MITCHELLS & BUTLERS PLC

LEI no: 213800JHYNDNB1NS2W10

18 May 2022

HALF YEAR RESULTS

(For the 28 weeks ended 9 April 2022)

Highlights

Reported results

Trading results

Balance sheet and cash flow

Phil Urban, Chief Executive, commented:

"We are encouraged by the improvement in sales trajectory through the first half of the year, having made progress in each of our markets, with our food-led businesses continuing to lead the way.

The trading environment remains difficult.  Cost headwinds present a significant challenge to the industry, particularly those costs related to utilities, wages and food. In light of this, our teams have refocused their efforts on driving further efficiency and productivity gains through our Ignite programme.  In parallel, we are pushing forward with our capital investment plan which we are pleased to see delivering strong sales uplifts.

The fundamental strengths of the business remain, and we are well positioned to continue on our trajectory of recovery following the pandemic."

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.

All sales measures are compared to FY 2019, being the last full year pre-Covid-19.

There will be a presentation held today at 9:30am accessible by phone on 020 3936 2999, access code: 040690 and www.incommuk.com/customers/online  access code: 040690. The slides will also be available on the website at www.mbplc.com  The replay will then be available at www.mbplc.com/hy2022/analystspresentation

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 Collection 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.

CURRENT TRADING AND OUTLOOK

We have been encouraged with the continued recovery in sales since our last update, with like-for-like sales^a  growth in the second quarter of 3.8%, resulting in overall like-for-like sales^a growth of 1.0% in the first half despite the adverse impact of Omicron over the important festive period.

At the end of the first half the rate of VAT on food and non-alcoholic drink reverted to its full rate of 20%. On an underlying basis, excluding the impact of this rate change, sales strengthened further in the five weeks after the end of the period to 2.2%. 

Cost inflation headwinds present a major challenge to the hospitality sector as a whole, most notably in utilities, wages and food.  Cost headwinds, based on FY 2019 and on a cost base of £1.8bn, are expected to be in the region of 11.5% for the current year.  Equivalent to 3.7% on an annualised basis across the three year period.  Next year, current assumptions indicate an increase of c.6% on a year-on-year basis but high volatility in energy markets could have a material impact.  Through accelerated and focused delivery of a new set of Ignite initiatives covering sales, productivity and cost reduction, alongside tight control of the business, we are working hard to mitigate these costs as far as possible.  However, there will inevitably be a residual margin impact in the short to medium term.

Whilst the trading environment remains challenging and uncertain, with increases in the cost of living  putting continued pressure on consumers, we are encouraged by the steady recovery in sales that we have seen since reopening last year.  We believe that the strength and diversity of our portfolio of brands, continued focus on our capital programme and a new wave of Ignite initiatives will position us well to gain further market share.

BUSINESS REVIEW

Total sales across the period were £1,159m reflecting a 2.2% decline on HY 2019, the last period not impacted by Covid-19 related closures, driven mainly by site disposals since FY 2019.  Operating profit of £121m (HY 2021 £132m loss) was generated, with adjusted operating profit^a of £120m reflecting the strong return to profitability the business made when Covid-19 restrictions were lifted. 

The first quarter was once again impacted by Covid-19, with the spread of the Omicron variant resulting in renewed calls for caution in socialising over the important festive period.  Thereafter, once it was confirmed that the symptoms of Omicron were generally mild, consumer confidence was boosted and like-for-like sales^a recovered to growth of 3.8% over the second quarter.

Food sales continue to outperform drink with like-for-like sales^a growth of 6.9% over the first half, and with premium brands continuing to perform well, helped by the reduced rate of VAT.  We have more recently observed an encouraging trend of recovery in city sites, with like-for-like sales^a growth of 1.1% during the second quarter, as people begin to return to offices, albeit trading in some areas of London, such as The City, still remains relatively subdued.  Drink sales continued to be challenged across the sector and like-for-like sales^a declined by 6.9% in the first half, with suburban locations seeing the largest declines.

