Mitchells & Butlers has reported results for the 52 weeks ended 26 September 2015, with Phil Urban, Chief Executive, commenting:
“In the last year we have increased our earnings by 9.5%, and I am delighted to announce the resumption of the dividend.
“Since joining Mitchells & Butlers in January I have seen first-hand the potential within the business. The market remains highly competitive but I have identified our key priorities to realise that potential. We will build a more balanced business; instil a more commercial culture; and increase the pace of execution and innovation. We are confident that with this approach we will drive sustained profit growth and enhanced shareholder returns.”
See below for the challenges that M&B faces, including competition, changing consumer expectations, and the impact of the National Minimum Wage.
Financial performance
- Total revenue of £2,101m, up 6.6%
- FY 2015 like-for-like sales growth of 0.8%
- Adjusted operating profit of £328m, up 4.8%
- Adjusted earnings per share of 35.7p, up 9.5%
- Adjusted net cash inflow of £89m (FY 2014 £199m outflow)
- Final dividend of 5p recommended
Reported results
- Profit before tax: £126m (FY 2014 £123m)
- Basic earnings per share: 25.0p (FY 2014 22.6p)
Balance sheet and cash flow
- Capital expenditure £162m (FY 2014: £162m), including 14 new site openings and 51 conversions
- Net debt of £1.87bn representing 4.3 times annualised adjusted EBITDA (FY 2014 4.5 times)
Operational highlights
- Adjusted operating margin 15.6%b (FY 2014: 15.9%), impacted by Orchid
- Orchid integration on track with 41 completed conversions performing well and closure of head office
Business Review:
The extracts below are taken from the M&B Business Review, and outline the challenges that are faced, including competition, changing consumer expectations, and the impact of the National Minimum Wage.
“Mitchells & Butlers is a leading UK operator of managed restaurants and pubs, with a high quality freehold estate and a portfolio of strong brands. Our strategy is to focus on the long term growth of food and drink within the £80bn eating and drinking out market, with around three- quarters of our turnover coming from guests eating in our pubs and restaurants.
In FY 2015 we have achieved strong earnings growth. Against this backdrop, and reflecting confidence in future prospects for the business, we are recommending the payment of a final dividend of 5 pence per share.
Going forward we expect the final dividend to represent two thirds of the full year payout.Like-for-like sales started the year well but softened over the last quarter. The weather in the summer was generally poor, such that beer gardens did not see the benefit of any sustained period of sunshine.
The market is becoming increasingly competitive, and we have seen this sales weakness persist into the early weeks of the current financial year. These are challenges which we are addressing.
Against this modest sales growth we have continued to generate value for our shareholders through our focus on costs and trading margins. We have delivered 9.5% growth in adjusted EPS, whilst continuing to de-lever the business, with net debt to adjusted EBITDA falling to 4.3 times.
FY 2015 also saw the completion of the EPOS systems projects, with new payment systems, tills, handheld devices and kitchen management equipment now rolled out across the estate. We have also continued the integration of the Orchid business, completing the closure of the head office and executing the conversion programme with encouraging results. Unconverted sites have now been integrated into our business within Heartland and are operating very much as business as usual.
The External Landscape
“The environment in which we operate remains competitive and dynamic. New supply into the market has been widely reported, consumer trends are evolving and becoming ever more demanding, and we are facing a dramatically changing cost landscape with the introduction of the National Living Wage next year.
However, such challenges are not new to the industry or the group, and we will respond with energy and urgency to each.
Market supply
In recent years the UK eating and drinking out market has changed significantly. We have seen the number of restaurants increase, with net new openings of around 1,700 in the year to June, and close to 5,000 from 2012 to 2015. Over that period there have been more than 3,500 restaurant closures, and many pub closures, highlighting the ongoing structural change in the market and the competitive environment in which we are all operating.
The composition of the market has changed: independent restaurants and tenanted pubs have reduced, with growth coming from the branded sector and casual dining. Much of the new competition in the sector is ‘fast-casual’, with operators often single-brand focused, with a relatively small number of outlets and flexibility to keep offers fresh and up-to-date.
In several of our outlets we have seen the direct impact of competition opening in close proximity. More than half of our Harvester and Toby Carvery sites have been impacted by direct competitors opening in their immediate catchment, with several of those seeing multiple new openings near
by. This clearly has an impact on short-term trading, and presents a challenge for us to meet.
However, we recognise the strength of our brands and that these new entrants have the effect of growing the market over time, and present an opportunity for the strongest and best executed offers to grow.
Consumers
“The changing competitive landscape is a direct response to a more demanding consumer. Expectations are rising on quality, environment, value and the range of offers available. Value continues to be important, although crucially this does not just equal low price. Consumers are now increasingly looking to explore and broaden their horizons for eating and drinking out. There is also a greater demand for personalisation – the mindset of having “what I want and when I want it” continues to strengthen.
Consumers’ lifestyles are also changing. Alcohol consumption is reducing, and there is a broad trend
towards health consciousness, although very much still retaining a willingness for the occasional indulgence in ‘guilty pleasures’.
Finally, the impact of technology is ubiquitous. Consumers are increasingly digitally connected in all aspects of life, with implications for how we communicate with and serve them.
National Living Wage
“The introduction of the National Living Wage is highly significant for our industry due to the relatively high proportion of employees paid at or close to the minimum wage, with earnings supported by gratuities. As a large employer, with more than 44,000 employees, we need to respond to what will be an impactful cost headwind. With consumers as focused as ever on value and service, we do not believe it will be possible for companies in our sector to simply ‘control’ their way out of the National Living Wage.
Our approach must therefore be rounded and must consider the long-term horizon: we recognise that it is a cost headwind but also that it potentially presents some consumers with higher incomes. We continue to consider productivity and efficiency opportunities, including technology and reviewing brand service models.
We will also continue to look at opportunities to increase guest spend per head. This may mean tactical price opportunities to the extent we feel it is appropriate for certain brands, but also offering our guests the opportunity to trade-up the menu.
Finally, we must respond to changes in consumer demand that arise, and therefore must continue to monitor the relevance of our offers. These processes will remain iterative throughout the coming years.”
For more information click here