Half Year Results

MITCHELLS & BUTLERS PLC

LEI no: 213800JHYNDNB1NS2W10

16 May 2018

HALF YEAR RESULTS

(For the 28 weeks ended 14 April 2018)

Financial performance

Strategic progress

Reported results

Balance sheet and cash flow

Phil Urban, Chief Executive, commented:

"During the first half we continued to deliver like-for-like sales growth against a period of growth last year. This strong performance comes from the progress we continue to make in our three priority areas: building a more balanced business; instilling a more commercial culture; and driving an innovation agenda.

Success in this highly competitive market is dependent on a continuous stream of improvements, and that is what we are focused on delivering. We have therefore embarked upon a new wave of initiatives which are in their early stages of development, and we believe have the potential to further transform the business. 

As previously announced, margins are being adversely impacted by increased costs, most notably from wage inflation, property costs, energy and food and drink costs. In light of this, our operational teams have performed well to deliver flat underlying profitability^b in the period."

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.

b - The period was impacted by one off adjusted operating profit items which are explained in the operating margin section of the Financial Review.

There will be a presentation today for analysts and investors at 9.30am 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 presentation will also be accessible by phone: 020 3059 5868 and quote "Mitchells & Butlers".  The replay will be available until 23 May 2018 on 0121 260 4862 replay access pin 386401#.

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

We remain focused on our three strategic priorities; to build a more balanced business, to instil a more commercial culture and to drive an innovation agenda.  We are pleased with further progress against actions implemented in the previous financial year which is translating into a sustained improvement in sales performance.  We have also embarked upon a new wave of initiatives covering sales and service, labour, stock, external spend, menus and pricing, return on investment, digital marketing and stock and cash leakage which are in their early stages of development, and we believe have the potential to further transform the business.  We believe that success in our market is dependent on a continuous stream of improvements, and that is what we are focused on delivering.

The benefits of actions taken are evident in our sales performance, with like-for-like sales^a growth in the first half of 1.6%.  Like-for-like sales are now growing on prior year growth and remain consistently ahead of the wider market, as measured by the Peach tracker.  The long Easter weekend in particular was encouraging, with like for like sales^a growth of 5.8%.  However, the first half was also punctuated by periods of exceptionally bad weather, including widespread snow, which we estimate has cost c.£12m in lost sales and impacted the half year growth by 0.9ppts. In the first 32 weeks of the year like-for-like sales^a have grown by 1.4%.

Whilst cost pressures continue to impact the industry we believe the progress made across the business both in streamlining operations and the consistent improvement in like-for-like sales^a growth positions the Company to be able to build on the momentum gained and to return to profitable growth in the mid-term.

THE EXTERNAL ENVIRONMENT

The macro environment we operate in remains challenging.  Consumer confidence has remained low and this, compounded by inflation growing at a higher rate than wages, has resulted in a reduction in consumers' disposable income.  In our market, despite these challenges, demand has been relatively resilient for now.  Turnover in the eating out market grew by 1.7% in the last calendar year with the frequency with which people eat out remaining flat.

However, increased supply over recent years has created a highly competitive environment, particularly in the food led sector.  Although net supply has slowed in the past year the overall result of increased new entrants is that c.4,000 more restaurants were open at the end of 2017 than in 2013.  The rate of growth in supply has been higher than growth in demand, making the acquisition of market share vital to growth.  Due to the heightened competition for consumer occasions we have seen an increased level and depth of discounting in the market, putting further pressure on margins. 

Quality of experience is ever more important in this competitive environment, with good quality food and drink no longer being enough to meet consumers' expectations.  This sets the context for our ongoing brand development which aims to keep our brands front of mind for guests.  We continue to monitor our prices carefully and challenge our thinking in this area through innovative workstreams.  Where appropriate we are focused on enabling guests to premiumise their experience through enhanced product options and menus, thus growing the total spend on a given occasion.  In addition, we are placing further emphasis on the overall guest experience which will encourage our customers to keep coming back to our brands, supported by investment in staff training which underpins the complete experience.  

Cost inflation continues to impact the sector, hence the importance of maintaining our focus on efficiency and driving profitable sales growth.  We believe that success requires trustworthy brands offering high quality experiences at the right price to generate sufficient sales growth to mitigate cost headwinds and grow profitability.

OUR PRIORITIES

Building a more balanced business

Our priority continues to be to maximise value creation from our estate of around 1,700 largely freehold sites.  Value is unlocked by ensuring optimal brand fit to the local market in each site with improved amenity standards and we are continuing with the execution of our estate plan to achieve this goal. 

Good progress has been made in the first half in this area.  We accelerated the capital programme, completing 220 conversion, remodel and growth projects, versus 172 in the first half last year.  The aim of completing projects earlier is to capture more of the post investment benefit in year, however it does result in a greater number of closure weeks in the first half of the year.  To minimise the impact we have been working hard to reduce closure time required for investment through operational efficiency and by working closely with suppliers to streamline work.  We continue to focus on the upgrade of amenities across the estate through our remodel programme and are generating returns of over 20% on projects completed this year.

The quantity of projects completed means that we are now within our targeted 6-7 year investment cycle, and we are reaching the tipping point in terms of reducing the proportion of the estate which has not been invested in for 7 years or more.

We also opened our 100^th Miller & Carter, a brand which continues to perform very well in a variety of geographies and site types, and whose expansion we plan to continue. 

Instilling a more commercial culture

In the current environment a relentless focus on commerciality is essential.  We have made good headway in instilling a more commercial culture across the organisation over the past two years and further progress is still being made. 

The upgraded labour system rolled out last financial year is delivering benefits.  The new system enables managers to plan their labour more effectively according to the trading pattern of their individual business, and to review scheduled and actual labour deployment accuracy versus the system's ideal standard.  The result has been improved efficiency, with more team members working when we need them and fewer in quieter times.  

Last financial year we also began the upgrade of our stock management system, the implementation and roll out of which has continued into the current financial year.  The new system will help managers to reduce waste, dramatically reduce the time taken to complete stock takes, whilst benefitting guests through reduced instances of stock unavailability.  This introduces a change in the way we manage stock and we anticipate significant cost savings once the system is fully embedded. 

Appropriate pricing is critical to success in a competitive environment.  We review pricing in the context of the local market in which our businesses operate and work hard to ensure that we are competitively priced in all of our sites.  The flexibility for guests to premiumise their experience through enhanced products and menus is a key part of our strategy.  We have been making further progress in this area through brand offer development, ensuring an appropriate stretch in the range of items within all of our brands as well as exploring and developing the way in which the offer is presented to guests though menu layout.  

In the face of the tough inflationary cost environment we continue to leverage our scale through central procurement and fine tune processes to ensure that maximum efficiency can be achieved.  By working closely with our suppliers we are able to find new ways to leverage our scale and increase efficiency resulting in both cost savings and improved processes for our managers. 

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 to benefit from changing consumer behaviour which presents an opportunity to develop and enhance the way we communicate with guests.

Our digital interaction with guests ranges from online bookings and take-away orders to feedback both through a number of third party social channels and our brand apps.  The data captured from the digital interaction enables us to be more targeted in our communication and to tailor our message to suit individual guest behaviour and preferences. 

The demand for food delivery in the industry has remained in growth, with delivery aggregators taking increasing market share.  Although delivery remains a relatively small part of what we do, we are working with Deliveroo and JustEat to expand our presence within this growing market with 109 sites now live.  Recent trials with JustEat have also enabled us to explore the potential of click and collect, presenting an opportunity to participate directly in this market through take-away.  

Guests increasingly expect to use technology as part of their experience in site.  To facilitate this we have rolled out an online payment option across all of our brands, which allows guests to view and pay their bill from their mobile device with the option to split the cost amongst a group.  We will also be trialling wireless charging across a selection of our All Bar One locations, with the facility being made available to guests who have downloaded the brand app.  In addition, we have been trialling our mobile order facility in three sites in O'Neill's, which allows guests to both order and pay for food and drinks from their mobile device within site, without approaching the bar.  Early evidence suggests that guests appreciate the ease with which orders can be placed with this facility allowing us to be more efficient during busy times.

We continue to focus on responding quickly and personally to guest feedback through online channels and are seeing the benefit of this work through our NPS score which has increased to 61, up 5 points from this time last year.  We now respond to 90% of all social media comments which we believe is driving the benefit in our reputation with guests.

Last financial year we launched two new concepts, Chicken Society and Son of Steak, both of which are generating very positive customer feedback.  These concepts remain in incubation whilst we refine the offers and we are pleased with the progress being made.  The creation of new offers was important to breed an innovation ethos across the business and is something which has translated to existing brands in terms of offer development.  For example, All Bar One has recently released a new menu including a larger range of healthy dishes, including vegan options, using the expertise of our company nutritionist.   This sort of brand development is ongoing across the business to help keep brands relevant to their consumer groups.

OUR PEOPLE

People are at the heart of our business and we rely on our team members to deliver the experiences which make our guests want to return to our brands.  As such we have been working hard in a number of areas and are pleased that engagement scores continued to strengthen across all cohorts.

We have developed and launched an online portal called MABLE which employs the principles of gamification to evolve the way in which we provide training and development to staff members.  The portal includes training materials which staff can access at a time and place to suit them, allows us to communicate individually with all staff members and also includes a social element.  The platform attracted the Learning & Performance Institute gold award for digital transformation.  

Due to the impact that Brexit is likely to have on the free movement of people into the UK we have a need to ensure that we can access alternative talent pools.  Whilst the proportion of our people who are non-British EU is relatively low at 13%, some brands and geographies would be more impacted than others and it is important that we address the issue. We have been investing in our apprenticeship programme which we believe will play an important part in developing the talent we need to drive our business forward in the future.  We have a total of 1,600 apprentices in active learning, providing access to career paths across all sectors of the business.  We were delighted to be awarded the Best Early in Careers Programme at the National HR Distinction Event in February this year as well as collecting the award for the Overall Best Place to Work award

OUTLOOK

Since the half-year trading has been strong, aided by good weather, and like-for-like sales^a in the 32 weeks to 12 May have grown by 1.4%.

We have made good progress against our three priorities so far this year and will be refining and embedding our next wave of initiatives during the second half.  In this uncertain environment and in the face of unrelenting cost headwinds our focus remains on delivering our strategy with the aim of returning the company to profitable growth and maximising long-term shareholder value.  

FINANCIAL REVIEW

On a statutory basis, profit before tax for the period was £69m (H1 2017 £75m), on sales of £1,130m (H1 2017 £1,123m). 

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

At the end of the period, the total estate comprised 1,691 managed businesses and 59 franchised businesses, in the UK and Germany.

Changes in accounting policies

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

Revenue

The Group's total revenues of £1,130m were 0.6% higher than the first half last year, with growth in like-for-like sales partially offset by the impact of disposals made in the previous financial year.

Total like-for-like sales^a grew by 1.6% in the first half with food sales up by 1.8% and drink sales by 1.4%.  Growth was positively impacted by the timing of Easter which fell in the second half of last year.  However, trade was negatively impacted by adverse weather which impacted sales growth by an estimated £12m in the period as a whole. Adjusting for this impact, like-for-like sales would have increased by 2.5%.  Volumes of food and drink fell 3.6% and 2.3% respectively with average spend per item on food up 5.7%, and average drink spend up 3.8% both reflecting the impact of the increasing premiumisation of the estate.   

Like-for-like sales^a for the 32 weeks to 12 May, which are not impacted by the timing of Easter, were up by 1.4%. 

Separately disclosed items

Separately disclosed items comprise £1m net profit arising on disposal of property and a £5m charge for impairment of a small number of short leasehold properties.

Operating profit and margins

Adjusted operating profit^a for the first half was £141m, 5.4% lower than the same period last year.  The period was adversely impacted by an estimated £8m due to weather in addition to disposals made last year (£2m) and closure cost from acceleration of our capital programme (£2m).  These are partly mitigated by the movement of Easter into the first half, with an estimated timing benefit of £4m.  Adjusting for these items illustrates underlying profits were broadly flat in the first half.  

Inflationary cost pressures remain, particularly on labour, utilities, property costs, energy, food and drink costs.  These are anticipated to remain at similar levels through the second half and into next year. 

Adjusted operating margin of 12.5% was 0.8ppts lower than last year.

Interest

Net finance costs of £68m were £2m lower than in the first half last year, reflecting the continued reduction in Group securitised borrowings.

For the current financial year we expect the full year pensions finance charge to be around £7m (FY 2017 £7m).

Earnings per share

Basic earnings per share, after the separately disclosed items described above, were 13.0p (H1 2017 13.7p).  Adjusted earnings per share^a were 13.9p, 8.6% lower than last year.  The weighted average number of shares in the period of 424m has increased due to the issue of shares as scrip dividends.  The total number of shares issued at the date of announcement is 428m.

Cash flow and net debt

The cash flow statement below excludes a net £6m outflow on unsecured revolving facilities (H1 2017 inflow of £6m).

The business generated £208m of operating cash flow from before adjusted items, movements in working capital and addition pension contributions from trading in the first half. 

The cash inflow from working capital movement is due largely to the unwinding of the 53^rd week trading in the previous year impacting the timing of scheduled payments within the first half.  Capital expenditure of £104m is higher than last year due to the accelerated capital programme. 

The cash dividend payment is higher than last year due to lower uptake of the scrip dividend issue and after bond amortisation there was a net free cash outflow of £3m. 

Net debt of £1,718m at the half year end (H1 2017 £1,825m), represented 4.1 times adjusted EBITDA^a (H1 2017 4.3 times).

Capital expenditure

Total maintenance and infrastructure capex of £29m was £5m higher than last year, with £3m of the additional spend in relation to investment in technology and systems.

During the period we have continued to increase return generating capital expenditure through remodelling or converting 220 sites (H1 2017: 172 sites) and opening 4 new sites (H1 2017: 6 sites).  Conversions and acquisitions were primarily focused on premiumisation, with conversions to Miller & Carter and Stonehouse and acquisitions of All Bar One (2) and Miller & Carter (2) sites.  

The EBITDA return on all freehold and leasehold conversion and acquisition capital invested since the start of the previous financial year is in excess of 19% and returns on remodel projects are over 20%.

Pensions

The Company continues to make pensions deficit payments as agreed as part of the triennial pensions valuation with the scheme trustees at 31 March 2016, which showed an asset funding shortfall at that time of £451m. The deficit will be funded by cash contributions of £46m per annum indexed to 2023, as per the agreement reached in 2013.

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

Dividends

As previously advised the Board is not declaring an interim dividend but will make an assessment of pay-out at the end of the year based on a full year of trading and development of the sector outlook. As previously set out, in making this assessment the Board considers investment to maintain the condition and competitiveness of the existing estate to be of primary importance for the long-term health of the business and would not expect to see a structural, or permanent, increase in the use of short term facilities.

Risk factors and uncertainties

The risks and uncertainties that affect the company remain unchanged and are set out on pages 36 - 40 of the 2017 Annual report and accounts which is available on the Mitchells & Butlers website at www.mbplc.com.

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.

Responsibility statement

We confirm that to the best of our knowledge:

This responsibility statement was approved by the Board of Directors on 15 May 2018 and is signed on its behalf by Tim Jones, Finance Director.

GROUP CONDENSED INCOME STATEMENT                                              

for the 28 weeks ended 14 April 2018

All results relate to continuing operations.

GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME

for the 28 weeks ended 14 April 2018

GROUP CONDENSED BALANCE SHEET

14 April 2018

GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

for the 28 weeks ended 14 April 2018

GROUP CONDENSED CASH FLOW STATEMENT

for the 28 weeks ended 14 April 2018

Cash and cash equivalents are defined in note 9.

 NOTES TO THE INTERIM FINANCIAL INFORMATION

5.         TAXATION

The taxation charge for the 28 weeks ended 14 April 2018 has been calculated by applying an estimate of the annual effective tax rate before adjusted items of 19.6% (2017 28 weeks, 19.9%).

5.         TAXATION (CONTINUED)

6.         EARNINGS PER SHARE (CONTINUED)

The final dividend of 5.0p per ordinary share declared in relation to the 53 weeks ended 30 September 2017 (2016 5.0p) was approved at the Annual General Meeting on 23 January 2018 and was paid to shareholders on 6 February 2018. Shareholders were able to elect to receive ordinary shares credited as fully paid instead of the cash dividend under the terms of the Company's scrip dividend scheme. Of the £21m final dividend, £14m was in the form of the issue of ordinary shares to shareholders opting in to the scrip alternative. The market value per share at the date of payment was 264.4p per share, resulting in the issue of 5 million new shares, fully paid up from the share premium account. The nominal value of the 5 million shares issued in relation to the final scrip dividends is £0.5m.

No interim dividend has been declared during the period.