Greggs
Annual Report 2001

Plain-text annual report

food for thought annual report and accounts 2001 COVER STORY: The Greggs Breakfast Club aims to get children off to a better start by providing them with free breakfasts, for which we provide all the food. Clubs currently operate in over 20 primary schools in the North and Midlands, and we hope to start 30 more this year. This is just one example of Greggs’ long-standing commitment to putting something back into the communities where we operate. OUR BUSINESS Greggs plc is the UK’s leading retailer specialising in sandwiches, savouries and other bakery-related products, with a particular focus on takeaway food and catering. We continue to show significant growth and now have over 1,100 retail outlets, trading under the Greggs and Bakers Oven brands. OUR VISION We intend to be Europe’s finest bakery-related retailer, achieving our ambitious growth targets by attaining world-class standards in everything we do. Our purpose is the growth and development of a thriving business for the benefit and enjoyment of employees, customers and shareholders alike. We aim to achieve a turnover of £1billion by 2010. OUR VALUES Greggs is a customer-focused business, seeking to provide excellent products and services that deliver enjoyment and value for money. We are committed to people development, within a considerate culture that combines autonomy and accountability, and maintains a strong focus on profitability. In all our activities, we aim to achieve excellence through continuous improvement. financial review EPS DIVIDEND Pence 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 C O N T E N T S 1 2 6 12 14 15 16 17 18 19 20 22 36 38 39 40 40 41 Financial review Chairman’s statement Managing Director’s report Directors’ report Statement of directors’ responsibilities Report of the auditors Group profit & loss account Group balance sheet Parent company balance sheet Group cash flow statement Accounting policies Notes to the accounts Corporate governance Corporate social responsibility Directors’ remuneration Ten year history Directors & advisers Shop allocation 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 F I N A N C I A L C A L E N D A R F I N A N C I A L H I G H L I G H T S Announcement of results and dividends Half year Full year Dividends Interim Final Early August Early March Mid October Late May Annual report to shareholders Early April Annual General Meeting 10 May 2002 2001 2000* £’m £’m Turnover 377.6 339.0 Pre-tax profits Post-tax profits 32.7 22.8 Shareholders’ funds 103.6 Capital expenditure 27.4 26.4 19.4 88.2 21.4 Pence Pence Earnings per share 190.2 162.3 Dividend *As restated following adoption of FRS 19. per ordinary share 65.0 55.0 GREGGS plc: annual report and accounts 2001 1 IAN GREGG:Chairman This has been another year of excellent progress for Greggs. We have achieved our tenth consecutive year of profit and earnings growth, with pre-tax profits rising by 24.2 per cent, following a 22.5 per cent increase in 2000. This has been based on our well-established strategy of investing to develop our products, shops, brands and people, so as to maximise the opportunities created by the strong growth of the takeaway food market. In 2001 Greggs sold 74 million sandwiches and filled rolls-quite a bite out of this fast-growing market CHAIRMAN’S STATEMENT This has been another year of excellent following our early adoption of the FRS19 accounting standard in progress for Greggs. We have achieved our tenth consecutive year of respect of deferred tax. profit and earnings growth, with pre-tax profits rising by 24.2 per cent, DIVIDEND The Board recommends a final dividend of 44.0 pence per following a 22.5 per cent increase in 2000. This has been based on our share (2000: 39.0 pence), an increase of 12.8 per cent. The interim well-established strategy of investing to develop our products, shops, dividend, paid in October 2001, was increased by 31.3 per cent to 21.0 brands and people, so as to maximise the opportunities created by the pence, partly to improve the balance between the interim and final strong growth of the takeaway food market. payments, so that the total dividend for the year will be 65.0 pence RESULTS Sales for the year grew by 11.4 per cent to £377.6 million, (2000: 55.0 pence), an increase of 18.2 per cent. This is in line with our including our best ever like-for-like sales increase of 8.4 per cent. long-established progressive dividend policy, which seeks to provide Consumers responded favourably to the roll-out of our new format shareholders with increases in their income broadly in line with the shops and the continuous improvement of our product range. We also underlying growth of earnings per share over the medium term. benefited from strong underlying demand for takeaway food, aided by Subject to the approval of the Annual General Meeting, the final favourable weather throughout the year and high levels of customer dividend will be paid on 24 May 2002 to shareholders on the register at traffic on the high street. 19 April 2002. Operating profit increased by 21.3 per cent to £31.6 million. After interest BUSINESS HIGHLIGHTS Core volumes advanced strongly throughout receivable of £1.1 million (2000: £0.3 million) reflecting our increasing the year. The Greggs brand continued to perform exceptionally well, net cash balances, pre-tax profit grew by 24.2 per cent to £32.7 million. with our newer divisions in the south of England again making very Earnings per share grew by 17.2 per cent to 190.2 pence, compared pleasing progress. The Managing Director comments on trading and with a prior year base of 162.3 pence which has been restated business development in more detail in his report on pages 6 to 11. GREGGS plc: annual report and accounts 2001 3 We will continue the progressive roll-out of the new Greggs shop format, and intend to achieve a further increase in the pace of shop opening, with a net addition of around 50 units planned in the UK. We also expect to open a pilot shop in mainland Europe. We are well positioned in a growing market place and despite continuing cost pressures I expect the group to achieve satisfactory progress in the current year. 00million sausage rolls Our quest to create the ultimate sausage roll has resulted in strong and continuous growth THE BOARD I announced last year that I intended to retire, and that need to increase the pace in expansion of our manufacturing capacity we had begun work to identify a suitable successor. We have been in order to be able to meet the demands of future growth. Total capital fortunate to secure the services of Derek Netherton, who has had a expenditure is expected to be a record £38 million, with much of this distinguished career in investment banking and is a non-executive investment designed to deliver its full benefits in the longer term. director of a number of listed companies including Next and Hiscox. We have achieved further strong sales progress since the start of the He joined the Board as a non-executive director and Chairman new year, with like for like sales in the first nine weeks up by 9.7 per Designate on 1 March 2002, and I intend to work with him closely to cent. Results to date are in line with our budgets, and ahead of the ensure a smooth hand-over of my responsibilities, prior to my planned comparable period last year. We are well positioned in a growing retirement in about 12 months’ time. market place and despite continuing cost pressures, notably on flour STAFF The continued strong growth of the business has been made and insurance, I expect the group to achieve satisfactory progress in possible only by the commitment of our staff to meeting our customers’ the current year. expectations. Once again I would like to record the thanks of the Board for their hard work in delivering the products and service on which our reputation depends. PROSPECTS We will continue the progressive roll-out of the new Greggs shop format, and intend to achieve a further increase in the pace of shop opening, with a net addition of around 50 units planned Ian Gregg, in the UK. We also expect to open a pilot shop in mainland Europe. Chairman Due to our success in strongly growing volumes in recent years, we 8th March 2002 GREGGS plc: annual report and accounts 2001 5 MIKE DARRINGTON:Managing Director Growing sales and profits are the result of our drive towards even better products and ever-higher standards across the group, aided by past investment in facilities such as our group technical centre. We remain committed to this successful strategy and are providing additional resources to raise standards even further and so drive continued growth for the benefit of employees and shareholders alike. 15,64employees Greggs plc is committed to building a culture in which our people can be both happy and successful MANAGING DIRECTOR’S REPORT Growing sales and profits are the Customer recognition of the high quality and consistency of our result of our drive towards even better products and ever-higher savouries has again helped to drive sales in this product category, standards across the group, aided by past investment in facilities such underlining the benefits of our investment in the group’s central as our group technical centre. We remain committed to this successful savouries unit, also at Balliol Park. During the year we undertook further strategy and are providing additional resources to raise standards even capital expenditure on equipment, effectively doubling the capacity of further and so drive continued growth for the benefit of employees and the unit, to keep pace with rapidly increasing demand. shareholders alike. Retail environment. The new Greggs format has been extended STRATEGIC DEVELOPMENT Our successful development has been to 168 locations through new store openings and the progressive based on our strategic focus on continuous improvement in five refurbishment of existing shops as part our normal refit cycle. key areas: products, service, retail environment, brands and people. Consumers have responded well to the new design, which stands out Product and service excellence. The introduction of new and on the high street, enhances the display and accessibility of our key improved products has made a major contribution to our strong volume takeaway food ranges, and optimises the speed of service. The roll-out growth. This continuing process has been greatly assisted by the of the Greggs touch-screen electronic point of sale system has also research, development and testing facilities provided at our group continued, providing us with even better management