Greene King Regulatory News (GNK)

PRELIMINARY RESULTS FOR THE 52 WEEKS TO 29 APRIL 2018

HIGHLIGHTS2

Successful customer investment and cost mitigation programmes

· Pub Company like-for-like (LFL) sales -1.2% excluding the impact of snow, up 20 bps since the half year; improved customer service scores

· Driven by investment in value, service and quality (VSQ) and good Christmas / Easter trading

· £44m cost savings delivered through mitigation programme and Spirit synergies

· Brand optimisation programme delivered 25% ROI; Fayre & Square fully debranded

· Pub Partners LFL net profit +0.4%; Brewing & Brands revenue +7.4%

Resilient financial metrics

· Strong cash generation; £89.9m post core capex & dividends, more than covers debt amortisation

· Net debt to EBITDA1,2 4.2x

· Well invested and located pub estate; 82% freehold or long leasehold

· Dividend per share3 of 33.2p; long-term track record of attractive, sustainable dividend

Strategic priorities to continue driving momentum

· Improve underlying sales growth in Pub Company

· Develop a more efficient and effective organisation

· Further strengthen the capital structure

Current trading and outlook

· Pub Company LFL sales +2.2% over the last eight weeks, aided by good weather and sporting fixtures; Pub Partners and Brewing & Brands trading in line with expectations

· Strong World Cup trading; 59% of consumers expect to watch an England game at the pub

· Expect £45-50m cost inflation; £30-35m cost savings and targeting Pub Company LFL growth

Rooney Anand, chief executive officer

"We made good progress improving the performance of the business during the second half of the year, despite a challenging trading environment. Our investment to improve the customer experience in our pubs and the focus on our strategic priorities are beginning to pay off. Positive momentum, both in terms of trading and customer satisfaction, is returning to our business.

"While it is still early days, this positive momentum has continued into the new financial year, aided by good weather and popular sporting events. We remain focused on continuing to drive top line growth, developing a more efficient organisation and further strengthening our capital structure to deliver long-term value creation for our shareholders.

"We expect the trading environment to remain challenging for some time, but we strongly believe people will continue to choose the great British pub as the place to enjoy time with friends and family."

FOR FURTHER INFORMATION

Further information is available at www.greeneking.co.uk or on Twitter using @greeneking

There will be a presentation for analysts and investors at 9.30am at Deutsche Bank, 1 Great Winchester St. London, EC2N 2DB.

The conference will also be accessible by phone: 0808 109 0700; UK Toll Free; +44 (0) 20 3003 2666 Standard International Access. Conference ID: Greene King

HEADLINE GROUP RESULTS

NOTES FOR EDITORS

· Greene King was founded in 1799 and is headquartered in Bury St. Edmunds, Suffolk. It currently employs around 39,000 people across its main trading businesses; Pub Company, Pub Partners and Brewing & Brands

· At the end of the financial year, Greene King operated 2,855 pubs, restaurants and hotels across England, Wales and Scotland, of which 1,745 were retail pubs, restaurants and hotels, and 1,110 were tenanted, leased and franchised pubs. Its leading retail brands are Greene King Local Pubs, Chef & Brewer, Farmhouse Inns and Hungry Horse

· Greene King also brews quality ale brands from its Bury St. Edmunds and Dunbar breweries. Its industry-leading portfolio includes Greene King IPA, Old Speckled Hen, Abbot Ale and Belhaven Best

CHAIRMAN'S STATEMENT

OVERVIEW

Greene King is a strong business with an excellent track record of delivery and resilience in tough market conditions. This has been a challenging financial year with pressures on both revenue and margins as consumer confidence remains fragile and a number of industry-specific input costs continue to rise ahead of headline inflation. Moreover, adverse weather in the second half and stronger competition across the year have given us additional challenges. I am pleased that the investments we made in the customer offer and other actions taken in the second half are starting to pay off and that underlying trading is improving. We are fully focused on delivering our aim of building the best pub and beer company in Britain.

PERFORMANCE

Group revenue was down 1.8% to £2,176.7m and group operating profit before tax, exceptional and non-underlying items was down 9.3% to £373.1m. Group profit before tax rose by 6.8% to £197.5m while group profit before tax, exceptional and non-underlying items was down 11.2% to £243.0m. Adjusted earnings per share was down 11.4% to 62.7p.

DIVIDEND

While trading this year was below our initial expectations, the board has recommended a final dividend of 24.4p, reflecting our confidence in the long-term prospects of the business. This takes the total dividend for the year to 33.2p, in line with last year. We have a long-term track record of covering our debt amortisation, core capital expenditure and dividend from our free cash flow and the board continues to target a dividend covered approximately two times by earnings.

PEOPLE

We have 39,000 talented and hard-working team members who are responsible for the continued success of the business. Under the leadership of our strong management team, they responded well to the challenges we are experiencing in the market place and, supported by the £10m investment into value, service and quality, helped to deliver an improvement in underlying trading in the second half of the year. I should like to record our thanks for their effort and commitment.

BOARD CHANGES

In February this year, Richard Smothers joined the board of Greene King as chief financial officer in succession to Kirk Davis. Richard has 20 years of experience at blue-chip retail and consumer-focused companies in senior financial roles. He is a strong addition to both the board and executive team. I should like to record the board's thanks to Kirk for his contribution to Greene King, particularly during the integration of Spirit.

LOOKING AHEAD

We are pleased with the most recent trading performance although we are aware that we have benefited from better weather and sporting events. Building pub brands that customers admire remains central to our strategy and we are focused on providing the customer with offers that deliver compelling value, service and quality. We shall maintain our discipline in investing in both our estate and our people to generate long term value, while continuing to manage our capital structure prudently. Our aim is that Greene King will emerge from the current challenging environment stronger than ever and I look forward to reporting on our progress next year.

