Mitchells & Butlers Regulatory News (MAB)

MITCHELLS & BUTLERS PLC

LEI no: 213800JHYNDNB1NS2W10

26 November 2020

FULL YEAR RESULTS

(For the 52 weeks ended 26 September 2020)

Highlights

Reported results

Trading results

Balance sheet and cash flow

Phil Urban, Chief Executive, commented:

"Throughout a very uncertain and challenging year our businesses and teams have adapted quickly, creating a safe environment for guests and putting us in a strong position to benefit when consumers are able to eat out again. We saw direct evidence of this from a strong trading period in July and August before further restrictions came into force.

With our great estate, balanced portfolio of brands and proven management team, we remain optimistic that we will be able to regain the momentum previously built and continue to achieve sustained market outperformance, when the current operating restrictions are eased." 

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 defined later in this announcement.

b - As measured by the Coffer Peach business tracker.

There will be a presentation held today at 8:30am accessible by phone on 0203 936 2999 access code: 213596, and at www.incommuk.com/customers/online access code: 213596. The slides will be available on our website at www.mbplc.com. The replay will be available until 10 December 2020 on 0203 936 3001, access code: 361779.

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.

BUSINESS REVIEW

This financial period has been dominated by the impact Covid-19 has had on the organisation and the wider industry. Like-for-like salesa over the period declined by 3.5% with a strong start to the year superseded by the subsequent impact of a prolonged period of enforced closure and social distancing restrictions. Total sales of £1,475m declined by 34.1% reflecting the closure period from 20 March to 4 July.

Adjusted operating profita of £99m declined by 68.8% and a statutory loss before tax of £(123)m was recognised for the period.

Before Covid-19 we had enjoyed a strong start to FY 2020, with particularly good growth over the festive period. Like-for-like salesa growth had remained consistently ahead of the marketb and we continued to see the beneficial impact of our Ignite programme of work coming through in results. This was reflected in stronger margins, better labour control and generally tighter cost management resulting in operating profit growth. We had just refreshed the range of Ignite initiatives, such that we were confident of maintaining and building on the momentum we had created.

As the Covid-19 pandemic began to spread across the country, the business initially proved to be very resilient, and it was not until the Prime Minister started to advise people to not visit pubs and restaurants that we saw a negative impact in our sales. When the full lockdown was announced on 20 March we closed the business immediately, with our priority being to protect our team members and guests and to ensure the safe closure of each site. A number of measures were taken from the outset of the crisis to protect the business including:

- putting over 99% of our employees on furlough;

- quickly reducing operating costs to the minimum required to keep the estate secure, safe and in good condition;

- halting all discretionary capital expenditure, including our development programme, as part of the broader cash management plan; and

- trying to sell stock with a short shelf life at cost and, where that proved impossible, working with charitable institutions to avoid as much waste as possible.

Securing a strong and stable financial base for the business became an immediate priority and we were pleased to agree additional liquidity and amended terms to our financing arrangements, the combination of which has provided us with stability and flexibility.

During the closure period we developed new Covid secure procedures which enabled us to reopen with safe environments whilst still providing a hospitable feel and great experiences for our guests. The people within our organisation typically responded to the challenges we faced with resilience and professionalism, which was key to our successful trading when we reopened the majority of our estate on 4 July.

New procedures were swiftly adopted by our teams and we were therefore able to take advantage of the boost to consumer confidence that the Government sponsored 'Eat Out to Help Out' scheme generated in August, which resulted in like-for-like salesa growth of 1.4% across the period when 94% of the estate was open. By maintaining the same strong focus on cost control that we had during lockdown, and with the Government's support, strong conversion to profit was achieved on this uplift in sales. By the end of the financial period we had reopened over 96% of our estate and our trading remained resilient into September, aided by good weather which benefitted the large proportion of sites with outdoor space. We continued to consistently outperform the marketb following the reopening in July, reflecting the benefit of our diversified portfolio of brands and progress previously made under our Ignite programme of work. We have also seen online feedback scores improve to an average of 4.3 out of 5 following reopening despite the new protocols in place. At brand level, our premium suburban brands traded very well, even with the Covid secure protocols, with Miller & Carter and Premium Country Pubs leading the way. Conversely, our city centre wet led businesses, such as Nicholson's, struggled with the restrictions, exacerbated by many offices remaining empty.

However, Covid-19 case numbers began to increase again during September resulting in the introduction of further restrictions by the UK Government and the devolved nations. The increased measures, including a 10pm curfew, full table service and mandatory mask wearing in England, caused a decline in consumer confidence and a reduction in the frequency of guest visits. Trade was further negatively impacted by the introduction of the regional tier system whereby household mixing restrictions came into place in some areas and full closure of businesses in others. Meanwhile, a full lockdown was put in place in Wales and Germany, and regional closure of businesses in Scotland. As a result, like-for-like salesa began to deteriorate at the end of the period and worsened at the start of the new financial period as an increasing proportion of our estate fell into Tier 2 or Tier 3 areas in England or were subject to closure in other countries.

Subsequently, a second lockdown began in England on 5 November requiring the closure of all pubs and restaurants, for which we were able to draw on learnings from the first period of closure to ensure the process was as efficient as possible. Like-for-like salesa since the end of the financial period have declined by 26.5% reflecting the heightened restrictions. Total sales over the same period declined by 50.8% driven primarily by closure in England.

