Disclosures on the Sources and Uses of Cash a Lab Project Report

Disclosures on the sources and uses of cash A Lab project report

September 2019

Financial Reporting Council Disclosures on the sources and uses of cash 2

Contents

Quick read 3 Examples used Introduction 10 Our report highlights some examples of current practice that were identified by the Financial Reporting Lab (Lab) 1 Focus on drivers 12 team and investors. Not all of the examples are relevant Focus on drivers 13 for all companies, and all circumstances, but each provides an example of a company that demonstrates an Bringing it all together 17 approach to useful disclosures. Highlighting aspects of 2 Disclosures supporting the sources of cash 20 reporting by a particular entity should not be considered an evaluation of that entity’s annual report as a whole. Where is the cash coming from? 21 Investors have contributed to this project at a conceptual Connecting ashc and working capital 26 level. The examples used are selected to illustrate the principles that investors have highlighted and, in many Cash generation within groups 30 cases, have been tested with investors. However, they 3 Disclosures supporting the uses of cash 32 are not necessarily examples chosen by investors, and should not be taken as confirmation of acceptance of the Uses of cash 33 company’s reporting more generally. Priorities orf generated and available cash 34 Responding to feedback Priorities in action 38 In 2019 the Lab ran a stakeholder survey. As part of this Distributions to shareholders 41 survey we asked users of the reports for feedback. We received feedback that the example disclosures were of Variabilities, isksr and restrictions 46 particular value to users. Responding to this feedback, we Appendix 1 Reverse factoring 51 have included more examples within this report than in previous Lab reports. Whilst it makes the report longer, we hope it adds to the overall value of this report. If you have any feedback, or would like to get in touch with the Lab, please email us at: [email protected]

Quick read

The understanding of the generation, availability, What investors want: Cash disclosures that and use of cash is fundamental to the investment process, both in the assessment of management’s historical stewardship of a company’s assets, and Provide a clear description of the drivers of current (and future) performance and position, in supporting analysis of future expectations. in the context of cash, supported by appropriate metrics. The core disclosure that supports these investor needs is the cash flow statement. This clearly provides information about the flow of cash (and equivalents), but does it do a good job of explaining And further detailed disclosures on: how that cash is, and more critically will be generated and used? Our project would suggest that the disclosures that are most helpful to investors in answering their questions about cash are often The sources of cash The uses of cash provided outside of the cash flow statement, and may be outside of the annual report completely. This report focuses on this supplemental cash flow Which explain Which cover Which link Which explain Which support Which highlight disclosure; disclosures that are principally about the how the the drivers of to strategy, a framework understanding relevant risks, sources and uses of cash. company’s performance working of priorities of the priorities restrictions and business model that generated capital and for the cash in action. variabilities. What do investors want? generates cash. cash in the risks to allow generated. current period. an assessment Investors told us that what they want, at a high- of future cash level, is an overall discussion on a company's cash generation. drivers, supported by further details. We have summarised their needs into the following model, and used this model as a structure to explore the All underpinned by strong processes, controls and clearly communicated assurance. topic in more detail.

Focus on drivers Examples of cash Key Performance Indicators include: report Strategic

Investors want disclosures that: 28 Strategic02 ReportStrategic Report J SainsburyJ plcSainsbury Annual plcReport Annual 2019 Report 2019 Governance Disclosures on the sources and uses of cash 15 Disclosures on the sources and uses of cash 16

Linked to remuneration £ Financialstatements Revenue Average Revenue Operating profit Basic EPS Cash generated Directors’ remuneration report £m Per Retailer (‘ARPR’) £m pence per share from operations page 64 2018/19 highlights £ per month £m Chairman’s letter Focus areas relevant to our KPIs Provide a clear description of the driversOur KPIs What is useful? 1 Maintain the best consumer experience for buying and What is useful? Chairman Martin Scicluna sets out how 11.0p 8.5% In these extracts, Sainsbury’s free cash fl ow KPI is shown from the narrati ve secti on of the annual selling vehicles Proposed full-year dividend Return on capital employed Autotrader provide a clear defi niti on of their KPI (cash generated from operati ons) and explain we plan to deliverFinancial on ourkey strategy performance and grow indicators are critical to £355.1m £1,844 report. The up-front£243.7m focus is supported by a rati onale and narrati ve context (not 21.00pshown). Further £258.5m 2 Create and maintain high-performing, understanding and measuring our financial health. support for the number is provided by way of a clear breakdown of its calculation +18%in the audited +13% data-orientated teams why they consider it useful. They also provide some context to the KPI by linking through to their value for shareholders. fi nancials. This allows investors to understand the use of the KPI and adjust the reported number if 3 Grow ARPR in a balanced and strategic focus areas and risks, providing cross-references to other sections. of current (and future) performance they wish to do so. 2019 2019 sustainable way, by creating value 21.00p £258.5m They provide a supporti ng bridge in the investor presentati on showing how they go from operati ng p m for our customers 22.0 £461 2018 17.74p 2018 £228.4m profit to the KPI. Underlying basic Free cash flow J Sainsbury plc - Annual Report 2019 4 mprove I stock choice, volumes, accuracy and transparency in both earnings per share 186 Financial Statements J Sainsbury plc Annual Report 2019 2017 15.62p 2017 £212.9m AutoTrader Group plc – Annual report 2019 and Results presentati on 2019 Alternative performance measures continued new and used vehicles and position, in the contextGroup of measurescash, 5 Develop a more efficient way for retailers to source, dispose and Relevant focus areas Relevant focus areas Relevant focus areas Relevant focus areas Relevant focus areas Underlying profit Underlying basic earnings Retail operatingI joined cash the flow Sainsbury’s (£m) Retail freeBoard cash in flow the (£m) knowledge Closest equivalent move vehicles 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 before tax (£m)1 per share (pence)1 Definition: Retailthat cash it generatedis a highly respected,Definition: Net values-drivencash generated APM IFRS measure Definition/Purpose Reconciliation 6 Extend our product offering further Definition: Profit before tax adjusted Definition: Earnings per share using from operations after changes from retail operations, adjusted for Cash flows and net debt down the buying funnel, towards business, known for quality, valueDefinition and Definition Definition Definition Definition online transactions supported by appropriate mefor certain trics.items in note 3 which, by underlying profit in working capital and pension exceptional pensionThe contributions, Group generates revenue fromCash three flow itemsAverage in No Revenue direct Per Retailer (‘ARPR’)To help is the readerOperating understand profit cash is as flows reported in the Basic earnings2019 per2018 share is defined as Cash generated from operations is as Ref £m £m virtue of their size and/or nature, do contributions,customer and before service. Sainsbury’safter cash capital hasexpendituredifferent a long streams: but and Trade, ConsumerFinancial Reviewcalculatedequivalent by taking the averageof monthly the business, aConsolidated summarised income cash flow statement on page profit for the year attributable to equity reported in the Consolidated statement not reflect the Group’s underlying exceptional pension contributions before strategic capitalServices expenditure and Manufacturer and Agency. revenue generated from retailer 83. This is defined as revenueNet less interest paid a holders(89) of the parent(105) divided by the of cash flows on page 87. This is defined Our strategy statement is included within the Financial pages 18-19 performance distinguished heritageand after and investments I’mTrade delighted in is joint broken down to into three customers and dividing by the averageReview. As part ofadministrative this a number expenses, of line plus share of weighted average number of shares in as cash generated from operating categories: Retailer, Home Trader and monthly number of retailer forecourts profit from joint ventures. OperatingStrategic capital expenditure b issue during(36) the year.Comparative(80) periods activities, before corporation tax paid. ventures and associates and items have been combined. The cash Risks relevant to our KPIs have become Chairman duringOther, the with Company’s Consumer Services similarly who subscribe to an Auto Trader profit margin is Operating profitAcquisition as a of subsidiaries c have been– restated135 to reflect the Group’s This is considered to be a more meaningful Sainsbury’s Bank capitalsplit into injections Private and Motoring Services. advertising package. flow in note 4 of percentagethe financial of statements revenue. Comparative adoption of the new accounting standard measure of performance than the Repayment of borrowings d (451) (174) 1 Economy, market and 150th anniversary year. includes a referenceperiods to show have whatbeen hasrestated to reflect the for Leases (‘IFRS 16’) from 1 April 2018 using statutory measure of cash generated from Progress Progress business environment been combined inGroup’s these adoptionline items. of the new accountingOther e the fully (8)retrospective(2) approach. operating activities, which can be distorted Revenue increased 8% year-on-year, with ARPR grew £149 in the year. Growth was 2014/15 681 2014/15 26.4 2014/15 1,398 2014/152 standard for Leases (‘IFRS 16’) Jointfrom ventures1 April f 28 by changes in funding structure and the 2 Brand the main driver of growth being our largely a function of the product lever Progress13 2018 using the fully retrospective time lag that applies to the payment of 3 Increased competition Retailer line, supported by ManufacturerRetail free through:N furtheret cash upsell to our higher-levelNet cash generated from retail Basic EPS2019 growth 2018was 18%, demonstrating In of the report we consider2015/16 investors’587 2015/16 views 24.2 2015/16 1,149 2015/16 296 approach. Reconciliation of retail free cash flow £m £m corporation tax. Comparative periods section 1 and Agency. This growth was slightly packages; the monetisation of our new the Group’s high operational gearing. 4 Failure to innovate: disruptive cash flow generated operations, adjusted for exceptional have been restated to reflect the Group’s offset by a decrease in Consumer Dealer Finance product; expanding the Progress Much of the growth drops through from technologies and changing 2016/17 581 2016/17 21.8 2016/17 1,128 2016/17 319 from operating pension contributions, after cash capital Cash generated from retail operations 1,156 1,259 adoption of the new accounting standard Services, largely as a result of declining products included within our packages to Operating profit increased by 10% growth in net income, which benefitted consumer behaviours activities expenditure but before strategic capital Net interest paid (ref (a) above) (89) (105) for Leases (‘IFRS 16’) from 1 April 2018 using private listings. include stock exports and improved reflecting top line revenue growth of 8% from a one-off profit on disposal as we 5 IT systems and cyber security 2017/18 589 2017/18 20.4 2017/18 1,259 2017/18 432 expenditure and after investments the fully retrospective approach. towards creating a narrative on drivers of cash. dealer landing pages; and small growth in and well managed costs. OperatingCorporation profit tax entered(61) a joint venture(72) with Cox Employee retention in joint ventures and associates and 6 2018/19 635 2018/19 22.0 2018/19 1,156 2018/19 461 the volume of customers paying for a also benefitted from one quarterRetail of profit,purchase of property, plant and Automotive(470) UK. Basic(553) EPS was also Progress The retail market remains highly Sainsbury’s Bank capital injections. 7 Reliance on third parties data-driven Managing product. Growth contributed through our new jointequipment venture, supported by a reduction in the weighted Cash generated from operations competitive. We have the right strategy in was further bolstered by an underlyingThis measures cashDealer generation, Auction. Operating profit margin average number of shares in issue during increased to £258.5 million in the year, price increase, which was slightly saw improvement, growing byRetail a further purchase of intangible assets the year(78) as a consequence(69) of our share giving growth of £30.1 million or 13%. This Retail underlying Retail underlying Dividend per share (pence) Core retail capital working capital efficiency and capital Principal risks and uncertainties place and a clear plan for the year ahead. offset by a year-on-year decline in our 2 percentage points to 69%. Retail proceeds from disposal of property, buyback64 programme.54 represented a high proportion of profit EBITDAR margin (%) operating margin (%)1 Definition: Total proposed expenditure (£m)1 expenditure of the retail business. pages 30-34 Combined with committed, hard-working stock lever. plant and equipment converted into cash, which was largely Companies note that articulating theirDefinition: Underlyingstrategy profit before Definition: Underlyingand profit before dividend per share in relation Definition: Capital expenditure returned to shareholders through Add back: Strategic capital expenditure 80 tax before underlying net finance tax before underlying net finance to the financial yearcolleagues led excludingby a tal Financialented, Services,experienced after 36 dividends and share buybacks. costs, underlying share of post- costs and underlying share of leadership team,proceeds I bel fromieve disposal we areof property, well Dividends and distributions received 18 37 tax results from joint ventures, post-tax results from joint ventures, placedplant for and the equipment future.” and before Investment in joint ventures and associates (5) (9) performance are essential objectivesdepreciation, of amortisation their and dividedinvestor by retail sales excluding VAT, strategic capital expenditureRelevant risks Relevant risks Relevant risks Bank capital injections Relevant(110) risks (190) Relevant risks rent, divided by sales excluding VAT, including fuel, excluding Financial Martin Scicluna1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 Retail free cash flow 1 2 4613 4 5 6 4327 1 2 3 4 5 6 7 including fuel, excluding Financial Services Chairman Cash generated Cash generated Retail cash generated from operations The reconciliation between retail and Group cash generated from communications. However, for manyServices companies, their from retail from operations after changes in working capital but operations is provided in note 4 of the financial statements. operations (per before pension contributions and Quick read Introducti on 1 Presenti ng an overall 2 Disclosures supporti ng 3 Disclosures supporti ng Appendix 1 Financial Review) exceptional pension contributions. narrative the sources of cash the use of cash Reverse factoring 2014/15 7.76 2014/15 3.07 2014/15 Quick read 13.2 2014/15 Introduction 947 1 Presenting an overall 2 Disclosures supporting 3 Disclosures supporting Appendix 1 narrative theThis sourcesenables management of cash to assess the use of cash Reverse factoring attention is on a number of performance2015/16 focused7.58 2015/16 2.74 2015/16 12.1 2015/16 542 the cash generated from its core retail operations. 2016/17 7.40 3 2016/17 2.42 2016/17 10.2 2016/17 547 Core retail capital No direct Capital expenditure excludes Financial 2019 2018 2017/18 7.44 2017/18 2.24 2017/18 10.2 2017/18 495 expenditure equivalent Services, after proceeds on disposals £m £m metrics (such as profit or adjusted profit) with cash and before strategic capital expenditure. Purchase of property, plant and equipment (434) (473) 2018/19 7.52 2018/19 2.43 2018/19 J Sainsbury11.0 2018/19 454 AutoTraderAuto Trader Group plc Annual Report and Financial Statements 2019 | 21 This allows management to assess core Purchase of intangibles (78) (69) retail capital expenditure in the period Cash capital expenditure before (512) (542) in order to review the strategic business strategic capital expenditure (note 4) metrics featuring as a supporting, rather than leading Clear, reconciled cash KPI with rationale,performance. and link to remuneration. KPIs with clear context and good links to risk and strategy. Strategic capital expenditure (ref (b) above) (36) (80) The reconciliation from the cash flow statement is included here. Proceeds on disposal 64 54 metric. Whilst companies often do a good job of Cash capital expenditure including (484) (568) strategic capital expenditure Capitalised interest (6) (7) explaining some aspects of their wider performance, Other (including strategic capital expenditure) 36 80 Total net retail core capital (454) (495) cash metrics and cash generation are often not fully Examples of overall cash narrativeexpenditure include: 4imprint Group plc Annual Report and Accounts 2018 09 Overview Strategic Report 1 Refer to APMs on page 185. Governance explained. This wider cash story deserves2 Retail free cash flow betterwas only defined as a KPI from 2015/16 onwards. Financial Statements Disclosures on the sources and uses of cash Disclosures on the sources and uses of cash 3 2016/17 restated to include Argos on a post acquisition consolidation basis. Additional Information 18 19

Objectives explanation. Based on our historical results, projections and financial condition, we believe that our future operating cash flows and liquidity will be sufficient to fund all of our expected capital improvements, new ship growth capital, Cash generation debt maturities and dividend payments over the next several years. We believe that our ability to generate significant operating cash flows and our strong balance sheet, as evidenced by our strong investment grade credit and profitability Group plc ratings, provide us with the ability, in most financial credit market environments, to obtain debt financing. We had a working capital deficit of $7.0 billion as of November 30, 2018 compared to a working capital deficit of Both numbers and narrative are crucial for investors. To deliver reliable and increasing free cash flow over the medium to longer term $7.2 billion as of November 30, 2017. The decrease in working capital deficit was driven by the increase in our cash 2018 ANNUAL REPORT To balance short-term profitability with marketing investment opportunities leading to sustainable and cash equivalents, partially offset by an increase in customer deposits and short-term borrowings. We operate with a long-term free cash flow and EPS growth substantial working capital deficit. This deficit is mainly attributable to the fact that, under our business model, What is useful? GroupWhat o�fce is useful? substantially all of our passenger ticket receipts are collected in advance of the applicable sailing date. These advance However, the most effective disclosures are those passenger receipts remainm a current liability until the sailing date. The cash generated from these advance receipts is Carnival provide a high level narrati ve on key aspects of the sources and uses of cash for the current, 4imprint4imprint Group bring plc several relevant cash disclosures together in a single page. They highlight how their 25 Southampton Buildings used interchangeably with cash on hand from other sources, such as our borrowings and other cash from operations. and prior two years. This allows investors to get a quick sense of performance and position and objecti ves for cash, relate to the key strategic drivers, and the risks which might impact those London WC2A 1AL The cash received as advanced receipts can be used to fund operating expenses, pay down our debt, make long-term identify areas for further review. Telephonedrivers. +44 On (0)20the same 3709 page 9680 they also highlight the key performance indicators that (in their view) are investments or any other use of cash. Included within our working capital deficit are $4.4 billion and $4.0 billion of where numbers and narrative are combined in a way E-mailrelevant [email protected] to assessing their performance against the objecti ve. customer deposits as of November 30, 2018 and 2017, respectively. In addition, we have a relatively low-level of Carnival Corporati on & PLC Annual Report 2018 Key enablers Risks Bringing everything together helps investors to quickly understand key elements of the company’s accounts receivable and limited investment in inventories. We generate substantial cash flows from operations and our Reinvestment of cash generated from Macroeconomic conditions Trading o�fces business model has historically allowed us to maintain this working capital deficit and still meet our operating, operations into organic growth initiatives story but also provides links to more detail if they wish to dig deeper. Competition USA investing and financing needs. We expect that we will continue to have working capital deficits in the future. based on multi-year revenue/return A projections Currency exchange 4imprint, Inc. that shows how future cash generation is underpinned Disciplined approach to investment: Business facility disruption 4Imprint Group plc Annual Report and Accounts 2018 101 Commerce Street Sources and Uses of Cash — Marketing investment based on our Disruption to product supply chain or Financing Activities assessment of both prevailing market delivery service Oshkosh conditions and a combination of current and Disturbance in established marketing WI 54901, USA Operating Activities During 2018, net cash used in financing activities of $1.5 billion was substantially all due to the following: future customer-centric metrics, including techniques Telephone +1 920 236 7272 prospecting yield curves, retention patterns Reliance on key personnel • Net proceeds of short-term borrowings of $417 million in connection with our availability of, and needs by current cash generation. Two ways in which we saw and lifetime revenue profiles Fax +1 920 236 7282 Our business provided $5.5 billion of net cash from operations during 2018, an increase of $227 million, or 4.3%, IT failure/interruption for, cash at various times throughout the period — Capital investment evaluated based on cash compared to $5.3 billion in 2017. This increase was driven by an increase in customer deposits. During 2017, our Security of customer data E-mail [email protected] • Repayments of $1.6 billion of long-term debt payback and discounted cash flow parameters business provided $5.3 billion of net cash from operations, an increase of $188 million, or 3.7%, compared to Direct marketing ‘drop-ship’ business • Issuances of $2.5 billion of long-term debt model, facilitating efficient working capital UK $5.1 billion in 2016. This increase was caused by an increase in our revenues less expenses settled in cash. A • Payments of cash dividends of $1.4 billion management companies trying to communicate this was through 4imprint Direct Limited • Purchases of $1.5 billion of Carnival Corporation common stock and Carnival plc ordinary shares in Low capital intensity of the business 5 Ball Green Investing Activities See pages 20–25. open market transactions under our Repurchase Program Cobra Court Trafford Park During 2018, net cash used in investing activities was $3.5 billion. This was caused by: During 2017, net cash used in financing activities of $2.5 billion was substantially all due to the following: KPIs Manchester M32 0QT • Capital expenditures of $2.1 billion for our ongoing new shipbuilding program • Net repayments of short-term borrowings of $29 million in connection with our availability of, and better disclosure around the selection and use of Freephone 0800 055 6196 • Capital expenditures of $1.7 billion for ship improvements and replacements, information technology Revenue per marketing dollar ($) Underlying† operating margin (%) Cash conversion (%) needs for, cash at various times throughout the period Telephone +44 (0)161 850 3490 and buildings and improvements • Repayments of $1.2 billion of long-term debt $5.63 6.14% 94% Fax +44 (0)161 864 2516 • Proceeds from sale of ships of $389 million ’18 ’18 ’18 • Issuances of $100 million of long-term debt under a term loan 5.63 6.14 94 E-mail [email protected] • Purchase of minority interest of $135 million ’17 5.67 ’17 6.70 ’17 101 • Proceeds of $367 million of long-term debt under an export credit facility key performance metrics (in-line with the practices ’16 5.77 ’16 6.80 ’16 115 • Payments of $39 million of fuel derivative settlements • Payments of cash dividends of $1.1 billion ’15 5.92 ’15 6.68 ’15 60 • Purchases of $552 million of Carnival Corporation common stock and Carnival plc ordinary shares in ’14 ’14 ’14 6.01 6.52 102 During 2017, net cash used in investing activities was $3.1 billion. This was caused by: open market transactions under our Repurchase Program • Capital expenditures of $1.4 billion for our ongoing new shipbuilding program Revenue per marketing dollar provides This KPI shows the profitability of the Cash conversion measures the efficiency • Capital expenditures of $1.5 billion for ship improvements and replacements, information technology During 2016, net cash used in financing activities of $2.6 billion was substantially all due to the following: suggested in our recent report on performance metrics), a measure of the productivity of our Group’s trading operations. In 2018 of the 4imprint business model in the marketing investment. We measure marketing investment in brand awareness conversion of operating profits into and buildings and improvements • Net proceeds from short-term borrowings of $447 million in connection with our availability of, and performance relative to in-year targets as impacted operating margin in the year. operating cash flow. 2018 was another • Payments of $203 million of fuel derivative settlements needs for, cash at various times throughout the period opposed to historical trend in accordance However, we believe that this investment strong year for cash conversion, reflecting • Repayments of $1.3 billion of long-term debt with our strategic objectives for organic will strengthen our position in the market good working capital management and During 2016, net cash used in investing activities was $3.3 billion. This was caused by: growth, profitability and cash generation. allowing recovery in operating margin in the low fixed capital requirements of • Issuances of $555 million of euro-denominated publicly-traded notes, which net proceeds were used for and through the use of narratives (that bring all the cash The performance in 2018 should be set in subsequent years. the business. • Capital expenditures of $1.9 billion for our ongoing new shipbuilding program general corporate purposes the context of the investment during the • Capital expenditures of $1.2 billion for ship improvements and replacements, information technology • Proceeds of $987 million of long-term debt year in brand marketing. and buildings and improvements • Payments of cash dividends of $977 million

† Underlying has been restated to include share • Payments of $291 million of fuel derivative settlements • Purchases of $2.3 billion of shares of Carnival Corporation common stock and $35 million of Carnival related elements together). option charges. • Proceeds from sale of ships of $26 million plc ordinary shares in open market transactions under our Repurchase Program Future Commitments Quick read Introduction 1 Presenting an overall 2 Disclosures supporting 3 Disclosures supporting Appendix 1 Payments Due by narrative the sources of cash the use of cash Reverse factoring 57 (in millions) 2019 2020 2021 2022 2023 Thereafter Total Quick read Introduction 1 Presenting an overall 2 DisclosuresDebt (a) supporting $ 2,6333 Disclosures $ 2,320 $ supporting 1,243 $ 1,203 $ 1,867Appendix $ 2,095 1 $ 11,360 Examples of how this might be applied include Other long-term liabilities reflected — 135 90 73 59 178 535 narrative theon sources the balance of sheet cash (b) the use of cash Reverse factoring 4imprint New ship growth capital 4,935 3,849 3,887 3,117 2,110 1,132 19,029 Carnival Corporation &Operating plc leases 70 48 46 36 35 180 415 J Sainsbury, AutoTrader, 4imprint Group and Carnival Port facilities and other 311 292 249 172 132 1,097 2,253 A single page that pulls the key elements of the cash narrative Purchase obligations 451———— — 451 Total Contractual Cash $ 8,400 $ 6,644 $ 5,514 $ 4,600 $ 4,203 $ 4,682 $ 34,044 Corporation. High-level narrative that supports keyObligations cash movements. together. (a) Includes principal as well as estimated interest payments. (b) Represents cash outflows for certain of our long-term liabilities which can be reasonably estimated. The primary outflows are for estimates of our compensation plans’ obligations, crew and guest claims and certain deferred income taxes. Customer deposits and certain other deferred income taxes have been excluded from the table because they do not require a cash settlement in the future.

58 Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring Disclosures on the sources and uses of cash 5

Examples that explained how cash is generated Sources of cash Disclosures on the sources and uses of cash 22 Investors want disclosures that: Phoenix group

OUR CASH GENERATION HELPS US RESULTING OUTCOMES DELIVERED REPORT STRATEGIC BUSINESS MODEL REALISE OPPORTUNITIES FOR GROWTH ARE POSITIVE FOR ALL STAKEHOLDERS WhatCash is useful? HOW WE CREATE VALUE IN-FORCE BOOK CUSTOMERS Phoenix have a series of disclosures in, and around, the CASH EMERGENCE Optimised customer 93% A business model disclosure that explains how cash is generated Capital requirements of operating life outcomes business model that provides some additi onal insight into WE ARE SET APART BY OUR STRENGTHS CUSTOMER SATISFACTION Resilience OUR STRATEGIC PRIORITIES HELP companies decline as policies mature, WHICH UNDERPIN OUR BUSINESS MODEL cash generati on. ENHANCE THE VALUE WE CREATE releasing capital in the form of cash THROUGH OUR BUSINESS MODEL. Read more on SCALE OF OUR PLATFORM P48 TheGrowth business model focuses on the importance of cash Largest Life and Pensions

GOVERNANCE CORPORATE generati on to the business and how that links to opportuniti es IMPROVE CUSTOMER MANAGEMENTConsolidator in Europe in simple terms. OUTCOMES ACTIONS SHAREHOLDERS for growth and ulti mately stakeholder returns. Improving customer outcomes is central to our Management track record of Shareholder value £664m A Sustainable Phoenix vision of being Europe’s Leading Life Consolidator, deliveringSECURITY incremental value created and stable CASH GENERATION Given that life insurance is a relati vely complex business they and to inspire confidence in the future. Strong balance sheet which generates and sustainable long term cash flows and provides security dividends delivered also provide a simplifi ed yet engaging illustrati ve explanati on Read more on for all stakeholders of the source and use of cash within life insurance companies. Provide details about sources of cash, both P18 NEW BUSINESS Read more on P58 3.5% Capital-lightSPECIALIST new business OPERATING MODEL DRIVE INCREASE IN 2018 Phoenix Group Annual Report 2018 under the StrategicSpecialist operating Partnership model enabling VALUE FINAL DIVIDEND FINANCIALS Full Year Results 2018 with Standardus to efficiently Life Aberdeen manage and integrate In order to drive value, the Group looks to and vestingheritage annuities books from identify and undertake management actions, our Heritage business COLLEAGUES 5 March 2019see which increase and accelerate cash flow. Disclosures on the sources and uses of cash Read more on P8 Challenged, 23 motivated and next Read more on rewarded colleagues page 1 P22 MERGERS AND now and in the future. SERVICE ACQUISITIONS MANAGE Quality service to our customers Read more on Value accretiveand their intermediaries acquisitions is critical P51 CAPITAL generate increasedto our strategy cash flows and synergy opportunities We continue to focus on the effective INFORMATION ADDITIONAL through scale advantages management of our risks and the efficient Read more from P18 to P21 allocation of capital against those risks. COMMUNITY & ENVIRONMENT £770k Read more on Support for local P24 BULKSKILLS PURCHASE ANNUITYSIGNIFICANT communities and DONATED TO MIDLANDS Talented and GROWTH BUSINESS MODELAND LONDON CONTINUED AIR TRANSACTIONS charity partners AMBULANCE CHARITY experienced A wealth of The bulkteam. purchase We will annuity market and reduced PARTNERS ENGAGE acquisitions environmental COLLEAGUES offers acontinue complementary to invest source opportunitiesof OUR CASH GENERATION PROCESS assets andin this growth expertise across the UK and impact Our people are at the heart of our business Europe and organic Cash and key to the successful growth of growth through Cash Phoenix Group. Read more on REPORTREPORT STRATEGIC new business is Read more on remitted Head P26 available to us P54 Management Cash remitted to from the life office Resilience

Read more on BUSINESS MODEL CONTINUED OUR CASH GENERATION PROCESS actions holding companies companies costs P26 Cash REPORT STRATEGIC remitted Head Management Cash remitted to from the life office actions holding companies companies costs Read more on P12

Pensions

Reduction GOVERNANCE CORPORATE Growth in capital Debt interest requirements and repayments

Dividends

Surplus generated Remaining

in life cash at holding FINANCIALS In of the report we explore views on disclosures that companies company level

Opening section 2 cash at Opening Closing holding free free company

INFORMATION ADDITIONAL Pensions surplus surplus level CASH AT THE HOLDING COMPANY ANY ASSETS WHICH THE LIFE LEVEL PROVIDES COMPANIES HOLD IN EXCESS OF RESOURCES AND OVERALL CAPITAL BUFFERS REQUIRED RESILIENCE FOR IS KNOWN AS FREE SURPLUS THE GROUP * For illustrative purposes only. A Sustainable Phoenix OPENING SOURCES OF LIFE USES OF HOLDING USES OF REMAINING FREE SURPLUS COMPANY CASH COMPANY CASH CASH — GROWTH GENERATION GENERATION OPPORTUNITIES

Pensions contributions GOVERNANCEGOVERNANCE CORPORATE and pensions products IMPACT OF NEW BUSINESS? Less Solvency Capital Requirement to support the dividend level. Reduction increasing Own Funds. Capital-light open business To Group’s employee Defined Benefit schemes. The level of regulatory capital required is known as the Bulk purchase annuity transactions Read more about our New business written across Debt interest and repayments Solvency Capital Requirement. Reduced capital requirements Generate increased cash flows over the longer our open product range is On outstanding Group shareholder debt. As our heritage business runs term and are value accretive. Less Capital Policy capital-light and does not require off, the Solvency Capital Dividends The life companies hold additional internal capital buffers significant capital to be retained. Requirements reduce. above the regulatory capital requirement for prudence. The Group maintains a stable and sustainable dividend. cash generation on in capital Debt interest

PHOENIX GROUP HOLDINGS PLC PHOENIX GROUP HOLDINGS PLC provide information on the sources and generation of cash. 16 ANNUAL REPORT & ACCOUNTS 2018 ANNUAL REPORT & ACCOUNTS 2018 17 P16 requirements and repayments Full Year Results 2018 5 March Dividends2019 PHOENIX GROUP HOLDINGSPHOENIX PLC GROUP HOLDINGS PLC 14 Quick read IntroductionANNUAL REPORT & ACCOUNTSANNUAL 2018 REPORT & ACCOUNTS1 Presenting 2018 an overall 2 Disclosures supporting15 3SurplusDisclosures supporting Appendix 1 generated Remaining 1

narrative the sources of cash inthe life use of cash Reverse factoring cash at holding FINANCIALS Understanding the link between the operations of a company companies company level

Opening cash at Opening Closing holding free free company and its generation of cash is a key objective for investors. surplus surplus level INFORMATIONINFORMATION ADDITIONAL CASH AT THE HOLDING COMPANY ANY ASSETS WHICH THE LIFE LEVEL PROVIDES COMPANIES HOLD IN EXCESS OF RESOURCES AND OVERALL CAPITAL BUFFERS REQUIRED RESILIENCE FOR IS KNOWN AS FREE SURPLUS THE GROUP However, this is not always easy to do from the information a * For illustrative purposes only. OPENING SOURCES OF LIFE USES OF HOLDING USES OF REMAINING FREE SURPLUS COMPANY CASH COMPANY CASH CASH — GROWTH company discloses in the annual report. Investors participating STRATEGIC REPORT GENERATION GENERATION OPPORTUNITIES WHAT IS THE OPENING FREE SURPLUS? HOW IS FREE SURPLUS Management actions WHAT IS THE CASH REMITTED FROM WHAT IS THE REMAINING Life Company Own Funds GENERATED? These can either increase THE LIFE COMPANIES USED FOR? CASH USED FOR? ÝřKĄřKŚÝyÝĩĄČěĄěK{ťӗ:ĩ¸ěĩĄKծ Life companies hold capital in accordance with Solvency II Margins earned Own Funds or reduce Head office costs Mergers and acquisitions regulations, providing appropriate security for policyholders. Life companies earn margins capital requirements. Including salaries and other administration costs. Transactions must be value accretive This capital is known as Solvency II Own Funds. on different types of life and cash flow generative and need Pensions contributions and pensions products IMPACT OF NEW BUSINESS? VALUES AND BUSINESS MODEL Less Solvency Capital Requirement to support the dividend level. increasing Own Funds. Capital-light open business To Group’s employee Defined Benefit schemes. The level of regulatory capital required is known as the Bulk purchase annuity transactions in this project noted that there can be a lack of clarity, and it New business written across Debt interest and repayments ÝʍɨɰɽɨƃɽǉǼʰǹɁƺʍɰǉɰɁȶǁǉȢȈʤǉɨȈȶǼʤƃȢʍǉɽɁƺʍɰɽɁȴǉɨɰƃȶǁɰȃƃɨǉȃɁȢǁǉɨɰӝěȃǉɰɽɨƃɽǉǼʰȈɰǁǉȢȈʤǉɨǉǁɽȃɨɁʍǼȃƃɥɨɁʤǉȶ Solvency Capital Requirement. Reduced capital requirements Generate increased cash flows over the our open product range is On outstanding Group shareholder debt. ƹʍɰȈȶǉɰɰ ȴɁǁǉȢ ʍȶǁǉɨɥȈȶȶǉǁ ƹʰ ƃ ɨɁƹʍɰɽ ɨȈɰȟ ȴƃȶƃǼǉȴǉȶɽ ƃȶǁ ǼɁʤǉɨȶƃȶƺǉ ǹɨƃȴǉʥɁɨȟ ƃȶǁ Ɂʍɨ ǉɰɽƃƹȢȈɰȃǉǁ As our heritage business runs longer term and are value accretive. QuickLess Capital read Policy Introduction capital-light.Presenting an overall Disclosures supporting Disclosures supporting Appendix 1 ƺʍȢɽʍɨǉծʤƃȢʍǉɰӝ off, the Solvency Capital 1 2 Dividends 3 Disclosures on the sources and uses of cash The life companies hold additional internal capital buffers Requirements reduce. narrative the24 sources of cash the use of cash Reverse factoring above the regulatory capital requirement for prudence. The Group maintains a stable and sustainable dividend. can be challenging to understand how the operations of the OUR BUSINESS MODEL SECTION B PHOENIX GROUP HOLDINGS PLC PHOENIX GROUP HOLDINGS PLC 16 ANNUAL REPORT & ACCOUNTS 2018 ANNUAL REPORT & ACCOUNTS 2018 17 Key stakeholders R REGULATORS C CUSTOMERS I INVESTORS Chesnara Stakeholder Financial stability and Fair outcomes Competitive return business are generating cash. objectives regulatory compliance yÇÇ:¸ĄKřKŚӓ:Č{KÇKĄěÝÇ

GROUP CASH GENERATIONWhat is useful? DIVISIONAL CASH GENERATION A business model that drills down to the underlying businesses Chesnara use a simple business model to note the cash generati on relati onship between the Cash generation and Economic Value growth £47.8M їѕіќԳїѝӝћM underlying divisions and the£63.9 group centre,M with helpfulїѕіќӖԳѝћӝќ crossM references to further informati on. This high-level disclosure is further supported by a more detailed narrati ve and a roll forward of cash generati on at a divisional level. ČȈǼȶȈˎƺƃȶɽƺƃɰȃǼǉȶǉɨƃɽȈɁȶȈȶɽȃǉĩ¶ȃƃɰǁɨȈʤǉȶƃɽɁɽƃȢǁȈʤȈɰȈɁȶƃȢƺƃɰȃɨǉɰʍȢɽɁǹԳћјӝўȴǹɁɨɽȃǉʰǉƃɨӗʥȈɽȃɰʍɥɥɁɨɽȈȶǼ and their ability to generate cash. Division UK NETHERLANDSƺɁȶɽɨȈƹʍɽȈɁȶɰǹɨɁȴÃɁʤǉɰɽȈƺƃȶǁŚƃƃɨǁӝ:ƃɰȃȈɰǼǉȶǉɨƃɽǉǁǹɨɁȴȈȶƺɨǉƃɰǉɰȈȶɽȃǉǼɨɁʍɥԇɰɰɁȢʤǉȶƺʰɰʍɨɥȢʍɰӗʥȃȈƺȃSWEDEN Chesnara Annual Report and Accounts 2018 ȈɰɨǉɥɨǉɰǉȶɽǉǁƹʰɽȃǉǉʯƺǉɰɰɁǹƃɰɰǉɽɰȃǉȢǁɁʤǉɨȴƃȶƃǼǉȴǉȶɽԇɰȈȶɽǉɨȶƃȢƺƃɥȈɽƃȢȶǉǉǁɰӝěȃǉɰǉƃɨǉƹƃɰǉǁɁȶɨǉǼʍȢƃɽɁɨʰ Operating Countrywide Waard Business model and cash Scildon Movestic company Assured Group ƺƃɥȈɽƃȢɨǉɧʍȈɨǉȴǉȶɽɰӗʥȈɽȃɽȃǉȈȶƺȢʍɰȈɁȶɁǹƃǁǁȈɽȈɁȶƃȢԆȴƃȶƃǼǉȴǉȶɽƹʍǹǹǉɨɰԇӝ Strategic 01 02 01 02 01 03 01 02 03 objectives Read more on p24 Read more on p28 GRO ReadUP more on p28 Read more on p26

Culture – Sufficient group cash has been generated in the year to cover the cost of 2017 whereas in 2018 falling bond values resulted in Own Funds losses of & values ĄǉɰɥɁȶɰȈƹȢǉɨȈɰȟӸƹƃɰǉǁȴƃȶƃǼǉȴǉȶɽǹɁɨɽȃǉƹǉȶǉˎɽɁǹƃȢȢɁǹɁʍɨɰɽƃȟǉȃɁȢǁǉɨɰ last year’s SECTION dividend. B over £20m. A strengthening of mortality assumptions also had an adverse Whilst the business model disclosure is not the only place – The overall increase in group cash year on year is a factor of several material impact in 2018. items. The 2017 result includes the impact of the completion of the Legal & – Other group activities reflect group expenses and the impact of consolidation OUR STRATEGIC OBJECTIVES yÇÇ:¸ĄKřKŚӓ:Č{KÇKĄěÝÇGeneral Nederland (Scildon) acquisition which, in line with expectations, routines, specifically movements in capital requirements determined at a

