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Punch Taverns PLC (PUB)

  Print      Mail a friend       Annual reports

Thursday 12 November, 2015

Punch Taverns PLC

Preliminary Results announcement

RNS Number : 4205F
Punch Taverns PLC
12 November 2015
 



PUNCH TAVERNS PLC

("Punch" or "the Group")

 

Preliminary results for the 52 weeks to 22 August 2015

 

Underlying financial performance1 - reflects reduced non-core estate and is in line with expectations:

§ Underlying1 EBITDA of £196 million (2014: £205 million);

 

§ Statutory loss before tax of £105 million includes £166 million of non-underlying charges, principally due to   the capital restructuring and transition to accounting for properties at market value.

 

Higher quality pub estate:

§ Core estate now expected to deliver c.95% of pub profits in the 2016 financial year (up from 88% in 2014);

 

§ Positive like-for-like trends in net income2; core estate net income up 0.3%;

 

§ Average profit per pub up 4%, benefiting from the disposal of non-core pubs.

 

Stronger balance sheet:

§ Property estate externally valued at £2,097 million; £692 million in excess of nominal net debt3;

 

§ Nominal net debt3 down £513 million in the year to £1,406 million;

 

§ Consolidated nominal net debt : LTM EBITDA at 7.2 times (2014: 9.5 times)

 

§ Post year end disposal of non-core assets (including the disposal of our 50% investment in Matthew Clark  for gross proceeds of £100.7 million; and pub disposals of £53.5 million) further enhance our ability to  pursue our strategic objectives.

 

Review of Strategic Priorities - The Way Forward

§ Delivering a clear, consistent consumer offer, adapting to changing consumer behaviour;

 

§ Comprising a broad range of flexible operating models that are in line with today's evolving pub market;

 

§ Underpinned by a reorganisation of management to drive operational excellence;

 

§ Built on an attractive offer, delivering real value to our publicans through the Punch Buying Club; and

 

§ Supported by releasing additional value from our under-utilised property portfolio and land bank.

 

Duncan Garrood, Chief Executive Officer of Punch Taverns plc, commented:

 

"Since joining in June, I have undertaken a detailed review of the business and today I set out a clear plan for the future.  In recent years, Punch has been at the forefront of change within the leased and tenanted pub sector.  The conclusions announced today represent an evolution of our existing plan.  It is also designed to address the many structural and regulatory changes impacting our market.

 

Our strategy enables us to maximise the value in our properties through a phased, lower risk approach to addressing an evolving pub market, taking greater control of the property and retail offer, but without the added overhead that comes with directly employing pub staff.

 

We have already made significant steps towards evolving our operating model and financial position, and while we have a lot to do, we are well placed to deliver on our plan."

 

 

 

1 before non-underlying items

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

3 nominal net debt represents the par value of loans less cash balances (note 7)

 

 12 November 2015

Enquiries:

 

Results: Punch Taverns plc

Tel: 01283 501 948

Duncan Garrood, Chief Executive Officer

Steve Dando, Chief Financial Officer

 

 

Media: Brunswick

Tel: 020 7404 5959

Jonathan Glass, Joe Shipley


 

A presentation for equity and debt analysts on the full year results will be held today at 9.00am (UK time) at the Andaz, 40 Liverpool Street, EC2M 7QN.

 

A live web cast and slide presentation of this event will be available on our website, www.punchtavernsplc.com and subsequently available on demand.  We recommend you register at 8.45am.

 

Forward-looking statements

This report contains certain statements about the future outlook for Punch.  Although we believe our expectations are based on reasonable assumptions, any statements about future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

 

 

CHAIRMAN'S STATEMENT

 

I am pleased with the progress we have made in the year in delivering on our key initiatives.  Continued like-for-like growth in the core estate and the completion of the capital restructuring in October 2014 provides a better platform to undertake a thorough review of the future direction of the business. 

 

We secured the appointment of new Chief Executive, Duncan Garrood, who joined the business in June 2015.  Duncan, together with the Board, has been undertaking a review of our operations and strategic direction bringing to bear his external perspectives from other businesses.  From this review, we have developed a clear direction to move forward in order to maximise long-term value for all our stakeholders.

 

Through our ongoing selective disposal programme, we benefit from having a higher quality pub estate in which approximately 95% of pub profits are expected to come from the core estate in the 2016 financial year (up from 88% in 2014).  Following the year end, we completed the sale of a package of 158 non-core pubs for gross proceeds of £53.5 million and the disposal of our 50% joint venture investment in Matthew Clark for gross proceeds of £100.7 million. 

 

The capital restructuring placed the Group in a stronger financial position with nominal net debt down by £513 million in the year.  All of the Group's debt is in the form of long-term securitised debt, secured against a property portfolio which was independently revalued at £2,097 million; £692 million in excess of nominal net debt. 

 

Following the restructuring, the securitisation structures contain a number of restrictive covenants in relation to the use of disposal proceeds, consequently, the Board is giving appropriate consideration to how best to improve flexibility and support the strategic development of the business going forward.  The Matthew Clark proceeds provide the Group with financial flexibility, with this cash being held outside of the securitisation structures.  We have not committed to any particular use of the sale proceeds at this stage, but the Board is mindful of the need to maintain sufficient flexibility in our finances, in light of the uncertainty created by the MRO, which could include retention of cash on the balance sheet or the purchase of or refinancing of bonds.

 

Legislative changes

The tied long-lease pub model, which today represents 56% of Punch's core estate, but fewer than 20% of the wider UK pub market, has successfully provided entrepreneurs with a low cost, lower risk entry into running pubs with the ability to build successful businesses and sell-on through the assignment market.

 

The Small Business, Enterprise and Employment Act 2015 (the 'Act') which includes the provision of a Statutory Code, independent adjudicator and a Market Rent Only option ("MRO") for all companies with over 500 pubs operating under tied leased and tenancy agreements in England and Wales, received Royal Assent on 26 March 2015. 

 

There is currently a period of consultation in order for the Government to prepare Secondary Legislation setting out the detail of how the Act will be implemented, and it is anticipated that it will come in to operation from June 2016.

 

We urge the Government to ensure that the Secondary Legislation for the MRO, when drafted, allows an appropriate period of time for implementation and protects the ongoing investment that pubs need to compete.  We believe that appropriately drafted legislation can avoid the adverse unintended consequences of the Act and allow the tied model to continue to thrive into the future, allowing future publicans the same low cost, lower risk access into a thriving pub market.

 

Board of directors

As referred to above, we announced in March 2015 the appointment of Duncan Garrood as Chief Executive Officer with effect from June 2015.  Duncan has extensive experience in the retail and franchise sectors which is of particular relevance to Punch, given the dynamic and evolving pubs market.

 

Following Duncan's appointment, I have reverted to my original role of Non-executive Chairman having held the position of Executive Chairman since February 2013, following the resignation of the previous Chief Executive.

 

Employees and publicans

We have an extremely committed and engaged workforce and the Board was pleased to see the results of our recent employee engagement survey in which 92% of our employees took part.  It is a testament to the commitment and calibre of our employees that we were recognised as the 'Operations Team of the Year' and 'Responsible Retailer of the Year' at the 2015 Publican Awards.

 

Our publicans include a number of award winners with a record eleven regional finalists and three overall category winners in this years 'Great British Pub Awards'.  Over 250 of our publicans (and their pubs) were represented in the '2016 Good Beer Guide' and over 1,000 pubs are 'Cask Marque' accredited.

 

Outlook

While our actions to date have put us in a much stronger position to address the structural changes impacting our market, we do not underestimate the challenges the industry faces in light of impending legislative changes. 

 

While the year ahead represents another period of transition for the business, we are confident in our plans and in our ability to implement our strategy, which is aimed at maximising the long-term value of our business.

 

 

CHIEF EXECUTIVE OFFICER'S REVIEW

 

INTRODUCTION

 

Having joined Punch in June 2015, my first priority was to get around the business and spend time listening to our publicans, employees and other key stakeholders.  My arrival as CEO has provided the Board and me with an opportunity to review and stress test our strategic priorities.  Given the changing market dynamics, this is of particular importance and I set out below the key elements of how the strategy will be deployed to move the business forward.

 

What I have set out today is very much aligned with the strategy the business is already pursuing, but with some refinements and developments to unlock opportunities within the business and manage an evolving operational and changing regulatory market.

 

STRATEGIC REVIEW

 

A summary of the review findings are below:

 

§ Pubs remain an attractive market with great potential.  Going to pubs continues to be one of the most popular leisure activities in the UK.  In 2014, the UK pub industry had estimated annual sales of approximately £22 billion and directly employed an estimated 750,000 staff.  Despite the challenges faced by the industry, there are some clear growth opportunities and I have seen many examples where we have been able to materially grow a pub's sales when we implement the right consumer offer that meets today's consumer trends.

