Annual Report 2018 - Ei Group plc · strategic evolution Z Strategy has evolved into business as...

26212 12 December 2018 11:39 AM Proof 9 26212 12 December 2018 11:39 AM Proof 9

Ei Group plc3 Monkspath Hall Road Solihull West Midlands B90 4SJ

Tel: +44 (0) 121 272 5000 www.eigroupplc.com

ANNUAL REPORT AND ACCOUNTSfor the year ended 30 September 2018

26212 13 December 2018 9:59 am Proof 9

We 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

We are making good progress with our strategic evolution

Z Strategy has evolved into business as usual Z Proactive portfolio management creating and

releasing value Z Asset evaluation and optimisation process

operating well

We are creating value for our stakeholders

Z Highly disciplined and returns-driven capital allocation Z Actively reviewing asset monetisation to unlock

embedded value Z Cash generation will optimise returns for all stakeholders

Welcome to

OVER4,400pubs £3.6bn

Property assets

Our business model page 8

Our strategy page 10

Our market page 6

Our strategy page 10

Chief Executive’s review page 16

Our business model page 8

Financial review page 22

Corporate social responsibility page 26

£695mRevenue

Key performance indicators page 14

26212 13 December 2018 9:59 am Proof 9

1Stock code: EIG www.eigroupplc.com

STRATEGIC REPORT

Highlights

CONTENTS

STRATEGIC REPORTHighlights 1

At a glance 2

Chairman’s statement 4

Our market 6

Our business model 8

Our strategy 10

Key performance indicators 14

Chief Executive’s review 16

Financial review 22

Corporate social responsibility 26

Risks and uncertainties 34

GOVERNANCEBoard of Directors 40

Directors’ report 42

Governance report 46

Audit Committee report 51

Nomination Committee report 56

Directors’ remuneration report 58

Statement of directors’ responsibilities 83

ACCOUNTSGroup income statement 84

Group statement of comprehensive income 84

Balance sheets 85

Group statement of changes in equity 86

Company statement of changes in equity 88

Cash flow statements 89

Notes to the accounts 90

Independent auditor’s report 138

SHAREHOLDER INFORMATIONFive year record 147

Analysis of ordinary shareholders 147

Notice of Annual General Meeting 148

Explanatory notes to the Notice of Annual General Meeting 152

Appendix to the Notice of Annual General Meeting 155

Shareholder information 158

Net asset value per shareFurther growth

Underlying EBITDAIn line with expectations and assisted by a great summer for pubs

Underlying PBTGrowing profitability

Statutory PATImpacted by non-underlying finance costs of £6m (2017: £30m)

Underlying basic EPSStatutory basic EPS of 15.2p (2017: 11.2p)

£3.34

£287m

£72m

£122m

21.2p

• Annual estate valuation stable for third consecutive year

• Strong operating cash flows of £271m (2017: £261m) and disposal proceeds of £66m (2017: £100m) funded capital investment of £81m (2017: £80m) and debt reduction

• Sufficient available bank facilities to repay the £100.5m corporate bonds due in December 2018

• Net debt reduced to £2.0bn (2017: £2.1bn), equivalent to loan-to-value of 56%

• Announcement of a further £20m share buyback programme commencing in November 2018

(2017: £3.13)

(2017: £287m)

(2017: £54m)

(2017: £121m)

(2017: 20.5p)

33%

3%

0%

1%

7%


2 3Annual Report and Accounts for the year ended 30 September 2018 Stock code: EIGEi Group plc www.eigroupplc.com

STRATEGIC REPORT

At a glance

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

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

PUBLICAN PARTNERSHIPS

MANAGED

COMMERCIAL PROPERTIES

Our purpose…

Drives our vision…

Which is underpinned by our values

Our core leased and tenanted business

Value from pub operations

Our 100% owned and operated managed pubs which are traded in

two unbranded formats

Value from pub operations

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

Value from monetisation

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

Value from monetisation

Respect

Innovative

Commercial

Collaborative

Service-led

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.

3,718pubs(2017: 4,051 pubs)

Revenue

£516m(74% Group)

Revenue

£27m(4% Group)

Revenue

£152m(22% Group)

47pubs

(2017: 30 pubs)

412assets

(2017: 331 assets)

308pubs(2017: 226 pubs)

Average net income per pub £81,400 (2017: £79,600)

Return on investment (2017: 21%)



Net annualised rental income (2017: £23m)

Average site EBITDA £102,000 (2017: £96,000)

Average site EBITDA £214,000 (2017: £230,000)

Average netincome perproperty £72,300 (2017: £66,800)

UP

2.2%

UP

6.3%

DOWN

7.0%

UP

8.2%

To work in partnership with our publicans to develop

great pub businesses

To identify talented operators and enable them to create exceptionally

successful businesses that deliver strong financial results

To maximise the value of Group assets using our commercial

property expertise

To maximise earnings by investing in defined retail offers with

direct management control

LFL* growth

7.1%

LFL* growth

1.2%

LFL* growth

5.1%

Sales growth

Net income

Net income

19%

23%

21%

£29m

* Like-for-like



STRATEGIC REPORT

Chairman’s statement

2018 was a pivotal year for Ei Group. The strategy is now business as usual with strong performance across each of our operating models.”

Robert Walker Chairman

It is now three and a half years since the announcement of the Group’s five year strategy. This aimed to create a portfolio of businesses comprising a variety of operating models and trading styles, designed to optimise value from each of the Group’s pubs. These business models included fully managed, leased and tenanted, and free-of-tie commercial properties.

Execution of the strategy remains on target and in line with our original objectives, after taking account of adjustments to meet the rapidly changing market place in which we operate. In simple terms, the strategy is now business as usual.

Underlying EBITDA remained flat at £287 million, even after the disposal of 174 pubs during the year. Underlying profit before tax (PBT) was £122 million, compared to £121 million in 2017 and underlying earnings per share (EPS) was 21.2p versus 20.5p in 2017.

As a result of this good performance, we are announcing a further £20 million share buyback programme, commencing with immediate effect.

Within Ei Publican Partnerships, our majority leased and tenanted business, like-for-like net income per pub was up by 1.2%, with growth across all geographic regions. This is now the fifth successive year and twentieth uninterrupted quarter of like-for-like growth. This performance not only validates our strategy but is a testament to the strength of relationships that our operational teams have built with the vast majority of lessees and tenants. It also demonstrates the benefit of transferring examples of best practice from our experience in our other managed and joint venture businesses.

In our managed pubs we achieved like-for-like sales growth of 7.1%. These comprise 308 pubs trading as fully managed operations, together with another 47 trading as Managed Investments alongside 11 specialist partners. The strong investment returns we are achieving upon conversion of selected sites to Managed Operations have been maintained and we are confident that we will continue to grow long-term incremental earnings from transferring additional selected pubs from our leased and tenanted estate.

Our free-of-tie, rent-only Commercial Properties business now comprises 412 properties. Average net income per property rose 8.2% in the last year and now stands at £72,300.

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

Equally important, the Group has a long-term, secure, flexible and tax-efficient finance structure comprising bank borrowings, securitised notes and corporate bonds. In 2018 a number of initiatives were successfully undertaken to provide greater flexibility in executing the Group’s strategy.

In July 2018, holders of a portion of Unique securitised notes voted to support our proposals that allow the Group greater flexibility in disposing of non-tied pubs out of the Unique estate and in September 2018, we increased the size of our bank revolving credit facilities to £150 million, extending the facilities to August 2022. We also have a £50 million term loan which

will provide additional funds, if required, to settle our outstanding £100.5 million corporate bonds due in December 2018.

Alongside these finance initiatives, we appointed Rothschild & Co to help us explore various routes to optimise value from our large commercial property portfolio. This may include the disposal of all or part of the portfolio. Should no material monetisation occur beforehand, we would expect our Commercial Properties business to grow to around 500 pubs by September 2020.

Once again, I would like to thank all of our colleagues across our businesses for their hard work, commitment and enthusiasm during this year, which has seen considerable change in the way we run our businesses. Regular colleague engagement surveys continue to show a significantly high level of engagement and support for our strategy. We are fortunate to have such a dedicated group of colleagues.

In July, we announced David Maloney’s retirement from the Board after ten years’ service, most of it as Senior Independent Director and Chairman of the Audit Committee. The Board is very grateful to David for the immense time, commitment and wisdom he brought to his roles during these years. At the same time, and replacing David, we announced the appointment of Jane Bednall to the Board. Jane brings extensive experience in consumer understanding to the Board which will be valuable as the business develops in the future.

A final word about Brexit. 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.

At the end of the day, ours is a self-help story.

R M Walker Chairman

19 November 2018



STRATEGIC REPORT

Our marketOur pubs form part of the UK’s top leisure activity, the out-of-home eating and drinking market, worth £89 billion1 per annum. Within the UK there are over 43,000 pubs and bars with annual sales of £22.5 billion, up 1.6% year on year 2.

Drink-led pubs sales up 1.6% since 20172

No. of licensed premises declined 2.5%

since 20177

2.1% growth in food-led pubs (last five years)7

17.2% decline in wet-led pubs (last five years)7

62% of consumers proactively lead a healthier lifestyle8

80% of consumers claim they are open to trying new and different products, services and

experiences9

The economic climate is challenging, consumer confidence remains negative3, and business confidence is subdued by Brexit uncertainty 4. RPI in August 2018 was the highest in six months at 3.5%5 and CPI was 2.7% whilst wage growth was 2.6%6.

Over the past couple of years the industry has been hit with additional cost headwinds in the form of National Living Wage, apprenticeship levy, sugar tax, utility tax and labour shortages, resulting in a number of recent and high profile compulsory voluntary arrangements in the casual dining market.

However whilst unemployment remains low and consumer habits are relatively stable, the frequency of eating and drinking out remains unchanged in five years2. Consumers want high quality for good value, they are discerning and demanding as competition, information and technology have raised expectations.

TrendsDrink-led pubs have again found their relevancy in the market place with their sales growing more quickly than the total eating out market for the first time since 2008 (1.6% vs.1.5%)2 and total pub outlet numbers are predicted to stabilise in 2021 and return to growth from 20232. The pubs that remain following this period of rationalisation are in better shape, more professionally managed and more able to adapt to current consumer trends.

Managed pubs and independents grew both in sales and number in the last year, with food pubs accounting for the greatest percentage of the eating out market2.

It remains a challenging consumer market, with no room for complacency as premium pubs are taking share from value pubs, reducing their market share from 72% to 67%2 and innovation, product development and professionalism are required to succeed.

OpportunitiesContraction of drink-focused outlets will result in a more sustainable wet-led market for those businesses with the most relevant retail offer. Food remains a growth market and therefore an opportunity.

TrendsAs consumers are becoming more discerning, their pub visits have reduced year on year while expectations have increased. Key trends they are demanding from visits include: value and quality; fun and play; localisation; balanced choices; socially conscious consuming; and technology and connectivity.

Operators, in response, are providing a better experience as evidenced by Net Promoter Scores (a measure of loyalty taken from consumers ranking the likelihood of recommending) which have increased in the year2 and businesses are actively investing in their people through recruitment, training, engagement and retention4 in order to support this.

The sales growth seen by the sector is driven by spend rather than visits, with discounts and promotions appealing to consumers and encouraging the higher spend10.

OpportunitiesRecent growth in pub visits by 18-24 year olds and families, provides opportunity to expand offers and drive additional occasions.

Event driven experiences such as sport and drink/food festivals tap into consumers’ desires for value and quality, fun and play, and clever use of technology will be integral to connecting and engaging.

INDUSTRY CONSUMER

KEY FACTORS AFFECTING THE MARKET PLACE

49% of consumers who drink out premiumised

their choice8

28% growth in low or no alcohol drinks8

6% increase in consumers stating quality of drink is

important 8

90% adults visit the pub for food2

Food retail selling price increased

by 2.7% compared with inflation at 3%2

Through our strategy of asset optimisation we have identified and continue to move our pubs into the most relevant retail concepts within our operating models. Our managed pubs estate continues to grow, as does the calibre of our publicans through targeted recruitment.

To meet the needs of our consumers, we have a localised and creative trading approach to enable the best operating style for each outlet. This includes consideration of segment, retail offer, publican or manager and access to a portfolio of products to support local demand.

We have a suite of products and applications that provide support through insight, recommendations and solutions specific to local demographic and demand, enabling the pub to build a sophisticated customer-centric retail offer.

TrendsDrink volume has decreased, whilst sales value has increased across all drink categories with the exception of spirits, which has seen both volume and value growth11. The premiumisation across the sector continues with one in three drink serves being premium, and premium beer volume growth outperforming standard and traditional.

Consumers continue to seek authenticity with their choices; provenance, localisation, small batch and craft continue to deliver experiences that are not easily replicated at home. They also seek balanced choices with 14% of consumers not drinking alcohol. This market is expected to grow at pace, as seen in the craft beer movement.

OpportunitiesA drinks product range with depth and interest that allows consumers to premiumise, customise and explore will attract, whilst quality assurance, accreditations and a knowledgeable team will further enhance experience and grow sales.

Wet-led pubs are more resilient to the challenges in the current market than higher cost-base food-led outlets.

TrendsThe eating out market continues to grow, and the pub remains the most popular eating out channel with food destination and family dining pubs predicted to continue growth into 20242.

Value and informal dining have been relatively protected against restrictions on discretionary consumer spending and growth in food outlet delivery channels have not impacted the out-of-home eating market. Although dinner occasions have seen some decline, growth has been seen in breakfast and food on the go.

Food trends are mirroring broader trends with key themes being local and fresh, balanced choices and sustainability.

OpportunitiesFood offers a broader trading platform and as informal social dining is on the rise, access into the market does not require significant investment but must address consumer preferences and demands through range, quality, value and accessibility.

DRINK FOOD

1 MCA Eating Out Market Report 20182 MCA UK Pub Market Report 20183 GFK Consumer Confidence Index September 20184 CGA Fourth Business Confidence Survey 2018

5 ONS RPI August 20186 ONS CPI August 20187 CGA Market Growth Monitor September 20188 CGA Brand Track 2018

9 MCA Insight June 201810 NPD Pub Tracker 201811 CGA OPMS data to May 2018

Sources

EIG DIFFERENTIATORS EIG RESPONSE

Diverse portfolio of properties

Trading formats that cover multiple consumer markets (value to premium; food to drink)

Range of operating models and offers

Returns-based investment strategy to drive quality

Exceptional levels of service and support to help with cost reduction and business development solutions

Commitment to sustainability

Read more about: Our business model on page 8

• Increased costs• Subdued confidence• Increased quality competition• Changing consumer expectations



STRATEGIC REPORT

Our business model

We have a flexible business model optimised to leverage market opportunities

OUR ASSETS AND CAPITAL STRUCTURE ENABLE OUR OPERATING MODELS

We have over 4,400 properties geographically

spread across the UK

Our total property assets are valued at £3.6 billion

Supported by our efficient capital structure

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

> 95% freehold

> High quality

> Significant buying power

> Returns-based capital investment programme

> Flexibility to respond to a changing environment

> Provides the optionality with which to optimise returns and unlock the

embedded value

> Efficient portfolio manager

KEY DIFFERENTIATORS:


Read more about: Our strategy page 10 Financial review page 22Balance sheet page 85

Read more about: At a glance page 2Our strategy page 10

PROVIDE OUR OFFER CREATING VALUE FOR OUR STAKEHOLDERS

AND SUPPORT OUR PEOPLE

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

We partner with those who are passionate about pubs keeping shared

success at the heart of our business

> Focused on maximising value from each property

> Wet-led model

> Buying power and long-term supply arrangements provide beneficial

access to the drinks market

> High proportion of prime and secondary locations

> Exceptional levels of service and support

> Flexibility in more challenging times



SHAREHOLDERS

COMMUNITIES

PUBLICANS

EMPLOYEES

Read more about: Our market page 6 Our strategy page 10Income statement page 84

Read more about: Our market page 6 Our strategy page 10Chief Executive’s review page 16

Underlying EPS growth of 3%Net asset value of £3.34 per share

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

15 million adults visit pubs weekly

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

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

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

We directly employ over 1,800 people, but in turn, our 4,400 pubs employ many more thousands of people across the country.

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



STRATEGIC REPORT

Our strategyOur overall strategic objective is to optimise value creation for every asset in our portfolio to drive returns to shareholdersAssets and capital structureWe have a high quality and well invested asset portfolio with a total property asset value of £3.6 billion and an efficient and improving loan to value (LTV) of 56%.

We have 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 underperforming, overlapping and ready to sell assets, delivering excess cash flow for us to utilise to enable investment, reduce debt and return value to shareholders.

Underpinning our strategic evolution, our capital strategy aims to utilise excess cash to optimise returns.

Our traditional leased and tenanted pub business model has successfully transformed into a multi-model operation providing a dynamic response to market and regulatory developments. The transition of assets between operating models is now normal operational execution.

EIPP remains our core business. We pride ourselves on our ability to attract and retain new and experienced publicans to run our pubs.

Focusing on our core strength of wet-led pubs and investing where returns are more certain. Utilising our own expertise and learnings from sharing best practice in our managed operations, we continually reassess our offer. Embracing the Pubs Code and MRO option we are focused on optimising the profile of tenancy and lease agreements.

EIMO represents our 100% owned and operated managed pubs which are traded in two unbranded formats. The Craft Union format now 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 a proven pre-existing retail offer and consumer occasion.

We are continuing to work across the business to identify appropriate conversion opportunities whilst constantly learning from experiences in the pubs already converted and sharing those learnings to improve conversion returns and improve operating efficiencies across both Bermondsey Pub Company and Craft Union.

Pubs with significant upside potential needing a specialist offering and operator in order to achieve optimum value are taken into EIMI where we partner with some of the best operators in the industry.

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. Learnings from our expert partners are shared across the business.

EICP 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.

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.

Our capital allocation framework uses a returns-based approach to evaluate the best use of cash to create a sustainable capital structure and regular returns to shareholders, balancing the following strategic objectives:

BUILD – OPERATING MODELS EXECUTE – NEAR-TERM STRATEGY

Whilst we expect the size of our estate to gradually reduce, we will endeavour to continually improve its quality.

Like-for-like net incomeAverage net income per pub

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

Number of managed sites

Like-for-like sales

Pub level EBITDA Free cash flow

Net asset value

Earnings per shareWe have 11 partners and plan to selectively grow the number of partners with whom we are operating ensuring we maintain a broad mix of operating styles and geographical coverage. Our primary focus is to grow the scale of our existing partners whilst enhancing the quality of trading operations with the strategic intention of monetising their value at the appropriate time.

Number of managed sites

Like-for-like sales

Pub level EBITDA

We will explore options including a full or partial sale of the Commercial Properties business in order to monetise the optimised asset value at the appropriate time.

Number of Commercial Properties sites

Average net income per property

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 workforce 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

Further we appreciate that 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.

MONETISE – OPTIMISE RETURNS FROM EACH ASSET DRIVING RETURNS – DRIVING GROWTH DELIVERING

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

LeverageNet asset value per share

7.1x

£3.34

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

Capital spend on growth driving schemes

Return on investment (ROI)

60%

22%

3 Returns to shareholdersWhilst 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 £20m

Read more in: Key performance indicators on pages 14 and 15



STRATEGIC REPORT

Our strategy

As our transformational strategy to develop optionality across the estate becomes embedded into business as usual we have continued to review how we can ensure optimum value from our assets.

For our Publican Partnerships and Managed Operations estates we believe that by operating the pub businesses, either directly or through our publicans, and continually evolving our retail offer in line with market developments and consumer demand, we will deliver the greatest value to our stakeholders.

In our Commercial Properties and Managed Investments estates the route to optimum value creation is most likely through monetisation. In Commercial Properties, we endeavour to attract a strong covenant for each of our properties such that the portfolio is desirable and could be monetised at the appropriate time. In our Managed Investments business we look to partner with specialist retailers who can help us access greater retail value through the operation of the pub, which we are then well-placed to monetise whilst retaining the freehold property.

The diagrams below show the profile of the estate at 30 September 2018 together with our expectation for September 2020:

(3,718)

Premium

Value

Food-ledWet-led

Premium

Value

Food-ledWet-led

(412)

(47)

(54)

Bermondsey

(254)

Craft Union

(c.500)

(c.100)

(c.3,050)

Pub operationsGrowing value through investment and asset optimisation

Asset managementCreation of value through monetisation

(c.500)

As at 30 September 2018

Indicative expectations for 2020

The Brook House

The Brook House, Hayes, reopened in June following a major investment. Our operator, who has always lived in Hayes, previously worked at the pub and has watched generations of his family use the pub. He is committed to employing people from the local community who play a vital role in developing and promoting the pub as a thriving local hub. Whilst the character and tradition of the pub has been retained, it has now been comprehensively refurbished. In typical Craft Union style, this included installing 15 large TVs around the pub showing Sky Sports and BT Sport. These proved especially popular during the recent World Cup. A state-of-the-art sound system also means that the pub can now regularly host evening music entertainment for the community.

Alongside the investment the formation of pool, dominoes, football and darts teams have provided a reason for customers of all ages to come together and enjoy being part of a local team. Other good opportunities for the community to get together are the weekly meat and beer raffles and bingo afternoons.

There was an official opening party in July, which also raised money for a local charity close to the heart of many of the pub’s customers, The Brain Tumour Charity, through an auction and raffle, and events continue to be hosted at the pub to increase awareness of this charity.

The Metropolitan

During the current year Bermondsey have looked to refine their operating model and their support functions providing the ability to offer a ‘turnkey’ approach for Managed Operations. One such example of this is The Metropolitan in Manchester.

Bermondsey took over a successful business that provided an exceptional retail offer which clearly met the needs of the local consumer market. The challenge for Bermondsey was to ensure that the existing outstanding team were well supported to ensure their high standards could be maintained.

In terms of enhancing the business, Bermondsey upgraded the kitchen equipment, was able to use its larger buying power to reduce the costs of operating the business whilst enhancing the employee benefits. The customers also benefited through the introduction of new offers to drive loyalty.

Bermondsey retained the existing Metropolitan team, both front and back of house, and most crucially for continuity, the management. Now operating within Bermondsey’s policies, the pub is being closely managed by the manager alongside the local Bermondsey support team. The key to its success has been continuity for the guest in service, quality and experience.

STRATEGY IN ACTION

STRATEGY IN ACTION



STRATEGIC REPORT

Key performance indicators

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 and also our wider employee population.

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

Read more in:• Highlights • Financial review • Directors’ remuneration report

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

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

Read more in:• Financial review • 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

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

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

Net debt Leverage Interest cover

Underlying EPS Free cash flow ROCE Like-for-like net income growth Capital spend on growth driving initiatives

Returns on investment

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

Read more in:

• Financial review

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 23 of the financial statements

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 23 of the financial statements

Number of trading properties Capital allocation Net asset value per share

Measures the number of trading properties in each business unit.

Read more in:• At a glance • Chief Executive’s review • Directors’ remuneration report

Measures the allocation of free cash to improving leverage (through purchase and cancellation of bonds on the open market) and returns to shareholders.

Read more in: • Highlights • Chief Executive’s review

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

Investment and disposal

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

Read more in: • Highlights • Chief Executive’s review

Colleague engagement index

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

BUSINESS PERFORMANCE KPIs STRATEGIC DEVELOPMENT KPIs CAPITAL STRUCTURE KPIs

Accordingly they have been grouped into:

21.2p20.5p19.6p

2017 20182016

2016: £121m*

2018:£128m

2017:£112m

2016:7.6%

2018:7.6%

2017:7.6%

21% 22%22%

15

20

25

2017 201820162017 20182016

57% 60% 60% 1.2%

2.3%2.1%

2017 20182016

£2.0bn£2.1bn£2.2bn

2017 20182016

2016:7.5×

2018:7.1×

2017:7.4×

2016:1.9 ×

2018:2.0×

2017:1.9 ×

3,718

PUBLICAN PARTNERSHIPS

2017: 4,0512016: 4,470

412

COMMERCIAL PROPERTIES

2017: 3312016: 273

254CRAFT UNION

2017: 1782016: 71

54BERMONDSEY

2017: 482016: 28

47

MANAGED INVESTMENTS

2017: 302016: 8

£3.34£3.13£2.96

2017 20182016

Bonds/£mShares/£m

20

20172016 2018

10 10

15

5

80

100

81

66

2017 20182016

74

98Disposals/£mCapex/£m

2017 20182016

81.1%82.1% 83.3%

* The result for 2016 also excludes expenditure associated with capital structure review.

See at a glance on pages 2 and 3 for KPIs relating to the Group’s business units

BUSINESS PERFORMANCE

STRATEGIC DEVELOPMENT

CAPITAL STRUCTURE



STRATEGIC REPORT

Chief Executive’s review

2018 has been a notable year for the Group as the strategic plan we launched in 2015 has evolved and matured to the extent that our implementation of the strategy is now business as usual.”

Simon Townsend Chief Executive Officer

OverviewWe are pleased to report our preliminary results for the year ended 30 September 2018, the third complete financial year following the launch of the Group’s new strategy in May 2015. We have delivered underlying EBITDA of £287 million, in line with the prior year, despite the continuation of planned asset disposals. Underlying profit before taxation was £122 million, up £1 million on the prior year as lower interest costs, resulting from reduced levels of debt, have offset higher depreciation charges.

The Group has made 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 include Managed Operations that are 100% owned by the Group and Managed Investments that are joint ventures with experienced retail partners.

As our business has evolved since we launched our new strategy, we have modified the execution of that strategy, reflecting on our experiences to date and also taking account of the rapidly changing marketplace in which we operate. At the same time as building a substantial managed business which comprised 355 outlets at 30 September 2018, with the necessary skills and infrastructure to operate such a business successfully and efficiently, we have grown a high quality, diversified commercial property business comprising 412 sites, predominantly pubs and restaurants but also including a variety of other commercial and residential uses. The Group has continued to optimise both its organisational structure and the deployment of resources in order to accommodate such a transformation, as assets have transferred out of the leased and tenanted estate into the managed and commercial property estates.

Against this background, it is testament to the skill and professionalism of our operational teams in the Publican Partnerships business, and the strength of relationships that they have built with the vast majority of lessees and tenants, that we have continued to deliver growth in like-for-like net income across the estate throughout the financial year. In addition to the transition of 180 sites into alternative operating models, the Publican Partnerships team have also accommodated the ongoing complexity of the Pubs Code Regulations 2016 (the “Pubs Code”) which came into effect in July 2016 and the Market Rent Only (MRO) option that it provides, whilst at the same time deploying capital into growth opportunities across the estate and delivering a substantial range of services and support to our publicans.

As our managed businesses grow in scale, diversity and geographic reach, delivering increased earnings to the Group, we are able to bring more examples of best practice to bear in our leased and tenanted pub business and utilise our purchasing scale to greater effect to help our publicans grow their sales and reduce their costs. By adding operational value in this way, and by deploying the Group’s capital to drive earnings growth, we will continue to create sustainable value in our two primary businesses of leased and tenanted pubs and wholly-owned Managed Operations.

Separately, through the progressive transfer of selected assets to commercial property lease agreements, we are unlocking the embedded value that resides in such properties. Our ability thereafter to add further value to the portfolio is limited, to the extent that the potential disposal of some, or all, of the portfolio is likely to realise best value for shareholders. Similarly, we have built our Managed Investments joint ventures specifically to realise value in selected sites to a much greater extent than would be achievable under our own Managed Operations, with a clear objective to monetise the value of those businesses when appropriate. We anticipate that, over time, the Group will realise proceeds which may then be deployed to create further value through repayment of debt, investment in our retained businesses or returns to shareholders.

The Milk House

From derelict pub to bustling hub, The Milk House has undergone quite the transformation in the past five years. Situated in Sissinghurst, one of the most picturesque corners of Kent, The Milk House is a village pub at the heart of the community. A former 16th century hall house and then a coaching inn, it boasts timber beams and a Tudor fireplace.

The Milk House is renowned for welcoming everyone; from muddy dogs, playful toddlers, cyclists, ramblers or even just a group of friends meeting for pizzas and a drink. Having such a large outdoor area allows for everyone to come together and the huge, bespoke table in the middle of the terrace allows up to 40 guests to dine together.

The pub always hosts an Italian event to herald the arrival of summer and the opening of their pizza oven for the season. They also use the large terrace in the summer to host the annual music festival ‘Milk Fest’ where a number of local musicians and performers are invited to take part. Last year saw guests enjoy a BBQ and garden games, whilst younger guests were treated to a bouncy castle and face painting.

There is always something for everyone at the pub and as well as hosting fairs and a number of live music events, they have even held a charity art auction which raised £15,500 for Save the Children.

STRATEGY IN ACTION

Publican Partnerships Publican Partnerships is the trading name for our tied leased and tenanted business which remains the largest part of our Group. Publican Partnerships contributed £307 million (2017: £325 million) to the underlying EBITDA of the Group reported in the year.

As at 30 September 2018, we had 3,718 (2017: 4,051) pubs trading within the leased and tenanted estate with average net income per pub growing by 2.3% to £81,400 (2017: £79,600). The success of the England football team in the FIFA World Cup combined with some prolonged periods of good weather resulted in a great summer for pubs and provided us with an estimated £2 million incremental benefit to income. We delivered like-for-like net income growth of 1.2% (2017: 2.3%) for the full year with our Northern estate sustaining the positive momentum that was achieved last year, with further growth (income up 0.5%), while we maintained our like-for-like net income growth in the Midlands (income up 0.9%) and delivered strong growth in the South (income up 1.6%).

Like-for-like net income growth in the leased and tenanted business has been maintained through the great work of our publicans supplemented by our business enhancing support and our desire to invest capital alongside the best publicans to improve the trading performance by enhancing the retail offer. In the year to 30 September 2018 we invested £19 million (2017: £20 million) in growth-orientated schemes across 322 (2017: 351) tied agreements and have delivered an average pre-tax return on investment (ROI) of 19% (2017: 21%).

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 28 Pub Principle Guides, including such business areas as product range, pricing, social

media and GDPR readiness, and our highly successful “eilive” roadshows saw an increase in number of publicans attending year on year. In the year we launched a new online ordering platform, and almost half of our publicans order a sizeable proportion of their weekly drinks requirement using this service.

Location

No. of trading pubs at

30 September 2018

Net income FY18

£m

% of total net income

FY18

Net income FY17

£m

Net income change

FY18%

North 1,031 78.2 26 77.8 0.5Midlands 746 55.0 18 54.5 0.9South 1,941 169.5 56 166.9 1.6Total 3,718 302.7 100 299.2 1.2



STRATEGIC REPORT


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 be facing increased inflationary pressures. Despite such external pressures there has been no material change in the number of unexpected business failures with 83, or 1.8% of the estate, (2017: 61, or 1.3% of the estate) suffering such failure in the period. Where appropriate we continue to provide direct financial assistance to tied publicans and this cost remains stable at £4 million in the year (2017: £4 million).

We have embraced the requirements of the Pubs Code and we have not seen a material impact on our financial results from its implementation. From the date of its introduction to 30 September 2018, there were 1,194 rent review or agreement renewal events which could potentially have triggered an MRO request. As required under the Pubs Code, we issued 310 MRO offers in response to requests by publicans of which 168 have been concluded by way of mutually agreed tied deals and 27 have resulted in new mutually agreed free-of-tie terms. In addition, three pubs have been sold, 16 leases have been repurchased from the occupational tenant and five claims have been cancelled by the tenant, with the balance of 91 not yet concluded. Of these, 54 have been referred to the Pubs Code Adjudicator for determination. It remains our working assumption that the majority of those cases which have been referred to the Adjudicator will ultimately lead to new free-of-tie agreements being granted.

For the 1,194 pubs referred to above there are 894 which are still operated by the same publican on either tied or

new free-of-tie agreements and in the year to 30 September 2018 these pubs delivered like-for-like net income growth of 0.2% compared to the prior period. The movement in our income for this group of pubs has not been as strong as the like-for-like net income growth of 1.2% achieved for the total estate reflecting, in part, the stronger negotiating position for publicans which the Pubs Code sets out to achieve.

We have reduced the number of longer-term leases and increased the proportion of our tied business operating under shorter-term tenancy agreements of up to five years in length. Since the concept of MRO agreements was first announced in November 2014 we have reduced the number of long-term agreements from 3,035 at that time to 1,804 as at 30 September 2018.

Managed Pubs Our largely wet-led managed pubs contributed £28 million (2017: £13 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 7.1%. We are operating a significant managed house business and remain pleased with the progress made to date.

The current level of managed house conversions reflects the profile of opportunities that arise and represents an efficient transition pipeline. As such, looking forward, we expect to maintain a similar level of asset transition, converting in the region of 110-125 pubs per annum to managed formats, which will deliver approximately 600 managed pubs by 30 September 2020 and we expect conversions to continue beyond 2020.

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. While we expect to selectively grow the number of partners with whom we are operating, 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 2018, we had 47 pubs (2017: 30) trading with a total of 11 partners and we expect to add a further 20-25 pubs in the current financial year.

As at 30 September 2018, we had 27 (2017: 13) pubs operating within our Managed Investments business that had been invested in and traded for more than six months and these pubs to that date generated average annualised site EBITDA of £214,000 (2017: £230,000), from an average site capital investment of £392,000 (2017: £530,000), which delivered an ROI, after the

relevant partner’s minority interest, of 21% (2017: 17%). As we evolve and grow the Managed Investments business we expect the average capital investment to be in the region of £400,000 to £500,000 with average site EBITDA to be in the region of £175,000 to £225,000, which we expect to continue to deliver an ROI in excess of 20%.

Profile of pubs under management:

Actual as at

30 September 2017

Actual as at

30 September 2018

Indicative as at

30 September2020

Managed Operations 226 308 500Managed Investments 30 47 100Total Managed Pubs 256 355 600

Managed Operations: Our Managed Operations business represents our 100% owned managed pubs which are traded in two unbranded formats. The Craft Union format now 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 2018, we operated 308 pubs within Managed Operations (2017: 226) and we expect to add in the region of 90-100 further pubs in the current financial year.

As at 30 September 2018, we had 232 (2017: 109) 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 £102,000 (2017: £96,000) from an average capital investment of £154,000 (2017: £154,000), which delivered an ROI of 23% (2017: 25%). As the estate matures we would expect our Managed Operations sites to continue to generate average site EBITDA in the region of £100,000 to £110,000. After an average capital investment in the region of £150,000, we expect to continue to deliver an ROI in excess of 20%.

The Princess Victoria

The Princess Victoria has a rich and wonderful history, being one of the original gin palaces built in 1829. It was also once owned by Richard Branson and was where Phil Collins filmed his video for the classic Sussudio.

Under our Managed Investment partnership Six Cheers (a partnership with Three Cheers Pub Co), the Group had the managed business skills in its armoury to be able to take control of this iconic pub after it closed suddenly.

It has since undergone an extensive refurbishment to become a truly beautiful public house, and in 2018 was named by Time Out Magazine as the Most Loved Pub in Shepherds Bush. The most important aspect of this accolade being the fact it was led by nominations from the community.

The handsome horseshoe bar offers over 100 artisan and big name gins, 40 craft beers and real ales plus an excellent wine list. There is also a stunning dining room, striking private party room as well as a new front terrace and rear courtyard garden.

Food focuses on the best quality ingredients using small producers from across the British Isles. Chicken and pork are free range, beef is aged in-house and fish is sourced sustainably from English day boats off the south coast.

In June 2018, further investment has created five luxurious bedrooms now located on the top floor. The boutique rooms are individually designed, named after classic gin cocktails and feature super king, king or twin beds, bespoke gin inspired artwork, Egyptian cotton linen, smart HD TV, Nespresso machine, black-out blinds and mini-fridge.

STRATEGY IN ACTION



STRATEGIC REPORT


Commercial Properties Our Commercial Properties division contributed £27 million (2017: £21 million) to the underlying EBITDA of the Group reported in the year, with the average net income per property growing by 8.2% to £72,300 (2017: £66,800). Properties that traded as commercial properties throughout both the current year and the prior year delivered a strong like-for-like net income growth of 5.1% (2017: 1.4%).

The scale of the Commercial Properties division continues to grow as we transfer assets, predominately from our leased and tenanted business, in order to optimise value. As at 30 September 2018 we had 412 commercial properties (2017: 331), the vast majority of which trade as pubs on a free-of-tie basis. The underlying quality of the commercial property estate continues to improve, evidenced by the average annualised rental income per property increasing to £71,000 (2017: £69,000).

The expansion of our high quality commercial property portfolio will continue through open market negotiations with exceptional operators who offer good covenant strength, running highly profitable businesses in well-located properties.

Reflecting our value-led approach we have recently appointed Rothschild & Co to assist us to explore various possible routes to optimise value from this portfolio. This may include the disposal of all or part of the portfolio. We have received indications of interest to acquire the portfolio from a number of parties and if we were to reach agreement to sell all or a substantial part of the portfolio the sale would be conditional on shareholder approval. However, there can be no certainty at this time that a sale of all or part of the portfolio will be completed. Should no material monetisation occur beforehand, we would expect our commercial property business to grow to be in the region of 500 assets by September 2020.

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.

Notwithstanding the current uncertainty which prevails across the UK, and the expectation of rising input costs, the underlying quality, diversity and resilience of our leased and tenanted and wet-led managed estate, combined with our ongoing investment and support, give us confidence that we can continue to deliver sustainable growth in like-for-like net income for the full year in our Publican Partnerships and Commercial Properties businesses, and like-for-like sales growth for the full year in our expanding managed house businesses.

W S TownsendChief Executive Officer

19 November 2018

Hickory’s

This year Ei Commercial Properties further strengthened its relationship with barbecue restaurant chain Hickory’s Smokehouse. The deal involved a major investment of over £1 million in the former Pageant pub in Southport and saw it converted to become one of nine restaurants in their portfolio, which also includes another Ei Commercial Properties site in Rhos-on-Sea.

With the aim of maximising value using our commercial property expertise and partnering with high-quality operators we were able to secure a new commercial lease with a tenant prepared to invest significantly in the asset to deliver the right proposition for the benefit of the local community. We are proactively working with the team at Hickory’s to identify other potential sites across our estate for future projects.

Hickory’s Chief Executive Neil McDonnell said “We are absolutely delighted to have reached agreement with Ei Commercial Properties on this site. It was originally marketed as a tied tenancy but they were flexible in their discussions, which enabled us to agree a different approach and make a significant investment into this site for the benefit of our customers. The new site has had a very positive response from the local community in the early days of trading.”

STRATEGY IN ACTION



STRATEGIC REPORT

Financial review

We plan to continue to reduce the level of our outstanding debt towards our medium-term leverage targets of around 6.0 times net debt to EBITDA.”

Neil SmithChief Financial Officer

Underlying 30 September

2018 £m

Underlying 30 September

2017 £m

Revenue 695 648Operating costs before depreciation and amortisation (408) (361)EBITDA 287 287Profit before tax 122 121Earnings per share 21.2p 20.5p

Cash flow Net cash flow from operating activities at £271 million (2017: £261 million), was higher than the prior year due primarily to tax payments in the current year being £7 million lower than the prior year following repayments from HMRC in respect of prior year overpayments and capital allowance claims.

Net cash flow from investing activities created an outflow of £15 million (2017: £20 million inflow). We reinvested our net disposal proceeds into capital investment in the estate, with the net proceeds received from disposals of £66 million (2017: £100 million) partially funding the £81 million (2017: £80 million) invested in the year. Absent material monetisation of our commercial property portfolio, we expect our disposal proceeds for the coming year to be in the region of £60 million.

Total capital investment in the year was £81 million (2017: £80 million), of which 60% (2017: 60%) was directed towards income growth opportunities. We target an ROI in excess of 15% on our growth-oriented capital expenditure and have achieved an average ROI of 22% (2017: 20%) on all such schemes delivered over the last twelve months. We anticipate the total capital investment for the coming year will be in the region of £75 to £80 million.

Financing cash flows of £249 million (2017: £275 million), primarily reflect interest paid of £143 million (2017: £149 million), net loan repayments of £66 million (2017: £77 million), net share repurchases of £21 million (2017: £16 million), bond purchases of £5 million (2017: £nil) and refinancing costs of £14 million (2017: £33 million).

Capital allocationWe generate significant cash flows from trading activities supplemented by the proceeds of disposals, predominantly of under-performing assets. We have established a returns-based approach to the utilisation of our future cash flows. We plan to continue to reduce the level of our outstanding debt towards our medium-term leverage targets 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 capital allocation framework ensures that all priority calls upon cash flows are satisfied, including corporation tax, interest, scheduled debt amortisation and other debt refinancing objectives, followed by on-going investment in our business. We are committed to gradually reducing our leverage over the medium-term and, assuming we are on track to satisfy this objective, then any “excess” cash flow can be assessed for alternative use including, in particular, the return of capital to shareholders.

We continually review the optimal use of excess cash flow and in November 2017 we determined that the best use of £20 million of excess cash flow expected to be generated in the financial year to September 2018 was to fund a share buyback programme. This programme commenced on 21 November 2017 and was completed on 22 March 2018 with some 15 million shares in EIG having been purchased and cancelled at an average price of £1.32.

Looking forward the Board has in place sufficient bank facilities to repay the £100.5 million corporate bonds due on 6 December 2018 and expects the business to generate at least a further £20 million of excess cash flow in the current financial year. Taking this into account and based upon current trading and the good progress the Group is making against our strategic objectives the Board has approved the return of up to £20 million to shareholders via a further share buyback programme which will commence immediately.

We delivered underlying EBITDA of £287 million in line with the prior year. Within Publican Partnerships, our leased and tenanted business, 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 £303 million (2017: £299 million). Our like-for-like net income from rent was in line with the prior year, whilst our net income from beer supply grew by £3 million as pricing and mix benefits, net of discounts, offset volume decline and we delivered an incremental £1 million of net income from the sale of wines, spirits and minerals.

Underlying administrative costs in the year were £44 million (2017: £42 million), reflecting the development of capability to deliver our strategic objectives and additional administrative costs arising from the continued operation of the Pubs Code. We expect current year underlying administrative costs to be in the region of £45-£46 million.

Underlying net finance costs of £146 million were £3 million lower than the prior year as a result of our planned debt reduction.

Total pre-tax non-underlying charges were £35 million (2017: £63 million) comprising £6 million (2017: £30 million) in respect of debt refinancing costs; £25 million (2017: £24 million) in respect of property net charges, £1 million profit on sale of the interest in Hunky Dory Pubs Limited and £5 million (2017: £9 million) of other

charges. The property charges were made up of £8 million (2017: £4 million) arising from the annual revaluation exercise; a charge of £11 million (2017: £20 million) on the revaluation of assets on transfer to non-current assets held for sale; a profit on the disposal of property (before goodwill allocation) of £2 million (2017: £10 million) and an £8 million (2017: £10 million) charge relating to goodwill allocated to those disposals. The other charges in the period related to £4 million (2017: £6 million) of surrender premiums paid to publicans to recover control of our pub assets and £1 million (2017: £3 million) of restructuring costs incurred to conclude our support team reorganisation to meet our future needs.

Total tax in the period was a charge of £15 million (2017: £4 million), representing a charge of £22 million (2017: £22 million) on the underlying trading profit and a credit of £7 million (2017: £18 million) relating to the tax on non-underlying items. The effective tax rate on the underlying trading profits arising in the year was 18.0% (2017: 18.2%), which is in line with our estimated effective tax rate for the current financial year.

Statutory profit after taxation was £72 million (2017: £54 million) which reflects the stable underlying profit of the business and the lower non-underlying items detailed above.

Underlying earnings per share (EPS) of 21.2p were up 0.7p on the prior year. Basic EPS was 15.2p, compared to 11.2p in the prior year, primarily due to higher non-underlying charges incurred in the prior year in respect of debt refinancing.

Operating cash flows

£271m2017: £261m



STRATEGIC REPORT

Financial review

Balance sheetOur balance sheet remains strong with a total net asset value of £1.55 billion (2017: £1.50 billion), primarily represented by £3.62 billion (2017: £3.63 billion) of property assets offset by net debt of £2.0 billion (2017: £2.1 billion). The property asset valuation reflects the valuation undertaken as at 30 September 2018. The Unique property estate is valued by Colliers International and the assets that secure the EIG corporate bonds are valued by GVA Grimley with the balance of the estate valued internally. The basis of the valuation is consistent with the prior year with 95% (2017: 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 (2017: 0.2% increase).

The share price at 30 September 2018 of £1.66 (2017: £1.38), which equates to an equity value of £771 million (2017: £661 million), compares to a net asset value per share of £3.34 (2017: £3.13). We believe that the continued successful execution of our strategic plan, which aims to optimise the use and value of our asset portfolio, should continue to reduce this value differential.

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 £2.0 billion (2017: £2.1 billion).

Corporate and convertible bonds As at 30 September 2018 we had £1,125 million (2017: £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% (2017: 6.4%). In the near-term we have £100.5 million of corporate bonds falling due which we expect to repay at maturity on 6 December 2018 from available resources including our bank facilities and bank term loan.

In addition to the secured corporate bonds we now have a £150 million bond that was issued on 25 September 2018. This bond is not secured over properties, has an interest rate payable of 7.5% and a maturity date of 15 March 2024. The bond contains a covenant package restricting certain aspects of our business that is customary for a bond of its 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.

The proceeds of the bond issuance have, in part, been used to fund a tender offer to repay the unsecured seven year convertible bonds that were issued in September 2013 for gross proceeds of £97 million. The tender offer was at a purchase price of 107% (together with accrued interest) and was accepted by £95.4 million of the bonds outstanding, with the balance of £1.6 million being subsequently redeemed at their principal amount after the year end.

Bank borrowings As at 30 September 2018 our drawn bank borrowings were £15 million and net of company cash were £12 million net cash (2017: £29 million net debt). On 14 August 2018, in agreement with our bank group, we increased the size of our bank revolving credit facilities from £140 million to £150 million and extended the availability of the facilities from August 2020 to August 2022 on substantially the same commercial terms including, without limitation, any drawn portion of the facility continuing to bear interest at a rate per annum of LIBOR plus 3%.

In addition to the bank revolving credit facilities we have a £50 million term loan facility, which was undrawn as at 30 September 2018, available for drawing until December 2018 with repayment of any amount drawn due by July 2020. The facility was established to provide additional funds, if required, for the settlement of the £100.5 million corporate bonds due in December 2018. For the first year following utilisation it will attract an interest rate of 3.1%-3.3% above LIBOR depending on our compliance with certain undertakings regarding energy efficiency.

Securitised notes During the year we used operational cash generated from the business to repay, in accordance with scheduled amortisation, £81 million (2017: £77 million) of the Unique A3 and A4 securitised notes. In addition we purchased and cancelled £5 million (2017: nil) of the Unique securitised notes in the open market, which left £0.9 billion (2017: £1.0 billion) outstanding at 30 September 2018. The notes amortise over a period to 2032 and attract interest rates of between 5.7% and 7.4%. As at 30 September 2018 the Group was £75 million (2017: £76 million) ahead of the amortisation schedule of the Unique A3 and A4 securitised notes through early repayment and market purchases. We expect to make amortisation payments of £84 million in 2019 and £89 million in 2020, subject to any further market purchases or repayments arising from monetisation of non-tied pubs.

On 6 July 2018 the holders of the Unique A3 and A4 securitised notes voted in favour of proposals to amend the permitted disposals clause within the Unique securitisation to allow the Group greater flexibility in disposing of non-tied pubs out of the Unique estate so long as the proceeds from such disposals are used to repay Unique securitised notes in class order with the applicable redemption premium.

With these amendments in place, we believe the capital structure can fully accommodate the delivery of any monetisation of parts of our non-tied pub estate and we will allocate proceeds from such monetisation to the benefit of all stakeholders.

N R SmithChief Financial Officer

19 November 2018

Total net asset value

£1.55bn2017: £1.50bn



STRATEGIC REPORT

Total

827 Male

549 Female

Directors

Senior managers

Employees

812542

Corporate social responsibility

We continue to be committed to the principle of corporate social responsibility and believe that it should be embedded in everything we do. As the strategic plan we announced in 2015 has become business as usual we have used this opportunity to engage with our employees to test our CSR framework and our key drivers of community, people, publicans, responsible retailing and environment. The output is being refined through the coming year so that we can better bring to life the positive impact our people and our pubs can have on their local communities and the wider environment.

With over 4,400 trading pubs throughout England and Wales, our pubs, publicans and managers operate at the heart of the communities they serve, employing local people, providing a diverse range of goods, services and facilities to local residents, businesses and visitors and making a valuable contribution to the local economy. We support these pubs to thrive in their communities through initiatives such as

sponsoring local community programmes and providing funding for schemes such as Pub is the Hub, who support opportunities for rural pubs and publicans to diversify their business.

During a bumper summer, we saw communities across the country come together in our pubs to celebrate the World Cup and the Royal Wedding.

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.

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. In 2018 our overall engagement score was 81%. The output from the survey is used to inform future engagement and drive activity across the Group.

In the coming year Jane Bednall, a non-executive director, will be working with our HR team on workforce policies and practices so that our healthy culture and positive engagement with the workforce is maintained.

Diversity and inclusion 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.

We recognise that a better work-life balance can improve team members’ motivation, performance and productivity, and reduce stress. Driven by output from the engagement survey, we have this year rewritten and promoted our flexible working policy and we welcome requests that meet the needs and objectives of both the Group and the employee.

Developing our people 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. 46% of our support team employees have been with us for over five years and 33% have over ten years’ experience.

Internal progression is something we are proud to champion. During 2018, sponsored by the Board, we embarked on a year long exercise of performance appraisal, evaluations, 360º feedback and succession planning throughout the executive talent across all the Group 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 hold the Gold accreditation by Investors in People.

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. Over 80% of our support team make use of one or more of these benefits. The Group also encourages employee ownership of Company shares through a Save as You Earn (SAYE) scheme 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 and to support reduction in staff turnover and improve productivity.

Community

People

Supporting industry trade bodies and associations We actively contribute to trade debates and support industry trade bodies and associations including the British Beer and Pub Association (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 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.

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

Since 2015 our partnership with The Royal British Legion has enabled us to sell Poppy Beer in the lead up to Remembrance Day. This year we raised over £22,000 through Poppy Beer where 20p from every pint sold was donated.

In addition to centrally organised charitable work, our pubs, both leased and 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 that pubs across the country raise each year.



STRATEGIC REPORT


Gender Pay Gap (GPG)In March 2018 we published our GPG report for the snapshot date in April 2017, required for two of our companies, Ei Group plc and Bermondsey Pub Company Limited. The results are summarised below: The Group is committed to fair, transparent

and lawful dealings with our publicans. The Pubs Code 2016 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 first compliance report to the Adjudicator for the period ended 31 March 2018 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 933 people, delivering 8,600 hours of training in the year under review. In June 2018 we launched a new online training platform for new and prospective publicans and close to 700 people have so far used this e-learning platform.

Awards for ExcellenceThis year’s inaugural Ei Group Awards for Excellence recognised the achievements of our operators from all around the country. This new programme offered us the chance to celebrate the most outstanding operators across our estate, to learn from the best and inspire other publicans and managers to further raise their offerings.

We saw an impressive number of entries across all categories and worked with a group of experts from the industry to judge. They were most impressed by the extraordinary levels of dedication and passion our publicans demonstrated for their individual businesses and to the industry.

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.

Human rights and slaveryThe Group employs over 1,800 people, with the largest concentration at the Group’s head office in Solihull and with increasing numbers employed in our managed houses located throughout England and Wales. We spend over £300 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.

GPG disclosure Ei Group Bermondsey

Mean GPG 47% 7%Median GPG 51% 1%Mean gender bonus gap 78% (61)%Median gender bonus gap 72% (352)%Proportion of males / females receiving a bonus payment 86% / 87% 3% / 2%Proportion of males / females in each pay quartile: Lower 25% / 75% 48% / 52% Lower middle 42% / 58% 42% / 58% Upper middle 74% / 26% 49% / 51% Upper 84% / 16% 69% / 31%

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.

We train line managers so they 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.

We have recently subscribed to the everywoman network to support us in attracting, developing, advancing and retaining more female colleagues.

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 risk 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.

Publicans

Responsible retailing

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.

Health and safetyWe have a dedicated health and safety function within the Group with 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 ensure best practice in development and implementation of safety systems. We were early adopters of the Primary Authority Scheme and now work closely with West Midlands Fire & Rescue Service and Milton Keynes Borough Council to help us build on and deliver the best safety and regulatory solutions across all of our businesses.

Allergens As a responsible hospitality business, we aim to serve great tasting, good quality, responsibly sourced food and drink to all our customers and give them the opportunity to make healthier choices with accurate, accessible and clear menu information. We aim to proactively respond to market trends in our managed house food offerings and aim to offer vegetarian, vegan and wellbeing options as demand for these products and dishes grow. We work closely with our suppliers and supply chain to provide full allergen information for each ingredient served in every dish in our managed houses, helping our customers make the right decisions for them and ensure that staff are trained to provide customers with accurate ingredient information. As we continue to expand, we work on IT solutions to further develop the ways in which our customers can access both nutritional and allergen information.



STRATEGIC REPORT


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

Our head office facility In 2017 we embarked on and completed a refurbishment of our head office facility. An important part of the specification for delivering this major project was to harness solutions for reduction in energy costs and emissions associated with operating the site. LED lighting and a high efficiency heat recovery VRF system were installed along with more efficient computers and monitors. The consumption data for this financial year confirms that our overall energy consumption at our office facility is 16% lower in the year following the refurbishment.

Our managed businesses Along with our head office 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.

At a commercial level we recognise that updating older buildings with new, more efficient technology can help reduce the energy demands of those businesses, lowering operating costs and improving profitability. By improving energy performance this also helps us reduce our carbon footprint and become a greener business, something we know is important to all our stakeholders.

Bermondsey Pub CompanyIn 2018 we have continued to monitor savings achieved from upgraded LED lighting, heating controls and cellar pumps. We have quantified the savings realised from the 8 sites upgraded to date at £56,164 which is 622,266 kWh, with all the 2016 sites savings now having exceeded the costs of their installations. From the learnings we are currently reviewing undertaking work on a further 8 sites and we will continue to work on our investments where the payback periods are demonstratively beneficial. For all projects, energy emissions and cost reduction are major considerations before final product choice is made.

Craft Union Pub CompanyThroughout 2018 we have been completing upgrades on five Craft Union sites. We have taken the energy saving learnings experienced from our Bermondsey estate and replicated them across our wet-led pubs. From installed LED lighting, new heating systems, heating controls and cellar pumps, there have been savings realised of £16,894 between March and September which totals 134,258 kWh.

Water managementWhere possible we have smart meters in our managed houses and use regular readings to identify and mitigate leakage, as well as using waterless urinals and cistermisers on refits where appropriate.

Energy Performance Standards The 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 looking to further commit 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 Scheme (ESOS)Throughout the next financial year, we will be working towards completing the submission for our next ESOS phase two which is due in December 2019. We embraced this initiative during phase one and took learnings from all of the energy saving opportunities highlighted in our ESOS report. Since December 2015, we have continued to complete 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. This activity will help ensure compliance with the next phase.

Environment

Greenhouse Gas Emissions (GHG) Statement

The GHG statement below provides a summary of Ei Group’s Greenhouse Gas (carbon) emissions from 1 October 2017 to 30 September 2018. 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 head office only with the baseline year 2013 and the total combined emission statement (head office and managed houses) with the baseline year of 2015 ensuring year on year continuity as we grow our managed businesses. Due to a major refurbishment carried out at our head office in the last financial year, the building is now run entirely on electricity resulting in no gas being consumed in the last year.

When comparing the GHG statement against that reported for 2017, a 7% reduction in tonnes of CO2 emissions per full time employee has been seen at head office. There has however, been an increase in the overall emissions across the entire estate due to the increased number of managed pubs opened and operated in 2018. It is the Group’s strategy to continue

to increase the number of managed pubs over the coming years and therefore it is expected that the carbon emissions will continue to rise. As stated above, we are better able to harness energy efficiencies where we have direct control so whilst the total emissions reported will rise, we will be employing the measures discussed above to manage the growth in emissions.

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

Waste reduction The 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 are in the third year of our 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.

We initially targeted to recycle a minimum of 75% of all waste across our managed estate. This target has been consistently exceeded and now measures some 95% or nearing 5,000 tonnes per annum.



STRATEGIC REPORT


Assessment parameters

Baseline year 2015

Consolidation approach Operational controlBoundary summary All facilities under operational control were included including our

managed housesConsistency 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 189 leased vehicles and 195 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 2018)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)

Years2018 2017 2016 2015

tCO2e tCO2e/FTEE tCO2e tCO2e/FTEE tCO2e tCO2e/FTEE tCO2e tCO2e/FTEE

Scope 1Fuel combustion (natural gas, diesel and fleet vehicles) 4,949 3.62 3,665 2.98 2,673 2.72 1,997 3.14Operation of facilities (refrigerants) 377 0.27 198 0.16 126 0.13 77 0.12

5,326 3.89 3,863 3.14 2,799 2.85 2,074 3.26Scope 2Purchased electricity 5,764 4.20 4,517 3.68 2,525 2.57 1,244 1.95Statutory total (Scope 1 & 2)* 11,090 8.09 8,380 6.82 5,324 5.43 3,318 5.21

Group metrics Full time equivalent employee (FTEE) 1,371 1,229 981 637

Intensity ratios (gross emissions) Tonnes of carbon dioxide equivalent per full-time equivalent employee (tCO2e/FTEE) 8.09 6.82 5.43 5.21

* 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 (September 2018) have also been excluded as they did not meet the materiality threshold.

Assessment parameters

Baseline year 2013

Consolidation approach Operational controlBoundary summary Head office onlyConsistency 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 189 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 2018)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)

Years2018 2017 2016 2015 2014 2013

tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE tCO2etCO2e/

FTEE

Scope 1Fuel combustion (natural gas, diesel and fleet vehicles) 1,174 2.08 1,106 2.02 1,528 2.84 1,454 2.86 1,403 2.84 1,380 2.94Operation of facilities (refrigerants) – – 89 0.16 5 0.01 – – 6 0.01 9 0.02

1,174 2.08 1,195 2.18 1,533 2.85 1,454 2.86 1,409 2.85 1,389 2.96Scope 2Purchased electricity 283 0.50 328 0.60 388 0.72 444 0.87 481 0.97 450 0.96Statutory total (Scope 1 & 2)* 1,457 2.58 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) 565 547 538 509 494 470

Intensity ratios (gross emissions) Tonnes of carbon dioxide equivalent per full-time equivalent employee (tCO2e/FTEE) 2.58 2.78 3.57 3.73 3 .82 3.92

* Statutory carbon reporting disclosures required by Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.

Note: Both grey fleet and a 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 head office but included in the Combined Emissions Statement to ensure an accurate year on year comparison.

Head office and managed houses Head office only



STRATEGIC REPORT

Risks and uncertainties

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.

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 agree 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 adjacent table sets out the principal risks and uncertainties facing the Group at 30 September 2018, 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.

Description and potential impact Mitigation processes Link to our business model

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

The Group’s properties have been valued at £3.6 billion at 30 September 2018. 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 a marginal net uplift in the book values of the pubs 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 buoyant.

We invested £81 million on developing and improving our assets during the year.

Our assets

Liquidity risk The Board believes there is no change to this risk following the risk decreasing last year.

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 four outstanding bonds, two of which also have 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 at 30 September 2018 is £100.5 million of bonds due in December 2018.

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.

During the year, the Group concluded an increase of its bank facility to £150 million and extended it for two years to August 2022. This was £15 million drawn at year end.

The Group also issued an unsecured and non-amortising £150 million bond due in 2024 and used some of the proceeds to tender and cancel £95.4 million of the convertible bonds due in 2020. At the year end the Group has undrawn facilities of £185 million in order to repay the £100.5 million corporate bonds due in December 2018.

Our capital structure

Key:

Increase

Decrease

Unchanged

Considered as part of viability assessment

Board oversight

Monitoring and review

Company culture

• Board meetings• Risk Committee

• Risk register• Assurance mapping• Internal audit

• Annual review: » Risk appetite

» Group risk policy

» Operation of management and control systems

» Determination of principal risks

• Ownership• Responsibility

• Audit Committee• Remuneration Committee

• Internal audit compliance• Group risk appetite and policies

• Incentivisation of strategic goals• Appraisals

» Integration with strategy and planning

» Risk changes response

» Incidents and action points



STRATEGIC REPORT



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 expected to be reviewed during 2019, being three years after 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.

The current year also saw the introduction of the General Data Protection Regulation (GDPR) regarding the collection, storage and destruction of personal data.

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 first Pubs Code annual compliance report during the year, which was audited by the internal audit team, 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 appropriately.

We are also an active member of the BBPA ensuring that we are aware of and can contribute to discussions that impact the industry and we are 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.

During the year we engaged a third party consultant to conduct a GDPR readiness review on the Group to ensure that we were in the best possible position when the legislation went live on 25 May 2018.

Enable our operating models

General economic conditions The Board increased this risk in the prior year due to the uncertainty of the impact of Brexit and inflationary cost pressures. As we have no additional clarity on Brexit, the risk remains unchanged this year.

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 risk).

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 an 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 would write down the value if it deemed an impairment was necessary. Any goodwill that is allocated to pubs that are sold, is written off during the year.



LitigationThe 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.


Health and safetyThe 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 don’t 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.

Provide our offer

Supply chain managementThe 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 products 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. In the year CO2 shortages affected the supply of certain key product lines for a short period, however the Group mitigated the disruption by being able to substitute for like products from alternative suppliers.

Provide our offer



STRATEGIC REPORT



Systems failureThe 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.

Provide our offer

Cyber riskThe 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.

Provide our offer

People With the continued uncertainty of Brexit and the impact it will have on the availability of migrant labour together with our growing managed estate, the Board has increased the people risk in the year.

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 Group is committed to providing appropriate employee training, retention and reward policies and holds the prestigious accolade of ‘Gold’ status for Investors in People. As outlined in the corporate social responsibility section on pages 26 to 33, 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.

Support our people

Viability statementIn 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.

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 34 to 38, agreed by the Board. Furthermore, additional information regarding the future prospects of the Group is included within the Chief Executive’s review on pages 16 to 20.

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, unless there are any significant events that would suggest that a longer period would be more appropriate. The Board has assessed that there are no events of note that fall outside of the normal three year cycle such that the viability assessment for the current year has been considered over the three year period to 30 September 2021.

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 specifically considered the financial liabilities maturing within the period, being the £100.5 million corporate bonds maturing in December 2018 and the £125 million corporate bonds maturing in February 2021, and have concluded that they have a reasonable expectation that these will either be paid by cash available in the business or from currently existing facilities, or adequately refinanced prior to being repayable such that the Group will be able to continue in operation and meet its liabilities as they fall due over the three year period assessed.

Going concernThe 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.

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 foreseeable future. For this reason the directors continue to adopt the going concern basis of accounting in preparing the financial statements.

Strategic report approvalThe strategic report, on pages 1 to 39, 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, the risks and uncertainties and the viability and going concern statements.

By order of the Board

L TogherCompany Secretary

19 November 2018


40 41Annual Report and Accounts for the year ended 30 September 2018 Stock code: EIG www.eigroupplc.comEi Group plc

GOVERNANCE

Board of Directors

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

Robert, 73, spent over 30 years with Procter & Gamble, McKinsey and, finally, PepsiCo, where he was responsible for the company’s beverage operations in Europe, the Middle East, Africa and Asia. He is currently Chairman of Eagle TopCo 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.

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

Simon, 56, 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 25 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. He is currently Vice Chairman of the BBPA.

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

Neil, 53, 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, 59, has over 25 years’ 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, 66, 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. Marisa is currently a non-executive director of AO World plc, Skipton Group Holdings Limited, where she chairs the Audit Committees, and a non-executive director of 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, 65, is a chartered surveyor and an independent consultant providing strategic property advice to retailers and private equity companies. He has 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 Director Appointed to the Board on 2 July 2018.

Jane, 51, is currently Chief Marketing Officer for SSE plc and has previously held senior marketing positions with Intercontinental Hotels Group, British Gas and British Airways. Until June 2018 Jane served as a non-executive director of Smart Energy GB, the body responsible for engagement in smart metering for domestic and commercial customers.



GOVERNANCE

Directors’ report

The directors submit the statutory financial statements for the Group for the year ended 30 September 2018.

The governance report on pages 46 to 50, 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 also 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 1 to 39).

Results and dividendsThe Group’s profit for the year, after taxation, amounted to £72 million (2017: £54 million).

The directors are not recommending the payment of any dividend on its ordinary shares for the year ended 30 September 2018 (2017: nil) but will consider future dividend policy in the light of results from the business going forward.

Share capitalAs at 30 September 2018, the Company’s issued share capital was 516,793,318 ordinary shares of 2.5 pence each as set out in note 29 to the accounts on page 129.

Authority of the directors to allot sharesThe Company was authorised by shareholders at the Annual General Meeting held on 8 February 2018 to allot shares and to grant rights to subscribe for, or convert securities into, shares up to a maximum nominal amount of £8,013,743.76.

This authority will expire at the 2019 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 incentive and employee share schemes.

Purchase of own shares by the CompanyThe Company was authorised by shareholders at the AGM held on 8 February 2018 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 2.5 pence 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 March 2018 the Company completed a share buyback programme and 15 million shares were purchased for cancellation under this authority during the period under review for £20 million, representing 3.2% of issued share capital. This authority will expire at the 2019 AGM and the directors will be seeking a new authority for the Company to purchase its ordinary shares, which will only be exercised if market and financial conditions make it advantageous to do so. Further details are set out in the explanatory notes to the Notice convening the AGM on pages 152 to 154.

Treasury shares and the Employee Benefit TrustAs at 30 September 2018, the Company held 50,000,000 shares in Treasury as set out in note 29 to the accounts on page 129. There has been no change to the number of shares held in Treasury during the period under review.

In addition, 1,134,828 shares are held by the Company’s Employee Benefit Trust and movements during the year are set out in note 29 to the accounts on page 129. These shares are held to satisfy awards made under the various incentive and employee share schemes, details of which are set out in note 30 to the accounts on pages 129 to 132.

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.

Material shareholdingsAs at 30 September 2018, the Company was aware of the following interests of 3% or more in the Company’s ordinary share capital:

Number of ordinary shares

Percentage of voting rights of the issued

share capital

Standard Life Aberdeen plc holdings 65,439,928 14.02Prudential plc group of companies 60,608,966 12.98Blackrock Inc 21,731,766 4.65Majedie Asset Management Ltd 21,728,141 4.65Morgan Stanley 15,434,215 3.31

Aberforth Partners 14,965,873 3.21Norges Bank Investment Management 14,890,080 3.19Dimensional Fund Advisors 14,711,879 3.15Societe Generale SA 14,508,299 3.11

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

• The holding of Norges Bank Investment Management decreased on 29 October 2018 to below 3%

• The holding of Societe Generale SA increased to 16,779,142 being 3.59%

DirectorsBiographical details of the directors currently serving on the Board are given on pages 40 and 41. 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 58 to 82. There have been no changes in the interests of the directors between the balance sheet date and the date of approval of the accounts.

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 are included within the strategic report on page 39.

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 1 to 39 and in the financial statements and notes to the accounts on pages 84 to 137. 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 34 to 38. Further details of our policy on financial instruments and capital risks and management are set out in notes 23 and 24 to the accounts on pages 117 to 124.

Annual General MeetingThe AGM will be held on 7 February 2019 at 11.00 a.m. 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, are set out on pages 148 to 157. A copy is also available on the website. The directors consider that all of the proposed resolutions are in the best interests of the Company and its shareholders as a whole. It is the directors’ recommendation that you support the proposed resolutions and vote in favour of them, as each of the directors intend to do.

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) may only be amended by special resolution at a general meeting of the shareholders. A copy of the Articles is available on our website.



GOVERNANCE

Directors’ report

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 117 to 124.

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

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. Otherwise, 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.

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 an extraordinary 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.

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 76.

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 80.

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 8 February 2018 to allot, issue and make market purchases of the Company’s ordinary shares. These authorities will expire at the 2019 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. Further details are set out in the explanatory notes to the Notice convening the AGM on pages 152 to 154.

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 80.


L TogherCompany Secretary19 November 2018

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



GOVERNANCE

Governance report

Letter from the Chairman of the Board of Directors

Dear Shareholders,Once again, and on behalf of the Board, I am pleased to present our Governance Report for the year ended 30 September 2018.

In this report, we explain our approach to Corporate Governance, together with information that is required by the UK Corporate Governance Code.

The Board continues to have the appropriate experience and skills to challenge and support the execution of the Company’s ambitious strategy, unveiled in May 2015. Jane Bednall replaced David Maloney on the Board in July 2018. With Jane’s appointment, the Board’s line up is complete. Adam Fowle brings a career’s knowledge of the pub and beer sectors as past CEO of Mitchells and Butlers. Peter Baguley has wide-spread experience in retail property with both Boots and Sainsbury; 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 member of the CMA. My own background is mainly in fast moving consumer goods and retail.

In terms of the Code’s new requirement to more closely engage with colleagues in the business, Jane Bednall has kindly agreed to undertake this responsibility and will be reporting on progress in next year’s report.

In other respects, the Board continues to operate as before.

Individual non-executive directors, including myself, participate in a partnering initiative with different business units and individual executives below Board level. This process ensures our non-executives are close to the evolution of the strategy and helps support the development of senior management as leaders of the future.

The Board conducted an internal board evaluation in the year but welcomed input in that process and its conclusions from Duncan Reed of Condign Board Consulting, who had carried out an external Board evaluation in 2015. Key conclusions were that the Board continues to function well.

Scheduled Board meetings are held either at the head office, 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 and this practice continues as the execution accelerates.

We are now well over half way in our transformational strategy to change the profile of the estate. The Board continues to monitor, challenge, and encourage the successful execution of the strategic plan. We will continue to address topics through the year to challenge and focus the team to continue to deliver on our strategic ambition.

Robert WalkerChairman

The Board continues to monitor, challenge, and encourage the successful execution of the strategic plan.”

Robert WalkerChairman

Compliance with the UK Corporate Governance Code The 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 of the Code that are applicable to it for the whole of the year ended 30 September 2018.

The Audit Committee report on pages 51 to 55, the Nomination Committee report on pages 56 and 57, and the directors’ remuneration report on pages 58 to 82 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).

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 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.

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 51.

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 six times during the year, 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. In 2018 the Chairman conducted the internal Board evaluation and feedback arising from the evaluation process.

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.



GOVERNANCE

Governance report

Board balance and independence The Board has a strong independent element and at the date of this report currently 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 four of the 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 51 to 55 and the directors’ remuneration report on pages 58 to 82.

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 and Marisa Cassoni have been on the board for, six, five and four years respectively and their reappointment is subject to rigorous review.

Jane Bednall was appointed in July 2018. 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.

Effectiveness Meetings and attendanceThe 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 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 2018

Board meetings

Audit Committee

(ii),(v)

Nomination Committee

(i),(iv),(v)

Remuneration Committee (i), (iii),(v)

Number of scheduled meetings held 6 3 5 5

Robert Walker 6 3 5 5

Simon Townsend 6 3 5 5

Neil Smith 6 3 5 3

Peter Baguley 6 3 5 5

Adam Fowle 6 3 5 5

Marisa Cassoni 6 3 5 5

Jane Bednall 2 1 1 2

David Maloney 5 2 4 4

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

(ii) Robert Walker, Simon Townsend, Neil Smith attended meetings of the Audit Committee by invitation.(iii) Simon Townsend and Neil Smith attended meetings of the Remuneration Committee, or part thereof, by invitation.(iv) The executive directors have attended meetings of the Nomination Committee by invitation.(v) Until retirement in July 2018 David Maloney has attended meetings of the Committees by invitation.(vi) Jane Bednall joined the Board in July 2018 and did not attend any meetings prior to that date.

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.

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 and input from Duncan Reed of Condign Board Consulting. The summary of the outcome was presented to the Board for discussion and follow up.

The CEO is responsible for regularly reviewing 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 or reappointment at the forthcoming 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 57.

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 or, in the case of Jane Bednall, reappointment at this year’s AGM.

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 and will be available for inspection for 15 minutes prior to, and during, the AGM.

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. None of the executive directors currently hold any such outside appointments but are encouraged to do so in the event that would bring them further experience and bring benefits to the Board.

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 how these principles have been applied is detailed in the Audit Committee report on pages 51 to 55.

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 58 to 82.



GOVERNANCE

Governance report Audit Committee report

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 and Adam Fowle also met with major shareholders early in the year. Peter Baguley conducted a consultation with major shareholders as part of the review of the Company’s remuneration policy and changes proposed thereto. All other non-executive directors are available to shareholders to discuss any matter they wish to raise.

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 its stake during the year, have been fully taken into account.

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 the inside back cover.

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.

Details of the resolutions to be proposed at the AGM to be held on 7 February 2019 can be found in the Notice convening the AGM on pages 148 to 151.


R M WalkerChairman

19 November 2018

Based on our activity in the year we are able to positively confirm that the Group continues to operate a robust internal control environment.”

Marisa CassoniChair, Audit Committee

Dear Shareholders,I am delighted to present my second report of the Company’s Audit Committee (the Committee), for the year ended 30 September 2018.

During the year the Committee has had a full agenda, since on top of its considerations of the integrity of financial reporting, the risk management procedures and internal control environment and the external auditor, the Committee has played a significant role in the Group’s readiness for GDPR and has approved the Group’s first Pubs Code annual compliance report.

The Company also received a letter from the Conduct Committee of the FRC during the year following their review of the Group’s 2017 Annual Report and Accounts and I am pleased to report that there were no queries or questions that required a response to the FRC.

Committee members have again ensured presence across the business by meeting regularly with the key business unit leads to really help them understand the risks that the various businesses face and the controls that are in place to mitigate those risks. Findings from these meetings are shared with the wider Committee at the scheduled Audit Committee meetings.

The Committee has also reviewed the Group’s risk register and approved the identified risks deemed principal such that they require disclosure in the Annual Report and Accounts. These risks are disclosed on pages 34 to 38. Based on our activity in the year we are able to positively confirm that the Group continues to operate a robust internal control environment and the work of the internal audit team confirms that these controls are effective in mitigating risk.

Finally I will take this opportunity to welcome Jane Bednall to the Committee and I look forward to working with her over the coming years.

Marisa CassoniChair, 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.

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

• Marisa Cassoni (Chair)

• Peter Baguley

• Adam Fowle

• Jane Bednall (since her appointment to the Board)

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 (full details of which are set out on page 41), 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 sector in which the Group operates.

The Committee held three scheduled meetings in the year under review, which were attended by all the members of the Committee. 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 team also attended all the Committee meetings to ensure full communication of matters relating to the audit.



GOVERNANCE

Audit Committee report

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. Key priorities for the coming year have also been identified and include conducting an audit tender process and updating our review of cyber risks and controls to ensure they remain robust.

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

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.

During the year the Committee, management and the external auditor considered and concluded on a number of significant matters in relation to the financial statements. Those matters and what the Committee did to ensure it was comfortable that these matters had been appropriately addressed in the financial statements are set out below:

The Committee reviews the Annual Report and Accounts and recommends to the Board whether it is fair, balanced and understandable when taken as a whole. In order to do so, it reviews the disclosures in the Annual Report and Accounts to ensure they are in line with its understanding of the business, performance for the year and the risks disclosed are those that concern the Committee.

During the year, the Company has received a letter from the Conduct Committee of the Financial Reporting Council (FRC) in respect of a review they have carried out of the 2017 Annual Report and Accounts. The review was based solely on the report and accounts and did not benefit from detailed knowledge of the business or an understanding of the underlying transactions entered into. This letter raised no questions or queries that required a response to the FRC, but detailed a few improvements that could be made to benefit users of the accounts. These have been acknowledged and incorporated accordingly into our 2018 Annual Report and Accounts.

Risk management and internal controlThe Committee also has responsibility for reporting to the Board on whether the Group’s key control policies and procedures remain appropriate and that it is operating a robust and effective control environment. This is achieved by reviewing and monitoring the effectiveness of 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 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 21 July 2016 to 31 March 2018 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 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 121 MRO related referrals, and 15 non-MRO referrals. We had received a total of 13 complaints relating to alleged breaches of the Pubs Code of which, five remained outstanding at the date of the report. No breaches had been upheld.

Another area of focus for the Committee in the year was in respect of GDPR. The Committee has been reviewing management’s plans and actions throughout the lead up to the implementation date including the output of a readiness review performed by Deloitte. This review shaped the further actions required in order for the Group to be compliant before the implementation date.

Effective internal controlThe 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.

Operating policies, procedures and controls are in place across the business, and have been in place throughout the year under review. These policies ensure the accuracy and reliability of financial reporting and the preparation of financial statements including the consolidation process. The key elements of the Group’s ongoing processes for the provision of effective internal control and risk management systems include:

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

• documented operational and control policies and procedures;

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

• an annual Board corporate strategy review to assess the appropriateness of the current business strategy and any potential changes to the future Group strategy, 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, utilising both local operational knowledge and a custom built segmentation model to identify all the relevant trends in the locality of the asset;

• a detailed investment process for major projects, including capital investment coupled with a post-investment appraisal analysis;

• 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 implements 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. This includes evolving the internal audit plan to ensure that it focuses, where relevant, on the highest risk areas identified in the key risk register and assurance framework;

• compliance related teams, such as tie compliance, retail audit and the Pubs Code compliance teams, to ensure appropriate focus on the key areas of risk to the Group;

Significant matter What the Committee did

Going concern and viability review

There is a risk to going concern and viability that the Group may not be able to meet its significant 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 have prepared a paper for the Committee that evidences the appropriateness of the assumption which the Committee reviewed, challenged and concluded upon. 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 has determined that the three year period through to 30 September 2021 is the suitable period for assessing the viability of the Group and, following evaluation of the testing performed in severe yet plausible scenarios, is able to recommend to the Board the viability statement on page 39.

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. To address this the Group’s policy 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 annual revaluation exercise through its review of the approach, key assumptions, valuation reports and management’s analytical review on the results of the exercise, challenging when necessary. 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 challenged by the external auditor and the Committee and appropriate values have been incorporated into the 2018 Annual Report and Accounts.

Deferred tax

Deferred tax provisioning for the Group’s 4,524 individual assets is a technically complex area due to various elements of tax legislation and accounting standards having to be applied in conjunction with each other.

The Committee ensures that management have enough time and resource in order to appropriately maintain the tax models and that the output of the models is robustly reviewed. Where elements of tax legislation are new, the Committee challenges management on its application, ensuring they have sought external advice where applicable. The Committee was satisfied that deferred tax provisions were appropriate.

Impairment review

In line with IFRS, Group goodwill acquired on business combinations, which totals £304 million at 30 September 2018, 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 (£1.8 billion at 30 September 2018). 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. During the current year, the Company has charged an impairment of £29 million.

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 compares to prior year and peer companies to assess their reasonableness (see notes 13 and 19 of the accounts). The external auditor also reviewed the rates used, with input from their specialist valuations team, and confirmed they were within an acceptable range. The Committee confirmed that based on the above evaluation, it was appropriate to reduce the growth rate used in the investment impairment calculations to be in line with the Group.



GOVERNANCE

Audit Committee report

• 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 reviewing the effectiveness of the system of internal control, the Committee has:

• received six-monthly self-assurance statements completed by key senior managers confirming that controls and risk management processes in their business units have operated satisfactorily. These returns are reviewed in detail by the Director of Internal Audit and challenged where appropriate by the management risk committee, which updates the risk register;

• received and reviewed the risk register, including detailed analysis of the key financial and accounting controls that provide assurance to mitigate the key risks, and proposed 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.

In respect of Group financial reporting, the finance department is responsible for preparing the Group financial statements using a well-established consolidation process and ensuring that accounting policies are in accordance with IFRS. All financial information published by the Group is subject to approval by the Committee. There have been no changes in the internal control over financial reporting during the year under review that has materially affected, or is reasonably likely to materially affect, the Group’s control over financial reporting.

Following advice from the Committee, the Board has confirmed that it is satisfied that a robust assessment of the principal risks facing the Group has been carried out, including those that threaten its business model, future performance, solvency or liquidity. As a result it 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.

The Committee believes that the Group’s risk management process was sufficiently robust 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 34 to 38.

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

Role of internal auditInternal audit is independent of business operations, undertaking an ongoing programme to provide assurance on the adequacy of internal control and risk management processes across the Group’s operations. It is responsible for reviewing and reporting on the effectiveness of internal controls and risk management systems to the Committee and, ultimately, the Board. The internal audit plan for each year is approved by the Committee and the Director of Internal Audit attends Committee meetings to present the findings of each audit and the progress against actions identified. The Committee was satisfied that the Director of Internal Audit, and the rest of the team, have suitable internal audit experience and are adequately resourced to be able to ensure a robust and independent internal control function.

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.

Reappointment of the external auditorThe reappointment of Ernst & Young LLP (EY) as the Group’s external auditor was reviewed in the year and approved.

While 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. Therefore, the Group is planning to tender the audit again for the year ending 30 September 2021, in accordance with recent EU regulations, and will initiate the tender process in the coming financial year.

In accordance with best practice and professional standards, after five years in the role, EY rotated their audit partner in 2016 and the Committee is satisfied that the current engagement partner, Christopher Voogd, has the experience and industry knowledge to be the lead audit partner until 2021.

Non-audit servicesA key issue that could impair auditor independence, and the auditor’s objective opinion on the Group’s financial statements, is the engagement of the external auditor for the provision of non-audit services.

The Group’s policy on engaging the external auditor for non-audit services has always been designed to ensure that such engagements do not result in the creation of a mutuality of interest between the auditor and the Group, that a transparent process and reporting structure is established to enable the Committee to monitor policy compliance and that unnecessary restrictions on the engagement of the auditor for non-audit services are avoided where the provision of advice is commercially sensible and is more cost effective than other providers.

The policy applicable throughout the year to 30 September 2018 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;

• 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; and

• that the level of fees paid for non-audit services should be restricted to 70% of the audit fees over a rolling three year period, commencing 1 October 2016.

The total fees paid to the external auditor during the year under review amounted to £536,000. Of this amount, £182,000 related to non-audit services, some 34% of the audit fees, being work associated with our financing activities and the bond security substitution exercises. This is work that would normally only be 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. Full details are set out in note 29 to the accounts on page 129.

Independence and performance assessmentThe Committee has assessed the independence of the external auditor and is satisfied that their independence is not impaired due to the fact that the audit engagement partner rotation policy has been complied with; the level and nature of the fees paid for non-audit services was of a level that does not present any ongoing threat to their independence and a separate external firm is appointed for taxation compliance and advisory services.

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.

The Committee also reviewed the external auditor’s performance, against criteria consistent with that adopted in the prior year, by taking into account:

• the reports and audit findings presented to the Committee by the audit engagement partner and other senior members of the audit team;

• evidence that demonstrates whether the external auditor has appropriately challenged management, where relevant, particularly in respect of the significant matters considered in relation to the financial statements, noted on page 52;

• consideration of responses to questions from the Committee;

• interaction between the Chair of the Committee and the audit engagement partner during the year; and

• input from management following meetings held with the audit engagement partner and other members of the audit team.

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.

Based on all of this information the Committee concluded that the external audit process was operating effectively, that EY remains sufficiently independent and that it continued to prove effective in its role as external auditor. 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. Full details are set out in the Notice convening the AGM on pages 148 to 151.

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 2018 Annual Report and Accounts are, when taken as a whole, fair, balanced and understandable;

• the viability statement as set out on page 39 represents a reasonable assessment of the expectations for the Group over the period to 30 September 2021; and

• the going concern assumption is appropriate for use in the 2018 Annual Report and Accounts.

M CassoniChair, Audit Committee

19 November 2018



GOVERNANCE

Nomination Committee report

The Board is stable and comprises the right mix of skills at executive and Board level.”

Robert WalkerChairman, Nomination 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 two major issues:

• Firstly, completing the search for a replacement for David Maloney. Reflecting the evolution of the Group’s strategy, our brief concentrated on finding a non-executive director with experience in consumer marketing and customer relationships. In July, we announced the appointment of Jane Bednall, currently Chief Marketing Officer at SSE plc and having previously worked for Intercontinental Hotels and British Airways, to the Board.

• Secondly, to review the strength, development and succession planning of our executive talent across all the Group’s businesses. A year-long exercise of performance appraisals, evaluations, 360º feedback and succession planning reviews culminated in a formal review to the Board and Nominations Committee in September 2018.

In terms of the year ahead, we intend to monitor the implementation of succession planning more broadly throughout the Group; and follow up on the Government’s promotion of greater employee involvement and consultation, at Board level. To that end, after considering the ways engagement may be best achieved in our business for the benefit of our growing workforce, we have determined that Jane Bednall will be the designated non-executive director responsible for workforce policies and practices which reinforce a healthy culture and engagement. Jane will report to the wider Board through the coming year on this initiative.

In all other respects, the Board is stable and comprises the right mix of skills at executive and Board level.

Robert WalkerChairman, Nomination Committee

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 (since her appointment to the Board)

David Maloney attended by invitation until his retirement from the Board in July 2018.

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 2018The main focus of the Committee’s work in 2018 included:

• completing the search for a new non-executive director;

• sponsoring a 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.

DiversityThe Board and the Committee continue to be mindful of diversity, including gender diversity, throughout the business. 40% of the growing workforce are female, including five out of 15 of the most senior managers, one out of five of the executive management group, excluding executive directors, and two out of five of the non-executive directors, While we have not committed to any specific targets for the number of women on the Board, we continue to consider and make appointments based on merit with the overriding objective of appointing the best candidate for the role. We use executive search firms who have signed up to the voluntary code of conduct setting out the seven key principles of best practice to abide by throughout the recruitment process and we continue to follow a policy of appointing talented people at every level to deliver high performance.

R M WalkerChairman, Nomination Committee

19 November 2018



GOVERNANCE

Directors’ remuneration report

The pace of change has steadied and our leadership team are focused on creating sustained value over an extended period of time.”

Peter BaguleyChairman, Remuneration Committee

Information not subject to audit: Following a detailed review and an extensive shareholder consultation the Committee is proposing the following changes to the policy in order to support these principles:

Changes to policy Rationale

Introduction of a Restricted Share Plan to replace the current Long-Term Incentive Plan (LTIP) for future awards

To reflect our overarching principle of long-term stewardship and sustained improvement in the quality of the estate.

Reduction in annual bonus maximum to 125% from 150% of base salary

Reduce the focus on short-term strategic delivery now that execution has become part of the operational running of the business.

Reduction in pension provisions for new hires to 15% from 25% of base salary

To more closely align pension provision with senior management levels within the Group.

Increase in the shareholding guidelines

To emphasise shareholder alignment and the importance of long-term share ownership.

Introduction of a post-employment shareholding requirement

To support the stewardship culture and quality of the long-term decision making of our executives.

Extension of malus and clawback provisions

To reflect current best practice and our adoption of the provisions of the new UK Corporate Governance Code with respect to the ability to recover variable remuneration.

Restricted Share PlanRestricted shares reflect our ethos of long-term stewardship which is demonstrated by our executive directors and their commitment to the business and our strategy for transformational change to deliver quality earnings.

The proposed Restricted Share Plan has the following design features:

• Restricted Share awards of 87.5% of salary. This compares to the current LTIP maximum of 175% of salary although, as the LTIP was fixed as a number of shares, the most recent two grants equated to c.230% of salary. At this level Restricted Shares represent a reduction of c.60% of the face value of the last LTIP grant.

• LTIPs have, or are expected to vest, at the following levels:

Year of vesting Vesting (% of

maximum)

% of salary (ignoring share

price growth)

2019/20 (estimate) c.80% c.170%

2018/19 (estimate) c.70% c.170%

2017/18 52% 91%

2016/17 27% 33%

2015/16 – –

2014/15 100% 125%

Average c.55% c.98%

• The Committee has taken into account those vestings for which both our executive directors were in situ in assessing the appropriate level at which to set the Restricted Share award. They have also taken into account the reduction in the annual bonus opportunity from 150% to 125% of base salary.

• The reduction in the annual bonus opportunity and the change to Restricted Shares reduces the expected value of the compensation package under the new policy by c.10% for the executive directors. This assumes a bonus payout of 60% and LTIP vesting of 50%, when in fact actual and forecast vestings are higher as shown in the table above. This is also when compared against an LTIP award of 175% of salary. The LTIP award for the year ended 30 September 2018 equated to c.215% of salary. Against this comparison, the reduction in expected value is c.20%.

• Vesting will be phased over a five year period, with 33% vesting after three years, 33% after four years and 33% after five years. A holding period will also apply such that no shares can be sold until at least five years from grant. This contrasts with the current LTIP under which shares vest in equal tranches at the end of years three, four and five and can be sold after vesting.

Vesting

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

33% of award

33% of award

33% of award

No shares can be sold until five years from grant

ANNUAL STATEMENTDear Shareholders,I am pleased to introduce our remuneration report for the 2018 financial year. This report includes details of our new remuneration policy for which we are seeking shareholder approval at our AGM in February 2019.

New remuneration policyWhen we introduced our current policy (which has applied from the year ended 30 September 2016) we structured it to focus delivery on a transformational change to the business following the launch of our new strategy. Over the past three years we have driven new behaviours, developed new skills and recruited highly experienced people at a senior level in the business in order to deliver this strategy.

Whilst our fundamental strategy is unchanged, the pace of change has steadied and our leadership team are focused on creating sustained value over an extended period of time. Our 2015 remuneration policy was built on the principle of super stretch performance delivering enhanced reward. As we evolve strategic delivery into business as usual, this principle is no longer relevant, although retaining our talented management team remains paramount.

This high quality team embody our principle of long-term stewardship which is the principle behind all decision making in the business. They have transformed what was our strategic development programme into the successful day-to-day operational execution of our business.

Recognising this shift in corporate development, it was apparent to the Committee that our 2015 policy needed to be replaced with one which supported our key reward principles of:

• Bringing focus to sustainable improvement – aligned to focus on the delivery of best returns for shareholders over the longer-term through improving the quality and the profile of earnings on a sustainable basis.

• Encouraging and enabling substantial long-term share ownership – applying this principle throughout our executive management group and creating a reward structure which is relevant and consistent across our senior leadership team.

• Simplifying and increasing effectiveness – a simple framework linked to business success and the execution of our strategy.



GOVERNANCE


• The Committee will retain discretion to reduce the vesting of any award if a performance underpin is not met. The underpins for the awards to be granted in respect of the year ending 30 September 2019 are below with further detail provided on page 81.

Underpins

Rationale

Balance sheet health

Cash flow Free cash flow improvement over the vesting period

KPI of the business given importance of funding reinvestment, debt and property transformation

Investor returns

NAV per share

Improvement in NAV per share over the vesting period

A KPI of the business and, as a large portfolio owner, a sign of future investor returns

Corporate governance

Major governance failure

No material failure in governance or an act resulting in significant reputational damage and / or material financial loss to the Group.

Reflects governance and minimum standards of behaviour expected of our executives

• Conventional best practice share plan provisions regarding leaver and change of control arrangements have been included.

If the policy and Restricted Share Plan rules receive shareholder approval then the first awards would be made in 2019 after our AGM. No further LTIP awards will be made.

Annual bonusThe annual bonus has been reduced to 125% of salary to refocus alignment on long-term sustainable delivery of the strategy. 50% of any amount earned above target continues to be deferred into shares for three years. The weightings and metrics have been rebalanced to accommodate this reduction in quantum and for the year ending 30 September 2019 these will be 75% EPS, 25% strategic and personal objectives and 25% free cash flow (FCF). EPS has always been a core part of our annual bonus but the introduction of FCF is new, to recognise that cash flow is a key metric and facilitator to the business in its debt management, returns to shareholders and conversion of the estate. The proposed changes to our long-term incentive structure mean that including FCF in the bonus is more appropriate.

Business context and incentive impact in the current yearThe existing policy on directors’ remuneration is set out in the 2015 Annual Report. The Chief Executive Officer and his management team continue to work closely with the Board to progress the execution of the strategy announced in May 2015. The transformational strategy is now more business as usual. The new managed businesses are now fully integrated in order to deliver our long-term strategy of a business with significantly improved earnings potential and growth in shareholder value for the benefit of all stakeholders. We remain confident that the right strategy is in place and that it is being well executed. In the year under review the share price rose from 136.50p per share to 165.60p per share.

During the year we successfully executed a number of refinancing activities. In August 2018 we increased the size of our bank revolving credit facilities from £140 million to £150 million and extended the availability of the facilities from August 2020 to August 2022 on substantially the same commercial terms. In September 2018 the Company launched an offer for a £150 million high yield unsecured bond which was oversubscribed and successfully tendered to repurchase £95.4 million of our guaranteed convertible bonds due in 2020.

In September 2018 the Company appointed Rothschild & Co to explore various routes to optimise value from the commercial property portfolio. These activities were an important part of our balance sheet management and have given us the platform and flexibility to deliver on our strategy to monetise and drive returns and deliver improvements in free cash flow and earnings per share. More detail is set out in our strategic report on pages 1 to 39.

The most significant operation with the Group remains our predominately wet-led Ei Publican Partnerships business and so it is pleasing that this part of the business continued to deliver like-for-like net income growth of 1.2% for the year (2017: 2.3% growth) capturing opportunities presented by good summer weather and sports viewing and underpinned by a controlled investment programme. This performance in our leased and tenanted estate was combined with our commercial property portfolio reaching significant scale with strong like-for-like growth in net income and our managed operations and investment businesses increasing their contributions to Group net income.

Overall Group performance has generated annual bonus pay-outs for the executive directors in respect of the year ended 30 September 2018 of 57.5% for Simon Townsend and 58.2% for Neil Smith of the maximum opportunity of 150% of salary, compared with 65.7% and 66.3% of the maximum opportunity in the prior year. Further details are provided on pages 71 to 74 on how performance under the annual bonus targets translated into bonus payments.

The LTIP awards granted in February 2016 vested with respect to performance in the year ended 30 September 2018. These awards were granted under the 2015 policy and were subject to performance conditions based on relative TSR, ROCE and FCF. Overall vesting against these performance criteria is 52.3% with further details provided on page 75.

As disclosed last year, the salaries of Simon Townsend and Neil Smith were increased by 1.7% and 3.1% respectively. These increases were effective from 1 January 2018. The percentage increase applied to the Chairman and non-executive directors’ fees was 1.4% and 1.5% respectively. Additional fees for chairing the Audit or Remuneration Committee were increased by 1.6% and the Senior Independent Director fee was adjusted to bring that into line with the additional fees for chairing a committee. The average increase across the wider employee population was around 2% including increases around promotions or other adjustments.

Executive remuneration for 2019Salary reviews for the executive directors, to be effective from 1 January 2019 have now been conducted and uplifts determined of 2% for both Simon Townsend (to £500,000) and Neil Smith (to £413,000). Other benefits, including pension provision, will be maintained at existing levels or by reference to existing percentages of base salaries as applicable.

