MITCHELLS & BUTLERS PLC

LEI no: 213800JHYNDNB1NS2W10

2 July 2020

HALF YEAR RESULTS

(For the 28 weeks ended 11 April 2020)

Highlights

Reported results

Trading results

Balance sheet and cash flow

Phil Urban, Chief Executive, commented:

"The business was performing very well before the enforced closure in response to Covid-19, building on the strengths of our estate of mainly freehold properties, our diversified and well-loved brands and our team's industry leading operational skills.  These assets, coupled with our early experience of re-opening in Germany, give us a clear plan for re-opening and ensure that we are well placed to continue to bring people and communities together and to keep Mitchells & Butlers at the forefront of the eating and drinking-out market."

Definitions

a - The Directors use a number of alternative performance measures (APMs) that are considered critical to aid the understanding of the Group's performance.  APMs are explained later in this announcement.

b - As measured by the Coffer Peach business tracker. 

There will be a conference call held today at 8:30am accessible by phone on 0203 936 2999, access code: 471216, slides will be available on the website at www.mbplc.com.  The replay will be available until 16 July 2020 on 0203 936 3001, access code: 174438.

All disclosed documents relating to these results are available on the Group's website at www.mbplc.com 

For further information, please contact:

Note for editors:

Mitchells & Butlers is a leading operator of managed restaurants and pubs. Its portfolio of brands and formats includes Harvester, Toby Carvery, All Bar One, Miller & Carter, Premium Country Pubs, Sizzling Pubs, Stonehouse, Vintage Inns, Browns, Castle, Nicholson's, O'Neill's and Ember Inns. In addition, it operates Innkeeper's Collection hotels in the UK and Alex restaurants and bars in Germany. Further details are available at www.mbplc.com and supporting photography can be downloaded at www.mbplc.com/imagelibrary.

CURRENT TRADING AND OUTLOOK

On 12 June we announced that we had extended our unsecured financing facilities by £100m to total £250m, and that temporary terms have been agreed with bondholders to avoid technical breaches which would have occurred due to forced closure.  These arrangements provide stability and flexibility for the group to navigate these uncertain times and provide sufficient liquidity to survive a delay in re-opening beyond our current expectation of early July.

We continue to be focused on emerging from the Covid-19 induced crisis in a position of strength with the intention of continuing to build the business and outperforming the industry.

At this time the business remains closed under government guidance to limit the spread of Covid-19.  Uncertainty remains over a number of important variables, including the re-opening profile of our sites, the social distancing measures which will need to be in place and the strength of consumer demand.  As such we do not feel it is currently meaningful to give forward guidance.

These financial statements have been prepared under the going concern basis, the specific considerations in reaching this assessment can be found in note 1 to the financial statements. 

BUSINESS REVIEW

The first half of the financial year has been dominated by the enforced closure of the estate in response to the Covid-19 outbreak. 

On 16 March the government advised the public to not attend busy places, including pubs and restaurants, in order to limit the spread of the virus.  This led to a sharp and immediate reduction of like-for-like sales.  Then, on 20 March, the government announced a directive to close all pubs and restaurants with immediate effect as measures to slow the spread of the virus increased.  The first half therefore includes four weeks of either mandated closure or government guidance not to visit pubs and restaurants.

Before Covid-19 we had enjoyed a strong start to the year.  Like-for-like sales^a growth of 2.6% in the first quarter had been followed by a period of softer sales due to the stormy weather, but we remained c.1% ahead of the market^b and continued to see the beneficial impact of our Ignite programme of work.  Stronger margins, better labour control and tighter cost management had resulted in operating profit growth and we had just started to refresh the range of Ignite initiatives, such that we were confident of a strong finish to the year.

We closed all our businesses immediately on the evening that lockdown was announced to protect our team and our guests.  Established communication channels were set in motion to ensure that we could keep the whole team updated during what was a period of confusion and concern for everyone.  In keeping with our values, we maintained an honest and open style to all communication and carefully considered our options in the light of the developing situation, including emerging details on government support.

We swiftly set up a closedown team to instigate a structured approach to closing the businesses and to minimise losses.  Stock loss was an immediate issue and so as to reduce the impact, perishable items were sold directly from sites or donated through our established relationship with the charity Fareshare.  In total we were able to donate 11.5 tonnes of food, equivalent to 27,500 meals, to vulnerable communities which would otherwise have gone to waste. Cash floats, including those in amusement machines were banked, full stock counts were taken, and each business was physically secured for a prolonged period of closure.

The rapid closure presented significant challenges in terms of managing and mitigating the profit and cash flow impact of lost revenue.  A number of measures were taken from the outset of the crisis to protect the business including putting over 99% of our employees on furlough with basic pay for all employees including the Board reduced to between 60% to 80% of normal pay, depending on seniority.  We quickly reduced operating costs to the minimum required to keep the estate secure, safe and in good condition and maintained strong control of working capital.  All discretionary capital expenditure was halted, including our development programme, and all temporary contracts have been cancelled. 

Throughout the closure period our central communications team have worked hard to keep team members connected and informed, including the launch of a new support portal which can be accessed from mobile devices, and which includes regularly updated FAQs, our Employee Assistance Programme, wellbeing resources and volunteering opportunities.  Social media platforms have also been used to create inclusive groups across all of our team members, from sites and the head office, to share positive and engaging content and ideas. The welfare and mental health of our team has been a primary concern, particularly for those colleagues who have isolated alone, and we have been encouraged in the way the business has pulled together at this difficult time.

We have had a skeleton team working throughout lockdown, including a field-based team that have maintained the businesses, responding to break-ins and emergency call outs. A structured cadence of meetings throughout the week has helped to keep everyone informed, as Covid-19 policy and the industry response has developed. Mitchells & Butlers has played a full role in the UK Hospitality led forums that have helped to devise the Hospitality Sector Protocols Document that the government issued for the sector, and we continue to lobby government directly to ensure that we, and the sector, get the support we need to protect jobs once we re-open and then re-build.

We are working to an early July date for English sites to re-open, with Wales and Scotland following over the next two weeks and have developed a detailed re-opening plan for the business.  Each site will have clear directional and spacing signage to explain and help maintain social distancing; sanitising stations; disposable menus; table spacing; capacity management where possible through our online booking engines; a cashless-first approach (and in some businesses cashless-only); and new brand specific Covid-19 safe service cycles such as vegetables being served in Toby Carvery, as opposed to the usual self-serve model. We have also worked hard to ensure that our team can both be and feel safe at work, including new protocols for deliveries, and where appropriate for take-away food collection.  Key to these measures is the government guidance on the necessary distance between people, clearly a 1-metre distance will allow for significantly higher capacity and will impact the extent of adaptations to service cycles required.

Our German business, Alex, re-opened through mid to late May, affording us valuable insight into the challenges and opportunities ahead, and we are encouraged that sales levels have grown each week since re-opening.  City centre sites have been the slowest to recover, but conversely some suburban businesses have generated days of year on year growth.  From the 1st July, VAT on food in Germany will drop from 19% to 7% for a year, and on all other categories, from 19% to 16%, through the rest of the calendar year.  We are therefore confident that the business will recover quickly, as the impact of Covid-19 subsides.

OUR STRATEGIC PRIORITIES

The fundamental strengths of our business remain. We have a well-known and diversified brand portfolio, an 83% freehold estate in strong locations, an experienced and proven management team and, going forward, we intend to continue to build on the momentum previously gained.  In the short to medium term, our focus will be on successfully re-opening the business in the current challenging environment, ensuring the safety of our team members and guests, and on growing the business back to, and beyond, the levels of trade that we were enjoying before the pandemic. 

Our Ignite programme of work remains at the core of our long-term growth plans and we had recently refreshed the initiatives and opportunities available to us.  Our immediate focus will be on the successful rebuilding of trade following this period of closure and we will be prioritising the shorter-term initiatives that have a quick impact on the business, such as sales driving initiatives.  We remain confident of our ability to deliver long term and sustained efficiencies and business improvements through the existing Ignite programme and will be working to refine and roll out the new initiatives once the business is trading well again.

Principal risks and uncertainties - Covid-19

We continually monitor and assess the principal risks and uncertainties of the business and operating environment.  Given the way in which Covid-19 has rapidly altered the environment in which we trade we note the new risks and uncertainties we now face in addition to the previously identified risks detailed on pages 40 to 44 in our FY 19 Annual Report:

Social distancing measures

Risk: We support the need for social distancing measures to reduce the spread of Covid-19.  While social distancing measures are in place the capacity of our businesses will be reduced, impacting the offer to our guests and the financial model of our operations.  Given the unknown nature of the virus the duration of distancing measures is uncertain.  

Controls / mitigating activity:  We will apply a risk assessment to each of our businesses and only re-open those which we believe can operate under the new guidelines.  For the pubs and restaurants which we can re-open we will adapt the format and practices of our sites to ensure that the distancing guidelines provided by the government can be adhered to, protecting both team members and guests.  We will take measures to protect the financial health of the business whilst operating at reduced capacity and continue to closely manage the cash position of the group.  We will continuously review the latest guidelines and continue to adapt our business operations in response in an agile manner.

Consumer behaviour

Risk: As pubs and restaurants re-open, consumers may have a different mindset to eating out, with health and safety at the forefront of priorities.  Guests may want greater insight into practices, and food supply chain information to feel confident in their eating our experience.  Equally some consumers may not heed the measures put in place to restrict the spread of the virus, potentially putting our team members and other guests at risk.    

Controls / mitigating activity:  Our priority is to protect our team members and guests, providing an eating out experience which can be enjoyed.  We have very strong health and safety practices already in place in our businesses, which we will enhance and evolve to tackle the challenges we now face.  We will be transparent with guests as to these measures such that they can trust in us.

FINANCIAL REVIEW

On a statutory basis, loss before tax for the half year was £(121)m (HY 2019 profit of £75m), on sales of £1,039m (HY 2019 £1,186m). 

The Group Income Statement discloses adjusted profit and earnings per share information that exclude separately disclosed items to allow a better understanding of the trading of the Group.  Separately disclosed items are those which are separately identified by virtue of their size or incidence.

At the end of the period, the total estate comprised 1,745 sites in the UK and Germany of which 1,674 are directly managed.

Changes in accounting policies

These are the first set of accounts the Group has published since the adoption of IFRS 16 (Leases).  As a result of adopting the modified retrospective (asset equals liability) method, prior year comparatives have not been restated.  A full impairment review of the right-of-use assets has been completed on transition to the new standard with the resulting impairment, net of any reversal of onerous lease provisioning, presented as an adjustment to opening reserves. Further details are included in note 13 to the financial statements.

The main impact of the adoption of this new standard on our financial statements, which should accrue evenly across the year, is as follows. On the balance sheet, recognition of a right of use asset of £466m and a lease liability of £543m.  On the full year income statement; an uplift in EBITDA of c.£50m (through lower rental costs) and a reduction in pre-tax profits (after increased depreciation and interest charges) of c.£8m, reducing basic earnings per share by 1.5p. 

Revenue

Total revenue of £1,039m was 12.4% lower than last year due to the government directive to close all sites on 20 March in response to the Covid-19 outbreak.  

As at week 24, the last full week of trading before closure to 14 March, like-for-like sales^a grew by 0.9% with food sales^a up by 1.3% and drink sales^a up by 0.3%.  The Group had a strong first quarter to week 14, with a particularly strong festive season. The second quarter from weeks 15 to 24 was truncated by enforced closure of all sites on 20 March 2020 and includes the negative impact of the storms and resulting flooding throughout the UK in February followed by a sharp decline in sales due to early restrictions put in place in response to the Covid-19 pandemic. 

