Mitchells & Butlers Stock

Right. Good morning, ladies and gentlemen. Bang on 8:30, so we'll start. Welcome to the interim results presentation for Mitchells & Butlers. Our first half was a tale of 2 quarters with quarter 1 being very strong, culminating with a great festive period, followed by quarter 2 that was impacted by poor year-on-year weather and to a lesser extent, by the macroeconomic backdrop. That's why we're delighted with our first half year results as despite quarter 2 softer growth in quarter 2 and despite the impact of incremental employers national insurance and a very high cost of stake, we managed to bring profit in just slightly ahead of expectations and slightly ahead of last year.

To us, that demonstrates the power of our Ignite program and the work done on cost mitigation. And as we believe the macro issues are temporary, we are maintaining our focus on the midterm where debt service costs significantly reduce where the business is going to be very well placed. I'm delighted to say that we are joined today by Emma Harris, our new CFO, but Tim will deliver his final city presentation this morning, but both he and Emma will be available to meet with you after the presentation. So I'll now hand over to Tim, who will take you through the financial results, and I will return to add color to the things we're working on.

Good morning. So as Phil said, I'd like to take you through the summary of the financial results for the 32nd and final time. We feel we had a really good first half of the year, as you can see here on this slide. Sales remained strong, certainly well ahead of the market. such that despite very stiff cost headwinds that we talked about previously, we were able to maintain our operating profits at GBP 181 million. And EPS, which continues to benefit from a reduction of debt, lower interest charges was up 3.6%. So a strong performance in this market.

It starts with sales. I've set out here the flow of the sales on a monthly basis over the last 12 months. Now clearly, individual months can be quite impacted by calendar event movements. So you shouldn't read too much into the individuals. But overall, across the first half, we had a like-for-like sales increase of 3.3%, with volumes marginally down and driven mainly by food. Now within that, we had a very strong start to the year, very strong festive season as we've previously reported with Q1 like-for-likes up 4.5%. Since then, the pace across Q2 is slightly slower, 1.8%. Phil is going to talk a little bit about that. Certainly, adverse weather was a key factor within that. But also it's harder to discern, but possible indications of some sort of response to macroeconomic pressures.

We look at how that affected our EBIT. You can see here the various drivers and elements that contribute to our performance. We are increasing CapEx justified by very strong returns in excess of 30%. Current year projects are dilutive, of course, for us for this year as a result of closure and preopening costs. But naturally, they lay the ground for profit growth next year. So we're continuing with that plan and indeed scaling up that plan. We're also driving value from like-for-like trading and from our Ignite efficiencies, and they all came together to balance what were very high cost headwinds in the year -- in the half year, disproportionately weighted to the first half. And impressively, we talk a lot about costs at these sessions because it's been a very important challenge for us.

But I've set out here what we consider to be the pre-mitigation cost headwinds that we face as a business. Now this year, we had talked about GBP 130 million premiums. We think it will be slightly lower than that, largely as a result of reductions in business rates and also red meat not being quite as extreme as we feared it was at the beginning of the year. We've also now closed out our energy purchasing year. So taking that risk off the table. So slightly lower cost headwind this year than we've previously flagged. That's going to be weighted 60% towards the first half. So we're like we're through the worst of it as a result principally of National Insurance contributions from employers, which we've now annualized on the increased rate. So that's no longer a headwind for us.

If I look forward to next year, we would anticipate the challenge becoming slightly more benign or slightly lower with cost inflation of GBP 95 million, representing about 4% of our cost base. Probably one area of risk in that is energy. We brought forward 15% of next year's energy as I stand here today. So there's scope for a little bit of volatility on that, and that's why you've got a slightly blurry bar for energy there. Cash flow was very strong. We have a typical seasonality whereby working capital is an inflow in the first half due to our payments profile. So a lot of that will reverse in the second half as we did last year. But beyond that items of note, CapEx increased to GBP 117 million as we're now back on our 7-year remodel cycle that we've talked to you about, justified by strong returns and indeed also including the purchase of a number of new sites.

So we bought 5 new sites within the first half and indeed a couple since the balance sheet date as well. So we'd expect full year CapEx to be slightly higher than we guided before up to about GBP 230 million with, I suspect, more new sites, single site acquisitions taking place. We've also paid the final consideration of our Pesto business of GBP 11 million. And lastly, tax paid. For the past couple of years, our tax paid has been depressed or alleviated, if you like, by the fact that we built up a number of losses during COVID. We are -- we've sort of used all those losses up, if you like, through the course of this year. So we'll start to see our cash tax paid slightly higher. But overall, a really strong cash performance and indeed, GBP 30 million in excess of what we need to pay down amortization in the first half.

And you can see the value of that cash flow on our balance sheet, reducing our gearing, net debt now just under GBP 750 million, about 1.6x EBITDA, excluding leases, alongside the transformation of our pension position to now what is a derisked asset of about GBP 100 million. We haven't revalued our property estate at the half year this year. We'll do that again at the end of the year. But we do have a further increase in net assets to now GBP 4.91 per share. So a very strong balance sheet. And as we've said before, consistently, over time, the Board will continue to keep the balance sheet and the capital allocation strategy under review, particularly with respect to break costs and new issue costs. So pulling that together and summarizing it, we think it's a strong trading performance in the first half, doing very well to maintain operating profit despite stiff cost headwinds.