Philip Yea

Chairman

27 June 2018

CHIEF EXECUTIVE'S REVIEW

Greene King has shown its resilience and made good progress on key initiatives which drove an improvement in the momentum of the business during a year of unprecedented cost inflation, weak consumer confidence and increased competition. Snowy weather impacted trading in the second half of the year but our £10m VSQ customer investment helped to improve underlying Pub Company trading. Pub Partners delivered another year of increased LFL net profit while Brewing & Brands grew revenue by 7.4% in a declining beer market. We have a strong strategy in place to continue driving momentum in the top line, to mitigate costs and to deliver value to our customers, our employees, our shareholders and our communities.

PERFORMANCE SUMMARY

Total revenue was down 1.8% to £2,176.7m as a result of the challenging market conditions and poor weather. EBITDA1,2 was £486.6m, down 7.2% and operating margin1,2 decreased 1.5%pts to 17.1%, reflecting the net cost inflation seen in the year as well as the VSQ investment in Pub Company. Profit before tax, exceptional and non-underlying items1,2 was £243.0m, in line with market expectations.

Pub Company revenue was £1,767.7m, down 2.7% due to the tough trading conditions and the 4.4% decrease in the average number of pubs trading, while average weekly take (AWT) was up 1.6% to £19.6k. Pub Company EBITDA1,2 was down 10.0% to £362.9m and operating profit margin1,2 was down 1.8%pts to 15.2% due to the increased cost pressures, as well as the VSQ investment. 

Pub Partners revenue was £193.9m, down 2.5% on last year, driven by the 4.7% decrease in average pubs trading. EBITDA1,2 was down 1.7% to £101.3m while average EBITDA1,2 per pub was up 3.1% to £88.9k, reflecting our continued estate optimisation.

Brewing & Brands achieved strong revenue growth, up 7.4% to £215.1m driven by increased sales from free trade and exports. EBITDA1,2 was down 0.6% to £36.0m and operating profit margin1,2 was down 1.2%pts to 14.3%, reflecting the change in product and channel mix.

Free cash flow before disposal proceeds was down 24.8% to £89.9m and our cash generated more than covers our debt service obligation, core capex expenditure and dividend payments.

Adjusted earnings per share1,2 was down 11.4% to 62.7p and the board has recommended a dividend per share of 33.2p, in line with last year.

The businesses generated a strong return on capital employed (ROCE) of 8.5% which remains comfortably above our weighted average cost of capital (WACC).

TRADING ENVIRONMENT

The current trading environment is still characterised by subdued consumer confidence, intense competition and rising costs.

Consumer confidence improved slightly since the lows of December 2017, but remains negative (source: GfK) and consumers expect to continue reducing leisure spend (source: Deloitte Consumer Tracker Q1 2018). Consumers are keeping a keen eye on costs and continue to expect more for their money. Other aspects of their behaviour are changing faster than ever. Spirit-based drinks and breakfast are growth areas for pubs, as are event-driven customer occasions, both in terms of key calendar events and in terms of our customers' own events. Health and diet remain key trends and consumers also favour brands associated with local and fresh produce. Quick service and convenience are also important to the consumer and have driven technological innovation such as Order and Pay apps and the rise of delivery services.

Competition for market share is intense, particularly in the food-led sector, with the overall number of restaurant outlets in the UK still on the rise, up 16.7% over the last five years, and food-led pub numbers up 4.7%. Total pub numbers reduced by 10.3% however, driven by a 16.9% reduction in drink-led pub numbers since 2012 (source: CGA & Alix Partners Market Growth Monitor April 2018). Demand for drink-led pubs is holding up though with LFL sales growth of 1.7% over the last 12 months versus a decline of 0.4% in pub restaurants and a 0.1% decline in restaurants (source: Coffer Peach Business Tracker April 2018).

The cost environment remains challenging and while we succeeded in mitigating £44m of the £60m gross inflation in the year, we expect there to be further cost inflation of around £45-50m in the new financial year, driven by the National Living Wage, sugar tax, utility taxes and business rates. Through the execution of our strategy outlined below we are targeting a return to LFL sales growth in the new financial year supported by additional cost mitigation of £30-35m. Through our planned cost savings programme, we will seek to increase our agility and competitiveness and be more effective at capturing sales opportunities in our main markets. 

STRATEGY

Our overall vision is to be the best pub and beer company in Britain and our mission is to be the best for our customers, our employees, our shareholders and our communities. The five key pillars of our long-term strategy are to:

1. Build brands that customers admire

We will focus on four brands going forward.

a. The Greene King pub brand has significant untapped provenance based on 219 years of history and we have redeveloped the brand's proposition to reflect its ambition to be 'the best pub in the neighbourhood'. We are extending the brand into more food-led pubs where appropriate and, in addition, both Pub Partners and Brewing & Brands will continue to play an important role in supporting the delivery of the Greene King brand proposition through our branded tenanted and leased pubs and through our beer range.

b. Chef & Brewer is our country pub brand with its focus on both the 'chef' and the 'brewer' essential for success. It caters effectively for customers looking to refuel on a casual basis, as well as customers treating their visit as a special occasion. 

c. Farmhouse Inns is our out-of-town, food-led brand where families and friends can 'feast together' from either our carvery offer or our main menu. It is an extremely popular brand with customers, as shown by the latest MCA Pub Brand Monitor in which customers placed Farmhouse Inns first across all large pub brands for food quality, drink quality, friendly service, menu choice and value for money.

d. Hungry Horse offers 'generous value, every day'. It is located in both local communities and in destination sites and is able to cater for a broad set of customer occasions ranging from adult football watching to family dining due to the average pub size and internal segmentation of the pub.

All our other pub brands have either been replaced (e.g. Fayre & Square) or will be subsumed into these four brands over the course of the new year. This emphasis on four brands will help to deliver significant business simplification and efficiency improvements while at the same time allow us to continue tailoring a pub's offer to local customer needs. Using this simpler brand structure will help us keep a tighter focus on the four brand propositions and drive up Net Promoter Scores (NPS) and customer satisfaction.