Separately disclosed items

Separately disclosed items are identified due to their nature or materiality to help the reader form a better view of overall and adjusted trading.  

A charge of £11m was recognised for costs directly associated with the Covid-19 pandemic, which relate primarily to the disposal or donation of short dated food and drink stock items as a result of the government enforced closure of pubs.  

A £148m charge is recognised relating to valuation and impairment of properties, comprising a £130m charge relating to downward valuation movements on freehold and long leasehold sites, a £2m impairment charge on short leasehold and unlicensed properties and a £16m charge for impairment of right-of-use assets.  The majority of these movements are a direct result of Covid-19 and the perceived trading environment present at the reporting date. With all pubs closed at the half year, assumptions reflect the impact of no sales during temporary closure and multiples have also been reduced to reflect uncertainty and an absence of observable comparable transactions at that time.

Adjusted operating profit^a of £108m was 28.5% lower than last year.  The period included a little over three weeks of enforced closure of all sites. After the completion of closedown activity, across the estate and central functions, over 99% of the Group's employees were subsequently furloughed under the Coronavirus Job Retention Scheme and all non-essential costs eliminated.

Statutory operating margin of (4.9)% was 16.7ppts lower than last year, materially impacted by the closure period and valuation and impairment reviews.  Adjusted operating margin^a for the half was 2.3ppts lower than last year at 10.4%. 

Interest

Net finance costs of £68m for the half year were £7m higher than last year reflecting an additional £10m recognised in respect of interest on lease liabilities due to IFRS16 adoption.

The net pensions finance charge was £2m (HY 2019 £4m), the charge for the full year is expected to be £3m.

Earnings per share

Basic (loss)/earnings per share, after the separately disclosed items described above, were (25.0)p (HY 2019 14.3p).  Adjusted earnings per share^a were 7.2p, 55.3% lower than last year.  The weighted average number of shares in the period was 428m and the total number of shares issued at the balance sheet date was 429m.

Cash flow

The business generated £193m of EBITDA before separately disclosed items^a. 

Working capital movement is summarised as; an increase in trade receivables of £10m, the majority of which relates to Coronavirus Job Retention Scheme monies due, offset in part by the absence of business rates prepayment, following the announcement of government Covid-19 support for businesses; a decrease in trade and other payables of £30m, primarily a reduction in accruals and VAT liability following the loss of sales in the last three weeks of the period and; a decrease in inventories of £6m which is the direct result of Covid-19 and the enforced closure of pubs and restaurants.

Capital expenditure of £82m relates to investment projects undertaken before the capital programme was suspended in light of the Covid-19 business closure.   

Following the adoption of IFRS16, leases are now included in net debt resulting in a corresponding presentational increase in book gearing of approximately 70 bps.  Book debt at the half year was £2,158m, including lease liabilities of £543m.

Capital expenditure

Capital expenditure of £82m comprises £79m from the purchase of property, plant and equipment and £3m in relation to the purchase of intangible assets. 

The investment programme was suspended in March as part of the cash management strategy in response to Covid-19, with only essential spend being undertaken after that event. 

Given the closure, into the second half of the financial year, we do not believe it will be possible to calculate a current and meaningful return on investment as all sites are impacted by closure. This will be particularly so for those that have not been trading for a full year.

Property

The mandatory closure of pubs and restaurants due to the Covid-19 pandemic is considered to be an indicator of impairment of property, plant and equipment.  As a result, a directors' revaluation has been completed of the freehold and long leasehold properties at the half year, although it has not been possible to physically visit sites. In addition, an impairment review has been performed for the short leasehold properties and right-of-use assets.  Further details of the assumptions applied are detailed in note 8.