Progress has also been made across all of our scorecard, cash debt returns, staff scores and guest scores. And we see a positive outlook looking forward. We expect to continue to outperform the sector, and we do see cost headwinds beginning to moderate. Now as I said before, this is the last time you'll hear from me. So we thought we'd sort of use the opportunity to reflect on where we are today and how we've got to where we are today. There have been a number of challenges in this sector over the last 15 years, and none of you here need reminding of those, so I won't go through them. But we feel we have met all of those challenges head on, and we now face the future in great shape as a business. We have a really strong financial position. We've navigated net debt down from over 6x EBITDA to under 2x. We've transformed the pension position from a GBP 0.5 billion deficit to GBP 100 million asset.

And looking forward, we will see value from that degearing as a number of capital allocation options and flexibility will open up for the group. We have a fantastic portfolio of invested sites. We have a large and stable of brands and formats that we can use to maximize the trading from each of those sites. And I think we have a business and management team that has now established a clear track record of continuous improvement and delivery. So we don't know what the future is going to hold, but we do believe that M&B faces it with confidence and is set up very well for success. With that, I'd like to hand you back to Phil...

Thanks, Tim. So I'd like to start by looking at sales in a little more detail. Now we came out of quarter 1 with 4.5% like-for-like sales growth, but poor weather at the start of January dampened our January performance. And you can see that both our and the market sales dipped as we came out of the festive season. And of course, year-on-year weather and a shift of key dates, not least Mother's Day and Easter further distorted year-on-year comparisons, making it quite difficult to get a read with the sustained very hot spring weather of last year not being repeated this time around. The black bar merely shows the impact of moving calendar dates and/or weather anomalies.

Pleasingly, our guest metrics remain at an all-time high, which suggests to me that the brands are in very good health, and it's the frequency of visit that has dipped as the consumer is being a little more careful with their spend. There's been a definite split between our wet-led and dry-led brands with the pubs having a strong performance and restaurants bearing the brunt of reduced frequency. For example, in my 11 years, Miller & Carter has been a big driver of company performance, but with a sharp rise of steak as and input cost, partially reflected in our selling prices, steak has clearly become more of a luxury item at the moment, which has given Miller & Carter a tough first half.

The guest review scores are as strong as ever, and the key calendar dates have traded incredibly well. It tells me that the brand is in good shape, and I'm convinced that we hold our nerve when the macro environment improves, M&C will bounce back quickly. Quarter 2 finished with 1.8% like-for-like sales growth, but it's been very difficult to get a clean read on underlying growth because there are so many moving parts and due to the poor year-on-year weather. There is no escaping that weather is a key factor to our business. And so far this year, it's pretty much worked against us. If I look at our daily sales, rain is a factor, of course, but so is temperature and sunshine hours.

Although we have a well-diversified estate, when there is a big drop in year-on-year temperature as there's been this year, we see the business that goes into decline. But when temperature is close to last year, we go back into growth. And when it's in this year's favor, we see big growth. In quarter 2, 69% of the days were colder than last year and 91% of the days had fewer sunshine hours. And in the last 3 weeks, 81% of the days were colder than last year and 90% had fewer sunshine hours. On Tuesday this week, Propel, one of the industry trade journal, headlined the impact on rain and colder weather had on April sales. So like I say, on the odd sunny day that we have had this year, we've seen the business jump back into solid growth. So we know the underlying trade is still very, very good.

As I say to my team, there's little merit from wasting too much time in trying to disaggregate result. And instead, we use this as a catalyst to work harder and faster on things to drive the business forward. And this is where Ignite and our way of working comes to the fore. As always, we don't believe there is a single silver bullet, but if we make progress on numerous fronts simultaneously, you can make a big difference to performance. Now for me, our half 1 profit was one of the best results that we have delivered in my time as CEO as we knew the cost headwinds we faced at the start of the year were at an unprecedented high. However, we faced into them with the same sort of rigor that the team has approached every challenge and to have flat profits despite the fact that we had to absorb the incremental GBP 12 million of employees National Insurance and despite the super high cost of stake, that has been really satisfying.

Our work on reducing energy consumption is a good example of activity undertaken in recent years now driving value solar panels, voltage optimizers, improved local housekeeping and now the Internet of Things project, which enables remote switching on and off of kit when the businesses are closed, helps to mitigate for other cost increases elsewhere. As you would expect, we have work streams in place looking at reducing consumable costs across the business. We have procurement and product specialists ensuring that we optimize our scale and that we limit exposure to the highest inflated categories, and we continue to employ our labor deployment. In many ways, half 1 demonstrated the real value of Ignite to the business as the many initiatives have helped to absorb extraordinary cost headwinds.

Now Ignite has a good blend of sales volume and spend initiatives balanced by some solid efficiency improvement projects, which I'll cover off in a few moments. However, we have used the tougher sales environment as a catalyst for embracing and implementing a suite of initiatives brand by brand to ensure that we optimize trading where we can in the short term. And to give you some examples, there is a lot of discounting going on or promotion going on across the sector right now, but we believe it's far better to be targeted when you promote, and we're trialing a series of price-led promotions in specific brands aimed at specific day parts. It's interesting to see that when we do run a week of discounted offers, which we do every year, the take-up is immediate, which would further cement the view that the consumer is currently being cautious but can still be attracted by the right offer and messaging.

Now if you don't want to take more price and you've done all that you can to attract new business, the other area to go is spend ahead from the existing business that you do have. And we have a number of initiatives in train to sell up to our guests, but in a way that adds enjoyment to their visit. Now an obvious example of this would be selling a second drink. We believe that this simple action spotting when guests are nearing the end of their drink and offering to bring a second drink to their table, could be worth several million given the huge number of drink transactions that we do in any year. Moving to costs. Now we have made great inroads in recent years in terms of understanding our labor rostering and we have driven efficiency year after year in this space.

