RTN.L Regulatory News (RTN)

The Restaurant Group plc ("TRG" or "The Group") Interim results for the 26 weeks ended 3 July 2022 ("H1")

Group portfolio outperforming in a challenging market

Financial summary

· Total sales of £423.4m (2021: £216.8m)

· Adjusted EBITDA of £41.7m on a pre IFRS 16 basis (2021: £11.2m) 

· Adjusted Profit before tax of £10.2m on a pre IFRS 16 basis (2021: loss of £19.9m)

· Robust cash generation in H1; net debt reduced to £158.4m on a pre IFRS 16 basis (FY 2021 year-end: £171.6m) 

· Statutory loss before tax of £28.5m on an IFRS 16 basis (2021: loss of £57.6m), includes exceptional charges of £42.4m predominately relating to non-cash impairment charges

· IFRS 16 net debt of £560.8m (FY 2021 year-end: £582.0m)

Highlights

- Wagamama, Pubs and Concessions deliver continued like-for-like ("LFL") sales outperformance versus the market:

YTD LFL sales (%) vs 2019 comparable for the 33 weeks to 21 August 2022

· Further improvements in customer offer; customer ratings remain very positive

· Ongoing significant cost pressures; partially mitigated by decisive management actions:

o  100% of utilities now hedged*** for FY22, FY23 & FY24 to provide future certainty on the cost base

o  Interest rate cap on £125m of gross debt; effective from November 2022 through to November 2025

· Disciplined approach to targeted expansion opportunities, organic and inorganic, to drive longer-term value creation:

o  Strong pipeline of new UK Wagamama restaurants with improved commercial lease terms

o  Barburrito acquisition[1]: Continuing to trade ahead of the market (outperformance of 13% for the 33 weeks to 21 August 2022)

Andy Hornby, Chief Executive Officer, commented:

"We have made good progress in the past six months, delivering a robust financial performance in a challenging market, with continued LFL sales outperformance. I'd like to thank each and every member of our teams for their phenomenal efforts in delivering these results. 

We have taken decisive management actions to reduce the impact of the industry cost pressures including fully hedging our utilities until December 2024 and reducing our interest rate exposure through interest rate caps.

Whilst the uncertain consumer environment presents challenges for the hospitality sector, the Group is well positioned to further develop our brands to deliver long-term growth for all stakeholders underpinned by our strong balance sheet."

*Market refers to Coffer Peach tracker for restaurants (Wagamama and Leisure benchmark) and Coffer Peach tracker for pub restaurants (TRG Pubs benchmark).  Coffer peach LFL sales represent the weighted average of weekly LFL sales reported (internal calculation)

** UK air passenger growth used as market benchmark for Concessions

*** Utilities relate to electricity and gas. This relates to own billed and managed sites and excludes landlord billed sites at shopping centres and airport concession sites

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 Communications for details on 020 3128 8826 or email TRG@mhpc.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 423 restaurants and pub restaurants throughout the UK as at 7 September 2022. Its principal trading brands are Wagamama, Frankie & Benny's 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 five Wagamama restaurants in the US and 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 Adjusted performance metrics ('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

Our performance in the year so far gives us further confidence in the strength of our business model and our ability to navigate the near-term sector challenges.

We update on four key areas below:

1) Trading update by business division for the year-to-date (33 weeks to 21 August 2022)

2) Current trading (covering the period post the Group's AGM trading update on 24 May 2022)

3) Navigating near-term sector cost challenges

4) Our disciplined approach to targeted long-term growth

1. Trading update (LFL sales % vs 2019 comparable for the year to date ("YTD") covering 33 weeks to 21 August 2022)

Wagamama

Wagamama achieved LFL sales growth of 11% in the YTD, representing a 6% outperformance versus the market. Customer ratings have remained strong with the June 2022 external NPS scores (as measured by BrandVue) positioning Wagamama as the number one brand amongst casual dining chains in the UK.

The key drivers of our consistent market out-performance are as follows:

- Continuous menu innovation: We began 2022 with a new vegan menu launch which was well received and saw our overall total plant-based (vegan and vegetarian) participation rise to its highest level. The business continues to innovate in anticipation of future food trends with a focus on maintaining our 50% plant-based commitment whilst also protecting other iconic Wagamama dishes

- Unique colleague culture: the Wagamama business continues to be underpinned by our unique culture and ethos. In 2022 we have taken this further and supported our teams through the introduction of mental health and well-being initiatives along with mental health training for team members

- Purpose-led marketing activity: Throughout 2022 we have continued to work with Young Minds to drive awareness of mental health in young people and we continue to invest in supporting students through our student platform, the Noodle Union

- Well-invested estate: Wagamama's estates review process has ensured we have continued to regularly invest in our sites through selective transformational and refresh refurbishments

Pubs

We have seen continued strong trading with LFL sales growth of 9%, representing a 11% outperformance versus the market. Customer sentiment remains strong with social media scores (consolidation of Google, Facebook and Tripadvisor scores) averaging 4.5/5 for the last 12 months to June 2022, maintaining our highest rating over the past five years. 

The key drivers of this strong out-performance:

- Targeting good customer demographics with limited competition nearby:  We remain disciplined in our proven approach to new pub site selection and do not compromise on our requirements on population and demographics within defined drive times of our pub locations. We regularly take on large scale renovation projects, over many months and years, to ensure we have a unique property in the right location

- Expansive buildings and grounds providing multiple ancillary trading opportunities: Examples include the "The Red Fox" on The Wirral which has function space as well as outdoor covered garden areas and "The Architect" in Chester with a fully-fitted outside bar and stretch tent

- Continuous evolution of food and drink menu with local flexibility: The business can be nimble with menu changes both regionally and locally and a full appraisal of the core menu content and architecture has led to improvements in the quality of many dishes

The business also benefits from strong asset backing with approximately 50% of our pubs being freehold. In August 2022, our freehold pub estate was valued at £160 million according to a third-party valuation commissioned by the Group.

Leisure

The business has achieved LFL sales growth of +2%, just behind the market. Our partnership with Yumpingo has provided greater customer insight on both customer service standards and dish feedback, and we have seen an improving trend on NPS scores over the last six months (as measured on the Yumpingo platform) for both Frankie & Benny's and Chiquito.

The key drivers of performance have been:

- Ongoing investment in food quality, menu simplification and our virtual brands: Further quality changes to the Frankie's main menu focussed on pasta dishes combined with significant improvements to our drinks menu across all brands. Core menu items will reduce by a further 15% to 20% in our winter menu launch to support improved dish execution and mitigate some of the inflationary pressures we are experiencing

- Improved colleague engagement through our 'Raise the Roof" programme: Over 20% of our Leisure teams have now graduated through the programme driving a strong improvement in customer NPS and team engagement scores

- Selective refurbishments: Over 20% of the Frankie and Benny's estate has had a capital light refurbishment over the past 12 months which has been very well received by customers and our teams, and we will selectively explore further opportunities to invest in the estate

Concessions

We currently have our entire estate of 43 sites open. LFL sales declined by 17%, 9% ahead of the passenger volume decline in the period. Sales have benefitted from a better than anticipated recovery in passenger volumes as well as higher average spend per passenger. 

Recruitment and retention have been well-publicised issues since the Spring but our teams have performed heroically against a tough backdrop to reopen our sites and be ready for the busy summer trading period.

Whilst we are pleased with progress, the Concessions sales recovery profile has been tempered by reduced peak summer flight schedules announced by various airlines following operational challenges at major UK airports.

The Concessions team are well positioned to maintain this momentum if passenger volumes continue to improve through 2023 and 2024.

2. Current Trading update (LFL sales % vs 2019 comparable for the period post the Group's last trading update in May)

YTD LFL sales (%) vs 2019 comparable post AGM trading statement update in May

- Further good momentum across the portfolio, despite recent trading being impacted by three factors:

o  In-line with the wider market, both Wagamama and Leisure's delivery-related sales have moderated in recent months

o  Wagamama and Leisure sales adversely impacted by heatwaves in July and August; with our Pubs business benefitting from the heatwaves

o  Concessions sales recovery profile impacted by airlines reducing planned summer flight schedules

3. Navigating near-term sector challenges

There are a number of well-documented sector challenges that the Group is navigating, and management have developed a series of actions to help mitigate the impact.

- Firstly, the UK consumer will become under greater pressure given the cost-of-living squeeze. The Group will remain focused on delivering value for money to customers across all its brands while continuing to develop our menus through ongoing product innovation

- Secondly, we expect a continuation of the inflationary pressure on each of our labour, food and drink purchases and utility cost lines. Mitigating actions taken by the Group include:

o  Continuing to develop our employee proposition in order to aid retention and attract new colleagues to our businesses

o  Working across our long-term supply base to mitigate the inflationary pressures that are impacting food and drink supply;

o  Fully hedging[2] our utilities volume for FY22, FY23 and FY24 to provide certainty on cost whilst we continue to work on reducing our utilities consumption as part of our ESG agenda

Our FY22 inflation expectations for labour and food and drink purchases are in line with the group's previous guidance, with early indications being that FY23 inflationary pressures are expected to be broadly-in-line with FY22, as laid out in the table below:

Note: All inflation figures are stated as their incremental impact in each year post mitigating activities

On our utilities cost exposure, the Group took the following decisive action to hedge volumes for both gas and electricity for FY23 and FY24:

· Hedged c. 50% of volume in November 2021

· Hedged a further c. 25% of volume in March 2022 (cumulatively c.75% hedged)

· Hedged a further c. 10% of volume in July 2022 (cumulatively c.85% hedged)

· Finally hedged the remaining 15% of volume in August 2022

As a consequence, TRG is 100% hedged for FY22, FY23 and FY24. In addition, we are 80% hedged for the first three quarters of FY25.

The table below shows the inflationary impact on our utilities balance post this hedging activity:

If the Group had not adopted this proactive hedging strategy, and needed to hedge its entire utilities volume at current spot prices (i.e. early September) TRG would have been faced with incremental inflation as follows:

· 2023 inflationary cost would have been £25m to £40m higher than our fixed contract

· 2024 inflationary cost would have been £15m to £30m higher than our fixed contract

- Thirdly, interest rates have increased significantly and are expected to increase further in the Autumn of 2022 and into 2023. Given the good cash flow generation of the business and significant liquidity the Group has:

· Repaid £89m of term loan facility. Based on current interest rates the repayment will save at least £7m in interest cost on an annualised basis and improves balance sheet efficiency

· Purchased interest rate caps limiting the SONIA bank rate to 0.75% on £125m of gross debt through to November 2025, reducing exposure to future interest rate increase

4. Disciplined approach to targeted long-term growth

Given the near-term market dynamics outlined above we are adapting our targeted capital investment plans in 2023. Our Wagamama and Pubs businesses have a track record of delivering strong returns on new sites and despite the near-term cost challenges we plan to selectively grow both businesses. Key developments include:

o  Securing improved commercial terms for new UK Wagamama restaurant leases

o  Ceasing the roll-out of our Wagamama delivery kitchens in light of the Delivery market softening and an increase in capital investment required

o  Reduced Pub openings for FY23 in light of current valuations for high quality UK pub assets

o  Maintaining Barburrito roll-out plans given lower per unit capital requirement and limited market penetration

Based on the above our refocused expansion pipeline over the course of FY22 and FY23 is as follows:

1Range relates to both leasehold and freehold pubs (i.e. £4.5m capex investment relates to a freehold pub)

Whilst there are near-term sector challenges to navigate, we remain focused on longer term trends and opportunities for sustainable growth.

The table below illustrates the opportunity to grow our business and deliver good shareholder returns over the next five years across:

1Based on a combination of actual returns from 2019 & 2020 openings where applicable and feasibility returns for future pipeline sites

2ROIC refers to return on invested capital defined by pre-IFRS 16 outlet EBITDA/initial capex invested

3Represents TRG's 20% share of each sites EBITDA

Wagamama International franchise: We have made very good progress in our expansion plans this year and now expect to open eight to 10 new sites in FY22 predominately in Italy and the Middle East. We expect to end the year with c. 65 sites operating across our Wagamama international franchise business. Going forward we expect to open five to eight new restaurants per year, representing a capital efficient way to expand the Wagamama brand internationally.

Outlook

Since the Group's AGM update in May 2022:

· Utilities inflation is £2m higher than previous guidance due to unhedged volumes on landlord billed sites and new openings

· Wagamama and Leisure sales were adversely impacted by heatwaves in July and August (whilst our Pubs sales benefitted from the heatwaves)

For the avoidance of doubt, today's update does not include the impact of any potential Government intervention.

Summary

Despite the well-documented pressures facing the sector, TRG is confident in our ability to continue to outperform the sector and deliver long-term sustainable growth for our stakeholders: 

· We have a strong portfolio of brands consistently out-performing the market

· We have taken decisive action to hedge our utility costs and reduce our interest rate exposure

· We benefit from a strong balance sheet with substantial liquidity

Driving forward our ESG agenda

Environmental initiatives

Through our 'Preserving the Future' steering Group we are mobilising the organisation behind our ambitious target of net zero by 2035.

Having moved all[3] of our directly controlled supplies of electricity, gas and LPG to renewable sources in Q4 last year, we have invested in carbon removal reforestation projects to offset our scope 1 and 2 residual emissions from FY 2022.

We continue to focus on operational energy efficiency and are making good progress through a combination of behavioural change, sharing best practice across our estate, and piloting new technologies to drive further efficiencies.

In the period we increased our focus on our scope 3 emissions, which account for the bulk of our carbon footprint. With the support of a specialist sustainability consultancy "Engie Impact", we have identified a scope 3 roadmap and decarbonisation levers specific to our business. We are now building out a detailed plan to implement the actions identified in the short, medium and long term. This will involve close co-operation and engagement with our suppliers and distribution partners. We will offset remaining emissions from 2035 onwards, to meet our net zero target.

With regard to packaging, we have developed a new packaging solution for Wagamama, which will eliminate up to 330 tonnes of virgin plastic per year and reduces the carbon intensity of the packaging for our most popular dish, Katsu curry, by 62%. We are rolling this out across the Wagamama business, alongside our Bowl Bank bowl return scheme. At present, c.50% of our total Wagamama restaurant estate have the new packaging.

On our Reduce Waste priority, we continue to work with the Sustainable Restaurant Association on their Plate Waste Project. Audits following implementation of initial recommendations on test sites across our divisions have shown an average reduction in plate waste per cover of c.20%. In the second half of this year and into 2023 we will work to implement these and other SRA recommendations to reduce waste across our business.

Social initiatives

On the social side, our role to support our colleagues and communities, and to create a representative, diverse and inclusive environment has never been more critical.

In a very challenging recruiting environment for the sector, we are on track to increase the number of apprentices on our programmes or graduating this year to around 450 - an increase of c.200 vs 2021.

We have launched a range of wellbeing and engagement initiatives for colleagues across our divisions in the period, including a new rewards and recognition platform in our Leisure and Concessions division, mental health training and mental health first aid boxes in Wagamama to ensure our restaurant teams have access to guidance and resources to look after their mental health & wellbeing, and a new wellbeing initiative in our pubs division, which has initially seen 90 Wellbeing Ambassadors across our pubs receiving mental health awareness training through our partnership with The Burnt Chef Project, a not-for-profit organisation who focus on improving the wellbeing of those within the hospitality profession and challenging the stigma of mental health.

Aligned with our focus on mental health and wellbeing, our key charity partners are 'Mind' and 'Young Minds' (Mental Health Charities), and we also support a large number of charities through our pubs and restaurants locally with a variety of fundraising activities. Through a combination of colleague led fundraising, company matched programmes, and charity partnerships we have raised over £200,000 for charity in the first half of the year.

We also placed a particular emphasis on diversity and inclusion, with a range of interactive training programmes and learning resources developed and launched across our divisions, and initiatives and celebrations aligned with campaigns going on in the wider world to encourage inclusion.

Financial Review

The 26 weeks to 3rd July 2022 is the first Interim period since 2019 which has not been significantly impacted by restrictions related to COVID and we are pleased to be reporting an Adjusted profit before tax and exceptional items (on an IFRS 16 basis) of £13.9m (2021: loss of £39.5m). The first 27 weeks of 2021 were significantly impacted by Covid restrictions with the Group only being able to trade fully for seven weeks and as such all financial measures for the first half of 2022 are significantly stronger.

Statutory Results

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

*Restated

Revenue for the period was £423.4m (2021: £216.8m) which represents an increase of 95% on the prior year, with strong trading across our Wagamama, Pubs and Leisure businesses. The Concessions business was impacted in Q1 with limited International travel but has seen a better than expected recovery through Q2 2022.

As outlined in the business review, in the current year 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 in all market conditions. Our Leisure business achieved LFL sales growth behind the market, with the business impacted to some degree by the increased inflationary pressures on the UK consumer.

The operating loss of £12.2m (2021: £34.9m) is due to the impact of significant exceptional items of £47.7m (2021: £16.2m) which are explained further below. These exceptional items are primarily due to a non-cash impairment charge, as a consequence of the expected inflationary pressures and challenging macro-economic environment in the near-term, which has meant a reduction in our future trading expectations for certain sites.

Net interest costs of £16.3m (2021: £22.7m) are significantly lower than the prior year due to the recognition of an exceptional gain in the period of £5.3m on our interest rate caps. The interest rate caps limit SONIA rates to 0.75% until November 2025 on £125m of gross debt, and until November 2026 on £100m of gross debt. The interest cost prior to this exceptional gain is £21.6m compared to £20.8m in the prior year, the increase in underlying cost of debt is due to the refinancing completed in May 2021.

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 profit 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

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 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 £41.7m (2021: £11.2m). As mentioned above and outlined in the business review, the main driver of this increase is due to the unrestricted trading in our restaurants and the LFL sales outperformance of our Wagamama, Pubs and Concessions business against their respective markets, and the management actions taken to partially mitigate the impact of the inflationary pressures.

The Group made an adjusted profit before tax (on a pre-IFRS 16 basis) for the period of £10.2m (2021: loss £19.9m). 

Cash flow and net debt

The Group ended the first half with net debt on an IFRS 16 basis of £560.8m (2021: £635.0m). The key driver of this reduction has been as a result of the cash generated by the business with pre IFRS 16 net debt being reduced by £41.8m to £158.4m. 

Operating cash flow in the period improved significantly to £57.6m from £14.3m due to improved Adjusted EBITDA of £41.7m (2021: £11.2m), and a recovery in the Group's working capital position following unrestricted trading, which provided an inflow of £15.9m (2021: £3.2m). 

We restarted our targeted capital expenditure programme with an increased spend of £22.0m (2021: £12.0m) as we grew both our Wagamama and Pubs businesses off the back of our strong balance sheet and selective opportunities within the property market. We expect to open eight Wagamama restaurants and two new pubs before the end of the financial year.

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

Given the Group's significant cash headroom and confidence in the underlying cash generation across our businesses, TRG has repaid £89.1m of its term loan during the period reducing the current facility from £330.0m to £240.9m and so reducing future interest costs. Cash headroom was £184.2m as at the half-year period end (2021: £227.4m).

The Group continues to target net debt/EBITDA[4] below 1.5x in the medium term.

This strong financial position and substantial liquidity enables the Group to navigate the near-term sector challenges with a good degree of cash flow flexibility in its operating model as laid out in the table below:

Exceptional items

An exceptional pre-tax charge of £42.4m has been recorded in the period (2021: £18.1m). The key driver of this charge has been the impairment of certain assets due to the near-term inflationary pressures and economic outlook reducing management's expectations for 2023 and 2024. An impairment charge of £45.4m has been provided in the period (2021: £1.3m). 

The other significant exceptional item is a gain of £5.3m on the interest rate caps which have appreciated in value since the year end due to the increase in interest rates actioned by the Bank of England, and expectation of further interest rate rises.

Additionally, £2.3m has been spent on projects to transform our head office efficiency and to carry on the process of restructuring our estate.

The tax credit relating to these exceptional charges was £6.0m (2021: £3.5m charge).

Cash expenditure associated with the above exceptional charges was only £3.1m (2021: £7.8m).

Tax

The tax credit for the period was £2.4m (2021: credit of £2.6m), summarised as follows:

*Restated for impact of rates provision adjustment, see Note 2

The Group's pre-exceptional effective tax rate is 25.9% excluding prior period adjustments (2021: pre-exceptional effective tax rate of 14.2% excluding prior period adjustments). The effective tax rate exceeds the statutory corporation tax rate of 19.0% primarily as a result of non-qualifying depreciation and a one-off tax charge relating to share-based payments due to a reduction in the share price in the year (which accounts for 3.8% of the differential on the effective tax rate).

The current year exceptional tax credit of £6.0m comprises a corporation tax credit of £3.3m relating to the utilisation of tax losses against the current period corporation charge, as well as a further £2.7m deferred tax credit relating to timing differences arising on the impairment of fixed assets, right-of-use assets and intangibles.

Selected FY22 modelling guidance

· Total capital expenditure approximately £55m-£60m:

o  Maintenance and IT investment of £20m-£25m

o  Refurbishment capex of c.£10m

o  Expansionary capex of c.£25m

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

o  Net add-back £54m to £58m

- £57m to £60m for fixed rent

- (£2m) to (£3m) for non-cash property charges

· Depreciation and interest detailed in table below:

Going concern

The directors have adopted the going concern basis in preparing these interim accounts after assessing the Group's principal risks including current macroeconomic headwinds, relating to the cost-of-living crisis, elevated levels of inflation and utility market volatility.

The Group has substantial liquidity with £184.2m in cash and cash equivalents, or available facilities at the balance sheet date, and these facilities are committed until at least March 2025. Further details of the Group's debt facilities are in Note 15 to the Interim Accounts.

Whilst H1 trading is robust, the Directors are 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 specifically the unprecedented increases in UK household energy bills. In preparing the 'base case' forecast for the period of going concern to 30 September 2023, the Directors have assumed a lower level of sales growth for the next 12 months versus 2019, which is also lower than the growth rates achieved in H1 as reported in our half year results. The 'base case' forecast is also updated for increased expectations of labour and input costs inflation as well as the known increase in utilities costs given the vast majority of the Group's volume is now fixed for 2023 and 2024. In this forecast, available liquidity does not drop below £115m compared to a minimum liquidity covenant of £40m, and Senior Secured Net Leverage does not exceed 2.0x against a covenant of no more than 4.5x.

In addition, the Board has considered a 'stress case' scenario where sales levels have been further reduced by 5% across all divisions, and an additional 2% of food and drink inflation has been included above the base case. In this 'stress case' scenario, liquidity falls to a minimum of £94m, and Senior Secured Net Leverage increases to 2.9x but still comfortably 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' on a sustained basis over the next 12 months before there is any risk of covenant breach in September 2023. Compared to the 'base case' sales would have to fall by 12% with mitigating actions taken on both operating and capital expenditure, which are within the control of the directors, before there is a risk of a covenant breach. The Board considers that this level of revenue decline in the reverse stress case is extremely unlikely, given the strength of business' performance historically and on how our consumers have reacted in previous recessionary environments. During the next 12 months if the Group were to experience a sustained reduction in sales the Group would take broader mitigating actions to manage any potential risk of a covenant breach. If it should be required, the directors would proactively engage with its lending group and are confident that covenant waivers would be provided as they were in similarly extreme circumstances during the pandemic. Finally, we have not assumed any Government intervention in our scenarios although the Board of Directors has a reasonable expectation that the new Government will provide significant support for both UK Households and UK Business' in navigating the near-term challenges presented by both the energy and cost-of-living crisis.

The Board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the period to 30 September 2023, being at least the next twelve months from the date of approval of the interim 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 57 to 58 of its 2021 Annual Report. Since then, the Group's Risk and Audit Committees have continued to review and update the main risks likely to impact the Group while assessing the controls and mitigations being put in place across the Group and maintaining a watch on emerging risks, such as the cost-of-living crisis and the significant increase in inflationary pressures, to ensure that the appropriate steps are taken at the right time. The Senior Management Risk Committee has met three times to date during the financial year and reported back to the Audit Committee and, ultimately, to the Board. The key material risks and mitigations as currently identified by the Directors are listed below:

INDEPENDENT REVIEW REPORT TO THE RESTAURANT GROUP PLC

Conclusion

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the 26 weeks ended 3 July 2022 which comprises a Condensed Consolidated Income Statement, Condensed Consolidated Statement of Comprehensive Income, a Condensed Consolidated Balance Sheet, a Condensed Consolidated Statement of Changes in Equity, a Condensed Consolidated Cash Flow Statement and explanatory notes. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the 26 weeks ended 3 July 2022 is not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Basis for Conclusion

We conducted our review in accordance with International Standard on Review Engagements 2410 (UK) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" (ISRE) issued by the Financial Reporting Council. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with UK adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK adopted International Accounting Standard 34, "Interim Financial Reporting".

Conclusions Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis of Conclusion section of this report, nothing has come to our attention to suggest that management have inappropriately adopted the going concern basis of accounting or that management have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with this ISRE, however future events or conditions may cause the entity to cease to continue as a going concern.

Responsibilities of the directors

The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

In preparing the half-yearly financial report, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the review of the financial information

In reviewing the half-yearly report, we are responsible for expressing to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Ernst & Young LLP

London

7 September 2022

*Restated refer to Note 2

*Restated refer to Note 2

Consolidated statement of changes in equity

* Restated refer to Note 2

* Restated refer to Note 2

 We confirm that to the best of our knowledge:

By order of the Board,

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 2 January 2022.

General information

The comparatives for the full year ended 2 January 2022 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 3 July 2022, with the comparative period to 27-week period ended 4 July 2021.

Going concern basis

The directors have adopted the going concern basis in preparing these interim accounts after assessing the Group's principal risks including current macroeconomic headwinds, relating to the cost-of-living crisis, elevated levels of inflation and utility market volatility.

The Group has substantial liquidity with £184.2m in cash and cash equivalents, or available facilities at the balance sheet date, and these facilities are committed until at least March 2025. Further details of the Group's debt facilities are in Note 15 to the Interim Accounts.

Whilst H1 trading is robust, the Directors are 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 specifically the unprecedented increases in UK household energy bills. In preparing the 'base case' forecast for the period of going concern to 30 September 2023, the Directors have assumed a lower level of sales growth for the next 12 months versus 2019, which is also lower than the growth rates achieved in H1 as reported in our half year results. The 'base case' forecast is also updated for increased expectations of labour and input costs inflation as well as the known increase in utilities costs given the vast majority of the Group's volume is now fixed for 2023 and 2024. In this forecast, available liquidity does not drop below £115m compared to a minimum liquidity covenant of £40m, and Senior Secured Net Leverage does not exceed 2.0x against a covenant of no more than 4.5x.

In addition, the Board has considered a 'stress case' scenario where sales levels have been further reduced by 5% across all divisions, and an additional 2% of food and drink inflation has been included above the base case. In this 'stress case' scenario, liquidity falls to a minimum of £94m, and Senior Secured Net Leverage increases to 2.9x but still comfortably 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' on a sustained basis over the next 12 months before there is any risk of covenant breach in September 2023. Compared to the 'base case' sales would have to fall by 12% with mitigating actions taken on both operating and capital expenditure, which are within the control of the directors, before there is a risk of a covenant breach. The Board considers that this level of revenue decline in the reverse stress case is extremely unlikely, given the strength of business' performance historically and on how our consumers have reacted in previous recessionary environments. During the next 12 months if the Group were to experience a sustained reduction in sales the Group would take broader mitigating actions to manage any potential risk of a covenant breach. If it should be required, the directors would proactively engage with its lending group and are confident that covenant waivers would be provided as they were in similarly extreme circumstances during the pandemic. Finally, we have not assumed any Government intervention in our scenarios although the Board of Directors has a reasonable expectation that the new Government will provide significant support for both UK Households and UK Business' in navigating the near-term challenges presented by both the energy and cost-of-living crisis.

The Board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the period to 30 September 2023, being at least the next twelve months from the date of approval of the interim accounts. On this basis, the Directors continue to adopt the going concern basis of preparation. 

 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.

2 Restatement of comparatives

Where the Group holds a lease for a site that is no longer trading, a closed site provision is recognised for the costs to be incurred until the expected exit date. The Group's policy is that this should be all unavoidable costs which includes utilities, service charges and insurance, and has also historically included business rates. As a result of the additional guidance issued in relation to IFRIC 21 "Levies" in 2022, the Group has reassessed its policy in this area and concluded that business rates are a statutory obligation rather than a contractual obligation. As such prior period comparatives have been restated to remove business rates from closed site provisions. The resulting restatements are disclosed below.

3 Segment 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 segments:

 • Wagamama

 • Pubs

 • Leisure; and

 • Concessions

The economic characteristics of these businesses, including Gross Margin, Net Margin, EBITDA and Sales trajectory, have been reviewed by the Directors along with the non‐financial criteria of IFRS 8. It is the Directors' judgement that all of the segments meet the requirements for aggregation under IFRS 8.

Geographical segments

The Group trades primarily within the United Kingdom and generates revenue from the operation of 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.

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:

*Restated refer to Note 2

5 Exceptional items

Impairment charges

An impairment charge has been recorded against certain assets to reflect forecast results at our trading sites.

This charge comprises the below adjustments:

• An impairment of right of use assets of £24.4m (Note 12)

• An impairment of property, plant and equipment of £15.4m (Note 12)

• An impairment of goodwill of £6.5m (Note 12)

• Credit gains of £0.9m in net investment assets relating to sublet properties, to reflect changes in estimated recoverability of amounts receivable from tenants

Further details on the impairment of non-current assets are given in Note 12.

Estate restructuring

The Group closed sites in 2020 and 2021 following the impact of the coronavirus pandemic. As a result of these closures, the Group has recognised a further non-recurring charge of £0.7m which reflects an adjustment to the estimated costs of exiting the sites following the restructuring programme. This provision for closed sites relates to service charge, utilities, insurance and exit costs. Business rates for closed sites are treated as an exceptional item and expensed as incurred.

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

The company has paid £3.1m for interest rate caps that now have a market value of £8.8m. Of this £5.7m gain, £0.4m was recognised in 2021 leaving £5.3m in H1 2022. The main reason for this gain is the increasing interest rates in the year, and future expectations of SONIA rises over the term of the interest rate caps.

Business Transformation

An exceptional charge of £1.6m has been incurred as a result of the ongoing transformation activity to deliver synergies across the group. This cost relates to the implementation of a SAAS common finance platform following the acquisition of Wagamama and includes software dual running costs and consultancy costs involved in the configuration and testing on the new system.

6 Net Interest Payable