The overall property portfolio valuation has decreased by £524m, reflecting a £132m separately disclosed net impairment charge in the income statement and a £392m net decrease in the revaluation reserve. We believe that this represents a reasonable valuation, based on perceived market conditions at the balance sheet date but note the high degree of uncertainty at that time, shortly following enforced shutdown of all sites in the hospitality sector, coupled with an absence of observed comparable transactions. 

Pensions

The Group continues to make pension deficit payments as agreed as part of the triennial pensions valuation with the schemes' Trustee at 31 March 2019, which showed an actuarial deficit of £293m.  It was agreed that the deficit would continue to be funded by cash contributions of £49m per annum indexed to 2023.  However, the Group has agreed with the Trustee that the contributions into the Mitchells & Butlers Pension Plan and the Mitchells & Butlers Executive Pension Plan would be suspended in respect of the monthly contributions in respect of April, May and June 2020 and those contributions have been added onto the end of the agreed recovery plan so that those contributions will be payable in 2023.  In 2024 an additional payment of £13m will be made into escrow, should such further funding be required at that time.

In light of the Covid-19 outbreak it has been mutually agreed by the Trustee and the Group that the trial of the Trustee's application to court concerning the power to determine the rate of inflation to be applied to pension increases for certain sections of the membership in excess of guaranteed minimum pensions, be adjourned until mid-2021.

Net debt and facilities

Debt within the Group securitisation arrangements is subject to quarterly testing on both a rolling half and full year basis. Following consideration of the impact of the Covid-19 pandemic and the enforced closure of all the Group's businesses from 20 March 2020 it was concluded that, in a highly uncertain environment, the Group was at risk of being in breach of a number of covenants within these debt arrangements through the second half and into next year. As such, alternative and revised arrangements have subsequently been agreed both with the controlling creditor and with trustee of the securitisation and the Group's main unsecured banks. These arrangements, which include extension to the existing term of unsecured facilities, the provision of an additional £100m of unsecured liquidity and waivers for anticipated covenant defaults, are summarised in note 15 on post balance sheet events and note 1 on going concern.

Further details can be found at https://www.mbplc.com/infocentre/debtinformation/.

Going Concern

The outbreak of Covid-19 during the first half of the year casts a high degree of uncertainty as to the future financial performance and cash flows of the group. The implications of this, and particularly the enforced shutdown of all the Group's sites from 20 March 2020, have been considered by the directors in assessing the ability of the Group to continue as a going concern. Further detail is provided in note 1 to the financial statements.

Both before and after the enforced shutdown urgent action was taken to protect access to liquidity, by drawing in full unsecured facilities of £150m, and to protect the business through limiting cash outflows, including: cancelling all discretionary capital expenditure, furloughing of over 99% of the workforce, where possible reaching agreement with suppliers and other creditors on extended payment terms, and the elimination of all non-essential operating expenses.

Subsequently agreement was reached with the Group's main creditors on a number of new arrangements which provide a platform of additional liquidity and improved financial flexibility for the Group in order to meet the challenge presented by Covid-19.  These included extension of the term of existing unsecured facilities and the raising of an additional £100m of unsecured facilities to the same date, to give a total of £250m committed unsecured facilities available to the group until 31st December 2021.

In addition, within the securitisation, a number of concessions have been agreed including waiver against default on financial covenant breaches, up to July 2021 for the six month look-back test and to September 2021 for the twelve month look-back test, and the ability to access further liquidity for debt service costs of up to £100m through drawing the liquidity facility within the securitisation.

At the date of approval of these interim results the Group has cash on hand of £100m and undrawn committed facilities totalling £150m.  When closed and under full furlough arrangements, the four week EBITDA loss (including rent) totals £15m with a cash outflow before debt service costs over the four week period of £30m to £35m after payment of legacy supplier balances.  The two main uncertainties in the year ahead are considered to be the duration of the enforced shutdown and the subsequent strength of recovery as sites re-open. To that end revised financial arrangements, outlined above, have been assessed against a base case, in which the majority of sites re-open in July 2020 (being the current expectation), and a severe but plausible downside case where no sites open before October 2020.  In both cases sales are assumed to take nine months to build back up to prior year levels.

