Mitchells & Butlers plc - Interim Results
(For the 28 weeks ended 14 April 2007)
|Note: EBITDA, operating profit and profit before tax are all stated before exceptional items|
|Profit before tax||89||91||(2.2)%|
|Earnings per share before exceptionals||14.8p||12.8p||15.6%|
|Earnings per share after exceptionals||17.4p||13.6p||27.9%|
- Good sales growth: same outlet like-for-like sales up 3.6% for 32 weeks to 12 May 20071
- Average weekly sales per managed pub up 7.6% to £18.3k
- Strong market share gains: same outlet food sales up 5.5%2, drink up 3.2%2
- Integration of Acquired Sites3 on track: over half (126) converted with initial sales uplifts already above 25%
- Net retail operating margin excluding Acquired Sites3 up by 1.1 percentage points to 17.2%
- Actively exploring 50:50 joint venture on majority of property assets
1 Includes entire Easter trading in both periods being compared
2 32 weeks to 12 May 2007
3 The “Acquired Sites” are the 239 pub restaurant sites acquired from Whitbread plc on 21 July 2006
Commenting on the results, Tim Clarke, Chief Executive said:
“These strong results, with EPS up 15.6%, reflect our leadership position in the growing eating-out market and significant gains in our drinks market share. Our average weekly sales per managed pub are up by 7.6%, with a strong underlying margin performance. We are now serving almost 100 million meals a year. We are successfully converting the pubs purchased from Whitbread last year and are well on track to deliver the targets set out at the time of the acquisition. We remain confident in our future growth prospects.”
In line with our commitment to progressive growth in dividends, an interim dividend of 4.25p per share, an increase of 16.4%, will be paid on 29 June 2007 to shareholders on the register on 1 June 2007.
A special dividend of £1 per share (£486m) was paid to shareholders at the beginning of this financial year on 25 October 2006 following the refinancing completed on 15 September 2006. This was accompanied by a 34 for 41 share consolidation to enable continuing share price comparability.
Revenue in the sixteen weeks, since the AGM trading statement to 12 May 2007, has shown good growth with same outlet like-for-like sales 3.2% ahead of last year, 1.9% ahead on an uninvested basis. Overall trading is in line with the Board’s expectations.
|16 weeks to 12 May 2007*||32 weeks to 12 May 2007*|
|* Includes entire Easter period in both years being compared and excludes the Acquired Sites
** Includes Hollywood Bowl
|Same outlet like-for-like sales|
|Uninvested like-for-like sales|
Our estate in the residential areas accounting for 75% of managed pub sales, continues to generate strong growth with same outlet like-for-like sales up 4.1% for the 32 weeks to 12 May. Within this, our Locals pubs have performed very strongly, especially in food, which together with our high levels of amenity and good value for money are attracting a wider customer base and sizeable drinks market share gains. Our pub restaurants have continued to grow like-for-like sales, albeit at a slower rate than last year, partly reflecting signs that the successive rises in interest rates have been having some effect on the spending patterns of mid-market consumers, as well as some increased competition in the pub food market ahead of the smoking ban.
In the High Street segment, accounting for 25% of sales, same outlet like-for-like sales growth has strengthened with an increase of 2.9% for the 32 weeks to 12 May. This has been driven by buoyant trading in central London and a strong performance by our Town Pubs and Bars outside London, particularly in food, whilst trading in our late night venues has also seen a good recovery with positive same outlet like-for-like sales growth since Christmas.
Further strong efficiency gains are being generated and productivity, measured by staff contribution per hour, is up by 4.6%. On the purchasing front, the increase in the cost of goods index has been held to 1%, significantly below inflation and further process efficiencies have been made in the overhead. All of these factors have contributed to the strong uplift in net operating margin which is up 1.1 percentage points to 17.2%, excluding the Acquired Sites.
PROGRESS ON ACQUIRED SITES
We have made excellent progress with our conversion of the 239 Acquired Sites. We currently have over half the estate converted, with 126 pubs reopened and operating under our formats. Initial sales uplifts are already above 25%, with further subsequent sales build-ups expected over the next two years. We are currently on site with a further 23 projects. The sales and operating profit contribution from the Acquired Sites for the first half were £87m and £4m respectively, net of closure and pre-opening costs of £10m.
With a further £5m of closure and pre-opening costs expected in the second half, the acquisition will, as stated at the time, be marginally dilutive to earnings in the current financial year. Our success to date in converting the sites underpins our confidence in the value creation from this acquisition.
PREPARATIONS FOR SMOKING BAN
In Scotland, which represents 5% of the estate, our experience of over a year of the smoking ban has shown that large, high quality pubs, with the ability to serve good quality meals at high volumes with attractive prices, can benefit from the ban.
Our same outlet like-for-like sales to 12 May 2007 are cumulatively ahead since the ban by 1.8%, with food up 7.4% and drinks down 0.4%. We have seen a marked upturn in trading since the winter months with like-for-like sales up 3.2% in the last 16 weeks.
In Wales, which represents 4% of the estate, it is too early to draw any firm conclusions, however the first seven weeks of the ban have seen like-for-like sales growth of 2.5%, a modest slowdown on the previous trend.
We continue to prepare our businesses in England for the ban on 1 July by enhancing their food, soft drinks and coffee offers, improving amenity levels and providing high quality external areas. In those uninvested pubs where we are now non-smoking, there have been very limited adverse effects. In total we now have over 340 non-smoking sites in England, including recent conversions, representing almost 20% of the estate. Overall we aim both to attract new users and retain existing customers.
We believe we are well placed to minimise any first year slow-down in sales growth post the ban and, thereafter, believe the ban will accelerate the medium term growth prospects of the business.
RELEASING ADDITIONAL VALUE FROM THE ESTATE
The Board has undertaken a thorough review of the options available to create additional value from our property portfolio. Three core beliefs, have shaped our decision making process:
- enduring shareholder reward is our corporate priority, delivered through day to day operational excellence, combined with a pragmatic harvesting of favourable debt and property market conditions when appropriate;
- property ownership and freehold appreciation is an intrinsic part of our integrated business model providing the firm foundations on which to deliver attractive returns and operational stability in both the short and longer term; and
- the business model should provide continued incentive to invest in consumer amenity in order to preserve competitive advantage and generate sustainable profit growth with capital appreciation.
We have taken expert advice on the market rent that all our existing freehold and long leasehold properties could support on a typical lease, which would be approximately £270m per annum.
In this context we have rigorously tested a variety of options, ranging from preservation of the status quo to full separation, all against three criteria:
- the quantum of the value potential against the existing share price, taking into account the costs of execution;
- the certainty of achieving that value in the short term; and
- the sustainability of the new business model and the scope to create yet more value for shareholders in the future.
The Board is clear that the market for REITs is as yet insufficiently developed to provide shareholders with certainty of material and sustainable value enhancement by adopting such a structure today. We will continue to review this position over time with shareholder value remaining at the top of our agenda.
We have concluded therefore, that the most appropriate solution lies in securing value for up to 50 per cent of our property interests through a partnership structure. This would crystallise a substantial proportion of our property value on historically attractive yields, whilst enabling us to preserve the integrity of the existing, proven business model.
To that end we have conducted a wide-ranging and competitive process with a number of major UK property companies and private investors in pursuit of the most favourable terms for shareholders. As announced on 21 May, we are exploring the possibility of a 50:50 joint venture covering the majority of our property assets with R20, the investment vehicle of Robert Tchenguiz, which has emerged as the most competitive bidder at this time. There can be no certainty that any transaction will be forthcoming, with significant work still required before a successful conclusion can be reached. A further announcement will be made in due course as appropriate.
Mitchells & Butlers is generating accelerated drinks market share gains and has built the leading position in the eating-out market. Our value and volume marketing strategy leaves us competitively well placed to withstand the impact of the successive rises in interest rates and the inflationary pressures on consumer spending.
The breadth of our estate and format portfolio is a key advantage. Our substantial presence in local pubs generating rapid food sales growth and in premium formats trading strongly in Central London and other affluent, economically buoyant areas is largely offsetting the current slowdown in our more mid-market pub restaurant formats.
Our development of enhanced food offers and investment in high amenity standards will enable us to take advantage of the opportunities arising from the smoking ban to attract new users as well as retain existing customers.
Our rapid progress in the conversion of the Acquired Sites is incurring significant closure and pre-opening costs estimated at £15m this year, but will lead to a good profits advance from these sites next year. We also expect to continue to generate high returns from our large pipeline of investments in the core estate.
We are continuing to generate significant productivity and purchasing gains, whilst the external cost pressures of recent years appear to be easing.
The Board remains confident in future prospects, generating shareholder value from both profits growth and the directly related capital appreciation of our licensed property.
For further information please contact:
0121 498 4907
0121 498 4526
James Murgatroyd (Finsbury Group)
0207 251 3801
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