Mitchells & Butlers plc - Interim Results for the 28 weeks ended 12 April 2003
Mitchells & Butlers plc - Interim Results for the 28 weeks ended 12 April 2003
Mitchells & Butlers plc announces today, Thursday 22 May 2003, its Interim Results for the 28 weeks ended 12 April 2003.
Financial Highlights – Pro forma
- Turnover up 1% to £793m
- EBITDA flat on h2 2002 at £191m
- Operating profit down 6% to £137m
- Earnings per share down 0.7p to 8.6p
- Net operating cash flow up £80m at £152m
Note: Basis of preparation of the Financial Highlights as set out in Note 1 to Pro forma Financial Statements.
Commenting on the results, Tim Clarke, Chief Executive of Mitchells & Butlers, said:
"The first half has seen solid progress against our operating priorities. Our focus on sales growth is driving an improved trend of results, as seen in the second quarter. Staff productivity continues to increase, costs have been reduced, and we are sustaining double-digit returns on cash capital employed. Overall, our performance remains resilient despite difficult trading conditions in the High Street and London.
We are confident that the strong actions we have taken to realign our business priorities will help to underpin our performance.
We have made rapid progress with the review of our long term financing options and intend to pursue a business securitisation with the aim of returning at least £400 million to shareholders later this year."
Current Trading and Outlook
We have seen some improvements in trading in the second quarter which have continued into May. Like for like sales in the 12 weeks to 12 April were down 3.7% (adjusted for Easter) and in the 8 weeks to 10 May down 3.1% against a decline of 4.5% in the 8 weeks to the end of November. The strongest performance is being generated by our branded local pubs and pub restaurants. The relative buoyancy of the economy in the Midlands and the North, accounting for almost 60% of Mitchells & Butlers’ business is reinforcing those trends.
In the High Street, while there has been a recent stabilisation of downward pricing pressures the impact of overcapacity on the High Street remains significant. In central London, there have been some modest signs of recovery following the end of the Iraq war.
We are focused on driving profitable sales volume growth and are continuing to reinvest margin through carefully controlled promotional activity. The continuing shift in mix to higher margin products and purchasing cost gains, together with the £5 million saving in overhead we will achieve in the second half, will help to mitigate the impact on our net operating margins in the second half.
Overall, while we remain cautious on the outlook for overall U.K. consumer spending, we are confident that the strong actions we are taking to stimulate profitable sales growth and control costs, will be instrumental in delivering the Board’s objectives.
Financing and Strategy Review
Following detailed evaluation of the financing options, with The Royal Bank of Scotland in consultation with rating agencies, the Board has determined to undertake a securitisation of its UK pub and restaurants business, in order to increase the efficiency of the Company’s balance sheet and to release surplus funds to shareholders.
Significant work is now underway to complete final due diligence, documentation and legal structuring of the transaction, and it is expected that the transaction will be executed during the autumn.
Subject to capital market conditions, and in particular long-term interest rates, Mitchells & Butlers aims to raise sufficient proceeds from the securitisation to return to shareholders at least £400m.
It is our intention to provide more details on the securitisation and return of funds by the time of our next trading update in September.
The announcement that Scottish and Newcastle intends to sell their retail business is the latest development in a period of major structural change in the industry. In the current circumstances our priority remains the refinancing of the business, the return of cash to shareholders and the development of the Group through organic endeavour. Only in the event that we identify and can deliver with certainty an alternative strategy of compelling and greater value will we consider departing from this well defined path.
Chief Executive’s Operating Review
During the first half of this financial year, in addition to clarifying the refinancing opportunity with a view to returning surplus funds to shareholders, Mitchells & Butlers has made further progress with its strategic priorities.
- We have increased our programme of marketing, promotional and pricing activities to drive sales. This follows the successful completion and evaluation of carefully controlled trials to ensure the optimal balance of volume and margins. To support this promotional activity we have placed increased training emphasis on staff selling skills.
- We have continued the development and evolution of our brands and formats to meet changing customer needs. The capital costs of our brand and operating templates are being significantly reduced. This will help to underpin the prospects for continued strong returns from the 500 conversions of unbranded outlets planned over the next 3 to 4 years. In London we have successfully developed an operating format for metropolitan professionals at a low capital cost which is achieving a pre-tax return of over 20% from the 32 sites we have converted to date.
- We have increased staff productivity through the roll-out of new scheduling processes supported by our continuing investment in training and staff development. In the year to date, staff productivity is up 5% and was up 6% in the second quarter.
- We have further driven the cost benefits of our corporate scale. On the purchasing front we have secured reductions of 6% on the 24% of our cost of goods renegotiated this year. We have also carried out an overhead rationalisation programme with £5m of benefits in the second half and £10m in 2004.
- Finally, we have concentrated our reduced capital spend on the residential pubs and pub restaurants where the incremental return on investment is particularly strong.
Our focus on the above priorities has enabled us to continue to generate post tax cash returns in excess of 10%.
Operating and Financial Review
Mitchells & Butlers plc was created on its separation from Six Continents on 15 April 2003. Pro forma financial statements for the 28 weeks to 12 April 2003 are included in this announcement. These pro forma financial statements show the underlying performance of Mitchells & Butlers as if it had been in existence as an independent company since 1 October 2001.