After due consideration of these factors the directors believe that they have a reasonable expectation that the Group has sufficient resources to continue in operational existence for the 12 months from the date of approval of these financial statements, and therefore continue to adopt the going concern in their preparation.

Director's responsibility statement

We confirm that to the best of our knowledge:

This responsibility statement was approved by the Board of Directors on 1 July 2020 and is signed on its behalf by:

Tim Jones

Chief Financial Officer

1 July 2020

Definitions

a - The Directors use a number of alternative performance measures (APMs) that are considered critical to aid the understanding of the Group's performance. Key measures are explained later in this announcement.

GROUP CONDENSED INCOME STATEMENT                                              

for the 28 weeks ended 11 April 2020

All results relate to continuing operations.

GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME

for the 28 weeks ended 11 April 2020

  GROUP CONDENSED BALANCE SHEET

GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

for the 28 weeks ended 11 April 2020

GROUP CONDENSED CASH FLOW STATEMENT

for the 28 weeks ended 11 April 2020

Cash and cash equivalents are defined in note 9.

 NOTES TO THE INTERIM FINANCIAL INFORMATION

Critical accounting judgements and key sources of estimation uncertainty

The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions in the application of accounting policies that affect reported amounts of assets, liabilities, income and expense.

Estimates and judgements are periodically reviewed and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Details of the Group's critical accounting judgements and estimates are described within the relevant accounting policies set out in the Annual Report and Accounts 2019.

Judgements and estimates for the interim period remain largely unchanged.  However, there have been changes to the estimates used in the valuation of property, plant and equipment as described in note 8. Judgement around provisions are also no longer relevant as onerous lease provisioning is no longer a requirement post IFRS 16.

3.       REVENUE

Revenue from services includes rent receivable from unlicensed properties and leased operations of £4m (2019 28 weeks £5m, 2019 52 weeks £10m).

4.       SEPARATELY DISCLOSED ITEMS

In addition to presenting information on an IFRS basis, the Group also presents adjusted profit and earnings per share information that excludes separately disclosed items and the impact of any associated tax. Adjusted profitability measures are presented excluding separately disclosed items as we believe this provides both management and investors with useful additional information about the Group's performance and supports a more effective comparison of the Group's trading performance from one period to the next.  Adjusted profit and earnings per share information is used by management to monitor business performance against both shorter-term budgets and forecasts but also against the Group's longer-term strategic plans.

Judgement is used to determine those items which should be separately disclosed. This judgement includes assessment of whether an item is of sufficient size or of a nature that is not consistent with normal trading activities.

Separately disclosed items include movements in the valuation of the property portfolio as a result of the revaluation exercise of property, plant and equipment, impairment review of short leasehold and unlicensed properties, impairment review of right-of-use assets, revaluation of assets held for sale, past service cost in relation to the defined benefit pension obligation and costs directly associated with the government enforced closure of pubs as a result of the Covid-19 pandemic.

In addition to those items presented as separately disclosed items in the Annual Report and Accounts 2019, the impairment review of right-of-use assets is classified as separately disclosed due to its potential volatility, which can be partly driven by movements in discount rate. Costs directly associated with the closure of pubs as a result of the Covid-19 virus are considered to be separately disclosed due to their size and one-off nature.

4.       SEPARATELY DISCLOSED ITEMS (CONTINUED)

6.       TAXATION

The taxation charge for the 28 weeks ended 11 April 2020 has been calculated by applying an estimate of the annual effective tax rate before adjusted items of 19.3% (2019 28 weeks, 19.9%).

6.       TAXATION (CONTINUED)

8.     PROPERTY, PLANT AND EQUIPMENT (CONTINUED)