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Mitchells & Butlers plc - Interim Results

(For the 28 weeks ended 12 April 2008)


  • * EBITDA, operating profit and profit before tax are all stated before exceptional items and IAS 39 movements
  • ** Adjusted earnings per share is stated as profit after tax before exceptional items and the IAS 39 movements, divided by the weighted average ordinary shares in issue
  • *** Exceptional items after tax were £(135)m, HY2007 £11m; IAS 39 movements after tax were £(12m), HY 2007 £nil
Revenue 995 995 -
EBITDA* 241 230 4.8
Operating Profit* 168 161 4.3
Profit before tax* 84 89 (5.6)
Adjusted earnings per share ** 14.9p 14.8p 0.7
Basic (loss) / earnings per share *** (21.6)p 17.4p n/a
Dividends 4.55p 4.25p 7.1


  • Resilient sales growth with same outlet like-for-like sales up 0.8% for 32 weeks to 10 May 2008
  • Significant market share gains with same outlet food sales up 5.1%, drinks decline limited to 1.5%
  • Productivity and cost efficiency gains drive operating profits up 4.3%
  • Net retail operating margin up by 0.7 percentage points to 16.8% despite £6m of additional regulatory costs
  • Strong cash flow from operations and disposals; net debt to EBITDA ratio of 5.8x
  • Interim dividend up 7.1% to 4.55 pence per share
  • Same outlet like-for-like sales in first four weeks of second half up 3.4%*

* Weeks 29 to 32


Comprehensive review of all aspects of the business and options for creating value for shareholders. These included:

  • testing the strength and sustainability of the business model;
  • reviewing the opportunity for accelerating the operational out-performance;
  • assessing the options for capturing the full value of the property estate;
  • investigating the prospects for managed pub sector consolidation; and
  • exploring the merits of a strategic investment by private equity.

Based on the review the Board has concluded that the business model is robust and well positioned to lead the eating out market growth and that the current performance of sales, operating profits and cash flow is strong. It has also agreed on the following actions to:

  • accelerate the execution of operational strategy for market out-performance;
  • implement a REIT structure to more fully capture the value of the property estate when market conditions are suitable;
  • provide in future the financial reporting on a proforma OpCo / PropCo structure;
  • continue to realise "Gold Brick" disposal proceeds;
  • actively explore opportunities for managed pub sector consolidation;
  • maintain dialogue with private equity on the funding of potential acquisitions;
  • seek to create additional value from non-core assets;
  • strengthen the Board's property skills by the appointment of two Non-Executive Directors from R20;
  • form a property sub-committee of the Board; and
  • maintain the appropriate balance of Independent Non-Executive Directors on the Board pursuant to the requirements of the Combined Code.

As previously announced, following Roger Carr's intention to retire as Chairman, Drummond Hall, currently Deputy Chairman, will become Chairman on 20 June.

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

"The comprehensive strategic review has explored all options for creating value. The conclusions reaffirm our commitment to capturing the value of the property for shareholders. We will also focus on accelerating our trading out-performance and pursuing consolidation in managed pubs."

"Strong food sales growth, sizable drinks market share gains and further productivity improvements have delivered these resilient trading results. The second half has started well."


In line with our commitment to a progressive policy for dividends, an interim dividend of 4.55p, an increase of 7.1%, will be paid on 27 June 2008 to shareholders on the register on 30 May 2008.

Trading Performance

Against the background of challenging economic conditions, Mitchells & Butlers has performed well with same outlet food sales up 5.1% and significant gains in drinks market share. Revenue in the 32 weeks to 10 May has been resilient with same outlet like-for-like sales up 0.8%. This sales growth has been generated against the background of the first winter period of the smoking ban in England and Wales and a continuing volume decline in the on-trade beer market of approximately 9%, as well as weakening consumer confidence. These results have also been impacted by the very poor weather over this Easter compared with the similar period last year which we estimate has reduced same outlet like-for-like sales by 0.4 percentage points.

In the Residential estate same outlet like-for-like sales were up 0.8% in the 32 weeks. Our Pub Restaurant brands performed particularly well with accelerating same outlet like-for-like sales up 3.3% in the second quarter, and a 2.0% growth for the period as a whole. Vintage Inns has had a sustained improvement as a result of our margin reinvestment programme since the new menus were launched last autumn. Our carvery offers, Toby Carvery and Pub & Carvery, continue to see excellent growth. In our Residential Pubs, we have taken advantage of the opportunities to attract new customers to our pubs in the post smoking ban environment, increasing food sales by 15%. This, coupled with our drinks market share gains, has enabled us to hold Residential Pubs same outlet like-for-like declines to 0.6% against the severe on-trade beer market pressures.

The performance of our High Street estate, which accounts for 24% of sales, reflects the differing trends within the three market segments in which we operate. Our Central London pubs and restaurants showed strong growth; our High Street pubs in the rest of the UK performed well driven by strong food sales growth while there was significant pressure on our circuit venues. Overall, same outlet like-for-like sales for our High Street businesses were up 0.3% in the 32 weeks.

Trading in our Scottish estate in the second year of the smoking ban continues to be very encouraging with same outlet like-for-like sales up 3.4% in the 32 weeks with food particularly strong, up 7.2% and a positive drinks performance, up 2.0%. These results reinforce our belief that the overall impact of the ban will be beneficial over time to larger, well invested pubs with an attractive food offer.

This good trading performance has generated strong operational cash inflows. We are also managing the asset base to take advantage of the strength in the property market for our quality of assets with disposals of £54m in the first half on EBITDA multiples of approximately 18 times. This positive performance has continued into the second half with £20m of disposals completed, or with contracts unconditionally exchanged, including the sale of a development property within SCPD realising proceeds of £11m and a profit of £9m. At the end of the first half, net debt had reduced by around £100m since the closure of the swaps in January and the ratio of net debt to EBITDA was 5.8 times, only a marginal increase from the level a year ago of 5.6 times.

Progress on the Acquired Sites

The Acquired Sites conversion programme has been completed with 204 sites converted or on site to convert to our brands and formats. 24 of the other sites have been identified for disposal (of which 19 have been completed to date) with the remainder transferred to franchise. Average weekly sales uplifts on the converted sites are running at approximately 19% above the levels at which the pubs were acquired and we are starting to see a good build up of post conversion profits. Productivity levels have been strongly enhanced, with the employment cost ratio falling from 32% to 27%. We remain confident of delivering our year three target of 30% sales uplifts by the end of the 2009 financial year.

Current Trading

Recent trading in the first four weeks of the second half of the financial year (weeks 29-32) has started well with same outlet like-for-like sales up 3.4%. This short period has encompassed both some poor and strong weather comparatives and it would be premature to draw any conclusions for general market trends. We have seen a good customer response to the launch of our new summer menus, while our drinks market share gains have further accelerated partly as a result of restrained price increases following the Budget duty uplifts.

Strategic Review

The Board has carried out a comprehensive strategic review to consider all options for creating value for shareholders.

In the past three months, all aspects of the business have been reviewed to test the strength and sustainability of the operating model; the options for more fully capturing the value of the property estate; the prospects for managed pub sector consolidation and the opportunities for improved business focus and accelerated operational out-performance. In the process we also explored the merits of detailed proposals from a number of private equity firms to take a strategic investment in the company to assist in the acceleration of our expansion plans. The process has been exhaustive in pursuit of value creation, with no opportunity ignored.

The conclusions have the full support of all our advisers, Citigroup and JP Morgan Cazenove, as well as Greenhill, who were appointed as an independent advisor to the strategic review process.

