Another record set of results Annual Report 2014 The Restaurant Group plc operates over 470 restaurants and pub restaurants. Its principal trading brands are Frankie & Benny’s, Chiquito and Coast to Coast. The Group also operates Pub restaurants and a Concessions business which trades principally at UK airports. Introduction Overview Financial highlights History Strategic report Chairman’s statement Review of Operations Financial review Governance Board of Directors Report of the Directors Corporate responsibility Directors’ remuneration report Audit Committee report Financial statements Independent auditor’s report Accounting policies for the consolidated accounts Consolidated income statement Consolidated statement of changes in equity Consolidated balance sheet Consolidated cash flow statement Notes to the accounts Company financial statements – Company balance sheet – Accounting policies and basis of preparation Group financial record Shareholder information 01 02 16 18 22 26 28 36 39 53 55 59 63 64 65 66 67 86 86 87 89 90 The Restaurant Group plc Annual Report 2014 01 Financial highlights The Group had another strong performance in 2014 with significant growth in revenues, profits and cash flow: • Revenue increased to £635.2m (like-for-like sales +2.8%) • EBITDA increased to £117.0m • Profit before tax increased to £78.1m • EPS increased to 29.96p per share • Proposed full year dividend increased to 15.4p per share Operations strongly cash generative. Free cash flow £85.5m, up 11% Roll out continues: • 40 new sites opened in the period • 42-50 new sites targeted for 2015 Total revenues (£m) +10% Adjusted EBITDA (£m) +8.5% 635.2 579.6 532.5 454.0 487.1 89.7 95.5 83.4 117.0 107.8 10 11 12 13 14 10 11 12 13 14 Operating profit (£m) +7.4% 61.2 56.7 66.4 Profit before tax (£m) +7.4% 80.5 74.9 78.1 72.7 64.6 60.3 54.0 10 11 12 13 14 10 11 12 13 14 EPS (p) +7.0% 24.08 21.86 19.25 Dividend per share (p) +10% 29.96 28.02 15.40 14.00 11.80 10.50 9.00 10 11 12 13 14 10 11 12 13 14 OverviewStrategic reportGovernanceFinancial statements 02 Annual Report 2014 The Restaurant Group plc “Our objective over the coming years is to build on the firm foundations that are in place.” 1995 1st Frankie & Benny’s opens 2004 Name changed from City Centre Restaurants plc to The Restaurant Group plc £250m Annual turnover reaches £250m 2007 50th Chiquito opens Brunning & Price acquired 2001 Concessions Division launched Alan Jackson appointed Chairman 2005 Company exits from High Street business The Restaurant Group plc Annual Report 2014 03 2011 200th Frankie and Benny’s opens First Coast to Coast opens 2013 70th Chiquito opens 2008 350th restaurant opens 2012 £500m Annual turnover reaches £500m 2014 50th Pub opens Danny Breithaupt appointed Chief Executive Officer £600m Annual turnover exceeds £600m OverviewStrategic reportGovernanceFinancial statements 04 Annual Report 2014 The Restaurant Group plc “Frankie & Benny’s has become one of the best known casual dining brands in the UK.” www.frankieandbennys.com The Restaurant Group plc Annual Report 2014 05 Frankie & Benny’s brings together classic American and Italian style with food and drink that always provides great value for money. The kitchen buzzes with bustling activity as the chefs prepare dishes from our broad menu – pizzas, pastas, burgers, grills and other favourites – while, in typical stateside fashion, service at Frankie & Benny’s is second to none! Settle into a cosy booth to enjoy a casual family meal or a catch up with friends and observe the clatter and chatter of the open kitchen and the familiar classic 50’s and 60’s soundtrack playing in the background. The restaurant walls are filled with family snapshots and memorabilia showing life on the lower east side of the Big Apple, helping you into a “New York state-of-mind”. First opened in 1995 in Leicester, Frankie & Benny’s has become one of the best known casual dining brands in the United Kingdom, and trades successfully in leisure and retail locations, standalone sites and at seven airports. The estate comprises of 247 restaurants spread across the country from Aberdeen to St Austell. OverviewStrategic reportGovernanceFinancial statements247 restaurants19 openings in 2014 06 Annual Report 2014 The Restaurant Group plc “We specialise in great food, good times and fantastic cocktails.” www.chiquito.co.uk The Restaurant Group plc Annual Report 2014 07 Mexican for fun, fantastic food, amazing atmosphere – for a good time, guaranteed. The Chiquito menu offers a great range of authentic Mexican and “Tex-Mex” dishes in a lively environment, with fantastic music. The décor draws inspiration from Mexican architecture and Latin style. Some restaurants have a rustic and relaxed feel while others demonstrate the buzz and graphic energy of contemporary Mexico City. Chiquito favourite dishes include nachos, burritos, enchiladas and our signature sizzling fajitas, as well as the old favourites – burgers, ribs, salads and hand-cut steaks from the grill. We specialise in great food, good times and fantastic cocktails to ensure every meal is a fiesta. Chiquito is open for breakfast, lunch, lazy afternoons and lively evenings, so whether you’re out shopping, meeting friends after work or planning a party it’s the only place to be! Trading in the UK for over 20 years, Chiquito continues to attract a broad mix of young adults, couples, teenagers, families and large parties. 80 leisure, retail and stand-alone restaurants cover the UK with more openings planned. OverviewStrategic reportGovernanceFinancial statements80 restaurants8 openings in 2014 08 Annual Report 2014 The Restaurant Group plc “We offer the best of classic American food.” www.c2crestaurants.com The Restaurant Group plc Annual Report 2014 09 Coast to Coast takes its inspiration from the Lincoln Highway, which spans the United States of America from New York to San Francisco. This is reflected in our great range of authentic food and drinks, all served with superb hospitality and service. We offer the best of classic American food – Aberdeen Angus beef burgers, deep dish style Chicago pizzas, distinctive steaks, amazing seafood dishes, wraps and South-West American specials. Coast to Coast is more than just a restaurant, with a great bar serving speciality cocktails and a wide range of beers, spirits and traditional milkshakes. The music is an eclectic mix of Motown and American Rock, songs you may not have heard in a little while, but are absolutely guaranteed to lift your spirits and make you smile. We currently have 13 restaurants open and see significant opportunities to grow Coast to Coast into a great brand. OverviewStrategic reportGovernanceFinancial statements13 restaurants3 openings in 2014 10 Annual Report 2014 The Restaurant Group plc “Really great pubs are timeless…” www.brunningandprice.co.uk The Restaurant Group plc Annual Report 2014 11 Really great pubs are timeless, familiar and very British. Everybody knows what their perfect pub looks like. Each of ours has its own style and personality and you’ll always find a warm welcome, set against a backdrop of ageless interiors. Mostly set in beautiful rural or semi- rural locations, each pub has a ‘local’ feel and many are set in intriguing buildings with fascinating histories. We don’t want all our pubs to look and feel the same – instead we preserve the character of the building, which after all was what attracted us to the property in the first place. We serve a wide selection of cask ales which change frequently and always try to include a local brew or two. We have decent but not over the top wines and the essence of our freshly prepared food is classic British dishes complemented by more exotic influences from other parts of the world: what we believe is modern British cookery. Seasonal and local specials mean the menu always offers new choices alongside trusted favourites each time you visit. There’s friendly, engaging service from the moment you arrive, ensuring that all your needs are taken care of. We believe that, when done well, classic pubs will never go out of fashion and that opportunities to expand in the sector are available for experienced operators with the right offer for customers. OverviewStrategic reportGovernanceFinancial statements52 pubs3 openings in 2014 12 Annual Report 2014 The Restaurant Group plc “A market-leading reputation… with specialist operating knowledge” www.trgconcessions.co.uk The Restaurant Group plc Annual Report 2014 13 The Group’s Concessions business has a market-leading reputation for developing partnerships to deliver catering solutions that meet the needs of our clients and their customers. Currently operating from outlets in the UK’s busiest airports, other transport locations and shopping centres, we have more than 21 years of experience providing exceptional hospitality to the travelling public. Our specialist operating knowledge and flexibility ensures successful performance across our diverse brand portfolio, covering a wide range of popular categories including table service, counter service, sandwich shops, pubs and bars. To meet client and customer needs we deliver existing TRG brands, create bespoke concepts and establish partnerships to franchise brands from third parties as appropriate. Building on our track record of innovation, partnership and performance ahead of sector growth will ensure we remain a market leader in this exciting sector. OverviewStrategic reportGovernanceFinancial statements58 restaurants and bars7 openings in 2014 14 Annual Report 2014 The Restaurant Group plc Founded in London’s West End in 1979, Garfunkel’s is proud to be the original British café restaurant serving breakfast, lunch and dinner all day every day. Wake up to a traditional British fry-up or a warming bowl of porridge and great coffee, made just the way you like it. For lunchtime our salad bar really hits the spot, it is fast, it is fresh and you can make it any way you want to. And of course there are Garfunkel’s classics like rotisserie chicken, hand-battered fish and chips and tasty topped burgers fresh from the grill. Everything has been chosen because we just love the taste. Principally located across Central London, each Garfunkel’s restaurant offers a place to relax and take a break from the hustle and bustle outside, with a loyal following of visitors, local residents and workers who have been eating at Garfunkel’s for years. 15 restaurants “A truly great name in British restaurant brands.” www.garfunkels.co.uk The Restaurant Group plc Annual Report 2014 15 Over 470 restaurants across the UK… 07 55 70 29 23 44 57 32 47 108 East Anglia – 32 17 Frankie & Benny’s 06 Chiquito 02 Pub restaurants 06 TRG Concessions 01 Coast to Coast Midlands – 57 40 Frankie & Benny’s 11 Chiquito 01 Pub restaurants 02 TRG Concessions 03 Coast to Coast North West – 70 32 Frankie & Benny’s 10 Chiquito 08 TRG Concessions 19 Pub restaurants 01 Coast to Coast North East – 44 33 Frankie & Benny’s 09 Chiquito 02 Coast to Coast Scotland – 55 28 Frankie & Benny’s 10 Chiquito 02 Garfunkel’s 08 TRG Concessions 07 Coast to Coast Northern Ireland – 07 06 Frankie & Benny’s 01 Chiquito Wales – 23 14 Frankie & Benny’s 04 Chiquito 05 Pub restaurants South West – 29 19 Frankie & Benny’s 07 Chiquito 01 Garfunkel’s 02 TRG Concessions South East – 108 40 Frankie & Benny’s 15 Chiquito 20 Pub restaurants 28 TRG Concessions 05 Coast to Coast London (inside the M25) – 47 18 Frankie & Benny’s 07 Chiquito 12 Garfunkel’s 05 Pub restaurants 04 TRG Concessions 01 Coast to Coast OverviewStrategic reportGovernanceFinancial statements 16 Annual Report 2014 The Restaurant Group plc Chairman’s statement Investing in the next stage of growth “Like-for-like sales were 2.8% ahead of the previous year and I am very encouraged that this positive trend has continued into 2015.” Alan Jackson Chairman Over 470 restaurants40 new restaurants15.4pTotal dividend The Restaurant Group plc Annual Report 2014 17 The new financial year has started well with total sales growth of 9.5% and like-for-like sales growth of 2.5% for the first eight weeks of the year. We have an outstanding business with market leading brands across a range of segments in the eating out market and an experienced management team with real strength and depth. With these core strengths and an improving UK economy, I am confident that TRG is well placed to continue making further profitable progress in 2015 and over the coming years. Alan Jackson Chairman 27 February 2015 The Group has delivered another record set of results in the 2014 financial year with significant growth in revenues, profits and cash flow. These results have been achieved following more than a decade of consistent year on year growth in earnings, underscoring the strength of the Group’s business. Like-for-like sales were 2.8% ahead of the previous year and I am very encouraged that this positive trend has continued into 2015. We again increased our openings programme during 2014 with a total of 40 new restaurants opened in the year. Since 2009 we have increased the number of new site openings every year, and we fully expect this trend to continue going forward. We have excellent visibility on our opening programme over the next few years. During the year the Group passed a number of key milestones, with turnover exceeding £600m and the total number of restaurants in our portfolio increasing to over 470. The continued growth and success of the Group is the product of the hard work, experience and dedication of our Directors, senior management and staff. On behalf of the Board I would like to record our thanks and appreciation to all of our teams across the country. As a result of the strong financial performance in the year, the Board is recommending a final dividend of 9.3p per share to give a total for the year of 15.4p, an increase of 10% on the prior year. This dividend is covered almost two times by earnings per share, in line with our stated dividend policy. Subject to shareholder approval at the Annual General Meeting to be held on 14 May 2015, the final dividend will be paid on 8 July 2015 and the shares will be marked ex-dividend on 18 June 2015. Danny Breithaupt took over as Chief Executive of the Group on the 1 September 2014, following the retirement of Andrew Page. I am delighted to report that the transition has gone extremely smoothly and Danny has already clearly demonstrated that he is the right person to lead The Restaurant Group through the next stage of its evolution. During the year Sally Cowdry joined the Board as a non- executive Director and is making a valuable contribution to the work of the Board. Since the year-end we have announced that Debbie Hewitt will be joining the Board from 1 May as non-executive Director, further strengthening and broadening the skill base of the Board. OverviewStrategic reportGovernanceFinancial statements 18 Annual Report 2014 The Restaurant Group plc Review of Operations A clear strategy to deliver growth “The Group is in robust shape with strong brands and an excellent management team. Our objective over the coming years is to build on the firm foundations that are in place.” Danny Breithaupt Chief Executive Officer 19new Frankie & Benny’s restaurants opened this year+£500kraised for charity in 20148new Chiquito restaurants opened this yearMore than 1,300 new jobs created in 2014+2.8% increase in like-for-like sales The Restaurant Group plc Annual Report 2014 19 Introduction The Group is in robust shape with strong brands and an excellent management team. Our objective over the coming years is to build on the firm foundations that are in place. The Group’s strategy will continue to be focused on building like-for-like sales and the disciplined roll out of new sites. We intend to accelerate and broaden the expansion programme, as described in more detail later in this report. TRG has an excellent track record of delivering consistent year on year growth in cash flows and profit, combined with high returns on investment, and this will continue to be our focus. Building on the solid growth that has been achieved over the past decade, TRG delivered another year of profitable progress in 2014 with growth in sales, profits and cash flow as described in more detail in the financial review. Our people and our business TRG is a people business. We employ more than 15,000 people throughout the UK and during 2014 more than 1,300 new team members joined the Group. Our people and the culture within the Company are crucial factors in the continuing success of TRG. We are therefore putting in place a number of initiatives to make further improvements in this area, such as our “Proud to be TRG” and recently announced “Family Matters” employee engagement initiatives. Throughout the Group we aim to continually evolve and improve our offering in terms of food, service standards and facilities. Menus in all of our brands are reviewed on a regular basis to take account of evolving trends. We also aim to ensure that all of our menus have healthy options and to ensure we have something to match all of our customers’ requirements. As part of our ongoing health and safety assurance processes we regularly conduct testing of ingredients and facilities at our suppliers. The Group has an active programme of supporting charities with which we are proud to be involved. During 2014 the key charities we supported were Leukaemia and Lymphoma Research, Children’s Hospital Association Scotland and Caudwell Children. During the year we raised over £500,000 for these and other charities. In 2015 we are partnering with Rays of Sunshine, a charity for children with life limiting illnesses. Our brands Frankie & Benny’s (247 units) Frankie & Benny’s traded well during the year with growth in turnover and profit. During the year we introduced a number of menu initiatives, notably the introduction of a chicken section on the menu which has proved to be hugely successful. We also took further steps to strengthen the management team as the brand continues its rapid rate of growth. During the year we opened 19 new restaurants, reaching a total of almost 250, an increase of some 20% in the size of the estate in the last three years. As in previous years these are in a range of different locations including new developments, the extension of existing schemes and the conversion of units from other operators. Trading at our new openings has been strong and they are set to deliver excellent returns. We anticipate opening between 14 and 18 new Frankie & Benny’s in 2015. The strength of the Frankie & Benny’s brand, its breadth of appeal, high levels of customer recognition and strong family appeal all contribute to a consistent track record of success. This gives us great confidence about the continuing success and further roll out of this brand. Chiquito (80 units) Chiquito had an excellent year with strong growth in turnover and profits. Several years ago we made some significant management changes in this brand. This has been supplemented in the last 18 months by an evolution of both the fit out and the menu. The strong improvement in financial performance is clear testament to the success of these initiatives and we are now confident in increasing the rate of openings in Chiquito. During 2014 we opened eight new restaurants (compared to four in the previous year). These are trading superbly and are set to deliver strong returns. In 2015 we expect to open between eight and ten new Chiquito restaurants. Most of our Chiquito restaurants are co-located with Frankie & Benny’s, either as part of a new development or as a new site on a scheme where we already successfully trade with the Frankie & Benny’s brand. We are excited about the prospects for Chiquito and are confident that this is a style of cuisine which is becoming more mainstream and familiar across the UK. OverviewStrategic reportGovernanceFinancial statements 20 Annual Report 2014 The Restaurant Group plc Review of Operations continued Coast to Coast (13 units) Coast to Coast also had an excellent year financially with substantial increases in turnover and profit. Following its launch at the end of 2011 in Brighton, Coast to Coast is now a well established and successful part of the Group’s portfolio of brands. Most of our Coast to Coast restaurants are co-located with Frankie & Benny’s and in a number of cases both Frankie & Benny’s and Chiquito. It has a distinct market position and as a result we see negligible levels of cannibalisation in such co-located situations. Our location strategy for Coast to Coast tends to be on leisure and retail schemes in larger markets. We are also confident that the brand can work well in some UK city centre locations, following the successful Birmingham Broad Street opening at the end of 2013. During the year we opened three Coast to Coast restaurants all of which are performing well and set to deliver strong returns. In 2015 we expect to open between seven and ten Coast to Coast restaurants. We are also delighted to have secured our first Coast to Coast restaurant in an airport environment as part of the major redevelopment at Stansted, which will open during the first half of the year. Garfunkel’s (15 units) Garfunkel’s is a good business generating significant cash flows and excellent returns on investment. As other parts of the Group continue to grow rapidly, Garfunkel’s is becoming a smaller proportion of the total. We do not have any specific roll out strategy for Garfunkel’s, but will consider new sites on an opportunistic basis. Pub restaurants (52 units) Our Pub restaurant business had a very strong year with substantial increases in turnover and profits. The Pub business is focused on delivering exceptional food and drink in attractive buildings and locations and as a result has won a number of national and regional awards including the 2015 Good Pub Guide, Best Town Pub of the Year awarded to the Old Harker’s Arms in Chester. During the year we opened three new pubs, all of which are performing well and are set to deliver strong returns. In 2015 we expect to open between three and five new pubs. Our Pub business has the potential to grow over the medium-term to be a substantial business as a nationwide operator of high quality, food-led pubs. Concessions (58 units) Concessions had another really strong year with good growth in turnover and profits. We have a strong market position in most of the leading UK airports. During the year we opened seven new sites, including taking over all of the catering operations at Southampton Airport and opening the very successful Wondertree restaurant in the new Heathrow Terminal 2. We are delighted with the performance of our new openings this year all of which are set to deliver strong returns. In 2015 we expect to open between five and seven outlets in our Concessions business. This includes three outlets in the re-developed Stansted airport, including the first Coast to Coast in an airport, as described earlier. TRG business model and strategy Our core objective is to grow shareholder value by building a business capable of delivering long-term sustainable and growing cash flows. We do this by providing great food, drink and service in well-appointed restaurants and pubs. Within the eating out market we focus on sectors where there are barriers to entry, good growth prospects and strong returns. Our growth model is primarily based on organic roll out of new sites. While most such sites are leasehold, we also acquire freehold premises where these give a satisfactory level of return. Although not a core part of our development plans, we remain open to evaluating acquisitions of existing businesses where there is a clear strategic rationale and where this would enhance shareholder value. Our business model is to grow through a combination of like-for-like sales growth and new site development. The profits from this growth are converted into cash at a healthy rate, which we use to maintain our existing estate in good order, pay dividends and invest in more new sites generating high levels of return. This has proven to be a very successful and value-accretive business model which has enabled the Group to grow in a predominately organic way funded principally by internally generated cash flows. This model delivers high returns, growth and income for shareholders in the form of dividends. Key to achieving all of this is that we continue to provide great service and food in our restaurants, and evolve our brands and offerings in line with changing consumer trends. The Restaurant Group plc Annual Report 2014 21 Future prospects Since 2008, in line with most consumer-facing businesses, TRG has faced challenging trading conditions. As is well documented, real incomes have been in decline for most of this period but notwithstanding this TRG has continued to grow sales, profits and cash flows every year. We have also continued to roll out new sites at an accelerating rate, as well as investing in our existing portfolio. In the last two years we have had to contend with disappointing film release schedules and associated reductions in UK cinema admissions. Looking forward, there are a number of external factors which should be much more positive for the business. In recent months, the UK has at last started to see an increase in real consumer incomes. In addition, both 2015 and 2016 have much stronger film release schedules than we have seen in the last two years and this is expected to generate growth in cinema admissions levels. Combined with an accelerating rate of new site openings, this augurs well for the future prospects of the Group. In order to capitalise on these improving trends we will continue to: • stick to our areas of expertise • focus on our customers by providing excellent value, choice and service • maintain high standards of operational efficiency and execution • add high quality new restaurants that meet our investment criteria. OverviewStrategic reportGovernanceFinancial statements 22 Annual Report 2014 The Restaurant Group plc Financial review Stephen Critoph Chief Financial Officer and Company Secretary “Total revenue increased by 9.6%, reflecting 2.8% like-for-like sales growth and the impact of new site openings.” Results TRG performed strongly in 2014, despite another challenging year for the sector, as summarised in the table below: Revenue Operating profit Margin % Net interest Profit before tax EPS (pence) 2014 £m 635.2 2013 £m 579.6 % change +9.6% 80.5 74.9 12.7% 12.9% +7.4% (2.4) 78.1 29.96 (2.2) +6.9% +7.4% 72.7 +6.9% 28.02 Total revenue increased by 9.6%, reflecting 2.8% like-for-like sales growth and the impact of new site openings. Total EBITDA for the year was £117m, an increase of 8.5% on the prior year, and operating profit at £80.5m grew by 7.4%. Group operating margin for the year was 12.7%, a 20 basis points decline on the previous year. This was primarily driven by two factors: firstly by a high level of new openings at the end of the year and associated pre-opening costs, and secondly wage cost inflation during the second half of the year, partly driven by increases in the national minimum wage, but also tightening labour market conditions. After interest costs Group profit before tax of £78.1m was up by 7.4% on the prior year. The average tax rate in the year