CHAIRMAN'S STATEMENT

Financial performance

The company was founded in 1979 - and this is the 39th year since incorporation in 1983.

The table below outlines some key aspects of our performance during that period.

Summary accounts for the years 1984-2022

Notes

Adjustments to statutory numbers

1. Where appropriate, the earnings per share (EPS), as disclosed in the statutory accounts, have been recalculated to take account of share splits, the issue of new shares and capitalisation issues.

2. Free cash flow per share excludes dividends paid which were included in the free cash flow calculations in the annual report and accounts for the years 1995-2000.

3. The weighted average number of shares, EPS and free cash flow per share include those shares held in trust for employee share schemes.

4. Before 2005, the accounts were prepared under UKGAAP. All accounts from 2005 to date have been prepared under IFRS.

5. Apart from the items in notes 1-4, all numbers are as reported in each year's published accounts.

6. From financial year 2020 data is based on both pre-IFRS16 numbers and post-IFRS16 numbers following the transition from IAS17 to IFRS16.

7. Free cash flow is defined in note 8 and in the Company's accounting policies. The calculation of free cash flow can be found on the cash flow statement.

8. 2022 results are for the 6 month period ended 23 January 2022.

Background

As previously reported, in the first half of the financial year, which ended on 23 January 2022, sales were adversely affected by Covid-19 restrictions, and labour costs were high, due mainly to Covid-related absences.

Like-for-like sales were -11.8%, compared to the six-month period ended 26 January 2020, before the pandemic, and were -12.4% for the first four weeks of the second half of the financial year, ending 20 February 2022, compared to the same period in FY20.

Since sales were affected by Covid from about February/March 2020, culminating in a pub closure on 20 March 2020, sales from 21 February 2022 are compared with sales from a similar period in 2019.

In the most recent three-week period, to 13 March 2022, sales improved, being 2.6% lower than the equivalent period in 2019.

Cash sales per week during this three-week period have been approximately 10% above the depressed levels of December 2021, our busiest month of the year, indicating an improving trend.

Detailed comparisons with 'normal' trading periods, before Covid, maybe of limited value. We have, even so, compared sales, profits and margins, below, with the first half of FY20, before the pandemic.

Total sales were £807.4m, a decrease of 13.5%, compared to the 26 weeks ended 26 January 2020.

Like-for-like sales, as indicated above, decreased by 11.8%. Like-for-like bar sales decreased by 12.7%, food sales by 11.1% and slot/fruit machine sales by 9.8%. Hotel room sales increased by 6.6%.

The unaudited pre-IFRS16 operating profit, before exceptional items, was £0.5m (2020: £76.6m). The operating margin, before exceptional items, was 0.1% (2020: 8.2%).

The unaudited pre-IFRS16 loss before tax and exceptional items was £21.3m (2020: £57.9m profit). This included property losses of £1.8m (2020: £0.2m).

Property losses arose from the disposal of four pubs and the closure of two pubs. The disposals resulted in a cash inflow of £2.1m.

Losses per share, including shares held in trust by the employee share scheme, before exceptional items, were 16.0p (2020: earnings per share of 43.3p).

Total capital investment was £64.7m (2020: £128.5m). £26.6m was invested in new pubs and pub extensions (2020: £23.7m), £18.9m in existing pubs and IT (2020: £34.1m) and £19.2m in freehold

reversions of properties where Wetherspoon was the tenant (2020: £70.7m).

The company increased investment levels, which are still substantially below the pre-pandemic period, on the basis that the adverse effects of Covid-19 were likely to diminish in the near future.

Exceptional items

There was a pre-tax exceptional gain of £13.0m (2020: £15.9m loss). £12.7m of the gain related to interest rate swaps. The company has interest rate swaps in place for approximately the next 10 years at an average rate of 1.24%, excluding the banks' margin.

Free Cash Flow

There was a free cash outflow of £34.5m (2020: £49.0m inflow), after capital payments of £19.5m for existing pubs (2020: £34.5m), £7.1m for share purchases for employees (2020: £9.3m) and payments of tax and interest. Free cash outflow per share was 27.2p (2020: 46.7p inflow).

The effect of IFRS16 on a hypothetical leasehold pub

As previously indicated, in order to illustrate the differences between old and new accounting, the example below shows how a leasehold pub would be affected. The following assumptions have been made:

n a 25-year lease, at a rent of £100k per annum, rising by 7.5% at each five-year rent review

n capital development costs of £1m funded by equity, without debt

n £30k of capital reinvestment per annum from year 6 to year 25

n pub EBITDA profits of £160k per annum

n head office costs and tax excluded from calculations

As the table illustrates, "cash earnings" are the same in both examples, however accounting earnings vary greatly.

Pre-IFRS16 treatment results in stable accounting profit of £100k, reflecting stable cash earnings, whereas post-IFRS16 treatment gives rise to erratic accounting profits, which vary from £60k to £154k, over the term of the lease.

As a result, it will be difficult for investors to understand the performance of the business, using IFRS16 accounting standards, at any given point in the lease, from an examination of the profit and loss account.

In appendix 1, below, we have provided profit and loss, balance sheet and cash flow statements, using pre-IRFS16 accounting methodology, for those who find the new accounting too complex or unhelpful.

Dividends and return of capital

The board has not recommended the payment of an interim dividend (2020: £0). There have been no share buybacks in the financial year to date (2020: £6.5m).

Financing

As at 23 January 2022, the company's total net debt, excluding derivatives, was £920.4m (2020: £804.5m), an increase of £115.9m. The half year-end net-debt-to-EBITDA ratio was 25.63 times (2020: 3.54 times).

Although debt has increased by £116m since H1 2020, trade creditors have reduced by £72m and £109m has been invested in new pubs and freehold reversions.

The company has an agreement with its lenders, who have been extremely supportive throughout the pandemic, that waives its debt covenants until October 2022 and replaces them with a minimum liquidity requirement of £75m. At the half-year-end liquidity was £159.1m.

There has been no change in the total finance facilities of £1,083.0m during the period.

As referred to above, the company has fixed its SONIA (SONIA is a replacement for LIBOR) interest rates in respect of £770m until November 2031. The weighted average cost of the swaps, excluding the banks' margin, is currently 1.61%. The total cost of the company's debt, including the banks' margin was 4.28%. The cost of the swaps is illustrated in the table below:

Property

The company opened four pubs during the first six months and sold or closed six, resulting in a trading estate of 859 pubs at the half year end.

The half-year depreciation charge, excluding depreciation of "right-of-use" assets (a new charge to the profit and loss account, post-IFRS16) was £37.2m (2021: £38.7m).

As at 24 July 2011, the company's freehold/ leasehold split was 43.4%/56.6%. As at 23 January 2022, as a result of investment in freehold reversions (relating to pubs where the company was previously a tenant) and freehold pub openings, the split was 67.8%/32.2%. As at 23 January 2022, the net book value of the property, plant and equipment of the company was £1.4 billion, including £1.1 billion of freehold and long-leasehold property. The properties have not been revalued since 1999.

Taxation

The current corporation tax credit for the year is £1.5m (2020: £13.6m charge). The 'accounting' tax credit, which appears in the income statement, is £1.0m (2021: £9.5m charge).

The accounting tax credit comprises two parts: the actual current tax credit (the 'cash' tax) and the deferred tax credit (the 'accounting' tax). The tax losses arising in the financial year will be carried forward for use against profits in future years, meaning that the cash tax benefit will be received in future years. Therefore, a 'deferred tax' benefit is created which will reverse in future years when the cash tax benefit of the losses is realised.

The company is seeking a refund of historic excise duty from HMRC, totalling £495k, in relation to goods sent to the Republic of Ireland, when Wetherspoon pubs first opened in that country. The company has been charged excise duty on the same goods twice, as they were purchased in the UK, and excise duty was paid in full. Irish excise duty was then paid in addition.

Owing to a paperwork error, in the early days of our business in the Republic, which the company has sought to rectify, it has, to date, been unable to reclaim this duty, even though it is transparently clear that the duty has been paid.

Scotland Business Rates

Business rates are supposed to be based on the value of the building, rather than the level of trade of the tenant. This should mean that the rateable value per square foot is approximately the same for comparable pubs in similar locations. However, as a result of the valuation approach adopted by the government "Assessor" in Scotland, Wetherspoon often pays far higher rates per square foot than its competitors.

This is highlighted (in the tables below) by assessments for the Omni Centre, a modern leisure complex in central Edinburgh, where Wetherspoon has been assessed at more than double the rate per square foot of the average of its competitors, and for The Centre in Livingston (West Lothian), a modern shopping centre, where a similar anomaly applies.

As a result of applying valuation practice from another era, which assumed that pubs charged approximately the same prices, the raison d'être of the rating system - that rates are based on property values, not the tenants trade- has been undermined.

Similar issues are evident in Galashiels, Arbroath, Wick, Anniesland - and indeed most Wetherspoon pubs in Scotland. In effect, the application of the rating system in Scotland discriminates against businesses like Wetherspoon, which have lower prices, and encourages businesses to charge higher prices. As a result, consumers are likely to pay higher prices, which cannot be the intent of rating legislation.

VAT equality

As we have previously stated, the government would generate more revenue and jobs if it were to create tax equality among supermarkets, pubs and restaurants. Supermarkets pay virtually no VAT in respect of food sales, whereas pubs pay 20%. This has enabled supermarkets to subsidise the price of alcoholic drinks, widening the price gap, to the detriment of pubs and restaurants. Pubs also pay around 20 pence a pint in business rates, whereas supermarkets pay only about 2 pence, creating further inequality.

Pubs have lost 50% of their beer sales to supermarkets in the last 35 or so years. It makes no sense for supermarkets to be treated more leniently than pubs, since pubs generate far more jobs per pint or meal than do supermarkets, as well as far higher levels of tax. Pubs also make an important contribution to the social life of many communities and have better visibility and control of those who consume alcoholic drinks.

Tax equality is particularly important for residents of less affluent areas, since the tax differential is more important there - people can less afford to pay the difference in prices between the on and off trade.

How pubs contribute to the economy

Wetherspoon and other pub and restaurant companies have always generated far more in taxes than are earned in profits. Wetherspoon generated total taxes in FY19, before the pandemic, of £763.6m. This equated to one pound in every thousand of UK government revenue

In the six months ended 23 January 2022, the company generated taxes of £294.1m.

The table below shows the tax revenue generated by the company, its staff and customers in the last 10 years. Each pub, on average, generated £6.1m in tax during that period:

Note - this table is prepared on a cash basis. 2022 is for the 6 month period ending 23 January 2022.

Corporate Governance

Wetherspoon has been a strong critic of the composition of the boards of UK-quoted companies.

As a result of the "nine-year rule", limiting the tenure of NEDs and the presumption in favour of "independent", part-time chairmen, boards are often composed of short-term directors, with very little representation from those who understand the company best - people who work for it full-time, or have worked for it full-time.

Wetherspoon's review of the boards of major banks and pub companies, which teetered on the edge of failure in the 2008-2010 recession, highlighted the short "tenure", on average, of directors.

In contrast, Wetherspoon noted the relative success, during this fraught financial period, of pub companies Fuller's and Young's, the boards of which were dominated by experienced executives, or former executives.

As a result, Wetherspoon has increased the level of executive experience on the Wetherspoon board by appointing four "worker directors".

All four worker directors started on the "shop floor" and eventually became successful pub managers. Three have been promoted to area management roles. They have worked for the company for an average of 24 years.

Board composition cannot guarantee future success, but it makes sensible decisions, based on experience at the coalface of the business, more likely.

The UK Corporate Governance Code 2018 (the "Code") is a vast improvement on previous codes, emphasising the importance of employees, customers and other stakeholders in commercial success. It also emphasises the importance of its 'comply or explain' ethos, and the consequent need for shareholders to engage with companies in order to understand their explanations.

A major impediment to the effective implementation of comply or explain seems to be the undermanning of the corporate governance departments of major shareholders.

For example, Wetherspoon has recently met a compliance officer from one major institution who is responsible for around 400 companies - an impossible task, since the written regulatory output of each company is vast, coupled with the practical impossibility of meeting with so many companies in any meaningful way.

As a result, it appears that compliance officers and governance advisors, in practice, often rely on a "tick-box" approach, which is, itself, in breach of the Code.

A further issue is that many major investors, in their own companies, for sensible reasons, do not observe the nine-year rule, and other rules, themselves. An approach of "do what I say, not what I do" is clearly unsustainable.

Further progress

As always, the company has tried to improve as many areas of the business as possible, on a week-to-week basis, rather than aiming for 'big ideas' or grand strategies.

Frequent calls on pubs by senior executives, the encouragement of criticism from pub staff and customers and the involvement of pub and area managers, among others, in weekly decisions, are the keys to success.

Wetherspoon paid £11.1m in respect of bonuses and free shares to employees in the period ending 23 January 2022, of which 98.7% was paid to staff below board level and 91.0% was paid to staff working in our pubs.

Wetherspoon has been the biggest corporate sponsor of 'Young Lives vs Cancer' (previously CLIC Sargent), having raised a total of £19.7m since 2002. During the pandemic, our contributions had been reduced, but since the reopening of our pubs there have been great efforts seen and our contributions have bounced back significantly.

Bonuses and Free Shares

As indicated above, Wetherspoon has, for many years (see table below), operated a bonus and share scheme for all employees. Before the pandemic, these awards increased, as earnings increased for shareholders.