RTN.L Regulatory News (RTN)

The Restaurant Group plc ("TRG" or "The Group") Interim results for the 26 weeks ended 2 July 2023 ("H1")

Increase in management expectations for FY23 EBITDA and excellent progress in executing medium-term plan

Highlights

· Strong like-for-like ("LFL") sales and Adjusted EBITDA1 growth driven by Wagamama, Pubs and Concessions

· Trading performance supports a moderate increase in management's FY23 Adjusted EBITDA1 expectations

· Excellent early progress in executing medium-term plan to:

o  Deliver 250bps to 350bps of Adjusted EBITDA1 margin accretion over a three-year time horizon2

o  Target net debt/adjusted EBITDA1 below 1.5x before the end of FY25, whilst supporting accelerated investment in Wagamama openings

· Continue to actively explore strategic options to further accelerate margin accretion and deleveraging

Financial summary

· Total revenue +10% to £467.4m (2022: £423.4m)

· Adjusted EBITDA1 +15% to £36.3m on a pre-IFRS 16 basis versus the VAT adjusted basis of £31.4m in H1 2022 (2022 reported Adjusted EBITDA1: £41.7m)

· Adjusted Profit before tax1 of £7.2m on a pre-IFRS 16 basis, well ahead of the VAT adjusted comparable loss of £0.1m in H1 2022 (2022 reported Adjusted profit before tax: £10.2m)

· Statutory profit before tax of £2.3m on an IFRS 16 basis (2022: loss of £28.5m), includes exceptional charges of £15.2m predominately relating to non-cash impairment charges

FY23 Outlook

· FY23 costs in line with previous expectations and medium-term cost outlook continues to improve

· The trading performance supports a moderate increase in management's FY23 Adjusted EBITDA1 expectations

o  FY23 Net debt1 expected to be between £180m and £190m

Andy Hornby, Chief Executive Officer, commented:

"We are encouraged by the significant progress made in the first eight months of the year, delivering strong LFL sales growth despite the consumer backdrop. In light of the strong trading we are increasing our expectations for FY23 Adjusted EBITDA.

We are making excellent progress on our medium-term plan and the Board continues to actively explore strategic options to further accelerate margin accretion and deleveraging.

A massive thanks to each and everyone of our dedicated team members who have worked so hard to deliver these excellent results." 

Operational highlights

· Wagamama, Pubs and Concessions recorded strong LFL sales growth:

Year To Date ("YTD") LFL sales (%) vs 2022 comparable split by category for the 34 weeks to 27 August 2023

o  Wagamama, Pubs and Concessions all delivering dine-in covers growth (YTD)

· Customer ratings remain very strong across all brands:

o  Wagamama maintained as the number one UK casual dining chain brand by BrandVue

o  Brunning and Price recognised as best Pub Group in the UK by CGA Pub Track

· Segmental disclosure shows strong Adjusted EBITDA1 progression in H1 23 on a VAT adjusted basis for Wagamama, Pubs and Concessions

· Excellent early progress in medium-term margin accretion and deleveraging plan:

o  Strong current trading

o  Incremental annualised cost savings achieved of £5m p.a.

o  Acceleration of new Wagamama UK openings to 8-10 a year from FY24

o  Leisure estate rationalisation ahead of plan

1 Pre-IFRS 16 Adjustment and exceptional charges

2 FY25 year-end run-rate

3VAT benefit boosted LFL sales by approximately 5 to 7% for the restaurant and pub sector in Q1 2022 (13 weeks to 3 April 2022). This is an estimation by management looking at the calculated VAT benefit impact within its divisions. The VAT adjusted figures in this announcement (including in the segmental disclosure section) have used this estimation consistently

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 9:00am (UK time). If you would like to register, please contact MHP Group for details on 020 3128 8100 or email TRG@mhpgroup.com.

The presentation slides will be available to download from 7:30am (UK time) from the Company's website https://www.trgplc.com/investors/reports-presentations

Notes:

1. The Restaurant Group plc had approximately 380 restaurants and pub restaurants throughout the UK as at 6 September 2023. Its principal trading brands are Wagamama and Brunning & Price. It also operates a multi-brand Concessions business which trades principally in UK airports. In addition, the Wagamama business has a 20% stake in a JV operating seven Wagamama restaurants in the US and c. 60 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" and reflect the Group's current expectations concerning future events. Actual results may differ materially from current expectations or historical results.

3. The Group's Alternative performance measures ('APMs') such as like-for-like sales, Adjusted measures, pre-IFRS 16 basis measures and free cash flow are defined within the glossary at the end of this report.

Business review

Introduction

We are particularly pleased with the strong LFL sales and Adjusted EBITDA growth achieved in Wagamama, Pubs and Concessions in the first half of the year, which has continued in Q3 to date, and this supports a moderate increase in management's expectations for FY23 Adjusted EBITDA.

Our Leisure business has been most impacted by the current cost-of-living pressures and is in marginal LFL sales decline. In response to these ongoing challenges the business has accelerated the rationalisation of the estate and is focused on improving the cash generation within the Leisure business.