was 23%, which was a little higher than the prior year average tax rate of 22.7% for the reasons described later in this report. This resulted in EPS of 29.96p, an increase of 6.9% on the prior year. +7.4%increase in Group profit before tax+9.6% revenue+11% free cash flow The Restaurant Group plc Annual Report 2014 23 Cash flow Cash generation was again strong with a healthy rate of profit conversion into cash. Operating cash flow increased by 7% to £125m (2013: £117m). Free cash flow (after interest, tax and maintenance capex) was £85.5m, an increase of 11% on the prior year. After development capex of £50.1m, dividends payable and other sundry items, the Group had net positive cash flow of just over £3m, resulting in year-end net debt of £39m. Set out below is a summary cash flow for the year: Cost inflation Food cost inflation continued to be subdued during 2014. This is due to a variety of factors including good global crop harvests in both 2013 and 2014, a significant strengthening in Sterling against the Euro over the last two years (roughly half of our food imports are sourced from the Eurozone) and further rationalisation of our supply chain to take out costs. We currently anticipate this benign environment on food cost inflation will continue during 2015. Operating profit Working capital and non-cash adjustments Depreciation Cash flow from operations Net interest paid Tax paid Maintenance capital expenditure Free cash flow Development capital expenditure Dividends (including £6.9m special dividend) Purchase of shares for employee benefit trust Other items (includes LV disposal proceeds) Net cash flow Net bank debt at start of year Net bank debt at end of year 2014 £m 80.5 8.0 36.5 125.0 (1.3) (18.2) (20.0) 85.5 (50.1) 2013 £m 74.9 9.0 32.9 116.8 (1.1) (17.7) (20.9) 77.1 (55.7) (36.4) (24.9) (5.3) (2.3) 9.6 3.3 (41.9) (38.6) (0.1) (5.9) (36.0) (41.9) Non-trading item On 17 April 2014 the Group disposed of part of its interest in the Living Ventures Group. TRG received £7m of cash proceeds in respect of this disposal and the resulting profit on disposal of £6.9m, net of costs, is reported as a non-trading item. The net proceeds of the disposal were distributed by way of a special dividend of 3.45p per share on 9 July 2014. Following the disposal, TRG’s only remaining interest in the Living Ventures Group is a £4m loan note which has been fully provided against. The national minimum wage increased by 3% in October 2014, the highest increase we have seen for a number of years. This combined with some tightening in the labour market has resulted in stronger wage cost inflation than we have seen since before the onset of the financial crisis. As the UK economy continues to strengthen, we expect this trend to continue. Our two other largest cost inputs are rent and utilities. We are seeing very modest increases in the levels of rental inflation reflecting a strengthening in the UK economy. In relation to utility costs our key electricity contracts are fixed until October 2016 and gas until March 2016. Although the current environment for wholesale energy costs remains benign, increases in tax, environmental and infrastructure levies mean that we continue to see mid-single digit inflation on our utility costs. Capital expenditure During the year the Group invested a total of £70.1m in capital expenditure compared to £76.6m in the prior year. This includes £20m maintenance and refurbishment expenditure and £50.1m of development expenditure. During the year we opened a total of 40 sites and these are typically generating levels of turnover and return ahead of feasibility. The table below summarises openings and closures during the year: Year end 2013 Opened Closed Transfers Year end 2014 Frankie & Benny’s Coast to Coast/ Filling Station Chiquito Garfunkel’s Pub restaurants Concessions Total 232 19 (2) (2) 247 15 73 16 49 60 445 3 8 - 3 7 40 - (1) (1) - (9) (13) 2 - - - - - 20 80 15 52 58 472 OverviewStrategic reportGovernanceFinancial statements 24 Annual Report 2014 The Restaurant Group plc Financial review continued Financing and key financial ratios The Group currently has a £140m five year credit facility in place which runs until October 2016. There are two covenants under this facility which are summarised in the table below, together with other key financial ratios: Banking covenant ratios EBITDA/interest cover Net debt/EBITDA Other ratios Fixed charge cover Balance sheet gearing Banking covenant 2014 2013 >4x <3x n/a n/a 49x 0.34x 48x 0.39x 2.7x 16% 2.7x 19% As can be seen, the Group has substantial headroom against both banking covenants and continues to be in a strong financial position. This enables us to continue to increase the acceleration of our opening programme over the coming years whilst at the same time investing and maintaining the existing estate. Tax The total tax charge for the year was £17.9m analysed as follows: Corporation tax Deferred tax Total Effective tax rate 2014 £m 18.0 (0.1) 17.9 2013 £m 19.2 (2.7) 16.5 23.0% 22.7% The effective tax rate for the year was 23%, compared to 22.7% in the prior year. In 2013 we benefitted from a one off credit of £2.1m, arising from the revaluation of our deferred tax liability at the then newly enacted eventual corporation tax rate of 20%. Without that credit the average tax rate in 2013 would have been 25.6%. We expect to see the tax rate fall again in 2015 in line with the implementation of the final reduction in the headline rate of corporation tax to 20%. As noted in previous reports, the Group’s effective tax rate will continue to be higher than the headline UK tax rate primarily due to our capital expenditure programme and the significant levels of disallowable capital expenditure therein. Strategy The Restaurant Group’s key objective is to grow shareholder value and the strategy deployed to achieve this is to build a business capable of generating long-term, sustainable and growing cash flows. In pursuit of this we have built a scalable business model which is focused on the growing casual eating out market. We have targeted areas of this market which offer distinct barriers to entry, where we can be confident of delivering good growth in profits and cash flows and where there is potential for high returns on investment. This has led the Group to focus on edge and out of town leisure and retail developments, rural and semi-rural pubs and our Concessions business which operates principally on airports. The Group operates in the expanding casual dining market, and our offerings continue to provide good value for money in comfortable surroundings with excellent service from our dedicated teams. The Group’s strategy is to deliver further organic growth through the roll out of our brands. We have a solid pipeline of sites for development, coupled with a strong focus on continuing to deliver like-for-like sales growth from our existing restaurants. Our Concessions business operates in a dynamic and complex market where our management teams have market-leading expertise and a track record of innovation and improving sales performance. The Group continues to look for opportunities to expand this area of the business. We discuss risks that might impact the successful execution of this strategy and the KPIs we use to measure its success below. Principal risk factors The Board of Directors regularly identify, monitor and manage potential risks and uncertainties to the Group. The list on the following pages sets out what the Directors consider to be the current principal risks and uncertainties, with an overview of the mitigation process for these. This list is not presumed to be exhaustive and is, by its very nature, subject to change. The Restaurant Group plc Annual Report 2014 25 Risks and uncertainties Mitigation process Adverse economic conditions and a decline in consumer confidence and spend in the UK Increased supply of new restaurant concepts into the market Regular monitoring of performance and appropriate action plans Concentration on segments offering higher barriers to entry and good growth prospects; regular monitoring of performance and appropriate action plans Lack of new site opportunities, and risks to existing Concession agreements Dedicated property department focusing on new site development, strong relationships with Concessions partners Failure to provide customers with brand-standard value for money offerings and service levels Training, mystery diner visits, monitoring of customer feedback, internal quality control testing Major failure of key suppliers to deliver products into restaurants Contingency planning for supply chain and suppliers Damage to our brands’ images due to failures in environmental health compliance in the restaurants or from contamination of products The loss of key personnel or failure to manage succession planning Training of restaurant and pub teams; detailed health and safety manual; regular internal and external auditing of all sites; auditing of supply chain and suppliers; health and safety incentives and awards Benchmarking of remuneration packages; analysis of staff turnover; performance appraisal and review system to retain existing talent; Long-Term Incentive Plan Increase in prices of key raw materials (including foreign currency fluctuations), wages, overheads and utilities Rolling programme of securing longer-term contracts to mitigate short-term pricing fluctuations; energy efficiency programme Breakdown in internal controls through fraud or error, major failure of IT systems Experienced staff in key roles; segregation of duties; internal and external audit processes; Audit Committee role Further information on the management of risks highlighted above is provided in the Review of Operations and the Financial Review. Operating profit margin The Board and management closely monitor profit margins as an indicator of operating efficiency within restaurants and across the Group. Key performance indicators The Board of Directors and executive management receive a wide range of management information delivered in a timely manner. Listed below are the principal measures of progress that are reviewed on a regular basis to monitor the development of the Group. Return on invested capital The Group closely scrutinises the returns on invested capital from new site openings and the performance of new sites is subject to periodic post completion reviews which are reported to and considered by the Board. Like-for-like sales This measure provides an indicator of the underlying performance of our existing restaurants and highlights successful development of our offerings to best match changing consumer demands over time. There is no accounting standard or consistent definition of “like-for-like sales” across the industry, although the Group has applied a consistent basis of calculation across years for reporting like-for-like performance. New sites opened The expansion of our brands is a key driver of the Group’s profitability. Potential new sites are subject to a rigorous appraisal process before they are presented to the Board for approval. This process ensures we maintain the quality of openings as well as the quantity of sites opened. EBITDA The ability of the Group to finance its roll out programme is aided by strong cash flows from the existing business. The Group defines EBITDA as operating profit before depreciation, amortisation and non-trading items. EBITDA serves as a useful proxy for cash flows generated by operations and is closely monitored. People As at 29 December 2014, 50% of TRG’s total workforce of 15,000 were women. One (17%) member of the Board is female and this will rise to two (29%) from 1 May 2015, following the appointment of Debbie Hewitt as a non- executive Director (as announced on 16 January 2015). Two (17%) of the senior executive team (excluding Directors) are female. We also have an excellent pipeline of over 1,600 managers coming up through the ranks, 40% of which are women. The Board’s approach to gender diversity is covered in more detail in the Report of the Directors. TRG’s operations are located wholly within the UK and the Company respects all relevant human rights legislation. Further information on TRG’s social and community engagement can be found in the Report of the Directors. Approved by the Board of Directors and signed on behalf of the Board. Stephen Critoph Chief Financial Officer and Company Secretary 27 February 2015 OverviewStrategic reportGovernanceFinancial statements 26 Annual Report 2014 The Restaurant Group plc Board of Directors as at 27 February 2015 Alan Jackson (71) Non-executive Chairman Danny Breithaupt (47) Chief Executive Officer Alan joined the Company as Executive Chairman in March 2001 and became non-executive Chairman in January 2006. He has a wealth of experience in the leisure sector. For 18 years, from 1973 to 1991, Alan occupied various positions within Whitbread, principally Managing Director of Beefeater steakhouses and also the Whitbread restaurant division where he was responsible for the creation and development of the Beefeater, Travel Inns and TGI Friday brands. After the Beer Orders in 1991 he founded his own business which became Inn Business Group plc in 1995 and was subsequently acquired by Punch in 1999. He chaired Oriental Restaurant Group plc until its sale to Noble House in 2000. Currently Alan is non-executive Chairman of Playtech plc. Stephen Critoph (54) Chief Financial Officer and Company Secretary Danny joined the Company in 2001. He held a number of senior positions within Frankie & Benny’s, becoming Operations Director in 2003 and Managing Director in 2009. During his time leading Frankie & Benny’s the brand grew from 75 to over 200 units. In 2011 Danny led the successful launch of the new Coast to Coast brand and was appointed Managing Director of the Group’s Leisure Division in 2012 and Chief Executive Officer on 1 September 2014. His earlier career included 10 years with Bella Pasta, then part of Whitbread PLC.Stephen was appointed as Finance Director of the Company in September 2004 and Company Secretary in 2013. In September 2014 he was promoted to the role of Chief Financial Officer. Previously Stephen held several senior finance positions in Compass Group plc and Granada Group plc, including Corporate Development Director of Compass Roadside and Finance Director of Travelodge and Little Chef. He trained and qualified as a Chartered Accountant with Deloitte & Touche. The Restaurant Group plc Annual Report 2014 27 Tony Hughes (66) Non-executive Director Simon Cloke (47) Non-executive Director Sally Cowdry (46) Non-executive Director OverviewStrategic reportGovernanceFinancial statementsTony was appointed as a non-executive Director of the Company in January 2008. Tony was Managing Director of the Restaurants Division of Mitchells & Butlers plc (previously Bass plc and Six Continents plc) from 1995 to 2007 and served on the Board of Mitchells & Butlers plc from 2003 to 2007. Prior to joining Bass, he held senior management roles at B&Q, J.A. Devenish and Whitbread PlC. Simon was appointed as a non-executive Director of the Company in March 2010. Formerly Global Head of Industrials at Dresdner Kleinwort Wasserstein, he was appointed Managing Director of HSBC’s Diversified Industries Group in 2005 and is currently responsible for managing HSBC’s business with some of its largest house building and building materials clients as well as a number of HSBC’s largest UK corporate relationships.Sally was appointed as a non-executive Director of the Company in March 2014. Sally is Marketing and Consumer Director at Camelot Lotteries UK Ltd, accountable for the strategic development and commercial performance of The National Lottery and its portfolio of games. Prior to joining Camelot in 2013, Sally was Marketing and Consumer Director at O2. 28 Annual Report 2014 The Restaurant Group plc Report of the Directors The Directors present their Annual Report and the Group Accounts for the year ended 28 December 2014. During the year the Audit Committee comprised the following non-executive Directors: Results and dividends The results for the year are presented under International Financial Reporting Standards (“IFRSs”) as adopted by the European Union. The Report and Accounts are drawn up on a 52 week reporting basis ending on 28 December 2014 (2013: 52 week reporting basis ending on 29 December 2013). The results for the year are set out in the consolidated income statement on page 63. This shows a Group profit after tax of £67m (2013: £56.2m). An interim dividend of 6.1p per share was paid on 9 October 2014. The Directors propose a final dividend of 9.3p per share, which is subject to approval at the Company’s Annual General Meeting (“AGM”) to be held on 14 May 2015. Should this be approved, the final dividend will be paid on 8 July 2015, bringing the ordinary dividend per share payable in respect of 2014 to 15.4p (2013: 14.0p). Directors The Directors who held office during 2014 were as follows: Executive Directors • Danny Breithaupt (from 1 September 2014) • Andrew Page (until 31 August 2014) • Stephen Critoph Non-executive Directors • Alan Jackson • Tony Hughes • Simon Cloke • Sally Cowdry (from 1 March 2014) Each of the non-executive Directors (excluding the Chairman) is considered by the Board to be independent. Tony Hughes is senior non-executive Director. Alan Jackson was appointed non-executive Chairman on 1 January 2006 having previously been executive Chairman and given his tenure as an executive Director, is not considered to be independent as defined by the UK Corporate Governance Code. No Director has a service contract with the Company requiring more than twelve months’ notice. In accordance with the UK Corporate Governance Code, the Directors will be subject to re-election at the Annual General Meeting. • Simon Cloke (Chairman) • Tony Hughes • Sally Cowdry (from 1 March 2014) During the year the Remuneration Committee comprised the following non-executive Directors: • Tony Hughes (Chairman) • Simon Cloke • Sally Cowdry (from 1 March 2014) During the year the Nominations Committee comprised the following Directors: • Tony Hughes (Chairman) • Simon Cloke • Alan Jackson • Sally Cowdry (from 1 March 2014) • Danny Breithaupt (from 1 September 2014) • Andrew Page (until 31 August 2014) The Directors’ remuneration report includes details of Directors’ remuneration and interests in the Company’s shares and options, together with information on service contracts. Directors’ shareholdings The interests of the Directors in the shares of the Company, all being beneficially owned, were as follows: At 26 February 2015 At 28 December 2014 At 29 December 2013 Executive Directors Danny Breithaupt Stephen Critoph 52,703 275,220 Non-executive Directors Alan Jackson Tony Hughes Simon Cloke Sally Cowdry 250,191 400,000 7,000 1,000 52,703 275,220 n/a 263,220 250,191 400,000 7,000 1,000 250,191 400,000 15,000 n/a Details of the Directors’ share options are disclosed in the Directors’ remuneration report. The closing mid-market price of the ordinary shares on 28 December 2014 was 666p and the range during the financial year was 555p to 713p. The Restaurant Group plc Annual Report 2014 29 Share capital structure The Company has one class of shares, ordinary shares of 281⁄8p. As at 28 December 2014, the issued, called up and fully paid number of shares in issue was 200,648,821 shares. There are no preference shares or special rights pertaining to any of the shares in issue. Following the 2014 Annual General Meeting the Directors have had the authority to allot shares up to an aggregate nominal amount of £18,810,669 which represented approximately one third of the ordinary share capital of the Company at the time the authority was given by shareholders. This authority expires at the Annual General Meeting to be held on 14 May 2015 and it will be proposed to extend this authority (updated for the current number of shares in issue) at the forthcoming Meeting. The Directors have no present intention of exercising this authority. At the 2014 Annual General Meeting the Directors were also provided with the authority to allot shares for cash other than on a pre-emptive basis, up to an aggregate nominal amount of £2,821,600 which represented approximately 5% of the issued share capital at the time that the authority was given by shareholders. This authority also expires at the Annual General Meeting to be held on 14 May 2015 and it will be proposed to extend this authority (updated for the current number of shares in issue) at the forthcoming Meeting. In addition, following the 2014 Annual General Meeting, the Directors have the authority to make market purchases of shares in The Restaurant Group plc on behalf of the Company up to 20,064,714 ordinary shares (which represented 10% of the Company’s issued ordinary share capital at the time of the Notice of the 2014 Annual General Meeting). The minimum price that may be paid for such shares is 281⁄8p per share. The maximum price is the higher of 5% above the average middle market quotation for the ordinary shares for the five business days preceding the date of purchase and the higher of the price of the last independent trade and the highest current independent bid on the London Stock Exchange Daily Official List at the time the purchase is carried out. This authority expires at the forthcoming Annual General Meeting and it will be proposed to extend this authority (updated for the current number of shares in issue) at the Meeting. The Group has entered into various contracts, including leases, during the course of ordinary business which may be terminated in the event of a change of control of The Restaurant Group plc. Substantial shareholdings As at 4 February 2015, the Company had been notified of the following interests of 3% or more in the issued ordinary share capital of the Company: Number of shares % of issued share capital Black Rock Investment Management Inc Standard Life Investments Old Mutual Asset Managers Royal London Asset Management M&G Investment Management Legal & General Investment Management Aviva Investors Aberdeen Asset Management Franklin Templeton 16,625,449 15,413,727 11,922,136 10,990,927 9,252,342 8,815,382 8,217,255 6,233,517 6,060,000 8.29 7.68 5.94 5.48 4.61 4.39 4.13 3.11 3.02 Corporate governance The Company is committed to high standards of corporate governance and to observing the principles of corporate governance contained in the UK Corporate Governance Code that was revised and issued in 2014 by the Financial Reporting Council (“the Code”) for which the Board is accountable to shareholders. Statement of compliance with the Code Throughout the year ended 28 December 2014, the Company has been in compliance with the provisions set out in the Code except for the independence of the Chairman (who was previously executive Chairman before being appointed to the role of non-executive Chairman in January 2006). Sally Cowdry was appointed a non-executive Director from 1 March 2014 and is considered independent. Accordingly, since that date, the Company has had three non-executive Directors who are considered to be independent and has been in compliance with Code provision B.1.2., since that time. The Audit, Nomination and Remuneration Committees therefore comprised of three non-executive Directors from 1 March 2014. The size and composition of the Board is regularly reviewed to ensure that the effectiveness of the Board (and performance of the Group) remains at a high standard. As announced in January 2015, Debbie Hewitt will join the Board as an independent non-executive Director on 1 May 2015. Debbie is currently Chair of Moss Bros Group Plc and senior non-executive director of Redrow Plc and NCC Group Plc. OverviewStrategic reportGovernanceFinancial statements 30 Annual Report 2014 The Restaurant Group plc Report of the Directors continued Application of Code Principles The Company has applied the principles of the Code, including both the Main Principles and the supporting principles, as reported above. Further explanation of how the Main Principles have been applied is set out below and in the Directors’ remuneration report and the Audit Committee report. The Board is responsible to shareholders for the proper management of the Group and has access to the necessary information and training to enable it to discharge its duties. All Directors are subject to election by shareholders at the first opportunity after their appointment, except where they are appointed by shareholders, and to annual re-election thereafter. The Board The Board’s role is to provide entrepreneurial leadership of the Company and Group within a framework of prudent and effective controls which enable risk to be assessed and managed. The Board reviews the Group’s business model and strategic objectives and looks to ensure that the necessary financial and human resources are in place to achieve these objectives, to sustain them over the long-term and to review management performance against these objectives. The Board also sets the Company’s values and standards and manages the business in a manner to meet its obligations to shareholders and other stakeholders. The Board currently comprises the non-executive Chairman, the Chief Executive Officer, the Chief Financial Officer and three independent non-executive Directors. Their biographies appear on pages 26 and 27 and demonstrate a range of experience and sufficient calibre to bring independent judgement on issues of strategy, risk management, performance, resources and standards of conduct which is vital for the success of the Group. Tony Hughes acts as senior independent non-executive Director and is available to shareholders if they have concerns on which contact through the normal channels is inappropriate or has failed to resolve an issue. The roles of Chairman and Chief Executive Officer are clearly defined. The Chairman is responsible for the leadership and effectiveness of the Board and the Chief Executive Officer is responsible for the strategic direction and operational management of the Group. The Board meets on a regular basis and there is a formal schedule of matters specifically reserved for its consideration. This includes approval of the annual budget and the three year business plan, approval of the interim Report and year-end Report and Accounts, review and approval of significant capital expenditure (including development of new sites), significant disposals of assets and acquisitions or disposals of businesses. Operational management are responsible for the day-to-day running of the Group and report on a regular basis on that performance to the Board. The Board is responsible for reviewing, challenging and approving the strategic direction of the Group and monitoring operational performance. There is significant involvement from the non-executive Directors. This includes an ongoing dialogue with the executive Directors including constructive challenge of performance and the Group’s strategy. The non-executive Directors are provided with sufficient information to allow them to monitor, assess and challenge the executive management of the Group. Comprehensive Board papers including financial information are circulated to all Directors prior to Board meetings and, on a weekly