Mitchells & Butlers Regulatory News (MAB)

MITCHELLS & BUTLERS PLC

22 May 2014

HALF YEAR RESULTS

(For the 28 weeks ended 12 April 2014)

Return to food volume growth underpins successful first half

Statutory results

Financial performance

Balance sheet and cash flow

Operational performance

Alistair Darby, Chief Executive, commented:

"We are pleased with our trading performance in this first half, particularly the turnaround in volumes, alongside which we have made good progress against our key priorities, and continued to position Mitchells & Butlers for sustainable long-term future growth.

Successful resolution of the recent triennial pensions valuation, which we are announcing today, provides greater visibility and certainty over future funding and cash flow, at an affordable level.

Our business transformation is gaining momentum. Through our clearly laid-out strategy, we are well-placed to take advantage of the economic recovery across the UK."

Definitions

a - Like-for-like sales growth includes the sales performance against the comparable period in the prior year of all UK managed pubs that were trading in the two periods being compared. For the 28 weeks to 12 April 2014, 97% of the UK managed estate is included in this measure.

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

c - Net cash flow excludes £28m mandatory bond amortisation and £148m 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 12 April 2014.

e - Operating margin is taken before exceptional items and other adjustments and is compared to H1 2013.

f - Growth in annualised site EBITDA, expressed as a percentage of expansionary capital.

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 4 June 2014 on 0121 260 4861 replay access pin 4751710#.

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 leading portfolio of well-recognised brands and a high quality freehold estate. We focus on long-term growth in the eating-out market, a focus that has yielded a 48% increase in food sales since 2007. Around three-quarters of our turnover is generated from the guests eating out in our restaurants and pubs.

We are a strong and resilient business:

· we own and operate around 1,600 of the highest quality managed houses in the country, across a wide geographic distribution;

· we have a number of the nation's most popular restaurant and pub brands;

· we employ 40,000 dedicated and hard-working people;

· we have an asset base of £3.9bn; with 83% of sites owned on a freehold and long leasehold basis;

· we have significant scale at the corporate, brand and unit levels; and

· we have long-term, fixed rate debt financing with secure asset backing.

These strengths represent a solid foundation on which to build. We are well positioned to grow as the UK economy enters a period of recovery which we expect to come from all geographic regions.

In line with the business transformation plan previously outlined by the Company, we remain fully focused on our business priorities; our people, our practices, our guests and our profits. We believe that if we develop, retain and recruit exceptional people to operate scale brands and formats in which our guests love to eat and drink, then we will achieve market leadership and deliver sustainable growth in shareholder value.

The market, brand positioning and expansion opportunities

We generate annual sales of approximately £1.9bn from a wide range of scale brands and formats, serving guests across the economic spectrum and across a broad range of occasions, from a casual meeting with friends to special occasion dining. Our market is highly fragmented, offering substantial opportunities for growth through market share gains.

Our 'five-star approach' to the market optimises our growth potential by focusing on five substantial 'market spaces', covering around half of the total market size. Three of the sectors, Upmarket Social, Special and Family, which include brands such as Miller & Carter, Harvester, Toby Carvery and All Bar One, are together worth £35bn per annum and benefit from the most attractive consumer trends. We invest in these areas and expand our brands where possible. The Everyday Social space, including brands such as Ember Inns, is worth £2bn. Here we optimise and invest in our brands to grow like-for-like sales and profits. In the Heartland space, worth £4bn and including brands such as Sizzling Pubs, we protect our position and compete to maximise cash generation, which is critical to fund overall business growth.

Business transformation plan

We have made further progress with our business transformation plan, now in its second full year, which places people and guests at the heart of our organisation. The first phase saw the restructuring of our central functions, the removal of unnecessary bureaucracy, and the start of major upgrades to our IT infrastructure. We continue to build on these foundations and are undertaking a more wide-ranging change programme, aimed at focusing the business on four priority areas: our people, our practices, our guests, and our profits.

Our people:

In an environment where unemployment is falling and a highly skilled workforce is critical to our ongoing success, our focus remains on the recruitment, induction, engagement, and retention of our people. Highly engaged people stay with us for longer, become more efficient, provide better service to our guests and in turn drive like-for-like sales. Retail staff turnover is therefore considered to be a key measure of success. We have shown good progress on this in the past year and it remains an area of focus for us.

Key activity in H1:

· Retail staff turnover was at a historical low of 78%, a fall of 4%pts since the start of the transformation plan

· Implementation of a centralised recruitment project for retail teams, aimed at utilising our scale to recruit collectively and improve team member engagement. This project started in London, where we have seen staff turnover fall, and is now being implemented in cities where we have a strong presence

· Investment in the time spent inducting every retail team member who is new to our business, further driving staff engagement and enhanced interaction with our guests

· Further investment in apprenticeships. We currently have more than 1,500 apprentices and in March pledged to recruit an additional 1,000 in the next two years

Our practices:

Practices refer to the professional, safe and efficient way that we run our operations. We continue to improve our already high scores in the FSA's Food Hygiene Ratings ('Scores on the Doors') by targeting four stars as a minimum acceptable rating whilst focusing our teams on achieving five.

