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17/12/2009

Annual Financial Report 2009

Further to the release of the Company's Final Results announcement on 26 November 2009, the Company announces that it has today published its Annual report and accounts 2009 (or 'Annual Financial Report') and that the Annual Financial Report is now available alongside the Final Results announcement on the Company's website at www.mbplc.com/171209ar09 .

In accordance with paragraph 9.6.1 of the FSA Listing Rules, two copies of the documents listed below, which are being mailed to shareholders today, have been submitted to the UKLA for publication through the Document Viewing Facility situated at:

Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Telephone 020-7066-1000

Documents:
- A letter to shareholders from the Board of Directors (the content of which is being released as a separate announcement);
- Company's Annual report and accounts 2009;
- Notice of Annual General Meeting 2010; and
- Form of Proxy with accompanying letter regarding communication methods.

The Company's 2010 AGM will be held at The International Convention Centre, Broad Street, Birmingham B1 2EA on Thursday 28 January 2010 at 11am.

Pursuant to paragraph 6.1.2 of the FSA Disclosure and Transparency Rules, two draft copies of the proposed amendments to the Company's Articles of Association pending approval at the 2010 AGM, have also been submitted to the UKLA. In addition, a full set of the Articles highlighting the amendments is available for inspection until the close of the AGM at the offices of Allen & Overy LLP, One Bishops Square, London E1 6AD during business hours.

The Company's Final Results announcement of 26 November 2009 contained a management report as well as the audited financial statements which were prepared in accordance with the applicable accounting standards. The Annual Financial Report submitted to the UKLA today also contains information regarding the Company's principal risks and uncertainties and a responsibility statement relating to the content of the Annual Financial Report (from the Directors in office as at 25 November 2009); an extract of this information is provided below as required under Disclosure and Transparency Rule 6.3.5, however this material is not a substitute for reading the full Annual report and accounts 2009. There are no related party transactions requiring disclosure.

Statement of Directors' Responsibilities for preparing the Annual report and accounts 2009

The following statement, which was prepared for the purposes of the Annual report and accounts 2009, is set out on page 34 of that document. As mentioned above, this statement is repeated here solely for the purpose of complying with Disclosure and Transparency Rule 6.3.5. This statement relates to and is extracted from the Annual report and accounts 2009. It is not connected to the information presented in this announcement or in the Company's Final Results announcement that was published on 26 November 2009:


The Directors are responsible for preparing the Annual report, the Remuneration report and the financial statements (Group and Company) in accordance with applicable UK laws and regulations. UK company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union ('EU') and applicable UK law. Further, they have elected to prepare the Company financial statements in accordance with UK accounting standards ('UK GAAP') and applicable UK law.


In preparing the financial statements, the Directors are required to:

• select suitable accounting policies and apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU, subject to any material departures disclosed and explained in the financial statements; and

• for the Company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements.


The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the Annual report and financial statements comply with the Companies Act 2006 and, with regard to the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for the system of internal control for safeguarding the assets of the Company and the Group and hence for taking reasonable steps to prevent and detect fraud and other irregularities.


A copy of the financial statements of the Company is posted on the Company's website www.mbplc.com. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the website. Information published on the Company's website is accessible in many countries with different legal requirements. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.


Each of the Directors, the names and functions of whom are set out on page 28, confirms that to the best of his or her knowledge they have complied with the above requirements in preparing the financial statements in accordance with applicable accounting standards and that the financial statements give a true and fair view of the assets, liabilities and financial position and profit of the Group and the Company and of the Group's income statement for that period. In addition each of the Directors confirms that the management report represented by the Directors' 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.


Disclosure of information to auditors

Having made the requisite enquiries, so far as the Directors are aware, there is no relevant audit information (as defined by Section 418(2) of the Companies Act 2006) of which the Company's auditors are unaware and each Director has taken all steps that ought to have been taken to make themselves aware of any relevant audit information and to establish that the Company's auditors are aware of that information.


By order of the Board
Bronagh Kennedy
Company Secretary
25 November 2009

Principal risks and uncertainties
Here follows an extract from the Annual report and accounts 2009 regarding the principal risks and uncertainties that the Company faces, as set out on pages 24 to 27 of that document:

This section highlights some of the risks which affect the Company. It is not intended to be an exhaustive and extensive analysis of all risks which may affect the Company, but those which have been identified and could have a material impact on Mitchells & Butlers' long-term performance and achievement of its strategy. These risks have been grouped under the following headings: market; operational; regulatory and financial. Mitchells & Butlers adopts a pro-active approach in this area with each member of the Executive Committee managing the specific risks associated with their areas of responsibility together with a dedicated Assurance team who report through the General Counsel to the Executive Committee and the Board.


The Board has overall responsibility for managing the Company's risk. A sub-committee of the Executive (the Risk Committee) assists the Board and the Executive Committee in the review of risk management processes and in the consideration of major risks.


Its primary responsibilities are to:

• review the operation of the risk management process;

• consider the Company's major and other significant risks and the adequacy of the mitigation actions;

• review and comment on the updates on risks prepared by Group Assurance prior to submission to the Executive and Audit Committees; and

• review and comment on the Group Assurance audit plan prior to submission for approval to the Audit Committee.


The Board also receives regular updates on significant legislative changes or developments in corporate governance best practice. The Company's social, environmental and ethical disclosures are reviewed for accuracy through a combination of detailed verification by members of management responsible for the individual areas of corporate social responsibility and high level review by the members of the Board and Executive Committee.


Market-driven risks

Consumer expenditure

Changes in the general economic climate, such as those caused by the global 'credit crunch' and the resultant recession, can have a detrimental effect on consumer expenditure and therefore Company revenues. More localised economic factors can also have an impact, such as reduced tourist visits to London following terrorist activity.


Mitchells & Butlers has around 2,000 pubs across the UK with a wide spectrum of customer offers targeted at different consumer groups and leisure occasions. This range provides flexibility to respond to changes in consumer expenditure either by altering the products sold and prices charged, or by substituting a more appropriate style of pub at a particular location.


Consumer taste

Changes in consumer taste or a new or improved competitor offering may reduce the appeal of Mitchells & Butlers' pubs to its customers, especially if the Company fails to anticipate, identify and respond adequately and promptly to these changes.


For example, on a long-term perspective, social and demographic changes have driven the growth in pub food while at the same time leading to a steady decline in the on-trade beer market. This decline has been further impacted by the introduction of the smoking ban in England on 1 July 2007 and the loss-leading pricing policies of the large supermarket groups, with the off-trade in total now accounting for almost 50% of all UK beer sales up from 18% 20 years ago. Competition in the eating-out market has increased as pubs have responded to the decline in drinks sales by introducing food or improving their existing menus. In light of this threat, Mitchells & Butlers has responded by improving the quality, value and range of its menu items and drinks offers in order to gain market share.


On a regular basis, there are marketing strategy meetings which analyse a variety of data to ensure that Mitchells & Butlers pubs are maintaining their relevance to their customers. This analysis is part of a structured programme to develop new styles of pubs and continuously improve existing brands. This process is co-ordinated with a property review to ensure the appropriate capital investment is taking place to support the marketing strategy. The evolution of Harvester, which has returned to sales growth following menu and pricing changes, and the development of Miller & Carter, a steakhouse offer, which has grown to 16 pubs over the last two years are relevant recent examples of this process in action.


Operational risks

Pricing Risks

The pricing of products is a critical management tool in maximising cash gross margin and therefore growing the net operating profits of the business. There is a risk that if the Company fails to price the products that it sells at the right level, volume declines will occur if the price is too high or insufficient margin will be achieved if the price is too low, thereby impacting on the profitability of the Company. As a result, retail pricing decisions are constantly monitored by a central pricing team which reviews and assesses the impact of pricing changes on profitability to ensure that any changes are effective.


Supplier dynamics

Food and drink purchases account for the majority of Mitchells & Butlers' supply costs. Mitchells & Butlers is exposed to the risk of higher food prices dependent on world economic conditions, global availability, foreign exchange fluctuations and demand for products. In FY 2008 and FY 2009 there has been an incremental food cost of £9m and £8m respectively. There are some signs that the level of future price increases will be at a lower rate however it is likely that they will still be subject to volatility.


Despite this, as a result of the value and volume strategy that the Company pursues and the strength of its consumer offers and pub estate, Mitchells & Butlers has continued to grow food volumes mitigating the increases in food cost of goods. Purchasing effectiveness is a key area of focus as the large number of food ingredients and fragmented nature of food suppliers on the world commodity markets have given Mitchells & Butlers a greater opportunity to source food from alternative suppliers. In addition to this, the Company continually reviews its cost of goods for each menu item in order to maximise value to the customer as well as profits, and this menu management process also assists in mitigating food cost increases.


In drinks Mitchells & Butlers has successfully renegotiated supplier contracts partially offsetting the effect of duty increases. Additionally, as the Company's legacy tied drinks arrangements have ended, Mitchells & Butlers has broadened the choice available to customers on favourable terms. Mitchells & Butlers is no longer contractually bound to source minimum purchase volumes from certain suppliers although there are some distribution obligations in place.


Mitchells & Butlers is a large commercial user of gas and electricity and is subject to fluctuations in utility costs (for example, gas and electricity costs rose sharply during 2008 due to global price increases). To reduce exposure to short-term fluctuations in energy prices, Mitchells & Butlers has a rolling programme of forward purchases. An energy awareness team reviews energy consumption and works with the business to find ways to promote further efficiencies.


The Company also regularly reviews the financial position of its major suppliers to assess the risk of suppliers ceasing to be able to trade.


Service standards

Service standards are a critical component of Mitchells & Butlers' pubs' success with levels of service and retailing standards a key element in the consumer's choice of pub. Mitchells & Butlers operates ongoing staff training focusing on service quality and supports this through a variety of methods including guest satisfaction surveys.


Health and safety

Mitchells & Butlers is the largest on-trade caterer and there is therefore the potential that there might be a major health and safety failure leading to illness, injury or loss of life or significant damage to the Company's reputation. In light of this, the Company has in place rigorous health and safety training programmes and regular independent audits which are carried out to ensure that procedures are followed.


People

Critical to Mitchells & Butlers' success is its ability to attract, retain, develop and motivate the best people with the right capabilities throughout the organisation. Remuneration packages are benchmarked to ensure that they remain competitive and a talent review process has been established to provide structured succession planning.


The Company makes significant investment in training to ensure that its people have the right skills to perform their jobs successfully. Furthermore an employee attitude survey is conducted annually to establish employee satisfaction and engagement and to compare it against other companies as well as previous annual surveys.


IT systems

Mitchells & Butlers is reliant on its IT systems to trade efficiently and to ensure that appropriate controls are in place. There is a potential for a failure of key IT systems for a sustained period which may restrict sales or reduce operational effectiveness. Therefore the Company has in place a number of tested contingency plans and disaster recovery processes which mitigate the impact of such failures.


Regulatory risks

Mitchells & Butlers operates in a heavily regulated sector, where changes in regulation can have a significant impact. Some examples of the regulatory changes which have affected Mitchells & Butlers include:


National Minimum Wage and Holiday Pay

The National Minimum Wage was introduced 10 years ago and has increased by a compound annual growth rate of 5.5% per annum over its first eight years, materially above inflation. However in 2007 the Low Pay Commission indicated that any further increase should remain in line with general wage inflation; consequently in October 2008 it rose by 3.8% to £5.73 (up 21p) and in October 2009 it rose by 1.2% to £5.80. In October 2007 new rules increased the statutory holiday entitlement of staff from 20 to 24 days, which increased the Company's employment costs.


Mitchells & Butlers has in the past successfully mitigated these statutory increases in employment costs through productivity improvements. These measures have allowed the Company to maintain the ratio of employment costs at 24.3% of sales in FY 2009.


Licensing

New licensing laws became effective in England and Wales in November 2005 with similar changes being introduced in Scotland in September 2009. Licensing matters were transferred to local authorities and greater flexibility of opening hours was introduced to allow pub operators to apply to the local authority for permission to change opening hours, subject to objections from local residents, the police and other relevant agencies. These groups have the right to ask the local authority for the premises' licence to be reviewed if they believe that the Government's licensing objectives are being compromised. The local authority now has the power to attach further conditions to the licence, reduce trading hours, call for a change in the pub management or ultimately suspend or revoke the licence.


The Policing and Crime bill is currently in committee stage in the Lords. The bill takes a two-tiered approach to further regulation of alcohol retailers with a small number of mandatory conditions for all alcohol retailers, alongside new discretionary powers for local authorities.


Mitchells & Butlers does not operate any 24 hour licences and invests heavily in the training of its pub managers and staff to ensure continued compliance with licensing laws and that its pubs are operated in a responsible manner.


Taxation

Mitchells & Butlers' profitability is affected by a number of different taxes. These include duty on alcoholic beverages, property rates, VAT, corporation tax and other business taxes. There is a risk that tax legislation changes may result in increased levels of tax and therefore reduced revenue, profitability or cash flow.


Mitchells & Butlers ensures it takes appropriate action to minimise the risks from legislation changes through a number of means including:

• active participation with industry organisations, such as the British Beer & Pub Association and the British Hospitality Association, ensuring that effective lobbying is carried out; and

• continual improvements in operating procedures to ensure any cost increases arising from such changes can be mitigated through productivity increases or other cost reductions.


The amount and timing of the Group's cash tax payments and receipts are dependent upon the interpretation of tax legislation. Alternative interpretations could affect tax returns which are submitted but not yet approved, material tax losses utilised in prior years or available for offset against future profits and claims for overpayments of tax in prior periods.


Should the Company be subject to a change of ownership as defined by the Income and Corporation Taxes Act 1988 (Sections 768, 769 and Schedule 28A) and be deemed to have undergone a significant change to its business, tax losses available for offset against future profits could be lost or the timing of cash tax credits could be impacted.


In mitigation of the above risks, Mitchells & Butlers monitors its tax position on an ongoing basis in conjunction with advice from tax specialists and discussions with HMRC.


Financial risks

Hedges

The Group uses interest rate and currency swap contracts to hedge its exposure to changes in interest rates and exchange rates. The Group currently has £1.35bn of interest rate swaps and cross-currency swaps in place in relation to the securitisation, with their longevity and amounts matched to the underlying bonds. It also has £150m of short-term interest rates swaps held outside the securitisation against floating rate debt with a maturity date of December 2010. There are no swaps remaining on the Group's balance sheet relating to the proposed property joint venture.


Cash flows

Mitchells & Butlers has financing in place with sufficient headroom to support the operational strategy and maintain an efficient balance sheet. There is a risk however that due to a change in the economic climate or other significant financial impact either that the business might not be able to fulfil the terms of its financial obligations, or that the business would not be able to refinance its unsecured medium-term facility, drawings on which were £383m at the year end, prior to its maturity in November 2011.


In either of these circumstances the Company could reduce its cash costs, primarily by reducing operating costs or reducing its maintenance and expansionary capital expenditure. Alternatively the business could look to other forms of finance such as sale and leaseback, rights issues, or other specific mortgage transactions to meet cash requirements. Clearly there is no guarantee that these other forms of finance will be available to the business at the required time.


Pension funding

Mitchells & Butlers has two defined benefit pension schemes which give rise to various funding risks. There is a risk that the Company's funding of these schemes may be increased or accelerated to meet the expected liabilities within the scheme. The expected liabilities of the schemes are impacted by changes in various economic factors such as life expectancy, asset returns, bond yields and inflation expectations.


Mitchells & Butlers' pension risks have been mitigated by the closure of the defined benefit schemes to new entrants in 2002, (as well as the introduction, with effect from 1 October 2009, of a 2% per annum limit on increases to that proportion of salary which is used to calculate the retirement benefit for current active members). As an alternative, a defined contribution pension scheme is now available to eligible new employees.


Mitchells & Butlers also maintains a close dialogue with the pension schemes' Trustees and three of the Trustees are appointed by the Company. As a result of the funding deficits in the schemes, in addition to the regular service contributions, the Company has made additional contributions of over £200m since demerger in 2003 in order to proactively reduce the deficit.


The pension deficit on the balance sheet had increased to £130m at the year end primarily due to a reduction in corporate bond yields. The next pension scheme triennial valuation for funding purposes is due in March 2010. Discussions have commenced with the Pension Trustees in respect of the various assumptions to be used in the valuation, some of which could vary significantly from the accounting basis, and we therefore anticipate that the valuation deficit may be higher than £130m. A revised funding plan will be agreed with the Trustees once the valuation process is complete.


Property valuation and security

There is a risk that a significant reduction in the Company's profitability or a material change to the basis of valuation of our property portfolio, upon which the Group's borrowing is secured, may adversely impact the Group's borrowing covenants or distributable reserves. This is mitigated by the headroom that we maintain against these risks, for example on the covenants within the securitisation there is a net worth threshold of £500m; and at the year end the headroom on this covenant was £1,092m.


Material litigation

Mitchells & Butlers may be subject to litigation in the ordinary course of its operations. If such litigation resulted in fines, damages or reputational damage to Mitchells & Butlers, its business could be adversely affected.


Mitchells & Butlers has audited procedures in place to safeguard against material litigation, and has insurance in place to cover the more easily identifiable litigation risks.


Other financial risks

Other financial risks are shown in note 20 to the accounts.

- Ends -


For further information, please contact:


Investor Relations:
Erik Castenskiold
+44 121 498 6513


Media:
James Murgatroyd (Finsbury Group)
+44 207 251 3801


Notes for editors:


Mitchells & Butlers owns and operates around 2,000 high quality pubs in prime locations nationwide. The Group's predominantly freehold, managed estate is biased towards large pubs in residential locations. With around 3% of the pubs in the UK, Mitchells & Butlers has 10% of industry sales and average weekly sales per pub almost four times greater than that of the average UK pub.


Mitchells & Butlers' leading portfolio of brands and formats includes Ember Inns, Harvester, Sizzling Pub Co., Toby Carvery, Vintage Inns, Crown Carveries, All Bar One, O'Neill's, Nicholson's and Browns. In addition, Mitchells & Butlers operates a large number of individual city centre and residential pubs.

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