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Group revenue grew 3.1% during the year to £984.1m, helped in particular by a 3.5% growth in our Retail businesses. This growth was achieved despite an estate 2.7% smaller in absolute size and in an environment that continued to be challenging. Our gross margins held up well and, through our consistent focus on costs and cash, we were able to more than offset the year-on-year increase of £11.8m non-wage costs and inflation, particularly in drinks and utilities. Operating margins were held to within 1.1% of last year, with the change in mix across our business units, net inflation and share-based payment charge accounting for almost all of the change in margin. Operating profit before exceptionals of £211.3m was down 2.3% on last year, with H2 stronger than H1. Interest costs of £88.3m were 9.6% lower than last year, despite the inclusion of £3.3m of pension interest, reflecting our strong positive cash flows, net of capex, and the use of proceeds from our successful rights issue. Profit before tax and exceptionals was £123.0m, an increase of 3.8% on last year, delivering earnings per share of 43.4p per share, down 18.7% on last year from the higher number of shares post rights issue.

Positive free cash flow maintained

We again continued our focus on cash. The group delivered £264.4m EBITDA, down only 1% on last year from 2.7% fewer pubs. With another year of strong cash management, including £9.0m of working capital inflow, the group has a strong cash platform. We continued to invest in the core estate for both maintenance and expansionary purposes, to pay down debt (ahead of our normal amortisation) and to pay dividends to shareholders. This has been and remains a very consistent part of our long term financial strategy, particularly so in this challenging climate.

Continued investment and disposals

£78.5m of capex was spent across the estate as part of an annual plan to keep capex broadly flat on a comparable estate year-over-year. This delivered returns ahead of our cost of capital across over 300 schemes in the year. We firmly believe that continued investment benefits our estate and the business in both the short and the longer term. We also disposed of 105 trading and non-trading assets, realising £27.2m net proceeds, £1.0m ahead of book value.

As part of the use of the rights issue proceeds, we purchased 28 high quality, freehold, managed pubs during the year which were quickly integrated into our retail estates. They are trading well against our expectations.

Financing and treasury

We successfully completed a 3 for 5 rights issue in May 2009 and raised net proceeds of £207.2m to be used for both targeted acquisitions and the opportunistic repurchase of below-par securitised debt. We made total investments of £91.1m, which utilised 44% of the proceeds in under a year from receipt of funds. As well as purchasing pubs as outlined above, we also repurchased £30.3m aggregate principal amount of bonds, at a weighted average purchase price of £524 per £1,000. These bonds have now been cancelled.

Net debt at the year end stood at £1,348.1m, down £210.5m from the previous year end. There was no short term debt outstanding at the year end in relation to our £400m bank facility, which remains available until April 2012. Our high quality and primarily freehold assets support £1,380m of securitised bonds. These have a flat debt service profile, with £23.6m amortisation in the year.

During the year, there was a further improvement in our overall credit metrics, with interest rate hedges in place for 100% of the group's floating rate debt at an overall blended interest rate of 6.1%. Fixed charge cover improved to 2.4x, up from 2.1x last year, and interest cover likewise improved to 2.5x from 2.2x last year. Net debt/EBITDA was down to 5.1x, in line with our targeted level, and this will continue to move slightly as proceeds are further invested ahead of the earnings stream they generate. Our securitised vehicle had a free cash flow debt service cover ratio of 1.5x at the year end, giving 27% headroom.

Dividend

The proposed final dividend of 15.6p per share takes the full year dividend to 21.5p per share, an increase of 2.4% against the dividend of 21.0p per share last year, adjusted for the effect of the rights issue. The board continues to adopt a dividend policy targeting dividend cover of around two times underlying earnings.

Pensions

The group maintains a defined contribution scheme which is open to all new employees. The group's defined benefit schemes are all closed to new entrants. Under IAS19, and recognising the turbulence in both equity markets and corporate bonds, the net pension liability was £78.7m, compared with £91.6m at the previous balance sheet date.

The majority of the group pension schemes have completed their triennial valuations since the year end. Following constructive dialogue with the schemes' trustees, the group has increased its overall cash contribution from £6.6m to £13.6m per annum, comfortably within the cash flow expectations for the group.

Exceptional items

We recorded £21.1m of exceptional charges during the year, as a result of their nature or size. We continue to review the pubs in the tail of our estate and recognised an impairment of £37.3m against the net book value of a small proportion of our estate. The cumulative impairment in the last two years represents 4.6% of NBV, demonstrating the quality of the vast majority of our estate, whilst recognising some adjustments around specific sites. We achieved a profit on disposed properties of £1.0m during the year.

We also recognised a net gain of £10.2m on the £30.3m aggregate principal of bonds purchased in the year and the cancellation of associated interest rate swaps.

In April 2010, the group received VAT repayments totalling £7.0m from HMRC following a ruling in the Tribunal/Court of Appeal hearings involving Rank plc in relation to the application of VAT on gaming machines. Questions raised during the Rank case have been referred to the European Court of Justice and are due to be heard in 2011. In the meantime, HMRC has issued protective assessments to recover these repayments in the event they are successful with their appeal. The group has appealed these protective assessments but, should HMRC be successful on appeal, the group would be required to repay the £7.0m of VAT with interest. An exceptional gain of £6.8m net of associated costs has been recognised.

Impact of the budget

The reduction in the rate of corporation tax by 1% per year for the next four years is welcomed. We hope this is alongside continued support, via appropriate capital expenditure and other allowances, for businesses such as ours to be encouraged to maintain investment levels.

Post balance sheet events

On 11 June we announced the purchase of four additional freehold managed sites from Punch Taverns PLC for £5.3m, bringing the total number of pubs purchased with the rights issue proceeds to 34 sites. We have now invested a total of £103.3m, or 50%, of the right issue proceeds. We continue to focus on accretive opportunities in both acquiring pubs and repurchasing below-par debt.

Summary

The year was once again a challenging one, and it is pleasing to report a resilient performance both operationally and financially. We have strong operational cash flows from well managed and consistently invested freehold assets, backing long term finance at competitive rates. Our financial strategy allows us to pay down debt, continue to invest in our estate and increase dividend returns to shareholders, which all supports our continued focus on growth. Whilst the coming months and years may hold further uncertainty and challenge, our financial strength gives us confidence that we will continue to make further progress in what remains a difficult environment.

Ian Bull
Finance director
30 June 2010

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