information on technical centre in Balliol Park, Newcastle upon Tyne, which opened in both sales trends and profitability. April 2000. The work undertaken here is also helping us to extend best Since the catering market has been considerably less buoyant than the practice, including the harmonisation of key products across our takeaway sector on which Greggs focuses, the emphasis in Bakers regional divisions, and to ensure the highest standards of food safety Oven has been on improving the performance of its existing portfolio of throughout the group. seated catering outlets, rather than on further expansion of the format. GREGGS plc: annual report and accounts 2001 7 Our focus has always been on achieving long-term growth by making our business progressively better. This will remain so as we continue to develop returns from our investment in even more enjoyable products, more attractive shops and better service, and increasingly concentrate our resources behind the harmonisation and promotion of strong national brands. We deliver fast, efficient and friendly service to satisfy the needs of 236 million customers every year. Brand awareness. During 2002 we will convert our 50 Birketts shops TRADING PERFORMANCE We made strong sales progress throughout in Cumbria, Lancashire and southern Scotland to the Greggs fascia, the year, with the second half proving even stronger than the first. completing the process of nationwide brand harmonisation which Like-for-like sales grew by 6.9 per cent in the first half (24 weeks) and began with the successful conversion of our Midlands and Yorkshire by 9.6 per cent in the second half, giving us an 8.4 per cent uplift for divisions in 1999. We believe that significant long term benefits will the year as a whole. Within this, core volumes advanced by 4.3 per accrue as we progressively simplify the business, ensure more cent in the first half and 6.7 per cent in the second, making an annual nationally consistent products, harmonise advertising and point of sale increase of 5.7 per cent. Implied inflation of 2.7 per cent over the year material, and concentrate on building consumer awareness of Greggs remained primarily a function of product upgrades, though we also as the leading brand in bakery-related takeaway food across the UK. recovered some substantial increases in ingredient costs, most notably This will be complemented by Bakers Oven, positioned as a premium of flour in the second half. brand and distinguished from Greggs by the role in its concept of Including the benefit of new selling space, total sales grew by 9.1 per cent seated catering and instore baking. The baking of products instore in the first half and 13.1 per cent in the second, making 11.4 per cent for enables us to extend our coverage to regions which could not be the year as a whole. supported by deliveries of fresh products from central bakeries. As the Chairman has noted, the weather was favourable for our business People. We have continued to benefit from progressive strengthening throughout the year, with relatively few instances of the extreme conditions of our management team both in the centre and in each of our that tend to deter daily purchasers of our products. Strong retail divisions, and by the increasing sophistication that this brings to our demand overall also ensured high levels of activity on the high streets work in understanding consumers’ changing needs and tastes, and where we operate, with a late surge of Christmas shoppers contributing ensuring that we respond to these effectively. to a stronger than expected performance in the final weeks of the year. GREGGS plc: annual report and accounts 2001 9 Underlying these external factors is the steadily increasing strength of 3.8 per cent increase over the year. Core volume performance our brands and proposition as we have continued to improve our products, improved in the latter part of the year but remained disappointing shops and service, reflected in growing consumer awareness of the overall at –0.1 per cent, comprising a 1.1 per cent decline in the first quality and value that we offer. These are the key drivers of the sustained half and a 0.6 per cent increase in the second half. real sales growth we have achieved over the last nine years, with The weaker performance of Bakers Oven compared with Greggs can like-for-like sales increasing by 15.8 per cent over the last two years be partly explained by its exposure to the catering market and its alone. This strong sales growth has enabled us to increase pre-tax correspondingly smaller involvement in the buoyant takeaway market. profits by a very satisfactory 24.2 per cent to £32.7 million. There remain significant regional variations in performance, however, This has been achieved despite significant increases in our cost base with the Midlands division making solid progress and the South improving, as we have invested in people and facilities to enable us to drive the while Scotland and the North have continued to underperform. We have business even more strongly in the future. made management changes designed to address these issues. Greggs. Like-for-like sales in the nine Greggs divisions, including Overall profits showed a small improvement over the previous year Birketts, grew by 8.5 per cent in the first half and 11.3 per cent in the despite the loss of Bakers Oven’s largest and most profitable unit with second, making a 10.1 per cent increase for the year. Within this, core the closure of the Millennium Dome. volumes advanced by 6.3 per cent in the first half and 8.9 per cent in PRODUCT PROFILE Continuing a long established pattern, the major the second, to give an annual increase of 7.8 per cent. takeaway food categories of sandwiches and savouries continued to show All divisions made progress, with Greggs of Twickenham continuing to the strongest growth, along with associated product areas such as soft perform exceptionally well and Greggs of Enfield also making strong drinks. Cakes and confectionery products, many of which are purchased progress. During 2002 we plan to integrate these two businesses into a to complement a savoury takeaway snack, remained fairly stable as a single South East division, which will enable us to develop our operations proportion of our trade, while bread and rolls continued their long decline. in southern England even more effectively in the future. The Midlands and RETAIL PROFILE We opened 67 new shops during the year and closed Gosforth divisions again made pleasing progress, while our operations 28, giving us a net increase of 39 to 1,144 outlets by 29 December 2001, in the North West achieved a very good result after a somewhat slightly ahead of our target. There were 905 Greggs and 239 Bakers disappointing year in 2000. Scotland remained our most profitable Oven shops at the year end, compared with 858 and 247 respectively division. The performance of this business has been transformed over twelve months earlier. We completed 64 comprehensive shop the last 20 years under the leadership of its Managing Director, Ken refurbishments and 31 minor refits during the year. Middleton, who retired from this role at the end of 2001, and I would like CAPITAL INVESTMENT Capital expenditure of £27.4 million was £6 to record our appreciation of his outstanding contribution to Greggs. million higher than in the previous year but below our original £30 Bakers Oven. Like-for-like sales in the four Bakers Oven divisions grew million budget. The bulk of investment continued to be directed to by 2.6 per cent in the first half and 4.7 per cent in the second, making a the expansion and improvement of our retail estate, though we 10 naturally require further investment in our production facilities to donations of £327,000 this year, the bulk of which is directed through keep pace with the strength of volume growth. These will result in a the Greggs Trust, dedicated to alleviating the effects of poverty and further planned increase in capital expenditure to some £38 million in social deprivation within our trading areas. In addition to our central the current year, during which we intend to open some 50 new contributions, our divisions are active in support of good causes within stores, net of closures. their trading areas, such as the major annual fun run sponsored CASH FLOW AND BALANCE SHEET The group remains strongly cash by Greggs of Gosforth in aid of children’s cancer research which has generative and we ended the year with a substantially increased net raised well over £2 million since its inception in 1983. cash position of £30.0 million, compared with £18.9 million in 2000. OUTLOOK We are the largest specialist operator in the UK addressing This was despite a £1.5 million increase in dividend payments as well the fast-growing market for bakery-related takeaway food. We have as higher capital expenditure. We remain strongly placed to fund all our significant scope for further expansion within our home market, with a future investment plans from our own resources. target of reaching over 1,700 units by the end of the present decade, EMPLOYEES One of the most striking characteristics of our staff is their and ultimate scope for at least 2,000 UK shops. In addition, unfailing cheerfulness – an attitude they have maintained despite the we continue to research the potential for our brands within mainland significant increases in sales per shop that we have achieved over the Europe, and expect a pilot shop to be trading there later this year. last few years. I am particularly grateful for their proven ability to deal Our focus has always been on achieving long-term growth by making with ever-increasing customer numbers without compromising our our business progressively better. This will remain so as we continue to standards, whether in service across the counter or in food handling develop returns from our investment in even more enjoyable products, and preparation. We remain absolutely committed to promoting a caring more attractive shops and better service, and increasingly concentrate and considerate culture in which people are treated properly, can enjoy our resources behind the harmonisation and promotion of strong their work, and are given the greatest possible opportunity to realise national brands. their potential through skills training and internal promotion. GREGGS IN THE COMMUNITY The Greggs Breakfast Clubs which feature on the front cover of this report are a growing phenomenon, currently operating in over 20 selected primary schools in the North and Midlands. They are designed to get children off to a better start by providing them with free breakfasts for which we provide all the food, including fresh bread from our shops, together with the necessary equipment. This initiative is just one example of our long-standing commitment Mike Darrington, to putting something back into the communities where we operate. Managing Director The group is a member of the ‘Per Cent’ Club and made charitable 8th March 2002 GREGGS plc: annual report and accounts 2001 11 directors’ report The directors have pleasure in presenting their annual report and the details of directors’ share options are set out in note 6 to the accounts. audited accounts for the 52 weeks ended 29 December 2001. Trustee holdings of ordinary shares with no beneficial interest include The comparative period is the 52 weeks ended 30 December 2000. 214,655 shares held by the Greggs Employee Benefit Trust to which PRINCIPAL ACTIVITIES certain directors are trustees. Mr. C.S. Gregg resigned from the Board The principal activity of the group is the retailing of sandwiches, on 9 May 2001. On 1 March 2002 Mr. D.N.D. Netherton was appointed savouries and other bakery related products with a particular focus on a non-executive director. In accordance with the Company's Articles of takeaway food and catering. The majority of products sold are Association, Mr. M.J. Darrington, Mr. S.W. Curran, Mrs. S. Johnson OBE manufactured in house. and Mr. D.N.D. Netherton retire from the Board, and being eligible, offer RESULTS AND DIVIDENDS themselves for re-election. Sales for the financial year excluding VAT were £377,556,000, an increase Mr. M.J. Darrington has a service agreement determinable by not less of £38,548,000 or 11.4% over the previous financial year. Group profit than two years’ notice from the Company, or not less than six months’ before taxation amounted to £32,742,000, an increase of 24.2% over the notice from Mr. M.J. Darrington. Mr. S.W. Curran, Mrs. S. Johnson OBE previous financial year. An interim dividend of 21.0p per ordinary share and Mr. D.N.D. Netherton do not have service agreements (in common was paid on 5 October 2001 and the directors propose a final dividend of with the other non-executive directors). 44.0p payable on 24 May 2002 leaving profit for the financial year to be CORPORATE GOVERNANCE retained of £15,146,000 (2000: £12,970,000 as restated). A separate report on corporate governance is set out on pages 36 to 37. BUSINESS REVIEW SUBSTANTIAL SHAREHOLDINGS A review of the business during the year and an outline of future At 8 March 2002 the only notified interests of substantial shareholdings developments are given in the Chairman's statement and Managing in the issued share capital of the Company, other than directors referred Director's report on pages 2 to 11. to in note 6, were: FIXED ASSETS Percentage of issued share capital, % In the opinion of the directors the market value of all of the Group's CGNU plc properties is not significantly different from their historical net book amount. DIRECTORS AND THEIR INTERESTS A.J. Davison (as trustee of various settlements) Prudential plc J.A. Wardropper (as trustee of The names of the directors in office during the year together with their various settlements jointly with A.J. Davison) relevant interests in the share capital of the Company (as defined in the Mrs G.V. Richardson and family Companies Act 1985) at 29 December 2001 and 30 December 2000 and Standard Life 8.90 9.16 4.81 5.44 4.45 3.96 12 EMPLOYMENT POLICIES CHARITABLE CONTRIBUTIONS We are committed to promoting policies which ensure that employees and The Group is a member of the ‘Per Cent’ Club. Charitable donations of those who seek to work for us are treated equally regardless of sex, marital £327,000 were made by the Group during the year including £218,000 to status, creed, colour, race or ethnic origin. Greggs Trust . The Trust also received donations from employees under It is our policy to give full and fair consideration to applications for Give As You Earn of £45,000, from major shareholders of £129,000 and employment by people who are disabled, to continue wherever possible income from investments of £163,000. These funds were used by the the employment of staff who become disabled and to provide equal Trust in pursuance of its main objective to alleviate the effects of poverty opportunities for the career development of disabled employees. and social deprivation in the areas where the Company trades. The number and dispersion of the Group's operating locations make it AUDITORS difficult, but essential, to communicate effectively with employees. In accordance with Section 384 of the Companies Act 1985, a resolution Communication with our shop staff is principally through the operational for the re-appointment of KPMG Audit Plc as auditors of the Company structure of shop area and divisional management. We communicate will be proposed at the forthcoming Annual General Meeting. with our bakery staff by regular briefings and letters to employees. All staff receive a copy of divisional and Group gazettes. The Group operates Profit Sharing and Savings Related Share Option Schemes to encourage its employees to identify with its corporate objectives. PAYMENTS TO SUPPLIERS Supplier credit is an extremely important factor in the success of the By order of the Board Group. Whilst the Group does not follow any code or standard on ANDREW DAVISON payment practice, payments to suppliers are made in accordance Secretary with the Group’s normal terms and conditions of business except Greggs plc (CRN 502851) where varied terms and conditions are agreed with individual Fernwood House suppliers in which case these prevail. Where disputes arise we Clayton Road attempt to resolve them promptly and amicably to ensure delays in Jesmond payment are kept to a minimum. Newcastle upon Tyne The average creditor payment period for the Company and the Group NE2 1TL at 29 December 2001 was 51 days (2000: 47 days). 8 March 2002 GREGGS plc: annual report and accounts 2001 13 statement of directors’ responsibilities in respect of the preparation of accounts The directors are required by company law to prepare accounts for The directors have responsibility for ensuring that the Company keeps each financial year which give a true and fair view of the state of affairs accounting records which disclose with reasonable accuracy at any of the Company and the Group at the end of the financial year and of time the financial position of the Company and which enable them to the results for that period. ensure that the accounts comply with the Companies Act 1985. The directors consider that in preparing the accounts on pages 16 to 35, The directors have general responsibility for taking such steps as are the Company has used appropriate accounting policies, consistently reasonably open to them to safeguard the assets of the Group and to applied and supported by reasonable and prudent judgements and prevent and detect fraud and other irregularities. estimates, and that all accounting standards which they consider to be applicable have been followed. The accounts have been prepared on a going concern basis on the presumption that the Group will continue in business. 14 report of the independent auditors to the members of Greggs plc We have audited the accounts on pages 16 to 35. BASIS OF AUDIT OPINION RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS We conducted our audit in accordance with Auditing Standards issued The directors are responsible for preparing the Annual Report. As described by the Auditing Practices Board. An audit includes examination, on a on page 14 this includes responsibility for preparing the accounts in test basis, of evidence relevant to the amounts and disclosures in the accordance with applicable United Kingdom law and accounting standards. accounts. It also includes an assessment of the significant estimates Our responsibilities, as independent auditors, are established in the United and judgements made by the directors in the preparation of the Kingdom by statute, the Auditing Practices Board, the Listing Rules of accounts, and of whether the accounting policies are appropriate to the the Financial Services Authority and by our profession’s ethical guidance. Group's circumstances, consistently applied and adequately disclosed. We report to you our opinion as to whether the accounts give a true and We planned and performed our audit so as to obtain all the information fair view and are properly prepared in accordance with the Companies and explanations which we considered necessary in order to provide us Act 1985. We also report to you if, in our opinion, the directors’ report with sufficient evidence to give reasonable assurance that the accounts is not consistent with the accounts, if the Company has not kept proper are free from material misstatement, whether caused by fraud or other accounting records, if we have not received all the information and irregularity or error. In forming our opinion we also evaluated the overall explanations we require for our audit, or if information specified by law adequacy of the presentation of information in the accounts. or the Listing Rules regarding directors’ remuneration and transactions OPINION with the Group is not disclosed. In our opinion the accounts give a true and fair view of the state of We review whether the statement on page 36 reflects the Company’s affairs of the Company and the Group as at 29 December 2001 and compliance with the seven provisions of the Combined Code specified for of the profit of the Group for the 52 weeks then ended and have been our review by the Listing Rules and we report if it does not. We are not properly prepared in accordance with the Companies Act 1985. required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report, including KPMG Audit Plc the corporate governance statement and consider whether it is Chartered Accountants consistent with the audited accounts. We consider the implications for Registered Auditor our report if we become aware of any apparent misstatements or material Newcastle upon Tyne inconsistencies with the accounts. 