MITCHELLS & BUTLERS PLC

LEI no: 213800JHYNDNB1NS2W10

19 May 2021

HALF YEAR RESULTS

(For the 28 weeks ended 10 April 2021)

Highlights

Reported results

Trading results

Balance sheet and cash flow

Phil Urban, Chief Executive, commented:

"M&B was a high performing business coming into the pandemic. With the support of our main stakeholders, we are now well placed to emerge in a strong competitive position and look forward to the removal of remaining trading restrictions in June such that the business is able to return again to full and sustainable profitability.

With our great estate, well diversified portfolio of brands and proven management team, we look forward to welcoming back our guests for great experiences in Covid-19 secure environments and focusing the business once again on continually enhancing our customer proposition while driving efficiencies through the Ignite programme."

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.

There will be a conference call held today at 9:15am accessible by phone on 0203 936 2999, access code: 327499 and www.incommuk.com/customers/online  access code: 327499. The slides will also be available on the website at www.mbplc.com.  The replay will be available until 2 June 2021 on 0203 936 3001, access code: 686064.

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

We successfully launched our Open Offer on 22 February, raising £351m. The equity raise, plus the associated package of refinanced terms for our secured and unsecured debt, provides a strong platform of financial stability as we continue to manage our way through the remaining uncertainty presented by the Covid-19 pandemic. 

At the balance sheet date the Group had cash balances on hand of £141m, with undrawn unsecured facilities of £150m. Subsequently, we have had five weeks of limited outdoor trading from 12 April. We started this period with 16% of our estate open, building to 44% as restrictions eased in Scotland and Wales, and based on the strong levels of bookings and demand we have seen open sites generating a level of outdoor sales that were 37% down on their total sales (outdoor plus indoor) pre Covid-19. As restrictions have eased further, we have this week re-opened almost all of our estate, now permitted to trade both indoors and outdoors.

Whilst uncertainty and challenges still remain, we are encouraged by the successful roll out of the Covid-19 vaccination programme and the fall in infection rates and are confident, given the demand that we have seen so far since re-openings, that we will see strong consumer confidence in our brands supporting a rebound to profitability and cash generation once restrictions are fully eased. Until that time, we continue to believe it is not meaningful to provide any forward guidance.

BUSINESS REVIEW

The first half of the financial year continued to be dominated by the effects of Covid-19 with increased trading restrictions, including the introduction of regional tiers, resulting in reduced guest visits in the lead up to the second 4-week lockdown in England on 5 November.

Trading recommenced on 2 December, but with even tighter restrictions within the regional tiers, including tier 3 areas remaining closed. Throughout December, with the introduction of tier 4 as the new variant was discovered, restrictions became progressively tighter still resulting in further site closures and significantly reduced sales activity over the important festive trading season followed by closure of the estate for the third time from 30 December, ahead of the imposition of the wider national lockdown on 4 January.

Total sales in the first half of the year were £219m, a decline of 78.9% reflecting these restrictions on trade.

As a result, the Group's liquidity position deteriorated significantly over the first quarter. On 15 February we announced our intention to undertake an Open Offer to raise additional equity. In parallel with this process, we reached agreement with our relationship banks for a new £150m 3-year unsecured facility and extended the temporary waivers and amendments in place over the securitisation to avoid technical breaches that would have been incurred due to forced closure, both of which were conditional on completion of the Open Offer. The formation of Odyzean was also announced, representing the combined shareholding of Piedmont, Elpida and Smoothfield, showing their support for the Company through this critical period by fully supporting the proposed Open Offer.

The Open Offer was launched on 22 February, with the results published on 11 March confirming gross proceeds of £351m to provide funding for short-term working capital needs, reduce the level of unsecured debt and strengthen the balance sheet. As we emerge from restrictions, this will also enable us to restart our estate investment strategy and maintain our strong competitive position, while continuing our focus on long-term deleveraging.

Throughout closure periods we have kept operating costs to a minimum, have reduced discretionary capital expenditure and over 99% of employees have been on furlough. We have continued to work hard to keep all our team members connected and informed through our support portal, launched last financial year, and social media platforms.  The welfare and mental health of our team has continued to be a primary concern and we are encouraged by the way our teams have pulled together in this difficult time.

