Mitchells & Butlers H1 Earnings Call Highlights

Mitchells & Butlers LON: MAB said first-half trading remained ahead of the wider market, with management pointing to resilient sales, cost controls and balance sheet progress despite weaker second-quarter momentum and significant inflationary pressures.

Chief Executive Officer Phil Urban said the pub and restaurant operator delivered profit “just slightly ahead of expectations and slightly ahead of last year” in the second quarter, despite higher employer national insurance costs and elevated steak prices. He said the performance showed “the power” of the company’s Ignite improvement program and its work on cost mitigation.

Tim Jones, chief financial officer, said in his final City presentation for the company that first-half sales were strong enough to offset “very stiff cost headwinds,” allowing operating profit to remain at GBP 181 million. Earnings per share rose 3.6%, helped by lower interest costs as debt continued to decline.

Sales Growth Slowed in the Second Quarter

Jones said like-for-like sales increased 3.3% across the first half, with a strong festive period contributing to first-quarter like-for-like growth of 4.5%. Growth slowed to 1.8% in the second quarter.

Urban attributed much of the slowdown to poor weather and calendar shifts, including the timing of Mother’s Day and Easter. He said guest metrics remained at an all-time high, suggesting the brands remained healthy, but that visit frequency had dipped as consumers became more cautious with spending.

Urban said there had been a clear split between wet-led and dry-led brands, with pubs outperforming restaurants. He highlighted Miller & Carter as a brand that had faced a difficult first half because steak had become more expensive as an input cost and “more of a luxury item” for consumers. However, he said guest review scores and trading on key calendar dates remained strong.

Management also said London sites had continued to trade strongly. In response to an analyst question about premium versus value performance, Urban said the more meaningful distinction was wet-led versus food-led trading, rather than premium versus value.

Cost Headwinds Begin to Moderate

Jones said the company now expects current-year cost headwinds to be lower than the GBP 130 million previously discussed, helped by reductions in business rates and red meat costs not being as extreme as feared. Urban later referred to cost headwinds of about GBP 120 million for the year, falling to around GBP 95 million next year.

Jones said the cost pressure was disproportionately weighted to the first half, with around 60% of the impact occurring in that period. He said employer national insurance contributions had now annualized at the higher rate and were no longer a headwind.

The company has also closed out its energy purchasing for the current year, removing that risk for the remainder of the financial year. For next year, Jones said 15% of energy requirements had been bought forward, leaving some potential volatility. He said the company had assumed a small increase in utilities costs of about GBP 10 million in its outlook.

Urban said Mitchells & Butlers had used multiple cost-saving initiatives to offset inflation, including reducing energy consumption through solar panels, voltage optimizers, local housekeeping improvements and Internet of Things technology that allows remote switching of equipment when sites are closed.

Ignite Program Remains Central to Strategy

Urban said the company’s Ignite program, now 10 years old, had become “a way of working” and was central to driving continuous improvement across the business. He said the program blends sales, volume and spend initiatives with efficiency projects.

Among current initiatives, Urban said the company is trialing targeted price-led promotions in specific brands and dayparts, rather than broad discounting. He said discount offers continue to receive immediate take-up, reinforcing management’s view that consumers remain cautious but responsive to the right offer.

The company is also focusing on encouraging higher spend from existing guests, including efforts to sell a second drink when guests are near the end of their first. Urban said that simple action could be worth “several million” pounds given the company’s volume of drink transactions.

On labor, Urban said the company is working to shift hours from lower-demand periods to peak trading periods. He said the opportunity to move “fat hours” into “thin hours” could begin to benefit the second half and set up the business for next year.

Capital Spending and Acquisitions Increase

Jones said first-half capital expenditure rose to GBP 117 million as the company returned to its seven-year remodel cycle and bought several new sites. Mitchells & Butlers acquired five sites in the first half and a couple more after the balance sheet date.

Full-year capital expenditure is now expected to be about GBP 230 million, slightly above prior guidance, including more single-site acquisitions. Jones said new-site spending could reach GBP 25 million to GBP 30 million this year, compared with GBP 9 million last year.

Urban said the remodel program continues to generate strong returns, with this year’s cohort and the prior two years’ cohorts delivering returns of about 33%. He said the company remains interested in quality freehold assets but will not overpay.

On larger acquisitions, Urban said the company reviews opportunities when groups of pubs come to market but does not need to acquire assets and will remain disciplined. Jones said potential sites are assessed against the company’s brand formats, including Miller & Carter, Toby Carvery, Nicholson’s and others.

Balance Sheet, Technology and Sustainability

Jones said cash flow was strong in the first half, with net debt reduced to just under GBP 750 million, or about 1.6 times EBITDA excluding leases. He said the pension position had moved to a de-risked asset of about GBP 100 million, while net assets increased to GBP 4.91 per share.

Asked about share buybacks or asset sales, Jones said the board continues to review capital allocation but would not return cash through dividends or buybacks if it required drawing debt. He also said the company would not sell profitable sites solely to fund share repurchases, although some estate churn would continue for operational reasons.

Urban said the company is investing in a new HR and payroll system due to go live in July, a new Guest 360 CRM platform for its 15 million-strong guest database and upgrades to network and hosting infrastructure to improve Wi-Fi coverage and order-at-table sales.

He also said Mitchells & Butlers is beginning to use artificial intelligence in recruitment, guest care and reporting, and has added chatbot functionality to brand websites.

On sustainability, Urban said the company had reduced its total carbon footprint by 16% versus a 2019 baseline, including a 22% reduction in Scope 1 and 2 emissions and a 15% reduction in Scope 3. He said the company now diverts 100% of waste from landfill, has increased recycling rates to more than 60% and reduced food waste by 23%.

Urban said Mitchells & Butlers remains focused on brand management, capital deployment and Ignite as it continues to reduce debt. He said management expects cost headwinds to ease next year and remains positive about the company’s outlook despite a tougher trading environment.

About Mitchells & Butlers LON: MAB

Mitchells & Butlers is a leading operator of managed restaurants and pubs in the UK. It listed on the London Stock Exchange in April 2003 and is a member of the FTSE 250. Its restaurants and pubs have some of the highest average sales and profits per site in the industry and it operates the best portfolio of brands in the UK.

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