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19/05/2004

Interim Results for the 28 weeks ended 10 April 2004

19 May 2004

Mitchells & Butlers plc - Interim Results

(For the 28 weeks ended 10 April 2004)


Financial Highlights

  • Turnover up 4% to £823m
  • EBITDA* up 3% to £197m
  • Operating Profit* up 2% to £140m
  • Profit before tax* down 5% to £88m
  • Earnings per share* up 16% to 10.0p
  • Basic earnings per share of 9.5p (8.4p)
  • Interim dividend 2.85p

*Before exceptional items. PBT & EPS: pro forma comparative for 2003

Business Highlights

Commenting on the results, Tim Clarke, Chief Executive said:

“More customers are choosing Mitchells & Butlers’ pubs as we continue to enhance amenity, service and value. We are delivering strong growth in food sales and capturing drinks market share.”

“Our strategy is generating good like for like sales growth and a solid operating profit performance. The combination of our trading results and the refinancing of the business completed in December has delivered strong EPS growth.”

  • Same outlet like for like sales up 5.3%*, uninvested like for like sales up 3.4%*,
  • Growth in uninvested like for like gross profits
  • Further cost efficiencies from unit and corporate scale
  • Solid operating profit growth, despite regulatory cost increases
  • Refinancing and £501m return of funds completed: more efficient balance sheet

*32 weeks to include Easter in both years

Current Trading and Outlook

Overall trading is in line with the Board’s expectations for the year.

Sales growth in the eight weeks to 8 May 2004 (which includes the full Easter period in both years) continues to be strong, particularly in residential areas. The High Street has also seen further improvement.

8 weeks to 8 May 2004 Same Outlet (invested)
Like for Likes
Uninvested
Like for Likes
Residential 6.9% 5.1%
High Street 5.1% 3.4%
Total 6.3% 4.6%

We will continue to pursue the optimal balance of volume, price and mix in order to generate sustainable profit growth. The anniversary of our sales strategy, together with the hot summer weather in the second half last year, will provide us with a more challenging sales comparative for the rest of this financial year. However, the price comparison should be a little easier. Based on the current levels of sales activity we estimate that average retail prices in the second half will be down 1% against the second half last year, compared to 3% down across the first half, leaving percentage gross margins slightly lower than last year.

We remain focused on tight cost management to offset the increase in external costs and maximise the profit contribution from our sales activity, so as to continue to grow earnings and cashflows in the second half.

For further information please contact:

Mitchells & Butlers plc
Kate Holligon - Investor Relations 0121 498 5092
Jeremy Probert - Media 0121 498 5547
Finsbury Group - James Murgatroyd 0207 251 3801

A presentation for analysts and investors will be held at 10am at the Cazenove Auditorium, 20 Moorgate, EC2. A live webcast of the presentation will be available on this website.

CHIEF EXECUTIVE’S OPERATING REVIEW

The Benefits of Focus

A year on from the demerger, Mitchells & Butlers is performing well. The benefits of focus and a reborn pub identity are reflected in the enthusiasm with which our people are executing the strategy.

We are focused on providing our customers with the best overall value experience competitively available in the market. As a result, food sales growth has accelerated and drinks market share has been gained. Higher sales volumes are in turn enabling us to generate cost efficiencies from both our unit and corporate scale.

These levers are the key to achieving our financial objectives of driving earnings growth and high returns on assets, sustainable for the longer term.

Generating Profitable Sales Growth

We have been pursuing the optimal combination of price, volume and mix to maximise profits and actively enhancing the food and drink range to increase customer choice. Our volume increases of 8%, with a 3% reduction in average retail prices, have driven same outlet like for like sales growth of 5.3% (32 weeks) and we are continuing to gain market share. Despite the significant rebasing of prices we are also able to report growth in uninvested like for like gross profits.

Productivity gains and cost efficiencies

We started this financial year with an increase in the cost base of some £8m in the first half primarily as a result of the 7% increase in the National Minimum Wage in October. Our volume led strategy has enabled cost efficiencies which have offset these increases.

We have re-negotiated some 60% of our food and drink supply contracts by value achieving a net reduction of 2% overall across our supply terms. We have also maintained staff contribution per hour to offset the increase in wage rates and reduction in average prices. In addition, we have achieved central support cost savings of £5m through actions put in place last year.

Brand and format performance

Same outlet like for like sales were up 6.4% (32 weeks) in the 70% of the estate in residential areas. This growth is being driven by our five leading residential brands: Ember Inns, Harvester, Sizzling Pub Co, Toby Carvery and Vintage Inns, and the strong consumer appeal of their informal food and drink offers.