GROUP CASH GENERATION resulted inDIVISIONAL a £55.3m CASH negative GENERATION impact on cash generation. A £26.8m release group level. From a capital requirement perspective, this is driven by movements 01 02 from the with-profit03 funds has driven a sizeable increase in UK cash in in required capital at a Chesnara holding company level coupled with £47.8M їѕіќԳїѝӝћM £63.9M їѕіќӖԳѝћӝќM 2018. In the opposite direction there has been a £34m adverse year on year consolidation adjustments. At a Chesnara holding company level, additional MAXIMISE THE VALUE FROM ACQUIRE LIFE AND ENHANCE VALUE THROUGH investors will go for information, for many it remains an ČȈǼȶȈˎƺƃȶɽƺƃɰȃǼǉȶǉɨƃɽȈɁȶȈȶɽȃǉĩ¶ȃƃɰǁɨȈʤǉȶƃɽɁɽƃȢǁȈʤȈɰȈɁȶƃȢƺƃɰȃɨǉɰʍȢɽɁǹԳћјӝўȴǹɁɨɽȃǉʰǉƃɨӗʥȈɽȃɰʍɥɥɁɨɽȈȶǼ EXISTING BUSINESS ƺɁȶɽɨȈƹʍɽȈɁȶɰǹɨɁȴÃɁʤǉɰɽȈƺƃȶǁŚƃƃɨǁӝ:ƃɰȃȈɰǼǉȶǉɨƃɽǉǁǹɨɁȴȈȶƺɨǉƃɰǉɰȈȶɽȃǉǼɨɁʍɥԇɰɰɁȢʤǉȶƺʰɰʍɨɥȢʍɰӗʥȃȈƺȃPENSIONS BUSINESSES movement in PROFITABLEScildon’s cashNEW generation.BUSINESS Much of the movement is due to the capital is principally required to be held for the currency risk associated with ȈɰɨǉɥɨǉɰǉȶɽǉǁƹʰɽȃǉǉʯƺǉɰɰɁǹƃɰɰǉɽɰȃǉȢǁɁʤǉɨȴƃȶƃǼǉȴǉȶɽԇɰȈȶɽǉɨȶƃȢƺƃɥȈɽƃȢȶǉǉǁɰӝěȃǉɰǉƃɨǉƹƃɰǉǁɁȶɨǉǼʍȢƃɽɁɨʰfact that economic conditions had a positive impact on Own Funds in the Movestic, Scildon and Waard Group surplus assets. ƺƃɥȈɽƃȢɨǉɧʍȈɨǉȴǉȶɽɰӗʥȈɽȃɽȃǉȈȶƺȢʍɰȈɁȶɁǹƃǁǁȈɽȈɁȶƃȢԆȴƃȶƃǼǉȴǉȶɽƹʍǹǹǉɨɰԇӝ Managing our existing customers Acquiring and integrating companies Writing profitable new business GROUP fairly and efficiently is core to into our business model is key to2018 £m supports the growth of our group 2017 £m delivering our overall strategic aims. – Sufficient groupcontinuing cash has been our generated growth in the yearjourney. to cover the cost of 2017 whereasand inhelps 2018 falling mitigate bond values the resulted natural in Own Funds losses of last year’s dividend. over £20m. A strengthening of mortality assumptions also had anMovement adverse in Movement in – The overall increase in group cash year on year is a factor of several material impact inrun-off 2018. of our book. items. The 2017 result includes the impact of the completion of the Legal & – Other group activities reflect group expenses and the impact of consolidationOwn Funds management’s capital Forex Cash Cash important starting point, especially for those new to the General Nederland (Scildon) acquisition which, in line with expectations, routines, specifically movements in capital requirements determined at a resulted in a £55.3m negative impact on cash generation. A £26.8m release group level. From a capital requirement perspective, this is driven by movements requirement impact generated generated from the with-profit funds has driven a sizeable increase in UK cash in in required capital at a Chesnara holding company level coupled with 2018. In the opposite direction there has been a £34m adverse year on year consolidation adjustments. At a Chesnara holding company level, additional movement in Scildon’s cash generation. Much of the movement is due to the capital is principally required to be held for the currency risk associated with fact that economic conditions had a positive impact on Own FundsUK in the Movestic, Scildon and Waard Group surplus assets. 18.0 37.8 – 55.8 34.5 18 CHESNARA ANNUAL REPORT AND ACCOUNTS 2018 2018 £m Sweden 2017 £m (10.7) 30.1 (1.3) 18.1 24.9 Movement in Movement in Own Funds management’sNetherlandscapital – WaardForex GroupCash Cash 3.0 4.6 0.2 7.8 11.1 requirement impact generated generated (23.5) 6.2 (0.4) (17.8) 16.2 business. As such, it is important that the disclosure either LB5111 Chesnara 2018 Sec B_Strategic_AW_Stg8.indd 18 UK Scildon 04/04/2019 12:43 18.0 37.8 – 55.8 34.5 Sweden (10.7) 30.1 (1.3) 18.1 24.9 Netherlands – Waard Group 3.0 4.6 0.2 7.8 11.1 Scildon (23.5) Divisional6.2 cash (0.4)generation(17.8) 16.2 (13.2) 78.6 (1.4) 63.9 86.7 Divisional cash generation (13.2) Other78.6 group activities(1.4) 63.9 86.7 (13.6) (3.6) 1.0 (16.1) (2.7) Other group activities (13.6) (3.6) 1.0 (16.1) (2.7) Impact of LGN acquisition Impact of LGN acquisition – (55.3) – (55.3) clearly explains how and where cash is generated, or Group cash generation (26.8) 75.0 (0.4) 47.8 28.6 UK Group SWEDENcash generation (26.8) 75.0 (0.4) 47.8 28.6

– The UK has continued to deliver substantial cash generation in 2018, following – Sweden generated £18.1m of cash for the year, due to a fall in the level of significant reductions in capital requirements. required capital. – Own Funds (OF) growth includes the benefit of a £26.8m release of restricted – Own Funds suffered from the decline in equity markets in the second half of surplus from the with-profit funds. A further £5.7m of surplus capital exists 2018, with lower fund values and investment returns resulting in a reduction within the with-profit funds that has not been recognised in the results. of £10.7m at the year end. – Underlying Own Funds performance was hampered by investmentUK markets – Conversely, the fall in investment markets also created a significant positive SWEDEN in the later stages of the year, with widening spreads having a negative cash impact. With equity values decreasing, the level of capital the business impact on Own Funds. was required to hold also fell substantially, primarily through lower equity Quick read – The fall in equity marketsIntroduction also had a positive effect on cash– generationThe UK due hasrisk exposurecontinued1 andPresenting diminished to lapse deliver risk. an substantial overall cash generation2 Disclosures in 2018, supportingfollowing – Sweden3 generatedDisclosures £18.1m supporting of cash for the year,Appendix due to a fall 1 in the level of references relevant disclosure throughout the rest of the to the subsequent reduction in required capital through lower equity and mass – SEK depreciation against sterling resulted in an exchange loss of £1.3m. lapse risk. narrative the sources of cash the use of cash Reverse factoring – This was supported by further reductions in equity risk and spreadsignificant risk, reductions in capital requirements. required capital. following the capital transfer. – Own FundsNETHERLANDS (OF) growth – SCILDON includes the benefit of a £26.8m release of restricted – Own Funds suffered from the decline in equity markets in the second half of – Scildon has reported a cash loss in the year, owing to a reduction in Own Funds. NETHERLANDS – WAARD surplus from– The steep the widening with-profit of spreads in the second funds. half of the A year further compounded £5.7m of surplus capital exists 2018, with lower fund values and Rinvestment returns resulting in a reduction the valuation losses on Italian bonds reported earlier in 2018, driving down the Linked to remuneration – see the – The Waard Group has continued to supply stable cash generation,within with thevalue with-profit of Own Funds. funds that has not been recognised in the results. of £10.7m at the year end. positive movements in both Own Funds and capital requirements. – Own Funds also include the impact of strengthening mortality assumptions Remuneration report on pages 101-136. – The growth in Own Funds was primarily a consequence– of lowerUnderlying mortality in the Own year. Funds performance was hampered by investment markets – Conversely, the fall in investment markets also created a significant positive experience and subsequent reductions in assumed mortality lapse rates. – Capital requirements moved favourably to partially offset the reduction in Own report. – Falls in lapse risk and counterparty default risk underpin the reduction in the Funds. Investment market conditions had a positive impact with exposure in the later stages of the year, with widening spreads having a negative cash impact. With equity values decreasing, the level of capital the business capital requirement. to spread risk and equity risk shrinking materially in the second half of the year. impact onThis Own also drove Funds. significant favourable movements in lapse risk. was required to hold also fell substantially, primarily through lower equity – The fall in equity markets also had a positive effect on cash generation due risk exposure and diminished lapse risk. CHESNARAto ANNUALthe subsequentREPORT AND ACCOUNTS reduction 2018FINANCE in required capital37 through lower equity and mass – SEK depreciation against sterling resulted in an exchange loss of £1.3m. An examplelapse risk. focused on the future report Strategic LB5111 Chesnara 2018 Sec B_Strategic_AW_Stg8.indd 37 – This was supported Totalby further shareholder reductions in 04/04/2019equity 12:43 risk and spreadPerformance risk, Associated risks following the capital returntransfer. R (TSR)1,2 As per last year, TSRNETHERLANDS performance over the – SCILDON– Market risks, such as variability in commodity five-year period was driven principally by prices and exchange rates. % over five years movements in commodity– Scildon hasprices reported and changes a cash loss– inStakeholder the year, owingrisks, including to a reduction the actions in Own of Funds. Key aspects of cash generation that could be enhanced in the in the global macro environment. The share joint-venture partners, third parties and NETHERLANDS – WAARD – The steep widening of spreads in the second half of the year compounded prices of Rio Tintothe plc valuationand Rio Tinto losses Limited on Italian bondsgovernments. reported earlier in 2018, driving down the Disclosures on the sources and uses of cash 2014 60.7 remained relatively flat in 2018. Rio Tinto – The Waard Group has continued to supply stable cash generation, with value of Own Funds. 25 outperformed the EMIX Global Mining Index Link to executive remuneration positive movements2015 in both Own Funds(18.2) and capital requirements. – Own Funds also include the impact of strengthening mortality assumptions over the five-year period, but significantly Reflected in long term incentive plans, measured – The growth in Own Funds2016 was primarily(40.7) a consequence of lower underperformedmortality thein theMSCI year. World Index. equally against the EMIX Global Mining Index and experience and subsequent reductions in assumed mortality lapse rates. – Capital requirements moved favourably to partially offset the reduction in Own business model, and related disclosures include: 5.8 the MSCI World Index (see page 109). Interacti on with regulati on 2017 – Falls in lapse risk and counterparty default risk underpin the reductionRelevance in the to strategyFunds. Investment market conditions had a positive impact with exposure 2018 33.4 Both the examples on cash generati on from thecapital requirement.Many of the disclosures we highlight areOur derived strategy aims to to spreadmaximise risk shareholder and equity risk shrinkingForward materiallyplan in the second half of the year. returns through theThis commodity also drove cycle, significant and favourableWe will continue movements to focus on in lapsegenerating risk. the free Rio Tinto previous pages are from companies within the from (or work alongside) the regulatoryTSR reporti is a direct ng measure of that. cash flow from our operations that allows us to insurance industry, and in this case specifi cally the life requirementsDefinition of their industry regulator. Nevertheless return cash to shareholders (short-term returns) Combination of share price appreciation (using while investing in the business (long-term returns). insurance segment. Throughout this report you will theyannual represent average share some prices) of and the dividends CHESNARAmore paid interesti ANNUAL ng REPORTcash AND ACCOUNTS 2018 37 fi nd examples from the insurance and uti liti es’ sectors. generatiand reinvested on (and to show use) the total disclosures return to the currently in the • Disaggregation of profit generation, by product line, Due to their very long ti me horizons, and the complex market.shareholder Whilst over the they preceding may five be years. more than many Contextualised performance indicators with some forward interacti on between shareholderLB5111 returns Chesnara and2018 Secprudent B_Strategic_AW_Stg8.indd companies 37 need, such disclosures are well received What is useful? 04/04/2019 12:43 protecti on of the wider stakeholders/policyholder by a wide range of investors (who generally focus Rio Tinto provide the historic context for net cash generati on as interest, the regulators of these industries have on1 other The chart industries). above reflects TSR Wefor the thereforefive-year period consider them shown. In last year’s Annual report, the equivalent well as highlighti ng how it feeds into executi ve remunerati on directional information. focused companies on the protecti on of capital. This useful examples to demonstrate att ributes desired by segment or geography (whichever is most relevant), and charts reflected annual TSR values. targets. By also providing detail on associated risks, as well 2 The TSR calculation for each period is based on the has led to a general focus within these companies investors.change in the calendar year average share prices for as the company’s forward plan, they provide some forward Rio Tinto plc and Rio Tinto Limited over the preceding (and therefore their investors) in unencumbered cash five years. This is consistent with the methodology directi on. used for calculating the vesting outcomes for generati on. Performance Share Awards (PSA). The data presented in this chart accounts for the dual Rio Tinto Plc - Annual Report 2018 corporate structure of Rio Tinto.

Cash generati on – forward guidance • Detail around conversion of profit into free cash (or other Net cash generated Performance Link to executive remuneration Whilst companies are rightly concerned about (and 3 Net cash generated from operating activities of Included in the short term incentive plan; in from operating activities $11.8 billion was 15% lower this year, primarily the longer term, the measure influences TSR restricted on) providing forward guidance, there is $ millions due to higher tax payments related to 2017 which is included in long term incentive a clear line in the minds of investors between broad profits and adverse working capital movements. plans (see pages 108 and 109). indicati ons and specifi c forecasts. cash metric, as selected by the company). 2014 14,286 Relevance to strategy Forward plan For many companies, understanding where cash will be 2015 9,383 This KPI measures our ability to convert We aim to generate additional free cash flow from underlying earnings into cash. our five-year productivity programme (2017 to generated from in the future is a key element of their 2016 8,465 2021). We expect the programme to deliver at Rio Tinto 2018 Annual report investment story. 2017 13,884 Associated risks least an additional $1.5 billion of incremental – Market risks, such as variability in commodity cash flow from 2021, and in each year thereafter. Therefore providing some disclosure that covers this is 2018 11,821 prices and exchange rates. – Operations, projects and people risks, very useful. Again, the disclosure does not need to be including improvements in productivity. very detailed; even simple trends and directi ons are Definition – Stakeholder risks, including the actions Examples that answered some of the investors' questions in Cash generated by our operations after tax of joint-venture partners, third parties helpful to investors. and interest, including dividends received from and governments. Ideally investors would like this disclosure integrated equity accounted units and dividends paid to non-controlling interests in subsidiaries. throughout the annual report, from business model to strategy. However, investors recognise that companies this area included Phoenix group, Chesnara and Rio Tinto. might be more comfortable providing this within presentati ons such as those supporti ng the annual results or capital markets’ days.

Quick read Introduction 1 Presenting an overall 2 Disclosures supporting 3 Disclosures supporting Appendix 1 3 Accounting information is extracted narrativefrom the financial statements. the sources of cash the use of cash Reverse factoring Key performance2018 indicators Annual report 2018 | riotinto.com 21 Annual report Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring Disclosures on the sources and uses of cash 6

Strategic report Chief Executive Officer’s reviewcontinued

£753m Housing Housing revenues Examples2018 2017 which focus on working capital include: H1 H2 FY H1 H2 FY 5.0% Revenue £m 374.9 378.3 753.2 402.1 364.0 766.1 Housing margin Operating profit £m 19.0 18.6 37.6 20.8 18.7 39.5 Connecting cash and working capital Operating profit margin % 5.1% 4.9% 5.0% 5.2% 5.1% 5.2% Disclosures on the sources and uses of cash 27

The Housing division reported revenues of £753.2m, The revenue for the full year was slightly lower than a slight reduction against the previous year. our expectations at the start of the year of a firm and Encouragingly the half year on half year progress shows probable revenue of £770m. In maintenance, some Whilst the generation of cash is important, to fullyrevenues increasing following the sharp reduction in the revenues expected to be delivered in 2018 were re- Mears second half of 2017. As expected, it was a quiet period phased and will be delivered into 2019 in agreement with for new contract mobilisations, following the slow period our partners, Milton Keynes being the most significant of new bidding success in 2017. The recently acquired example. Our development activities experienced a What is useful? Strategic report Strategic

business of MPS contributed revenues of £9.0m in the one challenging last quarter – whilst the primary focus has 2018 Accounts and Report PLC Annual Group Mears understand the health of a business, investors In this extract Mears provide a narrati ve descripti on of how diff erent parts of the Housing division operates, Disclosure that explains differing working capital characteristics month that it was part of the Group. been working in partnership with Housing Associations, and they support this with numeric disclosure. This helps investors understand the dynamics of the business and the development of affordable homes, this activity bett er and provides a bridge between the groups overall strategic intenti ons and what it means for individual The division generated an operating margin of 5.0%, with Transforming housing does incorporate an element of private sales, which most components of the business. the second half margin (4.9%) reflecting both the initial Housing Associations require to make the overall scheme within underlying businesses. also need to understand a company’s approach impact of MPS together with costs expensed in respect viable. The Development business experienced a significant Annual Report and annual performance report, 2017/18 of the AASC bidding and mobilisation. slowdown in private sales in the lead-in to the year end, with care

negatively impacting on both revenues and working capital. Financial statements Corporate governance The Housing division comprises three core activities: £117m Mears Group PLC 2018 2017 Maintenance, Management and Development. Historically the Group has pursued a strategy focusingCare revenues on Annual Report and Accounts 2018 Operating Operating to working capital. Investors participating in this Revenue profit Margin Revenue profit Margin Increasingly there have been opportunities to deliver earnings growth whilst keeping within the strict confines £m £m % £m £m % a combination of these services which we term as of Housing. Whilst good working capital management Maintenance 578.7 28.0 4.8% 606.2 32.6 5.4% ‘placemaking’. It is critical to the Group’s success that has been a cornerstone of the Group, equally cash3.2% has not Care margin Management 135.4 8.5 6.3% 133.8 5.7 4.3% Housing is operated and managed as a single division, been allowed to constrain the Group’s evolution. However, Development 39.1 1.1 2.8% 26.1 1.2 4.6% project noted that they seek disclosures that help with the different specialisms combining to deliver the as the Group’s Housing business has evolved, it should be optimal outcome. However, in broadening our Housing recognised that the different activities within Housing have Total 753.2 37.6 5.0% 766.1 39.5 5.2% activities, it has become harder to explain the underlying significantly different working capital requirements: performance, and, importantly, provide stakeholders with ~ Management (representing 18% of divisional revenue a simple contracting relationship, work can be invoiced them understand the particular company – so thata better understanding of the growth expectations and ~ Maintenance (representing 77% of divisional revenue in in 2018) is lower volume with the most significant during the course of construction although typically as risks attached to each area and, particularly in the current 2018) is a high volume and low value activity. Given the transactions being linked to collecting and paying projects approach their conclusion, the receipts become environment, the related working capital requirements. requirement to measure, review, inspect and value a property rentals. Typically both rental receipts and slower. Some mixed tenure developments include units large number of works orders, the invoicing cycle cannot payments are paid monthly in arrears such that the that are subject to private sale and Mears funds the It must be recognised that, increasingly, opportunities be rushed or short cuts taken. Accordingly, it is not they can better model its future value – and also business operates on a low working capital requirement. build cost of those units until their sale. The direct works are being secured that require a full asset management unusual for a period of 90 days between completion ~ Development (representing 5% of divisional revenue are entirely subcontracted, being paid in around 30 days service that does not slot easily into a single category. of work and receipt of income although the average is in 2018) is based on low volume but high value from invoicing and as a result, this area of our Housing Rather than artificially allocating revenues and profit closer to 70 days. On the positive, the measurement of

transactions. Where developments are being built under activities can absorb high levels of working capital. informationShareholder across each category, all revenues and profit are assigned revenues is very secure and there is minimal bad debt understand how changes in the operations flow to the predominant category. Given that the Housing risk. The cost base includes specialist subcontractors The working capital allocation and returns of each activity are set out below: Management activities incorporate an element of and merchant suppliers with varying payment terms maintenance, whilst the maintenance growth in isolation averaging 40 days. As a result, typically around 30 days’ 12-month may appear low, at times this will simply reflect a change work is absorbed in working capital. average Return on through to the business, allowing them to better in allocation more than a change in activity. Business Review Operating working working profit capital capital Return to Growth £m £m employed* continued Maintenance 28.0 19.0 >100% Management 8.5 1.7 >100% appreciate current performance and future risks. Development 1.1 15.6 7% stock locations, and assessment of the Manufacturing capabilities opportunity for supplier substitution. We Our principal tablet and capsule*Trade receivables formulation less trade payables. continue to consider further mitigation activities sites are in the UK, Sweden, China, Puerto with a focus on clinical trials and manufacturing Rico and the US, with local/regional supply given the risk arising from the mix of goods and sites in Russia, Japan, Indonesia,Looking aheadEgypt, into 2019, there will be29 a change of priorities The Group has broadened its service capability in recent for Mears. We will refocus our capital allocation on those years to include the provision of Housing Development, services,Quick read and the associated cross-borderIntroducti UK/ India, on Germany, Mexico andPresenti Brazil. We ng an overall We haveDisclosures 29 Operations supporti sites inng Disclosures supporti ng Appendix 1 EU and EU/UK movements. While we continue also have major formulation1areas sites which for deliver the best returns whilst17 countries2 being mindful primarily targeting3 existing clients, as part of the holistic Areas of disclosure that could be improved include: narrative the sources of cash the use of cash Reverse factoring to make progress, it is possible that adverse the global supply of parenteralof the and/orstrategic impact such changes may have upon service offering to them. However, the working capital Disclosures on the sources and uses of cash events will impact supplier activities. Issue inhalation products in thethe US, Group’s Sweden, future opportunities. The relatively modest absorbed in this area has been higher than expected, and 29 management may therefore play a key element France, Australia and the UK. Most of the working capital requirements of our core maintenance whilst the financial returns could be considerably higher in our ability to maintain safe supply of our manufacture of APIs is delivered through and management activities, combined with their attractive than their current levels, the working capital currently medicines and ongoing business operations the efficient use of external sourcing 260 more generally. that is housing complementedTransforming by returnsinternal on capital, indicate that theseCompleted are two core more areas than 260 majorallocated to this area could be better deployed elsewhere where the Group should focus its attention. or used to reduce current net debt levels. The Board 16 Mears Group PLC Annual Report and Accounts 2018 capability in Sweden. or strategically important business • Where businesses within a single company have In addition, as part of our planning to manage transactions in the last threewill years, keep this area under close review going forwards. AstraZeneca Whatthe impact is useful? of the UK leaving the EU, we have For biologics, our principalWhatThe commercial property is useful? acquisition facility of £30mincluding was introduced80 in 2018 in The current pipeline of works will unwind over the coming engaged with regulators and government to manufacturing facilities are2017 in the to enableUS the Group to acquire and build portfolios of three years although the Group will endeavour to accelerate ensure they have a clear view on the potential (Frederick, MD; Greater Philadelphia, In these extracts, from the 2018 Annual Report, Theproperties trade and prior other to disposal payables to anote long provides term funding context partner. for the that process, especially for those contracts which have the impact on pharmaceutical supply chains. We PA), the UK (Speke), and the Netherlands AstraZeneca highlight the existence of the supply schemeThis provided by showing the Group two yearswith an of ability comparati to accelerate ves and the clarifi es highest working capital intensity. The reasons for offering Disclosure that explains the group's approach to supplier have made significant efforts to duplicate our (Nijmegen), with capabilities in process very different working capital requirements or chain fi nancing program, its rati onale, and high- thatflow the of groupproperties have into assessed its Housing the nature Management of the balancesoperations and UK testing capability within the EU and to development, manufacturing and distribution 630 a development capability were compelling and remain level details of its working. They also provide links consider them to be correctly classifi ed. implement system changes necessary to of biologics, including globaltogether supply with of mAbsan additional profit opportunityWe have moreat the than point 630 so. The Group will continue to explore ways in which it with care with to furtherfacilitate disclosure compliance within with EUother law sectionce theons of the and influenza vaccines. Inof Sweden,transfer. Theour newfunding requirement collaborationsis high, relative worldwide to can contribute to its clients’ housing development needs, report with more detail. financing. UK becomes a third country. Furthermore, biologics drug product manufacturingour resources, facility and the flow of profits irregular. Whilst the but in a way which creates value for both parties without approaches, we have revised our logistics plans (including became available at the endproperty of 2018. acquisition facility has been useful, its cancellation significant working capital consequences for Mears. shipping routes) and built additional inventory over the course of 2019 will have a low strategic impact. in anticipation of some level of border WhatAs part of our ongoing review19science Trade ofThames and other Water payables Annual Report“A ands partAnnual can of Performance our planning Report 2018/19do 27 congestion to reduce the risk of disruption manufacturing capabilities and capacity, 2018 2017 2016 to manage the impact $m $m $m of supply to patients. in January 2019, we made the decision to AstraZenecadiscontinue Annualoperations atCurrent Reportthe Boulder liabilities andand Form 20-Fof Information the UK leaving 2018 the Supply chain financing Longmont, CO manufacturingTrade payables facilities to EU, we have engaged 1,720 2,285 1,680 Value added and payroll taxes and social security 204 243 240 AstraZeneca has a supply chain finance increase efficiencies in our global biologics with regulators and • Where changes to working capital processes are programme to support the cash flow of its supply chain. This step willRebates, consolidate chargebacks, our returns and other revenue accruals 4,043 3,264 3,601 supply base. This programme, in partnership biologic drug substanceClinical manufacturing trial accruals government to ensure 993 922 696 with Taulia Inc. and Greensill Capital, provides network to one large-scaleOther drug accruals substance they have a clear view 3,951 3,324 2,714 suppliers with visibility of invoices and facility, the Frederick ManufacturingExternalisation Center, revenue contract liabilities 92 – – on the potential impact Strategic report payment dates. Suppliers can access MD. The closure of the sitesContingent is expected consideration to 867 555 527 driving overall cash generation, and this platform free of charge and have full be completed by the end of 2019 and will not on pharmaceutical Other payables 971 1,048 1,028 optionality and flexibility on an invoice by impact the supply or global availability of any Total 12,841 11,641 10,486 invoice basis to request early payment of of our biologic medicines. We will be working supply chains.” invoices. On election of an early payment, with the impacted employeesNon-current to provide liabilities Mears Group PLC Annual Report and Accounts 2018 17 a charge is incurred by the supplier based outplacement and transitionAccruals support. 7 143 292 Borrowingson the period carrying of acceleration, value –central £m bank The increase in the Externalisationdeficit is mostly revenue driven contract by liabilitiesa The Trust Deed provides the Company with 78 – – interest rate, and the rate agreed between For small molecules we haveContingent constructed consideration 4,239 4,979 4,930 change in actuarial assumptions, specifically a an unconditional right to a refund of surplus The associatedTaulia Inc. andnet financeeach supplier. expense All earlyhas a new small-scale developmentAcerta Pharma and launch put option liability (Note 25) 1,838 1,823 1,901 • Where a specific approach to financing, such decreasedpayments by £44.7 are paid million by Greensill to £364.7 Capital, million and facilitydecrease alongside in the our discount existingOther manufacturingpayables rate for both schemes, assets assuming the full settlement of plan 608 895 2,365 (2018:AstraZeneca £409.4 million), settles which the original has been invoice driven by thefacilityresulting in Wuxi, in China.an actuarial ThisTotal investment loss. In addition to this, liabilities in the event of a plan wind-up. 6,770 7,840 9,488 lower amountRPI accretion with Greensill on borrowings. Capital at Some maturity of our supportswe recognised the acceleration a past of service delivery cost of new in the current Furthermore, in the ordinary course of business of the original invoice due date. innovative medicines to patients in China and interest expense is incurred in relation to borrowings year income statementThe Group of £9.0 has million revised relating the presentation the of Trustee Trade and can other only payables force a windin 2018 up to once separately all present clinical trial accruals, returns and other revenue

completes our ability to executeaccruals across that have the historically been presented within Trade payables (see the Group Accounting policiesGovernance section from page 153). The Group has also as factoring or reverse factoring needs to be raisedWe to deliverbelieve majorthis programme capital projects. offers a benefit wholeto Guaranteedlife-cycle of medicines Minimumseparately from Pensions discoverypresented (“GMP”) the Acerta put optionbenefits that have has historically been distributed been presented and any within surplus Other payables. to our suppliers, as it provides visibility and to commercialisation.which has been discussed in more detail in taken by the Company. Based on these rights, Under IFRS accounting rules we are able to Included within Rebates, chargebacks, returns and other revenue accruals are contract liabilities of $126m (1 January 2018: $138m). The revenue flexibility to manage their cash flow, and the the GMP section. any net surplus in the scheme is recognised in capitalise the interest costs related to major recognised in the year for contract liabilities is $139m, comprising $104m relating to other revenue accruals and $35m Externalisation Revenue rates offered can be preferential to their cost At the end of 2018, approximately 13,000 full. We have therefore restated our pension capitalof projectsfunding. Thewith programme the finance is expensecurrently livein in peopleAs part were of employed the last triennial atcontract 29 Operations valuation, liabilities. dated understood to fully comprehend the company’s the US, UK, Sweden and Germany. As of sites in 17 countries. figure for the previous year, such that our net the income statement being shown net of 21 March 2016, a recoveryTrade payables plan to includesreduce the $166m deficit (2017: $64m; 2016: $nil) due to suppliers that have signed up to a supply chain financing programme, under which December 2018, the programme had 2,548 pension deficit reduced from £300.8 million to these capitalised costs. to zero was agreed withthe suppliers the trustees. can elect The Companyon a invoice by invoice basis to receive a discounted early payment from the partner bank rather than being paid in line with suppliers enrolled, and a potential early the agreed payment terms. If the option£250.2 is taken million the Group’s following liability the is assignedrecognition by the of supplierthe to be due to the partner bank rather than the supplier. has agreed to make deficit repair payments of Capitalisedpayment interest balance costs of $166 were million. £109.3 million The value of the liability payable by the£50.6 Group million remains TWMIPS unchanged. surplus, The Groupat 31 assessesMarch 2018. the arrangement against indicators to assess if debts

£22.0 million (indexed)which per vendors annum have until sold 2027. to the funder under the supplier financing scheme continue to meet the definition of trade payables or should be classified Statements Financial approach to working capital. this year F (2018:or more information £100.7 on million). supply chain financing, The triennial valuationas borrowings.dated 31 March At 31 December2019 will 2018 the payables met the criteria of Trade payables. see Note 19 on page 177. be undertaken by Aon (the schemes’ actuaries). Guaranteed Minimum Pensions For more information on Ethical supply chain The Acerta Pharma put option liability is remeasured each period, based on the latest assessment of the expected redemption amount with

Pensionsmanagement, see from page 45. The deadline for completingremeasurements this is 30 taken June to 2020,Selling, generalOn and26 Octoberadministrative 2018, costs the High(see Note Court 2). Interest arising from amortisingFinancial statements the liability is included within Finance We operate three pension schemes for our but is expected to beexpense performed (see earlier.Note 3). The expected redemptionconcluded amount on the iscase dependent involving on the the Lloyds accumulated profits of Calquence to the point of redemption, which employeesQuick read – two defined benefit schemesIntroduction (Thames mayPresenting vary materially an overall dependent on factorsBankingDisclosures such Group’sas revenues supporting defined earned, benefit research pension Disclosuresand developmentschemes. supporting expenditure, regulatoryAppendix approvals 1 received, and 1 The net deficit on1 ourcertain defined other benefit expenses schemes offor Acerta Pharma2 B.V. and its subsidiaries. 3 Water Pension Scheme (“TWPS”) and Thames 31 March 2018 was narrativerestated following the recognition of Guaranteedthe sources Minimum of cash Pensions (“GMPs”)the use of cash Reverse factoring Examples that provide relevant information include Water Mirror Image Pension Scheme (“TWMIPS”)) the previously unrecognisedThe Group TWMIPS has adopted pensions IFRSscheme 15 Revenuebuilt from up Contracts in our pension with Customers schemes from between 1 January their 2018 under the modified retrospective method. Consequently, surplus which is discussedthe Group in more has detail presented below. Externalisation revenue contract liabilities prospectively from that date. and one defined contribution scheme. During the commencement and 5 April 1997. They form year ended 31 March 2019, we contributed With the exception of Contingent considerationa part of payablesthe overall of $5,106mpension (2017:and needed $5,534m; to 2016: be $5,457m) which are held at fair value within Level 3 of the 34 AstraZeneca Annual Report & Form 20-F Information 2018 / Strategic Report fair value hierarchy as defined in Note 11, all other financial liabilities are held at amortised cost with carrying value being a reasonable approximation £11.0 million (31 March 2018: £8.1 million) Recognition of pensionof fair value. surplus provided before April 1997 as a condition of our , and . to our defined contribution scheme. (TWMIPS scheme) opting out of the earnings related part of the Mears Johnson Mathhey AstraZeneca Contingent consideration In previous years, the Directors had reviewed state pension, as a result of which Thames Water 2018 2017 2016 Our defined benefit scheme accounting valuation $m $m $m the scheme rules of the defined benefit pension Utilities Limited and the pension scheme members has been updated to 31 March 2019 on our At 1 January 5,534 5,457 6,411

An example focused on group Annual performance report and cash: schemes and concluded that for the TWMIPS paid reduced rate national insurance contributions behalf by independent consulting actuaries, Settlements (349) (434) (293) scheme, the provisions of IFRIC 14 applied. up to April 2016. GMPs are subject to increase in Hymans Robertson LLP. Revaluations (495) 109 (1,158) This resulted in a restrictionDiscount unwind of the (Note surplus 3) for the payment and in deferment at different rates from 416 402 497 The total net retirement benefit obligation for scheme and as suchAt no 31 December surplus was recognised. the increases to benefits in excess of GMP. 5,106 5,534 5,457 Disclosuresthe two schemes on the sources as at and31 Marchuses of cash2019 was Our retirement benefitContingent obligations consideration consisted arising of fromEven business though combinations state pension is fair ages valued are using now decision-tree the analysis, with key inputs including the probability 31 £293.0 million (restated 2018: £250.2 million1), a deficit within the ofTWPS success, scheme consideration and a restricted of potential same delays for and men the expectedand women, levels GMPs of future for womenrevenues. are which includes a pension deficit of £338.8 million surplus1 in the TWMIPSRevaluations scheme. of Contingent considerationgenerally are recognised higher than in Selling, those general for men. and Despite administrative the costs and include a decrease of $482m in 2018 (2018: £300.8 million) for the TWPS scheme, (2017: an increase of $208m; 2016: a decrease of $999m) based on revised milestone probabilities, and revenue and royalty forecasts, relating to Cash generation within groups 2018/19 Report Performance Annual and Report Water Annual Thames equalisation of state pension ages, GMPs are offset by a pension surplus of £45.8 million Following a review into our approach, the Directors the acquisition of BMS’s share of the Globalstill required Diabetes to Alliance.come into Discount payment unwind on onthe the 60th liability is included within Finance expense (see Note 3). (restated 2018: £50.6 million) for the TWMIPS have concluded that a different interpretation Thames Water Management has identified that reasonablybirthday possible of women changes and in the certain 65th key birthday assumptions, for including the likelihood of achieving successful trial scheme and we have been taking measures of IFRIC 14 provided a truer, fairer picture of our results, obtaining regulatory approval,men. the projected As such, market GMPs shareare unequal of the therapeutic between menarea and expected pricing for launched products, may cause to reduce the overall deficit including regular pension scheme arrangementsthe calculated for fair our value stakeholders. of the above contingent consideration to vary materially in future years. and women of identical ages, salary histories contributions and deficit repair payments. Whilst investors are interested in the overall The contingent consideration balanceand relating periods to BMS’s of service. share ofThe Global Lloyds Diabetes case requires Alliance of $3,983m (2017: $4,477m; 2016: $4,240m) would Clear disclosure about the flow of interest and dividends through increase/decrease by $398m with an increase/decrease in sales of 10% as compared with the current estimates. this inequality to be remedied and has given rise to additional pension liabilities for the Group. 26 Thames Water Annual Report and Annual Performance Report 2018/19 capacity of a group to generate cash they also Our actuaries, Hymans Robertson LLP have the group structure. factored in the cost of equalisation into the Dividends AstraZeneca Annual Report & Form 20-F Information 2018 / Notes to the Group Financial Statements 177 Chief Financial Officer’s statement continuedaccountingWhat isvaluation useful? as at 31 March 2019. £78m Kemble Water Financing costs on ThisThames has resulted Water provides in a past detail service about cost how recognised dividends and loan repayments fl ow through the various Buildingin keythe components2018/19 income of the statement group. This of gives £6.8 users million an understandinga of how the business is using cash want to understand where within the group the Finance Limited external debt forfor TWPS debt and repayment £2.2 million and returns. for TWMIPS, The disclosure a total also clarifi es that no dividend is due to external £78m inter-company loan repayment ofshareholders £9.0 million acrossunti l 2020/21, the two schemes.which gives a user some indicati on of fl ows into the future. £21m £3m Annual Report and Annual Performance Report 2018/19 cash was generated, especially for credit investors. Dividend from other Thames Water Working capital better future group company Limited requirements Brandon Rennet £60m inter-company loan interest AnnualChief Financial OfficerReport and Annual This is an area where there are limited examples impacts profit. We only use derivatives for risk 27Dividends June 2019 Borrowings carrying value – £m Thames Watermanagement purposes and both the debt and PerformanceDuring the year, we paid dividends Report of 2018/19 Utilities Holdingsderivative contracts are generally held until £60.0 million (2018: £55.0 million) to our Limited maturity, so there is no cash impact due to these immediate parent company, Thames Water of good disclosure in the market place but an area £60mchanges. dividend This year, we made a loss on financial Utilities Holdings Limited (“TWUHL”), with all instruments of £37.7 million (2018: gain of of the current year dividends being applied to Thames Water£40.9 million). The loss of £37.7 million this year servicing debt obligations and working capital Utilities Limitedwas comprised of exchange losses on foreign requirements of other companies within the where investors need information. An example that currency denominated debt of £68.0 million due Kemble Water Group. to a weakening in sterling, offset by gains arising No dividends were paid by the Kemble Water on swaps of £64.5 million and a £34.2 million Holdings Group to external shareholders for loss due to a cash flow hedge being transferred 2018/19 in line with our commitment to withhold from equity. provided insight was . paying an external dividend until 2020/21. GBP EIB loans 858.3 Thames Water US Private Placements 1,187.5 This commitment will continue to help us GBP index-linked bonds 2,656.8 Cash flow increase our equity buffer1 and broaden financial GBP ﬁxed rate bonds 5,177.2 Foreign currency bonds 385.3 Underlying net cash generated from operating resilience, to improve our service to customers. GBP other loans 1,352.5 activities for the year ended 31 March 2019 1 Equity buffer is defined as the regulatory capital value less was £1,085.7 million, and therefore broadly net debt. consistent with £1,065.1 million generated in the year term (and two one-year extension options). previous year. Taxation This upsizing was strongly supported by our In 2018/19, we paid over £211 million in business relationship bank group. Through Kemble Water Capital expenditure rates, national insurance contributions, PAYE and Finance Limited, a holding company within the Quick read Introduction Presenting an overall Disclosures supporting Disclosures supporting Appendix 1 During the year,1 we invested a total of 2 other taxes. We incurred £147 million3 directly, wider group, around £650 million of new Sterling narrative the sources of cash the use of cash Reverse factoring £1,188.7 million (31 March 2018: £1,148.8 million) mainly through business rates, and collected debt was committed in November 2018 (of which in our assets. The total investment by area is £64 million on behalf of our employees. As in prior £310.0 million was drawn at 31 March 2019 summarised, by area, in the table below. years, we have not paid any corporation tax to and £340.0 million in April 2019), using the bank and private placement markets. £400 million of Non HMRC primarily because of interest costs and tax infra- Infra- relief for our capital investment programme. this was used to refinance the £400 million bond Introduction Focus on driversArea structure structure Total Disclosuresguaranteed supportingby Kemble Water Finance Limited Disclosures supporting Appendix 1 Quick read 1 The 2018/192 corporation tax charge of which was repaid in April 2019. The remaining 3 Water (£m) 304.5 268.1 572.6 £8.9 million consists of a deferred tax charge amount, roughly £250 million, was used to de-gear Waste (£m) 377.7 238.4 616.1 of £4.6 million and a current tax charge of Thames Water Utilities Limited in April 2019. £4.3 million, the latter of which arises because This is in line with the de-gearing plan outlined Total (£m) 682.2 506.5 1,188.7 the sources of cash the use of cash Reverse factoring Thames Water Utilities Limited pays for tax in our business plan. Key projects within the above capital losses from other Group companies, which should expenditure include: ultimately benefit customers through lower tax funding in future regulatory settlements. Financing our investment • £52.9 million on our metering programme (water) The overall tax charge is lower than the prior year As we continue to invest heavily in the business, • £92.2 million on connecting our network due to the decrease in accounting profits. our statutory net debt (as defined on page to the Thames Tideway Tunnel 178) has increased by £638.3 million to • £29.6 million on a customer relationship £11,619.8 million (2018: £10,981.5 million). management and billing system Credit ratings This has been accompanied by an increase in the • £26.9 million on our scheme aimed to reduce In May 2018, Moody’s affirmed our Baa1 Regulatory Capital Value (“RCV”) of £568.9 million the risk of flooding (waste) Corporate Family Rating (“CFR”) but placed us to £14,273.7 million (2018: £13,704.8 million), • £31.9 million on upgrading our sewage on negative outlook (31 March 2018: negative meaning that overall gearing (on a covenant treatment works at Deephams (waste) outlook). This continues to align with our ratings basis*), as at March 2019 before the £250 million of A3 and Baa3 for our Class A and Class B debt cash injection in April 2019, was 82.2% respectively. The change to negative outlook (2018: 81.3%), below the mandated maximum Bad debt reflects a change in assessment of the stability of 95.0%. Additionally, our PMICR (see PMICR Bad debt arises predominantly from those and predictability of the UK water regulatory definition on page 178) in 2018/19 was 1.6x who choose not to pay their bill, despite being regime rather than a reflection of Thames Water (2018: 1.6x) and was above the mandated financially able to, as opposed to those who specifically. In July 2018, S&P re-affirmed our credit minimum of 1.1x. cannot pay. This year we had an overall increase rating of BBB+ and BBB- (31 March 2018: BBB+ & in bad debt cost of £5.1 million to £62.6 million BBB-) in respect of our Class A debt and our Class We continue to borrow through external public (2018: £57.5 million). This is split between bad B debt respectively and placed us on negative and private debt capital markets and through debt relating to current year bills (amounts outlook (31 March 2018: stable outlook). We retain financial institutions across a diverse range of that are not expected to be collected when credit ratings that allow us to access efficiently currencies, geographies and sources. The past invoiced) of £33.4 million, which is shown as a priced debt to fund our investment programme, year has seen us continue to focus on increasing deduction in revenue, and bad debt relating to whilst keeping bills affordable for our customers. diversity including the issue of a further bills from prior years of £29.2 million, which is £227 million equivalent US Private Placement shown within operating expenses. The overall which was priced in January and funded in April increase in bad debt is attributed to increased Financing arrangements 2019 along with a number of new bilateral risk from debt relating to non-household bills pre- In anticipation of our 2020 to 2025 investment loans. The overall debt mix is shown on page 26, market opening. programme and being financially prudent, we have excluding the impact of intercompany swaps: increased the size of our RCF from £950 million to * Ratio of covenant net debt to Regulatory Capital Value around £1.65 billion during the year, with a five (“RCV”) defined on page 304. Disclosures on the sources and uses of cash 7

Uses of cash Whilst often the disclosure of a framework provides only a high-level picture of Investors want disclosures that: a company’s allocation priorities, it can serve to focus investor and management conversations on key aspects of the business. As such, investors often welcome such disclosure. Three examples of this are Burberry, Croda and IHG. Disclosures on the sources Provideand uses of cash detail on uses of cash both in the past and in the 38 future. Priorities in action To help them answer these questions particularly for Priorities in action companies that are asset intensive many investorsOnce want investors Cap-Ex are clear disclosures about priorities, help they show then levels want moreof specific information on prioritisation in the period, and disclosures which help them to In section 3 of the report we explore viewscapital on disclosures expenditure that split provide between relevant 'functions' understand howcurrent current investment decisions might and impact provide future insight flows. Detail regarding Once investors are informationclear on management’s about uses priorities,of cash. (such as country, product or division) and 'purpose' (such into quality of current and future cash they then want information on the prioritisation of these as growth vs maintenance). capital expenditure, dividends and other returns help establish whether in the period, and howOnce current investors decisions have considered might impact how a company generates cash and the quality managementgeneration. actions are aligned to these priorities. Examples of this are future flows. and sustainability of its generation, they thenWhilst want some to investorsunderstand question what a the value of 'purpose'AngloAmerican and Carnival Corporation. company intends to do with it. Investors usecategories this information which they to viewhelp asvalue a subjective the split (because Detail regarding capitalbusiness, expenditure, and also dividendsto support and their other consideration of a lack of thecomparability quality of andmanagement’s consistency across returns are criticalstewardship. to achieving this understanding, as companies), others consider that, if used consistently they help establish if management actions are aligned to within a company, it is useful. Furthermore, many INVESTMENT the priorities. Many investors and companies in this projectinvestors felt that, consider in general, that the disclosure value of such disclosure is about the use of cash was good, both in annual reports or other communications enhanced when it is placed within the audited sections such as investor presentations. However, ofinvestors the annual would report. like Asmore well information as historic information, that supports their own assessment of theinvestors likely future are alsouse ofkeen cash. to obtainThrough information our about INVESTMENTdiscussions, investors identified three areasfuture for expectationsimprovement: for capital expenditure, as these SHAREHOLDERS MAINTENANCE • Disclosure that clarifies priorities for helpedgenerated to improve and available the quality cash, of their forecasts. •RETURNS Disclosure to allow assessment of the prioritiesPreparers innoted action, that suchand splits in capital ecpenditure only had value where they were aligned to how V's V's • Clearer explanations of how the prioritiesthe business are impacted viewed by itself, relevant and risks,such xxxx xxxx into Investing in the businessrestrictions and variabilities. information, reporting and decision making. Capital expenditureSetting decisions priorities are often keyfor elements generated, of a Weand considered available a number cash of examples of disclosure STAKEHOLDERS EXPANSION company’s strategy. Investors note that whilst high-level with investors, and have selected AngloAmerican as disclosure on total Atcapital its simplest expenditure level, iscapital often allocation found is a anbalance example between of detailed maintaining accounts and based disclosure, and within the annual report,growing what the isbusiness, lacking isand the providing detail resourcesCarnival, to other who stakeholders.provide some future orientated disclosure. behind the aggregateDiffering numbers. considerations Investors need of suchthe relative priorities will lead to a very different view disclosure as it helpsfor them investors to understand and stakeholders both future when assessing a company. That is why information capacity (and thereforeabout cash how flow) companies and any prioritise concern different options and stakeholders is useful. about window dressing from under-investment. One way RETURNS of generating cashMany within businesses a business have is by taken under-investing to creating more structured disclosures, often in in the existing or growth-orientatedthe form of a capital capital allocation asset. framework.Whilst This approach is particularly used by this boosts cash in companiesthe short-term, that itare is launchinglikely to do new so or refreshed strategies. at the expense of the longer-term prospects of the business. Disclosures about returns on investment Quick read Introduction 1 Focus on drivers 2 Disclosures supportinghelp in the 3assessmentDisclosures supporting of the futureAppendix 1 the sources of balancecash betweenthe use shareholder of cash and otherReverse factoring stakeholder.

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring InterContinental Hotels Group PLC Broadwater Park, Denham Buckinghamshire UB9 5HR United Kingdom Tel +44 (0) 1895 512 000 Web www.ihgplc.com Make a booking at www.ihg.com

Contents Strategic Report Directors’ Report Strategy and Operations Our Board 44 Making a difference to: Corporate Governance 46 Sustainable supply chains 02 Remuneration Report 69 The changing population 04 Directors’ Report 90 The changing environment 06 The future 08 Financial Statements Chair’s Statement 10 Independent Auditors’ Report 94 Business Model 12 Group Consolidated 100 Our Stakeholders 14 Statements Chief Executive’s Review 16 Group Accounting Policies 105 Our Strategy 20 Notes to the Group Accounts 112 Company Financial Statements 138 Performance and Financials Notes to the Company 140 Key Performance Indicators 24 Financial Statements Sector Review 26 Sustainability 30 Other Information Finance Review 34 Related Undertakings 145 Risk Management 38 Shareholder Information 148 Five Year Record 150 Glossary of Terms 151

Sales NPP % Group sales £1,386.9m (constant currency) 2017: £1,373.1m 28.2% 2017: 27.6% Core Business sales growth Energy from Disclosures on the sources and uses of cash (constant currency) non-fossil fuels 8 +3.8% 21.1% 2017: 24.1% IFRS profit before tax (PBT) Safety (Total Recordable Injury Rate) £317.8m 2017: £314.1m 0.72 2017: 0.71 Adjusted PBT growth (constant currency) InterContinental Shanghai Wonderland, China Variabilities, risks and Examples which set the prioritiesMaking include: a +6.2% Strategic Report Our business model continued Ordinary dividend (proposed full year) restrictions STRATEGIC REPORT difference DisclosuresSTRATEGIC on REPORT the sources and uses of cash 35 Disclosures on the sources and uses of cash 36 StrategicDisclosures Report on the sources and uses of cash 37 CAPITAL ALLOCATION FRAMEWORK +7.4% Our business model continued CAPITAL ALLOCATION FRAMEWORK Our Strategy continued Annual Report and Accounts 2018 Disciplined approach to capital allocation Our asset-light business model is highly Our priorities for the uses of cash are consistent with previous years and comprise of: Burberry’s Capital Allocation Framework is used to prioritise the use of cash generated by the Group. The framework addresses To evaluate properly the future cash generative and enables us to invest the investment needs of the business, regular dividend payments and additional returns to shareholders. The framework also

Strategic Report in our brands. We have a disciplined seeks to maintain an appropriate capital structure for the business and a strong balance sheet with solid investment grade approach to capital allocation ensuring Burberry’scredit metrics. Capital The Allocation diagram Frameworkbelow summarises is used theto prioritise key priorities. the use of cash generated by the Group. The framework addresses the investment needs of the business, regular dividend payments and additional returns to shareholders. The framework also How we invested in 2018 Good capital discipline that the business is appropriately seeks to maintain an appropriate capital structure for the business and a strong balance sheet with solid investment grade invested in whilst maintaining an credit metrics. The diagram below summarises the key priorities. ‘Stretching the Growth’ focuses on accelerating sales Delivering a strong cash flow is core to our strategy; it efficient balance sheet. REINVEST FOR PROGRESSIVE STRATEGIC RETURN EXCESS Beyond this, we look to return surplus cash potential returns from a business, ORGANIC GROWTH DIVIDEND POLICY INVESTMENTS CASH TO What is useful?in our core sectors; creating more technology, new enables us to invest in R&D, faster growth technologies What is useful? Invest in Capital investments net ($m) Disciplined approach to capital allocation to shareholders through ordinary and SHAREHOLDERS and protected products and intellectual property; that are both organic and acquired, expand production 250 special dividends and share buybacks. the business 226 REINVEST1 FOR PROGRESSIVE2 STRATEGIC3 RETURN4 EXCESS Burberry have a clear/high-level disclosure on their capital allocati on framework that highlights the Croda’s disclosure provides an overview of their key prioriti es and then provides additi onal detail 225 and taking a disciplined approach to capital allocation. capacity and pay increased dividends. Our asset-light business model is highly Our priorities for the uses of cash are consistent with previous years and comprise of: What is useful? 202 ORGANIC GROWTH DIVIDEND POLICY INVESTMENTS CASH TO relati ve prioriti es for the use of cash. The framework is further supported with narrati ve of how about what this means in practice, with examples from the current year and key relevant metrics. Our objective is to maintain an investment 200 185 SHAREHOLDERS cash generative and enables us to invest grade credit rating. One of the measures Through strategic investments and 175 158 IHG have taken a more narrati ve approach to describing their capital150 allocati on prioriti es. The clear 1 2 3 4 they applied the frameworkIn line with our in disciplined 2018/19. capital The allocation disclosure policy, we makes invest in highcross-reference capital return opportunities to how to deliver the prioritisuperior shar eseholder value. We seek to deliver high quality returns, measured through a superior Return on Invested Capital (ROIC), earnings growth and strong cash in our brands. We have a disciplined we use to monitor this is net debt:EBITDA our day-to-day capital expenditures • Capital spend • Committed to • Investment in structural • Review future In order to achieve this, we are investing in six key areas. returns. The Group’s capital allocation policy is to: The disclosures are further enhanced by being located in the context of the strategy and business approach to capital allocation ensuring 125 connect with principal risks and how these are then assessed when considering viability. and wedisclosure aim for a ratio is further of 2.0-2.5x. enhanced The by supportiwe continue ng to detail drive growth. of net capital investment,100 ordinary dividend across store maintaining or changes to our business cash generation to that the business is appropriately model disclosures. On the opposing page the company have also highlighted key investments from ratio atprogression 31 December and2018 shareholderwas 1.7x. return. The company also highlights the75 dividend decision for the investors need to be able to assess portfolio, including growing the activities that typically tend to reflect Burberry’s invested in whilst maintaining an Following the adoption of IFRS 16 ‘Leases’ 50 • Capital spend • Committed to • Investment in structural • Review future The framework is also clearly mirrored in the cash walk, adding 2018 which gives further relevant areas for users to consider. current period. This provides users with a quick overview. new space, dividend in pence be infrequent. growth, investor results presentati ons Reinvest for Provide regular Acquire Maintain efficient balance sheet. (see page 115), from 1 January 2019 we 25 acrossrefreshes store and maintainingterms year or •changes In September to our 2018,business we cash generationproductivity and to Sustainability Greater R&D Premium niches 0 Beyond this, we look to return surplus cash will aim to maintain a net debt:EBITDA portfolio,refurbishments; including growingon year. the activitiescompleted that the typically acquisition tend of to a reflectinvestment Burberry’s plans, to the consistency ofleadership reporti ng. We have a relentless focus on innovation. Many of our markets are experiencing growth by: returns to promising appropriate Croda annual report and accounts 2018 Capital investments net ($m) -25 2015 2016 2017 2018 to shareholders through ordinary and Invest in ratio IHGof 2.5-3.0x, Annual which isReport equivalent and to Form 20-F 2018 newIT infrastructure, space, •dividend Deliver regularin pence bedivision infrequent. of our long-standing growth,while taking into In constant currency, new and protected a ‘flight to premium’. We continue to shareholders by: technologies to: balance sheet We are passionate about sustainability, 250 our guidance under the previous Maintenance capex, key money and product (NPP) sales have grown by 85% experience high levels of demand for our special dividends and share buybacks. the business 226 refreshesincluding and digital; termscash returns year to • InItalian September partner 2018, to create we a new productivityconsideration and Burberry PLC Annualbecause itReport is the right thing 2019 to do and and return 225 since 2012, from 20.5% of total sales to Sederma anti-ageing skin actives, which 202 accounting standard. selective investments refurbishments;and the supply on year.shareholders. completedleather goods the acquisitioncentre of of a investmentthe external plans, an integral part of how our sustainable Our objective is to maintain an investment 200 185 28.2% today. Personal Care has the richest is why we have recently doubled R&D and excess the upside opportunities and the IT infrastructure,chain. • Deliver regular divisionexcellence, of our covering long-standing activities whileenvironment. taking into ingredients add value to our customers’ grade credit rating. One of the measures Through strategic investments and 175 158 System fund capital investments innovation, with NPP sales accounting for enhanced production capacity. We have 150 including digital; cash returns to Italianfrom prototyping,partner to create product a new consideration products. Our bio-surfactants plant will see capital to: Recyclable investments 43% of total sector sales. increased capacity in our solar protection we use to monitor this is net debt:EBITDA our day-to-day capital expenditures the launch of our ECO range of sustainably 125 and the supply shareholders. leatherinnovation, goods engineering centre of and the the external business to support the growth of our and we aim for a ratio of 2.0-2.5x. The we continue to drive growth. 100 focused ingredients. chain. excellence,coordination covering of production. activities environment. Life Sciences has a healthy innovation Solaveil™ range of ingredients. Our Strategy continued ratio at 31 December 2018 was 1.7x. 75 from prototyping, product pipeline and is expected to deliver Following the adoption of IFRS 16 ‘Leases’ 50 The publication of the United Nations Final dividend Maintain sustainable Ordinary dividend progression (�) innovation, engineering and the fast growth in NPP sales. Performance We are expanding manufacture of our (see page 115), from 1 January 2019 we 25 Sustainable Development Goals (SDGs) Strategic Report 0 The Board has proposed a final Technologies has increased its proportion high purity excipients as demand continues 120 coordination of production. is providing growth opportunities for our • Investing in capital • Paying a regular dividend • Supplement organic • Meet future investment and will aim to maintain a net debt:EBITDA -25 dividend per ordinary share of growth in the of NPP sales to 18% as the sector to grow rapidly. In Brazil, we invested in How we invested in 2018 Good capital discipline 2015 2016 2017 2018 downside risks. Investors understand business. The SDGs are a commitment projects to grow sales, representing 40% to 50% growth in existing and trading requirements; with ratio of 2.5-3.0x, which is equivalent to 78.1¢. With the interim dividend per transitions to a higher technology business. capacity for our Crop Care adjuvants, typically each year spending of adjusted earnings over adjacent markets • A target leverage of 1.0 to ordinary dividend 100 to tackling some of the more pressing ‘Stretching the Growth’ focuses on accelerating sales Delivering a strong cash flow is core to our strategy; it our guidance under the previous Maintenance capex, key money and ordinary share of 36.3¢, the Maintain a strong balance sheet with solid investment grade credit metrics. providing us with new exciting opportunities. 1.5x depreciation the business cycle. • Enhance our strong 1.5x (excluding deficits on in our core sectors; creating more technology, new enables us to invest in R&D, faster growth technologies challenges facing the world today and, in accounting standard. selective investments full-year dividend per ordinary We continue to invest in our global R&D In the UK, we are expanding our polymer • Increasing product innovation product pipeline. retirement benefit schemes). and protected products and intellectual property; that are both organic and acquired, expand production 80 2018, our Executive Committee worked and taking a disciplined approach to capital allocation. capacity and pay increased dividends. IHG has a progressive dividend 11% CAGR 78 capabilities with new facilities in North additive manufacturing capacity. innovation In 2018 the Board has System fund capital investments share for 2018 will total 114.4¢. 71 with Cambridge Institute for Sustainability policy which means we look to 60 64 Maintain a strong balance sheet with solid investment grade credit metrics. America, China and Singapore. We have • Expanding in attractive proposed: In 2018 we: In 2018: In line with our disciplined capital allocation policy, we invest in high capital return opportunities to deliver superior shareholder value. We seek to deliver high quality returns, measured through a superior Return on Invested Capital (ROIC), earnings growth and strong cash Recyclable investments 58 Leadership to develop our sustainability In order to achieve this, we are investing in six key areas. returns. The Group’s capital allocation policy is to: grow the dividend per ordinary 52 NL MRCNPLC AMERICAN ANGLO also enhanced our R&D capabilities at geographic markets. 47 strategy in alignment with the SDGs. • An increase of 7.4% in the • Acquired Nautilus, a marine After the acquisition of 40 43 • Review the principal risks of the Group and relevant financial parameters, both historical and projected, including liquidity, Sederma and expanded our crop share each year. 39 full year dividend to 87.0p biotechnology company Biosector, leverage increased 35 care facility in Brazil. Sustainability Greater R&D Premium niches Reinvest for Provide regular Acquire Maintain 29 29 29 that returns are variable and lease-adjusted net debt and measures covering balance sheet strength and fixed charge cover. In 2018 we have invested (2017: 81.0p) • Acquired Plant Impact, a to 1.1x. In light of our strong growth by: returns to promising appropriate 26 leadership We have a relentless focus on innovation. Many of our markets are experiencing 20 19 19 33 36 In constant currency, new and protected a ‘flight to premium’. We continue to Final dividend Ordinary dividend progression (�) 17 28 30 • These risks and financial parameters are considered by the Board when assessing the viability of the Group, as set out 2x depreciation in: • A special dividend of biostimulants business performance and improving We are passionate about sustainability, shareholders by: technologies to: balance sheet Maintain sustainable 21 23 25 product (NPP) sales have grown by 85% experience high levels of demand for our 16 because it is the right thing to do and and return The Board has proposed a final 10 12 12 12 13 • Reviewon page the 74. principal risks of the Group and relevant financial parameters, both historical and projected, including liquidity, • Acquired Biosector, cash generation, the Board is since 2012, from 20.5% of total sales to Sederma anti-ageing skin actives, which 7 8 8 INTEGRATED ANNUAL REPORT 2018 • Funding asset replacement 115.0p per share. an integral part of how our sustainable 0 28.2% today. Personal Care has the richest is why we have recently doubled R&D and excess 120 ingredients add value to our customers’ growth in the a leading adjuvant proposing a return of £150m innovation, with NPP sales accounting for enhanced production capacity. We have dividend per ordinary share of lease-adjusted net debt and measures covering balance sheet strength and fixed charge cover. • New investment in products. Our bio-surfactants plant will see capital to: 2011 2017 2012 2015 2013 2014 2018 2016 43% of total sector sales. increased capacity in our solar protection 2010 2007 2005 2003 2008 2004 2009 the launch of our ECO range of sustainably 78.1¢. With the interim dividend per 2006 • These risks and financial parameters are considered by the Board when assessing the viability of the Group, as set out key technologies specialist for human excess capital to shareholders business to support the growth of our Innovation Partnering Disruptive Technology- Digitalisation focused ingredients. ordinary dividend “I mean100 if I could get • Completing the and veterinary vaccines by way of a special dividend. Life Sciences has a healthy innovation Solaveil™ range of ingredients. ordinary share of 36.3¢, the InterimInterim Final Final on page 74. pipeline and is expected to deliver The publication of the United Nations Capital structure metrics FY 2018/19 FY 2017/18 Our Open Innovation and Smart Partnering Digitalisation is an emerging fast growth in NPP sales. Performance We are expanding manufacture of our led acquisitions construction of our • Invested in SiSaf, a The effect of this return would Sustainable Development Goals (SDGs) full-year dividend per ordinary something80 like this for all Technologies has increased its proportion high purity excipients as demand continues is providing growth opportunities for our • Investing in capital • Paying a regular dividend • Supplement organic • Meet future investment and Programmes continue to evolve. We now differentiator for our business, creating of NPP sales to 18% as the sector to grow rapidly. In Brazil, we invested in IHG has a progressive dividend 11% CAGR 78 pioneering bio-surfactants novel drug delivery have been to increase the 2018 business. The SDGs are a commitment projects to grow sales, representing 40% to 50% growth in existing and trading requirements; with share for 2018 will total 114.4¢. Net cash £837m £892m We continue to invest in disruptive transitions to a higher technology business. capacity for our Crop Care adjuvants, 71 should reflect the changing focus have more than 450 partners, comprising many opportunities. We have invested to tackling some of the more pressing typically each year spending of adjusted earnings over adjacent markets • A target leverage of 1.0 to 64 plant in North America. technology company year-end leverage towards the providing us with new exciting opportunities. policy which means we lookthe to companies60 I invest in it technology as part of our strategy to challenges facing the world today and, in 1.5x depreciation the business cycle. • Enhance our strong 1.5x (excluding deficits on Lease-adjusted net debt (£409m) (£327m) We continue to invest in our global R&D In the UK, we are expanding our polymer 58 over 100 completed and 85 ongoing in global digital resource and established 2018, our Executive Committee worked • Increasing product innovation product pipeline. retirement benefit schemes). Shareholder returns 2003-18 ($bn) • Increased our investment in upper end of the Board’s capabilities with new facilities in North additive manufacturing capacity. grow the dividend per ordinary 52 Capital structure metrics FY 2018/19 FY 2017/18 ‘Stretch the Growth’. The integration of with Cambridge Institute for Sustainability innovation In 2018 the Board has 47 America, China and Singapore. We have projects with academics, universities, a Digital Centre of Excellence to take Cutitronics, the multi-award target range. Leadership to develop our sustainability • Expanding in attractive proposed: In 2018 we: In 2018: would be40 great, it is simple43 Return an innovative technology provider of static also enhanced our R&D capabilities at share each year. strategy in alignment with the SDGs. geographic markets. • An increase of 7.4% in the • Acquired Nautilus, a marine After the acquisition of 39 5.7 13.6 Net cash £837m £892m Sederma and expanded our crop start-ups and technology enterprises. advantage of this fast-evolving winning digital device full year dividend to 87.0p biotechnology company Biosector, leverage increased 35 Burberry has applied its capital allocation framework during the year ended 30 March 2019 as follows: electricity dissipation for electronic and care facility in Brazil. 29 29 29 Lease-adjusted net debt (£409m) (£327m) In 2018 we acquired Nautilus, from digital world. company. In 2018 we have invested (2017: 81.0p) • Acquired Plant Impact, a to 1.1x. In light of our strong but20 it works”26 surplus funds 2x depreciation in: • A special dividend of biostimulants business performance and improving 19 33 36 automotive applications, IonPhasE, is 17 19 25 28 30 one of our smart partners. • Funding asset replacement 115.0p per share. • Acquired Biosector, cash generation, the Board is 16 21 23 nearing completion. This acquisition has • New investment in a leading adjuvant proposing a return of £150m 10 12 12 12 13 • Reinvested £110 million into the business as capital expenditure. We focus our efforts on better 0 7 8 8 created openings in new fast growing, Innovation Partnering Disruptive Technology- Digitalisation key technologies specialist for human excess capital to shareholders Investor • Completing the and veterinary vaccines by way of a special dividend. In October 2018, we announced a 7.9 Burberry• Increased has appliedits full-year its capital dividend allocation by 3% toframework 42.5p. during the year ended 30 March 2019 as follows: 2018 REPORT ANNUAL INTEGRATED Along with our smart partner Glassflake, connecting with our customers. We Our Open Innovation and Smart Partnering Digitalisation is an emerging • Invested in SiSaf, a The effect of this return would

ROIC Acquisitions Ordinary Leverage Net capital led acquisitions construction of our 2011 2017 2012 2015 2013 2014 2018 2016 niche end markets. 2010 2007 2005 2003 2008 2004 2009 Programmes continue to evolve. We now differentiator for our business, creating 2006 $500m capital return to shareholders and priorities of the company, the We continue to invest in disruptive pioneering bio-surfactants novel drug delivery have been to increase the 2018 • Paid £14.5 million upon completion of the acquisition of a luxury leather goods business, to create a leather goods centre we developed and launched a range created entrepreneurial cells in Digital have more than 450 partners, comprising many opportunities. We have invested technology as part of our strategy to plant in North America. technology company year-end leverage towards the dividend expenditure over 100 completed and 85 ongoing in global digital resource and established Interim Final via a special dividend and share of Moonshine™ ingredients in 2018, Marketing and Data Analytics that will drive ‘Stretch the Growth’. The integration of • Increased our investment in upper end of the Board’s Interim Final • Reinvestedof excellence £110 in millionItaly. Payments into the business of £11.1 million as capital were expenditure. made in the year in respect of the acquisition of a non-controlling interest projects with academics, universities, a Digital Centre of Excellence to take In Health Care, we acquired Biosector, an innovative technology provider of static Cutitronics, the multi-award target range. start-ups and technology enterprises. advantage of this fast-evolving consolidation. The special dividend a new offering in colour cosmetics. an improved customer experience through electricity dissipation for electronic and winning digital device • Increasedin Burberry its Middlefull-year East dividend LLC. by 3% to 42.5p. a vaccine adjuvant specialist, seen In 2018 we acquired Nautilus, from digital world. automotive applications, IonPhasE, is company. We also completed an investment our digital channels. In Canada, we opened one of our smart partners. was paid on 29 January 2019. nearing completion. This acquisition has • •PaidReturned £14.5 milliona further upon £150 completion million to of shareholders the acquisition via aof share a luxury buyback leather programme. goods business, to create a leather goods centre as a natural extension of our existing We focus our efforts on better created openings in new fast growing, and a commercial arrangement the Nautilus Biosciences Croda Centre of Along with our smart partner Glassflake, connecting with our customers. We ROIC Acquisitions Ordinary Leverage Net capital of excellence in Italy. Payments of £11.1 million were made in the year in respect of the acquisition of a non-controlling interest pharmaceutical excipients portfolio. niche end markets. with SiSaf, a pioneering UK based Innovation for Marine Biotechnology. we developed and launched a range created entrepreneurial cells in Digital dividend expenditure Shareholder returns 2003-18 ($bn) of Moonshine™ ingredients in 2018, Marketing and Data Analytics that will drive in Burberry Middle East LLC. In Health Care, we acquired Biosector, Asset Operational Total a new offering in colour cosmetics. an improved customer experience through Return bio-pharmaceutical company. a vaccine adjuvant specialist, seen We also completed an investment our digital channels. In Canada, we opened 5.7 13.6 disposals cash lows 18.2% £82.5m 87.0p 1.1x £103.1m as a natural extension of our existing • Returned a further £150 million to shareholders via a share buyback programme. and a commercial arrangement the Nautilus Biosciences Croda Centre of pharmaceutical excipients portfolio. call of other stakeholders, and the 72 2017: 19.2% 2017: £30.4m 2017: 81.0p 2017: 1.0x 2017: £157.2m with SiSaf, a pioneering UK based Innovation for Marine Biotechnology. surplus funds bio-pharmaceutical company. 18.2% £82.5m 87.0p 1.1x £103.1m 2017: 19.2% 2017: £30.4m 2017: 81.0p 2017: 1.0x 2017: £157.2m In October 2018, we announced a 7.9 16 IHG | Annual Report and Form 20-F 2018 72 $500m capital return to shareholders Croda International Plc Croda International Plc Croda International Plc Croda International Plc 22 Annual Report and Accounts 2018 Annual Report and Accounts 2018 23 via a special dividend and share 22 Annual Report and Accounts 2018 Quick read Introducti on Annual1 ReportPresenti and Accounts ng 2018 an overall23 2 Disclosures supporti ng 3 Disclosures supporti ng Appendix 1 consolidation. The special dividend availability of resources. Investors Quick read Introduction 1 Presenting an overall 2 Disclosures supporti ng 3 Disclosures supporting Appendix 1 narrative the sources of cash the use of cash Reverse factoring Quick read Introductiwas paid on 29 on January 2019. 1 Presenting an overall 2 Disclosures supporting 3 Disclosures supporting Appendix 1 narrative the sources of cash the use of cash Reverse factoring narrative the sources of cash the use of cash Reverse factoring Asset Operational Total disposals cash lows

therefore value information that 16 IHG | Annual Report and Form 20-F 2018 helps them understand the potential Burberry and Croda IHG uncertainties and management’s Clear capital allocation frameworks tied into the overall business model and strategy. A narrative approach to setting of priorities. reaction. When thinking about the FY18 |HIGHER CASH GENERATION UNLOCKING future availability of cash, that means OUR FULL

POTENTIAL 7 € million they need information about: DISCIPLINED +23% GROWTH FOR 1,142 Strong cash generation A SUSTAINABLE 930 • Variability of future outcomes – FUTURE 162 Investment grade balance sheet 156 underlying earnings). In line with the policy, the Board We also completed the acquisitions of the remaining 50% How does the company consider Examplesproposes a final dividend of 40% of second half underlying interest inthat the Mototolo joint operation in South Africacover from the priorities in action and the risks and variabilities include: earnings, equal to 51cents per share, bringing the total Glencore and Kagiso Platinum Ventures; and in Canada, the dividends paid and proposed in the year to $1.00 per share. Chidliak Diamond Resource (through De Beers) through the acquisition of Peregrine Diamonds Limited. DISCRETIONARY CAPITAL OPTIONS Leverage GROUP CAPITAL EXPENDITURE◊ WIZZ | INCREASED CEE LCC MARKET SHARE IN FY18 980 Multiple aircraft financing options the range of possibilities for futureunderlying earnings). In line with the policy, the Board We alsoDiscretionary completed capitalthe acquisitions will continue of theto be remaining considered 50% in a balanced manner, between disciplined growth, upgrades Capital expenditure increased to $2.8 billion proposes a final dividend of 40% of second half underlying interest in the Mototolo joint operation in South Africa from Strategic report 774 earnings, equal to 51cents per share, bringing the total DisclosuresGlencoreto our on and the portfolio Kagiso sources and Platinum and additional uses Ventures; of returnscash and to shareholders. in Canada, the (2017: $2.2 billion), with rigorous capital discipline continuing Disclosures on the sources and uses of cash Disclosures on the sources and uses of cash to be applied to all projects. Sustaining capital increased to 39 46 49 dividends paid and proposed in the year to $1.00 per share. ChidliakStrict Diamond and disciplined Resource value (through criteria De are Beers) applied through to the the $2.5 billion (2017: $2.1 billion), driven by stronger average acquisitionassessment of Peregrine of future Diamonds options. WhereLimited. appropriate, we will # 1 # 2 # 3 local currencies, planned additional stay-in-business FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION NOTES TO THE FINANCIAL STATEMENTS 1.7x seek partners on major greenfield projects, and will avoid DISCRETIONARY CAPITAL OPTIONS expenditure across the Group, in line with our increased cash use, and how does that help committing to too many such projects◊ at the same time. The GROUP CAPITAL EXPENDITURE production base, and increased capitalised development and Poland Ryanair Norwegian Discretionary capital will continue to be considered in a Group will also continue to maintain optionality to progress CAPITAL BASE Two additional aircraft orders balanced manner, between disciplined growth, upgrades Capital expenditure increased to $2.8 billion stripping expenditure primarily due to longwall productivity

with value-accretive projects, should capital availability Strategic report improvements at Metallurgical Coal and an optimisation Romania Blue Air Ryanair to our portfolio and additional returns to shareholders. (2017: $2.2 billion),permit. We will with rigorous consider options capital to upgrade discipline the continuing quality of of the mine plan at Mogalakwena. In 2019, we expect to be appliedour portfolio to all inprojects. a measured Sustaining manner capital and only increased where we to see Ryanair Easyjet Strict and disciplined value criteria are applied to the total capital expenditure to increase to $3.8-$4.1 billion after11. PROPERTY, PLANT AND EQUIPMENT continued Hungary requiring aircraft deposits $2.5 billionvalue, (2017: through $2.1 inorganic billion), opportunities, driven by stronger and disposing average of Free Cash F18 utilising the remaining $0.5 billion of capital expenditure Depreciation includes $2,545 million (2017: $2,342 million) of depreciation within operating profit, $97 million (2017: $101 million) of depreciation arising F17 the prioritisation of decisions?assessment of future options. Where appropriate, we will assets. This approach ensures a high quality portfolio with Ryanair Norwegian local currencies, planned additional stay-in-business seek partners on major greenfield projects, and will avoid funding for Quellaveco from the Mitsubishi subscription. due to the fair value uplift on the pre-existing 45% shareholding in De Beers which has been included within operating remeasurements (see note 8), and What is useful? Lithuania expenditurebalanced across exposure the Group, to diverse in line asset with geographies our increased and end $17 million (2017: $9 million) of pre-commercial production depreciation and assets used in capital projects which has been capitalised. committing to too many such projects at the same time. The Restricted Cash productionmarkets. base, Where and increasedgrowth and capitalised upgrades do development not meet our and strict Disposals includes disposals of assets, businesses, and transfers to Assets classified as held for sale. What is useful? Bulgaria Ryanair Norwegian Group will also continue to maintain optionality to progress What is useful? 42% # 1 strippingcriteria, expenditure any excess primarily cash will due be to considered longwall productivity for additional Capital expenditure◊ FY18 |HIGHER CASH GENERATION with value-accretive projects, should capital availability returns to shareholders. Accounting judgements RSA provide some informati on in their investor presentati on which illustrates how future earnings might feed Latvia Ryanair Norwegian improvements at Metallurgical Coal and an optimisation InImpairment these testingextracts from the Annual Report, Anglo American provide a breakdown of the capital permit. We will consider options to upgrade the quality of What is useful? of the mine plan at Mogalakwena. In 2019, we expect $ million 2018 2017For the purposes of impairment testing, the recoverable amount of each of the cash generating units (CGUs) or group of CGUs has been determined based on through into organic growth and dividends. It highlights their overall range as well as a variable band which are our portfolio in a measured manner and only where we see In July 2018, the Board approved the development of expenditure for the year categorised by strategic orientati on (e.g. Sustaining capital vs Growth Ukraine Air Pegasus Ernest Air total capital expenditure to increase to $3.8-$4.1 billion after a fair value less costs of disposal basis. The key assumptions used in determining fair value less costs of disposal are set out in note 7. useful factors for investors to consider. Wizz also show the relati onship between Free Cash, Restricted Cash and total cash. Cash collateral on LC facilities value, through inorganic opportunities, and disposing of the Quellaveco copper project in Peru, with an expected Stay-in-business 1,617 1,310Projects). Further context is given by a 5yr historical split. € million utilisingcapital cost the remaining of $5.0-$5.3 $0.5 billion billion. of capitalAt the same expenditure time, and Deferred stripping Ryanair Air Flydubai assets. This approach ensures a high quality portfolio with In certain mining operations, rock or soil overlying a mineral deposit, known as overburden, and other waste materials must be removed to access the orebody. Slovakia+23% Wizz clearly show on each page of the presentati on whether the numbers are from audited or fundingaligned for Quellaveco with the Group’s from the disciplined Mitsubishi approach subscription. to capital Development and stripping 796 586The note to the fi nancial statements also provides a split of the same numbers by segment and RSA Plc – Preliminary Announcement Presentati on 2018 Strong cash generation balanced exposure to diverse asset geographies and end The process of removing overburden and other mine waste materials is referred to as stripping. 1,142 unauditedRyanair sources. This allows investors to assess the level of reliability of the disclosure. • – What is the link between allocation, agreement was reached with Mitsubishi to (1) reconciles through to cash fl ow. FlyOne Air - Life extension projects 245 216 Moldova Risks markets. Where growth and upgrades do not meet our strict The Group defers stripping costs onto the balance sheet where they are considered to improve access to ore in future periods. Where the amount to be 930 increase its interest in Anglo American Quellaveco S.A. capitalised cannot be specifically identified it is determined based on the volume of waste extracted compared with expected volume for the identified 162 30% criteria, any excess cash will be considered for additional ◊ Proceeds from disposal of (162) (52) Capital(AAQSA) expenditure from 18.1% to 40% via the issuance of new Anglocomponent Americanof the orebody. This plc determination - Integrated is dependent onAnnual an individual Reportmine’s design 2018 and Life of Mine Plan and therefore changes to the design or Life Serbia InvestmentRyanair grade FlydubaibalanceLeverage sheet returns to shareholders. shares. Mitsubishi subscribed $500 million in upfront property, plant and equipment of Mine Plan will result in changes to these estimates. Identification of the components of a mine’s orebody is made by reference to the Life of Mine Plan. 156 The assessment depends on a range of factors including each mine’s specific operational features and materiality. Pegasus Flydubai In July 2018, the Board approved the development of $ millionconsideration and an additional $351 2018million to fund2017 its Sustaining capital 2,496 2,060 Macedonia initial share of capital expenditure, resulting in a total cash Accounting policy Leverage Maintaining or lowering leverage the Quellaveco copper project in Peru, with an expected Stay-in-business 1,617 1,310 Growth projects(1) 168 2018 Dividend outlook 980 Multiple aircraft financing options the risks facing the company and subscription of $851 million. The Group will receive up to 340 See note 38D for the Group’s accounting policies on property, plant and equipment. 774Bosnia & capital cost of $5.0-$5.3 billion. At the same time, and (1) Flydubai Pegasus aligned with the Group’s disciplined approach to capital Developmenta further $100 and stripping million in net payments796 from AAQSA586 Total 2,836 2,228 1.7x Easyjet conditional on the achievement of certain prescribed Herzegovina allocation, agreement was reached with Mitsubishi to (1) Two additional aircraft orders Life extensionthroughput projects rates. As a result of the syndication245 transaction,216 Capitalised operating cash flows (18) (78)12. CAPITAL EXPENDITURE increase its interest in Anglo American Quellaveco S.A. The disclosures in this note include certain Alternative Performance Measures (APMs). For more information on the APMs used by the Group, including PRELIMINARYDIVIDEND OUTLOOK F17GeorgiaFree Cash F18 requiringFlydubai aircraft AirArabiadeposits 6% the Group’s share of capital expenditure to develop Proceeds from disposal of (162) (52) Total capital expenditure 2,818 2,150definitions, please refer to page 208. (AAQSA) from 18.1% to 40% via the issuance of new Quellaveco is $2.5-$2.7 billion. Restricted Cash property, plant and equipment Capital expenditure by segment shares. Mitsubishi subscribed $500 million in upfront (1) Life extension projects and growth projects are collectively referred to as the outturn in cash generation, US$ million 2018 2017 Illustrative use of earnings Earnings and dividends Cash collateral on LC facilities consideration and an additional $351 million to fund its We also have several smaller scale, high quality, fast expansionary capital expenditure. Sustaining capital 2,496 2,060 De Beers 417 273 IFRS16 debt at €1.5bn, reducing payback (3-4 years), organic capital expenditure Source: Innovata initial share of capital expenditure, resulting in a total cash Copper 703 665 (1) RESULTS Note: FY18 period subscription of $851 million. The Group will receive up to Growthopportunities projects to improve the existing business.340 For example,168 Platinum Group Metals 496 355 • Attractive earnings progression our goal, Leverage FY18 Results Group historical capital expenditure◊ 2014–2018 Iron Ore 415 252 (1) at Debmarine Namibia, a feasibility study is ongoing for the with increasing proportion available for MaintainingPage 5or lowering leverage1.5x a further $100 million in net payments from AAQSA Coal 722 568 100% Total 2,836 2,228 $ billion construction of an additional custom-built diamond mining Nickel and Manganese 38 28 to €1.3bn end FY19 conditional on the achievement of certain prescribed distribution Corporate and other 27 9 Capitalisedvessel whichoperating is planned cash flowsto add 0.5 Mct (18)per annum from(78) 2023, Retained to support organic use, and dividend payment? throughput rates. As a result of the syndication transaction, 7 Capital expenditure 2,818 2,150 IFRS16 debt at €1.5bn, reducing and a pre-feasibility study is under way for a debottlenecking Reconciliation to Consolidated cash flow statement: c.40-c.25-50%30% growth, pensions & net capex • Around 25-30% of earnings used for organic the Group’s share of capital expenditure to develop Total capital expenditure 2,818 2,150 6.0 1.5x FY17: 1.7x and expansion of the Moranbah-Grosvenor coal handling and 6 Cash flows from derivatives related to capital expenditure 15 40 investment growth, net capex investment and pensions to €1.3bn end FY19 Quellaveco is $2.5-$2.7 billion. Proceeds from disposal of property, plant and equipment 162 52 (1) preparation plant to increase capacity by 4-6 Mtpa from 2021. FY17: 1.7x Life extension projects and growth projects are collectively referred to as 5 Direct funding for capital expenditure received from non-controlling interests 374 36 We also have several smaller scale, high quality, fast expansionaryIn addition, capital we expenditure. continue to progress the application of Reimbursement of capital expenditure 31 – • Continue to plan for base dividend payout of 4.2 Expenditure on property, plant and equipment 3,400 2,278 payback (3-4 years), organic capital expenditure innovative concepts and step-change technologies 4 28 February 2019 40-50% with some look through of volatility Audited financial statements. c.20-35% Note 1: Cash and Cash Equivalents (€m) FY18 Results opportunities to improve the existing business. For example, for pull-to-par, Note 2: Leverage is defined as net debt adjusted to include capitalised stemming from our FutureSmart Mining™ programme. The Direct funding for capital expenditure received from non-controlling interests represents capital expenditure relating to the Quellaveco project funded by cash Variable ‘band’ operating lease obligations divided by earnings before interest, tax, ◊ 3 2.8 c.20-35% Page 12 at Debmarine Namibia, a feasibility study is ongoing for the Group historical capital expenditure 2014–2018 subscriptions from Mitsubishi. This is deducted in order to present capital expenditure on an attributable basis. The remaining $515 million of cash subscription, distribution and/ or other uses • Leaves a variable ‘band’ of 20-35% for depreciation, amortisation and aircraft rentals. Group is looking to invest $0.1-$0.5 billion per annum of 2.4 Audited financial statements. $ billion 2.2 received as part of the Quellaveco syndication transaction, will be offset against capital expenditure on the Quellaveco project in 2019. See note 25 for a full additional distributions, to fund pull-to-par or construction of an additional custom-built diamond mining discretionary capital in technology and innovation initiatives 2 description of the transaction. Note 1: Cash and Cash Equivalents (€m) vessel which is planned to add 0.5 Mct per annum from 2023, to drive improvements across our existing portfolio of assets. for any other need FY18 Results 7 Note 2: Leverage is defined as net debt adjusted to include capitalised • – Are there any and a pre-feasibility study is under way for a debottlenecking 1 Reimbursement of capital expenditure relates to funding provided for the development of the Charterhouse Street office. Restrictions Evaluation expenditure increased by 38% to $172 million in c.40-50% 6.0 • Pull-to-par effect impacts 2019 to 2021, but and expansion of the Moranbah-Grosvenor coal handling and 6 Capitalised operating cash flows operating lease obligations divided by earnings before interest, tax, 0 Capital expenditure includes net capitalised operating cash inflows of $18 million (2017: net inflows of $78 million) generated by operations prior to reaching c.25-30% Page 12 2018 (2017: $125 million) and expenditure on exploration Ordinary dividend distributions to a sharply decreasing extent preparation plant to increase capacity by 4-6 Mtpa from 2021. 2014 2015 2016 2017 2018 commercial production for accounting purposes. depreciation, amortisation and aircraft rentals. 5 activities increased 10% to $113 million (2017: $103 million). In addition, we continue to progress the application of Stay-in-business Capital expenditure by category • Emphasis will continue to be that In 2018, the Group4.2 completed a number of transactions, Development and stripping innovative concepts and step-change technologies 4 US$ million 2018 2017 shareholder reward follows performance, including the sale of our 88.2% interest in the Drayton Expansionary Expansionary 567 306 stemming from our FutureSmart Mining™ programme. The Stay-in-business 1,617 1,310 but does not lead restrictions on current or future 3 thermal coal mine (on care and maintenance since2.8 2016) Stripping and development 796 586 Group is looking to invest $0.1-$0.5 billion per annum of 2.4 and the Drayton South project in Australia.2.2 In South Africa, Proceeds from disposal of property, plant and equipment (162) (52) discretionary capital in technology and innovation initiatives 2 2,150 (1) The payment, by we completed the sale of the New Largo thermal coal project 2,818 to drive improvements across our existing portfolio ofway assets. of preference and the Eskom-tied domestic thermal coal operations, 1 dividend, will be PGMs’ 33% interest in the Bafokeng Rasimone Platinum Expansionary capital expenditure includes the cash flows from derivatives related to capital expenditure and is net of direct funding for capital expenditure 40 Evaluation expenditure increased by 38% to $172 million in received from non-controlling interests. Stay-in-business capital expenditure is net of reimbursement of capital expenditure. grossed up to take Mine associate, as well as its 11% listed stake in Royal 2018 (2017: $125 million) and expenditure on explorationaccount of the Group0 cash, either through capital or shareholding in Bafokeng Platinum, its 85% interest in Union mine and activities increased 10% to $113 million (2017: $103 million). 2014 2015 2016 2017 2018 AAQSA. 50.1% interest in Masa Chrome Company. Quick Stay-in-businessread Introducti on 1 Presenti ng an overall 2 Disclosures supporti ng 3 Disclosures supporti ng Appendix 1 Quick read Introduction 1 Presenting an overall 2 Disclosures supporting 3 Disclosures supporting Appendix 1 Quick read Introduction Presenting an overall Disclosures supporting Disclosures supporting Appendix 1 In 2018, the Group completed a number of transactions, Development and stripping narrative the sources of cash the use of cash Reverse factoring 1 2 3 including the sale of our 88.2% interest in the Drayton Expansionary Anglo American plc Integrated Annual Report 2018 41 narrative the sources of cash the use of cash Reverse factoring narrative the sources of cash the use of cash Reverse factoring thermal coal mine (on care and maintenance since 2016) and the Drayton South project in Australia. In South Africa,

exchange controls, availability(1) of The payment, by we completed the sale of the New Largo thermal coal project way of preference and the Eskom-tied domestic thermal coal operations, 150 Anglo American plc Integrated Annual Report 2018 dividend, will be PGMs’ 33% interest in the Bafokeng Rasimone Platinum grossed up to take Mine associate, as well as its 11% listed stake in Royal account of the Group shareholding in Bafokeng Platinum, its 85% interest in Union mine and dividend resources or otherAAQSA. items?50.1% interest in Masa Chrome Company. 1 AngloAmericanAnglo American plc Integrated Annual Report 2018 41 RSA Wizz Examples of how this can be applied Clear capital expenditure information, with Disclosure that communicates the range Disclosure that highlights the relationship context. and variability of future dividends. between restrictions and KPI’s. include Chesnara, Whitbread, Drax, RSA, Phoenix Group, AngloAmerican and Wizz.

Examples used in the report Page Conclusion Focusing on drivers of cash Whilst this project has identified a number of areas where improvement in disclosure would be welcome, it is also clear that investors do not seek to J Sainsbury 15 overburden preparers. Many of the areas are relevant to investment decision- AutoTrader 16 making and therefore, (where pertinent) they expect additional disclosure. 4imprint Group 18 Carnival Corporation 19 How to read the full report Disclosures supporting the sources of cash Phoenix 22 Using the model shown on page 3, the report provides more details about investor and preparer views on each topic and highlights relevant guidance Chesnara 24 and research. The report also includes a number of useful disclosures that Rio Tinto 25 were discussed with investors, sourced, both from the company participants in the project, and the wider market. In certain circumstances examples have Mears 27 been created by the Lab. Johnson Mathey 28 Given the breadth of the topic, each section stands alone and can be read as AstraZeneca 29 such. Those seeking a full understanding are advised to read the entire report. Thames Water 31 Disclosures supporting the use of cash Burberry 35 Croda 36 IHG 37 AngloAmerican 39 Carnival Corporation 40 Whitbread 42 Chesnara 45 Drax 45 RSA 46 Phoenix 47 AngloAmerican 48 Wizz 49

The conceptual framework that underpins International Financial Reporting Standards Our discussions with investors would suggest not completely. This report focuses on (IFRS) states that: those additional disclosures that provide context and further information on the cash flows, to enable investors to assess the current position and future cash flows of the “The objective of general purpose financial reporting is to provide financial business. information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing Answering investors’ questions resources to the entity.” In this project, we have interviewed 15 investors on their needs on cash-related (Para 1.3 – Conceptual Framework 2018) disclosure. Through our discussions, we have heard some core questions that investors wish to answer: • How much cash is being generated from the operations of the business, both in the Fundamental to the ability of those investors, lenders and other creditors to make current period and future? decisions, is information about current and future anticipated cash resources. Cash is a core measure of business performance and position for both investors and companies • Is generated cash likely to be sufficient to meet the company’s strategic objective themselves. and, if not, where will the required cash come from? • What is the company planning to do with the cash it generates, especially beyond The pre-eminence of the cash flow servicing its current operations? The cash flow statement is important to investors (particularly smaller direct • Is management being effective and efficient in its use of cash? shareholders), and is considered (by users) to be less prone to management influence (especially accounting judgement) than the other primary statements. However, We have used these insights to develop a model of investor needs shown on page 11. much research has been written which seeks to improve the cash flow statement and This model is a basis to explore the topics of cash generation and use. The remainder of make it more representative of the underlying business activity. This includes work this report uses the model developed to consider investor and preparer perspectives, undertaken by the FRC, Chartered Financial Analyst Institute and the IASB, who have and highlights some examples of how this can be applied. considered the position, and classification of different cash flows, differing approaches The report is split into three sections, focusing on drivers, disclosures focused on to creating cash flows (direct vs indirect) and other elements to better align the cash sources of cash, and disclosures focused on uses of cash. flow statement to a company’s operations. However, does the cash flow tell the whole story? By its nature, the cash flow is a company’s aggregated and summarised historical information. This information is clearly useful for assessing management stewardship of assets but, is it enough for those potential investors, lenders and other creditors (mentioned in the conceptual framework) when they have a more forward-looking focus?

What investors want: Cash disclosuresWhat investors that want: Cash disclosures that

Provide a clear description of the drivers of current (and future) performance and position, in the context of cash, supported by appropriate metrics.

And further detailed disclosures on:

The sources of cash The uses of cash

Which explain Which cover Which link Which explain Which support Which highlight how the the drivers of to strategy, a framework understanding relevant risks, company’s performance working of priorities of the priorities restrictions and business model that generated capital and for the cash in action. variabilities. generates cash. cash in the risks to allow generated. current period. an assessment of future cash generation.

All underpinned by strong processes, controls and clearly communicated assurance.

Section 1 Focus on drivers

What investors want: Cash disclosures that

Provide a clear description of the drivers of current (and future) performance and position, in the context of cash, supported by appropriate metrics.

And further detailed disclosures on:

The sources of cash The uses of cash

Which explain Which cover Which link Which explain Which support Which how the the drivers of to strategy, a framework understanding highlight company’s performance working capital of priorities of the priorities relevant risks, business model that generated and risks for the cash in action. restrictions and generates cash. cash in the to allow an generated. variabilities. current period. assessment of future cash generation.

All underpinned by strong processes, controls and clearly communicated assurance.

Focus on drivers Cash metrics disclosures Lab work Why cash metrics are important Investors want cash disclosures which: The Lab’s work on performance metrics is At an underlying level, investors are focused on the long- available in two reports. term value creation of a business, and cash metrics are an Provide a clear description of the drivers essential part of that as they feed directly into valuation Reporting on performance metrics – An of current (and future) performance and methodologies. investor perspective which provides a framework for useful performance metric In the Lab’s recent report position, in the context of cash, supported Performance Metrics – Principles reporting, based on a series of interviews we heard from investors that a range of metrics by appropriate metrics. and Practice with 25 investors. (both GAAP and non-GAAP) are essential for understanding a company’s position and performance. In this project, Performance Metrics – Principles and Annual reports are a balance between backward-looking investors noted that cash related metrics are particularly Practice which uses the framework from historical performance and forward-looking strategic important. Investors (and companies themselves) are the first report to explore examples of elements. Investors’ information needs are aligned to this. interested in the stewardship of a company’s assets useful disclosure and considers companies' First, for those already invested, they want to assess the (including cash resources), and how it grows those assets. perspectives and the wider regulatory current year's performance and consider if the company Given this focus, it is not surprising that metrics which context. can afford (in terms of cash, reserves and liquidity) the measure a company’s ability to generate cash and efficiently proposed dividend (the numbers). Second, for both current use it, are important to both the managers of a business and Both reports are available for free on and potential investors, they want to understand how to the investors who analyse them. the Lab’s publications page on the FRC’s the company is positioned to perform in the future (the Approximately 60% of the FTSE 100 have a cash-related website www.frc.org.uk/lab narrative). metric amongst their Key Performance Indicators (KPI’s) Both the numbers and the narrative context are therefore with Net Debt being the most common and Free Cash flow 1 important to investors; however, the most effective being the second most common . However there is also disclosures are those where numbers and narrative are very limited consistency in the way that these metrics are combined in a way that shows how future performance is calculated with many having their own methodology. Performance metrics – underpinned by the current results. Principles and practice Companies agree; communicating their strategy and November 2018 performance is an essential objective of their investor communications. However, for many companies, their primary focus is not on the historical cash flow statement, but other (often non-GAAP) measures of performance. This Financial Reporting Council can often lead to a lack of direct, focused description of cash, its generation and use in the period. 1 Based on FRC Lab analysis of FTSE 100 companies as at 31 Dec 2018. Two ways in which we saw companies trying to communicate their cash position was through the selection and use of key performance metrics and through the use of narratives (that bring all the cash related elements together).

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring Disclosures on the sources and uses of cash 14 What information is important? Companies and investors in Principle 1 Principle 2 Principle 3 Principle 4 Principle 5 this project identified several Aligned to strategy Transparent In context Reliable Consistent key metrics and ratios that are important. These include: The selected cash metrics While overall cash metrics Cash metrics should Where cash metrics are As previously noted, cash should be appropriate might seem like they be put into context, critical to the business, metric definitions are not Metrics that focus on the to the company, its should be the same from by a narrative that investors expect (rightly often consistent across generation of cash, such as: strategy, and the current company to company, it explains how a company or wrongly) that they companies (especially • Free-cash flow business cycle. If a is clear that they are not. performed against the have been subjected in the case of free- • Cash conversion company is in a growth Many companies (and metrics and why, both to scrutiny from audit cash flow). While most phase, the metrics may investors) have their own when performance is committees and auditors. investors accept this • Operating cash flow need to focus on capital ways that they present, positive and when it is There should be clear (although some advocate Metrics that focus on the expenditure or availability define and use cash negative. This also goes disclosure that explains standardised metrics), availability of cash resource, of cash. If it is in a metrics. Therefore, as to credibility, an overt the level of review for they do expect that year- such as: stable period, then cash important as the provision focus on positive metrics each metric. Where on-year application of the returns might be more of metrics themselves is and limited discussion on KPIs are provided within metric will be consistent • Net debt / Net cash appropriate. Investors the provision of sufficient negative metrics raises non-audited documents within a company. • Cash remitted to group note that relevance is granular detail to allow a red flag with users. (such as presentations), Where the company more important than investors to calculate or One well-received way investors expect that they has made changes, they Metrics that focus on the use of consistency, and if a adjust the metrics as of providing context is should clearly relate or should explain why they cash, such as: company is transitioning they wish. through the use of KPI reconcile back to those in have changed them, • Cash returned from a growth to a stable bridges (which graphically the audited documents, and provide historical • Capital expenditure period (or vice versa), it reconcile current and and that the links are clear comparatives. Investors may be appropriate for past years) supported by and easy to follow. are also skeptical of overly What makes a useful companies to change or explanation. adjusted metrics which introduce new metrics remove real cash outflows. disclosure? when relevant and well As well as consistency over Investors in the project echoed explained. time, investors also expect the core framework from the that key cash metrics are Lab’s original performance used consistently across metrics project, which detailed the full suite of reporting. five principles. These can be applied to cash metrics as Regulatory Focus follows. Investors also supported the guidance on Alternative Performance Measures (as issued by the European Securities and Market Authority) which sets out how APMs should be defined, presented and reconciled to GAAP measures. ESMA Guidelines on Alternative Performance Measures

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring 28 Strategic02 ReportStrategic Report J SainsburyJ plcSainsbury Annual plcReport Annual 2019 Report 2019 Disclosures on the sources and uses of cash 15

Chairman’s letter 2018/19 highlights Our KPIs What is useful? Chairman Martin Scicluna sets out how 11.0p 8.5% In these extracts, Sainsbury’s free cash flow KPI is disclosed in the narrative section of the annual we plan to deliverFinancial on ourkey strategy performance and grow indicatorsProposed are full-year critical dividend to Return on capital employed report. The up-front focus is supported by a rationale and narrative context (not shown). Further understanding and measuring our financial health. support for the number is provided by way of a clear breakdown of its calculation in the audited value for shareholders. financials. This allows investors to understand the use of the KPI and adjust the reported number if 22.0p £461m they wish to do so. Underlying basic Free cash flow J Sainsbury plc Annual Report 2019 earnings per share 186 Financial Statements J Sainsbury plc Annual Report 2019 Group measures Alternative performance measures continued

Underlying profit Underlying basic earnings Retail operatingI joined cash the flow Sainsbury’s (£m) Retail freeBoard cash in flow the (£m) knowledge Closest equivalent before tax (£m)1 per share (pence)1 Definition: Retailthat cash it generatedis a highly respected,Definition: Net values-drivencash generated APM IFRS measure Definition/Purpose Reconciliation Definition: Profit before tax adjusted Definition: Earnings per share using from operations after changes from retail operations, adjusted for Cash flows and net debt for certain items in note 3 which, by underlying profit in working capitalbusiness, and pension known forexceptional quality, pension value contributions, and Cash flow items in No direct To help the reader understand cash flows 2019 2018 virtue of their size and/or nature, do contributions,customer and before service. Sainsbury’safter cash capital hasexpenditure a long but and Financial Review equivalent of the business, a summarised cash flow Ref £m £m not reflect the Group’s underlying exceptional pension contributions before strategic capital expenditure statement is included within the Financial Net interest paid a (89) (105) performance distinguished heritageand after and investments I’m delighted in joint to Review. As part of this a number of line Strategic capital expenditure b (36) (80) have become Chairmanventures duringand associates the andCompany’s items have been combined. The cash Acquisition of subsidiaries c – 135 Sainsbury’s Bank capital injections flow in note 4 of the financial statements Repayment of borrowings d (451) (174) 150th anniversary year. includes a reference to show what has been combined in these line items. Other e (8) (2) 2014/15 681 2014/15 26.4 2014/15 1,398 2014/152 Joint ventures f 13 28 2019 2018 2015/16 587 2015/16 24.2 2015/16 1,149 2015/16 296 Retail free Net cash Net cash generated from retail cash flow generated operations, adjusted for exceptional Reconciliation of retail free cash flow £m £m 2016/17 581 2016/17 21.8 2016/17 1,128 2016/17 319 from operating pension contributions, after cash capital Cash generated from retail operations 1,156 1,259 activities expenditure but before strategic capital Net interest paid (ref (a) above) (89) (105) 2017/18 589 2017/18 20.4 2017/18 1,259 2017/18 432 expenditure and after investments Corporation tax (61) (72) in joint ventures and associates and 2018/19 635 2018/19 22.0 2018/19 1,156 2018/19 461 Retail purchase of property, plant and (470) (553) The retail market remains highly Sainsbury’s Bank capital injections. equipment This measures cash generation, competitive. We have the right strategy in Retail purchase of intangible assets (78) (69) Retail underlying Retail underlying Dividend per share (pence) Core retail capital working capital efficiency and capital place and a clear plan for the year ahead. Retail proceeds from disposal of property, 64 54 EBITDAR margin (%) operating margin (%)1 Definition: Total proposed expenditure (£m)1 expenditure of the retail business. Combined with committed, hard-working plant and equipment Definition: Underlying profit before Definition: Underlying profit before dividend per share in relation Definition: Capital expenditure tax before underlying net finance tax before underlying net finance to the financial yearcolleagues led excludingby a tal Financialented, Services,experienced after Add back: Strategic capital expenditure 36 80 costs, underlying share of post- costs and underlying share of leadership team,proceeds I bel fromieve disposal we areof property, well Dividends and distributions received 18 37 tax results from joint ventures, post-tax results from joint ventures, placedplant for and the equipment future.” and before Investment in joint ventures and associates (5) (9) depreciation, amortisation and divided by retail sales excluding VAT, strategic capital expenditure Bank capital injections (110) (190) rent, divided by sales excluding VAT, including fuel, excluding Financial Martin Scicluna Retail free cash flow 461 432 including fuel, excluding Financial Services Chairman Cash generated Cash generated Retail cash generated from operations The reconciliation between retail and Group cash generated from Services from retail from operations after changes in working capital but operations is provided in note 4 of the financial statements. operations (per before pension contributions and Financial Review) exceptional pension contributions. 2014/15 7.76 2014/15 3.07 2014/15 Quick read 13.2 2014/15 Introduction 947 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 theThis sourcesenables management of cash to assess the use of cash Reverse factoring 2015/16 7.58 2015/16 2.74 2015/16 12.1 2015/16 542 the cash generated from its core retail operations. 2016/17 7.40 3 2016/17 2.42 2016/17 10.2 2016/17 547 Core retail capital No direct Capital expenditure excludes Financial 2019 2018 2017/18 7.44 2017/18 2.24 2017/18 10.2 2017/18 495 expenditure equivalent Services, after proceeds on disposals £m £m and before strategic capital expenditure. Purchase of property, plant and equipment (434) (473) 2018/19 7.52 2018/19 2.43 2018/19 11.0 2018/19 454 This allows management to assess core Purchase of intangibles (78) (69) retail capital expenditure in the period Cash capital expenditure before (512) (542) in order to review the strategic business strategic capital expenditure (note 4) performance. Strategic capital expenditure (ref (b) above) (36) (80) The reconciliation from the cash flow statement is included here. Proceeds on disposal 64 54 Cash capital expenditure including (484) (568) strategic capital expenditure Capitalised interest (6) (7) Other (including strategic capital expenditure) 36 80 Total net retail core capital (454) (495) expenditure

1 Refer to APMs on page 185. 2 Retail free cash flow was only defined as a KPI from 2015/16 onwards. 3 2016/17 restated to include Argos on a post acquisition consolidation basis. taei report Strategic Governance Disclosures on the sources and uses of cash 16

Linked to remuneration £ Financialstatements Revenue Average Revenue Operating profit Basic EPS Cash generated Directors’ remuneration report £m Per Retailer (‘ARPR’) £m pence per share from operations page 64 £ per month £m Focus areas relevant to our KPIs What is useful? 1 Maintain the best consumer experience for buying and AutoTrader provides a clear definition of their KPI (cash generated from operations) and explain why selling vehicles they consider it useful. They also provide context by linking through to their strategic focus areas £355.1m £1,844 £243.7m 21.00p £258.5m 2 Create and maintain high-performing, and risks, providing cross-references to other sections. +18% +13% data-orientated teams 3 Grow ARPR in a balanced and They provide a supporting bridge in the investor presentation showing how they go from operating 2019 21.00p 2019 £258.5m sustainable way, by creating value profit to the KPI. for our customers 2018 17.74p 2018 £228.4m 4 mprove I stock choice, volumes, AutoTrader Group plc Annual report 2019 and Results presentation 2019 2017 15.62p 2017 £212.9m accuracy and transparency in both new and used vehicles 5 Develop a more efficient way for retailers to source, dispose and Relevant focus areas Relevant focus areas Relevant focus areas Relevant focus areas Relevant focus areas move vehicles 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 6 Extend our product offering further down the buying funnel, towards Definition Definition Definition Definition Definition online transactions The Group generates revenue from three Average Revenue Per Retailer (‘ARPR’) is Operating profit is as reported in the Basic earnings per share is defined as Cash generated from operations is as different streams: Trade, Consumer calculated by taking the average monthly Consolidated income statement on page profit for the year attributable to equity reported in the Consolidated statement Services and Manufacturer and Agency. revenue generated from retailer 83. This is defined as revenue less holders of the parent divided by the of cash flows on page 87. This is defined Our strategy Trade is broken down into three customers and dividing by the average administrative expenses, plus share of weighted average number of shares in as cash generated from operating pages 18-19 categories: Retailer, Home Trader and monthly number of retailer forecourts profit from joint ventures. Operating issue during the year.Comparative periods activities, before corporation tax paid. Other, with Consumer Services similarly who subscribe to an Auto Trader profit margin is Operating profit as a have been restated to reflect the Group’s This is considered to be a more meaningful Risks relevant to our KPIs split into Private and Motoring Services. advertising package. percentage of revenue. Comparative adoption of the new accounting standard measure of performance than the 1 Economy, market and periods have been restated to reflect the for Leases (‘IFRS 16’) from 1 April 2018 using statutory measure of cash generated from Progress Progress business environment Group’s adoption of the new accounting the fully retrospective approach. operating activities, which can be distorted Revenue increased 8% year-on-year, with ARPR grew £149 in the year. Growth was standard for Leases (‘IFRS 16’) from 1 April by changes in funding structure and the 2 Brand the main driver of growth being our largely a function of the product lever Progress 2018 using the fully retrospective time lag that applies to the payment of 3 Increased competition Retailer line, supported by Manufacturer through: further upsell to our higher-level Basic EPS growth was 18%, demonstrating approach. corporation tax. Comparative periods and Agency. This growth was slightly packages; the monetisation of our new the Group’s high operational gearing. 4 Failure to innovate: disruptive have been restated to reflect the Group’s offset by a decrease in Consumer Dealer Finance product; expanding the Progress Much of the growth drops through from technologies and changing adoption of the new accounting standard Services, largely as a result of declining products included within our packages to Operating profit increased by 10% growth in net income, which benefitted consumer behaviours for Leases (‘IFRS 16’) from 1 April 2018 using private listings. include stock exports and improved reflecting top line revenue growth of 8% from a one-off profit on disposal as we 5 IT systems and cyber security the fully retrospective approach. dealer landing pages; and small growth in and well managed costs. Operating profit entered a joint venture with Cox 6 Employee retention the volume of customers paying for a also benefitted from one quarter of profit, Automotive UK. Basic EPS was also Progress data-driven Managing product. Growth contributed through our new joint venture, supported by a reduction in the weighted Cash generated from operations 7 Reliance on third parties was further bolstered by an underlying Dealer Auction. Operating profit margin average number of shares in issue during increased to £258.5 million in the year, price increase, which was slightly saw improvement, growing by a further the year as a consequence of our share giving growth of £30.1 million or 13%. This Principal risks and uncertainties offset by a year-on-year decline in our 2 percentage points to 69%. buyback programme. represented a high proportion of profit pages 30-34 stock lever. converted into cash, which was largely returned to shareholders through dividends and share buybacks.

Relevant risks Relevant risks Relevant risks Relevant risks Relevant risks 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring

Auto Trader Group plc Annual Report and Financial Statements 2019 | 21 Disclosures on the sources and uses of cash 17

Bringing it all together Regulatory requirements As with many topics of interest to investors, they be the case. As the Strategic Report guidance makes There are a number of regulatory requirements that are often confronted with a patchwork of relevant clear, the use of cross-referencing and sign-posting can are important in the consideration of cash. Some of disclosures (in this case cash disclosure), both narrative assist in producing reports that work, both as a concise these requirements define how cash and capital can and numerical, across multiple sections of the annual document, while also providing enough detail. be used; others simply define aspects of disclosure. report and other investor-focused communications. The As part of the project, the Lab looked at several examples Lab’s recent implementation study on Business models of reporting that attempted to provide a single central The most important of these are the requirements identified a suite of disclosures that investors use to narrative. Those that were the most successful did not embodied in the Companies Act (2006) which understand a company (see diagram below), and set out focus on cash in a standalone manner, but looked at cash define when a dividend can be paid from a how these can be best linked together. as part of a more holistic discussion on performance and company. However the Companies Act has few Many investors will review all the related disclosure to position. detailed requirements for disclosures around construct a picture of the company’s approach to cash cash (specifically). For those companies subject Examples that are viewed positively by investors included generation and use. Others will focus on particular to the strategic report requirements it is the the 4imprint example, which brings metrics, narrative disclosures. As such, there is value to providing a hub for Strategic Report supporting guidance that provides and strategy together in a single page, and the Carnival such disclosure, especially where cash (either the need clarification on how cash should be covered in Corporation narrative disclosure that provides high-level for it, or the likely generation of it) is a vital aspect of the business performance narrative. detail of cash movements. These examples can be found company’s investment case. on the following pages. “The strategic report must provide a fair, balanced Companies are rightly concerned about disclosure and comprehensive analysis of the development of becoming overly repetitive. However, this need not the business in the financial year and of its position at the end of the year” (7A.59)

The suite of disclosures that allow investors to understand a company: It further clarifies: “Where necessary for an understanding …. the Business model Purpose analysis should make reference to cash flows during Explains how the company generates Explains how the company generate benefits the year and factors that may affect future cash for its members through economic success and preserves value over the The disclosure of flows. Where appropriate, the strategic report should longer-term whilst contributing to inclusive and a company’s purpose, sustainable growth discuss the entity’s current and prospective liquidity strategy, objectives and and its ability to fund its stated strategy” (7A.62) Strategy and objectives business model should together Principal risks and viability explain what the company does and Provides insight into the company’s Explains those material to the future development, performance, how and why it does it. company, or where the impact of its Further requirements on disclosure come from position and future prospects A description of a company’s activity poses a significant risk the underlying accounting frameworks (IFRS etc.) values, desired behaviours and and in the case of listed/quoted companies stem Business environment culture will help to explain and Performance metrics from other relevant legislation pertinent to one or put its purpose in context. Are used in assessing progress against Provides information about the main multiple jurisdictions in which they are listed. trends and factors, including both objectives or strategy, monitoring principal financial and wider matters risks, or generally the development, performance or position of the company

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring 4imprint Group plc Annual Report and Accounts 2018 09 Overview Strategic Report Governance Financial Statements Disclosures on the sources and uses of cash Additional Information 18

Objectives Cash generation

and profitability Group plc

To deliver reliable and increasing free cash flow over the medium to longer term To balance short-term profitability with marketing investment opportunities leading to sustainable long-term free cash flow and EPS growth

GroupWhat o�fce is useful? m 4imprint4imprint Group brings plc several relevant cash disclosures together in a single page. They highlight how their 25 Southampton Buildings objectives for cash relate to the key strategic drivers, and the risks that might impact those drivers. London WC2A 1AL TelephoneOn the +44same (0)20 page 3709 they 9680 also highlight the key performance indicators that, in their view, are relevant to assessing their performance against the objective. Key enablers Risks E-mail [email protected] Bringing everything together helps investors to quickly understand key elements of the company’s Reinvestment of cash generated from Macroeconomic conditions Trading o�fces operations into organic growth initiatives Competition USAstory, but also provides links to more detail if they wish to dig deeper.

based on multi-year revenue/return A projections Currency exchange 4imprint, Inc. Disciplined approach to investment: Business facility disruption 101 Commerce4imprint StreetGroup plc Annual Report and Accounts 2018 — Marketing investment based on our Disruption to product supply chain or assessment of both prevailing market delivery service Oshkosh conditions and a combination of current and Disturbance in established marketing WI 54901, USA future customer-centric metrics, including techniques Telephone +1 920 236 7272 prospecting yield curves, retention patterns Reliance on key personnel and lifetime revenue profiles Fax +1 920 236 7282 IT failure/interruption — Capital investment evaluated based on cash E-mail [email protected] payback and discounted cash flow parameters Security of customer data Direct marketing ‘drop-ship’ business model, facilitating efficient working capital UK A management 4imprint Direct Limited Low capital intensity of the business 5 Ball Green See pages 20–25. Cobra Court Trafford Park KPIs Manchester M32 0QT Freephone 0800 055 6196 Revenue per marketing dollar ($) Underlying† operating margin (%) Cash conversion (%) Telephone +44 (0)161 850 3490 $5.63 6.14% 94% Fax +44 (0)161 864 2516 ’18 ’18 ’18 5.63 6.14 94 E-mail [email protected] ’17 5.67 ’17 6.70 ’17 101 ’16 5.77 ’16 6.80 ’16 115 ’15 5.92 ’15 6.68 ’15 60 ’14 6.01 ’14 6.52 ’14 102

Revenue per marketing dollar provides This KPI shows the profitability of the Cash conversion measures the efficiency a measure of the productivity of our Group’s trading operations. In 2018 of the 4imprint business model in the marketing investment. We measure marketing investment in brand awareness conversion of operating profits into performance relative to in-year targets as impacted operating margin in the year. operating cash flow. 2018 was another opposed to historical trend in accordance However, we believe that this investment strong year for cash conversion, reflecting with our strategic objectives for organic will strengthen our position in the market good working capital management and growth, profitability and cash generation. allowing recovery in operating margin in the low fixed capital requirements of The performance in 2018 should be set in subsequent years. the business. the context of the investment during the year in brand marketing.

† Underlying has been restated to include share option charges.

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring Based on our historical results, projections and financial condition, we believe that our future operating cash flows and liquidity will be sufficient to fund all of our expected capital improvements, new ship growth capital, debt maturities and dividend payments over the next several years. We believe that our ability to generate significant operating cash flows and our strong balance sheet, as evidenced by our strong investment grade credit ratings, provide us with the ability, in most financial credit market environments, to obtain debt financing.

We had a working capital deficit of $7.0 billion as of November 30, 2018 compared to a working capital deficit of $7.2 billion as of November 30, 2017. The decrease in working capital deficit was driven by the increase in our cash Disclosuresand cash on equivalents, the sources partially and uses offset of cash by an increase in customer deposits and short-term borrowings. We operate with a 19 substantial working capital deficit. This deficit is mainly attributable to the fact that, under our business model, substantially all of our passenger ticket receipts are collected in advance of the applicable sailing date. These advance passenger receipts remain a current liability until the sailing date. The cash generated from these advance receipts is used interchangeably with cash on hand from other sources, such as our borrowings and other cash from operations. The cash received as advanced receipts can be used to fund operating expenses, pay down our debt, make long-term investments or any other use of cash. Included within our working capital deficit are $4.4 billion and $4.0 billion of customer deposits as of November 30, 2018 and 2017, respectively. In addition, we have a relatively low-level of accounts receivable and limited investment in inventories. We generate substantial cash flows from operations and our business model has historically allowed us to maintain this working capital deficit and still meet our operating, investing and financing needs. We expect that we will continue to have working capital deficits in the future. 2018 ANNUAL REPORT Sources and Uses of Cash What is useful? Operating Activities Carnival provides a high-level narrative on key aspects of the sources and uses of cash for the Our business provided $5.5 billion of net cash from operations during 2018, an increase of $227 million, or 4.3%, current, and prior two years. This allows investors to get a quick sense of performance and position compared to $5.3 billion in 2017. This increase was driven by an increase in customer deposits. During 2017, our and identify areas for further review. business provided $5.3 billion of net cash from operations, an increase of $188 million, or 3.7%, compared to $5.1 billion in 2016. This increase was caused by an increase in our revenues less expenses settled in cash. Carnival Corporation & PLC Annual Report 2018 Investing Activities

During 2018, net cash used in investing activities was $3.5 billion. This was caused by: • Capital expenditures of $2.1 billion for our ongoing new shipbuilding program • Capital expenditures of $1.7 billion for ship improvements and replacements, information technology Financing Activities and buildings and improvements • Proceeds from sale of ships of $389 million During 2018, net cash used in financing activities of $1.5 billion was substantially all due to the following: • Purchase of minority interest of $135 million • Net proceeds of short-term borrowings of $417 million in connection with our availability of, and needs • Payments of $39 million of fuel derivative settlements for, cash at various times throughout the period • Repayments of $1.6 billion of long-term debt During 2017, net cash used in investing activities was $3.1 billion. This was caused by: • Issuances of $2.5 billion of long-term debt • Capital expenditures of $1.4 billion for our ongoing new shipbuilding program • Payments of cash dividends of $1.4 billion • Capital expenditures of $1.5 billion for ship improvements and replacements, information technology • Purchases of $1.5 billion of Carnival Corporation common stock and Carnival plc ordinary shares in and buildings and improvements open market transactions under our Repurchase Program • Payments of $203 million of fuel derivative settlements During 2017, net cash used in financing activities of $2.5 billion was substantially all due to the following: During 2016, net cash used in investing activities was $3.3 billion. This was caused by: • Net repayments of short-term borrowings of $29 million in connection with our availability of, and • Capital expenditures of $1.9 billion for our ongoing new shipbuilding program needs for, cash at various times throughout the period • Capital expenditures of $1.2 billion for ship improvements and replacements, information technology • Repayments of $1.2 billion of long-term debt and buildings and improvements • Issuances of $100 million of long-term debt under a term loan • Payments of $291 million of fuel derivative settlements • Proceeds of $367 million of long-term debt under an export credit facility • Proceeds from sale of ships of $26 million • Payments of cash dividends of $1.1 billion • Purchases of $552 million of Carnival Corporation common stock and Carnival plc ordinary shares in open market transactions under our Repurchase Program

During 2016, net cash used in financing activities of $2.6 billion was substantially all due to the following: 57 • Net proceeds from short-term borrowings of $447 million in connection with our availability of, and needs for, cash at various times throughout the period • Repayments of $1.3 billion of long-term debt • Issuances of $555 million of euro-denominated publicly-traded notes, which net proceeds were used for general corporate purposes • Proceeds of $987 million of long-term debt • Payments of cash dividends of $977 million • Purchases of $2.3 billion of shares of Carnival Corporation common stock and $35 million of Carnival plc ordinary shares in open market transactions under our Repurchase Program

Future Commitments Payments Due by (in millions) 2019 2020 2021 2022 2023 Thereafter Total Quick read Introduction Focus on drivers DisclosuresDebt (a) supporting $ 2,633Disclosures $ 2,320 $ supporting 1,243 $ 1,203 $ 1,867Appendix $ 2,095 1 $ 11,360 1 2 Other long-term liabilities reflected 3 — 135 90 73 59 178 535 theon sources the balance of sheet cash (b) the use of cash Reverse factoring New ship growth capital 4,935 3,849 3,887 3,117 2,110 1,132 19,029 Operating leases 70 48 46 36 35 180 415 Port facilities and other 311 292 249 172 132 1,097 2,253 Purchase obligations 451———— — 451 Total Contractual Cash $ 8,400 $ 6,644 $ 5,514 $ 4,600 $ 4,203 $ 4,682 $ 34,044 Obligations

(a) Includes principal as well as estimated interest payments. (b) Represents cash outflows for certain of our long-term liabilities which can be reasonably estimated. The primary outflows are for estimates of our compensation plans’ obligations, crew and guest claims and certain deferred income taxes. Customer deposits and certain other deferred income taxes have been excluded from the table because they do not require a cash settlement in the future.

58 Disclosures on the sources and uses of cash 20

Section 2 Disclosures supporting the sources of cash

What investors want: Cash disclosures that

Provide a clear description of the drivers of current (and future) performance and position, in the context of cash, supported by appropriate metrics.

And further detailed disclosures on:

The sources of cash The uses of cash

All underpinned by strong processes, controls and clearly communicated assurance.

Quick read Introduction 1 Presenting an overall 2 Disclosures supporting 3 Disclosures supporting Appendix 1 narrative the sources of cash the use of cash Reverse factoring Disclosures on the sources and uses of cash 21

Where is the cash coming Balancing simplicity and complexity breakdown would be within the annual report (and thereby subject to a certain level of assurance), but some Many preparers try to keep the business model are happy for it to be within the investor presentation from? disclosure relatively high-level. However, investors would or other communications, as long as it is clear how it appreciate more detail, either directly or linked to the ties back to audited material. While some preparers Investors want cash disclosures that: business model disclosure. highlighted that, specifically for cash KPIs, many of the Key aspects of cash generation that could be enhanced KPIs do not make sense at a segment or business level Provide details about sources of cash in business model, and related disclosures include: (particularly the case where the group may pool or both now, and in the future. manage cash centrally), investors consider that a short • Disaggregation of profit generation, by product line, explanation as to the rationale for the level of disclosure segment or geography (whichever is most relevant), is still of value. and Explaining how a business generates cash In the following pages we highlight some examples of Understanding the link between the operations of a • Detail about the conversion of profit into free cash or high-level business model disclosures that focus on cash company and its generation of cash is important for other cash metric, as selected by the company. generation and disaggregation at segment level. investors. However, it is something that is not always Disaggregation easy to do from the information a company discloses in When cash needed is dependent on financing the annual report. Providing some high-level indication of the elements of Over the longer-term companies are only viable if they the business that are generating profit and cash help The Lab’s recent implementation study on business can generate sustainable positive cash flows from the investors focus their attention on what is important. underlying business. However, investors understand model reporting(Business model reporting, Risk & Providing detail in the business model that helps them that over the short or medium-term companies might Viability reporting – Where are we know?) showed that to understand the split of cash and profit is helpful. many companies are failing to answer basic questions need additional financing to fund restructuring or Details can be relatively focused (e.g. cash or revenue expansion. Where companies need to raise financing or with their disclosures, such as how a business actually as a %), but ideally would link to fuller disclosure within makes money. are dependent on the renegotiation of existing finance, the rest of the report. Where the business model is investors expect that this is acknowledged and disclosed. undergoing change and the disclosure for the period is Investors who participated in this project noted that this The Lab’s previous report on Debt terms and maturity not representative of the group, or its likely ability to lack of clarity is still prevalent; it can be challenging to tables highlighted some of the items that were useful for understand how businesses’ operations are generating generate cash/profit going forward, highlighting this is investors in assessing a company’s current debt (such as also important. cash. maturity, cost etc.) and our report on Risk and viability Whilst the business model disclosure is not the only Providing a little more reporting highlighted the importance of appropriately linking financing issues in both the risk and viability place investors will go for information, for many it Where a company operates multiple businesses with remains an important first port-of-call, especially for statements, especially where any renegotiation is likely different cash generating characteristics, additional to occur during the viability period selected. those new to the business. As such, it is important that narrative and numerical breakdowns are helpful, and the disclosure either clearly explains how and where some investors would like to see a cash flow and key cash is generated, or references relevant disclosure cash metrics for each part of the business. Ideally, this throughout the rest of the report.

OUR CASH GENERATION HELPS US RESULTING OUTCOMES DELIVERED REPORT STRATEGIC BUSINESS MODEL REALISE OPPORTUNITIES FOR GROWTH ARE POSITIVE FOR ALL STAKEHOLDERS What is useful? HOW WE CREATE VALUE IN-FORCE BOOK CUSTOMERS Cash

Phoenix has a series of disclosures in and around the CASH EMERGENCE Optimised customer 93% Capital requirements of operating life outcomes business model that provide some additional insight into WE ARE SET APART BY OUR STRENGTHS CUSTOMER SATISFACTION Resilience OUR STRATEGIC PRIORITIES HELP companies decline as policies mature, WHICH UNDERPIN OUR BUSINESS MODEL cash generation. ENHANCE THE VALUE WE CREATE releasing capital in the form of cash THROUGH OUR BUSINESS MODEL. Read more on SCALE OF OUR PLATFORM P48 TheGrowth business model focuses on the importance of Largest Life and Pensions IMPROVE CUSTOMER MANAGEMENTConsolidator in Europe GOVERNANCE CORPORATE cash generation to the business, and how that links to OUTCOMES ACTIONS SHAREHOLDERS opportunities for growth, and ultimately stakeholder returns. Improving customer outcomes is central to our Management track record of Shareholder value £664m A Sustainable Phoenix vision of being Europe’s Leading Life Consolidator, deliveringSECURITY incremental value created and stable CASH GENERATION Given that life insurance is a relatively complex business, they and to inspire confidence in the future. Strong balance sheet which generates and sustainable long term cash flows and provides security dividends delivered also provide a simplified yet engaging illustrative explanation Read more on for all stakeholders P18 of the source and use of cash within life insurance companies. NEW BUSINESS Read more on P58 3.5% Capital-lightSPECIALIST new business OPERATING MODEL DRIVE INCREASE IN 2018 Phoenix Group Annual Report 2018 under the StrategicSpecialist operating Partnership model enabling VALUE FINAL DIVIDEND FINANCIALS Full Year Results 2018 with Standardus to efficiently Life Aberdeen manage and integrate In order to drive value, the Group looks to and vestingheritage annuities books from identify and undertake management actions, our Heritage business COLLEAGUES 5 March 2019 which increase and accelerate cash flow. see Read more on P8 Challenged, motivated and next Read more on rewarded colleagues page 1 P22 MERGERS AND SERVICE ACQUISITIONS MANAGE Quality service to our customers Read more on Value accretiveand their intermediaries acquisitions is critical P51 CAPITAL generate increasedto our strategy cash flows and synergy opportunities We continue to focus on the effective INFORMATION ADDITIONAL through scale advantages management of our risks and the efficient Read more from P18 to P21 allocation of capital against those risks. COMMUNITY & ENVIRONMENT £770k Read more on Support for local P24 BULKSKILLS PURCHASE ANNUITYSIGNIFICANT communities and DONATED TO MIDLANDS Talented and GROWTH AND LONDON AIR TRANSACTIONS charity partners AMBULANCE CHARITY experienced A wealth of The bulkteam. purchase We will annuity market and reduced PARTNERS ENGAGE acquisitions environmental COLLEAGUES offers acontinue complementary to invest source opportunitiesof assets andin this growth expertise across the UK and impact Our people are at the heart of our business Europe and organic and key to the successful growth of growth through Phoenix Group. Read more on new business is Read more on P26 available to us P54

Read more on BUSINESS MODEL CONTINUED P26 OUR CASH GENERATION PROCESS Cash REPORT STRATEGIC remitted Head Management Cash remitted to from the life office actions holding companies companies costs Read more on P12

Pensions

Reduction GOVERNANCE CORPORATE in capital Debt interest requirements and repayments

Dividends

Surplus generated Remaining

in life cash at holding FINANCIALS companies company level

Opening cash at Opening Closing holding free free company surplus surplus level INFORMATION ADDITIONAL CASH AT THE HOLDING COMPANY ANY ASSETS WHICH THE LIFE LEVEL PROVIDES COMPANIES HOLD IN EXCESS OF RESOURCES AND OVERALL CAPITAL BUFFERS REQUIRED RESILIENCE FOR IS KNOWN AS FREE SURPLUS THE GROUP

* For illustrative purposes only.

OPENING SOURCES OF LIFE USES OF HOLDING USES OF REMAINING FREE SURPLUS COMPANY CASH COMPANY CASH CASH — GROWTH GENERATION GENERATION OPPORTUNITIES

WHAT IS THE OPENING FREE SURPLUS? HOW IS FREE SURPLUS Management actions WHAT IS THE CASH REMITTED FROM WHAT IS THE REMAINING Life Company Own Funds GENERATED? These can either increase THE LIFE COMPANIES USED FOR? CASH USED FOR? Life companies hold capital in accordance with Solvency II Margins earned Own Funds or reduce Head office costs Mergers and acquisitions regulations, providing appropriate security for policyholders. Life companies earn margins capital requirements. Including salaries and other administration costs. Transactions must be value accretive This capital is known as Solvency II Own Funds. on different types of life and cash flow generative and needs Pensions contributions and pensions products IMPACT OF NEW BUSINESS? Less Solvency Capital Requirement to support the dividend level. increasing Own Funds. Capital-light open business To Group’s employee Defined Benefit schemes. The level of regulatory capital required is known as the Bulk purchase annuity transactions Read more about our New business written across Debt interest and repayments Solvency Capital Requirement. Reduced capital requirements Generate increased cash flows over the longer our open product range is On outstanding Group shareholder debt. As our heritage business runs term and are value accretive. Less Capital Policy capital-light and does not require off, the Solvency Capital Dividends The life companies hold additional internal capital buffers significant capital to be retained. Requirements reduce. above the regulatory capital requirement for prudence. The Group maintains a stable and sustainable dividend. cash generation on

PHOENIX GROUP HOLDINGS PLC PHOENIX GROUP HOLDINGS PLC 16 ANNUAL REPORT & ACCOUNTS 2018 ANNUAL REPORT & ACCOUNTS 2018 17 P16

PHOENIX GROUP HOLDINGSPHOENIX PLC GROUP HOLDINGS PLC 14 Quick read IntroductionANNUAL REPORT & ACCOUNTSANNUAL 2018 REPORT & ACCOUNTS1 Focus 2018 on drivers 2 Disclosures supporting15 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring Disclosures on the sources and uses of cash 23

BUSINESS MODEL CONTINUED OUR CASH GENERATION PROCESS Cash Cash REPORT STRATEGIC remitted Head Management Cash remitted to from the life office Resilience actions holding companies companies costs

Growth

PensionsA Sustainable Phoenix

Reduction GOVERNANCE CORPORATE in capital Debt interest requirements and repayments

Full Year Results 2018 5 March Dividends2019

Surplus generated Remaining 1

in life cash at holding FINANCIALS companies company level

* For illustrative purposes only.

OPENING SOURCES OF LIFE USES OF HOLDING USES OF REMAINING FREE SURPLUS COMPANY CASH COMPANY CASH CASH — GROWTH GENERATION GENERATION OPPORTUNITIES

WHAT IS THE OPENING FREE SURPLUS? HOW IS FREE SURPLUS Management actions WHAT IS THE CASH REMITTED FROM WHAT IS THE REMAINING Life Company Own Funds GENERATED? These can either increase THE LIFE COMPANIES USED FOR? CASH USED FOR? Life companies hold capital in accordance with Solvency II Margins earned Own Funds or reduce Head office costs Mergers and acquisitions regulations, providing appropriate security for policyholders. Life companies earn margins capital requirements. Including salaries and other administration costs. Transactions must be value accretive This capital is known as Solvency II Own Funds. on different types of life and cash flow generative and need Pensions contributions and pensions products IMPACT OF NEW BUSINESS? Less Solvency Capital Requirement to support the dividend level. increasing Own Funds. Capital-light open business To Group’s employee Defined Benefit schemes. The level of regulatory capital required is known as the Bulk purchase annuity transactions New business written across Debt interest and repayments Solvency Capital Requirement. Reduced capital requirements Generate increased cash flows over the our open product range is On outstanding Group shareholder debt. As our heritage business runs longer term and are value accretive. QuickLess Capital read Policy Introduction capital-light.Focus on drivers Disclosures supporting Disclosures supporting Appendix 1 off, the Solvency Capital 1 2 Dividends 3 The life companies hold additional internal capital buffers Requirements reduce. the use of cash Reverse factoring above the regulatory capital requirement for prudence. theThe sources Group maintains of cash a stable and sustainable dividend.

PHOENIX GROUP HOLDINGS PLC PHOENIX GROUP HOLDINGS PLC 16 ANNUAL REPORT & ACCOUNTS 2018 ANNUAL REPORT & ACCOUNTS 2018 17 STRATEGIC REPORT

ÝřKĄřKŚÝyÝĩĄČěĄěK{ťӗ:ĩ¸ěĩĄKծ VALUES AND BUSINESS MODEL

ÝʍɨɰɽɨƃɽǉǼʰǹɁƺʍɰǉɰɁȶǁǉȢȈʤǉɨȈȶǼʤƃȢʍǉɽɁƺʍɰɽɁȴǉɨɰƃȶǁɰȃƃɨǉȃɁȢǁǉɨɰӝěȃǉɰɽɨƃɽǉǼʰȈɰǁǉȢȈʤǉɨǉǁɽȃɨɁʍǼȃƃɥɨɁʤǉȶ ƹʍɰȈȶǉɰɰ ȴɁǁǉȢ ʍȶǁǉɨɥȈȶȶǉǁ ƹʰ ƃ ɨɁƹʍɰɽ ɨȈɰȟ ȴƃȶƃǼǉȴǉȶɽ ƃȶǁ ǼɁʤǉɨȶƃȶƺǉ ǹɨƃȴǉʥɁɨȟ ƃȶǁ Ɂʍɨ ǉɰɽƃƹȢȈɰȃǉǁ DisclosuresƺʍȢɽʍɨǉծʤƃȢʍǉɰӝ on the sources and uses of cash 24

OUR BUSINESS MODEL

Key stakeholders R REGULATORS C CUSTOMERS I INVESTORS

Stakeholder Financial stability and Fair outcomes Competitive return objectives regulatory compliance

What is useful? Chesnara uses a simple business model to note the cash generation relationship between the Cash generation and Economic Value growth underlying divisions and the group centre, with helpful cross references to further information. This high-level disclosure is further supported by a more detailed narrative and a roll forward of cash generation at a divisional level. Division UK NETHERLANDS SWEDEN Chesnara Annual Report and Accounts 2018

Operating Countrywide Waard Scildon Movestic company Assured Group SECTION B Strategic 01 02 01 02 01 03 01 02 03 objectives Read more on p24 Read more on p28 Read more on p28 Read more on p26 yÇÇ:¸ĄKřKŚӓ:Č{KÇKĄěÝÇ Culture & values ĄǉɰɥɁȶɰȈƹȢǉɨȈɰȟӸƹƃɰǉǁȴƃȶƃǼǉȴǉȶɽǹɁɨɽȃǉƹǉȶǉˎɽɁǹƃȢȢɁǹɁʍɨɰɽƃȟǉȃɁȢǁǉɨɰ GROUP CASH GENERATION DIVISIONAL CASH GENERATION

£47.8M їѕіќԳїѝӝћM £63.9M їѕіќӖԳѝћӝќM OUR STRATEGIC OBJECTIVES ČȈǼȶȈˎƺƃȶɽƺƃɰȃǼǉȶǉɨƃɽȈɁȶȈȶɽȃǉĩ¶ȃƃɰǁɨȈʤǉȶƃɽɁɽƃȢǁȈʤȈɰȈɁȶƃȢƺƃɰȃɨǉɰʍȢɽɁǹԳћјӝўȴǹɁɨɽȃǉʰǉƃɨӗʥȈɽȃɰʍɥɥɁɨɽȈȶǼ ƺɁȶɽɨȈƹʍɽȈɁȶɰǹɨɁȴÃɁʤǉɰɽȈƺƃȶǁŚƃƃɨǁӝ:ƃɰȃȈɰǼǉȶǉɨƃɽǉǁǹɨɁȴȈȶƺɨǉƃɰǉɰȈȶɽȃǉǼɨɁʍɥԇɰɰɁȢʤǉȶƺʰɰʍɨɥȢʍɰӗʥȃȈƺȃ 01 02 03 ȈɰɨǉɥɨǉɰǉȶɽǉǁƹʰɽȃǉǉʯƺǉɰɰɁǹƃɰɰǉɽɰȃǉȢǁɁʤǉɨȴƃȶƃǼǉȴǉȶɽԇɰȈȶɽǉɨȶƃȢƺƃɥȈɽƃȢȶǉǉǁɰӝěȃǉɰǉƃɨǉƹƃɰǉǁɁȶɨǉǼʍȢƃɽɁɨʰ ƺƃɥȈɽƃȢɨǉɧʍȈɨǉȴǉȶɽɰӗʥȈɽȃɽȃǉȈȶƺȢʍɰȈɁȶɁǹƃǁǁȈɽȈɁȶƃȢԆȴƃȶƃǼǉȴǉȶɽƹʍǹǹǉɨɰԇӝ MAXIMISE THE VALUE FROM ACQUIRE LIFE AND ENHANCE VALUE THROUGH EXISTING BUSINESS PENSIONS BUSINESSES PROFITABLE NEW BUSINESS GROUP

– Sufficient group cash has been generated in the year to cover the cost of 2017 whereas in 2018 falling bond values resulted in Own Funds losses of Managing our existing customers Acquiring and integrating companies Writing profitable new business last year’s dividend. over £20m. A strengthening of mortality assumptions also had an adverse fairly and efficiently is core to into our business model is key to supports the growth of our group – The overall increase in group cash year on year is a factor of several material impact in 2018. delivering our overall strategic aims. continuing our growth journey. and helps mitigate the natural items. The 2017 result includes the impact of the completion of the Legal & – Other group activities reflect group expenses and the impact of consolidation run-off of our book. General Nederland (Scildon) acquisition which, in line with expectations, routines, specifically movements in capital requirements determined at a resulted in a £55.3m negative impact on cash generation. A £26.8m release group level. From a capital requirement perspective, this is driven by movements from the with-profit funds has driven a sizeable increase in UK cash in in required capital at a Chesnara holding company level coupled with 2018. In the opposite direction there has been a £34m adverse year on year consolidation adjustments. At a Chesnara holding company level, additional movement in Scildon’s cash generation. Much of the movement is due to the capital is principally required to be held for the currency risk associated with fact that economic conditions had a positive impact on Own Funds in the Movestic, Scildon and Waard Group surplus assets. 18 CHESNARA ANNUAL REPORT AND ACCOUNTS 2018 2018 £m 2017 £m Movement in Movement in Own Funds management’s capital Forex Cash Cash LB5111 Chesnara 2018 Sec B_Strategic_AW_Stg8.indd 18 04/04/2019 12:43 requirement impact generated generated

UK 18.0 37.8 – 55.8 34.5 Sweden (10.7) 30.1 (1.3) 18.1 24.9 Netherlands – Waard Group 3.0 4.6 0.2 7.8 11.1 Scildon (23.5) 6.2 (0.4) (17.8) 16.2

Divisional cash generation (13.2) 78.6 (1.4) 63.9 86.7 Other group activities (13.6) (3.6) 1.0 (16.1) (2.7) Impact of LGN acquisition – (55.3)

Group cash generation (26.8) 75.0 (0.4) 47.8 28.6

UK SWEDEN Quick read Introduction Focus on drivers Disclosures– The UK has continued supporting to deliver substantial cash generationDisclosures in 2018, following supporting– Sweden generated £18.1m of cashAppendix for the year, due 1 to a fall in the level of 1 2 significant reductions in capital requirements. 3 required capital. the– Own sources Funds (OF) growth of cash includes the benefit of a £26.8mthe release use of restricted of cash– Own Funds suffered from the declineReverse in equity factoring markets in the second half of surplus from the with-profit funds. A further £5.7m of surplus capital exists 2018, with lower fund values and investment returns resulting in a reduction within the with-profit funds that has not been recognised in the results. of £10.7m at the year end. – Underlying Own Funds performance was hampered by investment markets – Conversely, the fall in investment markets also created a significant positive in the later stages of the year, with widening spreads having a negative cash impact. With equity values decreasing, the level of capital the business impact on Own Funds. was required to hold also fell substantially, primarily through lower equity – The fall in equity markets also had a positive effect on cash generation due risk exposure and diminished lapse risk. to the subsequent reduction in required capital through lower equity and mass – SEK depreciation against sterling resulted in an exchange loss of £1.3m. lapse risk. – This was supported by further reductions in equity risk and spread risk, following the capital transfer. NETHERLANDS – SCILDON

– Scildon has reported a cash loss in the year, owing to a reduction in Own Funds. NETHERLANDS – WAARD – The steep widening of spreads in the second half of the year compounded the valuation losses on Italian bonds reported earlier in 2018, driving down the – The Waard Group has continued to supply stable cash generation, with value of Own Funds. positive movements in both Own Funds and capital requirements. – Own Funds also include the impact of strengthening mortality assumptions – The growth in Own Funds was primarily a consequence of lower mortality in the year. experience and subsequent reductions in assumed mortality lapse rates. – Capital requirements moved favourably to partially offset the reduction in Own – Falls in lapse risk and counterparty default risk underpin the reduction in the Funds. Investment market conditions had a positive impact with exposure capital requirement. to spread risk and equity risk shrinking materially in the second half of the year. This also drove signiﬁcant favourable movements in lapse risk.

CHESNARA ANNUAL REPORT AND ACCOUNTS 2018 37

LB5111 Chesnara 2018 Sec B_Strategic_AW_Stg8.indd 37 04/04/2019 12:43 R Linked to remuneration – see the Remuneration report on pages 101-136.

FINANCE Strategic report Strategic Total shareholder Performance Associated risks return R (TSR)1,2 As per last year, TSR performance over the – Market risks, such as variability in commodity five-year period was driven principally by prices and exchange rates. % over five years movements in commodity prices and changes – Stakeholder risks, including the actions of in the global macro environment. The share joint-venture partners, third parties and prices of Rio Tinto plc and Rio Tinto Limited governments. 2014 60.7 remained relatively flat in 2018. Rio Tinto 2015 (18.2) outperformed the EMIX Global Mining Index Link to executive remuneration Disclosures on the sources and uses of cash over the five-year period, but significantly Reflected in long term incentive plans, measured 25 2016 (40.7) underperformed the MSCI World Index. equally against the EMIX Global Mining Index and 2017 5.8 the MSCI World Index (see page 109). Relevance to strategy Interaction with regulation 2018 33.4 Our strategy aims to maximise shareholder Forward plan returns through the commodity cycle, and We will continue to focus on generating the free Both the examples on cash generation from the Many of the disclosures we highlight areTSR derived is a direct measure of that. cash flow from our operations that allows us to previous pages are from companies within the fromDefinition (or work alongside) the regulatory reporting return cash to shareholders (short-term returns) Combination of share price appreciation (using while investing in the business (long-term returns). insurance industry, and in this case specifically the life requirementsannual average share of their prices) industryand dividends regulator. paid insurance segment. Throughout this report you will Neverthelessand reinvested to they show therepresent total return some to the of the more shareholder over the preceding five years. find examples from the insurance and utilities’ sectors. interesting cash generation (and use) disclosures Due to their very long time horizons, and the complex currently in the market. Whilst they may be more interaction between shareholder returns and prudent than many companies need, such disclosures were

protection of the wider stakeholders/policyholder well1 received The chart above by reflects a wideTSR for the range five-year ofperiod investors (many shown. In last year’s Annual report, the equivalent interest, the regulators of these industries have of whomcharts reflected focus annual on TSRother values. industries). We therefore 2 The TSR calculation for each period is based on the focused companies on the protection of capital. considerchange themin the calendar useful year average examples share prices to for demonstrate Rio Tinto plc and Rio Tinto Limited over the preceding This has led to a general focus within these companies attributesfive years. Thisvalued is consistent by withinvestors. the methodology used for calculating the vesting outcomes for (and therefore their investors) on unencumbered Performance Share Awards (PSA). The data presented in this chart accounts for the dual cash generation. corporate structure of Rio Tinto.

Cash generation – forward guidance Net cash generated Performance Link to executive remuneration While companies are concerned about providing 3 Net cash generated from operating activities of Included in the short term incentive plan; in from operating activities $11.8 billion was 15% lower this year, primarily the longer term, the measure influences TSR forward guidance (especially those with US listings) for $ millions due to higher tax payments related to 2017 which is included in long term incentive many, understanding where cash will be generated from profits and adverse working capital movements. plans (see pages 108 and 109). in the future is a key element of their investment story. 2014 14,286 Therefore providing some disclosure that covers this is Relevance to strategy Forward plan 2015 9,383 This KPI measures our ability to convert We aim to generate additional free cash flow from very useful. underlying earnings into cash. our five-year productivity programme (2017 to 2016 8,465 2021). We expect the programme to deliver at Investors consider that companies could do more; 2017 13,884 Associated risks least an additional $1.5 billion of incremental for investors, there is a distinction between narrative – Market risks, such as variability in commodity cash flow from 2021, and in each year thereafter. 2018 11,821 prices and exchange rates. that provides broad indications and detailed specific – Operations, projects and people risks, forecasts. While they would value detailed guidance, including improvements in productivity. a more high-level directional narrative that may focus Definition – Stakeholder risks, including the actions Cash generated by our operations after tax of joint-venture partners, third parties on trends and policies, for example, is still helpful and and interest, including dividends received from and governments. perhaps more in line with companies' comfort level. equity accounted units and dividends paid to Ideally investors would like this disclosure integrated non-controlling interests in subsidiaries. throughout the annual report, from business model to strategy to viability. However, investors recognise that companies might be more comfortable providing What is useful? this within presentations such as those supporting the Rio Tinto provides the historical context for net cash generation as well as highlighting how it feeds into executive remuneration targets. annual results or capital markets' days. By also providing detail on associated risks, as well as the company’s forward plan, they provide some forward direction. Rio Tinto Plc Annual Report 2018 Rio Tinto 2018 Annual report

3 Accounting information is extracted Quick read Introduction 1 Focusfrom the financial statements. on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring Key performance indicators Annual report 2018 | riotinto.com 21

2018 Annual report Disclosures on the sources and uses of cash 26

Like many of the areas that investors identify, their Connecting cash and working expectations for the level of focus and detail in these Reverse factoring and payment capital disclosures is dependent on the industry and the practice company’s position in the economic cycle. When the project began, it was not considered As well as understanding how companies generate cash, What information is missing? that working capital facilities such as factoring, to fully understand the health of a business, investors reverse factoring or supplier chain finance would Overall, investors did not identify working capital also need to understand a company’s approach to be a significant area of focus. However, a number disclosures as a particular issue. However, areas where working capital. Without sufficient and well controlled of the investors that we interviewed raised working capital, a company will struggle to balance investors did have more concern were: specific concerns about the quality of disclosure growth, liquidity and solvency. • Wher e businesses within a single company had very in these areas. This report includes an example of different working capital requirements or approaches, What questions are investors looking to answer? good disclosure from AstraZeneca plc (page 29). However, many investors raised concerns that In the previous section we saw that investors want to • Where changes to working capital processes were driving overall cash generation, and those making the most use of these types of understand how a business model generates cash, but facilities were less forthcoming. To assist in moving cash is only part of the story. The importance of the • Wher e a specific approach to financing, such forward, the Lab has created an example that meets interaction between profit, cash, trade debtors and as factoring or reverse factoring needed to be many investors’ needs in this area. Alongside the trade creditors are areas where investors want more understood to properly comprehend the company’s example disclosure, Appendix A provides further information. approach to working capital (see box). discussion and explanation about the nature and Investors participating in this project noted that Investors considered that these were often areas where prevalence of reverse factoring. they seek disclosures that help them understand the companies’ disclosures were not fulsome, were opaque, As the project was concluding, the Department particular company and its relationships so that they or were not evident at all. can better model its future value. They also want to for Business Energy and Industrial Strategy, understand how changes in those relationships flow Whilst preparers are rightly concerned about the released a paper on Creating a responsible through to the business, allowing them to better creation of overly onerous or detailed disclosure, they do payment culture appreciate current performance and future risks. appreciate that giving more disclosure (especially when a business or its approach is evolving) would enhance This paper (amongst other aspects) explained What information is important? investor understanding. that the Government would work with the FRC to develop guidance on disclosure around supply Disclosures that help investors understand standard The rest of this section provides examples from the chain financing. approaches to working capital are: project that investors found useful in highlighting an aspect of the above. • Information about trade debtors, such as debtor days, • Information about trade creditors, such as creditor days, • Information about inventory such as inventory days, and • Information about working capital management practices.

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring Strategic report Chief Executive Officer’s reviewcontinued

£753m Housing Housing revenues 2018 2017 H1 H2 FY H1 H2 FY 5.0% Revenue £m 374.9 378.3 753.2 402.1 364.0 766.1 Housing margin Operating profit £m 19.0 18.6 37.6 20.8 18.7 39.5 Operating profit margin % 5.1% 4.9% 5.0% 5.2% 5.1% 5.2%

Disclosures on the sources and uses of cash 27 The Housing division reported revenues of £753.2m, The revenue for the full year was slightly lower than a slight reduction against the previous year. our expectations at the start of the year of a firm and Encouragingly the half year on half year progress shows probable revenue of £770m. In maintenance, some revenues increasing following the sharp reduction in the revenues expected to be delivered in 2018 were re- second half of 2017. As expected, it was a quiet period phased and will be delivered into 2019 in agreement with for new contract mobilisations, following the slow period our partners, Milton Keynes being the most significant of new bidding success in 2017. The recently acquired example. Our development activities experienced a business of MPS contributed revenues of £9.0m in the one Whatchallenging is useful? last quarter – whilst the primary focus has Strategic report Strategic month that it was part of the Group. 2018 Accounts and Report PLC Annual Group Mears been working in partnership with Housing Associations, In andthis theextract development Mears provides of affordable a narrative homes, description this activity of how different parts of the Housing division operates and support this with numeric disclosure. This helps investors understand the The division generated an operating margin of 5.0%, with dynamicsdoes incorporate of the business an element better of privateand provides sales, which a bridge most between the group's overall strategic intentions and what it means for individual components of the business. the second half margin (4.9%) reflecting both the initial Transforming housing AnnualHousing Report Associations and Annualrequire to Performancemake the overall schemeReport, 2017/18 impact of MPS together with costs expensed in respect viable. The Development business experienced a significant of the AASC bidding and mobilisation. slowdown in private sales in the lead-in to the year end, withnegatively impacting care on both revenues and working capital. The Housing division comprises three core activities: 2018 2017 Financial statements Corporate governance Maintenance, Management and Development. MearsHistorically Group PLCthe Group has pursued a strategy focusing£117m on Increasingly there have been opportunities to deliver Annualearnings Report growth and whilst Accounts keeping 2018 within the strict Careconfines revenues Operating Operating Revenue profit Margin Revenue profit Margin a combination of these services which we term as of Housing. Whilst good working capital management £m £m % £m £m % ‘placemaking’. It is critical to the Group’s success that has been a cornerstone of the Group, equally cash has not Maintenance 578.7 28.0 4.8% 606.2 32.6 5.4% Housing is operated and managed as a single division, been allowed to constrain the Group’s evolution.3.2% However, Care margin Management 135.4 8.5 6.3% 133.8 5.7 4.3% with the different specialisms combining to deliver the as the Group’s Housing business has evolved, it should be Development 39.1 1.1 2.8% 26.1 1.2 4.6% optimal outcome. However, in broadening our Housing recognised that the different activities within Housing have activities, it has become harder to explain the underlying significantly different working capital requirements: Total 753.2 37.6 5.0% 766.1 39.5 5.2% performance, and, importantly, provide stakeholders with a better understanding of the growth expectations and ~ Maintenance (representing 77% of divisional revenue in ~ Management (representing 18% of divisional revenue a simple contracting relationship, work can be invoiced risks attached to each area and, particularly in the current 2018) is a high volume and low value activity. Given the in 2018) is lower volume with the most significant during the course of construction although typically as environment, the related working capital requirements. requirement to measure, review, inspect and value a transactions being linked to collecting and paying projects approach their conclusion, the receipts become large number of works orders, the invoicing cycle cannot property rentals. Typically both rental receipts and slower. Some mixed tenure developments include units It must be recognised that, increasingly, opportunities be rushed or short cuts taken. Accordingly, it is not payments are paid monthly in arrears such that the that are subject to private sale and Mears funds the are being secured that require a full asset management unusual for a period of 90 days between completion business operates on a low working capital requirement. build cost of those units until their sale. The direct works service that does not slot easily into a single category. of work and receipt of income although the average is ~ Development (representing 5% of divisional revenue are entirely subcontracted, being paid in around 30 days Rather than artificially allocating revenues and profit closer to 70 days. On the positive, the measurement of in 2018) is based on low volume but high value from invoicing and as a result, this area of our Housing across each category, all revenues and profit are assigned revenues is very secure and there is minimal bad debt

transactions. Where developments are being built under activities can absorb high levels of working capital. informationShareholder to the predominant category. Given that the Housing risk. The cost base includes specialist subcontractors Management activities incorporate an element of and merchant suppliers with varying payment terms The working capital allocation and returns of each activity are set out below: maintenance, whilst the maintenance growth in isolation averaging 40 days. As a result, typically around 30 days’ may appear low, at times this will simply reflect a change work is absorbed in working capital. 12-month in allocation more than a change in activity. average Return on Operating working working profit capital capital £m £m employed* Maintenance 28.0 19.0 >100% Management 8.5 1.7 >100% Development 1.1 15.6 7%

*Trade receivables less trade payables.

Looking ahead into 2019, there will be a change of priorities The Group has broadened its service capability in recent for Mears. We will refocus our capital allocation on those years to include the provision of Housing Development, Quick read Introduction Focus on drivers Disclosures supporting Appendix 1 1areas which deliver the best returns whilst2 Disclosures being mindful supportingprimarily targeting3 existing clients, as part of the holistic of the strategic impact such changes maythe have sources upon of cashservice offeringthe to them. use of However, cash the working capitalReverse factoring the Group’s future opportunities. The relatively modest absorbed in this area has been higher than expected, and working capital requirements of our core maintenance whilst the financial returns could be considerably higher and management activities, combined with their attractive than their current levels, the working capital currently rnfrighousing Transforming 16 Mears Group PLC Annual Report and Accounts 2018 returns on capital, indicate that these are two core areas allocated to this area could be better deployed elsewhere where the Group should focus its attention. or used to reduce current net debt levels. The Board will keep this area under close review going forwards. The property acquisition facility of £30m was introduced in The current pipeline of works will unwind over the coming 2017 to enable the Group to acquire and build portfolios of three years although the Group will endeavour to accelerate properties prior to disposal to a long term funding partner. that process, especially for those contracts which have the This provided the Group with an ability to accelerate the highest working capital intensity. The reasons for offering flow of properties into its Housing Management operations a development capability were compelling and remain together with an additional profit opportunity at the point so. The Group will continue to explore ways in which it with care with of transfer. The funding requirement is high, relative to can contribute to its clients’ housing development needs, our resources, and the flow of profits irregular. Whilst the but in a way which creates value for both parties without property acquisition facility has been useful, its cancellation significant working capital consequences for Mears. over the course of 2019 will have a low strategic impact.

Mears Group PLC Annual Report and Accounts 2018 17 Disclosures on the sources and uses of cash 28

Free cash flow impacted by working capital What is useful? In this extract from their investor presentation, Johnson Matthey breaks down the impact that working capital has had, by segment, on free cash flow. They then provide further detail for each Free cash flow (£m) segment.Presentation of results for the th Halfsix Year months Investor ended Presentation 30 September 2018 2018

Half year ended 30th September 2018 2017 21st November 2018

Underlying operating profit 271 250

Depreciation and amortisation1 79 77

Precious metal working capital outflow (283) (156)

Non precious metal working capital outflow (76) (91) Pgm refinery downtime impacted precious metal working capital Other working capital outflow (32) (17)

Net working capital outflow2 (391) (264) Precious metal (pm) working capital (£m)

Net interest paid (23) (19) 800 Pm working capital increased £267 million1, Tax paid (48) (45) 700 mainly in pm inventory 600 Capex spend (96) (81) 500 Other 2 (8) 400 Impact from pgm refinery downtime Free cash flow (206) (90) 300 • Expect a significant reduction in pm working capital by year end 200

1. Excluding amortisation of acquired intangibles and restructuring impairments 100 2. Includes movements in provisions 13 0 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18

1. Balance sheet movement 14

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring Business Review Return to Growth continued

stock locations, and assessment of the Manufacturing capabilities opportunity for supplier substitution. We Our principal tablet and capsule formulation continue to consider further mitigation activities sites are in the UK, Sweden, China, Puerto with a focus on clinical trials and manufacturing Rico and the US, with local/regional supply given the risk arising from the mix of goods and sites in Russia, Japan, Indonesia, Egypt, 29 services, and the associated cross-border UK/ India, Germany, Mexico and Brazil. We We have 29 Operations sites in EU and EU/UK movements. While we continue also have major formulation sites for 17 countries to make progress, it is possible that adverse the global supply of parenteral and/or Disclosuresevents on willthe impactsources supplier and uses activities. of cash Issue inhalation products in the US, Sweden, 29 management may therefore play a key element France, Australia and the UK. Most of the in our ability to maintain safe supply of our manufacture of APIs is delivered through medicines and ongoing business operations the efficient use of external sourcing 260 more generally. that is complemented by internal Completed more than 260 major capability in Sweden. or strategically important business In addition, as part of our planning to manage transactions in the last three years, Whatthe impact is useful? of the UK leaving the EU, we have For biologics, our principalWhat commercial is useful? including 80 in 2018 engaged with regulators and government to manufacturing facilities are in the US In theseensure extracts, they have from a clear the view2018 on Annual the potential Report, (Frederick, MD; Greater ThePhiladelphia, trade and other payables note provides AstraZenecaimpact on highlights pharmaceutical the existence supply chains. of the We supply PA), the UK (Speke), andcontext the Netherlands for the scheme by showing two years of chainhave financing made significant program, efforts its rationale, to duplicate and our high- (Nijmegen), with capabilitiescomparatives, in process and clarifies that the group have UK testing capability within the EU and to development, manufacturingassessed and thedistribution nature of the balances,630 and considers level details of its working. They also provide links to furtherimplement disclosure system withinchanges other necessary sections to of the of biologics, including globalthem supply to be correctlyof mAbs classified. We have more than 630 collaborations worldwide reportfacilitate with compliancemore detail. with EU law once the and influenza vaccines. In Sweden, our new UK becomes a third country. Furthermore, biologics drug product manufacturing facility we have revised our logistics plans (including became available at the end of 2018. shipping routes) and built additional inventory in anticipation of some level of border WhatAs part of our ongoing review19science Trade of and other payables “As part can of our planning do congestion to reduce the risk of disruption manufacturing capabilities and capacity, 2018 2017 2016 to manage the impact $m $m $m of supply to patients. in January 2019, we made the decision to AstraZenecadiscontinue Annualoperations atCurrent Reportthe Boulder liabilities andand Form 20-Fof Information the UK leaving 2018 the Supply chain financing Longmont, CO manufacturingTrade payables facilities to EU, we have engaged 1,720 2,285 1,680 AstraZeneca has a supply chain finance increase efficiencies in Valueour global added biologicsand payroll taxes and social security 204 243 240 programme to support the cash flow of its supply chain. This step willRebates, consolidate chargebacks, our returns and other revenuewith accruals regulators and 4,043 3,264 3,601 supply base. This programme, in partnership biologic drug substanceClinical manufacturing trial accruals government to ensure 993 922 696 with Taulia Inc. and Greensill Capital, provides network to one large-scaleOther drug accruals substance they have a clear view 3,951 3,324 2,714 suppliers with visibility of invoices and facility, the Frederick Manufacturing Center, Externalisation revenue contract liabilities on the potential impact 92 – – payment dates. Suppliers can access MD. The closure of the sitesContingent is expected consideration to 867 555 527 this platform free of charge and have full be completed by the end of 2019 and will not Other payables on pharmaceutical 971 1,048 1,028 optionality and flexibility on an invoice by impact the supply or global availability of any Total 12,841 11,641 10,486 invoice basis to request early payment of of our biologic medicines. We will be working supply chains.” invoices. On election of an early payment, with the impacted employeesNon-current to provide liabilities a charge is incurred by the supplier based outplacement and transitionAccruals support. 7 143 292 on the period of acceleration, central bank Externalisation revenue contract liabilities 78 – – interest rate, and the rate agreed between For small molecules we haveContingent constructed consideration 4,239 4,979 4,930 Taulia Inc. and each supplier. All early a new small-scale developmentAcerta Pharma and launch put option liability (Note 25) 1,838 1,823 1,901 payments are paid by Greensill Capital, and facility alongside our existingOther manufacturingpayables 608 895 2,365 AstraZeneca settles the original invoice facility in Wuxi, China. ThisTotal investment 6,770 7,840 9,488 amount with Greensill Capital at maturity supports the acceleration of delivery of new of the original invoice due date. innovative medicines to patientsThe Group in Chinahas revised and the presentation of Trade and other payables in 2018 to separately present clinical trial accruals, returns and other revenue completes our ability to executeaccruals across that have the historically been presented within Trade payables (see the Group Accounting policies section from page 153). The Group has also We believe this programme offers a benefit whole life-cycle of medicinesseparately from discoverypresented the Acerta put option that has historically been presented within Other payables. to our suppliers, as it provides visibility and to commercialisation. flexibility to manage their cash flow, and the Included within Rebates, chargebacks, returns and other revenue accruals are contract liabilities of $126m (1 January 2018: $138m). The revenue rates offered can be preferential to their cost At the end of 2018, approximatelyrecognised 13,000 in the year for contract liabilities is $139m, comprising $104m relating to other revenue accruals and $35m Externalisation Revenue of funding. The programme is currently live in people were employed atcontract 29 Operations liabilities. the US, UK, Sweden and Germany. As of sites in 17 countries. Trade payables includes $166m (2017: $64m; 2016: $nil) due to suppliers that have signed up to a supply chain financing programme, under which December 2018, the programme had 2,548 the suppliers can elect on a invoice by invoice basis to receive a discounted early payment from the partner bank rather than being paid in line with suppliers enrolled, and a potential early the agreed payment terms. If the option is taken the Group’s liability is assigned by the supplier to be due to the partner bank rather than the supplier. payment balance of $166 million. The value of the liability payable by the Group remains unchanged. The Group assesses the arrangement against indicators to assess if debts

which vendors have sold to the funder under the supplier financing scheme continue to meet the definition of trade payables or should be classified Statements Financial For more information on supply chain financing, as borrowings. At 31 December 2018 the payables met the criteria of Trade payables. see Note 19 on page 177.

For more information on Ethical supply chain The Acerta Pharma put option liability is remeasured each period, based on the latest assessment of the expected redemption amount with management, see from page 45. remeasurements taken to Selling, general and administrative costs (see Note 2). Interest arising from amortising the liability is included within Finance expense (see Note 3). The expected redemption amount is dependent on the accumulated profits of Calquence to the point of redemption, which Quick read Introduction mayFocus vary on materially drivers dependent on factors such as revenues earned, research Disclosuresand development supporting expenditure, regulatoryAppendix approvals 1 received, and 1 certain other expenses of Acerta Pharma2 Disclosures B.V. and its supportingsubsidiaries. 3 the sources of cash the use of cash Reverse factoring The Group has adopted IFRS 15 Revenue from Contracts with Customers from 1 January 2018 under the modified retrospective method. Consequently, the Group has presented Externalisation revenue contract liabilities prospectively from that date. With the exception of Contingent consideration payables of $5,106m (2017: $5,534m; 2016: $5,457m) which are held at fair value within Level 3 of the

34 AstraZeneca Annual Report & Form 20-F Information 2018 / Strategic Report fair value hierarchy as defined in Note 11, all other financial liabilities are held at amortised cost with carrying value being a reasonable approximation of fair value. Contingent consideration 2018 2017 2016 $m $m $m At 1 January 5,534 5,457 6,411 Settlements (349) (434) (293) Revaluations (495) 109 (1,158) Discount unwind (Note 3) 416 402 497 At 31 December 5,106 5,534 5,457

Contingent consideration arising from business combinations is fair valued using decision-tree analysis, with key inputs including the probability of success, consideration of potential delays and the expected levels of future revenues. Revaluations of Contingent consideration are recognised in Selling, general and administrative costs and include a decrease of $482m in 2018 (2017: an increase of $208m; 2016: a decrease of $999m) based on revised milestone probabilities, and revenue and royalty forecasts, relating to the acquisition of BMS’s share of the Global Diabetes Alliance. Discount unwind on the liability is included within Finance expense (see Note 3). Management has identified that reasonably possible changes in certain key assumptions, including the likelihood of achieving successful trial results, obtaining regulatory approval, the projected market share of the therapeutic area and expected pricing for launched products, may cause the calculated fair value of the above contingent consideration to vary materially in future years. The contingent consideration balance relating to BMS’s share of Global Diabetes Alliance of $3,983m (2017: $4,477m; 2016: $4,240m) would increase/decrease by $398m with an increase/decrease in sales of 10% as compared with the current estimates.

AstraZeneca Annual Report & Form 20-F Information 2018 / Notes to the Group Financial Statements 177 Disclosures on the sources and uses of cash 30

Group vs entity Cash generation within groups Providing stakeholders with clarity The Lab’s early work on dividend disclosure showed that Investors are interested in the overall capacity of a group Thames Water is one company that provides there is often limited disclosure about the generation to generate cash, but also want to understand where stakeholders with an overview of its funding and of cash at the holding company level, not least because within the group the cash was generated, especially returns. most of the FTSE 100 opt not to present a holding for credit investors. This understanding is particularly company Income Statement. The document is primarily aimed at customers important where a group contains operations that are Because many investors are ultimately interested in subject to capital management restrictions, either due to and wider stakeholders, but they also receive positive feedback from investors. returns via dividends, information about the sources location, regulation, or other hard or soft impediments of the holding company’s dividend resources is crucial (such as joint venture structures or pension obligations). They have produced a separate stakeholder- to investors. This is especially the case where there is The nature of any such restrictions or impediments focused summary of key financing information a different nature to the income/cash that is supplying might also mean that there is wider stakeholder interest Our finances explained, since 2014. They started the holding company than that being generated at a outside of the traditional investor community, such producing the supplement after receiving press subsidiary level (eg. operating income versus investment as regulators, pensioners or the wider public. Some and public focus on their corporate structure. income). companies answer these disclosure needs through the Dividends are covered in more detail in the use of cash annual report; others publish specific documents that section of this report. However, this section includes an provide an overview of their financing and how this example that provides investors with clarification of how translates into the flow of returns (see box) or hold debt generated cash moves from the operating business to focused investor days. the holding company. Our finances explained. November 2018

“It is not just good enough for me to know how much is generated, where it is generated makes a big difference to my assessment” Investor

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring Thames Water Annual Report and Annual Performance Report 2018/19 27 Strategic report

Borrowings carrying value – £m The increase in the deficit is mostly driven by a The Trust Deed provides the Company with The associated net finance expense has change in actuarial assumptions, specifically a an unconditional right to a refund of surplus decreased by £44.7 million to £364.7 million decrease in the discount rate for both schemes, assets assuming the full settlement of plan (2018: £409.4 million), which has been driven by the resulting in an actuarial loss. In addition to this, liabilities in the event of a plan wind-up. lower RPI accretion on borrowings. Some of our we recognised a past service cost in the current Furthermore, in the ordinary course of business interest expense is incurred in relation to borrowings year income statement of £9.0 million relating the Trustee can only force a wind up once all raised to deliver major capital projects. to Guaranteed Minimum Pensions (“GMP”) benefits have been distributed and any surplus Governance which has been discussed in more detail in taken by the Company. Based on these rights, Under IFRS accounting rules we are able to the GMP section. any net surplus in the scheme is recognised in capitalise the interest costs related to major full. We have therefore restated our pension capital projects with the finance expense in As part of the last triennial valuation, dated figure for the previous year, such that our net the income statement being shown net of 21 March 2016, a recovery plan to reduce the deficit pension deficit reduced from £300.8 million to these capitalised costs. to zero was agreed with the trustees. The Company £250.2 million following the recognition of the has agreed to make deficit repair payments of Capitalised interest costs were £109.3 million £50.6 million TWMIPS surplus, at 31 March 2018. £22.0 million (indexed) per annum until 2027. this year (2018: £100.7 million). The triennial valuation dated 31 March 2019 will be undertaken by Aon (the schemes’ actuaries). Guaranteed Minimum Pensions

Pensions The deadline for completing this is 30 June 2020, On 26 October 2018, the High Court Financial statements We operate three pension schemes for our but is expected to be performed earlier. concluded on the case involving the Lloyds employees – two defined benefit schemes (Thames 1 The net deficit on our defined benefit schemes for Banking Group’s defined benefit pension schemes. Water Pension Scheme (“TWPS”) and Thames 31 March 2018 was restated following the recognition of Guaranteed Minimum Pensions (“GMPs”) Water Mirror Image Pension Scheme (“TWMIPS”)) the previously unrecognised TWMIPS pensions scheme built up in our pension schemes between their surplus which is discussed in more detail below. and one defined contribution scheme. During the commencement and 5 April 1997. They form year ended 31 March 2019, we contributed a part of the overall pension and needed to be £11.0 million (31 March 2018: £8.1 million) Recognition of pension surplus provided before April 1997 as a condition of our to our defined contribution scheme. (TWMIPS scheme) opting out of the earnings related part of the In previous years, the Directors had reviewed state pension, as a result of which Thames Water Our defined benefit scheme accounting valuation the scheme rules of the defined benefit pension Utilities Limited and the pension scheme members has been updated to 31 March 2019 on our

schemes and concluded that for the TWMIPS paid reduced rate national insurance contributions Annual performance report behalf by independent consulting actuaries, scheme, the provisions of IFRIC 14 applied. up to April 2016. GMPs are subject to increase in Hymans Robertson LLP. This resulted in a restriction of the surplus for the payment and in deferment at different rates from The total net retirement benefit obligation for scheme and as such no surplus was recognised. the increases to benefits in excess of GMP. Disclosuresthe two schemes on the sources as at and31 Marchuses of cash2019 was Our retirement benefit obligations consisted of Even though state pension ages are now the 31 £293.0 million (restated 2018: £250.2 million1), a deficit within the TWPS scheme and a restricted same for men and women, GMPs for women are which includes a pension deficit of £338.8 million surplus1 in the TWMIPS scheme. generally higher than those for men. Despite the (2018: £300.8 million) for the TWPS scheme,

Annual Report and Annual Performance Report 2018/19 Report Performance Annual and Report Water Annual Thames equalisation of state pension ages, GMPs are offset by a pension surplus of £45.8 million Following a review into our approach, the Directors still required to come into payment on the 60th (restated 2018: £50.6 million) for the TWMIPS have concluded that a different interpretation birthday of women and the 65th birthday for scheme and we have been taking measures of IFRIC 14 provided a truer, fairer picture of our men. As such, GMPs are unequal between men to reduce the overall deficit including regular pension scheme arrangements for our stakeholders. and women of identical ages, salary histories contributions and deficit repair payments. and periods of service. The Lloyds case requires this inequality to be remedied and has given rise to additional pension liabilities for the Group. 26 Thames Water Annual Report and Annual Performance Report 2018/19 Our actuaries, Hymans Robertson LLP have Dividends factored in the cost of equalisation into the Chief Financial Officer’s statement continuedaccountingWhat isvaluation useful? as at 31 March 2019. £78m Kemble Water Financing costs on ThisThames has resulted Water provides in a past detail service about cost how recognised dividends and loan repayments flow through the various Buildingin keythe components2018/19 income of the statement group understanding of £6.8 million of how thea business is using cash for debt repayment Finance Limited external debt forand TWPS returns. and £2.2The disclosure million for also TWMIPS, clarifies a totalthat no dividend is due to external shareholders until £78m inter-company loan repayment of2020/21, £9.0 million which across gives the users two some schemes. indication of flows into the future. £21m £3m Annual Report and Annual Performance Report 2018/19 Dividend from other Thames Water Working capital better future group company Limited requirements Brandon Rennet £60m inter-company loan interest AnnualChief Financial OfficerReport and Annual impacts profit. We only use derivatives for risk 27Dividends June 2019 Borrowings carrying value – £m Thames Watermanagement purposes and both the debt and PerformanceDuring the year, we paid dividends Report of 2018/19 Utilities Holdingsderivative contracts are generally held until £60.0 million (2018: £55.0 million) to our Limited maturity, so there is no cash impact due to these immediate parent company, Thames Water £60mchanges. dividend This year, we made a loss on financial Utilities Holdings Limited (“TWUHL”), with all instruments of £37.7 million (2018: gain of of the current year dividends being applied to Thames Water£40.9 million). The loss of £37.7 million this year servicing debt obligations and working capital Utilities Limitedwas comprised of exchange losses on foreign requirements of other companies within the currency denominated debt of £68.0 million due Kemble Water Group. to a weakening in sterling, offset by gains arising No dividends were paid by the Kemble Water on swaps of £64.5 million and a £34.2 million Holdings Group to external shareholders for loss due to a cash flow hedge being transferred 2018/19 in line with our commitment to withhold from equity. paying an external dividend until 2020/21. GBP EIB loans 858.3 US Private Placements 1,187.5 This commitment will continue to help us GBP index-linked bonds 2,656.8 Cash flow increase our equity buffer1 and broaden financial GBP ﬁxed rate bonds 5,177.2 Foreign currency bonds 385.3 Underlying net cash generated from operating resilience, to improve our service to customers. GBP other loans 1,352.5 activities for the year ended 31 March 2019 1 Equity buffer is defined as the regulatory capital value less was £1,085.7 million, and therefore broadly net debt. consistent with £1,065.1 million generated in the year term (and two one-year extension options). previous year. Taxation This upsizing was strongly supported by our In 2018/19, we paid over £211 million in business relationship bank group. Through Kemble Water Capital expenditure rates, national insurance contributions, PAYE and Finance Limited, a holding company within the Quick read Introduction Focus on drivers Disclosures supporting Appendix 1 During the year,1 we invested a total of 2 Disclosuresother taxes. Wesupporting incurred £147 million3 directly, wider group, around £650 million of new Sterling the use of cash Reverse factoring £1,188.7 million (31 March 2018: £1,148.8 million) themainly sources through of cashbusiness rates, and collected debt was committed in November 2018 (of which in our assets. The total investment by area is £64 million on behalf of our employees. As in prior £310.0 million was drawn at 31 March 2019 summarised, by area, in the table below. years, we have not paid any corporation tax to and £340.0 million in April 2019), using the bank and private placement markets. £400 million of Non HMRC primarily because of interest costs and tax infra- Infra- relief for our capital investment programme. this was used to refinance the £400 million bond Area structure structure Total guaranteed by Kemble Water Finance Limited The 2018/19 corporation tax charge of which was repaid in April 2019. The remaining Water (£m) 304.5 268.1 572.6 £8.9 million consists of a deferred tax charge amount, roughly £250 million, was used to de-gear Waste (£m) 377.7 238.4 616.1 of £4.6 million and a current tax charge of Thames Water Utilities Limited in April 2019. £4.3 million, the latter of which arises because This is in line with the de-gearing plan outlined Total (£m) 682.2 506.5 1,188.7 Thames Water Utilities Limited pays for tax in our business plan. Key projects within the above capital losses from other Group companies, which should expenditure include: ultimately benefit customers through lower tax funding in future regulatory settlements. Financing our investment • £52.9 million on our metering programme (water) The overall tax charge is lower than the prior year As we continue to invest heavily in the business, • £92.2 million on connecting our network due to the decrease in accounting profits. our statutory net debt (as defined on page to the Thames Tideway Tunnel 178) has increased by £638.3 million to • £29.6 million on a customer relationship £11,619.8 million (2018: £10,981.5 million). management and billing system Credit ratings This has been accompanied by an increase in the • £26.9 million on our scheme aimed to reduce In May 2018, Moody’s affirmed our Baa1 Regulatory Capital Value (“RCV”) of £568.9 million the risk of flooding (waste) Corporate Family Rating (“CFR”) but placed us to £14,273.7 million (2018: £13,704.8 million), • £31.9 million on upgrading our sewage on negative outlook (31 March 2018: negative meaning that overall gearing (on a covenant treatment works at Deephams (waste) outlook). This continues to align with our ratings basis*), as at March 2019 before the £250 million of A3 and Baa3 for our Class A and Class B debt cash injection in April 2019, was 82.2% respectively. The change to negative outlook (2018: 81.3%), below the mandated maximum Bad debt reflects a change in assessment of the stability of 95.0%. Additionally, our PMICR (see PMICR Bad debt arises predominantly from those and predictability of the UK water regulatory definition on page 178) in 2018/19 was 1.6x who choose not to pay their bill, despite being regime rather than a reflection of Thames Water (2018: 1.6x) and was above the mandated financially able to, as opposed to those who specifically. In July 2018, S&P re-affirmed our credit minimum of 1.1x. cannot pay. This year we had an overall increase rating of BBB+ and BBB- (31 March 2018: BBB+ & in bad debt cost of £5.1 million to £62.6 million BBB-) in respect of our Class A debt and our Class We continue to borrow through external public (2018: £57.5 million). This is split between bad B debt respectively and placed us on negative and private debt capital markets and through debt relating to current year bills (amounts outlook (31 March 2018: stable outlook). We retain financial institutions across a diverse range of that are not expected to be collected when credit ratings that allow us to access efficiently currencies, geographies and sources. The past invoiced) of £33.4 million, which is shown as a priced debt to fund our investment programme, year has seen us continue to focus on increasing deduction in revenue, and bad debt relating to whilst keeping bills affordable for our customers. diversity including the issue of a further bills from prior years of £29.2 million, which is £227 million equivalent US Private Placement shown within operating expenses. The overall which was priced in January and funded in April increase in bad debt is attributed to increased Financing arrangements 2019 along with a number of new bilateral risk from debt relating to non-household bills pre- In anticipation of our 2020 to 2025 investment loans. The overall debt mix is shown on page 26, market opening. programme and being financially prudent, we have excluding the impact of intercompany swaps: increased the size of our RCF from £950 million to * Ratio of covenant net debt to Regulatory Capital Value around £1.65 billion during the year, with a five (“RCV”) defined on page 304. Disclosures on the sources and uses of cash 32

Section 3 Disclosures supporting the uses of cash

What investors want: Cash disclosures that

Provide a clear description of the drivers of current (and future) performance and position, in the context of cash, supported by appropriate metrics.

And further detailed disclosures on:

The sources of cash The uses of cash

Which explain Which cover Which link Which explain Which support Which highlight how the the drivers of to strategy, a framework understanding relevant risks, company’s performance working capital of priorities of the priorities restrictions and business model that generated and risks for the cash in action. variabilities. generates cash. cash in the to allow an generated. current period. assessment of future cash generation.

All underpinned by strong processes, controls and clearly communicated assurance.

Investors want cash disclosures that:

Through our discussions, investors identified three areas Provide detail on uses of cash, both in the for improvement: past and in the future. • Disclosure that clarifies priorities for generated and available cash, Why investors are interested • Disclosure to allow assessment of the priorities in “It is the bit we like Once investors have considered how a company action, and talking about the most, generates cash and the quality and sustainability • Clearer explanation of how the priorities are impacted our plans… It is all the most of that generation, they then want to understand by relevant risks, restrictions and variabilities. interesting stuff” what a company intends to do with it. Investors use this to help value the business, and also to support The remainder of this section of the report will consider Company their consideration of the quality of management’s each of these areas in more detail. stewardship. As the 2018 strategic report guidance notes:

“For many companies, determining how a company allocates capital may be a principle decision. These capital allocation decisions could include considering “It is the kind of stuff working capital requirements, investment, capital they generally do well… expenditure, research and development, capital what they are going to do with distribution, and investment in skills and training” the money” Investor Given the significance of the decisions, investors and other stakeholders clearly need information that supports their understanding of policy, process and risks. Many investors and companies in this project felt that in general disclosure about the use of cash was good, either in annual reports or other communications such as investor day presentations. However one area in which further improvement was desired by investors was information that supported users in their own assessments of the future uses of cash.

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring Disclosures on the sources and uses of cash 34 Priorities for generated and Investors and frameworks Investors taking part in this project were either neutral What the market thinks available cash on frameworks, or considered that these approaches, The Investment Association (IA) undertook a when done well, were a useful starting point to their project with their members which detailed the At its simplest level, capital allocation is a balance assessment of a company. However, they note that such expectations of the investment community on between maintaining and growing the business, and frameworks should be used and applied consistently various aspects of Long Term Reporting. providing resources to other stakeholders. across time and across communications. Multiple and competing descriptions of priorities are unhelpful. One of the key areas that the report looked at Differing considerations of the relative priorities will lead was capital allocation. The IA report highlighted to a very different view for investors (and stakeholders) Investors note that a framework disclosure in itself that how well a company utilises its capital has when assessing a company. That is why information is not sufficient to give them a full understanding. To a significant impact on its long term profitability about how companies balance different options and better understand, they also need the framework to be and success. Therefore a key aim for investors stakeholder needs/expectations is useful. supported by evidence of how the priorities are playing out within the current period, and disclosure about is to understand the company’s approach in Preparers recognise that, whilst most boards will have how the board makes capital allocation decisions and making capital allocations decisions. Companies clear priorities for the use of cash and capital, it may prioritisations. can support investors in this aim through well- not be well articulated within the bounds of an Annual articulated and reasoned narrative on key Report. This is particularly likely when priorities were set decisions, supported by qualitative information some time ago, or where differing businesses within a that allows them to assess the decisions. group make it difficult to align to a single set of priorities. However, many businesses have more recently taken These findings were consistent with this project, to creating more structured disclosure, often in the where investors noted that, whilst frameworks form of a capital allocation framework. This approach is are useful, many would benefit from additional particularly prevalent where companies are launching focus around the decision making process. a new or refreshed strategy. Whilst often the disclosure 2 of a framework provides only a high-level picture of a “We used to get lots of The full report is available on the IA website . company’s allocation priorities, it can serve to focus questions about our priorities, investor and management conversations on key aspects especially as cash grew, but once 2 https://www.ivis.co.uk/media/12519/Long-Term-Reporting- of the business. As such users often welcome relevant we explained our framework and Guidance.pdf disclosure. When the capital priority disclosures are disclosed it all, investors became more connected and linked across disclosures and documents focused on outcomes” (both inside and outside of the annual report), they can Company also help users navigate the company’s approach.

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring STRATEGIC REPORT

DisclosuresSTRATEGIC on REPORT the sources and uses of cash 35 CAPITAL ALLOCATION FRAMEWORK CAPITAL ALLOCATION FRAMEWORK

Burberry’s Capital Allocation Framework is used to prioritise the use of cash generated by the Group. The framework addresses the investment needs of the business, regular dividend payments and additional returns to shareholders. The framework also seeks to maintain an appropriate capital structure for the business and a strong balance sheet with solid investment grade Burberry’scredit metrics. Capital The Allocation diagram Frameworkbelow summarises is used theto prioritise key priorities. the use of cash generated by the Group. The framework addresses the investment needs of the business, regular dividend payments and additional returns to shareholders. The framework also seeks to maintain an appropriate capital structure for the business and a strong balance sheet with solid investment grade credit metrics. The diagram below summarises the key priorities. REINVEST FOR PROGRESSIVE STRATEGIC RETURN EXCESS ORGANIC GROWTH DIVIDEND POLICY INVESTMENTS CASH TO What is useful? SHAREHOLDERS REINVEST1 FOR PROGRESSIVE2 STRATEGIC3 RETURN4 EXCESS Burberry has a clear and high-level disclosure on their capital allocation framework that highlights ORGANIC GROWTH DIVIDEND POLICY INVESTMENTS CASH TO SHAREHOLDERS the relative priorities for the use of cash. The framework is further supported with narrative of how 1 2 3 4 they applied the framework in 2018/19. The disclosure makes cross-reference to how the priorities • Capital spend • Committed to • Investment in structural • Review future across store maintaining or changes to our business cash generation to connect with principal risks and how these are then assessed when considering viability. portfolio, including growing the activities that typically tend to reflect Burberry’s • Capitalnew space, spend • Committeddividend in to pence • Investmentbe infrequent. in structural • Reviewgrowth, future The framework is also clearly mirrored in the Investor Results Presentation's cash walk, acrossrefreshes store and maintainingterms year or •changes In September to our 2018,business we cash generationproductivity and to adding to the consistency of reporting. portfolio,refurbishments; including growingon year. the activitiescompleted that the typically acquisition tend of to a reflectinvestment Burberry’s plans, newIT infrastructure, space, •dividend Deliver regularin pence bedivision infrequent. of our long-standing growth,while taking into refreshesincluding and digital; termscash returns year to • InItalian September partner 2018, to create we a new productivityconsideration and Burberry PLC Annual Report 2019 and Investor Results Presentations refurbishments;and the supply on year.shareholders. completedleather goods the acquisitioncentre of of a investmentthe external plans, IT infrastructure,chain. • Deliver regular divisionexcellence, of our covering long-standing activities whileenvironment. taking into including digital; cash returns to Italianfrom prototyping,partner to create product a new consideration and the supply shareholders. leatherinnovation, goods engineering centre of and the the external chain. excellence,coordination covering of production. activities environment. from prototyping, product innovation, engineering and the coordination of production.

Maintain a strong balance sheet with solid investment grade credit metrics.

Maintain a strong balance sheet with solid investment grade credit metrics. • Review the principal risks of the Group and relevant financial parameters, both historical and projected, including liquidity, lease-adjusted net debt and measures covering balance sheet strength and fixed charge cover. • These risks and financial parameters are considered by the Board when assessing the viability of the Group, as set out • Reviewon page the 74. principal risks of the Group and relevant financial parameters, both historical and projected, including liquidity, lease-adjusted net debt and measures covering balance sheet strength and fixed charge cover. • These risks and financial parameters are considered by the Board when assessing the viability of the Group, as set out on page 74. Capital structure metrics FY 2018/19 FY 2017/18 Net cash £837m £892m Lease-adjusted net debt (£409m) (£327m) Capital structure metrics FY 2018/19 FY 2017/18 Net cash £837m £892m Lease-adjustedBurberry has applied net debt its capital allocation framework during the year ended 30 March 2019 as follows: (£409m) (£327m)

• Reinvested £110 million into the business as capital expenditure. Burberry• Increased has appliedits full-year its capital dividend allocation by 3% toframework 42.5p. during the year ended 30 March 2019 as follows: • Paid £14.5 million upon completion of the acquisition of a luxury leather goods business, to create a leather goods centre • Reinvestedof excellence £110 in millionItaly. Payments into the business of £11.1 million as capital were expenditure. made in the year in respect of the acquisition of a non-controlling interest • Increasedin Burberry its Middlefull-year East dividend LLC. by 3% to 42.5p. • •PaidReturned £14.5 milliona further upon £150 completion million to of shareholders the acquisition via aof share a luxury buyback leather programme. goods business, to create a leather goods centre of excellence in Italy. Payments of £11.1 million were made in the year in respect of the acquisition of a non-controlling interest in Burberry Middle East LLC. • Returned a further £150 million to shareholders via a share buyback programme. 72

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring

ϳ ϳ Contents Strategic Report Directors’ Report Strategy and Operations Our Board 44 Making a difference to: Corporate Governance 46 Sustainable supply chains 02 Remuneration Report 69 The changing population 04 Directors’ Report 90 The changing environment 06 The future 08 Financial Statements Chair’s Statement 10 Independent Auditors’ Report 94 Business Model 12 Group Consolidated 100 Our Stakeholders 14 Statements Chief Executive’s Review 16 Group Accounting Policies 105 Our Strategy 20 Notes to the Group Accounts 112 Company Financial Statements 138 Performance and Financials Notes to the Company 140 Key Performance Indicators 24 Financial Statements Sector Review 26 Sustainability 30 Other Information Finance Review 34 Related Undertakings 145 Risk Management 38 Shareholder Information 148 Five Year Record 150 Glossary of Terms 151

Sales NPP % Group sales £1,386.9m (constant currency) 2017: £1,373.1m 28.2% 2017: 27.6% Core Business sales growth Energy from (constant currency) non-fossil fuels +3.8% 21.1% 2017: 24.1% IFRS profit before tax (PBT) Safety (Total Recordable Injury Rate) £317.8m 2017: £314.1m 0.72 2017: 0.71 Adjusted PBT growth (constant currency) Making a +6.2%

Ordinary dividend difference (proposed full year) Disclosures on the sources and uses of cash +7.4% 36

Annual Report and Accounts 2018

Our Strategy continued

Strategic Report Our Strategy continued How we invested in 2018 Good capital discipline What is useful? Croda’s disclosure ‘Stretching the Growth’ focuses on accelerating sales Delivering a strong cash flow is core to our strategy; it Strategic Report in our core sectors; creating more technology, new enables us to invest in R&D, faster growth technologies How we invested in 2018 providesGood an overview capital discipline and protected products and intellectual property; that are both organic and acquired, expand production of their key priorities and taking a disciplined approach to capital allocation. capacity and pay increased dividends. ‘Stretching the Growth’ focuses on accelerating sales andDelivering then provides a strong cash flow is core to our strategy; it in our core sectors; creating more technology, new additionalenables usdetail to investabout in R&D, faster growth technologies In line with our disciplined capital allocation policy, we invest in high capital return opportunities to deliver superior shareholder value. We seek to deliver high quality returns, measured through a superior Return on Invested Capital (ROIC), earnings growth and strong cash and protected products and intellectual property; that are both organic and acquired, expand production In order to achieve this, we are investing in six key areas. returns. The Group’s capital allocation policy is to: what this means and taking a disciplined approach to capital allocation. capacity and pay increased dividends. in practice, with In line with our disciplined capital allocation policy, we invest in high capital return opportunities to deliver superior shareholder value. examplesWe seek to from deliver high the quality returns, measured through a superior Return on Invested Capital (ROIC), earnings growth and strong cash Sustainability Greater R&D Premium niches Reinvest for Provide regular Acquire Maintain In order to achieve this, we are investing in six key areas. returns. The Group’s capital allocation policy is to: leadership We have a relentless focus on innovation. Many of our markets are experiencing growth by: returns to promising appropriate current year and key In constant currency, new and protected a ‘flight to premium’. We continue to We are passionate about sustainability, shareholders by: technologies to: balance sheet relevant metrics. product (NPP) sales have grown by 85% experience high levels of demand for our because it is the right thing to do and and return Reinvest for Provide regular Acquire Maintain since 2012, from 20.5% of total sales to Sederma anti-ageing skin actives, which Sustainability Greater R&D Premium niches an integral part of how our sustainable 28.2% today. Personal Care has the richest is why we have recently doubled R&D and excess leadership We have a relentless focus on innovation. Many of our markets are experiencing growth by: returns to promising appropriate ingredients add value to our customers’ The disclosure is innovation, with NPP sales accounting for enhanced production capacity. We have In constant currency, new and protected a ‘flight to premium’. We continue to shareholders by: technologies to: balance sheet products. Our bio-surfactants plant will see capital to: We are passionate about sustainability, product (NPP) sales have grown by 85% experience high levels of demand for our further enhanced 43% of total sector sales. increased capacity in our solar protection because it is the right thing to do and and return the launch of our ECO range of sustainably since 2012, from 20.5% of total sales to Sederma anti-ageing skin actives, which business to support the growth of our an integral part of how our sustainable focused ingredients. 28.2% today. Personal Care has the richest is why we have recently doubled R&D and by being located in excess Life Sciences has a healthy innovation Solaveil™ range of ingredients. ingredients add value to our customers’ innovation, with NPP sales accounting for enhanced production capacity. We have pipeline and is expected to deliver products. Our bio-surfactants plant will see the context of the capital to: The publication of the United Nations 43% of total sector sales. increased capacity in our solar protection fast growth in NPP sales. Performance We are expanding manufacture of our the launch of our ECO range of sustainably Sustainable Development Goals (SDGs) business to support the growth of our Technologies has increased its proportion high purity excipients as demand continues • Investing in capital • Paying a regular dividend • Supplement organic • Meet future investment and focused ingredients. strategy and business is providing growth opportunities for our Life Sciences has a healthy innovation Solaveil™ range of ingredients. of NPP sales to 18% as the sector to grow rapidly. In Brazil, we invested in projects to grow sales, representing 40% to 50% growth in existing and trading requirements; with business. The SDGs are a commitment pipeline and is expected to deliver model disclosures. transitions to a higher technology business. capacity for our Crop Care adjuvants, typically each year spending of adjusted earnings over adjacent markets • A target leverage of 1.0 to The publication of the United Nations to tackling some of the more pressing fast growth in NPP sales. Performance We are expanding manufacture of our providing us with new exciting opportunities. 1.5x depreciation the business cycle. • Enhance our strong 1.5x (excluding deficits on Sustainable Development Goals (SDGs) challenges facing the world today and, in Technologies has increased its proportion high purity excipients as demand continues On the• Investing opposing in capital • Paying a regular dividend • Supplement organic • Meet future investment and We continue to invest in our global R&D In the UK, we are expanding our polymer • Increasing product innovation product pipeline. retirement benefit schemes). is providing growth opportunities for our 2018, our Executive Committee worked of NPP sales to 18% as the sector to grow rapidly. In Brazil, we invested in projects to grow sales, representing 40% to 50% growth in existing and trading requirements; with capabilities with new facilities in North additive manufacturing capacity. innovation business. The SDGs are a commitment page, the company with Cambridge Institute for Sustainability In 2018 the Board has transitions to a higher technology business. capacity for our Crop Care adjuvants, typically each year spending of adjusted earnings over adjacent markets • A target leverage of 1.0 to America, China and Singapore. We have • Expanding in attractive to tackling some of the more pressing Leadership to develop our sustainability proposed: In 2018 we: In 2018: providing us with new exciting opportunities. 1.5x depreciation the business cycle. • Enhance our strong 1.5x (excluding deficits on also enhanced our R&D capabilities at challenges facing the world today and, in also highlights key geographic markets. • Acquired Nautilus, a marine After the acquisition of We continue to invest in our global R&D In the UK, we are expanding our polymer strategy in alignment with the SDGs. • An increase of 7.4% in the 2018, our Executive Committee worked • Increasing product innovation product pipeline. retirement benefit schemes). Sederma and expanded our crop biotechnology company Biosector, leverage increased capabilities with new facilities in North additive manufacturing capacity. full year dividend to 87.0p with Cambridge Institute for Sustainability investmentsinnovation from 2018 In 2018 the Board has care facility in Brazil. In 2018 we have invested America, China and Singapore. We have (2017: 81.0p) • Acquired Plant Impact, a to 1.1x. In light of our strong Leadership to develop our sustainability • Expanding in attractive proposed: In 2018 we: In 2018: 2x depreciation in: also enhanced our R&D capabilities at which gives further • A special dividend of biostimulants business performance and improving strategy in alignment with the SDGs. geographic markets. • An increase of 7.4% in the • Acquired Nautilus, a marine After the acquisition of Sederma and expanded our crop • Funding asset replacement 115.0p per share. • Acquired Biosector, cash generation, the Board is full year dividend to 87.0p biotechnology company Biosector, leverage increased care facility in Brazil. relevant areas for • New investment in a leading adjuvant proposing a return of £150m In 2018 we have invested (2017: 81.0p) • Acquired Plant Impact, a to 1.1x. In light of our strong Innovation Partnering Disruptive Technology- Digitalisation key technologies specialist for human excess capital to shareholders users2x depreciationto consider. in: • A special dividend of biostimulants business performance and improving • Completing the and veterinary vaccines by way of a special dividend. • Funding asset replacement 115.0p per share. • Acquired Biosector, cash generation, the Board is Our Open Innovation and Smart Partnering led acquisitions Digitalisation is an emerging construction of our • Invested in SiSaf, a The effect of this return would • New investment in a leading adjuvant proposing a return of £150m Programmes continue to evolve. We now differentiator for our business, creating We continue to invest in disruptive pioneering bio-surfactants novel drug delivery have been to increase the 2018 Crodakey technologies Annual specialist for human excess capital to shareholders have more than 450 partners, comprising many opportunities. We have invested Innovation Partnering Disruptive Technology- Digitalisation technology as part of our strategy to plant in North America. technology company year-end leverage towards the • Completing the and veterinary vaccines by way of a special dividend. over 100 completed and 85 ongoing in global digital resource and established ‘Stretch the Growth’. The integration of • Increased our investment in upper end of the Board’s Our Open Innovation and Smart Partnering led acquisitions Digitalisation is an emerging Reportconstruction of and our • Invested in SiSaf, a The effect of this return would projects with academics, universities, a Digital Centre of Excellence to take Programmes continue to evolve. We now differentiator for our business, creating an innovative technology provider of static Cutitronics, the multi-award target range. We continue to invest in disruptive pioneering bio-surfactants novel drug delivery have been to increase the 2018 start-ups and technology enterprises. advantage of this fast-evolving have more than 450 partners, comprising many opportunities. We have invested electricity dissipation for electronic and winning digital device technology as part of our strategy to plant in North America. technology company year-end leverage towards the In 2018 we acquired Nautilus, from digital world. over 100 completed and 85 ongoing in global digital resource and established Accounts 2018 • Increased our investment in upper end of the Board’s automotive applications, IonPhasE, is company. ‘Stretch the Growth’. The integration of one of our smart partners. projects with academics, universities, a Digital Centre of Excellence to take Cutitronics, the multi-award target range. nearing completion. This acquisition has an innovative technology provider of static We focus our efforts on better start-ups and technology enterprises. advantage of this fast-evolving winning digital device created openings in new fast growing, electricity dissipation for electronic and In 2018 we acquired Nautilus, from digital world. Along with our smart partner Glassflake, connecting with our customers. We ROIC Acquisitions Ordinary Leverage Net capital automotive applications, IonPhasE, is company. niche end markets. one of our smart partners. we developed and launched a range created entrepreneurial cells in Digital dividend expenditure nearing completion. This acquisition has of Moonshine™ ingredients in 2018, Marketing and Data Analytics that will drive We focus our efforts on better In Health Care, we acquired Biosector, created openings in new fast growing, a new offering in colour cosmetics. an improved customer experience through Along with our smart partner Glassflake, connecting with our customers. We ROIC Acquisitions Ordinary Leverage Net capital a vaccine adjuvant specialist, seen niche end markets. We also completed an investment our digital channels. In Canada, we opened we developed and launched a range created entrepreneurial cells in Digital dividend expenditure as a natural extension of our existing of Moonshine™ ingredients in 2018, Marketing and Data Analytics that will drive and a commercial arrangement the Nautilus Biosciences Croda Centre of In Health Care, we acquired Biosector, pharmaceutical excipients portfolio. a new offering in colour cosmetics. an improved customer experience through with SiSaf, a pioneering UK based Innovation for Marine Biotechnology. a vaccine adjuvant specialist, seen We also completed an investment our digital channels. In Canada, we opened bio-pharmaceutical company. as a natural extension of our existing and a commercial arrangement the Nautilus Biosciences Croda Centre of 18.2% £82.5m 87.0p 1.1x £103.1m pharmaceutical excipients portfolio. 2017: 19.2% 2017: £30.4m 2017: 81.0p 2017: 1.0x 2017: £157.2m with SiSaf, a pioneering UK based Innovation for Marine Biotechnology. bio-pharmaceutical company. 18.2% £82.5m 87.0p 1.1x £103.1m 2017: 19.2% 2017: £30.4m 2017: 81.0p 2017: 1.0x 2017: £157.2m

Croda International Plc Croda International Plc 22 Annual Report and Accounts 2018 Annual Report and Accounts 2018 23

Croda International Plc Croda International Plc 22 Annual Report and Accounts 2018 Annual Report and Accounts 2018 23 Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring InterContinental Hotels Group PLC Broadwater Park, Denham Buckinghamshire UB9 5HR United Kingdom Tel +44 (0) 1895 512 000 Web www.ihgplc.com Make a booking at www.ihg.com

InterContinental Shanghai Wonderland, China

Strategic Report

Our business model continued

StrategicDisclosures Report on the sources and uses of cash 37 Our business model continued

Disciplined approach to capital allocation

Our asset-light business model is highly Our priorities for the uses of cash are consistent with previous years and comprise of: cash generative and enables us to invest in our brands. We have a disciplined approach to capital allocation ensuring that the business is appropriately invested in whilst maintaining an efficient balance sheet. Beyond this, we look to return surplus cash Invest in Capital investments net ($m) Disciplined approach to capital allocation to shareholders through ordinary and 250 special dividends and share buybacks. the business 226 225 What is useful? 202 Our asset-light business model is highly Our priorities for the uses of cash are consistent with previous years and comprise of: Our objective is to maintain an investment 200 185 cash generative and enables us to invest grade credit rating. One of the measures Through strategic investments and 175 158 IHG has taken a more narrative approach to describing their capital 150allocation priorities. The clear in our brands. We have a disciplined we use to monitor this is net debt:EBITDA our day-to-day capital expenditures approach to capital allocation ensuring 125 anddisclosure we aim for a isratio further of 2.0-2.5x. enhanced The by supportingwe continue detailto drive ofgrowth. net capital investment,100 ordinary dividend that the business is appropriately ratio atprogression 31 December and 2018 shareholder was 1.7x. return. The company also highlights the dividend75 decision for the invested in whilst maintaining an Followingcurrent the period. adoption Thisof IFRS provides 16 ‘Leases’ users with a quick overview. 50 efficient balance sheet. (see page 115), from 1 January 2019 we 25 0 Beyond this, we look to return surplus cash will aim to maintain a net debt:EBITDA Capital investments net ($m) -25 2015 2016 2017 2018 to shareholders through ordinary and Invest in ratioIHG of 2.5-3.0x, Annual which Report is equivalent and to Form 20-F 2018 250 special dividends and share buybacks. the business 226 our guidance under the previous Maintenance capex, key money and 225 202 accounting standard. selective investments Our objective is to maintain an investment 200 185 grade credit rating. One of the measures Through strategic investments and 175 158 System fund capital investments 150 we use to monitor this is net debt:EBITDA our day-to-day capital expenditures Recyclable investments 125 and we aim for a ratio of 2.0-2.5x. The we continue to drive growth. 100 ratio at 31 December 2018 was 1.7x. 75 50 Following the adoption of IFRS 16 ‘Leases’ Final dividend Maintain sustainable Ordinary dividend progression (�) (see page 115), from 1 January 2019 we 25 0 The Board has proposed a final will aim to maintain a net debt:EBITDA growth in the 120 -25 2015 2016 2017 2018 dividend per ordinary share of ratio of 2.5-3.0x, which is equivalent to 78.1¢. With the interim dividend per ordinary dividend 100 our guidance under the previous Maintenance capex, key money and ordinary share of 36.3¢, the accounting standard. selective investments full-year dividend per ordinary 80 IHG has a progressive dividend 11% CAGR 78 System fund capital investments share for 2018 will total 114.4¢. 71 policy which means we look to 60 64 Recyclable investments 58 grow the dividend per ordinary 47 52 40 43 share each year. 39 35 29 29 29 20 26 Final dividend 19 19 3033 36 Maintain sustainable Ordinary dividend progression (�) 17 21 23 25 28 12 12 12 13 16 The Board has proposed a final 0 7 8 8 10 dividend per ordinary share of growth in the 120 2011 2017 2012 2015 2013 2014 2018 2016 2010 2007 2005 2003 2008 2004 2009 78.1¢. With the interim dividend per 2006 ordinary dividend 100 ordinary share of 36.3¢, the InterimInterim Final Final full-year dividend per ordinary 80 IHG has a progressive dividend 11% CAGR 78 share for 2018 will total 114.4¢. “I mean if I could get 71 policy which means we look to 60 64 58 Shareholder returns 2003-18 ($bn) grow the dividend per ordinarysomething like this for all 47 52 40 43 share each year. 39 Return 5.7 13.6 35 the companies I invest29 29 29 in it 20 26 surplus funds 19 19 3033 36 would be great,17 it is simple21 23 25 28 12 12 12 13 16 0 7 8 8 10 but it works” In October 2018, we announced a 7.9 2011 2017 2012 2015 2013 2014 2018 2016 2010 2007 2005 2003 2008 2004 2009 2006 $500m capital return to shareholders InvestorInterimInterim FinalFinal via a special dividend and share consolidation. The special dividend was paid on 29 January 2019.