However, we don't see labor control as about being about cost cutting, but more about optimizing deployment, ensuring you have the right number of team hours by day part. As well as we've done, we know that we still have far too many fat hours, those being hours where our labor rostering system is telling us that we have too many hours deployed off-peak times. And although never easy to deliver, those hours could in theory be taken out without impacting trade at all. Conversely, the system also tells us we have too many thin hours, those being the peak trading hours where we have insufficient labor to deliver our offers in an optimal fashion and where we had we deployed more hours, we could reasonably expect to take more sales.

So the challenge is obvious. move fat hours to thin, and we're determined to land this opportunity that will start to benefit half 2 and set us up for next year. The point of all of this is that we remain excited and positive about our ability to continue to outperform the market. And we believe that even if the Iran war continues, the warmer days and nights, the World Cup and more favorable comparatives in half 2, we'll see the growth rates climb again. And if they do and we deliver on our cost aspirations, then we will finish this year strongly. As for the World Cup, we would normally be saying that net-net, a World Cup tournament will be marginally negative for the business with the gains in our wet-led businesses being offset by the impact on food sales.

However, the timing of the matches this time around should mean that there's probably a slight opportunity because there will be less impact on the restaurants, and we will be extending licensing hours in some of our wet-led businesses for some of the later matches. As always, how far England and Scotland will decide whether it's a positive impact for the business, but we're optimistic. So we'll see how that unfolds. Despite a relatively difficult trading environment, we have maintained the pace of our capital programme. To remind you, one of our strategic priorities is to maintain a balanced portfolio, which is all about keeping the brands relevant by grounding them in quality customer insight, ensuring that we're structured and systematic in the way we raise the average quality of our amenity.

We recognize that the consumer has a lot of choice, and we believe that having a quality environment is a prerequisite of doing business. As you know, we target ourselves to operate on an average 7-year cycle of investment so that every site is refreshed on that time scale. And with payback being within 5 years, it gives us assurance that we have at least 2 years of genuine value creation. The return on investment for our remodel programme remains very stronge at circa 33% for this year's cohort and the prior 2 years cohorts that we continue to measure. This proves to me the investments we make will impact, longeivity of return and are cementing our brands at the top of their respective market. We believe capital investment is a critical lever to pull each year, on top of the remodel and conversion programme. We've also acquired five new sites in half 1and remain opportunistic towards the increasing number of sales leads come across our desks. As always we're ideally interested in quality freehold assets, but we won't overpay. We believe the opportunity is going to increase in the coming months as a tougher paying environment will inevitably lead to some casualities in the sector. We will grow our market share as and when that happens.

We are also investing in the new HR and payroll system, which is due to go live in July, which will generate modest running cost savings, but will improve our management information in this key area, which will help drive further engagement. Our team engagement scores are already at an all-time high, and we are relentless in trying to understand any dissatisfaction and to resolve any issues. The correlation between strong engagement and strong like-for-like sales is irrefutable. At the same time, we're about to launch a new CRM platform, Guest 360, which will step change our ability to genuinely personalize our communication to our 15 million strong guest database. This is potentially very, very powerful and should become a growth engine for next year and beyond.

On top of these projects, we soon to complete the full upgrade of our network and hosting at site level, which will mean improved Wi-Fi coverage, critical for capturing internal and especially external order at table sales. So capital investment remains a critical part of the business, and we believe this will further strengthen our position versus the rest of the sector. Moving on to Ignite, our ongoing change program. It's now 10 years old, and Ignite has just become a way of working has forged an ethos of constant and relentless improvement, and it's foster a culture where silos don't exist. Now we have a back catalog of successful improvement initiatives and the value that can be derived from assuring each of them has landed in the business would be significant in itself.

However, Ignite never stops. And this summer, we will continue our pattern of holding a formal event brainstorm and refill the hopper as I call it, as we have done every 2 years. I have no doubt that we will see a mixture of refinements and improvements in some of the things we already do, some large and small blue sky ideas, which will be great and exciting to test and some bigger ticket technology-intensive ideas that could be truly transformation. This is the beauty of Ignite. It has no boundaries, and it drives pace and innovation across the business. Now one of the areas that's growing in importance under Ignite is, of course, how we view the future, and it's all things AI.

Artificial intelligence is here to stay -- is here to stay. And we're already deploying it in some of our processes such as recruitment, guest care and reporting. And we have built chat box functionality on a brand website, giving our guests a quicker response when accessing information in a conversational style. And we think there is unlimited potential for AI to transform so much of what we do, initially saving time on more routine aspects of doing business, such as business administration, stock management and management reporting and freeing up our people to focus on guests. However, the AI work stream is still embryonic. And will grow in importance as we run through to 2030. We have plans to grow our expertise and knowledge. And as with all things in Ignite, the richness of the output will be improved by the quality of multifunctional input and expertise that will go into reimagining the hospitality business for the future.

What we're doing now is ensuring the myriad of data points that we have in the business, of which there are many, are available to be part of this very exciting initiative. Turning to sustainability. We continue to make strong measurable progress against our long-term commitments. We have reduced our total carbon footprint by 16% versus the 2019 baseline, including a 22% reduction in Scope 1 and 2 emissions, driven by lower energy use and reduced reliance on gas and a 15% reduction in Scope 3 through closer supplier engagement. Operationally, we now divert 100% of waste from landfill with recycling rates increased to over 60% and we have reduced food waste by 23%, supported by both on-site actions and partnerships with third parties such as Fair Share and Too Good to Go.