 2. Provide offers that deliver compelling value, service & quality

Increased consumer expectations, combined with the growth in alternative dining opportunities such as takeaway and delivery, mean that all eating and drinking out providers need to deliver more compelling experiences to customers. We continue to monitor the success of our £10m customer investment as we look to strike the right balance between the inherent value of a pub brand and the requirement to target specific customers through promotional activity. We increased the emphasis on delivering better service this year, incentivising pub teams on TripAdvisor scores, guest satisfaction reviews and mystery guest scores which all improved against the previous year. We also increased the frequency of food quality benchmarking and we are increasing our focus on drink quality with an integrated end-to-end plan covering all three of our businesses.

3. Develop people who exceed expectations

Running pubs is primarily a people business and having a team that not only meets customer expectations, but consistently exceeds them, will stand us apart from our peers and create material competitive advantage. Our 39,000 employees will start to see changes in the amount, the quality and the effectiveness of their training programmes over the next two to three years. We are addressing our recruitment capabilities and skills, investing in improving core management and front-line service skills, and focusing on further developing leadership skills throughout the business.

4. Maintain a well located and invested estate

Our pub estate is 82% freehold or long leasehold and we are committed to ensuring in both Pub Company and in Pub Partners that the core estate is well invested (on a five to six year cycle) and that we constantly improve the overall quality of the estate. We spent £193m in the financial year on our estate, covering core capital expenditure, new builds, brand conversions and freehold reversion purchases. We expect to spend between £180m and £210m in the new financial year. All investment options create value for shareholders including delivering normalised core capital investment returns of 25% and new build returns of 17%. Our new build programme, which has previously been focused on Farmhouse Inns, will diversify to include lodges, Chef & Brewer and specific formats within the Greene King estate. In addition, we will continue to make a small number of single site acquisitions and opportunistic freehold reversions. The other important element of our strategy is to dispose of non-core pubs. This has been a successful programme to date, having sold 295 pubs over the last three years raising proceeds of £288m at an average multiple of 14x EBITDA. These pubs are mainly tail pubs that we do not believe have a long-term future within Greene King, but are also 'gold bricks' where a buyer places a materially higher alternative use value on a pub.

5. Manage our finances prudently

We have a long-term track record of generating enough cash, pre-disposals, to cover our debt servicing obligations, our core capex requirements and our attractive dividend. Our balance sheet and cash flow management is aimed at continuing this into the future. As a consequence, we believe a net debt to EBITDA ratio of between 4 and 4.5x is the right range for our predominantly freehold estate and strong cash conversion.

PRIORITIES FOR THE NEXT YEAR

To help us deliver on the five key pillars of our long-term strategy, we have three near-term priorities:

1. Improve underlying sales growth

We are focused on delivering improved LFL sales and ultimately market outperformance. We will not drive LFL sales at any cost but seek to strike the right balance between sales growth and margin delivery. Some of the key activities over the next three years to help deliver better LFL sales include:

· clearer brand and price propositions

· industry-leading VSQ

· investment in becoming the pub leader in digital

· optimising our labour deployment

· maximising event-driven sales opportunities and

· further estate quality improvement

2. Develop a more efficient and effective organisation

We will continue to operate a diversified but integrated business model covering managed pubs, tenanted pubs and brewing. Within this, given the ongoing industry cost pressures and the fast pace of consumer change, we have to become a more efficient and effective organisation. Actions to deliver this include:

· further cost savings programmes

· a realignment of the Pub Company support centre to match the simpler brand portfolio

· a simplification of our business systems and processes

· improved employee engagement to help drive better productivity

3. Further strengthen our capital structure

We have a strong and flexible balance sheet supported by our relentless focus on generating enough cash, pre-disposals, to cover our debt service obligations, our core estate capex requirements and an attractive dividend to our shareholders. To further strengthen our capital structure and maintain the delivery of this strategy, we will use our targeted leverage levels to continue to invest in growth opportunities while looking to complete the refinancing of the Spirit debenture. Our Spirit refinancing plan will both reduce the overall cost of debt and increase the flexibility within our debt platform. Strengthening our capital structure will help ensure that, in the challenging trading environment, we can continue to pay attractive dividends and return dividend cover to around 2x in the longer-term.

PEOPLE

We spent over £3m in training and development in the year. We also launched our new online training platform, available to all our 39,000 employees, enabling company-wide training on areas such as safety and compliance, as well as more reactive and targeted training programmes, such as early stage inductions and social media training. Around 150,000 courses have been completed on the platform so far. We also launched Wellbeing Week to raise awareness about physical and mental health in the workplace and we launched networks for women and members of the LGBT+ community.

Our continued investment in training and development, together with our competitive employee benefits scheme, has led to improved engagement levels and a steady rate of turnover. Our average length of service for pub general managers is 7.4 years and for kitchen managers it is 4.5 years. We will seek to improve the future retention rate through the training initiatives detailed above, especially a quality induction programme, and greater engagement with our employees through digital HR and ongoing focus on our Winning Ways which we launched last year.

The apprenticeship scheme has now supported over 10,000 apprentices with 92% of our pubs having benefited from the programme and 71% of our pubs with an apprentice currently in training. The scheme continues to attract high levels of applicants and 2,700 apprentices joined the scheme this year. We were pleased to win awards from the National Apprenticeship Service (Top 100 Apprenticeship Employer), East of England Apprenticeship Awards (Macro Employer of the Year), and the Training Journal (Best Apprenticeship Programme) in recognition of our investment in apprentices.

COMMUNITY

Pubs are at the heart of communities across the country and are a force for good in those communities.

We are extremely proud of our national charity partnership with Macmillan Cancer Support, which to date has raised over £4m with record fundraising results of over £1m over the last year.

We ran eight Get into Hospitality programmes this year in association with The Prince's Trust and were able to celebrate one of our first Prince's Trust recruits going on to complete our apprenticeship programme. A further 20 Prince's Trust recruits are currently enrolled for an apprenticeship with Greene King. 

In addition, this was our fifth year donating to the Pub is the Hub Communities Fund, supporting rural pubs that want to diversify their services for the benefit of their local communities.

PUB COMPANY

1. Before exceptional and non-underlying items

Total Pub Company LFL sales were -1.7% and underlying LFL sales, adjusting for the impact of snow, were -1.2%. Slower food sales was the main driver of the negative LFL sales, partially offset by positive drink and accommodation sales growth. AWT was up 1.6% to £19.6k, reflecting ongoing estate quality improvement.

Operating profit was £268.2m, 13.0% or £39.9m lower than last year and the operating margin was down 1.8%pts to 15.2%, driven primarily by external cost pressures. The fall in operating profit was due to the 4.4% reduction in the size of the estate, the fall in LFL sales and the net cost inflation in the year.

In response to the challenging environment and negative LFL sales performance in the first half of the year, we took the decision to invest £10m in improving our customer offer. The investment was targeted at three main areas:

1. Strategic price investment in the value segment

2. 'Acting Local' or empowering general managers to invest in in-pub events, such as high profile pay-per-view boxing and live music nights

3. Effective labour redeployment at key customer occasions

The investment has shown early signs of success, reflected in the improvements in underlying LFL sales from -1.4% at the half year to -1.2% and in guest experience metrics including TripAdvisor, Guest Satisfaction and Mystery Guest service scores. 96% of our pubs in England and Wales received four or five star ratings this year in food standards. We will draw on the outcomes of the three initiatives to target further improvements in the offers of our four brands and continue to drive LFL sales momentum.

We laid solid foundations for growth in our digital offering. Our Season Ticket app is live in 750 pubs following an accelerated roll out in time for the World Cup. The app allows users to find upcoming sports fixtures and their nearest Greene King Season Ticket pubs and enables personalised offers and loyalty points. We signed up a total of 100,000 Season Ticket users in the run up to the World Cup. Our Order and Pay app is available at 32 Greene King and Hungry Horse pubs and has had 33,000 downloads so far. We are learning from these trial sites to improve the app as we look to roll it out further going forward. In addition, we launched a new platform onto which all of our pub websites were transferred, taking the total number of websites we run down from over 500 to 80. It provides us with a cost-effective, user-friendly platform which will better support Greene King's digital ambitions.

We have an excellent quality estate in Pub Company, achieved through the active management of our portfolio, primarily selling pubs at the tail of our portfolio and opportunistically disposing of a small number of high-end pubs. We disposed of 38 managed pubs in the year, raising over £84m in proceeds, which was above expectations due to the sale of three high value leasehold pubs. There were five internal transfers of managed pubs into Pub Partners where we believe the tenanted model will drive greater returns on investment. Meanwhile, we completed nine new builds in the year, mostly under the Farmhouse Inns brand.

Our disciplined approach to investment in our estate saw £96m of maintenance and development capex deployed over the year, maintaining our 5-6 year core capital investment cycle. We spent £27m on 106 brand conversions and have now fully debranded Fayre & Square, in line with our strategy of reducing exposure to the value food segment. Our brand optimisation programme continues to generate returns of around 25%.

PUB PARTNERS

1. Before exceptional and non-underlying items

In Pub Partners we have a high quality portfolio of 1,100 mainly drink-led pubs. It generates significant cash for the group, adds purchasing scale, enhances the Greene King brand and provides flexibility in our estate planning.

Pub Partners revenue was down 2.5% to £193.9m due to the 4.7% decrease in the average number of pubs trading. Rental income grew and offset a decline in LFL beer volumes. Operating profit was down 1.5% but operating profit margin was up 0.4%pts at 47.1% benefiting from estate optimisation, an increase in turnover agreements and cost savings initiatives.

We have a clear aim to be the preferred partner for the best independent operators in the market and therefore have an absolute focus on helping our tenants grow sustainable, successful businesses.

This starts with maintaining the best tenanted, leased and franchised pub estate. We have an excellent quality Pub Partners estate which we have achieved through active management of the portfolio and disciplined capital allocation. We sold 50 sites in the Pub Partners portfolio this year, raising £35m in disposals proceeds, and we invested £26m in the core Pub Partners estate. In addition, the estate benefited from the internal transfer of five managed sites from Pub Company.

We then provide our operators with the right agreement for them. While our most common agreement is our traditional tenancy agreement, we also have a number of alternatives to suit particular licensees and particular pubs. These include commercial free-of-leases, tied leases, franchises and an increasing number of turnover agreements. The range and flexibility of our agreements has enabled us to agree new terms in response to the majority of Market Rent Only (MRO) requests and we have just four MRO agreements in place as a result.

Our support to licensees in driving footfall and maximising profit has resulted in average EBITDA per pub of £88.9k this year, an increase of 3.1%. We are providing 14% of Pub Partners' pubs with food through the Greene King supply chain and have 142 pubs signed up to our digital services package for online purchasing. In addition, 190 of our operators currently use our Sports Club package, delivering customer promotions around sports events. 

Finally, investment in training, for both the licensees and the support system, is also critical to the success of Pub Partners. Over 2,000 delegates attended training programmes over the year, driving a further improvement in the average term of our licensees to 5 years and 11 months. Last year Yvonne Fraser was named Business Development Manager (BDM) of the year at the Association of Licensed Multiple Retailers awards, becoming the fourth winner from Pub Partners in the last five years of this award, and reflecting our ongoing commitment to investment in our BDMs.

BREWING & BRANDS

1. Before exceptional and non-underlying items

In Brewing & Brands, our proven long-term strategy is to build consumer loyalty to Greene King through consistent investment in our core ale brands and innovative range of seasonal and craft ales. Through this we continue to win market share and contribute to Greene King's strong returns and cash generation.

Own-brewed volumes (OBV) were down 1.2% with strong growth in free trade and exports offset by declines elsewhere in the on-trade. Greene King outperformed the total ale market which was down 3.7%, thereby increasing its share of the total ale market by 0.2%pts (source: BBPA).

Operating profit was down 1.0% and operating profit margin was down 1.2%pts, driven by the increased cost of goods sold and changes in sales channel and customer mix, including the disposals made over the year across the estate.

Greene King's core brands maintained their UK market leading positions: Greene King IPA continues to be the fastest selling top 10 cask ale brand in the on-trade; Abbot Ale is the number one premium cask ale brand and the fourth largest ale brand in the UK; Old Speckled Hen is the number one premium ale in the UK; Old Speckled Hen Gluten Free is the fastest selling gluten free ale in Britain; and Belhaven Best remains the number one draught ale in Scotland and number four keg ale in the UK. East Coast IPA also had a strong year, with total volume growth of 39%, making it one of the top 15 fastest growing keg ales in the UK.

The success of our brands is supported by our dedicated brand investment programme. Greene King IPA continues to be the official beer of England Cricket and the official sponsor of the Greene King IPA Rugby Championship. A new contemporary brand identity was fully rolled out for Abbot Ale Reserve, reinforcing the quality and premium attributes of the brand. We launched our largest ever new brand campaign for Old Speckled Hen: our Seek a Richer Life television and digital campaign reached over 7.5m consumers over its first six weeks. The Belhaven brewery celebrates its 300th birthday in 2019 and we will pursue a high profile PR and marketing campaign to mark the occasion and drive another year of growth for the brand.

Once again our beers won multiple awards over the year. We received a Grand Gold prize at the Monde Selection Awards 2018 for Vintage Heritage Pale Ale, a gold award for Belhaven Twisted Mango IPA, and silver for Craft Academy's Big Bang. In addition, Vintage Heritage Fine Ale was shortlisted for the Monde Selection Awards' Prize of the Jury 2018 for the best product in all beer, water and soft drinks categories. We were particularly pleased to be the first UK company to receive the Crystal Prestige Trophy, which is awarded to businesses that have received Grand Gold, Gold, Silver or Bronze Awards for 10 consecutive years.

OUTLOOK

Over the first eight weeks of the new financial year LFL sales in Pub Company were up 2.2%, benefiting from better weather and strong sporting fixtures as well as the investments we made in the second half of the year on value, service and quality for our customers. We are continuing to see strong drink sales growth, achieving record Pub Company drink sales in May, and we are starting to see the benefits from the World Cup, as more than half of consumers expect to watch an England game at the pub. Pub Partners and Brewing & Brands are trading in line with expectations. For the new financial year we expect £45-50m cost inflation and we are targeting £30-35m cost savings and Pub Company LFL sales growth.

Rooney Anand

Chief executive officer

27 June 2018

1. Adjusted measures exclude the impact of exceptional and non-underlying items as detailed in note 3 of this statement.

2. The directors use a number of Alternative Performance Measures (APMs) that are considered critical to aid the understanding of the group's performance. APMs are explained on page XX of this announcement.

FINANCIAL REVIEW

INCOME STATEMENT

1. Adjusted measures exclude the impact of exceptional and non-underlying items.

Revenue was £2,176.7m, a decline of 1.8% compared to the prior year reflecting lower Pub Company LFL sales, somewhat impacted by snow, and the impact of the non-core pub disposal programme. Pub Company was the biggest driver, with revenue down 2.7% to £1,767.7m. Non-core disposals helped AWT per pub rise 1.6%. Pub Company business accounts for 81% of group revenue. Total revenue in Pub Partners was £193.9m. Tenanted and leased AWT per pub increased 2.4% and average EBITDA per pub grew 3.1% due to the continuing improvement in the quality of the pub estate. Brewing & Brands grew revenue 7.4% to £215.1m due to increasing the number of new customers.

Operating profit before exceptional and non-underlying items was £373.1m, which was a decline of 9.3% on the prior year. Group operating profit margin before exceptional and non-underlying items was down 1.5%pts to 17.1%, reflecting a reduction in both Pub Company margin from 17.0% to 15.2% and Brewing & Brands margin from 15.5% to 14.3%. The reduction in the Pub Company margin reflected the group's ongoing investment in value, service and quality, alongside significant inflationary increases in cost of goods sold and labour, which were not fully mitigated through management actions.

Net interest costs before exceptional and non-underlying items were £130.1m, 5.7% lower than last year due in part to the impact of refinancing activities in the year.

Profit before tax, exceptional and non-underlying items was £243.0m, 11.2% lower than last year.

Basic earnings per share before exceptional and non-underlying items of 62.7p was down 11.4%. Statutory profit before tax was £197.5m, up 6.8% on last year.

TAX

The effective rate of corporation tax (before exceptional and non-underlying items) of 20.0% is higher than the standard UK corporation tax rate of 19.0% due to non-qualifying depreciation, compared to 19.9% in the previous year. This resulted in a charge to operating profits (before exceptional and non-underlying items) of £48.6m (2017: £54.3m). The exceptional and non-underlying tax credit of £13.6m (2017: £21.1m) is discussed under exceptional and non-underlying items.

The group generates revenue, profits and employment that deliver substantial tax revenues for the UK government in the form of VAT, duties, income tax and corporation tax. In the year, total tax revenues paid and collected by the group were £580m (2017: £580m). The group's tax policy, which has been approved by the board, has the objective of ensuring that the group fulfils its obligations as a responsible UK taxpayer.

On 16 October 2017 agreement was reached with HMRC regarding an internal property arrangement, the group's only material unresolved historical tax position. As a result, the group settled tax of £9.4m and interest of £2.1m during the year.

EXCEPTIONAL AND NON-UNDERLYING ITEMS

Exceptional and non-underlying charges were £31.9m, consisting of a £56.1m charge to operating profit, a £10.6m credit to finance costs and a net exceptional and non-underlying tax credit of £13.6m. Items recognised in the year included the following:

1. A £5.6m charge for legal, professional and integration costs following the Spirit acquisition and in relation to group refinancing activities and defending uncertain tax positions.

2. A net impairment charge of £70.4m (2017: £58.6m). Of this total, a net £63.3m charge was made against the carrying value of pubs and other assets.

3. A net surplus on disposal of property plant and equipment of £19.7m (2017: £3.4m).

4. The £10.6m credit for exceptional and non-underlying finance costs includes a £19.2m gain in respect of the mark-to-market movements in the fair value of interest rate swaps not qualifying for hedge accounting, £11.6m costs recycled from the hedging reserve in respect of settled interest rate swap liabilities and a £3.0m gain on the settlement of financial liabilities.

5. The exceptional and non-underlying tax credit of £13.6m consists of a £0.2m tax charge on exceptional items, a £2.9m tax credit on non-underlying items, a £3.1m tax charge in respect of prior periods and a £14.0m tax credit in respect of the licensed estate.  

CASH FLOW AND CAPITAL STRUCTURE

1. Adjusted EBITDA represents earnings before interest, tax, depreciation, amortisation and exceptional and non-underlying items

2. Adjusted measures excluding the impact of exceptional and non-underlying items

The group continued to be highly cash generative with free cash flow of £89.9m, after funding core capital expenditure of £132.2m and dividend payments of £102.9m. This is significantly ahead of scheduled debt repayments of £52.6m. Disposal proceeds at £117.5m reflected our ongoing programme of estate optimisation and we invested £61.0m in nine new builds and 106 brand conversions.

The group disposed of 38 pubs in Pub Company, 50 pubs in Pub Partners and four closed pubs, raising proceeds of £123.9m which was partially offset by exiting a small number of leases.

In November 2017 the group amended its existing £400m revolving credit facility to incorporate an additional £350m three-year revolving facility, taking total bank facilities to £750m. The new facility is available to fund the internal transfer of pubs from the Spirit secured financing vehicle, improving the group's ability to refinance Spirit secured loan notes and related interest rate swaps. Pubs released from the Spirit debenture increase the group's unsecuritised portfolio, improving flexibility.

During the year the group settled financial liabilities in relation to the Spirit secured financing vehicle, recognising a net gain of £3.0m. The financial guarantee provided by Ambac in respect of a number of Spirit secured bonds was terminated for a cash consideration of £12.6m with a further £2.2m being paid in respect of consent and other fees. The fair value of this off-market contract liability was initially recognised as part of the acquisition fair values of Spirit Pub Company. An exceptional gain of £5.9m has been recognised, being the difference between the carrying value of the liability and the total cash consideration and fees incurred in order to terminate it.

In addition the A1, A3, A6, and A7 Spirit secured bonds were fully repaid at their par value of £216.9m. This eliminates the cash sweep and 1.5% margin step-up on the £160m A6 and A7 bonds which was due to commence in September 2018.

The group has recognised exceptional losses on early settlement of £4.1m, being the difference between the carrying value of the bonds and their par value on prepayment. The group also terminated two interest rate swap contracts for cash consideration of £42.6m in connection with the repayment of these notes, recognising an exceptional gain of £1.2m amounting to the discount received on termination.

The total cash flow impact of refinancing accounted for £14.8m of the £61.6m exceptional/non-underlying cash flow reported.

In line with our strategic priorities, the group's objective is to maximise the strength and flexibility of its balance sheet, and maintain a capital structure aimed at meeting the short, medium and longer-term funding requirements of the business. The principal elements of the group's capital structure are its revolving credit facilities that were £277m drawn at the year end and two long-term asset-backed financing vehicles.

At the year end, the Greene King securitisation had secured bonds with a carrying value of £1,343.5m and an average life of 10 years, secured against 1,429 pubs with a carrying value of £1.7bn. The Spirit debenture had secured bonds with a carrying value of £563.6m and an average life of nine years, secured against 872 pubs with a carrying value of £1.1bn.

The group's credit metrics remain strong with 94.4% of net interest costs at a fixed rate and an average cash cost of debt of 6.1%. Fixed charge cover slightly reduced to 2.2x from 2.3x last year and net debt to EBITDA increased slightly to 4.2x from 4.0x last year. The Greene King secured vehicle had a free cash flow debt service cover ratio of 1.5x at the year end, giving 28% headroom. The Spirit debenture vehicle had a free cash flow debt service cover ratio of 1.9x giving 33% headroom.

Overall our net debt reduced in the year by £42.2m to £2,032.3m.

BALANCE SHEET

PENSIONS

The group maintains three defined contribution schemes, which are open to all new employees and two defined benefit schemes, which are closed to new entrants and to future accrual.

At 29 April 2018, there was an IAS 19 pension asset of £13.6m representing an improvement of £24.8m since the previous year end. The closing assets of the group's two pension schemes totalled £859.2m and closing liabilities were £845.6m compared to £888.0m and £899.2m respectively at the previous year end.

The improvement in position is due to contributions made by the group during the year, combined with the impact of changes to market-based discount rates and inflation assumptions.

Total cash contributions in the year were £3.6m for past service.

The triennial reviews for both the Greene King and Spirit pension schemes will be as at April 2018 and are due to be finalised by July 2019.

RETURN ON CAPITAL EMPLOYED

The group is focused on delivering the best possible returns on its assets and on the investments it makes and is focused on capital discipline, through targeted investment in new build pubs, single site acquisitions and in developing its existing estate to drive organic growth with disposals of non-core pubs. ROCE of 8.5% has declined 90 bps compared to the prior year primarily due to lower Pub Company profits. ROCE remains comfortably ahead of the group's cost of capital.

DIVIDEND

The board has recommended a final dividend of 24.4 pence per share, in line with last year, subject to shareholder approval. This will be paid on 14 September 2018 to shareholders on the register at the close of business on 03 August 2018.

The proposed final dividend brings the total dividend for the year to 33.2 pence per share, in line with last year. This is in keeping with the board's policy of maintaining dividend cover of around two times underlying earnings, while continuing to invest for future growth.

