Greene King Regulatory News (GNK)

GREENE KING plc

Interim results for the 24 weeks to 18 October 2015

STRONG FIRST HALF & INTEGRATION AHEAD OF PLAN

1Spirit contribution from date of completion: 23 June 2015. Includes fair value accounting adjustments and synergies 2Adjusted for exceptionals as detailed in note 3 3Greene King numbers exclude synergies in the existing Greene King business

HIGHLIGHTS

· Revenue and profit growth across all divisions; adjusted earnings per share up 15.4%

· Greene King Retail like-for-like (LFL) sales +2.0%, Spirit Managed LFL sales +1.2%, Pub Partners LFL net income +2.4% & Brewing & Brands own-brewed volume (OBV) +3.6%

· Dividend per share up 6.3%; maintaining long-term growth record

· Greene King return on capital employed (ROCE) up 20 basis points to 9.4%

· Record customer satisfaction in Greene King Retail; Net promoter score (NPS) +7.1%pts

· Completed acquisition of Spirit Pub Company; integration ahead of plan

§ Expect to outperform initial cost synergy guidance; target raised to £35m

§ Brand optimisation: Retail growth brands & investment programme identified to deliver long-term growth

§ Tenanted and leased fully integrated, ahead of schedule

§ Retail business to be based in Burton

Rooney Anand, Greene King chief executive officer, comments:

"It has been a strong first half, with the Greene King business strengthening and significant progress made in the Spirit integration. Like-for-like sales growth in Greene King Retail improved during the half and both Pub Partners and Brewing & Brands delivered profit growth and margin expansion.

"We completed the acquisition of Spirit Pub Company and, by combining the best of both companies, made good progress in capturing value from the acquisition and creating the UK's leading pub hospitality company.

"We believe we have the best portfolio of retail pub brands, the best pub assets and the most talented team which, when combined with the strong contribution from synergies and the benefits of our enlarged scale, will ensure we continue delivering value to our customers and our shareholders."

Definitions

For definitions please refer to glossary of terms at the end of this document.

Financial calendar

The group will publish its third quarter trading update in February 2016.

For further information

Information on Greene King plc is available at www.greeneking.co.uk

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NOTES FOR EDITORS

CHAIRMAN'S STATEMENT

RESULTS

In the first half of the financial year, we achieved strong results across the group. Revenue from the existing Greene King business was up 5.4% to £648.4m and the total increased by 49.2% to £917.7m, including a 17 week contribution from Spirit. Operating profit before exceptional items grew 4.1% in the existing Greene King estate and 46.1% to £180.2m when including Spirit and synergies realised to date. Overall, profit before tax and exceptional items grew 46.9% to £121.3m and adjusted earnings per share increased by 15.4% to 34.5p.

DIVIDEND

Following a period of further progress across the group and reflecting our confidence in future prospects for the company, the board has declared an interim dividend of 8.45p per share, up 6.3% on last year. The interim dividend will be paid on 22 January 2016 to those shareholders on the register at the close of business on 18 December 2015.

SPIRIT INTEGRATION

On 23 June 2015 we completed the acquisition of Spirit Pub Company plc. We have since conducted a thorough and detailed review of the business and the integration process is underway. We are pleased to report that the integration of Spirit is proceeding well and we remain excited by the opportunities for the combined group.

ACQUISITIONS AND DISPOSALS

In addition to Spirit, we continued to add new sites selectively and during the first half added ten managed sites to the existing Greene King estate. We continued to make strategic disposals of properties from our Pub Partners business and during the half sold a further 12 sites, including two from the Spirit tenanted and leased estate. Also, as required by the Competition and Markets Authority, we disposed of six tenanted and leased sites and ten managed sites.

BOARD

At the beginning of the financial year, Rob Rowley took over the role of senior independent director and will be taking on the chairmanship of the audit committee next year.

PEOPLE

I would like to thank everyone who has worked for the enlarged Greene King business over the course of the half year, our first trading period to include results from Spirit. The positive contribution from the Spirit teams is already evident and the dedication and hard work that all our people have shown, during a demanding period of integration for both businesses, has been impressive. They have ensured that our customers continue to have great experiences across the Greene King estate.

Tim BridgeChairman

1 December 2015

CHIEF EXECUTIVE'S REVIEW

PERFORMANCE SUMMARY

It has been a strong first half for Greene King with growth in operating profit across all divisions, augmented by the acquisition of Spirit, which was owned for 17 weeks. Total revenue grew 49.2% to £917.7m, including a £269.3m contribution from Spirit. Excluding Spirit, revenue increased 5.4% to £648.4m. Operating profit* grew 46.1% to £180.2m, including a £51.4m contribution from Spirit and reflecting £2.1m of synergy achieved to date. Excluding Spirit and synergies, the Greene King business delivered 4.1% growth in operating profit to £128.3m.