Key activity in H1:

· Further improvements seen in FSA Food Hygiene Ratings, from an already high base. This is a measure which we know is of critical importance to our guests, and therefore we continue to drive performance in this area

· Having started in June 2013, new pub systems are now installed and live in more than 750 pubs, with rollout to be completed during FY 2015. The introduction of handheld order pads and kitchen management systems have enabled us to speed up guest service, thus driving net promoter score

· Investment in back of house systems reducing administration and freeing up time for the General Manager and Area Manager to grow the business

Our guests:

We continue to invest in guest service, aiming to grow our sales and profits through delivering consistently excellent guest experiences, leading to increased revisits and recommendation. The best measure of how well we are delighting our guests is whether they are likely to recommend our restaurants and pubs (net promoter score). Our philosophy is supported by 'Good to Great', our long-term programme to enable and empower general management and teams to deliver great guest service.

Key activity in H1:

· Further strong improvements seen in our 'net promoter score'a to 63% (FY 2013: 59%)

· Continued evolution of long-term 'Good to Great' programme across the business

· Significant food and drink innovation informed by guest research

Our profits: 

A detailed review of our profit performance is provided in the next section. The return to positive food volume growth in H1, which underpins our increasing sales, is an initial sign of the success of our focus on enhancing guest experiences at affordable prices.

We expect to deliver around 35 new site acquisitions and conversions this financial year, consistent with our 'five star approach' to the market.

Key activity in H1:

· Consistent financial performance during business transformation, generating like-for-like sales growth of 1.1% and adjusted earnings per share growth of 1.4%

· Increased food sales supported by return to growth in like-for-like food volumes b

· Increase in site acquisitions and conversions to 15 in H1 2014 (H1 2013: 10), primarily in the Upmarket Social, Special and Family segments, alongside an accelerated remodel programme

Outlook

We are encouraged by the economic recovery that is developing across the UK. Against this backdrop, our business transformation is gaining momentum. We have a clear strategy for the long term development of the business, which is founded on well defined operational priorities. We are confident that we will make further progress against our key performance indicators and that we are well positioned for profitable future growth.

Notes

a - We ask our guests how likely they are to recommend our restaurants and pubs us to their friends, families and colleagues, scored out of 10. Each year we obtain over 700,000 responses. 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 out of 10 ('brand detractors'). Responses scoring 7 or 8 ('passives') are ignored in the calculation.

b - Number of main meals sold

FINANCIAL REVIEW

On a statutory basis, profit before tax for the period was £68m (H1 2013: £68m), on sales of £1,016m (H1 2013: £991m).

The Group discloses adjusted profit and earnings per share information that excludes exceptional items and other adjustments to allow a better understanding of the underlying trading of the Group. Adjusted earnings per share increased in the first half by 1.4%.

At the end of the first half, the total estate comprised 1,592 managed businesses and 59 franchised businesses in the UK and Germany.

Revenue

The Group's total revenues increased by 2.5% to £1,016m, as a result of growth in like-for-like sales as well as the contribution from new pubs and restaurants. Food sales increased by 2.7% and drink sales by 2.2%.

Total like-for-like sales increased by 1.1%, with growth from both food and drink sales. Whilst both food and drink sales were supported by price increases, food sales returned to volume growth of 0.2%a in the first half. Drink volumes declined by 0.3%b.

The like-for-like sales increase slowed in the latter part of the period, although the comparison in this period was impacted by Easter falling in the first half of last year.

Since the end of the first half, like for like sales, including Easter, have increased by 1.5%, bringing growth over the first 33 weeks (to 17 May 2014) to 1.2%.

Operating profit

Adjusted operating profit increased by 2.1% to £147m, reflecting a stable operating margin at 14.5%. The period benefited from sales growth and a marginally lower depreciation charge. These were partly offset by an additional £4m investment on IT infrastructure projects.

The Company opened 22 sites during FY 2013, which contributed £2m to operating profit growth in the first half. New site acquisitions and conversions in FY 2014 have had a slightly dilutive profit impact, due to opening costs.

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

The interest charge for the first half comprises three main elements: a finance cost of £71m relating to interest paid on the Company's securitised debt; finance income of £1m relating to cash deposit balances; and the net finance charge from pensions under IAS 19 (revised) of £5m. Further detail is provided in note 3.

Taxation

The estimated annual effective tax rate is 22%. The effective rate for the prior year (20%) was reduced by £2.5m of non-recurring historical tax credits.

Exceptional items and other non-cash adjustments

Exceptional items and other adjustments comprise a short lease impairment charge (£4m), the net finance charge for pensions referred to above (£5m), together with the associated tax credit (£2m).

Earnings per share

Adjusted earnings per share were 14.6p, 1.4% higher than last year. Basic earnings per share were 12.9p (H1 2013: 13.4p). Further detail is provided in note 6.

Cash flow and net debt

The cash flow statement below excludes £148m drawn from a liquidity facility under the terms of the securitisation. These funds are charged under the securitisation and are not available for use in the wider Group. Further detail is provided in note 9.

The business generated £204m of EBITDA in the first half, in line with last year. The working capital movement was largely driven by a reduction in trade receivables. Pension deficit contributions of £20m continued, in line with the deficit recovery plan agreed with the Trustees following the 2010 triennial valuation of the schemes. Cash flow from operations was £209m, £3m higher than last year.

Capital expenditure on maintenance, infrastructure and expansion increased from the low levels last year to £86m (H1 2013: £59m), resulting in a decrease in net cash flows to £43m (H1 2013: £70m). Net debt reduced to £1,721m, representing 4.1 times annualised EBITDA (FY 2013: 4.2 times EBITDA).

Net debt within the securitisation was £2,002m and cash and cash equivalents held outside the securitisation were £281m.

Capital expenditure

Total capital expenditure in the first half was £86m, £27m higher than the prior year. Of this amount, £58m was spent on maintenance and infrastructure projects. This includes a significant IT project to upgrade all pub and restaurant EPOS systems. The project rollout is due to be completed during FY 2015. The expected total cost of the project is £33m, of which approximately two thirds will be capital. Other ongoing infrastructure projects include upgrades to key head office HR and Finance systems.

The blended EBITDA return on expansionary capital 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:

Pensions

The Company has now reached agreement on the triennial valuation of the group pension schemes as at 31 March 2013. Due principally to lower real gilt rates and an increase in assumed longevity the funding shortfall as at the valuation date has increased to £572m (March 2010 valuation: £400m). The following arrangements and recovery plan have been agreed to address the shortfall:

· The Company has provided a PPF compliant parent company guarantee and will put in place a negative pledge, in favour of the schemes, over net assets outside of the existing securitisation arrangements

· The existing recovery plan will be extended by three years to March 2023, and comprise an increase in annual contributions to £45m (previously £40m). Annual contributions will be fixed in nominal terms for the first three years and indexed to RPI thereafter

· The Company will accelerate funding by making further contributions totalling £40m by 30 September 2015 on terms to be agreed with the Trustees

· Normal dividends may be resumed by the Company provided they are initially funded out of cashflow after bond amortisation and future increases are limited to the higher of the rate of RPI indexation and the annual increase in Group adjusted EPS

IAS 19 Employee Benefits (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 surplus or 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.

The impact of IAS 19 (revised) has been to reduce profit before tax by £4m for the 28 weeks to 13 April 2013; and by £8m for the 52 weeks ended 28 September 2013.

Dividends

Following agreement of the 2013 triennial pensions valuation and related recovery plan, the Board will assess a return to paying dividends in light of the full year trading and cashflow generation.

Responsibility statement

We confirm to the best of our knowledge that this condensed set of financial information, which has been prepared in accordance with IAS 34, gives 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 that the interim management report herein includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R.

This responsibility statement was approved by the Board of Directors on 21 May 2014 and is signed on its behalf by Tim Jones, Finance Director.

Notes

a - Number of main meals sold

b - Number of drinks sold

c - H1 2014 investments comprise expansionary capital specifically invested in respect of H1 2014 new site acquisitions and conversions

GROUP CONDENSED INCOME STATEMENT

for the 28 weeks ended 12 April 2014

* Restated for movement in pension liability recognised due to minimum funding requirements and for the impact of IAS 19 (revised), see note 15.

** Restated for the impact of IAS 19 (revised), see note 15.

All results relate to continuing operations.

GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME

for the 28 weeks ended 12 April 2014

* Restated for movement in pension liability recognised due to minimum funding requirements and for the impact of IAS 19 (revised), see note 15.

** Restated for the impact of IAS 19 (revised), see note 15.GROUP CONDENSED BALANCE SHEET

12 April 2014

* Restated for movement in pension liability recognised due to minimum funding requirements (see note 15).GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

for the 28 weeks ended 12 April 2014

* Restated for movement in pension liability recognised due to minimum funding requirements and for the impact of IAS 19 (revised) (see note 15).GROUP CONDENSED CASH FLOW STATEMENT

for the 28 weeks ended 12 April 2014

Cash and cash equivalents are defined in note 9.

NOTES TO THE INTERIM FINANCIAL INFORMATION