McColl's Retail Group plc
Annual Report 2017

Plain-text annual report

focus McColl’s Retail Group plc Annual Report and Accounts 2017 Your neighbourhood’s favourite shop With 1,611 stores across the UK we’re a pretty big business these days, but no two are the same. With our flexible model we are focused on bringing the best product offer, and convenient services, to all the local communities we serve, so we can achieve our vision to be your neighbourhood’s favourite shop. McColl’s Retail Group plc Annual Report and Accounts 2017 Warm Friendly and When we ask our customers what they like best about McColl’s, they tell us it’s our warm and friendly colleagues. More often than not our colleagues live locally and they’re on first name terms with many of our customers. They are a driving force in our journey to becoming your neighbourhood’s favourite shop. 1 2 McColl’s Retail Group plc Annual Report and Accounts 2017 and Little Often Being at the heart of neighbourhoods, with long opening hours, means we’re a convenient choice for lots of our customers. They’re buying more and more from us so we are continuing to grow our convenience offer to make sure they can get everything they need from their local McColl’s. £5.62 Average basket size 31% of customers shop with us every day 60% of customers live or work within 400m of their local McColl’s 3 Fresh Tasty and +120% Increase in fruit & vegetable sales +40% Increase in food-to-go sales 450+ In-store bakeries With essential food and groceries, fresh fruit and vegetables, ready meals and freshly prepared food-to-go, our stores cater for a wide range of customer needs and shopping missions. Demand for fresh food continues to grow, and with an exciting new supply partnership, we’re looking forward to developing our range to meet evolving customer needs, and bringing the best of British produce to McColl’s. 4 McColl’s Retail Group plc Annual Report and Accounts 2017 5 Range Services and We think of ourselves as a neighbourhood hub – providing great products and useful services, close to where people live, and available when they need them. From Post Offices that are open late to Amazon lockers and Collect+ points, plus bill payment services, home news delivery, cash machines and national lottery terminals, we’ve got it covered. 6am- 10pm We are open when customers need us 588 Post Offices 4 in 10 Visits to McColl’s involve a service 6 McColl’s Retail Group plc Annual Report and Accounts 2017 7 8 McColl’s Retail Group plc Annual Report and Accounts 2017 Caring and Compassionate We’ve been serving local neighbourhoods for over a hundred years, and know just how much people value having a shop nearby that provides a friendly welcome as well as access to fresh food and essential services. We also know how important it is to support communities around our stores. This year we’ve helped around 500 local organisations and good causes through the ‘Making a Difference Locally’ programme. Our generous customers and colleagues also helped to raise money to support St George’s Hospital’s research into sudden cardiac death in young people, and in 2017 we presented them with a cheque for £300,000. 500 local organisations and good causes supported 9 Contents Where to find things in this year’s report 12 Chairman’s statement 14 At a glance 16 Market overview 21 Chief Executive’s review 30 Our business model 37 McColl’s and responsibility Strategic report Governance Financial statements 2017 highlights 11 12 Chairman’s statement At a glance 14 16 Market overview 20 Our vision and strategy 21 Chief Executive’s review 24 A formula for growth 30 Our business model 32 Our performance KPIs Financial review 33 Social and environmental review 37 Principal risks and uncertainties 44 10 McColl’s Retail Group plc Annual Report and Accounts 2017 48 Chairman’s governance statement 49 Compliance with the UK Corporate Governance Code Board of Directors Retail Board 50 52 54 Corporate governance report 60 Nomination Committee report 63 Audit & Risk Committee report 68 71 78 86 Directors’ report 91 Remuneration report Directors’ remuneration policy Annual report on remuneration Statement of Directors’ responsibilities 92 Independent Auditor’s report to the members of McColl’s Retail Group plc 99 Consolidated income statement Consolidated statement of 99 comprehensive income 100 Consolidated statement of financial position 101 Consolidated statement of changes in equity 101 Consolidated statement of cash flows 102 Notes to the financial statements 130 Company statement of financial position 130 Consolidated statement of changes in equity 131 Notes to the Company financial statements 135 Glossary of terms IBC Contacts, addresses and shareholder information 2017 highlights A formula for growth Strategic report Governance Financial statements A transformational acquisition In 2017 we completed the transformational acquisition of 298 quality convenience stores from the Co-op, integrating all of the stores over the course of seven months. They are driving a step- change in sales and profit growth in the business, and are a great addition to the Group. Our groundbreaking new supply partnership Our new long-term partnership with Morrisons will provide McColl’s with a best-in-class fresh food and grocery offer through the Safeway brand. It will also simplify our operations as we move to a single wholesale supply partner. Driving organic growth This year we completed the second stage of our convenience store refresh trial that involves redesigning and relaying our older convenience stores. The results have been very encouraging and our refresh programme provides a great opportunity to drive organic growth in the business. Read more Page 24 Read more Page 26 Read more Page 28 Revenue* £1.13bn +19.1% 2016 Adjusted EBITDA* £44.0m +20.0% 2016 Adjusted earnings per share* Capital expenditure excluding the acquisition* 18.3p +14.3% 2016 Profit before tax £18.4m +4.2% 2016 £20.3m -21.0% 2016 * See glossary of terms on pages 135-136 for definition Full details of adjusted EBITDA can be found in note 6 on page 110. 11 Chairman’s statement Shaping the future It has been another year of transformation for McColl’s and the business continues to go from strength to strength. With a clear vision and strategy, never has the business had so many opportunities to drive growth. “ I’m pleased to report that the business has continued to make excellent progress.” 12 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements Having joined the Board of McColl’s in April 2016, I was delighted to succeed James Lancaster as Chairman in April 2017. It’s been a very busy and exciting year for the business and I’m pleased to report that it has continued to make excellent progress. Jonathan and his management team have done an outstanding job, delivering an excellent set of results, whilst simultaneously securing deals which provide the platform for sustainable future growth. The 298 acquired stores were successfully integrated and are driving significant growth in the business. The benefits of this acquisition will continue to be realised and these valuable stores will provide further opportunities for growth as they become an established part of the estate. The business made another important strategic step in August with the announcement of a groundbreaking supply partnership with Morrisons. This decision, at a time when the convenience sector is rapidly evolving and experiencing a period of consolidation, aligns McColl’s with a strong partner. It will allow us to provide a significantly enhanced fresh offer for customers through the launch of the Safeway brand, and access to better commercial terms whilst simplifying operations through sole supply. Alongside this the team has continued to identify opportunities to invest in growing the business and, with the development of the convenience store refresh trial, it has demonstrated the potential to drive growth in large parts of the more established estate. The early results of the trial are encouraging, even before we’ve seen the benefits of our new supply partnership. We are confident that investment in our store estate, coupled with a much stronger fresh and chilled range, will provide a strong platform for the future. Developing the Board After a rigorous and extensive search I was pleased to welcome Jens Hofma to the Board in July as an Independent Non-Executive Director. Jens is currently Chief Executive of Pizza Hut Restaurants in the UK and brings a wealth of knowledge and experience of the food industry. His focus on developing teams and improving customer experiences make him a great addition to the Board. James Lancaster, founder of the business, stepped down from his role as Non-Executive Director in October 2017. I’d like to thank him for his enormous contribution to McColl’s over the years. Under his direction and guidance, McColl’s grew into one of the largest neighbourhood retailers in the UK. I’d also like to thank James for all the support and advice he gave me during my first few months as Chairman. In addition I’d like to thank Sharon Brown and Georgina Harvey for their continued support and hard work as Chairs of the Audit & Risk Committee and Remuneration Committee respectively. Increasing returns to shareholders The business continues to generate strong cash returns which we use to fund the capital investment required to deliver sustainable growth in revenue and profit, alongside dividend payments to shareholders and reducing debt. The Board is recommending a final dividend of 6.9 pence per share, making a total dividend for the period of 10.3 pence, up slightly year-on-year as part of our commitment to increase returns to shareholders. This dividend will be paid on 1 June 2018, to shareholders on the register at the close of business on 20 April 2018, subject to approval at the forthcoming Annual General Meeting. Looking forward with confidence Jonathan and the team have another busy year ahead as they transition around 1,300 stores to new supply arrangements. Whilst this will involve some inevitable disruption it will position McColl’s as a strong, credible fresh food retailer that can serve the needs of a growing customer base. McColl’s will also continue to pursue other opportunities to grow the business, both through our acquisition programme and the next phase of the convenience store refresh initiative. I have every confidence that 2018 will represent another year of continued financial progress, and one which we will exit strongly placed for 2019 and beyond. Angus Porter Chairman 13 At a glance Our vision is to be your neighbourhood’s favourite shop Through our network of 1,611 neighbourhood stores, over 22,000 dedicated colleagues serve five million customers every week. Our goals: 1. Growing convenience offer 2. Excellent customer service 3. Increase neighbourhood presence Our values We want McColl’s to be a great place to shop and work, and how we behave is important. Our values help guide us and make better informed decisions every day. Who we are McColl’s is a leading neighbourhood retailer, with an estate of 1,611 managed convenience stores and newsagents. We operate 1,279 McColl’s branded convenience stores as well as 332 newsagents branded Martin’s across the UK, except in Scotland where we operate under our heritage brand, RS McColl. 22,000+ colleagues with shared values: 1,611 stores Customer first Simple and consistent 2011 47% Convenience 2017 5 8 8 1,263 stores 5 7 6 Caring and compassionate Community champions 3 3 2 79% Convenience 1,611 stores 1 , 2 7 9 14 McColl’s Retail Group plc Annual Report and Accounts 2017 Convenience stores Newsagents Where we are We serve communities right across the UK. Our sites are chosen carefully and most of our stores are close to residential areas, in neighbourhoods and villages, where customers really value all that our stores offer. What we offer We know that every community is different and that’s why we tailor our offer to meet the needs of local neighbourhoods, offering a wide range of products and useful services. Our colleagues are friendly and helpful making sure that our customers receive a warm welcome at McColl’s. Strategic report Governance Financial statements Five million customer visits a week Scotland 178 37 North West 219 33 North East 74 11 Yorkshire and Humber 123 14 Customer focus Warm and Friendly Our warm and friendly colleagues provide excellent customer service and are a driving force in our journey to becoming your neighbourhood’s favourite shop. Local Little and Often Being at the heart of neighbourhoods means we’re a convenient choice for lots of our customers. Products Fresh and Tasty With essential food and groceries, fresh fruit and vegetables, ready meals and freshly prepared food-to-go, we cater for a wide variety of customer needs and missions. East Midlands 73 18 West Midlands 62 31 East of England 124 80 Number of stores 0 – 100 101 – 200 200+ Wales 48 5 Convenience stores Newsagents South West 174 26 South East London 13 12 191 65 Everyday services Range and Convenience We think of ourselves as a neighbourhood hub – providing great products and useful services, close to where people live, and available when they need them. Communities Caring and Compassionate We know just how much people value having a shop nearby and how important it is to support communities around our stores. s t c u d o r P o c a l L E v s e e r r y v i d c a e y s s e m uniti Customer needs C ustomer focus m C o See our business model Page 30 15 Market overview Convenient routes to Shoppers continue to favour convenience stores and it’s been a year of unprecedented change for the channel. In particular we have seen increased activity and competition within the wholesale supply market for convenience stores. Amidst this competitive environment, we have aligned ourselves with a new supply partner, ensuring we are well positioned to maximise the growth opportunities that the convenience channel offers. 16 McColl’s Retail Group plc Annual Report and Accounts 2017 The grocery sector remains competitive The grocery sector has remained competitive as customers continue to have access to a multitude of retail brands and channels, and cost pressures have continued. In January 2017 the UK saw the return of food price inflation for the first time in over two years, as many retailers had to pass on some degree of input cost increases. We were able to mitigate some of this pressure through negotiations with suppliers on the basis of our enlarged estate. Consumer confidence fell throughout the latter part of the year as concerns over Brexit re-emerged, and in November we saw the first rise in interest rates in over a decade. Although this impacts much of the retail sector, the convenience channel generally performs relatively well in this environment because people tend to shop more frequently and locally, buying fewer items per shop as a way of managing their budget. Strategic report Governance Financial statements 1 Changing lifestyles favour convenience shopping Long-term trends are changing the way we live and shop, which in turn is shaping the grocery industry. Longer average life expectancy, more single person households, more dual-income households, lengthy commutes, a greater emphasis on leisure time and changes in technology are all impacting the way we shop. Although people aren’t generally working longer hours, more of us are in employment and feeling more time-pressured. We’re spending a significant proportion of our time shopping for food and groceries – on average people spend almost 17 hours each month, the equivalent of a whole waking day.1 Shoppers want to save time, and locations of store and speed of shop are two of the most important reasons for people to choose convenience stores. This trend for convenience is most evident amongst younger shoppers with one in five post millennials (18-25 year olds) claiming to do the majority of their food and grocery shopping in convenience stores.2 2 The convenience channel is growing faster than the grocery sector The overall grocery sector is forecast to grow by 15% in the next five years. The convenience channel is expected to outstrip this as it is predicted to benefit from changes in lifestyle and shopping behaviour. It is forecast to grow by 18% or £7.1bn to £47.1bn in 2022, at which point it is expected to remain larger than the online and discounter channels combined. 1 IGD/McColl’s research 2017 2 IGD research 2017 £86.0bn £91.1bn Growth in channels of the UK grocery sector 2017 2022 2017 2022 2017 2022 2017 2022 £40.0bn £47.1bn £20.1bn £30.1bn £16.2bn £16.3bn 2017 £10.4bn 2022 £16.0bn 2017 £11.8bn 2022 £12.2bn Supermarkets Convenience Discounters* Hypermarkets Online Other retailers** * ‘Discounters’ includes all sales of Aldi and Lidl, and grocery-only sales of principal variety discounters, including Wilkinson ** ‘Other retailers’ includes specialist food and drink retailers, CTNs (confectionery, tobacco and news), food sales from mainly non-food retailers and street markets Source: IGD 2017 17 Market overview continued 3 Convenience multiples are consolidating the channel and driving growth There are around 50,000 convenience stores in the UK. The market is made up of a number of different players, with true independents and symbol groups still accounting for almost 75% of stores. All the major grocery retailers are seeking growth in the convenience channel, with the number of stores operated by the multiples increasing by over 40% in the last five years. Whilst they currently only make up less than 10% of convenience stores, they account for over 20% of convenience store sales. We are the second largest multiple convenience store operator in the UK, with 1,279 convenience stores. The majority of our stores are in neighbourhood locations and we typically Number of UK convenience stores 49,918 Unaffiliated independents – 38% Symbol groups – 31% Convenience forecourts – 17% Convenience multiples – 9% Co-operatives – 5% Source: WRBM/Nielsen 2017 18 McColl’s Retail Group plc Annual Report and Accounts 2017 Our mix of sales also continues to evolve. With our heritage as a newsagent chain, we over-index in declining traditional categories such as confectionery, news and tobacco. However, our product mix is strengthening as we grow our convenience offer and focus on higher growth, higher margin categories including food-to-go and fresh foods. compete with independents and symbol group operators, rather than the major multiple convenience retailers who tend to favour larger, higher footfall locations. There is opportunity for further consolidation as we look to increase our neighbourhood presence through acquisition. Opportunities for new greenfield or brownfield convenience sites, as favoured by the major grocery retailers, are reducing and many retailers are looking for growth through franchising or wholesale supply models. In 2017 we saw the proposed merger of Tesco and Booker, and acquisition of Nisa by the Co-op. We have signed a new long-term supply partnership with Morrisons that will give us a best-in-class fresh offer through the Safeway brand and positions us well in a channel that continues to provide excellent opportunities for growth. 4 Shoppers are spending more on chilled foods in convenience stores Shoppers use convenience stores to buy a wide range of products and around 40% of all food and grocery shopping trips are now conducted in convenience stores. The frequency of top- up shopping is increasing and fresh food is a fundamental part of top-up baskets. In 2017 chilled food was the biggest sales category for the second year running, whilst sales in tobacco, confectionery and news, continue to decline. With fewer planned shopping trips, food-to-go and meal solutions are growing in popularity. They currently represent only a small proportion of convenience store sales, but are rapidly growing categories. Sales contribution by category Chilled foods Tobacco and E-cigarettes Alcohol Canned and packaged grocery 7.3% Fruit and vegetables Soft drinks Confectionery 6.4% 5.9% 5.3% Non-food Milk 4.0% 3.6% News and magazines Household 3.5% 3.5% Hot food-to-go 0.4% Others Source: IGD 2017 17.2% 15.0% 14.3% 13.6% Strategic report Governance Financial statements 5 Convenience stores play an important role in local communities Convenience stores used to be considered a distress purchase destination, but the role of the neighbourhood shop continues to evolve. Convenience stores are no longer just a place to buy a few extra items or emergency essentials. They fulfil a wide range of shopper missions at different times of the day – from hot breakfast items to take away, to ingredients for an evening meal, and online parcel collection on the way home from work. Services are an increasingly popular and important part of the convenience store offer with one in four shoppers using a service such as bill payment or cash machine at the same time as shopping for food and groceries. This rises to four in ten shopping trips at McColl’s. Services provide a good reason to visit convenience stores and support traditional footfall drivers such as news and tobacco that are in structural decline. At McColl’s we have a market leading services proposition which is profitable in its own right and we believe this is fundamental to providing excellent customer service. 96% Satisfaction with services on last convenience store visit % of most recent visits using services 42% 25% 27% Any services National lottery PayPoint 4% Cashpoint 4% 11% 12% 10% Parcel pick-up/return 8% 1% Post Office 4% 3% Mobile top-up 2% Café/restaurant 1% Takeaway e.g. Subway 1% McColl’s Convenience Source: IGD/McColl’s research 2017 19 Our vision and strategy Our clear strategy for growth has given us the framework for another year of excellent progress Our three strategic goals are clear and are underpinned by strong business plans aligned to our five key building blocks – brand, customer, stores, colleagues and offer. Every year we comprehensively review our strategy with our executive management (our Retail Board) and with our Board. This helps us review progress against our plans, address any learnings and evolving circumstances, and identify ways to maximise opportunities in the years ahead. Vision Goals Key building blocks Values Your neighbourhood’s favourite shop 1. Growing convenience offer 2. Excellent customer service 3. Increase neighbourhood presence Brand Offer Customer Stores Colleagues 1 Growing convenience offer Working with our carefully selected supply partners we offer an ever-greater range of products and services to meet the evolving needs of neighbourhoods across the UK. 2 3 Excellent customer service Understanding customers and doing everything that we can to meet their everyday needs is at our core. We strive to build loyalty and strengthen our reputation in the neighbourhoods we serve, by providing a warm and friendly welcome along with a host of services that make the lives of our customers easier. Increase neighbourhood presence We will grow our neighbourhood presence by strengthening our brand and acquiring new stores. The convenience market remains highly fragmented with plenty of opportunities for acquisition and consolidation. Customer first Simple and consistent Caring and compassionate Community champions 20 McColl’s Retail Group plc Annual Report and Accounts 2017 Chief Executive’s review Strategic report Governance Financial statements A bigger, stronger McColl’s This has been my 27th year in the business and my first full year as Chief Executive. I am immensely proud of what we have achieved and I believe the business is in the best place it’s ever been. I can’t recall a year when we have experienced more change in the grocery sector and never has there been a more exciting time to be in convenience. It’s been a year of significant change for McColl’s. We are a bigger and stronger business today than at any time in our long history. We have a far larger and better quality estate and our product mix has continued to strengthen. For the first time the business has achieved annual revenues of more than £1bn, demonstrating that we are a business of significant scale. In the last few years we have been growing principally through acquisition, consolidating a part of the grocery sector that remains dominated by independent retailers. We have long held the view that there would be consolidation in the wholesale supply market for convenience stores too. This has proved to be the case with the major grocery retailers looking to take advantage of the growing convenience channel. The merger of Tesco and Booker and the Co-op’s agreement to acquire Nisa have changed the broader competitive landscape. With a sector in flux we’ve ensured that McColl’s is well placed to succeed and further capitalise on the opportunities presented by the growing convenience channel. Our recent acquisition of almost 300 convenience stores was important in terms of giving us greater scale, and we had always planned to leverage this by retendering our distribution in the first half of 2017. The timing of our tender process meant that we were able to benefit from the increased competition for wholesale supply in the market. We wanted to achieve three things through this process: improve our customer offer; access better commercial terms, on the basis of our enhanced scale; and simplify our operations by moving to a single wholesale supply partner. On all of these measures Morrisons was the clear choice for us and we are delighted to have formed a long-term partnership that will see them supply our stores with branded products, and an ‘own-label’ through the launch of Safeway in 2018. We were both sad and disappointed to learn that Palmer and Harvey (P&H) was placed into 21 Chief Executive’s review continued administration on 28 November 2017. We had worked in partnership with P&H for over two decades and are grateful for all their support over the years. Our priority has been to ensure that, despite the inevitable disruption to stores previously supplied by P&H, any impact on customers is minimised. With the support of our partners we have largely ensured continuity of supply and have closely managed distribution to these stores. Defining McColl’s for customers and colleagues The McColl’s name has a long and rich history. We have evolved from a vending business, to a national chain of newsagents, to a leading neighbourhood convenience retailer. We have undergone a significant transformation and it’s important that we are clear about who we are, Proportion of grocery and alcohol sales 32% 2016: 27% “ I am confident and excited about our future.” 22 McColl’s Retail Group plc Annual Report and Accounts 2017 and the kind of business we want to be. We’ve talked to lots of customers and colleagues to understand how the business is perceived, and our strengths and opportunities. Our vision is to be your neighbourhood’s favourite shop, and we are clearer than ever on what that means to our customers, and how we can help them understand what they can expect from McColl’s. This work will support the rollout of Safeway at McColl’s and help establish our fresh food credentials in the minds of customers. Just as it’s important for customers to understand how McColl’s is changing, it’s essential that our colleagues are behind our vision so that we are all pulling in the same direction. We’ve been working on embedding our company values with colleagues across the business. That means we always put customers first, and we keep things simple and consistent so that as we grow we don’t introduce unnecessary complexity to the business. We are caring and compassionate and we are community champions, recognising that we have a wider responsibility to the communities we serve. Increase neighbourhood presence In 2017 we acquired 298 quality convenience stores from the Co-op. I’m delighted that all of the stores transitioned to McColl’s on time and on budget. It’s been an extraordinary team effort involving colleagues from every part of the business and I’m very proud of the way everyone worked together. We were delighted to welcome over 3,000 new colleagues to McColl’s. They have done a fantastic job helping customers through the transition. The feedback from customers has been positive on a wide range of metrics. With all the acquired stores on board by July they have driven a step-change in our sales and profit performance in the second half of the year. There is more potential for these stores, as we undertake further work to optimise the ranges and introduce our market-leading services proposition to more of the estate. With the acquired stores all transitioned, we resumed our single store acquisition programme buying a further 12 convenience stores during the year, and we will look to acquire around 20 new stores in 2018. We also sold or closed a number of stores, predominantly newsagents, as part of our planned disposal of underperforming stores, ending the year with 1,279 convenience stores and 332 newsagents. Growing convenience offer We have continued to evolve our offer to meet the needs of customers and reduce our reliance on traditional categories, such as tobacco, news and confectionery, that are in long term structural decline. Our grocery and alcohol sales have grown by over 70% in the last three years as we become more of a food-led business, representing excellent progress towards our target for this to be our biggest sales category. This growth has been accelerated by the recently acquired stores that have a greater proportion of grocery and alcohol sales. In the early part of the year we worked closely with our suppliers to develop a wider range of fresh and chilled products for these stores so that we could help transition customers to the McColl’s offer. We’ve learnt a lot through this process and there is potential for us to replicate some of this range development elsewhere in the estate. Our experience of developing fresh food ranges has also been valuable in our preparations for the launch of Safeway in 2018. Our store refresh programme has also given us an opportunity to develop our range and grow our convenience offer. We completed our first two pilot stores towards the end of 2016 and in the second half of 2017 we refurbished a further 25 stores. They have been completely refreshed in terms of the design and layout, providing more space for fresh and chilled foods, and food-to-go. We’ve also introduced new ranges such as healthy snacks, a free from range and craft ales. The early performance of these stores is very encouraging Strategic report Governance Financial statements and we believe there is a significant opportunity to drive organic growth in the estate by rolling out this programme over the next few years. In 2018 we plan to complete a further 100 store refreshes. Food-to-go, whilst currently still a small proportion of our overall sales, is an increasingly important part of our convenience offer. In 2017 our food-to-go sales grew by over 40% and we extended our successful partnership with Subway, opening six new franchises in the year. The greatest opportunity we have to grow our convenience offer is through our groundbreaking new supply partnership. We’re really excited to be working with a partner who is not only a very experienced grocery retailer, but also the UK’s second largest fresh food manufacturer. We have initially launched around 400 Safeway products into McColl’s stores as part of a phased rollout that began in January 2018. These are a combination of ambient grocery and fresh food lines, sourced from Morrisons’ farms and fisheries, and prepared in Morrisons-owned manufacturing sites. As we rollout Safeway this will enable us to provide an enhanced offer for McColl’s customers and there will be further opportunity to grow and develop the range over time. Excellent customer service Excellent customer service starts with an understanding of what customers need and want. Our store colleagues do a fantastic job of getting to know their customers and, because most of them live nearby, our stores feel very much like the hub of a local community. Our role extends beyond that of a traditional neighbourhood shop and we continue to develop our services offer to meet the needs of our customers. We know that four in ten visits to McColl’s involve a service of some kind, whether that be using one of our 588 Post Offices, visiting one of our ATMs, or using one of our fast-growing internet parcel collection points. We’re investing in more bespoke customer research to help us understand our customer needs and we’ve worked with a number of expert insight partners this year. Our Plus loyalty card remains one of our best tools for understanding customer behaviour and it’s growing in popularity. Over 10% of transactions in the newly acquired stores are made with a Plus card, giving us valuable insight into what sort of products and offers appeal to customers in those stores. Putting customers first is our absolute priority and I’m delighted to have appointed Tim Fairs as our first ever Customer Director. He joined the management team in January 2018 from Clintons, where he was VP Marketing and E-Commerce, leading the transformation of the customer offer and customer experience programme. He brings extensive experience in both the retail and non-retail sectors, and prior to his six years with Clintons, he was Head of Marketing for Dixons Carphone for over four years. Looking ahead In the next few months we will significantly enhance our offer when we begin to transition supply in over 1,300 stores and rollout Safeway at McColl’s. We will improve the quality of our estate and bring a great shopping experience to more customers through our refresh programme. We’ll also continue to grow through our successful acquisition programme. 2018 is set to be another busy year for McColl’s and I am confident and excited about our future. Jonathan Miller Chief Executive Revenue £1.13bn +19.1% 2016 2017 2016 2015 £1.13bn £0.95bn £0.93bn Adjusted EBITDA £44.0m +20.0% 2016 23 A formula for growth A transformational acquisition 298 quality convenience stores 1,700 sq ft average size of acquired stores 3,000+ new colleagues 24 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements In July 2017, we completed the transition of 298 newly acquired convenience stores. They are a perfect fit for McColl’s. In 2017 we acquired 298 quality convenience stores from the Co-op. The majority are in neighbourhood locations, close to where people live, and on average they are 1,700 sq ft, which is similar in size to our best performing convenience stores. We’ve worked hard with our wholesale supplier, Nisa, to develop the offer in these stores, initially seeking to replicate the range under previous ownership, in order to make the transition as easy as possible for customers. These stores now carry our widest selection of fresh food and grocery products and are accelerating our transition to a higher margin, food-based business. We have learned a lot from the process that we can replicate elsewhere in the estate and with the integration complete we are exploring further opportunities, bringing some of McColl’s strengths to these stores, such as our excellent neighbourhood services proposition. The stores were already profitable and we expect them to add around 30% to Group sales and 40% to Group profit on an annualised basis. With all of the stores transitioned by July, we have started to see the benefits flow through, and we are confident that, by applying the McColl’s flexible and efficient model, and with further synergies to be realised, over time they have the potential make an even more significant contribution to the Group. 25 A formula for growth continued Our groundbreaking supply partnership Six year supply partnership 3,000+ products 400+ Safeway products 26 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements In August 2017 we announced a groundbreaking new supply partnership following a competitive tender of our wholesale supply contracts. Our new long-term partnership will see Morrisons, in time, supply all McColl’s stores with big brand products, plus a new range of Safeway products. Not only will we be able to access a significantly improved fresh food offer, we will also be able to take advantage of improved commercial terms through partnership with a large, listed grocery retailer. This new deal has the additional benefit of simplifying our operations as we move from two wholesale supply partners to one for the entire estate. Our phased rollout to 1,300 stores began in January 2018 with the launch of around 400 Safeway products. They will be available exclusively at McColl’s for the first 12 months and we expect to grow and develop the range over time. We’re excited to bring the much loved and trusted Safeway brand to McColl’s and we expect this partnership to materially benefit both sales and profits in the future. 27 A formula for growth continued driving organic growth 26 McColl’s stores refreshed in 2017 5-10% sales uplift from early trials 100 stores to be refreshed in 2018 +50% sales increase in key categories 28 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements There is huge potential in the McColl’s estate and we’re investing in our refresh programme to drive sustained organic growth. We have focused our recent investment on growing the business through acquisitions and converting hundreds of newsagents to convenience stores. A significant number of our older convenience stores have not had any meaningful investment for some time, and so, towards the end of 2016, we began developing our store refresh programme, starting with two pilot stores. In 2017 we extended the trial to a further 25 stores, completely redesigning their layouts and ranges to create a better environment for customers, and meet the needs of a variety of convenience shopping missions. We have significantly increased the space dedicated to fresh and chilled foods, introduced new ranges such as healthier snacks and craft ales, and given a greater focus to food-to-go. The customer feedback has been excellent and we’ve seen sales uplifts of 5-10% in these early trials, with some categories such as chilled food growing by as much as 100%. In 2018 we will extend the refresh programme to 100 stores. We believe there are around 500 convenience stores in our estate that would benefit from this investment and provide a source of organic growth in the future. 29 Our business model Our vision is to become your neighbourhood’s favourite shop through our strategy focused on increasing our neighbourhood presence, growing our convenience offer and providing excellent customer service. Our business model is underpinned by our core values: Customer first Simple and consistent Caring and compassionate Community champions 30 McColl’s Retail Group plc Annual Report and Accounts 2017 The resources and relationships we need How we manage our supply chain Colleagues Our colleagues are our most important asset and a key driver in our vision to become your neighbourhood’s favourite shop. Stores We operate 1,611 stores across the UK comprising of 1,279 convenience stores and 332 newsagents. We manage all of our stores which means we can ensure strong retail standards. by In August 2017 we agreed a new long-term partnership with Morrisons. In January 2018 they began a phased rollout to supply our stores with big brands and a best-in-class fresh food and grocery offer through the Safeway brand. Partners & suppliers Our ability to run our stores efficiently relies on a strong relationship with our supply partners. We buy from wholesale distributors which means we do not have the investment and working capital costs associated with a distribution network. It gives us greater flexibility and allows us to focus on our retail operations. Brand & reputation The McColl’s name has been around for over 100 years. Our brand and reputation are important to us and as the business evolves we are helping customers understand what they can expect from McColl’s. IT The information systems we have in place are crucial to the smooth running and efficiency of our business, and we continue to invest to ensure our systems are fit for purpose. Strong financials Our vision to grow the business both organically and by acquisition needs a robust balance sheet to fund this activity. The majority of our products are delivered via two main wholesale distribution partners, with the remaining specialist categories, including news, cards and food-to-go delivered direct to our stores. In 2017 our wholesale distribution partners were Palmer and Harvey (P&H)* and Nisa, with P&H supplying our newsagents and smaller convenience stores, and Nisa supplying our larger convenience stores. * On 28 November 2017 P&H was placed into administration. Following this, we have worked with our supply chain partners (Nisa and Morrisons) to minimise disruption and ensure continuity of supply to affected stores. What makes us the neighbourhood’s favourite shop The value this creates Strategic report Governance Financial statements 31% of our customers visit our stores every day 60% of our customers live within 400m of our stores o c a l t h e h e a r t g a t o u r h o o d s means n v e n i e n t choice b c u s tomers. f o u r o B L e i n e i g o f n e ’r e a c fo r l o t s o w h c.400 Safeway products s t c u d o r ns. s, fresh als o, riety of -to-g e y m d missio d o o f d e a p e r a v e d w a i r r p o f n a s d e e n rie e c o r g d n a d o o d a e r , s e b a l t e g e v f l a P i t n e d n s a y l r e h t s a r e m e c r f o t s e u Customer first c.3k total products s d e t i u w c n h t i r f a W c c O o lle ur w f o u s t C u n m e o a h b g o u r c eig in o arm and friend l y es provide excell e n t er service and are a dr i v i n g ur journey to becoming y o u r urhood’s favourite sho p. stomer focus Plus Our Plus card rewards customers and drives loyalty 7 days Our stores are open seven days a week 871 Collect+ points and Amazon lockers 1,125 r y Eve k of o vid i We thin hub – pro useful s ple liv e r vi u n c th e , a e s , n e y n e d c l d ATMs rs a y e l v e g s g a s r e s e a t a n r peo e a o p e v v s r i d a e o g i t h i l t d h a o u b c e m . b l w e h c o t s u r e s e r e w h e n a n d h o o d w m h c u p o h s i s t it g a s n orta nitie u m s o o p m p le v alue havin w just h m unitie aro und our stores. y a n d how im p p ort co t o s u a r b W e k n o p e e n m o C c.500 local organisations and good causes supported 588 Post Offices £300k raised for St George’s University Hospital Reinvested in the business Customers We provide access to essential services, fresh food and grocery products for millions of people. 5m customers every week Colleagues We are committed to looking after our colleagues so that they can look after our customers. >90% enjoy working for McColl’s Social Our stores are run by local people for local people which gives us a strong sense of community. We support a wide range of local organisations and good causes. c.500 local organisations Economic We are investing for long term growth, which helps both our suppliers and the overall UK economy prosper. * See glossary of terms on page 136 for definition £20.3m capital expenditure excluding the acquisition* Shareholder returns We are committed to delivering value to shareholders and sharing in our success through dividends. 10.3p full year dividend Margins The strengthening mix in our sales is driving an improvement in our gross margin as we become less reliant on low margin traditional categories. 25.7% gross margin Shareholder funds By continuing to grow the business we’re increasing the total shareholder funds that we will use to invest in the business. £145.9m shareholder funds 31 Our performance KPIs In 2017 we made good progress against all our key performance indicators (KPIs) We use six KPIs to monitor the performance of the business. Revenue* £1.13bn +19.1% 2016 Like-for-like sales* +0.1% +two percentage points vs 2016 Adjusted EBITDA* £44.0m +20.0% 2016 We keep KPIs under review to ensure they remain appropriate and help determine remuneration policy. We show how we have performed against our current KPIs. 2017 2016 2015 £1.13bn £0.95bn £0.93bn -1.9% -1.9% 2017 +0.1% 2016 2015 2017 2016 2015 £44.0m £36.7m £37.7m In 2017 we introduced a new KPI when we announced our target, for grocery and alcohol to become our biggest sales category. This year we have included a new KPI for basket size. As we grow our convenience offer we expect customers to do more top-up shopping with us and to grow our average basket size. Total revenue grew by 19.1%, principally driven by the acquisition of 298 convenience stores. Like-for-like sales (LFL) increased by 0.1%, a significant improvement on the previous year LFL of (1.9)%. Adjusted EBITDA was up £7.3m year-on-year boosted by our acquisition of 298 convenience stores. Adjusted earnings per share* 18.3p +14.3% 2016 Average basket size £5.62 +7.3% 2016 Grocery and alcohol sales* 31% 32% 2017 2016 2015 18.3 pence 16.0 pence 15.9 pence 2017 2016 2015 £5.62 £5.24 £5.12 Adjusted earnings per share, increased by 2.3 pence to 18.3 pence. We have seen continued growth in our average basket size as we develop our convenience offer and increase the proportion of top-up shopping missions at McColl’s. 37% We have seen significant growth in grocery and alcohol sales and they now account for 32% of our total sales compared to 27% in 2016. Grocery and alcohol Cigarettes and tobacco Impulse, news and other * Please see glossary of terms on page 135 for definition. Full details of adjusted EBITDA can be found in note 6 on page 110. 32 McColl’s Retail Group plc Annual Report and Accounts 2017 Financial review Strategic report Governance Financial statements Building an exciting future for McColl’s If 2016 was about laying solid foundations for the future of McColl’s, then 2017 has been about cementing in place the building blocks that will support our growth for years to come. With the on-boarding of over 300 new stores, the successful conclusion of our store refresh trial, and having agreed a groundbreaking new supply deal, McColl’s is well set for sustainable growth in 2018 and beyond. Sales mix has continued to strengthen leading to gross margin improvement As we continue to evolve our mix of stores and products, for the third consecutive year we saw a material improvement in gross profit margins, up 60 basis points year-on-year to 25.7% (2016: 25.1%). Gross margins are generally strongest in our larger convenience stores, which offer a bigger range of groceries, including fresh food. These stores now account for a significantly greater proportion of our estate following our recent acquisitions, and planned closure of marginal stores. Consequently our overall sales mix is continuing to strengthen as we become less dependent on lower margin traditional categories. Annual revenue exceeds £1bn, boosted by major acquisition This year we reached a significant milestone, with our full-year revenue exceeding £1bn for the first time. It grew to £1.13bn (2016: £950.4m), an increase of 19.1%. This year-on-year growth was principally driven by the major acquisition we announced in 2016. The 298 stores we acquired were transitioned to McColl’s over the course of seven months with the final store rebranded in mid-July 2017. A number of single store acquisitions were also completed in the second half of the year. We continued to be impacted by the structural decline in traditional categories, principally news and confectionery. However, we have seen good growth in key grocery categories, including fresh food, and alcohol, which gave rise to a positive full-year like-for-like (LFL) of 0.1%, a significant improvement on the previous year LFL of (1.9)%. Sales in the stores we acquired and converted in 2015-16, which provide a barometer for the beneficial effects of recent capital investment, were up by 2.4% LFL. 33 Financial review continued Adjusted operating profit £31.4m +33.8% 2016 2017 2016 2015 £31.4m £23.5m £24.3m Gross margin 25.7% 25.1% 2016 “ We are well on the way to meeting our strategic target for grocery and alcohol to be our biggest sales category.” 34 McColl’s Retail Group plc Annual Report and Accounts 2017 Tobacco is still currently our largest individual sales category (and our sales have held up well as we successfully transitioned to the new EUTPD2 regulations in May). However, most critically, grocery and alcohol sales were up 43% year-on-year and are now 32% of our mix compared to 27% in 2016. Enhancing the quality of the McColl’s estate We have enhanced the quality of the estate through both the acquisition of 298 quality convenience stores and the planned closure or disposal of underperforming stores. This resulted in a series of adjustments in the year. We are well on the way to meeting our strategic target for grocery and alcohol to be our biggest sales category and we expect to make further progress in 2018 as we annualise our acquisition and rollout the Safeway range in over 1,300 stores. We had adjusting items of £5.0m associated with the 298 store acquisition, comprising £1.4m of legal fees and other professional adviser costs; £2.1m of setup and transition costs; and £1.5m of refinancing costs. In terms of overall value, total gross profit grew by 21.7%, from £238.7m to £290.4m, benefiting from the contribution of the newly acquired stores. Adjusted operating profit materially advanced Operating profit before adjusting items increased by £7.9m to £31.4m (2016: £23.5m), boosted by our acquisition, and the sale and leaseback of 10 of the 116 acquired freehold stores. As well as releasing immediate value through this programme, we have been able to reinvest the proceeds to accelerate our store refreshes, and other capital investment priorities. We anticipate that this will be a sustainable profit and cash flow, with further sale and leasebacks planned in the short/medium term. Adjusted operating profit excluding property- related items (see note 6 for definition), was up £5.9m year-on-year to £28.3m (2016: £22.4m). In aggregate, administrative expenses as a percentage of revenue, before adjusting items were broadly flat year-on-year at 25.3% despite the impact of continued wage inflation and the higher costs (but also higher margins) of operating convenience stores. As well as working to offset the impacts of wage inflation through growth and gross margin enhancement, there are a number of capital initiatives planned for the coming year and beyond to improve efficiency and remove cost. Other operating income increased by £1.6m to £24.8m (2016: £23.1m) reflecting additional income from the newly acquired stores, 38 of which have a Post Office service. We also had adjusting items of £2.9m relating to a new, broader initiative to close or dispose of marginal stores. In the year 73 stores were sold or closed, most of which were underperforming newsagents and smaller convenience stores, as we seek to optimise our estate. In total there were £7.9m of gross (pre-tax) adjusting items, split into £6.4m of adjusting items to operating profit and a £1.5m adjustment to finance costs. Net adjustments (post-tax) were £6.9m. Net finance costs increased as we invest in growing the business Adjusted net finance costs increased to £5.1m (2016: £2.7m). This reflects the increase in our debt as we have invested in growing the business through the significant acquisition. The adjustment of £1.5m to finance costs noted above relates to undrawn facility fees for the new term loan to support the acquisition, and the write-off of fees from our previous refinancing. Profit before tax impacted by adjusting items Profit on ordinary activities before taxation increased to £18.4m (2016: £17.7m). This was impacted by the £7.9m of adjusting items relating to the acquisition (£5.0m) and planned closures (£2.9m) as described above. Before adjusting items, profit before tax increased by £5.5m to £26.3m (2016: £20.8m). Stable effective rate of tax The tax charge for the period increased to £4.2m (2016: £3.7m), representing an effective tax rate of 22.9% (2016: 21.2%). This effective rate compares to an average statutory rate for the period of 19.3%. Double-digit percentage growth in adjusted earnings per share Basic earnings per share slightly reduced to 12.3 pence (2016: 12.8 pence). Adjusted earnings per share, however, increased to 18.3 pence (2016: 16.0 pence). Dividend per share increased I am pleased to confirm that the Board has recommended a final dividend of 6.9 pence per share (2016: 6.8 pence). The total dividend for the period has slightly increased to 10.3 pence per share (2016: 10.2 pence), reflecting our commitment to improve returns to shareholders as we grow the business. As previously advised, looking forward it is management’s intention to move towards a policy of a 50% payout ratio to profit after tax (before adjusting gains but after adjusting losses), as earnings (and therefore pence per share payouts) increase. Asset base strengthened by investment We have continued to grow the business, increasing total shareholder funds at the end of the year by £5.4m to £145.9m (2016: £140.5m). Our ongoing programme of capital investment increased the book value of goodwill and other intangibles, property, plant and equipment by £131.4m to £352.5m (2016: £221.1m). Current assets at the end of the period increased to £130.6m (2016: £97.7m). This increase of £32.9m is a result of an increase in stock of £20.9m and Trade Receivables of £5.2m with the growth in our estate following our acquisition, plus an increase in cash and cash equivalents of £10.5m due to higher levels of cash in transit and a lower overdraft, partly offset by reduction in assets held for sale. Strategic report Governance Financial statements Our current liabilities increased to £173.4m (2016: £139.1m), reflecting higher trade and other payables driven by business growth and increased provisions due to our store closure programme. Non-current liabilities increased to £177.6m (2016: £50.2m), as we extended our borrowings to finance the acquisition. Dividend 10.3p 10.2p 2016 Pension schemes stable, actuarial review completed We operate two defined benefit pension schemes, the TM Group Pension Scheme and the TM Pension Plan, both of which are closed to future accrual. The combined accounting surplus (based on corporate bond yields) in the two schemes at the end of the period further improved to £10.3m (2016: £6.1m), as a result of strong returns on assets. We concluded the actuarial review of the two schemes in June 2017. This review concluded that the combined funding deficit of our two pension schemes was £12.6m, broadly similar to that at the previous actuarial valuation. Therefore only a minor incremental cash contribution will be made in the current review period. The Company currently contributes approximately £1.6m per year, inclusive of fees and levies. Consistent cash generation supports future growth The cash generation of McColl’s continues to support significant investment in the business and a strong dividend yield for shareholders, whilst also controlling debt levels. Net cash provided by operating activities increased in the year to £54.2m (2016: £21.6m). This was supported by increased business scale and profits, favourable working capital flows and lower underlying capex (i.e. excluding the major acquisition). Adjusted EBITDA excluding property-related items (see note 6 on page 110 for definition) increased by £7.3m to £44.0m (2016: £36.7m). Net cash from operating activities £54.2m £21.6m 2016 Growing basket spend As we develop our convenience offer and we are able to provide a better, broader food offer for customers, we are capturing more of their spend. Our average basket size is £5.62, up 7.3% year-on-year. 35 Future outlook 2017 has been a very important year for the business, set against the backdrop of major changes in the grocery sector and particularly the convenience channel. We have looked to capitalise upon the opportunities this has afforded, particularly with the announcement of a strategic partnership with a FTSE 100 grocery retailer. We believe that this move, alongside the additional focus on store refreshes to unlock further organic growth, stands us in good stead for the short, medium and long term, as we look to fully exploit the benefits of a larger, more food-focused and better invested-in business. Simon Fuller Chief Financial Officer Excluding the acquisition, net capital expenditure (which excludes the acquisition of stock), reduced by £5.4m to £20.3m (2016: £25.7m). We continue to invest in the business for growth, including our programme of store acquisitions and refreshes, alongside the development and extension of our services and food-to-go offer. In the period we added 310 convenience stores, completed 26 store refreshes and delivered six new Subways in our stores. Net finance expense of £5.1m (excluding adjusting items) was higher than the prior year, reflecting increased borrowings and a higher interest rate given leverage levels. The interim and final dividends paid in the period totalled £11.7m, up slightly in total cash terms due to the additional shares now in issue. Net debt at the end of the period was £142.2m (2016: £37.0m), representing 3.2 times adjusted EBITDA (2016: 1.0 times adjusted EBITDA). This ratio reduces on a 12 month rolling EBITDA basis and is in line with the leverage profile that had been anticipated by management. Debt refinancing package to support major acquisition In 2016, we renegotiated our debt facilities, to support our major acquisition. The previous £85m working capital facility was extended to £100m and supplemented by a £100m repayment term loan. Both of these elements will run through until July 2021, with the interest rate reducing as the business deleverages. At the end of the period, drawings against the total facility were in line with management expectations at £154.5m (2016: £37.0m). Financial review continued 36 McColl’s Retail Group plc Annual Report and Accounts 2017 Social and environmental review Strategic report Governance Financial statements McColl’s and responsibility We are committed to operating responsibly, supporting neighbourhoods where our customers live, and our colleagues work. 37 Social and environmental review continued Our vision is to be your neighbourhood’s favourite shop. We will only achieve this vision if we are a good neighbour in all respects and that means managing our environmental impact, supporting local communities and looking after our colleagues. With everyday access to fresh food and groceries, plus a range of services such as ATMs, bill payment, Post Offices and internet collection points, our stores provide a vital service to lots of communities. In fact, based on a recent survey, convenience stores and Post Offices are the two services that have the most positive impact on a local area. Community champions Our role in the local community goes beyond being a neighbourhood retailer and our stores are actively involved in supporting their local communities. Through the ‘Making a Difference Locally’ scheme, where a proportion of sales we make on selected products are donated to a charity fund, we have supported a range of local causes, chosen by each store, including scout groups, schools, hospitals and local charities. To date we have supported almost 500 local organisations, charities and good causes. Through our Halloween charity campaign, colleagues and customers also raised money to support St George’s University Hospital’s research into sudden cardiac death in young people. This year we presented them with a cheque for £300,000 which brings our total to over £1m in funds to support this important research. Charitable donations During the year, the following donations were made: Region Charity England St George’s University Hospital Scotland Ronald McDonald House Hope House and Tyˆ Hafan Wales Donation amount £300,000 £59,000 £14,400 £373,400 These donations were raised from both carrier bag sales and the Group’s own Halloween-related fundraising activities. The Group donates four pence (net of VAT) from every carrier bag sale to specific charities in England, Scotland and Wales. 38 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements Colleagues Making all the difference Excellent customer service is essential to the success of our business and that’s why it’s a strategic priority for us. We can only deliver excellent customer service with the hard work and dedication of our colleagues. We have 22,260 colleagues, including over 6,000 Home News Deliverers, and altogether we employ the equivalent of 8,440 full-time colleagues. Many of our colleagues live locally to our stores which helps give them a strong sense of community and customers consistently rate us highly on colleague friendliness and helpfulness. Through our business briefings, annual retail exhibition and colleague magazine we keep colleagues updated on business strategy and performance, as well as any broader financial or economic factors that may impact us. We encourage colleague involvement in our strategic performance through operation of a performance-related bonus scheme which applies to over 100 senior employees and provides an incentive to them. We also operate an active sales incentive that gives stores the opportunity to earn a bonus each period creating an incentive for retail colleagues. As the business is evolving and we’re developing our fresh food credentials it’s important for colleagues to receive the right training to support our growth. This year we delivered fresh food training to around 900 Store Managers in our convenience stores. We also launched Training@McColls in February 2018 which will allow us to deliver a range of training, including compliance and customer service to all our colleagues using interactive digital learning modules. Colleagues can choose to access this eTraining on their own mobile and tablet devices so it is much more flexible and convenient. Listening to our colleagues We want all our colleagues to feel a part of McColl’s. Making sure they are engaged is really important to us, so that they enjoy working for McColl’s and management can take into account their views when making decisions that will impact them. We hold a series of regular business briefings and senior manager meetings that give colleagues an opportunity to ask questions and give feedback. We also conduct an annual colleague survey and an interim ‘pulse’ survey. This enables all our colleagues to share their views on working for McColl’s, and helps us identify things we need to improve on. Last year over 90% of colleagues said that they enjoy their job and around 80% would recommend McColl’s as a great place to work. In the year ahead we will take this a step further and launch our colleague forums that will give us more insight into the data behind the survey. They will enable us to engage colleagues on a more regular basis and really understand any issues or concerns they may have. Developing our people Whether they are at the start of their career with McColl’s or looking to take the next step, we are investing in our colleagues and making sure they have the right skills they need to do their job. For those colleagues wishing to progress, we operate our successful ‘onward and upward’ development programme focusing on some of the key roles within the business. We have a good track record of promoting colleagues with 56% of Store Manager vacancies being filled internally, 56% of our Area Managers having been promoted from store management and 60% of our Regional Managers having been promoted from area management. Many of our Store Managers started out with us on a paper round or as Sales Assistants, underlining the career opportunities we provide and the role we play for local people and the younger generation. This year we’ve invested in almost 30,000 hours of training for our c.3,000 new colleagues that have joined us from the Co-op, alongside our regular induction training for new starters. Around 300 colleagues are currently taking part in our apprenticeship programmes. 39 Social and environmental review continued Supporting women to reach their potential We have a strong track record of promoting women to store management and 51% of our current managers are female. We know there are many talented women in our business and we want to ensure they continue to progress with McColl’s. This year we have been developing our approach to help women in our business reach their full potential, starting with our women’s forums that are helping us to understand the barriers to promotion. 40 McColl’s Retail Group plc Annual Report and Accounts 2017 34% Store colleagues Male Female Store managers Male Female Senior managers Male Female Directors Male Female 28% 29% 66% 49% 51% 72% 71% We are developing our leadership capability and currently have over 30 managers on our leadership programme. This year we have also redefined the leadership skills and behaviours that are required to be a great manager, and redesigned our Area Managers’ Academy. Rewarding and recognising our people We offer a range of benefits for colleagues as well as flexible working opportunities. Through our colleague handbook, our online colleague portal, email updates and our Talking Shop magazine we explain the benefits that are available. These range from colleague discount in our stores to health care plans and a wide range of offers on days out and experiences. We know how important it is that colleagues feel valued and are recognised for their hard work. This year we celebrated outstanding contributions from a number of our store colleagues at our All Stars Awards evening. We want to make it easier to recognise great performance across the business and say thank you to colleagues who have demonstrated the company values in the work that they do. We’ve developed a new recognition plan and designed tools to support this, including the introduction of McColl’s Thank You cards. Fostering diversity and inclusion We are an equal opportunities employer. We do not discriminate against colleagues on the basis of age, disability, gender, marital or civil partner status, pregnancy or maternity, race, colour, nationality, ethnic or national origin, religion or belief, or sexual orientation. These principles of non-discrimination and equality of opportunity also apply to the way in which colleagues treat visitors, customers, suppliers and former colleagues. From April 2018 the UK Government requires all employers with more than 250 employees to publish their gender pay gap, showing the difference in the average pay between men and women across the entire business, regardless of job role. 65% of our colleagues are women and our gender pay gap in 2017 was 3.0% (the UK average gender pay gap is 18.4% – ONS, 2017). We are confident that men and women are paid the same salary for fulfilling the same job role at McColl’s. However, a gender pay gap exists in our business because women are underrepresented in senior roles in some functions. We know that taking considered and deliberate action to ensure talented women progress is important, together with instilling an inclusive culture. Our recently launched company values will help to guide us in making McColl’s a great place to work and we will continue to support colleagues through the delivery of a strong people plan. More information on the results of our gender pay gap analysis and our approach to developing female talent can be found at www.mccollsplc.co.uk/genderpaygap. Health and safety We continue to demonstrate our commitment to health and safety across the Group. It is discussed by the Board, and through our health and safety committee we take a consistent and collaborative approach to creating a safe place for our colleagues, customers and visitors. In 2017, colleague safety remained a key focus and we introduced improved incident reporting, facilitating a more collaborative response across the business. We continued to invest in colleague safety technology across key locations working with our two partners, SoloProtect and Positive Response, to install, and train colleagues to use lone working devices. These devices have panic alarms connected to monitoring centres with audio capability and improved police response. We have also entered into two new partnerships: one with Kingdom Services to provide guarding cover in some of our more vulnerable stores; and one with National Business Crime Solutions, who provide a vital link between other retailers and the Police allowing intelligence to be shared quickly and efficiently. We work closely with insurers, brokers and local authorities to advance our risk management, for example by increasing proactive risk management in stores. By improving the level of compliance across our business we saw a continued downturn in both employee and public liability claims. We launched our Safer for Stores programme in November 2017 to help all store colleagues manage security risks. This was supported by the introduction of a guide, colleague video and security poster. Across a large estate of stores, there are inevitably incidents and accidents. We recognise we have a duty of care to understand and address the risks within the business in order to ensure, as far as possible, we keep our colleagues and customers safe. Where there are incidents, we examine the circumstances and draw learnings from what occurred so that we can continually improve our approach to safety. All initiatives are managed and monitored through a health and safety committee of Executives and Senior Management, together with the Health and Safety Manager. Looking ahead Our colleagues are our greatest asset and in the year ahead we will continue to work to ensure that every colleague feels welcome at McColl’s, that they feel safe at work, that they have the training they need to do their job, and that they have the opportunity to progress if they wish to. Strategic report Governance Financial statements Human rights We treat people in line with internationally recognised human rights principles. The Group does not have a specific human rights policy; however, a number of policies are in place that demonstrate effective management of human rights issues in the business, including an Anti-Bribery and Anti-Corruption Policy, Anti-Harassment & Bullying Policy, Health and Safety Policy and a Policy for Speaking up in Confidence. We are absolutely committed to preventing modern slavery in all our activities and ensuring that our supply chain is free from slavery and trafficking. Our Modern Slavery Statement for the year 2017/18 (pursuant to s.54 of the Modern Slavery Act 2015) can be found at www.mccollsplc.co.uk/modernslaverystatement. 41 Social and environmental review continued Supporting food banks In 2017 we supported the Trussell Trust, a charity that operates a network of food banks providing emergency food and support to people in crisis. We have raised £140,000 through a combination of local store donations and fund raising activity, as well as providing a storage facility at our head office site in Brentwood. 42 McColl’s Retail Group plc Annual Report and Accounts 2017 Environment As part of our commitment to being a responsible business, we aim to act in a sustainable way, through driving efficiency, reducing waste, recycling and compliance. Improving energy efficiency We have an ongoing commitment to improving our energy efficiency. This year, following the roll-out of energy-efficient LED lighting to over 1,100 stores in 2016, we extended this programme to another 150 stores, including a significant number of those recently acquired from the Co-op. We have also switched to a more energy-efficient refrigeration supplier so that any new units installed in our stores will have more environmentally friendly double-glazed doors. We continue to remove surplus or particularly inefficient equipment from our stores and install ‘last person out’ switches (where all the lights can be switched off via one switch), as well as photocells that switch lighting on and off when areas aren’t used. Many of our stores have live energy monitors so we can see how much energy each store uses in real time and actively manage them accordingly. The energy saving measures we have put in place have helped us reduce our LFL energy consumption by a further 7.6% in 2017, despite increasing our overall chilled and frozen space. Managing waste Recycling Through our arrangements with our key wholesale distributors we recycle plastic and cardboard used in our business. The same lorries that arrive with products leave with plastic and cardboard, so no additional miles are involved – it’s a neat energy- efficient way to recycle packaging. Food waste Our regular waste management routines ensure that we maintain very low levels of food waste. We have a strong focus on managing waste and it’s a key metric for all our Store Managers. We conduct weekly reviews of the previous weeks’ waste which can result in a number of different actions, including, working with our wholesale distributors to supply smaller case sizes; changing our ordering algorithms; reviewing product quality and pricing; changing product pack sizes; reducing distribution of particular products, and in some cases delisting; and store training to improve waste routines such as stock rotation and mark-downs. This year we joined The Grocer’s campaign to reduce food waste which aims to unite the grocery industry in tackling this important issue. Greenhouse gas emissions Our overall carbon emissions were 53,651 tonnes CO2 (2016 51,316 tonnes CO2). This increase reflects a significantly larger estate following our acquisition of 298 convenience stores. This resulted in a 34% increase in scope 1 emissions as we have increased the number of stores with a higher proportion of refrigeration space. Scope 2 emissions were broadly flat year-on-year despite the enlarged estate, as a result of lower LFL energy consumption (down 7.6% year-on-year) and a 15% reduction in the emission factor for UK electricity. Our carbon intensity ratio reduced to 4.7, down from 5.4 in 2016. The Group is required to measure and report direct and indirect greenhouse gas (GHG) emissions pursuant to the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. This is the fourth GHG emissions report in line with UK mandatory reporting requirements set out by the Department for Environment, Food and Rural Affairs (DEFRA) and we have therefore expressed the report alongside the ‘base year’ of 2014 for comparison. The mandatory requirement is for the disclosure of the Scope 1 and 2 emissions only. Scope 1 emissions include heating, vehicle fuel and fugitive emissions (refrigerant leakage). Scope 2 emissions include purchased electricity. The Group’s total GHG footprint is shown in the table below. Emissions data for period 28 November 2016 to 26 November 2017 Scope 1 Fuel combustion (natural gas, vehicle fuels and other fuels) Refrigerants Scope 1 total Scope 2 Purchased Electricity Total of Scope 1 and 2 2014 Tonnes CO2(e) (base year) 2,125 2,122 4,247 51,884 56,131 2016 Tonnes CO2(e) 2,268 2,897 5,165 46,151 51,316 2017 Tonnes CO2(e) 2,357 4,569 6,926 46,725 53,651 Intensity – CO2(e) tonnes per £100,000 of revenue 6.1 5.4 4.7 Strategic report Governance Financial statements • The Group has reported on all the measured emissions sources required under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013 • The Group has used the guidance as set out in Defra’s Environmental Reporting Guidelines, including mandatory greenhouse gas emissions reporting guidance, dated June 2013 • Emission factors are based upon UK Government conversion factors for Company Reporting 2017. The electricity emissions are based upon a reduced emission factor for electricity in 2017 reflecting the UK’s increasing use of renewable energy in the overall electricity grid mix • The Group has engaged a consultancy firm, The Miles Consultancy, to oversee the collection of vehicle data and provide guidance on complying with appropriate regulations. Data collected has included fuel use and mileage, and business mileage has been calculated on the basis of actual fuel use recorded, applying 2017 emission factors for diesel and petrol (bio-fuel blends) • The figures disclosed for 2017 and the methodology used to collate the information has been reviewed and verified by Project Rome Ltd • For electricity, gas and other fuels, consumption data has been extracted from billing information from the start of the reporting period to the date of the last bill received for each type of supply. Therefore some extrapolation has been required in order to calculate the full 52-week consumption figure. Data has been provided by British Independent Utilities • Petrol and fuel data has been collated from information received from the Group’s fleet management consultant. Data for 11 months of the reporting year is calculated using data captured directly from the fleet. For the final month of the reporting year, data has been estimated using an average based on the previous 11 months • Refrigerant data has been calculated by reference to individual items of equipment and then extrapolating this based on an estimated level of equipment within each property used by the Group. The methodology utilises annual leakage rates as set out in Appendix C of the Environmental Reporting Guidelines for mandatory greenhouse gas emissions 43 Principal risks and uncertainties How we identify and manage risk Risk management framework Risk identification Risk reporting Risk assessment Strategy setting Risk policies Risk ownership Risk appetite Risk identification and assessment Risks are identified and assessed at all levels within the organisation, from individual store risk assessments through to identification and assessment of Group-wide strategic threats. We operate detailed procedures and appropriate training in store to ensure the safety and security of our colleagues and customers and protection of our property. At Group level, we look at a wide range of factors including customer trends, competition, economic conditions, regulatory developments, technological issues, counterparty security and financial matters to work out what the main threats to our business could be. Risk ownership Once a risk has been identified, responsibility for management of that risk is clearly defined. This equally applies in our stores, where an appropriate risk culture promotes personal responsibility for operating safely and for carrying out regular checks on potential hazards. Where a hazard cannot be dealt with simply and immediately, a reporting process exists to escalate the matter for resolution. Similarly, at Group level, risks relating to, for example, finance, legal, data, trading partners and operations, are monitored and managed through a variety of controls, including detailed procedures and delegations of authority to appropriately experienced and qualified individuals or groups such as our Group Risk Committee. Like all businesses, McColl’s is exposed to a number of internal and external factors which could positively or negatively affect its performance. Whilst minor variations in circumstances and outcomes will always occur, a proactive approach to those significant matters that could threaten successful delivery of our short and long term goals is essential. Our risk framework seeks to identify those threats, quantify how likely it is they will occur and how significant their impact could be. Mitigating actions are then applied to reduce the likelihood and impact to a level that is acceptable to the Board and monitor the effectiveness of those actions to ensure that they have the intended effect. Our understanding of these risks also informs our strategic choices for the business. As our strategy and plans evolve and the environment in which we operate changes, so our assessment and management of risk must keep pace. We therefore adopt a continual process of risk identification, assessment, management and monitoring as illustrated here. 44 McColl’s Retail Group plc Annual Report and Accounts 2017 Risk appetite and risk policies Having quantified and understood our risks, the Board, guided by the Audit & Risk Committee, considers what level of risk can be accepted within the business in pursuit of our strategic goals. The Board requires all risks to be appropriately managed and, where they cannot be sufficiently reduced or removed entirely, considers whether the risk should be transferred, for example through insurance cover or hedging arrangements. A vital component of the Board’s risk related responsibilities is that of fostering an appropriate risk culture. During the year, four new values were adopted by the business which are consistent with managing risk well within the business. These values have already been incorporated into some of our risk-related policies and will continue to be introduced into others as they fall due for review. Our values are: Customer first Simple and consistent Caring and compassionate Community champions Having understood the threats faced and the extent to which they have been reduced, eliminated or transferred, the Board determines its risk appetite and the strategy that can be delivered within acceptable risk parameters. A new or amended strategy can often give rise to new risks and these need to be identified and assessed and built into the management and reporting processes described above. Risk reporting The reporting of risk is an important step in the overall process. Reporting not only raises awareness and initiates discussion, it can also provide additional insight into the aggregation of risks that may not be immediately apparent when a single risk is considered or managed in isolation. Risks, both operational and strategic, are reported to our Group Risk Committee, which comprises our Retail Board members, Health & Safety Manager and Company Secretary. This committee brings together senior representatives from all areas of the business to consider collectively, and from their different functional perspectives, the more significant risks faced by the business. The Group Risk Committee reports, and escalates as appropriate, matters of risk to the Retail Board which has responsibility for supporting the Chief Executive in his delivery of the Group strategy and business objectives. The Audit & Risk Committee periodically reviews risks and makes recommendations to the Board. Individual matters of a significant nature are also escalated to the Board where appropriate. Resources and structure To undertake this work, appropriate structure and resources are needed to manage all the tasks that make up the risk management framework and to ensure that risks are appropriately understood and dealt with by all our colleagues. We have organised our internal resources as indicated here to ensure that the risk framework is embedded throughout the business. Strategic report Governance Financial statements Risk management structure Our risk framework is supported by the risk management structure detailed below: Board Executive Directors Audit & Risk Committee Retail Board Operational Risk Committee Functional Areas Colleagues External support and expertise 45 Principal risks and uncertainties continued The risk management processes described above are continual and risks evolve. However, at present, the Board, with the assistance of the Audit & Risk Committee, considers the following to be the principal risks facing the Group. Maintained Increased New 46 McColl’s Retail Group plc Annual Report and Accounts 2017 l i a p c n i r P k s i R k s i R e h t f o e r u t a N s n o i t a g i t i m k s i R s e g n a h c t n e r r u C Strategy Supply chain Supply chain transition Competition Customer Offer Economy Financial and treasury Information Technology Operational cost base Regulation If the Board either adopts the wrong strategy or does not implement it effectively the aims of the business, its performance and reputation may suffer. We rely on a small number of key distributors and may be adversely affected by changes in supplier dynamics and interruptions in supply. During 2018, we will be transitioning the wholesale arrangements for the majority of our estate to a new supplier. As with any significant project, there is a risk that it will not be delivered to plan. We operate in a highly competitive environment, which is continually changing and has been subject to consolidation. Failure to maintain market share could have an adverse effect on our core business and deflate sales and profitability. Customer shopping habits are influenced by a wide range of All our revenue is generated in the UK. Any deterioration in the factors. If we do not respond to their UK economy, for example as a The main financial risks are the availability of short- and long- term funding to meet business We depend on the reliability and We have a relatively high cost We operate in an environment capability of key information systems base, consisting primarily of salary, governed by strict regulations to and technology. A major failure, a property rental and energy costs. ensure the safety and protection of changing needs they are more likely consequence of Brexit, could affect needs, fluctuations in interest rates, breach, or prolonged performance Increases in these costs without a customers, colleagues, shareholders to shop with a competitor and our consumer spending and cost of movements in energy prices and issues with store or head office corresponding increase in revenues and other stakeholders. Regulations reputation could suffer, resulting in goods, which in turn would impact other post-Brexit impacts. could adversely impact our include alcohol licensing, falling revenues. our sales and profitability. systems could have an adverse impact on the business and its reputation. profitability. • Our strategic development is led by an experienced Board and Senior Management • We establish long- term relationships with trusted suppliers • There is close oversight by the Retail Board and Senior Management • An annual strategic review takes place alongside our budget- setting process • The McColl’s strategy is widely communicated and understood across the business • Business plans are developed, monitored and reviewed against strategic KPIs • Senior Management are incentivised with performance- related rewards to deliver our strategic goals • Our distribution partners • We undertook a significant maintain their own contingency planning as do we • We closely monitor supplier performance including service levels and hold regular discussions with them to address any issues • We monitor the financial stability of key partners • We regularly review our supply chain arrangements, with full tenders completed in 2013 and 2017 amount of planning and testing work to identify and resolve potential issues and have instigated close monitoring of the rollout programme • We have a dedicated and skilled management team with extensive experience of managing supply arrangements • We have established clear lines of communication and a joint project management approach with our new supplier • Phased rollout is designed to ensure the transition is manageable and adapted where necessary • We monitor competitor activity and customer trends • Regular meetings are held with key suppliers to optimise our offer • Development of the Plus card loyalty scheme continues • We are increasing brand awareness through marketing • Improvement of our estate and stores is ongoing • Local refit programmes are undertaken to counter specific threats Key strategic challenges for 2018 include successful transition to new supply arrangements and significant store refresh programme. Ongoing change and consolidation in the sector may also impact our business. Uncertainties in the market and the planned transition to a new supplier increase the risk in the shorter term. The recent collapse of Palmer & Harvey tested our contingency arrangements. The business is now more reliant on its remaining legacy supply partner whilst we transition to our new wholesale arrangements. The transition project has been carefully planned and tested. Implementation is being closely monitored and there is a clear route to escalate any issues if required. The rollout plan is ambitious but is designed to ensure the team is not over-stretched. Our new supply arrangements, including the exclusive launch of the Safeway brand and enhancement of our range, will bring competitive advantage. Our store refresh programme will enhance our customers’ shopping experience. employment, health and safety, data protection and the rules of the Stock Exchange. Failure to comply with relevant laws and regulations could result in sanctions and reputational damage. • Membership of third party organisations (such as the Institute of Grocery Distribution and the Association of Convenience Stores) gives us greater insight into the convenience sector trends and developments • Our new Customer Director will enhance the Retail Board’s capability to address changing customer needs • Promotional programmes offer customers great value • We have a customer loyalty scheme – Plus card • Our strong customer service standards are reflected in our evolving brand strategy • We complete detailed customer research for key projects, for example our store refurbishment programme • We sell food and household • Committed loan facilities are • All business-critical systems • We continually seek to remove • We have clear accountability essentials which are not considered to be highly discretionary in place, which provide us with are well established and are headroom to deliver our strategy supported by an appropriate (see notes 22 and 30) disaster recovery strategy designed to ensure continuity of the business • Business continuity plans are tested on an annual basis unnecessary complexity from our operational procedures to optimise performance for compliance with all laws and regulations • Our policies and procedures • We operate a flexible staff model are designed to meet all aligned to revenue levels relevant requirements • We monitor legislation and • We train colleagues to comply • We offer a wide range of • Funding requirements products at different price points, e.g. value and premium brands • Our flexible business model are managed through regular forecasting and treasury management allows us to respond to changes • The Board approves budgets • Regular reviews assess our in customer behaviour, for example, by adapting our ranges and business plans • Relationships with lenders are managed through vulnerability and our ability to re-establish operations in the event of a failure • Our growing scale enables us regular meetings • Testing is performed to ensure function with regular review data is controlled and protected processes in place with all relevant legislation • We have established governance groups, such as our Health and Safety Strategy Committee to review and manage our compliance • Through third party memberships and expert advice, we keep up-to-date with evolving statute developments related to our costs, e.g. minimum wage, rents and energy tariffs, to allow us to plan and mitigate increases • Property management is a key • We minimise energy costs by combining energy efficiency initiatives and forward purchasing • We regularly retender external contracts to ensure they remain market-competitive to achieve better buying terms, helping to mitigate inflationary pressures and we are already working with our new supply partner to achieve this • We are growing our range of own brand products through the rollout of Safeway • Our risks associated with financial instruments are disclosed in note 30 on page 122 • We manage exposure to fluctuating energy prices by forward buying electricity. We acknowledge that the forward contracts in place are derivatives, they are treated as a pre-agreed price for electricity Our new supply arrangements will Ongoing economic uncertainty We have commenced an annual We are preparing for compliance National Living Wage and National Regulations impacting our business increase our access to a wider range increases the risk of a loss of programme of sale and leaseback with the General Data Protection Minimum Wage will again increase continue to change but we have of the excellent quality products that consumer confidence. Further joint of stores purchased as part of the 298 Regulations, which come into effect above the rate of inflation in 2018. processes in place to make sure we our customers want at competitive plans will be developed with supply store acquisition to release further in May 2018, and are keeping our We have set up a group to focus on take proper account of regulatory prices. With the recent creation of a partners and manufacturers as funds in the business for investment, preparedness for cyber threats under delivering efficiencies and process developments in the way we new Customer Director role, we are needed. growth and de-leveraging. We review. We are also reviewing our improvements in our operations. conduct our business. increasing our focus on the customer and have identified key strengths within our offering that will help develop our brand. currently anticipate this strategy will future IT roadmap and have plans to be available to us over the medium upgrade our ERP and EPOS systems. term. We will continue to work with our banking group to optimally manage our funding position. Strategy Supply chain Supply chain transition Competition Customer Offer Economy Financial and treasury Information Technology Operational cost base Regulation If the Board either adopts the wrong We rely on a small number of key During 2018, we will be transitioning We operate in a highly competitive strategy or does not implement it distributors and may be adversely the wholesale arrangements for environment, which is continually effectively the aims of the business, affected by changes in supplier the majority of our estate to a new changing and has been subject to its performance and reputation dynamics and interruptions in supply. supplier. As with any significant consolidation. Failure to maintain may suffer. project, there is a risk that it will not market share could have an adverse be delivered to plan. effect on our core business and deflate sales and profitability. Customer shopping habits are influenced by a wide range of factors. If we do not respond to their changing needs they are more likely to shop with a competitor and our reputation could suffer, resulting in falling revenues. All our revenue is generated in the UK. Any deterioration in the UK economy, for example as a consequence of Brexit, could affect consumer spending and cost of goods, which in turn would impact our sales and profitability. The main financial risks are the availability of short- and long- term funding to meet business needs, fluctuations in interest rates, movements in energy prices and other post-Brexit impacts. We depend on the reliability and capability of key information systems and technology. A major failure, a breach, or prolonged performance issues with store or head office systems could have an adverse impact on the business and its reputation. We have a relatively high cost base, consisting primarily of salary, property rental and energy costs. Increases in these costs without a corresponding increase in revenues could adversely impact our profitability. We operate in an environment governed by strict regulations to ensure the safety and protection of customers, colleagues, shareholders and other stakeholders. Regulations include alcohol licensing, employment, health and safety, data protection and the rules of the Stock Exchange. Failure to comply with relevant laws and regulations could result in sanctions and reputational damage. Strategic report Governance Financial statements • Our strategic development is led • We establish long- by an experienced Board and term relationships with Senior Management trusted suppliers • There is close oversight by the Retail Board and Senior Management • An annual strategic review takes • Our distribution partners • We undertook a significant place alongside our budget- maintain their own contingency amount of planning and testing our offer discussions with them to address • We have a dedicated and setting process planning as do we • The McColl’s strategy is widely • We closely monitor supplier communicated and understood performance including across the business service levels and hold regular • Business plans are developed, monitored and reviewed against strategic KPIs • Senior Management are any issues • We monitor the financial stability of key partners incentivised with performance- • We regularly review our supply related rewards to deliver our strategic goals chain arrangements, with full tenders completed in 2013 and 2017 work to identify and resolve potential issues and have instigated close monitoring of the rollout programme skilled management team with extensive experience of managing supply arrangements • We have established clear lines of communication and a joint project management approach with our new supplier • Phased rollout is designed to ensure the transition is manageable and adapted where necessary • We monitor competitor activity and customer trends • Regular meetings are held with key suppliers to optimise • Development of the Plus card loyalty scheme continues • We are increasing brand awareness through marketing • Improvement of our estate and stores is ongoing • Local refit programmes are undertaken to counter specific threats Key strategic challenges for 2018 Uncertainties in the market and the The transition project has been include successful transition to new planned transition to a new supplier carefully planned and tested. Our new supply arrangements, including the exclusive launch supply arrangements and significant increase the risk in the shorter term. Implementation is being closely of the Safeway brand and store refresh programme. Ongoing The recent collapse of Palmer & monitored and there is a clear route enhancement of our range, will change and consolidation in the Harvey tested our contingency to escalate any issues if required. bring competitive advantage. sector may also impact our business. arrangements. The business is now The rollout plan is ambitious but is Our store refresh programme more reliant on its remaining legacy designed to ensure the team is not will enhance our customers’ supply partner whilst we transition to over-stretched. shopping experience. our new wholesale arrangements. • Membership of third party organisations (such as the Institute of Grocery Distribution and the Association of Convenience Stores) gives us greater insight into the convenience sector trends and developments • Our new Customer Director will enhance the Retail Board’s capability to address changing customer needs • Promotional programmes offer customers great value • We have a customer loyalty scheme – Plus card • Our strong customer service standards are reflected in our evolving brand strategy • We complete detailed customer research for key projects, for example our store refurbishment programme Our new supply arrangements will increase our access to a wider range of the excellent quality products that our customers want at competitive prices. With the recent creation of a new Customer Director role, we are increasing our focus on the customer and have identified key strengths within our offering that will help develop our brand. • We offer a wide range of products at different price points, e.g. value and premium brands • Our flexible business model allows us to respond to changes in customer behaviour, for example, by adapting our ranges • Our growing scale enables us to achieve better buying terms, helping to mitigate inflationary pressures and we are already working with our new supply partner to achieve this • We are growing our range of own brand products through the rollout of Safeway Ongoing economic uncertainty increases the risk of a loss of consumer confidence. Further joint plans will be developed with supply partners and manufacturers as needed. • Funding requirements are managed through regular forecasting and treasury management and business plans • Relationships with lenders are managed through regular meetings • Our risks associated with financial instruments are disclosed in note 30 on page 122 • We manage exposure to fluctuating energy prices by forward buying electricity. We acknowledge that the forward contracts in place are derivatives, they are treated as a pre-agreed price for electricity We have commenced an annual programme of sale and leaseback of stores purchased as part of the 298 store acquisition to release further funds in the business for investment, growth and de-leveraging. We currently anticipate this strategy will be available to us over the medium term. We will continue to work with our banking group to optimally manage our funding position. • We sell food and household • Committed loan facilities are • All business-critical systems essentials which are not considered to be highly discretionary in place, which provide us with headroom to deliver our strategy (see notes 22 and 30) • The Board approves budgets • Regular reviews assess our are well established and are supported by an appropriate disaster recovery strategy designed to ensure continuity of the business • Business continuity plans are tested on an annual basis vulnerability and our ability to re-establish operations in the event of a failure • Testing is performed to ensure data is controlled and protected • We continually seek to remove unnecessary complexity from our operational procedures to optimise performance • We operate a flexible staff model aligned to revenue levels • We have clear accountability for compliance with all laws and regulations • Our policies and procedures are designed to meet all relevant requirements • We monitor legislation and • We train colleagues to comply with all relevant legislation • We have established governance groups, such as our Health and Safety Strategy Committee to review and manage our compliance • Through third party memberships and expert advice, we keep up-to-date with evolving statute developments related to our costs, e.g. minimum wage, rents and energy tariffs, to allow us to plan and mitigate increases • Property management is a key function with regular review processes in place • We minimise energy costs by combining energy efficiency initiatives and forward purchasing • We regularly retender external contracts to ensure they remain market-competitive We are preparing for compliance with the General Data Protection Regulations, which come into effect in May 2018, and are keeping our preparedness for cyber threats under review. We are also reviewing our future IT roadmap and have plans to upgrade our ERP and EPOS systems. National Living Wage and National Minimum Wage will again increase above the rate of inflation in 2018. We have set up a group to focus on delivering efficiencies and process improvements in our operations. Regulations impacting our business continue to change but we have processes in place to make sure we take proper account of regulatory developments in the way we conduct our business. 47 l a p i c n i r P k s i R k s i R e h t f o e r u t a N s n o i t a g i t i m k s i R s e g n a h c t n e r r u C Chairman’s governance statement Strong corporate governance I am delighted to present my report on the corporate governance arrangements within McColl’s in my first year as Chairman. It has been a year of significant progress within the business as a whole and we have continued to strengthen our governance arrangements as well, to ensure that they remain proportionate and consistent with the principles of good governance enshrined within the UK Corporate Governance Code (the Code) and with the values that we defined during the year for the business. As the Code is further reviewed over the coming months, we will keep our Board arrangements under review and, in particular, will be looking at how we can improve the way we understand and take account of the views of our stakeholders, including colleagues, when making decisions. We will also be mindful of how we can do more to support and promote the McColl’s values: • Customer first • Simple and consistent • Caring and compassionate • Community champions As a Board it is important that we take the lead on incorporating these values into our work. I and my fellow Directors are fully committed to making sure governance and leadership of the business are sufficiently strong, effective and thoughtful to support the ongoing success of the business. It is in this context that we look forward to the continuing evolution of corporate governance within McColl’s as the business continues to develop and expand. Angus Porter Chairman 48 McColl’s Retail Group plc Annual Report and Accounts 2017 Compliance with the UK Corporate Governance Code Strategic report Governance Financial statements Leadership The Board is responsible for leading the business in the way which it believes is most likely to lead to long-term sustainable success. Read more Pages 54 to 55 Effectiveness Our practices aim to ensure we have a balanced Board comprised of committed, well-informed and appropriately skilled individuals to govern our business. Read more Pages 56 to 57 It is the opinion of the Board that the Company has been compliant with all the applicable provisions of the Code throughout the year with the exception of the following issue that was resolved part way through the year. The Code recommends that the Chairman should be independent upon appointment (Code A.3.1). James Lancaster, who had made an unparalleled contribution to the business over many years but who was not independent on appointment, stepped down as Non-Executive Chairman of the Company on 27 April 2017. As his successor, I was considered independent on appointment to the role of Chairman but, nevertheless, we acknowledge that we were not compliant with this Code provision for the entirety of the year. Accountability The Board defines McColl’s strategy, taking account of the need to avoid unnecessary or unacceptable risks. We are committed to transparency. Read more Page 58 Corporate Governance Remuneration Our remuneration policy aims to incentivise strong performance whilst avoiding excess. We are also mindful of the pay of our colleagues across the business. Read more Page 58 Relations with stakeholders We have enhanced our investor relations activities and are looking at how to improve dialogue with other stakeholders, particularly our colleagues. Read more Page 59 49 Board of Directors Strong leadership Angus Porter Non-Executive Chairman2 3 Jonathan Miller Chief Executive3 Simon Fuller Chief Financial Officer Current appointment: Angus was appointed Non- Executive Chairman on 27 April 2017, having formerly served as an Independent Non-Executive Director since 1 April 2016. Key strengths: Angus has extensive knowledge and experience in strategy, innovation, and brand development as well as significant leadership skills. Experience: Angus has held numerous executive and non-executive roles across a range of industry sectors, including senior marketing and general management roles at Mars, BT, Abbey National and WPP. Recently, he was Chief Executive of the Professional Cricketers Association from 2010-2016, and Senior Independent Director and Chairman of the Remuneration Committee of Punch Taverns Plc. from 2012-2017. Other directorships: Angus is Co-Chairman of Direct Wines Ltd and a Non-Executive Director of TDC A/S. Current appointment: Having joined the Group Board in 2004, Jonathan was appointed Chief Executive of McColl’s in 2016. He has worked in the Group since 1991 when he was recruited as Financial Director of cigarette vending operations, becoming Finance Director of retail operations in 1998. Prior to his current role he was the Group’s Chief Financial Officer with additional responsibility for store development, human resources and IT. Current appointment: Simon was appointed as the Group’s Chief Financial Officer in 2016 and has responsibility for finance, investor relations, property and IT. He joined McColl’s in 2015 as Deputy Chief Financial Officer. Key Strengths: With his deep understanding of financial management and the food retail industry, Simon plays a key role in delivery of the Group’s aspirations for change and growth. Key Strengths: Jonathan’s ambitious vision for McColl’s is driving a transformational strategy for the business. Experience: Through his long history with McColl’s, Jonathan has developed an in-depth understanding of both the business and the wider convenience retail market. He has had a major role in all of the key initiatives that have shaped the Group, including a secondary buyout in 2005, numerous corporate acquisitions and the IPO in 2014. As Chief Executive he led the transformational acquisition of 298 stores in 2016 and the negotiation in 2017 of the Group’s ground-breaking new wholesale arrangements. Experience: Having previously worked in other public companies, Simon has applied his experience of operating within a listed environment to improve the Group’s financial and risk management processes and enhance investor relations and external communications. He put in place the 2016 corporate refinancing required for the 298 store acquisition and has played a significant part in a number of re-tendering initiatives, most notably the advantageous new wholesale arrangements. 50 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements Dave Thomas Chief Operating Officer Georgina Harvey Senior Independent Director1 2 3 Current appointment: Dave was appointed as the Group’s Chief Operating Officer in 2014 but his history with McColl’s dates back to 1998 when he joined the business as Regional Manager for convenience. He became Operations General Manager in 2000 and was made Operations Director in 2005. Key Strengths: His long career rooted in the UK supermarket and convenience sector means Dave has extensive operational knowledge, enabling him to orchestrate a process of continual improvement and modernisation of the McColl’s offering across our growing estate. Experience: Dave’s retail career began with Iceland where he led a programme of new store openings as well as conversion of Bejam stores. Subsequently he joined Southern Co-operative as Operations Manager, developing a modern convenience format for the business. More recently within McColl’s, he successfully managed the 2017 conversion of the 298 acquired stores to the McColl’s format as well as taking a key role in the negotiations and implementation of new supply arrangements. Appointment: Georgina was appointed as an Independent Non-Executive Director on 7 February 2014 and is Chairman of the Company’s Remuneration Committee. On 24 May 2016 Georgina was appointed as the Company’s Senior Independent Director. Key Strengths: Georgina has significant experience across highly competitive consumer-facing markets and delivering successful transformational change. Experience: Georgina started her media career at Express Newspapers plc where she was appointed Advertising Director in 1994. She joined IPC Media Limited in 1995 and went on to form IPC Advertising in 1998, where she was Managing Director. Between 2005 and 2012, Georgina was Managing Director, regionals division and a member of the Executive Committee of Trinity Mirror. Other directorships: Georgina is also an Independent Non-Executive Director of William Hill PLC and Big Yellow Group PLC. Sharon Brown Independent Non-Executive Director1 2 3 Jens Hofma Independent Non-Executive Director1 2 3 Appointment: Sharon was appointed as an Independent Non-Executive Director on 7 February 2014 and is Chairman of the Company’s Audit & Risk Committee. Sharon previously served as the Group’s Interim Chairman. Key strengths: Sharon has deep knowledge of finance and audit-related matters, combined with over 25 years’ experience in the retail sector. Experience: Sharon is a management accountant and has extensive financial experience, gained whilst Finance Director and Company Secretary of Dobbies Garden Centres Limited between 1998 and 2013. She also held a senior financial position within the retail division of John Menzies plc from 1991 to 1998. She is, and has been, Audit Committee Chairman for a number of companies. Other directorships: Sharon is a Non-Executive Director and Audit Committee Chairman of Fidelity Special Values PLC, F&C Capital and Income Investment Trust plc, and Celtic plc and is a Non-Executive Director of a number of limited companies in the retail sector. Appointment: Jens was appointed as an Independent Non-Executive Director on 1 July 2017. Key strengths: Jens has particular expertise in consumer goods as well as the restaurant and food- to-go industry. He also possesses in-depth experience of growing multi-site businesses. Experience: Jens is Chief Executive Officer of Pizza Hut Restaurants in the UK. He joined the Pizza Hut business in February 2009 and has since led a private equity funded buyout of its dine-in restaurants. Prior to his involvement with Pizza Hut, Jens spent five years with Yum! Brands, working in the UK and in Europe. He has also previously worked for Nestlé and McKinsey in various European countries. Other directorships: Jens is Chief Executive Officer of Pizza Hut (UK) Limited. 1 Member of the Audit & Risk Committee. 2 Member of the Remuneration Committee. 3 Member of the Nomination Committee. 51 Retail Board Retail Board Jonathan Miller Chief Executive Simon Fuller Chief Financial Officer Dave Thomas Chief Operating Officer Read more on page 50. Read more on page 50. Read more on page 51. The Group’s Retail Board, comprises the Executive Directors and the most senior Managers within the business. The Retail Board is collectively responsible for supporting the Chief Executive in delivering the Group’s strategic objectives. Neil Hodge Information Technology Director Current appointment: Neil was appointed Information Technology Director in 2011 but has worked for the Group since 1993, initially as Field Support Manager and then, from 1997, as Information Technology Manager. Experience: As well as ensuring the day- to-day IT and data needs of the Group are well serviced, Neil plays a key role in the planning and delivery of numerous strategic initiatives across the business, the majority of which are technology-enabled. Before joining McColl’s, Neil worked at Dexham Shops and Royal Doulton. Steve Green Retail Finance Director Current appointment: Steve joined McColl’s as Retail Finance Director in May 2016. Experience: Since joining McColl’s, Steve has restructured the finance team, improved controls, and delivered financial support to all of the business’s major initiatives. Before joining McColl’s, Steve was the Group Financial Controller for Tesco’s Malaysian business. In total, Steve was with Tesco for 14 years, both in the UK and overseas. 52 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements Steve Goswell Operations Director Karen Bird Colleague Director David Archibald Development Director Peter Miller Trading Director Tim Fairs Customer Director Current appointment: Steve joined McColl’s as Operations Director in September 2016. Current appointment: Karen joined McColl’s as Colleague Director in October 2016. Experience: Steve’s first full year in our business has seen the successful integration of 298 Co-op stores into the McColl’s estate, alongside the deployment of the operational business improvement programme, which is primarily focused on improving the customer shopping trip and realising efficiency opportunities. Before joining McColl’s, Steve had spent the majority of his career with Tesco, holding a number of senior positions including Transformation Director and Regional Store Director. Experience: Since joining the business, Karen has restructured the HR team, focusing on the key processes and priorities to strengthen the function. In the last year, Karen has developed a strategic colleague plan for the business, and has begun work on capability, performance and talent development. Karen was previously People Director at Tesco, where she worked in both HR and Operational roles, including leading change programmes on culture and service. Current appointment: David was appointed Development Director in 2006 having joined the Group in 1993. Experience: Responsible for our acquisitions and estate management, David has been instrumental in ensuring conversion of the 298 stores to the McColl’s format proceeded to plan and is also playing a key role in our programme of shop refresh activity to deliver significant benefits from store modernisation. Previously David worked at Independent Stores, Fine Fare, Asda, Victoria Wine and the Ministry of Defence. Current appointment: Peter was appointed Trading Director in 2015, having originally joined McColl’s as Buying Director in 2011. Experience: Peter has a wealth of grocery sector experience, ensuring McColl’s trading performance is supported through effective and competitive supplier relationships. Before joining McColl’s, Peter was Group Trading Director at SPAR UK Ltd. Prior to this, Peter worked as Director of Trading at Big Food Group and Group Buying Director at Booker PLC. Current appointment: Tim joined McColl’s as our Customer Director in January 2018. Experience: Tim will develop the customer agenda, a key pillar of our strategy, by helping to define our brand proposition and bringing the McColl’s brand to life as well as establishing effective relationships with our customers after they have left the store. Tim is passionate about customers and has extensive relevant experience, most recently as VP Marketing and E-Commerce at Clintons, and prior to that as Head of Marketing at Dixons Carphone where he launched the service brand KNOWHOW. 53 Corporate governance report The following sections describe how the Board applies the principles of the UK Corporate Governance Code (the Code) and the extent to which we comply with the Code’s provisions. Leadership McColl’s is headed by an effective Board which is responsible for delivering long-term success in the business During the year, there have been a number of changes to the Board to ensure that the Board is sufficiently independent, challenging and experienced to lead this growing and ambitious business. James Lancaster stepped down as Chairman in April 2017 and I was honoured to be appointed as his successor. On appointment, I met the independence requirements set out in the Code. In July we appointed a new Independent Non-Executive Director, Jens Hofma. His experience in growing a consumer brand, including refurbishment of a multi-site estate, and knowledge of the food-to-go market, complement the attributes, backgrounds and know-how of the existing Board members and considerably enhance our collective skillset. Despite being new to our business, Jens has already made a strong contribution to our Board discussions. In October, James Lancaster, who has been such a significant contributor to the McColl’s business, stepped down from the Board. Following a review by the Nomination Committee, it was decided that there was no need to seek a replacement for James at this time. As a result of these changes, three of our Non-Executive Directors, being half of the Board (excluding myself as Chairman), meet the independence requirements of the Code and accordingly the Board now fully complies with the higher standard of Board independence expected of FTSE 350 companies. Notwithstanding the changes that have been made amongst the Non-Executive Directors, we have benefited from a period of stability in our Executive team. Under Jonathan Miller’s leadership, the business has had a transformative year. Jonathan receives outstanding support from his fellow Executives, Dave Thomas (Chief Operating Officer) and Simon Fuller (Chief Financial Officer). Together the Executive team is ambitious in its vision, responsible in its management, cohesive in its leadership and effective in its delivery. The matters covered by the schedule are listed below. The schedule is periodically reviewed. 1. Strategy and values 2. Annual budget and business performance 3. Major acquisitions and disposals and new business developments 4. Risk appetite, risk management and internal controls 5. Shareholder communications 6. Share capital changes, borrowings and treasury policy 7. Dividend payments and recommendations 8. Group entity structure 9. Board and other senior appointments 10. Corporate governance matters and delegations The responsibilities of the Board and the Executive are clearly defined and no individual has unfettered powers of decision 11. Group policies 12. Pensions and other legal matters The Chief Executive is responsible for delivering the Group’s strategy and for its operational performance. The Chief Executive is supported in carrying out his responsibilities by the Chief Financial Officer and Chief Operating Officer. These responsibilities are defined as part of a scheme of delegation established by the Board. The scheme of delegation is one element of the controls by which the Board seeks to ensure that risk is adequately and appropriately managed within the business. The starting point for those delegations is the schedule of matters reserved for the Board. This schedule sets out those decisions which will not be delegated to any other group or individual but will always require Board sign off. Matters that are not reserved to the Board may be delegated, for example, by: • terms of reference to a committee; • role description to an individual; • policies and procedures to colleagues within certain functions or of a certain grade; or • contract to external parties. The Group also has a Retail Board, comprising the Executive Directors and the most senior Managers within the business. The Retail Board is collectively responsible for supporting the Chief Executive in delivering the Group’s strategic objectives. Biographical details for the Retail Board members are provided on pages 52 to 53. 54 McColl’s Retail Group plc Annual Report and Accounts 2017 The Retail Board is supported by other specific operational committees within the business which help ensure that strategic actions are disseminated and managed, that progress and issues are appropriately reported and escalated and that management are properly accountable for the performance of their areas of responsibility. Further details of the different roles performed by the Chief Executive and the Chairman are provided on the Group’s website www.mccollsplc.co.uk/leadership. As Chairman, I am responsible for leadership of the Board and ensuring the Board is effective in all aspects of its role Specific roles have been delegated to me, as Chairman. I am responsible for the operation of the Board and for leading the Group’s governance. This includes setting the Board agenda and leading the Board’s discussions and decision-making. In addition, my role is to actively promote a culture of openness and debate by facilitating the effective contribution of the Independent Non-Executive Directors. I am available to discuss matters with shareholders and am responsible for ensuring that the Board is kept well informed about shareholder views. In order to assess the effectiveness of the Board and Committees, I lead the annual evaluation process. Further details of the Board evaluation are provided on page 57. My own performance as Chairman is appraised by the Non-Executives who, led by the Senior Independent Director, meet in my absence annually to discuss this. Our Non-Executive Directors constructively challenge and help develop McColl’s strategy Our shareholders have entrusted the Board with promoting the long-term success of the Company, whilst remaining true to the culture and values that we have set for the organisation. The Board does this by establishing a range of short and long-term objectives, monitoring and challenging progress made towards attaining them and incentivising behaviours that are likely to result in sustainable achievement of our vision for the business. All of this must be achieved without adopting an inappropriate approach to risk and risk management that could jeopardise enterprise value. Strategic report Governance Financial statements The Non-Executive Directors are key to this process, providing feedback based on their different backgrounds, experience and skills and with the benefit of having a degree of distance from the process by which initial proposals are developed. Active and robust debate of proposals with the Non-Executive Directors enables new perspectives to be considered and ensures that the ambitions and actions of management are subject to challenging oversight. The Board sets the strategic direction of the Group, taking account of factors such as the external environment and trends, the resources and existing challenges of the business, opportunities and risks. The Board takes time annually to review existing strategy and to refresh the agreed approach, priorities and expectations. To inform and provide context for its consideration and debate of management’s strategic proposals, the Board receives relevant reports and background presentations from both internal and external parties. Having set the strategic priorities, the Board monitors and incentivises delivery of these objectives (whether short- or long-term) on a continual basis, regularly reviewing the controls and resources that are in place, the risks faced by the business and how those risks are managed. Separate reports by the Board’s three main Committees – the Audit & Risk Committee, Remuneration Committee and Nomination Committee – are provided on pages 60 to 85. Working together to ensure strong governance Our experienced Executive team are supported and challenged by the Non-Executive Directors who bring a range of different backgrounds and perspectives to boardroom discussions and decision-making. 55 Our Board recruitment processes are formal, rigorous and transparent Our Directors should dedicate sufficient time to their responsibilities Corporate governance report continued Effectiveness The McColl’s Board has a strong balance of skills, experience, independence and knowledge of the business Last year we recognised that the independence of the Board and its Committees were not fully meeting the expectations of investors. We have therefore made changes to the Board’s composition, and of its Committees, to address that issue. In doing so, we have also been able to enhance the collective skills, experience and knowledge of the Board and believe that these changes will therefore significantly benefit the business. Details of the experience, background and skills of individual Directors can be found on pages 50 to 51. Diversity in all its forms is something that the Board welcomes. Ultimately diversity brings different perspectives to our debates and ensures that, as a Board, we are considering matters from a variety of different aspects. In particular, the balance of skills, experience and qualifications of the Board and its Committees and the mix of different backgrounds is of great importance to the effectiveness of our strategic leadership and our governance arrangements. Our policy is not to set a quota or target for Board diversity but we are fully committed to transparent and robust practices to identify the individual best suited to any vacancy. Recruitment is based on an assessment of the skills, experience, qualifications and other attributes sought and we support this principle being applied throughout the organisation. Further details of our approach to issues of diversity and, in particular, support for women within the business, can be found within the Nomination Committee report on page 62 and in relation to our wider organisation, on page 40. For our Board recruitment activity during the year, we engaged an external firm to help ensure we searched a wide pool of potential candidates and assessed them against objective criteria in order to identify someone with the appropriate skills. Further details about this process, which was led by our Nomination Committee, are provided on page 61. Attendance at meetings Angus Porter1 Jonathan Miller Simon Fuller Dave Thomas Georgina Harvey Sharon Brown Jens Hofma2 James Lancaster3 Board Audit & Risk Remuneration Nomination 9/9 9/9 9/9 9/9 8/9 9/9 6/6 5/8 1/1 – – – 4/4 4/4 3/3 – 3/3 – – – 3/3 3/3 2/2 – 3/3 3/3 – – 3/3 3/3 1/1 2/2 1 Angus Porter ceased to be a member of the Audit & Risk Committee on 1 July 2017. 2 Jens Hofma was appointed an Independent Non-Executive Director and member of the Audit & Risk, Remuneration and Nomination Committees on 1 July 2017. 3 James Lancaster resigned as a Non-Executive Director and member of the Nomination Committee on 3 October 2017. 56 McColl’s Retail Group plc Annual Report and Accounts 2017 The commitment of our Directors to their roles, including the time commitment of our Non-Executive Directors, is a crucial factor in ensuring that our skilled Board is able to lead the business effectively to build sustainable value for our shareholders. Non-Executive Directors’ letters of appointment define their duties and, taking account of these, the Nomination Committee has reviewed the time commitment required of our Non-Executive Directors. Further details regarding this can be found on pages 61 to 62. The number of meetings attended by our Directors does not fully reflect their involvement in the business as, between meetings, they are regularly involved in other activities. Such activities include meetings with management and external advisers, shareholder dialogue and background reading. However, meeting attendance statistics, set out in the table on this page, can provide an indication of the degree of commitment. New Directors receive a formal induction and ongoing development activities apply to the whole Board The talents of our Board members can be put to best use when we ensure that they are properly informed. All Directors need to be kept up to date about the business including trends and developments in the market, changes in the regulatory environment and other factors. This need particularly arises on appointment and, accordingly, all new Directors undergo a formal induction process that is described on page 62. However, Directors also need ongoing development in order to perform their duties as well as possible. As a Board we recognise this ongoing requirement and seek to identify and address these needs through a variety of individual and group activities such as in- depth board briefings, store and site visits and presentations by external advisers. Strategic report Governance Financial statements All Directors are subject to annual re-election The re-election of the Directors is considered annually by the Nomination Committee in advance of the Company’s Annual General Meeting. A recommendation for re-election is not automatic but is dependent upon the Nomination Committee being satisfied that the contribution of each Director warrants being proposed. For the Annual General Meeting to be held on 12 April 2018, following an assessment of individual performance, all Directors are unanimously recommended by the Board for re-appointment. Biographical details for the Directors are provided on pages 50 and 51 and further details accompany the notice of Annual General Meeting, including the reasons the proposed re-election of each Director has been agreed by the Board. Arrangements are in place to provide Directors with good quality information in a timely manner An externally facilitated Board evaluation has been conducted Directors, and in particular Non-Executive Directors who are not involved in the business on a day-to-day basis, must receive high quality, relevant information in a timely manner if they are to be able to make appropriate decisions for the business. Meeting agendas need to prioritise salient matters and ensure that the Board is considering the right issues at appropriate times. Reports must be thorough so that Directors arrive at meetings well briefed and ready to dedicate the valuable time we have together to challenging and testing rationales, risks and alternatives, for example, as opposed to seeking background information and facts that could readily have been addressed in the original papers. The Company Secretary plays a key role at McColl’s in ensuring that this is the case. The Directors of any business can face difficult issues from time to time and it is important that they always feel they are able to address those issues with the appropriate knowledge and advice at their disposal. Accordingly, all Directors, having notified the Chairman in the first instance, are able to take independent professional advice at the Company’s expense if they feel such advice is necessary in the furtherance of their duties. During 2017, no Director felt it necessary to take such individual advice. They also have access to the advice and services of the Company Secretary, who is responsible for advising the Board, through the Chairman, on all governance matters, and who is also available to any Director who wishes to seek her counsel. There are many aspects that can influence a Board’s effectiveness and, using the services of Deloitte, a full Board evaluation process was conducted. The externally-facilitated process illustrated below was completed during 2017. Whilst the evaluation concluded that the Board was effective, a number of actions were identified from that work which we believe will result in an even more effective Board. These include a greater focus on succession planning and talent management and the need to have an even longer term view on strategy. The Board agreed that the next evaluation should be carried out internally on the basis of individual discussions between myself and each Director. Those discussions took place towards the end of 2017. The feedback from those discussions was discussed by the Board during the early part of 2018 in order to assess progress since the last evaluation and to identify any further enhancements that can be made. In particular the Board concluded that it wished to develop and enhance the opportunities available to Non-Executive Directors to engage with colleagues. We will be looking for a range of ways in which we can listen to and learn from the people who make McColl’s a success. Board evaluation process Externally facilitated Internally facilitated Completion of questionnaire Collation and reporting of results Discussion of findings and agreement of action plan Individual discussions with Chairman Reporting of feedback Discussion of findings and update of action plan 57 Corporate governance report continued Accountability Our Board is responsible for determining the principal risks that it considers to be acceptable in order to achieve McColl’s strategic objectives Remuneration The McColl’s Board recognises its duty to present a fair, balanced and understandable assessment of the Group’s position and prospects The Annual Report and Accounts, together with other published information, provide important disclosures that enable shareholders and other readers to assess the performance, strategy and business model of the Company. The Group has thorough assurance processes in place in respect of the preparation, verification and approval of periodic financial reports, including: • a system of financial and other internal controls, • the involvement of qualified, professional employees with an appropriate level of experience (both in our finance team and throughout the business), • a transparent process to ensure full disclosure of information to the external Auditor, • access to external help and advice on highly technical subjects, • comprehensive review and, where appropriate, challenge from appropriate senior managers and Executive Directors, • oversight by the Audit & Risk Committee as described in more detail on pages 63 to 67. These processes provide reasonable assurance to the Board when they approve the Annual Report and Accounts and other published documents that the disclosures they contain, including the viability and going concern statements, are not misleading and are sufficient for users of those documents to form a reasonable view of the business and its prospects. The Board recognises that effective risk management is essential to the long-term success of the business and to protecting shareholder value. It has overall responsibility for the Group’s system of risk management and internal controls and for ensuring those systems are effective. Although no system can provide absolute assurance, our systems are considered adequate to appropriately manage the risk of failure to achieve business objectives and to provide reasonable protection from material misstatement or loss. The McColl’s approach to risk and risk management is described on pages 44 to 47 where a summary of our key risks and how they are mitigated is also provided. These principal risks have been agreed following robust and regular assessment. They include the risks that could threaten our business model, performance, solvency or liquidity. Our Board has established formal and transparent arrangements for considering how corporate reporting, risk management and internal control principles should be applied and how an appropriate relationship with the external Auditor can be maintained The Board has established an Audit & Risk Committee comprising Independent Non-Executive Directors, including individuals who have experience relevant to the retail sector. This Committee is chaired by Sharon Brown, who has recent and relevant financial experience, and who has provided a separate report on behalf of the Audit & Risk Committee on pages 63 to 67. The Audit & Risk Committee Report describes the membership, responsibilities and activities of the Committee and how it has discharged its duties during the year. Our approach to Executive Directors’ remuneration is designed to promote the long-term success of the business The Directors’ Remuneration Report on pages 68 to 85 describes in detail our approach to Executive Directors’ remuneration, the different elements that make up their remuneration package, the targets on which performance elements are based, and termination arrangements. One of the key factors of which the Remuneration Committee takes account when it is considering potential changes to Executive remuneration, is the pay and conditions that prevail across the wider group. Non-Executive Directors are paid a fee that reflects the time commitment required of them and their responsibilities. The Nomination Committee has recommended an increase in the time commitment expected of the Chairmen of the Audit & Risk and Remuneration Committees and, in recognition of that, the annual fee for chairing those committees has been increased from £5,000 to £8,000. Non- Executive Directors do not receive any performance-related benefits and no increase to other elements of the Non- Executive fee arrangements have been made. There is a formal and transparent procedure for developing Executive remuneration and for determining individual packages The Remuneration Committee, comprised wholly of Independent Non-Executive Directors, is responsible for setting our Executive team’s remuneration, including performance conditions, and for determining the extent to which relevant targets have been met. It consults with shareholders, in particular when changes are proposed, and has done so recently in respect of the remuneration policy that is submitted for shareholder approval at the Annual General Meeting to be held on 12 April 2018. The Remuneration Report on pages 68 to 85 describes in more detail how the Remuneration Committee discharges these duties. 58 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements Engaging with Stakeholders The McColl’s Board has responsibility for ensuring that dialogue with shareholders and other stakeholders is active and based on a mutual understanding of objectives This year McColl’s has considerably enhanced its investor relations activities. The programme has included individual meetings with investors, investor presentations, store visits and a capital markets day. The Board receives regular reports on the investor relations programme and, as part of this, shareholder views are fed back to the Board. Specific consultations are undertaken from time to time with our major shareholders. The most recent of these was undertaken in relation to proposed changes to our remuneration policy. The Board is also conscious that the views and interests of other stakeholders in the business are important. Engaging with those other stakeholders is an aspect which the Board recognises could be improved. In particular we are looking at how we can enhance the Board’s engagement with colleagues across the business. McColl’s general meetings are used to encourage investor communication and participation The McColl’s Board recognises that our shareholders are a key group of stakeholders in the business and their views and engagement are important. The Annual General Meeting provides an essential opportunity for shareholders to meet directly with our Directors and, in particular, the Chairmen of our Committees. We publicise the outcome of proxy votes received in advance of general meetings. Shareholders who wish to raise issues with the Company may contact us via email investor.relations@mccolls.co.uk. Approved by the Board and signed on its behalf: Angus Porter Non-Executive Chairman Investor Day In 2017 we commissioned IGD (Institute of Grocery Distribution) to conduct some research on how convenience shoppers value time, and in May we hosted an event for investors and city analysts where we presented the results. We also provided an update on our strategic plans. 59 Nomination Committee report “ Our balance of skills, experience, qualifications and diversity remains appropriate to the strategic ambitions of the business.” Angus Porter Nomination Committee Chairman Dear Shareholder On behalf of the Nomination Committee, I am pleased to present our report for 2017. Attendance at Nomination Committee meetings during the year is indicated in the table below. Three meetings were held during the year. Meeting attendance During the year, a key focus was the recruitment of an additional Independent Non-Executive Director. Our search prioritised the skills and attributes identified as likely to enhance the Board’s ability to shape and deliver the Group’s strategy for growth, as well as to improve the independent nature of the Board and its Committees. As reported below, after conducting an external search, we were delighted to recommend the appointment of Jens Hofma. Committee composition and effectiveness Following James Lancaster’s resignation from the Board, the Nomination Committee now comprises myself as Chairman, together with three Independent Non-Executive Directors and the Chief Executive. The Committee is actively supported by the Company Secretary. As part of the Board’s externally-facilitated performance evaluation which concluded during the year, the Nomination Committee also reviewed its own performance. The results of this exercise will continue to shape the future activities of the Committee. Angus Porter Nomination Committee Chairman since 27 April 2017 Chairman of the Board (considered independent on appointment) Sharon Brown Nomination Committee Member Independent Non-Executive Director Georgina Harvey Nomination Committee Member Senior Independent Director Jens Hofma Nomination Committee Member since 1 July 2017 Independent Non-Executive Director James Lancaster Nomination Committee Chairman until 27 April 2017 and Committee member until 3 October 2017 Jonathan Miller Chief Executive 60 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements The Nomination Committee’s responsibilities and activities The Nomination Committee’s responsibilities, which are set out in full in the Committee’s terms of reference (available from www.mccollsplc.co.uk/committees), and the activities through which the Committee has discharged those responsibilities, are explored in more detail below. As well as reviewing its terms of reference during the year, the Committee also considered its performance and reviewed the outcomes of the Board evaluation process as a whole. The performance evaluation was conducted by Deloitte and its findings informed a number of aspects of the Committee’s work during the year. A further internal Board evaluation has been carried out, which is described on page 57. The key matters considered at each of the Committee’s meetings during the year are summarised in the following table. Composition of the Board and its Committees This year has been another year of change for the Board. The composition of our Board is now fully compliant with the Code’s higher standard of independence requirements that apply to FTSE 350 companies. Our previous Chairman, James Lancaster, stepped aside from that role at our Annual General Meeting in April 2017 although he remained a Non-Executive Director until his resignation on 3 October 2017. Following discussions and consideration by the Nomination Committee conducted in my absence, and based upon a written role description, I was appointed James’ successor as Chairman of the Board. The Committee also led the search and selection of an additional Independent Non-Executive Director, Jens Hofma, and was assisted in this recruitment by external consultancy, Inzito Partnership. Inzito Partnership has no other connection with the business and is accredited under the Women on Boards’ Enhanced Code of Conduct for Executive Search Firms. Finally, the Nomination Committee also reviewed the composition of the Board following James Lancaster’s resignation from the Board in October and concluded that, at this time, no recommendation would be made to the Board for recruitment of an additional Non-Executive Director to replace him. As part of these activities, which might be described as the central functions of the Nomination Committee, the Committee reviewed the composition of the Board and its Committees to provide assurance that our balance of skills, experience, qualifications and diversity remains appropriate to the strategic ambitions of the business and the challenges it faces. In particular, in making the recommendation to appoint Jens Hofma, the Committee took account of his expertise in consumer goods and the food service industry as well as his in-depth experience of growing multi-site businesses. Our Non-Executive Directors’ key skills Meeting date Key agenda items Feb Apr Nov • review of Non-Executive Directors independence • consideration of suitability of Directors for re-election at the Annual General Meeting • search and selection of new Non-Executive Director • recommendation on appointment of Chairman of the Board • performance evaluation • recommendation on appointment of Non-Executive Director • review of Board Committee composition 2 2 3 Areas of Experience 4 2 2 • review of Directors’ conflict of interest authorisations • review of Non-Executive Directors’ time commitment • review of Nomination Committee terms of reference • agreement on future focus on succession planning and talent • review of the balance of the Board Finance Strategy Operations Retail Multi-site business Consumer brands Independence, interests and commitment The Committee is responsible for reviewing, at least annually, the independence of Board members, Directors’ potential conflicts of interest, the re-election of Directors at the Company’s Annual General Meeting and Directors’ time commitment. 61 Nomination Committee report continued The time commitments required of Non-Executive Directors are set out in their letters of engagement and are 25-30 days per year for the Chairman and 15-20 days per year for other Non-Executive Directors. Following review by the Nomination Committee, it has been recognised that these time commitments are not sufficient to enable the Chairmen of the Audit & Risk and Remuneration Committees to fully perform those roles in addition to their other duties. Accordingly, it has been decided to increase the required time commitment for those individuals by an extra five days per annum. Reflecting this change, the annual fees that are paid for chairing the Audit & Risk or Remuneration Committee have been increased from £5,000 to £8,000. The Committee reviewed all Directors’ interests and concluded that conflicts of interest have been appropriately disclosed and authorised. Following the Committee’s recommendations on these matters, the Board has confirmed that it considers all Non-Executive Directors to be independent and has proposed all Directors for re-election at the Company’s Annual General Meeting to be held on 12 April 2018. Induction and Board development As part of the Board and Committee externally-facilitated evaluation exercise concluded during the year, the effectiveness of existing induction and development activities was assessed and found to be adequate. Board Diversity Upon recruitment, Jens Hofma commenced a formal induction process that has involved providing him with background information about the business and its regulatory environment through, for example, the sharing of reports and governance documents. Face-to-face meetings were arranged with other Directors, key personnel within the business and its advisers and site visits were undertaken. The ongoing development of Board members is also a priority and regular in-depth reviews are undertaken to ensure that the Non-Executive Directors have a full understanding of the business, specific functional strategies and projects, changes to the regulatory environment and market developments. Additional development activities are planned over the coming months including various site visits, attendance at our annual conference and an update on the evolving governance landscape for listed businesses. Succession planning, talent management and diversity Feedback from the last Board and Committee evaluation indicated that the Board and Nomination Committee’s visibility of, and input to, succession planning and talent management processes could be improved. The Board received a presentation on the Group’s colleague plan during the year which addressed a number of relevant issues including succession within the business, the identification and nurturing of talent, and the diversity and inclusion 2 Gender Diversity Executive vs Independent 4 3 agenda. The Committee has determined that these are areas on which there should be some additional focus during 2018. The Board and Nomination Committee are committed to ensuring that inclusion and diversity, including gender diversity, are fully supported at Board level and throughout the business. We recognise that an organisation that embraces difference will benefit from the range of perspectives brought by variety of background and other influences. Accordingly, all appointments are based upon an assessment of the skills, qualifications and experience of individuals. It is not the Board’s policy to establish a quota of women for appointment. A number of wider initiatives have been established within the business during the year to ensure that we support our colleagues to achieve their aspirations and potential. Some of these are aimed at ensuring that we provide good support to women, whatever stage they are at in their life and career, to succeed in the workplace. More detail about our colleague engagement and initiatives and plans to support and develop colleagues can be found on pages 39 to 41. As a business, McColl’s is a significant employer of women. Like many other organisations, at McColl’s women are under- represented at senior management levels but it is good news that more than half our stores are managed by women. A focus group was run to learn from the real experiences of our female colleagues, and we have been analysing the data gathered for our gender pay gap reporting to understand better where efforts need to be more focused. Details of our gender pay gap are provided on page 41. This report was approved by the Nomination Committee and signed on its behalf: 5 Female Male Executive Independent Non-Executive* * The Chairman was deemed independent on appointment. Angus Porter Nomination Committee Chairman 62 McColl’s Retail Group plc Annual Report and Accounts 2017 Audit & Risk Committee report Strategic report Governance Financial statements “ We recognise that a culture that encourages high standards of conduct will reduce the risk of wrong-doing within the business.” Sharon Brown Audit & Risk Committee Chairman Dear Shareholder I am pleased to present the Audit & Risk Committee’s formal report. Developments in the business this year have continued apace and our strategy for the future remains ambitious (see page 20 in the Strategic Report). Whilst our plans for the business are exciting, we must remain particularly mindful of the risks and pitfalls that a fast-developing business can face and ensure that controls are sufficiently robust and that behaviours are appropriate. During the year, the Committee’s remit for risk oversight was extended following a review of its terms of reference. To reflect this the Committee was renamed the ‘Audit & Risk Committee’. The Audit & Risk Committee leads the Board’s focus on matters of risk, as well as on integrity of the Group’s financial reporting, and has been busy during the year in ensuring that we discharge our responsibilities carefully. The Committee’s report which follows provides information on how we have done so. McColl’s is a business which has long prided itself on the valuable role it plays within the neighbourhoods we serve. Our colleagues, whether in store or behind the scenes, care about the business, our customers and the community. During the year, four new corporate values (see page 14) which capture these great qualities were endorsed by the Board. We recognise that a culture that encourages high standards of conduct will reduce the risk of wrong-doing within the business. The Audit & Risk Committee has therefore been pleased to help the active implementation of these new corporate values by supporting their inclusion in some key policies which govern the way in which McColl’s does business. The make up of the Audit & Risk Committee and the skills we collectively bring to our work, the ways in which we have performed our role, the key matters that we have considered and the recommendations that we have made to the Board are described in the remainder of this report. Sharon Brown Audit & Risk Committee Chairman 63 Audit & Risk Committee report continued Committee composition and effectiveness The balance of skills, knowledge and experience of Committee members is a key factor in the Committee’s effectiveness. As part of the Board’s externally-facilitated performance evaluation which concluded during the year, the Audit & Risk Committee also reviewed its own performance. The Audit & Risk Committee has confirmed that the collective financial and sector experience of its members is considered to be appropriate, relevant and sufficiently recent to enable the Committee to discharge its responsibilities in full. Meeting attendance Sharon Brown Audit & Risk Committee Chairman Independent Non-Executive Director Member of the Chartered Institute of Management Accountants Previous experience as a Finance Director Chairs the Audit Committees of a number of other companies Georgina Harvey Audit & Risk Committee Member Senior Independent Director Jens Hofma Audit & Risk Committee Member since 1 July 2017 Independent Non-Executive Director Angus Porter Audit & Risk Committee member until 1 July 2017 Chairman of the Board (considered independent on appointment) The biography of each member of the Audit & Risk Committee can be found on page 51. Audit & Risk Committee’s responsibilities The Board has delegated a number of responsibilities to the Audit & Risk Committee in order to provide the Board and Shareholders with assurance that key financial and risk matters are being overseen and challenged by Independent Non-Executive Directors who are not involved on a day- to-day basis with the management or control of those functions. The Committee oversees financial reporting, external audit and internal controls, and reviews factors that influence the effectiveness of the external Auditor, for example their independence. The Audit & Risk Committee is responsible for making recommendations to the Board on a number of different matters including on the appointment of the Company’s external Auditor, approval of financial disclosures, including the Annual Report and Accounts and Interim Financial Statements. In addition, the Committee has responsibility, in the absence of a separate risk committee, for oversight of risk and risk management systems. It reviews some of the Company’s key policies to ensure that wrong-doing such as bribery and fraud is, as far as possible, prevented and, where it occurs, is detected and lessons are learned. As part of this, the Committee is responsible for ensuring that there are effective arrangements in place to enable colleagues to speak up in confidence if they become aware of any wrong-doing occurring within the business, including any conduct that is illegal. The Committee undertook a thorough review of its terms of reference during the year and adopted several changes to ensure continued compliance with best practice. A copy of the Committee’s terms of reference are available on the McColl’s website at www.mccollsplc.co.uk/committees. Audit & Risk Committee’s activities Given its extensive remit, it is vital that the Audit & Risk Committee organises its time so as to cover all its responsibilities regularly. Agendas are planned, with the support of the Company Secretary, to ensure that the responsibilities set out in the Committee’s terms of reference are fully discharged at the most appropriate time in the annual calendar. For example, the Audit & Risk Committee conducted a full review of the risk register and risk management framework in advance of the Board’s strategy meeting in order to inform the Board’s consideration of strategic plans. Planning the year ahead also helps ensure that less time- critical matters can be spread evenly across meetings so that adequate time can be provided at meetings for full discussion. The way in which the Audit & Risk Committee divided its time during 2017 is summarised in the table of key agenda items on page 65. 64 McColl’s Retail Group plc Annual Report and Accounts 2017 Meeting date Key agenda items Feb Jul Oct Nov • year-end external audit outcomes • draft Annual Report and Accounts 2016 and related matters • external Auditor independence, objectivity and reappointment • principal risk disclosures • Committee performance evaluation • half year external review outcomes • half year 2017 announcement and related matters • risk register • Committee terms of reference • policy on related party transactions • year-end external audit scoping • risk register as background to the Board’s strategy review • policy on provision of non-audit services by the Auditor • year-end external audit plan • key accounting policies • financial and internal controls • risk management systems • consideration of the requirement for an internal audit function • compliance, fraud, whistleblowing, bribery incidents review • policies on speaking up in confidence, anti-bribery and employment of former employees of the external Auditor Strategic report Governance Financial statements Making sure the Audit & Risk Committee is well informed The information that is provided to the Audit & Risk Committee is key to ensuring that Committee members are sufficiently well informed to enable them to form a reasonable view of the matters they are considering. Written reports are provided in advance and meetings are attended, by invitation, by the Chairman, Executive Directors, external Audit Partner and others so that the written reports can be discussed and challenged. Regular opportunity is also provided for the Committee to meet with the Auditor in the absence of management. Between meetings the Chairman of the Audit & Risk Committee receives regular updates from the Chief Financial Officer relating to Audit & Risk Committee matters and responsibilities. Another source of assurance to the Audit & Risk Committee could come from an internal audit function which the business does not currently have. The Audit & Risk Committee reviews annually whether it would be appropriate for an internal audit function to be established. During the year the Audit & Risk Committee received a report on the existing controls within the business and, after discussion, concluded that it was not necessary to establish an internal audit function at this stage. This decision will be reviewed again in 2018. After each Audit & Risk Committee meeting, actions are clearly identified, tracked and reported back to the Committee as progress is made in completing them. The Committee Chairman reports to the Board on the main items discussed at each meeting, including recommendations on any items requiring further consideration and decision by the Board. The Board also receives copies of the Committee’s full minutes. 65 Audit & Risk Committee report continued Non-audit services The assurance provided by the external audit process is key to ensuring confidence in our financial reporting. The Audit & Risk Committee therefore regards the continued independence of the external Auditor as vitally important. During the year, the Audit & Risk Committee undertook a careful review of the Group’s policy on the provision of non- audit services by the external Auditor and made adjustments in a number of areas to ensure the policy was clear and robust. In particular, there are specific services identified that are prohibited and may not be provided by the external Auditor in any circumstances. These include (but are not limited to) all tax services, bookkeeping, payroll, executive recruitment, internal audit, internal control and risk management, expert services (beyond audit) and valuations. Where the external Auditor provides non-audit services which are not prohibited, the Audit & Risk Committee has established as part of the policy that, other than in exceptional circumstances, the total cost of all non-audit services provided by the external Auditor must not exceed 70% of the cost of statutory audit services (based on the average of the last three years). The limit may only be exceeded if the Audit & Risk Committee is satisfied the external Auditor’s independence will not be compromised as a result and believes that the Auditor is best placed to undertake a particular piece of non-audit work. 55 Audit and non-audit fees 242 Audit fees (£’000) Non-audit fees (£’000) 66 McColl’s Retail Group plc Annual Report and Accounts 2017 Audit and non-audit fees are shown here and disclosed in note 6 to the financial statements. The non-audit fees paid during the year related to pensions advice. Independence was safeguarded by ensuring that the Deloitte team that provided the pensions advice did not perform any pension calculations or make any management decisions. Their work consisted of corporate advice and was not relied upon in the preparation of the financial statements. Auditor re-appointment The decision whether to recommend re-appointment of the external Auditor is reviewed annually. The Audit & Risk Committee has recommended that, for 2018, the incumbent external Auditor, Deloitte LLP, be re-appointed. This decision was made after considering, amongst other things, the effectiveness of the audit team and its key members including the Audit Partner, the independence of the firm and the audit fees charged. The current Audit Partner, Sukie Kooner, was appointed in 2014. Deloitte was first appointed as the Group’s auditor in 2006. At that point the Group was a private business but, following the Group’s listing in 2014, the Group is now also subject to regulatory requirements on audit re-tender. Accordingly the Group’s external audit arrangements need to be re-tendered no later than 2024. However it is currently planned that the re-tender will be carried out in time for the audit of the 2019 Annual Report and Accounts. The Audit & Risk Committee will provide updates on these timings in due course ensuring that the process allows sufficient time for a well-ordered tender. Significant accounting judgements and uncertainties considered by the committee during the year Summarised below are the most significant issues considered by the Committee in respect of these financial statements and how these issues were addressed. Having reviewed the audit plan initially and considered and discussed the draft financial statements and disclosures in the light of the external Auditor’s work and findings, the Audit & Risk Committee were satisfied with the significant accounting judgements made in preparing them. Major store acquisition programme During 2017, the Group completed its acquisition of 298 stores as agreed in 2016. Each individual store was assessed as a going concern and acquisition accounting was applied. The acquisition accounting for the transaction was considered during the year-end audit and the Committee was satisfied that the acquisition met the definition of a business combination to which acquisition accounting should be applied. The Committee reviewed the actions taken to verify the fair value assessment of assets including intangible assets and goodwill and were satisfied with the key controls that were used to ensure that reasonable judgements were applied. Treatment of supplier income The business has arrangements with a number of different suppliers which adds to the inherent complexity. Judgements are in particular required where payment periods are not concurrent with the financial year and accruals become necessary. The design and implementation of relevant controls were assessed in order to provide Outline timetable for audit tender Autumn 2018 Winter 2018/2019 Spring 2019 Summer 2019 Autumn 2019 Winter 2019/2020 Audit tender planning 2018 audit carried out by incumbent Auditor, Deloitte LLP Publication of 2018 Annual Report and Accounts and commencement of audit tender process Selection of Auditor confirmed and transition commenced if new firm appointed 2019 audit planned and preparatory work carried out 2019 audit carried out by new Auditor such incidents properly, to reassure colleagues who may consider reporting a concern that they can do so without fear of detriment, and to make the policy more readily understandable and easy to use. The revised policy has been incorporated into the Group’s colleague handbook. The Committee considers the policy for colleagues to speak up in confidence and the procedures that support it to be appropriate for the size and scale of the business. Conclusion The Audit & Risk Committee has advised the Board that the processes in place to ensure that the Annual Report and Accounts, when taken as a whole, is fair, balanced and understandable, are adequate. The Committee is also satisfied that appropriate governance continues to be applied to the Company’s systems of internal control, risk management and other compliance areas. Approved by the Audit & Risk Committee and signed on its behalf: Sharon Brown Audit & Risk Committee Chairman assurance that the accruals made are appropriate, and consistent with the terms of relevant supplier contracts. The extent and nature of the audit procedures and testing were also reviewed. Presentation and classification of results In reviewing the presentation of adjusted profits, the Committee fully recognise the importance of ensuring that the rationale applied in identifying items for adjustment is clear, appropriate and consistent with Group’s accounting policies. The most significant items of adjustment are identified in the Financial Review on page 34 and in the Auditor’s Report on page 95. The Audit & Risk Committee challenged and debated the appropriateness of each of these significant adjusting items with Management and sought an explanation of the judgement made and confirmation that a consistent Group policy, which also took account of market norms to ensure the treatment was consistent with best practice and the practice of others in our industry, was applied to treatment of such items. The Committee was also mindful of the need for adequate disclosure. The inclusion of relevant defined terms in the glossary is helpful in this respect. Management override of controls Management override is a presumed risk for any business. The external Auditor tested the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial statements and reviewed accounting estimates for evidence of bias. During the year, the Committee had also received a detailed report on the financial controls within the business. Arrangements for speaking up in confidence Consistent with the McColl’s values, the Group seeks to operate according to the highest ethical standards. An important aspect of this is ensuring that, if a colleague becomes concerned about suspected wrong-doing within the business, they are aware of how they can report their concerns, in confidence, so that the matter can be investigated and dealt with appropriately. During 2017, the Audit & Risk Committee reviewed the Group’s policy for speaking up in confidence and made changes to emphasise the Board’s commitment to dealing with Strategic report Governance Financial statements 67 Remuneration report “ Incentivising responsible delivery of an ambitious strategy.” Georgina Harvey Remuneration Committee Chairman Dear shareholder I am pleased to present the Directors’ Remuneration Report for the financial period ended 26 November 2017. This report has been prepared in accordance with the Large and Medium-sized Companies and Group (Accounts and Reports) Regulations 2013, as amended, and the principles of the UK Corporate Governance Code. In its discussions, the Remuneration Committee has been mindful of the pay and conditions of colleagues across the wider Group. The announcement of new rates of National Minimum Wage and National Living Wage from April 2018 have been reflected in uplifts for our colleagues in store of, on average, 2.9%. For our head office and field staff colleagues, average increases in salary of 2% have been implemented from January 2018. Our work has also been informed by the gender pay gap analysis and data presented to the Committee during the year. The data and an accompanying narrative will be separately published as required by the regulations but the Committee was relatively pleased to note that the mean pay gap across the business was small at 3% (see page 41). As a business we are a significant employer of women, with over half our stores managed by females. There is always more to do however, and our colleague plan (see page 39-40) is designed to drive further improvements into our colleague experience. Strategic background During the year we have benefited from a period of stability within the Executive team which has enabled encouraging progress to be made in delivering our strategy for growth. Supported by our excellent colleagues, during the year the Executive Directors achieved the smooth transition of the 298 stores we acquired to the McColl’s brand and negotiated a groundbreaking wholesale arrangement which will see the much-loved Safeway brand relaunched exclusively in McColl’s stores. They also trialled and commenced an ambitious programme of store refurbishments. Delivery of these exciting strategic projects will continue during 2018. The ultimate aim of these initiatives is to improve our offering and customer experience, that will in turn drive better financial performance. Alignment of our Executive Directors’ interests with those of shareholders is at the heart of our approach to remuneration. As well as appropriate performance-related rewards, in our new policy we propose to strengthen our shareholding guidelines to 200% of salary, supported by a new part bonus deferral requirement. 68 McColl’s Retail Group plc Annual Report and Accounts 2017 Annual Bonus Plan We are always mindful of the positive role that the right remuneration and reward structures can play in incentivising responsible delivery of an ambitious strategy. The annual bonus for 2017 was linked to both stretching operating profit targets and the strategic priorities of the business, including the achievements described above. Based on performance during 2017 (see page 81), the Executive Directors will receive an annual bonus for the year of 15% of basic salary relating to achievement of the strategic objectives for the year. The Executive Directors proposed that the Remuneration Committee make no payment in respect of achievement of the financial target for the year and the Remuneration Committee approved their proposal. For 2018, the performance conditions set for the annual bonus are again based on achievement of operating profit targets and strategic objectives. Well defined qualitative and quantitative measures will enable an objective view to be reached on the degree to which the latter are achieved. The strategic objectives and the underlying measures which will inform our judgement on the extent to which they have been achieved are described further on page 81. In summary they are rollout of the new supply arrangements and Safeway brand, delivery of our 100 store refurbishment project and implementation of a new customer plan. Together, these three priorities will provide the vital building blocks for delivering the Board’s long-term strategic vision of making McColl’s your neighbourhood’s favourite shop. Their inclusion as performance measures in the annual bonus plan provides assurance that the Executive team will be focused not only on delivering the current year’s financial targets but also on establishing the foundations needed for sustainable future growth. The importance of ensuring the Executive team’s efforts are balanced in this way has been reflected in an adjustment of the proportion of bonus that is dependent on the strategic objectives. For 2018, 30% of the bonus will be based on achievement of the strategic measures with the remaining 70% dependent on operating profit. Previously, 80% of the bonus was payable if the stretch target for operating profit was achieved. However, as in previous years, no element of the bonus will be awarded unless at least threshold operating profit is achieved. 100% of basic salary is the maximum payable under the plan. Long Term Incentive Plan In 2018, awards made in 2015 under the McColl’s Long Term Incentive Plan (LTIP) will vest subject to achievement of performance conditions based 70% on EPS and 30% on TSR. The EPS target for the three financial years ended November 2017 was not achieved and, accordingly, 70% of the LTIP awards are not expected to vest. The remaining 30% of the 2015 awards were dependent on TSR performance. As can be seen from the graph on page 84, total shareholder return has outperformed against the relevant groups and accordingly, subject to Remuneration Committee approval, 30% of the 2015 LTIP awards is expected to vest. Executive Directors will be required to hold the shares acquired from these awards for a minimum of two years or longer if needed to achieve the Company’s shareholding guideline. During 2017 we made a grant under the LTIP subject, as in previous years, to performance conditions whereby vesting will be subject to achievement of EPS (70%) and TSR (30%) targets. The TSR measure is calculated relative to the combined constituents of the FTSE All Share General Retailers Index and the FTSE All Share Food & Drug Retailers Index. The Remuneration Committee continues to believe that this combination of measures helps to reinforce delivery of the Company’s growth plans. For the EPS element of the 2017 LTIP awards, 25% will vest for three-year cumulative EPS of 60.4p and will vest in full at 68.6p. The Remuneration Committee considers that these targets will provide Executive Directors with an appropriately challenging and meaningful incentive to deliver performance aligned with shareholder expectations. Beyond the three-year performance period, an additional two-year holding period applies to any shares that vest for Executive Directors. During the year, James Lancaster, who had previously received an LTIP award whilst Chief Executive, stepped down from the Non-Executive Directorship that he had assumed on retirement from his Executive role. James’ LTIP options lapsed without vesting as a result of his resignation from the Board. Strategic report Governance Financial statements Remuneration policy This year we are required to present a refreshed remuneration policy for approval by shareholders at the Company’s Annual General Meeting. Therefore, as well as its regular work, the Remuneration Committee has undertaken a review and benchmarking exercise of Executive remuneration arrangements with the assistance and guidance of our advisers, Kepler. A small number of adjustments to the existing policy are proposed, as described in the Directors’ remuneration policy report on pages 71 to 77. We are grateful to the shareholders who actively participated in our consultation exercise on these proposals and whose feedback added additional focus to our determination to ensure performance targets remain appropriately stretching. Pending approval of the new remuneration policy, no change in Executive Directors’ remuneration has been made save for an annual increase in basic salary that was implemented with effect from January 2018 in line with other head office colleagues. Annual General Meeting The Remuneration Committee presents its remuneration report on pages 68 to 85. At our Annual General Meeting, which will be held on 12 April 2018, the first section, which sets out our proposed changes to the remuneration policy, will be submitted for approval by shareholders. At the same meeting, the second section of this report, the annual report on remuneration, which details the implementation of our policy, will be subject to an advisory shareholder vote. Yours sincerely Georgina Harvey Remuneration Committee Chairman 69 Remuneration report continued Remuneration at a glance The following is a summary of the key components of Executive Directors’ remuneration and their single figure total remuneration for financial year ended 26 November 2017. Key components Basic salary Pension benefits Other benefits Fixed pay e s o p u P r To attract and retain talent of the right calibre and with the ability to contribute to strategy, by ensuring basic salaries are competitive in the relevant talent market. To provide post-retirement benefits for participants in a cost-efficient manner. To provide a competitive and balanced package of benefits. Annual bonus Long Term Incentive Plan (LTIP) Variable pay e To incentivise focus on achievement of s o p u P stretch profit targets as well as the delivery of key strategic priorities for the year. r To align the interests of Executives with shareholders in growing the value of the business over the long term. Single figure for total remuneration of Executive Directors (£’000) 59% 14% 6% 9% 12% £750 57% 15% 8% 21% £698 61% 9% 5% 9% 17% £469 63% 9% 5% 22% £441 64% 10% 4% 10% 13% £427 53% 8% 3% 35% £334 Jonathan Miller1 2017 2016 Dave Thomas 2017 2016 Simon Fuller2 2017 2016 Basic salary Pension benefit Other benefits Single-year variable Multiple-year variable 1 Jonathan Miller was promoted from Chief Financial Officer to Chief Executive on 1 April 2016. 2 Simon Fuller was appointed Chief Financial Officer on 1 April 2016. These figures are described in more detail on page 80. 70 McColl’s Retail Group plc Annual Report and Accounts 2017 Directors’ remuneration policy Directors’ remuneration policy Strategic report Governance Financial statements This report sets out the Remuneration Committee’s proposed policy on remuneration for Executive and Non-Executive Directors which is to be submitted for approval by shareholders at the Annual General Meeting on 12 April 2018. If approved, the policy described below will apply from that date for a period of three years. The proposed policy has been devised taking account of existing arrangements, the results of a benchmarking exercise undertaken by the Company’s remuneration advisers and their guidance on current best practice and the views of shareholders. The Remuneration Committee key objective has been to ensure that our proposed policy will serve the business and its shareholders well and that this can best be done by incentivising appropriate behaviours and management focus on strategic and financial objectives and by remaining attractive as an employer to our successful team and, when necessary, their successors. The proposed policy retains the key fixed and variable pay elements that comprise existing arrangements but, amongst other things, proposes an uplift from 40% to 50% in the amount of on-target bonus pay out, together with the introduction of mandatory deferral of the bonus in part into McColl’s shares that must then be held for three years. This will help Executive Directors achieve the higher shareholding guideline, which we are proposing is increased to 200% of salary in line with best practice. The full proposals, which are outlined below, are intended to strike a better balance than the current arrangements between the need to have sufficiently competitive remuneration arrangements to enable retention and motivation of executives with the right skills and experience, but also ensuring that Executive pay is strongly aligned with shareholder interests and incentivises delivery of long term success in the business. Policy table The key components of the proposed remuneration policy including differences from the existing arrangements are described below. Basic salary Pension To attract and retain talent of the right calibre and with the ability to contribute to strategy, by ensuring base salaries are competitive in the relevant talent market. To provide post-retirement benefits for participants in a cost-efficient manner. Other benefits To provide competitive benefits for each role. Fixed pay Basic salaries are reviewed annually, with reference to individual performance, experience, market competitiveness, salary increases across the group and the position holder’s experience, competence and criticality to the performance of the business. Generally, the case for making any increases is considered annually. Executive Directors’ salary increases will normally be in line with those for the wider employee population. However, larger changes to salary may be made where there is a change in role or responsibilities or a significant market misalignment. An additional pay increase of approximately 4% is proposed to be made during 2018 for Simon Fuller to align the Chief Financial Officer’s basic salary with that of the Chief Operating Officer. All the current Executive Directors receive a salary supplement in lieu of pension but, in the case of the Chief Financial Officer, his supplement is reduced by the amount that is contributed towards his participation in the Group’s defined contribution scheme. Any new Executive Director would be eligible to participate in that scheme (or any replacement scheme) or to receive a salary supplement in lieu of pension provision. Pension contributions vary based on individual circumstances. Pension benefits will be capped at 20% of salary, excluding legacy arrangements for the current Chief Executive. Further details are set out on page 84. Benefits may currently include the provision of a car or car allowance, fuel, private medical insurance and life assurance. Reasonable relocation, travel and subsistence allowances and other benefits may be provided based on individual circumstances. These benefits are set at a level that is comparable to market practice. The Committee retains the discretion to amend benefits in exceptional circumstances or in circumstances where factors outside of the Group’s control have materially changed (e.g. increases in insurance premiums). Individual and Group performance is taken into account when determining appropriate salaries. None. None. No change. No change. No change. e s o p r u P o t k n i l d n a y g e t a r t s n o i t a r e p O m u m x a M i y t i n u t r o p p o e c n a m r o f r e P s c i r t e m s e g n a h C g n i t s i x e o t y c i l o p 71 Directors’ remuneration policy continued Annual bonus Variable pay Long Term Incentive Plan (LTIP) To focus Executive Directors on achieving stretching profit targets as well as delivering the strategic business priorities for the financial period. The partial deferral of bonus into shares is intended to further align Directors’ interests with those of shareholders. To align the interests of Executive Directors with those of shareholders in sustainably growing the value of the business over the long term. Performance measures and targets are set prior to or shortly after the start of the financial period. At the end of the financial period, the Remuneration Committee will determine the extent to which the targets have been achieved. Under the proposed new policy, one-third of the award after tax will be deferred into shares that must be retained for a period of three years, with the remainder paid in cash. The Committee has discretion to reduce the bonus in the event of serious financial misstatement or gross misconduct. In extreme cases of gross misconduct, the Committee may claw back annual bonus payments previously made. The maximum bonus opportunity for Executive Directors is up to 100% of salary. 10% and 50% of maximum will vest for threshold and on target performance respectively. Stretch targets apply to the full award. 70% of the award for 2018 will be based on achievement of Group operating profit targets. The remaining 30% of the award for 2018 will be based on achievement of strategic performance measures. Neither element will pay out if the threshold operating profit is not achieved. The majority of the annual bonus will be based on achievement of a stretching profit target. The remainder will be based on strategic performance measures, selected annually by the Remuneration Committee to reflect other key performance indicators and strategic priorities for the year ahead. The latter is intended to ensure that Executive Directors maintain focus not only on current year financial targets, but also on longer- term strategic goals to drive sustainable growth. Details of the measures used during the period under review are set out on page 81. The Committee has discretion to adjust the formulaic bonus outcome downwards (or upwards with shareholder consultation) within the limits of the plan, to ensure alignment of pay with the underlying performance of the business. The plan provides for annual awards of performance shares to eligible participants. Vesting is based on three-year performance. Executive Directors’ vested shares are subject to an additional two year holding period before being released to participants. The Committee has discretion to reduce any unvested long-term incentive awards (including those in a holding period), or to vary the opportunities for future awards, in case of serious financial misstatement or gross misconduct. In extreme cases of gross misconduct, the Committee may claw back vested long-term incentive awards. Participants are eligible to receive cash or shares equal to the value of dividends that would have been paid over the vesting period on shares that vest. Awards may be made up to a maximum of 150% of salary in normal circumstances and up to 250% in exceptional circumstances. For the 2018 financial period Executive Directors’ awards will be 150% of salary. Awards will vest on achievement of financial performance measures, measured over a three-year performance period, to include both EPS and TSR. EPS will receive a weighting in the LTIP of at least 50%. For the 2018 financial period the weightings on EPS and TSR will be 70% and 30% respectively. TSR will be measured on a relative basis against a relevant peer group. Other measures may be considered in future years to help capture the strategic goals of the business and may be used in conjunction with these metrics. Nothing will vest below threshold. 25% of each element will vest for achievement of threshold performance, then increase on a straight-line basis to full vesting for achieving stretch performance. The committee has discretion to adjust the formulaic LTIP award downwards (or upwards with shareholder consultation), within the limits of the plan, to ensure alignment of pay with the underlying performance of the business. Further details of awards to be made during the upcoming financial period are set out on page 82. Under the proposed policy, the on-target bonus pay out will be increased from 40% to 50% of salary in line with common market practice. The new policy will also introduce mandatory deferral of one-third of any bonus pay out into shares that must be held for three years. No change. e s o p r u P o t k n i l d n a y g e t a r t s n o i t a r e p O m u m x a M i y t i n u t r o p p o e c n a m r o f r e P s c i r t e m s e g n a h C g n i t s i x e o t y c i l o p 72 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements Shareholding guidelines To align Directors’ interests with the long-term interests of shareholders. Other arrangements Non-Executive Directors’ fees To reflect the time commitment in preparing for and attending meetings, the duties and responsibilities of the role and the contribution expected from the Non-Executive Directors. Executive Directors will be required to build up and retain a minimum shareholding in the Company at least equal to 200% of basic salary. To help Executive Directors achieve the required shareholding levels, some mandatory share deferral arrangements have been built into the variable elements of pay. One-third of any future annual bonus paid will be subject to mandatory deferral into shares to be held for three years. All share options that vest under the LTIP, but which must be held for a further period of two years prior to exercise, will count towards achievement of the shareholding guideline. An all-inclusive annual fee is paid to the Chairman. An annual base fee is paid to other Non-Executive Directors which is inclusive of their membership (but not chairmanship) of all Board Committees. Additional fees are paid to the Chairmen of the Audit & Risk and Remuneration Committees and to the Senior Independent Director. Non-Executive Directors do not participate in any incentive schemes, nor do they receive any pension or other benefits (other than reasonable out-of-pocket expenses incurred in the proper performance of their duties). No increases are currently planned for the Non-Executive Director fees although, following a review by the Nomination Committee of the time commitment expected of Non-Executive Directors, the additional fees payable for chairmanship of the Audit & Risk and Remuneration Committee have been increased from £5,000 to £8,000 per annum. Future increases may be considered as a result of the outcome of a review process and taking into account wider market factors including time commitment and inflation. There is no prescribed individual maximum fee but there is an aggregate limit of £500,000. Further details are set out on pages 80 and 84. None. None. The previous level of the shareholding requirement will be increased from 100% of salary to 200% of basic salary. The graph on page 77 illustrates how an Executive Director with no shares might meet the new requirement over time. No change. e s o p r u P o t k n i l d n a y g e t a r t s n o i t a r e p O m u m x a M i y t i n u t r o p p o e c n a m r o f r e P o t s e g n a h C s c i r t e m g n i t s i x e y c i l o p 73 Directors’ remuneration policy continued Performance measure selection and approach to target setting Annual bonus targets are selected prior to or shortly after the start of the financial period. Operating profit is considered to be the best measure of the Group’s annual financial performance and will continue to determine the majority (70% for 2018) of the annual bonus. The profit target is calibrated with reference to the Group’s budget for the upcoming financial period. The profit target is supplemented by an element (30% for 2018) based on strategic performance measures which are selected annually to reflect the Group’s key strategic priorities for the financial period ahead. For 2018 the strategic measures are transition to the new wholesale supply arrangements and introduction of the Safeway range across the majority of the estate (excluding the 298 stores acquired in 2017), delivery of a significant programme of 100 store refurbishments and implementation of a new customer plan. Clear and specific measures underpin each of these three strategic priorities to enable the degree of successful delivery to be assessed against both qualitative and financial criteria. These include specific impacts on like for like sales for the stores that are transitioned to the new supply arrangements and/or have been refurbished. No bonus pay out can be made based upon the strategic measures unless the profit target is at least achieved at threshold level. For the LTIP which incentivises delivery of longer-term success, EPS is considered to be the best measure of the Group’s bottom line financial performance over this time frame and will always determine the vesting for at least 50% of the overall LTIP award. For 2018, 70% of the LTIP award will be based on delivery of EPS targets. TSR will also be captured to further align the interests of LTIP participants with those of shareholders. For awards granted in 2018, TSR performance, measured relative to an appropriate peer group, will determine 30% of vesting after three years. Threshold and stretch performance levels under the EPS element of the LTIP are set at the start of the three-year performance period. The Remuneration Committee aims to set stretching but achievable targets, taking account of a range of reference points, including broker forecasts and the Group’s strategic plan. Performance targets for 2017 awards are detailed on page 82. The element linked to TSR vests based on three-year TSR compared to a peer group comprising the constituents of the FTSE All Share General Retailers Index and the FTSE All Share Food & Drug Retailers Index. Threshold vesting for the TSR element is set at median ranking with the stretch target set at upper quartile. These targets are in line with market practice for other listed companies and are expected to capture a range of good to excellent performance for the Group. The Remuneration Committee has established the following performance adjustment principles in order for there to be a shared understanding of the process for making adjustments to LTIP performance criteria in appropriate circumstances: a. the Committee will consider making an adjustment where a change is recognised as a Class 1 transaction (as defined by the UKLA Listing Rules); b. the Committee would not make an adjustment where the change results in less than a 5% impact on EPS; and c. adjustments will be considered between the upper and lower limits defined in a. and b. The Committee intends to apply these principles in respect of outstanding LTIP awards to reflect the 2017 acquisition of the 298 stores and will disclose details of any such adjustments after the end of the relevant performance period. Differences in remuneration policy operated for other employees Senior management’s remuneration has the same components as set out in the policy, being basic salary, annual bonus, pension, life assurance and other benefit provision. They may also be invited to participate in the LTIP or alternatively the Company’s share option plan. Annual bonus arrangements have the same structure but are subject to lower salary multiples, with the potential varying with seniority. Payout arrangements are based on specific key performance indicators relevant to each job function. Subject to approval of the new remuneration policy, consideration will be given to how an element of mandatory share deferral can be introduced into the annual bonus plan for Senior Managers below Board level. Shareholding guidelines already apply to our Retail Board members. All colleagues receive a basic salary and all eligible colleagues are automatically invited to enrol into a pension scheme. Store Managers participate in a bonus scheme that targets specific key performance indicators for their store. Other In addition to the above elements of remuneration, any commitment made prior to, but due to be fulfilled after, the approval and implementation of the policy detailed in this report will be honoured. 74 McColl’s Retail Group plc Annual Report and Accounts 2017 Performance scenarios The graph below provides estimates of the potential future reward opportunities for Executive Directors, and the potential split between the different elements of remuneration under three different performance scenarios; ‘Minimum’, ‘Target’ and ‘Maximum’. Approach to remuneration for new Director appointments When recruiting or appointing a new Executive Director, the Remuneration Committee may make use of all the existing components of remuneration, as follows: Component Approach Maximum opportunity Strategic report Governance Financial statements Executive Director remuneration scenarios for 2018 (£’000) Jonathan Miller Minimum Target Maximum Dave Thomas Minimum Target Maximum Simon Fuller Minimum Target Maximum Fixed pay Annual bonus Long Term Incentive Plan 100% £600 60% 35% 23% 17% £994 26% 100% £359 58% 33% 100% £341 58% 33% 24% 18% £615 27% 24% 18% £587 27% 40% £1,046 The potential reward opportunities illustrated are based on the policy submitted for approval at the Annual General Meeting on 12 April 2018, applied to the basic salaries in force at 1 January 2018. The projected value of LTIP amounts excludes the impact of share price movement or dividend accrual. The assumptions made in illustrating potential reward opportunities are shown in the table below: Performance scenario Fixed pay Minimum Target Maximum Salary as at most recent review date (1 January 2018). Salary supplements in lieu of pension contributions of 22.8% and 15% of salary are paid to the Chief Executive and Chief Operating Officer respectively. A combination of salary supplement in lieu of pension contribution and a pension contribution, together totalling 15% of salary, is paid for the Chief Financial Officer. Other benefits as for the most recent financial period. Annual bonus LTIP No annual bonus payable. Threshold not achieved (0%). On target annual bonus payable (50% of maximum). Performance warrants threshold vesting for 2018 (25% of maximum). Maximum annual bonus payable (100% of salary). Performance warrants full vesting for 2018 (150% of salary). Basic salary Pension 39% £1,727 Other benefits The basic salaries of new appointees will be determined based on the experience and skills of the individual, relevant market data and their current basic salary. New appointees will be entitled to participate in the Group’s defined contribution scheme (or any replacement scheme) or to receive a salary supplement in lieu of pension contributions. New appointees will be eligible to receive benefits in line with the policy which may include (but are not limited to) the provision of a company car or car allowance, fuel, private medical insurance and life assurance. 20% of basic salary. Annual bonus The structure described in the policy table will apply to new appointees with the relevant maximum being pro-rated to reflect the proportion of employment over the year. 100% of basic salary. LTIP 40% £1,092 New appointees will be granted awards under the LTIP on similar terms as other Executives, as described in the policy table. 150% of basic salary (250% in exceptional circumstances). In determining appropriate remuneration for a new Executive Director, the Committee will take into consideration all relevant factors to ensure that arrangements are in the best interests of the Group and its shareholders. The Committee may make an award in respect of a new appointment to ‘buy out’ incentive arrangements forfeited on leaving a previous employer, using Listing Rule 9.4.2 R if necessary. In doing so, the Committee will take account of relevant factors including any performance conditions attached to these awards, the likelihood of those conditions being met and the proportion of the vesting period remaining. The fair value of any buyout will not exceed that of the award being forgone. In cases of appointing a new Executive Director by way of internal promotion, the approach will be consistent with the policy for external appointees detailed above. Where an individual has contractual commitments made prior to their promotion to Executive Director level, the Group will continue to honour these arrangements. Incentive opportunities for below Board colleagues are no higher than for Executive Directors, but measures may vary. In recruiting a new Non-Executive Director, the Remuneration Committee will, subject to approval of the new remuneration policy proposed at the Annual General Meeting on 12 April 2018, use the policy as set out in the table on page 73. 75 Directors’ remuneration policy continued Service contracts and exit payment policy Non-Executive Directors The Chairman, Angus Porter, was appointed as a Non-Executive Director on 1 April 2016. Georgina Harvey and Sharon Brown were both appointed as Non-Executive Directors on 7 February 2014 and Jens Hofma was appointed on 1 July 2017. All Non-Executive letters of appointment set out the terms of the individual’s appointment and are available for inspection at the Company’s registered office and at the Annual General Meeting. They are not eligible to participate in the annual bonus or any equity schemes, nor do they receive any additional pension or benefits (other than out of pocket expenses directly incurred in the performance of their role) on top of the fees disclosed on page 80. Non-Executive Directors have a notice period of one month and receive no compensation on termination. Executive Directors On 24 February 2014, Dave Thomas entered into a service agreement with the Company. Both Jonathan Miller and Simon Fuller entered service agreements with the Company on 1 April 2016. In the case of Jonathan Miller, the contract reflected his promotion from Chief Financial Officer to Chief Executive. The Committee acknowledges that Executive Directors may be invited to become Independent Non-Executive Directors of other quoted companies which have no business relationship with the Company and that these duties can broaden their experience and knowledge to the benefit of the Company. Executive Directors are permitted to accept such appointments with the prior approval of the Chairman. Approval will only be given where the appointment does not present a conflict of interest with the Group’s activities and the wider exposure gained will be beneficial to the development of the individual. Where fees are payable in respect of such appointments, these would be retained by the Executive Director. Each of the Executive Directors’ service agreements is terminable by the relevant individual or the Company on not less than 12 months’ prior written notice. Executive Directors may be put on garden leave during their notice period and the Company can elect to terminate their employment by making a payment in lieu of notice equivalent to up to 12 months’ basic salary and benefits. The employment of each Executive Director is terminable with immediate effect without notice in certain circumstances which include, for example, where an Executive Director commits an act of serious misconduct, commits a material or persistent breach of any of the terms or conditions of his service agreement, has a bankruptcy order made against him, is convicted of a criminal offence, is disqualified from acting as a director or acts in a way which may bring the Company or any member of the Group into disrepute. The Company’s policy on termination payments is to consider the circumstances on a case-by-case basis, taking into account the Executive’s contractual terms, the circumstances of termination and any duty to mitigate. Executive Director service contracts are available for inspection at the registered office and at the Annual General Meeting. The table below summarises how incentives are typically treated in different circumstances. Reason for leaving Bonus Timing of vesting Calculation of vesting/payment Summary dismissal, resignation 1 Awards lapse. Not applicable. Good leaver 1, 2 Normally at year end. Change of control 1 On change of control, or shortly thereafter. The annual bonus plan for the period under review would normally have performance measured to the end of the financial period. In exceptional circumstances, the Committee may bring forward the date of award to the termination date and base it on performance over the period to termination. Awards will normally be pro-rated for time unless the Committee determines otherwise. The annual bonus plan for the period under review would normally be paid immediately and be based on pro-rata performance to date, with Committee discretion to treat otherwise. LTIP Summary dismissal, resignation Unvested awards and vested awards that have not been called, including shares subject to a holding period, lapse. Not applicable. Good leaver 1 In line with the vesting schedule at grant. Change of control On change of control. Unvested LTIP shares are normally pro-rated for performance to the end of the performance period. In exceptional circumstances, the Committee may bring forward the vesting date to the termination date and vest on performance over the period to termination. Awards will normally be pro-rated for time unless the committee determines otherwise. Unvested LTIP shares are normally pro-rated for performance to the date of change of control and paid immediately. Awards will normally be pro-rated for time unless the Committee determines otherwise. 1 The treatment of shares subject to deferral or holding periods will be subject to the Remuneration Committee’s discretion and will take into account the circumstances at the time. 2 A ‘good leaver’ is a participant ceasing to be employed by the Group by reason of death, injury, ill health, redundancy, retirement with the consent of the Group, the company of employment ceasing to be a member of the Group or any other reason that the Remuneration Committee determines in its absolute discretion (excluding summary dismissal or resignation to join a competitor). 76 McColl’s Retail Group plc Annual Report and Accounts 2017 Shareholding guidelines The graph below illustrates how an Executive Director who holds no shares in the Company might meet the proposed 200% shareholding guideline over a period of years. Performance is assumed to consistently result in 50% vesting for the purposes of both the annual bonus and LTIP. Value of shareholding as a percentage of basic salary % 300 250 200 150 100 50 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Cumulative holding Shares acquired Consideration of employment conditions elsewhere in the Group The Committee takes into account the levels of basic salary being offered to colleagues elsewhere in the Group and, when annually reviewing the salary increases and remuneration for the Executive Directors, it looks at what increases are planned for the wider employee population. During 2017, the Committee additionally received information about the Group’s gender pay gap. Colleagues have not been consulted in respect of the design of the Group’s Senior Executive remuneration policy. Strategic report Governance Financial statements Consideration of shareholder views The Committee considers shareholder feedback carefully when reviewing remuneration. As part of its work to propose the new remuneration policy for approval at the 2018 Annual General Meeting, it took advice on current best practice and institutional shareholder guidelines. The Committee also undertook an active consultation exercise with shareholders representing approximately 65% of the shareholder base in line with the Committee’s policy to consult with significant shareholders prior to making any major changes to its Executive remuneration structure. Shareholder bodies and advisors were also consulted. Feedback from the consultation indicated broad support for the proposals. Some respondents sought additional assurance that performance targets would be sufficiently stretching considering the proposed increase in potential. In its responses to these points, the Committee was able to make reference to the historically low annual bonus payouts (approximately 13% on average over the previous three years) as evidence of the Committee’s commitment to setting challenging targets. Similarly, whilst the first LTIP award made in 2015 has not yet vested, it is not expected to vest in respect of the EPS element (70% of the total) despite the excellent progress made within the business. The Committee also explained that increasing the proportion of the annual bonus that would be conditional upon strategic objectives was intended to ensure that management maintained appropriate focus on these important initiatives as well as on delivery of current year financial targets. The shareholders and advisory bodies who responded, in particular, widely welcomed the introduction of mandatory bonus deferral and the proposed increase in the shareholding guideline to 200%. 77 Annual report on remuneration Remuneration Committee composition The Remuneration Committee is comprised wholly of Independent Non-Executive Directors and is supported by the Company Secretary who attends all meetings. The Chief Executive, Chief Financial Officer, Chief Operating Officer and Colleague Director, together with the Committee’s independent advisers, Kepler (a brand of Mercer), attend committee meetings by invitation. The Remuneration Committee and the Board carried out an externally-facilitated performance evaluation which concluded during the year. Following this, an additional Non-Executive Director, Jens Hofma, was appointed to bring additional independence to the Board and its Committees. Meeting attendance implementation of the CSOP ‘good leaver’ provisions and valuation of the Group’s share based remuneration. Kepler do not provide any other services to the Group and the Committee is satisfied that they provide independent and objective remuneration advice. Mercer, of which Kepler is a part, is a signatory to the Code of Conduct for Remuneration Consultants in the UK, details of which can be found on the Remuneration Consultants Group’s website at www.remunerationconsultantsgroup.com. Remuneration Committee activities During the 2017 financial year, the committee met three times to consider the following remuneration matters: Meeting date Key agenda items Georgina Harvey Remuneration Committee Chairman Senior Independent Director Sharon Brown Remuneration Committee member Independent Non-Executive Director Jens Hofma Remuneration Committee Member since 1 July 2017 Independent Non-Executive Director Angus Porter Remuneration Committee member Chairman of the Board (considered independent on appointment) Remuneration Committee responsibilities The Remuneration Committee has responsibility for deciding the terms and conditions of employment, remuneration and benefits of the Executive Directors, including pension rights and any compensation payments, and for recommending and monitoring the level and structure of remuneration for Senior Managers and the implementation of share option or other performance-related schemes. In discharging its responsibilities, the Committee must review and have regard to the pay and employment conditions across the business. It must also have regard to the views of shareholders, the risk appetite of the Group and McColl’s strategic objectives. To assist them in their work, the Committee has appointed Kepler as its principal external adviser. Kepler were appointed independent advisers to the Remuneration Committee through a competitive tender process in 2014 and fees for advice provided to the Remuneration Committee were £68k for the 2017 financial year. These fees were primarily incurred for the advice and support Kepler provided in reviewing the Group’s remuneration policy, including the preparatory benchmarking of Executive Directors’ remuneration which provided context for the Remuneration Committee’s thinking on the changes that are now proposed for shareholder approval. In addition, Kepler provided advice on a proposed adjustment of the performance targets for the annual bonus, LTIP and Company Share Option Plan (CSOP) for 2016 in the light of the class 1 transaction to acquire 298 stores, 78 McColl’s Retail Group plc Annual Report and Accounts 2017 Feb Jul Nov • confirmed Executive Directors’ and Senior Managers’ salary increases • considered views expressed in a shareholder consultation on adjustment of performance targets following the 2016 class 1 transaction • approved an adjustment in the 2016 EPS performance target for LTIP and CSOP subject to future shareholder consultation • approved 2016 annual bonus outturn • approved, in principle, the 2017 LTIP and CSOP performance conditions • evaluated the Committee’s performance as part of Board evaluation • agreed, after benchmarking, not to recommend an increase in the Chairman’s fee • considered the approach to be taken in preparing for the remuneration policy review and agreed to instruct Kepler to undertake a benchmarking exercise in relation to key elements of fixed and variable pay • agreed pay and other benefits for a newly-recruited Senior Manager • considered gender pay gap and pay ratio information • reviewed proposed pay increases for colleagues across the Group • agreed a further review of the Committee’s terms of reference should be undertaken once best practice recommendations on oversight of pay and conditions across the Group are published • reviewed proposed salary increases for Senior Managers • reviewed potential 2017 bonus outturn • reviewed progress against targets on existing LTIP and CSOP awards • approved minor changes to the Directors’ expenses policy • agreed initial remuneration policy proposals on which to consult shareholders Strategic report Governance Financial statements Making sure the Remuneration Committee is well informed In considering remuneration arrangements, Remuneration Committee members need sufficient information to enable them to take account of factors including the Group’s strategy and attitude to risk, its financial position and prospects, competitive markets including peer group practice, and pay and conditions in place for the wider work force. Some examples of the information that may be provided to the remuneration committee when making key decisions is set out below. Decision Information needed Determining the remuneration policy • understanding of Group strategy and risk appetite • remuneration consultancy advice • benchmarking data • best practice and shareholder guidelines, including new developments and emerging trends • feedback from shareholder consultations Deciding Executive Directors’ and Senior Managers’ basic salary increases • benchmarking or market data • assessment of individual effectiveness • shareholder view • details of pay and conditions across the business and in particular the pay increases proposed for the wider workforce Determining annual bonus potential and performance conditions • remuneration policy limits • market data • Group budget • strategic priorities for the business • Group risk appetite • shareholder views Determining annual bonus payouts • financial results for relevant period • information on the extent to which relevant strategic priorities have been achieved Determining LTIP awards and performance conditions • remuneration policy limits • LTIP rules and share dilution limits • market data • relevant financial forecasts based on Group strategy • Group risk appetite • shareholder views Determining extent of LTIP vesting • LTIP rules and share dilution limits • EPS and TSR performance Determining Executive Directors’ or Senior Managers’ benefits on recruitment Considering pay and conditions across the business • benchmarking or market data • evidence of existing pay and rewards package • evidence of potential payouts under existing employer’s incentive arrangements (where applicable) • details of pay and conditions across the business • details of proposed pay increases • pay ratio calculations • gender pay gap information 1. 2. 3. 4. 5. 6. 7. 8. 79 Annual report on remuneration continued Shareholder views are expressed through formal consultation as well as the shareholder advisory vote on the remuneration report and, every third year, the binding vote on the remuneration policy. In addition, account is taken of published institutional investor guidelines. Single figure for total remuneration for Non-Executive Directors (audited) The table below sets out a single figure for the total remuneration received by each Non-Executive Director for the period ended 26 November 2017. Shareholder consultations are conducted periodically when more significant issues arise or when changes to the remuneration policy are being considered. Consultations were conducted in relation to a proposed adjustment to the 2016 bonus outturn in the light of the 298 store acquisition transaction and on the current remuneration policy proposals. A summary of the feedback provided on the latter is provided on page 77. Written reports are provided in advance and meetings are attended, by invitation, by the Executive Directors, Colleague Director and external remuneration adviser so that the written reports can be discussed with them and challenged appropriately. After each Remuneration Committee meeting, actions are clearly identified, tracked and reported back to the Committee as progress is made in completing them. The Committee Chairman reports to the Board on the main items discussed at each meeting. The Board also receives copies of the Committee’s full minutes unless their circulation is deemed inappropriate. The information provided in this part of the directors’ remuneration report is subject to audit. Single figure for total remuneration of Executive Directors (audited) The table below sets out a single figure for the total remuneration received by each Executive Director employed by the Company for the period ended 26 November 2017 and the prior period: Salary Pension Benefit3 Taxable Benefit4 Annual Bonus5 Multiple-year Variable6 Total £’000 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Jonathan Miller1 Dave Thomas Simon Fuller2 441 284 273 397 276 176 103 43 41 102 41 26 46 21 16 53 24 12 66 43 41 146 100 120 94 78 56 – – – 750 469 427 698 441 334 1 Jonathan Miller was promoted from Chief Financial Officer to Chief Executive on 1 April 2016. 2 Simon Fuller was appointed Chief Financial Officer on 1 April 2016. 3 Pension benefits include pension contributions and/or salary supplement payments. Pension contributions were paid during the year for Dave Thomas and Simon Fuller of £0 and £10k respectively (£14k and £7k in 2016). 4 Taxable benefits for Jonathan Miller, Dave Thomas and Simon Fuller include car or car allowance, of £35k, £12k and £15k (taken as car allowance) respectively for 2017 (£37k, £10k and £11k for 2016), fuel allowance of £2k, £1k and £0 for 2017 (£8k, £5k and £0 for 2016) and healthcare of £8k, £8k and £1k for 2017 (£8k, £9k and £1k for 2016). 5 Annual bonus paid for performance over the relevant financial period. Annual bonus payable in cash. Simon Fuller’s bonus for 2016 includes £37k relating to the fair value of awards forfeited at his previous employer (paid to him in July 2016). 6 The LTIP was introduced in 2015 under which awards will begin to vest, subject to achievement of stretching performance conditions, in 2018. No long term incentives vested during 2016 or 2017 but the awards granted in 2015 were dependent on performance to 26 November 2017 and accordingly the value presented in this table represents an estimate of the value of the awards that are expected to vest in 2018. 80 McColl’s Retail Group plc Annual Report and Accounts 2017 £’000 Sharon Brown1 Georgina Harvey2 Jens Hofma3 James Lancaster4 Angus Porter5 Salary 2017 50 55 19 146 103 2016 72 53 – 100 30 Taxable Benefit6 2017 2016 2 – – – – 2 – – – – Total 2017 52 55 19 146 103 2016 74 53 – 100 30 1 Sharon Brown stepped down as Interim Chairman on 1 April 2016. 2 Georgina Harvey was appointed as Senior Independent Director on 24 May 2016. 3 Jens Hofma was appointed a Non-Executive Director on 1 July 2017. 4 James Lancaster, who was previously Chief Executive, was appointed Non-Executive Chairman on 1 April 2016. He stepped down from this role on 27 April 2017 but remained a Non-Executive Director until his retirement on 3 October 2017. Fees shown cover the period 1 April 2016 to 3 October 2017 (split between the relevant financial periods). 5 Angus Porter was appointed a Non-Executive Director on 1 April 2016 and became Non-Executive Chairman on 27 April 2017. 6 Taxable benefits include nominal travel expenses to and from Company meetings and tax incurred on those expenses. The aggregate fees paid to Non-Executive Directors for the year fell within the £500k aggregate limit approved in accordance with the Company’s Articles of Association at the Company’s 2017 Annual General Meeting. Basic annual salary (audited) Basic salaries are generally reviewed annually, with reference to individual performance, experience, market competitiveness and salary increases across the Group. The latest salary increases were awarded to the Executive Directors on 1 January 2018. The salaries of Senior Executives were reviewed by the Committee after the end of the financial period and increases averaging 2.4% were awarded effective 1 January 2018. This compares with the average pay increase awarded across the wider workforce of 2.9%. Executive Director 28 November 2016 1 December 2016 26 November 20171 Jonathan Miller Dave Thomas Simon Fuller £430,000 £276,000 £265,000 £442,000 £285,000 £274,000 £442,000 £285,000 £274,000 % change during financial year 2.8% 3.3% 3.4% 1 Basic salaries for Jonathan Miller, Dave Thomas and Simon Fuller were increased with effect from 1 January 2018 to £450,840, £293,550 and £282,220 respectively. A further 4% pay increase will be awarded to Simon Fuller during the year. Annual bonus (audited) The Group operates an annual performance related bonus scheme for a number of Senior Managers including Executive Directors. For the 2017 financial period, annual bonuses for the Executive Directors were based on 80% of operating profit and 20% on key strategic performance measures covering successful on-boarding of the acquired 298 Co-op stores so as to deliver the benefits envisaged in the original business plan, conducting a wholesale retender for implementation during 2018 and delivering other elements of the strategic plan for the year covering a number of business enhancements. For the operating profit element of the 2017 annual bonus, the performance condition was set such that no vesting would occur below threshold, being 95% of target. At threshold and target, 10% and 40% of the profit element of the bonus would be awarded respectively. Maximum vesting of the profit element would be awarded for achievement of the stretch condition of 110% of on-target operating profit. Payments in between these points of measurement increase on a straight-line basis. Achievement of threshold operating profit is required before any of the strategic performance element of the bonus can vest. The maximum total bonus potential for 2017 was 100% of salary for Executive Directors. The targets, and achievement against them, were as follows: Measure Weighting Threshold Target Stretch Achievement Vesting (% of maximum) Operating profit before bonus, profit on asset disposals and exceptional items Successful on-boarding of the acquired 298 Co-op stores Conducting a wholesale retender Delivering other elements of the strategic plan for the year Total 80% £28.2m £29.6m £32.4m £28.4m 0.0% 20% achieved 15.0% achieved partially achieved 15.0% The Executive Directors proposed that no bonus payment be made for 2017 on the operating profit target despite the threshold profit for payment of such a bonus having been achieved. Having noted that it had discretion to deviate from a purely formulaic approach to determining bonus payouts where appropriate, the Committee accepted this proposal. Accordingly a bonus payment for 2017 was only considered for the strategic targets. The newly acquired 298 stores were successfully transitioned on time and within budget and accordingly the Remuneration Committee consider this objective to have been fully achieved. Likewise, the objective to conduct a wholesale tender that could be implemented during 2018 was fully delivered. The wholesale tender exercise delivered its objective of moving to a single supply partner that provides the business with access to high quality products at a lower cost. In addition, the tender exercise has resulted in the additional benefit of access to a high quality own brand in the guise of Safeway, which the business will have on an exclusive supply basis for 12 months. The third objective comprised delivery of a suite of strategic initiatives. Good progress had been made towards achievement of a number Strategic report Governance Financial statements of these, for example our brand strategy, external communications, colleague plan and store trials. However, for other initiatives, including our digital strategy, customer engagement and implementation of the next stage of our pricing framework, progress was more limited. The objective as a whole was therefore only achieved in part. Accordingly, having taken account of the full achievement of two out of three of the strategic targets and the partial achievement of the third, the Remuneration Committee determined that a bonus at 15% of salary (out of the maximum 20%) should be paid. The 2018 annual bonus will be based on a similar structure to the above save for the following differences: • the bonus payout will be based 70% on achievement of operating profit and 30% on strategic performance measures (previously 80% and 20% respectively), • subject to approval of the new remuneration policy, on-target achievement of the operating profit performance measure will result in 50% payout of the bonus compared with 40% in prior years, and • subject to approval of the new remuneration policy, one-third of any bonus payout to Executive Directors will be deferred into shares that must be held for three years The strategic objectives for the 2018 bonus plan are the successful transition of all stores to the new wholesale supply arrangements (except the 298 Co-op stores acquired in 2017 which are subject to a separate supply agreement), including launch of the Safeway range, delivery of the Group’s ambitious store refresh programme for the year, and implementation of a new customer plan. The degree to which these objectives are achieved will be assessed based on underlying measures of success which have been defined to include both qualitative and financial indicators. These include like for like sales increases for those stores which have been refreshed and/or supplied under the new arrangements. These strategic deliverables are considered to be of significant importance to the long term sustainable growth of the business. The increased conditionality of the bonus on these strategic goals reflects the Board’s desire to ensure they are achieved. The Committee has discretion to adjust the formulaic bonus outcome downwards, or upwards (with shareholder consultation), within the plan limits, to ensure awards properly reflect the underlying performance of the business. The Committee may also reduce future annual bonus opportunities in light of material misstatement or gross misconduct. In extreme cases of gross misconduct, the Committee may claw back annual bonus payments previously made. 81 In addition, for LTIP awards to become exercisable the Committee must be satisfied that the formulaic LTIP outcome is a genuine reflection of the underlying performance of the business. The Committee has discretion to adjust the formulaic LTIP outcome downwards, or upwards (with shareholder consultation), within the plan limits. An additional holding period of 2 years from the end of the performance period applies to vested options held by individuals who were Executive Directors at the time of grant. The Committee has discretion to claw back any unvested long term incentive awards, or to vary the opportunities for future awards, in case of serious financial misstatement or gross misconduct. In extreme cases of gross misconduct, the Committee may claw back vested long term incentive awards. The Group has undertaken a fair valuation of its share-based payment transactions, specifically the LTIP and CSOP, using IFRS 2. The results of the valuation have given rise to a charge to the accounts as set out in note 32 to the financial statements. Annual report on remuneration continued Long Term Incentive Plan (audited) The first grant of share options under the LTIP was made in 2015 in respect of performance over the financial years 2015 to 2017 inclusive. 30% vesting of the 2015 LTIP award is anticipated in view of the overall performance of the business during financial years 2015 to 2017. In particular, TSR for McColl’s shares was 85th centile relative to the FTSE All Share General Retailer Index and FTSE All Share Food & Drugs Retailers Index. The upper quartile stretch target for TSR was therefore exceeded. EPS performance was below the threshold of 55.9p. The Remuneration Committee is confident that the investments that the business has been making in growing and refurbishing its estate and the progress that has been made on other elements of the Group’s longer term strategy will deliver future EPS growth. The following table sets out the anticipated value of the 2015 awards on vesting for the Executive Directors. Anticipated value of 2015 LTIP Awards Executive Jonathan Miller Dave Thomas Simon Fuller Interests held 111,894 93,243 67,114 Vest % 30% Interests vesting Date vesting Assumed market price Estimated value (£’000) 35,568 27,972 20,134 17 August 2018 17 August 2018 8 October 2018 £2.79p 94 78 41 Further LTIP awards were made in 2016 and 2017, both based on three year targets for cumulative EPS and TSR performance relative to an appropriate peer group. In 2018, it is expected that Executive Directors will be granted awards equivalent to 150% of salary under the LTIP (100% in 2017). These shares will vest subject to EPS and TSR performance over a 3-year period, as follows: Performance measure element EPS1 70% Below threshold Threshold Stretch target or above TSR2 30% Below median Median Upper quartile Percentage of element that will vest 0% 25% 100% 1 EPS targets will be set at the time of grant and will be disclosed subsequently. Factors which will be considered when setting the relevant EPS targets will include a range of reference points including broker consensus (which was not available at the latest practicable printing date for this report). These will be referenced in the market announcement. 2 Total shareholder return relative to the constituents of the FTSE All Share General Retailers Index and the FTSE All Share Food & Drugs Retailers Index, measured over 3 financial years. 82 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements Awards made under the LTIP and any other share-based schemes (the CSOP) will not exceed the Investment Association’s guideline on dilution of 10% in aggregate over a 10-year rolling period. The LTIP grants made since 2015 to the Executive Directors who served during the year are outlined below: Executive Director Jonathan Miller Dave Thomas Simon Fuller Date of grant Number of shares Share price1 Face value (£’000) Face value (% salary) Vesting for threshold performance2, 3, 4 (% of maximum) 17 August 2015 11 April 2016 15 March 2017 17 August 2015 11 April 2016 15 March 2017 8 October 20155 11 April 2016 15 March 2017 111,894 259,036 237,634 93,243 166,265 153,225 67,114 159,638 147,311 149.25 166.00 186.00 149.25 166.00 186.00 149.00 166.00 186.00 166 430 442 138 276 285 100 265 274 50% 100% 100% 50% 100% 100% 50% 100% 100% 25% 25% 25% 25% 25% 25% 25% 25% 25% End of performance period 26 November 2017 25 November 2018 24 November 2019 26 November 2017 25 November 2018 24 November 2019 26 November 2017 25 November 2018 24 November 2019 1 Call Price per Award Share: £0.001. 2 2015 LTIP EPS performance conditions range is 55.9 pence to 61.5 pence. 3 2016 LTIP EPS performance conditions range is 52.5 pence to 60.1 pence. 4 2017 LTIP EPS performance conditions range is 60.4 pence to 68.6 pence. 5 Granted prior to his appointment as an Executive Director based on the same performance conditions as the Executive Directors’ awards. In addition to the above awards, options over 200,751 ordinary shares were granted to James Lancaster in 2015. Those options lapsed under the rules of the LTIP following his resignation from the Board on 3 October 2017. Directors’ shareholdings and interest in shares (audited) The current Remuneration Policy sets shareholding guidelines which require Executive Directors to acquire and maintain, over time, a personal shareholding in the Company of at least equivalent to one times salary. The Remuneration Committee proposes, via a change to the Remuneration Policy submitted for approval to the Annual General Meeting to be held on 12 April 2018, to increase this requirement to 200% of annual salary. A 200% shareholding guideline is consistent with best practice. The graph on page 77 provides an illustration of how an Executive Director might build a holding in shares equivalent to 200% of basic salary. The table below sets out, for Directors who served during the year, their interests in McColl’s shares and share options as at 26 November 2017. Options held4 Shares held4 Unvested and subject to deferral Unvested and subject to performance Vested but not exercised Unvested and subject to continued employment Owned outright Current shareholding (% of salary/fee1) Shareholding requirement (% of salary/fee) Guideline met? Director Executive Directors Jonathan Miller2 Dave Thomas Simon Fuller Non Executive Directors James Lancaster3 Georgina Harvey Sharon Brown Angus Porter Jens Hofma – – – – n/a n/a n/a n/a 608,564 412,733 374,063 – n/a n/a n/a n/a – – – – n/a n/a n/a n/a – – – – n/a n/a n/a n/a 11,399,500 1,183,792 – – 10,471 17,471 5,814 – 7,440 1,198 – – 34 62 11.6 – 100% 100% 100% n/a n/a n/a n/a n/a 1 Based on closing share price of £2.885 and prevailing salary on Friday 24 November 2017 (the last dealing day before the 2017 financial year-end). 2 The ordinary shares held by Jonathan Miller include shares held beneficially via holdings of connected persons. 3 James Lancaster stepped down as a Non-Executive Director on 3 October 2017 and disposed of his shareholding on that date. 4 There have been no changes in the Directors’ interests in the shares issued or options granted by the Company between the end of the period and the date of this report. Yes Yes No n/a n/a n/a n/a n/a 83 Annual report on remuneration continued Executive Directors’ pension arrangements (audited) Chief Executive, Jonathan Miller, received a salary supplement in lieu of pension for the full year. As a percentage of salary this payment represented 23.4% of basic salary paid to him in the year. The monetary amount of his pension supplement shall remain fixed until it reaches 20% of his salary, at which point it will increase in accordance with the Remuneration policy. The Chief Operating Officer received a salary supplement in lieu of pension equivalent to 15% of his basic salary. The Chief Financial Officer received a combination of salary supplement in lieu of pension and pension contributions equivalent, in aggregate, to 15% of his basic salary. Non-Executive Director fees (audited) Since his appointment on 27 April 2017, the Chairman, Angus Porter, has been paid a fee of £145,000 p.a. This fee was set following a benchmarking exercise and is £10,000 p.a. lower than the fee paid to the previous Chairman. The base fee for other Non-Executive Directors during 2017 remained at £45,000 p.a., with additional fees of £5,000 p.a. paid to the Chairmen of the Remuneration and Audit & Risk Committees and an additional £5,000 p.a. paid to Georgina Harvey for her role as Senior Independent Director. Following a review of current Non-Executive fees, which had not changed since 2014, and comparison with market rates, with effect from 1 February 2018 the Board have resolved that the fees paid for chairmanship of the Remuneration and Audit & Risk Committees will increase to £8,000 p.a. to reflect the increasing time commitment required for these roles. No other changes have been made or are proposed. Payments for loss of office (audited) On 3 October 2017, James Lancaster resigned as a Non-Executive Director of the Company. No compensation payments were made to him or to any Director during the year. Payments to previous Directors (audited) No payments were made to previous Directors during the financial period under review. The information in this part of the annual report on remuneration is not subject to audit. Total shareholder return Historical Performance graph – Value of £100 invested on 28 February 2014 (£) 200 180 160 140 120 100 80 60 40 20 0 McColl’s FTSE All Share General Retailers Index FTSE All Share Index FTSE All Share Food & Drug Retailers Index Feb 2014 Nov 2014 Nov 2015 Nov 2016 Nov 2017 The graph above shows the total shareholder return of the Group and the FTSE All Share Index and the FTSE All Share Food & Drug Retailers Index since listing. The FTSE All Share Index is chosen as it is a broad market index of which the Group is a member, and the FTSE All Share Food and Drug Retailers Index is chosen to illustrate performance relative to sector comparators. Chief Executive single figure of remuneration James Lancaster Single figure of remuneration (£’000) Annual bonus outcome (% of max) LTIP vesting (% of max) Jonathan Miller1 Single figure of remuneration (£’000) Annual bonus outcome (% of max) LTIP vesting (% of max)2 2013 2014 2015 2016 2017 834 0% n/a – – – 3,199 0% n/a – – – 840 0% n/a – – – 339 39.4% n/a 504 39.4% n/a – – – 750 15.0% 30.0% 1 Jonathan Miller was appointed Chief Executive upon the retirement of James Lancaster from that position on 1 April 2016. 2 The LTIP vesting figure for 2017 relates to options granted in 2015 and remains subject to confirmation by the Remuneration Committee. 84 McColl’s Retail Group plc Annual Report and Accounts 2017 Change in Chief Executive’s remuneration The table below sets out the percentage change in the remuneration of the Chief Executive and the average increase across all employees excluding the Board between the years 2016 and 2017. Chief Executive annual cash (£’000) 2016 (James Lancaster and Jonathan Miller1) 2017 Jonathan Miller Average change across all employees Change Salary (£’000) Pension benefit (£’000) Taxable benefits (£’000) Annual variable (£’000) 485 131 56 166 441 9.1% decrease 103 21.4% decrease 2.9% increase no change 46 18.0% decrease no change 160 3.6% decrease 31.3% decrease 1 The % change for the Chief Executive has been determined with reference to the aggregate 2016 remuneration for James Lancaster and Jonathan Miller for the period they were each undertaking the role of Chief Executive. Distribution statement The following chart shows for the current and preceding financial period the actual expenditure and percentage change in total remuneration paid to or receivable by colleagues and distributions to shareholders. Employment remuneration 2017 2016 Distribution to shareholders 2017 2016 £176m £141m £11.7m £11.0m The Group paid an interim dividend of 3.4 pence per share and the Board has recommended a final dividend of 6.9 pence per share subject to approval by shareholders at the Annual General Meeting, representing a total payment of £11.7m for 2017. Statement of shareholder voting The following table shows the results of the binding vote on the remuneration policy at the 17 April 2015 Annual General Meeting and advisory vote on the 2016 Annual Report on Remuneration at the 27 April 2017 Annual General Meeting. Votes Number (m) % Number (m) Remuneration policy 2015 2016 Annual Report on Remuneration 83.9 88.4 98.2 99.9 1.5 0.1 % 1.8 0.1 Number (m) 0.2 0.5 For Against Withheld Strategic report Governance Financial statements Shareholder consultations In December 2016 the Committee’s Chairman consulted with the Company’s largest shareholders regarding the profit element of the annual bonus for 2015/16. This consultation related to the impact of the Class one transaction to acquire the 298 convenience stores from the Co-op, where £0.5m in pre-acquisition costs were incurred and charged to operating profit. The Committee used its discretion to exclude these publicly disclosed costs from the 2015/16 operating profit bonus calculation. The rationale for applying this discretion focused on the fact that the costs: a. were operational in nature and included i) the advanced recruitment of field teams (e.g. area and regional management); ii) the establishment of larger central functions (e.g. payroll, HR and operational finance such as stock counting); and iii) the setting up of logistics (including additional distribution); b. had been incurred ahead of the stores being transferred; c. having been expensed in the 2015/16 income statement rather than defined as exceptional items; d. quantified and one-off in nature; and e. were beyond management control. Prior to the above adjustment the annual bonus outcome would have been 28.6% as a percentage of maximum. The Committee intends to use adjusted operating profit going forward for bonus purposes in a consistent manner, and has developed a set of principles to ensure that any adjustments (both positive and negative) are applied consistently and in line with shareholder interests. In December 2017 the Remuneration Committee Chairman also wrote to advisory bodies and shareholders holding 1% or more of the Company’s capital, who collectively represent approximately 65% of all shares. The letter described changes to the remuneration policy that the Committee wished to propose to shareholders for approval at the Annual General Meeting in 2018 together with some details about potential changes to the Committee’s implementation of the policy. Those changes are described on pages 71 to 77 and the response to the consultation is summarised on page 77. Approved by the Remuneration Committee and signed on its behalf: Georgina Harvey Chairman of the Remuneration Committee 85 Directors’ report McColl’s Retail Group plc (the “Company” or “McColl’s”, or “Group”) operates more than 1,600 convenience and newsagent stores offering a wide range of products and services to neighbourhoods across the United Kingdom. Our principal activities are described in more detail in the Strategic Report on pages 11 to 47. Governance at McColl’s Corporate governance The Board comprises three Executive Directors, led by our Chief Executive, Jonathan Miller, our Chairman, Angus Porter who was deemed independent on appointment, and three Independent Non-Executive Directors. As a result of the changes made to the Board during the year, the Board now fully meets the higher standard of independence requirements that apply to FTSE 350 companies under the provisions of the UK Corporate Governance Code (the Code). The Board’s full commitment to the Code is described in the Corporate Governance Report on pages 54 to 59 and the memberships, remits and activities of Audit & Risk, Nomination and Remuneration Committees are set out on pages 60 to 62, 64 to 67 and 78 to 80 and form part of this Directors’ Report. Directors Details of our current Directors can be found on pages 50 and 51. During the year, the following Directors served. Director Angus Porter Position Appointment date2 Non-Executive Chairman 1 April 2016 Jonathan Miller Chief Executive 3 February 2014 Simon Fuller Dave Thomas Georgina Harvey Sharon Brown James Lancaster1 Jens Hofma Chief Financial Officer Chief Operating Officer Senior Independent Director Remuneration Committee Chairman Independent Non- Executive Director Audit & Risk Committee Chairman Non-Executive Director Independent Non- Executive Director 1 April 2016 3 February 2014 7 February 2014 7 February 2014 3 February 2014 1 July 2017 1 James Lancaster resigned from the Board on 3 October 2017. James served as Non-Executive Chairman until 27 April 2017 when he was succeeded by Angus Porter. 2 Appointment dates for the Executive Directors indicate when they were appointed to the Board of the Company. All the Executive Directors were employees of the Group prior to the appointment dates shown and, in the case of Jonathan Miller and Dave Thomas, were Directors of the previous holding company prior to IPO. 86 McColl’s Retail Group plc Annual Report and Accounts 2017 Powers of Directors The general powers of the Directors are set out in article 94 of the Company’s articles. This provides that the business and affairs of the Company shall be managed by the Directors, subject to any limitations imposed by the articles, prevailing legislation or any directions given by special resolution of the shareholders of the Company. Conflicts of interest The Board considers and authorises potential or actual conflicts as appropriate and these decisions are kept under review by the Nomination Committee. Directors with a conflict do not participate in the discussion or vote on the matter in question. Further detail can be found in the Corporate Governance Report on page 62. Compensation for loss of office The Company does not have arrangements with any Director that would provide compensation for loss of office or employment resulting from a takeover, except that provisions of the Company’s share plans may cause options and awards granted under such plans to vest on a takeover. Further information is provided in the Remuneration Report on page 76. Directors’ indemnities and liability insurance As is standard practice for listed companies, the Company has granted a third party indemnity to each of its Directors against any liability that attaches to them in defending proceedings brought against them to the fullest extent permitted under English law. In addition, the Company maintains directors’ and officers’ indemnity insurance cover for any legal action brought against its Directors. Specific public offering and securities insurance cover was also placed on 28 February 2014 with a six year run-off period. The Company’s articles of association The Company’s articles of association (“articles”) set out the rights of shareholders including voting rights, distribution rights, attendance at general meetings, powers of Directors, proceedings of Directors as well as borrowing limits and other governance controls. A copy of the articles can be requested from the Company Secretary. The Company may alter its articles by special resolution passed at a general meeting of the Company. Listing rules The following table provides cross-references to where the relevant required information by Listing Rule 9.8.4R for the period is disclosed. Section Listing rule requirement Location 1 2 4 5 6 7 8 9 10 11 12 13 14 Interest capitalised Publication of unaudited financial information Details of long term incentive schemes Waiver of emoluments by a Director Waiver of future emoluments by a Director Non pre-emptive issues of equity for cash Item (7) in relation to major subsidiary undertakings Parent participant in placing by a listed subsidiary Contracts of significance Provision of services by a controlling shareholder Shareholder waivers of dividends Shareholder waivers of future dividends Agreements with controlling shareholder Not applicable Not applicable See Remuneration Report on pages 82-83 Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Strategic report Governance Financial statements McColl’s shareholders Share capital Details of the share capital from 28 November 2016 to 26 November 2017 are shown in note 28 of the financial statements. The nominal value of the total issued ordinary share shares of 0.1 pence each in the capital of the Company at the start and end of the year was £115,172.77, being divided into 115,172,774 fully paid ordinary shares. The rights attached to the shares can be summarised as follows: 1. the ordinary shares rank equally for voting purposes; 2. 3. 4. 5. on a show of hands each shareholder has one vote and on a poll each shareholder has one vote per ordinary share held; each ordinary share ranks equally for any dividend declared; each ordinary share ranks equally for any distributions made on a winding up of the Company; and each ordinary share ranks equally in the right to receive a relative proportion of shares on the event of a capitalisation of reserves. The Group has an Employee Benefit Trust (EBT) for the benefit of employees and former employees of the Group. Currently the EBT holds no ordinary shares in the Company. Shareholders’ rights The rights attaching to the ordinary shares are governed by the articles and prevailing legislation. There are no specific restrictions on the size of a holding. Subject to applicable law and the articles, holders of ordinary shares are entitled to receive all shareholder documents, including notice of any general meeting; to attend, speak and exercise voting rights at general meetings, either in person or by proxy; and to participate in any distribution of income or capital. 87 Directors’ report continued Restrictions on transfers of securities As at 26 November 2017, the ordinary shares are freely transferable with the following specific exception. In compliance with the Company’s share dealing code, the Directors, designated employees and their connected persons require approval to deal in the Company’s shares. There are no restrictions on the transfer, or limitations on the holding of ordinary shares. The Company is not aware of any other agreements between shareholders that may result in restrictions on the transfer of securities or voting rights. Substantial shareholdings Information on major interests in shares provided to the Company under the Disclosure and Transparency Rules (DTR) of the UK Listing Authority is published via a Regulatory Information Service and on the Company’s website at www.mccollsplc.co.uk/rns. As at the financial year-end and as of 28 February 2018 (being the last practical day before printing) the Company has been notified of the interests detailed in the following table, each of which represented holdings of 3% or more of the ordinary shares of the Company. This information was correct at the date of notification. It should be noted that these holdings may have changed since notified to the Company. However, notification of any change is not required until the next applicable threshold is crossed. Shareholder Klarus Capital Limited Aberforth Partners LLP Jonathan Miller1 FMR LLC FIL Limited Miton Group plc CI Investments Inc Notes: Directors’ interests There is a shareholding guideline within the existing Remuneration Policy that encourages Executive Directors to establish and hold McColl’s shares equivalent in value to 100% of salary. As part of the new Remuneration Policy for which approval will be sought at the Annual General Meeting on 12 April 2018, it is proposed to increase this shareholding guideline for Executive Directors to 200% of salary. The Directors are not required to hold shares in the Company under the articles or under their letters of appointment or service agreements. All of the Directors, except Simon Fuller and Jens Hofma, hold McColl’s shares and details of their shareholdings can be found in the Remuneration Report on page 83. 26 November 2017 28 February 2018 Number of shares 13,118,391 11,406,347 11,399,500 – 6,713,277 6,264,116 3,600,000 % interest in shares Number of shares % interest in shares 11.39% 13,118,391 9.90% 9.90% – 5.82% 5.44% 3.13% 11,598,247 11,399,500 5,779,091 6,713,277 5,550,193 3,600,000 11.39% 10.07% 9.90% 5.01% 5.82% 4.82% 3.13% 1 The ordinary shares held by Jonathan Miller include shares held beneficially via individual holdings of connected persons (as defined in sections 252 to 255 of the Companies Act 2006). 88 McColl’s Retail Group plc Annual Report and Accounts 2017 McColl’s stakeholders Colleague engagement Further information about our colleague engagement is provided on pages 39 to 41. Corporate responsibility and the environment The Company’s social and environmental review, including information about our greenhouse gas emissions and approach to corporate responsibility, is set out on pages 37 to 43. During the year, we defined four corporate values to inform the way the business, through its colleagues, operates and behaves. Our values are: Customer first Simple and consistent Caring and compassionate Community champions We have started to embed these values into our everyday operations by incorporating them into policies and procedures and by communicating them clearly so that there is a good level of awareness and understanding about what is expected of McColl’s colleagues. The Board and its Committees regularly review the Group’s policies and take responsibility for them. Financial matters Future developments within the Group Disclosures in relation to likely future developments within the Group are contained in the Strategic Report. External Auditor Deloitte LLP have given their independent report on the financial statements to the shareholders of the Company on pages 92 to 98. Directors’ statement of disclosure of information to Auditor The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information (as defined in Section 418(2) of the Companies Act 2006) of which the Company’s Auditor is unaware; and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s Auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006. Post year-end events Between 26 November 2017 and the date of this report there have been no material events. Financial risk management The Company manages its risks to ensure that the Group’s performance is not adversely affected by its exposure to financial risks resulting from its operation and sources of finance. Financial risk management objectives and policies, including information on financial risks that materially impact the Group can be found in notes 22 and 30 of the Group’s financial statements. Details are also available in the summary of the principal risks and uncertainties faced by the business and management’s approach to identifying and managing risk which are provided on pages 44 to 47. Going concern The Directors have made appropriate enquiries and consider that the Group has adequate resources to continue in operational existence for the foreseeable future, which comprises the period of at least 12 months from the date of approval of the financial statements. The Directors continue to adopt the going concern basis in preparing the financial statements. The financial position of the Group, its cash flows and liquidity position are set out in the financial statements section on pages 99 to 134. Furthermore, notes 22 and 30 to the Consolidated Financial Statements include the Group’s objectives and policies for managing its capital, its financial risk management objectives, details of its financial instruments and its exposure to credit and liquidity risk. In July 2016, the Company announced it had signed an amended credit facility agreement. The updated facility consists of a £100m Revolving Credit Facility (a £15m increase from the existing £85m, which became available on commencement of the 298 store transition to fund working capital) and an amortising £100m term loan for specific use to part finance the 298 store acquisition. In addition, there is a £50m unsecured accordion facility available at the Company’s option. At the end of the period, the Group had drawn down £154.5m (2016: £37.0m) of its facilities. The Directors have reviewed the Group’s long-term forecasts including its requirements for capital expenditure, operational needs and the expansionary impact of the 298 store acquisition. The Directors, taking into account these forecasts and the revised facilities available to the Group, continue to adopt the going concern basis in preparing the financial statements. The Directors have made this assessment after consideration of the Company’s budgeted cash flows and related assumptions and in accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting published by the UK Financial Reporting Council in September 2014. Strategic report Governance Financial statements Viability statement In accordance with provision C.2.2 of the Code, the Directors have assessed the prospects of the Group over a longer period than the 12 months required by the ‘going concern’ provision. The Directors have assessed the viability of the Group over a three year period through to 2020 which coincides with the Group’s strategic review period. This assessment has considered the potential impact of the principal risks on the business model, future performance and liquidity over the period. In making this statement the Directors have considered the resilience of the Group under varying market conditions together with the effectiveness of any mitigating actions. As already described in the statement of going concern, as part of this assessment the Directors have taken account of the Group’s revolving credit facility with accordion option which runs through to July 2021, strong track record of operational cash inflow, discretionary capital expenditure programmes, and forward dividend cover. Additionally, the Directors have reviewed the expected impact of government and legislative changes in particular the National Minimum and Living Wage, alongside the key financial ratios over the period e.g. EBITDA, operating profit, fixed charge cover, debt service cover and overall indebtedness. Finally it is noted that even in the event of a very severe impact on the business through continued food deflation and cost inflation, the business could reduce or suspend acquisitions activity, re-assess the dividend payouts and accelerate the newsagent disposal programme. Based on this assessment, the Directors have a reasonable expectation that the Group will have sufficient resources to continue in operation and meet its liabilities as they fall due over the period to November 2020. 89 Directors’ report continued Annual General Meeting AGM The Board welcome the opportunity to meet and engage with shareholders at the AGM which will be held on 12 April 2018 at 1.30pm at the registered office: McColl’s House, Ashwells Road, Brentwood, Essex CM15 9ST. The Chairman of the Board and of each of its Committees will be in attendance at the AGM to answer questions from shareholders. All Directors will be standing for reappointment at the AGM. The notice of the AGM and an explanation of the resolutions to be put to the meeting are set out in the Notice of Meeting accompanying this Annual Report and Accounts. The Board fully supports all the resolutions and encourages shareholders to vote in favour of each of them as they intend to in respect of their own shareholdings. Appointment and retirement of Directors Subject to a recommendation of the Nomination Committee, all Directors stand for re-election at the Company’s Annual General Meeting (AGM) in voluntary compliance with provision B.7 of the Code. This practice also exceeds the requirement of the articles for Directors to retire by rotation at every third AGM. The Company may, in accordance with and subject to the provisions of the Companies Act 2006, remove any Director before expiry of his or her term of office by ordinary resolution of which special notice has been given. The Company must have a minimum of two Directors. Further information on appointments to the Board is set out in the Corporate Governance Report on pages 54 to 59 and the Nomination Committee report on pages 60 to 62. An interim dividend of 3.4p per share was paid on 8 September 2017. The Directors have also proposed a final dividend of 6.9 pence per share, amounting to £7.9m, which is subject to shareholder approval at the AGM. Provided shareholder approval is received the final dividend will be paid on 1 June 2018 to those shareholders on the register at the close of business on 20 April 2018. Reappointment of Auditor Deloitte LLP was originally appointed as McColl’s Auditor in 2006 (when it was a private limited group). The Audit Partner last rotated during the year ended 30 November 2014. The Board recognises the commercial advantages of tendering the audit regularly. Our mandatory ten year audit period only commenced upon listing on the London Stock Exchange, which was in February 2014. Accordingly, the Company has until 2024 to tender the external audit although the Audit & Risk Committee has indicated that it currently intends to tender the appointment in time for audit of the 2019 Annual Report and Accounts. Further details about the proposed timing of this tender will be provided in due course. The Auditor, Deloitte LLP, have indicated their willingness to continue as the Company’s Auditor and a resolution to reappoint Deloitte LLP as Auditor of the Company and the Group will be proposed at the 2018 AGM. Further details regarding the re-appointment of Auditor may be found in the Audit & Risk Committee Report on page 66. Authority to allot shares The Company was granted a general authority by its shareholders at the 2017 AGM to allot shares pursuant to a rights issue up to an aggregate nominal amount of £76,781. The Company also received authority to allot shares for cash on a non pre-emptive basis up to a maximum nominal amount of £38,390. As at the date of this report, 741 shares have been issued under these authorities. These authorities will expire at the conclusion of the 2018 AGM unless revoked, varied or renewed prior to that meeting. Resolutions will be proposed at the 2018 AGM to renew these authorities. Dividend The Board’s policy is that the Company will generally pay an interim and a final dividend in the approximate proportions one-third and two-thirds respectively. Authority for the Company to purchase its own shares A resolution was passed at the 2017 AGM authorising the Company to purchase up to approximately 10% of its 90 McColl’s Retail Group plc Annual Report and Accounts 2017 ordinary shares (11,517,277 ordinary shares) at the Directors’ discretion. At the date of this report, no ordinary shares have been purchased under this authority. A similar resolution is proposed to be passed at the 2018 AGM which will, if approved, replace the existing authority and will lapse at the conclusion of the 2019 AGM. Political donations Further to shareholder approval at the 2017 AGM empowering the Directors to make political donations or incur political expenses, it is confirmed that no such donations were made or expenses incurred in the year ended 26 November 2017 (2016: £nil). The Company’s policy is not to make political donations or incur political expenses but a resolution to renew this authority on its expiry will be put to the 2018 AGM in order to avoid any inadvertent breach of the regulatory requirements that might occur if a wide interpretation of political donation were to be applied to, for example, some of the Group’s community support activities. The Strategic Report, the Directors’ Report and the Directors’ Remuneration Report were approved by the Board. By order of the Board Bernadette Young Company Secretary 18 February 2018 Statement of Directors’ responsibilities Strategic report Governance Financial statements The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and have also chosen to prepare the parent company financial statements under IFRSs as adopted by the EU. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that the Directors: • properly select and apply accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and • make an assessment of the Company’s ability to continue as a going concern. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility statement We confirm that to the best of our knowledge: • the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; • the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and • the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. This responsibility statement was approved by the Board of Directors on 18 February 2018 and is signed on its behalf by: Jonathan Miller Chief Executive 18 February 2018 Simon Fuller Chief Financial Officer 18 February 2018 91 Financial statements Financial statements Independent Auditor’s report to the members of McColl’s Retail Group plc Report on the audit of the financial statements Opinion In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 26 November 2017 and of the Group’s profit for the 52 week period then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; • the parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice including Financial Reporting Standard 101 “Reduced Disclosure Framework”; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements of McColl’s Retail Group plc (the ‘Company’) and its subsidiaries (the ‘Group’) which comprise: • the consolidated income statement; • the consolidated statement of comprehensive income; • the consolidated and company statement of financial position; • the consolidated and company statements of changes in equity; • the consolidated statement of cash flows; and • the related notes 1 to 34 and C1 to C7 The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure Framework” (United Kingdom Generally Accepted Accounting Practice). 92 McColl’s Retail Group plc Annual Report and Accounts 2017 Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non- audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Summary of our audit approach Key audit matters The key audit matters that we identified in the current year were: • acquisition of Co-op stores; • accounting treatment of supplier income; and • presentation and classification of results. Within this report, any new key audit matters are identified with key audit matters which are the same as the prior year identified with and any . Materiality Scoping Significant changes in our approach The materiality that we used in the current year was £1,240,000 based on 4.7% of profit before tax adjusted for certain items due to their nature and significance. The Group consists of a collection of retail stores and operates as a single operating segment, entirely within the UK, as disclosed in note 4 to the financial statements. We identify only one reporting component on which we perform our audit using a single audit team. Due to the transformation of the business this year we have included a new risk in the year around the presentation and classification of results. We have continued to assess the acquisition of the Co-op stores as a risk in the period. We no longer consider there is a risk surrounding the impairment of goodwill and property provisions. We continue to consider a fraud risk for supplier income. Strategic report Governance Financial statements Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Last year our report included goodwill impairment and property provisions which are not included in our report this year. The goodwill impairment risk of misstatement in the prior year related to the uncertainty in forecasts used to support the goodwill carrying value. Due to an increase in headroom in the goodwill impairment assessment, we do not consider this to be a key audit matter in the current period. The property provision risk of misstatement in the prior year related to the uncertainty in cash flows used to calculate the property provisions. In the current year, the property provision balance excluding the Co-op stores acquisition provision is not considered material. We continue to consider a fraud risk in relation to supplier income. We continue to consider the acquisition of the Co-op stores as a risk and have pinpointed this to the purchase price allocation in the current year. The presentation and classification of results has been included in our report this year as this is an area which has had a significant allocation of resources in the audit. Conclusions relating to going concern, principal risks and viability statement We confirm that we have nothing material to report, add or draw attention to in respect of these matters. We confirm that we have nothing material to report, add or draw attention to in respect of these matters. Going concern We have reviewed the Directors’ statement in note 2 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group’s and Company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements. We are required to state whether we have anything material to add or draw attention to in relation to that statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit. Principal risks and viability statement Based solely on reading the Directors’ statements and considering whether they were consistent with the knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the Directors’ assessment of the Group’s and the Company’s ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in relation to: • the disclosures on pages 44 to 47 that describe the principal risks and explain how they are being managed or mitigated; • the Directors’ confirmation on page 89 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; or • the Directors’ explanation on page 89 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions We are also required to report whether the Directors’ statement relating to the prospects of the Group required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit. 93 Financial statements continued Independent Auditor’s report to the members of McColl’s Retail Group plc continued Supplier income Key audit matter description Supplier income is generated from a number of commercial agreements with suppliers including incentives, rebates and discounts. This represents a deduction to cost of sales which is material to the Group financial statements. There are a large number of individual arrangements which can be complex in nature. The majority of these contributions tend to be small in unit value but high in volume and span relatively short periods of time, although these can be across the financial year-end. Judgement is required in determining the period over which the reduction in cost of sales should be recognised, requiring both a detailed understanding of the contractual arrangements themselves as well as complete and accurate source data to apply the arrangements to. Also, the process of appropriate recognition in the financial statements can involve significant manual adjustments which have the potential for inappropriate manipulation. We identified a key audit matter relating to the accrued supplier income recognised in the statement of financial position at the period end. On 31 July 2017 McColl’s entered into a new wholesale supply agreement with WM Morrison Supermarkets. Due to the material nature of the new agreement, we identified a key audit matter relating to the accounting treatment for supplier income associated with the agreement. The cost of sales accounting policy is outlined in note 2 to the financial statements. The Audit & Risk Committee has included this as a key risk on page 66. Acquisition of Co-op stores Key audit matter description How the scope of our audit responded to the key audit matter On 13 July 2016, McColl’s announced the acquisition of 298 stores from the Co-op for £117m, representing a Class 1 transaction. The transaction has been financed predominantly with additional debt and the balance as an equity placing. On 20th December 2016, the Competition and Markets Authority (CMA) gave full approval for the acquisition to proceed, with no store disposals required. The first store transitioned on 30th January 2017, with the final store transitioning on 13 July 2017. IFRS 3 requires that all separately identifiable assets and liabilities are allocated an appropriate fair value, with the remainder of the purchase price recognised as goodwill. Management judgement is required in determining the purchase price allocation, particularly the identification and valuation of intangible assets. We identified the risk of inappropriate allocation as a key audit matter. The business combination fair values are outlined in note 17 to the financial statements. The accounting policy is outlined in note 2. The Audit & Risk Committee has included this as a key risk on page 66. Our audit procedures included, but were not limited to: • evaluating the design and implementation of controls in place within the purchase price accounting process and assessing management’s processes for compliance with IFRS 3 Business Combinations; • assessing the judgements applied by management in their identification of the assets and liabilities acquired; • considering whether any other intangible assets should be recognised; • evaluating management’s assumptions used in estimating the fair value of assets and liabilities acquired by comparing to relevant available information, working with our real estate valuation specialists where appropriate; and • evaluating the adequacy of the business combination disclosures against the requirements in IFRS 3 Key observations We concurred with management’s identification of acquired assets and liabilities and found that their valuation was materially accurate. We consider the disclosure of the acquisition to be appropriate. 94 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements How the scope of our audit responded to the key audit matter Key observations Our audit procedures included, but were not limited to: Presentation and classification of results • evaluating the design and implementation of controls in place over supplier income and understanding of the commercial process as well as reviewing new and unusual agreements. Key audit matter description • for a statistical sample of supplier income agreements: – understanding the contract terms and recalculating the expected supplier income; – comparing the amounts used in the calculations to actual purchases; and – testing the IT controls over system-generated reports relating to supplier income for accuracy, validity and completeness; • performing analytical work on supplier income trends across suppliers and product categories and challenging management’s estimates by investigating any unexpected variances and corroborating with supporting evidence; • assessing the recoverability of a sample of accrued supplier income by agreeing to subsequent invoicing and cash receipts, or performing alternative procedures such as tracing to third party documentation or contracts; • inspecting a sample of post year-end credit notes for evidence of refunds or of invoiced amounts not being valid; • applying data interrogation tools to perform an analysis to determine if any manual adjustments were recorded within the supplier income balance; and • reviewing the terms of the WM Morrison Supermarkets wholesale agreement and evaluating the accounting treatment for supplier income arising from the agreement The results of our testing were satisfactory and we consider the disclosure around supplier income to provide a reasonable understanding of the types of supplier income received and the impact on the Group’s balance sheet and profit as at 26 November 2017. Management present adjusted profit excluding items that “may distort comparability that arise from events and transactions within the ordinary activities of the Group, but that should be separately identified to help explain underlying performance”. The presentation of income and costs within adjusted measures (to derive ‘adjusted profit before tax’) under IFRS is judgemental, with IFRS only requiring the separate presentation of material items. In the Group’s reported results, significant adjustments have been made to statutory profit before tax of £18.4m to derive adjusted profit before tax of £26.3m. Explanations of each adjustment are set out in notes 5 and 6 to the Financial Statements. Owing to the magnitude of these items and the inherent judgement required by management, we consider there to be a potential for inappropriate classification of costs as adjusted items. We identified a key audit matter relating to the appropriateness of the Group’s accounting policy of non-GAAP measures; the application of the policy in the period; and the disclosure of adjusted items. The most significant items classified as non-underlying in 2016/17 are: • costs associated with acquiring the Co-op stores of £5.0m; • costs associated with the store closure programme as part of the business restructuring of £2.9m; and • property, plant and equipment disposals and property provisions resulting in a gain of £3.1m The Audit & Risk Committee has included this as a key risk on page 67. 95 Financial statements continued Independent Auditor’s report to the members of McColl’s Retail Group plc continued Presentation and classification of results continued How the scope of our audit responded to the key audit matter Our audit procedures included, but were not limited to: • evaluating the design and implementation of controls of the classification of income and expenses as adjusting items; • reviewing the definitions and reconciliations of the alternative performance measures included in the annual report; Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: • considering the balance of presentation of statutory and non-statutory reporting measures; • evaluating the appropriateness of the inclusion of items, both individually and in aggregate, within adjusted items, this included: – assessing the consistency of items included year on year; and – evaluating adherence to IFRS requirements and latest guidance from regulators; • inspecting a sample of adjusted items to supporting evidence; • assessing unadjusted items, either highlighted by management or identified through the course of our audit, which were regarded as significant in nature and/or quantum for whether they should be included within adjusted items; and • discussing the appropriateness of the adjusted items with the Audit & Risk Committee and any disclosure considerations We are satisfied that the items excluded from profit before adjusted items and the related disclosure of these items in the financial statements are consistent with the Group’s accounting policy on non-GAAP measures. Materiality Basis for determining materiality Rationale for the benchmark applied Group financial statements Parent company financial statements £1,240,000 (2016: £1,000,000) £154,000 (2016: £181,940) 4.7% (2016: 4.8%) of adjusted pre-tax profit. Pre-tax profit has been normalised by adjusting for adjusted items (the one-off costs relating to the Co-op acquisition and store closure programme). See exceptional items disclosure in note 5 to the financial statements. We believe this is an appropriate basis for materiality as it reflects our view that recurring performance is the most relevant performance measure to the stakeholders of the entity. 0.2% (2016: 0.3%) of net assets. A factor of 3% of net assets was used capped to an appropriate component materiality (12% (2016: 18%) of Group materiality.) We believe this is an appropriate basis for materiality as it reflects the contribution of the parent company to the Group performance. Key observations We agreed with the Audit & Risk Committee that we would report to the Committee all audit differences in excess of £62,000 (2016: £50,000) for the Group and £7,700 (2016: £9,100) for the parent company, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit & Risk Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. An overview of the scope of our audit The Group business consists of a collection of retail stores and operates as a single operating segment, entirely within the UK, as defined in note 4 to the financial statements. The financial results of the Group are aggregated at a consolidated level without the need for consolidation adjustments to account for eliminations between Group statutory companies. Therefore we identify only one reporting component being the Group itself, which includes the parent company audit (which we audit to a lower materiality level), on which we perform our audit using a single audit team. 96 McColl’s Retail Group plc Annual Report and Accounts 2017 We have nothing to report in respect of these matters. Other information The Directors are responsible for the other information. The other information comprises the information included in the annual report including the Strategic Report, the Governance Report and Contacts, addresses and shareholder information, other than the financial statements and our Auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information include where we conclude that: • Fair, balanced and understandable – the statement given by the Directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or • Audit & Risk Committee reporting – the section describing the work of the Audit & Risk Committee does not appropriately address matters communicated by us to the Audit & Risk Committee; or • Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the Directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the Auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code Strategic report Governance Financial statements Responsibilities of Directors As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the parent company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an Auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditor’s report. Use of our report This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an Auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. 97 Financial statements continued Independent Auditor’s report to the members of McColl’s Retail Group plc continued Report on other legal and regulatory requirements Other matters Auditor tenure Following the recommendation of the Audit & Risk Committee, we were appointed by the Board of Directors on 3 February 2014 to audit the financial statements for the year ended 2014 and subsequent financial periods. The entity was listed on the London Stock Exchange on 28 February 2014. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is four years, covering the years ended 2014 to 2017. Prior to 2014, we were appointed by the Board of Directors on 1 October 2006 to audit the financial statements for the year ended 2006 and subsequent financial periods of McColls Retail Group Ltd which was previously the parent company to the Group. The period of total uninterrupted engagement including previous renewals and reappointments of the firm was 12 years, covering the years ended 2006 to 2017. Consistency of the audit report with the additional report to the Audit & Risk Committee Our audit opinion is consistent with the additional report to the Audit & Risk Committee we are required to provide in accordance with ISAs (UK). Sukhbinder Kooner, (Senior statutory auditor) for and on behalf of Deloitte LLP Statutory Auditor London, UK 18 February 2018 Opinions on other matters prescribed by the Companies Act 2006 In our opinion the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements In the light of the knowledge and understanding of the Group and of the parent company and their environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the Directors’ report. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: We have nothing to report in respect of these matters. • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’ remuneration have not been made or the part of the Directors’ remuneration report to be audited is not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. 98 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements Consolidated income statement for the 52 week period from 28 November 2016 to 26 November 2017 Revenue Cost of sales Gross profit Administrative expenses Other operating income Profits/(losses) arising on property-related items Operating profit Finance income Finance costs Net finance cost Profit before tax Income tax (expense)/receipt Profit for the period Earnings per share (pence) Diluted Earnings per share (pence) The above results were derived from continuing operations. Adjusted 2017 £’000 1,131,777 (841,370) 290,407 (286,889) 24,757 3,110 31,385 93 (5,200) (5,107) 26,278 (5,228) 21,050 18.28p 18.19p Adjusting items 2017 Note 5 £’000 – – – (3,730) – (2,621) (6,351) – (1,521) (1,521) (7,872) 1,014 (6,858) – – Total Adjusted 2017 £’000 1,131,777 (841,370) 290,407 (290,619) 24,757 489 25,034 93 (6,721) (6,628) 18,406 (4,214) 14,192 12.32p 12.26p 2016 £’000 950,403 (711,752) 238,651 (239,443) 23,147 1,109 23,464 13 (2,723) (2,710) 20,754 (3,406) 17,348 15.99p 15.99p Adjusting items 2016 Note 5 £’000 – – – (2,186) – (757) (2,943) – (152) (152) (3,095) (337) (3,432) – – Note 4 4 6 8 9 11 11 Consolidated statement of comprehensive income for the 52 week period from 28 November 2016 to 26 November 2017 Profit for the period Items that will not be reclassified subsequently to profit or loss Remeasurements of post employment benefit obligations Total comprehensive income for the period Note 9, 31 2017 £’000 14,192 2,522 16,714 Total 2016 £’000 950,403 (711,752) 238,651 (241,629) 23,147 352 20,521 13 (2,875) (2,862) 17,659 (3,743) 13,916 12.82p 12.82p 2016 £’000 13,916 (928) 12,988 99 Equity Share capital Share premium Retained earnings Equity attributable to owners of the Group Note 28 28 2017 £’000 2016 £’000 (115) (12,579) (133,214) (145,908) (115) (12,579) (127,812) (140,506) These financial statements of McColl’s Retail Group plc registered number 08783477 were approved and authorised for issue by the Board on 18 February 2018 and signed on its behalf by: Simon Fuller Director Financial statements continued Consolidated statement of financial position for the 52 week period from 28 November 2016 to 26 November 2017 Note 2017 £’000 2016 £’000 12 14 27 31 15 18 19 20 13 21 26 13 22 23 26 27 31 103,565 248,899 172 13,609 36 366,281 75,965 39,810 14,273 130,048 581 496,910 (165,469) (2,633) (4,508) (172,610) (830) (42,811) (152,968) (12,121) (593) (8,528) (3,352) (177,562) (351,002) 145,908 66,783 154,351 – 10,946 18 232,098 55,041 34,609 3,757 93,407 4,286 329,791 (130,021) (2,294) (1,647) (133,962) (5,137) (41,406) (35,961) (4,160) (365) (4,856) (4,844) (50,186) (189,285) 140,506 Assets Non-current assets Property, plant and equipment Intangible assets Deferred tax assets Retirement benefit asset Investments Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Assets classified as held for sale Total assets Equity and liabilities Current liabilities Trade and other payables Income tax liability Provisions Total current liabilities Liabilities directly associated with assets classified as held for sale Net current liabilities Non-current liabilities Loans and borrowings Other payables Provisions Deferred tax liabilities Retirement benefit obligations Total non-current liabilities Total liabilities Net assets 100 McColl’s Retail Group plc Annual Report and Accounts 2017 Consolidated statement of changes in equity for the 52 week period from 28 November 2016 to 26 November 2017 Consolidated statement of cash flows for the 52 week period from 28 November 2016 to 26 November 2017 Strategic report Governance Financial statements Note 10 32 Note 10 At 28 November 2016 Profit for the period Other comprehensive income Total comprehensive income Dividends Share-based payment transactions At 26 November 2017 At 30 November 2015 Profit for the period Other comprehensive income Total comprehensive income Dividends New share capital subscribed Other share premium reserve movements1 At 27 November 2016 Share capital £’000 115 Share premium £’000 12,579 – – – – – – – – – – Retained earnings £’000 127,812 14,192 Total equity £’000 140,506 14,192 2,522 2,522 16,714 (11,748) 16,714 (11,748) 436 436 115 12,579 133,214 145,908 Share capital £’000 105 Share premium £’000 47,836 Retained earnings £’000 78,024 13,916 Total equity £’000 125,965 13,916 (928) (928) 12,988 (11,036) 12,988 (11,036) – – – – 12,579 (47,836) 12,579 – 12,589 47,836 127,812 – 140,506 – – – – 10 – 115 1 On 18 May 2016, the Group received court approval for the special resolution, proposed and passed at the AGM, to cancel its share premium account of £47,836,000 and transfer this amount to distributable reserves. This was registered at Companies’ House on 23 May 2016. Cash flows from operating activities Profit for the period Adjustments to cash flows from non-cash items Depreciation and amortisation Profit on disposal of property plant and equipment Finance income Finance costs Share-based payment transactions Income tax expense Impairment losses Working capital adjustments Increase in inventories Increase in trade and other receivables Increase in trade and other payables Decrease in retirement benefit obligation net of actuarial changes Increase/(decrease) in provisions Cash generated from operations Income taxes paid Net cash flow from operating activities Cash flows from investing activities Interest received Acquisitions of property plant and equipment Proceeds from sale of property plant and equipment Acquisition of businesses, net of cash acquired Net cash flows from investing activities Cash flows from financing activities Interest paid Proceeds from issue of ordinary shares, net of issue costs Repayment of bank borrowing New bank borrowing (Payment of)/new finance lease creditors Interest payment to finance lease creditor Dividends paid Net cash flows from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Note 2017 £’000 2016 £’000 14,192 13,916 6 6 8 8 32 9 18 31 26 8 24 24 8 10 15,636 (489) (93) 6,721 436 4,214 746 41,363 (20,924) (3,969) 40,561 (1,633) 3,089 58,487 (4,267) 54,220 93 (25,655) 7,622 (122,409) (140,349) 14,305 (352) (13) 2,875 – 3,743 415 34,889 (1,853) (5,921) 3,207 (1,025) (2,504) 26,793 (5,144) 21,649 13 (15,920) 5,874 (15,656) (25,689) (6,327) (2,479) – (37,000) 154,500 (2,506) (274) (11,748) 96,645 10,516 3,757 14,273 12,559 (7,500) – 1,921 (199) (11,036) (6,734) (10,774) 14,531 3,757 101 Financial statements continued Notes to the financial statements for the 52 week period from 28 November 2016 to 26 November 2017 1 General information The Group is a public company limited by share capital, incorporated and domiciled in the United Kingdom. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial information are disclosed in note 3. The address of its registered office is: McColl’s Retail Group plc McColl’s House Ashwells Road Brentwood Essex CM15 9ST United Kingdom Principal activity The Group engages in one principal area of activity, as an operator of convenience and newsagent stores. 2 Accounting policies Basis of preparation The Group financial statements for 2017 consolidate the financial statements of McColl’s Retail Group plc (the ‘Company’) and all its subsidiary undertakings (together, ‘the Group’) drawn up to 26 November 2017. Acquisitions are accounted for under the acquisition method of accounting. The Group financial statements have been prepared on the going concern basis and in accordance with IFRS and IFRS Interpretations Committee (IFRIC) interpretations, as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reported under IFRS. The Group’s going concern position is set out in the Directors’ report section on page 89. The consolidated financial information is presented in sterling, the Group’s functional currency, and has been rounded to the nearest thousand (£’000). The preparation of financial information in compliance with adopted IFRS requires the use of certain critical judgements, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial information and the reported amounts of revenues and expenses during the reporting period. It also requires Group management to exercise judgement in applying the Group’s accounting policies. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. 102 McColl’s Retail Group plc Annual Report and Accounts 2017 Basis of measurement The consolidated financial information has been prepared on a historical cost basis, except for net defined benefit pension asset or liability which has been prepared on an actuarial basis (refer to individual accounting policy for details). Basis of consolidation The Group financial statements consolidate the financial statements of the Company and its subsidiary undertakings drawn up to 26 November 2017. The results of subsidiaries acquired or disposed of during the period are included in the consolidated income statement from the effective date of acquisition or up to effective date of disposal, as appropriate. Business combinations On acquisition, the assets, liabilities and contingent liabilities are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair value of the identifiable net assets acquired, including separately identifiable assets, is recognised as goodwill. Any discount on acquisition, i.e. where the cost of acquisition is below the fair values of the identifiable net assets acquired, is credited to the income statement in the period of acquisition. Changes in accounting policy New standards, interpretations and amendments not yet effective The following newly issued but not yet effective standards, interpretations and amendments, which have not been applied in these financial statements, will or may have an effect on the Company financial statements in future: IFRS 15 ‘Revenue from Contracts with Customers’ IFRS 15 is effective for periods beginning on or after 1 January 2018. The standard establishes a principles-based approach for revenue recognition and is based on the concept of recognising revenue for obligations only when they are satisfied and the control of goods or services is transferred. It applies to all contracts with customers, except those in the scope of other standards. It replaces the separate models for goods, services and construction contracts under the current accounting standards. The Group believes that the adoption of IFRS 15 will not have a material impact on its consolidated results. Strategic report Governance Financial statements IFRS 16 ‘Leases’ IFRS 16 represents a significant change in the accounting and reporting of leases for lessees as it provides a single lessee accounting model, and as such, requires lessees to recognise assets and liabilities for all leases unless the underlying asset has a low value or the lease term is 12 months or less. Accounting requirements for lessors are substantially unchanged from IAS 17. The Group has carried out preliminary work to assess the accounting impacts of the change. From work performed to date, it is expected that implementation of the new standard will have a substantial impact on the consolidated results of the Group. The Group continues to assess the full impact of IFRS 16, however, the impact will depend on the facts and circumstances at the time of adoption and upon transition choices adopted. It is therefore not yet practicable to provide a reliable estimate. IFRS 9 ‘Financial Instruments’ IFRS 9 replaces IAS 39. The standard is effective from 1 January 2018 and introduces: new requirements for the classification and measurement of financial assets and financial liabilities; a new model based on expected credit losses for recognising provisions; and provides for simplified hedge accounting by aligning hedge accounting more closely with an entity’s risk management methodology. The Group believes that the adoption of IFRS 9 will not have a material impact on its consolidated results. In addition to the above new standards or amendments, there are additional new standards and amendments which will not be applicable to the Group and as such have not been listed. None of the other standards, interpretations and amendments which are effective for periods beginning after 28 November 2016 and which have not been adopted early, are expected to have a material effect on the financial statements. Revenue recognition Revenue represents the amounts receivable for goods and services sold through retail outlets in the period which fall within the Group’s principal activities, stated net of value added tax. Revenue is shown net of returns. Revenue is recognised when the significant risks and rewards of goods and services have been passed to the buyer and can be measured reliably. Commission from the sale of lottery tickets, travel tickets and electronic phone top-ups is recognised net within turnover, when transactions deriving commissions are completed, as the Group acts as an agent. In the opinion of the Directors, the Group engages in one principal area of activity, that of operators of convenience and newsagent stores. Turnover is derived entirely from the United Kingdom. Cost of sales Cost of sales consists of all direct costs to the point of sale including warehouse and transportation costs. Supplier incentives, rebates and discounts are recognised as a credit to cost of sales in the period in which the stock to which the discounts apply is sold. The accrued value at the reporting date is included in prepayments and accrued income. Adjusting items Adjusting items relate to costs or incomes that derive from events or transactions that fall within the normal activities of the Group, but which are excluded from the Group’s adjusted profit before tax measure due to their size and nature in order to better reflect management’s view of the performance of the Group. The adjusted profit before tax measure (profit before adjusting items) is not a recognised profit measure under IFRS and may not be directly comparable with adjusted profit measures used by other companies. Details of adjusting items are set out in note 5. Other operating income Post Office, rental income, ATM commissions and franchise income are recognised in the consolidated income statement when the services to which they relate are earned. Tax The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except that a change attributable to an item of income or expense recognised as other comprehensive income is also recognised directly in other comprehensive income. Current tax is provided at amounts expected to be paid using the tax rates and laws that have been enacted or substantively enacted at the balance sheet date. Current tax is charged or credited to the income statement, except when it relates to items charged to equity or other comprehensive income, in which case the current tax is also dealt with in equity or other comprehensive income respectively. Deferred tax is accounted for on the basis of temporary differences arising from differences between the tax base and accounting base of assets and liabilities. Deferred tax is recognised for all temporary differences, except to the extent where a deferred tax liability arises from the initial recognition of goodwill or from the initial recognition of an asset or a liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit. It is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. 103 Financial statements continued Notes to the financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 2 Accounting policies continued Deferred tax assets are recognised only to the extent that the Directors consider that, on the basis of all available evidence, it is probable that there will be suitable future taxable profits from which the future reversal of the underlying differences can be deducted. cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash generating unit (CGU) to which the asset belongs. For property, plant and equipment and intangible assets excluding goodwill, the CGU is deemed to be each trading store. Any resulting impairment is charged to administrative expenses. Deferred tax is charged or credited to the income statement, except when it relates to items charged or credited directly to equity or other comprehensive income, in which case the deferred tax is also dealt with in equity or other comprehensive income respectively. Property, plant and equipment Tangible fixed assets are stated at cost net of accumulated depreciation and any provision for impairment. Cost includes the original purchase price of the asset and the costs incurred attributable to bringing the asset to its working condition for intended use. Depreciation is provided so as to write off the cost of tangible fixed assets less their estimated residual values on a straight-line basis over the expected useful economic lives of the assets concerned. Principal rates used for this purpose are: Depreciation Depreciation is charged so as to write off the cost of assets, other than land and properties under construction over their estimated useful lives, as follows: Asset class Depreciation method and rate Freehold (including land where it is not separately identifiable) Straight-line basis: 50 years Long leaseholds improvements Land (if separately identifiable) Straight-line basis: 50 years Nil Short leaseholds improvements – Shops & Other Straight-line basis:10 years Intangible assets impairment For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash generating units expected to benefit from the synergies of the combination. Cash generating units (CGU) to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the CGU is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. Non-current assets held for sale Non-current assets are classified as assets held for sale only if available for immediate sale in their present condition, a sale is highly probable and expected to be completed within one period from the date of classification. Such assets are measured at the lower of the carrying amount and fair value less costs to sell and are not depreciated or amortised. Leased assets Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases. For property leases, the land and building elements are treated separately to determine the appropriate lease classification. Leasehold premiums Motor vehicles Computer equipment Furniture and fittings Straight-line basis: the unexpired portion of the lease Straight-line basis: 4 years Straight-line basis: 5 years Straight-line basis: 10 years Gains and losses on disposal of any fixed assets are determined by comparing proceeds with the asset’s carrying amount and are recognised within operating profit. Fixed asset impairments At each reporting date, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset, which is the higher of its fair value less costs to sell and its value in use, is estimated in order to determine the extent of the impairment loss. Where the asset does not generate 104 McColl’s Retail Group plc Annual Report and Accounts 2017 Finance leases/hire purchase contracts Assets funded through finance leases or hire purchase contracts are capitalised as property, plant and equipment and depreciated over their estimated useful lives or the lease term, whichever is shorter. The amount capitalised is the lower of the fair value of the asset or the present value of the minimum lease payments during the lease term at the inception of the lease. The resulting lease obligations are included in liabilities net of finance charges. Finance costs on finance leases are charged directly to the income statement so as to produce a constant periodic rate of interest. Operating leases Assets leased under operating leases are not recorded on the balance sheet. Rental payments are charged directly to the income statement on a straight-line basis over the lease term. Strategic report Governance Financial statements Sale and leaseback A sale and leaseback transaction is one where a vendor sells an asset and immediately reacquires the use of that asset by entering into a lease with the buyer. The accounting treatment of the sale and leaseback depends upon the substance of the transaction and whether or not the sale was made at the asset’s fair value. For sale and finance leasebacks, any apparent profit or loss from the sale is deferred and amortised over the lease term. For sale and operating leasebacks, generally the assets are sold at fair value, and accordingly the profit or loss from the sale is recognised immediately in the income statement. Computer software within intangible assets Computer software is stated at cost less accumulated amortisation and any provision for impairment. Externally acquired computer software and software licences and costs relating to development of computer software for internal use (to the extent that they meet the recognition criteria of IAS 38 Intangible Assets) are capitalised and amortised on a straight-line basis over their useful economic lives of five years and are included within other intangible assets. Costs relating to development of computer software for internal use that do not meet the IAS 38 recognition criteria are expensed as incurred. Following initial recognition, the lease treatment is consistent with those principles described above. Lease incentives Lease incentives primarily include up-front cash payments or rent-free periods. Where lease incentives relate to the whole term of the contract lease incentives are capitalised and spread over the period of the lease term. Leases with predetermined fixed rental increases Where a lease has predetermined fixed rental increases, these rental increases are accounted for on a straight-line basis over the term of the lease. Operating lease income Operating lease income consists of rentals from sub-tenant agreements and is recognised as earned. Business combinations On acquisition, the assets, liabilities and contingent liabilities are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired, including separately identifiable assets, is recognised as goodwill. Any discount on acquisition, i.e. where the cost of acquisition is below the fair values of the identifiable net assets acquired, is credited to the income statement in the period of acquisition. Cash and cash equivalents Cash and cash equivalents includes cash in hand, cash in transit, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less. When drawn, bank overdrafts are shown within loans and borrowings in current liabilities in the Group balance sheet. Trade receivables Trade receivables are amounts due from customers for goods and services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. Trade receivables are recognised initially at the transaction price. A provision for the impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of any loss is recognised in the income statement. Inventories Inventories consist of goods for resale and are stated at the lower of cost and net realisable value. Cost is calculated using the retail method for each category of stock by reducing the net selling price by the attributable average gross margin. Net realisable value is the price at which the stocks can be realised in the normal course of business net of selling and distribution costs. Provision is made for obsolete, slow-moving or defective items where appropriate. Goodwill Goodwill represents the excess of the fair value of the consideration of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is recognised as an asset on the Group’s balance sheet in the year in which it arises. Goodwill is not amortised but is tested for impairment at least annually and is stated at cost less any provision for impairment. Any impairment is recognised in the income statement and is not reversed in a subsequent period. Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade payables are recorded initially at fair value and subsequently measured at amortised cost. Generally this results in their recognition at their nominal value. See note 14 for further details of cash generating units and impairment testing. 105 Financial statements continued Notes to the financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 2 Accounting policies continued Borrowings All borrowings are initially recorded at the amount of proceeds received, net of transaction costs. Borrowings are subsequently carried at amortised cost, with the difference between the proceeds, net of transaction costs, and the amount due on redemption being recognised as a charge to the income statement over the period of the relevant borrowing. Interest expense is recognised on the basis of the effective interest method and is included in finance costs. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Provisions The Group recognises provisions for liabilities of uncertain timing or amounts, including those for onerous leases, leasehold dilapidations and legal disputes. Provisions are recognised when there is a present legal or constructive obligation as a result of a past event, for which it is probable that an outflow of economic benefit will be required to settle the obligation, and where the amount of the obligation can be reliably estimated. Provisions are measured at the present value of the best estimate of expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. Onerous contracts/leases The Group compares the unavoidable costs of all leases with the expected economic benefits on a store by store basis. Once a lease is considered onerous, a provision is calculated based on the present value of the unavoidable costs net of expected benefits. Dilapidations Provisions for dilapidations and similar contractual property costs are recognised on a lease- by-lease basis when the need for expenditure has been identified, being the point at which the likely expenditure can be reliably estimated. Contingent liabilities Contingent liabilities are possible obligations whose existence will be confirmed only on the occurrence or non-occurrence of uncertain future events outside the Group’s control, or present obligations that are not recognised because it is not probable that a settlement will be required or the value of such a payment cannot be reliably estimated. The Group does not recognise contingent liabilities but discloses them. Refer to note 29 for the disclosures. 106 McColl’s Retail Group plc Annual Report and Accounts 2017 Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds. Dividends Dividend distribution to the Group’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Group’s shareholders. Defined contribution pension obligation Contributions to defined contribution pension schemes are charged to the income statement in the year to which they relate. Defined benefit pension obligation The Group operates two defined benefit pension schemes in addition to several defined contribution schemes, which require contributions to be made to separately administered funds. Defined benefit scheme surpluses and deficits are measured at: • The fair value of plan assets at the reporting date; less • Scheme liabilities calculated using the projected unit credit method discounted to its present value using yields available on high quality corporate bonds that have maturity dates approximating to the terms of the liabilities; plus • Unrecognised past service costs; less • The effect of minimum funding requirements agreed with scheme trustees A surplus is recognised where the Group has an unconditional right to the economic benefits in the form of future contribution reductions or refunds. Any difference between the interest income on scheme assets and that actually achieved on assets, and any changes in the liabilities over the year due to changes in assumptions or experience within the scheme, are recognised in other comprehensive income in the period in which they arise. Costs are recognised separately as operating and finance costs in the income statement. Operating costs comprise the current service cost, any income or expense on settlements or curtailments and past service costs where the benefits have vested. Strategic report Governance Financial statements Past service costs are recognised directly in income unless the changes to the pension scheme are conditional on the employees remaining in service for a specified period of time. In this case, the past service costs are amortised on a straight-line basis over the vesting period. Finance items comprise the interest on the net defined benefit asset or liability. Further information on pensions is disclosed in note 31. Share-based payments Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest, with a corresponding increase in equity. Where applicable at the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in the income statement. For further detail please refer to note 32. Financial instruments Financial assets The Group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. The Group has not classified any of its financial assets as held to maturity. Loans and Receivables These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally from the Group’s trading operations (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counter party or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the consolidated income statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. The Group’s loans and receivables comprise trade and other receivables and cash and cash equivalents in the Group balance sheet. Financial assets are de-recognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. Financial liabilities The Group classifies its financial liabilities into the below category: 1) Other financial liabilities • Interest-bearing bank loans and overdrafts – these are recorded initially at fair value, which is generally the proceeds received, net of direct issue costs. Subsequently, these liabilities are held at amortised cost using the effective interest method. Finance charges, including premiums payable on settlement or redemption and direct issue costs are accounted for on an accrual basis in the income statement using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Where existing debt is refinanced with the same lender it is treated as an extinguishment of the original debt and a new financial liability if the modified terms are substantially different from the previous terms. • Trade payables and other short-term monetary liabilities which are initially recognised at fair value and subsequently at amortised cost using the effective interest method. Fair value estimation The methods and assumptions applied in determining the fair values of financial assets and financial liabilities are disclosed in note 30. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 107 Financial statements continued Notes to the financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 3 Critical accounting judgements and key sources of estimation uncertainty In the application of the Group’s accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. Judgements Critical judgements, apart from those involving estimations, that are applied in the preparation of the consolidated financial statements are discussed below: 4 Revenue and other income In accordance with IFRS 8 ‘Operating segments’ an operating segment is defined as a business activity whose operating results are reviewed by the chief operating decision maker and for which discrete information is available. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors. The principal activities of the Group are currently managed as one segment. Consequently all activities relate to this segment, being the operation of convenience and newsagent stores in the UK. The analysis of the Group’s revenue for the period from continuing operations is as follows: Determination of cash generating units The Group determines CGUs for the purpose of goodwill impairment based on the way it manages the business. Judgement is required to ensure this assessment is appropriate and in line with IAS 36. This is discussed in further detail in note 14. Sale of goods Property rental income Finance income Other operating income Note 8 2017 £’000 1,131,777 3,224 93 21,533 1,156,627 2016 £’000 950,403 2,985 13 20,162 973,563 Other operating income includes income from the operation of sub-post offices, rental income, commission earned from ATMs and Subway franchise income. Sources of estimation uncertainty Estimates and underlying assumptions are reviewed on an ongoing basis. Sources of estimation and uncertainty are discussed below: Goodwill impairment The Group is required to test, on an annual basis, whether goodwill has suffered any impairment based on the recoverable amount of its cash generating units (CGUs). The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the determination of a pre-tax discount rate in order to calculate the present value of the cash flows. This is discussed in further detail in note 14. 108 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements 5 Adjusting items Adjusting items Due to their significance or one-off nature, certain items have been classified as adjusting as follows: 6 Operating profit Arrived at after charging/(crediting) Co-op acquisition and integration costs1 Impairment and onerous lease provisions related to assets held for sale2 Costs relating to closure of non-trading sites Finance costs in relation to Co-op acquisition and integration Unprofitable store closure programme3 Tax effect 2017 £’000 3,447 – – 1,521 2,904 (1,014) 6,858 2016 £’000 2,004 757 334 – – 337 3,432 Depreciation and amortisation expense Write-down of inventory recognised as an expense Operating lease expense – property Profit on disposal of property, plant and equipment Impairment Cost of inventories recognised as an expense The analysis of the Auditors’ remuneration is as follows: 1 Co-op acquisition and integration costs On 13 July 2016 management entered into an agreement to purchase 298 convenience stores from the Co-op, for an aggregate consideration of £117m. The acquisition was approved by the Competition and Markets Authority on 20 December 2016. The acquisition was integrated during 2017 by Martin McColl Limited, a wholly-owned subsidiary of the Group. The adjusting costs relate to legal fees, sponsor fees and implementation costs. All 298 stores were successfully transitioned by 13 July 2017. 2 Assets held for sale Following a review of its portfolio in 2015, the Group decided to sell 97 of its newsagents. The Group continues to focus on the strategy of developing and expanding the convenience business and identified these marginal stores as not being part of its long-term planning. As at year end 27 November 2016 there were 75 stores remaining. During 2017 the Group sold 17, 17 are trading on, and 32 have been transferred to the closure programme, leaving nine remaining at the end of the period. Audit of Group Audit of subsidiaries Total audit fees Audit related assurance services (including interim review) Total assurance services Services related to corporate finance transactions not covered above Other non-audit services not covered above 3 Unprofitable store closure programme Management have undertaken a review of poor performing stores and have made the decision to close stores which are not economically viable to continue trading. The majority of these stores are either near lease expiry or lease break date. The closure programme consists of stores which will either close in 2017 or 2018. Management have adjusted onerous lease provisions, impairment, and other costs in relation to the closures. £398,000 of the costs are included within administrative expenses. Any other closures costs which cannot be reliably estimated at present, will also be adjusting in 2018. Total other non-audit services1 Total non-audit services Total fees Note 12 2017 £’000 15,636 13,766 33,810 (489) 746 876,599 2016 £’000 14,305 8,417 30,191 (352) 415 738,678 2016 £’000 32 182 214 40 40 290 24 314 354 568 2017 £’000 60 182 242 41 41 – 14 14 55 297 1 In 2016 corporate finance transactions were one-off and subject to a tendering process. 2017 fee relates to work on pension schemes on behalf of the Group. 109 Financial statements continued Notes to the financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 6 Operating profit continued Adjusted EBITDA and operating profit excluding property-related items In order to provide shareholders with a measure of the underlying performance of the business and to allow a more understandable assessment of its position, the Group makes adjustments to profit before tax. These adjustments are one-off in nature, not in line with our normal course of business, material by size and are considered to be distortive of the true adjusted performance of the business. Adjusting items relate to costs or incomes that derive from events or transactions that fall within the normal activities of the Group, but which are excluded from the Group’s adjusted profit before tax measure due to their size and nature in order to better reflect management’s view of the performance of the Group. For example, the Group adjusts for property related items as these are not in line with our principal activity as an operator of convenience and newsagent stores. The Group also adjusts for share-based payments as a non-cash item. The adjusted profit before tax measure (profit before adjusting items) is not a recognised profit measure under IFRS and may not be directly comparable with adjusted profit measures used by other companies. Details of adjusting items are set out in note 5. 7 Employee costs The aggregate payroll costs (excluding Directors’ remuneration) were as follows: Wages and salaries Social security costs Pension costs, defined benefit scheme 2017 £’000 157,111 15,268 1,549 173,928 2016 £’000 132,136 5,860 1,008 139,004 The average number of persons employed by the Group (including Directors) during the period, analysed by category was as follows: Retailing Central administration Adjusted EBITDA excluding property-related items Operating profit before adjusting items Depreciation and amortisation Impairment of property, plant and equipment and onerous leases Profits arising on property-related items Share-based payments Adjusted operating profit excluding property-related items Operating profit before adjusting items Less: Profits arising on property-related items 2017 £’000 2016 £’000 8 Finance income and costs 31,385 15,289 – (3,110) 436 44,000 31,385 (3,110) 28,275 23,464 14,305 308 (1,422) – 36,655 23,464 (1,109) 22,355 Finance income Interest income on bank deposits Finance costs Interest on bank overdrafts and borrowings Interest on obligations under finance leases and hire purchase contracts Amortisation of issue costs Other finance costs Finance costs in relation to Co-op acquisition and integration (included in adjusting items) Total finance costs Net finance costs 110 McColl’s Retail Group plc Annual Report and Accounts 2017 2017 20,749 512 21,261 2016 19,011 308 19,319 2017 £’000 2016 £’000 93 13 (4,522) (2,226) (274) (381) (23) (1,521) (6,721) (6,628) (199) (279) (19) (152) (2,875) (2,862) 9 Income tax Current tax: Current tax on profit for the period Adjustments in respect of prior periods Deferred tax: Origination and reversal of temporary differences Associated with pension deficit Arising from change in tax rate Adjustments in respect of prior periods Income tax expense for the period Other comprehensive income Deferred tax in respect of actuarial valuation of retirement benefits Corporation tax The differences are reconciled below: Profit before tax Tax on profit calculated at standard rate for 2017 of 19.33% (2016: 20.00%) Disallowed expenses and non-taxable income Deferred tax on share options Adjustments in respect of prior years Arising from change in rate of tax Exempt amounts Total tax charge 2017 £’000 4,780 (173) 4,607 (81) – (14) (298) (393) 4,214 517 – 517 2017 £’000 18,406 3,558 642 (18) (471) (14) 517 4,214 2016 £’000 5,319 (283) 5,036 (955) 69 (125) (282) (1,293) 3,743 (168) (117) (285) 2016 £’000 17,659 3,532 901 – (565) (125) – 3,743 Changes to the UK corporation tax rates were enacted as part of Finance Bill 2015 on 18 November 2015. These included reductions to the main rate to reduce the rate to 19% from 1 April 2017 and to 18% from 1 April 2020. A subsequent change to reduce the UK corporation tax rate to 17% from 1 April 2020 was enacted as part of Finance Bill 2016 on 6 September 2016. Strategic report Governance Financial statements Amounts recognised in other comprehensive income 2017 Tax (expense) /benefit £’000 Before tax £’000 Net of tax £’000 Before tax £’000 2016 Tax (expense) /benefit £’000 Net of tax £’000 Remeasurements of post employment benefit obligations 3,039 (517) 2,522 (1,213) 285 (928) 10 Dividends Final 2016 dividend of 6.80p (2015: 6.80p) per ordinary share Interim 2017 dividend of 3.40p (2016: 3.40p) per ordinary share 2017 £’000 7,832 3,916 11,748 2016 £’000 7,120 3,916 11,036 The Directors are proposing a final 2017 dividend of 6.90 pence (2016: 6.80 pence) per share totalling £7,947,000 (2016: £7,832,000). The proposed final dividend is subject to approval by shareholders passing a written resolution and accordingly has not been included as a liability in these financial statements. 111 Financial statements continued Notes to the financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 11 Earnings per share Basic and diluted earnings per share are calculated by dividing the profit for the period attributable to shareholders by the weighted average number of shares. 12 Property, plant and equipment Basic weighted average number of shares Diluted weighted average number of shares Profit attributable to ordinary shareholders (£’000) Basic earnings per share Diluted earnings per share Adjusted earnings per share: Profit attributable to ordinary shareholders (£’000) Adjusting items (note 5) Tax effect of adjustments Profit after tax and before adjusting items Basic adjusted earnings per share Diluted adjusted earnings per share 2017 £’000 2016 £’000 115,172,774 108,505,494 115,724,645 108,505,494 14,192 12.32p 12.26p 14,192 7,872 (1,014) 21,050 18.28p 18.19p 13,916 12.82p 12.82p 13,916 3,095 337 17,348 15.99p 15.99p The difference between the basic and diluted average number of shares represents the dilutive effect of share options and warrants in existence. The diluted weighted average number of ordinary shares is calculated as follows: Ordinary shares in issue at the start of the period Effect of shares issued for the Co-op acquisition (part year) Effect of shares issued for the Co-op acquisition (full year) 108,505,494 – 6,667,280 Effect of shares to be issued for the Long-term incentive plan (LTIP) 115,172,774 551,871 Weighted average number of ordinary shares at the end of the period 115,724,645 104,712,042 3,793,452 – 108,505,494 – 108,505,494 2017 £’000 2016 £’000 Cost or valuation At 30 November 2015 Additions Acquired through business combinations Classified as held for sale Disposals Transfers At 27 November 2016 Additions Acquired through business combinations Classified as held for sale Disposals At 26 November 2017 Depreciation At 30 November 2015 Charge for period Eliminated on disposal Impairment Transfers Classified as held for sale At 27 November 2016 Charge for the period Eliminated on disposal Impairment Classified as held for sale At 26 November 2017 Carrying amount At 26 November 2017 At 27 November 2016 Land and buildings £’000 Furniture, fittings and equipment £’000 26,415 4,945 4,823 – (5,159) 3,655 34,679 8,727 29,839 – (5,242) 84,529 10,774 858 22 (2,122) (3,655) 90,406 15,981 4,410 3,044 (3,690) Total £’000 110,944 15,719 5,681 22 (7,281) – 125,085 24,708 34,249 3,044 (8,932) 68,003 110,151 178,154 7,315 3,655 (131) – 2,277 – 13,116 4,235 (274) – – 39,268 9,874 (1,628) 415 (2,277) (466) 45,186 10,761 (1,525) 746 2,344 46,583 13,529 (1,759) 415 – (466) 58,302 14,996 (1,799) 746 2,344 17,077 57,512 74,589 50,926 21,563 52,639 45,220 103,565 66,783 112 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements 13 Assets classified as held for sale Following a review of its portfolio in 2015, the Group decided to sell 97 of its stores. The Group continues to focus on the strategy of developing and expanding the convenience business and identified these stores as not being part of its long-term planning. As at year end 27 November 2016 there were 75 stores remaining. During 2017 the Group sold 17, 17 are trading on, and 32 have been transferred to the closure programme, therefore these are no longer classified as held for sale, leaving nine remaining at the end of the period as held for sale. The Group has treated this disposal under IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’. IFRS 5 requires that the Group must not offset the gains and losses compared to fair value of the individual stores. However, on the basis that it is not practical to disclose the remaining nine individual assets held for sale, these have been disclosed in aggregate. The major classes of assets and liabilities of stores are as follows: Property, plant and equipment Inventories Trade and other receivables Total assets classified as held for sale Trade and other payables Provisions Total liabilities as held for sale Net assets classified as held for sale Note 18 19 21 26 2017 £’000 190 300 91 581 (468) (362) (830) (249) 2016 £’000 890 2,073 1,323 4,286 (4,840) (297) (5,137) (851) 14 Intangible assets Cost or valuation At 30 November 2015 Additions Fair value adjustment for goodwill Deferred tax on fair value adjustment of land and buildings Classified as held for sale At 27 November 2016 Additions Deferred tax on fair value adjustment of land and buildings Fair value adjustment for goodwill At 26 November 2017 Amortisation At 30 November 2015 Amortisation charge Net transferred from assets held for sale At 27 November 2016 Amortisation charge At 26 November 2017 Carrying amount At 26 November 2017 At 27 November 2016 Goodwill £’000 147,531 9,662 (1,410) 286 1,223 157,292 91,442 3,377 (560) Other intangible assets £’000 5,706 166 – – – 5,872 929 – – Total £’000 153,237 9,828 (1,410) 286 1,223 163,164 92,371 3,377 (560) 251,551 6,801 258,352 3,518 – 716 4,234 – 4,234 247,317 153,058 3,803 776 – 4,579 640 5,219 1,582 1,293 7,321 776 716 8,813 640 9,453 248,899 154,351 The goodwill addition in the year includes £88,769,000 related to the acquisition of the 298 Co-op stores (see note 17). 113 Financial statements continued Notes to the financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 14 Intangible assets continued Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination. Before recognition of impairment losses, the carrying amount of goodwill had been allocated as follows: CGU 1 2017 £’000 2016 £’000 247,317 153,058 Since the IPO in 2014, McColl’s Retail Group has tested goodwill impairment annually on the basis of three cash generating units. They are: Following a review of how the business is governed, structured, financed and how performance is assessed, Management have concluded that goodwill impairment be tested going forward on the basis of a single CGU. Key rationale is noted below: • The Board and senior management assess performance at a Group level, that is as a single operating segment (note 4), and not on the basis of historical CGU splits • Management are incentivised on the performance of the Group, which is the operation of convenience stores • Financing, and covenant testing of the financing, are applicable to the Group as a whole • Acquisitions, whether major or individual stores, bring synergies to the Group as a whole and are not specific to an individual store or acquired group of stores • The Group recently announced a new sole supply agreement to service all stores in • CGU 1 – Goodwill arising from the 2005 Management buy-out including goodwill held at the Group that time • CGU 2 – Goodwill relating to the 2008 Smile acquisition • CGU 3 – Goodwill acquired on all other acquisitions since the 2005 management buy-out IAS 36 describes that a CGU is: • The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets; • Represents the lowest level within the entity at which the goodwill is monitored for internal management purposes; and • Not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments If the above existing methodology was adopted the carrying amount of goodwill would have been allocated as follows: CGU 1 CGU 2 CGU 3 2017 £’000 95,804 6,504 145,009 247,317 2016 £’000 95,865 6,504 50,689 153,058 However, during 2017 the business underwent significant transformation, following both the integration of 298 stores from the Co-op and the announcement of a new sole supply agreement with Morrisons. The recoverable amount of the CGU is determined from value in use calculations with a discounted cash flow model used to calculate this amount. The key assumptions for the value in use calculation include the discount rate and long-term growth rates. The value in use calculations use forecast cash flows taking into account actual performance for 2017. Cash flows beyond this period are extrapolated using a long-term growth rate of nil and discounted with a weighted average cost of capital (WACC) of 8.89% (2016: 12.05%). The change in WACC is driven by a change in capital structure, with an increase in debt and number of shares in issue. As adjusted EBITDA pre the Co-op stores acquisition has been stable over several years, management consider a long-term growth rate of zero to be a prudent basis to extrapolate cash flows. The pre-tax discount rate is based on the Group’s weighted average cost of capital, taking into account the cost of capital and borrowings, to which specific market- related premium adjustments are made. The Group has conducted sensitivity analysis on the impairment testing for goodwill. With reasonable possible changes in key assumptions including a 2% change in WACC, management have concluded that the carrying amount of goodwill would exceed the value in use, both under the historical 3 CGU and new single CGU classifications. 15 Investments Investments at cost 2017 £’000 36 2016 £’000 18 Investments have increased due to an increase in Nisa shares as a result of the Co-op store acquisition. 114 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements Group subsidiaries Details of the Group subsidiaries as at 26 November 2017 are as follows: All are held by the Group unless stated. All subsidiaries are registered at the same address as McColl’s Retail Group plc, except for those registered in Scotland, whose registered address is Unit 11, The Avenue, Newton Mearns, Glasgow G77 6AA. Name of subsidiary A Harris Limited* Birrell Limited* Bracklands Limited* Charnwait Management Limited* Clark Retail Limited* Dillons Stores Limited* Farthingmist Limited* Forbouys Limited* Forbouys Services Limited* Hargreaves Vending Limited* ISS Limited* Key Food Stores Limited* Lavells Limited* Lewis Meeson Limited* Marshell Group Limited* Martin CTN Group Limited* Martin McColl Limited* Martin McColl Group Limited* Martin McColl Retail Limited* Martin Retail Group Limited* Martin the Newsagent Limited* NSS Newsagents Limited* NSS Newsagents Retail Limited* Price Smasher Limited* RS McColl (UK) Limited* Smile Holdings Limited* Smile Property Limited* Smile Stores Limited* Thistledove Limited* TM Coffee Limited* TM Group Limited* TM Group Holdings Limited* Principal activity Dormant Dormant Property Company Retailing Retailing Retailing Dormant Dormant Dormant Corporate activities Dormant Intermediate Holding Co Dormant Dormant Corporate activities Dormant Retailing Dormant Intermediate Holding Co Retailing Dormant Dormant Dormant Intermediate Holding Co Dormant Intermediate Holding Co Dormant Retailing Intermediate holding Co Dormant Dormant Predecessor Holding Co Registered office Scotland Scotland Scotland England and Wales Scotland England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Scotland England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Proportion of ownership interest and voting rights held 2017 Proportion of ownership interest and voting rights held 2016 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 115 Financial statements continued Notes to the financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 15 Investments continued Name of subsidiary TM Pension Trustees Limited* TM Retail Limited* TM Vending Limited* Tog Limited* Trents Leisure Limited* Trimley Stores Limited* * Indicates direct investment by the Company. Principal activity Dormant Dormant Corporate Activities Intermediate Holding Co Dormant Dormant Registered office England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Proportion of ownership interest and voting rights held 2017 Proportion of ownership interest and voting rights held 2016 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% From the above table the following subsidiaries will take advantage of the audit exemption set out within section 479A of the Companies Act 2006 for the year ended 26 November 2017: Bracklands Limited, Charnwait Management Limited, Clark Retail Limited, Dillons Stores Limited, Martin McColl Limited, Martin McColl Retail Group Limited, Martin Retail Group Limited, Smile Stores Limited, Thistledove Limited, TM Group Holdings Limited, TM Vending Limited. All the subsidiaries are included on the Group’s consolidated financial statements for the period. The Group will guarantee the debts and liabilities of these UK subsidiaries at the balance sheet date in accordance with section 479C of the Companies Act 2006. 116 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements 16 Business combinations During the period, the Group made 12 acquisitions excluding the stores acquired from the Co-op, none of which was individually considered material to the Group. The cash consideration for these acquisitions and the assets acquired are summarised as follows: Tangible fixed assets Inventory Goodwill Deferred tax asset Cash consideration 2017 £’000 2,834 462 2,113 – 5,409 2016 £’000 5,681 1,758 7,931 286 15,656 17 Business combinations – Co-op stores On 13 July 2016, the Group agreed to acquire 298 stores from the Co-op as an asset purchase for an aggregate consideration of £117m. The acquisition was integrated during 2017 by Martin McColl Limited, a wholly-owned subsidiary of the Group, by way of asset purchase. The principal activity of the acquired Co-op stores is convenience stores operating in the same market as the Group. The first store was acquired on 30 January 2017 with its first day of trading on 31 January 2017. The last store was acquired on 13 July 2017. The Co-op stores were acquired in order to grow the existing convenience estate. The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below: Assets and liabilities at date of acquisition Property, plant and equipment Financial liabilities Total identifiable assets Goodwill Total consideration Satisfied by: Cash 2017 £’000 31,415 (3,184) 28,231 88,769 117,000 117,000 18 Inventories Finished goods and goods for resale Classified as held for sale 19 Trade and other receivables Trade receivables Prepayment of Co-op acquisition expenses Supplier rebates Prepayments Other receivables Transferred to assets held for sale Total current trade and other receivables Ageing of past due but not impaired receivables 31 to 60 days 61 to 90 days Greater than 90 days Supplier rebates receivable ageing 31 to 60 days 61 to 90 days Greater than 90 days Note 13 Note 13 2017 £’000 76,265 (300) 75,965 2017 £’000 1,945 – 24,746 6,972 6,238 (91) 39,810 2017 £’000 318 509 376 1,203 2017 £’000 1,299 818 621 2,738 The goodwill of £88,769,000 arising from the acquisition represents the difference between consideration transferred, and accounting of fair value of freeholds, fixtures and fittings and provisions relating to stock and dilapidations. None of the goodwill is expected to be deductible for income tax purposes. The acquisition contributed £183,000,000 of sales and £3,900,000 of adjusted operating profit to the Group’s results for the part-year. 2016 £’000 57,114 (2,073) 55,041 2016 £’000 3,223 2,396 19,169 5,492 5,652 (1,323) 34,609 2016 £’000 368 130 361 859 2016 £’000 1,641 291 378 2,310 117 Financial statements continued Notes to the financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 20 Cash and cash equivalents 22 Loans and borrowings Cash at bank and in hand 21 Trade and other payables Trade payables Accrued expenses Holiday pay accrual Social security and other taxes Other payables Accrued interest Amounts due under hire purchase obligations Classified as assets held for sale Deferred income 2017 £’000 14,273 2017 £’000 119,400 27,432 1,281 9,321 1,925 394 1,799 (468) 4,385 2016 £’000 3,757 2016 £’000 98,784 22,195 1,043 5,268 3,078 274 1,469 (4,840) 2,750 Note 13 Non-current loans and borrowings Bank borrowings Unamortised issue costs 2017 £’000 154,500 (1,532) 152,968 2016 £’000 37,000 (1,039) 35,961 The long-term loans are secured by a fixed charge over the Group’s head office property together with a floating charge over the Group’s assets. In July 2016, the Group completed a £100,000,000 term loan and an amended £100,000,000 revolving facility with a £50,000,000 accordion. The current facility drawn as at 26 November 2017 is £154,500,000 (2016: £37,000,000). Details of loans and hire purchase obligations repayable within two to five years are as follows: 165,469 130,021 Term loan and revolving facility available until July 2021 Hire purchase obligations Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. For most suppliers no interest is charged on the trade payables for the first 30 days from the date of the invoice. Thereafter, interest is charged on the outstanding balances at various interest rates. The Group has financial risk management policies in place to ensure that all payables are paid within the pre-agreed credit terms. 23 Non-current liabilities – other payables The Directors consider that the carrying amount of trade payables approximates to their fair value. Other payables and deferred income Amounts due under hire purchase obligations 118 McColl’s Retail Group plc Annual Report and Accounts 2017 2017 £’000 154,500 1,753 156,253 2017 £’000 10,368 1,753 12,121 2016 £’000 37,000 3,346 40,346 2016 £’000 814 3,346 4,160 24 Net debt Cash at bank and in hand Term loan and revolving facility available until July 2021 Less: unamortised issue costs Amounts due under hire purchase obligations Note 20 2017 £’000 14,273 14,273 (154,500) 1,532 (152,968) (3,552) (142,247) 2016 £’000 3,757 3,757 (37,000) 1,039 (35,961) (4,815) (37,019) Net debt Analysis of net debt Analysis of net debt Cash and short-term deposits Loans and borrowings Finance lease liabilities 25 Leases and commitments 2016 £’000 3,757 (35,961) (4,815) (37,019) Cash flow £’000 Other non-cash movements £’000 10,516 (117,500) 1,263 (105,721) – 493 – 493 2017 £’000 14,273 (152,968) (3,552) (142,247) Operating leases The Group leases various properties and equipment under non-cancellable operating leases. The terms of the property leases vary, with rent reviews every three to five years and many have break clauses. Strategic report Governance Financial statements As set out in note 4 property rental income earned during the year was £3,223,921 (2016: £2,985,000). The majority of the properties held have committed tenants for the next three to five years. All operating lease contracts contain market review clauses in the event that the lessee exercises its option to renew. The lessee does not have an option to purchase the property at the expiry of the lease period. At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments: Within one year Within one to five years After five years 2017 £’000 273 427 261 961 Finance leases The Group acquires the majority of its motor vehicles and LED lighting under contract purchase agreements and such assets are generally classified as finance leases. Future lease payments are due as follows: Amounts due within one year Amounts due within one to five years Less future interest 2017 £’000 1,882 1,840 3,722 (170) 3,552 2016 £’000 351 654 292 1,297 2016 £’000 1,041 1,990 3,031 (327) 2,704 The total future value of minimum lease payments is as follows: Land and buildings Within one year In two to five years In over five years 2017 £’000 2016 £’000 32,185 100,441 117,885 250,511 26,933 84,231 99,572 210,736 Other financial commitments In order to manage its exposure to fluctuating energy prices, during the year the Group entered into contracts to purchase 25.5 MW of electricity at a fixed price from Scottish Southern Electric (SSE). The contracts allow for a 10% over or underutilisation of the power contracted at the rates secured. While management acknowledge that the forward contracts in place are derivatives, they cannot be traded and are therefore treated as contracts that secure a pre-agreed price for electricity requirements to operate the stores portfolio. 119 Financial statements continued Notes to the financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 26 Provisions At 28 November 2016 (including held for sale) Additional provisions Utilised during the period Released unused Unwinding of the discount included in provisions Classified as held for sale 2016 Classified as held for sale 2017 At 26 November 2017 Non-current liabilities Current liabilities Note Dilapidations £’000 Onerous contracts £’000 1,220 3,744 (922) (295) 43 80 – 3,870 – 3,870 792 1,389 (385) (420) – 217 (362) 1,231 (593) 638 13 27 Deferred tax Deferred tax assets and liabilities 2017 Pension benefit obligations Revaluation of property, plant and equipment Revaluation of intangible assets Other items Total £’000 2,012 5,133 (1,307) (715) 43 297 (362) 5,101 2016 (593) 4,508 Pension benefit obligations Revaluation of property, plant and equipment Revaluation of intangible assets Other items Asset £’000 – – – 172 172 Asset £’000 – – – – – Liability £’000 (1,744) (3,174) (3,610) – (8,528) Liability £’000 (1,020) (422) (3,414) – (4,856) Net deferred tax £’000 (1,744) (3,174) (3,610) 172 (8,356) Net deferred tax £’000 (1,020) (422) (3,414) – (4,856) Dilapidations The provision includes estimates for certain properties for which the extent of the dilapidation has not been established. It is expected that most of these costs will be incurred in the next five years. Onerous contracts A provision is recognised for the present value of the unavoidable costs of the lease net of expected benefits for all leases that have been identified as onerous. 120 McColl’s Retail Group plc Annual Report and Accounts 2017 Deferred tax movement during the period At 28 November 2016 £’000 Recognised in income £’000 Recognised in other comprehensive income £’000 Recognised in equity £’000 At 26 November 2017 £’000 Pension benefit obligations Revaluation of property, plant and equipment Revaluation of intangible assets Other items Net tax assets/(liabilities) (1,020) (422) (3,414) – (4,856) (207) 733 (196) 101 431 (517) – (1,744) (3,485) (3,174) – 71 (3,610) 172 (8,356) (517) (3,414) – – – Strategic report Governance Financial statements 29 Contingent liabilities There are a number of contingent liabilities that arise in the normal course of business, which if realised, are not expected to result in a material liability to the Group. The Group recognises provisions for liabilities when it is more likely than not that a settlement will be required and the value of such a payment can be reliably estimated. At 26 November 2017, the Group has the following contingent liabilities: Certain subsidiaries of the Group have assigned UK property leases in the normal course of business. Should the assignees fail to fulfil any obligations in respect of these leases, members of the Group may be liable for those defaults. The Group cannot reliably quantify the amount of such contingent liabilities due to their uncertain nature. The number of such claims arising to date has been small and the liability, which is charged to the profit and loss account as it arises, has not been material. On 22nd December 2017 the Group was found guilty of a health and safety breach at a store, and subsequently a fine was issued to the Group. Bank arrangement fee (to be paid on first draw down of new term loan) Broker fee for acquisition to be paid after CMA approval has been obtained Health and safety incident 2017 £’000 – – 600 600 2016 £’000 447 1,170 – 1,617 Deferred tax movement during the prior period is as follows: At 30 November 2015 £’000 Recognised in income £’000 Recognised in other comprehensive income £’000 Recognised in equity £’000 At 27 November 2016 £’000 Pension benefit obligations Revaluation of property, plant and equipment Revaluation of intangible assets Other items Net tax assets/(liabilities) (1,119) (827) (4,279) 194 (6,031) (69) 691 865 (167) 1,320 151 – – – 151 17 (1,020) (286) – (27) (296) (422) (3,414) – (4,856) Deferred tax has arisen owing to accelerated capital allowances, business combinations, pension deficit/surplus and other temporary differences and also in respect of the taxable gains arising on the disposal of intangible fixed assets where the gains have been rolled into replacement assets. Deferred tax at 26 November 2017 has been measured at 17% (2016: 17%) being the tax rate enacted at the balance sheet date expected to be effective for future periods. 28 Authorised, issued and fully paid share capital Issued ordinary shares of £0.001 at 28 November 2016 Issued ordinary shares of £0.001 at 26 November 2017 115,172,774 115,172,774 115 115 12,579 12,579 Number of shares Share capital £’000 Share premium £’000 Voting rights The ordinary shares rank equally for voting purposes. On a show of hands each shareholder has one vote and on a poll each shareholder has one vote per ordinary share held. Each ordinary share ranks equally for any dividend declared. Each ordinary share ranks equally for any distributions made on a winding up of the Group. Each ordinary share ranks equally in the right to receive a relative proportion of shares in the event of a capitalisation of reserves. 121 Financial statements continued Notes to the financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 30 Financial instruments and risk management Derivatives and other financial instruments The Group’s principal financial instruments comprise loans, cash and short-term deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial instruments such as trade and other receivables and trade and other payables that arise directly from its operations. On 13 July 2016 the Group completed and signed an amended £100,000,000 revolving credit facility and a £50,000,000 accordion facility for the Group. The new facility will be in place until July 2021. The current facility drawn as at 26 November 2017 is £57,000,000 (2016: £37,000,000). On the same date, the Group completed a £100,000,000 term loan agreement for the purchase of 298 stores from the Co-op. At 26 November 2017, £97,500,000 had been drawn with £2,500,000 repaid per the terms of the agreement. Total drawings as at 26 November 2017 were £154,500,000. Interest rate risk The Group is exposed to interest rate risk from its use of interest bearing financial instruments. This is a market risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates. There are no financial instruments held at level 1, 2 or 3 fair value. Floating rate financial liabilities on which interest is paid bear interest at rates based on one month LIBOR. It is the Group’s policy to consider the need for interest rate hedging on an ongoing basis. No interest rate hedging is currently in place although this is kept under review by management. Interest rate risk profile of financial liabilities and assets The interest rate profile of the financial liabilities of the Group is as follows: Fixed rate financial liabilities Floating rate financial liabilities Financial liabilities on which no interest is paid Financial liabilities 2017 £’000 1,836 156,216 165,185 323,237 2016 £’000 2,705 39,109 128,938 170,752 122 McColl’s Retail Group plc Annual Report and Accounts 2017 The floating rate financial liabilities comprise a sterling designated working capital facility and hire purchase borrowings. The interest rate profile of the financial assets of the Group is as follows: Financial assets on which no interest is paid 2017 £’000 54,692 2016 £’000 42,678 If interest rates had been 0.5% higher during the period ended 26 November 2017, with all other variables held constant, the post-tax profit for the period would have been approximately £339,000 lower (2016: £300,000 lower) as a result of higher interest expense. Liquidity risk Liquidity risk arises from the Group’s management of working capital and the finance charges on its debt instruments and repayments of principal. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. Management carries out daily cash forecasts covering the next three to four periods. In addition management considers liquidity as part of the annual budgeting and long-term planning process. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of overdrafts and credit facilities to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. Maturity of financial liabilities The maturity profile of the Group’s financial liabilities based on the remaining period at the balance sheet date to the contractual maturity date, was as follows: Up to 3 months or on demand In 3 – 12 months In more than one year but not more than two years In more than two years but not more than five years In more than five years 2017 £’000 155,268 1,349 3,561 162,778 282 323,238 2016 £’000 128,526 1,208 2,047 38,971 – 170,752 The disclosures above are the contractual undiscounted cash flows and exclude unamortised finance costs. Strategic report Governance Financial statements Capital disclosures The Group’s objectives when maintaining capital are to safeguard the entity’s ability to continue as a going concern and to provide an adequate return to shareholders. Capital comprises the Group’s equity i.e. share capital including share premium and retained earnings, excluding pension asset and liability. The Group’s net debt to capital ratio is as follows: Net debt Total equity (as defined above) Debt to capital ratio 2017 £’000 142,247 135,651 1.05 2016 £’000 37,019 134,404 0.28 Borrowing facilities The Group had certain borrowing facilities available to it for general working capital requirements of which £57,000,000 has been drawn at 26 November 2017 (2016: £37,000,000). Credit risk Given the nature of the Group’s operations, credit risk is not considered significant and arises mainly from cash deposits held with banks and financial institutions which have a good credit rating. Credit risk also arises from trade and other receivables which comprise amounts due from credit card institutions and rebates due from suppliers. Set out below is a comparison by category of carrying values and fair values of all the Group’s financial assets and financial liabilities: Financial liabilities Trade and other short-term payables Hire purchase borrowings Long-term borrowings Long-term payables Financial assets Other investments carried at cost Classified as loans and receivables Short-term receivables Cash and short-term deposits 26 November 2017 27 November 2016 Carrying value £’000 Fair value £’000 Carrying value £’000 Fair value £’000 (154,818) (3,552) (154,500) (10,368) (154,818) (3,552) (154,500) (10,368) (323,238) (323,238) (128,123) (4,815) (37,000) (814) (170,752) (128,123) (4,815) (37,000) (814) (170,752) 36 36 18 18 40,393 14,273 54,702 40,393 14,273 54,702 38,903 3,757 42,678 38,903 3,757 42,678 The long-term rating for all financial institution counter parties ranges from AAA to Baa1 per Moody’s rating scale. 123 Financial statements continued Notes to the financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 31 Retirement benefit schemes The Group accounts for pensions in accordance with IAS19 revised. The Group operates two defined benefit pension schemes in the UK, the TM Group Pension Scheme and the TM Pension Plan, in addition to several defined contribution schemes which require contributions to be made to separately administered funds. Pension costs for defined contribution schemes were £1,559,000 (2016: £1,409,000). The two defined benefit pension schemes are subject to the UK regulatory framework for pensions, including the Scheme Specific Funding requirements. The schemes are operated under trust and, as such, the trustees of the schemes are responsible for operating the schemes and they have a statutory responsibility to act in accordance with the Trust Deed and Rules, in the best interest of the beneficiaries of the schemes, and UK legislation (including Trust Law). The nature of the schemes exposes the Group to the risk of paying unanticipated additional contributions to the schemes in times of adverse experience. The most financially significant risks are likely to be: • Members living for longer than expected; • Higher than expected actual inflation; • Lower than expected investment returns; and • The risk that movements in the value of the schemes’ liabilities are not met by corresponding movements in the value of the schemes’ assets The sensitivity analysis disclosed is intended to provide an indication on the impact on the value of the schemes’ liabilities of the risks highlighted. The ongoing funding position of the schemes are formally assessed on a triennial basis by an independent qualified actuary. The results of the valuation are used by the Group and the trustees of the schemes to agree a contribution schedule as required. Further details are set out in the valuation documentation. The last completed triennial full actuarial valuation of the schemes was carried out at 31 March 2016. Deficit repair contributions were agreed at £944,000 p.a. from 1 April 2017, £1,150,000 p.a. from 1 April 2018, and £1,400,000 p.a. from 1 April 2019 to November 2025, index-linked, and subject to review at future valuations. Additional contributions were agreed towards the costs of running the schemes. The figures for this financial information have been based, in accordance with IAS19, on valuations using the projected unit method. 124 McColl’s Retail Group plc Annual Report and Accounts 2017 The disclosures are based upon the preliminary valuation of the schemes which were carried out as at 31 March 2016, updated to 26 November 2017 by qualified independent actuaries. The main assumptions when valuing the assets and liabilities of the schemes under IAS19 revised are as follows: RPI inflation CPI inflation Rate of increase in pensionable salaries Rate of increase to pensions in payment: 5% LPI 2.5% LPI Discount rate Group pension schemes 2017 %pa 3.15 2.15 n/a 3.05 2.15 2.60 2016 %pa 3.25 2.25 n/a 3.15 2.20 2.90 None of the Group’s own financial instruments or properties, either held or occupied by the Group, are held as assets within either schemes. Demographic assumptions Life expectancy of a pensioner aged 65 – male Life expectancy of a pensioner aged 65 – female Life expectancy at age 65 for someone aged 45 – male Life expectancy at age 65 for someone aged 45 – female Notes to the balance sheet Fair value of scheme assets Present value of funded scheme obligations Net pension asset/(liability) TM Group Pension Scheme TM Pension Plan 2017 years 2016 years 2017 years 2016 years 87.0 88.9 88.5 90.6 87.0 89.0 89.4 90.6 87.2 88.9 88.4 90.5 87.1 88.8 89.5 90.4 TM Group Pension Scheme TM Pension Plan 2017 £’000 89,097 (75,488) 13,609 2016 £’000 89,249 (78,303) 10,946 2017 £’000 48,104 (51,456) (3,352) 2016 £’000 46,791 (51,635) (4,844) On its balance sheet, the Group recognises £13,609,000 surplus in respect of the TM Group Pension Scheme. Under IAS 19, the Group as employer is allowed to do this as it has unconditional right to any surplus once the last Group benefits have been paid. Notes to the income statement Current service cost including administration expenses Net interest on defined benefit asset Total included in ‘staff costs’ TM Group Pension Scheme TM Pension Plan 2017 £’000 290 (319) (29) 2016 £’000 299 (357) (58) 2017 £’000 2016 £’000 284 128 412 383 108 491 TM Group Pension Scheme TM Pension Plan Recognition of defined benefit obligation Opening defined benefit obligation Service costs Interest cost on defined benefit obligation Losses due to changes in demographic assumptions Losses due to changes in financial assumptions Losses/(gains) due to plan experience Benefits paid including expenses Closing defined benefit obligation Notes to the statement of comprehensive income (SCI) Return on assets excluding amounts included in net interest Losses due to changes in demographic assumptions Gains due to changes in financial assumptions Gains due to plan experience Total recognised in SCI 2017 £’000 3,910 1,095 (2,415) (339) 2,251 2016 £’000 2017 £’000 2016 £’000 7,137 3,070 3,462 – 268 – Recognition of defined benefit obligation (7,349) 841 629 (1,641) (909) 788 (5,705) 497 (1,746) Opening fair value of scheme assets Interest income on scheme assets Employer contributions Return on assets excluding amounts included in net interest Benefits paid including expenses Closing fair value of scheme assets Strategic report Governance Financial statements TM Group Pension Scheme TM Pension Plan 2017 £’000 78,303 290 2016 £’000 73,479 299 2017 £’000 51,635 284 2016 £’000 47,385 383 2,182 2,510 1,438 1,623 – – – – 1,320 339 (6,946) 75,488 7,349 (841) (4,493) 78,303 1,373 909 (4,183) 51,456 TM Group Pension Scheme TM Pension Plan 2017 £’000 89,249 2,501 383 3,910 (6,946) 89,097 2016 £’000 83,285 2,867 453 7,137 (4,493) 89,249 2017 £’000 46,791 1,310 1,116 3,070 (4,183) 48,104 5,705 (497) (2,964) 51,635 2016 £’000 43,701 1,515 1,077 3,462 (2,964) 46,791 125 Financial statements continued Notes to the financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 31 Retirement benefit schemes continued The Group expects to contribute £297,000 to the TM Group Pension Scheme and £1,318,000 to the TM Pension plan in the period ended 25 November 2018. Policy for recognising actuarial gains and losses The Group recognises actuarial gains and losses immediately in the statement of comprehensive income. The major categories of scheme assets as a percentage of total scheme assets are as follows: Sensitivity analysis TM Group Pension Scheme TM Pension Plan Equity securities Debt securities – Corporate Debt securities – Government Real estate Cash and cash equivalents 2017 £’000 623 57,012 25,655 4,207 1,600 89,097 TM Group Pension Scheme 2017 % 1% 63% 29% 5% 2% 100% 2016 £’000 15,736 42,010 20,336 4,022 7,145 89,249 2016 % 18% 46% 23% 5% 8% 100% Change in assumptions compared with 26 November 2017 and 27 November 2016 actuarial assumptions 0.5% decrease in discount rate 1 year increase in member life expectation 0.5% decrease in inflation (including impact of pension increases) Change in actuarial value of liabilities on 2017 £’000 Change in actuarial value of liabilities on 2016 £’000 Change in actuarial value of liabilities on 2017 £’000 Change in actuarial value of liabilities on 2016 £’000 5,355 3,020 2,351 5,544 3,132 (2,297) 4,071 2,058 2,746 4,018 2,065 (2,467) The sensitivities disclosed are calculated using approximate methods taking into account the weighted average duration of the schemes’ liabilities (13 years for the TM Group Pension Scheme and 14 years for the TM Pension Plan). This is the same approach as in previous years. The major categories of scheme assets as a percentage of total scheme assets are as follows: Equity securities Debt securities – Corporate Debt securities – Government Real estate Cash and cash equivalents 2017 £’000 608 23,802 10,510 11,905 1,279 48,104 TM Group Pension Plan 2017 % 1% 49% 22% 25% 3% 100% 2016 £’000 21,286 14,610 4,925 4,022 1,948 46,791 2016 % 45% 31% 11% 9% 4% 100% The investment strategy of the schemes is driven by their liability profiles. The assets of the schemes are managed by an independent pension and investment consultant. The schemes invest in different types of bonds (including corporate and government bonds) in order to align movements in the value of their assets with movements in their liabilities arising from changes in market conditions. 126 McColl’s Retail Group plc Annual Report and Accounts 2017 32 Share-based payments The Group makes equity settled share awards to Executive Directors and employees under two different share option plans. Further details of the plans and amounts recognised in respect of these are provided below: Long-term incentive plan (LTIP) Scheme details and movements The plan provides for annual awards of performance shares to eligible participants. Vesting is based on 3-year performance. Executive Directors’ vested shares will be subject to an additional 2-year holding period before being released to participants. Options are exercisable at a price of £0.001. The Remuneration Committee has discretion to reduce any un-vested long-term incentive awards (including those in a holding period), or to vary the opportunities for future awards, in case of serious financial misstatement or gross misconduct. In extreme cases of gross misconduct, the Committee may claw back vested long-term incentive awards. Participants are eligible to receive cash or shares equal to the value of dividends that would have been paid over the vesting period on shares that vest. Awards will vest on achievement of financial performance measures, measured over a three- year performance period, to include both earnings per share (EPS) and total shareholder return (TSR). EPS will receive a weighting in the LTIP of at least 50%. For all grants to date the weightings on EPS and TSR were 70% and 30% respectively. TSR will be measured on a relative basis against a relevant peer Group. Other measures may be considered in future years to help capture the strategic goals of the business and may be used in conjunction with these metrics. Nothing will vest below threshold. 25% of each element will vest for achievement of threshold performance under each metric, then increase on a straight-line basis to full vesting for achieving stretch performance. The Committee has discretion to adjust the formulaic LTIP award downwards (or upwards with shareholder consultation), within the limits of the plan, to ensure alignment of pay with the underlying performance of the business. Strategic report Governance Financial statements The movements in the number of share options during the period were as follows: Outstanding, start of period Granted during the period Forfeited during the period Outstanding, end of period 2017 Number 1,410,740 778,221 (200,751) 1,988,210 2016 Number 607,431 803,309 – 1,410,740 The movements in the weighted average exercise price of share options during the period were as follows: Outstanding, start of period Granted during the period Forfeited during the period Outstanding, end of period 2017 £’000 1.58 1.86 1.48 1.70 2016 £’000 1.48 1.68 – 1.58 No share options were exercised during the period. Outstanding share options Details of share options outstanding at the end of the period are as follows: Weighted average exercise price (£) Number of share options outstanding Expected weighted average remaining life (years) The contractual weighted average remaining life is 1.63 years. The exercise price range is £1.48 to £1.86. 2017 1.70 1,988,210 1.63 2016 1.58 1,410,740 1.13 Fair value of options granted The weighted average fair value of options granted during the period at measurement date was £nil (2016: £nil). The weighted average fair value per TSR unit (excluding dividends) of options granted during the period at measurement date was £1.04. 127 Financial statements continued Notes to the financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 32 Share-based payments continued The following table gives the assumptions applied to the options granted in the respective periods shown. No assumption has been made to incorporate the effects of expected early exercise. The main inputs are set out in the table below. The date of grant of the options was 15 March 2017 (2016: 11 April 2016 and 6 April 2017). Exercise price of option (£) Share price at date of grant (£) Expected volatility (%) Vesting period in years Option life in years Expected life of option in practice in years Expected dividends, expressed as a dividend yield (%) Risk-free interest rate (%) Number of employees subject to option grant Number of shares covered by option 2017 1.86 1.86 35.00 3.00 3.00 3.00 5.48 0.06 9.00 778,221 2016 1.68 1.68 33.46 3.00 3.00 3.00 6.08 0.33 6.00 803,309 2015 1.49 1.49 26.50 3.00 3.00 3.00 – 0.68 1.00 406,680 Volatility is a measure of the amount by which a price is expected to fluctuate during a period. This is based on an historical analysis of the volatility of McColl’s total return to shareholders as measured daily over a historic period commensurate with the remaining performance period at date of grant. Risk free rate is the yield to maturity on the date of grant on zero-coupon UK Government bond with a term commensurate with the remaining performance period at date of grant. McColl’s embedded performance is based on TSR performance banked over the period from the start of the averaging period to the date of grant. Comparators embedded performance is based on the TSR performance banked by each LTIP comparator over the period from the start of the averaging period to the date of grant. Correlation is based on an historical analysis of the average TSR correlation observed across the LTIP comparator Group as measured fortnightly over a historic period commensurate with the remaining performance period at date of grant. The fair value of services received during the period were the tenure of employment. 128 McColl’s Retail Group plc Annual Report and Accounts 2017 IFRS 2 requires that TSR-vesting shares under McColl’s LTIP awards be expensed based on fair value, taking into account the probability of achieving the market-based vesting condition (relative TSR). The probability of achieving the vesting condition is influenced by the performance already delivered between the start of the share price averaging period and the date of grant. McColl’s has used a Monte-Carlo simulation model to determine the grant- date fair value of performance shares for the TSR element of the scheme. Each Monte-Carlo iteration calculates the future value of a performance share by projecting forward a future TSR scenario for each of its TSR comparators. Valuations are based on the average of 10,000 iterations of the Monte-Carlo model. Charge/credit arising from share-based payments The total charge for the year for share-based payments was £392,818 (2016: £nil), of which £392,818 (2016: £nil) related to equity-settled share-based payment transactions. The carrying value of the liability arising from share-based payments was £392,818 (2016: £nil). Group share option scheme (CSOPS) Scheme details and movements The scheme began operation in August 2015. The scheme meets the criteria of an equity settled share-based payment as the entity receives goods or services as consideration for its own equity instruments (including shares or share options). Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the date of grant is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Performance conditions are 100% dependent on reaching an EPS growth targets which are consistent with LTIP performance conditions, these are detailed in the remuneration report on page 81. EPS is a non-market based vesting condition and therefore fair value is determined based upon the probability of achieving the target. Strategic report Governance Financial statements The movements in the number of CSOP share options during the period were as follows: Outstanding, start of period Granted during the period Forfeited during the period Outstanding, end of period 2017 Number 287,958 176,064 (24,687) 439,355 2016 Number 160,455 152,106 (24,603) 287,958 The movements in the weighted average exercise price of CSOP share options during the period were as follows: 33 Related party transactions Only the Directors are deemed to be key management personnel. All transactions between Directors and the Group are on an arm’s length basis and no period end balances have arisen as a result of these transactions. Salaries and other short-term employee benefits Share-based payments 2017 £’000 1,793 228 2,021 2016 £’000 2,068 – 2,068 Outstanding, start of period Granted during the period Forfeited during the period Outstanding, end of period 2017 £’000 1.57 1.86 1.62 1.68 2016 £’000 1.48 1.66 1.52 1.57 There were no material transactions or balances between the Group and its key management personnel or members of their close family. 34 Subsequent events Management has evaluated subsequent events through 18 February 2018, which is the date the consolidated financial statements were available to be issued. There were no subsequent events that required adjustment to, or disclosure in, the Group financial statements. No options were exercised during the period. Outstanding share options Details of share options outstanding at the end of the period are as follows: Weighted average exercise price (£) Number of share options outstanding Expected weighted average remaining life (years) The contractual weighted average remaining life is 1.54 years. The exercise price range is £1.48 to £1.86. 2017 1.68 439,355 1.54 2016 1.52 287,958 1.05 Charge/credit arising from share-based payments The total charge for the year for CSOP share-based payments was £43,050 (2016: £nil), of which £43,050 (2016: £nil) related to equity-settled share-based payment transactions. The carrying value of the liability arising from share-based payments was £43,050 (2016: £nil). 129 Financial statements continued Company statement of financial position for the 52 week period from 28 November 2016 to 26 November 2017 Company statement of changes in equity for the 52 week period from 28 November 2016 to 26 November 2017 Non-current assets Investments Total non-current assets Current assets Trade and other receivables Total current assets and net assets Total assets Shareholders’ equity Equity share capital Share premium account Retained earnings1 Note C4 C5 C6 C6 2017 £’000 77 77 59,367 59,367 59,444 115 12,579 46,750 59,444 2016 £’000 77 77 68,093 68,093 68,170 115 12,579 55,476 68,170 1 Included within Retained earnings and other reserves is profit of £3,022,000 (2016: £3,166,000). These financial statements of McColl’s Retail Group plc registered number 08783477 were approved and authorised for issue by the Board on 18 February 2018 and signed on its behalf by: As at 28 November 2016 Profit for the period Dividends paid As at 26 November 2017 As at 30 November 2015 Share premium transfer to retained earnings Issue of share capital Profit for the period Dividends paid As at 27 November 2016 Called up share capital £’000 115 – – 115 Called up share capital £’000 105 10 – – 115 Share premium account £’000 12,579 – – 12,579 Share premium account £’000 47,836 (47,836) 12,579 – – 12,579 Profit and loss account £’000 55,476 3,022 (11,748) 46,750 Profit and loss account £’000 15,510 47,836 – 3,166 (11,036) 55,476 Total £’000 68,170 3,022 (11,748) 59,444 Total £’000 63,451 – 12,589 3,166 (11,036) 68,170 Simon Fuller Director 130 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements Notes to the Company financial statements for the 52 week period from 28 November 2016 to 26 November 2017 C1. Basis of preparation The Company’s financial period is the period from 28 November 2016 to 26 November 2017. The parent company financial statements have been prepared in accordance with Financial Reporting Standard 101, ‘Reduced Disclosure Framework’ (FRS 101) and the Companies Act 2006 (the ‘Act’). FRS 101 sets out a reduced disclosure framework for a ‘qualifying entity’ as defined in the standard which addresses the financial reporting requirements and disclosure exemptions in the individual financial statements of qualifying entities that otherwise apply the recognition, measurement and disclosure requirements of EU-adopted IFRS. As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to business combinations, financial instruments, capital management, presentation of comparative information in respect of share capital, tangible fixed assets and intangible assets, presentation of a cash flow statement and related notes, standards not yet effective, impairment of assets, disclosures in respect of the compensation of key management personnel and related party transactions. Where required, equivalent disclosures are given in the consolidated financial statements of McColl’s plc. The parent company financial statements are prepared on a going concern basis as set out in note 2 of the consolidated financial statements of the Group. The Directors have taken advantage of the exemption available under Section 408 of the Companies Act 2006 and not presented an Income statement or a statement of comprehensive income for the Company alone. A summary of the Company’s significant accounting policies is set out below: Deferred taxation Deferred tax is accounted for on the basis of temporary differences arising from differences between the tax base and accounting base of assets and liabilities. Deferred tax is recognised for all temporary differences, except to the extent where a deferred tax liability arises from the initial recognition of goodwill or from the initial recognition of an asset or a liability in a transaction that is not a business combination and, at the time of transaction, affects neither accounting profit nor taxable profit. It is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised only to the extent that the Directors consider that, on the basis of all available evidence, it is probable that there will be suitable future taxable profits from which the future reversal of the underlying differences can be deducted. Deferred tax is charged or credited to the income statement, except when it relates to items charged or credited directly to equity or other comprehensive income, in which case the deferred tax is also dealt with in equity or other comprehensive income respectively. C3. Staff costs including Directors’ remuneration The average number of employees (all Executive Directors of the Company) during the financial year was three (2016: three). The Schedule 5 requirements of SI 2008/410 for Executive Directors’ remuneration are included within the Remuneration Report on pages 68 to 85. C2. Significant accounting policies Investments Fixed asset investments are shown at cost less provision for impairment. Taxation Current taxation Current tax is provided at amounts expected to be paid using the tax rates and laws that have been enacted or substantively enacted at the balance sheet date. Current tax is charged or credited to the income statement, except when it relates to items charged to equity or other comprehensive income, in which case the current tax is also dealt with in equity or other comprehensive income respectively. 131 Financial statements continued Notes to the Company financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 C4. Investments Shares in subsidiaries Investments 2017 £’000 77 2016 £’000 77 The carrying value of the investment in subsidiary undertakings has been reviewed at 26 November 2017 and no impairment charge is required. The following information relates to all UK subsidiary undertakings of the Group during the period: All subsidiaries are held by the Company unless stated. All subsidiaries are registered at the same address as McColl’s Retail Group plc, except for those registered in Scotland, whose registered address is Unit 11, The Avenue, Newton Mearns, Glasgow G77 6AA. Principal activity Dormant Dormant Property Company Retailing Retailing Retailing Dormant Dormant Dormant Corporate activities Dormant Intermediate Holding Co Dormant Dormant Corporate activities Dormant Retailing Dormant Intermediate Holding Co Retailing Dormant Dormant Dormant Registered office Scotland Scotland Scotland England and Wales Scotland England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Scotland England and Wales England and Wales England and Wales Proportion of ownership interest and voting rights held 2017 Proportion of ownership interest and voting rights held 2016 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Name of subsidiary A Harris Limited Birrell Limited Bracklands Limited Charnwait Management Limited Clark Retail Limited Dillons Stores Limited Farthingmist Limited Forbouys Limited Forbouys Services Limited Hargreaves Vending Limited ISS Limited Key Food Stores Limited Lavells Limited Lewis Meeson Limited Marshell Group Limited Martin CTN Group Limited Martin McColl Limited Martin McColl Group Limited Martin McColl Retail Limited Martin Retail Group Limited Martin the Newsagent Limited NSS Newsagents Limited NSS Newsagents Retail Limited 132 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements Name of subsidiary Price Smasher Limited RS McColl (UK) Limited Smile Holdings Limited Smile Property Limited Smile Stores Limited Thistledove Limited TM Coffee Limited TM Group Limited TM Group Holdings Limited TM Pension Trustees Limited TM Retail Limited TM Vending Limited Tog Limited Trents Leisure Limited Trimley Stores Limited Principal activity Intermediate Holding Co Dormant Intermediate Holding Co Dormant Retailing Intermediate holding Co Dormant Dormant Predecessor Holding Co Dormant Dormant Corporate Activities Intermediate Holding Co Dormant Dormant Registered office England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Proportion of ownership interest and voting rights held 2017 Proportion of ownership interest and voting rights held 2016 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% From the above table the following subsidiaries will take advantage of the audit exemption set out within section 479A of the Companies Act 2006 for the year ended 26 November 2017: Bracklands Limited, Charnwait Management Limited, Clark Retail Limited, Dillons Stores Limited, Martin McColl Limited, Martin McColl Retail Group Limited, Martin Retail Group Limited, Smile Stores Limited, Thistledove Limited, TM Group Holdings Limited, TM Vending Limited. All the subsidiaries are included on the Groups consolidated financial statements for the period. The Group will guarantee the debts and liabilities of these below UK subsidiaries at the balance sheet date in accordance with section 479C of the Companies Act 2006. 133 Financial statements continued Notes to the Company financial statements continued for the 52 week period from 28 November 2016 to 26 November 2017 C5. Trade and other receivables Amounts owed by Group undertakings C6. Authorised, issued and fully paid share capital Issued ordinary shares of £0.001 each as at 28 November 2016 Issued ordinary shares of £0.001 each as at 26 November 2017 2017 £’000 59,367 2016 £’000 68,093 Number of shares 115,172,774 115,172,774 Share capital £’000 Share premium £’000 115 115 12,579 12,579 C7. Dividends paid and proposed The Board has recommended a final dividend of 6.9 pence per share (2016: 6.8p), totalling £7,947,000, subject to shareholder approval at the Annual General Meeting to be held on 12 April 2018. The final dividend will be paid on 1 June 2018 to those shareholders on the register at the close of business on 20 April 2018. The payment of this dividend will not have any tax consequences for the Group. The interim dividend, declared and paid, was 3.4 pence per share (2016: 3.4p), totalling £3,916,000. Declared and paid during the year: Equity dividends on ordinary shares: Final dividend for 2016: 6.8p (2015: 6.8p) Interim for 2017: 3.4p (2016: 3.4p) Dividends paid Proposed for approval by shareholders at the AGM: Final dividend for 2017: 6.9p (2016: 6.8p) 2017 £’000 2016 £’000 7,832 3,916 11,748 7,120 3,916 11,036 7,947 7,120 The proposed final dividend is subject to approval by shareholders passing a written resolution and accordingly has not been included as a liability in these financial statements. 134 McColl’s Retail Group plc Annual Report and Accounts 2017 Strategic report Governance Financial statements Glossary of terms Introduction In the reporting of financial information, the Directors have adopted various Alternative Performance Measures (APMs) of financial performance, position or cash flows other than those defined or specified under International Financial Reporting Standards (IFRS). These measures are not defined by IFRS and therefore may not be directly comparable with other companies’ APMs, including those in the Group’s industry. APMs should be considered in addition to IFRS measures and are not intended to be a substitute for IFRS measurements. Purpose The Directors believe that these APMs provide additional useful information on the underlying performance and position of McColl’s. APMs are also used to enhance the comparability of information between reporting periods by adjusting for non-recurring or uncontrollable factors which affect IFRS measures, to aid the user in understanding McColl’s performance. Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive-setting purposes and have remained consistent with prior year. The key APMs that the Group has focused on this year are as follows: Like-for-like sales (LFL): This is a widely used indicator of a retailer’s current trading performance and is a measure of growth in sales from stores that have been open for at least a year. Sales from stores that have traded throughout the whole of the current and prior periods, and including VAT but excluding sales of fuel, lottery, mobile top-up, gift cards and travel tickets. Adjusted EBITDA excluding property-related items: This profit measure shows the Group’s Earnings Before Interest, Tax, Depreciation and Amortisation adjusted for both Property gains and losses and other adjusting items. Property gains and losses: are incomes and costs that arise from events and transactions in relation to the Groups property and not from the principal activity of the Group, i.e. that of an operator of convenience and newsagent stores. Adjusting items: relate to costs or incomes that derive from events or transactions that fall within the normal activities of the Group but which, individually or, if of a similar type, in aggregate, are excluded from the Group’s adjusted profit measures due to their size and nature in order to reflect management’s view of the performance of the Group. Adjusted Operating Profit: Operating Profit before the impact of adjusting items as explained above. Adjusted Earnings per share: Earnings per share before the impact of adjusting items. APM Income statement Revenue measures Closest equivalent IFRS measure Note reference for reconciliation Definition and purpose Sales growth No direct equivalent Not applicable Growth in sales is a ratio that measures year-on-year movement in Group sales for continuing operations for 52 weeks. It shows the annual rate of increase in the Group’s sales and is considered a good indicator of how rapidly the Group’s core business is growing. Sales mix No direct equivalent Not applicable The relative proportion or ratio of products sold compared to the same period in the prior year. Like-for-like (LFL) No direct equivalent Not applicable Profit measures Adjusted operating profit excluding property-related items Operating profit Note 6 Like-for-like is a measure of growth in Group sales from stores that have been open for at least a year (but excludes prior year sales of stores closed during the year). It is a widely used indicator of a retailer’s current trading performance and is important when comparing growth between retailers that have different profiles of expansion, disposals and closures. Operating profit before adjusting items is the headline measure of the Group’s performance. It is based on operating profit before the impact of certain costs or incomes, including property-related items, that derive from events or transactions that fall within the normal activities of the Group, but which are excluded by virtue of their size and nature in order to reflect management’s view of the performance of the Group. This is a key management incentive metric. 135 Glossary of terms continued APM Gross margin Closest equivalent IFRS measure Note reference for reconciliation No direct equivalent Not applicable Profits/(losses) arising on property-related items No direct equivalent Not applicable Adjusted net finance costs Finance costs Note 8 Adjusted EBITDA No direct equivalent Note 6 No direct equivalent Note 11 Basic adjusted Earnings per share (EPS) Diluted adjusted earnings per share Balance sheet measures Net debt Definition and purpose Gross margin is calculated as gross profit before adjusting items divided by revenue. Progression in gross margin is an important indicator of the Group’s operating efficiency. Profits/(losses) arising on property-related items relates to the Group’s property activities including; gains and losses on disposal of property assets, sale and lease back of freehold interests; costs resulting from changes in the Group’s store portfolio and income/(charges) associated with impairment of non-trading property and related onerous contracts. These items are disclosed separately to clearly identify the impact of these items versus the other operating expenses related to the core retail operations of the business. They can be one-time in nature and can have a disproportionate impact on profit between reporting periods. Total finance costs before adjusting items is the net finance costs adjusted for non-recurring one-off items due to their size and nature. This profit measure shows the Group’s Earnings Before Interest, Tax, Depreciation and Amortisation adjusted for both Property gains and losses and other adjusting items, in order to provide shareholders with a measure of true underlying performance of the business. This relates to profit after tax before adjusting items divided by the basic weighted average number of shares, in order to provide shareholders with a measure of true underlying performance of the business. Diluted earnings per share Note 11 The difference between basic and diluted metric is the impact of the dilutive effect of share options in existence. Borrowings less cash and related hedges Note 24 Net debt comprises bank and other borrowings, finance lease payables, and net interest receivables/payables, offset by cash and cash equivalents and short-term investments. It is a useful measure of the progress in generating cash and strengthening of the Group’s balance sheet position and is a measure widely used by credit rating agencies. Other Capital expenditure, excluding the acquisition: The additions to property, plant and equipment and intangible assets that do not relate to the acquisition of, or further investment in, the 298 stores acquired from the Co-op. Capital expenditure (Capex): The additions to property, plant and equipment and intangible assets. FTE: Full-time equivalents. RPI: Retail Price Index. CPI: Consumer Price Index. LPI: Limited Price Inflation. Total Shareholder Return (TSR): The notional annualised return from a share, measured as the percentage change in the share price, plus the dividends paid with the gross dividends, reinvested in McColl’s shares. This is measured over both a one and three year period. Grocery sales: This includes ambient, fresh, frozen and household groceries, and food-to-go, but excludes impulse categories (including confectionery, crisps and snacks, soft drinks and ice cream), general merchandise, news and magazines, and services. 136 McColl’s Retail Group plc Annual Report and Accounts 2017 Contacts, addresses and shareholder information Contacts and addresses Company registration number 08783477 Head office McColl’s Retail Group plc McColl’s House Ashwells Road Brentwood Essex CM15 9ST Telephone: 01277 372916 Email: investor.relations@mccolls.co.uk ISIN: GB00BJ3VW957 www.mccollsplc.co.uk/investor Shareholder information Corporate broker Numis Securities Limited The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT Legal advisors Travers Smith LLP 10 Snow Hill London EC1A 2AL Independent auditor Deloitte LLP 2 New Street Square London EC4A 3BZ Company Secretary Bernadette Young McColl’s Retail Group plc McColl’s House Ashwells Road Brentwood Essex CM15 9ST Registrar Link Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Telephone – UK: 0871 664 0300 from overseas, call +44 (0) 371 664 0300 Calls cost 12p per minute plus your phone company’s access charge. Calls outside the United Kingdom will be charged at the applicable international rate. We are open between 09.00 – 17.30, Monday to Friday excluding public holidays in England and Wales By email: enquiries@linkgroup.co.uk Web portal: www.signalshares.com Designed and produced by Radley Yeldar www.ry.com Printed by Pureprint Group using their environmental print technology, a guaranteed, low carbon, low waste, independently audited process that reduces the environmental impact of the printing process. Pureprint Group is a CarbonNeutral® company and is certified to Environmental Management System, ISO 14001 and registered to EMAS, the Eco Management and Audit Scheme. McColl’s Retail Group plc McColl’s House Ashwells Road Brentwood Essex CM15 9ST T: 01277 372916 www.mccollsplc.co.uk 

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