RTN.L Regulatory News (RTN)

The Restaurant Group plc ("TRG")

This announcement contains inside information

Final results for the 52 weeks ended 29 December 2019

2019 Highlights

·; Delivering the benefits of the Wagamama transaction

o Market-leading like-for-like (LFL) sales performance of +8.5%

o Cost synergies ahead of plan, site conversion programme well progressed

o US Joint Venture (JV) established after year-end to facilitate capital-light growth plan

·; Growing our Pubs and Concessions businesses

o Concessions LFL sales growth of +4.1% well ahead of passenger growth; strong presence in new Manchester terminal secured

o Pubs LFL sales growth +4.0% consistently outperforming the market; healthy pipeline of new sites in 2020

·; Optimising our Leisure brands

o LFL sales decline of 2.8%, representing an improvement on previous years

o Delivery sales performing well, supported by targeted operational initiatives to improve food offering and brand proposition

o Overall estate size reduced by 18 sites to 350 sites via closures and conversions to Wagamama

Andy Hornby, Chief Executive Officer, commented:

"Having joined the business in August last year I am particularly pleased with the continued and significant progress made following the acquisition of Wagamama and the integration of the business into the Group, which has transformed the Group's growth trajectory and momentum. 

Our three growth businesses of Wagamama, Concessions and Pubs are all out-performing their respective markets and have clear potential for further growth. I am also acutely aware of the challenges facing our Leisure business and the wider casual dining sector.

It is therefore clear that our strategic priorities need to evolve in order to maximise shareholder value in the medium term. Following extensive review we have defined three clear strategic priorities for the next two years:

·; Grow our Wagamama, Concessions and Pubs businesses;

·; Rationalise our Leisure business; and 

·; Accelerate our deleveraging profile

In order to support these strategic priorities, the Board has taken the decision to temporarily suspend the dividend. This will allow us to continue investing in our three high growth businesses, whilst facilitating an acceleration of our Leisure estate rationalisation and reducing our net debt. 

We have made an encouraging start to the new financial year with like-for-like sales up 5.3% for the first six weeks of 2020."

2020 to 2021 Strategic priorities

·; Grow our Wagamama, Concessions and Pubs businesses

o Continue selective approach to new sites generating strong returns

o Maintain like-for-like sales outperformance versus respective benchmarks

·; Rationalise our Leisure business

o Accelerate rationalisation of the estate from 350 sites today to a target of 260-275 sites by the end of 2021

·; Accelerate our deleveraging profile

o Target a reduction in net debt / EBITDA leverage from 2.1x today to below 1.6x by the end of 2021

Temporary suspension of dividend to facilitate strategic priorities

2019 Financial summary

·; Group like-for-like sales up 2.7%, with total sales up 56.4% to £1,073.1m (2018: £686.0m)

·; Adjusted1 profit before tax of £74.5m (2018: £53.2m). Statutory loss before tax of £37.3m (2018 Statutory profit: £13.9m)

·; Adjusted1 EBITDA of £136.7m (2018: £87.9m)

·; Exceptional pre-tax charge of £111.8m (H1 2019: £115.7m, H2 2019: (£3.9m) credit) primarily related to impairment in our Leisure business recorded in the first half of 2019 (2018: £39.2m)

·; Adjusted1 EPS of 11.9p (2018: 14.7p). Statutory loss per share of 8.2p (2018 earnings per share: 2.4p)

·; Operating cash flow of £140.5m (2018: £88.3m)

·; Net bank debt of £286.6m (2018: £291.1m) with net debt/EBITDA at 2.1x

·; No full year dividend declared to facilitate new strategic priorities

Current trading

Current trading is encouraging with like-for-like sales up 5.3% for the first six weeks of 2020.

1 The Group's adjusted performance metrics such as like-for-like sales and free cash flow are defined within the glossary at the end of this report

Enquiries:

Investor and analyst conference call facility

In conjunction with today's presentation to analysts, a live conference call and webcast facility will be available starting at 08:45am. If you would like to register, please contact Robert Collett-Creedy at MHP Communications for details on 020 3128 8147 or email TRG@mhpc.com.

The presentation slides will be available to download from 08:30am from the Company's website

https://www.trgplc.com/investors/reports-presentations

Notes:

1. At the year-end The Restaurant Group plc operated over 650 restaurants and pub restaurants throughout the UK. Its principal trading brands are Wagamama, Frankie & Benny's, Chiquito and Brunning & Price. It also operates a multi-brand Concessions business which trades principally in UK airports. In addition the Wagamama business had 5 restaurants in the US and over 50 franchise restaurants operating across a number of territories.

2. Statements made in this announcement that look forward in time or that express management's beliefs, expectations or estimates regarding future occurrences are "forward-looking statements" within the meaning of the United States federal securities laws. These forward-looking statements reflect the Group's current expectations concerning future events and actual results may differ materially from current expectations or historical results.

3. The Group's Adjusted performance metrics ('APMs') such as like-for-like sales, Adjusted measures and free cash flow are defined within the glossary at the end of this report.

4. The main factors that could affect the business and the financial results are described in the "Senior management Risk Committee" section in The Restaurant Group plc 2019 Annual Report, which will be available to shareholders in April 2020.

5. The information contained within this announcement is considered by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No.596/2016 ("MAR"). Upon the publication of this announcement via a Regulatory Information Service, this inside information will be considered to be in the public domain.

Chairman's statement

2019 has been a year of significant progress for the business, with the acquisition of Wagamama transforming the shape of the Group. We now have a diversified set of brands and a much greater emphasis on growth, providing firm foundations for future earnings.

Total revenues in the year were up 56% to £1,073m, with LFL sales up 2.7%, representing an improvement on the decline in LFL sales experienced in 2018. The divisional split of our performance was as follows:

·; Wagamama continued to deliver exceptional growth in its first year as part of "TRG", trading well ahead of its core UK market and ahead of management expectations at +8.5% LFL sales;

·; Our Concessions business traded strongly at +4.1% LFL sales, despite the impact of the demise of Thomas Cook and subsequent decline in passenger numbers;

·; Our Pubs business continued to see LFL sales trade consistently ahead of the pub restaurant sector at +4.0%; and

·; Our Leisure business saw a decline of 2.8% in LFL sales, an improvement on the prior year performance reflecting the tough competitive nature of this segment of the market. 

Adjusted1 profit before tax was up 40% to £74.5m and Adjusted1 EPS was down 19% to 11.9p per share. Statutory loss before tax was £37.3m (2018 Statutory profit: £13.9m) including exceptional charges of £111.8m (2018 £39.2m) which are explained further in the Financial review section. Statutory loss per share was 8.2p (2018 earnings per share: 2.4p).

The Board is excited by the multiple opportunities identified in our three growth businesses (Wagamama, Concessions and Pubs) but is also mindful of the importance of rationalising the Leisure estate alongside reducing our leverage. We have therefore concluded that the temporary suspension of the dividend is the most sensible way to ensure that we retain the flexibility to grow the business, whilst facilitating an acceleration of our Leisure estate rationalisation and strengthening our balance sheet. We are now targeting net debt to EBITDA to be below 1.6x by the end of 2021. The Board is therefore not recommending a final dividend payment and the total dividend for the year is, therefore 2.1 pence per share.

The Group now employs over 21,500 people and they are the lifeblood of our business. The Board would like to record our thanks and appreciation for their continued hard work and commitment.

The Board is confident that we have a strong strategic plan with the focus and rigour to deliver increased shareholder value notwithstanding the current challenging consumer environment.

Debbie Hewitt MBE

Chairman

25 February 2020

Business review

Introduction

We have three Group priorities:

·; Grow our Wagamama, Concessions and Pubs businesses: These businesses, which contribute c. 75% of Group Outlet EBITDA, are well aligned to structural growth and we have a number of opportunities to invest, whilst delivering attractive returns

·; Rationalise our Leisure business: Our Leisure business has been particularly impacted by the declining retail footfall, changing customer preferences and rising costs that affect the broader casual dining market. We are therefore focused on maximising the cash return of this division while we exit structurally unattractive sites and optimise our propositions

·; Accelerate our deleveraging profile: We are targeting a reduction in leverage from 2.1x to below 1.6x by the end of 2021, whilst retaining the flexibility to invest in our growth businesses and rationalise our Leisure business

1. Grow our Wagamama, Concessions and Pubs businesses

Wagamama

Wagamama is a differentiated, high growth pan-Asian proposition that has consistently and significantly outperformed its core UK market. It is well aligned to the key structural trends in our sector and addresses customer demand for speed of service, delivery and healthier options.

The Wagamama business is underpinned by a unique cohesive culture. In the year the business launched a refreshed set of core values that supported team engagement and saw a further reduction in team turnover to an all-time record low for both front and back of house teams.

The strong performance of our Wagamama business is reinforced by a highly selective approach to opening new sites, based on a methodical, data-driven approach and a capital expenditure investment appraisal that carefully evaluates and scores its key selection criteria, including demographic and competitive dynamics.

New openings continue to generate strong returns - the 23 sites opened between 2016 and 2018 have generated on average a 44% return on invested capital (defined as 2019 rolling 12 months outlet EBITDA/initial invested capital).

These strong foundations uniquely position the business to continue its exceptional track record of out-performing the market.

2019 performance

Wagamama delivered a strong performance with the core UK business benefiting from strong in-restaurant and delivery growth. UK like-for-like sales growth remained significantly ahead of the wider market, with like-for-like sales up 8.5% in the period. Adjusted EBITDA (on a rolling 12 months basis) in 2019 grew to £60.7m from £44.6m in 2018.

Delivery sales rose to c.12% of total sales in 2019 from c.10% in the previous year, as we benefited from the implementation of operational and technology improvements such as bespoke delivery stations, Deliveroo tablets and a switch to fully recyclable packaging.

During the year the Wagamama team continued to drive innovation at pace. 2019 saw further menu development leading to an increased participation of our vegan range, with the "Avant Gard'n" dish proving particularly successful. 

In 2019 we completed five transformational restaurant refurbishments, adding 200 covers with an expected return on invested capital of c.50%.

We made excellent progress on the cost synergy programme achieving £8m in 2019 and expect to achieve £15m in 2020, effectively delivering the cost synergy plan in only two years. In line with the acquisition plan, we prioritised the renegotiation of supply contracts for food, drinks and consumables, and have implemented a number of other initiatives across the Group.

On the site conversion programme we remain firmly on track to deliver an incremental EBITDA benefit of £7m per annum in 2021 from the conversion of 15 sites. We completed eight conversions in 2019 and these sites are generating an average weekly sales uplift of 120%, with an expected return on invested capital of over 40%. We are planning to convert five to six more sites in 2020 and believe there is scope for further conversions in 2021.

Growth opportunities

We continue to see opportunities to increase like-for-like sales in our business for the year ahead:

·; 2020 will see further menu innovation, both on core menu dishes (e.g. vegan 'Suika' tuna launched for Veganuary) and through collaborations

·; We will also be trialling new "pay-on-phone" functionality as part of a technology upgrade to provide our customers with faster service and remove the need to wait for the bill before paying and leaving

·; In 2020 we plan to further develop our delivery operation by installing more bespoke delivery stations in high volume sites to speed up packing and working with our delivery partners

·; A further five transformational restaurant refurbishments are planned for 2020, adding an additional 300 covers to those restaurants

As set out below, we also continued to make good progress on the multiple growth opportunities that the Wagamama acquisition has unlocked outside of the core business:

UK New sites: We continue to adopt a highly selective approach to new site openings. In 2019 we opened 10 Wagamama sites including eight conversions from our Leisure branded sites and two new sites at "The Bower" in Old Street London and Heathrow Terminal 3. We will continue our selective approach to high quality openings and currently expect to open up to 10 sites in 2020 including five to six conversions from our Leisure branded sites.

New formats: Away from the core UK business, we have made good progress in addressing the other growth opportunities associated with Wagamama. We currently operate three delivery kitchens and expect to open more this year focused on areas not covered by existing restaurants (e.g. Peckham) and towns and cities with demand opportunities (e.g. Leeds). In November 2019 we launched our first food-to-go concept, "Mamago", on Fenchurch Street in London. We expect to spend the next six months optimising the proposition before evaluating further roll-out potential.

US: As we previously announced, we launched a strategic review last year of how best to develop the Wagamama US business, given the well-known challenges of developing it as a fully owned business from the UK. Over the course of the last six months we identified and met with a number of potential development partners and are delighted to have entered a joint venture partnership (the "JV") with Conversion Venture Capital ("CVC2") as financial partners and Robert Cornog Jnr and Richard Flaherty as operating partners. Rob and Richard are two experienced US restaurant leaders who share our vision for Wagamama and have the financial support from Conversion Venture Capital, an investment firm that focuses on partnering with entrepreneurs and management teams that value flexible capital. Rob and Richard have a wealth of experience in the Hospitality segment, including most recently as senior leaders of the award-winning restaurant concept, "Punch Bowl Social" ("PBS"). The JV will be a 20:80 partnership (with TRG as the minority investor) and the JV will assume full ownership of the existing operations of the US business. The JV will provide Wagamama's US operations with local operational expertise and expansionary capital with the aim to further expand the brand in the United States. The JV Board will decide the precise scale of the expansion plans but we would expect to be opening approximately 30-40 restaurants over the first five to six years of the JV. TRG retains the option to repurchase the remaining 80% of the business starting in 2026. The JV therefore provides TRG with a capital efficient means for expanding the business in the US, whilst at the same time minimising losses in the near-term. The JV commenced on 31st of January 2020 and will license the Wagamama brand.

Concessions

Our Concessions business operates a wide variety of food and beverage formats, across over 35 brands, primarily in 16 UK airports. Our strong multi-brand portfolio consists of bespoke concepts designed with airport partners (45% of sites), TRG's own brands (15% of sites), and well-known third-party brands, which operate under franchise arrangements (40% of sites). We have established long-standing relationships with our airport partners having operated in this market place for 28 years. 

Our unique capabilities, enabling us to consistently deliver high operational standards at high volume and peak-load intensity, along with our format development and partnering skills, has resulted in a strong track record of like-for-like sales growth, winning new sites and renewing existing space. 

2019 performance

Our sales continue to trade ahead of passenger growth with like-for-like sales increasing by 4.1% in the year, and we continued our strong track record of retaining sites with 90% of sites having received contract renewals beyond the term of the initial contract following successful renewals on five sites during 2019. On average, our contracts have been extended for 100% of the original concession term.

We opened four new sites in 2019, including our Sonoma site at Gatwick airport which is our largest Concessions restaurant at c.7,000 square feet, accommodating over 300 covers at a time, as well as the first Shake-Shack restaurant in a UK airport, also at Gatwick.

Growth opportunities

We expect to open six sites in the first phase of the planned Manchester airport terminal redevelopment which is due to open in the second half of 2020. We are pleased with the broad portfolio of brands we have secured, which include a "Wagamama" restaurant, the first Pub with a brewery "Bridgewater exchange", the first "San Carlo" restaurant and the first ETM affiliated pub "Apiary" in a UK airport.

The market remains attractive with air passenger growth still positive albeit slowing, and airports continuing to invest in terminals, capacity and their offering. We see opportunities to expand our estate and will compete through a disciplined capital approach for forthcoming terminal development opportunities in the UK, including Birmingham, London City, Stansted and Luton airports, which will arise over the next three to four years. We continue to explore opportunities to expand our presence in adjacent markets, and expect to open two sites (both of which are bespoke brands) in locations within Hilton hotels in 2020.

Pubs

Our estate comprises of 72 Pubs within the "Brunning & Price" ("B&P") family, which are predominantly located in countryside and suburban locations, and 12 Pubs trading under the "Food & Fuel" banner, which are predominantly located in central London. Whilst having distinct difference; for example, the latter has a significantly higher dependence on drink rather than food sales, both are premium propositions focused on delivering for the local customer base.

Our Pubs business has been continuously outperforming the market as measured by the Coffer Peach Pub Restaurants tracker on a like-for-like sales basis for over five years.

A combination of factors contributes to this strong and consistently robust performance in B&P:

·; Attractive location demographics (within a 10-15 minute drive time) with on average a total population of at least 50,000 with approximately 55% of residents forming part of the higher income classes A to C1 (according to Experian data). The pubs often benefit from limited quality competition nearby due to their semi-rural locations and the B&P operational support network of chefs and operation managers help them to consistently deliver a fresh food-led offering in a relaxed pub environment

·; Our approach to running the Pubs business as a collection of individual local pubs, rather than a 'brand' or 'chain'. The aim is to delegate as much decision making as possible to the pub management in order to foster real ownership. Local chefs are able to create 30-50% of their own menu dishes and much of the drinks range is sourced by the manager and crew. This autonomy at site-level allows the pubs to evolve alongside their local community and respond quickly to customer-driven requirements; and

·; Strong operational capability and consistent execution with our social media score reviews maintained at 4.4 out of 5 throughout the year

The business also benefits from strong asset backing with approximately 50% of our pubs being freehold. In November 2019, Savill's valued our freehold pub estate at £153 million.

2019 performance

The business continued to outperform the pub restaurant sector in 2019 with like-for-like sales increasing by 4.0%, with particularly strong trading over the Christmas period with like-for-like sales increasing by 8% (over the 3 week period ending 5th January).

Growth opportunities

We continue to see opportunities to increase like-for-like sales in our business for the year ahead:

·; Rapid and flexible menu development and product range changes to respond to new demand and further opportunities such as vegan, vegetarian, set menu occasions, low/no alcohol

·; Ongoing evolution of already successful events including beer and gin festivals

·; Further utilisation of existing space and external areas with outside bars and BBQ's

·; Optimisation of group-managed phone bookings and online bookings - constant review and refinement of the booking algorithms for peak times to ensure maximum availability for customers to book and a steady, manageable flow of orders to assist smooth service

In terms of estate expansion, we opened four sites in 2019, which are trading well and ahead of expectations. We will continue our selective approach to site expansion with three to five sites planned for 2020 and see significant opportunity to expand our geographical reach across the UK.

2. Rationalise our Leisure business

Backdrop

The market place remains challenging for our Leisure business with chronic overcapacity in the sector and significant cost pressures particularly due to labour costs. As previously highlighted, we had identified 118 sites that are in structurally unattractive locations and we anticipate that we will exit at least 50% of leases when we are able to exercise a break clause or lease expiry. 

2019 progress

We continue to take a disciplined approach to our estate optimisation and closed 18 Leisure sites in 2019 (eight of which were conversions to Wagamama) taking the overall size of the estate to 350 sites as at 29th December 2019.

2020-2021 estate rationalisation plan

As part of our overall rationalisation plan for the Leisure business we are accelerating our reduction of the estate and are targeting to reach 260-275 sites by end of 2021. We will achieve this through a combination of exercising break clauses, lease expiries, selective conversions and are actively marketing other sites for disposal as follows:

·; Conversions - 7-12 sites to be converted to Wagamama over the next two years

·; Lease events - at least 31 sites will be exited at break or expiry, with this number potentially increasing if landlord negotiations to sensibly reduce rents and increase lease flexibility are not successful

·; Freeholds - 12 freeholds will be sold where the EBITDA multiple delivers the required shareholder return

·; Accelerated disposals - Sites are being marketed for sale and given the historic run rate of disposals over the last two years, we expect to dispose of 25-35 sites

Alongside our estate management activity we are focused on initiatives to improve the food offering and brand proposition as well as optimising the delivery opportunity for our Leisure business as set out below.

Targeted operational activities

Grow our delivery business

The delivery channel and online brands in particular, continue to be a core focus of growth for the Leisure business, with our delivery sales more than doubling in 2019 versus the previous year. We exited 2019 with delivery sales accounting for c.6% of total sales from our Leisure business, of which online only brands contributed c. 50% of total delivery sales.

Activity during the year included the launch a new online brand in the majority of Chiquito sites called 'Chicken Cartel', offering signature South American flavours across a variety of chicken and vegetarian formats (e.g. talera burgers, wraps, salad bowls and glazed chicken). We also continue to pursue opportunities with our existing brand, recently improving and extending the menu of 'Kick-Ass Burrito'. We are also trialling a Caribbean brand collaboration with Levi Roots in 12 sites on Uber eats.

We see further opportunities to extend the reach of delivery sales and have recently introduced a 'Vegan by Frankie's' online brand exclusive to Uber eats. We also trialled three new virtual brands in our Frankie and Benny's estate - pies, wraps and fish & chips - with a view to rolling out the most successful (Pies) across the estate in March 2020.

Improve our food credentials

As part of Frankie & Benny's October 2019 menu launch there was a particular focus on investing in food quality, targeting our grills category with an improved quality steak, as well as upgrading our pasta sauces (carbonara, meatballs). Customer and colleague feedback on the menu developments has been positive, and there are further plans to continue this momentum in 2020 with further quality investments and innovation in the pipeline. Additionally, to support the kitchen teams to consistently deliver the menu, we have reduced the number of items by 10%. The introduction of our vegan range at the start of 2019 helped meet our customers' needs and allowed us to attract new customers to the brand, with the most recent vegan campaign in January 2020 seeing the participation of vegan products climb to 10% of sales.

In Chiquito's, key food initiatives for the brand in the year included the launch of dedicated vegan and breakfast menus, which helped to extend the brand's reach to a broader range of customers and in our October menu launch we also enhanced our mainstream authentic Mexican offer and significantly reduced operational complexity.

New management team

We were delighted to announce the appointment of Mark Chambers as CEO of our Leisure Business, and Jacqui McManus as People Director for Leisure. Mark brings with him a wealth of experience in customer led multi-site retail businesses having most recently been Managing Director of the Retail business at GVC Group (owners of Ladbrokes Coral). Mark was responsible for a Retail estate of 3,500 shops (employing approximately 20,000 colleagues) and the Ladbrokes Coral Retail business has strongly out-performed the market under his leadership over the past few years. 

Jacqui joined us in January from TGI Fridays where for the past ten years she has led the HR transformation agenda focused on people, culture and engagement with significant success (demonstrated through both significantly improved employee turnover and impressive business performance).

3. Accelerate our deleveraging profile

We are focused on reducing our leverage to a level that is sustainable and prudent through the cycle and over the course of 2019, we reduced leverage on an absolute basis and on a multiple basis, whilst growing the business. We have today announced the temporary suspension of the dividend to enable the Group to accelerate its deleveraging profile, whilst maintaining the ability to continue investing in our high growth segments (Wagamama, Concessions and Pubs) and provide the flexibility required to rationalise our Leisure estate. We are targeting leverage of below 1.6x by the end of 2021.

Summary

In summary:

·; Strong financial performance by Wagamama in 2019 emphasising significant potential for future growth

·; Concessions and Pubs continue to outperform their respective benchmarks with multiple opportunities for growth ahead

·; Focused restructuring plan for the Leisure business

·; Temporary suspension of dividend to facilitate strategic priorities

Financial review

Trading results

Like-for-like sales increased by 2.7% for the year, with total revenue up 56.4% to £1,073.1m (2018: £686.0m). Like-for-like sales and total sales increases reflect the benefit of the Wagamama acquisition, as well as a strong performance from our Concessions and Pubs businesses. In the period, we saw a strong performance from Wagamama, which has continued to significantly outperform the UK market delivering +8.5% like-for-like sales growth. Our Concessions business saw like-for-like sales increase by 4.1% (despite being impacted by the Thomas Cook collapse), well ahead of passenger growth. Our Pubs business delivered like-for-like sales growth of +4.0%, maintaining its outperformance to the market. Like-for-like sales in our Leisure business declined by 2.8%, representing an improvement on the rate of decline versus previous years.

Adjusted1 operating profit increased by 64.4% to £91.1m (2018: £55.4m) with the adjusted1 operating margin rising to 8.5% from 8.1%, reflecting the combined business post acquisition and cost synergies delivered from a successful integration programme. On a statutory basis, the Group's operating loss was £20.7m (2018: operating profit: £16.6m), reflecting an exceptional pre-tax charge of £111.8m predominantly relating to impairment and onerous lease provisions in our Leisure business.

Adjusted1 profit before tax for the period was £74.5m (2018: £53.2m). Adjusted1 profit after tax was £58.3m (2018: £41.8m). The adjusted1 effective tax rate for the Group increased to 21.8% (2018: 21.4%). On a statutory basis, the increase in exceptional charges in the year led to an overall loss for the period, and resulted in an effective tax rate of 8.3% (2018: 50.6%). Adjusted1 earnings per share were 11.9p (2018: 14.7p). On a statutory basis, loss before tax was £37.3m (2018 statutory profit: £13.9m). On a statutory basis, loss after tax was £40.4m (2018: Statutory profit £6.9m) and statutory loss per share was 8.2p (2018 earnings per share: 2.4p).

The adjusted measures (as shown on the face of the Income Statement) are summarised below:

Cash flow and net debt

Operating cash flows remain strong, with free cash flow of £81.2m in the year (2018: £59.6m). The increased free cash flow generated in the year reflects the cash generated from the Wagamama operations, partially offset by the increased cost of financing. The Group's net debt at the year-end was £286.6m (2018: £291.1m), a decrease of £4.5m on the prior year. The decrease in net debt was driven by the increase in free cash flow generated by the business. In the year, we also completed the sale and leaseback of our head-office building raising gross proceeds of £26.9m and incurred acquisition and integration expenditure relating to Wagamama of £28.5m.

Summary cash flow for the year is set out below:

*Relates to Wagamama, Food & Fuel and Ribble Valley Inns acquisitions

In December 2018 the Group refinanced its borrowings and currently has £220m of revolving credit facilities that expire in December 2021 and a £10m overdraft facility repayable on demand. In addition the £225m Wagamama Bond matures in July 2022. At the year-end we had over £160m of cash headroom and significant headroom against our banking covenants.

Capital expenditure

During the year the Group invested £73.3m (2018: £68.5m excluding the acquisition of Wagamama). Our investment in refurbishment and maintenance capital expenditure increased to £34.5m (2018: £20.3m) reflecting an additional £16.0m in relation to Wagamama, which included five transformational refurbishment projects that created 200 additional covers in those restaurants. Our investment in new site expenditure of £38.8m (2018: £33.0) included £17.5m in relation to our Wagamama business. This investment included eight conversions of our Leisure sites to Wagamama, three new Wagamama restaurants (including one in the US), two new delivery kitchens and one "Mamago" site. We also opened four new Concessions sites and four new Pubs in the year. 

During the year we closed 16 sites, comprising 10 sites from Leisure, four sites from Concessions, one Pub and one Wagamama restaurant in the US. The table below summarises openings and closures during the year.

*Note: Wagamama sites include five Wagamama restaurants in the US, three delivery kitchens and one "Mamago" site in the UK

Restructuring and exceptional charge

An exceptional pre-tax charge of £111.8m has been recorded in the year (2018: £39.2m), which includes the following:

- A net impairment charge of £108.4m (2018: £14.0m) has been recognised in the period. Of this £102.1m was booked in the first half of the year and comprised two main elements:

(i) In the Leisure business we have recognised an impairment charge across sites that were identified as structurally unattractive; and

(ii) In addition, given the well documented over capacity and continued like-for-like sales decline in the casual dining market, and ongoing cost headwinds we have taken a more cautious medium term outlook when assessing the Leisure business for impairment.

- Onerous lease provisions resulted in a charge of £7.5m in the year (2018: £10.0m). The overall full-year charge comprises the following elements:

- A £1.0m credit in respect of unutilised provisions following the successful exit of eight sites ahead of expectations; and

- A further charge totalling £8.5m was provided for in the year. This comprised a charge of £7.9m in respect of newly identified onerous leases and an additional charge of £0.6m in respect of sites previously provided for.

- Acquisition and integration costs of £11.2m (2018: £14.8m) relating to costs incurred in the integration of Wagamama and the project costs to achieve the synergy cost saving and site conversion programme;

- An impairment of assets held for sale for £2.0m (2018: £nil) was incurred relating to Wagamama US sites which were under strategic review; and

- An exceptional profit of £17.2m has been recognised on the sale and leaseback of our freehold Head Office building.

The tax credit relating to these exceptional charges was £13.1m (2018: £4.3m).

Cash expenditure associated with the above exceptional charges was £13.8m in the year (2018: £21.3m) relating to the cash cost of the onerous leases of £12.6m (2018: £11.2m), and the cash cost of the acquisitions and refinancing of £28.5m (2018: £10.1m). This was offset by the £27.3m received in the year for the sale of our head office and one Leisure freehold site.

Tax

The adjusted1 tax charge for the year was £16.3m (2018: £11.4m), summarised as follows:

The effective adjusted1 tax rate for the year was 21.8% compared to 21.4% in the prior year. The Group's effective tax rate will continue to track above the headline UK tax rate primarily due to our capital expenditure programme and the significant levels of disallowable capital expenditure therein. The statutory effective tax rate for the year was 8.3%, a decrease from the 2018 rate of 50.6%. This was due to an increase in exceptional charges in the year and an overall loss for the period.

FY20 Guidance

• 2020 development capital expenditure - £40m to £45m

- Three to four new Pubs

- Eight new Concessions sites, including six sites in phase one of Manchester airport terminal redevelopment

- Three to four new Wagamama sites in the UK

- Five to six Leisure site conversions to Wagamama

• 2020 refurbishment and maintenance capital expenditure - £30m to £35m, including five further transformational refurbishments of Wagamama sites

• Net cost inflation expected to be £15m, which is £2m-£3m higher than previous expectations due predominately to the recently announced 6.2% increase in National Minimum Wage and National Living Wage

During the year, the Group made a £578,092 (2018: £Nil) foreign currency gain on translation of foreign subsidiaries. There is no further other comprehensive income other than the profit for the year ended 29 December 2019 or the year ended 30 December 2018.

Other reserves represents the Group's share-based payment transactions, shares held by the employee benefit trust and treasury shares held by the Group.

1 General Information

Corporate information

The Restaurant Group plc (the 'Company') is a public listed company incorporated and registered in Scotland. The consolidated financial statements of the Group for the year ended 29 December 2019 comprise the Company and its subsidiaries (together referred to as the 'Group').

The consolidated preliminary results of the Group for the year ended 29 December 2019 were approved by the directors on 25 February 2019. The 2020 AGM will be held at 10:00 am on Tuesday 19 May 2020 at the offices of MHP Communications at 6 Agar Street, London WC2N 4HN.

Accounting policies

Basis of preparation

Whilst the information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ("IFRSs") as adopted for use in the European Union and as issued by the International Accounting Standards Board, this announcement does not itself contain sufficient information to comply with IFRSs.

The consolidated financial statements comprise the financial statements of the Group as at 29 December 2019 and are presented in UK Sterling and all values are rounded to the nearest thousand (UK £'000), except when otherwise indicated.

Going concern basis

The financial statements have been prepared on a going concern basis as, after making appropriate enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future at the time of approving the financial statements.

Nature of financial information

The financial information contained within this preliminary announcement for the 52 weeks to 29 December 2019 and the 52 weeks to 30 December 2018 do not comprise statutory financial statements for the purpose of the Companies Act 2006, but are derived from those statements. The statutory accounts for The Restaurant Group plc for the 52 weeks to 30 December 2018 have been filed with the Registrar of Companies and those for the 52 weeks to 29 December 2019 will be filed following the Company's Annual General Meeting.

The auditor's reports on the accounts for both the 52 weeks to 29 December 2019 and 52 weeks to 30 December 2018 were unqualified and did not include a statement under Section 498 (2) or (3) of the Companies Act 2006.

The Annual Report will be available for Shareholders in April 2020

New accounting standards, interpretations and amendments adopted by the Group

The accounting policies adopted in the preparation of the consolidated preliminary results are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 29 December 2019. There have been no changes to the accounting standards in the current year that have materially impacted the Group financial statements. The only future accounting policy to have a material impact on the group financial statements if IFRS 16, as described below.

IFRS 16 'Leases' was issued in January 2016 and introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees and will supersede the current lease guidance including IAS 17 'Leases' and the related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019 and will be adopted by the Group for the financial year commencing 30 December 2019.

The standard represents a significant change in the accounting and reporting of leases, impacting the income statement and balance sheet as well as statutory and alternative performance measures used by the Group.

As a result, the profile of costs recognised in the consolidated income statement will change materially in comparison to IAS 17 as follows:

- Depreciation will increase due to the recognition of right-of-use assets

- Existing rental costs will reduce - the only rental costs that remain will relate to low value assets, turnover based leases, or short-term leases

 - Finance costs will increase due to the unwinding of the discounted lease liability

There is no net cash flow impact on application of IFRS 16, although the classification of cash flows will be affected as operating lease payments under IAS 17 are presented as operating cash flows, whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as operating and financing cash flows respectively.

The Group is in the process of conducting an extensive review of all the Group's leasing arrangements in light of the new accounting standard. The Group has elected to use the Modified Retrospective approach to calculate the impact of IFRS 16. This will mean that the results for the year ended 27 December 2020 will be presented under IFRS 16 but the year ended 29 December 2019 will not be restated. The opening balance sheet as at 30 December 2019 will be restated to recognise the right of use asset and lease liability.

The transition work stream is nearing completion and the Group estimates that, had IFRS 16 been applied in the 52 weeks ended 29 December 2019, the impact on the consolidated balance sheet would have been:

- Recognition of a right-of-use asset in the range of £850m - £890m disclosed within non-current assets.

- Recognition of a corresponding lease liability in the range of £920m - £960m.

- Derecognition of other balance sheet items, including onerous lease provisions, rent free accruals and fair value adjustments relating to acquired leases of around £70m.

- The above results in a reduction in opening retained earnings in the range of £5m - £20m (before adjusting for associated tax impacts).

Key judgements have been addressed, including the assessment of how reasonably certain it is considered to be that a lease option (extension, expiry or break) will be exercised, and the determination of an appropriate discount rate used to calculate the present value the lease liability and to initially measure the right-of-use asset. With regards to these, the Group has determined that the lease term will correspond to the duration of the contracts except in cases where the Group is reasonably certain that it will exercise contractual extension, break options, or management expect to be able to exit the lease in another manner. The incremental borrowing rate on transition has been based on the implicit rate within the lease agreement, where the implicit rate in the lease is not readily determinable this has been estimated.

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 combined Executive team of the Chief Executive Officer, and the Chief Financial Officer. The Group trades in two reportable segments, defined as the 'Growth Business' and the 'Leisure Business'. These have been defined based on the Leisure Business having different economic characteristics from the Growth businesses. The different brands within each reporting segment all meet the aggregation criteria set out in Paragraph 12 of IFRS 8.

Geographical Segments

The Group trades primarily within the United Kingdom. The Group operates restaurants in the United States and generates revenue from franchise royalties primarily in the Europe and the Middle East. The segmentation between geographical location does not meet the quantitative thresholds and so has not been disclosed.

3 Revenue

Revenue has been generated from the operation of restaurants, with approximately 98% of revenue generated within the United Kingdom. The remainder is attributable to restaurants within the United States and from franchise royalties primarily in Europe and the Middle East.

An exceptional pre-tax charge of £111.8m has been recorded in the year (2018: £39.2m), which includes the following:

A net impairment charge of £105.8m (2018: £14.0m) has been incurred against property, plant and equipment and software assets. Of the £105.8m charge, £103.1m related to restaurants trading within our Leisure operating segment which has a recoverable amount of £115.4m based on its value in use. £2.7m of the impairment charge relates to four Wagamama restaurants predominantly in the US. The impairment charge comprised of two main elements:

(i) In the Leisure operating segment we have recognised an impairment charge across sites that were identified as structurally unattractive; and

(ii) In addition, given the well documented over capacity and continued like-for-like sales decline in the casual dining market, and ongoing cost headwinds, a more cautious medium term outlook has been taken when assessing the Leisure operating segment for impairment.

• Onerous lease provisions resulted in a charge of £7.5m in the year (2018: £10.0m). This comprises:

- A £1.0m credit in respect of unutilised provisions following the successful exit of 8 sites ahead of expectations;

-A further charge totalling £8.5m was provided for in the year. This comprised a charge of £7.9m in respect of newly identified onerous leases and a charge of £0.6m in respect of sites previously provided for.

• An impairment of assets held for sale for £2.0m (2018: £nil) was incurred relating to Wagamama US sites which were under strategic review

• During the year the Group sold and leased back the head office building, for a gain of £17.2m. This was made up of the cost of the building of £6.2m, fixtures and fittings disposed of £3.3m, offset by the £26.7m, net of selling fees, received in the year for the sale of the head office building.

• An exceptional charge of £11.2m (2018: £14.8m) has been recorded in the year in relation to the integration of Wagamama.

• A write off of £2.6m was made to the carrying value of the property, plant and equipment for Leisure sites which are converting to Wagamama in line with the Leisure estate rationalisation plan.

The tax credit relating to these exceptional charges was £13.1m (2018: £4.3m).

Cash expenditure associated with the above exceptional charges was £13.8m in the year (2018: £21.3m) relating to the cash cost of the onerous leases of £12.6m (2018: £11.2m), and the cash cost of the acquisitions and refinancing of £28.5m (2018: £10.1m). This was offset by the £27.3m received in the year for the sale of our head office and one Leisure freehold site.

Diluted earnings per share is based on adjusting the weighted average number of shares for the purposes of basic earnings per share in respect of notional share awards made to employees in regards to share option schemes and the shares held by the employee benefit trust. The conversion, exercise or other potential issue of ordinary shares has an antidilutive effect on earnings per share and there is therefore no reduction from basic earnings per share.