A SLICE OF OUR LIFE ANNUAL REPORT & ACCOUNTS 2005 Fernwood House, Clayton Road, Jesmond, Newcastle upon Tyne NE2 1TL. www.greggs.plc.uk G R E G G S p l c A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 5 Financial Highlights Turnover Pre-tax profits Post-tax profits Shareholders’ funds Capital expenditure Earnings per share Dividend per ordinary share 2005 £’m 533.4 50.2 34.1 181.5 41.7 Pence 282.1 106.0 Financial calendar Announcement of results and dividends Half year Full year Dividends Interim Final Annual report posted to shareholders Annual General Meeting 2004 £’m 504.2 47.8 32.3 157.2 25.1 Pence 270.5 96.0 Early August Early March Mid October Late May Early April 10 May 2006 EPS DIVIDEND Nationwide Coverage GREGGS SHOP NUMBERS 2005 2004 Scotland North East Cumbria Yorkshire North West Midlands South West South East GREGGS 147 117 46 128 133 153 107 267 139 114 49 119 129 144 102 249 BAKERS OVEN SHOP NUMBERS Bakers Oven Scotland Bakers Oven North Bakers Oven Midlands Bakers Oven South 2005 2004 18 48 85 65 19 48 84 63 BAKERS OVEN 216 214 Greggs Belgium 5 4 1,098 1,045 TOTAL 1,319 1,263 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 74 75 Contents Contents 3 MISSION AND VALUES 4 8 CHAIRMAN’S STATEMENT MANAGING DIRECTOR’S REPORT 16 DIRECTORS’ REPORT 24 STATEMENT OF DIRECTORS’ RESPONSIBILITIES 25 REPORT OF THE INDEPENDENT AUDITORS 27 CONSOLIDATED INCOME STATEMENT 27 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE 27 PARENT COMPANY STATEMENT OF RECOGNISED INCOME AND EXPENSE 28 CONSOLIDATED BALANCE SHEET 29 PARENT COMPANY BALANCE SHEET 30 CONSOLIDATED STATEMENT OF CASHFLOWS 31 PARENT COMPANY STATEMENT OF CASHFLOWS 32 NOTES TO THE CONSOLIDATED ACCOUNTS 66 DIRECTORS’ REMUNERATION REPORT 73 CORPORATE SOCIAL RESPONSIBILITY 74 TEN YEAR HISTORY 74 DIRECTORS & ADVISERS 75 SHOP ALLOCATION Pence 290 280 270 260 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 Mission, vision and values Our Business Greggs plc is the UK’s leading retailer specialising in sandwiches, savouries and other bakery-related products, with a particular focus on takeaway food and catering. We continue to show significant growth and now have over 1,300 retail outlets, trading under the Greggs and Bakers Oven brands. Our Vision and Purpose Our vision is to be Europe’s finest bakery-related retailer. Our purpose is the growth and development of a thriving business, Enjoyable Experience: we will deliver customer satisfaction by offering great-tasting food at unbeatable value to the highest standards of food safety. This will be achieved from shops that provide friendly and efficient service in attractive surroundings. Business Excellence: our people will seek continuous improvement in their areas of responsibility, enabling them to make a real and lasting contribution to the objectives of the Company. Challenging Targets: we will strive to achieve a turnover of £1 billion by 2010 through continued core growth and the acquisition of new units, taking us to over 1,700 shops. operating with integrity, for the benefit and enjoyment of our Caring for the Community: our continued emphasis on social people, customers, shareholders and the wider community. Our Strategy Our people will be enabled, within overall guidance from the centre, to work towards the successful attainment of world-class standards. To achieve this, the focus will be on: A Great Place to Work: we will place major emphasis on responsibility will encourage even greater involvement in local charity activities and social projects, and a growing focus on protecting the environment. Our Values As a people-focused business, we aim to be enthusiastic and supportive in all that we do, open, honest and appreciative, and to treat everyone with fairness, consideration and respect. promoting a culture that encourages personal development, leadership qualities and creativity. This will be supported by Our Culture working conditions that meet the needs of our present and We are achievers! Working hard in a friendly and informal way, future people. where everyone matters. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 2 3 As expected, we made modest progress this year in the face of an increasingly challenging trading environment and substantial cost pressures in the second half, particularly in energy. This is the Group’s fourteenth consecutive year of profit, earnings and dividend increases, and our strategy remains focused on the delivery of continued growth in the longer term. Derek Netherton Chairman “We are extremely proud of the quality of the beef we supply to Greggs.” Commitment to quality, always CHAIRMAN’S STATEMENT RESULTS Group sales for the 52 weeks ended 31 December 2005 increased (2004: 96.0 pence). This is a rise of 10.4 per cent and the increased by 5.8 per cent to £533 million (2004: £504 million), including dividend is covered 2.6 times by diluted earnings per share. like-for-like sales growth of 4.0 per cent. Operating profit rose by 3.0 per cent to £47.1 million (2004: £45.8 million), representing an operating margin of 8.8 per cent (2004: 9.1 per cent). This reduction reflected the decline in our like-for-like sales growth as the year progressed, and significant cost increases particularly for shop wages and shop and bakery energy. Although this year included one fewer trading week than 2004, a more favourable pattern of shop holiday closures over the Christmas period meant that there was little net effect on profit. This is our twenty-first consecutive year of dividend growth since Greggs came to the stock market in 1984, which reflects the Group’s consistently strong cash generation, and our continued growth in earnings per share. Subject to the approval of the Annual General Meeting, the final dividend will be paid on 25 May 2006 to shareholders on the register at 28 April 2006. BUSINESS HIGHLIGHTS After increased finance income of £3.0 million (2004: £2.0 million) Trading conditions grew more challenging as the year progressed, as as a result of higher average cash balances, pre-tax profit improved growth in our market place slowed. Increasing pressure on consumer by 5.0 per cent to £50.2 million (2004: £47.8 million). Diluted earnings spending, reduced activity on the high street and increased per share rose by 4.2 per cent to 278.9 pence (2004: 267.7 pence). competition were reflected in our performance across the country. Net cash in the balance sheet at the year end was £65.6 million We have focused on controlling our costs to cope with this (2004: £62.6 million), an increase of £3.0 million. demanding environment, while maintaining our high standards of DIVIDEND The Board recommends a final dividend of 70.0 pence per share (2004: 66.0 pence), an increase of 6.1 per cent. Together with the interim dividend of 36.0 pence (2004: 30.0 pence), paid in October 2005, this makes a total for the year of 106.0 pence product quality, presentation and service. New shop openings exceeded our target and we have continued to invest in brand advertising and shop refurbishments designed to increase consumer awareness and appeal. Mike Darrington provides a fuller commentary on these and other trading and business development issues in his Managing Director’s Report on pages 8 -14. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 4 5 “Our savoury plant at Balliol Park allows us to control product quality while maximising efficiency.” State-of-the-art production facilities CHAIRMAN’S STATEMENT CONTINUED THE BOARD PROSPECTS Malcolm Simpson, who reaches the age of 65 in October, has The trends that emerged during the second half of 2005 have decided to retire as Finance Director after serving on the Board in continued in the current year to date. Like-for-like sales in the first that position since 1975. He will relinquish the finance role with nine weeks are level with last year, and we are facing increases in effect from our AGM in May, though he will remain an Executive the order of £5 million in our energy costs. This includes the full Director with continuing responsibility for our important IT function. year impact of a new one year electricity supply agreement covering I would like to record our appreciation of his exceptionally long, the majority of our shops, which took effect in autumn 2005; this dedicated and effective service. Richard Hutton FCA (37), who is currently Deputy Finance Director, is appointed to the Board as an Executive Director with effect from 13 March 2006, and will succeed Malcolm as Finance Director in May. Richard qualified as an accountant with KPMG and gained career winter has also brought significantly increased gas and power costs in our bakeries and some larger retail outlets not covered by our contract. We believe that it will prove difficult to recover these extra costs through higher selling prices, given the less buoyant consumer spending climate and increased competition. experience with Procter & Gamble before joining Greggs in 1998. We are taking action to ameliorate the effects of this more He is a Non-Executive Director of Northern Recruitment Group plc. challenging trading climate by continuing to bear down on costs We are delighted to welcome Sir Ian Gibson CBE (59) who has agreed to join the Board as an additional Non-Executive Director with effect from 1 April 2006. Ian was Chief Executive of Nissan Europe, Senior Vice President of Nissan Motor Company (Japan), Deputy Chairman of Asda Group and Chairman of BPB plc. Ian is a Non-Executive Director of Northern Rock plc and of GKN plc. On appointment, Ian will become a member of the Company’s Audit and Remuneration Committees. PEOPLE across the Group as well as finding more cost effective ways of increasing sales. However, profits in the first nine weeks are materially below the level of last year; whilst it is much too early to predict the performance of the business for the year as a whole, we believe that it is unlikely that we will attain the level of profit achieved in 2005. The business has great fundamental strengths in its brands, reputation, finances, management and people, and I am sure that these will continue to stand us in good stead during this testing period. Perhaps our greatest competitive strength is the cheerfulness and dedication of our excellent team in our shops and bakeries, and their commitment to delivering customer satisfaction by providing Derek Netherton excellent products and service. Once again I would like to express Chairman the Board’s thanks for their hard work during the year. 10 March 2006 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 6 7 MANAGING DIRECTOR’S REPORT Sir Michael Darrington Managing Director We have achieved another record result despite slowing sales growth and increasing cost pressures in the second half. This is a testimony to the strength of our proposition and above all to the quality of our excellent team of people. Their pride and confidence in the business, and their commitment to providing a friendly and efficient customer service, are our greatest assets for the future. TRADING PERFORMANCE As the Chairman has noted, trading conditions grew progressively the high street. This has led to reduced demand from both shoppers more difficult during 2005. These affected our operations under both and shop workers, while the proliferation of takeaway food outlets our brands, and in every part of the country. After a healthy start, in recent years has created an increasingly competitive trading climate. with like-for-like sales growth of 5.8 per cent in the 19 weeks up to our AGM in May, growth slowed in the final weeks of the first half and remained under pressure for the remainder of the year. Following the 5.2 per cent uplift reported for the first half, which included core volume growth of 2.3 per cent, second half like-for-like sales increased by an underlying 2.0 per cent, increased to 3.0 per cent by the benefit of additional trading days over the Christmas holiday Our selling price inflation was 2.9 per cent in the first half and 3.0 per cent in the second, averaging 3.0 per cent for the year. Although this partly reflected our continuing programme to upgrade our products, we were able to recover some of our increased costs in wages and energy, though the major impact of higher electricity and gas prices came only in the final months of the year. The environment for ingredient costs was generally benign period. Core volume in the second half was level with last year. throughout the year, though our suppliers are now also coming The like-for-like sales increase for the full 52 weeks was 4.0 per cent, under pressure from rising energy prices. We can be certain that including core volume growth of 1.0 per cent. Taking the year as a whole, the weather was average for our business, and we do not believe that it had any appreciable effect on energy will be a major inflationary element for the foreseeable future, with our total costs in this area in 2006 likely to be some £5 million higher than last year. our performance. More important factors appear to have been a Including the benefit of new shop openings in the current and general slowing of growth in our market place, influenced by prior year, total sales rose by 5.8 per cent, comprising increases increasing pressure on consumer spending and reduced activity on of 9.1 per cent in the first half and 3.3 per cent in the second. National Baking Industry Awards Student Bakers of the Year Greggs for providing us with the best training “Both Daniel and I would like to thank and guidance to help us get this far.” GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 8 9 MANAGING DIRECTOR’S REPORT CONTINUED Operating profit grew by 8.7 per cent in the first half and 0.7 per offer and improving products. Although the profit contribution from cent in the second, making an increase of 3.0 per cent for the year. the brand was lower than in 2004, when a very significant Pre-tax profit improved by 5.0 per cent to exceed £50 million for improvement was achieved, I believe that the longer term trends the first time. in Bakers Oven are encouraging. GREGGS BRAND UK GREGGS CONTINENTAL EUROPE The nine Greggs divisions in the UK account for over 80 per cent We opened a third shop in Antwerp in September 2005 and of our retail portfolio and are the main contributor to Group continue to trade in two locations in Leuven, giving us a total of profits. Like-for-like sales for the year grew by 4.2 per cent, five shops in Belgium. Sales trends are positive and our knowledge including core volume growth of 1.1 per cent. In the first half like- of the market place is constantly improving. We expect to open a for-like sales increased by 5.5 per cent, including core volume further two to three shops in Belgium over the next 12 months. growth of 2.3 per cent, while in the second half like-for-like sales RETAIL PROFILE advanced by 3.1 per cent. We opened 72 new shops during the year and closed 16, giving We have trialled several new sales promotion activities to help us a net increase of 56 units to a total of 1,319 at the year end. drive core growth, and we plan to roll out the more successful of This exceeded the target of 45 net openings that we set at the these as the year progresses. beginning of the year. BAKERS OVEN BRAND The four Bakers Oven divisions grew more slowly than the Greggs brand, with like-for-like sales for the year increasing by 3.2 per cent, At 31 December 2005 there were 1,098 units under the Greggs brand in the UK, a net addition of 53; five under the Greggs fascia in Belgium, an increase of one; and 216 under the Bakers Oven including core volume growth of 0.5 per cent. After a 3.9 per cent brand, a net addition of two. like-for-like uplift in the first half, including a core volume gain of Work has continued to refine and develop the new Greggs shop 2.0 per cent, the second half produced a like-for-like increase of format, so as to reinforce our bakery heritage and reduce the cost 2.7 per cent with nearly maintained volumes. Selling price inflation of refits. I am pleased to report that we have made significant over the year as a whole was 2.7 per cent, compared with 3.1 per progress in this area, reflected in an acceleration of our refurbishment cent in Greggs. programme during 2005, when we completed 34 comprehensive Bakers Oven’s seated catering business makes it more exposed than shop refurbishments and 15 minor refits. Greggs to the effects of reduced consumer activity on the high We plan to add approximately 35 new shops to our portfolio in street, though its management has enjoyed considerable success in 2006, net of closures. These will be predominantly under the Greggs countering these trends by focusing and simplifying the catering brand in the UK. “The bread we use in our sandwiches is baked fresh every day.” Baking on your doorstep GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 10 11 MANAGING DIRECTOR’S REPORT CONTINUED PRODUCT PROFILE Takeaway food categories continued to outperform other product a total investment of £13 million, during the current year, providing groups under both our brands. Although they are now a small additional capacity for the future growth of the business, enhanced proportion of our sales, we were encouraged that our marketing efficiencies and improved working conditions for our staff. We have focus on re-emphasising our bakery credentials helped to generate nearly completed a new production and distribution facility for modest growth in sales of bread and rolls in the second half, for Bakers Oven at Balliol Park to replace the Carricks bakery in the city. the first time in many years. During 2005 we have significantly strengthened our capability in the area of category management, in terms of both people and processes, allied to the substantial resources and facilities at our Group Technical Centre in Newcastle upon Tyne. We expect to see increasing benefit from our initiatives in both product development and range optimisation during 2006 and beyond. One important example of this will be the expansion During 2006 we plan to invest £40 million in the business, with major projects including the relocation of our Rutherglen bakery in Glasgow to a new site at nearby Cambuslang, where we will construct a new plant delivering improved productivity and with the capacity to serve more shops in Scotland as our expansion continues. CASH FLOW AND BALANCE SHEET and improvement of our healthier-eating range. The business is consistently and strongly cash generative, and this CAPITAL INVESTMENT Capital expenditure during the year totalled £41.7 million, a substantial increase on the £25.0 million we invested in 2004, but below our previous budget of £47.0 million. The main components of our expenditure were £18.2 million (2004: £13.4 million) on new shops and refurbishments, £18.4 million (2004: £8.3 million) on land, buildings and plant, and £5.1 million (2004: £3.3 million) on vehicles. The construction of our second central savouries unit at Balliol Park, Newcastle upon Tyne, is progressing on schedule and on budget. We expect to commission this major new plant, which has involved has permitted us to increase dividends to shareholders by a total of 32.5 per cent over the last two years while maintaining an exceptionally strong balance sheet. We have also made an additional contribution of £4.0 million to our main pension scheme, notwithstanding which we have a deficit of £9.7 million measured under IAS 19 at 31 December 2005. Net cash at the year end totalled £65.6 million, an increase of £3.0 million during the year, though our average cash balances were substantially higher than in 2004. We are currently considering plans for the use of our surplus cash. Keeping it fresh “Our sandwiches are made fresh in the shop every day with bread we baked. We even bake all our own pasties and muffins!” GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 12 13 MANAGING DIRECTOR’S REPORT CONTINUED THE COMMUNITY AND THE ENVIRONMENT to maximise the recycling of packaging and other appropriate materials, and we are working on a further initiative to reduce the Caring for the community is one of the most important of our use of packaging at source. values, which make Greggs such a special place to work. In May PEOPLE 2005 we passed an important milestone with the opening of our 100th Greggs Breakfast Club, and 113 of these now operate in primary schools in disadvantaged areas across the country, providing free, healthy breakfasts to children. Other charitable initiatives during the year included raising over £310,000 for children’s cancer charities through regional fun runs, which attracted over 11,000 participants. Over £150,000 was distributed by our divisional charity committees, which receive around a third of their funding from employees’ Give As You Earn donations, which are matched pound for pound by the Greggs Trust. The Trust remains our principal channel for the distribution of the Group’s charitable donations, which last year totalled £609,000 (2004: £615,000), in line with our commitment as a founder member of the ‘Per Cent’ Club. We also remain an active supporter of Business in the Community. As well as working to improve the lives of people in the communities where we operate, we aim to adopt a responsible approach to the environment. We continue to comply with all relevant legislation and regulations, and conduct regular environmental audits of all our operations. During 2005 we have paid particular attention to our SEBA (Save Energy Be Aware) initiative in all shops and factories, designed to reduce energy consumption. We have also Our super team of people are critical to the business, and we have always been committed to treating them with fairness, consideration and respect. By treating our staff well, we believe we will ensure that they in turn will treat our customers well, which is one of the most important keys to business success. I am grateful to all our 18,833 employees for the hard work they have done to produce another record result for the Group, in an increasingly testing trading climate. I would also like to take this opportunity to record our appreciation of the particular contribution of Steve Smith, a member of our senior executive team who retired during the year after 27 years with Greggs, including 13 as managing director of our South West division. THE FUTURE As the Chairman has noted, 2006 looks set to be the most challenging year the Group has faced for some considerable time. We are doing all we can to continue driving the business forward without compromising our core values, or our commitment to excellent products and service. I am sure that these provide us with the firmest of foundations for the future, as we continue our drive to deliver long term growth as Europe’s finest bakery-related retailer. introduced a waste management initiative designed to reduce the Sir Michael Darrington amount of food waste generated by our shops and bakeries, and to Managing Director examine alternatives to landfill for its disposal. Efforts have continued 10 March 2006 “Greggs pasties are the best. They really hit the spot.” Satisfaction delivered daily GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 14 15 Directors’ Report The directors have pleasure in presenting their annual report and the audited accounts for the 52 weeks ended 31 December 2005. Directors and their interests The comparative period is the 53 weeks ended 1 January 2005. Principal activity The principal activity of the Group is the retailing of sandwiches, savouries and other bakery-related products with a particular focus on takeaway food and catering. The majority of products sold are manufactured in house. Results and dividends The names of the directors in office during the year together with their relevant interests in the share capital of the Company (as defined in the Companies Act 1985) at 31 December 2005 and 1 January 2005 (or at date of appointment if later) are set out in note 24 to the accounts. Details of directors’ share options are set out in the Directors’ Remuneration Report on pages 66 to 72. On 1 March 2005, Julie Baddeley was appointed a non-executive director. In accordance with the Company’s Articles of Association, Stephen Sales for the financial year (excluding VAT) were £533,435,000, Curran, Ian Gregg, Sir Michael Darrington, Bob Bennett and Julie an increase of £29,249,000, or 5.8% over the previous financial Baddeley retire from the Board and, being eligible, offer themselves year. Group profit before taxation amounted to £50,159,000, an for re-election. increase of 5.0% over the previous financial year. An interim dividend of 36.0p per ordinary share was paid on 3 October 2005 and the directors propose a final dividend of 70.0p payable on 25 May 2006. Business review A review of the business during the year and an outline of future developments are given in the Chairman’s statement and Managing Director’s report. Fixed assets Substantial shareholdings At 10 March 2006, the only notified interests of substantial shareholdings in the issued share capital of the Company were: Number of shares held Percentage of issued share capital Aberforth Partners LLP 1,279,404 10.49% A.J. Davison (as trustee of various settlements) FMR Corporation Aegon Asset Management UK plc 1,151,365 589,091 541,950 In the opinion of the directors the market value of all of the M&G Investment Management Limited 512,400 Group’s properties is not significantly different from their historical Barclays plc net book amount. Mrs G.V. Richardson and family Standard Life 487,906 467,447 459,141 9.44% 4.83% 4.44% 4.20% 4.00% 3.83% 3.76% Various trustees jointly hold shares with A.J. Davison above, some of whom, by reason of such joint holdings and other holdings in their own name, have declarable interests as follows: Mrs F.M.E. Nicholson (7.69% jointly held with A.J. Davison and others plus 0.04% in other holdings), Mrs F.K. Deakin (7.69% jointly held with A.J. Davison and others plus 0.03% in other holdings) and Mr J.A. Wardropper (5.93% jointly held with A.J. Davison and others). Employment policies Charitable contributions We are committed to promoting policies which are designed to The Group is a member of the ‘Per Cent’ Club. Charitable donations ensure that employees and those who seek to work for us are of £609,000 (representing 1.2% of profit before tax) were made treated equally, regardless of sex, marital status, creed, colour, race by the Group during the year, including £350,000 to Greggs Trust. or ethnic origin. More details about Greggs Trust can be found on page 73. It is our policy to give full and fair consideration to applications for employment by people who are disabled, to continue wherever possible the employment of staff who become disabled and to provide equal opportunities for the career development of disabled employees. The number and dispersion of the Group’s operating locations make it difficult, but essential, to communicate effectively with employees. Communication with our shop staff is principally through the operational structure of shop area and divisional management. Authority to purchase shares At the AGM on 17 May 2005, the shareholders passed a resolution authorising the purchase by the Company of its own shares to a maximum of 607,095 ordinary shares of 20p each. That authority has not been used and remains in force until the conclusion of the AGM in 2006 or 16 August 2006, whichever is the earlier. Corporate Governance We communicate with our bakery staff by regular briefings and The Board recognises the importance of, and is committed to, letters. All staff receive a copy of divisional and Group gazettes. high standards of corporate governance and to integrity and high The Group operates Profit Sharing and Savings Related Share ethical standards in all of its business dealings. Option Schemes to encourage its employees to identify with its The Board considers that it has complied throughout the year corporate objectives. Payments to suppliers under review with the principles of governance set out in Section 1 of the Combined Code on corporate governance published by the Financial Reporting Council (the ‘Combined Code’) effective Supplier credit is an important factor in the success of the Group. during the financial year. Whilst the Group does not follow any code or standard on payment practice, payments to suppliers are made in accordance with the Group’s normal terms and conditions of business except where varied terms and conditions are agreed with individual suppliers, in which case these prevail. Where disputes arise we attempt to resolve them promptly and amicably to ensure delays in payment are kept to a minimum. The average creditor payment period for the Company and the Group at 31 December 2005 was 39 days (2004: 41 days). The following statements, together with the Directors’ Remuneration Report on pages 66 to 72, describe how the relevant principles and provisions of the Combined Code were applied to the Company in 2005 and will be relevant to the Company for the 2006 financial year. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 16 17 Directors’ Report continued Corporate Governance continued The Board Composition Ian Gregg OBE, 66, qualified as a solicitor before joining the The Board currently comprises the Chairman, 2 executive and 5 Company as Executive Chairman and Managing Director on the non-executive directors as follows: death of his father in 1964. He built the business up from a Derek Netherton (Chairman), 61, spent his career in investment banking and retired in 1996 from his position as joint head of corporate finance at J Henry Schroder & Co Limited. He is a non-executive director of Next plc, Hiscox plc and St James’s Place Capital plc. He was appointed to the Board on 1 March 2002 and was appointed Chairman in August of the same year. There have been no significant changes to the Chairman’s other commitments single-shop operation to a multi-divisional specialist retailer with almost 300 shops by the time of its successful flotation in 1984. Following the appointment of Mike Darrington as Managing Director in January 1984, Ian continued in the role of Executive Chairman until July 1993. He was then invited to become non- executive Chairman, which role he handed over to Derek Netherton in August 2002. during 2005. He is Chairman of the Nominations Committee. Susan Johnson OBE, 48, was appointed to the Board in March Sir Michael Darrington (Managing Director), 64, qualified as a Chartered Accountant and then spent 17 years with United Biscuits, latterly in General Management. During this time he attended the PMD course at Harvard Business School. He joined Greggs in 1983 and was appointed Managing Director in January 1984. Malcolm Simpson (Finance Director), 64, qualified as a Chartered Accountant with what is now KPMG and then worked for eight years within the finance department of Procter and Gamble Limited. He joined the Company in 1973 and was appointed Finance Director in 1975. Stephen Curran, 62, joined the Board in 1981. He was appointed Chairman of Candover Investments plc in May 1999, having previously been Chief Executive of Candover since January 1991. Prior to joining Candover in May 1981, he was a managing consultant with Coopers & Lybrand Associates and then an investment manager with what is now Cinven. In 2004 he was appointed as the Senior Independent Non-Executive Director. 2000. She obtained an MBA in 1993 after which she pursued a career in sales and marketing before being appointed as Chief Executive of the Northern Business Forum. She was an Executive Director of Yorkshire Forward until her appointment in 2005 as Chief Executive of County Durham and Darlington Fire and Rescue Service. Bob Bennett, FCA, 58, was appointed to the Board in December 2003. He trained as a Chartered Accountant with Spicer & Pegler and has, since 1993, been Group Finance Director of Northern Rock plc. He has been Chairman of the Audit Committee since 2004. Julie Baddeley, 54, was appointed to the Board in March 2005. She has held senior executive roles in the Woolwich plc (where she was responsible for Information Technology and Human Resources), Accenture and Sema Consulting. Julie is a non-executive director of Yorkshire Building Society, Computerland UK and the Pension Client Group within the Government’s Department of Works and Pensions. Julie was appointed as Chair of the Remuneration Committee in 2005. Effectiveness The Board is satisfied that a strategy is in place for orderly The Board, under the chairmanship of Derek Netherton, meets succession to the Board and to positions of senior management regularly to discharge its duties. At these meetings, it reviews Group so as to maintain an appropriate balance of skills and experience strategy, performance, resources, risk management procedures within the Company and on the Board. and other matters reserved for the Board. Whilst the executive responsibility for running the Company’s business rests ultimately with the Managing Director, Mike Darrington, the non-executive directors ensure that the strategies proposed by the executive directors are fully discussed and critically examined prior to adoption. During 2005, the Board met five times. All directors attended all meetings, save that Julie Baddeley and Stephen Curran were each unable to attend one meeting. After carefully reviewing the guidance in the Combined Code, all of the non-executive directors are considered by the Board to be independent in character and judgement and to be free from any business or other relationship or circumstance which is likely to affect or to interfere with the exercise of their independent judgement. The following relationships might appear to be capable of affecting the individual non-executive director’s independence. However, having considered these relationships carefully, the The Board has adopted a paper identifying the separation of the Board is of the view that they do not and that the individuals roles of the Chairman and the Managing Director. The Chairman concerned are of sufficient strength of character to avoid allowing sets the agenda for Board meetings and ensures that the Board is their independence to be so compromised: supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. The Board ■ Ian Gregg is a member of the Company’s pension scheme and a former employee, Managing Director and Chairman of the considers that it effectively leads and controls the Company. All directors take decisions objectively and in the interests of the Company. Company. The non-executive directors scrutinise the performance of management in meeting agreed goals and objectives and monitor ■ Stephen Curran and Ian Gregg have both served on the Board for more than nine years from the date of their first election. the reporting of performance. All directors receive induction The Board is grateful for the continued involvement of Ian and training on joining the Board and regularly update and refresh their Stephen, who bring considerable experience and insight to Board knowledge through reading, attendance on relevant courses and/or discussions. Both are now required by the Company’s Articles of activities outside the Company. Association to seek re-election to the Board by shareholders The Board meets with the Management Board at a different operating annually (see below). division each year. In addition, as part of the process of maintaining The Company’s Articles of Association require that all directors an awareness of the Company’s activities and assessing the ability of must retire and seek re-election at the first AGM following the management team, several members of the senior management appointment. Thereafter, one half of the directors (other than team are invited to attend Board meetings and/or to present those appointed since the last AGM) being those who have been papers to the Board. This process also affords senior managers the in office longest since last re-election and any other director who opportunity to bring matters to the attention of the Board. has not been elected or re-elected at either of the two preceding GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 18 19 Directors’ Report continued Corporate Governance continued AGMs must seek re-election at each AGM. Any non-executive The Committee, in performing these functions, reviews the annual director who has served on the Board for more than nine years and interim financial statements issued to shareholders, compliance must seek re-election annually. with financial reporting standards and the size and remit of the All directors are able to receive training and to take independent professional advice at the expense of the Company. They also have direct access to the Company Secretary, who is responsible for internal audit function. The Committee also considers and makes recommendations to the Board in relation to the independence and objectivity of the external auditors (including the impact of advising the Board, through the Chairman, on all governance matters. any non-audit work undertaken by them) and their suitability for During the year, the Chairman met with the non-executive directors without the executive directors present. The Senior Independent Director meets the non-executive directors without the Chairman present annually to appraise the Chairman’s performance. The performance of the Board, its Committees and of all directors is evaluated annually by a formal and rigorous process. Each director completes a questionnaire. The results are fed back to the Chairman and the Senior Independent Director and then to the Board for discussion. These discussions are used to identify actions to re-appointment. The Audit Committee determines the scope of the external audit in discussion with the external auditors and agrees their fees in respect of the audit. The Committee normally meets with the Finance Director and the external auditors in attendance, although time is set aside annually for discussion between the Committee and the external auditors and with the internal auditors, in each case in the absence of all executive directors, and the Committee has the power to engage outside advisers if it sees fit. The Committee also monitors and reviews the effectiveness of improve effectiveness and also to identify individual and collective the internal audit activities. training needs. Board Committees The Remuneration Committee currently consists entirely of independent non-executive directors (Julie Baddeley - Chair, Stephen The Board delegates some of its activities to the following committees, Curran, Bob Bennett and Ian Gregg). During 2005 it met six times. each of which has written terms of reference, which are available All Committee members attended all meetings in the period they on request. The Company Secretary acts as secretary to each of were members, save that Bob Bennett, Julie Baddeley and Stephen