The annual bonus opportunity will be decreased from 150% to 125% and as detailed above the metrics and weightings have been adjusted and rebalanced to reflect the change in policy for how we plan to deliver long-term incentives. Subject to receiving shareholder approval for both the new policy and the rules to the Restricted Share Plan, these will take effect from the AGM and we will grant Restricted Share awards thereafter.

Shareholder support has been strong for our approach to remuneration. Our 2015 policy received votes in favour of 92.8% and voting for the remuneration report has been in excess of 97% over the last three years. I hope that shareholders are supportive of our new policy and particularly the adoption of a Restricted Share Plan which the Committee and I consider to be a fundamental change which wholly supports our culture, our strategy and our business.

Peter BaguleyChairman, Remuneration Committee

DIRECTORS’ REMUNERATION POLICYThis 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). This part of the directors’ remuneration report sets out the Company’s remuneration policy for the year commencing 1 October 2018 and beyond. A binding resolution to approve this policy will be put to shareholders at the AGM. The differences between this policy and the policy approved at the AGM in 2016 are summarised in the Committee Chairman’s statement on pages 58 to 61.

How the views of shareholders are taken into accountDuring the financial year, the Committee consulted with major shareholders and governance bodies in relation to the proposed changes to the policy. The response and feedback has helped to formulate the design of the proposed policy and Restricted Share Plan.

How employees’ pay is taken into accountThe Committee liaises with senior managers in the Group, in particular the HR Director, to ensure pay and employment conditions (e.g. base salary levels and reviews, pension provision, the structure of annual bonuses and long-term incentive provision and other benefits) of the wider Group as a whole are taken into account when framing the executive remuneration policy. However, the Committee has not specifically consulted with employees when drawing up the policy or used any remuneration comparison measures between directors and employees.



GOVERNANCE


Future policy table

Remuneration element Purpose Operation Maximum opportunity Performance metrics

Base salary Core element of fixed remuneration reflecting the individual’s role and experience.

Salaries are ordinarily reviewed annually, with any changes normally taking effect from 1 January each year.

In determining any salary increase, the Committee takes into account a number of factors including (but not limited to) the value of the individual, their skills and experience, performance, pay increases within the Company more generally and Company organisation, profitability and prevailing market conditions.

Whilst there is no maximum salary, increases will normally be within the range of salary increases awarded (in percentage of salary terms) to the wider workforce.

Increases will be implemented over such time period as the Committee deems appropriate.

While no formal performance conditions apply, an individual’s performance in role is taken into account in determining any salary increase.

Benefits To provide an appropriate reward package and promote the well-being of employees.

Benefits normally comprise a car allowance or use of a motor car, fuel, private medical, travel, accident and legal expenses insurance, directors’ and officers’ insurance and life assurance. The benefit provision is reviewed periodically. Other benefits may be provided based on individual circumstances, which may include relocation costs.

No maximum value is set but the Committee periodically monitors the overall value of the benefits package and provides benefits at a level which the Committee considers to be appropriately positioned taking into account relevant market levels based on the nature and location of the role and individual circumstances.

N/A

SIP and SAYE To motivate and to facilitate share ownership on an all-employee basis.

The SIP and SAYE schemes are reviewed annually and if offered are offered to all eligible employees.

An executive director can participate by paying up to £500 per month (or such other limit as may be permitted under the relevant legislation) (SAYE) and £1,800 per annum (or such other limit as may be permitted under the relevant legislation) (SIP) into these tax advantaged all-employee schemes. Under the SAYE, the per share option exercise price is set at a discount of up to 20% (or such other amount as may be permitted under the relevant legislation) to the share price when participation is offered. Under the SIP the Company may match the shares up to a two for one basis (or on such other basis as may be permitted under the relevant legislation).

N/A


Pension To aid retention and to remain competitive in the market place.

Contribution to a personal pension arrangement or cash in lieu of pension by way of a salary supplement (or a combination thereof).

For executive directors in office as at the date of approval of this policy, 25% of salary.

For executive directors appointed after the date on which this policy is approved, 15% of salary.

N/A

Annual bonus plan

To motivate executives and incentivise the achievement of key financial and strategic goals and targets over the financial year.

Deferral of part of the bonus into shares provides alignment with shareholders.

Performance targets are reviewed annually and any pay-out is determined by the Committee after the year end based on targets set for the year.

The Committee has discretion to amend the pay-out should any formulaic output not reflect the Committee’s assessment of overall business performance.

50% of any bonus earned above the bonus earned for target performance will be deferred into shares for three years (Deferred Share Award), although the Committee may determine not to defer any amount of a bonus earned where the amount to be deferred is so small as to make the application of deferral, in the opinion of the Committee, unduly administratively burdensome. Directors may be permitted to defer a greater proportion of any bonus into a Deferred Share Award. Dividend equivalents may be paid on vested shares under Deferred Share Awards as described in the maximum opportunity column.

Recovery provisions apply, as referred to below.

The maximum bonus potential is 125% of salary.

Dividend equivalents (in cash or shares) may be paid on vested shares under Deferred Share Awards in respect of dividends that would have been paid on vested shares in respect of dividend record dates occurring between the grant date and the date of vesting. The dividend equivalents may assume the reinvestment of dividends into shares on such basis as the Committee determines.

The bonus is normally based on a mix of financial targets and individual strategic and/or personal objectives, with financial performance normally accounting for a majority of the overall bonus opportunity.

The element of the bonus subject to financial measures will be earned between 0% and 100% for performance between a threshold level of performance (the minimum level of performance that results in any pay-out) and maximum performance, with 50% of the maximum opportunity for target performance.

Vesting of the bonus in respect of strategic and individual objectives will be between 0% and 100% of the maximum opportunity for those elements based on the Committee’s assessment of the extent to which the relevant objective has been met.



GOVERNANCE



Restricted Share Plan (RSP)

To encourage and enable substantial long-term share ownership and to reflect our ethos of long-term stewardship.

Annual share awards will be made in the form of conditional share awards or nil-cost options. The awards will be subject to a performance underpin described in the column headed performance metrics. An award will vest in three equal tranches following the assessment of the relevant performance underpin, which will be assessed following the end of a period of no less than three years as regards the first tranche, no less than four years as regards the second tranche and no less than five years as regards the third tranche.

The first and second tranches of an award will be subject to a holding period which begins on the relevant vesting date and lasts until the vesting date of the third tranche; no holding period will apply to the third tranche of an award. The holding period will be structured as either (1) the award not being released, so that the participant is able to acquire the shares, until the end of the holding period; or (2) the participant being able to acquire shares following vesting but that, other than as regards the sale of shares to cover tax liabilities associated with the vesting or acquisition, the award is not released, so that shares can be dealt with, until the end of the holding period.

If a holding period is structured on the basis that the participant is unable to acquire shares until its end, dividend equivalents (in cash or shares) may be paid on vested shares in respect of dividends that would have been paid on those shares between vesting and the date on which the award is released. The dividend equivalents may assume the reinvestment of dividends into shares on such basis as the Committee determines.

Recovery provisions apply, as referred to below.

87.5% of salary Although no formal performance measures apply to any awards under the RSP, the extent to which a tranche of an award vests may be reduced by the Committee if a performance underpin assessed to the end of the financial year preceding the date of vesting is not achieved.

In addition, the Committee may reduce the extent to which a tranche vests if it believes this better reflects the underlying performance of the Company over the relevant period.


Chairman and non-executive directors’ fees

To attract and retain non-executive directors of the right calibre.

Ordinarily, the Chairman and non-executive directors’ remuneration takes the form solely of fees. The Chairman’s fee is approved by the Board on the recommendation of the Committee. Fees for the non-executive directors are approved by the Board, on the recommendation of the Chairman and the executive directors. The Chairman and non-executive directors may be eligible to be reimbursed for any reasonable hotel and travel expenses and other reasonable expenses incurred in performance of their duties.

The non-executive directors are not involved in any discussion or decisions about their own remuneration.

Additional fees, over and above the base fee for the non-executive directors, are payable to the Chairman of the Audit and Remuneration Committees and to the Senior Independent Director.

The fee levels are reviewed periodically taking into account the time commitment and responsibilities of the role and fees paid in other companies of comparable size and complexity.

N/A

Notes to the policy tableRecovery provisions (malus and clawback)

Annual bonusAny annual bonus paid in cash may be recovered from the participant (clawback) for a period of three years from the date on which the bonus is determined in the event of material misstatement of results, a material error in the information or assumptions on which the award was granted, vests or is released (including an error in assessing any underpin), a material failure of risk management, serious reputational damage, misconduct by the participant or material corporate failure as determined by the Board.

Deferred Share Awards may be cancelled or recovered from the participant at any time prior to the third anniversary of the award date in the circumstances referred to above.

RSPA tranche of an award under the RSP may be cancelled (if shares have not been delivered to satisfy it) or recovered from a participant (if shares have been delivered) up to the second anniversary of vesting in the event of a material misstatement of results, a material error in the information or assumptions on which the award was granted, vests or is released (including an error in assessing any underpin), a material failure of risk management, serious reputational damage, misconduct by the participant or material corporate failure as determined by the Board.

Operation of share plansThe Committee will operate its current and legacy share plans in accordance with their rules. Share awards may be made in the form of conditional share awards, options (including nil cost options) or forfeitable share awards. Awards granted over shares may be settled in cash. In the event of a variation of the Company’s share capital or a demerger, special dividend or other event which, in the Committee’s opinion may affect the price of shares, the Committee may alter the terms of awards under its share plans and the number of shares subject to those awards in accordance with the terms of the relevant plan.



GOVERNANCE


Choice of performance measuresThe annual bonus is based on a mix of financial and individual strategic targets, with measures based on the financial, operational and strategic priorities of the business which may vary from year to year as appropriate to reflect the changing needs of the business. A sliding scale of targets is set for the financial measures so as to drive significant improvements in business performance. Following the determination of the bonus by reference to the targets for the relevant financial year, the proportion deferred into a Deferred Share Award is not subject to any further performance condition.

Awards under the RSP are not subject to formal performance measures, but vesting is dependent upon performance underpins. For each element of the underpin a clearly defined and, where relevant, quantifiable threshold will be set at the point of grant. The elements of the underpin and any applicable threshold will be determined on an annual basis taking into account the Committee’s assessment of the metrics which will best reflect overall business health over the applicable vesting periods. The underpins applying for the RSP awards to be granted in respect of the Company’s financial year ending on 30 September 2019 are set out on page 81.

The Committee may vary any performance measure or RSP underpin if an event occurs which causes it to determine that it would be appropriate to do so, provided that any such variation is fair and reasonable and (in the opinion of the Committee) the change would not make the measure or underpin less demanding. If the Committee were to make such a variation, an explanation would be given in the next remuneration report.

SAYE options and awards under the SIP are not subject to performance conditions in line with the treatment of such awards for all employees and in accordance with the applicable tax legislation.

Shareholding guidelinesShareholding guidelines during employmentTo align the interests of executive directors with those of shareholders, the Committee has adopted formal shareholding guidelines. Executive directors are required to 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, 200% of salary for the CFO and 150% for any other executive director.

Shares subject to LTIP awards and RSP awards which have vested but not been released (that is which are in a holding period) or which have been released but have not been exercised and shares subject to any Deferred Share Award count towards the guidelines on a net of assumed tax basis.

For these purposes, shares (including, where relevant, shares subject to share plan awards) are valued at 165.60p being the closing share price on 28 September 2018, the last day of trading in the financial year preceding the financial year in which this policy comes into effect. Shares which count towards the guidelines with effect from after that date will be valued at the date on which they begin to count towards the guidelines. Subsequent changes in the share price will not affect the value of shares for the purposes of the guidelines, so that an increase in the share price will not, of itself, permit a disposal and a fall in the share price will not, of itself, require a further acquisition. However, if a share price decrease means that the value of shares is less than the guideline requirement the Committee will take this into account in determining whether shares acquired pursuant to share plans can be sold.

Shareholding guidelines post-cessationDeparting executive directors will be required to retain shares following the date of cessation. The required holding will be 50% of the guideline that applied at the date of cessation (or if lower, the actual holding excluding personal investment), reducing to nil over a period of 24 months.

Shares subject to LTIP, RSP and Deferred Share Awards which are no longer subject to performance conditions will count towards the guidelines on a net of assumed tax basis. If the post-cessation guideline is not adhered to, outstanding unvested share awards granted after 1 October 2018 may lapse at the discretion of the Committee.

Interaction with the policy for employee payThere are some differences in the structure of the remuneration policy for the executive directors (as set out above) compared with that for other employees within the organisation. This reflects differing levels of seniority and responsibility. For example, there is an increased emphasis on variable pay for executive directors through a higher annual bonus opportunity and participation in the RSP. This aligns the interests of directors with the long-term performance of the Company and the interests of shareholders.

Illustration of application of remuneration policyThe following charts provide an illustration, for each of the executive directors, of the application for the year ending 30 September 2019 of the policy. The charts show the split of the remuneration between fixed pay (that is base salary, benefits and employer pension contributions/salary supplement), annual bonus and RSP on the basis of minimum remuneration, remuneration receivable for performance in line with Ei Group’s expectations and maximum remuneration (not allowing for any share price appreciation or dividends/dividend equivalents that may be received on the share awards).

£654,000

£1,404,000

£1,717,000

Minimumperformance

Performancein line withexpectation

Maximumperformance

Simon Townsend

Fixed pay Annual bonus RSP

2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

0

Tota

l rem

uner

atio

n (£

)

100% 47%

22%

31%

38%

36%

26%


1,600

1,400

1,200

1,000

800

600

400

200

0

£546,000

£1,166,000

£1,424,000

Minimumperformance

Performancein line withexpectation

Maximumperformance

100% 47%

22%

31%

38%

36%

26%

Neil Smith

Tota

l rem

uner

atio

n (£

)

In illustrating the potential reward, the following assumptions have been made.


Minimum performance Base salary (being the rate of salary proposed to apply with effect from 1 January 2019, £500,000 for Simon Townsend and £413,000 for Neil Smith), employer pension contributions at an assumed rate of 25% on that salary, and benefits as disclosed in the single figure table on page 70 for the year ended 30 September 2018.

No bonus. No RSP vests.

Performance in line with expectations

Bonus equal to 62.5% of salary is earned.

RSP vests in full equal to 87.5% of salary.

Maximum performance Bonus equal to 125% of salary is earned.

RSP vests in full equal to 87.5% of salary.

These charts reflect the RSP. Existing LTIP awards may continue to vest, subject to the satisfaction of the applicable performance conditions and the other terms of the LTIP.



GOVERNANCE


The executive directors can also participate in all-employee share schemes on the same basis as other employees. The value that may be received under these schemes is subject to limits specified in the relevant tax legislation. For simplicity, the value that may be received from participating in these schemes has been excluded from the above charts.

Service contractsIt is the Company’s policy that, ordinarily, the period of notice for executive directors will not exceed 12 months and accordingly, the employment contracts of the executive directors are terminable on 12 months’ notice by either party. The Company may terminate a director’s employment without notice or compensation in the event of gross misconduct.

Payments for loss of officeIn the event of a director’s departure, the Company’s policy on termination payments is as follows:

• the Company will pay any amounts it is required to in accordance with or in settlement of a director’s statutory employment rights;

• the Company may pay salary, benefits and pension in lieu of notice and observe the other contractual entitlements of a director;

• the Company will seek to ensure that no more is paid than is warranted in each individual case and where appropriate, the Company will seek to apply the principles of mitigation to any proposed payment;

• there is no entitlement to bonus following notice of termination (or cessation of employment) and bad leavers will not receive any bonus in such circumstances. However, the Committee’s normal policy is that where the individual is considered a good leaver, a performance-related bonus may be paid which would typically be prorated for time. The performance measures used to determine the bonus payment may be on a different basis to that applying to the other executive directors depending on the timing and circumstances of the director’s departure. Time prorating will usually be based on the proportion of the bonus year for which the individual is employed and the bonus (if any) will usually be paid at the normal time, although the Committee retains discretion to pay it earlier in appropriate circumstances. If at the time the bonus is paid, the individual is under notice or has left employment, all of the bonus may be payable in cash; and

• in the event of a director’s departure, any outstanding share awards will be treated in accordance with the relevant plan rules, as follows:

Where appropriate the Company may enable the provision of outplacement services to a departing director and make payments in respect of accrued holiday and legal fees.

The Committee reserves the right to make additional exit payments where such payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way of settlement or compromise of any claim arising in connection with the termination of a director’s office or employment.

Where a buyout or other award is made outside the Company’s existing share plans as referred to below, the leaver provisions would be determined at the time of the award.

Change of controlIn the event of a change of control of the Company or other relevant corporate event, unvested share awards under the RSP and Deferred Share Awards will usually vest. In the case of any unvested tranche of an RSP award, the number of shares in respect of which the tranche vests shall be determined by the Committee taking into account whether it is appropriate to reduce vesting to reflect the extent to which the underpin is not satisfied at the date of the relevant event, or the extent to which the Committee determines it would have been satisfied at the end of the ordinary assessment period, and, unless the Committee determines otherwise, the proportion of the period over which the underpin is assessed that has elapsed at the date of the relevant event. Any tranche of an RSP award which has vested but which remains subject to a holding period will be released in full. Deferred Share Awards shall vest in respect of all of the shares subject to them.

Awards under the Company’s all-employee share plans will vest early in the event of a change of control of the Company, in accordance with the rules of those plans.

Awards under the Company’s legacy share plans (including the Company’s 2015 Long-Term Incentive Plan) shall vest and/or be released to the extent determined in accordance with the applicable plan rules, after the application of any discretion available to the Committee under the rules.

The contracts of the executive directors do not provide for any enhanced payments in the event of a change of control of the Company or for liquidated damages.

If a demerger, delisting, special dividend or other event is proposed which, in the opinion of the Committee would affect the price of shares in the Company, the Committee may permit awards under the RSP, Deferred Share Awards and any awards under the Company’s legacy share plans to vest early in whole or in part.

Approach to recruitment and promotionsThe remuneration package for a new executive director will typically be set in accordance with the Company’s approved remuneration policy, subject to the discretions below.

The salary level for a new appointment will be set taking into account the individual’s experience, the nature of the role being offered and their existing remuneration package. Pension will only be provided in line with the approved remuneration policy.

The maximum level of variable remuneration that may be granted in connection with recruitment (excluding any buyout award as referred to below) will ordinarily be in line with the Company’s approved directors’ remuneration policy (i.e. an RSP award over shares with a value of up to 87.5% of salary and an annual bonus of up to 125% of salary). Alternatively, the Committee may grant a newly recruited executive director variable remuneration of up to 275% of salary (excluding any buyout award) consisting of a performance based long-term incentive award over shares with a value of up to 150% of salary and an annual bonus of up to 125% of salary.

If an executive director is appointed at a time in the year when it would be inappropriate to provide a bonus or RSP award for that year, subject to the limit on variable remuneration, the quantum in respect of months employed during the year may be transferred to a subsequent year so that reward is provided on a fair and reasonable basis.

In relation to RSP and bonus awards, different performance targets/underpin measures, performance/assessment periods, vesting periods and holding periods may be set to those applying to the other executive directors in the first year of appointment, if the Committee determines that the circumstances of the appointment merit such alteration.

In addition, the Committee may offer further cash, benefits and/or share–based elements (including awards under Listing Rule 9.4.2(R)) as necessary to secure an appointment and/or buyout remuneration arrangements forfeited on leaving a previous employer – any such payments would take account of the remuneration relinquished when leaving the former employer, for example, reflecting the nature, time horizons and performance requirements attaching to that remuneration. Shareholders will be informed of any such payments at the time of appointment.

For an internal appointment, any variable pay or benefit element granted in respect of the prior role may be allowed to pay out or be provided according to its terms.

Relocation expenses or allowances may be paid as appropriate.

Fees payable to a newly appointed Chairman or non-executive director will be in line with the policy in place at the time of appointment.

Plan Treatment on cessation

RSP If a participant ceases employment while holding an unvested tranche of an RSP award, it will ordinarily lapse. However, if the participant ceases employment due to death, disability, ill-health, the sale of his employer out of the Group or any other reason at the discretion of the Committee, the unvested tranche will continue and vest following the end of the ordinary vesting period, subject to the application of the underpin in the ordinary way and, unless the Committee determines otherwise, the proportion of the period over which the underpin is assessed that has elapsed at the date of the relevant event. The unvested tranche will ordinarily be released following the end of the holding period. The Committee has discretion to vest and release any unvested tranche at cessation or to release any unvested tranche as soon as it vests.

If a participant ceases employment while holding a tranche of an RSP award which is subject to a holding period, it will ordinarily continue and be released following the end of the holding period. The Committee has discretion to release the tranche at cessation. However, if a participant ceases employment due to dismissal for misconduct during the holding period applying to a tranche, that tranche will lapse.

Deferred Share Awards

Awards will ordinarily lapse on cessation of employment if cessation is before the third anniversary of the date of grant.

However, in some circumstances such as death, injury, retirement (at the discretion of the Committee), sale of the employer out of the Group and any other circumstances at the discretion of the Committee (taking into account the individual’s performance and reasons for their departure), good leaver status may be applied. In the case of a good leaver unvested Deferred Share Awards will vest in full on the originally anticipated vesting date, unless the Committee determines they should vest in full on cessation.

All-employee share plans (SAYE and SIP)

Awards will vest in accordance with the rules of the relevant plan, which do not permit the exercise of any discretion by the Committee.

Legacy share plans Awards under the Company’s legacy share plans (including the Company’s 2015 Long-Term Incentive Plan) shall vest and/or be released to the extent determined in accordance with the applicable plan rules, after the application of any discretion available to the Committee under the rules.



GOVERNANCE


Chairman and non-executive directorsAll non-executive directors have letters of appointment, the terms of which take into account best practice. Their respective appointments continue on an annual basis from AGM to AGM, subject to re-election. There are no special provisions in the non-executive directors’ letters of appointment for compensation in the event of loss of office. A summary of the letters of appointment for non-executive directors is set out within the annual report on remuneration.

Legacy arrangementsThe Committee reserves the right to make remuneration payments and payments for loss of office notwithstanding that they are not in line with the policy set out above and to exercise any discretion available to it in relation to any such payment:

• where the terms of the payment were agreed before the remuneration policy came into effect; and

• where the terms of the payment were agreed at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in consideration of the individual becoming a director of the Company.

For these purposes, payments includes the satisfaction of variable remuneration and, in relation to an award over shares, the terms of the payment are agreed no later than the time the award is granted.

Any such payment shall include the satisfaction of any awards granted under the Company’s 2015 Long-Term Incentive Plan and any other legacy share plan.

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

Salaries from 1 January

2018

Salaries from 1 January

2017 Increase %

Simon Townsend £490,000 £482,000 1.7%Neil Smith £405,000 £393,000 3.1%

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

Fees from 1 January

2018

Chairman’s fee £214,000Basic fee paid to all non-executive directors £59,500Supplementary fees:Senior Independent Director £6,500Remuneration Committee Chairman £6,500Audit Committee Chairman £6,500

The Committee’s approach to the Chairman’s and non-executive directors’ fees for the year ending 30 September 2019 is summarised on page 81.

Annual bonus 2018Awards under the plan are subject to demanding performance targets. For the year under review, the bonus was structured as follows:

• 80% of salary subject to a sliding scale of challenging underlying basic EPS targets;

• 20% of salary subject to challenging individual personal and strategic targets; and

• 50% of salary was based on and linked to key milestones in the delivery of the 2020 strategy.

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

Executive directors are required to defer 50% of any bonus earned over target into shares for a period of three years with the remainder paid in cash (executive directors can choose voluntarily to defer more of the award into shares if they so wish and have both done so).

EPS targetsThe underlying EPS targets for the bonus plan were set at the beginning of the year and reflected the outlook at that time taking into account the Company’s plans to generate cash and pay down debt.

The targets and vesting level for the proportion of the bonus based on EPS are set out in the table below. For performance between the EPS targets specified, vesting on a straight–line sliding scale applies.

Award level (% weighted

annual salary) Underlying EPS

Below threshold 0% Less than 20.5pTarget 40% 21.0pMaximum 80% 21.6pActual performance 53.3% 21.2p

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 2016 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 forthcoming AGM. The information on pages 70 to 79 as indicated has been audited.

Remuneration outcomes during 2018The single figure table below sets out the remuneration received/receivable in relation to the year ended 30 September 2018:

Name £000

Base salary/fees(i)

Taxable benefits(ii)

Pension(iii) Annual bonus(iv) Long-term incentives(v)

SIP matching shares

Total

2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017

Executive directorsSimon Townsend 488 480 29 29 122 120 421 473 754 55 2 2 1,816 1,159Neil Smith 402 392 30 29 101 98 351 390 615 45 – – 1,499 954Total 890 872 59 58 223 218 772 863 1,369 100 2 2 3,315 2,113Chairman and non-executive directorsRobert Walker 213 210 – – – – – – – – – – 213 210David Maloney(vi) 46 65 – – – – – – – – – – 46 65Peter Baguley 66 65 – – – – – – – – – – 66 65Adam Fowle 65 59 – – – – – – – – – – 65 59Marisa Cassoni 66 60 – – – – – – – – – – 66 60Jane Bednall(vii) 15 – – – – – – – – – – – 15 –Total 471 459 – – – – – – – – – – 471 459

(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) David Maloney retired from the Board on 5 July 2018.(vii) Jane Bednall was appointed to the Board on 2 July 2018.



GOVERNANCE


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 now 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 (10% of salary) and the final agreed bonus for this element for each director is set out below:

Simon Townsend

Performance metricActual performance delivered

Performance assessment Bonus earned (% of salary)*

Personal and strategic measures (up to 20% of salary)

Business performanceManagement of and compliance with the Pubs Code and mitigation of impact of MRO

Compliance report issued to office of Pubs Code Adjudicator, no non-compliance issues. Delivery of transition of assets to mitigate risks while managing earnings and like-for-like net income growth.

Above target

17%

Succession planningDevelop clear plans across the Group around evolving business needs

Comprehensive programme of planning, sustainable leadership review and development proposals completed in the year.

Above target

Culture and valuesEmbed leadership behaviours across the Group to successfully manage change

Delivered leadership priorities without undermining Group values.

Above target

Stakeholder relationsReframe the investment thesis for the Group

Monetisation strategy comprehensively communicated to investors and further articulation of Group options subsequent to refinancing events.

Above target

* 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.

Neil Smith

Performance metricActual performance delivered

Performance assessment Bonus earned (% of salary)*

Personal and strategic measures (up to 20% of salary)

Business performanceChallenge the operating business to deliver continual improvement in KPIs, drive cost efficiency culture and maximise excess cash flow for shareholder returns

Improved KPIs and Group cash flow. Delivered cost efficiency budget.

Above target

18%

Strategic deployment of assetsRefine processes to deliver best returns

Led the development of decision making process though risk weightings and chaired investment panel to ensure best capital spend.

Above target

Balance sheetFurther develop and execute restructuring transactions to reduce restraints

Completed consent solicitation, RCF extension, unsecured bond issuance, tender and repurchase of convertible bond.

Above target

IT strategyImplement revised strategy to support efficient deployment of the wider business strategy

Completed deployment of strategic recommendations and post implementation review.

Above target

* 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.

Delivery of the 2020 strategyThe additional element of the annual bonus with an opportunity of up to 50% of salary for both executive directors was based on strategic milestones aligned to the delivery of the 2020 strategy and the growth and quality in the number of sites in the categories below. The Committee considered the delivery by the executives across all elements of the strategic milestones in assessing the overall level of performance and the bonus attributable. The Committee agreed that on a combined assessment of performance the executives had achieved 16% of the maximum opportunity for this element of 50% of salary, and the final agreed bonus for this element was 16% for both executive directors. This outcome reflected a slower pace of transfer of assets into our managed businesses.

2018 strategic milestones Threshold Maximum Actual

Combined assessment of performance

Commercial properties and average rental growth 380 430 412

16%

Craft Union 275 290 254

Bermondsey 60 66 54

Managed Investments partnerships 10 15 12*

Managed Investment sites 64 70 47

* Adjusted for disposal



GOVERNANCE


Overall bonuses earnedThe total bonuses earned as a percentage of salary for the year (out of a maximum bonus potential of 150% of average weighted salary) were as follows:

EPS Personal Strategic

milestones

Bonus earned in

2018% of salary

Total % of 2018

opportunity

Bonus earned in

2017% of salary

Simon Townsend 53.3% 17% 16% 86.3% 57.5% 98.5%Neil Smith 53.3% 18% 16% 87.3% 58.2% 99.5%

Half of any bonus earned above 75% of salary (the bonus earned for target performance) is deferred into shares. The executive directors may choose to defer a greater proportion of the bonus. Simon Townsend and Neil Smith have both deferred all of the bonus earned above 75% of salary equivalent to 11.3% of Simon Townsend’s weighted average salary and 12.3% of Neil Smith’s weighted average salary.

2016 and 2017 strategic milestones threshold and maximum targets disclosure (delivery of the 2020 strategy)As disclosed in our 2016 and 2017 Directors’ remuneration reports we committed to disclose the threshold and maximum levels for the strategic milestones within two years from the date the bonus is paid, when the information is no longer commercially sensitive. The Committee have determined that the information is no longer commercially sensitive and has disclosed the threshold and maximum levels for the strategic milestones below, alongside actual performance.



Commercial properties and average rental growth 300 350 311*

27.5%


Bermondsey 20 36 28

Managed Investments partnerships 1 8 5




Commercial Properties and average rental growth 375 430 349*

21.5%


Bermondsey 40 56 48

Managed Investments partnerships 6 14 9


* Adjusted for Commercial Properties sold in the year.

LTIP awards vesting in respect of performance in the year ended 30 September 2018The LTIP awards granted on 12 February 2016 vested in respect of the performance year ended 30 September 2018. The awards were subject to three performance measures, relative Total Shareholder Return (TSR) against the FTSE 250 Index as regard to 50% of the award, Return on Capital Employed (ROCE) as regards to 18% of the award and Free Cash Flow (FCF) as regards to 32% of award. The performance outcome and consequent vesting was as follows:

TSR ROCE FCF

TargetPay-out

(% of max) TargetPay-out


(% of max)

Threshold Median 10% Budget +0.25% 5% £330m 5%Stretch Upper quartile 35% Budget +1.0% 18% £345m 18%Additional stretch Upper quintile 50% N/A 18% £360m 32%Outcome Between median

and upper quartile23.0% Budget 0% £357m 29.3%

Total vesting (% of max) 52.3%

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 2018 is calculated by reference to a share price of 173.80p, being the closing share price on 19 November 2018, the date on which the awards vested.

LTIP awards vesting in respect of the year ended 30 September 2017The LTIP awards granted on 9 February 2015 were subject to a relative TSR performance measure (TSR performance measured against the FTSE 250 Index) as regards 70% of the award and a ROCE performance measure as regards 30% of the award, and a general financial underpin. As the performance measures were assessed over the period ended 30 September 2017, their value at vesting should be included in the single figure table for that year. Whilst previously omitted, in the single figure table on page 70, the 2017 long-term incentive value has now been updated to reflect final vesting outcome of 26.9% (as described below) and a share price of 128.25p being the market value of a share on the date of vesting.

TSR ROCE

TargetPay-out


(% of max)

Threshold Median 17.5% 7.583% 7.5%Maximum Upper quartile 70% 8.333% 30%Outcome Below median – 7.602% 8.1%Total vesting (% of max) 8.1%

LTIP awards made during the year ended 30 September 2018Awards were granted to the executive directors on 9 February 2018 on the following basis:

Types of award

Number of shares

Face value at grant

£000(i)

% of award vesting at threshold Performance period

Simon Townsend Nil cost optionunder the LTIP

829,285 1,047 20% 1 October 2017 – 30 September 2020

Neil Smith Nil cost option under the LTIP

676,822 854 20% 1 October 2017 – 30 September 2020

(i) For these purposes, the face value of the award is calculated by multiplying the number of shares by 126.20p, which was the value of a share at the date of grant.



