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

Right. Good morning, ladies and gentlemen, and welcome to the results presentation for Mitchells & Butlers this morning. We're delighted to be able to announce what we think is a very strong years trading, 9.1% like-for-like sales growth. Our operating profit up 17.6%, once you adjust for the government support we enjoyed in FY '22. Our strongest-ever guest review scores and our people metrics back to where they were pre-COVID. Whilst we understand that we still have challenges of our head, we now look forward with a new level of confidence, given our strong and unparalleled estate and brands the fact that macro-driven cost headwinds seem to be abating and given the fact that our capital and Ignite programs of work are full and we're on with those as I speak. I will take you through our current priorities and roadmap a little later, but first, Tim will take you through the financials.

Morning. So as Phil said, a strong year is trading starting to really feel like a return to normality in terms of trading terms for us and some very positive indications, I think, for the future. We're reporting on a 53-week year, as you all know, but we have also published a 52-week trading results to give you a better comparison to the year-on-year drivers. And it's that that'll be focusing on primarily in this presentation. As you can see, the -- on that basis, EBIT of GBP 221 million, against GBP 240 million last year. Last year, of course, reflecting the fact that it had GBP 52 million of additional government support, particularly primarily in the form of reduced levels of VAT. So if I rebase that out, really strong trading year. Profit is up over 17% year-on-year. Let me start with sales, which is right at the top of our P&L and certainly a highlight of last year's performance. Now what this chart does is it shows you every month. I'll show you our like-for-like performance within each month. And in relief at the back, you can see the total sales, not all months are created equal. Of course, some are more important to us than others. You can see how the years panned out for us across this chart. And I have to say, we entered last year with a fair amount of trepidation based on macroeconomic conditions and how the consumer spend would respond to cost of living price. So we're delighted with the performance that we've ended up delivering with an overall like-for-like sales growth of 9.1%. Strong performance is literally throughout our brand portfolio, increases in volume, food up over 6%; drink, up over 3%. Also importantly, a record outperformance against our sector against the Peach Tracker of 2.7 percentage points. So really, really strong year. You can see pretty consistent as well through the year. We benefited from Omicron in the prior year, in the festive periods. We don't get into March. We had a little bit of snow, which hit us slightly wet August. We got some train strikes peppered throughout the year, unfortunately. But essentially, a very robust and consistent performance throughout the whole of the year. And I'm really pleased to say that has continued since the balance sheet date, as we've reported. For the last 8 weeks, sales have been up at 7.2% with good indications ahead for the festive season, a very important festive season. We do have a very diverse portfolio of brands and offers. You can see them set out on this chart. And this really reflects the progress we've made over the last few years, looking to involve our brands. So as they become so premium within their own market sort of sense of gravity lifting on this chart. You can see [indiscernible] whether that be across food and drink, premium and value or urban, suburban and rural locations. We believe that, that breadth gives us and will continue to give us a resilience and stability and what will remain at uncertain times. And of course, we welcome Ego Restaurants, the newest addition to our stable, which Phil will talk about a little bit more in his presentation. Let me analyze out some of the moving parts in our profit performance, walking through from last year's results. As I said before, we had GBP 53 million of government support last year and GBP 1 million this year. So if I rebase to that, you got a basis on which you can see how we performed through the year. Now we continued with our capital looking to get back to the 7-year [indiscernible] good contribution, good rate of return last year's projects. That's making a positive contribution for us. We've continued to invest this year. That tends to be dilutive in year particularly because [indiscernible] that are going to help us with get profit growth next year. And a very strong sales performance, as I mentioned earlier on. Total sales up over GBP 250 million on the prior year, supported by our Ignite program, which is a backup at full speed. Phil's going to talk about -- a little bit about this, but that's already delivering additional efficiencies for us as well to support the sales growth. So all of that puts us in a really strong position. Of course, we knew -- it wasn't a surprise. We knew we also had