MITCHELLS & BUTLERS PLC

LEI no: 213800JHYNDNB1NS2W10

17 May 2023

HALF YEAR RESULTS

(For the 28 weeks ended 8 April 2023)

Highlights

Reported results

Trading results

Balance sheet and cash flow

Phil Urban, Chief Executive, commented:

"We are pleased to report a strong first half performance delivering continued like-for-like sales^a growth and outperformance^b against the market.

The trading environment for the hospitality sector remains challenging with inflationary costs putting pressure both on the industry's margins and disposable income of our guests. However, we are encouraged by the resilience of trade to date, including the most recent six weeks at 8.9% like-for-like sales^a growth, and also by early signs of the medium-term cost outlook improving.

We remain focused on our Ignite programme of initiatives and our successful capital investment programme, driving cost efficiencies and increased sales. Combined with our diverse portfolio of established brands, value proposition, enviable estate locations and talented people, we believe we are well positioned to continue to outperform the sector^b.

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 held today at 9:00am accessible by phone on 020 3936 2999, access code: 388030 and at https://www.netroadshow.com/events/login?show=b62bae44&confId=50883 The slides will also be available on the website at www.mbplc.com The replay will then be available at http://www.mbplc.com/hy2023/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 by the strength of trading throughout the first half of the year with the return to office working continuing, city centres becoming stronger, tourist numbers recovering and guests across the country continuing to enjoy the hospitality sector. This has continued since the period end with trading over the past six weeks, including the benefit of the Easter weekend in both years and all at full rates of VAT, delivering like-for-like sales^a growth of 8.9%. This gives us optimism for the future, although we continue to remain mindful of the cost-of-living challenge facing our guests.

There are indications that cost inflation headwinds across the supply chain are starting to abate, although they continue to present a challenge in the near-term. Energy prices have fallen back materially from earlier market highs and early evidence suggests that cost increases in other areas, notably food, will soon start to slow. Our cost guidance for the current year remains in line with that previously announced as we anticipate an inflationary cost headwind across our c.£1.8 billion cost base at the lower end of the 10-12% range before mitigation. We continue to work hard to mitigate as many of these pressures as we can through both driving sales growth and identifying and implementing cost efficiencies. This should allow margins to start to rebuild towards pre-covid levels.

Therefore, whilst the environment remains challenging, we are pleased with the momentum the business carries into the second half of the year. This provides confidence that we are tracking ahead of management's previous expectations in both the short and the medium term.

BUSINESS REVIEW

Total sales across the period were £1,282m reflecting 10.6% growth on HY 2022, supported by increases in both volume and spend per head. Like-for-like sales^a increased by 8.5%. Operating profit of £99m (HY 2022 £121m) was generated, with adjusted operating profit^a of £100m. Prior year figures include £53m of government support initiatives, including £43m benefit from the temporary reduction in the rate of VAT on food and non-alcoholic drink sales.

We made a strong start to the year with like-for-like sales^a growth of 6.5% over the first ten weeks, primarily driven by drink sales growth. As expected, growth significantly increased in the final five weeks of the first quarter due principally to last year being impacted by the emergence of the Omicron variant which resulted in a downturn in activity across much of the festive season. Like-for-like sales^a for the quarter were up 10.4% against FY 2022.

Sales remained resilient through the second quarter with strong performances on key trading dates and from our drink-led, city centre pubs, especially in London, that are benefitting from a further return of office working and tourists visiting. Across the quarter, we recorded like-for-like sales^a growth of 6.4%, comprising drink sales growth of 9.9% and food sales growth of 5.2%.

Against FY 2019, like-for-sales^a grew 9.7% over the first half, with growth driven by spend-per-head as volumes remain below pre-Covid levels.

Comparing our sales performance versus the wider market, we are currently outperforming the Coffer Peach tracker by between 2-3% on like-for-like sales^a each month.

The uncertainty and cost challenges the industry has faced has had an unavoidable impact on market supply with a 4.3% net decline in pubs and restaurants in the year to March 2023 and a 12.0% net decline since the start of the Covid-19 pandemic in March 2020 (CGA Outlet Index April 2023). Independent and tenanted businesses have made up the substantial majority of the net closures. Given our strong estate and portfolio of brands, we believe that we are well placed to continue to benefit from these changes in the competitive landscape.

