Mitchells & Butlers plc (MAB) Earnings Call Transcript & Summary

Good morning, and welcome to the Mitchells & Butlers Full Year Results Conference Call and Q&A. My name is Maxine, and I'll be your host today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the call over to Phil Urban, Chief Executive Officer; and Tim Jones, Chief Financial Officer, to begin.

Good morning. This is certainly a slightly surreal business update and one that none of us could have anticipated at the beginning of the year. Clearly 2020 has been dominated across the globe by the COVID-19 pandemic and here in the U.K., as the government has been trying to balance the need to protect the health of the most vulnerable in society, we're trying to keep the economy firing. Hospitality has been one of the sectors bearing the biggest brunt of government actions. I will give you a short update on how the year has unfolded with some detail on the steps we took to make the business COVID secure. And why we remain optimistic about how, once the pandemic is over, Mitchells & Butlers is well placed to see the business recover quickly. Tim will then take you through the financial detail. FY '20 started very well as the benefits from our Ignite transformation program has started to flow through the P&L. Sales outperformance, stronger margins, better labor efficiency and generally strong cost control meant that before the pandemic started, we were sitting comfortably with good year-on-year operating profit growth of 5%. And a program of initiatives still to land. The momentum we have built over the previous 3 years was strengthening. As news about COVID-19 began to grow, our trade proved to be fairly resilient up until the time the Prime Minister started advising people to stay away from pubs and restaurants. At that point, we saw a marked drop in year-on-year sales and that was quickly followed by full lockdown across the U.K. from March 20. Alex, our German business, had already been closed on March 16. We moved quickly to try and sell any perishable stock or divert it to charitable causes, where we were able to donate over 11 tonnes of food. However, given the immediacy of lockdown, there was little we could do to avoid writing off stock held further up the supply chain. We had also stocked up beer for St. Patrick's Day, and so many sites had full cellars at the point of closure. This became a bigger issue when it came to reopening as we had to get water board clearance from each individual authority and for each business before we could pour the beer away. Over 99% of the M&B team were placed under furlough and we set out on working with our suppliers and landlords to agree on new payment plans with a view to preserving cash. At the time, none of us knew how long the lockdown would last, and so we took the decision to clamp down on all expenditure immediately. This included halting work on our Ignite program and canceling the vast majority of our capital program. As reported at our interims, we were able to secure additional liquidity facilities and a number of waivers within our securitization, which Tim will update on. But at the start of lockdown, this was our main priority. Lockdown lasted for 14 weeks. And so we had to maintain a skeleton field-based team to ensure that businesses remain secure, had no issues with pest control and who could respond to maintenance issues that occurred during the period of closure. There was also a team working to ensure that we could deliver our interim results. We also played an active role in supporting our trade body, UKHospitality, who have done a fantastic job from day one of this pandemic in lobbying government throughout the closure period, firstly to secure an early warning of the likely reopening date, to enable the sector to restock and be prepared, but also to devise the COVID-secure protocols that we recognized would be required in order to open safely. Reopening on Saturday, 4th of July, was predicted by the media to be manic and have real potential for disaster. But in fact, we were able to control capacity in all of our businesses and due to the extensive protocols, for example, tables spaced 1.5 to 2 meters apart, sanitizing stations throughout the business and clear floor signage to keep guests apart, we were able to professionally serve our guests with both they and our team feeling and being safe. Trade built quickly throughout July, although it's fair to say that a pattern was very quickly established that saw the city center businesses and wet-led businesses struggling, whereas the suburban and food-led businesses did very well. Miller & Carter, particularly, despite the reduced capacity, had many days of like-for-like sales growth, which is incredible to see. Customers were clearly pleased to be out and willing to trade up. The reduced capacity also meant that our guests quickly got used to coming out earlier than they normally do to secure a table. Conversely, Nicholson's, our predominantly city-based wet-led brand, really suffered. A combination of city center offices being kept closed and no tourist trade meant that some of its sites had to remain closed. The Eat Out to Help Out government-sponsored scheme in August was a huge success, with guests enjoying 50% off food and soft drinks Mondays to Wednesdays. Whilst there was a little cannibalization on Sundays and Thursdays, we enjoyed like-for-like growth of 1.4% for the period. Trade held up well into September, but due to rising infections, regulators introduced more stringent restrictions in England, making the wearing of facemask mandatory when walking around