Greggs
Annual Report 2006

Plain-text annual report

Annual Report 2006 2 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 FINANCIAL HIGHLIGHTS Turnover 2006* £’m 550.8 Earnings before interest and tax 38.7 2005 £’m 533.4 47.1 50.2 34.1 181.5 41.7 Pence 282.1 40.2 27.0 144.9 30.0 Pence 241.2 Pre-tax profits Post-tax profits Shareholders’ funds Capital expenditure Earnings per share Dividend per ordinary share 116.0 106.0 *Includes £3.5m restructuring costs FINANCIAL CALENDAR Announcement of results and dividends Half year Full year Early August Early March Dividends Interim Final Mid October Late May Annual report posted to shareholders Annual General Meeting Early April 14 May 2007 EPS DIVIDEND Pence 290 280 270 260 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 CONTENTS 03 GREGGS THE BAKERS 04 TRIBUTE TO IAN GREGG AND MALCOLM SIMPSON 06 DIRECTORS’ REPORT AND BUSINESS REVIEW 06 06 08 12 13 19 19 OUR BUSINESS CHAIRMAN’S STATEMENT MANAGING DIRECTOR’S REPORT KEY PERFORMANCE INDICATORS CORPORATE GOVERNANCE FIXED ASSETS DIRECTORS AND THEIR INTERESTS 20 20 20 22 24 SUBSTANTIAL SHAREHOLDINGS 28 CONSOLIDATED BALANCE SHEET AUTHORITY TO PURCHASE SHARES CORPORATE SOCIAL RESPONSIBILITY AUDITORS STATEMENT OF DIRECTORS RESPONSIBILITIES 29 PARENT COMPANY BALANCE SHEET 30 CONSOLIDATED STATEMENT OF CASHFLOWS 31 PARENT COMPANY STATEMENT OF CASHFLOWS 25 REPORT OF THE INDEPENDENT AUDITORS 32 NOTES TO THE CONSOLIDATED ACCOUNTS 27 CONSOLIDATED INCOME STATEMENT 58 DIRECTORS REMUNERATION REPORT 27 CONSOLIDATED STATEMENT OF RECOGNISED 66 TEN YEAR HISTORY INCOME AND EXPENSE 27 PARENT COMPANY STATEMENT OF RECOGNISED INCOME AND EXPENSE 66 DIRECTORS & ADVISERS 67 SHOP ALLOCATION GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 3 Greggs the Bakers OUR BUSINESS Greggs plc is the UK’s leading bakery retailer, specialising in sandwiches, savouries and other baker-fresh food on the go. From humble beginnings as a single bakers shop, we now have over 1,300 shops throughout the UK, trading under our Greggs and Bakers Oven brands. Whilst our shops and products have evolved over time, we have remained loyal in our commitment to provide baker-fresh, quality food on the go. OUR VISION We will be Europe’s finest retail baker, growing, highly profitable and operating with integrity, for the benefit of our people, customers, shareholders and communities. Our medium term targets for the UK include growing to more than 1,700 shops; in the long term we believe that 2,000 shops is achievable. A GREAT PLACE TO WORK We aspire to be a company with good, honest values and a ‘can do’ culture, that everyone is proud to work for. ■ Our Values: We will be enthusiastic and supportive in all that we do, open, honest and appreciative, treating everyone with fairness, consideration and respect. ■ Our Culture: We are achievers! Working hard together, in a friendly, informal way, where everyone matters. ■ Our Communities: We will be responsible neighbours wherever we operate, supportive of our local communities and continually improving our impact on the environment. 4 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Tribute to Ian Gregg and Malcolm Simpson by Sir Michael Darrington The Greggs business was started by Ian’s parents in the bit of an act of faith. However, I had met Ian on a number of late 30s, selling yeast and eggs from a van. As a young occasions and as we got to know each other I felt we shared boy, after his parents bought their first shop and bakery lots of ideas and had a lot of values in common and that Ian in 1951, Ian found himself helping with all the tasks in was somebody to be trusted. the bakery, as well as studying. Just as Ian qualified as a lawyer, his father died unexpectedly. Ian agreed to help his mother with the business for a short period but, to his surprise, found he became enthused by it. At that time, the business comprised a bakery in Gosforth with one shop and seven delivery vans and, in those days, the business was mainly bread, rolls and cakes. Ian progressively built the business over the next 20 years, growing it both organically and by acquisition. He developed the savoury business, putting ovens into all the shops and he found himself working bakers’ hours. He also reintroduced the iconic Stottie Cake. As those who know him understand, Ian loves working with people and is excellent at choosing them, which has contributed to the strong and stable team that was built. He has excellent personal values which he built into the business in the early days and which we have progressively developed as the business has grown. He is remarkable in that he has the vision of an The business floated on the London Stock Exchange in May 1984 and we carried on growing and improving the business. Ian became progressively more non-executive in his Chairman’s role. He retired as Chairman in 2002 but, fortunately for us, agreed to stay on for a few more years. Ian was amazing in that the understanding we had was that he would leave me to get on with doing things my way rather than getting involved himself. He did this even when, on a number of occasions, he must have felt pretty uncomfortable. I doubt that anyone else could have done this as well as Ian. Even during his most frenetic times, Ian found time for the other passion in his life – salmon fishing. He has always been very involved in conservation – including being the Chairman of the River Tweed Commissioners and Tweed Foundation, for which he was awarded an OBE. He is also very generous and set up a significant charitable trust to help the disadvantaged. He has a large number of achievements, both in and out of the business, which have influenced a lot of people. entrepreneur but was never happier than when he went in to Ian is a very modest and unassuming man, with great strength help out with a problem in the bakery. of character. His retirement from Greggs is the end of an era. In the early 80s, Ian decided he had done his bit in growing The AGM also sees the retirement of another pillar of Greggs Greggs, which was still a private business, and he asked me to – Malcolm Simpson, who has been Financial Director of Greggs join and to continue the improvement and expansion of the since 1975. He was a great help to Ian in the early days and, business. I came to Greggs as MD in 1983 from a large public when I joined Greggs in 1983, Malcolm was particularly company, joining a relatively small family business, which was a welcoming and supportive in what was initially a challenging time. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 5 Ian Gregg Malcolm Simpson Malcolm steered us through our flotation in May 1984. I know that I, and many others, will miss them tremendously He is a larger-than-life character who has had a wide-ranging and would like to wish them every success and happiness in involvement in most areas of our business and has made a the future. major contribution to our success over many years. He is very strong minded and (most of the time!) I have appreciated both his challenging approach as well as his supportiveness. Sir Michael Darrington Managing Director 12 March 2007 Greggs have been very fortunate to have two such excellent people giving such long-term commitment to the very successful building of our business. 6 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Directors’ Report and Business Review for the 52 weeks ended 30 December 2006 OUR BUSINESS The directors have pleasure in presenting Net finance income was reduced by 50 per cent to £1.5 million their annual report and the audited accounts for the 52 weeks (2005: £3.0 million) as we returned surplus cash to our ended 30 December 2006. The comparative period is the shareholders through increased dividends and share buybacks. 52 weeks ended 31 December 2005. The directors’ report and business review is set out on pages 6 to 23. Greggs plc is the UK’s leading retailer specialising in sandwiches, savouries and other bakery-related products, with a particular focus on takeaway food and catering. We continue to show significant growth and now have over 1,300 retail outlets, trading under the Greggs and Bakers Oven brands. CHAIRMAN’S STATEMENT As we had anticipated, 2006 proved to be a challenging year for the Group. During the year we conducted a In consequence, pre-tax profit before restructuring costs was £43.7 million (2005: £50.2 million), a reduction of 12.8 per cent. After the £3.5 million closure costs arising from the Bakers Oven restructuring pre-tax profit was 19.8 per cent lower than in 2005 at £40.2 million. Before restructuring costs, diluted earnings per share were 262 pence (2005: 279 pence), a reduction of 6.2 per cent. This compared favourably with the 10.4 per cent decrease in operating profit, reflecting the benefit of share buybacks. After the impact of restructuring costs, diluted earnings per share were 240 pence (2005: 279 pence), a reduction of 14.0 per cent. comprehensive review of the business, which confirmed DIVIDEND The Board recommends a final dividend of 78.0 its fundamental strengths in terms of branding, shops, pence per share (2005: 70.0 pence), an increase of 11.4 per cent. products and people, but also identified opportunities Together with the interim dividend of 38.0 pence (2005: 36.0 for improvement. We are therefore making changes to enable us to become even more focused on our customers, respond more rapidly to a fast-changing and increasingly competitive market place, and facilitate Greggs’ continuing development as a powerful and innovative national brand. RESULTS Total Group sales for the 52 weeks ended 30 December 2006 increased by 3.3 per cent to £551 million (2005: £533 million). After a flat first half, like-for-like sales performance improved towards the end of the year. The like-for-like sales improvement during the second half (28 weeks) was 0.9 per cent, making an increase for the year as a whole of 0.5 per cent. Operating profit, excluding the costs of restructuring the Bakers Oven business in the North and Scotland, was £42.2 million (2005: £47.1 million), a reduction of 10.4 per cent giving an pence), paid in October 2006, this makes a total for the year of 116.0 pence (2005: 106.0 pence). This is a rise of 9.4 per cent, making 2006 our twenty-second consecutive year of dividend growth since Greggs came to the stock market in 1984. The increased dividend is covered 2.3 times by diluted earnings per share before restructuring costs (2005: 2.6 times) and is consistent with our previously stated intention to progress towards cover of 2.0 times. Subject to the approval of the Annual General Meeting, the final dividend will be paid on 25 May 2007 to shareholders on the register at close of business on 27 April 2007. As announced in the interim report, we believe that our shareholders will benefit from a more efficient balance sheet. In addition to delivering value through increased dividends, the Company spent a total of £39.5 million during the year purchasing 1,036,479 of its ordinary shares for cancellation, at an operating margin of 7.7 per cent (2005: 8.8 per cent) for the average price of £37.87 per share. The trustees of the Greggs year. The principal factors here were the modest like-for-like Employee Benefit Trust purchased a further 438,829 shares at a sales progress, including a 2.5 per cent decline in core volumes, cost of £16.4 million for the future satisfaction of employee share and a £4.5 million increase in energy costs. These were mitigated options. The combined effect of these purchases, totalling to some extent by efficiency improvements and a continuing £55.9 million, is seen in the reduction of net cash on our balance effort to bear down on overheads. sheet from £65.6 million to £19.6 million during 2006. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 7 Derek Netherton, Chairman It is the Board’s intention to renew its authority to buy back year he has served as an executive director in charge of our shares at the Annual General Meeting, and to continue to buy IT function. His contribution to the business cannot be back shares when it is in the interests of our shareholders overestimated. Mike Darrington pays tribute to Ian and Malcolm to do so. on pages 4 and 5. RESULTS OF STRATEGIC REVIEW During 2006 we PEOPLE This has been a challenging year for all at Greggs, and completed a thorough review, looking at all aspects of our I would like to express the thanks of the Board to every member business, to ensure that it continues to develop in line with our of our team for their continued commitment to delivering customers’ needs. In order to accelerate the implementation of excellent customer service, and for their positive response to initiatives to extend the appeal and availability of products under the necessary changes we have made during the year. the Greggs brand we are creating a new management structure. Key priorities will include the improvement of our product range to enhance its appeal as the mass market becomes more aspirational, and the development of formats and opening hours that can satisfy demand for food on the go throughout the day. Action in these areas will be backed by significantly increased investments in research, advertising and promotion, and in improving the retail environment through refits and refurbishments. This programme of change is intended to drive a progressive acceleration of both top and bottom line growth. Profitability is also expected to benefit in the medium term from cost reductions as best practice is implemented across the business. Mike Darrington discusses these changes in more detail in his report on pages 8 to 11. PROSPECTS The more positive sales trend which developed in the final weeks of 2006 has continued in the current year to date. Like-for-like sales in the nine weeks to 3 March 2007 have increased by 3.9 per cent, broadly in line with inflation. Operating profit is in line with our budget and ahead of the comparable period last year. In our programme to strengthen and develop the Greggs brand, the emphasis this year will be very much on evaluating and learning from the results of our trials, along with the progressive adoption of best practice across the business. Although we expect to see some near term benefits from this work, its real objective is to enhance the growth potential of the Group over the next two to three years. While additional costs will be incurred as we reorganise and develop the Greggs brand, overall we expect that 2007 will be a THE BOARD Raymond Reynolds (47) was appointed to the year of progress for the Group. Derek Netherton, Chairman 12 March 2007 Board as an executive director in the new role of Retail Director for the Greggs brand on 18 December 2006. He is charged with the development of a stronger, more unified and customer- focused Greggs brand throughout the UK. Two directors who have made truly exceptional contributions to the business will retire at our AGM in May. Ian Gregg (67), who has continued to serve as a non-executive director since August 2002, was Executive Chairman and Managing Director from 1964-84, then Executive Chairman 1984-93 and Non- Executive Chairman 1993-2002. Greggs is a unique business in many ways, one of which is the integrity of its values and the way in which these are embedded throughout the company. Ian was the inspiration for this as well as many other strengths of the business. On a personal note I am also very grateful for all the help that he has given to me since I took over from him as Chairman. Malcolm Simpson (65), retired as Financial Director in May 2006 after 31 years on the Board in that role. For the last 8 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Directors’ Report and Business Review (continued) MANAGING DIRECTOR’S REPORT In 2006, we faced an exceptional increase in energy costs We are significantly increasing our customer focus to enable us to drive a stronger and more unified Greggs brand that can respond more rapidly and effectively to changing needs and tastes. We are taking major initiatives in the areas of management, customers, products, shops and marketing. These actions will create a more streamlined Group with the capability to deliver progressively improving performance through a focus on innovation and best practice. TRADING PERFORMANCE Trading conditions during 2006 following the end of a long term electricity supply agreement and significant hikes in gas and other power costs. In total, the Group’s energy bill rose by £4.5 million compared with 2005, and this was the largest single contributor to the £4.9 million reduction in operating profit before restructuring costs. Through forward buying we managed to avoid the peak of the energy cost spike and, as a consequence, these costs in 2007 are likely to be at a similar level to 2006. Advantageous forward buying also enabled us to mitigate the effects of a significant increase in the market price of flour, our most important ingredient, from autumn 2006, as poor were the most demanding that we have encountered for well harvests worldwide resulted in a shortage of good quality over a decade, and these were reflected in our disappointing milling wheat. Labour, our largest single cost, reflected underlying like-for-like sales performance. The flat like-for-like sales trend wage inflation of just under 4 per cent, partially offset by of the first half (24 weeks) continued for longer than we had improved scheduling of shop staff hours and a continued drive expected in the second half, partly because of the effects of an to enhance efficiency. We also robustly challenged all spending exceptionally hot summer. Real improvements were achieved, as part of a determined focus on tighter cost management against progressively easier comparatives, in the final two across the Group. months of the year, with like-for-like sales in the six weeks to 9 December growing by 2.0 per cent and in the final three Greggs brand UK. The Greggs brand in the UK recorded a like-for-like sales decline of 0.3 per cent in the first half and an weeks to 30 December by 3.3 per cent. As the Chairman has improvement of 1.2 per cent in the second half, making an noted, these delivered an uplift of 0.9 per cent over the second increase of 0.5 per cent for the year. Selling price inflation half as a whole, making an increase of 0.5 per cent for the year. averaged 3.1 per cent, once again reflecting improvements to With our selling price inflation averaging 3.0 per cent, this our product offer as well as the recovery of cost increases. represented a 2.5 per cent decline in core volumes year-on-year. Bakers Oven brand. Like-for-like sales under the Bakers The market in which we operate has become progressively Oven brand grew by 0.8 per cent in the first half and recorded more competitive, with the proliferation of high street a marginal decline of 0.1 per cent in the second half, making convenience formats operated by the major supermarket an increase of 0.4 per cent for the year as a whole. Selling groups, and the growth of numerous specialist takeaway food price inflation averaged 2.6 per cent. chains. This has occurred at a time when high street footfall Greggs Continental Europe. Our Belgian business is now has in any case been under pressure. The high operational trading from six shops in Antwerp and Leuven, which are gearing of the business makes it sensitive to changes in like- achieving good core sales growth. We plan to open at least for-like sales. two more shops in Belgium during 2007. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 9 Sir Michael Darrington Managing Director STRUCTURE AND STRATEGY: GREGGS As the product contains less than 400 Kcalories, less than 10g of fat, Chairman has noted, we have conducted a comprehensive less than 4g of saturated fat and less than 2g of salt. The review of our structure and strategy during 2006. Whilst range is complemented by a healthy fruit salad pot. Together, confirming the fundamental strengths of the business, it has Healthier Options products already account for over 10 per made us even more determined to drive harder in those cent of our sandwich sales. areas where there are opportunities for improvement. Shops. The strategic review has confirmed the fundamental Management. We operate in an increasingly fast-moving strength of our retail property portfolio. We are now seeking market place, and it is essential that we have the capacity to develop our range of outlets and opening times so that to react quickly to changing consumer demands and tastes. they are appropriately geared to each meal occasion and to Following our review, the Board concluded that the previous local demand for food on the go. In developing our retail management structure, which allowed considerable autonomy estate, we will progressively focus on new types of locations to the eight Greggs divisions in the UK, could no longer meet where there is demand for high quality takeaway food, as this key requirement. Raymond Reynolds was therefore well as on the traditional high street. We will also put increasing appointed Retail Director in December 2006 to unify the emphasis on capital investment devoted to enhancing the appeal Greggs brand and to drive an improvement programme based of our existing shops through refits and refurbishments. on an even greater understanding of our customers and their needs. Customers. Our market research has confirmed the great loyalty of the million customers who visit Greggs each day. It has also highlighted clear opportunities to strengthen Marketing. All these changes will be supported by a significant increase in our marketing expenditure, including a campaign to promote awareness of the Greggs brand. We will place particular emphasis on the freshness, quality and enjoyability of our products, including the excellent provenance engagement with our existing customers and to extend our of our ingredients. appeal to new groups of consumers. Our objective is to develop As our new structure becomes established, we will speed the Greggs brand to deliver quality food on the go to customers up the adoption of best practice throughout the Greggs throughout the day, with a range that is capable of satisfying business, both in the product range we offer and in the way their varying lifestyles and preferences. Products. While maintaining our focus on delivering great taste and enjoyment at competitive prices, we will develop our offer it is produced and sold. This will help us to drive down costs as well as building Greggs’ reputation as a consistent, national brand. to cater for more aspirational demands. We will continue to STRUCTURE AND STRATEGY: BAKERS OVEN In August offer iconic bakery products such as our sausage rolls and we announced the restructuring of Bakers Oven in the North doughnuts. These will be complemented by more and Scotland, involving the closure of these two divisions and adventurous new products and by further expansion and the transfer of 49 of their shops either to the Greggs brand development of our Healthier Options range of wraps, rolls or the successful Bakers Oven Midlands operation. A further and sandwiches, which currently comprises seven lines. Each 14 poorly performing shops were closed. These changes have 10 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Directors’ Report and Business Review (continued) MANAGING DIRECTOR’S REPORT CONTINUED CAPITAL INVESTMENT Capital expenditure during the year was £30.0 million (2005: £41.7 million). This was been implemented in accordance with our plans, and will significantly below our original budget of £40 million, deliver the projected profit enhancement of £1.25 million per principally as the result of site problems which delayed the annum from 2007. We incurred total restructuring costs of £3.5 million, slightly below our revised estimate but exceeding our original budget start of work on our new Glasgow bakery, and the scaling back of planned shop openings. We plan to invest some £39 million in the business during 2007, which will include the of £2.5 million owing to higher than expected property costs. Glasgow bakery construction; the completion of a smaller Since the beginning of the current year we have completed scale expansion of our South Wales facility; and a substantial the sale of the Carricks bakery site in Newcastle upon Tyne, increase in our expenditure on shop refits and formerly the headquarters of Bakers Oven North. As we have refurbishments. previously disclosed, the property profit on this sale will help to mitigate the costs of closure. CASH FLOW AND BALANCE SHEET The business remains consistently highly cash generative, underpinning the Bakers Oven in the South and Midlands remains a successful Board’s strategic decision to maintain our long-established, and profitable business, delivering good returns on our progressive dividend policy, reduce dividend cover and conduct investment, and we remain committed to its future growth a continuing share buyback programme. During the year the and development. RETAIL PROFILE We opened 48 new shops during the year and closed 31, giving us a net increase of 17 units to a total of 1,336 at 30 December 2006. There were a larger number of closures than usual as a result of the restructuring of Bakers Company and the Greggs Employee Benefit Trust together spent £55.9 million on the purchase of shares; the Company paid dividends to shareholders totalling £12.1 million; and we made an additional contribution of £5.5 million to our main pension scheme, reducing its deficit under IAS19 to £1.9 million Oven in the North and Scotland. Following these changes, our at 30 December 2006 (2005: £9.7 million). portfolio at the year end comprised 1,165 shops (2005: 1,098) under the Greggs brand in the UK, an increase of 67; 165 (2005: 216) under the Bakers Oven brand, a reduction of 51; and six under the Greggs brand in Belgium, an increase of one. We completed 29 comprehensive shop refurbishments and 24 minor refits during the year. Despite these substantial outlays, we ended the year with net cash on the balance sheet of £19.6 million, a reduction of £46.0 million since our previous year end. COMMUNITY AND ENVIRONMENT We are proud to have maintained our commitment to the communities in which we operate during 2006, both through the Company’s During 2007, we expect to add a net 20 – 25 new shops to continued charitable donations and the efforts of our employees. our portfolio, after a continuing programme of action to weed In total Greggs gave £548,000 to charities during the year out underperforming outlets. As part of our drive to enhance (2005: £609,000), amounting to 1.3 per cent of our pre-tax the customer appeal of our stores, we will accelerate the profit. This was directed principally through the Greggs pace of our programme of refurbishments and refits during Trust and our Greggs Breakfast Clubs scheme, where the the year. number of clubs operating in primary schools in GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 11 disadvantaged areas rose from 113 to 124. In addition to this THE FUTURE We are taking clear steps to address the our staff helped to raise £345,000 for children’s cancer charities difficulties we encountered in 2006, and have initiated a through regional fun runs and over £70,000 for the BBC programme of change that will build on the enormous Children In Need appeal. We have maintained our drive to improve energy efficiency and reduce carbon emissions through our SEBA (Save Energy Be Aware) initiative in all our shops and bakeries. I am pleased to report that this delivered a 10 per cent reduction in our energy usage in production during 2006. We have also continued to pursue various initiatives to increase recycling and reduce the amount of food waste going to landfill. PEOPLE Our excellent people have again demonstrated fundamental strengths of the Group. This will help us to develop an even more responsive and cost-effective business that can satisfy the needs of customers, employees and shareholders alike. We will do so without compromising our core values or our commitment to delivering excellent products and service. I am confident that this will provide the most solid of foundations for the delivery of our vision of long term growth as Europe’s finest bakery-related retailer. their dedication to the business, and have worked hard to Sir Michael Darrington overcome the challenges created by a more demanding Managing Director market place. I would like to record my special appreciation 12 March 2007 of the way those affected by the restructuring of Bakers Oven pulled together to help us to make those changes as quickly and smoothly as possible. I would also like to thank and send our good wishes for the future to two senior members of our management team who retired this year after long periods of service: Ian Edgeworth, who had been Personnel Director at our Group head office in Newcastle upon Tyne since 1983; and Peter Rossi, who joined the business in 1988 and had been Managing Director of Greggs of Yorkshire since 1997. In addition we have two other significant retirements coming in 2007 and, as the Chairman has noted, a personal tribute from me to Ian Gregg and Malcolm Simpson appears on pages 4 and 5. 12 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Directors’ Report and Business Review (continued) KEY PERFORMANCE INDICATORS KPI Definition 2002 2003 2004 2005 2006 Like for like sales growth Total sales growth Total number of shops Capital expenditure Earnings before interest and tax (EBIT) Earnings per share (basic) (a) (b) (c) (d) (e) (f) 6.4% 3.3% 5.1% 4.0% 0.5% 11.9% 8.1% 10.3% 5.8% 3.3% 1,202 1,231 1,263 1,319 1,336 £42.1m £32.4m £25.1m £41.7m £30.0m £35.3m £39.2m £44.7m £47.1m £42.2m* 209.2p 230.5p 270.5p 282.1p 263.0p† DEFINITIONS: (a) Like-for-like sales growth compares year-on-year cash (e) EBIT reflects the performance of the business before sales in our ‘core’ shops, i.e. it is not distorted by shop financing and taxation impacts. openings or closures. Refitted shops are included in the like-for-like comparison unless there has been a (f) Earnings per share is calculated by dividing profit significant change in the trading space. Like-for-like sales attributable to shareholders (i.e. profit after taxation) by growth includes selling price inflation. the weighted average number of ordinary shares outstanding during the year after adjusting for the effect (b) Total sales growth is the percentage year-on-year of own shares held. change in total sales for the Group. (c) Total number of shops represents the total number of shops in operation at the end of the year. * † Before cost of Bakers Oven restructuring (£3.5m), 2006 EBIT after restructuring £38.7m 2006 earnings per share after restructuring costs 241.2p (d) Capital expenditure is the total cash spent in the year on investment in tangible fixed assets. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 13 CORPORATE GOVERNANCE 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. Richard Hutton FCA (Finance Director), 38, was appointed to the Board on 13 March 2006. He qualified as a Chartered Accountant with KPMG and gained career experience with Procter & Gamble before joining Greggs in 1998. He was appointed Finance Director on 10 May 2006. Richard is also a non-executive director of Northern Recruitment Group plc. The Board considers that it has complied, throughout the year under review, with the principles of governance set out Malcolm Simpson FCA (IT Director), 65, qualified as a Chartered Accountant with what is now known as KPMG. in Section 1 of the Combined Code on corporate governance He then worked for eight years within the finance department published by the Financial Reporting Council (the “Combined of Procter and Gamble. He joined the Company in 1973 and Code”) effective during the financial year. was appointed Finance Director in 1975. He stepped down The following statements, together with the Directors' Remuneration Report on pages 58 to 64, describe how the from this role in May 2006 and is now responsible for the IT operations of the Company. relevant principles and provisions of the Combined Code Raymond Reynolds (Retail Director), 47, was appointed were applied to the Company in 2006 and will be relevant to the Company for the 2007 financial year. THE BOARD Composition The Board currently comprises the Chairman, 4 executive and 5 non-executive directors as follows: Derek Netherton (Chairman), 62, 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 and St James’s Place 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 2006. He is Chairman of the Nominations Committee. Sir Michael Darrington FCA (Managing Director), 65, qualified as a Chartered Accountant and then spent 17 years to the Board on 18 December 2006. He joined Greggs in retail management in 1986. During the late 1990s, as General Manager he built a significant new business for Greggs in the Edinburgh region, and in 2002 he was appointed Managing Director of Greggs of Scotland. Stephen Curran, 63, joined the Board in 1981. He was Chairman of Candover Investments plc from 1999 to 2006, having previously been Chief Executive of Candover since January 1991. Prior to joining Candover in May 1981, he was a managing consultant with Coopers & Lybrand Associates and then an investment manager with what is now Cinven. He remains a director of Candover Investments plc and is a non-executive director of Copthorne Holdings Limited, O.X.I.P. and the Dakota, Minnesota and Eastern Railroad Corporation. In 2004 he was appointed as the Senior Independent Non-Executive Director. Ian Gregg OBE, 67, 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 with United Biscuits, latterly in General Management. During from a single-shop operation to a multi-divisional specialist this time he attended the PMD course at Harvard Business retailer with almost 300 shops by the time of its successful School. He joined Greggs in 1983 and was appointed Managing flotation in 1984. Following the appointment of Director in January 1984. Mike Darrington as Managing Director in January 1984, 14 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Directors’ Report and Business Review (continued) CORPORATE GOVERNANCE CONTINUED Sir Ian Gibson CBE, 60, was appointed to the Board on Ian continued in the role of Executive Chairman until July 1993. He was then invited to become non-executive Chairman, 1 April 2006. He was Chief Executive of Nissan Europe N.V., Senior Vice President of Nissan Motor Company (Japan), which role he handed over to Derek Netherton in Deputy Chairman of Asda Group and Chairman of BPB plc. August 2002. Bob Bennett, 59, was appointed to the Board in December He is now a non-executive director of Northern Rock plc and GKN plc and Chairman of Trinity Mirror plc. 2003. He trained as a Chartered Accountant with Spicer & Effectiveness Pegler and was Group Finance Director of Northern Rock plc from 1993 until his retirement at the end of January 2007. He has been Chairman of the Audit Committee since 2004. Julie Baddeley, 55, 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 is an Associate Fellow of the Said Business School, Oxford. Julie was appointed as Chair of the Remuneration Committee in 2005. 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 ensure that the strategies proposed by the executive directors are fully discussed and critically examined prior to adoption. During 2006, the Board met five times and the number of meetings attended by each director was as follows: Main Board Audit Committee Remuneration Committee Nominations Committee Number of meetings held Derek Netherton Mike Darrington Malcolm Simpson Richard Hutton (appointed 13 March 2006) Raymond Reynold (appointed 18 December 2006) Ian Gregg (retired from the Remuneration Committee 9 March 2006) Stephen Curran Julie Baddeley Ian Gibson (appointed 1 April 2006, appointed to the Remuneration Committee 10 May 2006 ) Bob Bennett Susan Johnson (resigned 30 September 2006) 5 5 5 5 4 - 5 4 5 4 5 3 3 - - - - - - 2 3 2 3 2 6 - - - - - 1 5 6 4 6 - 2 2 2 - - - 2 2 2 1 2 1 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 15 The Board has adopted a paper identifying the separation of ■ Ian Gregg is a member of the Company’s pension the roles of the Chairman and the Managing Director. The scheme and a former employee, Managing Director and Chairman sets the agenda for Board meetings and ensures Chairman of the Company. that the Board is supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge ■ Stephen Curran and Ian Gregg have both served on the Board for more than nine years from the date of their its duties. The Board considers that it effectively leads and first election. 