Mitchells & Butlers plc - Preliminary Results
(For the year ended 27 September 2008)
|1 Loss before tax after exceptional items and IAS 39 movements was £(238)m (FY07: £(48)m)|
|* 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 before tax were £(394)m (FY07: £(255)m); IAS 39 movements before tax were £(23)m (FY07: £(17)m); and the tax credit on these items was £114m (FY07: £100m)|
|Profit before tax1*||179||207||(13.5)|
|Adjusted earnings per share**||31.5p||35.5p||(11.3)|
|Basic (loss) per share ***||(43.7)p||(2.5)p||n/a|
- Robust sales and profits performance for FY08: like-for-like sales up 1.0% and operating profits in line with FY07
- Continued strong food growth in year: average sales per pub up 7.2%
- Current trading resilient: like-for-like sales up 1.0% in the eight weeks to 22 November
- Increasing market share gains: food sales up 3.5% and drink sales up 0.5% in the first eight weeks on a like-for-like basis
- 50% EBITDA uplifts achieved on a run rate basis on the Original Acquired Sites* converted to our industry leading brands and formats
- Revised property valuation of £4.7 billion down only 7% on last year
* The "Original Acquired Sites" are the pub restaurant sites purchased from Whitbread plc in July 2006
Dividends and Cash Flow
The Board is focused on reducing the levels of unsecured medium term debt. It has therefore decided, despite a resilient trading performance and strong cash generation, not to propose a final dividend and will suspend dividend payments until drawing levels on its medium term facility are adequately below £300m. This is the level the three year facility falls to in December 2010, having stepped down from the current level of £600m to £550m in December 2008 and £400m in December 2009.
We expect to resume dividend payments once a comfortable level of headroom has been reached. Drawings on the facility were £514m at the year end and have since fallen to £475m at today’s date.
Mitchells & Butlers operational performance has been robust with operating profits maintained for the year ended, while current trading is resilient, reflecting an acceleration in the rate of market share gains. As a result of this performance, cash generation has been strong with net cash flow last year of £164m, before dividend payments but after amortisation of secured debt. Overall, since the end of January, net debt has reduced by £175m to £2,735m.
We are also conserving cash by reducing current year expansionary capital expenditure to focus resources on the maintenance of the existing high amenity standards in the estate as well as implementing further cost efficiency measures in the business.
We will continue to seek value creative disposal opportunities. However, our ability to realise cash at acceptable values from the remaining non-core assets, as envisaged in the strategic review, has been significantly impacted by the prevailing conditions in the financial markets in recent months. We are not prepared to dispose of non-core assets for amounts materially below their fair value.
Based on the steps we are taking with regard to dividends and capital expenditure, and absent any further corporate disposals or alternative financing arrangements, we anticipate that the appropriate level of drawings will be achieved in FY2010, in advance of the scheduled amortisation.
The business model and its performance are robust and delivering significant market share gains. The Company is focusing its substantial cash flow generation on reducing debt to an appropriate long term level and securing a resilient operating performance amidst challenging market conditions. The suspension of dividend payments reflects proactive debt reduction in uncertain markets, not a change in the fundamental long term prospects of the business.
Current trading has shown a resilient trend in the first eight weeks of the financial year with like-for-like sales up 1.0% to 22 November. Food sales continue to be strong driven by the success of our new winter menus and were up 3.5% on a like-for-like basis. Drinks sales have continued their positive growth trajectory being up 0.5% in the period despite the sustained challenges in the on-trade beer market where volumes have fallen 8% over the past quarter. These sales increases have been driven by our value and volume strategy although the overall growth has been restrained by weak machine sales. Like-for-like sales since we last reported (for 51 weeks to September) were up 1.7% for the nine weeks ended to 22 November, with a strong final week of the last financial year.
|8 weeks ended 22 November 2008||Like-for-like sales growth|
In the Residential estate, accounting for 76% of our sales, like-for-like sales were up 1.9%, with strong growth across the spectrum of our value, mid-market and premium formats. Our new winter menus have started successfully and over the period there have been some good performances from Vintage Inns, which has continued its rejuvenation started in November last year; and from Sizzling Pub Co. and Crown Carveries which have both generated some excellent food and drink growth. Our menu and service enhancements in Harvester have made some initial encouraging progress in both the Early Bird menu and improvements in the trend of the later evening cover volumes.
In the High Street segment, accounting for 24% of sales, like-for-like sales were down 0.7%. This reflects continued strong growth from our Central London businesses, combined with a good performance from our Town Pubs outside London, which have been more than offset by very challenging market conditions for the later evening venues.
Progress on the Original Acquired Sites
Our strength in the casual dining market is best demonstrated by the uplifts achieved in the sites bought from Whitbread in July 2006 and subsequently converted to our brands and formats. The average EBITDA of the 205 converted pubs has now increased by over 50% on a fourth quarter run rate basis from the profitability level when acquired. This has been attained ahead of expectations through the strength of our market leading brands and formats and the implementation of our value and volume strategy that provides the platform for maximising the profits of each site. This has led to sales increasing by 20% and food volumes rising by 32%. Significant purchasing gains of £8m have also been extracted through these increased volumes. In addition, the introduction of our efficient staff scheduling systems and service training have radically improved staff productivity with employment costs reducing from 32% to 27% of sales. As a result, substantial improvements in profitability have been generated. These pub restaurants, together with the further 44 Whitbread outlets acquired on 19 September 2008, are high quality residential sites in prominent locations that offer an excellent opportunity for further long term growth within the pub eating out market. We expect that over half of the newly acquired sites will be converted to our brands by Christmas.
We have completed a revaluation of our freehold and long leasehold pubs in conjunction with our property valuers, Colliers CRE, based on the market value of each individual pub. The revised total value of the pubs as at 27 September 2008 is £4.7 billion, which includes a decline of 7% on last year’s property valuation, reflecting the impact on property values from the credit restrictions and the slowing economic growth. £131m of this movement is reported as an adjustment to the revaluation reserve. The impairment charge of £206m reported in the income statement relates principally to a number of wet-led community pubs with limited food capacity and certain late night bars and venues, which have suffered from the impact of the smoking ban, as well as a write down of assets held for sale.
We have continued discussions with our advisers and the tax authorities to review the feasibility, costs and benefits of converting to REIT status without breaking the securitisation. However, given the recent Treasury announcement to exclude internal re-organisations from the REIT regime, the need for cash conservation and the current Group tax position, we have no plans of adopting any such structure for the foreseeable future.
Mitchells & Butlers fully recognises its obligations inherent in the grant of our licences to operate safe, well managed premises where the consumption of alcohol takes place in a controlled environment. We invest considerable time and resource to ensure our retail staff receive comprehensive training. As a result of this we currently refuse service to some 70,000 people a month where no proof of age can be produced, and around 17,000 people a month on the grounds of being intoxicated.
We remain concerned that the Government’s response to the issue of alcohol misuse appears to propose further, disproportionate and unnecessary regulation of the on-trade. In this regard, it is reassuring that the Association of Chief Police Officers believes that there already exists sufficient legislation for licensed premises.
We believe the Government’s focus solely on the on-trade is misguided. The majority of alcohol is now purchased in the off-trade, where there is no supervision beyond the point of sale and where the widespread practice of irresponsible bulk promotions of cheap alcohol can encourage the purchase and consumption of excessive quantities of alcohol. We believe this serious issue should be addressed by the Government as a matter of urgency.
Outlook and Strategy
We remain highly cautious on the outlook for consumer spending in 2009 as the UK economy slides into recession. As a result, we expect continued significant declines in on-trade beer volumes and a contraction in the eating-out market in line with decreases in disposable incomes. Against this demand background, our value and volume strategy is well placed to support a resilient performance in a market driven by value orientated customers. For instance, the average price of a meal in our pubs is £6.05 and the average price of a pint of standard lager is over 40p cheaper than the average in leased pubs.
Mitchells & Butlers’ sales have proved highly resilient through the first year of the smoking ban and the credit crunch. This has been generated by our ability to grow our food sales per pub by 7.2% in the last year and to out-perform the on-trade beer market by over 5%. We are aggressively driving accelerated market share gains and ensuring that this is profitable activity by focusing on the optimal balance of volume, price and mix to maximise the cash contribution to profit. As a result of this policy and the proactive menu management we expect to significantly mitigate the impact of the input cost increases.
During the year ahead we will continue to face substantial increases from input and regulatory costs. Commodity price volatility remains high and, while there have been encouraging reductions in lead cost indicators primarily in wheat and oil, our input costs on food, gas and electricity have remained at historically high levels. This has been the case in securing our winter requirements at prices which are substantially above the levels prevailing during the first half of last year. As a consequence, we expect a £30m increase in food and energy input costs, heavily concentrated into the first half. We expect those increases to subside and in some cases reverse in the second half as the impact of the recent commodity price declines feed through into our input costs. In addition, there will be a £20m increase in regulatory costs driven by national minimum wage and holiday pay increases and by the pre-announced increase in the beer duty.
We expect these cost increases to continue to be partially offset by further improvements in staff productivity, food margin management, purchasing and other cost efficiency savings, which we are targeting to be in the region of £20m in the year. Our outlet scale, with average EBITDA per pub of £240,000 per annum, as well as our corporate scale, with sales of over 110 million meals and over 500 million drinks, will enable us to maximise the benefits of operating efficiencies and purchasing power to mitigate the impact of these external cost increases.
In relation to the reduction in VAT from 17.5% to 15% we are in the process of passing on in full the benefits of this reduction to our customers on products for resale other than alcoholic drinks as a result of the duty increases.
Taking all these factors into account we estimate that same outlet like-for-like sales will need to grow by around 3% in order to achieve a similar level of retail operating profits as last year.
To assist in the priority of reducing the levels of unsecured debt, we are reducing the levels of expansionary capital expenditure. Compared to last year’s total capital spend of £193m we expect to invest around £120m this year. The great majority of this spend, other than £18m for converting the recently acquired Whitbread sites, will be focused on maintaining the existing high standards of amenity within the estate.
Overall, despite the challenges from weakening consumer demand and the external cost pressures, we expect the consumer appeal of our brands, the quality of our well-invested estate, the accelerating market share gains from our value and volume sales strategy and further cost efficiencies, to support a resilient operating performance amidst what are set to remain very difficult trading conditions.
There will be a presentation for analysts and investors at 9.30am at the Allen & Overy Auditorium, One Bishops Square, London E1 6AD. A live webcast of the presentation will be available at
Presentation to investors – webcast
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