Half-year Report

MITCHELLS & BUTLERS PLC

19 May 2016

HALF YEAR RESULTS AND BUSINESS UPDATE

(For the 28 weeks ended 9 April 2016)

Financial performance

Reported results

Balance sheet and cash flow

Phil Urban, Chief Executive, commented:

"In the first half we increased our adjusted earnings by 9.0%^c. However, in order to accelerate the trading performance of the group there is much to do in our three priority areas: building a more balanced business; instilling a more commercial culture; and increasing the pace of execution and innovation.

During the last six months we have completed a review of our strategic options. I am very clear that our best route for delivering sustainable returns for our shareholders is through the acceleration of organic growth: to maximise the return on the high-quality assets we own. Our plan, to reshape the estate and innovate in both existing and new offers for our guests, is now well under way and I have every confidence in its success."

Definitions

a - Invested estate comprises 294 sites that have been remodelled or converted in either FY 2015 or H1 2016.

b - Like-for-like sales growth includes the sales performance against the comparable period in the prior year of UK managed pubs, bars and restaurants that were trading in the two periods being compared. Like-for-like sales are measured against relevant accounting weeks in the prior year.

c - Adjusted items are quoted before exceptional items. These comprised a £10m deferred tax credit and £1m profit on property disposals in H1 2016. There were no exceptional adjustments in H1 2015.

d - Free cash flow before exceptional items excludes £21m dividend payment (H1 2015 £nil); £32m (H1 2015 £30m) mandatory bond amortisation; £8m drawn from an unsecured revolving facility (H1 2015 £nil) and, in the prior year, £120m transferred from cash to other cash deposits.

e - Adjusted EBITDA for the 52 weeks to 9 April 2016.

There will be a presentation today for analysts and investors at 9.00am at Nomura International plc, 1 Angel Lane, London, EC4R 3AB. A live webcast of the presentation will be available at www.mbplc.com. The conference will also be accessible by phone: 0203 059 8125 and quote "Mitchells & Butlers". The replay will be available until 25 May 2016 on 0121 260 4861 replay access pin 3236934#.

For further information, please contact:

Notes to editors:

BUSINESS REVIEW

In the first half of this year we have continued to drive delivery of the plans laid out last November, by focusing on our three key priorities:

Consistent with these priorities, we have now completed a review of our strategic options, aimed at better utilising our outstanding estate to drive sustainable profit growth for our shareholders.

Market and performance

We set out previously the external challenges which we face. We are operating in a highly competitive market, with increasingly demanding consumers, and real wage inflation from both the National Living Wage and the National Minimum Wage. Having identified these challenges previously, we recognise that they remain, but also that we have a plan to overcome them.

We are pleased to have delivered 9.0% adjusted EPS growth in the first half, on a stronger operating margin. This demonstrates our commitment to the delivery of profitable sales.

Although profitability has improved in the first half, sales have remained challenging. We therefore continue to work towards ensuring that the business is competitive and retains its appeal to our guests, whilst also remaining focused on profitability. However, the actions we have been taking to address our sales performance do not all have an immediate impact and we look forward to further progress.

Review of strategic options

In the last six months we have completed a review of the strategic options available to us, the focus of which has been how we can best generate long-term value for our shareholders, whilst balancing our obligations to bondholders and pension schemes in a challenging trading environment.

Our review has concluded that the best approach to driving shareholder value is through accelerating the level of innovation and investment in the business to generate organic growth, supplemented where appropriate with selective site acquisitions and disposals. We have made good early progress in this respect.

We are in the fortunate position of having a high-quality estate across the country, and have an opportunity to generate strong returns from these assets. We will manage our estate by increasing the number of conversions into our growth concepts, whilst accelerating the level of remodel activity, ensuring we remain competitive and are best able to leverage our brands through consistency of amenity. The plan will increase our exposure to premium offerings, matching demand in the market whilst also providing a commercial response to what we believe will continue to be an inflationary wage environment.

We have a clear plan, which aligns to our three priority areas and will be delivered through a number of critical workstreams:

The workstreams within each priority area are outlined below.

Building a more balanced business

We believe that we have the best estate in the industry, with an outstanding array of outlets across the country. However, we recognise that elements of this estate have been under-invested in recent years, with capital expenditure having been directed towards necessary back-of-house investment in technology and kitchens, rather than guest-facing areas which would drive sales growth. This under-investment is manifest in the disparity between the strong sales performance in sites where we have recently invested as against declines where we have not. We also need to ensure that we make best use of our strong brands, by matching them individually to the right sites.

We have completed a full review of the estate, with a plan for every individual site to be achieved by 2020. This plan is aimed at building a more premium estate, by converting sites where appropriate into growth concepts, and with a small number of selected disposals.

A key feature to the estate plan is the level of investment. In order to remain competitive in this environment, and to fully leverage the power of our brands, we must invest in improving and maintaining amenity levels across the estate. As such we have accelerated our investment in remodels and conversions. We will aim for 300 to 350 sites per year, equivalent to a five to six year investment cycle compared to the cycle of over ten years on which we have been operating. This acceleration has begun already, with 142 remodels completed in the first half of this year, compared with 97 in the same period last year.

Our estate plan will result in us taking action across the premium, mid-market and value areas of our estate, three significant examples are described below:

At the premium end of our estate, we will look to grow the Miller & Carter brand towards 100 sites by 2018, from a current level of 43. This is a brand with a clear and attractive offer to guests, and one which consistently delivers strong like-for-like sales and volume growth. We completed three Harvester to Miller & Carter conversions in the first half, all of which are trading very well in their first few months with EBITDA returns well in excess of the targeted 30%. Following these early successes and given the strength of the Miller & Carter brand proposition, we have identified a number of further sites which are suitable for conversion to the brand.

Within the mid-market, Harvester is an example of a fantastic brand with high-taking sites and great consumer resonance, but which has had some challenges in recent years. Harvester has been competing in a market which has seen significant new openings, with competitor offerings often being well-invested. By contrast, too many of our 233 Harvester sites have been under-invested in guest-facing areas in recent years, making it difficult to remain competitive in their local markets. Over time we are looking to reduce the scale of the Harvester estate to a core, all of which will be remodelled within the next 18 months, offering a consistent proposition and a level of amenity to truly leverage the brand's strength.

Within our value-led sites we are rolling out our successful Pizza & Carvery format, of which there are currently 14 sites that previously traded as Crown Carveries. These sites have been trading well, generating EBITDA returns of around 25%. We will convert around 20 more by the end of FY 2016, with plans for a total of more than 80 by 2018. The format offers a compelling conversion opportunity for a number of our Crown Carveries sites, and selected sites from the unconverted Orchid estate.

Our plans in this area are already well under way. In the current year we have accelerated our capital programme and anticipate delivering around 260 remodels and conversions plus 10 new site openings, at a total capital cost of around £180m. Next year we anticipate delivering around 300 remodels and conversions, supplemented by around 15 new site openings, at a total capital cost of around £200m.

Instilling a commercial culture

As outlined previously, as a business we need to return to the fundamental principles of trading. Our plans in this area have now been broken down into a number of key workstreams.

Increasing the pace of execution and innovation

We set out in November an intention to increase the pace of activity, and to foster more of an innovative environment within the company. We have worked at pace to begin making progress across a number of initiatives, and our workstreams in this area are set out below.

Outlook

We are clear that our strategy to accelerate organic growth is the best route for delivering sustainable long-term value for our shareholders. We have an outstanding estate, and our plan is to generate the best returns from it through a continued focus on our three priority areas: building a more balanced business; instilling a more commercial culture; and increasing the pace of execution and innovation.

Following a challenging trading period with subdued sales but margin growth, our sales performance in recent weeks has been more encouraging. We are cognisant of the challenge of future wage cost increases but will continue to execute our plans at pace to build on this performance.

FINANCIAL REVIEW

On a statutory basis, profit before tax for the period was £83m (H1 2015 £75m), on sales of £1,096m (H1 2015 £1,113m).

The Group Income Statement discloses adjusted profit and earnings per share information that excludes exceptional items to allow a better understanding of the underlying trading of the Group. Adjusted earnings per share increased by 9.0% in the first half of 2016 to 15.7p.

At the end of the period, the total estate comprised 1,779 managed businesses and 55 franchised businesses, in the UK and Germany.

Changes in accounting policies

There have been no changes in accounting policies in the period.

Revenue

The Group's total revenues of £1,096m were 1.5% lower than the first half last year, with lower like-for-like sales only partially offset by new site openings.

Total like-for-like sales fell by 1.6%, reflecting sales growth on invested sites in excess of 10% in the year following investment, offset by declines in the uninvested estate. In total, food sales were down by 2.0% and drink sales by 1.5%. Volumes of both food and drink fell, by 5.1% and 4.8% respectively. Average spend on food was up by 3.3%, with average drink spend up by 3.6%.

Operating margins

Adjusted operating margins for the first half were 0.5ppts higher than last year at 14.2%. Cost inflation, with the exception of employment, has remained benign, in particular on food and energy. The first half margin also benefited from non-recurring prior year costs, including the Orchid head office, which remained open until April 2015, and the costs of completing IT projects in the first half of last year. These year-on-year cost savings will not continue into the second half.

Second half margins will also be impacted by the introduction of the National Living Wage, which is expected to generate an incremental gross cost of around £7m in the second half of this financial year.

Adjusted operating profit for the first half was £156m, 2.0% higher than the same period last year.

Exceptional items

Exceptional items comprise a £10m deferred tax credit arising mostly as a result of the reduction in the standard rate of corporation tax to 19% from April 2017 and to 18% from April 2020, plus £1m profit on property disposals.

Interest

Net finance costs of £74m were £4m lower than in the first half last year, reflecting a lower net pensions finance charge of £6m (H1 2015 £8m), and a reduction in Group securitised borrowings.

For 2016 we expect the full year pensions finance charge to be around £12m (2015 £15m).

Taxation

The estimated annual effective tax rate is 20.0% (H1 2015 20.5%), the reduction reflecting the lower rate of corporation tax in place from April 2015.

Earnings per share

Adjusted earnings per share were 15.7p, 9.0% higher than last year. After the exceptional items described above, basic earnings per share were 18.4p (H1 2015 14.4p).

Cash flow and net debt

The cash flow statement below excludes £32m of mandatory bond amortisation (H1 2015 £30m), £8m drawn from an unsecured revolving facility (H1 2015 £nil) and, in the prior year, £120m transferred from cash to other cash deposits.

The business generated £217m of EBITDA before exceptional items in the first half. Pension deficit contributions of £26m were higher than last year, driven by costs of the scheme's early retirement facility, which expired during the period. After capital expenditure, interest and tax, £34m of free cash before exceptional items was generated by the business.

Net debt of £1,862m, represented 4.2 times annualised EBITDA (H1 2015 4.4 times).

Capital expenditure

Total maintenance and infrastructure capex of £72m was £2m higher than last year, driven by an acceleration in the number of remodels completed in the first half, which are generating an EBITDA return of around 25%. This increase was partially offset by a reduction in infrastructure capex, with the completion of key IT projects in the first half of H1 2015.

Expansionary capital expenditure was lower in the first half, as our focus has turned to prioritising investment in the existing estate with fewer new site acquisitions. Our conversions in the first half comprised the continuation of the Orchid programme, as well as three Harvester to Miller & Carter conversions.

The blended EBITDA return on expansionary capital invested since FY 2013 was in line with last year at 18%.

Pensions

The Company continues to make pensions deficit payments based on the schedule of contributions agreed as part of the triennial valuations at 31 March 2013, which showed an assessed funding shortfall at that time of £572m. The discounted value of the minimum funding requirement agreed as part of the revised schedule of contributions is recognised in the balance sheet at £340m (H1 2015 £420m) before tax.

The Company is now in the early stages of negotiations with the Trustees of the pension schemes regarding the latest triennial valuation, which is as at 31 March 2016.

Dividends

The Board has approved an interim dividend of 2.5 pence per share which will be paid on 4 July 2016 to shareholders on the register at the close of business on 27 May 2016.

Shareholders who do not currently participate in the Company's Dividend Reinvestment Plan and wish to receive the interim dividend in shares rather than cash should complete a mandate form for the Dividend Reinvestment Plan and return it to the registrars no later than 13 June 2016.

Risk factors and uncertainties

The risks and uncertainties that affect the company remain unchanged and are set out on pages 18 - 21 of the 2015 Annual report and accounts which is available on the Mitchells & Butlers website at www.mbplc.com.

Responsibility statement

We confirm that to the best of our knowledge:

This responsibility statement was approved by the Board of Directors on 18 May 2016 and is signed on its behalf by Tim Jones, Finance Director.

GROUP CONDENSED INCOME STATEMENT

for the 28 weeks ended 9 April 2016

All results relate to continuing operations.

GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME

for the 28 weeks ended 9 April 2016

GROUP CONDENSED BALANCE SHEET

9 April 2016

*Restated for the fair valuation acquisition of Orchid Pub & Dining Limited and Midco 1 Limited (see note 14).

GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

for the 28 weeks ended 9 April 2016

GROUP CONDENSED CASH FLOW STATEMENT

for the 28 weeks ended 9 April 2016

Cash and cash equivalents are defined in note 9.

NOTES TO THE INTERIM FINANCIAL INFORMATION

An interim dividend of 2.5p per share, amounting to £10m, has been proposed by the Directors and will be paid on 4 July 2016 to those shareholders on the register at the close of business on 27 May 2016. This interim financial information does not reflect this dividend payable.

*Restated for the fair valuation acquisition of Orchid Pub & Dining Limited and Midco 1 Limited (see note 14).

9. ANALYSIS OF NET DEBT (CONTINUED)

Liquidity facility

Under the terms of the securitisation, the Group holds a liquidity facility of £295m provided by two counterparties. As a result of the decrease in credit rating of one of the counterparties, the Group was obliged to draw that counterparty's portion of the facility. The amount drawn at 9 April 2016 is £147m (11 April 2015 £147m, 26 September 2015 £147m). These funds are charged under the terms of the securitisation and are not available for use in the wider Group.

Unsecured revolving credit facilities

The Group holds two revolving credit facilities of £75m each, available for general corporate purposes. The amount drawn at 9 April 2016 is £8m (11 April 2015 £nil, 26 September £nil). Both facilities expire on 31 December 2017.