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 senior management at a different operating division each year. In addition, as part of the process of maintaining an awareness of the Company’s activities and assessing the ability of the management team, several members of the senior management team are invited to attend Board meetings and/or to present papers to the Board. This process also affords senior managers the opportunity to bring matters to the attention of the Board. 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: 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 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. Any non-executive director who has served on the Board for more than nine years must seek re-election annually. 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. During the year, the Chairman met with the non-executive directors without the executive directors present. The Senior Independent Director meets the non-executive directors without the Chairman present annually to appraise the Chairman's performance. The performance of the Board, its Committees and of all directors is evaluated annually by a formal and rigorous process. Each director completes a questionnaire. The results are fed back to the Chairman and the Senior Independent Director and then to the Board for discussion. These discussions are used to identify actions to improve effectiveness and also to identify individual and collective training needs. 16 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Directors’ Report and Business Review (continued) CORPORATE GOVERNANCE CONTINUED The Remuneration Committee currently consists entirely Board Committees The Board delegates some of its activities to the following committees, each of which has written terms of reference, which are available on the Company’s website. The Company Secretary acts as secretary to each of these Committees. The Audit Committee currently consists of four independent non-executive directors (Bob Bennett - Chairman, Stephen Curran, Julie Baddeley and Ian Gibson). 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 accounts and information published by the Company; (iii) to review the internal financial controls and the Group’s approach to risk management; and (iv) to monitor compliance with the Listing Rules and the recommendations of the Combined Code. of independent non-executive directors (Julie Baddeley – Chair, Stephen Curran, Bob Bennett and Ian Gibson). 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 58 to 64 of this Annual Report. The Committee, in performing these functions, reviews the The Nominations Committee currently comprises Derek annual and interim accounts issued to shareholders, compliance Netherton - Chairman, all of the non-executive directors and with financial reporting standards and the size and remit of the Mike Darrington. The Committee’s main functions are to internal audit function. The Committee also considers and review the balance and constitution of the Board; to advise makes recommendations to the Board in relation to the the Board as to whether directors retiring by rotation should 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 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. Each of the Committees is provided with sufficient resources the external auditors and with the internal auditors, in each to undertake its duties. case in the absence of all executive directors, and the Committee has the power to engage outside advisers if it sees fit. The Committee also monitors and reviews the effectiveness of the internal audit activities. 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 The Combined Code requires the Board to be satisfied that announcement of the interim and preliminary results and the at least one member of the Audit Committee has recent posting of results on the Company’s website. The Board receives and relevant financial experience – the Board is satisfied in reports on any comments received from shareholders this respect. following these presentations. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 17 The Board considers that the AGM is the main forum for Board of Directors communication with investors, with the Chairmen of the Board The Board takes a proactive approach to the management and its Committees available to answer any issues raised and any newly appointed directors being available to meet shareholders. In addition, the Company Secretary and the Company’s Brokers draw the attention of the Board to all of all forms of risk, and views risk management as a vital constituent of its role. At each Board meeting, the effectiveness of the controls relating to the most significant risks (i.e. those which may restrict the Company’s ability to meet its objectives) are monitored and reviewed. The Audit relevant shareholder communications. The Board also Committee, on behalf of the Board, conducts a formal review reviews briefings and comments by analysts in order to maintain of risks and risk management procedures and reports its 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 findings to the Board. 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 and accounts, are proposed at the AGM as separate resolutions. of risks to be given to it. 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. Operating Board The Operating Board, answerable directly to the Managing Director, is responsible for implementing decisions of the However, any such system can only be designed to manage, Main Board and providing protection against the major risks rather than eliminate, the risk of failure to achieve the by various techniques, including sharing best practice, Company’s objectives and, therefore, is only able to provide monitoring, supervision and training. reasonable, and not absolute, assurance against material misstatement or loss. The directors regularly review the risks Risk Committee A Risk Committee, consisting of the heads of each management to which the Company is exposed, as well as the operation function within the business, has responsibility for analysing, and effectiveness of the system of internal controls. This is assessing, measuring and understanding the Company’s risk an ongoing process which accords with the guidance in the environment, as well as devising a sound risk management Turnbull report, involving the identification, evaluation and management of the significant risks faced by the Company. Key elements of the internal control system, which have been in place during the whole of the year under review and up to the date of approval of this Annual Report and accounts, are: strategy for review and approval by the Board. The Risk Committee reports its 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) and through the Audit Committee. The Risk Committee also feeds the results of its assessments back into the business planning process at least annually. 18 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Directors’ Report and Business Review (continued) CORPORATE GOVERNANCE CONTINUED Health and Safety The risks are assessed on a regular basis across all functional areas but, in particular, the areas of food safety, health and The Company is committed to improving continuously the working environment with the objective that accidents and safety, information flow, asset protection and regulatory work related ill health should progressively be reduced. An requirements. The Board considers the key risks to the Group to be as follows: External factors Changes in the retail trading environment or in customer preferences will clearly have an effect on the business. The Company continually monitors market trends, the performance of its competitors and the performance of its own products and retail formats. Consumer research is carried out and key market reports are monitored. Operational 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. Financial Reporting The Company operates a comprehensive financial control system that incorporates Divisional Financial Controllers who The safety of our products, employees and customers is have responsibility for implementation of the Company’s paramount. Detailed systems are in place to ensure that we financial management policies within each division. Each are operating safely and these systems are subject to regular Divisional Financial Controller works closely with their audit to ensure compliance. High priority is given to implementing any resulting recommendations. respective Divisional Managing Director to monitor performance at Divisional Board level as against planned and Detailed plans are in place for all our major production facilities prior year comparatives. In addition, assets and liabilities are to maintain business continuity in the event of any potentially disruptive occurrence. Organisational The success of the Company is dependent upon the efforts 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 and abilities of its employees. The Company has established Financial Controller also reports directly to the Finance remuneration packages that will attract, retain and motivate Director on technical matters. individuals with appropriate skills and experience. A senior management executive training programme is in place together Whistle Blowing with group-wide processes for the training and development The Company has adopted “whistle blowing” procedures of all employees. 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. enabling employees to bring matters to the attention of the senior management and for the confidential, proportionate and independent consideration and follow-up of any matter so raised. The “whistle blowing” procedures are reviewed regularly by the Audit Committee. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 19 Internal Audit are set out in note 26 to the accounts. Details of directors’ The internal audit function visits every division on an annual share options are set out in the Directors’ Remuneration basis and reviews performance of the division across a Report on pages 58 to 64. range of financial and non-financial requirements, reporting findings to the relevant senior managers and direct to the Audit Committee. On 13 March 2006, 1 April 2006 and 18 December 2006 Richard Hutton, Sir Ian Gibson and Raymond Reynolds were respectively appointed as additional directors and on The Board confirms that it has reviewed the effectiveness of 30 September 2006, Susan Johnson retired as a non- the system of internal control (covering all material controls, executive director. including financial, operational, compliance and risk management systems) during the year under review and up to the date of approval of the annual report and accounts. ACCOUNTABILITY, AUDIT AND GOING CONCERN The Board acknowledges its responsibility to present a balanced and understandable assessment of the Company’s In accordance with the Company’s Articles of Association, Stephen Curran, Ian Gregg, Raymond Reynolds, Derek Netherton, Malcolm Simpson, Richard Hutton and Bob Bennett retire from the Board. All, except Ian Gregg and Malcolm Simpson who have decided not to seek re- election, being eligible, offer themselves for re-election. position and prospects. This is fulfilled by the statements DIRECTORS’ INDEMNITIES As at the date of this report, contained in the Chairman’s statement and Managing Director’s indemnities are in force under which the Company has agreed report, which supplement the statutory accounts themselves. to indemnify the directors, to the extent permitted by law, A statement of directors’ responsibilities in respect of the in respect of losses arising out of or in connection with the preparation of accounts is given on page 24. A statement of execution of their duties, powers or responsibilities as auditors’ responsibilities is given in the report of the auditors directors of the Company. The indemnities do not apply in on page 25. situations where the relevant director has been guilty of fraud or wilful misconduct. 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. 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. 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 30 December 2006 and 31 December 2005 (or at date of appointment if later) 20 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Directors’ Report and Business Review (continued) SUBSTANTIAL SHAREHOLDINGS At 12 March 2007, the only notified interests of substantial shareholdings in the issued share capital of the Company were: Number of shares held Percentage of issued share capital Aberforth Partners LLP 1,231,091 11.03% A.J. Davison (as trustee of various settlements) Baillie Gifford & Co Schroders 949,763 873,700 572,421 Aegon Asset Management UK plc 541,950 F.K. Deakin* Prudential plc Standard Life FMR Corporation F.M.E. Nicholson* Aviva plc Legal and General Investment Management Limited Mrs G.V. Richardson and family 529,036 487,516 459,141 446,509 375,868 363,975 395,527 360,449 8.51% 7.83% 5.13% 4.86% 4.74% 4.36% 4.11% 4.00% 3.37% 3.26% 3.54% 3.23% * Each of F.K. Deakin and F.M.E. Nicholson holds 375,868 shares jointly with A.J. Davison as trustees of various settlements within the numbers noted above. Various other trustees jointly CORPORATE SOCIAL RESPONSIBILITY Greggs plc believes that as a major employer, a provider of food products to the public, and a plc with obligations to its shareholders, the Company has a responsibility to conduct its business with integrity, to act responsibly, to address the impacts of our business on the environment, and to give something back to the wider communities in which we operate. This responsibility is delivered through the following: OUR CUSTOMERS, PEOPLE AND SUPPLIERS “Our Values” are embraced by the Board and expected of all colleagues: “We will be enthusiastic and supportive in all that we do, open, honest and appreciative, treating everyone with fairness, consideration and respect.” Our Values are a basis for all of our activities. Our employees are expected to use them in their relationships with each other and with customers and suppliers. Our Values are our ‘code of conduct’ and are the framework within which the business manages its activities and operates. EMPLOYMENT POLICIES We are committed to promoting policies which are designed to ensure that employees and those who seek to work for us are treated equally, regardless of sex, marital status, creed, colour, race or hold shares with A.J. Davison above, some of whom, by reason ethnic origin. of such joint holdings and other holdings in their own name, have declarable interests as follows: K.C. McCann (3.66% jointly held with A.J. Davison and others) and N.A. Instone (3.66% jointly held with A.J. Davison and others). 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 AUTHORITY TO PURCHASE SHARES development of disabled employees. At the AGM on 10 May 2006, the shareholders passed a The number and dispersion of the Group’s operating locations resolution authorising the purchase by the Company of its own shares to a maximum of 1,219,521 ordinary shares of 20p each. That authority has been used as to 676,479 shares as at 30 December 2006. The balance remains in force until 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. the conclusion of the AGM in 2007 or 8 August 2007, We communicate with our bakery staff by regular briefings and whichever is the earlier. letters. All staff receive a copy of divisional and Group gazettes. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 21 The Group operates Profit Sharing and Savings Related Share including provision of fresh bread from local Greggs or Option Schemes to encourage its employees to identify with Bakers Oven shops, together with the necessary equipment. its corporate objectives. Food Safety and Health & Safety are at the forefront of how we operate. We insist on providing our customers with good quality food products and assurances of food safety. Our robust systems also seek to protect the health & safety of Greggs’ customers and its employees. PAYMENTS TO SUPPLIERS Supplier credit is an important Greggs and Bakers Oven staff work with school teachers to encourage parents, grandparents and other volunteers to run the clubs, including serving the breakfasts, thereby helping them to help others in their own communities. In 2006, the number of Breakfast Club schemes increased from 113 to 124. 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 factor in the success of the Group. Whilst the Group does attentiveness in class. 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 The Greggs Cancer Run is an annual event which has raised over £3 million since its inception in 1983. In 2006, Cancer Runs took place in six divisions raising a total of £345,000. suppliers, in which case these prevail. Where disputes arise The Company’s five year investment in the Newcastle we attempt to resolve them promptly and amicably to Employment Bond matured in the summer of 2006 after ensure delays in payment are kept to a minimum. The average creditor payment period for the Company and the Group at 30 December 2006 was 36 days (2005: 39 days). helping hundreds of people into jobs and creating many successful new enterprises. The investment of £500,000 has been rolled over into the North East Enterprise Bond for a further five year period. This bond is also secured as to repayment by Northern Rock plc. The investment is at zero WIDER COMMUNITIES In 2006, Greggs plc directly rate interest, with the interest foregone to be used to fund donated 1.3% of pre-tax profit to charity. Greggs Trust is a registered charity, founded by Ian Gregg in 1987. Its main objective is the alleviation of the effects of a major private sector initiative to trigger and encourage new business start-ups and to evoke a change in the enterprise culture over the long-term across the North East. poverty and social deprivation in the areas where the Company On a nationwide basis, Greggs made charitable donations of trades. Its income in 2006 was £760,484, derived from the £548,000 in 2006, a significant proportion of which was directed Greggs plc donation, from employees under the Give As through the Greggs Trust. You Earn Scheme and staff fund raising activities. The balance was received in the form of donations from major shareholders and income from investments (including shares in Greggs plc) held by the Trust. Funds are distributed by the Trustees and via staff Charity Committees operating across the country, offering support to good causes within our trading areas. In addition to the schemes listed above, Greggs plc staff throughout the country participate voluntarily in a wide range of charity fund raising, which makes an additional meaningful contribution to the wider communities in which we operate. By their dedication and devotion, our employees are a true credit to the Greggs and Bakers Oven names, and the real benefits of what they achieve are inestimable. It is thanks to The Greggs Breakfast Club scheme is designed to get children these employees and their efforts that as a Company we are in selected primary schools off to a better start by providing able to make a significant contribution to the communities in them with free breakfasts. Greggs funds a nutritious breakfast, which we operate. 22 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Directors’ Report and Business Review (continued) CORPORATE SOCIAL RESPONSIBILITY CONTINUED THE ENVIRONMENT The Company recognises the importance of protecting our environment for future generations and is committed to carrying out its activities with due consideration for the environmental impacts of its operations and in line with Our Values. PROGRESS DURING 2006 Over the past 12 months we have made good progress against our environmental policy and commitment. Carbon reduction through our SEBA energy efficiency drive has led to achieving our business plan target of 10% reduction in energy usage from production operations. Partnership work has been carried out with the Carbon Trust to identify carbon reduction measures in both production sites ENVIRONMENT POLICY We are committed to an on-going and shops and as a result of this work monitoring and targeting programme of continual reduction of any adverse impacts of systems are being trialled in two parts of the country as an our operations in achieving our long-term business objectives. introduction to full energy targeting. To manage this, the Company is continuing to progress the following: Recognised externally trained environmental managers are now in place across the business and this has led to ■ compliance with all relevant environmental legislation, increased activity across the Group relating to recycling and regulation and other requirements applicable to the waste reduction. For example, the Greggs of Yorkshire Company or to which the Company subscribes; ■ reduction of waste at source via the efficient use of resources and encourage reuse and recycling of waste; ■ increasing energy efficiency at all its sites; recycling centre in Leeds has led to a reduction in waste to landfill (£45,000 annual saving) and resulted in fewer collections at shop level also assisting in reducing damage via transport emissions. We are exploring the possibility of waste to energy technology, and how we might develop this in the future. ■ monitoring and improving the performance of vehicles AUDITORS owned by Greggs plc; ■ working towards ensuring that policies and procedures AUDITOR INDEPENDENCE AND POLICY ON THE USE OF THE AUDITORS FOR NON-AUDIT WORK are in place so that accidents/incidents with potential The Audit Committee has reviewed whether, and is satisfied adverse environmental impact are controlled as far as is that, the Company’s auditors, KPMG Audit Plc, continue to 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. 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 £78,000 during 2006 and related to taxation compliance services and pensions advice). The Audit Committee's policy to ensure that the auditor's objectivity is not impaired by non-audit work is that the Company should be able to incur fees of up to GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 23 £100,000 per year on non-audit work (inclusive of tax compliance advice). Any fees in excess of this must be discussed in advance with the Chairman of the Audit Committee. The Company’s internal audit function assists in the monitoring of systems of control and augments the examination carried out by the external auditors. DISCLOSURE OF INFORMATION TO AUDITORS Each of the directors who held office at the date of approval of this directors' report confirms that, so far as he/she is individually aware, there is no relevant audit information of which the Company's auditors are unaware; and that he/she has taken all the steps that he/she ought to have taken as a director to make himself/herself aware of any relevant audit information and to establish that the Company's auditors are aware of that information. In accordance with Section 384 of the Companies Act 1985, a resolution for the re-appointment of KPMG Audit Plc as auditors of the Company will be proposed at the forthcoming Annual General Meeting. By order of the Board Andrew Davison Secretary Greggs plc (CRN 502851) Fernwood House Clayton Road Jesmond Newcastle upon Tyne NE2 1TL 12 March 2007 24 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Statement of Directors’ responsibilities in respect of the annual report and accounts The directors are responsible for preparing the annual report The directors are responsible for keeping proper accounting and the accounts, in accordance with applicable law and records that disclose with reasonable accuracy at any time the regulations. Company law requires the directors to prepare group and parent company accounts for each financial year. Under that law they are required to prepare the group accounts in accordance with IFRSs as adopted by the EU and applicable financial position of the parent company and enable them to ensure that its accounts comply with the Companies Act 1985. They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. law and have elected to prepare the parent company accounts Under applicable law and regulations, the directors are also on the same basis. The group and parent company accounts are required by law and by IFRSs as adopted by the EU to present fairly the financial responsible for preparing a Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. position of the group and parent company and the performance The Directors are responsible for the maintenance and for that period; the Companies Act 1985 provides in relation integrity of the corporate and financial information included to such accounts that references in the relevant part of that on the Company’s website. Legislation in the UK governing Act to accounts giving a true and fair view are references to the preparation and dissemination of accounts may differ from their achieving a fair presentation. legislation in other jurisdictions. In preparing each of the group and parent company accounts, the directors are required to: ■ select suitable accounting policies and then apply them consistently; ■ make judgements and estimates that are reasonable and prudent; ■ state whether they have been prepared in accordance with IFRSs as adopted by the EU. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 25 Independent auditors’ report to the members of Greggs plc We have audited the group and parent company accounts opinion, the information given in the Directors’ Report is (the “accounts”) of Greggs plc for the 52 weeks ended 30 consistent with the accounts. December 2006 which comprise the consolidated income statement, the consolidated and parent company balance sheets, the consolidated and parent company cashflow statements, the consolidated and parent company statements of recognised income and expense and related notes. The accounts have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. 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 than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the accounts in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU are set out in the Statement of Directors’ responsibilities on page 24. Our responsibility is to audit the accounts and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). In addition we report to you if, in our opinion, 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 regarding directors’ remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the 2003 Combined Code specified for our review by the Listing Rules of the Financial Reporting Authority, 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. We read the other information contained in the Annual Report and consider whether it is consistent with the audited accounts. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the accounts. Our responsibilities do not extend to any other information. BASIS OF AUDIT OPINION We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the Group’s and parent company’s circumstances, We report to you our opinion as to whether the accounts give consistently applied and adequately disclosed. a true and fair view and whether the accounts and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the group accounts, Article 4 of the IAS Regulation. We also report to you whether, in our 26 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Independent auditors’ report to the members of Greggs plc (continued) 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. OPINION In our opinion: ■ the Group accounts give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group’s affairs as at 30 December 2006 and of its profit for the 52 weeks then ended; ■ the parent company accounts give a true and fair view, in accordance with IFRSs as adopted by the EU as applied in accordance with the Companies Act 1985, of the state of the parent company’s affairs as at 30 December 2006; ■ the accounts and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the provisions of the Companies Act 1985 and, as regards the group accounts, Article 4 of the IAS Regulation; and ■ the information given in the Directors’ Report is consistent with the accounts. KPMG Audit Plc Chartered Accountants Registered Auditor Newcastle upon Tyne 12 March 2007 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 27 Consolidated Income Statement for the 52 weeks ended 30 December 2006 (2005: 52 weeks ended 31 December 2005) Revenue Cost of sales Gross profit Distribution and selling costs Administrative expenses Operating profit Finance income Finance expenses Profit before tax Income tax Profit for the financial year attributable to equity holders of the parent Basic earnings per share Diluted earnings per share Note 1 2 2 2 6 7 3-5 9 10 10 2006 £’000 Excluding Bakers Oven restructuring costs 550,849 (209,455) 341,394 2006 £’000 Total 2005 £’000 Total 2006 £’000 Bakers Oven restructuring costs (Note 4) - 550,849 533,435 (68) (68) (209,523) (203,346) 341,326 330,089 (262,917) (2,947) (265,864) (247,188) (36,232) (483) (36,715) (35,758) 42,245 (3,498) 38,747 47,143 1,579 (87) - - 1,579 3,106 (87) (90) 43,737 (3,498) 40,239 50,159 (14,227) 1,049 (13,178) (16,085) 29,510 (2,449) 27,061 241.2p 239.9p 34,074 282.1p 278.9p Consolidated Statement of Recognised Income and Expense for the 52 weeks ended 30 December 2006 (2005: 52 weeks ended 31 December 2005) Actuarial gains / (losses) on defined benefit pension plans Tax on items taken directly to equity Net income /(expense) recognised directly in equity Profit for the financial year Total recognised income and expense for the financial year attributable to equity holders of the parent Note 21 9 22 2006 £’000 2,741 (822) 1,919 27,061 2005 £’000 (2,345) 704 (1,641) 34,074 28,980 32,433 Parent Company Statement of Recognised Income and Expense for the 52 weeks ended 30 December 2006 (2005: 52 weeks ended 31 December 2005) Actuarial gains / (losses) on defined benefit pension plans Tax on items taken directly to equity Net income / (expense) recognised directly in equity Profit for the financial year Total recognised income and expense for the financial year Note 21 9 8 22 2006 £’000 2,741 (822) 1,919 26,332 28,251 2005 £’000 (2,345) 704 (1,641) 34,226 32,585 28 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Consolidated Balance Sheet at 30 December 2006 (2005: 31 December 2005) ASSETS Non-current assets Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Asset held for sale Total assets LIABILITIES Current liabilities Trade and other payables Current tax liabilities Non-current liabilities Defined benefit pension liability Other payables Deferred tax liability Total liabilities Net assets EQUITY Capital and reserves Issued capital Share premium account Capital redemption reserve Retained earnings Total equity attributable to equity holders of the parent Note 2006 £’000 2005 £’000 11 14 15 16 17 18 19 21 20 13 22 22 22 22 184,325 180,826 8,429 16,026 19,585 275 44,315 228,640 (61,295) (5,467) (66,762) (1,883) (90) (15,014) (16,987) (83,749) 144,891 2,232 13,533 207 128,919 144,891 7,713 15,861 65,602 - 89,176 270,002 (58,686) (8,086) (66,772) (9,730) (98) (11,927) (21,755) (88,527) 181,475 2,439 13,440 - 165,596 181,475 The accounts on pages 27 to 57 were approved by the Board of Directors on 12 March 2007 and were signed on its behalf by M.J. Darrington } Directors R.J. Hutton GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 29 Parent Company Balance Sheet at 30 December 2006 (2005: 31 December 2005) Note 2006 £’000 2005 £’000 ASSETS Non-current assets Property, plant and equipment Investments Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Current tax liabilities Non-current liabilities Defined benefit pension liability Other payables Deferred tax liability Total liabilities Net assets EQUITY Capital and reserves Issued capital Share premium account Capital redemption reserve Retained earnings Total equity attributable to equity holders 11 12 14 15 16 18 19 21 20 13 22 22 22 22 154,994 5,190 160,184 8,429 38,920 19,036 66,385 226,569 (61,284) (5,546) (66,830) (1,883) (90) (8,315) (10,288) (77,118) 149,451 2,232 13,533 207 133,479 149,451 150,922 5,190 156,112 7,713 38,006 65,823 111,542 267,654 (58,686) (7,524) (66,210) (9,730) (98) (4,852) (14,680) (80,890) 186,764 2,439 13,440 - 170,885 186,764 The accounts on pages 27 to 57 were approved by the Board of Directors on 12 March 2007 and were signed on its behalf by M.J. Darrington } Directors R.J. Hutton 30 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Consolidated Statement of Cashflows for the 52 weeks ended 30 December 2006 (2005: 52 weeks ended 31 December 2005) Operating activities Cash generated from operations (see below) Income tax paid Net cash inflow from operating activities Investing activities Acquisition of property, plant and equipment Proceeds from sale of property, plant and equipment Interest received Net cash outflow from investing activities Financing activities Defined benefit pension scheme special contribution Interest paid Proceeds from issue of share capital Sale of own shares Purchase of own shares Shares purchased and cancelled Dividends paid Net cash outflow from financing activities Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at the start of the year Cash and cash equivalents at the end of the year Cash flow statement – cash generated from operations Profit for the financial year Depreciation Loss on sale of property, plant and equipment Release of government grants Share-based payment expenses Finance income Finance expenses Income tax expense Increase in inventories Increase in debtors Increase / (decrease) in creditors Increase in pension liability Cash from operating activities Note 2006 £’000 66,185 (13,600) 52,585 11 (30,023) 1,599 1,579 (26,845) (5,500) (74) 93 1,809 (16,436) (39,544) (12,105) (71,757) (46,017) 65,602 19,585 2006 £’000 27,061 23,884 753 (8) 687 (1,579) 87 13,178 (716) (165) 2,609 394 66,185 22 22 22 22 22 16 Note 11 21 6 7 9 2005 £’000 67,689 (14,625) 53,064 (41,687) 2,171 3,106 (36,410) (4,000) (90) 1,234 3,695 (2,173) - (12,319) (13,653) 3,001 62,601 65,602 2005 £’000 34,074 22,038 484 (7) 557 (3,106) 90 16,085 (430) (1,912) (517) 333 67,689 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 31 Parent Company Statement of Cashflows for the 52 weeks ended 30 December 2006 (2005: 52 weeks ended 31 December 2005) Operating activities Cash generated from operations (see below) Income tax paid Net cash inflow from operating activities Investing activities Acquisition of property, plant and equipment Proceeds from sale of property, plant and equipment Interest received Net cash outflow from investing activities Financing activities Defined benefit pension scheme special contribution Interest paid Proceeds from issue of share capital Sale of own shares Purchase of own shares Shares purchased and cancelled Dividends paid Net cash outflow from financing activities Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at the start of the year Cash and cash equivalents at the end of the year Cash flow statement – cash generated from operations Profit for the financial year Depreciation Loss on sale of property, plant and equipment Release of government grants Share-based payment expenses Finance income Finance expenses Income tax expense Increase in inventories (Increase) / decrease in debtors Increase / (decrease) in creditors Increase in pension liability Cash from operating activities Note 2006 £’000 62,385 (12,536) 49,849 11 (29,414) 1,518 3,017 (24,879) (5,500) (74) 93 1,809 (16,436) (39,544) (12,105) (71,757) (46,787) 65,823 22 22 22 22 22 16 19,036 Note 11 21 2006 £’000 26,332 22,938 873 (8) 687 (3,017) 87 13,131 (716) (914) 2,598 394 62,385 2005 £’000 67,726 (13,153) 54,573 (41,682) 1,101 3,103 (37,478) (4,000) (90) 1,234 3,695 (2,173) - (12,319) (13,653) 3,442 62,381 65,823 2005 £’000 34,226 21,118 507 (7) 557 (4,549) 90 14,224 (430) 2,174 (517) 333 67,726 32 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Notes to the Consolidated Accounts Significant accounting policies Greggs plc (“the Company”) is a company incorporated and domiciled in the UK. The Group accounts consolidate those of the Company and its subsidiaries (together referred to as the “Group”). The parent company accounts present information about the Company as a separate entity and not about its Group. The accounts were authorised for issue by the directors on 12 March 2007. (a) Statement of compliance Both the parent company accounts and the Group accounts have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (“adopted IFRSs”). On publishing the parent company accounts here together with the Group accounts, the Company is taking advantage of the exemption in s230 of the Companies Act 1985 not to present its individual income statement and related notes that form a part of these approved accounts. (b) Basis of preparation The accounts are presented in pounds sterling, rounded to the nearest thousand, and are prepared on the historical cost basis. Non-current assets held for resale are stated at the lower of carrying amount and fair value less cost to sell. The Group chose not to restate business combinations prior to the transition date on an IFRS basis, as no significant acquisitions had taken place during the previous 10 years. The Group’s policy up to and including 1997 was to eliminate goodwill arising upon acquisitions against reserves. Under IFRS 1 and IFRS 3, such goodwill remains eliminated against reserves. The preparation of financial information in conformity with adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of revision and future years if the revision affects both current and future years. In particular, information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the accounts are described in the following notes: • Note 21 – measurement of defined benefit obligation • Note 21 – measurement of share-based payments • Note 24 – lease classification The accounting policies set out below have been applied consistently to all years presented in these consolidated accounts and are unchanged from previous years. The accounting policies have been applied consistently throughout the Group. (c) Basis of consolidation The consolidated accounts include the results of Greggs plc and its subsidiary undertakings for the 52 weeks ended 30 December 2006. The comparative period is the 52 weeks ended 31 December 2005. (i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists where the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The accounts of subsidiaries are included in the consolidated accounts from the date control commences until the date that control ceases. (ii) Transactions eliminated on consolidation Intragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated accounts. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 33 (d) Foreign currency Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign exchange differences arising on translation are recognised in the income statement. (e) Classification of financial instruments issued by the Group Financial instruments issued by the Group are treated as equity (i.e. forming part of shareholders’ funds) only to the extent that they meet the following conditions: (i) they include no contractual obligations upon the Company (or Group) to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Company; and (ii) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no contractual obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company’s exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments. To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company’s own shares, the amounts presented in these accounts for called up share capital and share premium exclude amounts in relation to these shares. Where a financial instrument that contains both equity and financial liability components exists these components are separated and accounted for individually under the above policy. The finance cost of the financial liability component is correspondingly higher over the life of the instrument. Finance payments that are associated with financial instruments that are classified as equity are dividends and are recorded directly in equity. (f) Property, plant and equipment (i) Owned assets Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation (see below) and impairment losses (see accounting policy (j)). The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. (ii) Subsequent costs The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when the cost is incurred if it is probable that the future economic benefits embodied within the item will flow to the Group and its cost can be measured reliably. All other costs are recognised in the income statement as incurred. (iii) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful economic lives of each part of an item of property, plant and equipment. Freehold and long leasehold properties are depreciated by equal instalments over a period of 40 years. Land is not depreciated. The depreciation rates are as follows: Short leasehold properties Plant: General Computers Motor vehicles Delivery trays Shop fixtures and fittings: General Electronic equipment 10% 10% 20% - 331/3% 20% - 25% 331/3% 10% 20% Depreciation methods, useful lives and residual values (if not insignificant) are reassessed annually. (iv) Assets in the course of construction Depreciation on these assets commences when the assets are brought into use. 34 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Notes to the Consolidated Accounts continued Significant accounting policies (continued) (g) Investments Investments in subsidiaries are carried at cost less impairment. (h) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories is based on the weighted average cost formula. (i) Cash and cash equivalents ‘Cash and cash equivalents’ comprises cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. (j) Impairment The carrying amounts of the Group’s assets, other than inventories and deferred tax assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in prior years are assessed at each reporting date and reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised. (k) Non-current assets held for sale Non-current assets that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. Immediately before classification as held for sale, the assets are remeasured in accordance with the Group’s accounting policies. Thereafter generally the assets are measured at the lower of their carrying amount and fair value less cost to sell. (l) Share capital (i) Repurchase of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as a deduction from equity. Repurchased shares that are held in the Employee Share Ownership Plan are classified as treasury shares and are presented as a deduction from total equity. (ii) Dividends Dividends are recognised as a liability in the year in which they are approved by the shareholders. (m) Employee share ownership plan The Group and parent company accounts include the assets and related liabilities of the Greggs Employee Benefit Trust (“EBT”). In both the Group and parent company accounts the shares held by the EBT are stated at cost and deducted from shareholders’ funds. (n) Segment reporting The consolidated entity operates in one business segment being that of retailing of sandwiches, savouries and other bakery related products (primary segment). As a result no additional business segment information is required to be provided. The consolidated entity operates principally in one geographic segment (secondary segment), the United Kingdom. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 35 (o) Employee benefits (i) Defined contribution plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement when they are due. (ii) Defined benefit plans The Group’s obligation in respect of defined benefit post-employment plans, including pension plans, is calculated by estimating the amount of the future benefit that employees have earned in return for their service in the current and prior years. That benefit is discounted to determine its present value and any unrecognised past service costs, and the fair value of any plan assets is deducted. The discount rate is the yield at the balance sheet date on AA credit rated bonds that have maturity dates approximating to the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the income statement. The Group recognises actuarial gains and losses in full in the year in which they occur in the statement of recognised income and expense. (iii) Share-based payment transactions The share option programme allows Group employees to acquire shares of the Company. The fair value of share options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date, using an appropriate model, taking into account the terms and conditions upon which the share options were granted, and is spread over the period during which the employees become unconditionally entitled to the options. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. For options granted before 7 November 2002 the recognition and measurement principles of IFRS 2 have not been applied in accordance with the transitional provisions in IFRS 1. In addition, deferred taxation has not been recognised on these options. (p) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. (i) Restructuring A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. (q) Revenue (i) Goods sold Revenue from the sale of goods is recognised as income on receipt of cash. 36 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Notes to the Consolidated Accounts continued Significant accounting policies (continued) (r) Government grants Government grants are recognised in the balance sheet initially as deferred income when there is a reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognised in the income statement on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are recognised in the income statement over the useful life of the asset. (s) Expenses (i) Operating lease payments Payments under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense over the term of the lease. (t) Finance income and expense (i) Finance income Finance income comprises interest receivable on funds invested and foreign exchange gains relating to those funds. Interest income is recognised in the income statement as it accrues using the effective interest method. (ii) Finance expenses Finance expenses comprise interest payable on borrowings and related foreign exchange losses. (u) Income tax Income tax comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax recognised is based on the expected manner of realisation or settlement of the carrying amounts of assets and liabilities, using tax rates that are expected to apply when the temporary differences reverse, based on rates enacted or substantively enacted at the balance sheet date. Temporary differences relating to the initial recognition of assets or liabilities that affect neither accounting nor taxable profit are not provided for, other than in a business combination, to the extent that they will probably not reverse in the foreseeable future. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related deferred tax benefit will be realised. (v) IFRSs available for early adoption not yet applied The following standards and amendments to standards which will have an impact for the Group, were available for early adoption but have not been applied in these accounts: • Amendment to IAS 1: Presentation of Financial Statements applicable for years commencing on or after 1 January 2007; • IFRS 7: Financial instruments: Disclosure applicable for years commencing on or after 1 January 2007; and • IFRIC 8: Scope of IFRS 2 Share-based Payment applicable for years commencing on or after 1 May 2006. The application of Amendment to IAS 1 and IFRS 7 in the current year would not have affected the balance sheets or income statement as the standards are concerned only with disclosure. The Group plans to apply these standards and amendments to standards in 2007. All other amendments to standards and interpretations that are available for early adoption currently have no impact for the Group. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 37 1. Segment analysis Business is the basis of the Group’s primary segmentation. The Group operates in one business segment being the retailing of sandwiches, savouries and other bakery related products. As a result no additional business segment information is required to be provided. The Group’s secondary segment is geography. It operates in one geographical segment, the United Kingdom, as the Group has no material operations outside the UK, and, therefore, no additional geographical segment information is required to be provided. 2. Employee profit sharing scheme The total amount paid out under the Group’s employee profit sharing scheme is contained within the main cost categories as follows: Cost of sales Distribution and selling costs Administrative expenses 3. Profit before tax Profit before tax is stated after charging/(crediting): Depreciation on owned property, plant and equipment Loss on disposal of fixed assets Release of government grants Payments under operating leases – property rents Auditors’ remuneration Audit of these accounts Audit of subsidiaries’ accounts pursuant to legislation Other services pursuant to such legislation Audit of pension schemes’ accounts Other services relating to taxation All other services 2006 £’000 1,299 2,852 711 4,862 2005 £’000 1,445 3,320 672 5,437 2006 £’000 2005 £’000 23,884 22,038 753 (8) 484 (7) 35,650 32,568 153 146 5 5 10 51 17 5 43 9 48 41 Amounts paid to the Company’s auditor in respect of services to the Company, other than the audit of the Company’s accounts, have not been disclosed as the information is required instead to be presented on a consolidated basis. 4. Bakers Oven restructuring costs During the year the Bakers Oven divisions in the North of England and Scotland were restructured to integrate them with the Greggs brand. The costs of this restructuring have been presented separately on the face of the consolidated income statement in order to show separately the underlying trading performance of the Group. The restructuring costs incurred relate to the costs of closing 14 shops and the transfer of 49 shops from Bakers Oven to other divisions within the Group. 38 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Notes to the Consolidated Accounts continued 5. Personnel expenses The average number of persons employed (including directors) during the year was as follows: Management Administration Production Shop The aggregate personnel costs of these persons were as follows: Wages and salaries Compulsory social security contributions Pension costs - defined contribution plans Pension costs - defined benefit plans Equity settled transactions 6. Finance income Interest income 7. Finance expenses Interest expense Foreign exchange loss Note 21 21 21 Group and parent company 2006 Number 671 367 2,851 15,085 18,974 2005 Number 687 355 2,766 15,296 19,104 Group and parent company 2006 £’000 2005 £’000 205,024 199,208 15,856 14,951 1,780 2,116 687 1,598 2,133 557 225,463 218,447 2006 £’000 1,579 2005 £’000 3,106 2006 £’000 (62) (25) (87) 2005 £’000 (50) (40) (90) 8. Profit attributable to Greggs plc Of the Group profit for the year, £26,332,000 (2005: £34,226,000) is dealt with in the accounts of the parent company. The Company has taken advantage of the exemption permitted by section 230 of the Companies Act 1985 from presenting its own income statement. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 39 2006 £’000 2005 £’000 13,372 15,729 (194) - 13,178 15,729 201 (201) - 937 (581) 356 13,178 16,085 2006 2006 £’000 40,239 2005 2005 £’000 50,159 30.0% 12,072 30.0% 15,048 0.9% 2.8% (1.0%) 361 1,140 (395) 1.2% 2.0% (1.1%) 613 1,005 (581) 32.7% 13,178 32.1% 16,085 2006 2006 Current tax Deferred tax £’000 (247) (1,950) - (2,197) £’000 315 1,950 822 3,087 2006 Total £’000 68 - 822 890 2005 Total £’000 (892) - (704) (1,596) 9. Income tax expense Recognised in the income statement Current tax expense Current year Adjustment for prior years Deferred tax expense Origination and reversal of temporary differences Adjustment for prior years Total income tax expense in income statement Reconciliation of effective tax rate Profit before tax Income tax using the domestic corporation tax rate Non-deductible expenses Non-qualifying depreciation Adjustment for over provision in prior years Total income tax expense in income statement Tax recognised directly in equity Relating to equity-settled transactions Relating to defined benefit plans - special contribution (SORIE) - actuarial gains / (losses) (SORIE) 40 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Notes to the Consolidated Accounts continued 10. Earnings per share Basic earnings per share Basic earnings per share for the year ended 30 December 2006 is calculated by dividing profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year ended 30 December 2006 as calculated below. Diluted earnings per share Diluted earnings per share for the year ended 30 December 2006 is calculated by dividing profit attributable to ordinary shareholders by the weighted average number of ordinary shares, adjusted for the effects of all dilutive potential ordinary shares (which comprise share options granted to employees) outstanding during the year ended 30 December 2006 as calculated below. Adjusted earnings per share Basic and diluted earnings per share have been calculated for the year ended 30 December 2006 which exclude the effect of the Bakers Oven restructuring costs. These have been calculated by dividing profit attributable to ordinary shareholders excluding Bakers Oven restructuring costs by the relevant weighted average number of ordinary shares as calculated below. Profit attributable to ordinary shareholders Profit for the financial year attributable to equity holders of the parent Basic earnings per share Diluted earnings per share Weighted average number of ordinary shares Issued ordinary shares at start of year Effect of own shares held Effect of shares issued Effect of shares purchased and cancelled Weighted average number of ordinary shares during the year Effect of share options on issue Weighted average number of ordinary shares (diluted) during the year 2006 Excluding Bakers Oven restructuring costs £’000 29,510 263.0p 261.6p 2006 Bakers Oven restructuring costs 2006 Total 2005 Total £’000 £’000 £’000 (2,449) (21.8p) (21.7p) 27,061 241.2p 239.9p 34,074 282.1p 278.9p 2006 Number 2005 Number 12,193,957 12,141,892 (347,535) (79,333) 2,142 17,967 (628,071) - 11,220,493 12,080,526 60,409 135,274 11,280,902 12,215,800 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 41 11. Property, plant and equipment Group Cost Balance at 2 January 2005 Additions Disposals Reclassification Land and buildings £’000 Plant and equipment £’000 Fixtures Under and fittings construction £’000 £’000 Total £’000 77,220 71,192 109,093 - 257,505 1,040 11,460 18,218 10,969 41,687 (1,236) (4,499) (3,458) (187) 180 7 - - (9,193) - Balance at 31 December 2005 76,837 78,333 123,860 10,969 289,999 Balance at 1 January 2006 76,837 78,333 123,860 10,969 289,999 Additions Disposals Reclassification Transfer to assets held for sale Effect of movements in exchange rate Balance at 30 December 2006 Depreciation Balance at 2 January 2005 Depreciation charge for the year Disposals Balance at 31 December 2005 Balance at 1 January 2006 Depreciation charge for the year Disposals Transfer to assets held for sale Balance at 30 December 2006 Carrying amounts At 2 January 2005 At 31 December 2005 At 1 January 2006 At 30 December 2006 3,923 (193) 8,659 (400) - 9,467 12,995 3,638 30,023 (4,539) (4,666) - (9,398) 1,815 495 (10,969) - - - (13) - - - (400) (13) 88,826 85,076 132,671 3,638 310,211 13,928 39,941 1,587 (185) 8,051 (3,401) 39,804 12,400 (2,952) 15,330 44,591 49,252 15,330 44,591 1,640 8,704 49,252 13,540 (106) (125) (3,799) (3,141) - - 16,739 49,496 59,651 - - - - - - - - - 93,673 22,038 (6,538) 109,173 109,173 23,884 (7,046) (125) 125,886 63,292 61,507 61,507 72,087 31,251 33,742 33,742 35,580 69,289 74,608 74,608 73,020 - 163,832 10,969 180,826 10,969 180,826 3,638 184,325 42 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Notes to the Consolidated Accounts continued 11. Property, plant and equipment (continued) Parent company Cost Balance at 2 January 2005 Additions Intra group transfers Disposals Reclassification Land and buildings £’000 Plant and equipment £’000 Fixtures Under and fittings construction £’000 £’000 Total £’000 36,613 71,725 109,581 - 217,919 1,035 11,460 18,218 10,969 41,682 43 (18) (187) - - (4,499) (3,458) 180 7 - - - 43 (7,975) - Balance at 31 December 2005 37,486 78,866 124,348 10,969 251,669 Balance at 1 January 2006 Additions Intra-group transfers Disposals Reclassification Effect of movements in exchange rate Balance at 30 December 2006 Depreciation Balance at 2 January 2005 Depreciation charge for the year Disposals Balance at 31 December 2005 Balance at 1 January 2006 Depreciation charge for the year Disposals Balance at 30 December 2006 Carrying amounts At 2 January 2005 At 31 December 2005 At 1 January 2006 At 30 December 2006 37,486 78,866 124,348 10,969 251,669 3,314 9,467 12,995 3,638 29,414 (24) - - (193) (4,539) (4,666) - - 8,659 1,815 - - 495 (13) (10,969) - (24) (9,398) - (13) 49,242 85,609 133,159 3,638 271,648 5,590 40,211 667 (14) 8,051 (3,401) 40,195 12,400 (2,952) 6,243 44,861 49,643 6,243 44,861 49,643 13,540 8,704 (3,799) (3,141) 6,846 49,766 60,042 694 (91) - - - - - - - - 85,996 21,118 (6,367) 100,747 100,747 22,938 (7,031) 116,654 31,023 31,243 31,243 42,396 31,514 34,005 34,005 35,843 69,386 74,705 74,705 73,117 - 131,923 10,969 150,922 10,969 150,922 3,638 154,994 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 43 Land and buildings The carrying amount of land and buildings comprises: Freehold property Shops Bakeries Other Long leasehold property Bakeries Short leasehold property Shops Group Parent company 2006 £’000 12,924 49,295 8,680 2005 £’000 13,252 41,798 5,559 2006 £’000 2005 £’000 7,888 7,449 25,507 17,978 8,773 5,652 70,899 60,609 42,168 31,079 1,070 118 751 147 110 118 17 147 72,087 61,507 42,396 31,243 Property, plant and equipment under construction Assets under construction at 30 December 2006 comprise a new bakery and an extension to an existing bakery. Shares in subsidiary undertakings £’000 5,828 638 5,190 12. Investments Parent company Cost As at 2 January 2005, 31 December 2005 and 30 December 2006 Impairment As at 2 January 2005, 31 December 2005 and 30 December 2006 Carrying amount As at 2 January 2005, 31 December 2005 and 30 December 2006 The Company’s subsidiary undertakings, which are all wholly owned, are as follows: Charles Bragg (Bakers) Limited Greggs (Leasing) Limited Thurston Parfitt Limited Greggs Properties Limited Olivers (U.K.) Limited Olivers (U.K.) Development Limited* Birketts Holdings Limited J.R Birkett and Sons Limited* Greggs Trustees Limited * held indirectly Principal activity Non-trading Dormant Non-trading Property holding Dormant Non-trading Dormant Non-trading Trustees Country of incorporation England and Wales England and Wales England and Wales England and Wales Scotland Scotland England and Wales England and Wales England and Wales 44 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Notes to the Consolidated Accounts continued 13. Deferred tax assets and liabilities Group Deferred tax assets and liabilities are attributable to the following: Property, plant and equipment Employee benefits Short term temporary differences Tax (assets) / liabilities Assets Liabilities Net 2005 £’000 2006 £’000 2005 £’000 2006 £’000 2005 £’000 - 17,440 17,376 17,440 17,376 2006 £’000 - (1,741) (4,645) (685) (804) - - - - (1,741) (4,645) (685) (804) (2,426) (5,449) 17,440 17,376 15,014 11,927 The movements in temporary differences during the year ended 31 December 2005 were as follows: Property, plant and equipment Employee benefits Short term temporary differences The movements in temporary differences during the year ended 30 December 2006 were as follows: Property, plant and equipment Employee benefits Short term temporary differences Balance at 2 January 2005 £’000 15,949 (3,486) - 12,463 Balance at 1 January 2006 £’000 17,376 (4,645) (804) 11,927 Recognised Recognised Balance at in income in equity 31 December £’000 1,427 (267) (804) 356 £’000 2005 £’000 - 17,376 (892) (4,645) - (804) (892) 11,927 Recognised Recognised Balance at in income in equity 30 December £’000 2006 £’000 - 17,440 3,087 (1,741) - (685) £’000 64 (183) 119 - 3,087 15,014 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 45 Parent company Deferred tax assets and liabilities are attributable to the following: Property, plant and equipment Employee benefits Short term temporary differences Tax (assets) / liabilities Assets Liabilities Net 2005 £’000 2006 £’000 2005 £’000 2006 £’000 2005 £’000 - 10,741 10,301 10,741 10,301 2006 £’000 - (1,741) (4,645) (685) (804) - - - - (2,426) (5,449) 10,741 10,301 (1,741) (4,645) (685) 8,315 (804) 4,852 The movements in temporary differences during the year ended 31 December 2005 were as follows: Property, plant and equipment Employee benefits Short term temporary differences The movements in temporary differences during the year ended 30 December 2006 were as follows: Property, plant and equipment Employee benefits Short term timing differences Balance at 2 January 2005 £’000 9,302 (3,486) - 5,816 Balance at 1 January 2006 £’000 10,301 (4,645) (804) 4,852 Recognised Recognised Balance at in income in equity 31 December £’000 999 (267) (804) (72) £’000 2005 £’000 - 10,301 (892) (4,645) - (892) (804) 4,852 Recognised Recognised Balance at in income in equity 30 December £’000 440 (183) 119 376 £’000 2006 £’000 - 10,741 3,087 (1,741) - 3,087 (685) 8,315 46 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Notes to the Consolidated Accounts continued 14. Inventories Raw materials and consumables Work in progress 15. Trade and other receivables Trade receivables Amounts owed by subsidiary undertakings Other receivables Prepayments All amounts fall due within one year. 16. Cash and cash equivalents Bank balances Call deposits Cash and cash equivalents in the cash flow statements 17. Asset held for sale 2006 £’000 5,825 2,604 8,429 2006 £’000 888 - 4,233 10,905 16,026 Group Parent company 2005 £’000 5,289 2,424 7,713 2006 £’000 5,825 2,604 8,429 2005 £’000 5,289 2,424 7,713 Group Parent company 2005 £’000 514 2006 £’000 888 2005 £’000 514 - 22,902 22,204 4,747 10,600 15,861 4,225 10,905 38,920 4,688 10,600 38,006 Group Parent company 2006 £’000 2005 £’000 2006 £’000 2005 £’000 19,585 59,192 19,036 59,413 - 6,410 - 6,410 19,585 65,602 19,036 65,823 The asset held for sale at 30 December 2006 is the Carricks bakery in Newcastle upon Tyne. Contracts were exchanged for the disposal of this property before the end of the year, conditional upon the purchaser being granted planning permission to redevelop the site. This permission was granted in February 2007 and the disposal was completed then. 18. Trade and other payables Trade payables Other taxes and social security Other payables Accruals and deferred income Group Parent company 2006 £’000 2005 £’000 2006 £’000 2005 £’000 24,835 25,599 24,835 25,599 6,208 16,620 13,632 61,295 5,862 15,220 12,005 58,686 6,208 16,609 13,632 61,284 5,862 15,220 12,005 58,686 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 47 19. Current tax liability The current tax liability of £5,467,000 in the Group and £5,546,000 in the parent company (2005: Group £8,086,000, parent company £7,524,000) represents the amount of income taxes payable in respect of current and prior years. 20. Other payables Deferred government grants 21. Employee benefits Defined benefit plan Group Parent company 2006 £’000 90 2005 £’000 98 2006 £’000 90 2005 £’000 98 The Group makes contributions to a defined benefit (final salary) plan that provides pension benefits for employees upon retirement. Present value of funded obligations Fair value of plan assets Recognised liability for defined benefit obligations Liability for defined benefit obligations Changes in the present value of the defined benefit obligation are as follows: Opening defined benefit obligation Service cost Interest cost Actuarial (gains) / losses Benefits paid Contributions by employees Group and parent company 2006 £’000 2005 £’000 (74,823) (69,538) 72,940 59,808 (1,883) (9,730) Group and parent company 2006 £’000 2005 £’000 69,538 58,283 2,919 3,466 (180) 2,144 3,194 6,414 (1,749) (1,402) 829 905 74,823 69,538 48 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Notes to the Consolidated Accounts continued 21. Employee benefits (continued) Changes in the fair value of plan assets are as follows: Opening fair value of plan assets Expected return Actuarial gains Contributions by employer Contributions by employee Benefits paid Closing fair value of plan assets The amounts recognised in the income statement are as follows: Current service cost Interest on obligation Expected return on plan assets Total included in employee benefit expense The expense is recognised in the following line items of the income statement: Cost of sales Distribution and selling costs Administrative expenses Group and parent company 2006 £’000 2005 £’000 59,808 47,231 4,269 2,561 7,222 829 3,205 4,069 5,800 905 (1,749) (1,402) 72,940 59,808 Group Group 2005 £’000 2,144 3,194 (3,205) 2,133 2005 £’000 400 772 961 2,133 2006 £’000 2,919 3,466 (4,269) 2,116 2006 £’000 450 642 1,024 2,116 Cumulative actuarial gains and losses reported in the statement of recognised income and expenses since 28 December 2003, the transition date to adopted IFRSs, for the Group and the parent company are £507,000 (2005: £3,248,000). GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 49 The fair value of the plan assets and the return on those assets were as follows: Equities Bonds Property Cash/other Actual return on plan assets Group and parent company 2006 £’000 2005 £’000 55,774 46,324 1,837 799 14,530 72,940 1,641 552 11,291 59,808 6,830 7,274 The plan assets include ordinary shares issued by the Company with a fair value of £2,258,000 (2005: £2,468,000). The expected rates of return on plan assets are determined by reference to relevant indices. The overall expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the plan’s investment portfolio. Principal actuarial assumptions (expressed as weighted averages): Discount rate Expected rate of return on plan assets Future salary increases Future pension increases Mortality rate assumptions have been taken from the A92 pre-retirement and AP92c2025 post-retirement tables. History of plan The history of the plan for the current and prior years is as follows: Present value of defined benefit obligation Fair value of plan assets Deficit Group and parent company 2006 5.2% 6.4% 4.4% 2.5% 2005 4.9% 6.8% 4.1% 2.5% Group and parent company 2006 £’000 2005 £’000 2004 £’000 (74,823) (69,538) (58,283) 72,940 59,808 47,231 (1,883) (9,730) (11,052) 50 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Notes to the Consolidated Accounts continued 21. Employee benefits (continued) Experience adjustments Experience adjustments on plan liabilities Experience adjustments on plan assets Net actuarial experience adjustments 2006 2005 2004 Group and parent company £’000 180 2,561 2,741 0.2% 3.5% £’000 (6,414) 4,069 (2,345) 9.2% 6.8% £’000 (2,613) 1,710 (903) 4.5% 3.6% The Group expects to contribute £1,300,000 to its defined benefit plan in 2007. Defined contribution plan The Company also operates defined contribution schemes for other eligible employees. The assets of the schemes are held separately from those of the Group. The pension cost represents contributions payable by the Group and amounted to £1,780,000 (2005: £1,598,000) in the year. Share-based payments – Group and parent company The Group has established a Savings Related Share Option Scheme, which granted options in April 2003, September 2004, September 2005 and September 2006 and an Executive Share Option Scheme, which granted options in September 2003, March 2004, August 2004, September 2004 and August 2006. Both of these schemes also made grants of options prior to 7 November 2002. The recognition and measurement principles of IFRS 2 have not been applied to these grants in accordance with the transitional provisions in IFRS 1 and IFRS 2. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 51 The terms and conditions of the grants are as follows, whereby all options are settled by physical delivery of shares: Date of grant Employees entitled Exercise price Number of shares granted Vesting conditions Executive Share Option Scheme 5 September 1996 Senior employees 1355p 115,000 Three years’ service and EPS growth of 2-4% over RPI on average over those three years Executive Share Option Scheme 6 Executive Share Option Scheme 7 Savings Related Share Option Scheme 5 Executive Share Option Scheme 8 Savings Related Share Option Scheme 6 March 1999 March 2000 April 2002 April 2002 April 2003 Senior employees Senior employees 26871/2p 100,250 Three years’ service and EPS growth of 2-4% over RPI on average over those three years 17011/2p 150,200 Three years’ service and EPS growth of 2% over RPI on average over those three years All employees 2821p 126,949 Three years’ service 3.5 years Senior employees 3526p 8,800 Three years’ service and EPS growth of 2-4% over RPI on average over those three years 7 to 10 years All employees 2700p 58,315 Three years’ service Executive Share Option Scheme 9 September 2003 Senior employees 31041/2p 8,250 Three years’ service and EPS growth of 2% over RPI on average over those three years Executive Share Option Scheme 10 Executive Share Option Scheme 11 March 2004 August 2004 Senior employees Senior employees 3388p 7,500 Three years’ service and EPS growth of 2% over RPI on average over those three years 3400p 93,000 Three years’ service and EPS growth of 3-5% over RPI on average over those three years September 2004 Senior employees 3485p 2,400 Three years’ service and EPS growth of 3-5% over RPI on average over those three years Savings Related Share Option Scheme 7 September 2004 Savings Related Share Option Scheme 8 September 2005 Executive Share Option Scheme 12 August 2006 Savings Related Share Option Scheme 9 September 2006 All employees 3098p 71,796 Three years’ service All employees 4116p 64,148 Three years’ service Senior employees 4077p 102,800 Three years’ service and EPS growth of 3-5% over RPI on average over those three years All employees 3713p 66,277 Three years’ service Contractual life 7 to 10 years 7 to 10 years 7 to 10 years 3.5 years 10 years 7 years 10 years 10 years 3.5 years 3.5 years 10 years 3.5 years 52 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Notes to the Consolidated Accounts continued 21. Employee benefits (continued) The number and weighted average exercise price of share options is as follows: Outstanding at the beginning of the year Lapsed during the year Exercised during the year Granted during the year Outstanding at the end of the year Exercisable at the end of the year 2006 Weighted Number of average options exercise price Weighted average exercise price 2005 Number of options 3151p 2312p 2297p 3934p 3642p 2597p 335,288 (20,724) 2785p 2014p 474,964 (13,172) (83,072) 2569p (190,652) 169,077 400,569 19,617 4116p 3151p 1951p 64,148 335,288 50,942 The options outstanding at 30 December 2006 have an exercise price in the range of £17.015 to £41.160 and have a weighted average contractual life of 5.62 years. The options exercised during the year had a weighted average market value of £38.58 (2005: £45.96). The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on the Black-Scholes model. The contractual life of the option is used as an input into this model. 2006 Executive Share Option Savings Related Share Scheme 12 Option Scheme 9 September 2006 August 2006 2005 Savings Related Share Option Scheme 8 September 2005 Fair value at grant date Share price Exercise price Expected volatility Option life Expected dividends Risk-free rate £7.74 £8.19 £9.87 £42.00 £40.77 19.3% 5 years 2.7% 4.8% £41.60 £37.13 19.3% £47.00 £41.16 17.3% 3 years 3.25 years 2.7% 4.8% 2.1% 4.1% The expected volatility is based on historic volatility, adjusted for any expected changes to future volatility due to publicly available information. The historic volatility is calculated using a weekly rolling share price for the three-year period immediately prior to the option grant date. Share options are granted under a service condition and, for grants to senior employees, a non-market performance condition. Such conditions are not taken into account in the grant date fair value measurement of the services received. There are no market conditions associated with the share option grants. The costs charged to the income statement relating to share based payments were as follows: Share options granted in 2003 Share options granted in 2004 Share options granted in 2005 Share options granted in 2006 Total expense recognised as employee costs 2006 £’000 31 333 210 113 687 2005 £’000 155 367 35 - 557 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 53 22. Capital and reserves Reconciliation of movement in capital and reserves attributable to equity holders of the parent Group Balance at 2 January 2005 Shares issued in the year Total recognised income and expense Purchase of own shares Sale of own shares Share-based payments Dividends Tax items taken directly to reserves Balance at 31 December 2005 Balance at 1 January 2006 Shares issued in the year Shares purchased and cancelled Total recognised income and expense Purchase of own shares Sale of own shares Share-based payments Dividends Tax items taken directly to reserves Balance at 30 December 2006 Issued capital Share Capital premium redemption Retained earnings Total £’000 £’000 2,428 12,217 11 1,223 - - - - - - - - - - - - 2,439 13,440 reserve £’000 - - - - - - - - - £’000 £’000 142,511 157,156 - 1,234 32,433 32,433 (2,173) 3,695 557 (2,173) 3,695 557 (12,319) (12,319) 892 892 165,596 181,475 Issued capital Share Capital premium redemption Retained earnings Total £’000 £’000 2,439 13,440 - (207) - - - - - - 93 - - - - - - - reserve £’000 - - £’000 £’000 165,596 181,475 - 93 207 (39,544) (39,544) - - - - - - 28,980 28,980 (16,436) (16,436) 1,809 687 1,809 687 (12,105) (12,105) (68) (68) 2,232 13,533 207 128,919 144,891 54 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Notes to the Consolidated Accounts continued 22. Capital and reserves (continued) Parent company Balance at 2 January 2005 Shares issued in the year Total recognised income and expense Purchase of own shares Sale of own shares Share-based payments Equity dividends Tax items taken directly to reserves Balance at 31 December 2005 Balance at 1 January 2006 Shares issued in the year Shares purchased and cancelled Total recognised income and expense Purchase of own shares Sale of own shares Share-based payments Equity dividends Tax items taken directly to reserves Balance at 30 December 2006 Share capital and share premium In issue and fully paid at start of year Issued for cash Purchased and cancelled In issue and fully paid at the end of the year Issued capital Share Capital premium redemption Retained earnings Total £’000 £’000 2,428 12,217 11 1,223 - - - - - - - - - - - - 2,439 13,440 reserve £’000 - - - - - - - - - £’000 £’000 147,648 162,293 - 1,234 32,585 32,585 (2,173) 3,695 557 (2,173) 3,695 557 (12,319) (12,319) 892 892 170,885 186,764 Issued capital Share Capital premium redemption Retained earnings Total £’000 £’000 2,439 13,440 - (207) - - - - - - 93 - - - - - - - reserve £’000 - - £’000 £’000 170,885 186,764 - 93 207 (39,544) (39,544) - - - - - - 28,251 28,251 (16,436) (16,436) 1,809 687 1,809 687 (12,105) (12,105) (68) (68) 2,232 13,533 207 133,479 149,451 Ordinary shares 2006 Number 2005 Number 12,193,957 12,141,892 4,085 52,065 (1,036,479) - 11,161,563 12,193,957 At 30 December 2006 the authorised share capital comprised 25,000,000 ordinary shares (2005: 25,000,000) with a par value of 20p each. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 55 During the year 1,036,479 shares, with a nominal value of £207,000 were purchased for cancellation for a consideration of £39,544,000. A further 439,829 shares, with a nominal value of £88,000, were purchased by the trustees of the Greggs Employee Benefit Trust (see below). The maximum number of shares held by the trustees during the year was 472,753, having a nominal value of £95,000. Own shares held Deducted from retained earnings is £15,892,000 (2005: £1,265,000) 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 409,745 shares (2005: 48,924 shares) with a market value at 30 December 2006 of £17,619,000 (2005: £2,299,000) 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. The trustees have elected to waive the dividends payable on these shares. Dividends The following tables analyse dividends when paid and the year to which they relate: 2004 final dividend 2005 interim dividend 2005 final dividend 2006 interim dividend 2006 Per share pence - - 70.0p 38.0p 2005 Per share pence 66.0p 36.0p - - 108.0p 102.0p The proposed final dividend in respect of 2006 amounts to 78.0 pence per share (£8,706,000). This proposed dividend is subject to approval at the Annual General Meeting and has not been included as a liability in these accounts.. 2004 final dividend 2005 interim dividend 2005 final dividend 2006 interim dividend 2006 £’000 - - 8,013 4,092 2005 £’000 7,959 4,360 - - 12,105 12,319 56 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Notes to the Consolidated Accounts continued 23. Financial instruments Group and parent company All the Group’s surplus cash is invested as cash placed on deposit. The Group’s treasury policy has as its principal objective the achievement of the maximum rate of return on cash balances whilst maintaining an acceptable level of risk. Other than mentioned below there are no financial instruments, derivatives or commodity contracts used. Financial assets and liabilities The Group’s main financial asset comprises cash and cash equivalents. Other financial assets include trade receivables arising from the Group’s activities. Other than trade and other payables, the Group had no financial liabilities within the scope of IAS 39 as at 30 December 2006 (2005: £nil). The Group has an overdraft facility of £10,000,000 of which £10,000,000 was undrawn at 30 December 2006 (2005: £10,000,000 undrawn). Fair values The fair value of the Group’s financial assets and liabilities is not materially different from their carrying values. Interest rate, credit and foreign currency risk The Group has not entered into any hedging transactions during the year and considers interest rate, credit and foreign currency risks not to be significant. Effective interest rates In respect of income-earning financial assets the following table indicates their effective interest rates at the balance sheet date. Cash and cash equivalents 24. Operating leases Total amounts payable under non-cancellable operating lease rentals are payable as follows: Operating leases which expire: In less than one year Between one and five years After more than five years Group 2006 2005 Effective £’000 interest rate £’000 Effective interest rate 4.75% 19,585 4.5% 65,602 2006 £’000 898 2005 £’000 762 28,431 23,528 128,014 139,442 157,343 163,732 The Group leases the majority of its shops under operating leases. The leases typically run for a period of 10 years, with an option to renew the lease after that date. Lease payments are generally increased every five years to reflect market rentals. For a small number of the leases the rental is contingent on the level of turnover achieved in the relevant unit. The inception of the shop leases has taken place over a long period of time and many date back a significant number of years. They are combined leases of land and buildings. It is not possible to obtain a reliable estimate of the split of the fair values of the lease interest between land and buildings at inception. Therefore, in determining lease classification the Group evaluated whether both parts are clearly an operating lease or a finance lease. Firstly, land title does not pass. Secondly, because the rent paid to the landlord for the buildings is increased to market rent at regular intervals, and the Group does not participate in the residual value of the building it is judged that substantially all the risks and rewards of the building are with the landlord. Based on these qualitative factors it is concluded that the leases are operating leases. 25. Capital commitments During the year ended 30 December 2006, the Group entered into contracts to purchase property, plant and equipment for £11,736,000 (2005: £8,067,000). These commitments are expected to be settled in the following financial year. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 57 26. Related parties Identity of related parties The Group has a related party relationship with its subsidiaries (see note 12) and its directors and executive officers. Trading transactions with subsidiaries - Group Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are therefore not disclosed. Trading transactions with subsidiaries - Parent company Rent paid Interest received 2006 £’000 2005 £’000 2006 £’000 2005 £’000 Greggs Properties Limited (3,015) (3,122) 1,413 1,105 Amounts owed by related parties Amounts owed to related parties 2006 £’000 - 2005 £’000 2006 £’000 2005 £’000 - 29,318 28,620 Dormant subsidiaries - - - - 6,416 6,416 - - Transactions with Greggs Properties Limited are carried out at arms’ length. The Greggs Trust is also a related party and during the year the Company made a donation to the Greggs Trust of £265,000 (see Corporate Social Responsibility on pages 20 to 22). Transactions with key management personnel The directors are the key management personnel of the Group. The interests of the directors who served during the year (including those of their immediate families but excluding interests in shares pursuant to unexercised share options) in the share capital of the Company, according to the register of directors’ interests are as follows: Mike Darrington Malcolm Simpson Richard Hutton (appointed 13 March 2006) Raymond Reynolds (appointed 18 December 2006) Ian Gregg (non-executive) Stephan Curran (non-executive) Susan Johnson (non-executive) (resigned 30 September 2006) Derek Netherton (non-executive) Bob Bennett (non-executive) Julie Baddeley (non-executive) Ian Gibson (non-executive) (appointed 1 April 2006) Ordinary Shares of 20p Ordinary shares of 20p (Beneficial interest) 2006 2005 (or date of appointment if later) (Trustee holding with no beneficial interest) 2006 2005 (or date of appointment if later) 61,470 57,970 - - 10,010 40,010 8,000 13,000 911 848 215,000 215,000 2,808 2,808 133,535 144,835 3,700 3,700 - 1,000 - - 522 - - - - - - - - - - - - - - - - - - - - - Details of directors’ share options, emoluments, pension benefits and other non-cash benefits can be found in the Directors’ Remuneration Report on pages 58 to 64. Total remuneration is included in personnel expenses (see note 5). There have been no changes since 30 December 2006 in the directors’ interests noted above. 58 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Directors’ Remuneration Report INTRODUCTION in a manner that will align the interests of executive directors with those of This report has been prepared in accordance with the Directors’ Remuneration Report Regulations 2002 (the “Regulations”). This report also meets the relevant shareholders. The Committee has the ability to consider corporate performance on environmental, social and governance issues when setting the remuneration requirements of the Listing Rules of the Financial Services Authority and describes of executive directors. how the Board has applied the Principles of Good Governance relating to Remuneration packages for executive directors are designed so as to reward them directors’ remuneration. fairly for their contributions within the range of benefits offered by other UK The Regulations require the auditors to report to the Company’s members on companies of equivalent size, to recognise the unusually complex nature of the the “auditable part” of the Directors’ Remuneration Report and to state whether, combined retail, manufacturing and distribution operations of the Greggs in their opinion, that part of the report has been properly prepared in accordance business and so as to take into account levels of remuneration paid to others with the Companies Act 1985 (as amended by the Regulations). This report has, within the Company. therefore, been divided into separate sections for audited and unaudited information. UNAUDITED INFORMATION Basic salaries for executive directors are set to reflect the complexities of our business in combining areas of retail, manufacturing and distribution and are based The Remuneration Committee of the Board (the "Committee") sets the on the ability to attract and retain the skills necessary successfully to manage this remuneration and terms of appointment of the executive directors and the range of operations. The target salary is set broadly at the median level for an Chairman on behalf of the Board. The names of the directors who have served individual who is well established and demonstrating the full range of skills and on the Committee during the year are Julie Baddeley (Chair), Stephen Curran, experience necessary, whilst newly appointed executive directors’ salaries are set Ian Gregg (who retired from the Committee in March 2006), Ian Gibson (who joined the Committee in May 2006) and Bob Bennett. Mike Darrington, Andrew Davison (the Company Secretary) and Nicola Instone (the Company's People Director) have assisted the Committee in their deliberations. The Committee received independent external advice from Monks Partnership (who were appointed by the Committee). Monks Partnership also assisted the Executive on a range starting below the median level, providing the opportunity for future salary growth linked to establishment and experience in post. Salaries and benefits are regularly benchmarked by external consultants using appropriate size and sector comparators and this exercise was undertaken in 2006 on the basis of advice provided by Monks Partnership. Directors’ Committee by producing comparative information to assist in determining Executive directors should also participate in bonus arrangements. The Committee the fees payable to non-executive directors and assisted the Company generally seeks to structure those bonus arrangements so as to encourage long term in determining the remuneration of its senior management team, but otherwise sustainable growth in the Company’s profits and, therefore, is satisfied that the had no connection with the Company. structure will not raise environmental, social or governance risks by inadvertently General Policy on Directors’ Remuneration The Committee's policy is to establish competitive remuneration packages that encouraging irresponsible behaviour. The bonus arrangements comprise: will attract, retain and motivate individuals with appropriate skills and experience (a) An All Employee Profit Sharing Scheme, which distributes 10% of profits and will best serve the interests of the Company, its shareholders and its employees. half yearly to all employees on the basis of a formula related to the Where possible, the Committee will also seek to structure bonus arrangements profitability of their relevant division, length of service and salary level. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 59 (b) A scheme which (when combined with the All Employee Profit Sharing The Committee’s policy is that bonus payments to executive directors should Scheme) could, subject to Remuneration Committee discretion, deliver not be pensionable. Whereas, in the past, the executive directors’ entitlement a non-pensionable cash bonus up to a maximum of 95% of basic salary to profit share under the all employee profit sharing scheme has counted for Mike Darrington and 70% of basic salary for other executive directors. towards pensionable salary, this arrangement has been terminated during the For 2006 the target for Mike Darrington and Malcolm Simpson comprised year in respect of all future profit share entitlements. corporate profit performance only, whilst the targets for Richard Hutton There have also been occasional grants to the executive directors of options comprised corporate profit performance combined with an element based over shares in the Company, pursuant to one or more of the share option on personal performance, measured through delivery against key set schemes operated through the Committee. These include both Inland Revenue objectives. The targets for Raymond Reynolds comprised corporate profit approved and unapproved long-term share incentive schemes, designed to performance combined with an element based on divisional profit encourage the executive directors and other employees to hold shares in the performance and an element based on personal performance, measured Company and to enhance share values. through delivery against key set objectives. For 2007 the targets for all executive directors will include elements relating to corporate profit, strategic and personal performance designed to encourage achievement of common objectives as well as personal development. (c) A new Long Term Incentive Plan (“LTIP”) was approved by shareholders at the AGM in 2006. Under this scheme the Remuneration Committee will select employees (including executive directors) to participate. No executive director will receive a grant of executive share options in the same financial year in which he/she is selected to participate in the LTIP. If selected, the Committee will invite the participants to utilise a proportion (not more than 50% for the first award) of their annual bonus to acquire shares in the Company and will then grant nil cost options to participants 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 a significant proportion of the shares 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 was made in August 2006. Any future grants of executive share options to executive directors will be based upon the need to secure individuals of appropriate calibre, having regard to prevailing market conditions at the date of appointment or to help to align the interests of executive directors with those of shareholders, especially if the LTIP is not available to a particular individual, or where the Committee considers it appropriate. to match the number of shares purchased. These nil cost options will be Unless granted pursuant to the all-employee Savings Related Share Option Scheme exercisable normally after three years and only if certain performance criteria, (under which options may be offered at a discount to market price), the Committee set by the Remuneration Committee at the time of grant, have been satisfied. intends that all options granted to executive directors in respect of shares in the For the initial award, due to be made in 2007, performance targets will be set as growth in earnings per share of 3% above the retail prices index Company (except those relating to "matching" shares under the LTIP) will be at exercise prices at least equal to the market price of a share as at the date of grant. for a 1:1match and 7.5% above the retail prices index for a 2:1 match, The above policies enable the executive directors to receive potentially significant with a straight line graph indicating the relevant match for performance benefits in addition to their basic salaries, but only if value has been created for in between. shareholders. The Committee considers that, although the non-performance 60 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Directors’ Remuneration Report continued related elements of the executive directors’ remuneration packages are substantial, Performance criteria in relation to the performance based annual cash bonuses the performance related elements are significant in terms of providing motivation payable to the executive directors are set by the Committee each year in to the executive directors to improve shareholder value. accordance with the general remuneration policy set out above. The Committee 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 will offer participation in the LTIP to a number of senior executives in the Company including Richard Hutton and Raymond Reynolds in 2007 on the basis of the performance criteria policy referred to above. executive directors (Mike Darrington, Malcolm Simpson, Richard Hutton and Policy on Service Contract Notice Periods and Payments on Early Termination Raymond Reynolds) who periodically seek advice from external consultants as to The Company’s policy on the duration of directors’ contracts is that: the appropriate market rates applicable. Such advice was obtained in 2006 from Monks Partnership. Policy on Performance Conditions • existing executive directors should have service contracts terminable on one year’s notice served by the Company or by six months’ notice served by the director; The performance conditions attaching to share options granted to the executive • future executive directors will be engaged on terms necessary to secure directors under the Company’s Senior Executive Share Option Schemes have individuals of appropriate calibre, having regard to prevailing market varied according to the date of grant. Such conditions are set by the Committee conditions at that time; to set challenging performance objectives linked to shareholder return. The Committee intends that performance conditions will continue to be settled on this basis and applied to any future grants of options to 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. • 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- Whether performance conditions attached to share options have been met is election. Any non-executive director who has served on the Board for over tested by the Committee, which compares the actual performance of the Company nine years must seek re-election annually. The Nominations Committee with relevant published statistics and, if necessary, obtains advice from external advises the Board as to whether a particular director, whose turn it is to retire consultants in order to reach its conclusion. by rotation, should be nominated for re-election. No performance conditions have been attached to options granted pursuant to The policy on termination payments for executive directors is that the Company the Company’s Savings Related Share Option Scheme, which is available for all does not normally make payments beyond its contractual obligations, including employees. The principal purpose of this scheme is to encourage employees at any payment in respect of notice to which a director is entitled. In exceptional all levels within the Company to participate in, and to understand better, the circumstances, an additional ex-gratia payment may be considered, based on factors growth in value of the Company and the rules of that scheme require that all including the director’s past contribution and the circumstances of the options granted must be on the same terms. director’s departure. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 61 Non-executive directors would not normally be entitled to compensation for early All cash bonuses are subject to confirmation by the Remuneration Committee. termination of their appointments prior to the date on which they would next Non-executive Directors be due to retire by rotation, or if not re-appointed at such time. Directors’ service contracts 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 Details of the directors’ service contracts or letters of appointment are as follows: appointment of each non-executive director require that they seek re-election 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 August 1983. 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. Richard Hutton has a service contract with the Company dated 7 April 2006. His No right of compensation exists where the office is terminated, for whatever reason. continuous period of service with the Company commenced on 1 January 1998. Performance graph 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. The graph below shows a comparison of the total shareholder return for the Company’s shares for each of the last five financial years against the total shareholder return for the companies comprised in the FTSE Mid 250 Index (excluding investment Raymond Reynolds has a service contract with the Company dated 18 December Trusts) and the FTSE 350 (excluding Investment Trusts). 2006. His continuous period of service with the Company commenced on These indices were chosen for this comparison because they include companies 1 December 1986. of broadly similar size to the Company. Each of Mike Darrington, Richard Hutton, Malcolm Simpson and Raymond Reynolds have provisions in their contracts which enable them to be terminated by the Company on 12 months’ notice or by the executive on six months’ notice. Malcolm Simpson has agreed to retire as a director and employee with effect from the Company’s AGM in 2007. In addition to their basic salaries, each is entitled to participate in the Company’s profit sharing scheme available to all employees and to a performance based cash bonus. They are also entitled to additional benefits including the use of a motor car, private medical insurance, life assurance, permanent health insurance and a contribution towards telephone expenses. In addition to the above arrangements, for 2007, the executive directors will receive a performance based cash bonus based on the policy set out above. 250 200 150 100 50 0 FTSE 350 (ex-Invst Trusts) Greggs FTSE Mid 250 (ex-Invst Trusts) 2 0 0 2 / 1 0 / 1 0 2 0 0 2 / 7 0 / 1 0 3 0 0 2 / 1 0 / 1 0 3 0 0 2 / 7 0 / 1 0 4 0 0 2 / 1 0 / 1 0 4 0 0 2 / 7 0 / 1 0 5 0 0 2 / 1 0 / 1 0 5 0 0 2 / 7 0 / 1 0 6 0 0 2 / 1 0 / 1 0 6 0 0 2 / 7 0 / 1 0 6 0 0 2 / 0 1 / 1 0 62 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Directors’ Remuneration Report continued AUDITED INFORMATION Directors’ emoluments and compensation The following table sets out details of the emoluments and compensation received or receivable by each director (excluding pension contributions, details of which are set out below). Salary / fees Salary / fees of benefits profit share Estimated Annual value bonus and Executive Mike Darrington Malcolm Simpson Richard Hutton (appointed 13 March 2006) set for 2007 paid in 2006 £ £ 462,000 420,000 150,000 189,230 200,000 132,717 2006 £ 23,401 18,805 11,106 2006 £ Total 2006 Total 2005 £ £ 27,649 471,050 477,565 11,568 219,603 286,985 40,749 184,572 Raymond Reynolds (appointed 18 December 2006) 175,000 6,233 374 2,202 8,809 - - Chairman Derek Netherton Non-executive Stephen Curran Ian Gregg Susan Johnson (resigned 30 September 2006) Bob Bennett Julie Baddeley Ian Gibson (appointed 1 April 2006) Total 105,000 101,000 35,000 33,000 - 37,000 37,000 33,000 31,000 27,500 20,625 34,000 33,000 21,750 - - - - - - - - - - - - - - 101,000 95,125 31,000 27,500 20,625 34,000 33,000 21,750 25,000 26,167 25,000 28,000 22,500 - 1,267,000 1,017,055 53,686 82,168 1,152,909 986,342 From May 2006 Malcolm Simpson reduced his working hours on relinquishing his responsibility as Finance Director. The fees for Stephen Curran for the period 1 January 2006 to 31 March 2006 were paid to a third party. The fees payable to the non-executive directors reflect their respective membership and chairmanship of the relevant Board Committees and, in the case of Stephen Curran, his role as Senior Independent Director. GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 63 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: Number of options during year At 1 January 2006 or date of appointment Number At 30 December Exercise Granted Number Exercised Number 2006 Number price £ Market price at date of exercise £ Gain on exercise £ Date from Date of which grant exercisable Expiry date Scheme Mike Darrington 12,000 6,000} 6,000} - 17.015 37.60 123,510 Mar 00 Mar 03 Mar 07 Executive 40.80 142,710 - 6,000 - 6,000 40.770 - - Aug 06 Aug 09 Aug 16 Executive Malcolm Simpson 10,000 Richard Hutton 2,000 Raymond Reynolds - 48 41 - 170 1,500 2,500 4,000 48 41 45 - - 4,000 - - 45 - - - - - - - 10,000 - 17.015 37.60 205,850 Mar 00 Mar 03 Mar 07 Executive - - - - - - - - - - - - 2,000 34.000 4,000 40.770 48 41 45 30.980 41.160 37.130 170 26.875 1,500 34.880 2,500 34.000 4,000 40.770 48 41 45 30.980 41.160 37.130 - - - - - - - - - - - - - - - - - - - - - - - - Aug 04 Aug 07 Aug 14 Executive Aug 06 Aug 09 Aug 16 Executive Sept 04 Nov 07 Apr 08 SAYE Sept 05 Nov 08 Apr 09 SAYE Sept 06 Nov 09 Apr 10 SAYE Mar 99 Mar 02 Mar 09 Executive Mar 04 Mar 07 Mar 11 Executive Aug 04 Aug 07 Aug 14 Executive Aug 06 Aug 09 Aug 16 Executive Sept 04 Nov 07 Apr 08 SAYE Sept 05 Nov 08 Apr 09 SAYE Sept 06 Nov 09 Apr 10 SAYE The aggregate gains on exercise of share options were £472,070 (2005: £1,065,950), including £266,220 (2005: £777,686) in respect of the highest paid director. The executive directors also have a potential beneficial interest in the Greggs Employee Benefit Trust. On each of the grants awarded under the Senior Executive Share Option Scheme, the exercise of the options granted was made conditional upon the growth in the Company’s basic earnings per share over a three year period. For options granted in 1999, 2000 and in March 2004, earnings per share growth must be greater than 2% per annum above growth in the Retail Prices index. On each of the grants awarded in August 2004 and in 2006, the exercise of the options granted was made conditional upon the average annual growth in the Company’s basic earnings per share over the three years from grant being greater than the average annual growth in the Retail Price Index over the three years. If earnings per share growth exceeds RPI growth by 3% then half of the options will be exercisable, if earnings per share growth exceeds RPI growth by 5% then all of the options will be exercisable and if earnings per share growth exceeds RPI growth by between 3% and 5% the number of options exercisable is pro-rated on a straight line basis. 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 30 December 2006 was £43.00. The highest and lowest mid-market prices of ordinary shares during the financial year were £47.74 and £34.75 respectively. Pensions Each of the executive directors earned pension benefits under the Greggs 1978 Retirement and Death Benefit Scheme, the Company’s defined benefit scheme, during the year under review. This scheme, which currently requires a contribution of 6.6% of pensionable salaries from members, provides for up to two-thirds of final pensionable salary, dependant on length of pensionable service. Certain executive directors also received contributions into the Company’s money purchase defined contributions pension schemes during the year under review. No pension benefits were earned or accrued in respect of any non-executive director. 64 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 Directors’ Remuneration Report continued 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 pension entitlement at age 65 as at 30 December 2006 £ Accrued annual pension entitlement at age 65 as at 31 December 2005 £ Increase in accrued pension entitlement for the year £ Increase in accrued pension entitlement for the year net of inflation of 2.7% £ Transfer value of increase in accrued pension entitlement for the year £ Date of birth Date service commenced 8/3/42 3/6/68 15/10/41 4/11/59 15/8/83 1/1/98 24/4/73 1/12/86 140,503 14,865 125,995 42,392 132,370 11,170 125,591 35,168 8,133 3,695 404 7,224 4,559 3,393 (2,986) 6,274 37,581 13,908 - 31,918 Executive Director Mike Darrington Richard Hutton Malcolm Simpson Raymond Reynolds 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 2.7% 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 Richard Hutton Malcolm Simpson Raymond Reynolds Cash equivalent Cash equivalent transfer value as at 30 December 2006 £ 2,103,546 103,444 * 385,414 transfer value as at 1 January 2006 £ 1,982,373 69,649 1,838,511 297,924 Increase in the cash equivalent transfer value since 1 January 2006 £ 31,756 7,631 * 23,991 Increase in the cash equivalent transfer value since date of appointment £ n/a 11,883 n/a 792 * A transfer value is not available at 30 December 2006 for Malcolm Simpson since he was older than the normal retirement age under the scheme. 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 contributions set out below to two of the Company’s money purchase schemes (the Greggs Bakeries (MJD) Retirement Benefit Scheme and the Greggs Senior Executive Pension Scheme) for the benefit of executive directors during this financial year. Executive Director Mike Darrington Richard Hutton Malcolm Simpson Raymond Reynolds Approval by Shareholders Contribution in respect of 2006 £ - 10,664 72,938 258 Contribution in respect of 2005 £ 3,333 - 60,500 - At the Annual General Meeting of the Company to be held on 14 May 2007, a resolution approving this report is to be proposed as an ordinary resolution. This report was approved by the Board on 12 March 2007 Signed on behalf of the Board Julie Baddeley Director Chair of Remuneration Committee 12 March 2007 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 65 Notes 66 GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 10 Year History 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006† (as restated)* Turnover (£'000) 265,941 291,420 308,678 339,008 377,556 422,600 456,978 504,186 533,435 550,849 Earnings before interest and tax (£’000) Profit on ordinary activities before taxation (£'000) 18,015 20,215 21,691 26,044 31,597 35,334 39,167 45,763 47,143 38,747 18,035 20,214 21,520 26,356 32,742 36,666 40,472 47,751 50,159 40,239 Shareholders' funds (£'000) 58,384 69,585 80,896 88,169 103,554 119,965 134,150 157,156 181,475 144,891 Earnings per share (pence) 121.1 Dividend per share (pence) 37.0 122.8 41.0 135.1 45.0 162.3 55.0 190.2 65.0 209.2 72.5 230.5 80.0 270.5 96.0 282.1 106.0 241.2 116.0 Capital expenditure (£'000) 24,364 26,204 22,403 21,397 27,385 42,143 32,361 25,090 41,687 30,023 Net book value of fixed assets (£’000) Number of shops in operation at year end 86,239 100,309 108,786 113,285 124,123 148,184 160,704 163,110 180,826 184,325 1,057 1,072 1,084 1,105 1,144 1,202 1,231 1,263 1,319 1,336 *restated for the transition to IFRSs †includes £3.5m Bakers Oven restructuring costs DIRECTORS Derek Netherton (Non-executive chairman)ø Mike Darrington FCA (Managing)ø Richard Hutton FCA (Finance) Malcolm Simpson FCA (IT) Raymond Reynolds (Retail) Ian Gregg OBE (Non-executive)ø Steven Curran FCCA (Non-executive)*†ø Bob Bennett (Non-executive)*†ø Julie Baddeley (Non-executive)*†ø Ian Gibson CBE (Non-executive)*†ø *Member of Audit Committee † Member of Remuneration Committee ø Member of Nominations Committee SECRETARY AND REGISTERED OFFICE Andrew John Davison, Solicitor Fernwood House Clayton Road Jesmond Newcastle upon Tyne NE2 1TL Bankers Stockbrokers Royal Bank of Scotland plc UBS 149 High Street Gosforth Newcastle upon Tyne NE3 1HA Auditors KPMG Audit Plc Quayside House 110 Quayside Newcastle upon Tyne NE1 3DX Solicitors Robert Muckle LLP Norham House 12 New Bridge Street West Newcastle upon Tyne NE1 8AS 1 Finsbury Avenue London EC2M 2PA Brewin Dolphin Securities Ltd Commercial Union House 39 Pilgrim Street Newcastle upon Tyne NE1 6RQ Registrars Capita Registrars Bourne House 34 Beckenham Road Beckenham Kent BR3 4TU GREGGS plc ANNUAL REPORT AND ACCOUNTS 2006 67 Nationwide Coverage GREGGS SHOP NUMBERS 2006 2005 Scotland North East Cumbria Yorkshire North West Midlands South West South East GREGGS 163 138 47 136 136 159 110 276 147 117 46 128 133 153 107 267 BAKERS OVEN SHOP NUMBERS Bakers Oven Scotland Bakers Oven North Bakers Oven Midlands Bakers Oven South 2006 2005 0 0 99 66 18 48 85 65 BAKERS OVEN 165 216 Greggs Belgium 6 5 1,165 1,098 TOTAL 1,336 1,319 Fernwood House, Clayton Road, Jesmond, Newcastle upon Tyne, NE2 1TL. www.greggs.plc.uk 

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