The interim financial statements within this announcement are for the Six Continents group for the six months to 31 March 2003. Due to its subsequent separation from that group, Mitchells & Butlers is disclosed as a discontinued operation in these financial statements in accordance with relevant accounting standards.
This Operating and Financial Review provides a commentary on the pro forma performance of Mitchells & Butlers plc for the 28 weeks ended 12 April 2003 and compares it with the equivalent period in 2002.
Mitchells & Butlers plc is the UK's leading operator of managed pubs, bars and restaurants with an estate of 2,095 predominantly freehold sites at the half year. These sites had average sales per week of £14,000 in the half year to April 2003, nearly three times the industry average, reflecting their individual unit scale.
Total sales were £793m, 0.9% up on last year. In the first half drink sales were 1.0% down and food sales showed 2.7% growth. This comparison is adversely affected by the important Easter trading period which fell in the first half last year but in the second half this year. Trading conditions, particularly in the first quarter, remained difficult in the London market and the competitive High Street. The residential estate has been more resilient, particularly for food sales.
Uninvested like for like sales in the 32 weeks to 10 May (to include Easter in both years) were down 3.7%. Food and Drink gross margins have been maintained due to favourable shifts in mix, the impact of price increases taken in the second half of last year and the improvement in supply terms achieved so far this year. We will continue to reinvest some margin through promotional activity and controlled pricing to drive further sales volume improvements over the balance of the year.
Overall, Group EBITDA was down only 0.5% on the equivalent period despite the shift in Easter, the impact of further regulation (which particularly affected employment and property costs), and an increase in the pension charge. Group operating profit was £137m, down 6.2%, due to higher depreciation costs.
We continue to drive benefits from our scale at the unit, brand and corporate levels. Targeted staff planning has optimised the benefits of outlet scale to drive gains in staff productivity of 5% in the year to date. Action has been taken to deliver £10m of annualised central cost reductions in 2004 of which £5m will be achieved in the second half of this year.
Despite the difficult trading conditions in the first quarter Mitchells & Butlers remains a strongly cash generative business producing post tax cash returns in excess of 10% and double digit returns on incremental investment.
Pubs & Bars
Sales in the Pubs & Bars division grew by 0.2% to £466m with a relatively strong underlying performance seen in the local pub market, led by Ember Inns and the Sizzling Pub Co. Trade on the High Street was impacted by competitive pressures and lower consumer confidence, however differentiated brands such as O’Neill’s continue to prove popular. Uninvested like for like sales on an adjusted basis were down 4.3%.
There were a number of opportunistic disposals during the period where outlets had high alternative use value. As a result the number of Pubs & Bars was reduced by 12 to 1,424. Our programme of conversions of unbranded outlets to our brands and formats continued with 67 projects completed at the half year principally to our Ember Inns, Sizzling Pub Co and metropolitan professionals formats. This programme of conversions will continue as we convert our planned pipeline of 500 sites over the next 3 to 4 years.
Operating Profit of £91m was 9.9% down on the last half-year due to the effects of regulation, High Street competition and weak London trading which were felt particularly in Pubs & Bars.
In the Restaurant division total turnover grew by 0.6% to £323m and uninvested like for like sales adjusted for Easter fell by 2.8%. The strongest trading performance was seen in the suburban restaurants led by Toby Carvery and Vintage Inns, highlighting the continuing preference shift amongst certain consumer groups towards local, user friendly pubs and restaurants. The performance of our brands in London and the South-East was less strong than elsewhere due to the influence of London market conditions.
The total number of outlets operated by the Restaurants division at the half year was 671, compared to 669 at the start of the year.
Operating Profit of £45m was flat on last year due largely to the shift in Easter, a particularly important trading period for our pub restaurants.
Interest and Taxation
Both interest and taxation have been calculated on a pro forma basis as if the capital structure of the Mitchells & Butlers group post separation had been in place since 1 October 2001 and excluding any tax impact arising directly as a result of the separation. On this basis, the interest charge reduced by £2m as a result of lower interest rates. The effective rate of taxation on profits was 32.3%, virtually unchanged on the 32.2% rate for the year ended 30 September 2002. On a similar basis, the cash tax rate for the first half was 27.1%.
The Group operations continued to be strongly cash generative. Net operating cash flow was £152m compared with £72m in the previous year. As a result of the Group’s continued focus on the efficient use of capital through a reduction in the average conversion cost and a reduced number of projects, as the Allied conversions come to an end, net capital expenditure for the Group decreased from £127m to £61m. There continues to be a number of sites within the estate where there is the opportunity to create value through disposal. We have realised £19m of proceeds in the first half and anticipate achieving a similar level in the second half.
Following separation and the return of capital to Six Continents’ shareholders, the Group had net debt of £1,265m. Taking account of some £52m of committed cash payments for pensions and costs arising from the separation, the net debt figure would be £1,317m.
Six Continents PLC paid an interim dividend of 6.6p ahead of separation. As a result Mitchells & Butlers’ first dividend as a stand alone company will be the final dividend for 2003.