From a social perspective, we are very proud of our partnership with Social Bite, focused on targeting homelessness issues in the U.K., and we've now raised GBP 2.5 million over the last 18 months, and we have employed 40 people impacted by homelessness through the employment program that we have established together. We remain committed to our sustainability ambitions, delivering measurable environmental and social impacts. So in summary, we remain on course to deliver this year despite a tougher quarter 2, and we're already focused on pushing on again next year when cost headwinds should drop back to circa GBP 95 million versus GBP 120 million this year.

We're staying focused on brand management, capital deployment and Ignite as these 3 levers continue to serve us well as we degear. The difficult macro environment is outside of our control, but we're not faced by it, and we've already closed out our energy requirements for the current financial year. We will continue to degear and the current volatility caused by geopolitical issues is a good reminder that being prudent until the debt service costs fall away is still the right path to follow. M&B has the best brands in the sector, some great locations, a strong track record of delivery and a strengthening balance sheet, and we remain excited and positive about the future. I'm happy to take your questions.

Okay. Maybe yes. So I've got 2 questions. It's Douglas Jack Peel Hunt. First one is, obviously, you're talking about competitive behavior and discounting. I was just wondering if you could talk about differences in performance between the premium end of your estate, excluding obviously the Red meat impact and the sort of value end? And any geographical differences you're seeing in trade? And then the other one was a capital allocation one because obviously, your NAV is GBP 4.91 a share, which is more than double the share price. And I was just wondering if you attempted to be maybe selling some assets from the non-core end of the estate if there is much and perhaps buying back shares given the massive difference that's in place at present.

I'll take the first one, Tim. So in terms of performance, premium value, I think our split, as I said in the script is more wet lead versus food lead, because I suppose you'd argue something like Nicholson's is a premium brand and that's had a very strong. London's traded very well. And I sort of London sites are very strong growth and and they they tend to be the more wet led businesses. So that's, that's more the split. I think the discounting we're seeing in the markets is probably not everywhere, but in the people who are running it are probably running it longer. And at times you would normally expect over weekends and things. It says to me there's some some people are sort of a little bit desperate, let's say, but that's, you know, I think this is this is something that we, you know, we constantly monitor and we can respond to. But I geographically generally, no, not really very, very many distinctions. But London has remained strong.

I think on capital allocation, Doug, I mean, I'll reiterate what we've been saying for a while now that the Board do keep it under review. And we will decide when is the most efficient and most effective time to reset the capital structure with respect to amongst other things, investment opportunities, freight costs, refinance costs. We've said we wouldn't return money back dividends or share buybacks if we had to draw down debt to do that. Neither would we sell assets just to do that.

I mean, I think if we've got sites that are trading well and profitably, we're not going to sell those and start undermining the very strength that we have as a group buy back shares. There will and always has been some element of churn of the estate. So you will see a small number of site disposals, but that will be for operational reasons. We don't think we can make as much value out of those sites as we can crystallize the value and maybe a decent at the top. We're not looking to cannibalize our stake just to share buyback...

Jamie Rollo from Morgan Stanley. Three questions, please. First, on the recent trading slowdown. Obviously, it's clearly weather as you laid out, is the main driver, but you also mentioned a weaker consumer. So what data points are you seeing that sort of makes you think it is the weaker consumer because your food sales are quite good in Q2? And are you not worried that gets worse, that sort of macro headwind in the second half of the year and into next year? Secondly, if we look at the M&A out there, you've been linked with a number of some of the bigger sort of sellers out there, but obviously, you're doing mostly individual transactions at the moment.

So how do you think about larger scale or even blocks of pubs rather than individual units? And then finally, on efficiencies, if things do get worse, that GBP 12 million H1 efficiency number if we annualize that, is there sort of a plan B that could perhaps step up if like-for-likes did suddenly deteriorate? I get the point about filling the whole chronic night, but just on the hard cost savings alone, is there something there to offset any top line weakness?

Yes. Firstly, I mean, look, I mean, I think the reference to consumer confidence is probably more borne out of it would be a bit naive to say that with all the government issues and all the things going on in the Middle East to say that, that's not a factor. We sort of felt we were a little bit naive not to say that. But I think the point of the script say we're pretty convinced it's weather. And as I say, on the very odd day where we've had year-on-year better weather, sales have been very strong. So we're not sort of overly concerned.

And I suppose where the data points reflected. I think the fact that we have had stronger food, but it tends to be the food in the wet-led businesses. And that's sort of logical. I would sort of say that the wet-led businesses have certainly had a tougher environment for sales because of the sunshine last year, but they have traded very well and sales have been strong there, which would say that could be a data point that people may be trading down into pubs. But like I say, I mean, it has been an incredibly difficult period to read, and we are still confident on the everything lines up, the business is as strong as ever.

So that would be my what I, my my take out to leave you with in terms of acquisition and larger scale. I mean, I probably be disappointed in the answer because it's the same answer we always give that we remain opportunistic to sales, to acquisitions. And whenever large groups of pubs come to market, of course we look at them. But as ever, we don't need to acquire and we won't want to overpay. And so I would say, look, yes, we'll look at them. We're very well aware that we get linked to everything. That doesn't mean to say that we are remotely interested. We just tend to get linked with everything. So I would put it like that. And then in terms of efficiency, I mean, yes, I suppose the point we're trying to get across today is that Ignite is already generating efficiency savings as it has been over the last 10 years.