Overall, excellent early progress has been made on executing the medium-term plan to:

- Deliver 250 to 350 basis points improvement in Adjusted EBITDA1 margins over the next three years (i.e. FY25 year-end run-rate)

- Reduce Net debt / Adjusted EBITDA1 to below 1.5x before the end of FY2025, whilst supporting accelerated investment in Wagamama openings

We provide updates on the following areas below:

1. Trading update and key priorities for each division

2. Our margin accretion plan

1. Trading update and key priorities for each division

Total Like-for like ("LFL") sales (%) vs 2022 comparable split by H1 and current trading showing both Q3 (to-date) and Q2 and Q3 (to-date) combined

VAT benefit boosted LFL sales by approximately 5 to 7% for the restaurant and pub sector in Q1 2022 (13 weeks to 3 April 2022). This is an estimation by management looking at the calculated VAT benefit impact within its divisions. 

LFL sales figures in the section below versus the market reference the final column in the table above, for the 21-week period from 03 April to 27 August 2023 (i.e. Q2 and Q3 to date) versus the comparable period in the prior year, as this normalises the comparisons for both Lower VAT and Omicron closures impacting the market to varying degrees in Q1 2022.

Wagamama

Trading update

Wagamama has traded strongly throughout the year with trading strengthening further in Q3 to an exceptionally strong 16%, helped in part by the cool summer weather.

Wagamama delivered LFL sales growth of 9% in Q2 & Q3 to date, representing a 2% outperformance versus the market. The outperformance in "dine-in" sales has been particularly pleasing at 5%. Customer ratings have remained very strong with the June 2023 external NPS scores (as measured by BrandVue) maintaining Wagamama as the number one brand amongst casual dining chains in the UK.

Wagamama has a consistent and strong track record of market outperformance with the key drivers of this being:

- Unique colleague culture: the Wagamama business continues to be underpinned by our unique culture and ethos. In 2023 we have delivered significantly reduced team turnover and strong retention levels as we have continued to focus on mental health and well-being initiatives to support our teams

- Continuous menu innovation: In 2023 we further evolved our vegan and core menus with two highlights being our vegan Kare Loman (which is our 3rd most popular plant-based dish) and within our sides range, we have seen our new crispy chilli mushrooms reach strong participation. In addition, as part of our summer menu launch, we innovated within the cocktail range and have seen cocktail participation increase significantly on last year

- Purpose-led marketing activity: Our marketing strategy remains to drive both short-term sales action whilst building long-term brand saliency to build both a functional and emotional relationship with our guests. In the first half of the year there has been a continuous drumbeat of demand driving activity which has included menu innovation, student-based activity and a Deliveroo exclusive TV campaign

- Well-invested estate: Wagamama's estates review process continues to ensure that we regularly invest in our sites and complete selective transformational refurbishments, such as the Ashford Designer Outlet in Kent, where we can further enhance returns.

Growth opportunities

Wagamama UK: We have opened 38 new full-service restaurants between 2016-2021. Within this 33 of the sites opened were in 'regional' locations (i.e. outside central London and airport locations) and these delivered a ROIC[1] in excess of 35% (rolling 12 months to June '23) providing strong financial returns, despite high food and energy inflation costs.

These strong returns achieved by our regional openings gives us confidence to accelerate our expansion plans and we are now targeting to open between eight to 10 sites per year from FY24 onwards.

Our long-term ambitions include significant measured roll-out potential to expand in the UK to a targeted 200 to 220 restaurants (from an expected 161 sites at the end of FY23).

Wagamama US: As a reminder our US JV is a 20:80 partnership (with TRG as the minority investor) and the JV assumes full ownership of the operations of the US business. The JV therefore provides TRG with a capital light means for expanding the business in the US. TRG retains the option to repurchase the remaining 80% of the business starting in December 2027. 

The JV will open four new sites in FY23 in Atlanta, Tampa, Dallas and Arlington bringing the estate to a total of nine sites by December 2023. We expect the JV to deliver a positive EBITDA contribution in FY24 as we further develop the US presence for Wagamama. The JV Board will decide the precise scale of the future expansion plans but we would continue to expect to target an overall estate size of 20-30 sites by December 2027.

Wagamama International franchise: Our Wagamama franchise business is currently comprised of 59 sites across Europe and the Middle East which contribute approximately £2.5m Adjusted EBITDA (post divisional overheads). We are in the final stages of securing a new franchise agreement to open several sites in airport locations in India (new territory) with the first site expected to open in 2024. In addition we are exploring opportunities to further accelerate our international footprint.

Brunning & Price Pubs

Trading update

Pubs have maintained a consistently strong performance from Q1 through to Q3, when normalising for weather comparisons over the summer.

