Trading improves at Mitchells & Butlers

MIDLANDS pubco Mitchells & Butlers has seen trading improve in the past half year lifting some of the gloom surrounding the company, which was recently the subject of a bitter boardroom battle.

Announcing its half-year figures, M&B said like for like sales had improved 1.8% compared with last year, with food and drink sales rising 4.3% and 0.3% respectively.

Retail operating profits were up 13.7% at £158m with the retail net operating margin up 1.6 percentage points.

Net debt reduced by £87m during the period to May 15.

Adam Fowle, chief executive, said: “The business continues to trade well and we are pleased with the progress made in the first half with improved sales and margins leading to an increase in operating profits and profit before tax of 12.2% and 55.3% respectively.  

“These results underpin our confidence in our strategy of increasing shareholder value by reshaping Mitchells & Butlers around its key food led brands.”

The group has maintained good sales growth in the first half, with total revenue up 1.3% to £1,037m.  

Second quarter sales were hit by the January VAT increase, the adverse weather conditions and by a materially lower level of promotional activity, down by a third compared with last year. 

It said that even with this reduced level of promotions, significant market share gains were achieved in both food and drink sales. These were against the general industry trend of declining levels.

The company, which operates the Harvester, Toby Carvery and All Bar One chains, said its overall strategy of driving higher spend per head through enhanced menu quality supported by brand advertising had resulted in continued increases in sales and gross margins. 

Successful national marketing campaigns such as Toby Carvery’s Great British Roast Debate were a key part of this strategy. 

Annual cost savings of £25m are likely to be generated through efficiency and productivity improvements. The figure is £5m above expectations.

Going forward, the company said it expected to invest an additional £20m in the second half, resulting in a gross capital investment of £160m.

The investment will be used to convert existing pubs into the brands achieving higher returns.

The group generated cash inflows of £168m in the first half including £21m from individual site disposals.  This has led to a net debt reduction in the period of £87m to £2.5bn.  Drawings on the group’s unsecured medium term facility are currently £296m.
 
M&B said it had agreed with its pension trustees the actuarial assumptions and funding terms to be used in the triennial actuarial review.  As a result, the pension deficit, on an actuarial basis, has increased to £400m from £250m in 2007. 

This will be funded by annual payments of £40m, up from £24m, funding the deficit over a 10-year period, which began on April 1. 

In outlook, it said: “The company continues to perform well in difficult market conditions and is making good progress in implementing the strategic plan as set out in March. 

“Consequently, we are confident about the future prospects of Mitchells & Butlers.”
 
Mr Fowle said declining beer sales in pubs due to competition from supermarkets and people drinking at home had reinforced the group’s decision to pull back from drinks-led pubs in favour of those serving food.

The number of people eating out grew by 4% between 2004 and 2009, determining the direction of the market.

In March, the group announced its intention to accelerate growth into food-led venues.

“We see significant potential for growth both in like-for-like sales as well as in numbers of pubs and have categorised the brands into two groups dependent on their potential for expansion,” said Mr Fowle.

The brands which will undergo active expansion are: Crown Caveries; Harvester; Premium Country Dining; Sizzling Pub Co; Toby Carvery; and Vintage Inns.

Those chosen for selective expansion are: All Bar One; Browns, Metro-Professionals; Miller & Carter; Nicholson’s; and O’Neills.

Mr Fowle said all these brands had high levels of customer satisfaction and loyalty with a potential to create value through increasing their number of sites. 

The six active expansion brands are likely to see their portfolio double to around 1,900 pubs.

It will start by focusing on where the investment returns are likely to be most attractive, namely its existing pubs estate.

The strategy will also target leisure parks and other high traffic locations such as retail parks with large car parks.

This will be followed by trials of Harvester and Toby variants on the High Street.

Its overall objective is to own and operate brands which have the potential to build to at least 100 pubs or deliver an EBIT of more than £10m with an acceptable return on investment. 

It also promised to be disciplined in its capital investment to ensure it creates shareholder value. The firm said that during the last three years it had materially reduced the cost of refitting its pubs and its aim was to take a further 15% off the incremental capital cost per square foot. 

“We will continue to focus on improving the profitability of the business and are targeting an overall improvement in net operating margins of between 2-3% points over and above the 15.3% achieved in the last financial year,” added Mr Fowle.

“We will achieve this through improved menu development, enhanced purchasing gains and increased customer spend per head.  It is encouraging to note that in the first half we have improved net operating margins by 1.6% points already.”