The operating margin was 19.6%, 0.5%pts lower than last year. This reflected a higher contribution from managed pubs and a 0.3%pt moderation in the existing Greene King business led by Retail, where the margin declined by 0.2%pts due to investment in our people and in customer service.

Adjusted earnings per share grew 15.4% and, as a result of the progress made in the first half, the board has declared a 6.3% increase in the dividend per share, maintaining our long-term growth record.

The existing Greene King business achieved a ROCE improvement of 20 basis points (bps) to 9.4%. Including Spirit, ROCE was also 9.4%, ahead of our weighted average cost of capital (WACC) following the acquisition.

Significant progress was achieved in key operational metrics within Greene King Retail including a record customer satisfaction score and a further reduction in team turnover.

The Spirit integration is proceeding well and is ahead of plan. We have already completed the integration of the tenanted and leased business, agreed the future systems suite for Retail and identified the retail brands and formats on which we will focus our future investment. In addition, we now expect to exceed our initial guidance on cost synergies and have raised the synergy target to £35m. We also see the potential for additional revenue benefits through optimising the combined brand portfolio and gaining further distribution for our ale brands.

\* Throughout this review, operating profit and operating profit margin are stated on a pre-exceptional basis

TRADING ENVIRONMENT

The consumer environment continued to improve during the first half. However, increased consumer confidence remains to be fully reflected in the UK eating and drinking out market and, as highlighted in the recent Greene King Leisure Spend Tracker, larger-ticket and other discretionary items remain bigger beneficiaries of the return to real income growth.

We are mindful of an increasingly dynamic, fragmented market place and intense competition for every pound in the consumer pocket. In an environment where consumers have such choice, we must ensure that our brands stand out and that they have defined, consistent propositions that signal reassuring brand familiarity, excitement and the opportunity to try something new.

Our people are core to our business and we constantly strive to pay them appropriately for their hard work while maintaining a high level of investment in development and training. As an employer of 42,000 people, with half under 25, the introduction of the national living wage (NLW) will affect our cost base. We are confident of being able to mitigate most of this impact and options to do so include enhanced labour scheduling - the right people at the right time - and improving labour utilisation across the whole day. We expect the benefits of mitigating actions to be fully achieved in 2018/2019 and, including addressing wage differentials, we estimate that the incremental impact, over and above general wage inflation, will be £2m in 2016/2017 and will reach an annualised run-rate of £6m per annum in 2018/2019.

Following the period-end, the Small Business, Enterprise and Employment Act took a further step towards implementation with the part-publication of a draft statutory code. We believe the draft code currently achieves a sensible balance between the interests of the licensee and the landlord. We will continue to work with Government to ensure that the secondary legislation does not add unnecessary 'red tape' and is supportive of continued investment in the tenanted and leased sector.

STRATEGIC & OPERATIONAL REVIEW

We are focused on achieving the right balance between 'business as usual' and the seamless integration of Spirit. Our focus in the first half was therefore on driving ongoing and sustainable improvements in the existing Greene King business, while successfully integrating Spirit using a 'best of both' companies approach, in order to create a clear industry leader.

In Greene King Retail, this focus was reflected in LFL sales growth of 2.0% and was further evident in its NPS, which increased 7.1%pts over last year and is now the highest since company-wide measurement started in 2011.

In line with our stated strategy to drive sales in all parts of the day, further evolution of our daytime offer resulted in a 9.9% increase in sales before 5pm in the Greene King Retail estate, encompassing strong growth in both food and drink.

In Pub Partners, there were 15 disposals, which helped to drive further improvement in estate quality and led to an 8.7% increase in average EBITDA per pub. Ongoing licensee recruitment and retention initiatives increased the average licensee tenure to five years and ten months in the Greene King estate.

Despite ongoing market challenges, Brewing & Brands achieved 3.6% OBV growth driven by core brands such as Greene King IPA and Old Speckled Hen, new product development (NPD) and additional volume from Spirit pubs. Driven by East Coast IPA, NPD accounted for 9.3% of OBV representing a 3.5%pt increase on the previous year.

SPIRIT INTEGRATION

On 23 June 2015, we completed the acquisition of Spirit Pub Company, adding 791 managed pubs and 416 tenanted and leased pubs to the estate. We have since conducted a thorough review of Spirit and the exciting task of combining these two leading pub businesses is well under way using a 'best of both' companies approach. At the end of the half, and ahead of schedule, our two tenanted and leased businesses were successfully integrated and, following strong customer and frontline team acceptance, over 90% of Spirit managed pubs are now selling Greene King IPA.

In line with our 'best of both' approach to the integration, we have opted to retain both the Spirit and Greene King offices. We will base our combined Retail division at the Spirit office in Burton-upon-Trent, while continuing to locate the combined Pub Partners division, Brewing & Brands and the company headquarters in Bury St Edmunds. This arrangement will ensure that Retail is more centrally located, reflecting our national scale and reach in this division, while protecting the heritage and legacy of Greene King by retaining a significant presence in Suffolk. We anticipate that the people transition will complete towards the end of the financial year.

We have made significant inroads into the realisation of purchasing synergies and reducing duplicated central costs, while we have identified the future Retail systems suite, which will be rolled out from March. The annualised run-rate of synergies achieved to date is £6.5m and we now expect annual cost synergies to be in the region of £35m by the end of 2017/2018, including around £12m in the current financial year. Our intention remains to invest a portion of cost synergies in excess of our stated target to strengthen important areas of our retail business such as our people, our brands and our systems.

BRAND OPTIMISATION

In addition, we anticipate there will be material benefits from the optimisation of the combined brand portfolio. Our vision is to operate a smaller number of brands and formats across the enlarged estate, creating a platform for long-term growth and value creation. We acquired a strong portfolio of brands and formats with Spirit - one that would have been very difficult to replicate organically - and optimising the brands from both businesses will provide an exciting growth opportunity over the next few years.

In order to select the growth brands and formats to invest in, we looked at the consumer relevance of each brand, the long-term opportunities to grow and expand, the financial performance and the proximity to other sites within the combined group.

Currently, the combined business has around 20 brands and formats and we anticipate halving this number in the future. There is significant potential profit upside from investment in between 300 and 400 sites to reposition them into the growth brands over the next three years. These growth brands are: Hungry Horse, Flaming Grill, Farmhouse Inns, Chef & Brewer and Metropolitan, our premium London estate. We will also continue to develop a strong Local Pubs estate, our hotels and Loch Fyne Seafood & Grill.

This portfolio of growth brands and formats will cover a wide range of consumer occasions. Hungry Horse and Flaming Grill will cater for different customer occasions within the value segment, Farmhouse Inns is our carvery offer spanning both value and mainstream occasions, Chef & Brewer will be our drive mainstream brand, while we will use Metropolitan to grow our presence in the premium end of the sector.

We estimate that these growth brands will account for up to around 950 sites from the current estate, while the Local Pubs estate will be around 800 sites.

This brand and format optimisation programme will be funded from a combination of internally generated cash and, where appropriate, disposals. Initial estimates suggest incremental capital investment in the region of £40-50m per annum over a three year period, commencing in 2016/2017.

CURRENT TRADING & OUTLOOK

Since the period-end, we have seen broadly similar trading patterns across the business and we go into the busy and important Christmas season with deposited bookings up strongly in both Greene King Retail and Spirit Managed. We anticipate a positive outcome for the full year as we focus on growing the existing business while continuing to integrate Spirit.

GREENE KING RETAIL & SPIRIT MANAGED

1Excludes synergies in the existing Greene King business 2Includes fair value accounting adjustments, synergies and a 17 week contribution from Spirit

Our Retail strategy is to offer customers unrivalled value, service and quality so they feel compelled to visit time and time again. The acquisition of Spirit Pub Company will help us accelerate this strategy through the addition of exciting brands, the opportunity to learn from each other and together enhance the customer offer. We will also generate greater scale to drive cost efficiencies that can be reinvested in the business.

Further strategic and operational progress was achieved during the period, reflected in sales growth of 6.7% in the existing Greene King estate and total sales growth, including Spirit, of 59.0%. This delivered combined Retail revenue of £740.2m.

In the Greene King estate, LFL sales strengthened during the period and grew 2.0% overall, comprising LFL sales growth in food, drink and accommodation. This outperformed the wider market*, which grew 1.5% over a broadly comparable period. In the final six weeks of the period, LFL sales growth was 4.3%, including 12.9% in Metropolitan, aided by the Rugby World Cup and warmer, drier weather.

LFL sales in the Spirit managed estate showed a similar improving trend, with growth of 1.2% in the period and growth of 2.1% in the last six weeks of the period.

LFL growth was driven by Farmhouse Inns and Metropolitan in the Greene King estate, and by Chef & Brewer and Taylor Walker in the Spirit estate.

On a combined basis, operating profit was up 49.8% to £137.4m, while the Greene King estate grew operating profit 5.3% to £96.6m. The combined operating margin declined 1.1%pts reflecting the inclusion of the lower margin Spirit estate and, in the Greene King estate, there was a 0.2%pt reduction in the margin due to ongoing investment in our people and service.

*Coffer Peach Business Tracker 

We remain committed to exceeding customer expectations through consistent execution of unbeatable value, service and quality. In the period, we expanded the number of known value items across the Greene King estate, driving repeat visits among core customers and positively impacting volumes and gross margins. On service, a focus on operational simplicity and investment in people led to a 7.1%pt increase in NPS to an all-time high since measurement began in 2011. Quality improvements included a refreshed 'Steak Education' programme in Flaming Grill and, in the Greene King estate, improvements in core dishes, which contributed to a 3.3%pt increase in customer quality scores.

