Punch Taverns plc 2011 Annual Report

Punch Taverns plc
Annual Report and Financial Statements 2011
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Our key risks and uncertainties
Market and economic risks
Financial
Risks and their impact
Economic climate
The recent recession and continued uncertain outlook for the UK
economy has affected consumer confidence and discretionary spending
across both the retail and leisure industries. Delays in economic recovery
or further challenges such as further duty increases could affect
consumer expenditure, our Partners’ businesses and Punch’s revenue.
Property valuations
Fluctuations in the UK property market as well as the current uncertain
market conditions could impact the value of Punch’s property portfolio
and our ability to dispose of pubs at an appropriate value.
Increasing costs
Increases in any of our key supply costs due to availability of products,
the economic climate or inflationary price increases is an ongoing risk
to our business.
Liquidity and covenant risk
Punch’s capital structure is made up of debt, issued share capital and
reserves. Secured loan notes make up the majority of our financing,
with approximately 85% (August 2010: 90%) of the capital balance
on these loan notes being repayable after more than five years.
These borrowings are subject to financial covenants.
Interest rate risk
Punch is exposed to interest rate risk from loan notes and borrows
at both fixed and floating rates of interest.
Further information on Punch’s financial instruments can be found in note 23
to the financial statements.
Pensions
Punch has a defined benefit pension scheme which must be funded to meet
required benefit payments. The value and funding of the scheme is subject
to risk of changes in life expectancy, actual and expected price inflation,
changes in bond yields and future salary increases. The difference in
value between scheme assets and scheme liabilities may vary resulting in an
increased deficit (or reduced surplus) being recognised on our balance sheet.
Internal financial control
Punch is committed to maintaining a robust internal control environment.
A lack of control could result in financial fraud or material error in our
financial statements.
Mitigating actions and controls
> We carry out regular reviews of the impact of economic conditions
on our budget and strategic plans.
> We provided c.£1.5m per period to support our Partners during the
difficult conditions last year resulting in 95% of our core estate pubs
now being on a substantive agreement.
> We continue to monitor the financial health of our Partners via a
Partner Support Tool, together with analysis to highlight potential
failures, and have launched new Partner Development Manager roles
to help grow and diversify our Partners’ businesses.
> We have conducted full estate reviews and regularly update these
to allow us to assess the future strategy of pubs within the estate.
> This has allowed us to invest where appropriate; to consider possible
alternative use; or to dispose of those which no longer fit our future strategy.
> We invested £42m on developing and improving the quality of our estate
during the year.
> We carry out an annual review for any indicators of impairment.
> We have negotiated supplier contracts to protect us against significant
increases in drink costs.
> Careful cost control processes ensure that costs are budgeted,
closely monitored and subject to appropriate authorisation.
> Cash flow forecasts are regularly produced to assist management in
identifying liquidity requirements and are stress-tested for possible scenarios.
> Cash balances are invested in short-term deposits such that they are
readily available to settle short-term liabilities or fund capital additions.
> Covenants are closely monitored and stress-tested to ensure we are
able to generate sufficient returns to service our debt and meet our
covenant requirements.
>The securitised debt is monitored by a variety of measures which are
reported to debt providers on a quarterly basis.
> Punch employs derivative financial instruments such as interest
rate swaps to generate the desired interest rate profile.
> Punch has taken out derivative financial instruments such that 100%
of all loans (August 2010: 100%) were either at fixed rate or were
converted to fixed rate as a result of swap arrangements, reducing our
exposure to changes in interest rates.
> The defined benefit pension scheme is closed to new members; and
instead we operate defined contribution schemes for our employees.
> We maintain a close relationship with the trustees of the pension scheme.
> Robust internal controls operate over all key processes including general
controls such as segregation of duties and authorisation of contracts
and expenditure.
> The Internal Audit function reviews and reports on strengths and
weaknesses in the internal control environment.
Business review
Financial statements Governance
For more information visit:
www.punchtaverns.com