very, very strong cost headwinds to deal with last year, GBP 175 million. So they enabled us to sort of get over those, if you like, and grow profits to GBP 221 million, which as I said, was just over 17%, excluding government support. And costs, of course, have been front of mind for a couple of years now. Last year, we think was pretty unprecedented GBP 175 million, representing maybe 10% of our cost base, driven by -- particularly by food and labor costs. And that's without large utility inflation, which have sort of gone up the year before and sort of sustained itself at a very high level. I think the positive news though is when we look forward to the year we're in now, we can see that coming down significantly to what we believe will be around about 3%. Now we know living wage is going to go up by 9.8% from April. We know it's going to be extended to 21-year old. So that remains quite high. But all other areas, particularly food and drink, have started to come down. And I think in this current year, you'll see that we actually have energy price deflation particularly because we don't hedge particularly forward, which meant that pain of high utility prices matters quite quickly on the way up. But on the way down, that's helping us. As I look forward to this year, we've got about 47% of this year's energy requirements by [ volume ] bought forward. Looking to cash flow, we continue to generate positive cash flow. We've reduced our net debt, excluding leases, now to GBP 1.2 billion. So that represents about 3.3x EBITDA. And we've managed to do that alongside an increase in capital expenditure, including 151 new projects. We try to get back onto our 7-year remodel cycle. We're not there yet, but we're making progress on getting back on to that. We bought Ego, as I said, or at least the remaining stake in Ego and we've invested an additional GBP 11 million this year in energy-saving projects, notably solar panels and voltage optimizers, which will help get down our energy usage and reduce our exposure to that very volatile cost. I think one element that's been very good news for us recently is extremely important to our cash flows in this year and going forward is pensions. Now for many years, we've had a large and I have to say, seemingly insurmountable pension deficit, driven particularly by sustained low gilt yields. And we're having to put GBP 50 million a year into that deficit. So we're delighted to say that as we stand here today, we feel we're pretty well drawn a line under that as fully funded. Both of our main schemes not only fully funded, but have gone through a buy-in transaction so they are buying with a third-party. So they're substantially derisked all material purposes. We are making no further contributions into either scheme. And in fact, we have GBP 47 million sitting in an escrow account that we hope and believe will be available to come back to us, the group over the next few years so some upside from that. The only real pension exposure we have now is a very small scheme. It's an unfunded top-up arrangement for some members of the exact scheme. And we're carrying a deficit on the balance sheet for that of GBP 22 million before tax relief. And in terms of net debt, of course, pensions coming down has really helped our overall reduction of net debt. Over the past 10 years, on this chart, we've reduced net debt of GBP 1 billion and we're now down from 5x net debt-to-EBITDA ratio to 3.3, excluding leases. There's an inbuilt structure, as you know, within our securitization that does gear automatically and that accelerates. So we can see those bond payments coming down in the years ahead until bonds start to fall away in 2028 and at which point shortly after our debt service comes down materially. All this is supported by new RCF that we put in place this year, but we've extended it by GBP 50 million to GBP 200 million across 6 banks. It's unsecured, remains unsecured, although it's a negative pledge and that's committed through to July 2026. So that underpins in terms of liquidity or everything else that we have. And I think you put that together, it gives the group a really strong capital base on which to help the business be successful in its market going forward. So I'd like to wrap up really on that. Just to sum up. We entered last year with a fair amount of trepidation, if I'm honest, with unprecedented cost headwinds, fears about consumer spend and how that was going to react to the cost of living crisis. So we're delighted with the really strong performance we've delivered, EBIT up over 17%, excluding government support building on a strong sales performance throughout the year. When we look forward, there are still uncertainties. Of course, there are still uncertainties. But we're certainly already starting to see costs abating, and we see that having internal impact in this year. Our brands and offers are all performing well within their markets and remain well-placed. And we have a Ignite program that Phil talk about that's back up at full speed and delivering efficiencies and sales increases to the group. So with that, I'd like to hand you over to Phil.

