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 1 7 Investing in our future Greggs plc Annual Report and Accounts 2017 because… Every savoury is freshly baked in our shops OUR BALANCED CHOICE range continues to grow and now accounts for more than £100m of sales We have been making GREAT QUALITY bakery products OURSELVES for over 75 years Every sandwich is FRESHLY PREPARED every day 21,000 well trained colleagues provide great service to their customers We fuel the nation with our great coffee, and had record-breaking sales in 2017 O P E N We are OPEN when our customers want us to be, including from 7am and on Sundays We loved rewarding our customers for their loyalty last year and reached the 1 million app downloads milestone We want to make a positive impact on people’s lives …We launched reusable coffee cups in all of our shops, alongside a great discount on all hot drinks for customers using one 450+ BREAKFAST CLUBS Greggs Foundation celebrated its 30th anniversary We donated 45% more unsold food in 2017 than we did in 2016. This year, we’ll try and give away even more Playing a key role in the food-on-THE-go sector on sugar reduction in response to the Government’s commitment We help customers to make informed choices and introduced nutrition traffic lights to product details on our website We made a pledge for veg to help our customers to eat more vegetables We care about our planet too… making sure our carbon footprint got smaller again We are INVESTING Constantly to improve our shops and open new ones We’ve ambitions to grow to over 2,000 shops nationwide £25m to modernise and centralise our systems and processes £100m to reshape our supply chain to support shop growth Greggs plc Annual Report and Accounts 2017 01 Strategic Report ABOUT US We stand for great tasting, freshly prepared food that our customers can trust, at affordable prices and aim to become the customers’ favourite for food-on-the-go. With ownership of our supply chain and ambitions to grow to over 2,000 shops nationwide, we are in a unique position to make good, freshly prepared food accessible to everyone, ensuring that ‘Everyday tastes good’ at Greggs. DIRECTORS’ REPORT ACCOUNTS Board of Directors and Secretary Governance report Directors’ report Audit Committee report Remuneration Committee report Statement of Directors’ responsibilities 03 04 06 08 10 16 24 28 38 40 46 48 54 70 Independent auditor’s report Consolidated income statement Consolidated statement of comprehensive income Balance sheets Statements of changes in equity Statements of cashflows Notes to the consolidated accounts Ten-year history Financial calendar Secretary and advisers 71 76 76 77 78 80 81 106 IBC IBC Contents STRATEGIC REPORT Financial highlights Greggs at a glance Chairman’s statement Our strategy Chief Executive’s report Strategy in action Financial review Financial key performance indicators Non-financial key performance indicators 30 Risk management Principal risks and uncertainties 33 36 02 Greggs plc Annual Report and Accounts 2017 FINANCIAL HIGHLIGHTS Total sales Company-managed shop like-for-like (LFL) sales growth Pre-tax profit £960m+7.4% £960m+7.4% 3.7% 3.7% £81.8m+1.9% £71.9m-4.3% Diluted EPS 63.5p 55.7p Ordinary dividend Return on capital employed 32.3p+4.2% 32.3p+4.2% 26.9% 23.7% Underlying excluding exceptional items Total including exceptional items Detailed calculations of Alternative Performance Measures, not otherwise shown in the Income Statement and related notes, are detailed on page 106. Strategic progress 2017 has been another year of strong performance as we continued on our journey to transform Greggs into a winning brand in the food-on-the-go market. We’ve been busy developing our great product offer to meet customer needs, opening more shops in new locations while refurbishing our existing estate and investing in improved customer service. We made significant progress in the fourth year of our major process and systems investment programme. We have made a good start with our £100 million supply chain investment programme to increase logistics capacity, consolidate our manufacturing operations into centres of excellence to improve product quality and support shop growth, allowing us to compete more effectively in the food-on-the-go market. The result has been a fourth consecutive year of strong like-for-like sales growth and record profits. Greggs plc Annual Report and Accounts 2017 Greggs plc Annual Report and Accounts 2017 03 03 Strategic Report GREGGS AT A GLANCE Becoming the customers’ favourite for food-on-the-go Greggs is a strong and trusted brand and we draw on our heritage in fresh bakery to compete successfully in the food-on-the-go market. Having made strong progress in recent years, we have set the bar higher with our vision and strategic plan reflecting longer-term ambitions and commitment to putting the customer at the heart of our strategy. Our purpose Our business began in the 1930s, serving fresh bakery products to working families in the North East at prices everyone could afford. Today we’re just as keen for Greggs to have a positive impact on people’s lives. With ambitions to grow to over 2,000 shops nationwide and ownership of our supply chain, we are in a unique position to make good, freshly prepared food accessible to everyone. Our vision In recent years we have shown we can be a winning brand in the food-on-the-go market and our vision is to become the customers’ favourite for food-on-the- go. To achieve this, we have been working hard to see the business through the eyes of our customers. We continue to invest in understanding their needs and ensure we have amazing teams in place to deliver the fast and friendly service our customers know and love. Insight provided by our award-winning Greggs Rewards app and dedicated customer insight team helps to inform decision making throughout the business and better meet customer needs every day. Our operations Ownership of our supply chain means that we can make good, freshly prepared food accessible to everyone at great value in an extremely competitive market place. By managing our own logistics operation we can remain focused on the customer, delivering what our shops and customers need on time and in full. Our target market Greggs is a brand with universal appeal and we have been working hard to ensure we understand our customers and evolve our offer in response to their changing needs as we continue our journey to become the customers’ favourite for food-on- the-go. Our market locations As the internet changes the way we shop and food-on-the go eating habits evolve, we have built on our existing estate of shops to take Greggs where our customers want us to be. As a result, we can now be found in retail parks, shopping centres, industrial estates and office parks. We are also located where our customers need us when travelling, with shops in travel hubs, roadside locations with parking and now in Drive Thru format. Through our franchise partnerships we are also in motorway service stations and petrol forecourts. Investment to reshape our supply chain to support shop growth: £100m Investment to modernise and centralise our systems and processes: £25m 04 Greggs plc Annual Report and Accounts 2017 Business Model WHAT WE DO WHERE WE OPERATE WHAT WE OFFER Manufacturing Delivery Shopping Travel Quality Convenience Shops Support Work Leisure Value Service Strategy Great tasting, freshly prepared food Best customer experience Competitive supply chain First class support teams Turn to page 08 to find out more. Risks and uncertainties Business change Product quality and safety Food scare Loss of production Market pressure Consumer trends Turn to page 33 to find out more. Positive impact Customer health We encourage healthier food-on- the-go choices Responsible sourcing We care about where our ingredients come from Community Environment People We share our success with the people around us We aim to use energy efficiently and minimise waste We are committed to creating a great place to work Turn to pages 16-23 to find out more. Greggs plc Annual Report and Accounts 2017 05 Strategic Report CHAIRMAN’S STATEMENT Investing to create the platform to deliver long-term growth Dividend increased in line with our progressive policy: 32.3p Greggs performed well in 2017, delivering further like-for-like sales growth as well as expanding its estate of shops. This was achieved despite significant inflationary headwinds and alongside continued major investment in line with our strategic plan. These investments are creating the platform for us to deliver sustainable long-term growth for the benefit of all stakeholders. Overview Greggs once again demonstrated the resilience of its people and business model, delivering a solid trading and financial performance in the face of increased cost inflation and a strategic change programme. The development of our products and shop formats has opened up additional opportunities for growth in shop numbers and we expect this expansion to continue in the year ahead. We are investing significantly in our supply chain to enable this growth, whilst continuing to make improvements to our processes and systems that will deliver enhanced capability and efficiency to compete in the fast-moving food-on-the-go market. Our people and values In 2017 we began the investment in our supply chain that will enable us to deliver growth whilst remaining competitive in terms of the quality and price of our products. As I reported last year this involved taking some difficult decisions, particularly regarding the organisation of our manufacturing and logistics operations. We have worked hard over the last year to carry out the necessary changes in line with our values. There has been much challenge and dialogue but the whole team has worked together with the best interests of the business in mind, and I would like to extend my thanks to all involved. Greggs has a long history of conducting its business in a responsible manner. We have made great strides in environmental management in recent years and are working with others in our industry to make further improvements. This includes finding solutions to increase the proportion of packaging that can be recycled and ensuring that more of our surplus food is channelled to those who need it most. 06 Greggs plc Annual Report and Accounts 2017 We have a strong reputation for sharing our success with the communities where we operate and direct much of this support through the Greggs Foundation, which celebrated its 30th anniversary in 2017. Representatives of the Foundation attended a Board meeting in the year to explain how they work with the Company and other partners. The Foundation makes a real difference to the lives of people in our communities and is given tremendous assistance by staff throughout Greggs. It is a great charity and one that we are very proud to support. I would like to thank everyone who has worked for Greggs during the past year and contributed to the positive impact that it has had on all of its stakeholders. The Board As we announced last year, our Retail Director Raymond Reynolds stepped down from the Board at the AGM in May 2017 but remains a key member of the Company’s Operating Board in his new role as Property and Business Development Director. Raymond was a member of the Board for ten years and I would like to thank him for his important contribution throughout that time. Otherwise the composition of the Board was unchanged in 2017. We continued to spend a significant amount of time overseeing the major programmes of change that support the Company’s strategic plan, particularly the investments under way in our internal supply chain. Other reviews included emerging risk areas, including the uncertainties around exiting the European Union, and examination of customer preferences and behaviours and our resulting plans. The Board also visited Northern Ireland in the year to see for itself the progress that Greggs has made establishing a presence there. It was pleasing to see the same levels of enthusiasm and commitment to doing business the right way that we experience in more established trading areas. Directors continue to be encouraged to visit different areas of the business and experience it through the eyes of our colleagues and customers. Look closer at our strategy and how it’s making a positive impact on pages 16-23 Looking beyond this we remain optimistic about the growth potential for Greggs and are currently investing to support this. The benefits of our major change programmes are beginning to show and will give us much greater capability and capacity for further growth in the years ahead. Greggs continues to be a strong business with a great team. I am confident that we will make further progress in the year ahead. Ian Durant Chairman 27 February 2018 This helps to ensure that Non-Executive Directors’ contributions to Board discussions are well informed, supporting open and constructive dialogue with the management team. This year I also spent time with an employee panel, a particularly helpful experience given the significant changes that we are making in our supply chain. Further details of the Board’s work are included in the Governance and Committee sections of this Annual Report. Dividend Our progressive dividend policy targets an ordinary dividend that is two times covered by earnings, with any further surplus capital being returned to shareholders. Our Finance Director, Richard Hutton, outlines the expected application of the distribution policy in more detail in the financial review. In line with its progressive dividend policy, the Board intends to recommend at the Annual General Meeting a final dividend of 22.0 pence per share (2016: 21.5 pence), giving a total ordinary dividend for the year of 32.3 pence (2016: 31.0 pence), an increase of 4.2 per cent. Looking ahead Greggs continues to demonstrate its resilience in the face of economic uncertainty. This environment seems unlikely to change in the short term as the UK negotiates its exit from the European Union, with the associated risks to consumer confidence and further cost inflation. We are alive to these risks and working hard to mitigate the possible impacts where we can. Greggs plc Annual Report and Accounts 2017 07 Strategic Report OUR STRATEGY Our vision is to become the customers’ favourite for food-on-the-go. Our strategic plan has four pillars and our commitment to having a positive impact on people’s lives is embedded across them all. GREAT TASTING, freshly prepared food BEST customer experience We provide customers with fast and friendly service, fixing issues without a fuss and enjoy making every day a great day by rewarding them for their loyalty. We are taking our modern shops to where our customers want them to be, becoming more and more convenient alongside their busy lives. We care about our local communities. We share our success with the people around us, choosing to help charities that our customers and people care about. That’s why we donate at least one per cent of our pre-tax profits to the Greggs Foundation and fundraise all year round for this fantastic charity. Since the charity was founded, 30 years ago, it has given over £26 million to support the local communities that we serve. Turn to page 19 to find out more. We work hard to make sure our range meets our customers’ needs and while our classic favourites can’t be beaten, there is always something new to excite them. We offer great value at every time of the day and care about where our ingredients come from. positive impact on people’s lives We care about the health of our customers and where our ingredients come from. We publicly commit to encouraging healthier food-on-the-go choices and are currently working with Public Health England on sugar reduction in response to the Government’s commitment to reducing the sugar in our diets. We also signed the Food Foundation’s ‘Peas Please’ pledge. Our Balanced Choice range now accounts for more than £100 million of sales with each item containing fewer than 400 calories and rated green or amber on the nutrition traffic light system. We’re proud of our commitment to purchasing Fairtrade products and take great care to ensure that the animal products used in our recipes are produced and delivered in a way that avoids the abuse or exploitation of animals. Our leadership on farm animal welfare has been acknowledged by the Business Benchmark on Farm Animal Welfare by achieving Tier 2. Turn to page 16 to find out more. 08 Greggs plc Annual Report and Accounts 2017 We stand out from the crowd because we make great quality bakery products ourselves and love to create new things that will excite customers. We are always looking for ways to be more efficient and to support shop growth. We care about the environment. We aim to use energy efficiently and minimise waste because we want to do our bit to reduce the environmental impact from our operations. We continue to reduce our carbon footprint on an annual basis and we are proud holders of the Carbon Trust Standard in recognition of our work on carbon efficiencies. We use the money raised by the carrier bag charge to support the important environmental initiatives delivered by both national organisations such as The Rivers Trust, Keep Britain Tidy and Surfers Against Sewage, as well as grassroots projects. Turn to page 18 to find out more. We have well-trained people providing great service to their colleagues and ultimately our customers, and we are always looking to improve the way we do things by investing in first-class systems. We care about our people. We are committed to creating a great place to work. We are strong advocates of equality, diversity and inclusion and have committed to the National Equality Standard programme to drive this agenda forward in the years ahead. Turn to page 16 to find out more. Greggs plc Annual Report and Accounts 2017 09 Strategic Report CHIEF EXECUTIVE’S REPORT Good growth and further strategic progress Total sales up 7.4%: £960m Underlying operating profit excluding property profits: £81.7m 4.6% Delivering our strategy Greggs is a strong and trusted brand and we draw on our heritage in fresh bakery to compete successfully in the food-on-the-go market. Our purpose is to make good, freshly prepared food accessible to everyone with the aim of becoming the customers’ favourite for food-on-the-go. We are committed to conducting our business in a responsible manner and, in doing so, to have a positive impact on people’s lives. Our strategy has four pillars: 1. Great tasting, freshly prepared food Greggs products are differentiated by the way we freshly prepare food each day in our shops and by offering outstanding value for good quality, great tasting food-on-the-go. In 2017 we delivered another strong performance in challenging economic circumstances as rising inflation impacted both our own costs and customers’ disposable income. At the same time, we continued to make good progress with our business transformation programme, investing in new systems and processes as well as increased capacity and efficiency in our supply chain. We are successfully developing our product offer to meet customer needs and investing in improved customer service, in addition to accelerating growth in shop numbers. Financial performance Total sales grew to £960.0 million in 2017, up 7.4 per cent. Within this company-managed shop like-for-like sales grew by 3.7 per cent. Underlying operating profit, excluding property profits and exceptional items, grew by 4.6 per cent to £81.7 million (2016: £78.1 million). Pre-tax profit (including exceptional items) fell by 4.3 per cent to £71.9 million. Market background Economic conditions became more challenging in 2017, with business cost inflation rising significantly due to food ingredient and labour cost increases affecting the entire sector. We were able to leverage our scale and deliver productivity improvements to mitigate some of these pressures but, as expected, saw some year-on-year margin slippage. The market generally saw price inflation returning to the food sector, which resulted in a slowdown in disposable income growth for our customers. Whilst the food-on-the-go sector remains highly competitive, a further year of unbroken growth in like-for-like sales demonstrates the continued relevance and strength of the Greggs brand. 10 Greggs plc Annual Report and Accounts 2017 Look closer at how we are being more socially responsible on pages 16-23 Did you know… Breakfast remains the fastest-growing part of our trading day and we continue to build increased spend and visit frequency through menu development. Making good, freshly prepared food accessible to all income levels is embedded in our core purpose as a brand with outstanding value meal deals setting us apart from the competition. Our product strategy has been to nurture and protect our market-leading reputation in long-established traditional bakery categories adapted to food-on-the-go whilst developing new reasons to visit Greggs by offering quality and value in new growth areas. Our traditional categories, including fresh baked savoury snacks, freshly prepared sandwiches and delicious sweet bakery treats, remain our best-selling products and are being supported by strong growth in new categories. Breakfast Breakfast-on-the-go continues to grow strongly and Greggs has established a leading position by focusing on offering outstanding value with our breakfast meal deal starting at just £2. This remains our fastest-growing part of our trading day and we continue to build increased spend and visit frequency through menu development. Strategically it plays an important role in diversifying demand patterns, making us less reliant on general shopping missions and less sensitive to weather. Hot drinks Led by coffee at breakfast, our reputation for quality, value and service in this growth category continues to build, enabling us to extend our drinks menu choice. Hot drinks feature in all of our meal deal offers and it is this outstanding value that differentiates us from our competitors. Balanced Choice Growing public concern over obesity is driving increased demand for healthier choices in food-on- the-go. Greggs has a key role to play in encouraging healthier food choices, making good quality freshly prepared food accessible nationwide at outstanding value. Sales of healthier options, including our Balanced Choice range offering fewer than 400 calories and good nutritionals, continue to grow as we extend menu choice and take steps to encourage healthier food choices through disproportionate space allocation and promotion in our shops. Alongside development of our Balanced Choice range we have adopted a proactive approach to supporting the Government’s Childhood Obesity Plan and making significant efforts to reduce salt, fat and sugar in our products and to encourage greater consumption of vegetables in the diet. Hot food Hot food is another area of growing customer demand, providing food-on-the-go solutions for all times of the day. Sales of hot sandwiches and hot soup are growing well and provide a platform for further menu development, which we intend will create the opportunity to extend trading in Greggs for longer in the day as our reputation grows. Good food Customers increasingly care where their food comes from and, because we make the majority of our food ourselves, we are well placed to deliver food they can trust. Unlike the majority of our competitors, who resell bought-in finished products, we are a large-scale food manufacturer in our own right dealing at source with base ingredients. We have invested significantly in recent years, gaining independent accreditation for our sourcing and manufacturing credentials and have set out to lead the food-on-the-go sector in eliminating or reducing unnecessary ingredients at the same time as providing full information to allow customers to make informed choices. Greggs plc Annual Report and Accounts 2017 11 Strategic Report CHIEF EXECUTIVE’S REPORT CONTINUED We have a strong pipeline of new shop openings for 2018 and are planning to further accelerate our shop growth, aiming to add in the range of 110-130 net new shops in the year. Number of shops trading as at 30 December 2017: 1,854 Number of franchise shops opened in 2017: 45 Proportion of estate now located in travel, leisure and work-centred catchments: 34% Looking ahead Once again we have a strong pipeline of new product developments planned for the year ahead, strengthening traditional product areas and continuing to build our reputation in new growth categories. We completed 132 refurbishments and franchise partners refurbished a further ten units. We also successfully developed a new Drive Thru format that will allow us to compete effectively in this type of location as we seek new sites. 2. Best customer experience As well as offering great tasting great value food, Greggs is loved by customers because of our fast and friendly service. Working in a Greggs shop is very demanding so we rely on our amazing teams to deliver fast, friendly service under pressure. We continue to invest to simplify our processes and increase productivity to release time for service, with significant gains last year from our new shop ordering process in addition to a best practice programme that we call ‘The Greggs Way’. Our most loyal customers are signing up in rapidly increasing numbers to our award-winning Greggs Rewards scheme. The insight that this provides now includes satisfaction ratings and is helping to inform decision-making throughout the business, helping us to better meet customer needs every day. Our shops The key consideration when customers choose where to shop for food-on-the-go is convenience. Being within easy reach for customers when they need us is a prerequisite and we are working hard to increase shop numbers in order to provide easy access everywhere. In 2017 we opened 131 new shops (including 45 franchise units) and closed 41, growing the estate to 1,854 shops trading as at 30 December 2017. We opened our 202nd franchise shop and extended our company-managed shop reach to new territory in Devon, in addition to opening further shops in Northern Ireland. Refurbishment of our shops slowed down last year as we reached the end of our programme to transform our legacy bakery shops to our food-on-the-go format. We have a strong pipeline of new shop openings for 2018 and are planning to further accelerate our shop growth, aiming to add in the range of 110-130 net new shops in the year. In keeping with recent years, the majority of these new shops will increase our presence in travel, leisure and work-centred catchments. At the end of 2017 34 per cent of our shop estate was located in these catchment types. 3. Competitive supply chain In January 2017 we communicated details of the next phase of our major investment programme focused on increasing logistics capacity and consolidating our manufacturing operations into centres of excellence in order to support shop growth. Once implemented this new supply chain platform will deliver improvements to product quality, our competitiveness and, alongside systems investment, will complete our transformation from traditional bakery to food- on-the-go. Overall our expansion plans will create thousands of new roles in retail and distribution operations but will result in fewer jobs in manufacturing. Decisions such as these, which impact our people, are always difficult but our teams have shown commitment and professionalism throughout these changes and we have been able to agree a way forward on a basis of voluntary redundancy in the majority of cases. This investment phase is a complicated programme of work which will take until 2020 to complete. We have made a good start in 2017, completing the transfer of our Edinburgh operations to our Glasgow bakery, which has been 12 Greggs plc Annual Report and Accounts 2017 extended to become a centre of excellence for Yum Yum production, and extending our Leeds bakery to create a centre of excellence for cake and muffin manufacturing. The year ahead will be the peak year for investment in the programme, including the creation of our centre of excellence for doughnuts in our Gosforth Park bakery. Strategic change of this magnitude is always challenging and I am grateful for the commitment of our teams who have been making these changes whilst maintaining service standards to our shops. 4. First class support teams We have made further significant progress in the fourth year of our major process and systems investment programme. In 2017 we successfully deployed our largest ever systems roll out, replacing our traditional shop ordering with a new central forecasting and replenishment process. We have already seen benefits in improved product availability for customers and expect to see savings start to come through in lower wastage figures as we become more experienced with the system’s capabilities. In the second half of the year we successfully deployed pilots in both logistics and manufacturing which will be rolled out alongside our supply chain investment programme. Scoping work has also begun for the remaining SAP support modules, with human resources, payroll and property management to be implemented in 2018. Having a positive impact on people’s lives Greggs has a long-standing tradition and reputation as a socially responsible business and as such we want our actions to have a positive impact on people’s lives. This ambition covers a broad range of stakeholders and in 2017 we made further improvements in all areas and were pleased to achieve an increase to a ‘4.5 star’ rating in the Business in the Community CR index in early 2018. We encourage healthier food-on-the-go choices As a leading bakery food-on-the-go retailer we recognise that many of the products we sell are traditional favourites best eaten in moderation. As such we aim to capture as much of the demand for these products as possible in a highly- competitive market but at the same time we are taking steps to encourage customers to see Greggs as a food-on-the-go retailer selling a variety of products, including healthier options. Our range of Balanced Choice products offers that choice at below 400 calories with good nutritional values and now represents more than £100 million of sales. We are committed to encouraging customers to make healthier food- on-the-go choices and are taking active steps by offering this range in all of our shops nationwide, providing access to all and allocating prominent and disproportionate space to bring these products to customers’ attention. Alongside Balanced Choice we are working on sugar reduction, in addition to the salt and fat reductions seen in recent years. Other initiatives include working with New Cross Hospital in Wolverhampton to redesign the retail format of our shop there and the product range to meet the requirements of NHS guidance. In addition, in 2017 we made the ‘Pledge for Veg’ in partnership with the Food Foundation, through which we will help customers to increase their vegetable intake through design of our salads, soups and cold sandwiches. Did you know… Our healthier options are increasingly popular – Balanced Choice now accounts for over £100m of sales. Greggs plc Annual Report and Accounts 2017 13 Strategic Report CHIEF EXECUTIVE’S REPORT CONTINUED Community In 2017, we increased the amount of end-of- day food donations by 45 per cent. We care where our products come from All the tea, coffee, hot chocolate, orange juice, apple juice and bananas we sell are certified Fairtrade. We source our prawns and tuna from sustainable sources and have recently maintained our Tier 2 status, despite increased requirements, in the Business Benchmark on Farm Animal Welfare. In our internal supply chain the majority of our manufacturing sites have achieved AA standard on version seven of the BRC Global standard for food safety. We share our success with the community around us We continue to share our success with the local communities in which we operate. In 2017 this included increasing the amount of end-of-day food that we donated to good causes by 45 per cent and continuing to support the work of the Greggs Foundation, which celebrated its 30th anniversary in 2017. Through the generous support of Greggs and other donors and fundraisers, including our staff and customers, the Greggs Foundation was able to distribute £3.1 million to support a wide range of initiatives that improve the quality of life in our local communities. These included the award-winning Greggs Breakfast Club programme which, with support from 80 partners, now provides six million free wholesome breakfasts each year to children in over 465 primary schools. We aim to use energy efficiently and minimise waste We hold the Carbon Trust Standard in recognition of our work on carbon efficiencies and our Environmental Management System is certificated to ISO 14001. We continue to trial technologies that could help to reduce our carbon footprint even further in the years ahead. We know that coffee cup recycling is a significant issue and, as a responsible business, we are working hard to reduce our impact on the environment and do our bit to help find a solution. We are currently conducting a trial in 20 shops across Manchester and Liverpool city centres to establish feasibility for in-store recycling of hot drinks cups. This will give us the opportunity to ensure we have a robust and effective process in place before potentially rolling out further. In addition, we sell reusable hot drinks cups in all of our shops and offer customers a 20 pence discount when using a reusable cup. Greggs is also part of the Paper Cup Recycling and Recovery Group and is working with others in the industry towards delivering a long-term, nationwide paper cup recycling solution. We continue to work hard with our suppliers to further improve our hot drink cups to ensure that they are as sustainable as possible. Reducing the use of plastic in society is another issue where we are trying to play our part. As a vertically-integrated business we have a natural advantage in making most of our products ourselves and controlling the way in which they are distributed. For example, we distribute food to our shops using reusable trays and have separation processes behind the scenes to support recycling. Going forward, we aim to reduce further the amount of plastic involved in our processes. 14 Greggs plc Annual Report and Accounts 2017 We are committed to creating a great place to work We pay all of our people more than the National Living Wage, including those under the age of 25. We share ten per cent of our profits with employees and will be sharing a record £9.2 million with our people as a result of our strong performance in 2017. Our Employee Opinion Survey engagement score has increased by five percentage points over the last two years; 81 per cent of our people say they feel committed to Greggs and to helping us achieve our goals. However, we are not complacent and in the year ahead will be working towards achieving the National Equality Standard as part of our commitment to make Greggs an even better place to work. We are committed to supporting the development of all our colleagues, in particular our talented female colleagues, as we work towards reducing our gender pay gap, which currently stands at 22 per cent. We have made good progress with this in recent years and at Board level have exceeded government guidelines with 43 per cent of our Board being women. Further details of all of our actions in these areas are described elsewhere in this annual report. Outlook for 2018 Whilst the UK consumer outlook remains challenging, with industry-wide cost pressures expected to moderate but continue in the year ahead, we are encouraged by the start to the year. Company-managed shop like-for-like sales in the eight weeks to 24 February 2018 have grown by 3.2 per cent, and total sales are up 6.2 per cent. 2018 will be the peak year for investment in our supply chain as we create the platforms for further growth. We also plan to open a record number of new shops as we implement our plan to grow Greggs as a leading food-on-the-go brand. We will be sharing a record £9.2 million with our people, due to our strong performance in 2017: £9.2m 81% of our people say they feel committed to Greggs: 81% Roger Whiteside Chief Executive 27 February 2018 Greggs plc Annual Report and Accounts 2017 15 Strategic Report STRATEGY IN ACTION We are investing in our future… We care about our people and value their opinion We work hard to ensure Greggs is a great place to work and that our people feel valued. Now in its second year, our dedicated employee health and wellness initiative ‘Balanced You’, which covers four key areas: healthy eating and drinking, keeping active and physically well, healthy social life and good relationships, and positive mental wellbeing, received a Bronze award from Better Health at Work. Roger Whiteside signed the Time to Change Employer Pledge, illustrating our long-term commitment to raising awareness about the importance of mental health and wellbeing at work and helping to break the culture of silence around mental health. 