Full Year Results

MITCHELLS & BUTLERS PLC

LEI no: 213800JHYNDNB1NS2W10

7 December 2022

FULL YEAR RESULTS

(For the 52 weeks ended 24 September 2022)

Highlights

Reported results

Trading results

Balance sheet and cash flow

Phil Urban, Chief Executive, commented:

"The trading environment remains highly challenging, with cost inflation continuing to put pressure on margins and we are ever mindful of the pressures that the UK consumer is facing.  However, we are encouraged by the strength of sales growth at the end of last financial year which has improved further into the early weeks of this year.

We remain focused on the delivery of our Ignite programme with existing and new initiatives driving cost efficiencies and increased sales, alongside our capital investment programme. Combined with our diverse portfolio of well-known brands, value proposition, strong estate locations and talented people, we are well positioned to face both the challenges and opportunities ahead."

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.

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

Since the year end, we have been encouraged by like-for-like sales^a growth of 6.5% as compared to FY 2022, which equates to growth of 11.1% excluding the VAT benefit in place last year. Comparing to FY 2019 pre Covid-19, like-for-like sales^a have grown by 9.2%.

The continued recovery of sales is encouraging, with a general return to office working, city centres becoming stronger and guests across the country becoming ever more confident to return to the hospitality sector. This makes us cautiously optimistic about the future, although we remain very mindful of the potential implications of the cost-of-living challenge facing guests, which is expected to persist at least through the year ahead.

Cost inflation headwinds continue to present a significant challenge for the sector as a whole, notably in energy, food and wages but now evident throughout our supply chains. Overall for the current year, we anticipate an inflationary cost headwind across our c.£1.8 billion cost base in the region of 10-12% before mitigation. The Energy Price Guarantee from the Government for businesses for 6 months from 1 October 2022 was welcome but energy costs are still expected to increase this year and significant uncertainty remains over the second half. At the current time we have bought forward 45% of this financial year's anticipated energy requirement.

The trading environment therefore remains very challenging. However, based on recent sales performance, the strength and diversity of our portfolio of brands, delivery of a new wave of efficiency initiatives under our proven Ignite programme and continued focus on our capital programme we believe we are well positioned to meet this challenge.

BUSINESS REVIEW

Total sales across the period were £2,208m reflecting a 1.3% decline on FY 2019, driven mainly by temporary covid-related sales reductions and closures in the first part of the year plus site disposals since FY 2019. Despite this, adjusted operating profit^a of £240m reflects a strong return to profitability. Excluding the c.£70m increase in utility costs, profits would have been close to pre Covid-19 levels, despite the impact during the year of the Omicron variant and inflationary cost pressures.

We made a good start to FY 2022 with positive like-for-like sales^a growth over the first eight weeks. This encouraging performance continued until late November when concerns first arose around the emergence of the new Covid variant, Omicron, which led to calls for further caution in socialising and resulted in a clear downturn in activity across the sector. As a result, over the seven weeks to the end of the first quarter, like-for-like sales^a declined with the adverse impact of Omicron being particularly felt over the important festive season.

As guest confidence returned early in the new year, our business regained momentum, supported by the benefits from a new set of Ignite initiatives, with strong like-for-like sales^a growth in the second quarter. Over the first half of the year, food sales continued to outperform drink, with food like-for-like sales^a growth of 6.9%, helped by the reduced rate of VAT.  At this point, we started to observe an encouraging trend of recovery in city sites, as people began to return to offices and city centre destinations, albeit trading in some areas of London, such as The City, remained relatively subdued, particularly at the end of the week.  Drink sales continued to be challenging across the sector and drink like-for-like sales^a declined by 6.9% in the first half, with suburban locations seeing the largest declines.

VAT reverted from 12.5% to 20% on 1 April 2022 which contributed to a softening of sales in the third quarter, alongside industrial action and very hot weather, resulting in only modest like-for-like sales^a growth across the full quarter, with food continuing to be the main driver. Trading improved in the fourth quarter, despite an additional period of extreme heat as well as further rail strikes. Sales over the August bank holiday were encouraging, with strong like-for-like^a growth over the three-day weekend, before returning to levels consistent with the quarter as a whole. Growth continued to be driven by food sales with the strongest performances in our premium, food-led brands.

The unprecedented challenges the industry has faced have had an unavoidable impact on market supply with a 9.9% decline in pubs and restaurants since March 2020 (CGA Outlet Index October 22).  Food-led venues have been hit harder by closures: the number of outlets reducing by 12.0%, with independent and tenanted businesses making up 82% of net closures.  Given our strong estate and portfolio of brands, we believe that we are well placed to benefit from these changes in the competitive landscape.

OUR STRATEGIC PRIORITIES

The fundamental strengths of our business provide a platform for the future.  We have an 83% freehold and long leasehold estate, with recognised and diversified brands across a broad range of consumer occasions, demographics and locations, and an experienced and proven management team with the focus to build on the momentum previously gained.  We remain focused on the strategic pillars which formed the foundations of our strong performance before the pandemic, and which are equally relevant to the current challenging trading environment. 

We continue to provide value for money to our guests, working hard to protect entry level items where we can and introducing more premium items to provide trade-up options. The benefit of our size and scale, our ability to continue to invest in our capital programme and the mitigation generated through Ignite allow us to use price tactically and to remain competitive.

Our Ignite programme of work remains at the core of our long-term value creation plans and we are working on over 40 fresh initiatives, alongside a large number already implemented in the business.  We are currently focusing particularly on initiatives which enhance efficiency and productivity, helping to offset cost headwinds, through enhancements such as improved labour scheduling, cost mitigating procurement strategies and energy consumption reduction. The auto-scheduling project aims to assist our site managers by producing automatically generated team member rosters to help ensure we have the right people on shift at the right time, to drive sales at peak times and reduce costs at quieter times. We have a number of energy reduction projects underway including the installation of voltage optimisers that reduce electricity consumption, chemical additives that have been added to our heating systems to reduce gas consumption, trial of internet-connected control devices to lower electricity and gas consumption and we have trained energy ambassadors across the country to complete site energy audits, all further reducing consumption in our sites. In addition, we are working with our waste oil collection partner as we look to grow our oil recycling rate though increasing frequency of pickups and trialling a QR code driver validation system.

With increasing food costs, we are flexible in the way we procure, and we are constantly looking to limit exposure to the lines that are seeing the highest inflation at any one time. This may mean a higher level of product substitution than we would normally have, or the removal of some food items entirely, until markets settle down. We also look to use our scale purchasing power, where we can procure items across all brands, and hence secure volume advantage. We are confident in our ability to deliver long-term and sustained efficiencies and business improvements through the existing Ignite programme.

We remain committed to accelerating our digital strategy, an area which became increasingly important to guests during the pandemic.  Our strategy focuses on building the correct organisational capabilities to allow for quick activation of new digital services as consumer behaviours change, allowing us to be at or near the forefront of digital advances in the sector.  We have made significant progress in our digital services in recent years, for example our digital order at table facility, our streamlined online booking experience, and the development of our own channel delivery capability seeking to drive sales and protect margins.

Success in hospitality is inextricably linked to customer satisfaction, with the correlation between superior guest review scores and stronger like for like sales, irrefutable. When we re-opened our doors in FY 2021, we saw our guest review scores strengthen, from an average 4.0 out of 5.0 pre Covid, to 4.3 post Covid. Whilst there may have been a grace period in guest expectations post lockdown, as the year progressed we were delighted to see these guest scores maintained, with every brand over 4.0. This is a solid foundation to build upon, and strengthening these scores further remains a key focus.

From the start of the financial year our capital programme has been resumed, delivering value by improving the competitive position of our pubs and restaurants within their local markets.  We are committed to re-establishing a seven-year investment cycle and, whilst short-term supply issues in terms of material procurement and contractor availability affected progress last year, this continues to be a key focus for the business.  This year we have completed 170 investment projects including 160 remodels, six conversions, the acquisition of the freehold of three sites that were previously leasehold and opened one new Alex site in Germany. We are continuing to see strong performances from our investment projects.  The conversion programme includes the trial of Browns in suburbia, stretching the brand beyond its usual high street location.  The first trial site opened in August and is performing well and a second has just opened in December.

PEOPLE

Our fantastic team of over 46,000 people are central to the performance of our business, delivering the all-important experiences guests have with us.  FY 2022 presented the industry with a challenging recruitment environment with wide-spread staffing issues across the country, largely as a result of losing people during furlough to other sectors and the absence of the EU talent pool. Therefore, our focus on attracting, training and retaining great people was more important to our organisation than ever and we were pleased that employee numbers recovered to pre-pandemic levels during the second half of the year. Staff turnover has stabilised through the year which is an important factor as lower turnover has a positive impact on guest experience. We are also delighted that our team engagement scores have continued to improve over the course of the year and are now at near record highs.

In order to retain our teams, we are committed to providing progression opportunities and development facilitated through training and a strong centralised HR function. We are proud of the work we have done on our apprentice scheme which we believe will provide excellent future talent to our organisation, from front and back of house roles in our pubs and restaurants to corporate roles in our head office. This year over 1,000 apprentices have joined our business and a similar number of our current employees have enrolled onto one of the apprenticeship opportunities open to them. In the year ahead, we will continue to expand our apprenticeship opportunities from Level 2 through to Level 7 and have a passion to keep growing our own apprenticeship talent, aspiring to recruit a further 1,000 new apprentices in addition to accelerating the careers of 1,000 current employees. Given the importance of developing and retaining chefs, M&B continue to grow our culinary capability via our Chefs' Academy. 175 of our chefs have embarked on the Commis Chef apprenticeship delivered by our award-winning tutors.

SUSTAINABILITY

We are committed to reducing the environmental impact of our business and the Board has agreed

even more challenging targets to drive momentum in this area. We have committed to:

-    Net Zero emissions by 2040, including scope 1, 2 and 3 emissions; we will submit our roadmap to net zero for Science Based Target Initiative approval next calendar year. We are founding members of the Zero Carbon Forum and are committed to playing our part in decarbonising the hospitality industry as a whole.

-    Zero operational waste to landfill by 2030; we have made great progress in this area in recent years and currently divert 96% of operational waste away from landfill. We have underpinned this ambition with a recycling rate target of 80% over the same period.

-    50% reduction in food waste by 2030; aligned with the UN Sustainable Development Goals we will halve food waste in our supply chain and in sites by 2030.  As at the year end, we have achieved 29% reduction in food waste since our 2019 baseline, driven by operational improvements and aided by partnerships with Fareshare and Too Good to Go.

We have a number of initiatives underway to support these ambitions.  Food emissions are the largest contributor to our carbon footprint and during the year we conducted two successful menu trials which significantly reduced emissions.  We will take the learnings from these trials forward to expand the programme, which involved working closely with suppliers.   We are also developing a transition plan to remove gas from our businesses through the electrification of our kitchens, finding alternative heating solutions to gas boilers and the trial of onsite renewable energy generation.

Our sustainability strategy has a strong focus on the positive impact we have on people and communities.  For example, we are committed to enhancing the wellbeing of our own people, and we have an established nutritional strategy aiming to provide balanced choices and information to guests. We have also developed charitable partnerships with Shelter and Social Bite through which we are helping to tackle the growing issue of homelessness in the UK.

FINANCIAL REVIEW

On a statutory basis, profit before tax for the year was £8m (FY 2021 loss £42m), on sales of £2,208m (FY 2021 £1,065m). 

The Group Income Statement discloses adjusted profit and earnings per share information that excludes separately disclosed items to allow an understanding of the trading performance 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 1,718 sites in the UK and Germany of which 1,636 are directly managed.

Revenue

Total revenue of £2,208m (FY 2021 £1,065m) reflects a period of continuous trading, albeit disrupted by the Omicron variant in the first quarter, as compared to the prior year which included substantial closures and restrictions relating to Covid-19.  Sales figures in the first half of the year include the benefit of the temporary reduction in the rate of VAT on food and non-alcoholic drink sales to 12.5%.

