Half Yearly Report

20 May 2011MITCHELLS & BUTLERS PLC

HALF YEAR RESULTS

(For the 28 weeks ended 9 April 2011)

Good progress with execution of strategy

Retained Estate¹ highlights

The Retained Estate represents the continuing operations of the group following the major disposals completed over the last year and before exceptional items and other adjustments.

Jeremy Blood, Interim Chief Executive, commented:

"Our growth strategy is on track and has delivered a strong trading performance with total sales up 4.2%. Harvester's performance has been particularly good, supported by its new advertising campaign together with its new breakfast and take-away menus. We have successfully positioned Mitchells & Butlers more firmly within the eating-out market with nearly three quarters of our revenue now generated around eating-out.

We have a healthy balance sheet and are investing for further growth with 50 new sites being opened this year from our brand roll-out. I have been impressed with the depth of skills within the Company that gives Mitchells & Butlers an excellent growth platform and enables the Board to have confidence in the prospects for the business."

Total Company performance

The Company has disposed of a range of its non-core assets in line with the strategy set out in March 2010, which enables an increased focus on the growing eating-out market. In the first half before disposal, those non-core assets contributed revenue of £34m and profit of £5m (H1 2010: £162m and £20m respectively). Total Company performance, including these assets, was as follows:

Notes

1- The Retained Estate comprises the ongoing business and is stated before exceptional items and other adjustments. It excludes the major disposals of 333 non-core pubs, lodges and Hollywood Bowl, and in addition SCPD. This is shown in note 2 of the accounts

2- EBITDA used is the Retained Estate for the last 12 months to 9 April 2011

3- Weeks 1-33 are shown to include Easter in both years being compared

4- Adjusted operating profit and adjusted profit before tax are stated before exceptional items and other adjustments as set out in note 3

5- Adjusted earnings per share is stated as profit after tax before exceptional items and other adjustments, divided by the weighted average number of ordinary shares in issue

Strategy on track

The implementation of the strategy as announced in March 2010 is on track with a number of key achievements:

We have finished the first phase of the strategy, to exit non-core assets and focus on core food-led brands. The £373m sale of wet-led pubs to Stonegate was a key element of this and was completed in November.

We now have nearly 1,600 restaurants and pubs distributed across an industry leading portfolio of brands. Food is now our largest single product with nearly three quarters of our sales deriving from meals and their directly associated drink sales.

The Retained Estate delivered total sales growth of 4.2% in the first half, driven by a 7.5% increase in food sales. Like-for-like sales growth was 3.3% in the first 33 weeks (with Easter included in both periods) broken down as follows:

Gross margins for the first half were 0.2% points higher than last year, with drink gross margin down 0.1% points and food gross margin up 0.6% points. This improvement in food gross margin was generated by ongoing menu development, customer spend increases and some minor like-for-like price rises partially offset by increased food input costs.

Operating profits¹ of £136m were in line with last year, despite being reduced by the movement of Easter into the second half (c.£3m) and by initial costs from our accelerated brand roll-out programme (c.£4m) relating to closedown and pre-opening costs. Net operating margins in the Retained Estate were 14.9%, against 15.5% in the first half last year.

In the first half of the year, £53m was invested with 29 new openings and 31 conversions, reflecting a rapid acceleration of the organic expansion programme. Investment returns are good, with an EBITDA ROI of 19% on all expansionary capital spent in FY10 and FY11. There has been an encouraging early performance from the new retail park investments and the Ha Ha Bar & Grill acquisition. In total we expect to spend approximately £75m on expansionary investments in FY11, of which c.£50m will be in respect of new site acquisitions and we expect this pace to increase in FY12.

Proceeds from our disposals have allowed us to pay off all unsecured borrowings and our net debt stands at £1.9bn, which is 4.9 times EBITDA. We have a clear funding plan in respect of our pension liabilities with £40m p.a. being paid through operating cash flow. We have funds and cash flow to support the roll-out of our brands envisaged in the strategy.

As stated previously, the Board will closely monitor the level of operating cash flow generation and capital investment opportunities for the business before taking a decision on the timing and quantum of the resumption of dividend payments.

Board update

The process for the recruitment of a new Chief Executive is progressing well. We are pleased to welcome Bob Ivell as a new independent non-executive director and will continue to strengthen the Board.

Outlook

Notwithstanding the current robust trading, we believe that challenges lie ahead in respect of input cost inflation from food and energy, in addition to uncertainty around UK discretionary consumer spending. These will create pressures on the business extending into FY12. However our food growth strategy and the reshaped estate mean that Mitchells & Butlers is well placed to deal with these challenges and to deliver sustainable growth in shareholder value.

There will be a presentation for analysts and investors at 9.30am at Nomura, One Angel Lane, London EC4R 3AB. A live webcast of the presentation will be available at www.mbplc.com. The conference will also be accessible by phone by dialling +44 (0) 203 059 5845, quote "Mitchells & Butlers", the replay will be available until 02/06/11 on +44 (0) 121 260 4861 replay access pin 6786009#.

For further information, please contact:

Notes for editors:

FINANCIAL REVIEW

The Retained Estate has delivered a good trading performance with sales up 4.2% to £912m and EBITDA up 1% to £194m in the first half of the year. Operating profit of £136m is in line with the prior year.

Food is the main driver of the sales growth with total food sales up 7.5%. Total customer numbers for food remained level with last year with average spend per head (excluding VAT) increasing by 7.4%. This increase has been achieved through a combination of increased spend from enhancing menu quality, selling additional courses and customer selection of higher priced items, together with some minor price rises on same dish items.

Total drink sales were up 1.7% with drink prices (excluding VAT) up 6.3%. The majority of this price increase was from same product price rises and the remainder through positive mix changes. Drink volumes were down 4.3% as a result of these price changes as well as being partially impacted by the disposal of a number of wet led pubs.

The Company experienced higher costs as a result of increases in the national minimum wage, alcohol duty and food inflation. These costs have been broadly offset by efficiencies in menu changes and labour productivity. Staff productivity was well managed, leading to outlet employment costs decreasing as a percentage of sales by 0.2% points to 24.9% despite increases to the national minimum wage.

The Easter holiday season moved into the second half of the financial year and we estimate that this movement reduced first half sales by approximately £6m and operating profits by £3m. We continue to accelerate investment into new sites and conversions of our estate to growth brands and in the period we successfully opened 29 and separately converted 31 sites. In the short term this had an adverse impact on results through closedown and pre-openings costs of c.£4m.

The combined result of all these factors was an operating profit¹ of £136m in the first half with a net operating margin of 14.9%.

Internal rent

From the start of FY11 the business applied an internal charge reflecting a market level of rent against each freehold and long leasehold site in order to charge a full arms-length property cost to all assets.

In addition, each site pays a capital charge in respect of brand roll-out, refurbishment and infrastructure capital spend. These incremental costs are designed to ensure that management is focussed on driving enhanced returns on capital spend within each individual business.

The introduction of internal rents is aligning our internal performance review for freehold and leasehold properties and assisting in driving appropriate investment decisions with greater clarity of margin development and capital efficiency.

Capital expenditure and disposals

Total capital expenditure in the first half was £99m, a significant increase on the £68m spend in the first half of last year. Expansionary capital, to accelerate our brand roll-out programme over and above normal refurbishment capital, totalled £53m for the period.

£39m was spent on acquisitions with 29 new sites opened in the period. 18 of the 22 Ha Ha Bar & Grill sites were converted in the first half and have now opened as Browns; All Bar One; Miller & Carter; Premium Country Dining and Harvester. 3 new sites have been opened in leisure or retail parks and are currently achieving above average EBITDA returns.

In addition, £14m was spent converting existing Mitchells & Butlers sites as part of our roll-out strategy.

Overall returns remain strong, with an EBITDA ROI of 19% achieved on expansionary capital spent in FY10 and FY11.

Of the remaining £46m capital spend, £43m was spent on enhancing the existing estate and a further £3m on infrastructure improvements such as IT and energy efficiency projects which have an expected payback period of approximately 3 years.

Disposals raising £417m were completed during the first half. The disposal of the non-core pubs to Stonegate completed on 13 November 2010. In addition to the major disposals programme, a further £34m was raised in the first half from other disposals at an average multiple of 11 times EBITDA .

Exceptional items and other adjustments

Total exceptional items and other adjustments reduced profits before tax by £20m and included a £4m pension finance charge, £13m relating to the curtailment of the defined benefit pension scheme as at March 2011 and a £3m loss on disposal of properties.

Finance costs and revenue

Net finance costs in the first half were £78m, £5m lower than the previous year due to the continuing reduction of debt in the business.

As at 25 September 2010 the Group had a £425m medium term and revolving credit facility. This facility was repaid and cancelled on 15 February 2011 following the transfer of assets into the securitised estate and subsequent transfer out of funds.

Taxation

The pre-exceptional tax charge for the first half year was £17m and is an effective rate of 27% of profit before tax.

Earnings per share

Earnings per share for the Company were 11.3p before exceptional items and other adjustments, a decrease of 13.1% on the prior first half period. The reduction is primarily a result of the disposal of non-core assets earlier in the year.

Balance sheet and cash flow

Net debt has reduced by £382m to £1.9bn at the half year. The ratio of net debt to EBITDA has fallen from 5.1 times at the start of the year to 4.9 times. This is the result of cash flow generated by the business coupled with the receipt of £417m in disposal proceeds during the first half.

Cash flow from operations of £149m is after the deduction of £20m in contributions to the pension deficit and an outflow of working capital of £33m, the latter due to the timing of a number of insurance and payroll costs as well as the impact of the disposal of the Stonegate pubs. Following payments for net interest of £69m and cash tax of £8m, net cash from operating activities was £72m in the period.

At the half year, the Group had net debt of £1,920m, consisting of net debt within the securitisation of £2,105m and cash held outside the securitisation of £185m.

Pensions

On 13 March 2011, employees in the defined benefit section of the pension plan were transferred into the defined contribution section of the plan. This followed agreement by the Company and the pension schemes' Trustees that future accruals for active employees would cease.

The pre-tax pension deficit on the balance sheet, calculated in accordance with IAS 19, has decreased to £35m (H1 2010: £147m). This is predominantly due to movements in prevailing market rates changing the values placed on the assets and liabilities of the scheme.

Furthermore, following closure of the defined benefit scheme to future accrual the Company has reconsidered the appropriate accounting for its funding obligations under IFRIC14. Following this review it has been concluded that a restatement of the accounting recorded at September 2010 is required which has the impact of reducing the balance sheet liability after tax by £13m.

These changes have no impact on the funding commitment entered into the last year under which the Company pays £40m p.a. towards deficit recovery. This agreement will be next reviewed as at March 2013, on a triennial basis.

KEY PERFORMANCE INDICATORS

Mitchells & Butlers implements and monitors its performance against its strategy principally through three KPIs. The performance was as follows:

1. Same outlet like-for-like sales growth - Mitchells & Butlers' operational and marketing plans have delivered like-for-like sales growth of 3.3% in the first 33 weeks of FY11 (1.8% in the first 33 weeks of FY10).

2. EPS growth - Due to the disposal of non-core assets, adjusted EPS has decreased from 13.0p in H1 FY10 to 11.3p in the first half of FY11.

3. Incremental return on expansionary capital - Pre-tax EBITDA returns of 19% and EBIT returns of 12% are being achieved on expansionary capital projects carried out over the last two financial years.

RISK FACTORS AND UNCERTAINTIES

The risks and uncertainties that affect the company remain unchanged and are set out on pages 20-23 of the 2010 Annual report and accounts which is available on the Mitchells & Butlers web site at www.mbplc.com. In summary, these are:

GROUP CONDENSED INCOME STATEMENT

for the 28 weeks ended 9 April 2011

GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME

for the 28 weeks ended 9 April 2011

GROUP CONDENSED BALANCE SHEET

9 April 2011

GROUP CONDENSED CASH FLOW STATEMENT

for the 28 weeks ended 9 April 2011

GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

for the 28 weeks ended 9 April 2011

NOTES TO THE INTERIM FINANCIAL INFORMATION