Recognising the growing demand for eating out throughout the day, we relaunched our value-orientated breakfast offer in Farmhouse Inns, introduced a breakfast offer in Old English Inns and extended breakfast service hours in Hungry Horse. These initiatives helped to drive 4.5% LFL sales growth in breakfast in the Greene King estate and a 9.9% increase in sales before 5pm driven by increases in both food and drink sales. A similar focus in the Spirit estate included the launch of a premium sandwich menu and the continued evolution of the snack menu in Chef & Brewer.

We use a mix of traditional and digital marketing to raise our brand awareness, better understand our customers and communicate more clearly and effectively with them - key elements of our customer interaction to help drive improved sales and profits across Retail.

Traditional marketing initiatives include: -

1. Improved internal and external on-site communications to existing and potential customers

2. Ongoing menu development to focus on the key value messages, simplify and guide the customer decision-making journey and drive better margins

3. Advertising of the Greene King retail brand on television as part of the 'To the Pub' campaign

In terms of digital, and learning from Spirit, we expanded our routes to market including the launch of Loch Fyne Seafood & Grill menus on Amazon, whereby customers can pre-purchase a two or three course meal voucher online. Aiming to stay close to our customers, we relaunched our 'Hungry for Feedback' initiative in Hungry Horse, offering a free dessert or starter for every review, and added TripAdvisor reviews to Chef & Brewer online pub pages. We actively monitor the feedback we receive through these and other channels and use it to continuously refine and improve our customer offer.

Overall, digital initiatives in the Greene King estate led to an 18% increase in online table reservations and a 61% increase in Facebook followers, while Spirit's 'Quality over Quantity' approach to social media and digital content resulted in a 23% increase in engagement** since its August launch.

Our teams play a pivotal role in exceeding customer expectations and apprenticeships are increasingly important to our success. Progress in the period included the recruitment of our 1,000th apprentice in 2015 in the Greene King estate and an 8% increase in the number of apprentices studying for a team-leader level qualification within Spirit. Including Spirit, over 4,000 employees have completed an apprenticeship since 2011 and we were delighted to be recognised as one of the top 50 apprenticeship employers in the UK by the Daily Telegraph and one of the top ten apprenticeship organisations within the retail and service sector.

We continued to invest in our estate and in the period spent £38.7m on Greene King sites with a further £15.1m spent on Spirit sites. Annualised EBITDA returns in both estates exceeded 30% reflecting a rigorous approach to investment allocation in order to drive customer footfall. Excluding Spirit, we spent £20.2m on acquiring and developing new Retail sites. We opened ten new sites in the period and anticipate opening 15 new sites in total in the current financial year. We disposed of 13 sites from the combined managed business in the period, of which ten were required by the Competition and Markets Authority (CMA).

**As measured by the number of clicks, comments & 'likes' each post receives

PUB PARTNERS & SPIRIT LEASED

1Excludes synergies in the existing Greene King business 2Includes fair value accounting adjustments, synergies and 17 week contribution from Spirit

In Pub Partners, our strategy is to be the preferred partner for the best operators in the industry. In the first half, we made further significant progress with this, driven by initiatives within the Greene King estate and supported by the acquisition of Spirit Pub Company and its high-quality tenanted and leased estate.

At the period-end, we successfully completed the integration of Pub Partners and Spirit leased, ahead of schedule.

Pub Partners traded well in the period, with the Greene King estate delivering LFL net income growth of 2.4% and average EBITDA per pub growth of 8.7% to £34.9k. In Spirit, LFL net income grew 1.4%.

Revenue was up 40.8% as a result of the addition of 416 tenanted and leased pubs from Spirit. Excluding Spirit, revenue declined 3.3% due to disposals. Average revenue per pub grew 5.0% and the operating margin expanded 1.6%pts, reflecting the higher quality of the remaining estate, strong cost control and synergy contribution.

Central to the successful execution of our strategy is the ability to offer licensees the best pubs and in the period we continued to optimise the combined estate through the disposal of a further 15 pubs from the Greene King estate and three disposals from Spirit Leased. These disposals included six that were required by the CMA.

Our teams play a vital role in ensuring we are preferred partners and can attract the best operators. Training initiatives included a focus on apprenticeships, where we had 116 in learning compared with 43 this time last year, and a 'Bury St Edmunds heritage experience' for our Spirit teams, which was well received.

Our open days continued to be a success and we supplemented these with a new online application process designed to improve the applicant user journey. For existing licensees who want to expand their portfolio of Greene King pubs, we introduced multi-site development workshops and, together with Spirit, we increased our focus on food to further support licensees to build sustainable, quality businesses.

We continue to offer a range of attractive and innovative agreements. Local Hero, our franchise-style agreement built around local provenance, saw the opening of its 50th site while we also reached our 50th leased turnover agreement in Spirit.

As a result of these initiatives, we have seen a further increase in average licensee tenure in the Greene King estate to five years and ten months and a consistently low number of temporary agreements.