All right. Thanks, Tim. As the New Year begins, it's good to see general level of inflation start to fall and real wage is moving ahead of inflation once again. Now we've sought to leverage this alongside our strong buying power and supply chain relationships to minimize our own cost input inflation, which is now falling back to a more reasonable level, allied with strong sales momentum, strongest-ever guest sentiment scores and with our people metrics back to where they were pre-COVID. We remain optimistic about our competitive position as a business and the macro landscape to the year ahead. So I'd like to start by looking at our sales performance in a little bit more detail before reminding you how our strategic priorities and our current programs work. So as I said earlier, our sales were very strong last year, and we're tracking consistently ahead of the market as evidenced by the Peach Tracker here. Now sales were ahead of the market on a calendar basis every single week. But it's the quantum of that sales growth of particular importance to us. And the fact that we delivered 9.1% like-for-like is hugely encouraging and validates all that we're doing. Over the year, we outperformed the market on average by 2.7 percentage points, which was a record outperformance for us. Now this performance reflects the strong portfolio of relevant brands that Tim talked about earlier and the myriad of initiatives that we have deployed to either improve guest satisfaction or to drive incremental sales. Pleasingly, all brands were in like-for-like sales growth last year with Nicholson's leading the way. And it's great to see its profitability back to and beyond pre-COVID levels despite the huge cost increases and despite the crippling train strikes. Incidentally, we estimate that the train strikes cost the business -- the whole business GBP 14.5 million last year over the [indiscernible] is real and broad-based. And it reflects the strength and quality of our states and brands and the enhancements that we've been making across the business, and it's these factors that's driving that performance. In terms of pricing, we took about 7.5% of price during the course of last year, which is higher than in recent years, but well below headlines and below the national living wage rate increase. So in real terms, we have at very least maintained our value. Once again, we try to protect entry points from food and drink where we can and introduce more premium products that allows us to drive spend without detracting from experience. The premise is validated by the guest sentiment chart that saw us grow our sentiment versus our competitors with value for money being a key compound to this. Now there's no denying that there's drop in market supply, must also have helped. And we believe there's still likely to be further fallout over the -- in the sector over the coming months, given that some segments are seemingly still struggling, and that should provide a tailwind for businesses that survive. However, we also feel that our strengthening guest review scores last year, driven by a concerted program of activity under our Ignite program also helped to drive the performance. As I said, irrefutable correlation between superior guest review scores and superior like-for-like sales. And so this has been a key area of focus for the business. Pleasingly sales post year-end was tracked at 7.2% like-for-like and we remained ahead of the market as reported by the Peach Tracker. We took circa 5% of price at the beginning of this financial year by low macro levels of inflation at that time. Looking ahead, we have the all-important festive season on the immediate horizon, and we're very encouraged by the bookings we've taken so far. And it does feel as though this could be the first proper Christmas since 2019 with COVID fears now hopefully generally behind us. The day also fall reasonably well for the sector this year with Christmas saving on a Monday. It means that we should get a full week, the week before for office parties. So our sales momentum has been maintained, and that will be important as we start to grow our profits back to and beyond where they were pre-COVID. As Tim said earlier, we have further cost increases to mitigate for this year, albeit we're expecting to be far closer to pre-COVID norms than they've been over the last couple of years. To help mitigate the cost increases, we have a myriad of cost and efficiency initiatives underway as part of our Ignite program, which I'll talk about a little bit in detail later on. For example, we continue a large-scale program of energy efficiency across the business, which has been successful in reducing consumption. Now this range is from simple housekeeping measures like making sure people understand how we set the thermostats directly and not turning ovens on too quickly in the morning to the more complex identification of investment opportunities where we might replace energy controls and the start of the installation of solar panels to a number of our sites. Today, we have 60 of our sites and our head office with solar power and plans to do a further 150 in this coming year. Another example of cost efficiency relates to the reducing the cost of maintenance and the capital cost of remodels. Now COVID-19 and the war in Ukraine has added cost pressure to the property sector too, both in terms of labor and materials. So we've had an Ignite initiative looking at this area of the business, seeking to bring a lot of maintenance in-house under what we call our DART program, which stands for directly employed [indiscernible] and are running a value engineering exercise that has taken about 15% to 20% out of the cost of grand remodels without listing their impact, of course. Now in practice, this will mean less structural changes which is what usually drives the biggest cost. Now we are a people business and people are clearly at the heart of all that we do. So the traction and retention of talented people is a key focus for us. I'm delighted to say that last year, our team turnover reduced by 13 points to 81%, a return to pre-pandemic levels, which has a positive impact on our guest experience as well as a positive commercial impact in terms of reducing the cost of recruitment and training. So a good sales momentum, macro event driven cost increases starting to subside and improving people metrics, we believe we're well placed. Our aim remains the same, which is to delever the business as we grow our profit. To do that, we have 3 strategic priorities that have remained the same, but -- which have evolved over the last 8 years. Firstly, we aim to maintain a balanced portfolio of well-invested restaurant and pub brands. As Tim showed earlier, this is a core strength of Mitchells & Butlers with a stable of wet and dry rural and suburban, premium and value brands, unmatched in the industry. Maintaining a balanced portfolio is about systematically investing in your estate. So you never again get to a position where the amenities are not up to scratch. The quality environment is simply an entry ticket to a competitive sector. And our aim is to get back to a 7-year cycle. We believe this gives us the assurance that we will be systematically growing the average quality of amenity over time, particularly when many of our competitors aren't or can't afford to invest. It's also about ensuring that each our brand stays relevant and they are constantly involving in line with the latest customer insight. We added Ego restaurants to our portfolio last year. As for of you don't know, it's a Mediterranean offer for which we believe we have a ready-made pipeline of sites, and we expect to grow to well over 50 sites in the next few years. As with all our brands, Ego has its own distinct personality and clear blue water between its offer and those with its sister brand, and it's a welcome addition to the lineup. And this is a good example of how we can acquire a new brand without paying a premium price, then generate incremental value by applying our scale efficiencies and then scale the brand through conversions, raising overall brand awareness and driving incremental returns as we do so. And it's a similar approach to that, which we took with Miller & Carter over the last few years, growing that brand from circa 30 sites back in the -- sorry, 2016 to 127 sites today. The second priority is about driving us to a commercial edge to the way we do business. And this is simply a constant reminder that the guest has to be at the heart of all that we do and drives all that we do. And it's also ensuring the whole business is focused on how each pound of sales converts down to bottom line profit. Robust forecasting, quality management information and swift to measure decision-making means that the business moves forward at pace and constantly learns if it does so. And the final priority is about fostering an innovative culture across M&B, where we encourage our people to constantly seek out ways to improve all that we do. We talk about sweating the technology that we've deployed, which there's a lot, ensuring that we're using all the functionality that it has to either make quicker and better decisions or to improve the guest experience. We want to keep digital marketing as the [ engine room ] for the business that it has become. And we're excited about our roadmap in this space, and we remain open to trialing new concepts and new product development. Now these priorities have kept us on path, and they will ensure that we keep evolving what we do and that we stay ahead of the market. In terms of the levers that we pull to deliver on these priorities, they can be summarized as almost the business user decisions that we take with each brands, pricing, offer development, operational practices, and I've already covered those. The capital program, where we aim to generate incremental profits from capital invested in remodels, conversions and a small number of acquisitions. And Ignite the umbrella term for our ongoing transformation program, where we have over 40 initiatives live at any one time, each designed to generate incremental profit, which together in aggregate adds up to a meaningful number. So let's look at capital. We're aiming to complete circa 200 remodels and conversions this year as well as progress another 150 sites for solar and 40 all electric kitchens. Return on investments from last year's program is strong, and now the capital program is up and running again. It starts to become a driver of incremental profit each year as opposed to being the drag that it was when we first resurrected the program post COVID. The third lever we pull is Ignite, which remains the overarching driver of improvements across the business. Unbelievably the program is 7 years old now, but it has evolved massively in that time with our skill and experience of delivering large-scale change across a multisite estate now ingrained in the business. As I said earlier, Ignite is just an umbrella name and attitude is we like to a way of working. I believe there is always a better way of doing everything in the business and are by pooling ideas, you can create a dynamic program activity that keeps the business moving forward. And we have -- too many initiatives in various states of completion to mention them all this morning. I talked about the energy initiative earlier. But to give you a flavor for some of the other things that are going on, we have an interesting project looking at how we can turn kit on and off remotely and automatically and hence reduce electricity consumption further. We're relaunching our everybody sales initiative, looking to harness the talent of all of our front-of-house team in driving spend while also making it fun our colleagues. And we're also looking to enhance our personalization capabilities in our digital marketing space, something which I'm sure we will talk about more in the future. So Ignite is important to trust today, as it has ever been, and we intend to hold a further round of ideation sessions next year to refill the hopper as I call it. But whilst the current Ignite program rolls on, we've also resolved to go back and look at all the initiatives landed in the business over the last 7 years. The difference this time is that we know definitively those initiatives work. We have the evidence. And if every business had implemented every initiative perfectly, we believe there could have been as much as another GBP 50 million of profit opportunity left on the table. Now of course, we'll never get 100% perfection but getting it even part of this represents a material opportunity for the business, and that's something we're looking at as I speak. I'm also pleased to say that whilst we've been doing all of this, we've also made good progress on our sustainability ambitions this year. Now as you know, we've set a net zero target for 2040, including our Scope 1, 2 and 3 emissions, which is currently pending science-based target initiative approval. But in order to meet our near-term targets in 2030, we're focused on removing gas from our site, moving to electric cooking platforms and heating over time. We've moved closer to our ambition to spend zero operational waste to landfill by 2030, with 97% of waste currently diverted and we've also improved our recycling rates to 59%. In the year, we also reduced food waste by 25% from our 2019 baseline through operational efficiencies as well as our partnerships with Too Good to Go and FareShare. Our ambition is to upskill all of our teams in sustainability knowledge so that over time, this just becomes part of the way we do business, and that work and that training is already underway. So in summary, we have a big program of work still ahead of us, but it does feel as though the business is well and truly on the way back after what has been a very challenging 2 to 3 years. We will continue to delever the business, strengthen the balance sheet and with pension liabilities now resolved, we're very well placed to weather whatever remaining storms lie ahead and to return the business back to and beyond the profit that was generating pre-COVID. Once we've done that, we believe that with lower debt and strong cash generation, the options available for Mitchells & Butlers going forward will be significant. We'll now be happy to take your questions.

Jamie Rollo from Morgan Stanley. Three questions, please. Clearly, very strong current trading. But is there any sign of a slowdown anywhere that you see, Phil, or there any brands or geographies or day parts, sort of worry in particular? And secondly, obviously, very encouraging cost outlook and Tim, your comments on margin recovery as well. How should we think about the sort of slowing top line as inflation normalizes and margin getting back there? What's the sort of shape of that? Are they fairly linear? And what sort of timing on when profits get back to 2019? And then if I may, just finally, on the balance sheet, I appreciate you're in cash trap at the moment, but you probably won't be in a year and you're delevering quite quickly. Does that open up opportunities to reprofile the debt or maybe to do something else with the excess cash with that pension going?

Okay. Thanks, Jamie. I'll take the first one. Tim, you do that. So are we seeing any slowdown in any geographies? No. I mean, there's 2 things I'd say, I think it's the slowest part which I think is well reported for us and the sector is late nights. We' not that exposed to that, but that seems to be the slowest part of market right now. Geographically, no real outliers. I think that -- where the caution I would say is, whilst it's great to have a great start to the year, we're always very quick to say it won't be until the end of the first quarter after Christmas out a way that we can really make a call. It's a sort of 7, 8 week run in October and November is impacted by strikes and weather and all those things, but if we have a good Christmas, it will dwarf what happens in October, November. So I think that's probably one for the post-Christmas update to know exactly how the year is looking.

I think the relationship between the top line and costs. And we're currently posting 9% like-for-like, 7% like-for-like. So that's a fairly unprecedented level of sustained like-for-likes, particularly for a group of our scale. And they are a product of exceptional times, right? There are a product of the extremely high inflation we've had last year. I think you should expect to see as we get to a period of normalization going forward, hopefully, in the economy. Cost inflation coming down, what we'd expect to see in the current year. And you'll see the top line come down as well because we weren't frankly be taking as much price as we took in a very, very high inflationary environment. So I think they should both come together. There may be a lag in that. Of course, sales is immediate and costs are to a greater or lesser extent contracted slightly further forward, but they should be moving in sympathy. And I would say that we would be a net beneficiary of that movement just -- because our profits were harmed with cost inflation going up. We couldn't take all of that in price. So as cost inflation comes down, whilst you might see sales coming down in sympathy with that, we would be a net beneficiary to my mind on the profit line. So you will see profits across the group grow. I think that answers the first question. In terms of currently of gearing net debt, I mean we're still in uncertain times. We're really pleased [ how it performed ]. We're still in uncertain times where we have 3x net debt to EBITDA, GBP 4.6 million if you include leases in that. As you said, Jamie, we're in cash trap on our securitization for a little longer. And we're going to sort of throw off material uncertainty against outgoing concern. And we're in transition for our profits. We expect our profits to increase significantly over the last couple of years. But the year we're reporting here, we're still GBP 100 million behind where we were pre-COVID. So it doesn't feel to us like a moment to suddenly decide the capital structure of the group with all that certainty. I think we'd like to see our recovery play out a little bit more. I think that's the sensible thing to do. As we have consistently said, we will be conservative and prudent with how we manage our capital structure and our gearing across the group. The capital structure is there to give the business the best chance to succeed in its market. I think that's working really well for us at the moment, if you look at our balance sheet compared to a lot of our competitors, and that's absolutely not a competitive advantage we want to give up going forward.

Tim Barrett from Numis. I had a revenue question and a cost question, please. On revenues, I think you said you took price of 5% in September. At the moment, do you think twice a year is the new norm for you and what you think we'll end up doing in the spring? And then second question on the energy element of costs. Feels like that's the only real bit where you've got some exposure or some doubt. Can you just remind us what that 50% roughly unhedged piece is in quantum, just so we can gauge what the exposure is?

Thanks, Tim. I'll take the first one. Actually, not a new one. We've always tried twice a year because we have menus and often drink prices on our menus, you're almost tied to that. So that's the time you can move price. So we've always, we call it, dark nights and light nights. So we do a dark night menu in September and light nights in the spring. So we've always done that. And to some extent, you don't have to make the call on what price you take until you get there. So last year, I say the blend was around 7.5%, we've just taken 5%. We have really a fixed view on what we'll take in the spring. I hope, we'll be honest Tim, as we noted, if costs start to subside, you should expect us to be far less aggressive in taking price. I mean we wouldn't take price if we don't have to. But you've got -- obviously, in the landscape, we've been in price is the one mechanism we have to use. And so far, we've been able to do that below the headline inflation rate, and I would expect that to carry on going forward.

On utility, I mean, it's a good question, Tim. So put this in context. Last year, our utility certainly to build GBP 155 million. As you've seen on the slide, we're expecting deflation maybe GBP 125 million for this year. Now that's made up of some variable elements and some pretty special elements, not all commodity-driven. So about GBP 70 million of that GBP 125 million is fixed charges coming with buying energy. And stuff like water rates, which are more stable, heating oil would we buy for vintage. So much more stable, which leaves about GBP 55 million, which is basically power, electricity and gas, the commodity element. So when I say we bought 47% forward. We bought 47% of that GBP 55 million. So your volatility is around -- it's not around GBP 125 million, it's around GBP 55 million really with more of an index following on the rest of it.

Okay. That's great. Thank you.

Thank you very much.