Greggs
Annual Report 2004

Plain-text annual report

Baked-in flavour A N N U A L R E P O R T & A C C O U N T S 2 0 0 4 Fernwood House, Clayton Road, Jesmond, Newcastle upon Tyne NE2 1TL. www.greggs.co.uk G R E G G S p l c A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Financial Highlights Turnover Pre-tax profits Post-tax profits Shareholders’ funds Capital expenditure Earnings per share Dividend per ordinary share 2004 £’m 504.2 46.7 31.6 157.2 25.0 Pence 264.7 96.0 *As restated following adoption of UITF 38 Financial calendar Announcement of results and dividends Half year Full year Dividends Interim Final Annual report posted to shareholders Annual General Meeting 2003* £’m 457.0 40.5 27.2 134.2 32.4 Pence 230.5 80.0 Early August Early March Mid October Late May Early April 17 May 2005 EPS DIVIDEND Pence 270 260 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 50 51 Nationwide Coverage GREGGS BAKERS OVEN SHOP NUMBERS 2004 2003 SHOP NUMBERS 2004 2003 Scotland North East Cumbria Yorkshire North West Midlands South Wales South East GREGGS 139 114 49 119 129 144 102 249 133 108 50 116 125 137 99 239 Bakers Oven Scotland Bakers Oven North Bakers Oven Midlands Bakers Oven South 19 48 84 63 25 49 84 64 BAKERS OVEN 214 222 Greggs Belgium 4 2 1,045 1,007 TOTAL 1,263 1,231 Contents Contents 2 FINANCIAL REVIEW 5 9 CHAIRMAN’S STATEMENT MANAGING DIRECTOR’S REPORT 16 DIRECTORS’ REPORT 19 STATEMENT OF DIRECTORS’ RESPONSIBILITIES 20 REPORT OF THE INDEPENDENT AUDITORS 22 GROUP PROFIT & LOSS ACCOUNT 23 GROUP BALANCE SHEET 24 PARENT COMPANY BALANCE SHEET 25 GROUP CASH FLOW STATEMENT 26 ACCOUNTING POLICIES 28 NOTES TO THE ACCOUNTS 42 DIRECTORS’ REMUNERATION REPORT 46 CORPORATE GOVERNANCE 49 CORPORATE SOCIAL RESPONSIBILITY 50 TEN YEAR HISTORY 50 DIRECTORS & ADVISERS 51 SHOP ALLOCATION GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 2 3 Mission, vision and values. Our Business. Greggs plc is the UK’s leading retailer specialising in sandwiches, Enjoyable Experience: we will deliver customer satisfaction by offering great-tasting food at unbeatable value to the highest standards of food safety. This will be achieved from shops that provide friendly and savouries and other bakery-related products, with a particular focus on efficient service in attractive surroundings. takeaway food and catering. We continue to show significant growth and now have over 1,250 retail outlets, trading under the Greggs and Bakers Oven brands. Our Vision and Purpose. Business Excellence: our people will seek continuous improvement in their areas of responsibility, enabling them to make a real and lasting contribution to the objectives of the Company. Challenging Targets: we will strive to achieve a turnover of £1 billion Our vision is to be Europe’s finest bakery-related retailer. Our purpose by 2010 through continued core growth and the acquisition of new is the growth and development of a thriving business, operating with units, taking us to over 1,700 shops. integrity, for the benefit and enjoyment of our people, customers, shareholders and the wider community. Our Strategy. Our people will be enabled, within overall guidance from the centre, to work towards the successful attainment of world-class standards. To achieve this, the focus will be on: Caring for the Community: our continued emphasis on social responsibility will encourage even greater involvement in local charity activities and social projects, and a growing focus on protecting the environment. Our Values. As a people-focused business, we aim to be enthusiastic and supportive A Great Place to Work: we will place major emphasis on promoting in all that we do, open, honest and appreciative, and to treat everyone a culture that encourages personal development, leadership qualities with fairness, consideration and respect. and creativity. This will be supported by working conditions that meet the needs of our present and future people. Our Culture. We are achievers! Working hard in a friendly and informal way, where everyone matters. All of our sandwiches are made fresh on the day, using freshly made bread, direct from our own bakeries. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 4 5 Chairman’s Statement Tasty. Derek Netherton Chairman I am pleased to report another year of good progress, based on our proven business strategy and values. Both our brands achieved healthy like-for-like sales growth, contributing to improved operating margins, while costs were again well controlled. This enabled the Group to deliver its thirteenth consecutive year of profit, earnings and dividend growth. Results Dividend The 2004 financial year comprised the 53 weeks to 1 January 2005 The Board recommends a final dividend of 66.0 pence per share (2003: 52 weeks to 27 December 2003). Total Group sales (2003: 54.5 pence). Together with the increased interim dividend for the period increased by 10.3 per cent to £504 million of 30.0 pence, paid in October 2004, this makes a total for the (2003: £457 million). Adjusted to a comparable 52 week basis, year of 96.0 pence (2003: 80.0 pence), a rise of 20.0 per cent. the total sales increase would have been 8.4 per cent. Operating profit grew by 14.0 per cent to £44.7 million (2003: £39.2 million), with a 0.3 percentage point improvement in operating margin reflecting our core volume growth and effective cost management. This more than offset continuing pressure from increasing wage costs. Because of shop holiday closures, inclusion of the 53rd week had a small negative impact on operating profit. After increased net interest receivable of £2.0 million (2003: £1.3 million), pre-tax profit rose by 15.3 per cent to £46.7 million (2003: £40.5 million). Basic earnings per share grew by 14.8 per cent to 264.7 pence (2003: 230.5 pence). Net cash in the balance sheet at the year end was £62.6 million, compared with £36.4 million at the end of 2003. We have increased our dividends to shareholders every year since the company floated in 1984, and the compound rate of growth over this period has been 18 per cent per annum. The Board is committed to a progressive dividend policy and, in view of the Company’s consistently strong cash generation, believes that it is likely that dividends will grow faster than earnings over the next few years. Subject to the approval of the Annual General Meeting, the final dividend will be paid on 27 May 2005 to shareholders on the register at 29 April 2005. Sometimes it’s nice to indulge in pure pleasure and we are proud to have harnessed best practice from across our regional divisions to create the ultimate doughnut. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 6 7 Chairman’s Statement continued Sweet. Business highlights People Our sustained success in the bakery-related takeaway food market The business depends on all our people working together to deliver reflects our clear, specialist focus and further improvements in our great products and excellent customer service each day. Our good products, shops and service. These have been complemented by results testify once more to the strength of their individual commitment successful, national brand marketing initiatives which are helping us and the effectiveness of their teamwork. On behalf of the Board, to achieve growing customer awareness of our consistent quality and I would like to express our thanks for all that they have achieved value. We also benefited from more favourable weather patterns during the year. over the year as a whole. Mike Darrington provides a more detailed commentary on these and other trading and business development Prospects issues in his Managing Director’s Report on pages 9 - 15. During 2005 we plan to accelerate both the opening of new shops The Board and the refurbishment of established outlets. We will be supporting this retail development with substantial investment in our manufacturing Julie Baddeley, 53, joined the Board as an additional Independent facilities, including the construction of a new savouries plant in Non-Executive Director on 1 March 2005, and has also become Newcastle upon Tyne. As a result, capital expenditure is budgeted a member of the Board’s Audit, Remuneration and Nominations to rise to nearly £50 million for the year. Committees. Julie is a non-executive director of Yorkshire Building Society, Computerland UK and the Pension Client Group within the Government’s Department of Work and Pensions. She previously held senior executive roles at Accenture, Sema Consulting and Woolwich plc, where she was a main board director responsible for Information Technology and Human Resources. Her extensive experience in these areas complements the existing strengths and skills of the Board, and is expected to enable her to make a valuable contribution to our discussions. Trading in the current year has started satisfactorily, with like-for-like sales in the year to date increasing by 5.2 per cent. Selling price inflation, which was 2.4 per cent at the end of 2004, is expected to trend upwards as we seek to recover further substantial increases in wage costs. We also face a significant rise in energy costs in the second half, following the end of our current long-term supply agreement. Despite these pressures, I believe that the Group is well equipped to make further progress during the year. Derek Netherton Chairman 14 March 2005 At Greggs we aim to source the very best ingredients to ensure our customers enjoy the highest quality products. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 8 9 The growth of Greggs has been based on the quality of our business ingredients. These include a proven strategy, enjoyable products, strong brands and a commitment to giving customers great service and good value. Our most important ingredient of all is our excellent team of people. Once again they have been a pleasure to work with over the year, and have delivered results ahead of expectations. Sir Michael Darrington Managing Director Managing Director’s Report Healthy. Trading performance Our good progress during 2004 reflects the benefits of increasing volume uplift of 3.7 per cent. The like-for-like sales increase for the core volumes through our established shops, the addition of a net year as a whole was 5.1 per cent, including core volume growth 32 new units and our continued focus on controlling costs. After a of 2.9 per cent. slow start like-for-like sales growth improved during the late spring and summer, when our performance compared with a period of exceptionally hot weather in 2003. Although progress then returned to more normal levels, a good consumer response to our marketing campaigns and generally favourable weather helped us to achieve better than expected like-for-like sales growth in the final quarter, despite the widely reported weakness of high street retailing over the Christmas period. After a like-for-like sales increase of 4.1 per cent in the first half (24 weeks), which included core volume growth of 2.0 per cent, performance improved in the second half (29 weeks), when we achieved like-for-like sales growth of 6.0 per cent, including a core Our selling price inflation was 2.1 per cent in the first half and 2.3 per cent in the second, averaging 2.2 per cent for the year. This again reflected a continuing programme of product upgrades as well as the recovery of significant cost increases. The most important of these was in wages, as we responded to market pressures throughout the retail sector and sought to ensure that our remuneration would continue to attract and retain high quality people. Including the benefit of new shop openings in the current and prior year, total sales rose by 10.3 per cent, comprising increases of 7.5 per cent in the first half and 12.6 per cent in the second, which this year included the benefit of a 53rd trading week. The latest Bakers Oven shop design reinforces the brand’s core values and is driving significant sales growth. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 10 11 Fresh. Managing Director’s Report continued Bakers Oven brand As the Chairman has noted, inclusion of the 53rd week actually had The four Bakers Oven divisions showed a very good improvement a small negative effect on operating profit, which nevertheless rose in both their like-for-like sales performance and their contribution to by 14.0 per cent to £44.7 million as operating margin benefited from Group profits. Like-for-like sales for the year grew by 6.3 per cent, our higher volume throughput. Including the benefit of increased including a core volume increase of 4.8 per cent. The brand interest receivable on our growing average cash balances, pre-tax enjoyed a good first half, in which like-for-like sales grew by 5.0 per profit improved by 15.3 per cent to £46.7 million. cent and core volumes by 3.9 per cent. Growth accelerated in the Greggs brand UK second half, which produced a like-for-like sales increase of 7.2 per cent including a core volume gain of 5.5 per cent. Selling price The nine Greggs divisions in the UK represent more than 80 per cent inflation over the year was below the Group average at 1.5 per of our retail portfolio and naturally remain the major contributor to cent, reflecting our successful initiatives to enhance consumer Group profits. Like-for-like sales for the year grew by 4.9 per cent, perceptions of the brand’s value credentials, notably in sandwiches. including core volume growth of 2.4 per cent. This comprised a like-for-like increase of 3.8 per cent in the first half and 5.7 per cent in the second, including core volume gains of 1.4 per cent and 3.2 per cent respectively. The improved performance of Bakers Oven follows the appointment of a new managing director and a strengthening of the senior team last year. The management team has taken determined action to drive sales through improvements in the product offer, The improvement in like-for-like sales performance was assisted by service standards and retail environment. It has also addressed areas a major brand re-launch in April, with the introduction of an updated of past underperformance, notably through the rationalisation of the identity designed to re-emphasise our heritage as a baker. This featured retail chain in Scotland. in point of sale material and in-shop promotions, and was backed by a major media campaign that included TV advertising in most of our regions, using the slogan ‘It’s the way we bake it that makes it’. This is helping us to achieve growing national awareness of Greggs as the leading brand in the bakery arena, including takeaway food. We are particularly pleased that this improvement in profitability is broad based, encompassing all four Bakers Oven divisions. Greggs Continental Europe We opened additional shops in Antwerp and Leuven during the All divisions made pleasing progress during the year. year, giving us two in each city and a total of four in Belgium. We continue to refine and develop our product range as the learning process continues. Our savoury products are at the core of our business, they are a vital part of our brand difference and they continue to be our strongest-growing category. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 12 13 Savoury. Managing Director’s Report continued Retail profile Product profile We opened a total of 56 new shops during the year and closed 24, Sales growth under both our brands continued to be driven including 10 which were re-sited in better locations. This produced predominantly by the takeaway food categories of savouries and a net increase of 32 shops to a total of 1,263 at the year end. At the sandwiches. Savouries showed the strongest growth, though beginning of 2005 we had 1,045 units under the Greggs brand in sandwiches also made good progress, benefiting from the Greggs the UK, a net addition of 38; four under the Greggs fascia in Belgium, brand relaunch and improvements to the Bakers Oven range. a net addition of two; and 214 under the Bakers Oven brand, a net Cakes and confectionery products continued to generate modest reduction of eight. We completed 24 comprehensive shop like-for-like sales growth. The traditional bakery staples of bread and refurbishments and 8 minor refits during the year. rolls continued their long term decline as a proportion of our sales, Further work was undertaken to refine the new Greggs shop format, with the aim of reinforcing our credentials as a baker, softening some aspects of its takeaway orientation and reducing the costs of though we believe that their quality and their presence in our shops is an important contributor both to the success of our sandwich ranges and to positive consumer perceptions of our entire offer. its implementation. Investment in shop refurbishments was Enjoyability and customer choice remain key criteria in our approach deliberately restrained as this process continued. Although some to product development. We have continued to widen the ‘Lifestyle work remains to be done, I am pleased to report that the results Choice’ range of healthier-eating sandwiches and wraps, and are of our latest trials have been sufficiently encouraging to permit a seeing a gradual and progressive improvement in sales. significant acceleration of the refurbishment programme in the current year, when we expect to refit some 60 shops. Strategic principles We also plan to increase the pace of new shop openings in 2005, and expect to add a net 45 shops to our chains during the year. Although these will predominantly be under the Greggs brand in the UK, we also plan a number of openings for Bakers Oven and the addition of two further shops in Belgium. We attach great importance to the Mission, Vision and Values statement set out on page 3, and have continued to make progress in all key areas. Managing Director’s Report continued ‘A Great Place to Work’. Greggs began as a small family bakery and best practice. The adoption of EFQM total quality management we have always striven to maintain the ethos of a caring business that standards has helped us in the process of systematically targeting, puts its people first. By treating our people correctly, we aim to benchmarking and measuring progress, by facilitating self-assessment ensure that they will treat customers well and help us to deliver good and the identification of critical areas for improvement. results for the benefit of all our stakeholders. We have borne a substantial increase in our wage bill to ensure that we can continue to recruit and retain high quality staff, particularly in our shops. We are also seeking to improve the working environment for all our people through investment in improved staff facilities in our shops and bakeries, and the progressive upgrading of our offices. During the year we undertook an extensive consultation exercise to develop a new statement of our culture, in words with which everyone in the Group can identify. This underlines our commitment to treating all our people in a friendly and informal way. While we are committed to hard work and achievement, we also want everyone to know that they matter and to enjoy what they do. ‘Challenging Targets’. Our growth has always been based on setting and attaining stretching targets. Since 1998 we have had a published goal of expanding the Group to achieve sales of £1 billion through 1,700 shops by 2010. As I noted last year, our planned growth has been constrained by our search for the right formula to permit us to drive expansion of the Bakers Oven chain. Latterly we had also slowed the Greggs shop opening programme as we focused on refining and developing its new concept. I am pleased that we are now in a position to accelerate our retail expansion and look forward to making more rapid progress towards our targets in the current year and beyond. In the longer term, I remain confident that there is significant further potential for the Group, with scope for at least ‘Enjoyable Experience’. Our business is all about producing tasty 2,000 shops under our existing brands in the UK and additional fresh food for daily purchase. Customers will only return to us day opportunities on the Continent. after day if we provide them with something that gives them real pleasure and satisfaction. The consistent focus of our investment in product development is therefore on making everything we sell even more enjoyable. We are aided in this by the substantial resources available in our state-of-the-art Group Technical Centre in Newcastle upon Tyne, where our technologists and chefs are also applying themselves to the reduction of salt and fat in our products, in line with Government guidelines. We are strongly committed to the principle of customer choice, and lower fat alternatives to a number of our key lines are currently under trial. The facilities at the Group Technical Centre for the rapid microbiological testing of ingredients and products are also helping us to ensure the highest standards of food safety. ‘Caring for the Community’. We remain strongly committed to making a contribution to the communities where we operate, particularly in areas of social deprivation. The Greggs Breakfast Clubs in selected primary schools have proved of real value in improving pupils’ attendance and concentration in the morning, as well as encouraging family involvement in their children’s schools. We have expanded the Clubs to 82 locations and expect to have 120 in operation by the end of 2005. Their development has been aided by the recruitment of a new Community Initiatives Manager, who also works closely with Greggs Trust. The Trust is our principal channel for the distribution of the Group’s charitable donations, which last year totalled £615,000 (2003: £420,000), in line with our ‘Business Excellence’. We are determined to achieve continuous commitment as a founder member of the ‘Per Cent’ Club. We gave improvement in every area of our business by simplifying what we £100,000 to the DEC appeal after the horrific Asian tsunami and do and ensuring that all our people understand our corporate I am pleased to report that this Group donation has been more objectives and how they can help to realise them. Great emphasis than matched by the fund-raising efforts of our staff. We also remain is placed on effective two-way communication with everyone in the an active supporter of Business in the Community. Group and on continuously raising standards through the sharing of GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 14 15 Our commitment to corporate social responsibility extends to ensuring proper care for the environment, and we have continued to pursue a range of initiatives to reduce our environmental impact by promoting efficient energy utilisation, maximising the recycling of packaging and minimising waste. Capital investment People We have an excellent team, which it is a real privilege to lead. I am glad to report that our genuine commitment to our people is fully matched by their commitment to doing an excellent job. Thus once again it is a great pleasure to be able to thank all our 18,240 employees for their individual contributions to another record result for the Group. Capital expenditure during the year totalled £25.0 million, compared I am also delighted to welcome the 335 additional staff we were with our original budget of £34.0 million and actual expenditure of able to recruit through our continued expansion in 2004, and look £32.4 million in the prior year. This reduction principally reflected a forward to the creation of a further 650 jobs in the current year. lower number of shop refurbishments than we had originally expected. In total we spent £13.4 million (2003: £14.3 million) on new shops The future and refurbishments, £8.3 million (2003: £13.8 million) on land, As the Chairman has noted, the Group faces significant pressures buildings and plant, and £3.3 million (2003: £4.3 million) on vehicles. from rising wage and energy costs during 2005. The challenge to us Expenditure on major bakery projects was at a lower level than in 2003, as managers is to absorb these increases while accelerating our shop though we completed extensions of our facilities in Leeds and Edinburgh. refurbishment and opening programmes and continuing to enhance During 2005 we expect a major increase in capital expenditure to nearly £50 million. This reflects the acceleration of our shop refurbishment and opening programmes, together with increased investment in our manufacturing and distribution facilities to support our products, service and marketing. I am confident that we have the right team in place to handle all these issues successfully, and to deliver a year of further progress towards our strategic targets and our vision of being Europe’s finest bakery-related retailer. the growth of our retail chains. The largest such project is the Sir Michael Darrington construction of a second central savouries facility at Balliol Park, Newcastle upon Tyne, close to the original factory we opened in Managing Director 14 March 2005 1998 and employing the same, proven technologies and processes. This will involve a total investment of £13 million over the next two years, and will enable us to meet growing demand for our successful savouries ranges under both the Greggs and Bakers Oven brands. Cash flow and balance sheet Our strong operating cash flow combined with lower than expected capital expenditure resulted in an increase in net cash on the balance sheet to £62.6 million at the year end. This compared with £36.4 million in December 2003, and £46.7 million at the end of our first half in June 2004. Directors’ Report The directors have pleasure in presenting their annual report and the audited accounts for the 53 weeks ended 1 January 2005. The comparative period is the 52 weeks ended 27 December 2003. Principal activity The principal activity of the Group is the retailing of sandwiches, savouries and other bakery related products with a particular focus 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 (as defined in the Companies Act 1985) at 1 January 2005 and 27 December 2003 (or at date of appointment if later) are set out in note 6 to the accounts. Details of directors’ share options are set out in the Directors’ on takeaway food and catering. The majority of products sold are Remuneration Report on pages 42 to 45. manufactured in house. Results and dividends Sales for the financial period (excluding VAT) were £504,186,000, an increase of £47,208,000, or 10.3% over the previous financial year. Group profit before taxation amounted to £46,702,000, On 11 May 2004, Sonia Elkin retired as a non-executive director. On 1 March 2005, Julie Baddeley was appointed a non-executive director. Trustee holdings of ordinary shares with no beneficial interest include 138,439 shares held by the Greggs Employee Benefit Trust of which an increase of 15.3% over the previous financial year. certain directors are trustees. An interim dividend of 30p per ordinary share was paid on 1 October 2004 and the directors propose a final dividend of 66p payable on 27 May 2005, leaving profit for the financial year to be retained of £20,063,000 (2003: £17,761,000). Business review In accordance with the Company’s Articles of Association, Stephen Curran, Ian Gregg, Susan Johnson, Derek Netherton and Malcolm Simpson retire from the Board and, being eligible, offer themselves for re-election. Having been appointed since the last Annual General Meeting, Julie Baddeley retires from the Board and, being eligible, offers herself for re-election. A review of the business during the year and an outline of future developments are given in the Chairman’s statement and Managing Corporate Governance Director’s report. Fixed assets In the opinion of the directors the market value of all of the Group’s properties is not significantly different from their historical net book amount. A separate report on corporate governance is set out on pages 46 to 48. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 16 17 Substantial shareholdings Employment policies At 14 March 2005, the only notified interests of substantial We are committed to promoting policies which ensure that employees shareholdings in the issued share capital of the Company were: and those who seek to work for us are treated equally, regardless of Number of shares held Percentage of issued share capital sex, marital status, creed, colour, race or ethnic origin. It is our policy to give full and fair consideration to applications for employment by people who are disabled, to continue wherever possible the employment of staff who become disabled and to provide equal opportunities for the career development of disabled employees. The number and dispersion of the Group’s operating locations make it difficult, but essential, to communicate effectively with employees. Communication with our shop staff is principally through the operational structure of shop area and divisional management. We communicate with our bakery staff by regular briefings and 9.10% 6.96% 4.26% 4.22% 3.78% A.J. Davison (as trustee of various settlements) FMR Corporation 1,104,941 844,607 Mrs G.V. Richardson and family 517,906 Prudential plc Standard Life Scottish Widows Investment Partnership 512,400 459,141 376,059 3.10% letters. All staff receive a copy of divisional and Group gazettes. Various trustees jointly hold shares with A.J. Davison above, some of whom, by reason of such joint holdings and other holdings in their The Group operates Profit Sharing and Savings Related Share Option Schemes to encourage its employees to identify with its corporate own name, have declarable interests as follows: Mrs F.M.E. Nicholson objectives. (7.72% jointly held with A.J. Davison and others plus 0.04% in other holdings), Mrs F.K. Deakin (7.72% jointly held with A.J. Davison and others plus 0.03% in other holdings) and Mr J.A. Wardropper (5.95% jointly held with A.J. Davison and others). Payments to suppliers Supplier credit is an important factor in the success of the Group. Whilst the Group does not follow any code or standard on payment practice, payments to suppliers are made in accordance with the Group’s normal terms and conditions of business except where varied terms and conditions are agreed with individual suppliers, in which case these prevail. Where disputes arise we attempt to resolve them promptly and amicably to ensure delays in payment are kept to a minimum. The average creditor payment period for the Company and the Group at 1 January 2005 was 41 days (2003: 41 days). Directors’ Report continued Charitable contributions This fair value will then be charged to the profit and loss account. Under UITF 17 no charge to profit and loss account was required The Group is a member of the ‘Per Cent’ Club. Charitable donations in respect of these schemes. of £615,000 (representing 1.3% of profit before tax) were made by the Group during the year, including £351,000 to Greggs Trust. IAS 12 Deferred tax More details about Greggs Trust can be found on page 49. International Financial Reporting Standards Deferred tax balances will be calculated with reference to temporary differences which are based on balance sheet carrying values and related tax allowances. This differs from UK GAAP whereby profit and loss based timing differences give rise to deferred tax balances. This is the last year that the audited accounts will be presented Dividends under UK GAAP. For reporting periods beginning on or after 1 January 2005 the consolidated accounts of the Group must comply with International Financial Reporting Standards (“IFRS”). This will include comparative The Company normally declares dividends to the holders of equity shares after the balance sheet date. These dividends will not be recognised as a liability at the balance sheet date as is currently the situation. Dividends paid during the period will not be shown on the face of the Income statement but will be included in the information for 2004 (subject to certain exemptions). During 2004 reconciliation of equity statement. the Group has continued its preparatory work to enable it to report its interim 2005 results under IFRS. The key areas that have been identified as having an impact for the Group are as follows: IAS 19 Pension scheme accounting The adoption of IFRS will result in changes to the format and disclosure requirements of both the primary financial statements and the related notes. Auditors Under this standard the Group defined benefit pension scheme’s In accordance with Section 384 of the Companies Act 1985, net liability position will be included on the balance sheet with the a resolution for the re-appointment of KPMG Audit Plc as auditors returns on scheme assets, current service costs and interest costs of the Company will be proposed at the forthcoming Annual being movements in the profit and loss account. The net position is General Meeting. expected to be broadly in line with FRS 17 values disclosed in note 7 (which would have been recognised in the 2005 opening balance By order of the Board Andrew Davison sheet under UK GAAP) with some limited differences in the Secretary measurement parameters used. The Group will, for the first time, Greggs plc (CRN 502851) be required to prepare a Statement of Recognised Income and Expense which will reflect the actuarial gain or loss on the scheme (presuming that IAS 19 (Revised) is endorsed for use in the EU). IFRS 2 Share options The fair value of share based payments will be calculated using an Fernwood House Clayton Road Jesmond Newcastle upon Tyne NE2 1TL option pricing model for all employee share option schemes. 14 March 2005 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 18 19 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 time the financial position of the Company and which enable them of the results for that period. to ensure that the accounts comply with the Companies Act 1985. The directors consider that in preparing the accounts on pages 22 The directors have general responsibility for taking such steps as are to 41, they have used appropriate accounting policies, consistently reasonably open to them to safeguard the assets of the Group and applied and supported by reasonable and prudent judgements and to 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. Report of the Independent Auditors to the Members of Greggs plc We have audited the accounts on pages 22 to 41. We have also We report to you our opinion as to whether the accounts give a true audited the information in the Directors’ Remuneration Report that and fair view and whether the accounts and the part of the Directors’ is described as having been audited. Remuneration Report to be audited have been properly prepared in This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. 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 accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors’ report is not consistent with the accounts, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors’ remuneration and transactions with the Group is not disclosed. than the Company and the Company’s members as a body, for our We review whether the corporate governance statement on pages audit work, for this report, or for the opinions we have formed. 46 to 48 reflects the Company’s compliance with the nine provisions Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report and the Directors’ Remuneration Report. As described on page 19 this includes of the 2003 FRC Code specified for our review by the Listing Rules, and we report if it does not. We are not 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. responsibility for preparing the accounts in accordance with applicable We read the other information contained in the Annual Report, United Kingdom law and accounting standards. Our responsibilities, including the corporate governance statement and the unaudited as independent auditors, are established in the United Kingdom by part of the Directors’ Remuneration Report, and consider whether it statute, the Auditing Practices Board, the Listing Rules of the Financial is consistent with the audited accounts. We consider the implications Services Authority and by our profession’s ethical guidance. for our report if we become aware of any apparent misstatements or material inconsistencies with the accounts. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 20 21 Basis of audit opinion Opinion We conducted our audit in accordance with Auditing Standards issued In our opinion: by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the accounts and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the accounts and the part of the Directors’ Remuneration Report to be audited. • the accounts give a true and fair view of the state of affairs of the Company and the Group as at 1 January 2005 and of the profit of the Group for the 53 weeks then ended; and • the accounts and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985. KPMG Audit Plc Chartered Accountants Registered Auditor Newcastle upon Tyne 14 March 2005 Group Profit and Loss Account for the 53 weeks ended 1 January 2005 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 1 2 2 2 3 4 9 10 11 24 12 12 2004 £’000 504,186 (193,009) 311,177 (228,891) (37,572) 44,714 1,988 46,702 (15,115) 31,587 (11,524) 20,063 264.7p 262.0p 2003 £’000 456,978 (175,284) 281,694 (209,559) (32,968) 39,167 1,305 40,472 (13,235) 27,237 (9,476) 17,761 230.5p 227.6p The Group’s operating profit for both the current and preceding financial year derives from continuing operations. There are no recognised gains or losses during the current and previous year other than the profit for the year. RECONCILIATION OF MOVEMENT IN CONSOLIDATED SHAREHOLDERS’ FUNDS for the 53 weeks ended 1 January 2005 Profit for the financial year Dividends Retained profit for the financial year New share capital - nominal value - share premium Purchase of own shares into Employee Benefit Trust Sale of own shares from Employee Benefit Trust Net addition to shareholders’ funds Opening shareholders’ funds – as previously stated Prior year adjustment – see accounting policies Opening shareholders’ funds – as restated Closing shareholders’ funds 2004 £’000 139,196 (5,046) 2003 £’000 119,965 (3,561) 2004 £’000 31,587 (11,524) 20,063 6 680 (941) 3,200 23,008 134,150 157,158 2003 £’000 27,237 (9,476) 17,761 18 1,452 (1,485) - 17,746 116,404 134,150 Group Balance Sheet at 1 January 2005 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 22 23 1 January 2005 27 December 2003 As restated (see accounting policies) Note £’000 £’000 £’000 £’000 Fixed assets Tangible assets Investments Current assets Stocks Debtors Cash at bank and in hand 13 15 16 17 7,283 13,949 62,601 83,833 Creditors: amounts falling due within one year 18 (74,811) Net current assets / (liabilities) Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Deferred tax Net assets Capital and reserves Called up share capital Share premium account Profit and loss account Equity shareholders’ funds 19 21 22 23 24 163,110 - 163,110 9,022 172,132 (105) (14,869) 157,158 2,428 12,217 142,513 157,158 7,126 13,037 36,358 56,521 (68,558) 160,704 - 160,704 (12,037) 148,667 (112) (14,405) 134,150 2,422 11,537 120,191 134,150 The accounts on pages 22 to 41 were approved by the Board of directors on 14 March 2005 and were signed on its behalf by M.J. Darrington } Directors M. Simpson Parent Company Balance Sheet at 1 January 2005 1 January 2005 27 December 2003 As restated (see accounting policies) Note £’000 £’000 £’000 £’000 Fixed assets Tangible assets Investments Current assets Stocks Debtors Cash at bank and in hand 14 15 16 17 7,283 38,777 62,381 108,441 Creditors: amounts falling due within one year 18 (74,210) Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Deferred tax Net assets Capital and reserves Called up share capital Share premium account Profit and loss account Equity shareholders’ funds 19 21 22 23 24 The accounts on pages 22 to 41 were approved by the Board of directors on 14 March 2005 and were signed on its behalf by M.J. Darrington } Directors M. Simpson 131,923 5,190 137,113 136,825 5,190 142,015 7,126 32,017 36,214 75,357 (68,488) 34,231 171,344 (105) (9,007) 162,232 2,428 12,217 147,587 162,232 6,869 148,884 (112) (10,854) 137,918 2,422 11,537 123,959 137,918 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 24 25 Group Cash Flow Statement for the 53 weeks ended 1 January 2005 Reconciliation of operating profit to net cash inflow from operating activities Operating profit Depreciation charges Loss on disposal of fixed assets Release of government grants Increase in stocks Increase in debtors Increase in creditors Net decrease / (increase) in working capital Net cash inflow from operating activities CASH FLOW STATEMENT Net cash inflow from operating activities Returns on investments and servicing of finance Interest received Interest paid 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 Net cash outflow from capital expenditure and financial investments Equity dividends paid Net cash inflow before financing Financing Issue of ordinary share capital Disposal / (purchase) of investments Net cash inflow / (outflow) from financing Net increase in cash in the period Further details regarding cash flows are given in note 26 to the accounts 2004 2003 As restated (see accounting policies) £’000 £’000 £’000 £’000 44,714 20,978 358 (7) 3,218 69,261 69,261 1,988 (14,150) (23,742) (10,059) 23,298 2,945 26,243 (796) (1,297) 1,601 1,313 (8) (32,361) 787 1,470 (1,485) 39,167 18,985 69 (7) (492) 57,722 57,722 1,305 (10,908) (31,574) (8,807) 7,738 (15) 7,723 (157) (912) 4,287 2,003 (15) (25,090) 1,348 686 2,259 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 required to be adopted during the past year have been implemented where relevant, in particular UITF Abstract 38 Accounting for ESOP trusts. (b) Prior year adjustment UITF 38 requires the assets and liabilities of the Group’s ESOP trust to be recognised in the Group’s accounts where there is de facto control of those assets and liabilities. The Company’s own shares held by the ESOP trust should be deducted from shareholders’ funds until they vest unconditionally with employees. Prior to the adoption of UITF 38 the Company’s own shares held by the ESOP trust were recognised as fixed asset investments on the balance sheet at the lower of cost and net book amount. All relevant primary statements and notes relating to the accounts have been restated accordingly. Compliance with UITF 38 has reduced the 2004 investments and shareholders’ funds by £2,787,000 (2003: £5,046,000). The net profit for 2003 was unaffected. The estimated impact on the current year’s profit if UITF 38 had not been adopted would be to increase the net profit by £85,000. (c) Consolidation The consolidated accounts include the results of Greggs plc and its subsidiary undertakings for the period of 53 weeks ended 1 January 2005. The comparative period is the 52 weeks ended 27 December 2003. (d) 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 10% Plant: General 10% Computers 20% - 331/3% Motor vehicles 20% - 25% Delivery trays 331/3% Shop fixtures and fittings: General Electronic equipment 10% 20% (e) 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. (f) Stocks Stocks are stated at the lower of cost and net realisable value. (g) Taxation 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. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 26 27 (h) 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. (i) Leased assets 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. (j) 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 in respect of the defined benefit scheme is based on actuarial estimates and is calculated to spread the cost of pensions over employees’ working lives with the Group. The amount charged to the profit and loss account in respect of the defined contribution schemes represents the contributions payable in respect of the accounting period. (k) Employee share ownership plan The Group accounts include the assets and related liabilities of the Greggs Employee Benefit Trust. During the year the Group has adopted the provisions of UITF 38 Accounting for ESOP trusts in these accounts. Under the requirements of UITF 38 the shares held by the ESOP are stated at cost and deducted from shareholders’ funds. (l) 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. (m) 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. (n) Foreign currency Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction or, if hedged, at the forward contract rate. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date or, if appropriate, at the forward contract rate. All exchange rate differences are included in the profit and loss account. 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 principally 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 and other income Interest payable and similar charges 2004 £’000 1,424 3,240 730 5,394 2004 £’000 2,003 (15) 2003 £’000 1,346 2,811 571 4,728 2003 £’000 1,313 (8) 1,988 1,305 Interest payable and similar charges includes net exchange losses on foreign currency deposits of £13,000 (2003: gains of £248,000 included in interest receivable and other income). 4. Profit on ordinary activities before taxation This is stated after charging / (crediting): Depreciation on owned tangible fixed assets Loss on disposal of fixed assets Release of government grants Auditors’ remuneration (group and parent company): audit services non-audit fees paid to the auditor and its associates: - corporation tax compliance - current year - prior years - other taxation services - pension schemes audit 2004 £’000 2003 £’000 20,978 18,985 358 (7) 99 27 31 24 9 69 (7) 91 27 25 20 10 Payments under operating leases – property rents 30,971 28,362 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 28 29 5. 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 1 January 2005 are as follows: Options outstanding at the end of the year Date of grant Price September 1996 1355p 2004 1,479 2003 3,401 March 1999 26871/2p 60,633 77,832 April 1999 2098p - 169,548 March 2000 17011/2p 75,446 94,208 April 2002 2821p 95,260 121,230 April 2002 3526p 7,400 8,200 April 2003 2700p 50,416 58,315 September 2003 31041/2p March 2004 3388p August 2004 3400p November 2004 3098p 7,050 7,500 95,400 71,580 8,250 - - - Dates exercisable Three to ten years after September 1996 Three to ten years after March 1999 June 2004 to December 2004 Three to ten years after March 2000 June 2005 to December 2005 Three to ten years after April 2002 June 2006 to December 2006 Three to ten years after September 2003 Three to ten years after March 2004 Three to ten years after August 2004 January 2008 to July 2008 Executive Share Option Scheme 5 Executive Share Option Scheme 6 Savings Related Share Option Scheme 4 Executive Share Option Scheme 7 Savings Related Share Option Scheme 5 Executive Share Option Scheme 8 Savings Related Share Option Scheme 6 Executive Share Option Scheme 9 Executive Share Option Scheme 10 Executive Share Option Scheme 11 Savings Related Share Option Scheme 7 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 according to the register of directors’ interests are as follows: Mike Darrington Malcolm Simpson Ian Gregg (non-executive) Stephen Curran (non-executive) Susan Johnson (non-executive) Derek Netherton (non-executive) Bob Bennett (non-executive) Ordinary shares of 20p (Beneficial interest) 2004 70,650 85,722 2003 70,440 85,523 154,655 219,300 3,700 3,700 - - - - - - Ordinary shares of 20p (Trustee holding with no beneficial interest) 2004 2003 138,354 166,955 138,354 264,163 292,764 264,163 - - - - - - - - The executive directors have a potential beneficial interest in the Greggs Employee Benefit Trust (note 24). Details of directors’ share options and emoluments and pension benefits can be found in the Directors’ Remuneration Report on pages 42 to 45. There have been no changes since 1 January 2005 in the directors’ interests noted above. Notes to the Accounts continued 7. 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 2002. 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 £33,334,400. The actuarial value of the scheme’s assets represented 87% of the benefits that had accrued to members, after allowing for expected future increases in earnings. In view of this situation the Company has already made several lump sum contributions to the scheme and has agreed to increase the funding rate, including employees’ contributions, to a total of 16.5% of annual pensionable salary. In addition the Company has undertaken regularly to review the funding position and intends to ensure that the scheme is adequately funded to meet its liabilities. The total pension cost to the Group of this scheme, including the group life premium, was £3,290,000 for the year (2003: £2,627,000). 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 1 January 2005, 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 and both the assets and liabilities include the value of those pensions in payment which are secured with insured annuities. The major assumptions used in this valuation were: Inflation Pension increases (LPI) Salary growth Discount rate 1 January 2005 2.9% pa 2.7% pa 4.4% pa 5.4% pa 27 December 2003 2.7% pa 2.6% pa 4.2% pa 5.4% pa 28 December 2002 2.4% pa 2.4% pa 3.9% pa 5.6% 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. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 30 31 7. Pensions (continued) 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 : Total fair value of assets Present value of liabilities Gross pension liability Related deferred tax asset Net pension liability Equities Bonds Cash Other Equities Bonds Cash Other £’000 33,122 2,060 9,864 2,303 1 January 2005 £’000 27 December 28 December £’000 2003 £’000 £’000 2002 £’000 27,326 5,880 - 6,653 18,188 6,229 - 7,952 47,349 (58,283) (10,934) 3,280 (7,654) 39,859 (51,106) (11,247) 3,374 (7,873) 32,369 (41,699) (9,330) 2,799 (6,531) Expected return Expected return Expected return 7.5% pa 4.6% pa 4.5% pa 5.5% pa 7.7% pa 4.8% pa - 4.9% pa 7.4% pa 4.5% pa - 4.5% pa Over the period to 1 January 2005, contributions by the Company of £2,889,000 (2003: £2,261,000) were made to the scheme. It has been agreed with the trustees that employer’s contributions for the period between 6 April 2003 and 5 April 2008 will be at the level of 9.9% of annual pensionable salary, plus the cost of insuring death in service benefits and the cost of administration expenses. The post retirement deficit under FRS 17 would have moved as follows during the period to 1 January 2005: Post retirement deficit at 28 December 2003 Current service cost (employee and employer) Contributions (employee and employer) Other net finance income / (expense) Actuarial loss Post retirement deficit at 1 January 2005 2004 £’000 (11,247) (3,006) 4,209 6 (896) (10,934) 2003 £’000 (9,330) (2,725) 3,477 (338) (2,331) (11,247) Notes to the Accounts continued 7. Pensions (continued) The following amounts would have been included within operating profit under FRS17: Current service cost (employer’s part only) Past service cost The following amounts would have been included as net finance income / (expense) under FRS 17: Expected return on pension scheme assets Interest on post retirement liabilities The following amounts would have been recognised within the statement of total recognised gains and losses (“STRGL”) under FRS 17: Annual return less expected return on scheme assets Experience gains / (losses) arising on liabilities Loss due to changes in assumptions underlying the present value of scheme liabilities Actuarial loss recognised in the STRGL 2004 £’000 1,717 55 (2,668) (896) 2003 £’000 3,188 (167) (5,352) (2,331) 4% 0% (5%) (2%) 2004 £’000 2,088 - 2,088 2004 £’000 2,813 (2,807) 6 8% (0%) (10%) (5%) 2002 £’000 (6,663) (2,206) (1,020) (9,889) 2003 £’000 1,808 - 1,808 2003 £’000 2,050 (2,388) (338) (21%) (5%) (2%) (24%) The above percentages show the STRGL components as a percentage of the end of period value of the scheme’s assets or liabilities as appropriate. 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 £149,504,000 at 1 January 2005 (£126,277,000 at 27 December 2003). 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 £1,234,000 in the period (2003: £1,135,000). There were no material amounts outstanding to any of the schemes at the period end. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 32 33 8. Employees The average number of persons employed by the Group (including directors) during the period 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 9. Taxation on profit on ordinary activities a). Analysis of charge in period at 30% (2003: 30%) Current tax: Corporation tax at 30% (2003: 30%) - current period - previous periods Total current tax Deferred tax Origination and reversal of timing differences - current period - previous periods Total deferred tax Tax on profit on ordinary activities 2004 No’s 651 337 2,697 14,555 18,240 2003 No’s 665 319 2,672 14,249 17,905 2004 £’000 2003 £’000 181,346 166,950 13,664 4,524 12,258 3,762 199,534 182,970 2004 2003 £’000 £’000 £’000 £’000 14,874 (223) 12,253 - 14,651 12,253 256 208 982 - 464 15,115 982 13,235 Notes to the Accounts continued 9. Taxation on profit on ordinary activities (continued) b). Factors affecting current tax charge for period The tax assessed for the period is higher (2003: higher) 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% (2003: 30%) Effects of: Capital allowances for period in excess of depreciation Expenses not deductible for tax purposes Chargeable gains rolled over Non-qualifying depreciation Other Adjustments in respect of previous periods Current tax charge for period 10. Profit attributable to Greggs plc 2004 £’000 46,702 14,011 2003 £’000 40,472 12,142 (256) 249 (177) 836 211 (223) (982) 181 (49) 822 139 - 14,651 12,253 Of the profit attributable to shareholders, £32,893,000 (2003: £27,415,000) is dealt with in the accounts of the parent company. The Company has taken advantage of the exemption permitted by section 230 of the Companies Act 1985 from presenting its own profit and loss account. 11. Dividends On ordinary shares of 20p Interim paid: 30.0p (2003: 25.5p) Final proposed: 66.0p (2003: 54.5p) Total dividends: 96.0p (2003: 80.0p) 12. Earnings per share 2004 £’000 3,602 7,922 11,524 2003 £’000 3,019 6,457 9,476 Basic earnings per share are calculated on earnings after taxation of £31,587,000 (2003: £27,237,000) divided by the weighted average number of shares in issue outstanding during the period of 11,931,728 (2003: 11,817,677). 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 of 12,055,134 (2003: 11,968,023). This number includes 123,406 (2003: 150,346) shares being the dilutive effect of the share options in place at the period end. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 34 35 Land and buildings £’000 Plant and Shop fixtures machinery and fittings £’000 £’000 Total £’000 72,842 71,541 103,713 248,096 4,477 7,237 13,376 25,090 (761) (7,586) (7,996) (16,343) 76,558 71,192 109,093 256,843 12,783 39,432 1,564 7,813 35,177 11,601 87,392 20,978 (359) (7,304) (6,974) (14,637) 13,988 39,941 39,804 93,733 62,570 60,059 31,251 32,109 69,289 68,536 163,110 160,704 2004 2003 £’000 £’000 £’000 £’000 13,922 41,955 5,710 13,785 39,392 5,822 61,587 759 224 62,570 58,999 753 307 60,059 13. Group statement of tangible fixed assets Cost At 27 December 2003 Additions Disposals At 1 January 2005 Depreciation At 27 December 2003 Charged in period Disposals At 1 January 2005 Net book amount At 1 January 2005 At 27 December 2003 The net book amount of land and buildings comprises: Freehold property Long leasehold property Short leasehold property Shops Bakeries Other Bakeries Shops Notes to the Accounts continued 14. Parent company statement of tangible fixed assets Cost At 27 December 2003 Additions Intra Group transfers Disposals At 1 January 2005 Depreciation At 27 December 2003 Charged in period Intra Group transfers Disposals At 1 January 2005 Net book amount At 1 January 2005 At 27 December 2003 The net book amount of land and buildings comprises: Freehold property Long leasehold property Short leasehold property Shops Bakeries Other Bakeries Shops Land and buildings £’000 Plant and Shop fixtures machinery and fittings £’000 £’000 Total £’000 41,058 72,074 104,201 217,333 4,441 (8,494) 7,237 13,376 25,054 - - (8,494) (392) (7,586) (7,996) (15,974) 36,613 71,725 109,581 217,919 5,238 39,702 35,568 11,601 80,508 20,178 - (169) 7,813 - (7,304) (6,974) (14,521) 764 (169) (243) 5,590 40,211 40,195 85,996 31,023 35,820 31,514 32,372 69,386 68,633 131,923 136,825 £’000 7,650 17,341 5,803 2004 £’000 30,794 5 224 31,023 2003 £’000 £’000 7,263 21,583 5,914 34,760 753 307 35,820 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 36 37 Shares in subsidiary undertakings £’000 Own shares £’000 Total £’000 - - - - 5,046 5,046 (5,046) (5,046) - - - - 5,828 5,046 10,874 - (5,046) (5,046) 5,828 5,828 638 5,190 5,190 - - - - - 5,828 5,828 638 5,190 5,190 15. Investments Group Cost and Net book amount At 27 December 2003 - as previously stated Prior year adjustment - see accounting policies At 27 December 2003 - as restated At 1 January 2005 Parent company Cost At 27 December 2003 - as previously stated Prior year adjustment - see accounting policies At 27 December 2003 - as restated At 1 January 2005 Provisions At 27 December 2003 and 1 January 2005 Net book amount At 1 January 2005 At 27 December 2003 Own shares held related to 264,163 shares of the Company held by the Greggs Employee Benefit Trust which are to be used to satisfy certain of the share option arrangements detailed in note 5. Following the adoption by the Group of UITF 38 during the year, own shares are no longer recognised as an asset on the balance sheet but are deducted from equity (see accounting policies). The Company’s subsidiary undertakings, which are all wholly owned, are as follows: Principal activity Country of incorporation Charles Bragg (Bakers) Limited Greggs (Leasing) Limited Thurston Parfitt Limited Non-trading Non-trading Dormant Greggs Properties Limited Property holding Olivers (U.K.) Limited Dormant Olivers (U.K.) Development Limited * Dormant Birketts Holdings Limited J R Birkett & Sons Limited * Greggs Trustees Limited * held indirectly Non-trading Non-trading Trustee England and Wales England and Wales England and Wales England and Wales Scotland Scotland England and Wales England and Wales England and Wales Notes to the Accounts continued 16. Stocks Raw materials and consumables Work in progress 17. Debtors Trade debtors Amounts owed by subsidiary undertakings Other debtors, including value added tax Prepayments and accrued income All amounts fall due within one year. 18. Creditors: amounts falling due within one year Trade creditors Corporation tax Other taxes and social security costs Other creditors Accruals Proposed final dividend Deferred government grants 19. Creditors: amounts falling due after more than one year Deferred government grants Group Parent company 2003 £’000 5,105 2,021 7,126 2004 £’000 5,322 1,961 7,283 2003 £’000 5,105 2,021 7,126 Group Parent company 2003 £’000 582 2004 £’000 665 2003 £’000 582 - 24,828 18,980 4,533 7,922 5,320 7,964 4,533 7,922 2004 £’000 5,322 1,961 7,283 2004 £’000 665 - 5,320 7,964 13,949 13,037 38,777 32,017 Group Parent company 2004 £’000 2003 £’000 2004 £’000 2003 £’000 25,467 23,794 25,467 23,794 7,685 5,502 16,433 11,795 7,922 7 7,183 4,777 16,942 9,398 6,457 7 7,084 5,502 16,433 11,795 7,922 7 7,113 4,777 16,942 9,398 6,457 7 74,811 68,558 74,210 68,488 Group Parent company 2004 £’000 105 2003 £’000 112 2004 £’000 105 2003 £’000 112 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 38 39 20. Financial assets and liabilities The Group’s activities are financed by cash at bank and short term investments which comprise cash placed on deposit. During the period the Group has held funds in a deposit account denominated in Euros to provide working capital for its operations in Europe. 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 and currency risks are 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 1 January 2005 the average floating interest rate earned on the closing cash balance was 4.8% (2003: 3.7%). At 1 January 2005 the Group had no financial liabilities (2003: £nil). The Group has an overdraft facility of £10,000,000 of which £10,000,000 was undrawn at 1 January 2005 (2003: £10,000,000 undrawn). The fair value of the Group’s other financial assets and liabilities is not materially different from their book values. 21. Provisions for liabilities and charges - deferred tax The provision is in respect of: Accelerated capital allowances The movement in deferred tax is represented by the charge for the period. Group Parent company 2004 £’000 2003 £’000 2004 £’000 2003 £’000 14,869 14,405 9,007 10,854 22. Share capital Authorised: 25,000,000 ordinary shares of 20p Issued and fully paid: Number of shares: 12,109,483 32,409 12,141,892 At 27 December 2003 Issued in respect of share options At 1 January 2005 Details of outstanding share options are given in note 5. 23. Share premium account At 27 December 2003 Premium arising on issue of shares in respect of share options At 1 January 2005 Group and Parent company 2004 £’000 2003 £’000 5,000 5,000 2,422 6 2,404 18 2,428 2,422 Group and Parent company £’000 11,537 680 12,217 Notes to the Accounts continued 24. Profit and loss account At start of period - as originally stated Prior year adjustment - see accounting policies At start of period - as restated Retained profit for the period Purchase of own shares into Employee Benefit Trust Sale of own shares from Employee Benefit Trust At end of period Group Parent company 2004 £’000 2003 £’000 2004 £’000 2003 £’000 125,237 107,476 129,005 111,066 (5,046) (3,561) (5,046) (3,561) 120,191 103,915 123,959 107,505 20,063 17,761 21,369 17,939 (941) (1,485) (941) (1,485) 3,200 - 3,200 - 142,513 120,191 147,587 123,959 Cumulative goodwill written off resulting from acquisitions made prior to 1 January 1998 amounts to £3,275,000 (2003: £3,275,000). Deducted from the profit and loss account is £2,787,000 (2003: £5,046,000) 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 138,439 shares (2003: 264,163 shares) with a market value at 1 January 2005 of £5,064,000 (2003: £8,295,000) which have not vested unconditionally in employees. The shares held by the Greggs Employee Benefit Trust can be purchased either by employees on the exercise of an option under the Greggs Executive Share Option Schemes or by the trustees of the Greggs Employee Share Scheme (see note 5). 25. Commitments a). Capital commitments Outstanding commitments for capital expenditure at 1 January 2005 not provided for in the accounts are as follows: Contracted for b). Operating lease commitments Group Parent company 2004 £’000 2003 £’000 2004 £’000 2003 £’000 1,867 4,794 1,867 4,794 At 1 January 2005 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 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. 2004 £’000 2003 £’000 1,362 7,351 20,839 29,552 1,551 6,940 20,077 28,568 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 40 41 26. Notes to the group cash flow statement a). Reconciliation of net cash flow to movement in net funds Increase in cash in the period Movement in net funds in the period Net funds at 27 December 2003 Net funds at 1 January 2005 b). Analysis of net funds 2004 £’000 26,243 26,243 36,358 62,601 At 27 December 2003 £’000 Cash flow Other changes £’000 £’000 2003 £’000 7,723 7,723 28,635 36,358 At 1 January 2005 £’000 Cash in hand and at bank 36,358 26,243 - 62,601 Directors’ Remuneration Report Introduction This report has been prepared in accordance with the Directors’ Remuneration Report Regulations 2002 (the “Regulations”). This report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the Principles of Good Governance relating to directors’ remuneration. The Regulations require the auditors to report to the Company’s members on the “auditable part” of the Directors’ Remuneration Report and to state whether, in their opinion, that part of the report has been properly prepared in accordance with the Companies Act 1985 (as amended by the Regulations). The report has, therefore, been divided into separate sections for audited and unaudited information. Unaudited information Remuneration Committee The Remuneration Committee of the Board sets the remuneration and terms of appointment of the executive directors and the Chairman on behalf of the Board. The names of the directors who have served on the Remuneration Committee during the year are Ian Gregg (Chairman), Sonia Elkin (until 11 May 2004), Stephen Curran and Bob Bennett. Mike Darrington and Andrew Davison have assisted the Committee in their deliberations on directors’ remuneration. General Policy on Directors’ Remuneration The Company’s policy is to establish competitive remuneration packages for its directors that will attract, retain and motivate individuals with appropriate skills and experience and will best serve the interests of the Company, its shareholders and its employees. Remuneration packages for executive directors are designed so as to reward them fairly for their contributions within the range of benefits offered by other UK companies of equivalent size, to recognise the unusually complex nature of the combined retail, manufacturing and distribution operations of the Greggs business and having considered levels of remuneration paid to others within the Company. The Remuneration Committee aims to set basic salaries for executive directors at a level broadly equivalent to median salaries for individuals holding similar positions in comparable companies, with adjustment to reflect individual performance. Basic salaries are normally benchmarked every three years unless a material change in the business or in market conditions warrants earlier review. Basic salaries were last benchmarked in 2002, to take effect from 1 January 2003, on the basis of advice and information as to levels of remuneration in comparable companies provided by Monks Partnership. A review was started towards the end of 2004 by Monks Partnership, who are benchmarking salaries and remuneration packages against both sector and turnover comparator groups of companies. Monks Partnership were selected and appointed by the Remuneration Committee. They also assisted the Executive Director Committee by producing comparative information to assist in determining the fees payable to non-executive directors and assisted the Company generally in determining the remuneration of its senior management team, but otherwise had no connection with the Company. The Remuneration Committee seeks to structure total benefits packages in a manner that will align the interests of the executive directors with those of shareholders. The performance-related elements of the executive directors’ remuneration packages, under which executive directors can receive payments in total of up to 50% of their basic salaries, consist of annual performance based cash bonuses and participation in the Company’s Profit-Sharing Scheme (which distributes 10% of profits half-yearly to all employees on the basis of a formula related to the profitability of their relevant division, length of service and salary levels). Such bonus payments are not pensionable. In addition, there have been occasional grants of options over shares in the Company, pursuant to one or more of the share option schemes operated through the Remuneration Committee. These include both Inland Revenue approved and unapproved long-term share incentive schemes, designed to encourage the executive directors and other employees to hold shares in the Company and to enhance share values. In accordance with institutional investor guidelines, the total number of new shares and shares held in treasury over which the Company may grant options is limited and the Company has chosen to allocate most of the number available to the Company’s Savings Related Share Option Scheme open to all employees, including executive directors. This has restricted the number of new shares or shares held in treasury available to be allocated under the discretionary Senior Executive Share Option Schemes, under which the last grant of options (in which no executive director participated) was made in August 2004. The company will keep under review the need to maintain competitive benefit packages, and where it considers appropriate, will make use of the Employee Benefit Trust to supply shares on the exercise of options. Unless granted pursuant to the all- employee Savings Related Share Option Scheme (under which options may be offered at a discount to market price), the Remuneration Committee intends that all options granted to executive directors will be at exercise prices at least equal to the market price of a share as at the date of grant. The above policies enable the executive directors to receive potentially significant benefits in addition to their basic salaries, but only if value has been created for shareholders. The Remuneration Committee considers that, although the non-performance related elements of the executive directors’ remuneration packages are at or around the median the performance related elements are significant in terms of providing motivation to the executive directors to improve shareholder value. In order to ensure that no director is involved in deciding his/her own remuneration, the fees payable to non-executive directors (other than the Chairman) are set, after consultation with the Chairman, by a committee of the Board consisting only of executive directors (Mike Darrington and Malcolm Simpson) who periodically seek advice from external consultants as to the appropriate market rates applicable. Policy on Performance Conditions The performance conditions attaching to share options granted to the executive directors under the Company’s Senior Executive Share Option Schemes have varied according to the date of grant. Such conditions are set by the Remuneration Committee following receipt of advice from external consultants as to prevailing market practice and in order to set challenging performance objectives linked to shareholder return. The Remuneration Committee intends that performance conditions will continue to be settled on this basis and applied to any grants of options to future executive directors under the discretionary Senior Executive Share Option Schemes. Details of the performance conditions for options currently outstanding are set out in the section headed ‘Share Options’ below. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 42 43 Whether performance conditions attached to share options have been met is tested by the Remuneration Committee, which compares the actual performance of the Company with relevant published statistics and, if necessary, obtains advice from external consultants in order to reach its conclusion. This ensures that no director is in a position to rule on whether any performance condition applicable to his own options has been satisfied. No performance conditions have been attached to options granted pursuant to the Company’s Savings Related Share Option Scheme, which is available for all employees. The principal purpose of this scheme is to encourage employees at all levels within the Company to participate in, and to understand better, the growth in value of the Company and the rules of that scheme require that all options granted must be on the same terms. Performance criteria in relation to the performance based annual cash bonuses payable to the executive directors are set by the Remuneration Committee each year in accordance with the general remuneration policy set out above. Policy on Service Contract Notice Periods and Payments on Early Termination The Company’s policy on the duration of directors’ contracts is that: • existing executive directors should have service contracts terminable on one year notice served by the Company or by six months notice served by the director. Future executive directors would be engaged on terms necessary to secure individuals of appropriate calibre, having regard to prevailing market conditions at that time; • non-executive directors are appointed subject to the Company’s Articles of Association, which require them to retire and to seek re-election at the first AGM after appointment. Thereafter, one half of the Board (other than those appointed since the last AGM), being those who have been longest in office since last re-election, and any other director who has not been elected or re-elected at either of the two preceding AGMs, must retire and seek re-election. Any non-executive director who has served on the Board for over 9 years must seek re-election annually. The Nominations Committee advises the Board as to whether a particular director, whose turn it is to retire, should be nominated for re-election. The policy on termination payments for executive directors is that the Company does not normally make payments beyond its contractual obligations, including any payment in respect of notice to which a director is entitled. In exceptional circumstances, an additional ex-gratia payment may be considered, based on factors including the director’s past contribution and the circumstances of the director’s departure. The Company’s policy on notice periods changed at the end of 2004 when the executive directors agreed (without receiving any compensation) to reduce their entitlement to notice and to compensation in all circumstances to a maximum of one year. Non-executive directors would not normally be entitled to compensation for early termination of their appointments prior to the date on which they would next be due to retire by rotation, or if not re-appointed at such time. Directors’ service contracts Details of the directors’ service contracts or letters of appointment are as follows: Executive Directors Mike Darrington has a service contract with the Company dated 7 March 2003. His continuous period of service with the Company commenced on 15 July 1983. Malcolm Simpson has a service contract with the Company dated 7 March 2003. His continuous period of service with the Company commenced on 24 April 1973. Both Mike Darrington and Malcolm Simpson have provisions in their contracts which enable them to be terminated by the Company on 12 months notice or by the executive on 6 months notice. In addition to their basic salaries, each is entitled to participate in a performance based cash bonus. They are also entitled to additional benefits including the use of a motor car, private medical insurance, pension, life assurance, permanent health insurance and a contribution towards telephone expenses. For 2005, the executive directors will receive a performance based cash bonus such that the combined bonus to be received by each of them under this arrangement and the Company’s Profit-Sharing Scheme will be set according to a straight line graph linked to the level of profit achieved by the Company in the financial year, subject to confirmation by the Remuneration Committee. Total bonus payments are capped at 50% of basic salary. Non-executive Directors The non-executive directors do not have service contracts with the Company. However, each of them does have a letter of appointment. The terms of appointment of each non-executive director require that they seek re-election on a regular basis in accordance with the Articles of Association of the Company (see above). The fees payable to the non-executive directors cover all normal duties. In exceptional circumstances, where significant additional time commitment is required, the Board (or a duly authorised committee) may award additional fees. No right of compensation exists where the office is terminated, for whatever reason. Performance Graph The graph below shows a comparison of the total shareholder return for the Company’s shares for each of the last 5 financial years against the total shareholder return for the companies comprised in the FTSE Mid 250 Index (excluding Investment Trusts). This index was chosen for this comparison because it includes companies of broadly similar size to the Company. 250 200 150 100 50 0 9 9 9 1 / 2 1 / 1 3 FTSE Mid 250 (ex-Invst Trusts) Greggs 0 0 0 2 / 2 1 / 1 3 1 0 0 2 / 2 1 / 1 3 2 0 0 2 / 2 1 / 1 3 3 0 0 2 / 2 1 / 1 3 4 0 0 2 / 2 1 / 1 3 Directors’ Remuneration Report continued Audited Information Directors’ emoluments and compensation The following table sets out details of the emoluments and compensation received in 2004 by each director (excluding pension contributions, details of which are set out below). Executive Mike Darrington Malcolm Simpson Chairman Derek Netherton Non-executive Stephen Curran Sonia Elkin Ian Gregg Susan Johnson Bob Bennett TOTAL Estimated value Salary / fees of benefits £ £ Annual bonus and profit share £ Total 2004 Total 2003 £ £ 320,000 212,000 23,431 17,958 96,833 64,152 440,264 294,110 384,072 256,845 88,000 23,500 9,617 25,000 23,500 25,500 - - - - - - - - - - - - 88,000 84,000 23,500 9,617 25,000 23,500 25,500 22,250 24,250 44,125 22,250 1,854 727,117 41,389 160,985 929,491 839,646 The fees for Stephen Curran were paid to a third party. No part of the remuneration, other than the basic salaries of the executive directors, is taken into account when calculating pension benefits. Share Options The following table sets out details of the share options (all of which were granted at a nominal or nil cost to the executive director concerned) held by, or granted to, each director during the year, according to the register of directors’ interests: Mike Darrington Malcolm Simpson Number of options during year At At 27/12/03 Granted Exercised 1/1/05 Exercise price £ Market price at date of exercise Gain on exercise Date of grant Date from which exercisable Expiry date Scheme 18,000 199 27,900 12,000 199 12,400 - - - - - - - 18,000 26.875 - - Mar 99 Mar 02 Mar 06 Executive (199) - 20.98 33.83 2,557 Jun 99 Jun 04 Dec 04 SAYE - - 27,900 17.015 12,000 26.875 - - - - Mar 00 Mar 03 Mar 07 Executive Mar 99 Mar 02 Mar 06 Executive (199) - 20.98 33.45 2,482 Jun 99 Jun 04 Dec 04 SAYE - 12,400 17.015 - - Mar 00 Mar 03 Mar 07 Executive The aggregate gain on exercise of share options was £5,039 (2003: £213,954), including £2,557 (2003: £80,937) in respect of the highest paid director. The executive directors also have a potential beneficial interest in the Greggs Employee Benefit Trust (see note 24 to the Accounts). On each of the grants awarded in 1999 and 2000 under the Senior Executive Share Option Scheme, the exercise of one half of the options granted was made conditional upon the growth in the Company’s basic earnings per share over the three years from grant being greater than the median earnings per share growth of the companies comprised in the FTSE Mid 250 Index (excluding Investment Trusts). The other half of the options granted was conditional upon growth in the basic earnings per share of the Company being at least 10% above the median basic earnings per share growth of such comparator companies within the same period. No non-executive director has any options to acquire shares in the Company. The mid-market price of ordinary shares in the Company as at 1 January 2005 was £36.58. The highest and lowest mid-market prices of ordinary shares during the financial year were £37.50 and £31.00 respectively. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 44 45 Pensions Both of the executive directors earned pension benefits under the Greggs 1978 Retirement and Death Benefit Scheme, the Company’s defined benefit scheme, during the period under review. This scheme, which currently requires a contribution of 6.6% of pensionable salary from members, provides for up to two-thirds of final pensionable salary, dependant on length of pensionable service. Both of the executive directors also received contributions into the Company’s money purchase defined contributions pension schemes during the period under review. No pension benefits were earned or accrued in respect of any non-executive director. Defined benefit scheme The following table sets out the change in each director’s accrued pension in the Company’s defined benefit scheme during the year and his accrued benefits in the scheme at the year end: Accrued annual Accrued annual Increase in Transfer value Executive Director Mike Darrington Malcolm Simpson pension pension Increase in entitlement at entitlement at accrued accrued pension age 65 as at age 65 as at pension entitlement for 1 January 27 December entitlement the year net of of increase in accrued pension entitlement for the year Date of Date service birth commenced 2005 £ 2003 £ for the year inflation of 2.8% £ £ £ 8/3/42 15/8/83 117,892 104,910 15/10/41 24/4/73 114,021 103,186 12,982 10,835 10,054 126,525 7,956 90,337 Note 1: The pension entitlement shown is that which would be paid annually on retirement based on service to the end of the year, but excluding any statutory increases which would be due after the year end. Note 2: The inflation rate of 2.8% shown in the table above is that published by the Secretary of State for Social Security in accordance with Schedule 3 of the Pensions Schemes Act 1993. Executive Director Mike Darrington Malcolm Simpson Increase in the Cash equivalent Cash equivalent cash equivalent transfer transfer transfer value as at value as at value since 27 December 1 January 27 December 2003 £ 2005 £ 2003 £ 1,593,107 1,708,175 101,775 1,539,655 1,627,859 68,116 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. Money purchase schemes The Company has paid the following contributions to two of the Company’s money purchase schemes (the Greggs Bakeries (MJD) Retirement Benefit Scheme and the Greggs Senior Executive Pension Scheme) for the benefit of executive directors during this financial year: Executive Director Mike Darrington Malcolm Simpson Approval by Shareholders Total Contribution contributions in respect made during of 2004 £ 76,868 10,500 2003 £ 67,800 10,310 At the Annual General Meeting of the Company to be held on 17 May 2005, a resolution approving this report is to be proposed as an ordinary resolution. This report was approved by the Board on 14 March 2005. Signed on behalf of the Board Ian Gregg Director Chairman of Remuneration Committee 14 March 2005 Corporate Governance The Combined Code The Board recognises the importance of, and is committed to, high standards of corporate governance and to integrity and high ethical standards in all of its business dealings. The Board considers that (except as stated in this paragraph) it has complied throughout the period under review with the principles of governance set out in Section 1 of the revised Combined Code on corporate governance appended to the Listing Rules published by the UK Listing Authority (the “Combined Code”) effective during the financial year. With effect from 1 January 2003 the executive directors agreed (without compensation) to a reduction in their notice periods to one year, save that they would be entitled to a payment by way of liquidated damages calculated by reference to a two year notice period if termination were to take place within 12 months following a change of control of the Company. This arrangement, which was in place throughout 2004, is not in compliance with the revised Combined Code. With effect from 1 January 2005, the executive directors agreed (without compensation) to reduce their notice periods and rights to compensation to which they are entitled in all circumstances to a maximum of one year. The following statements describe how the relevant principles and provisions of the Combined Code were applied to the Company in 2004 and will be relevant to the Company for the 2005 financial year. The Board The Board, under the chairmanship of Derek Netherton, meets regularly to discharge its duties. At these meetings, it reviews Group strategy, performance, resources, risk management procedures and other matters reserved for the Board. Whilst the executive responsibility for running the Company’s business rests ultimately with the Managing Director, Mike Darrington, the non-executive directors fulfil an essential role in ensuring that the strategies proposed by the executive directors are fully discussed and critically examined prior to adoption. During 2004, the Board met five times. All directors attended all meetings, save that Bob Bennett and Stephen Curran were each unable to attend one meeting. The Board has adopted a paper identifying the separation of the roles of the Chairman and the Managing Director. The Chairman sets the agenda for Board meetings 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. The Board meets with the Management Board at a different operating division each year as part of the process of maintaining an awareness of the company’s activities and assessing the ability of the management team. This meeting also affords senior managers the opportunity to bring matters to the attention of the Board. The Company has also adopted “whistle blowing” procedures enabling employees to bring matters to the attention of the senior management and for the confidential, proportionate and independent consideration and follow-up of any matter so raised. The Board currently comprises the Chairman, 2 executive and 5 non-executive directors as follows: Derek Netherton (Chairman), 60, spent his career in investment banking and retired in 1996 from his position as joint head of corporate finance at J Henry Schroder & Co Limited. He is a non-executive director of Next plc, Hiscox plc and St James’s Place Capital plc. He was appointed to the Board on 1 March 2002 and was appointed Chairman in August of the same year. There have been no significant changes to the Chairman’s other commitments during 2004. Sir Michael Darrington (Managing Director), 63, qualified as a Chartered Accountant and then spent 17 years with United Biscuits, latterly in General Management. During this time he attended the PMD course at Harvard Business School. He joined Greggs in 1983 and was appointed Managing Director in January 1984. Malcolm Simpson (Finance Director), 63, 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. Stephen Curran, 61, 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. With effect from the close of the Company’s Annual General Meeting in 2004 he replaced Sonia Elkin as the Senior Independent Non-Executive Director. Ian Gregg OBE, 65, 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 as Managing Director in January 1984, Ian continued in the role of Executive Chairman until July 1993. He was then invited to become non-executive Chairman, which role he handed over to Derek Netherton in August 2002. Susan Johnson OBE, 47, 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. Bob Bennett, FCA, 57, was appointed to the Board in December 2003. He trained as a chartered accountant with Spicer & Pegler and has, since 1993, been Group Finance Director of Northern Rock plc. With effect from the close of the Company’s Annual General Meeting in 2004 he replaced Sonia Elkin as Chairman of the Audit Committee. Julie Baddeley, 53, was appointed to the Board in March 2005. She has held senior executive roles in the Woolwich plc (where she was responsible for Information Technology and Human Resources), Accenture and Sema Consulting. Julie is a non- executive director of Yorkshire Building Society, Computerland UK and the Pension Client Group within the Government’s Department of Works and Pensions. The Board includes a balance of executive and non-executive directors (including independent non-executive directors) such that no individual or small group of individuals can dominate the Board’s decision taking. The Board is satisfied that a strategy 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. After carefully reviewing the guidance in the Combined Code, all of the non-executive directors are considered by the Board to be independent in character and judgement and to be free from any business or other relationship or circumstance which is likely to affect or to interfere with the exercise of their independent judgement. The following relationships might appear to be capable of affecting the individual non-executive director’s independence. However, having considered these relationships carefully, the Board is of the view that they do not and that the individuals concerned are of sufficient strength of character to avoid allowing their independence to be so compromised: • Ian Gregg is a member of the Company’s pension scheme and a former employee, Managing Director and Chairman of the Company. • Stephen Curran and Ian Gregg have both served on the Board for more than 9 years from the date of their first election. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 46 47 The Board is grateful for the continued involvement of Ian and Stephen, who bring considerable experience and insight to Board discussions. Both are now required by the Company’s Articles of Association to seek re-election to the Board by shareholders annually (see below). The Board is continuing to take steps to add to the number of independent non- executive directors on the Board. The Company’s Articles of Association require that all directors must retire and seek re-election at the first AGM following appointment. Thereafter, one half of the directors (other than those appointed since the last AGM) being those who have been in office longest since last re-election and any other director who has not been elected or re-elected at either of the two preceding AGMs must seek re-election at each AGM. A resolution was adopted at the AGM in 2004 to alter the Company’s Articles of Association to require non-executive directors to seek re-election annually after they have served for over 9 years on the 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, through the Chairman, on all governance matters. The performance of the Board, its Committees and of all directors is evaluated annually by a formal and rigorous process. Each director completes a questionnaire on the performance of the Board, the Chairman, the non-executive directors, the executive directors and the Board Committees. The results are collated by the Company Secretary and fed back to the Chairman and the Senior Independent Director and then to the Board for discussion. Members of the Audit Committee complete a separate additional questionnaire, the results of which are collated by the Company Secretary and fed back to the Chairman of the Audit Committee and then to the Board for discussion. In addition, the Chairman holds structured discussions with each director. The Senior Non-Executive Director conducts a similar discussion with the Chairman. These discussions are also used to identify individual and collective training needs. The Board delegates some of its activities to the following committees, each of which has written terms of reference, which are available on request. The Company Secretary acts as secretary to each of these Committees. The Audit Committee currently consists of four independent non-executive directors (Bob Bennett - Chairman, Susan Johnson, Stephen Curran and Julie Baddeley). During 2004 it met three times. All Committee members attended all meetings in the period they were members, save that Bob Bennett and Stephen Curran were each unable to attend one meeting. The Committee’s main functions are to endeavour (i) to ensure that the accounting and financial policies of the Company are proper and effective; (ii) to monitor the integrity of the financial statements and information published by the Company; (iii) to review the Group’s approach to risk management; and (iv) to monitor compliance with the Listing Rules and the recommendations of the Combined Code. The Committee, in performing these functions, reviews the annual and interim financial statements issued to shareholders, compliance with financial reporting standards and the size and remit of the internal audit function. The Committee also considers and makes recommendations to the Board in relation to the independence and objectivity of the external auditors (including the impact of any non-audit work undertaken by them) and their suitability for re-appointment. The Audit Committee determines the scope of the external audit in discussion with the external auditors and agrees their fees in respect of the audit. The Committee normally meets with the Finance Director and the external auditors in attendance, although time is set aside annually for discussion between the Committee and the external auditors and with the internal auditors, in each case in the absence of all executive directors, and the Committee has the power to engage outside advisers if it sees fit. The Remuneration Committee currently consists entirely of independent non-executive directors (Ian Gregg – Chairman, Stephen Curran, Bob Bennett and Julie Baddeley). During 2004 it met three times. All Committee members attended all meetings in the period they were members, save that Bob Bennett and Stephen Curran were each unable to attend one meeting. The Committee’s main duties are to determine the basic salary, benefits in kind, terms and conditions of employment, performance-related bonuses, share options and pension benefits of the executive directors and the Chairman on behalf of the Board. The Committee is also responsible for the operation of the Company’s share option schemes and, when requested by the Board or by the Managing Director, for monitoring and making recommendations in respect of the level and structure of remuneration for senior management. A separate Executive Director Committee sets, after discussion with the Chairman, the fees for the non-executive directors so as to ensure that no director is involved in setting his or her own remuneration. The Directors’ Remuneration Report is set out on pages 42 to 45 of this Annual Report. The Nominations Committee currently comprises Derek Netherton - Chairman, all of the non-executive directors and Mike Darrington. During 2004 it met formally only once (with all committee members except Bob Bennett present) but held several informal discussions during the year in order to progress the selection and recruitment of new non-executive directors. The Committee’s main functions are to review the balance and constitution of the Board; to advise the Board as to whether directors retiring by rotation should be nominated for re-election by the members; and to approve and manage the process for setting the specification for all Board appointments, identifying candidates who meet that specification and making recommendations to the Board on the basis of merit and compliance with objective criteria in respect of all new Board appointments. In relation to the appointment of Julie Baddeley, the Nominations Committee defined the criteria on the basis of its assessment of the skills required (which it agreed with the Board), engaged a recruitment consultant and held a series of interviews before deciding to recommend the Board to offer the role to Julie as its preferred candidate. Relations with shareholders. The Chairman ensures that there is effective communication with individual and institutional shareholders through the announcement of regular trading updates, as well as general presentations after announcement of the interim and preliminary results and the posting of results on the Company’s website. The Board considers that the AGM is the main forum for communication with investors, with the Chairmen of the Board and its committees available to answer any issues raised and any newly appointed non-executive directors being available to meet shareholders. In addition, 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 in order to maintain an understanding of market perceptions of the Company. The Senior Independent Director is available to shareholders if they have concerns which contact through the normal channels of the Chairman, Managing Director or Finance Director have failed to resolve or for which such contact is not appropriate. At the 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. Accountability, Audit and Going Concern. The Board acknowledges its responsibility to present a balanced and understandable assessment of the Company’s position and prospects. This is fulfilled by the statements contained in the Chairman’s statement and Managing Director’s report, which supplement the statutory accounts themselves. A statement of directors’ responsibilities in respect of the preparation of accounts is given on page 19. The Audit Committee has reviewed whether, and is satisfied that, the Company’s auditors, KPMG Audit Plc, continue to be objective and independent of the Company. KPMG Audit Plc does perform non-audit services for the Group but the Audit Committee is satisfied that its objectivity is not impaired by such work (non-audit fees amounted to £91,000 during 2004 and related mainly to taxation compliance services). Policies and Procedures Policies and procedures, covering control issues across appropriate aspects of the business, are defined and communicated to the respective managers and staff at all levels. Adherence is monitored and reported upon on an ongoing basis. Health and Safety The Company is committed to improving continuously the working environment with the objective that accidents and work related ill health should be progressively reduced. An occupational health strategy has been produced with Health and Safety Officers and Occupational Nurses appointed in every Division. Targets are set and programmes are devised to implement them. This approach involves a rigorous health assessment, during which hazards are identified, risks assessed, control measures applied and improvement actions agreed to manage residual risks to an acceptable level. Financial Reporting The Company operates a comprehensive financial control system that incorporates Divisional Financial Controllers who have responsibility for financial management within each Division. Each Divisional Financial Controller works closely with their respective Divisional Managing Director to monitor performance at Divisional Board level as against planned and prior year comparatives. In addition, assets and liabilities are scrutinised at several levels on a regular basis and remedial action taken where required. A comprehensive annual planning process is carried out which determines expected levels of performance for all aspects of the business. Each Divisional Financial Controller also reports directly to the Finance Director on technical matters. Internal Audit The internal audit function visits every Division at least once in every financial year and reviews performance of the Division across a range of financial and non-financial requirements, reporting findings to the relevant senior managers and direct to the Audit Committee. The Board confirms that it has reviewed the effectiveness of the system of internal control (covering all material controls, including financial, operational, compliance and risk management systems) during the period under review and up to the date of approval of the annual report and accounts. Corporate Governance continued The Company has an internal audit function. This assists in its monitoring of systems of control and augments the examination carried out by the external auditors. 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. Risk Management. The Board is ultimately responsible for the Group’s system of internal control, which covers all aspects of the business, and for reviewing its effectiveness. However, any such system can only be designed to manage, rather than eliminate, the risk of failure to achieve the Company’s objectives and, therefore, is only able to provide reasonable, and not absolute, assurance against material misstatement or loss. The directors regularly review the risks to which the Company is exposed, as well as the operation and effectiveness of the system of internal controls. This is an ongoing process which accords with the guidance in the Turnbull report, involving the identification, evaluation and management of the significant risks faced by the Company. Key elements of the internal control system, which have been in place during the whole of the period under review and up to the date of approval of the annual report and accounts, are: Board of Directors The Board takes a proactive approach to the management of all forms of risk, and views risk management as a vital constituent of its role. The Board holds five scheduled meetings a year. At each of these meetings the effectiveness of the controls relating to the most significant risks (i.e. those which may restrict the Company’s ability to meet its objectives) are monitored and reviewed. Remedial action is determined where appropriate. For some key risks, where it is felt necessary, specialist advice is sought from external agencies and professional advisers. The Board also reviews, at least annually, the level and scope of insurance cover maintained within the business. The Board receives reports from management on significant changes in the business and external environment which might affect the risk profile. It has also set in place a system of regular hierarchical reporting which provides for relevant details and assurances on the assessment and control of risks to be given to it. Management Board The Management Board, answerable directly to the Managing Director, is responsible for implementing decisions of the Main Board and providing protection against the major risks by various techniques, including sharing best practice, monitoring, supervision and training. Risk Committee A Risk Committee, consisting of the heads of each management function within the business (including Health and Safety, Food Safety, Personnel, Production and Purchasing), has responsibility for analysing, assessing, measuring and understanding the Company’s risk environment, as well as devising a sound risk management strategy for review and approval by the Board. The Risk Committee reports it findings and important changes to the Board on a regular basis through personal presentation, narrative reports and key performance indicators (internal and external to the organisation). The Risk Committee also feeds the results of its assessments back into the business planning for each division at least annually. The risks are assessed on a regular basis across all functional areas but, in particular, the areas of food safety, health and safety, information flow, asset protection and Regulatory Requirements. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 48 49 Corporate Social Responsibility Greggs plc believes that as a major employer, a provider of food products to the public, and a public company with obligations to its shareholders, the company has a responsibility to conduct its business with integrity, to act responsibly, to address the impacts of our business on the environment, and to give something back to the wider communities in which we operate. This responsibility is delivered through the following: Customers, People and Suppliers “Our Values” are embraced by the Board and expected of all colleagues: In 2004, Greggs plc appointed its first Community Initiatives Manager. This is a full-time dedicated role to oversee our work in the wider communities, in particular to accelerate further roll-out of the Greggs Breakfast Clubs. This appointment is testament to Greggs on-going commitment to the communities in which we operate. In addition to the schemes listed above, Greggs plc staff throughout the country participate voluntarily in a wide range of charity fund raising, which makes an additional meaningful contribution to the wider communities in which we operate. By their dedication and devotion, our employees are a true credit to the Greggs plc name, and the real benefits of what they achieve are inestimable. It is thanks to these employees and their efforts that as a Company we are able to make a contribution to the communities in which we operate. “We will be enthusiastic and supportive in all that we do, open, honest and appreciative, treating everyone with fairness, consideration and respect.” The Environment Our Values are a basis for all of our activities. Our employees are expected to use them in their relationships with each other and with customers and suppliers. Our Values are our ‘code of conduct’ and are the framework within which the business manages its activities and operates. Food Safety and Health and Safety are at the forefront of how we operate. We insist on providing our customers with good quality food products and assurances of food safety. Our robust systems also seek to protect the health and safety of our customers and employees. Wider Communities In 2004, Greggs plc directly donated 1.3% of pre-tax profit to charity. • The Greggs Trust is a registered charity, founded by Ian Gregg in 1987. Its main objective is the alleviation of the effects of poverty and social deprivation in the areas where the Company trades. Its income in 2004 was £884,390, derived from the Greggs plc donation, from employees under the Give As You Earn Scheme (10% of employees donated through this scheme in 2004), and staff fund raising activities. The balance was received in the form of donations from major shareholders and income from investments (including shares in Greggs plc) held by the Trust. Funds are distributed by the Trustees and via the 13 staff Charity Committees operating across the country, offering support to good causes within our trading areas. • The Greggs Breakfast Club scheme is designed to get children in selected primary schools off to a better start by providing them with free breakfasts. Greggs funds all of the healthy breakfast, including provision of fresh bread from local Greggs shops, together with the necessary equipment. Greggs staff work with school teachers to encourage parents, grandparents and other volunteers to run the clubs, including serving the breakfasts, thereby helping them to help others in their own communities. In 2004, the number of Breakfast Club schemes increased from 60 to 82. The concept has been validated by external independent research which has shown that Breakfast Club attendance encourages children to get to school on time and increases attentiveness in class. • The Greggs Cancer Run, is an annual event which has raised nearly £3 million since its inception in 1983. The Cancer Run originated in Greggs North East, organised each year by a group of dedicated staff. In 2004, Cancer Runs took place at both Greggs North East and Greggs North West. The event will take place in an additional two divisions in 2005. • 2004 was Year 4 of the Company’s investment of £500,000 in the 5-year Newcastle Employment Bond, which is secured as to repayment by Northern Rock plc. The investment is at zero rate interest, with the interest foregone to be used to help tackle long-term unemployment in the Newcastle upon Tyne area. • On a nationwide basis, Greggs is a member of the ‘Per Cent’ Club and made charitable donations of £615,000 in 2004, the majority of which was directed through the Greggs Trust. The Company recognises the importance of protecting our environment for future generations and is committed to carrying out its activities with due consideration for the environmental impacts of its operations and in line with Our Values. Environment Policy Greggs plc has identified the key environmental impacts of its activities. We are committed to an ongoing programme of continual reduction of any adverse impacts and prevention of pollution consistent with our long term business objectives. To manage this, the Company is progressively introducing an Environmental Management System (EMS) in each Division, which will seek the following: • Compliance with all relevant environmental legislation, regulation and other requirements applicable to the Company or to which the Company subscribes. • Reduction of waste at source via the efficient use of resources and encouragement of the re-use and recycling of waste. • Working towards increasing efficiency at all sites. • Monitoring and improving the performance of vehicles owned by Greggs plc. • Working towards ensuring that policies and procedures are in place so that accidents/ incidents with potential adverse environmental impact are controlled as far as is reasonably practicable. • Progressively making employees aware of the environmental issues relevant to their role within Greggs plc. • Taking into account the adverse impact on the environment of any capital expenditure project. During 2004, progress has been made as follows: • The first formal EMS has been implemented in the Greggs Central Savoury Plant at Balliol Park. • The Greggs Central Savouries Plant has been granted an Integrated Pollution Prevention and Control (IPPC) Permit to Operate. This is one of the first to be granted in the UK food industry. • Environmental Aspects and Impacts registers have been completed for all divisions (first stage of the EMS). These identify the environmental effects of our activities, and will be used to plan the appropriate actions to minimise these. • Environmental Audits of all divisions are now included in the annual audit schedule. • Greggs plc is working closely with DEFRA on the disposal considerations for animal by-products. • Continuation of the SEBA (Save Energy Be Aware) initiative in all shops and factories to reduce energy consumption by the Company. In 2004, the Company has taken steps towards meeting its environmental commitments and will continue to grow this commitment during 2005. 10 Year History 1995 1996 1997 1998 1999 2000 2001 2002 2003* 2004 Turnover (£’000) 219,514 238,465 265,941 291,420 308,678 339,008 377,556 422,600 456,978 504,186 Profit on ordinary activities before taxation (£’000) Shareholders’ funds (£’000) Earnings per share (pence) Dividend per share (pence) Cash generated by operations (£’000) (before dividends, tax and capital expenditure) Capital expenditure (£’000) Number of shops in operation at year end 13,056 15,673 18,035 20,214 21,520 26,356 32,742 36,666 40,472 46,702 41,219 48,107 58,384 69,585 80,896 88,169 103,554 119,965 134,150 157,158 79.0 95.8 121.1 122.8 135.1 162.3 190.2 209.2 230.5 264.7 26.0 32.0 37.0 41.0 45.0 55.0 65.0 72.5 80.0 96.0 20,838 24,955 30,408 34,902 34,526 43,431 50,418 55,555 57,722 69,261 11,931 15,669 24,364 26,204 22,403 21,397 27,385 42,143 32,361 25,090 967 1,032 1,057 1,072 1,084 1,105 1,144 1,202 1,231 1,263 *as restated following adoption of UITF 38 DIRECTORS Derek Netherton (Non-executive chairman)†ø Mike Darrington FCA (Managing)ø Malcolm Simpson FCA (Financial) Ian Gregg OBE (Non-executive)†ø Stephen Curran FCCA (Non-executive)*†ø Susan Johnson OBE (Non-executive)*ø Bob Bennett FCA (Non-executive)*†ø Julie Baddeley (Non-executive)*†ø *Member of Audit Committee † Member of Remuneration Committee ø Member of Nominations Committee SECRETARY AND REGISTERED OFFICE Andrew John Davison, Solicitor Fernwood House Clayton Road Jesmond Newcastle upon Tyne NE2 1TL Bankers Stockbrokers Royal Bank of Scotland plc UBS 149 High Street Gosforth Newcastle upon Tyne NE3 1HA Auditors KPMG Audit Plc Quayside House 110 Quayside Newcastle upon Tyne NE1 3DX Solicitors Robert Muckle Norham House 12 New Bridge Street West Newcastle upon Tyne NE1 8AS 1 Finsbury Avenue London EC2M 2PA Brewin Dolphin Securities Ltd Commercial Union House 39 Pilgrim Street Newcastle upon Tyne NE1 6RQ Registrars Capita Registrars Bourne House 34 Beckenham Road Beckenham Kent BR3 4TU Financial Highlights Turnover Pre-tax profits Post-tax profits Shareholders’ funds Capital expenditure Earnings per share Dividend per ordinary share 2004 £’m 504.2 46.7 31.6 157.2 25.0 Pence 264.7 96.0 *As restated following adoption of UITF 38 Financial calendar Announcement of results and dividends Half year Full year Dividends Interim Final Annual report posted to shareholders Annual General Meeting 2003* £’m 457.0 40.5 27.2 134.2 32.4 Pence 230.5 80.0 Early August Early March Mid October Late May Early April 17 May 2005 EPS DIVIDEND Pence 270 260 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2004 50 51 Nationwide Coverage GREGGS BAKERS OVEN SHOP NUMBERS 2004 2003 SHOP NUMBERS 2004 2003 Scotland North East Cumbria Yorkshire North West Midlands South Wales South East GREGGS 139 114 49 119 129 144 102 249 133 108 50 116 125 137 99 239 Bakers Oven Scotland Bakers Oven North Bakers Oven Midlands Bakers Oven South 19 48 84 63 25 49 84 64 BAKERS OVEN 214 222 Greggs Belgium 4 2 1,045 1,007 TOTAL 1,263 1,231 Contents Contents 2 FINANCIAL REVIEW 5 9 CHAIRMAN’S STATEMENT MANAGING DIRECTOR’S REPORT 16 DIRECTORS’ REPORT 19 STATEMENT OF DIRECTORS’ RESPONSIBILITIES 20 REPORT OF THE INDEPENDENT AUDITORS 22 GROUP PROFIT & LOSS ACCOUNT 23 GROUP BALANCE SHEET 24 PARENT COMPANY BALANCE SHEET 25 GROUP CASH FLOW STATEMENT 26 ACCOUNTING POLICIES 28 NOTES TO THE ACCOUNTS 42 DIRECTORS’ REMUNERATION REPORT 46 CORPORATE GOVERNANCE 49 CORPORATE SOCIAL RESPONSIBILITY 50 TEN YEAR HISTORY 50 DIRECTORS & ADVISERS 51 SHOP ALLOCATION Baked-in flavour A N N U A L R E P O R T & A C C O U N T S 2 0 0 4 Fernwood House, Clayton Road, Jesmond, Newcastle upon Tyne NE2 1TL. www.greggs.co.uk G R E G G S p l c A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 

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