OUR STRATEGIC PRIORITIES

The fundamental strengths of our business provide a strong platform for the future.  We have an 83% freehold and long leasehold estate, with recognised and diversified brands across a broad range of consumer occasions, demographics and locations, and an experienced and proven management team. We remain focused on the strategic pillars which formed the foundations of our strong performance both before and after the pandemic, and which are equally relevant to the current trading environment.  Our priority is to grow the business back to, and beyond, the levels of profit that we were achieving before Covid-19 and the war in Ukraine.

We provide value for money to our guests, working hard to protect entry level items where we can and introducing more premium trade-up options. We regularly assess prices across the market and respond accordingly. The benefit of our size and scale, our ability to continue to invest in our capital programme and the mitigation generated through Ignite allow us to use pricing tactically and to remain competitive. This, combined with market-beating guest net sentiment scores, leaves us well-positioned for further market share gains. 

Our Ignite programme of work remains at the core of our long-term value creation plans and we are working on a large number of fresh initiatives, alongside those already implemented in the business.  We continue to focus particularly on margin additive initiatives which improve efficiency and productivity, such as through better labour scheduling, cost-mitigating procurement strategies and energy consumption reduction.

Following successful trials, the auto-scheduling project has now been fully rolled out across the estate. This assists our site managers by producing automatically generated team member rosters to help ensure we have the right people on shift at the right time, to drive sales at peak times and reduce costs at quieter times. Based on encouraging early results, we believe there is significant further opportunity over the second half and into FY 2024.

We have now completed the installation of voltage optimisers into the majority of the estate and we have achieved c.6% electricity consumption reductions as a result. Our trained energy ambassadors have completed another round of energy audits and further trials of internet-connected control devices to lower electricity and gas consumption have begun.

Alongside efficiency improvements, we have a number of projects focused on sales growth and one of the most exciting new Ignite workstreams launched in the first half is focusing on further driving a 'sales and volume culture' across the organisation, including each site, district and brand targeting select products each quarter, to maximise incremental sales. We remain confident in our ability to deliver long-term sustained business improvements and efficiencies through the Ignite programme.

Success in hospitality is inextricably linked to customer satisfaction, with the correlation between superior guest review scores and stronger like-for-like sales irrefutable. Strengthening these scores remains a key focus throughout the organisation, from frontline team members through to the Board. Scores over recent months have been encouraging, especially in the context of the cost pressures our guests are facing which means, more than ever, every guest experience has to delight. We have risen to that challenge, renewing our guest focus with Ignite projects such as Guest Obsessed, where functional experts support our frontline teams with targeted training. We have brands now regularly scoring 4.5 or above out of 5.0 and, as a collective, we are outperforming our defined market on guest satisfaction.

We are continuing to invest in our digital strategy which focuses on building organisational capabilities to allow for quick activation of new digital services as consumer behaviours change, allowing us to be at or near the forefront of advances in the sector. In recent months we have completed the deployment of automated stock replenishment across our businesses, whilst launching a prep-and-par system which supports team members in identifying what food to prepare each day based on site specific trading patterns. Within the e-commerce arena, a variety of enhancements have been made to enrich our online booking and ordering services, for example a new Innkeepers Collection booking website, the acceptance of new payment methods on our order-at-table platform and a streamlined app registration experience within Browns. We remain committed to progressing projects that strengthen data-driven decision-making across the organisation.

Our capital programme is building and delivering significant value by improving the competitive position of our pubs and restaurants within their local markets. Over the first half, we have completed 90 investment projects comprising 81 remodels, 3 conversions and 6 acquisitions. We are continuing to see strong performances from our investment projects.  The conversion programme includes the trial of Browns in suburbia, stretching the brand beyond its usual high street location.  The first trial site opened in August 2022 and the second opened in December 2022, with both sites performing strongly. We are also keen to take advantage of new opportunities as they arise including opening a new Browns restaurant within a Marriott hotel in Cardiff in February 2023 and a new Innkeepers Collection lodge and Miller & Carter in Sheffield in April 2023. Arrowsmiths, our new competitive socialising darts concept, is now established within two O'Neill's sites, Solihull and Watford, and providing a strong return from secondary space.

In August 2018, we acquired an initial 40% stake in 3Sixty Restaurants Limited, owners of Ego Restaurants, and we will acquire the remaining 60% in June 2023.  Ego is a collection of Mediterranean inspired pubs and restaurants where guests can enjoy freshly cooked food, cocktails, cask ales and wine from across the continent.  We have built a good rapport with the Ego team, grown our understanding of their business and witnessed their impressive trading record.  Ego currently has 26 sites, including 16 that are leased from Mitchells & Butlers, and c.1,000 employees. We currently foresee scope for c.20-30 conversions using the Ego format over the next three to five years.