The business delivered LFL sales growth of 10% in Q2 and Q3 to date, representing a 1% outperformance versus the market. Customer sentiment has continued to be very strong with social media scores (consolidation of Google, Facebook and TripAdvisor scores) averaging 4.6/5 for the last 12 months to June 2023, delivering our highest ever rating. We are particularly pleased that Brunning and Price was recognised as the best Pub Group in the UK by CGA Pub Track, which is all credit to the strong leadership and delivery of the teams over many years.

The key drivers of this continued market outperformance are:

- Good customer demographics: On average around 60% of the total population that lives within a 15-minute drive time form part of the higher income classes (A to C1), and there are usually at least a 25,000 people within these catchments.

- High quality property estate in defensible, well-invested locations: Our sites are typically located in rural and suburban locations (c.80%) with expansive layouts and limited competition nearby, which has been instrumental in the Group's ability to trade strongly over the years. Over 60% of the Pubs estate benefits from having in excess of 100 "external" covers, which is clearly beneficial through good summer trading.

Growth opportunities

Our Pubs business is a high-quality asset with significant potential to create further value. The B&P offer has proved timeless and the business has consistently outperformed the market over the last nine years (between 2013 and 2022). During this period the business has opened 29 pub restaurants that have delivered a ROIC[2] in excess of 20% (rolling 12 months to June 23) providing good financial returns, despite high food and energy inflation costs. Our pub restaurants benefit from high sales densities with a food mix typically in excess of 65% and the significant investment in new sites means that they then have low ongoing maintenance and refurbishments capital expenditure requirements and therefore deliver strong free cash flow.

We opened one new pub during the first half of the year, the Mytton and Mermaid in Shrewsbury, which has surpassed our expectations and is one of our most successful new pub openings. We aim to open between 1 to 3 high quality pubs per year from FY24 onwards.

Concessions

Trading update

We are very pleased with the strong recovery of our Concessions business in 2023, which has exceeded management's expectations with LFL sales growth of 27% in Q2 and Q3 to date versus 2022, which is an outperformance to the market of 12%. Year-to-date LFL sales for the 34 weeks are +29%.

Importantly, UK air travel continues to make a significant recovery in 2023, with passenger volumes in airports where TRG operate improving from c. 90% of 2019 volumes in Q1 to c. 96% of 2019 volumes in Q3. The strength of the Concessions performance is further illustrated by comparing the trading run-rates against pre-Covid levels, with LFL sales versus 2019 up 3% in Q1, up 10% in Q2 and up 13% in Q3.

We now expect that passenger volumes will recover to 2019 levels in 2024, which is a year earlier than originally expected. This is a significant milestone for the industry and TRG. It is reassuring that the recovery in passenger volumes has been consistent across the country, with London, Regional and Scottish airports all performing well vs 2019 sales levels.

In order to capitalise on the expected future growth opportunities and for TRG to continue to position itself as the partner of choice for all future Food and Beverage opportunities the business continues to focus on:

- Improving the customer experience through enhanced service and ongoing menu development

- Ongoing brand development in partnership with new and existing franchise partners, for example, Jones the Grocer being delivered for T2 Heathrow in Q1 2024 

- Agreeing extensions on a number of existing contracts including major redevelopments at Gatwick and Luton. This activity maximises our future earnings stream from this business

Leisure

The Leisure business traded more resiliently in Q3 with a strong recent cinema slate helping LFL sales to 6% in Q3.

The business however has traded below the market, and achieved a LFL sales decline of 2% in Q2 and Q3 to date, with year-to-date LFL sales being down 3%. The Leisure business has been impacted by a number of challenges, in particular the cost-of-living pressures on its core customer base.

In response to these ongoing challenges the business has accelerated the rationalisation of the trading estate from 116 at FY22 year-end to an expected c. 76 sites at FY 23 year-end, delivering the planned two-year rationalisation programme in 12 months. This will be achieved through:

- Exercising the lease expiry / break clause on 14 sites, which have a contractual expiry within the next 18 months

- Selling eight freehold sites with five expected to complete in Q4 2023 generating c.£5m of proceeds

- Converting three sites to Wagamama by the end of FY24

- Accelerating the disposal of between 12 to 17 sites through mutual agreement with landlords / alternative tenants.

The TRG Property team has made good progress in efficiently managing the disposal programme and protecting net cash and we expect to exit the vast majority of the lease obligations of the c. 40 closed sites by the end of FY24.

In addition to the estate rationalisation the team remain focused on enhancing the core offer for both Frankie and Benny's and Chiquito's. In particular over the last six months the teams have concentrated on:

- Staff training and retention: We are investing in staff training and retention programs in order to attract and retain qualified employees, in order to provide our customers with the high-quality service that they expect

- Value for money: We are focusing on offering high-quality food and service at a competitive price in order to attract and retain customers

We continue to improve the customer offer and operational delivery in order to maximise the cashflow from the business.

2. Update on margin accretion and deleveraging plan

Excellent early progress has been made in the first eight months of the year on the margin accretion and deleveraging plans. As previously reported in our trading update at the start of May, £5m of incremental annualised cost savings had been identified and will in part benefit FY23 EBITDA with the full £5m of cost savings flowing through to FY24. In addition, other central cost saving initiatives have been identified and will deliver as part of the margin accretion plan in FY24.