 

§ Punch needs to modify its proposition in light of legislative changes and to maximise the opportunity from changing consumer trends.  While Punch has in recent years been at the forefront of change within the leased and tenanted pub sector, the market is changing rapidly and Punch will need to adapt further to meet the needs of this evolving marketplace. 

 

§ We can achieve significant benefits in this new environment by deploying more than one operating model.  Running a pub continues to be seen as an attractive proposition for many entrepreneurs and we typically receive 25 enquiries to every one publican being placed in a pub.  A broader range of operating models is required to appropriately meet the level of skills, support and financial position of the wide range of prospective publicans applying to run one of our pubs.  Providing a broader range of operating models will allow us to maximise the value in each and every one of our pubs.

 

§ A significant proportion of the estate could deliver higher returns through investment. Alongside setting the right consumer offer, providing an appropriate level of investment is key to maximising the returns in our pubs.  A significant proportion of our estate could benefit from investment, with investment being prioritised to those pubs where we have control over the consumer offer, and to new investments with a payback of less than five years in England and Wales.

 

§ There is still significant unrecognised value in Punch's freehold property estate. The Group has a sizeable property portfolio comprising in excess of 9 million sq. ft. of ground floor area, significant additional upper floor area and encompassing c.1,400 acres of total site area.  There is a significant portfolio of under-utilised upper floor areas and under-utilised land bank.

 

§ Punch has the right foundations in its business to deliver value for the longer term, but it will take time.  We have already taken significant steps towards evolving our operating model.  While we have a lot to do, and the year ahead represents the start of a period of transition for the business, we are confident in our plans going forward, and in our ability to implement our strategy, which will maximise the long-term value of our business.

 

From our review we have a clear set of plans to move the business forward:

 

1.    Deliver a clear, consistent consumer offer, adapting to changing consumer behaviour;

 

2.    Comprising a broad range of operating models that are in line with today's evolving pub market;

 

3.    Underpinned by a refocussing of management resources to drive operational excellence;

 

4.    Building on an attractive offer, delivering real value to our publicans through the Punch Buying Club; and

 

5.    Releasing additional value from our under-utilised property portfolio and land bank.

 

We believe that delivering these levers will help drive sales and profit by realising previously untapped growth opportunities in an evolving pub market and unlock significant additional value from our under-utilised property portfolio.

 

Development of the Punch model

 

1.    Consistent consumer offer:

Over the last few years, Punch's business has been evolving towards a model in which we have greater insight into the consumer offer and are best placed to implement a clear and consistent strategy going forward.  In 2013 we launched a dedicated New Business Development team working with our publicans from before the launch of their pub and throughout the first six months of trading, supporting them in executing the consumer offer in the pub.  In 2014 we introduced Retail Operating Plans, setting out the agreed consumer offer, operating plan and rhythm of the week in our pubs. 

 

In recent years, we have also developed and trialled a small number of retail concepts, 'Champs' sports bar, 'Mighty Local' community drinks led pub concept, and most recently 'Brewed & Baked', our new high street coffee shop and chameleon bar concept.  While the first Brewed & Baked outlet will open later this month, we have seen excellent results from our Champs and Mighty Local concepts which now number 6 and 13 outlets respectively with further rollouts planned for 2016. 

 

The majority of Punch's core estate (c.84%: c2,400 pubs) is in the drinks led, mainstream and value pub segments.  Having seen positive results from the early concepts where Punch has developed a clear and consistent consumer offer, we are now in a position to accelerate our programme of developing and rolling-out new concepts. 

 

We have a high level of confidence in the upside opportunity in rolling-out retail concepts across a meaningful proportion of the estate, but have purposely not put a target on how many pubs will operate under a defined concept as the scale of any roll-out will be determined by their financial performance, which is still in the trial phase.  There is also the potential to franchise these retail concepts at a future date.

 

While we are taking a much more active role in defining and overseeing the consumer offer in our drinks led mainstream and value pub segments, we will take a different approach in the premium and destination food led segments which accounts for c.16% of the core estate, (c.450 pubs).  These sectors require specialist skills to maximise the opportunity in these sites and we will continue to work with specialist operators, such as Harry Ramsden's, the iconic British brand, world famous for its fish and chips, and have formed a trading partnership within which we will jointly invest in selected sites across the Punch estate.

 

We have seen significant uplifts in pub sales and profit where we have invested, alongside setting the right consumer offer.  It will take time to implement our strategy however which will be phased over a five year period.  Investment will be directed to those pubs where we have input into the retail offer and have control over the terms of the agreement.  Subject to the above, we plan to invest in up to 500 pubs per year, investing between £250 million and £300 million over the next five years.

 

2.    Broad range of operating models:

The Group already offers a wide variety of flexible commercial agreements to our publicans, with over 60 different lease and tenancy agreements currently in place.  In recent years we have seen a significant market shift away from long-term fully repairing leases towards shorter-term tenancy agreements, where the external building repair obligations remain the responsibility of the pub company.  There has also been a marked shift away from fixed rent agreements towards variable turnover linked agreements.

 

We have been quick to address these changing market dynamics and have already introduced three new operating formats, including the Retail contract, our first managed pub, and commercial free-of-tie arrangements (covering both fixed-rent and variable turnover-linked agreements).

 

Under the Retail contract, Punch retains 100% of the sales and cost of sales (akin to a traditional managed house operation) and pub costs (excluding staff costs), and pays the retailer (the publican) a percentage of the retail sales, out of which the retailer pays their staff costs.  The retailer is free to focus on delivering an excellent consumer experience while Punch supports the back-of-house processes.

 

As at October 2015, we had 31 pubs operating under the Retail contract and have seen significant (15% to 20%) volume growth in these pubs compared to historic performance under a traditional leased and tenanted model.  We are pleased with the results from these initial trials and already have in place the infrastructure and a separate Retail operations team capable of rolling out the model nationally across the UK.  We anticipate having approximately 100 pubs operating under the Retail contract by August 2016.

 

Our first fully managed pub opened in October 2015, and while we do not currently anticipate building a significant managed pub presence, we will take learnings from a small managed pub trial to support the development of new consumer offers.

 

We already have a small but growing commercial free-of-tie operation with a number of fixed rent commercial free-of-tie leases and variable turnover-linked agreements in operation.  We expect this division to grow over time as we introduce new innovative agreements, particularly in the premium and destination food led segments of our estate.

 

3.    Refocussing management resources to drive operational delivery:

To ensure effective delivery of these changes and of the separate operating models, we have recently made a number of changes to the operating structure of the business with distinct divisions:

 

·        Tied tenanted & leased division;

·        Retail pub division (including the managed pub trial); and

·        Commercial leases (free-of-tie); which will move into a separate division managed under the property team.

 

Three new roles have also been created to ensure that we drive our future success, develop our employer brand and really maximise the opportunity from existing and new retail formats.   These roles are Chief Strategy Officer, Marketing Director and Development Director.

 

4.    Delivering value to our publicans through the Punch Buying Club:

Launched in 2009, the Punch Buying Club has been a great success with the vast majority of publicans using the club to purchase their drinks products.  Punch is one of the largest buyers of drinks in the UK on-trade market, delivering significant economies of scale not available to individual publicans buying drinks on their own.  We offer a wide range of drinks products through the Punch Buying Club to our publicans and during the last year have supplied over 3,000 drinks brands from 660 drinks suppliers, including in the region of 2,500 cask ale brands. 

 

Through the Punch Buying Club we leverage our group buying power to provide services such as free WiFi and provide access to cheaper electricity and gas supply through our brokerage service providers.  The Punch Buying Club is also full of useful information to help our publicans to professionally operate their pubs giving access to free training, legislative information, marketing materials and a legal helpline.  In addition, our innovative machines performance data, an industry leading service introduced earlier this year, is made available for publicans to monitor and maximise their machine income performance.

 

We have continued to build on the success of the Buying Club over the last five years and have plans to further develop it over the coming years.

 

5.    Releasing additional value from our property portfolio:

The Group has a sizeable property portfolio with over 3,500 properties comprising in excess of 9 million sq. ft. of ground floor gross area, significant additional upper floor area and encompassing c.1,400 acres of total site area.

 

Historically the Group has looked to operate its properties purely as tenanted and leased pubs.  While the principal use of our properties moving forward will continue to be that of public houses, there is a significant portfolio of under-utilised upper floor areas and excess under-utilised land bank.

 

Through more active property management we expect to be able to release additional value, which is not currently recognised in the external property valuation, in our freehold property and land estate over the next five years.

 

In summary, our strategic plan enables us to maximise the value in our properties through a phased, lower risk approach to addressing an evolving pub market, taking greater control of the property and retail offer, without the risk of added overhead that comes with directly employing pub staff.

 

 

BUSINESS REVIEW

 

Punch is a leading operator of leased and tenanted pubs in the UK, with the second largest pub estate by number of pubs.  As at 22 August 2015, the Punch estate comprised 3,588 pubs located across the UK, 96% of which were held on a freehold or long leasehold bases. 

 

Our market

 

The Group operates in the UK pub industry, which itself is part of the wider drinking-out and eating-out market.  The UK pub market, which consists of some 47,000 licenced public houses, has had to manage the impact of significant changes over the last decade including the smoking ban, changing consumer preferences and an increasingly competitive landscape.  Recent changes in legislation, including the lowering of the drink-driving limit in Scotland in December 2014 and the implementation of the Market Rent Only option (MRO) in England and Wales, which is expected to come into force progressively from June 2016, will result in further structural changes to the pub market. 

 

Success for the UK pub sector is being determined by the ability to respond, with pace, to the changing market conditions and provide offers which deliver great customer experiences and value.  Aware of the challenges, we have refocused our plans and strategy to ensure that we are in the strongest position to address the changing needs of the marketplace.

 

Our business model

 

We operate a predominantly tenanted and leased pub model where our pubs are let to independent publicans.  Our model makes a pub business accessible to many more publicans than the purchase of a freehold, while also providing an extensive package of support to our publicans to help them build a successful pub business.  The business model is simple and adaptable with no single pub or any single publican accounting for more than 1% of the Group's operating profit.

 

Publicans lease their pub(s) from the Group on the basis of agreements which provide a flexible split between rent and tied drink margin.  There is a higher risk for the publican if they opt for an agreement with a higher rent and lower drinks price, as opposed to an agreement with a lower rent and higher drinks price which provides the publican with protection in periods of lower trading.

 

Both we and our publicans have a mutual interest in making each pub successful as our profits are ultimately linked.  When we work in partnership with our publicans to drive sales in the pub, both Punch and the publican benefit from increased sales and potential profit.

 

Regulatory environment

 

The Small Business, Enterprise and Employment Act 2015 (the 'Act') which is expected to come into force from June 2016 includes a lessee's right, under certain circumstances, to change the freely-negotiated commercial terms of their agreement. This MRO option enables some occupational lessees to elect to opt-out of the drinks supply tie at certain points during the term of their lease agreement and therefore occupy the premises on a standard commercial property lease, paying rent only.

 

We remain concerned about the unintended consequences of the Act, which will only become clear over time.  Punch's initial view (which remains subject to seeing the finalised terms of the Secondary Legislation) is that the proposed legislation is contrary to existing legal contracts and property rights and runs contrary to the Office of Fair Trading's findings when it considered a super-complaint from the Campaign for Real Ale in 2010.  We are in dialogue with Government as to how the Act will work in practice.  Within phase one of Secondary Consultation there remain a number of areas in which we are seeking clarity from Government.  We await the publication of phase two of the consultation with interest and will continue to engage constructively with the process.

 

We are also fully engaged in the forthcoming pub sector review being undertaken by the Scottish Government and look forward to constructive dialogue with them to help develop plans for a healthy Scottish pub sector.

 

Tied pub leases provide access to financial, business and training support and a wider range of products and services that cannot normally be accessed in a free-trade pub.  We urge the Government to recognise the benefits that this model provides and continue to work with the industry to allow this model to continue to thrive into the future, allowing future business men and women the same low cost, lower risk access into a thriving pub market.

 

With limited impact in our current financial year, in our 2017 financial year we expect up to 400 potential MRO event triggers in the core estate and up to 300 event triggers per year in the following four years.  In the event that a lessee elected to invoke the MRO option, whilst our income derived from the supply of tied drinks products would be partially offset by increases in rent, we are aware of the potential for our total income to be adversely affected.

 

For the 2015 financial year Punch generated £248 million of net income of which £134 million was from the sale of drinks, £102m from rental income and £12 million of machine and other income.  Of the £134 million of drinks income, approximately £72 million was from core pubs with a potential at some time in the future for an MRO event trigger to occur.

 

While the take-up of the MRO option will only become clear over time through the cycle of five yearly rent reviews and renewals, our current expectations are that the majority of the estate will continue to operate under, and enjoy the benefits of the tied-drinks model.

 

Trading review

 

Given changing market dynamics, Punch's strategy is to focus on its core estate, which represents a higher quality, geographically well-located portfolio of pubs, suitably positioned to adapt to changing market conditions and support sustainable long-term profits for Punch and our publicans.

 

The aim for the core estate which comprised 2,872 pubs at 22 August 2015, is to make each pub the best of its type in its marketplace.  The focus is on attracting the right publicans through flexible agreements, to attractive well-located pubs that have had the appropriate level of investment.  We then support those publicans with extensive training and dedicated field support, backed up by further specialist support teams and access to the Punch Buying Club.

 

The strategy for the non-core estate, which comprised 716 pubs at 22 August 2015, focuses on maximising short-term returns prior to disposal.  These pubs are predominantly small, wet led and have a much lower average net income per pub.   Given the limited scope for investment, these pubs are expected in time to generate more value through disposal than retention.

 

Overall profit performance for the year was in line with management expectations and previous guidance.  In the 52 weeks ended 22 August 2015, Punch generated EBITDA of £196 million (excluding non-underlying items):

 


Core

Non-core

Central

Punch

Period end pub numbers

2,872

716

-

3,588

Revenue

£371m

£50m

-

£421m

Net income

£219m

£28m

-

£248m

Costs

£(19)m

£(6)m

£(34)m

£(59)m

Matthew Clark joint venture

-

-

£8m

£8m

EBITDA

£201m

£22m

£(26)m

£196m

 

Core estate:

The core estate accounted for 90% of outlet EBITDA in the year with an average net income per pub of approximately £76,000 p.a.  Trading has been in line with our expectations with like-for-like net income growth of 0.3% for the year.  Like-for-like growth has now been delivered for nine consecutive quarters.  The core estate is expected to generate c.95% of outlet EBITDA in the 2016 financial year.

 

We continue to offer high levels of support in developing our publicans' businesses, having invested heavily in this area in recent years.  The New Business Development team, which supports all new publicans with their initial investment, pub launch and throughout their first six months, has made further improvements against volume uplift expectations.

 

We ensure that new publicans are set up for success with our Foundation Week, a comprehensive training programme which provides all the skills needed to run a successful pub business.  Thereafter publicans have access to a variety of workshops and e-learning materials covering areas such as marketing and merchandising, finance and social media.  Overall, during the year we trained over 500 of our publicans.

 

Non-core estate:

The non-core estate accounted for 10% of outlet EBITDA in the year and represented 21% of the estate by number of pubs. 

 

We are committed to driving operating performance of the non-core estate and maximising the profits from these outlets.  For some of our estate, changing market dynamics and operational performance will lead to some reclassifications of sites between core and non-core.  Consequently, during the first half of the year, 71 pubs transferred to the core estate following improved performance and outlook and 65 pubs transferred from the core to non-core estate to focus on maximising short-term returns.  Immediately following the year end, a further 39 pubs transferred to the core estate and another 39 pubs transferred from the core to non-core estate.

 

Pubs remaining in the non-core estate are managed under separate categories; protect and sell.  We have reviewed the remaining estate to ensure that our focus is directed towards the opportunities we have to drive performance.

 

Property review

 

Following a review of our property portfolio, the Board considers that the most appropriate accounting policy to carry our pub estate, going forward, is at open market valuation, which gives greater transparency on the underlying value of our property assets than historic cost.  We commissioned external valuers to assist with this valuation during the second half of the year, having undertaken a full impairment review of the estate at the interim accounting date.

 


No. of pubs

Av. value

Valuation

August 2014 valuation

3,809

£568k

£2,165m

-     Core disposals and unlicensed

(59)

£658k

£(39)m

-     Non core disposals and unlicensed / ULP disposals

(162)

£244k

£(39)m

-     Valuation uplift



£9m

August 2015 valuation

3,588

£584k

£2,097m

 

Our property estate has been externally valued at £2,097 million which represents a net uplift in the valuation (after accounting for pub disposals) of £9 million.  It should be noted that whilst the valuation represents an-uplift on the prior year valuation, the change in accounting policy does necessitate a significant accounting charge against historic book value which is further explained in the Financial Review.

 

Consistent with our strategy to focus on the core estate, we disposed of 162 non-core pubs (including unlicensed) in the year, together with other assets for proceeds of £39 million.  Following the year end (on 11 September 2015), we completed on the sale of a package of 158 non-core pubs for gross proceeds of £53.5 million.  This disposal at an average of c.£340,000 per pub, was above book value and significantly ahead of the average proceeds achieved for previous non-core disposals.

 

We also disposed of a small number of core pubs in the year, realising £51 million in proceeds, £18 million above book value and at a multiple of 23 times LTM EBITDA.

 

We have continued to invest in our properties with a £46 million spend across the Group.  This was 11% below last year's level reflecting the uncertainty created by the MRO provisions of the Small Business, Enterprise and Employment Act.  While we have a strong pipeline of potential investments, new investments with a payback in excess of five years remain on hold pending finalisation of the Secondary Legislation expected in 2016.

 

Punch has a rigorous approach to capital allocation and authorisation, including an annual plan, a project by project capital approval process and regular post-investment reviews.

 

Disposal of our investment in Matthew Clark:

On 7 October 2015 we announced the completion of the disposal of our 50% shareholding in Matthew Clark (our 50% joint venture investment with Accolade Wines) for £99 million in cash (after £2 million of transaction costs) and at a £46 million premium to book value.  The sale of our investment in Matthew Clark, a non-core asset, enhances the Group's financial flexibility to pursue its strategic objectives.

 

On completion, the Group entered into a 10 year non-exclusive drinks supply contract with Matthew Clark Wholesale Limited.  Under this supply agreement, Matthew Clark will supply selected wines and spirits drinks products to the Group at agreed pricing levels.

 

 

Financial review

 

Income statement:

Results for the 52 weeks ended 22 August 2015:

 

 

Underlying results

2015

£m

2014

£m

Movement

£m

Core estate

200.6

206.2

(5.6)

Non-core estate

22.2

29.4

(7.2)

Matthew Clark joint venture

7.8

6.2

1.6

Central costs

(34.2)

(37.0)

2.8

EBITDA

196.4

204.8

(8.4)

Depreciation and amortisation

(12.5)

(11.0)

(1.5)

Net finance costs

(123.3)

(155.1)

31.8

Bond buyback profits

0.3

29.9

(29.6)

Profit before taxation

60.9

68.6

(7.7)

Tax

(11.4)

(8.2)

(3.2)

Net earnings

49.5

60.4

(10.9)

 

As previously presented, underlying results were in line with expectations, having delivered underlying EBITDA of £196.4 million.  Comparative results for the 2014 year were positively impacted by an extra week's trading (53rd week).

 

Like-for-like net income (which reflects rental income and net income from the sale of drinks and other products to our publicans) in the core estate, after adjusting for the impact of disposals, has been relatively stable, with a growth of 0.3% for the full year.  The decline in core estate profit is predominantly due to the additional week of trading in the previous year (£3.9 million) and the impact of pub disposals (£3.3 million).

 

The decline in profit from the non-core estate was principally due to the impact of the ongoing disposal programme (£3.1 million), lower like-for-like profits as these smaller uninvested pubs were impacted by market conditions, together with the impact of the additional week of trading in the previous year (£0.6 million).

 

The non-core disposal programme has had the benefit of improving the average quality of the Group's pub estate, with average profits per pub across the wider estate up 4% on the year.  The core estate now makes up 90% of the Group's pub profits, up from 88% in the previous year, with this proportion expected to increase to c.95% in 2016.

 

Matthew Clark provided a post-tax contribution to Punch of £7.8 million (2014: £6.2 million) and we received £6.0 million in dividends in the year.

 

We continued to maintain a tight control on costs, with central costs down by 6% in the year to £34.2 million, after adjusting for the additional week in 2014, which was in line with the reduction in the estate size, being down 6% on the previous year end.

 

Underlying net finance costs (before the impact of bond buyback profits in 2014) reduced by £31.8 million to £123.3 million, reflecting the benefit of the capital restructuring that completed on 8 October 2014.  Following the capital restructuring, the weighted average interest rate for the Group's gross borrowings, including the impact of interest rate swaps and PIK interest, at the balance sheet date was 7.8% (2014: 7.2%).  Underlying finance costs in the previous year included a net credit of £29.9 million in relation to loan note redemption profits, with a credit of only £0.3 million in the current year.  The one-off charges and credits relating to the capital restructuring in the year are shown within non-underlying items, referred to below.

 

Taxation:

The underlying taxation charge equates to an effective tax rate of 21.5% before post-tax earnings from joint ventures.  This compares with the UK corporation taxation rate of 20.6% for the year.

 

The availability of sizeable capital allowance pools amounting to £210 million (generated from our investment programme in community pubs) at August 2015, together with other tax assets is expected to result in no corporation tax payments being due in the 2016 financial year.

 

Non-underlying items:

A number of non-underlying items were recognised during the period amounting to a net charge of £132.1 million, resulting in a net non-underlying loss after tax of £82.6 million.  The principal items are set out below:

 

·      £(483.8) million charge on transition to accounting for properties at market valuation (note 3);

·      £(16.4) million impairment losses;

·      £374.6 million profit on capital restructuring;

·      £(35.0) million charge for the mark-to-market movement in value of interest rate swaps;

·      £21.9 million profit on disposal of properties; 

·      £(18.3) million charge for capital restructuring costs; and

·      £(9.1) million goodwill disposed on the transfer and disposal of core pubs.

 

The tax effect of all of these items, together with the resolution of prior year tax matters, gave rise to a tax credit of £34.0 million.

 

Completion of the Capital Restructuring (October 2014):

On 8 October 2014 the Group announced the successful completion of restructuring proposals for the Punch A and Punch B securitisations.  The impact of the restructuring reduced total net debt (including mark-to-market on interest rate swaps) by £0.6 billion.  The Group also issued a total of 3,771 million new ordinary shares in connection with the restructuring proposals, of which 1,273 million was a firm placing at 3.93 pence per share. 

 

A non-underlying profit of £374.6 million was recorded on completion of the capital restructuring, reflecting:

 

·      £794.0 million reduction in gross nominal debt and swap mark-to-market on exchanged notes;

·      £7.0 million on issue of class B3 notes;

·      £(271.1) million cash payments on debt settlement;

·      £(196.5) million equity issued;

·      £22.6 million on write off of deferred issue costs; and

·      £18.6 million other capital restructuring items.

 

Share capital and earnings per share:

Punch's issued share capital at the start of the year, 24 August 2014, amounted to 665.8 million shares.  Punch issued 3,771.2 million new ordinary shares on 8 October 2014 under the terms of the capital restructuring.  On 13 October 2014 Punch effected a share consolidation on the basis of 1 consolidated ordinary share for every 20 existing ordinary shares.  Following the share consolidation and as at the balance sheet date, the issued share capital amounted to 221.9 million ordinary shares.

 

For the purpose of calculating the earnings per share measure, the ordinary shares outstanding during the year (and the prior year) have been adjusted for the share consolidation.  The basic weighted average number of shares applied to the earnings per share calculation is 198.0 million for the current year (prior year: 33.3 million).

 

Adjusted basic earnings per share (EPS), which excludes the effect of non-underlying items was 25.0 pence.  Basic EPS was a loss of 41.7 pence, primarily due to the capital restructuring and impact on the transition to accounting for properties at market value.

 

Property valuation:

The result of the change in accounting policy for our properties to open market valuation has resulted in a net reduction in our property, plant and equipment values of £190.6 million. The net impact has been recognised as a £483.8 million charge to the income statement for pubs for which book values were higher than market value, offset by a £293.2 million credit to equity reflecting the reversal of previous impairment charges for a number of properties on which book values were below current market value.  

 

The net downward valuation reflects the fact that the current open market valuations are lower than the valuation at acquisition (or the August 2004 valuation, being the date of transition to IFRS) plus capital investment and less accumulated depreciation and impairment charges, largely reflecting the decline in like-for-like profits experienced from 2008 to 2013.  Under historic cost accounting a property's book value could be greater than the open market value of the property, providing that the value-in-use of the property (calculated by reference to the discounted future expected cash flows generated by the property) was no less than the book value of the property. 

 

Pensions:

Punch maintains a defined contribution scheme which is open to all employees. The Group has one defined benefit scheme (the Pubmaster pension scheme) which is closed to new entrants. Under IAS 19 the net pension liability was £6.1 million at August 2015 (2014: £4.3 million).

 

Cash flow:

Cash flow from operating activities at £181.8 million compared to an EBITDA of £178.1 million (net of £18.3 million of non-underlying costs). 

 

 

Cash flow

2015

£m

2014

£m

Underlying EBITDA

196.4

204.8

Exceptional restructuring costs

(18.3)

(27.3)

Working capital and other cash movements

3.7

(19.8)

Net cash from operating activities

181.8

157.7

Capital expenditure

(46.4)

(52.4)

Disposal proceeds

89.4

110.6

Interest received

2.4

7.6

Net cash from investing activities

45.4

65.8




Net cash flow before financing activities

227.2

223.5

Interest paid

(120.6)

(165.7)

Proceeds from ordinary share capital

50.0

-

Net repayment in borrowings

(339.8)

(69.3)

Other financing cash flows

7.7

(1.5)

Net decrease in cash

(175.5)

(13.0)

 

Net cash flows from investing activities generated £45.4 million in the year (2014: £65.8 million), as the level of disposal proceeds at £89.4 million exceeded the level of capital reinvestment in the estate of £46.4 million.  Interest received at £2.4 million (2014: 7.6 million) was significantly lower than the previous year as the high levels of cash balances in 2014 were used in the capital restructuring.

 

Financing cash flows primarily reflect interest paid of £120.6 million (2014: £165.7 million), net repayment in borrowings of £339.8 million (2014: £69.3 million), which in 2015 were largely as part of the capital restructuring, and £50.0 million of proceeds on the issue of shares in connection with the restructuring.

 

Cash flows have benefited in both the current and prior year from the ongoing pub disposal programme, proceeds from which have been used towards repayment of debt.  The non-core pub estate was valued at £179 million at the balance sheet date and we expect to continue to dispose out of this estate over time, with in the region of £60 million of disposal proceeds from individual pub sales (including a small number of core pubs) expected in the next financial year.  Proceeds from the disposal of non-core pubs are available to be used towards scheduled debt repayment, with excess proceeds used to prepay senior debt.

 

Capital Structure:

The nominal value of net debt (excluding the mark-to-market of interest rate swaps) was down by £513 million in the year and down by £102 million since the October 2014 refinancing to £1,406 million.

 

 

 

Punch A

£m

Punch B

£m

External

£m

Group

£m

Securitisation cash

£(66.0)m

£(34.8)m

-

£(100.8)m

Senior hedge notes

£97.4m

£37.2m

-

£134.6m

Class A notes

£441.3m

£498.0m

-

£939.3m

Class M notes

£300.0m

-

-

£300.0m

Class B notes

£99.1m

£72.9m

-

£172.0m

Net securitisation debt

£871.8m

£573.3m

-

£1,445.1m

External cash

-

-

£(17.3)m

£(17.3)m

Supply company & EBT cash

-

-

£(22.0)m

£(22.0)m

Nominal Net Debt

£871.8m

£573.3m

£(39.3)m

£1,405.8m






Property valuation

£1,300.1m

£791.2m

£6.2m

£2,097.5m

Matthew Clark net disposal value

-

-

£98.7m

£98.7m

Property and investments

£1,300.1m

£791.2m

£104.9m

£2,196.2m






Net Asset Value

£428.3m

£217.9m

£144.2m

£790.4m






LTM EBITDA

£117.8m

£71.0m

£7.6m

£196.4m

Nominal Net Debt leverage

7.4 times

8.1 times

-

7.2 times

 

The Group is financed solely by two long-term securitised debt structures (Punch A and Punch B securitisations) and has no bank borrowings.  The restructured debt has a lower contractual amortisation requirement with scheduled contractual amortisation of £200.8 million over the next five years, with no term repayments until 2021.

 

The capital restructuring has positively impacted the consolidated net debt to LTM EBITDA leverage ratio of the Punch Group, with leverage having reduced to 7.2 times (2014: 9.5 times).

 

Outside of the securitisations ('External'), the Group holds a number of loss making short leasehold pubs.  External EBITDA of £7.6 million represents Punch's share of the post-tax earnings from Matthew Clark (£7.8 million) together with the operating loss from the short leasehold pubs (£1.3 million) and the release of certain central accruals (£1.1 million).

 

Net debt at August 2015 of £1,405.8 million is secured against a largely freehold pub estate which was independently valued during August 2015 at £2,097 million.  Total Group Net Asset Value (defined as property valuation and investments less nominal net debt), including the value of Matthew Clark (shown at the net disposal value) amounted to £790 million (£3.56 per share).

 

The Group benefits from having a long-term securitisation financing structure.  While this provides certainty of financing with no term debt repayments until 2021, the covenant structure attached to the securitisations is restrictive, in particular in relation to the use of pub disposal proceeds, which is not permitted to be used to fund additional capital reinvestment into the estate, even where investment opportunities are at attractive levels of return.  Consequently, the Board is giving appropriate consideration to how best to improve financial flexibility and support the strategic development of the business going forward.

 

All of the Group's securitised debt, with the exception of the senior hedge notes, is at fixed rates of interest, or fixed through the use of interest rate swaps.  Consequently, the Group does not benefit from the current low UK interest rate.  The mark-to-market value on the Group's interest rate swap which matches the Class M notes amounted to £132.3 million at the balance sheet date.

 

The junior classes of securitised notes (Class M and Class B notes) are callable (at the Group's option) at par from October 2016 onwards, following the end of their no-call period.  The Class A notes carry make-whole provisions (modified Spens) whereby a predetermined price is set should the notes be redeemed early (at the Group's option).

 

For further information on the capital restructuring, please refer to our website: www.punchtavernsplc.com



CONSOLIDATED INCOME STATEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

for the 52 weeks ended 22 August 2015

 








52 weeks to 22 August 2015


53 weeks to 23 August 2014

                                                        

Notes

Underlying items

£m


Non-underlying items

(note 3)

£m


Total

£m

                  

Underlying items

£m


Non-underlying items

(note 3)

£m


Total

£m














Revenue                                                      

2

420.8


-


420.8


448.1


-


448.1

Operating costs before depreciation and amortisation


(232.2)


(18.3)


(250.5)


(249.5)


(27.3)


(276.8)

Share of post-tax profit from joint venture


7.8


-


7.8


6.2


-


6.2

EBITDA1


196.4


(18.3)


178.1


204.8


(27.3)


177.5

Depreciation and amortisation


(12.5)


-


(12.5)


(11.0)


-


(11.0)

Profit on sale of property, plant and equipment and non-current assets classified as held for sale


-


21.9


21.9


-


10.7


10.7

Impairment


-


(16.4)


(16.4)


-


(50.8)


(50.8)

Movement in valuation of properties


-


(483.8)


(483.8)


-


-


-

Goodwill disposed


-


(9.1)


(9.1)


-


(3.6)


(3.6)

Operating profit / (loss)


183.9


(505.7)


(321.8)


193.8


(71.0)


122.8

Finance income


2.5


374.6


377.1


36.4


3.3


39.7

Finance costs


(125.5)


-


(125.5)


(161.6)


(214.7)


(376.3)

Movement in fair value of interest rate swaps


-


(35.0)


(35.0)


-


(26.4)


(26.4)

Profit / (loss) before taxation


60.9


(166.1)


(105.2)


68.6


(308.8)


(240.2)

UK income tax (charge) / credit

5

(11.4)


34.0


22.6


(8.2)


73.3


65.1

Profit / (loss) for the financial period attributable to owners of the parent company


49.5


(132.1)


(82.6)


60.4


(235.5)


(175.1)

 

 













Earnings per share

6












- basic (pence)


25.0




(41.7)


181.5




(526.1)

- diluted (pence)


25.0




(41.7)


181.5




(526.1)

 

 

1 EBITDA represents earnings before depreciation and amortisation, profit on sale of property, plant and equipment and non-current assets classified as held for sale, impairment, movement in valuation of properties, goodwill disposed, finance income, finance costs, movement in fair value of interest rate swaps and tax of the Group.

 

 

 

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the 52 weeks ended 22 August 2015

 








 52 weeks to 22 August

 2015

£m


 53 weeks to 23 August

 2014

£m

Loss for the period attributable to owners of the parent company


(82.6)


(175.1)

Items that are or may be recycled subsequently to the income statement

Losses on cash flow hedges


 

 

-


 

 

(6.3)

Transfers to the income statement on cash flow hedges


-


214.4

Tax relating to components of other comprehensive income that  can be reclassified into profit or loss


-


(53.2)

Items that cannot be recycled subsequently to the income statement

 




Remeasurements of defined benefit pension schemes


(3.0)


(1.3)

Other items that cannot be recycled subsequently to the income statement


(4.2)


(0.9)

Unrealised surplus on revaluation of properties


293.2


-

Tax relating to components of other comprehensive income that cannot be reclassified into profit or loss


(1.6)


0.3

Other comprehensive profits for the period


284.4


153.0

Total comprehensive profit / (loss) for the period attributable to owners of the parent company


201.8


(22.1)

 

 

 

 

 

 

BALANCE SHEET

at 22 August 2015

 

 




22 August 2015

£m


23 August 2014

£m








Non-current assets







Property, plant and equipment




2,038.2


2,297.4

Operating leases




-


4.0

Other intangible assets




0.5


0.7

Goodwill




163.5


172.6

Investments in subsidiary undertakings




-


-

Investment in joint venture




52.3


50.5

Receivables




-


-

Deferred tax asset




8.1


-





2,262.6


2,525.2








Current assets







Inventories




0.1


-

Trade and other receivables




30.5


34.0

Current income tax assets




0.8


1.3

Non-current assets classified as held for sale




93.1


69.8

Cash and cash equivalents




140.1


315.6

Restricted cash




-


315.0





264.6


735.7








Total assets




2,527.2


3,260.9








Current liabilities







Trade and other payables




(99.6)


(99.9)

Short-term borrowings




(47.7)


(79.9)

Cash-backed borrowings




-


(315.0)

Derivative financial instruments




(15.8)


(38.2)

Provisions




(0.7)


(0.8)





(163.8)


(533.8)








Non-current liabilities







Borrowings




(1,511.7)


(2,189.9)

Derivative financial instruments




(116.5)


(240.3)

Deferred tax liabilities




-


(12.1)

Retirement benefit obligations




(6.1)


(4.3)

Provisions




(6.6)


(6.8)

Other non-current payables




-


-





(1,640.9)


 (2,453.4)








Total liabilities




(1,804.7)


(2,987.2)








Net assets




722.5


273.7








Equity







Called up share capital




2.1


0.3

Share premium




700.0


455.0

Revaluation reserve




291.0


-

Share based payment reserve




6.5


6.4

Retained earnings




(277.1)


(188.0)

Total equity attributable to owners of the parent company




722.5


273.7

 

 

 

 

 

 

STATEMENT OF CHANGES IN EQUITY

for the 52 weeks ended 22 August 2015

 


Share capital

£m

Share premium

£m

Hedge reserve

£m

 

 

 

Revaluation reserve

£m

Share based payment reserve

£m

Retained earnings

£m

Total equity

£m

Group








Total equity at 17 August 2013

0.3

455.0

(154.9)

-

7.2

(12.0)

295.6

Loss for the period

-

-

-

-

-

(175.1)

(175.1)

Other comprehensive gains  / (losses) for the period

-

-

154.9

-

-

(1.9)

153.0

Total comprehensive  income / (loss)  for the period attributable to owners of the parent company

-

-

154.9

-

-

(177.0)

(22.1)

Share based payments

-

-

-

-

(0.8)

1.0

0.2

Total equity at 23 August 2014

0.3

455.0

-

-

6.4

(188.0)

273.7

Loss for the period

-

-

-

-

-

(82.6)

(82.6)

Other comprehensive gains / (losses) for the period

-

 

-

   -

291.0

-

(6.6)

284.4

Total comprehensive gain / (loss) for the period attributable to owners of the parent company

-

-

-

291.0

-

(89.2)

201.8

Share issue

1.8

245.0

-

-

-

-

246.8

Share based payments

-

-

-

-

0.1

0.1

0.2

Total equity at 22 August 2015

2.1

700.0

-

291.0

6.5

(277.1)

722.5









 

 

 

CASH FLOW STATEMENT

for the 52 weeks ended 22 August 2015

 





 52 weeks to

 22 August

2015

£m


 53 weeks to

 23 August

2014

£m


Cash flows from operating activities








Operating (loss) / profit




(321.8)


122.8


Impairment of investment in subsidiary undertaking




-


-


Share of post-tax profit from joint venture




(7.8)


(6.2)


Depreciation and amortisation




12.5


11.0


Profit on sale of property, plant and equipment and non-current assets classified as held for sale




(21.9)


(10.7)


Impairment




16.4


50.8


Movement in valuation of properties




483.8


-


Goodwill disposed




9.1


3.6


Share based payment expense recognised in profit




0.2


0.2


Increase in inventories




(0.1)


-


Decrease in trade and other receivables




1.2


0.1


Increase / (decrease) in trade and other payables




5.1


(18.5)


Difference between pension contributions paid and amounts recognised in the income statement




(1.4)


(2.0)


Decrease in provisions and other liabilities




(0.8)


(1.4)










Cash generated from operations




174.5


149.7


Dividend received from joint venture




6.0


5.0


Income tax received




1.3


3.0


Net cash from operating activities




181.8


157.7










Cash flows from investing activities








Purchase of property, plant and equipment




(46.2)


(51.3)


Proceeds from sale of property, plant and equipment




31.3


60.0


(Cost) / proceeds from sale of operating leases




(0.2)


0.2


Proceeds from sale of non-current assets classified as held for sale




58.3


50.4


Purchase of other intangible assets




(0.2)


(1.1)


Purchase of shares in subsidiary undertaking




-


-


Interest received




2.4


7.6


Net cash generated from investing activities




45.4


65.8










Cash flows from financing activities








Proceeds from issue of ordinary share capital




50.0


-


Proceeds from issue of borrowings




7.0


-


Repayment of borrowings




(346.5)


(69.1)


Proceeds from new intercompany debt




-


-


Repayment of intercompany debt




-


-


Repayment of derivative financial instruments




(8.0)


(6.7)


Interest paid




(120.4)


(165.5)


Repayments of obligations under finance leases




(0.3)


(0.2)


Interest element of finance lease rental payments




(0.2)


(0.2)


Proceeds from sale of shares held in trust




-


5.2


Other restructuring cash flows




15.7


-


Net cash used in financing activities




(402.7)


(236.5)










Net decrease  in cash and cash equivalents




(175.5)


(13.0)










Cash and cash equivalents at beginning of period




315.6


328.6










Cash and cash equivalents at end of period




140.1


315.6










 

 

1.       ACCOUNTING POLICIES

 

Basis of preparation

 

The consolidated financial statements presented in this document have been prepared in accordance with IFRS as adopted by the European Union.  The Company's financial statements have been prepared in accordance with IFRS as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006.  The Company has taken advantage of the exemption provided under s408 of the Companies Act 2006 not to publish its individual income statement and related notes.

 

The consolidated financial statements of Punch Taverns plc and its subsidiary undertakings (together "the Group") are prepared under the historical cost convention, except where adopted IFRSs require an alternative treatment. The principal variations relate to financial instruments (IAS 39 "Financial instruments: recognition and measurement") and Property (IAS 16 "Property, Plant and Equipment")

 

New standards and interpretations issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC), becoming effective during the year, have not had a material impact on the Group's financial statements.  The preliminary statement of results was approved by the Board on 11 November 2015. The preliminary statement is derived from but does not represent the full Group statutory financial statements of Punch Taverns plc and its subsidiaries which will be delivered to the Registrar of Companies in due course. The financial information for the 53 weeks ended 23 August 2014 has been extracted from the Annual Report and Financial Statements 2014, as filed with the Registrar of Companies. The audit reports for both periods presented were (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 statements under section 498(2) or (3) Companies Act 2006 or equivalent preceding legislation.

 

Going Concern

 

The financial statements have been prepared on a going concern basis.  The Directors have prepared detailed operating and cash flow forecasts, which cover a period of more than 12 months from the date of approval of these financial statements. These show that the Group has adequate funds for the foreseeable future to meet its liabilities as they fall due.

 

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

(£938 million of gross debt secured against 2,076 pubs) and the Punch B Securitisation (£608 million of gross debt secured against 1,453 pubs), as well as certain cash resources held across the Group. 

 

On the 8 October 2014 the Group announced the successful completion of the restructuring of its securitisation arrangements, including the resetting of its financial covenants, with a £0.6 billion reduction in total net debt (including mark-to-market interest rate swaps).

 

Further details of the debt structure of the Punch A and Punch B securitisations following completion of the restructuring can be found in note 4 and also on the Punch Taverns website www.punchtavernsplc.com.

 

Change of accounting policy

 

During the second half of the financial year ending 22 August 2015, the Group adopted a policy of revaluing its property portfolio to market value, in accordance with the revaluation provisions of IAS 16 Property, Plant and Equipment.  In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, no prior year adjustment has been recognised in relation to this change in accounting policy.

 

The change in accounting policy reflects the adoption by the Group of the most appropriate accounting policy to carry our property portfolio at open market valuation, which gives greater transparency on the underlying value of our property assets. 

 

Under the previous accounting policy adopted by the Group, property, plant and equipment were stated at historical cost or deemed cost less accumulated depreciation and any impairment in value.  The impact on the financial statements of this change in accounting policy has been to:

 

·    decrease the net book value of property, plant and equipment as at 22 August 2015 by £190.6 million;

·    recognise a net non-underlying charge against operating profit of £483.8 million.  This reflects the impact of downward revaluations of £523.8 million where the fair value of the asset is below the net book value.  Offsetting this charge is a £40.0 million non-underlying credit against operating profit which reflects the impact of upward revaluations, where the fair value of the asset was greater than the net book value, and the credit to the income statement reverses a previous charge to the income statement for impairment;

·    recognise a £293.2 million credit to the revaluation reserve on upward revaluations where any impairment previously taken to the income statement has already been reversed.

 

 

 

 

2.       SEGMENTAL ANALYSIS 

 

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

 

The Chief Operating Decision Maker, represented by the Board, reviews the performance of the core and non-core divisions separately, at an underlying EBITDA level, as included in the internal management reports.  The Group operates solely in the United Kingdom.

 


52 weeks to 22 August 2015


Core

£m


Non-core

£m


Unallocated

£m


Total

£m

Drink revenue

267.6


37.6


-


305.2

Rental income

92.6


10.2


-


102.8

Other revenue

10.5


2.3


-


12.8

Underlying revenue

370.7


50.1


-


420.8

Underlying operating costs1

(170.1)


(27.9)


(34.2)


(232.2)

Share of post-tax profit from joint venture

-


-


7.8


7.8

EBITDA2 before non-underlying items

200.6


22.2


(26.4)


196.4

Underlying depreciation and amortisation







(12.5)

Operating non-underlying items







(505.7)

Net finance income







251.6

Movement in fair value of interest rate swaps







(35.0)

UK income tax credit







22.6

Loss for the financial period attributable to owners of the parent company







(82.6)

 

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

2 EBITDA represents earnings before depreciation and amortisation, profit on sale of property, plant and equipment and non-current assets classified as held for sale, impairment, movement in valuation of properties, goodwill disposed, finance income, finance costs, movement in fair value of interest rate swaps and tax of the Group.

 


53 weeks to 23 August 2014


Core

£m


Non-core

£m


Unallocated

£m


  Total

£m

Drink revenue

275.4


50.8


-


326.2

Rental income

96.4

2

14.5


-


110.9

Other revenue

8.2


2.8


-


11.0

Underlying revenue

380.0


68.1


-


448.1

Underlying operating costs1

(173.8)


(38.7)


(37.0)


(249.5)

Share of post-tax profit from joint venture

-


-


6.2


6.2

EBITDA2 before non-underlying items

206.2


29.4


(30.8)


204.8

Underlying depreciation and amortisation







(11.0)

Operating non-underlying items







(71.0)

Net finance costs







(336.6)

Movement in fair value of interest rate swaps







(26.4)

UK income tax credit







65.1

Loss for the financial period attributable to owners of the parent company







(175.1)

 

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

2 EBITDA represents earnings before depreciation and amortisation, profit on sale of property, plant and equipment and non-current assets classified as held for sale, impairment, movement in valuation of properties, goodwill disposed, finance income, finance costs, movement in fair value of interest rate swaps and tax of the Group.

 

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:

 


 52 weeks to 22 August

2015

£m


 53 weeks to 23 August

2014

£m

Operating non-underlying items




Capital restructuring

(18.3)


(27.3)

Profit on sale of property, plant and equipment and non-current assets classified as held for sale

21.9


10.7

Impairment losses

(16.4)


(50.8)

Movement in valuation of properties1

(483.8)


-

Goodwill disposed2

(9.1)


(3.6)


(505.7)


(71.0)

Finance income




Movement in fair value of provision for share scheme settlement3

-


3.3

Profit on capital restructuring (note 4)

374.6


-


374.6


3.3

Finance costs




Loss on sale of shares held in trust

-


(0.3)

Recycling of hedge reserve4

-


(214.4)


-


(214.7)





Movement in fair value of interest rate swaps5

(35.0)


(26.4)





Total non-underlying items before tax

(166.1)


(308.8)

Tax




Tax impact of non-underlying items

34.0


73.6

Change in standard rate of tax

(0.6)


(1.2)

Adjustments to tax in respect of prior periods

0.6


0.9


34.0


73.3

Total non-underlying items after tax

(132.1)


(235.5)

 

1 The movement in the valuation of properties of £483.8m comprises a downward valuation of £523.8m where the fair value of an asset is less than the net book value, offset by a credit of £40.0m where the fair value of an asset is greater than the net book value and the credit reverses a previous charge to the income statement for impairment.

 

2 Represents the goodwill relating to those core pubs disposed of in the period and also the goodwill relating to pubs transferred or identified for transfer to non-core.

 

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

 

4 Represents the recycling of the hedge reserve relating to the Punch A B3, D1 & M2(N) interest rate swaps following its reclassification as ineffective during the prior financial period, due to the announcement of the capital restructuring proposals.

 

5 Represents the movement in the fair value of interest rate swaps which do not qualify for hedge accounting.

 

 

 

 

 

4.       CAPITAL RESTRUCTURING

 

Completion of restructuring

 

On 8 October 2014 Punch Taverns plc announced the successful completion of restructuring proposals for the Punch A and Punch B securitisations.  The impact of the restructuring reduced total net debt (including mark-to-market on interest rate swaps) by £0.6 billion.  The Group also issued a total of 3,771,151,200 new ordinary shares in connection with the restructuring proposals, of which 1,273,005,000 was a firm placing at 3.93 pence per share. 

 

On 13 October 2014 Punch Taverns plc announced the consolidation of its ordinary shares, as described in the combined circular and prospectus dated 18 August 2014, had become effective.  As a result of the share consolidation, the existing ordinary shares in Punch Taverns plc have been consolidated into consolidated ordinary shares on the basis of one consolidated ordinary share for every 20 existing ordinary shares.

 

Punch A debt structure

 

Immediately following completion of the restructuring, the revised debt structure of the Punch A securitisation was as set out below:

 

Class of Notes

Notional

Cash coupon

PIK coupon

Maturity

Super Senior Hedge Notes

£123.4m

Libor

-

2021

A1 (F)

£202.5m

7.274%

-

2026

A1 (V)

£67.5m

7.274%

-

2026

A2 (F)

£137.4m

7.320%

-

2025

A2 (V)

£45.8m

7.320%

-

2025

M3

£300.0m

Libor+5.500%1

-

2027

B4

£89.9m

1.500%

13.500%

2028

Gross debt

£966.4m




 

 

1 An interest rate swap is in place to swap the Libor interest rate on the Class M3 floating rate note to a fixed rate of 5.954%

 

Punch B debt structure

 

Immediately following completion of the restructuring, the revised debt structure of the Punch B securitisation was as set out below:

 

Class of Notes

Notional

Cash coupon

PIK coupon

Maturity

Super Senior Swap Loan

£49.0m

Libor+0.400%

-

2019

A3

£146.9m

7.369%

-

2021

A6

£220.0m

5.943%

-

2022

A7

£149.1m

5.267%

-

2024

B3

£72.9m

7.750%

-

2025

Gross debt

£637.9m




 

 

 

Profit on capital restructuring

 

 







 52 weeks to 22 August

 2015

£m

Reduction in nominal debt



794.0

Cash payments



(271.1)

Equity issued



(196.5)

Class B3 note issued



7.0

Deferred issue costs written off



22.6

Loan fair value premiums written off



(1.9)

Other profits on capital restructuring



20.5

Profit on capital restructuring (note 3)



374.6

 

The £196.5m equity consideration comprised 2,498,146,197 shares issued at 7.86p.  The firm placing of 1,273,005,000 shares at 3.93p generated £50.0m of cash to be used in the restructuring.  Three new Ordinary shares were issued to the Company Secretary to facilitate a 1 for 20 share consolidation.

 

Further details of the debt structure of the Punch A and Punch B securitisations following completion of the restructuring can be found on the Punch Taverns website www.punchtavernsplc.com.

 

 

 

5.       TAXATION

 

 

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

 


52 weeks to 22 August 2015

53 weeks to 23 August 2014


 

 

 

 Underlying items

£m

 

Non-underlying items

(note 3)

£m

 

 

 

 

Total

£m

  

 

 

Underlying items

£m

 

Non-underlying items

(note 3)

£m

 

 

 

 

Total

£m

Profit / (loss) on ordinary activities before tax

60.9

(166.1)

(105.2)

68.6

(308.8)

(240.2)

Tax at current UK tax rate of 20.61% (August 2014: 22.22%)

12.6

(34.2)

(21.6)

15.2

(68.6)

(53.4)








Effects of:







Net effect of expenses not deductible for tax purposes and non-taxable income (underlying items)

(1.2)

-

(1.2)

(7.0)

-

(7.0)

Adjustments to tax in respect of prior periods (non-underlying items)

-

(0.6)

(0.6)

-

(0.9)

(0.9)

Current period non-underlying charges / (credits):







- Change in standard rate of tax

-

0.6

0.6

-

1.2

1.2

- Expenses not deductible for tax purposes / (income not chargeable for tax purposes)

-

0.2

0.2

-

(5.0)

(5.0)

Total tax charge / (credit) reported in the income statement

11.4

(34.0)

(22.6)

8.2

(73.3)

(65.1)

 

 

 

 

 

6.       EARNINGS PER SHARE

 

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, excluding those held in the employee share trust, which are treated as cancelled.

 

Diluted earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year (adjusted for the effects of dilutive options).

 

The weighted average number of ordinary shares outstanding during the prior year has been adjusted for the impact of the consolidation of ordinary shares as announced on 13 October 2014 following successful completion of restructuring proposals.  The ordinary shares of 0.04786p in Punch Taverns plc have been consolidated into ordinary shares of 0.9572p in Punch Taverns plc on a one for 20 basis. 

 

As part of the restructuring proposals the Group issued 3,771,151,200 new ordinary shares on 8 October 2014, prior to the share consolidation.  The weighted average number of ordinary shares outstanding in the periods leading up to the share issue has not been retrospectively adjusted for as per IAS 33: Earnings per share.  The share issue resulted in an increase in cash resources and as the share issue was not offered to all existing shareholders it was deemed that there was no bonus element associated with this issue.

 

The adjustment to the weighted average number of ordinary shares outstanding impacts the current and prior period.