BREWING & BRANDS

1Excludes benefit of additional volume to Spirit pubs since acquisition

Brewing & Brands' strategy is to drive growth through a successful core portfolio of national ales supported by an innovative range of seasonal and 'craft' ale brands. This strategy has led us to being the leading cask ale brewer in the UK.

Brewing & Brands achieved further progress in the period with OBV up 3.6% including additional volumes to Spirit pubs and against the UK ale market up 0.8%*. Our share of the total ale market increased 0.4%pts to 10.5%.

Revenue grew 4.7% to £95.4m while operating profit grew 5.1% to £14.5m, leading to a 10bp increase in the operating margin. During the period, the operating margin was positively affected by both channel mix and additional cost efficiencies realised in the second half of the last financial year.

The 'Hen' brand family enjoyed a further period of strong growth with volumes up 8.9%, while the on-trade brand refresh contributed to volume growth of 6.9% in Greene King IPA. Old Speckled Hen remains the number one premium ale brand in Great Britain**, while Greene King IPA saw its share of the UK ale market rise 30bps. Greene King IPA also received a significant increase in demand from China, following President Xi's recent visit to the UK.

Aided by the Rugby World Cup, volume in take-home grew 12.4%, with Old Speckled Hen and the wider 'Hen' brand family proving popular. The 'Hen' brand family attracted close to a quarter of a million more customers compared with this time last year.

NPD remains part of our strategy and, one year after launch, volumes of East Coast IPA increased further. NPD in the period included the launch of 'Old Spirited Hen' and overall NPD accounted for 9.3% of OBV, up from 5.8% last year.

Other exciting developments included the Greene King IPA 'To The Pub Campaign' - a campaign to capture fifty great moments in fifty amazing pubs, which was subsequently advertised on TV and generated over seven million views in two weeks. 84% of ale drinkers surveyed said that they liked the campaign and 60% said the adverts encouraged them to buy Greene King IPA on their next visit to the pub. Elsewhere, we were proud to see our Brewery Tour in Bury St Edmunds receiving a Certificate of Excellence on TripAdvisor for the fourth consecutive year and Belhaven awarded 'Distributor of the Year' at the prestigious DRAM awards.

Following the acquisition of Spirit, we have been encouraged by the response of the Spirit pub managers and their desire to sell Greene King beers. We hosted over two hundred Spirit pub managers in our brewery and are delighted that Greene King IPA is now on sale in over 90% of Spirit managed pubs.

*BBPA May-October 2015

**CGA Brand Index On Trade Survey 26 wks to 08/08/15/Nielsen Scantrack volume data 26 weeks to 10/10/15

FINANCIAL REVIEW

RESULTS

Revenue was £917.7m, an increase of 49.2% compared to the same half last year. Excluding the £269.3m post acquisition revenue contributed by the Spirit business, revenue increased 5.4% to £648.4m. Greene King Retail was the biggest driver of this growth, with revenue up 6.7% and average revenue per pub rising 3.9%. The combined Greene King Retail and Spirit Managed businesses accounted for over 80% of group revenues in the period. Total revenue in Pub Partners was £82.1m. In Greene King Pub Partners, revenue of £56.4m was down 3.3%, due to the impact of pub disposals, with the average revenue per pub increasing 5.0%. Brewing & Brands grew revenue 4.7% to £95.4m.

Operating profit before exceptionals was £180.2m, an increase of 46.1% compared to the same half last year. Excluding the contribution of Spirit, £2.1m of synergies and the impact of fair value adjustments, operating profit was £128.3m, up 4.1% on last year. Operating profit margin in the Greene King business was down 30bps to 19.8%, with the main driver being the reduction in Retail margin from 19.7% to 19.5% as a result of ongoing investment in labour, training and additional development closure costs.

Net interest costs before exceptional items were £58.9m and included £18.1m of interest relating to Spirit.

Profit before tax and exceptionals was £121.3m, an increase of 46.9% on last year. Excluding Spirit and synergies, profit before tax and exceptionals of £87.5m was up 5.9% on last year. The tax charge before exceptional items equated to an effective tax rate of 20%.

Earnings per share before exceptional items of 34.5p was up 15.4%. Statutory profit before tax was £84.9m, up 17.9% on last year.

CASH FLOW

Operating cash flows remained strong. Overall EBITDA before exceptional items was £223.9m while excluding Spirit and synergies, EBITDA before exceptionals was £158.6m, an increase of 4.0% on last year.

Due to the timing of the Spirit acquisition, we had a one-off working capital outflow of c.£30m in the period relating to rent, interest costs and VAT. Free cashflow, after investing in the core estate and paying interest, tax and dividends, was £13.3m. Excluding the impact of the Spirit acquisition, Greene King free cash flow of £35.5m was comfortably ahead of the Greene King securitisation's debt service obligation of £16.2m.

During the period, we disposed of 31 sites, which included 16 sites sold as a condition of the CMA's approval of the Spirit acquisition, with total cash proceeds of £39.9m.

We expect £140-£150m of core capex spend in the combined estate for the full year, including £40-£50m in the Spirit estate.