Unless otherwise noted, sales comparisons below are on a three-year basis, to the same period in FY 2019, being the last full pre Covid-19 financial year.

Like-for-like sales^a for the year increased by 1.1%, comprising an increase in like-for-like food sales^a of 5.2% and a decrease in like-for-like drink sales^a of (4.1)%.

Like-for-like sales^a growth/(decline) against FY 2019:

Sales growth in food was driven by premiumisation and other increases in spend per head, with the strongest performances in our premium, food-led brands. Volumes for both food and drink were in double-digit decline against FY 2019.

For the ten weeks since the period end like-for-like sales^a against FY 2019 have increased by 9.2%.

Moving forward it will become more meaningful to use FY 2022 as a primary comparator for like-for-like sales. On this basis, for the ten weeks since the period end, like-for-like sales^a have increased by 6.5%, comprising an increase in like-for-like food sales^a of 1.9% and like-for-like drink sales^a growth of 12.1%, with both in volume growth. Total sales in this period grew by 7.3%.

Separately disclosed items

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

A £117m reduction in value is recognised relating to valuation and impairment of properties, comprising a £86m impairment arising from the revaluation of freehold and long leasehold sites, a £9m impairment of short leasehold and unlicensed properties and a £22m impairment of right-of-use assets. The £22m tax credit relates to these impairments.

There was a £1m net profit arising on property disposals in the period.

Adjusted operating profit^a for the year was £240m (FY 2021 £29m), a substantial increase on FY 2021 which was significantly impacted by Covid-19 closures and restrictions.

Adjusted operating margin of 10.9% was 8.2ppts higher than last year, again due mainly to significant periods of closure and other trading restrictions. Statutory operating margin of 5.6% was 2.0ppts lower than last year due to the impact of separately disclosed property impairments.

Inflationary cost pressures presented an increasing challenge both to our business and to the hospitality sector as a whole, especially through the second half of the year. Inflationary costs were initially concentrated in the areas of energy, wages and food costs but progressively became evident throughout most of the supply chain.  Inflationary cost headwinds against FY 2019 totalled c.£220m during FY 2022, over the three year period, with energy cost increases contributing c.£70m, after consumption savings.

We continue to work very hard to mitigate as much of the impact of these cost increases as we can, both through driving sales growth and through identifying and implementing further cost efficiencies, all executed under our Ignite programme of work. Looking forward, we anticipate an aggregate cost headwind in the region of 10-12% on our cost base of c.£1.8 billion this year before mitigation, with operating margins remaining lower than pre-Covid levels in the medium term.

Government Support

Following the outbreak of the Covid-19 global pandemic in early 2020 and the subsequent enforced closure of the business, M&B received a number of different areas of support from both local and central Government in the UK and in Germany. During the year, Government support was received in the form of Local Authority Grants £3m (FY 2021 £11m), business rates relief £5m (FY 2021 £75m), grants for loss of profits in Germany £1m (FY 2021 £14m) and apprenticeship incentives £1m (FY 2021 £nil).

In the prior period, £210m of support was received in relation to the UK Coronavirus Job Retention Scheme (CJRS) and a further £9m of Government assistance for wages and salaries in Germany (Kurzarbeit).

The Group also 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 continued until 30 September 2021.  Following this a rate of 12.5% applied for the subsequent six months until 31 March 2022.  The estimated impact of this on food and drink revenue in FY 2022 is £43m (FY 2021 £81m).

Interest

Net finance costs of £114m for the year were £6m lower than the same period last year, with annual amortisation reducing the value of securitised debt.

The net pensions finance charge was £2m (FY 2021 £3m). The net pensions charge for next year is expected to remain at the same level.

Earnings per share

Basic earnings per share, after the separately disclosed items described above, were 2.2p (FY 2021 loss (11.5)p), adjusted earnings per share^a were 18.0p (FY 2021 loss (13.6)p).

The basic weighted average number of shares in the period was 595m and the total number of shares issued at the balance sheet date was 597m.

Cash flow

The business generated £374m of EBITDA before movements in the valuation of the property portfolio.  This is notably higher than last year due to FY 2021 being significantly impacted by Covid-19 closures and restrictions.

Capital expenditure has increased in FY 2022 as the capital programme resumed following reduced activity in the prior period due to the cash management strategy adopted in response to Covid-19 restrictions.

In FY 2021, share issue proceeds reflect the equity raise of £351m less £9m transaction fees and £1m purchase of own shares.

Before mandatory bond amortisation, cash inflow was £71m (FY 2021 £174m). After mandatory bond amortisation, cash outflow was £39m (FY 2021 inflow of £70m).

Capital expenditure

Capital expenditure of £122m (FY 2021 £33m) comprises £117m from the purchase of property, plant and equipment and £5m in relation to the purchase of intangible assets.

Capital expenditure remains a priority for the business but was below targeted levels due primarily to global supply chain disruption and delays in obtaining planning consent, resulting in reduced project completions. We expect capital expenditure for FY 2023 to increase further to approximately £200m. 

The three freehold acquisitions represent the purchase of three properties previously held as leasehold.

Property

In line with our property valuation policy a red book valuation of the freehold and long leasehold estate has been completed in conjunction with the independent property valuer, CBRE. In addition, the Group has undertaken an impairment review on short leasehold and unlicensed properties. The overall property portfolio valuation of c. £4bn has decreased by £282m (FY 2021 increase of £196m). This reflects £95m impairment separately disclosed in the income statement and a £187m decrease in the revaluation reserve. In addition to this, there was a £22m impairment of right-of-use assets, separately disclosed in the income statement.

Pensions

During the period, the trustees of the M&B Executive Pension Plan (MABEPP), working closely with the Company, have successfully completed a full scheme buy-in with Legal and General Assurance Society Limited. This transaction eliminates substantially all remaining risk in this scheme within the level of existing committed contributions. The MABEPP makes up approximately 20% of the Company's total pension obligations, with the vast majority of the balance being in the M&B Pension Plan (MABPP).

