Mitchells & Butlers Regulatory News (MAB)

MITCHELLS & BUTLERS PLC

25 November 2014

FULL YEAR RESULTS

(For the 52 weeks ended 27 September 2014)

Business gathers momentum

Financial performance

Reported results

Balance sheet and cash flow

Operational highlights

Alistair Darby, Chief Executive, commented:

"In the last year we have made significant progress, investing in the business for future growth. We completed the acquisition of Orchid, accelerated remodel and expansionary capex and have made a substantial investment in our systems. At the same time we have maintained our focus on the delivery of our four key priorities. In the year ahead, we will continue these actions.

The business is gathering momentum and we have made an encouraging start to the year. We expect to benefit further from these investments during this financial year."

Definitions

a - Like-for-like sales growth includes the sales performance against the comparable period in the prior year of all UK managed pubs, bars and restaurants that were trading in the two periods being compared. For the 52 weeks to 27 September 2014, 96% of the UK managed estate (excluding Orchid) is included in this measure.

b - Adjusted items are quoted before exceptional items as noted in the Group Income Statement.

c - Net cash flow excludes £58m mandatory bond amortisation; £25m transferred to cash from other cash deposits and £147m which the Group was obliged to draw down from a liquidity facility under the terms of the securitisation. Net cash flow is detailed within the Financial Review.

d - Adjusted EBITDA for the 52 weeks to 27 September 2014, including the estimated annualised full-year impact of Orchid.

e - Operating margin is taken before exceptional items.

f - Net promoter score is defined as the percentage of responses where we score 9 or 10 out of 10 ('brand promoters') less the percentage of responses where we score 0 to 6 ('brand detractors') to the statement "I am likely to recommend this pub to a friend and / or relative". Responses scoring 7 or 8 ('passives') are ignored in the calculation.

There will be a presentation for analysts and investors at 9.00am at Nomura International plc, 1 Angel Lane, London, EC4R 3AB. A live webcast of the presentation will be available at www.mbplc.com. The conference will also be accessible by phone: 020 3059 8125 and quote "Mitchells & Butlers". The replay will be available until 8 December 2014 on 0121 260 4861 replay access pin 8262392#.

All disclosed documents relating to these results are available on the Group's website at www.mbplc.com

For further information, please contact:

Notes for editors:

BUSINESS REVIEW

We are the UK's largest operator of managed restaurants and pubs, with a high quality freehold estate and a portfolio of strong brands. Our strategy is to focus on the long-term growth of food within the £78bn eating and drinking-out market, with around three-quarters of our turnover coming from guests eating in our pubs and restaurants.

During the year we took a significant step to grow our business by acquiring 173 pubs from the Orchid Group. This acquisition enables us to create value through the conversion of the majority of these pubs into our own brands and formats, a reduction in its central overheads and the realisation of purchasing synergies across the whole estate.

In a challenging year, we continued to position the business for future growth, whilst delivering increased earnings per share of 1.2%. We have delivered sales growth underpinned by volumes rather than price, invested further capital in both expansion into new sites and enhancement of amenity, and continued to upgrade our key systems. Together with the quality of our estate and our people, we have confidence going into the year ahead.

Our Market

We are operating in a dynamic market that is evolving constantly. We are continually reviewing the positioning and development of our brands and how we allocate capital between them. This approach has underpinned our growth in food and will ensure that our pubs, bars and restaurants remain relevant and competitive in the years to come.

During the year, the UK economy has grown led by London and the South East. Growth in the year ahead is forecast to be more evenly distributed across the UK, returning to areas that have been the most depressed since the economic downturn in 2007. Consumer confidence has started to increase and overall spending is up as a result. However, during the year earnings growth remained below inflation causing consumers to remain highly value conscious. The careful spending behaviour developed during the recession is now the norm.

Despite being the largest UK operator of managed pubs and restaurants, we have only around 3% share of this market and so there are significant opportunities for us to grow further.

The market in which we operate is, in aggregate, a mature one with growth expected broadly to track GDP and consumer expenditure. However, there are a number of dynamics on which we can capitalise:

Our brands and formats

Through our research we have identified five market spaces in which our businesses operate: Upmarket Social, Special, Family, Everyday Social and Heartland.

Market conditions in each of these spaces, as well as an understanding of how our brands and concepts sit within these, dictate how we operate and how we allocate our capital spend. We have developed two broad approaches to these market spaces: attractive expansionary investment and cash generation.

Attractive investment opportunities

The Family, Special and Upmarket Social segments currently present attractive opportunities for investment, with the market trends being towards branded food, special-occasion dining and speciality drinks offerings. These are the segments towards which we allocate the majority of our expansionary capital, including that relating to the conversion of Orchid sites.

Four of our brands are being prioritised for further expansion: All Bar One, Harvester, Miller & Carter and Toby Carvery. These offer opportunities for growth because they meet the following key criteria:

We will grow other brands in these market spaces through opportunistic acquisitions, if they are able to meet the criteria set out above.

Cash generation opportunities

The Heartland and Everyday Social segments are characterised by the need to offer great value and service to our guests in community pubs. In these segments our businesses generate significant profit and cash, but within market spaces that are not expected to grow as significantly as the other three.

These businesses continue to be valuable to us and have enduring appeal for their guests. As a result we look to grow them through consistently offering great prices, quality and service, as well as investing the necessary capital to ensure that our pubs continue to satisfy our guests' needs.

Our performance

We continue to operate and measure our business performance across four priority areas: our people, our practices, our guests and our profits.

Our people

Our key measure of success with regards to our people is retail staff turnover, which remained in line with the prior year at 78%. Whilst we have succeeded in maintaining this at its record low we will continue to focus on it.

Our approach to people is founded on our 'Good to Great' philosophy, which adapts our ways of working to engage with our teams, empower them to make their own decisions, and ultimately to drive stronger performance. This is now live in the majority of the estate, and at its best is delivering exceptional results.

In the last year we have also reviewed the way we recruit our team members. We have introduced collective recruitment days across multiple brands and concentrated geographical regions. This approach allows us to demonstrate the scale of our business and the career opportunities available to potential future employees.

We are proud of our investment in young people, which currently sees more than 1,500 people on a vocational or apprenticeship programme. We have pledged to take on a further 1,000 apprentices over the next two years.

We are delighted to have announced two high-quality and experienced external appointments to the Executive team. Catriona Kempston has assumed responsibility for Marketing and Phil Urban joins us in January as Chief Operating Officer. 

Our practices

Our practices refer to the safe and efficient way that we run our operations. We continue to make safety a top priority, and challenge all of our businesses to achieve the maximum National Food Hygiene Rating Scheme score of 5. We have made further progress towards achieving this goal in the last year.

The project to replace all of the EPOS systems in our pubs and restaurants has continued to be rolled out at pace. They are now live in more than 1,300 sites with the project due to be completed in FY 2015. These systems enable greater efficiency within our operations by speeding up order taking and bill payment, improving business controls, and allowing our retail teams to spend more time with our guests. Further detail is included within the Financial Review.

We have also made a significant change to the way in which our operations teams make decisions, with the provision of dashboard analysis on tablets for all General Managers and Area Managers. This analysis allows prioritisation of decisions based on real-time data, and is an important step forward in the day-to-day management of the operations of our businesses.

Our guests

Our key measure for understanding how we are seen by our guests is net promoter scorea, which measures how likely our guests are to recommend us to friends and family. In FY 2014 our net promoter score increased by 4 ppts to 63%.

Our focus on guests is evident in the development of our food volume growth throughout FY 2014. Following several years of spend per head increases, we have concentrated on driving our food sales through volume rather than price growth. We aim to deliver consistently great value to our guests and to build trust in our brands. We remain committed to driving this volume growth by offering ongoing value through our menus rather than by short term promotional activity.

Our focus on brands and value to meet our guests' needs can be demonstrated with a number of examples:

Our remodel programme is aimed at enhancing our existing businesses, to ensure that they surpass our guests' high standards. We have actively increased the pace and level of expenditure on remodels. 174 businesses were remodelled in FY 2014, compared with 97 in the prior year, generating returns in excess of 30%.

Our profits

In FY 2014 we increased our adjusted earnings per share by 1.2% to 32.6 pence, based on higher sales and the contribution from Orchid, as described further in the Financial Review. Our operating margins fell by 50 basis points, reflecting some short-term impact of the integration of Orchid, the increased closure costs from the accelerated remodel programme, and the growth in sales derived primarily from volume rather than price.

Outlook

Since I joined Mitchells & Butlers in October 2012 we have been committed to the fundamentals of our business plan. I remain confident that this is the right plan and will deliver sustainable profit growth and future shareholder value.

The actions we have taken are gathering momentum: we have seen staff turnover improve, net promoter score increase, a turnaround in food volume performance, increased levels of remodel and expansionary capex, and substantial investment in our systems. We are excited about integrating the Orchid estate into our leading portfolio of brands, and we have a fantastic team of more than 43,000 people to support our progress. Whilst we continue to operate in a challenging and competitive market, we are making real progress and we have confidence in our future success.

Responsibility statement

We confirm to the best of our knowledge:

- The financial statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole; and

- The Business Review, Financial Review and Risks and Uncertainties sections, which are incorporated into the directors' report, include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole together with a description of the principal risks and uncertainties they face.

This responsibility statement was approved by the Board of Directors on 24 November 2014 and is signed on its behalf by Tim Jones, Finance Director.

Notes:

a - Net promoter score is defined as the percentage of responses where we score 9 or 10 out of 10 ('brand promoters') less the percentage of responses where we score 0 to 6 ('brand detractors') to the statement "I am likely to recommend this pub to a friend and / or relative". Responses scoring 7 or 8 ('passives') are ignored in the calculation.

FINANCIAL REVIEW

On a statutory basis, profit before tax for the period was £123m (2013 £142m), on sales of £1,970m (2013 £1,895m).

The Group Income Statement discloses adjusted profit and earnings per share information that excludes exceptional items to allow a better understanding of the underlying trading of the Group. Adjusted earnings per share increased by 1.2% in FY 2014 to 32.6 pence.

At the end of the financial year, the total estate comprised 1,775 managed businesses and 57 franchised businesses, in the UK and Germany.

Change in accounting policies

IAS 19 (revised) was adopted on 29 September 2013 and has been applied retrospectively.

In addition following recent best practice guidance from the Financial Reporting Council (FRC), the net pensions finance charge is now recognised within underlying profit, having previously been classified as an other adjustment alongside identified exceptional items. As a result, additional finance charges of £11m in FY 2013 and £10m in FY 2014 have now been included as interest within adjusted profit.

Revenue

The Group's total revenues increased by 4.0% to £1,970m, as a result of both growth in like-for-like sales and the contribution of new pubs and restaurants, including 15 weeks of trading from the 173 outlets acquired from Orchid.

Total like-for-like sales increased by 0.6%, with growth from both food and drink sales. Food sales growth was driven by volume growth of 0.9%, partially offset by a small reduction in average spend per head. Drink sales growth, by contrast, resulted from average spend growth of 1.6% and volume declines of 1.1%.

Operating margins

Adjusted operating margins across the year declined by 0.5 ppts. Whilst Orchid contributed operating profit of £6m to the Group for its 15 weeks of trading, it was slightly dilutive to margin in the period, with the head office yet to be closed and businesses yet to be converted to our own brands and formats. These conversions begin in the first quarter of FY 2015, with the head office also to close during FY 2015.

Operating margins have also been impacted in the year both by increased closure costs relating to the accelerated remodel programme in order to reposition the estate, and the fact that volume, as opposed to spend per head, has been the driver of food sales growth in the year. Adjusted operating profit was £313m for the year, 1.0% higher than FY 2013.  

Internal rent

A regime of internal rents is in place to enable greater internal transparency around the performance of freehold and leasehold properties and external transparency concerning the performance of the operating and property functions. The operating performance is monitored on a regular basis through a system of profit reviews through all levels of the Group. Estate management is primarily monitored through the Portfolio Development Committee.

Interest

Net finance costs of £141m were £2m higher than the prior year. The factors behind this net increase were: step-up margins applied to four floating rate securitised notes from September 2013; additional interest incurred on a £147m liquidity facility drawn down under the terms of the securitisation; and the cost of new facilities put in place to finance the acquisition of Orchid.

As stated above, the net pensions finance charge of £10m (FY 2013 £11m) is now included within adjusted profits. The charge for FY 2015 is anticipated to be £16m.

Taxation

The tax charge of £30m in the year represents an effective rate of 24.4% (FY 2013 9.9%). The increase in the effective rate is principally due to a one-off £18m credit to deferred tax included in FY 2013 reflecting the reduction in the main rate of corporation tax to 20% from April 2015.

Exceptional items

Exceptional items comprise two items: a £37m charge relating to the net movement in the property portfolio (FY 2013 £29m); and a £12m charge for acquisition and integration costs relating to the Orchid transaction (FY 2013 £nil).

Earnings per share

Adjusted earnings per share were 32.6p, 1.2% higher than last year. After the exceptional items described above, basic earnings per share were 22.6p (FY 2013 31.2p).  

Cash flow and net debt

The cash flow statement below excludes £147m drawn from a liquidity facility under the terms of the securitisation and £25m transferred to cash from other cash deposits. The funds drawn from the liquidity facility are charged under the securitisation and are not available for use in the wider Group. Further detail is provided in note 18.

The business generated £422m of EBITDA in the year. Pension deficit contributions of £49m reflected the newly agreed annual contribution of £45m (previously £40m), with the incremental amount backdated to the triennial valuation date of March 2013. After maintenance capital, interest and tax, £102m of free cash was generated by the business.

The acquisition of Orchid for initial consideration of £266m resulted in a net cash outflow in the year of £258m after adjusting for acquired cash and working capital, and deferred consideration.

In the 15 weeks post acquisition trading included in this year Orchid contributed sales of £41m and operating profit of £6m.

Net debt was £1,958m, representing 4.5 times annualised EBITDA (FY 2013 4.2 times), the year on year increase being a result of the Orchid acquisition. Net debt within the securitisation was £1,986m and net cash held outside the securitisation was £28m.  

Capital expenditure

Total capital expenditure was £162m, comprising £94m (FY 2013 £88m) spent on maintaining and enhancing the high level of amenity in the Group's restaurants and pubs, £26m on infrastructure projects (FY 2013 £12m), and £42m on new site openings (FY 2013 £28m).

Expenditure on maintenance and infrastructure projects included the ongoing replacement and upgrade of pub and restaurant EPOS systems. The new system is now live in more than 1,300 sites and the rollout is due to be completed during FY 2015. The systems implementation and benefit varies according to our different brands and formats: in addition to tills, full table service restaurants receive new payment devices, handheld terminals for taking orders and kitchen management systems; pubs focused on ordering at the bar receive tills and payment devices only. This gives a range of financial and non-financial benefits, including productivity savings, improved controls in terms of daily cash processes, and improvements in the management and analysis of data, including promotional activity. Productivity benefits are to be realised through a combination of reduced levels of employment cost, and reinvestment into service to provide an enhanced guest experience. The new systems are estimated to drive productivity benefits worth in excess of 20 hours per pub per week at our full table service brands, and around 7 hours per pub per week in bar-service brands.

The blended EBITDA return on expansionary capital invested since FY 2011 was 16% (FY 2013 17%). Given the varying nature of freehold acquisitions, leasehold acquisitions and conversions, the business reviews returns by category:

Property

A red book valuation of the freehold and long leasehold estate has been completed in conjunction with the independent property valuers, CBRE. In addition, the Group has conducted an impairment review on short leasehold and unlicensed properties. The overall portfolio value has increased by £26m, reflecting a £36m exceptional charge in the income statement and a £62m increase in the revaluation reserve. There is a further £1m exceptional charge to the income statement in relation to the impairment of lease premiums.

Pensions

In May 2014 the Company reached agreement on the triennial valuation of the group pension schemes as at 31 March 2013, at an increased funding shortfall of £572m (March 2010 valuation: £400m). The discounted value of the minimum funding requirement agreed as part of the revised schedule of contributions is recognised in the balance sheet leading to an increased pensions liability, before tax, of £425m (FY 2013 £248m).

Dividends

The Board remains mindful of the attraction of the resumption of dividend payments and will continue to monitor anticipated net cash flow generation, before taking a decision on timing and quantum.

As an element of the recent pensions valuation, referred to above, the Group has agreed that normal dividends will only be resumed provided they can initially be funded out of cashflow after bond amortisation.

Responsibility statement

We confirm to the best of our knowledge:

- The financial statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole; and

- The Business Review, Financial Review and Risks and Uncertainties sections, which are incorporated into the directors' report, include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole together with a description of the principal risks and uncertainties they face.

This responsibility statement was approved by the Board of Directors on 24 November 2014 and is signed on its behalf by Tim Jones, Finance Director.

Notes:

a - Spend relating to new and converted sites completed in the current year.

* Restated for the impact of IAS 19 (revised) and presentation of pensions finance charge, see note 3.

All results relate to continuing operations.

* Restated for the impact of IAS 19 (revised), see note 3.

* Restated for the impact of IAS 19 (revised), see note 3.

Notes to the preliminary financial statements

For the 52 weeks ended 27 September 2014

1. Preparation of preliminary financial statements

Basis of preparation

Mitchells & Butlers plc, along with its subsidiaries, (together 'the Group') is required to prepare its consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and in accordance with the Companies Act 2006. The information contained within this release is based on the Group's consolidated financial statements.

The preliminary financial statements include the results of Mitchells & Butlers plc and all its subsidiaries for the 52 week period ended 27 September 2014. The comparative period is for the 52 week period ended 28 September 2013. The respective balance sheets have been drawn up as at 27 September 2014 and 28 September 2013.

The preliminary financial statements have been prepared on the historical cost basis as modified by the revaluation of properties, pension obligations and financial instruments.

Restatement

IAS 19 Employee Benefits (revised)

IAS 19 (revised) was adopted on 29 September 2013 and has been applied retrospectively in accordance with the transition provisions.

The new standard replaces the interest charge on defined benefit obligations and the expected return on plan assets with a single net interest cost that is calculated by applying the discount rate to the net pension deficit at the beginning of the period, inclusive of any minimum funding requirement. In addition the administration costs of the pension scheme, previously charged against the expected return on plan assets, are now charged within operating costs.

In addition to the changes noted above, following recent guidance from the Financial Reporting Council (FRC), the pensions finance charge is now recognised within underlying profit.

The impact of IAS 19 (revised) has been to reduce profit before tax by £8m for the 52 weeks ended 28 September 2013.

Further details of the restatement are shown in note 3. Basic and diluted earnings per share have been impacted and restated accordingly in note 7.

Going concern

The Group's forecasts and projections take account of anticipated trading performance and show that the Group should be able to operate within the level of its current borrowing facilities.

The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements.

Exchange rates

The results of overseas operations have been translated into sterling at the weighted average euro rate of exchange for the period of £1 = €1.22 (2013 £1 = €1.19), where this is a reasonable approximation to the rate at the dates of the transactions. Euro and US dollar denominated assets and liabilities have been translated at the relevant rate of exchange at the balance sheet date of £1 = €1.28 (2013 £1 = €1.19) and £1 = $1.62 (2013 £1 = $1.61) respectively.

2. Segmental analysis

IFRS 8 Operating Segments requires operating segments to be based on the Group's internal reporting to its Chief Operating Decision Maker (CODM). The CODM is regarded as the Chief Executive together with other Board members. The CODM uses profit before interest and exceptional items (operating profit pre-exceptionals) as the key measure of the segment results. Group assets are reviewed as part of this process but are not presented on a segment basis.

The retail operating business operates all of the Group's retail operating units and generates all of its external revenue. The property business holds the Group's freehold and long leasehold property portfolio and derives all of its income from the internal rent levied against the Group's retail operating units. The internal rent charge is eliminated at the total Group level.

* Restated for the impact of IAS 19 (revised), see note 3.

3. Pensions

Restatement in relation to IAS 19 (revised)

IAS 19 (revised) was adopted on 29 September 2013 and has been applied retrospectively in accordance with the transition provisions.

The new standard replaces the interest charge on defined benefit obligations and the expected return on plan assets with a single net interest cost that is calculated by applying the discount rate to the net pension deficit at the beginning of the period, inclusive of any minimum funding requirement. In addition the administration costs of the pension scheme, previously charged against the expected return on plan assets, are now charged within operating costs.

In addition to the changes noted above, following recent guidance from the Financial Reporting Council (FRC), the pensions finance charge is now recognised within underlying profit.

The Group has restated the comparative amounts in the income statement and statement of comprehensive income for the 52 weeks ended 28 September 2013. There is no impact on the balance sheet or cash flow statement from the changes introduced by IAS 19 (revised).

The tables below provide a summary of the amounts previously reported, the adjustments made and the restated amounts in relation to IAS 19 (revised).

3. Pensions (continued)

Measurement of scheme assets and liabilities

Minimum funding requirements

The results of the 2013 actuarial valuation showed a funding deficit of £572m, using a more prudent basis to discount the scheme liabilities than is required by IAS 19 (revised) and on 21 May 2014 the Company formally agreed a new 10 year recovery plan with the Trustees to close the funding deficit in respect of its pension scheme liabilities. The Group has agreed to increase contributions from £40m to £45m per annum, for three years effective from 1 April 2013. From 1 April 2016 contributions then increase each year by the rate of RPI (subject to a minimum increase of 0% and a maximum increase of 5%) for the following seven years. The Group has also agreed to make a further minimum underwritten payment of £40m on terms to be agreed with the Trustees by 30 September 2015. Under IFRIC 14, an additional liability is recognised, such that the overall pension liability at the period end reflects the schedule of contributions in relation to a minimum funding requirement, should this be higher than the actuarial deficit.

Amounts recognised in respect of defined benefit schemes

The following amounts relating to the Group's defined benefit and defined contribution arrangements have been recognised in the Group income statement and Group statement of comprehensive income:

*Restated for the impact of IAS 19 (revised).