Shareholder returns 2003-18 ($bn) Return Asset Operational Total 5.7 13.6 disposals cash lows surplus funds

In October 2018, we announced a 7.9 16 IHG | Annual Report and Form 20-F 2018 $500m capital return to shareholders via a special dividend and share consolidation. The special dividend Quick read Introductionwas paid on 29 January 2019. 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash Reverse factoring Asset Operational Total the use of cash disposals cash lows

16 IHG | Annual Report and Form 20-F 2018 Disclosures on the sources and uses of cash 38

To help them answer these questions, particularly for Priorities in action companies that are asset intensive, many investors want Cap-Ex disclosures help show levels of capital expenditure split between relevant 'functions' current investment and provide insight Once investors are clear on management’s priorities, (such as country, product or division) and 'purpose' (such into the quality of current and future they then want information on the prioritisation of these as growth vs maintenance). in the period, and how current decisions might impact cash generation. future flows. Some investors question the value of 'purpose' categories which they view as a subjective split (because Detail regarding capital expenditure, dividends and other of a lack of comparability and consistency across returns are critical to achieving this understanding, as companies); others consider that, if used consistently they help demonstrate whether management actions are within a company, it is useful. Furthermore, many INVESTMENT aligned to the priorities. investors consider that the value of such disclosure is enhanced when it is placed within the audited sections of the annual report. As well as historical information, investors are also keen to obtain information about INVESTMENT future expectations for capital expenditure, as these help SHAREHOLDERS MAINTENANCE to improve the quality of their forecasts. RETURNS Preparers noted that such splits in CapEx only had value where they are aligned to how the business viewed V's V's CapEx itself, and such splits feed into management Investing in the business information, reporting and decision making.

Capital expenditure decisions are often key elements of a We considered a number of examples of disclosure STAKEHOLDERS EXPANSION company’s strategy. Investors note that whilst high-level with investors, and have selected AngloAmerican as disclosure on total capital expenditure is often found an example of detailed accounts-based disclosure, and within the annual report, what is lacking is the detail Carnival, who provide some future orientated disclosure. behind the aggregate numbers. Investors need such disclosure as it helps them to understand both future capacity (and therefore cash flow) and any concern about window dressing from under-investment. One RETURNS way of generating cash within a business is by under- investing in the existing or growth-orientated capital asset. This boosts cash in the short-term, but it is likely to do so at the expense of the longer-term prospects of the business. Disclosures about returns help in the assessment of the future balance between shareholder and other stakeholder.

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring NL MRCNPLC AMERICAN ANGLO INTEGRATED ANNUAL REPORT 2018 NERTDANA EOT2018 REPORT ANNUAL INTEGRATED

UNLOCKING OUR FULL POTENTIAL DISCIPLINED GROWTH FOR A SUSTAINABLE FUTURE

underlying earnings). In line with the policy, the Board We also completed the acquisitions of the remaining 50% proposes a final dividend of 40% of second half underlying interest in the Mototolo joint operation in South Africa from earnings, equal to 51cents per share, bringing the total Glencore and Kagiso Platinum Ventures; and in Canada, the dividends paid and proposed in the year to $1.00 per share. Chidliak Diamond Resource (through De Beers) through the acquisition of Peregrine Diamonds Limited. DISCRETIONARY CAPITAL OPTIONS GROUP CAPITAL EXPENDITURE◊ underlying earnings). In line with the policy, the Board We alsoDiscretionary completed capitalthe acquisitions will continue of theto be remaining considered 50% in a balanced manner, between disciplined growth, upgrades Capital expenditure increased to $2.8 billion proposes a final dividend of 40% of second half underlying interest in the Mototolo joint operation in South Africa from report Strategic earnings, equal to 51cents per share, bringing the total DisclosuresGlencoreto our on and the portfolio Kagiso sources and Platinum and additional uses Ventures; of returnscash and to shareholders. in Canada, the (2017: $2.2 billion), with rigorous capital discipline continuing to be applied to all projects. Sustaining capital increased to 39 dividends paid and proposed in the year to $1.00 per share. ChidliakStrict Diamond and disciplined Resource value (through criteria De are Beers) applied through to the the $2.5 billion (2017: $2.1 billion), driven by stronger average acquisitionassessment of Peregrine of future Diamonds options. WhereLimited. appropriate, we will local currencies, planned additional stay-in-business FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION NOTES TO THE FINANCIAL STATEMENTS seek partners on major greenfield projects, and will avoid DISCRETIONARY CAPITAL OPTIONS expenditure across the Group, in line with our increased committing to too many such projects◊ at the same time. The GROUP CAPITAL EXPENDITURE production base, and increased capitalised development and Discretionary capital will continue to be considered in a Group will also continue to maintain optionality to progress CAPITAL BASE balanced manner, between disciplined growth, upgrades Capital expenditure increased to $2.8 billion stripping expenditure primarily due to longwall productivity

with value-accretive projects, should capital availability Strategic report improvements at Metallurgical Coal and an optimisation to our portfolio and additional returns to shareholders. (2017: $2.2 billion),permit. We will with rigorous consider options capital to upgrade discipline the continuing quality of of the mine plan at Mogalakwena. In 2019, we expect to be appliedour portfolio to all inprojects. a measured Sustaining manner capital and only increased where we to see Strict and disciplined value criteria are applied to the total capital expenditure to increase to $3.8-$4.1 billion after11. PROPERTY, PLANT AND EQUIPMENT continued $2.5 billionvalue, (2017: through $2.1 inorganic billion), opportunities, driven by stronger and disposing average of assessment of future options. Where appropriate, we will utilising the remaining $0.5 billion of capital expenditure Depreciation includes $2,545 million (2017: $2,342 million) of depreciation within operating profit, $97 million (2017: $101 million) of depreciation arising local currencies,assets. This planned approach additional ensures astay-in-business high quality portfolio with seek partners on major greenfield projects, and will avoid funding for Quellaveco from the Mitsubishi subscription. due to the fair value uplift on the pre-existing 45% shareholding in De Beers which has been included within operating remeasurements (see note 8), and expenditurebalanced across exposure the Group, to diverse in line asset with geographies our increased and end $17 million (2017: $9 million) of pre-commercial production depreciation and assets used in capital projects which has been capitalised. committing to too many such projects at the same time. The productionmarkets. base, Where and increasedgrowth and capitalised upgrades do development not meet our and strict Disposals includes disposals of assets, businesses, and transfers to Assets classified as held for sale. Group will also continue to maintain optionality to progress What is useful? strippingcriteria, expenditure any excess primarily cash will due be to considered longwall productivity for additional Capital expenditure◊ with value-accretive projects, should capital availability returns to shareholders. Accounting judgements improvements at Metallurgical Coal and an optimisation InImpairment these testingextracts from the Annual Report, AngloAmerican provides a breakdown of the capital permit. We will consider options to upgrade the quality of of the mine plan at Mogalakwena. In 2019, we expect $ million 2018 2017For the purposes of impairment testing, the recoverable amount of each of the cash generating units (CGUs) or group of CGUs has been determined based on our portfolio in a measured manner and only where we see In July 2018, the Board approved the development of expenditure for the year categorised by strategic orientation (e.g. Sustaining capital vs Growth total capital expenditure to increase to $3.8-$4.1 billion after a fair value less costs of disposal basis. The key assumptions used in determining fair value less costs of disposal are set out in note 7. value, through inorganic opportunities, and disposing of the Quellaveco copper project in Peru, with an expected Stay-in-business 1,617 1,310Projects). Further context is given by a 5yr historical split. utilisingcapital cost the remaining of $5.0-$5.3 $0.5 billion billion. of capitalAt the same expenditure time, and Deferred stripping assets. This approach ensures a high quality portfolio with In certain mining operations, rock or soil overlying a mineral deposit, known as overburden, and other waste materials must be removed to access the orebody. fundingaligned for Quellaveco with the Group’s from the disciplined Mitsubishi approach subscription. to capital Development and stripping 796 586The note in the financial statements also provides a split of the same numbers by segment and balanced exposure to diverse asset geographies and end The process of removing overburden and other mine waste materials is referred to as stripping. allocation, agreement was reached with Mitsubishi to (1) markets. Where growth and upgrades do not meet our strict Life extension projects 245 216reconcilesThe Group defers through stripping costs to ontocash the flow.balance sheet where they are considered to improve access to ore in future periods. Where the amount to be increase its interest in Anglo American Quellaveco S.A. capitalised cannot be specifically identified it is determined based on the volume of waste extracted compared with expected volume for the identified criteria, any excess cash will be considered for additional ◊ Proceeds from disposal of (162) (52) Capital(AAQSA) expenditure from 18.1% to 40% via the issuance of new AngloAmericancomponent of the orebody. This plc determination Integrated is dependent Annual on an individual Report mine’s design 2018 and Life of Mine Plan and therefore changes to the design or Life returns to shareholders. shares. Mitsubishi subscribed $500 million in upfront property, plant and equipment of Mine Plan will result in changes to these estimates. Identification of the components of a mine’s orebody is made by reference to the Life of Mine Plan. The assessment depends on a range of factors including each mine’s specific operational features and materiality. In July 2018, the Board approved the development of $ millionconsideration and an additional $351 2018million to fund2017 its Sustaining capital 2,496 2,060 initial share of capital expenditure, resulting in a total cash Accounting policy the Quellaveco copper project in Peru, with an expected Stay-in-business 1,617 1,310 (1) subscription of $851 million. The Group will receive up to Growth projects 340 168See note 38D for the Group’s accounting policies on property, plant and equipment. capital cost of $5.0-$5.3 billion. At the same time, and (1) aligned with the Group’s disciplined approach to capital Developmenta further $100 and stripping million in net payments796 from AAQSA586 Total 2,836 2,228 conditional on the achievement of certain prescribed allocation, agreement was reached with Mitsubishi to (1) Life extensionthroughput projects rates. As a result of the syndication245 transaction,216 Capitalised operating cash flows (18) (78)12. CAPITAL EXPENDITURE increase its interest in Anglo American Quellaveco S.A. The disclosures in this note include certain Alternative Performance Measures (APMs). For more information on the APMs used by the Group, including the Group’s share of capital expenditure to develop Proceeds from disposal of (162) (52) Total capital expenditure 2,818 2,150definitions, please refer to page 208. (AAQSA) from 18.1% to 40% via the issuance of new Quellaveco is $2.5-$2.7 billion. property, plant and equipment Capital expenditure by segment shares. Mitsubishi subscribed $500 million in upfront (1) Life extension projects and growth projects are collectively referred to as consideration and an additional $351 million to fund its SustainingWe also capital have several smaller scale, high2,496 quality, fast2,060 expansionary capital expenditure. US$ million 2018 2017 payback (3-4 years), organic capital expenditure De Beers 417 273 initial share of capital expenditure, resulting in a total cash Copper 703 665 (1) Growthopportunities projects to improve the existing business.340 For example,168 Platinum Group Metals 496 355 subscription of $851 million. The Group will receive up to ◊ (1) at Debmarine Namibia, a feasibility study is ongoing for the Group historical capital expenditure 2014–2018 Iron Ore 415 252 a further $100 million in net payments from AAQSA Coal 722 568 Total 2,836 2,228 $ billion conditional on the achievement of certain prescribed construction of an additional custom-built diamond mining Nickel and Manganese 38 28 Capitalisedvessel whichoperating is planned cash flowsto add 0.5 Mct (18)per annum from(78) 2023, Corporate and other 27 9 throughput rates. As a result of the syndication transaction, 7 Capital expenditure 2,818 2,150 and a pre-feasibility study is under way for a debottlenecking Reconciliation to Consolidated cash flow statement: the Group’s share of capital expenditure to develop 6.0 Totaland capital expansion expenditure of the Moranbah-Grosvenor2,818 coal handling2,150 and 6 Cash flows from derivatives related to capital expenditure 15 40 Quellaveco is $2.5-$2.7 billion. Proceeds from disposal of property, plant and equipment 162 52 (1) preparation plant to increase capacity by 4-6 Mtpa from 2021. Life extension projects and growth projects are collectively referred to as 5 Direct funding for capital expenditure received from non-controlling interests 374 36 We also have several smaller scale, high quality, fast expansionaryIn addition, capital we expenditure. continue to progress the application of Reimbursement of capital expenditure 31 – 4.2 Expenditure on property, plant and equipment 3,400 2,278 payback (3-4 years), organic capital expenditure innovative concepts and step-change technologies 4 opportunities to improve the existing business. For example, stemming from our FutureSmart Mining™ programme. The Direct funding for capital expenditure received from non-controlling interests represents capital expenditure relating to the Quellaveco project funded by cash ◊ 3 2.8 at Debmarine Namibia, a feasibility study is ongoing for the Group historical capital expenditure 2014–2018 subscriptions from Mitsubishi. This is deducted in order to present capital expenditure on an attributable basis. The remaining $515 million of cash subscription, Group is looking to invest $0.1-$0.5 billion per annum of 2.4 $ billion 2.2 received as part of the Quellaveco syndication transaction, will be offset against capital expenditure on the Quellaveco project in 2019. See note 25 for a full construction of an additional custom-built diamond mining discretionary capital in technology and innovation initiatives 2 vessel which is planned to add 0.5 Mct per annum from 2023, description of the transaction. 7 to drive improvements across our existing portfolio of assets. and a pre-feasibility study is under way for a debottlenecking 1 Reimbursement of capital expenditure relates to funding provided for the development of the Charterhouse Street office. Evaluation6.0 expenditure increased by 38% to $172 million in and expansion of the Moranbah-Grosvenor coal handling and 6 Capitalised operating cash flows 2018 (2017: $125 million) and expenditure on exploration 0 Capital expenditure includes net capitalised operating cash inflows of $18 million (2017: net inflows of $78 million) generated by operations prior to reaching preparation plant to increase capacity by 4-6 Mtpa from 2021. 2014 2015 2016 2017 2018 commercial production for accounting purposes. 5 activities increased 10% to $113 million (2017: $103 million). In addition, we continue to progress the application of Stay-in-business Capital expenditure by category In 2018, the Group4.2 completed a number of transactions, Development and stripping innovative concepts and step-change technologies 4 US$ million 2018 2017 including the sale of our 88.2% interest in the Drayton Expansionary Expansionary 567 306 stemming from our FutureSmart Mining™ programme. The Stay-in-business 1,617 1,310 3 thermal coal mine (on care and maintenance since2.8 2016) Stripping and development 796 586 Group is looking to invest $0.1-$0.5 billion per annum of 2.4 and the Drayton South project in Australia.2.2 In South Africa, Proceeds from disposal of property, plant and equipment (162) (52) discretionary capital in technology and innovation initiatives 2 2,150 (1) The payment, by we completed the sale of the New Largo thermal coal project 2,818 to drive improvements across our existing portfolio ofway assets. of preference and the Eskom-tied domestic thermal coal operations, 1 dividend, will be PGMs’ 33% interest in the Bafokeng Rasimone Platinum Expansionary capital expenditure includes the cash flows from derivatives related to capital expenditure and is net of direct funding for capital expenditure Evaluation expenditure increased by 38% to $172 million in received from non-controlling interests. Stay-in-business capital expenditure is net of reimbursement of capital expenditure. grossed up to take Mine associate, as well as its 11% listed stake in Royal 2018 (2017: $125 million) and expenditure on explorationaccount of the Group0 Bafokeng Platinum, its 85% interest in Union mine and activities increased 10% to $113 million (2017: $103 million).shareholding in 2014 2015 2016 2017 2018 AAQSA. 50.1% interest in Masa Chrome Company. Quick Stay-in-businessread Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 In 2018, the Group completed a number of transactions, Development and stripping the sources of cash Reverse factoring including the sale of our 88.2% interest in the Drayton Expansionary Anglo American plc Integrated Annual Report 20181 4 the use of cash thermal coal mine (on care and maintenance since 2016) and the Drayton South project in Australia. In South Africa, (1) The payment, by we completed the sale of the New Largo thermal coal project way of preference and the Eskom-tied domestic thermal coal operations, 150 Anglo American plc Integrated Annual Report 2018 dividend, will be PGMs’ 33% interest in the Bafokeng Rasimone Platinum grossed up to take Mine associate, as well as its 11% listed stake in Royal account of the Group shareholding in Bafokeng Platinum, its 85% interest in Union mine and AAQSA. 50.1% interest in Masa Chrome Company.

Anglo American plc Integrated Annual Report 20181 4 Based on our historical results, projections and financial condition, we believe that our future operating cash flows and liquidity will be sufficient to fund all of our expected capital improvements, new ship growth capital, debt maturities and dividend payments over the next several years. We believe that our ability to generate significant operating cash flows and our strong balance sheet, as evidenced by our strong investment grade credit ratings, provide us with the ability, in most financial credit market environments, to obtain debt financing.

Sources and Uses of Cash

Operating Activities Financing Activities Our business provided $5.5 billion of net cash from operations during 2018, an increase of $227 million, or 4.3%, 2018 ANNUAL REPORT During 2018, net cash used in financing activities of $1.5 billion was substantially all due to the following: compared to $5.3 billion in 2017. This increase was driven by an increase in customer deposits. During 2017, our • Net proceeds of short-term borrowings of $417 million in connection with our availability of, and needs business provided $5.3 billion of net cash from operations, an increase of $188 million, or 3.7%, compared to for, cash at various times throughout the period $5.1 billion in 2016. This increase was caused by an increase in our revenues less expenses settled in cash. • Repayments of $1.6 billion of long-term debt •Investing Issuances Activities of $2.5 billion of long-term debt • Payments of cash dividends of $1.4 billion What is useful? During•2018, Purchases net cash of $1.5 used billion in investing of Carnival activities Corporation was $3.5 common billion. This stock was and caused Carnival by: plc ordinary shares in •open Capital market expenditures transactions of $2.1 under billion our Repurchase for our ongoing Program new shipbuilding program Carnival provides a high-level narrative on key aspects of uses of cash for the current and prior • Capital expenditures of $1.7 billion for ship improvements and replacements, information technology two years. Carnival also provides a summary of the timing of future commitments and capital During 2017,and netbuildings cash used and inimprovements financing activities of $2.5 billion was substantially all due to the following: •• Net Proceeds repayments from sale of short-term of ships of borrowings $389 million of $29 million in connection with our availability of, and expenditure. •needs Purchase for, ofcash minority at various interest times of throughout $135 million the period •• Repayments Payments of of $39 $1.2 million billion of of fuel long-term derivative debt settlements These are very useful for investors who want to project future cash generation. • Issuances of $100 million of long-term debt under a term loan During•2017, Proceeds net cashof $367 used million in investing of long-term activities debt was under $3.1 an billion. export This credit was facility caused by: •• Payments Capital expenditures of cash dividends of $1.4 of billion $1.1 billion for our ongoing new shipbuilding program Carnival Corporation & PLC Annual Report 2018 •• Purchases Capital expenditures of $552 million of $1.5 of Carnivalbillion for Corporation ship improvements common and stock replacements, and Carnival information plc ordinary technology shares in openand buildings market transactions and improvements under our Repurchase Program • Payments of $203 million of fuel derivative settlements During 2016, net cash used in financing activities of $2.6 billion was substantially all due to the following: During•2016, Net proceeds net cash from used short-term in investing borrowings activities was of $447 $3.3 millionbillion. Thisin connection was caused with by: our availability of, and Capital Expenditure and Capacity Forecast •needs Capital for, expenditures cash at various of $1.9 times billion throughout for our the ongoing period new shipbuilding program Our annual capital expenditure forecast consists of contracted new ship growth capital, estimated payments for •• Repayments Capital expenditures of $1.3 billion of $1.2 of billion long-term for ship debt improvements and replacements, information technology planned new ship growth capital and capital improvements. • Issuancesand buildings of $555 and million improvements of euro-denominated publicly-traded notes, which net proceeds were used for •general Payments corporate of $291 purposes million of fuel derivative settlements (in billions) 2019 2020 2021 2022 •• Proceeds Proceeds of from $987 sale million of ships of long-term of $26 million debt Annual capital expenditure forecast $ 6.8 $ 5.7 $ 5.9 $ 5.4 • Payments of cash dividends of $977 million • Purchases of $2.3 billion of shares of Carnival Corporation common stock and $35 million of Carnival Our annual capacity forecast consists of contracted new ships and announced dispositions. plc ordinary shares in open market transactions under our Repurchase Program 57 2019 2020 2021 2022 Future Commitments Annual capacity forecast 4.6% 5.5% 7.2% 5.2% Payments Due by (in millions) 2019 2020 2021 2022 2023 Thereafter Total Share Repurchase Program and Stock Swap Programs Debt (a) $ 2,633 $ 2,320 $ 1,243 $ 1,203 $ 1,867 $ 2,095 $ 11,360 Under a share repurchase program effective 2004, we are authorized to repurchase Carnival Corporation common Other long-term liabilities reflected — 135 90 73 59 178 535 stock and Carnival plc ordinary shares (the “Repurchase Program”). Effective April 10 and August 27, 2018, the on the balance sheet (b) company approved modifications of the general authorization under the Repurchase Program, which replenished New ship growth capital 4,935 3,849 3,887 3,117 2,110 1,132 19,029 the remaining authorized repurchases at the time of the approvals to $1.0 billion. The Repurchase Program does not have an expiration date and may be discontinued by our Boards of Directors at any time. Operating leases 70 48 46 36 35 180 415 Port facilities and other 311 292 249 172 132 1,097 2,253 In addition to the Repurchase Program, we have programs that allow us to obtain an economic benefit when Purchase obligations 451———— — 451 either Carnival Corporation common stock is trading at a premium to the price of Carnival plc ordinary shares or Carnival plc ordinary shares are trading at a premium to Carnival Corporation common stock (the “Stock Swap Total Contractual Cash $ 8,400 $ 6,644 $ 5,514 $ 4,600 $ 4,203 $ 4,682 $ 34,044 Programs”). For example: Obligations • In the event Carnival Corporation common stock trades at a premium to Carnival plc ordinary shares, we may (a) Includes principal as well as estimated interest payments. elect to sell shares of Carnival Corporation common stock, at prevailing market prices in ordinary brokers’ (b) Represents cash outflows for certain of our long-term liabilities which can be reasonably estimated. The primary transactions and repurchase an equivalent number of Carnival plc ordinary shares in the UK market. outflows are for estimates of our compensation plans’ obligations, crew and guest claims and certain deferred income taxes. Customer deposits and certain other deferred income taxes have been excluded from the table • In the event Carnival plc ordinary shares trade at a premium to Carnival Corporation common stock, we may because they do not require a cash settlement in the future. elect to sell ordinary shares of Carnival plc, at prevailing market prices in ordinary brokers’ transactions and repurchase an equivalent number of shares of Carnival Corporation common stock in the U.S. market. 58 During 2018 and 2017, there were no sales or repurchases under the Stock Swap Programs. During 2016, under the Stock Swap Programs, a subsidiary of Carnival Corporation sold 0.9 million of Carnival plc ordinary shares for net proceeds of $40 million. Substantially all of the net proceeds from these sales were used to purchase 0.9 million shares of Carnival Corporation common stock. Any sales of Carnival Corporation common stock and Carnival plc ordinary shares have been or will be registered under the Securities Act of 1933. Quick read Introduction 1 Focus on drivers 2 DisclosuresFunding Sources supporting 3 Disclosures supporting Appendix 1 theAt Novembersources 30, of 2018, cash we had liquidity of $14.6the billion. use Our liquidityof cash consisted of $710 million of cashReverse and factoring cash equivalents, which excludes $271 million of cash used for current operations, $2.3 billion available for borrowing under our revolving credit facilities, net of our outstanding commercial paper borrowing, and $11.5 billion under our committed future financings, which are comprised of ship export credit facilities. These commitments are from numerous large and well-established banks and export credit agencies, which we believe will honor their contractual agreements with us.

(in billions) 2019 2020 2021 2022 Availability of committed future financing at November 30, 2018 $ 3.4 $ 2.9 $ 2.8 $ 2.4

59 Disclosures on the sources and uses of cash 41 Distributions to shareholders Timing of returns Investors continuously make investment decisions that What the market thinks Where cash is surplus to business requirements, either are optimised for different time horizons. They therefore through the normal operation of the business, or as require specific details about the timetable and nature The Investment Association (representing a part of a disposal, and can be distributed under the of any large or unusual returns (e.g. Special Dividend the Investment Management industry) were capital maintenance regime, companies will often vs Share buyback vs Enhanced ordinary dividend). This recently tasked by Government to investigate either return this to shareholders or use it to meet or is critical to investors in positioning their investment. the prevalence of dividends being paid without a accelerate other stakeholder commitments. These are all Whitbread is a good example of a company that corresponding vote by shareholders. Their report flows of cash outside of the company. provides clarity. The disclosure on the following page highlights that this is surprisingly common. The was published alongside the announcement of a large report also concludes that companies should Investors in this project noted that generating transaction, which generated significant cash. It details consider improving current dividend disclosure: expectations as to when returns will occur, its likely the mix of stakeholders that would obtain some of the quantum and the sustainability of such flows is useful proceeds, and also the timetable for further information. “the IA recommends that all listed companies, to those seeking to value and assess companies. In including those that put a dividend resolution to addition, many investors consider that information on shareholders, should as a minimum, articulate a dividend capacity and resources (Cash and distributable ‘distribution policy’. This policy should set out their reserves) is critical to their assessment of management’s long-term approach to making decisions on the stewardship, and necessary for them to be able to amount and timing of returns to shareholders, properly approve a dividend. including dividends, share buybacks and other Again, this is an area where company disclosure often capital distributions within the context of any falls short. High-level disclosure is of limited value to relevant legal or financial constraints.” investors who would welcome more definitive and Their full report can be found here3 Further detailed information. guidance is expected from the IA in Autumn 2019. Particular areas for improvement include: • Disclosure on the timing and size of any returns, 3 https://www.theia.org/sites/default/files/2019-05/20190528-sh • Disclosure on the availability and nature of dividend areholdervotesondividenddistributionsinuklistedcompanies.pdf resources currently accessible to the parent company, and • Details about risks, restrictions and variabilities that might impact returns in the future. Preparers noted that not all of these issues are relevant to all companies, and therefore the level and detail of disclosure should be dependent upon the importance of each element to the company's specific circumstances.

Proposed sale of Costa 31 August 2018

What is useful? Proposed sale of Costa In these extracts Whitbread provides high-level details of the expected use of the proceeds from PROPOSED SALE OF COSTA | AUGUST 2018 31 August 2018 the sale of a significant subsidiary (Costa). This provides some clarity as to how the proceeds will flow through to stakeholders. The company provided further disclosure in the capital markets day which gave more detail on uses and timing of any returns.

Whitbread Plc Proposed sale of Costa Investor Presentation 2018 and Capital Market Day 2019 PROPOSED SALE OF COSTA | AUGUST 2018

Timeline & proceeds | Completion expected in first half of 2019

1 Long-term structural opportunity 2 Unique model creates value 3 Best-in-class operations 4 Optimising our capital structure Surplus capital | Use of £3.9b Costa sale proceeds Approval timeline Use of proceeds • Separation activity progressing well & Total proceeds £3,900m • Transaction is conditional on • Transaction and separation costs of in line with our expectations Separation & • Agreement with Pension Trustee shareholder and various other approximately £100 million transation costs, £100m tax reached at one-off £380 million approvals contribution • Significant majority of net proceeds to Pension Shareholder offering circular to be be returned to shareholders contribution £380m • Previously committed German • acquisition to complete in Feb’20 Summary | Proposed sale of Costa to The Coca-Cola Company Comitted German distributed as soon as is practicable £300m • Appropriate routes to return proceeds acquisition • Short-term de-leveraging to provide • General Meeting to be held in October considered at completion flexibility for future investment Highly attractive transaction De-leveraging c.£500m 2018 • • A leading international coffee • Aiming to return at least £2.5 billion to benefitting all stakeholders • Pension Trustees and some debtbrand shareholders – subject to any other Return to Almost 4,000 stores in 32 >£2,500m more value-creating alternatives • Completion expected in first half of providers require consultation• shareholders Recognises strategic value in Costa countries 2019 • brand & international potential 92 FEBRUARY 2019 • Strategic progress and future• plansOver 8,000 self-serve 1 Long-term structural opportunity 2 Unique model creates value 3 Best-in-class operations 4 OptimisingCAPITAL our capitalMARKETS structure DAY | • Transaction consideration due at time discussed at capital markets dayExpress in machines Surplus capital | Pursuing a tender offer in June 2019 • Enterprise value of £3.9 billion (16.4x • Growing in-home and of completion early 2019 Costa Sale Buybacks Capital Full-Year AGM Completion started Markets Day Results Costa FY18 EBITDA) wholesale business 19 June 3 January 17 January 13 February 30 April • Significant majority of net proceeds to 4 AUGUST 2018 be returned to shareholders PROPOSED SALE OF COSTA• World’s | largest total Jan’19 Feb’19 Mar’19 Apr’19 May’19 Jun’19 Jul’19 Aug’19 Sep’19 Oct’19 beverage company Tender Offer Tender Buy-back Programme Review & return any Documentation Offer (up to £500m) further surplus capital • Transaction is conditional on • Strong global product, (up to £2 billion) Execution shareholder & other approvals distribution & vending platform • Recognises current share price does not reflect fair value • Whitbread to focus on attractive • Strong opportunities to grow • Can be conducted in a shorter timeframe than buyback programme structural growth opportunities for the Costa brand worldwide • Open to all shareholders to participate & provides choice on how much cash Premier Inn in the UK & Germany (if any) to access • More tax efficient for more shareholders 2 PROPOSED SALE OF COSTA | AUGUST 2018

95 CAPITAL MARKETS DAY | FEBRUARY 2019

Lab comment: Disclosure of Dividends

The Lab’s previous work on dividends: Disclosure The original report recommended specific of dividends – policy and practice showed that enhancements to dividend policy and dividend practice Lab project report: disclosures that allowed investors to understand a disclosures that would be of value to investors. These Disclosure of dividends – company’s policy on dividends, and the capacity to include: maintain that policy over the medium-term, were policy and practice November 2015 fundamental to their assessment of stewardship (in Dividend policy disclosures – Lab project participants the current period) and the longer-term value and identified good disclosure as providing: sustainability of the company. • an understanding of the board’s considerations in Financial Reporting Council Investors considered that good dividend disclosures setting the policy, should answer the following questions: • the rationale for the approach selected, and Original report • Why this policy? • sufficient detail to understand how the policy will • What will the policy mean in practice? operate. • What are the risks and constraints associated with Dividend practice disclosures – Lab project this policy? participants identified good disclosure to include: Lab implementation study: Disclosure of dividends – • What was done (in practice) to deliver under the • the key judgements and constraints considered by policy and practice policy? the board in applying the dividend policy, December 2016 The investors taking part in this project echo the same • the availability of dividend resources, including cash conclusions; understanding dividends is critical to and distributable profits, to pay dividends (this was understanding the company. considered particularly useful in situations where Lab implementation study: either was a constraining factor), and Disclosure of dividends – However, not all companies provide sufficient policy and practice disclosure to allow investors to fully assess dividends • clear linkage from the disclosed policy to its October 2017 in the current or future periods. application in the period. Bringing together various elements of disclosure to provide a focused narrative was considered helpful to investors. For more details of our findings please read the original reports or the implementation Implementation studies studies:

Disclosure on the availability and nature from the rest of the group, greaterPg48 clarity of dividend resources about where those resources are within the Lab example Audit Committee focus group is welcomed by investors. For investors The Lab’s previous work on dividends: this is not purely about the affordability Pg34 This year, as part of the audit committee's focus on supplier risk, the Disclosure of Dividend –committee Policy and undertook practice a deep diveof on the our current reverse factoring proposed scheme dividend/policy. As part of showed the availability ofthis dividend process we: resources, (although this is important), it is also about including cash and distributable profits, to understanding the interaction between pay dividends was a key •pieceConsidered of information the accounting forthe the schemeunderlying versus businesses, other reverse their factoring ability to £3m from many investors and wasschemes considered and relevant accountinggenerate guidance cash and literature,and furnish that cash to the Within • Looked at the underlying terms of the scheme, C&CR plc particularly useful in situations• Considered where the use the of the schemeholding by the company company throughoutfor wider the use; year, this and directly current or future availability of dividend impacts on valuation. resources was likely to be a constraining factor. It was also an area of practice Supplierwhere DuringPlus Facility the project Usage we considered a number Circa £30m disclosure was often poor or non-existent.400 of examples that attempted to answer investors' questions on dividend resources. Within C&CR plc’s In the intervening period, the demands350 by directly held subsidiaries investors for better disclosure in this 300area Whilst we found disclosures (in Drax) that

£M'S conveyed the link between the holding have grown. 250 company’s dividend and cash from below 200 A number of investors taking part in this the holding company, and disclosures which 150 project also raised issues in this area. Whilst Q1 linkedQ2 cash generationQ3 andQ4 affordability Circa £330m there have been moves made by companies2018 315 of dividend334 (Chesnara)350 we345 did not find Within companies below the directly held 2017 310 259 267 295 to clarify the availability of resources to pay disclosures that covered the location of subsidiaries but within the consolidation dividends, often by stating• Looked the at amounthow the schemein the fittedcash in withwithin our broadera group. commitments To show whatto strong might parent entity, this is frequentlysupplier donerelationships only and ourbe obligations possible under in thisrelevant area, regulation. the Lab created an where resources are abundant. In situations example based on the discussions we held The structure of cash and liquid resources as at the 31/12/2018 where the parent relies Afteron dividend conducting resources the review the committeewith investors was satisfied and companieswith the treatment (see and box). disclosure of the facility. In future periods the committee will instruct internal Dividend resources audit to build reviews of the scheme into the standard rotational work program. Clear & Concise Reporting plc, as the parent holding company of the group, holds limited cash resources directly, with most of the cash and liquid resources deployed in the operating subsidiaries. As such, when considering the group’s ability to pay dividends, the directors consider first the availability of cash and distributable profits in the parent company as well as in the directly What is useful? held subsidiaries. Whilst we consider that cash held below the direct subsidiary is ultimately In this example, constructed by the Lab, Clear and Concise Reporting plc highlights where the cash available to the group, we consider that the time frame and process involved in remitting that to resources are within the group, and provides narrative that covers the impact that this has on the overall group means that it should not be considered in our shorter term dividend consideration. Although dividend capacity of the company. This level of disclosure would be helpful in situations where cash (and/or at the year end the company had enough distributable profits (£40m) to pay the proposed dividend distributable profits) are a constraining factor, or information about the overall group structure is important (£20m) it did not have enough cash resources. The directors of Clear Concise London (one of to understand the group’s ability to support dividends. the group's directly held subsidiaries) announced on the 01/01/2019 that they would be paying a dividend to Clear & Concise Reporting plc of £18m. The dividend was received on the 03/02/2019. Given the post balance sheet receipt of the Clear Concise London dividend, the directors of Clear & Concise Reporting plc consider it appropriate to propose the £20m dividend for 2018. Clear & Concise Reporting Plc accounts p120

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring SECTION A

Strategic report Governance Financial statements Shareholder information

Disclosures on the sources and uses of cash DIVIDEND HISTORY VALUE GROWTH 45

14 SUCCESSIVE YEARS OF DIVIDEND GROWTH £626.1M OF ECONOMIC VALUE We recognise the importance of providing stable and attractive Value growth*6. CALLED-UP is achieved SHARE through CAPITAL a combination continued of efficient dividends to our shareholders. A full year 2018 dividend of 20.67p managementThe ofmovement the existing in allottedpolicies, andacquisitions fully paid and share writing capital of the Company during the year was as follows: per share represents an increase of 3% on the prior year, and profitable new business. The growth, shown here since is Chesnara’s fourteenth successive year of dividend growth. incorporation, includes £148m of new equity since 2004 but is Years ended 31 December net of £298m of cumulative dividend payments. The value of 2018 2017 the group is affected by investment market conditions at any (number) (number) given pointAt in 1 time,January with the closing 2018 position reflecting falls 407,034,429 406,700,321 in equity and bond values that were witnessed during the year. What is useful? IssuedWhat under is employee useful? share schemes 158,739 334,108 Drax Group plc Group Drax 723 Chesnara shows how the cash generated by the group Dividend(adjustedper share forhistory exceptional items) relates to Value growthAtDrax’s 31 December disclosure in the parent company’s accounts clarifies that, whilst the407,193,168 top company has407,034,429 Pence per share £m 626 20.7 603 19.5 20.1 the level of dividends that the company pays to the shareholders. This provides investors18.4 with18.9 sufficient distributable profits to pay out the proposed dividend, the company will need cash 17.4 17.9 16 SECTION A 16.4 16.9 The Company has only one class of shares, which are ordinary shares of 11 ⁄29 pence each, carrying no right to fixed income. 15.6 16.0 information about the affordability of the dividendSECTION A policy in the15.1 period. The company also juxtaposes resources from its subsidiaries.455 This provides investors with an understanding as to where the 13.1 No shareholders have waived their rights to dividends. 12.5 417 the disclosure by highlighting that its primary responsibility11.9 is to its policyholders, and therefore dividend resources (cash376 and distributable profits) that fund the proposed dividend will come 355 Annual report and accounts 2018 accounts and report Annual Enabling a there is a balance between shareholder returns and policyholders. Issuedfrom. under employee295 share311 schemes 263 From January to December 2018 a total of 158,739 shares were issued in satisfaction of options vesting in accordance with the rules of 189 176 the 187Group’s183 Savings-Related Share Option Plan. Of the shares issued, 42,874 were issued to individuals who have left the Group where Chesnara Annual Report and Accounts 2018 126 Drax Annual Report and Accounts 2018 zerodiscretion was used tocarbon, vest the shares. 2004 2005 2006 2007 2008 2009 2010 2 011 2012 2013 2014 2015 2016 2017 2018 2004 2005 2006 2007 2008 2009 2010 2 011 2012 2013 2014 2015 2016 2017 2018

*Value is basedThe on Embedded total cash Value received, principles up split until 2015,between thereafter nominal it is based value on and share premium, is shown in the statement of changes in equity on page 183. Economic Value (see page 39 for further information). The transition from Embedded Value to Economiclower Value resulted in only a modest cost change in valuation. Full details of share options outstanding are included in note 6.2 to the consolidated financial statements. DIVIDEND HISTORY VALUE GROWTH DIVIDEND HISTORY V ALUECASH GROWTH GENERATION POLICYHOLDERS7. DISTRIBUTABLE RESERVES energyNote 8 sets out the proposed final future dividend of £33.6 million in respect of 2018. SUCCESSIVE YEARS OF DIVIDEND GROWTH M OF ECONOMIC VALUE CASH GENERATION CONTINUES TO OUR PRIMARY RESPONSIBILITIES REMAIN 14 £626.1SUCCESSIVE YEARS OF DIVIDEND GROWTH M OF ECONOMIC VALUE 14 £626.1SUPPORT DIVIDENDS TO OUR POLICYHOLDERSThe Company considers its distributable reserves to be comprised of the profit and loss account less treasury shares, with a total value We recognise the importance of providing stable and attractive Value growth* is achieved through a combination of efficient of £233.6 million. Accordingly, the Company considers itself to have sufficient distributable profits from which to pay the current year dividends to our shareholders. A full year 2018 dividend of 20.67p mWeanagement recognise of the the importance existing policies, of providing acquisitions stable and and writing attractive Value Ultimatelygrowth* is achievedthe group through needs ato combination generate cash of efficient to service its – Customers can be confident that they have policies with a per share represents an increase of 3% on the prior year, and profitabledividends newto our business. shareholders. The growth, A full year shown 2018 heredividend since of 20.67p managementdividends. of theWe existing define cashpolicies, generation acquisitions as the and movement writing in the well capitalisedfinal dividend. group whereBased financialon a total stability dividend is centralfor 2018 to of £56.0 million, the Company has sufficient distributable reserves to pay four years of is Chesnara’s fourteenth successive year of dividend growth. incorporation,per share represents includes an£148m increase of new of 3% equity on thesince prior 2004 year, but and is profitablegroup’s new surplus business. own The funds growth, above shown the group’s here since internally required our culturedividend and values. at the current level without generating further distributable profits. In addition to its own reserves, the Company has access netis Chesnara’s of £298m offourteenth cumulative successive dividend payments. year of dividend The value growth. of incorporation,capital. Cumulativeincludes £148m cash ofgeneration new equity over since the 2004last 5 but years is to the distributable reserves of its subsidiary undertakings with which future dividend payments can be funded (see note 2.10 to the – Our investment returns remain competitive across the group. the group is affected by investment market conditions at any net of represents£298m of cumulativec190% of thedividend total dividendspayments. over The the value same of period. consolidated accounts for additional information). given point in time, with the closing 2018 position reflecting falls the group is affected by investment market conditions at any – We deliver good customer service levels across the group. given Businesspoint in time,as usual with cash the generation* closing 2018 position84.0 reflecting falls in equity and bond values that were witnessed during the year. The Company is dependent upon its subsidiaries for the provision of cash with which to make dividend payments. As shown in note 4.2 in equity andDividend bond values that were witnessed during the year. to the consolidated financial statements, the Group has sufficient cash resources with which to meet the proposed dividend. Dividend per share history 723 Value growth 723 Pence per share Dividend per share history 47.8 £m 626 Value growth42.6 44.2 20.1 20.7 603 19.5 Pence per share £m 36.5 626 8. DIVIDENDS 18.9 20.7 603 17.9 18.4 19.5 20.1 16.9 17.4 18.9 16.0 16.4 17.9 18.4 Years ended 31 December 15.1 15.6 16.9 17.4 16.0 16.4 455 30.1 31.0 13.1 15.1 15.6 27.6 12.5 417 22.5 24.0 455 2018 2017 11.9 13.1 376 12.5 355 417 £m £m 11.9 376 295 311 2014 2015355 2016 2017 2018 Amounts recognised as distributions to equity holders in the year 263 295 311 *The chart illustrates how263 business as usual cash generation compares to the total 189 (based on the number of shares in issue at the record date): 176 187 183 shareholder dividend. For this purpose the cash figure is based on divisional cash 189 126 176generation187 plus non-exceptional183 group items. To include exceptional items would mislead Interim dividend for the year ended 31 December 2018 of 5.5 pence per share paid on 12 October 2018 126 in terms of illustrating the effectiveness of the core business in funding the dividend. (2017: 4.9 pence per share paid on 6 October 2017) 22.4 20.0 2004 2005 2006 2007 2008 2009 2010 2 011 2012 2013 2014 2015 2016 2017 2018 2004 2005 2006 2007 2008 2009 2010 2 011 2012 2013 2014 2015 2016 2017 2018 2004 2005 2006 2007 2008 2009 2010 2 011 2012 2013 2014 2015 2016 2017 2018 2004 2005 2006 2007 2008 2009 2010 2 011 2012 2013 2014 2015 2016 2017 2018 *Value is based on Embedded Value principles up until 2015, thereafter it is based on Final dividend for the year ended 31 December 2017 of 7.4 pence per share paid on 11 May 2018 Economic Value (see page 39 for further information). The transition from Embedded *Value is based on Embedded Value principles up until 2015, thereafterCHESNARA it is based ANNUAL on REPORT AND ACCOUNTS(2017: 2018 0.4 pence per share paid on 12 May 2017) 07 30.1 1.6 Value to Economic Value resulted in only a modest change in valuation. Economic Value (see page 39 for further information). The transition from Embedded Value to Economic Value resulted in only a modest change in valuation. 52.5 21.6

LB5111 Chesnara 2018 Sec A_Overview_AW_Stg7.indd 7 04/04/2019 12:39 CASH GENERATION POLICYHOLDERS At the forthcoming Annual General Meeting the Board will recommend to shareholders that a resolution is passed to approve payment CASH GENERATION POLICYHOLDERS of a final dividend for the year ended 31 December 2018 of 8.5 pence per share (equivalent to approximately £33.6 million) payable on or CASH GENERATION CONTINUES TO OUR PRIMARY RESPONSIBILITIES REMAIN SUPPORT DIVIDENDS TOCASH OUR GENERATION POLICYHOLDERS CONTINUES TO OUR PRIMARY RESPONSIBILITIES REMAIN before 11 May 2019. The final dividend has not been included as a liability as at 31 December 2018. SUPPORT DIVIDENDS TO OUR POLICYHOLDERS Drax Group plc Annual report and accounts 2018 Ultimately the group needs to generate cash to service its – Customers can be confident that they have policies with a 9. CONTINGENT LIABILITIES dividends. We define cash generation as the movement in the Ultimatelywell capitalised the group group needs where to financialgenerate stability cash to is service central its to – Customers can be confident that they have policies with a The Company has provided unsecured guarantees to third parties in respect of contracts held by a subsidiary company. dividends. We define cash generation as the movement in the well capitalised group where financial stability is central to group’s surplus own funds above the group’s internally required our culture and values. The guarantees have been issued for nil consideration and the Company has not charged the subsidiary for the guarantees. capital. Cumulative cash generation over the last 5 years group’s surplus own funds above the group’s internally required our culture and values. –capital. Our investment Cumulative returns cash generationremain competitive over the acrosslast 5 years the group. represents c190% of the total dividends over the same period. – Our investment returns remain competitive across the group. The Company has granted a charge over the assets of certain of its subsidiaries, in respect of the Group’s debt (detailed in note 4.3 –represents We deliver c190% good customerof the total service dividends levels over across the same the group. period. Business as usual cash generation* 84.0 to the consolidated financial statements), which is guaranteed and secured directly by each of the subsidiary undertakings of the Business as usual cash generation* – We deliver good customer service levels across the group. Dividend 84.0 Company that is party to the security arrangement. The Company itself is not a guarantor of the Group’s debt. Dividend

47.8 44.2 42.6 47.8 36.5 42.6 44.2 Quick read 36.5 Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 30.1 31.0 27.6 the sources of cash the use of cash Drax Group plc AnnualReverse report factoring and accounts 2018 187 22.5 24.0 30.1 31.0 27.6 22.5 24.0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 *The chart illustrates how business as usual cash generation compares to the total shareholder dividend. For this purpose the cash ﬁgure is based on divisional cash *The chart illustrates how business as usual cash generation compares to the total generation plus non-exceptional group items. To include exceptional items would mislead shareholder dividend. For this purpose the cash ﬁgure is based on divisional cash in terms of illustrating the effectiveness of the core business in funding the dividend. generation plus non-exceptional group items. To include exceptional items would mislead in terms of illustrating the effectiveness of the core business in funding the dividend.

CHESNARA ANNUAL REPORT AND ACCOUNTS 2018 07 CHESNARA ANNUAL REPORT AND ACCOUNTS 2018 07

LB5111 Chesnara 2018 Sec A_Overview_AW_Stg7.indd 7 04/04/2019 12:39 LB5111 Chesnara 2018 Sec A_Overview_AW_Stg7.indd 7 04/04/2019 12:39 Disclosures on the sources and uses of cash 46

Disclosures on variabilities, risks and restrictions Investors noted that, in order to properly assess the future potential upside of a business, they need to be able to assess the downside. When thinking about future availability of cash that means they need information on: What is useful? • Variability of future outcomes - How does the company consider RSA provides some information in their investor presentation which illustrates how future earnings might feed the range of possibilities for future cash use and how does that feed through into organic growth and dividends. It highlights the overall range as well as a variable band, which are through to the prioritisation of decisions? useful factors for investors to consider. • Risks – What is the link between the risks facing the company and the RSA Plc Preliminary Announcement Presentation 2018 outturn in cash generation, use, and dividend? • Restrictions – Are there any restrictions on current or future cash, either through capital or exchange controls, availability of dividend resources or other items? 2018 Dividend outlook Variabilities - Investors understand that returns are variable and should reflect the changing focus and priorities of the company, the call of DIVIDEND OUTLOOK other stakeholders, and the availability of resources. Investors therefore PRELIMINARY value information that helps them understand management’s potential Earnings and dividends reaction to that variability. RESULTSIllustrative use of earnings Preparers are often concerned with providing too much definitive detail • Attractive earnings progression our goal, 100% with increasing proportion available for in case the outturn is not as expected. However, investors are generally distribution comfortable with some uncertainty as this allows them to make their Retained to support organic c.40-c.25-50%30% growth, pensions & net capex • Around 25-30% of earnings used for organic own judgements on the likely outturn. Both the examples we selected investment growth, net capex investment and pensions (RSA and Phoenix) find a middle-ground between insight and detail which is acceptable to both companies and investors. • Continue to plan for base dividend payout of 28 February 2019 40-50% with some look through of volatility c.20-35% c.20-35% Variable ‘band’ for pull-to-par, distribution and/ or other uses • Leaves a variable ‘band’ of 20-35% for additional distributions, to fund pull-to-par or for any other need

c.40-50% • Pull-to-par effect impacts 2019 to 2021, but c.25-30% Ordinary dividend distributions to a sharply decreasing extent • Emphasis will continue to be that shareholder reward follows performance, but does not lead

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring

1 Disclosures on the sources and uses of cash 47

Risks Participants in this project noted that information that supports them in assessing the likelihood and magnitude of risks, and the resultant What is useful? sensitivity to either the generation of cash, or calls on that cash, is fundamental to their investment decision-making. PhoenixCash provides investors with details of how certain scenarios might impact total cash generation. Whilst the disclosure makes no direct commitment on dividends it highlights that under the scenarios presented, cash In practice, this means that investors want detail about how the generationResilience remains sufficient to fund dividend and operating expenses. company’s principal (and significant) risks might impact the outturn for Phoenix Full Year Results 2018 cash, and/or the balance of the priorities for the use of that cash. Growth For many investors it is sufficient for disclosures to be delivered as part of a well executed principal risk disclosure section. Relatively high-level A Sustainable Phoenix disclosure can be given to good effect with such techniques as indicator Resilience of cash generation increases confidence in our dividend arrows showing the likely flow through of risks to KPIs or strategic Sensitivities for £3.8 billion expected cash generation between 2019-23(1) priorities or via simple narratives. Impact on cash Our recent report on Risk and viability reporting provides a number of Operating & interest UsesFull of cash Year Results 2018 Dividend of £1.7bn generation interesting examples on risk reporting. costs of £1.1bn 20195- 23March expected cash 2019 generation £3.8bn However, for some investors, high-level disclosure is not sufficient. This 20% fall in equity markets is particularly the case where capital requirements are an important part £3.8bn £0.0bn1 of understanding the availability of cash, or where the availability of cash 15% fall in property values and liquid resources is itself a principal risk or factor in the company's £3.7bn £(0.1)bn (2) viability assessment. 60bps rise in interest rates £3.9bn £0.1bn

(2) 80bps fall in interest rates £3.7bn £(0.1)bn

(3) 120bps credit spread widening £3.6bn £(0.2)bn

(4) 10% increase/decrease lapse rates £3.4bn £(0.4)bn

(5) 6 months increase in longevity £3.3bn £(0.5)bn

(1) Scenario assumes stress occurs on 1 January 2019 (2) Assumes recalculation of transitionals (subject to PRA approval) (3) Credit stress equivalent to an average 120bps spread widening across ratings and includes allowance for defaults/downgrades (4) Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups (5) Applied to the annuity portfolio

UNLOCKINGFINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION NOTES TO THE FINANCIAL STATEMENTS OUR FULL

POTENTIANET DEBT AND FINANCIALL RISK MANAGEMENT DISCIPLINEDNet debt decreased from $4.5 billion to $2.8 billion during the year, driven by operating cash inflows. Gearing has decreased from 13% at 31 December 2017 to 9% at 31 December 2018.

GROWTHUS$ million FOR 2018 2017 Net assets 29,832 28,882 Net debt is calculated as total borrowings less cash and cash equivalents Net debt including related derivatives (note 20) 2,848 4,501 (including derivatives that provide an economic hedge of net debt and ATotal SUSTAINABLE capital 32,680 33,383 excluding the impact of the debit valuation adjustment). Total capital is Gearing 9% 13% calculated as ‘Net assets’ (as shown in the Consolidated balance sheet) FUTURE excluding net debt.

20. NET DEBT Overview The disclosures in this note include certain Alternative Performance Measures (APMs). For more information on the APMs used by the Group, including definitions, please refer to page 208. Movement in net debt Cash Medium and Net debt Derivatives Net debt and cash Short term long term excluding hedging including Disclosures on the sources and uses of cash US$ million equivalents borrowings borrowings derivatives net debt derivatives48 At 1 January 2017 6,044 (1,799) (11,363) (7,118) (1,369) (8,487) Cash flow 1,549 1,838 318 3,705 419 4,124 Reclassifications – (1,077) 1,077 – – – Movement in fair value – (7) 210 203 601 804 Other non-cash movements – (151) (144) (295) – (295) Currency movements 199 (128) (718) (647) – (647) At 31 December 2017 7,792 (1,324) (10,620) (4,152) (349) (4,501) Cash flow (948) 1,077 1,666 1,795 250 2,045 Reclassifications – (434) 434 – – – Movement in fair value – 8 116 124 (345) (221) Other non-cash movements – 34 (137) (103) – (103) Restrictions Currency movements (296) 58 170 (68) – (68) statements Financial For some companies it is important for investors to AtWhat 31 December is useful? 2018 6,548 (581) (8,371) (2,404) (444) (2,848) understand the existence and, more crucially the AngloAmerican provides a detailed breakdown of the amounts of cash and debt within South Africa, Further information nature of, any restrictions on cash balances. Current and disclose the nature of cash restrictions. They also highlight that net cash/net debt are monitored Reconciliationseparately for to the the impacted Consolidated operations. balance sheet requirements under IFRS 7 require companies to disclose Medium and any restrictions on cash. Whilst this can provide investors AngloAmerican plc Integrated Annual Report 2018 Cash and cash equivalents Short term borrowings long term borrowings US$ million 2018 2017 2018 2017 2018 2017 with information, in practice disclosure is often not Balance sheet 6,567 7,800 (600) (1,351) (8,371) (10,620) fulsome. Balance sheet – disposal groups – 19 – – – – Bank overdrafts (19) (27) 19 27 – – Two examples considered by investors in this project Net cash/(debt) classifications 6,548 7,792 (581) (1,324) (8,371) (10,620) sought to go further by providing extra detail about the South Africa net cash nature of such balances, how they are managed (Anglo- The Group operates in South Africa where the existence of exchange controls may restrict the use of certain cash balances. The Group therefore monitors American), and the context of the restrictions in the cash and debt associated with these operations separately. These restrictions are not expected to have a material effect on the Group’s ability to meet its relation to overall performance (Wizz). ongoing obligations. On an owned basis cash and cash equivalents in South Africa is $5,316 million (31 December 2017: $4,276 million) and net cash is $4,603 million (31 December 2017: $3,446 million). Both of these examples were deemed useful by investors As part of the Group cash pooling arrangement cash that is legally owned by South African companies is managed outside of South Africa. Below is a as they provided greater transparency of a particular breakdown of net cash managed in South Africa. factor important to the understanding of the company. US$ million 2018 2017 Cash and cash equivalents 1,382 1,651 Short term borrowings (113) (34) Medium and long term borrowings (601) (798) Net cash excluding derivatives 668 819 Derivatives hedging net debt 1 2 Net cash including derivatives 669 821

Debit valuation adjustment The debit valuation adjustments reduce the valuation of derivative liabilities hedging net debt reflecting the impact of the Group’s own credit risk. These adjustments are excluded from the Group’s definition of net debt (as detailed on page 209). The movement in the debit valuation adjustments are as follows:

US$ million 2018 2017 At 1 January 9 73 Movement in fair value 6 (64) At 31 December 15 9

Anglo American plc Integrated Annual Report 2018 157

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring FY18 |HIGHER CASH GENERATION

€ million +23% 1,142 Strong cash generation 930 162 Investment grade balance sheet 156 WIZZ | INCREASED CEE LCC MARKET SHARE IN FY18

Disclosures on the sources and uses of cash Leverage980 49 Multiple aircraft financing options # 1 # 2 774# 3 Poland Romania 1.7x Hungary Two additional aircraft orders Lithuania Bulgaria 42% # 1 requiring aircraft deposits FY18 |HIGHER CASH GENERATION F17 FreeWhat Cashis useful? F18 Latvia RestrictedWizz shows the relationship Cash between Free Cash, Restricted Cash and total cash. Ukraine € million Wizz clearly shows on each page of the presentation whether the numbers are from audited or Slovakia+23% unaudited sources. This allows investors to assess the level of reliability of the disclosure. 1,142 Strong cash generation Ryanair Moldova FY2018 Results 24 May 2018 Cash collateral on LC facilities 930 162 Serbia Investment grade balance sheet 156 Macedonia Leverage980 Multiple aircraft financing options 774Bosnia & Leverage Herzegovina 1.7x Easyjet Two additional aircraft orders Maintaining or lowering leverage F17GeorgiaFree Cash F18 requiring aircraft deposits Restricted Cash Cash collateral on LC facilities Leverage FY18 Results Maintaining or lowering leverage Page 5 IFRS16 debt at €1.5bn, reducing IFRS16 debt at €1.5bn, reducing 1.5x to €1.3bn end FY19 1.5x FY17: 1.7x to €1.3bn end FY19

Audited financial statements. Note 1: Cash and Cash Equivalents (€m) FY17: 1.7x Note 2: Leverage is defined as net debt adjusted to include capitalised FY18 Results operating lease obligations divided by earnings before interest, tax, Page 12 depreciation, amortisation and aircraft rentals.

Audited financial statements. Note 1: Cash and Cash Equivalents (€m) Note 2: Leverage is defined as net debt adjusted to include capitalised FY18 Results operating lease obligations divided by earnings before interest, tax, Page 12 depreciation, amortisation and aircraft rentals.

Thanks We would like to thank the following who have provided input into the project:

Participation in the project comes either through response to a public call or being approached by the Companies Investors Lab. An iterative approach is taken, with additional participants sought during the project, though it is not 4imprint Group Allianz Global Investors intended that the participants represent a statistical Adnams Plc CFA Institute sample. References made to views of ‘companies’ and AngloAmerican Plc Evenlode Investments ‘investors’ refer to the individuals from companies and investment organisations with whom the Lab interacted AstraZeneca Plc Go Investment Partners in this project. Views do not necessarily represent those AutoTrader Group Plc Moody's Investors Service of the companies or organisations. Views were received Burberry Group Plc Schroders Investment Management from a range of UK and international institutional Carnival Corportation&Plc Other institutional investor (2) investors, analysts, retail investors and from a range of companies through FRC-led roundtables, one-to- Chesnara Plc Recent investment professionals (3) one interviews, short calls or roundtables with other Croda International Plc Individual investors (4) agencies. Deltex Medical Group Plc Drax Group Plc InterContinental Hotels Group PLC J Sainsbury Plc Johnson Matthey PLC M&C Saatchi Plc Mears Group Plc Phoenix Group Holdings PLC RioTinto Plc RSA Group Plc Thames Water Utilities Ltd Whitbread Plc Wizz Air Holdings Plc

We would also like to thank the many other organisations and groups who contributed to the discussions on this topic.

Appendix 1 Reverse factoring

Whilst normal payment terms might see a purchaser reverse factoring combined was £350bn for the UK & Reverse Factoring pay a supplier within 30 days, the switch to a reverse Ireland in 2017. factoring facility might also see the payment terms Furthermore, an analysis of the UK Government's What is Reverse Factoring? increase as the facility provider will agree terms with the originator. Any increase in payment period will have the Supplier Payment portal shows that around 6% of the Reverse factoring is a type of finance transaction akin effect of improving the originator’s working capital cycle. companies that filed on this portal offer supply chain to factoring. In a traditional factoring arrangement a finance (which includes individual entities as well as business will sell its accounts receivables (i.e. invoices it How prevalent is reverse factoring? subsidiaries of groups). has raised with buyers) to a third party (often a bank) in exchange for a significant proportion of the cash value There is limited data on the amount of reverse factoring of the invoice. Factoring has long been a method of currently in place. However, the European Factoring 4 https://euf.eu.com/facts-and-figures/facts-and-figures/euf-estimates-on- 4 managing working capital as it provides earlier access Association estimates that the total of factoring and eu-market.html to cash from sales than would otherwise follow the traditional credit terms. Example of reverse factoring Reverse factoring is similar to factoring, but it is the purchaser rather than the seller who is the originator Traditional Cycle Supplier-focused cycle Company-focused cycle of the facility. In reverse factoring the purchaser of goods organises a facility with their bank or other finance provider. This facility allows suppliers to get their 1 1 1 invoices factored, and receive cash at a point before the purchaser intended to pay. This type of scheme is particularly beneficial to smaller suppliers who may not have sufficient financial strength to obtain competitive factoring terms themselves. Supplier Company Supplier Company Supplier Company What is the benefit for the originator? Broadly there are two different (although in some cases $ $ $ $ parallel) objectives from the originator for such schemes: 1) to support smaller suppliers (supplier-focused): 2) to 2 2 3 2 3 support the originator’s working capital management and $ financing (company-focused). Whilst these two objectives are quite different it is often difficult to assess from the Within 10 days Within 30 days Within 10 days Within 90 days available disclosure what the company’s objective is. Within 30 days

Limited impact on Significant benefit company working capital to company working capital

Why are investors interested? Investors support companies that are effectively What the market thinks managing their working capital. However, a number Reverse factoring and wider supplier payments have been of high profile failures and other difficulties where an area in which market interest has grown. Recent analyst working capital issues have been important, have raised 5 6 questions on supplier financing schemes. reports from Barclays and Moody's have covered the issue, furthermore the Chartered Financial Analyst Institute (CFA) Their concern is that where (company-focused) reverse recently released an article which highlighted their concerns factoring is used, any curtailment of the facility might “I want to know around reverse factoring. They noted that it was important for create a working capital issue for the originator, as how much working capital investors to understand the difference between the three types comes from financing activities they would need to pay their supplier to the original of reverse factoring arrangement: timetable. They would therefore not benefit from such as factoring… it has grown extended terms with the bank or third party facility 3 or 4 times since 2007, it is • “Good” reverse factoring, the situation where a company uses provider (if such terms were in place). In addition there concerning.” Investor its stronger credit rating to facilitate factoring at superior is a concern that companies can become overly reliant rates and terms than the supplier could achieve. This upon the usage (and expansion) of these facilities and particularly benefits smaller suppliers. the favourable impact they have on cash (in the short term). Therefore clear disclosure on usage of the facility • “Bad” reverse factoring, the situation where the company and impact on results and financial statement balances uses its power to push the supplier to factor with a provider is very important and would allow users to better to enable it to maximise working capital. understand the risks of the business. “This idea that small • Confirming, the situation when a company cannot persuade businesses could collect their Whilst generally investors might look to the annual its supplier to extend the credit period and uses a bank or invoice by the due date via a report of a company to help identify issues such as financial provider to support the gap. bank, well surely this means that reverse factoring, current levels of disclosure are the money is now owed to the generally limited. Our review across the FTSE 350 In order to provide investors with information that allows banks… so why is it not shown identified only a very small number of companies them to assess these three different types of reverse factoring as debt?” disclosing anything related to reverse factoring. This Investor they advocate for an “maximum outstanding number of days” might reflect the relative immaterial nature of any disclosure for suppliers. This disclosure, based on contractual facility but may also reflect that there is limited specific terms including extension options, would inform them about accounting guidance on the topic. the presence of “bad” reverse factoring and would also provide transparency to confirming arrangements, both qualitatively and quantitatively. The full article is available on the CFA website.

5 Working Capital Finance: The Debt Factor - March 2018. 6 Reverse Factoring is increasingly popular but can weaken liquidity at times of stress - Sept 2019.

Accounting guidance In a recent letter to the BEIS select committee7 the These IAS 1 requirements provide a framework for FRC noted that there is limited specific guidance determining the structure of an entity's balance on reverse factoring and that the accounting and sheet. Liabilities that are financing in nature are Other areas of guidance include disclosure requirements depend on the specific facts normally presented together and described as debt • IFR S 7 requirements around liquidity risk and circumstances of the arrangement. However, or financial liabilities, and liabilities that are working disclosures (IFRS 7.39), concentration the letter highlighted that the following standards capital in nature are normally presented within risk (IFRS 7.B11F(d)) and an overarching could be considered as providing some guidance: trade and other payables. drive to add disclosure to ensure that IAS 39 – ‘Financial Instruments: Recognition If presentation and classification of the liability what is disclosed is representative and Measurement’ (recently replaced by IFRS9) constituted a critical accounting judgement for the (IFRS 7.35) addresses the derecognition of financial liabilities. entity, IAS 1 would require additional disclosure. • IAS 8 Accounting policies Its requirements are relevant in assessing the appropriate presentation of the liability arising IAS 7 – ‘Statement of Cash flows’ requires entities • IAS 1 Disclosures on judgements and from the arrangements. In particular, consideration to classify cash flows according to whether they estimates must be given to whether the original “trade arise from operating, financing or investing activities payable” liability is extinguished (i.e. the customer – and consistency between the statement of cash is legally released from its obligations to the flows and the balance sheet can be expected. supplier) or its terms amended to such an extent Therefore, the definitions of operating and financing that its replacement with a new debt-like liability is activities might also assist entities in determining appropriate. the appropriate presentation of liabilities arising from reverse factoring. The classification within the Consideration of quantitative and qualitative factors, cash flow statement should reflect the substance of including the detailed terms of the arrangement, will the arrangement which requires some judgement. be necessary when performing this assessment. The application of the above standards may involve IAS 1 – ‘Presentation of Financial Statements’ – a high level of judgement in order to determine requires that entities present separate line items and reflect the substance of the arrangement, on the balance sheet for trade and other payables and conclusions can only be drawn with reference and other financial liabilities. Additional line items to the specific facts and circumstance of each are also required, where relevant, to gain an individual arrangement. Whilst standards provide understanding of the entity's financial position- a framework, the FRC highlights that ultimately

either on the face of the balance sheet or in the the overriding legal requirements in presenting 7 https://www.parliament.uk/documents/commons- committees/ notes to the accounts. the financial statements are the true and fair work-and-pensions/Carillion%20report/Letter- from-FRC-to-Chairs- requirements which places an onus on companies 21-March-2018.pdf to provide sufficient disclosure.

What do investors want to know? Material by Interest Where companies do identify that they are using reverse factoring schemes, the level of detail about the scheme, In the Lab’s 2017 case study on WM Morrisons It should be noted that a lack of disclosure does not its purpose, and its operation are often limited. Investors Supermarkets plc which covered Supplier relationships necessarily mean that there is no reverse factoring in the would like sufficient details about the nature of the and emerging issue reporting we developed a model to minds of investors, especially for companies or industries scheme, its purpose, the size of the facility and amount describe investors' overall demands when a new issue, such as construction or consumer goods where it is seen currently used, facilitating party and how the scheme is such as reverse factoring emerges. as prevalent. being reflected in the accounts. Investors highlight that where a company uses Net Debt as a key performance Our discussions with investors on reverse factoring In response a number of companies have taken to metric, clarity on whether reverse factoring is reflected have shown that this is still relevant, although given the indicating that they do not use such schemes. in the number is useful. current lack of disclosure their focus at the moment is on the need for context. But most particularly, I'm glad to say, to formally Provide comfort announce, we have no factoring reverse upwards, Whilst currently the lack of information provided Disclosures which: downwards, sideways, over the top, and underneath. around reverse factoring means that investors are There was no factoring to our business. focused on understanding the arrangements, they also DE CON expect disclosure that provides comfort on how the VI TEX Rupert C. Soames RO T arrangement is being managed and monitored. P Serco Group plc Group CEO & Director Once understanding has been established, investors (2017 full-year conference call) want information that conveys if there has been Describe the nature of Detail significance movement in the magnitude of the scheme, or changes the issue or magnitude in the way it operates, or is accounted for. They also

want to understand the level of work undertaken by the

Investors find such disclosure useful as it quickly closes

auditors and the audit committee over the scheme and off any further investigation.

Describe connection Clarify the level of

supplier payments more widely, as well as understanding

to other processes review and assurance However, investors believe that there are many how (if significant) the schemes impact on the viability of

companies who do use such schemes for which the business.

P T disclosure is not clear. One particular issue with R R identifying reverse factoring disclosure is a lack of OV FO IDE CO M consistency with naming of such schemes. Many Investors would like disclosure such as: companies will use terms such as Early Payment Scheme, Supplier payment scheme or other such name. This • Existence of scheme, Provide context impedes investors’ ability to quickly identify relevant • Size, disclosure when scanning and searching company The first stage of providing context is describing the • Current amount used and impact on working reporting. Investors consider that using the term reverse capital, nature of the issue. Investors want to know which factoring alongside or in conjunction with other entity companies are using reverse factoring, what type specific terms would be helpful. • Facilitation party and key terms, and why. • Links to policies/accounting judgements, and

• Process used to monitor and manage.

Example disclosure that give context…

Lab example Describe the nature of the issue disclosure Pg22 Pg22 Pg22 The company highlights that it facilitates a reverse Our discussions with factoring scheme using clear identifiable terminology. The Supplier Plus Plus Scheme Scheme Supplier Plus Scheme details of the scheme show that it has an impact on the investors identified some We facilitate a supplier chain financingWe scheme facilitate for a supplierour small chain and mediumfinancing scheme for our small and medium Wesuppliers. facilitate This a issupplier a form chain of reverse financing factoring scheme scheme for providedour small by and Banque medium de suppliers. This is a form of reverse company's own working capital. suppliers. This is a form of reverse factoring scheme provided by Banque de examples of disclosure factoringl’armee Suisse scheme (BLAS). provided We have by Banque two objectives de l’armee for theSuisse scheme, (BLAS). firstly We it have serves two to objectives for the scheme; firstly it but these were often servessupport to our support smaller our suppliers, smaller givingsuppliers,l’armee them giving earlySuisse accessthem (BLAS). early to funding, Weaccess have secondly to two funding, objectives it secondly for the it scheme,supports firstly the wider it serves working to capitalsupports efficiency the wider workingof the group. capital efficiencysupport ourof the smaller group. suppliers, giving them early access to funding, secondly it where the scheme was Under the facility suppliers may optsupports to access the payment wider working after capital30 days efficiency rather than of the our group. normal 90 day payment terms. They identify the size of the facility and clarify how they insignificant. We did not WeUnder pay the the facility provider suppliers of the may scheme opt to after access 90 paymentdays or longerafter 30. This days scheme rather than is an important part of our management of account for it. identify good examples workingour normal capital. 90 day The payment balance terms. owed We Underon pay the the facility facilityprovider is suppliers£345m of the (2017:scheme may opt £295m). directly to access The payment total size after of the 30 daysfacility rather is £500m. than As theafter scheme 90 days. has This not scheme led to issignificant an importantour changesnormal part of90 in our daythe management paymentterms of terms. our of obligation workingWe pay the weprovider continue of the to schemetreat the directly amounts owed capital. The balance owed on the facility £345m (2017: £295m) because the that fully answered to BLAS within trade creditors (see afternote 90 12). days. Information This scheme about is an how important it is factored part of intoour managementrisks and our of assessment working ofscheme viability has can not be led found to significant on page changes 27. Further in the details terms about of our ourobligation accounting we policy for reverse factoring and the investors' questions in capital. The balance owed on the facility £345m (2017: £295m) because the judgementscontinue to treat around the amountsthe application owed to ofBLAS that within policy trade can creditorsbe found (seeon page note 111.12). They highlight other information that provides users with situations where reverse Information about how it is factored intoscheme risks has and not our led assessment to significant of viabilitychanges can in the terms of our obligation we understanding. be found on page 27. Further detailsTrade andcontinue about other our creditors to accountingtreat P122 the amounts policy for owed reverse to BLAS within trade creditors (see note 12). factoring was important for Risk & Viability P27 factoring and the judgements aroundPoliciesInformation theand applicationjudgements about P111 of how that it policy is factored can be into found risks on and our assessment of viability can working capital (company- page 111. be found on page 27. Further details about our accounting policy for reverse focused scheme). We factoring and the judgements around the application of that policy can be found on pageTrade 111. and other creditors P122 have therefore created DescribeRisk & Viability the P27 significance or magnitude an example of a fuller Policies and judgements P111 Trade and other creditors P122 disclosure on the next few Risk & Viability P27 Pg122 pages that goes further Policies and judgements P111

than the current market Note 12 Trade and other payables 2018 2017 Focus on: Supplier plus scheme £m £m practice. Within the current trade payables number is Current: They identify the size of the facility, clarify how they £345m (2017: £295m) related to our reverse Trade payables 676.5 675.4 This disclosure presents factoring facility. The substance of the account for it and how it is treated for the purposes of the Other taxation and social security 45 43 contractual terms of the scheme do not differ to Net Debt KPI. only extracts and would Deferred consideration 23.3 33 those under the original contract and therefore require additional Accruals 3.7 23.4 we consider the amount owed to the bank are 748.5 774.8 akin to amounts owed to the supplier. disclosure to be deemed Non current: On average we are paying the provider within fully sufficient, for Trade payables 11.4 12.3 121 days. For the purposes of our Net Debt KPI Deferred Consideration 1.5 1.6 we include trade creditors within the calculation. example, within the cash 12.9 13.9 flow statement detail on 12.9 13.9

treatment, accounting 761.4 788.7 policies and IFRS 7 Accounting policy P111 They highlight other information that provides users with understanding. disclosures. Strategic Report P22

And comfort… through disclosures which:

Describe how the issue connects with other processes Clarifies the level of review and assurance

Pg38 Pg48

Audit Committee focus Viability assessment Pg34 This year, as part of the audit committee's focus on supplier risk, the As part of our assessment of longer-term viability, the board have considered committee undertook a deep dive on our reverse factoring scheme. As part of a number of plausible bottom-up scenarios which could impact CCRL plc or this process we: the group as a whole (individually and in aggregate), as well as top down headroom. • Considered the accounting for the scheme versus other reverse factoring schemes and relevant accounting guidance and literature, Bank covenants require that the groups ratio of net debt to EBITDA stays below 5.0x. As at the group’s balance • Looked at the underlying terms of the scheme, sheet date the ratio is 1.4x. • Considered the use of the scheme by the company throughout the year, and

Supplier Plus Facility Usage A combination of the bottom up scenarios would see the net debt to 400 EBTIDA ratio increase to approx. 4.5 350

300

1) Our long-term Swiss Rail Link contract continues to underperform and is £M'S 250 subject to cancellation at the 2020 renewal date. 200

2) Our reverse factoring scheme is withdrawn by the provider and can not be 150 replaced, leading to a need to fund an additional working capital Q1 Q2 Q3 Q4 requirement (31 days). We have also considered that removal of the scheme 2018 315 334 350 345 may impact the attractiveness of the company to suppliers and impact our 2017 310 259 267 295 longer-term supplier relationships. • Looked at how the scheme fitted in with our broader commitments to strong 3) Our negotiations with our pension trustees of our runoff subsidiary Xyl SA supplier relationships and our obligations under relevant regulation. requires a full buyout of the scheme. After conducting the review the committee was satisfied with the treatment and disclosure of the facility. In future periods the committee will instruct internal Risks on P37 audit to build reviews of the scheme into the standard rotational work program.

The company is clear how the reverse factoring has been considered as part of In the Audit Committee report the company is clear how the reverse its viability assessment. This also links through to assessment of risk. This gives factoring has been considered and gives some clarity as to the actions taken investors comfort that (if significant) the issue is being appropriately considered. by the committee over the accounting and disclosure for the scheme.

Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring The Lab has published reports covering a wide range of reporting topics. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting transparency and integrity in business. The FRC Reports include: sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the Competent Authority for audit in the UK the FRC sets auditing and ethical standards and monitors and Reporting of performance metrics June 2018 enforces audit quality.

The reporting of performance metrics continues to be of Investors’ use of performance metrics performance, position and prospects. They rely on company significant interest to investors. Regardless of their position reporting as a base, but they also use a range of external in the investment chain, investors have strong views about During the project we heard that investors use metrics for a sources to triangulate that information, or where reporting The FRC does not accept any liability for any loss, damage or costs howsoever how companies should report their performance. It is clear range of reasons: is not provided by the company. that this issue is central to questions about how companies • analysis and valuation (benchmarking, comparing across demonstrate the value they create and how investors a sector and screening); Regulatory and market initiatives value companies. As a result of wide-ranging discussions, arising, whether directly or indirectly, whether in contract, tort or otherwise the Financial Reporting Lab (‘the Lab’) has developed a • assessing management’s credibility; The last few years has seen a number of regulatory and market initiatives regarding the reporting of performance framework and set of questions for companies and their • assessing long-term value; boards to consider when reviewing their reporting of metrics. The European Union’s Non-Financial Reporting from any action or decision taken (or not taken) as a result of any person relying stewardship; performance metrics. • Directive, the Commission’s Action Plan on Sustainable Finance, and initiatives such as the Task Force on Climate- • forecasting or assessing trends; and Investors often refer to the impact the reporting of Related Financial Disclosures, are changing the way that on or otherwise using this document or arising from any omission from it. performance metrics has on their assessment of • assessing whether management is appropriately companies are thinking about reporting on wider metrics. management credibility. The metrics chosen, how they are incentivised. reported, and whether or not the information is reported In relation to financial metrics, in October 2015, the These various uses and approaches mean investors may European Securities and Markets Association (ESMA) in a way that investors consider to be fair, balanced and be seeking different metrics, or using them in different understandable are central to this assessment. published its Guidelines on Alternative Performance ways, depending on their position in the investment chain Measures (APMs). Following its release, the Financial © The Financial Reporting Council Limited 2019 Investors want to see the metrics that management uses and the reason for assessment. For example, a sell-side Reporting Council’s Corporate Reporting Review team internally to monitor and manage performance, as these analyst may be more interested in standardised measures conducted two reviews into the use of APMs, which give insight into a company’s strategy and measure how for forecasting purposes, a governance specialist may be considered the extent to which companies were applying it is performing against that strategy. In this context, more interested in wider metrics as leading indicators the guidelines. The principles set out in this report are investors find it important to be given insight into how of long-term value, and a buy-side analyst may be more consistent with ESMA’s guidelines but provide an investor management links its metrics to its business model and interested in first assessing the performance metrics perspective on the reporting of all types of metrics strategy, including why metrics ‘make sense’ for the of an individual company at an in-depth level before (including wider metrics that are not covered by ESMA’s The Financial Reporting Council Limited is a company limited by guarantee. company and what it is trying to achieve. comparing these metrics to other companies. However, guidelines). these are only generalisations and all investors we spoke A view of performance is important for a number of to, regardless of their position in the investment chain, reasons. However, investors most often seek to understand Artificial Intelligence and corporate reporting mentioned using GAAP, non-GAAP and wider metrics how a company has performed in order to assess its future in different ways. The framework and questions for prospects. Metrics act as a signal, and performance is companies consolidate an overall investor view, but there understood in the context of the targets set, the wider will always be some difference depending on investment environment, and where the company intends to go next. style, position in the investment chain, place in the market Because of this, investors are also concerned about the and personal approach. How does it measure up? quality and sustainability of the reported performance, which helps explain why wider metrics, beyond the Investors use all information that might help them traditional financial metrics, are of increasing importance. build a picture about management and the company’s

Financial Reporting Council January 2019

Financial Reporting Council

Reports and information about the Lab can be found at: https://www.frc.org.uk/investors/financial-reporting-lab

Registered Office: Financial Reporting Council 8th Floor, 125 London Wall London EC2Y 5AS