Annual Report and Accounts - Ei Group plc...27094 11 December 2019 9:05 am Proof 10 Ei Group plc...

27094 11 December 2019 9:05 am Proof 10

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Annual Report and Accountsfor the year ended 30 September 2019

ei group AR2019 Proof 10 A.indd 3 11/12/2019 10:24:13


Welcome to our 2019 Annual Report and AccountsWe are the largest portfolio manager of pubs in the UK. We aim to partner with those who are passionate about pubs by granting leases and tenancies to the best publicans and recruiting high quality, entrepreneurial managers for our managed pubs, as well as collaborating with experienced experts in the pub industry.

We have a robust core at the heart of our business

Z Largely freehold asset backed business

Z Highly cash generative

Z Strong financial performance delivering stable returns

Our business model page 08Our strategy page 10

We are making good progress with our strategic evolution

Z Strategy delivery is now business as usual

Z Proactive portfolio management creating and releasing value

Z Asset evaluation and optimisation process operating well

Our market page 06Chief Executive‘s review page 16

We are creating value for our stakeholders

Z Highly disciplined and returns-driven capital allocation

Z Actively monetising assets to unlock embedded value

Z Cash generation to optimise returns for all stakeholders

Z Recommended cash acquisition of the Group by Stonegate Pub Company at 285p per share, representing 38.5% premium to closing share price on 17 July 2019

Over

4,000pubs

Property assets

£3.3bnRevenue

£724m

Financial review page 22Corporate social responsibility page 25



Highlights

Underlying EBITDAin line with expectations, reflecting the completion of the disposal of 354 commercial property assets

Contents

Underlying profit before tax

Statutory loss after taximpacted by net non-underlying charges of £306m (2018: £28m)

Underlying basic EPSStatutory basic loss per share 46.2p (2018: statutory basic earnings per share 15.2p)

Operating cash flows

Recommended cash acquisition by Stonegate Z Recommended cash acquisition of Ei Group plc by Stonegate Pub

Company (the Stonegate Offer) at 285p per share announced on 18 July 2019, and approved by shareholders on 12 September 2019

Z The offer price represented a premium of approximately 38.5% to the closing share price on 17 July 2019 and implies an enterprise value of £2,969.5 million and a multiple of approximately 11.3 times the Group’s underlying EBITDA for the financial year to 30 September 2019, adjusted for the disposal of commercial properties

Z As expected, the Competition and Markets Authority (CMA) is undertaking its phase one review of the transaction. Subject to the outcome of the CMA review our expectation remains that the transaction will complete in the first quarter of 2020

Strategic reportHighlights 01At a glance 02Chairman’s statement 04Our market 06Our business model 08Our strategy 10Key performance indicators 14Chief Executive’s review 16Financial review 22Corporate social responsibility 25

Workforce policies and practices 36Risks and uncertainties 37

GovernanceBoard of Directors 44Directors’ report 46Governance report 51Audit Committee report 57Nomination Committee report 63Directors’ remuneration report 65

Statement of directors’ responsibilities 79

AccountsGroup income statement 80Group statement of comprehensive income 80Balance sheets 81Group statement of changes in equity 82Company statement of changes in equity 84Cash flow statements 85Notes to the accounts 86

Independent auditor’s report 140

Shareholder informationFive year record 149Analysis of ordinary shareholders 149Shareholder information 150

£276m(2018: £287m)

£118m(2018: £122m)

£209m(2018: profit of £72m)

21.6p(2018: 21.2p)

£247m(2018: £271m)

01www.eigroupplc.com

Financial review page 22Corporate social responsibility page 25



Our purpose... Drives our vision...

To own and operate pubs that are at the heart of local communities

To be recognised as the most innovative, progressive, value creating portfolio manager of pubs and properties in the UK

Which is underpinned by our values

Central to how we operate and implement our strategy are our values:

Respect Service-led Innovative Collaborative Commercial

02 Annual Report and Accounts for the year ended 30 September 2019Ei Group plc

At a glance



Our strategic objective

To optimise value creation for every asset in our portfolio using the following operating models:

Publican Partnerships Managed Commercial Properties

Our core leased and tenanted business

To work in partnership with our publicans to develop

great pub businesses

Our 100% owned and

operated managed pubs which are traded in two

unbranded formats

To maximise earnings by investing in defined retail offers

with direct management control

Our pubs managed in partnership with some of the best operators in

the pub industry

To identify talented operators and enable them to create

exceptionally successful businesses that deliver strong financial results

A portfolio of assets which we lease to third parties on commercial property terms

To maximise the value of Group assets using our

commercial property expertise

Value from pub operations Value from pub operations Value from monetisation Value from monetisation


Strategic report

3,424 PUBS

(2018: 3,718 pubs)

392 PUBS

(2018: 308 pubs)

70 PUBS

(2018: 47 pubs)

125 ASSETS

(2018: 412 assets)

Revenue

£487m(67% of Group)

Revenue

£19m(3% of Group)

Average net income

per pub £83,200

(2018: £81,400)

Average site EBITDA £112,000

(2018: £102,000)

Average site EBITDA £187,000

(2018: £214,000)

Average net income per property

£75,300 (2018: £72,300)

Return on investment (2018: 19%)



Net annualised

rental income (2018: £29m)

LFL* growth

1.2%LFL* growth

5.0%LFL* decline

5.0%

Net income Sales Net income

UP

2.2%UP

9.8%DOWN

12.6%UP

4.1%20% 23% 23% £9m

Revenue

£218m(30% of Group)

* Like-for-like



Robert Walker Chairman


Chairman’s statement

Four and a half years ago the Group announced a transformational five year strategy. This was aimed at optimising the value of our pub assets for all our stakeholders: it included income growth in our Publican Partnerships business, the creation, from scratch, of a managed pub business and infrastructure (now operating at scale) and the consolidation and growth of a commercial property portfolio with the intention to monetise those sites at an appropriate juncture.

In March 2019 we completed the disposal of the first significant tranche of commercial properties realising £332.7 million, demonstrating their underlying value and providing a sustainable opportunity to return capital to our shareholders.

In May 2019 we were approached by Stonegate Pub Company. The clear position of the whole Board at the time of the initial approach was that the proposal, and a revised proposal put to us later, failed to reflect what we, as the Board, viewed as the fundamental value and prospects of the Group. The five year strategy was approaching maturity and we had delivered a net debt reduction of £780 million, grown the equity value in the same timeframe by 209% and materially narrowed the discount to the tangible net asset value of the Group.

While we had full confidence in continuing to execute the Group’s strategy, and had approved its further development to 2024, the Board felt that Stonegate’s further revised proposal of 285p per share was at a level that the Directors felt able to enter into discussions. As part of recommending this transaction to shareholders we took into account various factors including

that the offer price represents an enterprise value/EBITDA multiple of 11.3 times which was a premium to recent transactions and fully reflective of the quality of the estate and our cash flow generation. We were also mindful that the offer price represented a premium of approximately 4.3% to the tangible net asset value as at 31 March 2019 (on a fully diluted basis) and a premium to our shareholders of 38.5% to the closing share price on the day before the announcement of the acquisition. The Board also sought reassurances on Stonegate’s approach to our broader stakeholders.

Shareholder support for this transaction has been overwhelming, as demonstrated in the outcome of the general meeting held in September 2019 to approve the offer.

There is a strong strategic rationale for combining with Stonegate. It provides the opportunity to generate incremental benefits as a combined business and unlocks benefits to customers, tenants and employees. The acquisition also gives the opportunity for our shareholders to exit their investment at a substantial premium to the share price prior to the date of the announcement, at a premium to the tangible net asset value as at 31 March 2019 and at a level which allows them to realise the future benefits of our strategy sooner. At the time of writing this report we remain in an offer period and subject to regulatory clearance and our expectation is that the court sanction will be in or around the first quarter of 2020. Until that time, we continue to operate on a business as usual basis.

The financial performance for the year under review is a real testament to our people, tenants and retailers. Underlying

The financial performance for the year under review is a real testament to our people, tenants and retailers.

Underlying EBITDA

£276m(2018: £287m)

Underlying basic EPS

21.6p(2018: 21.2p)


27094 11 December 2019 9:05 am Shell

Strategic report


EBITDA was £276 million (2018: £287 million), after the disposal of 354 commercial properties during the year. Underlying profit before tax (PBT) was £118 million (2018: £122 million) and underlying earnings per share (EPS) was 21.6p (2018: 21.2p). Our statutory loss after tax for the year of £209 million (2018: statutory profit after tax of £72 million) is after goodwill impairment and other non-underlying items of £306 million (2018: £28 million).

Within Ei Publican Partnerships, our majority leased and tenanted business, like-for-like net income per pub was up by 1.2%. This is the sixth successive year of like-for-like growth, a performance which validates our strategy and is a testament to the strength of relationships that our operational teams have built with the vast majority of lessees and tenants.

In our managed pubs we achieved industry leading like-for-like sales growth of 5.0%. Our managed pubs comprise 329 pubs operating under our wet-led Craft Union business, 63 pubs trading as fully managed operations under our Bermondsey banner and another 70 trading as Managed Investments alongside 11 specialist partners.

Our free-of-tie, rent-only Commercial Properties business comprised 125 properties at year end, after disposal of 354, with the average net income per property on this smaller portfolio now at £75,300 (2018: £72,300).

All in all, a strong performance across each of our operating models.

I would like to thank all of our colleagues across our businesses for their hard work, commitment and enthusiasm during this year, and for not once being distracted by corporate activity so as to once again deliver an outstanding set of results.

Twelve months ago I did offer a final word about Brexit and find myself doing so again one year on. As I said last year the Board has regularly evaluated the potential impact of various outcomes on our businesses. Since most of our products and their ingredients are UK sourced and since the majority of our businesses are still wet-led, requiring less labour, we regard the likely impact as relatively small in nature. We remain confident in our ability to surmount any short-term problems.

R M Walker Chairman

18 November 2019



Overview Industry challenges

Competitive eating out market – the value of the eating and drinking out of home market in the UK is £91 billion p.a.(2), of which pubs make up £23 billion. To maintain share, pubs need to effectively compete with a huge variety of alternative eating and drinking options. They should capitalise on the informality of pub occasions and value driven by the perceived price of pubs versus restaurants, whilst also improving the quality and range of the pub offer. Pubs must also be mindful and adapt to the rise in consumer demand of convenience (on-the-go, quick service restaurant) and change in consumption, as seen in growth of breakfast and snacking and decline in lunch occasions.

Cost headwinds – annual increases in the National Living Wage are putting pressure on labour costs within pubs, with this seen as the single largest cost increase year-on-year. Together with growing utility costs, business rates and food and drink prices, pubs constantly need to seek out innovative ways to grow revenues and get best value on costs. Wet-led pubs have an inherent advantage here as they are less exposed to growing kitchen labour costs and food price increases.

The pubs and bars market in the UK is made up of over 43,000 outlets which generate a combined total of £23 billion annual sales, having grown 1.9% year-on-year(1). Over the past couple of decades pubs and bar outlets have been in significant decline although this rate of decline, estimated at 0.9% in 2019, (c.8 pubs per week) is forecast to return to growth in 2021.

The Group owns over 4,000 outlets or nearly 10% of the pubs and bars market in the UK. We are the largest operator of leased and tenanted pubs in this market with our 3,424 pubs operated under this model accounting for more than 20% of the total. In addition we are now the sixth largest managed house operator with our 462 generally unbranded outlets, and growing, as pubs transfer in line with our strategy.

Industry trends

Although steeped in tradition, the pub and bar industry has had to constantly evolve to remain relevant with today’s demanding consumers. Premiumisation continues at pace across the sector as consumers look for quality in product, service and environment and are willing to pay for them. Pubs need to ensure that not only do they have the breadth and depth of range but that they also deliver a premium experience to capture market share. The biggest growth models in the market at present are those that offer a differentiated product and/or experience and those that cater to an all-day market, the latter category becoming increasingly important in popularity as pubs capitalise on the rise of the ‘third space’. To this end pubs need to ensure they deliver home and work comforts such as free wifi, good lighting, comfortable spaces and varied food and drink ranges.

There is also opportunity for pubs to maximise their value through alternative revenue streams such as experience-led entertainment or converting unused trading spaces into accommodation.


Our market



Industry challenges

Recruitment challenges – unemployment levels in the UK remain low and within the industry it can be difficult to recruit skilled workers, especially into kitchen roles. This is expected to become more so post-Brexit. Access to apprenticeships and investment in people development and training is key to ensuring that good skilled workers are supported, engaged and promoted.

Supermarket pricing strategies and offers – the pub has to compete with supermarket chains that offer huge ranges of food and drinks, from beer through to gourmet meals, at low prices, tempting consumers to save their money and stay at home. To compete, pubs need to ensure they offer an experience their consumers can’t get at home - be that a place to connect socially or through a differentiated food and/or drink offer not readily available elsewhere.

The Group can continue to win by promoting those factors that are driving growth in the market.• Invest in place, have the right space to connect, with individuality and

character – to get people in, especially more women and younger generations. For the last three years the Group has spent c.£80 million per annum on capital schemes which are directed to ensure the best returns on investment across the estate.

• Invest in training, to improve the service and experience – to get people back and offer them what they want to maximise sales and dwell time through premiumisation, healthier food choices (vegan, vegetarian, lower calorie, sustainable options), and a greater range of food and drinks. With a growing managed estate the importance of good training in customer service has become more evident, with learnings from these pubs being made available to our EIPP publicans.

• Invest in technology, to make consumers’ experiences more engaging, entertaining and convenient.

• Invest in digital, consumers make and share their plans electronically, pubs need to accommodate this digital selection process through easily downloadable menus, clear interior shots, a diary of events and loyalty schemes. The Group has invested in our digital strategy over the last couple of years and appreciate there is more work for us to do in this area to be market leading.

• Support the experience economy, pubs need to be active in creating a schedule of events that spark interest and excitement. Make experiences that are relevant and shareable, pubs cannot be passive, activities and events, be that sport or curry nights, are the focus.

• Innovate, to ensure we stay ahead of the game with our products, experiences, and digital presence to meet and exceed consumer demands. Our scale, bandwidth and relationships with suppliers allow us access to new products and experiences as they come to market such that we can identify where they could be successful in our managed estate and offer to our publicans in our EIPP estate.

• Maximise trading spaces, to ensure pubs are generating best value through utilising excess space in pubs to further income streams such as accommodation. We seek to review all capital projects to ensure trading potential is maximised, which can include letting rooms where suitable.

• Relevance, consumers demand transparency and actively look to support those that are invested in making the world a better place be that investment in the local community (charity, produce) or supporting a sustainable agenda.

Read more about Our business model on page 08

(1) MCA UK Pub Market Report 2019(2) MCA UK Eating Out Market Report 2019


Strategic report



Our assets and capital

structure

Enable our operating

models

We have a flexible business model optimised to leverage market opportunities

Our business model

We have over 4,000 properties geographically spread across the UK

Our total property assets are valued at £3.3 billion

Supported by our efficient capital structure

Z 95% freehold

Z High quality

Z Significant buying power

Z Returns-based capital investment programme

We have operational flexibility through various trading models to facilitate asset value optimisation

The operating models have been designed to allow our pubs and publicans to thrive within their communities

Z Flexibility to respond to a changing environment

Z Provides the optionality with which to optimise returns and unlock the embedded value

Z Efficient portfolio manager

KEY DIFFERENTIATORS:


Our strategy on page 10 Financial review on page 22 At a glance on page 02 Our market on page 06 Accounts on page 80




Creating value for

stakeholdersProvide our offer

We have a flexible business model optimised to leverage market opportunities

Each of our properties are matched to their optimum retail proposition maximising the best mix of revenue

Drink: incorporating drinks sold to publicans for on-sale and directly to customers in our managed segment

Rent: largest leased and tenanted pub company in the UK

Z Focused on maximising value from each property

Z Wet-led model

Z Buying power and long-term supply arrangements provide beneficial access to the drinks market

Z High proportion of prime and secondary locations

We partner with those who are passionate about pubs keeping shared success at the heart of our business

Z Exceptional levels of service and support

Z Flexibility in more challenging times

Our shareholders are a key source of efficient capital enabling our business model

Z Underlying EPS growth Z Growing tangible net asset value

Our pubs are at the heart of community life, providing a diverse range of goods, services and facilities making a valuable contribution to the local economy

Z 15 million adults visit pubs weekly

Attracting the best publicans who run successful businesses allows our business model to grow

Z We have invested over £300 million in our pubs over the last five years

Our employees and the support they provide are key to attracting the best publicans and running the best managed pubs. Engaged and motivated staff are essential to our business

Z We directly employ over 2,000 people, but in turn, our 4,000 pubs employ many more thousands of people across the country



COMMUNITIES

PUBLICANS

EMPLOYEES

Support our people

SHAREHOLDERS


Strategic report



Our overall strategic objective is to optimise value creation from every asset in our portfolio to drive returns to shareholders.

Capital strategy

1 Reduce debtTo strengthen the balance sheet through deleverage, leading to greater free cash flow to invest in our assets and make returns to shareholders resulting in a prudent, sustainable balance sheet

Leverage 6.2x

Net asset value per share

£2.97

2 Invest in our assetsWe aim to invest in our estate to support like-for-like growth, enhance returns and optimise value

Capital spend on growth driving schemes

58%

Return on investment (ROI)

21%

3 Returns to shareholdersWhen the markets allow and the share price is at a significant discount to net asset value per share, look to buy back shares as an efficient use of cash that is accretive to shareholder value

Share buybacks £59m

We have identified that our value creation is driven by operating pubs in our Publican Partnerships and Managed Operations businesses and by monetising value through disposal in our Managed Investments and Commercial Properties businesses.

We own a high quality and well invested asset portfolio with a total property asset value of £3.3 billion and we apply a thorough asset optimisation process that considers various options for a pub, including disposal where applicable, to determine its optimal use. We generate strong free cash flows driven by the momentum of like-for-like sales and income growth, combined with disposal proceeds as we continue to dispose of unsustainable pubs, delivering excess cash flow for us to utilise to enable further investment in the estate, reduce debt and return value to shareholders.

This strategy was initially announced in May 2015 as a five-year strategy designed to drive returns to shareholders. Over the last four and a half years we have successfully executed both the operational and capital management elements of this strategy and returns to shareholders have been delivered.

The approach by Stonegate to acquire the business is recognition of the strength of our strategy and the value of our high quality pub estate. Stonegate has indicated its intention to continue our strategy of improving the quality of the estate following the expected completion of the acquisition.

300

275

250

225

200

175

150

125

100

75

50

2015 - 2016 2017 - 2018Build Execute Monetise

2019

Jan 15 Jan 16 Jan 17 Jan 18 Jan 19 Jul 19

285p

115p

New five year stategy announced

12 May 15

Share buybacks commence 22 Mar 16

200 managed pubs operational

30 Jul 17

Monetisation of EICP signalled

15 May 18

Monetisation of EICP contracts

exchanged 11 Jan 19

Group underlying EBITDAgrowth reported

14 May 19

Recommendedoffer announced

18 Jul 19

sha

re p

rice

(p)

Ei Group plc: Five year story of value creation


Our strategy



PeoplePeople are at the heart of our business and pivotal to our success. Our people strategy sets out our ambition and aspirations for our teams and how we aim to support and develop our people to deliver the very best service possible for our publicans and customers.

Our key people priorities are:

The right people

Doing the right things

In a great place to work

Where performance counts

And we are organised to win

Recruitment Performance, development & training

Culture Performance & reward

Organisational design

• The employer of choice within our market

• Increase the quality of our people

• Lead, inspire and develop our people to perform to their potential

• Retain the best

• A supportive environment

• Our values are lived and breathed

• Achievement is recognised

• Performance is rewarded

• The right infrastructure and resources

We appreciate that our publicans and operators are a critical element of our strategy and directly influence the success of each of our assets. We offer investment and support to enable our publicans to grow their businesses and continually reassess our offer to ensure that both the nature of our contractual agreements and the range of support we provide is competitive and impactful.


Strategic report



1Build – operating models

EIPP remains our core business to both generate growing returns and to provide a pipeline of sites for the other businesses. We pride ourselves on our ability to attract and retain new and experienced publicans to run our pubs.

EIMO represents our 100% owned and operated managed pubs which are traded in two unbranded formats. Craft Union is an established operator of community pubs, with one clear retail offer; drinks-led with quality beers, at affordable prices, served in local, well-invested facilities. Bermondsey has a more flexible retail offering, which can incorporate an element of food, and is increasingly tailored to reflect a proven pre-existing retail offer and consumer occasion.

EIMI concentrates on pubs that have significant upside potential needing a specialist offering and operator in order to achieve optimum value.

The EICP business manages all of our free-of-tie leases where tenants include household names as well as independent public houses and restaurant operators. They have good covenant strength and are keen to access our quality portfolio on commercial terms.

2Execute – near-term strategy

We are focusing on our core strength of wet-led pubs and investing where returns are more certain, whilst sharing best practice in our managed operations with our publicans. Embracing the Pubs Code and MRO option we are focused on optimising the profile of tenancy and lease agreements.

The whole business works together to identify appropriate conversion opportunities whilst Bermondsey and Craft Union continue to learn from their experiences in the pubs already converted to ensure new conversions are even better.

Combining our good pipeline of sites alongside the buying power and support we can provide with the specialist retail capabilities of our partners enables us to operate exceptional pubs. The best learnings from our partners are shared across the business.

We are focused on quality not quantity, working alongside other business units in evaluating opportunities to optimise value by bringing assets into our commercial property portfolio, whilst retaining the flexibility to realise value.

3Monetise – optimise returns from each asset

Whilst we expect the size of our estate to gradually reduce, we will work to continually improve its quality and grow returns from each asset.

We expect the estate to continue to grow in number and deliver like-for-like sales growth. We aim to grow value through good investment decisions, experience and asset optimisation.

We have 11 partners and our primary focus is to maintain a broad operating style mix and geographic coverage whilst growing the scale of our existing partners, ensuring trading results are optimised to get the best return on monetisation.

A portfolio of 354 properties were sold in the year achieving their book value, demonstrating our strategy of realising value at the appropriate time.

4Driving returns – driving growth

Like-for-like net income

Average net income per pub

Number of Managed Operations sites

Like-for-like sales

Pub level EBITDA

Number of Managed Investments sites

Like-for-like sales

Pub level EBITDA

Number of Commercial Properties sites

Average net income per property

5Delivering

Free cash flow Net asset value Earnings per share


Our strategy



Craft Union – Union Bank and Pub Support Hub, WakefieldIn July 2019 the Group completed an extensive refurbishment at the historic Grade II listed Wakefield and Barnsley Union Bank building on Westgate, Wakefield, which dates back to 1877, lovingly restoring this iconic building to its former glory.

The building is now home to a new Craft Union pub (the Union Bank), as well as accommodating the Group’s support team and a suite of training and meeting facilities for use by the wider business. Known as the Pub Support Hub, this initiative has generated 20 jobs for the local area and gives our people a base for the support and training they need to continually deliver exceptional customer experiences, share best practice and enhance their own personal development.

The Union Bank is the third Craft Union pub to open in Wakefield, joining the Strafford Arms and Raven and reaffirms Craft Union’s ethos of investing in great quality pubs at the heart of local communities.

Bermondsey – Three Tuns, AldgateThe Three Tuns in Aldgate is a traditional British pub in the City of London which originally transferred into Bermondsey in May 2016 following a major investment, having previously been operated on a lease within our EIPP business. Having traded the pub successfully in the Bermondsey format for two years, the team identified an opportunity to enhance the customer appeal of the site and so improve our returns. In August 2018 the newly refurbished site reopened with enhanced function space and an innovative roof terrace complete with a draught dispensing bar. This new trading space is now in use for private functions and as a public bar, proving an exceptionally popular outdoor drinking space on sunny days.

Alongside the reinvestment into the site, the team also launched a Deliveroo offering of its Pieminister menu, allowing delivery of the site’s popular pie menu to the local area and further improving sales.

The strong like-for-like sales growth seen since this additional investment is a testament to the team’s knowledge of their site and their guests.

Strategy in action

Union Bank

Three Tuns


Strategic report



Business performance

The key performance indicators below are those used by the Group to measure its performance. These are the Group’s way of assessing how successful it has been at delivering its business model, and ultimately driving value for its shareholders and are used internally to drive decision making. The measures chosen are a suite that facilitate comparability with our peers and are significant performance metrics for both our executive remuneration package and also our wider employee population.

Accordingly they have been grouped into: Read more information about:

Highlights page 01

Financial review page 22

Corporate social responsibility page 25

Accounts page 80

Like-for-like net income growth

Measures earning per share using profits before non-underlying items.

Read more in: Highlights Financial review Directors’ remuneration report

Return on investment

Measures the leased and tenanted change in net income on a same estate basis, i.e. adjusting for disposals, at the end of each year. Net income is defined as underlying EBITDA, stated before property costs and administrative expenses.

Read more in: Highlights Chief Executive’s review Directors’ remuneration report

Capital spend on growth driving initiatives

Measures the proportion of capital spend on projects aimed at driving income growth.

Read more in: Financial review Directors’ remuneration report

Measures cash flow from operations less interest and taxes but before capital expenditure and disposals.

* Adjusted for professional fees paid in relation to the proposed offer for the Company.

Read more in: Directors’ remuneration report

Measures return on capital employed as underlying EBITDA divided by net assets excluding net debt and deferred tax provisions.

Read more in: Directors’ remuneration report

Measures the incremental income delivered as a result of the investment divided by the value of the capital investment on growth driving initiatives.

Read more in: Chief Executive’s review

2017 2018 2019

21.6p

21.2p

20.5p

2017 2018 2019

1.2%

1.2%

2.3%

2017

7.6%2017

£112m2018

7.6%2018

£128m2019

8.7%2019

£113m*

Underlying EPS Free cash flow ROCE

2017 2018 2019

60% 60% 58%22% 21%21%

15

20

25

2018 20192017


Key performance indicators

Business performance

Strategic development

Capital structure



Strategic development

Capital structure

Measures net debt divided by underlying EBITDA, to give an indication of how much debt the Group has as compared to profit levels.

Read more in: Note 22 of the financial statements

Measures the number of properties in each business unit.

Read more in: Chief Executive’s review

Measures the level of debt in the Group, offset by the cash balances.

Read more in: Financial review

Measures how many times the Group can cover its interest charges with profits, calculated as underlying EBITDA divided by net underlying finance costs.

Read more in: Note 22 of the financial statements

Number of trading properties Investment and disposal

2017 2018 2019

£80m

£81m

£66m

£100

m

£87m

£384

m*

Measures the use of disposal proceeds to reinvest in the estate.

* £384 million includes £341 million of proceeds from the commercial property portfolio disposal and £43 million of proceeds from ordinary course disposals.

Read more in: Highlights Chief Executive’s review

2017 2018 2019£1

5m

£20m

£5m £59m

£162

m

Measures the allocation of free cash to improving leverage (through purchase, cancellation and redemption of bonds) and returns to shareholders.

Read more in: Highlights Chief Executive’s review

Bonds Shares

Capital allocation

Net debt

2017 2018 2019

£2.9

7£3.34

£3.13

Measures the net assets before amounts due to non-controlling interests divided by the number of shares at 30 September (excluding treasury shares and shares held in the Employee Benefit Trust).

Read more in: Highlights Financial review Directors’ remuneration report

Net asset value per share

Interest cover

Colleague engagement index

Leverage

2017 2018 2019

£1.7bn

£2.0

bn

£2.1

bn

Measures staff engagement by summing the scores from seven specific questions within the employee engagement survey undertaken by Parent Company employees.

Read more in: Corporate social responsibility Directors’ remuneration report

2018: 3,7182017: 4,051

Publican Partnerships

3,4242018: 4122017: 331

CommercialProperties

1252018: 2542017: 178

Craft Union

3292018: 542017: 48

Bermondsey

632018: 472017: 30

Managed Investments

70

Disposals Capex

See at a glance for KPIs relating to the Group’s business units on pages 02 and 0315www.eigroupplc.com

Strategic report

2018

81.1%

2017

83.3%

2019

86.0%

2017

1.9x2017

7.4x2018

2.0x2018

7.1x2019

2.0x2019

6.2x




Chief Executive’s review

Simon Townsend Chief Executive Officer

OverviewWe are pleased to report our preliminary results for the financial year ended 30 September 2019. We have delivered underlying EBITDA of £276 million, compared to £287 million in the prior year, reflecting the completion of the disposal of 354 commercial property assets during the year. These assets contributed approximately £13 million to underlying EBITDA in the current year and approximately £26 million in the prior year. Therefore, adjusting for this disposal, underlying EBITDA from our retained business grew from £261 million to £263 million.

The Group continues to make good progress in each of its three reportable segments: Publican Partnerships, our leased and tenanted business; Commercial Properties, our free-of-tie and non-pub property business; and Managed Pubs, which includes Managed Operations that are 100% owned by the Group and Managed Investments that are joint ventures with experienced retail partners.

Our Publican Partnerships business remains our core operation, generating approximately two-thirds of Group revenue, and the business has continued to deliver growth in like-for-like net income across the estate during the financial year. This resilient trading performance has now been maintained for six consecutive financial years, driven by the deployment of capital into growth opportunities across the estate and the provision of a substantial range of services and support to our publicans. Our operations team has accommodated the ongoing requirements of the Pubs Code Regulations 2016 (the “Pubs Code”) which came into effect in July

2016, whilst at the same time providing the source of assets to transition to our alternative operating models.

The fastest growing part of our Group is the managed businesses. As at 30 September 2019 we had 462 (2018: 355) managed pubs and expect this to grow further. Pubs are transferred to our managed businesses from Publican Partnerships, usually supported by significant investment in the pub, delivering increased diversity, predictability and scale of earnings to the Group. We have an established process of asset management that has effectively and efficiently been transferring in the region of 100-120 pubs a year to our managed businesses. As we have become more accomplished managed house operators we have grown our operational knowledge and capability and are able to bring more examples of best practice to our leased and tenanted pub business, as well as utilising our purchasing scale to greater effect to help our publicans increase their sales and reduce their costs.

We had substantially grown our Commercial Properties business over the last few years, primarily through the transfer of pubs from our tied Publican Partnerships business to pubs operating on free-of-tie agreements, including those which have elected to take up the Market Rent Only (MRO) option under the Pubs Code. This growth enabled us to monetise these assets through a disposal of many of them. The strategy for the Commercial Properties business continues as we transfer assets into it when we believe this will optimise value and then, as demonstrated by the recent transaction, we will look to monetise the portfolio through future disposal.

We continue to identify operational improvements to drive growth in like-for-like performance and to seek the optimum use for each of our properties.

Like-for-like net income growth

1.2%Offer for the Group

285pper share



The Tap on Tower Street, HarrogateThe Tap is a fantastic example of where a couple, who are real hospitality industry gems, have taken on a previously under-loved site and realised its true potential.

The Tap has always been a community wet-led pub, but in a fairly affluent area of Harrogate it had never really excelled. When Rob and Alison Thompson took on the site two years ago they were keen to create a modern community pub that would not only appeal to its core traditional drinkers but that would also attract affluent older drinkers from nearby sites and reach out to a younger beer-focused audience.

They believe the fundamental concept of a great community pub is good hospitality and activities accompanied by great drink in an environment where people feel comfortable. To that end they have created three distinct indoor and two outdoor drinking areas to appeal to their various customer groups and offer something a bit different to entertain, for example the pub is stocked with over 350 board games, a bottle shop, DVD players in the outside huts and pick and mix bar snacks. Their hospitality is delivered by teams that have the family-run business ethos at their core and that are supported and empowered to deliver great service.

All of this serves to strengthen The Tap’s true reason for being, its drink offer. Rob and Alison take pride in ensuring that their cask and craft ale range appeals to the widest audience by ensuring they offer quality, choice for both mainstream drinkers and those looking for something a little different and provenance, with all of their 60 gins being from the Yorkshire area. They constantly strive to innovate and refresh their range both in the products included and the way the drinks are served.

In just two years Rob and Alison’s hard work has turned The Tap around, culminating in its recognition as our Ei Group Pub of the Year for 2019.

The Tap

Strategy in action


Strategic report

Publican Partnerships Publican Partnerships, our tied leased and tenanted business, remains the largest part of our Group, contributing £291 million (2018: £307 million) to the underlying EBITDA of the Group reported in the year.

As at 30 September 2019, we had 3,424 (2018: 3,718) pubs trading within the leased and tenanted estate with average net income per pub growing by 2.2% to £83,200 (2018: £81,400). We delivered like-for-like net income growth of 1.2% (2018: 1.2%) through

the financial year with growth being achieved across all geographic regions. This performance is particularly pleasing given the very strong trading results last summer due to favourable weather and the FIFA World Cup.

LocationNo. of trading pubs at

30 September 2019

Like-for-like net income FY19

£m% of total net income

FY19

Like-for-like net income FY18

£m

Net income change FY19

%

North 949 74.1 26 73.1 1.4

Midlands 691 51.9 18 51.4 1.0

South 1,784 158.9 56 157.0 1.2

Total 3,424 284.9 100 281.5 1.2





Like-for-like net income growth in the leased and tenanted business has been maintained through the hard work of our publicans supplemented by our business enhancing support and our desire to invest capital alongside the best publicans to improve trading performance by improving the retail offer. In the year to 30 September 2019 we invested £14 million (2018: £19 million) in growth-orientated schemes across 330 (2018: 322) tied agreements and have delivered an average pre-tax return on investment (ROI) of 20% (2018: 19%).

We provide our tied leased and tenanted publicans with a broad range of services to help them increase sales and reduce costs, and to operate their pubs efficiently and effectively. Our growing managed businesses are now providing us with additional insight, experience and best practice with which to further enhance the support we can provide to tied publicans in the Publican Partnerships business. We have now published a total of 32 Pub Principle Guides, including such business areas as product range, pricing, social media and GDPR compliance, and our highly successful “eilive” roadshows saw an increase in the number of publicans attending year-on-year. In the prior year we launched a new online ordering platform, and almost two-thirds of our publicans now order a proportion of their weekly drinks requirement using this service.

The ability to assist publicans during periods of economic challenge is a key attribute of the business model operated by our Publican Partnerships business. The proactive intervention of our regional managers to identify and then avoid potential business failures is particularly important should our publicans face increased inflationary pressures. Despite external pressures such as rising input costs and the disproportionate burden of business rates, there has been no material change in the number of unexpected business failures with 82, or 2.0% of the estate (2018: 83, or 1.8% of the estate)

suffering such failure in the period. Where appropriate we continue to provide direct financial assistance to tied publicans and this cost has remained stable at £4 million in the year (2018: £4 million).

We continue to embrace the requirements of the Pubs Code, navigating a regulatory landscape which we believe continues to suffer from a lack of clarity, evolving interpretations and inconsistent arbitration outcomes. Notwithstanding this, we have not seen a material impact on our financial results from its implementation. From the date of its introduction to 30 September 2019, there were 1,662 rent review or agreement renewal events which could potentially have triggered an MRO request. As required under the Pubs Code, we issued 385 MRO offers in response to requests by publicans of which 213 have been concluded by way of mutually agreed tied deals and 52 have resulted in new mutually agreed free-of-tie terms. In addition, three pubs have been sold, 29 leases have been repurchased from the occupational tenant with the balance of 88 not yet concluded. Of these, 36 have been referred to the Pubs Code Adjudicator (PCA) for determination.

We have positively participated in the review of the Pubs Code which was announced on 30 April 2019.

We continue to believe that, despite the inevitable teething problems associated with the introduction of new legislation, there is clear evidence that the Pubs Code is having the effect that was intended by legislators. It provides tied publicans with a genuine opportunity to consider transferring their agreements to free-of-tie terms at specified trigger events during the life of their contractual agreements. Submissions to the review were invited between 30 April 2019 and 22 July 2019 and a response from the Department for Business, Energy and Industrial Strategy was expected within 12 weeks of the closing date. Once the response is published we will consider the findings and work with the PCA and industry colleagues to adopt any recommendations as appropriate.

Managed Pubs Our rapidly expanding and largely drinks-led managed pub businesses contributed £42 million (2018: £28 million) to the underlying EBITDA of the Group reported in the year, with those sites that traded as managed pubs throughout both this year and the prior year delivering like-for-like sales growth of 5.0% (2018: 7.1%).

The current level of managed house conversions reflects the profile of opportunities that have arisen and represents an efficient transition pipeline.

Profile of pubs under management:30 September

201930 September

2018

Managed Operations 392 308

Managed Investments 70 47

Total Managed Pubs 462 355



Star of the East, Limehouse

Old Spot Pub Company, one of our Managed Investment partnerships, has breathed new life into the Star of the East in Limehouse.

This pub had stood empty for a while and was proving to be a challenging pub to let in EIPP. However, our partners saw the opportunity to invest in this Grade II listed building and restore it for the local community.

With a brand new bar area, cosy snug, large courtyard and beautiful upstairs dining room overlooking Canary Wharf, the pub is a welcoming place with a relaxed atmosphere. The interior design reflects the care and attention originally invested in the striking frontage of the building. All events can be catered for, from boardroom meetings to birthday celebrations, with quality food alongside a carefully considered drinks menu that caters for all tastes.

Responding to the burgeoning trend for no and low alcohol drinks, Old Spot Pub Company has become the first to serve St Peter’s Brewery alcohol free beer on draught in all of its pubs.

Strategy in action

Star of the East


Strategic report

Managed Operations: Our Managed Operations business represents our 100% owned managed pubs which are traded in two unbranded formats. The Craft Union format has national coverage as a leading scale operator of community pubs, with one clear retail offer that is drinks-led with quality beers, at affordable prices, served in local, well-invested facilities. The Bermondsey format also operates nationally but has a more flexible retail offering, which can incorporate an element of food, and is increasingly tailored to reflect the pre-existing retail offer and consumer occasion.

As at 30 September 2019, we had 346 (2018: 232) pubs operating within Managed Operations that had been invested in and traded for more than six months. To that date, these pubs generated average annualised site EBITDA of £112,000 (2018: £102,000), from an average capital investment of £164,000 (2018: £154,000), which delivered an ROI of 23% (2018: 23%).

Managed Investments: In our Managed Investments business, we have developed a partnership model whereby we can work with carefully selected managed house operators to share in the benefits of trading in certain high quality and specialist retail segments. Our primary focus is to grow the scale of our existing partners, and enhance the quality of trading operations with the strategic intention of monetising their value at the appropriate time.

As at 30 September 2019, we had 50 (2018: 27) pubs operating within our Managed Investments business that had been invested in and traded for more than six months and these pubs generated average annualised site EBITDA of £187,000 (2018: £214,000), from an average site capital investment of £414,000 (2018: £392,000), which delivered an ROI, after the relevant partner’s minority interest, of 23% (2018: 21%).





Commercial Properties Our Commercial Properties division contributed £19 million (2018: £27 million) to the underlying EBITDA of the Group reported in the year, with the average net income per property growing by 4.1% to £75,300 (2018: £72,300). Only 41 properties traded as commercial properties throughout both the current year and the prior year and these properties reported like-for-like net income decline of 5.0% (2018: 5.1% growth). This performance has been impacted by six sites that were closed for periods during the year and one site where we received a significant backdated rent payment. Excluding these seven sites the like-for-like net income grew by 3.7%.

In 2018, reflecting our value-led approach, we appointed Rothschild & Co to assist us to explore various possible routes to optimise value from our commercial property portfolio. This process led to the announcement on 11 January 2019 that we had entered into sale agreements, subject to shareholder approval, with a subsidiary of Davidson Kempner Capital Management LP in relation to 370 commercial properties for an expected gross aggregate consideration of £348 million. On 14 March 2019 we completed the sale of the first tranche of this disposal, comprising 348 of the 370 commercial properties to be sold, for net proceeds of £332.7 million. As at 30 September 2019 we had completed the sale of six of the remaining 22 commercial properties, for proceeds of £7.9 million, which leaves 16 properties, with aggregate gross proceeds amounting to £3.5 million, subject to superior landlord consent and each sale will only complete should the relevant consent be obtained.

The Milehouse, Cross Heath

The Milehouse, Cross Heath has recently reopened following a significant joint investment with EICP. Previously a popular all-you-can-eat buffet, the site had been closed before Staffordshire & Cheshire Leisure Group (SLG) saw its intrinsic value.

The pub has been completely transformed into a premium bar and steakhouse and 50 new jobs have been created in the area. The restaurant has 170 covers, including a 20 seat private dining and meeting facility, and caters for all day parts with its traditional English menu with a twist.

The property will supplement the existing portfolio of SLG in the region and is a great example of EICP delivering on its strategy to partner with high quality tenants, prepared to invest significant capital in assets on standard commercial lease terms.

Strategy in action

The Milehouse




Strategic report

A significant proportion of the proceeds from the transaction have been used to reduce the level of the Group’s outstanding debt, accelerating the delivery of the Group’s medium-term target leverage ratio of 6.0 times net debt to EBITDA. In addition, the transaction enabled the Board to consider more immediate returns to shareholders through additional share buybacks.

The 354 commercial properties that have been sold to 30 September 2019 within the monetisation transaction contributed £13 million to Group EBITDA in the financial year to 30 September 2019 (2018: £26 million).

As at 30 September 2019 we had 125 properties within our Commercial Properties division, representing 36 sites which we held at 30 September 2018 that were not included in the disposal, 16 leasehold sites that may be sold as part of the disposal, subject to superior landlord consent being obtained, and 73 additional sites that have been added to the portfolio during the course of the year.

OutlookThe new financial year has started well, and the trading performance of our portfolio of businesses, together with the transfer of assets into alternative operating models, is progressing in line with our expectations.

We remain focused on leading the Group through to the expected completion of the acquisition by Stonegate. Our objectives are unchanged; it is business as usual. We continue to identify operational improvements to drive growth in like-for-like performance and to seek the optimum use for each of our properties.

W S Townsend Chief Executive Officer

18 November 2019




Financial review

Neil Smith Chief Financial Officer

Income statementUnderlying

30 September2019

£m

Underlying30 September

2018£m

Revenue 724 695

Operating costs before depreciation and amortisation (448) (408)

EBITDA 276 287

Profit before tax 118 122

Earnings per share 21.6p 21.2p

Our desire to return value to shareholders has been demonstrated by our share buyback programme in the financial year.

Net debt

£1.7bn(2018: £2.0bn)

Share buyback

£59m(2018: £20m)

We delivered underlying EBITDA of £276 million in the year compared to £287 million in the prior year. The reduction arises as a result of the completion of the disposal of 354 commercial property assets during the year. These assets contributed £13 million to underlying EBITDA in the current year and £26 million in the prior year. Therefore adjusting for this portfolio disposal, underlying EBITDA from our retained business grew from £261 million to £263 million.

Within Publican Partnerships, like-for-like net income, the primary component of our underlying EBITDA, is derived from our rental income and our net income from the sale of beer and other products to our publicans. Adjusted for the effect of disposals we saw our like-for-like leased and tenanted net income grow to £285 million (2018: £282 million). Our like-for-like net income from rent was in line with the prior year, whilst our net income from drink supply grew by £3 million driven by broadly stable volumes, pricing and mix benefits.

The growth in scale of our managed operations is increasingly evident in the financial performance of the Group as our managed businesses contributed £42 million in the year (2018: £28 million).

Underlying net finance costs of £137 million were £9 million lower than the prior year as a result of debt reduction.

