Half Year Results

MITCHELLS & BUTLERS PLC

LEI no: 213800JHYNDNB1NS2W10

23 May 2019

HALF YEAR RESULTS

(For the 28 weeks ended 13 April 2019)

Trading results

Operational highlights

Reported results

Balance sheet and cash flow

Phil Urban, Chief Executive, commented:

"This is a strong set of results, demonstrating that we continue to build momentum in the business, delivering sales growth, sustained market outperformance^b and a return to operating profit growth all while reducing leverage to below four times.  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 delivering with many small advances at site level driving significant benefits in aggregate. We will maintain our focus on these initiatives which we believe are transforming the business."

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.  Alternative performance measures are explained later in this announcement.

b - As measured by the Coffer Peach business tracker.  

There will be a presentation today for analysts and investors at 8.30am at the Glazier's Hall, 9 Montague Close, London, SE1 9DD.  A live webcast of the presentation will be available at www.mbplc.com.  The presentation will also be accessible by phone: 0203 936 2999, access code: 173906.  The replay will be available until 30 May 2019 on 0203 936 3001, access code: 157226.

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

For further information, please contact:

Note for editors:

Mitchells & Butlers is a leading operator of managed restaurants and pubs. Its portfolio of brands and formats includes Harvester, Toby Carvery, All Bar One, Miller & Carter, Premium Country Pubs, Sizzling Pubs, Stonehouse, Vintage Inns, Browns, Castle, Nicholson's, O'Neill's and Ember Inns. In addition, it operates Innkeeper's Lodge 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.

BUSINESS REVIEW

We are delighted to report a strong first half performance delivering improved like-for-like sales^a growth, continued trading outperformance^b against the market and adjusted operating profit growth^a.  Total revenue of £1,186m grew by 5.0%.   Like-for-like sales^a grew by 4.1% in the first half and by 3.8% in the 33 weeks to 18 May, which includes the movement of Easter into the second half.  Sustained like-for-like sales growth is largely the result of our continued focus on a number of initiatives under our Ignite 2 programme of work designed to deliver incremental gains which, in aggregate, are transformative to the performance of the Company. 

Despite the cost pressures which continue to impact the industry, we have achieved adjusted operating profit^a growth of £10m. After separately disclosed items totalling a net charge of £11m, which include an exceptional pension charge, growth in profit before tax was £6m.  Adjusted operating profit growth^a has been achieved through improved trading performance and a relentless focus on improving the efficiency of the business, with Ignite 2 workstreams identifying multiple areas of opportunity where our work is delivering results.

The market backdrop remains uncertain due to the political and economic landscape in the UK.  However we are pleased with the progress of our trading performance and with the momentum the business carries into the second half of the year.

Trading

Our trading performance has strengthened with like-for-like sales^a continuing to outperform the market, which grew by c.1.0% in the period.   Both our performance and that of the market benefits from the absence of snow which impacted the prior year and which is partly balanced by the movement of Easter into the second half this year.  The net operating profit impact of these movements is a benefit of £5m.  The drivers of our outperformance are the continued focus on enhancing the quality of our estate through investment and the Ignite 2 initiatives which have delivered improved trading performances across all of our brands.

Enhancement in the quality of our estate through capital investment has bolstered like-for-like sales.  The trading performance of sites improves following investment as we upgrade amenity levels and tailor the environment to appeal to the preferences of our guests in each of our brands.  Brand environments are continuously evolving, and we use guest feedback and market research to enhance the effectiveness of our investment programme which we expect to continue to deliver value.

Our uninvested estate, of 1,350 sites, which has not received investment in the last year has also performed well with like-for-like sales^a growth of 2.1% in the first half, demonstrating that capital investment is not the sole driver of improved trading performance.   The broad-based improvement in trading across our brands has been influenced by a number of Ignite 2 workstreams.  An example of one of these initiatives is a focus on each team member taking the opportunity to offer an additional item to guests such as a side dish, a dessert or an extra drink.  We are able to track and monitor success by transaction and the combined effect of each of our guest-facing teams executing this initiative across our sites is powerful at the consolidated group level. 

Cost Management

Adjusted operating margin^a growth of 0.2ppts is the result of our continued focus on improving efficiency across the company in the face of the continued inflationary cost headwinds which impact our industry.

One area of particular focus is labour efficiency, our largest cost.  We updated you on our labour deployment system last year which has put us in a far better position to be able to plan and deploy labour in line with individual site sales forecasts and trading patterns.  The focus this year has been on making that software work hard to enable managers to deliver enhanced efficiency in their businesses.   In order to support our managers we have developed a team of experts, made up of the best users of the system, who are paired with managers who have struggled to improve efficiency.  The results of this initiative have been immediate, and we have the opportunity to realise further efficiencies by continuously improving the base line performance.   