Strategic Review Conclusions

The Board's conclusions are as follows:

The business model is robust, sustainable and competitively powerful. Current performance is strong in sales, operating profits and cash flow. This reflects the quality of the company's estate, its eating out market leadership, the strength of its brands and formats, its operating capabilities and scale efficiencies. When combined with the future potential for unlocking more fully the value of the property estate, these strengths underpin the prospects for long term growth and shareholder value creation.

As a result, the Board is clear that our future strategy should focus on the following key elements of value creation for the benefit of shareholders:

  • implementation of an operational strategy for accelerated out-performance through extending our eating out market leadership and drinks market share gains;
  • pursue the implementation of a REIT or other appropriate OpCo/PropCo structure when financial market conditions permit and subject to regulatory clearances. We remain committed to ensuring that the value of both the property and the operating business are more fully captured for shareholders;
  • actively explore opportunities for managed pub sector consolidation in line with our strategy of creating value by raising Acquired Sites' average sales and profits to the levels generated in the MAB estate. We intend to maintain our dialogue with private equity firms, should an attractive acquisition arise, which may require additional funding; and
  • explore options to create additional value from the non-core assets including Lodges, Hollywood Bowl and Alex.

As previously announced, following Roger Carr's intention to retire as Chairman, Drummond Hall, currently Deputy Chairman, will become Chairman. This will take effect on 20 June.

In addition, we are pleased to announce that the property skills of the Board will be strengthened by the appointment of Tim Smalley and Aaron Brown, from R20 as Non-Executive Directors on 20 June. This will build upon the relationship established during the joint venture developed in 2007. They will also become members of a property sub-committee of the Board. It is intended that these directors would transfer to the REIT when the separation is effected.

The Board has agreed with R20 that in order to maintain two Non-Executive Directors on the Board, R20 should have an economic interest of more than 25% in Mitchells & Butlers. In the event that R20's interest falls below 25% but is more than 15%, the Board has agreed that R20 would have one Non-Executive Director on the Board.

If a corporate transaction occurred, which involved the issue of equity such that R20's position was automatically diluted, then the Board has agreed that R20's ownership threshold would reduce proportionately, but in no circumstances would the threshold fall below 20% for two Board seats and 10% for one Board seat.

An appropriate balance of independent Non-Executive Directors on the Board will be maintained pursuant to the requirements of the Combined Code.

Strategy for operational out-performance

Our operating strategy and competitive strengths are delivering strong food growth, substantial drinks market share gains and rapid productivity improvements. Our results announced today represent a material trading out-performance against a pub sector facing the most challenging conditions for many years. This robust performance over the first winter of the smoking ban has reinforced our confidence in future prospects, despite the deteriorating outlook for consumer spending.

An independent study carried out by LEK Consulting for the Board, to test the assumptions in our long term business plan, has validated and supported the resilient prospects for growtdh. Our focus will be on intensifying the value and volume sales strategy to attract new customers to our pubs. We expect this to continue to drive market share gains in a market where the consumer is becoming increasingly sensitive to value. We also continue to expect to benefit from the post-smoking ban environment which has widened the consumer appeal of food-led pubs.

We will also look to grow the distribution of our market leading pub food formats through both conversion of existing sites and new build acquisitions. We expect the current slow down in the property market to generate more new site opportunities.

Our widening operational out-performance is set to provide strong opportunities for increased market share gains through the current challenging trading conditions.

Strategy for capturing full value of property estate

The Board believes that a REIT or other appropriate OpCo/PropCo structure would more fully capture the value of the company's high quality property estate for shareholders than the current integrated model. We believe a dedicated property company with stable and growing rental streams and a strong dividend payout would enable greater transparency in the valuation of the estate. The tax advantages of a REIT would also be a source of significant value. Furthermore, with an appropriate starting level of rents and a long term lease structure, we also believe the strength of the brands and formats, the quality of the sites and the operating capabilities of the company would ensure a robust operating company business model, with attractive equity growth prospects.

Conditions in the financial markets currently preclude the implementation of such a structure for the group, largely related to the costs and lack of funding availability for the necessary debt restructuring requirements. Regulatory clearances would also be required. However, the Board will continue to actively monitor and pursue future opportunities for implementing such a structure to capture value for shareholders. In the meantime, in the interests of providing full and transparent information to investors, we will report more explicitly the results of the component parts of the operating and property elements within the integrated business.

We will also continue to proactively demonstrate the inherent value of the estate through individual site and smaller package transactions on "gold brick" properties. These will be pursued where high values can be realised on EBITDA multiples significantly above the current multiple on which the company is valued. For instance, in the first half £54m was raised from property sales on an EBITDA multiple of 18 times.

Despite the considerable uncertainties over the property market, we still continue to experience resilient conditions for individual, high quality assets. As a result, subject to those conditions being maintained, we anticipate that property disposal proceeds in the second half will continue to be achieved at a similar run rate.

Managed pub consolidation

We believe significant value can be created through the consolidation of the managed pubs sector by raising the sales and profitability of other estates to the substantially higher levels that are generated in the Mitchells & Butlers' estate. This would be delivered through conversions to our brands and formats, applying our value and volume sales strategy, enhancing service and productivity levels, and reducing purchasing and overhead costs. The company has a strong track record of adding value through this route over the past decade, with the acquisitions of the Harvester, ex-Allied and ex-Whitbread sites. In the case of the ex-Allied sites, average weekly sales have been raised by c.80% since 2000 and in the 18 months since the acquisition of the ex-Whitbread sites, average weekly sales have already been raised by 19% and we are confident of achieving our 30% uplift targets by the end of the 2008/09 year. Should further such managed pub acquisition opportunities arise, we would seek to pursue them on value creative terms.

Non-core assets

There are a number of non-core assets, outside our core UK pub and restaurant operations. It is our intention to pursue opportunities for value creation above the level that could be created through organic development, whether through asset swaps, disposals or sector consolidation. Assets that we are reviewing the options to create value for include the Lodge business, Hollywood Bowl and the Alex bar and brasserie sites in Germany.

Business Outlook

The quality of the estate, the consumer appeal of the brands and formats and the value and volume sales strategy are generating accelerated market share gains in both food and drinks. The demand for value for money, casual dining remains resilient, which is also underpinning the sales of drinks, such as wines, soft drinks and coffee served with a food related visit. However the traditional on-trade beer market remains in long term structural decline, due to off-trade price competition, social change and the smoking ban. This is likely to remain the case, whatever short term easing of the rate of decline, this summer's weather comparatives and the anniversary of the ban may bring.

Continuous improvements in training and scheduling are raising staff productivity which, alongside further cost efficiency gains, will ensure a reduction in both fixed and variable operating costs of £20m this year. These gains will help mitigate the significant input cost inflation of £11m from food and energy cost increases and £4m from the Budget duty increases during the second half, although it will be a challenge to sustain net retail operating margins for the year as a whole.

We expect discretionary consumer spending to continue to be under significant pressure over the balance of the year. However, we believe our estate and brands are very well positioned to take advantage of the wider consumer appeal of food-led pubs in a post smoking ban environment. Our focus on high amenity standards and good value is also increasing the pace of our drinks market share gains. As a result, we remain confident in a continued, resilient trading out-performance amidst challenging economic conditions.


Having completed the comprehensive strategic review, the Board believes that the company's competitive position and its brand and operational strengths in the pub and restaurant sector, alongside the future opportunities for capturing the property value of the estate and consolidation in managed houses, underpin the prospects for long term growth and shareholder value creation.

The review has been an intensive process, but it has reaffirmed the Board's confidence in Mitchells & Butlers' business model. The current trading performance underpins our confidence in the strategy and our ability to execute it to the benefit of all shareholders.

There will be a presentation for analysts and investors at 9.30am at the Merrill Lynch Financial Centre, 2 King Edward St, London EC1. A live webcast of the presentation will be available at

Presentation to investors – webcast

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