Richard Smothers

Chief financial officer

27 June 2018

Group income statement

for the fifty-two weeks ended 29 April 2018

1 Adjusted basic and diluted earnings per share exclude the effect of exceptional and non-underlying items.

Group statement of comprehensive income

for the fifty-two weeks ended 29 April 2018

Group balance sheet

as at 29 April 2018

Group cash flow statement

for the fifty-two weeks ended 29 April 2018

1 EBITDA represents earnings before interest, tax, depreciation, amortisation and exceptional and non-underlying items

GROUP Statement of changes in equity

for the fifty-two weeks ended 29 April 2018

Notes to the accounts

for the fifty-two weeks ended 29 April 2018

1 Basis of preparation

The consolidated financial statements and preliminary announcement of Greene King plc for the 52 week period ended 29 April 2018 were authorised for issue by the board of directors on 27 June 2018.

The financial information included within this preliminary announcement does not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006 (the "Act").

The financial information for the 52 week period ended 29 April 2018 has been extracted from the statutory accounts on which an unqualified audit opinion has been issued.

The 2018 Report & Accounts will be posted to shareholders on 2 August 2018 and copies will be available from that date from the company secretary at the registered office of the company, Westgate Brewery, Bury St. Edmunds, Suffolk IP33 1QT. The statutory accounts for the period ended 29 April 2018 will be delivered to the Registrar of Companies following the company's Annual General Meeting.

The statutory accounts for the prior financial year, for the 52 week period ended 30 April 2017, have been delivered to the Registrar of Companies, and the auditors have made a report thereon under Chapter 3 of part 16 of the Act. That report was unqualified and did not contain a statement under sections 498(2) or 498(3) of the Act.

The consolidated financial statements of Greene King plc and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) as required by European Union law and as applied in accordance with the Companies Act 2006.

The accounting policies adopted are consistent with those of the previous financial year. Other than new disclosure requirements in relation to the changes in liabilities arising from financing activities (note 10), new standards and interpretations which came into force during the year did not have a significant impact on the group's financial statements.

2 Segment information

The group has three reportable segments that are largely organised and managed separately according to the nature of products and services provided, distribution channels and profile of customers. The segments include the following businesses:

Pub Company: Managed pubs and restaurants

Pub Partners: Tenanted and leased pubs

Brewing & Brands: Brewing, marketing and selling beer

These are also considered to be the group's operating segments and are based on the information presented to the chief executive who is considered to be the chief operating decision maker. No aggregation of operating segments has been made.

Transfer prices between operating segments are set on an arm's length basis.

Notes to the accounts

for the fifty-two weeks ended 29 April 2018

2 SEGMENT INFORMATION (CONTINUED)

Notes to the accounts

for the fifty-two weeks ended 29 April 2018

2 SEGMENT INFORMATION (CONTINUED)

1 EBITDA represents earnings before interest, tax, depreciation, amortisation and exceptional and non-underlying items and is calculated as operating profit before exceptional and non-underlying items adjusted for the depreciation and amortisation charge for the period.

2 Unallocated assets/liabilities comprise cash, borrowings, pensions, net deferred tax, net current tax, indirect tax provisions and derivatives.

Management reporting and controlling systems

Management monitors the operating results of its strategic business units separately for the purpose of making decisions about allocating resources and assessing performance. Segment performance is measured based on segment operating profit or loss referred to as trading profit in the group's management and reporting systems. Included within the corporate column in the table above are functions managed by a central division.

No information about geographical regions has been provided as the group's activities are predominantly domestic.

Notes to the accounts

for the fifty-two weeks ended 29 April 2018

3 Exceptional AND NON-UNDERLYING items

Exceptional operating costs

Integration costs are items of one-off expenditure, including legal and professional fees, the costs of dedicated integration project teams and redundancy costs, incurred in connection with the acquisition and integration of Spirit Pub Company which was finished in the year.

During the period to 29 April 2018 the group has recognised a net impairment loss of £70.4m (2017: £58.6m). This is comprised of an impairment charge relating to properties of £76.1m (2017: £77.7m) and reversal of previously recognised impairment losses of £12.8m (2017: £19.1m). £39.3m impairment has been recognised in respect of a small number of pubs and is driven by changes in the local competitive and trading environment at the respective sites, and £24.0m due to a decision taken to exit some sites during the financial year. Impairment reversals have been recognised following an improvement in trading performance and an increase in amounts of estimated future cash flows from previously impaired sites or increases to fair value less costs of disposal. In addition an impairment charge of £7.1m (2017: £nil) was recognised in relation to intangible assets during the year.

Non-underlying operating costs

In the year the group incurred £1.9m non-underlying legal and professional fees in relation to group refinancing activities and defending uncertain tax positions.

Notes to the accounts

for the fifty-two weeks ended 29 April 2018

3 Exceptional AND NON-UNDERLYING items (CONTINUED)

The net profit on disposal of property, plant and equipment and goodwill of £19.7m (2017: £3.4m) comprises a total profit on disposal of £68.4m (2017: £38.2m) and a total loss on disposal of £48.7m (2017: £34.8m).

In the period the group received insurance compensation of £1.8m (2017: £nil) to meet the costs of restoring sites damaged by fire or flood in a previous period.

The group incurred £1.6m (2017: £3.7m) of non-underlying employee costs, which included restructuring costs and costs associated with changes to key management. 

Exceptional and non-underlying finance costs

During the period the group settled financial liabilities in relation to the Spirit secured financing vehicle, recognising a net gain of £3.0m. The financial guarantee provided by Ambac in respect of a number of Spirit secured bonds was terminated for cash consideration of £12.6m with a further £2.2m of consent and other fees paid. The fair value of this off-market contract liability was initially recognised as part of the acquisition fair values of Spirit Pub Company. An exceptional gain of £5.9m, being the difference between the carrying value of the liability and the total cash consideration and fees incurred in order to terminate it, has been recognised.

In addition the A1, A3, A6, and A7 Spirit secured bonds were fully repaid at their par value of £216.9m. The group has recognised exceptional losses on early settlement of £4.1m, being the difference between the carrying value of the bonds and their par value on prepayment.

The group also terminated two interest rate swap contracts for cash consideration of £42.6m in connection with the repayment of these notes, recognising an exceptional gain of £1.2m amounting to the discount received on termination.

During the prior year a number of the group's swap liabilities were settled at a discount recognising a £12.2m exceptional gain. The swaps concerned were hedging cash flows relating to the Greene King A5 bond and floating rate bank loans. These cash flows are still expected to occur and therefore in accordance with IAS 39 the cumulative losses taken to the hedging reserve will be recycled to the income statement over the same period during which the hedged forecast cash flows affect profit or loss. A non-underlying charge of £11.6m (2017: £11.8m) has been recognised in respect of this during the period.

In a prior period the group acquired as part of a business combination derivatives that are subsequently accounted for at fair value through profit and loss as they were deemed not to qualify for hedge accounting. An exceptional gain/(charge) of £19.2m (2017: £(23.6)m) relates to the mark-to-market movement on these derivatives, excluding amortisation of fair value on acquisition which reduces the pre-exceptional finance costs that include interest paid. Mark-to-market movements are considered to be exceptional owing to their volatility and are shown separately to ensure pre-exceptional finance costs are more readily comparable each year. Fair value amortisation is deemed to be a pre-exceptional item as it adjusts swap interest to a market rate.

Exceptional tax

The £14.0m deferred tax in respect of the licensed estate in the period arose due to management's revision of its estimate of the residual value of buildings from 80% to 85%. 

The exceptional tax credit in respect of the licensed estate in the prior year relates to impairment.

On 16 October 2017 agreement was reached with HMRC regarding an internal property arrangement, the group's only material unresolved historical tax position. Apart from the treatment of repairs, which is expected to be resolved by the end of the next financial year, this has been fully provided in the accounts. As a result the group has settled corporation tax of £9.4m and interest of £2.1m during the period.

Non-underlying tax

The tax credit in respect of the licensed estate in the prior period arises from movements in their tax base cost and indexation.

Notes to the accounts

for the fifty-two weeks ended 29 April 2018

3 Exceptional AND NON-UNDERLYING items (CONTINUED)

The Finance Act Act 2016 reduced the rate of corporation tax from 19% to 17% from 1 April 2020. The rate reduction was substantively enacted at the balance sheet date and is therefore included in these accounts. The net deferred tax asset has been calculated using the rates at which each temporary difference is expected to reverse.

4 Taxation

5 Earnings per share

Basic earnings per share has been calculated by dividing the profit attributable to equity holders of £162.5m (2017: £151.7m) by the weighted average number of shares in issue during the period of 309.9m (2017: 309.4m).

Diluted earnings per share has been calculated on a similar basis taking account of 0.5m (2017: 0.8m) dilutive potential shares under option, giving a weighted average number of ordinary shares adjusted for the effect of dilution of 310.4m (2017: 310.2m). There were no (2017: nil) anti-dilutive share options excluded from the diluted earnings per share calculations. The performance conditions for share options granted over 2.7m (2017: 2.4m) shares have not been met in the current financial period and therefore the dilutive effect of the number of shares which would have been issued at the period end has not been included in the diluted earnings per share calculation.

Adjusted earnings per share excludes the effect of exceptional and non-underlying items and is presented to show the underlying performance of the group on both a basic and diluted basis.

Notes to the accounts

for the fifty-two weeks ended 29 April 2018

5 Earnings per share (continued)

6 Dividends paid and proposed

Dividends on own shares have been waived.

Subject to the approval of shareholders at the Annual General Meeting, the final dividend will be paid on 14 September 2018 to shareholders on the register at the close of business on 3 August 2018.

7 cash and cash equivalents

Included within cash at bank and in hand and short-term deposits is £74.6m (2017: £112.0m) and £90.4m (2017: £88.9m) held within securitised bank accounts which are only available for use by the Greene King Secured financing vehicle and the Spirit secured financing vehicle respectively.

The Greene King secured financing vehicle comprises Greene King Retailing Parent Limited and its subsidiaries and the Spirit secured financing vehicle comprises Spirit Pubs Debenture Holdings Limited and certain of its subsidiaries.

The Greene King secured financing vehicle's liquidity facility reserve was fully repaid during the year.

Interest receivable on cash and short term deposits is linked to base rate and is received either monthly or in line with the term of the deposit.

Notes to the accounts

for the fifty-two weeks ended 29 April 2018

8 Borrowings

Unsecured bank loans

In November 2017 the group amended its existing £400m revolving credit facility (Facility A) to incorporate an additional £350m three-year revolving facility (Facility B), taking the total facilities to £750m. Facility B is available to fund the internal transfer of pubs from the Spirit secured financing vehicle, improving the group's ability to refinance Spirit secured loan notes and related interest rate swaps. In December 2017 a draw-down of £187.0m took place under Facility B in connection with the repayment of certain Spirit secured loan notes.

Spirit secured financing vehicle

In June 2017 the group fully repaid the £27.7m Class A3 secured loan note issued by Spirit Issuer plc at par.

In August 2017 a financial guarantee provided by Ambac was terminated. The guarantee was in respect of the A1, A3 and A5 secured loan notes and two interest rate swaps relating to the A1, A2 and A6 notes. This resulted in a reduction in the all-in interest rate applicable to these tranches.

In December 2017 the group fully repaid the £29.5m Class A1, £101.3m Class A6 and £58.4m Class A7 secured loan notes issued by Spirit Issuer plc at par. This eliminates the cash sweep and 1.5% margin step-up on the A6 and A7 notes which were due to commence in September 2018. The group also terminated two interest rate swaps in relation to the repaid notes.

Notes to the accounts

for the fifty-two weeks ended 29 April 2018

9 Working capital and non-cash movements

10 Analysis and movements in net debt