these Committees. The Audit Committee currently consists of four independent non- executive directors (Bob Bennett - Chairman, Susan Johnson, Stephen Curran and Julie Baddeley). During 2005 it met three times. All Committee members attended all meetings in the period they were members, save that Julie Baddeley and Stephen Curran were each unable to attend one meeting. The Committee’s main Curran were each unable to attend one meeting. The Committee’s main duties are to determine the basic salary, benefits in kind, terms and conditions of employment, performance-related bonuses, share options and pension benefits of the executive directors and the Chairman on behalf of the Board. The Committee is also responsible for the operation of the Company’s share option schemes and, when requested by the Board or by the Managing functions are to endeavour (i) to ensure that the accounting and Director, for monitoring and making recommendations in respect financial policies of the Company are proper and effective; (ii) to of the level and structure of remuneration for senior management. monitor the integrity of the financial statements and information A separate Executive Director Committee sets, after discussion published by the Company; (iii) to review the internal financial with the Chairman, the fees for the non-executive directors so as controls and the Group’s approach to risk management; and (iv) to to ensure that no director is involved in setting his or her own monitor compliance with the Listing Rules and the recommendations remuneration. The Directors’ Remuneration Report is set out on of the Combined Code. pages 66 to 72 of this Annual Report. The Nominations Committee currently comprises Derek through the normal channels of the Chairman, Managing Director Netherton - Chairman, all of the non-executive directors and Mike or Finance Director have failed to resolve or for which such Darrington. During 2005 it met formally only twice (with all contact is not appropriate. Committee members present except that Julie Baddeley and Susan Johnson were each unable to attend one meeting) but held At the AGM, the balance of proxy votes cast for and against each resolution and the number of abstentions is displayed. All substantial several informal discussions during the year. The Committee’s main issues, including the receipt of the annual report and accounts, are functions are to review the balance and constitution of the Board; proposed at the AGM as separate resolutions. to advise the Board as to whether directors retiring by rotation should be nominated for re-election by the members; and to approve and manage the process for setting the specification for all Board appointments, identifying candidates who meet that specification and making recommendations to the Board on the basis of merit and compliance with objective criteria in respect of all new Board appointments. Risk Management The Board is ultimately responsible for the Group’s system of internal control, which covers all aspects of the business, and for reviewing its effectiveness. However, any such system can only be designed to manage, rather than eliminate, the risk of failure to achieve the Company’s objectives and, therefore, is only able to provide reasonable, and not absolute, assurance against material Each of the Committees is provided with sufficient resources to misstatement or loss. The directors regularly review the risks to undertake its duties. Relations with shareholders The Chairman ensures that there is effective communication with individual and institutional shareholders through the announcement of regular trading updates, as well as general presentations after announcement of the interim and preliminary results and the posting of results on the Company’s website. The Board receives reports on any comments received from shareholders following these presentations. The Board considers that the AGM is the main forum for communication with investors, with the Chairmen of the Board and its committees available to answer any issues raised and any newly which the Company is exposed, as well as the operation and effectiveness of the system of internal controls. This is an ongoing process which accords with the guidance in the Turnbull report, involving the identification, evaluation and management of the significant risks faced by the Company. Key elements of the internal control system, which have been in place during the whole of the year under review and up to the date of approval of the annual report and accounts, are: Board of Directors The Board takes a proactive approach to the management of all forms of risk, and views risk management as a vital constituent of its role. At each Board meeting, the effectiveness of the controls relating to the most significant risks (i.e. those which may restrict appointed non-executive directors being available to meet the Company’s ability to meet its objectives) are monitored and shareholders. In addition, the Company Secretary and the Company’s reviewed. The Audit Committee, on behalf of the Board, conducts Brokers draw the attention of the Board to all relevant shareholder a formal review of risks and risk management procedures and communications. The Board also reviews briefings and comments reports its findings to the Board. Remedial action is determined by analysts in order to maintain an understanding of market where appropriate. For some key risks, where it is felt necessary, perceptions of the Company. The Senior Independent Director is specialist advice is sought from external agencies and professional available to shareholders if they have concerns which contact advisers. The Board also reviews, at least annually, the level and GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 20 21 Directors’ Report continued Corporate Governance continued scope of insurance cover maintained within the business. The Health and Safety Board receives reports from management on significant changes The Company is committed to improving continuously the working in the business and external environment which might affect the environment with the objective that accidents and work related ill risk profile. It has also set in place a system of regular hierarchical reporting which provides for relevant details and assurances on the assessment and control of risks to be given to it. Management Board health should be progressively reduced. An occupational health strategy has been produced with Health and Safety Officers and Occupational Nurses appointed in every Division. Targets are set and programmes are devised to implement them. This approach involves a rigorous health assessment, during which hazards are The Senior Executive Team and the wider Management Board, identified, risks assessed, control measures applied and improvement answerable directly to the Managing Director, are responsible for actions agreed to manage residual risks to an acceptable level. implementing decisions of the Main Board and providing protection against the major risks by various techniques, including sharing best practice, monitoring, supervision and training. Risk Committee A Risk Committee, consisting of the heads of each management function within the business (including Health and Safety, Food Safety, Personnel, Production and Purchasing), has responsibility for analysing, assessing, measuring and understanding the Company’s risk environment, as well as devising a sound risk management strategy for review and approval by the Board. The Risk Committee reports its findings and important changes to the Board on a Financial Reporting The Company operates a comprehensive financial control system that incorporates Divisional Financial Controllers who have responsibility for financial management within each Division. Each Divisional Financial Controller works closely with their respective Divisional Managing Director to monitor performance at Divisional Board level as against planned and prior year comparatives. In addition, assets and liabilities are scrutinised at several levels on a regular basis and remedial action taken where required. A comprehensive annual planning process is carried out which determines expected levels of performance for all aspects of the business. Each Divisional Financial Controller also reports directly regular basis through personal presentation, narrative reports and to the Finance Director on technical matters. key performance indicators (internal and external to the organisation) and through the Audit Committee. The Risk Committee also Whistle Blowing feeds the results of its assessments back into the business planning for each division at least annually. The risks are assessed on a regular basis across all functional areas but, in particular, the areas of food safety, health and safety, information flow, asset protection The Company has adopted “whistle blowing” procedures enabling employees to bring matters to the attention of the senior management and for the confidential, proportionate and independent consideration and follow-up of any matter so raised. The “whistle blowing” procedures are reviewed regularly by the and regulatory requirements. Policies and Procedures Audit Committee. Internal Audit Policies and procedures, covering control issues across appropriate The internal audit function visits every Division on an annual basis aspects of the business, are defined and communicated to the and reviews performance of the Division across a range of respective managers and staff at all levels. Adherence is monitored financial and non-financial requirements, reporting findings to the and reported upon on an ongoing basis. relevant senior managers and direct to the Audit Committee. The Board confirms that it has reviewed the effectiveness of the system of internal control (covering all material controls, including Auditors financial, operational, compliance and risk management systems) during the year under review and up to the date of approval of the annual report and accounts. In accordance with Section 384 of the Companies Act 1985, a resolution for the re-appointment of KPMG Audit Plc as auditors of the Company will be proposed at the forthcoming Annual General Meeting. By order of the Board Andrew Davison Secretary Greggs plc (CRN 502851) Fernwood House Clayton Road Jesmond Newcastle upon Tyne NE2 1TL 10 March 2006 Accountability, Audit and Going Concern The Board acknowledges its responsibility to present a balanced and understandable assessment of the Company’s position and prospects. This is fulfilled by the statements contained in the Chairman’s statement and Managing Director’s report, which supplement the statutory accounts themselves. A statement of directors’ responsibilities in respect of the preparation of accounts is given on page 24. A statement of auditors’ responsibilities is given in the report of the auditors on pages 25-26. Auditor Independence The Audit Committee has reviewed whether, and is satisfied that, the Company’s auditors, KPMG Audit Plc, continue to be objective and independent of the Company. KPMG Audit Plc does perform non-audit services for the Group but the Audit Committee is satisfied that its objectivity is not impaired by such work (non-audit fees amounted to £98,000 during 2005 and related to taxation compliance services and pensions advice). The Audit Committee’s policy to ensure that the auditor’s objectivity is not impaired by non-audit work is that the Company should be able to incur fees of up to £100,000 per year on non-audit work (inclusive of tax compliance advice). Any fees in excess of this must be discussed in advance with the Chairman of the Audit Committee. The Company’s internal audit function assists in the monitoring of systems of control and augments the examination carried out by the external auditors. Going Concern After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 22 23 Statement of Directors’ Responsibilities in respect of the Annual Report and Accounts The directors are responsible for preparing the Annual Report The directors are responsible for keeping proper accounting records and the group and parent company accounts, in accordance with that disclose with reasonable accuracy at any time the financial applicable law and regulation. position of the parent company and enable them to ensure that Company law requires the directors to prepare group and parent company accounts for each financial year. Under that law the directors are required to prepare the group accounts in accordance with IFRSs as adopted by the EU and have elected also to its accounts comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. prepare the parent company accounts in accordance with IFRSs. Under applicable law and regulations, the directors are also The group and parent company accounts are required by law and by IFRSs as adopted by the EU to present fairly the financial position and performance of the group and parent company. Provision has responsible for preparing a Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. been made within the Companies Act 1985 such that references The Directors are responsible for the maintenance and integrity of to a true and fair view are deemed to have the same meaning as the corporate and financial information included on the Company’s ‘present fairly’ in order that the accounts are in compliance with website. Legislation in the UK governing the preparation and all relevant legislation. dissemination of accounts may differ from legislation in other In preparing the group and parent company accounts, the directors jurisdictions. are required to: ■ select suitable accounting policies and then apply them consistently; ■ make judgements and estimates that are reasonable and prudent; ■ state whether they have been prepared in accordance with IFRSs as adopted by the EU; ■ prepare the accounts on a going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. Report of the Independent Auditors to the Members of Greggs plc We have audited the group and parent company accounts (the We report to you our opinion as to whether the accounts give a ‘accounts’) of Greggs plc for the 52 weeks ended 31 December true and fair view and whether the accounts and the part of the 2005 which comprise the consolidated income statement, the Directors’ Remuneration Report to be audited have been properly consolidated and parent company balance sheets, the consolidated prepared in accordance with the Companies Act 1985 and, as and parent company cashflow statements, the consolidated and regards the group accounts, Article 4 of IAS Regulation. We also parent company statements of recognised income and expense report to you if, in our opinion, the Directors’ Report is not and the related notes. The accounts have been prepared under consistent with the accounts, if the Company has not kept proper the accounting policies set out therein. We have also audited the accounting records, if we have not received all the information and information in the Directors’ Remuneration Report that is described explanations we require for our audit, or if information specified as having been audited. by law regarding directors’ remuneration and other transactions is This report is made solely to the Company’s members, as a body, not disclosed. in accordance with section 235 of the Companies Act 1985. Our We review whether the Corporate Governance Statement reflects audit work has been undertaken so that we might state to the the Company’s compliance with the nine provisions of the 2003 Company’s members those matters we are required to state to FRC Combined Code specified for our review by the Listing Rules them in an auditor’s report and for no other purpose. To the fullest of the Financial Reporting Authority, and we report if it does not. extent permitted by law, we do not accept or assume responsibility We are not required to consider whether the Board’s statements on to anyone other than the Company and the Company’s members internal control cover all risks and controls, or form an opinion on as a body, for our audit work, for this report, or for the opinions the effectiveness of the Group’s corporate governance procedures we have formed. or its risk and control procedures. Respective responsibilities of directors and auditors We read other information contained in the Annual Report, including the corporate governance statement and the unaudited part of the Directors’ Remuneration Report, and consider whether it is The directors’ responsibilities for preparing the Annual Report and consistent with the audited accounts. We consider the implications the group and parent company accounts in accordance with for our report if we become aware of any apparent misstatements applicable law and International Financial Reporting Standards (IFRSs) or material inconsistencies with the accounts. Our responsibilities as adopted by the EU are set out in the Statement of Directors’ do not extend to any other information. responsibilities on page 24. Our responsibility is to audit the accounts and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 24 25 Report of the Independent Auditors to the Members of Greggs plc continued Basis of audit opinion Opinion We conducted our audit in accordance with International Standards In our opinion: on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the Group’s and parent company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the accounts and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information ■ the group accounts give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group’s affairs as at 31 December 2005 and of its profit for the 52 weeks then ended; ■ the parent company accounts give a true and fair view, in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs for the 52 weeks ended 31 December 2005; and ■ the group and parent company accounts and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the group accounts, Article 4 of the IAS Regulations. in the accounts and the part of the Directors’ Remuneration Report KPMG Audit Plc to be audited. Chartered Accountants Registered Auditor Newcastle upon Tyne 10 March 2006 Consolidated Income Statement for the 52 weeks ended 31 December 2005 (2004: 53 weeks ended 1 January 2005) Revenue Cost of sales Gross profit Distribution and selling costs Administrative expenses Operating profit Finance income Finance expenses Profit before tax Income tax Profit for the financial year attributable to equity holders of the parent Basic earnings per share Diluted earnings per share Note 1 2 2 2 5 6 2005 £’000 533,435 (203,346) 330,089 (247,188) (35,758) 47,143 3,106 (90) 3-4 50,159 8 9 9 (16,085) 34,074 282.1p 278.9p 2004 £’000 504,186 (192,860) 311,326 (229,510) (36,053) 45,763 2,003 (15) 47,751 (15,474) 32,277 270.5p 267.7p Consolidated Statement of Recognised Income and Expense for the 52 weeks ended 31 December 2005 (2004: 53 weeks ended 1 January 2005) Actuarial losses on defined benefit pension plans Tax on items taken directly to equity Net expense recognised directly in equity Profit for the financial year Total recognised income and expense for the financial year attributable to equity holders of the parent Note 19 8 2005 £’000 (2,345) 704 (1,641) 34,074 20 32,433 2004 £’000 (903) 271 (632) 32,277 31,645 Parent Company Statement of Recognised Income and Expense for the 52 weeks ended 31 December 2005 (2004: 53 weeks ended 1 January 2005) Actuarial losses on defined benefit pension plans Tax on