Throughout the pandemic we have worked hard to keep team members connected and informed. A new support portal was launched which includes regularly updated FAQs and central communication. Social media platforms have also been used to create inclusive groups across all of our teams, from sites and the Retail Support Centre in Birmingham, to share positive and engaging content and ideas. Through our established online learning platform, we were able to facilitate continued learning and development opportunities for our team members during closure periods. This platform was also used to quickly communicate new operational procedures to ensure that our teams were always updated with, and trained on, the latest safety requirements. The welfare and mental health of our team has been a primary concern and we have been encouraged in the way the business has pulled together at this difficult time.

Digital technology has become increasingly important in supporting hospitality businesses during the pandemic. Technology allows the service cycle to be adapted to better adhere to Government restrictions. We had already developed a facility for guests to order at the table on their phone and this has been quickly rolled out across more brands in response to the pandemic. These sorts of technological interventions also help to enhance the economics of a service cycle and provide long-term guest and operational improvements.

Mitchells & Butlers has played a full role in the UK Hospitality led forums that have helped to devise the Hospitality Sector Protocols Document that the Government issued for the sector, and we continue to lobby Government directly to ensure that we, and the sector, get the support we need to protect jobs until we reopen and then as we rebuild. We have gratefully received the Government support which has been made available to date including the business rates holiday, which has benefitted retail, hospitality and leisure sectors and reduced VAT rates on certain supplies, which has had a sector specific benefit to food-led businesses. Our employees have benefitted from the Job Retention Scheme which has been of great value to our team providing some assurance during the initial closure period and enabling us to protect many roles. In spite of this support, we have not been immune to the impacts of the pandemic, and despite our best efforts to protect as many jobs as we can, we have had to make c.1,300 redundancies following the end of the financial period. The reduced levels of activity and closure of a small number of our sites meant that we could no longer support these roles.

The trading environment has presented unprecedented challenges for the industry, as it continues to navigate through an ever-changing backdrop of trading restrictions and social distancing measures. Despite the available Government support, not all businesses were able to weather the initial prolonged period of closure and subsequent reduced demand. A number of companies have entered into CVAs and closure programmes and by the end of October the Alix partners CGA Market Recovery Monitor showed that only 69.9% of total licensed premises had reopened for trading, suggesting that the long term impact of the pandemic on market supply is likely to be significant.

OUR STRATEGIC PRIORITIES

Despite the impacts of Covid-19, the fundamental strengths of our business remain. Our brand portfolio is well-known and diversified across consumer demographics and geographical locations, our estate is 82% freehold and we have an experienced and proven management team. We have made significant progress in recent years and we intend to continue to build on the momentum previously gained once trading restrictions have been lifted. In the short to medium term, our focus will be on successfully trading the business in the fast changing environment, ensuring the safety of our team members and guests, and on growing the business back to, and beyond, the levels of trade that we were enjoying before the pandemic. We continue to focus on the three identified priority areas which aim to strengthen the competitive position of the company: building a more balanced business; instilling a more commercial culture and driving an innovation agenda. These priorities will keep the business focused as we recover.

Our Ignite programme of work, a series of internal business improvement initiatives, which has delivered significant value to date, remains at the core of our long-term growth plan and we are working up a fresh wave of new initiatives ready to launch when trading becomes more stable. We are continuing to work on three or four major projects which we believe will yield significant opportunities in the future including auto-ordering, using a sophisticated forecasting tool to predict required food orders, and master data management, allowing us to gain insights from the data we own and to more easily enable our systems to interact with new technology. Aside from these, our immediate focus will be to prioritise the shorter-term initiatives which have a quick impact on the business, such as further rolling out mobile order-at-table and extending our delivery footprint.

We remain confident of our ability to deliver long-term and sustained efficiencies and business improvements through the Ignite programme and will be working to refine and roll out the new initiatives once the business is open and trading again.

OUTLOOK

The future will remain both challenging and highly uncertain with the duration and depth of the trading restrictions imposed on the hospitality sector in response to the Covid-19 pandemic being, in the first instance, the primary determinant of our financial performance. We will continue to manage the business on an efficient and prudent basis, limiting the outflow of resources when we are closed and taking advantage of the ability to reopen our sites and trade as and when that occurs. Given this uncertainty, we continue to be unable to provide detailed guidance on expected forward financial performance, other than to say that we believe we are well placed to recover quickly, once restrictions are lifted.

The results are prepared under the going concern basis of accounting, although given the high level of uncertainty due to Covid-19 there is material uncertainty both against this assumption and the valuation of the Group property portfolio. Further details of each are provided in notes to the consolidated financial statements.

As at 25 November the Group had cash balances on hand of £125m in addition to access to committed undrawn unsecured facilities of £100m, giving a total liquidity of £225m. During the current period of shutdown action has again been taken to limit costs such that the ongoing monthly cash burn is approximately £35m to £40m before payment of debt service costs (representing interest and amortisation) of £50m per quarter.

We remain confident that with our strong estate of largely freehold assets, balanced portfolio of well-known brands and proven management team we are well positioned to regain the previous momentum built and to continue our trend of outperformance of the market as trading restrictions ease. 

FINANCIAL REVIEW

On a statutory basis, loss before tax for the year was £(123)m (FY 2019 profit of £177m), on sales of £1,475m (FY 2019 £2,237m).

The Group Income Statement discloses adjusted profit and earnings per share information that exclude separately disclosed items to allow a better understanding of the trading of the Group. Separately disclosed items are those which are separately identified by virtue of their size or incidence.

The financial performance across the year has been dominated by restrictions on trading in response to the Covid-19 pandemic, including a full national shutdown for several months in both the UK and Germany.

At the end of the period, the total estate comprised 1,738 sites in the UK and Germany of which 1,660 are directly managed.

Changes in accounting policies

This is the first full year financial results the Group has published since the adoption of IFRS 16 Leases. As a result of adopting the modified retrospective method with assets equal to liabilities, adjusted for any prepaid lease payments, lease incentives, expected dilapidations and lease premiums at transition, prior year comparatives have not been restated. A full impairment review of the right-of-use assets has been completed on transition to the new standard with the resulting impairment, net of any reversal of onerous lease provisioning, presented as an adjustment to opening reserves. Further details are included in note 12.

The main impact of the adoption of this new standard on our financial statements, which should accrue evenly across the year, is as follows: on the balance sheet, recognition of right-of-use assets at the start of the year of £466m and lease liabilities of £545m. During the 52 weeks ended 26 September 2020, the Group recognised £41m of depreciation charges and £17m of interest costs in respect of these leases.

Revenue

Total revenue of £1,475m was down 34.1%, principally reflecting periods of closure in relation to the Covid-19 pandemic.

Like-for-like salesa declined by 3.5% over the financial period, with sales growth of 0.9% before closure more than offset by the impact of reduced capacity, increased social distancing measures and consumer caution in response to Covid-19 following reopening. Like-for-like food salesa declined by 0.3%, performing better than drink sales which fell by 7.3%, reflecting both the success of the Eat Out to Help Out scheme and subsequent promotions and the fact that city centre pubs have been hardest hit by the trading and movement restrictions imposed. Like-for-like salesa growth benefitted from the reduced VAT rates on certain supplies applied by the UK Government from 15 July. Included within total revenue is £30m received from the Government in relation to the Eat Out to Help Out Scheme.

Like-for-like salesa growth:

Since the period end, including the latest closure period, like-for-like salesa have declined by 26.5% and total sales by 50.8%.

Separately disclosed items

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

A £93m charge is recognised relating to valuation and impairment of properties, comprising a £43m impairment arising from the revaluation of freehold and long leasehold sites, a £10m impairment in relation to freehold and long leasehold tenant's furniture and fittings, a £7m impairment of short leasehold and unlicensed properties and a £33m impairment of right-of-use assets. The majority of these movements are a direct result of Covid-19 and the perceived trading environment present at the reporting date.

A £11m charge is recognised representing costs directly associated with the Covid-19 pandemic and primarily relates to the disposal of stock items at site and within distribution depots that were beyond useable dates as a result of the Government enforced closure of pubs on 20 March. This excessive wastage is not considered to be part of normal trading activity.

Income of £13m relates to a long-standing claim with HMRC, relating to VAT on gaming machines. HMRC paid the Group £13m in May 2010 but following an appeal by HMRC, the Group repaid this in 2014. During the 52 weeks ended 26 September 2020, HMRC agreed to settle this amount with the Group. The amount recognised is the settlement value including estimated interest.

A £10m deferred tax charge has been recognised following the substantive enactment of legislation on 17 March 2020, which increased the UK standard rate of corporation tax from 17% to 19% from 1 April 2020.

Operating profit and marginsa

Adjusted operating profita of £99m was 68.8% lower than last year due to restrictions, including the national closure of sites, in response to Covid-19. On closure of the estate, measures were taken to preserve profitability and all non-essential costs eliminated.

During the year, Government support was received in the form of a holiday on business rates (which will last through to April 2021) worth £47m, a reduction in the rate of VAT to 5% on non-alcoholic sales (to January 2021) and, in addition, the Group has secured additional debt facilities from banks under the Coronavirus Large Business Interruption Loan Scheme (CLBILs) backed by the UK Government. Employees also benefited from the Coronavirus Job Retention Scheme, with over 99% furloughed throughout much of the period of national shutdown in the summer which amounted to £165m.

Statutory operating margin of 0.5% was 12.8ppts lower than last year, materially impacted by the closure period and property valuation and impairment reviews. Adjusted operating margina was 7.5ppts lower than last year at 6.7%.

Interest

Net finance costs of £127m for the full year were £14m higher than last year due to an additional £17m recognised in respect of interest on lease liabilities due to IFRS16 and £2m additional interest in relation to unsecured facilities partially offset by a £4m reduction in interest costs in relation to securitised debt.

The net pensions finance charge was £4m (FY 2019 £7m). The charge for next year is expected to be £3m.

Earnings per share

Basic (loss)/earnings per share, after the separately disclosed items described above, were (26.2)p (FY 2019 33.5p). Adjusted (loss)/earnings per sharea were (6.3)p (FY 2019 37.2p). In both cases the reduction was due to the impacts of Covid-19 on profits. The weighted average number of shares in the period was 428m and the total number of shares issued at the balance sheet date was 429m.

Cash flow

The business generated £255m of EBITDA before movements in the valuation of the property portfolio.

Pension deficit contributions were lower in the year due to an agreement reached with the schemes' Trustees to suspend contributions for six months to enable the business to conserve liquidity during the period of shutdown. Contributions have now been resumed.

Capital expenditure of £108m relates to investment projects, the majority of which were undertaken before the capital programme was suspended in light of the Covid-19 business closure.

Despite the challenges of closure in the year the business has managed to generate positive net cash flow of £24m, after having funded a scheduled reduction in bond debt of £95m.

Capital expenditure

Capital expenditure of £108m comprises £104m from the purchase of property, plant and equipment and £4m in relation to the purchase of intangible assets.

The investment programme was suspended in March as part of the cash management strategy in response to Covid-19, with only essential spend being undertaken since reopening.

Property

In line with our property valuation policy a red book valuation of the freehold and long leasehold estate has been completed in conjunction with the independent property valuer, CBRE. In addition, the Group has undertaken an impairment review on short leasehold and unlicensed properties and fixtures and fittings.

The effects of the Covid-19 pandemic has disrupted activities across all real estate property markets, increasing uncertainties as to valuations which the Group's valuers, CBRE, need to take into consideration. As a consequence, CBRE has included in its valuation report of the Group's UK freehold and long leasehold properties wording to reflect that there is a "material uncertainty". This clause is included on a precautionary basis and does not mean that reliance cannot be placed on their valuation. It has been included to ensure transparency and to provide further insight as to the market context under which the valuation opinion was prepared. In recognition of the potential for market conditions to move rapidly in response to changes in Covid-19, CBRE have also highlighted the importance of the valuation date (26 September 2020).

Pensions

The Group continues to make pension deficit payments as agreed as part of the triennial pensions valuation with the schemes' Trustees at 31 March 2019, which showed an actuarial deficit of £293m. It was agreed that the deficit would continue to be funded by cash contributions of £49m per annum indexed to 2023. During the year, the Group agreed with the Trustees that the contributions into the Mitchells & Butlers Pension Plan and the Mitchells & Butlers Executive Pension Plan would be suspended in respect of the monthly contributions for the six months to September 2020. Those contributions have been added onto the end of the agreed recovery plan so that those contributions will be payable in 2023. In 2024 an additional payment of £13m will be made into escrow, should such further funding be required at that time.

The court hearing in relation to the rate of inflation to be applied to pensions increases for certain sections of the membership in excess of the guaranteed minimum pensions is expected to be heard in mid 2021.

Net debt and facilities

Following the adoption of IFRS16, leases are now included in net debt. Net debt at the period end was £2,104m, including lease liabilities of £541m (FY 2019 not restated). Excluding lease liabilities net debt at the period end was £1,563m, approximately flat across the period (FY 2019 £1,564m).

On 12 June the Group announced revised financing arrangements that had been agreed with our main creditors to provide a platform of both additional liquidity and improved financial flexibility in order to meet the challenge presented by Covid-19. This is represented by £100m of CLBILs and revolving credit facilities of which £10m was drawn at the balance sheet date.

In addition, as part of the revised financing arrangements, certain amendments and waivers were agreed within the Group securitisation to provide stability and flexibility to the Group in order to manage the Secured Financing structure. These arrangements are summarised under going concern in note 1.

In securing these valuable amendments the Group has agreed not to pay an external dividend, undertake any share buy-backs or repurchase bond debt until the end of the financial year to September 2021, at the earliest.

Further details can be found at https://www.mbplc.com/infocentre/debtinformation/.

Significant Judgements

The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions in the application of accounting polies. Estimates and judgements are periodically evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Judgements and estimates for the period relate to;

- going concern assessment (note 1)

- separately disclosed items (note 3)

- property plant and equipment (note 8)

- leases (note 9)

- pensions (note 11)

The impact of Covid-19 on the trading environment and property market has resulted in areas of estimation uncertainty in relation to some of these judgements.

Going Concern

After considering the forecasts, sensitivities and mitigating actions available to management and having regard to the risks and uncertainties to which the Group is exposed (including the material uncertainty referred to above), the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future, and 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 continue to be prepared on the going concern basis.

Full details are included in note 1.

Director's responsibility statement

The 2020 Annual Report and Accounts which will be issued in December 2020, contains a responsibility statement in compliance with DTR 4.1.12 of the Listing Rules which sets out that as at the date of approval of the Annual Report on 25 November 2020, the Directors confirm to the best of their knowledge:

- the Group and unconsolidated Company financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and Company, and the undertakings included in the consolidation taken as a whole; and

- the performance review contained in the Annual Report and Accounts includes a fair review of the development and performance of the business and the position of the Group and the undertakings including 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 25 November 2020 and is signed on its behalf by:

Tim Jones

Chief Financial Officer

25 November 2020

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 defined later in this announcement.

b - As measured by the Coffer Peach business tracker.

All results relate to continuing operations.

Notes to the consolidated financial statements

1. Preparation of preliminary consolidated financial statements

General information

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. While the financial information included in this release is based on the Group's consolidated financial statements and has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs.

The preliminary financial statements include the results of Mitchells & Butlers plc and all its subsidiaries for the 52 week period ended 26 September 2020. The comparative period is for the 52 week period ended 28 September 2019. The respective balance sheets have been drawn up as at 26 September 2020 and 28 September 2019.

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

The Group's accounting policies have been applied consistently.

Going concern

The Directors have adopted the going concern basis in preparing these financial statements after assessing the impact of identified principal risks and, in particular, the possible adverse impact on financial performance, specifically revenue and cash flows, of restrictions imposed by the relevant governments in the UK and Germany in response to the outbreak of Covid-19.

Liquidity

As at 26 September 2020, the Group had cash and cash equivalents of £158m, and undrawn committed unsecured facilities of £140m. We expect to retain significant liquidity headroom against these facilities throughout the going concern assessment period.

The Group's primary source of borrowings is through a secured financing structure made up of ten tranches of fully amortising loan notes with a gross debt value of £1.6bn. These are secured against the majority of the Group's real estate property assets and the future income streams generated from those properties. The periods for repayments of principal vary by class of note with maturity dates ranging from 2023 to 2036, but at a current aggregate annual debt service cost of c.£200m. Interest rate and exchange rate fluctuations have largely been fixed with currency and interest rate swaps which qualify for hedge accounting under IFRS 9 Financial Instruments. Within the securitisation structure, the Group maintains a Liquidity Facility of £295m, which is a condition of the securitisation documents. On 12 June 2020 the Group announced revised financing arrangements that had been agreed with its main creditors to provide additional liquidity and financial flexibility in order to meet the challenges presented by Covid-19. These are summarised below.

Unsecured borrowing facilities of £250m fall due for repayment in December 2021, outside the term of the going concern assessment period.

Revised facilities and covenants

During the period, and as a result of the Covid-19 pandemic, material trading restrictions were imposed on the Group and the sector by governmental authorities, including mandated closure for over three months. Mitigating action was swiftly taken which included agreeing revised arrangements in the secured financing structure with the consent of the controlling creditor of the securitisation and the securitisation Trustee. These can be summarised as:

· a waiver of, and amendment to, the 30 day suspension of business provision, where such provision was waived because the suspension arose due to the enforced closure during the Covid-19 pandemic;

· a waiver of the two quarter look-back debt service coverage ratio test up until July 2021 and a waiver of the four quarter look-back debt service coverage ratio test up until September 2021;

· a waiver of the requirement to appoint a financial adviser which would otherwise have arisen for any periods where the debt service coverage ratio falls to below the required level up until July 2021;

· a reduction in the minimum amount required to be spent on maintenance during FY 2020 and FY 2021 to reflect the operation of the Group's business having been temporarily suspended; and

· a waiver to facilitate drawings of up to £100m in total under the Liquidity Facility providing the Group with additional facilities in order to meet payments of principal and interest, provided such drawings are repaid in full by 15 March 2021.

1. Preparation of preliminary consolidated financial statements (continued)

Going concern (continued)

In order to secure such amendments and waivers, the Group gave certain undertakings in relation to its own financing arrangements, namely, to secure the £250m liquidity facilities referred to below, and an undertaking to provide funding into the securitisation of up to £100m in line with drawings on the Liquidity Facility.

In addition, the following was agreed with the Group's unsecured relationship banks:

· Extension of the term of existing £150m committed unsecured facilities to 31 December 2021; and

· The provision of an additional £100m of liquidity, also to 31 December 2021, backed by the Coronavirus Large Business Interruption Loan Scheme facilitated by the UK Government.

The Group will continue to remain in regular dialogue with its lenders throughout the period.

Significant judgements and base case

These revised financial arrangements provide a stronger platform for the business to meet the uncertainty ahead, therefore ensuring that liquidity is not expected to be a main concern during the going concern assessment period. Key to successfully meeting the challenge the Group faces will be the depth, duration and recovery profile of the pandemic which will, in turn, dictate the severity of imposed trading restrictions and, therefore, most importantly, the level of sales that the business is able to achieve. The level of sales drives the EBITDA of the business which is a critical measure for covenant compliance tests. The key judgements made by management in arriving at the level of sales are the trajectory of sales recovery, a return to historic trading conditions and the extent of future restrictions.

In reaching this assessment, the Directors have reviewed what they consider to be a plausible base case forecast scenario which includes the impact of the second national lockdown in England from 5 November 2020. This is assumed to be lifted on 2 December 2020 but is expected to be replaced with ongoing severe restrictions on trading in the hospitality sector, leading to an expectation of sales over the important festive trading period being over 40% lower than in previous years. Over the second quarter of FY 2021, to March 2021, sales are forecast to remain materially lower at approximately 25% down on years prior to FY 2020 (i.e. those years not impacted by the Covid-19 pandemic), reflecting management's expectation of further local lockdowns impacting c.10% of the estate, before building back gradually in the second half of FY 2021 as restrictions become less severe, although sales are not assumed to reach the level achieved pre-Covid during FY 2021. In aggregate, sales are forecast to be 15% down against pre Covid-19 comparatives over the period following anticipated re-opening in December to the end of the year. Site level operating margins have been assumed to be in line with recent operating margins achieved since reopening in July 2020, which is similar to margins the business has achieved before Covid-19 related closures.

Some limited mitigation and operational cost reduction initiatives are assumed in response to these reduced activity levels, amounting to 10% of total costs, also for the period after re-opening. During this time the Group is expected to continue to benefit from assistance from the UK Government, principally in the form of relief from business rates, a reduction in VAT on non-alcohol sales to April 2021 and some limited payment from the Job Retention Bonus, in respect of which the UK Government is expected to provide revised guidance. Access to the Job Retention Scheme to the extended date of March 2021 is assumed, where applicable, in order to protect employment.

Under the base case forecast, the Group continues to remain profitable with no forecasted covenant breach, with the securitised four quarter look back FCF : debt service covenant demonstrating the lowest level of headroom. In FY 2021 the Group continues to remain profitable with sufficient liquidity and no forecast unwaived covenant breaches, although a number of tests have limited remaining headroom.

Reverse stress test

The Group has undertaken reverse stress test modelling, being the identification of that level of downside forecast at which the business model becomes unsustainable for either solvency or liquidity reasons. Due to the complex capital structure of the Group, involving the interaction of both secured and unsecured estates with quarterly covenant testing, there is a very wide range of scenarios on which the reverse stress test can be constructed.

1. Preparation of preliminary consolidated financial statements (continued)

Going concern (continued)

Reverse stress test (continued)

In examining vulnerabilities, management believe that further sales shortfalls are likely to be most acute for the first half of FY 2021. After the assumed re-opening in England in December 2020, a deterioration beyond an average of 4% lower sales than the base case for this same period and second half sales in line with base case would result in a breach in covenants as noted below. From January 2021, some provision is assumed in this scenario for the potential for increased tariff costs on imported food and drink as a result of the risk of a no-deal or limited-deal Brexit. These costs have not been included in the base forecast model due to uncertainty and the availability of potential options to mitigate through supply chain arrangements and range changes. In the reverse stress test, management have assumed unmitigated costs to be £11m per annum.

There is a reasonably plausible scenario where the Group could experience the sales shortfalls set out in the reverse stress test which would result in a breach to its covenants. Any breach in covenants would result in a need for a waiver of the banking covenants, or for the Group to renegotiate its borrowing facilities, neither of which are fully within the Group's control. A breach of covenants would also result in the reclassification of £1,542m non-current borrowings to current borrowings. The Directors have, however, assessed that: given the strength of the underlying business including its property estate and brand portfolio; the Group's existing relationships with its main creditors; its historical success in obtaining covenant waivers and in raising finance; and ongoing dialogue with its main creditors, they believe that a waiver of the covenants or renegotiation of the facilities would be successful.

Given the very high degree of uncertainty resulting from the Covid-19 pandemic and resulting restrictions placed on trading in the hospitality sector, a material uncertainty therefore 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. This uncertainty stems directly from a lack of clarity on both the extent and the duration of current tiering, local and national lockdowns and operating restrictions, such as social distancing measures, limitations on party sizes and reduced opening times, all of which have an impact on consumers' ability and willingness to visit pubs and restaurants and, therefore, the Group's operational performance translating to sales and EBITDA that determine the Group's continuing covenant compliance.

Going concern statement

Notwithstanding the material uncertainty highlighted above, after due consideration the Directors have a reasonable expectation that the Company and the Group have sufficient resources to continue in operational existence for the period of at least 12 months from the date of approval of these financial statements. Accordingly, the financial statements continue to be prepared on the going concern basis.

Foreign currencies

The results of overseas operations have been translated into sterling at the weighted average euro rate of exchange for the period of £1 = €1.09 (2019 £1 = €1.13), 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 = €1.10 (2019 £1 = €1.12) and £1 = $1.27 (2019 £1 = $1.23) respectively.

New and amended IFRS Standards that are effective for the current period

The International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee (IFRIC) have issued the following standards and interpretations which have been adopted by the Group in these financial statements for the first time with the following impact.

IFRS 16 Leases

In the current period, the Group has applied IFRS 16 (as issued by the IASB in January 2016) that is

effective for annual periods that begin on or after 1 January 2019.

IFRS 16 introduced a single, on-balance sheet accounting model for lessees and sets out the principles for recognition, measurement, presentation and disclosure of leases. As a result, the Group, as a lessee, has recognised right-of-use assets representing its right to use the underlying assets, and lease liabilities representing

its obligation to make lease payments. In contrast to lessee accounting, lessor accounting under IFRS 16 is largely unchanged.

Given the number of leases and historical data requirements to adopt the full retrospective approach, the Group has applied the modified retrospective approach with assets equal to liabilities, adjusted for any prepaid lease payments, lease incentives, expected dilapidations and lease premiums at transition. As a result, there is no requirement to restate prior period information.

1. Preparation of preliminary consolidated financial statements (continued)

New and amended IFRS Standards that are effective for the current period (continued)

IFRS 16 Leases (continued)

The date of initial application of IFRS 16 for the Group is 29 September 2019. The impact of the adoption of IFRS 16 on the Group balance sheet, Group income statement and Group statement of changes in equity is shown in note 12.

The Group as lessee

The Group has applied the practical expedient available on transition to IFRS 16, not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to apply to those leases entered into or modified before 29 September 2019. The Group now assesses whether a contract is or contains a lease based on the new definition of a lease for all contracts entered into or modified on or after 29 September 2019. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

The Group has also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a remaining lease term of twelve months or less and do not contain a purchase option, or are lease contracts for which the underlying asset is of low value.

Where a lease is identified, the Group recognises a right-of-use asset and a corresponding lease liability.

The lease liability is measured at the present value of the lease payments, using the lessee's incremental borrowing rate specific to term, country, currency and remaining lease term as the discount rate, if the rate implicit in the lease is not readily determinable. Lease payments include fixed payments, less any lease incentives receivable, and variable lease payments that depend on an index or rate, with these being initially measured using the index or rate at the commencement date. Any variable lease payments that do not depend on an index or rate, are recognised as an expense in the period in which the event or condition that triggers the payment occurs. The lease liability is presented as a separate line in the Group balance sheet, split between current and non-current liabilities.

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest rate method) and by reducing the carrying amount to reflect the lease payments made. The lease liability is re-measured with a corresponding adjustment to the right-of-use asset, when there is a change in future lease payments resulting from a rent review, change in an index or rate, a change in lease term, e.g. lease extension, or a change in the Group's assessment of whether it is reasonably certain to exercise or not exercise a break option.

The Group recognises right-of-use assets at the commencement date of the lease. Right-of-use assets are measured at cost, less accumulated depreciation and impairment losses and adjusted for any re-measurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, adjusted for any re-measurement of lease payments made at or before the commencement date, less any lease incentives received. Right-of-use assets are depreciated over the shorter of the asset's useful life or the lease term on a straight-line basis. Right-of-use assets are subject to and reviewed regularly for impairment. This replaces the previous requirement to recognise a provision for fixed rental charges within onerous lease contracts.

Under IFRS 16, there is a lease-by-lease transition choice whereby a lessee can take a practical expedient to rely on assessments immediately before the date of initial application of whether leases are onerous under the definition within IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and to adjust the right-of-use asset by this amount. Alternatively, the new requirements under IFRS 16 can be applied and the right-of-use asset is tested for impairment in accordance with IAS 36 Impairment of Assets at the date of transition. The Group has considered this on a lease by lease basis with a transitional impairment review taken on a number of leases.

The transitional impairment review has resulted in an impairment charge which is presented as an opening reserves adjustment, net of the reversal of onerous lease provisions no longer required. This impairment predominantly resulted from the application of different discount rates in line with the applicable accounting standards. The onerous lease provisions previously recognised in accordance with IAS 37 and the IFRS 16 right-of-use calculations both use lower discount rates such as a risk-free or incremental borrowing rate. However, on adoption of IFRS 16 and recognition of right-of-use assets, these assets are tested for impairment under IAS 36 which uses a market participants' rate. The application of these standards and changes in discount rates have caused an impairment on numerous right-of-use assets.

The Group recognises lease payments in relation to short-term leases and low value assets as an operating expense on a straight-line basis over the term of the lease.

1. Preparation of preliminary consolidated financial statements (continued)

New and amended IFRS Standards that are effective for the current period (continued)

IFRS 16 Leases (continued)

The Group as lessee (continued)

At the commencement date of property leases the Group determines the lease term to be the full term of the lease, assuming any option to break or extend the lease is unlikely to be exercised. Leases are regularly reviewed and will be revalued if it becomes likely that a break clause or option to extend the lease will be exercised. Judgement is also required in respect of property leases where the current lease term has expired but the Group remains in negotiation with the landlord for potential renewal. Where the Group believes renewal to be reasonably certain and the lease is protected by the Landlord Tenant Act, it will be treated as having been renewed at the date of termination of the previous lease term and on the same terms as the previous lease. Where renewal is not considered to be certain the leases are included with a lease term which reflects the anticipated notice period under relevant legislation. The lease will be revalued when it is renewed to take account of the new terms.

The Group as lessor

IFRS 16 does not change substantially how a lessor accounts for leases. Under IFRS 16, a lessor continues to classify leases as either finance leases or operating leases and accounts for those two types of leases differently.

However, IFRS 16 has changed and expanded the disclosures required, in particular with regard to how a lessor manages the risks arising from its residual interest in leased assets.

Under IFRS 16, an intermediate lessor accounts for the head lease and the sub-lease as two separate contracts. The intermediate lessor is required to classify the sub-lease as a finance or operating lease by reference to the right-of-use asset arising from the head lease (and not by reference to the underlying asset as was the case under IAS 17).

As a result of this change, the Group has reclassified certain of its sub-lease agreements as finance

leases. As required by IFRS 9, an allowance for expected credit losses has been recognised on the

finance lease receivables.

The impact of the adoption of IFRS 16 on the Group balance sheet, Group income statement and Group statement of changes in equity is shown in note 12.

Interest Rate Benchmark Reform - Amendments to IFRS 9, IAS 39 and IFRS 7 

On 26 September 2019 the International Accounting Standards Board (IASB) published Interest Rate Benchmark Reform, Amendments to IFRS 9, IAS 39 and IFRS 7 bringing to a conclusion phase one of the IASB's work to respond to the effects of Interbank Offered Rates (IBOR) reform on financial reporting. The Group has early adopted the amendments from 29 September 2019.

The Intercontinental Exchange Benchmark Administration (IBA) has announced plans to phase out the IBOR benchmark and move to a new benchmark known as alternate reference rates (ARR) by the end of 2021. The amendments address the uncertainty caused by the current interest rate benchmark reforms and allow entities to continue to apply hedge accounting to hedge relationships containing instruments that are affected by the benchmark reforms.

The Group has floating rate debt linked to GBP LIBOR and USD LIBOR which it cash flow hedges using interest rate and cross currency interest rate swaps. The amendments allow the Group to continue to apply hedge accounting through the transition to the new benchmark rate even though there is uncertainty about the timing and amount of the hedged cash flows as a result of the interest rate benchmark reforms.

The Group will not discontinue hedge accounting should any assessment of effectiveness indicate any ineffectiveness as a direct result of the change in benchmark rate.

The Group continues to monitor the situation with regards the phasing out of LIBOR and its proposed replacement benchmark but at this stage has not engaged with counterparties to negotiate the appropriate amendments from LIBOR to a replacement benchmark rate. The Group expects to transition its swaps and loan notes to the same replacement benchmark rate at the same time and will continue to have highly effective hedge relationships as a result.

The amendments will continue to be applied until any uncertainty arising from the benchmark reforms to which the Group is exposed has ended. The Group has assumed that this uncertainty will continue until the swap and debt contracts, in hedge relationships, that reference LIBOR have been updated to state the replacement benchmark rate and the date on which it will first apply.

1. Preparation of preliminary consolidated financial statements (continued)

Critical accounting judgements and key sources of estimation uncertainty

The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions in the application of accounting policies that affect reported amounts of assets, liabilities, income and expense.

Estimates and judgements are periodically evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. In the current period, there has been significant judgement around the going concern assessment, including estimation uncertainty in the forecasts used for this assessment. Full details are provided in the going concern review provided above.

The Group's other critical accounting judgements and estimates are described within the relevant notes to the consolidated financial statements.

Judgements and estimates for the period remain largely unchanged from prior period, other than the consideration of the impact of Covid-19 where relevant. In addition, there are new judgements and estimates within note 9 Leases as a result of the adoption of IFRS 16 and the impact of Covid-19.

Critical judgements are described in each section listed below:

· Note 3 Separately disclosed items

· Note 6 Taxation

· Note 8 Property, plant and equipment

· Note 9 Leases

· Note 11 Pensions

Key sources of estimation uncertainty are described in:

· Note 6 Taxation

· Note 8 Property, plant and equipment

· Note 9 Leases

2. Segmental analysis

Operating segments

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 Group trades in one business segment (that of operating pubs and restaurants) and the Group's brands meet the aggregation criteria set out in Paragraph 12 of IFRS 8. Economic indicators assessed in determining that the aggregated operating segments share similar economic characteristics include: expected future financial performance; operating and competitive risks; and return on invested capital. As such, the Group reports the business as one reportable business segment.

The CODM uses EBITDA and profit before interest and separately disclosed items (operating profit pre-adjustments) as the key measures of the Group's results on an aggregated basis.

Geographical segments

Substantially all of the Group's business is conducted in the United Kingdom. In presenting information by geographical segment, segment revenue and non-current assets are based on the geographical location of customers and assets. 

3. Separately disclosed items

In addition to presenting information on an IFRS basis, the Group also presents adjusted profit and earnings per share information that excludes separately disclosed items and the impact of any associated tax. Adjusted profitability measures are presented excluding separately disclosed items as we believe this provides both management and investors with useful additional information about the Group's performance and supports a more effective comparison of the Group's trading performance from one period to the next. Adjusted profit and earnings per share information is used by management to monitor business performance against both shorter-term budgets and forecasts but also against the Group's longer-term strategic plans.

Critical accounting judgements

Judgement is used to determine those items which should be separately disclosed to allow a better understanding of the adjusted trading performance of the Group. This judgement includes assessment of whether an item is of sufficient size or of a nature that is not consistent with normal trading activities.

3. Separately disclosed items (continued)

The items identified in the current period are as follows:

4. Government grants

Accounting policy

Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received. Government grants are recognised in the income statement on a systematic basis over the periods in which the Group recognises as expenses the related operating costs for which the grants are intended to compensate.

Coronavirus Job Retention Scheme (CJRS)

Under this scheme, HMRC reimburses up to 80% of the wages of certain employees who have been

furloughed. The scheme is designed to compensate for staff costs, so amounts received are recognised in the income statement over the same period as the costs to which they relate. In the income statement, operating costs are shown net of grant income received. The scheme commenced on 20 March 2020 and will continue until 31 March 2021.

Eat Out to Help Out

During August 2020, HMRC offered a 50% discount off food and non-alcoholic drinks, capped to £10 per

person, when dining out between Monday and Wednesday. The Group participated in this scheme. In the income statement, food and drink revenue includes amounts received from HMRC in respect of the scheme.

Business rates

Businesses in the retail, hospitality and leisure sectors in England were granted 100% business rates relief for the 2020/2021 rates year.

The impact of grants received on the income statement for the 52 weeks ended 26 September 2020 is as follows:

In addition to the grants received above, during the current period, the UK Government announced 100% rate relief for all pubs and restaurants for the business rates year 2020/2021. The impact in the current period is an estimated saving of £47m (2019 £nil).

Although this has not been quantified, the Group has 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 will last until 31 March 2021.

5. Finance costs and income

6. Taxation

Critical accounting judgements

Recognition of deferred tax assets involves judgement regarding the future financial performance of the UK Group. The future financial performance used in this judgement is the base case forecast scenario as described in the going concern assessment in note 1. Under the base case forecast the Group continues to remain profitable in future years. This base case scenario has been used to forecast future taxable profits.

Key sources of estimation uncertainty

Differences in forecast taxable profits and actual future profits could impact the level of deferred tax assets recognised in future periods. The key estimation uncertainties in forecasting future financial performance will be the depth, duration and recovery profile of the Covid-19 pandemic which will in turn dictate the severity of trading restrictions imposed on the Group by the Government.

Taxation - Group income statement

Current tax:

Deferred tax: