MITCHELLS & BUTLERS PLC

LEI no: 213800JHYNDNB1NS2W10

22 May 2024

HALF YEAR RESULTS

(For the 28 weeks ended 13 April 2024)

Highlights

Reported results

Trading results

Balance sheet and cash flow

Phil Urban, Chief Executive, commented:

"Continued like-for-like sales^a outperformance against the market^b coupled with easing inflationary costs and focus on efficiencies has resulted in very strong profit recovery for the period. 

We remain focused on our Ignite programme of initiatives and our successful capital investment programme, driving further cost efficiencies and increased sales. We have confidence that continued focus on effective delivery of our strategic priorities will generate further value from our enviable estate portfolio and customer offers, enabling us to build further momentum throughout the year, with a strong foundation for long term outperformance."

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 CGA Business Tracker. 

There will be a presentation held today at 8:30am accessible by phone on 020 3936 2999, access code: 762969 and at https://www.netroadshow.com/events/login?show=20ca7536&confId=65342. 

The slides will also be available on the website at www.mbplc.com The replay will then be available at https://www.mbplc.com/hy2024/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, Ember Inns and Ego Restaurants. 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 entered the year having built up strong sales momentum, as we outperformed the sector, and with the expectation of margin enhancement as clear evidence emerged that cost inflation was abating. This progress has continued throughout the first half of the year. Sales growth has remained robust, now ahead of cost inflation, with every brand across the portfolio in like for like sales^a growth.  Over the most recent 4 weeks, following Easter in both this year and last, like-for-like sales^a have grown by 5.3%. 

Cost headwinds are anticipated to total c.£55m this financial year, slightly less than previously expected, with increases in labour costs due to the statutory National Living Wage rise mitigated by deflation in our energy costs and slowing food cost inflation. Coupled with a robust sales performance we believe this should allow us to continue to rebuild margins.

We remain mindful of uncertainty and pressures on the consumer. However, as trading continues to be strong, we have confidence that the current year outturn will be at the top end of consensus expectations, with momentum for further progress going forward into FY 2025.

BUSINESS REVIEW

Total sales across the period were £1,396m reflecting 8.9% growth on HY 2023. Like-for-like sales^a increased by 7.0% with strong performances across all brands driven by increases in spend per head. Operating profit of £164m was a marked recovery from last year (HY 2023 £99m).

We made a good start to the year with like-for-like sales^a growth of 7.2% over the first seven weeks. Strong trading over the important festive period led to an acceleration of like-for-like sales^a growth over the latter half of the quarter to 8.2%, resulting in overall like-for-like sales^a growth for the quarter of 7.7%.

Sales remained resilient through the second quarter with strong performances on key trading dates and particular resilience in food sales. Across the quarter, we recorded like-for-like sales^a growth of 6.1%, comprising drink sales growth of 5.3% and food sales growth of 6.6%.

We have continued to consistently outperform the market, as represented by the CGA Business tracker, by over 2% like-for-like sales^a over the first half.

Overall cost inflation started to abate last year, and this has continued through the first half. Whilst the recent level of statutory National Living Wage increases (effective in April each year) has been relatively high at approximately 10% in both the last two years, other costs have generally returned to more normalised levels and energy in particular has been in deflation so far this year. Strong and resilient sales growth through the first half combined with a clear abatement in overall cost inflation has driven a marked increase in both profitability and margins.

Across the sector the challenges the industry has faced have had an unavoidable impact on market supply with a 2.5% net decline in pubs and restaurants in the year to March 2024 and a c.15.0% net decline since the start of the Covid-19 pandemic in March 2020 (CGA Outlet Index April 2024). 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

Our strategic pillars, which have provided the foundation for our ongoing performance, remain consistent. We focus on maximising the value generated from our 83% freehold and long leasehold estate, utilising the diversity of our brand portfolio to grow market share across a broad range of consumer occasions, demographics and locations. Most immediately, our priority is to grow the business back to, and beyond, the levels of profit that we were achieving before Covid-19.

Our Ignite programme of work remains at the core of our long-term value creation, with a range of initiatives underway focused on driving sales and delivering cost efficiencies. We have been enhancing our digital capacity to drive sales, with exciting developments in our marketing allowing us to tailor communications to an individual's preferences based on past behaviour and to unlock loyalty programmes designed to drive frequency of visits. In addition to digital solutions, we continue to run training and skill enhancement workshops, equipping our managers with the skills to drive the sales of their businesses. These help to develop a culture of natural upselling within sites with a focus on attentiveness which will enhance the overall experience for our guests. The benefit of these initiatives is reflected in sustained like-for-like sales^a growth across our brand portfolio as well as continued market outperformance on guest review scores, which averaged 4.5 out of 5 over the first half.

Alongside driving sales, we have a range of initiatives focused on enhancing productivity and efficiency to help mitigate inflationary costs, including improved labour scheduling, cost mitigating procurement strategies and energy consumption reduction. Previous investment in enhanced labour scheduling, which automatically produces rosters to ensure we have the right people on shift at the right times, has delivered improved efficiencies and importantly has ensured enough team members are working at peak times to maximise sales opportunities. We believe there is further benefit to be extracted from effective use of the system and we continue to have a workstream focused on helping managers to maximise the potential value.

After the successful roll out of voltage optimisers which delivered c.6% energy consumption reduction, we are now trialling the use of remote control of our in-site energy systems with a view to obtaining further consumption savings. Remote control of heating, for example, provides a significant opportunity to reduce consumption whilst also relinquishing our managers of one of their many daily tasks, allowing them to focus on guests. Our energy initiatives help us to improve efficiency whilst also supporting our sustainability objectives.  

Our capital programme continues to deliver significant value by improving the competitive position of our pubs and restaurants within their local markets. Over the first half, we have completed 85 investment projects comprising 78 remodels, 4 conversions and 3 acquisitions. We are continuing to see strong performances from our investment projects and remain focused on reestablishing the target 7-year investment cycle which was interrupted by Covid-19.

Many of these initiatives are conceived, managed and delivered through our Ignite delivery programme. This summer we will be looking to initiate the fourth generation of this programme with teams from across our business coming together to challenge the way we work, identify new ideas, work up plans and present them for approval enabling us to maintain the momentum of improvement that has been so important to our recent performance.

In June 2023 we completed the acquisition of the remaining 60% stake in 3Sixty Restaurants Limited, owners of Ego Restaurants, having acquired the initial 40% stake in August 2018. 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. The process of integrating Ego is making good progress, with all sites having now moved onto our systems and processes. During the first half of FY 2024 we are starting to leverage the brand internally and have converted 5 of our sites to the Ego offer, with average sales doubling following conversion. We anticipate conversion of a further 5-10 sites in FY 2025. 

In May 2024 we completed the acquisition of Pesto Restaurants. The brand delivers an Italian Tapas offer across its ten strong estate which, as with the Ego acquisition, helps us to further diversify and premiumise our brand portfolio.  The consideration for the business will be determined over two payments and is partly contingent on its future performance but will be no more than £15m.

PEOPLE

Our people are fundamental to the delivery of great experiences for our guests. We are delighted that engagement scores have continued to improve across all employee groups in the first half of the year, representative of the commitment of our teams to work together to drive the future success of the business.  Pleasingly, turnover has also continued to improve, reaching record lows during the first half of FY 2024 having re-established pre-pandemic levels in FY 2023. The continued progress on our people measures, despite the challenging recruitment environment, is testament to our success in attracting the best talent, enhancing performance through our development programmes and retaining teams through progression opportunities.

Apprenticeships continue to be an integral part of our retention and succession strategy, with evidence that people who complete apprenticeships are more likely to stay with us and to be promoted.  Having delivered 9,448 apprenticeship starts since 2017, our commitment is unabated, and we are on track to deliver 1,750 starts this financial year. We are particularly proud of our culinary apprenticeships which provide a pipeline of talent to a more challenging area for recruitment, as well as a valuable career opportunity with above industry level enrolment for 19-24-year-olds.  We are delighted that our apprentice programmes were recognised at the December 2023 National Apprenticeship awards, winning the award for best large employer.

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

-    Zero operational waste to landfill by 2030

-    50% reduction in food waste by 2030

We remain focused on working towards our sustainability goals, with numerous initiatives underway to support these ambitions. We were delighted to receive Science Based Target initiative validation for our Net Zero plans in January 2024. We have conducted further trials to better understand available strategies to remove gas from operations, including at least one trial electrified kitchen in nearly all of our brands as well as two fully all-electric sites testing alternatives for heating and hot water. The output of these trials will inform the speed of transition over the medium term and enables better understanding of the collaboration needed to overcome challenges in achieving the removal of gas.  We continue to work closely with our suppliers towards our scope 3 emissions reduction plan, as well as collaborating with industry groups such as the Zero Carbon Forum. 

Our sustainability strategy has a strong focus on the positive impact we have on people and communities, and we are proud to partner with Social Bite, a homelessness charity. Of particular importance is the Jobs First programme, helping people back to independence through long-term employment opportunities, which to date has employed 18 people from their academy. We see considerable scope to grow this partnership and enhance our positive social impact over the coming years.

FINANCIAL REVIEW

On a statutory basis, profit before tax for the half year was £108m (HY 2023 £40m), on sales of £1,396m (HY 2023 £1,282m). 

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

At the end of the period, the total estate comprised 1,716 sites in the UK and Germany of which 1,659 are directly managed.

Revenue

Total revenue of £1,396m (HY 2023 £1,282m) reflects a strong period of trading driven by sustained like-for-like sales^a growth across the brand portfolio.

Like-for-like sales^a in the first half increased by 7.0%, comprising an increase in like-for-like food sales^a of 7.7% and of like-for-like drink sales^a of 6.0% driven by strengthening spend per head.  Volumes of food and drink were in marginal decline across the first half following a weaker period after the festive season.

Like-for-like sales^a:

Over the most recent 4 weeks, following Easter in both this year and last, like-for-like sales^a growth was 5.3%.

Separately disclosed items

There were no separately disclosed items recognised in the period. In the prior period £1m was recognised relating to VAT on gaming machine income for the period 2005 to 2012.

Operating profit and margins^a

Adjusted operating profit^a for the first half was £164m (HY 2023 £100m), an increase of 64.0%.

Adjusted operating margin of 11.7% was 3.9ppts higher than last year driven by strong like-for-like sales^a growth, reduced cost inflation and operating efficiencies.

We anticipate an aggregate net cost headwind for this year of slightly less than 3% of our cost base of c.£2.0 billion, including deflation in energy prices for which we have now secured just over 80% of the current year's anticipated requirement. 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.

Interest

Net finance costs of £55m (HY 2023 £58m) for the half year were £3m lower than the same period last year. The net pensions finance charge was £1m (HY 2023 £1m). The charge for the full year is expected to be £1m.

Earnings per share

Basic and adjusted earnings per share were 13.6p (HY 2023 5.4p and adjusted earnings per share^a 5.5p).  

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 598m.

Cash flow

This was a very strong period of cash generation. EBITDA increased sharply as a result of an improved trading performance to £233m, which converted to net cash inflow for the period before bond amortisation of £137m (HY 2023 £10m) helped principally by timing on working capital flows, return of historic pension contributions from escrow and lower capital expenditure.

After all outgoings, including mandatory bond amortisation of £61m (including net impact of currency swaps), cash inflow was £76m (HY 2023 outflow £47m).

Capital expenditure

Capital expenditure of £81m (HY 2023 £98m, including £3m intangible assets) comprises £80m from the purchase of property, plant and equipment and £1m in relation to the purchase of intangible assets.

Maintenance and infrastructure spend included investments towards our sustainability ambitions, such as solar panels and electrified kitchen equipment as well as digital and technological improvements. Investment in these areas continued through the first half, although the cash outflow was lower than the prior year.

During the period we have made good progress in reducing the average cost of refurbishment projects across the estate through a renewed focus on cost re-engineering. Overall, we remain committed to resumption of an average seven-year refurbishment cycle across our estate, although supply chain constraints, notably in securing timely planning consent, continue to prove a challenge.

One of the freehold acquisitions relates to the purchase of a current trading site previously operated as leasehold.

Pensions

Both the main pensions schemes of the group are now substantially de-risked, in third party buy-in, with no further contributions being made. During the year a return of £35m of historic contributions was made to the group from amounts held in escrow with respect to the Main Plan. A further return of up to £12m, relating to the Executive Plan, is anticipated in the next financial year. 

One further scheme, remains. This is closed and unfunded and has estimated liabilities of £23m.

Net debt and facilities

On the back of a strong cash performance, net debt^a at the period end reduced to £1,486m, comprised of £1,037m non-lease liabilities and lease liabilities of £449m (HY 2023 £1,660m comprised of £1,193m non-lease liabilities and lease liabilities of £467m). This represents a multiple of 3.6 times EBITDA over the last year including lease liabilities (2.5 times excluding these liabilities).

In addition to the securitisation the Group has a £200 million unsecured facility, expiring in July 2026. Further details of existing debt arrangements and an analysis of net debt 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. Accordingly, the financial statements have been prepared on the going concern basis. 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 21 May 2024 and is signed on its behalf by:

Tim Jones

Chief Financial Officer

21 May 2024

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 CGA Business Tracker.