CAPITAL EXPENDITURE

We invested in both maintaining and developing our existing estate. Total expenditure during the period was £86.3m of which £68.8m was in Greene King and £17.5m was in Spirit.

Capital expenditure on the Greene King business, including maintenance capital, was £48.6m, an increase of £7.6m over last year. A further £20.2m was invested in acquiring single sites and developing previously acquired sites.

NET DEBT AND TREASURY

Net debt at the period-end was £2,078.7m, an increase of £710.0m from the previous year-end, with the key movements being the £673.0m Spirit net debt on acquisition and the payment of the £43.2m special dividend to former Spirit shareholders. At the period-end, our £460.0m revolving credit facility was £265.om drawn. 

Our overall credit metrics remain strong with interest rate hedges in place for 98% of the variable rate debt and a blended average cost of debt of 6.4%. As a consequence of the Spirit acquisition, fixed charge cover was 2.5x with interest cover increasing to 3.4x. On a pro-forma basis, annualised net debt to EBITDA remained at 4.2x. Our securitised vehicle had a free cash flow debt service cover ratio of 1.5x at the period-end, giving 26% headroom. Spirit's debenture vehicle had a free cash flow debt service cover ratio of 1.9x giving headroom of 30%.

DIVIDEND

The board has declared an interim dividend of 8.45p, up 6.3%. This will be paid on 22 January 2016 to shareholders on the register at the close of business on 18 December 2015.

PENSIONS

Following the Spirit acquisition, the group now maintains four defined contribution schemes which are open to all new employees and three defined benefit schemes which are closed to new entrants and to future accrual.

At 18 October 2015, there was an IAS 19 pension deficit of £48.2m representing a reduction of £11.0m since the year-end. The £48.2m comprised £44.3m in respect of Greene King schemes and £3.9m in respect of the Spirit scheme.

The net movements are due to a reduction in the present value of the scheme's liabilities resulting from changes to the market-derived actuarial assumptions, partially offset by a reduction in the market value of the scheme assets since the period-end.

Total cash contributions in the period were £5.0m for past service.

EXCEPTIONAL ITEMS

We recorded a net exceptional charge of £27.0m, consisting of a £13.2m charge to operating profit before tax, a £23.2m charge to finance costs and a net exceptional tax credit of £9.4m. Full details are set out in note three, with the following items recognised in the period: -

1. An £11.3m charge for legal, professional, integration and reorganisation costs following the acquisition of Spirit Pub Company

2. A net impairment charge of £12.4m (2014: £4.6m) was made against the carrying value of a small number of our pubs where specific market conditions impacted trading or where estimates of fair value less disposal costs have fallen below carrying value

3. A net surplus on disposal of property plant and equipment of £10.5m

4. £23.2m of exceptional finance costs in respect of the mark-to-market movements in the fair value of interest rate swaps not subject to hedge accounting

5. The exceptional tax credit of £9.4m includes a £9.3m tax credit on exceptional items, a deferred tax charge of £0.3m, in respect of the licensed estate, and a £0.4m tax credit in respect of prior periods

ACQUISITION FAIR VALUES

As outlined in note seven, a provisional fair value exercise has been undertaken in respect of the assets and liabilities acquired following the acquisition of Spirit Pub Company. The provisional level of goodwill on acquisition following the fair value exercise is £456.4m.

Key provisional fair values include the following: -

• Property values, for which valuations have been performed by external surveyors, increased by £65.6m

• A £305.1m liability has been recognised in respect of lease arrangements that are no longer considered to have market rate terms

• Other off-market contract liabilities of £24.0m

The impact of fair value adjustments and other accounting alignments on the interim results has been to increase operating profit by £3.7m. The benefit to profit before tax and exceptionals has been £4.1m.

The fair value exercise will be concluded ahead of the announcement of our full year results.

Rooney Anand

Chief executive officer

01 December 2015

Risks and uncertainties

The principal risks and uncertainties facing the group during the period under review and going forwards for the remainder of this year have not materially changed from those set out on pages 28 to 30 of the 2014/2015 annual report and accounts, which can be viewed via the www.greeneking.co.uk website. The risks are summarised as follows:

· Integration of Spirit Pub Company and ability to deliver anticipated synergies

· Continued ability to develop an appealing customer offer that identifies and responds to the fast- changing consumer tastes

· Consumer confidence in the UK and increasing competitor activity

· Brand damage caused by poor service standard, food provenance or other issues leading to poor financial performance and reputational damage

· Information systems' data security and technology failure

· Inability to attract, retain, develop and motivate talented employees and tenants

· Supply chain failure and major supply chain problems

· Increased regulation and failure to respond to recent changes in regulation

· Non-compliance with health and safety legislation

· Failure to comply with the Pubs Code under the Small Business, Enterprise and Employment Act 2015

· Inability to meet the funding requirements of the enlarged group

· Failure to meet our financial covenants

· Financial fraud, material error in our financial statements or non-compliance with statutory obligations