Total pre-tax non-underlying charges were £317 million (2018: £35 million) comprising £15 million (2018: £6 million) in respect of debt redemption costs, £62 million (2018: £25 million) in respect of property net charges, a goodwill impairment of £232 million (2018: £nil) and £8 million (2018: £4 million) of other charges. The property charges were made up of £15 million (2018: £8 million) arising from the annual revaluation exercise, a charge of £5 million (2018: £11 million) on the revaluation of assets on transfer to non-current assets held for sale, a loss on the disposal of property (before goodwill allocation) of £7 million (2018: profit of £2 million) and a £35 million (2018: £8 million) charge relating to goodwill allocated to those disposals. The other charges in the period related to £5 million (2018: £nil) in respect of costs associated with the Stonegate Offer and £3 million (2018: £4 million) of surrender premiums paid to publicans to recover control of our pub assets. In the prior year an additional £1 million of organisational restructuring costs were incurred and a £1 million profit was recognised on the sale of our interest in Hunky Dory Pubs Limited.




Strategic report

Total tax in the period was a charge of £10 million (2018: £15 million), representing a charge of £21 million (2018: £22 million) on the underlying trading profit and a credit of £11 million (2018: £7 million) relating to tax on non-underlying items. The effective tax rate on the underlying trading profits arising in the period was 17.8% (2018: 18.0%).

Statutory loss after taxation was £209 million (2018: profit of £72 million) which reflects the higher non-underlying items detailed above.

Underlying earnings per share of 21.6p were up 0.4p on the prior year. Basic loss per share was 46.2p compared to a basic earnings per share of 15.2p in the prior year, primarily due to higher non-underlying charges incurred in the year in respect of property disposals, charges related to early debt repayment and goodwill impairment.

Cash flow Net cash flow from operating activities of £247 million (2018: £271 million) was lower than the prior year primarily due to the effect of the commercial property disposal and an increase in tax payments in the current year of £9 million due to the repayments received from HMRC in the prior year.

We reinvested our net proceeds from ordinary course disposals of £43 million (2018: £66 million) into capital investment in the estate, partially funding the £87 million (2018: £81 million) invested in the year.

On 14 March 2019 we received £332.7 million from the disposal of 348 commercial properties, of which £175.8 million related to the sale of commercial properties within the Unique securitisation. These proceeds have been used in the full prepayment of the Class A3 Notes, part prepayment of the Class A4 Notes and in meeting associated costs, which were approximately £14 million, arising on the prepayment of the Class A3 and Class A4 Notes. As at 30 September 2019 we had completed the sale of a further six commercial properties, for proceeds of £7.9 million.

The proceeds from the sale of commercial properties not held within the securitisation have been used to repay the outstanding balance of £35 million on the bank term loan facility and repay £115 million drawn under the Group’s revolving credit facility agreement such that as at 30 September 2019 the facility was undrawn.

Total capital investment in the year was £87 million (2018: £81 million), of which 58% (2018: 60%) was directed towards income growth opportunities. We target an ROI in excess of 15% on our growth-orientated capital expenditure and have achieved an average ROI of 21% (2018: 22%) on all such schemes delivered over the last 12 months.

Financing cash flows of £546 million (2018: £249 million), primarily reflect net interest paid of £137 million (2018: £143 million), net loan repayments of £330 million (2018: £66 million), net share repurchases of £63 million (2018: £21 million), largely relating to the share buyback programme, bond purchases

of £nil (2018: £5 million) and refinancing and redemption costs of £16 million (2018: £14 million).

Capital allocationWe generate significant cash flows from trading activities supplemented by the proceeds of ordinary course disposals, predominantly of underperforming assets. In the ordinary course of business we would aim to continue to reduce the level of our outstanding debt towards our medium-term leverage target of around 6.0 times net debt to EBITDA but also to provide a balance between additional value-enhancing investment opportunities and more immediate returns to shareholders.

Our desire to return value to shareholders has been demonstrated by our share buyback programme in the financial year. In November 2018 we determined that the best use of £20 million of cash flow expected to be generated in the financial year to 30 September 2019 was to fund a share buyback programme. This programme commenced on 20 November 2018 and



Community


Financial review

was completed on 22 January 2019, having purchased 10.6 million shares for cancellation at an average price of 189p per share.

Following the announcement of the completion of the first tranche of the commercial property portfolio disposal on 14 March 2019, the Board approved the return of up to an additional £65 million to shareholders via further share buyback programmes, representing approximately 20% of the net proceeds from the commercial property portfolio disposal. By 17 July 2019 we had used £39 million of this additional buyback programme through the purchase of a further 18.3 million shares for cancellation at an average price of 209p per share. On 18 July 2019 the Stonegate Offer was announced and, since that date, no further share buybacks have been completed.

Balance sheetOur balance sheet remains strong with a total net asset value of £1.30 billion (2018: £1.55 billion), primarily represented by £3.29 billion (2018: £3.62 billion) of property assets offset by net debt of £1.7 billion (2018: £2.0 billion). The property asset valuation reflects the valuation undertaken as at 30 September 2019. The Unique property estate is valued by Colliers International and the assets that secure the corporate bonds are valued by Avison Young with the balance of the estate valued internally. The basis of the valuation is consistent with the prior year with 95% (2018: 95%) of the property portfolio valued by independent external valuers. The result of this year’s valuation was no net movement in the total value of the estate (2018: no net movement).

The share price at 30 September 2019 of £2.81 (2018: £1.66), which equates to an equity value of £1,227 million (2018: £771 million), compares to a tangible net asset value per share of £2.88 (2018: £2.68). The offer price from Stonegate of £2.85 represented a 38.5% premium to the closing share price per share on 17 July 2019 and is broadly in line with the tangible net asset value as at 30 September 2019.

Capital structureWe have a long-term, secure, flexible and tax-efficient financing structure comprising bank borrowings, securitised notes and corporate bonds. We are a cash generative business and have, over the past few years, used excess cash flows to reduce debt and fund share buybacks. During the year we have used cash generated by the business to meet the scheduled amortisation of securitised notes leaving total net debt at £1.7 billion (2018: £2.0 billion).

Corporate bonds As at 30 September 2019 we had £1,025 million (2018: £1,125 million) of secured corporate bonds outstanding which are non-amortising, secured against ring-fenced portfolios of properties and attracting fixed interest rates averaging approximately 6.4% (2018: 6.4%). On 6 December 2018 we repaid £100.5 million of corporate bonds at par at maturity from available resources including our bank facilities and bank term loan.

In addition to the secured corporate bonds, we have £150 million bonds that were issued on 25 September 2018. These bonds are not secured over properties, have an interest rate payable of 7.5% and a maturity date of 15 March 2024. The bonds contain a covenant package restricting certain aspects of our business that is customary for bonds of this type. In general, the covenants are incurrence-based and therefore apply when certain corporate activities occur, such as asset disposals. Amongst other things, in relation to disposals, the covenant package allows for up to 20% of the proceeds from the disposal of non-tied pubs to be released to equity.

Bank borrowings As at 30 September 2019 we had no drawn bank borrowings (2018: £15 million) and we held £27 million of Company cash (2018: £27 million). We have bank revolving credit facilities of £150 million available to August 2022 bearing interest at a rate per annum of LIBOR plus 3% on any drawn amounts.

In addition to the bank revolving credit facilities, a £50 million term loan facility

was available to us, of which we drew £35 million on 6 December 2018 to partially fund the repayment of the £100.5 million corporate bond. Following the receipt of the disposal proceeds from the commercial property portfolio transaction this term loan was repaid and cancelled on 18 March 2019.

Securitised notes During the year we used operational cash generated from the business to repay, in accordance with scheduled amortisation, £51 million (2018: £81 million) of the Unique A3 and A4 securitised notes, and purchased and cancelled £nil (2018: £5 million) securitised notes.

In accordance with amendments to the permitted disposal clause within the Unique securitisation, agreed with noteholders on 6 July 2018, the proceeds of the disposal from non-tied pubs out of the Unique estate were used to repay Unique securitised notes in class order with the applicable redemption premiums. The total proceeds, net of costs, from the sale of the 348 commercial properties on 14 March 2019 was £332.7 million, of which £175.8 million related to the sale of properties in the Unique estate. The £175.8 million of proceeds were used in the full prepayment of the Class A3 Notes, part prepayment of the Class A4 Notes and in meeting associated early redemption premiums which were approximately £14 million. Prepayment took place on the earliest possible date following completion of the disposal, which was the note interest payment date falling on 28 June 2019.

Since 28 June 2019 additional non-tied pubs have been sold out of the Unique estate for proceeds of £4.1 million and these proceeds will be used to prepay Class A4 notes in December 2019. As at 30 September 2019 the value of notes outstanding within the securitisation was £691 million (2018: £904 million). The notes are scheduled to amortise over a period to 2032 and attract interest rates of between 5.7% and 7.4%.

N R Smith Chief Financial Officer

18 November 2019



Corporate social responsibility

As our business has diversified over the last five years we have evolved our thinking around our corporate social responsibility and have sought to embed it in everything we do. Our strategic plan announced in 2015 is now business as usual and the changes in the business have allowed us to unlock further ways to promote our CSR framework and our key drivers of community, people, publicans, responsible retailing and environment.

We have over 4,000 pubs located throughout England and Wales and our publicans, operators and managers are proud to operate our pubs at the heart of the communities they serve. Pubs employ local people, provide a diverse range of goods, services and facilities to local residents, businesses and visitors and make a valuable contribution to the local economy. We support these pubs to thrive in local communities through sponsoring local community programmes and continuing to provide funding for schemes such as Pub is the Hub, who support opportunities for rural pubs and publicans to diversify their business. We also support the Long Live the Local campaign which celebrates the vital role local pubs play in our community.

In our Craft Union business, our philosophy is about putting brilliant pubs back at the heart of local communities and creating pubs for people to love. It is particularly pleasing therefore that in 2019 Craft Union beat tough industry competition to be awarded the prestigious Heart of the Community Award at the British Beer & Pub Association (BBPA) awards. The awards, which have been run by the BBPA for the last eight years, celebrate and showcase the very best achievements and innovations of the beer and pub industry.

We believe to really support a community, we must strive to understand the needs and empathise with the individuals who represent that community. For Craft Union, it is about providing a safe and trusted place where friends and family can come together, today and for future generations. We have revitalised local community pubs, which has significantly enhanced the customer experience by delivering back into the communities their much loved, well invested community hubs.

Supporting industry trade bodies and associations We actively contribute to trade debates and support industry bodies and associations including the BBPA, the British Institute of Innkeeping (BII), the Federation of Licensed Victuallers Associations (FLVA), UK Hospitality and PubAid. We support Drinkaware, the independent UK-wide alcohol education charity working in

partnership to help reduce alcohol-related harm by helping people make better choices about their drinking. We also work with and promote the Licensed Trade Charity who assist pub, bar and brewery people who are in need of help or facing a crisis with practical, emotional and financial support.

Our Group continues to encourage school leavers to join the pub trade.Now in its third year, we are committed to inspiring young people to consider the pub trade as a career. In partnership with Stride Ventures, the education enrichment organisation, we have hosted ‘Young Minds Making a Difference’ for our local Solihull Sixth Form College students. Six local schools have been supported with work experience opportunities at our Pub Support Centre and we continue to promote apprenticeships in all areas of our business.

Community


Strategic report




Charity The Group supports the charitable activities undertaken by its employees and this support is coordinated by its charity committee.

We have strengthened our social responsibility efforts across the wider sector through a new corporate partnership with The Clink Charity. The Clink aims to reduce reoffending by providing training and enabling prisoners to obtain qualifications and ultimately employment in the hospitality sector upon release. A recent Justice Data Lab report states that a Clink graduate is 50% less likely to reoffend having been through one of their programmes.

This new partnership demonstrates our focus on promoting hospitality as a career of choice and transforming lives through providing individuals from all backgrounds opportunities that can lead to meaningful employment. The Clink currently trains up to 200 prisoners a day to gain their Level 2 NVQs in food service, food preparation, food hygiene and horticulture. It operates four training restaurants in partnership with Her Majesty’s Prison and Probation Service along with a training kitchen, gardens, a café and an events catering business. We were pleased to work with Marston’s to develop Serving Time, an English Pale Ale, with 25p from every pint sold donated to The Clink. To date over £15,000 has been raised through this initiative.

Our Craft Union business is working with Only a Pavement Away, a charity founded by representatives from the hospitality industry. The charity acts as a conduit to help those people struggling to get into work and overcome hurdles by finding jobs within the hospitality, pub and restaurant industry.

Our Bermondsey business has chosen to focus its fundraising activities to benefit MIND, which provides advice and support to empower anyone experiencing a mental health problem and campaign to improve services, raise awareness and promote understanding of mental health issues. During the year our Bermondsey pubs hosted quiz nights, spot the ball competitions and sponsored sky dives to raise money to support MIND. During the summer, as part of our new menu launch, Bermondsey donated £1 from every Sunday roast sold to MIND.

In addition to centrally organised charitable work, our pubs, both leased, tenanted and managed, run and coordinate their own local charity events, which helps to cement them at the heart of their communities and contribute to the £100 million it is estimated that pubs across the country raise each year.

People




We recognise that a better work-life balance can improve team members’ motivation, performance and productivity, and reduce stress. Driven by output from previous engagement surveys, we have embedded our flexible working policy and now have 66 of our colleagues in Ei Group working part time and/or flexibly and welcome requests that meet the needs and objectives of the Group and our employees.

Developing our peopleSince our five year strategic plan commenced in 2015 we have seen a rapid growth in our employee numbers and we strive to maintain high standards through this period of growth, recognising that people are the key differentiators for our businesses. All support team new starters receive a Group induction, followed by department specific inductions, initial training and on-the-job coaching as required.

We encourage and support our employees to develop a long-term career with us. Internal progression is something we are proud to champion. We continue on our journey of performance appraisal, evaluations, 360º feedback and succession planning throughout the businesses. The output from that has enabled individuals to revisit personal development plans and for us to support them in bespoke training and coaching opportunities to achieve their potential. We are proud to continue to

grow our apprenticeship provision within the organisation. We currently have 65 apprentices completing over 20 different qualifications and supporting our ability to “grow our own” workforce to fulfil our growing requirements at retail level in our expanding managed businesses and in our support functions.

We are proud to be recognised as a Gold Standard employer by Investors in People and we have been recently highly commended at the Engage Awards 2019 in the Best Employee Centric Strategy category.

Reward and recognition The Group offers a range of flexible benefits to employees, which allows them to tailor their overall reward to suit their particular individual needs, accompanied by the “My Rewards” scheme which is an employee discount platform. Over 90% of our Ei Group employees make use of one or more of these benefits. The Group has also encouraged employee long-term ownership of Company shares through Save as You Earn (SAYE) schemes and a Share Incentive Plan (SIP).

We regularly benchmark salaries and rates of pay and benefits as part of our aim to recruit and retain great people to operate our businesses, supporting a reduction in staff turnover and improving productivity.

Employee engagementThe Group recognises the importance of workforce policies and practices and engages with our people through regular quarterly briefing sessions, the Group intranet, Group briefing calls and annual conferences. This has been particularly relevant in respect of the year under review to ensure all our colleagues are aware of and regularly updated on the potential impact of the Stonegate Offer.

Annually we undertake an employee engagement survey to better understand how our employees feel about all aspects of their role and the Group. Year-on-year since we commenced this survey we have had a high response rate, with over 93% of employees participating in the survey in the year (2018: 93%). In 2019 our overall engagement score was 86% (2018: 81%). The output from the survey is used to inform future engagement and drive activity across the Group.

In the year under review the Group appointed Jane Bednall, as the designated non-executive director responsible for the oversight of workforce policies and practices to ensure our healthy culture and positive engagement with the workforce is maintained. Details of Jane’s engagement and progress throughout the year is contained at page 36.

Inclusion and diversity We are committed to equal opportunities and the creation of an entirely non-discriminatory working environment and our recruitment policy and guidance, underpinned by our vision and values, operates to ensure that all employees are recruited, developed, promoted and remunerated on the basis of their skills and job suitability. The Group is dedicated to undertaking all its business operations in a way which respects individual human rights, diversity and equality, and treats individuals with dignity and allows freedom of association. We give full consideration to applications for employment from disabled persons in light of aptitude and abilities. We endeavour to retain the employment of, and arrange suitable retraining for, any employee who becomes disabled during their employment as far as possible.

People

994 Male

689 Female

Directors Senior managers

Employees

Total

978 682


Strategic report



Gender Pay Gap (GPG) In February 2019 we published our GPG report for the snapshot date in April 2018, required for two of our companies, Ei Group plc and Bermondsey Pub Company Limited. The results are summarised below:

GPG disclosure Ei Group Bermondsey

Mean GPG 44% 6%

Median GPG 48% –

Mean gender bonus gap 77% 28%

Median gender bonus gap 73% 38%

Proportion of males/females receiving a bonus payment 80% / 88% 7% / 4%

Proportion of males/females in each pay quartile:

Lower 24% / 76% 47% / 53%

Lower middle 45% / 55% 51% / 49%

Upper middle 74% / 26% 46% / 54%

Upper 85% / 15% 71% / 29%

The GPG is the difference in average pay and bonuses for all men and women across an organisation. Whilst we are confident that men and women are paid equally for equivalent work across the business, we recognise that we have a gender pay gap under the prescribed definition. This is primarily driven by more male employees occupying senior roles compared to female employees and the lower representation of males in more junior positions and we recognise that there is work to do to close the gender pay gap in the pub sector and this requires a long-term programme of activity to reduce it. It is pleasing that in our younger Bermondsey business the gap is smaller and we will continue to take learnings from there to make progress in our mature business where the gap is greater.

We train line managers to better understand any unconscious bias and manage and challenge how this may impact recruitment and progression within the business. Where possible we promote gender balanced shortlists for senior positions and for our future management development programmes. We will monitor progress and movement in our GPG when assessing the performance of these activities.

Anti-bribery and corruptionThe Group operates a full suite of policies and procedures to guard against bribery and corruption. Whilst we operate in an industry that is not believed to be especially prone to bad practices the risks of bribery, corruption, fraud or theft exist in every company. We are committed to conducting our business with the highest level of integrity. This includes a zero tolerance approach to all forms of bribery, corruption, fraud and theft and procedures are in place which are designed to minimise or eradicate risks. Our Code of Practice applies to all employees, all our business dealings and transactions and is reviewed at least annually by the Board of Directors together with details of all hospitality offered by employees or attended by them.

WhistleblowingThe Group encourages any reports of malpractice, illegal acts or omissions or matters of a similar nature by employees, former employees, contractors, publicans, suppliers or advisors using mechanisms for reporting, and support the framework for protecting whistle-blowers who have a genuine concern about malpractice from victimisation, dismissal or detriment.

Human rights and slaveryThe Group employs over 2,000 people across the Group’s Pub Support Centre in Solihull, our new hub facility in Wakefield, increasing numbers employed in our managed houses located throughout England and Wales and a large group of home based workers. We spend over £250 million of annual revenue on goods and services required to carry out our day-to-day business and this activity is managed by a dedicated procurement team who operate in accordance with an agreed policy. That policy includes the requirement to source supplies from approved suppliers and for business to be conducted honestly, ethically and with respect for the rights and interests of the people with whom we do business. We expect honesty, openness and courtesy from all suppliers and their employees. We conduct business in accordance with our responsible sourcing principles and our Code of Practice sets out our expectations of suppliers based both in the UK and abroad on issues such as pay, working hours, child labour, workers’ rights and representation. We have in place a process to audit suppliers’ adherence to all requirements contained in our Code when deemed necessary.

While we consider the risk of modern slavery or human trafficking taking place in our supply chain to be low we do recognise the importance of combating slavery and human trafficking and the duty to tackle these issues.

Tax strategy We are a UK-based business and pay UK taxes which support the economic and social objectives of the UK Government. We are committed to conducting our tax affairs in a clear, fair and transparent way and do not have an aggressive tax planning strategy. We aim to meet all filing, reporting and payment obligations promptly and operate an open, honest and positive working relationship with HMRC. For further detail of our tax strategy, please see our website.

Publicans





The Group is committed to fair, transparent and lawful dealings with our publicans. The Pubs Code applies to the Group and all of our tied publicans as we are the landlord of more than 500 tied pubs. The regulations define our obligations to our tied publicans and provide guidelines for processes governed by the Code. The Pubs Code is overseen by an independent Adjudicator. We submitted our second compliance report to the Adjudicator in July 2019 for the year ended 31 March 2019 which is also published on our website.

We are passionate about the training support we provide to our publicans. With 11 courses available for our publicans and their teams to attend free of charge, we trained 572 people, delivering 4,576 hours of training in the year under review. Our online training platform continues to be widely utilised across the business with over 650 modules completed to date.

Awards for Excellence This year we hosted our second Group awards programme celebrating the pubs and operators from across our Group who demonstrate operational excellence and outstanding commitment to running fantastic pubs at the heart of their communities. We uncovered some truly inspirational stories proving the pub is still at the very heart of our local communities.

The standard of entries to our awards this year was exceptionally high with so many of our publicans going the extra mile to make a real difference in their communities. We are delighted that these awards provide us the opportunity to shine a light on some of the passion and energy that our publicans put into running their businesses.

Publicans

New publican support Our support programme is designed to give new publicans the best possible chance of success to run a sustainable pub business. We aim to provide all the support and information they need from their first contact with us through to the selection and operation of the best pub business for them.

Every new publican has access to a dedicated regional manager, our award-winning training, business tools and materials including a free website,

comprehensive commercial support and a mentor to help them shape their business plans. We provide free first year membership to their choice of the BII or FLVA as well as their first year’s membership of Cask Marque, a non-profit making organisation engaged in continuing to drive beer quality through training, project work and an accreditation scheme.


Strategic report



Alcohol The Group recognises its responsibility towards the promotion and management of a responsible drinking environment in all of its pubs. We participate in various schemes and initiatives including sponsoring the Drinkaware Trust, promoting proof of age schemes and other initiatives associated with addressing the consequences of alcohol misuse and minimising alcohol related harm. Within our managed houses, teams are fully trained and our pricing and promotional strategies do not encourage irresponsible behaviours. All our managed houses include a range of soft drinks and low and non-alcoholic options displayed and sold alongside a broad range of alcoholic beverages.

Responsible retailing

Comprehensive safety managementWe have a dedicated safety function within the Group which has the skill set to support all areas of our leased and tenanted estate and managed businesses. The function engages with the different business areas to provide advice and guidance as processes are developed, generates overarching group-wide safety policies, and provides the necessary level of oversight and governance to satisfy the Board as to the manner in which safety responsibilities are being effectively discharged.

We were early adopters of the Primary Authority Scheme and now work closely with both West Midlands Fire Service for fire safety advice, and Milton Keynes Council to gain regulatory advice for health and safety, food safety and trading standards. These partnerships help us to build on our existing arrangements and to deliver the most appropriate safety compliance solutions across all of our expanding businesses.

Food safety and allergensWe aim to serve great tasting, good quality, responsibly sourced food and drink to all our customers. We aim to give them the opportunity to make safe and healthy choices by providing accurate, accessible and clear menu information. We quickly respond to market trends in our managed house food offerings, and are committed to offering vegetarian, vegan and wellbeing options as demand for these products and dishes grow.

We work closely with our suppliers and their supply chains to ensure that we are able to supply the legally required allergen information to consumers for all food and drink sold within our managed houses. We train all of our managed house staff to provide the correct allergen information on request, and strive to handle and manage food allergens adequately so as to avoid cross contamination. We continue to explore technological solutions that will allow us to supply our customers with all ingredient and nutritional information in the future.



Environment



We are committed to reducing energy consumption and reducing our carbon footprint.

Pub Support Centre and Wakefield Pub Support Hub It is two years since the refurbishment of what we now call our Pub Support Centre in Solihull and we have complemented the refurbishment with the recent completion of a new staff cafe in our atrium.

In 2018, immediately post refurbishment of our Pub Support Centre, we saw energy consumption per person at our office facility reduce compared with the year prior to refurbishment. That trend has continued so that in the year to 30 September 2019 we saw a further reduction of 24%.

In 2019 we completed our investment in a new hub facility in Wakefield at the Union Bank, our Pub Support Hub. Following our investment we now have a fully trading Craft Union pub occupying the ground and mezzanine levels. On the first floor we have a training hub including meeting rooms and conference facilities whilst the second floor contains the administrative support function for Craft Union. Working closely with the local authority and sensitive to the listed and heritage status of the building, energy saving initiatives

were incorporated into the investment to manage energy consumption and to complement the historic features of the building. These included LED lighting to the offices, meeting rooms and conference facilities, PIR switches for lighting to the upper floors, lossnay heat recovery air conditioning system, loft insulation to assist in reducing heat loss from the offices, energy efficient boilers installed to the main trading areas, water saving initiatives to toilet areas and a cellar manager system that can save up to 30% on cellar cooling energy by turning the coolers off when not needed.

Electric cars We continued to make progress with our sustainability agenda by looking to install electric vehicle charge points at our Pub Support Centre in Solihull and across our Managed Operations businesses.

Phase one of the scheme involved five free-to-use double chargers installed at our Pub Support Centre, enabling colleagues and visitors to charge their electric vehicles. Phase two will see the installation of charging points in car parks at selected sites across our managed pubs, providing easily accessible, reliable and rapid charging to pub customers. The scheme, in partnership with specialist provider

ChargePoint Services, will enable us to roll out further charging points in the coming years. We have a growing number of plug-in hybrid electric cars as part of our company car fleet, so this investment in installing the charge points also makes sound business sense.

As the scheme progresses, we will also look to support publicans interested in this technology within our Publican Partnerships business through fully leveraging our buying power, as we do for them across many other areas.

Our managed businesses Along with our Pub Support Centre and Wakefield hub facility our managed businesses are within our direct operational control and we seek to deliver best practice in management of waste disposal, recycling and energy efficiency.

By improving energy performance this helps us reduce our carbon footprint and become a greener business, something we know is important to all our stakeholders.

During 2019 we continued to share learnings across our managed businesses and completed successful trials for reducing water and electricity consumption. The process of rolling out the technology across the estate is expected to be completed during 2020.

The water saving devices include flow saver taps in our hand wash sinks and water management systems to the cisterns in our gents toilets. This is forecast to reduce water consumption by approximately 50 million litres of water each year.

Working with Technic2 we have installed cellar manager equipment in 170 of our managed pubs with a target to roll out to the rest of the estate by summer 2020. The cellar manager system reduces energy consumption in the pub cellar, one of the biggest areas of consumption in a pub, by around 30%. The devices we have installed to date will save nearly 1.5 million kWh of electricity each year.


Strategic report

Environment



In addition there is an ongoing review and assessment of emerging technology which has resulted in, for example, more energy efficient bottle coolers being introduced to our wet led estate whilst the installation of LED lighting and recycling of furniture is a key consideration for all investments.

Distribution efficienciesOur drinks delivery partner’s operating processes are focused on efficiency, which delivers environmental benefits. Pooling volumes from our multiple brand owner supply base delivers reduced costs, improves supplier performance and reduces road mileage and fuel consumption.

Our publicans can benefit from the supply of food and non-consumable products from our partner Booker. Rather than order or collect multiple products from multiple sources, orders can be consolidated and supplied to their premises in a single vehicle.

Oil recycling The Group continues to work with suppliers to recycle cooking oil used in the estate. 693 (2018: 668) publicans are participating in this free service by recycling oil with Booker. In the past year, this has delivered £91,000 (2018: £77,000) of cash back to publicans in exchange for 455,000 litres of oil (2018: 380,000). The used cooking oil is converted into biodiesel which is used in the Booker HGV distribution fleet.

Waste reductionThe Group continues to fulfil its obligations imposed by the Packaging Waste Regulations based on all recyclables sold to publicans and distributed to our managed estate. We work in partnership with SUSTAIN Drinks Packaging, a BBPA led industry initiative, which has helped us develop our waste packaging strategy.

We have been working with our waste management partner for a number of years and are seeing significant progress across our rapidly expanding managed estate towards our CSR policy goal of zero waste to landfill. We continue to promote policies and procedures that implement new greener ways to manage waste and reduce our use of single use plastic products.

Energy Performance StandardsThe Minimum Energy Performance Standards Regulations came into effect in April 2018 and as part of our compliance with this we have now improved visibility on the energy performance of our portfolio. We have worked proactively to ensure that where leases and tenancies are approaching expiry, they are appropriately assessed for their rating ahead of being re-let. Where sites with low ratings have been identified we are seeking to prioritise these by investing in remedial works. Typically this is preceded by a bespoke and comprehensive energy audit report to determine how to improve efficiency and rating. The energy saving measures routinely include draught proofing, new boilers and LED lighting. We are now into the final phases of committing to our compliance with these regulations by ensuring that all of the properties in our estate have a valid energy performance rating by the end of 2020. This will allow us to forward plan and future proof our estate against increasing regulatory constraints, increased energy costs and to operate responsibly.

Energy Savings Opportunity SchemeIn 2019 we have completed all reporting requirements for our second submission due in December 2019. During phase one we took learnings from all of the energy saving opportunities highlighted in our first report and as part of phase two have completed surveys on all properties moving into our managed estate, highlighting the ways to reduce energy consumption when pubs move from the leased and tenanted estate to our management. As with phase one, we will be looking to take learnings from these audits, further reducing our carbon footprint.



Greenhouse Gas Emissions (GHG) statement



The greenhouse gas emissions (GHG) statement below provides a summary of the Group’s greenhouse gas (carbon) emissions from 1 October 2018 to 30 September 2019. It gives a summary of emissions from fuel combustion and the operation of our facilities which include our offices, managed houses and company cars (scope 1), and from our purchased electricity used during the year (scope 2). We have adopted the operational control approach, as defined in The Greenhouse Gas Protocol, A Corporate Accounting and Reporting Standard (Revised Edition), 2004. Therefore, emissions associated with our tenanted pubs are not included in this statement as they are considered to be outside of our operational control.

For ease of comparison, the GHG statement is set out in two parts; an assessment breakdown for the Pub Support Centre only with the baseline year 2013 and the total combined emission statement (Pub Support

Centre and managed houses) with the baseline year of 2015 ensuring year-on-year continuity as we grow our Managed estate. Due to a major refurbishment carried out at our Pub Support Centre, the building is now run entirely on electricity resulting in no gas being consumed following 2017. 2019 has seen the opening of our new Pub Support Hub in Wakefield. Since its launch in July, the property has been consuming solely electricity which has been included in our Pub Support Centre figures for 2019. Going forward we will be looking to report a year-on-year CO2 reduction on the site, similar to those we have been achieving at our Pub Support Centre.

When comparing the GHG statement against that reported for 2018, a 24% reduction in tonnes of CO2 emissions per full time equivalent employee has been seen at the Pub Support Centre. There has however, been an increase in the overall emissions across the entire estate due to the increase in number of managed pubs opened and operated in 2019.


Strategic report

Greenhouse Gas Emissions (GHG) statement



Pub Support Centre, Wakefield Pub Support Hub and managed houses

Assessment parametersBaseline year 2015Consolidation approach Operational control

Boundary summary All facilities under operational control were included including our managed houses

Consistency with the financial statements The use of the operational control approach causes a variation to those assets listed in our financial statements. Our tenanted pubs listed on our balance sheet were not under our operational control and are therefore not included in our emissions table. However, approximately 250 leased vehicles and 47 hire cars, which were under our operational control appear in our emissions table but not in our consolidated financial statements.

Emission factor data source Defra (August 2019)

Assessment methodology The Greenhouse Gas Protocol and ISO 14064-1 (2006)

Materiality threshold Materiality was set at group level at 5%, with all facilities estimated to contribute >1% of total emissions included.

Intensity ratio Emissions per full-time equivalent employee (FTEE)

Years 2019 2018 2017 2016 2015

tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE

Scope 1(i)

Fuel combustion 6,513 3.88 4,949 3.62 3,665 2.98 2,673 2.72 1,997 3.14

Operation of facilities 405 0.24 377 0.27 198 0.16 126 0.13 77 0.12

6,918 4.12 5,326 3.89 3,863 3.14 2,799 2.85 2,074 3.26

Scope 2

Purchased electricity 7,884 4.70 5,764 4.20 4,517 3.68 2,525 2.57 1,244 1.95

Statutory total (Scope 1 & 2)(ii) 14,802 8.82 11,090 8.09 8,380 6.82 5,324 5.42 3,318 5.21

Group metrics Full-time equivalent employee (FTEE) 1,678 1,371 1,229 981 637Intensity ratios (gross emissions) Tonnes of carbon dioxide equivalent per full-time equivalent employee (tCO2e/FTEE) 8.82 8.09 6.82 5.42 5.21

(i) Scope 1 fuel combustion includes natural gas, diesel and fleet vehicles. Scope 1 operation of facilities includes refrigerants(ii) Statutory carbon reporting disclosures required by Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.

Note: Both grey fleet and a private flat for staff have been excluded from this statement as they did not meet the materiality threshold. A small number of managed houses that had not been open for four weeks prior to the end of the financial year have also been excluded as they did not meet the materiality threshold.



Pub Support Centre and Wakefield Pub Support Hub only



Assessment parametersBaseline year 2013Consolidation approach Operational control

Boundary summary Pub Support Centre and Wakefield Pub Support Hub only

Consistency with the financial statements The use of the operational control approach causes a variation to those assets listed in our financial statements. Our tenanted pubs listed on our balance sheet were not under our operational control and are therefore not included in our emissions table. However, approximately 250 leased vehicles which were under our operational control appear in our emissions table but not in our consolidated financial statements

Emission factor data source Defra (August 2019)

Assessment methodology The Greenhouse Gas Protocol and ISO 14064-1 (2006)

Materiality threshold Materiality was set at group level at 5%, with all facilities estimated to contribute >1% of total emissions included.

Intensity ratio Emissions per full-time equivalent employee (FTEE)

Years 2019 2018 2017 2016 2015 2014 2013

tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE

Scope 1(i)

Fuel combustion 934 1.55 1,174 2.06 1,106 2.02 1,528 2.84 1,454 2.86 1,403 2.84 1,380 2.94

Operation of facilities – – – – 89 0.16 5 0.01 – – 6 0.01 9 0.02

934 1.55 1,174 2.06 1,195 2.18 1,533 2.85 1,454 2.86 1,409 2.85 1,389 2.96

Scope 2

Purchased electricity 236 0.39 283 0.50 328 0.60 388 0.72 444 0.87 481 0.97 450 0.96

Statutory total (Scope 1 & 2)(ii) 1,170 1.94 1,457 2.56 1,523 2.78 1,921 3.57 1,898 3.73 1,890 3.82 1,839 3.92

Group metrics Full-time equivalent employee (FTEE) 604 570 547 538 509 494 470

Intensity ratios (gross emissions)

Tonnes of carbon dioxide equivalent per full-time equivalent employee (tCO2e/FTEE) 1.94 2.56 2.78 3.57 3.73 3.82 3.92

(i) Scope 1 fuel combustion includes natural gas, diesel and fleet vehicles. Scope 1 operation of facilities includes refrigerants.(ii) Statutory carbon reporting disclosures required by Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.

Note: Both grey fleet and a private flat for staff have been excluded from this statement as they did not meet the materiality threshold. Hire cars have also been excluded from the Pub Support Centre and Wakefield Pub Support Hub but included in the combined emissions statement to ensure an accurate year-on-year comparison.


Strategic report

Pub Support Centre and Wakefield Pub Support Hub only



Dear Shareholders,As previously advised by the Chairman in last year’s Annual Report, I am the designated non-executive responsible for the oversight of workforce policies and practices. I am pleased to be able to provide an update in respect of the activities that I have undertaken during 2019.

As people are at the heart of any great hospitality business, it was important to the Board to be at the leading edge of workforce engagement. The Group enjoys an open and transparent employee environment with strong relationships between colleagues and the executive directors. Choosing to appoint a designated non-executive director to lead on the oversight of workforce engagement was the most suitable route for our business to create the same open two-way communication to the Boardroom and in particular to the non-executive directors and Chairman.

My designation combines both formal and informal engagement with the HR function and employees across the entire business in order to make my role as employee champion successful.

During the year I have:

• Established clear terms of reference.

• Developed a formalised relationship with the HR Director, with regular discussions held throughout the year to review the progress being made with regard to implementation of our people plan, review of all HR insight and data including the results of the annual engagement survey and feedback from the Investors in People reaccreditation in 2019.

• Conducted a series of employee listening forums designed to complement pre-existing engagement mechanisms to create a meaningful two-way dialogue. Employees from a cross section of roles and levels were involved in these forums at venues across the business. The sessions were highly energetic with employees open, engaged and all contributing honest and rounded views.

• Reported to the Board on my early findings and highlighted development areas including the promotion of internal career opportunities, diversity and inclusion across the Group and colleagues pay and benefits. Time was dedicated at the Board to discussing the key themes emerging from the discussions and a clear action plan put in place by the executive team in response to topics raised.

This heightened engagement and people focus has been invaluable to the Board at a time of change where employee, stakeholder and customer interests are paramount. In parallel, colleagues have welcomed the voice in the Boardroom. This positive momentum is set to continue into the new financial year with a regular cadence of listening groups and HR engagement now positively established and enthusiastically embraced by all.

J Bednall Non-Executive Director

18 November 2019


Workforce policies and practices

This heightened engagement and people focus has been invaluable to the Board at a time of change where employee, stakeholder and customer interests are paramount.

Jane Bednall Non-Executive Director



The Board delegates the review of the effectiveness of the Group’s risk management processes to the Audit Committee, which formally reports back annually. The Group’s internal audit function agrees with the Audit Committee an annual internal audit plan which is driven predominantly by business risks and which gives assurance on the internal control environment.

The following table sets out the principal risks and uncertainties facing the Group at 30 September 2019, an indication of how that risk has changed in the year and an overview of how we control and mitigate those risks. Our principal risks are those that are deemed by the Board as high risk, together with some medium risks which the Board deems should be disclosed due to their nature. This is not intended to be an exhaustive analysis of all the risks the Group may face.

The Board is ultimately responsible for ensuring there is a robust assessment of the principal risks facing the Group which it does through our risk identification and evaluation process described in the Audit Committee report. The executive directors report to the Board that they are appropriately managing the risks through their senior management team, with each business unit responsible for identifying, assessing and managing risks in their respective areas.

Board oversight• Board meetings

• Risk Committee

• Audit Committee

• Remuneration Committee

• Internal audit compliance

• Group risk appetite and policies

• Risk register

• Assurance mapping

• Internal audit

Annual review:• Risk appetite

• Group risk policy

• Operation of management and control systems

• Determination of principal risks

• Integration with strategy and planning

• Risk changes response

• Incidents and action points

Company culture• Ownership

• Responsibility

• Incentivisation of strategic goals

• Appraisals

Monitoring and review


Strategic report

Risks and uncertainties



Description and potential impact Mitigation processes

Property valuations The Board believes there is no change to this risk.

The Group’s properties have been valued at £3.3 billion at 30 September 2019. Values could, as they have in the past, move downwards due to changes in the UK property market, including the uncertain impact of Brexit, or as a result of more general economic conditions.

This impacts the Group through its ability to dispose of underperforming pubs and realise acceptable disposal proceeds and may also more widely impact the value of the Group and its financial covenants.

The Group has a policy to revalue every asset in its property portfolio annually at market value by qualified external and internal valuers in accordance with the RICS Red Book (2017 Global Edition plus UK 2014 (revised 2015) supplement). These valuations comply with the requirements of International Financial Reporting Standards (IFRS). The valuation this year has led to no net movement in the total value of the estate recorded in property, plant and equipment or investment property.

The valuers have confirmed that there is uncertainty in the general economy around Brexit negotiations, however there has been no significant impact on the property markets, and the market for licensed properties in particular remains stable.

We invested £87 million on developing and improving our assets during the year.

Liquidity risk The Board believes there is no change to this risk.

The Group’s primary liquidity risks are to ensure its debt is serviced, financial covenants are met, investment plans are satisfied and working capital requirements are met.

The securitised bonds have quarterly interest payments across all three outstanding bonds, one of which also currently has scheduled amortisation, while the corporate bonds have semi-annual interest payments and are non-amortising. The next scheduled maturity of the Group’s corporate bonds is £125 million of bonds due in February 2021.

The Group has a flexible financing structure comprising bonds issued from the Unique securitisation (securitised bonds), corporate bonds issued by the Company and bank borrowings.

The Board regularly reviews detailed financial forecasts of the Group, including budgets, to ensure there is sufficient headroom on all covenants and that there is sufficient cash available to meet the requirements of the Group. To manage cash, the Group can reduce capital expenditure on pubs, dispose of pubs or raise new finance.

In December 2018, the Group repaid at maturity its £100.5 million corporate bonds using £35 million drawn on its term loan facility and its revolving credit facility (RCF). Following the commercial properties portfolio disposal in March 2019, the term loan was repaid in full and all amounts drawn on the RCF were repaid. The RCF remains undrawn at 30 September 2019.

In addition £176 million of proceeds from the same disposal were used to repay all of the outstanding Class A3 securitised notes and a portion of the Class A4 securitised notes, together with the associated redemption premium.

Key:

Business model link:

Increase

Assets and capital structure

Decrease

Offer

Unchanged

Operating models

Considered as part of our viability statement

People






Regulatory changes, including the regulation of the tied pub model

The Board believes there is no change to this risk.

The Pubs Code legislation includes a tenant’s right, under certain circumstances, to change the freely-negotiated commercial terms of their agreement to a new MRO compliant agreement, and is overseen by an independent Adjudicator. The Code is currently undergoing a consultation and statutory review, being three years since it was introduced.

The operation of the Pubs Code could have an impact upon our profitability, our operational strategy and the relationships with our publicans.

Other regulatory risks that could impact the Group’s business include changes in the legislation governing the sale of alcohol, licensing, duty and areas of social responsibility.

Following introduction of legislation in 2018, the requirements of the General Data Protection Regulation (GDPR), regarding the collection, storage and destruction of personal data, have now been embedded into our business as usual activities.

The Group’s various operating models enable it to allocate assets to maximise value where opportunities arise and allow it to take the operational control of pubs at the end of leases if this generates incremental income for the Group.

The Group issued its Pubs Code annual compliance report during the year, which was audited by the internal audit team and the audit process was further reviewed by the auditor, giving us additional confidence that all provisions of the Code are being complied with.

We work closely with Local Authorities as necessary to ensure licensing requirements are dealt with whenever appropriate.

We are an active member of the BBPA, ensuring that we are aware of and can contribute to discussions that impact the industry. We are also a contributor to the Drinkaware Trust, working closely to promote responsible drinking. Further details can be found in the corporate social responsibility section of our website at www.eigroupplc.com.

General economic conditions The Board believes there is no change to this risk.

The Group operates in the leisure industry which is sensitive to economic conditions and pressures on disposable income. Whilst the full impact of Brexit remains uncertain, it is unclear to what extent consumer confidence may be impacted.

The Group operates wholly within the UK and all of the Group’s supply contracts are sterling denominated such that we do not anticipate that Brexit will have a significant direct impact upon supply. However, as well as consumer spending considerations, the Group could be impacted by restrictions on migrant labour (see People below).

The market is also enduring inflationary cost pressures relating to food prices, business rates, utility costs, pension contributions and the national living wage. These impact the Group’s managed business directly but also impact publican profitability in our Publican Partnerships estate.

In addition, changes in interest rates and other economic factors could lead to an increase in the Group’s weighted average cost of capital (WACC), reduced revenues or increased costs, all of which could impact our profitability and could lead to further impairment in the value of goodwill carried on the balance sheet.

The Board regularly reviews results and forecasts to assess the impact of economic conditions on its budget, strategic plans and our publicans. The Group is well placed to react to additional competition for leisure spending by being able to respond quickly in our managed pubs to adapt offers, and we also have the scale and tools available to support our publicans in doing likewise.

