Annual Financial Report

Risks and their impact

Mitigating actions and controls

Market and economic risks

Economic climate

The recent recession and continued uncertain outlook for the UK economy has affected consumer confidence and discretionary spending across both the retail and leisure industries. Delays in economic recovery or further challenges such as further duty increases could affect consumer expenditure, our Partners' businesses and Punch's revenue.

·; We carry out regular reviews of the impact of economic conditions on our budget and strategic plans.

·; We provided c.£1.5m per period to support our Partners during the difficult conditions last year resulting in 95% of our core estate pubs now being on a substantive agreement.

·; We continue to monitor the financial health of our Partners via a Partner Support Tool, together with analysis to highlight potential failures, and have launched new Partner Development Manager roles to help grow and diversify our Partners' businesses.

Property valuations

Fluctuations in the UK property market as well as the current uncertain market conditions could impact the value of Punch's property portfolio and our ability to dispose of pubs at an appropriate value.

·; We have conducted full estate reviews and regularly update these to allow us to assess the future strategy of pubs within the estate.

·; This has allowed us to invest where appropriate; to consider possible alternative use; or to dispose of those which no longer fit our future strategy.

·; We invested £42m on developing and improving the quality of our estate during the year.

·; We carry out an annual review for any indicators of impairment.

Increasing costs

Increases in any of our key supply costs due to availability of products, the economic climate or inflationary price increases is an ongoing risk to our business.

·; We have negotiated supplier contracts to protect us against significant increases in drink costs.

·; Careful cost control processes ensure that costs are budgeted, closely monitored and subject to appropriate authorisation.

Financial risks

Liquidity and covenant risk

Punch's capital structure is made up of debt, issued share capital and reserves. Secured loan notes make up the majority of our financing, with approximately 85% (August 2010: 90%) of the capital balance on these loan notes being repayable after more than five years. These borrowings are subject to financial covenants.

·; Cash flow forecasts are regularly produced to assist management in identifying liquidity requirements and are stress-tested for possible scenarios.

·; Cash balances are invested in short-term deposits such that they are readily available to settle short-term liabilities or fund capital additions.

·; Covenants are closely monitored and stress-tested to ensure we are able to generate sufficient returns to service our debt and meet our covenant requirements.

·; The securitised debt is monitored by a variety of measures which are reported to debt providers on a quarterly basis.

Interest rate risk

Punch is exposed to interest rate risk from loan notes and borrows at both fixed and floating rates of interest.

·; Punch employs derivative financial instruments such as interest rate swaps to generate the desired interest rate profile.

·; Punch has taken out derivative financial instruments such that 100% of all loans (August 2010: 100%) were either at fixed rate or were converted to fixed rate as a result of swap arrangements, reducing our exposure to changes in interest rates.

Pensions

Punch has a defined benefit pension scheme which must be funded to meet required benefit payments. The value and funding of the scheme is subject to risk of changes in life expectancy, actual and expected price inflation, changes in bond yields and future salary increases. The difference in value between scheme assets and scheme liabilities may vary resulting in an increased deficit (or reduced surplus) being recognised on our balance sheet.

·; The defined benefit pension scheme is closed to new members; and instead we operate defined contribution schemes for our employees.

·; We maintain a close relationship with the trustees of the pension scheme.

Internal financial control

Punch is committed to maintaining a robust internal control environment. A lack of control could result in financial fraud or material error in our financial statements.

·; Robust internal controls operate over all key processes including general controls such as segregation of duties and authorisation of contracts and expenditure.

·; The Internal Audit function reviews and reports on strengths and weaknesses in the internal control environment.

Operational and people risks

Change management

Punch is reliant on the successful implementation of change programmes such as Reaching for Growth to deliver both day-to-day operational improvements and our strategic plan.

·; Formal project management processes are used across the business to prepare project objectives and plans and to ensure progress is tracked and results measured.

·; Major projects are well communicated across the business so that a joined up approach is maintained.

·; Our Pathway to Partnership change programme is now largely complete, and the focus has moved onto Reaching for Growth.

Information systems, technology and security

Punch is reliant upon information systems and technology for many aspects of its business, which could cause damage if they were to fail for any length of time.

·; An incident management and business continuity plan is in place for critical business processes to ensure the business is able to continue operating in the event of a major incident.

·; The business has effectively tested these plans during the year and made further improvements to them.

·; We have an off-site disaster recovery facility if access to our support centre, or its systems, is affected.

Product quality

Punch is exposed to product quality risk in relation to drink which is

supplied to us and sold on to our Partners.

·; Safety measures are in place to ensure that product integrity is maintained and that drink products are fully traceable.

·; Our incident management plan is designed so that products can be recalled quickly if required.

Supply chain management

Punch Taverns places reliance on our key suppliers and distributors to ensure continuous supply of food, drink and other products into our pubs. Punch Taverns is exposed to the risk of interruption or failure of suppliers or distributors, resulting in our products not being delivered on time or to our required standards.

·; Punch has reviewed the disaster recovery and business continuity plans of our key distributors.

·; We monitor product quality closely and consider action which may be required to provide substitute products or suppliers if required.

People risks

Failure to recruit, train and successfully retain successful Partners for our leased pubs, talented managers and Team Players for our managed pubs, and high-calibre people for our support teams may impact the ability to deliver our strategic five-year plan and operational objectives.

·; Punch won 'Sunday Times 25 Best Big Companies to Work For 2011' status during the year.

·; We provide industry leading induction training and coaching programmes for our new Partners.

·; We have improved our succession planning at all levels to ensure we retain high calibre people.

·; We carry out an annual Employee Engagement Survey and regular listening groups to obtain direct feedback from our employees.

·; We have a formal remuneration strategy to ensure our teams are paid fairly and competitively.

Regulatory risks

Health and safety

A health and safety accident or incident could lead to serious illness, injury or even loss of life to one of our Partners, employees or visitors, or significantly impact Punch's reputation.

·; A health and safety management committee meets on a regular basis to consider all aspects of health and safety across Punch and to report to the Board of Directors on the status of health and safety.

·; We have formally documented and briefed health and safety policies for our support centre and field-based teams and carry out annual risk assessments in key areas.

Changes in legislation

Punch is subject to many different areas of regulation, many due to the high level of control over the sale of alcohol. Increasing focus in areas such as binge drinking, underage drinking, and health impacts over recent years also means that the Government may introduce further regulation which may significantly affect our business.

·; Punch works closely with our Partners and the rest of the industry to address the key issues facing the pub sector.

·; We actively participate in consultation processes and have attended consultation meetings for discussion of Rebalancing the Licensing Act.

·; We work closely with the BBPA and other industry bodies and have provided input into the Institute of Licensing's response to Rebalancing the Licensing Act.

·; We ensure that our training covers all aspects of licensing requirements and have due diligence in place to confirm that our pubs meet relevant licensing legislation.

·; Punch works closely with local Licensing Boards, to ensure individual pub licensing requirements are met and any issues are highlighted as soon as possible.

Stephen Billingham

Chairman

Roger Whiteside

Chief Executive Officer

Steve Dando

Finance Director

Mark Pain

Senior Independent Non-executive Director

Ian Fraser

Non-executive Director

Ian Dyson

Non-executive Director