Mitchells & Butlers plc

Good morning, ladies and gentlemen, and welcome to the prelims presentation for Mitchells and Butler's financial year 24-25. I'm pleased to be able to report another successful year where we outperformed the market once again in all categories. We delivered 4.3% life-life sales growth and 5.8% operating profit growth, despite the impact of employees' national insurance, which hit the second half by an unexpected 11 million. With the lowest team turnover the company has ever seen, the highest team engagement percentage, the highest guest review scores we've ever had, and a strong safety record, and the highest ever return on investment from our remodel programme, it feels like the business is set up for whatever challenges may lie ahead. And we are confident with a strong balance sheet, we have a very bright future ahead of us. We accept we have a tough year ahead, given our exposure to the currently very high red meat costs, But in igniting our capital programme, we are working hard to mitigate for this. In any case, this will be temporary and should not take the gloss of the underlying trajectory of the health of the business. And as 2030-31 gets ever closer, now nearer than COVID-19 is, when we see our debt to service costs drop by £130 million per annum, the business is very well placed to capitalise on any opportunities that may arise. I'll now hand over to Tim to take you through last year's results before I return to talk in more detail about where we are as a business and where we are heading.

Thanks, Phil. Good morning, everybody. So let me start with the income statement. This year represented good growth, building further on what was a very, very strong count spec performance in the prior year. We maintained our sales outperformance to the sector throughout the year. We managed cost headwinds at about 100 million, including a late 11 million pound impact in the second half of the national insurance contributions. to deliver an operating profit of 330 million. That's an increase of 5.8%, but a slightly richer margin, up 20 basis points. And if you look further down the P&L, you can also see the benefits of our deleverage starting to come through as well. Firstly, with reduced interest costs on our securitisation structure, And secondly, through pension funding, which is now from a deficit has moved into a de-risked surplus. So with the impact of that as well, that drove 17% growth in EPS over the year. So a very, very strong year, successful year for us. We look at sales. They've remained strong and well ahead of the sector throughout the year on volumes that were broadly flat. I think that reflects our well-operated and strong, stable brands and sites. We think the last eight weeks was a little bit adversely impacted by concern and uncertainty built up ahead of Wednesday's autumn budget. But despite that, we still managed to strengthen our sales performance against Q4 of last year with a like for like growth of 3.8%. We now, of course, move into the most important part, the important festive season, which all indications are positive. Much of this presentation, we're naturally going to focus on what we're doing today and future prospects for the business. But I'll take a quick look back at last year and what drove our trading performance, that 330 million operating profit. We continue to invest in our offers, in our estate, and we're getting very strong returns from that in excess of 35%. You can see the impact of that on this chart. Light for life sales growth of 4.3%, combined with efficiencies largely delivered under our Ignite programme, to allow us to overcome £100 million cost headwind, leading to an increase in operating profit to £330 million at a richer margin of 12.2%. Looking forward to this year as a whole, costs remain a concern for the sector. We've set out here what we expect the pre-mitigation cost headwind that we'll face this year to be, and it does include certainly our preliminary assessment of the impact of Wednesday's autumn budget. Now, we talk to the intrams a lot about food costs, notably red meats, and they are a particular challenge for us at the moment. We don't expect that to be structural. That is, we would expect those costs will revert and lower in time. And we are mitigating as much as we can through adapting our purchase arrangements. But they will be a larger component than normal this year of the cost inflation that we face. Labour, of course, is always our biggest cost. We will annualise on very steep increases that were announced last year. So during the last year, living wage went up 6.7%. We had a £23 million cost increase in national insurance contributions. So we got an annualisation impact on that. Plus in the second half of this year, we'll have the impact of the recently announced increase in the living wage of 4.1%. We'll have a little bit of further catch up for the under-21s. Other costs, including energy, are more normalised. So we wrap that all together. That's about £130 million cost headwind before mitigation, about 6% of our cost base. So that's above trends. We would say that's the top of the range. If we look forward to 27, 28, I would hope that that starts to come down. The result was accompanied by very strong cash flow, albeit helped by some non-recurring items. We had a refund from our executive pension plans escrow arrangement. This follows on a very large refund from the main plans escrow last year. So we have now had all monies that were held in escrow have been returned to us. That's done. CapEx increased to £181 million. We strive to get back on our seven-year remodel cycle. We're not there yet. But on the basis of strong returns, we're very keen to keep investing in our estate. We'd expect that level of capex to increase this year, probably to $210 million, something like that, and possibly with further upside on that by three whole site acquisitions. We've been benefiting from offset of COVID tax losses, reducing our cash tax paid. Those are now largely run out. We're at 6 million left as we go into the current year. So you'll see our cash tax start to increase. So overall cash flow, 146 million generated from the business, which is less than the surplus flow of 16 million after paying for bond amortisation at the end of the year. That strong cash flow continues the path of strengthening the business's balance sheet. We increased the valuation of our freehold estate properties by nearly 4% based on strong trading performances across those, and you've seen the impact of that. Pensions has come a very, very long way, you know, from the days only a few years ago where we had a £400 million deficit. We're having to put £50 million a year in to service that. We're now in significant surplus, and that surplus is largely de-risked. We have one scheme that has moved into buyout, so it's gone. Our main plan is in buy-in, so it's sort of de-risked and close to going, and we have one very small unfunded scheme. So we'll start to get real value for that surplus through offsetting it against DC contributions that we would otherwise have had to pay through cash flow. And we'll be able to do that, we reckon, going forward at about the rate of £10 million a year. So the end net debt is now down to £843 million by excluded leases, which is 1.8 times EBITDA. And our net asset value increases to £476 per share. Now, we have been, just to put this in context, we have been very successful in reducing debt in a business a few years ago that we felt was over-levered. Gearing has been managed down from well over four times 10 years ago to under two times today. And we've had success, as I mentioned before, in transforming our pension position as an additional part of that. So the valid question is, you know, where do we go from here? We are tied into a large and inflexible debt structure with the securitisation, and that has significant break costs if we want to change it. We would currently estimate those to be about £45 million. So with that in mind, we believe that it's right to continue on the deleverage journey to enhance the group through both improving our resilience in uncertain times and creating value through a transfer to equity. Now, of course, the board will continue to monitor this will open up a number of options, but we don't expect that to be in the near term, and it is certainly not on the current agenda. So let me wrap up before I hand over to Phil. I think a really good year on year performance in sales, in profits, in margin, and in cash. We've also supported that by making progress across the board, across all of our main strategic objectives, and Phil's gonna take you through those. So we face the future with a fair amount of optimism. We think we're in good shape. We think we're dealing very well with what we can control. And we have a high degree of confidence in our ability to continue to outperform the market. I'll hand you back to Phil now.

Thanks, Tim. So today I'm going to say a little bit about current trading before focusing mainly on reminding you who we are, what it is we've been trying to do and which we continue to do, and to paint a picture of the future where Mitchells and Butlers is going to be in an incredibly strong position. Now we finished last year with 4.3% like-for-like sales growth, which was our ninth straight year of market outperformance as measured by the CGA business track as you see on the slide. Given the uncertainty caused by speculation over this week's budget, we've been pleased with the way this year has begun, with the last nine weeks running at 3.8% like the like, and again tracking way ahead of the market average. We've launched new menus across the brands and taken blended food and drink price of circa 3.2% during this period, so that will have helped. However, it has to be said that the lack of clarity on what the Chancellor would do in our budget would have spooked the consumer, and this will have adversely impacted the sector and our trade. Internally, we are never fazed by the short-term trends and market issues, as what is important is the underlying trajectory of the business. And in this regard, the company is very well placed, with strong momentum and with a very bright future. In terms of our brands, last year we saw the wet-lead businesses lead the way, with Vintage Jeans, Nicholson, Sizzling Puffs, Emberins and Carsten Puffs finishing at the top of our scorecard. However, once again, we were pleased with progress across the board and particularly proud about managing to absorb the unwelcome and, in our view, unfair changes to employers' national insurance contributions, which disproportionately impacted the hospitality and retail sectors. For us, that was a £23 million annual cost, £11 million of which impacted last year. So the fact that we managed to still grow our property is a very credible performance. Looking