Mitchells & Butlers has continued to play a role in the UK Hospitality forums that helped devise the Hospitality Sector Protocols Document and have lobbied the Government directly to support the sector during closure. We welcomed the Government's extended support through a reduced VAT rate on certain supplies and the business rates holiday, in addition to the security of employment provided by the furlough scheme enabling us to continue to protect the vast majority of our employees.

The Government's announcement on 22 February provided a roadmap for the easing of restrictions and we have successfully traded an average of 535 sites from outdoor areas since 12 April. Performance has been varied and heavily influenced by the weather, with outdoor sales in open sites being on average 37% down on full pre Covid-19 levels (outdoor and indoor). Encouragingly our average guest review scores since reopening were 4.4 out of 5, despite the restricted trading conditions. The CGA Consumer Pulse survey has shown 44% of adults visited hospitality venues in the first week of trading, 9% points higher than reopening after England's first national lockdown. This indicates that consumer demand for hospitality remains strong and provided us with optimism ahead of our reopening for indoor trading on 17 May, with almost all of our estate now open. 

Covid-19 secure procedures including directional and spacing signage, sanitising stations, disposable menus and table spacing have previously been adopted by our teams, whilst still providing a hospitable feel and great experiences for our guests. We have the experience and confidence to support these measures going forward, alongside the application of test and trace guidance. Over this period consumer trends such as home delivery have been accelerated and digital technology that we were already implementing has been increasingly important. Order at table, now successfully rolled out across the majority of our estate, has been particularly popular with our pub brands where we have seen sales mix build to over 60%. 

The unprecedented challenges the industry has faced have had a damaging impact on market supply with a 7% decline in licensed premises, according to the May AlixPartners CGA Market Recovery Monitor. We believe that the platform of financial stability provided through the equity raise will leave us well placed to benefit from these changes in the competitive landscape.

OUR STRATEGIC PRIORITIES

Despite the impacts of Covid-19, the fundamental strengths of our business remain. We have an 82% freehold estate, with recognised and diversified brands across consumer demographics and geographical locations, and an experienced and proven management team with the focus to build on the momentum previously gained before the pandemic. In the short to medium term, our priority will be on successfully trading 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 Covid-19.  

Our Ignite programme of work remains at the core of our long-term value creation plans and we had refreshed the initiatives and opportunities available to us in early 2020.  Our immediate focus will be on the successful rebuilding of trade following the extended periods of closure and we will be prioritising initiatives that support this, such as sales driving actions and the resumption of capital investment in our estate to maintain competitiveness.  We remain confident in 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 new measures.

Principal risks and uncertainties

Since the financial year end, there have been no material changes to the principal risks previously disclosed (detailed in the Annual Report and Accounts 2020 page 32). However, in experiencing enforced Government closures, which have impacted the business due to Covid-19, we have identified a new risk in relation to 'Mandated Closures'. This new risk has been added to the Group's risk register, given the rare risk that the business could again be severely impacted by an enforced Government closure (or imposed severe trading restrictions), of part or all of the estate. The frequency and nature of these risks are unpredictable and the impact could be substantial for the Group, as evidenced during the Covid-19 pandemic. We continue to monitor and assess all key risks and uncertainties facing the business, in addition to any new and emerging risks.

The Group has prepared for Brexit and does not expect material supply shortages or cost increases. However, having been closed since the date Brexit became effective, the full impact will become more apparent as we begin to reopen for trade.

FINANCIAL REVIEW

On a statutory basis, loss before tax for the half year was £200m (HY 2020 loss £121m), on sales of £219m (HY 2020 £1,039m). 

The Group Income Statement discloses adjusted profit and earnings per share information that excludes 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 1,735 sites in the UK and Germany of which 1,649 are directly managed.

Revenue

Total revenue of £219m (HY 2020 £1,039m) was 78.9% lower than last year due to restrictions on trading.

During the first 14 weeks of the period some level of restricted trading was possible for parts of the estate. During this period like-for-like sales^a (for those sites open) were 30.1 below prior year levels with food sales^a down by 20.7% and drink sales^a down by 40.3%.

At the end of December, the estate entered a mandated closure for the third time, with the full national lockdown subsequently enforced from 4 January. No further sales were therefore recorded.

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 £5m was recognised in relation to stock write offs as a result of Covid-19 mandated closure and a £3m past service cost in relation to guaranteed minimum pensions (GMPs) equalisation for the defined benefit pension schemes.