16 Greggs plc Annual Report and Accounts 2017 We are committed to helping improve the health of our customers We believe in offering our customers choice so, alongside our traditional favourites, you’ll see a whole host of healthier options including savouries, sandwiches, salads, porridge and soup. Our Balanced Choice range continues to grow in popularity and now accounts for more than £100 million of sales. We have made a number of public commitments to highlight that we’re serious about customer health. We are currently working with Public Health England on sugar reduction in response to the Government’s commitment to reducing the sugar in our diets. We made a ‘Pledge for Veg’ in partnership with the Food Foundation which will enable us to help customers increase their vegetable intake through our salads, soups and cold sandwiches. Balanced Choice Our Balanced Choice range continues to grow and now accounts for over £100m of sales. Strategy links Sustainability links Great tasting, freshly prepared food Best customer experience Competitive supply chain First class support teams Customer health Responsible sourcing Community Environment People We aim to donate as much unsold food to charity as we can We have been donating unsold food from shops for many years. Traditionally our bakeries would team up with larger charities who would collect the unsold food from us and distribute to their own network of smaller charities. While this process is still in place, we have also been working hard to increase the amount of unsold food donated by our shops to local good causes where we can find an outlet. To this end, we ramped up our campaign in 2017. This involved creating a dedicated application page for unsold food donations on the Greggs Foundation website. We also have a sign placed prominently in our shops inviting customers to come forward if they know of a good cause that could benefit from unsold food. The amount of unsold food we donate has increased by 45 per cent in the last 12 months. Our customers can TRUST what our food is made of We are incredibly grateful to Greggs for the delicious support it has provided to our Contact the Elderly groups in Scotland. The unsold food is welcomed by our tea party groups which meet once a month, giving older people who live alone the chance to enjoy a vital lifeline of friendship. Contact the Elderly relies upon the kindness of the local community to make an immeasurable difference to the lives of older people. By supporting our work in this way, Greggs has played an integral role in this wider community kindness. Janice Kerr, Development Officer at Contact the Elderly We care where our ingredients come from We only buy free-range whole eggs and we are proud to have received Compassion in World Farming’s Good Egg award. Our tuna is caught by pole and line fishing or by using methods without any Fish Aggregating Devices and all of our prawns are from MSC certified sustainable sources. We only use palm-derived fats and oils in our ingredients, that are certified as sustainable. We measure our progress against the Business Benchmark on Farm Animal Welfare and we’re proud to have moved our rating from Tier 5 to Tier 2 over the last three years. We’re committed to making a positive difference through our commitment to purchasing Fairtrade products. All the tea, coffee, hot chocolate, sugar sachets, orange juice, apple juice, peppermint tea, green tea and bananas we sell are certified Fairtrade. We were proud to once again be a high-street partner for ‘Fairtrade Fortnight’ in 2018. Greggs plc Annual Report and Accounts 2017 17 Strategic Report STRATEGY IN ACTION CONTINUED We are proud of the Greggs Foundation In 2017, the Greggs Foundation celebrated its 30th birthday. In that time, through the provision of its five main grant programmes, North East core funding grant, local community projects fund grant, environmental grant, hardship fund grant and breakfast clubs, the Foundation has donated over £26 million to help improve the quality of life of people in local communities. 18 Greggs plc Annual Report and Accounts 2017 We care about the environment We have been successful over several years in reducing the carbon footprint of our operations and, whilst this programme continues, we are now turning our attention towards specific problems such as product packaging. We have the advantage of selling most of our products freshly prepared in shop and in that way require less packaging than factory food competitors. Nevertheless we are committed to further reducing the use of plastic in our processes. Alongside this, money raised by the carrier bag charge is being used to support local community environmental projects through the Greggs Foundation and environmental initiatives delivered by national organisations such as The Rivers Trust, Keep Britain Tidy and Surfers Against Sewage. We’re committed to reducing our annual carbon footprint and achieved a 15% reduction in intensity in 2017. We’re proud holders of the Carbon Trust Standard in recognition of our work on carbon efficiencies. A reduction of: 15% Surfers Against Sewage is delighted to work with Greggs to grow the impact of our work to tackle litter and plastic waste in communities right around the UK. Together we are inspiring and educating thousands of school children to take action to protect the beaches, parks and playgrounds they love, and mobilising thousands of beach clean volunteers in every part of the country. Together we really are making a difference to community spaces. Hugo Tagholm, CEO, Surfers Against Sewage In 2017, we opened 48 new breakfast clubs, taking the total number to 454. This means that we are helping to ensure that 28,900 children a day (that’s circa 6 million breakfasts a year!) are getting the best possible start to their school day with a nutritious breakfast. 450+ Breakfast Clubs We support those in need through charitable giving The Greggs Foundation isn’t the only charity we support. We also fundraise for a number of other charities which our people and customers feel passionate about, including BBC Children in Need, the Poppy Appeal and the Disasters Emergency Committee (DEC). We are also proud supporters of the North of England Children’s Cancer Research charity and are the main sponsor of its annual Children’s Cancer Run. To date, the run has raised over £30 million to fund research into improving recovery rates. In 2017, we celebrated our 11th anniversary supporting BBC Children in Need. During that time, our team members and customers have helped raise over £8.5 million for the charity – something we are all incredibly proud of! We want our business to have a positive impact on people’s lives Understanding and rewarding our loyal customers through Greggs Rewards Our award-winning loyalty scheme, Greggs Rewards, has had a very successful year and has provided numerous benefits to both our customers and our shop teams. The app has grown in popularity across the UK throughout the year. We surpassed the one million customer downloads milestone along with achieving the No 1 slot in the App Store after we helped ease students back into university life with a free Greggs lunch. We rewarded our customers with a wide variety of their favourite products via the app, whilst launching new technology that enables them to instantly rate our products and service after shopping with us. This information will prove invaluable in helping our shop teams to deliver a great Greggs customer experience every day. Greggs plc Annual Report and Accounts 2017 19 Strategic Report We are taking Greggs to new areas Convenience is key when it comes to customer choice and, as the internet changes the way we shop and our food-on-the go eating habits, we have been opening new shops to take Greggs to where our customers want us to be. In 2017, we accelerated our shop growth, opening 131 new shops, including 45 franchise shops focused on travel locations, reaching a significant milestone as we celebrated our 200th franchise shop opening. We opened a new Drive Thru format in Irlam, Manchester and we took Greggs to new territory in Devon whilst opening further shops in Northern Ireland. New shops opened in 2017: Franchise shops in travel locations: 131 45 STRATEGY IN ACTION CONTINUED We are proud to fuel the nation at breakfast time Breakfast remains our fastest growing part of the day and we have established a leading position by offering our customers outstanding value at just £2 for a breakfast deal – an offer we are proud to hold for the eighth year running. We continue to build on our reputation for high quality, great tasting, good value coffee and increased our hot drinks menu choice with the introduction of flavoured lattes towards the end of the year. We are OPEN when our customers want us to be, including from 7am and on Sundays 20 Greggs plc Annual Report and Accounts 2017 We are making great progress in transforming our supply chain In 2017, we made great progress in our £100 million supply chain investment programme to increase logistics capacity, consolidate our manufacturing operations into centres of excellence to improve product quality and support shop growth, allowing us to compete more effectively in the food-on-the-go market. We completed the transfer of our operations in Edinburgh to our Glasgow bakery which we have extended to create a centre of excellence for Yum Yum production. We also extended our Leeds bakery to create a centre of excellence for cake and muffin production. £100m to reshape our supply chain to support shop growth Greggs plc Annual Report and Accounts 2017 21 Strategic Report STRATEGY IN ACTION CONTINUED We are proud of our bakery heritage We are proud of our heritage and our long- established traditional bakery categories such as freshly baked savoury snacks, freshly prepared sandwiches and delicious sweet bakery treats remain our best-selling products. Greggs iconic sausage roll remains our number one bestseller. We have been making GREAT QUALITY bakery products OURSELVES for over 75 years 22 Greggs plc Annual Report and Accounts 2017 We love to excite our customers with new reasons to visit Greggs In 2017, we delivered an exciting variety of new products including additions to our hot food range with sales of our hot sandwiches and gluten-free soup growing well. More products will feature in 2018 as we create new reasons to visit us for food-on-the-go, at all times of the day. We believe in equality, diversity and inclusion At Greggs we are committed to treating our people equally and ensuring that everyone – no matter what their background, race, ethnicity or gender – has an opportunity to develop. We are signatories to the National Equality Standard and are committed to supporting the development of all our colleagues, in particular our talented female colleagues, as we work towards reducing our gender pay gap. We have made good progress with this in recent years and at Board level have exceeded Government guidelines with 43 per cent of our Board being women. 81% = Our Employee Opinion Survey engagement score has increased by two percentage points over the last two years. 81 per cent of our people say they feel committed to Greggs and to helping us achieve our goals. We are investing to improve our customer service As well as our great tasting, great value food, our customers love our fast and friendly service. We have been investing to further improve our customer service by putting simpler processes in place which will help to increase the productivity of our amazing teams. 21,000 well trained colleagues provide great service to their customers Greggs plc Annual Report and Accounts 2017 23 Strategic Report FINANCIAL REVIEW Another year of good financial performance Pre-tax profit before exceptional items was £81.8 million (2016: £80.3 million). Including exceptional items, pre-tax profit was £71.9 million (2016: £75.1 million). Exceptional items In 2016 we commenced the first phase of our major investment programme to reshape our internal supply chain, and this has continued throughout 2017. Activity in 2017 included the relocation of Yum Yum manufacturing to our Glasgow site, and expansion of that site to consolidate our distribution activity in Scotland following the closure in May of our Edinburgh bakery. In addition, we consolidated manufacturing of small cakes and muffins at our Leeds bakery and relocated our pizza manufacturing to our Manchester site. Total Group sales for the 52 weeks ended 30 December 2017: £960m Like-for-like sales in company-managed shops grew by: 3.7% In 2017 we delivered another good financial performance, mitigating the impact of increased cost inflation whilst managing a significant investment programme. The costs of this programme, along with continued growth in our estate, were all self-funded from our strong cash flow, whilst we also increased dividends to shareholders. Revenue Operating profit (excluding exceptional items and property profits) Property profits Operating profit (excluding exceptional items) Operating margin (excluding exceptional items Finance expense Profit before taxation (excluding exceptional items) Exceptional items Profit before taxation 2017 £m 2016 £m 960.0 894.2 81.7 0.5 78.1 2.2 82.2 80.3 8.6% 9.0% (0.0) (0.4) 81.8 (9.9) 71.9 80.3 (5.2) 75.1 Sales Total Group sales for the 52 weeks ended 30 December 2017 were £960.0 million (2016: £894.2 million), an increase of 7.4 per cent. Sales in company-managed shops with more than one calendar year’s trading history (’like-for-like’) grew by 3.7 per cent to £817.5 million (2016: £788.5 million). We also saw like-for-like and total sales growth in our franchised shop estate. Profit Operating profit before exceptional items was £82.2 million (2016: £80.3 million). This included a £0.5 million contribution from property disposals (2016: £2.2 million). Excluding the impact of property profits from both years, the underlying growth in operating profit was 4.6 per cent. The result reflects strong sales growth in a year when, as expected, we experienced higher than historical cost inflation. 24 Greggs plc Annual Report and Accounts 2017 Look closer at the KPIs we use to monitor the performance of the Group against our strategy on page 28 Did you know… In 2017, we relocated our Yum Yum manufacturing to our Glasgow site. In addition, we consolidated manufacturing of cakes and muffins to our Leeds bakery and relocated our pizza manufacturing to Manchester. Including related exceptional property gains, the total exceptional charge in relation to this programme was £10.1 million in 2017 (2016: £6.4 million). After adjustments made for the reversal of prior year exceptional costs the total exceptional charge for the year was £9.9 million (2016: £5.2 million), comprised as follows: Supply chain restructuring: – redundancy costs – transfer of operations – property-related Total cash costs of supply chain restructuring – depreciation and asset write-offs – property disposal gains Net supply chain restructuring charge 2017 £m 2016 £m 7.4 1.3 0.5 9.2 1.3 (0.4) 10.1 4.1 0.4 – 4.5 1.9 – 6.4 Restructuring of support functions – 0.4 Release of prior years’ exceptional items: – dilapidations – other property provisions – restructuring of support functions Total exceptional items – (0.2) – (0.5) (0.9) (0.2) 9.9 5.2 We continue to expect the total exceptional cash costs of our supply chain investment programme, excluding any associated property disposal gains, to be in the region of £25.0 million. Our expectation of non-cash costs (accelerated depreciation and asset write-offs) associated with the programme has reduced to £5.0 million (previously £7.0 million). Total charges so far have totalled £16.5 million and we expect a further £6.0 million in 2018. A property gain of £0.4 million resulting from the disposal of our Edinburgh site was treated as exceptional in the year because the site closure came as a result of the overall supply chain restructuring programme. We have now exchanged contracts for the conditional disposal of our vacant Twickenham site. Should this progress to completion, any resultant profit will also be treated as an exceptional gain. We continue to expect the total proceeds arising from supply chain site disposals to be in line with those anticipated in our investment plan. In 2017 the total cash impact of exceptional items was a net outflow of £1.9 million (2016: £3.8 million cash outflow). We expect the 2018 cash outflow in respect of exceptional items to be c.£12.5 million. Operating margin Operating margin before finance expenses and exceptional items was 8.6 per cent (2016: 9.0 per cent). Including exceptional items, the operating margin was 7.5 per cent (2016: 8.4 per cent). Gross margin before exceptional items was stable year-on-year at 63.7 per cent (2016: 63.7 per cent). We experienced high levels of food input cost inflation for most of the year but the impact of this on gross margin was partly mitigated by lower costs in our supply chain as a result of site closures. Including exceptional items gross margin was 62.7 per cent (2016: 63.2 per cent). In an inflationary environment savings from our actions to make the business simpler and more efficient have become even more important. In 2017 we delivered savings of £9.7 million (2016: £7.1 million). Benefits were achieved through procurement initiatives and as a result of improvements across our retail and supply chain operations. Cost inflation will continue to be a headwind in 2018 and we will redouble our efforts to mitigate this impact through our efforts to make the business more efficient. As noted above, in 2017 we recognised gains on the disposal of freehold properties totalling £0.5 million (2016: £2.2 million). These were in addition to the property gain on disposal of our Edinburgh site, which was treated as exceptional. Financing charges There was a net financing expense of £0.4 million in the year (2016: £0.0 million) reflecting the funding position of the defined benefit pension scheme, partially offset by interest received and exchange gains. In the year ahead we expect to incur a financing expense of around £0.2 million relating to the net liability of the pension scheme at the start of the year. Greggs plc Annual Report and Accounts 2017 25 Strategic Report FINANCIAL REVIEW CONTINUED The performance of new shops opened in 2017 was encouraging, with sales above the level expected at the time of investment. Amount invested on capital expenditure in the business during 2017: £70.4m Return on capital employed (excluding exceptionals) for 2017: 26.9% Balance sheet Capital expenditure We invested a total of £70.4 million (2016: £80.4 million) on capital expenditure in the business during 2017, less than we had originally expected due to later phasing of a number of new shop openings and supply chain projects. The total included £40.8 million for development and maintenance of our retail estate and £4.4 million in respect of IT infrastructure. Investment in our supply chain of £23.4 million included works at our Glasgow and Leeds bakeries to consolidate production of Yum Yums, small cakes and muffins, and preparations for further such projects in Manchester and Newcastle in the year ahead. Depreciation and amortisation in the year was £53.5 million (2016: £45.6 million). 2018 will be a year of record investment in the business as we reach the peak of our capital expenditure on consolidation of our manufacturing activities. This aspect of our investment programme is expected to require around £45 million of capital expenditure in 2018. We will also continue to grow and diversify our shop estate through the opening of c.90 new company-managed shops, with further openings funded by franchise partners. Overall we plan capital expenditure of around £95 million in 2018. There will be further investment to complete our supply chain programme across 2019 and 2020 and the bulk of the work to modernise our IT systems should also complete in this timeframe. Assuming that we invest to support continued growth of c.100 net shops per year then we expect capital expenditure of c.£95 million in 2019 reducing to c.£80 million in 2020. Taxation The Company has a simple corporate structure, carries out its business entirely in the UK and all taxes are paid there. We aim to act with integrity and transparency in respect of our taxation obligations. Excluding the effect of exceptional items the Group’s underlying effective tax rate was 20.7 per cent (2016: 22.5 per cent). The overall tax rate for the year including exceptional items was 20.9 per cent (2016: 22.8 per cent). The year-on-year reduction in the effective rate primarily reflected reductions in the headline rate of corporation tax and settlement of prior year tax computations. We expect the effective rate for 2018 to be around 21.25 per cent and that the effective rate going forward will continue to be around two per cent above the headline corporation tax rate. This is principally due to disallowed expenditure such as depreciation on non-tax-deductible qualifying properties and costs of acquisition of new shops. Earnings per share Diluted earnings per share before exceptional items were 63.5 pence (2016: 60.8 pence), an increase of 4.4 per cent. Basic earnings per share before exceptional items were 64.5 pence (2016: 62.0 pence). Including exceptional items diluted earnings per share were 55.7 pence (2016: 56.7 pence) and basic earnings per share were 56.6 pence (2016: 57.8 pence). Dividend The Board recommends a final ordinary dividend of 22.0 pence per share (2016: 21.5 pence). Together with the interim dividend of 10.3 pence (2016: 9.5 pence) paid in October 2017, this makes a total ordinary dividend for the year of 32.3 pence (2016: 31.0 pence). This is covered two times by diluted earnings per share before exceptional items in line with our progressive dividend policy. Our policy on special distributions is outlined below under ’Cash flow and capital structure’. Subject to the approval of shareholders at the Annual General Meeting, the final dividend will be paid on 18 May 2018 to shareholders on the register on 20 April 2018. 26 Greggs plc Annual Report and Accounts 2017 Working capital Group net current liabilities decreased to £21.4 million at the end of 2017 (2016: £28.8 million). We held higher cash balances at the end of 2017 as a result of delays in the phasing of capital expenditure, as noted above. Inventory levels rose by £2.8 million and receivables rose by £2.7 million in the year. The £6.5 million increase in current liabilities largely reflected a higher level of restructuring provisions resulting from the changes made to our supply chain in the year. Pension scheme liability The net liability shown on the balance sheet for the Company’s closed defined benefit pension scheme reduced to £7.5 million (2016: £22.9 million). The assets of the scheme performed strongly in 2017, reducing the liability by £8.8 million. In addition, in order to reflect scheme experience, an allowance has now been included in the valuation for expected commutation of pensions. This reduced the liability by £7.0 million. The scheme underwent a full actuarial revaluation in 2017, which showed no current requirement for Company contributions. Return on capital We manage return on capital against predetermined targets and monitor performance through our Investment Board, where all capital expenditure is subject to rigorous appraisal before and after it is made. For investments in new shops we target an average cash return on invested capital of 25 per cent, with a hurdle rate of 22.5 per cent, over an average investment cycle of seven years. Other investments are appraised using discounted cash flow analysis. The performance of new shops opened in 2017 was encouraging, with sales above the level expected at the time of investment. New shops opened in 2016 are maturing well and are now above our target for return on investment. We continue to see particularly strong returns on the relocation of shops within their existing catchments. We delivered an overall return on capital employed (ROCE) for 2017 of 26.9 per cent excluding exceptional items (2016: 28.1 per cent). The reduction in ROCE was expected given the level of supply chain investment in the year. Cash flow and capital structure The net cash inflow from operating activities in the year was £116.9 million (2016: £117.6 million). At the end of the year the Group had net cash and cash equivalents of £54.5 million (2016: £46.0 million). Having taken into account the views of shareholders the Board continues to believe that it is appropriate to maintain a target year-end net cash position of around £40 million to allow for seasonality in our working capital cycle and to protect the interests of all creditors. Looking forward we intend to maintain our progressive dividend policy and, to the extent that we have material surplus capital within the Group, the Board would expect to return capital to shareholders, likely by way of special dividends. In 2018 we expect that cash generated will be required to meet the Group’s investment plans whilst paying ordinary dividends in line with our policy. Richard Hutton Finance Director 27 February 2018 Did you know… 2018 will be a year of record investment in the business as we reach the peak of our capital expenditure on consolidation of our manufacturing activities. Greggs plc Annual Report and Accounts 2017 27 Strategic Report FINANCIAL KEY PERFORMANCE INDICATORS We use eight key financial performance indicators (KPIs) to monitor the performance of the Group against our strategy The definition of these KPIs and our performance over the last five years is detailed below. All of the non-GAAP measures detailed can be calculated from the GAAP measures included in the annual accounts or are detailed on page 106. Commentary on these KPIs is contained within the financial review: Total sales growth: 7.4% Like-for-like sales growth: 3.7% 2017 2016 2015 2014 2013 7.4% 7.0% 5.2% 4.7% 2017 2016 2015 2014 3.8% -0.8% 2013 3.7% 4.2% 4.7% 4.5% The percentage year-on-year change in total sales for the Group, adjusted for the impact of a 53-week year in 2014. Compares year-on-year cash sales in our company-managed shops, excluding any shops which opened, relocated or closed in the current or prior year. Like-for-like sales growth includes selling price inflation and excludes VAT. The impact of shop refurbishment is included in like-for-like sales growth. The calculation of these figures for the current and prior year can be found on page 106. Operating profit: £82.2 million Operating margin: 8.6% 2017 2016 2015 2014 2013 £72.3 £82.2 £80.3 £75.2 £73.1 £73.1 2017 2016 2015 2014 2013 £58.1 £49.6 £41.5 £33.4 8.6% 7.5% 9.0% 8.4% 8.7% 8.7% 7.2% 6.1% 5.4% 4.4% Reflects the performance of the Group before financing and taxation impacts and the underlying measure excludes any exceptional items arising in the year. Shows the operating profit of the Group as a percentage of turnover. The underlying measure excludes any exceptional items arising in the year. 28 Greggs plc Annual Report and Accounts 2017 Look closer at how we measure our progress with non-financial KPIs overleaf Graph keys Underlying Including exceptional items Diluted earnings per share (pence): Capital expenditure: 63.5p £70.4 million 2017 2016 2015 2014 2013 63.5p 55.7p 60.8p 56.7p 55.8p 55.8p 2017 2016 2015 2014 2013 43.4p 36.8p 30.6p 23.9p £70.4 £71.7 £80.4 £48.9 £47.6 Calculated by dividing profit attributable to shareholders by the average number of dilutive outstanding shares. The underlying measure excludes any exceptional items arising in the year. The total amount incurred in the year on investment in fixed assets. Net cash inflow from operating activities: Return on capital employed (ROCE): £116.9 million 26.9% 2017 2016 2015 2014 2013 £116.9 £117.6 £103.7 £97.1 2017 2016 2015 2014 2013 £69.3 26.9% 23.7% 28.1% 26.3% 26.8% 26.8% 22.4% 19.1% 16.4% 13.2% Operating profit adjusted for the impact of non-cash items and working capital movements. Calculated by dividing profit before tax by the average total assets less current liabilities for the year. The underlying measure excludes any exceptional items arising in the year. The calculation of these figures for the current and prior year can be found on page 106. Greggs plc Annual Report and Accounts 2017 29 Strategic Report NON-FINANCIAL KEY PERFORMANCE INDICATORS We continue to integrate social responsibility into our business strategy We continue to report our targets as non-financial KPIs under the five areas of focus. All of our targets and commitments are delivered under the guidance and ownership of Operating Board Champions – as illustrated below – with overall ownership by the Chief Executive. Our Social Responsibility Steering Group is convened by our Company Secretary and meets on a quarterly basis to review progress. KPI Our commitment 2017 targets Customer health We encourage healthier food-on-the- go choices Responsible sourcing We care about where our ingredients come from Community We share our success with the people around us – Increase sales of Balanced Choice by at least £10 million – Implement our Clean Label plan across our savoury and bread products – Engage with the external supply chain to meet our Modern Slavery Policy Obligations – Develop a five-year strategy for cage-free egg ingredients – Maintain our BBFAW Tier 2 Standard in relation to Animal Welfare – All of our retail paper and board packaging to be from accredited sustainable materials Commercial Director 12 RESPONSIBLE CONSUMPTION AND PRODUCTION – Work with our partners to further extend our Breakfast Club scheme to 440 schools – Support the Greggs Foundation to donate more than £2 million through our fundraising activity – Evaluate and improve our Environmental Grants Programme – Work with Greggs Foundation to maximise its impact – Launch a national initiative in Breakfast Club schools to promote good food choices Finance Director 11 SUSTAINABLE CITIES AND COMMUNITIES Environment We aim to use energy efficiently and minimise waste – Continue to develop our Environmental Management System to maintain our ISO14001 accreditation across all our operations – Continue to review our operational activities to support a reduction of our carbon footprint intensity by a further 1% – Increase the amount of unsold food donations by a further 50% (based on 2016 results) – Increase redistribution of unsold food by 10% (compared People We are committed to creating a great place to work – Drive activities to further improve employee engagement through flexible working – Achieve third-party accreditation for Balanced You, our health and wellbeing programme – Successfully deliver our year one action plan to achieve National Equality Standard accreditation in 2019 – Continue to drive health and safety engagement to reduce reportable accidents per hours worked in retail by 5% – Continue to drive health and safety engagement to reduce reportable accidents per hours worked in our supply chain by 10% – Further develop and deliver our online development tool across the business to enhance development opportunities for our people 1 We continue to drive our Balanced Choice range and were pleased to increase our sales by a further £2 million in 2017. 2 Our operational teams worked extremely hard in identifying new opportunities for unsold food donations in 2017 finding a large number of local community organisations to work with resulting in a 45% increase in the amount of food donations. We will continue to place our efforts in working with local community groups to find new routes for redistribution as well as further investigating how we could work with any national organisations to further increase donations wherever we can. 30 Greggs plc Annual Report and Accounts 2017 Status* 2018 targets Champion United Nations Sustainable Development Goals – Increase sales of healthier choices by 10% (based on 2017 results) – Reduce sugar by 5% in line with the Government’s Childhood Obesity Plan (based on 2015) Commercial Director 3 GOOD HEALTH AND WELL-BEING 1 3 – Reduce the amount of single-use plastics used within our stores and increase the level of segregation and recycling for key 2 – Further reduce our carbon footprint intensity by 2% Property and Business Development Director 13 CLIMATE ACTION packaging types to 2017 result) – Complete the relaunch of our ‘culture and values’ programme – Successfully deliver our 2-year action plan following our National Equality Standard Audit in 2017 – Continue to drive health and safety engagement to reduce reportable incidents across our operations by 10% Retail and People Director 10 REDUCED INEQUALITIES Customer health We encourage healthier food-on-the- go choices Responsible sourcing We care about where our ingredients come from Community We share our success with the people around us KPI Our commitment 2017 targets – Increase sales of Balanced Choice by at least £10 million – Implement our Clean Label plan across our savoury and bread products Status* 2018 targets Champion United Nations Sustainable Development Goals 1 – Increase sales of healthier choices by 10% (based on 2017 results) – Reduce sugar by 5% in line with the Government’s Childhood Obesity Plan (based on 2015) Commercial Director 3 GOOD HEALTH AND WELL-BEING – Engage with the external supply chain to meet our Modern Slavery Policy Obligations – Develop a five-year strategy for cage-free egg ingredients – Maintain our BBFAW Tier 2 Standard in relation to Animal Welfare – All of our retail paper and board packaging to be from accredited sustainable materials Commercial Director 12 RESPONSIBLE CONSUMPTION AND PRODUCTION – Work with our partners to further extend our Breakfast Club scheme to 440 schools – Support the Greggs Foundation to donate more than £2 million through our fundraising activity – Evaluate and improve our Environmental Grants Programme – Work with Greggs Foundation to maximise its impact – Launch a national initiative in Breakfast Club schools to promote good food choices Finance Director 11 SUSTAINABLE CITIES AND COMMUNITIES Environment We aim to use energy efficiently and minimise waste – Continue to develop our Environmental Management System to maintain our ISO14001 accreditation across all our operations – Continue to review our operational activities to support a reduction of our carbon footprint intensity by a further 1% – Reduce the amount of single-use plastics used within our stores and increase the level of segregation and recycling for key packaging types 2 – Further reduce our carbon footprint intensity by 2% – Increase the amount of unsold food donations by a further 50% (based on 2016 results) – Increase redistribution of unsold food by 10% (compared to 2017 result) Property and Business Development Director 13 CLIMATE ACTION People We are committed to creating a great place to work – Drive activities to further improve employee engagement through flexible working – Achieve third-party accreditation for Balanced You, our health and wellbeing programme – Successfully deliver our year one action plan to achieve National Equality Standard – Continue to drive health and safety engagement to reduce reportable accidents per accreditation in 2019 hours worked in retail by 5% – Continue to drive health and safety engagement to reduce reportable accidents per hours worked in our supply chain by 10% – Further develop and deliver our online development tool across the business to enhance development opportunities for our people – Complete the relaunch of our ‘culture and values’ programme – Successfully deliver our 2-year action plan following our National Equality Standard Audit in 2017 – Continue to drive health and safety engagement to reduce reportable incidents across our operations by 10% Retail and People Director 10 REDUCED INEQUALITIES 3 3 Although we missed our stretching target, we were proud to see that we reduced the number of reported incidents across our supply chain again by over 5%. Health and Safety remains a priority across our supply chain, especially in light of the transformation work we are in the process of completing within the estate. * More information about our 2017 achievements is available overleaf. Greggs plc Annual Report and Accounts 2017 31 Strategic Report Percentage of women on the Board: 43% Percentage of employees who are female: 71% NON-FINANCIAL KEY PERFORMANCE INDICATORS CONTINUED Carbon footprint Our net carbon footprint for the 2017 financial year was 110,350 tonnes of carbon dioxide and equivalent gases (CO2e), with an intensity of 115.61 tonnes of CO2e per £million turnover. This represents a 15.04 per cent improvement on our 2016 result. Carbon Trust Standard We measure our direct carbon footprint and in 2016 we were again accredited to hold the Carbon Trust Standard in recognition of our work on carbon efficiencies. In addition, we disclose our GHG emissions through the Carbon Disclosure Project (CDP). Global GHG emissions data In line with Companies Act 2006 (Strategic Report and Directors Report) Regulations 2013, we are reporting on our greenhouse gas (GHG) emissions as part of our annual strategic report. Our GHG reporting year is the same as our financial year from 1 January 2017 to 30 December 2017. We have reported on all of the emission sources which we deem ourselves to be responsible for, as required under the Companies Act 2006 (Strategic Report and Directors Report) Regulations 2013. These sources fall within our operation’s control and financial boundaries. We do not have responsibility for any emission sources that are outside of our operational control. The methodology used to calculate our emissions is based on the UK Government’s Environmental Reporting Guidance (2013) and emissions factors from UK Government’s GHG Conversion Factors for company reporting. The 2017 emissions are verified by the Carbon Trust as part of the review of our carbon footprint. Gender of workforce We are proud of our reputation for bringing the best talent through the business regardless of gender and that 71 per cent of our total workforce is female, almost half of our management population is female and, of the seven Board posts, three are held by women. Board Senior Managers Other managers Female Male Total 3 58 276 4 78 281 7 136 557 All employees 15,408 6,326 21,734 Current reporting year 2017 (tonnes of CO2e) Comparison year 2016 (tonnes of CO2e) Scope 1 Scope 1 Scope 2 Combustion of fuel & operations of facilities Refrigerants Electricity purchased for own use (including PV generated electricity) GROSS emissions Total Scope 1+2 CO2e emissions NET emissions Net emissions excluding PV NET intensity measure Tonnes of CO2e per £million of turnover adjusted to account for use of renewable energy 32,460 7,222 70,966 110,648 110,350 115.61 33,010 6,041 82,153* 121,204 120,824 136.08 * Emissions for 2016 have been adjusted as refrigerant emissions in 2016 were over reported. 