The latest triennial pension valuations of both schemes are assessed as at 31 March 2022 (2019 £293m combined deficit). MABEPP having already achieved buy-in, requires only limited future funding to cover its running costs and any data true ups. Preliminary results for MABPP show a significant improvement in the actuarial funding position. Once the valuations are agreed, the future contributions to be made by the company until 2023 should remain unchanged, but with all monies now being made into blocked escrow accounts.

Net debt^a and facilities

Following the adoption of IFRS 16 in FY 2020, leases are now included in net debt^a. Net debt^a at the period end was £1,679m, comprised of £1,198m non-lease liabilities and lease liabilities of £481m (FY 2021 £1,783m comprised of £1,270m non-lease liabilities and lease liabilities of £513m).

In addition to the securitisation, the Group has a £150 million unsecured facility expiring in February 2024.  Further details of existing debt arrangements and an analysis of net debt^a can be found in Note 9 to the financial statements and at https://www.mbplc.com/infocentre/debtinformation/. 

Going Concern

After considering forecasts, sensitivities and mitigating actions available to management and having regard to risks and uncertainties, the Directors have a reasonable expectation that the Group has adequate resources to continue to operate within its borrowing facilities and covenants for a period of at least 12 months from the date of signing the financial statements.  However, given the prevailing high level of unpredictability and uncertainty concerning both sales and, particularly, cost inflation, the Directors have concluded that a material uncertainty exists which may cast significant doubt over the Group's ability to trade as a going concern, in which case it may be unable to realise its assets and discharge its liabilities in the normal course of business.  

Accordingly, the financial statements continue to be prepared on the going concern basis but with material uncertainty arising from the impact of macro-economic factors on the group's compliance with financial covenants and its liquidity. Full details are included in Note 1.

Director's responsibility statement

The 2022 Annual Report and Accounts which will be issued in December 2022, contains a responsibility statement in compliance with DTR 4.1.12 of the Listing Rules which sets out that as at the date of approval of the Annual Report on 6 December 2022, the Directors confirm to the best of their knowledge:

      -   the Group and unconsolidated Company financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and Company, and the undertakings included in the consolidation taken as a whole; and

    -  the performance review contained in the Annual Report and Accounts includes a fair review of the development and performance of the business and the position of the Group and the undertakings including the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

This responsibility statement was approved by the Board of Directors on 6 December 2022 and is signed on its behalf by:

Tim Jones

Chief Financial Officer

6 December 2022

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.

All results relate to continuing operations.

a.     Interest paid is split to show gross payments on the interest rate and cross currency swaps.

b.     Principal repayments on securitised debt are split to show repayments relating to the cross currency swap.

Notes to the consolidated financial statements

1. Preparation of preliminary consolidated financial statements

General information

Mitchells & Butlers plc, along with its subsidiaries, (together 'the Group') is required to prepare its consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted within the UK and in accordance with the Companies Act 2006. While the financial information included in this release is based on the Group's consolidated financial statements and has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The preliminary financial statements include the results of Mitchells & Butlers plc and all its subsidiaries for the 52 week period ended 24 September 2022. The comparative period is for the 52 week period ended 25 September 2021. The respective balance sheets have been drawn up as at 24 September 2022 and 25 September 2021.

The consolidated financial statements have been prepared on the historical cost basis as modified by the revaluation of freehold and long leasehold properties, pension obligations and financial instruments.

The Group's accounting policies have been applied consistently.

Going concern

The Directors have adopted the going concern basis in preparing these financial statements after assessing the impact of identified principal risks and their possible adverse impact on financial performance, specifically revenue and cash flows.                                                                                                                                               

The Group's primary source of borrowings is through ten tranches of fully amortising loan notes with a gross debt value of £1.4bn as at the end of the period. These are secured against the majority of the Group's property and its future income streams. The principal repayment period varies by class of note with maturity dates ranging from 2023 to 2036, with £116m amortisation payments falling due within the going concern period.

The Group also has available a committed unsecured credit facility of £150m which has a maturity date in February 2024. At the balance sheet date there were no drawings under these facilities.

Last year the Group launched an Open Offer to shareholders resulting in an inflow of £351m of additional funds, gross of transaction costs, on 12 March 2021. This significantly enhanced the financial position of the Group. Further, and contingent on this equity raise, new debt arrangements were secured by agreement with the Group's main stakeholders. In summary: 

·      The establishment of the £150m 3 year unsecured revolving credit facility due to expire in February 2024, referred to above. 

·      Agreement to a number of covenant waivers and amendments with Ambac Assurance UK Ltd, as controlling creditor, and HSBC Trustee (CI), as trustee, running until January 2023 to provide flexibility and stability to manage the Group's secured debt financing structure. 

Within the secured debt financing structure there are two main covenants: the level of net worth (being the net asset value of the securitisation group) and, FCF to DSCR. As at 24 September 2022 there was substantial headroom on the net worth covenant. FCF to DSCR represents the multiple of Free cash Flow (being EBITDA less tax and required capital maintenance expenditure) generated by sites within the structure to the cost of debt service (being the repayment of principal, net interest charges and associated fees). This is tested quarterly on both a trailing two-quarter and a four-quarter basis. These tests were waived until January 2022 (two-quarter) and April 2022 (four-quarter) and then set as transitioning to their full level of a minimum of 1.1 times by January 2023.

Unsecured facilities were initially measured only against a liquidity covenant, against which there was substantial headroom, until the end of Q3 FY22. Following this date further covenants were introduced relating to the ratio of EBITDAR to rent plus interest (at a minimum of 1.5 times) and net debt to EBITDA (to be no more than 3.0 times) based on the performance of the unsecured estate, both tested on a half-yearly basis.

Notes to the consolidated financial statements (continued)

1. Preparation of preliminary consolidated financial statements (continued)

Going concern (continued)

In the year ahead the main uncertainties are considered to be the maintenance of growth in sales in the face of pressure on consumer spending power in an environment of falling real wages, and the future outlook for cost inflation across the whole of the cost base but most notably in energy prices, food costs and wages and salaries. The outlook for these is highly uncertain and volatile, particularly energy costs in the second half of FY 2023, and will depend on a number of factors including consumer confidence, global political developments and supply chain disruptions and government policy.

The Directors have reviewed the financing arrangements against a forward trading forecast in which they have considered the Group's current financial position. This forecast assumes further growth in sales beyond pre-pandemic levels and on the prior year slightly below the level generated in recent months. Costs are also assumed to continue to increase in line with recent experience blending at an expected increase of c10% across the cost base of the business of approximately £1.8bn. Under this base case the Group is able to stay within revised committed facility financial covenants, albeit with limited headroom, and maintains sufficient liquidity.   

The Directors have also considered a severe but plausible downside scenario covering adverse movements against the base forward forecast in both sales and cost inflation in which some, but limited, mitigation activity is taken including lower capital expenditure on site remodel activity and a flex down of labour costs in line with reduced sales. In this scenario sales are assumed to remain in growth but at a level further below current run rates, and the impact of unmitigated cost inflation is higher particularly in the areas of food, labour and energy aggregating to 12% of the cost base. In this downside scenario, whilst the Group retains sufficient liquidity throughout the period based on existing facilities, covenants would be breached in the fourth quarter of the year in both secured and unsecured facilities. Under such a scenario the Directors believe that, on the basis of previous waivers secured, the strong asset base and longer term trading prospects, waivers should be forthcoming from main stakeholders. However this is not within the Group's control and as a result the Directors cannot conclude that the possibility of an un-waived breach of covenant is remote.

After due consideration of these factors, the Directors believe that it remains appropriate to prepare the financial statements on a going concern basis.  However, the circumstances outlined above, in particular the uncertainty concerning sales and cost inflation with the resulting possibility of an un-waived covenant breach, and ultimately the need to renew unsecured facilities on or before February 2024, indicate the existence of a material uncertainty related to events or conditions that may cast significant doubt over the Group's and the Company's ability to realise their assets and discharge their liabilities in the normal course of business.  The financial statements do not include any adjustments that would arise from the basis of preparation being inappropriate.

Foreign currencies

The results of overseas operations have been translated into sterling at the weighted average euro rate of exchange for the period of £1 = €1.18 (2021 £1 = €1.15), where this is a reasonable approximation to the rate at the dates of the transactions.  Euro and US dollar denominated assets and liabilities have been translated at the relevant rate of exchange at the balance sheet date of £1 = €1.12 (2021 £1 = €1.17) and £1 = $1.09 (2021 £1 = $1.37) respectively.

New and amended IFRS Standards that are effective for the current period

The International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee (IFRIC) have issued the following standards and interpretations which have been adopted by the Group in these consolidated financial statements for the first time with the following impact.

Notes to the consolidated financial statements (continued)

1. Preparation of preliminary consolidated financial statements (continued)

Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement, IFRS 7 Financial Instruments: Disclosures, IFRS 4 Insurance Contracts, IFRS 16 Leases)

The Group has adopted the amendments to IFRS 9, included in Phase 2 of the Interest Rate Benchmark Reform, in the current period, which address issues that might affect financial reporting during the reform of an interest rate benchmark. This includes the effects of changes to contractual cash flows or hedging relationships arising from the replacement of an interest rate benchmark with an alternative benchmark rate.

A number of the Group's financial instruments had LIBOR as their interest reference rate at the start of the period. During the period, the Group completed the necessary amendments to transition its financing arrangements in advance of the discontinuation of LIBOR as a floating reference rate, replacing LIBOR with a Sterling Overnight Index Average (SONIA) based rate in respect of sterling and a Secured Overnight Financing Rate (SOFR) based rate in respect of US dollars. The amendments in respect of the securitised bonds were agreed by the Bondholders through a formal consent solicitation process and bilateral agreements were reached with securitised swap providers (using amended reference rates consistent with those agreed under the bonds). All sterling based facilities and agreements referencing sterling LIBOR transitioned in the period and now reference SONIA, plus a credit adjustment spread of 11.93 basis points to maintain an economically equivalent position, for periods commencing on or after 1 January 2022. The facilities currently referencing US dollar LIBOR will transition to SOFR plus 26.161 basis points for periods commencing on or after 1 July 2023. The liquidity facility and the unsecured committed facility were arranged on a SONIA basis in the prior period, so did not require any further amendment.

As part of the transition, all of the Group's hedge relationships have been reviewed and these continue to be highly effective.  Hedge documentation has been updated in accordance with the reliefs permitted in the amendments to IFRS 9, designating the new interest reference rate in both the hedged item and the hedging instrument. As a result of the transition, there has been no impact on the amounts recognised in the income statement or statement of other comprehensive income.

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 evaluated 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.

Judgements and estimates for the period remain largely unchanged from the prior period.

In the current and prior periods there has been significant judgement in the following areas:

·      Going concern assessment - including estimation uncertainty in the forecasts used for this assessment. Full details are provided in the going concern review above.

·      Fair value of freehold and long leasehold properties - see note 7

Other areas of judgement are described in each section listed below:

·              Note 3 Separately disclosed items

·              Note 7 Property, plant and equipment

·              Note 8 Leases

·              Note 11 Pensions

Other sources of estimation uncertainty are described in:

·              Note 7 Property, plant and equipment

·              Note 8 Leases

·              Note 11 Pensions

2. Segmental analysis

Geographical segments

3. Separately disclosed items

The items identified in the current period are as follows:

4. Government grants

Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received.

Government grants are recognised in the income statement on a systematic basis over the periods in which the Group recognises as expenses the related operating costs for which the grants are intended to compensate.

Local Authority grants

Following the outbreak of the Covid-19 global pandemic in early 2020 and the subsequent enforced

closure of the business, the Mitchells & Butlers Group (MAB), under the Temporary Framework for State

Aid for Covid-19 Reponses (TF), has received a number of different areas of support from both local and

central Government in the UK and also Germany. During the prior period, the Group applied for various

Local Authority grants as a result of both local and national restrictions that required pubs and restaurants

to close. Under these schemes, businesses in the retail, hospitality and leisure sectors in England and

Germany were entitled to one-off cash grants for each business impacted. The maximum amount the

Group was able to claim was £10.9m as a result of the State Aid cap. However, following the EU Court

ruling on State Aid aggregation, it has now become clear that aid provided to a Group via different

countries does not require aggregation for the purposes of the State Aid cap provided there is sufficient

autonomy between subsidiaries operating in different countries. As a result, the Group has sufficient

headroom to recognise further support, albeit subject to the individual caps applicable in both the UK and

Germany. This has resulted in the recognition of an additional £2m of income in the current period.

Following the outbreak of the Omicron variant of Covid-19 in the UK in November 2021, the Government

introduced some further grants to help support businesses in the leisure and hospitality sectors. Under this

scheme, the maximum amount the Group was able to claim was £1.3m.

German Government grants

During the prior period, the Group was entitled to receive Government assistance in Germany as a result of

Covid-19 in relation to the pubs and restaurants that are operated there. Assistance was received in

relation to staff wages and salaries under Kurzarbeit. In addition the German Government provided grants

to assist with loss of profits during enforced closure periods under the November 2020 Support and

December 2020 Support schemes, as well as the Fixed Cost Bridging Aid scheme. These grants all fell

outside of the Temporary Framework and were therefore excluded from the State Aid maximum rules.

Following the impact of the Omicron variant in December 2021, further grant claims have been made in the current period for costs incurred during periods of significantly lower sales under an extension of the

Bridging Aid scheme.

Business rates

Businesses in the retail, hospitality and leisure sectors in England, Scotland and Wales were granted 100% business rates relief for the 2020/21 rates year, covering the period from 1 April 2020 to 31 March 2021.  An additional three months of 100% business rates relief was granted to cover 1 April 2021 to 30 June 2021. Following this, in England, business rates were discounted by two-thirds from 1 July 2021 until 31 March 2022, subject to a £2m cap.  In Scotland and Wales, there was an extension of 100% rates relief for hospitality businesses until 31 March 2022.

Apprenticeship incentives

The Group is entitled to claim £1,000 for each apprentice employed, where they are aged 16 to 18, or

under 25 and meet certain other criteria.

As part of its response to the Covid-19 pandemic, the UK Government introduced a scheme to enable an

employer to receive up to an additional £3,000 per apprentice, where the apprentice commenced

employment between 1 August 2020 and 31 January 2022. The payment is phased with amounts due in

equal instalments at 90 days and 365 days after employment commenced and is recognised on receipt of

cash.

4. Government grants (continued)

Coronavirus Job Retention Scheme (CJRS)

Under this scheme, HMRC reimbursed up to 80% of the wages of certain employees who were

furloughed. The scheme was designed to compensate for staff costs, so amounts received were 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 continued until 30 September 2021. A similar scheme operated in Germany (Kurzarbeit).

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

In addition to the grants received above, the impact in the current period of business rates relief received, across all sites within the UK, is an estimated saving of £5m (2021 £75m).

The Group has also benefited 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 continued until 30 September 2021.  Following this a rate of 12.5% applied for the subsequent six months until 31 March 2022.  The estimated impact of this on food and drink revenue in the current period is £43m (2021 £81m).

5. Taxation

Taxation - Group income statement

Current tax:

Deferred tax:

Further analysed as tax relating to:

The standard rate of corporation tax applied to the reported profit/(loss) is 19.0% (2021 19.0%). 

The tax credit (2021 charge) in the Group income statement for the period is lower than (2021 lower) the standard rate of corporation tax in the UK.  The differences are reconciled below:

Taxation for other jurisdictions is calculated at the rates prevailing in those jurisdictions.

5. Taxation (continued)

Factors which may affect future tax charges

The Finance Act 2021 increased the main rate of corporation tax from 19% to 25% with effect from 1 April 2023. The effect of this change has been reflected in the closing deferred tax balances at 25 September 2021 and 24 September 2022.

6. Earnings/(loss) per share

Basic earnings/(loss) per share (EPS) has been calculated by dividing the profit or loss for the period by the weighted average number of ordinary shares in issue during the period, excluding own shares held by employee share trusts.

For diluted earnings/(loss) per share, the weighted average number of ordinary shares is adjusted to assume conversion of all dilutive potential ordinary shares.

Adjusted earnings/(loss) per ordinary share amounts are presented before separately disclosed items (see note 3) in order to allow an understanding of the adjusted trading performance of the Group.

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

a.  Adjusted profit/(loss) and adjusted EPS are alternative performance measures (APMs) and are considered critical to aid understanding of the Group's performance. These measures are explained later in this announcement.

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

a.   Adjusted earnings/(loss) and adjusted EPS are alternative performance measures (APMs) and are considered critical to aid understanding of the Group's performance. These measures are explained later in this announcement.

At 24 September 2022, 4,839,607 (2021 800,570) other share options were outstanding that could potentially dilute basic EPS in the future but were not included in the calculation of diluted EPS as they are anti-dilutive for the periods presented.

7. Property, plant and equipment

Accounting Policies

Property, plant and equipment

The majority of the Group's freehold and long leasehold licensed land and buildings, and the associated landlord's fixtures, fittings and equipment (i.e. fixed fittings) are revalued annually and are therefore held at fair value less depreciation.  Tenant's fixtures and fittings (i.e. loose fixtures) within freehold and long leasehold properties, are held at cost less depreciation and impairment.

Short leasehold buildings (leases with an unexpired lease term of less than 50 years), unlicensed land and buildings and associated fixtures, fittings and equipment are held at cost less depreciation and impairment.

