Full Year Results

MITCHELLS & BUTLERS PLC

LEI no: 213800JHYNDNB1NS2W10

20 November 2019

FULL YEAR RESULTS

(For the 52 weeks ended 28 September 2019)

Reported results

Trading results

Operational highlights

Balance sheet and cash flow

Phil Urban, Chief Executive, commented:

"These strong results reflect the work we have done over the last few years, first to build sustained sales growth and then to convert that into profit growth.  It has been extremely encouraging to see an improvement in like-for-like sales growth across the portfolio during the year, fuelled by our Ignite programme of work.  This puts us in a stronger position as we move forward into the next financial year, in what we expect to remain challenging market conditions."

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.

b - As measured by the Coffer Peach business tracker. 

There will be a presentation today for analysts and investors at 8.15am 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 on 0203 936 2999, access code: 089528.  The replay will be available until 27 November 2019 on 0203 936 3001, access code: 267517.

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

This has been a strong year for Mitchells & Butlers.  The work we have undertaken, principally through our Ignite programme of initiatives, is driving a strong trading performance and generating profit growth whilst we continue to invest in our estate and pay down debt. 

Like-for-like sales^a grew by 3.5%, with strong performances across all of our brands contributing to continued, consistent outperformance of the market^b.   Within this, our uninvested estate^c grew by 1.5% demonstrating breadth of performance across our portfolio.  Total sales grew by 3.9% over the year. 

Adjusted operating profit^a of £317m grew by £14m against last year.  Ignite initiatives focusing on sales and efficiency enhancements have resulted in adjusted operating margin^a growth of 0.1ppts, despite the inflationary cost headwinds which continue to impact our sector.  On a statutory basis, profit before tax of £177m grew by 36.2% against last year.  

OUR STRATEGIC PRIORITIES

We have maintained our strategic approach with three priority areas focused on repositioning the company to a stronger competitive position:

Our continued progress across each of these priorities has been instrumental in the strong performance during the year. 

Build a more balanced business

Our estate comprises 1,748 pubs, bars and restaurants, of which more than 80% are freehold or long-leasehold.  Our focus in this area is to optimise the balance of brands across the estate in order to create long-term value.  During the year, we continued to execute our plan focusing on improving the quality of the estate through premiumisation and amenity upgrades. 

We completed 240 remodels and conversions in FY 2019 (FY 2018 232) and remain on course to deliver a 6-7 year cycle of investment, from the 11-12 year cycle of previous years.  Ordinarily we expect a drag on profit in the year of investment due to lost trade during closure and the cost associated with opening the invested business.  This year we have been focusing on enhancing the 'in year' return of our investment projects and have eliminated profit drag by reducing closure time, more efficient use of resources and setting businesses up for success from the first day of trading.  As a result, return on investment^a for conversion and acquisition projects increased to 21%, the strongest we have seen for many years. 

Our remodel returns^a have also improved, increasing to 34% for projects completed in the financial year. Our remodel programme is designed to enhance the amenity and appeal of sites which remain within the same brand, giving the opportunity both to delight existing, and attract new, guests.  The remodel programme provides a vehicle through which brands can continue to evolve and innovate in the highly competitive market in which we operate.

We continue to search for new areas to create value. Miller & Carter Frankfurt opened in August and gives us an opportunity to test this successful offer in a new market.

We have been considering the environmental impact of our investment programme and, where possible, have refurbished existing kitchen equipment and furnishings to be used in new projects.  In so doing we have saved 500 pieces of equipment from landfill which equates to 274m³.  In addition, our new Edinburgh lodge has been built to high environmental standards and we are continually looking for opportunities to improve the sustainability credentials of our buildings to reduce our use of natural resources.

Instil a more commercial culture

Instilling a commercial mindset across the organisation has been instrumental in driving the turnaround in trading performance over the past two years.  In our sites, managers have been equipped with the knowledge to confidently grow sales in their local markets and have been provided with systems which assist them in running their businesses more efficiently.  Centrally, our procurement team continue to leverage our buying power and during the year have mitigated £6m of inflation costs across food, drink and logistics.  

