GREENE KING PLC Annual Report 2017 the LEADING PUB COMPANY and BREWER
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Annual report 2017 TIME WELL SPENT GREENE KING PLC Annual report 2017 THE LEADING PUB COMPANY AND BREWER —Greene King is the country’s leading integrated pub retailer and brewer. At our year end we operated 2,924 managed, tenanted, leased and franchised pubs, restaurants and hotels, including well known brands such as our Greene King locals estate, Hungry Horse, Flaming Grill, Farmhouse Inns and Chef & Brewer. We have a proud history of brewing award-winning ales for more than 200 years and our leading ale brand portfolio includes Old Speckled Hen, Greene King IPA, Abbot Ale and Belhaven Best. STRATEGIC REPORT FINANCIAL STATEMENTS 2 Investment case 72 Independent auditor’s report 4 Performance highlights 80 Group income statement 5 Chairman’s statement 81 Group statement of comprehensive income 6 Focus area – Best for customers 82 Group balance sheet 8 Focus area – Best for teams 83 Group cash flow statement 10 Focus area – Best for communities 84 Group statement of changes in equity 12 Chief executive’s review 85 Notes to the accounts 16 Our business model 121 Company balance sheet 18 Our markets 122 Company statement of changes in equity 20 Our strategy 123 Notes to the company accounts 22 Key performance indicators 127 Glossary – alternative 24 Operational review performance measures 24 Pub Company SHAREHOLDER INFORMATION 26 Pub Partners 28 Brewing & Brands 132 Shareholder information 30 Financial review 33 Risks and uncertainties 38 Corporate responsibility CORPORATE GOVERNANCE 44 Board of directors 46 Corporate governance statement 50 Nomination committee report 51 Audit committee report 54 Remuneration report 68 Directors’ report and disclosures VIEW THIS REPORT ONLINE 71 Directors’ responsibilities statements greenekingreports.com/ar17 STRATEGIC REPORT Investment case Our overall vision is TO BE THE BEST PUB COMPANY IN BRITAIN — This means building a business that is best for our customers, best for our teams, best for our shareholders and best for our communities. Within this, our aim is to offer customers experiences that they will value, remember and want to share. We will achieve this aim principally through the continued delivery of our five strategic priorities, which will ensure we offer compelling brand propositions, in high quality pubs, with unrivalled value, service and quality delivered by our award-winning teams. Through our proven business model and our focus on results, we aim to continue delivering long-term growth and returns to our shareholders. 2 GREENE KING PLC Annual report 2017 Business model REPORT STRATEGIC Destination – Greene King is the leading UK pub company and brewer 1 in a growing market – We have a portfolio of large, category-leading brands, including our five focus brands, Greene King Locals, Hungry Horse, Flaming Grill, Farmhouse Inns and Chef & Brewer Food-led – Our estate is the best invested in the industry and we proactively manage our pub portfolio to continue to drive our estate quality upwards Drink-led – Our strong management team offers deep experience across the retail sector – We have a successful acquisition track record and have completed the integration of our largest ever acquisition Local a year ahead of schedule Our business model page 16 EBITDA1 Performance (£m) – We have a long-term track record of earnings growth and 2 reached over £500m EBITDA in the 2016/17 financial year 600 – Our disciplined capital management ensures that our 524.1 return on capital employed is well above our weighted 450 496.9 average cost of capital – We are a highly cash generative business, giving us both 300 329.7 319.0 flexibility in capital investment and resilience during 306.5 tougher market conditions 150 Financial review page 30 0 1. EBITDA represents earnings before interest, tax, depreciation, amortisation and exceptional items and is calculated as operating 2013 2014 2015 2016 2017 profit before exceptional and non-underlying items adjusted for the depreciation and amortisation charge for the period. Shareholder benefits DIVIDEND PER SHARE (p) – The strong business model at the core of our business 3 and the results we achieve make us the leading player in a growing market 35 – We have a strong balance sheet and continue to cover 30 our debt service obligation, our core capital expenditure 25 and our dividend through internally generated cash flow 20 – We have a progressive dividend policy, with a long-term CAGR 8.6% track record of returns to shareholders 15 10 DIVIDEND PER SHARE 5 0 33.2p +3.6% 1951 2017 Annual report 2017 GREENE KING PLC 3 STRATEGIC REPORT Performance highlights RECORD RESULTS — OPERATING PROFIT PROFIT BEFORE TAX REVENUE BEFORE EXCEPTIONAL AND AND EXCEPTIONAL AND (£m) NON‑UNDERLYING ITEMS1 (£m) NON‑UNDERLYING ITEMS1 (£m) £2,216.5m +6.9% £411.5m +4.9% £273.5m +6.6% 2,500 420 300 411.5 392.2 273.5 2,000 2,216.5 360 250 2,073.0 256.5 1,500 300 200 1,315.3 168.5 1,000 240 256.2 150 500 180 100 2015 2016 2017 2015 2016 2017 2015 2016 2017 EBITDA1,2 ADJUSTED BASIC EARNINGS DIVIDEND PER SHARE (£m) PER SHARE1 (p) (p) £524.1m +5.5% 70.8p +1.3% 33.20p +3.6% 600 75.0 35.0 33.20 32.05 524.1 500 70.0 70.8 30.0 69.9 496.9 29.75 400 65.0 25.0 61.0 300 319.0 60.0 20.0 200 55.0 15.0 2015 2016 2017 2015 2016 2017 2015 2016 2017 Continued market outperformance Spirit integration completed a year ahead of schedule – Pub Company like-for-like (LFL)1 sales up 1.5%, ahead of the market3, – £35m targeted annual synergies delivered driven by a good Christmas, a stronger fourth quarter and a strong – Pub Company IT system rolled out across over 1,700 pubs performance from Greene King Locals – Integrated supply chain in place – Record performance from Pub Partners; LFL net profit1 up 5.0% – Organisational restructure completed – Brewing & Brands revenue up 1.7%; own-brewed volume (OBV) down 2.8%, beating the UK cask ale market4 – Year one brand conversions achieved sales uplifts of over 30% Strong financial metrics supporting growth and shareholder returns – Record revenue up 6.9% to £2,216.5m, and operating profit before 1. An explanation of the group’s use of alternative performance measures (APMs), exceptional and non-underlying items up 4.9% to £411.5m including definitions and reconciliations, is included on page 127. – Strong free cash flow generation; £119.6m post core capex1 2. EBITDA represents earnings before interest, tax, depreciation, amortisation and and dividends, covers scheduled debt repayments exceptional and non-underlying items and is calculated as operating profit before exceptional and non-underlying items adjusted for the depreciation and amortisation 1,2 – 4.0x net debt to EBITDA ; long-term debt financing charge for the period. – Return on capital employed1 (ROCE) maintained at 9.4% 3. Source: Coffer Peach Tracker, 52 weeks to end of April 2017. – Dividend per share up 3.6%; continued long-term dividend progression 4. Source: BBPA Beer Market data to April 2017. 4 GREENE KING PLC Annual report 2017 Chairman’s statement SUCCESSFUL INTEGRATION REPORT STRATEGIC — Dividend Reflecting this performance and confidence in our long-term prospects, the board has recommended a final dividend of 24.4p, giving a total dividend for the year of 33.2p. This represents growth of 3.6% compared to last year and continues the long-term track record of progressive dividends. The board continues to target minimum dividend cover of around two times earnings. People We have 44,000 talented and hard-working team members. The continued success of the business during the Spirit integration demonstrates the effort they have put in over the last 12 months. I would like to take this opportunity to thank everyone who has worked so hard during the last year helping us to deliver these results at the same time as completing the integration of Spirit ahead of schedule. Board changes In my first statement a year ago, I stated that Greene King was a strong At the AGM in September 2016, Ian Durant retired from the board after business with an excellent track record which, following the Spirit acquisition, nine years, latterly as chairman of the audit committee. Rob Rowley took was at an exciting time in its development. A year on, this remains the over as audit chair at the same time. In December 2016, Gordon Fryett case. The team has worked extremely hard over the last two years on the joined the board bringing a wealth of experience of both retail and property integration, which has completed one year ahead of schedule. This means through his career at Tesco. I should like to record the board’s thanks to we can now give all our focus to pursuing opportunities to grow and take Ian for his contribution to Greene King over such a critical period. share, prioritising long-term value creation, while delivering continued strong cash generation and maintaining a robust balance sheet. Ours is a strategically Looking ahead strong and well managed business which is positioned to address the We are excited about the opportunities we see in our core pub retailing tougher trading environment forecast for the next few years. brands, where the results from our brand conversions are showing very positive sales uplifts. We will continue with the programme over the coming Overview years, ensuring our pubs remain attractive and relevant to our customers We achieved another year of record results and market outperformance, as they face into the challenges that the economic uncertainties will driven by a good performance from the underlying business and an undoubtedly bring.