As highlighted above, each of the Wagamama, Pubs and Concessions businesses have seen strong LFL sales growth, market share gains and delivered year on year volume growth. This continued market outperformance on volume with selective price increases will further benefit margin accretion through to 2025.

Finally, the increase in planned new openings for Wagamama to eight to 10 a year combined with the accelerated rationalisation of the Leisure portfolio further enhances the profitability of the Group's portfolio.

As a consequence of the early progress above, management is well on track to deliver a 250 to 350 basis points improvement in its Adjusted EBITDA1 margins by December 2025 (i.e. year-end run-rate).

Net debt /Adjusted EBITDA1 (pre-IFRS 16) is expected to be below 1.5x before December 2025, whilst supporting accelerated investment in Wagamama openings.

Summary

· Strong LFL sales and Adjusted EBITDA1 growth driven by Wagamama, Pubs and Concessions

· Trading performance supports a moderate increase in management's FY23 Adjusted EBITDA1 expectations

· Excellent early progress in executing medium-term plan to:

o  Deliver 250bps to 350bps of Adjusted EBITDA1 margin accretion over a three-year time horizon2

o  Target net debt/Adjusted EBITDA1 below 1.5x before the end of FY25, whilst supporting accelerated investment in Wagamama openings

· Continue to actively explore strategic options to further accelerate margin accretion and deleveraging

Financial Review

As outlined in the business review, we were particularly pleased to have delivered a continued strong LFL sales outperformance versus the market across our Wagamama, Pubs and Concessions businesses, illustrating the strength of our customer propositions and ability to outperform the market. Our Leisure business achieved a moderate LFL sales decline which was behind the market, with the business impacted by the increased inflationary pressures on the UK mid-market consumer.

Statutory Results

The key statutory financial measures (IFRS 16) are summarised below and are stated after the impact of exceptional costs:

Revenue for the period was £467.4m (2022: £423.4m) which represents an increase of 10% on the prior year, with strong growth across our Wagamama, Pubs and Concessions businesses. 

The increase in operating profit to £19.6m (2022: loss of £12.2m) is due to the strong trading performance, good cost control and lower exceptional costs.

Net interest costs of £17.3m (2022: £16.3m) are higher than the prior year due to an increase in the interest cost of our floating debt and a lower exceptional gain on Group's interest rate caps in the current period compared to last year.

Alternative Performance Measures

TRG uses a number of non-statutory measures to monitor business performance which are referred to within the Interim Report, but primarily relate to Adjusted and pre-IFRS 16 profit metrics. This is because the pre-IFRS 16 profit is consistent with the financial information used in the management accounts to inform business decisions and investment appraisals. It is TRG's view that presenting the information on a pre-IFRS 16 basis will provide a useful basis for understanding the Group's results to all stakeholders. Specifically, the measures mainly relate to three adjustments:

- The main profit measure used is Adjusted EBITDA. This is not a statutory measure but closely represents the Group's ability to make cash trading profits as it excludes key non-cash elements of the Income Statement such as depreciation and amortisation.

- The adjusted profit and debt measures are based on the IAS 17 approach to lease accounting and does not include the impact of IFRS 16. This is used as it more closely represents the cash profits of the business, and debt as measured by our banks.

- The adjusted profit measures are quoted excluding the impact of items that management have deemed as exceptional as they are material and not related to underlying trading in the period.

As these measures are not defined by accounting standards, they may not be comparable across companies. The adjusted results may exclude significant costs (such as restructuring or impairments) and so may not be a complete picture of the Group's financial performance, which is presented in the statutory results. 

The key alternative performance measures (APM) are summarised below. Both pre-IFRS 16 and post- IFRS 16 figures are shown and are stated before the impact of exceptional costs:

APM (Pre-IFRS 16) APM (IFRS 16)

1The Group's adjusted performance metrics are defined within the glossary at the end of this report. All such adjusted measures are stated pre-exceptional items

Adjusted EBITDA (on a pre-IFRS 16 basis) for the 26 weeks is £36.3m (2022: £41.7m). As mentioned above and outlined in the business review, the main driver of the decrease in Adjusted EBITDA is due to the reduced VAT rate in Q1 2022, which was worth approximately £10m of EBITDA in H1 2022. Excluding the benefit of VAT in Q1 2022 underlying EBITDA increased from £31.4m in H1 2022 to £36.3m in H1 2023.

The Group made an adjusted profit before tax (on a pre-IFRS 16 basis) for the period of £7.2m (2022: £10.2m). 

Segmental analysis

Segmental disclosure is provided below to present a clearer view of the trading performance across each of our businesses. The information below is shown both with and without the benefit of the lower VAT rate in Q1 2022 having been removed (which contributed an estimated £10.3m to EBITDA in 2022). This allows the reader to understand the underlying performance of each business without the benefit of the lower VAT in Q1 2022:

Segmental analysis: H1 23 vs H1 22

*Adjusted (pre-exceptional charges)

**VAT benefit boosted LFL sales by approximately 5 to 7% for the restaurant and pub sector in Q1 2022 (13 weeks to 3 April 2022). This is an estimation by management looking at the calculated VAT benefit impact within it's divisions. The VAT adjusted figures in the table above have used this estimation

- Wagamama delivered Adjusted EBITDA1 of £28.8m compared to £23.1m on a VAT adjusted basis in the prior year, an increase of 25%

- Pubs delivered Adjusted EBITDA1 of £9.0m compared to £8.2m on a VAT adjusted basis in the prior year, an increase of 10%

- Concessions delivered Adjusted EBITDA1 of £6.8m compared to £2.7m on a VAT adjusted basis in the prior year, an increase of 150% based on a strong recovery of passenger volumes across UK airports; and

- Leisure (including Barburrito) delivered an Adjusted1 EBITDA loss of £0.8m compared to a VAT adjusted EBITDA profit of £5.1m in the prior year. This decline in EBITDA is due to the year-on-year sales decline and significant inflation impacting cost of goods sold, labour and utilities

In the period, divisional overhead costs were £15.4m, down from £15.7m in the prior year. Divisional overheads relate to operational resource, HR, marketing, and commercial finance teams within the divisions supporting their trading activities.

Central overheads were marginally lower at £7.5m compared to £7.7m in the prior year. Approximately 40% of central overheads relate to shared service functions supporting the trading divisions (procurement, property and IT) and c.60% related to corporate functions (including Plc Board requirements, central finance and Head Office property costs).

Cash flow and net debt

Net debt on an IFRS 16 basis has increased marginally from £581.7m (as at the Dec 22 year-end) to £585.5m in the period. The key driver of this increase in net debt relates to the timing of our capital expenditure and exceptional costs being first half weighted.

On a full year basis, we expect pre-IFRS 16 net debt to be between £180 to £190m. The reduction in net debt by year-end will be driven by:

- Higher management expectations for FY23 EBITDA

- Proceeds from the sale of Leisure freehold sites (c.£5m)

- An expected working capital inflow

- Lower capital expenditure in H2; and

- Lower exceptional costs

Operating cash flow (on a pre-IFRS 16 basis) in the period reduced to £36.4m from £57.6m in the prior year. The reduction in operating cashflow is primarily due to the prior year benefiting from a significant working capital inflow of £15.9m following the largely unrestricted trading in H1 2022 when compared to H1 2021 as a result of Covid related closures.

Summary cash flow for the year (on a pre-IFRS 16 basis) is set out below:

1The Group's adjusted performance metrics are defined within the glossary at the end of this report. All such adjusted measures are stated pre-exceptional items

2Operating cash flow excludes certain exceptional costs and includes payments made against lease obligations

The Group continues to benefit from significant cash headroom with £133.4m as at the half-year period end (2022 Year-end: £139.2m).

The Group continues to target net debt/EBITDA[3] below 1.5x before the end of FY25.

Exceptional items

An exceptional pre-tax charge of £15.2m has been recorded in the period (2022: £42.4m). The key driver of this charge has been the impairment of certain sites and goodwill predominantly relating to the Leisure division. A net impairment charge of £13.6m has been provided in the period (2022: £45.4m). 

The other two significant exceptional items are a £4.4m charge relating to the Leisure Division estate rationalisation programme (2022: £0.7m) and a further gain on the revaluation of the Group's interest rate caps of £4.3m (2022: £5.3m).

The tax credit relating to these exceptional charges was £1.5m (2022: £6.0m tax credit).

Cash expenditure associated with the above exceptional charges was £4.7m (2022: £3.1m).

Tax

The tax charge for the period was £3.8m (2022: credit of £2.4m), summarised as follows:

The Group's pre-exceptional effective tax rate is 30.2% (2022: pre-exceptional effective tax rate of 25.7%). The effective tax rate exceeds the blended statutory corporation tax rate of 23.0% primarily as a result of non-qualifying depreciation (which accounts for 6.0% of the differential on the effective tax rate).

The current year tax effect of exceptional items of £1.5m (effective tax rate of 10%) comprises a corporation tax credit of £1.0m and a net £0.5m deferred tax credit relating to the tax deductions on exceptional items such as right of use asset impairment and provisions.

Selected FY23 financial modelling guidance

· Total capital expenditure approximately £43m to £45m:

o  Maintenance and IT investment of c. £20m

o  Refurbishment capex of c.£10m

o  Expansionary capex of c. £10 to £15m

· IFRS 16 EBITDA add-backs (i.e., rent & other property non-cash charges):

o  Net add-back £58m to £64m:

- £60m to £62m for fixed rent

- £7m to £9m for lease modifications

- (£7m) to (£9m) for non-cash property charges

· Depreciation and interest detailed in table below:

Going concern

The directors have adopted the going concern basis in preparing the Interim Financial Review after assessing the Group's principal risks including current macroeconomic headwinds, relating to the cost-of-living crisis and elevated levels of inflation. In conducting their review, the Directors have concluded that the Group has sufficient liquidity and covenant headroom for the going concern review period to 30 September 2024.

The Group has substantial liquidity with £133m in cash and cash equivalents, or available facilities at the balance sheet date. Following an amend and extend in December 2022 these facilities are committed until at least March 2027. The facilities consist of a £220m Term loan and a £120m RCF. Further details of the Group's debt facilities and covenants are in Note 23 to the FY22 Annual Report and Accounts.

Whilst the Group has delivered Total revenue growth of 10% in the first half of the year the Directors remain cautious about the ability for our customers to continue their current level of spending in our restaurants and pubs whilst the cost-of-living crisis continues, and the current and future impact of increases in the Bank of England Interest rate. In preparing the 'base case' forecast for the period to 30 September 2024, the Directors have assumed continued growth in sales but that this growth would moderate throughout the period. Further, management have included the impact of current elevated levels of inflation throughout the remainder of 2023 and then a reduction in inflation in 2024. In this forecast, available liquidity does not fall below £89m compared to a minimum liquidity covenant of £40m, and Senior Secured Net Leverage does not exceed 2.3x against a covenant requirement of no more than 4.25x.

In addition, the Board has considered a 'stress case' scenario where sales have been reduced 4% from base case (5% reduction in volume with the benefit of a 1% price increase). In this 'stress case' scenario, without mitigation, liquidity falls to a minimum of £81m and Senior Secured Net Leverage increases to 2.5x but still within the covenants of the Group's banking facilities. In this 'stress case' scenario, including mitigations, such as, the ability to further increase our selling prices, conduct a central cost reduction program and to refine our uncommitted capital expenditure plans, liquidity falls to a minimum of £85m, and Senior Secured Net Leverage increases to 2.5x but still within the covenants of the Group's banking facilities.

The Board have also considered a reverse stress case to determine the level by which sales would need to fall from the 'base case' before there is a risk of a leverage covenant breach. Pre-mitigating actions, the level of sales decline compared to the base case is 9.7%. Following mitigating actions, which are within management's control, and include the ability to increase selling prices, conduct a far more extensive central cost reduction program and further refinement to capital expenditure plans the level of sales decline compared to the base case increases to 17.1%. Selling price increases before the assumed volume reduction have the largest mitigating benefit. The Board considers this level of sales decline over a sustained 12 month period as remote due to trading being ahead of the base case in the year to date, the current economic outlook from both the Bank of England and the International Monetary Fund is for a shallow recession in 2023 and that during the last economic recession the Group only experienced a modest sales decline of less than 2% in 2009 compared to the prior year and less than 1% in 2010 when compared to 2009.

However, if this level of sales decline were experienced on a sustained basis, the Group would take further decisive actions which is within its control to further reduce both its operating costs and capital expenditure to mitigate the potential risk of a covenant breach. Furthermore, the directors would also engage with its lending group for covenant waivers, which were provided during the pandemic given similarly extreme circumstances.

Based on the above the Board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the period to 30 September 2024, being at least the next twelve months from the date of approval of the year-end accounts. On this basis, the Directors continue to adopt the going concern basis of preparation.

Principal Risks and Uncertainties

The Group set out its internal risk management process together with its formal assessment of its principal risks and uncertainties as at the date of publication on pages 69 to 70 of its 2022 Annual Report. Since then, the Group's Risk and Audit Committees have continued to review and assess the main risks likely to impact the Group while assessing the controls and mitigations being put in place across the Group. In addition, the Risk Committee maintains a watch on emerging risks, as well as those relating to climate change and the environment, to ensure that the appropriate steps are taken at the right time. The potential impacts of climate change on the business are recorded in a separate register and are currently acknowledged within the key risks as part of the Group's broader supply chain risks. The Senior Management Risk Committee, which meets quarterly, has held three meetings to date during the financial year, and reported back to the Audit Committee and, ultimately, to the Board. The key material risks as currently identified by the Directors remain unchanged overall since the date of the Annual Report and are listed below, together with the controls and mitigations that are in place:

The Restaurant Group plc

Consolidated income statement

The table below is provided to give additional information to shareholders on a key performance indicator:

All amounts relate to continuing activities

The table below is provided to give additional information to shareholders on a key performance indicator:

All amounts relate to continuing activities

Consolidated cash flow statement

1 Accounting policies

Basis of preparation

The interim condensed consolidated set of financial statements included in this interim financial report has been prepared in accordance with the UK adopted IAS 34 'Interim Financial Reporting'. The accounting policies and methods of computation used are consistent with those used in the Group's latest annual audited financial statements. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's latest annual consolidated financial statements as at 1 January 2023.

General information

The comparatives for the full year ended 1 January 2023 do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on these accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The accounting period runs to a Sunday each half year which will be a 26 or 27 week period. The Directors present their report and consolidated financial statements for the 26 week period ended 2 July 2023, with the comparative 26 week period to 3 July 2022.

Going concern basis

The directors have adopted the going concern basis in preparing the Interim Financial Review after assessing the Group's principal risks including current macroeconomic headwinds, relating to the cost-of-living crisis and elevated levels of inflation. In conducting their review, the Directors have concluded that the Group has sufficient liquidity and covenant headroom for the going concern review period to 30 September 2024.

The Group has substantial liquidity with £133m in cash and cash equivalents, or available facilities at the balance sheet date. Following an amend and extend in December 2022 these facilities are committed until at least March 2027. The facilities consist of a £220m Term loan and a £120m RCF. Further details of the Group's debt facilities and covenants are in Note [15] to the FY22 Annual Report and Accounts.

Whilst the Group has delivered Total sales growth of 10% in the first half of the year the Directors remain cautious about the ability for our customers to continue their current level of spending in our restaurants and pubs whilst the cost-of-living crisis continues, and the current and future impact of increases in the Bank of England Interest rate. In preparing the 'base case' forecast for the period to 30 September 2024, the Directors have assumed continued growth in sales but that this growth would moderate throughout the period. Further, management have included the impact of current elevated levels of inflation throughout the remainder of 2023 and then a reduction in inflation in 2024. In this forecast, available liquidity does not fall below £89m compared to a minimum liquidity covenant of £40m, and Senior Secured Net Leverage does not exceed 2.3x against a covenant requirement of no more than 4.25x.

In addition, the Board has considered a 'stress case' scenario where sales have been reduced 4% from base case (5% reduction in volume with the benefit of a 1% price increase). In this 'stress case' scenario, without mitigation, liquidity falls to a minimum of £81m and Senior Secured Net Leverage increases to 2.5x but still within the covenants of the Group's banking facilities. In this 'stress case' scenario, including mitigations, such as, the ability to further increase our selling prices, conduct a central cost reduction program and to refine our uncommitted capital expenditure plans, liquidity falls to a minimum of £85m, and Senior Secured Net Leverage increases to 2.5x but still within the covenants of the Group's banking facilities.

The Board have also considered a reverse stress case to determine the level by which sales would need to fall from the 'base case' before there is a risk of a leverage covenant breach. Pre-mitigating actions, the level of sales decline compared to the base case is 9.7%. Following mitigating actions, which are within managements control, and include the ability to increase selling prices, conduct a far more extensive central cost reduction program and further refinement to capital expenditure plans the level of sales decline compared to the base case increases to 17.1%. Selling price increases before the assumed volume reduction have the largest mitigating benefit. The Board considers this level of sales decline over a sustained 12 month period as remote due to trading being ahead of the base case in the year to date, the current economic outlook from both the Bank of England and the International Monetary Fund is for a shallow recession in 2023 and that during the last economic recession the Group only experienced a modest sales decline of less than 2% in 2009 compared to the prior year and less than 1% in 2010 when compared to 2009. .

However, if this level of sales decline were experienced on a sustained basis, the Group would take further decisive actions which is within its control to further reduce both its operating costs and capital expenditure to mitigate the potential risk of a covenant breach. Furthermore, the directors would also engage with its lending group for covenant waivers, which were provided during the pandemic given similarly extreme circumstances.

Based on the above the Board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the period to 30 September 2024, being at least the next twelve months from the date of approval of the year-end accounts. On this basis, the Directors continue to adopt the going concern basis of preparation.

2 Changes in accounting policies

The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements.

Other standards, interpretations and amendments issued but not yet effective are not expected to have a material impact on the Group financial statements.

Reclassification of cost of sales and administrative expenses

Within the 2022 Annual report and accounts, the Directors adjusted the allocation of cost of sales and administration expenses to more appropriately reflect the nature of costs incurred. The same allocation has been consistently applied within the results for the 26-week period ended 2 July 2023. No adjustment has been made to the prior year interim figures presented as comparative information. Had an adjustment been made, costs of sales in the 26-week period ended 3 July 2022 would have been £4.2m greater and administration expenses reduced by an equivalent amount.

3 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 has four operating segments of:

-Wagamama

-Pubs

-Leisure; and

-Concessions

It is the Directors' judgment that given the ongoing cost-of-living crisis' impact on the broader casual dining sector and in particular the Leisure business that it is no longer appropriate to aggregate all segments under IFRS 8. The Directors have reviewed the future economic characteristics of our Wagamama, Pubs and Concessions businesses, including Gross Margin, Net Margin, EBITDA and Sales trajectory, along with the non-financial criteria of IFRS 8 and concluded they are similar. However, given the ongoing cost-of-living crisis and its impact on certain customer segments, the Leisure division no longer has similar long-term economic characteristics.

In addition, the Directors believe it is of greater value to stakeholders for the Group to provide transparency of divisional performance and central overheads cost through the provision of full divisional disclosure. In providing this segmental reporting the Directors are meeting the requirements of IFRS 8 and its stakeholders.