PEOPLE

Our people are fundamental to the delivery of great experiences for our guests. The recruitment challenges facing many industries are well-documented and the hospitality industry as a whole has been disproportionally impacted by labour shortages in recent years. Our overall employee numbers recovered to pre-pandemic levels towards the end of FY 2022 and have stabilised through the first half of the current year. Whilst the recruitment landscape remains challenging, in particular for kitchen teams, the market is returning to a more normal pattern with greater numbers of vacancy applications being received. Team turnover has now started to trend downwards and, whilst still well above pre-pandemic levels, this is encouraging as stable teams are crucial to the delivery of high quality guest experiences. It is also very encouraging to see that employee engagement scores remain at very high levels. Growing and developing our own talent internally has never been more important and we have had over 2,500 apprenticeship starts over the last 12 months. We are delighted that our apprentice programmes were recognised at the 2023 learning excellence awards winning the retail, hospitality, sports and leisure category.

SUSTAINABILITY

We are committed to reducing the environmental impact of our business and the Board has challenging targets to drive continued momentum in this area.  We have committed to:

-    Net Zero emissions by 2040, including scope 1, 2 and 3 emissions; we submitted our roadmap to net zero for Science Based Target Initiative approval in March 2023. 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 strong progress in this area in recent years and currently divert 97% of 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.  Food emissions are the largest contributor to our carbon footprint and we are collaborating with suppliers to reduce product specific emissions and formulate menus with lower-emission dishes, as seen in All Bar One and Harvester. We are developing a transition plan to remove gas from our businesses through the electrification of our kitchens, continue to examine alternative heating solutions such as ground source heat pumps and trials of onsite renewable energy generation using solar panels begin in the second half of this year. We have reduced electricity consumption through the installation of voltage optimisers across the majority of the estate in the first half of this year, and we also have an established kitchen refurbishment programme which has saved over 1,400 pieces of kitchen equipment from going to landfill since its inception.

Our sustainability strategy also has a strong focus on the positive impact we have on people and communities. 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 work with Fareshare and Too Good To Go, through whom we have now saved over one million meals from going to waste, and we also have charitable partnerships with Shelter and Social Bite through which we are helping to tackle the issue of homelessness in the UK.

Mitchells and Butlers was delighted to be voted 'Best Sustainable Pub Company' at the 2023 Publican Awards, endorsing the good progress we have made in this area.

FINANCIAL REVIEW

On a statutory basis, profit before tax for the half year was £40m (HY 2022 £57m), on sales of £1,282m (HY 2022 £1,159m). 

The Group Income Statement discloses adjusted profit and earnings per share information that excludes separately disclosed items to allow a more effective comparison of the Group's trading performance from one period to the next.  Separately disclosed items are those which are separately identified by virtue of their size or nature.

At the end of the period, the total estate comprised 1,717 sites in the UK and Germany of which 1,645 are directly managed.

Revenue

Total revenue of £1,282m (HY 2022 £1,159m) reflects a strong period of trading, albeit somewhat disrupted by industrial action on national transport systems. As expected, the first half was boosted by the comparative period last year being adversely impacted by the emergence of the Omicron variant which resulted in a downturn in activity across much of the festive season. However, prior year figures also include government support, as detailed later in this statement.

Sales comparisons unless otherwise stated are to the same period in FY 2022.

Like-for-like sales^a in the first half increased by 8.5%, comprising an increase in like-for-like food sales^a of 5.8% and of like-for-like drink sales^a of 12.8%, with both food and drink volumes in growth.

Like-for-like sales^a:

Against FY 2019, like-for-like sales^a growth across the first half was 9.7%.

The strength of recent trading is best represented across the six weeks from 2 April, including the Easter weekend in both years and all with full rates of VAT in force, during which like-for-like sales grew by 8.9%. For purely the five weeks since the period end, like-for-like sales^a were lower at 6.9%, reflecting the mismatch of Easter between the two years.

Separately disclosed items

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

There was a £1m separately disclosed item in the period. £19m has now been received from HMRC relating to VAT on gaming machine income for the period 2005 to 2012. An estimate of £20m for the amount receivable was previously recognised in the 52 weeks ended 25 September 2021. 

Operating profit and margins^a

Adjusted operating profit^a for the first half was £100m (HY 2022 £120m), a decrease of 16.7% on HY 2022.

Statutory operating margin of 7.7% was 2.7ppts lower than last year.

Despite a strong sales performance, operating profit and margin were lower overall than HY 2022 due primarily to government support in the prior year and high cost inflation across the supply chain, particularly in the areas of energy, wages and food costs.