In another workstream we have been focusing on site level purchases of sundry items which could previously have been made in cash by the manager, thus losing the leverage of our purchasing power and restricting our visibility of the nature of these purchases.  We have introduced a non-cash solution which has been in place for the majority of the first half of the year and which facilitates a reduction in the incidental costs of each business by allowing us to buy at scale.  By putting operational focus on these purchases, in totality across our estate, the resulting cost saving has been substantial.

IGNITE 2

Our Ignite 2 programme of work continues to deliver individual gains across several areas.  The programme of work remains focused on our three strategic priorities:

Building a more balanced business

Our priority in this area continues to be to maximise value creation from our estate of around 1,700 largely freehold sites.  We have been unlocking value through our estate investment plan by ensuring optimal brand fit in each site with improved amenity standards and an evolving brand environment to meet the needs of our guests.   Whilst we have increased capital investment over the past 3 years there is significant value still to be realised, with over 250 sites which have not been invested in for over 7 years.  As we move closer to our target 6 to 7 year investment cycle the proportion of the estate without recent investment reduces, improving the overall quality of our properties.  

Last year, we accelerated the number of capital projects in the first half of the year in order to capture more of the post investment benefit in year.  This year we have broadly maintained the weighting of projects in the first half, completing 206 conversion, remodel and growth projects and 2 acquisitions.  Capital spend has reduced slightly through marginally fewer projects and as the proportion of conversion projects reduces and remodels increase.  We have been pleased with the increased returns generated from our investment programme, particularly on more recent projects. 

Miller & Carter continues to perform very strongly and, in the second half of the financial year, we will open our first site in Germany, building on the infrastructure of our Alex brand.  This is an opportunity to test the concept in a new market and, if successful, would provide a further pipeline of growth for the brand.

We have also been focusing on enhancing our accommodation offer under our Innkeepers Lodge brand.  We have over 900 rooms across the estate with the majority attached to one of our managed sites.  Over the past 18 months, we have been investing in our accommodation in order to enhance the amenity level and diversify the portfolio such that rooms are appropriately positioned in the context of the site brand they are attached to.  By the end of FY20, we will have refurbished all our room stock and will have rooms from the top end of the budget sector to premium boutique rooms attached to Premium Country Pubs and Miller & Carters.  We have also invested in the management system which supports the booking of our accommodation and plan to relaunch the brand to the market on completion of the refurbishment programme.

Instilling a more commercial culture

We continue to work hard across many fronts to instil a more commercial culture across all aspects of our business, centrally and at site level.  By empowering people across the business to challenge the commerciality of processes through Ignite 2 we have identified areas where marginal improvements can add up to substantial gains.

From a trading perspective, the benefit of improved commercial skills from sales workshops coupled with increased local ownership of sales-driving activity can be seen in a broad-based improvement in all brands' sales performance.  This improvement has also been aided by specific sales focused Ignite workstreams including encouraging our team members to find additional selling opportunities across the 100 million meals and nearly 400 million drinks we sell each year and the enhanced use of our table management software and booking capabilities.  We have also continued to benefit from the introduction of reputation.com to the business, giving managers local ownership and oversight of feedback from guests.

Centrally, we have become more sophisticated in our approach to pricing, enabling us to be more agile in positioning each site within their local market and more refined in our approach to the pricing of products within one site.  We know that consumers are willing to pay for quality and that different occasions command varying propensities to trade up a menu, therefore by providing a range of products and add-ons within one menu we can accommodate a variety of guest needs whilst also enabling the guests to flex their experience to suit the occasion.

We have also invested in our labour and stock management systems which are designed to give our managers the tools to drive efficiencies within their businesses.

Drive an innovation agenda

Our innovation agenda focuses on enhancing our technological and digital capability and developing new products and concepts to position ourselves to benefit from changing consumer behaviour and expectations. 

We have made significant improvements in our ability to communicate with guests, including a more seamless booking process which has resulted in an increased conversion of website visits to bookings.  We have also enhanced our ability to send personalised marketing communication allowing us to be more targeted in our messaging to guests as well as continuing to invest in our brand apps and websites. 

Delivery continues to be a growth area of the industry and we now have over 170 sites live with Deliveroo and JustEat.  As this market develops we continue to look for opportunities which fit our core business operations.  We also have options for guests to pay via their mobile at all sites as well as our order at table facility which is being trialled in O'Neill's.  Our next focus is to create a data platform which will enable us to  integrate quickly and smoothly with third party software, allowing us to be more nimble in our response to developments in the market place.  