That point I made around labor rostering and that is a good example that if we were to land that, that would certainly more than offset any concern on sales. So whether we do expect to get every penny of that? Of course, we don't. But there's one example, just one initiative that we've got line of sight on that we know make a step change if we land it, and there are plenty of those. So the Ignite refresh that we're doing in July is probably more for next year. There tends to be probably a 6-month lag between the ideation and start to see it. So the things we are seeing now are things that we've been working on for the last year and the ideation in the summer next year.

And Tim, thank you too for many years and best of luck for the future.

Tim Barrett from Deutsche Bank. Just could I get a bit more color on a couple of the guidance points, please. Firstly, around CapEx, that GBP 230 million, it feels like there's some single sites implicit within that. Are you paying a couple of million for freehold, something like that? If you could split it, that would be good. And then secondly, around the 2027 cost guidance, it feels like it's a long way away. And within that, there's things like the living wage beyond April 27 the utilities. So could you just sort of say what you've assumed on wages and utilities, whether that's mark-to-market?

So on CapEx, that assumes we buy a few single sites way you said in the second half. So last year, I think we spent GBP 9 million on new sites. This year, I suspect within that number, it could be GBP 25 million to GBP 30 million year-on-year increase.

I guess asking a bit differently, what's the maintenance CapEx?

For the full year?

Yes, within the...

I think that will be up a little bit as well because as we call out in the narrative, we've done a lot of investing in our network and hosting around the whole estate. So that was GBP 65 million last year, GBP 85 million, something like that also accelerating our solar panels... And your other question...

Cost, the GBP 95.

Look, I think on -- clearly, wages numerically is the most important call we have to make in that guidance. We are assuming that there's a fairly measured approach taken to the living wage this year for next April. So sort of 4%, 4.5%, maybe 5%, something like that. I think we talked about GBP 15 didn't we certainly haven't baked that into our number. We're assuming it's roughly equivalent to the rate of inflation. And on utilities, we've baked in a small increase in the cost of utilities about GBP 10 million. Some of that will come from the fixed charges, which escalate, and that leaves provision for a little bit to come from increased commodity as well. And to reiterate, 15% is secured. So the bulk of it is not yet secured by us.

Karan Puri from JPMorgan. I have one question on full year '27. I know it's a bit far out. But in terms of margins, just wondering, given your cost inflation guidance of 4%, you have some offsets from operational efficiencies. What is the sort of like-for-like that you think you'll have to sort of maintain for any sort of margin expansion or keeping margins flat on a year-over-year basis? Just if you have any color on that would be helpful.

Yes. I mean I think I think the outlook for margins this year is tougher because of the cost headwinds. I think they moderate next year, I think our margin should be flat or better, to be honest, particularly benefit from national insurance coming out. So the sweet spot of sales at the moment seems to be around 3.9% that runs through, then we're...

Fintan Ryan here from Goodbody. Just one question for me, please. Given the step-up in the site acquisitions that you've sort of guided to for this year, under what banners are typically the new sites that you're looking for being acquired? Like are they being bought as single sites? Or are they bought for potential conversion to Miller Carter or Nicholson or just in terms of the brand strategy with the new sites?

Yes. No. I mean to be honest, I suppose in recent years, you'll probably be aware, we've tended to buy for Miller & Carter and travel hubs for buy one, and that's probably been the predominant thing. I think going forward, what we tend to do is look at the site. We have a property mapping tool that look at demographics, competition population, all those sort of things. And so increasingly, we will acquire other brands. I think on the sites we've acquired so far, there will be some Miller & Carter in there. We might even have 1 or 2 Toby in there, too. So it's sort of an evolving part of what we do.

If a brand has got real momentum, then why wouldn't we look to convert? We'd love to do more Nicholson, for example, but finding good quality pubs in London is quite hard to do. But that's certainly something else we would acquire for. So I think we've just got a number of brands at any point in time. With the right site comes. Rather than going out and saying, I'm going to buy a site for Nicholson's.

We'll see what the site coming forward is and we'll map it and say, this fits that brand. Will we will we acquire sites and just trade them under their existing badge? Possibly. But more likely we'll convert our site and think, right, we can put it into this brand format.

And. Just in terms of some of your recent acquisitions of the ego and the brands, how is the conversion of those sites going? And like, what's the plan?

Yes, we happen to accelerated. I mean, we, I think in recent years, we've sort of talked about a number of sort of R&D brands. Where we haven't accelerated on those really, because the. Really, because the donor brands, as I call them, are trading very well. So, for example, when we acquired ego. We envisaged it being a solution to vintage inns. Vintage inns was our top performing brand last year. So we're not going to convert unless there's a need to do so. So the focus on an ego and on Pesto's been around integration and being around establishing those brands as part of of M and B, but I think, you know, looking, looking in the future, I still think those brands probably will expand. We just don't need to do it right now unless we have a real emerging issue and another brand. We haven't had that.

Thank you. And best of luck to him for the future.

I think. That completes the questions. Thank you very much. Happy to have a chat offline off this.

Thank you.

Good morning, ladies and gentlemen, and welcome to the prelims presentation for Mitchells & Butlers for our financial year '24-'25. I'm pleased to be able to report another successful year where we outperformed the market once again in all categories. We delivered 4.3% like-for-like sales growth and 5.8% operating profit growth despite the impact of employees National Insurance, which hit the second half by an unexpected GBP 11 million. With the lowest team turnover the company has ever seen, the highest team engagement percentage, the highest guest review scores we've ever had and a strong safety record and the highest ever return on investment from our remodel program, it feels like the business is set up for whatever challenges may lie ahead.

And we are confident with a strong balance sheet, we have a very bright future ahead of us. We accept we have a tough year ahead given our exposure to the currently very high red meat costs. But in Ignite and our capital program, we are working hard to mitigate this. In any case, this will be temporary and should not take the [ growth ] of the underlying trajectory of the health of the business. And as 2030, '31 gets ever closer, now nearer than COVID-19 is, when we see our debt service costs drop by GBP 130 million per annum, the business is very well placed to capitalize on any opportunities that may arise. I'll now hand over to Tim to take you through last year's results before I return to talk in more detail about where we are as a business and where we are heading.

Thanks, Phil. Good morning, everybody. So let me start with the income statement. This year represented good growth building further on what was a very, very strong bounce back performance in the prior year. We maintained our sales outperformance to the sector throughout the year. We managed cost headwinds of about GBP 100 million, including a GBP 11 million impact in the second half from national insurance contributions to deliver an operating profit of GBP 330 million. That's an increase of 5.8% but a slightly richer margin, up 20 basis points. And as you look further down the P&L, you can also see the benefits of our deleverage starting to come through as well.

Firstly, we reduced interest costs on our securitization structure. And secondly, through pension funding, which is now from a deficit has moved into a derisked surplus. So with the impact of that as well, that drove a 17% growth in EPS over the year. So a very, very strong year, successful year for us. We look at sales, they've remained strong and well ahead of the sector throughout the year on volumes that were broadly flat. And I think that reflects our well-operated and strong stable of brands and sites. We think the last 8 weeks was a little bit adversely impacted by concern and uncertainty built up ahead of Wednesday's autumn budget. But despite that, we still managed to strengthen our sales performance against Q4 of last year with a like-for-like growth of 3.8%.

And we now, of course, move into the most important part, the important festive season, which all indications are positive. Much of this presentation, we're naturally going to focus on what we're doing today and future prospects for the business. But I'll take a quick look back at last year and what drove our trading performance, that GBP 330 million operating profit. We continue to invest in our offers, in our estate, and we're getting very strong returns from that in excess of 35%. You can see the impact of that on this chart. Like-for-like sales growth of 4.3%, combined with efficiencies largely delivered under our Ignite program to allow us to overcome a GBP 100 million cost headwind, leading to an increase in operating profit to GBP 330 million at a richer margin of 12.2%.

Looking forward to this year as a whole, costs remain a concern for the sector. We've set out here what we expect the pre-mitigation cost headwind that we face this year to be, and it does include our -- certainly our preliminary assessment of the impact of Wednesday's autumn budget. Now we talk to the interims a lot about food costs, notably red meat, and they are a particular challenge for us at the moment. We don't expect that to be structural. That is we would expect those costs will revert lower in time. And we are mitigating as much as we can through adapting our purchase arrangements, but there will be a larger component than normal this year of the cost inflation that we face.

Labor, of course, is always our biggest cost. We will annualize on very steep increases that were announced last year. So during the last year, Living Wage went up 6.7% had a GBP 23 million cost increase and that's insurance contribution. So we've got an annualization impact on that. Plus in the second half of this year, we'll have the impact of the recently announced increase in the Living Wage of 4.1% with a little bit of further catch-up for the end of '21. Other costs, including energy, are more normalized. So we wrap that all together, that's about GBP 130 million cost headwind before mitigation, about 6% of our cost base. So that's above trend. So we would say that's the top of the range.

If we look forward to '27, '28, I would hope that, that starts to come down. The result was accompanied by very strong cash flow, albeit helped by some nonrecurring items. We had a refund from our executive pension plans escrow arrangement. This follows on a very large refund from the main plans escrow last year. So we have now had all monies that were held in escrow have been returned to us. That's done. CapEx increased to GBP 181 million as we strive to get back on our 7-year remodel cycle, not there yet. But on the basis of strong returns, we're very keen to keep investing in our estate. We would expect that level of CapEx to increase this year, probably to GBP 210 million, something like that, and possibly with further upside on that [Technical Difficulty] freehold site acquisitions.

We've been benefiting from offset of COVID tax losses, reducing our cash tax paid. Those are largely run out GBP 6 million left as we go into the current year. So you'll see our cash tax start to increase. So overall cash flow of GBP 146 million generated from the business, which left us with a surplus flow of GBP 16 million after paying for bond amortization. That strong cash flow continues the path of strengthening the business' balance sheet. We increased the valuation of our freehold estate of properties by nearly 4% based on strong trading performances across those, and you've seen the impact of that. Pensions has come a very, very long way from the days only a few years ago where we had GBP 400 million deficit. We're having to put GBP 50 million a year into service that.

We're now in significant surplus and that surplus is largely derisked. We have one scheme that has moved into buyout, so it's gone. Our main plan is in buy-in. So it's sort of derisked and close to going, and we have one very small unfunded scheme. So we'll start to get real value for that surplus through offsetting it against DC contributions that we would otherwise have to pay through cash flow. And we'll be able to do that going forward at about the rate of GBP 10 million a year. So the end net debt is now down to GBP 843 million, if I exclude leases, which is 1.8x EBITDA, and our net asset value increases to 476p per share. Now we have been -- just to put this in context, we have been very successful in reducing debt in the business a few years ago that we felt was overlevered.

Gearing has been managed down from well over 4x 10 years ago to under 2x today. And we've had success, as I mentioned before, in transforming our pension position as an additional part of that. So the valid question is where do we go from here? We are tied into a large and flexible debt structure with the securitization. And that has significant break costs if we want to change it. We would currently estimate those to be about GBP 45 million. So with that in mind, we believe that it's right to continue on the deleverage journey to enhance the group through both improving our resilience in uncertain times and creating value through a transfer to equity.

Now of course, the Board will continue to monitor this and break costs will decline over time, which will impact economics and will open up a number of options. But we don't expect that to be in the near term, and it is certainly not on the current agenda. So let me wrap up before I hand over to Phil. I think a really good year-on-year performance in sales and profits, in margin and in cash. We've also supported that by making progress across the board across all of our main strategic objectives, and Phil is going to take you through those. So we face the future with a fair amount of optimism. We think we're in good shape. We think we're dealing very well with what we can control, and we have a high degree of confidence in our ability to continue to outperform the market. I'll hand you back to Phil now.

Thanks, Tim. So today, I'm going to say a little bit about current trading before focusing mainly on reminding you who we are, what it is we've been trying to do and which we continue to do and to paint a picture of the future where Mitchells & Butlers is going to be in an incredibly strong position. we finished last year with 4.3% like-for-like sales growth, which was our ninth straight year of market outperformance as measured by the CGA business track as you see on the slide. Given the uncertainty caused by speculation over the last -- this week's budget, we've been pleased with the way this year has begun with the last 9 weeks running at 3.8% like-for-like and again, tracking way ahead of the market average. We've launched new menus across the brands and taken blended food and drink price of circa 3.2% during this period. So that will help.

However, it has to be said that the lack of clarity on what the chance would do in the budget would have spooked the consumer, and this will have adversely impacted sector and our trade. Internally, we are never fazed by the short-term trends and market issues but what is important is the underlying trajectory of the business. And in this regard, the company is very well placed with strong momentum and with a very bright future. In terms of our brands, last year, we saw the wet-led businesses lead the way with Vintage Inns, Nicholson's, Sizzling Pubs, Ember Inns and Castle Pubs finishing at the top of our scorecard.

However, once again, we were pleased with progress across the board. I'm particularly proud about managing to absorb the unwelcome and in our view, unfair changes to employers' national insurance contributions, which disproportionately impacted the hospitality and retail sectors. For us, that was a GBP 23 million annual cost, GBP 11 million of which impacted last year. So the fact that we managed to still grow our profit is a very credible performance. Looking at this year, we have the remaining GBP 12 million of the employee national insurance contributions as an incremental cost to absorb and 30% rise in the cost of steak and beef, which when you run one of the nation's biggest steakhouse brands and the much loved Toby Carvery is a disproportionate challenge for us.

However, this will be a 1-year impact as steak prices won't move up by another 30% next year and in truth, should show some deflation, where upon I would expect the business to move forward strongly. Now we are working hard to mitigate for what is circa GBP 130 million of cost increases this year, which compares to circa GBP 90 million in a normal year. And we back ourselves to do this, but we will not take short-term decisions that damage the long-term prospects of our brands. So we're happy with where we are, confident about what we're doing and excited by what we believe will be a very strong future. And I would now like to spend the rest of this update explaining this in a little bit more detail.

Let me start by reminding you about who we are and what we are and why Mitchells & Butlers is unquestionably one of the strongest hospitality businesses in the sector. Now we are blessed with a very high-quality estate, 84% of which is freehold or long leasehold with very strong locations, many of which are prominent and landlocked, thus prohibiting direct competition from ever being developed on their doorsteps and covering most of the United Kingdom. Of course, we also have a small business in Germany, too. We have 1,631 managed businesses with circa 17 proven brand formats, all of which are constantly being refreshed and fine based upon quality guest insight. And of course, we have all bases covered with rural, suburban, city and town center locations, wet-led and food-led brands, value through to premium offers, sports, entertainment and a whole range of dining experiences.

We have over 1,000 rooms, a strong machines business and also a strong and growing delivery business, too. We appeal to regulars, workforce, families and tourists alike. And there's an interesting stat that 81% of the population lives within 5 miles of an M&B business. With average weekly turnover of GBP 31.2k per business and average annual EBITDA of GBP 385k, we run the most successful large-scale pub and pub restaurant businesses in the U.K. Now we aim to position each of these businesses at the premium end of their respective markets, and we put a lot of focus and effort into constantly improving their product ranges, the theater and service and guest propositions and the quality and [Technical Difficulty] of what we offer.

To help execute this ambition, we developed a new food innovation center in Warsaw 3 years ago, giving our development chefs the environment to constantly evolve our offers, keeping them at the forefront of U.K. hospitality. Now over the last 10 years, we've also invested heavily in technology, giving us a market-leading position in this space, too. We've implemented new EPOS, order at table apps, Kitchen IQ, digital stock taking, auto order, Prep and Par, [ tried in ] the basic standards app, the Employee App, proprietary booking engines and our own a new labor rostering system. The list goes on and on.

Each one of these has helped drive sales or improve our efficiency, and we believe there's still a lot more to be taken from the investments made to date. However, this year, we'll see our new HR and payroll system being implemented and a new CRM system, Guest360, which will step change our ability to converse with and better understand our guests. Our guest databases have grown this year, and we now have consent to contact 13.9 million guests through our programs. We recognize that to succeed in hospitality, it requires great service at all times, and that depends on having a great team of people. That is why we place such great emphasis on our engagement scores and why we invest so much into our Chef Academy, our award-winning apprenticeship programs and into our digital learning and development platform, affectionately known as Mable or M&B learning.

Having the lowest team turnover on record means that we are retaining our talent, and therefore, the experience of our team must be growing. I'm confident to say that the M&B team is second to none with the abundance of professionalism, passion, experience and energy. We systematically invest in our business with circa GBP 210 million being earmarked for this year on the core business before acquisitions. Now we aim to invest in every business on an average 7-year cycle. And when we do invest, we ensure we cover the whole operation, including externals, restrooms, back of house, et cetera. Now with payback from investment being within 5 years, it means we can be confident of driving real returns for the business. And it means the average quality of our amenity is always improving.

Each brand has an appointed lead designer, and they work with the operations directors and our marketing team to create environments that best represent our brand propositions. The designs stay fresh and evolve through each cycle using the latest color pallets and soft furnishings to maintain appeal. Because we have been doing this for the last 10 years, we no longer have many sites that are allowed to deteriorate to such an extent that reputation starts to get damaged. And we don't see many competitors matching this approach. And we know that where states have been allowed to be underinvested over a long period, it takes a lot of time and investment to create the back of the backlog of schemes, and it can be very costly in the short term.

Our remodel return on investment sits at an all-time high of circa 35%, which covers 199 projects. So this is a robust statistic. As you know, for the last 10 years, we have evolved Ignite, which started 10 years ago as a transformation program with an urgent need to turn the business around, but has since evolved into an ongoing way of working that promotes constant improvement in all that we do. With the benefit of 10 years of experience, Ignite is now ingrained as just a part of how we operate. At any one time, there are 40 to 50 separate initiatives [indiscernible], each driving incremental profit directly or indirectly. As importantly, Ignite has also cemented our organizational culture by breaking down departmental silos that existed as it encourages people from across the business to work together, whereas their day jobs might never create that opportunity.

Ignite is here to stay. It is as powerful as it's ever been, and I think its impact on the business will just get stronger and stronger. As you know, we have announced that Tim Jones here, our CFO, has decided to retire in the middle of next year. Tim has made an outstanding contribution to the company. He wrote that bit and has been a massive support to me personally over the last 10 years. And whilst a tough act to follow, we are delighted to have appointed Emma Harris, who will be joining us from Marks and Spencer, bringing a wealth of retail experience on top of her financial pedigree.

Emma and Tim will have an ample opportunity to have a detailed handover, and I would expect the transition to take place seamlessly. Building a team that will take this company forward over the next 5 to 10 years is one of my personal objectives. And I would argue that we already have a track record of being able to do just that whilst continuing to drive the business forward. We haven't shouted about it, but over the last 3 years, we've seen several retirements from the Executive Committee, and we've handled those changes well, and the business has not missed a beat, which highlights just how robust our ways of working are and the quality and depth of our management talent with the capital program and Ignite transformation program continues to be the engine room for the business.

Moving on to our financial strategy. We've always made it very clear that we believe degearing is the prudent and right path for this business right now. And given the rocky path of recent years, we're very pleased to have done so. Of course, we've managed to reduce our net debt down from GBP 2 billion 10 years ago to GBP 843 million today and the pension deficit of GBP 0.5 billion is now in surplus. So we've made good progress. We've also made it very clear that we will not consider paying a dividend until we are confident in being able to do so sustainably out of surplus cash. But given the GBP 200 million debt service costs and the GBP 210 million plus of capital program on top of tax and running costs, we are not there yet.

Even last year, the sudden impact of chancellor has changed employees' national insurance contributions wiped GBP 23 million of our annual profit with one stroke of the chancellor's pen, illustrating that certainty of profit level is still fragile. As Tim has just taken you through, where we to try and break the securitization now, there would be costs that would leak value, and we see no point in doing that. Looking further forward, the right capital structure in the future will depend a lot upon the path which we choose to take with regards to expansion or cementing what we do today. Our aim is to put Mitchells & Butlers in a position to lead the hospitality sector for the next 10 years and beyond and to have as many strategic options open to it as possible when the debt service costs fall away.

Given our strong and strengthening balance sheet, we believe we're placed to take -- very well placed to take a lead role in any industry consolidation if we choose to and to develop our remaining asset opportunities that we have across the estate. But assuming we still have surplus cash above investment requirements, we would return it to shareholders at that time. So we have delivered another year of progress despite the changes to employees' national insurance contributions, and we feel we've maintained our momentum. We've outperformed the market on sales growth for 9 straight years. We have the highest guest review scores we've ever had, the lowest team turnover we've ever seen and the highest team engagement we've ever recorded.

Our remodel program is delivering the strongest return on investments I've ever seen in my career. And in Ignite, we have a very special way of working that ensures we never become complacent and that we seek out constant improvement. We have the best brands in the industry. We have the best portfolio of largely freehold properties. And the fact degearing is accelerating, our balance sheet is becoming stronger and stronger. The U.K. hospitality sector is resilient. And let's face it, it has had to be in recent years. And when the market starts to recognize this and starts taking a more positive view of it, then Mitchells & Butlers will be viewed undoubtedly as the strongest company in the sector with a very bright future. Thank you, and we will now be happy to take your questions.