The significant impact of Covid-19 closures and restrictions resulted in an adjusted operating loss^a of £124m (HY 2020 adjusted profit £108m). Throughout the closure periods operating costs have been kept to a minimum and over 99% of employees have been on furlough, amounting to £175m of Government support for employees through furlough grants during the period. Support to the Group itself has continued in the form of a holiday from business rates, which is worth £51m across the half year, and a reduction in the rate of VAT to 5% on non-alcoholic sales.

Statutory operating margin of (60.3)% was 55.4ppts lower than last year, impacted by the significant closures and other trading restrictions. Adjusted operating margin^a for the half year was 67.0ppts lower than last year at (56.6)%. 

Interest

Net finance costs of £67m for the half year were £1m lower than last year. The net pensions finance charge was £1m (HY 2020 £2m). The charge for the full year is expected to be £3m.

The Group notes the requirement to transition the basis of future rates of interest on securitised bonds, the liquidity facility and swaps away from LIBOR ahead of the cessation of publication of that index. This transition is being reviewed with a view to seeking agreement with relevant stakeholders by the end of the year.

Earnings per share

Basic loss per share, after the separately disclosed items described above, were (33.0)p (HY 2020 (22.6)p), adjusted (loss)/earnings per share^a were (31.8)p (HY 2020 6.5p). (Loss)/earnings per share for comparative periods have been restated to reflect the bonus element of the Open Offer share issue (see note 8).  

The basic weighted average number of shares in the period was 500m and the total number of shares issued at the balance sheet date was 596m, following the equity raise and subsequent issue of an additional 167m shares.

Cash flow

The business generated a loss of £57m of EBITDA before movements in the valuation of the property portfolio. 

The working capital movement reflects significant periods of closure with continued supplier, landlord and HMRC commitments due. £28m of the movement is due to an increase in the Coronavirus Job Retention Scheme receivable. 

Share issue proceeds reflect the equity raise of £351m less £9m transaction fees.

Capital expenditure

Capital expenditure of £16m (HY 2020 £82m) comprises £15m from the purchase of property, plant and equipment and £1m in relation to the purchase of intangible assets. Capital expenditure was significantly below historic levels as part of the cash management strategy in response to Covid-19. Of the £15m spend, £7m relates to essential maintenance and infrastructure, with the balance being the completion of committed acquisitions and outstanding remodels.

As all sites have continued to be impacted by restrictions and closures, we do not believe it will be possible to calculate a current and meaningful return on previous investment.

Pensions

The Group continues to make pension deficit payments as agreed as part of the triennial pensions valuation with the schemes' Trustees 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 with RPI from 2016 to 2023.

During the last financial year, the Group agreed with the Trustees 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 for the six months to September 2020 and those contributions have been added onto the end of the agreed recovery plan so that those contributions will be payable in 2023. During the current period an additional agreement was reached with the trustee to delay monthly contributions from January to March 2021, inclusive, with these now being paid, albeit after the interim date.

In 2024 an additional payment of £13m will be made into escrow, should such further funding be required at that time.

The court hearing in relation to the rate of inflation to be applied to pensions increases for certain sections of the membership in excess of the guaranteed minimum pensions is expected to start during Summer 2021.

Net debt and facilities

Following the adoption of IFRS16 in the prior period, leases are now included in net debt. Net debt at the period end was £1,472m, excluding lease liabilities of £542m (HY 2020 £1,615m excluding lease liabilities of £543m).

On 14 February, the Group reached agreement with its three relationship banks for a new £150 million 3-year unsecured facility. In addition, extended waivers and then amendments until January 2023 were agreed within the Group securitisation to provide flexibility and stability to manage the secured financing structure. Without these extensions certain breaches would have resulted due to the ongoing impact of Covid-19 and the measures taken to stem the spread of the virus. Both the unsecured and secured financing agreements were conditional on completion of the Open Offer. In addition, on completion of the Open Offer the full £100m of the CLBILS term loans was repaid. The details of these arrangements and an analysis of net debt can be found in note 11 to the financial statements. 

In securing these valuable amendments the Group has agreed not to pay an external dividend, undertake any share buy-backs or repurchase bond debt until January 2023 at the earliest.

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

Director's responsibility statement

We confirm that to the best of our knowledge:

This responsibility statement was approved by the Board of Directors on 18 May 2021 and is signed on its behalf by:

Tim Jones

Chief Financial Officer

18 May 2021

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 10 April 2021

All results relate to continuing operations.

GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME/(EXPENSE)

for the 28 weeks ended 10 April 2021

  GROUP CONDENSED BALANCE SHEET

GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

for the 28 weeks ended 10 April 2021

GROUP CONDENSED CASH FLOW STATEMENT

for the 28 weeks ended 10 April 2021

Cash and cash equivalents are defined in note 11.

 NOTES TO THE INTERIM FINANCIAL INFORMATION

1.       GENERAL INFORMATION (CONTINUED)

Going concern (continued)

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 condensed financial statements, and therefore continue to adopt the going concern in their preparation.

Accounting policies

The interim financial information has been prepared on a consistent basis using the accounting policies set out in the Annual Report and Accounts 2020.

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 2020. Judgements and estimates for the interim period remain largely unchanged. 

3.       REVENUE

The Group has benefitted from a reduction in the rate of VAT from 20% to 5% on non-alcoholic sales which was introduced by the UK Government on 15 July 2020 and will continue until 30 September 2021.  Following this a rate of 12.5% will apply for the subsequent six months until 31 March 2022.

Revenue from services includes rent receivable from unlicensed properties and leased operations of £3m (2020 28 weeks £4m, 2020 52 weeks £7m).

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.

4.       SEPARATELY DISCLOSED ITEMS (CONTINUED)

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 tenant's fixtures and fittings, 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, VAT refund in relation to gaming duty and costs directly associated with the government enforced closure of pubs as a result of the Covid-19 pandemic.

4.       SEPARATELY DISCLOSED ITEMS (CONTINUED)

5.         GOVERNMENT GRANTS

Coronavirus Job Retention Scheme (CJRS)

Under this scheme, HMRC reimburses up to 80% of the wages of certain employees who have been

furloughed. The scheme is designed to compensate for staff costs, so amounts received are recognised in the income statement over the same period as the costs to which they relate. In the income statement, operating costs are shown net of grant income received. The scheme commenced on 20 March 2020 and will continue until 30 September 2021.

Business rates

Businesses in the retail, hospitality and leisure sectors in England were granted 100% business rates relief for the 2020/2021 rates year, covering the period from 1 April 2020 to 31 March 2021.  An additional 3 months of 100% business rates relief has been granted to cover 1 April 2021 to 30 June 2021. Following this, it has been announced that business rates will be discounted by two-thirds from 1 July 2021 until 31 March 2022. However, this extended relief is capped at £2m for the Group.

Eat Out to Help Out

During August 2020, HMRC offered a 50% discount off food and non-alcoholic drinks, capped to £10 per

person, when dining out between Monday and Wednesday. The Group participated in this scheme. In the income statement, food and drink revenue includes amounts received from HMRC in respect of the scheme.

The impact of grants received on the income statement is as follows:

In addition to the grants received above, during the prior period, the UK Government announced 100% rate relief for all pubs and restaurants for the business rates year 2020/2021, covering the period from 1 April 2020 to 31 March 2021.  During the current period, the UK Government announced an additional 3 months of 100% business rates relief to cover 1 April 2021 to 30 June 2021.  The impact in the current period is an estimated saving of £51m (2020 28 weeks £3m, 2020 52 weeks £47m).

Although this has not been quantified, the Group has benefitted from a reduction in the rate of VAT from 20% to 5% on non-alcoholic sales which was introduced by the UK Government on 15 July 2020

and will continue until 30 September 2021.  Following this a rate of 12.5% will apply for the subsequent six months until 31 March 2022.
 

6.         FINANCE COSTS AND FINANCE INCOME

7.       TAXATION

The taxation charge for the 28 weeks ended 10 April 2021 has been calculated by applying an estimate of the annual effective tax rate before separately disclosed items of 17.5% (2020 28 weeks, 19.3%).  The annual effective tax rate for the current period is lower than the statutory rate of 19.0% due to adjustments in respect of prior periods.

7.       TAXATION (CONTINUED)

The number of shares used for the (loss)/earnings per share calculations are as follows:

At 10 April 2021, 3,144,778 (2020 28 weeks 2,814,978, 2020 52 weeks 2,797,479) share options were outstanding that could potentially dilute basic EPS in the future but were not included in the calculation of diluted EPS are they are anti-dilutive for the periods presented.

The (losses)/profits used for the (loss)/earnings per share calculations are as follows:

Revaluation and impairment

At 10 April 2021, all of the Group's pubs and restaurants remained closed under the latest national lockdown.  Due to the extended period of closure since the prior reporting date of 26 September 2020, this is considered to be a potential indicator of impairment of the Group's property, plant and equipment.  As such, the revaluation and impairment approaches have been considered as follows.

Revaluation of freehold and long leasehold properties

Critical accounting judgements

The revaluation methodology is determined using management judgement, with advice from third-party valuers (CBRE) involving the application of a valuation multiple to the level of fair maintainable trade ('FMT') of each site.

At the prior period reporting date of 26 September 2020, judgement was applied to determine the most appropriate measure of site level FMT. Given numerous trading restrictions  impacting all sites as well as a significant period of mandated closure, FMT was determined by reference to the trading performance up to March 2020, the point of the first full lockdown following the emergence of Covid-19, in conjunction with the previous two years of trading performance.

At the interim date of 10 April 2021, given further periods of enforced closure which have persisted throughout the majority of the first half of the financial year, the March 2020 trading performance is still considered to be the most appropriate measure of site level FMT.

In the prior period, CBRE reduced the property multiples for certain brands to take into account the expected market impact of Covid-19.  Multiples have been reviewed at the interim date in conjunction with CBRE and are still considered to be appropriate.

In addition, after application of a valuation multiple to provide a site valuation, an income shortfall deduction was made to reduce the resulting property valuations by the difference between the FMT and the value of the Covid-19 impacted site annual forecast for FY21. This methodology continues to be applied at the interim date. A revised annual profit forecast for H2 FY21 and H1 FY22 has been applied, generating a movement in the income shortfall deduction which is offset by depreciation charged in H1 FY21.  The net result is therefore an immaterial movement against net book value.

Given both the FMT and property multiples used at the prior reporting date remain constant at the interim date, and the movement in the income shortfall deduction is offset by depreciation charged in H1 FY21, management have concluded that a full estate valuation is not required at the interim date.

9.         PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

Impairment review

The fair value of tenant's fixtures and fittings are removed from the valuation of freehold and long leasehold properties and are subsequently reviewed for impairment by comparing the recoverable amount to their carrying values. The recoverable amount is the higher of fair value less costs to sell or value in use. Any resulting impairment relates to sites with poor trading performance, where the output of the calculation is insufficient to justify their current net book value.

Short leasehold and unlicensed properties (comprising land and buildings and fixtures, fittings and equipment) which are not revalued to fair market value, are reviewed for impairment by comparing the site  recoverable amount to their carrying values. The recoverable amount is the higher of fair value less costs to sell or value in use. Any resulting impairment relates to sites with poor trading performance, where the output of the calculation is insufficient to justify their current net book value.

Value in use calculations use forecast trading performance cash flows, which are discounted by applying a pre-tax discount rate of 8.8% (2020 28 weeks 8.1%, 52 weeks 9.9%) and a long term growth rate of 1.0% (2020 28 weeks 0.0%, 52 weeks 0.0%).  At the interim date, the value in use calculations include an estimate of the impact of the expected remaining closure period and subsequent build up in trade post re-opening, as a direct result of the Covid-19 pandemic.

Critical accounting judgements

Judgement is required when assessing whether a short leasehold property or tenant's fixtures and fittings should be impaired as this requires management to determine the most reliable source for the basis of future income.

In the current and prior periods, judgement has been applied to determine the most appropriate forecast to use as a result of the impact of Covid-19 on site profitability. Management apply judgement when allocating overhead costs to site cash flows, with an overhead allocation being made only for those costs that can be directly attributable to a site on a consistent basis. Site level forecasts, including the allocation of directly attributable overhead costs, have been used that formed the basis of the overall Group forecast for both FY 2021 and FY 2022, that was in place at the interim balance sheet date.

Following a review of the interim impairment output, management have concluded that no additional impairment is required at the balance sheet date.

The impact of the revaluation and impairment review in prior periods is as follows: