May 23 (Bloomberg) -- Marston's Plc, the pub owner and brewer that sponsors England's national cricket team, said first- half profit dropped 13 percent after an indoor-smoking ban hurt bar sales and the company paid more for barley, food and energy.

Net income fell to 24.4 million pounds ($48.3 million), or 8.8 pence a share, in the six months ended March 29, from 28 million pounds, or 9.1 pence, a year earlier, the Wolverhampton, England-based company said today. Per-pub profit at outlets leased to tenant managers slipped 0.6 percent, Marston's said.

An English ban on public indoor smoking is hurting pub sales as rising living costs sap incomes, leaving less to spend in bars. Marston's has removed British Sky Broadcasting Group Plc's Sky TV cable-television channels from some outlets to cut expenses and raised prices to recoup increased costs and a higher beer tax. The company has also put more emphasis on meals to draw customers.

``These results confirm the trend of polarization in the industry between good managed pubs with strong food offerings and those tenanted pubs under severe cost pressure,'' MF Global analyst Christopher Gower wrote in a note to clients today. He has a ``neutral'' recommendation on the stock.

Revenue at company-managed pubs open at least a year rose 0.3 percent, led by 7.8 percent growth in food sales, Marston's said.

Marston's gained 5.75 pence, or 2.7 percent, to 220.25 pence in London trading. The stock has slid 34 percent this year, the fifth-biggest retreat in the 25-company FTSE 350 Travel & Leisure Index, which had declined 18 percent.

Higher Expenses

Profit margins may face ``bigger pressures'' over the ``next few months'' as food and energy costs increase, Chief Executive Officer Ralph Findlay said on a conference call with journalists today. ``There's a degree of uncertainty about how much we can recover that through higher pricing.''

So-called underlying operating margins narrowed by 0.5 percentage point to 22.9 percent in the first half.

Revenue in the period gained 3.6 percent to 316.4 million pounds. Sales at company-run properties rose 11 percent to 183.8 million pounds after the 2007 acquisition of Eldridge Pope.

At pubs leased to tenant managers, total revenue fell 7.1 percent to 92.7 million pounds after Marston's sold 279 outlets in last year's second half.

Sales since the end of March have been ``broadly in line with our expectations and consistent with the fact that the comparative period last year benefited from exceptionally good weather,'' Findlay said in the statement.

Pub Openings

So-called net finance costs increased by 11.1 million pounds to 41.6 million pounds, the statement shows. Operating expenses rose by 7.4 million pounds to 243.8 million pounds.

``We remain cautious about the outlook for 2008,'' Marston's said. A recent increase in beer duty has added further costs for pubs already in ``challenging trading conditions,'' it added.

Marston's opened eight new company-run properties in the first half and plans to add 12 more in the second six months of the fiscal year. It has more than 2,000 pubs in total, most of which are leased, in chains such as Pitcher & Piano.

First-half sales fell 0.7 percent to 39.9 million pounds at the company's brewing unit, maker of beers from Jennings Sneck Lifter to Ringwood Old Thumper. After the half ended, Marston's bought the maker of Hobgoblin and Brakspear beers for an undisclosed price to add more premium brands.

Findlay said the company is in a ``strong position'' to make more acquisitions and is ``flexible'' about which part of the market the company will invest in.

No REIT Conversion

Marston's said it has no current plans to convert to a real estate investment trust as it does not believe the benefits outweigh the risks or costs. REITS, introduced in Britain at the start of 2007, must pay 90 percent of relevant income in dividends to investors, and in return are exempt from capital and corporate taxes. Competitor Enterprise Inns Plc, won the right to make the change to REIT status earlier this month.

Marston's, which was formed in 1890 when three brewers combined and went public in 1947, raised its first-half dividend by 10 percent to 4.8 pence a share.

To contact the reporter on this story: Loveday Morris in London at lmorris7@bloomberg.net

Last Updated: May 23, 2008 11:54 EDT