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TIME WELL SPENT
Annual report 2016—
Greene King is the
LEADING PUB COMPANY
AND BREWER IN BRITAIN
—Greene King is the country’s leading integrated
3,035
PUBS, RESTAURANTS
AND HOTELS
pub retailer and brewer. In June 2015 we acquired
Spirit Pub Company. At our year end we operated
3,035 managed, tenanted, leased and franchised
pubs, restaurants and hotels, including well known
brands such as Hungry Horse, Chef & Brewer,
Flaming Grill, Farmhouse Inns and our Greene King
locals estate. We also have a proud history of brewing
award-winning ales for more than 200 years and our
leading ale brand portfolio includes Old Speckled Hen,
Greene King IPA, Abbot Ale and Belhaven Best.
STRATEGIC REPORT
Investment case
2
4
Performance highlights
5 Chairman’s statement
Focus area – Best for customers
6
Focus area – Best for teams
8
10 Focus area – Best for communities
12 Chief executive’s review
16 Our business model
18 Our markets
20 Our strategy
22 Key performance indicators
23 Operational review
23 Pub Company
26 Pub Partners
28 Brewing & Brands
30 Financial review
33 Risks and uncertainties
38 Corporate social responsibility
CORPORATE GOVERNANCE
46 Board of directors
47 Corporate governance statement
51 Nomination committee report
52 Audit committee report
55 Remuneration report
67 Directors’ report and disclosures
69 Directors’ responsibilities statements
FINANCIAL STATEMENTS
Independent auditor’s report
71
77 Group income statement
78 Group statement of comprehensive income
79 Group balance sheet
80 Group cash flow statement
81 Group statement of changes in equity
82 Notes to the accounts
117 Company balance sheet
118 Company statement of changes in equity
119 Notes to the company accounts
SHAREHOLDER INFORMATION
123 Group financial record
124 Shareholder information
IBC Glossary
VIEW THIS REPORT ONLINE
greenekingreports.com/ar16
Investment case
Our overall vision is to
BUILD THE BEST PUBS
BUSINESS IN BRITAIN
—
– A compelling blend of growth
and dividends
– Significant and exciting
opportunities following the
acquisition of Spirit Pub Company
– Synergy, scale and reinvestment
– Brand optimisation
– Award-winning teams
– A high quality, well positioned estate
– A strong and flexible balance sheet
Our overall vision is to build the best pubs
business in Britain; best for our customers,
best for our teams, best for our shareholders
and best for our communities.
Within this, our aim is to offer customers
experiences that they will value, remember
and want to share. We will achieve this
aim principally through the delivery of our
five strategic priorities that will ensure we
offer compelling brand propositions, in
high quality pubs, with unrivalled value,
service and quality delivered by our
award-winning teams.
2
GREENE KING PLC Annual report 2016
1 COMPELLING BLEND OF
GROWTH AND DIVIDENDS
Over the last five years our proven growth strategy, combined
with our attractive dividend policy, has delivered a total
shareholder return of 104% compared with a total return for
the FTSE All-Share of 29%. This includes 29.2% growth in
Greene King dividends and 67.1% share price appreciation.1
1. Past performance is not an indicator of future returns.
TOTAL DIVIDEND PER SHARE 2012–2016 (p)
+ 2 9 . 2 %
35
30
25
20
15
10
5
0
2012
2013
2014
2015
2016
GREENE KING SHARE PRICE 2011–2016 (p)
+ 6 7 . 1 %
1,000
800
600
400
200
0
May 2011 May 2012 May 2013 May 2014 May 2015 May 2016
STRATEGIC REPORT 2 SIGNIFICANT OPPORTUNITIES
FOLLOWING THE ACQUISITION
OF SPIRIT PUB COMPANY
Synergy, scale and reinvestment
The acquisition of Spirit Pub Company was an important step
towards achieving our vision to be the best pub company in Britain.
In addition to enhanced brand reach and recognition, we have the
opportunity to realise significant cost synergies. We have announced a
target of £35m annualised cost savings and we will reinvest synergies
in excess of this target in our people, our systems and our brands.
Brand optimisation
Greene King acquired a strong portfolio of brands and formats
with Spirit – one that it would have been very difficult to replicate
organically – and we have embarked on an exciting journey to
optimise the combined brand portfolio. The brand optimisation
programme will be an important driver of future growth
and value creation.
We have identified five growth brands – Hungry Horse, Flaming Grill,
Farmhouse Inns, Chef & Brewer and the Greene King brand.
The portfolio of growth brands and formats covers a wide range
of consumer occasions.
Premium
Growth brands/formats
Mainstream
Value
Local
Destination
We estimate profit upside from investment in over 300 of our
existing pubs to reposition them into these growth brands over
the next three years. In 2016/17 we expect to spend £40–50m
on converting around 100 sites to a growth brand.
3 AWARD-WINNING
TEAMS
Our people are fundamental to the success of our business
and being the first choice for people who want to work in the
hospitality sector is important to us.
Key to this is our strategy to engage employees through learning
and, having exceeded our target of offering 2,000 apprenticeships
last year, we have committed to employing a further 10,000
apprentices across the business over the next three years.
During the year, we were recognised by the Sunday Telegraph as
a Top 50 Apprenticeship Employer and following our investment in
people and training we were named as the Macro Apprenticeship
Employer of the Year 2016 by Apprenticeships 4 England.
4 A HIGH QUALITY,
WELL POSITIONED ESTATE
As at 1 May 2016 we operated 3,035 managed and tenanted
pubs. The acquisition of Spirit Pub Company, completed in the
year, has increased our national presence while maintaining a
focus on the South East (including London) and the East,
where around half of our estate is situated.
We own the freehold title on 83% of our estate. This gives us
more freedom to renovate our pubs as we see fit and to buy and
sell pubs when we want to in order to optimise growth and returns
from the estate. It also removes the ongoing requirement to use
a proportion of the cash that we generate to pay rent. We believe
that these benefits, among others, outweigh the initial capital
outlay associated with purchasing the freehold title of a pub.
Our preference is to hold the freehold title of our assets and,
where it makes sense to do so, we will look to acquire the
freehold title of leasehold pubs that we currently operate.
HALF
of the estate in
the South East
and the East
5 A STRONG AND FLEXIBLE
BALANCE SHEET
Our aim is to maximise the strength and the flexibility of our
balance sheet, and through a relentless focus on cash generation
we will continue to cover our debt service obligation, our core
capital expenditure and our dividend through internally generated
cash flow.
As at 1 May 2016, our net debt relative to EBITDA stood at
3.9x.1 We have successfully reduced this ratio in each of the last
five years from 5.1x in 2012.
NET DEBT RELATIVE TO EBITDA
(MULTIPLE OF EBITDA)
5
4
3
2
1
0
1. Pro-forma.
2012
2013
2014
2015
20161
Annual report 2016 GREENE KING PLC
3
STRATEGIC REPORT Performance highlights
GROWTH IN ALL AREAS
—
REVENUE
(£m)
OPERATING PROFIT BEFORE
EXCEPTIONALS (£m)
PROFIT BEFORE TAX
AND EXCEPTIONALS3 (£m)
£2,073.0m +57.6%
£392.2m +53.1%
£256.5m +52.2%
2,200
1,800
1,400
1,000
600
,
2
0
7
3
0
.
400
320
240
160
80
3
9
2
2
.
2
4
8
2
.
2
3
6
2
.
2
6
5
6
.
2
5
6
2
.
,
1
3
1
5
3
.
,
1
3
0
1
6
.
,
1
1
9
4
7
.
,
1
1
4
0
4
.
2012
2013
2014
(53 wks)
2015
2016
2012
2013
2014
(53 wks)
2015
2016
270
230
190
150
110
2
5
6
5
.
1
7
3
1
.
1
6
8
5
.
1
5
8
2
.
1
4
7
2
.
2012
2013
2014
(53 wks)
2015
2016
EBITDA2
(£m)
ADJUSTED BASIC EARNINGS
PER SHARE1,3 (p)
£496.9m +55.8%
69.9p +14.6%
DIVIDEND PER SHARE
(p)
32.05p +7.7%
510
420
330
240
150
4
9
6
9
.
3
2
9
7
.
3
1
9
0
.
3
0
6
5
.
2
9
2
0
.
70
60
50
40
30
6
9
9
.
6
1
4
.
6
1
0
.
5
5
6
.
5
1
3
.
35.00
30.00
25.00
20.00
15.00
.
3
2
0
5
2
9
7
5
.
2
8
4
.
2
6
6
.
2
4
8
.
2012
2013
2014
(53 wks)
2015
2016
2012
2013
2014
(53 wks)
2015
2016
2012
2013
2014
(53 wks)
2015
2016
Market outperformance
– Pub Company4 like-for-like (LFL) sales +1.5%;
ahead of the market +1.3%5
– Pub Partners LFL net income +2.7%
– Brewing & Brands own-brewed volume (OBV)
Strategic and operational progress
– Five strategic priorities outlined to drive future
underlying growth
– Record customer satisfaction scores in Greene King
Pub Company; net promoter score (NPS) +7.9%pts
+2.9%; ale market share up 40 basis points to 10.5%
– Greene King named Best Managed Pub Operator
at the 2016 Publican Awards
Financial strength
– Operating cash flow +24.1%; net debt/EBITDA
improved to 3.9x6
– Group return on capital employed (ROCE)
+10 basis points to 9.4%
– Dividend per share up 7.7%, continuing
our progressive dividend track record
Acquired Spirit Pub Company;
integration and synergies ahead of plan
– £16.7m of cost synergies delivered versus year one
target of £12m
– Tenanted and leased integrated ahead of schedule;
integration of the managed business well under way
– Five retail growth brands identified and optimisation
programme commenced to deliver long-term growth
1. As throughout, profit figures are shown
before exceptional items.
2. EBITDA represents earnings before
interest, tax, depreciation, amortisation
and exceptional items and is calculated
as operating profit before exceptionals
adjusted for the depreciation and
amortisation charge for the period.
3. 2011–2013 adjusted for the impact
of IAS 19(R).
4. Previously Retail.
5. Coffer Peach Business tracker.
6. Pro-forma, calculated by inclusion of
Spirit management accounts data for
the seven week pre-acquisition period.
EBITDA is adjusted for exceptional
items as detailed in note 3 of the
financial statements.
4
GREENE KING PLC Annual report 2016
STRATEGIC REPORT Chairman’s statement
A STRONG BUSINESS
—
I became chairman of Greene King on 2 May 2016 and so this is my first
report to you on the company, its performance and prospects. Greene King
is a strong business with an excellent track record and, following the acquisition
of Spirit Pub Company during the year, we are at an exciting time in our
development. I look forward to working with the board and senior executive
team to build upon the success of my predecessor in creating further value
for all our stakeholders.
Overview
2016 was a year of strong growth for Greene King, reflecting a continued
good performance from the underlying business, enhanced by a substantial
contribution from Spirit. Including a 45 week contribution from Spirit, group
revenue grew 57.6% and exceeded £2bn. Including synergies, operating
profit before exceptional items increased by 53.1% and profit before tax
and exceptional items grew 52.2% to £256.5m, resulting in a 14.6% increase
in adjusted earnings per share to 69.9p. Cash generation remained strong
and net debt to EBITDA improved to 3.9x. Excellent progress has been made
integrating the Spirit business and we realised synergies ahead of target
in the first year.
Dividend
As a result of this strong growth and reflecting confidence in future prospects,
the board has recommended a final dividend of 23.6p, giving a total dividend
for the year of 32.05p. This represents growth of 7.7% compared to last
year and continues the long-term track record of progressive dividends.
The board continues to target minimum cover of around two times earnings.
Our people
Greene King is a people business and the strength of the business performance
during the Spirit integration demonstrates the dedication, hard work and
passion of our teams. I would like to thank everyone who has worked so
hard within the enlarged group during the last year to deliver such strong
results while successfully integrating Spirit.
Board changes
On 2 February 2016, it was announced that Tim Bridge would be retiring
at the end of the financial year after more than 45 years with the company
including ten years as chief executive followed by over ten years as chairman.
Under Tim’s leadership, Greene King has been transformed and it is a testament
to his astute assessment of people and business opportunities that the group
is in such a good state both operationally and financially. It is a privilege to
succeed Tim Bridge as chairman and on behalf of the board I would like to
thank him for his enormous contribution to Greene King over the years.
At the beginning of the financial year, Rob Rowley took over the role of
senior independent director and will be taking the chairmanship of the audit
committee at this year’s annual general meeting (AGM). Ian Durant will be
retiring at the AGM after completing nine years as a director, latterly as chair
of audit, and I wish to record our sincere thanks for his valuable input
and advice over this period.
Looking ahead
The choice available to the UK consumer who wants to enjoy a drink or
a meal with family or friends has never been wider and capital continues
to be attracted to leisure dining. Greene King has great teams, great brands
and great assets and is well placed within this dynamic environment. The
recent decision by the UK to leave the EU will need time to be implemented
and the uncertainty this brings is likely to weigh on the economy in the
near term. We will not be immune from its effects, but our business has
shown resilience in the past, our teams are motivated and, particularly
following the Spirit acquisition, we have many opportunities. I look
forward to reporting on our continued progress.
Philip Yea
Chairman
28 June 2016
“ We are at an exciting time
in our development following
the acquisition of Spirit.”
Chief executive’s review page 12
Board of directors page 46
Corporate governance page 47
Annual report 2016 GREENE KING PLC
5
STRATEGIC REPORT Focus area
BEST FOR CUSTOMERS
—We aim to be the best in the eyes of the customer,
We considered:
which means offering our customers
industry‑leading value, service and quality, delivered
by the best people and in high quality, appealing
pubs with clear and exciting brands and formats.
We acquired a strong portfolio of brands with Spirit and, together
with the existing Greene King brands and formats, we have begun a brand
optimisation programme. We reviewed the combined portfolio in order
to select those brands and formats that will drive future growth.
6
GREENE KING PLC Annual report 2016
– the relevance of the brand or format to current and future customers;
– long-term opportunities to grow and expand the brand;
– financial performance; and
– proximity to other brands within the combined group to ensure
that we have a balanced portfolio.
Following the review, our five growth brands are Hungry Horse, Flaming Grill,
Chef & Brewer, Farmhouse Inns and the Greene King locals estate brand.
We then matched each pub with the most appropriate brand
and selected a number of pubs in which to trial brand changes.
STRATEGIC REPORT BEES KNEES REFURBISHMENT
—
In winter 2015, the ‘Bees Knees’ Fayre & Square
in Leicester reopened as the ‘Bees Knees’
Hungry Horse – a pub restaurant focusing on great
value food and with zoning allowing more families
to dine in a comfortable environment, while other
customers enjoy the option to watch sport.
We are very pleased with the results to date: average weekly turnover has
increased by 42% and we have generated a strong return on our investment.
We have had some positive feedback from our customers too!
Average weekly takings
Before:
£19.4k
After:
“Looking ahead, for each of the following activities
below, please say whether you think you will do this
more often than before in this pub restaurant?”
Source: PDIQ Brand Conversion Research (Dec 2015)
Eat in the daytime
£27.5k
Bring my family
15%
12%
28%
26%
We commissioned a third party to ask our
customers what they thought of the change for
their local pub to the Hungry Horse brand.
This research has confirmed that there is now an increased intention
to eat in the restaurant both during the day and in the evening. It has
also confirmed that the pub has become more family friendly and likely
to be chosen as a venue to celebrate special occasions. These results are
in line without overall strategic objective to build strong and attractive
brands and within this to broaden the appeal of our pubs.
18%
17%
Come for special occasions
6%
Eat in the evening
9%
Use it for early evenings of social drinking
7%
12%
Pre conversion
Post conversion
Annual report 2016 GREENE KING PLC
7
STRATEGIC REPORT Focus area
BEST FOR TEAMS
—
“ I really enjoy working in such a
fast-paced team and developing not
only my education, but also myself.
I can see myself growing as a person
and would recommend to anybody
wanting to learn on the job to look
into becoming an apprentice.”
Gabrielle Green, 18, an apprentice chef at the Ship in Bedford
8
GREENE KING PLC Annual report 2016
STRATEGIC REPORT 3,100
APPRENTICES STARTED
LAST YEAR, EXCEEDING
OUR PLEDGE OF 2,000
10,000
FURTHER APPRENTICES
BY MARCH 2019
Our people make us who we are and they are our
greatest asset. We employ more than 44,000 team
members across the country, so attracting and retaining
the best people, and developing and investing in
them, is key to our continued success.
We want to offer the best for our teams and one of the ways in which
we support their career aspirations is through our award‑winning
apprenticeship programme.
Apprenticeships provide learners with valuable skills which will help
them to build their career with us. Our programme offers bespoke
qualifications that cover a range of jobs, including front of house,
kitchen and management, which are tailored to each of our brands.
Last year, we exceeded our pledge of recruiting 2,000 apprentices,
with more than 3,100 starting their apprenticeship and working
towards a nationally recognised qualification.
This year, we announced our pledge to recruit a further 10,000 apprentices over
the next three years. This is our commitment to our people and also to
young people looking for that all important first step on the career ladder.
The acquisition of Spirit Pub Company provided us with the opportunity
to review both apprenticeship programmes and make improvements which
will benefit the business in the years to come. The main development
is that more of our team members are now able to access apprenticeship
qualifications across the country.
Our apprenticeship programme continues to grow. We have seen a
175% increase in applications to join Greene King as an apprentice
compared to the previous year. We are seeing a particular increase in
16–24 year olds interested in enrolling on our apprenticeship scheme
and, as our business grows, we are committed to supporting this age
group further by providing more opportunities to join.
Our apprenticeship programme has been recognised during the last
12 months by winning a number of awards, including:
– one of the Daily Telegraph and Top Apprenticeship Careers List’s
Top 50 Apprenticeship Employers in the UK;
– named as a Top 100 Apprenticeship Employer by the National
Apprenticeship Service;
– Apprenticeships 4 England’s Macro Employer of the Year;
– VQ Employer of the Year; and
– National Apprenticeship Service Regional Winner (East of England).
“ we believe we have a
responsibility to support
young people by creating
these opportunities to earn
and learn.”
Annual report 2016 GREENE KING PLC
9
STRATEGIC REPORT Focus area
BEST FOR
COMMUNITIES
—
£2m
3 years
PROUD TO HAVE RAISED
£2M FOR MACMILLAN
CANCER SUPPORT
EXTENDED PARTNERSHIP
FOR A FURTHER
THREE YEARS
For centuries, pubs have been at the heart of the
community and today we continue as our ancestors
did before us by serving, and supporting, those who
choose to spend time with us. We want to be the best
we can be for our communities. One of the ways we
support them is through our charity programme.
We wanted to unlock the powerful opportunity we have to raise money
for important causes through our local community pubs so, in May 2012,
we embarked on our first charity partnership with Macmillan Cancer
Support. At that time, we set ourselves a stretching target of raising
£1m in three years. We were delighted, and proud, to announce that
after three and half years we had raised £2m.
We see our team members and guests as the real heroes as they pulled
together to show such enthusiasm, passion, blood, sweat and tears to beat
our fundraising goal.
Some of the key pieces of activity during the last year included:
– the World’s Biggest Coffee Morning;
– the Hungry Horse Macmillan Week;
– locals’ Macmillan Fundraising Month of May; and
– in local communities, family fun days, bingo nights, bike rides,
marathons, climbs and much more!
This year, we were proud to receive the Pub Aid Award at the All Party
Parliamentary Beer Group Annual Awards for our fundraising
achievements for Macmillan.
The impact and reward of the partnership is not just felt by Macmillan.
It has helped us to connect with our local communities and allowed
our team members to show their creativity, strength and bravery
in their fundraising and build stronger relationships together.
We know the £2m raised will make a huge impact on cancer patients and
their families and, this year, we revealed we would continue our successful
partnership with Macmillan for a further three years. The money raised
over the next three years will continue to fund vital services such as
Macmillan nurses and local support programmes supporting people
with cancer to better self-manage in their own communities.
10
GREENE KING PLC Annual report 2016
STRATEGIC REPORT Our partnership with Greene King began in
May 2012 and we continue to be overwhelmed
by the generosity and ingenuity of Greene King
employees and customers in raising money for
Macmillan. The money that Greene King has raised
will make a real difference to the lives of people
affected by cancer and their families. It will provide
practical, medical, financial and emotional support
and will help them take back control of their lives.
At Macmillan we believe that
no one should face cancer
alone and with the continued
support of our partner
Greene King – no one will.”
Rachel Gascoigne, partnership manager at
Macmillan Cancer Support
Annual report 2016 GREENE KING PLC
11
Chief executive’s review
A TRANSFORMATIONAL YEAR
—
GROUP REVENUE WAS:
£2,073.0m
OPERATING PROFIT BEFORE
EXCEPTIONAL ITEMS WAS UP:
53.1%
PROFIT BEFORE TAX
AND EXCEPTIONALS WAS:
£256.5m
ADJUSTED BASIC EARNINGS
PER SHARE GREW:
14.6%
It has been a transformational year for Greene King, with the acquisition
of Spirit in June 2015 followed by significant progress integrating the ‘best
of both’ businesses and realising cost synergies, helping to deliver further
improvement in earnings and dividends, and strong returns.
Trading environment
In the first half, improvements in the economic environment, including
increased consumer confidence and sustained real income growth, were
slow to positively impact the UK eating and drinking out market. As the
UK referendum approached in the second half, the environment softened
and consumers appeared more reluctant to spend discretionary income
due to the uncertainty.
Following the UK’s vote to leave the European Union, the increasingly
uncertain trading environment is likely to weigh on consumer sentiment
in the near term. However, Greene King has a strong track record of
performing well in challenging trading environments and we have levers
to pull within our business, particularly following the Spirit acquisition,
to refocus our investment and help limit the indirect impact from lower
consumer confidence. In addition, we have limited exposure to European
sales, although we have some exposure to foreign exchange rate movements
through overseas sourcing. We will look to mitigate the impact of this
as far as possible.
Outside of the consequences of the vote, UK eating and drinking out
remains a dynamic market with intense competition for every pound in
the consumer pocket. This environment of increasing consumer choice
extends beyond the traditional pub and restaurant sector and includes
the supermarkets and the takeaway aggregators who have made eating
at home more attractive. Understanding this, and ensuring our offer is
compelling enough to compete successfully with this broader competitive
set, is increasingly important for delivering long-term growth.
Consumers remain highly value conscious with a heightened awareness
of price, a demand for excellent and personalised service, and a desire for
higher quality on the plate and in the glass. These trends will be exacerbated
by the uncertainty surrounding Brexit and we are well positioned to take
advantage of any weakening in spending power utilising our successful
value brands and formats.
They are also seeking experiences they can share with both friends and
family and with a much wider audience on social media. Our aim is to create
experiences that our customers will value and remember, and that they
want to share with others. While digital and technology will increasingly
contribute to the overall customer experience, it is the physical interaction
with our people and our pubs that will enhance these experiences. We
believe that our high quality estate, together with our approach to digital,
can set us apart from our broad competitive set.
STRATEGIC REPORT Our people are core to our business and we constantly strive to pay them
appropriately for their hard work while also ensuring we maintain a high
level of investment in their development and training. We remain confident
of being able to mitigate most of the impact from the ongoing increases in
the National Living Wage. We continue to expect the benefits of mitigating
actions to be fully achieved in 2018/19 and there are no changes to our
estimate that the incremental impact, over and above general wage inflation,
will be £2m in the current financial year and will reach an annualised run
rate of £6m per annum in 2018/19.
Now that the revised statutory Pubs Code has been announced, and
assuming there are no further changes, we are planning for the introduction
of the Code at the end of July 2016. We believe the overall financial impact
on the group will be immaterial.
Performance summary
Total revenue grew 57.6% to £2,073.0m while operating profit1 was 53.1%
higher than last year at £392.2m, including £16.7m of synergies achieved
during the year.
The operating margin was 18.9%, 0.6%pts lower than last year. This comprised
a positive contribution from cost synergies, diluted by a higher contribution
from managed pubs, higher lease costs following the Spirit acquisition and
incremental investment in our people and in customer service.
In Pub Company, this investment in our people helped to drive LFL sales
growth of 1.5%, ahead of the market2, and included LFL sales growth in
the original Greene King managed estate of 1.9%. Total sales growth in
Pub Company was 68.7% while operating profit grew by 56.8% to
£299.2m. 13 new pubs were opened during the year.
Having achieved a record customer satisfaction score in Greene King Pub
Company in the first half, further progress was achieved in the second half
resulting in a 7.9%pts increase in the full year. We also saw an improved trend
in team member retention and in our food safety ratings. The improvements
in these metrics indicate the success of our teams in continuing with
business as usual during the integration process.
The tenanted and leased businesses were successfully integrated at the end
of the first half and the combined Pub Partners business grew LFL net income
by 2.7% in the year. Average EBITDA per pub increased by 14.3% reflecting
further improvements in estate quality as a result of the Spirit acquisition,
the disposal of 48 pubs from the combined estate and synergy contribution.
Brewing & Brands achieved record revenue of £196.9m, including 2.9%
OBV growth, and we extended our share of the UK ale market by 40bps
to 10.5%. Operating profit grew 9.7% to £32.7m.
The integration of Spirit progressed ahead of plan, with synergy realisation
of £16.7m in the year exceeding our expectations. Overall, the positive
group performance delivered a 24.1% increase in net cash flow generated
from operations and we again covered our debt service obligation, core
capital expenditure and dividend from internally generated cash. Net debt
to EBITDA improved to 3.9x.
Adjusted earnings per share grew 14.6% to 69.9p and, as a result of
this growth and our confidence in the future, we have declared a 7.7%
increase in the dividend per share, maintaining our long-term progressive
dividend policy.
The business achieved another year of robust returns, generating a ten
basis point increase in ROCE to 9.4%, which remains comfortably ahead
of our weighted average cost of capital (WACC).
1. Throughout this review, operating profit, operating profit margin and EBITDA
are stated on a pre-exceptional basis.
2. Coffer Peach Business Tracker.
Serving food
at a Hungry Horse.
Annual report 2016 GREENE KING PLC
13
STRATEGIC REPORT Chief executive’s review continued
“ The acquisition of Spirit
in June 2015 was followed
by significant progress
integrating the best
of both businesses.”
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.
Following a thorough review of Spirit, we commenced the exciting task of
integrating these two leading pub businesses using a ‘best of both’ companies
approach. At the end of the first half of the year, our two tenanted and
leased businesses were integrated ahead of schedule. We also drove strong
acceptance of the Greene King beer brands within Spirit’s managed pubs
and we announced a decision to retain both the Spirit and Greene King
head offices. During the second half, the Greene King beer portfolio gained
further traction within Spirit pubs, we commenced the roll out of the
‘best of both’ pub IT system and the majority of the people transition
was completed.
The scale of change in the combined business since the acquisition is significant.
While maintaining trading momentum, we have driven fundamental
improvements to how the business is structured and run. Keeping Spirit’s
Burton office as the headquarters for our managed pub business and
putting together a senior management team with the requisite retailing
experience and skills has given us a platform to create an exceptional
retailing business that can generate sustainable competitive advantage.
Following a strong start, momentum with the realisation of cost synergies
continued in the second half with good progress on procurement, where
we saw a number of supplier negotiations concluded sooner than anticipated.
As a result, £16.7m of cost synergies were achieved in the year compared
with our original expectation of around £12m. We continue to anticipate
annual cost synergies in the region of £35m by the end of 2017/18, of
which 80% will be realised by the end of this financial year. Non-recurring
costs of achieving these synergies are still expected to total £25m. Our
intention remains to invest cost synergies in excess of our stated target
to strengthen key areas within Pub Company such as our people, our
systems and our brands.
The new Pub
Company support
centre in Burton,
Spirit’s former
headquarters.
14
GREENE KING PLC Annual report 2016
STRATEGIC REPORT Dining at a
Chef & Brewer pub.
Brand optimisation
We acquired a strong portfolio of brands and formats with Spirit – one
that would have been very difficult to replicate organically – and we continue
to anticipate material benefits from optimising the combined brand portfolio,
which will provide an exciting growth opportunity over the next few years.
The combined business has 20 brands and formats and our plan is to reduce
this to around ten. We are evolving the future brand portfolio and plan
to focus on five growth retail brands and formats: Hungry Horse, Flaming
Grill, Farmhouse Inns, Chef & Brewer and Greene King. We will also
continue to develop our hotels and Metropolitan, our premium London
pub format.
In order to select the growth brands and formats to invest in, we looked
at the consumer relevance and financial performance of each brand, the
long-term opportunities to grow and expand and the proximity to other
pubs within the combined group.
There is potential profit upside from investment in over 300 of our existing
pubs to reposition them into the growth brands over the next three years.
Our priority in 2016/17 is to convert around 100 Fayre & Square pubs into
the growth brands, of which the majority will be rebranded as Hungry Horse.
We also plan to simplify our Local Pubs estate. We will reduce the number
of formats and we will replace any existing retail branding with Greene King
branding, considerably increasing the size of the Greene King branded
estate and creating a significant pub retail brand in the UK eating and
drinking out market.
In the current year, we expect to spend around £40–50m on these conversions
and anticipate generating EBITDA returns significantly above our cost of
capital. We expect a £1m dilutive profit impact in the first year, including
the impact of additional opening costs.
During the year, we were proud to deliver the following initiatives:
– in March we announced that our teams and customers raised £2m
for our charity partner, Macmillan Cancer Support, doubling our initial
target. To mark the milestone, we were pleased to renew our partnership
with Macmillan Cancer Support for a further three years;
– a partnership with The Prince’s Trust to launch ten programmes across the
country giving unemployed young people an opportunity to step into work;
– for the third year running, we donated to the Pub is the Hub
Community Services Fund in order to help to support rural pubs that
want to diversify their services for the benefit of their communities; and
– further reduction in water consumption with Spirit named as the
Water Efficient Project of the Year at the 2015 Energy Awards.
Outlook
Trading in the first eight weeks of the year has strengthened, helped by the
European Football Championships and better weather in May, with Pub
Company LFL sales up 2.8%. We are pleased with the initial performance of
the brand optimisation programme and the exciting opportunity this presents
to deliver long-term growth, and today we have outlined five strategic priorities
to deliver our vision of being the best pub company in Britain.
The increasing uncertainty surrounding the UK’s future withdrawal from
the European Union is likely to have a negative impact on the economy
and on consumer confidence in the near term. However, with our track
record of success in previous challenging conditions, our strong balance
sheet and the limited direct impact on our business from Brexit, we remain
confident that our strategy will drive further growth in earnings, returns
and dividends and we look forward to delivering further financial and
strategic progress in the current financial year.
Best for our communities
Our pubs are at the heart of the community and have a unique opportunity
to play an active role in the communities they serve. We understand the
importance of operating a sustainable and responsible business and, as an
industry leader, it is our duty to set an example by delivering a winning
social responsibility programme.
Rooney Anand
Chief executive
28 June 2016
Annual report 2016 GREENE KING PLC
15
STRATEGIC REPORT Our business model
DELIVERING VALUE
TO ALL STAKEHOLDERS
—
The Greene King vision is to be the
best company in Britain: the best for
our customers, the best for our teams,
the best for our shareholders and
the best for our communities.
Our integrated business model is
predicated on balancing strong cash
generation with investment to further
position the business towards long-term
growth markets and, as a result, deliver
value to all of our key stakeholders.
Our business consists of three divisions:
Pub Company (previously Retail),
Pub Partners and Brewing & Brands.
Pub Partners
Pub Company
Brewing & Brands
Underpinning our business model is a financial strategy
to maximise the strength, flexibility and efficiency of our
balance sheet, with the aim of supporting growth through
investment in our existing estate and selectively acquiring
new sites, while maintaining our progressive dividend policy.
16
GREENE KING PLC Annual report 2016
Pub Company: Our Pub Company consists of both more food-focused
destination pubs and restaurants and more community-focused local pubs.
The principal revenue streams are food and drink available for consumption
on our premises. We gain further revenue from our accommodation offer
on some sites, and a number of our sites have gaming machines. The success
of our Pub Company is driven by our customers’ desire to eat and drink outside
of their homes and is specifically determined by the number of customers we
attract and the amount that they spend with us. Pub Company (1,841 pubs)
is the key growth driver for the group and in this division we typically own
and operate the pubs. This division is a key focus area for growth and we
will continue to invest the cash generated from the group in our people and
our pubs to ensure that Pub Company continues to gain share of the UK
eating and drinking out market.
Pub Partners: Pub Partners is responsible for operating our tenanted,
leased and franchised pubs and aims to ensure that each pub has the right
licensee to operate it, on the right agreement with the right offer. Revenue
in our Pub Partners business of 1,215 pubs is principally achieved through the
supply of beer and other drinks to our licensees and the rent that they pay
us for the pub and our support. We also derive a small portion of revenue
from gaming machines. Although we invest in this business – to ensure that
we can offer prospective lessees the best pubs – the cash generated
is principally reinvested into Pub Company.
Brewing & Brands: Our Brewing & Brands division operates two
breweries, one in Bury St Edmunds and the other in Dunbar, that brew
our core portfolio of ales, which are complemented by an innovative range
of craft ales. We generate revenue in this division from the sale and distribution
of ales produced by us in our own breweries, and from the sale and distribution
of drinks (both alcoholic and non-alcoholic) produced by third parties. As
well as to our internal customers in the other divisions, we also sell our ales
to other pub companies and to individual free trade customers. A further
important revenue stream is the sale of our own-brewed ales to supermarkets
and other retail outlets and, increasingly, in the export market.
An integrated business model
In addition to driving growth in Pub Company through enhanced investment,
further benefits of our integrated business model include the flexibility to transfer
pubs between Pub Company and Pub Partners and ensure that we match
each pub with the best operating model. Both Pub Company and Pub Partners
are customers of Brewing & Brands increasing the distribution of our ales.
Acquisition of Spirit
The acquisition of Spirit has added additional scale in both Pub Company
and Pub Partners, which, in addition to increasing our brand presence and
recognition, creates opportunities to realise cost synergies in areas such as
procurement and distribution. We have outlined a ‘best of both’ companies
approach to the integration. For example, we have based our Pub Company
division at the Spirit office in Burton-upon-Trent, while continuing to locate
the Pub Partners division, Brewing & Brands and the company headquarters
in Bury St Edmunds. This arrangement means that Pub Company 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 will also optimise the combined brand portfolio,
reducing the number of brands and formats from 20 to around ten,
including five growth brands, and focusing our investment.
STRATEGIC REPORT BEST FOR OUR...
—
Hungry Horse awarded Best Value
Pub Restaurant Menu1
Best Managed Pub Operator2
Improved value, service
and quality; record NPS
Custom e r
s
Top 50 Apprenticeship Employer4
Best Work Experience
Provider 20155
Will employ a further
10,000 apprentices over
three years
s
m
Te
a
Delivering value
to all stakeholders
a reholders
C
o
m
m
u
nities
h
S
Raised £2m
for Macmillan –
double our initial target
Water Efficient
Project of the Year3
Prince’s Trust partnership
ROCE 9.4% +10bps
Operating cash flow +24.1%
Full year dividend +7.7%
1. Menu Innovation and
Development Awards.
2. 2016 Publican Awards.
3. 2015 Energy Awards.
4. The Daily Telegraph.
5. Springboard Awards
for Excellence.
Annual report 2016 GREENE KING PLC
17
STRATEGIC REPORT Our markets
Overview
Our core markets are the UK eating out and UK drinking out markets.
We also compete in the UK ale market with our brewing of cask and
premium ales, and have a foothold in the UK staying out market.
Political environment
Regulatory forces have played, and will continue to play, a key role
in shaping our markets and our business.
Over the last 12 months our core markets have continued to be supported
by the macroeconomic environment. Alongside the rest of the sector, we
continue to navigate a number of changes in the regulatory environment,
in particular the introduction of the National Living Wage and the statutory
Pubs Code.
The long-term fundamentals behind our core markets remain strong and
we are cautiously optimistic about the future. We have seen the UK eating
out market grow and expect it to continue to do so. We also believe it will
become increasingly dynamic with intense competition for every pound in
the consumer’s pocket. The UK drinking out market will continue to show
resilience and hold its share of leisure spend.
Positive sector LFL growth continued, although it was
a little more subdued in the second half of the year
UK MARKET LFL GROWTH (% ROLLING MAT)
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Jun 2012
Jun 2013
Jun 2014
Jun 2015
Apr 2016
Source: Coffer Peach Business Tracker.
While recent sector like-for-like (LFL) sales growth has been a little more
subdued, within Pub Company, our largest and fastest growing business,
we successfully outperformed the market in the 12 months to April 2016,
growing our LFL sales by 1.5%, including by 1.9% in the original Greene King
managed estate.
Economic environment
The macroeconomic environment continued to provide a strong backdrop to
our core markets with consumers experiencing increases in average weekly
earnings (supported by a tightening labour market). As a result of a low
inflationary environment, the climb in consumer confidence throughout 2015
and an increasing appetite for households to spend rather than save, we saw
UK real household spending grow by c. 2.8% in 2015.1
However, the picture was mixed across the year and, in the second half,
as the UK referendum on the European Union approached, consumer
confidence dipped and the economic environment showed some signs
of softening with consumers more reluctant to spend discretionary
income in the face of such uncertainty.
We remain cautiously optimistic about the future UK economic outlook
and expect consumer discretionary spend to continue to grow, albeit
at a slower rate as the growth in average weekly earnings slows (as the
country approaches full employment) and inflation picks up.
Although the referendum is now behind us, the process by which Britain
extracts itself from Europe is uncertain. We are mindful of the potential
impact of this uncertainty on the consumer and expect consumer confidence
to remain more subdued until this is clearer.
In July 2015, it was announced that the UK government would introduce
a compulsory minimum wage premium for all staff over 25 years of age,
known as the National Living Wage. 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.
We remain confident of being able to mitigate most of the impact from
the ongoing increases in the National Living Wage.
Throughout the year, the Small Business, Enterprise and Employment Act
has taken steps towards implementation, with the publication of a draft
statutory Pubs Code in April 2016. Now that the revised Code has been
announced, and assuming there are no further changes, we can start to
plan for its introduction at the end of July 2016. We believe that the
overall financial impact on the group will be immaterial.
We welcomed the Chancellor’s decision to freeze excise duty in March
2016. We maintain our support for an alcohol minimum unit price (MUP).
We believe MUP, alongside other measures such as improved alcohol
education, can be a highly effective measure in reducing irresponsible
retailing and consuming of alcohol, therefore helping to reduce the costs
to society of rising alcohol related illness and crime.
We await more detail around the proposed Apprenticeship Levy and will
again look to work with government to ensure that this legislation supports
rather than hinders investment in people development and training.
1. Source: Thomson Datastream, Capital Economics.
Households have been increasingly
choosing to spend rather than save
UK HOUSEHOLD SAVING RATIO (%)
14%
12%
10%
8%
6%
4%
2%
0%
Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015
Source: Capital Economics.
Consumer confidence was strong throughout
2015, but dipped in early 2016
UK CONSUMER CONFIDENCE COMPOSITE INDEX
10
0
-10
-20
-30
-40
We are also mindful of the longer-term impact on household incomes
from government plans to reduce welfare spending, which are likely
to have a disproportionate impact on those with lower incomes.
Source: GfK.
Sep 2012
May 2013
May 2014
May 2015
May 2016
18
GREENE KING PLC Annual report 2016
STRATEGIC REPORT The pubs and bars segment is c. 25%
of the total UK eating out market
We have seen more recent signs of the
decline in alcohol consumption levelling off
UK EATING OUT MARKET STRUCTURE 2015 (£BN)
UK ALCOHOL CONSUMPTION – % IN LAST WEEK 2005–2014
2015
UK Eating out
22
20
11
9
8
7
7
85
2015
UK Pubs and bars
10
6
6
22
Pubs and bars
Restaurants
Fast food
Hotels
Coffee and
sandwich retailers
Retail grab and go
Other
Independent
Tenanted and leased
Managed and branded
66%
64%
62%
60%
58%
56%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: M&C Allegra (2015).
Source: ONS.
UK eating out
We offer a variety of eating out options and experiences across both
our destination and local community pubs, with eating out representing
c. 40% of leisure spend in 2015.
We compete in a broad UK eating out market made up of around 330,000
outlets and annual total spend of c. £85bn1. Within this market, the pubs
and bars segment consists of around 50,000 outlets and total spend
of c. £22bn – c. 25% of overall eating out spend.
The market is increasingly dynamic. An environment of increasing consumer
choice extends beyond the traditional pub and restaurant sector and includes
the supermarkets, who have successfully made eating at home more attractive,
and the takeaway aggregators who facilitate the option of combining the ease
of eating out with the comforts of home. Understanding this, and ensuring
our offer is compelling enough to compete successfully with this broader
competitive set, is increasingly important for delivering long-term growth.
The overall UK eating out market is expected to grow at an average
annual rate of c. 3–4% over the next three years1, supported by rising real
incomes, supply growth in the market and increases in the proportion
of adults eating out of home and the frequency with which they do so,
driven in particular by younger adults.
Hectic lifestyles and the increasing desire to seek experiences mean that
consumers are increasingly attracted to both informal dining with great
value food and drink across all day parts as well as more premium
offerings. Segments of the market such as fast food and ‘retail grab and go’
will therefore be among the fastest growing parts of the market. We will
continue to develop our offer to meet these needs, and are making
progress in improving our coffee offer and targeting breakfast and snack
sales as well as the more traditional out-of-home dining occasions.
The pubs and bars segment is forecast to hold its share of this market
at c. 25%. Managed and branded pubs will be the key drivers of the
evolution of the pub sector as consumers are drawn to brands that
stand out and have defined, consistent propositions that signal reassuring
brand familiarity, excitement and the opportunity to try something new.
In contrast, overall spend in the tenanted and leased sector will continue
to decline primarily as a result of falling supply. We see an opportunity
here to buck the inherent market decline by strengthening the quality
of our estate to win share from less well invested competitors.
UK drinking out
Through our pubs and our portfolio of award-winning ales we offer choice
for all types of drinkers and occasions. Drink is a key driver of overall spend
in the pubs sector with 40% of all meals involving an alcoholic drink and 52%
of consumers saying that alcohol is an important choice driver for where to
eat.2 A strong drinks range is therefore a crucial factor in achieving overall
customer satisfaction and we aim to capture share of spend by providing a
drinks range that offers value, quality and an experience to our guests.
After a notable decline in alcohol consumption between 2007 and 2012,
consumption has levelled off more recently.3 We have seen drinking out spend
retain its share of leisure spend at c. 22%.4 We expect to see continued
resilience in drinking out spend in value terms, which will be supported by the
broader increase in discretionary and leisure spend. We also expect the price
differential between the on and off trades to become less relevant as consumers
are drawn to the ‘experience’ of drinking out of their homes.
Other markets
UK ale market
We are the UK’s leading cask ale brewer and premium ale brewer. The overall
UK ale market was flat in the 12 months to April 2016. This improving picture
has been driven by a slowing in the decline of standard ale in keg and can
formats and continued growth of premium ale through cask and bottle formats.
During this period, we were successful in extending our share of the UK
ale market by 40bps to 10.5%, which we have achieved through building
consumer loyalty to our core ale brands, which have all grown in the year,
and through developing our innovative range of seasonal and ‘craft’ beers
to appeal to a new generation of beer drinkers.
We expect the UK ale market to continue to evolve and improve and to
see low single-digit growth in the total market. We remain confident in
our ability to continue to grow share with our enviable portfolio of brands
that can meet the needs of consumers across all drinking occasions.
UK staying out market
We compete in the UK provincial staying out market and offer great value
and convenience to guests on both business and leisure visits, with our estate
at the year end consisting of 3,399 bedrooms. We see the combination of a
pub restaurant and adjacent rooms to be an attractive guest proposition
in the context of increasing business and leisure travel, and therefore one
which offers plenty of opportunity for pubs to take share from the more
traditional branded hotel chains. The staying out market enjoyed a strong
year in 2015, benefiting from the economic recovery and a buoyant travel
market. RevPAR (revenue per available room) in the market continued to grow
in the provinces, and RevPAR across our combined Pub Company estate
grew by 4.5% across the financial year. RevPAR in the provincial staying
out market is expected to grow by c. 3–4% over the next two years
(i.e. continued growth, albeit at a slower rate) driven by moderate
increases in occupancy and hoteliers’ average daily rate.5
1. M&C Allegra (2015).
2. CGA Peach.
3. ‘% of UK population who drank in the last week (aged 16 and over)’
(source: adult drinking habits in Great Britain, 2014 ONS, released March 2016).
4. GK Leisure Tracker.
5. PwC (2016).
Annual report 2016 GREENE KING PLC
19
STRATEGIC REPORT Our strategy
TO BE THE BEST PUB
COMPANY IN BRITAIN
—
Our vision is to be the best pub company in Britain; the best for our customers, our teams, our communities
and our shareholders. By being the best, we believe we will generate superior underlying growth and returns
for our stakeholders. Pubs have to contend with a wider set of competitors, including coffee shops, takeaway
aggregators and grab and go stores and a faster pace of consumer change than ever before. This means we
will look to redefine what our pubs offer their customers, ensuring they have a broader and more lasting
appeal. In order to deliver our vision, we have identified five strategic priorities for the medium term:
Best for our customers, best for our teams, best for our shareholders
and best for our communities
1
2
BUILD
ATTRACTIVE AND
STRONG BRANDS
INDUSTRY-LEADING
VALUE, SERVICE
AND QUALITY
3
WORK WITH THE
BEST PEOPLE
4
OWN THE
BEST INVESTED
PUB ESTATE
IN BRITAIN
5
MAINTAIN A
STRONG BALANCE
SHEET AND
FLEXIBLE CAPITAL
STRUCTURE
Delivering attractive shareholder returns, earnings and dividend growth
20
GREENE KING PLC Annual report 2016
STRATEGIC REPORT 4 OWN THE BEST INVESTED
PUB ESTATE
We want to own and run the best pubs in Britain, which we will
achieve through proactive management of our pub portfolio and
continued industry-leading investment in our estate. We will further
grow the share of our profits from managed pubs, where we
can determine the customer experience, while valuing the role
that Pub Partners plays in generating cash, adding scale and
promoting the Greene King brand. The best pubs have the best
beers and we will continue to brew our own industry-leading
beer brands. We believe the strong relationship between our
pubs and our breweries is a clear competitive advantage.
We now operate 1,823 pubs, restaurants and hotels in our
managed estate. We will selectively build and acquire new pubs
and transfer exceptional tenanted and leased pubs to Pub Company
when the opportunity arises. We will also selectively reduce the
size of our current managed estate by selling pubs that dilute returns
or have an unattractive long-term outlook. In Pub Partners, we
now operate 1,212 pubs and we will reduce the size of the estate
through disposals from the tail and through transfers to Pub Company.
Our medium-term target for our Pub Partners estate is around
1,000 pubs.
Our preference remains to own the freehold title of our assets
and, where it makes financial sense, we will selectively acquire
pub freeholds where we currently operate the pub on a lease.
5 MAINTAIN A STRONG
BALANCE SHEET AND
FLEXIBLE CAPITAL
STRUCTURE
Underpinning our company strategy is a financial strategy
to maximise the strength and flexibility of our balance sheet.
Through a relentless focus on cash generated from operations,
we will continue to cover our debt service obligation, our core
capital expenditure and our dividend through internally generated
cash flow. After the year end, we successfully completed the
issuance of an additional £300m of bonds in the Greene King
secured financing vehicle, realising net proceeds of £180m after
settling certain interest rate swap liabilities. This additional financing
provides longer-term funding for general business operations
including increasing our optionality to invest in the business.
