Mitchells & Butlers : Presentation transcript(78.93 kB) (Mitchells Butlers Full Year Results Analysts Presentation Trancript )

About this update from Mitchells & Butlers Plc

Mitchells G Butlers Full Year Results 2025 Analysts' Presentation Phil Urban Good morning, ladies and gentlemen and welcome to the prelims presentation for Mitchells C Butlers for our financial year 2024/25. I am pleased to be able to report another successful year where we outperformed the market once again in all categories. We delivered 4.3% like-for-like sales growth and 5.8% operating profit growth despite the impact of employers' national insurance which hit the second half by an unexpected £11m. 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 Ignite and our capital programme we are working hard to mitigate for this. In any case, this will be temporary and should not take the gloss off 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 debts service cost drop by £130m 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're heading. Tim Jones Thanks Phil. Good morning everybody. Let me start with the income statement. This year represented good growth, building further on what was a very, very strong bounce back performance in the prior year. We maintained our sales outperformance to the sector throughout the year, we managed cost headwinds that are about £100m including a late £11m impact to the second half in national insurance contributions, to deliver an operating profit of £330m, that's an increase of 5.8% at a slightly richer margin, up 20 basis points. If you look further down the PCL, you can also see the benefits of our deleveraging 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. With the impact of that as well, that drove a 17% growth in EPS over the year, so a very, very strong year, successful year for us. If we look at sales, they've remained strong and well ahead of the sector throughout the year on volumes that were broadly flat, and I think that reflects our well operated and strong stable of 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 Ǫ4 of last year with a like-for-like growth of 3.8%, and we now of course move into the most important part, the important festive season for which all the indications are positive. For 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 £330m 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. Like-for-like sales growth of 4.3% combined with efficiencies largely delivered under our Ignite programme to allow us to overcome £100m cost headwind leading to an increase in operating profit to £330m 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. We talked at the Interims a lot about food costs, notably red meat, 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 were annualised on very steep increases that were announced last year, if you remember last year the living wage went up 6.7%, we had a £23m cost increase national insurance contributions, so we got an annualization 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 up 4.1% with a little bit of further catch-up for the under-21s. Other costs including energy are more normalised, so we ramp that all together, that's about £130m costs headwind before mitigation, about 6% of our costs base. 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 it helped by some non-recurring items. We had a refund from our executive pension plan's escrow arrangement, this follows on from a very large refund from the main plan's escrow last year, so we have now had all monies that were held in escrow been returned to us, that's done. Capex increased to £181m, so we strived 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 would expect that level of Capex to increase this year, probably to £210m, something like that, and possibly with further upside on that as we identify freehold site acquisitions. We've been benefitting from offset of COVID tax losses reducing our cash tax paid, those have now largely run out, we've got about £6m left as we go into the current year, so you'll see our cash tax start to increase. So overall cash flow £146m generated from the business which left us with a surplus flow of £16m after paying for bond amortisation. That strong cash flow continues the path of strengthening the business's balance sheet. We increased the valuation of our freehold estate, our 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 from the days only a few years ago where we had £400m deficit, we were having to put £50m a year in to service that. We're now in significant surplus and that surplus is largely de-risked. We have one scheme that's moved into buy-out so it's done, 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, 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 £10m a year. Year End net debt is now down to £843m if I exclude leases, which is 1.8x EBITDA, and our net asset value increases to 476 pence per share. Just to put this in context, we have been very successful in reducing debt in the business a few years ago that we felt was over-levered. Gearing has been managed down from well over 4x 10 years ago to under 2x 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 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 £45m, 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. Of course, the board will continue to monitor this, and break costs will decline over time which will impact economics and 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. Let me wrap up before I hand over to Phil. I think a really good year-on-year financial 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 going to 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. Phil Urban 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 C Butlers is going to be in an incredibly strong position. 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 Tracker, 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-for-like and again tracking way ahead of the market average. We've launched new menus across the brands and taken a 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 her budget will 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 brands, last year we saw the wet-led businesses lead the way with Vintage Inns, Nicholsons, Sizzling Pubs, Ember Inns and Castle Pubs finishing 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 £23m annual cost, £11m of which impacted last year, so the fact that we managed to still grow our profit is a very credible performance. Looking at this year, we have the remaining £12m of the employer 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 Carvery, 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. We are working hard to mitigate for what is circa £130m of cost increases this year which compares to circa £90m 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. 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. 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 C 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 land-locked 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-led and food-led 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 MCB business. With average weekly turnover of 31.2k per business, an average annual EBITDA of £385k, we run the most successful large scale pub restaurant businesses in the UK. 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, the theatre and service and guest propositions, and the quality and provenance 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. 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, kitchen IǪ, digital stocktaking, auto order, prep and park, pride in the basics standards app, the employee app, proprietary booking engines, and have grown our new labour 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 13.9m guests through our programmes. We recognise 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 MABLE, or MCB 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 MCB team is second to none, with the abundance of professionalism, passion, experience and energy. We systematically invest in our business with circa £210m being earmarked for this year on the core business before acquisitions. 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, rest rooms, back of house, etc. 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 have 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 estates have been allowed to be underinvested over a long period it takes a lot of time and investment to break the back of a backlog of schemes and it can be very costly in the short term. Our remodel return on investment sits at an all-time high of circa 35% which covers199 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 programme 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, it's just a part of how we operate. At any one time there are 40-50 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 that 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 has ever been, and I think its impact on the business will just get stronger and stronger. As you know, we have announced that 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 but… And has been a massive support to me personally over the last 10 years. Whilst a tough act to follow, we are delighted to have appointed Emma Harris who will be joining us from Marks C 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 5-10 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 a capital programme and Ignite our transformation programme continuing to be the engine room of the business. Moving onto 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 £2bn 10 years ago to £843m today, and the pension deficit of £0.5bn 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 £200m debt service costs and the £210m 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 £23m 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, and 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 C 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 our 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 programme 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 de-gearing is accelerating our balance sheet 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 C Butlers will be viewed undoubtedly as the strongest company in the sector with a very bright future.

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