Revaluation

The revaluation utilises valuation multiples, which are determined via third-party inspection of 20% of the sites such that all sites are individually valued approximately every five years; estimates of fair maintainable trade comprising estimates of both fair maintainable turnover (FMT) and fair maintainable operating profit (FMOP); and estimated fair value of tenant's fixtures and fittings. Properties are valued as fully operational entities, to include fixtures and fittings but excluding stock and personal goodwill. The value of tenant's fixtures and fittings is then removed from this valuation via reference to its estimated fair value. Where sites have been impacted by expansionary capital investment in the preceding twelve months, fair maintainable trade is taken as the post-investment forecast, as the current period trading performance includes a period of closure.

Valuation multiples derived via third-party inspections determine brand standard multiples which are then used to value the remainder of the non-inspected estate via an extrapolation exercise, with the output of this exercise reviewed at a high level by the Directors and the third-party valuer.

Where the value of land and buildings derived purely from a multiple applied to the fair maintainable trade misrepresents the underlying asset value, for example, due to low levels of income or location characteristics, a spot valuation is applied.

Impairment

Short leaseholds, unlicensed properties and fixtures and fittings are reviewed on an outlet basis for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable.  An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount.  The recoverable amount is the higher of fair value less costs to sell or value in use. Any changes in outlet earnings or cash flows, the discount rate applied to those cash flows, or the estimate of sales proceeds could give rise to an additional impairment loss.

Property, plant and equipment can be analysed as follows:

7. Property, plant and equipment (continued)

Revaluation of freehold and long leasehold properties

The freehold and long leasehold properties have been valued at fair value, as at 24 September 2022, using information provided by CBRE, independent chartered surveyors. The valuation was carried out in accordance with the RICS Valuation - Global Standards 2022 which incorporate the International Valuation Standards and the RICS Valuation - Professional Standards UK (the 'Red Book') assuming each asset is sold as a fully operational trading entity.  The fair value has been determined having regard to factors such as current and future projected income levels.  As part of this, CBRE have taken into account the rebuild in trade following reopening as a result of Covid-19, current cost inflationary pressures notably on labour and energy costs, as well as location, quality of the pub restaurant and recent market transactions in the sector.  In the current period, CBRE have increased the property multiples by removing the deduction applied in the prior period for the expected impact of Covid-19.  Property multiples have returned to pre-Covid levels, with some brand multiples exceeding the pre-Covid level, which is a reflection of the current demand in the freehold licensed property market.

Impairment review

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

Recoverable amount is determined as being the higher of fair value or value in use. Value in use calculations use forecast trading performance pre-tax cash flows, for years 1 to 3. These include steady growth in revenue and cost increases, notably across energy, labour and food, equivalent to c.10% of the cost base in year 1, with an easing of inflationary pressure in years 2 and 3, as recent increases in energy prices are assumed to reduce, albeit they remain significantly ahead of historical levels. The forecast cash flows are discounted by applying a pre-tax discount rate of 9.65% (2021 9.60%) and a long-term growth rate of 2.0% from year 4 (2021 2.0%). The long-term growth rate is applied to the net cash flows and is based on up-to-date economic data points.   

The impact of the revaluations/impairments described above is as follows:

7. Property, plant and equipment (continued)

Accounting judgements

Revaluation of freehold and long leasehold properties

The revaluation methodology is determined, with advice from third-party valuers, incorporating management judgement where appropriate. The application of a valuation multiple to the fair maintainable trade of each site is considered the most appropriate method for the Group to determine the fair value of freehold and long leasehold licensed land and buildings.

The emergence of the Omicron variant of Covid-19 in November 2021 negatively impacted trade in the first half of the current financial period. As a result fair maintainable trade at 24 September 2022 has been determined by adjusting the prior period fair maintainable trade on the basis of turnover (FMT) and operating profit margin (FMOP) performance trends over the second half of the financial period.  This adjustment is a matter of judgement that reflects the extent to which licensed property fair values are being impacted by performance over this period, as advised by third-party valuers. 

Where sites have been impacted by expansionary capital investment in the preceding twelve months, management judgement is used to determine the most appropriate source of site level fair maintainable trade, as the current period trading performance includes a period of closure. Fair maintainable trade has been determined by estimating both FMT and FMOP by reference to post-investment forecasts and turnover trends post opening.

Brand standard property multiples have been established by CBRE via third-party inspections of 20% of the freehold and long leasehold licensed property estate.  Market conditions that resulted in Covid-19 multiple reductions in the prior period are no longer considered relevant by CBRE due to the strength of the property market.  As a result the average multiple adopted has increased at 24 September 2022.

Impairment review of short leasehold and unlicensed properties

For the short leasehold property impairment review, judgement has been applied to determine the most appropriate site level profit and cash flow forecasts based on the Group forecast for FY 2023 to FY 2025 that was in place at the balance sheet date.

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.

Significant accounting estimates

Revaluation of freehold and long leasehold properties

The application of the valuation methodology requires two significant estimates; the estimation of valuation multiples, which are determined via third-party inspections; and an estimate of fair maintainable trade, consisting of estimates of both fair maintainable turnover (FMT) and fair maintainable operating profit (FMOP).  FMT and FMOP are determined at a site level by reference to both historic and future projected income levels. The valuers also make reference to market evidence of transaction prices for similar properties to support the multiples adopted. There is considered to be a significant risk that an adjustment to either of these assumptions could lead to a material change in the property valuation within the next year.

The carrying value of properties to which these estimates apply is £4,036m (2021 £4,277m).

Sensitivity analysis

Changes in the fair maintainable trade, or the multiple could materially impact the valuation of the freehold and long leasehold properties, and as such they are both considered to be significant estimates in the current period.

Fair maintainable trade

As noted in the accounting judgements above, fair maintainable trade in the prior period 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. In the current period, site level fair maintainable trade has been adjusted to reflect more recent performance, by adjusting fair maintainable turnover (FMT) and fair maintainable operating profit (FMOP) with reference to both sales and profit margin trends over periods 7 to 12 of FY22 (13 March 2022 to 27 August 2022).

7. Property, plant and equipment (continued)

Significant accounting estimates (continued)

Revaluation of freehold and long leasehold properties (continued)

In the current period, fair maintainable trade has declined by 8% as a result of the combined impact of the FMT and FMOP adjustments made. Judgement has been applied to determine the adjustments to FMT and FMOP, by assessing the extent that current trading performance is considered to be impacting on freehold licensed property values.  As a result, the valuation is sensitive to the view taken on the duration of the impact of high inflation on fair maintainable trade.  Should the fair maintainable trade used as the basis in property valuations decline further in line with EBITDA trends over the second half of the reporting period, fair maintainable trade may decline by a further 8%.  Assuming multiples remain stable, and without applying any further judgement on the resulting property valuation, this would generate an approximate £284m reduction in the valuation. 

Multiples

Valuation multiples are determined at an individual brand level.  Over the last three financial periods, the weighted average brand multiple has moved by an average of 0.3, which is considered to be within the range of reasonably possible outcomes for future movements in multiples.  It is estimated that a 0.3 change in the multiple would generate an approximate £115m movement in valuation.

Other sources of estimation uncertainty

Impairment review of short leasehold and unlicensed property and tenant's fixtures and fittings

The impairment review requires three key sources of estimation uncertainty in calculating the value in use: the estimation of forecast cash flows for each site; the selection of an appropriate discount rate and the selection of an appropriate long-term growth rate.  Both the discount rate and long-term growth rate are applied consistently to each cash-generating unit.

The carrying value of assets to which these estimates apply is £134m (2021 £146m).

Sensitivity analysis

Changes in forecast cash flows, the discount rate or the long-term growth rate could impact the impairment charge recognised for short leasehold and unlicensed properties. 

Forecast cash flows

The forecast pre-tax cash flows used in the value in use calculations are site level forecasts determined from the Group forecast for FY 2023 to FY 2025 that was in place at the balance sheet date.  Management has determined a potential downside scenario to forecast trading as part of the going concern review discussed in note 1. This would result in an increase of £2m to the impairment recognised.

Discount rate

The pre-tax discount rate applied to the forecast cash flows is derived from the Group's post-tax weighted average cost of capital (WACC). The assumptions used in the calculation of the Group's WACC are benchmarked to externally available data. A single discount rate is applied to all cash-generating units. Over the last two financial periods, the discount rate used in impairment reviews has moved by 0.1%. There is no material impact on the impairment charge to changes to the discount rate within a reasonable range.

Long-term growth rate

The long-term growth applied to the net cash flows in the value in use calculations is 2.0%. There is no reasonable scenario for the long-term growth rate under which further impairment occurs.

8. Leases

Right-of-use assets

Right-of-use assets can be analysed as follows

Impairment review of right-of-use assets

Right-of-use assets are reviewed for impairment by comparing site recoverable amount to their carrying values.  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.

Recoverable amount is determined as being the higher of fair value or value in use. Value in use calculations use forecast trading performance pre-tax cash flows, for years 1 to 3. These include steady growth in revenue and cost increases, notably across energy, labour and food, equivalent to c.10% of the cost base in year 1, with an easing of inflationary pressure in years 2 and 3, as recent increases in energy prices are assumed to reduce, albeit they remain significantly ahead of historical levels. The forecast cash flows are discounted by applying a pre-tax discount rate of 9.65% (2021 9.60%) and a long-term growth rate of 2.0% from year 4 (2021 2.0%). The long-term growth rate is applied to the net cash flows and is based on up-to-date economic data points.   

Impairment review of corporate level assets

In addition to the short leasehold property and right-of-use asset impairment review performed at a cash-generating unit level, the overall Group's cash-generating units have been grouped together to ensure that the corporate level assets are also considered for impairment. The assumptions are consistent with those described above for the value in use calculations performed at an individual outlet level, whilst also including unallocated central overheads.  As a result of this review, no additional impairment has been recognised in the current period. A sensitivity analysis has been provided below.

Accounting judgements

Impairment of right-of-use assets

Judgement is required when assessing whether a right-of-use asset should be impaired.  As impairment is considered at a cash-generating unit level, with this being an individual outlet, the carrying value used in the impairment test, is the total of the right-of-use asset value and the value held in property, plant and equipment.  As such, the judgements used in the impairment review are the same as those described in note 7.

Sources of estimation uncertainty

As noted above, the impairment review of right-of-use assets is performed in combination with the impairment review of property, plant and equipment.  The three key sources of estimation uncertainty are described in note 7.  They are, the estimation of forecast cash flows for each site; the selection of an appropriate discount rate and the selection of an appropriate long-term growth rate.

The carrying value of assets to which these estimates apply is £339m (2021 £379m).

8. Leases (continued)

Sources of estimation uncertainty (continued)

Sensitivity analysis

Changes in forecast cash flows, the discount rate or the long-term growth rate could materially impact the impairment charge recognised for right-of-use assets. Sensitivity analysis for short leasehold properties has been provided in note 7.

Forecast cash flows

The forecast pre-tax cash flows used in the value in use calculations are site level forecasts determined from the Group forecast for FY 2023 to FY 2025 that was in place at the balance sheet date.  Management have determined a potential downside scenario to forecast trading as part of the going concern review discussed in note 1. This would result in an increase of £4m to the impairment recognised against right-of-use assets and no further impairment charge at a Group level.

Discount rate

The pre-tax discount rate applied to the forecast cash flows is derived from the Group's post-tax weighted average cost of capital (WACC). The assumptions used in the calculation of the Group's WACC are benchmarked to externally available data. A single discount rate is applied to all cash-generating units. Over the last two financial periods, the discount rate used in impairment reviews has moved by 0.1%.  

Although considered unlikely, movements in the pre-tax discount rate beyond 10.35% would result in an impairment of c.£40m at Group level for each 0.1% increment.

Long-term growth rate

The long-term growth applied to the net cash flows in the value in use calculations is 2.0%.  There is no reasonable scenario for the long-term growth rate under which further impairment occurs, with an almost 1% reduction required before an impairment is recognised.

Lease liabilities

A maturity analysis of the undiscounted future lease payments used to calculate the lease liabilities is shown below.

9. Borrowings and net debt

Borrowings can be analysed as follows: