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The Restaurant Group plc

Final results for the 52 weeks ended 30 December 2018

Strategic highlights

· Acquisition of high quality business in Wagamama which has continued to outperform the sector

· Concessions business opened 21 new units and entered four new airports

· Pubs increasingly outperformed the market and opened a record 21 pubs

· Leisure business improved like-for-like sales momentum in every quarter in 2018

· Group delivered like-for-like sales growth since the World Cup

· Enlarged group now strongly orientated towards growth

Financial highlights

· Like-for-like sales down 2.0%, with total sales up 1.0% to £686.0m (2017: £679.3m)

· Adjusted1 profit before tax of £53.2m2 (20173: £57.8m2). Statutory profit before tax of £13.9m (20173: £28.2m)

· Exceptional pre-tax charge of £39.2m (20173: £29.7m)

· Adjusted1 EBITDA of £87.9m (2017: £95.8m)

· Adjusted1 EPS4 of 14.7p (20173: 16.7p). Statutory EPS of 2.4p (20173: 6.7p per share)

· Operating cash flow of £88.3m (2017: £107.8m)

· Net debt of £291.1m at year-end (20173: £23.1m) following Wagamama acquisition, with proforma net debt/EBITDA at 2.2x

· The Board proposes a final dividend of 1.47p5, reflecting the Board's policy of paying a dividend covered two times by adjusted1 profit after tax

1 Adjusted reflects pre-exceptional items and is further defined in the glossary at the end of this report

2 Includes a £2.2m benefit (2017: £0.7m) from lower depreciation following a prior year adjustment to the impairment provision

3 As restated, refer to Note 2 of the financial statements for details

4 Earnings per share adjusted for bonus element following the rights issue in both financial years

5 Full year dividend per share of 8.27p calculated such that the total cash paid out in dividends for the full year is covered twice by adjusted profit after tax. This is stated on the basis of dividends declared and paid not adjusted for the impact of the rights issue

Current trading

Current trading is in line with our expectations with like-for-like sales up 2.8% for the ten weeks to 10 March 2019.

Andy McCue, Chief Executive Officer, commented:

"We have made significant progress in 2018, acquiring a differentiated, high growth business in Wagamama, opening a record number of new sites in both our Pubs and Concessions businesses, and driving improved like-for-like sales momentum in the Leisure business throughout 2018. We now have a business that is orientated strongly towards growth and we continue to focus on delivering shareholder value."

Enquiries:

Investor and analyst conference call facility

In conjunction with today's management presentation meeting, a live conference call and webcast facility will be available starting at 10:00am. 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 9:45am from the Company's website https://www.trgplc.com/investors/reports-and-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 2018 Annual Report, which will be available to shareholders in April 2019.

Chairman's statement

2018 was a pivotal year for the Group. The acquisition of Wagamama and the development of our Pubs and Concessions businesses have accelerated our progress into growth sectors and we continue to make improvements to the customer proposition and our execution across our Leisure business.

Total revenues were up 1% to £686m, with like-for-like sales for the 52 weeks ended 30 December 2018 down 2%, representing an improvement on the decline in 2017. The group delivered like-for-like sales growth since the World Cup, with our Pubs business continuing to consistently trade ahead of the pub restaurant sector and our Concessions business trading strongly. Our Leisure business exhibited improved like-for-like sales momentum through 2018.

We opened a record 21 new pubs (inclusive of acquisitions) and a record 21 new concessions units during the year.

Adjusted1 profit before tax was down 8.1% to £53.2m and Adjusted1 EPS was down 11.9% to 14.7p per share. Statutory profit before tax was £13.9m (20173: £28.2m) including exceptional charges of £39.2m (20173: £29.7m) which are explained further in the Financial review section. Statutory EPS was 2.4p (20173: 6.7p).

The acquisition of Wagamama formally completed on 24 December 2018. The business has a differentiated, high growth, pan-Asian proposition which has significantly and consistently 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 healthy options. We continue to believe that the acquisition will be transformative for the Group, allowing us to accelerate Wagamama's UK roll-out with selected TRG site conversions, expand the UK concessions presence leveraging our existing relationships, address delivery opportunities via restaurants and delivery kitchens, pilot pan-Asian cuisine 'food-to-go' offerings, explore international growth options and deliver at least £22m of synergies.

The enlarged Group now derives c.70 per cent. of outlet EBITDA (on a full-year 2018 pro-forma basis) from high growth segments (Wagamama, Concessions and Pubs) and is well equipped to address compelling growth avenues.

We were appreciative of the engagement of all of our investors during the process of acquiring Wagamama and the support provided for the rights issue that was undertaken to raise £315m in order to fund the acquisition.

The Group has continued to face external cost pressures throughout 2018, including increases in the national living wage and national minimum wage, the apprenticeship levy, the revaluation of business rates, higher energy taxes and increased purchasing costs due to the combined effects of a devalued pound and commodity inflation. As we seek to mitigate these cost pressures, our initiatives to improve the effectiveness of our labour scheduling and to exploit new technologies are on track and continue to drive efficiencies. 

On 14 February 2019, we announced that Andy McCue, CEO, had informed the Board of his decision to leave the Company due to extenuating personal circumstances. Whilst the Board is clearly disappointed that Andy will not be able to provide the long-term leadership for the business, we recognise that his decision to step down is the right one for him and his family. The Board anticipates that Andy will remain in position while his successor is being recruited. An extensive search is well underway to recruit the new CEO. An announcement regarding the appointment will be made in due course.

Other Board changes during the year included the resignation of Paul May as Non-Executive Director in October 2018 and the appointment of Allan Leighton, who joined as a Non-Executive Director in December 2018, at the completion of the Wagamama transaction. Allan is currently Chairman of Co-operative Group Limited and Entertainment One Limited, among others, and has previously been Chief Executive Officer of ASDA Group Limited and Pandora A/S and Chairman of Pace plc and Royal Mail. He knows the Wagamama team well and has extensive experience of managing public and private companies in the retail and hospitality sectors and a wealth of experience in growing consumer businesses.

Simon Cloke, non-executive Director, will step down as Senior Independent Director at the AGM in May 2019 and will be replaced as Senior Independent Director by Allan Leighton.

Although a search had commenced to recruit an additional Non-Executive Director with digital credentials during 2019, the Board decided that it was sensible to postpone this search until such time as the new CEO is recruited. Simon Cloke has agreed to remain on the Board as a non-executive Director for a period of up to a year, to ensure continuity whilst the new CEO is recruited. The Board will then re-commence its search to recruit an additional non-executive Director with technology and digital credentials and at that point Simon Cloke will step down from the Board.

We have also added to the strength of the senior leadership team, with the appointment of Lisa Hillier as Chief People Officer, joining us from Just Eat plc.

The business continues to generate strong free cash flow, with £59.6m in 2018 (20173: £85.1m). As announced at the time of the acquisition, we will adopt a policy of paying a dividend covered two times by adjusted1 profit after tax, with this policy reflected in the final dividend that the Board has proposed for 2018 of 1.47 pence per share. The total dividend for the year is, therefore, 8.27 pence per share. The Board believes that this funding structure and dividend policy reflects an appropriate balance between delivering shareholder returns, enabling the Company to invest in further growth and enabling the Company to achieve an appropriate deleveraging profile.

The enlarged Group now employs over 22,000 people and they are the lifeblood of our business. The Board would like to record our thanks and appreciation for their hard work and commitment.

This has been a pivotal year for the Group, with progress on our strategic initiatives, improved like-for-like sales momentum in our Leisure business, growth in our Pubs and Concessions business, and a transformational acquisition that accelerates our momentum in growth segments. We continue to benefit from strong cash generation and a healthy balance sheet. The Board is confident that we have a robust plan and the focus and rigour to deliver value for shareholders in what is a challenging consumer environment.

Debbie Hewitt MBE

Chairman

15 March 2019

Business review

Introduction

Following the acquisition of Wagamama, the enlarged group is now strongly orientated towards growth with Wagamama and our Concessions and Pubs businesses contributing c. 70% of Group outlet EBITDA in the period (on a full-year 2018 pro-forma basis).

Wagamama is a differentiated, high growth pan-Asian proposition that has consistently and significantly outperformed its core UK market. That outperformance is driven by excellent operational standards, as well as being exceptionally well aligned to structural growth drivers as customers demand more convenient, faster, and healthier options. 

Our Concessions business is a market leader in UK airports. Our strength in capability to develop and operate a broad range of formats in a wide range of infrastructure types has resulted in a strong track record of like-for-like sales growth, winning new sites and renewing existing space. 

Our Pubs business is well positioned in the market with a premium, differentiated food-led offer that is increasingly outperforming the pub restaurant sector. The business benefits from operating and often owning differentiated assets and delivering an exceptional experience. There continues to be opportunities to expand this business and we have a healthy organic pipeline in place.

In our Leisure business we operate multi-brand casual dining restaurants across the UK. While the business is not inherently well exposed to structural growth drivers as a function of either location or proposition form, we are focused on optimising the propositions to maximise profitability. We will also be disciplined in our approach to capital allocation.

Our Group priorities are to:

- Deliver the benefits of the Wagamama acquisition;

- Grow our Concessions and Pubs businesses; and

- Optimise our Leisure brands

1. Deliver the benefits of the Wagamama acquisition

Wagamama

Wagamama has a strong competitive advantage as the only UK pan-Asian brand concept of scale.

The business is well aligned to key structural trends, consistently outperforming the market average on experience ratings6 in healthiness of food, convenience and speed.

Wagamama benefits from a high quality leadership team which operates the business as a standalone entity and has the freedom to cultivate its unique cohesive culture. 

Wagamama has demonstrated an outstanding track record of like-for-like revenue growth. In its quarter three results (12 weeks up to 3 February) Wagamama increased like-for-like sales7 by 9.1%; resulting in like-for-like sales7 of 9.7% for its financial year to date (quarters one-to-three). The Wagamama team have identified clear opportunities to grow like-for-like sales further in 2019, including:

- Development of the drinks range to help drive higher participation

- Investment in local marketing and events to drive greater awareness, using new data sources to more effectively target audiences and win share

- Further expansion of the vegan range, including new collaboration hero dish 'Avant Gard'n', which features a vegan 'egg', being launched in partnership with vegan chef Gaz Oakley

- Increased delivery growth via greater reach of aggregators and technology integration both within and between restaurants

- Six major refurbishments planned for this year which will add 300 additional covers (equivalent to two new restaurants)

6 Source: Morar/BrandVue Q4 customer ratings

7 Like-for-like sales as per Wagamama Q3 bond report

The business is also progressing well on driving future growth via the levers identified at the time of the transaction:

UK Casual Dining: We expect to open between three to four new restaurants this year in the UK, as well as converting eight Leisure sites to Wagamama.

UK Concessions: The business has won a tender for a site in Heathrow Terminal 3 which is due to open in the second half of this year. A site has also been secured in the planned redevelopment of Manchester airport and is due to open in the first half of 2020. The business is also exploring a variety of other airport opportunities.

Delivery: The delivery kitchen in Battersea has been successfully trialled and we will be rolling out further delivery kitchens in the year.

International: We opened a new restaurant in Murray Hill, NYC earlier this year and will open in Midtown Manhattan in the Summer. A strategic review of our options for the US business has commenced and we will update investors on our plans later in the year. 

Food to go formats: The business has developed a new grab and go concept which is to be branded "Mamago". The concept will offer a newly developed Asian menu to capitalise on increased customer demand for convenience. The initial pilot is planned for launch in the second half of this year. 

Synergies

We will convert eight Leisure sites to Wagamama restaurants this year, with a similar number expected next year. Teams across the business have well developed people, marketing and design and build plans to ensure the new restaurants launch successfully. The eight sites are in locations which align well with the Wagamama customer demographic, and in competitive markets where we have high confidence that we can take share from less differentiated offerings. The eight TRG sites collectively make a modest profit today and we expect them to generate incremental EBITDA returns in excess of 50% of the cost of capital to convert. The converted sites will open between August and November 2019. We have continued confidence in delivering an incremental EBITDA benefit of at least £7m per annum at maturity in 2021 from our site conversion programme. We are progressing well with our cost synergy plans and collaborative cross-functional working groups across the business have been established. We have continued confidence in delivering at least £15m of cost synergies per annum in 2021. Synergies will be achieved through leveraging scale and consolidating spend across the following cost categories:

- Procurement and logistics

- Site level overheads

- Central costs

2. Grow our Concessions and Pubs businesses

Concessions

Our Concessions business operates a wide variety of food and beverage formats, across over 35 brands, primarily in UK airports. This includes bespoke concepts designed with airport partners, The TRG Group's own leisure brands, and well-known third-party brands, which operate under franchise arrangements.

Our trading continues to be strong and we continued our strong track record of retaining sites with c.85% having received contract renewals beyond the term of the initial contract. In particular during 2018 we successfully renewed contracts for existing large spaces at both Gatwick and Heathrow airports. On average our contracts have been extended for 90% of the original concession term.

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, position us well for further contract wins in the future.

In 2018 we have been successful in winning 21 new units and adding five new clients in UK travel hubs as well as four new brand partnerships. These new openings were a mix of multiple formats and categories showcasing our operational capability strength and ability to provide full solutions to airport partners. This included a "Spuntino" restaurant in Heathrow, the first "Brewdog" bar in a UK airport in Edinburgh, two outlets for "Barburrito" and our first "Crepeaffaire" franchise unit. We also developed several in-house concepts such as the "Hawker Bar" in Luton and "Distilling House" pub in Aberdeen.

We expect to open at least 5 to 10 Concessions units in 2019. In addition to this we have secured a contract to operate a number of significant sites for the planned redevelopment at Manchester airport, due to trade in 2020.

Plans to grow our business outside of UK airports are progressing well. We have developed two new brands, "Mezze Box" and "Grains and Greens" with Sainsbury's. The initial trial has commenced with five counters opened so far this year. We are also building a team to support our longer term plans for growth into international airports.

Pubs

Our Pubs business is well positioned in the market with a premium offering tailored to local markets. The business continued to outperform the pub restaurant sector in 2018, with the extent of outperformance increasing year-on-year. 

During the year we optimised our menu pricing architecture and developed a more flexible approach to our menus, with an expansion of the nibbles and sharing sections, and smaller plate options on some of the core dishes. In the year ahead we will be launching a gluten-free menu in all our pubs. We continue to refine our drinks range to ensure we cater for an increasing trend in craft beer and low alcohol/no alcohol drinks.

We continue to look at opportunities to leverage the existing space in our estate. Benefitting from the warm weather over the summer we ran an increased number of events such as our gin and prosecco festivals as well as live music events which are proving increasingly popular. During the year we opened three new private dining rooms and our first separate function space at the Red Fox pub which has been used for larger functions, including weddings. Following the successful opening of our first pub with accommodation in September, we opened another in February 2019.  We anticipate additional revenue opportunities by continuing to leverage our existing space in the year ahead with further function space, private dining rooms and all-weather external terraces currently under consideration.

Our estate expansion plans are progressing well. We opened 21 new pubs in the year including the acquisitions of Ribble Valley Inns Ltd (consisting of four leasehold pubs) and Food & Fuel Ltd (consisting of 11 leasehold pubs and café-bars predominately situated in affluent London neighbourhoods). We have now refurbished three of the Ribble Valley sites and these are delivering a sales uplift in excess of 30% post refurbishment. The Food & Fuel Ltd sites are trading in line with expectations and plans are in place to further develop these propositions through 2019. Our single site Brunning and Price acquisitions are trading well and we expect to open at least seven more pubs in the coming year.

3. Optimise our Leisure business

The market backdrop for our Leisure business is challenging with a 27% increase in the number of branded restaurants over the past five years. This has been accompanied with a dramatic decrease in the growth rates of both total sales and like-for-like sales every year since 2014. Structural trends including declining retail footfall, the rapid rise of the delivery sector and fast changing customer preferences towards convenience and healthy options all create challenges for long established multi-site operators of scale. Profitability has been further challenged by the pressure of rising costs, with the bulk of our restaurant wage bill inflating by around 4%, electricity costs at eight year highs, and rent and rates costs remaining at high levels despite the decreasing consumer demand. In response, we are focused on ensuring our brands are competitively differentiated, increasing our exposure to healthy and convenient options and capitalising on 'off-trade' delivery and collection sales. However, given the market backdrop, we are acutely disciplined in how we allocate capital and highly discerning as to lease renewal commitments and the flexibility inherent within them. 

Our Leisure estate is disproportionately highly exposed to these pressures. 56% of our estate directly neighbours retail, most of which are in out-of-town locations. As a result of our discipline over recent years, the vast majority of our Leisure portfolio remains EBITDA positive. 41% of our Leisure portfolio also has a lease end or break option within the next five years. 

In order to ensure we make the correct property decisions, we have analysed every restaurant in our Leisure estate to determine its potential performance versus its actual performance. In the case of Frankie and Benny's, 31% of sites are in structurally unattractive locations, and as such, we will seek to exit these locations in future years. Of the remaining Frankie and Benny's locations, 60% are outperforming or in-line with their local markets; in 40% we believe there is scope for operational improvement. 

Frankie and Benny's

The brand has seen considerable activity over the last twelve months, progressing well on a number of initiatives.

In May, we saw the launch of our new Feel Good Range, offering our customers increased and improved healthier options. The range has proved popular with penetration at c.10% of sales, with the top performers in this range being the Nashville Chicken Skewers and Skinny Chicken Pizza.

We launched on Comparethemarket's 'Meerkat Meals' partner platform in June and have seen really strong engagement with it becoming one of our most popular promotions. 

We launched our squishies campaign in October through to November where we gave away a free Squishie toy with every kids meal. This proved successful in driving repeat visits.

Our payment at table feature, "pay my bill", is improving in popularity with customers, with over five percent of transactions being made through this channel.

Our customers are responding to these initiatives, and this has resulted in an improvement in our social review scores throughout the year as well as improved sales momentum.

We are currently trialling "order ahead" functionality in 25 sites. This gives our customers the ability to order and pay for their meal in advance, alongside a booked table, and have it ready for them when they arrive at the restaurant. Initial feedback from customers has been positive and we will look to roll out more broadly later in the year.

Upcoming activity includes continued improvement in the core proposition via new menus. We will shortly trial a simplified core menu with a large reduction in the number of dishes to help our teams improve operational consistency. Our marketing campaigns will become increasingly targeted to specific occasions and highlight new food development via limited time offers. We will invest in service and operational improvements in underperforming sites and actively manage the structurally disadvantaged tail. 

Chiquito

The brand has evolved its offering over the course of the year with a number of initiatives employed. In January 2018 we launched a new core menu aimed at reinstating value, improving choice, simplifying navigation and focusing on more authentic Mexican dishes such as our 'build your own' tortillas option.

We invested in a stronger senior operational team throughout the year. This in turn allowed us to focus on the quality of our General Managers and drive standards up through peer group benchmarking.

Our promotional strategy has become more centred around Mexican favourites, generating a very encouraging take-up from customers.

We also launched a virtual brand "Kick-ass Burrito" which, across all delivery aggregators now has 131 points of sale.

Our customers are recognising these improvements with a notable increase in our social review scores throughout the year as well as improved trading momentum, with like-for-like sales improving in every quarter.

Our plans for the year ahead include the launch of a new menu in April which will feature a strong range of dishes catering for people with dietary restrictions as well as improving our vegan and vegetarian offer with dishes such as our jackfruit burrito with benefits, beetroot and feta lettuce wrap and bean and red chilli burger. We will also offer exciting trade-up options with premium ingredients such as our Picanha surf & turf dish and Barabacoa beef build your own option.

Summary and current trading

In summary:

- The enlarged group is now strongly orientated towards growth

- Wagamama like-for-like sales momentum is strong and we are progressing well on the growth avenues unlocked by the acquisition

- Strong growth continues in Concessions and Pubs

- We remain focused on optimising our Leisure brands and property portfolio

- Current trading for first 10 weeks of the year in line with our expectations with like-for-like sales up 2.8%

Financial review

Trading results

Like-for-like sales declined by 2.0% for the year, with total revenue up 1.0% to £686.0m (2017: £679.3m). The like-for-like sales decline reflected the annualisation of the investments we made in price and proposition across our Leisure brands in 2017, along with the impact of the adverse weather and the World Cup in 2018, which were partially offset by a strong like-for-like sales performance from both our Pubs and Concessions businesses. The Group delivered like-for-like sales growth since the World Cup with our Leisure business exhibiting improved like-for-like sales momentum through 2018.

With declining like-for-like sales and the well-known sector specific inflationary cost pressures, the Group's Adjusted1 operating profit (EBIT) fell by 6.9% to £55.4m (20173: £59.5m) with the Adjusted1 operating margin falling from 8.8% to 8.1%. On a statutory basis, the Group's operating profit (EBIT) was £16.6m (20173 £29.8m). Adjusted1 operating profit (EBIT) includes a £2.2m (2017: £0.7m) benefit from lower depreciation following a prior year adjustment to the impairment provision. The prior year adjustment reflects the appropriate allocation of central costs to individual restaurants following a reassessment of our impairment methodology.

Adjusted1 profit before tax for the period was £53.2m (20173: £57.8m). Adjusted1 profit after tax was £41.8m (20173: £45.8m). The Adjusted1 effective tax rate for the Group increased to 21.4% (20173: 20.9%). On a statutory basis, the effective tax rate of 50.6% (20173: 34.9%) reflects the higher exceptional charges in the year. Adjusted1 earnings per share were 14.7p (2017: 16.7p). On a statutory basis, profit before tax was £13.9m (20173: £28.2m) and EPS was 2.4p (20173: 6.7p).

The adjusted measures are summarised below:

Cash flow and net debt

Operating cash flows remain strong with free cash flow of £59.6m in the year (2017: £85.1m). Free cash flow in the year reflects the lower EBITDA and higher refurbishment and maintenance capital expenditure. The Group's net debt at the year-end was £291.1m, an increase of £268.0m on the prior year net debt of £23.1m3 following the acquisition of Wagamama and significant capital investment for the strategic development of our Concessions and Pubs businesses.

Summary cash flow for the year is set out below:

In December 2018 the Group refinanced its borrowings and now has £220m of revolving credit facilities that expire in December 2021 and a £10m overdraft facility. In addition the £225m Wagamama Bond matures in July 2022. At the year-end we had £161.9m of cash headroom and significant headroom against our banking covenants.

8On a full-year 2018 pro-forma basis

Capital expenditure

During the year the Group invested £68.5m (2017: £33.3m) in capital expenditure (excluding the acquisition of Wagamama). Our investment in refurbishment and maintenance capital expenditure increased to £20.3m (2017: £14.9m) reflecting the Frankie and Benny's capital refreshes on 16 sites and the conversions of four Coast to Coast units to Firejacks. Our investment in new site expenditure increased to £47.8m (2017: £18.4m) reflecting the higher number of new site openings across our Pubs and Concessions businesses in 2018 compared to 2017. 

This expenditure included the acquisitions of "Ribble Valley Inns Ltd" and "Food & Fuel Ltd" which added 15 pubs to our portfolio. 

During the year we closed 20 sites, comprising 15 sites from Leisure and five sites from Concessions. Within Concessions two of the sites had reached the end of their contractual life and the other three sites are currently undergoing redevelopments into new Concession units. In the year we also closed 15 Leisure sites, five of which had reached the end of their contractual life and the remainder were sites which no longer generated acceptable cash returns. The table below summarises openings and closures during the year.

We expect to spend £55m to £60m on development expenditure in 2019; comprising:

- At least seven new pubs

- Between 5 to 10 new Concessions sites in 2019, including the initial expenditure relating to Manchester terminal redevelopment

- At least six new Wagamama sites

- Eight Leisure site conversions to Wagamama

- Roll-out of delivery kitchens across the enlarged group and pilot of Wagamama Grab and Go concept

Refurbishment and maintenance capital expenditure will range between £30m to £35m. This will include six transformational refurbishments of Wagamama UK sites and several large-scale Concessions redevelopment projects.

Restructuring and exceptional charge

An exceptional pre-tax charge of £39.2m has been recorded in the year (20173: £29.7m, including the prior year restatement of £16.5m), which includes the following:

- Onerous lease review resulted in a charge of £10.0m in the year (2017: £4.2m). This comprises:

· A £5.2m credit in respect of unutilised provisions following the successful exit of 28 sites ahead of expectations; and

· A further charge of £15.2m was provided for in the year. This comprised a charge of £11.1m in respect of newly identified onerous leases and a charge of £4.1m in respect of sites previously provided for

- A net impairment charge of £14.0m (20173: £20.7m, including the prior year restatement of £16.5m) was made against the carrying value of specific restaurant assets due to recent changes in certain markets. This comprises an impairment charge of £17.1m partially offset by reversals of previously recognised impairment losses of £3.1m

- An exceptional charge of £14.8m has been recorded in the year in relation to the acquisitions of Wagamama, Food and Fuel Ltd and Ribble Valley Inns Ltd. Acquisition related costs are items of one-off expenditure, including legal and professional fees, incurred in connection with the acquisitions

- Restructuring and strategic review costs of £nil (2017: £4.8m) relating to costs incurred in the restructuring projects that were initiated in 2017 to implement the new strategy and cost initiatives; and

- An exceptional charge of £0.5m has been recognised in the year as a result of the refinancing which took place to fund the acquisition of Wagamama. The charge relates to the write off of unamortised finance costs connected to the old debt facility

The tax credit relating to these exceptional charges was £4.3m (20173: £2.2m).

Cash expenditure associated with the exceptional charges was £21.3m in the year (2017: £19.5m). Cash costs relate to onerous leases of £11.2m (2017: £12.7m), acquisitions and refinancing costs of £10.1m (2017:£nil) and costs associated with the implementation of the new business strategy of £nil (2017: £6.8m)

Tax

The Adjusted1 tax charge for the year was £11.4m (2017: £12.1m), summarised as follows:

The effective Adjusted1 tax rate for the year was 21.4% compared to 20.9% 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 50.6%, which increased from the 20173 rate of 34.9% due to the increase in exceptional charges in the year.

1. General information

Corporate informationThe Restaurant Group plc (the "Company") is a public listed company incorporated and registered in Scotland. The consolidated preliminary results of the Company as at and for the year ended 30 December 2018 comprise the Company and its subsidiaries (together referred to as the "Group").

The consolidated preliminary results of the Group for the year ended 30 December 2018 were approved by the directors on 14 March 2019. The Annual General Meeting of The Restaurant Group plc will be held at 9:30am on Friday 17 May 2019 at the offices of MHP Communications at 6 Agar Street, London WC2N 4HN.

Accounting policies

Basis of preparationWhilst 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 30 December 2018 and are presented in UK Sterling and all values are rounded to the nearest thousand (UK £'000), except when otherwise indicated.

Going concernThe 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 informationThe financial information contained within this preliminary announcement for the 52 weeks to 30 December 2018 and 52 weeks to 31 December 2017 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 31 December 2017 have been filed with the Registrar of Companies and those for the 52 weeks to 30 December 2018 will be filed following the Company's Annual General Meeting.

The auditor's reports on the accounts for both the 52 weeks to 30 December 2018 and 52 weeks to 31 December 2017 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 2019.

New accounting standards, interpretations and amendments adopted by the GroupThe 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 30 December 2018.

2 Restatement of comparatives

During the year, management have identified five items for which we have retrospectively amended the financial statements.

(i) Lease incentives - capital contributions

The Group has historically recognised contributions received from landlords to offset against the cost of fitting out a restaurant as a reduction in Property, plant and equipment. Management has identified this error in the year, and reclassified to Trade and other payables, split between current and non-current. Whereas these have previously been depreciated each year, over the lease life, all lease incentives are now recognised, within Cost of sales in the income statement. The prior year credit was also reclassified from Depreciation into Cost of sales. This has resulted in:

- An increase in the Property, plant and equipment as at 1 January 2017 of £16.9m, representing the reversal of prior incentives, with a corresponding increase in the Trade and other payables balance for the remaining incentives to recognise over the lease life. 

- An increase in the Depreciation charge for 2017 of £0.5m and a decrease in rent of £0.8m.

(ii) Lease incentives - rent free periodsThe Group has previously accounted for rent free lease incentives as a current liability, despite them being recognised in the income statement over the life of the lease. The Group has reclassified amounts that will be unwound to the income statement after one year to non-current Other payables. This has resulted in: 

- An £8.0m increase in non-current Other payables as at 1 January 2017, and a corresponding decrease in current Trade and Other payables. 

- There is no impact on the 2017 income statement as the incentive was released appropriately.

(iii) Finance lease

The historical accounting for finance leases on a number of sites was incorrect. A mechanical calculation error had led to the future cash outflows being overstated. This has resulted in:

- A £1.7m reduction in non-current Other payables, and a corresponding reduction in Retained earnings as at 1 January 2017. There is less than a £0.1m impact on Property, plant and equipment as these sites have been fully impaired.

- The impact on the income statement for 2017 is considered immaterial, and has not been adjusted.(iv) Dilapidations provisionThe Group historically recorded dilapidation provisions within current Trade and other payables. The Group has corrected the reclassification of dilapidations to non-current Provisions. This has resulted in:- A £2.2m increase in non-current Provisions, and a corresponding decrease in current Trade and other payables as at 1 January 2017.- No impact on the income statement for 2017 as these were recognised prior to 1 January 2017.

(v) Impairment and onerous lease

As part of the year-end process, management reviewed and re-assessed the method by which central costs are allocated to the individual CGUs for the purposes of impairment testing. As a result, an appropriate portion of the central costs were allocated to the CGUs to more accurately determine their future cash flows. This change has been applied retrospectively to the 1 January 2017 balance sheet. This has resulted in: 

- A write down of the 1 January 2017 Property, plant and equipment values of £8.5m and corresponding reduction in opening Retained earnings; and 

- An additional 2017 Exceptional impairment charge of £16.5m and a reduction in Depreciation of £0.7m, totalling a £15.8m impact on Profit before tax.

3 Segmental analysis

The Group trades in one business segment (that of operating restaurants) primarily within the United Kingdom. In addition, the Group operates restaurants in the United States and generates revenues from franchise royalties primarily in the Middle East and Europe. The segmentation between geographical location and restaurant operations and royalty revenues are not considered significant to be reportable segments under IFRS 8.

4 Revenue

Revenue has been generated from the operation of restaurants, with approximately 99% of revenue generated within the United Kingdom. The remainder is attributable to restaurants within the United States and from franchise royalties primarily in the Middle East and Europe.

An exceptional pre-tax charge of £39.2m has been recorded in the year (2017 Restated: £29.7m), which includes the following:

- Onerous lease provisions resulted in a charge of £10.0m in the year (2017: £4.2m). This comprises:

· A £5.2m credit in respect of unutilised provisions following the successful exit of 28 sites ahead of expectations;

· A further charge totalling £15.2m was provided for in the year. This comprised a charge of £11.1m in respect of newly identified onerous leases and a charge of £4.1m in respect of sites previously provided for.

- A net impairment charge of £14.0m (2017 Restated: £20.7m) was made against the carrying value of specific restaurant assets due to continuing challenging trading conditions in the markets in which the Group's restaurants operate as well as a challenging outlook, and has had a significant impact on the Group and the wider casual dining market. There has been an improvement in trading conditions and outlook at certain of the Group's restaurants which has resulted in the reversal of some previous historic impairment charges. The net charge comprises an impairment charge of £17.1m partially offset by reversals of previously recognised impairment losses of £3.1m.

- An exceptional charge of £14.8m has been recorded in the year in relation to the acquisitions of Wagamama, Food and Fuel and Ribble Valley Inns. Refer to Note 17 for further details.

- Restructuring and strategic review costs of £nil (2017: £4.8m) relating to costs incurred in the restructuring projects that were initiated in 2017 to implement the new strategy and cost initiatives.

- An exceptional charge of £0.5m has been recognised in the year as a result of the refinancing which took place to fund the acquisition of Wagamama.

The tax credit relating to these exceptional charges was £4.3m (2017 Restated: £2.2m).

Cash expenditure associated with the above exceptional charges was £21.3m in the year (2017: £19.5m) relating to the cash cost of the onerous leases of £11.2m (2017: £12.7m), the cash cost of the acquisitions and refinancing of £10.1m (2017: £nil), and costs associated with the implementation of the new business strategy of £nil (2017: £6.8m).

The impairment charge comprises a charge of £17.1m partially offset by reversals of previously recognised impairment losses of £3.1m. Refer to Note 6 for further details. Included within the book value of property, plant and equipment are assets under construction of £2.8m (2017: £0.7m) which are not depreciated.

During the period the Group amended its estimate of residual values for property, plant and equipment by reference to an external valuation.Impairment testing on the Group's property, plant and equipment has been based on value in use estimates using cash flow projections based on one year budgets approved by the Board. The value in use estimates differ depending on the area of the business. The projected cash flows have been discounted using a rate based on the Group's pre-tax Weighted Average Cost of Capital of 9.2% (2017: 10.2%) that reflects the risk of these assets. Cash flows are extrapolated in perpetuity or to the end of the lease life with an annual growth rate of 2%.

The key assumptions in the value in use estimates are the discount rate applied and the forecast cash flows. An increase of 1% in the discount rate would give rise to an additional impairment charge of approximately £1.2m, whilst a decrease of 1% in the discount rate would give rise to a reduction in impairment of approximately £0.5m. The forecast cash flows take into account management's experience of the specific sites and its long term expectations of the market. A 10% reduction in these forecast cash flows would result in an additional impairment charge of approximately £2.8m.

The onerous lease provisions are for onerous contracts in respect of lease agreements. The provision comprises the onerous element of expenditure over the life of those contracts which are considered onerous, expiring in 1 to 30 years, and exit costs including the costs of strip out, dilapidations and the costs expected to be incurred over the void period until the property is sublet.

- Onerous lease provisions resulted in a charge of £9.5m in the year (2017: £4.5m). This comprises:

• A £5.2m credit in respect of unutilised provisions following the successful exit of 28 sites ahead of expectations;

• A further charge totalling £14.7m was provided for in the year. This comprised a charge of £11.1m in respect of newly identified onerous leases and a charge of £3.6m in respect of sites previously provided for.

During the year £16.8m of provisions were acquired through business combinations. Refer to Note 16 for further details.

Included in the opening balance is a £2.2m reclassification of dilapidations to other provisions, which are expected to be utilised within three years. Refer to Note 2 for further details.

Changes in the EBITDA performance of each site could impact on the value of the provision. It is estimated that, a 10% decline in the EBITDA performance of the sites included in the provision would generate an additional provision of £0.3m. Additionally, it is estimated that, should all leases with more than ten years remaining on the committed lease term be exited two years ahead of expiry, the provision would reduce by £1.0m. A 1% increase in the risk free rate would reduce the provision by £1.7m while a reduction of similar magnitude would result in an additional provision of £1.9m.