Centralisation of procurement and stock management has also allowed us to reduce the level of food waste in our supply chain during the year.  Through product and pack size review we have reduced food waste by 65% compared to last year.  During the year we also began working with FareShare who will take the unavoidable waste from our supply chain and distribute it to charitable organisations which aim to bring people together through food and social interaction.  We are also working hard to reduce food waste in our sites, aided by investment in a more sophisticated stock management system.  In addition, we are exploring opportunities to redistribute food from sites when we have a surplus, for example we have trialled Too Good to Go in Toby Carvery. 

Our enhanced labour deployment systems, in combination with a specialist team of system experts, continue to deliver improved efficiencies.  The system generates accurate deployment schedules, individual to the trading patterns of a specific business, enabling the manager to deploy staff in the most efficient way.  Our team of experts help managers to get the most out of the system and to optimise labour deployment in their business. 

Drive an innovation agenda

An innovation mindset continues to be a priority for our business.  Innovation takes place at all levels of the business from single product and process development to our organisation-wide digital strategy.  Our digital strategy represents an opportunity to unlock value by facilitating agile integration with new technology.  As consumer behaviour evolves, we are more able to provide flexible solutions to accommodate changing needs.  Technology and the resulting data also provide us with the insight to improve our understanding of the requirements of our guests and how we can fulfil those requirements and offer even better experiences.

During the year we have developed our technology to facilitate an improved online booking experience, have developed an employee app allowing our staff greater flexibility and have continued to work with Just Eat and Deliveroo, with 273 sites now offering delivery.  In addition to this, we have three delivery only brands in trial, utilising existing kitchens which have additional capacity. 

The George at Harpenden, a new all-day concept which we opened last year, has been performing well.  The offer is a premium suburban concept which aims to appeal across all day parts with flexible space which is appropriate for a range of occasions.

We are increasingly supporting innovative companies finding sustainable solutions for our industry, as well as working collaboratively with other organisations in our sector to share learnings and best practice in addressing the environmental challenges we are faced with.   

Ignite

Ignite is the internal name used for our focused programme of work underpinning the longer-term strategy.  Ignite initiatives have been instrumental in driving the turnaround in trading performance and profitability and have continued at pace in the year.  Ignite 2 initiatives are in place to continue to deliver benefits in the current financial year and our next stage, Ignite 3, will be developed during the coming year.

An example of an Ignite 2 initiative which was rolled out during the year is the enhancement of our booking platforms.  We have simplified the booking process by reducing the number of steps a guest needs to take to book a table.  Booking conversions have increased by 1.3ppts as a result of this more seamless experience. 

Centralised pricing process allows us to identify pricing opportunities and move quickly to realise them.  In the year we have streamlined this process and effectively utilised till software to enable centralised changes to be activated in line with changes to local market dynamics. 

During the year, we have systematically targeted leased businesses which were underperforming expectations.  A focused team has identified and implemented solutions to enhance the performance and profitability of these sites, and, as a result, we have improved the uninvested trading performance of these sites by over £1m in the financial year.

Contributing to our improved return on invested capital, we have invested in software which enables us to match specific guest criteria against a site location.  This technology enables us to make data driven investment decisions to ensure that each site operates under the brand which most appropriately matches the needs of the population around it. 

PEOPLE

Our fantastic team of over 46,000 people across the business is critical to delivering the all-important experiences which guests have with us.  We rely on our people to uphold the highest standards whilst making each visit personal and memorable.  That is why attracting, training and retaining great people is key to our organisation. We are delighted, therefore, that our engagement scores have improved across all cohorts and that team turnover has reduced by 3ppts to 81%. 

We are proud of our training and progression opportunities.  We are committed to providing progression opportunities and development to our people facilitated through training and a strong centralised HR function.  Our apprentice programme continues to grow: in the year 900 young people have completed an apprenticeship scheme and 1,600 existing employees have enrolled on a course.  We now have seven programmes available up to bachelor's degree level.  We believe that our apprentice scheme will provide excellent future talent to our organisation, and we were delighted to be recognised externally by the National Apprenticeship Service, The Springboard Charity, the BII and the CIPD for our Youth Engagement and Employment.

THE EXTERNAL ENVIRONMENT

The eating out industry continues to face challenges, including rising costs and supply which has, over recent years, outstripped demand.  The result of these factors has been a number of CVAs and business closures amongst our competitors, and, in the twelve months to June, the number of restaurants in operation fell by 3.4%.  This reduction in sites was evenly spread across the UK.

However, the industry as a whole remains in revenue growth; forecast to be 1.3% in the year to September 2019.  This suggests that, despite reported fragile consumer confidence, people ultimately still want to go out and treat themselves to social occasions. 

There are a number of key trends impacting the industry.  Consumers are increasingly seeking higher quality food when eating out, with a focus on superior ingredients and sourcing.  These factors have resulted in the continuing trend of increased spend per visit and a number of brands have premiumised their food offers and amenity in response to this changing consumer behaviour.  Premiumisation is also supported by consumers' increasing desire for healthy options, with 43% of the population stating a desire to eat and drink more healthily than they were doing five years ago.  To consumers of this mindset, high quality ingredients, healthy cooking methods and nutritionally beneficial meals command a higher price point and, therefore, there has been a growing proportion of offers targeting this trend.

Busy lifestyles have led to consumer demand across all day parts as people increasingly fit in social occasions during different parts of the day, with breakfast growth outstripping any other day part.  As a result, a number of brands have evolved with the intention of creating an offer which is competitive across the whole day.  The impact of this is increased capacity from existing restaurants without an increase in the number of sites, compounding the long-term increase in supply in the market.  Brands must consider their position in the market for each timeslot they are open to trade and must remain competitive across their trading hours in order to maximise the profitability of their offer.  

Delivery and take-away remain areas of growth in the industry facilitated by aggregators which allow consumers the convenience of a range of cuisines delivered to their homes.   The delivery sector has seen rapid growth over recent years, a trend which looks set to continue.  Until now, delivery has largely been an addition to the traditional restaurant model.  However, as the opportunity in this market grows there has been increasing introduction of delivery-only brands and the use of 'dark kitchens'.  Strategic participation in this area of the market is likely to be a key differentiator in performance over the coming years. 

The UK political and economic environment remains uncertain.  The impact of Brexit remains unclear, and, aside from macro-economic consequences, the specific areas of material impact for our business are likely to be increases in costs and the reduction of availability of goods, and implications of restrictions on the free movement of labour.  On the UK's exit from the EU, the cost of goods might be impacted by changes in terms of trade and therefore tariffs, additional border controls and fluctuations in the value of sterling.  From an employment perspective, at a time when unemployment levels are at a 40-year low, any restriction on the free movement of labour would be expected to have a material impact on both the cost of labour and access to talent.  Currently, across our business, 13% of staff are non-British EU nationals, with the proportion fluctuating by geographic region.  We remain close to these issues and have contingency plans in place whilst we await further details.

CURRENT TRADING AND OUTLOOK

In the first seven weeks of the new financial year like-for-like sales^a have grown by 1.4% having continued to outperform the market^b in a period of adverse weather.

A return to profit growth in the last financial year represents significant progress in the face of inflationary cost headwinds impacting the sector.  We have now started the new financial year with like-for-like sales^a remaining consistently ahead of the market and a new wave of initiatives from our Ignite programme of work under development. 

The market remains challenging with a high level of macro uncertainties, but we will remain focused on maintaining a strong balance sheet and reducing our net debt whilst positioning the business to generate value for our stakeholders.

