EI Group Regulatory News (EIG)

17 May 2016

Enterprise Inns plc

Unaudited Interim Results for the six months ended 31 March 2016

Implementation of strategy on plan and proceeding at pace

Enterprise Inns plc (ETI or Enterprise), the largest pub owner in the UK, today announces its interim results for the six months ended 31 March 2016.

Financial highlights

Ø EBITDA* before exceptional items of £142 million (H1 2015: £144 million), in line with expectations and reflecting the impact of planned disposals

Ø Profit before tax and exceptional items of £57 million (H1 2015: £57 million) as interest savings from reduced debt offsets reduction in EBITDA

Ø Profit after tax increased to £33 million (H1 2015: £4 million), primarily due to lower exceptional refinancing costs and property valuation movements

Ø Adjusted earnings per share# up 2.2% at 9.2p (H1 2015: 9.0p)

* Earnings before interest, tax, depreciation and amortisation

# Excludes exceptional items

Operational and strategic progress

Ø Business performing well with continued growth momentum and strategic evolution on track, providing a clear path to maximising shareholder value through the optimisation of returns from every asset

Ø Enterprise Publican Partnerships - our reinvigorated tied leased and tenanted business

o Leased and tenanted like-for-like net income up 1.8% (H1 2015: 0.6% growth) across the whole estate

o New Partnership Tenancy Plus agreement to be launched in second half of financial year

o Improved publican profitability and enhanced operational support have helped to further reduce unplanned business failures, down 9% compared to the prior year

Ø Enterprise Commercial Properties - our high quality commercial property portfolio

o Commercial property like-for-like net income up 5.2% (H1 2015: 5.0% growth)

o Rapidly expanding portfolio with 264 commercial properties at 17 May 2016 at an average annualised rental income of £59,000

o We have signed an unconditional contract, which will complete on 7 June 2016, for the sale of a portfolio of 22 sites for £20 million, at a yield of 6.7% and premium to book value of 9%, demonstrating the inherent value of our commercial property portfolio

Ø Managed operations

o The total number of managed pubs trading at 17 May 2016 stands at 75 with 21 trading under our Bermondsey operation, 50 under our Craft Union operation and four within Enterprise Managed Investments

o We have now partnered with three managed experts and have a strong pipeline of interest from other exceptional operators

Ø Strategic capital allocation framework in place to optimise returns from cash generated by the business.

o Net cash flows from operating activities increased to £129 million (H1 2015: £120 million)

o Additional net proceeds from the disposal of primarily under-performing assets of £27 million (H1 2015: £34 million)

o Total capital investment of £30 million (H1 2015: £33 million) with 50% focused on growth driving investment initiatives (H1 2015: 42%) yielding an average return on investment (ROI) of 19%

o Repaid £37 million (H1 2015: £35 million) of Unique securitised notes

o Initiated a new share buyback programme of up to £25 million of the issued share capital of ETI, with 3 million shares purchased to date.

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

"We are continuing to make good progress. Our leased and tenanted business is maintaining its growth momentum while the rapid expansion of our managed operations and commercial property portfolio is on track and delivering results in line with our expectations.

We are confident that the execution of our strategy is demonstrating a clear path to maximising long term shareholder value and our returns driven approach to allocating excess cash will deliver near term benefits to all our stakeholders."

Enquiries: Simon Townsend, Chief Executive Officer 0121 733 7700

Neil Smith, Chief Financial Officer 0121 733 7700

Tulchan Communications, Jonathan Sibun/Peter Hewer 0207 353 4200

The Interim Results presentation will be available on the Company website at www.enterpriseinnsplc.com. A live video webcast of the presentation will be available on the investor zone section on the above website from 9.30am BST. Alternatively, a live conference call of the presentation can be accessed at 9.30am BST by dialling +44 (0) 20 3003 2666 or 1 866 966 5335 (USA callers). A replay of the conference call will be available for seven days on +44 (0) 20 8196 1998 and 1 866 595 5357 (USA callers) replay passcode 3141162#.

Forward-looking statements

This announcement contains certain statements about the future outlook for ETI. 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.

OPERATIONAL AND STRATEGIC REVIEW

Overview

We are pleased to report our interim results for the six months ended 31 March 2016, during which period we have delivered EBITDA before exceptional items of £142 million, down £2 million on the comparative period primarily as a result of planned asset disposals. Profit before taxation, excluding exceptional items, was flat at £57 million as lower interest costs, resulting from reduced levels of debt, have offset the decline in EBITDA.