We now anticipate an aggregate cost headwind for this year to be at the lower end of the 10-12% range previously quoted on our cost base of c.£1.8 billion. We are working very hard to mitigate as much of the impact of these cost increases as we can, both through driving sales growth and through identifying and implementing further cost efficiencies, all executed under our Ignite programme of work.

Government Support

Following the outbreak of the Covid-19 global pandemic in early 2020 and the subsequent enforced closure of the business, we received a number of different areas of support from both local and central Government in the UK and in Germany. Over the comparative period in HY 2022, Government support of £53m was received. Principally, the Group benefitted from a reduction in the rate of VAT from 20% to 5% on non-alcoholic sales which was introduced by the UK Government on 15 July 2020 and continued until 30 September 2021.  Following this a rate of 12.5% applied for the subsequent six months until 31 March 2022.  The estimated impact of this on food and drink revenue in the comparative period in HY 2022 is £43m. Other support comprised Local Authority Grants £3m, business rates relief £5m, grants for loss of profits in Germany £1m and apprenticeship incentives £1m.

Interest

Net finance costs of £58m (HY 2022 £63m) for the half year were £5m lower than the same period last year, with annual amortisation reducing the value of securitised debt.

The net pensions finance charge was £1m (HY 2022 £1m). The charge for the full year is expected to be £3m.

Earnings per share

Basic earnings per share, after the separately disclosed items described above, were 5.4p (HY 2022 7.7p), adjusted earnings per share^a were 5.5p (HY 2022 7.6p).

The basic weighted average number of shares in the period was 595m and the total number of shares issued at the balance sheet date was 597m.

Cash flow

The business generated £168m of EBITDA before movements in the valuation of the property portfolio. 

The working capital movement of £27m in the first half was driven primarily by the following. Firstly, there was a £20m reduction in receivables due to the receipt of cash in relation to an historic gaming machine VAT claim with HMRC. This was partially offset by £13m of main plan pension payments now paid into blocked escrow accounts and recognised within other receivables. Secondly, there was a £15m increase in the year-on-year VAT liability as a result of the reduced rate of VAT of 12.5% on non-alcoholic sales in the prior year, which returned to 20% in April 2022.  

Capital expenditure was £40m higher than prior year (HY 2022 £58m). Supply issues in terms of material procurement, contractor availability and the timing on granting of planning consent have eased somewhat although they remain a limiting factor.

Before mandatory bond amortisation, cash inflow was £10m (HY 2022 inflow £22m). After mandatory bond amortisation of £57m (including net impact of currency swaps), cash outflow was £47m (HY 2022 outflow £32m).

Capital expenditure

Capital expenditure of £98m (HY 2022 £58m, including £2m intangible assets) comprises £95m from the purchase of property, plant and equipment and £3m in relation to the purchase of intangible assets. Of the £95m spend, £58m relates to the completion of acquisitions, conversions and remodels with the balance being essential maintenance and infrastructure.

The four freehold acquisitions comprise the purchase of two sites previously held as leasehold and two new sites.

As a result of supply chain issues noted above, we anticipate capital expenditure for the current year to be slightly lower than previously guided, at c.£175m.

Pensions

As previously announced, the latest triennial valuation of the pension schemes, as at 31 March 2022, was completed earlier in the year with an improvement in the combined actuarial funding position to a marginal surplus (FY 2019: £293m combined deficit). All future contributions to be made by the company under the agreed recovery plan to September 2023 are now being paid into blocked escrow accounts.

Net debt and facilities

Following the adoption of IFRS 16 in FY 2020, leases are now included in net debt^a. Net debt^a at the period end was £1,660m, comprised of £1,193m non-lease liabilities and lease liabilities of £467m (HY 2022 £1,736m comprised of £1,253m non-lease liabilities and lease liabilities of £483m).

In addition to the securitisation, the Group has a £150 million unsecured facility expiring in February 2024.  Further details of existing debt arrangements and an analysis of net debt^a can be found in Note 10 to the financial statements and at https://www.mbplc.com/infocentre/debtinformation/. 

Going Concern

After considering 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, particularly given the requirement to refinance existing unsecured facilities which expire in February 2024, but also due to the prevailing uncertainty concerning 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 on the Group's compliance with financial covenants and its liquidity. 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 16 May 2023 and is signed on its behalf by:

Tim Jones

Chief Financial Officer

16 May 2023

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. 

GROUP CONDENSED INCOME STATEMENT                                   

for the 28 weeks ended 8 April 2023

All results relate to continuing operations.