 

Reconciliations of the earnings and weighted average number of shares are set out below:

 






 52 weeks to 22 August 2015


53 weeks to 23 August 2014

 

 

 

 

Earnings

£m


Per share amount

pence


 

Earnings

£m


Per share amount

pence

Results attributable to ordinary shareholders:








Basic earnings per share

(82.6)


(41.7)


(175.1)


(526.1)

Diluted earnings per share

(82.6)


(41.7)


(175.1)


(526.1)









Supplementary earnings per share figures:








Basic earnings per share before non-underlying items

49.5


25.0


60.4


181.5

Diluted earnings per share before non-underlying items

49.5


25.0


60.4


181.5

 

The impact of dilutive ordinary shares is to increase weighted average shares by 23,442 (August 2014: nil) for employee share options.

 


 52 weeks to 22 August

 2015


53 weeks to 23 August 2014


No. (m)


No. (m)

Basic weighted average number of shares

198.0


33.3

Diluted weighted average number of shares

198.1


33.3

 

 

 

 

 

7.       NET DEBT

 

(a)      Analysis of net debt

 




22 August

 2015


23 August

 2014




£m


£m

Secured loan notes



(1,545.9)


(2,233.7)

Cash-backed borrowings



-


(315.0)

Cash and cash equivalents



140.1


315.6

Restricted cash



-


315.0

Nominal value of net debt



(1,405.8)


(1,918.1)







Capitalised debt issue costs



1.4


3.8

Fair value adjustments on acquisition of secured loan notes



(12.8)


(37.5)

Fair value of interest rate swaps



(132.3)


(278.5)

Finance lease obligations



(2.1)


(2.4)

Net debt



(1,551.6)


(2,232.7)







Balance sheet:






Borrowings



(1,559.4)


(2,269.8)

Cash-backed borrowings



-


(315.0)

Derivative financial instruments



(132.3)


(278.5)

Cash and cash equivalents



140.1


315.6

Restricted cash



-


315.0

Net debt



(1,551.6)


(2,232.7)

 

 

(b)      Analysis of changes in net debt

 


At 17 August 2013


 

Cash flow


 

Non-cash movements


At 23 August 2014


 

Cash

flow


 

  Non-cash movements


At 22 August 2015


£m


£m


£m


£m


£m


£m


£m

Current assets














Cash at bank and in hand

328.6


(13.0)


-


315.6


(175.5)


-


140.1

Restricted cash

315.0


-


-


315.0


(315.0)


-


-


643.6


(13.0)


-


630.6


(490.5)


-


140.1

Debt














Borrowings

(2,372.8)


69.3


33.7


(2,269.8)


339.8


370.6


(1,559.4)

Cash-backed borrowings

(315.0)


-


-


(315.0)


315.0


-


-

Derivative financial instruments

(254.3)


6.7


(30.9)


(278.5)


8.0


138.2


(132.3)


(2,942.1)


76.0


2.8


(2,863.3)


662.8


508.8


(1,691.7)

Net debt per balance sheet

(2,298.5)


63.0


2.8


(2,232.7)


172.3


508.8


(1,551.6)

 

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

 

Non-cash movements relate to amortisation of deferred issue costs and premium on loan notes (including amounts written off on capital restructuring (note 4)) and fair value movement in derivative financial instruments and profit on the purchase of securitised debt.

 

 

 

 

 

 

 

8.       OUR KEY RISKS AND UNCERTAINTIES

 

Market and economic risks

 

Economic climate

Punch's business operations rely upon the spending capacity of consumers.  The basic cost of living could rise at a faster rate than income and further challenges such as duty increases or the national living wage could affect our publican's businesses and Punch's revenue.

 

Mitigating actions and controls

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

·           We continue to monitor the financial health of our publicans via a Support Tool, together with analysis to highlight potential failures, and our Partnership Development Managers continue to help grow and diversify our publicans' businesses.

 

Property valuations

Fluctuations in the UK property market as well as the current uncertain market conditions and planning restrictions which affect the ability to convert pubs for alternative use, could impact the value of Punch's property portfolio and our ability to dispose of pubs at an appropriate value.

 

Property valuations also have an implication for the overall value of the Group and impact on financial covenants.

 

Mitigating actions and controls

·           The Group commissioned an open market valuation of our properties during the second half of the year by qualified external valuers in accordance with RICS Valuation Standards.  These valuations comply with the requirements of International Financial Reporting Standards.

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

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

·           We invested £46m on developing and improving the quality of our estate during the year.

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

 

Increasing costs

Increases in any of our key supply costs due to availability of products or inflationary or above inflationary price increases are an ongoing risk to our business. 

 

Mitigating actions and controls

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

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

 

Liquidity and covenant risk

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

 

Punch is financed through two whole business securitisations, the Punch A Securitisation and the Punch B Securitisation, as well as cash resources held across the Group.

 

The key short-term liquidity risk is the requirement to meet scheduled debt service costs as they fall due. 

 

Both of Punch's securitisation structures have financial covenants.

 

Mitigating actions and controls

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

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

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

 

Interest rate risk

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

 

The use of fixed rate borrowings and derivative financial instruments exposes Punch to fair value interest rate risk such that Punch would not benefit from falls in interest rates and would be exposed to unplanned costs, such as breakage costs, should debt or derivative financial instruments be restructured or repaid early.

 

Mitigating actions and controls

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

·           Punch has taken out derivative financial instruments such that 91% of all external debt (August 2014: 100%) was either at fixed rates or was converted to fixed rates as a result of swap arrangements, reducing our exposure to changes in interest rates

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

 

Pensions

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

 

Mitigating actions and controls

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

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

 

Internal financial control

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

 

Mitigating actions and controls

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

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

 

Operational and People

 

Change Management

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

 

Mitigating actions and controls

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

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

·           The introduction of a workflow system (Appian) has allowed controls to be embedded within business processes.

 

Information systems, technology and security

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

 

Mitigating actions and controls

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

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

 

Product quality

Punch is exposed to product quality risk in relation to drink which is supplied to us and sold on to our publicans. Food contamination, food scare, poor quality or wrongly prepared food in our pubs could result in a food safety issue for our guests and impact our guest satisfaction and reputation.

 

Mitigating actions and controls

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

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

·           Monthly food safety audits are carried out in every pub within the Retail pub division. 

·           Upon entry to the pub all retailers (publicans) are provided with food safety training.

·           A food safety helpline is available to all retailers for day to day advice on associated issues

 

Supply chain management

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

 

Mitigating actions and controls

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

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

 

People risks

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

 

Mitigating actions and controls

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

·           We undertake succession planning at all levels to ensure we attract and retain high calibre people.

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

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

 

Regulatory

 

Health and safety

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

 

Mitigating actions and controls

·           Health & Safety is discussed at each Executive Board meeting to consider all aspects of health and safety across Punch and to report to the Board of Directors on the status of health and safety.

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

·           Our 'Knowingly Safe' and planned maintenance programs have significantly improved the approach to Health and Safety within our pubs.

 

Changes in legislation

Following a consultation regarding the introduction of a Statutory Code, it is proposed by the Government that there will be a Statutory Code and an independent adjudicator appointed to oversee the Code. Although this removes some of the uncertainty in the sector, until the parliamentary process is complete and the final detail is known, the potential costs of implementation and the operation of the regime could have an impact upon our profitability, our operational strategy and our relationship with our publicans.

 

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

 

The Small Business, Enterprise and Employment Act 2015 (the 'Act') which includes the provision of an independent adjudicator and Market Rent Only option (MRO) for all companies with over 500 pubs operating under tied leased and tenancy agreements in the UK, received Royal Assent on 26th March 2015.  The Act includes a lessee's right, under certain circumstances, to change the freely-negotiated commercial terms of their agreement.  This MRO option enables some occupational lessees to elect to opt-out of the drinks supply tie at certain points during the term of their lease agreement and therefore occupy the premises on a standard commercial property lease, paying rent only.

 

There is currently a period of consultation in order for the Government to prepare Secondary Legislation setting out the detail of how the Act will be implemented and it is anticipated that the Secondary Legislation will come into operation from the middle of 2016.  In our 2017 financial year we expect up to 400 potential MRO event triggers and up to 300 event triggers per year in the following four years.  In the event that a lessee elected to invoke the MRO 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 would be adversely affected by this amendment.

 

Mitigating actions and controls

·           We are actively participating in the ongoing consultation and undertaking a number of actions based on our understanding of what the statutory code will comprise, including the introduction of new systems for the recording of meetings, development of business plans and the information provided to new entrants to our business.

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

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

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

·           While the take-up of the MRO option will only become clear over time through the cycle of five yearly rent reviews and renewals, our current expectations are that the majority of the estate will continue to operate under, and enjoy the benefits of the tied-drinks model.

·           The Group has already begun to take a number of operational actions to address the potential implications on the Group of the implementation of the legislation, including; a review of new managed and franchised pub operating formats on a select number of sites; modernisation of pub tenancy agreements and development of new commercial free-of-tie lease agreements and operating models.

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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