Annual Financial Report

Greene King plc

Report and accounts and AGM circular

In accordance with Listing Rule 9.6.1, copies of the annual report and accounts for the year ended 29 April 2012 and of the circular convening the 2012 annual general meeting (AGM) have been submitted to the UK Listing Authority and will shortly be available for inspection from the National Storage Mechanism, which can be accessed at www.hemscott.com/nsm.do:

The report and accounts and the AGM circular will also be available on the company's website, www.greeneking.co.uk.

Lindsay Keswick

Company Secretary

3 August 2012

Information required by the Disclosure and Transparency Rule 6.3.5

The principal purpose of this announcement is to notify the submission by the company to the UK Listing Authority of copies of the report and accounts and of the AGM circular. However, the information set out below, which is extracted from the report and accounts, is also included in the announcement for the sole purpose of complying with Disclosure and Transparency Rule 6.3.5 and the requirements it imposes on issues as to how to make annual financial reports public. It should be read in conjunction with the company's preliminary results announcement released on 28 June 2012. This material is not a substitute for reading the full report and accounts. Page numbers and cross- references in the extracted information below refer to page numbers and cross-references in the report and accounts.

Responsibility statement

The following statement is extracted from page 50 of the report and accounts and is not connected to the extracted information presented in this announcement or in the preliminary results announcement.

"Statement of directors' responsibilities in respects of the group financial statements

The directors are responsible for preparing the annual report and the group financial statements, in accordance with applicable United Kingdom law and those International Financial Reporting Standards as adopted by the European Union.

Under company law the directors must not approve the group financial statements unless they are satisfied that they present fairly the financial position, financial performance and cash flows of the group for that period. In preparing those group financial statements the directors are required to:

§ select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

§ present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

§ provide additional disclosures when compliance with the specific requirements in IFRS's is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the group's financial position and financial performance; and

§ state that the group has complied with IFRS's, subject to any material departures disclosed and explained in the financial statements; and

§ make judgments and estimates that are reasonable and prudent.

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

Statement of directors' responsibilities in respect of the parent company financial statements

The directors are responsible for preparing the directors' 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 elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing those financial statements, the directors are required to:

§ select suitable accounting policies and then apply them consistently;

§ make judgments and estimates that are reasonable and prudent;

§ state whether applicable UK Accounting Standards 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 appropriate 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 transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the company financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities."

The names of the directors who have given these statements are:

Rooney Anand (chief executive)

Tim Bridge (chairman)

John Brady

Mike Coupe

Ian Durant

Matthew Fearn

Norman Murray

Principal risks and uncertainties

The following description of the principal risks and uncertainties is extracted from page 26 of the report and accounts.

This section highlights some of the key risks and uncertainties which affect Greene King, but it is not intended to be an exhaustive analysis of all risks facing the business. Formal risk management processes are in place to identify and evaluate risks, taking into account the likelihood of their occurrence, the scale of potential impact on the business and the impact of planned risk mitigation actions, so that risks can be ranked and actions suitably prioritised. Given that some risks are external and not fully within our control, the risk management processes are designed to manage risks which may have a material impact on our business, rather than to fully mitigate all risks.

Using a group-wide consistent approach, each business unit or functional area reviews its risks and mitigation plans on a regular basis, and draws up plans to manage new risks or gaps in mitigation plans. Progress of these risk implementation plans is monitored by senior management on a regular basis. In addition, a company-wide risk committee reviews in detail and monitors those risk mitigation plans, ensuring that plans work across the group as well as the sharing of best practice. Particular emphasis has been placed during the year on reviewing plans to deal with those risks which might arise from catastrophic events, and on emerging strategic risks. There has also been an increased focus on ensuring that risk mitigation plans are subject to independent review and audit.

At executive level, each of the risks has an identified owner to ensure senior management accountability for risk mitigation measures. Each business unit managing director or functional head presents a report to the audit committee once a year on the risk management processes for which they are responsible. The audit committee also reviews the company's top risks, as set out on the group's risk register, on an annual basis, prior to their submission to the board, which retains ultimate responsibility for the company's risk management framework.

The paragraphs below highlight some of the key risks and uncertainties which affect Greene King but are not intended to be an exhaustive analysis of all risks facing the business.

Strategic risks

Risk

To achieve our Retail expansion plans we need to be able to acquire existing pubs, smaller pub businesses and brown- or green-field sites on which to build new pubs.

Potential impact

A failure to find and secure the acquisition (and development where appropriate) of top quality sites could reduce our rate of growth in the future.

Mitigation

We maintain a pipeline of sites available for purchase and a team of acquisition managers responsible for securing new sites on an on-going basis. Our in-house property development team is employed to help deliver new-build projects on time and on budget.

Monitoring/ assurance

Regular updates are provided to management as to the status of potential acquisitions and of development progress for new build sites or major conversions of acquired pubs. Monthly estate plan meetings are held to discuss progress.

