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Edited Transcript of MAB.L earnings conference call or presentation 20-Nov-19 8:15am GMT

Full Year 2019 Mitchells & Butlers PLC Earnings Call

London Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Mitchells & Butlers PLC earnings conference call or presentation Wednesday, November 20, 2019 at 8:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Philip Urban

Mitchells & Butlers plc - CEO & Director

* Timothy Charles Jones

Mitchells & Butlers plc - Finance Director & Director

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Conference Call Participants

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* Anna Elizabeth Barnfather

Liberum Capital Limited, Research Division - Research Analyst

* Douglas Jack

Peel Hunt LLP, Research Division - Analyst

* James Robert Garforth Ainley

Citigroup Inc, Research Division - Director and European Hotels and Leisure Analyst

* Jamie David William Rollo

Morgan Stanley, Research Division - MD

* Julian Kenneth Easthope

RBC Capital Markets, Research Division - MD & Analyst

* Nigel Andrew Parson

Canaccord Genuity Corp., Research Division - Analyst

* Richard Michael Taylor

Barclays Bank PLC, Research Division - Analyst

* Ted Nyhan

JP Morgan Chase & Co, Research Division - Analyst

* Timothy William Barrett

Numis Securities Limited, Research Division - Leisure Analyst

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Presentation

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Timothy Charles Jones, Mitchells & Butlers plc - Finance Director & Director [1]

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Okay. Good morning. Thank you for joining us this morning. As always, I'd like to go through the financial results, and then I'll hand over to Phil. So let's make a start.

Overall, we think this is a really encouraging set of results, building a lot on the progress we've made over the last couple of years. That strong sales growth that's been consistently ahead of the market, and we're now starting to drive the growth in profits for the first time since the living wage was introduced in 2016. And we've been able to do that this year also at a higher -- the highest percentage margin. Looking forward, I think the environment still remains tough, and it still remains uncertain. We still have cost headwinds, in particular, and I'll talk a little bit about those. But most importantly, we believe we're really well placed now to face that challenge. We're getting a lot of the benefits of our Ignite 2 program starting to have a tangible difference for our income statement. And early in the new year, as we'll talk about, we're going to look at launching a whole new set of initiatives under Ignite 3. So we're confident in our ability to maintain investment in what is a fantastic estate and deliver real equity value over the coming years.

Let me start with the income statement. Sales increased just under 4%. So that's a marked acceleration on previous years, and we give that down well to GBP 317 million EBIT, up 4.6% on the prior year, and that set us a set of 10 basis points richer margin. PBT grew by over 10%, so further benefiting from the progress we're making in paying down debt, and that begins to come through as a low interest charge.

So overall, a good, solid year of organic growth. In terms of sales, like-for-like sales for the full year were up 3.5%, very well balanced across food and drink, well balanced across our brand portfolio with all of our individual brands being in like-for-like growth. And also with the uninvested estate being in like-for-like growth as well, showing that it's not just capital that's driving this improvement. It's the whole raft of initiatives that we've got coming through the business. Growth has essentially come from an increase in spend per item, particularly price and premiumization. But at this year, we've also seen a marked improvement in the volume trajectory, both the of our food and our drink sales. The last 7 weeks have been slightly softer. But most importantly, we have continued to outperform the market. So it's been a difficult trading period, I think, for the sector, it's been cold, it's been very wet, as you all know, but we have maintained our margin of our performance, which I think is important.

In terms of cost headwinds, costs have been a tough challenge last year, and we expect them to remain so. I think we're probably faced an inflationary headwind of about GBP 64 million last year. We managed to mitigate about GBP 25 million of that directly. The main elements, of course, come through in wages, particularly energy last year and also transitional increases in business way. If I look forward, I think the challenge before us is going to be of the same ilk, perhaps slightly lighter in the year we're in now, we think energy may not be quite as stiffless year-on-year. So maybe GBP 60 million to GBP 65 million headwind rather than the GBP 65 million we had last year, but essentially the same challenge. There are a number of moving parts, as you know, on our EBIT. And I've set these out on this chart, to start with our capital plan. We have the benefit of the investments we made in the prior year. So they're starting to annualize at a higher rate as we get a return on that capital. And then we've managed to generate a positive impact on the P&L from the investments we made in the current year. And it's the first time we've done that. It essentially means that those businesses have traded so well that within the year, they've been able to fund that, the opening costs and the closure period that they had to bear with every model. So we're really pleased with that result, and that's been one of our Ignite workstream focuses.

Cost headwinds, as I've mentioned, and the mitigation of GBP 25 million against that. And then we have the benefits of our like-for-like trading which is really all the other initiatives we're undertaking across the group. So in aggregate, both halves in growth, total EBIT, GBP 14 million higher at GBP 317 million.

You'll note from our previous presentations that building a balanced business is -- remains 1 of our 3 pillars of our strategy. Total CapEx for the year is GBP 152 million. That's a little bit lower-than-expected than last year. Part of that reduction is a reduction in maintenance spend, particularly IT spend. We had some large IT spend in the previous year. But also, we've had a lower average project costs, type of projects we've done have been fewer conversions and more remodels and a little bit of inevitable slippage. But I think the main positive from our capital program for me, there are 2 of them, probably. First is we actually completed more projects this year than we had in the previous year, and we remain bang on our 6 to 7-year life cycle, which is very important for us. And secondly, returns have shown a dramatic improvement. So our sort of blended full year return has gone up 5 percentage points to 16% to 21%. And that's being led by the success of our current year remodels, which are heading about a 34% EBITDA return in this year. So really, really strong performance in those. Looking forward, I'd expect a total level of CapEx this year to drift up back to where it was so to GBP 170 million, possibly at the top end to GBP 180 million.

Our cash flows remain strong. It benefited from the slightly lower CapEx, as I mentioned. We had a small amount of disposal proceeds and a little bit of inflow into working capital. That allowed us to pay down GBP 124 million of debt in the year, of net debt in addition to the GBP 49 million we contributed into our pension fund. So that's reduced this gearing over the course of the year to 4x down to 3.6x, continuing good progress in delevering. In terms of our distribution policy and dividends, really, nothing has changed since we've seen here a year ago. I spoke about Brexit, I spoke about political uncertainty and economic uncertainty. And the picture is really absolutely the same as we stand here today. So we don't really see any change in that. Our priority will remain to meet our fixed charges and our cash flow to maintain balance sheet investment across the estate and to keep a strong balance sheet going forward. And that will allow us to continue to reduce our gearing and create value. And as a reminder, over the last 3 years, we reduced our book gearing down from 4.3x to 3.6x. So on a good course and that progress will only accelerate because of how our securitization is structured. So we'll keep having GBP 200 million of debt service, but more and more of that will be capital as we go forward. So you'll see an acceleration in this deleveraging as go forward. And that will create more and more equity value within the business.

Before I hand over to Phil, I would like to say a few words on IFRS 16, I'm sure you're all familiar with the standard now. So we won't make this the feature. But we're adopting it in this current year, FY '20, we'll use the modified retrospective methods, asset equals liability. There'll be no restraint for comparatives. And I'll remind you that the obvious point there is no cash implications to this. This is purely about accounting.

In terms of the individual impact on us. In our income statement, we'll see a reduction in lease charges, which will lead to an increase in EBITDA of about GBP 50 million. We'll have an increased depreciation charge, we start to depreciate our right-of-use asset, which will mean that our operating profit will be about GBP 6 million higher. However, we'll also have increased interest charges coming through from the lease liability, which will lead to a negative impact on PBT, when you wrap it all up about GBP 11 million, and that's 2.1p on EPS or 5%.

In terms of our balance sheet, we expect to establish a right-of-use asset of GBP 500 million. We'll have a lease liability of GBP 546 million. So if you just do a simple book gearing net debt-to-EBITDA calculation, that would add 70 basis points to that going forward.

So I'll hand back to Phil. But I think just pulling out, we believe this is a really strong set of results. Sales persistently ahead of the market now, really encouraging so to drive profit growth. And doing that at a higher margin. We don't think things are going to get any easier in the environment going forward, but we do think we're really well placed to meet that change or to continue to meet that change with the number of initiatives we've got, and that will allow us to continue to create real equity value to deleveraging the group.

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Philip Urban, Mitchells & Butlers plc - CEO & Director [2]

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Thanks, Tim, and good morning, ladies and gentlemen. Quite clearly, FY '19 was a good year for us for partnering the expectations we've set ourselves 12 months earlier. I'm pleased to say we've now posted 3 halves on the troughs of profit growth. Understandably, we're delighted with that momentum and being able to demonstrate that we can stabilize the profitability of the business with the next major milestone we set ourselves having previously got the business back into sustained sales growth. As Tim has outlined, I think the performance was very much driven by strong sales performance of 3.5% like-for-like growth. Pleasingly, every single brand, I think, Tim mentioned, posting positive like-for-like, the first time that's happened in many years within the business, we believe. And I think it also demonstrates that our recovery is quite broad based, it reflects all the progress on the numerous workstreams we've been working on, beginning to pay dividends as opposed to any one thing. Further evidence, it is the aggregate value of all the Ignite initiatives that drive the business forward. There isn't really a silver bullet.

I think equally pleasing is the fact that we've managed to grow our profit conversion despite the cost increases, I think, evidenced again as the Ignite initiatives, with our looking at efficiency beginning to bear fruit. Importantly, we have remained consistently ahead of the market in terms of sales growth as the Peach Tracker demonstrates. To remind you, the Peach Tracker is a cohort of around 40-plus businesses. And this graph reflects all the contributors as opposed to any self-selected cohorts. We've now tracked ahead of the market for over 3 years now, with only the odd weekly blip when specific events either impacts us more or benefits us less than a competitor. So 1 or 2 weeks over the World Cup, if you like. But other than that, we've consistently traded ahead of the market. So we're happy with the progress for sure. But of course, last year's history, we're now 7 weeks into a new year. It is fair to say the new year started a little bit more -- a little softer. But given the poor weather, I think that's unsurprising. I think people would have seen this in October, the industry sector was minus 0.6, we remained in positive territory throughout and ahead of that competition. And you can see in the Peach Tracker here, we remain consistently ahead up to last week, indeed. So we do think this is a market issue, and just a blip and we think underlying, we're still in very good shape.

So what I'd like to do over the next 10 minutes is, really, starting to update you on our current interpretation of the macro landscape, which we find ourselves trading in, share an update on our Ignite and capital programs and then talk a little bit about our aspirations for the year ahead.

So let's start with the macro landscape. With Brexit and the impending general election, I can only say that a protracted period of uncertainty is unhelpful to any business, and of course, we're not exempt from that. However, we've already taken as many as precautions as we can regarding Brexit. Brexit, we did that sort of several months ago, such as securing more warehousing and working with our suppliers to guarantee supply in an eventuality of a hard Brexit. And we've also done a lot of work on our own talent pipeline, which I'll talk about a little later. So we continue to take a sort of pragmatic view that we will press on with our plans to drive this business forward. And then see how, if at all, those plans were affected once we have greater clarity about the macro environment. In the meantime, I think rising costs, such as employment, rates, utilities, et cetera, coupled with the best flat consumer confidence continues to impact the sector. Total U.K. supply of June of last year dropped by 3.4%, with the restaurants taking the brunt with closures of 3.4% in the year. Whilst we also face those same macro factors, a reduction in supply can only help us over the medium term. And I'm sure that we probably -- that's probably already contributed to our performance. Now we remain convinced of having an 83% freehold estate and arguably the strongest lineup or stable of brands in the sector. We believe this is a strengthening competitive advantage for us. And it is our leasehold and the overleveraged competitors in the sector that will continue to struggle due to rising rents or the inability to invest in their estate, and we would anticipate further closures in the coming months.

As Tim has outlined, predicted cost increases this year are slightly lower than last, which, of course, is helpful, but we have to keep moving our top line if we're going to move the business forward. And that brings me nicely on to Ignite, which is our sort of change program. Now for those of you who've followed us, Ignite 1 kicked off in February '16 and ran them through to about February '18. Ignite 2 has been underway now for just over 18 months. So unsurprisingly, we're about to launch Ignite 3, and I know not the most creative of titles, but the thing is that carvery is now firmly ingrained in the business. And even some of you guys have played it back to us. It seems sensible to stick with it. As we say, Ignite is not about revolution. This is evolution. We call it filling the hopper, ensuring that we have a sufficient number of initiatives to work on, which coupled with a capital program, in aggregate, it means that we're actually more than enough to cover our cost increases and hence, move our business forward. And I'll update you more about the initiatives coming out of Ignite 3 of our interims in May. What I will do, however, is share a little detail on some of the things we've been working on that perhaps we haven't mentioned before. So for example, we've had 3 separate workstreams over the last year, looking at underperforming parts of our business. Now whilst you could argue that the day job of operations is to sort out underperformance, it is funny how bringing a fresh perspective and a greater profile to issues could have a big effect. We've had teams looking at the invested sites that haven't been meeting their appraisals, another team looking at sites with the biggest year-on-year declines and a further team focusing on our onerous lease sites. Over and above the day job, the operators have had to develop very focused action plans on each of the sites that they have to fall into 1 of those 3 categories. And then we've held a very structured review and visit cycle, and we've been able to allocate resources to turn around each individual site. All 3 cohorts have been able to demonstrate real improvements in profit trajectories, with perhaps the trading improvement of over GBP 1 million coming from the onerous lease cohorts without any capital investment being the most impressive.

Another workstream that I think I have mentioned before, is the menu engineering workstream. This team studies the performance of all our menus across the business and the levels of wastage that we were seeing. Sometimes wastage was being caused by ingredients only impairing in 1 or 2 dishes. On a menu, we call them orphan products or where supplier pack sizes were too big and were leading to ingredients that are coming out of date before we'd used them. A year on, we've reengineered our dishes to remove those orphan products, and we've worked with suppliers to get appropriate pack sizes, and we estimate the annualized value of that work being about GBP 5 million to our margin. So they're big numbers.

In the digital world, we've made giant strides this year, and certainly in our booking platforms, improving the user experience by crucially reducing the number of steps it takes from entering the sites to make a booking. Over the last 12 months, we've seen online bookings continue to grow by 25% and the conversion from sort of entering a page through to making a booking increased from 10.1% to 11.4%. And as the move to digital channels continue to pace, we see this progress has been critical. And of course, it also brings down our cost of customer acquisition. We have numerous workstreams still live that are now impacting the business. But the exciting thing for me is that whilst we're pleased with the results we've had, we know they're far from being optimal. In several instances, we have yet to roll out initiatives to all our businesses where we have mixed level of user acceptance or ability, which means there's further work to do to train and change. And we need to do that before we can reap the full reward. So even before we do Ignite 3, we believe we still have plenty of work to do that should continue to move the business forward. Whilst I'm keen to stress that the whole business has now momentum, I also recognize that the capital program is now becoming the engine room that it should be for the business. Four years ago, the business had underinvested, certainly in the customer-facing areas. And it was on 11- to 12-year cycle of reinvestment. At the same time, when it was investing, we weren't spending enough to really make an impact on a side-by-side basis. Over the last 3.5 years, we've moved the business onto a 6- to 7-year cycle of reinvestment and we made sure we spend the right amount on each site, including the externals and the toilets, which are areas that were perhaps being missed before.

In the first 2 years of the current approach, we prioritize the brands that was giving us a bit of a headache at the time, namely the Harvester refresh program and moving Crown Carvery, converting them into Stonehouse. And whilst the capital program undoubtedly has succeeded in stabilizing those businesses, they meant that the headline return on investments were suppressed. Three years on, today, we have all our brands in like-for-like growth. It means the starting points are stronger. We have proven investment formats for each of our brands, and therefore, we're now seeing a step change in our return on investment. The ROI from our FY '19 remodel program, as Tim said, was 34.2%, the strongest the business has seen in many years. And this bodes well for the future because we're still only halfway through the program to get the entire estate onto a 6-year, 7-year cycle, but I do believe we've now reached what I would call the tipping point.

At the same time, we've been innovating and looking at trialing new design templates in some of our businesses. So this on the screen is project Mandarin and our premium country pub estate, where we have invested more heavily in opulent design, which we believe reestablishes design leadership in that part of the market. We're quite critical in the gastro end. We have a similar project going on in Vintage under our very vintage tax, again, effective in premiumizing what is already a successful offer.

Browns is not a business we often talk about. Over the last 2 years, we've done a lot of work in the background around the menu and around that offer. But we now believe we have a winning design template already successfully deployed in Edinburgh and Bath that can now step change the performance of that brand. I think, as mentioned, is the -- in the interims, we've also opened a new concept, the George of Harpenden, producing fresh food from an open kitchen in a premium environment under the working title of Neighborhood Pubs. And we also opened our first Miller & Carter in Frankfurt, Germany. I haven't got a picture because it just looks like Miller & Carter, surprisingly enough. And we're pleased to see that both it and the George of Harpenden are now producing over 30,000 a week from a standing start, which is a good start, but still too early to draw any conclusions.

So Ignite and the capital program continue to underpin all that we drew to and drive progress under each of our 3 strategic priorities, namely, building and now maintaining a balanced portfolio, which is about accelerating the most successful parts of our business, systematically upgrading our amenity and getting on to that 6- to 7-year cycle of investment and ensuring that each of the brand propositions remain grounded in deep customer insight. Secondly, driving a commercial edge to the way we do business, putting the customer at the heart of all that we do and ensuring that we're really clear on how each pound of sales is converting down to bottom line profit. And finally, driving an innovation agenda, which is about making all the technology we have in the business really work for us, [questing] it if you like, making digital marketing and interim for the business, and being willing to trial new products and new concept development. And these priorities keep us focused and will remain the priority from the Ignite 3 program.

One part of the business that we haven't talked about much in the past is sustainability and the impact our business has on the environment around us. It's a responsibility we've always taken very seriously. But over the course of last year, we developed a relative new strategic plan to further our progress in this area. The ambition of our plan is to increase the positive impact we have on people and communities and to reduce any negative impact where our operations have on the environment. Now we've developed the strategy to align with the year-end sustainable development goals and have set ambitious targets in relation to greenhouse gas emissions, food waste, recycling and use of plastics, all of which we will now report in our annual report this year.

Now in a business of our scale, this sort of activity requires government -- a governance of process around it. And therefore, we've created a Head of Sustainability role and a board level subcommittee responsible for moving the business forward. And we have the ambition that it will generally become industry-leading. We have set up 4 cross-functional working groups that are already up and running. One, focusing on product sourcing; another on the attrition; one, looking at community issues; and another one, natural resources. Our intention is not to create a separate function in the business but to embed sustainable thinking for everything we do, such that it just becomes business as usual.

So we continue to cover ahead of a lot of ground. And of course, success depends entirely on our people and how we perform as a team. I was, therefore, personally delighted to see our engagement scores reach record highs across the business amongst our managers, our front-line team and the support team alike with overall engagement moving up from 78.9 to 81.3 last year. Our apprenticeship schemes also continued to gather pace. In the year, 900 young people into the business on an apprenticeship program and 1,600 of our existing employees also signed up to apprenticeship opportunities that were available to them. We also expanded our successful Chef Academy from 2 to several locations nationwide. And this year, we had 280 chefs recruited onto the scheme, both internally and externally, and it's now one of the larger schemes in the U.K. Our apprenticeship program gives us the opportunity to grow our own talent and provide progression opportunities for new and existing employees. And we understand that the best way to retain people is to progress their careers. So we do prioritize their progression through the organization. In the year, 1,030 people took a step forward in their career with us, either through a promotion to a management role or through additional responsibility of a larger or more complex business.

