flow from operating activities was £14.7 million, up £3.7 million from this time last year. We have invested £12.2 million in the business, £3.2 million on new outlets, £5.0 million on our existing estate and £4.0 million acquiring the freehold interest of the Clarence, Whitehall, a Geronimo pub we previously held as a leasehold. During the summer we disposed of three tenanted pubs and one managed one for £3.6 million; these pubs were not achieving acceptable returns on capital and we believed that the capital would be better invested elsewhere.

In August we sold our entire 40% stake in Wells & Young's for £15.1 million. As a result, Wells & Young's has been treated as a discontinued operation for the six months and our comparatives have been restated accordingly. The £15.1 million is receivable in three instalments; £5.1 million in February 2012 and the remaining £10.0 million in two equal amounts in February 2013 and February 2014. The disposal has resulted in a £0.4 million loss or £1.7 million when taking account of a £1.3 million implied cost of the deferred consideration. This implied cost will be unwound through the income statement over the deferment period. The disposal allows us to increase our focus on our pubs while at the same time allowing Wells & Young's to continue to develop its brands.

Lower than expected returns on investments and falling bond yields have impacted the pension deficit. Over the course of the six months, despite making a £0.7 million special contribution, the deficit increased by £2.4 million to £9.9 million. 

Finance costs were £2.9 million, an increase of £1.6 million over last year as a result of the extra debt taken on to fund last December's acquisition of Geronimo. Nonetheless, interest cover at 5.2 times remains strong. Total net debt at the period end was £124.5 million of which £100 million has been effectively fixed at just below 5.0%, with none needing to be refinanced until December 2015. Longer-term interest rates have fallen since the year end. As a result we are enjoying lower rates on our variable debt, but where we have taken the decision to fix interest rates there has been a £9.0 million adverse movement in our interest rate swap liability.

At the end of the period Colliers valued our estate at £497.4 million, which excludes any lotting premium. The balance sheet is robust with net assets per share, having taken account of deferred tax, of £6.43, leaving gearing at 40.1%.

Current trading and outlook

Trading since the period end has been very positive. Managed house revenue in the first seven weeks of the second half is up 45.1% in total and 5.4% on a like for like basis (which excludes Geronimo's 6.8% like for like sales growth).

The backdrop of wider economic uncertainty, increased pressures on disposable income and rising unemployment continues to have a negative impact on consumer sentiment. Nonetheless, our trading performance remains resilient. Our premium London-orientated strategy helps insulate us in part against the worst of any downturn and we believe that we are therefore well placed to continue the positive momentum achieved in the first half of this financial year. The Oyster Shed, on the riverside near Cannon Street in London, is due to open under the Geronimo offer in January and, in line with our strategy of having a smaller and better invested tenanted estate, we disposed of two tenancies, the Queen Dowager and the Britannia Tap. 

The business remains focused on maximising shareholder value through its well invested estate. Following the successful acquisition and integration of Geronimo, and with our balance sheet strength, we will continue to seek out appropriate opportunities for expansion whilst driving growth in our existing estate.

Stephen Goodyear

Chief Executive

23 November 2011

The 2011 interim report is expected to be mailed to shareholders on 2 December 2011 and copies of it will be available on the company's website and on request from the Company Secretary at the company's registered office: Riverside House, 26 Osiers Road, Wandsworth, London, SW18 1NH (tel: 020 8875 7000).

Independent review report

Introduction

We have been engaged by the company to review the condensed set of financial statements in the Interim Report for the 26 weeks ended 3 October 2011 which comprises the group income statement, the group statement of comprehensive income, the group balance sheet, the group statement of cash flow, the group statement of changes in equity and the related explanatory notes. We have read the other information contained in the Interim 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 ISRE 2410 (UK and Ireland) "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 Interim Report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Interim Report in accordance with the AIM Rules issued by the London Stock Exchange which require that it is presented and prepared in a form consistent with that which will be adopted in the company's annual accounts having regard to the accounting standards applicable to such annual accounts.

As disclosed in note 1, 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 Interim Report has been prepared in accordance with the AIM Rules issued by the London Stock Exchange.

Our Responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the Interim 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 Interim Report for the 26 weeks ended 3 October 2011 is not prepared, in all material respects, in accordance with the accounting policies outlined in note 1, which comply with IFRS's as adopted by the European Union and in accordance with the AIM Rules issued by the London Stock Exchange.

Ernst & Young LLP

London

23 November 2011