basis, they receive up-to-date trading information. The non-executive Directors have the opportunity to meet without the executive Directors being present. Matters examined on these occasions include consideration of targets set and performance achieved by management. All Directors have access to the advice and services of the Company Secretary and a procedure has been agreed for the Directors, in the furtherance of their duties, to take independent professional advice, if necessary, at the expense of the Company. On joining the Board there is a process for Directors to receive training as to their role and its requirements and for non-executive Directors to gain an understanding of the whole business. Non-executive Directors are actively encouraged to meet with operational management and to visit the Group’s operations in order to enhance their understanding of the Group’s business, its brands, employees and processes. During 2014 there were eight Board meetings with full attendance by Board members at all but one meeting, which Sally Cowdry was unable to attend due to a prior commitment that pre-dated her appointment to the Board. The Company acknowledges the importance of developing the skills of the Directors to run an effective Board. To assist in this, Directors are given the opportunity to attend relevant courses and seminars to acquire additional skills and experience which may enhance their contribution to the ongoing progress of the Group. The performance of the Board and its Committees are appraised annually. The process is led by the Chairman, supported by the Company Secretary, and involves a comprehensive review of performance against objectives and areas for future development. The non-executive Directors also meet in the absence of the Chairman to appraise the Chairman’s performance. The Restaurant Group plc Annual Report 2014 31 Following feedback received during the externally facilitated review of Board effectiveness completed in 2013, Board papers are more focussed on matters of strategic importance. The papers are now circulated electronically via a secure web based portal. In 2014 an internal review was undertaken which examined the key functions of the Board, the effective discharge of its responsibilities and progress since the prior year’s review. The results were analysed by the Board which concluded that no further significant changes or improvements were required. The Board continues to evolve in accordance with best practice and feedback received from the Directors. Communications with shareholders Communications with shareholders are given high priority. The Strategic Report includes a detailed review of the business and operations, including a review of planned future developments. There is a regular dialogue with institutional investors including presentations after the Company’s announcement of the year end results, and at the half year. Feedback from major institutional shareholders is provided to the Board on a regular basis and, where appropriate, the Board will take steps to address their concerns and recommendations. The Board uses the Annual General Meeting to communicate with private and institutional investors and welcomes their participation. The Chairman seeks to ensure that the Chairs of the Audit Committee, Remuneration Committee and Nominations Committee are available at the Annual General Meeting to answer questions, and for all Directors to attend. Remuneration Committee Since the appointment of Sally Cowdry on 1 March 2014, the Remuneration Committee has consisted of three independent non-executive Directors. There are written terms of reference for the Remuneration Committee. The Remuneration Committee met on four occasions in 2014. There was full attendance at each meeting but for the absence of Sally Cowdry at one meeting, due to a commitment that pre-dated her appointment to the Board. The role of the Committee and details of how the Company complies with the principles of the Code are set out in the Directors’ remuneration report. Nominations Committee Since 1 March 2014, the Nominations Committee has consisted of the three independent non-executive Directors, the non-executive Chairman and the Chief Executive Officer. It met twice during 2014, with full attendance. There are written terms of reference for the Nominations Committee. It is responsible for making recommendations to the Board for the appointment or replacement of additional Directors and ensuring there is an appropriate balance and diversity of skills, experience, knowledge and independence, both now and in the future. Following an extensive search by a leading, independent executive search consultancy (who are a signatory of the Voluntary Code of Conduct), Sally Cowdry was appointed as a non-executive Director of the Company on 1 March 2014. Debbie Hewitt will also join the Board with effect from 1 May 2015. The Nominations Committee is also responsible for succession planning for the Group. In 2014, it oversaw the appointment of Danny Breithaupt as Chief Executive Officer following a search carried out by a leading independent search consultancy. The Committee’s work on succession planning was a significant factor in the smooth transition of this key role within the Group. Both the Nominations Committee and the Board acknowledge the importance of diversity and promoting equal opportunities throughout the Group and continue to have regard to the recommendations of Lord Davies’ “Women on Boards” report published in February 2011 in its deliberations on future appointments and to the benefits of diversity more broadly. Audit Committee Since 1 March 2014 the Audit Committee has consisted of three non-executive Directors. During the year the Committee was chaired by Simon Cloke. There are written terms of reference for the Audit Committee. The Audit Committee met on two occasions during 2014 with full attendance at each meeting but for the absence of Sally Cowdry at one meeting due to another commitment that pre-dated her appointment to the Board. A more detailed description of the work undertaken by the Audit Committee is included in the Audit Committee report. Shareholders will have the opportunity to re-appoint Deloitte LLP as external auditor of the Company at the Annual General Meeting to be held on 14 May 2015. Internal control The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. In accordance with the Code (as revised in September 2014) the Board has ensured that there is an ongoing process for reviewing the effectiveness of the system of internal control including identifying, evaluating and managing the significant risks faced by the Group. This process, which is reviewed throughout the year, is carried out in conjunction with business planning and is documented in a risk register that has been progressively enhanced during the financial year and up to the date of approval of the Annual Report and Accounts. OverviewStrategic reportGovernanceFinancial statements 32 Annual Report 2014 The Restaurant Group plc Report of the Directors continued Whilst acknowledging its overall responsibility for the system of internal control, the Board is aware that the system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, but not absolute, assurance against material misstatement or loss. The Group has well-established procedures which have been developed over many years which meet the requirements of the Turnbull Guidance and the Code. A key control procedure is the day-to-day involvement of executive members of the Board in all aspects of the business and their attendance at regular management meetings at which performance against plan and business prospects are reviewed. The Group has a monthly executive management meeting where the executive Directors, senior operational managers and heads of functional departments review Group performance and issues affecting the Group. Additionally, the Board seeks to continually strengthen its’ internal control procedures to ensure there is a consistent and appropriate balance between risk and reward. Other key features and the processes for reviewing effectiveness of the internal control and risk management system in relation to financial reporting are described below: • terms of reference for the Board and its sub-committees, including a schedule of matters reserved for the Board and an agreed annual programme of fixed agenda items for Board approval; • an established organisational structure with clear lines of responsibility and rigorous reporting requirements; • operational performance and operational matters are considered at monthly meetings of the executive Directors with senior management. Financial performance is monitored and action taken through weekly reporting to the executive Directors and monthly reporting to the Board against annual budgets approved by the Board; • capital investment is regulated under a budgetary process and appropriate authorisation levels, including appraisals and post-investment reviews; • comprehensive policy manuals setting out agreed standards and control procedures. These include human resources related policies, information technology and health and safety. The Group employs a firm of external auditors to monitor restaurants on a regular basis for compliance with statutory and internal health and safety requirements; and • an internal audit function headed by an experienced internal auditor with access to all areas of the Company and Group’s business. Statement of Directors’ responsibilities in relation to the accounts The Directors are responsible for preparing the Annual Report and Accounts in accordance with applicable law and regulations. Company law requires the Directors 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 chosen to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the Group financial statements, International Accounting Standard 1 requires that 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. In preparing the parent company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable UK Accounting Standards have been followed; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Restaurant Group plc Annual Report 2014 33 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. Information provided to auditor Each of the current Directors have taken all the steps that they ought to have taken to make themselves aware of any relevant information needed by the Company’s auditor for the purpose of their audit and to establish that the auditor is aware of that information. The Directors are not aware of any relevant information of which the auditor is unaware. This information is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. Going concern The Financial Review contains a summary of the cash flows and borrowing position of the Group. The Group is highly cash generative and enjoys negative working capital as, given the nature of the business, it generally does not give credit to its customers. Further information on the Group’s policies for capital risk management and financial risk management are set out below. The principal risk factors and uncertainties that could affect the business are detailed in the Strategic Report. Based on the Group’s plans for 2015 and after making enquiries (including preparation of reasonable trading forecasts, consideration of current financing arrangements and current headroom for liquidity and covenant compliance), the Directors have a reasonable expectation that the Group has adequate resources to continue operations for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements. Capital risk management The Group manages its capital to ensure that it will be able to continue as a going concern while looking to maximise returns to shareholders. The capital structure of the Group consists of equity (comprising issued share capital, other reserves and retained earnings), debt, finance leases and cash and cash equivalents. The Group monitors its capital structure on a regular basis through cash flow projections and consideration of the cost of financing its capital. The Group has a £140m revolving credit facility in place until October 2016 and a £10m overdraft facility. Under the terms of the £140m revolving credit facility the Group is required to comply with its financing covenants whereby net interest charges must be covered at least four times by EBITDA and net debt must not exceed three times EBITDA. The margin (on interest rates) applied to the revolving facility is dependent on the ratio of net debt to EBITDA. The banking facility covenants are tested twice annually and are monitored on a regular basis. The Group remained within its banking facility covenant limits throughout 2014. Financial risk management The Board regularly reviews the financial requirements of the Group and the risks associated therewith. The Group does not use complex financial instruments, and where financial instruments are used it is for reducing interest rate risk. The Group does not use derivative financial instruments for trading purposes. Group operations are primarily financed from retained earnings and bank borrowings (including an overdraft facility). In addition to the primary financial instruments, the Group also has other financial instruments such as debtors, prepayments, trade creditors and accruals that arise directly from the Group’s operations. Further information is provided in note 23 to the accounts. The average rate of interest charged during the year on the Group’s debt was 2.90% (2013: 2.74%), and the average year end rate was 1.75% (2013: 1.74%). On 2014 results, net interest was covered 33.7 times (2013: 33.6 times) by profit before tax, interest and non-trading items. Based on year end debt and profits for 2014, a 1% rise in interest rates would reduce profits before tax and non-trading items by 0.5% (2013: 0.7%) and interest cover would reduce to 28.9 times (2013: 27.4 times). At 28 December 2014 the Group had gross borrowings attracting interest (including overdraft) of £40m (2013: £50m) and cash balances of £0.9m (2013: £7.3m). OverviewStrategic reportGovernanceFinancial statements 34 Annual Report 2014 The Restaurant Group plc Report of the Directors continued Annual General Meeting A separate Circular is included with the mailing of the Annual Report and Accounts to shareholders setting out the resolutions to be voted on at the Annual General Meeting, which is to take place at 11am on 14 May 2015 at the offices of Instinctif Partners, 65 Gresham Street, London, EC2V 7NQ. The Board believes that the proposed resolutions to be put to the shareholders at the Annual General Meeting are in the best interests of shareholders and, accordingly, recommends that shareholders vote in favour of the resolutions, as the Directors intend to do in respect of their own beneficial shareholdings in the Company. Auditor Deloitte LLP have expressed their willingness to continue in office as auditor and a resolution to re-appoint them will be proposed at the forthcoming Annual General Meeting. Directors’ responsibility statement We confirm that to the best of our knowledge: • the financial statements, prepared in accordance with the International Financial Reporting Standards (“IFRSs”) 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 Accounts, taken as a whole are fair, balanced and understandable and provide the necessary information for shareholders to assess the Company’s performance, business model and strategy. By order of the Board Stephen Critoph Company Secretary 27 February 2015 The Restaurant Group plc Annual Report 2014 35 • Alcohol Unit Reduction – we have signed up to a core commitment to “foster a culture of responsible drinking”. Part of the commitment is to help to remove 1 billion units of alcohol sold annually from the market by December 2015. We aim to achieve this by improving consumer choice of lower alcohol products and making the alcohol units more visible on our products and displays. • Fruit and Vegetables – we will support customers in their consumption of fruit and vegetables. To help achieve this we will be using the Government’s “5-a-day” guidelines, due to be published in 2015, with a view to help making it easier for our customers to choose healthier meals. Being a Responsibility Deal partner means that the Company is required to monitor and provide regular updates to the Department of Health with regard to the actions we are taking to fulfil our commitments within each pledge. Healthy eating is a personal responsibility but the Group acknowledges that as a provider of food and drink we have a role to play in providing appropriate options from which individuals may choose when they eat out. The Company strongly believes that we should offer our guests choices on the menu. Whilst we do not wish to be prescriptive we aim to provide a healthy choice at each menu point, alongside more indulgent options. For many people, dining out is a treat and therefore normal restrictions which may be applied to healthy eating on a day-to-day basis may be waived in favour of their enjoyment and experience. Allergens In October 2013, Frankie & Benny’s launched a Non-Gluten Containing Ingredients (NGCI) menu to cater for consumers with a gluten allergy or intolerance. This menu has been fully endorsed by Coeliac UK and as a result, Chiquito also launched a NGCI menu to improve choice for customers in 2014. During 2014, we published full allergen information for food and drink for all of our Leisure and Concessions brands in accordance with EU legislation. This information is easily accessible to customers on our brand websites. Frankie & Benny’s and Chiquito customers are also now able customise the menus online by selecting their dietary needs. Customers visiting these brands can also access allergen information online via a personalised iPad on site. Corporate responsibility report The Restaurant Group plc (“TRG”, “Company” or “Group”) acknowledges that it has a significant role to play in the communities and wider environment in which it operates. This statement sets out the principal areas of focus and activity that the Group has undertaken to date: • Nutrition – the Group’s approach to healthy eating. • Our people – the Group’s policies and actions towards our employees. • Our communities – how TRG interacts with those communities from which our customers and employees are drawn. • Our environment – the impact of TRG on the wider environment, and how we are seeking to reduce this. • Our shareholders – those that have invested capital in the development of TRG, and to whom the Directors and management of the Group are accountable. Nutrition TRG is a partner of the Public Health Responsibility Deal (“the Responsibility Deal”), launched by the Department of Health. The Responsibility Deal has been established to tap into the potential for businesses and other organisations to improve public health through their influence over food, alcohol, physical activity and health in the workplace. The Group has renewed three pledges within the Responsibility Deal: • we have removed all added trans fats from our products and constantly monitor our products to ensure this remains the case; • we will use our local presence to encourage children and adults to become more active; and • we commit to ensuring effective action is taken in all premises to reduce and prevent under-age sales of alcohol (primarily through the rigorous application of Challenge 21 and Challenge 25). The Group has also signed up to a further five pledges during 2014: • Salt Reduction – we feel this is an important consideration for our customers and as a result have agreed to three pledges under this category and commit: – to the salt targets for the end of 2012 agreed by the Responsibility Deal of which we achieved 95% compliance in 2014; – to achieve the 2017 salt targets and are currently working with suppliers to reduce salt in the products we procure; and – to work towards reaching the Salt Catering: Procurement target to help consumers lower their salt intake while eating meals out of the home. We commit to procuring at least 50% (by volume) of products to meet these targets. OverviewStrategic reportGovernanceFinancial statements 36 Annual Report 2014 The Restaurant Group plc Corporate responsibility report continued Other initiatives The Group is a member of the Supplier Ethical Data Exchange (“SEDEX”), which facilitates measurement and improvement in ethical business practices across the supply chain; in 2013, 164 of our food and non-food suppliers provided information describing their procedures and practices to the Group via SEDEX. This has risen to 251 in 2014. During 2014 the Group successfully opened a further 40 restaurants and in the process created over 1,300 jobs within the local communities; a trend which we expect to continue as we expand our business. As part of our commitment to equal opportunities, our policies offer equal rights regardless of age, colour, gender, sexual orientation, disability or religion and the diversity of our people reflects the diversity of the customers we serve. As in previous years, there continues to be no known genetically modified foods in any product the Group uses and new suppliers are required to confirm that they will not provide the Group with such products. We have also removed the “Southampton Institute” colourings that can cause hyperactivity in children from all TRG branded products. Our people The most important asset any company can have is its people and with over 15,000 employees it is essential that we foster that talent, and support employees in building great teams. All employees are encouraged and supported to progress and develop within our Company and we endeavour to provide them with the tools and knowledge to achieve this. This is the key to any successful business and our team is one of which we are especially proud. All of our new managers, no matter the experience or the level, undertake our Managers in Training (“MIT”) programme when they join us or are promoted from within. Our MIT programme continues to identify and develop talent; the Group also continues to implement leadership programmes to assist in the identification and development of our future managers. Whilst we realise the importance of developing internal talent, we are expanding our commitment to apprentice and graduate programmes to help create a clear path for an individual, as part of this programme, to join the Company and progress in to a management position. Already some of our graduates from previous intakes have been promoted into more senior roles. Appraisals setting clear objectives are also firmly in place with development and performance linked to clear salary structures and career progression. Such schemes are a key feature of the Group’s succession planning strategy and are therefore designed to equip managers with the skills they need to develop their careers at the next level and to ensure the Company remains their employer of choice over the long-term. The Group pays all of its employees at least the national minimum wage and does not utilise tips in any form to make up this rate. All gratuities are paid to the employees, with credit card tips attracting only the usual tax deductions but, unlike some of our competitors, no administration fee is taken by the Company. Within the Company, training and development is the foundation on which our business is built. We have specialist training teams that ensure that every employee receives the highest quality training possible. We have invested and launched a state of the art e-learning platform, providing new IT equipment for every site allowing us to deliver a wide array of classroom training, on the job development and individually designed training programmes through our own training teams and selected specialist learning partners. We feel this approach helps keep the Group and all of our employees ahead of the competition. As our portfolio of sites is spread throughout the UK, it is vital that our communication is of a very high standard. We work hard to ensure employees, in particular those based at our branches, are given regular team briefings. Our senior managers travel extensively around our businesses and interact daily with their branch management and team members to ensure full two-way communication is present throughout the business. Employee engagement is important for the Group. In addition to the 2015 Employee Survey, we are currently implementing new visions and values through our “Proud to be TRG” initiative. Health and Safety The health and safety of our customers and employees is of paramount importance. The Group has worked hard to ensure extensive procedures are in place to mitigate risks as far as possible to our guests and employees. We have very clear procedures and standards in place, and to enforce these we employ external auditors to perform a rolling programme of independent safety audits and carry out benchmarking of our restaurants. We have invested significant time and resources in health and safety matters across the Group in recent years to further enhance the clean, safe environment for our customers and staff. The Restaurant Group plc Annual Report 2014 37 Our communities We are passionate about engaging with our communities and actively support our teams in their fundraising efforts and community engagement. Throughout 2014 we supported a number of local and national charitable events, some of which are detailed below: Leukaemia & Lymphoma Research During 2014, Frankie & Benny’s worked with Leukaemia & Lymphoma Research, the UK blood cancer charity. Every year they help prevent people dying of blood cancer and carry out research into preventable measures to avoid those developing blood cancer in the first instance. In July, several members of the senior management team took part in a 500km London to Paris bike ride raising over £275,000 and throughout the year restaurants have held various fundraising weekends to help highlight the need for further research. Children’s Hospice Association Scotland (CHAS) The Group has raised over £400,000 for CHAS since fundraising began. During 2014 Filling Station undertook various fundraising activities for CHAS raising over £11,000 for the charity. CHAS provides the only hospice service in Scotland for children and young people who have life- shortening conditions for which there is no known cure. Caudwell Children Caudwell Children provide family support services, equipment, treatment and therapies for disabled children and their families across the UK. Frankie & Benny’s raised £60,000 in 2011 helping to fund treatment for a little girl called Susanna who was unable to walk. In 2014 we were pleased to raise over £43,000 for Susanna to continue her rehabilitation and help to fund treatment for another 16 children who have cerebral palsy and brain injuries. Susanna has recently started playing netball, the first time she has ever been able to participate in P.E. classes at school. BBC Children in Need During 2014 our ‘Penny from a pint’ campaign raised over £20,000 for Children in Need and a further £90,000 had been raised through a number of local fund raising activities across our Frankie & Benny’s restaurants. In the last six years, the brand has raised a combined total of over £500,000 for Children in Need. Help Amber Walk Appeal In August 2014, Frankie & Benny’s became aware of a young girl called Amber who suffers from Spastic Diplegia Cerebral Palsy. She needed to raise £60,000 to pay for an operation that would enable her to walk. Following fundraising efforts throughout the weekends in our restaurants and sponsorship of a 100 mile cycle, Frankie & Benny’s were able to donate over £17,300 towards her operation. The operation was a success and Amber is currently undergoing physiotherapy. British Heart Foundation In 2014, Chiquito raised funds for the British Heart Foundation, the nation’s heart charity and the largest independent funder of cardiovascular research. Throughout the year the restaurants held a variety of charity breakfasts and fun days and donated over £12,700. Charity breakfasts & local charity events In addition to the large fundraising drives above, there any many other charities that have benefitted from our support this year. We regularly host charity breakfasts at which we offer free breakfasts in return for a donation to local charities including Young Epilepsy, Phyllis Tuckwell Hospice, St George’s Hospital Charity and Shine Northern Ireland. Coast to Coast and Filling Station regularly raise funds for DEBRA who are the national charity supporting individuals and families affected by Epidermolysis Bullosa (EB); during 2014 the brand donated over £15,400. Sport & Education Junior sports team sponsorship Frankie & Benny’s have a long history of sponsoring local junior sports. During 2014, we sponsored a total of 144 junior teams across the country playing football, rugby, hockey, swimming, gymnastics, netball and much more. Not only do we provide kits for the teams, but we also take an active role during the season, attending tournaments and inviting them to enjoy end of season celebration dinners at Frankie & Benny’s. Schools visit programme The Frankie & Benny’s schools visit programme has been in place for more than six years now and continues to grow in popularity with over 1,750 visits taking place in 2014. School children, accompanied by their teachers, are given the opportunity to visit our restaurants to help bring curriculum based subjects such as maths, science and food hygiene to life. The children are also able to make their own pizzas by choosing their toppings. Whilst we leave the cooking to the chefs, school children are given an educational activity book to complete – a pack that has been designed by educational experts. OverviewStrategic reportGovernanceFinancial statements 38 Annual Report 2014 The Restaurant Group plc Corporate responsibility report continued Our environment The Group recognises its responsibility in minimising its impact on the natural environment and continues its commitment in reducing its energy consumption (and carbon emissions), water usage and waste. Under Scope 1 we have seen a significant drop in our F-Gas (Operation of Facilities) compared to 2013 where there was a higher need for replacement gas due to maintenance issues; something the Group has worked hard to rectify throughout 2014. Energy Consumption and Carbon Emissions The Group continues to maintain the Carbon Saver Gold Standard and also seeks to further improve the energy efficiency of the fabric of its estate. New restaurant fit-out specifications now include heat recovery systems, energy saving lighting, low energy hand dryers and increased insulation. In the course of the year we opened a number of sites under the Building Research Establishment Environmental Assessment Method (BREEAM) incorporating the use of Solar PV, Building Management Software and grey water harvesting. Further investment in Voltage Optimisation equipment and behavioural training resulted in a like-for-like energy reduction for the 5th consecutive year. Waste Management The Group has introduced food recycling across the estate resulting in 85% of our waste being redirected from landfill; up from 49% in 2013. Emissions data in respect of the 2014 reporting period, on the financial control reporting basis, is as follows: We continue to promote our energy saving campaign to all restaurants and through the timely supply of accurate reporting, operational managers have the information they need to allow them to monitor and reduce energy consumption levels. This alongside our other initiatives will assist the Group in completing future obligations under the new Energy Savings Opportunity Scheme (ESOS) legislation and allow us to explore new environmental opportunities. Our shareholders The Group has had a clear strategy since 2001 – to deliver value for shareholders by focusing on sectors within the eating out market that offer high barriers to entry, where we can generate sustainable and growing cash flows and which offer high returns on investment. This has led the Group to focus investment in edge and out of town leisure locations, rural and semi-rural pubs and our Concessions business, which operates principally within airports. The Group has maintained a progressive track record of growing profits and dividends for shareholders. The Chairman’s Statement, the Review of Operations and the Financial Review provide further detail on the Group’s strategy, performance during 2014 and the prospects for the Group. Emission Type Scope 1: Operation of Facilities Scope 1: Combustion TOTAL Scope 1 Emissions Scope 2: Purchased Energy TOTAL Scope 2 Emissions Total Emissions 2013/14 CO2e tonnes (Carbon Dioxide equivalent) 851 16,909 17,760 61,700 61,700 79,460 2012/13 CO2e tonnes (Carbon Dioxide equivalent) 4,046 17,397 21,443 53,788 53,788 75,231 Greenhouse Gas Emissions Intensity Ratio: Total Footprint (Scope 1 and Scope 2) – CO2e Turnover (£) Intensity Ratio (tCO2e/£1,000) 79,460 635.2m 0.125 75,231 579.2m 0.130 Notes: – Our methodology has been based on the principals of the Greenhouse Gas Protocol. – We have reported on all the measured emissions sources required under The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. – Conversion factors for electricity, gas and other emissions are those published by the Department for Environment, Food and Rural Affairs in 2013. – Refrigerant fugitive emissions from our pub estate were excluded last year due to an absence of data. Directors’ remuneration report The Restaurant Group plc Annual Report 2014 39 Annual statement Dear Shareholder, I am pleased to introduce our report on Directors’ remuneration for the year ended 28 December 2014. This report complies with the reporting regulations published by the Department for Business, Innovation & Skills in 2013 and will be subject to two shareholder votes at the forthcoming Annual General Meeting (“AGM”): • the Directors’ remuneration policy report, amended from the previous year as described below, sets out the Directors’ remuneration policy for the Company from the date of the AGM in May 2015 and will be subject to a binding shareholder vote; and • the annual report on remuneration provides details of the remuneration earned by Directors in the year to 28 December 2014 and how the policy will be implemented for the 2015 financial year and will be subject to an advisory shareholder vote. Remuneration outcomes in 2014 For the year under review, and reflecting the excellent financial performance of the Group, the annual bonus paid out at 75% of the maximum for each of the executive Directors as detailed in the annual report on remuneration. The 2012 Long-Term Incentive Plan (“LTIP”), which vests in March 2015 based on performance over the three year period up to and including 2014, will vest at 100% in respect of the total shareholder return (“TSR”) element and at 88% in respect of earnings per share (“EPS”) performance. Remuneration policy for 2015 The Remuneration Committee continually reviews the executive remuneration policy to ensure it promotes the attraction, retention and incentivisation of high calibre executives to deliver the Group’s strategy. It is equally important that the policy reflects shareholder’s views and the changing landscape in which the Group operates. As a result of the 2005 LTIP reaching the end of its 10 year life, the Committee has consulted with major shareholders on a number of changes to the current policy, designed to simplify remuneration and further enhance the link between pay and long-term performance. Subject to shareholder approval at the 2015 Annual General Meeting, it is therefore proposed that the 2005 LTIP Scheme (the final awards under which are expected to be granted in March 2015) will be replaced by a broadly similar, yet simplified, long-term incentive arrangement under which no Matching Awards may be granted. In addition, a two year post-vesting holding period will apply with the effect that, to the extent that awards granted under the 2015 LTIP vest after three years, executive Directors will be required to retain the net of tax shares for a further two years thereafter. Full details are included in the 2015 Notice of AGM. In light of the proposed changes to the remuneration policy approved by shareholders at last year’s AGM, the revised policy will again be put to shareholders for approval this year. I hope that you will be supportive of the two resolutions to approve the Directors’ remuneration report at this year’s AGM. Yours sincerely, Tony Hughes Chairman of the Remuneration Committee 27 February 2015 OverviewStrategic reportGovernanceFinancial statements 40 Annual Report 2014 The Restaurant Group plc Directors’ remuneration report continued Directors’ remuneration policy report Policy overview The objective of our remuneration policy is to attract, retain and incentivise a high calibre of senior management who can direct the business and deliver the Group’s core objective of growth in shareholder value by building a business that is capable of delivering long-term, sustainable and growing cash flows. Consideration of employment conditions elsewhere in the Group In determining the remuneration of the Group’s Directors, the Committee takes into account the pay arrangements and terms and conditions across the Group as a whole. The Committee seeks to ensure that the underlying principles which form the basis for decisions on Directors’ pay are consistent with those on which pay decisions for the rest of the workforce are taken. To achieve this objective, executive Directors and senior management receive remuneration packages with elements of fixed and variable pay. Fixed pay elements (basic salary, pension arrangements and other benefits) are set at a level to recognise the experience, contribution and responsibilities of the individuals and to take into consideration the level of remuneration available from a range of the Group’s broader competitors. Variable pay elements (annual bonus and Long-Term Incentive Plan (“LTIP”) awards) are set at a level to incentivise executive Directors and senior management to deliver outstanding performance in line with the Group’s strategic objectives. Key elements of the remuneration policy for Directors Set out below is a summary of the main elements of the remuneration policy for executive Directors and non-executive Directors, together with further information on how these aspects of remuneration operate. The main changes from the policy approved at the 2014 AGM are: • the replacement of the 2005 LTIP which expires in November 2015; • a reduction in annual bonus potential; • the introduction of a two year post-vesting LTIP holding period; and • an increase in executive Director shareholding guidelines. Consideration of shareholders’ views The Remuneration Committee considers feedback from shareholders received at each AGM and any feedback from additional meetings as part of any review of executive remuneration. In addition, the Remuneration Committee engages pro-actively with shareholders and ensures that shareholders are consulted in advance where any material changes to the remuneration policy are proposed. This policy will be operated from the date of the Annual General Meeting in May 2015. Basic salary Purpose and link to strategy Attract and retain key personnel. Reflects individual responsibilities, skills and achievement of objectives. Operation Opportunity Reviewed annually from 1 January or when an individual changes position or responsibility. Increases based on role, experience, performance and consideration of the broader workforce pay review and competitor pay levels. No prescribed maximum annual increase. The Committee is guided by the general increase for the broader UK employee population but on occasions may need to recognise, for example, an increase in the scale, scope or responsibility of the role. Performance metrics None. Benefits To provide market consistent benefits. Contractual entitlement. No maximum limit. None. Benefits packages typically comprise a car (or car allowance), health insurance, and life assurance although other benefits may be provided where appropriate. Pension Annual bonus Purpose and link to strategy Rewards sustained contribution. Rewards the achievement of annual financial targets and other key performance indicators, depending on job responsibilities. The Restaurant Group plc Annual Report 2014 41 Operation Opportunity Performance metrics Up to 20% of basic salary for the executive Directors. None. Maximum of 150% of basic salary. Normally based on a one year performance period. Majority of the bonus opportunity will be based on Group profit before tax. Contribution to a personal pension plan (no defined benefit schemes operate) and/or a salary supplement (e.g. where HMRC limits would be exceeded). Targets renewed annually as part of the budgeting process and primarily related to Group performance. Bonus level is determined by the Committee after the year-end based on performance conditions drawn up before the financial year commences. In respect of any bonus in excess of 100% of salary, within three months of payment of bonus the executive must invest any such excess, net of tax, in shares (or retain shares vested under the LTIP to an equivalent value) which must be held for not less than three years (“deferred bonus shares”) or until the executive ceases full time employment, there is a change of control of the Company or other appropriate circumstances. Not pensionable. A claw back mechanism operates. OverviewStrategic reportGovernanceFinancial statements 42 Annual Report 2014 The Restaurant Group plc Directors’ remuneration report continued Performance metrics Normally based on a three year performance period. TSR vs comparator group. Financial metrics (e.g. EPS). 25% of an award vests at threshold performance increasing to full vesting at maximum performance. Operation Opportunity Maximum of 200% of base salary. LTIP Purpose and link to strategy Promotes achievement of long-term strategic objectives of increasing shareholder value and delivering sustainable and expanding cash flows. Save As You Earn scheme (‘SAYE’) Encourages employee share ownership and therefore increases alignment with shareholders. Shareholding guidelines Increase alignment with shareholders. Non-executive Directors’ fees Reflects fees paid by similarly sized companies. Reflects time commitments and responsibilities of each role. Annual grant of Conditional Awards in the form of nil cost options. Conditional Awards vest three years after grant subject to performance conditions and continued employment. Two year post-vesting holding period applies to the net of tax shares for awards under the 2015 LTIP (with the first grant expected to be made in 2016). Dividend equivalents may be payable. A claw back mechanism operates. HMRC plan under which eligible employees are able to purchase shares under a three year savings contract at a discount of up to 20% of market value at grant. Provides tax advantages to UK employees. Requirement to retain no fewer than 50% of the net of tax shares vesting under an LTIP award until the required shareholding is achieved. Fees are reviewed annually. Fees paid in cash. Prevailing HMRC limits. None. 200% of basic salary. None. None. As per executive Directors, there is no prescribed maximum annual increase. The Committee is guided by the general increase in the non-executive director market and for the broader UK employee population but on occasions may need to recognise, for example, an increase in the scale, scope or responsibility of the role. Financial performance measures (profit before tax, earnings per share (“EPS”) and total shareholder return (“TSR”)) are used as the key performance indicators (“KPIs”). The combination of EPS and TSR performance conditions provides a balance between rewarding management for growth in sustainable profitability and stock market outperformance. TSR is a clear indicator of the relative success of the Group in delivering shareholder value and, as a performance measure, firmly aligns the interests of Directors and shareholders. The EPS target range will require growth from the current all-time high level of profitability and the TSR condition will be based from a strong recent share price performance. Performance against EPS and TSR targets are reviewed by the Committee. The Committee operates share plans in accordance with their respective rules and in accordance with the Listing Rules and HMRC where relevant. The Committee, consistent with market practice, retains discretion over a number of areas relating to the operation and administration of these plans. There are no material differences in the structure of remuneration arrangements for the executive Directors and senior management population, aside from quantum, performance metrics and participation rates in incentive schemes, which reflect the fact that a greater emphasis is placed on performance-related pay for executive Directors and the most senior individuals in the management team. Outside of the senior management team, the Company aims to provide remuneration structures for employees which reflect market norms. For avoidance of doubt, in approving this Directors’ remuneration policy report, authority is given to the Company to honour any prior commitments entered into with current or former Directors. Illustration of application of remuneration policy The chart below shows the value of the executive Directors’ packages under three performance scenarios, minimum, on-target and maximum assuming that the proposed changes to the policy are approved at the 2015 AGM. References to annual bonus relate to the 2015 financial year while references to LTIP awards relate to the 2016 awards (i.e. the first award to be granted under the new policy). The Restaurant Group plc Annual Report 2014 43 Value of remuneration packages at different levels of performance (£’000) 2,500 2,000 1,500 1,000 500 0 39% 34% 27% 33% 25% 42% 100% 39% 34% 27% 33% 25% 42% 100% Minimum On-target Maximum CEO Minimum On-target Maximum CFOCFO LTIP Bonus Basic salary, benefits and pension Notes: 1 Salary levels are based on those applying from 1 January 2015. 2 The value of benefits receivable in 2015 is estimated and pension is based on 20% of salary. 3 The on-target level of bonus is taken to be 50% of the maximum bonus opportunity (150% of salary for both the Chief Executive Officer and the Chief Financial Officer). 4 The on-target level of vesting under the LTIP is taken to be 55% of the face value of the expected 2016 LTIP awards at grant and the maximum value is taken to be 100% of the face value of the expected 2016 awards at grant (175% of salary for both executive Directors). 5 No share price appreciation has been assumed for the deferred bonus shares and LTIP awards. Approach to recruitment and promotions The remuneration package for a new executive Director would be set in accordance with the terms of the Company’s prevailing approved remuneration policy at the time of appointment and take into account the skills and experience of the individual, the market rate for a candidate of that experience and the importance of securing the relevant individual. Salary would be provided at such a level as required to attract the most appropriate candidate and may be set initially at a below mid-market level on the basis that it may progress towards the mid-market level once expertise and performance has been proven and sustained. The annual bonus potential would be limited to 150% of salary and grants under the LTIP would be limited to 200% of salary (but normally limited to a maximum of 175%). In addition, the Committee may offer additional cash and/or share-based elements to replace deferred or incentive pay forfeited by an executive leaving a previous employer. It would seek to ensure, where possible, that these awards would be consistent with awards forfeited in terms of vesting periods, expected value and performance conditions. For an internal executive Director appointment, any variable pay element awarded in respect of the prior role may be allowed to pay out according to its terms. In addition, any other ongoing remuneration obligations existing prior to appointment may continue. OverviewStrategic reportGovernanceFinancial statements 44 Annual Report 2014 The Restaurant Group plc Directors’ remuneration report continued For external and internal appointments, the Committee may agree that the Company will meet certain relocation and/or incidental expenses as appropriate. If appropriate, the Committee may agree, on the recruitment of a new executive, to a notice period in excess of 12 months but to reduce this to 12 months over a specified period. Service contracts and payments for loss of office Contractual provisions It is the Company’s policy that any new executive Director appointment should have a service contract with an indefinite term which is subject to one year’s notice by either party with provision, at the Board’s discretion, for early termination by way of a payment in lieu of salary, benefits and pension, with the ability to phase payments and mitigate such payments if alternative employment is obtained. There will be no provisions in respect of a change of control. In respect of the newly appointed Chief Executive Officer, in the event of early termination by the Company, the Company shall make a payment in lieu of notice equivalent to twelve months of base salary only. There are no provisions in respect of change of control. Under the Chief Financial Officer’s contract (originally dated 7 July 2004), the Company shall make a payment in lieu of notice equivalent to twelve months of base salary, benefits, pension and annual bonus. Following a review of service contract provision carried out in November 2014, Stephen Critoph relinquished his contractual change of control provisions (as disclosed in last year’s remuneration policy report). Outstanding incentive awards The annual bonus may be payable with respect to the period of the financial year worked although it will be pro-rated for time and paid at the normal pay-out date. Any share-based entitlements granted to an executive Director under the Company’s share plans will be determined based on the relevant plan rules. Any outstanding LTIP awards will normally lapse on cessation of employment. However, in certain prescribed circumstances, such as death, ill-health, disability, retirement or other circumstances at the discretion of the Committee, ‘good leaver’ status may be applied. Awards held by executive Directors will normally vest on their scheduled vesting date, subject to the satisfaction of the relevant performance conditions at that time and reduced pro-rata to reflect the proportion of the performance period actually served. However, the Remuneration Committee has discretion to determine that awards vest at cessation and/or to dis-apply time pro-rating. Non-executive Directors Letters of appointment for the non-executive Directors were each set for an initial three year period (renewable thereafter for periods of three years). They are required to submit themselves for re-election every year. The Chairman has a notice period of a year and the non-executive Directors are appointed under arrangements that may generally be terminated at will by either party without compensation. Fees payable for a new non-executive Director appointment will take into account the experience and calibre of the individual and current fee structure. Annual report on remuneration Implementation of the remuneration policy for the 2015 financial year Executive Directors’ salaries for 2014 and applying with effect from 1 January 2015 are: 2014 (to 31 August 2014) £ – £615,000 £290,000 2014 (from 1 September 2014) £ £450,000 – £350,000 2015 (from 1 January 2015) £ £480,000 – £380,000 £905,000 £800,000 £860,000 Basic salary Danny Breithaupt Andrew Page Stephen Critoph Total Executive Director salaries Following Danny Breithaupt’s promotion to Chief Executive Officer from 1 September 2014, his annual base salary was set at £450,000 from appointment. While this reflected a below median base salary (and was c.27% lower than previous Chief Executive Officer’s base salary), the Committee intends to increase his salary to market level over time as his experience in the role grows. The first such assessment was carried out at the start of 2015 and, noting Danny Breithaupt’s progress to date, his salary with effect from 1 January 2015 was increased from £450,000 to £480,000. The next such review will take place at the start of 2016. The Restaurant Group plc Annual Report 2014 45 Performance targets for LTIP awards to be granted in 2015 Consistent with previous years, the final Conditional and Matching Awards to be granted under the 2005 LTIP will be subject to the following targets: • TSR element (50%) – the Company’s TSR vs the FTSE 350 Travel and Leisure sector (excluding airlines). 30% of this element of the award vests for a median ranking, increasing to full vesting for an upper quartile ranking; and • EPS element (50%) – growth in the Company’s EPS in excess of inflation. 30% of this element of the award vests for growth equal to RPI + 4% p.a., increasing to full vesting for growth equal to or in excess of RPI + 10% p.a.. Conditional Awards (there will be no facility to grant Matching Awards) granted from 2016 will, subject to shareholder approval at the 2015 AGM, be granted under the 2015 LTIP. The key elements of the proposed new 2015 LTIP Scheme are set out in the Notice of AGM. Non-executive Directors As detailed in the remuneration policy, the Company’s approach to setting non-executive Directors’ fees is by reference to fees paid at similar companies and reflects the time commitment and responsibilities of each role. A summary of current fees is as follows: Chairman Other non-executive Directors 2014 £321,500 £53,500 2015 £337,600 £56,200 In addition to the review of Danny Breithaupt’s base salary carried out at the start of the year, the Committee has also reviewed Stephen Critoph’s salary with effect from 1 January 2015. Stephen Critoph’s salary was set at £350,000 from 1 September 2014 following a material change in his role and responsibilities. Upon originally reviewing Stephen’s role, the Committee arrived at a base salary range of between £350,000 – £400,000 (based on Chief Financial Officer salaries in the top half of the FTSE 250). At the time of the September 2014 review date, the Committee felt that it was appropriate to position the salary at the bottom of the range and review his performance in the role over time. However, following a review of Stephen’s performance in the role; how his role has evolved to date; and his importance in respect of working with Danny Breithaupt to deliver the growth strategy over the longer term, the Committee determined that his salary should be increased from £350,000 to £380,000 with effect from 1 January 2015. In the Committee’s view, this now places Stephen’s salary broadly around market when compared to similarly sized FTSE 250 roles. Future salary increases for Stephen Critoph are expected to be in line with workforce inflation. The average increase for managerial and administrative employees across the Group was 3% for the 2015 pay review. Pension and benefits Pension and benefits will continue to be provided in line with the stated policy. Performance targets for the annual bonus in 2015 For 2015, the annual bonus will continue to be based on Group financial measures. The Committee has chosen not to disclose, in advance, the performance targets for the forthcoming year as these include items which the Committee considers commercially sensitive. For 2015, Danny Breithaupt’s annual bonus will be set at 150% of salary (a reduction from the 165% of salary offered to the previous Chief Executive Officer) and Stephen Critoph’s annual bonus potential will be set at 150% of salary for 2015 onwards (an increase from the 137.5% of salary for 2014 to reflect his increased responsibilities). OverviewStrategic reportGovernanceFinancial statements 46 Annual Report 2014 The Restaurant Group plc Directors’ remuneration report continued Remuneration received by Directors (audited) The table below sets out the remuneration received by the Directors in relation to performance in the year ended 28 December 2014 (or for performance periods ending in 2014 in respect of long-term incentives) and the year ended 29 December 2013. Taxable benefits1 Pension2 Annual bonus3 SAYE vesting Long-Term Incentive Plan4, 5 Value of vesting award at grant Increase in value due to rise in share price Dividend equivalent Value of award Total Salary & fees 150 410 602 310 284 – 94 322 315 53 53 53 53 45 5 18 27 12 13 – 4 49 47 – – – – – 15 169 82 120 62 56 – 9 – – – – – – – 509 993 300 378 – 103 – – – – – – – – – – 236 303 35 574 913 1,808 1,042 1,567 933 165 123 3,540 2,098 4,559 3,840 – 16 397 376 509 338 – – – – – – – – – – 330 – 296 – – – – – – – – – – – – – – 59 44 – 39 – – – – – – – 965 758 1,649 1,505 – 665 – 875 – – – – – – – 371 362 53 53 53 53 45 £’000 Executive Directors Danny Breithaupt6 2014 Andrew Page7 2014 2013 Stephen Critoph 2014 2013 Trish Corzine (retired 2013) 2014 2013 Non-executive Directors Alan Jackson 2014 2013 Tony Hughes 2014 2013 Simon Cloke 2014 2013 Sally Cowdry 2014 1 Benefits comprise car (or car allowance), health care and life assurance. 2 This comprises contributions to the Directors’ personal pension plans and/or salary supplements. 3 This relates to the payment of the annual bonus for the year ended 28 December 2014. Further details of this payment are set out below. 4 This relates to the vesting of the 2012 LTIP Conditional and Matching Awards (where the performance period ended on 28 December 2014). Further details of the values attributed to the 2012 LTIP awards are set out below. 5 Prior year LTIP awards were valued with reference to the three month average share price to 29 December 2013 of 561.2 pence. The actual share price on the date of exercise by the executive directors was 698.0 pence. 6 Remuneration for Danny Breithaupt relates to the period after 1 September 2014 and, in the case of the LTIP, for the performance periods ending after this date. 7 Andrew Page’s remuneration covers the period until his retirement from office on 31 August 2014. The Restaurant Group plc Annual Report 2014 47 Annual bonus payments (audited) The annual bonus for the year under review for the Chief Executive Officer and Chief Financial Officer was primarily based on profit before tax performance. The structure of the targets and the actual performance against the targets was as follows: 23% of maximum potential bonus was payable for achieving target PBT, increasing to 100% for achieving 107% of target PBT. The actual result was 103% of target PBT. Targets have not been disclosed on the grounds of commercial sensitivity. The target PBT will be disclosed in a subsequent remuneration report when it no longer forms part of the comparative PBT result. Vesting of LTIP Awards in year under review (audited) The LTIP Award granted on 1 March 2012 was based on a three year performance period ended 28 December 2014. As disclosed in previous annual reports, the performance condition for this award was as follows: Metric Earnings per share (50% for Conditional Award; 50% for Matching Award) Performance Condition EPS growth of RPI + 4% p.a. (15% vesting) to RPI + 10% p.a. (50% vesting) over three financial years. Threshold Target 26.24p EPS Stretch Target 30.75p EPS Actual 29.96p EPS Total shareholder return (50% for Conditional Award; 50% for Matching Award) TSR against the constituents of the FTSE 350 Travel and Leisure sector (excluding airlines). 15% vesting for median performance and 50% vesting for upper quartile performance. TSR measured over three financial years with a three month average at the start and end of the performance period. 80.2% (Median) 140.1% (Upper Quartile) 144.0% % Vesting 44% (max 50% for Conditional Awards) 44% (max 50% for Matching Awards) 50% (max 50% for Conditional Awards) 50% (max 50% for Matching Awards) Total vesting for Conditional Award Total vesting for Matching Award 94% 94% The award details for the executive Directors are therefore as follows: Executive Danny Breithaupt Stephen Critoph Type of award Conditional Award Matching Award Conditional Award Matching Award Number of shares at grant 60,788 27,692 100,144 48,631 Number of shares to vest 57,231 26,072 94,285 45,785 Number of shares to lapse 3,557 1,620 5,859 2,846 Cash value of dividends on shares to vest1 23,951 10,911 39,458 19,161 Estimated value2 394,121 179,545 649,294 315,298 1 The table above and following wording assumes the 2012 LTIP Award dividend equivalent will be settled in cash. Consistent with best practice, the LTIP enables award holders to benefit from the payment of dividend equivalents but only to the extent that the underlying share awards vest. The accounting charge for these amounts is spread over the relevant vesting period as part of the IFRS 2 “Share-based payments” charge (see note 20). As disclosed above and consistent with past practice, dividend equivalents on the 2012 awards, to the extent they vested, will be settled by way of cash payments. 2 The estimated value of the vested shares is based on the average share price during the 3 months to 28 December 2014 (646.8 pence). Details of awards held by Andrew Page which vested at cessation are presented in the Payments on cessation of office section below. OverviewStrategic reportGovernanceFinancial statements 48 Annual Report 2014 The Restaurant Group plc Directors’ remuneration report continued Outstanding share awards The table below sets out details of executive Directors’ outstanding share awards (which will vest in future years subject to performance and/or continued service). At 29 December Name of Director Danny Breithaupt Scheme LTIP (1) LTIP (2) 2013 Granted Exercised (41,043) – (23,095) – 43,594 26,156 Lapsed (2,551) (3,061) Andrew Page Stephen Critoph LTIP (3) 60,788 LTIP (4) 2012 SAYE 27,692 2,226 LTIP (5) 49,867 LTIP (6) 24,933 – – – – – LTIP (7) – 43,947 – – – – – – 2012 SAYE LTIP (8) 2014 SAYE – – LTIP (1) 284,790 LTIP (2) 94,930 LTIP (3) 318,804 LTIP (4) 100,504 3,180 LTIP (5) 218,326 LTIP (6) 72,775 LTIP (7) LTIP (8) LTIP (1) LTIP (2) – 16,480 – 2,228 (268,129) – – (83,823) – (265,670) (83,752) – – – (109,162) – (36,386) – (23,708) – 142,251 (7,902) 47,417 – (86,492) – 91,867 (40,558) – 45,933 LTIP (3) 100,144 LTIP (4) 48,631 LTIP (5) 68,544 LTIP (6) 34,272 – – – – LTIP (7) LTIP (8) 2014 SAYE – – – 44,718 22,359 3,428 – – – – – – – – – – – – – – – (16,661) (11,107) (53,134) (16,752) – (109,164) (36,389) (118,543) (39,515) (5,375) (5,375) – – – – – – – At 28 December 2014 – – Exercise price – – 60,788 – 27,692 2,226 49,867 24,933 43,947 16,480 2,228 – – – – 3,180 – – – – – – 100,144 48,631 68,544 34,272 44,718 22,359 3,428 – 283p – – – – 525p – – – – 283p – – – – – – – – – – – – 525p Date from which exercisable 17.03.2014 17.03.2014 Publication of 2014 results Publication of 2014 results 01.12.2015 Publication of 2015 results Publication of 2015 results Publication of 2016 results Publication of 2016 results 01.12.2017 17.03.2014 17.03.2014 31.08.2014 31.08.2014 01.12.2015 31.08.2014 31.08.2014 31.08.2014 31.08.2014 17.03.2014 17.03.2014 Publication of 2014 results Publication of 2014 results Publication of 2015 results Publication of 2015 results Publication of 2016 results Publication of 2016 results 01.12.2017 Expiry date 17.09.2014 17.09.2014 6 months after vesting 6 months after vesting 01.06.2016 6 months after vesting 6 months after vesting 6 months after vesting 6 months after vesting 01.06.2018 17.09.2014 17.09.2014 28.02.2015 28.02.2015 01.06.2016 28.02.2015 28.02.2015 28.02.2015 28.02.2015 17.09.2014 17.09.2014 6 months after vesting 6 months after vesting 6 months after vesting 6 months after vesting 6 months after vesting 6 months after vesting 01.06.2018 The Restaurant Group plc Annual Report 2014 49 LTIP (1) – 2011 Conditional Award: Vesting of 50% of the award was based on relative TSR performance and 50% was based on EPS growth to 29 December 2013. Details of the Company’s performance against the performance conditions are set out in last year’s Directors’ remuneration report. 94.15% of the Conditional Award vested based on performance to 29 December 2013. LTIP (2) – 2011 Matching Award: Vesting was based on EPS growth to 29 December 2013. Details of the Company’s performance against the performance condition are set out in last year’s Directors’ remuneration report. 88.3% of the Matching Award vested. LTIP (3) – 2012 Conditional Award: Details of performance conditions are set out on page 47. LTIP (4) – 2012 Matching Award: Details of performance conditions are set out on page 47. LTIP (5) and (6) – 2013 Conditional Award and Matching Award: Vesting of 50% of the award is based on TSR performance of the Group against a comparator group comprising the FTSE 350 Travel and Leisure Sector (excluding airlines) over the three years from 2012 to 2015, with 30% of this part of the award vesting at median performance and full vesting of this part of the award for upper quartile performance. The remaining 50% of the award is based on EPS growth of the 2015 results compared with the 2012 results, with a requirement for average annual growth of between RPI+4% and RPI+10% p.a.. LTIP (7) and (8) – 2014 Conditional Award and Matching Award: Vesting of 50% of the award is based on TSR performance of the Group against a comparator group comprising the FTSE 350 Travel and Leisure Sector (excluding airlines) over the three years from 2013 to 2016, with 30% of this part of the award vesting at median performance and full vesting of this part of the award for upper quartile performance. The remaining 50% of the award is based on EPS growth of the 2016 results compared with the 2013 results, with a requirement for average annual growth of between RPI+4% and RPI+10% p.a.. Long-Term incentives granted during the year (audited) On 27 February 2014, the following LTIP awards were granted to executive Directors: Executive Andrew Page Type of award Conditional Awards – nil cost option Matching Awards – nil cost option Stephen Critoph Conditional Awards – nil cost option Matching Awards – nil cost option Basis of award granted 150% of salary of £615,000 Compulsory and voluntary bonus deferral 100% of salary of £290,000 Compulsory and voluntary bonus deferral Share price at date of grant 658.5p Number of shares over which award was granted 142,251 Face value of award (£)* 922,498 % of face value that would vest at threshold performance** 30% Vesting determined by performance over 658.5p 47,417 307,499 30% 658.5p 44,718 289,996 30% Three financial years to 1 January 2017 658.5p 22,359 144,998 30% * Based on an average share price of 648.5 pence immediately prior to grant. ** Details of the performance targets are set out on page 45 of the annual report on remuneration. Payments on cessation of office (audited) Andrew Page stepped down from the Board on 31 August 2014. No payments were made for loss of office. He was eligible to receive a pro-rated annual bonus for the year ended 28 December 2014 in respect of the period of the financial year that he worked full time (to 31 August 2014) amounting to £509,000. As disclosed in the 2013 Directors’ remuneration report, outstanding LTIP awards vested on cessation subject to performance and time pro-rating. Amounts vesting under those awards amounted to: LTIP award 2012 2013 2014 Number of shares at grant 419,308 291,101 189,668 Number of vested shares 349,422 145,548 31,610 Number of lapsed shares 69,886 145,553 158,058 Cash value of dividends on vested shares 124,918 36,023 3,856 Estimated Value1 (£’000) 2,365 969 206 1 LTIP awards are valued at the share price on the day of vesting (641.0 pence). Performance targets were met in full. OverviewStrategic reportGovernanceFinancial statements 50 Annual Report 2014 The Restaurant Group plc Directors’ remuneration report continued Payments to past Directors (audited) After stepping down from the Board on 15 May 2013, Trish Corzine continued to work for the Company on a part-time basis until 31 May 2014. She received £21,042 in salary and £1,142 in benefits in respect of her employment with the Company from 30 December 2013 until she left the Company. As disclosed in the 2013 Directors’ remuneration report, 99,286 shares relating to the 2012 LTIP vested on the cessation of Trish Corzine’s employment, with an estimated value, including dividend equivalent, of £631,000, based on the share price on the date of vesting (612.1 pence) (2013 payments to Trish Corzine as a past Director as disclosed in 2013 Annual Report: salary of £69,777, benefits of £3,309 and pension contribution of £1,086). Statement of Directors’ shareholdings and share interests (audited) Director Danny Breithaupt Andrew Page Stephen Critoph Alan Jackson Tony Hughes Simon Cloke Sally Cowdry Beneficially owned at 29 December 2013 52,7031 490,056 263,220 250,191 400,000 15,000 n/a Beneficially owned at 28 December 2014 52,703 n/a 275,220 250,191 400,000 7,000 1,000 Shareholding % of salary at 28 December 2014 76% n/a 509% n/a n/a n/a n/a Outstanding LTIP awards 223,706 n/a 318,667 n/a n/a n/a n/a Guideline Met? No n/a Yes n/a n/a n/a n/a 1 Holding on appointment at 1 September 2014 The Chief Executive Officer and Chief Financial Officer are required to hold shares in the Company worth 200% of salary and must retain no fewer than 50% of the shares, net of taxes, vesting under an LTIP Award until the required shareholding is achieved. At 28 December 2014, Stephen Critoph had met the shareholding requirement. As at the date this report was approved by the Board of Directors, there have been no changes in respect of the numbers of shares presented in the table above. Performance graph and Chief Executive Officer pay The graph below compares the Company’s TSR performance and that of the FTSE 250 index, the FTSE Small Cap Index and the FTSE 350 Travel and Leisure Index over the past six years, all rebased from 100. The FTSE 350 Travel & Leisure Index has been selected for this comparison because it is the index most relevant to gauging the Company’s relative performance. This graph shows the value, by 28 December 2014, of £100 invested in The Restaurant Group plc on 28 December 2008 compared with the value of £100 invested in the FTSE 250 Index, the FTSE Small Cap Index and the FTSE 350 Travel and Leisure Index. On this basis the value, as at 28 December 2014, of £100 invested is as follows: The Restaurant Group plc (dividends re-invested) FTSE 250 Index FTSE Small Cap Index FTSE 350 Travel & Leisure £718 £317 £302 £296 The Restaurant Group plc Annual Report 2014 51 The Restaurant Group FTSE 250 FTSE SmallCap FTSE 350 Travel & Leisure Index Source: Thomson Reuters (Datastream) Total shareholder return ) £ ( l e u a V 800 700 600 500 400 300 200 100 0 28 Dec 08 27 Dec 09 02 Jan 11 01 Jan 12 30 Dec 12 29 Dec 13 28 Dec 14 This graph shows the value, by 28 December 2014, of £100 invested in The Restaurant Group plc on 28 December 2008 compared with the value of £100 invested in the FTSE SmallCap*, FTSE 250* and FTSE 350 Travel and Leisure Indices. The other points plotted are the values at intervening financial year-ends. * excluding investment trusts The table below shows the total remuneration for the Chief Executive Officer for each of the last six years: Andrew Page 2009 535 27 108 670 642 2010 543 29 109 681 2011 558 27 112 697 2012 590 27 118 735 2013 602 27 120 749 543 720 974 993 2014 to 31.08.2014 410 18 82 Danny Breithaupt 2014 from 01.09.2014 150 5 15 510 509 509 916 1,097 623 1,042 1,808 (186) 34 357 1,114 154 2,184 1,471 243 2,811 647 91 1,361 933 123 2,098 1,567 165 3,540 999 2,727 3,531 2,335 3,091 4,049 1,669 100% 3,408 100% 4,228 86% 3,070 100% 3,840 100% 4,559 75% 85% 90% 100% 82% 93% 100% 170 169 236 303 35 574 743 913 75% 94% Salary Benefits Pension Total fixed remuneration Annual bonus LTIP face value of vested shares at grant LTIP increase in value between grant and vest Dividend equivalent Total LTIP Total performance related remuneration Total remuneration Annual bonus % Annual LTIP Vesting % OverviewStrategic reportGovernanceFinancial statements 52 Annual Report 2014 The Restaurant Group plc Directors’ remuneration report continued Percentage change in Chief Executive Officer’s remuneration The table below shows the percentage change in the Chief Executive Officer’s salary, benefits and annual bonus between the financial year ending 28 December 2014 and 29 December 2013, compared to all employees of the Group. The Committee makes recommendations to the Board. No Director plays a part in any discussion about his or her own remuneration. In determining the executive Directors’ remuneration for the year, the Committee consulted Alan Jackson (non-executive Chairman) about its proposals. Chief Executive All employees Average number of employees Salary % change n/a 3% Benefits % change n/a 3% 13,601 Bonus % change n/a 3% New Bridge Street (‘NBS’), part of Aon plc, were appointed by the Committee and act as independent advisers to the Committee, providing services encompassing all elements of the remuneration packages. Neither NBS nor any other part of Aon plc provided any other services to the Group during the year. Total fees paid to NBS in respect of its services were £31,855. Following Danny Breithaupt’s appointment as Chief Executive Officer from 1 September 2014, his annual base salary was set at £450,000 and this increased to £480,000 on 1 January 2015. His salary on 1 September represents a c.27% reduction to the previous Chief Executive Officer’s base salary and his bonus entitlement of 150% of salary represents a c10% reduction to the previous Chief Executive Officer’s bonus potential. Relative importance of spend on pay The following table shows the Company’s actual spend on pay (for all employees) relative to dividends. £m Staff costs Dividends1 Retained profits1 2013 184.1 24.9 56.2 2014 205.2 29.5 60.1 % change 11.5% 18.5% 6.9% 1 Dividends and retained profits are as reported for the 2014 trading business and exclude the non-trading income and dividend relating to the disposal of the Group’s equity interest in BH Restaurants Limited. Appointments outside the Group Executive Directors are entitled to accept appointments outside the Company or Group and there is no requirement for Directors to remit any fees to The Restaurant Group plc. Currently, none of the executive Directors hold any external appointments. Consideration by the Directors of matters relating to Directors’ remuneration The Company has a Remuneration Committee (“the Committee”) which is constituted in accordance with the recommendations of the UK Corporate Governance Code. The members of the Committee during the year were Tony Hughes (Chairman), Simon Cloke and Sally Cowdry, who were independent non-executive Directors. None of the Committee has any personal financial interest in the Company (other than as shareholders). NBS is a signatory to the Remuneration Consultants’ Code of Conduct. The Committee has reviewed the operating processes in place at NBS and is satisfied that the advice that it receives is objective and independent. Statement of shareholder voting The Directors’ remuneration policy and the Directors’ remuneration report for the financial year ending 29 December 2013 were put to shareholders at the Annual General Meeting held on 15 May 2014 on an advisory basis. The voting outcomes were as follows: Directors’ remuneration policy Votes cast in favour Votes cast against Total votes cast Votes withheld Directors’ remuneration report Votes cast in favour Votes cast against Total votes cast Votes withheld 140,732,782 1,100,972 141,833,754 164,888 132,863,783 664,055 133,527,838 8,470,804 99% 1% 100% 100% 0% 100% Approval This report was approved by the Board of Directors on 27 February 2015 and signed on its behalf by: Tony Hughes Chairman of the Remuneration Committee Audit Committee report The Restaurant Group plc Annual Report 2014 53 This report sets out the work carried out by the Audit Committee (“Committee”) of the Board with reference to the UK Corporate Governance Code (“the Code”) and associated best practice guidance issue by the Financial Reporting Council. The Audit Committee also reviews the arrangements whereby staff of the Company may, in confidence, raise concerns about possible improprieties in financial reporting or other matters, to ensure there are proportionate and independent procedures in place for such an occurrence. Audit Committee composition The Audit Committee is appointed by the Board and comprises independent non-executive Directors of the Company. The Committee is chaired by Simon Cloke, who has significant financial experience gained as a Managing Director within HSBC Bank’s Corporate Sector Group. On the 1 March 2014 Sally Cowdry became a member of the Audit Committee shortly after her appointment to the Board. Tony Hughes is also a member of the Committee. The Code recommends that audit committees be comprised of at least three independent non-executive directors for companies with a premium listing, such as The Restaurant Group plc. Following Sally Cowdry’s appointment, the Audit Committee has comprised of three independent non-executive directors. The Board continues to review the composition of the Audit Committee to ensure that it remains proportionate to the task and provides sufficient scrutiny of risk management and internal and external controls. The Board as a whole reviews the risks facing the Group, and the processes put in place to mitigate those risks, on a regular and formal basis. The Board also reviews the work carried out by the Internal Audit function. Audit Committee frequency The Audit Committee meets at least twice a year. Two formal meetings of the Committee were held during 2014 to review and discuss the 2013 year end audit and the findings from the external auditor on the 2014 interim review. On one occasion, a conflicting appointment prevented full attendance of the Committee. The Chairman and other members of the Committee also meet with the Chief Financial Officer and the external auditor, as required, to discuss matters pertinent to the Committee’s responsibilities. This included a meeting to discuss the external audit plan, including significant risk assessment, developments in corporate governance and audit fees. The Chairman of the Audit Committee also meets, as required, with the Group Internal Audit function to review their findings. The Audit Committee regularly invites the external auditor, the Chairman of the Board, the Chief Executive Officer and the Chief Financial Officer to its meetings. Discussions are held in private when appropriate. Responsibilities of the Audit Committee The responsibilities of the Audit Committee are set out in its terms of reference and the principal matters are to: • provide additional assurance regarding the integrity, quality and reliability of financial information used by the Board and in financial statements issued to shareholders and the public; • review the Company’s internal procedures for control and compliance with regard to financial reporting to satisfy itself that these are adequate and effective; • review the principles, policies and practices adopted in the preparation of the Group’s financial statements to ensure they comply with statutory requirements and generally accepted accounting principles; • receive reports from the Group’s external auditor concerning external announcements, in particular the Annual Report and Accounts and the Interim Report; • develop and oversee the Company’s policy regarding the external audit process, review the independence of the external auditor, review the provision of non-audit services provided by the external auditor and review and approve the remuneration of the external auditor; and • consider any other matter that is brought to its attention by the Board or the external auditor. Audit Committee process The Committee discharges its responsibilities, as defined in its terms of reference, through Audit Committee meetings during the year, at which detailed reports are presented for review. From time to time, the Committee commissions reports from external advisers or Company management, either after consideration of the Company’s major risks or in response to developing issues. The Committee has the opportunity to meet privately with the external auditor at least twice a year and liaises with Company management in considering areas for review. During the year, the Committee considered the following matters: • interim and full year financial results. As part of this review the Committee received reports from the external auditor on their audit of the Annual Report and Accounts and their review of the Interim Report; • the external auditor’s interim and full year reports; • the scope and cost of the external audit; • non-audit work carried out by the external auditor in accordance with the Committee’s policy to ensure the safeguard of audit independence; • the effectiveness of the external audit process and consideration of the reappointment of the external auditor; • the suitability of the Group’s accounting policies and practices. Specific accounting policy issues which were considered include the Group’s policies in relation to the recognition and timing of commercial discounts received, the impairment of tangible fixed assets and the classification of leases. OverviewStrategic reportGovernanceFinancial statements 54 Annual Report 2014 The Restaurant Group plc Audit Committee report continued • Commercial discounts received – this is an area the Board has also focussed closely on due to recent high profile cases in the broader food and retail sector. The report from the external auditor has covered this topic in detail and the Committee also considered the strength of management controls in this area. • Impairment of tangible fixed assets – tangible fixed assets are the most quantitatively significant item on the balance sheet, with a net book value at 28 December 2014 of £368.6 million. The Committee has reviewed the paper that management prepare setting out their approach and challenged the key judgements made relating to impairment as well as reviewing this topic in discussion with the external auditor. • Lease classification – the Group has over 400 leases and therefore their classification as either finance or operating leases is critical to the financial statements. The Audit Committee notes that typically the Group takes leases of 25 years or less and it considered management’s approach to assessing the appropriate classification of leases as part of the report it received from the external auditor. For further information on the judgements and estimates reviewed in relation to the impairment of tangible fixed assets, see section a) of the Critical accounting judgements and key sources of estimation and uncertainty in the Accounting policies for the consolidated accounts. The Company’s public financial statements are reviewed by the Committee in advance of their consideration by the Board. Independence of the external auditor The Committee has adopted a policy on the use of the external auditor for non-audit work which is in compliance with the Code. The pre-approved services may be summarised as follows: • audit related services, including work related to the annual Group financial statements audit, subsidiary audits and local statutory accounts; and • certain specified tax services, including tax compliance, tax planning and tax advice. Other work to be carried out by the external auditor is subject to review by the Audit Committee. To fulfil its responsibility regarding the independence of the external auditor, the Committee takes into account the following: • the external auditor’s plan for the current year, noting the role of the senior statutory audit partner who signs the audit report and who, in accordance with professional rules, has not held office for more than five years; • the arrangements for day-to-day management of the audit relationship; • a report from the external auditor describing their arrangements to identify, report and manage any conflicts of interest; • the overall extent of non-audit services provided by the external auditor, in addition to its case-by-case approval of the provision of non-audit services by the external auditor; and • the past service of the auditor who was first appointed by formal tender in 2007. To assess the effectiveness of the external audit process, the Committee takes into account: • the arrangements for ensuring the independence and objectivity of the external auditor; • the external auditor’s fulfilment of the agreed audit plan; • the robustness and perceptiveness of the auditor in their handling of the key accounting and audit judgements; and • the auditor’s conclusions with regard to existing management and control processes. The External Audit and Audit Tendering Under transition rules set out in the Competition & Markets Authority (“CMA”) final order in response to recent EU regulations, the Group has to mandatorily tender the audit every 10 years. Deloitte LLP was first appointed as external auditor, following a tender process, for the year ended 30 December 2007. The Committee expects to tender the external audit no later than is necessary to comply with the new regulations. The Committee undertakes a review of the objectivity and effectiveness of the audit process each year. When considering the suitability of the external auditor, the Committee takes account of the findings set out in the Public Report on the most recent inspections of Deloitte carried out by the Financial Reporting Council’s Audit Quality Review team and their reports on all other auditors in its sample. When considering suitable external auditors the Committee also takes account of the ability of the auditor to add value through observations from the audit process and interactions of the auditor with the Company’s management. Overview As a result of its work during the year, the Audit Committee has concluded that it has acted in accordance with its terms of reference. The Committee has reviewed the independence and objectivity of Deloitte LLP as external auditor and recommends the re-appointment of Deloitte LLP by shareholders at the Annual General Meeting to be held on 14 May 2015. On behalf of the Audit Committee, Simon Cloke Chairman of the Audit Committee 27 February 2015 The Restaurant Group plc Annual Report 2014 55 Independent auditor’s report to the members of The Restaurant Group plc Opinion on financial statements of The Restaurant Group plc 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 28 December 2014 and of the Group’s profit for the year 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; 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. The financial statements comprise the Consolidated Income Statement, the Consolidated and Parent Company Balance Sheets, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Equity, the Parent Company Reconciliation of Movements in Shareholders’ Funds and the related notes 1 to 27. 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 (United Kingdom Generally Accepted Accounting Practice). Going concern As required by the Listing Rules we have reviewed the directors’ statement that the Group is a going concern. We confirm that: • we have concluded that the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate; and • we have not identified any material uncertainties that may cast significant doubt on the Group’s ability to continue as a going concern. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern. Our assessment of risks of material misstatement The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team: Risk How the scope of our audit responded to the risk Impairment of tangible fixed assets Tangible fixed assets are the most quantitatively significant item on the balance sheet with a net book value at 28 December 2014 of £368.6 million (see note 11 to the financial statements) The fixed asset balance is primarily comprised of freehold and leasehold buildings and the plant and equipment therein that support the Group’s restaurant operations. There are 472 separate restaurant sites. The assessment of the carrying value of tangible fixed assets requires evaluating whether any indicators of impairment exist in the asset base by reference to expected future profitability of cash generating units (“CGUs”) within the restaurant estate. This is recognised as a critical judgement in the accounting policies on page 61 of the financial statements. To audit the risk of potential fixed asset impairment our audit procedures included the following: We challenged management’s identification of CGUs and whether it is appropriate given the requirements in IAS 36, “Impairment of assets”. Specifically we considered whether it is appropriate to treat certain sites together in clusters, given their location and impact of customers. We also considered the indicators of impairment identified by management, if any, and performed an analysis to challenge their assumptions. We did this by analysing historical and budgeted branch performance, benchmarking with comparator sites (for example those sites of similar size or in similar locations such as town centres or retail parks). In addition, we held discussions with business heads and sought evidence to support assumptions of improved profitability supporting the asset value. OverviewStrategic reportGovernanceFinancial statements 56 Annual Report 2014 The Restaurant Group plc Independent auditor’s report to the members of The Restaurant Group plc continued Risk How the scope of our audit responded to the risk Lease accounting The Group operates a significant number of leasehold sites with varying lease terms. The accounting for leases involves the exercise of judgement particularly whether the leases meet the definition of an operating or a finance lease. The Group primarily operates operating leases. If these were incorrectly classified the associated assets would be capitalised and there would be depreciation and finance charges in the Income Statement with a commensurate reduction in operating rent paid. This judgement is recognised as a critical judgement in the accounting policies on page 61 of the financial statements. Obligations under operating leases are disclosed in note 24. There is also judgement in the identification of potentially onerous leases and whether any provision is required under IAS 37, “Provisions, contingent liabilities and contingent assets”. Provisions for onerous leases are disclosed in note 16 to the financial statements. Recognition of commercial discounts The restaurant business uses a wide range of suppliers. It is typical for suppliers to be on term contracts (mostly annual) and as part of the process to agree the contract, it is common for price discounts to be agreed. These principally take the form of rebates for meeting quantitative volume targets. The recognition of commercial discounts in the Income Statement is a risk given their scale and, in certain cases, the judgement that is required in calculating the discount. Commercial discounts should be recognised in accordance with negotiated supplier contracts and over the correct period to which they relate. To test the classification of leases, our audit procedures focussed on a substantive sample of leases, including new leases. We evaluated the lease terms against the criteria in IAS 17, “Leases” and considered whether the risks and rewards support management’s classification. For onerous leases we challenged the judgements supporting leases identified as onerous and considered completeness by reference to site trading performance. We also tested the onerous lease calculation to supporting evidence, including the lease terms. Discount rates used were also assessed for appropriateness. We held meetings with those negotiating commercial discount arrangements to identify the types of deal in place. Our substantive testing focussed on completeness of discount arrangements, cut-off and the appropriate recognition in the financial year by sampling contracts and comparing suppliers with discount arrangements and amounts recognised in prior periods. With reference to ageing of amounts outstanding, we have also assessed the reasonableness of any provisions held against commercial discounts receivable. The Restaurant Group plc Annual Report 2014 57 Last year our report included one other risk relating to the impairment of goodwill all of which relates to the Pub restaurant business. We have not included this as a key risk in our report this year as the growth in and continued profitability of the Pub restaurant business has increased headroom and consequently it has not had a great impact on our audit strategy or allocation of resources. The description of risks above should be read in conjunction with the significant issues considered by the Audit Committee discussed on page 53. Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters. 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. We determined materiality for the Group to be £4m, which is approximately 5% of statutory pre-tax profit adjusted for the one-off exceptional gain on disposal of the associate, Living Ventures, and below 2% of equity. This is a change of approach from 2013 in order to align more closely with comparable companies. In 2013 we used a materiality of £5.4m which was approximately 7.5% of statutory profit before tax and equated to 3% of equity. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £80,000 (2013: £108,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Based on this assessment our Group audit scope focused on the Group’s head office in London and the accounting function in Chester, which were subject to a full audit. This represents 100% of the Group’s net assets, revenue and profit before tax. Our audit work was executed at levels of materiality applicable to each individual subsidiary entity, which were lower than Group materiality. All audit work done across all components was carried out by the Group audit team. Opinion 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; and • 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. 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 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. We have nothing to report in respect of these matters. 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 arising from these matters. Corporate Governance Statement Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the company’s compliance with ten provisions of the UK Corporate Governance Code. We have nothing to report arising from our review. OverviewStrategic reportGovernanceFinancial statements 58 Annual Report 2014 The Restaurant Group plc Independent auditor’s report to the members of The Restaurant Group plc continued Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Mark Lee-Amies, FCA (Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 27 February 2015 Our duty to read other information in the Annual Report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: • materially inconsistent with the information in the audited financial statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or • otherwise misleading. In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the Annual Report is fair, balanced and understandable and whether the Annual Report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements. Respective responsibilities of Directors and auditor 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. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews. 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. Accounting policies for the consolidated accounts The Restaurant Group plc Annual Report 2014 59 Significant accounting policies The Restaurant Group plc (the “Company”) is a company incorporated and registered in Scotland. The consolidated financial statements of the Company for the year ended 28 December 2014 comprise the Company and its subsidiaries (together referred to as the “Group”). Future accounting policies At the date of authorisation of these financial statements, the following new and revised Standards and Interpretations have been adopted in the current year. Their adoption has not had any significant impact on the amounts reported in these financial statements. (a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) and its interpretations adopted by the International Accounting Standards Board (“IASB”) and as adopted by the European Union. (b) Going concern basis The consolidated financial statements have been prepared on a going concern basis as, after making appropriate enquires, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future at the time of approving the financial statements. The principal risks and uncertainties facing the Group and further comments on going concern are set out in the report of the Directors. (c) Basis of preparation The accounting year runs to a Sunday within seven days of 31 December each year which will be a 52 or 53 week period. The financial statements are presented in sterling, rounded to the nearest thousand. They have been prepared on the historical cost basis except derivative financial instruments which are held at their fair value. Non-current assets and assets held for sale are stated at the lower of carrying amount and fair value less costs to sell. The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and 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. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. IFRS 10 (Issued) IFRS 11 (Issued) IFRS 12 (Issued) IAS 27 (Revised) IAS 28 (Revised) IAS 32 (Amended) IAS 36 (Amended) IAS 39 (Amended) IFRIC 21 (Issued) Consolidated Financial Statements Joint Arrangements Disclosure of Interests in Other Entities Separate Financial Statements Investments in Associates Financial Instruments Impairment of Assets Financial Instruments Levies At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU): Annual Improvements to IFRSs Annual Improvements to IFRSs IFRS 9 (Issued) IFRS 15 (Issued) (2010 – 2012) Cycle (2011 – 2013) Cycle Financial Instruments Revenue from contracts with Customers The Directors do not expect that the adoption of the Standards and Interpretations listed above will have a material impact on the financial statements of the Group in future periods, except as that IFRS 9 will impact both the measurement and disclosures of financial instruments. Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these Standards until a detailed review has been completed. (d) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account, regardless of management’s intention to exercise that option or warrant. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. OverviewStrategic reportGovernanceFinancial statements 60 Annual Report 2014 The Restaurant Group plc Accounting policies for the consolidated accounts continued (ii) Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an associate, the Group’s carrying amount would be reduced to £nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an associate. (iii) Transactions eliminated on consolidation Intragroup balances and any gains and losses or income and expenses arising from intragroup transactions are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (e) Foreign currency Assets and liabilities in foreign currencies are translated into sterling at the rates of exchange ruling at the date of the balance sheet. Transactions in foreign currencies are translated into sterling at the rate of exchange at the date of the transaction. The profit and loss accounts for overseas operations are translated at the average rate of exchange for the periods covered by the accounts. Exchange differences that relate to the net equity investment in overseas activities are taken directly to reserves. (f) Derivative financial instruments The Group uses derivative financial instruments, where appropriate, to hedge its exposure to interest rate risks arising from operational, financing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. (g) Property, plant and equipment Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses (see accounting policy (l)). Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Leases in which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. The owner-occupied properties (excluding land element) acquired by way of finance lease are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation (see below) and impairment losses (see accounting policy (l)). Lease payments are accounted for as described in accounting policy (s). Subsequent costs The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred. Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows: Freehold land Freehold buildings Long and short leasehold property Term of lease or Indefinite 50 years Fixtures and equipment Motor vehicles Computer equipment 50 years, whichever is lower 3-10 years 4 years 3-5 years Derivative financial instruments are recognised initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the income statement. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged. The Group does not currently hold any derivative financial instruments. (h) Intangible assets – Goodwill All business combinations are accounted for by applying the acquisition method. Goodwill represents amounts arising on acquisition of subsidiaries, associates and joint ventures. In respect of business acquisitions that have occurred since 1 January 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The classification and accounting treatment of business combinations that occurred prior to 1 January 2004 has not been reconsidered in preparing the Group’s opening IFRS balance sheet at 1 January 2004. The Restaurant Group plc Annual Report 2014 61 Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units and is formally tested for impairment annually (see accounting policy (l)). In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate. Any excess of fair value of net assets over consideration on acquisition are recognised directly in the income statement. (i) Trade and other receivables Trade and other receivables are stated at their cost less impairment losses (see accounting policy (l)). (j) Stock Stock is stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (k) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. (l) Impairment The carrying amounts of the Group’s assets are reviewed annually to determine whether there is any indication of impairment. For property, plant and equipment, the carrying value of each cash generating unit (“CGU”) is compared to its estimated value in use. Value in use calculations are based on discounted cash flows over the remaining useful life of the CGU (between 2 and 50 years). The discount rate used is the rate believed by the Board to reflect the risks associated with each CGU. Impairment losses are recognised in the income statement. For goodwill and assets that have an indefinite useful life, the recoverable amount is estimated annually. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement and are not subsequently reversed. All goodwill stated on the balance sheet relates to the acquisition of Blubeckers Limited and Brunning and Price Limited and is included in the impairment analysis of the Pub restaurant business conducted at each balance sheet date. (m) Share-based payment transactions The share option programme allows Group employees to acquire shares of the Company and all options are equity- settled. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using a Stochastic model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is only due to market based conditions not achieving the threshold for vesting. (n) Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (o) Deferred and current tax Corporation tax payable is provided on the taxable profit at the current rate. Deferred tax is recognised in respect of all temporary differences that have originated but not reversed at the balance sheet date, except to the extent that the deferred tax arises from the initial recognition of goodwill. Temporary differences are differences between the carrying amount of the Group’s assets and liabilities and their tax base. Deferred tax is measured at the tax rates that are expected to apply in the periods in which the temporary differences are expected to reverse based on tax rates and laws that are enacted, or substantively enacted, by the balance sheet date. Deferred tax is measured on a non-discounted basis. (p) Pensions The Group makes contributions for eligible workers into defined contribution pension plans and these contributions are charged to the income statement as they become payable. The Group does not operate any defined benefit plans. (q) Onerous contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. OverviewStrategic reportGovernanceFinancial statements 62 Annual Report 2014 The Restaurant Group plc Accounting policies for the consolidated accounts continued Critical accounting judgements and key sources of estimation and uncertainty In the process of applying the Group’s accounting policies as described above, management has made a number of judgements and estimations of which the following are the most significant: a) Impairment of property, plant and equipment The Group formally determines whether property, plant and equipment are impaired by considering indicators of impairment annually. This requires the Group to determine the lowest level of assets which generate largely independent cash flows (cash generating units or “CGU”) and to estimate the value in use of these assets or CGU; and compare these to their carrying value. Cash generating units are deemed to be individual units or a cluster of units depending on the nature of the trading environment in which they operate. Calculating the value in use requires the Group to make an estimate of the future cash flows of each CGU and to choose a suitable discount rate in order to calculate the present value of those cash flows. The discount rate used in the year ended 28 December 2014 for all CGUs was based on the Group’s weighted average cost of capital of 9.7% (year ended 29 December 2013: 9.9%) as the Directors believe there are broadly equal risks associated with each CGU. No impairment is required in the year ended 28 December 2014. b) Impairment of loan note due The Group has an outstanding long-term receivable of £4.0m from BH Restaurants Limited. As a result of a detailed trading review of the business, the Board has made full provision against the loan note due (further details are provided in note 12). c) Lease classification The Group has over 400 leases and therefore their classification as either finance or operating leases is critical to the financial statements. The accounting for leases involves the exercise of judgement particularly whether the leases meet the definition of an operating or a finance lease. (r) Revenue Revenue represents amounts received and receivable for services and goods provided (excluding value added tax and voluntary gratuities left by customers for the benefit of employees) and is recognised at the point of sale. Where the Group operates a Concession unit under a franchise agreement, it acts as principal in this trading arrangement. All revenue from franchise arrangements is recognised by the Group at the point of sale and licencing fees are recorded in Cost of Sales as the goods are sold. The Group does not act as a franchisor in any trading relationship. (s) Expenses (i) Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Incentives to enter into an operating lease are also spread on a straight-line basis over the lease term as a reduction in rental expense. (ii) Finance lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (iii) Pre-opening expenses Property rentals and related costs incurred up to the date of opening of a new restaurant are written off to the income statement in the period in which they are incurred. Promotional and training costs are written off to the income statement in the period in which they are incurred. (iv) Borrowing costs Debt is stated net of borrowing costs which are spread over the term of the loan. All other borrowings costs are recognised in the income statement in the period in which they are incurred. (t) Dividend policy In accordance with IAS 10 “Events after the Balance Sheet Date”, dividends declared after the balance sheet date are not recognised as a liability at that balance sheet date, and are recognised in the financial statements when they have received approval by shareholders. (u) Commercial discount policy Commercial discounts represent a reduction in cost of goods and services in accordance with negotiated supplier contracts, the majority of which are based on purchase volumes. Commercial discounts are recognised in the period in which they are earned and to the extent that any variable targets have been achieved in that financial period. Costs associated with commercial discounts are recognised in the period in which they are incurred. Consolidated income statement The Restaurant Group plc Annual Report 2014 63 Revenue Cost of sales: Excluding pre-opening costs Pre-opening costs Gross profit 52 weeks ended 28 December 2014 52 weeks ended 29 December 2013 Trading business £’000 635,225 Non- trading £’000 – Note 2 Total £’000 635,225 Trading business £’000 579,589 Non- trading £’000 – Total £’000 579,589 3 (516,623) 3 (4,702) (521,325) 113,900 – – – – (516,623) (4,702) (521,325) (469,729) (3,784) (473,513) 113,900 106,076 Administration costs (33,450) (138) (33,588) (31,160) Trading profit 80,450 (138) 80,312 74,916 Disposal of investment in associate 5 – 7,000 7,000 – Earnings before interest, tax, depreciation and amortisation Depreciation Operating profit Interest payable Interest receivable 116,972 6,862 123,834 107,791 (36,522) – (36,522) (32,875) 80,450 6,862 87,312 74,916 6 6 (2,488) 103 – – (2,488) 103 (2,447) 216 Profit on ordinary activities before tax 78,065 6,862 84,927 72,685 Tax on profit from ordinary activities 7 (17,958) 30 (17,928) (16,495) Profit for the year 60,107 6,892 66,999 56,190 Earnings per share (pence) Basic Diluted 8 8 29.96 29.92 33.39 33.35 28.02 27.97 – – – – – – – – – – – – – – – (469,729) (3,784) (473,513) 106,076 (31,160) 74,916 – 107,791 (32,875) 74,916 (2,447) 216 72,685 (16,495) 56,190 28.02 27.97 OverviewStrategic reportGovernanceFinancial statements 64 Annual Report 2014 The Restaurant Group plc Consolidated statement of changes in equity Balance at 30 December 2013 Profit for the year Issue of new shares Dividends Share-based payments – credit to equity Employee benefit trust – purchase of shares Other reserve movements Current tax on share-based payments taken directly to equity Deferred tax on share-based payments taken directly to equity Share capital £’000 56,432 Share premium £’000 24,491 Other reserves £’000 (8,940) Retained earnings £’000 143,982 – 1 – – – – – – – 4 – – – – – – – – – 2,795 (5,272) (554) – – Total £’000 215,965 66,999 5 (36,367) 2,795 (5,272) (554) 66,999 – (36,367) – – – 1,474 1,474 (521) (521) Balance at 28 December 2014 56,433 24,495 (11,971) 175,567 244,524 Balance at 31 December 2012 56,334 24,027 (7,737) 111,224 183,848 Profit for the year Issue of new shares Dividends Share-based payments – credit to equity Employee benefit trust – purchase of shares Other reserve movements Current tax on share-based payments taken directly to equity Deferred tax on share-based payments taken directly to equity – 98 – – – – – – – 464 – – – – – – – – – 2,947 (2,291) (1,859) – – 56,190 – (24,863) – – – 950 481 56,190 562 (24,863) 2,947 (2,291) (1,859) 950 481 Balance at 29 December 2013 56,432 24,491 (8,940) 143,982 215,965 There is no comprehensive income other than the profit for the year in the year ended 28 December 2014 or the year ended 29 December 2013. Consolidated balance sheet The Restaurant Group plc Annual Report 2014 65 Non-current assets Intangible assets Property, plant and equipment Current assets Stock Trade and other receivables Prepayments Cash and cash equivalents Total assets Current liabilities Corporation tax liabilities Trade and other payables Other payables – finance lease obligations Provisions Net current liabilities Non-current liabilities Long-term borrowings Other payables – finance lease obligations Deferred tax liabilities Provisions Total liabilities Net assets Equity Share capital Share premium Other reserves Retained earnings Total equity At 28 December 2014 £’000 At 29 December 2013 £’000 Note 10 11 13 14 22 15 24 16 22 24 17 16 26,433 368,576 395,009 26,433 337,519 363,952 5,530 8,991 14,009 880 29,410 5,085 7,794 14,601 7,307 34,787 424,419 398,739 (8,055) (112,254) (332) (993) (121,634) (9,725) (103,780) (330) (1,120) (114,955) (92,224) (80,168) (39,458) (2,930) (12,947) (2,926) (58,261) (49,164) (2,885) (12,524) (3,246) (67,819) (179,895) (182,774) 244,524 215,965 18 19,20 56,433 24,495 (11,971) 175,567 244,524 56,432 24,491 (8,940) 143,982 215,965 The financial statements of The Restaurant Group plc (company registration number SC030343) on pages 59 to 85 were approved by the Board of Directors and authorised for issue on 27 February 2015 and were signed on its behalf by: Alan Jackson Stephen Critoph ACA OverviewStrategic reportGovernanceFinancial statements 66 Annual Report 2014 The Restaurant Group plc Consolidated cash flow statement Operating activities Cash generated from operations Interest received Interest paid Tax paid Net cash flows from operating activities Investing activities Purchase of property, plant and equipment Disposal of fixed assets Net proceeds from repayment of loan note Net cash flows used in investing activities Financing activities Net proceeds from issue of ordinary share capital Employee benefit trust – purchase of shares Net repayments of loan draw downs Dividends paid to shareholders Net cash flows used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 52 weeks ended 28 December 2014 £’000 52 weeks ended 29 December 2013 £’000 124,992 103 (1,424) (18,222) 105,449 (70,070) 2,828 7,000 (60,242) 5 (5,272) (10,000) (36,367) (51,634) 116,838 216 (1,308) (17,700) 98,046 (76,626) (400) – (77,026) 562 (2,291) – (24,863) (26,592) (6,427) (5,572) 7,307 12,879 880 7,307 Note 21 5 19 9 22 22 The Restaurant Group plc Annual Report 2014 67 Notes to the accounts For the year ended 28 December 2014 1 Segmental analysis The Group trades in one business segment (that of operating restaurants) and one geographical segment (being the United Kingdom). The Group’s brands meet the aggregation criteria set out in paragraph 22 of IFRS 8 “Operating Segments” and as such the Group report the business as one reportable segment. 2 Revenue Income for the year consists of the following: Revenue from continuing operations Other income not included within revenue in the income statement: Rental income Interest income Total income for the year 3 Profit for the year Cost of sales consists of the following: Continuing business excluding pre-opening costs Pre-opening costs Total cost of sales for the year Profit for the year has been arrived at after charging / (crediting): Depreciation Purchases Staff costs (see note 4) Minimum lease payments Contingent rents Total operating lease rentals of land and buildings Rental income Net rental costs 2014 £’000 2013 £’000 635,225 579,589 2,950 103 638,278 3,338 216 583,143 2014 £’000 2013 £’000 516,623 4,702 521,325 469,729 3,784 473,513 2014 £’000 2013 £’000 36,522 139,141 205,197 62,028 8,278 70,306 (2,950) 67,356 32,875 129,703 184,122 57,266 8,418 65,684 (3,338) 62,346 OverviewStrategic reportGovernanceFinancial statements 68 Annual Report 2014 The Restaurant Group plc Notes to the accounts continued 3 Profit for the year continued Auditor’s remuneration: Fees payable to the Company’s auditor for the audit of the Company’s annual accounts Fees payable to the Company’s auditor and their associates for other services to the Group The audit of the Company’s subsidiaries Total audit fees Audit-related assurance services Other assurance services Tax compliance services Other tax advisory services Other services Total non-audit fees Total auditor’s remuneration 2014 £’000 2013 £’000 137 134 10 147 20 31 47 – – 98 245 15 149 20 27 56 10 21 134 283 Audit fees included in the above total relating to the Company are borne by a subsidiary undertaking. All of the auditor’s remuneration in 2014 and 2013 was expensed as administration costs. 4 Staff costs and numbers a) Average staff numbers during the year (including executive Directors) Restaurant staff Administration staff b) Staff costs (including Directors) comprise: Wages and salaries Social security costs Share-based payments Pension costs c) Directors’ remuneration Emoluments Money purchase (and other) pension contributions Charge in respect of share-based payments 2014 2013 13,313 288 13,601 2014 £’000 187,494 13,614 2,795 1,294 205,197 2014 £’000 2,405 159 2,564 1,233 3,797 12,025 270 12,295 2013 £’000 167,455 12,738 2,947 982 184,122 2013 £’000 2,966 185 3,151 1,463 4,614 Further details of the Directors’ emoluments and the executive pension schemes are given in the Directors’ remuneration report. The Restaurant Group plc Annual Report 2014 69 5 Non-trading item On 17 April 2014 The Restaurant Group disposed of part of its interest in The Living Ventures group following the sale of the Gusto business. The Group received £7m of cash proceeds in respect of this disposal and the resulting profit on disposal of £6.9m, net of costs, is reported as a non-trading item in the 52 weeks ended 28 December 2014. The net proceeds of the disposal were distributed by way of a special dividend of 3.45 pence per share on 9 July 2014. Following the disposal, TRG’s only remaining interest in the residual business is a £4m loan note which has been fully provided against as a result of a detailed review of the trading performance of the business. 6 Net finance charges Bank interest payable Other interest payable Facility fees Interest on obligations under finance leases Total borrowing costs Bank interest receivable Other interest receivable Loan note interest receivable (see note 12) Total interest receivable Net finance charges 7 Tax a) The tax charge comprises: Current tax UK corporation tax at 21.5% (2013: 23.25%) Adjustments in respect of previous years Deferred tax Origination and reversal of temporary differences Adjustments in respect of previous years Credit in respect of rate change Total tax charge for the year 2014 £’000 1,378 420 314 376 2,488 (11) (1) (91) (103) 2013 £’000 1,345 399 330 373 2,447 (11) (47) (158) (216) 2,385 2,231 2014 £’000 2013 £’000 18,668 (642) 18,026 (161) 63 – (98) 17,928 19,463 (261) 19,202 (558) (60) (2,089) (2,707) 16,495 OverviewStrategic reportGovernanceFinancial statements 70 Annual Report 2014 The Restaurant Group plc Notes to the accounts continued 7 Tax continued b) Factors affecting the tax charge for the year The tax charged for the year varies from the standard UK corporation tax rate of 21.5% (2013: 23.25%) due to the following factors: Profit on ordinary activities before tax Profit on ordinary activities before tax multiplied by the standard UK corporation tax rate of 21.5% (2013: 23.25%) Effects of: Depreciation on non-qualifying assets Expenses not deductible for tax purposes Exempt non-trading income Credit in respect of rate change on deferred tax liability Adjustment in respect of previous years Total tax charge for the year 2014 £’000 84,927 2013 £’000 72,685 18,259 16,899 1,933 (180) (1,505) – (579) 17,928 1,811 195 – (2,089) (321) 16,495 The Finance Act 2012 introduced a reduction in the main rate of corporation tax from April 2014 from 23% to 21% resulting in a blended rate of 21.5% being used to calculate the tax liability for the 52 weeks ended 28 December 2014. A further rate reduction to 20% from April 2015 was substantively enacted on 2 July 2013, therefore the deferred tax provision at the balance sheet date has been calculated at 20%. 8 Earnings per share a) Basic earnings per share: Weighted average ordinary shares in issue during the year Total profit for the year (£’000) Basic earnings per share for the year (pence) Total profit for the year (£’000) Effect of non-trading items on earnings for the year (£’000) Earnings excluding non-trading items (£’000) Adjusted earnings per share (pence) b) Diluted earnings per share: Weighted average ordinary shares in issue during the year Dilutive shares to be issued in respect of options granted under the share option schemes Diluted earnings per share (pence) Adjusted diluted earnings per share (pence) 2014 2013 200,647,834 66,999 33.39 66,999 (6,892) 60,107 29.96 200,510,419 56,190 28.02 56,190 – 56,190 28.02 2014 2013 200,647,834 275,381 200,510,419 347,065 200,923,215 200,857,484 27.97 27.97 33.35 29.92 The additional non-statutory earnings per share information for 2014 (where non-trading items, described in note 5, have been added back) has been provided as the Directors believe it provides a useful indication as to the underlying performance of the Group. Diluted earnings per share information is based on adjusting the weighted average number of shares in issue in respect of notional share awards made to employees in respect of share option schemes. The Restaurant Group plc Annual Report 2014 71 9 Dividend Amounts recognised as distributions to equity holders during the year: Final dividend for the 52 weeks ended 29 December 2013 of 8.75p (2012: 7.30p) per share Interim dividend for the 52 weeks ended 28 December 2014 of 6.10p (2013: 5.25p) per share Special dividend of 3.45p per share paid on 9 July 2014 Total dividends paid in the year Proposed final dividend for the 52 weeks ended 28 December 2014 of 9.30p (2013 actual proposed and paid: 8.75p) per share 2014 £’000 17,373 12,145 29,518 6,849 36,367 2013 £’000 14,460 10,403 24,863 – 24,863 18,516 17,373 The proposed final dividend is subject to approval by shareholders at the Annual General Meeting to be held on 14 May 2015 and is not recognised as a liability in these financial statements. The proposed final dividend payable reflects the number of shares in issue on 28 December 2014, adjusted for the 1.6m shares owned by the employee benefit trust for which dividends have been waived. Further details are provided in note 19. 10 Intangible assets Cost and carrying amount At 31 December 2012, 29 and 30 December 2013 and 28 December 2014 £’000 26,433 Goodwill arising on business combinations is not amortised but is subject to an impairment review annually, or more frequently if events or changes in circumstances indicate that it might be impaired. Therefore, goodwill arising on acquisition is monitored and an impairment test is carried out which compares the value in use of each cash generating unit (“CGU”) to its carrying value. The intangible assets reported on the balance sheet represent goodwill arising on the acquisition of Blubeckers Limited and Brunning and Price Limited, which now trade as Pub restaurants. Value in use calculations are based on cash flow forecasts derived from the most recent financial budgets and three year business plans approved by the Board. Cash flows are then extrapolated in perpetuity with an annual growth rate of 2%. Perpetuity is believed to be reasonable due to the significant proportion of freeholds in the estate and the nature of the leasehold properties. The pre-tax discount rate applied to cash flow projections is 9.7% (2013: 9.9%) which is the rate believed by the Directors to reflect the risks associated with the CGU. The Group has conducted a sensitivity analysis taking into consideration the impact on key impairment test assumptions arising from a range of possible trading and economic scenarios. The scenarios have been performed separately with the sensitivities summarised as follows: • An increase in the discount rate of 1% • A decrease of 5% on forecast cash flows The sensitivity analysis shows that no impairment would result from either an increase in the discount rate or a decrease in forecast cash flows. OverviewStrategic reportGovernanceFinancial statements 72 Annual Report 2014 The Restaurant Group plc Notes to the accounts continued 11 Property, plant and equipment Cost At 31 December 2012 Additions Disposals At 29 December 2013 Accumulated depreciation and impairment At 31 December 2012 Provided during the year Disposals At 29 December 2013 Cost At 30 December 2013 Additions Disposals At 28 December 2014 Accumulated depreciation and impairment At 30 December 2013 Provided during the year Disposals At 28 December 2014 Net book value as at 29 December 2013 Net book value as at 28 December 2014 Net book value of land and buildings: Freehold Long leasehold Short leasehold Assets held under finance leases Costs at the beginning and the end of the year Depreciation At the beginning of the year Provided during the year At the end of the year Net book value at the end of the year Land and buildings £’000 359,091 56,693 (6,670) 409,114 119,784 17,340 (6,670) 130,454 409,114 48,838 (10,549) 447,403 130,454 19,406 (8,313) 141,547 278,660 305,856 Fixtures, equipment and vehicles £’000 140,391 19,933 (11,941) 148,383 85,913 15,535 (11,924) 89,524 148,383 21,232 (6,675) 162,940 89,524 17,116 (6,420) 100,220 58,859 62,720 Total £’000 499,482 76,626 (18,611) 557,497 205,697 32,875 (18,594) 219,978 557,497 70,070 (17,224) 610,343 219,978 36,522 (14,733) 241,767 337,519 368,576 2014 £’000 2013 £’000 97,482 5,291 203,083 305,856 88,482 5,446 184,732 278,660 2014 £’000 2013 £’000 1,961 1,961 1,199 25 1,224 737 1,174 25 1,199 762 The Restaurant Group plc Annual Report 2014 73 12 Investment in associate Until 17 April 2014, The Restaurant Group held a 37.4% investment in BH Restaurants Limited (formerly Living Ventures Restaurants Group Limited) and this investment was accounted for using the equity method. On 17 April 2014 The Restaurant Group disposed of part of its interest in BH Restaurants Limited following the sale of the Gusto business (further details are provided in note 5). Following the disposal, TRG’s only remaining interest in the residual business is a £4m loan note which has been fully provided against as a result of a detailed review of the trading performance of BH Restaurants Limited. Interest was receivable from BHR Finance Limited on a loan note of £10.4m at a rate of LIBOR + 1%. In the 52 weeks ended 28 December 2014 £0.1m of interest accrued (to the date of disposal) of which the Group recognised £0.1m (2013: £0.2m of which the Group recognised £0.2m). 13 Stock Stock comprises raw materials and consumables and has been valued at the lower of cost and estimated net realisable value. The replacement cost at 28 December 2014 is not considered by the Directors to be materially different from the balance sheet value. The Group recognised £139.1m of purchases as an expense in 2014 (2013: £129.7m). 14 Trade and other receivables Amounts falling due within one year: Trade debtors Other debtors 15 Trade and other payables Amounts falling due within one year: Trade creditors Other tax and social security Other creditors Accruals 2014 £’000 1,504 7,487 8,991 2014 £’000 2013 £’000 1,723 6,071 7,794 2013 £’000 50,977 18,035 6,447 36,795 112,254 47,197 16,040 6,312 34,231 103,780 OverviewStrategic reportGovernanceFinancial statements 74 Annual Report 2014 The Restaurant Group plc Notes to the accounts continued 16 Provisions Provision for onerous lease contracts and property exit costs: Balance at the beginning of the year Additional provisions made Amounts utilised Provisions released Adjustment for change in discount rate Unwinding of discount Balance at the end of the year Analysed as: Amount due for settlement within one year Amount due for settlement after one year 2014 £’000 4,366 238 (1,173) (183) 257 414 3,919 993 2,926 3,919 2013 £’000 5,782 474 (1,692) (366) (229) 397 4,366 1,120 3,246 4,366 The provision for onerous contracts is in respect of lease agreements and covers the element of expenditure over the life of those contracts which are considered onerous, expiring in 1 to 32 years. The provision for property exit costs is anticipated to be short-term and settled within one year. 17 Deferred taxation Balance at the beginning of the year Depreciation in advance of capital allowances credited to the income statement Other temporary differences Credit in respect of rate change Deferred tax taken directly to the income statement (see note 7) Tax on share-based payments Credit in respect of rate change Deferred tax taken through equity Balance at the end of the year Deferred tax consists of: Capital allowances in advance of depreciation Capital gains rolled over Other temporary differences 2014 £’000 12,524 (290) 192 – (98) 521 – 521 12,947 2014 £’000 14,579 388 (2,020) 12,947 2013 £’000 15,712 (461) (157) (2,089) (2,707) (691) 210 (481) 12,524 2013 £’000 14,869 388 (2,733) 12,524 The Restaurant Group plc Annual Report 2014 75 18 Share capital Authorised, issued and fully paid At 31 December 2012 Exercise of share options At 29 and 30 December 2013 Exercise of share options At 28 December 2014 Number £’000 200,298,132 349,011 200,647,143 1,678 200,648,821 56,334 98 56,432 1 56,433 19 Employee benefit trust An employee benefit trust (“EBT”) was established in 2007 in order to satisfy the exercise or vesting of existing and future share awards under the Long-Term Incentive Plan. The EBT purchases shares in the market, using funds provided by the Company, based on expectations of future requirements. Dividends are waived by the EBT. At 28 December 2014, the Trustees, Appleby Trust (Jersey) Limited, held 1.6m shares in the Company (29 December 2013: 2.5m shares). Net cash outflow in the 52 weeks ended 28 December 2014 was £5.3m, inclusive of costs (52 weeks ended 29 December 2013: £2.3m, inclusive of costs). At 31 December 2012 Purchase of shares on 8 April 2013 at an average price of 455 pence per share Transfer of shares to satisfy the exercise of share awards At 29 and 30 December 2013 Purchase of shares on 17 March 2014 at an average price of 698 pence per share Transfer of shares to satisfy the exercise of share awards At 28 December 2014 Details of options granted under the Group’s share schemes are given in note 20. £’000 2,291 5,272 Number 3,147,953 500,000 (1,166,820) 2,481,133 750,000 (1,676,205) 1,554,928 OverviewStrategic reportGovernanceFinancial statements 76 Annual Report 2014 The Restaurant Group plc Notes to the accounts continued 20 Share-based payment schemes The Group operates a number of share-based payment schemes, details of which are provided in the Directors’ remuneration report. The Group has taken advantage of the exemption under IFRS 2 “Share-based payments” not to account for share options granted before 7 November 2002. The charge recorded in the financial statements of the Group in respect of share-based payments is £2.8m (2013: £2.9m). The other reserves account in the balance sheet reflects the credit to equity made in respect of the charge for share-based payments made through the income statement and the purchase of shares in the market in order to satisfy the vesting of existing and future share awards under the Long-Term Incentive Plan (see note 19). Long-Term Incentive Plan The Group operates the 2005 Long-Term Incentive Plan (“LTIP”), details of which are provided in the Directors’ remuneration report. Awards under the LTIP are granted to executive Directors and senior management in the form of nil cost options. Conditional Award share options and Matching Award share options are granted to Directors and selected employees. In respect of the Matching Award share options, the respective Director or employee is required to acquire a number of shares by a specified date, known as “deposited shares”, and retain these shares until the Matching Award share options vest, for these Matching Award share options to be valid. The table below summarises the dates of awards under the LTIP and the dates by which Directors and employees were required to acquire their deposited shares. Date of Award 1 March 2012 28 February 2013 27 February 2014 Date by which Deposited Shares must be acquired 30 June 2012 30 June 2013 30 June 2014 Vesting of share options under the LTIP is dependent on continuing employment or in accordance with “good leaver” properties as set out in the scheme rules. In exceptional circumstances, employees may be permitted to exercise options before the normal period in which they are exercisable. The Conditional and Matching Awards granted on 16 March 2011 became exercisable on 17 March 2014. The performance criteria was based on total shareholder return (“TSR”) and earnings per share (“EPS”). For the TSR element of the award, The Restaurant Group plc was ranked in the upper quartile against its comparator group and consequently the TSR element of the award vested in full. In respect of the EPS element of the award, the growth in EPS was between RPI +4% and RPI +10% and 88% of this part of the award vested. For those awards granted on 1 March 2012 that vest in 2015, the performance criteria were based on TSR and EPS. For the TSR element of the award, The Restaurant Group plc was ranked in the upper quartile against its comparator group and consequently the TSR element of the award will vest in full. In respect of the EPS element of the award the growth in EPS was between RPI +4% and RPI +10% and 88% of this part of the award will vest. The options from the LTIP scheme will be satisfied through shares purchased via a trust. Further details are provided in note 19. The Restaurant Group plc Annual Report 2014 77 Year ended 28 December 2014 Period during which options are exercisable Type of award Fair value Outstanding at the beginning of the year Granted Exercised Lapsed Outstanding at the end of the year Exercisable at the end of the year Conditional – TSR element Conditional – EPS element Matching Conditional – TSR element Conditional – EPS element Matching – TSR element Matching – EPS element Conditional – TSR element Conditional – EPS element Matching – TSR element Matching – EPS element Conditional – TSR element Conditional – EPS element Matching – TSR element Matching – EPS element 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 Total number 209.8p 417,873 295.5p 295.5p 417,873 322,184 124.5p 456,186 283.5p 456,187 124.5p 164,791 283.5p 164,793 214.9p 330,197 418.9p 330,197 214.9p 116,312 418.9p 116,311 – – – – – – – – – – – (416,492) (1,381) (367,736) (260,391) (50,137) (61,793) – – – (166,783) (32,749) 256,654 (166,810) (32,721) 256,656 (58,591) (8,743) 97,457 (58,618) (8,715) 97,460 (56,226) (68,851) 205,120 (56,226) (68,851) 205,120 (18,361) (18,936) 79,015 (18,361) (18,932) 79,018 431.8p 658.5p 431.8p 658.5p – – – 264,578 (11,854) (69,732) 182,992 264,578 (11,854) (69,731) 182,993 104,096 (3,951) (36,571) 63,574 – 3,292,904 104,095 (3,951) 737,347 (1,676,205) (36,569) 63,575 (584,412) 1,769,634 – – – – – – – – – – – – – – – – OverviewStrategic reportGovernanceFinancial statements 78 Annual Report 2014 The Restaurant Group plc Notes to the accounts continued 20 Share-based payment schemes continued Year ended 29 December 2013 Period during which options are exercisable Type of award Fair value Outstanding at the beginning of the year Granted Exercised Lapsed Outstanding at the end of the year Exercisable at the end of the year Conditional – TSR element Conditional – EPS element Matching Conditional – TSR element Conditional – EPS element Matching Conditional – TSR element Conditional – EPS element Matching – TSR element Matching – EPS element Conditional – TSR element Conditional – EPS element Matching – TSR element Matching – EPS element 2013 2013 2013 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 Total number 144.0p 497,774 208.9p 208.9p 497,775 365,954 209.8p 446,764 295.5p 295.5p 446,765 354,087 124.5p 502,963 283.5p 502,962 124.5p 180,719 283.5p 180,719 – – – – – – – – – – (497,774) – (356,526) (260,348) (141,249) (105,606) – – – (14,002) (14,889) 417,873 (7,658) (11,082) (21,234) (20,821) 417,873 322,184 (7,439) (39,338) 456,186 (5,521) (41,254) 456,187 (3,716) (12,212) 164,791 (2,754) (13,172) 164,793 214.9p 418.9p 214.9p 418.9p – – – 344,556 344,556 143,756 – – – (14,359) 330,197 (14,359) 330,197 (27,444) 116,312 – 3,976,482 143,755 976,623 – (1,166,820) (27,444) 116,311 (493,381) 3,292,904 – – – – – – – – – – – – – – – Save As You Earn Scheme Under the Save As You Earn (“SAYE”) scheme, the Board may grant options over shares in The Restaurant Group plc to UK-based employees of the Group. Options are granted with a fixed exercise price equal to 80% of the average market price of the shares for the five days prior to invitation. Employees pay a fixed amount from their salary into a savings account each month for the three-year savings period. At the end of the savings period, employees have six months in which to exercise their options using the funds saved. If employees decide not to exercise their options, they may withdraw their funds saved and the options expire. Exercise of options is subject to continued employment within the Group. In exceptional circumstances, employees may be permitted to exercise these options before the end of the three-year savings period. Options were valued using the Stochastic share pricing model. Year ended 28 December 2014 Period during which options are exercisable 2015 – 2016 2017 – 2018 Total number Weighted average exercise price Exercise price 283.0p 525.0p Outstanding at the beginning of the year 484,404 – 484,404 Granted – 1,296,434 1,296,434 Exercised (1,678) – (1,678) Outstanding at the end of the year 439,511 1,285,466 1,724,977 Exercisable at the end of the year – – – Lapsed (43,215) (10,968) (54,183) 283.0p 525.0p 283.0p 332.0p 463.3p – The Restaurant Group plc Annual Report 2014 79 Year ended 29 December 2013 Period during which options are exercisable 2013 2015 – 2016 Total number Weighted average exercise price Exercise price 184.0p 283.0p Outstanding at the beginning of the year 216,049 575,063 791,112 Granted – – – Exercised (206,977) – (206,977) Outstanding at the end of the year – 484,404 484,404 Exercisable at the end of the year – – – Lapsed (9,072) (90,659) (99,731) 256.0p – 184.0p 274.0p 283.0p – During 2014, the weighted average market price at date of exercise was 608.0p per share (2013: 513.8p). Executive Share Option Plans (“ESOPs”) Under the 2003 ESOP scheme, the Remuneration Committee may grant options over shares in The Restaurant Group plc to employees of the Group. The contractual life of an option is ten years. Options granted under ESOPs become exercisable on the third anniversary of the date of grant, subject to growth in earnings per share exceeding RPI growth by more than 2.5%. Exercise of options is subject to continued employment within the Group. Options were valued using a Stochastic option pricing model. No performance conditions were included in the fair value calculations. Year ended 28 December 2014 Period during which options are exercisable 2007 – 2014 2008 – 2015 Total number Weighted average exercise price Exercise price 97.7p 134.4p Outstanding at the beginning of the year 21,000 39,000 60,000 Granted – – – Exercised – – – Outstanding at the end of the year – 17,000 17,000 Exercisable at the end of the year – 17,000 17,000 Lapsed (21,000) (22,000) (43,000) 121.6p – – 116.5p 134.4p 134.4p Year ended 29 December 2013 Period during which options are exercisable 2006 – 2013 2007 – 2014 2008 – 2015 Total number Weighted average exercise price Exercise price 67.4p 97.7p 134.4p Outstanding at the beginning of the year 7,034 36,000 159,000 202,034 Granted – – – – Exercised (7,034) (15,000) (120,000) (142,034) Outstanding at the end of the year – 21,000 39,000 60,000 Exercisable at the end of the year – 21,000 39,000 60,000 Lapsed – – – – 125.5p – 127.2p – 121.6p 121.6p There were no exercises during 2014. During 2013, the weighted average market price at date of exercise was 459.7p. OverviewStrategic reportGovernanceFinancial statements 80 Annual Report 2014 The Restaurant Group plc Notes to the accounts continued 20 Share-based payment schemes continued Assumptions used in valuation of share-based payments granted in the year ended 28 December 2014: Scheme Grant date Share price at grant date Exercise price No. of options originally granted Minimum vesting period Expected volatility1 Contractual life Risk free rate Expected dividend yield Expected forfeitures Fair value per option 2014 LTIP Conditional Award EPS element 27/02/2014 658.5p n/a 264,578 3 years – 3.5 years – 0.00% 15% 658.5p TSR element 27/02/2014 658.5p n/a 264,578 3 years 22.5% 3.5 years 0.99% 0.00% 15% 431.8p 2014 LTIP Matching Award EPS element 27/02/2014 658.5p n/a 104,095 3 years – 3.5 years – 0.00% 40% 658.5p TSR element 27/02/2014 658.5p n/a 104,096 3 years 22.5% 3.5 years 0.99% 0.00% 40% 431.8p 2014 SAYE 24/10/2014 661.0p 525.0p 1,296,434 3 years 23.3% 3.5 years 1.10% 2.25% 30% 157.3p 1 Expected volatility is the measure of the amount by which the share price is expected to fluctuate during a period. In order to calculate volatility, the movement in the return index (share price plus dividends re-invested) over a period prior to the grant date equal in length to the remaining period over which the performance condition applies has been calculated. For the discount for the TSR performance condition for the relevant Conditional and Matching Awards, the calculated volatility based on the movement in the return index over a period of 3 years prior to the grant has been used. For the discount for the SAYE scheme, the calculated volatility based on the movement in the return index over a period of 3.25 years prior to the grant has been used. 21 Reconciliation of profit before tax to cash generated from operations Profit before tax Net finance charges Disposal of investment in associate Share-based payments Depreciation Increase in stocks (Increase) / decrease in debtors Increase in creditors Cash generated from operations 2014 £’000 84,927 2,385 (6,862) 2,795 36,522 (445) (605) 6,275 124,992 2013 £’000 72,685 2,231 – 2,947 32,875 (213) 21 6,292 116,838 Major non-cash transactions There were no major non-cash transactions in the 52 weeks ended 28 December 2014 or 52 weeks ended 29 December 2013. The Restaurant Group plc Annual Report 2014 81 22 Reconciliation of changes in cash to the movement in net debt Net debt: At the beginning of the year Movements in the year: Repayments of loan draw downs Non-cash movements in the year Cash outflow At the end of the year 2014 £’000 2013 £’000 (41,857) (35,974) 10,000 (294) (6,427) (38,578) – (311) (5,572) (41,857) Represented by: Cash and cash equivalents Bank loans falling due after one year At 31 December 2012 £’000 Cash flow movements in the year £’000 Non-cash movements in the year £’000 At 29 and 30 December 2013 £’000 Cash flow movements in the year £’000 Non-cash movements in the year £’000 At 28 December 2014 £’000 12,879 (48,853) (35,974) (5,572) – (5,572) – 7,307 (6,427) (311) (311) (49,164) (41,857) 10,000 3,573 – (294) (294) 880 (39,458) (38,578) 23 Financial instruments and derivatives The Group finances its operations through equity and borrowings, with the borrowing interest subject to floating rates. Management pay rigorous attention to treasury management requirements and continue to: • ensure sufficient committed loan facilities are in place to support anticipated business requirements; • ensure the Group’s debt service will be supported by anticipated cash flows and that covenants will be complied with; and • manage interest rate exposure with a combination of floating rate debt and interest rate swaps when deemed appropriate. The Board closely monitors the Group’s treasury strategy and the management of treasury risk. Further details of the Group’s capital risk management can be found in the report of the Directors. Further details on the business risk factors that are considered to affect the Group are included in the Strategic Report and more specific financial risk management (including sensitivity to increases in interest rates) are included in the report of the Directors. Further details on market and economic risk are included in the Strategic Report. Further detail on headroom against covenants is included in the Strategic Report on page 24. (a) Financial assets and liabilities Financial assets The financial assets of the Group comprise: Cash and cash equivalents – Sterling Cash and cash equivalents – Euro Trade and other receivables Total financial assets 2014 £’000 879 1 880 8,991 9,871 2013 £’000 7,307 – 7,307 7,794 15,101 Cash and cash equivalents include £0.5m (2013: £0.5m) held on account in respect of deposits paid by tenants under the terms of their rental agreement. OverviewStrategic reportGovernanceFinancial statements 82 Annual Report 2014 The Restaurant Group plc Notes to the accounts continued 23 Financial instruments and derivatives continued Financial liabilities The financial liabilities of the Group comprise: Trade and other payables excluding tax Finance lease debt Short-term financial liabilities Long-term borrowings – at floating interest rates* Finance lease debt Long-term financial liabilities Total financial liabilities 2014 £’000 94,219 332 94,551 39,458 2,930 42,388 136,939 2013 £’000 87,740 330 88,070 49,164 2,885 52,049 140,119 * Total financial liabilities attracting interest were £40m (2013: £50m). Interest is payable at floating interest rates which fluctuate and are dependent on LIBOR and base rate. The average weighted year end interest rate for these borrowings was 1.75% (2013: 1.74%). The Group has in place a five year £140m loan facility. This facility provides the Group with medium-term security of funding, additional capacity to take advantage of business opportunities as they become available and the flexibility to optimise the Group’s funding structure. Interest is payable on the amount drawn down at LIBOR plus mandatory cost and the bank’s margin, which is dependent on the debt to EBITDA ratio. The Group has a £10m overdraft facility, which is repayable on demand, on which interest is payable at the bank’s overdraft rate. At 28 December 2014 the Group has £100m of committed borrowing facilities in excess of gross borrowings (29 December 2013: £90m) and £10m of undrawn overdraft (29 December 2013: £10m of undrawn overdraft). The maturity profile of anticipated gross future cash flows, including interest, relating to the Group’s non-derivative financial liabilities, on an undiscounted basis, are set out below; At 28 December 2014 Within one year Within two to five years After five years Less: future interest payments Trade and other payables excluding tax £’000 94,219 – – 94,219 – 94,219 Floating rate loan £’000 259 41,761 – 42,020 (2,562) 39,458 Finance lease debt £’000 332 1,326 11,475 13,133 (9,871) 3,262 Total £’000 94,810 43,087 11,475 149,372 (12,433) 136,939 The Restaurant Group plc Annual Report 2014 83 At 29 December 2013 Within one year Within two to five years After five years Less: future interest payments Trade and other payables excluding tax £’000 87,740 – – 87,740 – 87,740 Floating rate loan £’000 10,967 43,584 – 54,551 (5,387) 49,164 Finance lease debt £’000 330 1,318 11,597 13,245 (10,030) 3,215 Total £’000 99,037 44,902 11,597 155,536 (15,417) 140,119 Fair value of financial assets and liabilities All financial assets and liabilities are accounted for at cost and the Directors consider the carrying value to approximate their fair value. (b) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial losses to the Group. Counterparties for cash and derivative balances are with large established financial institutions. The Group is exposed to credit related losses in the event of non-performance by the financial institutions but does not expect them to fail to meet their obligations. As a retail business with trading receipts settled either by cash or credit and debit cards, there is very limited exposure from customer transactions. The Group is exposed to credit risk in respect of commercial discounts receivable from suppliers but the Directors believe adequate provision has been made in respect of doubtful debts and there are no material amounts past due that have not been provided against. The Group has an outstanding long-term receivable of £4m from BH Restaurants Limited. As a result of a detailed trading review of the business, the Board has made full provision against the loan note due (further details are provided in note 12). The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represent the Group’s maximum exposure to credit risk. (c) Liquidity risk The Group has built an appropriate mechanism to manage liquidity risk of the short, medium and long-term funding and liquidity management requirements. Liquidity risk is managed through the maintenance of adequate cash reserves and bank facility by monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. The Group’s loan facility, which matures in October 2016 (as set out in note (a) above) ensures continuity of funding, provided the Group continues to meet its covenant requirements (as detailed in the report of the Directors on page 24). (d) Foreign currency risk The Group is not materially exposed to changes in foreign currency rates and does not use foreign exchange forward contracts. Following the closure of the Group’s three restaurants in Spain in 2011, any transactional or translational exposure to changes in foreign exchange rate is marginal and relates to the outstanding transactions in relation to the termination of the Spanish business. (e) Interest rate risk Exposure to interest rate movements has been controlled historically through the use of floating rate debt and interest rate swaps to achieve a balanced interest rate profile. The Group does not currently have any interest rate swaps in place as the continued reduction in the level of debt combined with current market conditions results in a low level of exposure. The Group’s exposure will continue to be monitored and the use of interest rate swaps may be considered in the future. OverviewStrategic reportGovernanceFinancial statements 84 Annual Report 2014 The Restaurant Group plc Notes to the accounts continued 24 Lease commitments Future lease payments in respect of finance leases are due as follows: Within one year Within two to five years After five years Less: future interest payments Present value of lease obligations Analysed as: Amount due for settlement within one year Amount due for settlement after one year Present value of lease obligations Minimum lease payments Present value of minimum lease payments 2014 £’000 332 1,326 11,475 13,133 (9,871) 3,262 2013 £’000 330 1,318 11,597 13,245 (10,030) 3,215 2014 £’000 332 1,017 1,913 2013 £’000 330 1,010 1,875 3,262 3,215 332 2,930 3,262 330 2,885 3,215 Lease commitments are in respect of property leases where the initial term of the lease is in excess of 25 years and the conditions of the lease are in keeping with a finance lease. There are no finance leases where the Group itself is the lessor. The interest rate applied in calculating the present value of the payments is the incremental borrowing cost of the Group in relation to each lease. The fair value of the lease payments is estimated as £3.3m (2013: £3.2m). The total future minimum rentals payable and receivable under operating leases over the remaining lives of the leases are: Payments due: Within one year Within two to five years After five years Payable 2014 £’000 57,902 200,990 451,385 710,277 Receivable 2014 £’000 2,642 8,523 20,477 31,642 Payable 2013 £’000 55,923 190,678 437,500 684,101 Receivable 2013 £’000 2,866 9,326 25,263 37,455 The Group has entered into a number of property leases on standard commercial terms, both as lessee and lessor. There are no restrictions imposed by the Group’s operating lease arrangements, either in the current or prior year. Included within the minimum rentals are amounts payable on properties where the rental payment is based on turnover. For these properties, primarily in the Group’s Concession business, the amount included above is the minimum guaranteed rent as detailed in the concession agreement. Where there is no minimum guaranteed rent, the amount included is based on the estimated amount payable. 25 Capital commitments Authorised and contracted for: 2014 £’000 45,551 2013 £’000 40,053 The Restaurant Group plc Annual Report 2014 85 26 Contingent liabilities The Group has assigned a number of leases to third parties that were originally completed prior to 1 January 1996 and are therefore unaffected by the Landlord and Tenant (Covenants) Act 1995 and also a number of leases completed after this date that were the subject of an Authorised Guarantee Agreement. Consequently, should the current tenant default, the landlord has a right of recourse to The Restaurant Group plc, or its subsidiaries, for future rental payments. As and when any liability arises, the Group will take whatever steps necessary to mitigate the costs. 27 Related party transactions BH Restaurants Limited (formerly Living Ventures Restaurants Group Limited) was a related party to The Restaurant Group plc through the Group’s 37.4% holding until 17 April 2014 when the Group disposed of its investment in the company. In the 52 weeks ended 28 December 2014, the Group received £7m cash and £0.1m of loan note interest, all of which was recognised in the income statement (52 weeks ended 29 December 2013: £0.2m of interest all of which was recognised in the income statement). Remuneration in respect of key management personnel, defined as the Directors for this purpose, is disclosed in note 4. Further information concerning the Directors’ remuneration is provided in the Directors’ remuneration report. OverviewStrategic reportGovernanceFinancial statements 86 Annual Report 2014 The Restaurant Group plc Company financial statements – under UK GAAP Company balance sheet Fixed assets Investments in subsidiary undertakings Current assets Debtors Amounts falling due within one year from Group undertakings Creditors Amounts falling due within one year to Group undertakings Net current assets Total assets less current liabilities Net assets Capital and reserves Called up share capital Share premium account Other reserves Profit and loss account Shareholders’ funds At 28 December 2014 £’000 At 29 December 2013 £’000 Note i ii v v v v 140,571 140,571 137,776 137,776 273,504 273,504 242,787 242,787 (256,329) 17,175 157,746 157,746 56,433 24,495 (10,729) 87,547 157,746 (214,141) 28,646 166,422 166,422 56,432 24,491 (7,698) 93,197 166,422 The financial statements of The Restaurant Group plc (company registration number SC030343) on pages 86 to 88 were approved by the Board of Directors and authorised for issue on 27 February 2015 and were signed on its behalf by: Alan Jackson Stephen Critoph ACA The Restaurant Group plc Annual Report 2014 87 Company financial statements – under UK GAAP Accounting policies and basis of preparation Basis of accounting The accounts for the Company have been prepared under UK Generally Accepted Accounting Practice, whilst the Group accounts have been prepared under International Financial Reporting Standards. The Company accounts have been prepared under the historical cost convention in accordance with applicable UK accounting standards and on a going concern basis. Investments Investments are valued at cost less any provision for impairment. Dividends In accordance with FRS 21 “Events after the Balance Sheet Date”, dividends declared after the balance sheet date are not recognised as a liability at that balance sheet date, and are recognised in the financial statements when they have received approval by shareholders. Share-based payment transactions The share options have been accounted for as an expense in the company in which the employees are employed, using a valuation based on the Stochastic simulation model. In accordance with an available election in FRS 20 “Share-based payments”, awards granted before 7 November 2002 have not been subject to a charge. An increase in the investment held by the Company in the subsidiary in which the employees are employed, with a corresponding increase in equity, is recognised in the accounts of the Company. Information in respect of the Company’s share-based payment schemes is provided in note 20 to the consolidated financial statements. The value is accounted for as a capital contribution in relevant Group subsidiaries that employ the staff members to whom awards of share options have been made. i) Investment in subsidiary undertakings Cost At 29 December 2013 Additions – share-based payment schemes At 28 December 2014 Amounts written off At 29 December 2013 and 28 December 2014 Net book value at 29 December 2013 Net book value at 28 December 2014 Shares £’000 91,829 – 91,829 888 90,941 90,941 Loans and other £’000 47,369 2,795 50,164 534 46,835 49,630 Total £’000 139,198 2,795 141,993 1,422 137,776 140,571 The Company’s operating subsidiaries, listed below, are held by an intermediate holding company (TRG (Holdings) Limited): The Restaurant Group (UK) Limited Chiquito Limited Blubeckers Limited Brunning and Price Limited DPP Restaurants Limited Holding Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Proportion of voting rights and shares held at 28 December 2014 100% 100% 100% 100% 100% The Company’s principal operating subsidiaries are registered in England and Wales, and operate restaurants in the United Kingdom. All other subsidiary undertakings are wholly owned by the Company or one of its subsidiaries and are either non-trading or dormant. OverviewStrategic reportGovernanceFinancial statements 88 Annual Report 2014 The Restaurant Group plc Accounting policies and basis of preparation continued ii) Creditors – amounts falling due within one year In accordance with FRS 21 “Events after the Balance Sheet Date”, the proposed final dividend in respect of 2014 is not recorded as a liability in these financial statements as it was declared after the balance sheet date and is subject to approval by shareholders. iii) Profit attributable to members of the holding Company As permitted by section 408 of the Companies Act 2006, a separate profit and loss account has not been presented for the holding Company. During the year the Company recorded a profit of £30.7m, representing paid and accrued internal preference dividend income (2013: £30.7m representing paid and accrued internal preference dividend income). Remuneration of the auditor is borne by a subsidiary undertaking (refer to note 3 in the consolidated accounts). iv) Employee costs and numbers All costs of employees and Directors are borne by a subsidiary undertaking. At 28 December 2014 the Company employed four persons (29 December 2013: three persons). v) Share capital and reserves As at 29 December 2013 Issue of shares Employee share-based payment schemes Employee benefit trust – purchase of shares Other reserve movements Profit for the year Dividends As at 28 December 2014 Share capital £’000 56,432 1 – – – – – 56,433 Share premium £’000 24,491 4 – – – – – 24,495 Other reserves £’000 (7,698) – 2,795 (5,272) (554) – – (10,729) Profit and loss account £’000 93,197 – – – – 30,717 (36,367) 87,547 Total £’000 166,422 5 2,795 (5,272) (554) 30,717 (36,367) 157,746 Details of share issues during the year are given in note 20 of the consolidated accounts and details of the dividends paid and proposed during the year are given in note 9 of the consolidated accounts. Group financial record The Restaurant Group plc Annual Report 2014 89 Revenue Adjusted operating profit Underlying interest Adjusted profit before tax Non-trading credits / (charges) Profit on ordinary activities before tax Tax Profit for the year Basic earnings per share Adjusted earnings per share Proposed total ordinary dividend per share for the year Special dividend per share Dividend cover (excluding non-trading items and special dividends) Employment of finance Property, plant and equipment Other non-current assets Net current liabilities Long-term liabilities Financed by: Equity shareholders’ funds Net debt Gearing 2014 £’000 635,225 80,450 (2,385) 78,065 6,862 84,927 (17,928) 66,999 33.39p 29.96p 15.40p 3.45p 2013 £’000 579,589 74,916 (2,231) 72,685 – 72,685 (16,495) 56,190 28.02p 28.02p 14.00p – 2012 £’000 532,541 66,435 (1,874) 64,561 – 64,561 (16,334) 48,227 24.08p 24.08p 11.80p – 2011 £’000 487,114 61,185 (902) 60,283 (11,675) 48,608 (14,231) 34,377 17.19p 21.86p 10.50p – 2010 £’000 465,704 58,556 (2,674) 55,882 596 56,478 (16,353) 40,125 20.16p 19.95p 9.00p – 1.95 2.00 2.04 2.08 2.22 368,576 26,433 (92,224) (58,261) 244,524 244,524 (38,578) 15.8% 337,519 26,433 (80,168) (67,819) 215,965 215,965 (41,857) 19.4% 293,785 26,433 (65,268) (71,102) 183,848 183,848 (35,974) 19.6% 269,141 26,433 (62,641) (75,651) 157,282 157,282 (41,593) 26.4% 259,583 26,433 (66,518) (74,785) 144,713 144,713 (46,924) 32.4% OverviewStrategic reportGovernanceFinancial statements 90 Annual Report 2014 The Restaurant Group plc Shareholder information Directors Alan Jackson Non-executive Chairman Danny Breithaupt Chief Executive Officer (from 1 September 2014) Stephen Critoph Chief Financial Officer Tony Hughes Non-executive Simon Cloke Non-executive Sally Cowdry Non-executive (from 1 March 2014) Debbie Hewitt (from 1 May 2015) Non-executive Company Secretary Stephen Critoph Head office (and address for all correspondence) 5-7 Marshalsea Road London SE1 1EP Registrar Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA 0871 384 2030 Auditor Deloitte LLP 2 New Street Square London EC4A 3BZ Solicitors Slaughter and May One Bunhill Row London EC1Y 8YY Goodman Derrick LLP 10 St Bride Street London EC4A 4AD Brokers JPMorganCazenove 25 Bank Street London E14 5JP Telephone number 020 3117 5001 Company number SC030343 Registered office 1 George Square Glasgow G2 1AL Numis Securities Limited The London Stock Exchange Building One Paternoster Square London EC4M 7LT Financial calendar Annual General Meeting Thursday, 14 May 2015 Proposed final dividend – 2014 Announcement – 27 February 2015 Ex-dividend – 18 June 2015 Record date –19 June 2015 Payment date – 8 July 2015 Notes The Restaurant Group plc Annual Report 2014 91 92 Annual Report 2014 The Restaurant Group plc Notes The paper used in this report is sourced from well-managed forests and is FSC accredited. Printed in the UK using vegetable based inks which have lower VOC emissions (Volatile Organic Compounds), are derived from renewable sources and less hazardous than oil-based inks. The printer is ISO 14001 accredited and Forest Stewardship Council (FSC) chain of custody certified. Under the framework of ISO 14001 a structured approach is taken by the company to measure, improve and audit their environmental status on an ongoing basis. FSC ensures there is an audited chain of custody from the tree in the well-managed forest through to the finished document in the printing factory. If you have finished reading this report and no longer wish to retain it please pass it to interested readers, return it to The Restaurant Group plc or dispose of it in your recycled paper waste. Thank you. Designed and produced by Instinctif Partners www.instinctif.com The Restaurant Group plc 5-7 Marshalsea Road London SE1 1EP Tel: 020 3117 5001 www.trgplc.com