Although the cost inflationary pressures have a direct impact on our managed pubs, this is a growing business and therefore we are able to design operations to best mitigate increasing costs, albeit we are acutely aware of the cost base that our publicans and operators face and look to support them as best we can.

We also continue to foster mutually beneficial relationships with key suppliers to ensure the impact of any price increases is minimised wherever possible.

The Group regularly reviews its WACC in line with the capital structure, and how it compares to its competitors. It annually reviews the carrying value of goodwill and has written down the value through impairment as was necessary. Any goodwill that is allocated to pubs that are sold, is written off during the year.

Considered as part of our viability statement


Strategic report




Health and safety The Board believes there is no change to this risk.

A health and safety incident could result in serious injury to the Group’s employees, publicans or customers.

There is a risk that we do not have visibility of our full supply chain, especially where food products are concerned, that could lead to unsafe foods entering the chain without our knowledge.

In addition, the importance of allergen information continues to grow and the Group needs to make sure that its information is accurate and readily available.

The Group has developed an effective health and safety management system to ensure compliance with all legal duties placed on the organisation by health and safety law. All systems are subject to regular review with training provided as appropriate.

These measures ensure effective control of the managed house operations as well as continued appropriate focus on the issues facing the Publican Partnerships estate.

The Group employs a health and safety manager, a fire safety manager and a food safety manager to maintain the health and safety management system along with the identification and remediation of specific risks. It also operates a strategic and operational health and safety regime and operates within a Primary Authority Scheme with Milton Keynes Borough Council and the West Midlands Fire Service.

Litigation The Board believes there is no change to this risk.

The Group operates in a heavily regulated industry and may be involved in legal or statutory proceedings in relation to our pubs, our publicans or our suppliers. The impact of such litigation may be immaterial in value but may result in harm to the Group’s reputation.

The Group employs an in-house solicitor and other specialists to ensure we comply with legislation and to manage any litigation with our publicans.

The Group will work with Local Authorities as necessary whenever any statutory issues are raised in relation to its pub estate. Where appropriate, the Group takes legal proceedings against publicans to ensure compliance with their agreements.






People The Board believes there is no change to this risk.

The Group is reliant on the ability to attract, train and retain the best employees, publicans for its leased and tenanted pubs as well as managers and team members for its managed pubs.

With Brexit uncertainty there is increased risk that in certain geographies recruitment may be more difficult if restrictions on the use of a migrant workforce are introduced, or if living and working in the UK becomes much less attractive following the conclusion of the Brexit negotiations.

The Stonegate Offer has introduced some uncertainty and personal insecurity for our employees. Whilst we continue to successfully fill vacancies, these same uncertainties may impact our ability to recruit.

The Group is committed to providing appropriate employee training, retention and reward policies and holds the prestigious accolade of Gold standard for Investors in People. As outlined in the corporate social responsibility section on pages 25 to 35, we conduct annual staff engagement surveys which are used to identify issues and opportunities to improve the working environment.

The Group’s publican recruitment and training programmes and its variety of tenancy and lease agreements are designed to attract the best quality people.

The Group has also established a robust programme for the recruitment, induction and training of all of the managers and team members in each of its managed pub operations, which it continues to evolve and improve as the business grows.

Critical dependencies and retention risks have been reassessed and mitigated following the Stonegate Offer and a comprehensive communications programme has been initiated to keep colleagues regularly informed of developments.

Supply chain management The Board believes there is no change to this risk.

The Group places reliance on key suppliers and distributors to ensure that there is a continuous supply of drinks and other products to its publicans or to its managed operations. There is also a risk of over reliance on any one individual supplier.

Interruption or failure of these key suppliers and distributors could result in such products not being delivered on time or the pubs not having sufficient product to operate.

The Group works closely with its key suppliers and distribution partners to ensure good working relationships, as well as taking reasonable steps to try to ensure that key suppliers and distributors have appropriate disaster recovery plans in place to maintain continuity of supply.

The Group also has its own contingency plans to minimise the disruption of any external interruption to supply.


Strategic report




Systems failure The Board believes there is no change to this risk.

The Group’s operations are reliant on its information technology systems for business processes, accounting, reporting and communication. There is a risk of serious disruption if these systems fail for an extended period of time.

A thorough business continuity plan is in place to ensure the business could continue to function in the event of a major systems failure. This plan is tested in full at least annually. This plan and testing has been extended in order to incorporate the managed house businesses.

There are comprehensive controls in place to protect information technology systems, including anti-viral software and the back up and off-site storage of data.

Cyber risk The Board believes there is no change to this risk.

Increasing levels of cybercrime represent a threat to every business with the potential to cause a loss of system availability, which could have a consequential financial loss.

The threats facing IT are regularly monitored as part of the ongoing review by the IT steering committee, which regularly reports to the executive management group.

IT disaster recovery and business continuity plans exist and are tested regularly to ensure the business could continue to function in the event of a major incident.

As noted in the Audit Committee report, KPMG performed a review of cyber security controls during the year. Actions arising have now been substantially completed, with no overall change to our view of cyber risk.





Going concern The directors have given due consideration to the proposed offer for the Group that has been accepted by shareholders but at the time of approving these financial statements remains conditional on approval by the CMA. The CMA approval, if granted, could result in the acquisition of the Group completing during the going concern review period. Accordingly, the directors have considered going concern under two scenarios, on a standalone basis and on the assumption that the possible acquisition completes within the going concern review period.

For the Group on a standalone basis, the directors have considered the Group’s financial resources including a review of the medium-term financial plan, which includes a review of the Group’s cash flow forecasts for the period of at least 12 months from the date of approval of these financial statements along with the principal risks and uncertainties.

On the assumption that the Stonegate Offer completes within the going concern review period, the directors have further considered that:

• There is sufficient financing available to Stonegate to purchase the Company’s shares and repay the obligations arising on the Group’s existing debt facilities due to the change of control clauses triggered as a result of the acquisition;

• Stonegate will continue to operate the business in a manner that would not give rise to a material adverse impact to the Group’s existing forecasts; and

• The forecast cash flows modelled by management and the Group’s advisers for the enlarged group support the ability to satisfy the debt service costs and comply with covenants of the facilities throughout the going concern period including stress testing under plausible scenarios.

The directors will resign from the Board should the transaction complete and have had no access to Stonegate’s forecast cash flows of the combined group. However the directors, as well as assessing the existing Group’s ability to continue as a going concern, have also done so assuming that operation of the Group, its distributions to shareholders and its financing arrangements under new ownership would be no less favourable than is currently envisaged on a standalone basis. Any such material changes arising from a new board’s actions could impact the ability of the Group to maintain adequate funding. Nevertheless, in the context of these assumptions, the directors have a reasonable expectation that both for the Group on a standalone basis and when considering the possible acquisition, the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing the financial statements.

Viability statement In accordance with the UK Corporate Governance Code, the directors have assessed the prospects of the Group over a period significantly longer than 12 months from the approval of the financial statements.

As part of this assessment the directors have given due consideration to the offer for the Group which is conditional on CMA approval and in the event the deal completes, the viability assessment has been made on the assumption that the new board would continue to operate and finance the business and make distributions to shareholders with no material adverse impact to the Group’s forecasts.

The Board has continued to review its progress against its strategic plans during the year and evolved these plans where opportunities and the market have suggested it is necessary. In addition, as in prior years, the Group has continued to assess the principal risks and mitigating factors that could impact the Group. The current and future risks, controls and assurances available have been fully analysed and documented, resulting in a clear picture of the risk profile across the whole of the business. This has been reviewed and the principal risks and uncertainties, which are detailed on pages 37 to 42, agreed by the Board.

The Board has concluded that the most relevant time period for the viability assessment should be the three year period of the normal business forecasting cycle to 30 September 2022.

Those risks that could affect the future viability of the Group over the next three years were identified and the resilience of the Group to the occurrence of these risks in severe yet plausible scenarios has been evaluated.

The directors have concluded that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three year period reported on for viability.

Strategic report approvalThe strategic report, on pages 01 to 43, incorporates highlights, at a glance, the Chairman’s statement, our market, our business model, our strategy, KPIs, the Chief Executive’s review, the financial review, the corporate social responsibility report, workforce policies and practices, the risks and uncertainties and the going concern and viability statements.

By order of the Board

L TogherCompany Secretary

18 November 2019


Strategic report




Board of Directors



Robert WalkerChairman of the BoardChairman of the Nomination CommitteeAppointed to the Board on 9 February 2012.

Robert, 74, spent over 30 years with Procter & Gamble, McKinsey and, finally, PepsiCo, where he was Division President responsible for the company’s beverage operations in Europe, the Middle East, Africa and Asia. He is currently Chairman of Busy Bees Holdings Limited and Deputy Chairman and Senior Independent Director of Camelot UK Lotteries Limited. He was previously Chairman of Travis Perkins plc, WH Smith PLC, Williams Lea Group Limited, BCA Europe Limited and Americana International Holdings Limited. He was also Group Chief Executive of Severn Trent Plc and has held a number of FTSE 100/250 Board appointments with Tate & Lyle, BAA, Signet Group, Thomson Travel and Wolseley/Ferguson.

Simon TownsendChief Executive OfficerAppointed to the Board on 1 October 2000 and to CEO on 6 February 2014.

Simon, 57, joined the Company in February 1999, was appointed to the Board in October 2000 and appointed as Chief Executive Officer on 6 February 2014. He has worked in the pub and leisure industry for over 30 years in various sales, marketing, commercial and operational roles, previously with Whitbread PLC, Allied Domecq PLC, The Rank Group Plc and Marston, Thompson & Evershed PLC. Simon is currently a Non-Executive Director of Countryside Properties plc, Vice Chairman of the BBPA and a member of the advisory Board of Women in Hospitality, Travel & Leisure 2020.

Neil SmithChief Financial OfficerAppointed to the Board on 20 January 2011.

Neil, 54, a chartered accountant, joined the Company in January 2011. He was previously Finance Director of Compass Group UK & Ireland and Chief Financial Officer of Telewest Global Inc. He has held senior finance positions with Virgin Media and Somerfield plc.

Adam FowleSenior Independent DirectorAppointed to the Board on 6 February 2014.

Adam, 60, has over 25 years of licensed retail experience. He was previously occupying the role of Chief Executive at Tesco Hospitality and prior to that held roles including Chairman of Bramwell Pub Company, Chief Executive Officer of Mitchells & Butlers plc and Retail Director at Sainsbury’s Supermarkets Limited. Adam has also held senior positions at Bass Leisure.

Marisa CassoniIndependent Non-Executive DirectorChair of the Audit CommitteeAppointed to the Board on 1 April 2015.

Marisa, 67, is a chartered accountant and finance professional with over 40 years of experience. She was previously Finance Director of the UK Division of Prudential Group, the Post Office (subsequently Royal Mail), and the John Lewis Partnership and a Non-Executive Director at Skipton Group Holdings Limited, where she chaired the Audit Committee. Marisa is currently a Non-Executive Director of AO World plc and Galliford Try plc; she also previously sat on the Economics Affairs Committee of the CBI, as a panel member of the Competition and Markets Authority and on the Accounting Standards Board.

Peter Baguley Independent Non-Executive Director Chairman of the Remuneration CommitteeAppointed to the Board on 31 January 2013.

Peter, 66, is a chartered surveyor and an independent consultant providing strategic property advice to retailers and private equity companies. Peter is a lay member of Court at Glasgow Caledonian University and has previously held a number of senior management positions in the UK retail sector with a strong focus upon property. He was the leader of the group property functions at both J Sainsbury plc and Boots plc, was Director of Investor Relations at Boots plc and a Non-Executive Director at Atrium European Real Estate, a company listed in Amsterdam.

Jane BednallIndependent Non-Executive DirectorAppointed to the Board on 2 July 2018.

Jane, 52, previously occupied the role of Chief Marketing Officer for SSE plc. Prior to that Jane held senior marketing positions with Intercontinental Hotels Group, British Gas and British Airways and was previously Non-Executive Director of Smart Energy GB, the body responsible for engagement in smart metering for domestic and commercial customers.


GovernanceGovernance



The directors submit the statutory financial statements for the Group for the year ended 30 September 2019.

The governance report on pages 51 to 56, and the corporate social responsibility report (with regard to information about the employment of disabled persons, employee involvement, share schemes and greenhouse gas emissions) are incorporated into this report by reference.

The Company has chosen, in accordance with section 414 C(11) of the Companies Act 2006 to include the disclosure of likely future developments in the strategic report (see pages 01 to 43) and this material is also incorporated into this report by reference.

Results and dividendsThe Group’s statutory loss for the year after taxation amounted to £209 million (2018: profit of £72 million).

Pursuant to the terms and conditions of the Stonegate Offer, Stonegate has reserved the right to reduce its offer price by an amount equivalent to any dividend other distribution or return of value which is announced, declared, paid or becomes payable to shareholders prior to the completion of the transaction. The Board is not intending to propose a final dividend on its ordinary shares for the year ended 30 September 2019 (2018: nil).

Share capitalAs at 30 September 2019, the Company’s issued share capital was 487,910,075 ordinary shares of 2.5p each as set out in note 28 to the accounts on page 130.

Authority of the directors to allot sharesThe Company was authorised by shareholders at the Annual General Meeting held on 7 February 2019 to allot shares and to grant rights to subscribe for, or convert securities into, shares up to a maximum nominal amount of £7,731,431.60.

This authority will expire at the 2020 AGM and the directors will be seeking a new authority for the directors to allot shares, and to grant subscription and conversion rights, to ensure that the directors continue to have the flexibility to act in the best interests of shareholders, when opportunities arise, by issuing new shares or granting such rights. There are no current plans to issue new shares except in connection with employee incentive plans and employee share schemes.

Purchase of own shares by the CompanyThe Company was authorised by shareholders at the AGM held on 7 February 2019 to purchase up to a maximum of 14.99% of its ordinary shares in the market. The price per ordinary share that the Company may pay is set at a minimum amount (excluding expenses) of 2.5p and a maximum amount (excluding expenses) of the higher of: (i) 5% over the average of the previous five business days’ middle market prices; and (ii) the higher of the price of the last independent trade and the highest current independent bid on the trading venue where the purchase is carried out. In July 2019 the Company completed a share buyback programme and 28.9 million shares were purchased for cancellation under this authority during the period under review for £59 million, representing 5.9% of issued share capital at the year end date. This authority will expire at the 2020 AGM and the directors will be seeking a new authority for the Company to purchase its ordinary shares, which will only be exercised if: (a) the Stonegate Offer does not complete (on account of Stonegate’s reservation of its right to reduce its offer price by an amount equivalent to any return of value prior to the completion of the transaction); and (b) market and financial conditions make it advantageous to do so.

Treasury shares and the Employee Benefit TrustAs at 30 September 2019, the Company held 50,000,000 shares in Treasury as set out in note 28 to the accounts on page 130. There has been no change to the number of shares held in Treasury during the period under review.

In addition, 1,438,136 shares are held by the Company’s Employee Benefit Trust and movements during the year are set out in note 28 to the accounts on page 130. These shares are held to satisfy awards made under the various employee incentive plans and employee share schemes, details of which are set out in note 29 to the accounts on pages 130 to 133.

Issue of sharesSubject to the provisions of the Companies Act 2006 relating to authority to allot shares and pre-emption rights, and any resolution of the Company in a general meeting, all unissued shares of the Company shall be at the disposal of the directors and they may allot (with or without conferring a right of renunciation), grant options over or otherwise dispose of them to such persons, at such times and on such terms as they think proper.


Directors’ report



Material shareholdingsAs at 30 September 2019, the Company was aware of the following interests of 3% or more in the Company’s ordinary share capital:

Number ofordinary shares

Percentage of voting rights of the issued

share capital Standard Life Aberdeen Holdings plc 45,065,446 10.29

M&G Investments 39,944,037 9.12

Dimensional Fund Advisors 29,895,858 6.83

UBS Securities (London) 20,569,183 4.70

Morgan Stanley (London) 18,848,049 4.30

Bank of America Securities 18,029,632 4.12

HSBC Securities (London) 15,874,424 3.63

JPMorgan Asset Mgt (London) 14,928,819 3.41

Norges Bank Investment Mgt (Oslo) 13,890,080 3.17

Majedie Asset Mgt (London) 13,491,923 3.08

Subsequent to the year end and up to the date of this report, there have been the following significant changes:

• The holding of UBS increased on 7 November 2019 to 30,783,908 being 7.03%.

• The holding of JP Morgan Chase increased on 30 October 2019 to 28,355,100 being 6.48%.

• The holding of Morgan Stanley on 8 October 2019 decreased to below 3%, on 13 November 2019 increased to 23,080,001 being 5.27% and on 14 November 2019 decreased to below 3%.

DirectorsNames and biographical details of the directors currently serving on the Board are given on pages 44 and 45. All of the current directors served during the period covered by the accounts. The interests of the directors in the Company’s shares, along with details of directors’ share options are contained in the directors’ remuneration report on pages 65 to 78. There have been no changes in the interests of the directors between the balance sheet date and the date of approval of the accounts.

It is intended that, with effect from completion of the Stonegate Offer, each of the non-executive members of the Board shall resign from his/her office as a director. It is also expected that the Chief Executive Officer and Chief Financial Officer will leave the Company with effect from completion of the Stonegate Offer.

Audit informationThe directors confirm that, so far as they are aware, there is no relevant audit information (as defined in section 418 of the Companies Act 2006) of which the Group’s auditor is unaware and that all directors have taken all the steps they ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the Group’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

Political donationsDuring the year the Group has not made any political donations and intends to continue its policy of not doing so for the foreseeable future.

Going concernThe directors have adopted the going concern basis of accounting in preparing the financial statements, and their going concern considerations, including specific considerations in light of the proposed offer for the Company, are included within the strategic report on page 43.

Financial instruments and treasuryThe financial position of the Group, its cash flows, debt and borrowing facilities are set out in the strategic report on pages 01 to 43 and in the financial statements and notes to the accounts on pages 80 to 139. In addition, details of the factors likely to affect the Group’s future development and performance are set out in the risks and uncertainties section on pages 37 to 43. Further details of our policy on financial instruments and capital risks and management are set out in notes 22 and 23 to the accounts on pages 118 to 125.


Governance



Annual General MeetingThe AGM will be held in March 2020 at the registered office of the Company at 3 Monkspath Hall Road, Solihull, West Midlands, B90 4SJ. The Notice convening the AGM, and an explanation of the resolutions to be put to the meeting will be mailed to shareholders in or around February 2020 subject to the Stonegate Offer not having completed before that date.

If the Stonegate Offer completes and the Company is acquired by Stonegate prior to the AGM, then only Stonegate will be entitled to attend and vote at the AGM and an update announcement to this effect will be released through a regulatory information service.

Additional informationSet out below is a summary of certain provisions of the Company’s current Articles of Association (the Articles) and applicable provisions of the Companies Act 2006 (the Companies Act). More detailed information can be found in the Articles and the Companies Act.

Articles of AssociationThe Articles (adopted in substitution for and to the exclusion of all existing articles by a special resolution passed on 20 January 2011 and amended by special resolution passed on 12 September 2019) may only be amended by special resolution at a general meeting of the shareholders. A copy of the Articles is available on our website.

Significant agreements: change of controlThe agreements in relation to bank borrowings and corporate bonds, to which the Company is party, contain provisions that allow the counterparties to terminate funding to the Company in certain circumstances where there has been a change of control of the Company or contain provision for repurchase. These are detailed within the financial instruments note to the accounts on pages 118 to 125.

Cooperation AgreementStonegate and the Company entered into a Cooperation Agreement on 2 August 2019. Pursuant to the Cooperation Agreement, Stonegate and the Company have, amongst other things, each agreed to: (i) cooperate in relation to obtaining any consents, clearances, permissions, waivers and/or approvals as may be necessary, and the making of all filings as may be necessary, from or under the law, regulations or practices applied by any applicable regulatory authority in connection with the Stonegate Offer; and (ii) cooperate in preparing and implementing appropriate proposals in relation to the Company’s share plans.

The Cooperation Agreement will terminate in certain circumstances, including if the Stonegate Offer is withdrawn, terminated or lapses, a competing offer completes, becomes effective or is declared unconditional, or if prior to 15 June 2020 or such later date as may be agreed or allowed (the “Long-stop Date”) any condition to the Stonegate Offer has been invoked by Stonegate, if the Company’s directors withdraw their recommendation of the Stonegate Offer or if the scheme of arrangement to implement the Stonegate Offer does not become effective in accordance with its terms by the Long-stop Date or otherwise as agreed between Stonegate and the Company.

Under the terms of the Cooperation Agreement, Stonegate has agreed to use its best endeavours to secure such clearance from the CMA as is necessary to satisfy the CMA approval condition to the Stonegate Offer with the aim of obtaining such clearance on or before 31 January 2020. This obligation includes, to the extent necessary to secure the clearance of the CMA, agreeing to make disposals of public houses, which are either owned, leased, operated or managed by the Stonegate group or the Group; provided that Stonegate is not required to agree to any remedies which require the sale or other disposal of 100 or more of such public houses in aggregate.

Rights and obligations attaching to sharesThe rights and obligations attaching to the ordinary shares are set out in the Articles.


Directors’ report



Voting rights attaching to sharesOn a show of hands, every member who is present in person or by proxy shall have one vote. On a poll, every member who is present in person or by proxy shall have one vote for every share of which they are the holder.

Where shares are held by the Trustee of the Employee Benefit Trust and the voting rights attached to such shares are not directly exercisable by the employees, it is the Company’s practice that such rights are not exercised by the Trustee. Shares purchased by employees, along with matching shares, held in a SIP Trust, are capable of being voted through a direction to the Trustee by the relevant employee.

Under the Companies Act, members are entitled to appoint a proxy, who need not be a member of the Company, to exercise all or any of their rights to attend and to speak and vote at a general meeting. A member may appoint more than one proxy in relation to a general meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. A member that is a corporation may appoint one or more individuals to act on its behalf at a general meeting as a corporate representative.

Restrictions on voting rights attaching to sharesNo member shall, unless the directors otherwise determine, exercise any voting rights either personally or by proxy at a general meeting if any call or other sum presently payable by him/her to the Company in respect of any share or shares remains unpaid. The Company is not aware of any arrangements between shareholders that may result in a restriction on voting rights attaching to shares.

Deadlines for exercising voting rights attaching to sharesVotes are exercisable at a general meeting of the Company in respect of which the business being voted upon is being heard. Votes may be exercised in person, by proxy, or by corporate representatives (in relation to corporate members). The Articles provide a deadline for the submission of proxy forms (electronically or by paper) of not less than 48 hours before the time appointed for the holding of the meeting or the adjourned meeting (in each case ignoring any part of a day that is not a working day).

Shares in uncertificated formDirectors may determine that shares may be held in uncertificated form and title to such shares may be transferred by means of a relevant system or that shares should cease to be so held and transferred.

Variation of rights attaching to sharesThe Articles provide that rights attached to any class of shares may be varied with the written consent of the holders of not less than three-quarters in nominal value of the issued shares, or with the sanction of a special resolution passed at a separate general meeting of the holders of those shares. At every such separate general meeting, the quorum shall be two persons holding or representing by proxy at least one-third in nominal value of the issued shares (calculated excluding any shares held in treasury). The rights conferred upon the holders of any shares shall not, unless otherwise expressly provided in the rights attaching to those shares, be deemed to be varied by the creation or issue of further shares ranking pari passu with them.

Transfer of sharesThere are no restrictions on the transfer of ordinary shares in the Company other than:

• restrictions which may from time to time be imposed by laws and regulations (for example, insider trading laws);

• restrictions pursuant to the Company’s share dealing code which apply to all staff and which encompass the requirements of the Market Abuse Regulations;

• whereby the directors and employees require approval of the Company to deal in the Company’s shares; and

• where a person with an interest of at least 0.25% in the Company’s certificated shares has been served with a disclosure notice and has failed to provide the Company with information concerning interests in those shares.

The Company is not aware of any arrangements between shareholders that may result in a restriction on the transfer of ordinary shares.

Dividends and distributionsSubject to the provisions of the Companies Act, the Company may, by ordinary resolution from time to time, declare dividends not exceeding an amount recommended by the directors. The directors may pay interim dividends whenever the financial position of the Company, in the opinion of the Board, justifies such payment. The Board may withhold payment of all or any part of any dividend or other monies payable in respect of the Company’s shares from a person with an interest of at least 0.25% if such a person has been served with a disclosure notice and has failed to provide the Company with information concerning interests in those shares required to be provided by the Companies Act.


Governance



Appointment and replacement of directorsUnless determined by ordinary resolution of the Company, the number of directors shall not be less than two but is not subject to a maximum number. While a director is not required to hold any shares in the Company by way of qualification, the Company has adopted shareholding guidelines for executive directors which require them to build up and retain a holding of shares. Further details on directors’ shareholdings are contained in the directors’ remuneration report on page 72.

The Board may appoint any person to be a director and such director shall hold office only until the next AGM, when he or she shall then be eligible for reappointment by the shareholders. The Articles provide that, at each AGM, all those directors who have been in office for three years or more since their election or last re-election shall retire from office. However, in accordance with the UK Corporate Governance Code, all directors of the Company are subject to annual re-election.

Further details of the directors’ service contracts can be found in the directors’ remuneration report on page 76.

Powers of directorsSubject to the Articles, the Companies Act and any directions given by special resolution, the business of the Company is managed by the Board who may exercise all of the powers of the Company to, for example: borrow money; mortgage or charge any of its undertaking, property and uncalled capital; and issue debentures and other securities, whether outright or as collateral security for any debt, liability or obligation of the Company.

The Company was authorised by shareholders at the AGM held on 7 February 2019 to allot, issue and make market purchases of the Company’s ordinary shares. These authorities will expire at the 2020 AGM and the directors will be seeking new authorities for the Company to allot, issue and make market purchases of the Company’s ordinary shares.

Directors’ indemnitiesThe Articles permit the Board to grant the directors indemnities in relation to their duties as directors, including third party indemnity provisions (within the meaning of the Companies Act) in respect of any liabilities incurred by them in connection with any negligence, default, breach of duty or breach of trust in relation to the Company. No such indemnities have been granted.

Compensation for loss of officeThere are no agreements between the Company and its directors or employees providing for compensation for loss of office or employment that occurs as a result of a takeover bid. Details regarding change of control provisions in respect of share plan awards and other related agreements are included within the directors’ remuneration report. Further details of the directors’ service contracts can be found in the directors’ remuneration report on page 76.

Important events affecting the CompanyA description of the Stonegate Offer is provided on page 01.

Overseas branchesThe Company does not have any branches registered overseas.


L Togher Company Secretary

18 November 2019

Registered Company name: Ei Group plc Registered Company number: 2562808


Directors’ report



Letter from the Chairman of the Board of DirectorsDear Shareholders,Possibly for the final time, and on behalf of the Board, I am pleased to present our Governance report for the year ended 30 September 2019. In this report, we explain our approach to corporate governance, together with information that is required by the UK Corporate Governance Code.

The Board has the appropriate experience and skills. Adam Fowle brings a career’s knowledge of the pub and beer sectors as past CEO of Mitchells & Butlers. Peter Baguley has wide experience in retail property with both Boots and Sainsbury’s; and Jane Bednall brings insights into consumer and customer behaviour from British Airways, Intercontinental Hotels and SSE. As Chair of Audit and Risk, Marisa Cassoni brings great knowledge as a former CFO at Royal Mail and John Lewis Group, and a former panel member of the CMA. My own background is mainly in fast moving consumer goods and retail.

In terms of the Code’s requirement to more closely engage with colleagues across the entire business, the Board nominated Jane Bednall as our designated non-executive director responsible for the oversight of workforce policies and practices. Jane has made great progress during the year on this initiative as set out in her report on page 36.

The Board conducted an internal board evaluation in the year. Key conclusions were that the Board continues to function at a high standard. At a time when boards are coming under increased criticism, we believe your Board has performed exceptionally well on almost every measure.

It is helpful for me to set out here why the Board has performed so well. A recent discussion highlighted seven principal reasons.

• A management team that consistently demonstrates the very highest values of integrity, transparency and openness; issues are confronted and communicated immediately.

• A complete absence of an entitlement mentality on remuneration.

• The strategy development process, and its ongoing monitoring, has always involved every member of the Board and senior management team.

• A balanced skillset around the Board table. Key skills are represented, sector, property, customer and marketing, debt and audit.

• Each non-executive, including myself, was allocated a part of the business to mentor each year, demonstrating real involvement, but also demystifying the Board among colleagues.

• Pro-active and extensive relationships with the Company’s stakeholders. These included investors, analysts, the health and safety community, the Pub’s Code Adjudicator and parliamentarians.

• Board papers are consistently high quality, of the right length, timely, well-argued and comprehensively cover all key risks.


At a time when boards are coming under increased criticism, we believe your Board has performed exceptionally well on almost every measure.


Governance

Governance report



After almost 25 years on FTSE 100/250 boards, and the great pleasure I have had to chair the Ei Group Board for eight years, I would like to make a final comment on corporate governance. In the UK, we are rightly proud of our standards of corporate governance, in spite of a small handful of well publicised exceptions. The vast majority of boards take the governance codes very seriously and work to high standards. I am concerned however, that the comply or explain principle is coming under threat. The sheer weight of targets, rules and regulations require significant resources from investors to both monitor, comment and make judgement. Very few investors are resourced to do this effectively, with the result that most delegate their voting intentions to third party agents who simply assess annual reports on a tick-box, rules based basis. In my experience, companies find it very difficult to engage with these third party agents on any constructive basis. There needs to be a better way for Boards to engage with investors on issues of substance. One such third party agent regularly recommended a vote against my annual re-election, recommended shareholders should vote against or abstain on resolutions connected to our remuneration arrangements and consistently recommended a vote against our ability to buyback shares which was a key strategy to return investment to shareholders. I feel strongly that the over reliance and/or delegation of voting recommendations to third parties is unhelpful and often not reflective of real world requirements that do not damage corporate governance.

At the time our transformational strategy was announced in 2015, most analysts and investors highlighted executional risk; which was understandable and appropriate. We successfully addressed that risk by adding critical new resources and planning each stage meticulously. As a result, we have seen 24 quarters (out of 25) of like-for-like growth in net income per pub. Once approached by Stonegate, it was incumbent upon us to achieve a premium to tangible net asset value for the whole estate. As a result of this sustained performance since 2015, we were approached with an all cash offer for the Company in May 2019. Confident of the Company’s future, the Board unanimously rejected two offers until a price was achieved we felt we could recommend to shareholders. In the end, shareholders agreed with the Board’s recommendation in September and a total of 99.98% of shares voted were in favour of approving the Stonegate Offer.


Compliance with the UK Corporate Governance CodeThe UK Corporate Governance Code (Code) sets out guidance in the form of main principles and specific provisions on how companies should be directed and controlled to follow good governance practice. The rules of the Financial Conduct Authority (FCA) require listed companies incorporated in the UK to disclose, in relation to the Code, how they have applied those principles and whether they have complied with the provisions throughout the financial year.

The Company reviews its compliance with the Code regularly and considers that it has fully complied with the provisions and applied the main principles of the Code that are applicable to it for the whole of the year ended 30 September 2019.

The Audit Committee report on pages 57 to 62, the Nomination Committee report on pages 63 and 64, and the directors’ remuneration report on pages 65 to 78 are also incorporated into this report by reference. For further details on the Company’s compliance with the Code and the terms of reference for each of its Committees, see the Company’s website (www.eigroupplc.com). The Code can be accessed at www.frc.org.uk.

LeadershipRole of the BoardThe Board has a collective responsibility to provide leadership and challenge and for the overall control and effective oversight of the Group and its business and to promote the long-term success for its shareholders. The Board has the ultimate responsibility to ensure that the business is managed effectively and in the best interest of the shareholders as a whole and all other stakeholders. Its role includes reviewing and approving key policies and decisions of the Group, particularly in relation to strategy and operating plans, governance and compliance with laws and regulations, business development, major investments and disposals and, through its Committees, financial reporting and risk management.

The Board has a schedule of matters reserved for Board decision. This schedule details key aspects of the affairs of the Group which the Board does not delegate, including key strategic, operational and financial issues. This schedule is reviewed annually and can be found on the Company’s website.

The Board delegates to management the day-to-day operation of the business, subject to appropriate risk parameters. Board meetings are scheduled to coincide with key events in the Group’s financial calendar, including interim and final results and the AGM. Other meetings during the year will review the Group’s strategy and budgets for the next financial year and the Group’s key risks as well as reviewing each of the main operating functions including financial, commercial, operational, managed businesses and commercial property.


Governance report



Board CommitteesSubject to those matters reserved for its decision, the Board has delegated to its Audit, Nomination and Remuneration Committees certain authorities. The terms of reference for each of the Audit, Nomination and Remuneration Committees are reviewed regularly and published on the Company’s website. Separate reports for each of these Committees are included in this Annual Report and Accounts from page 57.

Role of the ChairmanThe Chairman, Robert Walker, is responsible for the leadership and effectiveness of the Board, ensuring its effectiveness in all aspects of its role as well as being responsible for its governance, taking into account the interests of stakeholders and promoting the highest standards. A summary of the Chairman’s responsibilities has been agreed by the Board, is set out in writing and is available on the Company’s website. In accordance with the Code, the Chairman met with the non-executive directors at least six times during the year before scheduled Board meetings and without the executive directors being present, to discuss in detail matters which they believed to be relevant for the purposes of the strategic business review, including key operational and financial issues and the performance of the CEO. Further adhoc meetings were held which reflected the increased activity in the year relating to the Stonegate Offer. In 2019, the Chairman conducted the internal Board evaluation and managed the feedback arising from the evaluation process (further details of this process are set out below).

Role of the Senior Independent Director (SID)The SID, Adam Fowle, provides a sounding board to the Chairman, serves as an intermediary for the other directors if necessary and is available to shareholders if they have concerns. The SID’s role includes responsibility for the Chairman’s appraisal and succession. A summary of the responsibilities of the SID has been agreed by the Board, is set out in writing and is available on the Company’s website. In compliance with the Code, the SID met with the other non-executive directors during the year in a forum that did not include the Chairman or the executive directors.

Role of the Chief Executive Officer (CEO)The CEO, Simon Townsend, is responsible for the day-to-day running of the business, the preparation, evaluation and implementation of the Company’s strategic goals and leading the senior management team. He is accountable to the Board for the operational and financial performance of the business and, together with the Chairman, provides leadership of the Group. The role is distinct and separate to that of the Chairman and clear divisions of accountability and responsibility have been agreed by the Board, which are set out in writing and are available on the Company’s website.

Role of the Company SecretaryLoretta Togher is the Company Secretary. The role of the Company Secretary is to develop, implement and sustain good governance practices. This includes supporting the Chairman and non-executive directors as necessary, managing Board and Committee meetings, facilitating the induction of new directors, ensuring appropriate directors’ and officers’ insurance is in place and that the Group is compliant with statutory and regulatory governance requirements. The written responsibilities of the Company Secretary have been agreed by the Board, are set out in writing and are available on the Company’s website.

Board balance and independenceThe Board has a strong independent element and, at the date of this report, comprises, in addition to the Chairman, two executive directors and four non-executive directors. The Board comprises individuals with wide business skills and experience which are considered to be a balance of the skills and experience appropriate for the needs of the business and allows it to exercise objectivity in decision making and proper control of the business. The Chairman and each of the four non-executive directors are considered to be independent in character and judgement; they satisfied the criteria in the Code on appointment and continue to satisfy the criteria. The non-executives have a wide range of skills and experience; they constructively challenge management; help develop the Company’s strategy and have satisfied themselves as to the integrity of the Group’s financial information, controls and risk management strategy. Further information about how they have achieved this can be found in the Audit Committee report on pages 57 to 62 and the directors’ remuneration report on pages 65 to 78.

All directors may take independent professional advice at the Company’s expense. There is a formal written procedure, available on the Company’s website, concerning independent professional advice and setting out clear guidelines which have been agreed by the Board.

At the date of this report Peter Baguley, Adam Fowle, Marisa Cassoni and Jane Bednall have been on the board for, seven, six, five and one year(s) respectively and their suitability for reappointment is subject to rigorous review. The Board believes that Peter Baguley, Adam Fowle, Marisa Cassoni and Jane Bednall continue to display all of the qualities of independence as set out in the Code.


Governance



EffectivenessMeetings and attendanceScheduled Board meetings are held either at the Pub Support Centre, regionally or in new business areas and provide the opportunity for the whole Board to meet key suppliers, partners and advisers. Included on the agenda at each scheduled Board meeting is an update from a member of the senior management team on the delivery of the key platforms of the strategic plan. In particular, in the year under review, we were pleased to conduct our first Board meeting at our new Pub Support Hub in Wakefield.

The Board held six scheduled meetings in the year under review. In addition, a strategic business review was held off-site at which high level strategic issues, including future business direction and its financial and operational implications, were reviewed and debated. The Board has an agreed approach

and procedure for dealing with conflicts of interest in relation to matters which are scheduled for Board consideration, although no such conflicts arose during the year under review. If directors are unable to attend meetings in person then they are consulted prior to the meeting and their views made known to the other directors and/or they may attend the meeting or part thereof by telephone or other conference facility.

A monthly board pack is prepared at the end of each financial period which includes an update on key performance targets, trading performance against budget and includes detailed financial data and analysis including a review of applicable financial covenants. Board papers are generally circulated seven days prior to meetings to ensure directors have sufficient time to review papers ahead of the meeting. Attendance at scheduled meetings is set out below:

Attendance at scheduled Board and Committee meetings during the year ended 30 September 2019

Board meetings(i)

Audit Committee(ii)

Nomination Committee(i), (iv)

Remuneration Committee(i), (iii)

Number of scheduled meetings held 6 3 2 5

Robert Walker 6 3 2 5

Simon Townsend 6 3 2 2

Neil Smith 6 3 2 –

Peter Baguley 6 3 2 5

Adam Fowle 6 3 2 5

Marisa Cassoni 6 3 2 5

Jane Bednall 6 3 2 5

(i) Additional non-scheduled meetings of the Board, Nomination and Remuneration Committees were held outside those scheduled meetings referred to above to deal with matters arising as required, and were attended, where possible, by all members of the Board or Committees.

(ii) Robert Walker, Simon Townsend and Neil Smith attended meetings of the Audit Committee by invitation.

(iii) The executive directors attended meetings of the Remuneration Committee, or part thereof, by invitation.

(iv) The executive directors attended meetings of the Nomination Committee by invitation.

Training and developmentThe Company’s directors have a wide range of expertise as well as significant experience in strategic, financial and operational matters. New directors receive a personalised induction programme designed to develop their knowledge and understanding of the Group, its culture and operations.

All directors have access to management and to the advice of the Company Secretary, who regularly updates the Board on material governance and compliance issues.

The training and development needs of directors are reviewed and assessed by the Chairman as part of the annual Board performance evaluation process.

Business mentoring by non-executivesThe Board continues with the allocation of business units and central functions to non-executive directors, including the Chairman. This practice is firmly embedded in the Board’s culture so that each year non-executive directors are allocated a business unit and/or central function and the non-executive director has regular engagement, meetings and visits throughout the year with his/her respective assignment. Assignments are rotated so that the benefit of the mentoring programme continues to be relevant.


Governance report



Board evaluationAs referred to above during the year the Board conducted an internal evaluation of its effectiveness. This evaluation took the form of written questionnaires followed up by individual discussion between the Chairman and the Board members. The summary of the outcome was presented to the Board for discussion and follow-up.

The CEO is responsible for regularly reviewing the other executive director’s performance against objectives and the CEO’s performance is assessed by the Chairman in consultation with the non-executive directors. In addition, the Remuneration Committee regularly reviews executive director performance in connection with their personal performance objectives. The Chairman’s performance is appraised by the SID in consultation with the non-executive directors, taking into account the views of the executive directors, and the non-executive directors’ performance is reviewed by the Chairman. As a result of these individual reviews, it is considered that the performance of each director continues to be effective and that each director demonstrates sufficient commitment to their role. Consequently, the Chairman can confirm that each director is suitable for re-election at the next AGM.

The Nomination Committee is responsible for proactively reviewing and refreshing the Board’s composition and further information about the roles and responsibilities of this Committee can be found on page 64.

Election of directorsThe directors comply with the requirements of the Code and submit themselves for re-election every year, if they wish to continue serving and are considered by the Board to be eligible. Accordingly, the whole Board will be proposed for re-election at the 2020 AGM.

It is intended that, with effect from completion of the Stonegate Offer, each of the non-executive members of the Board shall resign from his/her office as a director. It is also expected that the Chief Executive Officer and Chief Financial Officer will leave the Company with effect from completion of the Stonegate Offer.

Service agreementsThe service agreements of the executive directors and copies of the letters of appointment of the non-executive directors are available for inspection during business hours on any weekday (excluding public holidays) at the registered office of the Company.

External appointmentsThe executive directors may accept outside appointments provided that such appointments do not in any way prejudice their ability to perform their duties as executive directors of the Company. The executive directors are encouraged to hold external appointments in the event that they would bring them further experience and bring benefits to the Board. Since 1 March 2019 Simon Townsend has been a non-executive director of Countryside PLC.

The role of non-executive director requires a time commitment in the order of 15 days per annum plus additional time as necessary to properly discharge their duties. There is no restriction on outside appointments provided that they do not prevent the director from discharging their responsibilities effectively.

AccountabilityThe Board presents a fair, balanced and understandable assessment of the Company’s position and prospects, maintains sound risk management and internal control systems and manages an appropriate relationship with the Company’s auditor.

Further information about these systems and about how these principles have been applied is detailed in the Audit Committee report on pages 57 to 62.

RemunerationLevels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the Company successfully, whilst avoiding paying more than is necessary for this purpose, and there should be a formal and transparent procedure for developing policy on executive remuneration.

Further information about how these principles have been applied is detailed in the directors’ remuneration report on pages 65 to 78.

Relations with shareholdersWe are committed to, and place a great deal of importance on, having an active dialogue with our investor base. The Company maintains constructive engagement with its key stakeholders including institutional shareholders. During the year, our CEO and CFO met with a number of our leading shareholders to discuss issues relating to the performance of the Group, strategy and new developments. In addition, the Chairman engaged with the majority of our top ten shareholders on a range of governance matters. All non-executive directors are available to shareholders to discuss any matter they wish to raise.


Governance



As regards governance issues, the Chairman aims to meet with most of our major shareholders shortly after each AGM. These meetings with shareholders are timed early in the process so that the Board has enough time to consider, and respond to, any shareholder concerns well in advance of the next year’s Annual Report. The Chairman normally contacts as many major shareholders as possible, and not simply the very largest, to ensure the widest consultation possible and also to ensure that the views of any shareholder who has substantially increased their stake during the year, have been fully taken into account.

The understanding gained from engagement with major shareholders prior to Stonegate’s approach and the excellent relationships which have been developed gave the Board confidence in engaging with Stonegate and ultimately recommending their offer. This confidence proved justified with shareholders voting overwhelmingly in favour of the transaction.

Following the announcement of results, an investor relations report is produced for the Board which summarises feedback from shareholders and ensures the Board has a balanced view from our major investors.

The Company ensures that any price-sensitive information is released to all shareholders at the same time in accordance with regulatory requirements. All major presentations are available to shareholders through the Company’s website.

Shareholders may choose to receive the Annual Report either in paper form or electronically. This Report, along with a wide range of shareholder information including the interim report, is also available on the Company’s website. Additional information for shareholders can be found on page 150.

AGMShareholders receive at least 20 working days’ notice of the AGM. The AGM offers the opportunity for the Board, including the Chairs of each of the Audit, Nomination and Remuneration Committees, to communicate the Company’s progress directly to shareholders. The Board aims to ensure that all members, including in particular the Chairs of the Board Committees, are available to answer questions at the AGM. To encourage shareholders to participate in the AGM process, the Company offers electronic proxy voting through the CREST service and all resolutions are proposed and voted on at the meeting on an individual basis by shareholders or their proxies. Voting results are announced on the same day as the meeting through RNS and made available on the Company’s website.

It should, however, be noted that if the Stonegate Offer completes and the Company is acquired by Stonegate prior to the AGM, then only Stonegate will be entitled to attend and vote at the AGM and an update announcement to this effect will be released through a regulatory information service.


R M Walker Chairman

18 November 2019


Governance report



Dear Shareholders,As Chair of the Company’s Audit Committee (the Committee) I am delighted to present my report for the year ended 30 September 2019. The aim of the Committee’s report is to give shareholders a better understanding of the work of the Committee such that it is able to positively confirm on the effectiveness of the Group’s risk management processes and internal control systems and the integrity of its financial information.

My report also covers those accounting matters in relation to these financial statements that are deemed significant and that have been specifically considered and concluded on by the Committee including our going concern and viability review and the impact of the Stonegate Offer on this review, the annual valuation of the estate and our impairment review.

As I proposed last year, the Committee has also conducted an audit tender process during the current year, in advance of our requirement to change external auditor. The Committee is confident the process was inclusive and thorough, although it is currently not being finalised and implemented following the announcement of the possible acquisition of the Company. Should the acquisition not proceed, the tender process will be concluded.

Marisa Cassoni Chair, Audit Committee

Role of the CommitteeThe Board has responsibility for establishing formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the Company’s auditor. The Board has delegated responsibility for the detailed assessment of each of these areas to its Audit Committee, and the Committee confirms back to the Board, highlighting any potential areas of concern.

The full terms of reference are available on the Company’s website or on request from the Company Secretary.

Marisa Cassoni Chair, Audit Committee

My report covers those accounting matters in relation to these financial statements that are deemed significant and that have been specifically considered and concluded on by the Committee.


Governance

Audit Committee report



Membership and operationThe Committee is formed of the independent non-executive directors:

Date of appointment to the Committee

Relevant sector experience Meetings attended

Marisa Cassoni (Chair) April 2015 Retail 3 of 3

Peter Baguley January 2013 Property, retail 3 of 3

Adam Fowle February 2014 Retail, leisure 3 of 3

Jane Bednall July 2018 Leisure 3 of 3

The Board considers that, by virtue of her former executive and current non-executive director positions, as well as her roles in various industry and accounting bodies, Marisa Cassoni has the requisite current and relevant financial experience to fulfil the role of Chair of the Audit Committee. In addition the Board is confident that the Committee is independent and, as a whole, that the members have sufficient competence relevant to the sectors in which the Group operates most notably property, retail and leisure. The members’ biographies are included on page 45.

The Committee held three scheduled meetings in the year under review. Other than the members, also in attendance at all of the meetings were Loretta Togher (Group Legal Counsel and Company Secretary), who serves as Secretary to the Committee, and, by invitation, the Chairman, the Chief Executive Officer, the Chief Financial Officer, the Group Financial Controller and the Director of Internal Audit. The external audit engagement partner and managers attended all the Committee meetings to ensure full communication of matters relating to the audit.

This year, again as part of the wider Board review, we have reviewed the Committee’s performance to ensure that it continues to perform effectively, which included reviewing the membership of the Committee for expertise and independence and ensuring the terms of reference remain appropriate.

ResponsibilitiesIn order to fulfil its role, the Committee considers all information available such that it can confirm to the Board across three areas being:

• Financial reporting;

• Risk management and internal control; and

• The external audit.

Financial reportingThe Committee reports to the Board on whether the interests of shareholders are protected in relation to financial reporting by monitoring the integrity of the annual and interim financial statements. This is achieved by reviewing and challenging, as necessary, the judgements and actions of management in relation to the financial statements and by ensuring that any formal announcements relating to the Company’s financial performance are fair, balanced and understandable.

In order to confirm to the Board on fair, balanced and understandable in respect of the 2019 Annual Report and Accounts the Committee has specifically considered:

• that the Annual Report and Accounts provides a balanced view of performance and prospects;

• that the overall layout of the Annual Report and Accounts is clear with good linking throughout;

• that the content and tone of the Annual Report and Accounts reflect management’s internal reporting;

• that the KPIs are consistent with management’s internal reporting, clear, well explained and show historic trends;

• that the key issues and judgements included within the Strategic report are consistent with those highlighted in the rest of the Annual Report and Accounts;

• that non-IFRS measures of performance are clearly defined, reconciled where appropriate and used consistently;

• that significant events or changes are highlighted and clearly explained; and

• that the Annual Report and Accounts includes simple explanations of the business model, strategy and accounting policies.

During the year and in order to prepare the 2019 Annual Report and Accounts the Committee, management and the external auditor have considered and concluded on a number of significant matters in relation to the financial statements. These are set out below:





Significant matter Committee response

Going concern and viability review

There is a risk to going concern and viability that the Group may not be able to meet its debt liabilities as they fall due and that it cannot comply with the financial covenants underpinning these liabilities both from risks to income generation and risks to the carrying value of properties (considered below). As the going concern assumption is fundamental to the preparation of the Annual Report and Accounts, management has prepared a paper for the Committee that evidences the appropriateness of the assumption which the Committee reviewed. This paper considered the Group’s principal risks and uncertainties together with the controls and actions taken to mitigate those risks, and further whether any of those risks could impact on the viability of the Group over a longer term. The Committee concluded that in a business as usual scenario the assumption was appropriate.

The paper also considered the impact of the proposed acquisition of the Company on the going concern and viability assumptions, most notably should the acquisition complete, whether the directors have sufficient knowledge of the future plans for the combined group that would enable them to conclude on going concern. The Committee considered, amongst other things, the reputation of the buyer together with their experience and expertise at operating pubs, the detail of the buyer’s financing arrangements, management and adviser modelling of cash flows to meet debt service and the buyer’s intentions for the Group as publicly announced. Even though there is uncertainty around the future operations of the Group under new management, the Committee has satisfied itself that it can recommend to the Board the appropriateness of the going concern assumption.

Valuation of the estate

The value of properties held by the Group is the largest figure on its balance sheet and therefore presents a significant risk if not appropriately valued. The Group’s policy to mitigate this risk as much as possible is to hold its properties at fair value derived from an annual revaluation exercise. 95% of the estate is valued by external, independent professional valuation firms whilst the remainder is valued by the Group’s internal team of RICS qualified chartered surveyors. The Committee ensures it is comfortable with the output of the annual revaluation exercise through its review of the consistency of approach, key assumptions, valuation reports prepared by the external valuers and management’s analytical review on the results of the exercise. It then applies that understanding to the accounting and disclosures proposed in the Annual Report and Accounts such that it can confirm they are appropriate.

The Committee was satisfied that a thorough and robust valuation exercise has been carried out, it has been considered by the external auditor and the Committee and appropriate values have been incorporated into the 2019 Annual Report and Accounts.

Impairment review

In line with IFRS, Group goodwill acquired on business combinations is not amortised but is tested annually for impairment, and an impairment test is also performed on the carrying value of investments in the Company. The Group and Company use assumptions of growth rates and discount rates to determine the net present value of future cash flows in the testing. The Group allocates goodwill across its operating segments and therefore requires impairment testing to be performed by segment. The Committee reviewed the growth and discount rates used in the testing and compared to prior year and peer companies to assess their reasonableness. In light of the offer made for the Company, which demonstrates shareholder appetite to realise value sooner at a discount, and wider market evidence, the discount rate and long-term growth rate assumptions used in the value in use calculation have been updated and an impairment of £232 million has been recognised on goodwill. The carrying value of goodwill at 30 September 2019 is therefore £37 million (see note 12 of the accounts). Those same assumptions have been applied to the impairment test for the carrying value of investments in the Company and an impairment of £793 million has been recognised, reducing the carrying value to £968 million (see note 18 of the accounts).

The Committee is satisfied that the impairment test is robust and that the assumptions used in the value in use calculation reflect the current market. The external auditor also reviewed the updated rates used, with input from their specialist valuations team, and confirmed they were in line with their expectations of the market and within an acceptable range.


Governance



Risk management and internal controlThe Committee has responsibility for reporting to the Board on whether the Group’s control environment remains robust and effective which it does through reviewing and monitoring the Group’s internal control and risk management systems, including the internal audit function, controls for preventing and detecting fraud and bribery and the Group’s whistleblowing policy.

Risk managementThe Group designs its risk management framework to manage rather than eliminate the risk of failure to achieve its strategic objectives. The Committee, on behalf of the Board, ensures that the Group’s principal risks and uncertainties have been appropriately identified and assessed, including reviewing internal processes used to identify and monitor all key risks and associated controls. It further reviews those key risks and the quality of the assurance on the effectiveness of the controls that mitigate those risks, allowing it to conclude on the principal risks for disclosure and what, if any, material residual risks remain so that they could be factored into the assessment of going concern and the Group’s ongoing viability.

In addition, the Committee reviews whether compliance related policies and procedures have been adequately established and implemented to ensure that highly regulated areas, such as the statutory Pubs Code, are fully complied with. During the year under review and in accordance with the Pubs Code regulations, a compliance report was prepared for the period from 1 April 2018 to 31 March 2019 and approved by the Chair of the Committee prior to being submitted to the Pubs Code Adjudicator within the guidelines set by the Code. In order to give this approval, our Code Compliance Officer and internal audit team audited the inputs to the compliance report and reported findings to the Committee. It was noted that a compliance officer has been appointed and there is ongoing Code training for all Business Development Managers, to ensure they are familiar with it. Since the Code was introduced, we have not been subject to any investigations or enforcement actions by the Pubs Code Adjudicator. During the reporting period there were 37 MRO related referrals, and nine non-MRO referrals. There were ten cases within the reporting period where breaches of the Code were found by the Adjudicator, seven in relation to a non-compliant MRO proposal, two in relation to a tenant request for a Rent Assessment Proposal and one in relation to a Business Development Manager’s conduct not being consistent with the principle of fair and lawful dealing.

Another area of focus for the Committee in the year was in respect of cyber risk. KPMG were engaged as specialists to review the effectiveness of cyber controls across the Group. The Committee reviewed the output which identified some areas of good practice but also areas where further work is required and have now engaged KPMG to assist with a remediation programme, which is near completion at the date of this report.

Effective internal controlThe Group’s system of internal controls is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

In order to support the accuracy and reliability of financial reporting and the preparation of financial statements the Group has operating policies, procedures and controls that have been in place throughout the year. The key elements of the Group’s internal control environment include:

• an established organisational structure with clearly defined lines of responsibility and levels of authority;

• well documented operational and control policies and procedures;

• regular Board meetings to consider matters reserved for directors’ consideration;

• an annual Board corporate strategy review, including a formal review of material business risks and uncertainties facing the business;

• regular review by the Board of financial budgets, forecasts and covenants with performance reported to the Board monthly;

• an asset optimisation review process to consider all viable options for each asset;

• a detailed investment approval process for major projects;

• a formal management risk committee comprising members from across the business, which meets quarterly, responsible for the ongoing process of identifying, evaluating and managing the principal risks faced by the Group through maintenance of the risk register and evaluation of controls and assurances, reporting its findings back to the Committee;

• an internal audit function which focuses on the highest risk areas and executes the annual internal audit plan and provides independent assurance to executive management, the Committee and the Board on the effectiveness of internal controls and risk management;

• a team employed specifically to address risk of non-compliance such as retail audit, tie compliance and the Pubs Code compliance teams;

• an anti-bribery and corruption code of conduct as the Group is committed to conducting its business with the highest degree of integrity, including a zero tolerance approach towards all forms of bribery, corruption, fraud and theft. Procedures within the Company have been designed to minimise these risks and comply with our published policy, which is available on the Group’s website; and

• a whistleblowing policy, which is reviewed annually, that encourages employees to report any malpractice or illegal acts or omissions or matters of similar concern (whether in the UK or elsewhere) by other employees or former employees, contractors, publicans, suppliers or advisers using internal mechanisms for reporting.





In order to review the effectiveness of the Group’s internal control system the Committee has:

• confirmed with the Director of Internal Audit that senior managers from across the Group have completed their six-monthly self-assurance statements about their business processes and that their output has been considered, challenged where necessary and fed into the management risk committee;

• received and reviewed the Group risk register, including detailed analysis of the key controls that provide assurance to mitigate the key risks, and proposed to the Board principal risks and uncertainties disclosures, which were then approved for use in the Annual Report and Accounts; and

• met with the Director of Internal Audit without management being present to discuss their remit and any issues arising from internal audits carried out, reviewed all the internal audit reports and monitored management’s responsiveness to the findings and recommendations of those reports.

All financial information published by the Group is prepared by the finance team in line with the Group’s accounting policies and is subject to approval by the Committee. There have been no changes in the internal control over financial reporting during the year that has materially affected, or is reasonably likely to materially affect, the Group’s control over financial reporting.

With advice from the Committee the Board has concluded that an effective system of internal controls and risk management processes are in place which enable the Group to identify, evaluate and manage key risks and which accord with the FRC’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting 2014 from the start of the financial year and up to the date of approval of the accounts. Further details of risk management frameworks and the principal risks and uncertainties facing the business can be found on pages 37 to 43.

In addition there have been no material instances of whistleblowing or any recorded instances of bribery or corruption during the period under review.

Role of internal auditThe Group operates an internal audit function that is independent of business operations and has direct access to the Committee. The team consists of a Director of Internal Audit and two internal auditors who have suitable experience and adequate resource to carry out their roles. The previous Director of Internal Audit retired during the year and the Committee is satisfied that the individual appointed has the necessary experience and expertise for the role. The team’s primary role is to review and report on the suitability of internal control and risk management processes across the Group. Each year its scope of work is approved by the Committee to ensure that the risks addressed are those most pertinent to the business and the Director of Internal Audit is invited to attend Committee meetings to present findings and progress against actions.

During the current year the internal audit function underwent an external quality assessment conducted by KPMG and in line with the Institute of Internal Auditor’s International Professional Practices Framework. KPMG measured the team against 52 standards, identifying 44 where the team were assessed as ‘generally conforms’ and the remaining eight as ‘partially conforms’ although by the date of this report actions plans have been put in place for seven of these findings. The eighth action concerning an audit of governance processes has been deferred following the possible acquisition of the Company.

External auditThe Committee has responsibility to ensure that there is a sufficiently robust and effective external audit through considering the independence of the external auditor, the appointment and reappointment of the external auditor and all reports from the external auditor. These reports include the scope of the interim review and annual audit, the approach to be adopted by the external auditor to address and conclude upon key estimates and other key audit areas, the basis on which the external auditor assesses materiality, the terms of engagement for the external auditor and an ongoing assessment of the impact of future accounting developments on the Group. To monitor its independence, the Committee annually reviews the remuneration, terms of engagement and objectivity of the external auditor, including its appropriateness to undertake non-audit work.


Governance



Audit tender process

Reappointment of the external auditorThe reappointment of Ernst & Young LLP (EY) as the Group’s external auditor was reviewed in the year and approved. In addition the current audit partner, Christopher Voogd, was appointed for the year ended 30 September 2016 and therefore in accordance with best practice and professional standards he can remain partner for five years with his final year being the year ending 30 September 2020. The Committee is satisfied he has the experience and industry knowledge to continue to be the lead audit partner until this time.

Although EY has been the Group’s external auditor since the Company started trading in 1991, the audit was put out to a market tender during 2012, with EY chosen to continue with the audit services and KPMG appointed for taxation services. In accordance with EU regulations, the Group is required to tender the audit again for the year ending 30 September 2021 and has therefore conducted a tender process in the current year. The tender process has not yet been concluded, but rather paused, following the announcement of the Stonegate Offer. Should the acquisition not complete the Committee will resume the process and look to determine and appoint the external auditor for the year ending 30 September 2021.

Non-audit servicesThe Group recognises that engaging the external auditor for non-audit services could impair auditor independence. In line with EU audit legislation the Group has a policy that restricts the level of fees for non-audit services that are payable to the external auditor to 70% of audit fees over a rolling three year period. The total fees payable to the external auditor during the year under review amount to £729,000. Of this amount, £274,000 relates to non-audit services, some 38% of the audit fees, being work associated with our commercial property portfolio disposal and the bond security substitution exercises. This is work that is most effectively performed by the external auditor as it requires confirmations to third parties, such as Trustees, as to the correct extraction of data from our accounting records. Over the three years to 30 September 2019, the fees for non-audit services were £526,000, 47% of the total audit fees. Full details are set out in note 7 to the accounts.

The policy applicable throughout the year to 30 September 2019 also specified:• services that are specifically not permitted – this includes

work relating to accounting records that will ultimately be subject to external audit, valuation services, remuneration advice for key management and the provision of strategic advisory or consultancy services; and

• services that are permitted with prior approval of the Committee – this includes accounting advice and reviews of accounting standards and advice, due diligence matters as required by debt prospectuses, assurance work in respect of tax matters including tax compliance, routine tax planning and tax advisory services and any other services not prohibited.

Independence and performance assessmentDuring the year the Committee has again assessed whether EY remain effective in their role as external auditor through consulting with management, confirming EY’s independence from the Company, reviewing the level of non-audit fees and nature of work, and through their interactions with EY throughout the year.

The Committee has authority to take independent advice as it determines necessary in order to resolve issues on auditor independence. No such advice was required during the year and there are no contractual restrictions over choice of auditor.

As part of the process, the Chair of the Committee met with the external auditor without the presence of management during the year and had regular contact with the audit engagement partner during the year. Robert Walker also had two private meetings with the audit engagement partner during the year.

As a result of this review the Committee is satisfied that the external audit is effective and that EY remain independent and objective in that role. The Committee has therefore recommended to the Board to propose to shareholders the reappointment of EY as auditor until the conclusion of the AGM in 2020.

AccountabilityThrough their work during the year, the Committee is able to recommend to the Board that:• the Group’s financial position and prospects as detailed in

the 2019 Annual Report and Accounts are, when taken as a whole, fair, balanced and understandable;

• the viability statement as set out on page 43 represents a reasonable assessment of the expectations for the Group over the period to 30 September 2022; and

• the going concern assumption is appropriate for use in the 2019 Annual Report and Accounts.

M Cassoni Chair, Audit Committee

18 November 2019

Feb2019

March2019

May2019

June2019

July2019

Introductory meetings

Short list of tender

participants agreed

Invitations to tender sent out to participating firms and data room available

to access

Management meetings

Presentations to the Audit Committee





Dear ShareholdersThe Nomination Committee is responsible for monitoring the performance, appropriateness and future succession planning of the Company’s Board and senior management talent.

In my report to you last year, I said the Committee would focus on monitoring the implementation of succession planning on a broad basis throughout the Group and follow up on the Government’s promotion of greater colleague involvement and consultation.

For succession planning the Committee had two meetings in the year under review to monitor and follow up on the output and opportunities arising from the 2018 activity of performance appraisals, evaluations, 360º feedback and succession planning across the entire senior leadership team and executive management group.

As I advised last year Jane Bednall accepted the designated role of the non-executive director responsible for Board oversight of our workforce policies and practices in order to reinforce a healthy culture and colleague engagement. You will see details of the progress Jane has made in that area on page 36.

As a Board we are stable and comprise the right mix of skills at executive and non-executive level. Some further activity around long-term Board level succession planning was paused in the second half of the year following the announcement of the offer from Stonegate. As has been announced it is anticipated that Simon Townsend and Neil Smith will leave the business with effect from completion of the Stonegate Offer.

Robert Walker Chairman, Nomination Committee

As a Board we are stable and comprise the right mix of skills at executive and non-executive level.



Governance

Nomination Committee report



MembershipThe Committee is formed of the Chair of the Board and the independent non-executive directors:

• Robert Walker (Chair)

• Peter Baguley

• Adam Fowle

• Marisa Cassoni

• Jane Bednall

The Company Secretary acts as secretary to the Committee. The Chief Executive Officer and the Chief Financial Officer attend by invitation of the Nomination Committee Chair.

Roles and responsibilitiesThe key roles and responsibilities of the Committee are:

• overall responsibility for leading the process for new appointments to the Board and ensure appointments bring the required level of experience and skill having regard to, amongst other things, the benefits of diversity including gender diversity, the balance and composition of the Board with the overriding requirement to ensure that recommendations are made on merit;

• to act proactively, recognising it is important to plan Board succession well in advance and for all scenarios;

• to ensure that the Company’s Board and executive leadership skills are fully aligned to the Company’s long-term strategy;

• succession planning for directors and other senior executives taking into account the challenges, opportunities and future needs facing the Company; and

• to ensure any appointees have sufficient time to fulfil their duties effectively.

In planning any appointments, the Committee prepares a full description of the role, skills and capabilities required; appoints external search firms, each time reviewing available options, and ensuring that the firm selected has signed up to the relevant industry codes (for example, on diversity) and has no connection with the Company.

What the Committee did in 2019The main focus of the Committee’s work in 2019 included:

• following up on the comprehensive review of the strength, development and succession planning of our executive talent across all the Group’s businesses;

• reviewing the Committee’s terms of reference; and

• conducting an internal review of the Committee’s performance.

Diversity and inclusionAs a Board and through this Committee we have been mindful of diversity, including gender diversity, throughout the business. In the last five years the gender profile at Board level has become more reflective of the business as a whole. While we have not committed to any specific targets for the number of women on the Board, we considered and made appointments based on merit with the overriding objective of appointing the best candidate for the role. We do not now expect to have the opportunity over time to progress with greater diversity and inclusion but would certainly have built on progress over the last five years had we been in a position to do so. From our activity with our senior leadership team I hope that we have developed all of them, of whatever gender, to aspire to career progression in the new structure in 2020 and maintain the momentum for personal development which is now embedded across our businesses.

R M Walker Chairman, Nomination Committee

18 November 2019


Nomination Committee report



Dear Shareholders,I am pleased to introduce our remuneration report for the 2019 financial year which sets out amounts earned by the executive directors in respect of the financial year ended 30 September 2019 under the remuneration policy that was approved by our shareholders at the 2019 AGM.

Information not subject to audit:

Annual statementOver 99% of votes cast were in favour of the policy. Our 2018 remuneration report was similarly strongly supported with over 99% of votes cast in favour of it.

Business context and incentive impact in the current yearThe Chief Executive Officer and his management team have continued to work closely with the Board to progress the execution of the strategy announced in May 2015 to develop optionality across the estate, strengthen the balance sheet through deleveraging and efficiently reinvest disposal proceeds in order to support the core estate and optimise value for shareholders. In March 2019 the business completed the disposal of the first significant tranche of its commercial properties portfolio for total net proceeds of £332.7 million.

The disposal unlocked embedded value, provided an opportunity to return capital to shareholders and demonstrated our ability to successfully execute against the strategy. The benefit of the strategy has been reflected in the share price which has seen an increase of approximately 209% from a low of 72.8p in February 2016 to a five year high before the Stonegate Offer of 224.8p in May 2019, with the discount to tangible net asset value also narrowing materially over the period.

Over the last five years we have achieved a net debt reduction of £780 million which has contributed to growth in equity value. Our ability to substantially reduce debt has provided us with the opportunity to provide greater and more immediate returns to shareholders. Demonstrating our commitment to shareholders the Company announced up to £65 million of the net proceeds from the disposal of 370 commercial properties would be used to fund share buybacks, which were to be in addition to the £20 million completed in January 2019. Up to July 2019 the business had bought back over £100 million of its shares for cancellation over the last four years at prices that have been accretive to both earnings and tangible net asset value per share.

Over 99% of votes cast were in favour of the policy. Our 2018 remuneration report was similarly strongly supported with over 99% of votes cast in favour of it.

Peter Baguley Chairman, Remuneration Committee


Governance

Directors’ remuneration report



On 18 July 2019 we announced agreement on the terms of a recommended all cash acquisition to be effected by a Scheme of Arrangement at a price of 285p per share, further information on which is set out earlier in this Annual Report. Completion of the Stonegate Offer was subject to shareholder approval, obtained on 12 September 2019 with overwhelming support, regulatory clearance which is awaited and Court sanction. Decisions in relation to the impact of the Stonegate Offer on the executive directors’ variable remuneration will be taken closer to completion, when the Company’s performance in the part year ending 30 September 2020 can be better assessed; decisions will be in line with the shareholder approved directors’ remuneration policy and, where relevant, shareholder approved rules of the Company’s share plans.

In respect of the year ended 30 September 2019 overall Group performance has generated annual bonus pay-outs for the executive directors of 88.4% for both Simon Townsend and Neil Smith of the maximum opportunity of 125% of salary (110.5% of salary), compared with 57.5% and 58.2% of the maximum opportunity in the prior year where the maximum opportunity was greater at 150% of salary (86.3% and 87.3% of salary respectively). Further details are provided on pages 68 to 70 on how performance under the annual bonus targets translated into bonus payments.

The LTIP awards granted in February 2017 vested with respect to performance in the year ended 30 September 2019. These awards were granted under the 2015 policy and were subject to performance conditions based on relative total shareholder return (TSR), return on capital employed (ROCE) and free cash flow (FCF). Overall vesting against these performance criteria is 79.83%, compared with vesting of 52.3% for the LTIP award for the performance to the year ended 30 September 2018. Further details are provided on page 71.

As disclosed last year, the salaries of both Simon Townsend and Neil Smith were increased by around 2%. These increases were effective from 1 January 2019. A similar percentage increase applied to the Chairman and non-executive directors’ fees and additional fees for the senior independent director and for chairing the Audit and Remuneration Committees. The average increase across the wider employee population was also around 2%.

During the year, the Committee adjusted the underlying EPS and FCF targets for the 2019 annual bonus arrangements and the FCF underpin applying to the RSP awards granted in March 2019 and the LTIP awards granted in February 2017 and February 2018 to take account of the completion of the commercial property disposal in March 2019. In each case, the Committee considered that the adjusted targets were no less challenging than those originally set.

Executive remuneration for 2020Salary reviews for the executive directors, to be effective from 1 January 2020 have now been conducted and salaries will be held at existing levels for both Simon Townsend (£500,000) and Neil Smith (£413,000).

Our approach to the annual bonus and RSP for 2020 is described on page 77.

As noted above, decisions in relation to the impact of the Stonegate Offer on the executive directors’ variable remuneration will be taken closer to completion, and will be in line with the shareholder approved directors’ remuneration policy and, where relevant, shareholder approved rules of the Company’s share plans.

Peter Baguley Chairman, Remuneration Committee





ANNUAL REPORT ON REMUNERATIONThe following information has been subject to audit:This annual report on remuneration sets out how the Company’s remuneration policy for directors approved at the 2019 AGM was implemented during the year under review. This report has been prepared in accordance with the provisions of the Companies Act 2006 and Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) and 9.8.8R of the Listing Rules. An advisory resolution to approve this report will be put to shareholders at the next AGM.

The information on pages 67 to 74 as indicated has been audited.

Remuneration outcomes during 2019The single figure table below sets out the remuneration received/receivable in relation to the year ended 30 September 2019:

Name £000

Base salary/fees(i)

Taxable benefits(ii)

Pension(iii) Annual bonus(iv)

Long-term incentives(v)

SIP matching shares

Total

2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018Executive directors

Simon Townsend 498 488 31 29 124 122 550 421 1,867 754 2 2 3,072 1,816

Neil Smith 411 402 31 30 103 101 454 351 1,524 615 – – 2,523 1,499

Total 909 890 62 59 227 223 1,004 772 3,391 1,369 2 2 5,595 3,315

Chairman and non-executive directors

Robert Walker 217 213 – – – – – – – – – – 217 213

Peter Baguley 67 66 – – – – – – – – – – 67 66

Adam Fowle 67 65 – – – – – – – – – – 67 65

Marisa Cassoni 67 66 – – – – – – – – – – 67 66

Jane Bednall(vi) 61 15 – – – – – – – – – – 61 15

David Maloney(vii) – 46 – – – – – – – – – – – 46

Total 479 471 – – – – – – – – – – 479 471

(i) Base salary/fees – this is the salary or fees in respect of the relevant period.(ii) Taxable benefits – this includes car allowances or use of a motor car, fuel, private medical, travel, accident and legal expenses insurances.(iii) Pension – this represents the salary supplements in lieu of directors’ pension contributions.(iv) Annual bonus – this is the value of the bonus earned in respect of the financial year, including any amount deferred into shares.(v) Long-term incentives – this is the value of any long-term incentives vesting where the performance period ended in the relevant period, calculated as described below.(vi) Jane Bednall was appointed to the Board on 2 July 2018.(vii) David Maloney retired from the Board on 5 July 2018.


Governance



Additional disclosures in respect of the single figure tableSalaries and feesDetails of annual base salaries for executive directors are set out below:

Salaries from1 January

2019

Salaries from1 January

2018 Increase

Simon Townsend £500,000 £490,000 2%

Neil Smith £413,000 £405,000 2%

Details of Chairman and non-executive directors’ fees are set out below:

Fees from1 January

2019

Fees from1 January

2018 Increase

Chairman’s fee £218,000 £214,000 1.9%

Basic fee paid to all non-executive directors £60,700 £59,500 2.0%

Supplementary fees:

Senior Independent Director £6,600 £6,500 1.5%

Remuneration Committee Chairman £6,600 £6,500 1.5%

Audit Committee Chairman £6,600 £6,500 1.5%

The Committee’s approach to the Chairman’s and non-executive directors’ fees for the year ending 30 September 2020 is summarised on page 77.

Annual bonus 2019Awards under the plan are subject to demanding performance targets. For the year under review, the bonus was structured as follows:

• 75% of salary subject to a sliding scale of challenging underlying basic EPS targets;

• 25% of salary subject to challenging individual personal and strategic targets; and

• 25% of salary was based on a sliding scale of challenging underlying FCF.

Any bonus earned in respect of the latter two elements can only be paid if a threshold level of underlying EPS performance is delivered.

In accordance with the policy, each executive director has deferred 50% of any bonus earned over target into shares for a period of three years with the remainder paid in cash. In prior years the executives have deferred a greater amount than they are required to into shares but in 2019 have deferred 50% of the bonus earned over target given the anticipated court sanction for the Stonegate Offer in 2020.

EPS and FCF targets

The underlying EPS and FCF targets for the bonus plan were set at the beginning of the year and both EPS and FCF targets were adjusted in the year in light of the completion of the commercial property disposal and were considered no less challenging than those originally set. Targets and vesting levels for the proportion of the bonus based on EPS and FCF are set out in the tables below. For performance between the targets specified, vesting on a straight–line sliding scale applies.

Award level (% weighted

annual salary)

Underlying EPS

Below threshold 0% Less than20.2p

Target 37.5% 20.8p

Maximum 75% 21.4p

Actual performance 75% 21.6p

Award level (% weighted

annual salary) FCF

Below threshold 0% Less than£109.7m

Target 12.5% £113.0m

Maximum 25% £116.3m

Actual performance 12.5% £113.0m

Personal

Each executive director was given a number of different personal and strategic objectives individually tailored to their role and the needs of the business in the year under review. Different weightings were applied to each objective. The achievements against objectives were considered carefully by the Committee and weightings given to each individual component. The precise objectives are considered by the Company to be commercially sensitive and, accordingly, are not disclosed. The Committee agreed that on a combined assessment of performance the executives achieved well above target. Target would deliver 50% of the maximum (12.5% of salary) and the final agreed bonus for this element for each director is set out on pages 69 and 70.





Simon Townsend

Performance metricActual performance delivered

Performance assessment

Bonus earned (% of weighted average salary)*

Personal and strategic measures (up to 25% of salary)

Business performanceManagement of all MRO financial implications and lead the response to the 2019 Statutory Review of Pubs Code legislation.

Delivered in full across the Group with prudent cost management. Detailed submission made on consultation and full engagement in process.

At maximum

23%

Succession planningEvolve the Group’s 2018 sustainable leadership programme into Executive Director and EMG succession plan.

Succession plan framework delivered in full, with Board review and approval.

At maximum

Sustainable leadershipDrive the personal development plans of the entire senior leadership team, and ensure that subsequent organisational design is aligned to measurable objectives.

Continual improvement delivered in all parts of the senior leadership team and efficient management of the organisational design requirements of the Group.

Significantly above target

Stakeholder relationsRedefine the Group’s investment case post commercial property disposal and roadmap beyond 2020.

Effective narrative of all aspects of strategic evolution to capital markets.


* Bonuses earned by reference to the personal and strategic measures are based on a qualitative assessment by the Committee of performance against the relevant measures.


Governance



Neil Smith

Performance metricActual performance delivered

Performance assessment

Bonus earned (% of weighted average salary)*

Personal and strategic measures (up to 25% of salary)

Business performanceDelivery of Group EBITDA, through cost management and ensuring all individual business units execute plans and business objectives in line with budgeted expectations.

Delivered in full across the Group, and within prudent cost management parameters.

At maximum

23%

PeopleDrive personal development plans of Corporate Services senior team and deliver enhanced bench strength and succession plans.

Continual improvement delivered in all functions, arising from sustainable leadership investment and personal development plans. Delivered effective strategy for retention and high quality recruitment.

At maximum

Capital allocationEvolve capital allocation strategy to deliver maximum and sustainable impact across a broad range of stakeholder interests arising from monetisation opportunities.

Evolution of capital allocation framework securing the Group’s reputation as a prudent manager of capital. Comprehensive delivery of monetisation objectives and subsequent deployment of proceeds to underpin tangible NAV.


Strategic deploymentImplement enhanced analysis, measurement and assessment of capital investment and returns for each business unit leading to a net investment scorecard for the Group.

Framework redesigned and published, showing ongoing improvements together with framework for deployment of organic and inorganic investment articulated to equity markets.


* Bonuses earned by reference to the personal and strategic measures are based on a qualitative assessment by the Committee of performance against the relevant measures.

Overall bonuses earned

The total bonuses earned as a percentage of salary for the year (out of a maximum bonus potential of 125% of average weighted salary) were as follows:

EPS Personal FCF

Bonus earned in

2019% of salary

Total % of 2019

opportunity

Bonus earned in

2018% of salary

Simon Townsend 75% 23% 12.5% 110.5% 88.4% 86.3%

Neil Smith 75% 23% 12.5% 110.5% 88.4% 87.3%

Half of any bonus earned above 62.5% of salary (the bonus earned for target performance) is deferred into shares (24.0% of Simon Townsend’s weighted average salary and 24.0% of Neil Smith’s weighted average salary).





LTIP awards vesting in respect of performance in the year ended 30 September 2019The LTIP awards granted on 9 February 2017 vested in respect of the three year performance period ended 30 September 2019. The awards were subject to three performance measures: relative TSR against the FTSE 250 Index as regard to 50% of the award; ROCE as regards to 18% of the award; and FCF as regards to 32% of award. The performance outcome and consequent vesting was as follows:

TSR ROCE FCF

TargetPay-out

(% of max) Target(i)

Pay-out (% of max) Target(ii)

Pay-out (% of max)

Threshold Median 10% Budget +0.25% 5% £327m 5%

Stretch Upper quartile 35% Budget +1.0% 18% £342m 18%

Additional stretch Upper quintile 50% n/a n/a £357m 32%

Outcome Upper quintile 50.00% Above threshold 5.31% £349m 24.52%

Total vesting (% of max) 79.83%

(i) The ROCE outcome has been adjusted to exclude the impact of the goodwill impairment recognised in the year.(ii) The FCF targets are as adjusted to reflect the completion of the commercial property disposal in March 2019, to exclude fees paid in relation to the Stonegate Offer in 2019 and to

exclude any benefit from tax refunds in 2018.

Vesting was also subject to the Committee’s assessment of the underlying financial performance of the Company over the performance period. The Committee considered the underlying financial performance and concluded that performance supported the vesting level, which it therefore confirmed.

In the single figure table, the value attributable to the LTIP awards vesting in respect of performance in the year ended 30 September 2019 is calculated by reference to a share price of 282.00p, being the closing share price on 18 November 2019, the date on which the awards vested.

RSP awards made during the year ended 30 September 2019Awards were granted to the executive directors on 15 March 2019 at the level of 87.5% of salary as follows:

Types of awardNumber of

shares

Face value at grant

£000(i)

Simon Townsend Nil cost option under the RSP 219,320 437

Neil Smith Nil cost option under the RSP 181,158 361

(i) For these purposes, the face value of the award is calculated by multiplying the number of shares by 199.48p, which was the five day average share price preceding the date of grant.

As noted above, decisions in relation to the impact of the Stonegate Offer on these awards will be taken closer to completion, and will be in line with the shareholder approved directors’ remuneration policy and shareholder approved rules of the RSP.

The table below shows the underpins in respect of the RSP award made in 2019 and the illustrative normal timings of vesting and release.

The underpins attached to each tranche of the RSP Award are:

1) the Company’s adjusted FCF balance for the relevant financial year exceeds £113 million*;2) the Company’s net asset value per share for the relevant financial year exceeds £3.34; and3) that in the opinion of the Board there has been no material failure in governance or an act resulting in significant

reputational damage and/or material financial loss to the Group in the period beginning at the start of the Company’s financial year beginning on 1 October 2018 and ending on the date on which the Board assess elements (1) and (2) of the underpin conditions.

* This is as adjusted to reflect the completion of the commercial property disposal in March 2019.


Governance



Assessment and vesting Release following holding period

Tranche One (one third of the shares under Award)

Underpins will be assessed based on performance to 30 September 2021.Shares vest thereafter.

Shares can be exercised and sold two years after the vesting so likely to be around December 2023.

Tranche Two (one third of the shares under Award)


Shares can be exercised and sold one year after the vesting so likely to be around December 2023.

Tranche Three (one third of the shares under Award)


Shares can be exercised and sold immediately.

Payments to past directorsThere were no payments made to past directors during the period.

Payments for loss of officeThere were no payments for loss of office made to directors during the period.

Directors’ shareholdings and share interestsShareholding guidelines and statement of directors’ shareholdings and interestsIn respect of the financial year ended 30 September 2019, the Company’s shareholding guidelines for executive directors required that the executive directors retain half of any shares acquired under the Deferred Share Awards, LTIP and RSP (net of tax) until such time as their holding has a value equal to 300% of salary for the CEO and 200% of salary for the CFO.

The interests as at 30 September 2019 of the directors who held office during the period from 1 October 2018 to 30 September 2019 (including the interests of their families) in the ordinary shares of the Company are as set out in the table below. Both Simon Townsend and Neil Smith hold shares significantly in excess of the guidelines.

Name 2019 2018

Simon Townsend(i) 1,375,000 1,322,482

Neil Smith 565,000 525,000

Robert Walker 502,000 502,000

Peter Baguley – –

Adam Fowle 100,000 100,000

Marisa Cassoni – –

Jane Bednall – –

(i) Beneficial share interests include partnership and matching shares held under the SIP of 49,554 shares for Simon Townsend at 30 September 2019 (2018: 47,562 shares) and shares held by connected persons.

Conditional shares under the RSP, deferred share awards and LTIPs are as shown in the tables on page 73. In respect of directors serving at 30 September 2019 there have been no other changes in share interests from 30 September 2019 to the date of this report.

The directors are not permitted to hold their shares in hedging arrangements or as collateral for loans without the express permission of the Board. None of the directors currently hold their shares in such an arrangement.





Executive directors’ interests under LTIPNo awards of shares were made under the LTIP during the year under review. Prior years are set out in the table below. The performance conditions and details for each award are set out in the directors’ remuneration report for the financial year in respect of which the award was granted.

Date of grantAt 1 Oct

2018

Granted during the

year

Exercised during the

year

Lapsed during the

yearAt 30 Sept

2019 Status

Simon Townsend

09/02/2015 28,847 – (14,424) – 14,423 Vested

12/02/2016 433,584 – (144,528) – 289,056 Vested

09/02/2017 829,285 – – (167,248) 662,037 Vested(i)

09/02/2018 829,285 – – – 829,285 Unvested(ii)

2,121,001 – (158,952) (167,248) 1,794,801

Neil Smith

09/02/2015 23,516 – (11,758) – 11,758 Vested

12/02/2016 353,870 – (117,957) – 235,913 Vested

09/02/2017 676,822 – – (136,499) 540,323 Vested(i)

09/02/2018 676,822 – – – 676,822 Unvested(ii)

1,731,030 – (129,715) (136,499) 1,464,816

(i) These awards have satisfied their performance conditions in part as set out above.(ii) As noted above, decisions in relation to the impact of the Stonegate Offer on these awards will be taken closer to completion, and will be in line with the shareholder approved

directors’ remuneration policy and shareholder approved rules of the LTIP.

Awards are subject to performance conditions assessed over a period of three years. In accordance with the rules of the 2015 LTIP approved by shareholders at the Annual General Meeting in 2015, awards become exercisable as to one third of the vested shares on the assessment by the Committee of the performance conditions and a further third on each of the first and second anniversaries of assessment. Vested options can be exercised until the tenth anniversary of grant.

£1 in aggregate is payable on the exercise of each tranche of each year’s LTIP award.

Executive directors’ interest under Deferred Share AwardsDetails of the shares awarded under the bonus plan to executive directors are set out in the table below.

Date of grant At 1 Oct

2018

Grantedduring

the year

Exercised during

the yearAt 30 Sept

2019

Face value at grant

£000

Exercisable

From To

Simon Townsend

14/12/2015 24,608 – (24,608) – – 14/12/2018 13/06/2019

14/12/2016 91,227 – – 91,227 94 14/12/2019 13/06/2020

14/12/2017 50,668 – – 50,668 73 14/12/2020 13/06/2021

14/12/2018(i) 29,788 – – 29,788 55 14/12/2021 13/06/2022

18/11/2019 – 42,460 – 42,460 119 18/11/2022 18/05/2023

196,291 42,460 (24,608) 214,143 341

Neil Smith

14/12/2015 23,709 – (23,709) – – 14/12/2018 13/06/2019

14/12/2016 74,455 – – 74,455 77 14/12/2019 13/06/2020

14/12/2017 41,326 – – 41,326 60 14/12/2020 13/06/2021

14/12/2018(i) 26,710 – – 26,710 49 14/12/2021 13/06/2022

18/11/2019 – 35,078 – 35,078 99 18/11/2022 18/05/2023

166,200 35,078 (23,709) 177,569 285

(i) This reflects the actual number of shares granted on 14 December 2018 at a price of 185.12p per share. As explained in the 2018 directors’ remuneration report, this figure was previously based on an estimated market value of shares using the closing mid-market price of the shares on 30 September 2018.


Governance



The share price at which the number of deferred shares granted under the bonus plan is calculated will not be confirmed until after the date of approval of the accounts. The number of deferred shares awarded for the 2019 financial year is therefore estimated by using the closing mid-market price of the shares on 30 September 2019 being 281.20p. The number of shares granted along with the actual grant and exercise dates will thereafter be revised to reflect the actual date of grant, when an announcement will be made to shareholders.

Deferred shares ordinarily vest after three years and are not subject to any further performance conditions but are subject to future service conditions. £1 in aggregate is payable on the exercise of each year’s award under the bonus plan.

Executive directors’ interests under share optionsOptions granted under the Company’s SAYE scheme are shown in the table below. There are no performance conditions restricting the exercise of options held under this scheme (reflecting the relevant legislation).

NameExercise

price At 1 Oct

2018 Exercised Lapsed Granted At 30 Sept

2019Simon Townsend 86.88p 17,437 – – – 17,437(i)

83.40p 17,985 – – – 17,985(ii)

(i) Exercise period from 1 February 2020 to 1 August 2020.(ii) Exercise period from 1 February 2022 to 1 August 2022.

