Mitchells & Butlers Regulatory News (MAB)

1.

Company Annual Report and Accounts 2021 (the Annual Report)

2.

Notice of the 2022 Annual General Meeting

Risk category and description

Controls/mitigating activities

1. Borrowing covenants

There are risks that borrowing covenants are breached because of circumstances such as:

i. The continuation of disruption due to the Covid-19 pandemic;

ii. A change in the economic climate leading to reduced cash net inflows; or

iii. A material change in the valuation of the property portfolio.

Risk Stable

Following the equity raise in March 2021, covenant waivers remain in place, which has meant the overall risk is reduced. However, this needs to be balanced against potential for further lockdowns/restrictions, so on balance, is assessed as 'Stable'.

• The Company maintains headroom against the covenants. The finance team conducts daily cash forecasting with periodic reviews at the Treasury Committee, the role of which includes 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.

• A detailed assessment of the mitigating risks are included in the long-term viability statement.

• We have taken measures to protect the financial health of the business whilst operating at reduced capacity and continue to closely manage the cash position of the Group.

• In March 2021, we agreed the waivers required to ensure we would remain compliant with all covenant requirements (please refer to the Corporate Viability Disclosure on page 40 of the Annual Report).

2. Declining sales performance

This risk falls into the below 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 combination, 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.

Consumer behaviour as a result of Covid-19: With the reopening of pubs and restaurants, consumers may have a different mindset to eating out, with health and safety at the forefront of priorities. Guests may want greater insight into practices, and food supply chain information to feel confident in their eating out experience.

Risk Increasing

Overall risk is increasing due to the potential decline in sales following the Covid-19 pandemic.

• Right operational and commercial team and structure in place. Brand alignment ensures the right research is done and is acted upon.

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

• During the period of disruption caused by the Covid-19 pandemic, a steering committee met at least weekly and more frequently as needed to ensure appropriately diligent supervision, monitoring and management of controls and risks.

• 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.

• Our priority is to continue to protect our team members and guests, providing an eating-out experience which can be enjoyed. We have very strong health and safety practices already in place in our businesses, which we will enhance and evolve to tackle the challenges we face. We will be transparent with guests as to these measures such that they can trust in us and will clearly communicate our expectations of guests to comply with the measures put in place.

• Measures are in place to ensure that the business continues to respond to guest requirements post the pandemic.

• Although now ceased, during FY 2021, the Government financial assistance, such as furlough payments in respect of employee costs, business rates suspension and reduction of VAT, assisted to address the decline in revenue

3. 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 guest service levels would be affected.

Prior to Covid-19, the external pipeline for high potential talent, particularly in senior roles, and digital, was tightening due to the rise in opportunity in a growing and competitive marketplace. Post-Covid-19, external recruitment activity over the previous year is challenging due to quality candidates being reluctant to move in the current climate. A further potential risk is the image of hospitality, given the recent pandemic impact.

Retention is high amongst our director and 'head of' populations which may lead to a perceived lack of progression routes and hence unwanted loss of good talent at lower levels.

Regarding retail labour, overall, there is a continued risk of a lack of quality of internal/ external pipeline for key roles resulting in open vacancies or poor-quality appointments, leading to poor performance, reduced quality of service and loss of sales. There is a previous lack of consistent skills training affecting guest satisfaction and employee engagement and retention.

Despite Covid-19 and the high level of redundancies in the UK, this still remains a risk mainly driven by the declining number of non-UK applicants following the UK's departure from the EU and the restrictions which some non-UK employees have faced in moving to the UK to work as a result of the pandemic control measures such as travel restrictions and border controls.

Kitchen Manager attraction and attrition continues to be the role with the highest concern, particularly given the declining non-UK applicants, decrease in internal progression and increase in turnover which is influencing the overall risk rating.

Wage pressure (over 25s) remains an issue, as competition for labour increases.

Risk increasing

There has been a loss of EU workers within the Group, particularly in London and the South East. Therefore, the overall risk is increasing following the UK's departure from the EU. Restrictions on the movement of labour have had 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 non-UK workers.

• A new talent management system has been sourced.

• In compliance with the furlough scheme, we were able to continue employee training so that staff were fully trained on new ways of working for our reopening.

4. 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 a further disease pandemic might restrict sales or reduce operational effectiveness.

Risk Stable

Staff have the resources and ability to work remotely rather than rely on access to the Retail Support Centre.

• The Company has in place crisis and continuity plans that are tested and refreshed regularly.

• Following Covid-19, new ways of working are in place for all Retail Support Centre staff when the office is temporarily closed to employees. Positively, all staff have the appropriate resources available to them in order to work remotely and in an efficient manner.

• We have assessed the risks associated with remote working and cyber security and are confident that those areas are suitably controlled.

5. Information and cyber security

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.

Given the increase in the level and frequency of global cyber attacks, the likelihood of occurrence is therefore increasing, although current IT controls and monitoring tools are robust.

Risk of non-compliance with data protection laws is an increasing risk for the business to ensure full compliance remains up to date.

Risk Increasing

The increased activity, information security and reliance on IT systems continues to be a key focus to ensure critical IT systems are kept secure and tested frequently and any vulnerabilities identified are closed out efficiently.

• A detailed external review of cyber security processes is performed on a regular basis in order to highlight any gaps and address any challenges. As a result, a number of further improvements have been made (and continue to be made) to strengthen overall cyber security controls.

• 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.

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

- The effective implementation of a business-wide data protection compliance programme, including training of all relevant employees and contractors.

- Systems, processes and controls have been reviewed and updated to ensure compliance with data protection laws.

6. 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.

It is unclear at this stage how Covid-19 may affect overall wage costs as we head into FY 2022. Therefore, this review will continue as part of our review of all emerging risks facing the business.

Risk Increasing

Due to further increases set by Government, wage costs could continue to increase.

• A detailed review of the risks associated with the National Living Wage has been completed. This review has been undertaken at a strategic level to ensure that the Group carefully manages productivity and efficiency across the estate.

• We have successfully implemented a time and attendance system to improve the management controls and reporting of staff hours.

7. Pension fund deficit

The material value of the pension fund deficit remains a risk.

Risk Stable

The Company has made significant additional contributions to reduce the funding deficit.

• In September 2019, the Company reached agreement on the triennial valuation of the Group pension schemes as at 31 March 2019, with a funding shortfall of £293m (March 2016 valuation £451m shortfall).

• The Company will continue to pay cash contributions (of £49m p.a. indexed) to 2023, with an additional payment of £13m into escrow in 2024 should such further funding be required at that time.

• We reached agreement with the Trustees in respect of non-payment of monthly deficit contributions from April - September 2020, with those payments now added to the end of the current agreement, thereby extending it by six months. Further agreement was also reached to delay payment of the January - March 2021 deficit contributions, which have now been paid alongside the April 2021 contributions, following the successful equity raise.

8. 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.

Risk Stable

Allergen related incidents and near misses have stabilised. There is evidence in the last quarter of FY 2021 that allergen incidents are levelling out.

• 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 use 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 is immediately targeted for improvement and then reassessed.

• The Company maintains two food safety Primary Authority relationships. These are held with Luton Borough Council (May 2019) and Shared Regulatory Services (November 2019) and provide assured advice on matters in England and Wales respectively. Westminster City Council continue to provide support on health and safety matters and 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.

• We continuously review the latest Covid-19 guidelines and continue to adapt our businesses in response.

9. Cost of goods - price increases

Food: The cost of food for resale increases due to changes in demand, food legislation, exchange rates and/or production costs and uncertainty of supply, leading to decreased profits.

Drinks: The cost of drinks for resale increases due to changes in demand, legislation, exchange rates and production costs, leading to decreased profits.

Goods not for resale: Increases in the cost 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.

Supply: Given the national shortage of drivers and labour, which is putting additional pressure on suppliers, overall costs are likely to increase.

Brexit: Although the tariff risk of a hard Brexit is now removed, we are experiencing Brexit related cost pressures from our food suppliers relating to import administration costs and workforce shortages. These Brexit related cost pressures, combined with a volatile global food market, present higher food inflation levels than pre-Covid, which we have forecasted for FY 2022.

Risk Increasing

The overall risk of price increases is increasing.

Overall, cost 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 are carried out on key categories to ensure optimum value is achieved in each category.

• A full range review was completed in FY 2021 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, the supply base is rationalised, and consumer needs are met.

• Good relationships with key suppliers.

• Supplier collaboration programmes are in place.

Brexit: Brexit risks have remained a key focus and have been subject to continued regular review and development by management during FY 2021. Brexit risks and the mitigating action plans are embedded within each of the key risks, which are regularly reviewed by both 'risk owners' and the Risk Committee.

A number of key measures have been taken to mitigate both the known and emerging risks that Brexit may present to the business. For example, we have secured agreements with our key suppliers which include:

• Buying ahead to mitigate the increasing risk of a lack of availability of products, following the UK's departure from the EU.

• Review and update of key contracts to secure the most commercially effective supply of goods and pricing.

• Identifying contingency markets for the alternative supply of food and drink, should it be required.

• Strong commercial relationships with key suppliers which have assisted with securing an adequate supply of goods in the event of a disruption.

Covid-19

During the Covid-19 pandemic, suppliers have continued to remain very supportive, and no material further supply chain associated risks have materialised.

10. 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 cause an increase in cost of goods for resale and reduced sales due to consumer fears and physical harm to guests/employees.

Risk Stable

The key risks facing the food supply chain safety are regarded as stable.

• 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.

11. Health and lifestyle concerns

Failure to respond to changing consumer expectations in relation to health and lifestyle choices and our responsibility to facilitate those.

Risk Increasing

There is an increasing level of focus from media and Government on health and obesity issues. This heightened consumer awareness has increased consumer awareness of the health implications of their eating and drinking choices, and it is important that we continue to evolve our offers to facilitate consumers to make informed decisions. Failure to meet these expectations could have both a financial and reputational impact on the business. Therefore, this risk is increasing.

• We monitor changing behaviour in relation to health and lifestyle issues and adapt our brands to appeal to changing needs ensuring that the brands remain relevant and competitive.

• We have set targets for ongoing sugar and salt reduction.

• A plan is in place to provide nutritional information for all brands to allow customers to make informed decisions.

12. Environment and sustainability

Climate change, biodiversity depletion and environmental pollution present a risk to our ability to source products, with food being particularly at risk.

Risk Increasing

The impact of extreme and longer-term shifts in weather patterns, natural resource depletion and other effects of climate change could impact the business both financially and reputationally. These factors could disrupt our supply chain and the ability to source products due to reduced availability. Regulatory action to manage climate change could result in the introduction of additional taxes or restrictions being imposed. The business also has a responsibility to continually aim to reduce its usage of natural resources and its negative impact on the climate. Therefore, this risk continues to increase.

• We have set challenging targets in key areas such as greenhouse gas emissions, food waste, recycling and use of plastics (see page 20 of the Annual Report).

• We have completed an exercise to determine our baseline greenhouse gas emissions from which we have developed a plan to deliver our ambitions of reducing emissions by 25% by FY 2030, which has been approved by the Board.

• We are working with the World Resources Institute on their Cool Food Pledge programme to reduce the emissions of food supply chain links, which is a significant contributor to emissions globally.

• All direct palm oil purchases continue to be sourced from Rainforest Alliance approved suppliers.

• We are working with industry collaboration groups to develop a roadmap to sourcing sustainable soy in our supply chain.

• We are developing initiatives to reduce our consumption of natural resources, with an electricity workstream live in the business, and gas and water in the planning phases.

13. Enforced Government closure/trading restrictions

There is a risk that the business could be impacted by an enforced Government closure or imposed severe trading restrictions, of part or the whole of the estate, for example, regional/national/global pandemic, chemical/terrorist activity etc.

A global pandemic may have a negative impact on the Group's operating and financial performance and liquidity. An outbreak of a global virus may cause severe disruptions in the global economy which could adversely affect the Group's business or operations, as well as the business or operations of third parties with whom the Group conducts business.

Risk Stable

The frequency and nature of these risks arising are unpredictable, as evidenced during the Covid-19 pandemic. However, given that Government trading restrictions have been lifted, the associated risks to the business have stabilised.

• Contingency plans are in place to review/respond to enforced Government actions and/or severe business disruption/trading restrictions. These should be subject to a formal review.

• Business opening/closure processes have been updated.

• Strong supply chain relationships are maintained to assist in the event of cancelling/returning stock orders.

• Robust processes are in place to manage Government furlough schemes.

• The business, and in particular the Safety and Security Team, is able to adapt quickly and respond to a change in operational and functional processes, as a result of a pandemic/business closures.

• Established communication cascade/mechanisms are in place for employees, guests and suppliers.

• IT infrastructure, hardware, systems and employee support are in place to maintain remote working.

• Key financial controls have been reviewed, assessed and updated to ensure they continue to be operated in the event of limited/no access to either the Retail Support Centre or businesses.

• A high-level review of lessons learned, following the Covid-19 pandemic, has been undertaken to inform the required changes to business planning/operating procedures.