hospitality businesses, insisting on table service only and introducing a 10:00 p.m. curfew. That was quickly followed by a tiering system in England with a new [Audio Gap] doing the most damage to sales. With infections continuing to rise, England followed Wales by moving to full lockdown. As of today, we are trading in Wales and Scotland, although the Scottish tiering restrictions are making most businesses marginal at best. Our Alex business is currently in lockdown, but -- and is not due to reopen until the 20th of December. And that data has moved recently. We will reopen our doors in England from the middle of next week, but that will be with tougher tiering restrictions than we had when we shut. All Tier 3 sites will have to remain closed except for any delivery business, and Tier 2 sites will now have -- only be able to trade with a substantial -- if a substantial meal is served. Sensibly, the curfew has been amended with 10:00 p.m. now being last ordered and an additional allowance for guests to complete their meals and disperse slowly instead of all at once. We, like our peers in this sector, feel extremely let down by the latest regulations that single out hospitality businesses in the run up to Christmas. The protocols that we operate with make our venues very safe for our teams and guests alike and there's been no evidence provided that can link the spread of the virus to the sector. Allowing gyms and retail to reopen, having a 5-day period where families can mix in their own homes is totally inconsistent with the government's approach to our sector. Throughout the pandemic, the sector has behaved entirely responsibly and professionally. So if the government is determined to undermine us during the busiest trading season, then it's time for our sector -- time for some sector-specific support. Christmas is, of course, our biggest month, and so we were keen to be allowed to trade. We know that festive trade will fall well short of prior years, but some sites will now be closed. We will not have the big parties that boost trade in the run up to a normal Christmas and reduced capacity will make it impossible to serve the same number of guests as we normally do. However, we would still expect December to be a relatively good month for those sites that can trade and a profitable month. Looking further forward, and it's fair to say that we and the sector will not recover to pre-COVID levels until restrictions start to be lifted, news of an impending vaccine is therefore very positive, as one of the most -- as once the most vulnerable in society have been protected, it will be easier for regulations to ease. Given how we were trading in the summer and the fact that during this period, our guests' health scores improved from 4.1 out of 5 pre-lockdown to 4.3 post, we are confident that we will bounce back very quickly when they do. Finally, our work on the Ignite transformation program continues in the background, and we are ready to start accelerating progress in early 2021. There have been very few positive things coming out of this pandemic, but maybe the quicker adoption of technology has been one of them. We will have order at table apps up and running across 8 brands pre-Christmas. And where we're already using them, 35% of transactions are coming through this channel from a standing start. We've also seen a step-up in our delivery and click and collect channels, where the latest weekly turnover pre-lockdown would suggest an annualized income stream in excess of GBP 20 million and growing. Like everyone else, we've also been forced to embrace the world of videoconferencing, as we are doing on this call, and now we know it can work, this too should save a lot of traveling costs for the business going forward. I'd like to finish by saying a few words about our people. When I look back over the last 8 months, I cannot find the words that do justice to the professional job everyone has done. Almost everyone in the team has had to accept a salary cut for 4 months of the year or more. Our frontline teams have had to understand and deliver ever-changing protocols and manage the associated customer reaction. And most importantly of all, our leaders have had to help our team overcome their anxieties, either relating to the pandemic or to the security of their jobs. Protecting as many jobs as we can is a priority for us, as it is our people who have driven the progress we've seen in recent years. Unfortunately, we have not been totally immune to the effect of the pandemic, and we've had to lay off circa 1,300 jobs, wherein there is no immediate prospect of those roles being required again. It is our hope that with the Job Retention Scheme extended through to March, we can continue to protect the vast majority of remaining roles in the business, and we will be able to hit the road running when restrictions are lifted. So in summary, we were in great shape before the pandemic with a clear program of work that was building on our momentum. It is worth reminding you that we have an 82% freehold estate, a broad portfolio of popular brands and once we come through this pandemic, we will be in a sector with reduced supply. We have built a track record of delivery in recent years and Ignite 3, with its program of initiatives, will provide additional impetus to our progress. The pandemic and subsequent restrictions and lockdowns have temporarily put the brakes on, but we see no reason why once they're behind us that we cannot quickly get back onto the path that we're on and back to the top of the U.K. hospitality sector. And I will now hand over to Tim.

Good morning. So it has, of course, been a very difficult year and a lot of uncertainty still remains. But I do believe that we've taken very quick and very effective action to respond to all the challenges presented to us. And that has left us very well placed to benefit as and when restrictions are limited. If I start with the income statement for the year, I'll remind you that this is the first year of our adoption of IFRS 16, which has an impact on presentation, both of the income statement and the balance sheet. And the prior year has not been restated. To be honest, the impact of that is swamped by the disruption that we've experienced in the second half as a result of COVID though. Overall, we made an operating profit for the year of GBP 99 million. So a very small loss in the second half. At the half year, we've made a profit of GBP 108 million. If we look at sales, and this slide really gives you the narrative of what has been an extraordinary year for us. We made a very strong start, building through to a good Christmas trading series season and through January, continuing to regularly outperforming the sector. February, we were -- trading was disrupted by a number of storms that swept across the U.K., Dennis and Ciara. And unfortunately, just as those storms started to abate, so we began our descent into COVID culminating in the shutdown of the whole estate on the 20th of March until the 4th of July. We reopened cautiously in July, deliberately restraining capacity at first to ensure we could operate responsibly in the new environment. Gradually, we're allowed to build trade though, through to a very strong, very encouraging August. As we all know, though, in September, that infection rates started rising again, increasing restrictions starting being imposed on us and the wider economy and sales dipped accordingly all the way down to the second lockdown on the 5th of November. As we sit here today, we are aware that, that lockdown is about to be lifted next week. So we would hope that the majority of our estate is up and trading. But of course, that is going to depend on the tiering announcement that's eminent and what tier each pub is in. Throughout, we've worked really hard to conserve cash. We've limited our costs and outgoings to an absolute minimum. We've restricted CapEx to what has been essential only. And we've reached agreement with our scheme trustees to suspend pension contributions for 6 months, those have now been resumed. So cash has been pretty resilient, given the disruption we've had on the sales line. And net debt at the year, excluding lease liabilities, is actually flat. So it's the same as it was at the start of the year. Within that, of course, we have a lower level of bond debt and a corresponding slightly high level of short-term borrowings. In terms of the balance sheet, one of the key challenges for us and a key priority for us has been to establish a firm and resilient financial platform for the business to trade from. We managed to do that very successfully in the summer. We secured GBP 100 million of additional facilities in our unsecured estate and extended the term of those in existing facilities to 2021, and we secured a number of covenant waivers through to the second half of this year. That's put us in a really good position to deal with whatever is in front of us. As we sit through the current sort of second lockdown, our cash burn is GBP 35 million to GBP 40 million per month before our debt service costs. And at the beginning of this week, we had cash of GBP 125 million and liquidity headroom, so that's including undrawn committed facilities totaling GBP 225 million. So it's a strong position for us to be in. In terms of the balance sheet, our principal asset, of course, is our largely freehold property estate. I remind you that we revalue this every year. So it's at the current valuation and, in fact, this year, given the circumstances we even undertook a full revaluation at the half year. And in hindsight, that half year, the balance sheet date was 11th of April, was probably the period of maximum uncertainty for us, when we had just closed down. We had really no idea what we were heading into. So we took a very large and prudent write-down at that stage. We reviewed that now at the end of September and we -- of course, the whole year, we've written the estate valuation down by 5% to GBP 3.8 billion. But you'll see that is a significant reversal of the write-down we took at the half year. And that leaves us with net assets of about GBP 1.7 billion equivalent to GBP 3.90 a share. Most pertinent, I think, is what lies ahead of us. And of course, that remains highly uncertain. Unfortunately, given that degree of uncertainty, we just don't feel able to provide detailed guidance on forward trading. But what we have seen and what we take encouragement from is that when people can come out, they will come out and they will spend. And that leaves us with a number of strengths well positioned as restrictions are lifted. In particular, a really good freehold estate in great locations; stable and diversified well-known brands; a management team that has a track record of consistently outperforming the market; and particularly with a whole raft of Ignite initiatives to come through once we're able to open and trade again. So we're positive about the future as soon as restrictions allow. We'll be both very happy to take Q&A. So I'll hand you back to Maxine who will organize that.

[Operator Instructions] We have a question from Jamie Rollo from Morgan Stanley.

A few questions. First, on the liquidity. I mean it looks remarkably stable, as does indeed, the cash flow and the debt position. But just bridging the current GBP 225 million liquidity. I think we should compare that to the GBP 240 million at the end of September rather than the -- sorry, the GBP 240 million over 22nd of September rather than the GBP 298 million from a face of the statement. I'm just trying to work out, is it, therefore, only a GBP 15 million production in liquidity at about 2 months? And if so, that seems very good, given I think you paid the GBP 50 million of debt service after that GBP 240 million. Can I assume November was -- or is loss making? So just to help us understand, does that mean October was very, very profitable? Or I'm missing something else in that bridge? Secondly, on the unsecured refinancing. Do you need to extend both the CBILS loan and the RCF or can you use the RCF, which is barely drawn to repay the GBP 100 million CBILS loan? Or do you still need to refi both and therefore, GBP 250 million refi? And how -- and I appreciate it's a qualitative question, but how easy do you think you will be able to do that? Or do you need alternative funds if you can't extend those? And then finally, appreciate the outlook is impossible right here, but if you could help us understand what sort of tier levels the estate was in on the [ latter ] tiering system, particularly the Tier 2, Tier 3 exposure? And maybe we can then apply that to whatever we hear later today on the new tiering structure.

Okay. Jeremy, I mean, on liquidity, the GBP 240 million that you referred to in our pre-close statement, the cash that we included in that, if you go back to that statement, it was only unsecured cash. It didn't include cash within the securitization. So the liquidity position now is slightly higher than GBP 240 million. It was probably about GBP 280 million, something like that. So I think that explains your bridge. Whilst September was profitable, cash has come down more than if you just look at that GBP 240 million. In terms of refi, well, we have to do both the GBP 150 million sort of bilaterals and the GBP 100 million CBILS loan. That will really depend on where we are early next year. I mean we put in place those facilities early on in the summer to try and insulate ourselves against a worst-case scenario. We haven't come anywhere near close to make them fully drawn as you noted, subsequently. And we're going into -- what's going to be an important trading period for us with Christmas and it will be important where all the pubs end up in the various tiers. So we'll sort of emerge into January, February. And we'll need to assess at that time how much money we've made over the festive period. So what our liquidity position is and particularly what we think sort of the prognosis or the prospects are for trading going forward. That will determine to what extent we need those facilities and/or look to any other types of financing for the group going forward. But it's a decision we can't really make at the moment. I mean you said how easy do we think that will be? Difficult not to be a hostage to fortune, to be honest. All I can say is we have good established relationships with all 3 of those banks that have extended those facilities. We're in constant dialogue with them now and through this pandemic, and I have every indication that they will continue to be supportive to us. But we'll have to see what the position is, of course, early next year when we start talking to them in earnest. In terms of tiering, so in the U.K. previously, and we had -- we have talked about the early tiers. We had about 200 in Tier 3, we have about 750 in the middle tier, we had about 550 in the medium tier. And then there's about 100 others that I haven't included there because they were in Scotland and Wales.

And just a follow-up. So the GBP 225 million total liquidity does include securitization cash?

It does, yes.

Yes. And on those pub geographical splits, could you help us give just roughly the sales drop when the restrictions came in, in those 3 tiers? [indiscernible] give us a number overall, but...

Okay. I can't -- yes. I can't -- I mean it's not -- firstly, been connected. It's not a geographical split. It's a tier. It's a restriction split, right? But generally, if you're in Tier 1 previously, we'll see sort of like-for-like sales down sort of high single digits. For those in Tier 2 and 3, actually, performance is very similar. They were both down sort of over 30%, sort of 30% to 35% under the old restrictions.

We have a question registered by Owen Shirley from Berenberg.

I have three if that's okay for me. The first is on -- you've sort of talked to some of the efficiencies, whether it be videoconferencing, order at tables. I just wondered if you'd be able to comment on and quantify if it's at all possible, any efficiencies you expect to keep? The second question was whether you could just give us an update on the latest with pension. So perhaps a reminder on when the next triannual review is. And based on kind of spot rates, discount rates, mortality, inflation, et cetera, where you think that can come out or what the key moves could be? And also just where the contributions, the agreement on those stands at the moment? And then the final one was on CapEx. I appreciate there's no guidance, but based on what we know today, what's your working assumption on CapEx? Or what's the low-risk figure it could be?

Okay. And I'll take the first one, which is the question around order at table and the initial -- the efficiency initiatives we're talking about. I think it's difficult to put a definitive number. I think the encouraging thing for us is order at table. As I said in the script, we've had it in a couple of brands for quite a while, but we've stepped up rollout in the summer, so we could open post the major lockdown with order at table. And we will have it in 8 brands going forward. We're already at 35% usage of transactions, and that's growing all the time. So the reason that drives efficiency, it's obviously far easier for customers and the acceptance of doing that makes it easier. But it means that there's no queuing in the bar. So therefore, there's less people deciding, because the queue is deep at the bar, I won't order a drink. People are therefore going on to order. And we find also transactions are greater on order at table than they are when people stand at the bar. So I think as that starts to -- there's no -- I certainly don't believe that's going to lessen post the pandemic. I think people will get used to doing that because it's far easier for customers to order that way. So that's going to only be good news. And we're at 35% today, I would imagine usage to increase and therefore, that drives more spend and more sales. And similarly, with this -- the sort of the delivery piece. Again, we've been with delivery for a good 2 or 3 years, but in a small way, and what we've done in the recent time just to really increase the rollout across the number of sites, partly from getting our guys, our businesses, to adopt delivery as a realistic channel, but also as the delivery partners have extended their footprints. And what we're seeing is that even where sites are offering delivery with more than 1 aggregator, that's not sort of a distorting figure, each one is incremental. So we see this is something that's going to continue. And I think one byproduct of lockdown is a different -- a new audience has been bought to delivery. And people are seeing that as something they're going to embrace. So certainly something we think we can build on. But like I said, difficult to put numbers to it, but I see all of these things as being incremental and not substitutional. So that is going to be good news.

In terms of pensions, I mean, you asked about the contribution. So we're committed to putting in GBP 50 million a year in that -- that was going to go up to March 2023. As I mentioned earlier, we've had a sort of 6-month holiday on contribution. So they're getting added to the back end of that. So that takes us to the end of 2023. And there's just sort of a very small contingent payment just if it's required in the following year. So that remains in place. We'll be sitting down with the trustees again in [indiscernible] of the year to review that. But the scheme is 85% hedged and has only got just under 20% in equities. So the funding position isn't materially distorted or impacted by what's happened actually in the last 12 months. So we got a sort of fairly stable base there. We've got a good relationship with the trustees, and we'll see where we get to in a year's time. But I'm sort of not anticipating a material movement in that schedule of contributions that we're going to see. In terms of CapEx, clearly, CapEx is going to sort of counterbalance trading. So the better we trade, which is good, the higher CapEx will be. The more severe restrictions are, so CapEx will sort of move to offset that slightly because we'll spend less. So if you look at this year, we spent just over GBP 100 million. So that might be -- trying to give you some numbers. That might be a -- sort of your bottom line, if you like, if things are really severe in terms of restrictions going forward. And if we're trading more and things are looking better through sales, then the top level might be GBP 130 million, maybe GBP 135 million, something like that. So I would expect it to be somewhere within that range depending on what we're allowed to trade.

We have a question registered by Tim Barrett from Numis.

A smattering of things, please. Just firstly, on the cash burn. That's increased a bit from when you last [ reported ]. Is that simply the pension policy coming to an end? And a bit of color around cash burn would be good. And secondly, can you tell us what the assets now are outside the securitization? Obviously, we'll see it in due course, but a figure there would be good pace right now. And when you talk about the options you have on the nonsecuritization debt, which kind of disposals in unencumbered assets the cause of that? And then lastly, just to shop the question around, how big is the gap now between your urban pubs and your rural, semi-urban pubs in terms of like-for-likes?

Yes. I didn't get your third. But let me answer the first 2 and then I'll ask you to rephrase. In terms of cash burn, that's gone up a bit from the first lockdown, but that's not -- that's partly because we've -- we started paying for pension, as you said. But also the furloughing terms of this lockdown are different to they were in the summer. So in the summer, we were not paying pension and NI, whereas we and everybody else are now. So your cash burn is higher for that reason. In terms of what's the sort of sites in the unsecured estate, it's just under 400 -- about 390 sites. And their valuation is around about GBP 500 million. Can you just repeat the third question? Sorry, I didn't catch it.

Well, part 2b was just -- does that valuation come into play, the unincumbered assets come into play when you think about next year? And then also just trying to understand how your non-city center pubs are trading versus the 30% to 35% for the whole business?

Well, on the non-city center, we have a massive spectrum in the performance of the brands this year, right? More than we've ever had. So at the top end, you've got the premium country pubs and Miller & Carter, which, on many occasions since we've been reopened, have been in growth and strongly in growth, including even in the autumn where we had some quite heavy restrictions coming in. At the other end of the spectrum, the most challenged are the more traditional pubs and perhaps the most recognized brand probably would be Nicholson's in that respect, where they are overwhelmingly city center, overwhelmingly wet-led and they sort of rely on 2 or 3 people standing at a bar, which you actually can't do on that [indiscernible] end of the day. So Nicholson's is down several tens of percent. So miles away from what MC and certain premium country pubs have done. I still don't understand your third question, I'm sorry, Tim.

No. We can take it offline. Just trying to understand whether the unencumbered assets come into play in any refinancing.

Well, not sure you mean come into play. I mean they sit there in the unsecured estate. There's a negative pledge over them held by both the pension fund and the banks that have that -- given us our bilaterals. So they're very important quasi security to those stakeholders, and they will remain that. If I come [indiscernible] we get to leverage something specifically on them, then no, because those stakeholders already have an interest in them.

Our next question comes from Joe Thomas from HSBC.

The first thing I just wanted to ask about was the scale of the VAT tailwind that you're getting on your sales. If you could sort of quantify that and just confirm that when -- in your base case planning that you've given in the notes to the account, is that before or after the VAT tailwind that's going through? The second thing I just wanted to ask about was, again, relating to that sort of recovery trajectory. At what point would you expect to get back to a -- sort of a comparable pre-COVID level of sales? And is the comparative a 2019 comparative? Or is it sort of theoretical number that you would have been at? And then finally, can you just -- you've previously said, if I recall, that you would achieve EBITDA breakeven at 60% to 65% of normal sales. Is that still the view that you've got?

Okay. So VAT tailwind, Joe, is worth GBP 30 million in this set of results. In terms of our base planning going forward, we have continued to bank that benefit up till March, which is when the chancellor has said it is in place for. Obviously, we haven't banked in anything beyond that. We would hope that he feels able to extend it. But we've -- that hasn't been announced. So we're not taking any benefit for that in any of the projections we're doing. We're just relying on what the government have already committed to. And in terms of when do we get back to pre-COVID sales levels. In those sort of base case scenarios we talked about, we don't get there this year. We get very close. We get to a few single digits off, but it's not [ till ] we get into next year that we think we start getting back to where we were. And what we mean by pre-COVID sales levels, I mean the sort of the 12 months trading before March of this year. So it's the most recent 12-month tradings for that. Once we hit that, then we say we're back at pre-COVID trading levels. In terms of breakeven, 60% to 65% is the number we said. Clearly, that varies wildly, right, by site to site. And in particularly, if you're a freeholder or leaseholder, it's going to be very different from that. But that's the blend across our estate. That doesn't have the back benefit in, and it doesn't have any further benefit in. So whilst we're enjoying those, it allows us to make profits at a slightly lower level. But that's importantly the sort of ongoing level of breakeven across our estate.

Right. And is it possible that you said the VAT tailwind in these numbers was GBP 30 million. I mean on an ongoing basis, what is it? Is it about a sort of 10% contributor to like-for-like sales?

It's about 7% or 8% to sales.

We currently have no questions registered. So if you'd like to continue.

No, I think that's great, if there's no more coming through. Thank you very much for your time, everyone. If you do have any other questions, then do feel free to give us a call. We're very happy to speak to you later on today or tomorrow. Thank you.

Ladies and gentlemen, thank you for your participation. You may disconnect.