Looking forward, we have the festive season on the horizon, which will dictate how strong our first quarter will be. As always, it's difficult to be really sure how strong Christmas is looking. It very much depends on last minute walk-ins and, of course, favorable weather, fingers crossed for no snow. But we do flat bookings, obviously. Now this year, one of the Ignite workstreams rolled out some software called [Collins] to our non-food business and non-restaurant businesses, which effectively, is a sales tool that allows customers to book directly online and book their respective functions. As expected, bookings in these venues are way up from where they were last year, but although we recognize that given the manual nature of last year's process, it's impossible to be 100% sure of last year's pace. So we'll just keep pressing on. So I guess, we're pleased with the progress being driven by Ignite. We recognize we still have a lot of work to do before we can say we've optimized the rewards we're seeing from that program. And it's encouraging. We have a lot to go at with Ignite 3 still to come, to fill the hopper in the new year. We're, therefore, confident of being able to maintain the momentum we've built. And whilst there's still macro factors to consider and the ongoing cost headwinds, we believe that we have the business moving in the right direction. This means that as we continue to pay down our debt and our pension commitments, which should at the very least, see this reflected in increasing shareholder value. Thank you for listening, and I'm more than happy to take your questions. If you could give your name and the company that would certainly help.

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Questions and Answers

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Jamie David William Rollo, Morgan Stanley, Research Division - MD [1]

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Jamie Rollo from Morgan Stanley. Three questions, please. First, Phil, I'm just sort of interested as to how you approach Ignite and what you want to achieve from that? Did you sort of start the year with a profit target in mind? And then see what you have to do with Ignite to get there? Or is it reverse? You sort of moved in with initiatives and sort of see where you end up? And as part of that is, could you talk about how maybe the managers are incentivized to hit some of those targets? Secondly, if you could talk a bit about the quantification of the underperforming sites, maybe what the revenue pool is there, just so we can think about how big they are. And finally, any interest in any bolt-on deals? It's been about 5 years since, I think it was Orchid's just don't get out the market, I guess, but any interest in using turnaround skills and other assets?

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Philip Urban, Mitchells & Butlers plc - CEO & Director [2]

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Okay. Firstly, Ignite, I think of the 2 approaches. No, we don't start the year and think we need to find GBP 40 million or whatever. We tend to move up to versions of Ignite. Ignite 3 will be no different, is we effectively see how one of the initiatives we can do and what it adds up to. And I suppose, when we first started, we knew we had circa GBP 150 million, GBP 160 million cost headwind over the following 3 years. So we needed a program that's going to at least cover that. And I think Ignite 3 would be the same. We would just refresh what we've got in train. We'll make sure the things that have partially landed are landing fully, but I'm sure we'll also fill that hopper and have a number that's far bigger than we probably end up delivering. But if we get anywhere close, we'll be more than happy. In terms of the size of the cohorts in the fourth quarter, I'd -- we'd have to come back to you on the specific.

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Timothy Charles Jones, Mitchells & Butlers plc - Finance Director & Director [3]

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It's probably about -- it's about 60 sites in terms of use for the waste. Their average take away is probably low, low, [teens] [12%, 13%]

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Philip Urban, Mitchells & Butlers plc - CEO & Director [4]

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And in terms of being -- I think I've always said when I asked, are we looking at other consolidation opportunities. I think we've always said we will remain opportunistic. And I think that's probably the right way. It's not something we're actively chasing down at the moment. I think there are still a lot of moving parts in the macro environment and the businesses that probably come into market or funds running into trouble in a leasehold and have all those issues. So -- but we'll remain opportunistic for that, and it's something certainly as time goes on, we're getting better and better paced on the financials for them.

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Timothy William Barrett, Numis Securities Limited, Research Division - Leisure Analyst [5]

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Tim Barrett from Numis. Two things, please. On the cost outlook, you talked about GBP 60 million in the gross number. But do you think you can mitigate GBP 25 million again? How are things looking on that? And so as linked to that, what level of like-for-like sales would you look at margin neutrality? And then a question on the balance sheet and -- you're starting to build up cash now. I think you always said you wanted to pay your fixed obligations. But when will you look at returns to shareholders?

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Timothy Charles Jones, Mitchells & Butlers plc - Finance Director & Director [6]

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Cost mitigation, I think more of the same, and we'll go into -- as Phil said, this Ignite fever, we mitigate the GBP 25 million in this year. And I would expect we'll probably maintain a set of targets around the same (inaudible) really. In terms of like-for-like, I mean, you said margin, the answer is different because it means to holding profits flat versus lean holding the percentage margin flat. And I don't think holding the percentage margin flat is something that we would guide to in the next few years. So I think cost savings will continue but we're probably going to have to run faster at the sales line in order to be able to keep our profits flat or slightly growing, which is where the current consensus is.

In terms of balance sheet gearing, what -- I mean, what I would encourage you to do is not look at our sort of optimal capital structure. And the first instance on the balance sheet but I would look at it through the cash flow because, really, the amount of debt that we can afford is the amount of debt service that we can sustainably fund off our ongoing cash flow. So we've got our obligations to the pensions, what have you. One of the features of the securitization, of course, is that whilst you do gear, your debt service does not come down so our debt service stays at GBP 200 million a year. So you get to sort of 2014, at which point, funds and such come down. So we are degearing, but it's not necessarily giving us the opportunity to take them or get them off benefiting from that within our cash flow. So for the moment, we'll just look to stay on that path. I think the sort of decision points for us, come hopefully, in 2023, when we hope we've paid off the pension fund. If that is the case, that would give us GBP 50 million a year more cash. So it will be a decision point there and I think the next decision point to say is about 2030 when some of the bonds start to expire and, therefore, our debt service comes off GBP 200 million. But I'd encourage you to look at it through the cash flow because that's really the benefit for us rather than what's on the balance sheet.

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Ted Nyhan, JP Morgan Chase & Co, Research Division - Analyst [7]

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Ted Nyhan, JP Morgan. Firstly, you've given figures for the average spend prior to the growth. Could you give us a sense of distributing premiumization and like-for-like price increases in that? And then secondly, could you speak a bit about site opening plans and disposal plans any very tail sites in your state that you're thinking of disposing?

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Philip Urban, Mitchells & Butlers plc - CEO & Director [8]

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Yes. Yes, I mean, I think (inaudible) had growth split between the 2. It's difficult to drink. It's easy to look at a like-for-like price because if the (inaudible) grown, the (inaudible) grown. But this has changed, right? I think probably our like-for-like price is probably 2% to 3%, something like that and the rest will be premiumization. And in terms of opening plans and disposals. I mean we're sort of opening 7 to 10 sites a year, really have done the last couple of years. I think that's what you should see going forward. There tends to be (inaudible) and in turn, we're working for internally last year and a couple of other ones. So I mean, I think that's probably where we'll be. And in terms of disposals, we sold -- I think it was 5 sites last year, because we've got a very attractive opportunity, it's quite a big premium to our book value for those sites but you shouldn't expect to see any material disposals from us. It would be small and opportunistic rather than anything sort of concerted.

Yes. James?

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James Robert Garforth Ainley, Citigroup Inc, Research Division - Director and European Hotels and Leisure Analyst [9]

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James Ainley from Citi. A couple of questions from me. Just following from the commentary around like-for-like pricing. So can you talk about what's been happening to the trajectory of like-for-like volumes in the business? Have those resolved in the meantime? That would be great, please. And then secondly, can you update us on the latest on the RPI-CPI case (inaudible)?

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Philip Urban, Mitchells & Butlers plc - CEO & Director [10]

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Yes. Okay. So in terms of volumes, both were improved. So if you look at drink volume, we're about minus 2 in FY '18. We're about minus 1 in FY '19. Food volumes have much more dramatically improved. So they're about minus 5 in FY '18. But we're actually flat in FY '19. It's quite a dramatic increase in that. The court case, unfortunately, there's not really anything I can say. The case will be heard next summer. Until that happens, it just sort of rumbles on with Lloyds, but it's not done until it's done, really. So it's not baked into our numbers. So it's sort of upside to that. And we'll see what happens when we get there. Rich?

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Richard Michael Taylor, Barclays Bank PLC, Research Division - Analyst [11]

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Richard Taylor from Barclays. Firstly, on rent costs whereas your rentals are pretty small, but you must be surrounded by CGA properties and opportunities to get rents lower? Or you kind of your lease term's too long? And secondly, just on pay. Can you speak to the differential for you guys over and under 25? And if [ventilation] does change, what sort of impact would that be if it's normalized amongst all age groups?

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Timothy Charles Jones, Mitchells & Butlers plc - Finance Director & Director [12]

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I mean, I'm certain on the CGA point. I mean, I think, as I say, closures are good news for us. CGAs in the short term, particularly help, but I always think CGA is just a stay of execution with a business leader of CVA who has some fundamental things to put right before it can trade. Are there opportunities? I mean, immediately with the CVAs, then that's no. But then down the line, I think when the some of those developments, some of the problems and the rent negotiation that can have a benefit to us. I want to come back to look at how those rentals being a bigger issue is when we see supply coming out of the market, that's got to be good news. You don't see an overnight jump in your business, so you do pick up a little bit. And then, of course, actually, you end up back and say, you can almost pinpoint that to when a competitor shocks you that's when you realize that's what kind of business. So yes, unfortunately, for others, but I think we'll see some more fallout. And I think that's probably good for us who remains in this part of the business. The point on labor and ...

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Philip Urban, Mitchells & Butlers plc - CEO & Director [13]

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(inaudible) going under 25.

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Timothy Charles Jones, Mitchells & Butlers plc - Finance Director & Director [14]

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Yes. I mean have -- we effectively do have differential rates. But we also -- we give living wage, we move -- we don't rate differentials. So when we are going to ship, we move everybody in proportion. So I think, obviously, it's our biggest cost in the business, depending on how big that living wage increase is, I would see immediate impact to our property business. So it's not something we can keep sort of looking at driving, [reducing roles], if you like, in businesses, but it's something that I think the whole industry has taken on board, it's the right thing to do. And actually, living wage growth, there's more money in the economy that you get from back to the tools anyway. It's the cost of doing business actually every single year.

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Julian Kenneth Easthope, RBC Capital Markets, Research Division - MD & Analyst [15]

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It's Julian Easthope from RBC. Just a few things. I think last year, you had a stunning Christmas. And I just struggle with stunning years, 1 year comes a tough comp to next year. I just wondered how their bookings are looking and how confident you are about the festive season? And second thing, in terms of cost. I think the labor part, you're actually proposing potentially going to straight to a GBP 10 national living wage. Just how difficult would that be? And what sort of -- what are you going to do about it effectively? And also, I think on the slide, you show that the 2018 upgrades showed a GBP 20 million bounce back for -- in 2019. So presumably, the 2019 investment you made in CapEx? And would you expect a similar sort of improvement? Bear in mind, you actually had a better start in 2019.

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Philip Urban, Mitchells & Butlers plc - CEO & Director [16]

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(inaudible) it's almost Christmas. (inaudible). Okay, okay. Yes. I mean, Christmas, as I said there, we do track them. I think, yes, you're right. We had a very good Christmas. And I think that always gives you a strong comparable. But I'm fairly comfortable -- confident. I think whenever we've spaced long and hard about forward indicators to Christmas, and they -- there will be never accurate. So whilst, as I say, our colleagues' businesses, the ones that are (inaudible), they haven't had additional booking engine, are looking very, very good on paper. I'm a little bit skeptical because we don't know how many of those people were booking manually last year. So we just keep pressing on that. I don't see -- I mean, I'm probably fairly optimistic. I think my time in this business, we've always done well with peak trading times. I think we have these sort of brands that people want to go to Browns, Miller & Carter, Premium Country Pubs do very well over Christmas. We obviously have more Miller & Carter this year than we did last year. So I am confident and optimistic, whether it's the one thing I'm interested at. I think the election and Brexit, is that making people notice that distraction? I'm not overly worried about that. If anything, people will be coming out to vote might then pop into one of our businesses on the other hand. So I think -- for everything we can see, we're comfortable that we right now, and it's a walk-in business it's just what it really dictates.

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Timothy Charles Jones, Mitchells & Butlers plc - Finance Director & Director [17]

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Yes. I mean, living wage. And living wage is GBP 8.21 at the moment. So that went up to GBP 10 overnight, that would add many tens of millions to our cost base, of course. There's probably 3 impacts. So firstly, obviously, we'd have to have a very, very close look at the economics of the label we use and where we have to shed it. I think, secondly, some of that is going to come back to the tills. So we would need to position ourselves to take advantage of that injection of spending power into people's pockets, a lot of those people would be our sort of type of customers. And the third impact is, I expect a lot of people will go back before us. So I think you'll see an acceleration capacity come out of the market, which would probably help us well. So we need to move to traditional to take advantage of that. And your last question, I think, is on capital's on plan. Yes. I mean, the capital plan that we had for this current year, will be at the same scale or slightly larger than the year we just reported, and we're not sort of planning or anticipating for reduction of returns. So I would expect a similar uplift coming through the P&L. Anna?

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Anna Elizabeth Barnfather, Liberum Capital Limited, Research Division - Research Analyst [18]

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Anna Barnfather from Liberum. Just to follow-on, actually, from that CapEx and those CapEx plans. So you've got great improvements in the uninvested and the invested but I'm trying to work out, with all the premiumization and perhaps, intents to go again, what is the long-term maintenance CapEx level when you've achieved that 6- to 7-year cycle? And what is the split between some major remodels or rebrand? And just ongoing returns (inaudible)?

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Philip Urban, Mitchells & Butlers plc - CEO & Director [19]

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Well, I think our maintenance has typically been GBP 60 million to GBP 70 million within our overall capital spend. And I think it will stay around there. I mean clearly, as we come to a shorter life cycle, 6% to 7% from sort of 10% to 11%, there may be some advantage in there but slight different maintenance capital that may happen. At the moment though, we're picking up more investments through Ignite, particularly Ignite 2 and what have you to be able to generate the study. So I wouldn't guide you away from maintenance capital remaining within the same level. And in terms of the mix of what we call a return-generating capital that sits on top of that, I think we'll still end up around GBP 170 million a year. And the blend of that between sort of conversions or growth projects that (inaudible) will just ebb and flow. I mean we had a lot of conversions recently because there was quite a lucrative sort of pipeline of turning Harvesters into Miller & Carters, for example. That sort of -- that slowed down and we've taken most of the low-hanging fruit there. So there's been slightly more remodels in the current year that we just reported. I think as you look forward, there'll be other opportunities or new brands such as the ones we thought we want to roll out, and you might find conversions come up again, then we'll do that, and it will take you back to the model. So I think it will ebb and flow. The best way for you to think about it is in total, we'll probably still come to about GBP 170 million and GBP 175 million and about GBP 70 million of that would be maintenance and the rest of it return to generating. Nigel?

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Nigel Andrew Parson, Canaccord Genuity Corp., Research Division - Analyst [20]

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Nigel Parson from Canaccord. Could you give us an update on your delivery initiatives. I think there was some chatter and the question you might look to continue and what you're seeing in the quarter (inaudible)?

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Philip Urban, Mitchells & Butlers plc - CEO & Director [21]

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Yes. I mean, I think as we've said before, delivery is here to stay, and it's more the consumer wanting what they want, when they want, where they want it. And I think 3 years ago, we sort of said we believe it's necessary adding the fact that attendance is not for us so we embraced it and that's what we tried to do. I think we have about 270 businesses now, some we just seasoned with delivery. And we have, funny enough with -- it's [preceded] Ignite 3, but we have one of our sort of 2 new workstreams that have emerged, is what we call [Delivery 1]and [Delivery 2]. Delivery 1 is about making what we currently do work better, which is working with Just Eats and deliverers, but it's about making -- I think what we find, the difference between a site that's doing lots of delivery and a site that isn't invariably comes down to the person running it. Is he or she really behind it? Do they want to make it work? So there's a lot of work to do just to get value out of that. And so we have a full-blown workstream driving that. So we would expect under Ignite 3, for that to be quite a good value enhanced quite quickly -- value-enhancing workstream. And Ignite -- and delivery, too, is looking at coming at the other way and say, actually, if Ignite -- if Delivery 1 is about selling what we currently do for delivery, Delivery 2 is about saying, yes, let's view our state of a network of kitchens, some of which aren't being used at certain times a day. But actually, we already have a network of dark kitchens which we operate. So could we actually do delivery-only brands out of those kitchens? The consumer is oblivious, they don't really care which kitchen it's coming from, if it's the food-type that they're ordering. And therefore, actually, we don't have to build our kitchens. We've already got them, and we have the right product offering and sold the right way. And some of that actually -- that could generate a new income stream platform. That's quite embryonic. And I think in Ignite 3, we'll be one of those ones that will be pushed out of value. And we also have a couple of, I think, it's 3 delivery -- effectively dark brands already coming out on one of our businesses in London. They're actually the delivery-only food offer that's delivered out one of our kitchens and you'd be unaware which business it came out from. Doug?

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Douglas Jack, Peel Hunt LLP, Research Division - Analyst [22]

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Douglas Jack from Peel Hunt. Just a quick one on that. Would you say the like-for-like trend in (inaudible) volume the minus 5 for that. Is that largely due to delivery, do you think?

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Philip Urban, Mitchells & Butlers plc - CEO & Director [23]

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Not largely in part, not in -- not materially enough to just grow 5%, no. But I think -- I mean, we look at the growth of delivery and realize they're a very small share of that, and we think there's a lot more upside from Mitchells & Butlers if we get that together. So that's why we're going for it.

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Douglas Jack, Peel Hunt LLP, Research Division - Analyst [24]

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And could you track the cannibalization from the (inaudible)?

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Philip Urban, Mitchells & Butlers plc - CEO & Director [25]

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It's difficult to be tracked about that. I think when you step back and look at what's happening in the wider sector in volumes [and the aggression] you just have to conclude that some of those food occasions are now being replaced. You'd have to conclude that. We couldn't do that on an individual site basis. But I know it's real, which is why we need to embrace it while we're here. One more. One more here.

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Unidentified Analyst, [26]

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(inaudible) a relatively boring question and kind of housekeeping. IFRS 16, some of the experience we've had so far in this is that some analysts are early adopters and some are late adopters, and you end up with a consensus in the middle that's meaningless. By choice, would you prefer us all to adopt IFRS 16 for the interims in the full year? Will you report base? Or would you prefer us to wait until that we have a bit more information in interims?

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Timothy Charles Jones, Mitchells & Butlers plc - Finance Director & Director [27]

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So well, we try to be very open with you now what the impact is going to be, okay? So it's all out there. If I were you, I would go on a pre-IFRS 16 basis at the moment and keep things consistent, and then we can help you at the interims, we can make a switch there. I think that would be easier than trying to bake in all the moving parts of these results, the upgrade (inaudible) and the translation. So I would stay on pre for now. But we've told you, we've given you the sort of road map for how you are going to have to do it later.

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Philip Urban, Mitchells & Butlers plc - CEO & Director [28]

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Okay. Thank you very much.

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Timothy Charles Jones, Mitchells & Butlers plc - Finance Director & Director [29]

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Thank you.

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Operator [30]

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This concludes today's call. Thank you for joining. You may now disconnect your lines.