· Changes to the valuation of the group's defined benefit schemes

INCOME STATEMENT ANALYSIS

1Post acquisition since 23 June 2015

2Accounting alignments and income statement impact of fair value adjustments

3 Before exceptional items

OPERATING PROFIT ANALYSIS3

1Post acquisition since 23 June 2015

2 Accounting alignments and income statement impact of fair value adjustments

3 Before exceptional items

Responsibility statement

The directors confirm that to the best of their knowledge:

a) the condensed set of financial statements has been prepared in accordance with IAS34;

b) the interim management report includes a fair review of the information required by the Financial Statements Disclosure and Transparency Rules (DTR) 4.2.7R - "indication of important events during the first six months and their impact on the financial statements and description of principal risks and uncertainties for the remaining six months of the year"; and

c) the interim management report includes a fair review of the information required by DTR 4.2.8R - "disclosure of related party transactions and changes therein".

On behalf of the board

Tim Bridge Rooney Anand

Chairman Chief executive

Unaudited group income statement

for the twenty-four weeks ended 18 October 2015

* Adjusted earnings per share excludes the effect of exceptional items.

Unaudited group statement of comprehensive income

for the twenty-four weeks ended 18 October 2015

Unaudited group balance sheet

as at 18 October 2015

Unaudited group cashflow statement

for the twenty-four weeks ended 18 October 2015

* EBITDA represents earnings before interest, tax, depreciation, amortisation and exceptional items.

Unaudited GROUP statement of changes in equity

for the twenty-four weeks ended 18 October 2015

Notes to the accounts

for the twenty-four weeks ended 18 October 2015

1 Basis of preparation

The interim condensed consolidated financial statements are prepared in accordance with Disclosure and Transparency rules and with IAS 34 Interim Financial Reporting. The financial information contained in this interim statement does not constitute statutory accounts as defined in section 435 of the Companies Act 2006.

The figures for the period ended 3 May 2015 have been derived from the statutory accounts of the group for that year adjusted for the balance sheet restatement as disclosed in note 4. These published accounts were prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted for use in the European Union, and reported on by auditors without qualification, emphasis of matter or statement under Sections 498(2) and 498(3) of the Companies Act 2006 and have been filed with the Registrar of Companies.

The interim condensed consolidated financial statements for the 24 weeks ended 18 October 2015 and the comparatives to 19 October 2014 are unaudited but have been reviewed by the auditor; a copy of their review report is included at the end of this report.

A combination of the strong operational cashflows generated by the business, and the significant available headroom on its credit facilities, support the directors' view that the group has sufficient funds available to meet its foreseeable working capital requirements. The directors, having also considered the principal risks, have therefore concluded that the going concern basis of accounting remains appropriate.

The accounting policies adopted in the preparation of the interim report are consistent with those applied in the preparation of the group's annual report for the period ended 3 May 2015, except for the adoption of new standards and interpretations applicable as of 4 May 2015.

The Group does not consider that any standards or interpretations issued by the International Accounting Standards Board (IASB), but not yet applicable, will have significant impact on the financial statements for the 52 weeks ending 1 May 2016.

Notes to the accounts

for the twenty-four weeks ended 18 October 2015

2 Segment information

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

Retail: Managed pubs and restaurants (Greene King and Spirit)

Pub Partners: Tenanted and Leased pubs (Greene King and Spirit)

Brewing & Brands: Brewing, marketing and selling beer

These segments have changed compared to 3 May 2015 as a result of the acquisition of Spirit Pub Company.

Notes to the accounts

for the twenty-four weeks ended 18 October 2015

2 Segment information (continued)

* EBITDA represents earnings before interest, tax, depreciation, amortisation and exceptionals.

** Unallocated assets/liabilities comprise cash, borrowings, pensions, deferred tax, current tax, VAT provisions and derivatives.

Notes to the accounts

for the twenty-four weeks ended 18 October 2015

3 Exceptional items

Exceptional acquisition and integration costs are items of one-off expenditure incurred in connection with the acquisition and integration of Spirit Pub Company.

During the 24 week period to 18 October 2015 the group has recognised a net impairment loss of £12.4m (2014: £4.6m) in respect of its licensed estate. This is comprised of an impairment charge of £40.4m (2014: £4.6m) and a reversal of previously recognised impairment losses of £28.0m (2014: £nil). 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 changes to estimates of fair value less costs of disposal. In addition to this impairment reversals have been recognised following an improvement in trading performance and an increase in amounts of estimated future cashflows for previously impaired sites.

The net profit on disposal of property, plant and equipment of £10.5m (2014: loss of 2.9m) comprises a total profit on disposal of £21.6m (2014: £2.2m) and a total loss on disposal of £11.1m (2014: £5.1m).

During the period the group acquired as part of the business combination derivatives that are subsequently accounted for at fair value through profit and loss as opposed to existing derivatives which are designated in hedge relationships.

