Half Year Results

MITCHELLS & BUTLERS PLC

17 May 2017

HALF YEAR RESULTS

(For the 28 weeks ended 8 April 2017)

Financial performance

Strategic progress

Reported results

Balance sheet and cash flow

Phil Urban, Chief Executive, commented:

"During the half year we have generated sustained sales growth, whilst consistently out-performing the market. This comes from the good progress we have made in our three priority areas: building a more balanced business; instilling a more commercial culture; and driving an innovation agenda.

As previously announced, margins have been adversely impacted by increased costs, most notably from wage inflation, property costs  and exchange rate movements. In order to partially mitigate these costs we have been working hard to encourage our guests to trade up and increase spend per head for a more premium experience whilst challenging our General Managers to run their businesses as cost effectively as possible.

Overall, we are pleased with the turnaround in our sales trajectory and relative performance against the market. In a challenging cost and consumer environment we will continue to focus on our three priority areas."

Definitions

a - Like-for-like sales growth reflects the sales performance against the comparable period in the prior year of UK managed pubs, bars and restaurants that were trading in the two periods being compared, unless marketed for disposal.  Like-for-like sales are measured against relevant accounting weeks in the prior year.

b - Adjusted earnings are quoted before separately disclosed items as set out in the Group Income Statement and detailed in note 3 of the accounts.

c - Free cash flow excludes £4m dividend payment (HY 2016 £21m); £38m mandatory bond amortisation (H1 2016 £32m) and net £6m drawn from unsecured revolving facilities (H1 2016 £8m).

d - Annualised EBITDA before separately disclosed items is used to calculate debt service coverage ratio.

There will be a presentation today for analysts and investors at 8.45am at the London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS.  A live webcast of the presentation will be available at www.mbplc.com.  The conference will also be accessible by phone: 020 3059 8125 and quote "Mitchells & Butlers".  The replay will be available until 24 May 2017 on 0121 260 4861 replay access pin 6014173#.

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

For further information, please contact:

Notes to editors:

BUSINESS REVIEW

In the first six months of this year we have made further progress against our three strategic priorities:

Over the last year, we have seen a steady improvement in our rate of like-for-like sales performance, both compared to where we were and relative to the wider market.  Our like-for-like sales in the year-to-date, including Easter, have now increased by 1.9%. 

We have increased the level of capital investment in the estate, reducing the remodel life cycle closer to an average of 6 to 7 years. This is clearly helping our sales growth.  However, we have also seen a marked improvement in the trajectory of the uninvested business over this time, suggesting the many other initiatives we have been working on are also now starting to benefit the business.  We believe that by working hard to make a large number of marginal improvements across all areas of the business, we will continue to improve our performance. 

We will continue to work on multiple fronts to maintain the good progress that we have achieved over the last twelve months.

THE EXTERNAL ENVIRONMENT

We operate in a challenging and uncertain environment, both in the economy as a whole and in our sector specifically.  Consumer confidence has remained fragile throughout 2016 and 2017, whilst spending remains in growth, albeit at a slowing rate.  There is clearly therefore some caution over future demand.  However, this backdrop is not new and, encouragingly, we have still continued to improve our sales performance. 

In the UK we have seen headline inflation figures start to rise recently and, more specifically, wholesale food inflation has increased in recent months, up to 6.0% in March 2017.  Overall however, our cost outlook for the year is unchanged from that set out in our full-year results last November and continues to present a challenge which we must mitigate.  This inflationary environment clearly impacts on our own, and our competitors', decisions on pricing.  We have stated previously that we would expect some price to be taken in the sector, and we have seen recent indications of this.  Nevertheless, there has also been evidence of aggressive discounting during quieter trading periods. We continue to monitor our own prices carefully, and have carried out some price adjustments, including both price increases and price reductions in local markets.  We will continue to enable and encourage guests to premiumise and increase the level of spend per head through enhanced products and menus, although some movement on like-for-like prices is also likely to be necessary.   

The level of supply in our market has also changed significantly in recent years.  We have commented previously on the high number of new casual dining restaurants opening, particularly up until the middle of 2015.  Since then we have seen restaurant supply growth slow considerably, reducing to a small decline in the last four quarters, although clearly within the net position there are examples of segments and operators that are continuing to roll out.  While we are not now seeing the same level of new openings as two years ago, our marketplace remains highly competitive.

OUR PRIORITIES

Building a more balanced business

Our priority continues to be to reach the optimal balance of brands and formats across our high-quality estate, of around 1,800 largely freehold sites.  Last year we carried out a full review to identify the ideal brand for each site, and since then we have been working towards achieving this profile, aiming to premiumise where possible to take advantage of higher growth and more resilient markets, alongside improving the general level of amenity and shortening the cycle within which all of our sites are invested. 

We have made good progress against this plan.  Our main growth focus has been Miller & Carter, our specialist steak format which continues to be a great success both for new openings and conversions of existing sites.  We now have 67 Miller & Carter sites open and are on track to reach around 100 sites by the end of 2017.  These investments perform very well for us, and offer possible growth opportunities even beyond the 100-site target.  We have also continued our conversion of sites into the Stonehouse Pizza & Carvery format, now in 72 sites, and extended the Harvester Feel Good Dining concept, now in 55 sites.

In all, we completed 172 remodels and conversions (H1 2016: 164) in the first half of the year, keeping us on track to achieve our aim of a 6 to 7 year cycle of reinvesting in each of our sites.  We have opened 6 new sites, and expect to complete around 15 new openings in the full year, mostly in All Bar One, Alex and Miller & Carter.

We also identified a number of sites for disposal last year.  This followed several years of limited disposals, and was an output of the estate review outlined above.  We are currently in negotiations to sell 78 sites which we would expect to complete before the end of the year.  The annualised EBITDA of these disposals is around £5m.

Instilling a more commercial culture

Instilling a more commercial culture is about the way in which the organisation operates and strives for profitable sales growth.  We are pleased with the progress in this area. The four divisional structure is now embedded and working well. This year we will update our labour rostering system, which will enable us to operate Time & Attendance across the business, as well as giving our managers and team the ability to access the system from their own devices.

Our use of social media is becoming increasingly important as a tool to interact with our guests, such that we are now generating more than 40,000 pieces of customer feedback every month.  This provides a rich source of data as well as the opportunity for our managers to engage directly with our guests.  We have installed a social media consolidation tool across all our brands, which enables our managers to see and respond to feedback from multiple social media channels.  Data suggests a clear link between 'scores' achieved on social media and performance measures, including like-for-like sales, complaints per meal sold and net promoter score.

Our commercial culture also extends to discipline around managing our cost base, as we strive to mitigate the substantial cost pressures that we, and the industry, face.  Our scale clearly helps us in this regard.  Our procurement teams have worked across our supplier base to, where possible, substitute or consolidate products and suppliers while maintaining the quality of product offered to guests.  We have also been focusing on costs at an operational level and, whilst we feel that the organisation is already lean in the way it operates, we have given each of our sites a daily challenge to work towards in terms of cost savings - through challenging productivity, energy usage, and food and drink waste to name a few.  This gives us a clear goal to work towards and engages the teams, whilst taking care not to take actions which will impact upon the guest experience.  We are pleased with the progress we have made, both centrally and at an operational level, and expect to be able to mitigate an element of the full-year cost headwinds.

Drive an innovation agenda

We continue to drive our innovation agenda by working to improve our technological and digital capability, and developing new products and concepts.

Innovation and technology are critical areas for us as a business, in terms of efficiency, attracting and interacting with guests and remaining competitive in our markets.  We aim to use our technology to improve all aspects of the customer journey, which sometimes means making seemingly small adjustments to make a significant difference.  Examples of our progress in this area include:

We have continued to extend our use of delivery, which is now live across more than 50 sites and in three of our existing brands, plus our two new concepts Chicken Society and Son of Steak.  We are convinced that this is an area of the market which is here to stay, and the demand appears strong across towns and cities nationwide.  On average we are still seeing delivery sales of around £300 per site per week, showing the strength of the offer as we continue to roll out.  Certain individual sites trade well in excess of this amount, with the two new concepts being particularly strong on delivery sales.  We currently partner with one provider, but are close to extending the offer into other regions through alternative suppliers and believe that a delivery offer may ultimately be applicable for up to a quarter of the estate.

As well as using technology to enhance the guest experience, we are also using technology to improve the way we work.  These improvements may appear small, but can make a significant difference to our teams.  Based on feedback, we have issued all of our house managers with laptops to facilitate more flexible working on site.  We have also introduced enhancements to our telephone system to allow bookings to be routed through a centrally operated telephone line, rather than the team having to manage phones directly at sites during peak trading periods.

We have done much to improve our digital marketing in the last 18 months, by consolidating all of our customer information into one database, trialling flexible offers through email and other channels, and by developing apps for a number of our brands.  We now have six brand apps (Harvester, Toby Carvery, All Bar One, Nicholson's, Ember Inns and Browns), with an aggregate of 825k downloads so far.  We have begun testing a loyalty function within some of these apps, and in the months ahead will develop this further to tailor rewards to guests based on their individual usage.  This enables us to understand our guests' preferences more clearly and therefore to have much more personalised interaction with them.

Our work on innovation also extends to the ongoing development of new products and concepts.  Existing brands are continuously looking to evolve their offers, with examples ranging from the introduction of a low calorie prosecco in a quarter of the estate and the development of vegan dishes, to exploring popup and partnership opportunities to expand the reach of our brands.  As mentioned above we also opened two new concepts this financial year: Chicken Society and Son of Steak.  Both are based on a simple but high-quality offer, with a focused concept aimed at millennials, who are arguably underrepresented as a customer base across our existing portfolio of brands.  Chicken Society opened in Finchley in December, and Son of Steak in Nottingham in March.  We are encouraged by the early trading in both and whilst we expect to open more sites in the months ahead, we will take time to assess the performance and the business model of each before deciding whether a scale rollout is appropriate.  We have always been very clear that, whilst the concepts may end up being a future conversion opportunity for the estate, it is more important that they help us develop our own culture of testing and learning, and being able to innovate at pace - benefiting both future new trials and innovation within our existing brands.

OUTLOOK

Since the half-year, trading has benefited from Easter falling later this year. In the year-to-date (as at 13^th May) our like-for-like sales have now increased by 1.9%.  This builds on the momentum we have seen in the last twelve months, as a result of the various activities we have been undertaking and despite the challenging market backdrop.

We have made good progress against our three priorities, but must continue to work at pace and on multiple fronts in order to maintain our market outperformance and offset the increasing cost pressures facing our sector, such that we maximise long term shareholder value.

FINANCIAL REVIEW

On a statutory basis, profit before tax for the period was £75m (H1 2016 £83m), on sales of £1,123m (H1 2016 £1,096m). 

The Group Income Statement discloses adjusted profit and earnings per share information that excludes separately disclosed items to allow a better understanding of the underlying trading of the Group. 

At the end of the period, the total estate comprised 1,770 managed businesses and 56 franchised businesses, in the UK and Germany.

This year will be a 53 week accounting year to maintain alignment of accounting and calendar dates, ending on 30 September 2017.

Changes in accounting policies

There have been no changes in accounting policies in the period.

Revenue

The Group's total revenues of £1,123m were 2.5% higher than the first half last year, with growth in like-for-like sales supported by new site openings.

Total like-for-like sales^a grew by 1.6% in the first half with food sales up by 0.8% and drink sales by 2.3%.  Volumes of both food and drink fell 4.8% and 1.8% respectively with average spend per item on food up 5.9%, and average drink spend up 4.2% both reflecting the impact of the increasing premiumisation of the estate.   However, this excludes the impact of Easter, which fell in the first half of last year.  Like-for-like sales for the 33 weeks to 13^th May, including Easter, grew by 1.9% continuing an improvement in sales performance across the estate in both invested and uninvested sites. 

Separately disclosed items

Separately disclosed items comprise a £4m impairment charge in relation to assets held for sale and a £2m capital gains tax adjustment in respect of the prior year.

Operating margins

Whilst we have marginally increased gross margins, inflationary cost pressures have, as anticipated, driven a year-on-year operating margin reduction with increased labour, utilities, property costs, duty and food and drink costs all impacting the first half.  Adjusted operating margins^b were 0.9ppts lower than last year at 13.3%.

Inflationary cost pressures are anticipated to continue through the second half of the year and into next year at a similar level.

Adjusted operating profit^b for the first half was £149m, 4.5% lower than the same period last year as a result of the inflationary costs pressures above and the delay of Easter outweighing the improvement we have made in both the invested and uninvested estates performance in the period.

Interest

Net finance costs of £70m were £4m lower than in the first half last year, reflecting a lower net pensions finance charge of £4m (H1 2016 £6m), and a reduction in Group securitised borrowings.

For the current financial year we expect the full year pensions finance charge to be around £7m (FY 2016 £12m).

Earnings per share

Basic earnings per share, after the separately disclosed items described above, were 13.7p (H1 2016 18.4p).  Adjusted earnings per share^b were 15.2p, 3.2% lower than last year.  The weighted average number of shares in the period of 415m has increased due to the issue of shares as scrip dividends.  The total number of shares issued at the date of announcement is 421m.

Cash flow and net debt

The cash flow statement below excludes £38m of mandatory bond amortisation (H1 2016 £32m) and a net £6m drawn from unsecured revolving facilities (H1 2016 £8m).

The business generated £210m of EBITDA before adjusted items the first half.  Capital expenditure of £93m is higher than last year due to the accelerated capital programme.  After capital expenditure, interest and tax, £24m of free cash flow was generated by the business.  The cash dividend payment is lower than last year due to the scrip dividend issue.

Net debt of £1,825m at the half year end (H1 2016 £1,862m), represented 4.3 times adjusted EBITDA^c (H1 2016 4.2 times).

Capital expenditure

Total maintenance and infrastructure capex of £24m was £10m lower than last year, following review and improvement of the delivery of maintenance work and due to the increase in remodel and conversion activity over the past year.

During the period we have increased return generating capital expenditure through remodelling or converting 172 sites (H1 2016: 164 sites) and opening 6 new sites (H1 2016: 4 sites), at an additional investment spend of £15m.  Conversions were primarily focused on premiumisation to Miller & Carter and Stonehouse and, acquisitions on growth of All Bar One (4 sites) and Miller & Carter (2 sites).   

The EBITDA return on all conversion and acquisition capital invested since FY 2014 is 18%, with projects since the start of 2016 returning in excess of 20%.  Recent remodel performance has been encouraging, delivering sales uplifts in excess of 10%.  

Pensions

The Company continues to make pensions deficit payments based on a ten year schedule of contributions agreed as part of the triennial valuations at 31 March 2013, which showed an assessed funding shortfall at that time of £572m.  The discounted value of the minimum funding requirement agreed as part of the schedule of contributions is recognised in the balance sheet at £316m (H1 2016 £340m) before tax.

The Company is in negotiations with the Trustees of the pension schemes regarding the latest triennial valuation, as at 31 March 2016.

Dividends

The Board has approved an interim dividend of 2.5 pence per share which will be paid on 3 July 2017 to shareholders on the register at the close of business on 26 May 2017. The Board intends to make a scrip dividend alternative available to shareholders.

Shareholders who hold share certificate(s) will need to complete a Scrip Dividend Mandate Form, which can be found on our website www.mbplc.com or by contacting Equiniti on 0371 384 2065.  The completed Scrip Dividend Mandate form should be returned to the registrars no later than 5pm on 12 June 2017.

Shareholders who hold their shares in CREST and who wish to elect for the Scrip Dividend should complete an election through CREST no later than 5pm on 12 June 2017. Please refer to the elections process document available at www.shareview.co.uk/info/reinvest

Shareholders who do not hold their shares in CREST and who have already submitted a Scrip Dividend Mandate form in respect of the final dividend for the 2016 financial year do not need to submit a new mandate form. The existing Mandate form will continue in force for those shareholders who do not hold shares in CREST unless and until notice of cancellation is received by the Company's registrars not less than 15 working days before the date on which the dividend is to be paid.

Risk factors and uncertainties

The risks and uncertainties that affect the company remain unchanged and are set out on pages 20 - 24 of the 2016 Annual report and accounts which is available on the Mitchells & Butlers website at www.mbplc.com.

Definitions

a - Like-for-like sales growth reflects the sales performance against the comparable period in the prior year of UK managed pubs, bars and restaurants that were trading in the two periods being compared, unless marketed for disposal.  Like-for-like sales are measured against relevant accounting weeks in the prior year.

b - Adjusted measures are quoted before separately disclosed items as set out in the Group Income Statement and detailed in note 3 of the accounts.

c - Annualised EBITDA before separately disclosed items is used to calculate debt service coverage ratio.

Responsibility statement

We confirm that to the best of our knowledge:

This responsibility statement was approved by the Board of Directors on 16 May 2017 and is signed on its behalf by Tim Jones, Finance Director.

GROUP CONDENSED INCOME STATEMENT                                              

for the 28 weeks ended 8 April 2017

All results relate to continuing operations.

GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME

for the 28 weeks ended 8 April 2017

GROUP CONDENSED BALANCE SHEET

8 April 2017

GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

for the 28 weeks ended 8 April 2017

GROUP CONDENSED CASH FLOW STATEMENT

for the 28 weeks ended 8 April 2017

Cash and cash equivalents are defined in note 9.

There was an issue of 7 million shares during the year as a scrip dividend which is a non-cash transaction. Refer to note 7 for further details.

NOTES TO THE INTERIM FINANCIAL INFORMATION

5.         TAXATION

The taxation charge for the 28 weeks ended 8 April 2017 has been calculated by applying an estimate of the annual effective tax rate before adjusted items of 19.9% (2016 28 weeks, 20.5%).

An interim dividend of 2.5p per share, amounting to £10m, has been approved by the Directors and will be paid on 3 July 2017 to those shareholders on the register at the close of business on 26 May 2017. This interim financial information does not reflect this dividend payable.

 A scrip dividend alternative was offered to shareholders for the 2016 final dividend. Of the £21m final dividend, £17m was in the form of ordinary shares to shareholders opting in to the scrip alternative. The market value per share at the date of payment was 227.3 pence per share, resulting in the issue of 7 million new shares, fully paid up from the share premium account. The nominal value of shares issued is £1m.