32 Greggs plc Annual Report and Accounts 2017 RISK MANAGEMENT The Board has ultimate responsibility for ensuring that risks are managed appropriately Our risk management approach We have well-established risk management processes embedded within the business, which enable us to identify, evaluate, record and monitor significant risks. Taking an appropriate level of risk is an inherent part of any business, but in doing so we assess the likelihood and impact of each risk arising. The diagram below sets out our approach and shows the various information flows. Business Assurance Function Insured risks Functional risks Project risks Key strategic risks Other strategic risks New & emerging risks Risk Manager Risk Committee/Operating Board Main Board/Audit Committee The responsibilities of key participants within the risk management process are summarised below: Board of Directors/Audit Committee – Ultimate responsibility for ensuring risks are managed appropriately; – full annual review of the risk management process; – regular consideration of key strategic risks and new and emerging risks; and – robust annual assessment of principal risks as set out on the following page. Risk Committee/Operating Board – Quarterly detailed discussion of significant risks; – understanding the business’ exposure to risk; – supporting the implementation of the Company’s risk management strategy; and – escalating significant matters to Main Board, via the Audit Committee. Risk Manager – Maintaining the corporate risk register; – supporting the Risk Committee to operate effectively; and – ensuring adequate insurance is in place, as determined by the Main Board. Business Assurance function – Providing independent internal audit coverage of the business, reporting findings to Audit Committee); – oversight of the risk process; and – support to the whistleblowing process, which allows staff to raise matters of concern. Greggs plc Annual Report and Accounts 2017 33 Strategic Report RISK MANAGEMENT CONTINUED Principal risks and uncertainties These risks are those which the Directors consider to present the most significant threat to the business’ future development or performance. Additional risks have been disclosed this year compared with previous statements. This is in response to guidance from the Financial Reporting Council, along with a peer review of the disclosures of other companies operating in the retail environment, which has encouraged reporting of a broader range of risks to enhance stakeholder understanding. As a result, we have reported on five additional risks in the current disclosure. All risks reported in last year’s statement remain relevant. Where appropriate, the impact of these risks occurring has been considered when developing the scenarios tested as part of the financial viability statement as set out opposite. Additional risks and uncertainties, not presently known to management or deemed less material currently, may also have an adverse effect on the business. Further, the exposure to each risk will evolve as we take mitigating actions, or as new risks emerge. The risks set out below provide a snapshot of the position at the date of the annual report. The risks are described along with the strategic pillars to which they are linked, and the movement in net risk level during the year. They are ranked based on their perceived impact and likelihood, taking into account the effectiveness of existing controls (i.e. the net risk faced by the business). Our principal risks can be mapped to our strategy and categorised as follows: Great tasting freshly prepared food Best customer experience Competitive supply chain First class support teams Loss of production Product quality Food scare Market pressures Product quality Food scare Business change Cyber & data security Consumer trends Regulatory and compliance Economic climate Management of third party relationships Ability to attract/retain/motivate people Impact of Brexit Key Strategic risk Operational risk Compliance risk 34 Greggs plc Annual Report and Accounts 2017 Viability statement The Directors have assessed the Company’s prospects and viability taking into account its current position, plans and principal risks. The Company remains cash-generative and has no debt other than normal trading liabilities to creditors and the obligations arising under commercial leases and its defined benefit pension scheme. In assessing the Company’s prospects the Board has taken into account the following: – The Company’s strong financial position and cash-generative nature. – The continued growth of out-of-home eating and the alignment of the Company’s offer to this growing market. – The potential for further growth in existing markets and investment plans to support this. – The maintenance of a competitive, differentiated offer to customers. – Controls over and mitigations of the occurrence of principal risks and uncertainties. In assessing the Company’s viability the Board has considered potential scenarios that have been envisaged to reflect the occurrence of the principal risks that the business faces. These include threats to its operations, such as a loss of production capacity, and the occurrence of risks affecting confidence in the Greggs brand. In carrying out its assessment the Board has reviewed the three-year operational and financial plan to 2020. This is the period over which the Board reviews management’s business planning and therefore the Board believes that this is the most appropriate timeframe over which to make the viability assessment. The principal risks to which the Company is exposed ultimately affect the ability of its shops to trade successfully, either through an interruption to supply or because of a loss of confidence in the Greggs brand. A significant loss of sales would be particularly damaging given the Company’s vertical integration in that the cost of the internal supply chain cannot be reduced quickly. In order to stress-test the Company’s financial resilience three separate scenarios were created to simulate the impact arising from the occurrence of the following principal risks: 1. A brand-damaging food scare resulting in a significant one-year sales reduction followed by gradual recovery of confidence. In making assumptions the Directors considered real examples of companies in the food sector that had experienced such issues. 2. The impact of a ten per cent annual sales decline as a result of changing shopping habits or consumer trends. 3. Temporary loss of production capacity for the Company’s iconic pastry savoury products and the consequences for liquidity as capacity is restored. In each case the Directors reviewed the mitigating actions that would be necessary to protect the Company’s liquidity. These included: – Temporary suspension of dividend payments in order to preserve cash for operational use, including the restoration of customer confidence in the Greggs brand. – Restriction of capital investment to cover only essential maintenance of infrastructure, taking into account capital commitments to major investment programmes. – Addition of temporary financing facilities, taking into account the Company’s borrowing capacity. – Drawing on the Company’s insurance arrangements on the occurrence of an insured risk. The scenarios tested represent more extreme circumstances than the Company has ever experienced. Based on the results of the analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their detailed assessment. Greggs plc Annual Report and Accounts 2017 35 Strategic Report PRINCIPAL RISKS AND UNCERTAINTIES Description Loss of production Product quality and safety Food scare Market pressures Business change Cyber and data security Consumer trends Regulatory and compliance Economic climate Management of third party relationships Ability to attract/retain/ motivate people No change No change No change As we move towards more centralised production and national distribution, any interruption to production may have a significant impact on our customers. Key mitigations Change Links to strategy All of our supply sites have contingency plans in place. We simulate scenarios and test our recovery processes periodically. We have identified alternative supply sources for key ingredients and products. Our property insurers conduct annual site inspections, helping us to protect our facilities. Due to our vertically-integrated structure, and the fact that we freshly prepare food every day in our retail premises, we may have a greater exposure to food safety risk than many of our competitors. Procedures are in place throughout our supply sites and shops to ensure that food safety is maintained. Compliance is monitored both internally and by regulatory bodies. We may suffer a loss of trade due to customer confidence being impacted by an external food scare beyond our control. Most of the products on sale in our shops are made by our staff in our bakeries. Routine checks are carried out to confirm the integrity of our products and ingredients. Changing customer habits such as the increasing popularity of online shopping impact on our ability to attract footfall into our shops. We are progressively diversifying the market segments in which we trade, reducing the reliance on shoppers. This includes opening shops in travel and workplace locations as well as developing No change our food offer to match the needs of customers outside of general shopping hours. We continue to implement our strategy of transformation into a food-on-the-go retailer, requiring restructuring, capital investment and new systems implementation. We phase our change activity to avoid affecting the Company as a whole wherever possible. Timelines and forecasts are clearly defined and agreed. Progress against these is reported on No change Expected timelines or savings may not be met, and there may be disruption to our customers. a regular basis to our Operating Board. As with all businesses, our data and systems are exposed to external threats such as hackers or viruses. These could lead to data breaches, or disruption to our operation. We actively monitor our networks and systems, including conducting regular penetration testing. Our approach to information security is closely monitored by the Board. No change The new General Data Protection Regulation (GDPR) provides a rigorous control framework, with severe penalties for non-compliance. We are working to ensure compliance with the GDPR requirements, including data mapping, policy development and staff training. As customers become more concerned about nutrition, health and the provenance of food, our traditional products may be perceived as less attractive. The publication of the Government’s 25 year Environmental Strategy and growing concern over the environment may give rise to the introduction of additional levies and taxes. Following the implementation of new Sentencing Council guidelines, large financial penalties could be imposed on the business for breaches of Food Safety or Health & Safety legislation. Due to the number of stores we operate, and the volume of customer transactions we handle on a daily basis, we may be exposed to isolated incidents which fall below our expected standards and may expose us to prosecution. We continue to work on improving the nutrition of our traditional products, including a commitment to reduce sugar in line with the Government’s Childhood Obesity Strategy. Our “Balanced Choice” range provides healthier options and is growing well. No change We are working hard to reduce our impact on the environment, including reviewing our packaging designs, introducing a reusable hot drinks cup and continuing to reduce our carbon intensity. We have a system of controls and monitoring in place, and our teams are provided with extensive New training on safe processes and procedures. Our audit processes confirm whether proper procedures are being followed. Increased uncertainty about the economy and the outcome of Brexit impacts on consumer confidence. Wider economic uncertainty and job insecurity may cause consumers to be more cautious with their discretionary spending. As a leading value brand, we take steps to control our costs whilst maintaining the quality of our New customer offer. We closely monitor our competitiveness and are focused on remaining great value for money. As our reliance on third parties for services, ingredients or business support increases, we become more exposed to their business interruption risks. This could impact on our ability to produce, distribute or sell our products. Our own contingency arrangements consider the implications of key systems or ingredients being New unavailable. All third parties are vetted prior to us engaging with them. Key supplier relationships are managed by our central procurement team. Market forces and particularly the impact of Brexit may result in a shortage of available workforce. This may be compounded by the relative complexity of our shop operations compared with other retailers. We offer attractive remuneration and benefit packages to reward our teams, along with training New and development opportunities. We carry out an annual opinion survey to ensure high levels of employee engagement. We are working to streamline our shop processes and simplify operations for our teams. As part of our business change programme, we are investing in improved recruitment processes. Impact of Brexit In addition to the risks relating to the economy and resources highlighted above, there is uncertainty regarding the possibility of changes to trading arrangements, customs agreement, tariffs etc. This may give rise to increased costs. Developments continue to be monitored, with regular review by our Operating Board. New Contingency arrangements are being considered. 36 Greggs plc Annual Report and Accounts 2017 Description Loss of production Product quality and safety Food scare Market pressures Business change Cyber and data security Economic climate Management of third party relationships Ability to attract/retain/ motivate people Impact of Brexit As we move towards more centralised production and national distribution, any interruption to production may have a significant impact on our customers. Key mitigations All of our supply sites have contingency plans in place. We simulate scenarios and test our recovery processes periodically. We have identified alternative supply sources for key ingredients and products. Our property insurers conduct annual site inspections, helping us to protect our facilities. Change Links to strategy No change Due to our vertically-integrated structure, and the fact that we freshly prepare food every day in our retail premises, we may have a greater exposure to food safety risk than many of our competitors. Procedures are in place throughout our supply sites and shops to ensure that food safety is maintained. Compliance is monitored both internally and by regulatory bodies. No change We may suffer a loss of trade due to customer confidence being impacted by an external food scare beyond our control. Most of the products on sale in our shops are made by our staff in our bakeries. Routine checks are carried out to confirm the integrity of our products and ingredients. No change Changing customer habits such as the increasing popularity of online shopping impact on our ability to attract footfall into our shops. We continue to implement our strategy of transformation into a food-on-the-go retailer, requiring restructuring, capital investment and new systems implementation. Expected timelines or savings may not be met, and there may be disruption to our customers. We are progressively diversifying the market segments in which we trade, reducing the reliance on shoppers. This includes opening shops in travel and workplace locations as well as developing our food offer to match the needs of customers outside of general shopping hours. No change We phase our change activity to avoid affecting the Company as a whole wherever possible. Timelines and forecasts are clearly defined and agreed. Progress against these is reported on a regular basis to our Operating Board. No change As with all businesses, our data and systems are exposed to external threats such as hackers or viruses. These could lead to data breaches, or disruption to our operation. We actively monitor our networks and systems, including conducting regular penetration testing. Our approach to information security is closely monitored by the Board. No change The new General Data Protection Regulation (GDPR) provides a rigorous control framework, with severe penalties for non-compliance. We are working to ensure compliance with the GDPR requirements, including data mapping, policy development and staff training. Consumer trends As customers become more concerned about nutrition, health and the provenance of food, our traditional products may be perceived as less attractive. The publication of the Government’s 25 year Environmental Strategy and growing concern over the environment may give rise to the introduction We continue to work on improving the nutrition of our traditional products, including a commitment to reduce sugar in line with the Government’s Childhood Obesity Strategy. Our “Balanced Choice” range provides healthier options and is growing well. No change of additional levies and taxes. Regulatory and compliance Following the implementation of new Sentencing Council guidelines, large financial penalties could be imposed on the business for breaches of Food Safety or Health & Safety legislation. Due to the number of stores we operate, and the volume of customer transactions we handle on a daily basis, we may be exposed to isolated incidents which fall below our expected standards and may expose us to prosecution. We are working hard to reduce our impact on the environment, including reviewing our packaging designs, introducing a reusable hot drinks cup and continuing to reduce our carbon intensity. We have a system of controls and monitoring in place, and our teams are provided with extensive training on safe processes and procedures. Our audit processes confirm whether proper procedures are being followed. New Increased uncertainty about the economy and the outcome of Brexit impacts on consumer confidence. Wider economic uncertainty and job insecurity may cause consumers to be more cautious with their discretionary spending. As a leading value brand, we take steps to control our costs whilst maintaining the quality of our customer offer. We closely monitor our competitiveness and are focused on remaining great value for money. As our reliance on third parties for services, ingredients or business support increases, we become more exposed to their business interruption risks. This could impact on our ability to produce, distribute or sell our products. Our own contingency arrangements consider the implications of key systems or ingredients being unavailable. All third parties are vetted prior to us engaging with them. Key supplier relationships are managed by our central procurement team. Market forces and particularly the impact of Brexit may result in a shortage of available workforce. This may be compounded by the relative complexity of our shop operations compared with other retailers. We offer attractive remuneration and benefit packages to reward our teams, along with training and development opportunities. We carry out an annual opinion survey to ensure high levels of employee engagement. We are working to streamline our shop processes and simplify operations for our teams. As part of our business change programme, we are investing in improved recruitment processes. New New New In addition to the risks relating to the economy and resources highlighted above, there is uncertainty regarding the possibility of changes to trading arrangements, customs agreement, tariffs etc. This may Developments continue to be monitored, with regular review by our Operating Board. Contingency arrangements are being considered. New give rise to increased costs. Greggs plc Annual Report and Accounts 2017 37 Strategic Report BOARD OF DIRECTORS AND SECRETARY Ian Durant Chairman Biography Ian has a background in international finance and commercial management, with experience in the retail, property, hotels and transport sectors. His career includes leadership roles with the retail division of Hanson and Jardine Matheson, HongKong Land, Dairy Farm International, Thistle Hotels and SeaContainers and as Finance Director of Liberty International. Appointed since 5 October 2011 Independent Yes External appointments Roger Whiteside Chief Executive Richard Hutton FCA Finance Director Allison Kirkby Non-Executive Director Roger began his career at Marks and Spencer where he spent 20 years, ultimately becoming head of its food business. He was then one of the founding team of Ocado, serving as Joint MD from 2000 to 2004. From 2004 to 2007 Roger led a successful turnaround as Chief Executive of the Thresher Group off-licence chain before joining Punch Taverns, ultimately becoming Chief Executive. Roger was appointed as Chief Executive of Greggs on 4 February 2013. Richard qualified as a Chartered Accountant with KPMG and gained career experience with Procter and Gamble before joining Greggs in 1998. He held a number of roles within the Company’s finance function before joining the Board as Finance Director in 2006. Allison is currently President and CEO of Tele 2, a major European telecoms company. Prior to Tele 2, where she joined as CFO, Allison spent two decades in the FMCG sector at Procter and Gamble in a variety of senior financial and operational roles before moving to the TMT sector first at Virgin Media and then as Group CFO at Shine, a division of 21st Century Fox. Allison is a Fellow of the Chartered Institute of Management Accountants. 17 March 2008 (Non-Executive Director until 3 February 2013) 13 March 2006 30 January 2013 Not applicable Not applicable Yes Chairman of Capital and Counties PLC. Chairman of DFS Furniture plc. Member of the Women’s Business Council. Non-Executive Director of Card Factory plc. Trustee of Greggs Foundation. Trustee Director of Business in the Community. Trustee of The Alnwick Garden Trust. Director of Secure Value Consulting Limited. Board member of Reach for Change. Committee membership Chair of Nominations Committee Not applicable Not applicable Chair of Audit Committee; Remuneration and Nominations Committee member Board diversity Our Board brings a balance of relevant backgrounds and gender to their discussions. 38 Greggs plc Annual Report and Accounts 2017 Helena Ganczakowski Non-Executive Director Peter McPhillips Non-Executive Director Sandra Turner Non-Executive and Senior Independent Director Jonathan Jowett Company Secretary and General Counsel Biography Helena worked for Unilever for 23 years and held senior positions in brand management and marketing including UK Marketing Director and ultimately Head of Global Agencies. Helena has a PhD in Engineering from the University of Cambridge. Peter spent most of his executive career in food manufacturing having held a number of executive positions including Divisional Managing Director of Hillsdown Holdings, Director of Terranova (the chilled foods business demerged from Hillsdown Holdings) and ultimately as UK Managing Director of Uniq plc. More recently, Peter was European Chairman of Hain Celestial Group. Sandra has been involved in the retail sector throughout her career and was employed by Tesco PLC, latterly as Commercial Director for Tesco Ireland, from 1987 to 2009. Prior to this she worked in sales and marketing roles for Unilever and Wilkinson Sword. Jonathan is a lawyer by profession and has held the position of Company Secretary for a number of FTSE 250 and FTSE SmallCap companies. His previous employers include Avon Cosmetics Limited, SSL International plc, Wagon plc and Bakkavor Group. Appointed since 2 January 2014 Independent Yes External appointments Non-Executive Director of Croda International Plc and also owner, manager of consulting business working with companies ranging from start-up businesses to FTSE 100 constituents, helping them to develop and implement strategies. Committee membership 10 March 2014 1 May 2014 12 May 2010 Yes Yes Not applicable Non-Executive Director of Browns Food Group. Non-Executive Director of Jackson’s Bakery Limited. Non-Executive Director of Carpetright plc, McBride plc and Huhtämaki OYJ. Member of the British Retail Consortium Policy Board; Chair of the Trustees of the Percy Hedley Foundation. Non-Executive Director of Newcastle Hospitals NHS Foundation Trust. Audit, Remuneration and Nominations Committee member Audit, Remuneration and Nominations Committee member Chair of Remuneration Committee; Audit and Nominations Committee member Secretary to the Board and all its Committees 4:3 Board diversity, by gender M F 6.3 Board diversity, by tenure (years) Average 3-6 years >7 years 4.5 10.8 Greggs plc Annual Report and Accounts 2017 39 Directors’ Report GOVERNANCE REPORT – CHAIRMAN’S INTRODUCTION We have enjoyed a period of stability on the Board Dear Shareholder, I am pleased to introduce our governance report, which follows on pages 41 to 47. In 2017, the executive team undertook an extensive consultation exercise to explain to our people in more detail what impact our £100 million investment in our supply chain could have on their working lives. This included shift changes, new contractual terms in some instances, different and reduced product ranges as we move to create centres of excellence and, regrettably, some job losses by reason of redundancy, as we come to the end of our programme in 2019. 40 Following our Board evaluation at the beginning of the year, and in anticipation of the planned consultation, we decided that we would take the opportunity to find new ways of engaging with our people and listening to their views during a time of significant change. As a first step, in the Autumn Peter McPhillips and I attended a meeting with the Greggs Negotiating Committee, which is made up of elected union officials from supply chain and retail. Having explained our role as Non-Executive Directors, we were asked questions about Board decision-making and the application of Greggs’ values, the independence of Non-Executive Directors and potential conflicts of interest, and the importance of ensuring that the impact of decisions on people’s lives is always given proper consideration. As part of our Board deliberations, we always apply the Company’s values in making strategic decisions whilst recognising the necessity for judgement calls to protect our competitiveness and future growth. At a time when the Government is consulting on changes to the Corporate Governance Code, our experience is that there is great value to be had from ensuring that people most affected by Board decisions have the opportunity to make their views known directly to Non-Executive Directors. The corporate governance statement, together with the reports of the Audit and Remuneration Committees on pages 48 to 69, explain how our governance framework operates and how we oversee both the performance of the Company and also the general understanding and application of the values for which Greggs is known. Leadership and culture are central to this, supported by the programme to improve systems and processes, together with regular discussion regarding risks and risk management. The Board is accountable to shareholders for governance and I have continued to meet with some of our largest shareholders. In 2017, I was accompanied by Helena Ganczakowski at those sessions, ensuring that our shareholders have access to a broader range of our Non-Executive Directors. All of our Directors will be seeking re-election at our AGM to be held on 9 May 2018. We have enjoyed a period of stability on the Board and this reflects the continued enthusiasm of a high-performing management team working well with Non-Executive Directors who bring a balance of relevant backgrounds and gender to Board discussions. We were delighted to have been recognised in the Hampton-Alexander Review, published in November 2017, as a top ten FTSE 250 Company for Women on Boards and in Leadership. I look forward to welcoming as many shareholders as possible to our AGM. Ian Durant Chairman 27 February 2018 Greggs plc Annual Report and Accounts 2017 GOVERNANCE REPORT The Company is subject to the UK Corporate Governance Code issued by the Financial Reporting Council. The edition of the Code issued in April 2016 applied throughout the 2017 financial year. This governance report, together with information contained elsewhere within the Directors’ report, describes how the relevant principles and provisions of the Governance Code were applied in 2017 and will be relevant to the Company for the 2018 financial year. The Company has been a constituent of the FTSE 250 Index throughout 2017, and maintains a Premium listing on the London Stock Exchange. The Board confirms that it was compliant with the Governance Code throughout the year, and all of the policies and terms of reference referred to in this report are available on the corporate website at http://corporate.greggs.co.uk. Did you know… We were recognised in the Hampton-Alexander Review, published in November 2017, as a top ten FTSE 250 company for women on Boards and in Leadership. The Board Effectiveness The Chairman chairs the Nominations Committee whose primary function is to consider the blend of skills and experience that the Directors bring to the Board. This includes independent and objective experience of food retailing and manufacturing, finance, marketing, property and corporate finance to complement the existing skills and experience of the Executive Directors. The Board meets regularly to discharge its duties. At these meetings it reviews strategy, financial performance against key indicators, resources, risk management and other matters reserved for the Board. Whilst executive responsibility for running the Company’s business rests ultimately with the Chief Executive, the Non-Executive Directors ensure that the strategies proposed by the Chief Executive are fully discussed and critically examined prior to adoption. During the year, the Chairman and the Non-Executive Directors individually undertook a number of visits and meetings as part of the day-to-day running of the business, in order to ensure that they were sufficiently well-versed in operations to facilitate strong support and challenge. Such visits included meetings with key suppliers, production centre visits and getting out into our own shops and those of our competitors, accompanied by members of the Operating Board and senior management. Additionally, the Board met in Northern Ireland during the year and was able to experience first hand the directly-run and franchised shops that have been operating since we first entered the province in 2016. The Board schedules six meetings per year and meets on an ad hoc basis as required. Attendance at scheduled meetings held during the year is recorded in the table below, where the number of meetings actually attended are shown with the number of meetings that the individual could have attended. Audit Committee Remuneration Committee Nominations Committee 4 – – – 2 – – – 1 – – Meeting attendance Number of meetings held Main Board 6 Ian Durant Roger Whiteside Richard Hutton Helena Ganczakowski Allison Kirkby Peter McPhillips Sandra Turner Raymond Reynolds* – – – * Raymond Reynolds stepped down from the Board following the AGM in May 2017. Greggs plc Annual Report and Accounts 2017 41 Directors’ Report GOVERNANCE REPORT CONTINUED All Directors are invited to attend the Audit Committee and the Chief Executive attends the Remuneration and Nomination Committees. The business conducted at Committee meetings is reported by the respective Chair at subsequent Board meetings. In addition, the Non-Executive Directors meet formally twice each year and from time to time, as required. Board modus operandi The Board has a policy on the separation of the roles of the Chairman and the Chief Executive. The Chairman sets the agenda for Board meetings in accordance with a specific Schedule of Matters Reserved policy (which is reviewed and approved annually), and ensures that the Board is supplied, in a timely manner, with information in a form and of a quality appropriate to enable it to discharge its duties. The Board considers that it effectively leads and controls the Company. All Directors take decisions objectively and in the interests of the Company. The Non-Executive Directors scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. All Directors receive induction training on joining the Board and regularly update and refresh their knowledge through reading, attendance on relevant courses and/or activities outside the Company. In a change from previous practice, and following Raymond Reynolds’ stepping down from the Board, it was agreed that additional operating information would be made available to Non-Executive Directors in the expectation that this would add further colour to the debate and discussion at Board meetings. Consequently, Board papers now include a summary of activity by each Operating Board director, together with a fuller and more detailed report attached should Non-Executive Directors wish to explore further any matter being reported. Members of the Operating Board are invited to attend Board meetings on a rolling rota in order to participate in the Board’s discussion on business performance and key issues. This process also affords senior managers the opportunity to bring matters to the attention of the Board. During the year, the Board received regular updates including: – Developments on the two main strategic projects, being the implementation of SAP, and the £100 million investment in our supply chain. – Business performance in Northern Ireland. – The implications of “Brexit”. – The Gender Pay Gap report. – Sentencing Council guidelines in relation to regulatory convictions. – Customer insight, competitor activity, marketing and category plans. – Wage negotiations and people issues. – Food safety and health and safety. The Board sets itself a Rolling Agenda, which facilitates agenda planning for scheduled meetings across the year. In this way the Board monitors its activities and ensures that it is operating effectively. Diversity The Board believes it is in the best interests of the Company to bring more women through to the top levels of the organisation and, as a result of this belief, a programme launched in 2012 to encourage women to strive for the most senior positions in the business. Our gender reporting is now contained on page 32 of the strategic report. The progress that the Board has made in its diversity policy was recognised by the Hampton-Alexander Review published in November 2017, when we were recognised as a top ten FTSE 250 Company for Women on Boards and in Leadership. Succession, and development The Board is satisfied that a process is in place for orderly succession to the Board and to positions of senior management, so as to maintain an appropriate balance of skills and experience within the Company and on the Board. The Chief Executive meets with the Chairman and the Non-Executive Directors on a regular basis in order that succession and development plans can be drawn up for Executive Directors and members of the Operating Board. 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 advising the Board on all governance matters. Evaluation The performance of the Board, its Committees and of all Directors is evaluated annually by a formal and rigorous process. Later in 2018, the Board will be conducting its second externally-facilitated evaluation. In anticipation of this more detailed review, for 2017 the Board conducted its own evaluation which consisted of a question-based review which resulted in a series of themes that were debated at a Board meeting. The emerging themes included a review of our risk disclosures, looking forward on Board Succession planning, harvesting best practice from Non-Executive Director experience on other boards, and considering how to engage better with stakeholders in meeting Companies Act (S172) obligations. Consequently, it was agreed that specific actions should include a Non-Executive Director attending a Risk Committee meeting and the creation of a stakeholder engagement data map for subsequent review by the Board. As a key part of the ongoing evaluation process, the Chairman also meets with the Non-Executive Directors at least annually without the Executive Directors present, and also has one-to-one sessions with every member of the Board. The Senior Independent Director meets the Non-Executive Directors annually without the Chairman present to appraise the Chairman’s performance. 42 Greggs plc Annual Report and Accounts 2017 Election and re-election of Directors The Board has resolved that, in line with Governance Code provision B.7.1, all Directors will be subject to annual re-election by shareholders. Following recommendation by the Nominations Committee, all of the Non-Executive Directors who will offer themselves for re-election at the Annual General Meeting 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 Non-Executive Directors, chaired by the Senior Independent Director, have also specifically considered the Chairman’s commitment to the Company in light of his Chairmanships of two other FTSE 250 Companies. The Non-Executive Directors had noted that the Chairman had stepped down from the Boards of two other FTSE 250 companies in September 2016. The review included an assessment of his ongoing engagement with the business, evidenced by his numerous shop, manufacturing and distribution centre visits and meeting with the Greggs Negotiating Committee (see page 40), his one off meetings with members of the Operating Board and his ongoing dialogue with ex-employees, key stakeholders, industry experts and face-to-face meetings with shareholders. The Non-Executive Directors also considered the potential risk and mitigants of the Chairman not being available to the Greggs Board in a situation which might demand more of his time and attention. The conclusion drawn was that the Chairman evidences a very high level of commitment to Greggs plc which is not affected by his roles with other companies, and the Non-Executive Directors would encourage all shareholders to support his re-appointment as Chairman. Board Committees The Board delegates some of its activities to the following committees, each of which has written terms of reference, which are available on the Company’s website. The Company Secretary acts as secretary to and is generally in attendance at each of these committees, and each of the committees is provided with sufficient resources to undertake its duties. The Audit Committee currently consists of four independent Non-Executive Directors: Allison Kirkby (Chair), Helena Ganczakowski, Peter McPhillips and Sandra Turner. The Committee met four times in the year, and a fuller report on its activities is set out on pages 48 to 53. The Remuneration Committee currently consists of four independent Non-Executive Directors: Sandra Turner (Chair), Helena Ganczakowski, Allison Kirkby and Peter McPhillips. The Committee’s main duties (which it discharged during the year) are detailed within the Directors’ remuneration report which is set out on pages 54 to 69 of this annual report. Shareholders approved the current Remuneration Policy at the AGM held on 19 May 2017, and this is included on pages 56 and 57 for the sake of expediency. The Chairman’s fees are reviewed annually and set by the Executive Directors, following the general policy of everyone in the Company receiving the same basic level of pay award. The Nominations Committee currently comprises Ian Durant (Chairman) and all of the Non-Executive Directors. The Committee’s main functions (which it discharged during the year) are to review the balance and constitution of the Board; to advise the Board as to whether Directors 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. In recruiting additional Directors the Nominations Committee defines the role and uses external consultants to assist in identifying suitable candidates from which the Committee selects a short list and conducts interviews. The final candidate is then subject to formal recommendation by the Committee and approval by the Board. The Nominations Committee did not seek external consultancy support during 2017. Following appointment, new Directors are subject to an in-depth tailored induction process. In the case of Non-Executive Directors, this includes meeting with members of the Operating Board, visiting bakeries, shops and offices, and being provided with an extensive Board Handbook which contains key information and policies that are relevant to the position. For new Executive Directors, and Non-Executive Directors for whom the appointment is their first to a UK-listed company, the induction includes details of the legal duties and obligations of being a Director of the Company. New Non-Executive Directors are also encouraged to provide formal feedback of their first months on the Greggs Board during a Board meeting. Risk management Details of the Company’s principal risks and the management of them are set out within the Strategic Report, and given on pages 33 to 37. The Board confirms that it has reviewed the effectiveness of the system of internal control (covering all material controls, including 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. Greggs plc Annual Report and Accounts 2017 43 Directors’ Report GOVERNANCE REPORT CONTINUED Relations with shareholders The Board 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 and market analysts following these presentations. The Chief Executive and the Finance Director carry out extensive engagement with institutional shareholders and market analysts, either meeting them as part of Company presentations and briefings, individual meetings, or on telephone calls. During the year the Chairman met with two institutional shareholders with significant shareholdings, Standard Life Aberdeen plc, and MFS Investment Management, currently the largest shareholder. On both occasions the Chairman was accompanied by Helena Ganczakowski. The Chairman adopts an ongoing policy of arranging to meet with major shareholders, and the Non-Executive Directors are encouraged to attend meetings and events which provide them with the opportunity to engage generally with the investment community. During the last quarter of 2016, the Remuneration Committee chair had engaged with institutional shareholders representing over 50 per cent of the issued share capital, as part of the consultation on the proposed Remuneration Policy which was put to shareholders at the AGM in May 2017. Following that engagement, the Board was pleased to receive the support of 94% of voting shareholders for the revised Remuneration Policy. The Company Secretary and the Company’s Brokers draw the attention of the Board to all relevant shareholder communications. The Board also reviews briefings and comments by analysts and shareholders in order to maintain an understanding of market perceptions of the Company. The Board reviews at each meeting an analysis of the share register, noting all significant changes. The Annual General Meeting (AGM) is well attended, and a short presentation of business performance is given to attendees by the Chief Executive (although no non-public sensitive information is shared). The Chairman and the Chairs of the Board Committees are available to answer any issues raised and any newly-appointed Directors being available to meet shareholders. During informal sessions both before and after the meeting, the Chairman, and all Directors are available to meet with any of the 60 or so individual private shareholders who are in attendance. This is in addition to the opportunity given to shareholders to ask questions of the Board during the formal meeting, which session is always welcomed by those in attendance. In 2017, information stalls were set up at the entrance to the meeting informing shareholders of the Company’s progress on key social responsibility topics. At each AGM, the balance of proxy votes cast for and against each resolution and the number of abstentions is displayed. All substantial issues, including the receipt of the annual report and accounts, are proposed at the AGM as separate resolutions. All resolutions were strongly supported by shareholders, and were determined by poll, in accordance with best practice. The Senior Independent Director is available to shareholders if they have concerns which they have not been able to resolve through the normal channels of the Chairman, Chief Executive or Finance Director, or for circumstances where such contact would not be appropriate. The Company provides on its website www.greggs.co.uk a significant amount of information both about its customer offerings in the bakery food-on-the-go market, as well as detailed information on the governance arrangements. Substantial shareholdings At 27 February 2018 the only notified holdings of substantial voting rights in respect of the issued share capital of the Company (which may have altered since the date of such notification, without any requirement for the Company to have been informed) were: MFS Investment Management Standard Life Aberdeen plc BlackRock Inc. Number of shares held 5,314,697 5,036,488 not notified Percentage of issued share capital 5.25% 4.98% <5% Accountability, audit and going concern The Board acknowledges its responsibility to present a fair, balanced and understandable assessment of the Company’s position and prospects. In order to assist the Board to comply with the requirements within the Governance Code, the Audit Committee was requested to undertake an assessment of the annual report and to make a recommendation to the Board. This request has been enshrined within the Audit Committee’s terms of reference, which are available at corporate.greggs.co.uk. The actions undertaken by the Audit Committee in confirming its advice to the Board included the consideration of a detailed review that has been undertaken by the Head of Business Assurance and reviewing the annual report as a whole to confirm that it presents a fair, balanced and understandable assessment. In considering the advice of the Audit Committee, and having reviewed the annual report including the contents of the strategic report on pages 03 to 37, together with the statutory accounts themselves, the Board duly considers the annual report and accounts, taken as a whole, is fair, balanced and understandable, and provides the necessary information for shareholders to assess the Company’s performance, business model, and strategy. 44 Greggs plc Annual Report and Accounts 2017 A statement of Directors’ responsibilities in respect of the preparation of accounts is given on page 70. A statement of auditor’s responsibilities is given in the report of the auditor on page 75. 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 (see basis of preparation on page 81). The Board’s “viability statement” made in accordance with Code provision C.2.2; can be found on page 35. Policies Freedom of association At Greggs, we recognise the right of all employees to freedom of association and collective bargaining. Whilst we do not have a formal ‘Freedom of Association’ policy, the Company encourages all its employees in bakeries, shops and offices to become, and remain, members of a union. Bribery and corruption Greggs has an ‘Anti-Bribery and Corruption’ policy which applies to all employees and prohibits the offering, giving, seeking or acceptance of any bribe in any form to any person or company by acting on its behalf, in order to gain an advantage in an unethical way. Business conduct We have a specific policy that sets out the standards of ethical behaviour that are expected of all employees. All graded managers, and members of the procurement department, are required to make an annual confirmation of their compliance with the policy. Whistle-blowing Our ‘whistle-blowing’ policy creates an environment where employees are able to raise concerns without fears of disciplinary action being taken against them as a result of any disclosure. Any matters raised are treated in confidence and an independent review will be undertaken where it is appropriate. The Chair of the Audit Committee is the designated first point of contact for any concerns which cannot be addressed through normal management processes. Political donations Greggs has a clear policy forbidding political donations or contributions. This includes financial and in-kind contributions made by the Company. Disclosure of information to the auditor Each of the Directors who held office at the date of approval of this Directors’ report confirms that, so far as they are individually aware, there is no relevant audit information of which the Company’s auditor is unaware; and that they have taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. Greggs plc Annual Report and Accounts 2017 45 Directors’ Report DIRECTORS’ REPORT Directors and their interests The names of the Directors in office during the year, together with their relevant interests in the share capital of the Company at 1 January 2017 and 30 December 2017 are set out in the Directors' remuneration report on page 68. Details of the Directors’ share options are also set out in the Directors’ remuneration report on pages 66 and 67. In accordance with provision B.7.1 of the Governance Code, all Directors will retire from the Board at the AGM. Mr. Raymond Reynolds stepped down from the Board following the AGM held on 19 May 2017, although he remains a member of the Operating Board. The Nominations Committee has considered the appropriateness and suitability of each Director standing for election and has recommended to the Board that each individual should be put forward for re-election. Directors’ indemnities and conflicts As at the date of this report, indemnities are in force under which the Company has agreed to indemnify the Directors, to the extent permitted by law, in respect of losses arising out of or in connection with the execution of their duties, powers or responsibilities as Directors of the Company. The indemnities do not apply in situations where the relevant Director has been guilty of fraud or wilful misconduct. Under the authority granted to it in the Company’s articles of association, the Board has considered carefully any situation declared by any Director pursuant to which they have or might have a conflict of interest and, where it considers it appropriate to do so, has authorised the continuation of that situation. In exercising its authority, the Directors have had regard to their statutory and other duties to the Company. Additional information – The information set out within the governance report on pages 41 to 45 forms part of the Directors’ report. – Greenhouse Gas emissions: All disclosures concerning the Group’s greenhouse gas emissions (as required to be disclosed under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 are contained in the non-financial KPIs on page 32. Authority to purchase shares At the AGM on 19 May 2017, the shareholders passed a resolution authorising the purchase by the Company of its own shares to a maximum of 10,350,000 ordinary shares of 2 pence each. That authority had not been used as at 30 December 2017. The authority remains in force until the conclusion of the AGM in 2018 or 8 August 2018, whichever is the earlier. It is the Board’s intention to seek approval at the 2018 AGM for the renewal of this authority. Takeover directive information Following the implementation of the European Directive on Takeover Bids by certain provisions of the Companies Act 2006, the Company is required to disclose certain additional information in the Directors’ report. This information is set out below: – The Company has one class of share in issue being ordinary shares of 2 pence each. As at 27 February 2018, there were 101,155,901 such ordinary shares in issue. There are no shares in the Company that grant the holder special rights with regard to the control of the Company; – At general meetings of the Company, on a show of hands every shareholder present in person or by proxy has one vote only and, in the case of a poll, every shareholder present in person or by proxy has one vote for every share in the capital of the Company held by him or her; – The Company’s articles of association set out the circumstances in which shares may become disenfranchised. No shareholder is entitled, unless the Directors otherwise determine, in respect of any share held by him or her to be present or vote at a general meeting either personally or by proxy (or to exercise any other right in relation to meetings of the Company) in respect of that share in certain circumstances if any call or other sum is payable and remains unpaid, if the shareholder is in default in complying with a duly served notice under section 793(1) of the CA 2006 or if any shareholder has failed to reply to a duly served notice requiring him or her to provide a written statement stating he or she is the beneficial owner of the shares; – A notice convening a general meeting can contain a statement that a shareholder is not entitled to attend and vote at a general meeting unless his or her name is entered on the register of members of the Company at a specific time (not more than 48 hours before the meeting) and if a shareholder’s name is not so entered he or she is not entitled to attend and vote; 46 Greggs plc Annual Report and Accounts 2017 – Under the Company’s articles of association the Directors may, in their absolute discretion, refuse to register the transfer of a share in certified form in certain circumstances where the Company has a lien on the share (provided that the Directors do not exercise their discretion so as to prevent dealings in partly paid shares from taking place on an open and proper basis), where a shareholder has failed to reply to a duly served notice under section 793(1) CA 2006 or if a transfer of a share is in favour of more than four persons jointly. In addition, the Directors may decline to recognise any instrument of transfer unless it is in respect of only one class of share and is deposited at the address at which the register of members of the Company is held (or at such other place as the Directors may determine) accompanied by the relevant share certificate(s) and such other evidence as the Directors may reasonable require to show the right of the transferor to make the transfer. In respect of shares held in uncertificated form the Directors may only refuse to register transfers in accordance with the Uncertificated Securities Regulations 2001 (as amended from time to time); – Under the Company’s code on dealings in securities in the Company, persons discharging managerial responsibilities and some other senior executives may in certain circumstances be restricted as to when they can transfer shares in the Company; – There are no agreements between shareholders known to the Company which may result in restrictions on the transfer of shares or on voting rights; – Details of significant holders of the Company shares are set out on page 44; – Where, under an employee share plan operated by the Company, participants are the beneficial owners of shares but not the registered owner, the voting rights are normally exercised by the registered owner at the direction of the participant; – The Company’s articles of association may only be amended by special resolution at a general meeting of the shareholders; – The Company’s articles of association set out how Directors are appointed and replaced. Directors can be appointed by the Board or by the shareholders in a general meeting. At each Annual General Meeting, any Director appointed by the Board since the last Annual General Meeting must retire from office but is eligible for election by the shareholders. Furthermore, the Board has resolved that, in line with Governance Code provision B.7.1, all the Directors will be subject to annual re-election by shareholders. Under the CA 2006 and the Company’s articles of association, a Director can be removed from office by the shareholders in a general meeting; – The Company’s articles of association set out the powers of the Directors. The business of the Company is to be managed by the Directors who may exercise all the powers of the Company and do on behalf of the Company all such acts as may be exercised and done by the Company and are not by any relevant statutes or the Company’s articles of association required to be exercised or done by the Company in general meeting, subject to the provisions of any relevant statutes and the Company’s articles of association and to such regulations as may be prescribed by the Company by special resolution; – Under the CA 2006 and the Company’s articles of association, the Directors’ powers include the power to allot and buyback shares in the Company. At each Annual General Meeting, resolutions are proposed granting and setting limits on these powers; – The Company is not party to any significant agreements which take effect, alter or terminate upon a change in control of the Company, following a takeover bid; and – There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment (whether through resignation, purported redundancy or otherwise) that occurs because of a takeover bid. Details of the Directors’ service agreements and terms of appointment are set out in the Directors’ remuneration report on pages 54 to 69. However, provisions in the employee share plans operated by the Company may allow options to be exercised on a takeover. Employees Applications for employment of disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff being disabled every effort is made to ensure that their employment within the Company continues and that appropriate training is arranged. It is the policy of the Company that the training, career development and promotion of disabled people should, as far as possible, be identical to that of other employees. The Directors recognise the importance of good communications and good relations with employees. A weekly bulletin is sent to all shop staff and quarterly bulletin to all bakery employees. Significant relationships The Group does not have any contractual or other relationships with any single party which are essential to the business of the Group and, therefore, no such relationships have been disclosed. By order of the Board Jonathan D Jowett Company Secretary Greggs plc (CRN 502851) 27 February 2018 Greggs House Quorum Business Park Benton Lane Newcastle upon Tyne NE12 8BU Greggs plc Annual Report and Accounts 2017 47 Directors’ Report AUDIT COMMITTEE REPORT The Committee plays an important part in the governance of the Company Introduction I am pleased to introduce the report of the Audit Committee for 2017. The Committee plays an important part in the governance of the Company with its principal activities focused on the integrity of financial reporting, quality and effectiveness of internal and external audit, risk management and the system of internal control. I have set out below the main matters considered by the Committee during the year and the conclusions drawn. We meet formally at key times within our reporting calendar and the agendas for our meetings are designed to cover all significant areas of risk over the course of the year and to provide oversight and challenge to the key financial judgements, controls and processes that operate within the Company. The Committee continues to keep its activities under review in the light of regulatory developments and the emergence of best practice. Key topics for consideration in 2018 will be the Company’s ongoing supply chain investment programme and the associated exceptional charges, together with the new General Data Protection Regulation which comes into effect during the year. Cyber security matters continue to be a priority for the Committee, as do the Company’s preparations for the implementation of IFRS 16 Leasing at the start of 2019. Overall I am satisfied that the activities of the Committee enable it to gain a good understanding of the key matters impacting the Company during the year, along with oversight of the governance and operation of its key controls and ultimately to draw the conclusions set out in the report below. Allison Kirkby Chair of the Audit Committee 27 February 2018 48 Greggs plc Annual Report and Accounts 2017 Composition The Audit Committee is comprised of the following: Allison Kirkby (Chair) Helena Ganczakowski Peter McPhillips Sandra Turner It is the practice of the Company for all independent Non-Executive Directors to serve as members of the Audit Committee. There have been no changes in the composition of the Committee during 2017. Training is provided for any new members of the Audit Committee by way of a thorough induction process which includes access to the external auditor, the Head of Business Assurance and relevant members of management. The Directors’ biographies on pages 38 and 39 detail the Committee members’ previous experience and demonstrate that they have experience individually in a range of disciplines relevant to Greggs’ business. The Board considers that Allison Kirkby has recent and relevant financial experience. Role and responsibilities The Terms of Reference of the Committee can be accessed at: http://corporate.greggs.co.uk/investor-centre/corporate-governance/company-documents. The key responsibilities of the Audit Committee are: – ensuring that the accounting and financial policies of the Company are proper and effective; – assisting the Board in fulfilling its oversight responsibilities by monitoring the integrity of the accounts and information published by the Company and reviewing significant financial judgements contained in them; – advising the Board on whether it believes the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy; – reviewing the internal financial controls and the Group’s approach to risk management; – oversight of whistle-blowing arrangements; – monitoring compliance with the Listing Rules and the recommendations of the Governance Code; – oversight of the Company’s external and internal auditors and reviewing the effectiveness and objectivity of the audit process; and – reporting to the Board on how it has discharged its responsibilities. Meetings during the year The Audit Committee met four times during the year. Details of Committee members’ attendance is given on page 41. The Committee normally invites the Company Chairman, the Executive Directors, the Head of Business Assurance and the external auditor to attend its meetings. Time is set aside bi-annually for discussion with the external auditor and with the Head of Business Assurance, in each case in the absence of all Executive Directors. The Committee also has access to the Company’s management team and to its auditor and can seek further professional advice, at the Company’s cost, if required. The Chair has regular contact with the Finance Director and internal and external auditors, in addition to scheduled Committee meetings to ensure that emerging issues are addressed. She also has access to, and in 2017 made contact several times with, an audit partner independent of the partner responsible for the audit. Financial reporting In 2017 the Audit Committee reviewed the 2016 annual report, interim results, preliminary results announcement and reports from the external auditor on the outcome of their reviews and audits. During the year, and up to the date of this report, the Committee considered key accounting issues and judgements and related disclosures in the Group’s accounts. The significant areas of judgement considered by the Committee in relation to the accounts for the 52 weeks ended 30 December 2017 are as follows: Greggs plc Annual Report and Accounts 2017 49 Directors’ Report AUDIT COMMITTEE REPORT CONTINUED Area of focus Action taken Understanding and treatment of exceptional items The accounts include exceptional items in the current year. Costs of £9,862,000 were incurred in 2017 (2016: £5,177,000) relating to the restructuring of supply chain operations. £7,458,000 of this is in respect of redundancy costs (2016: £3,961,000) with the balance relating to asset-related costs and other contractual obligations. Asset-related costs comprise acceleration of depreciation for assets with an expected reduction in useful life as a result of the restructuring and the cost of disposing of assets which are no longer required. Dilapidations Dilapidation provisions have been made based on the future expected repair costs required to restore the Group’s leased buildings to their fair condition at the end of their respective lease terms, where it is considered a reliable estimate can be made. The balance held in respect of dilapidation provisions at the end of the year was £2,956,000 (2016: £3,243,000). Accounting for defined benefit pension schemes The determination of the defined benefit obligation depends on the selection of certain assumptions including the discount rate, inflation rates and mortality rates. There was a change in one of the assumptions used during the year in order to more closely align them with those used by the scheme actuary when conducting the triennial valuation. Allowance has now been made for the commutation of pensions by members on retirement based on the actual scheme experience. The net liability held in relation to defined benefit pension schemes at the end of 2017 was £7,506,000 (2016: £22,851,000). Fair, balanced and understandable The Committee is responsible for advising the Board on whether it believes the annual report and accounts, taken as a whole, is fair, balanced and understandable. Going concern The accounts continue to be prepared on a going concern basis. The Committee considered the accounting requirements of IAS1 relating to the separate disclosure of material items of income or expense together with the FRC’s guidance on the subject, with reference to the costs arising from the decision, announced in March 2016, to invest in and reshape the Company’s supply chain in order to support future growth. The Committee ensured that consistent principles were established (and agreed with the external auditor) early in the process and that reporting was suitably clear. The Committee gave careful consideration to the judgements made in the separate disclosure of non-underlying items, both in respect of events occurring in 2017 and also changes in circumstance in respect of provisions relating to events from prior years, ensuring that the annual report as a whole presents a balanced view, including the presentation of GAAP and non-GAAP measures. It concluded that separate disclosure should be made of items of expenditure incurred in 2017 related to the supply chain investment programme. The Committee reviewed management’s assessment of the need for dilapidation provisions, together with the movement in the provision during the year, and concluded that the principles applied were appropriate. Pension scheme liabilities are assessed on behalf of the Company by independent actuaries. The Committee assessed the underlying assumptions and concluded that they were appropriate and also discussed the appropriateness of the assumptions with the external auditor. The Committee received a report from the Head of Business Assurance who is not involved in the preparation of the annual report and accounts and who conducted an independent review of it. The following factors were considered during the course of this review: – – – – – – ensuring that all the statements are consistent with one another; verifying that figures in the narrative sections are consistent with the relevant financial detail; identifying any duplication of information; ensuring that the disclosure of non-underlying items is balanced; confirming that ‘bad news’ is included, as well as ‘good news’; and highlighting any inappropriate use of technical language or jargon. The Audit Committee considered the feedback from this report alongside its own review of the annual report and accounts when making its recommendation to the Board regarding fair, balanced and understandable. Information provided by the Finance Director regarding future financial plans, risks and liquidity is presented to the Committee to enable it to determine whether the going concern basis of accounting remained appropriate. The Committee reviewed and challenged the assumptions used and concluded that the Board is able to make the going concern statement on page 45 of the Directors’ report. Viability Revisions to the UK Corporate Governance Code in 2015 introduced a new requirement for the Board to consider the period over which they are able to conclude that the Company will remain viable, having taken into account severe but plausible risks and risk combinations. On account of this being a relatively new requirement, the Committee considered this to be a significant reporting matter. The Committee reviewed the process undertaken by management to support and allow the Directors to assess the Group’s long-term prospects and make its viability statement. The Committee considered and provided input into the determination of which of the Group’s principal risks and combinations thereof might have an impact on the Group’s liquidity and solvency. The Committee reviewed the results of management’s scenario modelling and the stress testing of these models. The Committee reviewed and challenged the assumptions used and concluded that the Board is able to make the viability statement on page 35 of the strategic report. 50 Greggs plc Annual Report and Accounts 2017 The Committee also considered other key accounting issues and related disclosures in the Group’s accounts as follows: – whether any changes in accounting policy were required following changes in the business or in legislation; – whether the Company’s tax policy remains appropriate; – the impact of changes in accounting standards and their relevance, if any, to the Company; and – reports from the Company Secretary and Finance Director which assess the Company’s compliance with the Listing Rules. Two areas which were previously considered to be significant – accounting for onerous leases and shop asset impairment – are no longer included above as the amounts provided have been utilised to such an extent that they are no longer material. As a result the Committee does not consider the judgements required to be significant to the accounts. External audit Assessing external audit effectiveness The Audit Committee discussed and agreed the scope of the audit with the external auditor and agreed their fees in respect of the audit. The Committee reviewed the effectiveness of the external audit in line with the Financial Reporting Council’s ‘Practice aid for audit committees’ (May 2015). It considered the results of external quality inspections by the Audit Quality Inspection Team on other KPMG clients. It sought feedback from senior management, by way of a detailed questionnaire, in respect of the effectiveness of the audit process with particular reference to audit planning and design and audit execution. The Committee also considered the effectiveness of the audit through the reporting from and communications with the auditor and an assessment of the auditor’s approach to key areas of judgement and any errors identified during the course of the audit. The Committee concluded that the audit was effective and that the relationship and effectiveness of the external auditor be kept under review. Appointing the auditor and safeguards on non-audit services KPMG has been the Company’s auditor for more than 20 years and the transitional rules in the EU Directive require an initial change of audit firms no later than 2020. Having reappointed KPMG in 2014 following a competitive tender, the Committee expects to change audit firms in accordance with the requirements of the EU directive. The Committee will continue to consider annually whether to conduct an audit tender for audit quality or independence reasons. The current audit partner is Mick Thompson who has held the role since 2013. He retires by rotation after the conclusion of the 2017 audit and will be replaced by Nick Plumb. The Audit Committee confirms that the Company complies with the Statutory Audit Services for Large Companies Market Investigation (Mandatory use of Competitive Tender Process and Audit Committee Responsibilities) Order 2014. It is the responsibility of the Committee to monitor the independence and objectivity of the external auditor (including the impact of any non-audit work undertaken by it) and its suitability for re-appointment. The Company has a formal policy to ensure that the provision of non-audit services by the external auditor for non-audit work does not compromise the auditor’s independence or objectivity. It monitors the level and type of non-audit fees on an annual basis and ensures that the overall level of non-audit fees remains in line with current ethical guidance governing the accounting profession. The Audit Committee favours a presumption that non-audit work will be awarded to a firm other than the audit firm unless there is a good reason to use the auditor. An annual base plan for non-audit fees paid to the external auditor is agreed in advance by the Audit Committee. Expenditure in accordance with this plan can then be committed without further referral to the Audit Committee. Expenditure that is not included in the agreed plan is subject to strict authority limits and is reviewed by the Committee. During 2017, in response to the implementation of the EC Audit Directive and Regulation in the UK, new providers were appointed in respect of taxation services that had previously been provided by KPMG. All use of the external auditor for non-audit work must be reported to and approved by the Committee. In circumstances where non-audit fees are significant relative to the audit fee an explanation would be provided in the subsequent Audit Committee Report. In addition, the Audit Committee ensures that the external auditor has its own policies and is subject to professional standards designed to safeguard their independence as auditor. Greggs plc Annual Report and Accounts 2017 51 Directors’ Report AUDIT COMMITTEE REPORT CONTINUED The Audit Committee has reviewed whether, and is satisfied that, the Company’s auditor, KPMG LLP, continues to be objective and independent of the Company. KPMG LLP did perform non-audit services during 2017 for the Group but the Audit Committee is satisfied that its objectivity was not impaired by such work. In 2017, the charge to the income statement in respect of non-audit fees paid to KPMG LLP and related KPMG operations amounted to £17,000 (which is 11 per cent of the audit fee for the year) and related to audit of turnover statements required by shop landlords and pension scheme audits. Reappointment of auditor In accordance with Section 489 of the Companies Act 2006, a resolution for the reappointment of KPMG LLP will be proposed at the forthcoming AGM. Risk management and internal control Internal control The Committee reviewed the Company’s internal control environment to satisfy itself that procedures are in place to ensure that assets are well protected, authority levels for expenditure are clear, segregation of duties exists and performance is regularly monitored. Processes are in place to ensure that key controls are being operated and compliance with these processes is the subject of inspection by the Internal Audit team and subsequent review by the Audit Committee. Whistle-blowing The Company’s whistle-blowing policy is made available to all employees through the intranet, as well as via posters displayed across the business. This gives information regarding how to raise a concern in strict confidence. Two reports were made during the year, relating to inappropriate management behaviour and product theft. Both events were reported directly to the Chair of the Audit Committee by telephone or email. The case of low level theft related to our franchise operation, and this was referred to the relevant franchise partner for action. The issue concerning management behaviour was investigated internally, and appropriate action taken by senior management to address the matter. The outcome of both matters was reported to the Board during the year. The Company’s whistle-blowing policy was last subject to a detailed review in 2016 and updated to align with best practice. The Audit Committee is confident that it remains appropriate and fit for purpose. Risk management process The Audit Committee undertakes a review of the risk management process in the Group at least annually, as set out in its terms of reference. The process is detailed on page 33, and has been reviewed by the Committee to confirm its appropriateness in light of the risks identified. The key areas that the Committee has specifically considered are as follows: Area of focus Action taken New and emerging risks The Audit Committee considers areas of new and emerging risk which have been identified by the business via the Risk Committee. It assesses these for completeness, and raises any other areas which it believes should be documented within the Company’s risk register. Cyber risk and information security The Company’s approach to cyber risk and information security is considered at every Audit Committee meeting, by receiving a regular update on activity. During the year, this has included consideration of the Company’s preparation for the General Data Protection Regulation (GDPR). The Committee received a training session from the external auditor to enhance their understanding of the new requirements. Business transformation Review of principal risks and uncertainties The Committee has received reports on progress with the Company’s transformation programme, including supply chain investment and SAP implementation. The proposed disclosure of principal risks and uncertainties was prepared by the Risk Committee, based on its discussions during the year. The statement was then considered and approved by the Audit Committee. 52 Greggs plc Annual Report and Accounts 2017 Internal audit The work of the internal audit function is set out in more detail within the principal risks and uncertainties statement on pages 33 to 37 of this annual report. The team is led by the Head of Business Assurance, supported by the Risk Manager, the Information Security & Compliance Manager and 14 auditors. The majority of the audit team work across the retail estate to provide assurance over the Company’s retail operations. We have strengthened our resource allocated to information security with a temporary appointment, to assist with GDPR preparation. The Audit Committee approves the annual plan for the team and monitors progress against that plan. The effectiveness of the internal audit team and its level of resource are reviewed by the Committee at least annually. This review includes assessing the delivery of the audit plan, considering the function’s output across the year, and evaluating customer feedback received by the team. Committee effectiveness Each year the Committee reviews critically its own performance, assisted by consideration of a series of questions, and considers where improvements can be made. Allison Kirkby Chair of the Audit Committee 27 February 2018 Greggs plc Annual Report and Accounts 2017 53 Directors’ Report REMUNERATION COMMITTEE REPORT The Committee has continued to ensure that executive remuneration is closely aligned to the delivery of Greggs’ business strategy 54 Greggs plc Annual Report and Accounts 2017 Dear shareholders, I am pleased to present our remuneration report for 2017. We have continued to be as transparent as possible with this year’s remuneration report, aiming for a report that is easy to read, follow and understand. The report is made up of three key sections: – This annual Chair’s letter. – Our remuneration policy report, which sets out a summary of the Directors’ remuneration policy for all Directors of Greggs. This policy was formally agreed at our AGM held on 19 May 2017. – Our annual remuneration report, split into two sections that set out: – how our remuneration policy will be implemented in 2018; and – how our remuneration policy was implemented in 2017. This is an audited section of the report outlining the remuneration of the Company’s Executive and Non- Executive Directors during the 52 weeks ended 30 December 2017. The annual remuneration report is subject to an advisory shareholder vote at the 2018 AGM. Remuneration policy We are in year one of a three-year policy, and in developing this policy the Committee was very aware that executive remuneration continues to be a key focus for shareholders, as well as being a topic that is regularly discussed in the public domain. Throughout 2017 the Committee has continued to assess the effectiveness of overall levels of remuneration and continues to review emerging market practice and best practice expectations in line with the business strategy. The Committee has taken into account a number of reference points, both internal and external. Independent advice was also sought, where appropriate, from the Committee’s advisors. Remuneration structure and philosophy The existing remuneration framework consists of the following elements: – fixed pay – base salary, pension and benefits; and – variable pay – annual bonus (paid in both cash and deferred shares) and performance share plan (PSP). The Committee believes that the current structure works well and remains fit-for-purpose. It is simple and consistent, with pay outcomes dependent upon performance linked to our business strategy. It ensures a significant proportion of pay is delivered in shares to provide alignment with investors and incorporates a number of best practice features, including a two-year post- vesting holding period for PSP awards. Since announcing our five-year strategic plan in 2013, transforming the business from a traditional bakery into a modern food-on-the- go-retailer, we have delivered excellent operational and financial performance. In the four years since 2013 our company-managed like-for-like sales have grown by 17.1 per cent and pre-tax profit (excluding exceptional items) has increased by 98 per cent, reflecting sales growth combined with significant savings arising from structural changes and investment in better processes and systems. This is reflected in strong EPS growth (averaging 21 per cent p.a. since 2013). Policy report review Our remuneration policy report sets out our policy for the three years from 2017 and was put to a binding vote of shareholders at the AGM on 19 May 2017. This policy was approved with a majority vote of 93.91 per cent. Our related amendment to the PSP rules was also approved with a majority vote of 97.14 per cent. Approval of this policy has ensured that we have strengthened the alignment between Executive Directors and shareholders and kept the team focused on long-term, sustainable value creation for our shareholders. We have reviewed the policy again and are comfortable that it remains appropriate to ensure the team running our business are incentivised going forwards, whilst at the same time ensuring the policy is flexible to remain applicable over the remaining two years of the policy period. Accordingly there are no changes to our policy proposed in 2018. Performance in 2017 and incentive payments Despite challenging conditions, including significant cost headwinds, a busy change agenda and the continued major investment in line with our strategic plan, the Company has delivered another year of solid performance. The business has performed well against the stretching financial targets as described in the financial review on pages 24 to 27. Against the targets set at the beginning of the year for the annual bonus the profit element resulted in 22.54 per cent of the maximum being achieved with 12.53 per cent of the maximum sales performance being achieved. Despite significant cost challenges facing the business a strong control on costs resulted in 9.25 per cent of the maximum being achieved. There was a stronger performance in the strategic objectives that were set and we made excellent progress with our technology and supply chain change programme. This resulted in 100 per cent bonus payment against these strategic elements. Overall annual bonuses representing 80.4 per cent (out of a maximum possible of 125 per cent) and 57.9 per cent (out of a maximum possible of 90 per cent) of salary will be payable to the Chief Executive and Finance Director, respectively. Any element of the bonus earned above 50 per cent of the maximum will be paid in shares and will be subject to a two-year holding period. Under the Performance Share Plan, awards made in March 2015 are due to vest in March 2018. These awards are based on EPS growth over the three years to 30 December 2017 and average annual ROCE over the three-year performance period 2015 to 2017. EPS has grown by 12.86 per cent and our average annual ROCE was 27.3 per cent, which meant that the performance condition was achieved in full. For the purpose of calculating total remuneration payable we have therefore assumed full vesting of the award. The Committee is very comfortable that this performance justifies a full vesting level for this award. Approach for 2018 The salary increase for both the Chief Executive and Finance Director was in line with that of the base increase for the workforce generally and was 2.8 per cent. Increases to salaries and Non-Executive Directors’ fees took effect from 1 January 2018. As part of the Committee’s ongoing review of best practice and a review of the market, the target-setting process for the annual bonus has been reviewed. The Committee believes that the nature of the current measures (profit, sales and strategic objectives) remains appropriate and no changes are proposed to the measures or the mix. Financial targets for these measures for the 2018 annual bonus have been set in line with the financial plan for the business for the year and the rolling five-year strategic plan, and continue to be stretching. We will also continue to require any bonus earned over 50 per cent of the maximum to be payable in shares and be subject to a two-year holding period. The Committee has reviewed the percentage pay out for on target performance for the profit and sales element of the bonus and has decided to move this to 50 per cent (increased from 30 per cent in 2017). This change recognises the challenging nature of the targets we have set for 2018 and, more generally, we have a record of setting very demanding targets in the context of prior year performance and market expectations. We believe this has been demonstrated by the 2017 bonus outcomes as discussed above, where outcomes were well below the maximum, notwithstanding Greggs’ strong performance during the year. We have also been cognisant of wider market practice, where a 50 per cent payout for target performance is the norm (even in bonus schemes where the maximum opportunity is greater than at Greggs). The 50 per cent level remains lower than the 60 per cent level which we applied prior to 2017. Threshold performance will remain at ten per cent pay out. Due to the commercial sensitivity of the 2018 bonus targets they are not disclosed within this report, but will be disclosed retrospectively in next year’s report. Under the PSP the Committee has considered the performance conditions and has determined that EPS and ROCE should continue to apply with an equal weighting given to each. The Committee has ensured that targets have been set for the year ahead which reflect the strategic plan and business outlook over the performance period. Consequently, the ROCE ranges have been increased to ensure that they remain appropriately stretching in light of our business strategy, without encouraging undue risk taking. Concluding remarks I hope that you will find this report transparent, clear and informative. The Committee has continued to ensure that executive remuneration is closely aligned to the delivery of Greggs’ business strategy as well as remaining relevant to market and best practice. I look forward to receiving your continued support at this year’s AGM. Yours faithfully Sandra Turner Chair of the Remuneration Committee 27 February 2018 Greggs plc Annual Report and Accounts 2017 55 Directors’ Report REMUNERATION COMMITTEE REPORT CONTINUED Remuneration policy report This section of our report sets out the summary of the remuneration policy for all Executive and Non-Executive Directors at Greggs. It explains the purpose and strategy of each element of the package and demonstrates how the policy will incentivise Executive Directors to achieve sustainable long-term growth and value that will best serve the interests of the Company, its shareholders, its employees and customers. Our Directors’ remuneration policy was approved by shareholders at our AGM on 19 May 2017 and became effective for three years from that date. The policy for the remuneration of the Executive and Non-Executive Directors is set out in the tables below: Maximum opportunity Key reference points for salary increases are market and economic conditions and, in line with our values, the approach to employee pay throughout the organisation. No maximum limit is prescribed particularly as the cost of providing insured benefits fluctuates over time. However, the Committee monitors on an annual basis the overall cost of the benefit provision. Up to 22.5% of base salary contribution for the Chief Executive and up to 15% of base salary for other Executive Directors. Capped at 125% of base salary for the Chief Executive and 90% of base salary for other Executive Directors. On target performance delivers no more than 60% of the maximum. No more than 25% of the bonus opportunity is payable under each element for threshold performance. Executive Directors Element Purpose and strategy Operation Base salary To attract and retain high calibre individuals in order to promote the long-term success of the business. Reviewed and set annually in January. Benchmarked periodically by the Committee against the remuneration levels for executives in similar roles in companies of a comparable size. Individual performance and contribution is recognised in setting salary levels. Salaries are paid monthly in cash. Benefits To support a competitive remuneration package in the marketplace. Benefits include provision of a company car (or cash in lieu), private medical health care, life assurance and permanent health insurance. Pension To support a competitive remuneration package in the marketplace. Annual bonus (including profit share) To incentivise achievement of annual targets and objectives consistent with the short to medium-term strategic needs of the business, so as to encourage sustainable growth in the Company’s operating profits. Executive Directors can elect to either: – participate in the Company defined contribution pension scheme (up to a cap). Above the cap Executive Directors receive a salary supplement; or – take cash in lieu of this contribution paid as a supplement to their salary on a monthly basis. The Executive Directors are able to make this choice on an annual basis. The remuneration adjustment is disclosed later in this report. The bonus will be based on a mix of business KPIs, with operating profit being the largest component of the mix of metrics and this will not be less than 50% of the overall mix. Targets for each metric are set in advance and in line with business planning objectives set by the Committee. Each Executive Director is entitled to participate in the Company’s profit sharing scheme available to all employees. The value of this is then deducted from their annual bonus and is subject to the individual cap. The Committee will use appropriate underpins for any non-profit, based element of the annual bonus such that payment under these elements may be scaled back (potentially to zero), at the discretion of the Committee, in the event that the operating profit performance for the year is judged to be running significantly below that required for the achievement of the long-term strategy. Any bonus paid in excess of 50% of the maximum will be payable in shares, which (after any sales to pay tax and other statutory deductions) must be held in the Employee Benefit Trust for two years after receipt. The dividends payable on deferred bonus shares are paid to the individual as they fall due. Recovery and withholding provisions allow the Company to recoup annual bonus payments within three years in the event of misstatement of performance, error or misconduct, where this has led to an overpayment in the view of the Committee. There is a flexible mechanism which allows the Company to withhold outstanding deferred or future remuneration or recover the overpayment direct from the individual concerned. 56 Greggs plc Annual Report and Accounts 2017 Element Purpose and strategy Operation Performance Share Plan (PSP) To incentivise long-term value creation, retention of our talent and ensure alignment of Executive Directors’ and shareholders’ interests. Awards are granted under the PSP annually at the discretion of the Committee. Performance conditions will be based on an equal split of two different financial measures, EPS and ROCE (for discrete parts of an award). Targets will be set for each metric which reflect the strategic plan and business outlook over the respective performance period. The mix may alter for future awards and/ or different metrics, such as TSR, may be used. Performance will be measured over a three-year period with an additional mandatory holding period of two years for the vested shares (net of tax and other deductions). Recovery and withholding provisions allow the Company to recoup vested Performance Share awards within three years in the event of misstatement of performance, error or misconduct, where this has led to an overpayment in the view of the Committee. There is a flexible mechanism which allows the Company to withhold outstanding deferred or future remuneration, or recover the overpayment directly from the individual concerned. Maximum opportunity 115% of base salary for Chief Executive and 95% of base salary for other Executive Directors 150% of base salary in exceptional circumstances. Threshold vesting at 25% of the maximum. Saving Related Share Option Scheme (SAYE and SIP) To encourage employees at all levels within the Company to understand better and so participate in the growth in value of the Company. No performance conditions have been attached to options granted pursuant to the Company’s SAYE and SIP Schemes, which are available for all employees. The rules of these schemes require that all options granted must be on the same terms. Executive Directors may enter into a contract to save up to an agreed saving limit in line with all colleagues in the business and HMRC guidelines. Share retention guidelines To further align the interests of Executive Directors to those of shareholders. Executive Directors are required to build up a shareholding of 200% of base salary within five years of appointment. n/a This is achieved through vested awards granted via the PSP and deferred bonus shares. Non-Executive Directors Element Purpose and strategy Operation Non-Executive Chairman and Directors’ fees To attract and retain high quality and experienced Non-Executive Chairman and Directors. The Chairman is paid an all-encompassing fee. Non-Executive Directors are paid a basic fee and the Chairs of the Main Board Committees and the Senior Independent Director (SID) are paid an additional fee to reflect their additional responsibilities. Where the SID role is combined with that of chairing a Committee then only one fee is paid. These fees are reviewed and set annually in December and implemented from 1 January. Non-Executive Directors are not eligible for pension scheme membership, bonus or incentive arrangements. They are entitled to reimbursement of reasonable business expenses and tax thereon. They may also receive limited travel or accommodation related benefits in connection with their role as a Director. Maximum opportunity There is no prescribed maximum. Difference in remuneration policy across the Group The remuneration policy for the Executive Directors is designed having regard to the policy for employees across the Group as a whole. There are differences in salary levels and in the levels of potential reward depending upon seniority and responsibility, although a key reference point for executive salary increases is the average increase across the general workforce. A higher proportion of the Executive Directors’ remuneration package is delivered through performance-related pay and in share-based form, which provide a good link to long-term Company performance. All colleagues, with one-year’s service or more, may participate in the SAYE scheme and in the SIP that are run annually. Under the SAYE scheme, at the end of a three-year saving period, colleagues can buy Greggs shares at a discounted rate. With the SIP, all colleagues may purchase Company shares from pre-tax salary subject to HMRC limits. After six months’ service all colleagues are eligible to participate in the profit-sharing scheme in which they share ten per cent of our profits. Greggs plc Annual Report and Accounts 2017 57 Directors’ Report REMUNERATION COMMITTEE REPORT CONTINUED Policy discretion The Committee will operate incentive plans in accordance with their respective rules, the Listing Rules and the HMRC limits where relevant. The Committee, consistent with market practice, retains discretion over a number of areas relating to the operation and administration of certain plan rules. These include (but are not limited to) the following: – who participates; – the timing of the grant of award and/or payment; – the size of an award (up to plan/policy limits) and/or a payment; – discretion relating to the measurement of performance in the event of a change of control or reconstruction; – determination of a good leaver (in addition to any specified categories) for incentive plan purposes and the treatment of leavers; – adjustments required in certain circumstances (e.g. rights issues, corporate restructuring and special dividends); and – the ability to adjust existing performance conditions for exceptional events so that they can still fulfil their original purpose. Legacy arrangements For the avoidance of doubt, in approving this policy report, authority is given to the Company to honour any commitments entered into with current or former Directors (such as the payment of a pension or the unwinding of legacy share schemes) that have been disclosed to shareholders in previous remuneration reports. Details of any of these payments to former Directors will be set out in the annual report on remuneration as they arise. Policy on recruitment remuneration The Committee will aim to set a new Executive Director’s remuneration package in line with the Company’s approved policy at the time of appointment. The Committee will take into account, in arriving at a total package and in considering the quantum for each element of the package, the skills and experience of the candidate, the market rate for a candidate of that experience as well as the importance of securing the best available candidate. Annual bonus and PSP awards will not exceed the policy maxima (not including any arrangements to replace forfeited deferred pay). Participation in the annual bonus plan and PSP will normally be pro-rated for the year of joining. The Committee may make one-off additional cash and/or share-based awards as it deems appropriate, and if the circumstances so demand to take account of deferred pay forfeited by an Executive Director on leaving a previous employer. Awards to replace deferred pay forfeited would, where possible, reflect the nature of awards forfeited in terms of delivery mechanism (cash or shares), time horizons, attributed expected value and performance conditions. Other payments may be made in relation to relocation expenses and other incidental expenses as appropriate. Any buyout awards would be made under existing arrangements where possible or as permitted under the Listing Rules. In the case of an internal appointment, any variable pay element awarded in respect of the prior role would be allowed to pay out according to its terms and any other ongoing remuneration obligations existing prior to appointment would continue. For the appointment of a new Chairman or Non-Executive Director, the fee arrangement would be set in accordance with the approved remuneration policy at that time. Service contracts and policy on cessation Executive Directors’ service contracts contain the following remuneration-related aspects: Provision Detailed terms Remuneration – Salary, pension and benefits; – company car or cash allowance; – private medical health care for the Director; – permanent health insurance; – participation in annual bonus and profit share (subject to scheme rules); – participation in long-term incentive schemes or similar arrangements (subject to scheme rules); and – life assurance. Notice period – Chief Executive’s contract is terminable on 12 months’ notice served by either the Company or the Director; – other Executive Directors’ service contracts are terminable on 12 months’ notice served by the Company or by six months’ notice served by the Director; and – any future Executive Directors’ service contracts will be terminable on 12 months’ notice served by either party. Termination payment – Payment in lieu of notice equal to any unexpired notice of termination given by either party; and – payment in lieu shall not include: – any bonus payment; – any payment in respect of benefits which the Director would have been entitled to receive; and – any payment in respect of any holiday entitlement that would have accrued during the period for which the payment in lieu is made. Details of the circumstances in which the Committee has the ability to exercise discretion with regards to Termination Payments are set out opposite. 58 Greggs plc Annual Report and Accounts 2017 The Company’s policy is that current Executive Directors’ service contracts do not have a specific duration but may be terminated with twelve months’ notice from the Company and six months’ notice from the Executive Director. Any future Executive Directors’ service contracts will be terminable on 12 months’ notice served by either party. Under their service contracts the Executive Directors are entitled to salary, pension contributions and benefits for their notice period save where a payment in lieu is to be made. The Company would seek to ensure that any payment is mitigated by use of phased payments and offset against earnings elsewhere in the event that an Executive Director finds alternative employment during his notice period. There are no contractual provisions in force other than those set out above that impact any termination payment. Areas where the Committee can exercise discretion with regards to Termination Payments: – annual bonus may be payable pro-rated for that part of the year worked; – deferred bonus shares must normally be retained in trust until the end of their two year holding period and will be subject to recovery and withholding in the event of misstatement of performance, error or misconduct, where this has led to an overpayment in the view of the Committee for a period of three years from the payment date; – any unvested awards held under the PSP will lapse at cessation, unless the individual is leaving in good leaver circumstances (defined under the plan as death, injury, ill-health, disability, redundancy, retirement, his office or employment being with either a company which ceases to be a Group member or relating to a business or part of a business which is transferred to a person who is not a Group member, a change of control or any other reason the Committee so decides). In these circumstances, unvested awards will normally vest at the normal vesting date (other than on death or where the Committee decides they should vest at cessation) subject to performance conditions being met and scaling back in respect of actual service as a proportion of the total vesting period (unless the Committee decides that scaling back is inappropriate). Vested awards will normally be subject to the mandatory two-year holding period although the Committee will have discretion to waive this in exceptional circumstances; and – the Committee may agree to payment of disbursements such as legal costs and outplacement services if appropriate and depending on the circumstances of cessation. The table below sets out the details of the Executive Directors’ service contracts: Director Roger Whiteside Richard Hutton Date of contract 4 February 2013 7 April 2006 Raymond Reynolds stepped down from the Main Board on 19 May 2017. The service contracts are available for inspection during normal business hours at the Company’s registered office, and are available for inspection at the AGM. Expected value of the proposed annual remuneration package for Executive Directors The following charts indicate the level of remuneration payable to Executive Directors in 2018 based on policy at ‘minimum’ remuneration, remuneration in line with ‘on target’ Company performance, and the maximum remuneration available. Chief Executive – Roger Whiteside £2,003,060 Minimum On target Stretch 2,000 1,500 1,000 500 0 £1,412,756 22% 29% 49% 32% 34% 34% £685,172 100% Minimum On target Stretch PSP Bonus Fixed remuneration Fixed remuneration: salary pension benefits Bonus Performance Share Plan £549,120 £123,552 £12,500 £549,120 £123,552 £12,500 £549,120 £123,552 £12,500 – – £411,840 £686,400 £315,744 £631,488 Total £685,172 £1,412,756 £2,003,060 Greggs plc Annual Report and Accounts 2017 59 Directors’ Report REMUNERATION COMMITTEE REPORT CONTINUED Finance Director – Richard Hutton 1,000 800 600 400 200 0 £687,863 21% 25% 54% £369,469 100% £949,794 31% 30% 39% Minimum On target Stretch PSP Bonus Fixed remuneration Fixed remuneration: salary pension benefits Bonus Performance Share Plan Minimum On target Stretch £313,689 £40,780 £15,000 £313,689 £40,780 £15,000 £313,689 £40,780 £15,000 – – £169,392 £282,320 £149,002 £298,005 Total £369,469 £687,863 £949,794 Assumptions used in the charts: Base salary levels as at 1 January 2018. The value of taxable benefits is based on the cost of supplying those benefits (as disclosed) for the 52 weeks ended 30 December 2017. BONUS Minimum remuneration – assumes no award is earned under the annual bonus plan. On target remuneration – the annual bonus plan assumes the target level is reached for each of the elements: – 50% of profit (total 25% of max potential) – 50% LFL sales (total 10% of max potential) – Mid-range for costs (total 5% of max potential) – Full pay out for strategic elements (10% for each element giving a total 20% of max potential) Calculated as 60 per cent of max potential – 75 per cent of salary for CEO and 54 per cent of salary for FD Maximum remuneration – assumes full vesting for all elements under the annual bonus plan and therefore full pay out. Calculated as 125 per cent of salary for CEO and 90 percent of salary for FD. PSP element is calculated as award percentage of base salary multiplied by the relevant vesting percentage. Share price movement and dividend accrual have been excluded. Minimum remuneration – assumes no vesting is achieved under the PSP. On target remuneration – assumes 50% vesting is achieved and is calculated as 50 per cent of 115 per cent of salary for CEO and 50 per cent of 95 per cent of salary for FD. Maximum remuneration – assumes full vesting is achieved and is calculated as 100 per cent of 115 per cent of salary for CEO and 100 per cent of 95 per cent of salary for FD. Terms of appointment of Non-Executive Directors Non-Executive Directors are appointed subject to the Company’s articles of association, retiring and seeking election at the first AGM after appointment. Thereafter, every Director will be subject to annual re-election by shareholders. The Nominations Committee advises the Board as to whether Directors should be nominated for re-election. Non-Executive Directors are not entitled to compensation for early termination of their appointments prior to the date on which they would next be due to offer themselves for election or re-election, or if not re-appointed at such time. The following table shows the effective date of appointment for each Non-Executive Director: Non-Executive Director Ian Durant Allison Kirkby Helena Ganczakowski Peter McPhillips Sandra Turner Original date of appointment 5 October 2011 30 January 2013 2 January 2014 10 March 2014 1 May 2014 Non-Executive Directors are appointed on an understanding that the appointment will last for at least six years, but without any commitment by either party. 60 Greggs plc Annual Report and Accounts 2017 Annual remuneration report Our remuneration policy is simple and consistent, with pay outcomes dependent upon performance linked to our business strategy. It ensures a significant proportion of pay is delivered in shares to provide alignment with investors and incorporates a number of best practice features. Outlined below are the current Remuneration Committee members: Member Sandra Turner (Chair since appointment to the Board) Allison Kirkby Helena Ganczakowski Peter McPhillips Meeting attendance 2/2 2/2 2/2 2/2 All members are considered to be independent for the purpose of the UK Corporate Governance code and the Company Secretary acts as Secretary to the Committee. Responsibility is delegated to the Remuneration Committee to ensure that an effective remuneration policy is in place for the Chief Executive, the Chairman and other Executive and Non-Executive Directors. It is the Committee’s role to design a policy to ensure that executive remuneration is aligned to the delivery of Greggs’ business strategy and the alignment between our Executive Directors and shareholders is strengthened whilst taking close account of the business strategy, current and emerging market practice and the best practice expectations of institutional shareholders. The Committee maintains an active dialogue with institutional investors and shareholder representatives and although the Committee does not currently consult with employees on Directors’ pay policy this is kept under review. The Committee will give further consideration to this during 2018 in light of the proposed changes to the UK Corporate Governance Code. Summary of committee activity during 2017 During 2017 the committee has: – Finalised the review of the remuneration policy. – Discussed and reviewed Directors’ salaries. – Discussed and reviewed bonus percentage, bonus metrics and bonus deferral. – Discussed and reviewed the targets for bonus and PSP for the year ahead. – Approved grants under the share option scheme (to senior managers below Operating Board level) and the Company SAYE scheme. – Appointed new advisors to the Remuneration Committee. Structure and content of the remuneration report The Remuneration Report has been prepared in accordance with the provisions of the Companies Act 2006 (the Act) and The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the Regulations). It also meets the requirements of the UK Listing Authority’s Listing Rules. The Regulations also require our auditor to report to shareholders on the audited information within this remuneration report and to state whether, in their opinion, the relevant sections have been prepared in accordance with the Act and the Regulations. The auditor’s opinion is set out on pages 71 to 75 and we have indicated appropriately the audited sections of this remuneration report. Remuneration advice The Chief Executive along with Jonathan Jowett (Company Secretary and General Counsel), Roisin Currie (Retail & People Director) and Emma Walton (Head of People) are normally invited to attend the Committee meetings in order to provide advice and support to the Committee. During the year NBS, part of Aon plc, supported the Committee. NBS is a signatory to the Remuneration Consultants’ Code of Conduct in relation to executive remuneration consulting in the UK. The Committee appointed new advisors, Korn Ferry Hay Group, in December 2017. Korn Ferry Hay Group is also a signatory to the Remuneration Consultants’ Code of Conduct. The Committee reviewed the operating processes in place at NBS and Korn Ferry and is satisfied that the advice it receives is objective and independent. Fees paid to NBS during the year were £12,800. No fees were paid to Korn Ferry Hay Group during the year. Greggs plc Annual Report and Accounts 2017 61 Directors’ Report REMUNERATION COMMITTEE REPORT CONTINUED Shareholder dialogue The voting outcome from the 2017 Annual General Meeting reflected both strong individual and institutional shareholder support. Shareholders were asked to approve the 2016 Directors’ remuneration report, our new remuneration policy and an amendment to the PSP and did so as outlined below. We will continue to engage with shareholders to understand any concerns they may have about our policy and its implementation during the life of the new policy. For Against Total votes cast (excluding votes withheld) Votes withheld Total votes cast (including votes withheld) For Against Total votes cast (excluding votes withheld) Votes withheld Total votes cast (including votes withheld) For Against Total votes cast (excluding votes withheld) Votes withheld Total votes cast (including votes withheld) Votes withheld are not included in the final proxy figures as they are not recognised as a vote in law. How our remuneration policy will be implemented in 2018 – Executive Directors The section below summarises the implementation of our remuneration policy for 2018. Approve the remuneration report Total number of votes % of votes cast 95.66% 4.34% 100% 57,539,485 2,607,460 60,146,945 170,676 61,185,466 Approve the remuneration policy Total number of votes % of votes cast 93.91% 6.09% 100% 57,297,311 3,717,480 61,014,791 170,676 61,185,467 Approve amendment to PSP Total number of votes % of votes cast 97.14% 2.86% 100% 59,300,511 1,747,528 61,048,039 137,428 61,185,467 Base salary 2018 The annual base salaries for the Executive Directors were reviewed with effect from 1 January 2018; increases and current salaries are outlined below: Salary as at Salary as at Director Roger Whiteside (Chief Executive) Richard Hutton (Finance Director) 1 January 2017 1 January 2018 % increase £534,163 £305,145 £549,120 £313,689 2.8% 2.8% Increases are in line with the average base salary increase for the workforce as a whole. Pension contribution 2018 The pension contribution rates (both of which are cash in lieu) are: Roger Whiteside Richard Hutton Annual bonus 2018 The annual bonus opportunity for 2018 is outlined below: 22.5% 13% Chief Executive Finance Director • Maximum opportunity of 125% of base salary. • Bonus in excess of 50% of maximum will be payable in shares deferred for two years. • Maximum opportunity of 90% of base salary. • Bonus in excess of 50% of maximum will be payable in shares deferred for two years. 