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

Good morning, everybody. Thanks very much for joining us. This is Tim. I'm here with Bob, with Phil and with Gabby. And as you'll note, today we're formally launching our open offer on terms as outlined last week, namely to raise approximately GBP 350 million at GBP 2.10 per share to fund primarily working capital and continued investment in our estate. And this equity raise is supported by an extension to the term to GBP 150 million unsecured bank facilities and a package of revised arrangements within the securitization. What we'd like to do today is we've got a few slides. We'd like to take you through those to give you the background and some of the details of the open offer. And then we'd be very happy to move on to Q&A at the end of that. So with that, I'll hand over to Phil.

Thanks, Tim, and good morning, everybody. Just over a year ago, we could not have envisaged wanting or needing to a deficit. We were performing strongly and had seen over 3 years of market outperformance in terms of like-for-like sales growth as measured by the Peach Tracker. Whilst the pandemic has undoubtedly derailed our progress, we are sure that its impact is temporary. We had a detailed transformation program at work driving the business forward, and we are committed to resurrecting that work and rebuilding momentum as soon as we're able to trade again. The current uncertainty over when we can reopen, the lack of information over what restrictions will be placed upon us and for how long when we do reopen and the lack of clarity on what, if any, ongoing support there'll be for the sector in the Chancellor's forthcoming budget has meant that we've had to plan with caution. The immediate priority is to secure the liquidity injection we need to ensure that we can provide a prolonged period of lockdown or disruption and to rebuild the balance sheet that has been weakened over the last year. However, we remain confident that once we do open our doors, we can swiftly return to profitability. Going forward, we will return to the path that we were on, focusing on deleveraging the business and cash generation. We hope to emerge into a market with a lot of pent-up demand and with a solid platform that will allow us to exploit the market opportunities that arise. The chart in the top left-hand corner of this slide is an extract from the Peach sales tracker, and it is a reminder of how we transformed our like-for-like sales performance versus the market since 2015. The chart on the top right illustrates how we have deleveraged the business over that same time period. To remind you, we have an annual bond debt service of GBP 200 million per annum but as each year goes by, a bigger percentage of that payment pays down the debt. So deleveraging will accelerate, all other things being equal. The quality of the estate and the brand in Mitchells & Butlers has always been a key strength for the business, 82% of which is freehold, with locations in all the major conurbations across Great Britain. We have a portfolio of well-known and proven brands, each grounded in deep customer insight. The other major strength that we have, in my view, not represented on this slide are our people, who are experienced hospitality professionals. The depth of feeling expressed and the determination to see Mitchells & Butlers recover quickly as soon as we are allowed to trade has been marked. Post-COVID, our aim will be to get the business back onto the path we were on before the pandemic as quickly as possible. To remind you, we have 3 key strategic priorities that guide what we do namely: building a more balanced portfolio, which is all about ensuring that we consistently raise the quality of our amenity across the portfolio in a systematic way, getting on to a 6- to 7-year cycle of reinvestment as soon as we can. We aim to premiumize each of our brands within their respective markets. And we look to accelerate the expansion of those brands generating the strongest returns. Secondly, instilling a more commercial culture to the way we do business, which is all about putting the guest at the heart of all the decisions that we take and ensuring that the whole business remains focused on how each pound of sales is converting to bottom line profit. And finally, driving an innovation agenda, which is about optimizing the use of all the technology that we've deployed in the business, making digital marketing an engine room for the business and ensuring that each of our brands are constantly evolving. Our Ignite transformation program with the driver of the momentum we had -- that we built pre-COVID, with each initiative aimed at improving an aspects of doing business, which, in turn, has helped to address one of the strategic priorities. It is a dynamic program of initiatives that works across the business and having only just refreshed the program in February 2020, just before the first lockdown, which we call refilling the hopper, we have a wide range of projects and initiatives to resurrect as soon as our teams start to return to work. Over the last 4 years, the Ignite program has seen us, amongst many other things: introduce a new labor deployment system; a new guest care process; help address poor site performance through coaching and support; rolling out delivery with third parties; improve our capital deployment; and refresh sales training across the business. At the end of last year, we rolled out our order-at-table solutions to all the brands that needed it. And it's fair to say that the pandemic has certainly helped to accelerate customer adoption. We've also taken the opportunity to revisit our menus, ensuring that we're balancing the need for brand pain points with optimizing the benefits of Mitchells & Butlers' scale. So before I hand back to Tim, I'd like to remind you that we have a strong portfolio of brands represented in good locations across Great Britain. We have a good balance of wet and food-led businesses, cities, suburban and rural businesses and as such, we feel that we are well positioned and well hedged to withstand different recovery rates among different locations and types of business. We have proven investment models for each of our brands that pre-pandemic were yielding strong returns. And in Ignite, we have a program of work ready and waiting that we are convinced will continue to drive the business forward. Finally, we have an experienced and professional hospitality team with a strong track record of profitable like-for-like sales growth, and that is why we expect to recover quickly once restrictions are lifted.

Thanks, Phil. So you'll all be well aware that M&B was a strongly performing business going into the pandemic. We had a clear strategic agenda under our Ignite program of work, and that was enabling us to establish a track record of consistent sales outperformance against the sector and growing profits, whilst we generated cash and continued to pay down our debt and reduce our gearing. However, the last year has posed an unprecedented challenge and uncertainty. We've had 3 enforced shutdowns. When we have been allowed to trade, it's been under significant restrictions, which have depressed sales. We've had some government support, but essentially, we've had to manage a business that have had significant cash outgoings with very limited sales income. Our immediate priority, of course, was to minimize cost and cash outflow, and that's included stopping all nonessential discretionary capital spend, whilst developing and investing in new COVID-secure processes so that we can trade responsibly when we are allowed to open. From a balance sheet perspective, in the summer, we worked with our main stakeholders to put together a financial platform. We've increased and extended unsecured facilities and within the securitization, a number of waivers and amendments to give us flexibility and the headroom that we required. This allowed us to remain solvent until we -- 'til we felt the situation had settled sufficiently to assess what's the right capital structure for the business. I have to say, at that time, the last summer, we didn't believe that we would effectively lose the whole of the Christmas trading season and then be shut for several months at the beginning of 2021. So what we did achieve then has been absolutely invaluable today in bridging us to what is now the time to recapitalize our business. In order to scope the quantum of the equity raise and, indeed, to come to the revised debt arrangements, both secured and within the securitization, we've had to undertake the difficult task of forecasting the pandemic or trying to forecast the pandemic and, in particular, the impact that it's going to have on the hospitality sector. Now, the COVID-specific assumptions that we've made are going to be disclosed in the prospectus, which is coming out if you have time, focus on the reasonable worst case, which is really the case that we've used to scope all of this. We assume that the whole of our estate in the U.K. and in Germany is fully closed until early May, until the 9th of May. And even then, when we do open, we assume that we open with significant restrictions. Like-for-likes initially being 30% down for 3 months, which takes us into August, from which point, they slowly begin to increase, such that from May until the end of our financial year in September, we are average about 23% down in like-for-like sales. Next year, we assume also starts slightly down and it's only until we get to the second half of next year that we actually begin to achieve flat like-for-like sales on what at that stage we'll be on 2 years previously. It's also worth noting, we've assumed that there is no sort of second -- or fourth, should I say, closure in the winter and the autumn later on this year. So as the Prime Minister has said, we've assumed that this is the last total lockdown that we have. It's very important as well as raising equity, of course, that we refinance and revisit our debt structure to support the capital that's coming in. We've got strong relationships with our debtholders, and that's enabled us to get to a decent package and flexibility, I think, contingent on the equity raise. And again, this is scoped around the reasonable worst case. In terms of the unsecured estate, we've put in place a GBP 150 million 3-year club deal, which replaces the GBP 150 million of facilities that would have expired at the end of this year. We have some liquidity tests in that before covenants kick in, which isn't until July 2022. And we expect to pay our CLBILs, GBP 100 million CLBILs shortly. Within the securitization, we have waivers for the main covenants until January 2022 for the 2-quarter test, until April 2022 for the 4-quarter test. The covenant level then builds up to normal levels by January 2023. We have the flexibility to draw on the liquidity facility within the securitization in March and in June, but that needs to be fully repaid by the end of this year in December. So putting all that together, M&B was a very strong performing business going into COVID, and we believe we have managed it very well through what has been a particularly difficult time. What this open offer does is it enables us to reset and recapitalize our equity and our debt, giving us a very strong financial base for the business going forward and certainly positioning us to be successful again as restrictions start to lift. Okay. Thank you all very much for joining us. If you do have any other questions, of course, get in touch and we'd expect the prospectus to be up on our website in a few hours' time. Thank you.