THE EXTERNAL ENVIRONMENT

The political and macroeconomic environments we operate in remain uncertain.   Studies indicate that Brexit has negatively impacted consumer confidence and created high levels of uncertainty around the wider financial and economic context within which consumers will make decisions.  However, on the whole our market has been relatively resilient, with consumers proving that they still want to eat and drink out and spend money on social experiences, particularly special occasions.   Turnover in the eating out market grew by 1.6% in the year to March 2019 with an improving trajectory despite the challenges the consumer faces.   The initiatives undertaken by the business have resulted in like-for-like sales^a growth ahead of the market^b demonstrating that we are also growing our share of the market.

We continue to closely monitor Brexit developments and have been working to develop a contingency plan alongside our main supply chain partners, including the provision of additional storage facilities.  Should a 'no deal' scenario take place we believe these actions will help mitigate and reduce the potential disruption.   

Uncertainty is a challenge for businesses which need to be able to forecast accurately in order to make decisions.  This, coupled with the oversupply into the casual dining market, has resulted in a number of casualties in the industry.  As a result, supply has started to decrease with managed restaurant numbers reducing for the first time this decade, by 1.1% in the year to March.

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

OUTLOOK

Like-for-like sales^a in the last 33 weeks, including the period since the half year, have grown by 3.8%.

We are pleased with the continued progress of our trading performance and see the return to adjusted operating profit growth^a as an important milestone in the Company's performance.  Looking forward, whilst we expect the market we operate in to remain tough and with limited visibility, we are confident in our ability to continue to out-perform based on the many initiatives that we are now seeing make a real difference to both the competitiveness and efficiency of our business.

FINANCIAL REVIEW

On a statutory basis, profit before tax for the period was £75m (H1 2018 £69m), on sales of £1,186m (H1 2018 £1,130m). 

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 trading of the Group.  Separately disclosed items are those which are separately identified by virtue of their size or incidence.

At the end of the period, the total estate comprised 1,745 sites in the UK and Germany of which 1,677 were directly managed.

Changes in accounting policies

The Company has adopted IFRS 15 (Revenue from Contracts with Customers) and IFRS 9 (Financial Instruments) in the period neither of which have had a material impact on the financial statements, see note 1 for further details.

In the next financial year the Company will adopt IFRS 16 (Leases), and expects to do so using the modified retrospective (asset equals liability) approach.  This essentially means that all leases (with some exceptions) will be recognised on balance sheet through a right of use asset and related lease liability.  In the income statement operating lease costs will be replaced by depreciation of the asset and interest on the liability.  There is no cash impact.  Guidance as to the impact on financial statements, which will depend partly on conditions prevailing at the start of the year, will be given in the financial statements for the current year.

Revenue

The Group's total revenue of £1,186m were 5.0% higher than the first half last year, due predominantly to growth in like-for-like sales.

Total like-for-like sales^a grew by 4.1% with food sales^a up by 3.5% and drink sales^a by 4.5%. Growth was generated across both the invested and uninvested estates, with the Ignite 2 initiatives and workstreams delivering improved performance across all our brands.  Volumes of food and drink fell 0.9% and 0.2% respectively, an improvement on recent trends, with average spend per item on food up 4.6%, and average drink spend up 4.8%, both reflecting the impact of the increasing premiumisation of the estate.   

Like-for-like sales^a for the 33 weeks to 18 May, which are not impacted by the timing of Easter, were up by 3.8%.

Separately disclosed items

Separately disclosed items comprise a £19m past service cost for an increase in defined benefit pension obligation, being the estimated additional liability required to equalise for guaranteed minimum pensions; £1m net profit arising on disposal of property; and, a £7m revaluation on reclassification of property to assets held for sale, reversing previous impairment recognised on those properties.

Operating profit and margins

Adjusted operating profit^a for the first half was £151m, 7.1% higher than the same period last year.  Whilst the benefit of Easter falls in the second half this year, growth in the period did benefit from the absence of last year's cold weather and snow. The operating profit impact of these movements is a benefit of £5m.  Increasingly the impact of the multiple Ignite 2 initiatives we are undertaking, as outlined above, is becoming evident in the improving performance and momentum of the business leading to growth in adjusted operating profit of £10m, after £37m of inflationary costs partially offset by £13m of savings and efficiencies.

Adjusted operating margin^a of 12.7% was 0.2ppts higher than last year.

Inflationary cost pressures for the year remain in line with expectations, particularly impacting labour, utilities, property costs, energy, food and drink costs.

Interest

Net finance costs of £65m were £3m 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 2018 £7m).

Earnings per share

Basic earnings per share, after the separately disclosed items described above, were 14.3p (H1 2018 13.0p).  Adjusted earnings per share^a were 16.1p, 15.8% higher than last year.  The weighted average number of shares in the period was 428m.  The total number of shares issued at the date of announcement is 428m.

Cash flow and net debt

The cash flow statement below excludes movements on unsecured revolving facilities which remained undrawn on at the half year (H1 2018 outflow of £6m).

The business generated £217m of EBITDA before separately disclosed items (H1 2018 £206m) with the increase from prior year driven by improved trading performance. 

Net debt of £1,627m at the half year (H1 2018 £1,718m), represented 3.8 times adjusted EBITDA^a (H1 2018 4.1 times).

Capital expenditure

Total maintenance and infrastructure capex of £30m was marginally higher than last year due to increased investment in technology and systems.

We have continued to prioritise the number of capital projects undertaken in the first half in order to achieve more in-year benefit post investment as we move closer towards our 6 to 7 year investment cycle target. In the half year we remodelled or converted 206 sites (H1 2018: 220 sites) and opened 2 new sites (H1 2018: 4 sites).  Return on projects continues to improve.

Pensions

The company continues to make pensions deficit payments as agreed as part of the triennial pensions valuation with the schemes' Trustee at 31 March 2016, which showed an asset funding shortfall at that time of £451m. The deficit is being funded by cash contributions of £48m per annum indexed to 2023 with a potential additional £13m payment into escrow in 2024, as per the agreement reached in 2013.

This schedule of contributions will be reassessed as a part of the subsequent triennial valuation, dated as at 31 March 2019, which is ongoing.

As previously disclosed, legal proceedings between the company and the Trustee concerning the power to determine the rate of inflation to be applied to increases for certain sections of the membership of Mitchells & Butlers Pension Plan are expected to be heard in mid-2020.

Dividends

The Board is not declaring an interim dividend. As previously set out and in making this assessment the Board is mindful of its fixed charge obligations (notably debt service and pension payments) and considers the need to continue investment to maintain the condition and competitiveness of the estate to be of primary importance for the long-term health of the business.

Risk factors and uncertainties

The risks and uncertainties that affect the company remain unchanged and are set out on pages 38 - 42 of the 2018 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.  Alternative performance measures are explained later in this announcement.

b - As measured by the Coffer Peach business tracker. 

Responsibility statement

We confirm that to the best of our knowledge:

This responsibility statement was approved by the Board of Directors on 22 May 2019 and is signed on its behalf by Tim Jones, Finance Director.

GROUP CONDENSED INCOME STATEMENT

for the 28 weeks ended 13 April 2019

All results relate to continuing operations.

GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME

for the 28 weeks ended 13 April 2019

GROUP CONDENSED BALANCE SHEET

13 April 2019

GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

for the 28 weeks ended 13 April 2019

GROUP CONDENSED CASH FLOW STATEMENT

for the 28 weeks ended 13 April 2019

Cash and cash equivalents are defined in note 9.

 NOTES TO THE INTERIM FINANCIAL INFORMATION

1.         GENERAL INFORMATION (CONTINUED)

5.       TAXATION

The taxation charge for the 28 weeks ended 13 April 2019 has been calculated by applying an estimate of the annual effective tax rate before adjusted items of 19.9% (2018 28 weeks, 19.6%).

5.       TAXATION (CONTINUED)

6.     EARNINGS PER SHARE (CONTINUED)

No dividends have been declared or paid in the 28 weeks ended 13 April 2019.  Dividends declared or paid in prior periods are as follows.

9.   ANALYSIS OF NET DEBT (CONTINUED)

Liquidity facility

Under the terms of the securitisation, the Group holds a liquidity facility of £295m provided by two counterparties.  As a result of the decrease in credit rating of one of the counterparties, the Group was obliged to draw that counterparty's portion of the facility during the 52 weeks ended 27 September 2014.  The amount drawn at 13 April 2019 is £147m (14 April 2018 £147m, 29 September 2018 £147m). These funds are charged under the terms of the securitisation and are not available for use in the wider Group.

Unsecured revolving credit facilities

The Group holds three unsecured committed revolving credit facilities of £50m each and uncommitted revolving credit facilities of £15m, available for general corporate purposes. The amount drawn at 13 April 2019 is £nil (14 April 2018 £nil, 29 September 2018 £nil).  All committed facilities expire on 31 December 2020.