Annual report 2016

Risks and uncertainties MANAGING RISK


BOARD

Overall responsibility for risk management

Sets the group’s risk appetite

AUDIT COMMITTEE

Delegated responsibility for monitoring risk profile and mitigation

Regularly reviews risk management processes for each division and functional area

GROUP RISK COMMITTEE

Reviews individual risk registers and mitigation plans

Ensures consistency of risk profiling across the group

Aggregates risk registers to create group risk register

SENIOR MANAGEMENT

Responsibility for identification of risks, implementation of mitigating actions and maintenance of business unit and functional risk registers

STRATEGIC PRIORITIES

1 Build attractive and strong brands
2 Industry-leading value, service and quality
3 Work with the best people
4 Own the UK’s best invested pub estate
5 Maintain a strong balance sheet and flexible capital structure

As with any business, Greene King faces a range of risks and uncertainties in the course of its business. It is essential that we identify and manage these risks effectively in order to deliver on our strategic objective of being the best pub company in the UK and to maximise shareholder returns.

Approach to risk management

Board

The board has overall responsibility for the group’s risk management framework. It reviews the group’s principal risks on an annual basis, together with the actions taken to mitigate them. This year there has been a particular focus on developing our approach to risk appetite. The board has started this by defining group-level risk appetite statements, to set out the board’s desired risk-taking approach to the achievement of our strategic objectives, in the context of managing our principal risks. Our risk appetite is an expression of the types and amount of risk we are willing to take or accept to achieve our plan. By defining our risk appetite, we will be able to better determine the mitigating activities required to manage to within acceptable levels both the likelihood of risks occurring and their potential impact.

Details of our broad risk appetite in relation to each of our key risks is set out below.

Audit committee

The board has delegated to the audit committee responsibility for reviewing the effectiveness of the group’s risk management processes. It regularly reviews the risk management processes for each business unit and functional area.

Management

The implementation of risk management and internal control systems is the responsibility of the executive directors and other senior management, with each business unit or functional area responsible for identifying, assessing and managing the risks in their respective areas. They are required to maintain, review and regularly update a risk register to assist in this process.

Risk management process

Classification of risks follows a standard methodology used in risk management and takes into account the likelihood of their occurrence and the scale of potential impact (both financial and reputational) on the business.

Once the key economic, operational, financial, people and strategic risks have been identified, each business unit and functional area is then responsible for evaluating current controls, drawing up plans to improve controls and managing new risks. Each key risk has an ‘action owner’ to ensure that responsibilities are formally aligned. To ensure continuous improvement across the business, progress of these risk implementation plans is monitored by senior management on a regular basis.

In addition, a group-wide risk committee reviews the individual risk registers in detail, monitors the risk mitigation plans and assists in the production of the group risk register, whereby risk registers are aggregated and considered on a top-down basis in the context of delivering our strategy for the group.

Given that some risks are external and not fully within our control, the risk management processes are designed to manage risks which may have a material impact on our business, rather than to fully mitigate all risks.

Principal risks and uncertainties

This section highlights some of the key risks and uncertainties which affect Greene King. The group is of course exposed to risks wider than those listed, but these are believed to be likely to have the greatest impact on our business at this moment in time.

For the first time this year we have indicated whether we believe the risk has increased, decreased or remained the same during the year and also how each risk relates to our strategic priorities.

CHANGE POTENTIAL IMPACT MITIGATION AND MONITORING RISK APPETITE STRATEGY
Integration of Spirit Pub Company and failure to deliver the full anticipated synergies.

Decreased

Reduced revenue, profitability and lower growth rates than our strategic objectives.

Integration steering committee overseeing integration.

Retention arrangements in place for critical-to-retain staff.

Communication plan designed to keep all staff and other stakeholders informed of progress and changes impacting them.

Synergy targets established and systems are in place to record synergies captured.

Brand swap plans in place and being implemented and monitored.

We have an appetite for risks which we understand and are rewarded for and which are consistent with the delivery of our strategic objectives.

1 3 4
Failure to develop an appealing customer offer, to identify and respond to fast-changing consumer tastes and to maintain and grow market share

No change

Reduced revenue, profitability and lower growth rates than our budget.

Research conducted into consumer trends and plans developed to respond to key trends, including the piloting of new variations of existing brands.

Use of guest satisfaction tools and net promoter scores to collect customer feedback and measure performance of our pubs.

Increased investment in support and training for our employees to ensure service standards meet guest expectations and continue to improve.

Increased use of social media to enhance communication with our guests and other consumers.

With our vision to be the best pub company in the UK we expect to be able to react swiftly and appropriately to changing consumer trends to ensure continuity of earnings growth and achievement of our strategic objectives.

1 2 3 4 5
CHANGE POTENTIAL IMPACT MITIGATION AND MONITORING RISK APPETITE STRATEGY
Reduced consumer confidence in the UK, particularly in light of the referendum vote to leave the European Union increasing competitor activity
Increased

Reduced revenue, profitability and lower growth rates.

Focus on value, service and quality to appeal to a broad range of consumers. Piloting of new variations of existing brands.

Costs are kept under constant review and mitigation plans prepared and implemented where appropriate.

Broad geographic spread of pubs including in London and the South East.

Ongoing agreement innovation, training and support for our tenants.

Monitoring of competitor activity at strategic and tactical levels.

We acknowledge and recognise that in the normal course of business, the group is exposed to risk and we are willing to accept a level of risk in order to achieve our strategic priorities and will manage the business accordingly.

1 2 4

CHANGE POTENTIAL IMPACT MITIGATION AND MONITORING RISK APPETITE STRATEGY
Significant cyber security breach

Increased

Potential impact on our ability to do business, impacting revenue and profitability.

Reputational damage and financial damage from fines or compensation.

Networks are protected by firewalls and anti-virus protection systems with back-up procedures also in place.

Plans in place to further enhance controls in this area including ongoing investment.

Constant monitoring of threats to data protection by viruses, hacking and breach of access controls, with additional controls added during the year.

Data governance committee drives improved behaviours and management response.

We have a low appetite for significant breaches within our IT operations.

3 5
Risks associated with the recruitment, retention and development of employees and licensees

No change

Inability to execute our business plans and strategy.

Potential impact on the profitability of our Pub Partners business where the risks relate to licensees.

A branded recruitment plan is in place with a strong pipeline of suitable candidates. In addition, we operate a range of apprenticeship programmes.

Remuneration packages are benchmarked to ensure that they remain competitive and appropriate mechanisms are in place for managing pay progression.

Career development programmes are in place to retain key employees and leadership training has been introduced for all levels of management.

Our annual employee engagement survey is used to obtain direct feedback from employees on a range of issues.

Exit interviews are conducted with all head office, Brewing & Brands and Pub Company managers to enable action plans to be developed to deal with key leaver reasons.

The range of tenancy agreements, training programmes and support available is designed to attract and retain the best quality licensees.

The nature of the sector in which we operate is predisposed to high turnover levels, but we have a low tolerance for levels which exceed the sector average. We expect our staff to have appropriate skills to deliver the functions of the business.

3
Reliance on a number of key suppliers and third party distributors and on our own ability to produce, package and distribute our own beers
Increased

Supply disruption could impact customer satisfaction, leading to loss of revenue.

Key supplier or distributor withdrawal or long-term failure could reduce revenues or lead to increased costs.

Inability to brew and distribute our own beers could lead to loss of revenue.

Back-up plans are maintained in the event of the failure by or loss of a key supplier.

Detailed risk management and mitigation plans exist in our internal production and distribution activities, which are tested regularly across the business.

Key suppliers are expected to maintain disaster recovery plans, which we review on a regular basis.

We recognise that we carry an inherent risk in relation to third party suppliers, but we seek to minimise this risk through management and control.

1 2
CHANGE POTENTIAL IMPACT MITIGATION AND MONITORING RISK APPETITE STRATEGY
Risk of increased regulation, and failure to respond to recent changes in regulation, in relation to any matter affecting our retail business, including National Living Wage, the apprenticeship levy, the anticipated rates revaluation in 2017 and potential future changes in relation to the sale of alcohol

Increased

Legislation such as the National Living Wage and the apprenticeship levy will drive up costs as will any increases in rates charged on our pubs and restaurants. Legislation impacting consumers could potentially reduce demand leading to reduced revenue.

We have developed a plan which will in part mitigate the cost impact of the National Living Wage and the apprenticeship levy over the next three years.

Monitoring of legislative developments and active engagement with government where necessary.

Diversified offer includes soft drinks, coffee, food and accommodation to reduce our reliance on alcohol-based revenue.

We recognise that, in the normal course of business, we are exposed to legislative risk that we need to manage appropriately in order to meet our strategic objectives.

1 5
Failure to respond to the threats to our Pub Partners business posed by the introduction of the ‘market rent only’ (MRO) option and the statutory code

No change

Loss of income and profits in Pub Partners from reduced beer margin and penalties for breach of the statutory code.

Development of agreements that are exempt from the MRO option with plans to adopt these where possible.

Site-by-site plans developed to mitigate risks.

Upweighted compliance team in place with training for all relevant employees, and enhanced processes and procedures to reduce risks.

We recognise that in the normal course of business, we are exposed to legislative risk that we need to manage appropriately in order to meet our strategic objectives.

4 5
Failure to comply with major health and safety legislation, including in the areas of food safety and fire safety, or significant food integrity issues
Increased
Serious illness, injury or even loss of life to one of our customers, employees or tenants, or significant food integrity issues, could have a significant impact on our reputation, leading to financial loss too.

Comprehensive range of formally documented policies and procedures in place, including centrally managed system of compliance KPI tracking and internal and independent audits to ensure compliance with current legislation and approved guidance.

Health and safety policies reviewed by our primary authority partner, Reading Borough Council, which has rated our safety management systems as very good.

Safety measures are in place, including a supplier assurance programme, to ensure that product integrity is maintained and that all food and drink products are fully traceable.

Compliance programme in place to ensure pubs are safely handed over to new tenants.

We have no appetite for health and safety breaches within our operations. 1 2
CHANGE POTENTIAL IMPACT MITIGATION AND MONITORING RISK APPETITE STRATEGY
Inability to meet the funding requirements of the enlarged group

Decreased

Reduced revenue, profitability and lower growth rates than our strategic plan.

The group's debt structures and financing requirements are kept under regular review.

The group has a £460m bank facility to support activities outside the securitisation vehicles, which was entered into in July 2013 and is available until July 2018.

We completed a tap of our Greene King securitisation vehicle in May 2016.

We expect the group to be able to access suitable financial facilities to meet the ongoing requirements of the business and our longer-term strategic objectives.

5
Liquidity and covenant risk relating to the group’s securitisation and other financing arrangements

No change

A breaching of any financial covenants applicable to the group would impact our ability to pay dividends or reinvest cash, and impact our reputation and ongoing creditworthiness.

Long-term strategy and yearly business plans are formulated to ensure that financial covenants can be met and monitored on a regular basis.

Working capital is carefully forecast, regularly reviewed by the finance teams and closely managed.

We expect to be able to meet our payment obligations and covenant levels under a range of cautious but plausible liquidity scenarios.

5
Funding requirements of our defined benefit pension schemes, which are subject to the risk of changes in life expectancy, actual and expected price inflation and investment yields
Increased

Increased deficit being recognised on our balance sheet, and volatility of the deficit makes longer-term planning more difficult.

All the schemes are now closed to future accrual to reduce volatility.

There is regular monitoring of the schemes’ investments and dialogue with the trustees on an ongoing basis regarding funding requirements.

We expect to maintain funding levels for our pension schemes at manageable levels.

5

Viability statement

In accordance with provision C2.2 of the 2014 UK Corporate Governance Code, the board has assessed the prospect of the company over a period of three years from the date of approval of the financial statements.

The board concluded that a three year period was appropriate as it is aligned to the group’s strategic planning process. The latest three year plan was approved by the board in February 2016 and covers the three year period to the end of the 2018/19 financial year.

Long-term financing is provided by the group’s securitisation and debenture vehicles both of which have a weighted average life of 12 years remaining. The group also utilises a £460m revolving credit facility to provide liquidity and to manage its seasonal cash flows. The latest three year period goes beyond the June 2018 date when this facility matures.

The group’s three year plan is prepared by consolidating each business segment’s own plan and overlaying group assumptions in respect of estate optimisation and capital structure. Key assumptions underpinning the three year plan and the associated cash flow forecasts are the economic outlook, revenue growth expectations, impact of expected inflationary cost pressures, estate development and disposal opportunities, the successful integration of the Spirit business and realisation of synergies, and that credit markets remain stable in order to renew the revolving credit facility. A further report on viability was presented to the board following the conclusion of the tap of the Greene King securitisation vehicle which took place after the year end.

The three year plan considers cash flows and compliance with the financial covenants contained within the group’s revolving credit facility and structured finance vehicles.

As detailed in this section the board has conducted a robust assessment of the principal risks facing the company. This includes consideration of strategic risks, economic and market risks, operational and people risks, regulatory risks and financial risks. The resilience of the group to the impact of these risks has been assessed by applying significant but plausible sensitivities to the cash flow projections based on past experience. This includes modelling the effect of reduced consumer confidence and therefore spending, the failure of our business to maintain and develop compelling customer offers, food safety issues, lower than anticipated acquisition synergies and the impact of increased regulation across the business.

Taking account of the company’s current position, principal risks and the sensitivity analysis discussed above, as well as the potential mitigating actions that the company can take, and the experience that the company has in adapting the business to change, the board has a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the three year period of assessment.