The highest and lowest closing mid-market prices of the Company’s shares during the year under review were 285.00p and 161.20p respectively. The closing mid-market price of the Company’s shares at 30 September 2019, being the last trading day of the financial year, was 281.20p.

Share Incentive Plan (SIP)During the year under review, Simon Townsend purchased 996 shares under the SIP at 180.80p per share (2018: 1,241 at a price of 145.00p per share). These shares were matched by the Company on a 1:1 basis (2018: 1:1) conditional upon continued employment. The face value of the shares awarded under the matching arrangement was £1,800 (2018: £1,800). Details of the total partnership and matching shares held under the SIP are included in the table of directors’ interests on page 72.

Dilution limitsWhilst the Company has authority and retains discretion to issue new shares and/or treasury shares under its employees’ share plans, since 1 October 2004 the Company’s policy has been to satisfy all awards and options granted under the Company’s executive share schemes and all-employee share incentive plans using existing shares purchased in the market by the Trustees of the Company’s Employee Benefit Trust (the Trust). At 30 September 2019 no new shares or treasury shares have been issued to satisfy awards or options granted in the previous ten years under any of the Company’s employee share incentive plans and, as at 30 September 2019, the total number of shares held in the Trust was 1,438,136, equivalent to 0.33% of the issued ordinary share capital of the Company, excluding treasury shares.





The following information has not been subject to audit:Percentage change in the remuneration of the Chief Executive Officer

2019 £000

2018 £000 % change

Chief Executive Officer

– salary 498 488 2.0

– benefits 31 29 6.9

– bonus 550 421 30.6

Average per employee

– salary 33.2 31.1 6.8

– benefits 1.9 1.9 –

– bonus 2.9 3.2 (9.4)

The table above shows the movement in the remuneration for the CEO between the financial year under review and the previous financial year compared with movement of the average remuneration (per head) for all Group employees. The total number of employees has again increased in the year as we have continued to increase the number of employees within our expanding managed pubs businesses, notably at pub retail level.

Relative importance of the spend on payThe table below shows the relative importance of the spend on pay (for all employees) compared with the returns distributed to shareholders:

2019 £m

2018 £m % change

Remuneration paid to or receivable by all employees 64 54 18.5

Distributions to shareholders by way of dividends and share buybacks 59 20 195.0

Historical comparative TSR performance graphThe graph below shows the TSR in terms of change in value (with dividends re-invested) of an initial investment of £100 on 1 October 2009 in a holding of the Company’s shares against the corresponding TSR in a hypothetical holding of shares in the companies represented in the FTSE 250 index and FTSE SmallCap.

0

50

100

150

200

250

300

350Value (£) Ei Group plc

FTSE 250

Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Sep 18 Sep 19

FTSE SmallCap

Source: Thomson Reuters Datastream

The graph shows the value at 30 September 2019 of £100 invested in the Company’s shares on 1 October 2009 compared with the value of £100 notionally invested in the FTSE 250 index and the FTSE SmallCap index. The other points plotted are the values at intervening financial year ends.


Governance



Chief Executive Officer remuneration for ten previous yearsYear ended 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Total remuneration £000 1,386 1,073 1,159 1,024 1,084 1,628 1,118 1,159 1,816 3,072

Annual bonus (%)* 87% 38% 51% 30% 76% 61% 70% 66% 58% 88%

LTIP vesting (%)* 0% 0% 0% 0% 0% 100% 0% 8% 52% 80%

* Percentage of the maximum award.

The table above shows the total remuneration figure for the CEO during each of those financial years. The total remuneration figure includes the annual bonus, matching shares awarded in relation to the SIP and LTIP awards (performance and matching) which vested based on performance in those years.

Service contractsA summary of the service contracts and letters of appointments for the directors is set out below:

Executive director Date of agreement Effective date Notice periodSimon Townsend 31 October 2000 1 October 2000 12 months

Neil Smith 8 October 2010 1 January 2011 12 months

Non-executive director Date of agreement Notice period

Robert Walker 9 February 2012 Terminable on 6 months’ notice

Peter Baguley 31 January 2013 Terminable on 6 months’ notice

Adam Fowle 6 February 2014 Terminable on 6 months’ notice

Marisa Cassoni 1 April 2015 Terminable on 6 months’ notice

Jane Bednall 2 July 2018 Terminable on 6 months’ notice





External appointmentsThe executive directors may accept outside appointments provided that such appointments do not in any way prejudice their ability to perform their duties as executive directors of the Company. The extent to which any executive director is allowed to retain any fees payable in respect of such outside appointments, or whether such fees are remitted to the Company, will be assessed on a case-by-case basis. On 1 March 2019 Simon Townsend was appointed as a non-executive director of Countryside Properties PLC. The fee Simon Townsend received for that appointment in the year under review is £29,000 and it is retained by Simon Townsend. No other appointments are held by the executive directors.

Application of the policy for 2020Base salaries and feesAs set out above the Committee has reviewed the salaries for the executive directors and no change is proposed to take effect on 1 January 2020. The review of salaries for the wider employee population has not yet been concluded but it is expected to be an average of 2%.

At the date of this report the fees for the Chairman and non-executive directors effective from 1 January 2020 have not been reviewed. It is anticipated that increases, if any, will be modest, would not exceed the increases awarded to the wider workforce and would be based on merit.

At the date of this report the Company is offering an all employee SIP award, but does not envisage an offer under the SAYE plan in the coming year given the anticipated completion of the Stonegate Offer in the first quarter of 2020. The 2019 SIP offer is subject to the limits permitted under the relevant legislation.

Annual bonus 2020The maximum bonus opportunity for the 2020 financial year will be 125% of salary for both executive directors: an award of up to 75% of salary may be earned subject to the achievement of a sliding scale of adjusted basic EPS targets; up to 25% of salary may be earned subject to personal and strategic targets; and up to a further 25% of salary may be earned subject to FCF targets.

The Committee considers that the targets for the 2020 bonus are commercially sensitive at this time and has therefore chosen not to disclose them in advance.

Restricted Share Plan award 2020Having regard to the anticipated completion of the Stonegate Offer in the first quarter of 2020, the Committee does not currently propose to grant RSP awards in respect of the year ending 30 September 2020. If the transaction does not complete before the long stop date of 15 June 2020, the Committee may grant RSP awards in respect of the year. The awards would be granted in accordance with the shareholder approved directors’ remuneration policy and shareholder approved rules of the RSP, and would be subject to performance underpins which would be disclosed at grant.

The Stonegate Offer and impact on remuneration in 2020On 18 July 2019 the Company and Stonegate Pub Company Bidco Limited announced a recommended acquisition of the Company by a scheme of arrangement for 285p per share. The scheme was approved by shareholders on 12 September 2019 where 99.98% of shares voted supported the recommended cash acquisition. It is anticipated that the transaction will be sanctioned by the Court in the first quarter of 2020. Further information on the transaction is set out earlier in this Annual Report.

Decisions in relation to the impact of the Stonegate Offer on the executive directors’ variable remuneration will be taken closer to completion, when the Company’s performance in the part year ending 30 September 2020 can be better assessed; decisions will be in line with the shareholder approved directors’ remuneration policy and, where relevant, shareholder approved rules of the Company’s share plans. This will include consideration by the Committee of the impact of the transaction on the vesting of the LTIP awards granted in 2018, for which the three year performance period is scheduled to end on 30 September 2020 and the RSP awards granted in March 2019.

Role of the CommitteeThe Committee is responsible for considering and making recommendations to the Board on the:

• general policy on executive and senior management remuneration;

• overall remuneration packages for executive directors including base salary, pensions, benefits and performance-related short-term and long-term incentives;

• Chairman’s remuneration; and

• design and operation of the Company’s share incentive plans.

The Committee reports to the Board on how it has discharged its responsibilities and operates within agreed terms of reference, a copy of which is available on the Company’s website or on request from the Company Secretary. Details of the members of the Committee and of the advisers to the Committee are provided on page 78.


Governance



Composition of the CommitteeThe Committee has been constituted and operated throughout the year in accordance with the provisions of the UK Corporate Governance Code. The Committee comprised the following non-executive directors:

• Peter Baguley, Chairman;

• Adam Fowle;

• Robert Walker;

• Marisa Cassoni; and

• Jane Bednall.

No member of the Committee has any personal financial interest in the matters being decided. The Company’s CEO attends meetings by invitation of the Committee except where his own remuneration is being discussed. The Committee receives assistance from the Company Secretary as appropriate and the Company Secretary acts as secretary to the Committee.

AdvisersDuring the year under review, the Committee received external advice on directors’ remuneration matters from Deloitte LLP, appointed by the Committee in 2014, as its independent adviser. Deloitte also provided services in relation to risk advisory and consulting services.

Deloitte is a founder member of the Remuneration Consultants Group and as such voluntarily operates under its Code of Conduct in relation to executive remuneration in the UK. During the year the Chairman of the Committee reviewed the performance of Deloitte, in terms of the quality and independence of advice, the potential for conflicts of interest (which are actively managed within Deloitte) and its knowledge and understanding of market practice. Having reviewed these factors, the Committee is satisfied that Deloitte is objective and independent and chose to continue to retain them as its adviser in 2019 and to work with them on the remuneration impact of the Stonegate Offer and impact on executive reward. The Committee recognises that it needs to exercise independent judgement and is not over reliant on its remuneration consultants.

The total fees paid to Deloitte in the year in respect of advice to the Remuneration Committee were £19,530.

Shareholder voteThe Committee encourages dialogue with the Company’s shareholders and will endeavour to consult with major shareholders ahead of any significant future changes to the remuneration policy.

Details of the votes cast in relation to the annual remuneration report and policy at last year’s AGM are set out below:

Remuneration report %

Remuneration policy %

Votes cast in favour 356,257,117 99.56 353,760,640 99.10

Votes cast against 1,568,750 0.44 3,224,924 0.90

Total 357,825,867 356,985,564

Votes withheld 3,452 843,755

ApprovalThis directors’ remuneration report has been approved by the Board of Directors of the Company.

On behalf of the Board

P J Baguley Chairman, Remuneration Committee

18 November 2019





The directors are responsible for preparing the Annual Report, the directors’ remuneration report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group and Company financial statements in accordance with IFRSs as adopted by the EU. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and Company for that period. In preparing these financial statements, the directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and accounting estimates that are reasonable and prudent;

• state whether applicable IFRSs as adopted by the EU have been followed, subject to any material departures disclosed and explained in the financial statements; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s and the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements and the directors’ remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are also responsible for preparing the directors’ report (including the corporate governance report) and the directors’ remuneration report in accordance with the Companies Act 2006 and applicable regulations, including the Listing Rules and the Disclosure Guidance and Transparency Rules.

The directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the directors, whose names and functions are disclosed on page 45, confirms that, to the best of their knowledge:

• the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and result of the Group; and

• the Strategic report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

The directors are responsible for preparing the annual report in accordance with applicable law and regulations. Having taken advice from the Audit Committee, the Board considers the report and accounts, taken as a whole, to be fair, balanced and understandable and that it provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.

On behalf of the Board

W S Townsend Chief Executive Officer

N R Smith Chief Financial Officer

18 November 2019


Governance

Statement of directors’ responsibilitiesin relation to the Group and Company financial statements



Notes2019

£m2018

£m

Revenue 4 724 695

Operating costs before depreciation and amortisation 6 (456) (413)

EBITDA* 268 282

Depreciation and amortisation 6 (21) (19)

Operating profit 247 263

Profit on sale of controlling interest in subsidiary undertaking 5 – 1

(Loss)/profit on sale of property (7) 2

Goodwill allocated to disposals (35) (8)

Net loss on sale of property 5 (42) (6)

Movements in valuation of the estate and related assets 5 (20) (19)

Goodwill impairment 12 (232) –

Finance costs 9 (152) (152)

(Loss)/profit before tax (199) 87

Taxation 10 (10) (15)

(Loss)/profit after tax attributable to members of the Parent Company (209) 72

(Loss)/earnings per share 11

Basic (46.2)p 15.2p

Basic diluted (46.2)p 14.7p

* Earnings before taxation, finance costs, goodwill impairment, movements in valuation of the estate and related assets, net loss on sale of property, profit on sale of controlling interest in subsidiary undertaking and depreciation and amortisation

Group statement of comprehensive incomefor the year ended 30 September 2019

2019£m

2018£m

(Loss)/profit for the year (209) 72

Items that will not be reclassified to the income statement:

Unrealised surplus on revaluation of pub estate 16 8

Revaluation of assets on transfer to investment property (5) –

Movement in deferred tax liability related to revaluation of the estate (3) –

Other comprehensive income for the year net of tax 8 8

Total comprehensive (loss)/income for the year attributable to members of the Parent Company (201) 80


Group income statementfor the year ended 30 September 2019



Group Company

Notes2019

£m2018

£m2019

£m2018

£mNon-current assetsGoodwill 12 37 304 – –Intangible assets: operating lease premiums 13 8 9 3 4 Property, plant and equipment 14 3,185 3,228 1,617 1,660 Investment property 15 81 368 35 175 Investments 18 – – 968 1,761 Financial assets 22 1 – 23 14 Trade receivables 20 3 3 2 2

3,315 3,912 2,648 3,616 Current assetsInventories 19 5 3 – –Trade and other receivables 20 48 55 713 685 Financial assets 22 1 3 1 3 Cash 156 158 27 18

210 219 741 706 Non-current assets held for sale 16 15 13 7 7 Total assets 3,540 4,144 3,396 4,329 Current liabilitiesTrade and other payables 21 (196) (207) (237) (231)Current tax payable (5) (10) (3) (2)Financial liabilities 22 (19) (186) – (102)Pension 27 (1) (1) (1) (1)Provisions 25 (1) (1) (1) (1)

(222) (405) (242) (337)Non-current liabilitiesFinancial liabilities 22 (1,845) (2,006) (1,168) (1,180)Provisions 25 (5) (5) (4) (4)Deferred tax 26 (172) (174) (71) (76)

(2,022) (2,185) (1,243) (1,260)Total liabilities (2,244) (2,590) (1,485) (1,597)Net assets 1,296 1,554 1,911 2,732 EquityCalled up share capital 28 12 13 12 13 Share premium account 30 486 486 486 486 Revaluation reserve 30 675 751 374 424 Capital redemption reserve 30 13 12 13 12 Merger reserve 30 77 77 – –

Treasury share reserve 30 (227) (227) (227) (227)Other reserve 30 (3) (2) 95 298 Profit and loss account* 262 443 1,158 1,726 Equity attributable to members of the Parent Company 1,295 1,553 1,911 2,732 Non-controlling interests 1 1 – –Total equity 1,296 1,554 1,911 2,732

* The profit and loss account of the Parent Company is omitted from the Company’s accounts by virtue of the exemption granted by section 408 of the Companies Act 2006. The loss for the year included in the financial statements of the Parent Company amounted to £755 million (2018: profit of £5 million).

Approved by the Board on 18 November 2019 and signed on its behalf by:

W S TownsendN R Smith


Accounts

Balance sheetsat 30 September 2019



Group

Sharecapital

£m

Sharepremiumaccount

£m

Revaluationreserve

£m

Capitalredemption

reserve£m

Mergerreserve

£m

Treasury share reserve

£m

Otherreserve

£m

Profit and loss account

£m

Equity attributable to

members of theParent Company

£m

Non-controlling interests

£mTotal

£m

At 1 October 2017 13 486 747 12 77 (227) 18 376 1,502 1 1,503

Profit for the year – – – – – – – 72 72 – 72

Other comprehensive income – – 8 – – – – – 8 – 8

Total comprehensive income – – 8 – – – – 72 80 – 80

Transfer of realised revaluation surplus – – (7) – – – – 7 – – –

Transfer of deferred tax – – 3 – – – – (3) – – –

Share-based expense recognised in operating profit – – – – – – – 2 2 – 2

Share option entitlements exercised in the year – – – – – – 2 (2) – – –

Purchase of own shares into Employee Benefit Trust – – – – – – (1) – (1) – (1)

Share buybacks – – – – – – – (20) (20) – (20)

Convertible bond redemption – – – – – – (21) 11 (10) – (10)

At 30 September 2018 13 486 751 12 77 (227) (2) 443 1,553 1 1,554

Loss for the year – – – – – – – (209) (209) – (209)


Total comprehensive income/(loss) – – 8 – – – – (209) (201) – (201)





Tax related to share schemes recognised directly in equity – – – – – – – 2 2 – 2


Share buybacks (1) – – 1 – – – (59) (59) – (59)

At 30 September 2019 12 486 675 13 77 (227) (3) 262 1,295 1 1,296


Group statement of changes in equityat 30 September 2019



Group

Sharecapital

£m

Sharepremiumaccount

£m

Revaluationreserve

£m

Capitalredemption

reserve£m

Mergerreserve

£m

Treasury share reserve

£m

Otherreserve

£m


£m

Equity attributable to

members of theParent Company

£m

Non-controlling interests

£mTotal

£m

At 1 October 2017 13 486 747 12 77 (227) 18 376 1,502 1 1,503

Profit for the year – – – – – – – 72 72 – 72


Total comprehensive income – – 8 – – – – 72 80 – 80






Share buybacks – – – – – – – (20) (20) – (20)

Convertible bond redemption – – – – – – (21) 11 (10) – (10)

At 30 September 2018 13 486 751 12 77 (227) (2) 443 1,553 1 1,554

Loss for the year – – – – – – – (209) (209) – (209)


Total comprehensive income/(loss) – – 8 – – – – (209) (201) – (201)





Tax related to share schemes recognised directly in equity – – – – – – – 2 2 – 2


Share buybacks (1) – – 1 – – – (59) (59) – (59)

At 30 September 2019 12 486 675 13 77 (227) (3) 262 1,295 1 1,296


Accounts



Company

Sharecapital

£m

Sharepremiumaccount

£m

Revaluationreserve

£m

Capitalredemption

reserve£m

Treasury share

reserve£m

Otherreserve

£m


£mTotal

£m

At 1 October 2017 13 486 430 12 (227) 347 1,699 2,760

Profit for the year – – – – – – 5 5

Other comprehensive loss – – (4) – – – – (4)

Total comprehensive (loss)/income – – (4) – – – 5 1

Transfer of realised revaluation surplus – – (2) – – – 2 –

Transfer of deferred tax – – – – – – – –

Share-based expense recognised in operating profit – – – – – – 2 2

Share option entitlements exercised in the year – – – – – 2 (2) –

Purchase of own shares into Employee Benefit Trust – – – – – (1) – (1)

Share buybacks – – – – – – (20) (20)

Convertible bond redemption – – – – – (21) 11 (10)

Reclassification (see note 30) – – – – – (29) 29 –

At 30 September 2018 13 486 424 12 (227) 298 1,726 2,732

Loss for the year – – – – – – (755) (755)

Other comprehensive loss – – (9) – – – – (9)

Total comprehensive loss – – (9) – – – (755) (764)

Transfer of realised revaluation surplus – – (47) – – – 47 –

Transfer of deferred tax – – 6 – – – (6) –

Share-based expense recognised in operating profit – – – – – – 3 3

Share option entitlements exercised in the year – – – – – 2 (2) –

Tax related to share schemes recognised directly in equity – – – – – – 2 2

Purchase of own shares into Employee Benefit Trust – – – – – (3) – (3)

Share buybacks (1) – – 1 – – (59) (59)

Reclassification (see note 30) – – – – – (202) 202 –

At 30 September 2019 12 486 374 13 (227) 95 1,158 1,911


Company statement of changes in equityat 30 September 2019



Group Company2019

£m2018

£m2019

£m2018

£m

Cash flow from operating activities

Operating profit 247 263 122 139

Depreciation and amortisation 21 19 12 11

Share-based expense recognised in the income statement 3 2 3 2

Decrease/(increase) in receivables 6 (7) (23) (30)

(Decrease)/increase in payables (10) 3 9 (4)

Increase in inventories (2) (1) – –

Increase in provisions – 1 – 1

265 280 123 119

Tax paid (18) (9) (10) (3)

Net cash flows from operating activities 247 271 113 116

Cash flows from investing activities

Payments to acquire public houses – – (11) (9)

Payments made on improvements to public houses (81) (75) (43) (38)

Payments to acquire other property, plant and equipment (6) (6) (6) (6)

Receipts from sale of property 384 66 198 30

New loans to subsidiary undertakings – – (8) (6)

Dividend from subsidiary undertakings – – 31 13

Net cash flows from investing activities 297 (15) 161 (16)

Cash flows from financing activities

Interest paid (139) (143) (84) (81)

Interest received 2 – 1 –

Debt extinguishment costs – (7) – (7)

Debt restructuring costs (2) (7) (2) (3)

Debt redemption costs (14) – – –

Payments to acquire own debt – (5) – –

Payments to acquire own shares (63) (21) (63) (21)

New loans 320 340 320 340

Repayment of loans (650) (406) (437) (325)

Net cash flows from financing activities (546) (249) (265) (97)

Net (decrease)/increase in cash (2) 7 9 3

Cash at start of year 158 151 18 15

Cash at end of year 156 158 27 18


Accounts

Cash flow statementsfor the year ended 30 September 2019



1. General informationThe consolidated financial statements of Ei Group plc (the ‘Parent Company’ or the ‘Company’) for the year ended 30 September 2019 were authorised for issue by the Board on 18 November 2019. Ei Group plc is a public company limited by shares, incorporated and registered in England. The Company’s ordinary shares are traded on the London Stock Exchange.

2. Presentation of financial statementsStatement of complianceThese financial statements are prepared on a going concern basis and in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).

Basis of preparationThe financial information for the year ending 30 September 2019 has been prepared in accordance with the accounting policies set out in note 3 and is presented in pounds sterling. Amounts are shown in millions, unless stated otherwise.

Basis of consolidationThe consolidated financial statements incorporate the financial statements of Ei Group plc and its subsidiaries. Consolidated financial statements are drawn up to 30 September each year and adjustments are made to the financial statements of the subsidiaries where necessary to bring the accounting policies used in line with those used by the Group.

Subsidiaries are those controlled by the Group. Control exists when the Group is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity taking into account any potential voting rights. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group.

Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity in those subsidiaries. Profit or loss and each component of other comprehensive income are attributed to the equity holders of the parent of the Group and to the non-controlling interests.

Result of the Parent CompanyThe directors have taken advantage of the exemption provided under section 408 of the Companies Act 2006 not to publish the Parent Company individual income statement, statement of comprehensive income and related notes.

Going concern The Group’s business activities, including a description of its financial position, cash flows, debt and borrowing facilities, are set out in the Strategic report on pages 01 to 43, along with a summary of factors likely to affect the Group’s future development and performance.

Further details on the Group’s financial instruments and risks can be found in note 22 of the accounts on pages 118 to 125.

The directors have considered the Group’s financial resources including a review of the medium-term financial plan, which includes a review of the Group’s cash flow forecasts for the period of at least 12 months from the date of approval of these financial statements along with the principal risks and uncertainties as described on pages 37 to 43.

The directors have given specific consideration to going concern in light of the proposed offer for the Group as explained further in the Strategic report on page 43.

Based on the outcome of the above considerations the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the period under review. For this reason the directors continue to adopt the going concern basis of accounting in preparing the financial statements.

New standards and interpretations adopted during the yearDuring the year ended 30 September 2019 the Group has adopted the following amendments to existing standards.These have not had a material impact on the results of the Group:

• IFRS 2 - Share Based Payments

Classification and measurement of share-based payment transactions - amendments to IFRS 2

The amendment clarifies the accounting around cash-settled share-based payment transactions and those with net settlement features.

• IFRS 9 - Financial Instruments

IFRS 9 sets out requirements for recognition and measurement of financial instruments, including impairment, derecognition and general hedge accounting.

This standard replaces IAS 39 Financial Instruments: Recognition and Measurement.

The Group adopted IFRS 9 on 1 October 2018 prospectively and therefore the information presented for comparative periods has not been restated and is presented, as previously reported, under IAS 39.


Notes to the accountsat 30 September 2019



Classification and measurementThe adoption of IFRS 9 has had no material impact on the measurement of financial assets and financial liabilities. The Group’s financial assets, trade and other receivables and Parent Company intercompany loan receivables, all previously carried at amortised cost under IAS 39, continue to be carried at amortised cost under IFRS 9.

There are no changes to the classification and measurement of the Group’s financial liabilities.

Impairment of financial assetsIFRS 9 replaces the incurred loss model in IAS 39 with an expected credit loss (ECL) model. The new impairment model applies to the Group’s financial assets that are held at amortised cost.

The Group has determined that the application of the impairment requirements of IFRS 9 as at 1 October 2018 has not resulted in an additional allowance for impairment and given there was no impact on retained earnings, no restatement was required.

The Group’s policy for measuring the expected credit loss is described in the accounting policies, note 3, and additional disclosure in notes 20 and 22.

• IFRS 15 - Revenue from Contracts with Customers

The Group adopted IFRS 15 on 1 October 2018 using the modified retrospective approach without practical expedients.

The core principle of IFRS 15 is that an entity will recognise revenue in line with the transfer of each element of promised goods or services in a contract to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those individual elements of goods or services. This core principle is delivered in a five-step model framework that involves allocating the transaction price to each performance condition within a contract.

Following an assessment of the terms of contracts it enters into with customers, the Group has concluded that the adoption of the new standard does not have a material impact on its consolidated results and financial position, but has resulted in additional disclosure requirements.

New standards and interpretations not yet adoptedEffective for periods beginning on or after 1 January 2019 which is the year ended 30 September 2020 for the Group.

• IAS 12 - Income Taxes

IFRIC 23 - Uncertainty over Income Tax Treatments issued

The interpretation sets out how to determine the accounting tax position when there is uncertainty over income tax treatments.

• IFRS 16 - Leases

IFRS 16 replaces IAS 17 and establishes principles for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that appropriately represents those transactions. It requires lessees to recognise assets and liabilities for all leases unless the underlying asset has a low value or the lease term is 12 months or less.

The standard requires an entity that is a lessee to recognise a right of use asset and a lease liability based on the net present value of the payments required under each of its leases. The operating lease charge, currently recognised in EBITDA, is replaced by the depreciation of the right of use asset and interest on the lease liability. As well as a change to the line items in the income statement it also changes the profile of the net charge recognised in the income statement over the lease term.

Lessor accounting remains similar to the current standard, whereby the lessor continues to classify leases as finance or operating leases, however, the standard prescribes that the sub-lease of an asset held on a lease is categorised as a finance lease or an operating lease with reference to the right of use asset arising from the head lease.

TransitionOn transition the Group has the option to apply the new standard retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognised in the profit and loss reserve at the date of initial application being 1 October 2019.

The Group expects to apply IFRS 16 following the modified retrospective approach which results in the recognition of a lease liability at the date of initial application measured at the present value of the remaining lease payments, discounted using the incremental borrowing rate at 1 October 2019 along with a right of use asset based on either the carrying amount as if IFRS 16 had been applied since the lease commencement date, but discounted using the incremental borrowing rate 1 October 2019 or an amount equal to the lease liability adjusted for payments made immediately prior to initial adoption on a lease by lease basis.


Accounts



2. Presentation of financial statements continued

Impact of adoptionOn adoption the Group is expected to recognise a right of use asset of £215 million and a financial asset of £9 million (including the existing intangible operating lease premium asset of £8 million) with a corresponding lease liability of £281 million. The right of use asset of £215 million is net of an impairment provision based on an impairment test carried out on adoption.

A balance of £5 million in prepayments in relation to lease payments made immediately prior to adoption is expected to be released along with the existing onerous lease provision of £6 million and an overdue rent review provision of £5 million.

The net balance of £59 million is expected to be recognised in the opening profit and loss reserve. The deferred tax effect of the above balance recognised in the opening profit and loss reserve is estimated to be £10 million.

EBITDA in the financial year ending 30 September 2020 is expected to increase by approximately £21 million being the operating lease payments previously recognised as an expense within EBITDA net of a reduction in rental income for those properties that have been identified as sub-let on finance leases. Depreciation and amortisation is expected to increase by £10 million reflecting the deprecation of the right of use asset resulting in a net increase to operating profit of £11 million. Finance costs will increase by a net £15 million resulting in an overall net decrease to profit before tax of £4 million.

There is no net cash impact of the adoption of IFRS 16, however, the standard prescribes that where operating lease payments were previously categorised as operating cash flows the payments will be split between the principal portion and the interest element with both to be presented within cash flows from financing activities. The change in presentation is expected to result in an improvement to operating cash flows of £21 million, the corresponding decrease being in financing cash flows.

Incremental borrowing rateThe weighted average incremental borrowing rate applied to lease liabilities was 5.8%.





The expected impact of the adoption of IFRS 16 on the balance sheet as at 1 October 2019 is estimated to be as follows:

Group CompanyAs reported at 30 September

2019£m

IFRS 16 adoption

£m

As at 1 October

2019£m

As reported at 30 September

2019£m

IFRS 16 adoption

£m

As at 1 October

2019£m

Non-current assetsGoodwill 37 – 37 – – –Intangible assets: operating lease premiums 8 (8) – 3 (3) –Property, plant and equipment 3,185 197 3,382 1,617 174 1,791 Investment property 81 18 99 35 18 53 Investments – – – 968 – 968 Financial assets 1 – 1 23 – 23 Trade receivables 3 – 3 2 – 2

3,315 207 3,522 2,648 189 2,837 Current assetsInventories 5 – 5 – – –Trade and other receivables 48 (5) 43 713 (4) 709 Financial assets 1 9 10 1 20 21 Cash 156 – 156 27 – 27

210 4 214 741 16 757 Non-current assets held for sale 15 – 15 7 – 7 Total assets 3,540 211 3,751 3,396 205 3,601 Current liabilitiesTrade and other payables (196) 5 (191) (237) 3 (234)Current tax payable (5) – (5) (3) – (3)Financial liabilities (19) (4) (23) – (3) (3)Pension (1) – (1) (1) – (1)Provisions (1) 1 – (1) 1 –

(222) 2 (220) (242) 1 (241)Non-current liabilitiesFinancial liabilities (1,845) (277) (2,122) (1,168) (268) (1,436)Provisions (5) 5 – (4) 4 –Deferred tax (172) 10 (162) (71) 10 (61)

(2,022) (262) (2,284) (1,243) (254) (1,497)Total liabilities (2,244) (260) (2,504) (1,485) (253) (1,738)Net assets 1,296 (49) 1,247 1,911 (48) 1,863 EquityCalled up share capital 12 – 12 12 – 12 Share premium account 486 – 486 486 – 486 Revaluation reserve 675 – 675 374 – 374 Capital redemption reserve 13 – 13 13 – 13 Merger reserve 77 – 77 – – –Treasury share reserve (227) – (227) (227) – (227)Other reserve (3) – (3) 95 – 95 Profit and loss account 262 (49) 213 1,158 (48) 1,110 Equity attributable to members of the Parent Company 1,295 (49) 1,246 1,911 (48) 1,863 Non-controlling interests 1 – 1 – – –Total equity 1,296 (49) 1,247 1,911 (48) 1,863


Accounts



3. Accounting policiesGoodwillGoodwill represents the excess of consideration over the fair value of identifiable assets and liabilities acquired in a business combination. Goodwill is not amortised but is tested for impairment annually, or more frequently where events or changes in circumstances indicate that the carrying value may be impaired. Goodwill is stated at cost less any impairment. At 30 September 2015 goodwill was allocated to individual properties based on their relative value at that time, and on disposal of a property, this attributable amount of goodwill is included in the determination of profit or loss on sale. For the purpose of impairment testing, goodwill is allocated to cash generating units that are consistent with the Group’s operating segments. As properties move between segments the associated goodwill will also be transferred.

Goodwill arising on acquisitions prior to 1 October 1998 was written off against reserves and has not been subsequently reversed. Any such goodwill is not included in determining the profit or loss on disposal.

Fixed asset investmentsFixed asset investments in the Parent Company balance sheet are initially recognised at fair value and then held at this value subject to an annual impairment test. The assessment for impairment is detailed in the property, plant and equipment accounting policy below.

Property, plant and equipmentLicensed land and buildings are held at their fair value, and landlord’s fixtures and fittings and other assets are held at cost.

The Group’s licensed land and buildings recognised in property, plant and equipment, are revalued each year by external valuers or employees who are professionally qualified to carry out such valuations.

Surpluses arising from the revaluation exercise are taken through other comprehensive income to the revaluation reserve except where they reverse a revaluation decrease relating to the same asset previously recognised as an expense in the income statement. Any deficit arising from the revaluation exercise is taken through other comprehensive income to the revaluation reserve to the extent that there is a surplus in place relating to the same asset. Any further decrease in value is recognised in the income statement as an expense.

Freehold land is not depreciated. Freehold buildings are depreciated so as to write off the difference between their carrying value and residual value over their useful economic life of 50 years. Residual value is reviewed at least at each financial year end and there is no depreciable amount if residual value is the same as, or exceeds, book value.

Landlord’s fixtures and fittings are split into two categories, long-life landlord’s fixtures and fittings and short-life landlord’s fixtures and fittings. Both are held at cost less accumulated depreciation. The useful economic life of additions in the form of long-life landlord’s fixtures and fittings has been calculated at 30 years and additions to short-life landlord’s fixtures and fittings has been calculated at 5 years. Depreciation is charged on a straight line basis to write off the total cost less residual value over the useful economic life.

Properties held under finance leases are depreciated on a straight line basis over the shorter of the remaining lease term and their useful economic life of 50 years.

Depreciation is provided on other categories of property, plant and equipment over 3 to 50 years on a straight line basis to residual value.

Property, plant and equipment is reviewed annually for indicators of impairment. Where any indicators are identified, assets are assessed fully for impairment. Impairment occurs where the recoverable amount of the asset is less than its carrying amount. Recoverable amount is the higher of an asset’s fair value less costs to dispose and value in use. Any impairment loss is treated as a revaluation decrease to the extent that a surplus exists for the same asset, and thereafter as an expense in the income statement.

Investment propertyThe Group leases some properties on commercial leases within the Commercial Properties segment, the commercial terms of these leases result in the assets meeting the criteria of investment property.

Properties held as investment property are measured at fair value reflecting market conditions at the balance sheet date. Gains and losses arising from changes in the fair value of investment property are recognised in the income statement in the period in which they arise. Fair values are determined based on an annual revaluation by external valuers or employees who are professionally qualified to carry out such valuations.

Transfers are made to/from investment property when there is change of use evidenced by a change in the lease terms. When a property transfers from property, plant and equipment to investment property it is revalued to fair value and the movement recognised in line with the accounting policy described under property, plant and equipment. When a property transfers from investment property to property, plant and equipment it is revalued to fair value and the movement recognised in the income statement.





Non-current assets held for saleProperties identified for disposal which are classified in the balance sheet as non-current assets held for sale are held at the lower of carrying value on transfer to non-current assets held for sale, as assessed at the time of transfer, and fair value less costs to dispose. The fair value less costs to dispose is based on the net estimated realisable disposal proceeds (ERV) which is provided by third party property agents who have been engaged to sell the properties. Licensed land and buildings, investment property and operating lease intangibles are classified as held for sale when they have been identified for disposal by the Group. They must be available for immediate sale in their present condition and the sale should be highly probable. These conditions are met when management are committed to the sale, the property or lease is actively marketed and the sale is expected to occur within one year. Licensed land and buildings held for sale are not depreciated and operating lease intangible assets held for sale are not amortised.

Profits or losses on disposal of property are calculated as the difference between the net sales proceeds and the carrying amount of the asset within non-current assets held for sale at the date of disposal.

InventoriesInventories which comprise products held for resale in managed houses are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

LeasesLeases where the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Properties acquired under finance leases are capitalised at the lower of their fair value and the present value of future minimum lease payments. The corresponding liability is included in the balance sheet as a finance lease payable. Properties held under finance leases are revalued along with the freehold estate on an annual basis. Lease payments are apportioned between finance charges and reduction of the lease liability so as to obtain a constant rate of interest on the remaining balance of the liability. Finance charges are taken as an expense to the income statement.

Leases where substantially all the risks and rewards of ownership are retained by the lessor are classified as operating leases. Rentals paid under operating leases are charged on a straight line basis to the income statement over the lease term. The fair value attributed to properties acquired as part of business combinations that are held as operating leases are classified in the balance sheet as intangible assets: operating lease premiums within non-current assets and are amortised over the lease term.

The Group has previously entered into sale and leaseback transactions where licensed land and buildings have been sold and the Group has immediately entered into a lease agreement with the acquiree. These land and buildings have been classified as operating leases. They are no longer included within property, plant and equipment and the rentals paid are charged on a straight line basis to the income statement over the lease term.

Repairs and maintenanceRepairs and maintenance expenditure is charged to the income statement as incurred.

Assignment premiumsWhere an amount is paid to a publican in order to take the assignment of a lease or to break a lease at any point other than at renewal, the payment made is expensed through administrative costs. During the period of our strategic evolution, which we determine to be five years following the implementation of the Pubs Code to allow for a full cycle of rent reviews, this will be treated as non-underlying.

Where an amount is paid to a publican in order to regain control of the property at the point of lease renewal in order that the Group can operate the site as a directly managed pub, the amount is linked to a capital investment project in order to reposition the property for the managed offering, and the premium paid is capitalised and depreciated in line with the project spend.

Financial instrumentsa) Cash and cash equivalentsCash comprises cash at bank and in hand. Any short-term deposits with an original maturity date of three months or less are classified as cash equivalents.

b) BorrowingsBorrowings which include bank borrowings, corporate bonds and securitised bonds are measured at amortised cost. This method is used to ensure that the interest charge associated with the debt, combined with the amortisation of the issue costs, premiums and discounts, represents a constant percentage of the borrowings across the life of the instrument based on the estimated cash flows and the contractual terms of the agreement.


Accounts



3. Accounting policies continued

When borrowings are refinanced the Group reviews whether the arrangement constitutes an extinguishment of the original financial liability and the recognition of a new financial liability or a modification of the terms of the existing financial liability. If the refinanced borrowings are accounted for as an extinguishment of the original financial liability, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment and written off through non-underlying finance costs. If the refinanced borrowings are accounted for as a modification, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining life of the modified loan. The effects of changes to the amount and timing of cash flows due to a modification adjust the future amortisation of the carrying amount.

c) Convertible financial instrumentsThe gross proceeds received from the issue of a convertible bond are split between a liability element and an equity component at the date of issue. The fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt. The difference between the proceeds of issue of the convertible bond and the fair value assigned to the liability component, representing any embedded option to convert the liability into equity of the Company, is included in equity and is not remeasured. The liability component is carried at amortised cost using the effective interest method until extinguished upon conversion or the instrument’s maturity date. Issue costs are apportioned between the liability and equity components of the convertible bond based on their relative carrying amounts at the date of issue. The portion relating to the equity component is charged directly against equity.

On early redemption the consideration paid and any transaction costs for the repurchase are allocated to the liability and equity components at the date of the transaction based on the fair value of the liability component estimated using the prevailing market interest rate for a similar non-convertible debt. The difference between the amount allocated to the liability and the book value of the liability is recognised in the income statement as a non-underlying finance cost. The amount allocated to equity is recognised in equity. The balance remaining in equity relating to the amount redeemed is transferred to the profit and loss reserve.

The difference between the interest expense calculated under the effective interest rate method and interest paid to bondholders is added to the carrying amount of the convertible bond.

d) Equity instrumentsEquity instruments, being ordinary shares issued by the Parent Company, are recorded at the fair value of the proceeds received, net of any direct issue costs. The nominal value of shares issued is recorded in called up share capital and the balance of the net proceeds is recorded in share premium.

When the Group returns surplus cash to shareholders through share buybacks, consideration paid or payable for shares purchased for cancellation is deducted from equity. The Company uses contingent share purchase contracts and the obligation to purchase shares is recognised in full at the inception of the contract. Any subsequent reduction in the obligation caused by the expiry or termination of a contract is credited back to equity at that time.

e) Trade receivables and trade payablesTrade receivables are held at their original invoiced amount net of an ECL allowance, based on the simplified model as allowed by IFRS 9 (further detail is given in note 20). Trade payables are held at amortised cost. Amounts owed by subsidiary undertakings are assessed for ECLs on a general basis under IFRS 9. The Company recognises a provision on this basis when the carrying value of the asset is not supported by the collateral available

Fair value measurementThe Group measures licensed land and buildings, within property, plant and equipment, investment property and non-current assets held for sale, at fair value and provides disclosure information in respect of the financial assets and liabilities.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Group.

The fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use provided that use was physically possible, legally permissible and financially feasible to access. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

IFRS 13 requires that all assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole.





The classification uses the following three-level hierarchy:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 – Other techniques whereby the inputs are either directly or indirectly derived from market data.

Level 3 – Inputs used in the valuation are not based on observable market data.

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

Net debtNet debt is the total book value of all financial assets and liabilities (not including trade receivables, trade payables and the equity component of the convertible bond) less cash. Underlying net debt is the nominal value of all financial assets and liabilities (not including trade receivables, trade payables and the equity component of the convertible bond) less cash.

TaxationThe tax expense comprises both the tax payable based on taxable profits for the year and deferred tax. Deferred tax is provided using the balance sheet liability method in respect of temporary differences between the carrying value of assets and liabilities for accounting and tax purposes. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. No deferred tax is recognised if the taxable temporary difference arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled based on tax rates that have been enacted or substantively enacted by the balance sheet date.

Current tax assets and liabilities are offset where there is a legally enforceable right to offset the recognised amounts and the intention is to either settle on a net basis or realise the asset and liability simultaneously. Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and liabilities, and the assets and liabilities relate to taxes levied by the same tax authority which are intended to be settled net or simultaneously.

Tax is charged or credited to other comprehensive income if it relates to items that are charged or credited to other comprehensive income. Similarly tax is charged or credited directly to equity if it relates to items charged or credited directly to equity. Otherwise tax is charged in the income statement. Tax is calculated using tax rates enacted or substantively enacted at the balance sheet date.

ProvisionsProvisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. If the effect is material, the amount of the provision is discounted using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The amount of the provision would therefore represent the present value of the expenditure expected to be required to settle the obligation.

Pension obligationsThe Group has both defined contribution and defined benefit pension arrangements.

The cost of defined contribution payments made to employees’ own pension plans is charged to the income statement as incurred.

As described in note 27, the Group entered into a bulk annuity policy that is a qualifying insurance policy in respect of the defined benefit section of the pension scheme.

Having entered into this policy, the scheme liabilities continue to be valued on the projected unit credit method and then the value of the annuity policy is stated as equal to the amount ascribed to the plan liabilities covered by the policy. Actuarial movements in the value of the scheme liabilities and the interest costs on scheme liabilities are matched by equivalent movements in the scheme asset. To the extent that the Group is committed to deferred premiums or future administration costs in respect of the annuity policy or the scheme, these are recorded as an additional liability within the pension deficit at the net present value of future premiums. The interest paid on the bulk annuity policy is charged as a finance cost. The plan obligations will be derecognised on final settlement of the plan.

Treasury sharesThe cost of own shares held in employee benefit trusts and in treasury is deducted from shareholders’ equity until the shares are cancelled, re-issued or disposed of. Any proceeds received are also taken to shareholders’ equity. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of own shares held.


Accounts




Revenue recognitionRevenue is the fair value of consideration received or receivable for goods and services provided in the normal course of business, net of discounts, volume rebates and VAT. Revenue from drink and food is recognised at the point at which the goods are provided. Property rental income is recognised on a straight line basis over the life of the lease. Amusement machine royalties are recognised in the accounting period to which the income relates.

Publican PartnershipsDrink revenue - Drink revenue is earned from the supply of drink products to publicans and revenue is recognised at the point of delivery to the pub at which point physical possession is passed and the publican takes control of the product, obtaining the significant risks and rewards of ownership. The proceeds from the sale are recognised as revenue.

Rent revenue - Rent revenue is recognised on a straight line basis over the term of the lease based on the contractual terms of the lease agreement.

Revenue from amusement and other machines - Amusement machine royalty income represents our share of the net income earned from machines in our properties. The revenue is recognised in the period to which the sale relates.

Commercial PropertiesRent revenue – Rent revenue is recognised on a straight line basis over the term of the lease based on the contractual terms of the lease agreement.

ManagedDrink revenue – Drink revenue is earned from retail sale of drinks to customers and is recognised at the point of delivery.

Food revenue – Food revenue is earned from retail sale of food to customers and is recognised at the point of delivery.

Revenue from amusement and other machines - Amusement machine income represents the income earned from machines in our managed properties. The revenue is recognised in the period to which the sale relates.

Share-based payments The Group operates a number of equity-settled share-based payment schemes for employees. Share-based payments are measured at fair value at the date of the award. This value is subsequently updated at each balance sheet date for management’s best estimate of the effect of non-market based vesting conditions on the number of equity instruments that will ultimately vest. In valuing equity-settled transactions, no account is taken of any service and

performance (vesting conditions), other than performance conditions linked to the price of the shares of the Parent Company (market conditions). Any other conditions which are required to be met in order for an employee to become fully entitled to an award are considered to be non-vesting conditions. Like market performance conditions, non-vesting conditions are taken into account in determining the grant date fair value. The fair value is recognised as an expense over the vesting period by calculating the cumulative expense and recognising the movement in the cumulative expense in the income statement. A corresponding entry is made to equity.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance or service conditions are satisfied.

DividendsFinal dividends are recognised as a liability when they have been approved by shareholders at the Annual General Meeting. Interim dividends are recognised when they are paid.

Operating profitOperating profit as referred to in the income statement is defined as being profit generated from normal trading activities before net profit/(loss) on sale of property, movements in valuation of the estate and related assets, goodwill impairment, finance costs and taxation.

Non-underlying itemsThe Group uses adjusted figures as key performance measures in addition to those reported under IFRS as management believe these measures enable them to assess the underlying performance of the business. Adjusted figures exclude non-underlying items which comprise exceptional items, non-recurring items and other adjusting items.

Use of accounting estimates and judgementsThe Group makes judgements, estimates and assumptions during the preparation of the financial statements in the application of its accounting policies. Actual results may differ from these estimates under different assumptions and conditions. Those judgements and estimates that have the most significant effect on the amounts recognised in the financial statements are discussed on the next page.





Significant judgements:Classification of non-underlying itemsJudgement is used to determine those items that should be classified as non-underlying so as to give a better understanding of the underlying trading performance of the Group. These items include:

a) Non-underlying operating costsNon-underlying operating costs relating to regulatory matters and reorganisational costs have been recognised in the operating costs before depreciation and amortisation line.

During the period of our strategic evolution, assignment premiums where an amount is paid to publicans in order to take the assignment of a lease or to break a lease at any point other than at renewal would be treated as non-underlying. These costs have been incurred following the strategic review and the introduction of the Pubs Code in July 2016 and are not considered to be part of the underlying business as they are not expected to recur once the realignment of properties has been completed. This treatment is expected to apply for five years following the implementation of the Pubs Code which will allow for a full cycle of rent reviews over which time the Group will assess the optimal location for each asset which may include the payment of an assignment premium to allow the Group access to the property.

In addition, professional fees incurred in respect of the Stonegate Offer have been included in non-underlying operating costs.

b) Net profit/(loss) on sale of propertyNet profit/(loss) arising from the sale of property less goodwill allocated to disposals. The Group’s trading operations are based around the income earned from owning property and therefore the profit or loss made from the sale of property is considered to be non-underlying.

c) Movements in valuation of the estate and related assetsAny revaluation that causes the book value of a property held in property, plant and equipment to fall below historic cost will lead to a charge in the income statement. If that same property later recovers in value so that its book value exceeds historic cost, the increase in value is credited to the income statement to the extent that a debit was previously recognised. Where properties identified for disposal are revalued immediately prior to transfer to non-current assets held for sale, the revaluation movement is recognised on the same basis.

Any gain or loss arising from the change in value of investment property is recognised in the income statement in the period in which it arises.

The movements in valuation of the estate and related assets do not directly result from underlying trading performance of the Group in any one reporting period and therefore have been categorised as non-underlying since they are not in the direct control of the Group.

d) Goodwill impairmentWhere the recoverable amount of each cash generating unit to which goodwill has been allocated to is lower than the carrying value of goodwill the impairment is recognised as a non-underlying item.

e) Net finance costsThe gain or loss on purchase of own debt is calculated as the difference between the carrying value of the debt purchased less the aggregate of the consideration and related transaction costs paid. The Group has elected to take the gain or loss on the settlement date.

Non-underlying finance costs are recognised in relation to fees written off following the commitment to extinguish or restructure borrowings or where incurred as part of debt restructuring projects.

f) TaxationA deferred tax liability has been recognised on the balance sheet relating to the estate. On transition to IFRS, the Group elected to apply IFRS 3 retrospectively to acquisitions from 1 January 1999. This led to an increase in goodwill in respect of this deferred tax. As this pre-acquisition liability changes due to capital gains indexation relief and changes in the rate of UK tax, a debit or a credit is recognised in the income statement. This has been classified as a non-underlying tax item due to its size and because it does not relate to any income or expense recognised in the income statement in the same period. All other movements in respect of this deferred tax liability are accounted for in the same performance statement as the gross item to which it relates.

The effect of changes in the substantively enacted rate of tax used to calculate deferred tax is reflected in other comprehensive income to the extent it relates to revaluation surpluses therein and in non-underlying profit/loss for all other elements of deferred tax.

The tax effect of all other non-underlying items is categorised as non-underlying in the income statement.

Going concernThe directors exercise judgement when concluding on going concern as the basis of preparation of the financial statements. For details of the specific assessment please see the Strategic report.


Accounts




Methodology applied in the valuation of propertiesProperty assets are revalued annually to fair value in accordance with the Appraisal and Valuation Manual published by the Royal Institute of Chartered Surveyors (RICS) and IFRS 13. The valuation is based on an assessment of the income generating potential of the properties, and applying an appropriate multiple. The highest and best use for the property assets is assumed to be their current use by the Group, principally due to the legal restrictions imposed by the agreement with the publican, planning regulations and the financial implications of a change of use given those restrictions and the Group’s business model. However, consideration is given to an alternative highest and best use if there are factors that indicate that such an alternative use exists which is physically possible, legally permissible and financially feasible to access.

Further information about the valuation of the estate is provided in note 17 of these financial statements.

Financing costsWhen borrowings are refinanced with substantially the same lender, the Group uses judgement when reviewing whether the arrangement constitutes an extinguishment of the original financial liability and the recognition of a new financial liability or a modification of the terms of the existing financial liability. As described in note 5, the Group carried out a number of re-financing events during the prior year and the following judgements were made:

• With regards to the Unique consent solicitation exercise, judgement has been applied when assessing the change in terms and conditions, in determining that the event was a non-substantial modification to the existing financial liability.

• With regards to the refinancing of the RCF, judgement has been applied in determining that the event was a non-substantial modification to the existing financial liability by considering the expected future drawndown balance.

Related party transactionsThe Group uses judgement when concluding that transactions with related parties of minority interests are not material for disclosure. This judgement is made based on the value of transactions.

TaxationIn order to calculate deferred tax on balances held by the Group it must make a judgement at each balance sheet date as to when a deferred tax asset is likely to be realised or when a deferred tax liability is likely to be settled to determine the rate at which tax should be calculated.

As the tax treatment of some transactions cannot be finally determined until a formal resolution has been reached with the tax authorities the Group uses judgement to determine the need for a tax provision. Tax benefits are not recognised unless it is probable that the benefit will be obtained. Tax provisions are made if it is expected that a liability will arise. The Group reviews each significant tax liability or benefit to assess the appropriate accounting treatment.

Significant estimates:Property valuation estimatesThe valuation methodology uses an estimation of the fair maintainable trade (FMT) of a pub and then applies a multiple. The FMT is estimated based on historic trends and projected future income whilst the multiples are determined by our valuers with reference to each specific asset and market information. For more detail on the FMT and multiples see note 17.

Goodwill and investment impairment testing estimatesThe Group annually tests whether goodwill has been impaired and the parent company tests whether the investment in subsidiary undertakings has been impaired. Management makes judgements in calculating the recoverable amount based on value-in-use calculations which require estimating future cash flows and applying a suitable discount rate. Details of the tests and carrying value of the asset are shown in notes 12 and 18.

TaxationIf the Group has determined that a tax provision is required whilst a formal resolution is being reached with tax authorities it recognises a provision which requires estimation. The Group will use the information and circumstances it has available to it at the time to best estimate the quantum of any provision required.

The Group also uses fair value as its estimate for realisable value in calculating the deferred tax on the property estate.





4. Segmental analysisThe Group has five distinguishable operating segments being Publican Partnerships, Commercial Properties, Bermondsey Pub Company, Craft Union Pub Company and Managed Investments which reflect the different nature of income earned, types of property and profile of customers. The five segments have been identified because the Chief Operating Decision Maker (CODM) regularly reviews discrete financial information relating to them.

Operating segments are aggregated when they have similar economic characteristics and therefore Bermondsey Pub Company, Craft Union Pub Company and Managed Investments have been combined as they represent income earned from the direct operation of pubs, albeit through differing trading styles.

This results in three reportable segments being:

1) Publican Partnerships Rental income and revenue from supply of drinks and gaming machines

2) Commercial Properties Rental income

3) Managed Revenue from the sale of food, drink, accommodation and gaming machine income

The CODM reviews the financial results by segment to underlying EBITDA and this therefore provides the basis for the disclosures below. Inter-segment revenues and costs are eliminated upon consolidation and the segmental note is presented net of these eliminations.

All of the Group’s revenue is generated in the United Kingdom and is not further segmented based on location, therefore no geographical segmental analysis has been provided. The balance sheet is not reviewed by the CODM on a segmented basis and therefore no disclosure has been made in relation to segmental assets and liabilities.

Year ended 30 September 2019


£m

Commercial Properties

£mManaged

£mCentral

£mTotal

£m

Drink revenue 363 – 186 – 549

Rent revenue 116 19 – – 135

Food revenue – – 20 – 20

Revenue from amusement and other machines 8 – 8 – 16

Other revenue – – 4 – 4

Total revenue 487 19 218 – 724

Operating costs before depreciation and amortisation (196) – (176) (76) (448)

Underlying EBITDA 291 19 42 (76) 276

Non-underlying operating costs before depreciation and amortisation (8)

Depreciation and amortisation (21)

Net loss on sale of property (42)

Movements in valuation of the estate and related assets (20)

Goodwill impairment (232)

Finance costs (152)

Loss before tax (199)

Taxation (10)

Loss after tax (209)


Accounts



4. Segmental analysis continued

Year ended 30 September 2018


£m

Commercial Properties

£mManaged

£mCentral

£mTotal

£m

Drink revenue 383 1 130 – 514

Rent revenue 125 26 – – 151

Food revenue – – 15 – 15

Revenue from amusement and other machines 8 – 5 – 13

Other revenue – – 2 – 2

Total revenue 516 27 152 – 695

Operating costs before depreciation and amortisation (209) – (124) (75) (408)

Underlying EBITDA 307 27 28 (75) 287

Non-underlying operating costs before depreciation and amortisation (5)

Depreciation and amortisation (19)

Profit on sale of controlling interest in subsidiary undertaking 1

Net loss on sale of property (6)

Movements in valuation of the estate and related assets (19)

Finance costs (152)

Profit before tax 87

Taxation (15)

Profit after tax 72

5. Non-underlying items

The Group uses adjusted figures as key performance measures in addition to those reported under IFRS as management believe these measures better reflect the ongoing trading transactions and enable better comparability and accountability for performance for them and other stakeholders. Adjusted figures exclude non-underlying items which comprise exceptional items, non-recurring items and other adjusting items.

Non-underlying items include reorganisation costs, assignment premiums paid to publicans in order to take the assignment of a lease or to break a lease at any point other than at renewal during the period of our realignment of properties, professional fees incurred in respect of the Stonegate Offer, the profit on sale of controlling interest in subsidiary undertaking, the profit/loss on sale of property, the movements in valuation of the estate, goodwill impairment and costs incurred in repaying debt ahead of maturity and refinancing.





The adjusted figures are derived from the reported figures under IFRS as follows:

2019 2018

Underlyingitems

£m

Non-underlying

items£m

Total£m

Underlyingitems

£m

Non-underlying

items£m

Total£m

Revenue 724 – 724 695 – 695

Operating costs before depreciation and amortisation (448) (8) (456) (408) (5) (413)

EBITDA 276 (8) 268 287 (5) 282

Depreciation and amortisation (21) – (21) (19) – (19)

Operating profit/(loss) 255 (8) 247 268 (5) 263

Profit on sale of controlling interest in subsidiary undertaking – – – – 1 1

(Loss)/profit on sale of property – (7) (7) – 2 2

Goodwill allocated to disposals – (35) (35) – (8) (8)

Net loss on sale of property – (42) (42) – (6) (6)

Movements in valuation of the estate and related assets – (20) (20) – (19) (19)

Goodwill impairment – (232) (232) – – –

Finance costs (137) (15) (152) (146) (6) (152)

Profit/(loss) before tax 118 (317) (199) 122 (35) 87

Taxation (21) 11 (10) (22) 7 (15)

Profit/(loss) after tax attributable to members of the Parent Company 97 (306) (209) 100 (28) 72

Earnings per share

Underlying 21.6p 21.2p

Underlying diluted 21.6p 20.0p

Those items identified as non-underlying are explained further below:

a) Operating costs before depreciation and amortisationA charge of £8 million (2018: £5 million) has been incurred in respect of assignment premiums paid, professional fees incurred in respect of the Stonegate Offer and reorganisation costs.

During the period of our strategic evolution, the £3 million (2018: £4 million) of assignment premiums paid to publicans in order to take the assignment of a lease or to break a lease at any point other than at renewal would be treated as non-underlying. These costs have been incurred following the strategic review and the introduction of the Pubs Code in July 2016 and are not considered to be part of the underlying business as they are not expected to recur once the realignment of properties has been completed. This treatment is expected to apply for five years following the implementation of the Pubs Code which will allow for a full cycle of rent reviews over which time the Group will assess the optimal location for each asset which may include the payment of an assignment premium to allow the Group access to the property.

In the year to 30 September 2019, £5 million (2018: £nil) of costs have been committed and incurred in relation to the proposed acquisition of the Group. These primarily relate to adviser, legal and professional fees and have been allocated to non-underlying as they are one-off in nature.

In the prior year restructuring costs of £1 million were incurred as we concluded the reorganisation of a number of support teams to meet our future needs and these charges were allocated to non-underlying as they were one-off in nature.

A tax credit of £1 million (2018: £1 million) has been recognised in relation to these costs.


Accounts



5. Non-underlying items continued

b) Profit on sale of controlling interest in subsidiary undertakingIn the prior year on 21 September 2018 the Group completed the sale of its 51% controlling interest in Hunky Dory Pubs Limited, a company established in May 2016 with Oakman Inns to operate pubs, generating a profit on disposal of £1 million.

c) Net loss on sale of property2019

£m2018

£m

Profit on sale of property, plant and equipment 4 11

Loss on sale of property, plant and equipment (5) (8)

Net (loss)/profit on sale of property, plant and equipment (1) 3

Profit on sale of investment property 24 –

Loss on sale of investment property (30) (1)

Net loss on sale of investment property (6) (1)

Net (loss)/profit on sale of property before goodwill allocation (7) 2

Goodwill allocated to disposals (35) (8)

Net loss on sale of property (42) (6)

The tax impact of the sale of properties and other assets is set out in note 10.

On 14 March 2019 the Group completed on the disposal of a portfolio of 348 properties and their associated non-licensed premises in a transaction to a subsidiary of Davidson Kempner Capital Management LP. Following this, and as part of the original agreement, a further six leasehold properties were also disposed to this purchaser during August and September 2019. All properties were trading within the Commercial Properties segment. The total net cash proceeds from the sale of £341 million were predominantly used to reduce debt. The loss on disposal of the transaction of £6 million includes fees of £4 million and a provision for future capital payments of £2 million. In accordance with IAS 36, £28 million of goodwill was allocated to these disposals.

In addition to this transaction, 129 properties (2018: 174 properties) and various other plots of land with a book value of £44 million (2018: £64 million) were disposed of generating gross proceeds of £50 million (2018: £71 million) which, after taking account of disposal costs, resulted in an overall loss of £1 million (2018: profit of £2 million). In accordance with IAS 36, £7 million (2018: £8 million) of goodwill was allocated to these disposals.

Included within the total profits on sale of property, plant and equipment above of £4 million, £1 million related to three properties and various plots of land with a ‘special interest’ value to particular buyers. The remaining profits of £3 million arose on 59 properties sold at an average profit of £49,000. The total losses on sale of property above of £5 million related to 67 properties sold at an average loss of £72,000.

d) Movements in valuation of the estate and related assets2019

£m2018

£m

Movement in property, plant and equipment from revaluation of the estate (see note 14) (14) (23)

Movement in investment property from revaluation of the estate (see note 15) (1) 15

Revaluation movement from retained estate (15) (8)

Revaluation of property, plant and equipment on transfer to investment property (see note 14) (1) –

Revaluation of operating leases on transfer to non-current assets held for sale (see note 13) 1 –

Revaluation of non-current assets held for sale (see note 14) (5) (11)

(20) (19)

There is no current tax expense associated with these movements. A deferred tax credit of £3 million (2018: £3 million) arises as a result of the revaluation and write down of these properties (see note 10c).

Of the £4 million revaluation of non-current assets held for sale (2018: £11 million), £nil (2018: £5 million) related to properties held in non-current assets held for sale at the year end.





e) Finance costsDuring the year ended 30 September 2019, £1 million of unamortised fees relating to the term loan have been recognised in non-underlying finance costs following the extinguishment of this financial liability. There is no cash impact in the year from this write off.

Furthermore, following the disposal of a portfolio of commercial properties the proceeds that related to the sale of commercial properties within the Unique securitisation were used in the full prepayment of the Class A3 Notes and part prepayment of the Class A4 Notes together with the associated costs. These costs of £14 million (2018: £nil) have been recognised as a non-underlying finance costs and have been fully paid.

In the prior year, Unique securitised bonds with a nominal and book value of £4 million were purchased and cancelled for the equivalent price of £1.14 for each £1 of outstanding nominal value, generating a loss of £1 million.

Also in the prior year the Group concluded a consent solicitation exercise to amend certain terms within the Unique securitisation documents to allow greater flexibility over disposals of pubs that are not subject to the tie. This has been accounted for as a non-substantial modification and the total costs and cash outflow of £4 million have been included in the carrying value of the Unique bonds.

Furthermore, on 14 August 2018 the Group completed an increase and two-year extension of its £140 million existing revolving credit facility (RCF). The new maximum facility is £150 million and it is now available until August 2022. This has been accounted for as a non-substantial modification and the total costs and cash outflow of £1 million have been included in the carrying value of the RCF.

On 25 September 2018 the Group issued a new £150 million bond and at the same time a tender offer for the £97 million outstanding convertible bonds. The proceeds of the bond were received on 25 September 2018. The bond has a fixed coupon of 7.5% and is repayable in March 2024. The costs incurred of £4 million (£2 million cash outflow in the prior year and £2 million cash outflow in the current year) have been included in the carrying value of the debt.

In the prior year a tender offer for the convertible bonds was issued resulting in £95.4 million of the bonds being redeemed at a premium of 107% of their par value. Of the premium and fees associated with the tender offer totalling £7 million, £5 million was charged to the income statement in non-underlying finance costs in the year ended 30 September 2018, whilst £2 million was recognised in the other reserve representing the equity element of the redemption. On 27 September 2018 the Group issued an optional redemption notice to redeem the remaining £1.6 million of convertible bonds at par. This was completed during the year ended 30 September 2019.

A tax credit of £3 million (2018: £1 million) has been recognised on the non-underlying finance costs.

6. Operating profitOperating profit is stated after charging:

2019£m

2018£m

Cost of inventories 261 251

Other direct selling costs 7 8

Managed house running costs 98 70

Operating lease rentals 22 24

Other property costs 13 11

Administrative charges 47 44

Non-underlying administrative charges 8 5

456 413

Depreciation and amortisation 21 19

477 432


Accounts



7. Auditor’s remuneration (This note is shown rounded to the nearest £000)

A description of the work of the Audit Committee is set out in the Audit Committee Report on pages 57 to 62 and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditor.

2019£000

2018£000

Group audit fees 284 224

Audit fees in respect of subsidiaries 141 120

Audit related assurance services 30 25

Other assurance services 250 170

Non-audit services 24 12

729 551

Of the non-audit assurance related fees and non-audit services above of £274,000 (2018: £182,000), £152,000 (2018: £182,000) represents work required to be performed by the auditor under law, regulation or the terms of the Group’s financing arrangements. Excluding these amounts, the ratio of non-audit fees to audit fees was 1:3.7 (2018: nil). Within other assurance services above is £250,000 in relation to the commercial property portfolio disposal (2018: £170,000 in relation to assurance reporting as part of the issuance of a new corporate bond).

Group audit fees include £182,000 (2018: £158,000) paid to the auditor for the audit of the Parent Company. Fees paid to the auditor in respect of non-audit services provided to the Parent Company are not required to be disclosed because the Group financial statements are only required to disclose such fees on a consolidated basis.

8. Staff costsGroup Company

2019£m

2018£m

2019£m

2018£m

Wages and salaries 62 52 36 33Social security costs 7 5 5 4Other pension costs 2 2 2 2

71 59 43 39

Included in wages and salaries is an expense relating to share-based payments of £3 million (2018: £2 million). All of this expense arises from transactions accounted for as equity-settled share-based payments (see note 29).

Other pension costs represents payments made into employees’ individual defined contribution plans.

The average monthly number of employees comprised:Group Company

2019No.

2018No.

2019No.

2018No.

Operations staff 1,858 1,558 282 261Administration staff 322 314 322 314

2,180 1,872 604 575

Directors’ remuneration is summarised below to the nearest £000 with full detail given in the directors’ remuneration report.

2019£000

2018£000

Directors' remuneration* 2,454 2,192

Executive directors' pensions 227 223

Share-based payments† 1,322 903

* Comprises fees, salary, benefits and performance-related bonus.† Fair value of share-based payments charged to the income statement during the year.

In addition to the above, gains arising on LTIPs that have vested and been exercised in the year by executive directors amounted to £466,000 (2018: £38,000).





9. Finance costs2019

£m2018

£m

Bank borrowings 5 4

Corporate bonds/securitised bonds 132 140

Other interest payable and finance costs 1 2

Interest receivable (1) –

Total underlying finance costs 137 146

Non-underlying finance costs:

Other interest payable and finance costs 15 6

Non-underlying finance costs 15 6

Total net finance costs 152 152

10. Taxationa) Total tax expense recognised in the income statement

2019 2018

Underlyingitems

£m

Non-underlying

items£m

Total£m

Underlyingitems

£m

Non-underlying

items£m

Total£m

Current tax

UK corporation tax 23 (4) 19 23 (2) 21

Adjustments in respect of prior years (6) – (6) (4) – (4)

Total current tax 17 (4) 13 19 (2) 17

Deferred tax

Origination and reversal of temporary differences 3 (11) (8) 3 (9) (6)

Adjustments in respect of prior years 1 4 5 – 4 4

Total deferred tax 4 (7) (3) 3 (5) (2)

Taxation 21 (11) 10 22 (7) 15

b) Tax charge reconciliation 2019 2018

Underlyingitems

£m

Non-underlying

items£m

Total£m

Underlyingitems

£m

Non-underlying

items£m

Total£m

Profit/(loss) before tax 118 (317) (199) 122 (35) 87

Profit/(loss) before tax at 19.0% (2018: 19.0%) 22 (60) (38) 23 (7) 16

Effects of:

Non taxable expenses/(income) not deductible for tax purposes 4 45# 49 3 (3) –

Movement in the deferred tax liability for retained properties due to indexation* – – – – (1) (1)

Adjustments in respect of prior years (5) 4 (1) (4) 4 –

Total tax charge/(credit) in the income statement 21 (11) 10 22 (7) 15

# Non taxable expenses/(income) not deductible for tax purposes includes the goodwill impairment of £232 million (2018: £nil) at 19.0%.

* On transition to IFRS under IAS 12, a deferred tax liability was recognised on the balance sheet relating to the revaluation of the estate and gains previously rolled over, or due to be rolled over into other assets. The deferred tax liability that would have been in place at the time of business combinations that have occurred since 1 January 1999 resulted in the recognition of additional goodwill of £330 million as the fair value of the net assets acquired had been reduced. As this pre-acquisition liability changes due to capital gains indexation relief and disposals, the movement has been recognised in the income statement. The non-underlying indexation credit for the year ended 30 September 2019 is £nil (2018: £1 million). This has been classed as a non-underlying tax item because it does not relate to any income or expense recognised in the income statement in the same period.


Accounts



10. Taxation continued

c) Deferred tax recognised in the income statement2019 2018

Underlyingitems

£m

Non-underlying

items£m

Total£m

Underlyingitems

£m

Non-underlying

items£m

Total£m

Temporary differences 1 – 1 1 – 1

Accelerated capital allowances 3 (8) (5) 2 (3) (1)

Deferred tax on the movement in valuation of the estate* – (3) (3) – (5) (5)

Movement in the deferred tax liability for retained properties due to indexation – – – – (1) (1)

Adjustments in respect of prior years – 4 4 – 4 4

4 (7) (3) 3 (5) (2)

* The £3 million (2018: £5 million) deferred tax credit on the movement in valuation of the pub estate includes a credit of £3 million (2018: £3 million), being the tax effect of the £20 million (2018: £19 million) non-underlying movement in the valuation of the pub estate and related assets in the income statement (see note 5), a tax charge of £nil (2018: £1 million) in respect of properties disposed, and a net charge of £nil (2018: credit of £3 million) for other tax differences based on a tax rate of 17% (2018: 17%).

d) Tax recognised directly in other comprehensive income2019

£m2018

£m

Tax related to share schemes recognised directly in equity 2 –

Movement in deferred tax liability related to revaluation of the estate (3) –

Tax charge (1) –

The movement in the deferred tax liability relating to revaluation of property and rolled over gains is calculated as follows:

2019£m

2018£m

Tax effect of revaluation of property and properties sold and awaiting sale (2) (2)

Movement in indexation during the year (1) 2

Total movement as above (3) –

11. (Loss)/earnings per shareThe calculation of basic (loss)/earnings per share is based on the (loss)/profit attributable to ordinary shareholders for the year divided by the weighted average number of equity shares in issue during the year after excluding shares held by trusts relating to employee share options and shares held in treasury.

Underlying earnings per share, which the directors believe reflects the underlying performance of the Group, is based on profit attributable to ordinary shareholders adjusted for the effects of non-underlying items net of tax, divided by the weighted average number of equity shares in issue during the year after excluding shares held by trusts relating to employee share options and shares held in treasury.

The dilution adjustments for share options and the convertible bonds are reviewed independently and where they are anti-dilutive to the calculation of basic diluted earnings per share they are not included in the calculation of either basic diluted and underlying diluted earnings per share.

Following redemption of 98% of the nominal value of convertible bonds during the prior year with the remaining balance being redeemed during the current year, a pro-rated number of shares has been taken into account in the consideration of whether they are dilutive.

For the year ended 30 September 2019, the adjustment for share options is assessed as being anti-dilutive (2018: dilutive) which has resulted in an adjustment to the weighted average number of equity shares in issue during the year of nil shares (2018: 5.4 million shares).





For the year ended 30 September 2019, the adjustment for the convertible bonds is assessed as being anti-dilutive (2018: dilutive) which has resulted in an adjustment to (loss)/profit in the calculation of diluted earnings per share of £nil (2018: £5.7 million) for the post tax interest cost associated with the convertible bonds and an adjustment to the weighted average number of equity shares in issue during the period of nil shares (2018: 50.1 million shares).

2019 2018(Loss)/

earnings£m

Per share amount

pEarnings

£m

Per share amount

p

Basic (loss)/earnings per share (208.3) (46.2) 71.7 15.2

Diluted (loss)/earnings per share (208.3) (46.2) 77.4 14.7

Underlying earnings per share 97.5 21.6 99.7 21.2

Underlying diluted earnings per share 97.5 21.6 105.4 20.0

2019m

2018m

Weighted average number of shares 450.6 470.9

Dilutive share options – 5.4

Dilutive convertible loan note shares – 50.1

Diluted weighted average number of shares 450.6 526.4

12. Goodwill2019

£m2018

£m

At 1 October 304 312

Allocated to disposals (35) (8)

Impairment (232) –

At 30 September 37 304

Allocation to disposalsIn accordance with IAS 36, goodwill is allocated to operations disposed of and accordingly, goodwill of £35 million (2018: £8 million) has been allocated to the 483 pubs (2018: 174 pubs) disposed of during the year.


Accounts



12. Goodwill continued

Impairment testingGoodwill acquired via business combinations is tested annually for impairment. At 30 September 2019 the goodwill has been allocated to the operating segments described in note 4. Within these segments the goodwill is tested for impairment by comparing the recoverable amount of each segment to the carrying amount. The recoverable amount is the higher of fair value less costs of disposal and value in use.

Within each segment value in use is calculated using budgeted EBITDA and forecasts of cash flows over a three year period, as prepared for the Board, adjusted to reflect the current segmentation of the estate. The three year cash flows continue to be risk adjusted to reflect a conservative outlook and are adjusted to reflect the forecast level of disposals. The key assumptions in these estimates are trading margin, rent projections and levels of working capital required to support trading. Key assumptions have been assigned values by management using estimates based on past experience and expectations of future changes in the market. These assumptions have been reviewed by the Board and are believed to be reasonable. Cash flows beyond three years are extrapolated using a growth rate identified as appropriate for each segment. The key driver to maintaining the growth rate is management’s focus on selecting and supporting the best publicans, whilst meeting the challenges of changing consumer demand. The forecast cash flows are then discounted to give a value in use.

Based on external market trends the long-term growth rate used in the value in use calculation has been updated in the current year. The growth rate for the Publican Partnerships segment was 0.75% (2018: 2.00%), Commercial Properties segment was 1.50% (2018: 2.00%), Bermondsey Pub Company was 1.00% (2018: 2.00%), Craft Union Pub Company was 1.00% (2018: 2.00%) and Managed Investments was 1.00% (2018: 2.00%).

The discount rate used is based on the Group weighted average cost of capital (WACC), which has been risk adjusted to reflect current market factors which have not already been captured within the cash flows. In making this adjustment to the Group WACC, management have risk adjusted the cost of debt and the cost of equity by using an average of the highest three market risk premiums and Company betas obtained from four advisers at the year end date. The cost of equity has been further inflated by using a theoretical share price derived from peer group data. Management have then given further consideration to market indicators identified following the Stonegate Offer specifically the willingness of shareholders to realise their investment now at a discount to the net asset value of the Group. The pre-tax risk adjusted discount rate used in the testing at 30 September 2019 was therefore increased to 8.5% (2018: 7.8%), this has been reviewed and considered appropriate for each operating segment as risk factors are considered to be similar.

As at 30 September 2019, based on the updated inputs the impairment test has resulted in a total impairment of goodwill of £232 million (2018: £nil). This represents the full goodwill balance allocated to Publican Partnerships of £228 million and an impairment of £4 million recognised against the balance of goodwill allocated to the Bermondsey Pub Company segment.

The carrying value of goodwill remaining represents Publican Partnerships £nil (2018: £248 million), Commercial Properties £7 million (2018: £31 million), Bermondsey Pub Company £2 million (2018: £5 million), Craft Union Pub Company £22 million (2018: £16 million) and Managed Investments £6 million (2018: £4 million).

In the prior year there was headroom within the Publican Partnerships segment of £786 million and the growth rate needed to reduce to 0.2% or the pre-tax adjusted discount rate increase to 9.3% before any impairment was identified.

Within the Bermondsey Pub Company segment, the remaining balance of goodwill would be impaired if the growth rate reduced to 0.8% or the discount rate increased to 8.7%. In the prior year there was headroom within the Bermondsey Pub Company segment of £23 million and the growth rate needed to reduce to below zero or the pre-tax adjusted discount rate increase to 9.5% before any impairment was identified.

There was headroom on the Commercial Properties segment of £23 million (2018: £82 million). The growth rate would need to be reduced to below zero (2018: 0.7%) or the pre-tax adjusted discount rate could increase to 10.1% (2018: 9.0%) before any impairment would be required.

There was headroom on the Craft Union Pub Company segment of £91 million (2018: £112 million). The growth rate would need to be reduced to below zero (2018: zero) or the pre-tax adjusted discount rate could increase to 10.7% (2018: 10.6%) before any impairment would be required.

There was headroom on the Managed Investments segment of £70 million (2018: £106 million). The growth rate would need to be reduced to below zero (2018: 0.5%) or the pre-tax adjusted discount rate could increase to 14.0% (2018: 17.7%) before any impairment would be required.





13. Intangible assets: operating lease premiumsGroup Company

2019£m

2018£m

2019£m

2018£m

CostAt 1 October 14 14 7 7 Revaluation on transfer to non-current assets held for sale:- Recognised in the income statement 1 – – –Transfer to non-current assets held for sale (3) – (2) –At 30 September 2019 12 14 5 7

AmortisationAt 1 October 5 5 3 3 Transfers to non-current assets held for sale (1) – (1) –At 30 September 2019 4 5 2 3 Net book value:At 30 September 8 9 3 4 At 1 October 9 9 4 4

Lease premiums are amortised on a straight line basis over the remaining life of the lease. The remaining operating lease terms vary from 1 to 91 years.

There are 36 properties within the Group and 22 properties within the Parent Company attracting operating lease premiums in 2019 (2018: 46 properties in the Group and 28 properties in the Parent Company).


Accounts



14. Property, plant and equipmentGroup

Licensedland andbuildings

£m

Landlord'sfixtures and

fittings £m

Otherassets

£mTotal

£mCost or valuation

At 1 October 2017 3,083 285 47 3,415

Additions 46 41 5 92

Revaluation:

– Recognised in the statement of comprehensive income 8 – – 8

– Recognised in the income statement (23) – – (23)

Net transfers to investment property (81) (8) – (89)

Revaluation of assets on transfer to non-current assets held for sale:


Net transfers to non-current assets held for sale (37) (9) – (46)

Disposals (1) (12) (5) (18)

At 1 October 2018 2,984 297 47 3,328


Revaluation:

– Recognised in the statement of comprehensive income 16 – – 16


Revaluation of assets on transfer to investment property:

– Recognised in the statement of comprehensive income (5) – – (5)




- Recognised in the income statement (5) – – (5)


Disposals – (13) (6) (19)

At 30 September 2019 2,926 315 49 3,290

Depreciation

At 1 October 2017 16 59 18 93

Revaluation on transfer to investment property – (2) – (2)

Charge for the year 2* 14 3 19


Disposals – (5) (3) (8)

At 1 October 2018 17 65 18 100

Revaluation on transfer to investment property – (1) – (1)


Net transfers to non-current assets held for sale – (2) – (2)

Disposals – (8) (5) (13)

At 30 September 2019 18 70 17 105

Net book value

At 30 September 2019 2,908 245 32 3,185

At 30 September 2018 2,967 232 29 3,228

* Relates to finance lease amortisation





CompanyLicensedland andbuildings

£m

Landlord'sfixtures and

fittings £m

Otherassets

£mTotal

£mCost or valuation

At 1 October 2017 1,566 171 44 1,781


Revaluation:

− Recognised in the income statement (15) – – (15)


− Recognised in the statement of comprehensive income (2) – – (2)






Disposals – (7) (5) (12)

At 1 October 2018 1,504 174 44 1,722


Revaluation:









Disposals – (7) (5) (12)

At 30 September 2019 1,459 176 46 1,681

Depreciation

At 1 October 2017 6 35 18 59

Net transfers to investment property – (1) – (1)


Net transfers to non-current assets held for sale (1) – – (1)

Disposals – (3) (3) (6)

At 1 October 2018 6 38 18 62


Net transfers to non-current assets held for sale – (1) – (1)

Disposals – (4) (5) (9)

At 30 September 2019 7 40 17 64

Net book value

At 30 September 2019 1,452 136 29 1,617

At 30 September 2018 1,498 136 26 1,660

* Relates to finance lease amortisation


Accounts



14. Property, plant and equipment continued

If licensed land and buildings had been measured using the cost model, the carrying amounts would be as follows:

Group CompanyLicensed land and buildings

£m

Licensed land and buildings

£mAt 30 September 2019Cost 2,450 1,168 Accumulated depreciation (31) (18)Net book value 2,419 1,150 At 30 September 2018Cost 2,514 1,195

Accumulated depreciation (30) (18)

Net book value 2,484 1,177

Within the Group the carrying value of property held under finance leases at 30 September 2019 was £98 million (2018: £98 million). Additions during the year include £3 million to property held under finance leases (2018: £4 million). Within the Parent Company the carrying value of property held under finance leases at 30 September 2019 was £28 million (2018: £28 million). Additions during the year include £1 million to property held under finance leases (2018: £1 million).

At 30 September 2019, the Group had entered into contractual commitments to purchase £7 million (2018: £6 million) of property, plant and equipment. At 30 September 2019, the Parent Company had entered into contractual commitments to purchase £3 million (2018: £5 million) of property, plant and equipment.

15. Investment propertyGroup Company

£m £m

Valuation

At 1 October 2017 270 119

Net transfers from property, plant and equipment 87 56

Revaluation 15 4

Net transfers to non-current assets held for sale (4) (4)

At 1 October 2018 368 175

Net transfers from property, plant and equipment 60 26

Revaluation (1) –

Net transfers to non-current assets held for sale (346) (166)

At 30 September 2019 81 35

Within the Group the carrying value of property held under finance leases at 30 September 2019 was £1 million (2018: £15 million). Additions during the year include £nil to property held under finance leases (2018: £nil). Within the Parent Company the carrying value of property held under finance leases at 30 September 2019 was £nil (2018: £9 million). Additions during the year include £nil to property held under finance leases (2018: £nil).





16. Non-current assets held for saleGroup Company

2019£m

2018£m

2019£m

2018£m

At 1 October 13 25 7 12 Net transfer from property, plant and equipment (see note 14) 44 44 37 21 Net transfer from investment property (see note 15) 346 4 166 4 Net transfer from intangible assets: operating lease premiums (see note 13) 2 – 1 –Write down to fair value less costs to dispose (1) (1) – (1)Disposals (389) (59) (204) (29)At 30 September 15 13 7 7 Representing:Property, plant and equipment 13 13 6 7 Investment property 2 – 1 –

15 13 7 7

Non-current assets held for sale comprises properties that have been identified by the Group for disposal as part of the continued disposal programme. The sale of all assets within this category is expected to be completed within one year of the balance sheet date.

At the end of the year non-current assets held for sale in the Group includes 50 properties (2018: 47 properties). Within the Group a balance of £2 million (2018: £1 million) in relation to these properties is held within the revaluation reserve representing revaluation surpluses.

At the end of the year non-current assets held for sale in the Parent Company includes 29 properties which are expected to be sold within the next year (2018: 25 properties). Within the Parent Company a balance of £nil (2018: £1 million) in relation to these properties is held within the revaluation reserve representing revaluation surpluses.

17. Property fair value measurementsIn determining the appropriate classes of asset to present for fair value purposes, the Group has considered the nature, characteristics and risks of the assets. This has resulted in determining two separate classes of assets being property assets held in property, plant and equipment and property assets held in investment property.

Revaluation of property assets held in property, plant and equipment and investment propertyValuations are carried out on an annual basis at each year end date. With the exception of properties identified for disposal and transferred to non-current assets held for sale, the Group’s properties were revalued as at 30 September 2019 by GVA Grimley Limited (t/a Avison Young) or Colliers International Property Advisers UK LLP, independent Chartered Surveyors, or by the internal Estates Director, Simon Millar MRICS, Chartered Surveyor. For further analysis of the pubs valued by valuer see table below.

All valuations of assets have been assessed as being level 3 valuations, as there are no directly comparable market observable inputs.

Property assets held in property, plant and equipment were valued using fair maintainable trade income (FMT) capitalised at an appropriate rate of return (as defined within RICS Valuation - 2017 Global Edition) or an equivalent multiple. This method of valuation involves making an assessment of the fair maintainable rent, wholesale and machine income that can be generated from the property assuming they are run by a reasonably efficient operator, taking into account future trading potential. This assessment of profit is then capitalised at an appropriate multiple to reflect the risks and rewards of the property. In determining the multiple to use, the valuers consider evidence of comparable market transactions. The resulting fair value of the pub represents the land and buildings and any fixed landlord’s fixtures and fittings. The valuation of the managed pub assets is prepared using a consistent approach that effectively capitalises the net income attributable to the Group from operating the pub at an appropriate multiple.

Property assets held in investment property include free-of-tie pubs let to tenants at open market rents and non-pub assets, which are predominantly blue-chip let convenience stores. These assets have been valued adopting the investment method of valuation. By reference to the rents, fixed lease terms and market conditions, an appropriate multiple based on comparable market transactions is applied, discounting future rental receipts back to present value.


Accounts



17. Property fair value measurements continued

All classes of asset are, under IFRS 13, required to be valued at highest and best use. IFRS 13 prescribes that the Group’s current use is presumed to be its highest and best value, unless market or other factors suggest that a different use by market participants would maximise the value of the asset. In doing their valuations, the valuers consider whether the asset may have a higher or better feasible use which would be reflected in the fair value where applicable. This is on an asset by asset basis if there are circumstances to indicate that there may be a higher and better use. In the current year the highest and best use of all the property assets in property, plant and equipment and investment property has been assessed as their existing use.

The impact of the Group revaluation is as follows:

2019£m

2018£m

Income statement

Revaluation loss charged as an impairment (44) (50)

Reversal of past impairments 30 27

Gains on revaluation of investment property 3 17

Losses on revaluation of investment property (4) (2)

(15) (8)

2019£m

2018£m

Revaluation reserve

Unrealised surplus 69 69

Reversal of past revaluation surplus (53) (61)

16 8





The table below presents, by class of property, the income and multiple bandings within which the properties have been valued, and the number of properties that have been valued in each of the bandings. In determining the bandings to use, the Group has considered a variety of options including size and location of property, but has concluded that the value of the property is principally driven by FMT and multiple, so this forms the most appropriate disclosure.

Group

Number of pub assets – within property, plant and equipment

Multiple applied to FMT

FMT income bandings Total

numberover

12 times10 – 12

times8 – 10 times

6 – 8 times

under 6 times

At 30 September 2018more than £90,000 per annum 1,421 82 489 685 135 30£60,000 to £90,000 per annum 1,523 67 535 744 145 32less than £60,000 per annum 915 46 263 427 137 42

3,859 195 1,287 1,856 417 104At 30 September 2019more than £90,000 per annum 1,430 85 457 689 167 32£60,000 to £90,000 per annum 1,445 111 484 649 168 33less than £60,000 per annum 819 68 248 351 105 47

3,694 264 1,189 1,689 440 112

Number of pub assets – within non-current assets held for sale

FMT income bandingsAt 30 September 2018more than £90,000 per annum – – – – – –£60,000 to £90,000 per annum 2 – – 2 – –less than £60,000 per annum 45 12 1 4 7 21

47 12 1 6 7 21At 30 September 2019more than £90,000 per annum 1 – – – – 1£60,000 to £90,000 per annum 3 1 1 – – 1less than £60,000 per annum 46 10 3 1 4 28

50 11 4 1 4 30

Number of assets – within investment property

Multiple applied to income

Income bandingsTotal

numberover

16 times14 − 16

times12 − 14

times10 − 12

timesunder

10 timesAt 30 September 2018more than £90,000 per annum 99 4 26 49 17 3£60,000 to £90,000 per annum 130 8 27 67 21 7less than £60,000 per annum 156 10 29 66 30 21

385 22 82 182 68 31At 30 September 2019more than £90,000 per annum 17 – 3 10 3 1£60,000 to £90,000 per annum 43 5 16 16 4 2less than £60,000 per annum 29 2 5 15 2 5

89 7 24 41 9 8


Accounts



17. Property fair value measurements continued

Company

Number of pub assets – within property, plant and equipment

Multiple applied to FMT

FMT income bandings Total

numberover

12 times10 – 12

times8 – 10 times

6 – 8 times

under 6 times

At 30 September 2018more than £90,000 per annum 677 20 313 294 41 9£60,000 to £90,000 per annum 808 23 403 339 33 10less than £60,000 per annum 483 19 210 185 54 15

1,968 62 926 818 128 34At 30 September 2019more than £90,000 per annum 664 30 285 303 37 9£60,000 to £90,000 per annum 767 71 381 266 41 8less than £60,000 per annum 450 50 201 144 39 16

1,881 151 867 713 117 33

Number of pub assets – within non-current assets held for sale

FMT income bandingsAt 30 September 2018more than £90,000 per annum – – – – – –£60,000 to £90,000 per annum – – – – – –less than £60,000 per annum 25 10 – 2 2 11

25 10 – 2 2 11At 30 September 2019more than £90,000 per annum – – – – – –£60,000 to £90,000 per annum – – – – – –less than £60,000 per annum 29 5 – 1 2 21

29 5 – 1 2 21

Number of assets – within investment property

Multiple applied to income

Income bandingsTotal

numberover

16 times14 − 16

times12 − 14

times10 − 12

timesunder

10 timesAt 30 September 2018more than £90,000 per annum 45 – 4 27 12 2£60,000 to £90,000 per annum 79 3 9 50 13 4less than £60,000 per annum 75 2 9 38 11 15

199 5 22 115 36 21At 30 September 2019more than £90,000 per annum 9 – 1 8 – –£60,000 to £90,000 per annum 16 – 7 8 – 1less than £60,000 per annum 17 1 3 9 – 4

42 1 11 25 – 5





Sensitivity analysis tableThe significant unobservable inputs used in the fair value measurement categorised within level 3 of the fair value hierarchy of the Group’s estate are FMT and a multiple. There is a limited amount of interrelation between the variation in these inputs.

A change in either of these assumptions could have a significant effect on the overall valuation of the estate. Sensitivities around these assumptions that are deemed to be reasonably likely based on the experience of the valuers are illustrated below:

Group Company2019

£m2018

£m2019

£m2018

£mFMT sensitivity+ 2.5% 80 89 42 46- 2.5% (80) (89) (42) (46)Multiple sensitivity+ 0.25 84 91 42 46- 0.25 (84) (91) (42) (46)

The properties used as security for the corporate bonds in Ei Group plc have been valued by GVA Grimley Limited (t/a Avison Young) (1,771 properties) and all properties held by Unique Pub Properties Limited (Unique) have been valued by Colliers International Property Advisers UK LLP (1,860 properties). The balance of the estate held in Ei Group plc (152 properties) have been valued by the internal Estates Director using RICS valuation guidelines. The results of this internal valuation have been compared to that of the external valuers, to ensure that the results are consistent.

The following table provides a reconciliation of property numbers:

At 30 September 2019

Property,plant and

equipmentInvestment

property

Non-currentassets held

for sale

Addoperating

leases^Total

properties

Less non-viable

and closedproperties

Totaltrading

properties

Properties valued by GVA Grimley Limited (t/a Avison Young) 1,735 36 – – 1,771 (8) 1,763

Properties valued internally 146 6 – – 152 (1) 151

Other – – 29 188 217 (9) 208

Total Parent Company 1,881 42 29 188 2,140 (18) 2,122

Properties valued by Colliers International Property Advisers UK LLP 1,813 47 – – 1,860 – 1,860

Other – – 21 20 41 (12) 29

Total Group 3,694 89 50 208 4,041 (30) 4,011

At 30 September 2018

Property,plant and

equipmentInvestment

property

Non-currentassets held

for sale

Addoperating

leases^Total

properties

Less non-viable

and closedproperties

Totaltrading

properties

Properties valued by GVA Grimley Limited (t/a Avison Young) 1,803 145 – – 1,948 (7) 1,941

Properties valued internally 165 54 – – 219 (1) 218

Other – – 25 209 234 (17) 217

Total Parent Company 1,968 199 25 209 2,401 (25) 2,376

Properties valued by Colliers International Property Advisers UK LLP 1,891 186 – – 2,077 (1) 2,076

Other – – 22 24 46 (13) 33

Total Group 3,859 385 47 233 4,524 (39) 4,485

^ not subject to valuation


Accounts



18. InvestmentsCompany2019

£m2018

£m

Cost or valuation

At 1 October 1,761 1,790

Impairment (793) (29)

At 30 September 968 1,761

At the year end, the Company has carried out an impairment review of its investment in the Unique sub-group which involved calculating a value in use using forecast cash flows, a long-term growth rate and a suitable discount rate.

The growth rate used in the calculation has reduced in line with the goodwill calculation and was 0.75% (2018: 2.00%).

The discount rate used is based on the Group weighted average cost of capital (WACC), which has been risk adjusted to reflect current market factors which have not already been captured within the cash flows. In making this adjustment to the Group WACC, management have risk adjusted the cost of debt and the cost of equity by using an average of the highest three market risk premiums and Company betas obtained from four advisers at the year end date. The cost of equity has been further inflated by using a theoretical share price derived from peer group data. Management have then given further consideration to market indicators identified following the Stonegate Offer specifically the willingness of shareholders to realise their investment now at a discount to the net asset value of the Group. The pre-tax risk adjusted discount rate used in the testing at 30 September 2019 was therefore increased to 8.5% (2018: 7.8%).

This has resulted in an impairment of £793 million (2018: £29 million) resulting in the carrying value of investments at 30 September 2019 being £968 million (2018: £1,761 million).

As an assessment of theoretical sensitivities to this impairment review calculation, an increase of 0.25% in the discount rate used would result in a further impairment of £55 million (2018: £115 million) or a decrease of 0.25% in the discount rate used would result in a reduction in the impairment of £59 million (2018: headroom of £97 million). Similarly an increase of 0.25% in the long-term growth rate used would result in a reduction in the impairment of £58 million (2018: headroom of £109 million) or a decrease of 0.25% in the long-term growth rate used would result in a further impairment of £55 million (2018: £126 million).

The Parent Company’s subsidiaries are listed in note 32.

19. InventoriesGroup Company

2019£m

2018£m

2019£m

2018£m

Goods for resale 5 3 – –

20. Trade and other receivablesTrade receivables due in more than one year represents money owed by publicans for the sale of fixtures and fittings on deferred terms and part of the balance is due in more than one year.

Group Company2019

£m2018

£m2019

£m2018

£mTrade receivables 3 3 2 2





Trade and other receivables within current assets represents the following:

Group Company2019

£m2018

£m2019

£m2018

£mTrade receivables 32 40 22 29Amounts owed by subsidiary undertakings – – 678 647Prepayments and accrued income 13 11 10 8Other receivables 3 4 3 1

48 55 713 685

The ageing of total trade receivables at 30 September was as follows:Group Company

2019£m

2018£m

2019£m

2018£m

Not past due 32 40 23 29Up to 30 days overdue 3 3 1 2

35 43 24 31

Credit riskThere are no significant concentrations of credit risk within the Group. The Group is exposed to a small amount of credit risk that is primarily attributable to trade receivables and cash balances. The Group’s objective is to minimise this risk by carrying out credit checks where appropriate. The amount of trade and other receivables included in the balance sheet are net of an expected credit loss (ECL) provision. The Group has adopted the simplified impairment model to measure the expected lifetime credit losses on its trade receivables. Using a provision matrix the Group analyses its historic bad debt experience to create an ageing profile which it then applies to its trade receivables balance as at the reporting date. The Group writes off its trade receivables when it has no reasonable expectation of recovery of the debt.

Amounts owed by subsidiary undertakings have been assessed for ECLs on a general basis under IFRS 9. The Company recognises a provision on this basis when the carrying value of the asset is not supported by the collateral available.

At 30 September 2019 the value of deposits held by the Group is £26 million (2018: £32 million) and by the Parent Company is £16 million (2018: £19 million). This balance is held on the balance sheet in other payables.

An analysis of the provision held against trade receivables is set out below. This provision relates to trade receivables which are primarily owed by publicans.

Group Company2019

£m2018

£m2019

£m2018

£mProvision as at 1 October 2 2 2 2 Increase in provision during the year 1 2 1 2 Provision utilised during the year (1) (1) (1) (1)Provision released during the year (1) (1) (1) (1)Provision as at 30 September 1 2 1 2

There are no indications as at 30 September 2019 that debtors will not meet their payment obligations in respect of the amount of trade receivables recognised in the balance sheet that are neither past due nor impaired. The maximum amount of exposure to credit risk is the carrying value of trade receivables. The Group’s credit risk on liquid funds is limited because the Group only invests with banks and financial institutions with high credit ratings.


Accounts



21. Trade and other payablesGroup Company

2019£m

2018£m

2019£m

2018£m

Trade payables 47 46 44 43Amounts due to subsidiary undertakings – – 89 77Accruals and deferred income 112 114 83 85Other payables 37 47 21 26

196 207 237 231

At 30 September 2019 the value of deposits held by the Group in other payables is £26 million (2018: £32 million) and by the Parent Company is £16 million (2018: £19 million).

22. Financial assets and liabilitiesGroup Company

Financial assets2019

£m2018

£m2019

£m2018

£mCurrentOther loans receivable 1 3 1 3

1 3 1 3Non-currentOther loans receivable 1 – 1 –Loans due from subsidiary undertakings (see note 32) – – 22 14

1 – 23 14Total financial assets 2 3 24 17

Group Company

Financial liabilities2019

£m2018

£m2019

£m2018

£mCurrentCorporate bonds – 102 – 100Securitised bonds 19 84 – –Loans due to subsidiary undertakings (see note 32) – – – 2

19 186 – 102Non-currentBank borrowings (1) 12 (1) 12Corporate bonds 1,168 1,167 1,168 1,167Securitised bonds 675 824 – –Finance lease payables 3 3 1 1

1,845 2,006 1,168 1,180Total financial liabilities 1,864 2,192 1,168 1,282

‘Bank borrowings’ refers to the revolving credit facility (see table opposite).

‘Corporate bonds’ refers to secured and unsecured bonds and an unsecured convertible bond (see table opposite).

‘Securitised bonds’ refers to secured bonds (see table opposite).





Fair valuesThe corporate bonds and securitised bonds were valued at fair value as at 30 September by J C Rathbone, independent valuers. The fair value of the corporate bonds and securitised bonds is measured at market price and are therefore evaluated to be level 1 in the fair value hierarchy described in note 3.

Management assessed that cash and short-term deposits, trade receivables, trade payables, and other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.

The fair value of unquoted instruments, loans from banks and other financial liabilities, obligations under finance leases, as well as other non-current financial liabilities is estimated by discounting future cash flows using rates currently available for debt on similar terms, credit risk and remaining maturities.

The fair value of the Group’s bank borrowings, evaluated to be level 2 in the fair value hierarchy described in note 3, is not deemed to be materially different to the nominal value if it had been determined by using the discounted cash flow method using a discount rate that reflects the issuer’s borrowing rate as at the end of the reporting period. The own non-performance risk as at 30 September 2019 was also assessed to be insignificant.

The nominal, book and fair values of financial assets and liabilities have been analysed into categories as below:

Group

Interest rate

2019Nominal

value£m

2019Bookvalue

£m

2019Fair

value£m

2018Nominal

value£m

2018Bookvalue

£m

2018Fair

value£m

Bank borrowings:

Revolving credit facility LIBOR +3.0% – (1) – 15 12 15

– (1) – 15 12 15

Corporate bonds:

Secured bond - issued 9 May 2000 6.875% 125 125 128 125 125 138

Secured bond - issued 15 February 2001 6.875% 125 125 129 125 125 136


Secured bond - issued 3 March 2003 6.5% – – – 100 100 101

Secured bond - issued 7 October 2014 6.0% 250 248 256 250 248 271

Secured bond - issued 4 November 2016 6.375% 250 250 257 250 250 259

Unsecured bond - issued 25 September 2018 7.5% 150 147 161 150 146 153

Unsecured convertible bond - issued 10 September 2013 3.5% – – – 2 2 2

1,175 1,168 1,214 1,277 1,269 1,367

Securitised bonds:

A3 - issued 30 March 1999 6.542% – – – 168 168 176

A4 - issued 20 September 2002 5.659% 276 274 314 321 319 356

M - issued 30 March 1999 7.395% 225 228 259 225 229 250

N - issued 20 September 2002 6.464% 190 192 219 190 192 185

691 694 792 904 908 967

1,866 1,861 2,006 2,196 2,189 2,349

Finance lease payables (see note 24) – 3 3 – 3 3

Total debt 1,866 1,864 2,009 2,196 2,192 2,352

Cash* (156) (156) (158) (158)

Underlying net debt / net debt (see note 31) 1,710 1,708 2,038 2,034

* Cash balances, in the current year and in the prior year, within the Group include £65 million held within a securitised reserve account. Withdrawals can only be made from this account with the consent of the securitisation Trustee.


Accounts



22. Financial assets and liabilities continued

The nominal value of financial assets and liabilities is the principal amount.

The book value of financial assets and liabilities includes unamortised fees, fair value adjustments made on acquisition and excludes the value ascribed to the equity element of the convertible loan note.

Company

Interest rate

2019Nominal

value£m

2019Bookvalue

£m

2019Fair

value£m

2018Nominal

value£m

2018Bookvalue

£m

2018Fair

value£m

Bank borrowings:

Revolving credit facility LIBOR +3.0% – (1) – 15 12 15

– (1) – 15 12 15

Corporate bonds:

Secured bond - issued 9 May 2000 6.875% 125 125 128 125 125 138



Secured bond - issued 3 March 2003 6.5% – – – 100 100 101

Secured bond - issued 7 October 2014 6.0% 250 248 256 250 248 271

Secured bond - issued 4 November 2016 6.375% 250 250 257 250 250 259

Unsecured bond - issued 25 September 2018 7.5% 150 147 161 150 146 153

1,175 1,168 1,214 1,275 1,267 1,365

1,175 1,167 1,214 1,290 1,279 1,380

Finance lease payables (see note 24) – 1 1 – 1 1

Intercompany:

Amounts owed to subsidiary undertakings – – – 2 2 2

Total debt 1,175 1,168 1,215 1,292 1,282 1,383

Cash (27) (27) (18) (18)

Underlying net debt / net debt 1,148 1,141 1,274 1,264

The bank borrowings, corporate bonds and securitised bonds are held at amortised cost. Finance lease payables represent the present value of future minimum lease payments. Other categories of financial instruments include trade receivables and trade payables. However there is no difference between the book value and fair value of these items.

Bank borrowingsThere is in place a non-amortising revolving credit facility (RCF) with a total facility of £150 million available through to August 2022, attracting interest at 3% above LIBOR on the drawn balance.

The Group also had a committed term loan bank facility of £50 million which was available for drawing until December 2018 with repayment of the amount drawn due by July 2020. This loan was £35 million drawn, repaid and then the facility was cancelled during the current year.

Corporate bondsOn 6 December 2018 £100 million of corporate bonds were repaid at par at maturity from available resources including the RCF bank facility and bank term loan.

On 10 September 2013 Enterprise Funding Limited (the Issuer) issued a £97 million 3.5% guaranteed convertible bond due 2020 (the bond) at par. The Parent Company had unconditionally and irrevocably guaranteed the due and punctual performance by the Issuer of all of its obligations (including payments) in respect of the bond. The obligations of the Parent Company, as guarantor, constitute direct, unsubordinated, unconditional and unsecured obligations of the Parent Company.





Subject to the terms, the bond was convertible into preference shares of the Issuer which were automatically transferred to the Parent Company in exchange for ordinary shares in the Parent Company. The bond converted at a premium of 35% to the share price on 10 September 2013 of 141.5p, which means that the bond was convertible based on an exchange share price of 191.0p into 50.8 million ordinary shares. The exchange share price would have been adjusted on the happening of certain events, including the payment of a dividend.

In accordance with the Group’s accounting policy for convertible financial instruments, the proceeds received from the convertible bond issue were split, with an initial £75 million recorded as a liability and £22 million recorded within equity, stated net of costs of £2 million and £1 million respectively. The difference between the effective interest charged and the actual interest paid is added to the liability element over the life of the convertible bonds.

On 26 September 2018 the Group redeemed and cancelled £95.4 million of the convertible bonds at a purchase price of 107% of their par value. On 27 September 2018 the Group issued an optional redemption notice to redeem the remaining £1.6 million of convertible bonds at par. This was completed during the year ended 30 September 2019.

On 25 September 2018 the Group issued a £150 million unsecured corporate bond with a coupon of 7.5% maturing in 2024. Although the holders of these bonds have no security over Group properties they do benefit from a shared share pledge over Unique Pubs Limited.

Securitised bondsFollowing the disposal of a portfolio of commercial properties on 14 March 2019 as explained in more detail in note 5, the proceeds that related to the sale of commercial properties within the Unique securitisation were used in full prepayment of the Class A3 Notes and in part prepayment of the Class A4 Notes together with the associated costs.

During the year the Group has made scheduled repayments on the Unique A3 and A4 securitised bonds which together with the prepayment made with the disposal proceeds from the commercial properties portfolio sold in March 2019, leaves £691 million outstanding at the year end. At 30 September 2019 the Group was £199 million ahead of the amortisation schedule through early repayment and market purchases.

IntercompanyThe amount owed to subsidiary undertakings related to the issue of the convertible bonds in Enterprise Funding Limited, these proceeds had been on-loaned to Ei Group plc on the same terms with an amount recorded in equity and an amount recorded as a liability. On redemption of these bonds as explained above the intercompany loan was also redeemed.

Loans due from subsidiary undertakings have been assessed for ECLs on a general basis under IFRS 9. The Company recognises a provision on this basis when the carrying value of the asset is not supported by the collateral available.

Financial instruments and riskThe Group’s financial instruments comprise bank borrowings, corporate bonds, securitised bonds and cash. The main purpose of these financial instruments is to raise finance for the Group’s operations.

The main risks arising from the Group’s financial instruments are interest rate risk and liquidity risk. There is no currency exposure as all transactions are in sterling. The Board reviews and agrees policies for managing each of these risks and they are summarised as follows:

Liquidity riskThe Group has exposure to liquidity risk, being the risk that payments cannot be made when they fall due. The Group’s objective is to maintain a balance between the continuity of funding and flexibility through the use of bank borrowings, corporate bonds and securitised bonds.

This objective is achieved through the following processes:

• regular cash flow forecasting and reporting through the treasury function;

• regular review of the Group’s debt portfolio including maturities and repayment profile; and

• maintenance of undrawn bank facilities.


Accounts




The proportion of nominal value of borrowings comprised:

Group Company

2019 2018 2019 2018Bank borrowings – 1% – 1%Corporate bonds 63% 58% 100% 99%Securitised bonds 37% 41% – –

The maturity of the debt and interest payments is set out below:

Group2019 2018

Debt£m

Interest£m

Total£m

Debt£m

Interest£m

Total£m

In more than five years 726 204 930 1,222 257 1,479 In more than two years but not more than five years 938 231 1,169 699 303 1,002 In more than one year but not more than two years 183 114 297 89 128 217

In one year or less or on demand 19 121 140 186 139 325

1,866 670 2,536 2,196 827 3,023

Company2019 2018

Debt£m

Interest£m

Total£m

Debt£m

Interest£m

Total£m

In more than five years 400 128 528 800 156 956 In more than two years but not more than five years 650 141 791 390 189 579 In more than one year but not more than two years 125 72 197 – 77 77

In one year or less or on demand – 77 77 102 83 185

1,175 418 1,593 1,292 505 1,797

The table above shows the contractual, undiscounted cash flows due in future periods to settle the debt and interest payments. The total amount of debt payable shown above differs from the total book value of debt of £1,864 million (2018: £2,192 million) in the Group and £1,168 million (2018: £1,282 million) in the Parent Company as the book value of debt includes unamortised fees, fair value adjustments made on acquisition and excludes the value ascribed to the equity element of the convertible loan note. The contractual maturity of trade and other payables is within one year.

An analysis of minimum lease payments due under finance leases is set out in note 24.

The Group’s bank borrowings, corporate bonds and securitised bonds are repayable as follows:

Bank borrowings:Revolving credit facility August 2022Corporate bonds:£125 million 6.875% bond May 2025£125 million 6.875% bond February 2021£275 million 6.375% bond September 2031£249.5 million 6.0% bond October 2023£250 million 6.375% bond February 2022£150 million 7.5% bond March 2024Securitised bonds:A4 September 2013 – June 2027M June 2021 – March 2024N September 2027 – March 2032





Details of undrawn borrowing facilities available at 30 September are as follows:

Group Company

Expiring:2019

£m2018

£m2019

£m2018

£mIn more than five years – 100 – –In more than two years but not more than five years 150 183 150 135In more than one year but not more than two years – 54 – 50In one year or less or on demand 152 – – –

302 337 150 185

Group Company

The undrawn facilities relate to:2019

£m2018

£m2019

£m2018

£mUndrawn liquidity facility 152 152 – –Undrawn element of revolving credit facility 150 135 150 135Undrawn term loan facility – 50 – 50

The liquidity facility is in respect of the Unique securitisation and is a renewable committed facility of £152 million (2018: £152 million). The liquidity facility is available to meet certain payment obligations falling due in the Unique securitisation to the extent that insufficient funds are received to meet such payments. The liquidity facility is due for renewal on 30 June 2020 and so has been classified as due in less than one year. Subsequent to the year end the facility has been further extended to 30 June 2021. The facility relates to the bonds that amortise over a period to 2032 and it reduces as the bonds amortise.

Interest rate riskThe Group borrows its corporate bonds and securitised bonds at a fixed rate. Bank borrowings and cash balances attract interest at a floating rate. The Group’s objective is to manage exposure to changes in interest rates. This exposure is managed by borrowing at fixed rates on the majority of its debt. At 30 September 2019, the Group’s borrowings were 99% fixed with an average interest rate of 6.4% for 6 years (2018: 99% fixed with an average interest rate of 6.4% for 6 years). The Parent Company’s borrowings were 87% fixed with an average interest rate of 6.5% for 5 years (2018: 87% fixed with an average interest rate of 6.5% for 6 years).

Interest rate sensitivityIn estimating the sensitivity of the financial instruments we have assumed a reasonable potential change in interest rates. The method used assumes that all other variables are held constant to determine the impact on profit before tax. The analysis is for illustrative purposes only, as in practice market rates rarely change in isolation.

Actual results in the future may differ materially from these estimates due to the movements in the underlying transactions, actions taken to mitigate any potential losses, the interaction of more than one sensitivity occurring, and further developments in global financial markets. As such the below should not be considered as a projection of likely future gains and losses in these financial instruments.

If interest rates were to increase by 50 basis points the interest receivable in the Group would increase by £1 million (2018: £nil) and the interest payable would increase by £nil (2018: £nil). If interest rates were to decrease by 50 basis points the interest receivable in the Group would decrease by £1 million (2018: £nil) and the interest payable would decrease by £nil (2018: £nil).

If interest rates were to increase by 50 basis points the interest payable in the Parent Company would increase by £nil (2018 £nil). If interest rates were to decrease by 50 basis points the interest payable in the Parent Company would decrease by £nil (2018: £nil). There are no floating rate receivables in the Parent Company and therefore no exposure within interest receivable to movements in interest rates.


Accounts




SecurityThe bank borrowings are secured by a security deed entered into by the companies which comprise the Group, excluding Enterprise Inns Holding Company Limited and its subsidiaries and Unique Pubs Limited and its subsidiaries. The lenders have a floating charge over all of the assets and undertakings of such Group companies. The floating charge ranks subsequent to the fixed charges created by the corporate bonds.

The total value of assets within the Group secured by way of a fixed or floating charge as at 30 September 2019 is property, plant and equipment £3,153 million (2018: £3,199 million), investment property £81 million (2018: £368 million) operating lease premiums £8 million (2018: £9 million) and non-current assets held for sale £15 million (2018: £13 million). The value of assets within the Parent Company secured by way of a fixed or floating charge as at 30 September 2019 is property, plant and equipment £1,588 million (2018: £1,634 million), investment property £35 million (2018: £175 million) operating lease premiums £3 million (2018: £4 million) and non-current assets held for sale £7 million (2018: £7 million).

The security pledged for the Group’s debt is summarised below:

Debt instrument Security

Bank borrowings • First floating charge over the balance of properties in the Parent Company not already secured by a 1st fixed charge created by the corporate bonds.

• Second floating charge over the properties secured by a 1st fixed charge created by the corporate bonds.

• Share pledge over Unique Pubs Limited shared with holders of the £150 million unsecured bond.

Corporate bonds (excluding the unsecured convertible bond and the unsecured bond)

• First fixed charge over the 1,771 properties in the Parent Company valued by GVA Grimley Limited (t/a Avison Young) (see note 17).

• Second floating charge over the balance of properties in the Parent Company.

Unsecured bond • Share pledge over Unique Pubs Limited shared with the RCF bank syndicate members.

Securitised bonds • Collectively over the whole securitisation the security incorporates a 1st fixed charge in favour of the Trustee over the Issuer's right, title, interest and benefit, present and future to all properties, cash, eligible investments and income generated by Unique Pub Properties Limited.

CovenantsThe Group is subject to a number of financial covenants in relation to its borrowing facilities. There are three covenants that relate to the bank borrowings, which are tested quarterly. There is one leverage covenant and two asset valuation covenants. There is sufficient headroom on all three of these covenants.

There are two covenants that relate to the corporate bonds (excluding the unsecured bond); an asset value covenant and a net annual income covenant. At the year end there is an annual valuation of the estate and a review of the annual income for the properties secured under each of the corporate bonds. The valuation is undertaken by a firm of independent chartered surveyors. The directors certify the net annual income as part of an annual compliance exercise. In the event that property values or incomes have fallen, there may be a requirement to add more properties to the security of the corporate bonds and any addition of new properties must be completed within 90 days of the year end. There is sufficient headroom on both of these covenants. There are no new covenants under the unsecured bond.

There are two covenants that relate to the securitised bonds which are tested at each quarter end. These covenants are based solely on the assets held within the securitised bonds and comprise a net asset covenant and a debt service cover covenant. There is sufficient headroom in both of these covenants.

The Group tests all of the above covenants on a regular basis and forecasts are prepared during the budgeting process. These are reviewed at Board level.





Change of controlAll of the agreements in relation to bank borrowings and corporate bonds to which the Group is party, contain provisions that allow the counterparties to terminate funding in certain circumstances where there has been a change of control of the Parent Company. These are detailed below:

Agreement Summary of change of control clause

Revolving credit facility agreement dated 24 October 2016 (amended 14 August 2018)

If any person or group of persons acting in concert gains control of the Company then the Company shall promptly notify the agents and lenders. If any lender so requires, it may cancel its commitments to the Company and require the Company to repay all loans outstanding to it.

£125 million 6.875% secured bonds due 2025 £125 million 6.875% secured bonds due 2021 £275 million 6.375% secured bonds due 2031 £249.5 million 6.0% secured bonds due 2023 £250 million 6.375% secured bonds due 2022

The terms and conditions of each of the secured bonds provide that following the occurrence of a restructuring event, which is defined in the terms and conditions to include:

(i) any person or persons acting in concert becoming interested in more than 50% of the shares of the Company; or

(ii) any person or group of connected persons acquiring control of the Company; or

(iii) any person or persons acquiring the right to appoint more than 50% of the directors of the Company,

the secured bonds must:

(a) if they are not rated, after a written resolution of the bondholders, either be redeemed by the Company or the Company must successfully seek an investment grade rating for the secured bonds; or

(b) if they are rated and such rating is below investment grade or later falls below investment grade, be redeemed by the Company.

£150 million 7.5% bonds due 2024 If any person or persons, acting together, acquire(s) or becomes entitled to control more than 50% of the votes that may ordinarily be cast on a poll at a general meeting of the Parent Company, the Issuer must make an offer to repurchase the bonds in cash at 101% of the principal amount together with any accrued and unpaid interest up to (but excluding) such date.

23. Capital disclosures and analysis of changes in net debtThe capital structure is managed to support the Group’s objective of maximising long-term shareholder value through ready access to debt and capital markets, cost effective borrowing and flexibility to fund business and acquisition opportunities whilst maintaining appropriate leverage to optimise the cost of capital.

The capital structure of the Group is based upon management’s judgement of the appropriate balancing of all key elements of its financial strategy in order to meet the Group’s operational and strategic requirements. This includes a strategy on dividends, share buybacks and monitoring liquidity risk. The overall financing strategy of the Group is presented to the Board annually as part of the budgeting exercise.


Accounts



24. LeasesThe Group and the Parent Company as lesseeThe Group and the Parent Company lease a proportion of their licensed estate from landlords under finance leases and operating leases. These leases have varying terms, escalation clauses and renewal rights.

Finance leasesFuture minimum lease payments due under finance leases:

Group Company2019

£m2018

£m2019

£m2018

£mFuture minimum lease payments due under finance leases:In less than one year – – – –After one year but not more than five years 2 2 1 1 In more than five years 17 19 6 8

19 21 7 9 Future finance lease interest (16) (18) (6) (8)Present value of future minimum lease payments 3 3 1 1

The present value of future minimum lease payments is due in more than five years (2018: more than five years).

Properties that are leased from landlords under finance leases are let to tenants. Future minimum rentals receivable in the Group, from non-cancellable sub-leases on the above properties are £27 million (2018: £46 million). Future minimum rentals receivable in the Parent Company, from non-cancellable sub-leases on the above properties are £8 million (2018: £17 million).

Operating leasesGroup Company

2019£m

2018£m

2019£m

2018£m

Operating lease rentals recognised as an expense in the year 20 21 19 20

Group Company

2019£m

Restated*2018

£m2019

£m

Restated*2018

£mFuture minimum lease payments due under operating leases:Within one year 20 21 19 20After one year but not more than five years 79 81 76 78In more than five years 302 327 282 304

401 429 377 402

* As a result of the IFRS 16 analysis of the Group’s leases it was identified that for certain leases the full lease term was not being appropriately reflected in the future minimum lease payments. Following this the comparatives have been restated to reflect the full future minimum lease payments. This resulted in an increase in the lease payments due in more than five years of £56 million in the Group and Parent Company.

Properties that are leased from landlords under operating leases are let to tenants. Future minimum rentals receivable in the Group, from non-cancellable sub-leases on the above properties are £99 million (2018: £98 million). Future minimum rentals receivable in the Parent Company, from non-cancellable sub-leases on the above properties are £134 million (2018: £137 million).





The Group and Parent Company as lessorThe Group and the Parent Company lease their properties to tenants. The majority of lease agreements have terms of between one and 30 years and all are classified for accounting purposes as operating leases. Most of the leases with terms of over three years include RPI or CPI based rent adjustments and provision for rent reviews on either a three or five year basis.

The present value of future minimum lease rentals receivable under non-cancellable operating leases are as follows:

Group Company2019

£m2018

£m2019

£m2018

£mFuture minimum lease rentals receivable under operating leases:Within one year 104 130 74 84After one year but not more than five years 267 383 182 246In more than five years 278 498 189 286

649 1,011 445 616

Leases with future minimum lease rentals receivable under operating leases in more than five years within the Group have an average term of 13 years (2018: 13 years) remaining on their agreements and within the Parent Company have an average term of 13 years (2018: 14 years) remaining on their agreements.

25. ProvisionsGroup Company

2019£m

2018£m

2019£m

2018£m

At 1 October:Current 1 1 1 1Non-current 5 4 4 3

6 5 5 4Movement during the year:Increase in provision during the year 3 3 2 2Release of provision during the year (3) (2) (2) (1)

– 1 – 1At 30 September:Current 1 1 1 1Non-current 5 5 4 4

6 6 5 5

The provision in both the Group and Parent Company relates to future commitments under onerous lease agreements. The provision is expected to be utilised over the life of leases involved or as the properties are disposed. The remaining lease terms vary from 1 to 52 years.


Accounts



26. Deferred taxThe deferred tax in the balance sheet relates to the following:

Group Company2019

£m2018

£m2019

£m2018

£mUnrealised surplus on revaluation of fixed assets and rolled over gains 138 134 49 48 Accelerated capital allowances 39 44 25 29 Share-based payments (3) (1) (3) (1)Temporary differences (2) (3) – –

172 174 71 76

The UK Government reduced the rate of corporation tax from 20% to 17% effective by 1 April 2020. Deferred taxation has been calculated based on the current substantively enacted rate of 17%. No further changes in the UK tax rate are anticipated.

The deferred tax provision for the unrealised surplus on the revaluation of fixed assets in the Group has moved during the year as follows:

£m

Opening provision at 1 October 2018 134

Reduction in deferred tax liability due to movements from revaluation of the estate and disposals recognised in the income statement 1

Reduction in deferred tax liability recognised in other comprehensive income 3

Closing provision at 30 September 2019 138

The Group has not provided deferred tax in relation to temporary differences associated with undistributed earnings of subsidiaries on the basis that under current enacted law, no tax is payable on dividends payable and receivable within the Group.

27. PensionThe Group and the Parent Company make defined contribution payments to employees’ own pension plans and these payments are charged to the income statement as incurred.

RetailLink Management Limited (a subsidiary company that has now been liquidated as part of a group reorganisation) established a pension plan for its employees in January 1999. The plan has a defined contribution and defined benefit scheme. The plan is now closed to new members and for the future accrual of benefits.

The plan is governed by the employment laws of the United Kingdom which require final salary payments to be adjusted for the consumer price index upon payment during retirement. The level of benefits provided depends on a member’s length of service and salary at retirement age. The fund has a legal form of foundation and is governed by the Board of Pension Trustees. The Board of Trustees is responsible for the administration of the plan assets and for the definition of the investment strategy.

In April 2014, the Trustees of the RetailLink Management Limited pension plan (the Plan) and the Company committed to a bulk annuity buy out of the defined benefit section of the Plan, crystallising a liability of £10 million payable through a deferred payment schedule over a four year period. The initial stage of this process involved the Trustees using the Plan’s defined benefit section assets to purchase a bulk annuity policy from Legal & General Assurance Society Limited (LGAS). The policies commenced with effect from 30 April 2014 and are being held as investments of the Plan. The Trustees have completed calculations to determine adjustments required to members benefits in respect of GMP equalisation and sought premium information from LGAS. At that point, subject to agreement to and payment of the premium and dispatching discharge and closing notices to the members, the final wind-up arrangements of the Plan can conclude. Thereafter the Company will no longer retain any responsibilities or obligations to the members of the Plan.

In view of the relative insignificance of the pension scheme, both on a gross and net basis, the Group has elected to only present summarised disclosures to one decimal place in respect of the scheme.





Assets and liabilities of the plan2019

£m2018

£m

Fair value of plan assets:

Cash 0.1 0.1

Assets held by insurance companies 43.3 33.7

43.4 33.8

Present value of plan liabilities (43.4) (33.8)

Provision for settlement (0.7) (0.8)

Net pension deficit (0.7) (0.8)

Recognised in the balance sheet as:2019

£m2018

£m

Current liabilities (0.7) (0.8)

(0.7) (0.8)

Movement in deficit during the year2019

£m2018

£m

Net deficit at the start of the year (0.8) (2.4)

Deferred premium paid – 1.6

Fees paid 0.1 –

Net pension deficit at the end of the year (0.7) (0.8)

Following the decision by the Trustees to wind up the plan in July 2018, and communication of this intention to the members, a constructive obligation has arose in the prior year in order to secure final settlement. An amount of £0.7 million (2018: £0.8 million) has been included within the net pension deficit, being the estimated costs required in respect of final settlement. The winding up of the scheme remains ongoing at 30 September 2019.

The principal assumptions made by the actuaries were:2019

%2018

%

Rate of increase in pension payments 3.55 3.60

Rate of increase of pensions in deferment 2.05 2.20

Discount rate 1.80 2.95

Inflation assumption 3.05 3.20

Longevity at age 65 for current pensioners

Men 23 years 23 years

Women 25 years 25 years

Longevity at age 65 for future pensioners

Men 25 years 25 years

Women 27 years 27 years

The mortality tables used to value the plan’s liabilities are S2PA light table (-1 year age rating for females) with CMI 2018 projections, a long-term rate of improvement of 1.25% and a smoothing parameter. These tables give a life expectancy as set out above.

Due to the nature of the pension deficit being the deferred payment plan outstanding for the bulk annuity policy, sensitivity analysis is not relevant and has therefore not been disclosed.

The Company will not be making any contributions to the defined benefit plan in future years following the bulk annuity buy out.


Accounts



28. Share capital Authorised:

2019 2018No. £m No. £m

Ordinary shares of 2.5p each 1,000,000,000 25 1,000,000,000 25

Allotted, called up and fully paid:2019 2018

No. £m No. £m

Ordinary shares of 2.5p each 487,910,075 12 516,793,318 13

Ordinary shares carry no right to fixed income. Holders of ordinary shares are entitled to vote at meetings.

At 30 September 2019, the Group owned 50 million of its own shares as treasury shares with a nominal value of £1 million and a market value of £141 million (2018: 50 million shares, nominal value £1 million, market value £83 million). In addition, at 30 September 2019 the Group held 1,438,136 shares with a nominal value of £0.04 million and a market value of £4 million (2018: 1,134,828 shares, nominal value £0.03 million, market value £2 million). These shares are held by the Employee Benefit Trust and are shares used to satisfy awards made under the Company incentive plans and other share option schemes (note 29).

During the year the Group made on-market purchases in respect of 29 million (2018: 15 million) of its own ordinary shares for an aggregate consideration of £58 million (2018: £20 million) (excluding costs) as part of its share buyback plan. These shares were cancelled. Transaction costs of £0.4 million (2018: £0.1 million) have been accounted for directly in equity in the profit and loss reserve.

29. Share-based paymentsThe Group operates share-based payment schemes for both directors and other employees. Details of the Deferred Share Award, Long-Term Incentive Plan (LTIP) and the Restricted Share Plan (RSP) which form part of the remuneration of the executive directors are given in the directors’ remuneration report on pages 65 to 78.

The Group also operates a Share Incentive Plan (SIP), an Employee Share Option Scheme (ESOS), and a Save As You Earn Scheme (SAYE).

A total expense of £3 million (2018: £2 million) has been incurred in the year in relation to share-based payments. This expense relates wholly to the equity-settled schemes described above.

Share Incentive PlanThe SIP is open to all Parent Company and Bermondsey Pub Company employees. At times determined by the Parent Company, employees may allocate the lower of £1,800 or 10% of pre-tax salary to purchase shares out of their salary. The Board may also decide to award matching shares. The shares are held in trust on behalf of the employee. If shares are removed from trust within three years, any allocation of matching shares may be lost. Shares can be transferred tax-free to employees after a period of five years. Matching shares were awarded every year from 2005 to 2019.

The cost of the matching shares is being spread over the three year vesting period of the scheme.

Details of the number of matching shares held in trust during the year are as follows:

2019Number of

shares

2018Number of

shares

Outstanding at beginning of year 349,558 367,587

Granted 119,024 129,358

Vested (151,655) (135,283)

Forfeited (20,487) (12,104)

Outstanding at end of year 296,440 349,558

Weighted average remaining contractual life 1.2 years 1.2 years





Employee Share Option Scheme The ESOS is open to all employees. Share options are awarded to employees at the discretion of the Board. Options will normally vest after three years if an employee remains in service and if EPS targets are met. There were no options granted during the current or prior year. Options may normally only be exercised during the period of seven years commencing on the third anniversary of the date of grant of the option. Options will usually be settled using ordinary shares held by the Employee Benefit Trust.

Details of the share options outstanding during the year are as follows:

2019 2018

Number of share options

Weighted average exercise

price £



price £

Outstanding at beginning of year 147,125 0.37 240,622 0.37

Exercised (74,575) 0.37 (69,925) 0.37

Forfeited (2,775) 0.37 (23,572) 0.37

Outstanding at end of year 69,775 0.37 147,125 0.37


Options outstanding at 30 September 2019 comprise the following:

Exercise date

Number ofshare

options

Exerciseprice

£

Exercisable:

12/12/14 - 12/12/21 69,775 0.37

SAYE schemeThe SAYE scheme is open to executive directors and employees at the discretion of the Board. Participants contract to save a fixed amount each month with a savings institution for a period of five years. At the end of the savings term, participants are given the option to purchase shares at a price set before the savings began. The option price will be not less than 80% of the market value of a share on the date that participants are invited to take part in the scheme, or the nominal value of a share, if higher. Options will usually be settled using ordinary shares held by the Employee Benefit Trust and will usually be exercisable for six months after the fifth anniversary of the commencement of the savings contract.

Details of the share options outstanding during the year are as follows:

2019 2018



price £



price £

Outstanding at beginning of year 3,013,733 0.80 3,327,008 0.80

Granted 340,754 1.50 494,201 1.16

Exercised (451,128) 0.70 (475,069) 0.63

Forfeited (312,347) 1.09 (332,407) 0.86

Outstanding at end of year 2,591,012 0.96 3,013,733 0.88



Accounts



29. Share-based payments continued

Options outstanding at 30 September 2019 comprise the following:

Exercise date

Number ofshare

options

Exerciseprice

£01/02/20 - 31/07/20 713,413 0.87

01/02/21 - 31/07/21 424,740 0.86

01/02/22 - 31/07/22 812,913 0.83

01/02/23 - 31/07/23 357,421 1.16

01/02/24 - 31/07/24 282,525 1.50

2,591,012

The weighted average fair value of options granted during the year under the SAYE scheme was £0.80 (2018: £0.49).

Deferred Share Award and LTIPExecutive directors and other members of the senior management team are eligible to participate in a Deferred Share Award and an LTIP plan. A summary of the rules of these schemes along with details of shares that have been granted to the executive directors and are outstanding in relation to them is included in the directors’ remuneration report on pages 65 to 78.

Shares awarded vest over between one and three years from fulfilment of performance targets.

Details of the total number of share options outstanding during the year are as follows:

2019 2018

LTIPNumber of share options

Deferred Share Award

Number of shareoptions

LTIPNumber of share options

Deferred Share Award

Number of shareoptions

Outstanding at beginning of year 5,201,931 2,869,338 5,534,552 3,583,015

Granted – 713,505 2,096,397 768,811

Exercised (481,200) (299,088) (40,366) (974,363)

Lapsed (394,561) – (2,232,361) –

Forfeited (32,654) (282,857) (156,291) (508,125)

Outstanding at end of year 4,293,516 3,000,898 5,201,931 2,869,338

Weighted average remaining contractual life 2.0 years 2.5 years 2.8 years 2.2 years

The share price at which the number of shares granted under the Deferred Share Award scheme is calculated, is not confirmed until after the date of the approval of the accounts. The maximum number of Deferred Share Award shares granted during the year is therefore estimated using the closing share price on 30 September 2019. The number of shares granted in 2018 has been amended to show the actual number granted in 2018.

