Sector discounting levels ‘unsustainable’ as M&B refrains from following suit: Urban said: “If a competitor does a big discount for a sustainable period we can see the impact it’s having as soon as the next day. We have so far refused to go down that route and fight fire with fire by discounting beyond our normal levels. I don’t think the level of discounting we are seeing is sustainable.”

 

New concepts yet to generate level of returns to justify roll-out: Urban said M&B’s new concepts Son of Steak and Chicken Society, which the company is trialling in Nottingham and Finchley, north London, respectively, were in an “incubation period” because they were not yet generating the level of returns to justify roll-out. However, he said what they had done was create an ethos of innovation in the wider business. He added: “Son of Steak has created an offer to millennials and students that is busy in the evenings. It was previously a Harvester that wasn’t performing greatly but did trade through all dayparts. Both businesses were launched in pretty quick time and we are getting good customer feedback. What it has done is create an innovation ethos in everything we do. Will we roll out? It’s too early to say. There are opportunities for both to go into empty trading spaces but at the moment it’s not a priority for us.”

Second wave of initiatives: Urban said the company was now working on a second wave of initiatives that would be in “full flow” by 2019. It would continue to build a more balanced business with further capital investment and estate management. The company would instil a more commercial culture through its sales and service, external spend and further labour deployment and stock and waste management initiatives. M&B would also drive its innovation agenda through menu process and pricing as well as digital marketing. Urban added: “This is another step change in reducing our labour costs.” 

Crown exit and premiumisation: The company is on track to exit its Crown Carveries brand before Christmas following conversions to the Stonehouse Pizza and Carvery format, which had proved a “successful premiumisation route for the estate”. It opened 46 Stonehouse sites during the year taking the total to 82. It also still expects to open its 100th Miller & Carter restaurant in 2018 having added 32 sites in the financial year, taking the portfolio to 84. It opened 27 of its upgraded Harvester sites taking the total to 59. The company said sites following investment were generating sales uplift in excess of 10% and it was now building a more balanced estate. The company’s investment cycle was now six to seven years rather than the 11 to 12 years previously.

 

Accommodation: Urban said accommodation would become more of a priority in 2018, with the company opening its first purpose-built lodge, in Edinburgh. He added: “It’s something we are now giving more thought to. It’s low-hanging fruit for us. Accommodation is certainly a way for us to swell assets we already have.” It has seen like-for-like sales growth of more than 20% following investment. It currently operates accommodation across 52 locations with 900 rooms and carried out 15 remodels during the financial year. The company aims to bring accommodation in line with the feel of the site it is within, taking opportunities to premiumise.

 

Mitigating cost headwinds: The company said it expected to have circa £60m of headwind this year of which it believes about £26m can be mitigated directly before the benefits of trading. Urban said trials of auto-order and kitchen preparation systems would further “improve dish availability, leading to greater customer satisfaction and sales”. The company expects costs to be “broadly in line” with last year, even accounting for additional headwinds such as £4m for the sugar tax that will be introduced in April.

 

Delivery: Urban said delivery was a small part of the business, generating revenue of between £1m and £2m, but there was potential to roll out delivery to a further 300 sites as the company extended its partnerships with Just Eat and Deliveroo. The company is also trialling order at table at O’Neills as well as click-and-collect with Just Eat.

 

Disposals: The company generated £46m from the disposal of 79 sites during the year and said it didn’t expect sales to continue at that level as it had now identified most of the sites that did not create long-term value. It said it looked at a number of criteria before deciding on a sale. This included converting to a different offer before finally with freehold sites looking to see if it could find a suitable tenant. M&B said it had about 50 to 60 such sites. Once all options were exhausted, it would then seek a buyer.

 

Dividend: The company also defended its decision not to pay an interim dividend this year, with the political and macro-economic uncertainty being the key reasons. The group intends to reduce debt by about £1.5bn, including pension of circa £300m, during the next ten years. Given the cost environment, it said meaningful Ebitda growth in the medium term appeared unlikely and therefore the payment of a dividend would compromise its debt reduction plans.

Analyst view: Goodbody leisure analyst Brian Devitt said: “Overall an interesting presentation from M&B. The decision to not pay an interim dividend will obviously receive the majority of attention. We did not come away from the presentation feeling this was a result of underlying trading weakness in the business (current trading is strong and Christmas bookings are up year-on-year). Rather, it feels that a strategically financial decision has been made to prioritise debt reduction over dividend payments. This can be justified in an environment of heightened uncertainty (and management appears particularly concerned about the political backdrop) but will clearly be seen as a disappointment to some. Our thoughts on the stock are broadly unchanged – the sector could be heading towards a very challenging period in 2018 that creates a reasonable level of forecast risk (cost pressures, market slowdown and competitive discounting) from which Mitchells & Butlers is not immune. On the positives, given good underlying trading and continued strong operational execution we believe the group is likely to outperform many of its peers. However, we fail to see a near term positive catalyst and we reiterate our ‘Hold’ recommendation. The business has started the year well as per this morning’s statement (like-for-likes +2.3% in the first seven weeks). Management is very satisfied with the execution of the group’s organic initiatives and are confident the business is benefitting from those. Miller & Carter and Stonehouse brands continue to trade well and generally the more premium brands within the estate are outperforming value. New concepts (such as Chicken Society) have received very positive customer feedback but volumes are concentrated around the evening times so returns not at a level yet where greater roll-out is justified. On cost headwinds, the group faces a circa £60m headwind this year of which it believes circa £26m can be mitigated directly before the benefits of trading. On the external environment, management suggested discounting has increased in the market to unsustainable levels but M&B has refrained from discounting above normal levels. Material supply growth is not expected from here but the challenges of overcoming well flagged cost headwinds and the uncertainty from the political and macroeconomic environment has driven a significant degree of caution on outlook. The decision not to pay an interim dividend this year was unsurprisingly a key area of focus. Management stressed the aforementioned political/macro uncertainty were the key drivers of this decision. They devoted a considerable amount of the presentation explaining the capital constraints of the group, the long-term balance sheet plans and the factors that determine capital allocation. The group intends to reduce debt by circa £1.5bn (including pension of circa £300m) over the next ten years. Debt service will total circa £250m per year for the foreseeable future, including the agreed pension payments. Deducting this from Ebitda of circa £420m, leaves a surplus of circa £170m which roughly equates to the normalised capital expenditure budget. Given the cost environment meaningful Ebitda growth in the medium term appears unlikely. Therefore, the payment of a dividend would compromise the debt reduction plans.”