1 BUILD ATTRACTIVE
AND STRONG BRANDS
We must ensure our brands stand out and remain relevant
to today’s increasingly demanding consumer in order to drive
long-term growth. We are optimising our brands and formats
and using the scale this brings to increase investment in our
brand propositions to drive greater brand awareness and loyalty.
We will look to broaden the appeal of our pubs, both in terms
of the customers who use them and their reasons for visiting.
For our Local Pubs estate, Pub Partners and Brewing & Brands,
the Greene King brand is key to superior performance and we
will extend our brand marketing leadership by investing more in
communicating the brand’s benefits. A strong digital presence is
vital in building successful brands and we will create the digital
industry leader through combining the best of Greene King and
Spirit’s digital expertise to drive customer engagement, engender
higher levels of customer brand loyalty and improve the return
on our marketing investment.
2 INDUSTRY-LEADING VALUE,
SERVICE AND QUALITY
We remain committed to exceeding customer expectations and
we will achieve this by constantly improving the value offer to our
customers, the service delivery of our teams and the quality of
our food and drink offer. We will use our scale to deliver leading
value propositions through the successful execution of known
value item (KVI) and everyday low pricing (EDLP) strategies to
drive a sustainable mix of volume and spend per head growth.
We will increase investment in our people to ensure we lead
the industry on service and successfully compete with the wider
competitive set. Lastly, we will evolve and improve the quality
of the food, drink and accommodation we offer our customers,
regularly benchmarking against the best in class.
3 WORK WITH THE
BEST PEOPLE
Being the first choice for people who want to work in the
hospitality sector is important to us and we want to offer every
existing team member the opportunity to grow and develop.
Our refreshed career pathway ‘Craft your career’ provides
individuals with structured development opportunities while
further initiatives include our focus on apprenticeships across
the business, which has led to a commitment to employ a
further 10,000 apprentices over the next three years.
We also want to recruit, retain and develop the best operators
in our Pub Partners business and this means extending our focus
on training and development to both existing and future licensees.
Overall, investing more in the recruitment, retention and
development of our people will lead to a better trained and
more motivated team across our business, which will be reflected
in ongoing improvements in team retention and customer service.
Annual report 2016 GREENE KING PLC
21
STRATEGIC REPORT Key performance indicators
To maintain focus on our five strategic priorities, we have a set of overall financial and non-financial KPIs,
which are also used to help to align remuneration to performance.
KPI
PROGRESS IN FY16
Pub Company like-for-like sales (%)
The sales this year compared to those in the previous year for all
Pub Company sites that were trading throughout the two periods
being compared, expressed as a percentage.
EBITDA per pub: Pub Company
EBITDA (operating profit before depreciation, amortisation
and exceptionals) divided by the average number of trading pubs
in the period.
Pub Partners LFL net income
Net income is EBITDA in our leased, tenanted and free-of-tie pubs,
stated before property costs and administrative expenses – the change
in net income is on a same estate basis (i.e. adjusting for disposals).
EBITDA per pub: Pub Partners
EBITDA (operating profit before depreciation, amortisation
and exceptionals) divided by the average number of trading pubs
in the period.
Brewing & Brands OBV growth (%)
Year-on-year growth in the sold volume of our own-brewed ales.
Return on investment (%)
The incremental EBITDA delivered as a result of our developments,
divided by the value of the capital investment.
Return on capital employed (ROCE) (%)
Pre-exceptional operating profit divided by the average capital employed
throughout the year. Capital employed is defined as total net assets
excluding deferred tax balances, derivatives, post-employment liabilities
and net debt.
Adjusted basic earnings per share (pence)
Profit for the period attributable to equity holders, excluding the effect
of exceptional items, divided by the weighted average number of shares
in issue during the period excluding own shares held.
Pub Company net promoter score (NPS) (%)
The percentage of responses where we score 9 or 10 (out of 10) less the
percentage of responses where we score 0 to 6 (out of 10) to the statement
‘I am likely to recommend this pub to a friend and/or relative’.
Team turnover (%)
The percentage of leavers against the average headcount over a rolling
annual period, excluding any student leavers.
Team engagement (%)
The proportion of respondents who agreed with the following statement:
‘I would recommend Greene King as a great place to work to others’.
In Pub Company, on a combined basis, LFL sales grew by 1.5%, ahead of the
market, which grew by 1.3% over a broadly comparable period1. LFL sales
growth in the original Greene King estate of 1.9% (2015: 0.4%2).
In FY16, EBITDA per pub in Pub Company was impacted by synergies and
fair value adjustments offset by the higher proportion of leasehold properties
in Spirit – as a result EBITDA per pub fell by -3.6%. However, in the original
Greene King managed estate average EBITDA per pub grew by 2.3%
(2015: -0.2%2), which excludes synergy contribution.
The tenanted and leased businesses were successfully integrated at the end
of the first half and the combined Pub Partners business grew net income
by 2.7% in the year (2015: +3.5%2).
Average EBITDA per pub increased by 14.3% (2015: +15.5%1) reflecting
the contribution of the Spirit sites, ongoing improvements in the quality
of the estate (such as the disposal of 48 pubs from the combined estate)
and synergy contribution.
Brewing & Brands achieved 2.9% OBV growth (2015: +4.2%2), and helped
us to extend our share of the UK ale market by 40bps to 10.5%.
Annualised return on development capex improved to 27.8% (2015: 22%2).
The business achieved another year of robust returns, generating a ten basis
point increase in ROCE to 9.4% (2015: 9.3%) which remains comfortably
ahead of our cost of capital.
Earnings per share before exceptional items was 69.9p (2015: 61.0p),
up by 14.6%.
Record customer satisfaction scores; NPS +7.9%pts (2015: +12.3%pts).
We saw an improved trend in team turnover. The improvements indicate
the success of our teams in continuing with business as usual during the
integration process.
Team engagement currently stands at 73% across the combined group.
Investing more in the recruitment, retention and development of our people
will lead to a better trained and more motivated team working across our
business, which will be reflected in ongoing improvements in team engagement,
team retention and the service we give to guests.
1. Coffer Peach Business Tracker.
2. Greene King: excludes synergies arising in the Greene King business.
22
GREENE KING PLC Annual report 2016
STRATEGIC REPORT Operational review
PUB COMPANY
At the year end our Pub Company division comprised
1,823 pubs and restaurants open across Britain, appealing
to a broad range of the population.
OUR GROWTH BRANDS
The Boathouse in Peterborough has
been converted to a Chef & Brewer
during the year.
REVENUE
£1,688.2m
SHARE OF TOTAL REVENUE
81.4%
Annual report 2016 GREENE KING PLC
23
Operational review continued
PUB COMPANY CONTINUED
—
LIKE-FOR-LIKE SALES
OPERATING PROFIT1
+1.5%
+56.8%
NPS IN THE
GREENE KING ESTATE
+7.9%pts
INCREASE IN ONLINE
TABLE BOOKINGS
41%
Our Pub Company strategy is to attract customers with exciting brands
that deliver unrivalled value, service and quality. The acquisition of Spirit
Pub Company has helped us accelerate this strategy through the addition
of successful brands and the opportunity to learn from each other and
enhance the customer offer. It also allows us to generate greater scale
to drive cost efficiencies that can be reinvested in the business.
In the former Greene King estate, total sales grew by 5.1%, while total
sales increased 68.7% to £1,688.2m when including Spirit.
Full year LFL sales growth in the Greene King and Spirit managed estates
was 1.9% and 1.0% respectively. On a combined basis, LFL sales grew by
1.5%, ahead of the market, which grew by 1.3%2 over a broadly comparable
period. We achieved LFL sales growth in food, drink and accommodation
and, by brand, we saw notable strength in Chef & Brewer.
1. Before exceptionals.
2. Coffer Peach Business Tracker.
“ The acquisition of Spirit
added successful brands
and the opportunity
to enhance the
customer offer.”
24
GREENE KING PLC Annual report 2016
On a combined basis, operating profit increased 56.8% to £299.2m. The
combined operating margin declined 1.4%pts reflecting higher lease costs
following the Spirit acquisition and a 0.3%pt reduction in the margin in the
Greene King managed estate due to ongoing investment in our people and
our service proposition.
1. Build attractive and strong brands
We constantly improve our brands and the offer within them to ensure
they remain fresh and appealing to today’s demanding consumer. For
example, to extend the appeal of Hungry Horse while retaining the
brand’s family focus, we are trialling improved zoning, allowing more
families to dine in a comfortable environment, while other customers
enjoy the option to watch sport.
On digital, we have combined the ‘best of both’ from the Greene King and
Spirit businesses and our ambition is to create seamless hospitality across
the whole customer experience. Aiming to facilitate the customer journey,
we developed our online booking capabilities, which contributed to a 41%
increase in online bookings. Feedback from our customers on how we are
doing is important to us and during the year we relaunched our ‘Hungry
For Feedback’ initiative in Hungry Horse while, recognising the increasingly
important role of social media, we further rolled out the ‘Always On Service’
initiative encouraging pub teams to engage with customers on Facebook
at a pub level. We continued to personalise the content of our email
communications with customers and saw an 18% increase in visits to
our pub websites.
Our food festivals turn classic pub food and drink into interesting events,
giving customers more reasons to visit and offering them the opportunity
to trade up, which can drive spend per head. Further initiatives to expand the
appeal of the traditional pub included the relaunch of our value-oriented
breakfast offer in Farmhouse Inns, extended breakfast service hours in
Hungry Horse and the introduction of a ‘Grab ‘n’ Go’ price point for a
coffee and a pastry in Local Pubs. Including the Spirit estate, the proportion
of sales generated before 5.00pm increased by 7.6%, including by 8.6%
in the five retail growth brands.
2. Industry-leading value, service and quality
During the year, we expanded the number of KVIs across the Greene King
estate, driving repeat visits among core customers and positively impacting
volumes and gross margins. We introduced an ‘EDLP’ approach into the
Spirit estate and, aiming to enhance the customer experience, particularly
ahead of the Euros, upgraded our sports viewing facilities in Flaming Grill
and in Local Pubs. Elsewhere, we were proud to see Hungry Horse win
best value pub restaurant menu at the Menu Innovation and Development
Awards. On service, initiatives focusing on great service at all customer touch
points led to further increases in NPS since the half year and a 7.9%pt
increase in the full year in the original Greene King estate to a new company
record since measurement began in 2011. Quality improvements included
a refreshed ‘Steak Education’ programme in Flaming Grill, and, in the
Greene King estate, further improvements in core dishes contributed
to a 2.3%pt increase in quality scores compared to last year.
STRATEGIC REPORT
3. Work with the best people
Our teams are vital to our success and we are pleased with the trend in team
member retention since the acquisition of Spirit, demonstrating the resilience
and commitment of our pub teams throughout the integration progress
to date. During the year, we began developing updated employee value
propositions by brand, which outline recruitment, retention and development
opportunities in each as well as the overall employee experience. This
initiative has delivered positive results to date including the highest team
member retention in Hungry Horse since measurement began.
On apprenticeships, we had over 3,000 apprentices in learning during the
year and we were delighted to be recognised for our commitment to
apprenticeships through the award of Macro Employer of the Year by
Apprenticeships 4 England. We were also named as one of the top 50
apprenticeship employers in the UK by the Daily Telegraph.
4. Own the best invested pub estate
We continued to invest in our estate to ensure that our pubs remain
enticing places for our customers to spend their time. During the year,
we spent £139.0m on maintaining and developing the combined estate,
including £51.8m on the Spirit managed estate and, reflecting a rigorous
approach to investment allocation, we achieved annualised EBITDA
returns in excess of 27%. Taking advantage of opportunities to selectively
and strategically expand our Pub Company estate, we opened 13 new
pubs in the year. We disposed of 26 pubs from the combined managed
business including ten disposals that were required by the Competition
and Markets Authority (CMA).
Overall, we were pleased to be recognised with the award of Best Managed
Operator at the prestigious Publican Awards.
“ We had over 3,000
apprentices in learning
during the year.”
AVERAGE NUMBER OF PUBS TRADING
REVENUE
EBITDA
Greene King 1,062 +1.9%
Combined 1,740 +67.0%
Greene King1 £1,051.6m +5.1%
Combined2 £1,688.2m +68.7%
Greene King1 £249.9m +4.2%
Combined2 £386.0m +61.0%
,
1
7
4
0
,
1
0
0
7
,
1
0
4
2
,
1
0
6
2
1,800
1,400
1,000
600
200
1,800
1,400
1,000
600
200
9
6
3
0
.
,
1
0
0
0
7
.
,
1
6
8
8
2
.
,
1
0
5
1
6
.
2014
2015
2016
2014
2015
2016
400
350
300
250
200
3
8
6
0
.
2
3
6
5
.
2014
2
3
9
8
.
2015
2
4
9
9
.
2016
OPERATING PROFIT
Greene King1 £197.2m +3.4%
Combined2 £299.2m +56.8%
OPERATING PROFIT MARGIN
Greene King1 18.8% -0.3% pts
Combined2 17.7% -1.4% pts
AVERAGE EBITDA PER PUB
Greene King1 £235.3k +2.3%
Combined2 £221.8k -3.6%
300
250
200
150
100
2
9
9
2
.
1
8
7
7
.
1
9
0
8
.
1
9
7
2
.
20
19
18
17
16
1
9
5
.
1
9
1
.
1
8
8
.
1
7
7
.
240
230
220
210
200
2
3
4
9
.
2
3
0
1
.
2
3
5
3
.
2
2
1
8
.
2014
2015
2016
2014
2015
2016
2014
2015
2016
1. Excludes synergies in the existing Greene King business.
2. Includes Spirit acquisition fair value accounting adjustments, synergies and a 45-week
contribution from Spirit.
Annual report 2016 GREENE KING PLC
25
STRATEGIC REPORT Operational review continued
PUB PARTNERS
Pub Partners is responsible for operating our tenanted, leased and
franchised pubs across Britain and aims to be the preferred partner
for the best operators in the industry.
We have expanded our range
of partner suppliers to include
premium brands such as Italian
cuisine-focused Barrel & Stone.
OUR AGREEMENTS
– Standard tenancy agreement
– Scholarship tenancy agreement
– Standard lease agreement
– Meet & Eat franchise agreement
– Local Hero franchise-style agreement
– Turnover agreement
26
GREENE KING PLC Annual report 2016
REVENUE
£187.9m
SHARE OF TOTAL REVENUE
9.1%
STRATEGIC REPORT REVENUE PER PUB
+13.8%
EBITDA PER PUB
+14.3%
50th
LOCAL HERO
FRANCHISE‑STYLE
SITE OPENED
In Pub Partners, our strategy is to be the preferred partner for the best
operators in the industry. We will achieve this through the offer of the
best retail partnerships, in flexible formats and in the best pubs. During
the year, we made further significant progress with this, accelerated by the
acquisition of Spirit, including its high quality tenanted and leased estate
and talented operations team.
The integration of Pub Partners and Spirit Leased was successfully
achieved ahead of schedule at the end of the first half.
Pub Partners traded well throughout the year and the combined estate
delivered LFL net income growth of 2.7%. Average EBITDA per pub
increased by 14.3%, reflecting the contribution of the Spirit pubs, ongoing
improvements in the quality of the estate and synergy contribution.
The addition of 416 tenanted and leased pubs from Spirit led to growth in
revenue and operating profit in the year of 54.1% and 58.0% respectively.
Excluding Spirit, revenue declined 2.1% due to disposals, although the operating
margin improved by 1.3%pts reflecting good cost control and higher estate
quality. The combined Pub Partners operating margin increased by 1.1%pts
and was positively impacted by the performance in the original Greene King
estate, offset by the increased proportion of leaseholds following the Spirit
acquisition. Average revenue per pub grew 13.8% in the combined estate.
to optimise the combined estate through the disposal of a further 48
pubs. These disposals included six that were required by the CMA.
Aiming to attract and retain the best licensees, we increased our focus on
food to further support licensees to build sustainable, quality businesses
and expanded our range of partner suppliers to include premium brands
such as Italian cuisine-focused Barrel & Stone. We also continued to develop
our range of attractive and innovative agreements. During the year, Local
Hero, our franchise-style agreement built around local provenance, saw
the opening of its 50th site while, together with Spirit, we refreshed our
suite of turnover agreements.
Digital is a means through which we can further engage with current and
prospective licensees and in the year we launched a new and improved
online application process and expanded our use of social media. Overall,
our number of Twitter followers increased by 75% and traffic to the
Pub Partners website increased twelvefold.
Our teams are important in ensuring we are preferred partners and can
attract the best operators. Training initiatives included a ‘Bury St Edmunds
heritage experience’ for our Spirit teams and a continued focus on
apprenticeships where we now have 154 qualified apprentices
compared with 85 this time last year.
Central to the successful execution of our strategy is the ability to offer
licensees the best pubs in their location. During the year, we spent £21.1m
on maintaining and developing our Pub Partners estate. We also continued
These initiatives have contributed to a consistently low proportion of bad
debts in the estate and a stable average licensee tenure at around five years.
AVERAGE NUMBER OF PUBS TRADING
REVENUE
Greene King 829 -5.9%
Combined 1,193 +35.4%
Greene King1 £119.4m -2.1%
Combined2 £187.9m +54.1%
EBITDA
Greene King1 £62.0m +0.6%
Combined2 £95.3m +54.7%
1,300
1,100
900
700
500
,
1
2
1
3
,
1
1
9
3
8
8
1
8
2
9
200
175
150
125
100
1
8
7
9
.
1
4
9
6
.
1
2
1
9
.
1
1
9
4
.
105
90
75
60
45
9
5
3
.
7
4
9
.
6
1
6
.
6
2
0
.
2014
2015
2016
2014
2015
2016
2014
2015
2016
OPERATING PROFIT
Greene King1 £54.4m +0.7%
Combined2 £85.3m +58.0%
OPERATING PROFIT MARGIN
Greene King1 45.6% +1.3%pts
Combined2 45.4% +1.1%pts
AVERAGE EBITDA PER PUB
Greene King1 £74.8k +7.0%
Combined2 £79.9k +14.3%
90
75
60
45
30
8
5
3
.
6
5
3
.
5
4
0
.
5
4
4
.
46
45
44
43
42
4
5
6
.
4
5
4
.
4
4
3
.
4
3
6
.
85
75
65
55
45
7
9
9
.
7
4
8
.
6
9
9
.
6
1
7
.
2014
2015
2016
2014
2015
2016
2014
2015
2016
1. Excludes synergies in the existing Greene King business.
2. Includes Spirit acquisition fair value accounting adjustments, synergies and a 45-week contribution from Spirit.
Annual report 2016 GREENE KING PLC
27
STRATEGIC REPORT Operational review continued
BREWING & BRANDS
Brewing & Brands sells and distributes a wide range of award-winning
craft ales to both the on and the off-trade. They are brewed in one
of our two breweries in Bury St Edmunds and Dunbar.
The new Greene King IPA branding
was extended to bottle formats
during the year.
OUR CORE BRANDS
28
GREENE KING PLC Annual report 2016
REVENUE
£196.9m
SHARE OF TOTAL REVENUE
9.5%
STRATEGIC REPORT OPERATING PROFIT1
OWN BREWED VOLUME
ALE MARKET SHARE
GREENE KING
IPA VOLUMES
+9.7%
+2.9%
+40bps to 10.5%
+8.0%
In Brewing & Brands, our strategy is to drive growth and cash generation
through building consumer loyalty to our core ale brands and our innovative
range of seasonal and ‘craft’ ales. This strategy has led us to being the UK’s
leading cask ale brewer.
Significant progress was achieved in the year and, including additional volumes
to Spirit pubs, OBV grew by 2.9%, increasing our share of the UK ale
market by 40bps to 10.5%2.
Revenue grew 2.2% to a record £196.9m, while operating profit grew by 9.7%
to £32.7m leading to a 1.1%pt increase in the margin. The margin increase was
predominantly driven by new sales to Spirit managed pubs, which are included
in the Pub Company revenues along with those to the rest of the Greene King
estate, but there was also a benefit from a positive channel mix and additional
cost efficiencies realised in the second half of the previous financial year.
During the year, initiatives to further build consumer loyalty and engagement
included the Greene King IPA ‘To The Pub’ campaign, which reached an
audience of over 20 million and resulted in 60% of ale drinkers surveyed
saying that the adverts encouraged them to buy Greene King IPA on their
next visit to the pub. Other initiatives were a £1.2m investment in a
multi-channel media campaign in the Hen brand family and increased use
of social media to promote the Abbot Ale brand, with industry-leading
engagement levels to date3.
Our three core ale brand families – Greene King IPA, Old Speckled Hen
and Belhaven – saw further volume growth in the year and our ale portfolio
benefited from a number of exciting new partnerships, including Greene King IPA’s
sponsorship of the England and Wales Cricket Board. Greene King IPA was
positively impacted by a brand refresh in the on-trade and growing popularity
in the export market led by China. Overall, volumes of Greene King IPA grew
by 8.0%, increasing its share of the UK cask ale market by 0.4%pts. The ‘Hen’
brand family had another successful year, particularly in take-home where
penetration increased by 3%4 on last year and, overall, Old Speckled Hen
remains the number one premium ale brand in Great Britain.5
New product development remains a core part of our strategy and
helps us to remain relevant to core consumer drinking occasions. Volumes
of East Coast IPA continued to grow throughout the year, we launched
‘Old Spirited Hen’ and we also released limited edition ales such as Purple
Reign, launched in celebration of Her Majesty’s 90th birthday.
Elsewhere, we were proud to see Belhaven awarded ‘Distributor of the Year’
in Scotland at the prestigious DRAM awards and a number of our ales, including
Greene King IPA, Abbot Ale and Belhaven Best, won gold at this year’s Monde
Awards. The launch of our new beer café at our Bury St Edmunds brewery has
added to the brewery tour experience, which itself received a Certificate of
Excellence on TripAdvisor for the fourth consecutive year.
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 and are
delighted that Greene King IPA is on sale in over 90% of Spirit managed pubs.
1. Before exceptionals.
2. BBPA May 2015-May 2016.
3. Google analytics.
4. Kantar Worldpanel 52 w/e 24 April 2016.
5. CGA Brand Index On-Trade Survey, 52 weeks to 03/16/Nielsen Scantrack volume
data 52 weeks to 04/16.
REVENUE
EBITDA
£196.9m +2.2%
£37.8m +8.3%
OPERATING PROFIT
£32.7m +9.7%
1
9
6
9
.
1
9
2
7
.
1
8
9
0
.
200
190
180
170
160
3
7
8
.
3
6
1
.
3
4
9
.
38
36
34
32
30
34
32
30
28
26
3
2
7
.
3
0
4
.
2
9
8
.
2014
2015
2016
2014
2015
2016
2014
2015
2016
“ Greene King IPA, Old Speckled Hen
and Belhaven all saw volume
growth in the year.”
OPERATING PROFIT MARGIN
16.6% +1.1%pts
17
16
15
14
13
1
6
6
.
1
6
1
.
1
5
5
.
2014
2015
2016
Annual report 2016 GREENE KING PLC
29
STRATEGIC REPORT
Financial review
STRONG RETURNS AND
FURTHER DIVIDEND GROWTH
—
GROUP REVENUE INCREASED:
57.6%
FREE CASH FLOW:
£50.2m
ROCE:
9.4%
DIVIDEND:
32.05p
Income statement
Revenue was £2,073.0m, an increase of 57.6% compared to the prior year.
Excluding a £705.1m contribution from Spirit, revenue increased 4.0% to
£1,367.9m. Pub Company was the biggest driver of this increase, with revenue
up 68.7% and average revenue per pub rising 1.0%. The combined Pub
Company business now accounts for over 81% of group revenue. Total
revenue in Pub Partners was £187.9m. This included the Greene King
tenanted and leased estate where revenue of £119.4m was down 2.1%,
due to the impact of pub disposals. Average tenanted and leased revenue per
pub increased 13.8% and average EBITDA per pub grew 14.3%, demonstrating
improvements in the quality of the estate and also benefiting from the
inclusion of synergies and fair value accounting. Brewing & Brands grew
revenue 2.2% to £196.9m.
Operating profit before exceptionals was £392.2m, which was an increase
of 53.1% on the prior year. Group operating profit margin before exceptional
items was down 60bps to 18.9%, reflecting a higher contribution from the
managed estate and, within this, a reduction in Pub Company margin from
19.1% to 17.7%. The reduction of the Pub Company margin was in line
with expectations and reflected ongoing investment in labour and training
along with the impact of the higher proportion of leasehold pubs in the
Spirit estate compared to the Greene King estate.
Net interest costs before exceptional items were £135.7m and included
£49.0m of interest relating to Spirit.
Profit before tax and exceptionals was £256.5m, an increase of 52.2% on
last year. The tax charge before exceptional items equated to an effective
tax rate of 19.3%.
Earnings per share before exceptional items of 69.9p was up 14.6%.
Statutory profit before tax was £189.8m, up 60.6% on last year.
Cash flow and capital structure
Operating cash flows remained strong. We generated free cash flow (FCF)
of £50.2m, ahead of our scheduled debt repayments of £43.3m and after
our core capital expenditure and dividend payments. Overall, EBITDA
before exceptional items was £496.9m.
Group net debt at the year end was £2,048.4m, an increase of £679.7m
from the previous year end due to acquiring net debt of £674.5m with
the Spirit business.
“ Operating cash flows
remained strong.”
STRATEGIC REPORT In line with our strategic priorities, our objective is to maximise the
strength and flexibility of our balance sheet, and the group has 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 a shorter dated £460m revolving credit facility to June 2018
that was £315m drawn at the year end and two long-term asset-backed
financing vehicles. The Greene King securitisation has secured bonds with
a carrying value of £1,140.9m and an average life of 11 years, while the
Spirit debenture has secured bonds with a carrying value of £788.7m
and an average life of 12 years.
Our credit metrics remain strong with 96.1% of our interest costs at a
fixed rate and an average cost of debt of 6.6%. As a consequence of the
Spirit acquisition, fixed charge cover reduced to 2.3x from 2.9x last year,
while interest cover increased to 3.3x from 3.0x last year. On a pro-forma
basis, annualised net debt to EBITDA improved to 3.9x. Our Greene King
secured vehicle had a free cash flow debt service cover ratio of 1.5x at the
year end, giving 26% headroom. The Spirit debenture vehicle had a free
cash flow debt service cover ratio of 1.9x giving headroom of 33%.
Tax
The effective rate of corporation tax (before exceptional items) was 19.3%
compared to 21.0% in the previous year, resulting in a charge to operating
profits (before exceptional items) of £49.4m. This is slightly below the standard
UK corporation tax rate due to adjustments in respect of prior periods.
The exceptional tax credit of £50.5m is discussed under exceptional items.
The group’s business strategy generates revenue, profits and employment,
all of which deliver substantial tax revenues for the UK government in the
form of duties, VAT, income and corporation tax. In the year, total tax revenues
paid and collected by the group were £570m (2015: £405m). The group’s
tax policy, which has been approved by the board, aligns with this strategy
and ensures that the group fulfils its obligations as a responsible UK taxpayer.
Since the year end, a formal agreement has been reached with HMRC on
a number of historical tax positions. We expect to draw the remaining issue
to a close and this will be heard by the Court of Appeal in July. The provision
for uncertain tax positions and related interest accrued at the balance sheet
date were £10.5m (2015: £31.6m) and £5.9m (2015: £13.9m) respectively.
After the year end, the group issued a £300m A6 bond at a coupon of
4.06%, realising net proceeds of £180m after settling certain interest rate
swap liabilities. Capitalising on our high proportion of freehold assets, this
transaction increased the proportion of longer-term debt in our capital
structure and took the outstanding nominal value of bonds issued by
Greene King Finance plc at that point to £1,447.7m. The Greene King
bond portfolio is secured against 1,543 pubs with a market value
of £2.2bn and a carrying value of £1.6bn.
Capital expenditure and disposals
During the year, we invested in both maintaining and developing our
existing estate. Total expenditure during the year was £168.4m, made up
of £110.3m in Greene King and £58.1m in Spirit.
In addition to the acquisition of Spirit, we added 13 new pubs, investing
£46.7m in our retail expansion. Total cash capital expenditure was
£194.1m, including £137.5m of core capital expenditure. Core capital
expenditure included £45.9m on the Spirit estate.
We disposed of 48 pubs from the combined Pub Partners estate, including
six required by the CMA. We also disposed of 26 Pub Company pubs, including
ten required by the CMA. Total cash proceeds were £82.6m and a net
profit on disposal of £23.3m has been recognised.
Return on capital employed
The group is focused on delivering the best possible returns on our assets
and on the investments we make. We are focused on capital discipline,
coupling targeted investment in new build pubs, single-site acquisitions and
in developing our existing estate to drive organic growth with disposals
of non-core pubs. This has contributed to a 10bp improvement in group
ROCE to 9.4%. These returns were achieved despite a 10bp dilutive impact
from Spirit. ROCE remains comfortably ahead of the group’s cost of capital.
Dividend
The board has recommended a final dividend of 23.6p per share, up 8.3%.
This will be paid on 12 September 2016 to shareholders on the register
at the close of business on 12 August 2016.
The proposed final dividend brings the total dividend for the year to
32.05p per share, up 7.7%. This maintains our long-term track record
of annual dividend growth and is in line with the board’s policy of maintaining
a minimum dividend cover of around two times underlying earnings,
while continuing to invest for future growth.
Pensions
Following the Spirit acquisition, the group now maintains three 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 1 May 2016, there was an IAS 19 pension deficit of £52.3m representing
a reduction of £6.9m since the previous year end. The £52.3m comprised
£48.6m in respect of Greene King schemes and £3.7m in respect of the
Spirit scheme.
The deficit reduction resulting from the effect of contributions paid to
the schemes and the reduction in scheme liabilities following changes to
demographic assumptions are partially offset by the impact of changes to
the market-derived actuarial assumptions and a reduction in the market
value of the schemes’ assets since the previous year end.
Total cash contributions in the year were £12.5m for past service.
The triennial funding valuation and recovery plans have now been agreed for the
three defined benefit pension schemes and future deficit recovery contributions
are expected to be £3.3m per annum, a reduction of £8.6m per annum.
Exceptional items
We recorded a net exceptional charge of £16.2m, consisting of a £25.9m
charge to operating profit before tax, a £40.8m charge to finance costs
and a net exceptional tax credit of £50.5m. The following items were
recognised in the year:
– A £17.5m charge for legal, professional, integration and reorganisation
costs following the Spirit acquisition.
– A net impairment charge of £32.2m (2015: £27.4m) was made against
the carrying value of our pubs and other assets. This comprises an
impairment charge of £79.8m offset by reversals of previously
recognised impairment losses of £47.6m.
– A net surplus on disposal of property plant and equipment, which
includes a number of high alternative use value disposals, of £23.3m.
– £39.1m of exceptional finance costs in respect of the mark-to-market
movements in the fair value of interest rate swaps not qualifying for
hedge accounting within the Spirit debenture.
– The exceptional tax credit of £50.5m consists of a £11.4m tax credit
on exceptional items, a deferred tax credit of £33.6m in respect of the
licensed estate, a £0.7m tax credit in respect of prior periods and a £4.8m
tax credit in respect of rate changes. The deferred tax credit in respect
of the licensed estate includes a credit of £26.8m in relation to revaluation
and rolled over gains on the licensed estate following clarification from
HMRC on the treatment of certain judgmental terms.
Annual report 2016 GREENE KING PLC
31
STRATEGIC REPORT Financial review continued
Spirit acquisition
The group completed the acquisition of Spirit Pub Company plc
on 23 June 2015 for consideration of £763.1m.
Guidance for financial year 2016/17
The 2016/17 pre-exceptional tax rate is expected to be c.20%.
A fair value exercise was undertaken upon completion and the final
assessment in respect of the assets and liabilities acquired has been concluded.
The goodwill on acquisition following the fair value exercise is £434.0m.
Key fair values include the following:
– Property, plant and equipment values, for which valuations have been
performed by external surveyors, of £1,413.4m.
– A £168.3m intangible operating lease asset.
– The brands acquired with the Spirit business have been valued at
£16.1m.
– A £312.7m liability recognised in respect of lease arrangements that are
not considered to have market rate terms.
– Derivative liabilities in respect of interest rate swaps of £165.2m.
– Deferred tax asset of £68.7m recognised relating to losses, derivatives
and other temporary differences.
– Net debt acquired, which totalled £674.5m and included cash of £147.5m.
The impact of fair value adjustments and other accounting alignments on
the annual results has been to increase operating profit by £7.1m, largely
as a result of the treatment of the off-market lease liability. The benefit
to profit before tax and exceptionals has been £7.4m. There has been
no impact on cash.
In Pub Company, we anticipate opening 10–15 pubs in the current year
and disposing of 65–75 pubs from the estate.
In Pub Partners, we expect to reduce the estate by 50–65 pubs in the
financial year. These disposals, as well as potential transfers to Pub Company,
will improve the quality of the estate while generating cash for other uses
across the business.
We anticipate spending £130–140m in the current financial year, excluding
brand optimisation capex, on maintaining and developing our pubs, in order
to ensure that they remain attractive places for customers to spend their time.
Spend on the brand optimisation programme is expected to total
£40m–50m in the current financial year – out of a total spend over three
years of £120–150m – and we are targeting EBITDA returns significantly
ahead of our cost of capital.
Our blended cost of debt is expected to be c.6.3%.
Kirk Davis
Chief financial officer
28 June 2016
F16
£m
Synergies
£m
Spirit1
Accounting
adjustments 2
£m
—
11.1
11.1
—
11.1
—
10.3
7.1
0.3
7.4
Total
£m
Total
group
£m
705.1
2,073.0
164.8
128.3
496.9
392.2
(49.0)
(135.7)
79.3
256.5
Spirit1
Synergies
£m
Accounting
adjustments 2
£m
10.0
1.1
—
—
11.1
5.6
1.5
—
—
7.1
Total
£m
98.5
29.8
—
—
Total
group
£m
299.2
85.3
32.7
(25.0)
128.3
392.2
705.1
143.4
110.1
(49.3)
60.8
F16
£m
82.9
27.2
—
—
110.1
Income statement analysis
Revenue
EBITDA3
Operating profit3
Net finance cost3
Profit before tax3
Operating profit analysis3
Pub Company
Pub Partners
Brewing & Brands
Corporate
Total
Greene King
F16
£m
Synergies
£m
1,367.9
326.5
258.3
(86.7)
171.6
—
5.6
5.6
—
5.6
Total
£m
1,367.9
332.1
263.9
(86.7)
177.2
Greene King
F16
£m
Synergies
£m
197.2
54.4
31.7
(25.0)
258.3
3.5
1.1
1.0
—
5.6
Total
£m
200.7
55.5
32.7
(25.0)
263.9
1. Post acquisition since 23 June 2015.
2. Accounting alignments and income statement impact of fair value adjustments.
3. Before exceptional items.
32
GREENE KING PLC Annual report 2016
STRATEGIC REPORT Risks and uncertainties
MANAGING RISK
—
As with any business, Greene King faces a range of risks and uncertainties in the course of its business.
It is essential that we identify and manage these risks effectively in order to deliver on our strategic
objective of being the best pub company in the UK and to maximise shareholder returns.
BOARD
Overall responsibility for risk management
Sets the group’s risk appetite
AUDIT COMMITTEE
Delegated responsibility for monitoring risk profile
and mitigation
Regularly reviews risk management processes
for each division and functional area
GROUP RISK
COMMITTEE
Reviews individual
risk registers and
mitigation plans
Ensures consistency of risk
profiling across the group
Aggregates risk registers to
create group risk register
SENIOR
MANAGEMENT
Responsibility for
identification of risks,
implementation of
mitigating actions and
maintenance of business
unit and functional
risk registers
Approach to risk management
Board
The board has overall responsibility for the group’s risk management
framework. It reviews the group’s principal risks on an annual basis, together
with the actions taken to mitigate them. This year there has been a particular
focus on developing our approach to risk appetite. The board has started
this by defining group-level risk appetite statements, to set out the board’s
desired risk-taking approach to the achievement of our strategic objectives,
in the context of managing our principal risks. Our risk appetite is an expression
of the types and amount of risk we are willing to take or accept to achieve
our plan. By defining our risk appetite, we will be able to better determine
the mitigating activities required to manage to within acceptable levels
both the likelihood of risks occurring and their potential impact.
Details of our broad risk appetite in relation to each of our key risks is set
out in the table on page 34.
Audit committee
The board has delegated to the audit committee responsibility for reviewing
the effectiveness of the group’s risk management processes. It regularly reviews
the risk management processes for each business unit and functional area.
Management
The implementation of risk management and internal control systems is
the responsibility of the executive directors and other senior management,
with each business unit or functional area responsible for identifying, assessing
and managing the risks in their respective areas. They are required to maintain,
review and regularly update a risk register to assist in this process.
Risk management process
Classification of risks follows a standard methodology used in risk management
and takes into account the likelihood of their occurrence and the scale of
potential impact (both financial and reputational) on the business.
Once the key economic, operational, financial, people and strategic
risks have been identified, each business unit and functional area is then
responsible for evaluating current controls, drawing up plans to improve
controls and managing new risks. Each key risk has an ‘action owner’ to
ensure that responsibilities are formally aligned. To ensure continuous
improvement across the business, progress of these risk implementation
plans is monitored by senior management on a regular basis.
In addition, a group-wide risk committee reviews the individual risk registers
in detail, monitors the risk mitigation plans and assists in the production of
the group risk register, whereby risk registers are aggregated and considered
on a top-down basis in the context of delivering our strategy for the group.
Given that some risks are external and not fully within our control, the
risk management processes are designed to manage risks which may have
a material impact on our business, rather than to fully mitigate all risks.
Annual report 2016 GREENE KING PLC
33
STRATEGIC REPORT Risks and uncertainties continued
Principal risks and uncertainties
This section highlights some of the key risks and uncertainties which affect Greene King. The group is of course exposed to risks wider than those listed,
but these are believed to be likely to have the greatest impact on our business at this moment in time.
For the first time this year we have indicated whether we believe the risk has increased, decreased or remained the same during the year and also how
each risk relates to our strategic priorities.
STRATEGIC RISKS
CHANGE
POTENTIAL IMPACT
MITIGATION AND MONITORING
RISK APPETITE
LINK TO
STRATEGY
Integration of Spirit Pub Company and failure to deliver the full anticipated synergies
↓
Integration steering committee overseeing integration.
Retention arrangements in place for critical-to-retain staff.
Reduced revenue,
profitability and lower
growth rates than our
strategic objectives.
Communication plan designed to keep all staff and other
stakeholders informed of progress and changes impacting them.
Synergy targets established and systems are in place to record
synergies captured.
Brand swap plans in place and being implemented and monitored.
1 3 4
We have an appetite for
risks which we understand
and which are consistent
with the delivery of our
strategic objectives.
Failure to develop an appealing customer offer, to identify and respond to fast-changing consumer tastes and to maintain
and grow market share
↔ Reduced revenue,
profitability and
lower growth rates
than our budget.
Research conducted into consumer trends and plans developed
to respond to key trends, including the piloting of new variations
of existing brands.
Use of guest satisfaction tools and net promoter scores to collect
customer feedback and measure performance of our pubs.
Increased investment in support and training for our employees
to ensure service standards meet guest expectations and
continue to improve.
With our vision to be the
best pub company in the
UK we expect to be able
to react swiftly and
appropriately to changing
consumer trends to ensure
continuity of earnings
growth and achievement
of our strategic objectives.
1 2 3 4 5
Increased use of social media to enhance communication with
our guests and other consumers.
ECONOMIC AND MARKET RISKS
CHANGE
POTENTIAL IMPACT
MITIGATION AND MONITORING
RISK APPETITE
LINK TO
STRATEGY
Reduced consumer confidence in the UK, particularly in light of the referendum vote to leave the European Union and
increasing competitor activity
↑
Focus on value, service and quality to appeal to a broad range
of consumers. Piloting of new variations of existing brands.
1 2 4
Reduced revenue,
profitability and lower
growth rates.
Costs are kept under constant review and mitigation plans
prepared and implemented where appropriate.
Broad geographic spread of pubs including in London
and the South East.
Ongoing agreement innovation, training and support
for our tenants.
Monitoring of competitor activity at strategic and tactical levels.
We acknowledge and
recognise that in the
normal course of business,
the group is exposed to risk
and we are willing to accept
a level of risk in order to
achieve our strategic
priorities and will manage
the business accordingly.
STRATEGIC PRIORITIES
1 Build attractive and
strong brands
2 Industry-leading value,
service and quality
3 Work with the
best people
4 Own the best
invested pub estate
5 Maintain a strong
balance sheet and
flexible capital structure
34
GREENE KING PLC Annual report 2016
STRATEGIC REPORT OPERATIONAL AND PEOPLE RISKS
CHANGE
POTENTIAL IMPACT
MITIGATION AND MONITORING
RISK APPETITE
LINK TO
STRATEGY
Significant cyber security breach
↑
Potential impact on our
ability to do business,
impacting revenue
and profitability.
Reputational damage
and financial damage
from fines or
compensation.
Networks are protected by firewalls and anti-virus protection
systems with back-up procedures also in place.
Plans in place to further enhance controls in this area including
ongoing investment.
Constant monitoring of threats to data protection by viruses,
hacking and breach of access controls, with additional controls
added during the year.
Data governance committee drives improved behaviours
and management response.
We have a low appetite
for significant breaches
within our IT operations.
3 5
Risks associated with the recruitment, retention and development of employees and licensees
↔ Inability to execute
our business plans
and strategy.
Potential impact on
the profitability of our
Pub Partners business
where the risks relate
to licensees.
3
The nature of the sector
in which we operate
is predisposed to high
turnover levels, but we
have a low tolerance for
levels which exceed the
sector average. We expect
our staff to have appropriate
skills to deliver the functions
of the business.
A branded recruitment plan is in place with a strong pipeline
of suitable candidates. In addition, we operate a range of
apprenticeship programmes.
Remuneration packages are benchmarked to ensure that they
remain competitive and appropriate mechanisms are in place
for managing pay progression.
Career development programmes are in place to retain key
employees and leadership training has been introduced for
all levels of management.
Our annual employee engagement survey is used to obtain
direct feedback from employees on a range of issues.
Exit interviews are conducted with all head office, Brewing & Brands
and Pub Company managers to enable action plans to be
developed to deal with key leaver reasons.
The range of tenancy agreements, training programmes
and support available is designed to attract and retain
the best quality licensees.
Reliance on a number of key suppliers and third party distributors and on our own ability to produce, package
and distribute our own beers
↑
Back-up plans are maintained in the event of the failure
by or loss of a key supplier.
1 2
Detailed risk management and mitigation plans exist in our
internal production and distribution activities, which are tested
regularly across the business.
Key suppliers are expected to maintain disaster recovery plans,
which we review on a regular basis.
We recognise that we
carry an inherent risk in
relation to third party
suppliers, but we seek to
minimise this risk through
management and control.
Supply disruption
could impact customer
satisfaction, leading
to loss of revenue.
Key supplier or
distributor withdrawal or
long-term failure could
reduce revenues or lead
to increased costs.
Inability to brew and
distribute our own
beers could lead to
loss of revenue.
Annual report 2016 GREENE KING PLC
35
STRATEGIC REPORT Risks and uncertainties continued
REGULATORY RISKS
CHANGE
POTENTIAL IMPACT
MITIGATION AND MONITORING
RISK APPETITE
LINK TO
STRATEGY
Risk of increased regulation, and failure to respond to recent changes in regulation, in relation to any matter affecting
our retail business, including National Living Wage, the apprenticeship levy, the anticipated rates revaluation in 2017
and potential future changes in relation to the sale of alcohol
↑
1 5
We have developed a plan which will in part mitigate the cost
impact of the National Living Wage and the apprenticeship levy
over the next three years.
Monitoring of legislative developments and active engagement
with government where necessary.
Diversified offer includes soft drinks, coffee, food and
accommodation to reduce our reliance on alcohol-based revenue.
We recognise that, in the
normal course of business,
we are exposed to legislative
risk that we need to
manage appropriately
in order to meet our
strategic objectives.
Legislation such as the
National Living Wage
and the apprenticeship
levy will drive up costs
as will any increases in
rates charged on our
pubs and restaurants.
Legislation impacting
consumers could
potentially reduce
demand leading to
reduced revenue.
Failure to respond to the threats to our Pub Partners business posed by the introduction of the ‘market rent only’
(MRO) option and the statutory code
↔ Loss of income and
profits in Pub Partners
from reduced beer
margin and penalties
for breach of the
statutory code.
Development of agreements that are exempt from the MRO
option with plans to adopt these where possible.
Site-by-site plans developed to mitigate risks.
Upweighted compliance team in place with training for all
relevant employees, and enhanced processes and procedures
to reduce risks.
4 5
We recognise that in the
normal course of business,
we are exposed to legislative
risk that we need to
manage appropriately
in order to meet our
strategic objectives.
Failure to comply with major health and safety legislation, including in the areas of food safety and fire safety,
or significant food integrity issues
↑
We have no appetite for
health and safety breaches
within our operations.
1 2
Serious illness, injury
or even loss of life to
one of our customers,
employees or tenants,
or significant food
integrity issues, could
have a significant impact
on our reputation,
leading to financial
loss too.
Comprehensive range of formally documented policies
and procedures in place, including centrally managed system
of compliance KPI tracking and internal and independent
audits to ensure compliance with current legislation
and approved guidance.
Health and safety policies reviewed by our primary authority partner,
Reading Borough Council, which has rated our safety management
systems as very good.
Safety measures are in place, including a supplier assurance
programme, to ensure that product integrity is maintained
and that all food and drink products are fully traceable.
Compliance programme in place to ensure pubs are safely
handed over to new tenants.
STRATEGIC PRIORITIES
1 Build attractive and
strong brands
2 Industry-leading value,
service and quality
3 Work with the
best people
4 Own the UK’s
best invested
pub estate
5 Maintain a strong
balance sheet and
flexible capital structure
36
GREENE KING PLC Annual report 2016
STRATEGIC REPORT FINANCIAL RISKS
CHANGE
POTENTIAL IMPACT
MITIGATION AND MONITORING
RISK APPETITE
LINK TO
STRATEGY
Inability to meet the funding requirements of the enlarged group
↓
The group's debt structures and financing requirements are kept
under regular review.
Reduced revenue,
profitability and lower
growth rates than our
strategic plan.
The group has a £460m bank facility to support activities outside the
securitisation vehicles, which was entered into in July 2013 and is
available until July 2018.
We completed a tap of our Greene King securitisation vehicle
in May 2016.
We expect the group to
be able to access suitable
financial facilities to meet
the ongoing requirements
of the business and
our longer-term
strategic objectives.
Liquidity and covenant risk relating to the group’s securitisation and other financing arrangements
↔ A breaching of any
financial covenants
applicable to the group
would impact our ability
to pay dividends or
reinvest cash, and
impact our reputation
and ongoing
creditworthiness.
Long-term strategy and yearly business plans are formulated
to ensure that financial covenants can be met and monitored
on a regular basis.
Working capital is carefully forecast, regularly reviewed
by the finance teams and closely managed.
We expect to be able
to meet our payment
obligations and covenant
levels under a range of
cautious but plausible
liquidity scenarios.
