Mitchells & Butlers Regulatory News (MAB)

1.

Company Annual Report and Accounts 2018

2.

Notice of the 2019 Annual General Meeting

Risk category and description

Controls/mitigating activities

1.Market risks

Declining sales performance

This risk falls into three main categories:

Sales: There is a risk that declining sales,

concerns around consumer confidence,

increased personal debt levels, squeezes

on disposable income and rising inflation

individually, together or in combinations,

may adversely affect our market share and

profitability, reducing headroom against

securitisation tests.

Consumer and market insight:

If Mitchells & Butlers fails to manage and

develop its existing (and new) brands in

line with consumer needs and market trends

due to failure to obtain or use sufficient

insight in a timely manner, this may lead

to a decline in revenues and profits.

Pricing and market changes: If price

changes are not intelligently applied due to

a lack of appreciation of market sensitivities

and elasticities, this may result in decreased

revenue and profit particularly in relation

to exceptional dry/hot summer weather

and extreme cold/snow conditions.

Right team and structure in place. Brand alignment ensures the right research gets done and is acted on.

Daily, weekly and periodic sales reporting, monitoring and scrutiny activity is in place.

Our Eat Drink Share panel provides robust, quick and cost-effective research. This is our own panel of 27,000 Mitchells & Butlers guests whom we can use for research purposes for quick and cost-effective insights.

Primary research in partnership with brand/category teams.

Working with suppliers to tap into their research.

Each brand has its own pricing strategy.

Price promotions are in line with the agreed strategy.

Sales training for Management.

Consumer/insight-led innovation process and development

for new brands.

Reduce guest complaints by improving the local management of social media responses (e.g. TripAdvisor responses).

Increased digital marketing activity including new loyalty apps.

Increased activity from takeaway and delivery offerings.

Online guest satisfaction survey to collect guest feedback. This feedback, together with the results of research studies, is monitored and evaluated by a dedicated guest insight team to ensure that the relevance to guests of the Company's brands is maintained.

Cost of goods - price increases

Food: The price of goods increases

due to changes in demand, legislation,

exchange rates and/or production costs

and uncertainty of supply, leading to

decreased profits.

Drinks: The price of drinks goods

increases due to changes in demand,

legislation, exchange rates and production

costs, leading to decreased profits.

Goods not for resale: Increases in the price

of goods not for resale and utilities costs as

a result of increases in global demand and

uncertainty of supply in producing nations

can have a significant impact on the cost

base, consequently impacting margins.

Brexit: Given that in FY 2019, the

transition period for the UK to exit from

the EU will commence (noting that c.30%

of food spend is sourced from EU countries),

the overall risk and impact of additional

costs is higher. In addition, there is an

increasing risk of sourcing certain products

given the expected delays at ports

following exit from the EU. On exit of the

EU, cost of goods would be impacted by

changes in terms of trade and therefore

tariffs, additional border controls and

fluctuations in the value of sterling.

Overall, price increases are mitigated as Mitchells & Butlers leverages its scale to drive competitive cost advantage and collaborates with suppliers to increase efficiencies in the supply chain. The fragmented nature of the food supply

industry in the world commodity markets gives the Company the opportunity to source products from a number of alternative suppliers in order to drive down cost. Consideration has been given to potential areas such as supply chain risk (e.g. customs controls on imports), labour risk and economic disruption. Key mitigating activities for food and drink are detailed below:

Food:

A Food Procurement Strategy is in place.

Full reviews have been carried out on key categories to ensure optimum value is achieved in each category.

A full range review was completed in 2017 ensuring the correct number of products/suppliers. This is regularly reviewed.

Regular reporting of current and projected inflation.

Good relationships with key suppliers.

Drinks:

Each drinks category has a clearly defined strategic sourcing plan to ensure Company scale is leveraged, supply base is rationalised and consumer needs are met.

Good relationships with key suppliers.

Supplier collaboration programmes are in place.

Plans in place to mitigate Sugar Tax.

Risk is increasing mainly due to the devaluation of the pound following the EU referendum, changes in Government policy (raising the risk of punitive duty changes) and the introduction of the Sugar Tax in 2018. Brexit risks have been considered in detail during FY 2018 and mitigating plans continue to be developed.

Buying ahead to mitigate the increasing risk of a lack of availability of products upon exit from the EU.

2. Operational Risks

People planning and development

Mitchells & Butlers has a strong guest

focus and so it is important that it is able

to attract, retain, develop and motivate

the best people with the right capabilities

throughout the organisation. There is a risk

that, without the right people, our customer

service levels would be affected.

There are a large number of EU workers

within the Group, particularly in London

and the South East. Therefore, the overall

risk is increasing as the UK approaches its

exit from the EU. Any restriction on the

free movement of labour would have a

material impact on both the cost of labour

and access to talent.

The Company makes significant investment in training to ensure that its people have the right skills to perform their jobs successfully.

Furthermore, an employee survey is conducted annually to establish employee satisfaction and engagement and this is compared with other companies, as well as previous surveys. Where appropriate, changes in working practices are made in response to the findings of these surveys.

Remuneration packages are benchmarked to ensure that they remain competitive and a talent review process is used to provide structured succession planning.

The apprenticeship programme will also assist in mitigating against the increasing risk in relation to EU workers.

Business continuity and crisis management

Mitchells & Butlers relies on its food and

drink supply chain and the key IT systems

underlying the business to serve its guests

efficiently and effectively. Supply chain

interruption, IT system failure or crises such

as terrorist activity or the threat of disease

pandemic might restrict sales or reduce

operational effectiveness.

The Company has in place crisis and continuity plans that are tested and refreshed regularly. The Company's third-party back-up facility, for Retail Support Centre employees, has been successfully tested to ensure critical business systems are able to function in the event of a disaster.

In addition, during FY 2018, departmental Business Continuity Plans have been revised, updated and reviewed by the Risk Committee.

During FY 2018, two key departments took part in a test of our third-party off-site back-up facility. This test was a success and identified some key learnings to improve the overall service, all of which were implemented.

Information security and disaster recovery

There is a risk that inadequate disaster

recovery plans and information security

processes are in place to mitigate against

a system outage, or failure to ensure

appropriate back-up facilities (covering

key business systems and the recovery

of critical data) and loss of sensitive data.

Increasing risk of cyber-attacks.

Risk of non-compliance with GDPR.

In FY 2018 a further review of cyber security was performed in order to highlight any gaps and address any challenges. As a result, a number of further improvements have been made to address audit actions.

In addition, controls include:

The work carried out by the Group's cross-functional Information Security Steering Group.

Group Assurance IT controls reviews.

Implementation and revision of appropriate cyber security governance policies and procedures.

Ongoing security awareness initiatives continue to be undertaken.

A regular cycle of penetration testing.

An effective implementation of a business wide Global Data Protection Regulation compliance programme, including training of all relevant employees and contractors.

Increased focus on protecting the business against potential cyber-attacks has resulted in the implementation of additional controls to mitigate against such risks.

Systems, processes and controls have been reviewed and updated to ensure GDPR compliance.

Wage cost inflation

There is a risk that increased costs

associated with further increases to the

National Living Wage may adversely

impact upon overall operational costs.

A detailed review of the risks associated with the National Living Wage has been completed. This review has been undertaken at a strategic level and seeks to ensure that appropriate mitigating actions are in place, some of which are in relation to how the Group carefully manages productivity and efficiency across the estate.

We have successfully implemented a new Time and Attendance system to improve the management controls and reporting of staff hours.

Borrowing covenants

There are risks that borrowing covenants

are breached because of circumstances

such as:

i. A change in the economic climate

leading to reduced cash inflows; or

ii. A material change in the valuation

of the property portfolio.

The overall risk has increased in the

year due to increased trading and cost

pressures which could essentially drive

reduced headroom.

The Company maintains headroom against these risks. The finance team conducts daily cash forecasting with periodic reviews at the Treasury Committee, the role of which include ensuring that the Board Treasury Policy is adhered to, monitoring its operation and agreeing appropriate strategies for recommendation to the Board.

In addition, regular forecasting and testing of covenant compliance is performed and frequent communication is maintained with the Securitisation Trustee.

Annual property valuation.

Detailed assessment within the long-term viability statement.

Pension fund deficit

The material value of the pension fund

deficit remains a risk.

The Company has made significant additional contributions to reduce the funding deficit. In July 2017, the Company reached agreement on the triennial valuation of the Group pension schemes as at 31 March 2016, with a funding shortfall of ￡451m (March 2013 valuation ￡572m shortfall).

The Company will continue to pay cash contributions (of £48m p.a. indexed) to 2023, with an additional payment of￡13m into escrow in 2024 should such further funding be required at that time.

Failure to operate safely and legally

A major health and safety failure could

lead to illness, injury or loss of life or

significant damage to the Company's

or a brand's reputation.

Mitchells & Butlers maintains a robust programme of health and safety checks both within its restaurants, pubs and bars and throughout the supply chain.

The dedicated Safety Assurance team uses a number of technical partners including food technologists, microbiologists and allergen specialists to ensure that our food procedures are safe.

Regular independent audits of trading sites are performed to ensure that procedures are followed and that appropriate standards are maintained.

If a business is identified as underperforming in terms of health and safety standards, it would be immediately targeted for improvement.

The Company has Primary Authority Partnerships with Westminster City Council for the provision of assured advice on, amongst other things, safety issues and with Hampshire Fire Service for the provision of support and guidance on fire safety risks.

Food suppliers are required to meet the British Retail Consortium Global Standard for Food Safety and are subject to regular safety and quality audits.

Comprehensive health and safety training programmes are in place.

Food supply chain safety

Malicious or accidental contamination

in the supply chain could lead to food

goods for resale being unfit for human

consumption or being dangerous to

consume. This could lead to restrictions

in supply which in turn causes an increase

in cost of goods and reduced sales due

to consumer fears and physical harm

to customers/employees.

Allergens are becoming an increased

risk within the industry.

Mitchells & Butlers has a Safety Assurance team and uses a number of technical partners including food technologists, food safety experts, microbiologists, allergy consultants, trading standards specialists and nutritionists.

Mitchells & Butlers uses a robust system of detailed product specifications.

All food products are risk rated using standard industry definitions and assessment of the way the products are used in Mitchells & Butlers' kitchens. Suppliers are then risk rated according to their products.

Each food supplier is audited at least once per annum in respect of safety and additionally in response to any serious food safety complaint or incident.

A robust response has been taken to manage allergens and the associated data within the menu cycle coupled with a continuous review in place to ensure controls remain appropriate.