GOVERNANCE


The table below shows the vesting schedule for the awards granted in respect of 2018:

Vesting as a proportion of shares awarded

Threshold Stretch Additional stretch

Target Pay-out Target Pay-out Target Pay-out

Performance measures

TSR(i) Median 10% Upper quartile 35% Upper quintile 50%ROCE(ii),(iii) Budget+

0.25%5% Budget+

1.0%18% n/a 18%

FCF(iv) £345m 5% £360m 18% £375m 32%Total 20% 71% 100%

(i) The Comparator Group is Ei Group plc and the companies within the FTSE 250 (excluding Investment Trusts) at the start of the performance period on 1 October 2017.(ii) Average ROCE is the average of the Company’s ROCE (EBITDA, before non-underlying items, divided by Adjusted Capital Employed for each of the three financial

years in the performance period being years ended 30 September 2018, 2019 and 2020.(iii) The Committee considers that disclosing the forward looking three year ROCE budget is commercially sensitive and has therefore chosen not to disclose it in

advance but will provide full details if the award vests.(iv) Cumulative free cash flow is cash flow from operations less interest and taxes but before capital expenditure and disposals for each of the three financial years in

the performance period.

Irrespective of performance against TSR, ROCE and FCF, the awards will only vest to the extent that the Committee is satisfied that the Company’s underlying financial performance over the performance period supports the vesting.

There will be straight line vesting between the points and no award below threshold performance.

Performance is measured over three years; however, awards vest after three, four and five years in equal tranches.

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 2018, the Company’s shareholding guidelines for executive directors required that by the later of: (i) the fifth anniversary of the introduction of the guidelines in 2011 (or, as regards the additional element following the revision of the guidelines in 2016, the fifth anniversary of that revision); and (ii) the fifth anniversary of them joining the Board, the CEO and CFO are required to have acquired and retained a holding of Ei Group shares equivalent to the value of at least 200% and 150% of their base salaries respectively. The executive directors are required to retain 50% of the net of tax vested awards under the LTIP and/or deferred share awards until the guidelines are met. The executive directors have met their required shareholdings under the original guidelines.

The interests of the directors who held office during the period from 1 October 2017 to 30 September 2018 (and their families as at 30 September 2018 or, if earlier, the date of resignation) in the ordinary shares of the Company are as set out in the table below:

Name

At 30 September

2018

At 30 September

2017

Simon Townsend(i) 1,322,482 1,285,000Neil Smith 525,000 500,000Robert Walker 502,000 502,000Peter Baguley – –Adam Fowle 100,000 100,000Marisa Cassoni – –Jane Bednall – –David Maloney 75,000(ii) 75,000

(i) Beneficial share interests include partnership and matching shares held under the SIP of 47,562 shares for Simon Townsend at 30 September 2018 (2017: 45,080 shares) and shares held by connected persons.

(ii) At cessation on 5 July 2018.

Conditional shares under deferred share awards and LTIPs are as shown in the tables on page 78 and below. In respect of directors serving at 30 September 2018 there have been no other changes in share interests from 30 September 2018 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 holds their shares in such an arrangement.

Executive directors’ interests under LTIPDetails of conditional awards of shares made under the LTIP during the year under review and 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 when the award was granted.

Date of grantAt 1 Oct

2017

Granted during the

year

Exercised during the

yearLapsed during

the yearAt 30 Sept

2018 Status

Simon Townsend09/02/2015 536,201 – (14,424) (492,930) 28,847 Vested†

12/02/2016 829,285 – – (395,701) 433,584 Vested†

09/02/2017 829,285 – – – 829,285 Unvested09/02/2018 – 829,285 – – 829,285 Unvested 2,194,771 829,285 (14,424) (888,631) 2,121,001Neil Smith09/02/2015 437,121 – (11,759) (401,846) 23,516 Vested†

12/02/2016 676,822 – – (322,952) 353,870 Vested†

09/02/2017 676,822 – – – 676,822 Unvested09/02/2018 – 676,822 – – 676,822 Unvested 1,790,765 676,822 (11,759) (724,798) 1,731,030

† These awards have satisfied their performance conditions in part as set out above.

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.



GOVERNANCE


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

Date of grant At 1 Oct

2017

Grantedduring the

year

Exercised during the

yearAt 30 Sept

2018

Face value at grant£000 Exercisable/holding period

Simon Townsend12/12/2014 114,028 – (114,028) – – 12/12/2017 12/06/201814/12/2015 24,608 – – 24,608 25 14/12/2018 13/06/201914/12/2016 91,227 – – 91,227 94 14/12/2019 13/06/202014/12/2017(i) 50,668 – – 50,668 73 14/12/2020 13/06/202119/11/2018 – 33,299 – 33,299 55 19/11/2021 13/06/2022

280,531 33,299 (114,028) 199,802 247Neil Smith12/12/2014 99,487 – (99,487) – – 12/12/2017 12/06/201814/12/2015 23,709 – – 23,709 25 14/12/2018 13/06/201914/12/2016 74,455 – – 74,455 77 14/12/2019 13/06/202014/12/2017(i) 41,326 – – 41,326 60 14/12/2020 13/06/202119/11/2018 – 29,858 – 29,858 49 19/11/2021 13/06/2022

238,977 29,858 (99,487) 169,348 211

(i) This reflects the actual number of shares granted on 14 December 2017 at a price of 142.10p per share. As explained in the 2017 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 2017.

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 2018 financial year is therefore estimated by using the closing mid-market price of the shares on 28 September 2018 being 165.60p. 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

2017 Exercised Lapsed Granted At 30 Sept

2018

Simon 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 115.00p and 171.40p respectively. The closing mid-market price of the Company’s shares at 28 September 2018, being the last trading day of the financial year was 165.60p.

Share Incentive Plan (SIP)During the year under review, Simon Townsend purchased 1,241 shares under the SIP at 145.00p per share (2017: 1,500 at a price of 120.00p per share). These shares were matched by the Company on a 1:1 basis (2017: 1:1) conditional upon continued employment. The face value of the shares awarded under the matching arrangement was £1,800 (2017: £1,800). Details of the total partnership and matching shares held under the SIP are included in the table of directors’ interests above.

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 2018 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 2018, the total number of shares held in the Trust was 1,134,828 equivalent to 0.24% 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

2018 £000

2017 £000 % change

Chief Executive Officer– salary 488 480 1.7– benefits 29 29 –– bonus 421 473 (11.0)Average per employee– salary 31.1 33.3 (6.6)– benefits 1.9 2.4 (20.8)– bonus 3.2 4.8 (33.3)

The table above shows the movement in the remuneration for the CEO between the current and previous financial year compared with movement of the average remuneration (per head) for all Group employees. The total number of employees has 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:

2018 £m

2017 £m % change

Remuneration paid to or receivable by all employees 54 46 17.4Distributions to shareholders by way of dividends and share buybacks 20 15 33.3



GOVERNANCE


Historical comparative TSR performance graph The graph below shows the TSR in terms of change in value (with dividends re-invested) of an initial investment of £100 on 1 October 2008 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 index. The FTSE SmallCap was selected as it represents the broad equity market which the Company was a constituent member during the period and the FTSE 250 index is the Company’s comparator for relative TSR purposes under the LTIP.

0

50

100

150

200

250

300

350Value (£) Ei Group plc

FTSE 250

30 Sep 08 30 Sep 09 30 Sep 10 30 Sep 11 30 Sep 12 30 Sep 13 30 Sep 14 30 Sep 15 30 Sep 16 30 Sep 17 30 Sep 18

FTSE SmallCap

Source: Thomson Reuters Datastream

The graph shows the value at 30 September 2018 of £100 invested in the Company’s shares on 1 October 2008 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.

Chief Executive Officer remuneration for ten previous yearsYear ended 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Total remuneration £000 972 1,386 1,073 1,159 1,024 1,084 1,628 1,118 1,159† 1,816Annual bonus (%)* 18% 87% 38% 51% 30% 76% 61% 70% 66% 58%LTIP vesting (%)* 0% 0% 0% 0% 0% 0% 100% 0% 8% † 52%

* Percentage of the maximum award (for LTIP, this includes matching shares).† The total remuneration and LTIP values for 2017 have been calculated by reference to the finally determined LTIP value, as set out on page 75.

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 period

Simon Townsend 31 October 2000 1 October 2000 12 monthsNeil 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’ noticePeter Baguley 31 January 2013 Terminable on 6 months’ noticeAdam Fowle 6 February 2014 Terminable on 6 months’ noticeMarisa Cassoni 1 April 2015 Terminable on 6 months’ noticeJane Bednall 2 July 2018 Terminable on 6 months’ notice

External appointments The 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. None of the executive directors held any such appointments in the year under review (2017: none).

Application of the policy for 2019Base salaries and feesAt the date of this report the Committee has reviewed the salaries for the executive directors which take effect on 1 January 2019 and has proposed an increase of 2% for both Simon Townsend (to £500,000) and Neil Smith (to £413,000). The review of salaries for the wider employee population has not yet been concluded but it is expected to be in a similar range.

At the date of this report the fees for the Chairman and non-executive directors effective from 1 January 2019 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.

The two all-employee share plans, SAYE and SIP, will be considered on an annual basis and may be offered subject to the limits permitted under the relevant legislation.

Annual bonus 2019The maximum bonus opportunity for the 2019 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 free cash flow targets. The Committee considers that the targets for the 2019 bonus are commercially sensitive at this time and has therefore chosen not to disclose them in advance. Details will be set out retrospectively in next year’s annual report on remuneration. The personal and strategic measures are focused on three to four lead indicators of performance. All targets are considered to be demanding in the context of the Group’s circumstances.

Restricted Share award 2019Subject to shareholder approval at the 2019 AGM it is proposed that awards under the RSP will be made in the year ending 30 September 2019 at 87.5% of salary. The market value of a share for the purposes of determining the number of shares subject to an award is intended to be determined by the Committee based on the average closing share price on each of the five dealing days preceding the date of grant. Vesting will be phased over a five year period, with 33% vesting after three years, 33% after four years and 33% after five years, although all vested shares must be held to the end of year five.

The Restricted Share awards will be subject to performance underpins driven by a key set of metrics to monitor the overall business health over the vesting periods, where relevant, a quantifiable threshold will be set. The thresholds for the 2019 award will be on FCF improvement over the vesting period, improvement in NAV per share over the vesting period and a good governance underpin based on the avoidance of governance failures and expected risk management behaviours, as detailed below:

Performance underpin Description Detail

Free cash flow (FCF) FCF improvement over the vesting periods Adjusted FCF balance for financial year ended 30 September 2018 of £121 million. At each vesting point, FCF should be at least greater than this level at commencement.

NAV per share Improvement in NAV per share over the vesting periods

NAV per share as at 30 September 2018 calculated as £3.34. This should be exceeded at each vesting point.

Major governance failure No material failure in governance or an act resulting in significant reputational damage and/or material financial loss to the Group.

Qualitative measure, no quantifiable threshold available.



GOVERNANCE

Directors’ remuneration report Statement of directors’ responsibilitiesIn relation to the Group and Company financial statements

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 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 41, 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 TownsendChief Executive Officer

19 November 2018

N R SmithChief Financial Officer

19 November 2018

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 below.

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;

• Jane Bednall from 2 July 2018.

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. David Maloney attended the committee by invitation during the year. 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 are objective and independent and chose to continue to retain them as its adviser in 2018 to work with them in relation to the design of the new policy. 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 £33,950.

Shareholder vote The 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 at last year’s AGM and remuneration policy at the 2016 AGM are set out below:

Remuneration report %

Remuneration policy %

Votes cast in favour 347,850,163 97.98 280,915,725 92.81Votes cast against 7,184,798 2.02 21,748,037 7.19Total 355,034,961 302,663,762Votes withheld 200,633 2,678,709

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


P J BaguleyChairman, Remuneration Committee

19 November 2018



ACCOUNTS

Group income statementfor the year ended 30 September 2018

Group statement of comprehensive incomefor the year ended 30 September 2018

Balance sheetsat 30 September 2018

Notes

Group Company

2018£m

2017£m

2018£m

2017£m

Non-current assetsGoodwill 13 304 312 – –Intangible assets: operating lease premiums 14 9 9 4 4 Property, plant and equipment 15 3,228 3,322 1,660 1,722 Investment property 16 368 270 175 119 Investments 19 – – 1,761 1,790 Financial assets 23 – – 14 9 Trade receivables 21 3 2 2 1

3,912 3,915 3,616 3,645 Current assetsInventories 20 3 2 – –Trade and other receivables 21 55 53 685 660 Financial assets 23 3 – 3 –Cash 158 151 18 15

219 206 706 675 Non-current assets held for sale 17 13 25 7 12 Total assets 4,144 4,146 4,329 4,332 Current liabilitiesTrade and other payables 22 (207) (197) (231) (228)Current tax payable (10) (2) (2) 1 Financial liabilities 23 (186) (81) (102) –Pension 28 (1) (2) (1) (2)Provisions 26 (1) (1) (1) (1)

(405) (283) (337) (230)Non-current liabilitiesFinancial liabilities 23 (2,006) (2,180) (1,180) (1,261)Provisions 26 (5) (4) (4) (3)Deferred tax 27 (174) (176) (76) (78)

(2,185) (2,360) (1,260) (1,342)Total liabilities (2,590) (2,643) (1,597) (1,572)Net assets 1,554 1,503 2,732 2,760 EquityCalled up share capital 29 13 13 13 13 Share premium account 31 486 486 486 486 Revaluation reserve 31 751 747 424 430 Capital redemption reserve 31 12 12 12 12 Merger reserve 31 77 77 – –Treasury share reserve 31 (227) (227) (227) (227)Other reserve 31 (2) 18 298 347 Profit and loss account* 443 376 1,726 1,699 Equity attributable to members of the Parent Company 1,553 1,502 2,732 2,760 Non-controlling interests 1 1 – –Total equity 1,554 1,503 2,732 2,760

* 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 profit generated in the year for ordinary shareholders, and included in the financial statements of the Parent Company, amounted to £5 million (2017: £20 million).

Approved by the Board on 19 November 2018 and signed on its behalf by:

W S TownsendN R Smith

Notes2018

£m2017

£m

Revenue 6 695 648 Operating costs before depreciation and amortisation 7 (413) (370)EBITDA* 282 278 Depreciation and amortisation 7 (19) (17)Operating profit 263 261 Profit on sale of controlling interest in subsidiary undertaking 5 1 –Profit on sale of property 2 10 Goodwill allocated to disposals (8) (10)

Net loss on sale of property 5 (6) –Movements in valuation of the estate and related assets 5 (19) (24)Finance costs 10 (152) (179)Profit before tax 87 58 Taxation 11 (15) (4)Profit after tax attributable to members of the Parent Company 72 54 Earnings per share 12Basic 15.2p 11.2pBasic diluted 14.7p 11.1p

* Earnings before finance costs, taxation, depreciation and amortisation

2018£m

2017£m

Profit for the year 72 54 Items that will not be reclassified to the income statement:Unrealised surplus on revaluation of pub estate 8 11 Revaluation of assets on transfer to investment property – 1 Revaluation of assets on transfer to non-current assets held for sale – (6)Movement in deferred tax liability related to revaluation of the estate – 3 Other comprehensive income for the year net of tax 8 9 Total comprehensive income for the year attributable to members of the Parent Company 80 63



ACCOUNTS

Group statement of changes in equityat 30 September 2018

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 2016 14 486 748 11 77 (227) 10 328 1,447 1 1,448 Profit for the year – – – – – – – 54 54 – 54 Other comprehensive income – – 9 – – – – – 9 – 9 Total comprehensive income – – 9 – – – – 54 63 – 63 Transfer of realised revaluation surplus – – (14) – – – – 14 – – –Transfer of deferred tax – – 4 – – – – (4) – – –Share-based expense recognised in operating profit – – – – – – – 3 3 – 3 Share option entitlements exercised in the year – – – – – – 10 (9) 1 – 1 Purchase of own shares into Employee Benefit Trust – – – – – – (2) – (2) – (2)Share buybacks (1) – – 1 – – – (15) (15) – (15)Share buyback commitments – – – – – – – 5 5 – 5 At 30 September 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



ACCOUNTS

Company statement of changes in equityat 30 September 2018

Cash flow statementsfor the year ended 30 September 2018

Company

Sharecapital

£m

Sharepremiumaccount

£m

Revaluationreserve

£m

Capitalredemption

reserve£m

Mergerreserve

£m

Treasury share

reserve£m

Otherreserve

£m

Profit and loss account

£mTotal

£m

At 1 October 2016 14 486 446 11 – (227) 339 1,685 2,754 Profit for the year – – – – – – – 20 20 Other comprehensive loss – – (6) – – – – – (6)Total comprehensive (loss)/income – – (6) – – – – 20 14 Transfer of realised revaluation surplus – – (11) – – – – 11 –Transfer of deferred tax – – 1 – – – – (1) –Share-based expense recognised in operating profit – – – – – – – 3 3 Share option entitlements exercised in the year – – – – – – 10 (9) 1 Purchase of own shares into Employee Benefit Trust – – – – – – (2) – (2)Share buybacks (1) – – 1 – – – (15) (15)Share buyback commitments – – – – – – – 5 5 At 30 September 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 31) – – – – – – (29) 29 –At 30 September 2018 13 486 424 12 – (227) 298 1,726 2,732

Group Company

2018£m

2017£m

2018£m

2017£m

Cash flow from operating activitiesOperating profit 263 261 139 152 Depreciation and amortisation 19 17 11 10 Share-based expense recognised in profit 2 3 2 3 Increase in receivables (7) (7) (30) (53)Increase/(decrease) in payables 3 3 (4) (1)Increase in inventories (1) (1) – –Increase in provisions 1 1 1 –

280 277 119 111 Tax paid (9) (16) (3) (7)Net cash flows from operating activities 271 261 116 104

Cash flows from investing activitiesPayments to acquire public houses – – (9) (14)Payments made on improvements to public houses (75) (72) (38) (34)Payments to acquire other property, plant and equipment (6) (7) (6) (6)Receipts from sale of property 66 100 30 73 New loans to subsidiary undertakings – – (6) (7)Acquisition of subsidiary undertaking – (1) – (1)Dividend from subsidiary undertaking – – 13 13 Net cash flows from investing activities (15) 20 (16) 24

Cash flows from financing activitiesInterest paid (143) (149) (81) (82)Debt extinguishment costs (7) (30) (7) (30)Debt restructuring costs (7) (3) (3) (3)Payments to acquire own debt (5) – – –Payments to acquire own shares (21) (17) (21) (17)Receipts from exercise of share options – 1 – 1 New loans 340 520 340 520 Repayment of loans (406) (597) (325) (520)Net cash flows from financing activities (249) (275) (97) (131)

Net increase/(decrease) in cash 7 6 3 (3)Cash at start of year 151 145 15 18 Cash at end of year 158 151 18 15



ACCOUNTS

Notes to the accountsat 30 September 2018

1. General informationThe consolidated financial statements of Ei Group plc (the ‘Parent Company’ or the ‘Company’) for the year ended 30 September 2018 were authorised for issue by the Board on 19 November 2018. 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 compliance These 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 preparation The financial information for the year ending 30 September 2018 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 consolidation The 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 Company The 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 1 to 39, 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 23 of the accounts on pages 117 to 124.

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 34 to 38.

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 not yet adopted During the year ended 30 September 2018 the Group has adopted the following amendments to existing standards, these have not had a material impact on the Group:

• IAS 12: Income TaxesRecognition of deferred tax assets for unrealised losses - amendment to IAS 12

• IAS 7: Statement of Cash FlowsDisclosure initiative - amendment to IAS 7

Effective for periods beginning on or after 1 January 2018, which is the year ended 30 September 2019 for the Group, although earlier application is permitted:

• IFRS 2 - Share-Based PaymentsClassification 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 replaces IAS 39 and addresses the classification, measurement and de-recognition of financial assets and liabilities. The standard also introduces a new impairment model for financial assets and new rules for hedge accounting. The Group has reviewed its financial assets and liabilities and is not expecting any significant impact or material adjustment to opening balances from the adoption of the new standard on 1 October 2018.

• IFRS 15 - Revenue from Contracts with CustomersThe 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 will not have a material impact on its consolidated results and financial position, but will result in additional disclosure requirements.

Effective for periods beginning on or after 1 January 2019 which is the year ended 30 September 2020 for the Group:

• IAS 12: Income TaxesIFRIC 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 – LeasesIFRS 16 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.

On adoption the Group will 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 will be 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 is also expected to change the profile of the net charge recognised in the income statement over the lease term.

The Group has made good progress on its transition project however it is not currently practicable to provide a reasonable estimate of the full impact of the standard at this stage.

3. Accounting policies GoodwillGoodwill 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.



ACCOUNTS


3. Accounting policies (continued)

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 property The 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.

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. 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.

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.

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 payables Trade receivables are held at their original invoiced amount net of an allowance for any doubtful amounts when collection of the full amount is no longer considered probable (further detail is given in note 21). Trade payables are held at amortised cost.

Fair value measurement The 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.



ACCOUNTS



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 28, 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 shares The 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.

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.

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 profit Operating 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, finance costs and taxation.

Non-underlying items The 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 judgements The 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 below.

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.

In addition, during the period of our strategic evolution, assignment premiums where 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 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.

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) 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.



ACCOUNTS



e) 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.

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 18 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 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 transactions The 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 18.

Goodwill and investment impairment testing estimates The 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 13 and 19.

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 analysis The 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 and 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 2018

Publican Partnerships

£m

Commercial Properties

£mManaged

£mCentral

£mTotal

£m

Revenue 516 27 152 – 695Operating costs before depreciation and amortisation (209) – (124) (75) (408)Underlying EBITDA 307 27 28 (75) 287Non-underlying operating costs before depreciation and amortisation (5)Depreciation and amortisation (19)Profit on sale of controlling interest in subsidiary undertaking 1Net loss on sale of property (6)Movements in valuation of the estate and related assets (19)Net finance costs (152)Profit before tax 87Taxation (15)Profit after tax 72

Year ended 30 September 2017

Publican Partnerships

£m

Commercial Properties

£mManaged

£mCentral

£mTotal

£m

Revenue 547 21 80 – 648Operating costs before depreciation and amortisation (222) – (67) (72) (361)Underlying EBITDA 325 21 13 (72) 287Non-underlying operating costs before depreciation and amortisation (9)Depreciation and amortisation (17)Movements in valuation of the estate and related assets (24)Net finance costs (179)Profit before tax 58Taxation (4)Profit after tax 54



ACCOUNTS


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 a publican 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, the profit on sale of controlling interest in subsidiary undertaking, the profit/loss on sale of property, the movement in valuation of the estate and costs incurred in respect of refinancing.

The adjusted figures are derived from the reported figures under IFRS as follows: 2018 2017

Underlyingitems

£m

Non-underlying

items£m

Total£m

Underlyingitems

£m

Non-underlying

items£m

Total£m

Revenue 695 – 695 648 – 648 Operating costs before depreciation and amortisation (408) (5) (413) (361) (9) (370)EBITDA 287 (5) 282 287 (9) 278 Depreciation and amortisation (19) – (19) (17) – (17)Operating profit/(loss) 268 (5) 263 270 (9) 261 Profit on sale of controlling interest in subsidiary undertaking – 1 1 – – –Profit on sale of property – 2 2 – 10 10 Goodwill allocated to disposals – (8) (8) – (10) (10)

Net loss on sale of property – (6) (6) – – –Movements in valuation of the estate and related assets – (19) (19) – (24) (24)Finance costs (146) (6) (152) (149) (30) (179)Profit/(loss) before tax 122 (35) 87 121 (63) 58 Taxation (22) 7 (15) (22) 18 (4)Profit/(loss) after tax attributable to members of the Parent Company 100 (28) 72 99 (45) 54

Earnings per share Underlying 21.2p 20.5pUnderlying diluted 20.0p 19.5p

Those items identified as non-underlying are explained further below:

a) Operating costs before depreciation and amortisation A charge of £5 million (2017: £9 million) has been incurred in respect of assignment premiums paid and reorganisation costs.

During the period of our strategic evolution, the £4 million (2017: £6 million) of assignment premiums 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 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, following the reorganisation of a number of support teams in the business in the prior year at a cost of £3 million, a further £1 million has been incurred in the current year to conclude this exercise. These charges have been allocated to non-underlying as they are one-off in nature.

A tax credit of £1 million (2017: £2 million) has been recognised in relation to these costs.

b) Profit on sale of controlling interest in subsidiary undertakingOn 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. The proceeds from the sale remain outstanding at 30 September 2018 and are included in the financial assets on the balance sheet.

c) Net loss on sale of property2018

£m2017

£m

Profit on sale of property, plant and equipment 11 13 Loss on sale of property, plant and equipment (8) (5)Net profit on sale of property, plant and equipment 3 8

Profit on sale of investment property – 3 Loss on sale of investment property (1) (1)Net (loss)/profit on sale of investment property (1) 2

Net profit on sale of property before goodwill allocation 2 10 Goodwill allocated to disposals (8) (10)Net loss on sale of property (6) –

The tax impact of the sale of properties and other assets is set out in note 11.

During the year 174 properties (2017: 224 properties) and various other plots of land with a book value of £64 million (2017: £86 million) were disposed of generating gross proceeds of £71 million (2017: £109 million) which, after taking account of disposal costs resulted in an overall profit of £2 million (2017: £10 million).

Included within the total profits on sale of property above of £11 million, £5 million related to 18 properties and various plots of land with a ‘special interest’ value to particular buyers. The remaining profits of £6 million arose on 69 properties sold at an average profit of £83,000. The total losses on sale of property above of £9 million related to 87 properties sold at an average loss of £103,000.

In accordance with IAS 36 purchased goodwill is allocated to operations disposed of. Accordingly, goodwill of £8 million (2017: £10 million) has been allocated to the 174 properties (2017: 224 properties) disposed of during the year.



ACCOUNTS


5. Non-underlying items (continued)

d) Movements in valuation of the estate and related assets2018

£m2017

£m

Movement in property, plant and equipment from revaluation of the estate (see note 15) (23) (11)Movement in investment property from revaluation of the estate (see note 16) 15 7 Revaluation movement from retained estate (8) (4)Revaluation of non-current assets held for sale (see note 15) (11) (20)

(19) (24)

There is no current tax expense associated with these movements. A deferred tax credit of £3 million (2017: £4 million) arises as a result of the revaluation and write down of these properties (see note 11c).

Of the £11 million revaluation of non-current assets held for sale (2017: £20 million), £5 million (2017: £11 million) related to properties held in non-current assets held for sale at the year end.

e) Finance costsDuring the year ended 30 September 2018, Unique securitised bonds with a nominal and book value of £4 million (2017: £nil) were purchased and cancelled for the equivalent price of £1.14 (2017: £nil) for each £1 of outstanding nominal value, generating a loss of £1 million (2017: £nil).

On 6 July 2018 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 has 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 has 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 year) have been included in the carrying value of the debt.

The tender offer for the convertible bonds resulted 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 has been charged to the income statement in non-underlying finance costs, whilst £2 million has been 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 subsequent to the year end on 12 November 2018.

In the prior year, on 24 October 2016 the Group replaced its existing £138 million RCF with a new £120 million facility. Furthermore, on 14 March 2017 the £120 million non-amortising RCF was increased in size to £140 million on the same terms. The facility was available through to August 2020 and attracted an interest rate of 3% above LIBOR applicable to any drawn portion of the facility.

In addition in the prior year, on 4 November 2016 the Group completed a partial refinancing of the 2018 corporate bond. The partial refinancing resulted in a lower interest coupon and an extended debt maturity. Prior to the refinancing £350.5 million of 2018 secured corporate bonds were outstanding with a coupon of 6.5%. The Group received and accepted tender instructions for £250 million of these bonds at a cash purchase price of 111% of their principal amount. In connection with this partial refinancing the Group issued new £250 million secured corporate bonds, due in February 2022, at a coupon of 6.375%, which resulted in a reduction of the corporate bonds maturing in 2018 to £100.5 million. The new issue benefited from a security package on substantially the same terms as the 2018 bonds.

The total cash outflow arising from the bank and bond refinancing in the prior year was £32 million, being £28 million in respect of the repurchase premium on the extinguished bond, which was charged to the income statement, and total fees and disbursements of £4 million, of which £2 million was charged to the income statement and £2 million arising on the new bank facility was deferred over the life of the new debt instrument. Furthermore on 19 September 2017 the Group signed a new £50 million term loan facility, available for drawing until December 2018 with repayment of the amount drawn due by July 2020 which resulted in £1 million of fees that were deferred over the life of the new facility.

A tax credit of £1 million (2017: £6 million) has been recognised on the non-underlying finance costs.

6. Revenue2018

£m2017

£m

Drink revenue 514 473Rent revenue 151 154Food revenue 15 9Revenue from amusement and other machines 13 11Other revenue 2 1

695 648

7. Operating profitOperating profit is stated after charging:

2018£m

2017£m

Cost of inventories 251 243Other direct selling costs 8 6Managed house running costs 70 38Operating lease rentals 24 23Other property costs 11 9Administrative charges 44 42Non-underlying administrative charges 5 9

413 370Depreciation and amortisation 19 17

432 387

8. 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 51 to 55 and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditor.

2018£000

2017£000

Group audit fees 224 189Audit fees in respect of subsidiaries 105 76Audit related assurance services 25 25Other assurance services 170 54Non-audit services 12 16

536 360

Of the non-audit assurance related fees and non-audit services above of £182,000 (2017: £70,000), £182,000 (2017: £70,000) 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 nil (2017: nil). Within other assurance services above is £170,000 in relation to assurance reporting as part of the issuance of a new corporate bond (2017: £54,000).

Group audit fees include £158,000 (2017: £154,000) 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.



ACCOUNTS


9. Staff costs

Group Company

2018£m

2017£m

2018£m

2017£m

Wages and salaries 52 44 33 33Social security costs 5 5 4 4Other pension costs 2 2 2 2

59 51 39 39

Included in wages and salaries is an expense relating to share-based payments of £2 million (2017: £3 million). All of this expense arises from transactions accounted for as equity-settled share-based payments (see note 30).

Other pension costs represents payments made into employees’ individual defined contribution plans.

The average monthly number of employees comprised:

Group Company

2018No.

2017No.

2018No.

2017No.

Operations staff 1,558 1,058 261 259Administration staff 314 311 314 311

1,872 1,369 575 570

Directors’ remuneration is summarised below to the nearest £000 with full detail given in the directors’ remuneration report.

2018£000

2017£000

Directors’ remuneration* 2,192 2,252Executive directors’ pensions 223 218Share-based payments† 903 854

* 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 £38,000 (2017: £518,000).