FINANCIAL REVIEW

On a statutory basis, profit before tax for the year was £177m (FY 2018 £130m), on sales of £2,237m (FY 2018 £2,152m). 

The Group Income Statement discloses adjusted profit and earnings per share information that exclude 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 1,748 sites in the UK and Germany of which 1,671 are directly managed.

Changes in accounting policies

During the period the Group has adopted IFRS 15 (Revenue from Contracts with Customers) and IFRS 9 (Financial Instruments).  In the forthcoming year, FY 2020, we shall adopt IFRS 16 (Leases), the anticipated impact of which is dealt with later in this review.

Revenue

Total revenue of £2,237m was 3.9% higher than last year, with growth in like-for-like sales^a and the benefit of conversions and new site openings.

Like-for-like sales^a grew by 3.5% with food sales^a up by 3.4% and drink sales^a up by 3.2%.  Average spend per item on food was up 3.4%, and average drink item spend up 4.5%, following strengthening of prices and increasing premiumisation across the estate.  Other sales, including accommodation and machine sales, grew at a higher rate impacting total like-for-like sales^a growth.  

Separately disclosed items

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

A £19m past service cost is recognised in relation to the defined benefit pension obligation as a result of the High Court ruling on guaranteed minimum pensions equalisations.

A £9m charge is recognised relating to valuation and impairment of properties, comprising a £4m (FY 2018 £28m) charge relating to downward valuation movements on selected sites and a £5m (FY 2018 £15m) impairment charge on short leasehold and unlicensed properties.

Disposal of assets generated a £1m profit in the year (FY 2018 nil), in addition to a £7m (FY 2018 nil) reversal of past impairment on disposed assets when reclassified to assets held for sale at the interim date.

Despite ongoing inflationary cost pressures, growth in adjusted operating margin^a was achieved through like-for-like sales growth and enhanced efficiencies.  Inflationary cost pressures which totalled £64m were in line with expectations, particularly impacting labour, energy, property and food and drink.  Adjusted operating margin^a for the full year was 0.1ppts higher than last year at 14.2%. 

Adjusted operating profit^a of £317m was 4.6% higher than last year as a result of mitigating cost reductions and like-for-like sales^a growth.

Interest

Net finance costs of £113m for the full year were £5m lower than last year reflecting the reduction in Group securitised borrowings.

The net pensions finance charge for the year was £7m (FY 2018 £7m). The charge for next year is expected to be £3m.

Earnings per share

Basic earnings per share, after the separately disclosed items described above, were 33.5p (FY 2018 24.5p).  The increase over last year reflects an increase in profit before adjusted items and reduced separately disclosed items.  Adjusted earnings per share^a were 37.2p, 9.1% higher than last year.  The weighted average number of shares in the period was 427m and the total number of shares issued at the balance sheet date was 429m.

Cash flow and net debt

The cash flow statement below excludes the net movement on unsecured revolving facilities of nil (FY 2018 (£6m)), which were undrawn at the year end (FY 2018 undrawn).

The business generated £436m of EBITDA before separately disclosed items^a. 

Capital expenditure of £152m was lower than the prior year due to lower central and maintenance investment and to lower capital cost per project driven by a decreased proportion of conversion projects.  Disposal income of £14m related to the sale of 5 sites in the year. 

During the year the securitisation liquidity facility of £147m, originally drawn in 2014, was repaid. £120m of the repayment was made using other cash deposits, with the balance of £27m from cash and cash equivalents.

After all outgoings other than mandatory bond amortisation, cash flow generated was £98m.

There was no dividend paid in the year.

Net debt reduced to £1,564m at the year end (FY 2018 £1,688m), representing 3.6 times adjusted EBITDA^a (FY 2018 4.0 times).

All debt at the year-end was within the group securitisation arrangements and is subject to quarterly testing on both a rolling half, and full year basis.  Full year headroom against the restricted payment test and covenants is set out below:

Securitisation restricted payment tests:

Securitisation covenants

Further details can be found at https://www.mbplc.com/infocentre/debtinformation/.

Capital expenditure

Capital expenditure of £152m comprises £147m from purchase of property, plant and equipment and £5m in relation to purchase of intangible assets. 

Maintenance and infrastructure capex of £60m was £10m lower than the prior year due primarily to reduced maintenance requirements as the proportion of the estate recently invested grows, and reduced IT investment as significant projects took place in the prior year.

During the year we completed a greater number of investment projects, 247 in total (FY 2018 239). This was achieved at a lower level of return generating capital, £92m, due to the reduced proportion of conversion projects and increased number of remodels which require lower spend per project.  Acquisitions were focused on premiumisation and expansion with the opening of three new Miller & Carter sites (one in Germany), three new Alex sites and a purpose built lodge in Edinburgh.   

Our return on expansionary capital^a across all conversion and acquisition projects over the past four years has increased markedly to 21% (FY 2018 16%), with increasing returns particularly coming through from more recent projects.   Recent remodel performance, for projects completed in FY 2019, has also been especially encouraging, delivering returns^a of 34%^a and sales uplifts in excess of 10%. 

The Group capital expenditure next year is expected to increase to a similar level to that of FY 2018, in the range of £170m to £180m.

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 conducted an impairment review on short leasehold and unlicensed properties.  The overall property portfolio valuation has increased by £82m (FY 2018 decrease of £48m) reflecting a £2m separately disclosed net impairment charge in the income statement and a £84m increase in the revaluation reserve. 

Pensions

The net pensions liability, including minimum funding is £215m (FY 2018 £249m). 

The results of the 2019 triennial valuation show an actuarial deficit of £293m and in September we reached agreement with the Trustee for an unchanged schedule of future contributions.  The deficit will continue to be funded by cash contributions of £49m per annum indexed to 2023.  In 2024 an additional payment of £13m will be made into escrow, should such further funding be required at that time.

The hearing in relation to the rate of inflation to be applied to pensions increases for certain sections of the membership in excess of the guaranteed minimum pensions is expected to be heard in mid 2020.

Capital allocation policy and dividends

The Company has obligations, notably in respect of debt service and pension fund contributions, after which investment in the estate and distribution to shareholders can be considered.   Subsequent capital allocation decisions are made primarily to protect the ongoing and future health of the business and, as previously stated, when assessing dividends the Board would not expect to see a structural, or permanent, increase in the use of short term facilities.   

Given this capital allocation framework combined in particular with the uncertain political and economic outlook, the Board does not propose a final dividend for the year

The Board keeps its dividend policy under review as appropriate in the context of its capital allocation policies, capital structure, and visibility on trading.

IFRS 16 (Leases)

The Group will adopt IFRS16 for the first time in FY 2020 using the modified retrospective (asset equals liability) method, without restatement of prior year comparatives. Any opening balance sheet adjustments are recorded directly into equity.

Adoption will mean that the majority of leases will be recognised on balance sheet through creation of a right of use asset and related lease liability.  In the income statement operating rental costs will largely be replaced by depreciation of the asset and interest on the liability.  There is no cash impact.

The impact on transition of adoption on the income statement is expected to be an uplift in EBITDA of c.£50m (through lower rental costs) and a reduction in pre-tax profits (after increased depreciation and interest charges) of c.£11m, reducing basic earnings per share by 2.1p.  On the opening FY 2020 balance sheet we expect to recognise a right of use asset of £500m and a lease liability of £546m.  These changes should lead to an increase of 70bps in the book net debt: EBITDA multiple.   Further details of the new policy and expected impact are included in section 1 of the accounts.

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 - As measured by the Coffer Peach business tracker. 

c - Uninvested estate refers to sites which have not received investment in the last year

All results relate to continuing operations.

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 by the European Union 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 28 September 2019. The comparative period is for the 52 week period ended 29 September 2018.  The respective balance sheets have been drawn up as at 28 September 2019 and 29 September 2018.