5
5
Funding requirements of our defined benefit pension schemes, which are subject to the risk of changes in life expectancy,
actual and expected price inflation and investment yields
↑
All the schemes are now closed to future accrual
to reduce volatility.
5
Increased deficit being
recognised on our
balance sheet, and
volatility of the deficit
makes longer-term
planning more difficult.
There is regular monitoring of the schemes’ investments
and dialogue with the trustees on an ongoing basis
regarding funding requirements.
We expect to maintain
funding levels for our
pension schemes at
manageable levels.
Viability statement
In accordance with provision C2.2 of the 2014 UK Corporate Governance
Code, the board has assessed the prospect of the company over a period
of three years from the date of approval of the financial statements.
The board concluded that a three year period was appropriate as it is
aligned to the group’s strategic planning process. The latest three year plan
was approved by the board in February 2016 and covers the three year
period to the end of the 2018/19 financial year.
Long-term financing is provided by the group’s securitisation and debenture
vehicles both of which have a weighted average life of 12 years remaining.
The group also utilises a £460m revolving credit facility to provide liquidity
and to manage its seasonal cash flows. The latest three year period goes
beyond the June 2018 date when this facility matures.
The group’s three year plan is prepared by consolidating each business
segment’s own plan and overlaying group assumptions in respect of estate
optimisation and capital structure. Key assumptions underpinning the three
year plan and the associated cash flow forecasts are the economic outlook,
revenue growth expectations, impact of expected inflationary cost pressures,
estate development and disposal opportunities, the successful integration
of the Spirit business and realisation of synergies, and that credit markets
remain stable in order to renew the revolving credit facility. A further report
on viability was presented to the board following the conclusion of the tap
of the Greene King securitisation vehicle which took place after the year end.
The three year plan considers cash flows and compliance with the financial
covenants contained within the group’s revolving credit facility and
structured finance vehicles.
As detailed on pages 33 to 37 the board has conducted a robust assessment of
the principal risks facing the company. This includes consideration of strategic risks,
economic and market risks, operational and people risks, regulatory risks and
financial risks. The resilience of the group to the impact of these risks has been
assessed by applying significant but plausible sensitivities to the cash flow
projections based on past experience. This includes modelling the effect of
reduced consumer confidence and therefore spending, the failure of our business
to maintain and develop compelling customer offers, food safety issues, lower
than anticipated acquisition synergies and the impact of increased regulation
across the business.
Taking account of the company’s current position, principal risks and the
sensitivity analysis discussed above, as well as the potential mitigating actions
that the company can take, and the experience that the company has in
adapting the business to change, the board has a reasonable expectation
that the company will be able to continue in operation and meet its
liabilities as they fall due over the three year period of assessment.
Annual report 2016 GREENE KING PLC
37
STRATEGIC REPORT Corporate social responsibility
MAKING A DIFFERENCE
LOCALLY AND NATIONALLY
—
OUR CUSTOMERS
—
We pride ourselves on offering our customers the very best experience
when they visit us and we continue to focus on delivering industry-leading
value, service and quality to our customers. With over 3,000 pubs, restaurants
and hotels across the country, we want to make sure that everybody’s
time is well spent when they visit us.
We are committed to supporting our customers to make healthier lifestyle
decisions and providing them with safe, affordable and memorable experiences.
Healthy eating
We continue to review the nutritional profiles of a range of our dishes and
made some positive changes to enable our customers to make healthier
eating choices.
We continually review our products and, as part of this, we have made
improvements to a range of sauces, such as an 80% reduction of sugar
in our standard French dressing. We are reviewing the children’s menu
choices across our brands to improve the nutritional profile of our dishes.
One of our premium children’s burgers now has a 59% reduction in salt.
Our Hungry Horse children’s menu also now includes a number of dishes
that are lower in salt, including chicken curry and rice, penne pasta and
a salad bowl. This will continue to be a key focus area for Greene King.
We continue to provide a range of lower calorie menu options for customers
who are counting the calories and looking for a lighter option when dining
out. As a key part of the menu development process, we will review and
develop our menus and our focus for the future is to continue to expand
our nutritional expertise along with providing lower calorie and healthier
options for our customers.
Allergens
We are working towards the development of our company strategy on
nutrition. Following our acquisition of Spirit, we have an opportunity to
review our nutritional policies to ensure we have a clear set of guidelines.
We are evaluating all of our allergen procedures to ensure that we have
one process in place across the group. This will ensure we remain safe and
compliant with legislation as we continue to provide our customers with
allergen information about the meals we provide.
As a leading pub company in the UK,
with 3,035 pubs, restaurants and hotels,
two breweries and 44,000 team members,
we understand the importance of
making a positive contribution to the
communities we serve and operating
in a responsible, sustainable way.
During this year, we have been focused
on integrating Spirit Pub Company,
taking learnings and applying a ‘best of
both’ approach to our corporate social
responsibility (CSR). We are pleased
to have made considerable progress
on the integration and we are now
reporting as one business.
We will continue to develop our
CSR strategy around four key areas:
our customers, our teams, our
communities and our environment.
38
GREENE KING PLC Annual report 2016
STRATEGIC REPORT Gluten
We continue to respond to the growing demand to provide a range of dishes
for customers wishing to avoid gluten. Our spring/summer menus include a
number of new non-gluten dishes including a mushroom and goat’s cheese
risotto and chilli salmon, with kale, sweet potato and toasted seeds.
Awards
Our hard work and focus on providing our customers with the very best
value, service and quality has once again been recognised this year:
– We won Best Managed Operator at the Publican Awards, which
recognised our food offering, diverse portfolio of brands, commitment
to investing in our people and our charity work.
– Wacky Warehouse won UK’s Best Children’s Activity Provider 2016
at the Tommy’s awards.
– We won Best Premium High Street Pub Menu 2016 at the MIDAS
(Menu Innovation and Development Awards).
– We were given a Good Egg Award by Compassion in World Farming
in recognition of our commitment to using only free range eggs across
the business in the next five years.
Food standards
Providing our customers with consistently high quality food is paramount
to us and we do this by actively promoting kitchen standard excellence.
In Pub Company, this is achieved through training, external audits, open
dialogue with local authorities and operational incentive schemes.
“ We have an ongoing
commitment towards
developing healthier menu
options for our guests.”
We are proud that out of the 1,618 pubs visited in the year by local
environmental health officers, 1,521 (94%) received a 4 or 5 star rating.
Such high scores are a reflection of how hard our managers and team
members work to maintain the highest standards, along with our continued
investment in improving the quality of our kitchens. We will continue to work
hard to ensure all of our pubs are doing everything they can to maintain
the highest standards of hygiene.
Quality standards for our beers
Once again, the Westgate Brewery in Bury St Edmunds and the
Belhaven Brewery in Dunbar both maintained an A grade rating with the
new British Retail Consortium version 7 standard, confirming that our beers
are produced to the very highest of quality and food safety standards.
The quality and dispense services team in our Brewing & Brands division
completed over 1,400 trade quality audits, including 850 independent Cask
Marque audits covering our entire Pub Partners and Inns estates. As a
result, we have again improved the quality standards in our cellars and
dispense equipment, which has led to improved standards and a pass
rate of 95%.
We have seen many of our beers win awards at the Monde Selection, an
independent quality award, and we were proud that four of our beers,
Old Speckled Hen, Abbot Ale, Belhaven Black and Belhaven Wee Heavy,
received the Gold Award this year.
Responsible retailing
Tackling under‑age sales
We train all new Pub Company bar team members on our central online
training tool, which provides training on the obligations and responsibilities
of the employee including materials highlighting the impact of alcohol on
children. The training course must be completed and passed before our
team members can serve alcohol.
All of our Pub Company premises operate the ‘Challenge 21’ or ‘Challenge 25’
programmes. We also support the principles laid out in the Portman Code
of Practice on the responsible retailing of alcohol.
Not only are all general managers and front of house team members trained
when they join us, but we also ensure this training is ongoing so they
always understand their role in promoting the responsible consumption of
alcohol by our customers.
Best Bar None and Pub Watch schemes
We are proud that a significant number of our Belhaven pubs achieved
Best Bar None accreditations this year, including 19 golds, ten silvers
and three bronze awards.
In England, our pubs belong to Pub Watch and Best Bar None where
access to these schemes is available.
Designated driver campaign
We are passionate about encouraging our customers to ‘enjoy responsibly’
and during 2015’s festive season, we once again supported Coca Cola’s
Designated Driver Christmas Campaign. This was the seventh year
in a row that we rewarded designated drivers with free soft drinks.
Minimum unit pricing for alcohol
We continue to call on the government to introduce minimum unit
pricing in the UK. Alcohol should never be cheaper to buy than water
and government policy must address the sale of alcohol at ‘pocket money’
prices. We believe that the minimum unit pricing of alcohol would
be a meaningful step in reducing alcohol-related harm.
Annual report 2016 GREENE KING PLC
39
STRATEGIC REPORT Corporate social responsibility continued
OUR COMMUNITIES
—
As a pub company, we have a unique opportunity to play an active role
in the communities we serve and support good causes.
We have been running pubs for over 200 years and are committed to
continuing to being present and involved with community life for many
more. That is why our charity programme is so important to us.
Macmillan Cancer Support
In March this year, we announced that our teams and customers had raised
more than £2m for our national charity partner, Macmillan Cancer Support,
doubling our initial target. To mark this milestone, we were proud to renew
our partnership with the cancer charity for a further three years.
Our team members have carried out a wide range of fundraising activities
including cake sales and taking part in challenges such as the Yorkshire Three
Peaks and the London Marathon. Our pubs, restaurants and hotels across
the country have pulled together with national campaigns such as the
World’s Biggest Coffee Morning as well as supporting many local
fundraisers within their communities.
We were proud to be recognised by the All Party Parliamentary Beer Group
by winning the 2016 PubAid award for our fundraising for Macmillan.
Prince’s Trust
As a leader in the hospitality industry, we want to support young people
into work by offering opportunities to learn a skill and a trade and helping
them start their career journeys. As part of this ambition, this year we
announced a partnership with The Prince’s Trust.
“ We are supporting
150 young people
through our Prince’s
Trust partnership.”
40
GREENE KING PLC Annual report 2016
The ‘Get into Hospitality’ programme will offer 150 of the UK’s most
disadvantaged 16-25 year olds an opportunity to develop skills in the
hospitality sector, achieve accredited hospitality qualifications and support
them into jobs and other positive outcomes in the industry.
Subject to successfully completing the three week programme, we aim
to offer jobs and a place on our award-winning apprenticeship scheme
to as many course participants as possible.
There will be ten programmes offered around the country over the next
12 months. We have successfully completed our first course in London.
Other locations include Liverpool, Portsmouth and Glasgow.
Pub is the Hub
For the third year, we have donated to the Pub is the Hub Community
Services Fund in order to support rural pubs that want to diversify their
services for the benefit of their communities. Over the course of the
three years, the money we have donated to the fund comes to £45,000.
The Community Services Fund, which has been running since April 2013,
aims to offer funds to licensees who are looking to broaden their services to
the wider community but are unable to find suitable funding from other sources.
With grants available of up to £4,000, applicants have to demonstrate that
they will be offering a new service or replacing a service that has already
been lost to the local community, such as a local shop or a library.
Prostate Cancer UK
Over 600 of our pubs across the country raised more than £71,000
for Prostate Cancer UK during last year’s Rugby World Cup.
Taylor Walker, Flaming Grill and Chef & Brewer pubs partnered with
Prostate Cancer UK last autumn to help support the charity’s Men United
movement in reaching men.
As well as individual pub fundraising events, a select few were fully
transformed into Men United Arms. The pubs were rebranded for a few
days using Prostate Cancer UK branded signs, bunting, beer mats, drip
trays and team uniforms.
Great Ormond Street Hospital
Our Taylor Walker pub brand celebrated completing a ten year charity
partnership programme with Great Ormond Street Hospital which raised
£100,000 for the children’s charity.
ITV Text Santa
Customers and team members at our pubs raised £26,000 in aid of ITV’s
2015 Text Santa fundraising appeal by holding Christmas quizzes.
Pubs across the country, including the Hungry Horse and Chef & Brewer
brands and Greene King Local pubs, took part in the national Text Santa
Christmas Quiz during December. The much-needed funds contributed
to the appeal’s record-breaking £8.5m total.
Cash raised during the appeal is being split between ITV Text Santa’s chosen
charities, Macmillan Cancer Support, Make-A-Wish® UK and Save the Children.
STRATEGIC REPORT OUR TEAM MEMBERS
—
Our people are our greatest asset. We now have 44,000 team members
and our ambition is to be the best employer for each of them. We
continue to focus on attracting and retaining the best people but also
understand the importance of motivating, engaging and developing our
team members right across the business.
Employee engagement
Our Employee Engagement Survey is a valuable tool to help us build the
best pub company in Britain. This survey provides us with a wealth of
information that we are committed to actioning across the business.
Developing our talent
We recognise the talent that all our team members bring to Greene King
and, by nurturing this talent when they first arrive, we aim to provide an
environment through development and opportunity that allows them
to flourish and craft their own career.
Apprenticeships
We pride ourselves on developing and investing in our team members
and also supporting those who are just beginning their careers. In March,
we pledged to take on a further 10,000 apprentices during the next three
years. Since the launch of our award-winning apprenticeship scheme in 2011,
we have helped support over 7,400 apprentices to achieve a qualification
while working in our pubs.
The scheme offers bespoke qualifications that cover a range of job roles
including front of house, kitchen and management roles which are tailored
to each of the Greene King retail brands. The course, which has been
commended by the Prime Minister David Cameron at a reception hosted
at 10 Downing Street, has received numerous awards this year including:
Apprenticeships 4 England’s Macro Employer of the Year; National
Apprenticeship Service Regional Winner (East of England); VQ Employer
of the Year; and was named as a Top 100 Apprenticeship Employer
by the National Apprenticeship Service.
Creating jobs
Thanks to the opening of newly-built Hungry Horse and Farmhouse Inns
pubs, we have been able to create 1,000 new jobs across the country
in the last 12 months.
In many areas of the country where we run recruitment drives for our
new pubs, we hold a two week pre-employment training programme in
conjunction with local Job Centre Plus teams. The schemes prove to be
very popular and successful and we are able to welcome successful
candidates to our team.
“ We pledge to recruit
10,000 apprentices during
the next three years.”
Diversity
We take pride in making sure all of our team members are given the same
opportunities to achieve their full potential. We are committed to our equal
opportunities policy to ensure that our team members and candidates are
recruited, developed, remunerated and promoted on the basis of their
skills and suitability for the work performed.
We promote an environment in our pubs, restaurants, hotels,
headquarters, pub company support centre and breweries, that is free
from discrimination. We work to a policy in which no employee receives
less favourable treatment on the grounds of their colour, nationality, race,
religion/belief, ethnic or national origin, sex, marital or civil partnership
status, gender reassignment (whether proposed, started or completed
and under or not under medical supervision), disability or past disability,
part-time or fixed-term status, pregnancy or maternity, parental
responsibilities, sexual orientation or age (a protected characteristic).
Gender diversity
Directors
Senior managers
(excluding directors)
All employees
Male
6
Female
1
Total
7
Percentage
female
14
164
23,051
51
21,085
215
44,137
24
48
Workplace pensions
We are fully compliant with Workplace Pensions Reform Regulations and
enrol our employees automatically into a qualifying workplace pension.
Support for our tenants
We have been successfully providing opportunities for self-employed
entrepreneurs for over 200 years and, following the acquisition of Spirit,
our Greene King Pub Partners division has grown to more than 1,200 pubs.
We continue to provide a variety of different agreement options for a
high quality estate of pubs, ranging from Michelin-starred premium food
pubs to the village local at the heart of the community. Our pubs are as
individual as the people who run them and often thrive on offering
genuine local provenance and community activity.
The level of support that we provide to our tenants and lessees is central
to us being a preferred partner to the best licensees in the country.
Our support is tailored to meet the individual needs of our licensee partners
and their staff. This year we have developed industry-leading training courses
to support our partners in a number of areas, including digital marketing,
management development and becoming a multiple operator.
In keeping with our ‘best of both’ approach, we have taken on an innovative
food supply service which was originally used in Spirit and is now, in its first
year, supplying food to around 120 pubs.
Our Brewing & Brands dispense team helps our tenants and lessees
to maintain consistently outstanding cellar quality ensuring that our beer
brands are always being offered at their best. This is all underpinned
by our professionally qualified business development managers (BDMs)
who are trained to the highest levels in the industry and who are dedicated
to supporting all our licensee partners in making the most of their
business opportunities.
Annual report 2016 GREENE KING PLC
41
STRATEGIC REPORT Corporate social responsibility continued
OUR ENVIRONMENT
—
Energy
We are compliant with the government’s Energy Saving Opportunity
Scheme (ESOS), which is a mandatory energy assessment scheme in the
UK. It looks at actions taken and plans made by businesses to reduce
energy usage and must be completed every four years.
We audited the energy used by our buildings, pubs and breweries to
identify cost-effective energy saving measures. Procedures in place include
but are not exclusive to:
– The ability to measure electricity usage on a 24/7 basis in all of our
pubs, allowing us to analyse any long or short-term changes. We have
similar information for mains gas usage in c. 97% of our pubs.
– Ongoing engagement across our business to encourage teams to save
energy provided it does not detract from our customers’ experience.
65% of our pubs’ internal lighting is now via LED bulbs. We also have
an enhanced boiler replacement programme to move older sites to
energy-saving condensing technology and linked to heating control
systems to reduce gas usage.
Waste
We are signatories to Courthauld 2025 – a voluntary ten year agreement
that brings together organisations across the food system, with a goal
of making food and drink production and consumption more sustainable.
As part of this commitment we have partnered with SWR waste management
to deliver a recycling-led waste management solution to our pub estate.
The ultimate aim is to achieve zero waste to landfill and propel the business
to the forefront of the hospitality industry with a ‘best practice’ waste initiative.
Short-term plans involve all pubs segregating food from dry materials
and in the longer term we plan to implement Spirit’s award-winning
backhaul solution to the entire Greene King estate.
We will continue to implement the ‘best of both’ philosophy, by following
Spirit’s lead in its diversion from landfill rate, which is currently 96% for all
waste collected direct from ex-Spirit pubs. In the last year the ex-Spirit
pubs have also seen a reduction in general waste of 2%, glass volume of
23% and overall waste volume of 6%. Across the Greene King estate
diversion of waste from landfill stands at 57% with 20,696 tonnes
of waste being recycled in total.
42
GREENE KING PLC Annual report 2016
“ We were winners of the
Water Efficient Project
at the Energy Awards
and the Economic
Sustainability category
at the Footprint
Foodservice Awards.”
STRATEGIC REPORT Source of emissions
Natural gas
Gas oil
Kerosene
Liquefied petroleum gas
Red diesel
Refrigerants
Owned vehicles
Electricity
2015/16
tonnes
of CO2e
61,940
1,186
188
5,525
78
3,115
7,669
79,700
2014/15
tonnes
of CO2e
41,741
806
197
2,624
81
3,196
7,486
56,131
167,562
247,263
111,240
167,371
1,885,100
13.117
1,193,400
14.025
Water
In readiness for market deregulation in 2017, we have been working hard
to take best practice from the acquisition of Spirit and apply a ‘best of
both’ approach across the estate. Water benchmarking across brands
continues and we have conducted 149 audits of high-consuming pubs
to highlight opportunities for greater efficiency.
We have again managed to reduce consumption on a like-for-like basis.
Spirit was named winner of the Water Efficient Project at the Energy
Awards, and, as a group, we won the Economic Sustainability category
at the Footprint Awards. Both awards recognised our continued effort
to drive water usage downwards.
Our focus has been to ensure that our water data is in the best possible
shape to allow us to target more effectively and take advantage of any
opportunities that the opening market has to offer from a fiscal or socially
responsible perspective.
At our Bury St Edmunds brewery we are continually looking at ways to
reduce our water usage. Current initiatives include reviewing tank cleaning
programmes and pipeline flushes to maximise efficiency.
CO2 emissions by type
Direct emissions scope 1
Total direct emissions scope 1
Indirect emissions scope 2
Gross emissions
Revenue in Pub Company and Brewing & Brands (£’000)
Tonnes CO2e per £100k revenue
Mandatory greenhouse gas reporting
The table above, which has been produced in compliance with the
requirements of the Companies Act 2006 (Strategic and Directors’
Report) Regulations 2013, shows the main greenhouse gas emissions in
tonnes of CO2 equivalent (CO2e) for our scope 1 (direct) and scope 2
(indirect) CO2 emissions. The figures below include those of Spirit from
the date of acquisition, 23 June 2015, except where stated.
Scope 1 relates to the direct emissions from the fuels we use in our
breweries, pubs, restaurants, hotels and offices such as natural gas and
liquid petroleum gas. It also includes (although not for Spirit) emissions from
owned vehicles (including company cars) but excludes logistics where we
outsource this to third parties. Refrigerant gas and F-gas emissions in
respect of our breweries, pubs and restaurants are also included, except
in relation to Spirit.
We have used the UK government’s greenhouse gas (GHG) Conversion
Factors for Company Reporting for all scope 1 emissions (2014 for 2014/15
and 2015 for 2015/16). GHG emissions from refrigeration and air conditioning
units have been determined using the simplified material balance method
as described in the Environmental Reporting Guidelines 2013.
Scope 2 relates to the indirect emissions associated with the generation of
electricity consumed in our sites. Emissions have been calculated using the
Carbon Reduction Commitment (CRC) Energy Efficiency Scheme factor
(2014 for 2014/15 and 2015 for 2015/16).
Electricity and gas figures in the table below cover the CRC reporting
period from 1 April to 31 March each year, whilst all other figures cover
our respective financial years. The intensity ratio refers to revenue in
our Pub Company and Brewing & Brands businesses as the vast majority
of our CO2 emissions relate to those businesses.
Annual report 2016 GREENE KING PLC
43
STRATEGIC REPORT Corporate social responsibility continued
SUSTAINABILITY IN ACTION
—
Case study: supporting our communities
Angefrancois Kevin Grah, 21, is one of the students from the Prince’s Trust
pilot scheme, which was held in London in April and May. He successfully
completed the course and is now one of our team members at Loch Fyne
Covent Garden, where he received his on-the-job training. He now hopes
to move onto our apprenticeship scheme.
‘I’d been unemployed for a couple of months after having to leave my job
as a chef at a local Chinese restaurant. I left school with only one GCSE,
in Italian. So, I was struggling to be offered job interviews.
‘A friend of mine actually told me about the Prince’s Trust and so I decided
to attend the open day, and I’m glad I did.
‘The course taught me a lot, but my highlight really was the work
placement at Loch Fyne. I was mostly in the kitchen, learning the role
of the chef, and it was great to be able to be so involved. Working in
such a fast-paced team was brilliant. I was in my element and everybody
was so welcoming.
‘I’m so pleased my hard work paid off. I’ve been offered a job at the
Loch Fyne in Covent Garden and, around my college classes, I work evenings
and weekends as a waiter. I would love nothing more than to have a long
future with Greene King. Maybe, one day, I’ll be running my own pub or
restaurant and helping to support young people.’
“ Being a trainee chef as
a Greene King apprentice
was an easy move to make.”
David Redpath, general manager of Loch Fyne Covent Garden, who was
a ‘buddy’ during the London programme, said:
‘I thought this was a great programme and was honoured that it was piloted
in our restaurant. ‘Get into Hospitality’ gives young people who haven’t yet
had the best of chances, the opportunity to showcase themselves and prove
that they really can get the job done. It’s a fantastic scheme, which really does
help young people learn and progress, and I’d definitely volunteer to help
out again.
‘We had two students train at our restaurant, and it felt great to watch
them ‘graduate’ at the end of the programme and I was proud to offer
our candidates two full time jobs. They have a lot of work and training
ahead of them, but I know and trust they can do it.’
Case study: investing in our people
Despite the many celebrity chefs on our televisions, there is an industry
shortage of chefs. However, our award-winning apprenticeship scheme
aims to buck the trend, with 719 out of 2,876 apprentices working in
our kitchens.
Gabrielle Green, 18, has been an apprentice chef at the Ship in Bedford
for nine months. After completing her GCSEs, she decided that she did
not want to continue with typical further education and left school
at the age of 16.
Now working towards her Level 2 in Hospitality certificate, Gabrielle said:
‘I’ve always had an interest in cooking, right from a very young age, so
being a trainee chef as a Greene King apprentice really was an easy move
to make. I didn’t want to be stuck in a classroom all the time, and now I
get the chance to learn while being paid at the same time.
‘I really enjoy working in such a fast-paced team and developing not only
my education, but also myself. For instance, I have the chance to cook and
taste food that I’ve never experienced before, and preparing meals is such
an important responsibility. I really can see myself growing as a person and
would recommend to anybody wanting to learn on the job to look into
becoming an apprentice. It’s not only for young people either – anybody,
at any stage of their lives – can do it.’
APPROVAL OF THE STRATEGIC REPORT
Pages 2 to 44 of the annual report form the strategic report.
By order of the board
Lindsay Keswick
Company secretary
28 June 2016
44
GREENE KING PLC Annual report 2016
STRATEGIC REPORT CORPORATE
GOVERNANCE
—
46 Board of directors
47 Corporate governance statement
51 Nomination committee report
52 Audit committee report
55 Remuneration report
67 Directors’ report and disclosures
69 Directors’ responsibilities statements
Board of directors
N
N
A
R
Rooney Anand (52)
Chief executive
Commenced role – 2005
(Appointed to board in 2001)
Rooney Anand joined the group
as managing director of the
brewing division and was
promoted to chief executive in
2005. He was previously president
and managing director of the UK
bakery division at Sara Lee, the
international consumer goods
business, and, prior to that,
was at United Biscuits.
Kirk Davis (44)
Chief financial officer
Commenced role – 2014
Kirk Davis joined Greene King
from JD Wetherspoon plc where
he had been finance director since
2011. He has extensive retail
experience having held senior
finance roles at Tesco and
Marks & Spencer and is a member
of the Chartered Institute of
Management Accountants.
Mike Coupe (55)
Non-executive director
Commenced role – 2011
Mike Coupe is the chief executive
of J Sainsbury plc and also brings
knowledge and experience from
working for other large, multi-site
retail organisations, including Asda
and Tesco, before that.
Philip Yea (61)
Chairman
Commenced role – May 2016
(Appointed to board in
February 2016)
Philip Yea became chairman in
May 2016 after being appointed
to the board as an independent
non-executive director in February
2016. He is senior independent
director at both Vodafone Group
plc and Computacenter plc. He is
also a non-executive director of
Aberdeen Asian Smaller Companies
Investment Trust plc, and an
independent director and trustee of
the Francis Crick Institute. His prior
executive career included roles as
finance director of Diageo plc and
chief executive of 3i Group plc.
N
R
Senior management
The senior management team
comprises Rooney Anand, chief
executive, Kirk Davis, chief financial
officer, the managing directors of
each of the group’s business units
and the heads of key functional
areas, including retail, trading and
marketing, HR and property.
They meet once every four weeks
under the chairmanship of the
chief executive.
Lynne Weedall (49)
Non-executive director
Commenced role – 2012
Lynne Weedall is currently group
HR director for Selfridges Group
and brings to the board a wealth of
experience of HR and organisational
development gained from a variety
of roles in the retail sector, including
at Dixons Carphone, Whitbread
and Tesco.
Key to committees
N
A
R
Nomination committee
Audit committee
Remuneration committee
N
A
R
N
A
R
Ian Durant (57)
Non-executive director
Commenced role – 2007
Ian Durant is a former finance
director at Liberty International plc
and has extensive financial experience.
He is also chairman of Capital &
Counties Properties plc and Greggs plc
and a non-executive director of
Home Retail Group plc. Ian stood
down as senior independent director
at the end of the financial year.
Rob Rowley (66)
Senior independent
non-executive director
Commenced role – 2014
Rob Rowley joined the board in
July 2014 and has extensive board
experience gained as a former
finance director of the Reuters
Group plc. He is currently a
non-executive director and
chairman of the audit committees
at Taylor Wimpey plc and Morgan
Advanced Materials plc, having
retired from the same role at
Moneysupermarket.com Group plc
in April 2016. Rob was appointed
senior independent director
in May 2015.
46
GREENE KING PLC Annual report 2016
CORPORATE GOVERNANCE Corporate governance statement
Chairman’s introduction
I am pleased to introduce this report, which is my first
since becoming chairman at the beginning of the current financial
year. My predecessor, Tim Bridge, took his responsibility for ensuring
that we met high standards of corporate governance very seriously,
and I will continue to do so throughout my tenure.
During the year the company again applied the main principles
and relevant provisions of the UK Corporate Governance Code
(the Code), and I hope this report gives you a good understanding
of the systems of governance and control which continue to operate.
As you might expect, the board was very busy during the 2015/16
financial year dealing with the integration of Spirit Pub Company,
the acquisition of which completed in June 2015. I am pleased to have
joined Greene King at such an exciting time in our development. I am
looking forward to working closely with Rooney and the rest of the
board in the next stage of our progress as a leading pub hospitality
company, whilst at the same time continuing to ensure that we have a
well balanced and effective board, strong oversight of risk management,
alignment of remuneration policies with shareholder interests and
sound shareholder relationships.
In accordance with the Code, we conducted a board evaluation exercise
during the year. Having joined the board in February, and to facilitate
my understanding of the board and its ways of working, it was agreed
that I should undertake that evaluation by means of individual discussions
with each board member, with a view to looking forward and focusing
on how to improve board effectiveness, rather than looking back
at past practice.
Finally, I would like to thank my fellow directors for their support
since my appointment. Together, I believe we can continue to
maintain a strong and effective governance system to enable the
business to deliver its strategy, generate shareholder value and
safeguard our shareholders’ long-term interests.
Philip Yea
Chairman
Statement of compliance with the UK
Corporate Governance Code
The company is subject to the UK Corporate Governance Code
which is issued by the Financial Reporting Council and which is
available at www.frc.org.uk. The code sets out guidance in the form
of principles and provisions on how companies should be directed
and controlled to follow good governance practice. Companies listed
in the UK are required to disclose how they have applied the main
principles and whether they have complied with its provisions
throughout the financial year. Where the provisions have not been
complied with companies must provide an explanation.
The board considers that the company has complied with the UK
Corporate Governance Code dated September 2014 throughout
the year in all respects, save that, with the impending retirement
of Tim Bridge at the end of the financial year, no evaluation was
undertaken of his performance as chairman as is required by
Code provision A4.2.
“ I believe we can
continue to maintain
a strong and effective
governance system.”
Philip Yea, Chairman
Board independence – current directors
Name
Philip Yea
Rooney Anand
Mike Coupe
Kirk Davis
Ian Durant
Rob Rowley
Lynne Weedall
Independent
Nomination
committee
Audit
committee
Remuneration
committee
Yes
No
Yes
No
Yes
Yes
Yes
N
N
N
N
N
A
A
A
R
R
R
R
Annual report 2016 GREENE KING PLC
47
CORPORATE GOVERNANCE Corporate governance statement continued
The board
Board composition
As at the year end the board comprised the chairman, two executive
directors and five non-executive directors. The non-executive chairman
was Tim Bridge, who retired at the end of the year. The new chairman
is now Philip Yea. The chief executive is Rooney Anand and the senior
independent director during the year was Rob Rowley.
The board believes that the structure and size of the board is appropriate
and that no single individual or group dominates the decision making process.
The board is currently looking to recruit a further non-executive director,
to replace Ian Durant, who will be retiring from the board at the AGM in
September. Further details are set out in the nomination committee report.
The directors’ biographies are on page 46.
Independence of non-executive directors
In compliance with the UK Corporate Governance Code, more than half
of the board, excluding the chairman, are non-executive directors. The board
is satisfied that all of the non-executive directors were independent throughout
the year, in that they satisfied the independence criteria of the code on
their appointment and continue to satisfy those criteria.
Tim Bridge, the chairman during the last financial year, was not independent
on appointment, having previously served as chief executive. However, the
board was satisfied that he showed independent judgment, that his performance
as chairman was effective and that he demonstrated continued
commitment to the role.
Philip Yea, the new chairman, is independent on appointment, having
never been employed by the company and having diverse business
interests beyond the company.
Rob Rowley was the senior independent non-executive director during
the year. He too has never been employed by the company and has diverse
business interests. As well as supporting the chairman and acting as a
sounding board for the chairman and an intermediary for other directors,
a key responsibility for the senior independent director is to be available
for direct contact from shareholders should they require. During the year
Rob Rowley played an active role in the recruitment of Philip Yea as the
new chairman, as explained in the nomination committee report.
Leadership
Role of the board
The board has collective responsibility for the long-term success of the
company and for its leadership, strategy, control and management.
The offices of chairman and chief executive are separate and distinct and
the division of responsibilities between them has been clearly established,
set out in writing and agreed by the board.
The chairman is responsible for the leadership and effectiveness of the
board and for ensuring that each non-executive director is able to make
an effective contribution to the board through debate and discussion with
the executive directors. He is also responsible for setting the style and
tone of board discussions.
The chief executive’s role is to develop the company’s strategic direction
and to lead senior management in executing the company’s strategy
and managing the operational requirements of the business.
The non-executive directors have a particular responsibility to ensure that
the strategies proposed by the executive directors are carefully examined
and fully discussed, that the performance of the company is monitored and
challenged and that the financial information provided is comprehensive
and accurate. They are also responsible for ensuring, through the relevant
committee, that appropriate remuneration arrangements are in place
for the executive directors.
Operation of the board
The board has a formal schedule of matters which are reserved for its
consideration, including approval of the long term objectives and strategy,
approval of budgets and financial statements including the annual report
and accounts, acquisitions and disposals, changes to the structure of the
group and overall corporate governance issues. It reviews trading performance
and considers major capital expenditure.
The board has delegated certain responsibilities to standing committees,
details of which are set out on page 49. By delegating key responsibilities to
these committees, the board is able to ensure that adequate time is devoted
by board members to the oversight of key areas within their responsibility.
Day to day management and control of the business is delegated to the
executive directors, business unit managing directors and certain key functional
heads, who meet formally on a four-weekly basis together with other
senior managers as appropriate.
Board meetings are scheduled to be held eight times a year, with main
meetings linked to key events in the company’s financial calendar, with the
annual results and dividend being approved in June or July and the interim
results and dividend in November or December. Regular agenda items
include an overview of the market and current trading as well as a detailed
review of financial performance against agreed targets.
There is a two-day meeting of the board in February each year focusing
on strategy, with the business unit managing directors and heads of the
main functional areas, namely trading, marketing, HR and property,
attending for part thereof. The strategy sessions include an in-depth
review of relevant economic factors and issues affecting the sector and
management’s projections for the medium term. The board then has the
opportunity to agree the strategic plans across all areas for the short and
medium term. Following approval of the company’s strategy, budgets are
prepared for the next financial year, which are reviewed and approved
by the board in April. The board also has a programme to review each
business unit and main functional area in detail on a regular basis, with
particular focus on the achievement of strategic objectives. The relevant
managing director or functional head attends such meetings to present
and answer questions.
The board has responsibility for determining, with the assistance of the
audit committee, whether the annual report, taken as a whole, is fair
balanced and understandable to enable shareholders to assess the company’s
performance, business model and strategy. In coming to its view, the board
took into account the views of the audit committee, which assisted in the
process this year, as well as its own knowledge of the group, its strategy
and performance in the year, the guidance given to all contributors to
the annual report and a detailed review by senior management of the
overall content.
A key focus area for the board during the year included the integration
of the Spirit business following completion of the acquisition of Spirit Pub
Company in June 2015, to ensure that planned synergies are being effectively
captured and that the business is being appropriately managed during the
integration period. Regular reports on progress have been presented to
the board with plenty of opportunity for the board to raise any concerns.
Looking forward this focus will continue whilst the programme of brand
swaps is carried out and the remaining synergies continue to be captured.
Another key focus area for the board has been financing, to ensure that
the group had available sufficient funds to deliver its capital expenditure
programme and for general business purposes. The board approved the
£300m tap of the Greene King securitisation vehicle which completed
shortly after the year end realising net proceeds of £180m after settling
certain interest rate swap liabilities.
The board has also spent some time considering matters relating to risk,
including the issue of risk appetite and a robust assessment of the principal
risks facing the group. Further details, including the new viability statement,
are set out in the risk management section which starts on page 33.
48
GREENE KING PLC Annual report 2016
CORPORATE GOVERNANCE GREENE KING BOARD
The board is ultimately responsible for the long-term success of the company. Its principal responsibilities are to:
– approve the group’s long-term objectives, commercial strategy and the overall funding strategy;
– approve the budgets and financial statements, including the report and accounts;
– approve acquisitions and disposals; and
– oversee the group’s operations and review performance in the light of the group’s strategy, objectives, business plans and budgets.
COMMITTEES
NOMINATION
– reviews structure, size and composition
of the board;
AUDIT
– reviews and monitors full year
and interim results;
– makes recommendations for
appointments; and
– succession planning.
– monitors internal financial controls;
– oversees external audit relationship; and
– oversees risk management.
REMUNERATION
– sets remuneration policy;
– sets executive director remuneration
and incentives;
– approves annual performance
objectives; and
– approves granting of long-term incentives.
MEMBERS
Philip Yea (Chairman)
Ian Durant (Chairman)
Lynne Weedall (Chairman)
Mike Coupe
Ian Durant
Rob Rowley
Lynne Weedall
Mike Coupe
Rob Rowley
Mike Coupe
Ian Durant
Rob Rowley
Nomination committee report
page 51
Audit committee report
page 52
Remuneration report
page 55
Board
Nomination
committee
Audit
committee
Remuneration
committee
Executive directors
Rooney Anand
Kirk Davis
Non-executive directors
Tim Bridge
Mike Coupe1
Ian Durant
Rob Rowley
Lynne Weedall2
Philip Yea3
8/8
8/8
8/8
8/8
8/8
8/8
7/8
3/3
—
—
3/3
3/3
3/3
3/3
3/3
1/1
—
—
—
2/3
3/3
3/3
—
—
—
—
—
3/3
3/3
3/3
3/3
1/1
1. Mike Coupe was unable to attend one audit committee meeting due to prior
commitments with J Sainsbury plc.
2. Lynne Weedall was unable to attend one board meeting due to prior commitments
with Selfridges Group.
3. Philip Yea was appointed to the board on 2 February 2016.
Between meetings, as required, the board can be in frequent contact to
progress the company’s business and if necessary, board meetings can be
held at short notice. Where possible, however, ad hoc committees of the
board are appointed to deal with matters which it is known will need to
be dealt with between scheduled board meetings. It is expected that all
directors attend board and relevant committee meetings, unless they are
prevented from doing so by prior commitments. If directors are unable to
attend meetings in person or by telephone they are given the opportunity
to be consulted and comment in advance of the meeting.
Attendance at scheduled meetings held during the year is set out
in the adjacent table.
Board papers are generally circulated seven days prior to each board or
committee meeting to ensure that directors have sufficient time to review
them before the meeting. Documentation includes detailed management
accounts, reports on current trading, reports from each business unit and
main functional areas and full papers on matters where the board is
required to give its approval.
The chairman holds regular, informal meetings with the non-executive
directors without the executive directors being present and the non-executives
also meet with the chairman and the chief executive on an informal basis
twice each year.
Annual report 2016 GREENE KING PLC
49
CORPORATE GOVERNANCE Corporate governance statement continued
Board effectiveness
Board performance and evaluation
The UK Corporate Governance Code requires the board to conduct an
annual evaluation of its own performance and that of its committees and
directors. This year, on account of the impending retirement of Tim Bridge
as chairman, there was no formal evaluation of Tim Bridge’s performance
as chairman.
The board evaluation exercise was carried out by Philip Yea, who conducted
an informal review comprising individual meetings with each director to
elicit any immediate concerns or issues that he should take account of in
formulating the future conduct, structure and agenda for the board. No
material concerns were expressed, and so discussions focussed on future
board composition (given the planned retirement of Ian Durant at the
AGM), future topics for board review, including succession planning and
talent management, and other potential changes to board agendas given
the increased scale of the group following the acquisition of Spirit. The
findings were recorded in a paper considered by the board at its meeting
in June 2016.
In addition to the annual evaluation exercise there remains an on-going
dialogue within the board to ensure that it operates effectively and that
any matters raised are addressed in a timely manner.
The performance of the executive directors is reviewed annually by the
remuneration committee in conjunction with their annual pay review
and the payment of bonuses.
Training and support
The training needs of the board and its committees are regularly reviewed
and each director is responsible for ensuring their skills and knowledge of
the company remain up to date. Particular emphasis is placed on ensuring
that directors are aware of proposed legislative changes in areas such
as corporate governance, financial reporting and sector specific issues.
All directors are encouraged to visit the company’s pubs and restaurants
and do so throughout the year.
Newly-appointed directors receive a tailored induction on joining the
board to acquaint them with the company. This includes meetings with
other board members and senior management, and the provision of an
induction pack containing general information on the company, its policies
and procedures, financial and operational information and a briefing on
directors’ responsibilities. Philip Yea received a particularly detailed induction
on joining the board given his future role as chairman of the board, and
met all the board directors individually and a large number of senior
managers across the business.
There is an agreed written procedure for directors, in furtherance of their
duties, to take independent professional advice at the company’s expense.
Directors also have access to the services of the company secretary. The
company has in place directors’ and officers’ liability insurance.
Commitment and conflicts of interest
All significant commitments which the directors have outside Greene King
are disclosed prior to appointment and on an on-going basis when there
are any changes. The board is satisfied that the chairman and each of the
non-executive directors commits sufficient time to their duties and fulfils
their obligations to the company.
The board has the right, under the articles of association, to approve
potential situational conflicts of interest. A small number of such potential
conflicts have been approved by the board following disclosure by certain
directors, in each case with the relevant director not taking part in any
decision relating to their own position. Directors are also aware that the
disclosure and authorisation of any potential conflict situation does not
detract from their requirement to notify the board separately of an actual
or potential conflict in relation to a proposed transaction by the company.
Communication with shareholders
The board is keen to ensure that our shareholders have a good understanding
of the business and its performance, and that the directors are aware of
any issues or concerns which shareholders may have. Communication
with shareholders takes a variety of forms.
Institutional shareholders and analysts
There is a regular dialogue with institutional shareholders, including meetings
after the announcement of the year-end and interim results. Analysts are
also invited to presentations at those times and separately to analyst trips
to visit our premises and hear presentations on specific divisions of the
business. The board receives regular reports and feedback on the meetings
held between the executive directors and principal shareholders, and
copies of analysts’ reports on the company.
The senior independent non-executive director, Rob Rowley, is available
to shareholders if they have concerns about governance issues which the
normal channels of contact fail to resolve.
AGM
The AGM is fully utilised as a means of communicating directly with
private shareholders, who receive a brief presentation on the business
before the formal business of the meeting begins. They also have the full
opportunity to ask questions during the meeting and to meet directors
and senior management informally after the meeting. The board aims to
ensure that all members of the board, including in particular the chairmen
of the board committees, are available to answer questions at the AGM.
The notice of the AGM is sent to shareholders at least twenty working
days before the meeting. All substantive items of business at shareholders’
meetings are dealt with under separate resolutions, including a resolution
to adopt the annual report. The chairman announces the results of the
proxy voting on each resolution after it has been dealt with on a show
of hands.
The next AGM will be held on 9 September 2016 at the Millennium
Grandstand, Rowley Mile Racecourse Conference Centre, Newmarket,
Suffolk CB8 0TF. Details can be found in the separate notice of meeting.
Website
The company maintains a website (www.greeneking.co.uk) to provide
up-to-date, detailed information on the company’s operations and brands,
which includes a dedicated investor relations section. All company
announcements are available on this site, as are copies of slides used for
presentations to investment analysts. We are happy to answer questions
by telephone or email (investorrelations@greeneking.co.uk or
companysecretary@greeneking.co.uk).
Board committees
The board has established a nomination committee, an audit committee
and a remuneration committee, each of which has formal terms of reference
governing its method of operation. Each of the terms of reference, which
have been approved by the board, are available on request or to download
from the company’s website and will be available for inspection at the AGM.
DTR disclosure
The information required by DTR 7.2 is set out in this report, the nomination
committee report and the audit committee report, except for information
required under DTR 7.2.6 which is set out in the directors’ report.
50
GREENE KING PLC Annual report 2016
CORPORATE GOVERNANCE Nomination committee report
I am pleased to introduce our nomination committee
report for 2015/16, which explains the committee’s
focus and activities during the year, a key part of which
related to my own appointment as a non-executive
director and chairman-elect. Having now taken over as
chairman of the board and of the nomination committee
I shall endeavour to ensure that the committee continues
to focus on succession planning and on ensuring that
the size, composition and structure of the board is
appropriate for the delivery of the group’s strategic
objectives and that all relevant provisions of the
UK Corporate Governance Code continue to be met.
Philip Yea
Chairman of the nomination committee
Membership
During the year the nomination committee was chaired by Tim Bridge.
The other members of the committee were Mike Coupe, Ian Durant,
Rob Rowley, Lynne Weedall and Philip Yea (following his appointment as
a director in February 2016). Apart from Tim Bridge, all members were
considered by the board to be independent. On Tim Bridge’s retirement at
the end of the financial year Philip Yea took over as chairman of the committee.
Responsibilities
The key responsibilities of the nomination committee are to identify,
evaluate and nominate candidates for appointment to the board, to review
regularly the structure, size and composition (including skills, knowledge
and experience) of the board and to make recommendations to the board
with regard to any adjustments that are deemed necessary.
The committee is also responsible for considering the company’s succession
plans for board members and senior management, taking into account the
challenges and opportunities facing the company, and what skills and expertise
are therefore needed on the board in the future, and for reviewing membership
of the board’s committees to ensure that undue reliance is not placed
upon any individuals.
Activities during the year
The committee held three meetings during the year. Attendance at these
meetings by the committee members is shown in the table on page 49.
Tim Bridge advised the non-executive directors during 2015 that he was
considering retiring from the board, and so a key activity for the committee
was to find a suitable successor to him. The committee reviewed a panel of
head hunters to assist them in the process and chose The Zygos Partnership,
which has no other connection with the company and which has signed up
to the voluntary code of conduct on matters such as diversity for executive
search firms. In conjunction with them, a job specification and a profile
of the likely characteristics, qualifications, experience and merits required
were produced before starting the search, with the aim of finding a short
list of candidates suited to the role, without prejudice between male
and female candidates.
A long-list of candidates was initially drawn up for the role, from which
a short-list evolved after extensive discussions by the committee. Rob Rowley,
as senior independent director, as well as all the other members of the
nomination committee and Rooney Anand, the chief executive, then
interviewed the short-listed candidates before the committee made
a formal recommendation to the board that Philip Yea be appointed
to the board, initially as a non-executive director and member of the
nomination and remuneration committees, with a view to him taking over
as chairman of the board from the start of the current financial year. The
handover process worked well, giving Philip Yea time for a well-planned and
extensive induction process, and participation in two board meetings,
including the strategy sessions, before taking over as chairman.
The committee has also begun the search for a new non-executive director
to replace Ian Durant who will be retiring at the AGM in September.
The Zygos Partnership has also been appointed to conduct the search,
with the aim of finding a suitable candidate.
In terms of committee composition, it was noted that Rob Rowley would
be taking over as chairman of the audit committee on the retirement of
Ian Durant, given his recent and relevant financial experience (as former
finance director of Reuters Group plc). Philip Yea, initially appointed to be
a member of both the nomination and remuneration committees, became
chairman of the nomination committee and stood down from the remuneration
committee with effect from the beginning of the current financial year.
No other changes were recommended to the composition of the
board committees.
The issues of succession planning and board structure will remain the ongoing
focus of the committee during the course of the forthcoming year.
On the recommendation of the nomination committee, and taking into
account the continuing effective performance of the directors, the board
has decided once again this year to ask all ongoing directors to stand for
re-election at the forthcoming AGM, with the exception of Philip Yea
who will be standing for election for the first time.
Other matters considered by the committee during the year included the
board evaluation exercise, training requirements for directors and the
committee’s terms of reference.
Diversity
The board approves of the principle of trying to recruit more women into
senior management and director roles. There is currently one female director
on the board, Lynne Weedall, who is chairman of the remuneration committee.
With a board of seven people, the board believes that the key is to ensure
a suitable range of skills, experience and knowledge across the board members,
and that the issues of gender and diversity are just two considerations
to be taken into account when filling board vacancies.
Annual report 2016 GREENE KING PLC
51
CORPORATE GOVERNANCE Audit committee report
I am pleased to introduce our
audit committee report for 2015/16.
The committee’s key responsibilities
include monitoring the integrity of
the group’s financial reporting, internal
controls and risk management procedures,
overseeing the internal and external
audit processes and a range of other
corporate governance activities.
During the year the committee devoted particular
attention to the following key areas: the year-end
financial statements and interim report and associated
audit matters, with particular focus on the accounting
treatment of certain matters arising as a result of the
acquisition of Spirit Pub Company; the relationship with
the external auditor, including audit tender and audit
partner rotation review; and risk management processes
and internal controls. In particular the committee
reviewed the viability statement on page 37 before
it was recommended to the board.
I will be retiring from the board at the AGM in September
and therefore, during 2016/17, under the stewardship of
Rob Rowley, the committee will continue its focus on
the financial statements, on governance matters and
on risk management, whilst at the same time ensuring
that the new Ernst & Young audit partner, as explained
below, has a full and detailed understanding of the issues
facing the business and is able to deliver a robust and
detailed audit of the group’s financial statements.
Ian Durant
Chairman of the audit committee
52
GREENE KING PLC Annual report 2016
Membership
The audit committee was chaired during the year by Ian Durant. The
other members of the committee were Mike Coupe and Rob Rowley.
All members are considered by the board to be independent. The board
is satisfied that Ian Durant has recent and relevant financial experience, as
the former finance director of Liberty International plc, since renamed as
Intu Properties PLC, and the current audit committee chairman at Home
Retail Group plc. Looking forward Rob Rowley, who is the former finance
director of Reuters Group plc, will take over as chairman of the committee
following Ian Durant’s retirement from the board at the AGM in September.
Responsibilities
A key responsibility for the audit committee is reviewing the financial
reporting, controls and risk management processes across the group.
The committee assesses the external audit conclusions on both the full
year and interim results, in each case prior to their submission to the
board. Whilst the board retains responsibility for undertaking the required
assessment that the annual report is fair, balanced and understandable,
the audit committee this year, at the request of the board, has undertaken
a review of this prior to submission of the annual report to the board,
as detailed below.
The committee also reviews the company’s internal control systems,
advises the board on the appointment of external auditor, oversees
the relationship with the external auditors, and reviews the quality and
effectiveness of both the internal and the external audit. In addition,
the committee is responsible for considering the company’s whistle
blowing procedures and reviewing their effectiveness in practice.
In relation to risk matters, the committee reviews the group’s risk
management policies and procedures prior to submission to the board
and receives detailed reports on the risk management processes within
the business units and key functional areas. The committee receives
regular updates on regulatory, accounting and reporting developments
and their application to the company.
Operation of the committee
The committee held three half-day meetings during the year. Attendance
at these meetings by the committee members is shown in the table on
page 49. On each occasion the external auditors, chief financial officer and
senior members of the finance function attended, as well as the company
secretary, head of risk and members of the internal audit function. By rotation,
operational managers and functional heads present risk reports at audit
committee meetings.
There is an opportunity at each meeting for the committee to discuss
matters privately with the internal and external auditors without management
present. Outside of scheduled meeting times, the chairman of the committee
is in regular contact with the external audit partner to discuss matters
relevant to the company.
The committee’s terms of reference are available on the company’s website
and these are reviewed annually and updated to reflect changes in the
responsibility and regulation of the committee. In addition, the committee
conducts a review of its own performance on an annual basis, taking input
from the members of the committee, the external auditor and senior members
of the finance function. As a result of the review the audit committee has
assisted the board in its fair, balanced and understandable review of the
annual report, as explained below.
Financial statements and audit
The committee reviewed and provided input into the audit scope and audit
plan presented by the external auditor, ensuring there was adequate focus
on the fair value issues arising from the acquisition of Spirit. In considering
the financial statements the committee reviewed the group’s accounting
policies to ensure consistency on a year-to-year basis, and that appropriate
accounting policies were adopted for new issues such as brand valuations
associated with the acquisition of Spirit. Significant issues that the committee
addressed in relation to the financial statements are set out in the table
on page 53. The committee also reviewed management’s attestation paper
setting out the information that had been provided to the auditor to enable
it to form its opinion on the group’s financial statements and demonstrating
that it was appropriate for the directors to make the representations set out
in the letter of representation.
CORPORATE GOVERNANCE Significant issues considered by the audit committee in relation to the financial statements for 2015/16
Matter considered
What the committee did
Fair value accounting
for acquired Spirit
assets and liabilities
The committee reviewed the proposed fair value accounting treatment of assets and liabilities acquired as a result of the
Spirit acquisition and the changes proposed to the interim adjustments applied by management at the half year. In particular,
it considered key judgmental areas including off-market leases, brand valuations and property and lease valuations and the
treatment of goodwill, ensuring an appropriately rigorous process had been applied to determine fair values based on reasonable
assumptions. In particular, the committee noted the assessments of independent advisers appointed to undertake property
valuations of the Spirit estate and to consider the valuation of brands and other intangible assets. Following discussions with
the external auditors, the committee concluded that the proposed accounting treatment of the Spirit assets and liabilities
was reasonable and confirmed that the fair values set out in note 7 to the financial statements were appropriate.
Uncertain tax
positions
The committee undertook a detailed review of uncertain tax positions which have not yet been agreed or are in dispute with
HMRC. Whilst many of the uncertain tax provisions have been resolved with HMRC, the largest of these, an internal funding
arrangement undertaken in 2003/4, known as Sussex, remains outstanding. The committee satisfied itself that an appropriate
provision was in place in respect of this uncertain tax position following discussion with the external auditor.
Impairment
of property, plant
and equipment
Management prepared a detailed report for consideration by the committee concerning the methodology used to determine
the extent of any impairment required. The committee considered the methodology used, reviewed management’s proposals
and considered the expected timetable for the disposal of non-core sites. The committee assessed the proposed changes to
both the underlying growth rates and the discount rate used and determined them to be appropriate. The committee agreed
that the growth rates were appropriate at this stage even in light of possible consumer uncertainty following the referendum
vote to leave the European Union. The external auditors were asked for their input and the committee took into account their
views on the questions raised. Following the review and discussions the committee concluded that an impairment of £32.2m
was appropriate in relation to property, plant and equipment.
Funding headroom
and covenants and
the viability
statement
The committee reviewed the group’s funding headroom and covenants in conjunction with the review of the use of the going
concern assumption and, in particular, the viability statement on page 37. The committee considered the time period proposed
for the viability statement, challenged management’s projections, assumptions and stress testing (which included material reductions
in planned growth rates), as well as the extent to which mitigating actions would achieve the desired outcomes, and took into
account the external auditor’s comments on its own work on this issue.
Accounting for
supplier income and
customer rebates
The committee reviewed the group’s accounting for supplier income, including listing fees, performance fees and volume
rebates, noting that such income is not recognised until it can be reliably estimated. The auditor’s review of both supplier
income and customer rebates was considered. During 2015/16 the annual value of supplier fees and rebates amounted to
approximately £27m, whilst customer rebates amounted to £22m in the year. The committee was satisfied that the current
controls in place provided reasonable assurance that the risks associated with these areas were being appropriately managed.
Accounting for
deferred tax
The committee reviewed the changes to the deferred tax provision for rolled over gains and property revaluations, which led to
a £26.8m deferred tax credit. The auditor’s review of the capital gains model and HMRC’s review as part of the dispute resolution
process were considered. The committee was satisfied that the revised deferred tax provision for capital gains was appropriate.
Fair balanced and understandable annual report
One of the key governance requirements in relation to the annual report
is that it should be fair, balanced and understandable. At the request of the
board this year, the audit committee undertook a review of management’s
processes in this regard (including the clear guidance given to contributors and
the review process adopted by management) and also considered in detail
the draft annual report to ensure that it was fair, balanced and understandable
in their view. The committee then recommended to the board that it could
make the required disclosure as set out on page 69.
Effectiveness of the external audit
After the 2014/15 audit was completed a review of the effectiveness of the
auditor and of the audit service was undertaken, supported by a questionnaire
completed by the audit committee chairman, the chief financial officer, and
a number of key members of the finance team involved in the preparation
of the statutory accounts. The overall quality of the service, the audit partner
and the audit team were all reviewed and matters such as the management
of the audit team, the quality of its challenge, insight and communications
and the cost-effectiveness of the audit were considered. Taking into account
the internal review the committee was satisfied that the quality of the audit
service provided by Ernst & Young LLP was appropriate. The feedback
from the review was also provided to Ernst & Young LLP. The committee
also took into account the quality of the audit firm procedures as
published by the Financial Reporting Council.
Ensuring external auditor independence
The audit committee is cognisant of the importance of auditor independence
and objectivity and has a policy in relation to the use of the auditor for
non-audit work. The company will award non-audit work to the firm
which provides the best commercial solution for the work in question,
taking into account the skills and experience of the firm; and (if the audit
firm is being considered) the nature of the services involved, the level of
fees relative to the audit fee and whether there are safeguards in place to
mitigate to an acceptable level any threat to objectivity and independence
in the conduct of the audit resulting from such services.
Work estimated to cost in excess of £25,000 is put out to tender unless
agreed otherwise by the chairman of the audit committee. The chief
financial officer may approve specific engagements up to £50,000 (in
aggregate up to £100,000 p.a.), and the chairman of the audit committee
may approve engagements up to £100,000 (in aggregate up to £200,000
p.a.), with fees in excess of those limits being subject to approval of the full
committee. This policy was complied with during the year.
The audit committee has considered a revised policy for non-audit services
in line with the recent guidance issued by the FRC which will have effect
for the group’s 2017/18 financial year. Now that the guidance is finalised,
the audit committee will confirm its policy and implement it before the
2017/18 financial year. The revised policy will be more restrictive than
that which currently exists.
The committee also has a policy in relation to the appointment of former
partners or employees of the auditor by the group, which provides that audit
partners will not be offered employment by Greene King or any of its subsidiary
undertakings within two years of undertaking any role on the audit. Other
key team members will not be offered employment by Greene King within
six months of undertaking any role on the audit. Other audit team members
who accept employment by Greene King must cease activity on the audit
as soon as they tender their resignation to the audit firm. No members
of the audit team have joined Greene King in the period.
Annual report 2016 GREENE KING PLC
53
CORPORATE GOVERNANCE Audit committee report continued
Ensuring external auditor independence continued
During the year the company made limited use of specialist teams within
Ernst & Young LLP for non-audit work, including acting as auditors to the
Belhaven pension scheme and in relation to the restated FRS 101 accounts
for Greene King Finance plc, required in relation to the secured financing
completed in May 2016. The total fees paid to Ernst & Young LLP during
the year amounted to £0.65m of which £12k related to prior year expenses,
and £0.04m (6%) related to non-audit work. Further detail is in note 4
to the financial statements.
In considering the independence and objectivity of the external auditor,
and the further safeguards in place to protect it, the committee noted the
annual review undertaken by the external auditor identifying all services
provided to the group and determined that carrying out such work did not,
and will not going forward, impair the independence of the external auditor.
External auditor – tendering and re-appointment
The company last tendered the external audit contract in 1997 and
Ernst & Young have been the auditor since then, with an annual rolling contract
and subject to an annual shareholder vote at the AGM. Ernst & Young LLP
are required to rotate the audit partner responsible for the group every
five years and the current audit partner’s term ends with completion
of this annual report.
In accordance with The Statutory Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive Processes and Audit Committee
Responsibilities) Order 2014 (the Order) and in the light of the transitional
provisions on audit matters thereunder which allow a period until April 2024
before an audit tender and change is required, and given the change of audit
committee chairman which will take place immediately after the signing of
this annual report, the committee recommended to the board, and the board
accepted the recommendation, that Ernst & Young LLP should be retained
as the group’s auditors for the time being. A new audit partner will be
in place for the 2016/17 financial year audit, and the committee will give
consideration to undertaking a full audit tender, in which Ernst & Young LLP
will not be permitted to partake, within the next five years. The company
was in compliance with the Order during the year.
The committee therefore recommended to the board that Ernst & Young LLP
should be reappointed as the company’s auditor for the forthcoming year.
This resolution will be put to shareholders at the AGM.
Internal audit
The company’s internal audit function is responsible for reviewing the
effectiveness and efficiency of the systems of internal control in place
to safeguard the assets of the company. Under the terms of reference
for the function, the internal audit team has direct access to the audit
committee chairman to enable it to raise any significant issues and to
maintain independence. Members of the internal audit team also attend
the audit committee meetings to report on the progress and actions taken
by the function. During the year, as well as full reviews of relevant areas,
the internal audit function had also carried out a number of key financial
control reviews, all of which were reported to management and the
committee. The committee also reviewed the resources available to the
internal audit function both in the short term following the acquisition
of Spirit and on a longer term basis, noting that resources have been
increased during the year.
Other matters considered during the year
The committee considered the group’s policy in relation to the valuation
of its property assets, in the light of the fact that Spirit operated with an
annual revaluation policy, whereas Greene King has historically adopted
a policy whereby property plant and equipment are valued at cost or deemed
cost on transition to IFRS. The committee considered the advantages and
disadvantages of each approach and recommended to the board no change
to Greene King’s policy in this regard.
The committee reviewed, as it does on an annual basis, the group’s whistle
blowing policy and its application across the business. All whistle blowing
reports were investigated and resolved satisfactorily, with no significant
issues emerging.
The committee has continued to review the subject of cyber security and
receives regular reports from management on the issue and how it is
54
GREENE KING PLC Annual report 2016
managing external threats in this area. At the request of the committee,
management undertook further testing (including by external consultants)
of the company’s defences against a cyber security attack, implemented
a number of additional security measures as a result and addressed the
content of regular committee reporting on this topic.
The terms of reference of the committee were also reviewed during the
year and an exercise was undertaken to assess the effectiveness of the
audit committee itself.
Internal control and risk management
As disclosed in the Risks and uncertainties section of this report on page 33,
there is an on-going process for identifying, evaluating and managing the
principal risks faced by the company. The board has overall responsibility
for the group’s risk management framework and systems of internal
control and for reviewing their effectiveness, whilst the audit committee
monitors and reviews those internal controls and risks on a regular basis,
and reports to the board on its findings. During the course of the year the
committee continued to review reports from a number of business units
and functional areas on their respective risk management processes and key
risks and on the key financial internal controls and to challenge representatives
of the relevant business unit or functional area who attended those meetings
to present the relevant reports. The risk management framework and
internal control systems are designed to manage to an acceptable level,
and not to eliminate, the risk of failure to achieve business objectives. They
can provide reasonable, but not absolute, assurance that the group’s assets
are safeguarded and that the financial information used within the business
and for external reporting is reliable.
The company has in place procedures to assess the key risks to which it is
exposed and has formalised the control environment needed to address
these and other issues. There are processes in place which accord with
the Financial Reporting Council’s Guidance on Risk Management, Internal
Control and Related Financial and Business Reporting, and these remained
in place up to the date of this report. The board is satisfied that there are
no significant weaknesses in these systems and that the group’s internal
controls are operating effectively.
The key elements of the internal control framework, in addition to the risk
management processes outlined in the risks and uncertainties section
of this report, are:
– the schedule of matters reserved for the board;
– the group’s defined management structure with suitable authority limits
and responsibilities, staffed by appropriate personnel;
– regular updates for the board on strategy;
– a comprehensive planning and financial reporting procedure including
annual budgets and a three-year strategic plan, both of which are
reviewed and approved by the board;
– ongoing monitoring by both the board and senior management of
performance against budgets, through the periodic reporting of detailed
management accounts and key performance indicators;
– ongoing monitoring by the board of compliance with financial covenants;
– a centralised financial reporting system and close process, with controls
and reconciliation procedures designed to facilitate the production
of the consolidated accounts;
– clearly defined evaluation and approval processes for acquisitions and
disposals, capital expenditure and project control, with escalating levels
of authority (including board approval for major acquisitions and disposals),
detailed appraisal and review procedures and post-completion reviews;
– review of retail operational compliance by the retail internal audit team
responsible and other analytical and control procedures facilitated by
the EPOS till system;
– audits conducted by the group internal audit function of business
and functional control environments; and
– documented policies to cover bribery and whistle-blowing and regular
updates on any incidents.
CORPORATE GOVERNANCE Remuneration report
I am pleased once again to be able to summarise the
company’s remuneration policy, the way in which it has
been implemented during the last financial year and
the way it will be implemented this forthcoming year.
The remuneration committee remains very mindful
of investor interest in executive remuneration and has
again sought to ensure that the remuneration policies
and practices at Greene King drive appropriate behaviours
by management that are in the long term interests
of the company and its shareholders.
Lynne Weedall
Chairman of the remuneration committee
Annual statement
Shareholders approved the remuneration policy for the company’s directors
at the 2014 AGM, and in line with the regulations on directors’ remuneration,
the company will next submit its policy to shareholders for approval in 2017.
Whilst the policy is not required to be presented this year, it has been set
out in full in this report to assist you in reviewing the implementation of
the policy in the 2015/16 financial year, details of which are set out in the
annual report on remuneration on pages 59 to 66. This latter report is
subject to an advisory shareholder vote at the forthcoming AGM.
Decisions during the year
As I highlighted in last year’s directors’ remuneration report, given the
significant changes to the size and complexity of the group as a result of
the acquisition of Spirit Pub Company, the remuneration committee gave a
commitment to review executive director base salary levels and other
elements of the directors’ remuneration policy during 2015/16.
Following the completion of the review, the main conclusions reached
were that no changes should be made to the directors’ remuneration
policy at this time although a number of decisions were made in respect
of the operation of the policy.
In particular, in the light of a detailed review of the changes in the size and
complexity of the group as a result of the Spirit acquisition, the progress
that management was making in respect of the integration and the individual
performance of the two executive directors, the remuneration committee
awarded base salary increases of 13% and 7% to the chief executive and
chief financial officer respectively, with effect from 19 October 2015, the
half year point. Further details are set out on page 61. It should be noted
however that no further increase to the executive directors’ base salary
was made in May this year, and no further changes will be considered
until May 2017.
In addition, the committee reviewed the various outstanding long-term
incentive plan (LTIP) award performance targets to ensure that it was
satisfied that the EPS and ROCE target ranges provide an appropriate level
of stretch in light of the acquisition of Spirit. As such, targets for the 2013
and 2014 awards have been adjusted to take into account the anticipated
impact of the Spirit acquisition (excluding synergies) and, given that the
performance targets for the 2015 LTIP awards were set without taking
into account the expected impact of Spirit, the committee has significantly
toughened the targets in respect of these awards. Consistent with best
practice, major investors were consulted in respect of the adjustments,
which are explained on page 62.
Pay for performance
Bonus pay outs for this year were 97.5% of eligible salary for the
chief executive and 77.5% of eligible salary for the chief financial officer,
reflecting the stretching targets set at the beginning of the year. The LTIP
awards granted in 2013 are expected to vest in August this year at 100%
of the maximum for the core LTIP award and 76% of the maximum for
the growth LTIP award.
We are happy to receive feedback from shareholders at any time in
relation to our remuneration policies and hope to receive your support
for the resolution referred to above at the forthcoming AGM.
Lynne Weedall
Chairman of the remuneration committee
28 June 2016
Annual report 2016 GREENE KING PLC
55
CORPORATE GOVERNANCE Remuneration report continued
Policy report
This section of the report sets out Greene King’s current remuneration
policy which was approved at the 2014 AGM by 96% of shareholders who
voted. No changes are being made to the policy this year and, therefore, the
policy is set out below for information only. Details of actual remuneration
paid, LTIP awards granted and the associated performance conditions are
set out in the annual report on remuneration which starts on page 59.
Policy overview
The key objective of the company’s remuneration policy is to provide
a remuneration structure that is aligned with shareholder interests and
that enables us to attract, motivate and retain talented and high quality
individuals able to deliver continued growth of the business and achieve
the group’s strategic aims. The remuneration package is designed to be
competitive but not excessive and to contain an appropriate balance between
fixed and variable remuneration and, for the variable remuneration,
between short-term and longer-term performance.
The committee has considered whether there are any aspects of the
policy which could inadvertently encourage executives to take inappropriate
risk and is satisfied that this is not the case. The committee has also ensured
that the incentive structure for executive directors and senior management
does not raise environmental, social or governance risks by inadvertently
motivating irresponsible behaviour.
Details of each element of remuneration, their purpose, link to strategy
and their operation and performance metrics are set out below.
Policy table
Element of
remuneration
Salary
Annual
performance
bonus
Purpose and link to strategy Operation
Maximum opportunity
Performance metrics
Base salaries are reviewed annually or
when a change in responsibility occurs,
to reflect the executive's responsibilities,
market value and sustained performance
level. In setting pay levels, the committee
considers current market practice and
makes comparisons against a selection
of other companies determined
by reference to turnover, market
capitalisation and operational details.
When reviewing base salaries, the
committee is mindful of the gearing effect
that increases in base salary will have on
the potential total remuneration of the
executive directors.
Performance measures and targets
are set at the beginning of each financial
year to ensure that the measures and
weightings are appropriate and support
the business strategy. Bonuses are payable
after the end of each financial year, based
on performance against those targets.
Bonuses are non-pensionable. A clawback
mechanism applies in the event of a
material misstatement of the group's
accounts, error or gross misconduct.
To recruit,
reward and
retain high calibre
executives with
an appropriately
competitive
base salary.
To incentivise
executive
directors to
deliver superior
performance
during the course
of a year, and
to promote
retention and
stability amongst
the senior
management
team. Performance
measures and
targets are designed
to reinforce
strategic priorities
for the year.
—
There is no prescribed
maximum annual increase.
The committee is guided by
the general increase for the
broader employee population
but on occasions may need
to recognise, for example,
an increase in the scale, scope
or responsibility of the role.
A maximum of 100% of
salary can be earned by the
executive directors, with
no bonus payable for below
threshold performance and
up to 75% of salary for target
levels of performance.
Payment of bonuses is
dependent on a mixture of
financial targets and specific
personal targets. In relation
to the financial targets, awards
are made on a straight-line
basis for performance
between threshold and target
and on a separate straight-line
basis for performance
between target and maximum.
Performance is measured
relative to challenging targets
in key financial measures.
Details of measures and
weightings for the 2015/16
financial year and of the
proposed measures and
weightings for next year's
annual bonus, are set out
in the annual report on
remuneration, which starts
on page 59. An explanation
of how the performance
measures were chosen is
given in the notes below.
56
GREENE KING PLC Annual report 2016
CORPORATE GOVERNANCE Element of
remuneration
Long term
incentive plan
("LTIP")
Shareholding
policy
Pension
Benefits
All employee
share
schemes
Purpose and link to strategy Operation
Maximum opportunity
Performance metrics
A maximum of 200% of salary
can be awarded each year,
100% as a core LTIP and
100% as a growth LTIP.
Dividend equivalents will be
paid on any shares that vest.
The core LTIP will be subject
to a suitably stretching EPS
target and the growth LTIP
to a suitably stretching ROCE
target. Performance will
normally be measured over
a three year period. Vesting
will generally be subject to
continued employment.
The committee retains the
discretion to scale back the
vesting levels of the growth
LTIP award in appropriate
circumstances.
The committee normally makes an annual
LTIP award, usually in the form of nil-cost
options. The awards are subject to suitably
stretching performance conditions set by
the committee, which are reviewed annually.
Awards normally vest on the third
anniversary of grant, subject to performance,
and will be exercisable until the tenth
anniversary of grant. A clawback mechanism
applies in the event of a material misstatement
of the group's accounts, error or
gross misconduct.
Executive directors are required to build
and retain a shareholding of at least 100%
of salary. To the extent that the shareholding
requirement has not been met, executives
will be expected to retain at least 50%
of the net exercised LTIP awards until
the requirement is met.
The company contributes to defined
contribution pension arrangements for
the executive directors or provides cash
in lieu where appropriate.
Current company contribution
levels are 25% for the chief
executive and 20% for the
chief financial officer.
Benefits comprise the provision of
company cars (or cash allowances in lieu
thereof), fuel for company cars, life
assurance, permanent health insurance
and private medical insurance.
Employees are invited to participate in the
sharesave in January each year provided
that they have the requisite service.
Benefits are reviewed
periodically in line with market
practice and are not pensionable.
The maximum saving under
the sharesave scheme will be
no more than HMRC
approved limits, allowing
employees to buy company
shares at up to a 20% discount
at the end of a three or five
year savings period.
—
—
—
To incentivise
the executive
directors to
deliver superior
levels of long-term
performance for
the benefit of
shareholders,
thereby aligning
their interests
with those of
our long-term
shareholders.
To align the
interests of
the executive
directors with
shareholders
and to promote
a long-term
approach.
To offer market
competitive levels
of benefit.
To be
appropriately
competitive with
those offered
at comparator
companies.
All employees,
including executive
directors, have
the opportunity
to build their
shareholding in a
tax-efficient way
by participating
in the company's
HMRC approved
sharesave scheme.
Notes:
1. A description of how the company intends to implement the policy set out in this table
for 2016/17 is set out in the annual report on remuneration, which starts on page 59.
2. The choice of performance metrics applicable to the annual bonus scheme reflect
the committee’s belief that the compensation should be appropriately stretching, but
achievable, and tied to both the delivery of profit growth, key financial metrics and
specific individual objectives.
3. The EPS performance condition underpinning the core LTIP award was selected by
the committee on the basis that it would reward the delivery of long-term financial
growth and is the most widely understood profit-based measure across the business.
ROCE was chosen as the performance condition to apply to the growth LTIP award
as it will ensure that management focuses on generating the necessary returns in
excess of the cost of capital and because it provides a more strategic measure of long
term performance, where capital needs to be re-deployed in order to focus on Pub
Company. The performance targets are set by the committee following a detailed
review of the company’s projections and are believed to be appropriately stretching.
4. The policy and practice for the remuneration of employees generally differs
from that for the executive directors as follows:
– A lower level of maximum annual bonus opportunity (or zero bonus opportunity)
may apply to employees other than the executive directors and certain senior
executives and targets may differ by business unit and by employee.
– Other employees may receive fewer or lower levels of benefits than those for
executive directors. Company car benefits are only offered where required for
the role or to meet market norms.
– Pension contribution levels may be lower for employees generally compared
with those for the executive directors.
– Participation in the core LTIP is limited to the executive directors and around
40 senior managers. Participation in the growth LTIP is limited to an even smaller
senior management population. These differences generally arise from the development
of remuneration arrangements that are market competitive for various categories
of employees. They also reflect the fact that, in the case of executive directors
and senior executives, there is a greater emphasis on performance related pay.
5. Subject to the achievement of the applicable performance conditions, executive
directors are eligible to receive payment from any award made prior to the approval
and implementation of the remuneration policy detailed in this report.
Annual report 2016 GREENE KING PLC
57
CORPORATE GOVERNANCE Remuneration report continued
Indicative total remuneration levels
The graphs below provide scenarios for the potential future reward
opportunity for each executive director, and the potential split between
the different elements of remuneration, under three different
performance scenarios – minimum, on- target and maximum.
Chief executive officer
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
£2,768k
4
7
%
2
3
%
3
0
%
£1,962k
3
3
%
2
4
%
4
2
%
£833k
1
0
0
%
Minimum
On-target
Maximum
Chief financial officer
1,500,000
1,200,000
900,000
600,000
300,000
0
£1,486k
4
7
%
2
4
%
2
9
%
£1,024k
3
2
%
2
6
%
4
2
%
£438k
1
0
0
%
Minimum
On-target
Maximum
Core and growth LTIP
Annual Bonus
Salary, pension and benefits
Core and growth LTIP
Annual Bonus
Salary, pension and benefits
Notes:
1. Minimum relates to the value of the package assuming that current salary, benefits
and pension alone are paid.
2. The on-target annual bonus opportunity, based on stretching performance targets,
is 75% of salary for the chief executive and 75% for the chief financial officer.
3. The on-target vesting level under the core LTIP and the growth LTIP is assumed
to be 50% and 50% respectively.
4. The maximum scenario assumes full bonus payout and full vesting of LTIP awards.
5. No assumption as to share price growth is made in either the on-target
or the maximum scenarios.
Approach to recruitment and promotions
The remuneration package for a new executive director would be set in
accordance with the terms of the company’s prevailing approved remuneration
policy at the time of recruitment. In particular, the annual bonus potential
will be limited to 100% of salary and awards under the LTIP will be limited
to 200% of salary.
In the case of an external hire, if required to secure an individual, the
committee may offer additional cash and or share-based elements when it
considers them to be in the best interests of the company, to take account
of deferred remuneration forfeited by the new hire when leaving their former
employer. Any such additional payments would be one-off in nature, would
reflect where possible the nature, time horizons and performance requirements
attaching to that forfeited remuneration and would be limited to the value
of the forfeited remuneration.
For an internal promotion to executive director level, any variable pay
element awarded in respect of the prior role may be allowed to pay out
in accordance with its terms, adjusted as relevant to take into account the
appointment. In addition, any other on-going remuneration obligations
existing prior to appointment may continue, provided that they are put
to shareholders for approval at the earliest opportunity.
For both external and internal appointments, the committee may agree
that the company may meet certain relocation and/or incidental expenses
as appropriate.
Service agreements and exit payment policy
Newly appointed executive directors are offered a service agreement
with a notice period of one year. In the event of the employment of an
executive director being terminated, the committee would take into
account the commercial interests of the company, pay due regard to best
practice and apply usual common law and contractual principles, including
the individual’s duty to mitigate their loss.
The payment of any annual bonus in respect of the year of termination is
subject to the discretion of the committee, which may determine that an
annual bonus is payable with respect to the period of the financial year
served, but pro-rated for time served, and not paid until the normal due
date for the payment of bonuses.
The vesting of any LTIP awards will be governed by the rules of the LTIP.
Awards will normally lapse unless the individual is considered a ‘good leaver’.
An individual would generally be considered a ‘good leaver’ if they left the
group’s employment by reason of death, injury, ill-health, disability approved
by the committee, or retirement, although the committee has the absolute
discretion to treat any individual as a ‘good leaver’ for any other reason.
In the case of a ‘good leaver’, payments would normally be scaled back
to recognise the shorter period of service than the award was intended
to cover and remain subject to outstanding performance conditions.
Rooney Anand, whose employment with the company commenced on
6 August 2001, is subject to a one year notice period from the company.
His terms of employment do not contain any additional terms relating
to compensation for termination of employment. The terms of his
appointment as chief executive were agreed and set out in a letter
dated 24 December 2004.
Kirk Davis’s employment, which commenced on 3 November 2014, is
subject to the terms of a contract dated 29 September 2014. His employment
may be terminated by the company on giving one year’s notice, without any
additional terms relating to compensation for termination of employment.
There are no obligations on the company contained within the existing
directors’ contracts which would give rise to payments not disclosed
in this report.
Non-executive director policy table
Non-executive directors are appointed pursuant to letters of appointment
for three-year periods. The table below sets out, for each of the current
directors, the start and expiry date of their respective appointments.
Director
Philip Yea
Mike Coupe
Ian Durant
Rob Rowley
Lynne Weedall
Date of
appointment
Present
expiry date
2 Feb 16
1 Feb 19
26 Jul 11
25 Jul 17
16 Mar 07
9 Sep 16
18 Jul 14
17 Jul 17
11 Oct 12
10 Oct 18
58
GREENE KING PLC Annual report 2016
CORPORATE GOVERNANCE The appointments of all these non-executive directors can be terminated by the company at any time on three months’ written notice, notwithstanding
the present expiry dates above.
The table below summarises each of the components of the remuneration package for the non-executive directors. The non-executive directors are
not entitled to receive any pension, bonus or long-term incentive benefits from the company in respect of their roles as non-executive directors.
Element of remuneration Purpose and link to strategy
Operation
Reward
Performance metrics
Fee
To recruit and retain
appropriately qualified
non-executive directors.
Benefits
To be appropriately
competitive with those
offered at comparator
companies.
The chairman and non-executive director
fees are typically reviewed every two
years. Fees are benchmarked against
similar roles in the sector and in other
similar sized companies and reflect the
time commitments and responsibilities
of each role.
The chairman's benefits include private
healthcare and the provision of a
company car.
Non-executive director fees may
include a basic fee and a fee for acting
as a committee chairman. They are set
at a level that is considered appropriately
competitive in the light of market practice.
Benefits are reviewed periodically in
line with market practice. The value
of the chairman's benefits will be
comparable with those offered
to the executive directors.
—
—
External directorships
The company’s policy is to allow executive directors to take up one or more non-executive directorships in an external company, subject to board
approval. Fees received for serving as a non-executive director of an external company are retained by the executive director.
Consultation
The company engages regularly with shareholders on matters relating to its strategy and business operations. Where necessary, we also engage with
shareholders and their representative bodies on matters relating to executive remuneration and it is the committee’s policy to consult with major
shareholders prior to making any major changes to its executive remuneration structure.
Consideration of conditions elsewhere in the group
The committee does not consult with employees when deciding remuneration policy, although it does receive information on salary increases
and long-term incentives for employees across the group.
Annual report on remuneration
This section of the report explains how Greene King’s remuneration policy has been implemented during the year.
The remuneration committee
The remuneration committee is appointed by the board. The members are Lynne Weedall (chairman), Mike Coupe, Ian Durant and Rob Rowley.
Philip Yea was appointed as an additional member of the committee on 2 February 2016 but stepped down from the committee on 2 May 2016
when he took over as chairman of the company. All of the committee members are regarded by the board as independent non-executive directors.
The role of the committee, as set out in its terms of reference (which are available on the company’s website), includes determining the remuneration
policy for the executive directors, the chairman and certain members of senior management. It agrees total individual remuneration packages, considers
the granting of awards under the long-term incentive plan and determines bonuses payable to the executive directors and certain senior executives.
It approves the service contracts of the executive directors and any compensation arrangements arising from their termination. The committee is made aware
of, and takes into account, the salary levels of the wider senior management team and of the incentive arrangements operating throughout the company.
During the year there were three scheduled meetings of the committee. Attendance at these meetings is shown in the table on page 49.
Advisers to the remuneration committee
The committee has appointed New Bridge Street, part of Aon plc, to provide advice on general remuneration matters and comparator information.
Aon plc provides insurance broking and consultancy services to the group. The committee is satisfied that the provision of these services does not in any
way prejudice the position of New Bridge Street as independent advisers to the committee. Fees paid during the year to New Bridge Street in respect
of advice to the committee, generally charged on a time spent basis, were £35,274.
Rooney Anand, chief executive, attends meetings of the committee by invitation and provides advice to help the committee determine appropriate
remuneration and incentive packages for the chief financial officer and the other senior executives, but he leaves the meeting when his own remuneration
is being discussed. The chairman of the board also attends meetings of the committee by invitation.
Annual report 2016 GREENE KING PLC
59
CORPORATE GOVERNANCE Remuneration report continued
Shareholder voting at the 2014 and 2015 AGM
The table below shows the results of the binding vote on the directors’ remuneration policy at the AGM held in September 2014 and the advisory vote
on the 2014/15 directors’ remuneration report at the AGM held in September 2015.
Approval of the directors' remuneration policy report – passed in 2014
Approval of the remuneration report – passed in 2015
Votes for
Percentage
Votes against
Percentage Votes withheld
138,964,449
209,030,752
95.8%
6,047,870
99.1%
1,916,795
4.2%
0.9%
2,105,782
9,342,342
Audited information
Single figure of remuneration
The tables below show the details of the total remuneration paid to each director in 2015/16 and 2014/15.
2015/16 (52 weeks) (audited)
Executive directors
Rooney Anand
Kirk Davis
Non-executive directors
Tim Bridge
Mike Coupe
Ian Durant
Rob Rowley
Lynne Weedall
Philip Yea
2014/15 (52 weeks) (audited)
Executive directors
Rooney Anand
Kirk Davis
Matthew Fearn
Non-executive directors
Tim Bridge
John Brady
Mike Coupe
Ian Durant
Rob Rowley
Lynne Weedall
Salary
or fees
£'000
Taxable
benefits
£'000
Pension-
related
benefits 1
£'000
Annual
bonus
£'000
Long-term
incentives 2
£'000
Total
£'000
609
340
183
46
53
46
53
11
20
12
34
—
—
—
—
—
152
68
594
264
—
—
—
—
—
—
—
—
—
—
—
—
1,172
—
—
—
—
—
—
—
Salary
or fees
£'000
Taxable
benefits
£'000
Pension-
related
benefits 1
£'000
Annual
bonus
£'000
Long-term
incentives 2
£'000
554
160
134
174
10
44
51
35
51
22
6
11
33
—
—
—
—
—
139
32
45
—
—
—
—
—
—
332
118
—
—
—
—
—
—
—
1,092
—
552
—
—
—
—
—
—
2,547
684
217
46
53
46
53
11
Total
£'000
2,139
316
742
207
10
44
51
35
51
Notes:
1. Pension benefits for the executive directors comprised cash in lieu of pension contributions.
2. Long term incentives in 2015/16 comprised the value of the awards granted in October 2013, which will vest in October 2016 and which were subject to performance targets
measured over the three years to May 2016. The value of the award has been calculated using £8.66, being the average share price for the last three months of the 2015/16
financial year, and also takes into account the value of the dividend equivalent shares which accrued on the award. 100% vesting of the 2013 core LTIP award and 76% vesting
of the 2013 growth LTIP has been assumed. For the long-term incentives in 2014/15 the actual share price on the date of vesting has been used (restated from the estimates
of £1,088k for Rooney Anand and £550k for Matthew Fearn disclosed in the 2014/15 annual report).
60
GREENE KING PLC Annual report 2016
CORPORATE GOVERNANCE Details of the elements included in the table above are as follows:
Base salary
The base salaries for 2015/16 for Rooney Anand and Kirk Davis (£567,970 and £328,000 respectively) were increased to £645,000 and £351,000 respectively
with effect from 19 October 2015, following a detailed review by the committee of the changes in the size and complexity of the group as a result of
the Spirit acquisition, the progress that management was making in respect of the integration and the individual performance of the two executive directors.
The base fee for the chairman was £183,000, whilst the base fees for the non-executive directors were £46,000 for Mike Coupe, Rob Rowley and Philip Yea
and £53,400 for Ian Durant and Lynne Weedall (due to their roles as chairmen of the audit and remuneration committees respectively).
Taxable benefits
Taxable benefits were provided to directors in line with the policy table set out on page 56.
Pension-related benefits
Cash in lieu of pension contributions were in line with the policy table set out on page 56.
Annual bonus
Executive directors may earn bonuses depending on the company’s performance and their own individual performance. Awards for 2015/16 for the
chief executive were based 90% on financial performance and 10% on individual performance, whilst for the chief financial officer the respective percentages
were 72.5% on financial performance and 27.5% on individual performance.
For both the chief executive and the chief financial officer, the financial performance measures were based on profit before tax and exceptionals (PBTE),
free cash flow and the amount of synergies captured from the Spirit acquisition. The target ranges, outcome and awards (as a % of salary) are included
in the table below:
Rooney Anand
PBTE (excluding fair value accounting adjustments)
Free cash flow1
Spirit synergies
Personal target2
Total
Kirk Davis
PBTE (excluding fair value accounting adjustments)
Free cash flow1
Spirit synergies
Personal targets3
Total
Target range
Outcome
Maximum
percentage
of bonus
Actual
percentage
of bonus
£243.5m – £249.0m
£249.1m
£26.0m – £32.0m
£11.0m – £13.0m
—
£50.2m
£16.7m
—
£243.5m – £249.0m
£249.1m
£26.0m – £32.0m
£11.0m – £13.0m
—
£50.2m
£16.7m
—
62.5
15.0
12.5
10.0
100.0
50.0
12.5
10.0
27.5
100.0
62.5
15.0
12.5
7.5
97.5
50.0
12.5
10.0
5.0
77.5
Notes:
1. Free cash flow significantly out-performed the target range as a result of better than anticipated trading, better than expected working capital from the Spirit business and lower
than anticipated interest and pension costs.
2. The personal target for Rooney Anand related to the strengthening and development of the senior executive team. Following the remuneration committee’s assessment
of the personal target and actual performance, 7.5% of salary was awarded.
3. The personal targets for Kirk Davis related to targets linked to like for like sales growth and the performance of the senior finance team. As the like for like sales growth targets
remain commercially sensitive, the target and result have not been disclosed above but will be disclosed next year. Following the remuneration committee’s assessment of the personal
targets and actual performance, 5% of salary was awarded against these metrics.
Performance against the combined financial and individual targets resulted in bonuses being paid at £594k (97.5% of eligible salary) for the chief executive
and at £264k (77.5% of eligible salary) for the chief financial officer. Eligible salary is salary earned during the relevant financial year.
Disclosure of 2014/15 bonus targets
On the basis that the financial targets and the company’s performance against those targets for the 2014/15 financial year are no longer considered
commercially sensitive, details are set out below. The group delivered a strong financial result for the year, achieving record sales and profit, with revenue
up 3.0%, notwithstanding underlying retail growth being lower than anticipated and operating profit before exceptional items up 3.8%. Profit before tax
and exceptional items fell 0.8% to £168.5m although adjusted earnings per share were up 1.3%. Operating cash flows continued to be strong.
Performance measure
PBTE
Free cash flow
Details of the performance against non-financial targets were disclosed last year.
Target range
Actual
performance
£167.9m – £175.9m
£168.5m
£44.2m – £50.2m
£55.7m
Percentage
of bonus
opportunity
awarded
48%
100%
Annual report 2016 GREENE KING PLC
61
CORPORATE GOVERNANCE Remuneration report continued
Audited information continued
Long-term incentive plans
The LTIP awards granted on 4 August 2013 were based on a three year performance period ended 1 May 2016. The target ranges, calculated
on a straight-line basis from 0% to 100%, are set out below.
Performance measure
Core LTIP – earnings per share1
Growth LTIP – return on capital employed2
Performance target
62.3p – 68.5p
8.85% – 9.55%
Actual
performance
69.9p
9.38%
Threshold
vesting
of award
Maximum
percentage
of award
Actual
percentage
of award
0%
0%
100%
100%
100%
76%
Notes:
1. The earnings per share target was adjusted to take account of an increased number of disposals and the acquisition of Spirit which completed in June 2015. No adjustment was
made in respect of anticipated synergies arising from the acquisition allowing management to benefit from those that have been delivered. The prior target range was 59.7p – 65.9p.
The committee is satisfied that the adjustment was appropriate and that the revised target was a fairer measure of performance and was no more or less difficult to achieve than
the previous range.
2. The ROCE target was adjusted on the same basis as the earnings per share target. The prior range was 9.1% - 9.8%. The committee is satisfied that the adjustment was appropriate
and that the revised target was a fairer measure of performance and was no more or less difficult to achieve than the previous range.
The award details for the executive directors are therefore as follows:
Director
Rooney Anand
Rooney Anand
Type of award
Number
of shares
at grant
Core LTIP
68,630
Growth LTIP
68,630
Number
of shares
to vest
68,630
52,159
Number
of shares
to lapse
—
16,471
Estimated
value 1
£'000
594
452
Estimated
value of
dividend
equivalent
shares
to vest 2
£'000
65
61
Total
estimated
value
£'000
659
513
Notes:
1. The estimated value of the shares is based on the average share price during the three months to 1 May 2016 (866 p).
2. The LTIP enables award holders to benefit from the payment of dividend equivalents but only to the extent that the underlying share awards vest. The estimated value has been
calculated on the same basis as set out in note 1 above, with an additional estimate for the value of the dividend equivalent shares which will be due in relation to the 2016 final
dividend payable in September 2016.
Interests under the LTIP
A summary of the current directors’ interests under the LTIP at the beginning and end of the year, and changes during the year, is below:
Date of grant
Type of award
Exercise
price
Rooney Anand
6-Aug-12
4-Oct-13
4-Oct-13
24-Jul-14
24-Jul-14
Restricted
forfeitable share
Core LTIP
Growth LTIP
Core LTIP
Growth LTIP
10-Aug-15
Core LTIP
10-Aug-15
Growth LTIP
Kirk Davis
10-Aug-15
Core LTIP
10-Aug-15
Growth LTIP
nil
nil
nil
nil
nil
nil
nil
nil
nil
Outstanding
as at
3 May 2015
117,000
68,630
68,630
66,361
66,361
—
—
—
—
Granted during
the period
Vested during
the period
Lapsed during
the period 1
Outstanding
at 1 May 2016
Performance period
—
—
—
—
—
66,558
66,558
38,437
38,437
117,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
68,630 May 2013 – May 2016
68,630 May 2013 – May 2016
66,361 May 2014 – May 2017
66,361 May 2014 – May 2017
66,558 May 2015 – May 2018
66,558 May 2015 – May 2018
38,437 May 2015 – May 2018
38,437 May 2015 – May 2018
The 2014 LTIP award targets have been adjusted to take into account the impact of the Spirit acquisition. The EPS target applicable to the core LTIP
was increased by the forecast net benefit to earnings that Spirit was forecast to generate and the ROCE target applicable to the growth LTIP was adjusted
to reflect the expected impact of Spirit on returns. No adjustment was made in respect of delivering the potential future synergies to enable management
to benefit should these be delivered as planned. Under the revised targets there will be no vesting of the core award for EPS growth of 26.2% or less
above a base of 56.1p, increasing on a straight-line basis to full vesting for growth of 35.3% during the performance period above that base. The prior
target range was 22–31% above the 56.1p base. For the growth LTIP award, there will be no vesting for ROCE of 9.25% or less, increasing on a straight-line
basis to full vesting for ROCE of 9.85% at the end of the performance period. The prior target range was 9.4–10.0%.
The 2015 LTIP award targets have also been adjusted to take into account the impact of the Spirit acquisition and in the light of feedback received from
a number of shareholders following the publication of the 2015 annual report regarding the level of stretch in the targets. Under the revised targets there
will be no vesting of the core award for EPS growth of 22% or less above a base of 61.0p, increasing on a straight-line basis to full vesting for growth of
32% during the performance period above that base. The prior target range was 7.5–16.5% above the 61.0p base. For the growth LTIP award, there will
be no vesting for ROCE of 9.6% or less, increasing on a straight-line basis to full vesting for ROCE of 10.2% at the end of the performance period.
The prior target range was 9.2–9.7%.
62
GREENE KING PLC Annual report 2016
CORPORATE GOVERNANCE Details of the awards granted to the directors on 10 August 2015 are as follows:
Director
Scheme
Type of award
Rooney Anand
Core LTIP
nil-cost option
Rooney Anand Growth LTIP
nil-cost option
Kirk Davis
Core LTIP
nil-cost option
Kirk Davis
Growth LTIP
nil-cost option
Basis of
award granted
Share price
used for award
purposes 1
Number of
shares over
which award
was granted
Face value
of award
100% of salary
of £567,970
100% of salary
of £567,970
100% of salary
of £328,000
100% of salary
of £328,000
853.33p
66,558
£567,959
853.33p
66,558
£567,959
853.33p
38,437
£327,994
853.33p
38,437
£327,994
Performance period
Exercisable between
May 2015 –
May 2018
11 August 2018 –
9 August 2025
May 2015 –
May 2018
11 August 2018 –
9 August 2025
May 2015 –
May 2018
11 August 2018 –
9 August 2025
May 2015 –
May 2018
11 August 2018 –
9 August 2025
Note:
1. The share price used for award purposes was determined by reference to the average closing share price on the three days immediately prior to the date of the award.
Interests under the executive share option scheme
There are no outstanding interests under the group’s executive share option scheme (under which no awards have been made since September 2008).
In the prior year the gain made by Rooney Anand on the exercise of his 74,751 share options amounted to £235k.
Interests under the sharesave scheme
The interests of the directors in options granted under the sharesave scheme were as follows:
Kirk Davis
Outstanding
as at
4 May 2015
3050
Granted
during
the period
—
Exercised
during
the period
—
Lapsed during
the period
Outstanding
as at
1 May 2016
Option price
(p)
Exercise period
—
3050
580 1 April – 30 Sept 2018
In the prior year, the gain made by Matthew Fearn on the exercise of his 2,325 share options amounted to £8k.
Payments to former directors
As disclosed in last year’s directors’ remuneration report Matthew Fearn stepped down from the board and his role as chief financial officer on
29 September 2014. As disclosed last year, he will remain an employee of the company until 24 August 2016 (“date of cessation”). During that time
he will not be entitled to any remuneration other than as set out below and will not be required to perform any work for the company.
In accordance with the company’s remuneration policy, an amount equal to £234,802 was paid in the prior year to Matthew Fearn based on 6 months’
salary, the value of his company car and the anticipated cost of private medical cover until his date of cessation. The company also maintained
Matthew’s private medical insurance cover until he was able to procure alternative cover on comparable terms at his own cost.
Life assurance cover will be provided until the date of cessation and any permanent health insurance payments will not be paid until after the date
of cessation. The company also agreed in the prior year to pay £15,650 plus VAT towards the costs of Matthew’s legal fees incurred in connection
with the agreement.
No payments in respect of annual bonus for the 2014/15, 2015/16 or any future financial years was or will be paid.
As set out in last year’s report, the awards granted to Matthew Fearn under the LTIP scheme in 2012 vested at the normal date in August 2015 subject
to performance and time pro-rating. The actual value received by him, based on the share price at the date of vesting, is shown in the 2014/15 section
of single figure of remuneration table (updated from the estimated amount disclosed last year). In addition, also as disclosed last year, the awards granted
to him in 2013 will be permitted to vest at the normal date in October 2016, also subject to performance and time pro-rating. The anticipated value
of those awards, calculated on the same basis as set out above in the section headed ‘Long term incentive plans’ is as follows:
Former director
Matthew Fearn
Matthew Fearn
Type of award
Number
of shares
at grant
Core LTIP
43,290
Growth LTIP
43,290
Number
of shares
to vest
20,894
15,880
Number
of shares
to lapse 1
22,396
27,410
Estimated
value
£'000
181
138
Estimated
value of
dividend
equivalent
shares
to vest
£'000
13
10
Total
estimated
value
£'000
194
148
Note:
1. Matthew Fearn’s core and growth LTIP awards were both pro rated to reflect time served prior to his departure from the company. The resulting amounts will then vest
as to 100% for the core LTIP and 76% for the growth LTIP as a result of the performance of the company against the performance targets.
Annual report 2016 GREENE KING PLC
63
CORPORATE GOVERNANCE Remuneration report continued
Audited information continued
Directors’ shareholdings and share interests
Under the shareholding guidelines executive directors are required to build and retain a shareholding of at least 100% of salary and must retain 50%
of the net exercised value of vested LTIP awards until the requirement is met.
Details of the directors’ shareholdings are set out in the table below.
Director
Rooney Anand
Kirk Davis
Tim Bridge
Mike Coupe
Ian Durant
Rob Rowley
Lynne Weedall
Philip Yea
At 3 May 2015
At 1 May 2016
Legally owned
Legally owned
Subject to
performance
under the LTIP
Shareholding
as percentage
of salary as at
1 May 2016
Total
467,265
529,041
403,098
932,139
671
—
4,000
76,874
80,874
1,438,531
1,526,432
— 1,526,432
2,000
3,690
22,320
22,320
—
2,000
3,000
2,051
—
30,000
—
—
—
—
—
3,690
22,320
3,000
2,051
30,000
9
—
—
—
—
—
—
At 1 May 2016, Tim Bridge had a non-beneficial interest in 87,900 (2015: 87,900) shares, in addition to the holding shown above.
The share price as at 1 May 2016 was 818p.
There has been no change in the interests of the current directors since 1 May 2016 to the date of this report.
Other information (unaudited)
Performance graph and chief executive pay
A graph showing the total shareholder return of Greene King relative to the FTSE All-Share Index over the last seven years in shown below. We have
chosen this comparator group as it is the most appropriate market index of which the company is a member.
Greene King plc
FTSE All-Share
)
0
0
1
o
t
d
e
s
a
b
e
r
(
R
S
T
300
250
200
150
100
50
0
May 2009
April 2010
April 2011
April 2012
April 2013
May 2014
May 2015
May 2016
The table below shows the total remuneration for the chief executive over each of the last seven years.
CEO single figure (£'000)
annual bonus percentage of maximum
LTIP percentage of maximum
2009/10
1,096
97%
0%
2010/11
1,406
100%
0%
2011/12
1,248
75%
0%
2012/13
2,689
72%
100%
2013/14
2,517
97%
100%
2014/15
2015/16
2,139
60%
100%
2,547
97.5%
88%
64
GREENE KING PLC Annual report 2016
CORPORATE GOVERNANCE
Percentage increase in the chief executive’s remuneration
The table below shows the percentage change in the chief executive’s remuneration from the prior year compared to the average percentage change
in remuneration for all four-weekly paid employees (which include pub and restaurant managers but exclude colleagues working for them in those pubs
and restaurants), who have been selected as the comparator as they participate in similar remuneration arrangements to the executive directors.
Salary
Taxable benefits
Annual bonus
Relative importance of spend on pay
The following table shows the company’s actual spend on pay (for all employees) relative to dividends and group revenue.
Chief executive
% change
Employees
% change
9.9
-9.7
78.7
6.7
4.8
44.8
2,500
2,000
1,500
1,000
500
0
m
£
2016
2015
Dividends and
share buy-backs
Wages and
salaries before
exceptionals
Revenue
Remuneration from other company directorships
Rooney Anand is non-executive chairman of JB Drinks Holdings Limited and received and retained £56k (2015 – £45k) from that company by way of fees.
Since January 2016 he has also been a non-executive director of Wm Morrison Supermarkets plc and received and retained £12.5k from that company
by way of fees during the year. Neither company is a related party of the group.
Implementation of remuneration policy in 2016/17
Salary
Although the executive directors’ salaries are generally reviewed annually, as explained above their salaries were increased in October 2015 following the
acquisition of Spirit. As a result, there will be no further change to the base salaries of the executive directors for the current financial year. Their salaries
with effect from 2 May 2016 (and previous year levels) are as follows:
Name
Position
Rooney Anand
Chief executive
Kirk Davis
Chief financial officer
From
2 May
2016
£645,000
£351,000
Percentage
increase
0.0%
0.0%
From
19 October
2015
£645,000
£351,000
Percentage
increase
From
4 May
2015
13.6%
£567,970
7.0%
£328,000
Typical pay rises for the group’s four-weekly paid employees (which include pub and restaurant managers but exclude colleagues working for them
in those pubs and restaurants) were 2.0%.
Pension and benefits
The pension contributions and benefits will continue in line with the policy table on page 56.
Annual bonus
The annual bonus opportunity will remain unchanged for 2016/17. The chief executive’s financial performance targets will continue to be based primarily
on group PBTE (maximum weighting 62.5%) and free cash flow (maximum weighting 15%). In addition the chief executive will continue to have a financial
target relating to the achievement of synergies from the acquisition of Spirit (maximum weighting 12.5%) and a further 10% of his bonus will be based
on personal targets relating to the development of his senior management team.
The chief financial officer’s financial performance targets will be based on PBTE (maximum weighting 45%), free cash flow (maximum weighting 10%),
the achievement of synergies from the acquisition of Spirit (maximum weighting 10%) and Pub Company like for like sales growth (maximum weighting
15%), and a further 20% of his bonus will be based on personal targets which relate to his performance and that of the senior finance team.
The committee has decided that the bonus targets should not be disclosed prospectively due to commercial sensitivity. The committee expects to publish
the performance targets once they have ceased to be commercially sensitive, in the 2017/18 annual report.
Annual report 2016 GREENE KING PLC
65
CORPORATE GOVERNANCE Remuneration report continued
Other information (unaudited) continued
Implementation of remuneration policy in 2016/17 continued
LTIP
The awards to be made in 2016 will continue to be based on 200% of the executive director’s base salary (100% for the core LTIP and 100%
for the growth LTIP), calculated by reference to the average closing prices on the three business days immediately prior to the date of the award.
The awards will vest three years after the date of the award, subject to continued employment within the group and dependent on performance over
the three financial years to April 2019. There will be no vesting under the core LTIP award for EPS growth (from a base of 69.9p) of 16% or less, increasing
on a straight-line basis to full vesting for growth of 25%. For the growth LTIP award, there will be no vesting for ROCE of 9.75% or less, increasing on
a straight-line basis to full vesting for ROCE of 10.3%. The committee retains the discretion to scale back the vesting levels of the growth LTIP awards
in appropriate circumstances.
Chairman and non-executive directors’ fees
The fees payable to the chairman and the non-executive directors in 2016/17 are as set out below. The chairman will not be entitled to any benefits.
Name
Philip Yea
Mike Coupe
Ian Durant
Rob Rowley
Position
Chairman
Non-executive director
Non-executive director
Non-executive director
Lynne Weedall
Non-executive director
2015/16
base fee
2016/17
base fee
Percentage
increase
n/a
£250,000
£46,000
£53,400
£46,000
£53,400
£50,000
£60,000
£60,000
£60,000
—
8.7%
12.4%
30.4%
12.4%
The increased fee for Rob Rowley reflects the additional time commitments relating to his role as senior independent director.
Approved by the board on 28 June 2016.
Lindsay Keswick
Company secretary
66
GREENE KING PLC Annual report 2016
CORPORATE GOVERNANCE Directors’ report and disclosures
The directors present their annual report together with the audited
financial statements of the company and the group for the 52 weeks
ended 1 May 2016. The company has chosen, in accordance with section
414C(11) of the Companies Act 2006, to include matters of strategic
importance, such as future developments in the business of the group, and
details of the greenhouse gas emissions, in the strategic report which
otherwise would be required to be disclosed in the director’s report.
Profits and dividends
The group’s profit before taxation and exceptional items for the period
amounted to £256.5 million (2015 – £168.5 million). An interim dividend
of 8.45p per share (2015 – 7.95p) was paid on 22 January 2016. The directors
recommend a final dividend of 23.6p per ordinary share (2015 – 21.8p),
making a total dividend for the year of 32.05 per share (2015 – 29.75p).
Subject to the approval of shareholders at the AGM, the final dividend
will be paid on 12 September 2016 to shareholders on the register
at the close of business on 12 August 2016.
Directors
Details of the current directors are given on page 46. Philip Yea was
appointed to the board on 2 February 2016. At the end of the year
Tim Bridge retired as chairman, having served as a director for 39 years.
The board has recommended that all of the directors offer themselves
for re-election at the forthcoming AGM, with the exception of Philip Yea
who will be standing for election for the first time.
Details of the directors’ service agreements, remuneration, and interests in
long term incentives and awards are set out in the directors’ remuneration report.
Directors’ interests in shares
The beneficial interests of each of the directors and their immediate
families in the ordinary share capital of the company are shown below:
agreements between holders of securities that may result in restrictions
on the transfer of securities or on voting rights.
In connection with the acquisition of Spirit Pub Company the consideration
was satisfied by the allotment of 89,095,959 ordinary shares, with an
aggregate nominal value of £11,136,995.
A total of 371,620 ordinary shares, with an aggregate nominal value of
£46,453 were allotted, for cash, during the period in connection with the
company’s share save and executive option schemes.
The company makes regular use of the employee benefit trust (EBT) to
satisfy the exercise of share options and will make market purchases of
the company’s shares from time to time to ensure that it has sufficient
shares to enable it to do so.
Purchase of own shares
In accordance with the company’s articles of association, authority was
sought at the last AGM to purchase up to 10% of the company’s shares in
issue as at 27 July 2015. The authority, which has not been exercised, was
approved and remains exercisable until the next annual general meeting
or 8 February 2017, whichever is earlier. The directors have again sought
approval for the authority to purchase the company’s own shares.
Voting rights
In a general meeting of the company, on a show of hands, every member
who is present in person or by proxy and entitled to vote shall have one
vote. On a poll every member who is present in person or by proxy shall
have one vote for every share of which they are the holder. The AGM
notice gives full details of deadlines for exercising voting rights in respect
of resolutions to be considered at the meeting.
No voting rights will be exercised in respect of any own shares held
by the company.
3 May 2015
1 May 2016
467,265
529,041
1,438,531 1,526,432
Transfer of shares
There are no restrictions on the transfer of shares in the company other
than those which may from time to time be applicable under existing laws
and regulations (for example under the Market Abuse Directive).
Rooney Anand
Tim Bridge
Mike Coupe
Kirk Davis
Ian Durant
Rob Rowley
Lynne Weedall
Philip Yea
2,000
—
3,690
4,000
22,320
22,320
—
2,000
3,000
2,051
— 30,000
At 1 May 2016, Tim Bridge had a non-beneficial interest in 87,900
(2015: 87,900) shares, in addition to the holding shown above.
There have been no changes in the interests of the current directors
between 1 May 2016 and the date of this report.
Interests in contracts
No director had a material interest in any contract, other than an
employment contract, that was significant in relation to the group’s
business at any time during the period.
Substantial shareholdings
The company has been notified of the following significant holdings
(3% or more) of voting rights:
Standard Life Investments (Holdings) Limited
The Capital Group Companies, Inc
1 May 2016
28 June 2016
4.774%
16.28%
4.774%
16.28%
Share capital
Details of the authorised and issued share capital of the company, which
comprises a single class of shares, ordinary shares of 12½p, are set out in
note 27 to the financial statements. The rights attaching to the shares are
set out in the articles of association. There are no special control rights in
relation to the company’s shares and the company is not aware of any
In addition, pursuant to the Listing Rules of the Financial Conduct
Authority, directors of the company and persons discharging managerial
responsibility are required to obtain prior approval from the company to
deal in the company’s securities, and are prohibited from dealing during
close periods.
Change of control
All of the company’s share incentive plans contain provisions relating
to a change of control and full details of these plans are provided in the
directors’ remuneration report. Outstanding options and awards would
normally vest and become exercisable on a change of control, subject
to the satisfaction of performance conditions, if applicable, at that time.
The group’s banking facility agreements contain provisions entitling the
counterparties to exercise termination or other rights in the event of a
change of control. Certain of the company’s trading contracts also contain
similar provisions.
There is one employee who, on a change of control of the company
resulting in the termination of their employment, would be entitled to
compensation for loss of office. However, in the context of the company
as a whole, this agreement is de minimis.
Articles of association
The company’s articles of association may only be amended by special
resolution at general meetings of shareholders.
Appointment and replacement of directors
The number of directors on the board shall be no less than five nor more
than twelve. Directors may be appointed by the company by ordinary
resolution or by the board of directors. A director appointed by the
board of directors holds office until the next following AGM, and is then
eligible for election by the shareholders.
Annual report 2016 GREENE KING PLC
67
CORPORATE GOVERNANCE Directors’ report and disclosures continued
Appointment and replacement of directors continued
The articles provide that at each AGM all those directors who were elected,
or last re-elected, at the AGM held in the third calendar year before the
current year shall retire from office and may stand for re-election. In practice
directors submit themselves for annual re-election in accordance with
the provisions of the UK Corporate Governance Code.
Directors’ and officers’ indemnity insurance
The group has taken out insurance to indemnify the directors of the company
against third party proceedings whilst serving on the board of the company
and of any subsidiary. This cover indemnifies all employees of the group who
serve on the boards of all subsidiaries. These indemnity policies subsisted
throughout the year and remain in place at the date of this report.
The company may by ordinary resolution, of which special notice has
been given, remove any director from office.
Any director automatically ceases to be a director if (i) they give the company
a written notice of resignation, (ii) they give the company a written offer
to resign and the directors decide to accept this offer, (iii) all of the other
directors remove them from office by notice in writing served upon them,
(iv) they are or have been suffering from mental ill health and have a court
order for their detention or the appointment of a guardian made in respect
of them, (v) a bankruptcy order is made against them or they make any
arrangement or composition with their creditors generally, (vi) they are
prohibited from being a director by law or (vii) they are absent from
board meetings for six months without leave and the other directors
resolve that their office should be vacated.
Powers of the directors
The business of the company is managed by the directors who may exercise
all the powers of the company, subject to its articles of association, any
relevant legislation and any directions given by the company by passing
a special resolution at a general meeting. In particular, the directors may
exercise all the powers of the company to borrow money, issue shares,
appoint and remove directors, and recommend and declare dividends.
Communications with shareholders
Shareholders who are interested in signing up to e-communications
should refer to the shareholders information page for further information
on how to register via www.greeneking-shares.com.
Charitable donations
The group continues to support community initiatives and charitable
causes, in particular Macmillan Cancer Support, full details of which are
given in the corporate social responsibility section of this annual report.
The group makes no political donations.
Employment and recruitment policies
It is the company’s policy to ensure that employees are recruited, selected,
developed, remunerated and promoted on the basis of their skills and
suitability for the work performed. The company is committed to treating
all employees fairly and equally and will endeavour to provide workplace
adaptations and training for employees or candidates who have a disability
and colleagues who become disabled during their employment.
The company values employee engagement across the business and
produces a monthly publication that is circulated to all employees
containing company news and articles, which is circulated to all employees.
In addition, the company provides regular briefings and presentations to
staff on the company’s performance and strategy as well as annual and
interim results. The company operates an HMRC approved sharesave
scheme open to all employees which helps to align employees with the
performance of the company.
We are a people business so it is vitally important that we recruit and
train the right people to deliver value, service and quality to our customers.
The company works in partnership with local communities to promote
and provide opportunities for all.
Human rights
Even though the company does not have a formal human rights policy,
it is committed to conducting business with integrity and fairness.
Corporate responsibility
Disclosure of the group’s greenhouse gas emissions is contained within
the corporate responsibility statement on page 43.
68
GREENE KING PLC Annual report 2016
Financial instruments
The group’s policy on the use of financial instruments is set out in note 24
to the financial statements.
Post balance sheet events
Details of events occurring after the year-end are set out in note 33
to the financial statements.
Directors’ statement as to disclosure of information
to the auditor
The directors who were members of the board at the time of approving
the directors’ report are listed on page 46. Having made enquiries of fellow
directors and of the company’s auditor, each of these directors confirms that:
– to the best of each director’s knowledge and belief, there is no
information relevant to the preparation of their report of which the
company’s auditor is unaware; and
– each director has taken all the steps a director might reasonably be
expected to have taken to be aware of relevant audit information and
to establish that the company’s auditor is aware of that information.
Going concern
The group’s business activities, together with the factors likely to affect
its future development, performance and position, are set out in the
chief executive’s review. The financial position of the group, its cash-flows,
liquidity position and borrowing facilities are described in the financial
review. In addition, note 24 to the financial statements includes the group’s
objectives, policies and processes for managing its capital; its financial risk
management objectives; details of its financial instruments and hedging
activities; and its exposure to credit and liquidity risk.
The directors are of the opinion that the group’s forecast and projections,
which take account of reasonably possible changes in trading performance,
and its stress testing to take account of expected payments in respect of
uncertain tax positions show that the group should be able to operate within
its current borrowing facilities and comply with its financing covenants.
After making enquiries, the directors have a reasonable expectation that the
company and the group have adequate resources to continue in operational
existence for the foreseeable future. Accordingly, they continue to adopt the
going concern basis in preparing the annual report and financial statements.
Auditor
Ernst & Young LLP has expressed its willingness to continue in office
and a resolution to re-appoint the firm as the company’s auditor will
be proposed at the AGM.
Annual general meeting
The AGM will be held at 12 noon on Friday 9 September 2016 at the
Millennium Grandstand, Rowley Mile Racecourse Conference Centre,
Newmarket, Suffolk. The notice of the AGM is set out in the separate
circular to shareholders.
The directors consider that all of the resolutions set out in the notice of
AGM are in the best interests of the company and its shareholders as a
whole. The directors will be voting in favour of them and unanimously
recommend that shareholders vote in favour of each of them.
By order of the board
Lindsay Keswick
Company secretary
28 June 2016
CORPORATE GOVERNANCE Directors’ responsibilities statements
Under applicable law and regulations the directors are also responsible
for preparing a strategic report, directors’ report, directors’ remuneration
report and corporate governance statement that comply with that law
and those regulations. The directors are responsible for the maintenance
and integrity of the corporate and financial information included on the
company’s website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from legislation
in other jurisdictions.
Directors’ responsibility statement
The directors confirm, to the best of their knowledge:
– that the consolidated financial statements are prepared in accordance
with IFRSs, as adopted by the European Union, give a true and fair view
of the assets, liabilities, financial position and profit of the company
and undertakings included in the consolidation taken as a whole;
– that the annual report, including the strategic report, includes a fair
review of the development and performance of the business and the
position of the company and undertakings included in the consolidation
taken as a whole, together with a description of the principal risks
and uncertainties that they face; and
– having taken into account all matters considered by the board and brought
to the attention of the board during the year, the directors consider that
the annual report, taken as a whole, is fair, balanced and understandable.
The directors believe that the disclosures set out in this annual report
provide the information necessary for shareholders to assess the company’s
performance, business model and strategy.
The directors of Greene King plc are listed on page 46.
P Yea
Director
28 June 2016
R Anand
Director
Statement of directors’ responsibilities in respect
of the financial statements
The directors are responsible for preparing the annual report and the
financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for
each financial year. Under that law the directors have elected to prepare
the group financial statements in accordance with International Financial
Reporting Standards (‘IFRSs’) as adopted by the European Union, and the
parent company financial statements in accordance with United Kingdom
Generally Accepted Accounting Practice (United Kingdom Accounting
Standards and applicable law), including Financial Reporting Standard 101
Reduced Disclosure Framework (“FRS 101”). Under company law the
directors must not approve the financial statements unless they are satisfied
that they give a true and fair view of the state of affairs of the group
and the company and of the profit or loss of the group for that period.
In preparing these financial statements the directors are required to:
– select suitable accounting policies and then apply them consistently;
– make judgments and estimates that are reasonable and prudent;
– present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
– in respect of the group financial statements, state whether IFRSs as
adopted by the European Union have been followed, subject to any
material departures disclosed and explained in the financial statements;
– provide additional disclosures when compliance with the specific
requirements in IFRSs is insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the group’s financial position and financial performance;
– in respect of the parent company financial statements, state whether
applicable UK Accounting Standards, including FRS 101, have been
followed, subject to any material departures disclosed and explained
in the financial statements; and
– prepare the financial statements on the going concern basis unless
it is inappropriate to presume that the company and/or the group
will continue in business.
The directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the company’s and group’s transactions
and disclose with reasonable accuracy at any time the financial position of
the company and the group and enable them to ensure that the financial
statements comply with the Companies Act 2006 and, with respect to
the group financial statements, Article 4 of the IAS Regulation. They are
also responsible for safeguarding the assets of the company and group
and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
Annual report 2016 GREENE KING PLC
69
CORPORATE GOVERNANCE
FINANCIAL
STATEMENTS
—
Independent auditor’s report
71
77 Group income statement
78 Group statement of comprehensive income
79 Group balance sheet
80 Group cash flow statement
81 Group statement of changes in equity
82 Notes to the accounts
117 Company balance sheet
118 Company statement of changes in equity
119 Notes to the company accounts
Independent auditor’s report
To the members of Greene King plc
Our opinion on the financial statements
In our opinion:
– the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 1 May 2016 and of the group’s
profit for the year then ended;
– the group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted
by the European Union;
– the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice
including FRS 101 Reduced Disclosure Framework; and
– the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial
statements, Article 4 of the IAS Regulation.
What we have audited
We have audited the primary statements and related notes of Greene King plc for the 52 weeks ended 1 May 2016 which comprise:
Group
Group income statement
Parent company
Company balance sheet
Group statement of comprehensive income
Company statement of changes in equity
Group balance sheet
Group cash flow statement
Group statement of changes in equity
Related notes 1 to 34 to the financial statements
Related notes 35 to 45 to the financial statements
The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and IFRSs as adopted by the
European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law
and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework.
Overview of our audit approach
Materiality
– Overall group materiality was £12.4m (2015: £7.8m) which represents approximately 5% of pre-tax profit before exceptional
items. The increase in the materiality is primarily due to the acquisition of Spirit Pub Company plc (Spirit) during the year.
Audit scope
– We performed an audit of the complete financial information of all of the trading components and the corporate centre
which together represent 100% of the group’s results for the year.
– We have obtained an understanding of the entity-level controls of the group which assisted us in identifying and assessing
risks of material misstatement due to fraud or error, as well as assisting us in determining the most appropriate audit strategy.
Risks of material
misstatement
– Fair value estimates of assets and liabilities acquired in the Spirit business combination.
– Asset impairment considerations in relation to the trading estate and associated goodwill.
– Uncertain tax positions.
– Revenue recognition, including fraud risks and risk of management override.
What has changed
– Our audit approach and assessment of areas of focus changes in response to changes in circumstances affecting the
Greene King plc business and impacting the group financial statements. Since the 2015 audit we have made the following
changes to our areas of focus:
– On 23 June 2015, the group completed the acquisition of Spirit. As part of the acquisition accounting, accounting standards
require the purchase price to be allocated between the assets acquired and liabilities assumed, resulting in the recognition
of goodwill. We have identified as an additional risk for this year the fair valuation of assets acquired and liabilities assumed.
– We no longer consider the funding headroom and compliance with debt covenants as a risk of material misstatement
on the basis of the increased level of headroom over prior years, even after the acquisition of Spirit.
– The risk relating to uncertain tax positions has been reduced relative to the prior year due to the agreement of the HMRC
on many of the arrangements.
– Our performance materiality was set to a lower threshold in 2016, largely due to the significant changes in the group
through the acquisition of Spirit which increases the risks of material misstatement.
Annual report 2016 GREENE KING PLC
71
FINANCIAL STATEMENTS Independent auditor’s report continued
To the members of Greene King plc
Our assessment of risk of material misstatement
We identified the risks of material misstatement described below as those that had the greatest effect on our overall audit strategy, the allocation of
resources in the audit and the direction of the efforts of the audit team. This is not a complete list of all the risks identified in our audit. In addressing
these risks, we have performed the procedures below which were designed in the context of the financial statements as a whole and, consequently,
we do not express any opinion on these individual areas.
Details of why we identified these risks of material misstatements and our audit response are set out in the below table. This is not a complete list of all
the procedures we performed in respect of these areas. The arrows in the table indicate whether we consider the financial statement risk associated
with this focus area to have increased, decreased or stayed the same compared to 2015.
Risk
Our response to the risk
What we concluded to the Audit Committee
Fair value estimates of assets and liabilities acquired in the Spirit business combination
Refer to the audit committee report (page 53); accounting policies (page 82); and note 17 of the group financial
statements (page 106)
Risk direction
New
During the period the group acquired Spirit for
a total consideration of £763m. The acquisition
is accounted for as a business combination
in relation to which there are a number of
significant and complex judgments involved in
the determination of the fair value of the
assets acquired and liabilities assumed.
A purchase price allocation exercise has been
performed by management, assisted by external
experts. The primary element of the valuation
exercise assessed the fair value of the trading
estate (£1,419m including assets held for sale)
and the resulting goodwill (£434m). The allocation
also considered the fair values of intangible
assets (favourable operating leases and brands),
borrowings, off market contract liabilities,
derivative financial instruments, post-retirement
obligations and scheme assets, other assets
and liabilities and deferred tax.
We verified the appropriateness of the group’s accounting
for the acquisition of Spirit including the following procedures:
– we challenged the group’s preliminary estimates of fair value
to test their robustness, by checking completeness of the
company’s process to identify the assets acquired and liabilities
assumed, and checking internal consistency of the assumptions
used in the valuations, including of the brand intangible asset,
off-market leases and onerous contract liabilities;
– we obtained the group’s external expert’s reports supporting
the value of the trading estate and brand intangible assets and
used our firm’s valuation specialists to verify the appropriateness
of the valuation methodologies and the reasonableness of key
assumptions and judgments made by the valuers;
– we also involved our valuation specialists to assist the audit team
in assessing the appropriateness of the methodology and the
assumptions applied to value the off market leases and onerous
contracts, and to independently recalculate the fair value of
secured bonds and related interest rate swaps;
As a result of the procedures
performed we are satisfied that
assets and liabilities acquired are
measured at fair value in line
with the requirements of the
accounting standards.
We also concluded that
appropriate disclosures have
been included in the group
financial statements.
We have identified the fair valuation of the
assets acquired and the liabilities assumed
as a significant risk.
– we checked the arithmetical accuracy of management’s
calculation of the off market liabilities, tested the adequacy of the
discount rates applied and agreed the future expected payments
to the terms in the relevant contracts or other supporting
evidence;
– in respect of post retirement obligations, we involved
our pensions specialists to test the reasonableness
of the assumptions applied by the group’s actuaries;
– we evaluated the competence and independence of
the experts used by the group and our in-house experts
by reference to their qualifications and experience; and
– we evaluated whether appropriate disclosures have been
included in the group financial statements.
Asset impairment considerations in relation to the trading estate and associated goodwill
Refer to the audit committee report (page 53); accounting policies (page 82); and note 14 of the group financial
statements (page 100)
Risk direction
↔
The group has property, plant and equipment
(PP&E) with a net book value of £3,671m relating
to its trading estate and £1,122m of goodwill
as at 1 May 2016.
For the trading estate, impairments are
considered on a site by site basis when an
impairment indicator has been identified
through reduced profit performance. For
goodwill, impairment is assessed at an
operating segment level (i.e. Pub Company
Greene King, Pub Company Spirit, Pub
Partners Greene King, Pub Partners Spirit
and Brewing & Brands), being the lowest
level at which goodwill is monitored.
We obtained an understanding of the group’s process employed
to identify indicators of impairment and to estimate appropriate
impairments of PP&E at a cash-generating unit (CGU) level
(site level) or goodwill at an operating segment level. We then
tested key elements of those processes. In particular:
– we compared the profit growth rates in the cash flow
forecasts to the budget, external market growth estimates
rates applied by industry peers and recent actual profit growth
rates over the last five year period, and corroborated
explanations for any anomalies;
– we tested the reasonableness of the discount rate applied to
cash flows through benchmarking to comparator companies
and market expectations;
We considered the reasonableness
and appropriateness of the group’s
estimates, noting that all significant
assumptions fell within a range
of acceptable outcomes.
As a result of the procedures
performed, we concluded that
the group’s impairment indicator
analysis and impairment assessment
for the group’s CGUs had been
carried out appropriately and
in accordance with the
accounting standards.
72
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS Risk
Our response to the risk
What we concluded to the Audit Committee
Asset impairment considerations in relation to the trading estate and associated goodwill continued
We concur with management’s
assessment that goodwill for
each reportable segment is not
impaired and is recoverable.
We concluded that the related
disclosures in the group financial
statements are appropriate.
In assessing impairment, management estimates
the recoverable value of each site by reference
to the higher of its value in use (based on the
group’s key assumptions in relation to forecast
profits, a growth rate and a discount rate) and
fair value less costs of disposal (FVLCD). As
a result of the Spirit acquisition and the bond
issue, current valuations were available upon
which to base the FVLCD. The recoverable
value is compared to the carrying value of
each site to determine any impairment. For
goodwill, the group performs its impairment
analysis by considering the value in use of
the operating segment, based on forecast
cash flows for that segment, employing
consistent assumptions.
These processes have a high degree of
judgment and therefore carry a higher level of
inherent risk of material error.
– we reperformed the group’s sensitivities applied to the cash
flows and considered the group’s judgment of how a reasonably
possible change in assumptions would lead to an impairment
based upon our knowledge of the group’s activities and factors
in the sector;
– we obtained an understanding of the methodology
management applied to allocate the new Spirit goodwill to the
operating segments, as well as the methodology applied for
allocating goodwill to disposals, to ensure that the approach
taken is in line with the requirements of the applicable
accounting standards; and
– we checked the arithmetical accuracy and integrity of the
impairment models.
For the trading estate, additionally:
– we checked on the impairment model that the site’s
recoverable value is the higher of value in use and FVLCD;
– where the FVLCD was required to support the recoverable
value of a site, we evaluated the robustness and appropriateness
of the valuation methodologies and the reasonableness of key
assumptions and judgments made by the experts, using our
own property valuation specialists, who utilised their knowledge
of property valuation and comparator transactions on a sample
of the sites. We also evaluated the competence and independence
of the experts used by the group and our in-house experts
by reference to their qualifications and experience;
– where impairment indicators existed but no impairment
charge had been recognised, we sought and corroborated
explanations from management on individual pubs to assess
whether an impairment charge was required; and
– on a sample of sites where judgment has been applied
to determine the recoverable value, we have obtained and
corroborated explanations from management.
We evaluated the appropriateness, sufficiency and clarity of any
impairment-related disclosures provided in the group financial
statements, including the disclosure of key sensitivities.
Uncertain tax positions
Refer to the audit committee report (page 53); accounting policies (page 82); and note 10 of the group financial
statements (page 96)
Risk direction
↓
The group has implemented a number of
intra-group arrangements to finance third
party acquisitions and to effect other intra
group transactions. Certain of the potential
benefits from these arrangements were
under dispute by the HMRC.
Subsequent to the year end, a settlement
agreement has been confirmed with the HMRC
in respect of the majority of legacy tax items
at £21.4m, similar to the liability recognised at
the 2015 year end and of which £9m remains
payable at the year end.
The uncertainty over resolution of the remaining
arrangements (principally an arrangement
known as ‘Project Sussex’) has required the
directors to make judgments on the level of
tax that will ultimately be paid. The directors
obtained opinions from independent advisers to
help them assess the level of tax liability required.
Estimated liabilities for uncertain tax positions of
£10.5m (2015: £31.6m) and related interest of
£5.9m (2015: £13.9m) are included within Income
tax payable and Trade and other payables
respectively. This amount excludes the provision
of £9m related to the legacy items as this is no
longer considered an uncertain tax position
on the basis of the agreement confirmed
shortly after the year end.
We used our tax audit specialists to evaluate the group’s
assessment of the liability recognised. Our work included:
– agreeing the amount of the provision recognised (£21.4m) to
the agreement reached with the HMRC through its 'High Risk
Corporate Process' on a number of outstanding matters;
– with regard to Project Sussex, inspecting correspondence
with HMRC and the advice received from the group’s advisers,
and performing our own assessment of the likely outcome of
litigation on the basis of our experience of similar scenarios; and
– recalculating the accrual for the interest on late paid corporation
tax if the group were to settle the Project Sussex liability at the
amounts provided at the balance sheet date.
As a result of the procedures
performed we have concluded
that the provision for uncertain
tax positions is within a range
of probable outcomes of the
final settlement.
We consider the group’s level
of disclosure in the financial
statements is appropriate taking
into account the FRC guidance
on this area.
Annual report 2016 GREENE KING PLC
73
FINANCIAL STATEMENTS Independent auditor’s report continued
To the members of Greene King plc
Our assessment of risk of material misstatement continued
Risk
Our response to the risk
What we concluded to the Audit Committee
Revenue recognition, including fraud risks and risk of management override
Refer to the audit committee report (page 53); accounting policies (page 82); and note 3 of the group financial
statements (page 89)
Risk direction
↔
As a result of the procedures
performed, we have been able
to conclude that revenue has
been recognised in accordance
with the revenue recognition
policy and accounting standards.
In accordance with International Standards on
Auditing (UK and Ireland) there is a presumed
fraud risk relating to revenue recognition.
We obtained an understanding of the processes for the recognition
of revenue in each of the revenue streams, and separately for the
recognition of retrospective discounts by the group as a whole.
We consider that there is a higher level of risk
associated with the appropriate recognition
of sales in the correct accounting period on
beer and liquor sales in the Brewing & Brands
and Pub Partners divisions. This risk is associated
with the accuracy and completeness of
retrospective discounts and rebates due
to the area being more susceptible
to management override.
For food, liquor and accommodation sales in
the Pub Company division, we consider these
are low risk given that the transactions are
routine, low value and high volume with no
estimation uncertainty. Accordingly, the fraud
risk for such revenues is limited to journal
entries and other adjustments made at
the end of a reporting period.
For food, liquor and accommodation sales in the Pub Company
division we have focused our testing on manual journals posted
to this revenue stream. Furthermore we have utilised data
analytics to agree revenue posted to cash received.
For beer and liquor sales in the Brewing & Brands
and Pub Partners divisions:
– we performed detailed transaction testing by agreeing a
sample of individual revenue items to sales invoices, evidence
of delivery and subsequent cash receipt;
– we performed sales cut-off testing immediately before and
after the year end by testing sales invoices to evidence of
delivery to ensure that revenue had been recognised in the
correct accounting period; additionally we have performed
similar detailed testing on credit notes to confirm that the
credit note has been recognised in the appropriate accounting
period; and
– we conducted specific analytical procedures on revenue and
credit notes recognised either side of the year end to test
management’s conclusion that the related revenue had been
recognised in the correct accounting period.
For retrospective customer discounts and rebates:
– we performed audit procedures on key customer contracts to
identify complex rebate agreements and ensure that the treatment
is appropriate in light of the revenue recognition policy;
– we agreed the nature and terms of certain significant discount
arrangements to contracts or other supporting documentation
and tested a sample of rebates to the specified terms, subsequent
invoice and if available settlement to ensure the amounts
accrued were reasonable; and
– we analysed the volume of distributor sales in the period
before and after the year end to ensure correct cut-off.
As in all of our audits, we also addressed the risk of management override of internal controls, including evaluating whether there is evidence of bias
by the directors that may represent a risk of material misstatement due to fraud.
The scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity
within the group. Taken together this enables us to form an opinion on the group financial statements under International Standards on Auditing
(UK and Ireland). We take into account size, risk profile, the organisation of the group and effectiveness of group-wide controls, changes in the business
environment and other factors when assessing the level of work to be performed at each entity.
The group’s operations are based solely in the United Kingdom and therefore all audit procedures are completed by one audit team based in the head
office location working across both the group and subsidiary financial statement audits.
We performed an audit of the complete financial information of all of the trading components and the corporate centre which together represent
100% of the group’s results for the year. We have obtained an understanding of the entity-level controls of the group which assisted us in identifying
and assessing risks of material misstatement due to fraud or error, as well as assisting us in determining the most appropriate audit strategy.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming
our audit opinion.
As we develop our audit strategy, we determine materiality at the overall level and at the individual account level (referred to as our ‘performance materiality’).
MATERIALITY
£12.4m
PERFORMANCE
MATERIALITY
£6.2m
REPORTING
THRESHOLD
£600k
74
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions
of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.
We determined materiality for the group to be £12.4m (2015: £7.8m), which is set at approximately 5% (2015: 5%) of pre-tax profit before exceptional items.
Our materiality amount provides a basis for determining the nature and extent of risk assessment procedures, identifying and assessing the risk of material
misstatement and determining the nature and extent of further audit procedures. Materiality is assessed on both quantitative and qualitative grounds.
How we determined materiality
Starting basis
Profit before tax £189.8m
Adjustment
Excluding exceptional items
of £66.7m to determine
the profit before tax and
exceptional items of £256.5m
Materiality
£12.4m, being approximately
5% of the profit before tax
and exceptional items
Rationale for basis
We used pre-tax profit before exceptional items of £256.5m because it is a key performance indicator used in communications with investors, it is more
reflective of underlying trading profitability and it is a key metric used by the group in the assessment of the performance of management. We also note
that market and analyst commentary on the group uses pre-tax profit before exceptional items as a key metric. Therefore, in our view, we consider pre-tax
profit before exceptional items to be the most appropriate performance metric on which to base our materiality calculation as we considered this to be
the most relevant performance measure to the stakeholders of the entity.
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability
that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the group’s overall control environment, the changes in the business environment
resulting from the acquisition of Spirit, and the number and monetary amounts of individual uncorrected misstatements identified in prior periods as well
as the nature of the misstatements, our judgment was that the overall performance materiality for the group should be 50% (2015: 75%) of our planning
materiality, namely £6.2m (2015: £5.9m). We have set our performance materiality to a lower threshold in 2016, reflecting the significant changes in the
group through the acquisition of Spirit which increases the risks of misstatement. Our objective in adopting this approach was to ensure that the total
of any detected and undetected audit differences does not exceed our materiality of £12.4m for the group financial statements as a whole.
Audit work on individual components for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on
a percentage of total performance materiality. The performance materiality set for each component is based on the size of the component relative to
the group as a whole and our assessment of risk of misstatement at that component. In the current year the range of performance materiality allocated
to components was £2.5m to £5.6m (2015: £2.3m to £5.3m).
Reporting threshold
An amount below which identified misstatements is considered as being clearly trivial.
We agreed with the audit committee that we would report to them all uncorrected audit differences in excess of £0.6m (2015: £0.4m), which is set
at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant
qualitative considerations in forming our opinion.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial
statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are
appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of
significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and
non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information
that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit.
If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ responsibilities statement set out on page 69, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements
in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work
has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for
no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s
members as a body, for our audit work, for this report, or for the opinions we have formed.
Annual report 2016 GREENE KING PLC
75
FINANCIAL STATEMENTS Independent auditor’s report continued
To the members of Greene King plc
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
– the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006;
– the information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared
is consistent with the financial statements; and
– the information given in the Corporate governance statement in the annual report which starts on page 47 with respect to internal control and risk
management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements.
Matters on which we are required to report by exception
ISAs (UK and
Ireland) reporting
We are required to report to you if, in our opinion, financial and non-financial information
in the annual report is:
– materially inconsistent with the information in the audited financial statements; or
– apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group
acquired in the course of performing our audit; or
We have no
exceptions to report.
Companies Act
2006 reporting
– otherwise misleading.
In particular, we are required to report whether we have identified any inconsistencies between
our knowledge acquired in the course of performing the audit and the directors’ statement (included
on page 69) that they consider the annual report and accounts taken as a whole is fair, balanced and
understandable and provides the information necessary for shareholders to assess the entity’s performance,
business model and strategy; and whether the annual report appropriately addresses those matters
that we communicated to the audit committee that we consider should have been disclosed.
We are required to report to you if, in our opinion:
– adequate accounting records have not been kept by the parent company, or returns adequate
for our audit have not been received from branches not visited by us; or
– the parent company financial statements and the part of the Directors’ Remuneration Report
to be audited are not in agreement with the accounting records and returns; or
– certain disclosures of directors’ remuneration specified by law are not made; or
– we have not received all the information and explanations we require for our audit; or
– a Corporate Governance Statement has not been prepared by the company.
We have no
exceptions to report.
Listing Rules review
requirements
We are required to review:
– the directors’ statement in relation to going concern, set out on page 68, and longer-term viability,
We have no
exceptions to report.
set out on pages 37; and
– the part of the Corporate Governance Statement relating to the company’s compliance
with the provisions of the UK Corporate Governance Code specified for our review.
Statement on the directors’ assessment of the principal risks that would threaten the solvency
or liquidity of the entity
ISAs (UK and
Ireland) reporting
We have nothing
material to add or
to draw attention to.
We are required to give a statement as to whether we have anything material to add or to draw
attention to in relation to:
– the directors’ confirmation in the annual report that they have carried out a robust assessment of
the principal risks facing the entity, including those that would threaten its business model, future
performance, solvency or liquidity;
– the disclosures in the annual report that describe those risks and explain how they are being
managed or mitigated;
– the directors’ statement in the financial statements about whether they considered it appropriate
to adopt the going concern basis of accounting in preparing them, and their identification of any
material uncertainties to the entity’s ability to continue to do so over a period of at least twelve
months from the date of approval of the financial statements; and
– the directors’ explanation in the annual report as to how they have assessed the prospects of the
entity, over what period they have done so and why they consider that period to be appropriate,
and their statement as to whether they have a reasonable expectation that the entity will be able
to continue in operation and meet its liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any necessary qualifications or assumptions.
Notes:
1. The maintenance and integrity of the Greene King plc website is the responsibility of the
directors; the work carried out by the auditor does not involve consideration of these
matters and, accordingly, the auditor accepts no responsibility for any changes that may
have occurred to the financial statements since they were initially presented on the website.
2. Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
76
GREENE KING PLC Annual report 2016
Bob Forsyth (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
28 June 2016
FINANCIAL STATEMENTS Group income statement
For the fifty-two weeks ended 1 May 2016
Revenue
Operating costs
Operating profit
Finance income
Finance costs
Profit before tax
Tax
2016
Before
exceptional
items
£m
Exceptional
items
(note 5)
£m
Before
exceptional
items
£m
Total
£m
2015
Exceptional
items
(note 5)
£m
Total
£m
2,073.0
—
2,073.0
1,315.3
—
1,315.3
Note
2,3
4
(1,680.8)
(25.9)
(1,706.7)
(1,059.1)
(43.9)
(1,103.0)
2,4
7
7
10
392.2
(25.9)
366.3
1.5
—
1.5
(137.2)
(40.8)
(178.0)
256.5
(49.4)
(66.7)
50.5
189.8
1.1
256.2
0.3
(88.0)
168.5
(35.3)
133.2
(43.9)
—
(6.4)
(50.3)
6.4
(43.9)
212.3
0.3
(94.4)
118.2
(28.9)
89.3
Total
40.9p
40.6p
Profit attributable to equity holders of parent
207.1
(16.2)
190.9
Earnings per share
– basic
– adjusted basic
– diluted
– adjusted diluted
Dividends per share (paid and proposed in respect of the period)
Before
exceptional
items
Note
12
12
12
12
11
69.9p
69.5p
2016
2015
Total
64.4p
64.1p
Before
exceptional
items
61.0p
60.6p
32.05p
29.75p
Annual report 2016 GREENE KING PLC
77
FINANCIAL STATEMENTS Group statement of comprehensive income
For the fifty-two weeks ended 1 May 2016
Profit for the period
Other comprehensive loss to be reclassified to the income statement in subsequent periods:
Cash flow hedges:
– Losses taken to equity
– Transfers to income statement on cash flow hedges
Tax on cash flow hedges
Items not to be reclassified to the income statement in subsequent periods:
Actuarial losses on defined benefit pension schemes
Tax on actuarial losses
Other comprehensive expense for the period, net of tax
Total comprehensive income for the period, net of tax
Note
2016
£m
190.9
2015
£m
89.3
24
24
10
9
10
(40.1)
27.6
(2.5)
(15.0)
(4.5)
(1.5)
(6.0)
(21.0)
169.9
(93.4)
29.7
12.7
(51.0)
(11.9)
2.4
(9.5)
(60.5)
28.8
78
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS Group balance sheet
as at 1 May 2016
Non-current assets
Property, plant and equipment
Intangibles
Goodwill
Financial assets
Deferred tax assets
Prepayments
Trade and other receivables
Current assets
Inventories
Financial assets
Trade and other receivables
Prepayments
Cash and cash equivalents
Property, plant and equipment held for sale
Current liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Off market contract liabilities
Income tax payable
Provisions
Non-current liabilities
Borrowings
Trade and other payables
Off market contract liabilities
Derivative financial instruments
Deferred tax liabilities
Post-employment liabilities
Provisions
Total net assets
Issued capital and reserves
Share capital
Share premium
Merger reserve
Capital redemption reserve
Hedging reserve
Own shares
Retained earnings
Total equity
Net debt
Signed on behalf of the board on 28 June 2016
P Yea
Director
R Anand
Director
As at
1 May 2016
£m
Note
As at
3 May 2015
£m
(see note 10)
As at
4 May 2014
£m
(see note 10)
14
13
13
15
10
19
18
15
19
20
21
23
24
22
25
10
26
23
22
25
24
10
9
26
27
28
28
28
28
28
3,671.3
174.6
1,121.9
16.8
78.7
0.3
0.1
2,235.4
—
700.9
21.3
28.3
0.4
0.1
2,169.7
—
703.8
24.2
13.3
0.3
0.1
5,063.7
2,986.4
2,911.4
41.3
9.8
82.7
27.7
381.7
543.2
2.3
545.5
(210.3)
(41.2)
(424.0)
(22.4)
(30.3)
(24.7)
(752.9)
32.1
9.1
58.9
18.0
210.3
328.4
0.4
328.8
(189.9)
(28.1)
(294.1)
—
(50.8)
(0.5)
(563.4)
30.5
8.6
60.2
13.3
216.2
328.8
81.7
410.5
(202.0)
(9.4)
(256.5)
—
(46.5)
(0.5)
(514.9)
(2,219.8)
(1.5)
(277.5)
(399.7)
(17.9)
(53.6)
(12.7)
(1,389.1)
(1.0)
—
(208.8)
(57.4)
(60.5)
(6.1)
(1,449.8)
—
—
(163.0)
(72.0)
(53.5)
(6.0)
(2,982.7)
(1,722.9)
(1,744.3)
1,873.6
1,028.9
1,062.7
38.6
261.0
752.0
3.3
(182.0)
(0.2)
1,000.9
27.5
259.3
—
3.3
(167.0)
(4.9)
910.7
27.4
256.6
—
3.3
(116.0)
(6.3)
897.7
1,873.6
1,028.9
1,062.7
30
2,048.4
1,368.7
1,435.6
Annual report 2016 GREENE KING PLC
79
FINANCIAL STATEMENTS
Group cash flow statement
For the fifty-two weeks ended 1 May 2016
Operating activities
Operating profit
Operating exceptional items
Depreciation
Amortisation
EBITDA1
Working capital and other movements
Interest received
Interest paid
Tax paid
Net cash flow from operating activities
Investing activities
Purchase of property, plant and equipment
Advances of trade loans
Repayment of trade loans
Sales of property, plant and equipment
Acquisition of subsidiary, net of cash acquired
Net cash flow from investing activities
Financing activities
Equity dividends paid
Issue of shares
Transaction costs for share issue
Purchase of own shares
Repayment of borrowings
Advance of borrowings
Net cash flow from financing activities
Net increase in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
1. EBITDA represents earnings before interest, tax, depreciation, amortisation and exceptional items.
Note
2016
£m
2015
£m
366.3
212.3
5
14
13
2
29
15
15
17
25.9
94.9
9.8
496.9
(75.1)
1.5
(132.8)
(45.7)
244.8
43.9
62.8
—
319.0
4.6
0.3
(86.0)
(40.6)
197.3
(194.1)
(160.5)
(4.1)
4.8
82.6
104.3
(6.5)
(5.5)
7.9
94.0
—
(64.1)
11
(93.3)
(62.8)
1.7
(2.1)
—
(44.0)
65.0
2.8
—
(4.2)
(61.1)
—
(72.7)
(125.3)
165.6
210.3
375.9
7.9
202.4
210.3
30
30
20
20
80
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS Group statement of changes in equity
For the fifty-two weeks ended 1 May 2016
At 4 May 2014
Profit for the period
Other comprehensive income:
Actuarial losses on defined benefit
pension schemes (net of tax)
Net loss on cash flow hedges
(net of tax)
Total comprehensive income
Issue of ordinary share capital
Release of shares
Repurchase of shares
Share-based payments
Tax on share-based payments
Equity dividends paid
At 3 May 2015
Profit for the period
Other comprehensive income:
Actuarial losses on defined benefit
pension schemes (net of tax)
Net loss on cash flow hedges
(net of tax)
Total comprehensive income
Issue of ordinary share capital
Transaction costs for share issue
Release of shares
Share-based payments
Tax on share-based payments
Equity dividends paid
At 1 May 2016
Note
Share
capital
(note 27)
£m
27.4
—
Share
premium
(note 28)
£m
256.6
—
—
—
—
0.1
—
—
—
—
—
—
—
—
2.7
—
—
—
—
—
27.5
—
259.3
—
—
—
—
11.1
—
—
—
—
—
—
—
—
1.7
—
—
—
—
—
27
28
28
8
10
11
27
17
28
8
10
11
Merger
reserve
(note 28)
£m
Capital
redemption
reserve
(note 28)
£m
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
752.0
—
—
—
—
—
3.3
—
—
—
—
—
—
—
—
—
—
3.3
—
—
—
—
—
—
—
—
—
—
Hedging
reserve
(note 28)
£m
Own
shares
(note 28)
£m
Retained
earnings
£m
Total
equity
£m
(116.0)
(6.3)
897.7
1,062.7
—
—
(51.0)
(51.0)
—
—
—
—
—
—
—
—
—
—
—
5.6
(4.2)
—
—
—
89.3
89.3
(9.5)
(9.5)
—
79.8
—
(5.6)
—
3.1
(1.5)
(62.8)
(51.0)
28.8
2.8
—
(4.2)
3.1
(1.5)
(62.8)
(167.0)
(4.9)
910.7
1,028.9
—
—
(15.0)
(15.0)
—
—
—
—
—
—
—
190.9
190.9
—
—
—
—
—
4.7
—
—
—
(6.0)
(6.0)
—
(15.0)
184.9
—
(2.1)
(4.7)
6.2
(0.8)
(93.3)
169.9
764.8
(2.1)
—
6.2
(0.8)
(93.3)
38.6
261.0
752.0
3.3
(182.0)
(0.2)
1,000.9
1,873.6
Annual report 2016 GREENE KING PLC
81
FINANCIAL STATEMENTS Notes to the accounts
For the fifty-two weeks ended 1 May 2016
1 Accounting policies
Corporate information
The consolidated financial statements of Greene King plc for the 52 weeks ended 1 May 2016 were authorised for issue by the board of directors
on 28 June 2016. Greene King plc is a public limited company incorporated and domiciled in England and Wales. The company’s shares are listed
on the London Stock Exchange.
Statement of compliance
The group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU as they
apply to the financial statements of the group for the 52 weeks ended 1 May 2016 (prior year 52 weeks ended 3 May 2015).
Basis of preparation
The consolidated financial statements have been prepared in accordance with those parts of the Companies Act 2006 applicable to companies
reporting under IFRS. They are presented in pounds sterling, with values rounded to the nearest hundred thousand, except where otherwise indicated.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of Greene King plc, its subsidiaries and its related parties, Greene King Finance plc
and Spirit Issuer plc. Greene King Finance plc and Spirit Issuer plc are structured entities set up to raise bond finance for the group. As Greene King plc
has full control over both entities they are fully consolidated. The financial statements of subsidiaries are prepared for the same reporting year end
as the parent company with adjustments made to their financial statements to bring their accounting policies in line with those used by the group.
The results of subsidiaries are consolidated from the date of acquisition, being the date on which the group obtains control, and continue to be
consolidated until the date that such control ceases. Intercompany transactions, balances, income and expenses are eliminated on consolidation.
Changes in accounting policies
The accounting policies adopted are consistent with those of the previous financial year. New standards and interpretations which came into force
during the year did not have a significant impact on the Group’s financial statements.
Significant accounting policies
Property, plant and equipment
Property, plant and equipment is stated at cost or deemed cost on transition to IFRS, less accumulated depreciation and any impairment in value.
Depreciation is calculated on a straight-line basis over the estimated useful life of the asset.
Freehold land is not depreciated. Freehold and long leasehold buildings are depreciated to their estimated residual values over periods up to 50 years,
and short leasehold improvements are depreciated to their estimated residual values over the shorter of the remaining term of the lease or useful life
of the asset. There is no depreciable amount if residual value is the same as, or exceeds, book value. Plant and equipment assets are depreciated over
their estimated lives which range from three to 20 years.
Residual values, useful lives and methods of depreciation are reviewed for all categories of property, plant and equipment and adjusted, if appropriate,
at each financial year end.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use. Profit or loss
on derecognition is calculated as the difference between the net disposal proceeds and the carrying amount of the asset, and is included in the income
statement in the year of derecognition.
Intangible assets
Operating lease intangibles
The fair value attached to operating leasehold interests on acquisition are deemed to represent lease premiums, and are carried as intangible assets.
The operating lease intangible is amortised over the period of the lease.
Brand intangibles
Brand intangible assets recognised on acquisition are amortised on a straight-line basis over their estimated useful lives (15 years).
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration
transferred, measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree. The choice of measurement of
non-controlling interests, either at fair value or at the proportionate share of the acquiree’s identifiable net assets, is determined on a transaction
by transaction basis. Acquisition costs incurred are taken to the income statement.
When the group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance
with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded
derivatives in host contracts of the acquiree.
Any contingent consideration to be transferred to the vendor is recognised at fair value at the acquisition date. Subsequent changes to the fair value
of the contingent consideration which are deemed to be an asset or a liability is recognised in the income statement. If the contingent consideration
is classified as equity, it should not be remeasured until it is finally settled within equity.
Goodwill is initially measured at cost being the excess of the aggregate of the acquisition date fair value of the consideration transferred and the amount
recognised for the non-controlling interest over the net identifiable amounts of the assets acquired and liabilities assumed in exchange for the business
combination. Assets acquired and liabilities assumed in transactions separate to the business combinations, such as the settlement of pre-existing relationships
or post-acquisition remuneration arrangements, are accounted for separately from the business combination in accordance with their nature and applicable
IFRSs. Identifiable intangible assets, meeting either the contractual-legal or separability criterion, are recognised separately from goodwill. Contingent
liabilities representing a present obligation are recognised if the acquisition date fair value can be measured reliably.
If the aggregate of the acquisition date fair value of the consideration transferred and the amount recognised for the non-controlling interest is lower
than the fair value of the assets, liabilities and contingent liabilities and the fair value of any pre-existing interest held in the business acquired, the
difference is recognised in the income statement.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses.
82
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 1 Accounting policies continued
Significant accounting policies continued
Impairment
Property, plant and equipment
Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash inflows independent of the
cash inflows of other groups of assets.
An assessment is made at each reporting date as to whether there is an indication of impairment. If an indication exists, the group makes an estimate of
the recoverable amount of each asset group. An asset’s or cash-generating unit’s recoverable amount is the higher of its fair value less costs of disposal
and value-in-use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from
other assets or groups of assets.
An impairment loss is recognised where the recoverable amount is lower than the carrying value of assets. If there is an indication that any previously
recognised impairment losses may no longer exist or may have decreased, a reversal of the loss may be made only if there has been a change in the
estimates used to determine the recoverable amounts since the last impairment loss was recognised. The carrying amount of the asset is increased to its
recoverable amount only up to the carrying amount that would have resulted, net of depreciation, had no impairment loss been recognised for the asset
in prior years.
Impairment losses and any subsequent reversals are recognised in the income statement.
Details of the impairment losses recognised in respect of property, plant and equipment are provided in note 14.
Goodwill
Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the group’s cash-generating
units (or groups of cash-generating units) that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree
are assigned to those units. Each unit or group of units to which goodwill is allocated represents the lowest level within the group at which goodwill is
monitored for internal management purposes and cannot be larger than an operating segment before aggregation.
Impairment is determined by the recoverable amount of an operating segment. Where this is less than the carrying value of the operating segment
an impairment loss is recognised immediately in the income statement. This loss cannot be reversed in future periods.
Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, any goodwill associated with the operation
disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in
this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.
Goodwill amortised prior to the conversion to IFRS on 3 May 2004 has not been reinstated and the net book value of goodwill at that date has been
carried forward as the carrying value. Prior to May 1998, goodwill was written off to reserves. Such goodwill has not been reinstated and is not included
in determining profit or loss on disposal.
Financial instruments
Financial instruments are recognised when the group becomes party to the contractual provisions of the instrument and are derecognised when the
group no longer controls the contractual rights that comprise the financial instrument, normally through sale or when all cash flows attributable to the
instrument are passed to an independent third party.
Financial assets
Financial assets are classified as either financial assets at fair value through the income statement, loans and receivables, held-to-maturity investments or
available-for-sale financial assets. The group determines the classification of its financial assets at initial recognition and, where appropriate, re-evaluates
this designation at each financial year end.
The group makes trade loans to publicans who purchase the group’s beer. Trade loans are non-derivative and are not quoted in an active market and
have therefore been designated as ‘Loans and receivables’, carried at amortised cost using the effective interest method. Gains and losses are recognised
in income when the loans and receivables are derecognised or impaired, as well as through the amortisation process.
The group assesses at each balance sheet date whether any individual trade loan is impaired. If there is evidence that an impairment loss has been
incurred, the amount of loss is measured as the difference between the loan’s carrying amount and the expected future receipts (excluding future credit
losses that have not been incurred), discounted at the loan’s original effective interest rate. The loss is recognised in operating profit.
Trade and other receivables
Trade and other receivables are recorded at their original invoiced amount less an allowance for any doubtful amounts when collection of the full
amount is no longer considered probable.
Inventories
Inventories are valued at the lower of cost and net realisable value. Raw materials are valued at average cost. Finished goods and work in progress
comprise materials, labour and attributable production overheads where applicable, and are valued at average cost.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less.
For the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.
Property, plant and equipment held for sale
Property, plant and equipment is classified as held for sale only if it is available for sale in its current condition, management is committed to the sale and
a sale is highly probable and expected to be completed within one year from the date of classification. Property, plant and equipment classified as held
for sale is measured at the lower of carrying amount and fair value less costs of disposal and is no longer depreciated or amortised.
Interest-bearing loans and borrowings
All loans and borrowings are initially recognised at fair value of the consideration received, net of issue costs. After initial recognition, interest-bearing
loans and borrowings are measured at amortised cost using the effective interest method.
Annual report 2016 GREENE KING PLC
83
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
1 Accounting policies continued
Significant accounting policies continued
Finance costs and income
Finance costs are expensed to the income statement using the effective interest method. Finance income is recognised in the income statement using
the effective interest method.
Derivative financial instruments and hedge accounting
The group uses interest rate swaps to hedge its exposure to interest rate fluctuations on its variable rate loans, notes and bonds.
Interest rate swaps are initially measured at fair value, if any, and carried on the balance sheet as an asset or liability. Subsequent measurement is at fair
value and the movement is recognised in the income statement unless hedge accounting is adopted. For interest rate swaps where hedge accounting is
not applied the fair value movement is analysed between pre-exceptional finance costs and exceptional finance costs. Pre-exceptional finance costs includes
cash payments or receipts on the interest rate swaps so as to show the underlying fixed rate on the debt with the remaining fair value movement
(which is generally the movement in the carrying value of the swap in the period) reflected as an exceptional item. For derivatives acquired at a non-zero
fair value (e.g. on acquisition) the amortisation of the initial fair value is recognised in pre-exceptional finance costs to offset the cash payments or receipts.
Hedge accounting
To qualify for hedge accounting the hedge relationship must be designated and documented at inception. Documentation must include the group’s risk
management objective and strategy for undertaking the hedge and formal allocation to the item or transaction being hedged. The group also documents
how it will assess the effectiveness of the hedge and carries out assessments on a regular basis to determine whether it has been, and is likely to
continue to be, highly effective.
Hedges can be classified as either fair value (hedging exposure to changes in fair value of an asset or liability), or cash flow (hedging the variability in cash
flows attributable to an asset, liability or forecast transaction). The group uses certain of its interest rate swaps as cash flow hedges.
Cash flow hedge accounting
The effective portion of the gain or loss on an interest rate swap is recognised in Other comprehensive income (OCI), whilst any ineffective portion
is recognised immediately in the income statement.
Amounts recognised in the OCI are transferred to the income statement in the same period that the financial income or expense is recognised, unless
the hedged transaction results in the recognition of a non-financial asset or liability whereby the amounts are transferred to the initial carrying amount
of the asset or liability.
When a hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting, amounts previously recognised
in OCI are held there until the previously hedged transaction affects the income statement. If the hedged transaction is no longer expected to occur,
the cumulative gain or loss recognised in OCI is immediately transferred to the income statement.
Trade payables
Trade payables are non-interest bearing and are stated at their nominal value.
Provisions
Provisions are recognised when the group has a present legal or constructive obligation as a result of a past event, when it is probable that an outflow
of resources will be required to settle the obligation, and when a reliable estimate can be made of the amount of the obligation.
Provisions are discounted to present value, where the effect of the time value of money is material, using a pre-tax discount rate that reflects current
market estimates of the time value of money and the risks specific to the liability. The amortisation of the discount is recognised as a finance cost.
Off market contract liabilities
Off market contract liabilities are recognised where contracts are at unfavourable terms relative to current market terms on acquisition. For leases
where the current rentals are below market terms, the related asset is considered to be included within the residual value of the leasehold pub. For
other acquired pubs an off market liability has been calculated as the difference between the present value of future contracted rentals and the present
value of future market rate rentals. The liability unwinds against the rental expense so that the income statement charge reflects current market terms.
The off market contract liability is increased by the unwinding of the discount at acquisition (using the effective rate applied in measuring the off market
contract liabilities at the date of acquisition) and decreased by utilisation which is unwound against rental expense in the income statement so that the
income statement charge reflects current market terms.
Pensions and other post-employment benefits
Defined benefit pension schemes
The group operates three defined benefit pension schemes which require contributions to be made into separately administered funds. The cost of providing
benefits under the schemes is determined separately for each plan using the projected unit credit actuarial method on an annual basis. The current service
cost is charged to operating profit. Any remeasurement gains and losses are recognised in full in the group statement of comprehensive income in the
period in which they occur.
When a settlement or curtailment occurs the obligation and related scheme assets are remeasured and the resulting gain or loss is recognised
in the income statement in the same period.
Net interest on the net defined benefit liability/(asset) is determined by multiplying the net defined benefit liability/(asset) by the discount rate both
as determined at the start of the annual reporting period, taking account of any changes in the net defined benefit liability/(asset) during the period
as a result of contributions and benefit payments.
The defined benefit asset or liability recognised on the balance sheet comprises the present value of the schemes’ obligations less the fair value
of scheme assets. Defined benefit assets are restricted to the extent that they are considered recoverable.
Defined contribution pension schemes
The cost of the group’s defined contribution pension schemes amounts to the value of contributions made. Contributions are charged to the income
statement as they become payable.
84
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 1 Accounting policies continued
Significant accounting policies continued
Share-based payments
Certain employees and directors receive equity-settled remuneration, whereby they render services in exchange for shares or rights over shares. The fair value
of the shares and options granted is measured using a Black-Scholes model, at the date at which they were granted. No account is taken in the fair value
calculation of any vesting conditions (service and performance), other than market conditions (performance linked to the price of the shares of the company).
Any other conditions that are required to be met in order for an employee to become fully entitled to an award are considered non-vesting conditions.
Like market performance conditions, non-vesting conditions are taken into account in determining the grant date fair value. The fair value of shares and
options granted is recognised as an employee expense with a corresponding increase in equity spread over the period in which the vesting conditions
are fulfilled ending on the relevant vesting date. The cumulative amount recognised as an expense reflects the extent to which the vesting period has
expired, adjusted for the estimated number of shares and options that are ultimately expected to vest. The periodic charge or credit is the movement
in the cumulative position from beginning to end of that period.
No expense is recognised for awards that do not ultimately vest because non-market performance and/or service conditions have not been met.
Where awards include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting
condition is satisfied, provided that all other performance and/or service conditions are satisfied.
Own shares
Own shares consist of treasury shares and shares held within an employee benefit trust. The group has an employee benefit trust for the granting
of shares to applicable employees.
Own shares are recognised at cost as a deduction from shareholders’ equity. Subsequent consideration received for the sale of such shares is also
recognised in equity, with any difference between the sale proceeds from the original cost being taken to retained earnings. No gain or loss is recognised
in the performance statements on transactions in treasury shares.
Revenue
Generally, revenue represents external sales (excluding taxes) of goods and services, net of discounts. Revenue is recognised to the extent that it is
probable that the economic benefits will flow to the group and is measured at the fair value of consideration receivable, excluding discounts, rebates,
and other sales taxes or duty relating to brewing and packaging of certain products. Revenue principally consists of drink, food and accommodation
sales, which are recognised at the point at which goods or services are provided, and rental income, which is recognised on a straight-line basis over the
lease term and machine income, where net takings are recognised as earned. The accrued value for rebates payable is included within other payables.
Supplier rebates
Supplier rebates are included within operating profit as they are earned. The accrued value at the reporting date is included within other receivables.
Operating leases
Leases where the lessor retains substantially all the risks and benefits of ownership are classified as operating leases. Lease payments are recognised
as an expense in the income statement on a straight-line basis over the period of the lease.
Lease premiums paid on entering into or acquiring operating leases represent prepaid lease payments and are held on the balance sheet as current
(the portion relating to the next financial period) or non-current prepayments. These are amortised on a straight-line basis over the lease term.
The fair values attached to operating head leasehold interests on acquisitions are deemed to represent lease premiums, and are carried as intangible
assets. These operating leases are capitalised at cost and amortised over the period of the lease.
See ‘Off market contract liabilities’ for the accounting policy where the fair values of operating leases are a liability.
Finance leases
Leases of property, plant and equipment, where the group has substantially all the risks and rewards of ownership, are classified as finance leases.
Finance leases are recognised at acquisition at the lower of the fair value of the leased asset and the present value of the minimum lease payments.
The asset is then depreciated over the shorter of the estimated useful life of the asset or the lease term. A corresponding liability is included in the
balance sheet as a finance lease obligation. Lease payments are apportioned between the finance charges and reduction of the lease liability to achieve
a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs.
Merger reserve
The merger reserve represents capital contributions received and amounts recognised on the acquisition of Spirit Pub Company Limited being
the difference between the value of the consideration and the nominal value of the shares issued as consideration.
Taxes
Income tax
The income tax charge comprises both the income tax payable based on profits for the year and the deferred income tax. It is calculated using taxation rates
enacted or substantively enacted by the balance sheet date and is measured at the amount expected to be recovered from or paid to the taxation authorities.
Income tax relating to items recognised in OCI and equity are recognised in OCI and equity respectively.
Deferred tax
Deferred tax is provided for using the liability method on temporary differences at the balance sheet date between the tax bases of assets and liabilities
and their carrying values in the financial statements.
Deferred tax is recognised for all temporary differences except where the deferred tax arises from the initial recognition of goodwill or of an asset or
liability in a transaction that is not a business combination that, at the time of the transaction, affects neither the accounting profit nor taxable profit or
loss or, in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences and carry forward of unused tax losses only to the extent that it is probable
that taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax losses can be utilised.
Annual report 2016 GREENE KING PLC
85
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
1 Accounting policies continued
Significant accounting policies continued
Taxes continued
Deferred tax continued
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient
taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each balance
sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured, on an undiscounted basis, at the tax rates that are expected to apply to the year when the asset is realised
or the liability is settled, based on tax rates that have been enacted or substantively enacted at the balance sheet date.
Deferred tax assets and deferred tax liabilities are offset when there is a legally enforceable right to offset income tax assets and income tax liabilities
and they relate to the same taxable entity and same tax authority and when it is the intention to settle the balances on a net basis.
Deferred tax relating to items recognised in OCI and equity are recognised in OCI and equity respectively.
Uncertain tax positions
Provision for uncertain tax positions is based on an assessment of the tax treatment of certain transactions. Tax benefits are not recognised unless it is
probable that the benefit will be obtained and tax provisions are made if it is probable that a liability will arise. The group reviews its uncertain tax positions
each period in order to determine the appropriate accounting treatment.
Exceptional items
The group has elected to classify certain items as exceptional and present them separately on the face of the income statement. Exceptional items are
classified as those which are separately identified by virtue of their size, nature or expected frequency, to allow a better understanding of the underlying
performance in the period.
New standards and interpretations not applied
As at the date of approval of the financial statements there are a number of standards and interpretations issued by the IASB and IFRIC with an effective
date after the date of these financial statements and which have not been early adopted by the group. These are expected to be applied as follows:
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments was first issued in November 2009 and has since been amended several times. A complete version of the standard was
issued in July 2014 and is a replacement of IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 covers the classification, measurement
and derecognition of financial assets and financial liabilities, together with a new hedge accounting model and the new expected credit loss model for
calculating impairment. The new standard becomes effective for annual periods beginning on or after 1 January 2018, subject to EU adoption. The
group is currently considering the impact of IFRS 9 on its consolidated results and financial position.
IFRS 15 Revenue from Contracts with Customers
The IASB issued IFRS 15 Revenue from Contracts with Customers in May 2014. The new standard provides a single, five-step revenue recognition
model, applicable to all sales contracts, which is based upon the principle that revenue is recognised when the control of goods or services is transferred
to the customer. This standard replaces all existing revenue recognition guidance under current IFRS and becomes effective for annual periods beginning
on or after 1 January 2018. The group is currently considering the impact of IFRS 15 on its consolidated results and financial position.
IFRS 16 Leases
In January 2016, the IASB issued IFRS 16 Leases which requires lessees to recognise assets and liabilities for most leases. For lessors, there is little change
to the existing accounting in IAS 17 Leases. The new standard will be effective for annual periods beginning on or after 1 January 2019. Early application
is permitted, provided the new standard, IFRS 15 Revenue from Contracts with Customers, has been applied, or is applied at the same date as IFRS 16.
The group is currently considering the impact of adopting IFRS 16 on its consolidated results and financial position.
Other standards and interpretations that are relevant to the group have been assessed as having no significant financial impact or additional disclosure
requirements at this time.
Significant accounting judgments and estimates
The preparation of financial statements requires management to make judgments, estimates and assumptions in the application of accounting policies
that affect reported amounts of assets and liabilities, income and expense. The group bases its estimates and judgments on historical experience and
other factors deemed reasonable under the circumstances, including any expectations of future events. Actual results may differ from these estimates.
The estimates and judgments considered to be significant are detailed below.
Taxation
Judgment is required when determining the provision for taxes as the tax treatment of some transactions cannot be finally determined until a formal
resolution has been reached with the tax authorities. Assumptions are also made around the assets which qualify for capital allowances and the level of
disallowable expenses and this affects the income tax calculation. Provisions are also made for uncertain exposures which can have an impact on both
deferred and current tax. Tax benefits are not recognised unless it is probable that the benefit will be obtained and tax provisions are made if it is possible
that a liability will arise. The final resolution of these transactions may give rise to material adjustments to the income statement and/or cash flow in
future periods. The group reviews each significant tax liability or benefit each period to assess the appropriate accounting treatment. Refer to note 10
for further details.
86
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 1 Accounting policies continued
Significant accounting judgments and estimates continued
Share-based payments
Judgment is required when calculating the fair value of awards made under the group’s share-based payment plans. Note 8 describes the key
assumptions and valuation model inputs used in the determination of these values. In addition estimates are made of the number of awards that will
ultimately vest and judgment is required in relation to the probability of meeting non-market-based performance conditions and the continuing
participation of employees in the plans.
Pension liabilities
The present values of pension liabilities are determined on an actuarial basis and depend on a number of actuarial assumptions which are disclosed in
note 9. Any change in these assumptions will impact on the carrying amount of pension liabilities. Note 9 describes the key assumptions used in the
accounting for retirement benefit obligations.
Impairment of goodwill
The group determines whether goodwill is impaired on at least an annual basis. Details of the tests and carrying value of the assets are shown in note
13. This requires an estimation of the value-in-use of the cash-generating units to which the goodwill is allocated. Value-in-use calculations require
assumptions to be made regarding the expected future cash flows from the cash-generating unit and choice of a suitable discount rate in order to
calculate the present value of those cash flows. If the actual cash flows are lower than estimated, future impairments may be necessary.
Impairment of property, plant and equipment
The group determines whether property, plant and equipment is impaired where there are indicators of impairment. This requires an estimation of the
value-in-use and fair value less costs of disposal at an individual pub level. Value-in-use calculations require assumptions to be made regarding the expected
future cash flows from the cash-generating unit and choice of a suitable discount rate in order to calculate the present value of those cash flows.
Note 14 describes the assumptions used in the impairment testing of property, plant and equipment together with an analysis of the sensitivity to changes
in key assumptions.
Residual values
Residual values of property are determined with reference to current market property trends. If residual values were lower than estimated, an impairment
of asset value and reassessment of future depreciation charge may be required. Useful lives are reassessed annually which may lead to an increase or
reduction in depreciation accordingly.
Property provisions
The group provides for its onerous obligations under operating leases where the property is closed or vacant and for properties where rental expense
is in excess of income. The estimated timings and amounts of cash flows are determined using the experience of internal and external property experts.
However, changes to the expected method of exiting from the obligation could lead to changes in the level of provision recorded. See note 26 for details.
Business combinations
For the business combination the assets acquired and liabilities assumed have been valued at fair value. This requires a number of estimates with the
details on the fair valuation being disclosed in note 17. Additionally, the goodwill acquired in the business combination was allocated to the operating
segments of the group, based on the extent that the benefits of acquisitions flow to those segments (see note 13 for allocation).
2 Segment information
Following the acquisition of Spirit Pub Company on 23 June 2015 the group had five 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 (Greene King and Spirit)
Pub Partners: Tenanted and leased pubs (Greene King and Spirit)
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.
Following the back-office integration of the Greene King and Spirit businesses from the start of the next financial year, the group has reverted to three
reportable segments: Pub Company, Pub Partners and Brewing & Brands.
Segmental information presented in respect of the prior year is for the three Greene King reportable segments.
Annual report 2016 GREENE KING PLC
87
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
2 Segment information continued
Transfer prices between operating segments are set on an arm’s length basis.
2016
External revenue
Greene King
Spirit
Total
Segment operating profit
Greene King
Spirit
Total
Exceptional items
Net finance costs
Income tax credit
EBITDA2
Greene King
Spirit
Total
Balance sheet
Segment assets
Greene King
Spirit
Unallocated assets1
Segment liabilities
Greene King
Spirit
Unallocated liabilities1
Net assets
Other segment information:
Capital expenditure
Additions – Greene King
Additions – Spirit
Depreciation and amortisation
Greene King
Spirit
Pub
Company
£m
Pub
Partners
£m
Brewing &
Brands
£m
Corporate
£m
Total
operations
£m
1,051.6
636.6
119.4
68.5
196.9
—
1,688.2
187.9
196.9
—
—
—
1,367.9
705.1
2,073.0
200.7
98.5
299.2
55.5
29.8
85.3
32.7
—
32.7
(25.0)
—
(25.0)
263.9
128.3
392.2
(25.9)
(176.5)
1.1
190.9
253.4
132.6
386.0
63.1
32.2
95.3
37.8
—
37.8
(22.2)
—
332.1
164.8
(22.2)
496.9
2,338.2
1,452.6
—
629.6
288.1
—
384.5
—
—
55.8
3,408.1
— 1,740.7
460.4
—
3,790.8
917.7
384.5
55.8
5,609.2
(73.1)
(362.1)
—
(435.2)
(12.0)
(33.4)
—
(45.4)
(84.8)
—
—
(168.0)
(6.0)
(337.9)
(401.5)
— (2,996.2)
(84.8)
(174.0) (3,735.6)
3,355.6
872.3
299.7
(118.2)
1,873.6
111.3
45.9
157.2
(52.7)
(34.1)
(86.8)
15.4
5.9
21.3
(7.6)
(2.4)
(10.0)
6.3
—
6.3
(5.1)
—
(5.1)
7.1
—
7.1
140.1
51.8
191.9
(2.8)
—
(68.2)
(36.5)
(2.8)
(104.7)
1. Unallocated assets/liabilities comprise cash, borrowings, pensions, net deferred tax, net current tax, derivatives and VAT provision acquired. Prior year assets and liabilities have
been restated for the £33.7m deferred tax liability that has been offset against deferred tax assets as detailed in note 10.
2. EBITDA represents earnings before interest, tax, depreciation, amortisation and exceptional items and is calculated as operating profit before exceptionals adjusted for the depreciation
and amortisation charge for the period.
88
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 2 Segment information continued
2015
External revenue
Segment operating profit
Exceptional items
Net finance costs
Income tax expense
EBITDA2
Balance sheet
Segment assets
Unallocated assets1
Segment liabilities
Unallocated liabilities1
Net assets
Other segment information:
Capital expenditure
Additions
Depreciation
Pub
Company
£m
1,000.7
190.8
Pub
Partners
£m
121.9
54.0
Brewing &
Brands
£m
192.7
29.8
Corporate
£m
—
(18.4)
239.8
61.6
34.9
(17.3)
2,058.2
608.7
358.7
51.0
2,058.2
(110.0)
608.7
(14.1)
358.7
(73.7)
51.0
(103.9)
Total
operations
£m
1,315.3
256.2
(43.9)
(94.1)
(28.9)
89.3
319.0
3,076.6
238.6
3,315.2
(301.7)
(1,984.6)
(110.0)
1,948.2
(14.1)
594.6
(73.7)
285.0
(103.9)
(2,286.3)
(52.9)
1,028.9
139.4
(49.0)
18.9
(7.6)
4.7
(5.1)
2.6
(1.1)
165.6
(62.8)
1. Unallocated assets/liabilities comprise cash, borrowings, pensions, net deferred tax, net current tax, derivatives and VAT provision acquired. Prior year assets and liabilities have
been restated for the £33.7m deferred tax liability that has been offset against deferred tax assets as detailed in note 10.
2. EBITDA represents earnings before interest, tax, depreciation, amortisation and exceptional items and is calculated as operating profit before exceptionals adjusted for the depreciation
and amortisation charge for the period.
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 our 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.
3 Revenue
Revenue is analysed as follows:
Goods
Services
Revenue from services includes rent receivable from licensed properties of £50.5m (2015: £33.5m).
2016
£m
2015
£m
1,920.6
152.4
1,224.4
90.9
2,073.0
1,315.3
Annual report 2016 GREENE KING PLC
89
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
4 Operating expenses
Operating profit is stated after charging/(crediting):
Cost of products sold recognised as an expense
Employment costs (note 6)
Depreciation of property, plant and equipment (note 14)
Amortisation (note 13)
Operating lease rentals:
– Minimum lease rentals payable
Other operating charges
Net profit on disposal
Fees paid to the auditors during the period consisted of:
Audit of the consolidated financial statements
Audit of subsidiaries
Other services relating to acquisition
Tax advisory services
Included in other operating charges
Before
exceptional
items
£m
2015
Exceptional
items
£m
2016
Before
exceptional
items
£m
Exceptional
items
£m
748.7
529.4
94.9
9.8
71.9
226.1
—
—
9.7
—
—
—
39.5
(23.3)
Total
£m
748.7
539.1
94.9
9.8
71.9
265.6
(23.3)
515.2
336.8
62.8
—
17.0
127.3
—
1,680.8
25.9
1,706.7
1,059.1
—
0.9
—
—
—
43.1
(0.1)
43.9
2016
£m
0.5
0.1
—
—
0.6
Audit of the consolidated financial statements includes additional one-off fees for additional procedures in relation to the acquisition of Spirit.
5 Exceptional items
Included in operating profit
Acquisition and integration costs
Net impairment of property, plant and equipment (note 14)
Employee costs
Share-based payment credit
Insurance proceeds
Net profit on disposal of property, plant and equipment and goodwill
Included in financing costs
Interest on tax adjustment in respect of prior periods
Fair value losses on ineffective element of cash flow hedges
Fair value movements of derivatives held at fair value through profit and loss
Interest on VAT provision (note 26)
Total exceptional items before tax
Tax impact of exceptional items
Tax credit in respect of the licensed estate
Tax credit in respect of rate change
Adjustment in respect of prior periods – income tax
Adjustment in respect of prior periods – deferred tax
Total exceptional tax
Total exceptional items after tax
90
GREENE KING PLC Annual report 2016
2016
£m
17.5
32.2
—
—
(0.5)
(23.3)
25.9
—
1.3
39.1
0.4
66.7
(11.4)
(33.6)
(4.8)
(0.5)
(0.2)
(50.5)
16.2
Total
£m
515.2
337.7
62.8
—
17.0
170.4
(0.1)
1,103.0
2015
£m
0.2
0.1
1.2
0.1
1.6
2015
£m
15.8
27.4
1.5
(0.6)
(0.1)
(0.1)
43.9
4.0
2.4
—
—
50.3
(7.0)
(2.3)
—
9.5
(6.6)
(6.4)
43.9
FINANCIAL STATEMENTS 5 Exceptional items continued
Exceptional operating costs
Acquisition and 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.
During the period to 1 May 2016 the group has recognised a net impairment loss of £32.2m (2015: £27.4m). This is comprised of an impairment charge
of £79.5m (2015: £27.4m) and reversal of previously recognised impairment losses of £47.3m (2015: £nil). The impairment charge includes £1.4m in respect
of properties damaged by fire in the year. A £4.8m charge has also been recognised in respect of IT assets acquired with Spirit that will not form part
of the IT infrastructure post integration. Impairment of £73.3m 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 cash
flows for previously impaired sites or increases to fair value less costs of disposal.
In the period, the group received further insurance compensation to meet the costs of restoring sites fire damaged in a previous period totalling £0.5m (2015: £0.1m).
The net profit on disposal of property, plant and equipment and goodwill of £23.3m (2015: £0.1m profit) comprises a total profit on disposal of £50.1m
(2015: £10.2m) and a total loss on disposal of £26.8m (2015: £10.1m). The net profit on disposal is made up of the following segments: Pub Company
– Greene King £2.7m profit, Pub Partners – Greene King £17.5m profit, Pub Company – Spirit £0.5m loss, Pub Partners – Spirit £0.9m loss and Corporate
£4.5m profit.
In the prior period the group incurred £1.5m of exceptional employee costs, which included restructuring costs and costs associated with changes to
key management. In addition a share-based payment credit of £0.6m was recognised which resulted from the reversal of charges recognised in earlier
years following a reassessment of expected scheme performance.
Exceptional finance costs
The £1.3m fair value loss (2015: £2.4m loss) is the mark-to-market movement on the ineffective element of cash flow hedges resulting from changes
in the LIBOR yield curve (note 24).
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. The exceptional charge relates to the mark-to-market movement on these
derivatives, excluding amortisation of the fair value on acquisition which reduces the pre-exceptional finance costs that include the interest paid (note 24).
Exceptional tax
The tax credit in respect of the licensed estate has arisen from movements in their tax base cost, including the impact of indexation.
The Finance (No.2) Act 2015 reduced the rate of corporation tax from 20% to 19% from 1 April 2017 and to 18% from 1 April 2020. These rate reductions
were substantively enacted at the balance sheet date and are 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. The effect of these rate reductions is to reduce the deferred tax provision by a net
£2.7m comprising a credit to the income statement of £4.8m and a debit to the group statement of comprehensive income and equity of £7.5m.
The adjustment in respect of prior periods’ income tax in 2015 arises from finalising the tax returns for earlier periods including the reversal of tax relief
previously taken on intra-group transactions. On 6 June 2016 a formal agreement was reached on a number of historical tax positions, in respect of which
£9m remains payable, excluding Sussex which will be heard by the Court of Appeal on 4 July 2016.
The adjustment in respect of prior periods’ deferred tax arises from finalising the tax returns for earlier periods and also deferred tax on revaluation
and rolled over gains on the licensed estate. During the period the group recognised a deferred tax credit of £26.8m in relation to revaluation and rolled
over gains on the licensed estate following correspondence with HMRC which clarified the treatment of certain judgmental items that led to a change in
the group’s estimation of base cost.
6 Employment costs
Wages and salaries
Other share-based payments (note 8)
Total wages and salaries
Social security costs
Other pension costs (note 9):
– Defined contribution
2016
Before
exceptional
items
£m
Exceptional
items
£m
484.5
6.2
490.7
32.0
6.7
529.4
9.7
—
9.7
—
—
9.7
Before
exceptional
items
£m
307.4
3.7
311.1
21.1
Total
£m
494.2
6.2
500.4
32.0
6.7
4.6
539.1
336.8
2015
Exceptional
items
£m
1.5
(0.6)
0.9
—
—
0.9
Total
£m
308.9
3.1
312.0
21.1
4.6
337.7
The total expense of share-based payments relates to equity-settled schemes.
The average number of employees during the period was as follows:
Pub Company
Pub Partners
Brewing & Brands
Corporate
2016
2015
39,587
50
806
1,043
41,486
22,709
56
875
485
24,125
The figures above include 20,638 (2015: 15,256) part-time employees.
Details of directors’ emoluments are shown in the directors’ remuneration report on pages 59 to 64.
Annual report 2016 GREENE KING PLC
91
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
7 Finance (costs)/income
2016
Before
exceptional
items
£m
Exceptional
items
£m
Bank loans and overdrafts
Other loans including recycling of cash flow hedge reserve
Ineffective element of cash flow hedges
Derivatives held at fair value through profit and loss
Interest on tax adjustment in respect of prior period
Interest on tax provisions
Interest on exceptional VAT provision
Unwinding of discount element of provisions and off market contract liabilities
Net finance cost from pensions
(10.7)
(112.4)
1.6
—
—
(1.2)
—
(12.6)
(1.9)
—
—
(1.3)
(39.1)
—
—
(0.4)
—
—
Total
£m
(10.7)
(112.4)
0.3
(39.1)
—
(1.2)
(0.4)
(12.6)
(1.9)
Before
exceptional
items
£m
2015
Exceptional
items
£m
(10.6)
(76.2)
1.6
—
—
(0.4)
—
(0.4)
(2.0)
(88.0)
0.3
0.3
—
—
(2.4)
—
(4.0)
—
—
—
—
(6.4)
—
—
Total
£m
(10.6)
(76.2)
(0.8)
—
(4.0)
(0.4)
—
(0.4)
(2.0)
(94.4)
0.3
0.3
Total finance costs
Bank interest receivable
Total finance income
Net finance costs
(137.2)
(40.8)
(178.0)
1.5
1.5
—
—
1.5
1.5
(135.7)
(40.8)
(176.5)
(87.7)
(6.4)
(94.1)
8 Share-based payment plans
The group operates three types of share-based payment arrangements: a senior management long-term incentive plan (LTIP/Growth LTIP), a deferred
share scheme for other management and a general employee share option plan (SAYE). In prior periods a deferred bonus scheme and an executive
share option scheme (ESOS) have also been operated.
The general terms of the LTIP/Growth LTIP are detailed in the directors’ remuneration report on pages 59 to 64. All are equity settled.
The total charge recognised for the period arising from share-based payment transactions including National Insurance contributions is £7.1m (2015: £3.4m).
A corresponding credit of £6.2m (2015: £3.1m) has been recognised in equity. The increase is due to a change in estimate on the expected result
of performance conditions.
The fair value of the LTIP/Growth LTIP issued since 2015 is considered to be equal to the share price on the date of issue. For 2016 issue the fair value
was 8.63p (2015: 8.40p) per share option. Future dividend payments have not been factored into the valuation as participants are entitled to dividend
payments. The fair value of previously issued LTIPs were estimated using the Black-Scholes model.
The fair value of other equity-settled options are estimated using a Black-Scholes model. The fair values of the grants and model inputs used to calculate
the fair values of grants during the period were as follows:
Weighted average share price
Exercise price
Expected dividend yield
Risk-free rate of return
Volatility
Expected life (years)
Weighted average fair value of grants in the year
2016
SAYE
870p
726p
3.9%
0.6%
21.2%
3.3
140p
2015
SAYE
857p
590p
3.6%
0.7%
20.1%
3.3
215p
Risk-free rate of return is the yield on zero coupon UK government bonds with the same life as the expected option life. Expected volatility is based on
historical volatility of the company’s share price which assumes that the past trend in share price movement is indicative of future trends. Expected life
of options has been taken as the mid-point of the relevant exercise period. This is not necessarily indicative of future exercise patterns.
No other feature of the equity instruments granted was incorporated into the fair value measurement.
92
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 8 Share-based payment plans continued
Movement in outstanding options and rights during the period are as follows:
ESOS
Outstanding at the beginning of the period
Exercised
Outstanding at the end of the period
Exercisable at the end of the period
SAYE
Outstanding at the beginning of the period
Granted
Forfeited
Exercised
Outstanding at the end of the period
Exercisable at the end of the period
LTIP
Outstanding at the beginning of the period
Granted
Forfeited
Vested
Outstanding at the end of the period
Exercisable at the end of the period
Number of options
Weighted average
exercise price
2016
m
0.1
(0.1)
—
—
2015
m
0.3
(0.2)
0.1
0.1
2016
p
528
528
528
—
2015
p
506
500
528
528
Number of options
Weighted average
exercise price
2016
m
1.9
1.0
(0.3)
(0.3)
2.3
0.2
2015
m
1.6
1.1
(0.3)
(0.5)
1.9
0.2
2016
p
570
726
603
462
645
453
2015
p
502
590
586
375
570
378
Number of shares
2016
m
2.1
1.0
(0.2)
(0.7)
2.2
—
2015
m
2.5
0.7
(0.3)
(0.8)
2.1
—
The options and shares granted under the LTIP are at nil cost; therefore the weighted average exercise price for rights outstanding at the beginning
and end of the period, granted, forfeited and exercised during the period is £nil (2015: £nil).
ESOS, SAYE and LTIP
Options were exercised on a range of dates. The weighted average share price through the period was 856p in 2016 and 809p in 2015.
The rights outstanding at 1 May 2016 under the LTIP had an exercise price of £nil (2015: £nil) and a weighted average remaining contractual life
of 1.4 years (2015: 1.3 years).
The outstanding options for the SAYE scheme had an exercise price of between 368p and 726p (2015: 349p and 701p) and the weighted average
remaining contractual life was 3.4 years (2015: 3.4 years).
In the prior year outstanding options for the ESOS scheme had an exercise price of 528p and a weighted average remaining contractual life of 0.3 years.
9 Pensions
The group maintains three defined contribution schemes, which are open to all new employees, and three defined benefit schemes.
The group also has a past service liability in relation to post-employment medical benefits previously offered to employees to cover any medical costs
after employment. This benefit is no longer given to employees.
Defined contribution pension schemes
Member funds for the defined contribution schemes are held and administered by the Friends Life Group. The total cost recognised in operating profit
for the period was £6.7m (2015: £4.6m).
Annual report 2016 GREENE KING PLC
93
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
9 Pensions continued
Defined benefit pension schemes and post-employment benefits
The group maintains the following defined benefit schemes which are closed to new entrants and are closed to future accrual. Only administrative costs
are incurred going forward. All schemes have had full actuarial valuations in the last three years: Greene King Pension Scheme (last valued as at April 2015),
Belhaven Pension Scheme (last valued May 2014) and Spirit (Legacy) Scheme (last valued April 2015).
Member funds for the defined benefit schemes are held in separate funds independently of the group’s finances and are administered by pension
trustees. Pension benefits are related to members’ final salary at the earlier of retirement or closure to future accrual and their length of service.
Since the pension liability is adjusted for the changes to consumer price index, the pension plan is exposed to inflation, interest rate risks and changes
in the life expectancy for pensioners. As the plan assets include significant investments in quoted equity shares of entities in manufacturing and consumer
product sector, the group is also exposed to equity market risk arising in the manufacturing and consumer products sector. The significant increase
in equities and bonds is due to the acquisition of Spirit. The majority of the bonds relate to UK government and corporate bonds.
The total cost recognised in the income statement was:
Administrative costs
Total recognised in operating profit
Interest on pension scheme assets
Interest on scheme liabilities
Net interest on net defined liability
Pension schemes
Post-employment
benefits
2016
£m
2.1
2.1
26.5
(28.4)
(1.9)
2015
£m
—
—
12.0
(14.0)
(2.0)
2016
£m
—
—
—
—
—
2015
£m
—
—
—
—
—
The values of the schemes’ liabilities have been determined by a qualified actuary based on the results of the last actuarial valuation, updated to 1 May 2016
using the following principal actuarial assumptions:
Discount rate
Expected pension payment increases
Rate of inflation (RPI)
Rate of inflation (CPI)
The mortality assumptions imply the following expectations of years of life from age 65:
Man currently aged 40
Woman currently aged 40
Man currently aged 65
Woman currently aged 65
2016
3.4%
3.4%
3.3%
2.3%
24.4
26.5
22.2
24.2
2015
3.4%
3.2%
3.3%
2.3%
24.5
26.7
22.3
24.4
Mortality assumptions are based on standard tables adjusted for scheme experience and with an allowance for future improvement in life expectancy.
The table below shows the investment allocation of pension assets against the related liabilities of the pension schemes and other post-employment benefits:
Pension plans
value
Post-employment
benefits
2016
£m
2015
£m
2016
£m
2015
£m
366.6
3.1
370.2
1.5
48.0
11.8
257.0
3.0
62.7
—
—
1.7
801.2
324.4
—
—
—
—
—
—
—
(853.5)
—
(52.3)
(383.6)
—
(59.2)
—
(1.3)
(1.3)
—
—
—
—
—
—
—
—
(1.3)
(1.3)
Investment quoted in active markets:
Equities
With profits
Bonds
Annuities
Unquoted investments:
Property
Cash
Total fair value of assets
Present value of scheme liabilities:
– Funded plans
– Unfunded plans
Non-current liability recognised
94
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 9 Pensions continued
Defined benefit pension schemes and post-employment benefits continued
The movements in the pension schemes’ net liability and post-employment benefits liability during the period are as follows:
At beginning of period
Net acquisition (note 17)
Pension costs charged to income statement
Administrative costs
Net interest
Benefits paid
Remeasurement (losses)/gains in other comprehensive income
Return on plan assets (excluding amounts included in net interest expenses)
Actuarial changes arising from changes in demographic assumptions
Actuarial changes arising from changes in financial assumptions
Experience adjustments
Contributions paid – employers
Contributions paid – employees
At end of period
Pension assets
Pension liabilities
Net pension liability
2016
£m
324.4
480.4
(2.1)
26.5
24.4
(35.7)
(4.8)
—
—
—
(4.8)
12.5
—
2015
£m
295.5
—
—
12.0
12.0
(10.6)
20.6
—
—
—
20.6
6.9
—
2016
£m
(383.6)
(477.5)
2015
£m
(347.7)
—
—
(28.4)
(28.4)
35.7
—
5.1
(19.9)
15.1
0.3
—
—
—
(14.0)
(14.0)
10.6
—
2.1
(35.0)
0.4
(32.5)
—
—
2016
£m
(59.2)
2.9
(2.1)
(1.9)
(4.0)
—
(4.8)
5.1
(19.9)
15.1
(4.5)
12.5
—
801.2
324.4
(853.5)
(383.6)
(52.3)
2015
£m
(52.2)
—
—
(2.0)
(2.0)
—
20.6
2.1
(35.0)
0.4
(11.9)
6.9
—
(59.2)
Contributions on the Spirit pension scheme stopped in 2016 therefore expected future contributions have reduced accordingly.
At beginning and end of period
Post-employment
benefits liability
2016
£m
(1.3)
2015
£m
(1.3)
The sensitivities regarding the principal assumptions assessed in isolation that have been used to measure the scheme liabilities are set out below:
0.25%pts increase in discount rate
0.25%pts increase in inflation assumption
Additional one year increase to life expectancy
Decrease/(increase)
in liability
2016
£m
37.1
(29.6)
(27.1)
2015
£m
16.8
(13.8)
(12.5)
The following payments, which are also the minimum funding requirements, are the expected contributions to the defined benefit plan in future years:
Within 1 year
Between 2 and 5 years
Between 5 and 10 years
The average duration of the defined benefit plan obligation at the end of the reporting period is 18 years (2015: 18 years).
2016
£m
3.3
13.1
12.4
28.8
2015
£m
6.9
27.5
17.4
51.8
Annual report 2016 GREENE KING PLC
95
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
10 Taxation
Consolidated income statement
Income tax
Corporation tax before exceptional items
Recoverable on exceptional items
Current income tax
Adjustment in respect of prior periods
Deferred tax
Origination and reversal of temporary differences
Adjustment in respect of prior periods
Tax credit in respect of rate change
Tax charge/(credit) in the income statement
Group statement of comprehensive income
Deferred tax
Loss on actuarial valuation of pension liability
Net loss on revaluation of cash flow hedges
Tax charge in respect of rate change
Group statement of changes in equity
Deferred tax
Share-based payment – future taxable benefit
Tax charge in respect of rate change
Deferred tax reported in equity
Income tax
Share-based payments – current taxable benefit
Total tax reported in equity
2016
Before
exceptional
items
£m
Exceptional
items
£m
32.6
—
32.6
(1.0)
31.6
17.3
0.5
—
17.8
49.4
—
(3.2)
(3.2)
(0.5)
(3.7)
(41.8)
(0.2)
(4.8)
(46.8)
(50.5)
Before
exceptional
items
£m
2015
Exceptional
items
£m
38.5
—
38.5
—
38.5
(3.2)
—
—
(3.2)
35.3
—
(1.2)
(1.2)
9.5
8.3
(8.1)
(6.6)
—
(14.7)
(6.4)
Total
£m
32.6
(3.2)
29.4
(1.5)
27.9
(24.5)
0.3
(4.8)
(29.0)
(1.1)
Total
£m
38.5
(1.2)
37.3
9.5
46.8
(11.3)
(6.6)
—
(17.9)
28.9
2016
£m
2015
£m
(0.8)
(2.3)
7.1
4.0
2016
£m
3.4
0.4
3.8
(3.0)
0.8
2016
£m
189.8
38.0
0.5
(33.6)
(4.8)
(1.5)
0.3
(1.1)
(2.4)
(12.7)
—
(15.1)
2015
£m
3.4
—
3.4
(1.9)
1.5
2015
£m
118.2
24.7
3.6
(2.3)
—
9.5
(6.6)
28.9
Reconciliation of income tax expense for period
The effective rate of taxation is lower (2015: higher) than the full rate of corporation tax. The differences are explained below:
Profit before tax
Profit before tax multiplied by the standard rate of corporation tax of 20.0% (2015: 20.9%)
Effects of:
– Expenses not deductible for tax purposes
– Exceptional deferred tax credit in respect of licensed estate
– Exceptional tax credit in respect of rate change
– Adjustment in respect of prior periods – income tax
– Adjustment in respect of prior periods – deferred tax
Income tax (credit)/expense reported in the income statement
Income tax payable
The income tax liability of £30.3m (2015: £50.8m) includes an assessment of the expected liabilities in respect of uncertain tax positions of £10.5m
(2015: £31.6m) which have yet to be agreed or are in dispute with HMRC. On 6 June 2016 a formal agreement was reached on a number of historical tax
positions, in respect of which £9m remains payable at the year end, excluding Sussex which will be heard by the Court of Appeal on 4 July 2016.
96
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 10 Taxation continued
Deferred tax
The deferred tax included in the balance sheet is as follows:
Deferred tax liability
Accelerated capital allowances
Rolled over gains and property revaluation
Operating leases
Other temporary differences
Deferred tax asset
Post-employment liabilities
Other temporary differences
Derivative financial instruments
Share-based payment
Off market contract liabilities
Capital losses carried forward
Trading losses carried forward
Net deferred tax (asset)/liability
2016
£m
30.8
29.6
28.7
8.7
97.8
(9.7)
(0.1)
(79.4)
(1.5)
(53.7)
(11.7)
(2.5)
(158.6)
(60.8)
2015
£m
33.7
63.8
—
—
97.5
(12.1)
(0.9)
(47.1)
(1.9)
—
(6.4)
—
(68.4)
29.1
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset income tax assets and income tax liabilities and when it is
the intention to settle the balances on a net basis. Deferred tax assets and liabilities have therefore been offset and disclosed on the balance sheet as follows:
Deferred tax liability
Deferred tax asset
Net deferred tax (asset)/liability
The deferred tax included in the income statement is as follows:
2016
Before
exceptional
items
£m
Exceptional
items
£m
Deferred tax in the income statement
Accelerated capital allowances
Rolled over gains and property revaluations
Operating leases
Post-employment liabilities
Other temporary differences
Derivative financial instruments
Share-based payments
Off market contract liabilities
Capital losses carried forward
Tax losses carried forward
Deferred tax credit/(expense)
3.6
—
(1.6)
1.5
0.8
2.2
(1.7)
2.5
—
10.5
17.8
(4.0)
(47.6)
(3.4)
(1.2)
(1.5)
(4.0)
0.4
6.3
8.2
—
(46.8)
(29.0)
1 May 2016
£m
3 May 2015
£m
17.9
(78.7)
(60.8)
57.4
(28.3)
29.1
Before
exceptional
items
£m
2015
Exceptional
items
£m
(3.5)
—
—
0.9
—
—
(0.6)
—
—
—
(3.2)
(0.8)
(14.6)
—
—
1.2
(0.5)
—
—
—
—
(14.7)
Total
£m
(4.3)
(14.6)
—
0.9
1.2
(0.5)
(0.6)
—
—
—
(17.9)
Total
£m
(0.4)
(47.6)
(5.0)
0.3
(0.7)
(1.8)
(1.3)
8.8
8.2
10.5
Annual report 2016 GREENE KING PLC
97
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
10 Taxation continued
Deferred tax continued
The movements on deferred tax assets and liabilities during the period are shown below:
Accelerated
capital
allowances
£m
Rolled over
gains and
property
revaluation
£m
Operating
leases
£m
Other
temporary
differences
£m
Deferred tax liabilities
At 4 May 2014
Credit to the income statement
At 3 May 2015
Credit to the income statement
Acquired (note 17)
At 1 May 2016
Deferred tax assets
At 4 May 2014
(Credit)/charge to equity/comprehensive income
Charge/(credit) to the income statement
At 3 May 2015
Charge to equity/comprehensive income
Charge/(credit) to the income statement
Acquired (note 17)
At 1 May 2016
38.0
(4.3)
33.7
(0.4)
(2.5)
30.8
80.8
(17.0)
63.8
(47.6)
13.4
29.6
Post-
employment
liabilities
£m
Other
temporary
differences
£m
Derivatives
£m
Share-based
payments
£m
Off market
contract
liability
£m
(10.6)
(2.4)
0.9
(12.1)
1.5
0.3
0.6
(9.7)
(2.1)
—
1.2
(0.9)
—
0.9
—
—
(33.9)
(12.7)
(0.5)
(47.1)
2.5
(1.8)
(33.0)
(4.7)
3.4
(0.6)
(1.9)
3.8
(1.3)
(2.2)
—
—
—
—
—
8.8
(62.5)
—
—
—
(5.0)
33.7
28.7
Capital
losses
carried
forward
£m
(8.8)
—
2.4
(6.4)
—
8.2
(13.5)
—
—
—
(1.6)
10.3
8.7
Trading
losses
carried
forward
£m
—
—
—
—
—
10.5
(13.0)
Total
£m
118.8
(21.3)
97.5
(54.6)
54.9
97.8
Total
£m
(60.1)
(11.7)
3.4
(68.4)
7.8
25.6
(123.6)
(79.4)
(1.6)
(53.7)
(11.7)
(2.5)
(158.6)
There are no income tax consequences attaching to the payment of dividends by Greene King plc to its shareholders.
At 1 May 2016, the group had unused trading losses of £12.6m (2015: £nil) and unused capital losses of £815.5m (2015: £32.0m). A deferred tax asset
of £2.5m (2015: £nil) has been recognised in respect of trading losses and a deferred tax asset of £11.7m (2015: £6.4m) in respect of capital losses
where tax losses are expected to be utilised against future profits and gains. Current legislation allows all of the group’s tax losses to be carried forward
for an unlimited period.
Prior year restatement
The comparatives have been restated to reflect the netting of deferred tax assets and liabilities, as in the current year, the net impact being that a £33.7m
(2014: £38.0m) deferred tax liability has been offset against deferred tax assets.
Factors that may affect future tax charges
The Finance Act (No.2) Act 2015 reduced the rate of corporation tax from 20% to 19% from 1 April 2017 and to 18% from 1 April 2020. These rate
reductions were substantively enacted at the balance sheet date and are 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. The effect of these rate reductions is to reduce the net deferred
tax asset by a net £2.7m comprising a credit to the income statement of £4.8m and a debit to the group statement of comprehensive income and equity
of £7.5m (as explained in note 5).
In addition the Finance Bill 2016 further reduces the rate of corporation tax to 17% from 1 April 2020. This further reduction had not been substantively
enacted at the balance sheet date so is not included in these accounts. However, it will further reduce the net deferred tax asset at the balance sheet
date by £3.0m and the group’s income tax charge in future periods.
11 Dividends paid and proposed
Declared and paid in the period
Interim dividend for 2016 – 8.45p (2015: 7.95p)
Final dividend for 2015 – 21.8p (2014: 20.8p)
Proposed for approval at AGM
Final dividend for 2016 – 23.60p (2015: 21.8p)
Total proposed dividend for 2016 – 32.05p (2015: 29.75p)
Dividends on own shares have been waived.
98
GREENE KING PLC Annual report 2016
2016
£m
26.2
67.1
93.3
73.0
99.2
2015
£m
17.4
45.4
62.8
67.1
84.5
FINANCIAL STATEMENTS 12 Earnings per share
Basic earnings per share has been calculated by dividing the profit attributable to equity holders of £190.9m (2015: £89.3m) by the weighted average
number of shares in issue during the period of 296.2m (2015: 218.3m).
Diluted earnings per share has been calculated on a similar basis taking account of 1.6m (2015: 1.6m) dilutive potential shares under option, giving a
weighted average number of ordinary shares adjusted for the effect of dilution of 297.8m (2015: 219.9m). There were no (2015: nil) anti-dilutive share
options excluded from the diluted earnings per share calculation. The performance conditions for share options granted over 1.6m (2015: 1.5m) 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 items and is presented to show the underlying performance of the group on both a basic
and diluted basis.
Earnings
Basic earnings per share
Diluted earnings per share
Adjusted earnings per share
Profit attributable to equity holders
Exceptional items
2016
£m
190.9
16.2
2015
£m
89.3
43.9
Profit attributable to equity holders before exceptional items
207.1
133.2
13 Goodwill and other intangible assets
Cost
At 4 May 2014
Disposal
At 3 May 2015
Disposal
Acquisitions (note 17)
At 1 May 2016
Impairment and amortisation
At 4 May 2014 and 3 May 2015
Amortisation
At 3 May 2015 and 1 May 2016
Net book value
At 1 May 2016
At 3 May 2015
At 4 May 2014
2016
p
64.4
5.5
69.9
2015
p
40.9
20.1
61.0
2016
p
64.1
5.4
69.5
2015
p
40.6
20.0
60.6
Brand
intangibles
£m
Operating
lease
intangible
£m
Total
other
intangibles
£m
—
—
—
—
16.1
—
—
—
—
168.3
—
—
—
—
184.4
Goodwill
£m
703.8
(2.9)
700.9
(13.0)
434.0
16.1
168.3
184.4
1,121.9
—
(0.9)
(0.9)
15.2
—
—
—
(8.9)
(8.9)
—
(9.8)
(9.8)
—
—
—
159.4
—
—
174.6
—
—
1,121.9
700.9
703.8
Other intangibles consists of Brand intangibles and Operating lease intangibles both recognised as part of the acquisition made during the year (see note 17).
Brand intangibles are amortised over the expected life of the asset (15 years). Operating lease intangibles are amortised on a straight-line basis over the length
of the lease with a weighted average useful life of 26 years.
All goodwill was recognised as part of business combinations. As from 3 May 2004, the date of transition to IFRS, goodwill is no longer amortised
but is subject to annual impairment testing.
Goodwill has been allocated to operating segments, the lowest group of cash-generating units in the group at which goodwill is monitored internally,
based on the extent that the benefits of acquisitions flow to that segment.
The carrying amount of goodwill is allocated as follows:
Pub Company – Greene King
Pub Company – Spirit
Pub Partners – Greene King
Pub Partners – Spirit
Brewing & Brands
2016
£m
566.3
133.6
169.5
17.6
234.9
1,121.9
2015
£m
352.7
—
133.7
—
214.5
700.9
Goodwill disposed of in the year is the amount of goodwill allocated to parts of operating segments disposed of during the year. The amount disposed
is calculated based on the relative value of the operation disposed and the portion of the operating segment retained.
Annual report 2016 GREENE KING PLC
99
FINANCIAL STATEMENTS
Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
13 Goodwill and other intangible assets continued
Goodwill disposed of in the year:
Pub Company – Greene King
Pub Partners – Greene King
2016
£m
4.3
8.7
13.0
2015
£m
0.8
2.1
2.9
The recoverable amount of each segment was determined on a value-in-use basis, using cash flow projections based on one year budgets approved
by the board, and in all cases exceeded the carrying amount.
The key assumptions used in the value-in-use calculations are budgeted EBITDA, the pre-tax discount rate and the growth rate used to extrapolate cash
flows beyond the budgeted period.
Budgeted EBITDA is based on past experience adjusted to take account of the impact of expected changes to sales prices, volumes, business mix
and margin, based on the current estate.
Cash flows are discounted at 8.65% (2015: 9.0%), which is used as an approximation for the risk-adjusted discount rate of the relevant operating segment.
As risk factors are considered to be similar in each of the group’s operating segments the same level of discount rate is applied to all. A growth rate of 1.75%
in Pub Company (2015: 1.00%), 2.50% in Pub Partners (2015: 1.00%) and 1.00% in Brewing & Brands (2015: 1.00%) has been used to extrapolate cash
flows. The growth rate is below the long-term average growth rate for the operating segments and reflects trends in trading performance.
Sensitivity to changes in assumptions
The calculation is most sensitive to changes in the assumptions used for budgeted cash flow, pre-tax discount rate and growth rate. Management considers
that reasonably possible changes in assumptions would be an increase in discount of 1%pt, a reduction in growth rate of 1%pt or a 10% reduction in
budgeted cash flow. As an indication of sensitivity, when applied to the value-in-use calculation in isolation or individually neither a 1% reduction in growth
rate, a 10% reduction in budgeted cash flow, nor a 1% increase in the discount rate would have resulted in an impairment of goodwill in the period. In the
prior year a 1% increase in the discount rate would have resulted in an impairment of £4.6m to the goodwill allocated to Pub Partners, with the carrying
amount equalling the recoverable amount at a discount rate of 9.9%.
14 Property, plant and equipment
Cost
Balances at 4 May 2014
Additions during period
Transfer to property, plant and equipment held for sale
Disposals during period
Balances at 3 May 2015
Additions during period
Acquisitions (note 17)
Transfer to property, plant and equipment held for sale
Disposals during period
Licensed estate
Other
Land and
buildings
£m
Plant and
equipment
£m
Land and
buildings
£m
Plant and
equipment
£m
2,060.1
99.1
(0.8)
(28.1)
2,130.3
96.6
1,265.0
(2.6)
(45.8)
631.8
59.3
(0.1)
(9.7)
681.3
92.7
142.7
—
(11.2)
63.4
2.8
—
(0.1)
66.1
(0.2)
5.7
—
(1.0)
125.9
4.4
—
—
130.3
2.8
—
—
(0.4)
Total
£m
2,881.2
165.6
(0.9)
(37.9)
3,008.0
191.9
1,413.4
(2.6)
(58.4)
Balances at 1 May 2016
3,443.5
905.5
70.6
132.7
4,552.3
Depreciation and impairment
Balances at 4 May 2014
Provided during the year
Written back on disposals
Impairment (see below)
Transfer to property, plant and equipment held for sale
Balances at 3 May 2015
Provided during the year
Written back on disposals
Impairment (see below)
Impairment reversal (see below)
Transfer to property, plant and equipment held for sale
167.1
7.5
(23.1)
27.4
(0.4)
178.5
2.0
(10.8)
74.7
(47.3)
(0.3)
452.8
49.1
(5.5)
—
(0.1)
496.3
86.6
(7.3)
—
—
—
13.1
1.8
—
—
—
14.9
1.8
(0.2)
—
—
—
78.5
4.4
—
—
—
82.9
4.5
(0.1)
4.8
—
—
711.5
62.8
(28.6)
27.4
(0.5)
772.6
94.9
(18.4)
79.5
(47.3)
(0.3)
Balances at 1 May 2016
196.8
575.6
16.5
92.1
881.0
Net book value
At 1 May 2016
At 3 May 2015
At 4 May 2014
100
GREENE KING PLC Annual report 2016
3,246.7
1,951.8
1,893.0
329.9
185.0
179.0
54.1
51.2
50.3
40.6
47.4
47.4
3,671.3
2,235.4
2,169.7
FINANCIAL STATEMENTS 14 Property, plant and equipment continued
The licensed estate relates to properties, and assets held within those properties, licensed to trade (i.e. managed, tenanted and leased houses).
Other assets relate to property, plant and equipment associated with unlicensed properties (i.e. brewing, distribution and central assets).
The net book value of land and buildings comprises:
Freehold properties
Leasehold properties >50 years unexpired term
Leasehold properties <50 years unexpired term
2016
£m
3,171.9
75.6
53.3
2015
£m
1,895.9
64.7
42.4
3,300.8
2,003.0
Valuation
The licensed estate properties were valued by the group’s own professionally qualified chartered surveyors, as at 20 December 2003, on the basis of
existing use value, in accordance with the Royal Institution of Chartered Surveyors’ Appraisal and Valuation Standards. A representative sample of properties
was also valued by external valuers, Gerald Eve Chartered Surveyors and Property Consultants, who confirmed that the values were consistent with
their appraisal. Frozen revaluation has been taken as deemed cost on the transition to IFRS; therefore, no historic cost analysis is provided.
Up to 1999 the brewery and depots were valued at depreciated replacement cost and other properties at open market value. These valuations
have been retained but they have not been updated. Subsequent additions have been included at cost or, in the case of acquisitions, at fair value.
Charges over assets
Included in land and buildings are properties with a net book value of £1,446.2m (2015: £1,425.2m) and £1,519.1m (2015: £nil) over which there is a first
charge in favour of the securitised debt holders of the Greene King secured financing vehicle and the Spirit secured financing vehicle respectively. See details
in note 23.
Assets held under finance leases
The group leases various licensed properties, offices and other commercial properties and other assets under finance leases. The leases have various
terms, escalation clauses and renewal rights. Included in property, plant and equipment above are properties held under finance leases with a net book
value of £22.3m (2015: £nil).
Disposals
Disposals includes properties sold during the year, some of which were required in order to complete the acquisition.
Future capital expenditure
Contracted for
2016
£m
7.6
2015
£m
7.0
Impairment of property, plant and equipment
During the period to 1 May 2016 the group has recognised a net impairment loss of £32.2m (2015: £27.4m). This is comprised of an impairment charge
of £79.5m (2015: £27.4m) and reversal of previously recognised impairment losses of £47.3m (2015: £nil). The recoverable amount for assets impaired
was based on value in use of £25.2m and fair value less cost of disposal of £47.3m. The recoverable amount for assets with impairment reversal was
based on value in use of £43.0m and fair value less cost of disposal of £4.6m.
These are analysed between the group’s principal reporting segments as shown below:
Pub Company – Greene King
Pub Partners – Greene King
Corporate
2016
Impairment
£m
Reversal of
impairment
£m
Net
impairment
£m
Impairment
£m
56.6
17.4
5.5
79.5
(33.5)
(13.8)
—
(47.3)
23.1
3.6
5.5
32.2
21.1
6.3
—
27.4
2015
Reversal of
impairment
£m
Net
impairment
£m
—
—
—
—
21.1
6.3
—
27.4
The group considers that each of its individual pubs is a cash-generating unit (CGU). Each CGU is reviewed annually for indicators of impairment.
When indicators of impairment are identified the carrying value of the CGU is compared to its recoverable amount. The recoverable amount is the
higher of the CGU’s fair value less costs of disposal and its value-in-use.
The group estimates value-in-use using a discounted cash flow model. The key assumptions used are expected cash flow projections for the next year,
the discount rate applied to those cash flows of 8.65% (2015: 9.00%) and the projected cash flows extrapolated using an average growth rate of 1.75%
in Pub Company (2015: 1.00%) and 2.50% in Pub Partners (2015: 1.00%) which are below the long-term average growth rate for the operating segments
and reflect trends in trading performance. As risk factors are considered to be similar in each of the group’s operating segments the same level of discount
rate is applied to all.
Cash flow projections relating to individual CGUs have been made based on historic trends adjusted for management’s estimates of medium-term
trading prospects.
Estimates of fair value less costs of disposal are based on an external valuation with the latest valuation being performed in 2015/2016. The valuation
considers assumptions such as current and future projected income levels, which take account of the location and quality of the pub. In addition recent
market transactions in the sector and potential alternative use values have been considered.
The valuation techniques applied are consistent with the principles in IFRS 13 Fair Value Measurement. As they use significant unobservable inputs they
are classified within Level 3 of the fair value hierarchy; this hierarchy is further explained in note 24.
Annual report 2016 GREENE KING PLC
101
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
14 Property, plant and equipment continued
Impairment of property, plant and equipment continued
The impairment charge recognised in relation to a small number of pubs was driven by changes in the local competitive and trading environment at their
respective sites, and decisions taken to exit some sites where current market values are lower than book values. The impairment reversals have been
recognised following an improvement in trading performance and an increase in amounts of estimated future cash flows for previously impaired sites.
Sensitivity to changes in assumptions
The level of impairment is predominantly dependent upon judgments used in arriving at fair values, future growth rates and the discount rate applied to
cash flow projections. The net impact on the impairment charge of applying different assumptions to fair values, the growth rates used to calculate cash
flow projections and the pre-tax discount rates would be as follows:
Increased net impairment resulting from:
a 10% reduction in fair
value less cost of disposal
a 1% increase
in discount rate
a 1% reduction
in growth rate
Pub Company
Pub Partners
2016
£m
9.8
2.2
12.0
2015
£m
10.5
2.3
12.8
2016
£m
11.7
3.1
14.8
2015
£m
5.0
1.0
6.0
No impairment was recognised in relation to the Spirit estate and as such the above sensitivities only include the Greene King estate.
15 Financial assets
Trade loans (net of provision)
Total current
Trade loans (net of provision)
Other financial assets
Total non current
2016
£m
11.7
3.1
14.8
2016
£m
9.8
9.8
16.3
0.5
16.8
2015
£m
5.0
1.0
6.0
2015
£m
9.1
9.1
20.8
0.5
21.3
Trade loans are net of provisions of £5.1m (2015: £4.1m). During the year £0.3m (2015: £0.2m) of the provision was utilised and £1.3m (2015: £0.2m)
of new provision was created. All trade loans that are neither past due nor impaired are expected to be fully recoverable. All significant overdue balances
are fully provided for.
Trade loans are advanced to customers on terms linked to supply terms such that returns are greater than interest income. The fixed rate trade loans
amounted to £19.2m (2015: £20.7m) and variable rate trade loans amounted to £12.0m (2015: £13.3m). Included in fixed rate loans are £16.4m of loans
with settlement related to purchase levels (2015: £17.5m). The write down of these loans has been taken on a straight-line basis over the remaining term
of the loan as an approximation of the settlement.
The fixed rate trade loans had a weighted average interest rate of 0.50% (2015: 0.64%) and a weighted average period of 3.93 years (2015: 4.55 years).
Interest rates on variable rate trade loans are linked to base rate.
Trade loans (net of provision)
Balance at beginning of period
Advances
Repayments and amortisation
Provisions
Balance at end of period
2016
£m
29.9
4.1
(6.9)
(1.0)
26.0
2015
£m
32.3
5.5
(7.9)
—
29.9
102
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 16 Subsidiary undertakings
The subsidiary undertakings are:
Subsidiary undertakings
Directly held by Greene King plc
Beards of Sussex Limited
Greene King Debt Acquisitions Limited
Greene King Developments Limited
Greene King EBT Investment (Jersey) Limited
Greene King GP Limited
Greene King Investments Limited
Greene King Pension Scheme Limited
Greene King Properties Limited
Greene King Pubs Limited
Greene King Retailing Parent Limited
Morrells of Oxford Limited
Norman Limited
Realpubs Limited
Rushmere Sports Club Limited
Spirit Pub Company Limited
The Capital Pub Company Limited
Indirectly held by Greene King plc
Allied Kunick Entertainments Limited
Ashes Investment LP
Aspect Leisure Activities Limited
Aspect Ventures Limited
AVL (Pubs) No.1 Limited
AVL (Pubs) No.2 Limited
Barnaby’s Carvery Limited
Barshelf 2 Limited
Belhaven Brewery Company Limited
Belhaven Finance Limited
Belhaven Group Properties Limited
Belhaven Pubs Limited
Capital Pub Company Trading Limited
Catertour Limited
Chef & Brewer Hotels Limited
Chef & Brewer Limited
Cheshire Hotels (Developments) Limited
Cheshire Hotels Limited
City Limits Limited
Cleveland Place Holdings Limited
Cloverleaf Restaurants Limited
Country Fayre Restaurants Limited
Country Grill Restaurants Limited
CPH (R&L) No.1 Limited
CPH (R&L) No.2 Limited
CPH Palladium Limited
Dearg Limited
Freehouse Limited
Freshwild Limited
G.K. Holdings No.1 Limited
Greene King Acquisitions (No.3) Limited
Greene King Acquisitions No.2 Limited
Greene King Brewing and Retailing Limited
Principal
activity
Country of
incorporation
Held by
Holding
Proportion
of voting
rights and
ownership
Financing
Financing
Property
Holding company
Dormant
Holding company
Pension trustee
Property
Property
Holding company
Financing
Holding company
Financing
Financing
Holding company
Holding company
Property
Financing
Non-trading
Holding company
Holding company
Non-trading
Non-trading
Non-trading
Financing
Financing
Financing
Financing
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Holding company
Non-trading
Holding company
Financing
Non-trading
Holding company
Holding company
Non-trading
Holding company
Holding company
Non-trading
Holding company
Holding company
Holding company
Holding company
Brewing and retailing
England & Wales
England & Wales
England & Wales
Jersey
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Channel Islands
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Scotland
Scotland
England & Wales
Scotland
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Parent
Parent
Parent
Parent
Parent
Parent
Parent
Parent
Parent
Parent
Parent
Parent
Parent
Parent
Parent
Parent
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Preference shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Preference shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Annual report 2016 GREENE KING PLC
103
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
16 Subsidiary undertakings continued
Subsidiary undertakings
Greene King Leasing No.1 Limited
Greene King Leasing No.2 Limited
Greene King Neighbourhood Estate Pubs Limited
Greene King Retail Services Limited
Greene King Retailing Limited
Greene King Services Limited
Hardys & Hansons Limited
Homespreads Limited
Huggins and Company Limited
John Barras & Co Limited
LFR Group Limited
Little London Pubs Limited
London Pub-Restaurants Limited
London Tourist Pubs Limited
Mountloop Limited
Narnain
New Pubco Holdings Limited
Old English Inns Limited
Open House Limited
Partstripe Limited
Premium Casual Dining Limited
Premium Dining Restaurants and Pubs Limited
R.V. Goodhew Limited
Readystripe Limited
Realpubs Developments Limited
Realpubs II Limited
Sapphire Food North East No.1 Limited
Sapphire Food North West No.3 Limited
Sapphire Food South East No.4 Limited
Sapphire Food South West No.2 Limited
Sapphire Rural Destinations No.5 Limited
Schooner Inns Limited
Southern Inns Limited
Spirit (AKE Holdings) Limited
Spirit (BRB) Limited
Spirit (CCR) Limited
Spirit (Faith) Limited
Spirit (Legacy) Pension Trustee Limited
Spirit (Lodges Holdings) Limited1
Spirit (OOL) Limited
Spirit (PSC) Limited
Spirit (Redwood Bidco) Limited
Spirit (SGL) Limited
Spirit Acquisition Properties Limited
104
GREENE KING PLC Annual report 2016
Principal
activity
Holding company
Financing
Financing
Employment
Pub retailing
Employment
Financing
Non-trading
Non-trading
Non-trading
Financing
Non-trading
Non-trading
Non-trading
Non-trading
Holding company
Non-trading
Financing
Non-trading
Holding company
Holding company
Retailing
Non-trading
Non-trading
Financing
Financing
Financing
Financing
Financing
Financing
Financing
Non-trading
Non-trading
Holding company
Holding company
Non-trading
Property
Pension trustee
Non-trading
Non-trading
Non-trading
Non-trading
Holding company
Holding company
Country of
incorporation
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Scotland
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Scotland
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Holding
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
4.9% cumulative
preference shares
4.2% cumulative
preference shares
Ordinary shares
Employee shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Deferred
ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
7% cumulative
preference shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Proportion
of voting
rights and
ownership
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Held by
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
FINANCIAL STATEMENTS 16 Subsidiary undertakings continued
Subsidiary undertakings
Spirit Acquisitions Guarantee Limited1
Spirit Acquisitions Holdings Limited
Spirit Financial Holdings Limited
Spirit Finco Limited
Spirit Funding Limited
Spirit Group Equity Limited
Spirit Group Holdings Limited
Spirit Group Parent Limited
Spirit Group Pension Trustee Limited
Spirit Group Retail (North) Limited
Spirit Group Retail (Northampton) Limited
Spirit Group Retail (Pubs) No.1 Limited
Spirit Group Retail (Pubs) No.2 Limited
Spirit Group Retail (South) Limited
Spirit Group Retail Hotels Limited
Spirit Group Retail Limited
Spirit Group Retail Pensions Limited
Spirit Group Retail Pubs and Restaurants Limited
Spirit Intermediate Holdings Limited
Spirit Managed Funding Limited
Spirit Managed Holdings Limited
Spirit Managed Inns Limited
Spirit Parent Limited
Spirit Pub Company (Derwent) Limited
Spirit Pub Company (Holdco) Limited
Spirit Pub Company (Inns) Limited
Spirit Pub Company (Investments) Limited
Spirit Pub Company (Leased) Limited
Spirit Pub Company (Managed) Limited
Spirit Pub Company (Services) Limited
Spirit Pub Company (SGE) Limited
Spirit Pub Company (Supply) Limited
Spirit Pub Company (Trent) Limited
Spirit Pubs Debenture Holdings Limited
Spirit Pubs Parent Limited
Spirit Retail Bidco Limited
Spirit SLB Limited
Springtarn Limited
Steward & Patteson Limited
Stickpad Limited
Telscombe Tavern Limited
The Chef & Brewer Group Limited
The Host Group Limited
The Nice Pub Company Limited
Tom Cobleigh (Inns) Limited
Tom Cobleigh (Trading) Limited
Tom Cobleigh Group Limited
Tom Cobleigh Holdings Limited
Tom Cobleigh Limited
Whitegate Taverns Limited
1. Company is limited by guarantee.
Principal
activity
Non-trading
Holding company
Holding company
Non-trading
Non-trading
Holding company
Holding company
Holding company
Pension trustee
Non-trading
Non-trading
Holding company
Non-trading
Holding company
Non-trading
Holding company
Pension trustee
Non-trading
Holding company
Financing
Holding company
Non-trading
Holding company
Pub retailing
Holding company
Non-trading
Financing
Leasing of public houses
Pub retailing
Administration
Holding company
Procurement
Pub retailing
Holding company
Holding company
Holding company
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Holding company
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Holding company
Holding company
Non-trading
Country of
incorporation
England & Wales
England & Wales
England & Wales
Cayman Islands
Cayman Islands
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Scotland
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Proportion
of voting
rights and
ownership
Holding
n/a
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Preference shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Preference shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Preference shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
n/a
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Held by
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Annual report 2016 GREENE KING PLC
105
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
17 Business combinations
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.
Fair value of assets acquired
Property, plant and equipment
Brand intangibles
Operating leases (intangible assets)
Inventories
Trade receivables
Other receivables/prepayments
Property, plant and equipment held for sale
Cash and cash equivalents
Trade payables
Other payables/accruals
Off-market contract liabilities
Retirement benefit asset
Provisions
Deferred tax
Derivatives
Finance lease
Borrowings
Fair value of net assets acquired
Goodwill
Consideration
The net cash flow impact of the acquisition is:
Special dividend paid to Spirit Pub Company shareholders
Cash acquired
Fair value of debt and finance leases acquired
£m
1,413.4
16.1
168.3
9.0
7.5
33.6
6.0
147.5
(52.9)
(160.7)
(312.7)
2.9
(30.4)
68.7
(165.2)
(22.7)
(799.3)
329.1
434.0
763.1
£m
(43.2)
147.5
104.3
(822.0)
(717.7)
At the interim provisional fair values of assets acquired and liabilities assumed were presented. As a result of the work completed since the interim goodwill
has changed from £456.4m to £434.0m.
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. The goodwill arising on acquisition has been allocated to the operating segments based on the forecast level of synergies expected by operating segment.
The fair value of properties acquired including operating leases was established following a review of properties that was carried out by external 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.
Off-market contract liabilities of £312.7m have been recognised upon acquisition where contracts are at unfavourable terms relative to current market terms.
For leases where the current rentals are below market terms, the related asset is considered to be included within the residual value of the leasehold
pub. For other acquired pubs an off-market liability has been calculated as the difference between the present value of future contracted rentals and the
present value of future market rate rentals. External qualified surveyors were engaged to provide a formal evaluation of current market rentals for the
acquired leased pub assets. Rental growth rates of 2.0–2.5% were taken from market consensus forecasts for the retail sector and a discount rate of 5%
was applied, being the estimated incremental borrowing costs of the acquired business, to arrive at the present value of market rentals.
Brand Intangibles of £16.1m have been recognised to the extent that a format provides a profit benefit versus similar unbranded pubs. Brand intangibles
are being amortised over a useful economic life of 15 years.
Trade receivables acquired have 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 £35.1m; the best estimate of amounts not expected
to be collected is £1.5m and therefore a fair value of £33.6m has been recognised.
Further details on provisions acquired are disclosed in note 26.
106
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 17 Business combinations continued
In the period to 1 May 2016 acquisition related costs of £1.3m have been recognised within exceptional acquisition and integration costs totalling £17.5m
(see note 5), and a further £2.1m of share issue costs have been recognised in 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 £705.1m, pre-exceptional operating profit of £128.3m and profit before tax and exceptional
items of £79.3m.
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 £2,193.6m, pre-exceptional operating profit of £414.6m and profit before tax and exceptional items of £270.6m.
18 Inventories
Raw materials and work in progress
Finished goods and goods for resale
Consumable stores
19 Trade and other receivables
Other receivables
Total non current
Trade receivables
Other receivables
Total current
Trade and other receivables are non-interest bearing.
The ageing analysis of trade receivables is as follows:
Neither past due nor impaired
Past due but not impaired
– Less than 30 days
– 30–60 days
– Greater than 60 days
Trade receivables are shown net of a provision of £5.4m (2015: £4.0m).
20 Cash and cash equivalents
Cash at bank and in hand
Short-term deposits
Liquidity facility reserve (note 23)
Cash and cash equivalents for balance sheet
Bank overdrafts (note 23)
Cash and cash equivalents for cash flow
2016
£m
4.7
34.2
2.4
41.3
2016
£m
0.1
0.1
63.2
19.5
82.7
2016
£m
55.5
3.6
1.0
3.1
2015
£m
4.5
25.4
2.2
32.1
2015
£m
0.1
0.1
50.5
8.4
58.9
2015
£m
47.5
2.2
0.5
0.3
63.2
50.5
2016
£m
155.2
69.0
157.5
381.7
(5.8)
375.9
2015
£m
50.0
2.8
157.5
210.3
—
210.3
Included within cash at bank and in hand and short-term deposits is £109.1m (2015: £34.3m) and £113.0m (2015: £nil) 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 liquidity facility reserve is restricted cash as explained in note 23.
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.
21 Property, plant and equipment held for sale
Property, plant and equipment held for sale
2016
£m
2.3
2015
£m
0.4
At the year end, property, plant and equipment held for sale of £2.3m (2015: £0.4m) represents pubs that are being actively marketed for sale with
expected completion dates within 1 year. The value of property, plant and equipment held for sale represents the expected net disposal proceeds;
further details on the valuation of fair value less costs of disposal are held in note 14. The impairment charge on reclassification to assets held for sale
for these sites was £nil (2015: £nil).
Annual report 2016 GREENE KING PLC
107
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
22 Trade and other payables
Trade payables
Other payables:
– Other taxation and social security costs
– Accruals and deferred income
– Interest payable
Total current
Other payables
Total non-current
2016
£m
112.2
87.2
194.2
30.4
424.0
1.5
1.5
2015
£m
107.2
49.5
108.9
28.5
294.1
1.0
1.0
Trade payables and other payables are non-interest bearing. Interest payable is mainly settled monthly, quarterly or semi-annually throughout the year,
in accordance with the terms of the related financial instrument. Interest payable also includes interest on uncertain tax positions including £5.9m for Sussex.
Prior year accruals and interest payable have been reclassified to more appropriately reflect the nature of the balances recognised.
23 Borrowings
Bank overdrafts
Liquidity facility loan
Bank loans – floating rate
Secured debt:
– Issued by Greene King Finance plc
– Issued by Spirit Issuer plc
Obligations under finance leases
Repayment date
On demand
On demand
2018
2016
Current
£m
Non-current
£m
5.8
157.5
—
—
—
315.0
Total
£m
5.8
157.5
315.0
2005 to 2036
2015 to 2036
2015 to 2084
34.3
11.1
1.6
1,106.6
777.6
20.6
1,140.9
788.7
22.2
2015
Current
£m
Non-current
£m
—
157.5
—
32.4
—
—
—
—
248.3
1,140.8
—
—
Total
£m
—
157.5
248.3
—
1,173.2
—
—
210.3
2,219.8
2,430.1
189.9
1,389.1
1,579.0
Bank overdrafts
Overdrafts are utilised for the day-to-day management of cash. The group has facilities of £25.0m (2015: £25.0m) available with interest linked to base rate.
Bank loans – unsecured
The group has a 5 year revolving credit facility of £460m, of which £315.0m (2015: £248.2m) was drawn down at the year end. Any amounts drawn
down bear interest at a margin above LIBOR, with commitment payments on the undrawn portions. Interest is payable at each renewal date which vary
in maturity. Although any individual draw-downs are repayable within 12 months of the balance sheet date, the group expects to renew this funding and
immediate renewal is available under the £460m facility until June 2018. Final repayment of the total drawn-down balance is due as one payment on the
agreement repayment date.
Greene King secured financing vehicle
The group has issued various tranches of bonds in connection with the securitisation of pubs operated by Greene King Retailing Limited. The bonds
are secured over the properties and their future income streams and were issued by Greene King Finance plc.
The securitised debt issued by Greene King Finance plc consists of the following tranches:
Nominal value
(£m)
113.8
237.9
73.4
258.9
242.9
120.9
99.9
Carrying value (£m)1
2016
112.8
235.7
72.6
257.6
242.9
120.0
99.3
2015
122.0
240.4
84.0
257.4
250.2
119.9
99.3
Interest
Floating
Fixed
Floating
Fixed
Floating
Fixed/floating
Floating
1,147.7
1,140.9
1,173.2
Interest
rate (%) 2
6.11% 2
5.32%
6.09% 2
5.11%
7.76% 2
5.70%
6.92% 2
Last
repayment
period
2031
2031
2021
2034
2033
2034
2036
Average life 3
6.3 years
10.0 years
3.0 years
12.4 years
10.6 years
17.2 years
19.3 years
Tranche
A1
A2
A3
A4
A5
B1
B2
1. Carrying value is net of related deferred finance fees.
2. Includes the effect of interest rate swaps.
3. This assumes notes are held until final maturity.
108
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 23 Borrowings continued
Greene King secured financing vehicle continued
Repayment of nominal is made by quarterly instalments, in accordance with the repayment schedule, over the period shown on the previous page.
Payment of interest is made on quarterly dates for all classes of bond. All of the floating rate bonds are fully hedged using interest rate swaps.
The Class A1, A2, A3, A4 and A5 bonds rank pari passu in point of security and as to payment of interest and principal, and have preferential interest payment
and repayment rights over the Class B bonds. The Class B1 and B2 bonds rank pari passu in point of security, principal repayment and interest payment.
The securitisation is governed by various covenants, warranties and events of default, many of which apply to Greene King Retailing Limited, a group
company. These include covenants regarding the maintenance and disposal of securitised properties and restrictions on its ability to move cash to other
group companies.
Liquidity facility
In 2014 the standby liquidity facility provider to the Greene King secured financing vehicle had its short-term credit rating downgraded below the minimum
prescribed in the facility agreement and as such the group exercised its entitlement to draw the full amount of the facility and hold it in a designated bank
account. The corresponding balance of £157.5m (2015: £157.5m) held in this bank account is included within cash and cash equivalents. The amounts
drawn down can only be used for the purpose of meeting the securitisation’s debt service obligations should there ever be insufficient funds available
from operations to meet such payments. As such these amounts are considered to be restricted cash.
Spirit secured financing vehicle
Following the acquisition of Spirit Pub Company on 23 June 2015, the group now has various secured loan notes issued by Spirit Issuer plc. The secured
loan notes have been secured by way of fixed and floating charges over various property assets of Spirit Pub Company (Managed) Ltd and Spirit Pub
Company (Leased) Ltd.
The securitised debt issued by Spirit Issuer plc consist of the following:
Carrying value (£m)1
Tranche
Class A1
Class A2
Class A3
Class A4
Class A5
Class A6
Class A7
Nominal value
(£m)
29.5
186.6
38.6
207.7
158.5
101.3
58.3
780.5
2016
25.9
181.3
37.2
220.5
166.1
98.3
59.4
788.7
2015
Interest
Floating
Floating
Fixed/floating
Fixed/floating
Fixed/floating
Floating
Fixed/floating
—
—
—
—
—
—
—
—
Interest
rate (%) 2
8.37% 2
9.42% 2
6.13% 2
6.58%
6.49%
8.52% 2
8.48% 2
Last
repayment
period
2026
2029
2019
2025
2032
2036
2036
Expected
average life 3
9.7 years
11.7 years
1.8 years
6.3 years
14.9 years
18.8 years
18.8 years
1. Carrying value includes premium arising from fair value adjustment.
2. Includes the effect of interest rate swaps.
3. This assumes notes are held until final maturity.
Repayment of nominal is made by quarterly instalments, in accordance with the repayment schedule, within the date ranges shown above.
Interest is paid quarterly in arrears on all secured loan notes.
The debenture bonds rank pari passu in point of security and as to payment of interest and principal.
The debenture is governed by various covenants, warranties and events of default, many of which apply to Spirit Pub Company (Managed) Ltd
and Spirit Pub Company (Leased) Ltd, group companies. These include covenants regarding the maintenance and disposal of debenture properties
and restrictions on its ability to move cash to other group companies and utilisation of disposal proceeds.
Obligations under finance leases
Upon acquisition of Spirit Pub Company on 23 June 2015, the group acquired leases of property, plant and equipment, where it substantially has all
the risks and reward of ownership, and which have been classified as finance leases. In the balance sheet a corresponding liability has been included
as a finance lease obligation.
The minimum lease payments under finance leases fall due as follows:
Within 1 year
Within 1 to 5 years
Over 5 years
2016
2015
Minimum
lease
payments
£m
Present
value
of future
obligations
£m
Minimum
lease
payments
£m
Present
value
of future
obligations
£m
1.6
5.3
53.1
60.0
1.6
4.5
16.1
22.2
—
—
—
—
—
—
—
—
Annual report 2016 GREENE KING PLC
109
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
24 Financial instruments
The primary treasury objectives of the group are to identify and manage the financial risks that arise in relation to underlying business needs,
and provide secure and competitively priced funding for the activities of the group. If appropriate, the group uses financial instruments and derivatives
to manage these risks.
The principal financial instruments held for the purpose of raising finance for operations are bank loans and overdrafts, secured bonds, cash and short-term
deposits. Other financial instruments arise directly from the operations of the group, such as trade and other receivables, trade payables and trade loans.
Derivative financial instruments, principally interest rate swaps, are used to manage the interest rate risks related to the group’s operations and financing
sources. No speculative trading in derivative financial instruments is undertaken.
The main risks from the group’s financial instruments are interest rate risk, liquidity risk and credit risk. The policy for managing each of these risks is set
out below.
Interest rate risk
Exposure to changes in interest rates on the group’s borrowings is reviewed with regard to the maturity profile and cash flows of the underlying debt.
The group uses a mixture of fixed and floating interest rate debt with exposure to market interest rate fluctuations primarily arising from the floating
rate instruments. The group operates a policy that no less than 95% of the overall interest exposure should be at a fixed rate. The group enters into
interest rate swaps to manage the exposure. Certain swaps are designated as cash flow hedges at the date of contract included within the accounts,
and tested for effectiveness every 6 months.
In accordance with IFRS 7, the group has undertaken sensitivity analysis on its financial instruments which are affected by changes in interest rates.
This analysis has been prepared on the basis of a constant amount of net debt, a constant ratio of fixed to floating interest rates, and on the basis of the
hedging instruments in place at 1 May 2016 and 3 May 2015. The analysis relates only to balances at these dates and is not representative of the year
as a whole. The following assumptions were made:
– Balance sheet sensitivity to interest rates applies only to derivative financial instruments, as the carrying value of debt and deposits does not change
as interest rates move.
– Gains and losses are recognised within equity or the income statement in line with the accounting policies of the group.
– Cash flow hedges were assumed to be effective or ineffective on the same basis as those as at the year end.
Based on the group’s net position at the year end, a 1% increase or decrease in interest rates would change the group’s profit before tax by
approximately £50.6m (2015: £0.6m) and the group’s OCI by £82.9m (2015: £87.6m).
Whilst cash flow interest rate risk is largely eliminated, the use of fixed rate borrowings and derivative financial instruments exposes the group to fair
value interest rate risk such that the group would not significantly benefit from falls in interest rates and would be exposed to unplanned costs,
such as break costs, should debt or derivative financial instruments be restructured or repaid early.
The percentage of net debt that was fixed as at the year end was 96.1% (2015: 95.5%), in line with the group’s policy of fixing at least 95% of all net debt.
Liquidity risk
The group mitigates liquidity risk by managing cash generated by its operations combined with bank borrowings and long-term debt. The group’s
objective is to maintain a balance between the continuity of funding and flexibility through the use of overdrafts and bank loans. The group also
monitors the maturity of financial liabilities to avoid the risk of a shortage of funds.
The standard payment terms that the group has with its suppliers is 60 days following month end (2015: 60 days following month end).
Excess cash used in managing liquidity is placed on interest-bearing deposit with maturities fixed at no more than 1 month. Short-term flexibility
is achieved through the use of short-term borrowing on the money markets under the group’s revolving credit facility.
The table below summarises the maturity profile of the group’s financial liabilities at 1 May 2016 and 3 May 2015 based on contractual undiscounted
payments including interest.
Period ended 1 May 2016
Interest-bearing loans and borrowings:
– Capital
– Interest
Interest rate swaps settled net
Trade payables and accruals
Finance lease obligations
Off-market contract liabilities
Within 1 year
£m
1–2 years
£m
2–5 years
£m
>5 years
£m
Total
£m
208.8
92.2
301.0
48.9
349.9
318.3
1.6
2.7
48.0
94.3
142.3
44.3
186.6
—
1.6
2.2
511.6
243.5
755.1
134.8
889.9
—
3.7
27.7
1,638.1
671.9
2,406.5
1,101.9
2,310.0
329.7
3,508.4
557.7
2,639.7
—
53.1
—
4,066.1
318.3
60.0
32.6
672.5
190.4
921.3
2,692.8
4,477.0
110
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 24 Financial instruments continued
Liquidity risk continued
Period ended 3 May 2015
Interest-bearing loans and borrowings:
– Capital
– Interest
Interest rate swaps settled net
Trade payables and accruals
Finance lease obligations
Off-market contract liabilities
Within 1 year
£m
1–2 years
£m
2–5 years
£m
>5 years
£m
Total
£m
190.4
55.2
245.6
28.2
273.8
234.3
—
—
508.1
34.8
57.4
92.2
23.7
115.9
—
—
—
115.9
366.7
160.0
526.7
53.7
580.4
—
—
—
996.3
416.1
1,412.4
162.5
1,574.9
—
—
—
1,588.2
688.7
2,276.9
268.1
2,545.0
234.3
—
—
580.4
1,574.9
2,779.3
Credit risk
Financial assets include trade loans, cash and cash equivalents and trade and other receivables. Credit risk is the risk of default by the counterparty to
discharge their obligation and the maximum exposure of the group is the carrying amount of these instruments. The credit risk on cash and cash equivalents
is limited by investment of surplus funds with banks and financial institutions with high credit ratings assigned by international credit agencies.
The policy for third party trading is that all customers who wish to trade on credit terms are subject to regular credit verification procedures.
Receivable balances are also monitored on an ongoing basis and provided against where deemed necessary to limit the exposure to bad debts
to a non-significant level.
There is no significant collateral held and there are no significant concentrations of credit risk within the group.
Financial instruments qualifying for hedge accounting
At 1 May 2016 the group held 2 (2015: 3) interest rate swap contracts for a nominal value of £100m (2015: £135m), designated as a hedge of the cash
flow interest rate risk of the £315.0m (2015: £248.3m) drawn down from the revolving credit facility in the year. The interest rate swaps are held on the
balance sheet as a fair value liability of £34.6m (2015: £32.8m). The cash flows occurred quarterly based a variable rate of interest based on LIBOR.
At 1 May 2016 the group held 5 (2015: 5) interest rate swap contracts for a nominal value of £530.0m (2015: £558.1m), entered into as part of the
securitisation and subsequent securitisation taps. A fair value liability of £214.6m (2015: £204.1m) has been recognised on the balance sheet in respect
of these contracts which are designated cash flow hedges against £530.0m (2015: £558.1m) of variable rate bonds, receiving a variable rate of interest
based on LIBOR and paying a weighted average fixed rate of 7.0% (2015: 7.0%). The contract maturity dates range from September 2021 to March 2036.
Retrospective quantitative hedge effectiveness testing is performed and the bonds and interest rate swaps have the same critical terms excluding credit risk.
Changes in cash flow hedge fair values are recognised in the hedging reserve to the extent that the hedges are effective. The interest rate swaps have
been assessed as highly effective during the period and are expected to remain highly effective over their remaining contract lives. The ineffectiveness
amounting to a £0.3m gain (2015: £0.8m loss) has been recognised within finance costs/income.
Financial instruments not qualifying for hedge accounting
Interest rate swap agreements have been acquired as part of the business combination with Spirit Pub Company which swap the LIBOR interest rate to
a fixed rate of 6.681% on the Class A1, Class A2 and Class A6 notes and, after their respective step-up dates, 4.555% on the Class A3, Class A4, Class A5
and Class A7 notes. The swaps were deemed ineffective hedges and therefore do not qualify for hedge accounting, with movements in their fair value
being recognised in the income statement. The interest rate swaps are held on the balance sheet as a fair value liability of £191.7m (2015: £nil). The cash
flows occurred quarterly based a variable rate of interest based on LIBOR.
The fair value movement from acquisition splits into cash payments made of £21.7m recognised in pre-exceptional finance costs net of amortisation of
fair value on acquisition of £12.3m. The remainder of the fair value movement is recognised as a charge in exceptional finance costs amounting to £39.1m.
Where the nominal value of the derivative exceeds that of the related secured note (for example, due to early repayment of floating rate notes) the
group will seek to eliminate the over-hedging where this is financially practicable. At 1 May 2016, there were £5.7m of interest swaps outstanding on
cancelled floating rate notes which relate to the Spirit secured debt.
Fair values
Set out in the table below is a comparison of carrying amounts and fair values of all of the group’s financial instruments.
The fair values of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced liquidation or sale. The following methods and assumptions were used to estimate the fair values:
Cash and cash equivalents (comprising cash at bank and in hand and short-term deposits) – approximates to the carrying amount stated in the accounts.
Trade receivables – approximates to the carrying amount because of the short maturity of these instruments.
Financial assets – these are carried at amortised cost using the effective interest method and fair value is deemed to be the same as this.
Overdrafts – approximates to the carrying amount because of the short maturity of these instruments.
Long-term loans – based on quoted market prices in the case of the securitised debt; approximates to the carrying amount in the case of the floating
rate bank loans and other variable rate borrowings.
Annual report 2016 GREENE KING PLC
111
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
24 Financial instruments continued
Fair values continued
Interest rate swaps – calculated by discounting all future cash flows by the market yield curve at the balance sheet date and adjusting, where appropriate,
for the group’s and counterparty's credit risk. The changes in credit risk had no material effect on the hedge effectiveness assessment for derivatives
designated in hedge relationships.
Trade payables and accruals – approximates to the carrying amount because of the short maturity of these instruments.
Finance lease obligations and off-market contract liabilities (excludes off-market lease liability) – estimated by discounting future cash flows using rates
currently available for debt on similar terms, credit risk and remaining maturities.
Financial liabilities
Overdraft
Interest-bearing loans and borrowings:
– Secured debt:
Issued by Greene King Finance plc
Issued by Spirit Issuer plc
– Floating rate bank loans
– Liquidity facility loan
Interest rate swaps
Trade payables and accruals
Finance lease obligations
Off-market contract liabilities
Financial assets
Cash
Trade receivables
Liquidity facility reserve
Financial assets
Hierarchical
classification
Fair
value
2016
£m
Carrying
value
2016
£m
Fair
value
2015
£m
Carrying
value
2015
£m
Level 2
5.8
5.8
—
—
Level 1
Level 1
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 3
1,158.0
757.3
315.0
157.5
440.9
318.3
22.2
22.6
1,140.9
788.7
315.0
157.5
440.9
318.3
22.2
22.6
(224.2)
(63.2)
(157.5)
(26.6)
(224.2)
(63.2)
(157.5)
(26.6)
1,247.0
—
248.3
157.5
236.9
216.1
—
—
(52.8)
(50.5)
(157.5)
(30.4)
1,173.2
—
248.3
157.5
236.9
216.1
—
—
(52.8)
(50.5)
(157.5)
(30.4)
Carrying values are stated net of any deferred finance fees which amounted to £6.9m (2015: £9.2m). The carrying values of the secured debt issued
by Spirit Issuer plc includes premium arising from fair value adjustment of £8.2m (2015: £nil).
Hierarchical classification of financial assets and liabilities measured at fair value
IFRS 13 requires that the classification of financial instruments at fair value be determined by reference to the source of inputs used to derive fair value.
The classification uses the following three-level hierarchy:
Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly.
Level 3 – techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.
During the periods ending 1 May 2016 and 3 May 2015 there were no transfers between level 1, 2, or 3 fair value measurements.
Capital risk management
The group aims to maximise shareholder value by maintaining a strong credit rating and a core level of debt which optimises the weighted average cost
of capital (WACC) and shareholder value.
A number of mechanisms are used to manage net debt and equity levels (together referred to as capital) as disclosed on the balance sheet, as
appropriate in light of economic and trading conditions. To maintain or adjust the capital structure, the group may adjust the dividend payment
to shareholders, return capital to shareholders or issue new shares. No changes were made to the objectives, policies or processes during the period.
The group monitors capital using interest cover and several other measures, including fixed charge cover, the ratio of net debt to EBITDA and free cash
flow debt service coverage. Interest cover is calculated by dividing operating profit before exceptional items by net interest on debt before exceptional
items (note 7). For the period to 1 May 2016 interest cover was 3.3x (2015: 3.0x). All covenants in relation to the securitisation vehicles and bank loans
have been fully complied with. The board’s dividend policy is to maintain a minimum dividend cover of two times adjusted basic earnings per share.
112
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 25 Off-market contract liabilities
At 4 May 2014 and 3 May 2015
Acquisitions (note 17)
Unwinding of discount element of provisions
Utilised during the period
At 1 May 2016
Off-market contract liabilities are analysed between current and non-current as follows
Current
Non-current
Off-market
liabilities
£m
—
312.7
12.2
(25.0)
299.9
1 May
2016
£m
22.4
277.5
299.9
3 May
2015
£m
—
—
—
Off-market contract liabilities are recognised where contracts are at unfavourable terms relative to current market terms on acquisition. For leases
where the current rentals are below market terms, the related asset is considered to be included within the residual value of the leasehold pub. For
other acquired pubs an off-market liability has been calculated as the difference between the present value of future contracted rentals and the present
value of future market rate rentals. The liability unwinds against the rental expense so that the income statement charge reflects current market terms
over an average period of 19 years. The remainder of the balance held relates to an unfavourable guarantee contract.
26 Provisions
At 4 May 2014
Unwinding of discount element of provisions
Provided for during the period
Utilised during the period
At 3 May 2015
Acquisitions (note 17)
Unwinding of discount element of provisions
Provided for during the period
Utilised during the period
At 1 May 2016
VAT
provision
£m
Property
leases
£m
—
—
—
—
—
23.0
—
0.4
—
6.5
0.4
0.5
(0.8)
6.6
7.4
0.4
—
(0.4)
Total
£m
6.5
0.4
0.5
(0.8)
6.6
30.4
0.4
0.4
(0.4)
23.4
14.0
37.4
Provisions have been analysed between current and non-current as follows:
Current
Non-current
VAT
provision
1 May
2016
£m
Property
leases
1 May
2016
£m
23.4
—
23.4
1.3
12.7
14.0
Total
1 May
2016
£m
24.7
12.7
37.4
VAT
provision
3 May
2015
£m
—
—
—
Property
leases
3 May
2015
£m
0.5
6.1
6.6
Total
3 May
2015
£m
0.5
6.1
6.6
Property leases
The provision for property leases has been set up to cover operating costs of vacant or loss making premises as well as dilapidation requirements.
Payments are expected to be ongoing on these properties for an average of 15 years (2015: 15 years).
VAT provision
During a previous period Spirit received VAT refunds of £7.0m and £17.9m from HMRC in respect of gaming machines following a ruling involving
The Rank Group plc (Rank) that the application of VAT contravened the EU’s principal of fiscal neutrality. HMRC successfully appealed the decision
in October 2013 and Spirit was therefore required to repay the VAT refund of £7.0m and associated interest of £1.7m. However, HMRC did not seek
to recover the VAT refund of £17.9m and associated interest of £5.5m because it had accepted a guarantee from Spirit that it would only repay this VAT
if Rank’s litigation is finally determined in HMRC’s favour. Rank’s latest appeal was rejected by the Supreme Court in July 2015 and the group is currently
awaiting the outcome of related litigation.
Annual report 2016 GREENE KING PLC
113
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
27 Share capital
Called up, allotted and fully paid
At beginning of period
Issue of share capital – Spirit acquisition
Issue of share capital – share options exercised
At end of period
2016
2015
Number
of issued
shares
m
219.7
89.1
0.4
309.2
Share
capital
£m
27.5
11.1
—
38.6
Number
of issued
shares
m
219.0
—
0.7
219.7
Share
capital
£m
27.4
—
0.1
27.5
Details of options granted and outstanding are included in note 8.
28 Reserves
Share premium account
Share premium represents the excess of proceeds received over the nominal value of new shares issued.
Merger reserve
The merger reserve represents capital contributions received and amounts recognised on the acquisition of Spirit Pub Company Limited being the difference
between the value of the consideration and the nominal value of the shares issued as consideration.
Capital redemption reserve
Capital redemption reserve arose from the purchase and cancellation of own share capital, and represents the nominal amount of the share capital cancelled.
Hedging reserve
Hedging reserve adjustments arise from the movement in fair value of the group’s derivative instruments used as an effective hedge, in line with the
accounting policy disclosed in note 1. Amounts recycled to income are included within finance costs in the income statement.
Own shares
Own shares relates to shares held in treasury, held by the employee benefit trust or purchased to fulfil awards made under the deferred share bonus
scheme. At 1 May 2016 nil shares (2015: 0.13m) were held in treasury, 0.04m shares (2015: 0.61m) were held by the employee benefit trust and nil
(2015: nil) were held to fulfil awards under the deferred share bonus scheme. The market value at 1 May 2016 of the treasury shares was £nil (2015: £1.1m),
of the shares held by the employee benefit trust was £0.3m (2015: £5.0m) and of the shares held for the deferred share bonus scheme was £nil (2015: £nil).
The employee benefit trust is independently managed and has purchased shares in order to satisfy outstanding employee share options and potential
awards under the long-term incentive plan.
At the year end nil (2015: nil) treasury shares and nil (2015: 0.31m) shares in the employee benefit trust were allocated to meet awards under the long-term
incentive plan.
A transfer of £4.7m (2015: £5.6m) from own shares to retained earnings has been made to reflect transfers to satisfy awards under the long-term
incentive plan and options exercised under the executive share option plan and reflects the weighted average cost of own shares.
During the period nil (2015: nil) shares were repurchased at a cost of £nil (2015: £nil) to fulfil awards made under the deferred share bonus scheme
with nil (2015: 0.04m) shares transferred to individuals to satisfy awards. The employee benefit trust purchased nil shares (2015: 0.5m) at a cost of £nil
(2015: £4.2m) and 0.57m (2015: 0.82m) shares were transferred to satisfy awards under the long-term incentive plan.
Goodwill
The cumulative amount of goodwill written off to retained earnings in respect of acquisitions made prior to May 1998 amounts to £89.7m.
29 Working capital and non-cash movements
Increase in inventories
Decrease/(increase) in trade and other receivables
(Decrease)/increase in trade and other payables
Decrease in off-market contract liabilities
Decrease in provisions
Other non-cash movement
Share-based payment expense
Difference between defined benefit pension contributions paid and amounts charged
Exceptional items
Working capital and other movements
2016
£m
(0.2)
4.9
(28.7)
(25.0)
—
3.1
6.2
(10.4)
(25.0)
(75.1)
2015
£m
(1.6)
(1.4)
16.8
—
(0.3)
—
3.7
(7.0)
(5.6)
4.6
114
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 30 Analysis of and movements in net debt
Cash at bank and in hand and short term deposits1
Liquidity facility reserve1
Overdrafts
Current portion of borrowings
Liquidity facility loan
Non-current portion of borrowings
Closing net debt
1. Included in cash and cash equivalents on the balance sheet.
Movement in net debt
Net increase in cash and cash equivalents
Proceeds – advances of borrowings
Repayment of principal
Debt acquired through acquisitions (note 17)
Decrease in net debt arising from cash flows
Other non-cash movements
Decrease in net debt
Opening net debt
Closing net debt
2016
£m
224.2
157.5
(5.8)
(47.0)
(157.5)
(2,219.8)
2015
£m
52.8
157.5
—
(32.4)
(157.5)
(1,389.1)
(2,048.4)
(1,368.7)
2016
£m
165.6
(65.0)
44.0
(822.0)
(677.4)
(2.3)
2015
£m
7.9
—
61.1
—
69.0
(2.1)
(679.7)
(1,368.7)
66.9
(1,435.6)
(2,048.4)
(1,368.7)
31 Financial commitments
The group has entered into commercial leases on certain properties and items of plant and machinery. The terms of the leases vary but typically
on inception a property lease will be for a period of up to 30 years and plant and machinery will be for up to 6 years. Most property leases have
an upwards-only rent review based on open market rents at the time of the review.
Future minimum rentals payable under non-cancellable operating leases:
Within 1 year
Between 1 and 5 years
After 5 years
2016
£m
81.9
315.2
1,281.7
1,678.8
2015
£m
12.9
43.9
134.2
191.0
Operating leases for which an off-market liability has been recognised on acquisition has been included in the above.
The group leases part of its licensed estate and other non-licensed properties to tenants. The majority of lease agreements have terms of between
6 months and 25 years and are classified for accounting purposes as operating leases. Most of the leases with terms of over 3 years include provision
for rent reviews on either a 3 year or 5 year basis.
Future minimum lease rentals receivable under non-cancellable operating leases are as follows:
Within 1 year
Between 1 and 5 years
After 5 years
Future minimum lease rentals include £1.5m (2015: £2.9m) receivable in respect of non-cancellable subleases.
2016
£m
47.0
145.0
133.1
325.1
2015
£m
28.5
81.8
54.6
164.9
Annual report 2016 GREENE KING PLC
115
FINANCIAL STATEMENTS Notes to the accounts continued
For the fifty-two weeks ended 1 May 2016
32 Related party transactions
No transactions have been entered into with related parties during the period.
Greene King Finance plc and Spirit Issuer plc are structured entities set up to raise bond finance for the group, and as such are deemed to be related parties.
The results and financial position of the entities have been consolidated.
Compensation of directors and other key management personnel of the group
Short-term employee benefits (including national insurance contributions)
Post-employment pension and medical benefits
Termination benefits
Share-based payments
2016
£m
4.9
0.5
1.0
2.3
8.7
2015
£m
4.6
0.6
0.4
2.1
7.7
Key management personnel
Key management personnel are deemed to be those employees who are directors of Greene King plc or its subsidiaries.
Directors’ interests in an employee share incentive plan
Details of the options held by executive members of the board of directors are included in the remuneration report. No options have been granted
to the non-executive members of the board of directors under this scheme.
33 Post balance sheet events
Final dividend
A final dividend of 23.6p per share (2015: 21.8p) amounting to a dividend of £73.0m (2015: £67.1m) was proposed by the directors at their meeting
on 28 June 2016. These financial statements do not reflect the dividend payable.
Financing
On 26 May 2016 the group issued a £300m A6 bond at a coupon of 4.0643%, taking the outstanding nominal value of bonds issued by Greene King Finance
plc to £1,447.7m. These bonds are secured against 1,543 pubs in the Greene King estate which had a market value of £2,178.0m and a carrying value of
£1,637.9m. Proceeds of £116.6m were used to meet the mark to market liability in respect of interest swaps with a nominal value of £302.9m.
34 Contingent liabilities
The group has provided guarantees totalling £0.8m at 1 May 2016 (2015: £1.0m) in respect of free trade customers’ bank borrowings.
116
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS Company balance sheet
As at 1 May 2016
Registered number: 24511
Fixed assets
Investments
Current assets
Debtors
Amounts due from subsidiaries
Prepayment
Cash
Creditors: amounts falling due within one year
Bank overdraft
Derivative financial instruments
Income tax payable
Other creditors
Net current liabilities
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Borrowings
Derivative financial instruments
Net assets
Capital and reserves
Called up share capital
Share premium account
Merger reserve
Revaluation reserve
Hedging reserve
Other reserve
Own shares
Retained earnings
Equity attributable to owners of the parent
Signed on behalf of the board on 28 June 2016.
P Yea
Director
R Anand
Director
As at
1 May 2016
£m
As at
3 May 2015
£m
Note
39
3,381.9
2,597.9
270.7
—
—
(4.4)
—
(6.4)
68.3
2.1
11.7
—
(1.0)
(1.5)
41
40
(1,921.1)
(1,722.9)
(1,661.2)
(1,643.3)
1,720.7
954.6
41
41
42
43
43
43
43
43
(315.0)
(248.2)
—
(0.2)
1,405.7
706.2
38.6
261.0
752.0
2.5
—
93.9
(0.2)
257.9
1,405.7
27.5
259.3
—
2.5
(1.2)
93.9
(4.9)
329.1
706.2
Annual report 2016 GREENE KING PLC
117
FINANCIAL STATEMENTS
Company statement of changes in equity
For the fifty-two weeks ended 1 May 2016
At 4 May 2014
Profit for the period
Other comprehensive income:
Cash flow hedges – loss taken
to equity
Total comprehensive income
Issue of ordinary share capital
Release of shares
Repurchase of shares
Share-based payments
Equity dividends paid
At 3 May 2015
Profit for the period
Other comprehensive income:
Cash flow hedges – loss taken
to equity
Total comprehensive income
Issue of ordinary share capital
Transaction costs for share issue
Release of shares
Share-based payments
Equity dividends paid
Called up
share capital
£m
27.4
—
Share
premium
account
£m
256.6
—
—
—
0.1
—
—
—
—
—
—
2.7
—
—
—
—
27.5
—
259.3
—
—
—
11.1
—
—
—
—
—
—
1.7
—
—
—
—
Merger
reserve
£m
Revaluation
reserve
£m
—
—
—
—
—
—
—
—
—
—
—
—
—
752.0
—
—
—
—
2.5
—
—
—
—
—
—
—
—
2.5
—
—
—
—
—
—
—
—
At 1 May 2016
38.6
261.0
752.0
2.5
Hedging
reserve
£m
(1.9)
—
0.7
0.7
—
—
—
—
—
(1.2)
—
1.2
1.2
—
—
—
—
—
—
Other
reserve
£m
93.9
—
—
—
—
—
—
—
—
93.9
—
—
—
—
—
—
—
—
Own
shares
£m
(6.3)
—
—
—
—
5.6
(4.2)
—
—
(4.9)
—
—
—
—
—
4.7
—
—
Retained
earnings
£m
169.1
225.3
Total
£m
541.3
225.3
—
0.7
225.3
226.0
—
(5.6)
—
3.1
2.8
—
(4.2)
3.1
(62.8)
(62.8)
329.1
706.2
22.7
22.7
—
22.7
—
(2.1)
(4.7)
6.2
1.2
23.9
764.8
(2.1)
—
6.2
(93.3)
(93.3)
93.9
(0.2)
257.9
1,405.7
118
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS Notes to the company accounts
For the fifty-two weeks ended 1 May 2016
35 Accounting policies
Basis of accounting and presentation
The financial statements have been prepared under the historical cost convention and in accordance with applicable UK accounting standards.
The company meets the definition of a qualifying entity under FRS 100 Application of Financial Reporting Requirements as issued by the Financial
Reporting Council (FRC). Therefore in the period ended 1 May 2016, the company has transitioned from reporting under UK GAAP to reporting
under FRS 101 Reduced Disclosure Framework. The financial statements have therefore been prepared in accordance with FRS 101. This transition
is not considered to have had a material impact on the financial statements.
The company has taken advantage of the following disclosure exemptions under FRS 101:
– the requirements of IAS 7 Statement of Cash Flows
– the requirements of IAS 8 IFRSs Issued but not Effective
– the requirements of IFRS 2 Share-based Payments
– the requirements of IFRS 7 Financial Instruments: Disclosures
– the requirements of IFRS 13 Fair Value Measurements
– the requirements of IAS 24 Related Party Disclosures, to present key management personnel compensation and intragroup transactions including
wholly owned subsidiaries
– the requirements of IAS 1 Presentation of Financial Statements, to present certain comparative information and capital management disclosures
– the requirements of IFRS 1, to present an opening statement of financial position when adopting FRS 101 for the first time
There were no transitional adjustments in the transition from UK GAAP to FRS 101 in the opening balance sheet as at 5 May 2014, and therefore
no third balance sheet has been prepared.
The basis for all of the above exemptions is because equivalent disclosures are included in the consolidated financial statements of the group in which
the entity is consolidated.
Investments
Investments in subsidiaries are recorded at cost less impairment and held as fixed assets on the balance sheet. The carrying value of investments
is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. On transition to FRS 101,
the previous GAAP carrying amount at the date of transition was regarded as deemed cost.
Taxation
Corporation tax payable is provided on taxable profits using the tax rates and laws that have been enacted or substantively enacted by the balance
sheet date.
Financial instruments
Financial instruments are recognised when the company becomes party to the contractual provisions of the instrument and are de-recognised when the
company no longer controls the contractual rights that comprise the financial instrument, normally through sale or when all cash flows attributable to
the instrument are passed to an independent third party.
Borrowings
All loans and borrowings are initially recognised at fair value of the consideration received, net of issue costs. After initial recognition, interest-bearing
loans and borrowings are measured at amortised cost using the effective interest method.
Derivative financial instruments and hedge accounting
The company uses interest rate swaps to hedge its exposure to interest rate fluctuations on its variable rate borrowings.
Interest rate swaps are initially measured at fair value, if any, and carried on the balance sheet as an asset or liability. Subsequent measurement is at fair
value determined by reference to market values for similar instruments. If a derivative does not qualify for hedge accounting the gain or loss arising on
the movement in fair value is recognised in the profit and loss account.
Annual report 2016 GREENE KING PLC
119
FINANCIAL STATEMENTS Notes to the company accounts continued
For the fifty-two weeks ended 1 May 2016
35 Accounting policies continued
Hedge accounting
To qualify for hedge accounting the hedge relationship must be designated and documented at inception. Documentation must include the company’s
risk management objective and strategy for undertaking the hedge and formal allocation to the item or transaction being hedged. The company also
documents how it will assess the effectiveness of the hedge and carries out assessments on a regular basis to determine whether it has been, and is
likely to continue to be, highly effective.
Hedges can be classified as either fair value (hedging exposure to changes in fair value of an asset or liability) or cash flow (hedging the variability
in cash flows attributable to an asset, liability, or forecast transaction). The company uses its interest rate swaps as cash flow hedges.
For these cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective
portion is recognised in the income statement. Amounts taken to equity are transferred to the profit and loss account when the hedged transaction
affects the income statement.
When a hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting, amounts previously recognised
in equity are held there until the previously hedged transaction affects profit or loss. If the hedged transaction is no longer expected to occur, the
cumulative gain or loss recognised in equity is immediately transferred to the income statement.
Own shares
Own shares consist of treasury shares and shares held within an employee benefit trust. The company has an employee benefit trust for the granting
of shares to applicable employees.
Own shares are recognised at cost as a deduction from equity shareholders’ funds. Subsequent consideration received for the sale of such shares is also
recognised in equity, with any difference between the sale proceeds and the original cost being taken to retained earnings. No gain or loss is recognised
in the financial statements on transactions in treasury shares.
Share-based payments
Certain employees and directors receive equity-settled remuneration, whereby they render services in exchange for shares or rights over shares.
The fair value of the shares and options granted is measured using a Black-Scholes model, at the date at which they were granted. No account is taken
in the fair value calculation of any vesting conditions (service and performance), other than market conditions (performance linked to the price of the
shares of the company). Any other conditions that are required to be met in order for an employee to become fully entitled to an award are considered
non-vesting conditions. Like market performance conditions, non-vesting conditions are taken into account in determining the grant date fair value. The
fair value of shares and options granted is recognised as an employee expense with a corresponding increase in equity spread over the period in which
the vesting conditions are fulfilled ending on the relevant vesting date. The cumulative amount recognised as an expense reflects the extent to which the
vesting period has expired, adjusted for the estimated number of shares and options that are ultimately expected to vest. The periodic charge or credit
is the movement in the cumulative position from beginning to end of that period.
No expense is recognised for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where
awards include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting condition is
satisfied, provided that all other performance and/or service conditions are satisfied.
Significant accounting judgments and estimates
The preparation of financial statements requires management to make judgments, estimates and assumptions in the application of accounting policies
that affect reported amounts of assets and liabilities, income and expense. The company bases its estimates and judgments on historical experience and
other factors deemed reasonable under the circumstances, including any expectations of future events. Actual results may differ from these estimates.
No estimates and judgments were considered to be significant.
36 Profit for the period
No income statement is presented for the company as permitted by section 408 of the Companies Act 2006. The profit after tax for the period is
£22.7m (2015: £225.3m).
37 Auditor’s remuneration
Auditor’s remuneration in respect of the company audit was £16,500 (2015: £16,500). The figures for auditor’s remuneration for the company required
by regulation 5(1)(b) of the Companies Regulations 2008 are not presented here as the group accounts comply with this regulation on a consolidated basis.
120
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS 38 Directors’ remuneration and employee costs
Details of directors’ remuneration are contained in the directors’ remuneration report on pages 59 to 64. The company has no employees other
than directors and the directors are not remunerated through this company. Details of share options issued by the company are given in note 8.
39 Investments
Cost at 4 May 2014
Share-based payment awards to employees of subsidiaries
Cost at 3 May 2015
Additions
Share-based payment awards to employees of subsidiaries
Cost at 1 May 2016
Impairment at 4 May 2014
Impairment of non-trading subsidiaries
Impairment at 3 May 2015 and 1 May 2016
NBV at 1 May 2016
NBV at 3 May 2015
NBV at 4 May 2014
Principal subsidiaries
For a full list of all subsidiaries see note 16.
40 Other creditors
Accruals
Amounts owed to subsidiaries
Investments in
subsidiaries
£m
Loans to
subsidiaries
£m
1,579.8
3.1
1,582.9
777.8
6.2
1,038.2
—
1,038.2
—
—
Total
£m
2,618.0
3.1
2,621.1
777.8
6.2
2,366.9
1,038.2
3,405.1
—
(23.2)
(23.2)
—
—
—
—
(23.2)
(23.2)
2,343.7
1,559.7
1,579.8
1,038.2
1,038.2
1,038.2
3,381.9
2,597.9
2,618.0
2016
£m
2.3
1,918.8
1,921.1
2015
£m
16.7
1,706.2
1,722.9
Interest on amounts owed to and from group undertakings accrues at a rate of LIBOR + 1.0% and is payable at interim and year-end dates.
41 Borrowings
Bank loans – floating rate
Within
one year
£m
2016
After
one year
£m
Total
£m
Within
one year
£m
2015
After
one year
£m
Total
£m
—
315.0
315.0
—
248.2
248.2
At 1 May 2016 the company held 1 (2015: 2) interest rate swap contract to hedge cash flow interest rate risk related to floating rate debt. The swap
had a nominal value of £40m (2015: £75m) and is held on the balance sheet as a net fair value liability of £nil (2015: £1.2m). The term of the swap ends
June 2016.
Bank loans due after 1 year are repayable as follows:
Due between 2 and 5 years
2016
£m
315.0
2015
£m
248.2
Although the drawdown is repayable within 12 months of the balance sheet date, immediate renewal is available until June 2018 (2015: June 2018) for
the facility.
Annual report 2016 GREENE KING PLC
121
FINANCIAL STATEMENTS Notes to the company accounts continued
For the fifty-two weeks ended 1 May 2016
42 Allotted and issued share capital
Allotted, called up and fully paid
Ordinary shares of 12.5p each
309.2m shares (2015: 219.7m)
2016
£m
2015
£m
38.6
27.5
Further information on share capital is given in note 27. Details of options granted and outstanding are included in note 8.
43 Reserves
Share premium account
Share premium represents the excess of proceeds received over the nominal value of new shares issued.
Merger reserve
The merger reserve represents capital contributions received and amounts recognised on the acquisition of Spirit Pub Company Limited being the difference
between the value of the consideration and the nominal value of the shares issued as consideration.
Other reserve
The other reserve consists of a £3.3m (2015: £3.3m) capital redemption reserve arising from the purchase of own share capital and £90.6m (2015: £90.6m)
arising from the transfer of revalued assets to other group companies and will only be realised when the related assets are disposed of by the group.
Hedging reserve
Hedging reserve adjustments arise from the movement in fair value of the company’s derivative instruments used as an effective hedge, in line
with the accounting policy disclosed in note 35.
Own shares
Own shares relates to shares held in treasury and by the employee benefit trust. Movement in own shares is described in note 28.
44 Contingent liabilities
The company has provided a guarantee to the Greene King Pension Scheme in respect of the payment obligations to the scheme of its subsidiaries
Greene King Services Limited and Belhaven Brewery Company Limited. In the event that these obligations are not met the company will become liable
for amounts due to the pension scheme; such an event is not considered probable.
Details of the group’s pension schemes are included in note 9.
45 Post balance sheet events
Final dividend
A final dividend of 23.6p per share (2015: 21.8p) amounting to a dividend of £73.0m (2015: £67.1m) was proposed by the directors at their meeting
on 28 June 2016. These financial statements do not reflect the dividend payable.
122
GREENE KING PLC Annual report 2016
FINANCIAL STATEMENTS Group financial record
Income statement
Revenue
Operating profit before exceptionals
Profit before taxation and exceptionals
Profit before taxation
Basic earnings per share1
Adjusted basic earnings per share1
Adjusted dividend per share1
Adjusted operating profit/revenue
Adjusted tax expense/profit before tax
Adjusted interest cover (times)
Adjusted dividend cover (times)2
Balance sheet
Property, plant and equipment
Intangibles
Goodwill
Financial assets
Property, plant and equipment held for sale
Working capital
Derivatives
Off-market contract liabilities
Provisions
Net debt
Net assets
Gearing
Cash flow and investment
EBITDA before exceptionals
Cash inflow from operations
Interest, tax and dividends
Capital expenditure
Proceeds from sales of property, plant and equipment
Trade loans and investments
Acquisitions
Other
(Increase)/decrease in debt
2016
(52 weeks)
£m
2,073.0
392.2
256.5
189.8
64.4p
69.9p
32.1p
18.9%
19.3%
2.9
2.2
2015
(52 weeks)
£m
1,315.3
256.2
168.5
118.2
40.9p
61.0p
29.8p
19.5%
20.9%
2.9
2.1
2014
(53 weeks)
£m
1,301.6
265.6
173.1
105.2
44.2p
61.4p
28.4p
20.4%
23.0%
3.0
2.1
2013 3
(52 weeks)
£m
1,194.7
248.2
158.2
111.0
44.1p
55.6p
26.6p
20.8%
24.0%
2.9
2.1
2012 3
(52 weeks)
£m
1,140.4
236.2
147.2
125.1
46.0p
51.3p
24.8p
20.7%
25.0%
2.7
2.1
£m
£m
£m
£m
£m
3,671.3
174.6
1,121.9
26.6
2.3
(303.7)
(440.9)
(299.9)
(30.2)
(2,048.4)
2,235.4
—
700.9
30.4
0.4
(236.4)
(236.9)
—
(96.2)
(1,368.7)
2,169.7
—
703.8
32.8
81.7
(198.6)
(172.4)
—
(118.7)
(1,435.6)
1,873.6
1,028.9
1,062.7
109%
133%
135%
2,211.1
—
724.8
34.1
8.4
(174.2)
(239.2)
—
(143.1)
(1,450.4)
971.5
149%
2,191.3
—
729.3
39.0
6.2
(168.6)
(200.8)
—
(157.9)
(1,493.2)
945.3
158%
£m
£m
£m
£m
£m
496.9
421.8
(270.3)
(194.1)
82.6
0.7
—
(720.4)
(679.7)
319.0
323.6
(189.1)
(160.5)
94.0
2.4
—
(3.5)
66.9
329.7
325.2
(179.6)
(169.6)
38.4
1.3
—
(0.9)
14.8
306.5
312.5
(170.7)
(123.6)
28.0
3.0
(0.9)
(5.5)
42.8
292.0
282.0
(167.1)
(126.8)
29.9
2.2
(70.8)
(32.4)
(83.0)
1. Adjusted earnings per share, operating profit, taxation, interest cover and dividend cover exclude the effect of exceptional items.
2. 2014 assumes adjusted earnings per share on a 52 week basis.
3. 2012–2013 restated for the impact of IAS 19(R).
Annual report 2016 GREENE KING PLC
123
SHAREHOLDER INFORMATION Shareholder information
Financial calendar
Ex-dividend date
Record date for final dividend
Annual general meeting
Payment of final dividend
Announcement of interim results
Payment of interim dividend
Preliminary announcement of the 2016/17 results
Registrars
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Telephone: 0871 664 03001
Fax:
Email:
Website: www.capitaassetservices.com
01484 601512
shareholder.services@capita.co.uk
11 August 2016
12 August 2016
9 September 2016
12 September 2016
30 November 2016
January 2017
June 2017
1. Calls cost 10p per minute plus network extras; lines are open 8.30am to 5.30pm,
Monday to Friday.
E-communications
To register to receive shareholder communications from the company
electronically, visit www.greeneking-shares.com and either log in or click
on ‘register new user’ and follow the instructions.
By registering your email address you will receive emails with a web link
to information posted on the company's website, including the report
and accounts, notice of meetings and other information communicated
to shareholders.
Indirect investors' information rights
Beneficial owners of shares held on their behalf by a different registered
holder now have certain information rights regarding Greene King. They
have the right to ask their registered holder to nominate them to receive
all non-personalised information distributed to shareholders, in accordance
with the provisions of section 146 of the Companies Act 2006.
Should you wish to be nominated to receive information from Greene King
directly, please contact your registered holder, who will need to notify our
registrars, Capita Asset Services, accordingly. Please note that, once nominated,
beneficial owners of shares must continue to direct all communications
regarding those shares to the registered holder of those shares rather
than to the registrars or to Greene King directly.
Company secretary and registered office
Lindsay Keswick
Westgate Brewery
Bury St Edmunds
Suffolk IP33 1QT
Telephone: 01284 763 222
Fax:
01284 706 502
Website: www.greeneking.co.uk
Share dealing services
Stocktrade
Telephone: 0131 240 0400
Redmayne Bentley
Moseley's Farm Offices
Fornham All Saints
Bury St Edmunds
Suffolk IP28 6JY
Telephone: 01284 723 761
124
GREENE KING PLC Annual report 2016
Capita Share Dealing Services
Telephone: +44 (0)371 664 04451
Website: www.capitadeal.com
1. Calls are charged at the standard geographic rate and will vary by provider.
Calls from outside the UK are charged at the applicable international rate.
Lines are open 8.00am to 4.30pm, Monday to Friday.
Capital gains tax
For the purpose of computing capital gains tax, the market value of the
ordinary shares on 31 March 1982, after adjustment for the capitalisation
issues in 1980 and 1982, was 72.5625p. After take-up of the rights issue
in July 1996, the March 1982 value becomes 129.6875p. With the take-up
of the rights issue in May 2009, the March 1982 value becomes 182.3046875p.
Shareholder vouchers
We are pleased to offer shareholders with 100 or more shares in the
company a booklet of discount vouchers for use across our retail pubs
and restaurants. Those holding shares in their own name will receive the
vouchers directly. If you hold shares in a nominee account please contact
your nominee provider to obtain a set of vouchers. Unfortunately, we are
not able to deal with individual requests for vouchers from underlying
beneficiaries. Please visit www.findaproperpub.co.uk for details of the
participating outlets.
Unsolicited communication
Please note that we will never contact our shareholders by telephone.
If you receive an unsolicited call from anyone purporting to be from
or calling on behalf of Greene King, please do not disclose any of your
personal details to the caller. You can find out more information about
investment scams and how to protect yourself and report any suspicious
telephone calls from the Financial Conduct Authority (FCA) by visiting
their website (www.fca.org.uk) or contacting them on 0800 111 6768.
The FCA advises that if it sounds too good to be true, it probably is.
Corporate advisers
Financial advisers
Lazard & Co. Limited
50 Stratton Street
London W1J 8LL
Joint stockbrokers
Deutsche Bank AG London
Winchester House
1 Great Winchester Street
London EC2N 3EQ
Citigroup Global Markets Limited
Citigroup Centre
33 Canada Square
Canary Wharf
London E14 5LB
Auditor
Ernst & Young LLP
1 More London Place
London SE1 2AF
Solicitors
Linklaters
One Silk Street
London EC2Y 8HQ
SHAREHOLDER INFORMATION Glossary
EBITDA – Earnings before interest, tax, depreciation, amortisation and
exceptional items. Calculated by taking operating profit before exceptional
items and adding back depreciation.
Fixed charge cover – Calculated by dividing EBITDAR (operating profit
before depreciation, rent and exceptional items) less maintenance capex
by the sum of interest and rent.
Free cash flow – Movement in net debt due to operating cash flows after
interest payments, tax payments, core capex and dividends, but excluding
exceptional items, acquisitions, disposals and share movements.
LFL – Like for like. LFL performance is calculated against a comparable
period in the prior year for pubs that were trading in both periods. Figures
for the Spirit business and combined group business therefore take account
of Spirit trading prior to the acquisition date. Pub Company like-for-like sales
include revenue from the sale of drink, food and accommodation.
NPS – Net promoter score. Calculated by asking customers how likely they
are to recommend the pub on a scale of 0–10 (10 being the most favourable).
The percentage of responses where the score is 0–6 (brand detractors) is
subtracted from the percentage of responses where the score is 9 or 10
(brand promoters) to give the NPS. Scores of 7 or 8 (passive responses)
are ignored.
OBV – Own-brewed volume. The volume of beer brewed at our
Greene King and Belhaven breweries sold in the period.
ROCE – Return on capital employed. Calculated by dividing pre-exceptional
operating profit by average capital employed. Capital employed is defined as
total net assets excluding deferred tax balances, derivatives, post-employment
liabilities and net debt.
Core capex – Cash outflow in respect of ongoing development and
maintenance capital investment on pubs in the group’s estate. Core capex
excludes integration capex, investment in the brand optimisation programme
and investments in single-site acquisitions and new-build developments.
Printed by Park Communications on FSC® certified paper. Park is an EMAS
certified company and its Environmental Management System is certified
to ISO 14001. 100% of the inks used are vegetable oil based, 95% of press
chemicals are recycled for further use and, on average 99% of any waste
associated with this production will be recycled. This document is printed
on Arcoprint, a paper certified by the FSC®. The pulp used in this product
is bleached using an elemental chlorine free (ECF) process.
Design Portfolio is committed to planting
trees for every corporate communications
project, in association with Trees for Cities.
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Greene King plc
Registered in England No. 24511
Registered office
Westgate Brewery
Bury St Edmunds
Suffolk
IP33 1QT
Telephone: 01284 763222
www.greeneking.co.uk