items taken directly to equity Net expense recognised directly in equity Profit for the financial year Total recognised income and expense for the financial year Note 19 8 7 20 2005 £’000 (2,345) 704 (1,641) 34,226 32,585 2004 £’000 (903) 271 (632) 33,608 32,976 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 26 27 Consolidated Balance Sheet at 31 December 2005 (2004: 1 January 2005) ASSETS Non-current assets Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Current tax liabilities Non-current liabilities Defined benefit pension liability Other payables Deferred tax liability Total liabilities Net assets EQUITY Capital and reserves Issued capital Share premium account Retained earnings Total equity attributable to equity holders of the parent Note 2005 £’000 2004 £’000 10 13 14 15 16 17 19 18 12 20 20 20 180,826 163,832 7,713 15,861 65,602 89,176 270,002 (58,686) (8,086) (66,772) (9,730) (98) (11,927) (21,755) (88,527) 181,475 2,439 13,440 165,596 181,475 7,283 13,949 62,601 83,833 247,665 (59,204) (7,685) (66,889) (11,052) (105) (12,463) (23,620) (90,509) 157,156 2,428 12,217 142,511 157,156 The accounts on pages 27 to 65 were approved by the Board of Directors on 10 March 2006 and were signed on its behalf by M.J. Darrington } Directors M. Simpson Parent Company Balance Sheet at 31 December 2005 (2004: 1 January 2005) ASSETS Non-current assets Property, plant and equipment Investments Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Current tax liabilities Non-current liabilities Defined benefit pension liability Other payables Deferred tax liability Total liabilities Net assets EQUITY Capital and reserves Issued capital Share premium account Retained earnings Total equity attributable to equity holders Note 2005 £’000 2004 £’000 10 11 13 14 15 16 17 19 18 12 20 20 20 150,922 5,190 156,112 7,713 38,006 65,823 111,542 267,654 (58,686) (7,524) (66,210) (9,730) (98) (4,852) (14,680) (80,890) 186,764 2,439 13,440 170,885 186,764 131,923 5,190 137,113 7,283 38,777 62,381 108,441 245,554 (59,204) (7,084) (66,288) (11,052) (105) (5,816) (16,973) (83,261) 162,293 2,428 12,217 147,648 162,293 The accounts on pages 27 to 65 were approved by the Board of Directors on 10 March 2006 and were signed on its behalf by M.J. Darrington } Directors M. Simpson GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 28 29 Consolidated Statement of Cashflows for the 52 weeks ended 31 December 2005 (2004: 53 weeks ended 1 January 2005) Cash flows from operating activities Profit for the financial year Depreciation Loss on sale of property, plant and equipment Release of government grants Share based payment expenses Finance income Finance expenses Income tax expense Increase in inventories Increase in debtors (Decrease) / increase in creditors Increase / (decrease) in pension liability Cash from operating activities Interest paid Income tax paid Net cash inflow from operating activities Cash flows from investing activities Acquisition of property, plant and equipment Proceeds from sale of property, plant and equipment Interest received Net cash outflow from investing activities Cash flows from financing activities Proceeds from issue of share capital Sale of own shares Purchase of own shares Dividends paid Defined benefit pension scheme special contribution Net cash outflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the start of the year Cash and cash equivalents at the end of the year Note 2005 £’000 10 19 5 6 8 6 34,074 22,038 484 (7) 557 (3,106) 90 16,085 (430) (1,912) (517) 333 67,689 (90) (14,625) 52,974 10 (41,687) 2,171 3,106 (36,410) 1,234 3,695 (2,173) (12,319) (4,000) (13,563) 3,001 62,601 65,602 5 20 20 20 20 15 2004 £’000 32,277 21,003 358 (7) 124 (2,003) 15 15,474 (157) (912) 4,287 (198) 70,261 (15) (14,150) 56,096 (25,090) 1,348 2,003 (21,739) 686 3,200 (941) (10,059) (1,000) (8,114) 26,243 36,358 62,601 Parent Company Statement of Cashflows for the 52 weeks ended 31 December 2005 (2004: 53 weeks ended 1 January 2005) Cash flows from operating activities Profit for the financial year Depreciation Loss on sale of property, plant and equipment Release of government grants Share based payment expenses Finance income Finance expenses Income tax expense Increase in inventories Increase in debtors (Decrease) / increase in creditors Increase / (decrease) in pension liability Cash from operating activities Interest paid Income tax paid Net cash inflow from operating activities Cash flows from investing activities Acquisition of property, plant and equipment Proceeds from sale of property, plant and equipment Interest received Net cash outflow from investing activities Cash flows from financing activities Proceeds from issue of share capital Sale of own shares Purchase of own shares Dividends paid Defined benefit pension scheme special contribution Net cash outflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the start of the year Cash and cash equivalents at the end of the year Note 2005 £’000 7 10 19 6 34,226 21,118 507 (7) 557 (4,549) 90 14,224 (430) 2,174 (517) 333 67,726 (90) (13,153) 54,483 10 (41,682) 1,101 3,103 (37,478) 1,234 3,695 (2,173) (12,319) (4,000) (13,563) 3,442 62,381 65,823 20 20 20 20 15 2004 £’000 33,608 20,178 844 (7) 124 (3,105) 15 12,603 (157) 2,651 4,287 (198) 70,843 (15) (14,120) 56,708 (25,054) 609 2,018 (22,427) 686 3,200 (941) (10,059) (1,000) (8,114) 26,167 36,214 62,381 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 30 31 Notes to the Consolidated Accounts Significant accounting policies Greggs plc (“the Company”) is a company incorporated in the UK. The Group accounts consolidate those of the Company and its subsidiaries (together referred to as the “Group”). The parent company accounts present information about the Company as a separate entity and not about its Group. The accounts were authorised for issue by the directors on 10 March 2006. (a) Statement of compliance Both the parent company accounts and the Group accounts have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (“adopted IFRSs). On publishing the parent company accounts here together with the Group accounts, the Company is taking advantage of the exemption in s230 of the Companies Act 1985 not to present its individual income statement and related notes that form a part of these approved accounts. (b) Basis of preparation The accounts are presented in pounds sterling, rounded to the nearest thousand, and are prepared on the historical cost basis. Both the Group and the Company are preparing their accounts in accordance with adopted IFRSs for the first time and consequently both have applied IFRS 1. An explanation of how the transition to adopted IFRSs has affected the previously reported financial position, financial performance and cash flows of the Group and parent company is provided in note 26. IFRS 1 grants certain exemptions from the full reporting requirements of IFRSs in the transition year. The following exemptions have been taken in these accounts: (i) (ii) Employee benefits: All cumulative actuarial gains and losses have been recognised in equity at the transition date. This is to maintain consistency with Group policy, whereby all actuarial gains and losses are recognised directly via the statement of recognised income and expense. Share based payments: The Group has elected to apply IFRS 2 Share based payments only to relevant share based payment transactions granted after 7 November 2002 as permitted under IFRS 1. (iii) Business combinations: The Group has chosen not to restate business combinations prior to the transition date on an IFRS basis, as no significant acquisitions have taken place for the past 10 years. The Group’s policy up to and including 1997 was to eliminate goodwill arising upon acquisitions against reserves. Under IFRS 1 and IFRS 3, such goodwill will remain eliminated against reserves. (iv) Fair value as deemed cost: The Group has adopted the exemption which allows the restatement of certain items of property, plant and equipment to fair value at the transition date. The amendment to IAS 19 has been adopted early in these accounts. The preparation of financial information in conformity with IFRSs requires management to make judgements, estimates and assumptions that effect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of revision and future years if the revision affects both current and future years. The accounting policies set out below have been applied consistently to all years presented in these consolidated accounts and in preparing the opening IFRS balance sheet at 28 December 2003 for the purpose of the transition to IFRSs. The accounting policies have been applied consistently throughout the Group. (c) Basis of consolidation The consolidated accounts include the results of Greggs plc and its subsidiary undertakings for the 52 weeks ended 31 December 2005. The comparative period is the 53 weeks ended 1 January 2005. (i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists where the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The accounts of subsidiaries are included in the consolidated accounts from the date control commences until the date that control ceases. (ii) Transactions eliminated on consolidation Intragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated accounts. (d) Foreign currency Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign exchange differences arising on translation are recognised in the income statement. (e) Classification of financial instruments issued by the Group Financial instruments issued by the Group are treated as equity (i.e. forming part of shareholders’ funds) only to the extent that they meet the following conditions: (i) they include no contractual obligations upon the Company (or Group) to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Company; (ii) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company’s exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments. To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company’s own shares, the amounts presented in these accounts for called up share capital and share premium exclude amounts in relation to these shares. Where a financial instrument that contains both equity and financial liability components exists these components are separated and accounted for individually under the above policy. The finance cost on the financial liability component is correspondingly higher over the life of the instrument. Finance payments that are associated with financial instruments that are classified as equity are dividends and are recorded directly in equity. (f) Property, plant and equipment (i) Owned assets Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation (see below) and impairment losses (see accounting policy (j)). The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. Certain items of property, plant and equipment that have been revalued to fair value on or prior to 28 December 2003, the date of transition to IFRSs, are measured on the basis of deemed cost, being the revalued amount at the date of that revaluation. (ii) Subsequent costs The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when the cost is incurred if it is probable that the future economic benefits embodied within the item can be measured reliably. All other costs are recognised in the income statement as incurred. (iii) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful economic lives of each part of an item of property, plant and equipment. Freehold and long leasehold properties are depreciated by equal instalments over a period of 40 years. Land is not depreciated. The depreciation rates are as follows: Short leasehold properties Plant: General Computers Motor vehicles Delivery trays Shop fixtures and fittings: General Electronic equipment 10% 10% 20% - 331/3% 20% - 25% 331/3% 10% 20% The residual value, if not insignificant, is reassessed annually. (iv) Assets in the course of construction Depreciation on these assets commences when the assets are ready for their intended use. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 32 33 Notes to the Consolidated Accounts continued Significant accounting policies continued (g) Investments Investments in subsidiaries are carried at cost less impairment. (h) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories is based on the weighted average cost formula. (i) Cash and cash equivalents ‘Cash and cash equivalents’ comprises cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. (j) Impairment The carrying amounts of the Group’s assets, other than inventories and deferred tax assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s value is estimated. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in the income statement. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised. (k) Share capital (i) Repurchase of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as a change in equity. Repurchased shares that are held in the Employee Share Ownership Plan are classified as treasury shares and are presented as a deduction from total equity. (ii) Dividends Dividends are recognised as a liability in the year in which they are approved by the shareholders. (l) Employee share ownership plan The Group accounts include the assets and related liabilities of the Greggs Employee Benefit Trust (“EBT”). In both the Group and parent company accounts the shares held by the EBT are stated at cost and deducted from shareholders’ funds. (m) Segment reporting The consolidated entity operates in one business segment being that of retailing of sandwiches, savouries and other bakery-related products (primary segment). As a result no additional business segment information is required to be provided. The consolidated entity operates principally in one geographic segment (secondary segment), the United Kingdom. (n) Employee benefits (i) Defined contribution plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred. (ii) Defined benefit plans The Group’s obligation in respect of defined benefit post-employment plans, including pension plans, is calculated by estimating the amount of the future benefit that employees have earned in return for their service in the current and prior years. That benefit is discounted to determine its present value, and the fair value of any plan assets is deducted. The discount rate is the yield at the balance sheet date on AA credit rated bonds that have maturity dates approximating to the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the income statement. The Group recognises actuarial gains and losses in full in the year in which they occur in the statement of recognised income and expense. (iii) Share-based payment transactions The share option programme allows Group employees to acquire shares of the Company. The fair value of share options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date, using an appropriate model, taking into account the terms and conditions upon which the share options were granted, and is spread over the period during which the employees become unconditionally entitled to the options. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. For options granted before 7 November 2002 the recognition and measurement principles of IFRS 2 have not been applied in accordance with the transitional provisions in IFRS 1. (o) Revenue (i) Goods sold Revenue from the sale of goods is recognised as income on receipt of cash. (ii) Government grants Government grants are recognised in the balance sheet initially as deferred income when there is a reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognised as revenue in the income statement on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are recognised in the income statement over the useful life of the asset. (p) Expenses (i) Operating lease payments Payments under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense. (q) Finance income and expense (i) Finance income Finance income comprises interest receivable on funds invested and foreign exchange gains relating to those funds. Interest income is recognised in the income statement as it accrues using the effective interest method. (ii) Finance expenses Finance expenses comprise interest payable on borrowings and related foreign exchange losses. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 34 35 Notes to the Consolidated Accounts continued Significant accounting policies continued (r) Income tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amounts of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is probable that the related deferred tax benefit will be realised. (s) IFRSs available for early adoption not yet applied The following IFRSs, which will have an impact for the Group, were available for early adoption but have not been applied in these accounts: • Amendment to IAS 1: ‘Presentation of Financial Statements’ applicable for years commencing on or after 1 January 2007; and • IFRS 7: ‘Financial instruments: Disclosure’ applicable for years commencing on or after 1 January 2007. The application of Amendment to IAS 1 and IFRS 7 in the current year would not have affected the balance sheets or income statement as the standards are concerned only with disclosure. The Group plans to apply these IFRSs in 2007. All other standards that are available for early adoption currently have no impact for the Group. 1. Segment analysis Business is the basis of the Group’s primary segmentation. The Group operates in one business segment being the retailing of sandwiches, savouries and other bakery-related products. As a result no additional business segment information is required to be provided. The Group’s secondary segment is geography. It operates in one geographical segment, the United Kingdom, as the Group has no material operations outside the UK, and, therefore, no additional geographical segment information is required to be provided. 2. Employee profit sharing scheme The total amount paid out under the Group’s employee profit sharing scheme is contained within the main cost categories as follows: Cost of sales Distribution and selling costs Administrative expenses 3. Profit before tax Profit before tax is stated after charging/(crediting): Depreciation on owned property, plant and equipment Loss on disposal of fixed assets Release of government grants Auditors’ remuneration (Group and Parent Company) audit services - annual audit - IFRS conversion project non audit fees paid to the auditor and its associates - corporation tax compliance - current year - prior year - other taxation services - pension scheme audits & advisory - other advisory 2005 £’000 1,445 3,320 672 5,437 2004 £’000 1,424 3,240 730 5,394 2005 £’000 2004 £’000 22,038 21,003 484 (7) 151 43 28 3 17 40 10 358 (7) 99 - 27 31 24 9 - Payments under operating leases - property rents 32,568 30,971 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 36 37 Notes to the Consolidated Accounts continued 4. Personnel expenses The average number of persons employed by the Group (including directors) during the year was as follows: Management Administration Production Shop The aggregate personnel costs of these persons were as follows: Wages and salaries Compulsory social security contributions Contributions to defined contribution plans Increase in liability for defined benefit plans Equity settled transactions 5. Finance income Interest income 6. Finance expenses Interest expense Foreign exchange loss Note 19 19 19 Group and parent company 2005 Number 687 355 2,766 15,296 19,104 2004 Number 651 337 2,697 14,555 18,240 Group and parent company 2005 £’000 2004 £’000 199,208 181,346 14,951 13,664 1,598 2,133 557 1,234 2,092 124 218,447 198,460 2005 £’000 3,106 2004 £’000 2,003 2005 £’000 (50) (40) (90) 2004 £’000 - (15) (15) 7. Profit attributable to Greggs plc Of the Group profit for the year, £34,226,000 (2004: £33,608,000) is dealt with in the accounts of the parent company. The Company has taken advantage of the exemption permitted by section 230 of the Companies Act 1985 from presenting its own income statement. 8. Income tax expense Recognised in the income statement Current tax expense Current year Adjustments for prior years Deferred tax expense Origination and reversal of temporary differences Adjustment for prior years Total income tax expense in income statement Reconciliation of effective tax rate Profit before tax 2005 £’000 2004 £’000 15,729 14,874 - (223) 15,729 14,651 937 (581) 356 615 208 823 16,085 15,474 2005 2005 £’000 50,159 2004 2004 £’000 47,751 Income tax using the domestic corporation tax rate 30.0% 15,048 30.0% 14,325 Non-deductible expenses Non-qualifying depreciation Other Adjustment for over provision in prior years Total income tax expense in income statement Tax recognised directly in equity Relating to equity-settled transactions Relating to defined benefit plans - special contribution - actuarial losses (SORIE) 1.2% 2.0% 0.0% 613 1,005 - 0.5% 1.8% 0.1% (1.1%) (581) (0.0%) 249 836 79 (15) 32.1% 16,085 32.4% 15,474 2005 2005 Income tax Deferred tax £’000 (404) (300) - (704) £’000 (488) 300 (704) (892) 2005 Total £’000 (892) - (704) (1,596) 2004 Total £’000 (145) - (271) (416) GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 38 39 Notes to the Consolidated Accounts continued 9. Earnings per share Basic earnings per share The calculation of basic earnings per share for the year ended 31 December 2005 was based on profit attributable to ordinary shareholders of £34,074,000 (2004: £32,277,000) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2005 of 12,080,526 (2004: 11,931,728), calculated as follows: Weighted average number of ordinary shares Issued ordinary shares at start of year Effect of own shares held Effect of shares issued Weighted average number of ordinary shares during the year Diluted earnings per share 2005 Number 2004 Number 12,141,892 12,109,483 (79,333) (195,196) 17,967 17,441 12,080,526 11,931,728 The calculation of diluted earnings per share for the year ended 31 December 2005 was based on profit attributable to ordinary shareholders of £34,074,000 (2004: £32,277,000) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2005 of 12,215,800 (2004: 12,055,134), calculated as follows: Weighted average number of ordinary shares (diluted) Weighted average number of ordinary shares during the year Effect of share options on issue Weighted average number of ordinary shares (diluted) during the year 2005 Number 2004 Number 12,080,526 11,931,728 135,274 123,406 12,215,800 12,055,134 10. Property, plant and equipment Group Cost Balance at 28 December 2003 Additions Disposals Balance at 1 January 2005 Balance at 2 January 2005 Additions Disposals Reclassification Land and buildings £’000 Plant and equipment £’000 Fixtures Under and fittings construction £’000 £’000 73,504 71,541 103,713 4,477 (761) 7,237 13,376 (7,586) (7,996) 77,220 71,192 109,093 77,220 71,192 109,093 - - - - - Total £’000 248,758 25,090 (16,343) 257,505 257,505 1,040 11,460 18,218 10,969 41,687 (1,236) (4,499) (3,458) (187) 180 7 - - (9,193) - Balance at 31 December 2005 76,837 78,333 123,860 10,969 289,999 Depreciation Balance at 28 December 2003 Depreciation charge for the year Disposals Balance at 1 January 2005 Balance at 2 January 2005 Depreciation charge for the year Disposals Balance at 31 December 2005 Carrying amounts At 28 December 2003 At 1 January 2005 At 2 January 2005 At 31 December 2005 12,698 39,432 1,589 (359) 7,813 (7,304) 35,177 11,601 (6,974) 13,928 39,941 39,804 13,928 39,941 39,804 12,400 8,051 (3,401) (2,952) 1,587 (185) 15,330 44,591 49,252 60,806 63,292 63,292 61,507 32,109 31,251 31,251 33,742 68,536 69,289 69,289 74,608 - - - - - - - - - - - 87,307 21,003 (14,637) 93,673 93,673 22,038 (6,538) 109,173 161,451 163,832 163,832 10,969 180,826 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 40 41 Notes to the Consolidated Accounts continued 10. Property, plant and equipment (continued) Parent company Cost Balance at 28 December 2003 Additions Intra group transfers Disposals Balance at 1 January 2005 Balance at 2 January 2005 Additions Intra group transfers Disposals Reclassification Land and buildings £’000 Plant and equipment £’000 Fixtures Under and fittings construction £’000 £’000 41,058 72,074 104,201 4,441 (8,494) 7,237 13,376 - - (392) (7,586) (7,996) 36,613 71,725 109,581 36,613 71,725 109,581 - - - - - - Total £’000 217,333 25,054 (8,494) (15,974) 217,919 217,919 1,035 11,460 18,218 10,969 41,682 43 (18) (187) - - (4,499) (3,458) 180 7 - - - 43 (7,975) - Balance at 31 December 2005 37,486 78,866 124,348 10,969 251,669 Depreciation Balance at 28 December 2003 Depreciation charge for the year Intra group transfers Disposals Balance at 1 January 2005 Balance at 2 January 2005 Depreciation charge for the year Intra group transfers Disposals Balance at 31 December 2005 Carrying amounts At 28 December 2003 At 1 January 2005 At 2 January 2005 At 31 December 2005 764 (169) (243) 667 - (14) 5,238 39,702 35,568 11,601 - 7,813 - (7,304) (6,974) 5,590 40,211 40,195 5,590 40,211 40,195 12,400 - 8,051 - (3,401) (2,952) 6,243 44,861 49,643 35,820 31,023 31,023 31,243 32,372 31,514 31,514 34,005 68,633 69,386 69,386 74,705 - - - - - - - - - - - - - 80,508 20,178 (169) (14,521) 85,996 85,996 21,118 - (6,367) 100,747 136,825 131,923 131,923 10,969 150,922 Land and buildings The carrying amount of land and building comprises: Freehold property Shops Bakeries Other Long leasehold property Bakeries Short leasehold property Shops 2005 £’000 13,252 41,798 5,559 60,609 751 147 Group Parent company 2004 £’000 14,644 41,955 5,710 62,309 759 224 2005 £’000 7,449 17,978 5,652 31,079 17 147 2004 £’000 7,650 17,341 5,803 30,794 5 224 61,507 63,292 31,243 31,023 Property, plant and equipment under construction Assets under construction at 31 December 2005 comprise a distribution centre, a savoury factory and an extension to the head office building. 11. Investments Parent company Cost As at 28 December 2003, 1 January 2005 and 31 December 2005 Impairment As at 28 December 2003, 1 January 2005 and 31 December 2005 Carrying amount As at 28 December 2003, 1 January 2005 and 31 December 2005 The Company’s subsidiary undertakings, which are all wholly owned, are as follows: Charles Bragg (Bakers) Limited Greggs (Leasing) Limited Thurston Parfitt Limited Greggs Properties Limited Olivers (U.K.) Limited Olivers (U.K.) Developments Limited* Birketts Holdings Limited J.R Birkett and Sons Limited* Greggs Trustees Limited * held indirectly Principal activity Non-trading Dormant Non-trading Property holding Dormant Non-trading Dormant Non-trading Trustees Country of incorporation England and Wales England and Wales England and Wales England and Wales Scotland Scotland England and Wales England and Wales England and Wales Shares in subsidiary undertakings £’000 5,828 638 5,190 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 42 43 Notes to the Consolidated Accounts continued 12. Deferred tax assets and liabilities Group Deferred tax assets and liabilities are attributable to the following: Property, plant and equipment Employee benefits Short term timing differences Tax (assets) / liabilities Assets Liabilities Net 2004 £’000 2005 £’000 2004 £’000 2005 £’000 2004 £’000 - 17,376 15,949 17,376 15,949 2005 £’000 - (4,645) (3,486) (804) - - - - - (4,645) (3,486) (804) - (5,449) (3,486) 17,376 15,949 11,927 12,463 The movements in temporary differences during the year ended 1 January 2005 were as follows: Balance at Recognised Recognised 28 December in income in equity Property, plant and equipment Employee benefits The movements in temporary differences during the year ended 31 December 2005 were as follows: Property, plant and equipment Employee benefits Short term timing differences 2003 £’000 15,485 (3,429) 12,056 Balance at 2 January 2005 £’000 15,949 (3,486) - 12,463 Balance at 1 January 2005 £’000 £’000 - 15,949 (416) (416) (3,486) 12,463 £’000 464 359 823 Recognised Recognised Balance at in income in equity 31 December £’000 1,427 (267) (804) 356 £’000 2005 £’000 - 17,376 (892) (4,645) - (804) (892) 11,927 Parent company Deferred tax assets and liabilities are attributable to the following: Property, plant and equipment Employee benefits Short term timing differences Tax (assets) / liabilities Assets Liabilities Net 2004 £’000 2005 £’000 2004 £’000 2005 £’000 2004 £’000 - 10,301 9,302 10,301 9,302 2005 £’000 - (4,645) (3,486) (804) - - - - - (5,449) (3,486) 10,301 9,302 (4,645) (3,486) (804) 4,852 - 5,816 The movements in temporary differences during the year ended 1 January 2005 were as follows: Property, plant and equipment Employee benefits The movements in temporary differences during the year ended 31 December 2005 were as follows: Property, plant and equipment Employee benefits Short term timing differences Balance at Recognised Recognised 28 December in income in equity 2003 £’000 £’000 £’000 11,149 (1,847) (3,429) 7,720 359 (1,488) - (416) (416) Balance at 1 January 2005 £’000 9,302 (3,486) 5,816 Balance at 2 January 2005 £’000 9,302 (3,486) - 5,816 Recognised Recognised Balance at in income in equity 31 December £’000 999 (267) (804) (72) £’000 2005 £’000 - 10,301 (892) (4,645) - (892) (804) 4,852 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 44 45 Notes to the Consolidated Accounts continued 13. Inventories Raw materials and consumables Work in progress 14. Trade and other receivables Trade receivables Amounts owed by subsidiary undertakings Other receivables Prepayments All amounts fall due within one year. 15. Cash and cash equivalents Bank balances Call deposits Cash and cash equivalents in the cash flow statements 16. Trade and other payables Trade payables Other taxes and social security Other payables Accruals and deferred income 2005 £’000 5,289 2,424 7,713 2005 £’000 514 - 4,747 10,600 15,861 2005 £’000 59,192 6,410 65,602 2005 £’000 25,599 5,862 15,220 12,005 58,686 Group Parent company 2004 £’000 5,322 1,961 7,283 2005 £’000 5,289 2,424 7,713 2004 £’000 5,322 1,961 7,283 Group Parent company 2004 £’000 665 - 5,320 7,964 13,949 2005 £’000 514 22,204 4,688 10,600 38,006 2004 £’000 665 24,828 5,320 7,964 38,777 Group Parent company 2004 £’000 18,199 44,402 62,601 2005 £’000 59,413 6,410 65,823 2004 £’000 17,979 44,402 62,381 Group Parent company 2004 £’000 25,467 5,502 16,440 11,795 59,204 2005 £’000 25,599 5,862 15,220 12,005 58,686 2004 £’000 25,467 5,502 16,440 11,795 59,204 17. Current tax liability The current tax liability of £8,086,000 in the group and £7,524,000 in the parent company (2004: group £7,685,000, parent company £7,084,000) represents the amount of income taxes payable in respect of current and prior years. 18. Other payables Deferred government grants 19. Employee benefits Defined benefit plan Group Parent company 2005 £’000 98 2004 £’000 105 2005 £’000 98 2004 £’000 105 The Group makes contributions to a defined benefit plan that provides pension benefits for employees upon retirement. Present value of funded obligations Fair value of plan assets Recognised liability for defined benefit obligations Liability for defined benefit obligations Changes in the present value of the defined benefit obligation are as follows: Opening defined benefit obligation Service cost Interest cost Actuarial losses Benefits paid Contributions by employees Group and parent company 2005 £’000 2004 £’000 (69,538) (58,283) 59,808 47,231 (9,730) (11,052) Group and parent company 2005 £’000 2004 £’000 58,283 51,106 2,144 3,194 6,414 2,088 2,807 2,613 (1,402) (1,249) 905 918 69,538 58,283 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 46 47 Notes to the Consolidated Accounts continued 19. Employee benefits (continued) Changes in the fair value of plan assets are as follows: Opening fair value of plan assets Expected return Actuarial gains Contributions by employer Contributions by employee Benefits paid Closing fair value of plan assets The amounts recognised in the income statement are as follows: Current service cost Interest on obligation Expected return on plan assets Total included in employee benefit expense The expense is recognised in the following line items of the income statement: Cost of sales Distribution and selling costs Administrative expenses Group and parent company 2005 £’000 2004 £’000 47,231 39,759 3,205 4,069 5,800 905 2,803 1,710 3,290 918 (1,402) (1,249) 59,808 47,231 Group 2004 £’000 2,088 2,807 2005 £’000 2,144 3,194 (3,205) (2,803) 2,133 2,092 Group 2004 £’000 261 710 1,121 2,092 2005 £’000 150 1,022 961 2,133 Cumulative actuarial gains and losses reported in the statement of recognised income and expenses since 28 December 2003, the transition date to IFRSs, for the Group and the parent company are £3,248,000 (2004: £903,000). The fair value of the plan assets and the return on those assets were as follows: Equities Bonds Property Cash/other Actual return on plan assets Group and parent company 2005 £’000 46,324 1,641 552 11,291 59,808 7,274 2004 £’000 33,039 2,055 - 12,137 47,231 4,513 The plan assets include ordinary shares issued by the Company with a fair value of £2,468,000 (2004: £2,012,000). The expected rates of return on plan assets are determined by reference to relevant indices. The overall expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the plan’s investment portfolio. Principal actuarial assumptions (expressed as weighted averages): Discount rate Expected rate of return on plan assets Future salary increases Future pension increases Mortality rate assumptions have been taken from the A92 pre-retirement and AP92c2025 post-retirement tables. History of plan The history of the plan for the current and prior years is as follows: Present value of defined benefit obligation Fair value of plan assets Deficit Group and parent company 2005 4.9% 6.8% 4.1% 2.7% 2004 5.4% 6.7% 4.4% 2.7% Group and parent company 2005 £’000 2004 £’000 2003 £’000 (69,538) (58,283) (51,106) 59,808 47,231 39,759 (9,730) (11,052) (11,347) GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 48 49 Notes to the Consolidated Accounts continued 19. Employee benefits (continued) Experience adjustments Experience adjustments on plan liabilities Experience adjustments on plan assets Net actuarial experience adjustments Group and parent company 2005 2004 £’000 (6,414) 4,069 (2,345) 9.2% 6.8% £’000 (2,613) 1,710 (903) 4.5% 3.6% The Group expects to contribute £1,872,000 to its defined benefit plan in 2006. Defined contribution plan The Group also operates defined contribution schemes for other eligible employees. The assets of the schemes are held separately from those of the Group. The pension cost represents contributions payable by the Group and amounted to £1,598,000 (2004: £1,234,000) in the year. Share-based payments - Group and parent company The Group has established a Savings Related Share Option Scheme, which granted options in April 2003, September 2004 and September 2005, and an Executive Share Option Scheme, which granted options in September 2003, March 2004, August 2004 and September 2004. Both of these schemes also made grants of options prior to 7 November 2002. The recognition and measurement principles of IFRS 2 have not been applied to these grants in accordance with the transitional provisions in IFRS 1 and IFRS 2. The terms and conditions of the grants are as follows, whereby all options are settled by physical delivery of shares: Date of grant Employees entitled Exercise price Number of shares granted Vesting conditions Executive Share Option Scheme 5 September 1996 Senior employees 1355p 115,000 Three years’ service and EPS growth of 2-4% over RPI on average over those three years Executive Share Option Scheme 6 Executive Share Option Scheme 7 Savings Related Share Option Scheme 5 Executive Share Option Scheme 8 Savings Related Share Option Scheme 6 March 1999 March 2000 April 2002 April 2002 April 2003 Senior employees Senior employees 26871/2p 100,250 Three years’ service and EPS growth of 2-4% over RPI on average over those three years 17011/2p 150,200 Three years’ service and EPS growth of 2% over RPI on average over those three years All employees 2821p 126,949 Three years’ service 3.5 years Senior employees 3526p 8,800 Three years’ service and EPS growth of 2-4% over RPI on average over those three years 7 to 10 years All employees 2700p 58,315 Three years’ service Executive Share Option Scheme 9 September 2003 Senior employees 31041/2p 8,250 Three years’ service and EPS growth of 2% over RPI on average over those three years Executive Share Option Scheme 10 Executive Share Option Scheme 11 March 2004 August 2004 Senior employees Senior employees 3388p 7,500 Three years’ service and EPS growth of 2% over RPI on average over those three years 3400p 93,000 Three years’ service and EPS growth of 3-5% over RPI on average over those three years September 2004 Senior employees 3485p 2,400 Three years’ service and EPS growth of 3-5% over RPI on average over those three years Savings Related Share Option Scheme 7 September 2004 Savings Related Share Option Scheme 8 September 2005 All employees 3098p 71,796 Three years’ service All employees 4116p 64,148 Three years’ service Contractual life 7 to 10 years 7 to 10 years 7 to 10 years 3.5 years 10 years 7 years 7 to 10 years 7 to 10 years 3.5 years 3.5 years GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 50 51 Notes to the Consolidated Accounts continued 19, Employee benefits (continued) The number and weighted average exercise price of share options is as follows: Outstanding at the beginning of the year Lapsed during the year Exercised during the year Granted during the year Outstanding at the end of the year Exercisable at the end of the year 2005 Weighted Number of average options exercise price Weighted average exercise price 2004 Number of options 2785p 2014p 474,964 (13,172) 2375p 2614p 539,684 (52,411) 2569p (190,652) 2101p (187,005) 4116p 3151p 1951p 64,148 335,288 50,942 3277p 2785p 2126p 174,696 474,964 140,358 The options outstanding at 31 December 2005 have an exercise price in the range of £13.55 to £41.16 and have a weighted average contractual life of 4.42 years. The options exercised during the year had a weighted average market value of £45.96 (2004: £33.76). The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on the Black-Scholes model. The contractual life of the option is used as an input into this model. Fair value at measurement date Share price Exercise price Expected volatility Option life Expected dividends Risk free rate 2005 Savings Executive 2004 Executive Related Share Share Option Share Option Scheme 11 Option Scheme 10 Scheme 8 Savings Related Share Option Scheme 7 September 2005 March 2004 August 2004 September 2004 September 2004 £9.87 £47.00 £41.16 17.3% 3.25 years 2.1% 4.1% £7.19 £33.88 £33.88 21.3% 5 years 2.3% 4.6% £6.55 £34.00 £34.00 19.6% 5 years 2.7% 4.9% £6.71 £34.85 £34.85 19.5% 5 years 2.7% 4.9% £8.84 £36.95 £30.98 19.5% 3 years 2.3% 4.5% The expected volatility is based on historic volatility, adjusted for any expected changes to future volatility due to publicly available information. The historic volatility is calculated using a weekly rolling share price for the three year period immediately prior to the option grant date. Share options are granted under a service condition and, for grants to senior employees, a non-market performance condition. Such conditions are not taken into account in the grant date fair value measurement of the services received. There are no market conditions associated with the share option grants. The costs charged to the income statement relating to share based payments were as follows: Share options granted in 2003 Share options granted in 2004 Share options granted in 2005 Total expense recognised as employee costs 2005 £’000 155 367 35 557 2004 £’000 61 63 - 124 20. Capital and reserves Reconciliation of movement in capital and reserves attributable to equity holders of the parent Group Balance at 28 December 2003 Shares issued in the year Total recognised income and expense Purchase of own shares Sale of own shares Share-based payments Dividends Tax items taken directly to reserves Balance at 1 January 2005 Balance at 2 January 2005 Shares issued in the year Total recognised income and expense Purchase of own shares Sale of own shares Share-based payments Dividends Tax items taken directly to reserves Balance at 31 December 2005 Issued capital £’000 Share premium £’000 Retained earnings £’000 Total £’000 2,422 11,537 118,397 132,356 6 - - - - - - 680 - 686 - - - - - - 31,645 31,645 (941) 3,200 124 (941) 3,200 124 (10,059) (10,059) 145 145 2,428 12,217 142,511 157,156 Issued capital £’000 Share premium £’000 Retained earnings £’000 Total £’000 2,428 12,217 142,511 157,156 11 1,223 - 1,234 - - - - - - - - - - - - 32,433 32,433 (2,173) (2,173) 3,695 557 3,695 557 (12,319) (12,319) 892 892 2,439 13,440 165,596 181,475 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 52 53 Notes to the Consolidated Accounts continued 20. Capital and reserves (continued) Parent company Balance at 28 December 2003 Shares issued in the year Total recognised income and expense Purchase of own shares Sale of own shares Share-based payments Equity dividends Tax items taken directly to reserves Balance at 1 January 2005 Balance at 2 January 2005 Shares issued in the year Total recognised income and expense Purchase of own shares Sale of own shares Share-based payments Equity dividends Tax items taken directly to reserves Balance at 31 December 2005 Share capital and share premium In issue and fully paid at start of year Issued for cash In issue and fully paid at the end of the year Issued capital £’000 Share premium £’000 Retained earnings £’000 Total £’000 2,422 11,537 122,203 136,162 6 - - - - - - 680 - 686 - - - - - - 32,976 32,976 (941) 3,200 124 (941) 3,200 124 (10,059) (10,059) 145 145 2,428 12,217 147,648 162,293 Issued capital £’000 Share premium £’000 Retained earnings £’000 Total £’000 2,428 12,217 147,648 162,293 11 1,223 - 1,234 - - - - - - - - - - - - 32,585 32,585 (2,173) (2,173) 3,695 557 3,695 557 (12,319) (12,319) 892 892 2,439 13,440 170,885 186,764 Ordinary shares 2005 Number 2004 Number 12,141,892 12,109,483 52,065 32,409 12,193,957 12,141,892 At 31 December 2005 the authorised share capital comprised 25,000,000 ordinary shares (2004: 25,000,000) with a par value of 20p each. Own shares held Deducted from retained earnings is £1,265,000 (2004: £2,787,000) in respect of own shares held by the Greggs Employee Benefit Trust. The Trust, which was established during 1988 to act as a repository of issued Company shares, holds 48,924 shares (2004: 138,439 shares) with a market value at 31 December 2005 of £2,299,000 (2004: £5,064,000) which have not vested unconditionally in employees. The shares held by the Greggs Employee Benefit Trust can be purchased either by employees on the exercise of an option under the Greggs Executive Share Option Schemes or by the trustees of the Greggs Employee Share Scheme. Dividends The following tables analyse dividends when paid and the year to which they relate: 2003 final dividend 2004 interim dividend 2004 final dividend 2005 interim dividend 2005 Per share pence - - 66.0p 36.0p 2004 Per share pence 54.5p 30.0p - - 102.0p 84.5p The proposed final dividend in respect of 2005 amounts to 70.0 pence per share (£8,536,000). This proposed dividend is subject to approval at the Annual General Meeting and has not been included as a liability in these accounts. 2003 final dividend 2004 interim dividend 2004 final dividend 2005 interim dividend 2005 £’000 - - 7,959 4,360 2004 £’000 6,457 3,602 - - 12,319 10,059 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 54 55 Notes to the Consolidated Accounts continued 21. Financial instruments All the Group’s surplus cash is invested as cash placed on deposit. The Group’s treasury policy has as its principal objective the achievement of the maximum rate of return on cash balances whilst maintaining an acceptable level of risk. Other than mentioned below there are no financial instruments, derivatives or commodity contracts used. Financial assets and liabilities The Group’s main financial asset comprises cash and cash equivalents. Other financial assets include trade receivables arising from the Group’s activities. Other than trade and other payables, the Group had no financial liabilities within the scope of IAS 39 as at 31 December 2005 (2004: £nil). The Group has an overdraft facility of £10,000,000 of which £10,000,000 was undrawn at 31 December 2005 (2004: £10,000,000 undrawn). Fair values The fair value of the Group’s financial assets and liabilities is not materially different from their carrying values. Interest rate, credit and foreign currency risk The Group has not entered into any hedging transactions during the year and considers interest rate, credit and foreign currency risks not to be significant. Effective interest rates In respect of income-earning financial assets the following table indicates their effective interest rates at the balance sheet date. Cash and cash equivalents 22. Operating leases Total amounts payable under non-cancellable operating lease rentals are payable as follows: Operating leases which expire: In less than one year Between one and five years After more than five years Group 2005 2004 Effective £’000 interest rate £’000 Effective interest rate 4.5% 65,602 4.8% 62,381 2005 £’000 762 2004 £’000 958 23,528 23,297 139,442 145,252 163,732 169,507 The Group leases the majority of its shops under operating leases. The leases typically run for a period of 10 years, with an option to renew the lease after that date. Lease payments are generally increased every five years to reflect market rentals. For a small number of the leases the rental on contingent on the level of turnover achieved in the relevant unit. 23. Capital commitments During the year ended 31 December 2005, the Group entered into contracts to purchase property, plant and equipment for £8,067,000 (2004: £1,867,000). These commitments are expected to be settled in the following financial year. 24. Related parties Identity of related parties The Group has a related party relationship with its subsidiaries (see note 11) and its directors and executive officers. Trading transactions with subsidiaries - Group Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are therefore not disclosed. Trading transactions with subsidiaries - Parent company Rent paid Interest received 2005 £’000 2004 £’000 2005 £’000 2004 £’000 Greggs Properties Limited (3,122) (2,968) 1,443 1,105 Amounts owed by related parties Amounts owed to related parties 2005 £’000 - 2004 £’000 2005 £’000 2004 £’000 - 28,620 31,244 Dormant subsidiaries - - - - 6,416 6,416 - - The Greggs Trust is also a related party and during the year the Company made a donation to the Greggs Trust of £350,000 (see Corporate Social Responsibility on page 73). Transactions with key management personnel The directors are the key management personnel of the Group. The interests of the directors who served during the year (including those of their immediate families) in the share capital of the Company, according to the register of directors’ interests are as follows: Mike Darrington Malcolm Simpson Ian Gregg (non-executive) Stephan Curran (non-executive) Susan Johnson (non-executive) Derek Netherton (non-executive) Bob Bennett (non-executive) Julie Baddeley (non-executive) Ordinary Shares of 20p Ordinary shares of 20p (Beneficial interest) (Trustee holding with no beneficial interest) 2005 2004 2005 2004 57,970 70,650 - 138,354 40,010 85,722 13,000 166,955 144,835 154,655 3,700 3,700 - - - - - - - - - - - - - - 138,354 - - - - - Details of directors’ share options, emoluments, pension benefits and other non-cash benefits can be found in the Directors’ Remuneration Report on pages 66 to 72. Total remuneration is included in personnel expenses (see note 4). There have been no changes since 31 December 2005 in the Directors’ interests noted above. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 56 57 Notes to the Consolidated Accounts continued 25. Accounting estimates and judgements Critical accounting judgements in applying the Group’s accounting policies Certain critical accounting judgements made in applying the Group’s accounting policies are described below: Finance and operating leases The inception of the shop leases has taken place over a long period of time and many date back a significant number of years. They are combined leases of land and buildings. It is not possible to obtain a reliable estimate of the split of the fair values of the lease interest between land and buildings at inception. Therefore, in determining lease classification the Group evaluated whether both parts are clearly an operating lease or a finance lease. Firstly, land title does not pass. Secondly, because the rent paid to the landlord for the buildings is increased to market rent at regular intervals, and the Group does not participate in the residual value of the building it is judged that substantially all the risks and rewards of the building are with the landlord. Based on these qualitative factors it is concluded that the leases are operating leases. 26. Explanation of transition to IFRSs As stated in section (b) of the significant accounting policies, these are the Group’s first consolidated accounts prepared in accordance with IFRSs. The significant accounting policies set out on pages 32 to 36 have been applied in preparing the accounts for the 52 weeks ended 31 December 2005, the comparative information presented in these accounts for the 53 weeks ended 1 January 2005 and in the preparation of an opening IFRS balance sheet at 28 December 2003 (the Group’s date of transition). In preparing its opening IFRS balance sheet, the Group has adjusted amounts reported previously in accounts prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP). An explanation of how the transition from UK GAAP to IFRSs has affected the Group’s financial position, financial performance and cashflows is set out in the following tables and notes. Reconciliation of the consolidated income statement for the 53 weeks ended 1 January 2005 Revenue Cost of sales Gross profit Distribution and selling costs Administrative costs Operating profit Finance income Finance expenses Profit before tax Income tax Profit for the year financial attributable to equity shareholders Net expense recognised directly in equity Total recognised income and expense attributable to equity shareholders Dividends UK GAAP £’000 504,186 (193,009) 311,177 (228,891) (37,572) 44,714 2,003 (15) 46,702 (15,115) 31,587 IFRS adjustments Employee Share-based Revaluation benefits payments Dividends (a) £’000 (b) £’000 (c) £’000 (d) £’000 - - - (25) - (25) - - (25) - (25) 149 149 406 643 1,198 - - 1,198 (359) - - - - (124) (124) - - (124) - 839 (124) IFRS £’000 504,186 (192,860) 311,326 (228,510) (37,053) 45,763 2,003 (15) 47,751 (15,474) 32,277 (632) 31,645 - - - - - - - - - - - - - - - (632) - 31,587 (11,524) (25) - 207 - (124) - 11,524 - Reconciliation of parent company profit for the 53 weeks ended 1 January 2005 Profit for the financial year attributable to equity shareholders Dividends UK GAAP IFRS adjustments IFRS Employee Share-based benefits payments Dividends £’000 32,893 (11,524) (b) £’000 839 - (c) £’000 (124) (d) £’000 £’000 - 33,608 - 11,524 - Explanation of the IFRS adjustments to the income statement for the 53 weeks ended 1 January 2005 (a) Fair value of freehold property as deemed cost Principal difference Under the transitional rules of IFRS 1 the fair value items of property, plant and equipment can be used as the deemed cost at the date of transition. The items are then depreciated based on the deemed cost over their remaining useful economic lives. This has been adopted in respect of one freehold property. Impact Under UK GAAP the depreciation charge in respect of the asset was £9,000 and under IFRS the charge is £34,000 resulting in an increased charge to operating profit of £25,000. (b) Employee benefits Principal difference Under UK GAAP, the Group measures pension commitments and other related benefits in accordance with SSAP 24 Accounting for Pension Costs. Additional disclosures were given in accordance with the transitional requirements of FRS 17 Retirement Benefits. Under IFRS, the Group measures pension commitments in accordance with the amended IAS 19 Employee Benefits. IAS 19 is similar to FRS 17 in that it adopts a balance sheet approach, bringing the surplus/deficit of the pension scheme onto the balance sheet. However, FRS 17 dictates that all actuarial gains and losses are to be recognised directly in reserves, whereas IAS 19 also includes an alternative option allowing actuarial gains and losses to be held on the balance sheet and released to the income statement over a period of time. Greggs has elected not to adopt this alternative option. Impact Under SSAP 24, a pension charge of £3,290,000 was recognised in operating profit in 2004. Under IFRS a charge of £2,092,000 is recognised. Therefore there is a net credit to operating costs of £1,198,000. The actuarial loss of £903,000 is recognised in the statement of recognised income and expenses. Due to the deferred tax impact the income statement tax adjustment is a charge of £359,000, resulting in an overall credit of £839,000 to profit for the year. The deferred tax credit that relates to the actuarial loss of £271,000 is recognised in the statement of recognised income and expenses resulting in an overall charge of £632,000. (c) Share-based payments Principal difference The Group operates a number of share-based incentive schemes that are impacted by IFRS 2 Share-based payments. Under UK GAAP no expense has been recognised for awards under the Executive Share Option Scheme as the intrinsic value (the difference between the exercise price and the market value at the date of grant) was nil or for awards under the SAYE scheme as this was exempt under UITF17. Under IFRS, an expense is recognised in the income statement for all share-based payments. This expense has been calculated based on the fair value at the date of the awards using pricing models appropriate to the schemes. Impact This has resulted in a charge for the full year of £124,000, recognised within operating costs. (d) Dividends Principal difference Under UK GAAP, the dividend charge is recognised in the profit and loss account. Under IFRS, the dividend is not recognised in the income statement but is recognised directly in reserves. Impact Both the interim and the final dividend for 2004 have been reversed from the income statement with an impact of £11,524,000. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 58 59 Notes to the Consolidated Accounts continued 26. Explanation of transition to IFRSs (continued) Reconciliation of the consolidated balance sheet as at 1 January 2005 UK GAAP £’000 Rolled over gains (a) £’000 IFRS adjustments Employee Share- based IFRS Revaluation benefits payments Dividends Reclassification (b) £’000 (c) £’000 (d) £’000 (e) £’000 £’000 £’000 ASSETS Non-current assets Property, plant and equipment 163,110 Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Current tax liability Non-current liabilities Defined benefit pension liability Other payables Deferred tax liability Total liabilities Net assets EQUITY Capital and reserves Issued capital Share premium account 7,283 13,949 62,601 83,833 246,943 (74,811) - (74,811) - (105) (14,869) (14,974) (89,785) 157,158 2,428 12,217 - - - - - - - - - - - (856) (856) (856) (856) - - 722 - - - - 722 - - - - - (224) (224) (224) 498 - - - - - - - - - - - (11,052) - 3,316 (7,736) (7,736) (7,736) - - - - - - - - - - - - - 170 170 170 170 - - Retained earnings 142,513 (856) 498 (7,736) 170 7,922 Total equity attributable to equity holders of the parent 157,158 (856) 498 (7,736) 170 7,922 - - - - - - - - - - - - 163,832 7,283 13,949 62,601 83,833 247,665 7,922 7,685 (59,204) - (7,685) (7,685) 7,922 - - - - 7,922 7,922 - - - - - - - - - - - - - (66,889) (11,052) (105) (12,463) (23,620) (90,509) 157,156 2,428 12,217 142,511 157,156 Reconciliation of the consolidated balance sheet as at 28 December 2003 UK GAAP £’000 Rolled over gains (a) £’000 IFRS adjustments Employee Share- based IFRS Revaluation benefits payments Dividends Reclassification (b) £’000 (c) £’000 (d) £’000 (e) £’000 £’000 £’000 ASSETS Non-current assets Property, plant and equipment 160,704 Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Current tax liability Non-current liabilities Defined benefit pension liability Other payables Deferred tax liability Total liabilities Net assets EQUITY Capital and reserves Issued capital Share premium account 7,126 13,037 36,358 56,521 217,225 (68,558) - (68,558) - (112) (14,405) (14,517) (83,075) 134,150 2,422 11,537 - - - - - - - - - - - (856) (856) (856) (856) - - 747 - - - - 747 - - - - - (224) (224) (224) 523 - - - - - - - - - - - (11,347) - 3,404 (7,943) (7,943) (7,943) - - Retained earnings 120,191 (856) 523 (7,943) Total equity attributable to equity holders of the parent 134,150 (856) 523 (7,943) - - - - - - - - - - - 25 25 25 25 - - 25 25 - - - - - - - - - - - - 161,451 7,126 13,037 36,358 56,521 217,972 6,457 7,183 (54,918) - (7,183) (7,183) 6,457 - - - - 6,457 6,457 - - 6,457 6,457 - - - - - - - - - - - (62,101) (11,347) (112) (12,056) (23,515) (85,616) 132,356 2,422 11,537 118,397 132,356 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 60 61 Notes to the Consolidated Accounts continued 26. Explanation of transition to IFRSs (continued) Reconciliation of the parent company balance sheet as at 1 January 2005 UK GAAP £’000 131,923 5,190 137,113 7,283 38,777 62,381 108,441 245,554 (74,210) - (74,210) - (105) (9,007) (9,112) (83,322) 162,232 2,428 12,217 Rolled over gains (a) £’000 - - - - - - - - - - - - - (295) (295) (295) (295) - - IFRS adjustments Share- based Employee IFRS benefits payments Dividends Reclassification (c) £’000 (d) £’000 (e) £’000 £’000 £’000 - - - - - - - - - - - (11,052) - 3,316 (7,736) (7,736) (7,736) - - - - - - - - - - - - - - - 170 170 170 170 - - - - - - - - - - - - - - - - 131,923 5,190 137,113 7,283 38,777 62,381 108,441 245,554 7,922 7,084 (59,204) - (7,084) (7,084) 7,922 - - - - 7,922 7,922 - - - - - - - - - - - - - (66,288) (11,052) (105) (5,816) (16,973) (83,261) 162,293 2,428 12,217 147,648 162,293 147,587 (295) (7,736) 170 7,922 162,232 (295) (7,736) 170 7,922 ASSETS Non-current assets Property, plant and equipment Investments Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Current tax liability Non-current liabilities Defined benefit pension liability Other payables Deferred tax liability Total liabilities Net assets EQUITY Capital and reserves Issued capital Share premium account Retained earnings Total equity attributable to equity holders Reconciliation of the parent company balance sheet as at 28 December 2003 IFRS adjustments Share- based Employee IFRS benefits payments Dividends Reclassification (c) £’000 (d) £’000 (e) £’000 £’000 £’000 ASSETS Non-current assets Property, plant and equipment Investments Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Current tax liability Non-current liabilities Defined benefit pension liability Other payables Deferred tax liability Total liabilities Net assets EQUITY Capital and reserves Issued capital Share premium account Retained earnings Total equity attributable to equity holders UK GAAP £’000 136,825 5,190 142,015 7,126 32,017 36,214 75,357 217,372 (68,488) - (68,488) - (112) (10,854) (10,966) (79,454) 137,918 2,422 11,537 Rolled over gains (a) £’000 - - - - - - - - - - - - - (295) (295) (295) (295) - - - - - - - - - - - - - (11,347) - 3,404 (7,943) (7,943) (7,943) - - 123,959 (295) (7,943) 137,918 (295) (7,943) - - - - - - - - - - - - - 25 25 25 25 - - 25 25 - - - - - - - - - - - - - - - - 136,825 5,190 142,015 7,126 32,017 36,214 75,357 217,372 6,457 7,113 (54,918) - (7,113) (7,113) 6,457 - - - - 6,457 6,457 - - 6,457 6,457 - - - - - - - - - - - (62,031) (11,347) (112) (7,720) (19,179) (81,210) 136,162 2,422 11,537 122,203 136,162 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 62 63 Notes to the Consolidated Accounts continued 26. Explanation of transition to IFRSs (continued) Notes to the reconciliation of the balance sheets (a) Deferred tax on rolled over gains Principal difference Under IAS 12 a deferred tax provision must be made in respect of all taxable temporary differences including rolled over capital gains. Under UK GAAP deferred tax was not provided in respect of these rolled over gains. Transition impact A deferred tax liability has been included in the transition consolidated balance sheet of £856,000 (parent company £295,000). Impact as at 1 January 2005 There is no movement on the deferred tax liability during the 53 weeks ended 1 January 2005 and therefore no further impact on the balance sheet as at 1 January 2005. (b) Fair value of freehold property as deemed cost (consolidated balance sheet only) Principal difference Under the transitional rules of IFRS 1 the fair value of items of property, plant and equipment can be used as the deemed cost at the date of transition. This has been adopted in respect of one freehold property. Transition impact The freehold property has been included in the transition balance sheet at its deemed cost of £1,020,000. This has resulted in an increase to non-current assets and to retained earnings of £747,000. In accordance with IAS 12 a provision for deferred tax is required in respect of the increased deemed cost which increases the deferred tax liability by £224,000. The net impact on retained earnings is therefore an increase of £523,000, which is not distributable. Impact as at 1 January 2005 The freehold property has been depreciated throughout the 53 weeks ended 1 January 2005. At 1 January 2005 the balance sheet reflects the closing net book value of the asset of £986,000. This has resulted in an increase in non-current assets and to retained earnings of £722,000. The property was sold in the first half of 2005. There is no movement in the deferred tax liability during the year in respect of this asset. (c) Employee benefits Principal difference Under UK GAAP, any (liability) / asset on the balance sheet represented the timing difference between the SSAP 24 charge and the payments made to the pension scheme. Under IFRS, the (liability) / asset on the balance sheet represents the (deficit) / surplus on the defined benefit pension scheme. Transition impact A pension scheme liability of £11,347,000 has been recognised at the transition date. There is a corresponding positive deferred tax adjustment of £3,404,000 resulting from this recognition. The net effect is a reduction of shareholders’ funds of £7,943,000 on transition. Impact as at 1 January 2005 Throughout the year all movements in the deficit on the pension scheme are recognised against the liability. At 1 January 2005 the liability on the balance sheet reflects the closing deficit of the pension scheme. This has been adjusted to reflect the actuarial loss for the year of £903,000 that has been recognised directly in reserves. The movement in the deferred tax asset arising from this liability was an £88,000 decrease. (d) Share-based payments Principal difference Under UK GAAP no liability was recognised in respect of share awards as for the executive share options the intrinsic value was nil and the SAYE scheme was exempt under UITF 17. Under IFRS 2, as all of the share awards are equity settled, the balance sheet entry, based on the fair value of the awards is a credit direct to equity reserves. Transition impact A deferred tax asset of £25,000 has been recognised on transition at 28 December 2003. Impact as at 1 January 2005 The deferred tax asset has been increased by £145,000 as at 1 January 2005. (e) Dividends Principal difference Under UK GAAP, the practice is to recognise dividends in the year to which they relate, whereas under IFRS the dividend is recognised in the year in which it is declared. As a result, the dividend creditor is not recognised until the dividend is declared and therefore at each year end needs to be adjusted accordingly. Transition impact As the 2003 interim dividend had been paid and the 2003 final dividend had not been declared at 28 December 2003, there is no dividend creditor in the transition balance sheet. The opening creditor of £6,457,000 has been reversed. Impact as at 1 January 2005 At the year end the 2004 interim dividend had been paid and the final dividend had not been declared. The closing dividend creditor of £7,922,000 under UK GAAP has been reversed. Group cashflow statement For the 53 weeks ended 1 January 2005 The move from UK GAAP to IFRS does not change the cashflow of the Group. The IFRS cashflow statement is similar to UK GAAP but presents various cashflows in different categories and in a different order from the UK GAAP cashflow statement. Parent company cashflow statement For the 53 weeks ended 1 January 2005 Under UK GAAP, the parent company was not required to, and did not, prepare a cashflow statement. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 64 65 Directors’ Remuneration Report Introduction This report has been prepared in accordance with the Directors’ Remuneration Report Regulations 2002 (the “Regulations”). This report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the Principles of Good Governance relating to directors’ remuneration. The Regulations require the auditors to report to the Company’s members on the General Policy on Directors’ Remuneration The Committee’s policy is to establish competitive remuneration packages that will attract, retain and motivate individuals with appropriate skills and experience and will best serve the interests of the Company, its shareholders and its employees. Where possible, the Committee will also seek to structure bonus arrangements in a manner that will align the interests of executive directors with those of shareholders. Remuneration packages for executive directors are designed so as to reward them fairly for their contributions within the range of benefits offered by other UK companies “auditable part” of the Directors’ Remuneration Report and state whether, in their of equivalent size, to recognise the unusually complex nature of the combined opinion, that part of the report has been properly prepared in accordance with the retail, manufacturing and distribution operations of the Greggs business and so as to Companies Act 1985 (as amended by the Regulations). This report has, therefore, take into account levels of remuneration paid to others within the Company. been divided into separate sections for audited and unaudited information. Unaudited information Basic salaries for executive directors should be at a level broadly equivalent to median salaries for individuals holding similar positions in comparable companies, with adjustment to reflect individual performance. Basic salaries are normally benchmarked The Remuneration Committee of the Board (the “Committee”) sets the remuneration every three years unless a material change in the business warrants earlier review. and terms of appointment of the executive directors and the Chairman on behalf of Between major reviews, basic salaries will normally rise in line with rates of increase the Board. The names of the directors who have served on the Committee during adopted elsewhere in the Greggs business. Basic salaries and other benefits were last the year are Ian Gregg (who was Chairman until 3 August 2005), Julie Baddeley benchmarked in 2005, on the basis of advice provided by Monks Partnership. This (who joined the Committee in May 2005 and assumed the Chair from 3 August 2005), advice indicated that the fees payable to the Chairman, the basic salary of the Chief Stephen Curran and Bob Bennett. Mike Darrington, Andrew Davison (the Company Executive, the annual bonus arrangements for the executive directors and share- Secretary) and Nicola Instone (the Company’s People Director) have assisted the based/long term incentive schemes for the executive directors had all fallen some Committee in their deliberations. The Committee received independent external way behind the Company’s stated policy. Acting on this advice, the Remuneration advice from Monks Partnership (who were appointed by the Committee). Monks Committee has adjusted the fees payable to the Chairman and the basic salary of Partnership also assisted the Executive Director Committee by producing the Chief Executive. The annual bonus formula for executive directors has also been comparative information to assist in determining the fees payable to non-executive altered so that during 2005, this scheme (when combined with the All Employee directors and assisted the Company generally in determining the remuneration of Profit Sharing Scheme, which distributes 10% of profits half-yearly to all employees its senior management team, but otherwise had no connection with the Company. on the basis of a formula related to the profitability of their relevant division, length of service and salary levels) could, subject to Remuneration Committee discretion, shareholders, especially if the proposed new LTIP is not available to a particular deliver a cash bonus (non-pensionable) of 3% of basic salary for every 1% increase individual, or where the Committee considers it appropriate. in the net profit (excluding property profit and adjusted for the issue of any shares during the year) over a level fixed by the Committee in the light of economic and market conditions. The aggregate of these bonuses is subject to a cap of 60% of basic salary. In addition, the Committee is recommending the adoption of a new Long Term Incentive Plan (“LTIP”). This LTIP will be proposed for shareholders to vote upon at the Annual General Meeting and details of it are set out in the circular to shareholders accompanying the Notice of that meeting. If approved by shareholders, the Committee intends that the LTIP will be used for the first time in 2007. The Committee’s policy is that bonus payments to executive directors should not be pensionable. There have been occasional grants to the executive directors of options over shares in the Company, pursuant to one or more of the share option schemes operated through the Committee. These include both Inland Revenue approved and unapproved long-term share incentive schemes, designed to encourage the executive directors and other employees to hold shares in the Company and to enhance share values. In accordance with institutional investor guidelines, the total number of new shares and shares held in treasury over which the Company may grant options is limited and the Company has chosen to allocate most of the number available to the Company’s Savings Related Share Option Scheme open to all employees, including executive Unless granted pursuant to the all-employee Savings Related Share Option Scheme (under which options may be offered at a discount to market price), the Committee intends that all options granted to executive directors in respect of shares in the Company (except those relating to “matching” shares under the LTIP) will be at exercise prices at least equal to the market price of a share as at the date of grant. The above policies enable the executive directors to receive potentially significant benefits in addition to their basic salaries, but only if value has been created for shareholders. The Committee considers that, although the non-performance related elements of the executive directors’ remuneration packages are substantial, the performance related elements are significant in terms of providing motivation to the executive directors to improve shareholder value. In order to ensure that no director is involved in deciding his/her own remuneration, the fees payable to non-executive directors (other than the Chairman) are set, after consultation with the Chairman, by a committee of the Board consisting only of executive directors (Mike Darrington and Malcolm Simpson) who periodically seek advice from external consultants as to the appropriate market rates applicable. Such advice was obtained in 2005 from Monks Partnership. Policy on Performance Conditions directors. This has restricted the number of new shares or shares held in treasury The performance conditions attaching to share options granted to the executive available to be allocated under the discretionary Senior Executive Share Option directors under the Company’s Senior Executive Share Option Schemes have varied Schemes under which the last grant of options (in which no executive director according to the date of grant. Such conditions are set by the Committee following participated) was made in September 2004. Any future grants of executive share receipt of advice from external consultants as to prevailing market practice and in options to executive directors will be based upon the need to secure individuals of order to set challenging performance objectives linked to shareholder return. The appropriate calibre, having regard to prevailing market conditions at the date of Committee intends that performance conditions will continue to be settled on this appointment, or to help to align the interests of executive directors with those of basis and applied to any future grants of options to executive directors under the GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 66 67 discretionary Senior Executive Share Option Schemes. Details of the performance • non-executive directors are appointed subject to the Company’s Articles of conditions for options currently outstanding are set out in the section headed Association, which require them to retire and to seek re-election at the first AGM ‘Share Options’ below. after appointment. Thereafter, one half of the Board (other than those appointed Whether performance conditions attached to share options have been met is tested by the Committee, which compares the actual performance of the Company with relevant published statistics and, if necessary, obtains advice from external consultants in order to reach its conclusion. This ensures that no director is in a position to rule on whether any performance condition applicable to his own options has been satisfied. since the last AGM), being those who have been longest in office since last re-election, and any other director who has not been elected or re-elected at either of the two preceding AGMs, must retire and seek re-election. Any non- executive director who has served on the Board for over nine years must seek re-election annually. The Nominations Committee advises the Board as to whether a particular director, whose turn it is to retire by rotation, should be No performance conditions have been attached to options granted pursuant to the nominated for re-election. Company’s Savings Related Share Option Scheme, which is available for all employees. The principal purpose of this scheme is to encourage employees at all levels within the Company to participate in, and to understand better, the growth in value of the Company and the rules of that scheme require that all options granted must be on the same terms. Performance criteria in relation to the performance based annual cash bonuses payable to the executive directors are set by the Committee each year in accordance with the general remuneration policy set out above. If approved by shareholders, the Committee will offer participation in the proposed new LTIP in accordance The policy on termination payments for executive directors is that the Company does not normally make payments beyond its contractual obligations, including any payment in respect of notice to which a director is entitled. In exceptional circumstances, an additional ex-gratia payment may be considered, based on factors including the director’s past contribution and the circumstances of the director’s departure. Non-executive directors would not normally be entitled to compensation for early termination of their appointments prior to the date on which they would next be due to retire by rotation, or if not re-appointed at such time. with the provisions set out in the circular to shareholders proposing its adoption. Directors’ Service Contracts Policy on Service Contract Notice Periods and Payments on Early Termination Details of the directors’ service contracts or letters of appointment are as follows: The Company’s policy on the duration of directors’ contracts is that: Executive Directors • existing executive directors should have service contracts terminable on one year’s notice served by the Company or by six months’ notice served by the director; Mike Darrington has a service contract with the Company dated 7 March 2003. His continuous period of service with the Company commenced on 15 July 1983. • future executive directors would be engaged on terms necessary to secure individuals of appropriate calibre, having regard to prevailing market conditions at Malcolm Simpson has a service contract with the Company dated 7 March 2003. His continuous period of service with the Company commenced on 24 April 1973. that time; Both Mike Darrington and Malcolm Simpson have provisions in their contracts which enable them to be terminated by the Company on 12 months’ notice or by Performance Graph the executive on six months’ notice. In addition to their basic salaries, each is entitled to participate in the Company’s profit sharing scheme available to all employees and to a performance based cash bonus. They are also entitled to additional benefits including the use of a motor car, private medical insurance, life assurance, permanent health insurance and a contribution towards telephone expenses. In addition to the above arrangements, for 2006, the executive directors will receive a performance based cash bonus such that the combined bonus to be received by each of them under this arrangement and the Company’s Profit-Sharing Scheme will be set according to a straight line graph based upon net profit achieved by the Company, subject to confirmation by the Remuneration Committee. Total bonus payments are capped at 60% of basic salary. Non-executive Directors The non-executive directors do not have service contracts with the Company. However, each of them does have a letter of appointment. The terms of appointment of each non-executive director require that they seek re-election on a regular basis in accordance with the Articles of Association of the Company (see above). The fees payable to the non-executive directors cover all normal duties. In exceptional circumstances, where significant additional time commitment is required, the Board (or a duly authorised committee) may award additional fees. No right of compensation exists where the office is terminated, for whatever reason. The graph below shows a comparison of the total shareholder return for the Company’s shares for each of the last five financial years against the total shareholder return for the companies comprised in the FTSE Mid 250 Index (excluding Investment Trusts) and the FTSE 350 (excluding Investment Trusts). These indices were chosen for this comparison because they include companies of broadly similar size to the Company. 250 200 150 100 50 0 1 0 0 2 / 1 0 / 1 0 1 0 0 2 / 7 0 / 1 0 2 0 0 2 / 1 0 / 1 0 2 0 0 2 / 7 0 / 1 0 3 0 0 2 / 1 0 / 1 0 3 0 0 2 / 7 0 / 1 0 4 0 0 2 / 1 0 / 1 0 4 0 0 2 / 7 0 / 1 0 5 0 0 2 / 1 0 / 1 0 5 0 0 2 / 7 0 / 1 0 FTSE 350 (ex-Invst Trusts) Greggs FTSE Mid 250 (ex-Invst Trusts) GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 68 69 Directors’ Remuneration Report continued Audited Information Directors’ emoluments and compensation The following table sets out details of the emoluments and compensation received or receivable by each director (excluding pension contributions, details of which are set out below). Executive Mike Darrington Malcolm Simpson Chairman Derek Netherton Non-executive Stephen Curran Sonia Elkin Ian Gregg Susan Johnson Bob Bennett Julie Baddeley Total Estimated Annual value bonus and Salary / fees Salary / fees of benefits profit share set for 2006 paid in 2005 £ £ 2005 £ 2005 £ Total 2005 Total 2004 £ £ 420,000 380,833 23,441 73,291 477,565 440,264 235,000 225,000 18,684 43,301 286,985 294,110 101,000 95,125 31,000 25,000 - 27,500 27,500 34,000 33,000 - 26,167 25,000 28,000 22,500 - - - - - - - - - - - - - - 95,125 88,000 25,000 23,500 - 9,617 26,167 25,000 28,000 22,500 25,000 23,500 25,500 - 909,000 827,625 42,125 116,592 986,342 929,491 The fees for Stephen Curran were paid to a third party. The fees payable to the non-executive directors reflect their respective membership and chairmanship of the relevant Board Committees and, in the case of Stephen Curran, his role as Senior Independent Director. Share options The following table sets out details of the share options (all of which were granted at a nominal or nil cost to the executive director concerned) held by, or granted to, each director during the year, according to the register of directors’ interests: Mike Darrington At 01/01/05 Number 18,000 27,900 Malcolm Simpson 12,000 12,400 Number of options during year Granted Number Exercised 31/12/05 Number Number price £ At Exercise Market price at date of exercise £ Gain on exercise £ Date from Date of which grant exercisable Expiry date Scheme - - - - 18,000 7,900} 8,000} - 26.875 45.25 330,750 Mar 99 Mar 02 Mar 06 Executive 12,000 17.015 45.25 45.00 223,056 223,880 Mar 00 Mar 03 Mar 07 Executive 12,000 - 26.875 45.25 220,500 Mar 99 Mar 02 Mar 06 Executive 2,400 10,000 17.015 45.25 67,764 Mar 00 Mar 03 Mar 07 Executive The aggregate gains on exercise of share options were £1,065,950 (2004: £5,039), including £777,686 (2004: £2,557) in respect of the highest paid director. The executive directors also have a potential beneficial interest in the Greggs Employee Benefit Trust. On each of the grants awarded in 1999 and 2000 under the Senior Executive Share Option Scheme, the exercise of one half of the options granted was made conditional upon the growth in the Company’s basic earnings per share over the three years from grant being greater than the median earnings per share growth of the companies comprised in the FTSE Mid 250 Index (excluding Investment Trusts). The other half of the options granted was conditional upon growth in the basic earnings per share of the Company being at least 10% above the median basic earnings per share growth of such comparator companies within the same period. No non-executive director has any options to acquire shares in the Company. The mid-market price of ordinary shares in the Company as at 31 December 2005 was £47.00. The highest and lowest mid-market prices of ordinary shares during the financial year were £49.50 and £36.20 respectively. Pensions Both of the executive directors earned pension benefits under the Greggs 1978 Retirement and Death Benefit Scheme, the Company’s defined benefit scheme, during the year under review. This scheme, which currently requires a contribution of 6.6% of pensionable salaries from members, provides for up to two-thirds of final pensionable salary, dependant on length of pensionable service. Both of the executive directors also received contributions into the Company’s money purchase defined contributions pension schemes during the year under review. No pension benefits were earned or accrued in respect of any non-executive director. The Finance Act 2004 has led to changes in the tax treatment of the current UK pension regime which are effective from 6 April 2006. These changes are not expected to have any material effect on the Company. Defined benefit scheme The following table sets out the change in each director’s accrued pension in the Company’s defined benefit scheme during the year and his accrued benefits in the scheme at the year end: Accrued annual Accrued annual Increase in Transfer value pension pension Increase in entitlement at entitlement at accrued accrued pension age 65 as at age 65 as at pension entitlement for 31 December 1 January entitlement the year net of of increase in accrued pension entitlement for the year Date of Date service birth commenced 2005 £ 2005 £ for the year inflation of 2.4% £ £ £ 8/3/42 15/8/83 132,370 117,892 15/10/41 24/4/73 125,591 114,021 14,478 11,570 11,649 119,533 8,833 87,228 Executive Director Mike Darrington Malcolm Simpson Note 1: The pension entitlement shown is that which would be paid annually on retirement based on service to the end of the year, but excluding any statutory increases which would be due after the year end. Note 2: The inflation rate of 2.4% shown in the table above is that published by the Secretary of State for Social Security in accordance with Schedule 3 of the Pensions Schemes Act 1993. Executive Director Mike Darrington Malcolm Simpson Increase in the Cash equivalent Cash equivalent cash equivalent transfer transfer transfer value as at value as at value since 1 January 31 December 1 January 2005 £ 2005 £ 1,862,841 1,982,373 1,751,283 1,838,511 2005 £ 96,820 72,258 Note: cash equivalent transfer values have been calculated in accordance with Actuaries Guidance Note GN11 and the increase is stated net of contributions made by the director. The transfer values disclosed above do not represent a sum paid or payable to the individual director. Instead they represent a potential liability of the pension scheme. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 70 71 Directors’ Remuneration Report continued Money purchase schemes The Company has paid the contributions set out below to two of the Company’s money purchase schemes (the Greggs Bakeries (MJD) Retirement Benefit Scheme and the Greggs Senior Executive Pension Scheme) for the benefit of executive directors during this financial year. Executive Director Mike Darrington Malcolm Simpson Approval by Shareholders Total Contribution contributions in respect made during of 2005 £ 3,333 60,500 2004 £ 76,868 10,500 At the Annual General Meeting of the Company to be held on 10 May 2006, a resolution approving this report is to be proposed as an ordinary resolution. This report was approved by the Board on 10 March 2006. Signed on behalf of the Board Julie Baddeley Director Chair of Remuneration Committee 10 March 2006 Corporate Social Responsibility Greggs plc believes that as a major employer, a provider of food products to the public, and a plc with obligations to its shareholders, the Company has a responsibility to conduct its business with integrity, to act responsibly, to address the impacts of our business on the environment, and to give something back to the wider communities in which we operate. This responsibility is delivered through the following: Customers, People and Suppliers “Our Values” are embraced by the Board and expected of all colleagues: “We will be enthusiastic and supportive in all that we do, open, honest and appreciative, treating everyone with fairness, consideration and respect.” Our Values are a basis for all of our activities. Our employees are expected to use them in their relationships with each other and with customers and suppliers. Our Values are our ‘code of conduct’ and are the framework within which the business manages its activities and operates. Food Safety and Health & Safety are at the forefront of how we operate. We insist on providing our customers with good quality food products and assurances of food safety. Our robust systems also seek to protect the health & safety of Greggs’ customers and its employees. In addition to the schemes listed above, Greggs plc staff throughout the country participate voluntarily in a wide range of charity fund raising, which makes an additional meaningful contribution to the wider communities in which we operate. By their dedication and devotion, our employees are a true credit to the Greggs and Bakers Oven name, and the real benefits of what they achieve are inestimable. It is thanks to these employees and their efforts that as a Company we are able to make a significant contribution to the communities in which we operate. The Environment The Company recognises the importance of protecting our environment for future generations and is committed to carrying out its activities with due consideration for the environmental impacts of its operations and in line with Our Values. Environment Policy Greggs plc has identified the key environmental impacts of its activities. We are committed to an ongoing programme of continual reduction of any adverse impacts and prevention of pollution consistent with our long term business objectives. To manage this, the Company is progressively introducing an Environmental Management System (EMS) in each Division, which will seek the following: • Compliance with all relevant environmental legislation, regulation and other requirements applicable to the Company or to which the Company subscribes; Wider Communities In 2005, Greggs plc directly donated 1.2% of pre-tax profit to charity. • Reduction of waste at source via the efficient use of resources and encourage re-use and recycling of waste; • Greggs Trust is a registered charity, founded by Ian Gregg in 1987. Its main objective is the alleviation of the effects of poverty and social deprivation in the areas where the Company trades. Its income in 2005 was £909,757, derived from the Greggs plc donation, from employees under the Give As You Earn Scheme and staff fund raising activities. The balance was received in the form of donations from major shareholders and income from investments (including shares in Greggs plc) held by the Trust. Funds are distributed by the Trustees and via staff Charity Committees operating across the country, offering support to good causes within our trading areas. • The Greggs Breakfast Club scheme is designed to get children in selected primary schools off to a better start by providing them with free breakfasts. Greggs funds a nutritious breakfast, including provision of fresh bread from local Greggs or Bakers Oven shops, together with the necessary equipment. Greggs and Bakers Oven staff work with school teachers to encourage parents, grandparents and other volunteers to run the clubs, including serving the breakfasts, thereby helping them to help others in their own communities. In 2005, the number of Breakfast Club schemes increased from 82 to 113. The concept has been validated by external independent research which has shown that Breakfast Club attendance encourages children to get to school on time and increases attentiveness in class. The scheme received the Business in the Community ‘Big Tick’ award for Excellence in 2003, which ran for 2 years. • The Greggs Cancer Run is an annual event which has raised over £3 million since its inception in 1983. The Cancer Run originated in Greggs North East, organised each year by a group of dedicated staff. In 2005 Cancer Runs took place at Greggs North East; Greggs North West; Greggs of Scotland and Greggs South East. The event is growing and will take place in 6 divisions in 2006. • 2005 was Year 5 of the Company’s investment of £500,000 in the 5-year Newcastle Employment Bond, which is secured as to repayment by Northern Rock plc. The investment is at zero rate interest, with the interest foregone to be used to help tackle long-term unemployment in the Newcastle upon Tyne area. • On a nationwide basis, Greggs made charitable donations of £609,000 in 2005, the bulk of which was directed through the Greggs Trust. Greggs plc has employed a full-time dedicated Community Initiatives Manager since January 2005. This role oversees our work in the wider communities, in particular to accelerate further roll-out of the Greggs Breakfast Clubs. This appointment is testament to Greggs’ ongoing commitment to the communities in which we operate. • Working towards increasing energy efficiency at all its sites; • Monitoring and improving the performance of vehicles owned by Greggs plc; • Working towards ensuring that policies and procedures are in place so that accidents/incidents with potential adverse environmental impact are controlled are far as is reasonably practicable; • Progressively making employees aware of the environmental issues relevant to their role within Greggs plc; • Taking into account the adverse impact on the environment of any capital expenditure project. During 2005, progress has been made as follows: • Continuation of environmental audits of all divisions. • Introduction of a waste management initiative; - Reduce the amount of food waste generated by our shops and bakeries; - Looking at alternatives to landfill disposal of food waste that is generated; - Using the Greggs productivity system to help reduce waste at source. • Certified environmental training being carried out with divisional representatives. • EMS review at Balliol to bring it in line with revised environmental standard ISO14001. • Second central savouries plant is being built IPPC compliant from commission, hence will become a low environmental risk plant. • Introduction of Greggs building standards meaning risk reduction measures against environmental impact. • Continuation of the SEBA (Save Energy Be Aware) initiative in all shops and factories to reduce energy consumption by the Company, to meet the Company targets for reduction set out in the plc Business Plan. • Working to introduce a packaging environmental impact measurement into the business, reducing packaging at source. In 2005, the Company has taken steps towards meeting its environmental commitments and will continue to grow this commitment during 2006. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 72 73 10 Year History 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 (as restated)* Turnover (£'000) 238,465 265,941 291,420 308,678 339,008 377,556 422,600 456,978 504,186 533,435 Profit on ordinary activities before taxation (£'000) 15,673 18,035 20,214 21,520 26,356 32,742 36,666 40,472 47,751 50,159 Shareholders' funds (£'000) 48,107 58,384 69,585 80,896 88,169 103,554 119,965 134,150 157,156 181,475 Earnings per share (pence) Dividend per share (pence) 95.8 32.0 121.1 37.0 122.8 41.0 135.1 45.0 162.3 55.0 190.2 65.0 209.2 72.5 230.5 80.0 270.5 96.0 282.1 106.0 Cash generated by operations (£'000) (before dividends, tax and capital expenditure) 24,955 30,408 34,902 34,526 43,431 50,418 55,555 57,722 69,261 63,689 Capital expenditure (£'000) 15,669 24,364 26,204 22,403 21,397 27,385 42,143 32,361 25,090 41,687 Number of shops in operation at year end 1,032 1,057 1,072 1,084 1,105 1,144 1,202 1,231 1,263 1,319 *restated for the transition to IFRSs DIRECTORS Derek Netherton (Non-executive chairman)†ø Sir Michael Darrington FCA (Managing)ø Malcolm Simpson FCA (Finance) Ian Gregg OBE (Non-executive)†ø Stephen Curran FCCA (Non-executive)*†ø Susan Johnson OBE (Non-executive)*ø Bob Bennett FCA (Non-executive)*†ø Julie Baddeley (Non-executive)*†ø *Member of Audit Committee † Member of Remuneration Committee ø Member of Nominations Committee SECRETARY AND REGISTERED OFFICE Andrew John Davison, Solicitor Fernwood House Clayton Road Jesmond Newcastle upon Tyne NE2 1TL Bankers Stockbrokers Royal Bank of Scotland plc UBS 149 High Street Gosforth Newcastle upon Tyne NE3 1HA Auditors KPMG Audit Plc Quayside House 110 Quayside Newcastle upon Tyne NE1 3DX Solicitors Robert Muckle LLP Norham House 12 New Bridge Street West Newcastle upon Tyne NE1 8AS 1 Finsbury Avenue London EC2M 2PA Brewin Dolphin Securities Ltd Commercial Union House 39 Pilgrim Street Newcastle upon Tyne NE1 6RQ Registrars Capita Registrars Bourne House 34 Beckenham Road Beckenham Kent BR3 4TU Financial Highlights Turnover Pre-tax profits Post-tax profits Shareholders’ funds Capital expenditure Earnings per share Dividend per ordinary share 2005 £’m 533.4 50.2 34.1 181.5 41.7 Pence 282.1 106.0 Financial calendar Announcement of results and dividends Half year Full year Dividends Interim Final Annual report posted to shareholders Annual General Meeting 2004 £’m 504.2 47.8 32.3 157.2 25.1 Pence 270.5 96.0 Early August Early March Mid October Late May Early April 10 May 2006 EPS DIVIDEND Nationwide Coverage GREGGS SHOP NUMBERS 2005 2004 Scotland North East Cumbria Yorkshire North West Midlands South West South East GREGGS 147 117 46 128 133 153 107 267 139 114 49 119 129 144 102 249 BAKERS OVEN SHOP NUMBERS Bakers Oven Scotland Bakers Oven North Bakers Oven Midlands Bakers Oven South 2005 2004 18 48 85 65 19 48 84 63 BAKERS OVEN 216 214 Greggs Belgium 5 4 1,098 1,045 TOTAL 1,319 1,263 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2005 74 75 Contents Contents 3 MISSION AND VALUES 4 8 CHAIRMAN’S STATEMENT MANAGING DIRECTOR’S REPORT 16 DIRECTORS’ REPORT 24 STATEMENT OF DIRECTORS’ RESPONSIBILITIES 25 REPORT OF THE INDEPENDENT AUDITORS 27 CONSOLIDATED INCOME STATEMENT 27 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE 27 PARENT COMPANY STATEMENT OF RECOGNISED INCOME AND EXPENSE 28 CONSOLIDATED BALANCE SHEET 29 PARENT COMPANY BALANCE SHEET 30 CONSOLIDATED STATEMENT OF CASHFLOWS 31 PARENT COMPANY STATEMENT OF CASHFLOWS 32 NOTES TO THE CONSOLIDATED ACCOUNTS 66 DIRECTORS’ REMUNERATION REPORT 73 CORPORATE SOCIAL RESPONSIBILITY 74 TEN YEAR HISTORY 74 DIRECTORS & ADVISERS 75 SHOP ALLOCATION Pence 290 280 270 260 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 A SLICE OF OUR LIFE ANNUAL REPORT & ACCOUNTS 2005 Fernwood House, Clayton Road, Jesmond, Newcastle upon Tyne NE2 1TL. www.greggs.plc.uk G R E G G S p l c A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 5