10. Finance costs

2018£m

2017£m

Bank borrowings 4 4 Corporate bonds/securitised bonds 140 144 Other interest payable and finance costs 2 1 Total underlying finance costs 146 149

Non-underlying finance costs:Other interest payable and finance costs 6 30 Non-underlying finance costs 6 30

Total net finance costs 152 179

11. Taxationa) Total tax expense recognised in the income statement

2018 2017

Underlyingitems

£m

Non-underlying

items£m

Total£m

Underlyingitems

£m

Non-underlying

items£m

Total£m

Current taxUK corporation tax 23 (2) 21 20 (7) 13 Adjustments in respect of prior years (4) – (4) (2) – (2)Total current tax 19 (2) 17 18 (7) 11 Deferred taxOrigination and reversal of temporary differences 3 (9) (6) 4 (12) (8)Adjustments in respect of prior years – 4 4 – 1 1 Total deferred tax 3 (5) (2) 4 (11) (7)Taxation 22 (7) 15 22 (18) 4

b) Tax charge reconciliation 2018 2017

Underlyingitems

£m

Non-underlying

items£m

Total£m

Underlyingitems

£m

Non-underlying

items£m

Total£m

Profit/(loss) before tax 122 (35) 87 121 (63) 58 Profit/(loss) on ordinary activities before tax at 19.0% (2017: 19.5%) 23 (7) 16 24 (12) 12 Effects of:Non taxable expenses/(income) not deductible for tax purposes 3 (3) – – (3) (3)Movement in the deferred tax liability for retained properties due to indexation* – (1) (1) – (4) (4)Adjustments in respect of prior years (4) 4 – (2) 1 (1)

Total tax charge/(credit) in the income statement 22 (7) 15 22 (18) 4

* 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 2018 is £1 million (2017: £4 million). This has been classed 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.

c) Deferred tax recognised in the income statement 2018 2017

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 2 (3) (1) 3 (4) (1)Deferred tax on the movement in valuation of the estate* – (5) (5) – (4) (4)Movement in the deferred tax liability for retained properties due to indexation – (1) (1) – (4) (4)Adjustments in respect of prior years – 4 4 – 1 1

3 (5) (2) 4 (11) (7)

* The £5 million (2017: £4 million) deferred tax credit on the movement in valuation of the pub estate includes a credit of £3 million (2017: £4 million), being the tax effect of the £19 million (2017: £24 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 £1 million (2017: £2 million) in respect of properties disposed, and a net £3 million credit (2017: £2 million) for other tax differences based on a tax rate of 17% (2017: 17%).



ACCOUNTS


11. Taxation (continued)

d) Tax recognised directly in other comprehensive income

2018£m

2017£m

Movement in deferred tax liability related to revaluation of the estate – 3 Tax credit in other comprehensive income – 3

The movement in the deferred tax liability relating to revaluation of property and rolled over gains is calculated as follows: 2018

£m2017

£m

Tax effect of revaluation of property and properties sold and awaiting sale (2) (1)Movement in indexation during the year 2 4 Total movement as above – 3

12. Earnings per share The calculation of basic earnings per share is based on the 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 dilutive to the calculation of basic diluted earnings per share they are included in the calculation of both basic diluted and underlying diluted earnings per share.

For the year ended 30 September 2018, the adjustment for share options is assessed as being dilutive (2017: dilutive) which has resulted in an adjustment to the weighted average number of equity shares in issue during the year of 5.4 million shares (2017: 3.5 million shares).

For the year ended 30 September 2018, the adjustment for the convertible bonds is assessed as being dilutive (2017: dilutive) which has resulted in an adjustment to profit in the calculation of diluted earnings per share of £5.7 million (2017: £5.5 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 50.1 million shares (2017: 50.8 million shares).

2018 2017

Earnings£m

Per share amount

pEarnings

£m

Per share amount

p

Basic earnings per share 71.7 15.2 53.8 11.2Diluted earnings per share 77.4 14.7 59.3 11.1Underlying earnings per share 99.7 21.2 98.9 20.5Underlying diluted earnings per share 105.4 20.0 104.4 19.5

2018m

2017m

Weighted average number of shares 470.9 481.9 Dilutive share options 5.4 3.5 Dilutive convertible loan note shares 50.1 50.8 Diluted weighted average number of shares 526.4 536.2

Following redemption of 98% of the nominal value of convertible bonds before the current year end, a pro-rated number of shares has been taken into account in the calculation of diluted weighted average number of shares and a pro-rated value of post-tax interest cost has been added back to the profit in the year.

13. Goodwill 2018

£m2017

£m

At 1 October 312 321 Goodwill arising on new business combinations – 1 Allocated to disposals (8) (10)At 30 September 304 312

Business combination During the prior year the Group purchased 51% of the share capital of Bestplace Limited, a small boutique hostel operator in London, for consideration of £1 million. Goodwill of £1 million has arisen on the transaction being the excess of the consideration over the fair value of the tangible and intangible assets and liabilities, and this goodwill has been allocated to the managed segment.

Allocation to disposals In accordance with IAS 36 goodwill is allocated to operations disposed of and accordingly, goodwill of £8 million (2017: £10 million) has been allocated to the 174 pubs (2017: 224 pubs) disposed of during the year.

Impairment testingGoodwill acquired via business combinations is tested annually for impairment. At 30 September 2018 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.

The carrying amount of goodwill allocated to the Publican Partnerships segment was £248 million (2017: £271 million) with the balance allocated to the Commercial Properties segment of £31 million (2017: £24 million) and Managed segment of £25 million (2017: £17 million).

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 2% growth rate in operating income (2017: 2%) which was selected as prudently below the Group’s estimate of the long-term average growth rate. 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.

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. The pre-tax risk adjusted discount rate used in the testing at 30 September 2018 was 7.8% (2017: 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 2018, the headroom on the impairment test is £786 million (2017: £717 million) for the Publican Partnerships segment, £82 million (2017: £74 million) for the Commercial Properties segment and £241 million (2017: £254 million) for the Managed segment. The pre-tax adjusted discount rate could increase to 9.3% (2017: 9.1%) for the Publican Partnerships segment, 9.0% (2017: 9.2%) for the Commercial Properties segment and 9.5% (2017: 11.0%) for the Managed segment before any impairment would be required. Management have considered the volatility in the current economic climate within the risk adjusted cash flows and the growth rate of any cash flows beyond the budget period would need to fall to 0.2% (2017: 0.5%) for the Publican Partnerships segment, 0.7% (2017: 0.4%) for the Commercial Properties segment and 0.1% (2017: 0%) for the Managed segment before any impairment would be required. There is no impairment to goodwill in the current or prior period.



ACCOUNTS


14. Intangible assets: operating lease premiumsGroup Company

2018£m

2017£m

2018£m

2017£m

Cost: At 1 October and 30 September 14 14 7 7 Amortisation:At 1 October and 30 September 5 5 3 3 Net book value:At 30 September 9 9 4 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 92 years.

There are 46 properties within the Group and 28 properties within the Parent Company attracting operating lease premiums in 2018 (2017: 48 properties in the Group and 28 properties in the Parent Company).

15. Property, plant and equipment Group

Licensed land and buildings

£m

Landlord’s fixtures and

fittings £m

Other assets

£mTotal

£m

Cost or valuationAt 1 October 2016 3,206 272 42 3,520 Additions 41 42 7 90 Revaluation:– Recognised in the statement of comprehensive income 11 – – 11 – Recognised in the income statement (11) – – (11)Revaluation of assets on transfer to investment property:– Recognised in the statement of comprehensive income 1 – – 1 Net transfers to investment property (79) (8) – (87)Revaluation of assets on transfer to non-current assets held for sale:– Recognised in the statement of comprehensive income (6) – – (6)– Recognised in the income statement (20) – – (20)Net transfers to non-current assets held for sale (60) (14) – (74)Disposals – (7) (2) (9)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:– Recognised in the income statement (11) – – (11)Net transfers to non-current assets held for sale (37) (9) – (46)Disposals (1) (12) (5) (18)At 30 September 2018 2,984 297 47 3,328 DepreciationAt 1 October 2016 15 54 17 86 Revaluation on transfer to investment property – (2) – (2)Charge for the year 2* 12 3 17 Net transfers to non-current assets held for sale (1) (3) – (4)Disposals – (2) (2) (4)At 1 October 2017 16 59 18 93 Revaluation on transfer to investment property – (2) – (2)Charge for the year 2* 14 3 19 Net transfers to non-current assets held for sale (1) (1) – (2)Disposals – (5) (3) (8)At 30 September 2018 17 65 18 100 Net book valueAt 30 September 2018 2,967 232 29 3,228 At 30 September 2017 3,067 226 29 3,322

* Relates to finance lease amortisation



ACCOUNTS


15. Property, plant and equipment (continued)

CompanyLicensedland andbuildings

£m

Landlord’sfixtures and

fittings£m

Otherassets

£mTotal

£m

Cost or valuationAt 1 October 2016 1,655 170 39 1,864 Additions 36 21 7 64 Revaluation:– Recognised in the statement of comprehensive income (1) – – (1)– Recognised in the income statement (15) – – (15)Revaluation of assets on transfer to non-current assets held for sale:– Recognised in the statement of comprehensive income (6) – – (6)– Recognised in the income statement (13) – – (13)Net transfers to non-current assets held for sale (41) (11) – (52)Net transfers to investment property (49) (5) – (54)Disposals – (4) (2) (6)At 1 October 2017 1,566 171 44 1,781 Additions 32 21 5 58 Revaluation:– Recognised in the income statement (15) – – (15)Revaluation of assets on transfer to investment property:– Recognised in the statement of comprehensive income (2) – – (2)Net transfers to investment property (51) (6) – (57)Revaluation of assets on transfer to non-current assets held for sale:– Recognised in the statement of comprehensive income (2) – – (2)– Recognised in the income statement (7) – – (7)Net transfers to non-current assets held for sale (17) (5) – (22)Disposals – (7) (5) (12)At 30 September 2018 1,504 174 44 1,722 DepreciationAt 1 October 2016 5 33 17 55 Revaluation on transfer to investment property – (1) – (1)Charge for the year 1* 6 3 10 Net transfers to non-current assets held for sale – (3) – (3)Disposals – – (2) (2)At 1 October 2017 6 35 18 59 Revaluation on transfer to investment property – (1) – (1)Charge for the year 1* 7 3 11 Net transfers to non-current assets held for sale (1) – – (1)Disposals – (3) (3) (6)At 30 September 2018 6 38 18 62 Net book valueAt 30 September 2018 1,498 136 26 1,660 At 30 September 2017 1,560 136 26 1,722

* Relates to finance lease amortisation

If licensed land and buildings had been measured using the cost model, the carrying amounts would be as follows:

Group Company


£m


£m

At 30 September 2018Cost 2,514 1,195 Accumulated depreciation (30) (18)Net book value 2,484 1,177 At 30 September 2017Cost 2,602 1,237 Accumulated depreciation (30) (19)Net book value 2,572 1,218

Within the Group the carrying value of property held under finance leases at 30 September 2018 was £98 million (2017: £100 million). Additions during the year include £4 million to property held under finance leases (2017: £3 million). Within the Parent Company the carrying value of property held under finance leases at 30 September 2018 was £28 million (2017: £30 million). Additions during the year include £1 million to property held under finance leases (2017: £1 million).

At 30 September 2017, the Group had entered into contractual commitments to purchase £6 million (2017: £6 million) of property, plant and equipment. At 30 September 2018, the Parent Company had entered into contractual commitments to purchase £5 million (2017: £3 million) of property, plant and equipment.

16. Investment property Group Company

£m £m

ValuationAt 1 October 2016 196 82 Additions 3 –Net transfers from property, plant and equipment 85 53 Revaluation 7 3 Net transfers to non-current assets held for sale (21) (19)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 30 September 2018 368 175

Within the Group the carrying value of property held under finance leases at 30 September 2018 was £15 million (2017: £14 million). Additions during the year include £nil to property held under finance leases (2017: £nil). Within the Parent Company the carrying value of property held under finance leases at 30 September 2018 was £9 million (2017: £9 million). Additions during the year include £nil to property held under finance leases (2017: £nil).



ACCOUNTS


17. Non-current assets held for sale Group Company

2018£m

2017£m

2018£m

2017£m

At 1 October 25 21 12 10 Net transfer from property, plant and equipment (see note 15) 44 70 21 49 Net transfer from investment property (see note 16) 4 21 4 19 Write down to fair value less costs to dispose (1) (1) (1) –Disposals (59) (86) (29) (66)At 30 September 13 25 7 12 Representing:Property, plant and equipment 13 24 7 11 Investment property – 1 – 1

13 25 7 12

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 47 properties (2017: 85 properties). Within the Group a balance of £1 million (2017: £2 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 25 properties which are expected to be sold within the next year (2017: 40 properties). Within the Parent Company a balance of £1 million (2017: £1 million) in relation to these properties is held within the revaluation reserve representing revaluation surpluses.

18. 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, plant and equipmentValuations 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 2018 by GVA Grimley Limited 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 landlords’ 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.

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: 2018

£m2017

£m

Income statementRevaluation loss charged as an impairment (50) (47)Reversal of past impairments 27 36 Gains on revaluation of investment property 17 9 Losses on revaluation of investment property (2) (2)

(8) (4)

2018£m

2017£m

Revaluation reserveUnrealised surplus 69 69 Reversal of past revaluation surplus (61) (58)

8 11



ACCOUNTS


18. Property fair value measurements (continued)

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 FMTTotal

numberover 12

times10 - 12

times8 - 10 times

6 - 8 times

under 6 times

FMT

inc

om

e b

an

din

gs

At 30 September 2017more than £90,000 per annum 1,378 84 483 656 123 32£60,000 to £90,000 per annum 1,682 73 579 804 180 46less than £60,000 per annum 1,008 43 304 483 139 39

4,068 200 1,366 1,943 442 117At 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 1,856 417 104

FMT

inc

om

e b

an

din

gs

Number of pub assets – within non-current assets held for sale

At 30 September 2017more than £90,000 per annum – – – – – –£60,000 to £90,000 per annum 2 – 1 – – 1less than £60,000 per annum 83 28 8 4 7 36

85 28 9 4 7 37At 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 21

Inco

me

ban

din

gs

Number of assets – within investment property

Multiple applied to incomeTotal

numberover 16

times14 - 16

times12 - 14

times10 - 12

timesunder 10

times

At 30 September 2017more than £90,000 per annum 67 5 9 40 8 5£60,000 to £90,000 per annum 93 9 17 40 17 10less than £60,000 per annum 146 8 20 51 42 25

306 22 46 131 67 40At 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 31

Company

Number of pub assets – within property, plant and equipment

Multiple applied to FMTTotal

numberover 12

times10 - 12

times8 - 10 times

6 - 8 times

under 6 times

FMT

inc

om

e b

an

din

gs

At 30 September 2017more than £90,000 per annum 664 16 302 295 44 7£60,000 to £90,000 per annum 869 20 426 362 43 18less than £60,000 per annum 551 20 245 223 50 13

2,084 56 973 880 137 38At 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 34

FMT

inc

om

e b

an

din

gs

Number of pub assets – within non-current assets held for sale

At 30 September 2017more than £90,000 per annum – – – – – –£60,000 to £90,000 per annum 1 – – – – 1less than £60,000 per annum 39 15 5 1 2 16

40 15 5 1 2 17At 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 11

Inco

me

ban

din

gs

Number of assets – within investment property

Multiple applied to incomeTotal

numberover 16

times14 - 16

times12 - 14

times10 - 12

timesunder 10

times

At 30 September 2017more than £90,000 per annum 26 – – 16 5 5£60,000 to £90,000 per annum 53 4 10 29 7 3less than £60,000 per annum 71 1 10 27 15 18

150 5 20 72 27 26At 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 21



ACCOUNTS


18. Property fair value measurements (continued)

Sensitivity analysis table The 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 Company

2018£m

2017£m

2018£m

2017£m

FMT sensitivity+ 2.5% 89 89 46 46 - 2.5% (89) (89) (46) (46)Multiple sensitivity+ 0.25 91 91 46 46 - 0.25 (91) (91) (46) (46)

The properties used as security for the corporate bonds in Ei Group plc have been valued by GVA Grimley Limited (1,948 properties) and all properties held by Unique Pub Properties Limited (Unique) have been valued by Colliers International Property Advisers UK LLP (2,077 properties). The balance of the estate held in Ei Group plc (219 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 2018

Property,plant and

equipmentInvestment

property

Non-currentassets held

for sale

Addoperating

leases*Total

properties

Lessnon-viable

and closedproperties

Totaltrading

properties

Properties valued by GVA Grimley Limited 1,803 145 – – 1,948 (7) 1,941Properties valued internally 165 54 – – 219 (1) 218Other – – 25 209 234 (17) 217Total Parent Company 1,968 199 25 209 2,401 (25) 2,376Properties valued by Colliers International Property Advisers UK LLP 1,891 186 – – 2,077 (1) 2,076Other – – 22 24 46 (13) 33Total Group 3,859 385 47 233 4,524 (39) 4,485

At 30 September 2017

Property,plant and

equipmentInvestment

property

Non-currentassets held

for sale

Addoperating

leases*Total

properties

Lessnon-viable

and closedproperties

Totaltrading

properties

Properties valued by GVA Grimley Limited 1,881 103 – – 1,984 (3) 1,981Properties valued by Colliers International Property Advisers UK LLP 3 2 – – 5 – 5Properties valued internally 200 45 – – 245 (2) 243Other – – 40 214 254 (21) 233Total Parent Company 2,084 150 40 214 2,488 (26) 2,462Properties valued by Colliers International Property Advisers UK LLP 1,984 156 – – 2,140 – 2,140Other – – 45 25 70 (34) 36Total Group 4,068 306 85 239 4,698 (60) 4,638

* not subject to valuation

19. Investments Company

2018£m

2017£m

Cost or valuationAt 1 October 1,790 1,790 Impairment (29) –At 30 September 1,761 1,790

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 discounted at 7.75% (2017: 7.75%) based on the Group’s pre-tax risk adjusted WACC and a long-term growth rate appropriate to the Unique sub-group of 2.0% (2017: 2.3%). Following the reassessment of the growth rate the recoverable amount of the Unique sub-group has been determined as £1,687 million (2017: £1,828 million), resulting in an impairment of £29 million (2017: headroom of £112 million) which has been recorded in the period. 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 £115 million (2017: an impairment of £15 million) or a decrease of 0.25% in the discount rate used would result in headroom of £97 million (2017: increase the headroom to £253 million). Similarly an increase of 0.25% in the long-term growth rate used would result in headroom of £109 million (2017: £267 million) or a decrease of 0.25% in the long-term growth rate used would result in a further impairment of £126 million (2017: an impairment of £28 million).

The Parent Company’s subsidiaries are listed in note 33.

20. Inventories Group Company

2018£m

2017£m

2018£m

2017£m

Goods for resale 3 2 – –

21. Trade and other receivables Trade 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 Company

2018£m

2017£m

2018£m

2017£m

Trade receivables 3 2 2 1

Trade and other receivables within current assets represents the following:

Group Company

2018£m

2017£m

2018£m

2017£m

Trade receivables 40 39 29 29Amounts owed by subsidiary undertakings – – 647 622Prepayments and accrued income 11 10 8 8Other receivables 4 4 1 1

55 53 685 660

Group Company

The ageing of total trade receivables at 30 September was as follows:2018

£m2017

£m2018

£m2017

£m

Not past due 40 40 29 30Up to 30 days overdue 3 1 2 –

43 41 31 30



ACCOUNTS


21. Trade and other receivables (continued)

Credit risk There 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 a bad debt provision which has been determined by management following a review of individual receivable accounts and is based on prior experience and known factors at the balance sheet date after taking into account collateral held in the form of cash deposits. Receivables are written off against the bad debt provision when management considers that the debt is no longer recoverable.

At 30 September 2018 the value of deposits held by the Group is £32 million (2017: £32 million) and by the Parent Company is £19 million (2017: £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 Company

2018£m

2017£m

2018£m

2017£m

Provision as at 1 October 2 2 2 2 Increase in provision during the year 2 1 2 1 Provision utilised during the year (1) – (1) –Provision released during the year (1) (1) (1) (1)Provision as at 30 September 2 2 2 2

There are no indications as at 30 September 2018 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.

22. Trade and other payables

Group Company

2018£m

2017£m

2018£m

2017£m

Trade payables 46 37 43 35Amounts due to subsidiary undertakings – – 77 79Accruals and deferred income 114 113 85 85Other payables 47 47 26 29

207 197 231 228

At 30 September 2018 the value of deposits held by the Group in other payables is £32 million (2017: £32 million) and by the Parent Company is £19 million (2017: £19 million).

23. Financial assets and liabilities Group Company

Financial assets2018

£m2017

£m2018

£m2017

£m

CurrentOther loans receivable 3 – 3 –

3 – 3 –Non-currentLoans due from subsidiary undertakings (see note 33) – – 14 9

– – 14 9Total financial assets 3 – 17 9

Group Company

Financial liabilities2018

£m2017

£m2018

£m2017

£m

CurrentCorporate bonds 102 – 100 –Securitised bonds 84 81 – –Loans due to subsidiary undertakings (see note 33) – – 2 –

186 81 102 –Non-currentBank borrowings 12 55 12 55Corporate bonds 1,167 1,205 1,167 1,120Securitised bonds 824 917 – –Finance lease payables 3 3 1 1Loans due to subsidiary undertakings (see note 33) – – – 85

2,006 2,180 1,180 1,261Total financial liabilities 2,192 2,261 1,282 1,261

‘Bank borrowings’ refers to the revolving credit facility (see table on page 118).

‘Corporate bonds’ refers to secured and unsecured bonds and an unsecured convertible bond (see table on page 118).

‘Securitised bonds’ refers to secured bonds (see table on page 118).

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 2018 was also assessed to be insignificant.



ACCOUNTS


23. Financial assets and liabilities (continued) The nominal, book and fair values of financial assets and liabilities have been analysed into categories as below:

Group

Interest rate

2018 Nominal

value £m

2018 Book value

£m

2018 Fair

value £m

2017 Nominal

value £m

2017 Book value

£m

2017 Fair

value £m

Bank borrowings:Revolving credit facility LIBOR + 3.0% 15 12 15 55 55 55

15 12 15 55 55 55 Corporate bonds:Secured bond – issued 9 May 2000 6.875% 125 125 138 125 125 139 Secured bond – issued 15 February 2001 6.875% 125 125 136 125 124 139 Secured bond – issued 26 February 2002 6.375% 275 273 307 275 273 308 Secured bond – issued 3 March 2003 6.5% 100 100 101 100 100 106 Secured bond – issued 7 October 2014 6.0% 250 248 271 250 248 272 Secured bond – issued 4 November 2016 6.375% 250 250 259 250 250 271 Unsecured bond – issued 25 September 2018 7.5% 150 146 153 – – –Unsecured convertible bond – issued 10 September 2013 3.5% 2 2 2 97 85 99

1,277 1,269 1,367 1,222 1,205 1,334 Securitised bonds:A3 – issued 30 March 1999 6.542% 168 168 176 227 229 247 A4 – issued 20 September 2002 5.659% 321 319 356 347 345 394 M – issued 30 March 1999 7.395% 225 229 250 225 231 259 N – issued 20 September 2002 6.464% 190 192 185 190 193 187

904 908 967 989 998 1,087 2,196 2,189 2,349 2,266 2,258 2,476

Finance lease payables (see note 25) – 3 3 – 3 3 Total debt 2,196 2,192 2,352 2,266 2,261 2,479 Cash* (158) (158) (151) (151)Underlying net debt / net debt (see note 32) 2,038 2,034 2,115 2,110

* 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.

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

2018 Nominal

value £m

2018 Book value

£m

2018 Fair

value £m

2017 Nominal

value £m

2017 Book value

£m

2017 Fair

value £m

Bank borrowings:Revolving credit facility LIBOR + 3.0% 15 12 15 55 55 55

15 12 15 55 55 55 Corporate bonds:Secured bond – issued 9 May 2000 6.875% 125 125 138 125 125 139 Secured bond – issued 15 February 2001 6.875% 125 125 136 125 124 139 Secured bond – issued 26 February 2002 6.375% 275 273 307 275 273 308 Secured bond – issued 3 March 2003 6.5% 100 100 101 100 100 106 Secured bond – issued 7 October 2014 6.0% 250 248 271 250 248 272 Secured bond – issued 4 November 2016 6.375% 250 250 259 250 250 271 Unsecured bond – issued 25 September 2018 7.5% 150 146 153 – – –

1,275 1,267 1,365 1,125 1,120 1,235 1,290 1,279 1,380 1,180 1,175 1,290

Finance lease payables (see note 25) – 1 1 – 1 1 Intercompany:Amounts owed to subsidiary undertakings 2 2 2 97 85 85 Total debt 1,292 1,282 1,383 1,277 1,261 1,376 Cash (18) (18) (15) (15)Underlying net debt / net debt 1,274 1,264 1,262 1,246

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 borrowingsIn the prior year, on 24 October 2016 a new £120 million non-amortising revolving credit facility (RCF) was agreed, which was available through to August 2020 and attracted interest at 3% above LIBOR on the drawn balance. This replaced the £138 million RCF which attracted interest at the same rate and was due to expire in September 2018. On 14 March 2017 the RCF was increased in size to £140 million on the same terms.

In the current year, on 14 August 2018 this facility was further increased to £150 million and the availability was extended to August 2022.

Additionally, in the prior year, on 19 September 2017 the Group entered into a new committed term loan bank facility of £50 million which is available for drawing until December 2018 with repayment of the amount drawn due by July 2020.

Corporate bondsOn 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.



ACCOUNTS


23. Financial assets and liabilities (continued) 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 a notice to redeem the remaining £1.6 million of the convertible bonds. Subsequent to the year end, on 12 November 2018 the remaining bonds were redeemed at par.

In the prior year, on 4 November 2016 the Group completed a partial refinancing of the 2018 corporate bond. The partial refinancing resulted in a lower interest coupon and an extended debt maturity. Prior to the refinancing £350.5 million of 2018 secured corporate bonds were outstanding with a coupon of 6.5%. The Group received and accepted tender instructions for £250 million of these bonds at a cash purchase price of 111% of their principal amount resulting in a £28 million repurchase premium. In connection with this partial refinancing the Group issued new £250 million secured corporate bonds, due in February 2022, at a coupon of 6.375%, resulting in a reduction of the corporate bonds maturing in 2018 to £100.5 million. The new issue benefits from a security package on substantially the same terms as the 2018 bonds.

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 bondsDuring the year the Group has made scheduled repayments on the Unique A3 and A4 securitised bonds which together with £4 million of bonds purchased and cancelled, leaves £904 million outstanding at the year end. At 30 September 2018 the Group was £75 million ahead of the amortisation schedule through early repayment and market purchases.

IntercompanyThe amount owed to subsidiary undertakings relates 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.

Financial instruments and risk The 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.

The proportion of nominal value of borrowings comprised:

Group Company

2018 2017 2018 2017

Bank borrowings 1% 2% 1% 5%Corporate bonds 58% 54% 99% 95%Securitised bonds 41% 44% – –

The maturity of the debt and interest payments is set out below:

Group

2018 2017

Debt £m

Interest £m

Total £m

Debt £m

Interest £m

Total £m

In more than five years 1,222 257 1,479 1,184 327 1,511 In more than two years but not more than five years 699 303 1,002 816 312 1,128 In more than one year but not more than two years 89 128 217 185 129 314 In one year or less or on demand 186 139 325 81 140 221

2,196 827 3,023 2,266 908 3,174

Company

2018 2017

Debt £m

Interest £m

Total £m

Debt £m

Interest £m

Total £m

In more than five years 800 156 956 650 196 846 In more than two years but not more than five years 390 189 579 527 178 705 In more than one year but not more than two years – 77 77 100 73 173 In one year or less or on demand 102 83 185 – 79 79

1,292 505 1,797 1,277 526 1,803

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 £2,192 million (2017 £2,261 million) in the Group and £1,282 million (2017: £1,261 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 and the share buyback commitment is within one year.

An analysis of minimum lease payments due under finance leases is set out in note 25.

The Group’s bank borrowings, corporate bonds and securitised bonds are repayable as follows:

Bank borrowings:Revolving credit facility August 2022Term loan facility July 2020Corporate bonds:£125 million 6.875% bond May 2025£125 million 6.875% bond February 2021£275 million 6.375% bond September 2031£100.5 million 6.5% bond December 2018£249.5 million 6.0% bond October 2023£250 million 6.375% bond February 2022£150 million 7.5% bond March 2024£1.6 million 3.5% convertible bond November 2018Securitised bonds:A3 December 2013 – March 2021A4 September 2013 – June 2027M June 2021 – March 2024N September 2027 – March 2032



ACCOUNTS


23. Financial assets and liabilities (continued)

Details of undrawn borrowing facilities available at 30 September are as follows:

Group Company

Expiring:2018

£m2017

£m2018

£m2017

£m

In more than five years 100 148 – –In more than two years but not more than five years 183 139 135 135In more than one year but not more than two years 54 – 50 –In one year or less or on demand – – – –

337 287 185 135

Group Company

The undrawn facilities relate to: 2018

£m2017

£m2018

£m2017

£m

Undrawn liquidity facility 152 152 – –Undrawn element of revolving credit facility 135 85 135 85Undrawn term loan facility 50 50 50 50

The liquidity facility is in respect of the Unique securitisation and is a renewable committed facility of £152 million (2017: £152 million) for a term of 364 days. 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 20 September 2019. The facility relates to the bonds that amortise over a period to 2032 and it reduces as the bonds amortise. Of the total facility available at 30 September 2018, £4 million expires within one to two years, £48 million expires within two to five years and £100 million expires in more than five years.

Interest rate risk The 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 2018, the Group’s borrowings were 99% fixed with an average interest rate of 6.4% for 6 years (2017: 98% fixed with an average interest rate of 6.3% for 6 years). The Parent Company’s borrowings were 87% fixed with an average interest rate of 6.5% for 6 years (2017: 95% fixed with an average interest rate of 6.3% for 7 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 £nil (2017: £nil) and the interest payable would increase by £nil (2017: £1 million). If interest rates were to decrease by 50 basis points the interest receivable in the Group would decrease by £nil (2017: £nil) and the interest payable would decrease by £nil (2017: £1 million).

If interest rates were to increase by 50 basis points the interest payable in the Parent Company would increase by £nil (2017: £nil). If interest rates were to decrease by 50 basis points the interest payable in the Parent Company would decrease by £nil (2017: £nil). There are no floating rate receivables in the Parent Company and therefore no exposure within interest receivable to movements in interest rates.

Security The 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, Unique Pubs Limited and its subsidiaries and Enterprise Funding Limited. 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 2018 is property, plant and equipment £3,199 million (2017: £3,293 million), investment property £368 million (2017: £270 million) operating lease premiums £9 million (2017: £9 million) and non-current assets held for sale £13 million (2017: £25 million). The value of assets within the Parent Company secured by way of a fixed or floating charge as at 30 September 2018 is property, plant and equipment £1,634 million (2017: £1,696 million), investment property £175 million (2017: £119 million) operating lease premiums £4 million (2017: £4 million) and non-current assets held for sale £7 million (2017: £12 million).

The security pledged for the Group’s debt is summarised below:Debt instrument Security

Bank borrowings – 1st floating charge over the balance of properties in the Parent Company not already secured by a 1st fixed charge created by the corporate bonds.

– 2nd 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)

– 1st fixed charge over the 1,948 properties in the Parent Company valued by GVA Grimley Limited (see note 18).

– 2nd 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. The covenants are unchanged under the amended and extended revolving credit facility.

There are no covenants on the term loan facility until a loan is drawn.

There are two covenants that relate to the corporate bonds (excluding the unsecured bond and the unsecured convertible 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 new 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.



ACCOUNTS


23. Financial assets and liabilities (continued)

Change of control All 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.

Term loan facility dated 19 September 2017 If any person or group of persons acting in concert gains control of the Company then the Company shall promptly notify the agent. A lender shall not be obliged to fund a loan and may cancel its commitment 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 £100.5 million 6.5% secured bonds due 2018 £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.

Unsecured convertible bond due 2018 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 holder of each bond will have the right to require the Issuer to redeem that bond on the change of control put date at its principal amount, together with accrued and unpaid interest up to (but excluding) such date.

24. 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.

25. LeasesThe Group and the Parent Company as lessee The 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 leases

Group Company

2018£m

2017£m

2018£m

2017£m

Future 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 19 21 8 9

21 23 9 10 Future finance lease interest (18) (20) (8) (9)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 (2017: 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 £46 million (2017: £59 million). Future minimum rentals receivable in the Parent Company, from non-cancellable sub-leases on the above properties are £17 million (2017: £30 million).

Operating leases

Group Company

2018£m

2017£m

2018£m

2017£m

Operating lease rentals recognised as an expense in the year 21 21 20 20

Group Company

2018£m

2017£m

2018£m

2017£m

Future minimum lease payments due under operating leases:Within one year 21 21 20 19After one year but not more than five years 81 84 78 77In more than five years 271 291 248 258

373 396 346 354

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 £98 million (2017: £110 million). Future minimum rentals receivable in the Parent Company, from non-cancellable sub-leases on the above properties are £137 million (2017: £135 million).



ACCOUNTS


25. Leases (continued)

The Group and Parent Company as lessor The 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 Company

2018£m

2017£m

2018£m

2017£m

Future minimum lease rentals receivable under operating leases:Within one year 130 135 84 78After one year but not more than five years 383 414 246 259In more than five years 498 542 286 300

1,011 1,091 616 637

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 (2017: 15 years) remaining on their agreements and within the Parent Company have an average term of 14 years (2017: 14 years) remaining on their agreements.

26. Provisions

Group Company

2018£m

2017£m

2018£m

2017£m

At 1 October:Current 1 – 1 –Non-current 4 4 3 4

5 4 4 4Movement during the year:Increase in provision during the year 3 2 2 1Release of provision during the year (2) (1) (1) (1)

1 1 1 –At 30 September:Current 1 1 1 1Non-current 5 4 4 3

6 5 5 4

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 of. The remaining lease terms vary from 0 to 54 years.

27. Deferred taxThe deferred tax in the balance sheet relates to the following:

Group Company

2018£m

2017£m

2018£m

2017£m

Unrealised surplus on revaluation of fixed assets and rolled over gains 134 136 48 50 Accelerated capital allowances 44 45 29 30 Share-based payments (1) (1) (1) (1)Temporary differences (3) (4) – (1)

174 176 76 78

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 2017 136 Reduction in deferred tax liability due to indexation credited to the income statement (2)Reduction in deferred tax liability due to movements from revaluation of the estate and disposals recognised in the income statement –Reduction in deferred tax liability recognised in other comprehensive income –Closing provision at 30 September 2018 134

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.

28. 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. Once the deferred premiums have been paid, the Trustees intend to ask LGAS to issue individual annuity policies to defined benefit section members and then wind-up the Plan, after which the Company will no longer retain any responsibilities or obligations to the members of the Plan. The deferred payment plan attracts interest at a rate of LIBOR plus 2.5%.



ACCOUNTS


28. Pension (continued)

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 plan2018

£m2017

£m

Fair value of plan assets:Cash 0.1 0.1 Assets held by insurance companies 33.7 34.7

33.8 34.8 Present value of plan liabilities (33.8) (34.8)Provision for settlement (0.8) (2.4)Net pension deficit (0.8) (2.4)

Recognised in the balance sheet as:2018

£m2017

£m

Current liabilities (0.8) (2.4)

Movement in deficit during the year2018

£m2017

£m

Net deficit at the start of the year (2.4) (4.7)Deferred premium paid 1.6 2.3 Net pension deficit at the end of the year (0.8) (2.4)

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 arisen in the year in order to secure final settlement. An amount of £0.8 million has been included within the net pension deficit, being the estimated costs required in respect of final settlement.

The principal assumptions made by the actuaries were:2018

%2017

%

Rate of increase in pension payments 3.60 3.60Rate of increase of pensions in deferment 2.20 2.20Discount rate 2.95 2.70Inflation assumption 3.20 3.20Longevity at age 65 for current pensioners Men 23 years 23 years Women 25 years 25 yearsLongevity 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 tables adjusted for CMI improvements subject to a minimum annual long-term improvement of 1.25% p.a. for current pensioners and for future retirees (with a -1 year age adjustment for females). 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.

29. Share capital Authorised:

2018 2017

No. £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:2018 2017

No. £m No. £m

Ordinary shares of 2.5p each 516,793,318 13 531,919,858 13

Ordinary shares carry no right to fixed income. Holders of ordinary shares are entitled to vote at meetings.

At 30 September 2018, the Group owned 50 million of its own shares as treasury shares with a nominal value of £1 million and a market value of £83 million (2017: 50 million shares, nominal value £1 million, market value £69 million). In addition, at 30 September 2018 the Group held 1,134,828 shares with a nominal value of £0.03 million and a market value of £2 million (2017: 1,869,815 shares, nominal value £0.05 million, market value £3 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 30).

During the year the Group made on market purchases in respect of 15 million (2017: 13 million) of its own ordinary shares for an aggregate consideration of £20 million (2017: £15 million) (excluding costs) as part of its share buyback plan. These shares were cancelled. Transaction costs of £0.1 million (2017: £0.1 million) have been accounted for directly in equity in the profit and loss reserve.

30. Share-based paymentsThe Group operates share-based payment schemes for both directors and other employees. Details of the Deferred Share Award and Long-Term Incentive Plan (LTIP) which form part of the remuneration of the executive directors are given in the directors’ remuneration report on pages 58 to 82.

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 £2 million (2017: £3 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 2018.

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:2018

Number of shares

2017Number of

shares

Outstanding at beginning of year 367,587 478,446 Granted 129,358 161,928 Vested (135,283) (258,735)Forfeited (12,104) (14,052)Outstanding at end of year 349,558 367,587 Weighted average remaining contractual life 1.2 years 1.3 years



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30. Share-based payments (continued)

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:

2018 2017

Number ofshare

options

Weighted averageexercise

price£

Number ofshare

options


price£

Outstanding at beginning of year 240,622 0.37 312,497 0.37Exercised (69,925) 0.37 (71,875) 0.37Forfeited (23,572) 0.37 – –Outstanding at end of year 147,125 0.37 240,622 0.37Weighted average remaining contractual life 3.2 years 4.2 years

Options outstanding at 30 September 2018 comprise the following:

Exercise date

Number ofshare

options

Exerciseprice

£

Exercisable:12/12/14-12/12/21 147,125 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 (previously a seven year scheme has also been offered). 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 or seventh anniversary of the commencement of the savings contract.

Details of the share options outstanding during the year are as follows:

2018 2017

Number ofshare

options


price£

Number ofshare

options


price£

Outstanding at beginning of year 3,327,008 0.80 5,908,494 0.49Granted 494,201 1.16 1,243,831 0.83Exercised (475,069) 0.63 (3,305,470) 0.25Forfeited (332,407) 0.86 (519,847) 0.87Outstanding at end of year 3,013,733 0.88 3,327,008 0.80Weighted average remaining contractual life 3.0 years 1.8 years

Options outstanding at 30 September 2018 comprise the following:

Exercise date

Number ofshare

options

Exerciseprice

£

01/02/19-31/07/19 190,907 0.2401/02/19-31/07/19 127,318 1.2101/02/20-31/07/20 763,108 0.8701/02/21-31/07/21 547,457 0.8601/02/22-31/07/22 907,261 0.8301/02/23-31/07/23 477,682 1.16

3,013,733

The weighted average fair value of options granted during the year under the SAYE scheme was £0.49 (2017: £0.64).

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 58 to 82.

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:

2018 2017

LTIPNumber of

shareoptions

Deferred Share Award

Number ofshare

options

LTIPNumber of

shareoptions

Deferred Share Award

Number ofshare

options

Outstanding at beginning of year 5,534,552 3,583,015 5,558,974 4,326,130 Granted 2,096,397 811,128 2,096,397 1,260,335 Exercised (40,366) (974,363) (1,293,456) (1,514,299)Lapsed (2,232,361) – (746,475) –Forfeited (156,291) (508,125) (80,888) (489,151)Outstanding at end of year 5,201,931 2,911,655 5,534,552 3,583,015 Weighted average remaining contractual life 2.8 years 2.2 years 2.7 years 2.4 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 2018. The number of shares granted in 2017 has been amended to show the actual number granted in 2017.

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 2018 are not yet exercisable.

The weighted average fair value of shares granted during the year under the Deferred Share Award was £1.66 (2017: £1.38 restated for actual number of shares granted in 2017) and under the LTIP was £1.00 (2017: £1.09).

The weighted average share price on exercise of shares and share options under all schemes during the year was £1.41 (2017: £1.20).



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30. Share-based payments (continued)

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 LTIPWeighted average: 2018 2017 2018 2017* 2018 2017

Share price (£) 1.37 1.30 1.66 1.38 1.31 1.39Exercise price (£) 1.16 0.83 0.00 0.00 0.00 0.00Dividend yield 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Expected volatility 32% 37% 33–34% 34–36% 33–35% 34–36%Risk-free interest rate 0.75% 0.75% 0.19–0.33% 0.11–0.45% 0.33–0.45% 0.24–0.56%Expected life of option (years) 5 5 2– 4† 2– 4† 3–5^ 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 2018. The 2017 weighted averages have been amended to reflect the actual number of shares granted in 2018.

† The Deferred Share Award for the executive directors vests in four years (2017: four years), the Deferred Share Award for the executive management vests in two equal tranches after two and three years (2017: two and three years) and the Deferred Share Award for the other members of the senior team vests after four years (2017: four years).

^ 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.

31. 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 and 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 equity component of the on-loan of the funds raised in Enterprise Funding Limited through the convertible bond. This reserve also includes 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 year ended 30 September 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.

32. Additional cash flow informationa) Reconciliation of net cash flow to movement in net debt

2018£m

2017£m

Increase in cash in the year 7 6 Cash outflow from change in debt 71 77 Debt restructuring costs paid in the year 7 3 Change in net debt resulting from cash flows 85 86 Debt restructuring costs not paid in the year 2 –Amortisation of issue costs and discounts/premiums on long-term loans (4) (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) (3)Movement in other reserve arising on convertible bond issue (7) –Movement in commitment for share buybacks – 5 Movement in net debt in the year 76 88 Net debt at start of year (2,110) (2,198)Net debt at end of year (2,034) (2,110)

b) Analysis of net debt2018

£m2017

£m

Bank borrowings (15) (55)Corporate bonds (1,277) (1,222)Securitised bonds (904) (989)Gross debt (2,196) (2,266)Cash 158 151 Underlying net debt (note 23) (2,038) (2,115)Capitalised debt issue costs 20 15 Fair value adjustments on acquisition of bonds (13) (17)Convertible loan note effective interest – (11)Convertible bond reserve – 21 Finance lease payables (3) (3)Net debt (note 23) (2,034) (2,110)

Balance sheet:Current financial liabilities (186) (81)Non-current financial liabilities (2,006) (2,180)Cash 158 151 Net debt (2,034) (2,110)

Underlying net debt represents amounts repayable to banks and other lenders net of cash retained in the business. Cash includes £121 million held in the securitised Unique sub-group, of which £65 million is held in a securitised reserve account.

33. Related party transactionsCompensation of key management personnel

2018£000

2017£000

Short-term employee benefits 2,192 2,252Post-employment benefits 223 218Share-based payments 903 854

3,318 3,324

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 58 to 82.



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33. Related party transactions (continued)SubsidiariesThe Parent Company’s subsidiaries are listed in the following table.

Country ofincorporation Holding

Proportion of voting rights

and shares held Nature of business

Directly held by Ei Group plc:Enterprise Funding Limited Jersey Ordinary shares 100% Financing companyEnterprise Managed Investments Limited England Ordinary shares 100% Investment holding companyEnterprise Inns Holding Company Limited England Ordinary shares 100% Investment holding companyUnique Pubs Limited England Ordinary shares 100% Investment holding companyEi Publican Services Limited (formerly Enterprise Commercial Properties Services Limited) England Ordinary shares 100% Intermediate supply companyCentury Inns Limited England Ordinary shares 100% DormantGibbs Mew Limited England Ordinary shares 100% Dormant

Indirectly held by Ei Group plc:Unique Pub Properties Limited England Ordinary shares 100% Ownership of licensed propertiesBermondsey Pub Company Limited England Ordinary shares 100% Management of public housesBestplace Limited England Ordinary shares 51% Management of public housesDirty Liquor Alpha Limited England Ordinary shares 51% Management of public housesDirty Liquor Limited England Ordinary shares 75% Management of public housesFrontier Pubs Limited England Ordinary shares 75% Management of public housesHippo Inns Limited England Ordinary shares 75% Management of public housesHush Heath Inns Limited England Ordinary shares 51% Management of public housesMarmalade Pubs Limited England Ordinary shares 75% Management of public housesMash Inns Limited England Ordinary shares 51% Management of public housesOcean Pubs Limited England Ordinary shares 51% Management of public housesOld Spot Pub Company Limited England Ordinary shares 75% Management of public housesSix Cheers Limited England Ordinary shares 51% Management of public housesThe Craft Union Pub Company Limited England Ordinary shares 100% Management of public housesThe Unique Pub Finance Company PLC England Ordinary shares 100% Financing company

Cumulative preference shares 100%

Bestplace (Beta) Limited England Ordinary shares 75% Non–tradingSocial Cellar Limited England Ordinary shares 100% Non–tradingVixen Pub Company Limited England Ordinary shares 75% Non–tradingUnique Pub Investments Limited England Ordinary shares 100% Investment holding companyVoyager Pub Group Holdings Limited England Ordinary shares 100% Investment holding companyVoyager Pub Group Limited England Ordinary shares 100% Investment holding companyBede Holding Company Limited England Ordinary shares 100% DormantImagegold Limited England Ordinary shares 100% DormantUnique Pub Properties Alpha Limited England Ordinary shares 100% DormantUnique Pub Properties Beta Limited England Ordinary shares 100% DormantUnique Pub Properties Gamma Limited England Ordinary shares 100% DormantUnique Pub Properties Theta Limited England Ordinary shares 100% DormantWest Midlands Taverns Limited England Ordinary shares 100% Dormant

The registered office of all the Group’s subsidiary undertakings is 3 Monkspath Hall Road, Solihull, B90 4SJ with the exception of Enterprise Funding Limited which is registered at 22 Grenville Street, St Helier, JE4 8PX, Channel Islands.

Non-controlling interests in the net assets of Bestplace Limited, Bestplace (Beta) Limited, Dirty Liquor Alpha Limited, Dirty Liquor Limited, Frontier Pubs Limited, Hippo Inns Limited, Hush Heath Inns Limited, Marmalade Pubs Limited, Mash Inns Limited, Ocean Pubs Limited, Old Spot Pub Company Limited, Six Cheers Limited and Vixen Pub Company Limited total £1 million at 30 September 2018 (2017: £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 £7 million (2017: £7 million).

The following loans were outstanding at the year end:2018

£m2017

£m

Loans due from subsidiary undertakings 14 9Loans due to subsidiary undertakings (2) (85)

12 (76)

The Parent Company entered into other trading transactions with its subsidiary undertakings which included revenue of £70 million (2017: £47 million) from an Asset Management Fee, drink revenue and rent revenue and costs of £68 million (2017: £72 million) from a Procurement Fee. During the year the Parent Company purchased property, plant and equipment at book value for consideration of £9 million (2017: £14 million) from subsidiary undertakings and sold property, plant and equipment at book value for consideration of £4 million (2017: £20 million) to subsidiary undertakings.

Dividends of £14 million (2017: £14 million) were received in the Parent Company from its subsidiary undertakings.

The following balances were outstanding at the year end:2018

£m2017

£m

Amounts due from subsidiary undertakings 647 622 Amounts due to subsidiary undertakings (77) (79)

570 543

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.

34. Post balance sheet eventsOn 19 November 2018 the Group announced a £20 million share buyback programme.



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35. Alternative performance measuresLike-for-like Publican Partnerships net incomePublican Partnerships like-for-like net income of £303 million (2017: £299 million) represents underlying EBITDA for the Publican Partnerships business of £307 million (2017: £325 million) excluding £2 million (2017: £8 million) of income in respect of disposals and £2 million of net income (2017: £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 £15 million (2017: £15 million) represents underlying EBITDA for the Commercial Properties business of £27 million (2017: £21 million) excluding £nil (2017: £1 million) of income in respect of disposals and £12 million of net income (2017: £5 million) relating to other non-like-for-like net income.

Managed like-for-like sales Managed like-for-like sales represents revenue from the Managed estate of £152 million (2017: £80 million) excluding Machine sales of £5 million (2017: £2 million) and underlying revenue from those pubs that have not traded for two full years post investment in their managed format of £101 million (2017: £35 million).

Average net income per pubAverage net income per pub represents the annual net income for Publican Partnerships assets trading at 30 September 2018 of £303 million (2017: £322 million) divided by the total Publican Partnerships assets trading at 30 September 2018 of 3,718 properties (2017: 4,051 properties).

Publican Partnerships net income of £303 million (2017: £322 million) represents underlying EBITDA for the Publican Partnerships business of £307 million (2017: £325 million) excluding £2 million (2017: £2 million) of income in respect of disposals and £2 million of net income (2017: £1 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 2018 of £30 million (2017: £22 million) divided by the total Commercial Properties assets trading at 30 September 2018 of 412 properties (2017: 331 properties).

Commercial Properties net income of £30 million (2017: £22 million) represents underlying EBITDA for the Commercial Properties business of £27 million (2017: £21 million) excluding £nil (2017: £1 million) of income in respect of disposals and including £3 million of net income (2017: £2 million) relating to the pubs before they were transferred to the Commercial Properties segment offset by unlicensed property income.

Excess cash flowExcess cash flow in the period was £27 million (2017: £55 million) and is derived from net cash flows from operating activities of £271 million (2017: £261 million) less net cash flows from investing activities of £15 million (2017: inflow of £20 million) less net interest paid of £143 million (2017: £149 million) less scheduled debt amortisation and open market debt purchases of £86 million (2017: £77 million).

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 £24 million (2017: £10 million) divided by the total number of sites that have traded post investment for more than six months being 232 sites (2017: 109 sites).

Managed investments annualised average site EBITDA represents annualised EBITDA of sites that have traded post investment for more than six months of £6 million (2017: £3 million) divided by the total number of sites that have traded post investment for more than six months being 27 sites (2017: 13 sites).

The total annualised EBITDA for sites that have traded for more than six months referred to above of £30 million (2017: £13 million) represents underlying EBITDA for the Managed business of £28 million (2017: £13 million) excluding costs not allocated at site level of £4 million (2017: £1 million), excluding EBITDA of pubs that have not traded for more than six months post investment of £4 million (2017: £2 million) and including an adjustment of £2 million (2017: £1 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 finance costs, taxation, 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 and assignment premiums 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 during the period of our strategic review.

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 a publican 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, the profit/loss on sale of property, the movement in valuation of the estate and related assets 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.




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Independent auditor’s report to the members of Ei Group plc

OpinionIn our opinion:

• Ei Group plc’s 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 2018 and of the Group’s profit 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 Company

Group balance sheet as at 30 September 2018 Company balance sheet as at 30 September 2018Group income statement for the year then ended Company statement of changes in equity for the year then endedGroup 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 35 to the financial statements including a summary of

significant accounting policiesGroup cash flow statement for the year then endedRelated notes 1 to 35 to the financial statements, including a summary of significant accounting policies

Overview of our audit approachKey audit matters • Property valuation

• Goodwill impairment

• Deferred taxation

• Parent Company – impairment of cost of investments

Audit scope • We performed an audit of the complete financial information of four (2017: four) full scope components, performed specific scope procedures in respect of three components (2017: three) and performed other procedures in respect of 20 components (2017: 17).

• The components where we performed full audit procedures accounted for 77% of underlying profit before tax, 78% of revenue and 99% of total assets.

• The components subject to specific scope procedures or specified procedures covered 23% of underlying profit before tax, 22% of revenue and 1% of total assets.

Materiality • Overall group materiality of £6 million represents 5% of underlying profit before tax.

Key audit matters Key audit matters are those matters that, in our professional judgement, 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.

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. Commercial Property – through either higher multiples than the market and/or overstatement of estimated rental value (ERV).

(2018: Property, Plant and Equipment £3,228 million; Investment Property £368 million; 2017: Property, Plant and Equipment £3,322 million; Investment Property £270 million)

Refer to the Audit Committee report (pages 51 to 55); accounting policies (pages 92 to 96); and note 18 of the consolidated financial statements (pages 111 to 114)

This is the largest estimate within the financial statements, prepared on an asset by asset basis for 4,244 individual assets. The valuation is performed by a combination of internal and external appropriately qualified valuers (as described in note 18). The valuation has been performed by third party independent valuers for 95% of the properties by value (2017: 95%).

The risk is the over-valuation of the Group’s property assets as a result of the use of valuation multiples above normal market ranges or where FMT for the pub estate and ERV for the commercial property estate differs from actual income outside the expected range dependant on the lease profile of the asset.

As a result of continued uncertainty over the impact of the MRO legislation and the UK economy, we consider the risk of material misstatement to remain consistent with the prior year.

Our response to the riskValuation of the property estate 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 valuation process.

We inspected managements’ analysis over the estate valuation documenting their conclusions with regard to the appropriateness of the external valuations.

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 18) 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.

We tested the source data provided by the Group to the external and internal valuation experts back to invoices for a sample of 60 transactions. We also tested the arithmetical accuracy of the valuation models.

We evaluated the adequacy of the disclosures regarding property assets in line with IAS 16, IAS 40 and IFRS 13.

We used 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.

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 statement We 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 pages 34 to 38 that describe the principal risks and explain how they are being managed or mitigated;

• the directors’ confirmation set out on page 39 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 39 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 39 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.



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Independent auditor’s reportto the members of Ei Group plc

We also 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-actual income gap was not congruent with underlying changes in the lease agreement profile.

• Where, for the commercial 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.

From this analysis, we selected a sample of 206 (2017: 125) asset valuations and 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.

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 have affirmed the overall valuation outcome and we identified no material overstatement of property values.

RiskFailure to impair goodwill in respect of the Publican Partnerships, Commercial Properties or Managed segments (being Bermondsey Pub Company, Craft Union Pub Company and Managed Investments) through inappropriate impairment model assumptions in respect of discount rate, long-term growth or underlying short-term forecasts.

(2018: £304 million; 2017: £312 million)

Refer to the Audit Committee report (pages 51 to 55); accounting policies (pages 92 to 96); and note 13 of the consolidated financial statements (page 105)

As discussed in note 13, the Group has five Cash Generating Units (CGUs) (2017: five). The Group is required to allocate goodwill between CGUs and test impairment for each CGU.

The Group has goodwill with a total carrying value of £304 million (2017: £312 million) of which £248 million relates to Publican Partnerships (2017: £271 million), £31 million (2017: £24 million) to Commercial Properties and £25 million (2017: £17 million) to the three Managed segments. The impairment test is sensitive to the key assumptions of discount rate, the level of forecast cash flows (including long-term growth rate assumptions) and the results of the estate valuation exercise as described in note 18.

We consider the risk to remain consistent with prior year given the continued uncertainty of the impact of the MRO legislation and the UK economy on the assumptions used in the impairment test.

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 ensured that management had appropriately determined the carrying amount for each CGU and tested the basis for any movement of goodwill between segments.

We confirmed the cash flow forecasts were consistent with those approved by the board and 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.

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, in respect of the discount rate assumption, an independent assessment by our valuation specialists based on general market indicators.

We ensured the appropriate disclosures are included in the Annual Report and Accounts.

Key observations communicated to the Audit CommitteeWe concur with management that no impairment of goodwill needs to be recorded.

The pre-tax discount rate of 7.75% applied in the impairment tests for EiPP and EiCP is within our acceptable range, albeit towards the lower end. The pre-tax discount rate of 7.75% applied in the impairment tests for the Managed segments (Bermondsey, Craft Union and Managed Investments) is outside of our acceptable range however no impairment would result from applying a discount rate towards the lower end of our acceptable range. Management’s discount rate of 7.75% is in line with comparable companies.

The assumption for a long-term growth rate of 2% applied to all segments is consistent with external economic forecasts for the UK pub industry as well as comparable companies.

The short-term forecasts are consistent with those approved by the Board and management have demonstrated that their forecasting process is historically accurate.

RiskMisstatement of deferred tax liability due to the following complexities evaluated through a bespoke tax model: (a) indexation; (b) rolled over gains; (c) capital allowances; (d) DRE claims; (e) allocation between performance statements.

Refer to the Audit Committee report (pages 51 to 55); accounting policies (pages 92 to 96); and note 27 of the Consolidated Financial Statements (page 127)

The deferred tax liability associated with carrying the pub estate at valuation (which the Group refer to as contingent tax) of £134 million (2017: £136 million) is established through an internally developed model set up on a pub by pub basis. Due to the impact of indexation (and restrictions thereon), the ability to roll over gains and carry forward losses, and the difference between cost for accounting and taxation purposes, the calculation of the contingent tax is complex.

The recognition of any resultant movement in the contingent tax between the income statement and other comprehensive income is also complex, being impacted by any accounting valuation surplus or deficit and whether or not the pub was acquired through a business combination that was revisited at the time of transition to IFRS.

In addition to the contingent tax arising on revaluation, the Group has a substantial deferred tax balance arising in respect of qualifying capital expenditure on the estate (for which capital allowances can be obtained). This calculation is impacted by the disposal of pubs and the accounting and tax values ascribed to the associated qualifying expenditure.

We consider the risk to remain consistent with the prior period given there have been no significant changes in accounting and tax regulations.

Our response to the riskThe deferred tax liability is wholly within the components subject to full scope audits.

We identified, documented and confirmed our understanding of the controls operated by the Group surrounding the recognition of the deferred tax liability arising on the valuation of the estate.

We stratified the components of the deferred tax liability into categories based on the risk factors identified within the risk wording above. With the support of our tax specialists we re-performed the full proof of tax through independently re-calculating the impact of each stratification being indexation, capital loss restrictions, DRE claims, rollover relief, and the result of the annual revaluation exercises across the estate.

We tested the allocation of deferred tax to performance statements on a pub by pub basis.

We re-performed the overall proof of tax prepared by management for each performance statement and compared movements in the year with our expectations.

Key observations communicated to the Audit CommitteeThe process for deriving the deferred tax liability in respect of the estate has resulted in liabilities which are fairly stated. We are satisfied that the deferred tax movements have been recorded in the relevant performance statements.

RiskFailure to impair cost of investments in subsidiaries held by Parent Company through inappropriate impairment model assumptions in respect of discount rate, long-term growth and underlying short-term forecasts.

Company investments (2018: £1,761 million; 2017: £1,790 million)

Refer to the Audit Committee report (pages 51 to 55); accounting policies (pages 92 to 96); and note 19 of the consolidated financial statements (page 115)

The Company has investments with a total carrying value of £1,761 million (2017: £1,790 million) in subsidiaries which are subject to an annual impairment test in accordance with IAS 36. The impairment test is sensitive to the key assumptions of discount rate, the level of forecast cash flows (including long-term growth rate assumptions) and the results of the estate valuation exercise, as described in note 19.



ACCOUNTS


Our response to the riskCompany investments were 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 Company surrounding the investment impairment review.

We ensured 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 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 output against comparator companies and, in respect of the discount rate assumption, an independent assessment by our specialists based on general market indicators.

Key observations communicated to the Audit CommitteeWe concur with the investment impairment of £29 million recorded in the year.

The pre-tax discount rate of 7.75% applied in the impairment test is towards the low end of our acceptable range.

The assumption for long-term growth rate of 2% is consistent with external economic forecasts for the UK pub industry and comparable companies.

The short-term forecasts are consistent with the current trading performance of UPP.

Other matters The 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) are 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.

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 11 of the Group’s managed house operations which are managed on stand-alone systems maintained by third party managers. These 11 operations are subject to specified 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 27 (2017: 24) reporting components of the Group. We performed an audit of the complete financial information of four (2017: four) full scope components which were selected based on their size or risk characteristics. We performed audit procedures on specific balances in respect of three (2017: 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.

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, manual journals, and 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 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 £0.9 million to £3.2 million (2017: £0.9 million to £3.2 million).

The reporting components where we performed audit procedures accounted for 95% (2017: 99%) of the Group’s underlying profit before tax, 97% (2017: 99%) of the Group’s revenue and 100% (2017: 99%) of the Group’s total assets.

For the current year, the full scope components contributed 77% (2017: 91%) of the Group’s underlying profit before tax, 78% (2017: 88%) of the Group’s revenue and 99% (2017: 99%) of the Group’s total assets.

The specific scope component contributed 18% (2017: 8%) of the Group’s underlying profit before tax, 19% (2017: 11%) of the Group’s revenue and 0% (2017: 0%) of the Group’s total assets. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group.

The charts below illustrate the coverage obtained from the work performed by our audit teams.

Underlying profit before tax (2018)

44%

5%

77%

18%

Full scope components

Specific scope components

Other procedures

Underlying profit before tax (2017)

44%

1%



Other procedures

91%

8%

Revenue (2018)

44%

3%

19%



Other procedures

78%

Total assets (2018)

44%

1%



Other procedures

99%

Changes from the prior year Specific scope components represent 18% of underlying profit before tax (2017: 8%) 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.

The increase in components subject to other procedures to 20 (2017: 17) is due to three new managed investment entities in the year.

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 £6 million (2017: £6 million), which is 5% (2017: 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.

Profit before tax – £87 million

Starting basis

Adjustments

Materiality

Non-underlying items – £35 million

Underlying profit before tax – £122 millionMateriality of £6 million (5% of materiality basis)

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.



ACCOUNTS


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% (2017: 75%) of our planning materiality, namely £4.5 million (2017: £4.5 million).

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 £0.9 million to £3.2 million (2017: £0.9 million to £3.2 million).

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 £0.3 million (2017: £0.3 million), 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 1 to 158, including the strategic report, set out on pages 1 to 39, governance, set out on pages 40 to 83, and shareholder information set out on pages 147 to 158, 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 55 – the statement given by the directors that they consider the Annual Report and Accounts 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;

• Audit Committee report set out on pages 51 to 55 – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or

• Directors’ statement of compliance with the UK Corporate Governance Code set out on page 47 – 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 83 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.

Explanation of the extent to which our 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 Ei Group plc is 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, papers provided to the Audit Committee and correspondence received from regulatory bodies.

• We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur by meeting with management 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 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.



ACCOUNTS


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 28 years, covering the years ending 30 September 1991 to 30 September 2018.

• 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 19 November 2018

Five year recordyear ended 30 September

Analysis of ordinary shareholdersat 30 September 2018

2018£m

2017£m

2016£m

2015£m

2014£m

Revenue 695 648 632 625 632Operating profit 263 261 273 279 273Underlying profit before tax 122 121 122 122 121Profit/(loss) after tax 72 54 71 (65) 30 Underlying earnings per share (pence) 21.2 20.5 19.6 19.4 19.0

2018£m

2017£m

2016£m

2015£m

2014£m

Non-current assets 3,912 3,915 3,963 4,006 4,185 Current assets* 232 231 212 200 189 Current liabilities (405) (283) (275) (255) (303)Non-current liabilities (2,185) (2,360) (2,452) (2,605) (2,668)Net assets 1,554 1,503 1,448 1,346 1,403

* Includes non-current assets held for sale.

RangeNo. of

shareholders % Shares held %

1 - 1,000 434 32.70 187,884 0.041,001 - 10,000 455 34.29 1,750,085 0.3410,001 - 50,000 179 13.49 4,188,471 0.8150,001 - 100,000 44 3.32 3,226,212 0.62100,001 - 150,000 24 1.81 2,976,369 0.58150,001 - 500,000 83 6.25 24,203,693 4.68500,001 - 1,000,000 38 2.86 27,387,876 5.301,000,001 - 5,000,000 48 3.62 90,643,933 17.545,000,001 and over 22 1.66 362,228,795 70.09

1,327 100.00 516,793,318 100.00

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.



SHAREHOLDER INFORMATION

Notice of Annual General Meeting

This Notice is important and requires your immediate attention. If you are in any doubt about the action you should take, you should immediately consult your stockbroker, bank manager, solicitor, accountant or other independent adviser duly authorised under the Financial Services and Markets Act 2000.

The 2019 Annual General Meeting of Ei Group plc (the “Company”) will be held at the offices of the Company, 3 Monkspath Hall Road, Solihull, West Midlands, B90 4SJ at 11.00 a.m. on 7 February 2019 for the following purposes:

Ordinary resolutionsTo consider and, if thought fit, to pass the following resolutions, which will be proposed as ordinary resolutions:

1. To receive the directors’ reports and the audited accounts for the year ended 30 September 2018 and the auditor’s report on the accounts.

2. To approve the directors’ remuneration report for the year ended 30 September 2018 (other than the part containing the directors’ remuneration policy.

3. To approve the directors’ remuneration policy contained in the directors’ remuneration report for the year ended 30 September 2018.

4. To re-elect Robert Walker as a director.

5. To re-elect Simon Townsend as a director.

6. To re-elect Neil Smith as a director.

7. To re-elect Peter Baguley as a director.

8. To re-elect Adam Fowle as a director.

9. To re-elect Marisa Cassoni as a director.

10. To re-appoint Jane Bednall as a director.

11. To re-appoint Ernst & Young LLP as auditor of the Company, to hold office until the conclusion of the next Annual General Meeting of the Company.

12. To authorise the directors to determine Ernst & Young LLP’s remuneration as auditor of the Company.

13. That the directors be generally and unconditionally authorised pursuant to section 551 of the Companies Act 2006 to exercise all the powers of the Company to allot shares in the Company and grant rights to subscribe for or to convert any security into shares in the Company (together “relevant securities”) up to an aggregate nominal amount of £7,731,431.60 comprising:

a. an aggregate nominal amount of £3,865,715.80 (whether in connection with the same offer or issue as under (b) below or otherwise); and

b. an aggregate nominal amount of £3,865,715.80, in the form of equity securities (within the meaning of section 560(1) of the Companies Act 2006) in connection with an offer or issue by way of rights, open for acceptance for a period fixed by the directors, to holders of ordinary shares (other than the Company) on the register on any record date fixed by the directors in proportion (as nearly as may be) to the respective number of ordinary shares deemed to be held by them, subject to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to fractional entitlements, legal or practical problems arising in any overseas territory, the requirements of any regulatory body or stock exchange or any other matter whatsoever.

This authority shall expire (unless renewed, varied or revoked by the Company in general meeting) on the earlier of fifteen months from the date this resolution is passed and the conclusion of the Annual General Meeting of the Company to be held in 2020, except that the Company may before such expiry make any offer or agreement which would or might require relevant securities to be allotted after such expiry and the directors may allot relevant securities pursuant to any such offer or agreement as if such authority had not expired.

14. That the Ei Group 2019 Restricted Share Plan (the RSP) in the form produced to the meeting and initialled by the Chairman for the purposes of identification, the principal terms of which are summarised in the Appendix to this Notice, be approved and the directors be authorised to make such modifications to the RSP as they may consider appropriate to take into account best practice and the requirements of the UK Listing Authority and to adopt the RSP as so modified and to do all such as acts and things as they may consider appropriate to implement the RSP.

Special resolutionsTo consider and, if thought fit, to pass the following resolutions, which will be proposed as special resolutions:

15. That the directors be empowered pursuant to section 570 of the Companies Act 2006 to allot equity securities (as defined in section 560(1) of that Act) for cash pursuant to the general authority conferred on them by resolution 13 above and/or to sell equity securities held as treasury shares for cash pursuant to section 727 of the Companies Act 2006, in each case as if section 561(1) of that Act did not apply to any such allotment or sale, provided that this power shall be limited to:

a. any such allotment and/or sale of equity securities in connection with an offer or issue by way of rights or other pre-emptive offer or issue, open for acceptance for a period fixed by the directors, to holders of ordinary shares (other than the Company) on the register on any record date fixed by the directors in proportion (as nearly as may be) to the respective number of ordinary shares deemed to be held by them, subject to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to fractional entitlements, legal or practical problems arising in any overseas territory, the requirements of any regulatory body or stock exchange or any other matter whatsoever; and

b. any such allotment and/or sale, otherwise than pursuant to paragraph (a) above, of equity securities having, in the case of ordinary shares, an aggregate nominal value or, in the case of other equity securities, giving the right to subscribe for or convert into ordinary shares having an aggregate nominal value, not exceeding the sum of £579,857.37.

This authority shall expire, unless previously revoked or renewed by the Company in general meeting, at such time as the general authority conferred on the directors by resolution 13 above expires, except that the Company may at any time before such expiry make any offer or agreement which would or might require equity securities to be allotted or equity securities held as treasury shares to be sold after such expiry and the directors may allot equity securities and/or sell equity securities held as treasury shares in pursuance of such an offer or agreement as if the power conferred by this resolution had not expired.

16. To authorise the Company generally and unconditionally to make market purchases (as defined in section 693(4) of the Companies Act 2006) of its ordinary shares of 2½ pence each provided that in doing so it:

a. purchases no more than 69,536,495 ordinary shares of 2½ pence each in aggregate;

b. pays not less than 2½ pence (excluding expenses) per ordinary share of 2½ pence each; and

c. pays a price per share that is not more (excluding expenses) than the higher of: (i) 5% above the average of the middle market quotations for the ordinary shares as derived from the London Stock Exchange Daily Official List for the five business days immediately before the day on which it purchases that share; (ii) the price of the last independent trade on the trading venue where the purchase is carried out; and (iii) the highest current independent purchase bid on that venue.

This authority shall expire fifteen months after the date of the passing of this resolution or, if earlier, at the conclusion of the Annual General Meeting of the Company to be held in 2020, except that the Company may, if it agrees to purchase ordinary shares under this authority before it expires, complete the purchase wholly or partly after this authority expires.

17. To authorise the directors to call a general meeting of the Company, other than an Annual General Meeting, on not less than 14 clear days’ notice.

The directors believe that the proposals in resolutions 1 to 17 are in the best interests of shareholders as a whole and they unanimously recommend that you vote in favour of all the resolutions.


L TogherCompany Secretary

6 December 2018

Registered office:3 Monkspath Hall RoadSolihullWest Midlands B90 4SJ

Registered in England and Wales No. 2562808




Notes to the Notice of Annual General Meeting

1. A member who is an individual is entitled to attend, speak and vote at the meeting or to appoint one or more other persons as his proxy to exercise all or any of his rights on his behalf. Further details of how to appoint a proxy, and the rights of proxies, are given in the paragraphs below. A member that is a company can appoint one or more corporate representatives (such as a director or employee of the company) whose attendance at the meeting is treated as if the company were attending in person, or it can appoint one or more persons as its proxy to exercise all or any of its rights on its behalf. In each case, a person attending the meeting will need to provide the Company or its Registrars, Computershare Investor Services PLC, with evidence of their identity and, if applicable, their appointment as a proxy or corporate representative with authority to vote on behalf of a member.

2. A shareholder may appoint more than one proxy in relation to the Annual General Meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that shareholder. A proxy need not be a shareholder of the Company. To appoint a proxy or proxies, shareholders must complete: (a) a form of proxy, sign it and return it, together with the power of attorney or other authority (if any) under which it is signed, or a notarially certified copy of such authority, to the Company’s Registrars, Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol, BS99 6ZY; or (b) a CREST Proxy Instruction (as set out in paragraph 11 below); or (c) an online proxy appointment at www.investorcentre.co.uk/eproxy (you will need to enter the Control Number, together with your unique PIN and Shareholder Reference Number printed on your personalised form of proxy), in each case so that it is received no later than 11.00 a.m. on 5 February 2019. To appoint more than one proxy, you will need to complete a separate proxy form in relation to each appointment. A personalised form of proxy for use in connection with the Annual General Meeting is enclosed with this document. If you do not have a personalised form of proxy and believe that you should, please contact the Company’s Registrars, Computershare Investor Services PLC, on 0370 889 4080 or at Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol, BS99 6ZY.

3. You will need to state clearly on each proxy form the number of shares in relation to which the proxy is appointed. A failure to specify the number of shares each proxy appointment relates to, or specifying a number of shares in excess of those held by the member, will result in the proxy appointment being invalid.

4. The return of a completed proxy form, other such instrument or any CREST Proxy Instruction (as described in paragraph 11 below) will not prevent a shareholder attending the Annual General Meeting and voting in person if he/she wishes to do so.

5. In the case of joint holders, where more than one of the joint holders purports to appoint a proxy, only the appointment submitted by the most senior holder will be accepted. Seniority is determined by the order in which the names of the joint holders appear in the Company’s register of members in respect of the joint holding (the first-named being the most senior).

6. Any person to whom this Notice is sent who is a person nominated under section 146 of the Companies Act 2006 to enjoy information rights (a “Nominated Person”) may, under an agreement between him/her and the shareholder by whom he/she was nominated, have a right to be appointed (or to have someone else appointed) as a proxy for the Annual General Meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, he/she may, under any such agreement, have a right to give instructions to the shareholder as to the exercise of voting rights.

7. The statement of the rights of shareholders in relation to the appointment of proxies in paragraphs 1, 2 and 3 above does not apply to Nominated Persons. The rights described in these paragraphs can only be exercised by shareholders of the Company.

8. Pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, the Company gives notice that only those shareholders included in the register of members of the Company at 6.30 p.m. on 5 February 2019 or, if the meeting is adjourned, in the register of members at 6.30 p.m. on the day which is two working days before the day of any adjourned meeting, will be entitled to attend and to vote at the Annual General Meeting in respect of the number of shares registered in their names at that time. Changes to entries on the share register after 6.30 p.m. on 5 February 2019, or, if the meeting is adjourned, in the register of members at 6.30 p.m. on the day which is two working days before the day of any adjourned meeting, will be disregarded in determining the rights of any person to attend or vote at the Annual General Meeting.

9. As at 9.00 a.m. on 6 December 2018, the Company’s issued share capital comprised 513,885,896 ordinary shares of 2½ pence each. Each ordinary share carries the right to one vote at a general meeting of the Company and, therefore, the total number of voting rights in the Company as at 9.00 a.m. on 6 December 2018 is 513,885,896. After excluding treasury shares, which cannot be voted, the total number of voting rights in the Company as at 9.00 a.m. on 6 December 2018 is 463,885,896.

10. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the Annual General Meeting and any adjournment(s) of the meeting by using the procedures described in the CREST Manual (available via www.euroclear.com/CREST). CREST personal members or other CREST sponsored members, and those CREST members who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf.

11. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications, and must contain the information required for such instruction, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of a proxy or is an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the Company’s agent (ID 3RA50), by the latest time for receipt of proxy appointments set out in paragraph 2 above. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the Company’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time, any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means.

12. CREST members and, where applicable, their CREST sponsors or voting service providers, should note that Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will, therefore, apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member, or sponsored member, or has appointed any voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings.

13. Under section 527 of the Companies Act 2006, members meeting the threshold requirements set out in that section have the right to require the Company to publish on a website a statement setting out any matter relating to: (i) the audit of the Company’s accounts (including the auditor’s report and the conduct of the audit) that are to be laid before the Annual General Meeting; or (ii) any circumstance connected with an auditor of the Company ceasing to hold office since the previous meeting at which annual accounts and reports were laid in accordance with section 437 of the Companies Act 2006. The Company may not require the shareholders requesting any such website publication to pay its expenses in complying with sections 527 or 528 of the Companies Act 2006. Where the Company is required to place a statement on a website under section 527 of the Companies Act 2006, it must forward the statement to the Company’s auditor not later than the time when it makes the statement available on the website. The business which may be dealt with at the Annual General Meeting includes any statement that the Company has been required under section 527 of the Companies Act 2006 to publish on a website.

14. Under section 338 and section 338A of the Companies Act 2006, members meeting the threshold requirements in those sections have the right to require the Company (i) to give, to members of the Company entitled to receive notice of the Annual General Meeting, notice of a resolution which may properly be moved and is intended to be moved at the Annual General Meeting and/or (ii) to include in the business to be dealt with at the Annual General Meeting any matter (other than a proposed resolution) which may be properly included in the business. A resolution may properly be moved or a matter may properly be included in the business unless (a) (in the case of a resolution only) it would, if passed, be ineffective (whether by reason of inconsistency with any enactment or the Company’s constitution or otherwise), (b) it is defamatory of any person, or (c) it is frivolous or vexatious. Such a request may be in hard copy form or in electronic form; must identify the resolution of which notice is to be given or the matter to be included in the business; must be authorised by the person or persons making it; must be received by the Company not later than the date falling six weeks before the Annual General Meeting (excluding the date of the Annual General Meeting itself and the date on which the request is received); and (in the case of a matter to be included in the business only) must be accompanied by a statement setting out the grounds for the request.

15. Any member attending the meeting has the right to ask questions. The Company must answer any such question relating to the business being dealt with at the meeting but no such answer need be given if: (a) to do so would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information; (b) the answer has already been given on a website in the form of an answer to a question; or (c) it is undesirable in the interests of the Company or the good order of the meeting that the question be answered.

16. If you have sold or otherwise transferred all your ordinary shares in the Company, please forward this Annual Report and Accounts to the purchaser or transferee or to the stockbroker, bank or other person through whom the sale or transfer was effected for transmission to the purchaser or transferee.

17. The service agreements of the executive directors and copies of the letters of appointment of the non-executive directors are available for inspection during normal business hours on any weekday (excluding Saturdays, Sundays and public holidays) at the registered office of the Company and will be available for inspection for fifteen minutes prior to and during the Annual General Meeting.

18. You may not use any electronic address provided in this Notice, or any related documents including the proxy form, to communicate with the Company for any purposes other than those expressly stated.

19. A copy of this Notice, and other information required by section 311A of the Companies Act 2006, can be found at www.eigroupplc.com.




Explanatory notes to the Notice of Annual General Meeting

The Notice of the Annual General Meeting of the Company to be held on 7 February 2019 is set out on pages 148 to 151 of the Annual Report and Accounts. The following notes provide an explanation as to why the resolutions set out in the Notice are to be put to shareholders.

Resolutions 1 to 14 are ordinary resolutions. These resolutions will be passed if more than 50% of the votes cast for or against are in favour.

Resolution 1 — Laying of accountsThe directors are required by the Companies Act 2006 to present to the shareholders of the Company at a general meeting the reports of the directors and auditor, and the audited accounts of the Company, for the year ended 30 September 2018. The reports of the directors and the audited accounts have been approved by the directors, and the report of the auditor has been approved by the auditor, and a copy of each of these documents may be found in the Annual Report and Accounts.

Resolutions 2 & 3 — Directors’ remuneration report and directors’ remuneration policyThe Companies Act 2006 requires the Company to seek shareholder approval of the directors’ remuneration report on an annual basis. This is sought in resolution 2. The vote on the remuneration report is advisory. The directors’ entitlement to remuneration is not conditional on the report being approved.

The Companies Act 2006 also requires the Company to have received shareholder approval of a remuneration policy for its directors. This is a binding policy and, after it takes effect, the directors are not entitled to remuneration unless such remuneration is consistent with the approved policy from time to time or shareholders otherwise approve the remuneration. The Company last obtained shareholder approval for its remuneration policy at its AGM in February 2016 and approval of the new policy is sought in resolution 3 and, if approved, the policy will take effect from the end of the AGM and will replace the policy approved by shareholders in February 2016.

Resolutions 4–9 — Re-election of directorsIn accordance with the UK Corporate Governance Code, all of the directors of the Company will stand for re-election. Biographical information for the directors is shown on page 41 of the Annual Report and Accounts. Details of why the Board believes that the directors should be re-elected are included in the governance report in the Annual Report and Accounts, starting at page 46.

Resolution 10 — Director appointed since the last Annual General MeetingThe Company’s Articles of Association require that directors appointed by the Board must seek re-appointment at the next following AGM. Accordingly, Jane Bednall is retiring and is seeking re-appointment. Biographical information for Jane Bednall is shown on page 41 of the Annual Report and Accounts. Details of why the Board believes she should be re-appointed are included in the governance report in the Annual Report and Accounts, starting at page 46.

Resolution 11 — Auditor’s re-appointment The Companies Act 2006 requires that an auditor is appointed at each general meeting at which accounts are laid, to hold office until the next such meeting. The resolution seeks shareholder approval for the re-appointment of Ernst & Young LLP. The Audit Committee keeps under review the independence and objectivity of the external auditor, further information on which can be found in the Annual Report and Accounts on pages 51 to 55. After considering relevant information, the Audit Committee recommended to the Board that Ernst & Young LLP be re-appointed.

Resolution 12 — Auditor’s remunerationThis resolution gives the directors the authority to determine the remuneration of the auditor for the audit work to be carried out by them in the next financial year. The amount of the remuneration paid to the auditor for the next financial year will be disclosed in the next audited accounts of the Company.

Resolution 13 — Authority to the directors to allot sharesThe Companies Act 2006 provides that the directors may only allot shares if authorised by shareholders to do so. Resolution 13 will, if passed, authorise the directors 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 which represents an amount which is approximately equal to two-thirds of the issued ordinary share capital of the Company as at 6 December 2018 (excluding treasury shares), the latest practicable date prior to the publication of the Notice. The Company did not issue any shares during the period under review.

As provided in paragraph (a) of the resolution, up to half of this authority (equal to one-third of the issued ordinary share capital of the Company) will enable the directors to allot and issue new shares in whatever manner (subject to pre-emption rights) they see fit. Paragraph (b) of the resolution provides that the remainder of the authority (equal to a further one-third of the issued ordinary share capital of the Company) may only be used in connection with a rights issue in favour of ordinary shareholders. As paragraph (a) imposes no restrictions on the way the authority may be exercised, it could be used in conjunction with paragraph (b) so as to enable the whole two-thirds authority to be used in connection with a rights issue.

The authority will expire at the earlier of the date that is fifteen months after the date of the passing of the resolution and the conclusion of the next Annual General Meeting of the Company.

Passing resolution 13 will ensure that the directors continue to have the flexibility to act in the best interests of shareholders, when opportunities arise, by issuing new shares. There are no current plans to issue new shares except in connection with employee share schemes.

As at 6 December 2018, the latest practicable date prior to the publication of the Notice, the Company had 513,885,896 ordinary shares of 2½ pence each in issue and held 50,000,000 treasury shares, which is equal to approximately 10.78% of the issued share capital of the Company (excluding treasury shares) as at that date.

Resolution 14 — Approval of the new Restricted Share Plan (the RSP)After extensive consultation with, and good support from, major shareholders, the Company is seeking shareholder approval for the RSP. A summary of the principal terms of the RSP is set out in pages 155 to 157 of these Explanatory Notes and details of the Remuneration Committee’s proposals in relation to the awards proposed to be granted in 2019 are described in the directors’ remuneration report for the year ended 30 September 2018.

Resolutions 15–17 are special resolutions. These resolutions will be passed if not less than 75% of the votes cast for or against are in favour.

Resolution 15 — Disapplication of statutory pre-emption rightsThe Companies Act 2006 prescribes certain pre-emption rights under which, if the Company issues new shares, or grants rights to subscribe for or to convert any security into shares, for cash or sells any treasury shares, it must first offer them to existing shareholders in proportion to their current holdings.

Under Resolution 15, it is proposed that the directors be authorised to issue shares for cash and/or sell shares from treasury without offering them first to existing shareholders in accordance with statutory pre-emption rights:

i. up to an aggregate nominal value of £579,857.37 (up to 23,194,294 new ordinary shares of 2.5 pence each). This amount represents approximately 5% of the Company’s issued share capital (excluding shares held in treasury) as at 6 December 2018, the latest practicable date prior to the publication of the Notice. This part of the authority is designed to provide the directors with flexibility to raise further equity funding and to pursue acquisition opportunities as and when they may arise; or

ii. in respect of a rights issue, open offer or other offer that generally provides existing shareholders with the opportunity to subscribe for new shares pro rata to their existing holdings. This part of the authority is designed to give the directors flexibility to exclude certain shareholders from such an offer where the directors consider it necessary or desirable to do so in order to avoid legal, regulatory or practical problems that would otherwise arise.

If passed, the authority in Resolution 15 will expire at the same time as the authority to allot shares given pursuant to Resolution 13.

The directors do not intend to issue more than 7.5% of the issued share capital on a non-pre-emptive basis in any rolling three-year period.




Resolution 16 — Purchase of own shares by the CompanyIf passed, this resolution will grant the Company authority for a period of up to fifteen months after the date of passing of the resolution to buy its own shares in the market. The resolution limits the number of shares that may be purchased to 14.99% of the Company’s issued share capital (excluding treasury shares) as at 6 December 2018, the latest practicable date prior to the publication of the Notice. The price per ordinary share that the Company may pay is set at a minimum amount (excluding expenses) of 2½ pence per ordinary share 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. This authority will only be exercised if market conditions make it advantageous to do so.

The directors’ present intention is that shares purchased pursuant to this authority will be cancelled immediately on purchase. Alternatively, the shares may be held in treasury, sold for cash or (provided Listing Rule requirements are met) transferred to an employees’ share scheme. The effect of any cancellation would be to reduce the number of shares in issue. For most purposes, while held in treasury, shares are treated as if they have been cancelled (for example, they carry no voting rights and do not rank for dividends). The directors will only make purchases under this authority if they believe that the effect of such purchases (where such shares are purchased for cancellation) would result in increased earnings per share, and would be in the interests of the shareholders generally.

As at 6 December 2018, the latest practicable date prior to the publication of the Notice, the total number of options to subscribe for ordinary shares of 2½ pence each in the Company was 10,051,637 representing approximately 2.17% of the issued share capital of the Company (excluding treasury shares) at that date. If the proposed market purchase authority were to be used in full and all of the repurchased ordinary shares were cancelled (but the Company’s issued share capital otherwise remained unaltered), the total number of options to subscribe for ordinary shares at that date would represent approximately 2.55% of the Company’s issued share capital (excluding treasury shares).

Resolution 17 — Approving the notice period for General MeetingsIn order to maintain its ability to call general meetings (other than an Annual General Meeting) on 14 clear days’ notice, the Company must offer all shareholders the ability to appoint a proxy electronically (via the website of the Company or its Registrars) and must obtain the approval of its shareholders by means of a special resolution passed each year. Resolution 17 seeks such approval. It is intended that a similar resolution will be proposed at future Annual General Meetings.

Explanatory notes to the Notice of Annual General Meeting

Appendix to the Notice of Annual General Meeting

A summary of the principal terms of the Ei Group 2019 Restricted Share Plan (the RSP) are set out below.

The RSP is a discretionary share plan which will be administered by the Board of Directors or a committee appointed by the Board, and references in this summary to the Board should be read accordingly. Decisions in relation to the participation in the RSP by executive directors of the Company will be taken by the Remuneration Committee of the Board.

The RSP is being introduced as the Company’s new long-term incentive plan for executive directors and other senior executives, as described in the statement from the Chairman of the Company’s Remuneration Committee in the directors’ remuneration report for the year ended 30 September 2018.

EligibilityAny employee (including an executive director) of the Company or any of its subsidiaries will be eligible to participate in the RSP at the discretion of the Board.

Form of AwardAn Award under the RSP may be in the form of:

a. a conditional right to acquire ordinary shares in the Company (shares) at no cost (a Conditional Award);

b. an option to acquire Shares at no cost or for an exercise price per Share equal to the nominal value of a Share (a Nil-Cost Option); or

c. a right to a cash amount related to the value of a number of Shares (a Cash Award).

In this summary, Conditional Awards, Nil-Cost Options and Cash Awards are together referred to as “Awards”. References to Shares includes notional shares to which a Cash Award relates. The Company does not intend to grant Cash Awards, and would do so only where the particular circumstances make that appropriate, for example where there is a regulatory restriction on the delivery of Shares.

Grant of AwardsAwards may be granted within the six week period following the Company’s 2019 Annual General Meeting. Thereafter, ordinarily Awards may only be granted within the six week period following announcement of the Company’s results for any period or the approval by shareholders of a new directors’ remuneration policy. However, the Board may grant Awards at other times in exceptional circumstances. If Awards cannot be granted in any of these periods due to regulatory restrictions, they may be granted within the six week period following the lifting of the restriction.

Individual LimitA participant shall not be granted an Award (other than an Award granted to facilitate the recruitment of the participant) in respect of any financial year of the Company over Shares with a market value (as determined by the Board) in excess of 87.5% of their annual base salary.

Overall LimitsAwards may be granted over newly issued Shares, treasury Shares or Shares purchased in the market. In any ten year period, the number of Shares which may be issued under the RSP and under any other employees’ share plan adopted by the Company may not exceed 10% of the issued ordinary share capital of the Company from time to time.

In any ten year period, the number of Shares which may be issued under the RSP and under any other discretionary employees’ share plan adopted by the Company may not exceed 5% of the issued ordinary share capital of the Company from time to time.

Treasury Shares will be treated as newly issued for the purpose of this limit until such time as guidelines published by institutional investor representative bodies determine otherwise.




UnderpinAwards will be subject to one or more “Underpin Conditions”, and prior to vesting of an Award the Board will determine whether the failure to meet any applicable Underpin Condition should result in a discretionary reduction in the extent of vesting.

The Underpin Conditions proposed for the awards in respect of the Company’s financial year ending 30 September 2019 are described in the directors’ remuneration report for the year ended 30 September 2018.

An Underpin Condition may be amended or substituted if an event occurs which causes the Board to consider such action to be appropriate. Any amended or substituted Underpin Condition would not be materially less difficult to satisfy.

The Board will also have discretion to reduce the extent to which an Award vests having regard to the underlying performance of the participant or group over the vesting period.

Vesting, Release and ExerciseAwards will normally vest as soon as practicable following the assessment of the applicable Underpin Condition. Awards may be subject to a “Holding Period” following vesting. An Award which is subject to a Holding Period will be released (so that the participant is entitled to acquire the Shares) following the end of the Holding Period. Alternatively, Awards may be granted on the basis that the participant is entitled to acquire Shares following vesting but that (other than as regards sales to cover tax liabilities) the Award is not released (so that the participant is able to dispose of Shares) until the end of the Holding Period. Awards which are not subject to a Holding Period will ordinarily be released at vesting.

The vesting period and Holding Period for Awards granted to the Company’s executive directors will be consistent with the directors’ remuneration policy from time to time. The Awards to be granted to the Company’s executive directors in respect of the Company’s financial year ending 30 September 2019 will be divided into three tranches, and subject to vesting periods and Holding Periods as follows.

Tranche Proportion of AwardVesting period over which the Underpin

Condition is assessed Holding Period

Tranche 1 33% 1 October 2018 – 30 September 2021 Period from vesting until the announcement of the Company’s results for its financial year

ending 30 September 2023Tranche 2 33% 1 October 2018 – 30 September 2022Tranche 3 33% 1 October 2018 – 30 September 2023

Options will normally be exercisable from the date of release until the tenth anniversary of the grant date, or such earlier date as the Board determines.

Settlement of AwardsBefore Shares have been delivered, the Board may decide to pay a cash amount equal to the value of some or all of the Shares the participant would otherwise have received. The Company does not intend to settle Awards in cash, and would do so only where the particular circumstances make that appropriate, for example where there is a regulatory restriction on the delivery of Shares.

DividendsOn the release of an Award (or on the exercise of an Award granted in the form of a Nil-Cost Option), the Company may provide cash or additional Shares to the participant based on the value of dividends paid on vested Shares over such period as the Board determines (beginning no earlier than the vesting date and ending no later than the date on which the Award is released).

The Board shall determine the basis on which this amount is calculated which may assume the reinvestment of the dividends into Shares.

Malus and ClawbackAt any time up to the second anniversary of the date on which an Award vests, the Board may reduce the Award (or require repayment of it if Shares and/or cash have been delivered to satisfy it) in the event of a material misstatement of financial results, a material error in the information or assumptions on which the Award was granted, vests or is released, a material failure of risk management, serious reputational damage, misconduct or material error on the part of the participant, or material corporate failure.

Appendix to the Notice of Annual General Meeting

Cessation of Employment — Unvested AwardsOrdinarily, unvested Awards will lapse on termination. However, if a participant ceases to hold office or employment by reason of death, ill health, injury, disability or for any other reason at the Board’s discretion, any unvested Award they hold will usually continue and be released at the originally anticipated release date. The Board will retain the discretion to vest and release the Award as soon as reasonably practicable after the cessation of employment (and will do so in the event of death) or at some other time (such as following the end of the vesting period in the case of an Award which would otherwise be subject to a Holding Period).

If the Award is released following the end of the vesting period, the Underpin Condition will be assessed in the normal way. If the Award is released before the end of the vesting period, the Underpin Condition will be assessed at the date of cessation. In either case, the extent to which the Award vests will be reduced to take account of the proportion of the vesting period that has elapsed at the date of cessation, unless the Board determines otherwise.

Cessation of Employment — Vested but Unreleased AwardsIf an Award is granted subject to a Holding Period and the participant ceases employment during the holding period, the Award will ordinarily be released, to the extent vested, at the normal release date (unless the participant is summarily dismissed, in which case the Award will lapse). The Board will have discretion to release the Award at the date of cessation (and will do so in the event of death).

Corporate EventsIn the event of a takeover of the Company, unvested Awards will vest and be released (and vested but unreleased Awards will be released) as soon as reasonably practicable. The extent to which an unvested Award vests will be determined taking into account the Board’s assessment of the Underpin Condition at the date of the relevant event and, unless the Board determines otherwise, taking into account the proportion of the vesting period that has elapsed. Alternatively, the Board may permit Awards to be exchanged for Awards over shares in the acquiring company (and, ordinarily, will require this if the change of control is an internal reorganisation).

If other events occur such as a winding-up of the Company, demerger, delisting, special dividend or other event which, in the opinion of the Board, may affect the current or future value of Shares, the Board may determine that Awards will vest and be released on the same basis as in the event of a change of control.

Adjustment of AwardsIn the event of a variation of the Company’s share capital, the number of Shares subject to an Award, and/or any Underpin Condition attaching to an Award, may be adjusted. The number of Shares subject to an Award and any Underpin Condition may also be adjusted in the event of a demerger, delisting, special dividend, rights issue or other event, which may, in the Board’s opinion, affect the current or future value of Shares.

Amendment, Termination and Further Terms of the RSPThe Board may amend the RSP at any time, provided that the approval of the Company’s shareholders in general meeting will be required for any amendments to the advantage of participants relating to eligibility, limits, the basis for determining a participant’s entitlement to, and the terms of, the Shares or cash comprised in an Award and the impact of any variation of capital to become effective. However, any minor amendment to benefit administration, to take into account legislative changes, or to obtain or maintain favourable tax treatment, exchange control or regulatory treatment may be made by the Board without shareholder approval. The RSP will usually terminate on the tenth anniversary of its approval by shareholders but the rights of existing participants will not be affected by any termination. Awards are not transferable (other than on death). No payment will be required for the grant of an Award. Awards will not form part of pensionable earnings.

Documents available for inspectionThe rules of the RSP will be available for inspection at the office of Deloitte LLP (Company Secretarial Department), 2 New Street Square, London EC4A 3BZ on any weekday (excluding Saturdays, Sundays and public holidays) until the close of the Annual General Meeting, and will also be available at the place of the Annual General Meeting for at least 15 minutes before the Annual General Meeting and during the Annual General Meeting.

26212 13 December 2018 9:59 am Proof 9 26212 13 December 2018 9:59 am Proof 9

158 Annual Report and Accounts for the year ended 30 September 2018Ei Group plc

Annual General MeetingWill be held at 11.00 a.m. on Thursday 7 February 2019 at 3 Monkspath Hall Road, Solihull, West Midlands, B90 4SJ.

Financial calendarTrading update – 7 February 2019Interim results announcement – 14 May 2019Annual results announcement – 19 November 2019Annual General Meeting – 6 February 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 direct 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: GB00B1L8B624SEDOL Number: B1L8B62TIDM: EIG

Registered officeIf you would like to contact us:

Ei Group plc3 Monkspath Hall RoadSolihullWest MidlandsB90 4SJ

Telephone: 0121 272 5000Email: [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

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