In the year to date, the Peach tracker has recorded like-for-like market growth of 0.7%, with growth increasing in recent months. Growth was reported to be led by restaurants, with a strengthening trend in bars, driven by the younger, high tempo and experiential market, with London continuing to lag the market as a whole.  Against the Peach tracker we continue to significantly outperform in the restaurants and pub restaurant sectors.  However, in this period the portion of our estate included in the pub sector has underperformed driven by relatively lower exposure to young markets.

The cost environment has worsened since our last announcement, with the war in Ukraine driving up energy and food prices in particular.  At the current time we have bought c.80% of this year's total energy requirement and c.10% of next year's.  We continue to work hard to offset as much of these additional costs as possible, with our Ignite programme continuing to be an effective method through which to do so.  However, the industry as a whole will undoubtedly feel the impact of increased costs in the short to medium term. 

The pandemic resulted in consumer trends such as home delivery being accelerated and we have expanded our offer to benefit from this growing market.  We now have over 1,100 sites live with Just Eat, Uber Eats and Deliveroo and we offer takeaway and click and collect orders directly to guests across a number of brands. Annual delivery and takeaway sales are estimated to rise to c.£45m this financial year. 

The unprecedented challenges the industry has faced have had an unavoidable impact on market supply with a 6.4% decline in pubs and restaurants since March 2020 (CGA Outlet Index).  Restaurants have been hit harder by closures: the number of outlets has declined by 9.3%, with independent and tenanted businesses making up 69% of net closures.  We believe that the platform of financial stability provided through the equity raise leaves us well placed to benefit from these changes in the competitive landscape.

OUR STRATEGIC PRIORITIES

The fundamental strengths of our business remain and ensure that we are well-positioned for the future.  We have an 82% freehold estate, with recognised and diversified brands across a broad range of consumer occasions, demographics and locations, and an experienced and proven management team with the focus to build on the momentum previously gained.  In the short to medium term, our priority is to continue to successfully trade the business in this challenging environment, ensuring the safety of our team members and guests, managing cost inflation and growing the business back to, and beyond, the levels of trade that we were enjoying before Covid-19.  

Given the current market dynamics we have an opportunity to win market share through our pricing strategy and specifically by continuing to provide value for money to our guests.  We have taken the decision to not pass through the full extent of the cost inflation impacting the business and to instead assess the pricing movement across the market.  We will assess market prices more frequently and respond depending on our analysis of market movements.  The benefit of our stable financial position, our ability to continue to invest in our capital programme and the mitigation generated through Ignite makes this market acquisition strategy possible.

Our Ignite programme of work remains at the core of our long-term value creation plans and we have now reopened our project office and are working on over 40 fresh initiatives, some of which are already being implemented in the business.  We are focusing on initiatives which enhance efficiency and productivity, helping to offset some of the headwinds in areas such as automatic product ordering, enhanced labour scheduling, cost mitigating procurement strategies and energy consumption reduction.  We remain confident in our ability to deliver long-term and sustained efficiencies and business improvements through the existing Ignite programme.

We remain committed to accelerating our digital strategy, an area which became increasingly important to guests during the pandemic resulting in changes in behaviour which are here to stay.  Our strategy focuses on building the correct organisational capabilities to allow for the quick activation of new digital services as consumer behaviours change, allowing us to be at the forefront of digital advances in the sector.  We have made significant progress in our digital services in recent years, for example our digital order at table facility, our streamlined online booking experience, and the development of our own channel delivery capability. 

We have also resumed our capital programme which has been proven to deliver value by improving the competitive position of our pubs and restaurants within their local markets.  We are committed to re-establishing a 6-7 year investment cycle and, whilst short-term supply issues in terms of material procurement and contractor availability may affect progress in the current financial year, this continues to be a key focus for the business.  In the year to date we have completed 63 investment projects including 57 remodels, three conversions and the acquisition of the freehold of three leasehold sites.  We are continuing to see strong performance from our investment projects with an average sales uplift of nearly 30% from projects completed since FY 2019.

SUSTAINABILITY

We are committed to reducing the environmental impact of our business and the Board has recently agreed our new, even more challenging targets, to drive momentum in this area.  We have committed to:

-      Net Zero emissions by 2040; including scope 1, 2 and 3 emissions, we will submit our roadmap to net zero for Science Based Target Initiative approval when applications reopen next calendar year.   We are founding members of the Zero Carbon Forum and are committed to playing our part in decarbonising the hospitality industry as a whole.

-      Zero operational waste to landfill by 2030; we have made great progress in this area in recent years and currently divert 96% operational waste away from landfill.  We have underpinned this ambition with a recycling rate target of 80% over the same period.

-      50% reduction in food waste by 2030; aligned with the UN Sustainable Development Goals we will halve food waste in our supply chain and in sites by 2030.

We have a number of initiatives underway to support these ambitions including formulating menus with lower-emission dishes and trialling the attraction of these dishes to guests.  We are developing a transition plan to remove gas from our businesses, electrification of our kitchens and finding alternative heating solutions to gas boilers.  We also have an established kitchen refurbishment programme which has saved 941 pieces of kitchen equipment from going to landfill since its inception.

Our sustainability strategy has a strong focus on the positive impact we have on people and communities. For example, we are committed to enhancing the wellbeing of our own people, and we have an established nutritional strategy aiming to provide balanced choices and information to guests.  We have also developed charitable partnerships with Shelter and Social Bite through which we are committed to tackling the growing issue of homelessness in the UK.

FINANCIAL REVIEW

On a statutory basis, profit before tax for the half year was £57m (HY 2021 loss £200m), on sales of £1,159m (HY 2021 £219m). 

The Group Income Statement discloses adjusted profit and earnings per share 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 1,726 sites in the UK and Germany of which 1,641 are directly managed.

Revenue

Total revenue of £1,159m (HY 2021 £219m) reflects a period of continuous trading, albeit disrupted by the Omicron variant, against last year which included substantial closures and restrictions relating to Covid-19.  Sales figures include the benefit of the temporary reduction in the rate of VAT on food and non-alcoholic drink sales worth £43m in the period (HY 2021 £18m).  The full VAT rate resumed in the last week of the period.

Sales comparisons below are on a three-year basis, to the same period in FY 2019, being the last full pre Covid-19 financial year.

Like-for-like sales^a in the first half increased by 1.0% against FY 2019, comprising an increase in like-for-like food sales^a of 6.9% and a decrease of like-for-like drink sales^a of (6.9)%.

Like-for-like sales^a growth/(decline) against FY19:

We made a strong start to the year with like-for-like sales growth of 2.7% over the first eight weeks. This encouraging performance continued until early December when concerns first arose around the emergence of the new Covid variant, Omicron, leading to calls for further caution in socialising such that, over the seven weeks to early January, like-for-like sales^a declined by 6.0% resulting in a decline of 1.5% over the first quarter. 

Sales strengthened in the second quarter, with the news that the Omicron symptoms were mild, with like-for-like sales^a growth of 3.8%, bringing first half growth to 1.0%. 

Volumes remain in decline of between 10% to 15%, with sales being driven by premiumisation and increases in spend per head. Sales have remained stronger in food-led brands, particularly at the more premium end of the market.

At the end of the first half, the rate of VAT on food and non-alcoholic drinks returned to its full rate of 20%.  On an underlying basis, excluding the impact of this rate change, sales continued to strengthen in the five weeks since the end of the period, to 2.2%.

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.  

There was a £1m net profit arising on property disposals in the period.

Operating profit and margins^a

Adjusted operating profit^a for the first half was £120m against an adjusted operating loss^a of £124m in HY 2021, with HY 2021 significantly impacted by Covid-19 closures and restrictions.

Statutory operating margin of 10.4% was 70.7ppts higher than last year but remains below pre-Covid levels achieved in FY 2019.

Whilst the outlook remains highly uncertain, inflationary cost headwinds have been, and are anticipated to remain, higher than pre-covid levels due particularly to increases in statutory wage rates, food costs and persistent high prices in the energy markets.  As outlined in the outlook statement, we now expect these to continue into the medium term.

Interest

Net finance costs of £63m for the half year were £4m lower than the same period last year, with annual amortisation reducing the value of securitised debt.

The net pensions finance charge was £1m (HY 2021 £1m). The charge for the full year is expected to be £2m.

Earnings per share

Basic earnings per share, after the separately disclosed items described above, were 7.7p (HY 2021 loss (33.0)p, adjusted earnings per share^a were 7.6p (HY 2021 loss (31.8p).

The basic weighted average number of shares in the period was 596m and the total number of shares issued at the balance sheet date was 597m.

Cash flow

The business generated £191m of EBITDA before movements in the valuation of the property portfolio. 

In HY 2021, the working capital outflow reflected significant periods of closure with continued supplier, landlord and HMRC commitments due. This has now normalised.  

Capital expenditure has increased in HY 2022 as the capital programme resumed following reduced activity in the prior period due to the cash management strategy in response to Covid-19.

In HY 2021, share issue proceeds reflect the equity raise of £351m less £9m transaction fees and £1m purchase of own shares.

After all outgoings including mandatory bond amortisation, cash outflow was £(32)m (HY 2021 outflow £(16)m).

Capital expenditure

Capital expenditure of £58m (HY 2021 £16m, including £1m intangible assets) comprises £56m from the purchase of property, plant and equipment and £2m in relation to the purchase of intangible assets. Of the £56m spend, £39m relates to the completion of acquisitions, conversions and remodels with the balance being essential maintenance and infrastructure.

Capital expenditure was significantly below historic levels in the comparative year HY 2021 as part of the cash management strategy in response to Covid-19.

The three acquisitions represent the purchase of freehold sites previously held as leasehold.

Pensions

The Group continues to make pension deficit payments as agreed as part of the triennial pension's valuation with the schemes' Trustees at 31 March 2019, which showed an actuarial deficit of £293m.  At the time it was agreed that the deficit would continue to be funded by cash contributions of c.£45m per annum indexed with RPI from 2016 to 2023. In 2024 an additional payment of £13m will be made into escrow, should such further funding be required at that time.

During the period, the trustees of the M&B Executive Pension Plan (MABEPP), working closely with the Company, have successfully completed a full scheme buy-in with Legal and General Assurance Society Limited. This transaction eliminates substantially all remaining risk in this scheme within the level of existing committed contributions. The MABEPP makes up approximately 20% of the Company's total pension obligations, with the vast majority of the balance being in the M&B Pension Plan (MABPP) for which the next triennial valuation will be as at 31st March 2022.

Net debt and facilities

Following the adoption of IFRS16 in FY 2020, leases are now included in net debt. Net debt at the period end was £1,736m, comprised of £1,253m non-lease liabilities and lease liabilities of £483m (HY 2021 £2,013m comprised of £1,472m non-lease liabilities and lease liabilities of £541m).

On 14 February 2021, the Group reached agreement with its three relationship banks for a new £150 million 3-year unsecured facility. In addition, extended waivers and then amendments until January 2023 were agreed within the Group securitisation to provide flexibility and stability to manage the secured financing structure as the business rebuilt following reopening. Without these extensions certain breaches would have resulted due to the impact of Covid-19 and the measures taken to stem the spread of the virus. The details of these arrangements and an analysis of net debt can be found in Notes 1 and 11 to the financial statements. 

In securing these valuable amendments the Group agreed not to pay an external dividend, undertake any share buy-backs or repurchase bond debt until January 2023 at the earliest.

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

Going Concern

After considering the forecasts, sensitivities and mitigating actions available to management and having regard to risks and uncertainties, the Directors have a reasonable expectation that the Group has adequate resources to continue to operate within its borrowing facilities and covenants for a period of at least 12 months from the date of signing the financial statements.  However, given the prevailing high level of unpredictability and uncertainty concerning both sales and cost inflation, the Directors have concluded that a material uncertainty exists which may cast significant doubt over the Group's ability to trade as a going concern, in which case it may be unable to realise its assets and discharge its liabilities in the normal course of business.  

Accordingly, the financial statements continue to be prepared on the going concern basis but with material uncertainty arising from the impact of macro-economic factors.

Full details are included in Note 1.

Director's responsibility statement

We confirm that to the best of our knowledge:

This responsibility statement was approved by the Board of Directors on 17 May 2022 and is signed on its behalf by:

Tim Jones

Chief Financial Officer

17 May 2022

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.

GROUP CONDENSED INCOME STATEMENT                                  

for the 28 weeks ended 9 April 2022

All results relate to continuing operations.