62 Greggs plc Annual Report and Accounts 2017 The bonus metrics are: Measure Weighting Detail and link to strategy. Profit 50% of total Sales 20% of total Reflects the profit of the Group at an underlying level before tax. This will be based on meeting and exceeding budget for the year. Based on company-managed shop like-for-like sales excluding any additional shops opened during the bonus year. Strategic objectives 30% of total Detailed below. The strategic objectives for each bonus cycle are based on measures which will provide a strong link to future value creation. For the 2018 bonus the three strategic objectives, each relating to ten per cent of the bonus opportunity, will be: i. Cost savings (ten per cent of the measure); ii. Specific project delivery within our change programme regarding processes and systems with two elements measured independently, both elements being worth five per cent each. These measures will be based on delivery of new systems and processes into two of our supply chain operations (five per cent payable on each element; a total of ten per cent) and iii. Specific project delivery within our programme for supply chain restructuring, specifically the transfer and operation of product platforms with three elements measured independently; one element being worth five per cent, one element being worth three per cent and one element being worth two per cent. The annual bonus is based on performance against a range of financial and strategic performance measures. This range of metrics measures achievement of the Company’s key operational objectives. The Committee reviews the key performance indicators (KPIs) each year and varies them as appropriate to reflect the priorities for the business in the year ahead. Where appropriate a sliding scale of targets is set for each KPI to encourage continuous improvement, or sustained high performance. There will be an underpin to the sales and strategic objectives elements of the bonus whereby any payment under these elements may be scaled back (potentially to zero) at the discretion of the Committee, if the profit performance for the year is judged to be running significantly below that required for the achievement of the long-term strategy. Bonus targets for the forthcoming year are considered to be commercially sensitive and so have not been disclosed. Retrospective disclosure of the targets and performance against them will be made in next year’s annual report on remuneration. PSP award 2018 PSP awards will be granted as follows: Chief Executive Executive Directors 115% of base salary 95% of base salary Performance conditions will be based on an equal split of two different financial measures, EPS and ROCE (for discrete parts of an award)*. EPS and ROCE are two of our eight strategic KPIs and together provide a rounded assessment of our overall profitability against stretching targets set in line with the strategic plan and business outlook over the performance period. For these awards the ROCE ranges have been increased to ensure that they remain appropriately stretching in light of our business strategy without encouraging undue risk taking. The EPS targets require the same level of growth as for last year’s award, albeit the base point from which the growth is measured is higher than last year. For the 2018 awards the target ranges will be as follows: – The EPS performance condition will require average annual growth of EPS of 5 per cent to 11 per cent over three financial years measured from the 2017 financial year end. – The ROCE condition will require average annual ROCE over the three-year performance period (2018, 2019 and 2020) to be in the range 25 per cent to 29 per cent. In both cases 25 per cent of an award will vest on achieving threshold performance and thereafter straight-line sliding scales will apply until stretch performance is achieved. In order to improve alignment of interest between Executive Directors and shareholders, a holding period is attached to vested PSP awards granted in the policy period, requiring the vested shares to be held (net of tax and other deductions) for a further two years. * EPS and ROCE are measured excluding exceptional items. Greggs plc Annual Report and Accounts 2017 63 Directors’ Report REMUNERATION COMMITTEE REPORT CONTINUED How our remuneration policy will be implemented in 2018 – Non-Executive Directors In order to ensure that no Director is involved in deciding his/her own remuneration, the fees payable to Non-Executive Directors are set, after consultation with the Chairman, by a Committee of the Board consisting only of the Executive Directors. The fees payable to the Chairman are set by the Remuneration Committee. These fees are reviewed and set annually in December and implemented from 1 January. The fees for Non-Executive Directors increased by 2.8 per cent on 1 January 2018 in line with the base award for our whole workforce in 2018. The Non-Executive Directors are paid an annual base fee which is currently £44,639 and additional responsibility fees of £6,637 for the role of Senior Independent Director (SID) or for chairing a Board Committee. Where the SID role is combined with the role of chairing a Committee then only one fee of £6,637 will be paid. Details of the fees being paid to Non-Executive Directors in 2018 are set out below: Name Ian Durant Allison Kirkby Helena Ganczakowski Peter McPhillips Sandra Turner Position Chairman Chair of the Audit Committee Non-Executive Director Non-Executive Director SID & Chair of the Remuneration Committee Fee £167,815 £51,276 £44,639 £44,639 £51,276 How our remuneration policy was implemented in 2017 (audited) Total remuneration payable for 2017 The following table presents the remuneration payable for 2017 (showing the equivalent figures for 2016) for the Executive Directors. Roger Whiteside 2017 2016 Richard Hutton 2017 2016 Raymond Reynolds 20172 2016 Pension contribution (including salary in lieu) £ Salary £ Taxable benefits £ Annual incentives (including profit share) £ Long-term incentives1 £ Total remuneration £ 534,163 521,135 120,186 117,255 12,441 12,408 429,467 564,780 580,395 919,948 1,676,652 2,135,526 305,145 297,702 104,012 265,641 41,067 30,582 15,043 32,680 16,203 15,298 176,642 232,297 257,870 408,734 796,927 984,613 6,006 14,833 60,210 207,280 230,103 364,721 415,374 885,155 Notes: 1 The 2017 long-term incentive vesting values are based on the forecast value of the awards due to vest on 26 March 2018. This value will be trued up in the 2018 report to reflect the actual level of vesting and share price at the vesting date. The 2016 long-term incentive value has been restated and reflects the actual value of the awards that vested in March 2017, following the estimated value last year. 2 2017 remuneration until date of retirement from the Board on 19 May 2017. Fees for Non-Executive Directors The fees for Non-Executive Directors were as follows: Ian Durant Allison Kirkby Helena Ganczakowski Peter McPhillips Sandra Turner 2017 2016 £163,244 £49,880 £43,424 £43,424 £49,880 £159,263 £48,663 £42,365 £42,365 £48,663 64 Greggs plc Annual Report and Accounts 2017 Annual bonus 2017 The table below outlines the bonus payments to Executive Directors in respect of 2017. Measure Strategic objective Weighting Entry Target Stretch Actual % All Executive Directors Profit (£) Profit before tax (excluding exceptional items and property profits) To deliver profit target 50% £78.0m £80.0m £88.0m £81.7m 22.54% Company–managed like-for-like sales To deliver target increase 20% 1.5% 3.0% 4.5% 3.7% 12.53% £6.0m £10.0m – £9.7m Achieved 9.25% 10.0% Achieved 10.0% Sales (%) Strategic (£) Strategic (3 elements) Strategic (3 elements) Cost savings Process and system change delivery* Supply chain reorganisation* Total weighting based on balanced scorecard * Project milestones. Bonus achieved for 2017 Roger Whiteside Richard Hutton Raymond Reynolds1 Note: 1 Reflects bonus earned during period served as Director during 2017. 10% 10% 10% 100% Criteria Process and system change delivery Supply chain reorganisation Forecast and replenishment roll-out All company-managed shops by end of Q3 2017 Manufacturing pilot Warehousing pilot Increased capability Delivered and operational by end of FY2017 Delivered and operational by end of FY2017 To enable opening of 130 shops Transfer of production platform (Yum Yum) Delivered and operational by end of FY2017 Transfer of production platform (muffin) Delivered and operational by end of FY2017 Any element of the bonus earned above 50 per cent of the maximum will be paid in shares for the Chief Executive and other Executive Directors listed above, which (after any sales to pay tax and other statutory deductions) must be held in the Employee Benefit Trust for two years after receipt. The number of shares will be calculated by dividing 14.32 per cent of the net bonus by the closing market share value on the date of payment. Details of the shares awarded in 2017 for the 2016 bonus year are outlined below: Director Roger Whiteside Richard Hutton Raymond Reynolds Number of shares awarded 11,701 3,008 2,684 Performance Share Plan award for performance over 2015 – 2017 The PSP award granted in 2015 measured EPS performance by reference to the three financial years to 30 December 2017 and average annual ROCE over the three-year performance period 2015 to 2017. The performance targets that were set, together with the performance delivered, are set out in the table below. Metric Condition Threshold target Stretch target Actual % vesting Earnings per share (50%) Normalised EPS* growth of RPI + 1% p.a. to RPI + 7% p.a. over three financial years. RPI +1% (12.5% vesting) ROCE (50%) Average annual ROCE over the three-year performance period. 19.0% (12.5% vesting) * Normalised EPS is the Company’s reported earnings per share excluding exceptional items. RPI +7% (100% vesting) 21.5% (100% vesting) RPI +12.86% 50% 27.3% 50% Total vesting 100%* Greggs plc Annual Report and Accounts 2017 65 64.32% As % of maximum 64.32% 64.32% 64.32% Payment of 10% total 5.0% 2.5% 2.5% 5.0% 2.5% 2.5% Directors’ Report REMUNERATION COMMITTEE REPORT CONTINUED These options will vest on 26 March 2018. The table below details the impact on share price appreciation on the value of this PSP award. Executive Roger Whiteside Richard Hutton Raymond Reynolds Number of shares at grant Value at grant 1 Vesting outcome 44,103 19,595 17,485 £456,466 £202,808 £180,970 100% 100% 100% Number of shares to vest 44,103 19,595 17,485 Estimated value 2 Value attributable to share price growth £580,395 £123,929 £257,870 £230,103 £55,062 £49,133 Notes: 1 Based on a share price at grant of £10.350. 2 Based on a three-month average share price to 31 December 2017 of £13.16. Performance Share Plan Awards granted during 2017 are as follows: Executive Type of award Basis of award granted Share price at date of grant (19 May 2017) Number of shares over which award was granted Roger Whiteside Richard Hutton nil cost option 115% of salary 95% of salary £10.72 £10.72 57,303 27,041 % of face value that would vest at threshold performance 25% Face value of award £614,288 £289,879 Vesting determined by performance over Three financial years to 3 January 2020 The target ranges for this award are as follows: – EPS average annual growth of 5 per cent to 11 per cent over three years from the 2016 financial year end. – Average annual ROCE over the three-year performance period (2017, 2018 and 2019) to be in the range 23 per cent to 27 per cent. In both cases, 25 per cent of the award will vest on achieving threshold performance and thereafter straight-line sliding scales will apply until stretch performance is achieved. A holding period is attached to vested PSP awards requiring the vested shares to be held (net of tax) for a further two years. Outstanding Share Awards The following table sets out details of the PSP, executive and savings-related share options (all of which were granted at a £nil cost to the Executive Director concerned) held by, or granted to, each Executive Director during the year: Granted number Exercised number Lapsed number At 30 December 2017 number Exercise price Date of grant Market price of each share at date of grant Date from which exercisable Expiry date Scheme Roger Whiteside Richard Hutton At 1 January 2017 number 90,191 44,103 42,560 – 449 215 148 – – – – 57,303 – – – 169 90,1911 – – – 4492 – – – 177,666 57,472 90,640 40,072 19,595 18,910 – 449 215 148 – – – – 27,041 – – – 169 40,0723 – – – 4492 – – – 79,389 27,210 40,521 66 Greggs plc Annual Report and Accounts 2017 – – – – – – – – – – – – – – – – – – – 44,103 42,560 57,303 – 215 148 169 144,498 – 19,595 18,910 27,041 – 215 148 169 66,078 £4.9425 Mar 17 Mar 24 £nil Mar 14 £nil Mar 15 £10.350 Mar 18 Mar 25 £11.020 Mar 19 Mar 26 £nil Mar 16 £10.720 May 20 May 27 £nil May 17 Jun 17 Nov 17 Apr 14 Jun 18 Nov 18 Apr 15 Jun 19 Nov 19 Apr 16 Jun 20 Nov 20 Apr 17 £4.65 £8.18 £8.70 £8.07 £4.9425 Mar 17 Mar 24 £nil Mar 14 £nil Mar 15 £10.350 Mar 18 Mar 25 £11.020 Mar 19 Mar 26 £nil Mar 16 £10.720 May 20 May 27 £nil May 17 Jun 17 Nov 17 Apr 14 Jun 18 Nov 18 Apr 15 Jun 19 Nov 19 Apr 16 Jun 20 Nov 20 Apr 17 £4.65 £8.18 £8.70 £8.07 PSP PSP PSP PSP SAYE SAYE SAYE SAYE PSP PSP PSP PSP SAYE SAYE SAYE SAYE At 1 January 2017 number Granted number Exercised number Lapsed number Raymond Reynolds 62,640 12,125 36,736 35,757 17,485 16,873 – 449 148 – – – – – – – 24,129 – – 169 57,5554 – – – – – – – – – 182,213 24,298 57,555 – – – – – – – 449 – – 449 At 30 December 2017 number 5,0855 12,125 36,736 35,757 17,485 16,873 24,129 – 148 169 148,507 Exercise price Date of grant Market price of each share at date of grant Date from which exercisable Expiry date Scheme Apr 19 Apr 12 Apr 09 £3.56 £5.260 Apr 22 Apr 15 £nil Apr 12 £4.735 Mar 16 Mar 23 £nil Mar 13 £4.9425 Mar 17 Mar 24 £nil Mar 14 £nil Mar 15 £10.350 Mar 18 Mar 25 £11.020 Mar 19 Mar 26 £nil Mar 16 £10.720 May 20 May 27 £nil May 17 Jun 17 Nov 17 Apr 14 Jun 19 Nov 19 Apr 16 Jun 20 Nov 20 Apr 17 £4.65 £8.70 £8.07 Exec PSP PSP PSP PSP PSP PSP SAYE SAYE SAYE Notes: 1 The market value on the date of exercise was £10.200 and the resultant gain on exercise was £919,948. 2 The market value on the date of exercise was £10.910 and the resultant gain on exercise was £2,811. 3 The market value on the date of exercise was £10.900 and the resultant gain on exercise was £436,785. 4 The market value on the date of exercise was £11.15 and the resultant gain on exercise was £436,842. 5 Performance conditions have been achieved and the shares remained exercisable. Options granted under the all-employee SAYE scheme are not subject to performance conditions. The mid-market price of ordinary shares in the Company as at 30 December 2017 was £13.99. The highest and lowest mid-market prices of ordinary shares during the financial year were £13.99 and £9.645, respectively. Legacy defined benefit pension scheme (Audited) 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: Executive Director Date of birth Richard Hutton Raymond Reynolds 3/6/68 4/11/59 Date service commenced 1/1/98 1/12/86 Accrued annual pension entitlement as at 1 January 2017 £ Accrued annual pension entitlement as at 30 December 2017 £ Increase in accrued pension entitlement for the year £ Increase in accrued pension entitlement for the year net of inflation of 1.2% £ Transfer value of increase in accrued pension entitlement for the year £ 18,522 69,535 18,522 69,535 – – – – – – Notes: 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. 2 The inflation rate of 3.2 per cent 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. Richard Hutton Raymond Reynolds Cash equivalent transfer value as at 1 January 2017 £ 386,456 1,669,402 Cash equivalent transfer value as at 30 December 2017 £ 327,015 1,515,966 Increase in the cash equivalent transfer value since January 2017 £ – – 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. The main features of the defined benefit scheme are: – Pension at normal retirement age of 1/60th of member’s final pensionable salary for each complete year and a proportionate amount for each additional complete month of service from the date of joining the scheme until 5 April 2008 when the scheme was closed to future accrual; – choice of giving up part of the pension in exchange for a tax free cash sum subject to a limit of 25 per cent of the total value of the member’s benefits under the scheme; – pension payable in the event of ill health; – spouse’s pension on death; and – normal retirement at age 65. Greggs plc Annual Report and Accounts 2017 67 Directors’ Report REMUNERATION COMMITTEE REPORT CONTINUED Chief Executive pay compared to performance The graph below shows a comparison of the total shareholder return for the Company’s shares for each of the last nine financial years against the total shareholder return for the companies comprised in the FTSE 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. 600 500 400 300 200 100 0 D D D D D D D D D D e c - 0 e c - 0 e c - 1 e c - 1 e c - 1 e c - 1 e c - 1 e c - 1 e c - 1 e c - 1 8 9 0 1 2 3 4 5 6 7 FTSE 350 (excluding investment trusts) FTSE 250 (excluding investment trusts) Greggs Remuneration outcomes for Chief Executive over last eight years The table below shows the total remuneration figure for the Chief Executive over the same eight-year period. The total remuneration figure includes the annual bonus, pension and PSP/option awards which vested based on performance in those years. 2010 2011 2012 2013 2014 2015 2016 2017 Total remuneration £767,397 £707,245 £635,030 £1,011,381 £1,238,248 £2,462,193 £2,135,526 1,676,652 Bonus (% of max potential) 56.6% 38.6% PSP/options (% max potential) n/a 0% 18% 78.3% 20%* n/a 100% n/a 93.7% 100% 86.7% 100% 64.32% 100% * This figure includes only the performance related bonus that was achieved in 2013 and not the bonus share award given to the Chief Executive. Directors’ shareholding and share interests (Audited) Details of the shareholdings of each Executive Director as of 30 December 2017 and their interests in shares are detailed below with the percentage holding calculated using the share price at that date: Director Roger Whiteside Richard Hutton Raymond Reynolds Ian Durant Allison Kirkby Helena Ganczakowski Peter McPhillips Sandra Turner Beneficially owned at 30 December 2017 195,472 70,844 63,168 11,700 1,600 1,100 1,000 1,000 Beneficially owned at 1 January 2017 Outstanding PSP awards Outstanding deferred bonus awards Outstanding option awards 135,563 78,094 64,484 11,700 1,600 1,072 1,000 1,000 143,966 65,546 143,105 – – – – – – – – – – – – – – – 5,085 – – – – – % shareholding guideline achieved at 30 December 2017 512% 325% 324% n/a n/a n/a n/a n/a There have been no changes since 30 December 2017 in the Directors’ interests noted above. Exit payments or payments to past Directors (Audited) There were no payments to past Directors in the 52 weeks ended 30 December 2017. No payments for compensation or loss of office were paid to, or receivable by, any Director. This includes Raymond Reynolds, who did not receive any payments for loss of office following his departure from the Board on 19 May 2017. He remains employed by Greggs in a different role. 68 Greggs plc Annual Report and Accounts 2017 External directorships Executive Directors may take up one Non-Executive Directorship outside of the Company subject to the Board’s approval and provided that such an appointment is not likely to lead to a conflict of interest. It is recognised that this can support a Director’s development and enhance experience as well as benefit the Company. Executive Directors will be entitled to retain the fees of such an appointment. Roger Whiteside was appointed as Non-Executive Director of Card Factory plc, effective from 4 December 2017. He retains the fees that he earns. Relative importance of spend on pay The Committee is aware of the importance of pay across the business and the table below shows the expenditure and percentage change in the overall spend on all colleague costs compared to other key financial indicators. All colleague costs Dividends Retained profit (excluding exceptional items) Corporation tax paid 2017 £m 357.3 32.2 64.9 17.6 2016 £m 336.9 30.9 62.3 16.2 % increase/ (decrease) 6.1% 4.2% 4.2% 8.9% Percentage change in remuneration of Director undertaking role of Chief Executive The table below sets out the percentage change in remuneration for the Chief Executive compared to the wider workforce. For this purpose the wider workforce is defined as all full-time head office management colleagues as they too are entitled to receive benefits and annual bonus awards. Chief Executive (£) – salary – benefits – performance pay Average per colleague (£) – salary – benefits* – performance pay % change from 2016 to 2017 2.5% 0.3% (32%) 4.1% 15% (6.1%) * The average employee benefits figure is based on tax year 2015/16 for 2016 and tax year 2016/17 for 2016. At the AGM of the Company to be held on 9 May 2018, an ordinary resolution will be proposed to approve the annual report on remuneration. This report was approved by the Board on 27 February 2018. Signed on behalf of the Board Sandra Turner Chair of the Remuneration Committee 27 February 2018 Greggs plc Annual Report and Accounts 2017 69 Directors’ Report STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND ACCOUNTS The Directors are responsible for preparing the annual report and the Group and Parent Company accounts in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company accounts for each financial year. Under that law they are required to prepare the Group accounts in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the Parent Company accounts on the same basis. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company accounts, the Directors are required to: – select suitable accounting policies and then apply them consistently; – make judgements and estimates that are reasonable, relevant and reliable; – state whether they have been prepared in accordance with IFRSs as adopted by the EU; – assess the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and – use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its accounts comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of accounts that are free from material misstatement, whether due to fraud or error, and 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. Under applicable law and regulations, the Directors are also responsible for preparing a strategic report, Directors’ report, Directors’ remuneration report and corporate governance statement that complies with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of accounts may differ from legislation in other jurisdictions. Responsibility statement of the Directors in respect of the annual accounts We confirm that to the best of our knowledge: – the accounts, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and – the strategic report and Directors’ report include a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. Roger Whiteside Chief Executive 27 February 2018 Richard Hutton Finance Director 70 Greggs plc Annual Report and Accounts 2017 INDEPENDENT AUDITOR’S REPORT to the members of Greggs plc Opinions and conclusions arising from our audit 1. Our opinion is unmodified We have audited the accounts of Greggs plc (the Company) for the 52 weeks ended 30 December 2017 which comprise the consolidated income statement, consolidated statement of comprehensive income, balance sheets, statements of changes in equity, statements of cashflows and the related notes, including the accounting policies. In our opinion: – the accounts give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 30 December 2017 and of the Group’s profit for the period then ended; – the Group accounts have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU); – the Parent Company accounts have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and – the accounts have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group accounts, Article 4 of the IAS Regulation. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the Audit Committee. We were appointed as auditor by the Company before 1984. The period of total uninterrupted engagement is for more than the 34 financial years ended 30 December 2017. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided. Overview Materiality: Group accounts as a whole Risks of material misstatement (Group and Parent) £4m (2016: £3.9m) 5% (2016: 5%) of normalised PBT vs 2016 New: Event-driven Recoverability of property, plant and equipment Recurring risks Dilapidation provisions Greggs plc Annual Report and Accounts 2017 71 Accounts INDEPENDENT AUDITOR’S REPORT to the members of Greggs plc continued 2. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the accounts and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the accounts as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters. Recoverability of property, plant and equipment (Group and Parent Company) (carrying amount of property, plant and equipment: £319.2m; 2016: £307.4m Refer to page 50 (Audit Committee report), pages 82-83 (accounting policy) and pages 93-94 (financial disclosures) The risk Our response In 2016 the Group announced a large-scale investment programme in manufacturing and distribution operations. The next phase of the supply chain investment programme, including the creation of centres of excellence, was announced in early 2017. The consolidation of certain production processes may reduce the useful economic life and recoverable amount of certain assets. Where assets are considered recoverable but will no longer be used once the programme progresses this may result in the need for accelerated depreciation. Where the assets are no longer considered recoverable an impairment should be recognised. Subjective estimate Identifying the affected assets requires fixed assets information which reflects the current location and use of supply chain assets. There is a risk that all relevant assets may not be appropriately captured or that assets may be provided against which continue to be used elsewhere in the Group. Determining the period over which to accelerate the depreciation of assets depends on when the assets are expected to be used by the Group. This is a judgemental assessment of future activities and there is a risk that assets may be depreciated over the incorrect period. Our procedures included: – Personnel interviews: We obtained a detailed understanding of the progress of this phase of the programme and the forecast business and financial impacts as at the period end; – Methodology choice: We assessed the Group’s assumptions around useful economic lives of assets with reference to detailed plans for the programme; – Site visits: We visited a sample of affected supply sites to test that the data used in the Group’s assessment reflected the pattern of use and location of assets. As part of these visits we independently identified affected assets and compared these with those identified by the Group for impairment or accelerated depreciation; – Test of detail: We critically assessed whether all relevant assets had been considered, inspected the fixed asset register for assets which may become obsolete and compared these with those assets already provided against; – Assessing application: We challenged the classification of items as exceptional charges for the period and tested that items presented as exceptional were incurred as a result of the programme with reference to internal plans and communications; and – Assessing transparency: We considered the adequacy and accuracy of the related disclosures in the accounts and compliance of the annual report with the rules for alternative performance measures. Our results We found the Group’s assessment of the property, plant and equipment balance to be acceptable (2016: acceptable). 72 Greggs plc Annual Report and Accounts 2017 The risk Our response Retail property provisions (Group and Parent Company) (dilapidations provisions £3.0 million; 2016: £3.2 million) Refer to pages 50-51 (Audit Committee Report), pages 81 and 85 (accounting policy) and page 103 (financial disclosures) The Group leases the majority of its shops and has circa 1,600 shop leases at the end of the period. Subjective estimate For the majority of shop leases the Group has obligations to restore shops to a certain condition at the end of the lease and provisions may be required for the costs of doing so. Determining provisions involves estimation of the costs anticipated to make good any alterations to properties and consideration of obligations present in lease agreements. Both of these factors can vary significantly between shops and, whilst the majority of leases contain dilapidation clauses, the Group does not always incur costs as a consequence. We continue to perform procedures over onerous lease provisions. However, following the Group’s exit from a number of leases, we have not assessed the onerous lease aspect of the provision as one of the most significant risks in our current period audit and, therefore, it is not separately identified in our report. Our procedures included: – Historical comparisons: We critically assessed the methodology applied to identify properties which required dilapidation provisions and the reasonableness of estimated costs in the context of Greggs’ historic experience; – Test of detail: We inspected a sample of the Group’s lease agreements to compare the relevant clauses with the Group’s approach to provisioning; – Comparisons: We tested whether dilapidation obligations had been provided for by selecting a sample, concentrating on known and planned closures or resites of shops; – Our sector experience: We considered specific issues on certain Group properties, such as the shops which previously had in-store bakeries, and critically assessed the impact of these on the likely level of dilapidation costs; and – Assessing transparency: We also considered the adequacy of the Group’s disclosures about the degree of estimation involved in arriving at the provisions. Our results We found the Group’s estimated dilapidations provisions to be acceptable (2016: acceptable). We continue to perform procedures over provisions in respect of restructuring costs. However, as the Group’s supply site investment programme has progressed into the next phase this risk has reduced. We have not assessed this as one of the most significant risks in our current period audit and, therefore, it is not separately identified in our report. 3. Our application of materiality and an overview of the scope of our audit Materiality for the accounts as a whole was set at £4.0 million (2016: £3.9 million), determined with reference to a benchmark of Group profit before tax normalised to exclude exceptional items (as disclosed in Note 4 of the accounts) of which it represents 5 per cent (2016: 5 per cent). Materiality for the Parent Company accounts as a whole was set at £4.0 million (2016: £3.9 million) determined with reference to a benchmark of Company profit before tax normalised to exclude exceptional items of which it represents 5 per cent (2016: 5 per cent). We agreed to report to the Audit Committee any corrected or uncorrected misstatements exceeding £200,000 (2016: £195,000), in addition to other identified misstatements that warranted reporting on qualitative grounds. The Group audit team performed the audit of the Group as if it was a single aggregated set of financial information which covered 100 per cent (2016: 100 per cent) of total Group revenue, Group profit before tax and total Group assets. The audit was performed using the materiality levels set out above. The Group team performed procedures on the items excluded from normalised Group profit before tax. Profit before tax Group materiality Profit before tax excluding exceptional items £81.8m (2016: £80.3m) Materiality £4.0m (2016: £3.9m) £4.0m Whole accounts materiality (2016: £3.9m) The Group audit team performed the audit of the Group as if it was a single aggregated set of financial information. £200k Misstatements reported to the Audit Committee (2016: £195k) Greggs plc Annual Report and Accounts 2017 73 Accounts INDEPENDENT AUDITOR’S REPORT to the members of Greggs plc only continued 4. We have nothing to report on going concern We are required to report to you if: – we have anything material to add or draw attention to in relation to the Directors’ statement included in the accounts (page 81) on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis for a period of at least 12 months from the date of approval of the accounts; or – the related statement under the Listing Rules set out on page 45 is materially inconsistent with our audit knowledge. We have nothing to report in these respects. 5. We have nothing to report on the other information in the annual report The Directors are responsible for the other information presented in the Annual Report together with the accounts. Our opinion on the accounts does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our accounts audit work, the information therein is materially misstated or inconsistent with the accounts or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Strategic report and Directors’ report Based solely on our work on the other information: We have not identified material misstatements in the strategic report and the Directors’ report; – in our opinion the information given in those reports for the financial period is consistent with the accounts; and – in our opinion those reports have been prepared in accordance with the Companies Act 2006. Directors’ remuneration report In our opinion the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. Disclosures of principal risks and longer-term viability Based on the knowledge we acquired during our accounts audit, we have nothing material to add or draw attention to in relation to: – the Directors’ confirmation within the viability statement on pages 34-35 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; – the principal risks and Uncertainties disclosures describing these risks and explaining how they are being managed and mitigated; and – the Directors’ explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Under the Listing Rules we are required to review the viability statement. We have nothing to report in this respect. Corporate governance disclosures We are required to report to you if: – we have identified material inconsistencies between the knowledge we acquired during our accounts audit and the Directors’ statement that they consider that the annual report and accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or – the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the 11 provisions of the UK Corporate Governance Code specified by the Listing Rules for our review. We have nothing to report in these respects. 74 Greggs plc Annual Report and Accounts 2017 6. We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: – adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or – the Parent Company accounts and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or – certain disclosures of Directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. 7. Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 70, the Directors are responsible for: the preparation of the accounts including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of accounts that are free from material misstatement, whether due to fraud or error; assessing the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the accounts as a whole are free from material misstatement, whether due to fraud, other irregularities, or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the accounts. The risk of not detecting a material misstatement resulting from fraud or other irregularities is higher than for one resulting from error, as they may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control and may involve any area of law and regulation not just those directly affecting the accounts. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. Irregularities – ability to detect Our audit aimed to detect non-compliance with relevant laws and regulations (irregularities) that could have a material effect on the accounts. In planning and performing our audit, we considered the impact of laws and regulations in the specific areas of Food Safety and Health and Safety, given the industry in which the Group operates. We identified these areas through discussion with the Directors and other management (as required by auditing standards), and from our sector experience. In addition we had regard to laws and regulations in core areas such as financial reporting and company and taxation legislation. We considered the extent of compliance with those laws and regulations that directly affect the accounts, being Food Safety and Health and Safety, as part of our procedures on the related accounts items. For the remaining laws and regulations, we made enquiries of Directors and other management (as required by auditing standards). We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. As with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. 8. The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Mick Thompson (Senior Statutory Auditor) For and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants Quayside House, 110 Quayside Newcastle upon Tyne NE1 3DX 27 February 2018 Greggs plc Annual Report and Accounts 2017 75 Accounts CONSOLIDATED INCOME STATEMENT for the 52 weeks ended 30 December 2017 (2016: 52 weeks ended 31 December 2016) Revenue Cost of sales Gross profit Distribution and selling costs Administrative expenses Operating profit Finance expense Profit before tax Income tax 2017 Excluding exceptional items £’000 2017 Exceptional items (see Note 4) £’000 Note 2016 Excluding exceptional items £’000 2016 Exceptional items (see Note 4) £’000 2017 Total £’000 2016 Total £’000 1 960,005 (348,098) – 960,005 (358,158) (10,060) 611,907 (476,215) (53,517) (10,060) 601,847 198 (476,017) (53,517) – 82,175 (368) 81,807 (16,923) (9,862) – (9,862) 1,884 72,313 (368) 71,945 (15,039) 6 3-6 8 894,195 (324,289) 569,906 (441,246) (48,315) 80,345 (26) 80,319 (18,064) – (4,367) 894,195 (328,656) (4,367) 565,539 (441,840) (48,531) (594) (216) (5,177) – (5,177) 915 75,168 (26) 75,142 (17,149) Profit for the financial year attributable to equity holders of the Parent Basic earnings per share Diluted earnings per share 64,884 (7,978) 56,906 62,255 (4,262) 57,993 9 9 64.5p 63.5p (7.9p) (7.8p) 56.6p 55.7p 62.0p 60.8p (4.2p) (4.1p) 57.8p 56.7p CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the 52 weeks ended 30 December 2017 (2016: 52 weeks ended 31 December 2016) Profit for the financial year Other comprehensive income Items that will not be recycled to profit and loss: Re-measurements on defined benefit pension plans Tax on re-measurements on defined benefit pension plans Other comprehensive income for the financial year, net of income tax Total comprehensive income for the financial year Note 2017 £’000 2016 £’000 56,906 57,993 20 8 15,962 (2,714) 13,248 70,154 (18,791) 3,194 (15,597) 42,396 76 Greggs plc Annual Report and Accounts 2017 BALANCE SHEETS at 30 December 2017 (2016: 31 December 2016) ASSETS Non-current assets Intangible assets Property, plant and equipment Investments Deferred tax asset Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Current tax liability Provisions Non-current liabilities Other payables Defined benefit pension liability Long-term provisions Total liabilities Net assets EQUITY Capital and reserves Issued capital Share premium account Capital redemption reserve Retained earnings Total equity attributable to equity holders of the Parent Balance sheets Note Group 2017 £’000 Parent Company 2016 £’000 2017 £’000 2016 £’000 10 11 12 13 14 15 16 17 18 21 19 20 21 22 22 14,737 319,195 – 782 334,714 18,688 33,365 54,503 106,556 441,270 (107,126) (8,714) (12,090) (127,930) (5,127) (7,506) (1,344) (13,977) (141,907) 299,363 2,023 13,533 416 283,391 299,363 14,254 307,363 – 1,750 323,367 15,934 30,713 45,960 92,607 415,974 (104,924) (10,426) (6,088) (121,438) (5,599) (22,851) (1,426) (29,876) (151,314) 264,660 2,023 13,533 416 248,688 264,660 14,737 319,788 4,987 1,231 340,743 18,688 33,365 54,503 106,556 447,299 (114,933) (8,714) (12,090) (135,737) (5,127) (7,506) (1,344) (13,977) (149,714) 297,585 2,023 13,533 416 281,613 297,585 14,254 307,956 4,987 2,199 329,396 15,934 30,713 45,960 92,607 422,003 (112,731) (10,426) (6,088) (129,245) (5,599) (22,851) (1,426) (29,876) (159,121) 262,882 2,023 13,533 416 246,910 262,882 The accounts on pages 76 to 105 were approved by the Board of Directors on 27 February 2018 and were signed on its behalf by: Roger Whiteside Richard Hutton Company Registered Number 502851 Greggs plc Annual Report and Accounts 2017 77 AccountsPage Title at start:Content Section at start: Statements of changes in equity STATEMENTS OF CHANGES IN EQUITY for the 52 weeks ended 30 December 2017 (2016: 52 weeks ended 31 December 2016) Group 52 weeks ended 31 December 2016 Balance at 3 January 2016 Total comprehensive income for the year Profit for the financial year Other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Sale of own shares Purchase of own shares Share-based payment transactions Dividends to equity holders Tax items taken directly to reserves Total transactions with owners Balance at 31 December 2016 52 weeks ended 30 December 2017 Balance at 1 January 2017 Total comprehensive income for the year Profit for the financial year Other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Sale of own shares Purchase of own shares Share-based payment transactions Dividends to equity holders Tax items taken directly to reserves Total transactions with owners Balance at 30 December 2017 Attributable to equity holders of the Company Issued capital £’000 Share premium £’000 Capital redemption reserve £’000 Retained earnings £’000 Total £’000 Note 2,023 13,533 416 248,697 264,669 – – – – – – – – – – – – – – – – – – – – – – – – – – – 57,993 (15,597) 57,993 (15,597) 42,396 42,396 4,063 (12,398) 1,994 (30,936) (5,128) 4,063 (12,398) 1,994 (30,936) (5,128) (42,405) (42,405) 2,023 13,533 416 248,688 264,660 20 22 8 Attributable to equity holders of the Company Issued capital £’000 Share premium £’000 Capital redemption reserve £’000 Retained earnings £’000 Total £’000 Note 2,023 13,533 416 248,688 264,660 – – – – – – – – – – – – – – – – – – – – – – – – – – – 56,906 13,248 56,906 13,248 70,154 70,154 5,358 (11,352) 1,835 (32,187) 895 5,358 (11,352) 1,835 (32,187) 895 (35,451) (35,451) 2,023 13,533 416 283,391 299,363 20 22 8 78 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: STATEMENTS OF CHANGES IN EQUITY for the 52 weeks ended 30 December 2017 (2016: 52 weeks ended 31 December 2016) continued Parent Company 52 weeks ended 31 December 2016 Balance at 3 January 2016 Total comprehensive income for the year Profit for the financial year Other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Sale of own shares Purchase of own shares Share-based payment transactions Dividends to equity holders Tax items taken directly to reserves Total transactions with owners Balance at 31 December 2016 52 weeks ended 30 December 2017 Balance at 1 January 2017 Total comprehensive income for the year Profit for the financial year Other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Sale of own shares Purchase of own shares Share-based payment transactions Dividends to equity holders Tax items taken directly to reserves Total transactions with owners Balance at 30 December 2017 Attributable to equity holders of the Company Issued capital £’000 Share premium £’000 Note Capital redemption reserve £’000 Retained earnings £’000 Total £’000 2,023 13,533 416 246,945 262,917 7 20 22 8 – – – – – – – – – – – – – – – – – – – – – – – – – – – 57,967 (15,597) 57,967 (15,597) 42,370 42,370 4,063 (12,398) 1,994 (30,936) (5,128) 4,063 (12,398) 1,994 (30,936) (5,128) (42,405) (42,405) 2,023 13,533 416 246,910 262,882 Attributable to equity holders of the Company Issued capital £’000 Share premium £’000 Capital redemption reserve £’000 Retained earnings £’000 Total £’000 Note 2,023 13,533 416 246,910 262,882 7 20 22 8 – – – – – – – – – – – – – – – – – – – – – – – – – – – 56,906 13,248 56,906 13,248 70,154 70,154 5,358 (11,352) 1,835 (32,187) 895 5,358 (11,352) 1,835 (32,187) 895 (35,451) (35,451) 2,023 13,533 416 281,613 297,585 Greggs plc Annual Report and Accounts 2017 79 AccountsPage Title at start:Content Section at start: Statements of cashflows STATEMENTS OF CASHFLOWS for the 52 weeks ended 30 December 2017 (2016: 52 weeks ended 31 December 2016) Operating activities Cash generated from operations (see below) Income tax paid Net cash inflow from operating activities Investing activities Acquisition of property, plant and equipment Acquisition of intangible assets Proceeds from sale of property, plant and equipment Interest received Net cash outflow from investing activities Financing activities Sale of own shares Purchase of own shares Dividends paid 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 Cash flow statement – cash generated from operations Profit for the financial year Amortisation Depreciation (Reversal of impairment)/impairment Loss on sale of property, plant and equipment Release of government grants Share-based payment expenses Finance expense Income tax expense Increase in inventories Increase in receivables Increase in payables Increase in provisions Cash from operating activities Group Parent Company Note 2017 £’000 2016 £’000 2017 £’000 2016 £’000 134,470 (17,602) 133,773 (16,157) 134,470 (17,602) 133,773 (16,157) 116,868 117,616 116,868 117,616 (68,646) (3,918) 2,171 249 (74,016) (6,106) 4,698 124 (68,646) (3,918) 2,171 249 (74,016) (6,106) 4,698 124 (70,144) (75,300) (70,144) (75,300) 5,358 (11,352) (32,187) (38,181) 8,543 45,960 54,503 4,063 (12,398) (30,936) (39,271) 3,045 42,915 45,960 5,358 (11,352) (32,187) (38,181) 8,543 45,960 54,503 4,063 (12,398) (30,936) (39,271) 3,045 42,915 45,960 2017 £’000 56,906 3,435 50,044 (415) 2,719 (472) 1,835 368 15,039 (2,754) (2,652) 4,497 5,920 2016 £’000 57,993 2,100 43,453 488 2,476 (472) 1,994 26 17,149 (490) (3,066) 11,845 277 2017 £’000 56,906 3,435 50,044 (415) 2,719 (472) 1,835 368 15,039 (2,754) (2,652) 4,497 5,920 2016 £’000 57,967 2,100 43,453 488 2,476 (472) 1,994 26 17,175 (490) (3,066) 11,845 277 134,470 133,773 134,470 133,773 6 22 16 16 10 11 11 20 6 8 80 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: Notes to the consolidated accounts NOTES TO THE CONSOLIDATED ACCOUNTS Significant accounting policies Greggs plc (‘the Company’) is a company incorporated and domiciled in the UK. The Group accounts consolidate those of the Company and its subsidiaries (together referred to as ‘the Group’). The results of the associate are not consolidated on the grounds of materiality. 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 27 February 2018. (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’), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. On publishing the Parent Company accounts here together with the Group accounts, the Company is taking advantage of the exemption in s408 of the Companies Act 2006 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 except the defined benefit pension asset/liability, which is recognised as plan assets less the present value of the defined benefit obligation. The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Directors’ report and strategic report on pages 03 to 70. The financial position of the Group, its cash flows and liquidity position are described in the financial review on pages 24 to 27. In addition, Note 2 to the accounts includes: the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. The Group chose not to restate business combinations prior to the IFRS transition date (1 January 2004), as no significant acquisitions had taken place during the previous ten 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 remains eliminated against reserves. The accounting policies set out below have been applied consistently throughout the Group and to all years presented in these consolidated accounts and are unchanged from previous years. There are no accounting standards, amendments or interpretations that have been adopted by the Group since 1 January 2017. Going concern Directors have reviewed the Company’s operational and investment plans for the next 12 months along with the principal risks and uncertainties that could affect these plans or threaten its liquidity. The key factors likely to affect future performance and the Company’s exposure to risks are set out on pages 33 to 37 of the strategic report. In addition the financial review on pages 24 to 27 sets out the Company’s net cash position and continued strong cash generation. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the next 12 months. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. Key estimates and judgements The preparation of financial information in conformity with adopted IFRSs requires management to make judgements, estimates and assumptions that affect 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. Treatment of items as exceptional The accounts for both the current and the prior year include items which are material and unusual in nature and which are considered to be of such significance that they require separate disclosure on the face of the income statement. These items relate to the decision to invest in and reshape the Company’s supply chain in order to support future growth. Judgement is required in ensuring that only items that relate directly to this activity are separately presented. Dilapidation provisions Dilapidation provisions have been included in the accounts based on a judgement of the future expected repair costs, required under the terms of the lease, to restore the Group’s leased buildings to their fair condition at the end of their respective lease terms, where it is considered a reliable estimate can be made. These provisions represent the best estimate of the liability at the balance sheet date. Expectations will be revised each period until the actual liability arises, with any difference accounted for in the period in which the revision is made. Greggs plc Annual Report and Accounts 2017 81 AccountsPage Title at start:Content Section at start: NOTES TO THE CONSOLIDATED ACCOUNTS CONTINUED Significant accounting policies continued (b) Basis of preparation continued Key estimates and judgements continued Realisable value of property, plant and equipment Property, plant and equipment is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. For example, bakery equipment may be impaired if it is no longer in use and/or shop fittings may be impaired if sales in that shop fall. When a review for impairment is conducted the recoverable amount is estimated based on either value-in-use calculations or fair value less costs of disposal. Value-in-use calculations are based on management’s estimates of future cash flows generated by the assets and an appropriate discount rate. Consideration is also given to whether the impairment assessments made in prior years remain appropriate based on the latest expectations in respect of recoverable amount. Where it is concluded that the impairment has reduced, a reversal of the impairment is recorded. The restructuring of supply chain operations in 2017, including the consolidation of production processes, gave rise to the need to evaluate the useful lives and realisable values of the assets used in the supply chain. The key judgements in assessing the recoverable amount for assets used in the supply chain, which are included in either land and buildings or plant and equipment within property, plant and equipment, are determining remaining useful economic lives or how assets would be priced by market participants. The sensitivities for growth rate, discount rate and lease term used in testing shop assets, which are included in fixtures and fittings within property, plant and equipment, for impairment have been considered and are deemed not significant. For instance, a two per cent change in the growth rate would result in no change in the impairment charge. The useful economic lives of items of property, plant and equipment are reviewed if events or changes in circumstances indicate that the assets are likely to become obsolete before the end of their current estimated life. If the asset is expected to become obsolete then consideration is given as to the likely remaining life of the asset, whether the asset can be reused in some other capacity and whether it has any residual recoverable value. Depreciation of the asset may be accelerated to take account of all of these judgements. During the year, the consolidation of production processes triggered a reassessment of the remaining useful economic lives of certain assets used in the supply chain. These assets, which previously had useful economic lives of up to ten years, are now depreciated on an accelerated basis over a ten to 28-month period. Post-retirement benefits The determination of the defined benefit obligation of the Group’s defined benefit pension scheme depends on the selection of certain assumptions including the discount rate, inflation rate, mortality rates and commutation. Differences arising from actual experience or future changes in assumptions will be reflected in future years. The key assumptions made for 2017 are given in Note 20. (c) Basis of consolidation The consolidated accounts include the results of Greggs plc and its subsidiary undertakings for the 52 weeks ended 30 December 2017. The comparative period is the 52 weeks ended 31 December 2016. (i) Subsidiaries Subsidiaries are entities controlled by the Company. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The accounts of subsidiaries are included in the consolidated accounts from the date on which control commences until the date on which control ceases. (ii) Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 per cent of the voting power of another entity. At the year end the Group has one associate which has not been consolidated on the grounds of materiality (see Note 12). (iii) 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) Exceptional items Exceptional items are defined as items of income and expenditure which are material and unusual in nature and which are considered to be of such significance that they require separate disclosure on the face of the income statement. Any future movements on items previously classified as exceptional will also be classified as exceptional. (e) 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. 82 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: Intangible assets (f) The Group’s only intangible assets relate to software and the costs of its implementation which are measured at cost less accumulated amortisation and accumulated impairment losses. Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is recognised in the income statement as incurred. Amortisation is recognised in the income statement on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The estimated useful lives for the current and comparative periods are five years. Assets in the course of development are re-categorised and amortisation commences when the assets are available for use. (g) 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 (k)). The cost of self-constructed assets includes the cost of materials and direct labour. (ii) Subsequent costs The cost of replacing a component of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the component will flow to the Group, and its costs can be measured reliably. The carrying value of the replaced component is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in the income statement as incurred. (iii) Depreciation Depreciation is provided so as to write off the cost (less residual value) of each item of property, plant and equipment during its expected useful life using the straight-line method over the following periods: Freehold and long leasehold buildings 40 years Short leasehold properties 10 years or length of lease if shorter Plant, machinery, equipment, vehicles, fixtures and fittings 3 to 10 years Freehold land is not depreciated. Depreciation methods, useful lives and residual values (if not insignificant) are reassessed annually. (iv) Assets in the course of construction These assets are re-categorised and depreciation commences when the assets are available for use. Investments (h) Non-current investments comprise investments in subsidiaries and associates which are carried at cost less impairment. Current investments comprise fixed-term fixed-rate bank deposits where the term is greater than three months. Inventories (i) 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 includes expenditure incurred in acquiring the inventories and direct production labour costs. (j) 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. (k) Impairment The carrying amounts of the Group and Company’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 recoverable amount is estimated. Impairment reviews are carried out on an individual shop basis unless there are a number of shops in the same location, in which case the impairment review is based on the location. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in prior years are assessed at each reporting date and 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. Greggs plc Annual Report and Accounts 2017 83 AccountsPage Title at start:Content Section at start: NOTES TO THE CONSOLIDATED ACCOUNTS CONTINUED Significant accounting policies continued (l) Non-current assets held for sale Non-current assets that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. Immediately before classification as held for sale, the assets are re-measured in accordance with the Group and Company’s accounting policies. Thereafter generally the assets are measured at the lower of their carrying amount and fair value less cost to sell. Once classified as held for sale assets are no longer depreciated or amortised. (m) Share capital and reserves (i) Re-purchase of share capital When share capital recognised as equity is re-purchased, the amount of the consideration paid, including directly attributable costs, is recognised as a deduction from equity. Re-purchased 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 when the Company has an obligation to pay and the dividend is no longer at the Company’s discretion. (iii) Distributable reserves All retained earnings are distributable and are the only such reserves. (n) Employee share ownership plan The Group and Parent Company 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 total equity. (o) Employee benefits (i) Short-term employee benefits Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be measured reliably. (ii) Defined contribution plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement when they are due. (iii) Defined benefit plans The Company’s net obligation in respect of defined benefit pension plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any plan assets (at bid price) is deducted. The Company determines the net interest on the net defined benefit asset/liability for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit asset/liability. The discount rate is the yield at the reporting date on bonds that have a credit rating of at least AA, that have maturity dates approximating to the terms of the Company’s obligations and that are denominated in the currency in which the benefits are expected to be paid. Re-measurements arising from defined benefit plans comprise actuarial gains and losses and the return on plan assets (excluding interest). The Company recognises them immediately in other comprehensive income and all other expenses related to defined benefit plans in employee benefit expenses in the income statement. When the benefits of a plan are changed, or when a plan is curtailed, the portion of the changed benefit related to past service by employees, or the gain or loss on curtailment, is recognised immediately in profit or loss when the plan amendment or curtailment occurs. The calculation of the defined benefit obligation is performed by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Company, the recognised asset is limited to the present value of benefits available in the form of any future refunds from the plan or reductions in future contributions and takes into account the adverse effect of any minimum funding requirements. (iv) 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. 84 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: (v) Termination benefits Termination benefits are expensed at the earlier of the date at which the Group can no longer withdraw the offer of these benefits and the date at which the Group recognises costs for a restructuring. If benefits are not expected to be settled wholly within 12 months of the reporting date they are discounted. (p) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. (i) Restructuring A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. (ii) Onerous leases Provisions for onerous leases are recognised when the Group believes that the unavoidable costs of meeting the lease obligations exceed the economic benefits expected to be received under the lease. Before a provision is established the Group recognises any impairment loss on the associated assets. (iii) Dilapidations The Group provides for property dilapidations, where appropriate, based on the future expected repair costs required to restore the Group’s leased buildings to their fair condition at the end of their respective lease terms, where it is considered a reliable estimate can be made. (q) Revenue (i) Retail sales Revenue from the sale of goods is recognised as income on receipt of cash or card payment. Revenue is measured net of discounts, promotions and value added taxation. (ii) Franchise sales Franchise sales are recognised when goods are dispatched to franchisees. Additional franchise royalty fee income, generally calculated as a percentage of gross sales income, is recognised on an accruals basis in accordance with the relevant agreement. Pre-opening capital fit-out costs are recharged to the franchisee and represent a key performance obligation of the overall franchise sales agreement. These recharges are recognised as income on completion of the related fit-out. (iii) Wholesale sales Wholesale sales are recognised when goods are dispatched to customers. (iv) Loyalty programme/gift cards Amounts received for gift cards or as part of the loyalty programme are deferred. They are recognised as revenue when the Group has fulfilled its obligation to supply products under the terms of the programme or when it is no longer probable that these amounts will be redeemed. No adjustment is made to revenue to reflect the fair value of the free items provided under the loyalty scheme as these would be immaterial to the accounts. The costs of these free items are expensed as the products are provided to the customer. (r) 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 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. (s) 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 over the term of the lease. (t) Finance income and expense Interest income or expense is recognised using the effective interest method. Greggs plc Annual Report and Accounts 2017 85 AccountsPage Title at start:Content Section at start: NOTES TO THE CONSOLIDATED ACCOUNTS CONTINUED Significant accounting policies continued (u) Income tax Income tax 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 profit 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. Taxable profit differs from profit as reported in the income statement because some items of income or expense are taxable or deductible in different years or may never be taxable or deductible. Deferred tax is the tax expected to be payable or recoverable in the future arising from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used in the calculation of taxable profit. It is accounted for using the balance sheet liability method. The amount of deferred tax recognised is based on the expected manner of realisation or settlement of the carrying amounts of assets and liabilities, using tax rates that are expected to apply when the temporary differences reverse, based on rates enacted or substantively enacted at the balance sheet date. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. 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 reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related deferred tax benefit will be realised. (v) Research and development The Company continuously strives to improve its products and processes through technical and other innovation. Such expenditure is typically expensed to the income statement as the related intellectual property is not capable of being formalised and does not always have distinguishable research and development phases. (w) IFRSs available for early adoption not yet applied The following standards and amendments to standards which will be relevant to the Group were available for early adoption but have not been applied in these accounts: – IFRS 9 Financial Instruments (effective date 1 January 2018) – IFRS 15 Revenue from Contracts with Customers (effective date 1 January 2018) None of these standards and amendments is expected to have a significant impact on the accounts when they are adopted. With regard to IFRS 9 the only area of relevance relates to provisions in respect of trade receivables. Given the immateriality of the Group’s provision for bad debts no further analysis will be required. With regard to IFRS 15 the Group has considered all current revenue streams and concluded that none of them will require any change of treatment under the new standard. IFRS 16 Leases was adopted by the EU on 31 October 2017. The effective date for implementation is 1 January 2019. The Group continues to work on a project to effect this implementation and be in a position to give a quantification of the impact by the end of 2018. The preferred software solution for the project has been selected and the Group plans to start work on the implementation of this in March 2018. 1. Segmental analysis The Board is considered to be the ‘chief operating decision-maker’ of the Group in the context of the IFRS 8 definition. In addition to its retail activities, the Group generates revenues from franchise and wholesale. However, these elements of the business are not sufficiently significant to be ‘Reportable Segments’ in the context of IFRS 8. Products and services – the Group sells a consistent range of fresh bakery goods, sandwiches and drinks in its shops. The Group also provides frozen bakery products to its wholesale customers. Major customers – the majority of sales are made to the general public on a cash basis. A small proportion of sales are made on credit to certain organisations, including wholesale customers, but these are immaterial in a Group context. Geographical areas – all results arise in the UK. The Board regularly reviews the revenues of each segment separately but receives information on profits, assets and liabilities on an aggregated basis consistent with the Group accounts. Of the Group’s revenue, £891,778,000 (2016: £835,786,000) was attributable to the retail segment. 86 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: 2. Financial risk management Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Retail sales represent a large proportion of the Group’s sales and present no credit risk as they are made for cash or card payments. The Group does offer credit terms on sales to its wholesale and franchise customers. In such cases the Group operates effective credit control procedures in order to minimise exposure to overdue debts. Counterparty risk is also considered low. All of the Group’s surplus cash is held with highly-rated banks, in line with Group policy. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group operates with net current liabilities and is therefore reliant on the continued strong performance of the retail portfolio to meet its short-term liabilities. This is a well-established and proven business model. Any increase in short-term liquidity risk can be mitigated by reducing capital expenditure. The model has been tested in various scenarios for the Group’s viability statement which is included in the strategic report on page 81. The Group had significant cash resources at the year end. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. Market risk is not significant and therefore sensitivity analysis would not be meaningful. Currency risk The Group has no regular transactions in foreign currency although there are occasional purchases, mainly of capital items, denominated in foreign currency. Whilst certain costs such as electricity and wheat can be influenced by movements in the US dollar, actual contracts are priced in sterling. In respect of those key costs which are volatile, such as electricity and flour, the price may be fixed for a period of time in line with Group policy. All such contracts are for the Group’s own expected usage. Interest rate risk The Group has low exposure to interest rate risk. Interest only arises on its bank deposits and overdrafts and the defined benefit pension scheme liability. Net financial expense in the year was £368,000 (2016: £26,000). Equity price risk The Group has no equity investments other than its subsidiaries and associate. As disclosed in Note 20 the Group’s defined benefit pension scheme has investments in equity-related funds. Capital management The Board defines capital as the equity of the Group. The Group has remained net cash positive with funding requirements met by cash generated from retail operations. The Board considers that it is not currently appropriate to take on structural debt given the inherent leverage of the leasehold shop estate and working capital requirements. The Board’s policy on dividend levels is to pursue a progressive dividend policy that pays due regard to the growth of earnings per share over the medium term, the cash-generative nature of the business and the continuing determination to deliver value to shareholders. The Board would expect to return any material level of surplus capital to shareholders, likely by way of a special dividend. The Board reserves the option to purchase its own shares in the market dependent on market prices and surplus cash levels. The trustees of the Greggs Employment Benefit Trust also purchase shares for future satisfaction of employee share options. Financial instruments Group and Parent Company All of the Group’s surplus cash is invested as cash placed on deposit or fixed-term deposits. 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 assets comprise cash and cash equivalents and fixed-term deposits. 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 30 December 2017 (2016: £nil). Greggs plc Annual Report and Accounts 2017 87 AccountsPage Title at start:Content Section at start: NOTES TO THE CONSOLIDATED ACCOUNTS CONTINUED 2. Financial risk management continued Financial instruments continued Fair values The fair value of the Group’s financial assets and liabilities is not materially different from their carrying values. Financial assets and liabilities comprise principally of trade receivables and trade payables and the only interest bearing balances are the bank deposits and borrowings which attract interest at variable rates. 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. 3. Profit before tax Profit before tax is stated after charging/(crediting): Amortisation of intangible assets Depreciation on owned property, plant and equipment (Reversal of impairment)/impairment of owned property, plant and equipment Loss on disposal of fixed assets Release of government grants Payments under operating leases – property rents Research and development expenditure Auditor’s remuneration Audit of these accounts Audit of pension schemes’ accounts Other services – tax advisory All other services 2017 £’000 3,435 50,044 (415) 2,719 (472) 50,933 325 154 8 – 9 2016 £’000 2,100 43,453 488 2,476 (472) 48,335 325 150 10 3 15 Amounts paid to the Company’s auditor in respect of services to the Company, other than the audit of the Company’s accounts, have not been disclosed as the information is required instead to be presented on a consolidated basis. 4. Exceptional items Cost of sales Supply chain restructuring Prior year items – redundancy – gain on property disposal – depreciation and asset write-off – transfer of operations – property related – dilapidations Distribution and selling Supply chain restructuring Prior year items – redundancy – transfer of operations – property related Administrative expenses Restructuring of support functions Prior year items – redundancy Total exceptional items 2017 £’000 7,458 (403) 1,245 1,302 458 – 10,060 – – (198) (198) – – – 9,862 2016 £’000 3,028 – 1,852 44 – (557) 4,367 1,108 356 (870) 594 391 (175) 216 5,177 Supply chain restructuring This charge arises from the decisions, announced in 2016 and 2017, to invest in and reshape the Company’s supply chain in order to support future growth. In 2017 the costs relate to the sale of one bakery site, including the gain on disposal, redundancy costs relating to the consolidation of production processes, accelerated depreciation and other contractual obligations that arise as a result of this consolidation. In 2016 the costs related to the closure of three bakery sites and included redundancy and other employment-related costs, asset write-offs, impairment and transfer and other contractual obligations that arose as a result of the closure of the sites. 88 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: Restructuring of support functions This charge related to redundancy costs arising from the restructuring of bakery administration and payroll functions. Prior year items These relate to the movement on costs treated as exceptional in prior years and arise from the settlement of various property and redundancy transactions. 5. 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 costs of these persons were as follows: Wages and salaries Compulsory social security contributions Pension costs – defined contribution plans Equity-settled transactions (including employer’s NI costs) 2017 Number 711 461 2,988 17,389 21,549 2017 £’000 321,872 22,535 11,258 2,575 358,240 2016 Number 720 464 3,028 16,369 20,581 2016 £’000 301,105 22,022 11,886 1,873 336,886 Note 20 20 In addition to wages and salaries, the total amount accrued 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 2017 £’000 2,395 5,710 1,106 9,211 2016 £’000 2,289 5,458 1,056 8,803 For the purposes of IAS 24 ‘Related Party Disclosures’, key management personnel comprises the Directors and the members of the Operating Board and their remuneration was as follows: Salaries and fees Taxable benefits Annual bonus (including profit share) Post-retirement benefits Share-based payments 2017 £’000 2,956 93 1,350 352 933 5,684 2016 £’000 2,597 94 1,608 298 1,136 5,733 During the year the Company further considered the requirements of IAS 24 and decided that the definition of key management personnel should be extended to include the Operating Board. The figures for 2016 have been restated to reflect this wider definition. The following amounts are disclosed in accordance with Schedule 5 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008. Aggregate Directors’ remuneration Aggregate amount of gains on exercise of share options 2017 £’000 1,820 1,374 3,194 2016 £’000 2,653 1,982 4,635 The number of Directors in the defined contribution pension scheme and in the defined benefit pension scheme during the year was two (2016: two). Greggs plc Annual Report and Accounts 2017 89 AccountsPage Title at start:Content Section at start: NOTES TO THE CONSOLIDATED ACCOUNTS CONTINUED 6. Finance expense Interest income on cash balances Foreign exchange gain/(loss) Net interest related to defined benefit obligation Note 20 2017 £’000 46 203 (617) (368) 2016 £’000 173 (49) (150) (26) 7. Profit attributable to Greggs plc Of the Group profit for the year, £56,906,000 (2016: £57,967,000) is dealt with in the accounts of the Parent Company. The Company has taken advantage of the exemption permitted by section 408 of the Companies Act 2006 from presenting its own income statement. 8. Income tax expense Recognised in the income statement Excluding exceptional items 2017 £’000 Exceptional items 2017 £’000 Excluding exceptional items 2016 £’000 Exceptional items 2016 £’000 Total 2017 £’000 Current tax Current year Adjustment for prior years Deferred tax Origination and reversal of temporary differences Reduction in tax rate Adjustment for prior years 18,902 (1,256) 17,646 (1,756) – (1,756) 17,146 (1,256) 15,890 (457) – (266) (723) (128) – – (128) (585) – (266) (851) 18,716 (946) 17,770 (342) 239 397 294 Total income tax expense in income statement 16,923 (1,884) 15,039 18,064 (767) – (767) (148) – – (148) (915) Total 2016 £’000 17,949 (946) 17,003 (490) 239 397 146 17,149 Reconciliation of effective tax rate The tables below explain the differences between the expected tax expense calculated at the UK statutory rate of 19.25 per cent (2016: 20 per cent) and the actual tax expense for each year for both the total tax expense and the underlying tax expense, excluding the effect of exceptional items. Total tax expense Profit before tax Income tax using the domestic corporation tax rate Expenses not deductible for tax purposes Non-tax-deductible depreciation Loss on disposal of non-tax-deductible assets Impact of reduction in deferred tax rate Adjustment for prior years Total income tax expense in income statement Underlying (excluding exceptional items) Profit before tax Income tax using the domestic corporation tax rate Expenses not deductible for tax purposes Non-tax-deductible depreciation Loss on disposal of non-tax-deductible assets Impact of reduction in deferred tax rate Adjustment for prior years Total income tax expense in income statement 90 Greggs plc Annual Report and Accounts 2017 2017 19.25% 1.20% 2.00% 0.45% 0.10% (2.10%) 20.90% 2017 19.25% 1.10% 1.75% 0.40% 0.10% (1.90%) 20.70% 2017 £’000 71,945 13,849 882 1,425 328 77 (1,522) 15,039 2017 £’000 81,807 15,748 882 1,425 328 62 (1,522) 16,923 2016 20.0% 0.9% 2.1% 0.1% 0.4% (0.7%) 22.8% 2016 20.0% 0.9% 1.8% 0.1% 0.4% (0.7%) 22.5% 2016 £’000 75,142 15,028 697 1,554 93 326 (549) 17,149 2016 £’000 80,319 16,064 697 1,473 80 299 (549) 18,064 Page Title at start:Content Section at start: A reduction in the rate of corporation tax from 19 per cent to 17 per cent with effect from 1 April 2020 was substantively enacted on 6 September 2016. Any timing differences which reverse before 1 April 2020 will do so at 19 per cent and any timing differences which exist at 1 April 2020 will reverse at 17 per cent. Tax recognised in other comprehensive income or directly in equity Debit/(credit): Relating to equity-settled transactions Relating to defined benefit plans – re-measurement gains/(losses) 2017 Current tax £’000 2017 Deferred tax £’000 – – – (895) 2,714 1,819 2017 Total £’000 (895) 2,714 1,819 2016 Total £’000 5,128 (3,194) 1,934 The deferred tax movements in both the current and prior years relating to equity-settled transactions are in respect of share-based payments and arise primarily as a result of fluctuations in share price in the year and the stage of maturity of existing schemes. 9. Earnings per share Basic earnings per share Basic earnings per share for the 52 weeks ended 30 December 2017 is calculated by dividing profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the 52 weeks ended 30 December 2017 as calculated below. Diluted earnings per share Diluted earnings per share for the 52 weeks ended 30 December 2017 is calculated by dividing profit attributable to ordinary shareholders by the weighted average number of ordinary shares, adjusted for the effects of all dilutive potential ordinary shares (which comprise share options granted to employees) outstanding during the 52 weeks ended 30 December 2017 as calculated below. Profit attributable to ordinary shareholders Profit for the financial year attributable to equity holders of the Parent Basic earnings per share Diluted earnings per share Weighted average number of ordinary shares 2017 Excluding exceptional items £’000 64,884 64.5p 63.5p 2017 Exceptional items £’000 2017 Total £’000 (7,978) 56,906 (7.9p) (7.8p) 56.6p 55.7p 2016 Excluding exceptional items £’000 62,255 62.0p 60.8p 2016 Exceptional items £’000 (4,262) (4.2p) (4.1p) 2016 Total £’000 57,993 57.8p 56.7p Issued ordinary shares at start of year Effect of own shares held 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 2017 Number 2016 Number 101,155,901 (510,293) 101,155,901 (710,295) 100,645,608 100,445,606 1,921,344 1,489,067 102,134,675 102,366,950 Greggs plc Annual Report and Accounts 2017 91 AccountsPage Title at start:Content Section at start: NOTES TO THE CONSOLIDATED ACCOUNTS CONTINUED 10. Intangible assets Group and Parent Company Cost Balance at 3 January 2016 Additions Transfers Balance at 31 December 2016 Balance at 1 January 2017 Additions Transfers Balance at 30 December 2017 Amortisation Balance at 3 January 2016 Amortisation charge for the year Balance at 31 December 2016 Balance at 1 January 2017 Amortisation charge for the year Balance at 30 December 2017 Carrying amounts At 3 January 2016 At 31 December 2016 At 1 January 2017 At 30 December 2017 Software £’000 2,532 5,961 7,968 16,461 16,461 3,522 762 20,745 1,257 2,100 3,357 3,357 3,435 6,792 1,275 13,104 13,104 13,953 Assets under development £’000 8,973 145 (7,968) 1,150 1,150 396 (762) 784 – – – – – – 8,973 1,150 1,150 784 Total £’000 11,505 6,106 – 17,611 17,611 3,918 – 21,529 1,257 2,100 3,357 3,357 3,435 6,792 10,248 14,254 14,254 14,737 Assets under development relate to software projects arising from the investment in new systems platforms. 92 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: 11. Property, plant and equipment Group Cost Balance at 3 January 2016 Additions Disposals Transfers Balance at 31 December 2016 Balance at 1 January 2017 Additions Disposals Transfers Balance at 30 December 2017 Depreciation Balance at 3 January 2016 Depreciation charge for the year Impairment charge for the year Impairment release for the year Disposals Balance at 31 December 2016 Balance at 1 January 2017 Depreciation charge for the year Impairment charge for the year Impairment release for the year Disposals Transfers Balance at 30 December 2017 Carrying amounts At 3 January 2016 At 31 December 2016 At 1 January 2017 At 30 December 2017 Land and buildings £’000 Plant and equipment £’000 Fixtures and fittings £’000 Assets under construction £’000 126,999 7,710 (3,427) 9,075 129,764 13,446 (9,083) 2,094 267,707 50,724 (29,898) – 140,357 136,221 288,533 140,357 7,606 (2,501) 1,748 136,221 10,246 (10,022) 686 288,533 40,586 (22,398) – 11,168 2,435 – (11,169) 2,434 2,434 8,037 – (2,434) Total £’000 535,638 74,315 (42,408) – 567,545 567,545 66,475 (34,921) – 147,210 137,131 306,721 8,037 599,099 36,019 2,949 436 – (1,423) 37,981 37,981 3,770 – – (1,569) (164) 40,018 90,980 102,376 102,376 107,192 87,650 11,250 – – (8,409) 90,491 90,491 12,022 – – (9,203) 164 93,474 42,114 45,730 45,730 43,657 127,806 29,254 624 (572) (25,402) 131,710 131,710 34,252 104 (519) (19,135) – 146,412 139,901 156,823 156,823 160,309 – – – – – – – – – – – – – 11,168 2,434 2,434 8,037 251,475 43,453 1,060 (572) (35,234) 260,182 260,182 50,044 104 (519) (29,907) – 279,904 284,163 307,363 307,363 319,195 Assets are reviewed for impairment on a regular basis and provision made where necessary. For shop assets a discounted cashflow is calculated for each shop using historic cashflows including attributable overheads, a zero per cent growth rate, the Group’s cost of capital of ten per cent, as an approximation to that for each individual unit, and an appropriate assumption regarding the remaining lease term. The net book value of the relevant assets attributable to the shop is impaired to the extent that the net present value of the cashflows is lower than the net book value. Supply chain assets are impaired to their estimated recoverable amount which is generally deemed to be £nil. Greggs plc Annual Report and Accounts 2017 93 AccountsPage Title at start:Content Section at start: NOTES TO THE CONSOLIDATED ACCOUNTS CONTINUED 11. Property, plant and equipment continued Parent Company Cost Balance at 3 January 2016 Additions Disposals Transfers Balance at 31 December 2016 Balance at 1 January 2017 Additions Disposals Transfers Balance at 30 December 2017 Depreciation Balance at 3 January 2016 Depreciation charge for the year Impairment charge for the year Impairment release for the year Disposals Balance at 31 December 2016 Balance at 1 January 2017 Depreciation charge for the year Impairment charge for the year Impairment release for the year Disposals Transfers Balance at 30 December 2017 Carrying amounts At 3 January 2016 At 31 December 2016 At 1 January 2017 At 30 December 2017 Land and buildings The carrying amount of land and buildings comprises: Freehold property Short leasehold property Land and buildings £’000 Plant and equipment £’000 Fixtures and fittings £’000 Assets under construction £’000 127,509 7,710 (3,427) 9,075 140,867 140,867 7,606 (2,501) 1,748 130,297 13,446 (9,083) 2,094 136,754 136,754 10,246 (10,022) 686 268,195 50,724 (29,898) – 289,021 289,021 40,586 (22,398) – 11,168 2,435 – (11,169) 2,434 2,434 8,037 – (2,434) Total £’000 537,169 74,315 (42,408) – 569,076 569,076 66,475 (34,921) – 147,720 137,664 307,209 8,037 600,630 36,296 2,949 436 – (1,423) 38,258 38,258 3,770 – – (1,569) (164) 40,295 91,213 102,609 102,609 107,425 87,920 11,250 – – (8,409) 90,761 90,761 12,022 – – (9,203) 164 93,744 42,377 45,993 45,993 43,920 128,197 29,254 624 (572) (25,402) 132,101 132,101 34,252 104 (519) (19,135) – 146,803 139,998 156,920 156,920 160,406 – – – – – – – – – – – – – 11,168 2,434 2,434 8,037 252,413 43,453 1,060 (572) (35,234) 261,120 261,120 50,044 104 (519) (29,907) – 280,842 284,756 307,956 307,956 319,788 Group 2017 £’000 105,576 1,616 107,192 2016 £’000 100,725 1,651 102,376 Parent Company 2017 £’000 105,809 1,616 107,425 2016 £’000 100,958 1,651 102,609 94 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: 12. Investments Non-current investments Parent Company Cost Balance at 3 January 2016, 31 December 2016 and 30 December 2017 Impairment Balance at 3 January 2016, 31 December 2016 and 30 December 2017 Carrying amount Balance at 3 January 2016, 31 December 2016, 1 January 2017 and 30 December 2017 The undertakings in which the Company’s interest at the year end is more than 20 per cent are as follows: Shares in subsidiary undertakings £’000 5,828 841 4,987 Charles Bragg (Bakers) Limited Greggs (Leasing) Limited Thurston Parfitt Limited Greggs Properties Limited Olivers (U.K.) Limited Olivers (U.K.) Development Limited* Birketts Holdings Limited J.R. Birkett and Sons Limited* Greggs Trustees Limited Solstice Zone A Management Company Limited Principal activity Non-trading Dormant Non-trading Property holding Dormant Non-trading Dormant Non-trading Trustees Non-trading Notes: * Held indirectly. 1 Greggs House, Quorum Business Park, Newcastle upon Tyne NE12 8BU. 2 Clydesmill Bakery, 75 Westburn Drive, Clydesmill Estate, Cambuslang, Glasgow G72 7NA. 3 The Abbey, Preston, Yeovil, Somerset BA20 2EN. Address of registered office Proportion of voting rights and shares held 1 1 1 1 2 2 1 1 1 3 100% 100% 100% 100% 100% 100% 100% 100% 100% 28% Solstice Zone A Management Company Limited was not consolidated on the grounds of materiality. The Company’s subsidiary undertakings listed above were all entitled to exemption, under subsections (1) and (2) of section 480 of Companies Act 2006 relating to dormant companies, from the requirement to have their accounts audited. 13. Deferred tax assets and liabilities Group Deferred tax assets and liabilities are attributable to the following: Property, plant and equipment Employee benefits Short-term temporary differences Tax assets/(liabilities) Assets Liabilities Net 2017 £’000 – 4,044 575 4,619 2016 £’000 – 6,397 48 6,445 2017 £’000 (3,837) – – (3,837) 2016 £’000 (4,695) – – (4,695) 2017 £’000 (3,837) 4,044 575 782 2016 £’000 (4,695) 6,397 48 1,750 Greggs plc Annual Report and Accounts 2017 95 AccountsPage Title at start:Content Section at start: NOTES TO THE CONSOLIDATED ACCOUNTS CONTINUED 13. Deferred tax assets and liabilities continued Group continued The movements in temporary differences during the year ended 31 December 2016 were as follows: Property, plant and equipment Employee benefits Short-term temporary differences Balance at 3 January 2016 £’000 Recognised in income £’000 Recognised in equity £’000 (5,080) 8,878 32 3,830 385 (547) 16 (146) – (1,934) – (1,934) The movements in temporary differences during the year ended 30 December 2017 were as follows: Property, plant and equipment Employee benefits Short-term temporary differences Balance at 1 January 2017 £’000 Recognised in income £’000 Recognised in equity £’000 (4,695) 6,397 48 1,750 858 (534) 527 851 – (1,819) – (1,819) Balance at 31 December 2016 £’000 (4,695) 6,397 48 1,750 Balance at 30 December 2017 £’000 (3,837) 4,044 575 782 Parent Company Deferred tax assets and liabilities are attributable to the following: Property, plant and equipment Employee benefits Short-term temporary differences Tax assets/(liabilities) Assets Liabilities Net 2017 £’000 – 4,044 575 4,619 2016 £’000 – 6,397 48 6,445 2017 £’000 (3,388) – – (3,388) 2016 £’000 (4,246) – – (4,246) 2017 £’000 (3,388) 4,044 575 1,231 2016 £’000 (4,246) 6,397 48 2,199 The movements in temporary differences during the year ended 31 December 2016 were as follows: Property, plant and equipment Employee benefits Short-term temporary differences Balance at 3 January 2016 £’000 (4,605) 8,878 32 4,305 Recognised in income £’000 Recognised in equity £’000 359 (547) 16 (172) – (1,934) – (1,934) The movements in temporary differences during the year ended 30 December 2017 were as follows: Property, plant and equipment Employee benefits Short-term temporary differences Balance at 1 January 2017 £’000 Recognised in income £’000 Recognised in equity £’000 (4,246) 6,397 48 2,199 858 (534) 527 851 – (1,819) – (1,819) Balance at 31 December 2016 £’000 (4,246) 6,397 48 2,199 Balance at 30 December 2017 £’000 (3,388) 4,044 575 1,231 96 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: 14. Inventories Raw materials and consumables Work in progress 15. Trade and other receivables Trade receivables Other receivables Prepayments Group and Parent Company 2017 £’000 13,330 5,358 18,688 2016 £’000 12,375 3,559 15,934 Group and Parent Company 2017 £’000 11,833 4,921 16,611 33,365 2016 £’000 12,250 4,741 13,722 30,713 At 30 December 2017 trade receivables are shown net of an allowance for bad debts of £24,000 (2016: £46,000) arising in the ordinary course of business. The ageing of trade receivables that were not impaired at the balance sheet date was: Not past due date Past due 1-30 days Past due 31-90 days Past due over 90 days Group and Parent Company 2017 £’000 9,897 1,923 11 2 11,833 2016 £’000 11,563 149 458 80 12,250 The Group believes that the unimpaired amounts that are past due by more than 30 days are still collectable in full based on historic payment behaviour and extensive analysis of customer credit risk. Based on the Group’s monitoring of customer credit risk, the Group believes that no impairment allowance is necessary in respect of trade receivables not past due. 16. Cash and cash equivalents Cash and cash equivalents 17. Trade and other payables Trade payables Amounts owed to subsidiary undertakings Other taxes and social security Other payables Accruals and deferred income Deferred Government grants Group and Parent Company 2017 £’000 54,503 2016 £’000 45,960 Group Parent Company 2017 £’000 48,207 – 7,378 33,325 17,748 468 2016 £’000 49,482 – 7,143 28,744 19,087 468 2017 £’000 48,207 7,807 7,378 33,325 17,748 468 2016 £’000 49,482 7,807 7,143 28,744 19,087 468 107,126 104,924 114,933 112,731 Greggs plc Annual Report and Accounts 2017 97 AccountsPage Title at start:Content Section at start: NOTES TO THE CONSOLIDATED ACCOUNTS CONTINUED 18. Current tax liability The current tax liability of £8,714,000 in the Group and the Parent Company (2016: Group and Parent Company £10,426,000) represents the estimated amount of income taxes payable in respect of current and prior years. 19. Non-current liabilities – other payables Deferred Government grants Group and Parent Company 2017 £’000 5,127 2016 £’000 5,599 The Group has been awarded five Government grants relating to the extension of existing facilities and construction of new facilities. The grants, which have all been recognised as deferred income, are being amortised over the weighted average of the useful lives of the assets they have been used to acquire. 20. Employee benefits Defined benefit plan Scheme background The Company sponsors a funded final salary defined benefit pension plan (the ‘scheme’) for qualifying employees. The scheme was closed to future accrual in 2008 and all remaining employees who are still members of the scheme are now members of the Company’s defined contribution scheme. The scheme is administered by a separate Board of Trustees which is legally separate from the Company. The Trustees are composed of representatives of both the employer and employees. The Trustees are required by law to act in the interest of all relevant beneficiaries and are responsible for the investment policy with regard to the assets plus the day-to-day administration of the benefits. UK legislation requires that pension schemes are funded prudently. The last funding valuation of the Scheme was carried out by a qualified actuary as at 6 April 2017 and showed a surplus. The Company is currently not required to pay contributions into the scheme. Profile of the scheme The defined benefit obligation includes benefits for former employees and current pensioners. Broadly, two-thirds of the liabilities are attributable to deferred members and one-third to current pensioners. The scheme duration is an indicator of the weighted average time until benefit payments are made. For the scheme as a whole, the duration is approximately 20 years. Investment strategy The Company and Trustees have agreed a long-term strategy for reducing investment risk as and when appropriate. This includes a policy to hold sufficient cash and bond assets to cover the anticipated benefit payments for at least the next five years so as to improve the cashflow matching of the scheme’s assets and liabilities. Defined benefit obligation Fair value of plan assets Net defined benefit liability Group and Parent Company 2017 £’000 (122,244) 114,738 (7,506) 2016 £’000 (131,373) 108,522 (22,851) 98 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: Liability for defined benefit obligations Changes in the present value of the defined benefit obligation are as follows: Opening defined benefit obligation Interest cost Re-measurement (gains)/losses: – changes in mortality assumptions – changes in commutation assumptions – changes in financial assumptions – experience Benefits paid Changes in the fair value of plan assets are as follows: Opening fair value of plan assets Net interest on plan assets Re-measurement gains Benefits paid Closing fair value of plan assets The costs charged in the income statement are as follows: Interest expense on net defined benefit liability The amounts recognised in other comprehensive income are as follows: Re-measurement gains/(losses) on defined benefit pension plans Group and Parent Company 2017 £’000 131,373 3,483 (4,879) (7,010) 3,770 953 (5,446) 2016 £’000 102,918 3,871 – – 29,387 (699) (4,104) 122,244 131,373 Group and Parent Company 2017 £’000 108,522 2,866 8,796 (5,446) 114,738 2016 £’000 99,008 3,721 9,897 (4,104) 108,522 Group 2017 £’000 617 2016 £’000 150 Group 2017 £’000 15,962 2016 £’000 (18,791) Cumulative re-measurement gains and losses reported in the consolidated statement of comprehensive income since 28 December 2003, the transition date to adopted IFRSs, for the Group and the Parent Company are net losses of £24,048,000 (2016: net losses of £40,010,000). The fair value of the plan assets is as follows: Equities – UK – overseas Bonds – corporate – government Absolute return funds Cash and cash equivalents/other Group and Parent Company 2017 £’000 40,494 45,329 16,230 3,564 5,486 3,635 2016 £’000 40,239 42,740 13,747 3,606 7,280 910 114,738 108,522 Greggs plc Annual Report and Accounts 2017 99 AccountsPage Title at start:Content Section at start: NOTES TO THE CONSOLIDATED ACCOUNTS CONTINUED 20. Employee benefits continued Defined benefit plan continued Liability for defined benefit obligations continued Principal actuarial assumptions (expressed as weighted averages): Discount rate Future salary increases Future pension increases Group and Parent Company 2017 2016 2.50% n/a 1.7% – 2.45% 2.70% n/a 1.7% – 2.45% Mortality assumption Mortality in retirement is assumed to be in line with the S2PXA tables using CMI_2016 projections and a long-term rate of 1.25 per cent per annum. Under these assumptions, pensioners aged 65 now are expected to live for a further 22.1 years (2016: 22.5 years) if they are male and 24.0 years (2016: 24.5 years) if they are female. Members currently aged 45 are expected to live for a further 23.9 years (2016: 24.4 years) from age 65 if they are male and for a further 25.5 years (2016: 26.5 years) from age 65 if they are female. The sensitivities regarding the principal assumptions used to measure the scheme liabilities are set out below: Discount rate Inflation Mortality rates Change in assumption Impact on scheme liabilities 0.1% increase 0.1% decrease 1 year decrease £2.6m decrease £1.6m decrease £5.2m decrease Commutation assumption The assumptions have been reviewed during the year. In order to reflect the levels of commutation being experienced by the scheme, an allowance has now been included in the valuation for commutation. The assumption adopted is that 90% of deferred members will opt to commute 25% of their pension at retirement. The commutation factors used for members aged 65 are 14.00 for males and 15.11 for females. The adoption of this assumption in respect of commutation has resulted in a decrease in the defined benefit obligation of £7,010,000. The other demographic assumptions have been set having regard to latest trends in the scheme. The triennial valuation of the scheme took place in April 2017. The outcome of that valuation was considered by the Trustees and the Company and no requirement for future contributions was identified. Defined contribution plan The Company 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 £11,258,000 (2016: £11,886,000) in the year. 100 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: Share-based payments – Group and Parent Company The Group has established a Savings Related Share Option Scheme, an Executive Share Option Scheme and a Performance Share Plan. The terms and conditions of the grants for these schemes are as follows, whereby all options are settled by physical delivery of shares: Date of grant Employees entitled Exercise price Number of shares granted April 2008 Senior employees 457p 618,500 April 2009 Senior employees 356p 2,012,000 March 2012 Senior executives £nil 248,922 March 2013 Senior employees 480p 693,000 March 2013 Senior executives £nil 305,592 Contractual life 10 years 10 years 10 years 10 years 10 years Vesting conditions Three years’ service and EPS growth of 3-5% over RPI on average over those three years Three years’ service and EPS growth of 3-7% over RPI on average over those three years Three years’ service, EPS annual compound growth of 3-8% over RPI over those three years and TSR position relative to an appropriate comparator group Three years’ service and EPS growth of 3-7% over RPI on average over those three years Three years’ service, EPS annual compound growth of 3-8% over RPI over those three years and TSR position relative to an appropriate comparator group April 2013 All employees 414p 699,989 Three years’ service 3.5 years March 2014 Senior executives £nil 224,599 April 2014 Senior employees 500p 598,225 Three years’ service, EPS annual compound growth of 1-4% over RPI over those three years and average annual ROCE of 15.5-17% over those three years Three years’ service and EPS growth of 1-4% over RPI on average over those three years 10 years 10 years April 2014 All employees 465p 696,344 Three years’ service 3.5 years March 2015 Senior employees 1022p 298,045 May 2015 Senior employee 1056p 3,285 March 2015 Senior executives £nil 146,174 Three years’ service and EPS growth of 1-7% over RPI on average over those three years Three years’ service and EPS growth of 1-7% over RPI on average over those three years Three years’ service, EPS annual compound growth of 1-7% over RPI over those three years and average annual ROCE of 19-21.5% over those three years 10 years 10 years 10 years April 2015 All employees 818p 391,979 Three years’ service 3.5 years Executive Share Option Scheme 13 Executive Share Option Scheme 14 Performance Share Plan 3 Executive Share Option Scheme 16 Performance Share Plan 4 Savings Related Share Option Scheme 14 Performance Share Plan 5 Executive Share Option Scheme 17 Savings Related Share Option Scheme 15 Executive Share Option Scheme 18 Executive Share Option Scheme 18a Performance Share Plan 6 Savings Related Share Option Scheme 16 Greggs plc Annual Report and Accounts 2017 101 AccountsPage Title at start:Content Section at start: NOTES TO THE CONSOLIDATED ACCOUNTS CONTINUED 20. Employee benefits continued Share-based payments – Group and Parent Company continued Date of grant Employees entitled Exercise price March 2016 Senior executives £nil Number of shares granted 133,271 April 2016 Senior employees 1088p 235,857 Vesting conditions Three years’ service, EPS average annual growth of 2-8% over RPI over those three years and average annual ROCE of 22-27% over those three years Three years’ service and EPS growth of 2-8% over RPI on average over those three years Contractual life 10 years 10 years April 2016 All employees 870p 361,853 Three years’ service 3.5 years May 2017 Senior executives £nil 206,404 April 2017 Senior employees 1033p 246,219 Three years’ service, EPS average annual growth of 5-11% over those three years and average annual ROCE of 23-27% over those three years Three years’ service and EPS growth of 5-11% on average over those three years 10 years 10 years April 2017 All employees 807p 403,560 Three years’ service 3.5 years Performance Share Plan 7 Executive Share Option Scheme 19 Savings Related Share Option Scheme 17 Performance Share Plan 8 Executive Share Option Scheme 20 Savings Related Share Option Scheme 18 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 2017 Weighted average exercise price 548p 848p 374p 677p 649p 419p Number of options 3,521,408 (165,172) (1,318,930) 856,183 2,893,489 685,933 2016 Weighted average exercise price 446p 662p 324p 782p 548p 399p Number of options 4,033,559 (106,112) (1,137,020) 730,981 3,521,408 582,327 The options outstanding at 30 December 2017 have an exercise price in the range of £nil to £10.88 and have a weighted average contractual life of 5.5 years. The options exercised during the year had a weighted average market value of £11.19 (2016: £10.93). The fair value of services received in return for share options granted is 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 for all Savings Related Share Option Schemes and Executive Share Option Schemes and for Performance Share Plan options granted from 2014 onwards. The Monte Carlo option pricing model was used for Performance Share Plans granted prior to 2014. The fair value per option granted and the assumptions used in these calculations are as follows: 2017 2016 Performance Share Plan 8 May 2017 Executive Share Option Scheme 20 April 2017 Savings Related Share Option Scheme 18 April 2017 Performance Share Plan 7 March 2016 Executive Share Option Scheme 19 April 2016 Savings Related Share Option Scheme 17 April 2016 981p 1072p nil 30.25% 3 years 2.95% 0.17% 165p 1033p 1033p 30.25% 3 years 3.00% 0.17% 238p 807p 1009p 30.09% 3 years 3.07% 0.14% 971p 1102p nil 29.5% 3 years 2.60% 0.55% 177p 1088p 1088p 29.4% 3 years 2.63% 0.48% 263p 870p 1087p 28.8% 3 years 2.66% 0.66% Fair value at grant date Share price Exercise price Expected volatility Option life Expected dividend yield Risk-free rate 102 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: The expected volatility is based on historical volatility, adjusted for any expected changes to future volatility due to publicly available information. The historical volatility is calculated using a weekly rolling share price for the three-year period immediately prior to the option grant date. The costs charged to the income statement relating to share-based payments were as follows: Share options granted in 2013 Share options granted in 2014 Share options granted in 2015 Share options granted in 2016 Share options granted in 2017 2017 £’000 – 178 748 482 427 2016 £’000 134 639 820 401 – Total expense recognised as employee costs 1,835 1,994 21. Provisions Balance at start of year Additional provision in the year: – ordinary – exceptional Utilised in year: – ordinary – exceptional Provisions reversed during the year: – ordinary – exceptional 2017 Dilapidations £’000 2017 Onerous leases £’000 2017 Redundancy £’000 Group and Parent Company 2017 Other £’000 2017 Total £’000 2016 Dilapidations £’000 2016 Onerous leases £’000 2016 Redundancy £’000 2016 Other £’000 2016 Total £’000 3,243 1,819 1,438 1,014 7,514 3,343 2,289 – 1,605 7,237 1,954 – 206 10 – 7,349 1,513 – 3,673 7,359 (940) (95) (352) (81) – (1,583) (574) – (1,866) (1,759) 1,611 72 (426) (209) 690 – – 3,964 22 – 2,323 4,036 (306) (268) – (2,526) (470) – (1,202) (3,003) (1,152) (54) (175) (106) – – – – (1,327) (160) (586) (562) (200) (386) – – (143) – (929) (948) Balance at end of year 2,956 1,321 7,204 1,953 13,434 3,243 1,819 1,438 1,014 7,514 Included in current liabilities Included in non-current liabilities 2,689 379 7,204 1,818 12,090 267 942 – 135 1,344 2,899 344 866 953 2,956 1,321 7,204 1,953 13,434 3,243 1,819 1,438 1,014 1,438 885 6,088 – 129 1,426 7,514 The provisions at the end of the year relates to ordinary or exceptional activity as follows: Ordinary Exceptional 2,619 337 2,956 713 608 1,321 – 7,204 7,204 1,953 – 5,285 8,149 1,953 13,434 2,757 486 3,243 1,034 785 1,819 – 1,438 1,438 1,014 – 1,014 4,805 2,709 7,514 The provision for onerous leases is held in respect of leasehold properties for which the Group is liable to fulfil rent and other property commitments for shops from which either the Group no longer trades or for which future trading cash flows are projected to be insufficient to cover these costs. Amounts have been provided for the shortfall between projected cashflows and property costs up to the lease expiry date or other appropriate estimated date. Included within the provision is £607,000 (2016: £607,000) in respect of possible recourse on leases which have been conditionally assigned. The provision for redundancy costs arises from the supply chain restructuring described in Note 4. Other provisions relate predominantly to national insurance costs on future share option exercises. The majority of all of the provisions are expected to be utilised within four years such that the impact of discounting would not be material. Greggs plc Annual Report and Accounts 2017 103 AccountsPage Title at start:Content Section at start: NOTES TO THE CONSOLIDATED ACCOUNTS CONTINUED 22. Capital and reserves Share capital In issue and fully paid at start and end of year – ordinary shares of 2p Ordinary shares 2017 Number 2016 Number 101,155,901 101,155,901 The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. Capital redemption reserve The capital redemption reserve relates to the nominal value of issued share capital bought back by the Company and cancelled. Own shares held Deducted from retained earnings is £28,327,000 (2016: £22,333,000) 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 504,215 shares (2016: 878,235 shares) with a market value at 30 December 2017 of £7,054,000 (2016: £8,519,000) which have not vested unconditionally in employees. During the year the Trust purchased 986,150 shares for an aggregate consideration of £11,352,000 and sold 1,360,170 shares for an aggregate consideration of £5,358,000. 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, Greggs Savings Related Share Option Scheme and Greggs Performance Share Plan or by the trustees of the Greggs Employee Share Scheme. The trustees have elected to waive the dividends payable on these shares. Dividends The following tables analyse dividends when paid and the year to which they relate: 2015 final dividend 2016 interim dividend 2016 final dividend 2017 interim dividend 2017 Per share pence – – 21.5p 10.3p 31.8p 2016 Per share pence 21.2p 9.5p – – 30.7p The proposed final dividend in respect of 2017 amounts to 22.0 pence per share (£22,142,000). This proposed dividend is subject to approval at the Annual General Meeting and has not been included as a liability in these accounts. 2015 final dividend 2016 interim dividend 2016 final dividend 2017 interim dividend 2017 £’000 – – 21,768 10,419 32,187 2016 £’000 21,326 9,610 – – 30,936 104 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: 23. Operating leases Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years More than five years 2017 £’000 Property 39,751 90,070 15,866 145,687 2017 £’000 Equipment 2,005 2,949 – 4,954 2017 £’000 Total 41,756 93,019 15,866 150,641 2016 £’000 Property 37,896 82,492 14,230 134,618 2016 £’000 Equipment 2,057 3,672 – 5,729 2016 £’000 Total 39,953 86,164 14,230 140,347 The Group leases the majority of its shops under operating leases. The leases typically run for a period of ten 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 is contingent on the level of turnover achieved in the relevant unit; these amounts are immaterial. 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, title does not pass for the land or buildings. 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 land or buildings it is judged that substantially all the risks and rewards of the land and buildings are with the landlord. Based on these qualitative factors it is concluded that the leases are operating leases. 24. Capital commitments During the year ended 30 December 2017, the Group entered into contracts to purchase property, plant and equipment and intangible assets for £10,098,000 (2016: £1,268,000). These commitments are expected to be settled in the following financial year. 25. Related parties Identity of related parties The Group has a related party relationship with its subsidiaries (see Note 12) and its Directors and executive officers. Trading transactions with subsidiaries – Group There have been no transactions between the Company and its subsidiaries or associates during the year (2016: £nil). Trading transactions with subsidiaries – Parent Company Dormant subsidiaries Amounts owed to related parties Amounts owed by related parties 2017 £’000 7,807 2016 £’000 7,807 2017 £’000 – 2016 £’000 – The Greggs Foundation is also a related party and during the year the Company made a donation to the Greggs Foundation of £900,000 (2016: £860,000), as well as passing on £697,000 (2016: £715,000) raised from the sale of carrier bags and £303,000 (2016: £193,000) raised from the sale of products. The Greggs Foundation holds 300,000 shares in Greggs plc and Richard Hutton, a Director of Greggs plc is a trustee of the Greggs Foundation. Transactions with key management personnel Details of Directors’ shareholdings, share options, emoluments, pension benefits and other non-cash benefits can be found in the Directors’ Remuneration report on pages 54 to 69. Summary information on remuneration of key management personnel is included in Note 5. 26. Events after the reporting period As noted in the financial review on page 25 the Company has, subsequent to the year end, exchanged contracts for the disposal of the vacant Twickenham site. The disposal is conditional on a number of factors, including the application for and successful grant of planning permission, none of which are expected to be resolved in the 2018 financial year, and therefore this asset continues to be classified as non-current. At this stage the total proceeds arising from supply chain site disposals are still expected to be in line with those anticipated in the investment plan. Greggs plc Annual Report and Accounts 2017 105 AccountsPage Title at start:Content Section at start: 2017 960.0 7.4% 3.7% 82.2 8.6% (9.9) 71.9 63.5 32.3 Ten-year history TEN-YEAR HISTORY 2008 20091 20101 2011 (as restated)3 2013 (as restated)1,4 20151 2016 2012 2014 Turnover (£’m) 628.2 658.2 662.3 Total sales growth (%) 7.1% 4.8% 0.6% 701.1 5.8% 734.5 762.4 806.1 835.7 894.2 4.8% 3.8% 5.7% 3.7% 7.0% company-managed shop like-for-like sales growth (%) 4.4% 0.8% 0.2% 1.4% (2.7%) (0.8%) 4.5% 4.7% 4.2% 44.3 48.4 52.4 53.0 51.3 41.5 58.1 73.1 80.3 7.1% 7.4% 7.9% 7.6% 7.0% 5.4% 7.2% 8.7% 9.0% 4.3 – – 7.4 1.4 (8.1) (8.5) – (5.2) 49.5 48.8 52.5 60.5 52.4 33.2 49.7 73.0 75.1 Earnings before interest and tax (EBIT) excluding exceptional items (£’m) EBIT margin excluding exceptional items (%) Pre-tax exceptional (charge)/credit (£’m) Profit on ordinary activities including exceptional items and before tax (£’m) Diluted earnings per share excluding exceptional items (pence) Dividend per share (pence)2 Total shareholder return (%) Capital expenditure (£’m) 30.6 14.9 (22%) 40.8 34.0 16.6 29% 30.3 37.3 18.2 11% 45.6 38.8 19.3 13% 59.1 38.3 19.5 (6%) 46.9 30.6 19.5 1% 47.6 43.4 22.0 70% 48.9 55.8 48.65 60.8 31.0 87.1% (23.4%) 47.4% 71.7 80.4 70.4 28.1% 26.9% Return on capital employed 26.2% 25.9% 25.9% 24.4% 21.3% 16.4% 22.4% 26.8% Number of shops in operation at year end 1,409 1,419 1,487 1,571 1,671 1,671 1,650 1,698 1,764 1,854 Notes: 1 2009 and 2014 were 53 week years, impacting on total sales growth for that year and the year immediately following. 2 All years prior to 2009 adjusted to take account of the ten-for-one share split which took place during 2009. 3 Reestated following the adoption of IAS 19 (Revised). 4 Restated to include revenue in respect of franchise fit-out costs. 5 Includes a special dividend of 20p. All of the non-GAAP measures detailed above can be calculated from the GAAP measures included in the annual accounts with the exception of those detailed below. Calculation of alternative performance measures Like-for-like (LFL) sales growth – compares year-on-year cash sales in our company-managed shops, excluding any shops which opened, relocated or closed in the current or prior year and is calculated as follows: Current year LFL sales Prior year LFL sales Growth LFL sales growth percentage 2017 £’000 817,533 788,510 29,023 3.7% 2016 £’000 777,204 745,609 31,595 4.2% Return on capital employed – calculated by dividing profit before tax by the average total assets less current liabilities for the year. Profit before tax Capital employed: Opening Closing Average Return on capital employed 106 Greggs plc Annual Report and Accounts 2017 2017 Underlying £’000 2017 Including exceptional items £’000 81,807 71,945 294,536 313,340 303,938 26.9% 294,536 313,340 303,938 23.7% 2016 Underlying £’000 80,319 277,622 294,536 286,079 28.1% 2016 Including exceptional items £’000 75,142 277,622 294,536 286,079 26.3% Page Title at start:Content Section at start: NOTES Greggs plc Annual Report and Accounts 2017 107 Page Title at start:Content Section at start: NOTES 108 Greggs plc Annual Report and Accounts 2017 Page Title at start:Content Section at start: FINANCIAL CALENDAR Announcement of results and dividends Late July Half year Early March Full year Dividends Interim Final Mid-October 18 May 2018 Annual report posted to shareholders Annual General Meeting Late March 9 May 2018 SECRETARY AND ADVISERS Secretary Jonathan D Jowett, LL.M. Solicitor Registered office Greggs House Quorum Business Park Newcastle upon Tyne NE12 8BU Registered number 502851 Bankers National Westminster Bank Plc 149 High Street Gosforth Newcastle upon Tyne NE3 1HA Auditor KPMG LLP Quayside House 110 Quayside Newcastle upon Tyne NE1 3DX Stockbrokers UBS 5 Broadgate London EC2M 2QS Investec 2 Gresham Street London EC2V 7QP Solicitors Muckle LLP Time Central 32 Gallowgate Newcastle upon Tyne NE1 4BF Registrars Link Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU 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 1 7 corporate.greggs.co.uk Greggs plcCompany Registered Number 502851