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

Going concern

The Group's forecasts and projections take account of anticipated trading performance and show that the Group should be able to operate within the level of its current borrowing facilities.

The Directors have, at the time of approving the consolidated financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the consolidated financial statements.

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 = €1.13 (2018 £1 = €1.13), 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 (2018 £1 = €1.12) and £1 = $1.23 (2018 £1 = $1.30) respectively.

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

IFRS 9 Financial Instruments

In the current period, the Group has adopted IFRS 9, which replaces IAS 39 Financial Instruments: Recognition and Measurement.  The date of initial application for the Group is 30 September 2018.

IFRS 9 introduced new requirements for:

(i) classification and measurement of financial assets and financial liabilities,

(ii) impairment of financial assets, and

(iii) general hedge accounting.

IFRS 9 introduced a new model for classification and measurement of financial assets and financial liabilities, a single, forward-looking "expected credit loss" model for measuring impairment of financial assets (including trade receivables) and a new approach to hedge accounting that is more closely aligned with an entity's risk management activities.

The application of IFRS 9 has had no impact on the Group balance sheet, the Group income statement, the Group statement of comprehensive income or the Group cash flow statement.

IFRS 15 Revenue from Contracts with Customers

In the current period, the Group has adopted IFRS 15 which is effective for financial periods beginning on or after 1 January 2018.  The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the standard introduces a five-step approach to revenue recognition:

Step 1: Identify the contract with a customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognise revenue when the entity satisfies a performance obligation

1. Preparation of preliminary consolidated financial statements (continued)

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

IFRS 15 Revenue from Contracts with Customers (continued)

As the majority of the Group's revenue is in relation to the sale of food and drink within pubs and restaurants, for which the consideration is known and the performance obligations are satisfied at the point of sale, the application of IFRS 15 has had no impact on the financial position or performance of the Group.

New and revised IFRS Standards in issue but not yet effective

The IASB and IFRIC have issued standards and interpretations which could impact the Group, with an effective date for future financial periods.  IFRS 16 Leases will have a material impact on the Group for the 52 week period ending 26 September 2020.  None of the other standards that are not yet effective are expected to have a material impact on the Group.  The impact of IFRS 16 is described below:

Impact of adoption of IFRS 16 Leases

General impact of application of IFRS 16

IFRS 16, which was endorsed by the EU on 9 November 2017, provides a comprehensive model for the identification of lease arrangements and their treatment in the consolidated financial statements for both lessors and lessees.  IFRS 16 will supersede the current lease guidance including IAS 17 Leases and the related Interpretations when it becomes effective for accounting periods beginning on or after 1 January 2019. The date of initial application of IFRS 16 for the Group is 29 September 2019.

Given the number of leases and historical data requirements to adopt the fully retrospective approach, the Group intends to apply the modified retrospective approach, with assets equal to liabilities, at transition. This approach will not require restatement of comparative information.

In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17.

Impact on lessee accounting

IFRS 16 will change how the Group accounts for leases previously classified as operating leases under IAS 17, which were off-balance sheet.

On initial application of IFRS 16, for all leases (except as noted below), the Group will:

(i) recognise right-of-use assets and lease liabilities in the Group balance sheet, initially measured at the present value of the future lease payments;

(ii) recognise depreciation of right-of-use assets and interest on lease liabilities in the Group income statement; and

(iii) separate the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within operating activities) in the Group cash flow statement.

For short-term leases (lease term of 12 months or less) and leases of low-value assets (such as personal computers and office furniture), the Group will opt to recognise a lease expense on a straight-line basis as permitted by IFRS 16.

The Group will recognise total lease liabilities of £546m in respect of all its leases. The weighted average incremental borrowing rate used to calculate the opening lease liabilities was 3.5%.

The following is a reconciliation of total operating lease commitments at 28 September 2019, to the lease liabilities recognised at 29 September 2019:

1. Preparation of preliminary consolidated financial statements (continued)

New and revised IFRS Standards in issue but not yet effective (continued)

Impact of adoption of IFRS 16 Leases (continued)

The Group will recognise a corresponding right-of-use asset of £500m in respect of all of its leases. The following is a reconciliation of the opening lease liabilities to the opening right-of-use assets:

The reconciling items include lease incentives, lease premiums and prepayments which are included in the measurement of right-of-use assets at transition to IFRS 16, whereas under IAS 17 they were amortised on a straight-line basis over the lease term.  In addition, expected dilapidations costs are included in the right-of-use asset and depreciated over the lease term under IFRS 16.

The Group will apply the practical expedient to rely on its assessment of onerous lease contracts under IAS 37 as an alternative to performing an impairment review at the transition date, resulting in an amount of £31m being recognised as impairment against the right-of-use assets at transition.

Under IFRS 16, an intermediate lessor accounts for a head lease and sublease as two separate contracts. As a result, some of the Group's sublease agreements will be reclassified to finance leases at transition. The leased assets will be derecognised and finance lease asset receivables recognised. This change in accounting will change the timing of recognition of the related revenue (recognised in finance income).  An amount of £19m will be derecognised from the opening right-of-use asset and recognised as a finance lease receivable at transition.  

2. Segmental analysis

IFRS 8 Operating Segments requires operating segments to be based on the Group's internal reporting to its Chief Operating Decision Maker (CODM). The CODM is regarded as the Chief Executive together with other Board members. The Group trades in one business segment (that of operating pubs and restaurants) and the Group's brands meet the aggregation criteria set out in Paragraph 12 of IFRS 8. Economic indicators assessed in determining that the aggregated operating segments share similar economic characteristics include expected future financial performance; operating and competitive risks; and return on invested capital.

The disclosure set out in the Annual Report and Accounts for 2018 included segmental information for the retail operating business and property business, with an internal rent charge being levied against the Group's retail operating units by the property business. With a stable estate, the internal rent charge is no longer used by the CODM as an indicator of performance as movements in this charge are insignificant. The business is focused on delivery of sales growth and control of short-term costs within its trading pubs, in order to maximise return from its existing estate.

The CODM uses EBITDA and profit before interest and adjusted items (operating profit pre-adjustments) as the key measures of the Group's results on an aggregated basis.

Geographical segments

Substantially all of the Group's business is conducted in the United Kingdom.  In presenting information by geographical segment, segment revenue and non-current assets are based on the geographical location of customers and assets.

2. Segmental analysis (continued)

Geographical segments

3. Separately disclosed items

The items identified in the current period are as follows:

3. Separately disclosed items (continued)

4. Finance costs and revenue

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 is 19.0% (2018 19.0%). 

6. Earnings per share

Basic earnings 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 per share, the weighted average number of ordinary shares is adjusted to assume conversion of all dilutive potential ordinary shares.

Adjusted earnings per ordinary share amounts are presented before adjusted items (see note 3) in order to allow a better understanding of the adjusted trading performance of the Group.

a.  Adjusted profit 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 weighted average number of ordinary shares used in the calculations above are as follows:

At 28 September 2019, 782,078 (2018 2,746,844) 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

Property, plant and equipment can be analysed as follows:

Assets held for sale

During the first half of the financial period, a group of properties were classified as held for sale. At the interim date, 13 April 2019, the net book value of these properties was £13m. A revaluation uplift of £7m was recognised to increase the carrying value of these assets to the fair value less costs to sell. The revaluation uplift has been recognised in the Group income statement as it reverses a previously recognised impairment.  The properties were sold during the second half of the financial period and therefore the value of assets held for sale remaining at 28 September 2019 is £nil.

Revaluation of freehold and long leasehold properties

The freehold and long leasehold properties have been valued at fair value, as at 28 September 2019 using information provided by CBRE, independent chartered surveyors. The valuation was carried out in accordance with the RICS Valuation - Global Standards 2017 which incorporate the International Valuation Standards and the RICS Valuation - Professional Standards UK January 2014 (revised April 2015) (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, taking account of location, quality of the pub restaurant and recent market transactions in the sector.

Sensitivity analysis

Changes in either the fair maintainable trade (FMT) or the multiple could materially impact the valuation of the freehold and long leasehold properties.  The average movement in FMT of revalued properties in the past three years is 1.0%.  It is estimated that, given the multiplier effect, a 1.0% change in the FMT of the freehold or long leasehold properties would generate an approximate £37m movement in their valuation.

Multiples are determined at an individual brand level.  Over the last three years, the weighted average of all brand multiples has moved by an average of 0.1.  It is estimated that a 0.1 change in the multiple, would generate an approximate £43m movement in valuation.

Impairment review of short leasehold and unlicensed properties

Short leasehold and unlicensed properties (comprising land and buildings and fixtures, fittings and equipment) which are not revalued to fair market value, are reviewed for impairment by comparing site value in use calculations to their carrying values. The value in use calculation uses forecast trading performance cash flows, which are discounted by applying a pre-tax discount rate of 7.7% (2018 7.5%).  Any resulting impairment relates to sites with poor trading performance, where the output of the value in use calculation is insufficient to justify their current net book value.

Current year valuations have been incorporated into the consolidated financial statements and the resulting revaluation adjustments have been taken to the revaluation reserve or Group income statement as appropriate.

7. Property, plant and equipment (continued)

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

8. Net debt

8. Net debt (continued)

9. Pensions

The following amounts relating to the Group's defined benefit and defined contribution arrangements have been recognised in the Group income statement and Group statement of comprehensive income:

9. Pensions (continued)

The movement in the fair value of the schemes' assets in the period is as follows:

Changes in the present value of defined benefit obligations are as follows:

10. Provisions

The provision for unavoidable losses on onerous property leases has been set up to cover rental payments and service charge of vacant or loss-making properties. Payments are expected to continue on these properties for periods of 1 to 24 years.

Provisions can be analysed as follows:

a. Releases in the current and prior period primarily relate to improvement in performance of managed properties.

11. Dividends

Declared and paid in the period

There were no dividends declared or paid during the current period.  Dividends declared and paid in the prior period are as follows:

The final dividend of 5.0p per ordinary share declared in relation to the 53 weeks ended 30 September 2017 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 £1m.

12. Financial Statements

The preliminary statement of results was approved by the Board of Directors on 19 November 2019. It does not constitute the Group's statutory consolidated financial statements for the 52 weeks ended 28 September 2019 or for the 52 weeks ended 29 September 2018. The financial information is derived from the statutory consolidated financial statements of the Group for the 52 weeks ended 28 September 2019.

Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the Company's Annual General Meeting. The Company's auditor reported on those accounts; their reports were unqualified; did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under S498(2) or (3) of the Companies Act 2006.

Alternative Performance Measures

The performance of the Group is assessed using a number of Alternative Performance Measures (APMs).

The Group's results are presented both before and after separately disclosed items. Adjusted profitability measures are presented excluding separately disclosed items as we believe this provides both management and investors with useful additional information about the Group's performance and supports a more effective comparison of the Group's trading performance from one period to the next. Adjusted profitability measures are reconciled to unadjusted IFRS results on the face of the income statement with details of separately disclosed items provided in note 3.

The Group's results are also described using other measures that are not defined under IFRS and are therefore considered to be APMs. These APMs are used by management to monitor business performance against both shorter term budgets and forecasts, but also against the Group's longer-term strategic plans.

APMs used to explain and monitor Group performance include:

A. Like-for-like sales

The sales this year compared to the sales in the previous year of all UK managed sites that were trading in the two periods being compared, expressed as a percentage. This widely used industry measure provides better insight into the trading performance than total revenue which is impacted by acquisitions and disposals.

Drink and food sales growth FY 2019

Like-for-like sales for first 7 weeks of FY 2020