at this year, we have the remaining 12 million of the employee national insurance contributions as an incremental cost to absorb and a 30% rise in the cost of steak and beef, which when you run one of the nation's biggest steakhouse brands and the much-loved Toby Carberry, is a disproportionate challenge for us. However, this will be a one-year impact. The steak prices won't move up by another 30% next year and, in truth, should show some deflation, whereupon I would expect the business to move forward strongly. Now, we're working hard to mitigate for what is circa 130 million of cost increases this year, which compares to circa 90 million in a normal year. And we back ourselves to do this. But we will not take short-term decisions that damage the long-term prospects of our brands. So we're happy with where we are, confident about what we're doing, and excited by what we believe will be a very strong future. And I would now like to spend the rest of this update explaining this in a little bit more detail. Let me start by reminding you about who we are and what we are, and why Mitchells & Butlers is unquestionably one of the strongest hospitality businesses in the sector. We are blessed with a very high quality estate, 84% of which is freehold or long leasehold, with very strong locations, many of which are prominent and landlocked, thus prohibiting direct competition from ever being developed on their doorsteps, and covering most of the United Kingdom. Of course, we also have a small business in Germany too. We have 1,631 managed businesses with circa 17 proven brand formats, all of which are constantly being refreshed and refined based upon quality guest insight. And of course, we have all bases covered with rural, suburban, city and town centre locations, wet-lead and food-lead brands, value through to premium offers, sport, entertainment, and a whole range of dining experiences. We have over 1,000 rooms, a strong machines business, and also a strong and growing delivery business too. We appeal to regulars, workforce, families and tourists alike. And there's an interesting stat that 81% of the population lives within five miles of an M&B business. With average weekly turnover of 31.2K per business and average annual EBITDA of 385K, we run the most successful large-scale pub and pub restaurant businesses in the UK. Now, we aim to position each of these businesses at the premium end of their respective markets, and we put a lot of focus and effort into constantly improving their product ranges, their theatre and service and guest propositions, and the quality and performance of what we offer. To help execute this ambition, we developed a new food innovation centre in Walsall three years ago, giving our development chefs the environment to constantly evolve our offers, keeping them at the forefront of UK hospitality. Now, over the last 10 years, we've also invested heavily in technology, giving us a market-leading position in this space, too. We've implemented new EPOS, order-at-table apps, KitchenIQ, digital stock-taking, order-to-order, prep-and-par, tried-in-the-basics standards app, the employee app, proprietary booking engines, and our new labor rostering system. The list goes on and on. Each one of these has helped drive sales or improve our efficiency and we believe there's still a lot more to be taken from the investments made to date. However, this year we'll see our new HR and payroll system being implemented and a new CRM system, Guest 360, which will step change our ability to converse with and better understand our guests. Our guest databases have grown this year and we now have consent to contact 13.9 million guests through our programmes. We recognise that to succeed in hospitality, it requires great service at all times, and that depends on having a great team of people. That is why we place such great emphasis on our engagement scores, and why we invest so much into our Chef Academy, our award-winning apprenticeship programmes, and into our digital learning and development platform, affectionately known as Mabel, or MMD Learning. Having the lowest team turnover on record means that we are retaining our talent, and therefore the experience of our team must be growing. I'm confident to say that the M&B team is second to none with the abundance of professionalism, passion, experience and energy. We systematically invest in our business with circa 210 million being earmarked for this year on the core business before acquisitions. Now, we aim to invest in every business on an average seven year cycle. And when we do invest, we ensure we cover the whole operation, including externals, restrooms, back of house, etc. And with payback from investment being within five years, it means we can be confident of driving real returns for the business. And it means the average quality of our amenity is always improving. Each brand has an appointed lead designer, and they work with the operations directors and our marketing team to create environments that best represent our brand propositions. The designs stay fresh and evolve through each cycle, using the latest colour palettes and soft furnishings to maintain appeal. Because we've been doing this for the last 10 years, we no longer have many sites that are allowed to deteriorate to such an extent that reputation starts to get damaged. We don't see many competitors matching this approach. And we know that where states have been allowed to be underinvested over a long period, it takes a lot of time and investment to break the backlog of schemes. And it can be very costly in the short term. Our remittal return on investment sits at an all-time high of circa 35%, which covers 199 projects. So this is a robust statistic. As you know, for the last 10 years, we have evolved Ignite, which started 10 years ago as a transformation program with an urgent need to turn the business around, but has since evolved into an ongoing way of working that promotes constant improvement in all that we do. With the benefit of 10 years of experience, Ignite is now ingrained as just a part of how we operate. At any one time, there are 40 to 50 separate initiatives in play, each driving incremental profit, directly or indirectly. As importantly, Ignite has also cemented our organisation culture by breaking down departmental silos as existed, as it encourages people from across the business to work together, whereas their day jobs might never create that opportunity. Ignite is here to stay. It is as powerful as it ever been. And I think its impact on the business will just get stronger and stronger. As you know, we have now Tim Jones here, our CFO, has decided to retire in the middle of next year. Tim has made an outstanding contribution to the company. He wrote that bit and has been a massive support to me personally over the last 10 years. Now, whilst a tough act to follow, we are delighted to have appointed Emma Harris, who will be joining us from Marks & Spencer, bringing a wealth of retail experience on top of her financial pedigree. Emma and Tim will have an ample opportunity to have a detailed handover, and I would expect the transition to take place seamlessly. Building a team that will take this company forward over the next five to ten years is one of my personal objectives, and I would argue that we already have a track record of being able to do just that, whilst continuing to drive the business forward. We haven't shouted about it, but over the last three years, we've seen several retirements from the executive committee, and we've handled those changes well, and the business has not missed a beat, which highlights just how robust our ways of working are and the quality and depth of our management talent. With the capital programme and Ignite, our transformation programme continues to be the engine room for the business. Moving on to our financial strategy. We've always made it very clear that we believe de-gearing is the prudent and right path for the business right now. And given the rocky path of recent years, we're very pleased to have done so. Of course, we've managed to reduce our net debt down from 2 billion 10 years ago to 843 million today. And the pension deficit of half a billion is now in surplus. So we've made good progress. We've also made it very clear that we will not consider paying a dividend until we are confident in being able to do so sustainably out of surplus cash. But given the 200 million debt service costs and the 210 million plus of capital programme, on top of tax and running costs, we are not there yet. Even last year, the sudden impact of the Chancellor's change to employers' national insurance contributions wiped 23 million off our annual profit with one stroke of the Chancellor's pen, illustrating that certainty of profit level is still fragile. As Tim has just taken you through, were we to try and break the securitisation now, there would be costs that would leak value. We see no point in doing that. Looking further forwards, the right capital structure in the future will depend a lot upon the path which we choose to take with regards to expansion or cementing what we do today. Our aim is to put Mitchells and Butlers in a position to lead the hospitality sector for the next 10 years and beyond, and to have as many strategic options open to it as possible when the debt service costs fall away. Given our strong and strengthening balance sheet, we believe we're very well placed to take a lead role in any industry consolidation if we choose to, and to develop out remaining asset opportunities that we have across the estate. But assuming we still have surplus cash above investment requirements, we would return it to shareholders at that time. So we have delivered another year of progress, despite the changes to employers' national insurance contributions, and we feel we've maintained our momentum. We've outperformed the market on sales growth for nine straight years. We have the highest guest review scores we've ever had, the lowest team turnover we've ever seen, and the highest team engagement we've ever recorded. Our remodel program is delivering the strongest return on investments I've ever seen in my career. And in Ignite, we have a very special way of working that ensures we never become complacent and that we seek out constant improvement. We have the best brands in the industry. We have the best portfolio of large and freehold properties. And the fact D. Gearin is accelerating our balance sheets is becoming stronger and stronger. The UK hospitality sector is resilient. And let's face it, it has had to be in recent years. And when the market starts to recognise this and starts taking a more positive view of it, then Mitchells and Butlers will be viewed undoubtedly as the strongest company in the sector with a very bright future. Thank you. And we will now be happy to take your questions.