The continuing implementation of our strategic plan means that we are evolving from a predominantly leased and tenanted operation to a portfolio of businesses which operate a variety of models and trading styles.

Enterprise Publican Partnerships

Enterprise Publican Partnerships is the trading name for our tied leased and tenanted business which is the largest part of our group. As at 31 March 2016, we had 4,669 pubs trading within the leased and tenanted estate and they have grown their like-for-like net income by 1.8% through the first six months of the financial year. The improvement in trading performance has been achieved across our estate and had some assistance in the final week of the period as Easter was a week earlier than in the prior year.

Whilst the pubs in the north of the country continue to face a more challenging economic and trading environment it is pleasing to see that they have delivered stable like-for-like net income in the first half of the year. We have maintained our like-for-like net income in the midlands, and delivered growth in the south, up 3.3%. The top 90% (4,202 pubs) of our leased and tenanted estate, in terms of income earned, grew like-for-like net income by 3.8% in the first half of the year, demonstrating the strong performance of the majority of our pubs, and the quality of the publicans who run them.

* Leased and tenanted net income represents EBITDA of £142 million, stated before, property costs of £14 million, unallocated central costs of £22 million and excluding £9 million of net income relating to commercial properties and managed houses.

We provide our tied leased and tenanted publicans with a broad range of services to help them operate their pubs efficiently and effectively. Where appropriate we will also provide direct financial assistance to publicans. In the first half of the year we provided £3 million (H1 2015: £3 million) of such assistance. As a consequence of the successful application of these initiatives we have further reduced the number of unplanned business failures, down 9% in the first half of the current year compared to the first half of last year. The proactive interventions of our regional managers to identify and then avoid these potential business failures is a key driver of the consistent improvements achieved in our like-for-like net income.

We are in the process of launching a new deal for tied publicans in the form of a Partnership Tenancy Plus (PTP) agreement. The new agreement will continue to offer many of the benefits of existing tenancy agreements but will be enhanced through reducing property obligations for publicans and a commitment that, where appropriate, we will match the value of capital investment made by our publicans. Initially this new agreement is being offered in relation to 50 new lets during the second half of the financial year. We will then determine its attractiveness to our publicans prior to extending its availability across the business.

Enterprise Commercial Properties

We are rapidly expanding our high quality commercial property portfolio operated within Enterprise Commercial Properties and in the first half of the financial year the commercial properties increased like-for-like net income by 5.2%.

We today have 264 commercial properties, the vast majority of which trade as pubs on a free-of-tie basis. These properties have an annualised rental income of £15.6 million (average rent of £59,000) and were valued at 30 September 2015 at £181 million, resulting in a gross yield of 8.6%.

On 16 May 2016 we signed an unconditional contract for the sale of a portfolio of 22 commercial properties which comprised 17 pubs and 5 convenience stores geographically spread across England. The disposal will generate £20 million, representing a 9% premium to the book value and a 6.7% yield based upon the gross rental income of £1.34 million. The disposal package will complete on 7 June 2016 and is typical of the type of assets we are now adding to our commercial property portfolio and therefore provides an indication of the expected inherent value of the portfolio.

We expect to be operating around 300 commercial properties by 30 September 2016 and in excess of 450 commercial properties by 30 September 2017. As we have demonstrated by the planned disposal, growing the scale of our commercial property portfolio in itself is not our primary objective, and we will constantly assess opportunities to crystallise and capture value from this estate.

We are delighted to have confirmed the forthcoming appointment of Julia Poulson as Group Property Director. Julia, who has over 25 years property market experience and is currently Property Director for Domino's Pizza Group, will join the Company in August 2016. She will lead the evolution and expansion of the Company's quality commercial property portfolio and oversee investment in our reinvigorated leased and tenanted estate and our growing managed house businesses.

Managed operations

An important element of our strategic plan is to build the capability to operate a significant managed house business and we are pleased with the progress made to date. Greater operational control, complete transparency of all sales and cost lines and the use of consumer insights are giving us increased certainty over the returns achievable from these managed pubs.

Utilising our newly developed segmentation model we have identified that our existing pub estate provides us with a robust pipeline for the future expansion of our managed retail formats and we are confident that the original target, which we set back in May 2015, of a managed house business comprising between 750 and 850 pubs by 2020 is deliverable.

Indicative forecast profile of pubs under managed operation:

Craft Union Pub Company

Our largest managed house operation is the Craft Union business which operated 42 sites at 31 March 2016, now operates 50 sites and which we expect to be operating around 70 sites by 30 September 2016. This business predominantly operates in the north of England, but is beginning to expand south and we expect its offer to appeal nationally. Currently, its offer is wet-led with quality beers, at affordable prices, served in local, well-invested, community pubs. The simplicity of the offer mitigates any execution risk and also limits the required capital investment.

As we enhance our offer and accelerate the rollout programme we would expect these pubs, on average, to generate site EBITDA in the range of £80,000 to £100,000 which, after an average capital investment in a range of £75,000 to £100,000, are expected to yield returns on investment in excess of 15%.

Bermondsey Pub Company

As at 31 March 2016 we operated 16 managed pubs within our Bermondsey business. As of today we operate 21 pubs and expect to have in excess of 25 pubs in this model by 30 September 2016.

These Bermondsey pubs operate under two retail propositions. We have 16 sites operating successfully in our "Meeting House" format, an upper mid-market, mixed food and drink offer. We also have five sites operating under our "Friends and Family" format which is in the value-led segment of mixed food and drink offer. These five sites are not achieving the desired level of returns for the Group and we have decided that this highly competitive retail segment is not a priority for further capital investment. We are currently processing these sites through our asset optimisation and segmentation model to reassess their optimal use and during the second half of the year will implement the proposed changes, which may involve disposal, free-of-tie let, tied tenancy let or an amended retail offer within managed operations.

As we extend our offers within the Bermondsey business we would expect the average capital investment to be in the region of £200,000 with average site EBITDA expected to be in the range of £125,000 to £175,000 and yield returns on investment in excess of 15%.

Enterprise Managed Investments

In order to compete successfully in certain retail segments, pub operators have to be innovators and highly flexible so they can adapt to changing consumer needs. The offer can be complex and so the operational execution risk is heightened, as are the potential rewards for those that do succeed. We have developed a partnership "Expert" model whereby we can work with carefully selected managed house operators to share in the benefits of trading certain high quality establishments in our estate.

Hippo Inns was our first partnership, established with Rupert Clevely, founder of Geronimo Inns, and we currently have four pubs in operation, with a further two openings planned in the coming months. Subsequent partnerships have been agreed with the creation of Mash Inns, a new venture with Laine Pub Group and also with the creation of Frontier Pubs, a venture with Food & Fuel led by Karen Jones, and a pipeline of sites for each venture has been identified. Laine Pub Group will also be providing us with support and advice on the next stage of development of our Craft Union Pub Company.

We aim to announce further partnerships in the second half of the year and expect to have 10 pubs trading under our various relationships by 30 September 2016.

Optimising capital allocation to enhance returns

We have implemented a clear framework with which to determine the appropriate capital allocation to deliver maximum shareholder value.

Enterprise generates significant cash flows from trading activities supplemented by disposals of under-performing assets. We have established a returns-based approach to the utilisation of our future cash flows which seeks to continue our debt reduction programme and provide a balance between additional value enhancing investment opportunities and more immediate returns to shareholders.

Our capital allocation framework will first ensure that all priority calls upon cash flows are satisfied, including corporation tax, interest, scheduled debt amortisation and costs associated with debt refinancing, together with on-going investment in our business. We are committed to reduce our leverage levels steadily over the medium term and, assuming we are on track to satisfy this objective, then any "excess" cash flow can be assessed for alternative use, in particular, investing further in the estate or returning capital to shareholders.

Capital investment

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

Total capital investment in the first half of the year was £30 million (H1 2015: £33 million), of which 50% was directed toward income growth opportunities, up from 42% in the first half of last year. We target Return on Investment (ROI) in excess of 15% on our growth oriented capital expenditure and have achieved an average ROI of 19% on schemes delivered in the last six months.

Allocation of excess cash

Based upon current trading and the good progress the Group is making against our strategic objectives, the Board expects the business to generate £25 million of excess cash flow in the current financial year. Applying our capital allocation framework, we announced on 22 March 2016 that we intend to use this excess cash to fund a buyback of Enterprise shares for cancellation. This programme has commenced and to date we have purchased 3 million shares at an average price of 94.7p.

OUTLOOK

The first week of the second half of the year was inevitably adversely affected by the timing of the Easter period, but since then trading has been broadly in line with our expectations. We forecast trade to benefit from the UEFA Euro 2016 football championship in June and July although we do anticipate a period of disruption to follow the introduction of the Pubs Code. We remain confident that we will deliver positive like-for-like net income growth in our leased, tenanted and commercial estates for the full year.

REGULATORY REVIEW

On 14 April 2016 the Government's response to the Pubs Code and Pubs Code Adjudicator consultation was published and regulations were laid. The resultant legislation was initially due to come into effect from 26 May 2016 with no period of transition. However, on 5 May 2016, the Government withdrew the regulations, citing "technical drafting errors" which need to be addressed. As a result, the legislation will come into effect at a later date which is to be determined.

The legislation introduces a Statutory Code of Practice, to be overseen by an independent Adjudicator for all companies with over 500 pubs operating under tied leased and tenancy agreements in England and Wales. The legislation also includes a tenant's right, under certain circumstances, to change the freely-negotiated commercial terms of their existing agreement to a new Market Rent Only (MRO) compliant contract.

The MRO option enables some occupational tenants to elect to opt-out of the supply tie at certain points or after certain exceptional events during the term of their lease agreement and therefore occupy the premises on a standard commercial property lease, paying rent only. In the event that a tenant elected to invoke this option, whilst our income derived from the supply of tied drinks products would be partially offset by increases in rent, it is possible that our total income from that property would be adversely affected.

While the unintended consequences of the Small Business, Enterprise and Employment Act 2015 will only become clear over time, we are as prepared as we can be for the implementation of the legislation and its potential impact on our business. Preparing for this legislation has been difficult as material late amendments have been, and continue to be, made. We strongly believe that a transition period for implementation of the new Code is required to enable the industry, publicans, the Adjudicator's office and landlord companies to translate this legislation into an effective solution for all.

The impact of the MRO is expected to take effect over five years, as MRO events are largely expected to arise through the cycle of five yearly rent reviews and agreement renewals. Depending on the date that the Pubs Code takes effect, we anticipate that in our 2016 financial year we will have approximately 200 such events that may constitute an MRO event under the new regulatory regime and some 600 such events per year thereafter.

As the underlying intent of the legislation has become clear, so our response has developed. We are confident that our strategic plan provides us with sufficient flexibility to accommodate this legislation and represents the appropriate response to its likely impact.

FINANCIAL REVIEW

Income statement

*presented before exceptional items

We have delivered EBITDA before exceptional items of £142 million, down £2 million compared to the prior year primarily due to our disposal programme.

Leased and tenanted estate like-for-like net income, the primary component of our EBITDA, is derived from our rental income and our net income from the sale of beer and other products to our publicans. Adjusted for the effect of disposals we have seen our like-for-like leased and tenanted net income grow to £169 million (2015: £166 million). In the first six months of the year our like-for-like net income from rents is in line with last year, primarily assisted by growth at rent reviews and the reduction in unplanned business failures, whilst our net income from beer supply has grown by £3 million as pricing and mix benefits, net of discounts, have offset volume decline.

Pre-exceptional administrative costs in the first half are £19 million (2015: £17 million), reflecting the recruitment of additional capability to assist in the delivery of our strategic objectives. We expect current year pre-exceptional administrative costs to be in the region of £39-40 million. The introduction of the new Pubs Code and the associated cost of the Adjudicator's office will bring an additional administrative burden and associated costs which we estimate may be in the region of £1-2 million per annum.

Pre-exceptional net finance costs of £77 million are £2 million lower than the comparative period as a result of our strategy of debt reduction.

Total pre-tax exceptional charges are £17 million (2015: £47 million) comprising a charge of £7 million (2015: £26 million) in respect of debt refinancing charges and £10 million (2015: £21 million) in respect of property charges. The property charges are made up of £6 million (2015: £20 million) arising from the revaluation of assets on transfer to non-current assets held for sale, a loss on the disposal of property, plant and equipment (before goodwill allocation) of £1 million (2015: £3 million profit) and a £3 million (2015: £4 million) charge relating to goodwill allocated to those disposals.

Total tax in the period was a charge of £7 million (2015: £6 million), representing a charge of £11 million (2015: £12 million) on the pre-exceptional trading profit and a credit of £4 million (2015: £6 million) relating to the tax on exceptional items. The effective tax rate on the pre-exceptional trading profits arising in the period is 20.0% (2015: 20.5%), being our estimated effective tax rate for the full financial year.

Adjusted earnings per share (EPS) of 9.2p, was up 0.2p on the comparative period. Basic EPS was 6.6p compared to 0.9p in the prior year, primarily due to lower exceptional charges incurred in respect of debt refinancing and property valuation movements.

Cash flow

Net cash flow from operating activities at £129 million (2015: £120 million), was higher than the comparative period primarily as a result of tax payments being lower by £12 million due to the tax benefits from the prior year refinancing costs and repayments from HMRC in respect of prior year overpayments and capital allowance claims.

Net cash flows from investing activities created an outflow of £3 million compared to an inflow of £1 million in the prior half year, primarily due to lower disposal activity. We reinvest our net disposal proceeds into capital investment in the estate, with the net proceeds received from disposals of £27 million (2015: £34 million) helping fund the £30 million (2015: £33 million) invested in the period.

Financing cash flows of £109 million (2015: £128 million), primarily reflect interest paid of £77 million (2015: £77 million), net loan repayments of £32 million (2015: £21 million) and nil (2015: £28 million) relating to refinancing costs

Balance sheet

Our balance sheet remains strong with a total net asset value of £1.4 billion, represented by £3.7 billion of property assets offset by net debt of £2.3 billion. The property asset valuation is based upon the valuation undertaken as at 30 September 2015. We have been advised by our external valuers that there is no market evidence to suggest that these property valuations would be materially different as at 31 March 2016. A revaluation of the property assets will be completed for the year end accounts as at 30 September 2016.

The share price at 31 March 2016 of 95.5p (2015: 100.3p), which equates to an equity value of £478 million, compares to a net asset value per share of £2.79 (2015: £2.80). We believe that the successful execution of our strategic plan, which will optimise the use and value of our asset portfolio, should lead to a significant reduction of this value differential.

Capital structure

We have a long-term, secure, flexible and tax efficient financing structure comprising bank borrowings, securitised notes and corporate bonds. We are a cash generative business and have, over the past few years, used excess cash flows to reduce debt. During the first half of the current financial year we have used cash generated by the business to meet the scheduled amortisation of securitised notes leaving total net debt at £2.27 billion (2015: £2.39 billion). We expect to use cash generated in the second half of the year to further reduce total net debt and fund the share buyback.

Corporate and convertible bonds

As at 31 March 2016 we had £1,125 million (2015: £1,125 million) of secured corporate bonds outstanding which are non-amortising, secured against ring-fenced portfolios of freehold pubs and attracting fixed interest rates averaging approximately 6.5% (2015: 6.5%).

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

Bank borrowings

At 31 March 2016 our drawn bank borrowings net of Enterprise company cash were £62 million (2015: £69 million). The non-amortising revolving credit facility of £138 million, which is available through to September 2018, has a coupon rate of 3% above LIBOR.

Securitised notes

During the period we have repaid, in accordance with scheduled amortisation, £37 million of the Unique A3 and A4 securitised notes, which leaves £1.1 billion outstanding at 31 March 2016. Operational cash generated from the business has been used to meet this scheduled amortisation of the securitised notes. The notes amortise over a period to 2032 and attract interest rates of between 5.7% and 7.4%. At 31 March 2016 the Group was £72 million ahead of the amortisation schedule of the "class A" securitised notes through early repayment and market purchases.

On 24 March 2016 the noteholders of the Unique securitisation voted in favour of proposals to amend certain aspects of the transaction documentation to permit increased numbers of managed houses within the securitisation property portfolio. With these amendments in place we believe the capital structure can fully accommodate the delivery of our strategic plans.

W S Townsend

17 May 2016

The financial information contained in this half-yearly financial report, which is unaudited, does not constitute statutory accounts in accordance with the Companies Act 2006. The financial information for the year ended 30 September 2015 is extracted from the statutory accounts for that year which have been delivered to the Registrar of Companies, on which the auditors issued an unqualified opinion that did not include an emphasis of matter reference or statements under section 498(2) or (3) of the Companies Act 2006.

a) Basis of preparation

This interim report has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 'Interim Financial Reporting' and reflects the accounting policies set out in the notes to the 30 September 2015 Annual Report and Accounts which have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).

b) Segmental reporting

Following the announcement of the outcome of the Group's strategic review the Group now has three reportable segments being Enterprise Publican Partnerships, Enterprise Commercial Properties and Managed Businesses, however the Group has concluded that the Enterprise Commercial Properties segment and Managed Businesses segment do not meet, either individually or collectively, the quantitative thresholds to constitute reportable segments as defined by IFRS 8. Rather than being shown as 'all other segments' they have been combined within the Enterprise Publican Partnerships segment as the Group is currently in the early stages of estate segmentation and therefore the results are not currently material.

c) Going concern

The Directors have made enquiries into the adequacy of the Group's financial resources including a review of its budget, forecasts, medium-term financial plan, cash flow forecasts, financial covenant calculations and the principal risks and uncertainties.

The Directors have considered the impact of the Small Business, Enterprise and Employment Act 2015 which includes the introduction of a Statutory Code of Practice for the sector and a Market Rent Only (MRO) option for certain leased pubs including the current anticipated timetable for implementation and the alternative actions available to the Enterprise Group in response to the legislation.

Based on the outcome of the above consideration the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis of accounting in preparing the financial statements (see the principal risks and uncertainties section at the end of this report).

d) Exceptional items

The Group has elected to classify certain items as exceptional and present them separately on the face of the Income Statement. Exceptional items are classified as those which are separately identified by virtue of their size or nature to allow a full understanding of the underlying performance of the Group and are explained further in notes 3 to 7 below.

3. Exceptional operating costs

An exceptional charge of £nil (31 March 2015: £nil, 30 September 2015: £1 million) has been incurred. The charge of £1 million in the year ended 30 September 2015 reflects costs incurred in respect of assignment premiums paid.

4. Net loss on sale of property, plant and equipment

During the period, 100 properties (31 March 2015: 133 properties, 30 September 2015: 260 properties) and various other plots of land with a book value of £27 million (31 March 2015: £31 million, 30 September 2015: £68 million) were sold generating gross proceeds of £29 million (31 March 2015: £37 million, 30 September 2015: £82 million) which, after taking account of disposal costs, resulted in an overall loss of £1 million (31 March 2015: profit of £3 million, 30 September 2015: profit of £5 million).

In accordance with IAS 36, purchased goodwill is allocated to pubs disposed of, based on the relative value of the disposal to pubs retained. Accordingly, goodwill of £3 million (31 March 2015: £4 million, 30 September 2015: £8 million) has been allocated to the 100 properties (31 March 2015: 133 properties, 30 September 2015: 260 properties) disposed of during the period.

5. Movements in valuation of the estate and related assets

In respect of assets revalued on transfer to non-current assets held for sale, a total net write-down of £7 million (31 March 2015: £21 million, 30 September 2015: £44 million) has been recorded. Of this net write-down, £1 million (31 March 2015: £1 million, 30 September 2015: £1 million) has been debited to Other Comprehensive Income and £6 million (31 March 2015: £20 million, 30 September 2015: £43 million) has been charged to the Income Statement as an exceptional item. At 31 March 2016, there are 80 properties (31 March 2015: 127 properties, 30 September 2015: 114 properties) included within non-current assets held for sale which have been recorded at the lower of carrying value on transfer to non-current assets held for sale, as assessed at the time of transfer, and fair value less costs to sell.

Following discussions with our external valuers, corroborated by market evidence and after considering the potential effect of the MRO legislation, there is no indication that values recorded in property, plant and equipment in respect of the estate would be materially different as at 31 March 2016. A full valuation of the total pub estate is undertaken at the end of each financial year.

6. Exceptional finance costs

During the period to 31 March 2016 the Group completed a full strategic and legal review of our capital structure to ensure that it did not constrain our ability to execute our operational strategy. A significant output of this review was the consent solicitation approved by the noteholders of the Unique securitisation voting in favour of proposals to amend certain aspects of the documentation to permit increased numbers of managed houses within the securitisation.

Of the total fees incurred in this strategic review, £7 million has been recognised as an exceptional item in the Income Statement and £7 million has been deferred over the remaining life of the Unique securitised bonds.

The exceptional finance cost of £26 million recognised in the prior year related to the partial refinancing of the 2018 corporate bonds and the replacement of the bank facility.

7. Taxation

a) Pre-exceptional tax

The pre-exceptional tax charge of £11 million (31 March 2015: £12 million, 30 September 2015: £25 million) equates to an effective tax rate of 20.0% (31 March 2015: 20.5%, 30 September 2015: 20.5%). The effective tax rate does not include the effect of exceptional items.

b) Exceptional tax

The items below are classified as exceptional due to their size and either because they do not relate to any income or expense recognised in the Income Statement in the same period or because they relate to exceptional items.

Under IFRS, a deferred tax liability has been recognised on the Balance Sheet relating to the estate. On transition to IFRS, the Group elected to apply IFRS 3 retrospectively to acquisitions from 1 January 1999 which led to an increase in goodwill in respect of this deferred tax of £330 million. As this pre-acquisition liability changes due to capital gains indexation relief and changes in the rate of UK tax, the movement is recognised in the Income Statement. The impact of capital gains indexation relief is calculated based on the movement in the Retail Price Index (RPI). A charge of £nil (31 March 2015: £nil, 30 September 2015: £7 million) has been recognised in the Income Statement in relation to capital gains indexation relief, and a deferred tax charge of £2 million (31 March 2015: £2 million, 30 September 2015: £5 million) in relation to other adjustments to capital gains and tax base cost not recognised in the financial statements.

The current rate of corporation tax is 20%, however the UK Government previously announced and substantively enacted a reduction in the rate of corporation tax of 1% to 19% by 1 April 2017 and an additional 1% to 18% by 1 April 2020. In March 2016 the UK Government announced its intention to further reduce the corporation tax rate to 17% by 1 April 2020 however this has not yet been substantively enacted. Where appropriate deferred taxation has therefore been calculated based on the current substantively enacted rate of 18% resulting in an exceptional tax credit of £3 million (31 March 2015: £nil, 30 September 2015: £nil).

A deferred tax credit of £2 million (31 March 2015: £4 million, 30 September 2015: £33 million) relating to the movements in valuation of the estate and related assets and net profit/loss on disposal of properties has been recognised in the Income Statement.

An exceptional tax credit of £1 million (31 March 2015: £4 million, 30 September 2015: £10 million) has been recognised in relation to all other exceptional items in the Income Statement. The total exceptional tax credit is therefore £4 million (31 March 2015: £6 million, 30 September 2015: £31 million).

c) Tax recognised in Other Comprehensive Income

In addition to the exceptional tax credit of £3 million (31 March 2015: £nil, 30 September 2015: £nil) recognised in the Income Statement in relation to the restatement of deferred tax related to movements in the valuation of the estate and related assets for the change in UK tax rate, a further £20 million (31 March 2015: £nil, 30 September 2015: £nil) has been recognised in Other Comprehensive Income in this respect.

8. Earnings per share

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

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

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

For the period ended 31 March 2016, the adjustment for the convertible bonds is assessed as being dilutive (31 March 2015: anti-dilutive, 30 September 2015: anti-dilutive) which has resulted in an adjustment to profit in the calculation of diluted earnings per share of £2.6 million (31 March 2015: £nil, 30 September 2015: £nil) for the post tax interest cost associated with the convertible bonds and an adjustment to the weighted average number of equity shares in issue during the period of 50.8 million shares (31 March 2015: nil, 30 September 2015: nil).

9. Additional cash flow information

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

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

10. Financial instruments

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

11. Related party transactions 

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

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

At 31 March 2016, the Group had entered into contractual commitments to purchase £7 million (31 March 2015: £7 million, 30 September 2015: £5 million) of property, plant and equipment.

13. Seasonality of operations

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

14. Share buybacks

The Group has initiated a new share buyback programme of up to £25 million of the issued share capital.

A financial liability has been recognised as the Group has entered into a contingent agreement which requires the Group to purchase shares acquired by a third party up to £5 million.

On 31 March 2016 the Group purchased for cancellation 100,000 shares for which the highest price paid was 96.50 pence per share and the lowest price paid was 95.00 pence per share.

To date the Group has purchased 3 million shares at an average price of 94.7p and immediately cancelled them.

15. Post balance sheet events

Subsequent to the balance sheet date, on 16 May 2016, the Group signed an unconditional contract for the sale of a portfolio of 22 properties for £20 million, at a yield of 6.7% and a premium to book value of 9%.

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

The Directors of ETI are as listed in the Enterprise Inns plc Annual Report for the year ended 30 September 2015.

By order of the Board

W S Townsend N R Smith

Chief Executive Officer Chief Financial Officer

16 May 2016 16 May 2016

ADDITIONAL INFORMATION

Principal risks and uncertainties

Full detail of the Group's assessment of current and future risks, controls and assurances available is set out in the 2015 Annual Report and Accounts together with a summary of the resulting principal risks and uncertainties and their mitigating factors. This section summarises the key changes in those risks, uncertainties and mitigating factors in the half year period.

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

While there have been no new principal risks and uncertainties identified in the period, the significant changes or updates to the previously identified risk and uncertainties are:

Regulation of the tied pub model

On 14 April 2016 the Government's response to the Pubs Code and Pubs Code Adjudicator consultation was published and regulations were laid. The resultant legislation was initially due to come into effect from 26 May 2016 with no period of transition. However, on 5 May 2016, the Government withdrew the regulations, citing "technical drafting errors" which need to be addressed. As a result, the legislation will come into effect at a later date which is to be determined.

The legislation introduces a Statutory Code of Practice and includes a tenant's right, under certain circumstances, to seek a new Market Rent Only (MRO) compliant contract that will enable some occupational tenants to elect to opt-out of the supply tie and therefore occupy the premises on a standard commercial property lease, paying rent only. As a consequence of this it is possible that our total income from that property would be adversely affected.

Mitigation process:

While the extent of the impact of these changes is unknown at this time, we are as prepared as we can be for the implementation of the legislation and its potential impact on our business. In addition the impact of the MRO is expected to arise over five years, as MRO events are largely expected to arise through the cycle of five yearly rent reviews and agreement renewals.

Implementation of new strategy

The implementation of the new strategy continues in line with the Group's expectation. However throughout the implementation there will remain a risk that there is not enough expertise, resource or time to build the necessary support infrastructure to successfully execute the new strategy in the desired timeframe or that the assets are not allocated to the most optimum area, impacting the effectiveness of the strategy.

Mitigation process:

The Group continues to develop the necessary infrastructure to support the new strategy, including the recruitment of high quality, experienced individuals into key areas of the business, with a number of key individuals successfully recruited in the period. In addition, the Group utilises outsourced experienced resource where required.

The Group has been operating an asset optimisation assessment process to ensure that all options for the use of Group assets are reviewed in detail and the assets allocated to the most optimum area. The Group will continue to review the performance of the assets once they have been operating for a period in their asset optimised segment to ensure they are generating the returns that were expected.

Liquidity risk

The Group continues to have a flexible financing structure comprising bonds issued from the Unique securitisation (securitised bonds), corporate bonds issued by the Company and bank borrowings. However, the primary liquidity risks are the requirements to meet all on-going finance costs, repay the principal amounts of the securitised borrowings as they amortise and the corporate bonds as they fall due, ensure there are sufficient funding facilities in place to enable the business to satisfy all cash flow requirements and stay within the financial covenants associated with the financing structure. Other than the on-going amortisation of the securitised bonds, the next scheduled bond repayment relates to £350.5 million of corporate bonds, maturing in December 2018.

Mitigation process:

Throughout the period the Group has tested the financial covenants and the Board has regularly reviewed detailed financial forecasts to ensure there is sufficient headroom on all covenants and adequate cash available to meet the requirements of the Group.

The Group undertook a consent solicitation exercise during the period, resulting in the A class noteholders of the Unique securitisation voting in favour of proposals to amend certain aspects of the transaction documentation to permit the increased operation of managed houses within the securitisation property portfolio. With these amendments in place, we believe the capital structure can fully accommodate the delivery of our strategic plans.

Independent Review Report to Enterprise Inns plc

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2016 which comprises the Group Income Statement, Group Statement of Comprehensive Income, Group Balance Sheet, Group Statement of Changes in Equity, Group Cash Flow Statement, and the related notes 1 to 15. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

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

Directors' Responsibilities

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

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

Our Responsibility

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

Scope of Review

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

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2016 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

Birmingham

16 May 2016