Risk

The current economic situation and fluctuations in the UK property market may make it more difficult to reduce the size of our tenanted estate.

Potential impact

It may be more difficult to dispose of properties at an appropriate valuation, impacting our ability to reinvest those funds elsewhere or service debt. This may also lead us to continuing operating pubs that are in long-term profit decline.

Mitigation

We have an ongoing programme of investment in our sites, in the form of both expansionary and maintenance capital. Under-performing sites receive additional operational focus through our Independence Pub division. Our team of estate managers is tasked with achieving the sale of proposed disposal sites at the best possible prices.

Monitoring / assurance

There is regular assessment of the long-term value of all of our sites by the property department.

Risk

We are investing significantly in our core ale brands to deliver continued profitable growth in our branded beer business.

Potential impact

A failure to execute this strategy correctly could result in lower or stagnant sales growth in those brands, affecting profitability.

Mitigation

This year our investment in marketing and innovation is up 7.2% including £4m invested in relaunching the UK's No.1 cask ale, Greene King IPA is under way. This has included extending the Greene King IPA family with new versions to broaden its appeal.

Monitoring / assurance

The Brewing & Brands executive team reviews and approves brand investment proposals, monitors customer opinions and is tasked with turning increased investment into increased sales.

Economic and market risks.

Risk

We are dependent on the extent to which our customers choose to spend their discretionary spend in our pubs and restaurants or buying our beers, and are thus impacted by the wider economic situation within the UK and by competitor activity.

Potential impact

A prolonged recession or delay in economic recovery, or significant competitor activity, could lead to a potential reduction in our revenue and lower growth rates.

Mitigation

Our diversified business model enables us to provide a wide range of offers targeted at different consumer groups. Our emphasis on value, service and quality is designed to ensure that we continue to appeal to consumers. We have a broad geographic spread of pubs with a focus towards the more affluent areas of London and the South East.

Monitoring/assurance

The executive teams and the board receive regular updates on performance. Competitor activity is monitored at both a strategic and tactical level to enable suitable actions to be developed in response. All business units keep and update profit protection plans in case of any downturn in trading conditions.

Risk

Inflationary trends increase the costs of our key products, including food, drink and site services including utilities.

Potential impact

Higher costs could impact margins and lead to reduced profitability.

Mitigation

We have contracts in place with major suppliers designed to protect us against significant increases in major cost items and against price volatility. We continually evolve the composition of menus and retail prices to optimise value to the customer and profits for the company.

Monitoring / assurance

All costs, including labour, are closely monitored by the executive teams to ensure that they remain in line with budget.

Risk

The challenging economic situation impacts our tenanted and leased licensees too.

Potential impact

There is the risk of more tenant defaults and business failures, potentially reducing revenue and increasing costs in the form of tenant support or recruiting new licensees.

Mitigation

Operational and financial support is provided to licensees where necessary and appropriate. Business Development Managers are trained to help grow and diversify our licensees' businesses. There is ongoing agreement innovation to ensure that more of our tenants are able to run profitable businesses.

Monitoring / assurance

Our Pub Partners division constantly monitors the vital signs of our licensee health, including debt levels and the numbers of tenancies at will.

Financial risks

Risk

Our financing structure requires us to be able to repay capital borrowed and interest on time and to ensure that we operate within certain financial covenants.

Potential Impact

Breaching our financial covenants would have a significant impact on our ability to pay dividends or reinvest cash back into the business. It could also impact our reputation and ongoing creditworthiness.

Mitigation

Our long term strategy and yearly business plans are formulated to ensure that financial covenants can be met. Our securitised vehicle had a free cash flow debt service cover ratio at the year end of 1.5x, giving 27% headroom. Under our bank facility we had 94% headroom on the key net debt/EBITDA covenant.

Monitoring / assurance

We regularly monitor our performance against our financial covenants, including stress-testing. Working capital is carefully forecast, regularly reviewed by the finance teams and closely managed.

Risk

We are reliant on maintaining robust systems of internal control to deal accurately with the large numbers of transactions undertaken by the business and to ensure compliance with statutory obligations particularly with regard to taxation.

Potential impact

Inadequate internal control systems increase the risk of fraud being perpetrated against us. Non-compliance with statutory obligations or a material mis-statement in the reported results of the company could damage our reputation.

Mitigation

Our systems of internal control, more details of which appear on page [ ], include robust controls, appropriately qualified staff, segregation of duties and authority levels for expenditure and payments. Appropriate advice is taken to ensure relevant statutory compliance.

Monitoring / assurance

Regular management accounts are produced for each area and reviewed in detail, to enable irregularities to be exposed. There is a detailed external audit of our statutory accounts.

Risk

We operate 3 defined benefit pension schemes which must be funded to meet the required benefit payments. The value and funding of the schemes are subject to the risk of changes in life expectancy, actual and expected price inflation, changes in investment yields and future salary increases.

Potential impact

The difference in value between the schemes' assets and liabilities may vary, resulting in an increased deficit being recognised on our balance sheet. The volatility of this deficit makes longer term planning more difficult.

Mitigation

All the schemes are closed to new members and we have been consulting with members regarding closure of the schemes to future accrual, to reduce volatility.

Monitoring / assurance

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

Regulatory risks

Risk

Increasing public focus on issues such as binge drinking, underage drinking and the health impacts of drinking alcohol mean that there is the risk of further legislative changes in these areas, including additional taxation.

Potential Impact

Additional taxation or further changes to laws on the sale of alcohol could lead to both reduced revenue and increased costs across the group.

Mitigation

We engage actively with government to ensure that it appreciates that the safest and most responsible place to consume alcohol is in a well-managed licensed on-trade premises. 

Monitoring/assurance

The regulatory landscape is monitored on our behalf by public affairs advisers, so we remain aware of any potential changes which may adversely impact our business.

Risk

We are required to comply with a wide range of health & safety legislation, including in the areas of food safety and fire safety, across all parts of our business.

Potential impact

A major incident which causes serious illness, injury or even loss of life to one of our customers, employees or tenants could have a significant impact on our reputation.

Mitigation

We have a comprehensive range of formally documented policies and procedures in place to ensure compliance with current legislation and approved guidance in this area, as well as our own high standards. We have entered into a primary authority partnership with Reading Borough Council to validate our health & safety policies and they have rated our safety management systems as very good. A new programme in Pub Partners is designed to improve safety levels for new tenants. Safety measures are in place to ensure that product integrity is maintained and that all food and drink products are fully traceable.

Monitoring / assurance

We have a centrally managed system of compliance tracking (KPI's), which is validated by both internal and independent external audits carried out at all Retail sites to measure performance against certain strict health & safety standards including food safety and fire safety. Operational managers are regularly briefed on performance and remedial actions are tracked from the centre.

Operational and people risks

Risk

Given that we have some well known national brands it is vital to avoid poor service standards or non-compliance with brand standards. 

Potential Impact

Customers may stop visiting our sites or visit less frequently, leading to a loss of revenue and reputational damage.

Mitigation

We maintain tight controls to protect and enhance our reputation and brand values, alongside staff training, targeted investment programmes and mystery guest visits. Incident escalation and management systems are also in place.

Monitoring / assurance

Mystery guest scores are regularly measured and reviewed by the relevant executive teams in our Retail divisions.

Risk

We are reliant on information systems and technology for many aspects of our business.

Potential impact

A lengthy failure of any such systems could impact our ability to do business and cause reputational damage.

Mitigation

Our networks are protected by firewalls and anti-virus protection systems and back-up procedures are also in place. A business continuity plan is in place for critical business processes. We have access to an off-site disaster recovery facility in the event of a major issue with our head office or our systems.

Monitoring / assurance

The IT department constantly monitor threats to data protection by viruses, hacking and breach of access controls. The business continuity plan is also regularly reviewed and tested.

Risk

We are reliant on a number of key suppliers and third party distributors to supply our pubs and restaurants.

Potential impact

Interruption of supply or key supplier or distributor failure could over the longer term reduce our revenue or lead to increased costs if alternative arrangements are required.

Mitigation

Our key suppliers are expected to maintain disaster recovery plans. We also maintain back up plans in the event of the failure by or loss of a key supplier.

Monitoring / assurance

The financial stability of key suppliers that we regard as most at risk is monitored with the help of external advisers. Disaster recovery plans of suppliers are reviewed regularly and our own supply chain alternative plans tested.

Risk

An event may occur preventing us from producing, packaging and distributing our own beers 

Potential impact

Supply disruption could impact customer satisfaction and, in the longer term, lead to reduced revenue and profitability.

Mitigation 

Detailed risk management and mitigation plans exist in our internal production and distribution activities.

Monitoring / assurance

The risk mitigation plans are reviewed and tested regularly by the Brewing & Brands division.

Risk

We are reliant on the quality of our employees and our licensees.

Potential impact

A failure to attract, develop, retain and motivate the best employees at all levels of the organisation and the best tenants may mean that we are not able to execute our business plans and strategy.

Mitigation

We aim to recruit the best people and offer training and development programmes to ensure that we retain them. Remuneration packages are benchmarked to ensure that they remain competitive. The range of tenancy agreements, training programmes and support available is designed to attract and retain the best quality licensees.

Monitoring / assurance

Our annual employee engagement survey is used to obtain direct feedback from employees on a range of issues. Both staff and licensee turnover is measured and reviewed by relevant management teams.

Related party transactions

The following description of related party transactions is extracted from page 87 of the report and accounts.

"31 Related party disclosures

No transactions have been entered into with related parties during the period.

Greene King Finance plc is a special purpose entity set up to raise bond finance for the group, and as such is deemed a related party. The results of this entity have been consolidated.

Compensation of directors and other key management personnel of the group

Directors' interests in an employee share incentive plan

Details of the options held by executive members of the board of directors are included in the remuneration report. No options have been granted to the non-executive members of the board under this scheme."