Where the conditions are not met the shares are released in the forfeited/released line.

Directors and other members of the management team eligible to participate in the Deferred Share Award pay £1 to exercise awards granted under the Deferred Share Award and the LTIP. This is a one-off charge. All of the shares outstanding at 30 September 2019 are not yet exercisable.

The weighted average fair value of shares granted during the year under the Deferred Share Award was £2.81 (2018: £1.85 restated for actual number of shares granted in 2019). There were no LTIP grants during the year (2018: weighted average fair value of shares granted under the LTIP was £1.00).

RSPDuring the year the Company proposed and the shareholders approved a Restricted Share Plan (RSP) for executive directors. A summary of the rules of the plan is included in the directors’ remuneration report on pages 65 to 78.





Shares granted under the RSP will vest in three equal tranches after three, four and five years, although all vested shares must be held to the end of year five. Vested shares are exercisable until the tenth anniversary of grant. There are no performance criteria associated with the award but there are performance underpins that are required to be met before vesting can be confirmed for each of the periods.

Details of the number of share options outstanding during the year are as follows:

2019 Number of share options

2018 Number of share options

Outstanding at beginning of year – –

Granted 400,478 –

Outstanding at end of year 400,478 –

Weighted average remaining contractual life 9.5 years –

The share options granted under the RSP are nil-cost options. All of the shares outstanding at 30 September 2019 are not yet exercisable.

The weighted average fair value of shares granted during the year under the RSP was £1.99 (2018: nil).

The weighted average share price on exercise of shares and share options under all schemes during the year was £2.09 (2018: £1.41).

Fair value of share schemesThe fair value of equity-settled share options and share awards granted is estimated at the date of grant using share option valuation models. The SAYE and Deferred Share Award schemes are valued using the Black-Scholes model. The element of the LTIP scheme that relates to non-market conditions is valued using the Black-Scholes model. The element of the LTIP that includes market conditions is valued using the Monte-Carlo Simulation model.

The following tables list the inputs to the models for options and shares granted during the year:

SAYE Deferred Share Award RSP LTIPWeighted average: 2019 2018 2019 2018+ 2019 2018

Share price (£) 2.02 1.37 2.81 1.66 1.99 1.31

Exercise price (£) 1.50 1.16 0.00 0.00 0.00 0.00

Dividend yield 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Expected volatility 30% 32% 23–29% 33–34% 28–30% 33–35%

Risk-free interest rate 0.90% 0.75% 0.70–0.79% 0.19–0.33% 0.78–0.89% 0.33–0.45%

Expected life of option (years) 5 5 2–4~ 2–4~ 3–10# 3–5*

+ The share price at which the number of shares granted under the Deferred Share Award scheme is calculated is not confirmed until after the date of the approval of the accounts. The maximum number of Deferred Share Award shares granted during the year is therefore estimated using the closing share price on 30 September 2019. The 2018 weighted averages have been amended to reflect the actual number of shares granted in 2019.

~ The Deferred Share Award for the executive directors vests in four years (2018: four years), the Deferred Share Award for the executive management vests in two equal tranches after two and three years (2018: two and three years) and the Deferred Share Award for the other members of the senior team vests after four years (2018: four years).

# The RSP vests in three equal tranches after three, four and five years although must continue to be held until the end of the fifth year and it is then exercisable for a further period.

* The LTIP vests in three equal tranches after three, four and five years.

Expected share-price volatility is based on historic volatility over the same period of time as the vesting period of the option. For the LTIP the expected life of an option is based on historical data.

The LTIP will only vest in full if a TSR target is met. This is a market condition and the TSR performance criteria has therefore been taken into account when calculating the fair value of the options granted under the LTIP. These conditions have been incorporated into the Monte-Carlo Simulation model which is used to fair value the TSR element of the scheme.


Accounts



30. ReservesShare premium accountThis reserve represents the amount of proceeds received for shares in excess of their nominal value of 2.5 pence per share.

Revaluation reserveThis reserve shows the surplus generated on revaluation of the estate. It represents the amount by which the fair value of the estate exceeds its historic cost net of related tax.

Capital redemption reserveThis reserve arose on the repurchase and cancellation of own shares in 1995/96, 2005/06, 2006/07, 2007/08, 2015/16, 2016/17 and 2017/18.

Merger reserveThis reserve arose as a consequence of the acquisition of Century Inns plc in 1998/99.

Treasury share reserveThis reserve shows the cost of own shares purchased by the Parent Company and held as treasury shares. These shares can be cancelled or re-issued.

Other reserveIn the Group this comprises the cost of shares in the Parent Company that are held by the Employee Benefit Trust. In the prior year it also included the equity component of the convertible bond. The shares in the Employee Benefit Trust are used to satisfy awards made under share incentive plans (note 30).

In the Parent Company this comprises the cost of shares in the Company that are held by the Employee Benefit Trust and the increase in fair value of subsidiaries recorded at fair value under IAS 27 and the dividends received from Enterprise Pubs Five Limited that cannot be distributed outside the Group. In the prior year it also included the equity component of the on-loan of funds raised in Enterprise Funding Limited (now dissolved) through the convertible bond.

In the year ended 30 September 2019 £202 million (2018: £29 million) has been reclassified from other reserves to the profit and loss account in the Parent Company following an impairment to the carrying value of investments.

31. Additional cash flow informationa) Reconciliation of net cash flow to movement in net debt

2019£m

2018£m

(Decrease)/increase in cash in the year (2) 7

Cash outflow from change in debt 330 71

Debt restructuring costs paid in the year 2 7

Change in net debt resulting from cash flows 330 85

Debt restructuring costs paid in the current year relating to prior year charge (2) 2

Amortisation of issue costs and discounts/premiums on long-term loans (6) (4)

Loss on purchase of own debt – (1)

Amortisation of the fair value adjustments of securitised bonds 4 4

Convertible loan note effective interest – (3)

Movement in other reserve arising on convertible bond redemption – (7)

Movement in net debt in the year 326 76

Net debt at start of year (2,034) (2,110)

Net debt at end of year (1,708) (2,034)





b) Analysis of net debt2019

£m2018

£m

Bank borrowings – (15)

Corporate bonds (1,175) (1,277)

Securitised bonds (691) (904)

Gross debt (1,866) (2,196)

Cash 156 158

Underlying net debt (note 22) (1,710) (2,038)

Capitalised debt issue costs 14 20

Fair value adjustments on acquisition of bonds (9) (13)

Finance lease payables (3) (3)

Net debt (note 22) (1,708) (2,034)

Balance sheet:

Current financial liabilities (19) (186)

Non-current financial liabilities (1,845) (2,006)

Cash 156 158

Net debt (1,708) (2,034)

Underlying net debt represents amounts repayable to banks and other lenders net of cash retained in the business. Cash includes £111 million held in the securitised Unique sub-group, of which £65 million is held in a securitised reserve account.

32. Related party transactionsCompensation of key management personnel

2019£000

2018£000

Short-term employee benefits 2,454 2,192

Post-employment benefits 227 223

Share-based payments 1,322 903

4,003 3,318

Key management personnel comprises both executive and non-executive directors.

Short-term employee benefits comprise fees, salaries, benefits and performance related bonus as reported in the directors’ remuneration report. Post-employment benefits comprise payments made to the directors’ own personal pension by way of salary supplements in lieu of contributions. Share-based payments comprise the fair value of Deferred Share Award and LTIP share awards charged in the year. Further information about the remuneration of individual directors is available in the directors’ remuneration report on pages 65 to 78.


Accounts



32. Related party transactions continued

SubsidiariesThe Parent Company’s subsidiaries are listed in the following table.

Country of incorporation Holding

Proportion of voting rights

and shares held Nature of businessDirectly held by Ei Group plc:

Enterprise Managed Investments Limited England Ordinary shares 100% Investment holding company

Enterprise Inns Holding Company Limited England Ordinary shares 100% Investment holding company

Unique Pubs Limited England Ordinary shares 100% Investment holding company

Ei Publican Services Limited England Ordinary shares 100% Intermediate supply company

Century Inns Limited England Ordinary shares 100% Dormant

Gibbs Mew Limited England Ordinary shares 100% Dormant

Indirectly held by Ei Group plc:

Unique Pub Properties Limited England Ordinary shares 100% Ownership of licensed properties

Bermondsey Pub Company Limited England Ordinary shares 100% Management of public houses

Bestplace (Beta) Limited England Ordinary shares 75% Management of public houses

Bestplace Limited England Ordinary shares 51% Management of public houses

Dirty Liquor Alpha Limited England Ordinary shares 51% Management of public houses

Dirty Liquor Limited England Ordinary shares 75% Management of public houses

Frontier Pubs Limited England Ordinary shares 75% Management of public houses

Hippo Inns Limited England Ordinary shares 75% Management of public houses

Hush Heath Inns Limited England Ordinary shares 51% Management of public houses

Marmalade Pubs Limited England Ordinary shares 75% Management of public houses

Mash Inns Limited England Ordinary shares 51% Management of public houses

Urban Pubs & Bars 2 Limited England Ordinary shares 51% Management of public houses

Old Spot Pub Company Limited England Ordinary shares 75% Management of public houses

Six Cheers Limited England Ordinary shares 51% Management of public houses

The Craft Union Pub Company Limited England Ordinary shares 100% Management of public houses

Vixen Pub Company Limited England Ordinary shares 75% Management of public houses

The Unique Pub Finance Company PLC England Ordinary shares 100% Financing company

Cumulative preference shares 100%

Social Cellar Limited England Ordinary shares 100% Non–trading

Social Cellar (Gamma) Limited England Ordinary shares 100% Non–trading

Unique Pub Investments Limited England Ordinary shares 100% Investment holding company

Voyager Pub Group Holdings Limited England Ordinary shares 100% Investment holding company

Voyager Pub Group Limited England Ordinary shares 100% Investment holding company

Bede Holding Company Limited England Ordinary shares 100% Dormant

Imagegold Limited England Ordinary shares 100% Dormant

Unique Pub Properties Alpha Limited England Ordinary shares 100% Dormant

Unique Pub Properties Beta Limited England Ordinary shares 100% Dormant

Unique Pub Properties Gamma Limited England Ordinary shares 100% Dormant

Unique Pub Properties Theta Limited England Ordinary shares 100% Dormant

West Midlands Taverns Limited England Ordinary shares 100% Dormant





The registered office of the Group’s subsidiary undertakings is 3 Monkspath Hall Road, Solihull, B90 4SJ.

Non-controlling interests in the net assets of Bestplace (Beta) Limited, Bestplace Limited, Dirty Liquor Alpha Limited, Dirty Liquor Limited, Frontier Pubs Limited, Hippo Inns Limited, Hush Heath Inns Limited, Marmalade Pubs Limited, Mash Inns Limited, Urban Pubs & Bars 2 Limited, Old Spot Pub Company Limited, Six Cheers Limited and Vixen Pub Company Limited total £1 million at 30 September 2019 (2018: £1 million).

Parent Company transactions with subsidiary undertakingsThe Parent Company enters into loans with its subsidiary undertakings which attract interest at varying levels. Net interest on these loans was £nil (2018: £nil).

The following loans were outstanding at the year end:

2019£m

2018£m

Loans due from subsidiary undertakings 22 14

Loans due to subsidiary undertakings – (2)

22 12

The Parent Company entered into other trading transactions with its subsidiary undertakings which included revenue of £93 million (2018: £70 million) from an Asset Management Fee, drink revenue and rent revenue and costs of £65 million (2018: £68 million) from a Procurement Fee. During the year the Parent Company purchased property, plant and equipment at book value for consideration of £11 million (2018: £9 million) from subsidiary undertakings and sold property, plant and equipment at book value for consideration of £8 million (2018: £4 million) to subsidiary undertakings.

Dividends of £31 million (2018: £14 million) were received in the Parent Company from its subsidiary undertakings.

The following balances were outstanding at the year end:

2019£m

2018£m

Amounts due from subsidiary undertakings 678 647

Amounts due to subsidiary undertakings (89) (77)

589 570

Amounts due to the Parent Company from subsidiary undertakings have been reviewed for impairment at the balance sheet date. No impairments have been recorded in the current or prior year.


Accounts



33. Alternative performance measuresLike-for-like Publican Partnerships net incomePublican Partnerships like-for-like net income of £285 million (2018: £282 million) represents underlying EBITDA for the Publican Partnerships business of £291 million (2018: £307 million) excluding £1 million (2018: £7 million) of income in respect of disposals and £5 million of net income (2018: £18 million) relating to other non like-for-like net income.

Like-for-like Commercial Properties net incomeCommercial Properties like-for-like net income of £3 million (2018: £3 million) represents underlying EBITDA for the Commercial Properties business of £19 million (2018: £27 million) excluding £13 million (2018: £26 million) of income in respect of disposals and £3 million of net income relating to other non like-for-like net income (2018: includes a net £2 million of income representing income from before the properties moved into the segment net of non like-for-like net income).

Managed like-for-like sales Managed like-for-like sales represents revenue from the Managed estate of £218 million (2018: £152 million) excluding underlying revenue from those pubs that have not traded for two full years post investment in their managed format of £113 million (2018: £52 million).

Average net income per pubAverage net income per pub represents the annual net income for Publican Partnerships assets trading at 30 September 2019 of £285 million (2018: £303 million) divided by the total Publican Partnerships assets trading at 30 September 2019 of 3,424 properties (2018: 3,718 properties).

Publican Partnerships net income of £285 million (2018: £303 million) represents underlying EBITDA for the Publican Partnerships business of £291 million (2018: £307 million) excluding £1 million (2018: £2 million) of income in respect of disposals and £5 million of net income (2018: £2 million) relating to other non like-for-like net income.

Average net income per propertyAverage net income per property represents the annual net income for Commercial Properties assets trading at 30 September 2019 of £9 million (2018: £30 million) divided by the total Commercial Properties assets trading at 30 September 2019 of 125 properties (2018: 412 properties).

Commercial Properties net income of £9 million (2018: £30 million) represents underlying EBITDA for the Commercial Properties business of £19 million (2018: £27 million) excluding £13 million (2018: £nil) of income in respect of disposals and including £3 million of net income (2018: £3 million) relating to the pubs before they were transferred to the Commercial Properties segment offset by unlicensed property income.

Managed annualised site EBITDAManaged operations annualised average site EBITDA represents annualised EBITDA of sites that have traded post investment for more than six months of £39 million (2018: £24 million) divided by the total number of sites that have traded post investment for more than six months being 346 sites (2018: 232 sites).

Managed investments annualised average site EBITDA represents annualised EBITDA of sites that have traded post investment for more than six months of £9 million (2018: £6 million) divided by the total number of sites that have traded post investment for more than six months being 50 sites (2018: 27 sites).

The total annualised EBITDA for sites that have traded for more than six months referred to above of £48 million (2018: £30 million) represents underlying EBITDA for the Managed business of £42 million (2018: £28 million) excluding costs not allocated at site level of £5 million (2018: £4 million), excluding EBITDA of pubs that have not traded for more than six months post investment of £1 million (2018: £4 million) and including an adjustment of £2 million (2018: £2 million) to annualise the EBITDA of pubs that have traded post investment for more than six months but less than the full year.

EBITDA EBITDA represents earnings before taxation, finance costs, goodwill impairment, movements in valuation of the estate and related assets, net loss on sale of property, profit on sale of controlling interest in subsidiary undertaking and depreciation and amortisation.





Underlying EBITDAUnderlying EBITDA represents earnings before finance costs, taxation, depreciation and amortisation excluding non-underlying items. Non-underlying items that are excluded from underlying EBITDA include reorganisation costs, assignment premiums paid to publicans in order to take the assignment of a lease or to break a lease at any point other than at renewal during the period of our strategic review and professional fees incurred in respect of the Stonegate Offer.

Underlying profit before taxUnderlying profit before tax excludes non-underlying items. Non-underlying items excluded from profit before tax include reorganisation costs, assignment premiums paid to publicans in order to take the assignment of a lease or to break a lease at any point other than at renewal during the period of our strategic review, professional fees incurred in respect of the Stonegate Offer, the profit/loss on sale of property, the movement in valuation of the estate and related assets, goodwill impairment and costs incurred in respect of refinancing.

Underlying earnings per share (EPS)Underlying EPS is based on profits after tax excluding non-underlying items as explained above.

Growth driving capital investment Growth driving capital investment is discretionary capital cash spend on the Group’s assets which is intended to generate incremental income at returns ahead of our target return on investment.

Maintenance and letting capital investment Maintenance and letting capital investment is all capital cash spend that is not growth driving capital investment, typically focused on maintaining the quality of our assets and supporting the letting programme.

Return on investment Return on investment is measured as the incremental income delivered as a result of the investment divided by the value of the capital investment.

Unplanned business failuresUnplanned business failures are all lease and tenancy agreements that do not reach their full term, where failure is not through the mutual agreement of ourselves and the departing publican. For example, through publican abandonment or via legal proceedings.

34. Property valuation and net asset valueThe Group’s total property valuation of £3,289 million as at 30 September 2019 includes other property assets in addition to the properties valued subject to Rule 29 of the Takeover Code including the value of assets held for sale, operating leasehold sites and other fixed assets. These items have not been independently valued and do not require an independent valuation for the purposes of Rule 29 of the Code.

2019£m

2019No.

Properties valued by GVA Grimley Limited (t/a Avison Young) 1,544 1,771

Properties valued by Colliers International Property Advisors UK LLP 1,538 1,860

Properties valued by internal Estates Director 120 152

Property subtotal* 3,202 3,783

Non-current assets held for sale 15

Operating leasehold sites 28

Other fixed assets 44

Total property asset value 3,289

* Properties subject to Rule 29 of the Code.

The net asset value of £1,296 million recorded in the Group balance sheet is arrived at by taking the total property asset value of £3,289 million (as detailed in the table above), adding to this goodwill of £37 million, financial assets of £1 million, trade receivables of £3 million, total current assets of £210 million and net of total liabilities of £2,244 million.


Accounts



OpinionIn our opinion:

• Ei Group plc’s (“Ei Group”) group financial statements and Parent Company financial statements (the “financial statements”) give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 30 September 2019 and of the Group’s loss for the year then ended;

• the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

• the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 2006; and

• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the group financial statements, Article 4 of the IAS Regulation.

We have audited the financial statements of Ei Group plc which comprise:

Group Parent CompanyGroup balance sheet as at 30 September 2019 Company balance sheet as at 30 September 2019

Group income statement for the year then ended Company statement of changes in equity for the year then ended

Group statement of comprehensive income for the year then ended

Company cash flow for the year then ended

Group statement of changes in equity for the year then ended

Related notes 1 to 34 to the financial statements including a summary of significant accounting policies

Group cash flow statement for the year then ended

Related notes 1 to 34 to the financial statements, including a summary of significant accounting policies

The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent of the Group and Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Conclusions relating to principal risks, going concern and viability statementWe have nothing to report in respect of the following information in the annual report, in relation to which the ISAs(UK) require us to report to you whether we have anything material to add or draw attention to:

• the disclosures in the annual report set out on page 37 to 42 that describe the principal risks and explain how they are being managed or mitigated;

• the directors’ confirmation set out on page 43 in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;

• the directors’ statement set out on page 43 in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements

• whether the directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or

• the directors’ explanation set out on page 43 in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.


Independent auditor’s reportto the members of Ei Group plc



Overview of our audit approach

Key audit matters • Going concern

• Goodwill impairment

• Property valuation

• Parent Company - Impairment of cost of investments

Audit scope • We performed an audit of the complete financial information of three (2018: four) full scope components, performed specific scope procedures in respect of five components (2018: three) and performed other procedures in respect of 20 components (2018: 20).

• The components where we performed full or specific scope audit procedures accounted for 99% of underlying profit before tax, 97% of revenue and 99% of total assets.

• The components subject to specified procedures covered 1% of underlying profit before tax, 3% of revenue and 1% of total assets.

Materiality • Overall group materiality of £5.9m represents 5% of underlying profit before tax.

Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, we do not provide a separate opinion on these matters.

RiskRisk of inappropriate assessment and disclosure of going concern, viability and covenant compliance given the proposed acquisition of the Group.

Refer to the Strategic report (page 43); the Audit Committee Report (from page 57); and Note 22 of the Consolidated Financial Statements (from page 118)

The Group has to comply with a number of covenants in debt facilities and the rules of the Unique securitisation. The going concern basis of preparation is dependent upon the availability of such debt facilities and related covenant tests being met for a period of at least 12 months from the date of approving the financial statements.

Furthermore, as a result of the cash offer for the shares of Ei Group plc by Stonegate Pub Company (Stonegate), which was approved by Ei Group plc’s shareholders on 12 September 2019 and is subject to Competition and Markets Authority (CMA) approval, the risk in regard to going concern has increased. As discussed in the Strategic report (page 43), this is because, if approved by the CMA, the takeover is expected to complete within the going concern review period and will trigger the change in control clauses in certain of the Group’s debt facilities resulting in the need for these to be repaid immediately. In addition, the existing Ei Group plc directors are expected to step down on completion of the acquisition. Consequently, there is uncertainty surrounding possible changes to the ongoing operation of the business, future financing arrangements and distributions to shareholders that the new board may make.

Our response to the riskWe inspected management’s going concern assessment including stress testing and sensitivity analysis to support the application of the going concern assumption for the ongoing business. This included recalculating and stress testing covenant compliance throughout the review period.

We inspected the Group’s debt facility agreements for evidence of change of control clauses. In addition, for the Unique securitisation trust deeds, which do not include change of control clauses, we obtained management’s correspondence from their lawyers confirming there would be no requirement to repay this debt.

We obtained the signed financing agreements from the acquirer. We agreed the funding within these agreements to management’s model prepared to demonstrate that the acquirer had sufficient funding in place to cover the cash acquisition and related costs as well as the repayment of the Group’s facilities that include change of control clauses.

We recalculated management’s cash flow forecasts and covenant compliance tests for the enlarged group including sensitivity analysis of future cash flows from operating activities.

We read the information in the public domain in respect of the acquirer’s future intentions for the business. We obtained a direct confirmation from the acquirer that these remain an accurate representation of Stonegate’s intentions and inspected the representation letter provided by the acquirer to the current directors in respect of the future funding, operations and profitability of the Group post acquisition.

We considered management’s disclosures in respect of both going concern and viability to ensure appropriate explanation of the circumstances was given.


Accounts



Key observations communicated to the Audit CommitteeOn a standalone basis the forecasts support the Group’s ability to continue as a going concern for at least 12 months from signing the financial statements.

On the assumption the acquisition completes, the acquirer has sufficient funding in place to cover the cash acquisition, associated costs and would be able to repay the Group’s debt facilities that would be withdrawn on a change of control. Management’s cash flow forecasts for the enlarged group support the Group’s ability to continue as a going concern for at least 12 months from signing the financial statements, taking into account assurances received from the acquirer that they have no intentions to make material changes that would adversely impact the ongoing group.

We consider management’s disclosures in the Annual Report and Accounts to be appropriate in regards to the assumptions over going concern (being that the assessment is prepared on the assumption that operation of the Group, its distributions to shareholders and its financing arrangements under new ownership would be no less favourable than is currently envisaged on a standalone basis).

We consider management’s disclosures in the Annual Report and Accounts to be appropriate in regards to the assumptions upon which the viability assessment has been made (being the new board would continue to operate and finance the business and make distributions to shareholders with no material adverse impact to the Group’s forecasts).

RiskFailure to impair goodwill in respect of the Ei Publican Partnerships, Ei Commercial Properties and Ei Managed (being Bermondsey and Managed Investments) segments through inappropriate impairment model assumptions in respect of discount rate, underlying short-term forecasts or long-term growth.

(2019: £37m; 2018: £304m)

Refer to the Audit Committee Report (from page 57); Accounting policies (from page 90); and Note 12 of the Consolidated Financial Statements (from page 105)

As discussed in note 4, the Group has five Cash Generating Units (CGUs) (2018: five). The Group is required to allocate goodwill between CGUs and test impairment for each CGU.

As a result of further information in the second half of the year including the Stonegate Offer to acquire the Group, management has revised the discount rate and growth rate used in the impairment test. This has resulted in a goodwill impairment of £232m being recorded resulting in a total carrying value of £37m (2018: £304m). Of the £37m remaining balance of goodwill, £nil relates to Ei Publican Partnerships (2018: £248m), £7m (2018: £31m) to Ei Commercial Properties

and £30m (2018: £25m) to the three Ei Managed segments. The impairment test is sensitive to the key assumptions of discount rate, the level of forecast cash flows and the long-term growth rate as described in note 12.

Our response to the riskGoodwill was included wholly within that part of the audit subject to full scope procedures.

We identified, documented and confirmed our understanding of the controls operated by the Group surrounding the goodwill allocation and impairment process.

We confirmed that the operating segments represented the appropriate level to perform the goodwill impairment review and that no further sub-analysis was required.

We ensured that management had appropriately determined the carrying amount of goodwill for each CGU and tested the basis for any movement of goodwill between segments.

We checked the discounted cash flow workings to ensure they were clerically accurate.

We examined the cash flow forecasts by testing the underlying models, which included an analysis of the underlying assumptions, and by reference to the accuracy of previous forecasts and underlying assumptions. We also confirmed the forecasts were consistent with the Board approved forecasts and those used in the going concern and viability assessments.

The key assumptions of the discount rate and long-term growth rate underlying the goodwill impairment test were addressed through a combination of testing the Group’s detailed calculations, benchmarking the assumptions used against comparator companies and external forecasts and, in respect of the discount rate assumption, an independent assessment by our valuation specialists based on general market indicators.

We recalculated the goodwill impairment to confirm the amount and allocation to CGUs was appropriate.

For the remaining goodwill, we have considered if there were any further indicators of impairment.

We ensured the appropriate disclosures were included in the Annual Report and Accounts.





Key observations communicated to the Audit CommitteeFollowing review and challenge, management have recorded an impairment of goodwill of £232m resulting in goodwill of £37m remaining as at 30 September 2019.

We recalculated the goodwill impairment to confirm the amount and allocation to each CGU was appropriate. For the remaining goodwill no further indicators of impairment were identified.

A pre-tax discount rate of 8.5% has been applied in the impairment tests for all segments and is within our acceptable range.

The reduction in the assumptions for long-term growth rates are reflective of external forecasts.

The short-term forecasts are consistent with those approved by the Board and management have demonstrated that their forecasting process is historically accurate.

RiskOver valuation of property assets

1. Pub estate – through either higher multiples than the market and/or fair maintainable trade (FMT) in excess of achievable income.

2. Investment property – through either higher multiples than the market and/or overstatement of estimated rental value (ERV).

(2019: Property, Plant and Equipment £3,185m; Investment Property £81m; 2018: Property, Plant and Equipment £3,228m; Investment Property £368m)

Refer to the Audit Committee Report (from page 57); Accounting policies (from page 90); and Note 17 of the Consolidated Financial Statements (from page 111)

This is the largest estimate within the financial statements, prepared on an asset by asset basis for 3,783 individual assets. The valuation is performed by a combination of internal and external appropriately qualified valuers (as described in note 17). The valuation has been performed by third party independent valuers for 96% of the properties by value (2018: 95%).

The risk is the overvaluation of the Group’s property assets as a result of:

• The use of valuation multiples above normal market ranges; and/or

• Where FMT per outlet for the pub estate / ERV for the investment property estate differs from actual income outside the expected range dependant on the lease profile of the asset.

Our response to the riskThe entire property estate valuation was subject to full scope procedures.

We identified, documented and confirmed our understanding of the controls operated by the Group over the valuation process.

We inspected management’s assessment of the estate valuation, in particular, their considerations and conclusions with regard to the appropriateness of the values determined by the external valuers.

Together with our internal property valuation specialists, we met with the Group’s internal and external valuers in order to understand market trends, the overall estate valuation movement as well as specific trends within the year end valuation. We challenged the method adopted, the derivation of the key inputs of fair maintainable trade and FMT/ERV multiple (as described in note 17) and the nature and extent of the work they performed in preparing the valuations.

Together with our internal property valuation specialists, we evaluated the competence, capability and objectivity of management’s external and internal valuation experts.

The source data provided by the Group to the external and internal valuation experts for the EIPP and EICP estate (consisting of drink barrelage, drink income and rental income by property), was tested back to underlying invoices for a sample of 60 transactions. The source data for the Managed estate (consisting of EBITDA by property) was agreed to underlying financial records for a sample of 52 properties.

We tested the arithmetical accuracy of the valuation models.

We performed risk specific sampling:

• Where the multiples applied did not fall within our expected ranges as informed through: historically achieved ranges by region; yields achieved through observable market transactions in the period; and overall trends in yields in the market as assessed by our internal property valuation specialists.

• Where, for the pub estate, movements in the FMT to actual income gap was inconsistent with underlying changes in the lease agreement profile.

• Where, for the investment property estate, the ERV applied in the valuation showed a material difference to the actual rental value achieved in the year.

• We also selected a random sample of assets to add unpredictability into our sampling approach.


Accounts



We used data analytics as a risk assessment procedure over the whole estate to direct our testing towards those assets which displayed one or more unusual features either in their underlying performance or in their valuation outcome. We sampled properties where our overall property analytics identified outliers within the estate.

From our risk specific sampling and analytics procedures, we identified 203 (2018: 206) asset valuations for follow up. For the items identified we obtained explanations from the internal and external valuers as well as from the Director of FP&A where relevant for the valuation movement and/or FMT/multiple. With the involvement of our internal valuation specialists, we tested these explanations by corroborating changes in factual circumstances to relevant source documentation and historic trading performance.

We evaluated the adequacy of the disclosures regarding property assets in line with IAS 16, IAS 40 and IFRS 13.

Key observations communicated to the Audit CommitteeThe valuers have adopted an approach to the valuation of the Group’s properties which is appropriate, consistent, and in accordance with applicable guidance.

The results of our procedures support the overall valuation outcome and we identified no material overstatement of property values.

RiskFailure to impair cost of investments in subsidiaries held in the Parent Company through inappropriate impairment model assumptions in respect of discount rate, long-term growth and underlying short-term forecasts.

Company Investments (2019: £968m; 2018: £1,761m)

Refer to the Accounting policies (from page 90); and Note 18 of the Consolidated Financial Statements (page 116)

The Company investments have been impaired by £793m resulting in a total carrying value of £968m (2018: £1,761m). The impairment test is sensitive to the key assumptions of discount rate, the level of forecast cash flows and long-term growth rate, as described in note 18.

Our response to the riskParent Company investments were subject to full scope audit procedures.

We identified, documented and confirmed our understanding of the controls operated by the Company surrounding the investment impairment review.

We ensure that management had appropriately determined the carrying amount of the investment and audited the discounted cash flow workings to ensure they were clerically accurate.

We examined the cash flow forecasts by testing the underlying models, including analysis of the underlying

assumptions, and by reference to the accuracy of previous forecasts and underlying assumptions.

The key assumptions of the discount rate and long-term growth rate underlying the investment impairment test were considered through a combination of testing the Company’s detailed calculations, benchmarking the assumptions against comparator companies and external forecasts and, in respect of the discount rate assumption, an independent assessment by our specialists based on general market indicators.

We recalculated the investment impairment to confirm the amount was appropriate and for the remaining investment balance, we have considered if there were any further indicators of impairment.

We ensured the appropriate disclosures are included with the Annual Report and Accounts.

Key observations communicated to the Audit CommitteeFollowing review and challenge management have recorded an impairment of Parent Company investments of £793m resulting in a balance of £968m as at 30 September 2019.

We recalculated the investment impairment to confirm the amount was appropriate and for the remaining balance no further indicators of impairment were identified.

The pre-tax discount rate of 8.5% applied in the impairment test is within our acceptable range.

The reduction in the assumption for the long-term growth rate is reflective of external forecasts.

The short-term forecasts are consistent with the current trading performance of Unique Pub Properties Limited.

Other mattersThe overstatement of wet, dry, food and amusement income through manual journal postings, the risk of fraud as a result of management override (through inappropriate classification of items as non-underlying or through the classification of expenditure between capital or expense) and the risk of inappropriate disclosure of the impact of adopting IFRS 16 were also considered significant risks, but have not been included in the table above as a key audit matter as they were not areas of greatest audit effort.

In the prior year a key audit matter was included relating to the risk of a material misstatement of the deferred tax liability. This is no longer a key audit matter as a result of a reduction in the risk driven by lower historical material misstatements.





An overview of the scope of our audit Tailoring the scopeOur assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the group and effectiveness of group-wide controls, changes in the business environment and other factors such as recent internal audit results when assessing the level of work to be performed at each entity.

The Group has common financial systems, processes and controls covering its operations with the exception of eight of the Group’s managed house operations which are managed on stand-alone systems maintained by third party managers. Two of these eight operations are subject to specific scope procedures.

We assessed the risk of material misstatement to the financial statements, and ensured we had adequate coverage of significant accounts in the financial statements, of the 28 (2018: 27) reporting components of the Group. We performed an audit of the complete financial information of three (2018: four) full scope components which were selected based on their size or risk characteristics. We performed audit procedures on specific balances in respect of five (2018: three) specific scope components that we considered had the potential for the greatest impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile. These reporting components accounted for 99% (2018: 95%) of the Group’s underlying profit before tax, 97% (2018: 97%) of the Group’s Revenue and 99% (2018: 100%) of the Group’s total assets.

The audits of the entities subject to full and specific scope audits (which represent the principal business units within the Group, one being the Parent Company itself) are performed at a materiality level calculated by reference to a proportion of the Group materiality appropriate to the relevant scale and risk of the business concerned. In the current year, the range of performance materiality allocated to these components was £0.9m to £3.1m (2018: £0.9m to £3.2m).

Of the remaining 20 components that together represent 1% of the Group’s underlying profit before tax, none are individually greater than 1% of the Group’s underlying profit before tax. For these components, we performed other procedures, including analytical review; review of group wide entity level controls; testing of consolidation journals; intercompany eliminations; and the assessment of control in accordance with IFRS 10; to respond to any potential risks of material misstatement to the Group financial statements.

The charts below illustrate the coverage obtained from the work performed by our audit.

Underlying profit before tax (2019)

Full scope components

Specific scope components

Other procedures

44%

1%

68%

31%

Underlying profit before tax (2018)

44%

5%

77%

18%



Other procedures

Revenue (2019)

44%

4%

26%



Other procedures

70%

Total assets (2019)

44%

1%1%



Other procedures

98%


Accounts



Changes from the prior year The decrease in full scope components to three (2018: four) is due to the removal of Enterprise Funding Limited as a full scope component in the current year as 98% of the convertible bonds held by the entity were redeemed at the end of the prior year.

The increase in specific scope components to five (2018: three) is due to the inclusion of additional managed expert entities as specific scope in the current year. Specific scope components represent 31% of underlying profit before tax (2018: 18%) and procedures have been performed on material balances within underlying profit before tax in these entities. These components are not full scope as they only represent 1% of the Group’s total assets.

Involvement with component teams All audit work performed for the purposes of the audit was undertaken by the Group audit team.

Our application of materialityWe apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.

MaterialityThe magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.

We determined materiality for the Group to be £5.9m (2018: £6.0m), which is 5% (2018: 5%) of underlying profit before tax. We have used underlying profit before tax as our materiality basis as it provides a normalised trend in trading performance.

Loss before tax – £199mStarting

basis

Adjustments

Materiality

Non-underlying items – £317m

Underlying profit before tax – £118mMateriality of £5.9m (5% of materiality basis)

We determined materiality for the Parent Company to be £3.8m (2018: £3.5m), which is 5% (2018: 5%) of underlying profit before tax.

During the course of our audit, we reassessed initial materiality and there was no change in our final materiality from our original assessment at planning.

Performance materialityThe application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.

On the basis of our risk assessments, together with our assessment of the Group’s overall control environment and limited historical audit findings indicating a lower risk of undetected misstatement in the financial statements, we set performance materiality at 75% (2018: 75%) of our planning materiality, namely £4.4m (2018: £4.5m).

Audit work for components for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was £0.9m to £3.1m (2018: £0.9m to £3.2m).

Reporting thresholdAn amount below which identified misstatements are considered as being clearly trivial.

We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £0.3m (2018: £0.3m), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.

Other information In the context of the Annual Report and Accounts, other information comprises the information included in the Annual Report set out on pages 01 to 150, including the Strategic report set out on pages 01 to 43, Governance set out on pages 44 to 79 and shareholder information set out on pages 149 to 150, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon.





In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.

We have nothing to report in this regard.

In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:

• Fair, balanced and understandable set out on page 62 – the statement given by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or

• Audit Committee reporting set out from page 57 – the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the audit committee

• Directors’ statement of compliance with the UK Corporate Governance Code set out on page 52 – the parts of the directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.

Opinions on other matters prescribed by the Companies Act 2006In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

• the information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

• the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exceptionIn the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic report or the Directors’ report.

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

• adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

• the Parent Company financial statements and the part of the directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or

• certain disclosures of directors’ remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit

Responsibilities of directorsAs explained more fully in the directors’ responsibilities statement set out on page 79, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.


Accounts


27094 11 December 2019 5:09 pm Proof 8

Explanation as to what extent the audit can detect fraud The objectives of our audit, in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.

Our approach was as follows:

• We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most significant framework is the Small Business, Enterprise and Employment Act 2015, in particular the new Statutory Code of Practice.

• We understood how the Group complying with this framework by making inquiries of management, internal audit, those responsible for legal and compliance procedures, and the Company Secretary and through the review of the pubs code compliance report submitted to the Pubs Code Adjudicator. We corroborated our enquiries through review of board minutes, review of internal audit reports and papers provided to the Audit Committee.

• We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur by meeting with management and the Audit Committee to understand where they considered there was susceptibility to fraud. In addition, we also performed specific procedures to respond to our fraud risks of overstatement of wet, dry, food and amusement income through manual journal postings, and the risk of fraud as a result of management override (through inappropriate classification of items as non-underlying or through the classification of expenditure between capital or expense). Such procedures included testing manual journals and were designed to provide reasonable assurance that the financial statements were free from material fraud or error.

• Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations that we considered could result in a material misstatement of the financial statements. Our procedures included a review of board minutes to identify any non-compliance with laws and regulations, a review of papers provided to the Audit Committee by internal audit on compliance with regulations and enquiries with the Director of Internal Audit, management and the Company Secretary.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

Other matters we are required to address • We were appointed by the company at the AGM to audit

the financial statements for the year ending 30 September 1991 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments is 29 years, covering the years ending 30 September 1991 to 30 September 2019.

• The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company and we remain independent of the Group and the Parent Company in conducting the audit.

• The audit opinion is consistent with the additional report to the audit committee

Use of our reportThis report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Christopher Voogd (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor Birmingham 18 November 2019

Notes:

1. The maintenance and integrity of the Ei Group plc web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site.

2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.



ei group AR2019 extra notes pg148.indd 148 11-Dec-19 5:13:27 PM


Year ended 30 September

2019£m

2018£m

2017£m

2016£m

2015£m

Revenue 724 695 648 632 625

Operating profit 247 263 261 273 279

Underlying profit before tax 118 122 121 122 122

(Loss)/profit after tax (209) 72 54 71 (65)

Underlying earnings per share (pence) 21.6 21.2 20.5 19.6 19.4

Year ended 30 September

2019£m

2018£m

2017£m

2016£m

2015£m

Non-current assets 3,315 3,912 3,915 3,963 4,006

Current assets* 225 232 231 212 200

Current liabilities (222) (405) (283) (275) (255)

Non-current liabilities (2,022) (2,185) (2,360) (2,452) (2,605)

Net assets 1,296 1,554 1,503 1,448 1,346

* Includes non-current assets held for sale.

Range No. of shareholders % Shares held %

1 > 1,000 413 33.31% 177,622 0.04%

1,001 > 10,000 441 35.57% 1,723,116 0.35%

10,001 > 50,000 162 13.06% 3,801,278 0.78%

50,001 > 100,000 35 2.82% 2,621,710 0.54%

100,001 > 150,000 27 2.18% 3,231,279 0.66%

150,001 > 500,000 63 5.08% 17,922,971 3.67%

500,001 > 1,000,000 31 2.50% 21,951,531 4.50%

1,000,001 > 5,000,000 46 3.71% 101,585,553 20.82%

5,000,001 and over 22 1.77% 334,895,015 68.64%

Total 1,240 100.00% 487,910,075 100.00%

Analysis of ordinary shareholdersat 30 September 2019


Shareholder information

Five year recordfor the year ended 30 September



Important Note – If the Stonegate Offer completes and the Company is acquired by Stonegate prior to the AGM, then only Stonegate will be entitled to attend and vote at the AGM and an update announcement to this effect will be released through a regulatory information service and the following information will be subject to change.

Annual General MeetingWill be held in March 2020 at 3 Monkspath Hall Road, Solihull, West Midlands, B90 4SJ.

Financial calendarTrading update – March 2020

Interim results announcement – May 2020

Annual results announcement – November 2020

Shareholder enquiriesEnquiries relating to shareholdings should be made to the Company’s Registrars, Computershare Investor Services PLC. If you have a query regarding your shareholding please contact them directly by using the dedicated telephone enquiry line 0370 889 4080. You can also use the Registrar’s website to check and maintain your records. Details can be found at www-uk.computershare.com/investor.

Computershare Investor Services PLCThe PavilionsBridgwater RoadBristolBS99 6ZZ

Electronic communicationsThe Company has introduced innovative ways of communicating to shareholders electronically via eTree, an environmental incentive programme. For full details and to register to receive future communications electronically please visit www.investorcentre.co.uk/ecomms/eigroup.

Share dealing serviceThe Registrars offer a share dealing service which allows you to buy and sell the Company’s shares if you are a UK resident. You can deal in your shares on the internet or by telephone. Log onto www.computershare.com/dealing/uk or call 0370 703 0084 for more details on this service.

ShareGiftIf you only have a small number of shares whose value makes it difficult to sell, you may wish to consider donating to charity through ShareGift, an independent charity share donation scheme. For further details please contact Computershare or ShareGift, telephone +44 (0) 207930 3737 or visit www.sharegift.org.

Share price informationThe Company’s ordinary shares are listed on the London Stock Exchange. Share price information can be found on the website www.eigroupplc.com or through your broker.

ISIN Number: GB00B1L8B624

SEDOL Number: B1L8B62

TIDM: EIG

Registered officeIf you would like to contact us:

Ei Group plc3 Monkspath Hall RoadSolihullWest MidlandsB90 4SJ

Telephone: 0121 272 5000

Email: [email protected]

Company number2562808

Advisers:AuditorErnst & Young LLP, No. 1 Colmore Square, Birmingham B4 6HQ

BankerLloyds Bank plc, 33 Old Broad Street, London EC2N 1HZ

StockbrokersDeutsche Bank AG, London Branch, Winchester House, 1 Great Winchester Street, London EC2N 2DB

Numis Securities Ltd, The London Stock Exchange Building, 10 Paternoster Square, London EC4M 7LT

SolicitorCMS Cameron McKenna Nabarro Olswang LLP, Cannon Place, 78 Cannon Street, London EC4N 6AF

Financial public relationsTulchan Communications Group Ltd, 85 Fleet Street, London EC4Y 1AE

Shareholder information



27094 11 December 2019 9:05 am Proof 10ei group AR2019 Proof 10 A.indd 3 11/12/2019 10:25:18


Ei Gro

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Ei Group plc3 Monkspath Hall Road Solihull West Midlands B90 4SJ

Tel: +44 (0) 121 272 5000 www.eigroupplc.com


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