Notes to the accounts

for the twenty-four weeks ended 18 October 2015

3 Exceptional items (continued)

Exceptional tax

The tax credit in respect of the licensed estate arises from movements in their cost base, including the impact of indexation.

The adjustment in respect of prior periods is in respect of deferred taxation on revaluation and rolled over gains on the licensed estate.

The Finance (No 2) Act 2015 will reduce the rate of corporation tax from 20% to 19% from 1 April 2017 and to 18% from 1 April 2020. The deferred tax asset is calculated based on the rate of 20% substantively enacted at the balance sheet date. The effect of these further rate reductions will be included in the accounts for the year ended 1 May 2016.

4 Tax

The tax charge before exceptional items is £24.3m which equates to an effective tax rate of 20% which is estimated to be the effective rate before exceptional items for the year ended 1 May 2016. This compares to an effective rate of 21% for the same period last year.

The comparatives have been restated to reflect the netting of deferred tax assets and liabilities, as in the current year, the impact being that a £33.7m liability has been offset against assets. There was no overall impact on net assets as a result of this restatement.

5 Earnings per share

Basic earnings per share has been calculated by dividing the profit attributable to equity holders of £70.0m (2014: £64.3m) by the weighted average number of shares in issue during the period (excluding own shares held) of 281.4m (2014: 218.1m).

Adjusted earnings per share excludes the effect of exceptional items and is presented to show the underlying performance of the group.

Diluted earnings per share has been calculated on a similar basis taking account of 1.0m (2014: 1.1m) dilutive potential shares under option, giving a weighted average number of ordinary shares adjusted for the effect of dilution of 282.4m (2014: 219.2m).

Treasury shares and shares held by the EBT are excluded from the calculation of weighted average number of shares in issue.

Notes to the accounts

for the twenty-four weeks ended 18 October 2015

6 Dividends paid

7 ACQUISITIONS

On 23 June 2015 the group completed the acquisition of Spirit Pub Company plc creating the UK's leading managed pub company.

The acquisition provides the group with the opportunity to accelerate its retail expansion strategy by creating the UK's leading managed pub operator with significantly enhanced estate quality and scale. The group's tenanted business will materially benefit from the high quality of the acquired estate, and the Greene King Brewing & Brands business will benefit from additional routes to market.

The group acquired 100% of the share capital of Spirit Pub Company plc for consideration of £763.1m, made up of 89,095,959 shares of Greene King plc with a market value of £8.565 per share on completion.

Preliminary fair value of assets acquired and liabilities assumed

The impact on net cash flow and net debt of the acquisitions has been:

Notes to the accounts

for the twenty-four weeks ended 18 October 2015

7 ACQUISITIONS (continued)

Due to the proximity of the acquisition date to the interim announcement the fair values attributed to the acquisition have been determined provisionally.

Key areas of the fair value assessment that have yet to be concluded are: the categorisation of property, plant and equipment and operating lease balances into identifiable asset classes, the separate identification of any other intangible assets acquired that are currently included within goodwill and the calculation of the off market contract liability.

Goodwill has arisen primarily due to expected operating synergies, in recognition of management's proven track record, and as a result of opportunities that are expected to arise to optimise performance in the enlarged group's pub estate. The amount of goodwill expected to be deductible for tax purposes is £nil.

Movement on the overall level of group goodwill in the period to 18 October 2015 is shown below:

The fair value of properties acquired was established following a review of properties that was carried out by qualified surveyors. Properties have been revalued at their existing use value giving consideration to the highest and best use of the properties. The values of other current assets and liabilities have been adjusted to amounts to be realised or paid respectively.

Trade receivables acquired have a gross contractual value of £8.9m; the best estimate of amounts not expected to be collected is £1.4m and therefore the fair value recognised is £7.5m. Other receivables and prepayments have a gross contracted amount of £34.1m; the best estimate of amounts not expected to be collected is £1.5m and therefore a fair value of £32.6m has been recognised.

In the period to 18 October 2015 acquisition related costs of £1.3m have been recognised within exceptional acquisition and integration costs totalling £11.3m (see note 3), and a further £2.1m of share issue costs have been charged to retained earnings. In the year to 3 May 2015 acquisition costs, which included amounts contingent on completion, of £13.4m were recognised.

Since 24 June 2015 Spirit Pub Company has contributed revenue of £269.3m and profit before tax of £19.0m.

If the acquisition of Spirit Pub Company had taken place at the start of the financial period, the enlarged Greene King group would have recognised revenue of £1,038.3m. A pro-forma profit figure has not been presented as it is impracticable to calculate the pre-acquisition effect of fair value adjustments.

Notes to the accounts

for the twenty-four weeks ended 18 October 2015

8 Working capital and non-cash movements

9 Analysis and movements in net debt

*included in cash and cash equivalents on the balance sheet

Notes to the accounts

for the twenty-four weeks ended 18 October 2015

9 Analysis and movements in net debt (continued)