8 March 2002 GREGGS plc: annual report and accounts 2001 15 group profit and loss account for the 52 weeks ended 29 December 2001 Turnover Cost of Sales Gross profit Distribution and selling costs Administrative expenses Operating profit Net interest receivable and other income Profit on ordinary activities before taxation Taxation on profit on ordinary activities Profit on ordinary activities after taxation Dividends paid and proposed Retained profit for the financial year Basic earnings per share Diluted earnings per share Note 2001 £’000 1 2 2 2 3 4 10 11 12 25 13 13 377,556 (147,468) 230,088 (172,711) (25,780) 31,597 1,145 32,742 (9,933) 22,809 (7,663) 15,146 190.2p 187.7p 2000 £’000 As restated* 339,008 (131,197) 207,811 (158,327) (23,440) 26,044 312 26,356 (6,964) 19,392 (6,422) 12,970 162.3p 161.0p * FRS 19 ‘Deferred tax’ has been adopted for the first time resulting in a restatement of the 2000 accounts. This is discussed in further detail in the accounting policies section on page 20. The Group’s operating profit for both the current and preceding financial period derives from continuing operations. There are no recognised gains or losses during the current and previous period other than the profit for the period. RECONCILIATION OF MOVEMENT IN CONSOLIDATED SHAREHOLDERS’ FUNDS Profit for the financial year - as previously stated - prior year adjustment (see accounting policies) Dividends Retained profit for the financial year New share capital - nominal value - share premium Net addition to shareholders’ funds Opening shareholders’ funds - as previously stated - prior year adjustment (see accounting policies) Closing shareholders’ funds 16 2001 £’000 22,809 2000 £’000 As restated 22,131 2000 £’000 As restated - (2,739) 22,809 (7,663) 15,146 3 236 15,385 88,169 103,554 80,896 (6,113) 19,392 (6,422) 12,970 9 407 13,386 74,783 88,169 group balance sheet at 29 December 2001 29 December 2001 Note £’000 £’000 £’000 Fixed assets Tangible assets Investments Current assets Stocks Debtors Cash at bank and in hand 14 16 17 18 6,275 12,406 30,027 48,708 Creditors: amounts falling due within one year 19 (60,762) Net current liabilities Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Deferred tax Capital and reserves Called up share capital Share premium account Profit and loss account Equity shareholders’ funds 20 22 23 24 25 5,636 11,893 20,015 37,544 (55,227) 124,123 3,563 127,686 (12,054) 115,632 (109) (11,969) 103,554 2,400 9,794 91,360 103,554 The accounts on pages 16 to 35 were approved by the Board of directors on 8 March 2002 and were signed on its behalf by M.J. Darrington}Directors M. Simpson 30 December 2000 As restated £’000 113,285 3,563 116,848 (17,683) 99,165 (133) (10,863) 88,169 2,397 9,558 76,214 88,169 GREGGS plc: annual report and accounts 2001 17 parent company balance sheet at 29 December 2001 29 December 2001 30 December 2000 As restated Note £’000 £’000 £’000 £’000 Fixed assets Tangible assets Investments Current assets Stocks Debtors Cash at bank and in hand 15 16 17 18 6,275 30,737 29,872 66,884 Creditors: amounts falling due within one year 19 (60,556) Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Deferred tax Capital and reserves Called up share capital Share premium account Profit and loss account Equity shareholders’ funds 20 22 23 24 25 102,739 8,753 111,492 86,641 8,753 95,394 5,268 32,362 19,289 56,919 (51,557) 6,328 117,820 (109) (9,250) 108,461 2,400 9,794 96,267 108,461 5,362 100,756 (133) (7,272) 93,351 2,397 9,558 81,396 93,351 The accounts on pages 16 to 35 were approved by the Board of directors on 8 March 2002 and were signed on its behalf by M.J. Darrington}Directors M. Simpson 18 group cash flow statement for the 52 weeks ended 29 December 2001 Reconciliation of operating profit to net cash inflow from operating activities Operating profit Depreciation charges (Profit) / loss on disposal of fixed assets Release of government grants (Increase) / decrease in stocks Increase in debtors Increase in creditors Net increase in working capital Net cash inflow from continuing operating activities CASH FLOW STATEMENT Net cash inflow from continuing operating activities Returns on investments and servicing of finance Interest received Interest paid Interest element of finance lease payments Net cash inflow from returns on investments and servicing of finance Taxation paid Capital expenditure and financial investments Purchase of tangible fixed assets Disposal of tangible fixed assets Purchase of investments Net cash outflow for capital expenditure and financial investments Equity dividends paid Financing Issue of ordinary share capital Redemption of loan notes Capital element of finance lease payments Loan repayments Government grants received Net cash outflow from financing Net increase in cash in the period Further details regarding cash flows are given in note 27 to the accounts £’000 2001 £’000 £’000 2000 £’000 31,597 14,907 (248) (24) 4,186 50,418 50,418 26,044 14,162 222 (46) 3,049 43,431 43,431 347 (2,142) 4,844 622 (301) (9) 1,145 (6,005) 312 (5,604) (21,397) 2,514 (2,133) (25,497) (7,067) (21,016) (5,593) 416 (32) (40) (1,913) 22 (1,842) 11,152 (1,547) 9,983 (639) (513) 5,338 1,354 (209) - (27,385) 1,888 - 239 (42) - (2,039) - GREGGS plc: annual report and accounts 2001 19 accounting policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group’s accounts. (a) Basis of accounting The accounts are prepared under the historical cost accounting rules and in accordance with applicable accounting standards. The requirements of all new accounting standards and pronouncements adopted during the past year have been implemented where relevant, in particular FRS 19 ‘Deferred tax’. (b) Consolidation The consolidated accounts include the results of Greggs plc and its subsidiary undertakings for the period of 52 weeks ended 29 December 2001. The comparative period is the 52 weeks ended 30 December 2000. (c) Depreciation Depreciation is provided on the cost of tangible fixed assets before deducting government capital grants and after taking the estimated residual value into consideration. Freehold and long leasehold properties are depreciated by equal instalments over a period of 40 years. No depreciation is provided on freehold land. Depreciation of other tangible fixed assets is provided on a straight line basis as follows: Short leasehold properties Plant: General Computers Motor vehicles Delivery trays Shop fixtures and fittings: General Electronic equipment 10% 10% 20% - 331/3% 20% - 25% 331/3% 10% 20% (d) Government grants Grants received in respect of specific capital items are credited to deferred income and transferred to the profit and loss account in equal instalments over the estimated average life of the relevant fixed assets. Grants which are related to the fulfilment of certain conditions or to the expiry of a period of time are also credited to deferred income and are transferred to the profit and loss account in equal instalments over a period from the commencement of the project until these conditions are met. (e) Stocks Stocks are stated at the lower of cost and net realisable value. (f) Taxation and prior year adjustment The charge for taxation is based on the profit for the year and takes into account taxation deferred or accelerated because of timing differences between the treatment of certain items for taxation and accounting purposes. Deferred tax is recognised, without discounting, in respect of all timing differences between the treatment of certain items for taxation purposes and accounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS 19. Financial Reporting Standard 19 has been adopted for the first time and accordingly a further £8,852,000 has been included as a provision at 30 December 2000 and a charge of £2,739,000 has been included within the tax charge for that year. The movement in the current year of £1,106,000 has been charged to results for the year and included within the current tax charge. 20 (g) Goodwill Purchased goodwill arising in respect of acquisitions before 1 January 1998, when FRS 10: “Goodwill and Intangible Assets” was adopted was written off to reserves in the year of acquisition. When a subsequent disposal occurs any related goodwill previously written off to reserves is written back through the profit and loss account as part of the profit or loss on disposal. Purchased goodwill (representing the excess of the fair value of the consideration given over the fair value of the separable net assets acquired) arising in respect of acquisitions since 1 January 1998 is capitalised. Positive goodwill is amortised to nil by equal annual instalments over its estimated useful life. Negative goodwill arising in respect of acquisitions since 1 January 1998 is included within fixed assets and released to the profit and loss account in the periods in which the fair values of the non-monetary assets purchased on the same acquisition are recovered whether through depreciation or sale. (h) Leased assets Assets acquired under finance leases are capitalised and depreciated over their estimated useful lives in accordance with Group policy for owned assets. The obligation to repay the capital element of the lease is included in creditors. Finance interest is charged to the profit and loss account over the period of the lease to reflect the outstanding capital commitment. The rental costs of properties and other assets acquired under operating leases are charged to the profit and loss account on a straight line basis over the term of the lease. (i) Pension costs The Group operates defined benefit and defined contribution schemes for its employees. The assets of these funds are held by the Trustees of the schemes and are entirely separate from those of the Group. The amount charged to the profit and loss account is based on actuarial estimates and is calculated to spread the cost of pensions over employees’ working lives with the Group. (j) Financial assets and liabilities Changes in the value of financial instruments are disclosed in the notes to the accounts but are not reflected in the profit and loss account or the balance sheet. (k) Cash and liquid resources Cash, for the purposes of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts repayable on demand. Liquid resources are current asset investments which are disposable without curtailing or disrupting the business and are either readily convertible into known amounts of cash at or close to their carrying values or traded in an active market. Liquid resources comprise term deposits of less than one year (other than cash), government securities and investments in money market managed funds. GREGGS plc: annual report and accounts 2001 21 notes to the accounts 1. Turnover Turnover represents sales to customers less value added tax. The turnover arises from the Group's principal activity and relates wholly to sales within the United Kingdom. 2. Employee profit sharing scheme The total amount paid out under the Group’s employee profit sharing scheme is contained within the main cost categories as follows: Cost of sales Distribution and selling costs Administrative expenses 3. Net interest receivable /(payable) and other income / (similar charges) Interest receivable Interest payable on bank loans Interest payable on finance leases 4. Profit on ordinary activities before taxation This is stated after charging / (crediting): Depreciation on tangible fixed assets: owned held under finance leases (Profit) / loss on disposal of fixed assets Release of government grants Auditors’ remuneration: audit services non-audit fees paid to the auditor and its associates: - corporation tax compliance (2001: including £42,000 in respect of dealing with earlier years’ computations) - other taxation services - pension schemes audit - IT consultancy 2001 £’000 1,212 2,362 504 4,078 2001 £’000 1,354 (209) - 1,145 2000 £’000 922 1,942 374 3,238 2000 £’000 622 (301) (9) 312 2001 £’000 2000 £’000 14,907 14,111 - (248) (24) 84 67 26 10 25 51 222 (46) 81 20 10 8 10 Payments under operating leases – property rents 25,226 23,780 22 5. Directors’ emoluments (a) Directors’ remuneration excluding pensions Salary and Benefits Annual fees £ bonus and profit share £ £ Total 2001 £ Total 2000 £ Executives M J Darrington M Simpson Non-executives I D Gregg OBE S W Curran S I L Elkin OBE C S Gregg S Johnson OBE 267,000 178,000 10,798 11,503 82,049 359,847 340,315 54,699 244,202 231,451 71,500 20,250 21,250 7,180 20,250 - - - - - - - - - - 71,500 20,250 21,250 7,180 20,250 68,000 19,250 20,250 19,250 16,042 585,430 22,301 136,748 744,479 714,558 Further details of directors’ remuneration are shown on page 39. Details of directors’ share options are shown in note 6. (b) Directors’ pension information (i) Defined benefit scheme Accrued annual pension entitlement at age 65 as at 29 December 2001 £ Accrued annual pension entitlement at age 65 as at 30 December 2000 £ Date of birth Date service commenced 8/3/42 15/8/83 15/10/41 24/4/73 82,379 82,766 72,763 74,412 Increase in accrued pension entitlement for the year £ 7,215 5,898 Transfer values of increase in entitlement for the year £ 84,151 68,529 Executive M J Darrington M Simpson Note 1 The pension entitlement shown is that which would be paid annually on retirement based on service to the end of the year, but excluding any statutory increases which would be due after the year end. Note 2 The increase in accrued pension during the year excludes any increases for inflation. The inflation rate used is that published by the Secretary of State for Social Security in accordance with Schedule 3 of the Pension Schemes Act 1993. The inflation rate for the year to 29 December 2001 was 3.3%. (ii) Defined contribution schemes During the year contributions were made to defined contribution schemes in respect of M.J. Darrington of £67,800 (2000: £66,390) and M. Simpson of £8,900 (2000: £8,350). GREGGS plc: annual report and accounts 2001 23 notes to the accounts (continued) 6. Directors’ share interests The directors who served during the year and who were still in office at the end of the year and their interests in the share capital of the company are as follows: Ordinary shares of 20p Ordinary shares of 20p (Trustee holding with (Beneficial interest) no beneficial interest) 2001 2000 2001 2000 I D Gregg OBE (non-executive) 240,500 257,500 214,655 429,655 M J Darrington M Simpson S W Curran (non-executive) S I L Elkin OBE (non-executive) S Johnson OBE (non-executive) 70,640 80,723 3,700 900 - 70,397 214,655 214,655 77,309 243,256 243,256 3,700 900 - - - - - - - C S Gregg resigned as a director on 9 May 2001. D N D Netherton was appointed a non-executive director on 1 March 2002. The executive directors have a potential beneficial interest in the Greggs Employee Benefit Trust (note 16). The directors held options as follows: M.J. Darrington M. Simpson Number of options during year Market price Exercise at date of Gain on Date from which At 30/12/00 Granted Exercised At 29/12/01 price exercise exercise exercisable Expiry date £ £ £ 5,000 18,000 199 27,900 3,500 12,000 199 18,600 - - - - - - - - - - - - - - - - 5,000 13.55 18,000 26.875 199 20.98 27,900 17.015 3,500 13.55 12,000 26.875 199 20.98 18,600 17.015 - - - - - - - - - - - - - - - - Sep-99 Aug-03 Mar-02 Mar-06 Jun-04 Dec-04 Mar-03 Mar-07 Sep-99 Aug-03 Mar-02 Mar-06 Jun-04 Dec-04 Mar-03 Mar-07 In 2000 the aggregate gains on exercise of share options were £141,737, including £83,375 in respect of the highest paid director. As at 8 March 2002 there had been no changes since 29 December 2001 in the directors’ interests noted above. The mid-market price of a Greggs plc ordinary share on 29 December 2001 was £30.625. The mid-market high and low price during the year was £34.85 and £24.00 respectively. 24 7. Share options Contingent rights to the allotment of Ordinary Shares in the Company at future dates exist under the terms of the Company's Savings Related Share Option Scheme and its Executive Share Option Schemes. Details of these options at 29 December 2001 are as follows: Date of grant Price 2001 2000 exercisable Options outstanding at the end of the year Dates September 1993 700p 11,900 17,600 September 1996 1355p 36,812 52,500 March 1999 26871/2p 93,350 100,250 April 1999 2098p 185,128 229,153 March 2000 17011/2p 144,400 150,200 Three to ten years after September 1993 Three to ten years after September 1996 Three to seven years after March 1999 June 2004 to December 2004 Three to seven years after March 2000 Executive Share Option Scheme 4 Executive Share Option Scheme 5 Executive Share Option Scheme 6 Savings Related Share Option Scheme 4 Executive Share Option Scheme 7 8. Employees The average number of persons employed by the group (including directors) during the year was as follows: Management Administration Production Shop The aggregate payroll costs of these persons were as follows: Wages and salaries Social security costs Other pension costs 2001 No’s 585 290 2,529 12,237 15,641 2000 No’s 576 259 2,433 11,447 14,715 2001 £’000 2000 £’000 142,530 125,347 9,135 2,691 8,414 1,785 154,356 135,546 GREGGS plc: annual report and accounts 2001 25 notes to the accounts (continued) 9. Pensions (a) Defined benefit scheme The company operates a defined benefit pension scheme, the Greggs plc 1978 Retirement and Death Benefit Scheme. The scheme funds are administered by trustees and are independent of the company’s finances. Contributions are paid to the scheme in accordance with the recommendations of an independent actuarial advisor. The pension cost relating to the scheme is assessed in accordance with the advice of an independent qualified actuary using the attained age method. Actuarial valuations are carried out triennially and the latest actuarial assessment of this scheme was at 6 April 1999. The assumptions which have the most significant effect on the results of the valuation are those relating to the rate of return on investments and the rate of increase in salaries. It was assumed that the investment return would exceed salary increases by 2.0% per annum. At the date of the latest actuarial valuation, the market value of the scheme’s assets was £26,344,300. The actuarial value of the scheme’s assets represented 109% of the benefits that had accrued to members, after allowing for expected future increases in earnings. The total pension cost to the group of this scheme was £1,798,000 for the year (2000: £1,248,000). Whilst the Group continues to account for pension costs in accordance with Statement of Standard Accounting Practice 24 ‘Accounting for Pension Costs’, under FRS 17 ‘Retirement Benefits’ the following transitional disclosures are required: The actuarial valuation was updated to 29 December 2001, by an independent qualified actuary in accordance with the transitional arrangements of FRS 17. As required by FRS 17, the defined benefit liabilities have been measured using the projected unit method. The major assumptions used in this valuation were: Inflation Pension increases (LPI) Salary growth Discount rate 2.5% pa 2.5% pa 4.0% pa 5.8% pa The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions, which, due to the timescale covered, may not necessarily be borne out in practice. Scheme assets The fair value of the scheme’s assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present value of the scheme’s liabilities, which are derived from cash flow projections over long periods and thus inherently uncertain, were: Fair value of assets Composed of : Present value of liabilities Gross pension liability Related deferred tax asset Net pension liability Equities Bonds Other 8.0% pa 4.8% pa 5.3% pa £’000 20,908 7,125 6,034 £’000 34,067 (36,114) (2,047) 614 (1,433) Over the year to 29 December 2001, contributions by the company of £1,852,000 were made to the scheme. It has been agreed with the trustees that employer’s contributions for the period between 1 March 2000 and 28 February 2005 will be at the level of 7.6% of annual pensionable salary plus the cost of insuring death in service benefits and the cost of administration expenses. The scheme is now closed to new entrants and, under the method used to calculate pension costs in accordance with FRS 17, the cost as a percentage of covered pensionable payroll will tend to increase as the average age of the membership increases. The Group’s net assets, including the disclosed FRS 17 balance sheet item above, would be £102,121,000 at 29 December 2001. (b) Defined contribution schemes 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 £893,000 in the year (2000: £537,000). There were no material amounts outstanding to the schemes at the year end. 26 10. Taxation on profit on ordinary activities (a) Analysis of charge in period at 30% (2000: 30%) Current tax: Corporation tax at 30.0% (2000 30.0%) - current year - previous years Total current tax Deferred tax Origination and reversal of timing differences - current year - previous years Total deferred tax Tax on profit on ordinary activities 2001 £’000 2000 £’000 As restated 8,827 - 1,316 (210) 6,950 (2,725) 8,827 4,225 1,007 1,732 1,106 9,933 2,739 6,964 (b) Factors affecting current tax charge for period The tax assessed for the period is lower than the standard rate of corporation tax in the UK (30%). The differences are explained below: Profit on ordinary activities before tax Tax on profit on ordinary activities at UK standard rate of tax of 30% (2000:30%) Effects of: Capital allowances for period in excess of depreciation Expenses not deductible for tax purposes Lease rentals Chargeable gains rolled over Non-qualifying depreciation In respect of earlier years Other Current tax charge for period 2001 £’000 32,742 9,823 (1,316) 208 (660) (273) 789 - 256 8,827 2000 £’000 26,356 7,907 (1,258) 92 (572) (125) 716 (2,725) 190 4,225 GREGGS plc: annual report and accounts 2001 27 notes to the accounts (continued) 11. Profit attributable to Greggs plc Of the profit attributable to shareholders, £22,534,000 (2000: £18,561,000 as restated) is dealt with in the accounts of the parent company. The company has taken advantage of the exemption permitted by section 230 of the Companies Act 1985 from presenting its own profit and loss account. 12. Dividends On ordinary shares of 20p Interim paid: 21.0p (2000:16.0p) Final proposed: 44.0p (2000:39.0p) Total dividends: 65.0p (2000: 55.0p) 13. Earnings per share 2001 £’000 2000 £’000 2,477 5,186 7,663 1,832 4,590 6,422 Basic earnings per share are calculated on earnings after taxation of £22,809,000 (2000: £19,392,000 as restated) divided by the weighted average number of shares in issue for which consideration is receivable during the year 11,993,371 (2000:11,956,166). Diluted earnings per share are calculated using the same earnings as those used for basic earnings per share, and a weighted average number of shares 12,153,399 (2000: 12,044,814). This number includes 160,028 (2000: 88,648) shares being the dilutive effect of the share options in place at the year end. 28 14. Group statement of tangible fixed assets Cost At 30 December 2000 Additions Disposals Reclassification At 29 December 2001 Depreciation At 30 December 2000 Charged in year Disposals At 29 December 2001 Net book amount At 29 December 2001 At 30 December 2000 Plant and Shop fixtures Land and buildings machinery and fittings £’000 £’000 £’000 Total £’000 50,372 51,746 73,474 175,592 2,364 8,987 16,034 27,385 (666) (2,403) (7,458) (10,527) - (451) 451 - 52,070 57,879 82,501 192,450 9,511 1,291 27,232 25,564 5,982 7,634 62,307 14,907 (128) (2,183) (6,576) (8,887) 10,674 31,031 26,622 68,327 41,396 26,848 55,879 124,123 40,861 24,514 47,910 113,285 Included in land and buildings is an amount of £1,218,000 (2000: £1,218,000) in respect of freehold land which is not depreciated. Included in plant and machinery is an amount of £nil (2000: £12,000) representing assets held under finance leases. The net book amount of land and buildings comprises: Freehold property Long leasehold property Short leasehold property Shops Bakeries Other Bakeries Shops 2000 £’000 13,773 21,231 5,170 2001 £’000 15,242 20,578 4,965 £’000 40,785 149 462 41,396 £’000 40,174 158 529 40,861 GREGGS plc: annual report and accounts 2001 29 notes to the accounts (continued) 15. Parent company statement of tangible fixed assets Cost At 30 December 2000 Additions Intra group transfers Disposals Reclassification At 29 December 2001 Depreciation At 30 December 2000 Charged in year Intra group transfers Disposals At 29 December 2001 Net book amount At 29 December 2001 At 30 December 2000 Land and buildings £’000 Plant and Shop fixtures machinery and fittings £’000 £’000 Total £’000 19,695 50,424 72,032 142,151 2,248 2,215 8,987 1,855 16,034 27,269 1,930 6,000 (137) (2,403) (7,458) (9,998) - (451) 451 - 24,021 58,412 82,989 165,422 3,527 26,676 25,307 624 249 5,973 836 7,645 638 55,510 14,242 1,723 (32) (2,183) (6,577) (8,792) 4,368 31,302 27,013 62,683 19,653 27,110 55,976 102,739 16,168 23,748 46,725 86,641 Included in plant and machinery is an amount of £nil (2000: £12,000) representing assets held under finance leases. The net book amount of land and buildings comprises: 2001 £’000 7,838 6,146 5,058 £’000 19,042 149 462 19,653 2000 £’000 4,945 5,366 5,180 £’000 15,491 158 519 16,168 Freehold property Long leasehold property Short leasehold property Shops Bakeries Other Bakeries Shops 30 16. Investments Group Investments relate to shares in Greggs plc held by the trustees of the Greggs Employee Benefit Trust. This trust was established during 1988 to act as a repository of issued Company shares which can be purchased either on the exercise of an option by employees under the Greggs Executive Share Option Schemes or by the trustees of the Greggs Employee Share Scheme. The trust holds 214,655 shares in Greggs plc (2000: 214,655). These are shown in the accounts at cost of £3,563,000 (2000: £3,563,000) and have a market value at 29 December 2001 of £6,574,000 (2000: £5,152,000). The trust has registered a waiver in respect of dividends on these shares. Parent Company 2001 £'000 2000 £'000 5,828 (638) 5,190 3,563 8,753 5,828 (638) 5,190 3,563 8,753 Interest in subsidiary undertakings Shares at cost Less: Amounts written off Employee Benefit Trust The Company's subsidiary undertakings, which are all wholly owned, are as follows: Charles Bragg (Bakers) Limited Non-trading Greggs (Leasing) Limited Thurston Parfitt Limited Non-trading Dormant Greggs Properties Limited Property holding Olivers (UK) Limited Olivers (UK) Development Limited * Birketts Holdings Limited J R Birkett & Sons Limited * Greggs Trustees Limited * held indirectly Dormant Dormant Non-trading Non-trading Trustee GREGGS plc: annual report and accounts 2001 31 notes to the accounts (continued) 17. Stocks Raw materials and consumables Work in progress 18. Debtors Trade debtors Amounts owed by subsidiary undertakings Other debtors, including value added tax Prepayments and accrued income 19. Creditors: amounts falling due within one year Bank overdraft (unsecured) Loan notes Bank loan (see note 21) Trade creditors Corporation tax Other taxes and social security costs Other creditors Accruals Proposed final dividend Deferred government grants 32 2001 £’000 4,865 1,410 6,275 2001 £’000 484 - 5,383 6,539 Group 2000 £’000 4,536 1,100 5,636 Group 2000 £’000 508 Parent company 2001 £’000 4,865 1,410 6,275 2000 £’000 4,291 977 5,268 Parent company 2001 £’000 484 2000 £’000 182 - 18,331 21,093 5,909 5,476 5,383 6,539 5,728 5,359 12,406 11,893 30,737 32,362 2001 £’000 - - - Group 2000 £’000 1,140 42 2,039 Parent company 2001 £’000 - - - 2000 £’000 1,425 42 - 24,097 19,658 24,097 18,836 4,786 3,531 1,964 3,030 4,580 3,531 1,762 2,886 14,914 15,103 14,914 14,681 8,224 5,186 24 7,637 4,590 24 8,224 5,186 24 7,311 4,590 24 60,762 55,227 60,556 51,557 20. Creditors: amounts falling due after more than one year Deferred government grants 21. Financial assets and liabilities 2001 £’000 109 Group 2000 £’000 133 Parent company 2001 £’000 109 2000 £’000 133 The Group’s activities are financed by cash at bank and short term investments which comprise cash placed on deposit. The Group’s borrowings comprise a fixed rate, fixed term bank loan. 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 above there are no financial instruments, derivatives or commodity contracts used. The Group considers that the interest rate risk is not significant. For the purposes of the following disclosures, short-term debtors and creditors have been excluded, as permitted by FRS13. The Group’s financial assets comprise cash at bank. At 29 December 2001 the average interest rate earned on the closing cash balance was 3.5% (2000: 5.7%). At 29 December 2001 the Group had no financial liabilities (2000: a bank loan in the sum of £2,039,000). The Group has an overdraft facility of £10,000,000 which was undrawn at 29 December 2001 (2000: £8,860,000 undrawn). The maturity profile of the Group’s financial liabilities at 29 December 2001 was as follows: In one year or less The fair value of the Group’s other financial assets and liabilities is not materially different from their book values. 22. Provisions for liabilities and charges - deferred tax 2001 £’000 2000 £’000 - 2,039 The provision is in respect of: Accelerated capital allowances The movement in deferred tax is represented by the charge for the year. 2001 £’000 Group 2000 £’000 As restated Parent company 2001 £’000 2000 £’000 As restated 11,969 10,863 9,250 7,272 GREGGS plc: annual report and accounts 2001 33 notes to the accounts (continued) 23. Share capital Authorised: 25,000,000 ordinary shares of 20p Issued and fully paid: Number of shares: 11,984,557 16,075 12,000,632 Details of outstanding share options are given in note 7. 24. Share premium account At 30 December 2000 Premium arising on issue of shares in respect of share options At 29 December 2001 25. Profit and loss account At start of year – as originally stated Prior year adjustment – see accounting policies As restated Retained profit for the year At end of year At 30 December 2000 Issued in respect of share options At 29 December 2001 2001 £’000 2000 £’000 5,000 5,000 2,397 2,388 3 9 2,400 2,397 Group and parent company £’000 9,558 236 9,794 2001 £’000 Group 2000 £’000 As restated Parent company 2001 £’000 2000 £’000 As restated 85,066 69,357 87,011 72,133 (8,852) (6,113) (5,615) (2,876) 76,214 15,146 91,360 63,244 12,970 76,214 81,396 14,871 96,267 69,257 12,139 81,396 Cumulative goodwill written off resulting from acquisitions made prior to 1 January 1998 amounts to £3,275,000 (2000: £3,275,000). 34 26. Commitments a) Capital commitments Outstanding commitments for capital expenditure at 29 December 2001 not provided for in the accounts are as follows: Contracted for b) Operating lease commitments 2001 £’000 Group 2000 £’000 Parent company 2001 £’000 2000 £’000 2,161 1,284 2,161 1,284 At 29 December 2001 the Group and Company had annual commitments under operating leases on land and buildings as set out below: Operating leases which expire: Within one year In the second to fifth years inclusive After more than five years 2001 £’000 2000 £’000 1,213 5,882 16,690 23,785 723 5,101 14,846 20,670 The Group’s business is carried on through retail outlets which are subject to operating leases which include clauses for periodic rent reviews. The property commitments above are stated at current rents. 27. Notes to the group cash flow statement (a) Reconciliation of net cash flow to movement in net funds Increase in cash in the period Cash outflow from decrease in debt and decrease in lease financing Movement in net funds in the period Net funds at 30 December 2000 Net funds at 29 December 2001 (b) Analysis of net funds Cash in hand and at bank Bank overdraft Debt due within one year Total 2001 £’000 11,152 2,039 13,191 16,836 30,027 At 30 December 2000 £’000 Cash flow Other changes £’000 £’000 20,015 10,012 (1,140) 1,140 18,875 11,152 (2,039) 2,039 16,836 13,191 - - - - - 2000 £’000 9,983 1,953 11,936 4,900 16,836 At 29 December 2001 £’000 30,027 - 30,027 - 30,027 GREGGS plc: annual report and accounts 2001 35 corporate governance In June 1998, the Stock Exchange published the Principles of Good Governance and Code of Best Practice (“the Combined Code”) which embraces the work of the Cadbury, Greenbury and Hampel Committees. The continuing role of the Board is regularly to review the key risks inherent in the business, the operation of the system of control necessary to manage such risks and its effectiveness and satisfy itself that all reasonable steps are being taken in mitigation of these risks. The Group is committed to high standards of corporate governance. This statement describes how the relevant principles of governance are applied to the Company. The Board has complied throughout the year with the Combined Code apart from the provisions relating to the length of executive directors’ notice periods. The Board has not set as an objective the reduction of directors’ service contract periods to one year or less. The Board does not wish to reduce the service contract period below the current level of two years as it feels this is the minimum appropriate to retain the services of key executives in a competitive environment. Risk Management. The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness. However, any such system can only be designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide only reasonable and not absolute assurance against material misstatement or loss. Following publication of guidance for directors on internal control, Internal Control: Guidance for Directors on the Combined Code (the Turnbull guidance), in 2000 the Board initiated measures to consolidate and develop the existing risk management, assurance and compliance processes into a group wide system of internal control which is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. This process is regularly reviewed by the Board and accords with the guidance. The Board has reviewed the effectiveness of the system of internal control. In particular, it has reviewed and updated the process for identifying and evaluating the significant risks affecting the business and the policies and procedures by which these risks are managed. Management is responsible for the identification and evaluation of significant risks applicable to their areas of business together with the design and operation of suitable internal controls. These risks are assessed on a continual basis covering all functional areas but in particular the areas of Food Safety, Health and Safety, Information flow, Asset protection and Regulatory Requirements. In addition management is responsible for providing protection against these significant risks by various techniques, including putting in place adequate insurance cover. Management also reports to the Board on significant changes in the business and external environment which affect this risk profile. The Board has set in place a system of regular hierarchical reporting which provides for relevant details and assurances on the assessment and control of risks to be given to it. The following statements show how the Company has applied the principles of the Combined Code:- The Board and Directors Whilst the executive responsibility for the running of the Company’s business rests ultimately with the Managing Director, Mike Darrington, the Board, under the non-executive Chairmanship of Ian Gregg, meets regularly to discharge its duties. At these meetings, it reviews Group strategy, performance and matters reserved for the Board. 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. Thus the Board feels it has effectively led and controlled the Company. The Board considers that with five non-executive and two executive members the balance is suitable and complies with recommendations regarding the level of non-executives. The non-executive directors fulfil a vital role in corporate accountability. They ensure that the strategies proposed by executive directors are fully discussed and critically examined. Directors’ C.V.s Executive directors Mike Darrington, 60, qualified as a Chartered Accountant and then spent 17 years with United Biscuits, latterly in General Management. During this time he attended the PMD course at Harvard Business School. He joined Greggs in 1983 and was appointed Managing Director in January 1984. Malcolm Simpson, 60, qualified as a Chartered Accountant with what is now KPMG and then worked for eight years within the finance department of Procter and Gamble Limited. He joined the Company in 1973 and was appointed Financial Director in 1975. Non-executive directors Ian Gregg OBE, 62, Chairman, qualified as a solicitor before joining the Company as Executive Chairman and Managing Director on the death of his father in 1964. He built the business up from a single- shop operation to a multi-divisional specialist retailer with almost 300 shops by the time of its successful flotation in 1984. Following the appointment of Mike Darrington in January 1984, Ian continued in the role of Executive Chairman until July 1993. He was then invited to become non-executive Chairman in order that the Board could avail itself of his unequalled experience of both the industry and the Company. 36 Stephen Curran, 58, joined the Board in 1981. He was appointed Chairman of Candover Investments plc in May 1999, having previously been Chief Executive of Candover since January 1991. Prior to joining Candover in May 1981, he was a managing consultant with Coopers & Lybrand Associates and then an investment manager with what is now Cinven. He is a non-executive director of Jarvis Hotels plc and a number of unquoted companies. Sonia Elkin OBE, 69, is a former CBI Director, responsible for its Regional organisation and policy in relation to Smaller Firms. She was a Commissioner of the Manpower Services Commission and served on a DTI committee on deregulation. She is a member of the Review Committee of the Institute of Chartered Accountants. She joined the Board in 1992, is Chairman of the Audit Committee and has been appointed the senior independent non-executive. Susan Johnson OBE, 44, was appointed to the Board in March 2000. She obtained an MBA in 1993 after which she pursued a career in sales and marketing before being appointed as Chief Executive of the Northern Business Forum. She is now an Executive Director of Yorkshire Forward. Derek Netherton, 57, spent his career in investment banking and retired in 1996 as joint head of corporate finance at J Henry Schroder & Co. He is a non-executive director of Next plc, Hiscox plc, St James’s Place Capital plc, Plantation and General Investments plc, Schroder Property Investment Management Limited and Life Assurance Holding & Corporation Limited. After carefully considering the guidance in the Combined Code, all of the non-executive directors are considered to be independent of management and free from any business or other relationship which would materially interfere with the exercise of their independent judgement. To facilitate the effective administration of the Group’s affairs, the Board has established sub-committees as follows: The Audit Committee consists of three non-executive directors (Miss S.I.L. Elkin OBE – Chairman, Mrs. S. Johnson and Mr. S.W. Curran). It meets twice a year and, as its main function, reviews the annual and interim financial statements issued to shareholders, compliance with financial reporting standards, internal financial controls, the scope of the external audit and the report of the auditors. The Remuneration Committee consists entirely of non-executive directors (Mr. I.D. Gregg OBE – Chairman, Mr. S.W. Curran and Miss S.I.L.Elkin OBE). Its main duties are to review and make recommendations to the Board on the basic salary, benefits in kind, terms and conditions of employment including performance-related bonuses, share options and pension benefits of executive directors. In order to assist with these duties the Committee has used the services of a leading specialist consultancy. The Board report on directors’ remuneration is included on page 39 of this Annual Report. This provides an indication of how the principles of the Combined Code have been applied. The Nominations Committee comprises Mr. I.D. Gregg - Chairman, Mr. M.J. Darrington - Managing Director and Miss S.I.L. Elkin OBE. Its duty is to ensure that there is a formal and transparent procedure for the appointment of new directors and the reappointment of existing directors to the Board. Going concern. After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. Relations with shareholders. There is regular dialogue with individual institutional shareholders as well as general presentations after the interim and preliminary results. The directors believe that the Annual General Meeting provides an excellent forum for communication with investors with the Chairman of the Board and its sub-committees available to answer any issues raised. At the Annual General Meeting the balance of proxy votes cast for or against each resolution are indicated after it has been dealt with on a show of hands. All substantial issues including the adoption of the annual report and accounts are proposed at the Annual General Meeting as separate resolutions. The Company intends to comply with the Combined Code and give 20 working days notice of the Annual General Meeting. Accountability and audit. The Board acknowledges its responsibility to present a balanced and understandable assessment of the Company’s position and prospects. This is fulfilled by the statements contained in the Managing Director’s and Chairman’s statements which supplement the statutory accounts themselves. The procedures regarding internal controls and the operation of the Audit Committee are outlined above. The Company has now implemented a full time internal audit function following its periodic review of the need for such a function during the year. This is in order to further improve its monitoring of systems of control and augment the examination carried out by external audit. The Audit Committee is satisfied that the Company’s auditors, KPMG Audit Plc continue to be objective and independent of the Company. KPMG Audit Plc does perform non audit services for the Group but the Audit Committee is satisfied that its objectivity is not impaired by such work. A statement of directors’ responsibilities in respect of the preparation of accounts is given on page 14. GREGGS plc: annual report and accounts 2001 37 corporate social responsibility Greggs’ culture and values are built upon a foundation of an awareness of its social responsibility. It is committed to making a positive difference for its customers, its employees and for the wider communities in which it operates. Greggs plc has a set of aspirational values which are the basis for everything from operational activity to policy production, contained within the statement that:- “We will be enthusiastic and supportive in all that we do, open, honest and appreciative, treating everyone with fairness, consideration and respect.” Examples of how these values are put into practice outside the company’s core business activities include: • A group of dedicated staff work together for the benefit of the community by organising the major annual fun run sponsored by Greggs of Gosforth in aid of children’s cancer research. This has raised well over £2 million since its inception in 1983. • On a nationwide basis, Greggs is a member of the “Per Cent” Club and made charitable donations of £327,000 in 2001, the bulk of which was directed through the Greggs Trust. • The Greggs Breakfast Club scheme is designed to get children in selected primary schools off to a better start by providing them with free breakfasts. Greggs funds all of the food, including providing fresh bread from the local Greggs shop, together with the necessary equipment. Under the now well established model, Greggs staff work with school teachers to encourage parents, grandparents and others to run the clubs, including serving the breakfasts, thereby helping them to help others in their own communities. There are already 20 Greggs Breakfast Clubs in the North and Midlands and it is intended that this will increase over time. The concept has been validated by external independent research, which has shown that breakfast club attendance encourages children to get to school on time and increases attentiveness in class. • Many staff fund raising activities, such as Bakery open days, direct the proceeds to the Greggs Trust. The main objective of Greggs Trust (a registered charity, founded by Ian Gregg in 1987), is the alleviation of the effects of poverty and social deprivation in the areas where the Company trades. Its income in 2001 was £532,787, derived partly from the Greggs plc donation, the staff fund-raising initiatives, and donations received from employees under Give As You Earn (the payroll giving scheme). The balance was from donations from major shareholders and income from investments (including shares in Greggs plc) held by the Trust. Funds are distributed by the Trustees and via the 13 Charity Committees operating across the country offering support to good causes within our trading areas. • The Company’s investment of £500,000 in 2000 in the Newcastle Employment Bond for a five year period, which is secured as to repayment by Northern Rock plc. This investment is at zero rate of interest. The purpose of the investment is for all the interest foregone to be used to help tackle long term unemployment in the Newcastle area. Although Greggs provides funding and makes time available for its staff to become engaged in these community activities, the real credit is due to the staff themselves, at all levels, for their voluntary commitment and for the inestimable benefit of what they achieve in Greggs’ name. The community is not just the people that live in it, but also the environment in which they live. Greggs believes that its operations should have the minimum adverse impact on the environment consistent with its long-term business objectives. This is endorsed by the Main and Management Boards. To this end we have undertaken a review of our position and are currently working on identifying and spreading Greggs’ best practice and setting targets for the reduction in adverse environmental impact, including the levels of waste and energy usage. 38 report of the board on directors’ remuneration Introduction Long-Term Incentive Schemes The Board is pleased to present this report to shareholders for the 52 week period ended 29 December 2001. The remuneration packages of the executive directors are determined, on behalf of the Board, by the Remuneration Committee, consisting of three non-executive directors, Mr. S.W. Curran, Miss S.I.L. Elkin OBE and myself as Chairman. None of the Committee members have a personal financial interest, other than as shareholders, in the matters to be decided. There are no conflicts of interest arising from cross- directorships and no day-to-day involvement in the running of the business. The remuneration of the executive directors consists of a basic salary, benefits in-kind, an annual performance-related bonus, profit share, long-term incentive schemes and a contribution to Company pension schemes. Details of the amounts of each element are set out in notes 5 and 6 to the accounts. The Company operates both Inland Revenue approved and unapproved long-term share incentive schemes to encourage the executive directors and employees to hold shares in the Company and to enhance share values. In accordance with the Joint Statement from the Investment Committees of the Association of British Insurers and the National Association of Pension Funds, the total number of shares on which the Company may grant options is limited and the directors have chosen to allocate most of the number available to S.A.Y.E. schemes open to all employees. This has restricted the number of shares available to be allocated under the Senior Executive Share Option Scheme. This has been in existence since 1987 and the last grant of options was made in 1999. Options have been granted on a discretionary basis to senior executives and managers, as well as to executive directors. The Savings Related Share Option Schemes are an all-employee arrangement, including executive directors. The remuneration of the non-executive directors is determined by the executive directors. Pensions Objectives The aim of the Committee is to ensure that the Company has competitive remuneration packages in place, in order best to serve the interests of the Company, the shareholders and employees. In order to assist in meeting this aim on an informed basis, the Committee commissioned a report by an independent consultant in 1998. Salaries Base salary reflects job responsibilities, their market value and the level of individual performance. The Company sets base salaries around the upper quartile relative to comparator companies, reflecting the level of its achievements over a sustained period and its desire to retain these for the future. Mr. M.J. Darrington and Mr. M. Simpson are members of the Greggs 1978 Retirement and Death Benefit Scheme and, in accordance with the Combined Code recommendations, only their basic salary is pensionable. The scheme, which requires a contribution of 5.7% of pensionable salary from members, provides for up to two-thirds of final pensionable salary, dependent on length of service. Mr. M.J. Darrington is the sole member of the Greggs Bakeries (MJD) Retirement Benefit Scheme which is a defined contribution scheme, the cost of which is met by the Company. Mr. M. Simpson is a member of the Greggs Senior Executive Pension Scheme which is a defined contribution scheme. The Company contributes 5% of basic salary to the Scheme and members may also make contributions. Benefits in Kind Service contracts These are the use of a company car, private medical cover and permanent health insurance. Annual Bonus The annual bonus is directly determined by reference to the level of achieved net profit before tax in relation to the budget approved by the Board. The relationship between level of bonus and variance from budget is set by the Remuneration Committee. Mr M.J. Darrington and Mr. M. Simpson have service contracts which are terminable by the Company on two years’ notice, this being the minimum considered appropriate by the Board to retain the services of key executives in a competitive environment, or by the individual on not less than six months’ notice. Profit Share The executive directors participate in the overall Company Profit Share Scheme, in which 10% of Company profits are distributed half-yearly to all employees on a formula related to service and salary level. This profit share can be taken in the form of shares in the Company purchased by the Trustees of the Employee Share Scheme. On behalf of the Board of Greggs plc I.D. GREGG OBE Chairman of the Board 8 March 2002 GREGGS plc: annual report and accounts 2001 39 10 year history 1992 1993 1994 1995 1996 1997 1998 1999 2000 (as restated) 2001 Turnover (£'000) 100,990 110,426 167,851 219,514 238,465 265,941 291,420 308,678 339,008 377,556 Profit on ordinary activities before taxation (£'000) Shareholders' funds (£'000) Earnings per share (pence) Adjusted earnings per share (pence) Dividend per share (pence) Cash generated by operations (£'000) (before dividends, tax and capital expenditure) Capital expenditure (£'000) Acquisition of Baker's Oven (£'000) Number of shops in operation at year end 6,967 9,019 12,017 13,056 15,673 18,035 20,214 21,520 26,356 32,742 26,314 30,475 36,591 41,219 48,107 58,384 69,585 80,896 88,169 103,554 40.6 53.0 71.0 79.0 95.8 121.1 122.8 135.1 162.3 190.2 40.6 53.0 71.0 79.0 95.8 111.2 122.8 135.1 162.3 190.2 15.0 18.0 23.0 26.0 32.0 37.0 41.0 45.0 55.0 65.0 11,466 14,670 25,251 20,838 24,955 30,408 34,902 34,526 43,431 50,418 5,046 5,643 15,008 11,931 15,669 24,364 26,204 22,403 21,397 27,385 - - 19,547 - - - - - - - 485 499 930 967 1,032 1,057 1,072 1,084 1,105 1,144 DIRECTORS Ian Gregg OBE (Non-executive chairman)†ø Mike Darrington FCA (Managing)ø Malcolm Simpson FCA (Financial) Steven Curran FCCA (Non-executive)*† Sonia Elkin OBE (Non-executive)*†ø Susan Johnson OBE (Non-executive)* Derek Netherton (Non-executive) *Member of Audit Committee †Member of Remuneration Committee øMember of Nominations Committee SECRETARY AND REGISTERED OFFICE Andrew John Davison, Solicitor Fernwood House Clayton Road Jesmond Newcastle upon Tyne NE2 1TL 40 Bankers Stockbrokers National Westminster Bank Plc Warburg Dillon Read 149 High Street Gosforth Newcastle upon Tyne NE3 1HA Merchant Bankers SG Hambros Corporate Finance Advisory 41 Tower Hill London EC3N 4SG Auditors KPMG Audit Plc Quayside House 110 Quayside 1 Finsbury Avenue London EC2M 2PA Brewin Dolphin Securities Ltd Commercial Union House 39 Pilgrim Street Newcastle upon Tyne NE1 6RQ Solicitors Eversheds Central Square South Orchard Street Newcastle upon Tyne NE1 3XX Registrars Capital IRG plc Bourne House Newcastle upon Tyne 34 Beckenham Road NE1 3DX Beckenham Kent BR3 4TU nationwide coverage BIRKETTS G R E G G S S H O P N U M B E R S Scotland Gosforth Birketts Yorkshire North West Midlands Treforest Enfield Twickenham TOTAL 2 0 0 1 118 112 50 102 120 119 81 95 108 905 2 0 0 0 115 109 51 98 115 109 73 88 100 858 B A K E R S O V E N S H O P N U M B E R S Scotland North Midlands South TOTAL 2 0 0 1 33 51 88 67 239 2 0 0 0 37 51 89 70 247 TOTAL GROUP 2 0 0 1 1,144 2 0 0 0 1,105 GREGGS plc: annual report and accounts 2001 41 Greggs plc, Fernwood House, Clayton Road, Jesmond, Newcastle upon Tyne NE2 1TL. www.greggs.co.uk 

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