In the 30% of the estate in the High Street, the differentiation of brands such as All Bar One, Goose and O'Neill's and our consumer value proposition is driving out-performance in tough trading conditions. Same outlet like for like sales were up 3.1% (32 weeks).

Pro-active Estate Development

We have continued with our programme of raising the quality of the estate.

Our investment has been concentrated in residential areas and is showing good sales uplifts and returns slightly ahead of the 14% being achieved on the capital invested in developing our brands and formats over the last 10 years. For the year as a whole we now anticipate completing 100 to 110 conversions, reflecting a rigorous approach to evaluation but no change to our overall assessment of the potential pipeline. We also anticipate opening 11 new pubs this year, four with adjacent lodges.

Encouraged by the results and interest from individual operators for our Business Franchise, we have plans to extend this initiative further from the 56 trading at the half year to around 100 over the next 6 months. In return for access to Mitchells & Butlers support systems, training and food purchasing scale, we can attract additional entrepreneurial talent and create value through a share of the trading upside and continued ownership of the property.

Where we see a greater opportunity to add value through disposal we will do so. We achieved proceeds of £29m in the first half and we currently anticipate proceeds of around £50m for the year. Overall, we expect net capital expenditure to be around £100m for the year as a whole.

Strong earnings per share growth and cash returns

As a result of our operating performance and cash generation together with the successful refinancing of the company completed in December, underlying earnings per share were up 16%. In addition, the business continues to generate high returns with a post-tax cash return in excess of 10%.

OPERATING AND FINANCIAL REVIEW

This Operating and Financial review provides a commentary on the performance of the Mitchells & Butlers group for the 28 weeks ended 10 April 2004 and compares it with the equivalent period in 2003.

The commentary refers to the actual results of the Group except where the term ‘pro forma’ is used. The ‘pro forma’ results show the performance of the Group for 2003 as if it had been an independent company since 1 October 2002 operating under the financing and taxation structure put in place on 15 April 2003, the date of separation from Six Continents PLC.

Overall Performance

Mitchells & Butlers is one of the UK’s leading operators of pubs, bars and pub restaurants with an estate of 2057 sites as at 10 April 2004. The outlets are predominantly freehold, mostly in residential areas and have a book value of £3.5bn. The 1989 managed outlets had average weekly takes of £14,700 in the period, three times the industry average.

Total sales in the first half were £823m, 4.3% up on last year. Sales growth continues to be particularly strong in our residential pubs and our High Street businesses are showing an improvement in a competitive market.

  Same outlet (invested)*
Like for Likes
Uninvested*
Like for Likes
Residential 6.4% 4.4%
High Street 3.1% 1.3%
Total 5.3% 3.4%

*32 weeks to include Easter in both periods

The business invested gross capital expenditure of £77m in the period under review. 5 new pubs were opened which, together with investment in converting 63 existing pubs to new brands or formats, accounted for £29m of total capital expenditure. In addition, the evolution and maintenance of the estate continues in order to keep existing offers up to date and in good condition.

Group operating profit before exceptional items was up 2.2% at £140m.

Pubs & Bars
  h2 2004  
Total sales £485m +4.5%
Operating Profit £92m +1.1%
Same outlet like for like sales   +4.7%*
Uninvested like for like sales   +2.2%*

*32 weeks to include Easter in both periods

Sales growth has remained strongest in the residential segment led by our two drink-led brands with distinctive food offers - Ember Inns and Sizzling Pub Co. Performance in the High Street and in London has also improved. Total sales growth was diluted by disposals and transfers to Business Franchises.

A total of 54 conversions were completed, predominantly to residential brands and formats such as Sizzling Pub Co, Ember Inns and the Metropolitan Professionals format. Overall, as a result of our active franchise development programme and selective disposals the number of managed pubs and bars reduced by a net 41 over the half year to 1346.

Operating profit of £92m was up 1.1% on last year.

Restaurants
  h2 2004  
Total sales £333m +3.7%
Operating Profit £47m +4.4%
Same outlet like for like sales   +6.2%*
Uninvested like for like sales   +5.0%*

*32 weeks to include Easter in both periods

Sales in the Restaurant Division benefited from menu development and enhancements to the drinks range. At the same time, we have been further evolving the pub restaurant brands to provide a distinct bar area, increasing the opportunity for pre and post meal drinks sales. Vintage Inns, Harvester and Toby all traded strongly in the period. All Bar One and Browns benefited in the second quarter from the recovery of the Central London market.

4 new Vintage Inns opened in the period together with 9 pub restaurant conversions. Following some transfers to Pubs & Bars the total number of Restaurants has reduced by a net 17 to 643.

Operating profit of £47m was 4.4% up on last year.

Standard Commercial Property Developments (SCPD)

SCPD aims to maximise the value of the Group’s surplus properties which are suitable for development. Turnover of £5m and operating profit of £1m were generated during the period primarily through the sale of a retail development in Bournemouth, on the site of a former pub.

Exceptional items

Exceptional operating costs of £2m relate to the securitisation of the Group’s UK pub and pub restaurant business which was completed on 13 November 2003. An exceptional interest charge of £2m arises from the acceleration of facility fee amortisation in respect of the syndicated loan facility put in place at the time of separation and repaid on securitisation.

Refinancing and return of funds

On 13 November 2003, the Group completed a securitisation of the majority of its UK pubs and restaurant business, raising a total of £1.9bn through the issue of secured loan notes and providing the Group with long term financing at attractive rates. The proceeds from the securitisation were used to repay the Group’s outstanding borrowings of £1,243m under its syndicated loan facility, meet the costs of the refinancing, make special additional contributions to the pension schemes and return surplus funds of £501m to shareholders by way of special dividend of 68p per share accompanied by a 12 for 17 consolidation of the number of shares in issue.

Interest

The net interest charge for the half year was £52m before the exceptional charge of £2m.

Following the securitisation, the Group has a blended interest rate of approximately 6.3% including the interest cost on the £1.9 billion loan notes issued, amortisation of deferred issue costs and interest income earned on the Group’s cash balances.

Taxation

The tax charge of £29m, excluding exceptional items, represents an effective tax rate of 32.4% which is higher than the UK statutory rate due to non allowable items, in particular the depreciation of properties.

Earnings per share

Underlying earnings per share, calculated before exceptional items and compared to the pro forma comparative for the first half last year, was 10.0p, up 16%. Adjusted earnings per share, which adjusts for exceptional items but reflects the financing structure pre de-merger for last year, was 10.0p (h2 2003: 10.5p). Basic earnings per share for the period was 9.5p (h2 2003: 8.4p).

Dividends

The dividend charge for the period of £516m comprises the special dividend of £501m referred to above and paid on 8 December 2003, plus a proposed interim dividend of £15m. The latter equates to a dividend per ordinary share of 2.85p and will be paid on 1 July 2004 to shareholders registered on 28 May 2004.

The Board has announced its intention to pay a final ordinary dividend of 6.65p per share thereby giving an expected total dividend for the year ending 20 September 2004 of 9.5p per share.

Cash Flow and Net Debt

The Group’s operations continued to generate strong cashflow with EBITDA of £197m before exceptional items, compared to £191m last year. Operating cash flow after net capital expenditure, but before expenditure relating to exceptional items, was £155m compared with £152m last year.

Net interest paid was £45m, tax paid was £9m and the final dividend for 2002/03 was £29m. Following the refinancing and return of £501m to shareholders, accompanying issue costs and additional pension contributions of £40m, the Group had net debt at 10 April 2004 of £1,667m.

Pensions

On an FRS 17 basis, the Group’s pension schemes showed a deficit of £170m after tax at 30 September 2003. At 31 March 2004, it is estimated that this deficit had fallen to £141m reflecting the benefit of the additional pension contributions and improved investment returns, after allowing for an increase in life expectancy assumptions. As announced at the time of the securitisation, the Company has agreed to make further additional cash contributions of £10m in each of the next two years.

Actuarial valuations of the Group’s pension schemes as at 31 March 2004 are currently in progress.

Accounting Policies

Amendment to FRS 5 ‘Reporting the substance of transactions: Revenue recognition’ and UITF 38 ‘Accounting for ESOP Trusts’ apply for the first time in these interim financial statements. The adoption of the Amendment to FRS 5 has required the Group to change its accounting policy on revenue recognition to record turnover net of coupons and staff discounts. Prior period comparatives have been restated accordingly, with a decrease in the Group’s reported turnover in h2 2003 of £4m (2003 full year £9m) and no impact on reported profits. UITF 38, which requires an entity’s own shares held in Employee Share Trusts to be deducted from shareholders’ funds rather than being shown as an asset, has not required a restatement of prior period comparatives.

IFRS Implementation

Mitchells & Butlers will present its first set of financial statements prepared under IFRS for the year ended 30 September 2006. This will require a full profit and loss account, balance sheet and cash flow statement for the year ended 30 September 2005 for comparative purposes.

A project is underway to ensure that appropriate accounting policies, processes and procedures are in place to facilitate a smooth transition to IFRS. The areas where significant differences in accounting policy have been identified to date include the recognition and measurement of financial instruments, accounting for pensions, accounting for share-based remuneration and deferred tax.

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