Comparative period segmental presentation has been represented.

Geographical segments

The Group trades primarily within the United Kingdom and generates revenue from the operation of pubs and restaurants, with substantially all revenue generated within the United Kingdom. The Group generates some revenue from franchise royalties primarily in Europe and the Middle East. The segmentation between geographical location does not meet the quantitative thresholds and so has not been disclosed.

*Divisional overheads relate to operational resource, HR, marketing, and commercial finance teams within the divisions supporting their trading activities.

40% of central overheads relate to shared service functions supporting the trading divisions (procurement, property and IT) and 60% related to corporate functions (including Plc Board requirements, central finance and Head Office property costs).

VAT benefit boosted LFL sales by approximately 5 to 7% for the restaurant and pub sector in Q1 2022 (13 weeks to 3 April 2022). This is an estimation by management looking at the calculated VAT benefit impact within it's divisions. The VAT adjusted figures in the table above have used this estimation

4 Reconciliation to Underlying Trading Profit

The results used by the Directors to monitor and review the performance of the Group continue to reflect the IAS 17 approach to accounting and a number of the key metrics used in this report are prepared on that basis. A reconciliation is provided below of the key differences between results under IFRS 16 and the basis used for management reporting.

The "Adjustments for IFRS 16" summarised above can be seen in the below reconciliation of trading profit before tax (excluding exceptional items) from the IAS 17 basis to the IFRS 16 basis of accounting:

5 Exceptional Items

Impairment charges

An impairment charge has been recorded against certain assets to reflect forecast EBITDA at our trading sites over the Group's viability period.

This charge comprises the following:

- An impairment reversal of property, plant and equipment and right-of-use assets of £4.5m

- An impairment of goodwill of £9.1m

The impairment charge includes a reversal of £6.4m of impairment from the prior year due to a revision in allocation of prior impairments to Cash Generating Units. Further details on the impairment of non-current assets are given in note 10.

Estate restructuring

At FY22 year-end the Group announced a restructuring programme relating to the closure of certain sites within the Leisure Division. At the half year the Group has reassessed the onerous obligations relating to these sites and any additional costs that need to be provided for, including redundancy costs.

Professional fees re. various corporate activities

During the year, the Group incurred material one-off costs relating to corporate refinancing and restructuring activity. Since these costs are material, one-off and unrelated to underlying or ongoing trading, they are presented as exceptional items.

Business Transformation

As part of the ongoing transformation activity to deliver synergies across the group a project has been undertaken to implement a common finance platform. In H1 2023, costs of £0.3m were incurred as the finance platform was extended to cover the Wagamama operations from March 2023.

Gain made on derivative financial instruments at fair value through income statement.

At the 2 July 2023, the Group held interest rate caps valued at £17.9m which are used to manage in parts the Group's exposure to interest rate risk on a proportion of its borrowing facilities. In the current interim period, a gain of £3.9m was recognised upon fair value remeasurement. The main reason for this gain is the increasing future expectations of SONIA rates over the remaining term of the derivative instruments.

For details of prior period exceptional items, please see Note 5 of the Group's 2022 interim results and Note 7 of the 2022 Annual report and accounts.

6 Net Interest Payable

Bank interest payable is largely comprised of interest on the term loan (see Note 12), which has increased due to rising SONIA rates.

7 Tax

The tax net charge of £3.8m is composed of a trading current tax charge of £1.0m, as well as a trading deferred tax charge of £4.3m. This is partially offset by the tax impact on exceptional items, comprising a current tax credit of £1.0m, as well as a deferred tax credit of £0.5m. The effective Corporation tax rate on the adjusted loss (before exceptional items) is 30.2%. The effective tax rate is above the corporation tax rate of 23.5% principally as a result of non-qualifying depreciation. The effective corporation tax rate on exceptional items is 10.0% due principally to impairment charges on goodwill.

On 20 June 2023, Finance (No.2) Act 2023 was substantively enacted in the UK, introducing a global minimum effective tax rate of 15%. The legislation implements a domestic top-up tax and a multinational top-up tax, effective for accounting periods starting on or after 31 December 2023.

The Group has applied the exception under IAS 12 to recognising and disclosing information about deferred tax assets and liabilities related to top-up income taxes.

8 Earnings Per Share

Diluted earnings per share information is based on adjusting the weighted average number of shares for the purposes of basic and diluted earnings per share per share in respect of notional share awards made to employees in regards of share option schemes and the shares held by the employee benefit trust.

The diluted earnings per share figures allow for the dilutive effect of the conversion into ordinary shares of the weighted average number of options outstanding during the year.

9 Right of Use Assets and Lease Liabilities

Movements in the right of use assets during the period are shown below:

When indicators of impairment exist, right of use assets may be assessed for impairment. As described in Note 10, all non-current assets were assessed at 2 July 2023.

Movements in lease liabilities during the period are shown below: