Annual report
and accounts
2018
Contents
Strategic report
1 Welcome to Mitchells & Butlers
10 Chairman’s statement
12 Mitchells & Butlers at a glance
14 Chief Executive’s business review
18 Our markets
20 Our business model
22 Our strategic priorities
24 Our strategy in action
30 Key performance indicators
32 Corporate social responsibility
38 Risks and uncertainties
43 Financial review
Governance
47 Chairman’s introduction to governance
48 Board of Directors
50 Directors’ report
56 Directors’ responsibilities statement
57 Corporate governance statement
64 Audit Committee report
68 Report on Directors’ remuneration
Financial statements
93 Independent auditor’s report to the
members of Mitchells & Butlers plc
100 Group income statement
101 Group statement of comprehensive
income
102 Group balance sheet
103 Group statement of changes in equity
104 Group cash flow statement
105 Notes to the financial statements
142 Five year review
143 Company financial statements
145 Notes to the Company financial
statements
Other information
148 Alternative performance measures
151 Shareholder information
Non-financial information statement
The Group has complied with the requirements
of s414CB of the Companies Act 2006 by
including certain non-financial information
within the Strategic report. This can be found
as follows:
• Business model on pages 20 to 21.
• Information regarding the following matters
can be found on the following pages:
− Environmental matters on page 37.
− Employees on pages 35 to 36.
− Social matters on pages 32 to 37.
− Respect for human rights on page 37.
− Anti-corruption and anti-bribery matters
on page 62.
• Where principal risks have been identified
in relation to any of the matters listed above,
these can be found on pages 38 to 42,
including a description of the business
relationships, products and services which
are likely to cause adverse impacts in those
areas of risk, and a description of how the
principal risks are managed.
• All key performance indicators of the Group,
including those non-financial indicators,
are on pages 30 to 31.
• The Financial review section on pages 43 to 45
includes, where appropriate, references to,
and additional explanations of, amounts
included in the accounts.
Financial highlights
Revenue (£m)
£2,152m
2018
2017**
2016
2015
2014
Profit before tax (£m)***
£130m
2018
2017
2016
2015
2014
Adjusted* operating profit (£m)
£303m
2018
2017**
2016
2015
2014
2,152
2,141
2,086
2,101
1,970
130
77
94
126
123
303
308
318
328
313
Adjusted* earnings per share (pence)
34.1p
2018
2017**
2016
2015
2014
34.1
34.4
34.9
35.7
32.6
*
The Directors use a number of alternative performance measures (APMs) that are considered critical to aid
understanding of the Group’s performance. Key measures are explained on pages 148 to 150 of this report.
** FY 2017 was a 53 week year. Adjusted 2017 performance is therefore presented on a 52 week comparable basis.
*** Includes separately disclosed items.
Financial review
See pages 43 to 45
Welcome to Mitchells & Butlers
We are a leading operator of managed restaurants
and pubs. Our strong portfolio of brands and formats
includes Harvester, Toby Carvery, All Bar One,
Miller & Carter, Premium Country Pubs, Sizzling
Pubs, Stonehouse, Vintage Inns, Browns, Castle,
Nicholson’s, O’Neill’s and Ember Inns. In addition,
we operate Innkeeper’s Lodge hotels in the UK
and Alex restaurants and bars in Germany.
Our focus on our three priority areas of building a
more balanced business; instilling a more commercial
culture; and driving an innovation agenda has
continued to move the business forward over the
financial year. The implementation of the second
wave of initiatives from our transformation
programme has resulted in sustained like-for-like
sales growth, continued market outperformance1
and a return to adjusted profit growth in the second
half despite Easter moving into the first half.
Through their hard
work, our teams
create fantastic guest
experiences every day.
Here are just a few
of them…
1. As measured by the Coffer Peach business tracker.
Annual report and accounts 2018 Mitchells & Butlers plc
1
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Miller & Carter,
Rickmansworth
Beef is a labour of love at Miller
& Carter. We put everything into
pursuing the perfect steak, from the
field to the butcher’s block to the grill,
so only the finest, most flavoursome
cuts make your plate.
This restaurant, nestled in the
charming suburb of Rickmansworth,
reopened as a Miller & Carter in 2017
and provides the perfect setting to
escape the hustle and bustle of
everyday life with the added charm
of a working mill.
More customer feedback
2
Mitchells & Butlers plc Annual report and accounts 2018
“ The birthday
lunch was
a great success –
full of food, fun…
AND a delicious
slice of cake.”
Annual report and accounts 2018 Mitchells & Butlers plc
3
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 The Colney Fox,
St Albans
Vintage Inns has got everything you
need from a country pub; burning
log fires in the winter, and beautiful
beer gardens in the summer.
The Colney Fox, St Albans was
previously called The Watersplash
Hotel in the 1940s and 50s, a venue
complete with restaurant and
swimming pool. Now restored and
renamed, The Colney Fox is still full
of heritage and tradition whilst also
benefiting from recently renovated,
comfortable and characterful B&B
Innkeeper’s Lodge hotel rooms.
More customer feedback
4
Mitchells & Butlers plc Annual report and accounts 2018
“ Having passed
our exams there
was only one
thing left to do.
Celebrate!”
Annual report and accounts 2018 Mitchells & Butlers plc
5
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Browns, Windsor
Browns is perfect for casual dining
or for those special occasions.
Together with a bustling brasserie
atmosphere and a passionate
team, there’s a unique restaurant
experience that you’ll love.
Browns, Windsor is an elegant,
spacious building with incredible
views across the Thames from the
front and the mighty Windsor
Castle from the back. You’ll find
a delightful outdoor balcony with
comfy sofas, perfect to enjoy an
al fresco lunch as you sit back and
watch the boats (and world) go by.
More customer feedback
6
Mitchells & Butlers plc Annual report and accounts 2018
“ I walked in
as a friend
and left a fairy
godmother.”
Annual report and accounts 2018 Mitchells & Butlers plc
7
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Horniman’s at
Hays, London
Nicholson’s has been delighting
guests since 1873 by offering
delicious food and drink
accompanied by a friendly
welcome. It proudly serves classic
British pub dishes or seasonal
specials alongside an unrivalled
collection of cask ales and an
exciting range of premium gins
in historic city centre pubs.
Horniman’s is located in the heart
of central London, on the banks
of the Thames. It’s minutes from
Tower Bridge, The Shard, and
London Bridge, whilst the Tower
of London, The Clink Museum,
HMS Belfast, and the bustling
Borough Market, are only a short
walk away.
More customer feedback
8
Mitchells & Butlers plc Annual report and accounts 2018
“ Friday lunchtime
with my mates
is such a laugh.
It signals the start
of my weekend…”
Annual report and accounts 2018 Mitchells & Butlers plc
9
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Chairman’s statement
Well placed to deliver
continued outperformance1
I am convinced that we have the right
elements in place to continue to grow
long-term shareholder value.
Bob Ivell Chairman
10
Mitchells & Butlers plc Annual report and accounts 2018
The performance of the business in the year has been very encouraging
with sustained like-for-like salesa growth; continued outperformance
of the market1 and a return to adjusted operating profita growth in the
second half.
This has been achieved against the backdrop of increased long-term
supply in the eating out market and an unprecedented level of cost
headwinds which have resulted in several CVAs and closures amongst
our competitors during the period.
The response of our team has been exemplary, with real momentum
being created by their single-minded focus on the delivery of our
strategic priorities and the second wave of our transformational activity.
I would like to record the Board’s thanks to our over 44,000 employees,
whose spirited response to the external pressures whilst delighting our
guests and continuously improving our processes, has been the critical
element in our strong performance.
As previously outlined, at the FY 2017 year end, the Board assessed
the potential for a dividend payout based on the year’s trading and the
sector outlook. We were transparent about our criteria for making this
assessment, namely that maintenance of the condition and
competitiveness of the existing estate was of primary importance for the
long-term health of the business and that we would avoid any structural,
or permanent, increase in the use of short-term facilities to fund dividends.
Having conducted this assessment it has been decided that a full year
dividend will not be paid to shareholders this year; we will keep this
under review depending on performance and outlook.
On a statutory reporting basis profit before tax and earnings per share
grew against last year, albeit these measures are impacted by separately
disclosed items.
In September, Stuart Gilliland informed the Board of his intention to step
down from the Board to concentrate on his other non-executive roles.
Having joined the Board in May 2013, he became Senior Independent
Director in February 2015 and has played a key role in the successful
development of the business as a valuable, supportive and extremely
helpful member of our Board. I would like to wish him every success in
his other Board roles. The process of identification and recruitment of
a replacement is underway, following which an announcement will be
made about both Stuart’s leaving date and his replacement. This is likely
to be concluded by the end of December 2018. I remain pleased with
the composition and balance of skills of the Board.
Our strategy is bearing fruit with like-for-like salesa growth and market
outperformance1 despite macro-economic uncertainty. I am convinced
therefore that we have the right elements in place to continue to grow
long-term shareholder value.
Bob Ivell Chairman
Operational highlights
Number of managed sites (at year end)
1,687
2018
2017
2016
2015
2014
Average weekly sales per pub (£k)
£24.5k
2018
2017
2016
2015
2014
Food sales as a % of total sales
51%
2018
2017
2016
2015
2014
Business review
See pages 14 to 17
1,687
1,695
1,768
1,779
1,775
24.5
23.7
22.7
22.6
23.2
51
51
51
51
51
1. As measured by the Coffer Peach business tracker.
a. The Directors use a number of alternative performance measures (APMs) that are
considered critical to aid the understanding of the Group’s performance. Key measures
are explained on pages 148 to 150 of this report.
Annual report and accounts 2018 Mitchells & Butlers plc
11
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Mitchells & Butlers at a glance
Brands for
all occasions
If you’re looking for a drink or a bite to eat you’ll find a Mitchells & Butlers brand that’s
perfect for you. We operate restaurants, bars and pubs all over the UK and Germany
and work hard to offer our customers a great choice of quality food and drink, fast and
friendly service and excellent value for money. Our success is based on innovation,
listening to customer feedback and ensuring our passionate staff are the best trained
in the industry.
Alex 41 sites
If you’re out in a German city centre,
these classic bars are the perfect places
to stop for a beer and a bite to eat.
All Bar One 56 sites
From cocktails to a well-chosen bottle of wine
or an excellent meal, you’ll find something
to suit you in our stylish city bars.
Browns 25 sites
Since the first Browns opened in 1973,
it’s been providing delicious food and drink
and superb service in beautiful surroundings.
Castle 113 sites
If you like a place with real personality,
pull up a chair in one of our urban pubs
serving the best draught beer and great food.
Ember Inns 148 sites
Relaxed and welcoming suburban pubs.
We serve the best cask ales and classic pub
food with a twist, in stylish environments.
Harvester 194 sites
A welcoming place for families to spend
time together, have fun and share the
pleasure of good, honest food.
{
High Street 81 sites
Our High Street pubs are the perfect place
for decent food and quality beer – and at
prices that put other pubs to shame.
Miller & Carter 105 sites
We put everything into pursuing the
perfect steak at Miller & Carter so only
the finest cuts make it to your plate.
Nicholson’s 77 sites
You can really relax at these traditional city
and town centre pubs that have been loved
since our first pub opened in 1873.
O’Neill’s 32 sites
Bars where you really feel at home –
whether for a few rounds with mates
or a spot of lunch with colleagues.
Premium Country Pubs 127 sites
Our traditional pubs have been stylishly
refurbished to make them the perfect place
to find a cosy corner and take time out.
Stonehouse 106 sites
Alongside our traditional carvery, we serve
up handmade pizzas made with fresh dough;
as well as burgers and pub classics at a great price.
Suburban 238 sites
What unites these pubs is unbeatable value
for money, generosity, and big-hearted service.
Many of these pubs are Sizzling Pub and Grills.
Toby Carvery 158 sites
We lay on a feast of tender, slow-cooked
meats, eight lots of veg including crispy,
ruffled roasties and all the trimmings.
Vintage Inns 186 sites
We manage some of the best country pubs
in the UK, all offering modern pub food
and outstanding drinks.
12
Mitchells & Butlers plc Annual report and accounts 2018
A diverse portfolio of brands
Premium
Browns
Miller & Carter
Castle
All Bar One
Alex
Nicholson’s
O’Neill’s
Premium
Country Pubs
Vintage Inns
Drink led
Food led
Ember Inns
Harvester
Suburban
High Street
Toby
Carvery
Stonehouse
Value
Annual report and accounts 2018 Mitchells & Butlers plc
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STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Chief Executive’s business review
Continued trading
above the market average1
and a return to profit growtha
I am pleased with the momentum
we have built and with the activity
that is underway in the business.
Phil Urban Chief Executive
14
Mitchells & Butlers plc Annual report and accounts 2018
I have been CEO for three years now and over that period we
have undergone a lot of change both internally and in the external
environment, with the cost headwinds which continue to impact the
sector and more recently Company Voluntary Arrangements (CVAs)
and closures in casual dining.
When I joined the business, we were in sustained like-for-like sales
decline and the business was underperforming on a number of metrics
which are key to the success of a hospitality company. Therefore, we
embarked on a new strategy which focused on addressing the issues
within the business and these fell into three strategic priorities which
I discuss in detail later in this review.
In February 2016, we launched a programme of work called Ignite
designed to meet these priorities, whose first objective was to get the
business back into sustained sales growth and ahead of the market,
a target we achieved over 18 months ago and have maintained since.
The second objective was then to stabilise profits and, although
FY 2018 adjusted profit before taxa finished £5m down against last year,
our performance in the second half, and the knowledge that there were
some exceptional events in the first half, gives me confidence to say that
we are now achieving that aspiration.
Our third objective is to return this business to sustained profit growth,
which will be no mean feat given the macro environment I describe later,
but that is exactly why we have embarked on our Ignite 2 programme
of work. The approach we have taken recognises that there is no silver
bullet to growing businesses, but instead it is the incremental gains made
across several fronts that can bring success. Ignite 2 is a programme of
work with a number of different workstreams, grouped under eight broad
headings, each led by one of our Executive Directors and a functional
expert. We have also set up a project office and a governance routine,
to ensure that we all remain focused on extracting as much value as
we can from the programme.
Some of the workstreams have already seen their initiatives implemented
and value start accruing, whereas others are far longer term, may require
net investment this year, and should start paying back from FY 2020
and beyond.
The review that follows updates you on our progress in the year against
the three strategic priorities; outlines our current view of the market in
which we operate; summarises our corporate social responsibility values;
details our financial performance in FY 2018 and updates you on our
priorities for FY 2019.
Overall, I am pleased with the momentum we have built and with the
activity that is underway within the business. We continue to trade ahead
of the market average1, and our second half adjusted profita performance
gives us confidence that the business has stabilised. However, the
spectre of an uncertain Brexit outcome, and political instability, means
that we remain cautious about the short- and medium-term future.
During the year we have maintained a strong trading performance,
investing in our estate and mitigating £28m of cost inflation whilst
maintaining quality for our guests.
For a second consecutive year like-for-like salesa growth outperformed
the market. We achieved like-for-like salesa growth of 1.3% in the financial
year despite extended periods of snow, unusually hot weather in the
summer and England’s prolonged success in the FIFA World Cup. The
last reported period of like-for-like salesa growth of 2.2% was free from
one-off events and, since the year-end, like-for-like salesa have continued
to grow at 2.2%. Total sales grew by 0.5% on a 52 week basis impacted
by disposals made in the prior year.
Profitability in the first half was negatively impacted by snow in particular,
resulting in a decline of £8m against last year. However, in the second
half, adjusted operating profita grew by £3m, despite Easter shifting into
the first half, as the momentum from our strategic initiatives continued
to gather pace.
Adjusted operating profita of £303m was down 1.6% year-on-year
on a 52 week basis. On a statutory basis profit before tax of £130m
grew against last year impacted by separately disclosed items.
Our strategic priorities
We have maintained our strategic approach with three priority areas
focused on repositioning the Company to a stronger competitive position:
• Build a more balanced business
• Instil a more commercial culture
• Drive an innovation agenda
We continued to make strong progress across these three strategic
priorities over the year resulting in sustained like-for-like sales growtha
ahead of the market and growth in adjusted operating profita in the
second half of the financial year.
Build a more balanced business
Our estate comprises 1,750 pubs, bars and restaurants, of which more
than 80% are freehold or long-leasehold. Our focus in this area is to
optimise the balance of brands across the estate in order to create
long-term value. During the year, we continued to improve the quality
of the estate through premiumisation and amenity upgrades.
We completed 232 remodels and conversions in FY 2018 (FY 2017 252)
and remain on course to deliver a six to seven year cycle of investment,
from the eleven to twelve year cycle of previous years. In order to
maximise the profit uplift following investment within the financial year,
we completed more projects in the first half than in previous years.
The in-year benefit from this, coupled with savings made in costs relating
to closure, was £3m. Conversions remain focused on the expansion
of Miller & Carter, which now consists of 105 sites and continues
to perform strongly both in terms of sales growth and returns.
We continued to enhance the amenity of sites through our remodel
programme. Remodel projects provide a refreshed environment for sites
which remain within the same brand, giving the opportunity both to delight
existing, and attract new, guests. The remodel programme provides
a vehicle through which brands can continue to evolve and innovate
in the highly competitive market in which we operate.
Instil a more commercial culture
We have made progress in developing a more commercial culture across
the business over recent years, with a relentless focus on profitability
essential in the current environment. Our centralised procurement process
allows us to leverage our scale and during the year we mitigated £6m of
inflationary costs across food, drink and logistics. In addition, centralised
pricing changes have generated a benefit of £5m through benchmarking
against local competitors, events pricing and menu psychology.
Labour remains the most significant cost to the business and improving
efficiency without compromising on quality is a constant focus. Last year
we rolled out new software across all of our UK business to help managers
to more effectively deploy labour through more accurate sales forecasting,
scheduling recommendations and electronic time management.
We have seen the benefit of embedding this software with in-year cost
mitigation of £8m. We will continue to find additional efficiency benefits
by focusing on best practice use of the software.
Our focus on online interaction with guests continues with their
increasing use of our digital platforms, such as apps and online feedback.
Last year we introduced reputation.com – a feedback consolidation tool
which enables managers to respond to comments from multiple sources
through one system. Through this tool we now respond to 93% of all
online feedback and we continue to see the benefits of the personal
interaction this platform enables for the guest. In addition, it allows us
to gather consumer insight to evolve our brands in line with consumer
demands. Since the year end we have increased the average feedback
score across the estate to 4 out of 5 reflecting the hard work undertaken
in this area.
Our strategy
See pages 22 to 23
Annual report and accounts 2018 Mitchells & Butlers plc
15
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Chief Executive’s business review continued
Revenue by region
(FY 2018)
1
7
9
3
2
4
6
5
8
11
10
% of sales
1 Scotland
2 North West
3 North East
4 Yorkshire and Humberside
5 West Midlands
6 East Midlands
7 Wales
8 East of England
9 South West
10 South East (excluding London)
11 London
16
Mitchells & Butlers plc Annual report and accounts 2018
Drive an innovation agenda
Technological developments are constantly changing the way consumers
behave and our digital strategy is designed to enable us to benefit from
those changes and to satisfy guests’ changing needs. A mobile payment
option is available in all of our brands, allowing guests to pay their bill on
their mobile device. In addition, we continue to refine our order at table
facility where guests can order food and drink from their mobile device
at their table rather than having to queue at the bar. This facility is currently
on trial in several O’Neill’s sites and the results show both a demand for,
and a benefit from, introducing this technology across more of the business.
As a result of this successful trial we plan to roll out the technology further
across O’Neill’s and to four additional brands during FY 2019.
Digital development provides us with the opportunity to better
understand and enhance our guests’ experiences. An example of this is
free wireless charging stations which we have trialled in a selection of our
city centre locations with extremely positive guest feedback. We have
also developed our customer relationship management platform which
enables more targeted and personalised communication with guests,
the result of which has been increased conversions to bookings.
Ignite
Ignite is the internal name used for our focused programme of work
underpinning the longer-term strategy. The first phase of Ignite launched
in FY 2016 and focused primarily on returning the business to sustained
like-for-like salesa growth. Having achieved this aim, work began on
Ignite 2, a second wave of initiatives which continue the focus on sales
growth and also incorporate more efficiency and cost-saving workstreams
aimed at improving profitability in the face of industry-wide cost
headwinds. This second wave of initiatives required an in-depth,
cross-functional analysis of processes and, in order to coordinate this
work, a project office has been set up to support and govern the various
workstreams. This focus will ensure that the maximum value can be
extracted from the programme of work. Several initiatives are already
in place within the business and are delivering value, whereas others are
longer-term projects which will require investment during the financial
year to begin delivering returns from FY 2020.
Examples of live Ignite 2 initiatives include the formation of a central
expert labour deployment team who visit sites which are performing
below the required labour scheduling accuracy. This team provides
practical support and system expertise and the result has been a material
improvement in performance of the 210 sites visited in the year.
5%
9%
3%
8%
14%
5%
4%
7%
7%
15%
23%
People
We have a fantastic team of over 44,000 people across the business
who are crucial to the all-important experiences which guests have with
us. Attracting, training and retaining high-quality staff is more important
than ever and despite the numerous initiatives we have introduced over
the course of the financial year, we are pleased that our management
level turnover has improved by 2.6ppts. This is particularly important
during a period of change as managers provide stability to the teams on
site. Our kitchen management turnover has reduced by 3.1ppts since last
year which is reassuring in light of the challenges that any changes in the
free movement of labour resulting from Brexit might bring. Overall staff
turnover has increased by 2ppts, driven by hourly paid staff, reflecting
the heightened competitiveness of this sector of the labour market.
Engagement scores have also improved across all cohorts over the year.
In terms of training, we are proud of the work we have done on our
apprentice scheme which we believe will provide excellent future talent
to our organisation. We are delighted to now have 1,800 apprentices
taking part in our schemes which range from front and back of house
roles in our pubs and restaurants to corporate roles in our head office.
Current trading and outlook
In the first seven weeks of the new financial year like-for-like salesa have
grown by 2.2%.
A return to adjusted operating profita growth in the second half
of the last financial year was a significant milestone for the Company.
With like-for-like salesa growth consistently ahead of the market and
our focus on efficiency initiatives, we are confident that we are addressing
the elements of performance which are within our control. However,
the market in which we operate remains challenging and a high level
of macro uncertainties remain. We will remain focused on maintaining
a strong balance sheet and reducing our net debt whilst positioning
the business to generate long-term shareholder value.
Phil Urban Chief Executive
We have also introduced enhancements to our booking platforms by
reducing the number of steps a guest needs to take to book a table which
has improved our booking conversions. In addition, we have introduced
the recommendation of alternative venues when there is no availability
at the selected site. Take-up of alternative site bookings equates to
c.13,000 bookings per year.
Following a successful trial, we have, from the start of FY 2019, removed
cash expenditure for sundry expenses such as flowers, taxis, emergency
food purchases etc. from our businesses; the aims of this are to increase
visibility and therefore control over expenses of this nature and also to
identify opportunities to leverage our scale to achieve a better price for
these items. We have also introduced an interrogative software tool
which analyses all transactional till data and identifies patterns of behaviour
which require further investigation. We have a team of people trained in
the software who support our managers in then taking action if required.
Longer-term projects include a system update and change of processes
around our stock management. Last financial year we updated our stock
system, a complicated project which impacted each of our businesses,
a number of central teams and also required the cooperation of our
suppliers. The benefits of the system upgrade are significant; it allows
us to automate tasks within the business which currently take up a large
amount of management time. For example, remote counting will facilitate
barcode scan stock taking which will significantly reduce the amount of
time taken to perform a stock count and will automatically load the results
into the system. Prep and par is a tool which will aid kitchen staff with
identifying what to prepare for each session of the day based on site
specific trading patterns and forecasts. This system, particularly when
used in combination with auto-ordering, will help to reduce waste and
instances of menu items being unavailable, improving guest experience.
As digital developments gather pace, it is important to ensure that we are
well positioned for future developments. Therefore, we are undertaking a
significant piece of work to consolidate our data onto one platform which
allows integration into third-party technologies. This work will provide the
foundation for fast adoption of future digital development opportunities.
The Ignite programme of work is designed to encourage the challenge
of boundaries on many fronts, and we have been exploring opportunities
to work with third parties as a way to accelerate innovation. We have
entered into a formal agreement with Ego Restaurants, who already
successfully operate their Mediterranean offer in a few of our sites within
the leasehold estate, investing in the brand’s parent company and
agreeing a pipeline of our sites to facilitate the growth of the proposition.
Further to this we will open the first Miller & Carter site in Germany,
supported by the Alex team, in 2019 which provides us with an opportunity
to test another market given the success of the brand in the UK.
1. As measured by the Coffer Peach business tracker.
a. The Directors use a number of alternative performance measures (APMs) that are
considered critical to aid the understanding of the Group’s performance. Key measures
are explained on pages 148 to 150 of this report.
Annual report and accounts 2018 Mitchells & Butlers plc
17
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Our markets
Outperforming in
a challenging economic
and political environment
Market trends suggest that consumers
are eating out less frequently but spending
more when they do, supporting our
strategy of premiumisation and focus
on providing opportunities for guests
to ‘trade up’ menus.
The external environment
The eating out industry has faced a number of challenges over recent
years. The number of restaurants in the UK increased by 11% over the
past five years, outstripping demand growth and resulting in pressure
on sales per site across the sector. Over the same period, the sector
has continued to face strong cost headwinds with the combined result
of these two factors being a number of CVAs and business closures
amongst our competitors in the past year. In the twelve months to
September 2018, the number of restaurants in operation in the UK fell by
1.0% reflecting the competitive pressure in this highly fragmented sector.
From a demand perspective there have been several economic factors
impacting consumer confidence including Brexit, political uncertainty
and limited growth in real wages. Despite this, turnover in the eating out
market as a whole continues to grow, with forecast growth of 1.5% in 2018
indicating that leisure spend is currently being protected to some extent
by consumers. Market trends suggest that consumers are eating out less
frequently but spending more when they do, supporting our strategy
of premiumisation and focus on providing opportunities for guests
to ‘trade up’ menus.
The impact of Brexit remains uncertain. Aside from macro-economic
consequences, the specific areas of material impact for our business are
increases in costs and reduction of availability of goods, and implications
of restrictions on the free movement of labour. On exit of the EU, cost
of goods would be impacted by changes in terms of trade and therefore
tariffs, additional border controls and fluctuations in the value of sterling.
From an employment perspective, at a time when unemployment levels
are at a 40-year low, any restriction on the free movement of labour
would have a material impact on both the cost of labour and access
to talent. Currently across our business, 13% of staff are non-British
EU nationals, with the proportion fluctuating by geographic region.
We remain close to these issues whilst we await further details.
18
Mitchells & Butlers plc Annual report and accounts 2018
Net UK restaurant openings (MAT)
Source: CGA Outlet Index.
2,500
2,000
1,500
1,000
500
0
-500
-1,000
2015
2016
2017
2018
UK eating out market
Source: MCA Eating Out in the UK Report 2018.
£2bn
Mitchells & Butlers
share of market
£57bn
Turnover
Mitchells & Butlers inflationary costs £m
70
60
50
40
30
20
10
0
2016
2017
2018
2019
Our risks and uncertainties
See pages 38 to 42
Actual
Estimated
Annual report and accounts 2018 Mitchells & Butlers plc
19
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Our business model
Creating value for
our stakeholders
Through the people who work for us,
our well-invested freehold estate and
the high-quality practices we adopt, our
brands delight our guests again and again,
creating value for all our stakeholders.
Value proposition
We create value for our stakeholders through the delivery of quality
eating and drinking experiences. Last year, we served 120 million meals
and 386 million drinks across our brands, providing us with the
opportunity to engage with guests on a daily basis.
Guest experience is a critical element of our brands’ offers. We use
a feedback consolidation tool, reputation.com, to provide us with the
insight to continuously evolve our offers to suit our guests’ needs.
In the long term, we aim to maximise the opportunity from these guest
experiences through our largely freehold-backed estate, the teams
of people working within the business, and the high-quality practices
which we adopt.
Estate
In total we own 1,750 pubs, bars and restaurants, of which over 80% are
owned under a freehold or long leasehold. The estate is predominantly
UK-based, and is nationwide although most heavily concentrated in
London and the South East, the West Midlands and the North West.
We also have sites in Germany within our Alex brand portfolio.
This array of high-quality locations, matched with our diverse brand
portfolio, enables us to match the right concept to the right trading asset,
as well as offering a strong pipeline for future conversions. Our property
has a value of £4.4bn as at the end of FY 2018, offering a stable and
long-term opportunity for value creation.
People
We have more than 44,000 employees across our pubs, bars and
restaurants and in our Retail Support Centre, who are critical to delivering
outstanding experiences to our guests. Our people include those with
strong business and sector experience, as well as new and enthusiastic
young talent who we look to develop through our apprenticeship
programmes. Adopting a structured approach to recruitment, driving high
levels of engagement with our existing teams and offering development
and learning opportunities are key elements of our people strategy.
Practices
Practices refers to the ways in which we operate in the best way to
generate value throughout the business. This encompasses our use of
scale for purchasing and operational efficiency; sharing of ideas between
similar brands and concepts within the portfolio; adherence to the
highest operational standards; and an increasing use of technology
to enhance guest experiences. We continuously strive to move forward
in all of these areas in order to maximise the value of the Company.
20
Mitchells & Butlers plc Annual report and accounts 2018
Estate
In total we own 1,750
pubs, bars and restaurants,
of which over 80% are
owned under a freehold
or long leasehold.
Building a more balanced business
See pages 24 to 25
People
We have more than
44,000 employees across our
pubs, bars and restaurants
and in our Retail Support
Centre, who are critical
to delivering outstanding
experiences to our guests.
Instilling a more commercial culture
See pages 26 to 27
Guests
Brands
Practices
Practices refers to the ways
in which we operate in the
best way to generate value
throughout the business.
Driving an innovation agenda
See pages 28 to 29
Creating
value
Our business model
creates sustainable value
for our stakeholders.
For shareholders
For the environment
For suppliers
For employees
Total shareholder return
See page 87
Corporate social responsibility
See pages 32 to 37
Corporate social responsibility
See pages 32 to 37
Corporate social responsibility
See pages 32 to 37
Annual report and accounts 2018 Mitchells & Butlers plc
21
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Our strategic priorities
Maximising
returns
Our strategy aims to deliver long-term
sustainable shareholder value through
organic growth. Our priority is to
maximise the return generated from
our existing assets, through ensuring we
have a balanced estate; instilling a more
commercial culture; and driving an
innovation agenda.
22
Mitchells & Butlers plc Annual report and accounts 2018
1. Build a more
balanced business
Rationale
• To generate maximum value from our estate of largely
freehold-backed properties.
• To ensure we are exposed to the right market segments
by having the correct trading brand or concept in each outlet,
based on location, site characteristics and local demographics.
• To maintain the amenity level of the estate such that we operate
safely and remain competitive to guests, alongside meeting
cash flow commitments.
FY 2018 progress
• Maintained level of investment in capital activity at £171m.
• Completed 239 capital projects in the year, maintaining
a six to seven year investment cycle.
• Continued investment in growth brand Miller & Carter with
105 sites now open.
• Completed more projects in H1 than in previous years with less
closure weeks resulting in £3m in-year benefit.
• Acquired seven sites and disposed of five sites which did not fit
into our estate strategy.
FY 2019 priorities
• Focus on enhancing asset value through remodelling or converting
sites where we believe increased value can be unlocked.
• Make further selective acquisitions where we feel they add value
to the estate, and disposals where we feel we have extracted
maximum value.
• Further explore investment opportunities with third parties.
Link to key risks
1A, 2A
Link to KPIs
2, 3, 4, 5
Risks and uncertainties
See pages 38 to 42
Key performance indicators
See pages 30 to 31
2. Instil a more
commercial culture
3. Drive an
innovation agenda
Rationale
Rationale
• To ensure we focus on the delivery of profitable sales.
• To ensure that our brands and formats remain fresh and relevant
• To engage our teams in delivering outstanding guest experiences.
• To act quickly and decisively to remain competitive in our
fast-changing marketplace.
within their market segments.
• To leverage the increasing role technology can play in improving
efficiency and guest experience.
• To execute a digital strategy to engage with consumers across
a variety of platforms.
• To facilitate new product and concept development.
FY 2018 progress
FY 2018 progress
• Mitigation of £28m of food, drink and logistics cost headwinds
• Expanded our involvement with delivery partners, 131 sites
through continued efficiency savings.
are now live with Deliveroo or Just Eat.
• Continued to bring guest technology to the customer through
order and pay at table as well as the installation of wireless
charging pads in some of our All Bar One businesses.
• Increased the sophistication of our customer relationship
management capability, with the ability to target the right
customers with the right offers through our digital channels.
• Generated £5m benefit from centralised pricing changes.
• New labour rostering system fully embedded, allowing managers
to improve sales forecasting and enhance deployment of labour
resulting in an £8m in-year benefit.
• Team formed to support sites performing below required labour
scheduling accuracy.
• Further advances in guest engagement with social media
response rate of 93% (FY 2017 83%) and net promoter score
also up 3 percentage points.
• System update and change of processes around our stock
management.
• Removal of cash expenditure for sundry expenses trialled to increase
visibility, control and identify scale purchasing opportunities.
FY 2019 priorities
FY 2019 priorities
• Fully roll out and embed the new stock auto-ordering system,
improving control through a reduction in waste, fewer stock
outages and a more efficient stock take process.
• Consolidate all data onto one platform to facilitate increased
use of technology within our business.
• Further develop guest loyalty initiatives and extend roll out
• Removal of all unprofitable hours throughout the business.
to more brands.
• Increase spend per head through tailored pricing,
• Roll out our order at table technology across more O’Neill’s sites
menu psychology and upselling.
and to four additional brands.
• Continue to leverage scale through central procurement
and roll out of cash expenditure removal across all businesses.
• Continue to evolve and develop all of our brands and concepts.
Link to key risks
1A, 1B, 2A, 2D, 2G
Link to KPIs
1, 2, 3, 5
Risks and uncertainties
See pages 38 to 42
Key performance indicators
See pages 30 to 31
Link to key risks
1A, 2B, 2C
Link to KPIs
2, 3, 5
Risks and uncertainties
See pages 38 to 42
Key performance indicators
See pages 30 to 31
Annual report and accounts 2018 Mitchells & Butlers plc
23
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Our strategy in action
24
Mitchells & Butlers plc Annual report and accounts 2018
Building a
more balanced
business
We aim to generate maximum value
from our estate by ensuring we have
the right brand in the right location.
During the year we invested £171m
in capital activity, completing a total
of 239 projects as well as investing
in the maintenance and infrastructure
of our businesses.
We continued the premiumisation of our estate through investment
in Miller & Carter which saw a further 21 sites open in the year,
taking the brand to 105 restaurants in total.
This means we have kept pace with our aim to invest in each of
our sites every six to seven years, ensuring we upgrade and maintain
the look and feel in an ever more competitive market. Our returns
from this investment are strong too, with return on capitala of 27%
on our remodel projects and 23% on our conversion and acquisition
projects completed in the year.
As a direct result of our transformation programme, we successfully
completed more projects in the first half of the year than previously
resulting in an increase in the number of trading weeks post
investment. This, in addition to a reduction in the time and cost
associated with closure, delivered a total in-year benefit of £3m.
In the coming year, we will maintain this investment cycle and
look to unlock further value from our existing assets through
our remodel programme.
Annual report and accounts 2018 Mitchells & Butlers plc
25
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Instilling a
more commercial
culture
Engaged people with the right
skills and means to both delight
guests and deliver profitable
growth remain essential to
our strategy.
With unrelenting external cost pressures, we are equipping
our managers with the tools to deliver efficiencies within
the business. These efficiencies include enhanced labour
deployment through a new rostering system, improved
stock control and reduced petty cash spend through
greater access to central suppliers.
Labour remains our most significant cost. The new
rostering system helps our General Managers more
effectively deploy labour through better sales forecasting,
scheduling recommendations and electronic time
management. The embedding of this software has
already resulted in an in-year cost mitigation of £8m.
The next stage, identified by one of our Ignite workstreams,
was the formation of a team of labour scheduling experts
who work with the sites that need further support to
extract the benefit from the system. 210 sites have been
visited this year by the team releasing an annualised cost
benefit of £1.5m.
Our guest focus, aided by our feedback consolidation
tool, reputation.com, has also continued to improve with
net promoter score growing by three points during the
year, against the backdrop of like-for-like sales growth
and market outperformance.
Our strategy in action
26
Mitchells & Butlers plc Annual report and accounts 2018
Annual report and accounts 2018 Mitchells & Butlers plc
27
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Our strategy in action
28
Mitchells & Butlers plc Annual report and accounts 2018
Driving an
innovation
agenda
Delivering our digital strategy
is still at the forefront of our
focus as we continue to bring
technology to the guest
experience through our brand
apps, order and pay at table
facilities, and the installation
of wireless charging pads.
We have also increased our food delivery capability in the
year across Deliveroo and Just Eat, with 131 sites now live
across one of the two platforms.
Our customer relationship management capability has
increased in sophistication as we are now able to target
specific groups of customers through digital channels by
tailoring messages and offers to better meet the needs
of individuals.
In addition, one of our Ignite teams identified
improvements to our booking platforms which have been
introduced. These include reducing the number of steps
a guest needs to take to book a table on-line resulting in
improved booking conversions; and offering alternative
venue recommendations when there is no availability
at the initially selected site. We estimate that this has
resulted in an annualised figure of around 13,000
additional booking conversions.
Annual report and accounts 2018 Mitchells & Butlers plc
29
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Key performance indicators
Measuring
performance
We measure our performance against our
strategy through five key performance indicators.
We have made a change to the KPIs used to measure the business performance
in the current financial year, replacing adjusted EPS with adjusted operating profit.
The change was made to align KPIs more closely with the changes detailed in the
remuneration report to long-term incentive measures.
1. Staff turnover
Definition
The number of leavers in our retail businesses, expressed as a percentage
of average retail employees. This like-for-like measure excludes
site management.
FY 2018 performance
Retail staff turnover increased by 2ppts to 84% with the increase
being driven by hourly paid team members reflecting the heightened
competitiveness of this sector of the labour market.
Despite this, turnover across all management cohorts improved from
the prior year, which is important for overall stability going forward.
2. Net promoter score
Definition
The net promoter score for a pub, bar or restaurant is defined
as the percentage of responses where we score 9 or 10 out of 10,
less the percentage of responses where we score 0 to 6 out of 10 based
on the question “how likely are you to recommend this pub to a friend
and/or relative?”
FY 2018 performance
Net promoter score for FY 2018 was 62 which has increased from a score
of 59 in FY 2017.
The improvement in the score has been driven by a continued
improvement in guest care standards as well as our focus on personalised
responses to guest feedback with 93% of all social media comments
being responded to (FY 2017 83%).
84%
2018
2017
2016
2015
2014
Link to strategy
2
62
2018
2017
2016
2015
2014
Link to strategy
1, 2, 3
%
84
82
86
82
83
62
59
51
65
63
Our strategy
See pages 22 to 23
Our strategy
See pages 22 to 23
30
Mitchells & Butlers plc Annual report and accounts 2018
3. Like-for-like salesa
Definition
The sales this year compared to the sales in the previous year of all UK
managed sites that were trading in the two periods being compared,
expressed as a percentage.
FY 2018 performance
Like-for-like salesa rose by 1.3% in FY 2018. This sales performance
was negatively impacted by extreme weather and the World Cup but
remained consistently ahead of the market when measured against
the Coffer Peach business tracker.
1.3%
2018
2017
2016
2015
2014
%
1.3
1.8
-0.8
0.8
0.6
Link to strategy
1, 2, 3
Our strategy
See pages 22 to 23
4. Return on
expansionary capitala
Definition
16%
Expansionary capital includes investments made in new sites and
investment in existing assets that materially changes the guest offer.
Return on investment is measured by incremental site EBITDA following
investment expressed as a percentage of return generating capital.
Return on investment is measured for four years following investment.
2018
2017
2016
2015
2014
FY 2018 performance
Link to strategy
The EBITDA return on all conversion and acquisition capital invested
over the last four years was 16% (FY 2017 18%). This is due to a higher
proportion of expansionary capital being spent on our food-led brands,
which were more impacted by the extreme weather in FY 2018. Projects
since the start of the most recent financial year generated a return of 23%.
1
%
16
18
20
18
16
Our strategy
See pages 22 to 23
£303m
5. Adjusted
operating profita
Definition
Operating profit before separately disclosed items as set out in the
Group Income Statement. Separately disclosed items (as detailed in note
2.2 of the financial statements) are those which are separately disclosed
by virtue of their size or incidence. Excluding these items allows a better
understanding of the trading of the Group.
FY 2018 performance
Adjusted operating profita for the year of £303m was 1.6% down on
the prior year on a 52 week basis. However in the second half, adjusted
operating profit grew by 1.9%, despite Easter shifting into the first half,
as the momentum from our strategic initiatives continues to gather pace.
a. The Directors use a number of alternative performance measures (APMs) that are
considered critical to aid understanding of the Group’s performance. Key measures
are explained on pages 148 to 150 of this report.
2018
2017
2016
2015
2014
Link to strategy
1, 2, 3
£m
303
314
318
328
313
Our strategy
See pages 22 to 23
Annual report and accounts 2018 Mitchells & Butlers plc
31
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Corporate social responsibility
Brands
people trust
Food and drink
• We have committed to Public Health England’s Sugar Reduction
programme for our family brands Harvester, Toby Carvery,
Sizzling Pubs and Stonehouse.
• We are a national sponsor of Best Bar None, an accreditation
scheme promoting responsible management.
• 98% of our businesses have been rated good or very good
for food hygiene.
• Browns continues to serve 100% British Red Tractor Farm Assured
beef through its Integrated Beef Supply Programme.
• 100% of our shell on eggs are produced from free range hens.
32
Mitchells & Butlers plc Annual report and accounts 2018
Food sourcing
We have a responsibility to our guests to ensure that the food we source
has been produced in a sustainable and ethical manner, having due
regard for high standards of animal welfare.
Our Sourcing Policy has been developed to ensure that the procurement
of all meat, poultry and finfish used within our business is carried out in
accordance with the Company’s ethical standards that operate across all
our brands. Working closely with our suppliers, we aim to optimise animal
welfare standards to meet business needs and satisfy guest requirements.
Guest insight research that we conducted has highlighted key areas
that matter to our guests in terms of animal welfare, environmental
impact and social equity. Our Sourcing Policy addresses these issues
and confirms our approach to the achievement of the optimal standards
possible for each of our brands. Led by a cross-functional team, reporting
directly to the Executive Committee, the Sourcing Policy continues to
evolve and is reviewed on a regular basis, to incorporate any changes
in legislation, procurement policies or business needs.
Our key achievements in FY 2018:
• Browns continues to serve guests with 100% British Red Tractor Farm
Assured beef, produced through their very own Browns Integrated
Beef Supply programme. This initiative takes calves from known
Red Tractor Farm Assured dairy farms, which are reared on specialist
calf units, through to the finishing stage on selected assured farms,
contracted to supply Mitchells & Butlers. In recognition of the great
quality beef produced from this scheme, Browns has won Silver and
Bronze awards at the World Steak Challenge in 2017 and 2018.
• Updates to the Farm Animal Welfare and Sourcing Policy have been
shared with our core food suppliers at the Company’s annual food
and drink supplier conference, most recently held in April 2018.
• The Mitchells & Butlers Antibiotics Policy has been updated to prohibit
the prophylactic use of antibiotics.
• We are gathering data from all our suppliers who procure eggs, liquid
eggs or egg derivatives for inclusion within our products, to ascertain
the production system in place for laying hens. The information gathered
allows Mitchells & Butlers to assess how we can progress to a 100% cage
free status for laying hens. This assists Mitchells & Butlers in delivering
its objective of extending the procurement of shell on eggs from cage
free hens, to include egg products, and to complete this transition by
2025, subject to product availability and commercial negotiations.
• Mitchells & Butlers continues to engage with Compassion in World
Farming (CIWF) and Farm Animal Investment Risk and Return (FAIRR)
on matters relating to welfare and antibiotic usage, as well as holding
preliminary meetings with The Humane Society and the National
Farmers Union on our sourcing strategy.
• After attending the CIWF forum on the Better Chicken Commitment,
Mitchells & Butlers is holding further meetings with its poultry
suppliers and CIWF, to assess the impact of this initiative on current
production models.
More details on our food Sourcing Policy can be found at
www.mbplc.com/responsibility/goodfood
Nutrition
We continue to look for the most effective way to present nutritional
information to our guests across our portfolio of brands. By using our
guest insight to understand better our guests’ preferences and priorities,
we can develop our nutritional messaging to ensure it remains effective.
We believe our focus should be on communicating about ingredients,
healthy cooking techniques and the freshness of our food as well as
providing healthier options to enable our guests to make informed
choices when eating with us.
We publish the nutritional information for our menus on our websites for
All Bar One, Ember Inns, Harvester, Premium Country Pubs, Toby Carvery,
Suburban Pubs and Vintage Inns. For example, this year we launched
specific menus in All Bar One for Veganuary and a wellness campaign.
We have invested significantly in technical processes and systems to
incorporate the requirements of Regulation (EU) No. 1169/2011 on the
provision of food information to consumers. We follow both regulatory
and best practice advice, to ensure the information is as accurate as
possible and helps our guests make the most informed choice to suit
their dietary needs and preferences.
It is a mandatory requirement for all suppliers to Mitchells & Butlers
to provide nutritional information for every food product, and to follow
Company policy on the provision of accurate nutrition data. This enables
our chefs to have the detail required to design and improve dishes that
meet the specific nutritional requirements of our guests.
Allergens
We are committed to ensuring that customers who suffer from allergies
are provided with the information they need to make an informed choice
about the suitability of the food we serve for their own circumstances.
We provide allergen information on our brand websites and include
filters to help customers find the dishes which do not contain any filtered
allergens. We continually review our service cycle and retail staff training
on allergens to improve the customer experience.
Salt
Over three years ago, our brands replaced standard salt used in salt
shakers on tables, and to season food back of house, with a mineral salt
which contains 15% less sodium than standard salt and which is high in
magnesium. This change has helped us deliver on our commitment to
the Government Responsibility Deal pledge to support and enable
consumers to reduce their dietary salt intake.
Sugar
We continue to engage actively with Public Health England (PHE)
and our suppliers to meet the sugar reduction targets set by PHE in 2017.
This year we have reported our Year One data and are working towards
a further sugar reduction in our top selling desserts for 2019.
This year we have committed to Public Health England’s Sugar Reduction
Programme for our family brands Harvester, Toby Carvery, Sizzling Pubs
and Stonehouse. We are focusing on reducing sugar in some of our
higher sugar desserts through dish reformulation. Whilst we make these
changes we aim to support our customers in making healthier choices
by providing a choice of dishes, including lower sugar and calorie options,
and by providing nutritional information on many of our brand websites.
This year, in line with the introduction of the Government Soft Drinks
Sugar Levy, we have proactively reduced the number of sugary products
in our soft drinks ranges and introduced additional healthier soft drink
choices. Working closely with our suppliers, we have replaced many
added sugar soft drinks with new low and no sugar reformulations.
Over 90% of our soft drinks are exempt from the levy. We will continue
to offer our guests choice from a selection of soft drinks. Where our
products incur the levy, we will pass it on to the customer, to encourage
consumers towards healthier alternatives.
Annual report and accounts 2018 Mitchells & Butlers plc
33
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Corporate social responsibility continued
Signposting healthier options
In partnership with Campden BRI, an independent food and drinks
research service, we developed a guide to help position our brands
as leaders in the industry for healthier options and to enable guest
communication that is on trend, truthful, substantiated and
legally compliant.
Several of our brands have increased their range of healthier options,
and supported these with nutritional and health information, to make
them easily identifiable to the health-conscious guest. Examples include
Toby Carvery’s signposting of a range of menu options which are low in
saturated fat and contain 500 calories or fewer, and All Bar One’s range
of calorie-controlled options, with the energy content published on the
menu copy, whilst dishes high in protein, omega-3 and ‘lighter’ options
are also signposted.
Responsibility Deal partnership
We are committed partners of the Government’s Responsibility Deal,
which is now under the remit of Public Health England, and remain
focused on delivering our pledges relating to artificial trans fats
and salt reduction.
Children’s menus
In response to the growing concern over childhood obesity, we developed
our own Children’s Food Standards that were implemented across all
brands from Spring 2016. We continue to optimise our children’s offer
and updated the standards with new public health guidance following
the Government’s Childhood Obesity Plan.
The standards incorporate best practice and recommendations from
leading health charities such as The Soil Association and have been
developed in consultation with the School Food Standards, Government
Buying Standards and established dietary recommendations for children.
Food safety
We place great importance on the Food Hygiene Ratings Scores of our
pubs, bars and restaurants and we have made a commitment to increase
the number of our businesses that achieve a 4 or 5-star Food Hygiene
Rating, taking a zero-tolerance approach to anything below. It is pleasing
that at the year end, 98% of our sites were rated either good or very good
for food hygiene, a further improvement on our strong performance
last year.
Mitchells & Butlers is fully engaged with the Food Standards Agency
and supports the Regulating Our Future initiative. We continue to remain
involved with the Food Standards Agency and their development and
shaping of the future of regulation and food safety enforcement in
England, Wales and Northern Ireland.
The Company supports the development of the UK Hospitality Assured
Catering Scheme and wishes to see a robust, fair and sustainably funded
scheme that informs Food Hygiene Ratings standards.
Health and safety
The well-being of all employees and guests is of paramount concern
to Mitchells & Butlers. The continuous cycle of improvements has been
maintained and we continue to deliver an industry leading RIDDOR
(Reporting of Injuries, Diseases and Dangerous Occurrences
Regulations) position in respect of our guests and our employees.
Serving alcohol responsibly
The responsible operation of our pubs and restaurants is central to
the culture of our business. Our Alcohol and Social Responsibility Policy
has now been in place for over a decade, and lays down best practice
about serving alcohol responsibly in England and Wales, and Scotland,
including team training, responsible pricing and promotions.
Mitchells & Butlers operates the Challenge 21 policy in all our businesses
across England and Wales (and a Challenge 25 policy in our Scottish
businesses). The policy requires that any guest attempting to buy alcohol
who appears under the age of 21, or 25 in Scotland, must provide an
acceptable form of proof of age ID to confirm that they are over 18,
before they can be served. This policy forms part of our regular training
for our employees on their responsibilities for serving alcohol.
We strongly support local ‘Pubwatch’ schemes and crime prevention
initiatives and aim to participate fully in the drive to promote responsible
drinking. It is Company policy for all managers to join and support a local
‘Pubwatch’ scheme if one exists. We also actively support our managers
in participating in local Best Bar None schemes and are an official sponsor
of Best Bar None nationally. Best Bar None is a national award scheme
supported by the Home Office aimed at promoting responsible
management and operation of alcohol licensed premises.
We are a major funder of Drinkaware Trust, the aim of which is to promote
responsible drinking by finding innovative ways to challenge the national
drinking culture. In turn, this helps reduce alcohol misuse and minimise
alcohol-related harm.
34
Mitchells & Butlers plc Annual report and accounts 2018
Mitchells & Butlers is a well-balanced business and overall there is a
broadly even split between males and females across our employee base.
Our gender pay gap is primarily a result of there being a greater proportion
of men in senior management roles, as well as in roles that attract higher
salaries or bonus payments.
The 2018 reduction in the mean pay gap is predominantly due to
increases in base pay rates for hourly paid retail team members, where
there is a higher proportion of female employees. The pay increases
applicable to this group were higher in percentage terms than for more
senior salaried roles and accounted for 0.4% of the overall reduction.
The remaining reduction in the pay gap is due to the impact of leavers
and joiners with females joining at higher pay rates than those leaving.
To ensure we continue our focus on creating a diverse workforce we have
been working on several initiatives:
• We have established a Diversity and Inclusion Steering Group to develop,
promote and monitor our overall diversity and inclusion agenda;
• We are reviewing our business practices, policies and procedures
to further enhance flexibility and inclusivity in the workplace;
• We have hosted a Careers & Development Marketplace for our
Retail Support Centre colleagues to ensure we are empowering
our employees to understand and explore the job roles and training
opportunities available to them; and
• We have developed our employee value proposition, known as our
People Promise, to support our wider recruitment strategy. The People
Promise is an explanation of what is unique and special about Mitchells
& Butlers’ offering as an employer, based on feedback and insights
from our employees about what they value the most.
Our full Gender Pay Gap report can be found at:
www.mbplc.com/investors/businessconduct/genderpaygapreporting
Diversity
We are committed to providing equal opportunities for all of our
employees. Our employee Diversity Policy ensures that every employee,
without exception, is treated equally and fairly and that all employees
are aware of their responsibilities.
The policy confirms that there will be no direct or indirect discrimination
in respect of age, disability, religious belief, gender, sexual orientation,
race, colour, marital status, political belief or nationality, or any other
category defined by law in all aspects of employment including
recruitment, promotion, and opportunities for training, pay and benefits.
The following table sets out our diversity balance as between men and
women at the end of FY 2018.
Directors
Other senior managers
All employees
Men
10
26
21,434
Women
1
10
23,252
Reward and recognition
We acknowledge the importance of rewards and how important these
tools are in recognising the hard work and dedication of our people.
Pickaperk, our benefits platform, continues to be popular with our
employees, with a spend on discounted goods of £1.92m in FY 2018,
an increase of £310k from the previous year.
Many of our employees continue to rate the ‘Dine with Us’ programme
as their favourite benefit, where they can access their employee discount
digitally when they eat in one of our businesses. This remains at 33% for
the employee and up to five of their guests.
Annual report and accounts 2018 Mitchells & Butlers plc
35
People
• Named Best Place to Work at HR Distinction Awards.
• We saw an all time high in Mitchells & Butlers’ Your Say employee
engagement survey with engagement scores improving or being
sustained across all survey groups.
• At Mitchells & Butlers Group level, our overall median Gender Pay
Gap has reduced to 4.7%, from the 5.2% level we reported last year.
• Winner of Best Youth Engagement and Employment category
at HR Excellence Awards.
• We celebrated our 1,000th apprentice completing the programme.
As one of the largest managed pubs, bars and restaurant companies in
the UK, we have a huge range of career opportunities on offer. Through
our people strategy we strive to attract, develop and retain the best
talent. Everything we do as a business is built on the enthusiasm and
professionalism of our people.
Listening to our people
Our annual employee engagement survey ‘Your Say’ is an integral
part of our calendar. It enables our employees to share their views and
demonstrates how much we value their feedback.
This year we saw an all-time high in our results, with engagement scores
improving or being sustained across all survey groups. We continue to
see a huge step forward in how much our employees see our PRIDE
(Passion, Respect, Innovation, Drive and Engagement) values are living
across Mitchells & Butlers. Our colleagues also told us that they value
flexibility, work life balance, being a valued member of their respective
teams, and working in a fun and friendly environment as important factors
in driving engagement. Following the survey, employees in each business
or department create an action plan specific to their team results.
Gender pay gap
At Mitchells & Butlers we work hard to ensure that everyone across the
organisation is treated equally. We remain committed to attracting and
retaining the very best talent and believe in creating job opportunities for
everyone regardless of gender. As a result, we continue to build a culture
that values our differences and embraces them as strengths, to drive our
business forward and nurture a workplace where our people can love
every moment.
At Mitchells & Butlers Group level, our overall median Gender Pay Gap
has reduced to 4.7%, from the 5.2% level we reported last year. We have
a mean pay gap of 7.4% versus last year’s gap of 8.1%, both of these figures
comparing favourably with the national average median pay gap which
stands at 18.4% and the national average mean pay gap of 17.4%.
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Corporate social responsibility continued
Over 14,000 employees have received an award recognising their service
to the business. Awards are made to employees for achieving service
milestones between one year and 45 years. Around a further 1,700 have
been recognised across the year with specific, ad hoc acknowledgements
for their contribution for a job well done.
During the year, our Reward team has been focusing on developing and
broadening our Wellbeing programme. Several members of the Reward
team completed the Mental Health at Work First Aid course and work
is ongoing to develop this initiative throughout the wider business.
Additionally, we are developing a Wellbeing Hub at our Retail Support
Centre as a space for employees to use for a variety of activities such
as a book swap, peaceful space and mindfulness. Our Health Age
programme will be rolled out further to help support our employees
understand their own ‘health age’ and provide proactive information
for the employees to make changes to their diet and lifestyle if they wish.
Finally, we have launched a benefit with Neyber, who provide financial
wellbeing support to our employees.
Nurturing and developing young talent
We have continued to expand our successful apprentice programmes
over the last year. In addition to offering apprenticeships nationwide in the
majority of our managed pubs, bars and restaurants, we have extended
our programmes to include intermediate and higher-level apprenticeships
in our Retail Support Centre for our corporate employees. We have
developed a series of learning pathways, which mean our apprentices
can gain a nationally recognised qualification, transferable career skills
alongside on and off the job training. Hospitality is one of the few
industries where you can very quickly progress from an apprenticeship
into a management role, thereby helping us develop a talent pipeline and
apprenticeship scheme to support our business today and for future years.
In recognition of our apprentice activity and its impact, the Company
was recognised by winning a British Institute of Innkeeping National
Innovation and Training Award and the Best Youth Engagement and
Employment category at the HR Excellence and HR Distinction Awards.
Our Chefs’ Academy is our primary apprenticeship programme
to develop culinary skills and it continues to grow in both reach and
reputation. In total, 222 chefs have commenced their learning in FY 2018
making Chefs’ Academy one of the largest workshop supported commis
chef apprenticeship schemes in the UK. Now in its second year of
delivery, the business is feeling the benefits of the programme, with
many graduates already being promoted into Kitchen Manager or Head
Chef roles and with a number being awarded divisional accolades such
as Head Chef of the Year. The business has also now launched an
Advanced Chefs’ Academy programme which aims to further develop
culinary skills and also focuses on the managerial and leadership
capabilities needed to run a highly professional and successful kitchen.
Of the total number of learner starters this year, 39 have commenced
this advanced programme.
In addition, a further 800 young people have joined our business
on hospitality apprenticeships this year and over 1,200 of our current
employees have enrolled onto one of the apprenticeship opportunities
open to them. We are also delighted to see over 625 employees
successfully complete their first apprenticeship in 2018 and we celebrated
our 1,000th apprentice completing the programme. Mitchells & Butlers
now has c.1,800 active apprentices within the organisation and we are
aspiring to add a further 3,000 apprenticeship starters in 2019.
Mitchells & Butlers now offers apprenticeship opportunities from Level 2
through to Level 7, which allows a 16-year-old school leaver to join us on
an intermediate apprenticeship and progress through a range of
qualifications culminating in a BA (Hons) degree.
We understand that there is not one learning pathway which fits all and,
therefore, we are confident that we offer a true alternative to a traditional
academic route; and that we have the building blocks in place to help
produce our leaders of the future.
36
Mitchells & Butlers plc Annual report and accounts 2018
Communities
• Over a three year partnership we have raised over £34,000
for Birmingham Children’s Hospital.
• On Armed Forces Day Toby Carvery donated over 6,270 meals
to military personnel.
• All Bar One donated over £49,000 to homeless charity, Shelter.
We are committed to being a good neighbour and a responsible
contributor to society, locally and nationally, by supporting our
communities. We support our employees and businesses across a
spectrum of charitable activities and fundraising, enabling us to build
strong relationships with our guests, our colleagues and our neighbours
while giving back to the communities in which we trade.
Employee donations programme
The employee donations programme helps individual Mitchells & Butlers’
employees (and retired employees) support a personal charity event or
challenge of their choice. This year we have donated around £14,000
through this initiative, to a large number of local and national causes
including Aidan’s Elephants, MIND, British Heart Foundation, Macmillan
Cancer, Shelter, MS UK, Alzheimer’s Society and many more.
Payroll Giving
We have re-launched our Payroll Giving programme with a new provider,
which enables employees to donate to their chosen charity direct from
their pay. The Company has committed to paying the administration fee
to process each employee’s donation, so each charity gets the benefit of
the full donation amount. Employees receive tax relief on the donation.
Big hearted brands, proud to serve those who serve
In June, Toby Carvery showed its support for the armed forces by
offering all military personnel a free carvery meal on Armed Forces Day.
The offer was open to all military personnel, from serving troops and
reserves to veterans and cadets and over 6,270 meals were donated
by Toby Carvery teams across the country.
Again the RNLI and Nicholson’s pubs joined forces to promote the charity’s
Respect the Water campaign. Nicholson’s helped to spread the safety
messages as well as donating 50p from every Ocean Fish & Chips dish
sold, to the RNLI to generate over £35,000 of fundraising for the charity.
With millions of people every year struggling with bad housing or
homelessness, All Bar One has been working with Shelter since 2016
to help support the charity’s work offering advice, support and legal
services. All Bar One supported Shelter by donating 50p from every
special Shelter dish sold on its Christmas and Breakfast menus.
This has resulted in over £49,000 being raised for Shelter so far.
Once again, we supported the Royal British Legion Poppy Appeal selling
poppies to raise funds for thousands of serving and ex-Service people.
Toby Carvery has also made the Royal British Legion its official charity
partner and have raised over £38,000 via donating 25p from every
Jam and Coconut Sponge pudding sold.
Support for Birmingham Children’s Hospital
Over the past three years the Retail Support Centre Social Committee
has organised a series of fundraising events for Birmingham Children’s
Hospital. Money has been raised through a sky dive, a mud run, abseils,
leg waxing, and cake sales. Over the course of our three year partnership
Mitchells & Butlers has raised over £34,000.
Licensed Trade Charity
Mitchells & Butlers is a supporter of the Licensed Trade Charity
– an organisation that supports hundreds of pub, bar and brewery people
facing crisis with practical, emotional and financial support. The Company
supports a number of the charity’s initiatives including employees taking
on telephone befriending roles, a service set up to ease the isolation felt
by some former hospitality industry staff. This year we have also started
working with the charity as our provider of our Employee Assistance
Programme called ‘Time To Open Up’ which is a confidential 24/7 helpline
and provides support with a range of practical advice and services.
Our environment
We successfully manage our energy, waste and water in a way which is
cost effective to the business and reduces our impact on the environment.
Waste management
We continue to drive successfully our waste disposal strategy, focused
on reducing, re-using and effectively recycling the waste generated
by our restaurants and pubs. This captures recycling cardboard, glass,
food and cooking oil.
Plastic straws
We have removed plastic straws from service in our restaurants and pubs
and only provide a straw if a guest requests one. As a direct result we
have seen our straw usage drop by approximately 50% during FY 2018.
We have also sourced a non-plastic straw made from paper and bamboo
pulp that is being phased in across the estate and will eventually replace
all plastic straws.
Energy efficiency
Our whole estate is fitted with energy efficient lighting. This has helped
us to make considerable savings on energy consumption as well as
improving lighting levels for our guests.
Smart meters are installed in almost all our businesses, along with heat
recovery units which have been fitted in a number of our cellars. This has
not only allowed the recovery of heat, but also reduced maintenance costs
by allowing other equipment in the cellars to operate in cooler conditions.
We also use free cellar air cooling systems, which draw in cool air from
outside when temperatures drop below 8˚C and turn off the traditional
cellar cooling process, saving a huge amount of energy every day.
This year we have focused on enhancing the reporting of our consumption
of gas and electricity allowing us to better monitor and reduce energy
consumption. Each site receives a weekly report outlining half hourly
energy consumption from the previous week, enabling our managers
to make informed decisions on how to best manage their energy usage.
In addition, we are currently rolling out new gas and electricity meters
across the estate to ensure that we have accurate consumption data,
again to help inform our decisions on reducing our energy consumption.
Many of our kitchens use technology to control our extraction and air
supply fans to ensure that they always run at the lowest speed to minimise
energy usage. We have added smart heating controls to compatible
sites that allow for better time and temperature control of our businesses,
demonstrating how the reduction of our consumption of energy
is now a fundamental part of our everyday business.
Energy consumption
A programme of work has commenced to drive a greater focus
on reducing the consumption of electricity and gas across the estate.
Reporting of consumption at outlet level has been enhanced and time
slot analysis is driving a focus on ‘out of trading hours’ wastage.
Alongside this, a specialist third-party expert has been engaged
to scope out a co-ordinated programme of activity looking across the
key influencers of energy consumption, i.e. the pub (fabric and plant);
controls and maintenance; site personnel and practices, and management
and incentive schemes. It is anticipated this programme will cover a
three to five year period.
Tax strategy
The aim of the Company tax strategy is to manage the tax affairs of the
Group as efficiently as possible to support the commercial objectives of
the Group. We manage our tax affairs in accordance with the letter and
spirit of the law, whilst seeking to minimise the tax paid by the Group. We
seek to maintain strong compliance controls and operate a policy of open
and transparent dialogue with the relevant tax authorities. The full strategy
can be found at www.mbplc.com/investors/businessconduct/taxstrategy
Modern slavery
Mitchells & Butlers has a zero-tolerance approach to any form of
mistreatment of people and is committed to operating and conducting
its business in such a way that human rights are respected and protected.
The full statement can be found at www.mbplc.com/investors/
businessconduct/modernslaverystatement
Annual report and accounts 2018 Mitchells & Butlers plc
37
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Risks and uncertainties
Keeping risk
under control
This section highlights the top ten
principal risks and uncertainties that affect
the Company, together with the key
mitigating activities in place to manage
those risks.
This does not represent a comprehensive
list of all of the risks that the Company
faces, but focuses on those that are
currently considered to be most relevant.
38
Mitchells & Butlers plc Annual report and accounts 2018
Overview
Risk management is critical to the proper discharge of our corporate
responsibilities and to the delivery of shareholder value. Risk is at the
heart of everything we do as an organisation. Therefore, the process for
identifying and assessing risks and opportunities for improvements is an
integral and inseparable part of the management skills and processes
which are at the core of our business.
There is a formally established Risk Committee in place which continues
to meet on a quarterly basis to review the key risks facing the business.
Key risks identified are reviewed and assessed by the Risk Committee in
terms of their likelihood and impact and recorded on the Group’s ‘Key Risk
Heat Map’, in conjunction with associated agreed risk mitigation plans.
The processes that are used to identify and manage risks are described in
the Internal Control and Risk Management statement on pages 62 and 63.
Management support, involvement and enforcement is fundamental
to the success of our risk management framework and each member of
the Executive Committee takes responsibility for the management of the
specific risks associated with their function. Our Group risk register
clearly outlines the alignment of each key risk to an Executive Committee
member and identifies an ‘action owner’, to ensure responsibilities are
formally aligned.
Therefore, there is a robust and transparent process in place to provide
an appropriate level of direction and support in the identification,
assessment and management of those aspects of the business
which have the potential to damage seriously our financial position,
our shareholder value, our responsibilities to our staff and guests,
our reputation and our relationships with key stakeholders.
.
1. Market risks
Our three
lines of defence
1st
• Executive Committee
• Leadership group/management
• Internal controls and processes
• Internal policies and procedures
• Training
2nd
• Financial authority limits
• Risk Management processes
• Audit Committee
• Risk Committee
• Health and Safety Team
• Technology specialists
• Legal support
3rd
• Group Assurance
• Operational Practices Team
Risk category and description
A. Declining sales performance
Controls/mitigating activities
• Right team and structure in place. Brand alignment ensures the right
Movement
Risk decreasing
This risk falls into three main categories:
Sales: There is a risk that declining sales,
concerns around consumer confidence,
increased personal debt levels, squeezes
on disposable income and rising inflation
individually, together or in combinations,
may adversely affect our market share and
profitability, reducing headroom against
securitisation tests.
Consumer and market insight:
If Mitchells & Butlers fails to manage and
develop its existing (and new) brands in
line with consumer needs and market trends
due to failure to obtain or use sufficient
insight in a timely manner, this may lead
to a decline in revenues and profits.
Pricing and market changes: If price
changes are not intelligently applied due to
a lack of appreciation of market sensitivities
and elasticities, this may result in decreased
revenue and profit particularly in relation
to exceptional dry/hot summer weather
and extreme cold/snow conditions.
research gets done and is acted on.
• Daily, weekly and periodic sales reporting, monitoring and scrutiny
activity is in place.
• Our Eat Drink Share panel provides robust, quick and cost-effective
research. This is our own panel of 27,000 Mitchells & Butlers guests whom
we can use for research purposes for quick and cost-effective insights.
• Primary research in partnership with brand/category teams.
• Working with suppliers to tap into their research.
• Each brand has its own pricing strategy.
• Price promotions are in line with the agreed strategy.
• Sales training for Management.
• Consumer/insight-led innovation process and development
for new brands.
• Reduce guest complaints by improving the local management
of social media responses (e.g. TripAdvisor responses).
• Increased digital marketing activity including new loyalty apps.
• Increased activity from takeaway and delivery offerings.
• Online guest satisfaction survey to collect guest feedback. This feedback,
together with the results of research studies, is monitored and evaluated
by a dedicated guest insight team to ensure that the relevance to guests
of the Company’s brands is maintained.
Annual report and accounts 2018 Mitchells & Butlers plc
39
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Risks and uncertainties continued
Movement
Risk increasing
1. Market risks continued
Risk category and description
B. Cost of goods – price increases
Food: The price of goods increases
due to changes in demand, legislation,
exchange rates and/or production costs
and uncertainty of supply, leading to
decreased profits.
Drinks: The price of drinks goods
increases due to changes in demand,
legislation, exchange rates and production
costs, leading to decreased profits.
Goods not for resale: Increases in the price
of goods not for resale and utilities costs as
a result of increases in global demand and
uncertainty of supply in producing nations
can have a significant impact on the cost
base, consequently impacting margins.
Brexit: Given that in FY 2019, the
transition period for the UK to exit from
the EU will commence (noting that c.30%
of food spend is sourced from EU countries),
the overall risk and impact of additional
costs is higher. In addition, there is an
increasing risk of sourcing certain products
given the expected delays at ports
following exit from the EU. On exit of the
EU, cost of goods would be impacted by
changes in terms of trade and therefore
tariffs, additional border controls and
fluctuations in the value of sterling.
Controls/mitigating activities
Overall, price increases are mitigated as Mitchells & Butlers leverages its scale
to drive competitive cost advantage and collaborates with suppliers to increase
efficiencies in the supply chain. The fragmented nature of the food supply
industry in the world commodity markets gives the Company the opportunity
to source products from a number of alternative suppliers in order to drive
down cost. Consideration has been given to potential areas such as supply
chain risk (e.g. customs controls on imports), labour risk and economic
disruption. Key mitigating activities for food and drink are detailed below:
Food:
• A Food Procurement Strategy is in place.
• Full reviews have been carried out on key categories to ensure optimum
value is achieved in each category.
• A full range review was completed in 2017 ensuring the correct number
of products/suppliers. This is regularly reviewed.
• Regular reporting of current and projected inflation.
• Good relationships with key suppliers.
Drinks:
• Each drinks category has a clearly defined strategic sourcing plan
to ensure Company scale is leveraged, supply base is rationalised
and consumer needs are met.
• Good relationships with key suppliers.
• Supplier collaboration programmes are in place.
• Plans in place to mitigate Sugar Tax.
Risk is increasing mainly due to the devaluation of the pound following the
EU referendum, changes in Government policy (raising the risk of punitive
duty changes) and the introduction of the Sugar Tax in 2018. Brexit risks
have been considered in detail during FY 2018 and mitigating plans continue
to be developed.
Buying ahead to mitigate the increasing risk of a lack of availability of products
upon exit from the EU.
2. Operational risks
Controls/mitigating activities
• The Company makes significant investment in training to ensure that
its people have the right skills to perform their jobs successfully.
• Furthermore, an employee survey is conducted annually to establish
employee satisfaction and engagement and this is compared with other
companies, as well as previous surveys. Where appropriate, changes in
working practices are made in response to the findings of these surveys.
• Remuneration packages are benchmarked to ensure that they remain
competitive and a talent review process is used to provide structured
succession planning.
• The apprenticeship programme will also assist in mitigating against
the increasing risk in relation to EU workers.
Movement
Risk increasing
(specifically in
London/South East)
Risk category and description
A. People planning and
development
Mitchells & Butlers has a strong guest
focus and so it is important that it is able
to attract, retain, develop and motivate
the best people with the right capabilities
throughout the organisation. There is a risk
that, without the right people, our customer
service levels would be affected.
There are a large number of EU workers
within the Group, particularly in London
and the South East. Therefore, the overall
risk is increasing as the UK approaches its
exit from the EU. Any restriction on the
free movement of labour would have a
material impact on both the cost of labour
and access to talent.
40
Mitchells & Butlers plc Annual report and accounts 2018
2. Operational risks continued
Risk category and description
B. Business continuity and
crisis management
Mitchells & Butlers relies on its food and
drink supply chain and the key IT systems
underlying the business to serve its guests
efficiently and effectively. Supply chain
interruption, IT system failure or crises such
as terrorist activity or the threat of disease
pandemic might restrict sales or reduce
operational effectiveness.
C. Information security and
disaster recovery
There is a risk that inadequate disaster
recovery plans and information security
processes are in place to mitigate against
a system outage, or failure to ensure
appropriate back-up facilities (covering
key business systems and the recovery
of critical data) and loss of sensitive data.
Increasing risk of cyber-attacks.
Risk of non-compliance with GDPR.
Controls/mitigating activities
• The Company has in place crisis and continuity plans that are tested and
refreshed regularly. The Company’s third-party back-up facility, for Retail
Support Centre employees, has been successfully tested to ensure critical
business systems are able to function in the event of a disaster.
• In addition, during FY 2018, departmental Business Continuity Plans
have been revised, updated and reviewed by the Risk Committee.
• During FY 2018, two key departments took part in a test of our third-party
off-site back-up facility. This test was a success and identified some key
learnings to improve the overall service, all of which were implemented.
Movement
No movement
• In FY 2018 a further review of cyber security was performed in order
Risk increasing
to highlight any gaps and address any challenges. As a result, a number
of further improvements have been made to address audit actions.
• In addition, controls include:
− The work carried out by the Group’s cross-functional Information
Security Steering Group.
− Group Assurance IT controls reviews.
− Implementation and revision of appropriate cyber security governance
policies and procedures.
− Ongoing security awareness initiatives continue to be undertaken.
− A regular cycle of penetration testing.
− An effective implementation of a business wide Global Data Protection
Regulation compliance programme, including training of all relevant
employees and contractors.
− Increased focus on protecting the business against potential
cyber-attacks has resulted in the implementation of additional
controls to mitigate against such risks.
− Systems, processes and controls have been reviewed and updated
to ensure GDPR compliance.
D. Wage cost inflation
• A detailed review of the risks associated with the National Living Wage
Risk increasing
There is a risk that increased costs
associated with further increases to the
National Living Wage may adversely
impact upon overall operational costs.
E. Borrowing covenants
There are risks that borrowing covenants
are breached because of circumstances
such as:
i. A change in the economic climate
leading to reduced cash inflows; or
ii. A material change in the valuation
of the property portfolio.
The overall risk has increased in the
year due to increased trading and cost
pressures which could essentially drive
reduced headroom.
has been completed. This review has been undertaken at a strategic level
and seeks to ensure that appropriate mitigating actions are in place, some
of which are in relation to how the Group carefully manages productivity
and efficiency across the estate.
• We have successfully implemented a new Time and Attendance system
to improve the management controls and reporting of staff hours.
• The Company maintains headroom against these risks. The finance team
conducts daily cash forecasting with periodic reviews at the Treasury
Committee, the role of which include ensuring that the Board Treasury
Policy is adhered to, monitoring its operation and agreeing appropriate
strategies for recommendation to the Board.
• In addition, regular forecasting and testing of covenant compliance
is performed and frequent communication is maintained with the
Securitisation Trustee.
• Annual property valuation.
• Detailed assessment within the long-term viability statement.
Risk increasing
F. Pension fund deficit
• The Company has made significant additional contributions to reduce
No movement
The material value of the pension fund
deficit remains a risk.
the funding deficit. In July 2017, the Company reached agreement on the
triennial valuation of the Group pension schemes as at 31 March 2016,
with a funding shortfall of £451m (March 2013 valuation £572m shortfall).
• The Company will continue to pay cash contributions (of £48m p.a.
indexed) to 2023, with an additional payment of £13m into escrow
in 2024 should such further funding be required at that time.
Annual report and accounts 2018 Mitchells & Butlers plc
41
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Risks and uncertainties continued
2. Operational risks continued
Risk category and description
G. Failure to operate safely
and legally
A major health and safety failure could
lead to illness, injury or loss of life or
significant damage to the Company’s
or a brand’s reputation.
Movement
No movement
Controls/mitigating activities
• Mitchells & Butlers maintains a robust programme of health and safety
checks both within its restaurants, pubs and bars and throughout the
supply chain.
• The dedicated Safety Assurance team uses a number of technical
partners including food technologists, microbiologists and allergen
specialists to ensure that our food procedures are safe.
• Regular independent audits of trading sites are performed to ensure that
procedures are followed and that appropriate standards are maintained.
• If a business is identified as underperforming in terms of health and safety
standards, it would be immediately targeted for improvement.
• The Company has Primary Authority Partnerships with Westminster
City Council for the provision of assured advice on, amongst other things,
safety issues and with Hampshire Fire Service for the provision of support
and guidance on fire safety risks.
• Food suppliers are required to meet the British Retail Consortium Global
Standard for Food Safety and are subject to regular safety and quality audits.
• Comprehensive health and safety training programmes are in place.
H. Food supply chain safety
• Mitchells & Butlers has a Safety Assurance team and uses a number
Risk increasing
Malicious or accidental contamination
in the supply chain could lead to food
goods for resale being unfit for human
consumption or being dangerous to
consume. This could lead to restrictions
in supply which in turn causes an increase
in cost of goods and reduced sales due
to consumer fears and physical harm
to customers/employees.
Allergens are becoming an increased
risk within the industry.
of technical partners including food technologists, food safety experts,
microbiologists, allergy consultants, trading standards specialists
and nutritionists.
• Mitchells & Butlers uses a robust system of detailed product specifications.
• All food products are risk rated using standard industry definitions
and assessment of the way the products are used in Mitchells & Butlers’
kitchens. Suppliers are then risk rated according to their products.
• Each food supplier is audited at least once per annum in respect of safety
and additionally in response to any serious food safety complaint or incident.
• A robust response has been taken to manage allergens and the associated
data within the menu cycle coupled with a continuous review in place to
ensure controls remain appropriate.
Long-term viability statement
Assessment of prospects
The Group’s strategy provides long-term direction and considers the viability of the business model given prevailing market and economic conditions.
The Directors’ subsequent assessment of longer-term prospects has been made taking account of the current financial position, compliance with
covenants, strategy, the budget planning process and the key risks and uncertainties, as detailed within the Annual Report.
Assessment period
Three years is deemed an appropriate period of assessment as it aligns with the Group’s planning horizon in a fast-moving market subject to economic
and political uncertainties and is supported by three year forecasts as approved by the Board in September 2018. This period also aligns with the
triennial process of pensions valuations, a key consideration in respect of future cash flows.
Assessment of viability
In accordance with Provision C2.2 of the 2016 UK Corporate Governance Code, the Directors have undertaken an assessment, including sensitivity
analyses, of the prospects of the Group for a period of three years to September 2021.
The current funding arrangements of the Group consist of £1.8bn of long-term securitised debt and £150m of unsecured committed bank facilities.
The securitised debt amortises on a scheduled profile over the next 18 years and, whilst the unsecured facilities expire in December 2020, refinancing
is believed to remain within the debt capacity of the business. Secured debt covenants are tested quarterly both on an annual and a half year basis.
Unsecured facility covenants are tested twice yearly on an annual basis. No significant changes to the capital structure are assumed.
The three year plan takes account of the prevailing economic outlook, capital allocation decisions and of significant cost headwinds that are expected to recur
each year alongside planned mitigating activity to manage such costs, principally driven through the Ignite programme of initiatives. The resilience of this
plan is assessed through application of a significant but plausible downside sensitivity analysis focused in particular on the impact of the following Principal
Risks described in the Annual Report: Declining Sales Performance, Cost of Goods Price Increases and Wage Cost Inflation (including combinations of
these factors). Compliance with financial covenants on both secured debt and unsecured facilities is assessed for both the Plan and downside sensitivities.
Viability statement
The Directors have therefore concluded, based upon the extent of the financial planning assessment, sensitivity analysis, potential mitigating actions
and current financial position that there is a reasonable expectation that the Group has adequate resources and will be able to continue in operation
and meet all its liabilities as they fall due over the three year period of assessment.
42
Mitchells & Butlers plc Annual report and accounts 2018
Financial review
Our financial and
operating performance
On a statutory basis, profit before tax
for the year was £130m (FY 2017 £77m),
on sales of £2,152m (FY 2017 £2,180m).
The Group Income Statement discloses adjusted profit and earnings
per share information that exclude separately disclosed items to allow
a better understanding of the trading of the Group. Separately disclosed
items are those which are separately identified by virtue of their size
or incidence.
Tim Jones Finance Director
FY 2017 was a 53 week period. In order to facilitate comparison of trading
performance a restated 52 week summary of adjusted performance is
detailed below. All year-on-year growth rates in the financial review are
provided on a consistent 52 week basis.
Statutory
Adjusteda
FY 2018
£m
2,152
255
130
24.5p
11.8%
FY 2017
53 weeks
£m
2,180
208
77
15.1p
9.5%
FY 2018
£m
2,152
303
178
34.1p
14.1%
FY 2017
52 weeks
£ma
2,141
308
180
34.4p
14.4%
Revenue
Operating profit
Profit before tax
Earnings per share
Operating profit margin
At the end of the period, the total estate comprised 1,750 sites in the UK
and Germany of which 1,687 are directly managed.
Annual report and accounts 2018 Mitchells & Butlers plc
43
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Financial review continued
Changes in accounting policies
Earnings per share
There have been no changes in accounting policies in the period.
Revenue
The Group’s total revenues of £2,152m were 0.5% higher than last year,
with growth in like-for-like salesa and the benefit of new site openings
partially offset by disposals made in the prior year.
Total like-for-like salesa grew by 1.3% with food salesa up by 0.3% and
drink salesa by 2.6% reflecting in part the extended warm weather in the
second half. Average spend per item on food was up 5.9%, and average
drink spend up 4.9%, following some strengthening of prices and the
increasing premiumisation of the estate.
Like-for-like salesa growth:
Food
Drink
Total
Weeks 1–32*
FY 2018
1.0%
1.9%
1.4%
Weeks 33–52
FY 2018
(0.6)%
3.5%
1.2%
Weeks 1–52
FY 2018
0.3%
2.6%
1.3%
* Weeks 1–32 presented to adjust for movement of Easter into first half.
Separately disclosed items
Separately disclosed items are identified due to their nature or materiality
to help the reader form a better view of overall and adjusted trading.
A £28m charge was recognised relating to the downward valuation
movements on selected sites in the property portfolio resulting from
the revaluation (FY 2017 £51m).
A £15m charge for impairment of short leaseholds and unlicensed
properties (FY 2017 £17m) was recognised as a result of our annual
review of asset carrying values.
A £6m charge was recognised relating to the legal costs associated
with ongoing legal proceedings between Mitchells & Butlers Pensions
Limited and the Company regarding the rate of inflation which should
be applied to pension increases for certain sections of the membership
of the Mitchells & Butlers Pensions Plan.
Operating margins and profita
The business continues to face inflationary cost pressures which have
driven a year-on-year adjusted operating margina reduction. Increases
for the year have in particular impacted labour, energy, property costs,
and food and drink costs. Adjusted operating marginsa for the full year
were 0.3ppts lower than last year at 14.1%.
Adjusted operating profita of £303m was 1.6% lower than last year as
a result of the inflationary cost pressures outlined above, partially offset
by like-for-like salesa growth and mitigating cost reductions.
Interest
Net finance costs of £125m for the full year were £3m lower than last
year on a 52 week basisa, reflecting the reduction in Group securitised
borrowings.
The full year pensions finance charge for next year is expected to be £7m.
Basic earnings per share, after the separately disclosed items described
above, were 24.5p (FY 2017 15.1p). The increase over last year reflects
a reduction in the aggregate charge relating to separately disclosed items.
Adjusted earnings per sharea were 34.1p, 0.9% lower than last year.
The weighted average number of shares in the period of 425m has
increased due to the issue of shares as scrip dividends. The total number
of shares issued at the balance sheet date is 428m.
Cash flow and net debt
The cash flow statement below excludes the net movement on unsecured
revolving facilities of £(6)m (FY 2017 £(25)m).
FY 2018
£m
FY 2017
£m
Operating cash flow before adjusted items,
movements in working capital and
additional pension contributions
Cost charged in respect
of share-based payments
Administrative pension costs
EBITDA before separately disclosed itemsa
Working capital movement
Pension deficit contributions
Cash flow from operations
before adjusted items
Cash flow from adjusted items
Capital expenditure
Interest
Tax
Disposals and other
Investment in associates
Cash flow before adjusted items
Mandatory bond amortisation
Net cash flow before dividends
Dividend
Net free cash flowa
427
(3)
(2)
422
7
(48)
381
(2)
(171)
(119)
(20)
6
(5)
70
(82)
(12)
(7)
(19)
433
(2)
(2)
429
(10)
(46)
373
–
(169)
(121)
(26)
46
–
103
(77)
26
(12)
14
The business generated £422m of EBITDA before separately disclosed
items. Capital expenditure of £171m was marginally higher than the prior
year due to increased technology spend of £10m partially offset by a
lower capital cost per project driven by a decreased proportion of
conversion projects. Disposal income related to the sale of five sites
in the year. Investment in associates of £5m related to two investments
made during the year.
After capital expenditure, disposals income, investment in associates,
interest and tax, £70m of cash flow was generated by the business.
The cash dividend payment of £7m is lower than last year as no interim
dividend was declared.
Net debt of £1,688m at the year end (FY 2017 £1,750m), represented
4.0 times adjusted EBITDAa on a 52 week basis (FY 2017 4.2 times).
44
Mitchells & Butlers plc Annual report and accounts 2018
Capital cash expenditure
Pensions
Capital expenditure of £171m comprises £167m from purchase of property,
plant and equipment and £4m in relation to purchase of intangible assets.
Maintenance and infrastructure capex of £70m was £17m higher than the
prior year due primarily to investment in systems and technology of £10m.
The Company continues to make pensions deficit payments as part
of the triennial pensions valuation as agreed with the schemes’ Trustee
at 31 March 2016, which showed an asset funding shortfall at that time
of £451m. The deficit will be funded by cash contributions of £48m
per annum indexed to 2023, as per the agreement reached in 2013.
Return generating capital of £101m decreased due to the reduced
proportion of conversion projects and increased number of remodels
which require lower spend per project. During the year we completed
232 remodels and conversions (FY 2017 252 sites) and opened seven
new sites (FY 2017 13 sites). Acquisitions were primarily focused on
premiumisation with the opening of four new Miller & Carter sites,
two new All Bar Ones and one Toby Carvery.
The return on expansionary capitala across all conversion and acquisition
projects over the past four years was 16% (FY 2017 18%), with increasing
returns coming through from more recent projects. Across projects
completed in the year the return was 23%. Recent remodel performance,
for projects completed in FY 2018, has also been encouraging, delivering
returns of 27%a and sales uplifts in excess of 10%.
Maintenance and
infrastructure
Remodels – refurbishment
Remodels – expansionary
Conversions
Acquisitions – freehold
Acquisitions – leasehold
Total return generating
capital expenditure
Total capital expenditure
FY 2018
£m
No.
70
63
7
21
7
3
101
171
188
13
31
2
5
239
FY 2017
£m
53
42
14
39
3
18
116
169
No.
143
31
78
1
12
265
The Group capital expenditure is expected to be slightly higher next year,
in the range of £175m to £180m.
Property
In line with our property valuation policy, a red book valuation of the
freehold and long leasehold estate has been completed in conjunction
with the independent property valuer, CBRE. In addition, the Group has
conducted an impairment review on short leasehold and unlicensed
properties. The overall property portfolio valuation has decreased by £48m
(FY 2017 increase of £2m) reflecting a £43m separately disclosed charge
in the income statement and a £5m decrease in the revaluation reserve.
In 2024 an additional payment of £13m will be made into escrow,
should such further funding be required at that time.
The Mitchells & Butlers Pension Plan Trust Deed and Rules provide that
it is a matter for the Company to determine the rate of inflation which
should be applied to pension increases for certain sections of the
membership in excess of the guaranteed minimum pensions and the
Company has instructed the Trustee to apply CPI (subject to certain caps)
in respect of such increases. The Trustee believes that this power was
incorrectly vested in the Company in the Trust Deed and Rules in 1996
and, despite it being reflected in further versions, has made an
application to court for these various Trust Deeds and Rules to be
rectified. It is the Board’s belief that the Company holds the power to
fix such an inflation index and the Company is therefore contesting that
application. The hearing is expected to be held in late 2019. The actuarial
surplus as determined under IAS 19 (revised) has continued to be
calculated using RPI, pending final resolution of the matter. Leaving all
other principal financial assumptions constant, the impact of this change
on the defined benefit obligation as measured under IAS 19 (revised) is
estimated to be £150m. However (under IFRIC 14) an additional liability
is recognised such that the total balance sheet position reflects the
schedule of contributions agreed by the Company, extending to 2023.
As such should the Company be successful in contesting the application
there will be no necessary movement in the total balance sheet position.
Legal fees associated with these proceedings of £6m have been
recognised as separately disclosed items.
Capital allocation policy and dividends
The Company has capital allocation obligations notably in respect of debt
service and pension fund contributions after which investment in the
estate and distribution to shareholders can be considered. Subsequent
capital allocation decisions are made primarily to protect the ongoing and
future health of the business and, as previously stated, when assessing
dividends the Board would not expect to see a structural, or permanent,
increase in the use of short-term facilities.
Given this capital allocation framework combined with the uncertain
outlook, the Board does not propose a final dividend for the year
The Board keeps its dividend policy under review as appropriate in the
context of its capital allocation policies, capital structure, and inherent
visibility on trading.
The Strategic report on pages 1 to 45 was approved by the Board on
21 November 2018 and signed on its behalf by Tim Jones, Finance Director.
Tim Jones Finance Director
a. The Directors use a number of alternative performance measures (APMs) that are
considered critical to aid the understanding of the Group’s performance. Key measures
are explained on pages 148 to 150 of this report.
Annual report and accounts 2018 Mitchells & Butlers plc
45
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Governance
In this section
47 Chairman’s introduction to governance
48 Board of Directors
50 Directors’ report
56 Directors’ responsibilities statement
57 Corporate governance statement
64 Audit Committee report
68 Report on Directors’ remuneration
46
Mitchells & Butlers plc Annual report and accounts 2018
Chairman’s introduction to governance
Dear fellow shareholder
It gives me great pleasure to
update you on our progress
in corporate governance over
the past year.
One of the key roles for the Board of Directors at Mitchells & Butlers
is to provide leadership for more than 44,000 employees and maintain
the highest possible standards of corporate governance. In doing so,
due regard is paid to the Financial Reporting Council’s report of July 2016
‘Corporate Culture and the Role of Boards’, in particular the need to align
values and incentives, and the assessment and measurement of company
culture. The Board also regularly considers the need for diversity as set
out in the Davies Report of 2011 and the follow up Hampton-Alexander
Review published in November 2016.
The Board continues to monitor developments in corporate governance
and reporting regulations. The Strategic Report on pages 1 to 45 includes
the Group’s strategy, progress and performance for the year.
During the year the Board as a whole has continued to work together
to implement the Company’s strategy in a cohesive way. Our broad range
of Board talent covers a variety of professional skills and our diverse group
of Non-Executive Directors continue to bring much experience and
challenge to the Board. In September 2018, we announced that Stewart
Gilliland, who joined the Board as a Non-Executive Director in May 2013
and was appointed as Senior Independent Director in February 2015,
had informed the Board of his intention to step down from the Board
in order to concentrate on his other roles outside the Group. The Board
has already commenced a process of identification and recruitment of
a replacement for Stewart following which it will confirm the date for him
to step down and make an appropriate announcement. This is likely to be
by the end of December 2018. My focus continues to be on maintaining
a strong team, with a broad range of professional backgrounds and skills
to drive further improvements where possible.
In line with the best practice recommendations of the UK Corporate
Governance Code, last year we committed to carrying out an externally
facilitated review of the Board’s effectiveness. The results of the 2018
externally facilitated review can be found on page 63.
The remainder of this report contains the narrative reporting required
by the UK Corporate Governance Code, the Listing Rules and the
Disclosure Guidance and Transparency Rules. I hope that you find this
report to be informative and helpful in relation to this important topic.
We are committed to maintaining an active dialogue with all our
shareholders, and we continue to offer our institutional investors access
to key senior management and our Investor Relations team via our
Investor Roadshow programme. I would like to encourage shareholders
to attend our Annual General Meeting, details of which are set out in the
separate Notice of AGM sent out with this Annual Report. The use of our
Retail Support Centre in Birmingham as a venue for our AGM has proved
to be a success (as well as a cost saving) and so we intend to use the same
facility for the 2019 AGM and we look forward to welcoming you, where
I hope you will take the opportunity of meeting our Executive and
Non-Executive Board Directors.
I look forward to the year ahead, confident in the knowledge that the
Company is led by a highly competent, professional and motivated team.
I also look forward to the support of you, our shareholders, as our senior
management team continues to focus on driving future profit growth
and creating additional shareholder value.
Bob Ivell Chairman
For the Company’s latest financial information
go to: www.mbplc.com/investors
Annual report and accounts 2018 Mitchells & Butlers plc
47
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Board of Directors Knowledge and experience
Phil Urban
Chief Executive ME
Aged 55
Phil joined Mitchells & Butlers in January 2015
as Chief Operating Officer and became
Chief Executive in September 2015. Phil was
previously Managing Director at Grosvenor
Casinos, a division of Rank Group and
Chairman of the National Casino Forum.
Prior to that, he was Managing Director for
Whitbread’s Pub Restaurant division, and for
Scottish & Newcastle Retail’s Restaurants and
Accommodation Division. Phil has an MBA and
is a qualified management accountant (CIMA).
Tim Jones
Finance Director ME
Aged 55
Tim was appointed Finance Director in
October 2010. Prior to joining the Company,
he held the position of Group Finance Director
for Interserve plc, a support services group.
Previously, he was Director of Financial
Operations at Novar plc and held senior
financial roles both in the UK and overseas in
the logistics company, Exel plc. Tim is a member
of the Institute of Chartered Accountants
in England and Wales and obtained an
MA in Economics at Cambridge University.
Bob Ivell
Non-Executive Chairman RNM
Aged 66
Appointed to the Board in May 2011, Bob has
over 30 years of extensive food and beverage
experience with a particular focus on food-led,
managed restaurants, pubs and hotels.
He is currently Non-Executive Chairman
of Carpetright plc, a Non-Executive Director
of Charles Wells Limited and President of
The Association of Licensed Multiple Retailers.
He was previously Senior Independent
Director of AGA Rangemaster Group plc
and Britvic plc, and a main Board Director of
S&N plc as Chairman and Managing Director
of its Scottish & Newcastle retail division.
He has also been Chairman of Regent Inns,
Park Resorts and David Lloyd Leisure Limited,
and was Managing Director of Beefeater
Restaurants, one of Whitbread’s pub restaurant
brands, and a Director of The Restaurant Group.
Bob is Chair of the Nomination Committee
and of the Market Disclosure Committee.
Ron Robson
Deputy Chairman AN
Aged 55
Appointed as Deputy Chairman in July 2011,
Ron is a Managing Director of Tavistock Group,
Chief Executive of Ultimate Finance Group,
Chairman of Avenue Insurance Partners and a
Non-Executive Director of Tottenham Hotspur
Limited. He was previously Chief Financial
Officer of Tamar Capital Partners and Group
Finance Director of Kenmore, both property
investment and management groups. From
2005 to 2008 he was Group Finance Director
of The Belhaven Group plc, a listed pub
retailing, brewing and drink distribution group.
Prior to that he held a number of senior finance
roles including Group Finance Director of a
listed shipping and logistics group, and trained
as a Chartered Accountant with Arthur
Andersen. Ron is a nominated shareholder
representative of Piedmont Inc.
Colin Rutherford
Independent Non-Executive
Director ARNM
Aged 59
Appointed as an independent Non-Executive
Director in April 2013, Colin is currently
Chairman of Brookgate Limited and Teachers
Media plc. He is also a Non-Executive Director
of Evofem Biosciences Inc. and Renaissance
Services SAOG amongst his other activities.
He was formerly Executive Chairman of MAM
Funds plc and Euro Sales Finance plc and has
served as a Director of various other public
and private companies in the UK and overseas.
Colin is a member of the Institute of Chartered
Accountants of Scotland and has directly
relevant corporate finance experience in
both the leisure and hospitality industries.
Colin is Chairman of the Audit Committee,
and serves on all other independent
governance committees.
Imelda Walsh
Independent Non-Executive
Director ARN
Aged 54
Appointed as an independent Non-Executive
Director in April 2013, Imelda is a Non-Executive
Director, and Chair of the Remuneration
Committees of FirstGroup plc and Aston
Martin Lagonda Global Holdings plc. She was
a Non-Executive Director, and subsequently
Chair of the Remuneration Committee, of
William Hill plc from 2011 to 2018, Mothercare
plc from 2013 to 2016, and Sainsbury’s Bank
plc from 2006 to 2010. She has held senior
Executive roles at J Sainsbury plc, where she
was Group HR Director from March 2004 to
July 2010, Barclays Bank plc and Coca-Cola &
Schweppes Beverages Limited. Imelda is Chair
of the Remuneration Committee.
48
Mitchells & Butlers plc Annual report and accounts 2018
Stewart Gilliland
Senior Independent Director ARN
Aged 61
Appointed as an independent Non-Executive
Director in May 2013 and as Senior
Independent Director in February 2015.
Stewart was Chief Executive Officer of Muller
Dairy (UK) Limited until 2010 and prior to that
held senior management positions in InBev SA,
Interbrew UK Limited and Whitbread plc.
He is currently Chairman of C&C Group plc
and Curious Drinks Limited and a Non-Executive
Director of Tesco plc and Nature’s Way
Foods Limited.
Eddie Irwin
Non-Executive Director ARN
Aged 59
Appointed as a Non-Executive Director
in March 2012, Eddie is a nominee of Elpida
Group Limited, a significant shareholder in
Mitchells & Butlers. Eddie is Finance Director
of Coolmore, a leading thoroughbred
bloodstock breeder with operations in Ireland,
the USA and Australia and a Non-Executive
Director of Grove Ltd, the holding company of
Barchester Healthcare Limited. He graduated
from University College Dublin with a Bachelor
of Commerce Degree and he is a Fellow of
both the Association of Chartered Certified
Accountants and the Institute of Chartered
Secretaries and Administrators.
Josh Levy
Non-Executive Director R
Aged 28
Appointed a Non-Executive Director
in November 2015, Josh is a nominated
shareholder representative of Piedmont Inc.,
a significant shareholder in Mitchells & Butlers.
Josh is an Investment Analyst at Tavistock
Group having previously worked in the
Investment Banking Division of Investec Bank.
Josh holds an MSc and a BA (Hons) from the
University of Nottingham.
Keith Browne
Non-Executive Director
Aged 49
Appointed as a Non-Executive Director in
September 2016, Keith is a representative of
Elpida Group Limited, a significant shareholder
in Mitchells & Butlers. Keith obtained a
Bachelor of Commerce Degree from University
College Dublin, qualified as a chartered
accountant in 1994 and subsequently gained
an MBA from University College Dublin. After
joining KPMG Corporate Finance in 1996, he
became a partner in the firm in 2001 and Head
of Corporate Finance in 2009. He retired from
the partnership to operate as an Independent
Consultant in 2011.
Dave Coplin
Independent Non-Executive
Director ARN
Aged 48
Appointed as an independent Non-Executive
Director in February 2016, Dave is the CEO
and founder of The Envisioners Limited and
was formerly the Chief Envisioning Officer
for Microsoft Limited, and is an established
thought leader on the role of technology in
our personal and professional lives. For over
25 years he has worked across a range of
industries and customer marketplaces,
providing strategic advice and guidance
around the role and optimisation of technology
in the modern society both inside and outside
of the world of work.
Key to Committee membership
A Audit Committee
R Remuneration Committee
N Nomination Committee
M Market Disclosure Committee
E Executive Committee
Annual report and accounts 2018 Mitchells & Butlers plc
49
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Directors’ report
The Board’s responsibilities in respect of the
Company include:
• Determining the overall business and commercial strategy
• Identifying the Company’s long-term objectives
• Reviewing the annual operating budget and financial plans
and monitoring performance in relation to those plans
• Determining the basis of the allocation of capital
• Considering all policy matters relating to the Company’s activities
including any major change of policy
For the Company’s latest financial information
go to: www.mbplc.com/investors
The Directors present their report on the affairs of the Group and the
audited financial statements for the 52 weeks ended 29 September 2018.
The Business review of the Company and its subsidiaries is given on
pages 14 to 17 which, together with the Corporate governance statement
and Audit Committee report, are incorporated by reference into this
report and, accordingly, should be read as part of this report.
Details of the Group’s policy on addressing risks are given on pages 38
to 42 and 62 and 63, and details about financial instruments are shown
in note 4.4 to the financial statements. These sections include information
about trends and factors likely to affect the future development and
performance of the Group’s businesses. The Company undertakes
no obligation to update forward-looking statements.
Key performance indicators for the Group’s businesses are set out
on pages 30 and 31.
This report has been prepared under current legislation and guidance
in force at the year end date. In addition, the material contained on
pages 1 to 45 reflects the Directors’ understanding of the requirement
to provide a Strategic report.
This report has been prepared for, and only for, the members of the
Company as a body, and no other persons. The Company, its Directors,
employees, agents or advisers do not accept or assume responsibility to
any other person to whom this document is shown or into whose hands
it may come or who becomes aware of it and any such responsibility
or liability is expressly disclaimed.
Areas of operation
Throughout FY 2018 the Group had activities in, and operated through,
pubs, bars and restaurants in the United Kingdom and Germany.
Share capital
The Company’s issued ordinary share capital as at 29 September 2018
comprised a single class of ordinary shares of which 428,310,823 shares
were in issue and listed on the London Stock Exchange (30 September
2017 422,548,604 shares). The rights and obligations attaching to the
ordinary shares of the Company are contained within the Company’s
Articles of Association. Of the issued share capital, no shares were held
in treasury and the Company’s employee share trusts held 1,885,130
shares. Details of movements in the issued share capital can be found
in note 4.7 to the financial statements on page 139. Each share carries the
right to one vote at general meetings of the Company. The notice of the
Annual General Meeting specifies deadlines for exercising voting rights
in relation to the resolutions to be put to the Annual General Meeting.
All issued shares are fully paid up and carry no additional obligations
or special rights. There are no restrictions on transfers of shares in the
Company, or on the exercise of voting rights attached to them, other than
those which may from time to time be applicable under existing laws and
regulations and under the Articles of Association. In addition, pursuant
to the Listing Rules of the Financial Conduct Authority, Directors and
certain officers and employees of the Group require the prior approval
of the Company to deal in the ordinary shares of the Company.
Participants in the Share Incentive Plan (‘SIP’) may complete a Form
of Instruction which is used by Equiniti Share Plan Trustees Limited,
the SIP Trustee, as the basis for voting on their behalf.
During the year, shares with a nominal value of £34,816 were allotted
under all-employee schemes as permitted under Section 549 of the
Companies Act 2006, and shares with a nominal value of £457,374
were allotted pursuant to the Scrip Dividend Scheme. No securities
were issued in connection with a rights issue during the year.
The Company is not aware of any agreements between shareholders
that restrict the transfer of shares or voting rights attached to the shares.
Interests of the Directors and their immediate families in the issued share
capital of the Company as at the year end are on page 86 in the Report
on Directors’ remuneration.
Dividends
No final dividend will be paid in respect of the year ended 29 September
2018 (FY 2017 final dividend of 5p). No interim dividend was paid during
the year (FY 2017 interim dividend of 2.5p).
50
Mitchells & Butlers plc Annual report and accounts 2018
Interests in voting rights
As at 29 September 2018, the Company was aware of the following
significant holdings of voting rights (3% or more) in its shares:
Shareholder
Piedmont Inc.
Elpida Group Limited
Standard Life
Aberdeen plc
Smoothfield Holding
Limited
Ordinary shares
116,234,517
100,840,659
% of
share capital*
27.14
23.54
Direct holding
Direct holding
47,103,182
10.99 Indirect holding
19,021,589
4.44
Direct holding
* Based on the total voting rights figure as at 29 September 2018 of 428,310,823 shares.
The following changes took place between 30 September 2018 and
21 November 2018:
Standard Life Aberdeen plc notified the Company on 5 October 2018
that its holding had decreased to 44,739,657 shares (10.45%), and again
on 7 November 2018 that its holding had decreased to 42,780,803
shares (9.99%).
Directors
Details of the Directors as at 21 November 2018 and their biographies
are shown on pages 48 and 49. The Directors at 29 September 2018 and
their interests in shares are shown on page 86. There were no changes
to the Board of Directors during the year nor subsequent to the year end,
up to the date of this report. In September 2018, the Company
announced that Stewart Gilliland had informed the Board of his intention
to step down from the Board and this is likely to take place by the end
of December 2018.
The Company is governed by its Articles of Association and
the Companies Act 2006 and related legislation in relation to the
appointment and removal of Directors. The powers of the Company’s
Directors are set out in the Company’s Articles of Association.
In accordance with the Company’s Articles of Association (which are
in line with best practice guidance of the UK Corporate Governance Code)
all the Directors, with the exception of Stewart Gilliland, will retire at the
AGM and will offer themselves for re-election.
Under a Deed of Appointment between Piedmont Inc. and the
Company, Piedmont Inc. has the right to appoint two shareholder
Directors to the Board whilst it owns 22% or more of the issued share
capital of the Company, and the right to appoint one shareholder
Director to the Board whilst it owns more than 16% of the Company
but less than 22%. In the event that Piedmont Inc. owns less than 16%
of the Company any such shareholder Directors would be required
to resign immediately.
The Company’s two largest shareholders, Piedmont Inc. and Elpida
Group Limited, have nominated representatives on the Board. Piedmont’s
appointment rights are formalised in the Deed of Appointment referred
to in this report but there is no equivalent agreement in place between
the Company and Elpida. The Elpida representatives were appointed
with the approval of the Board in March 2012 and September 2016.
The Board has carefully considered whether it would be appropriate
to enter into a formal agreement with Elpida that is similar to the existing
agreement between the Company and Piedmont. Having taken into
account the Financial Reporting Council’s report of August 2014
‘Towards Clear & Concise Reporting’ and the views expressed previously
by certain of the investor representative bodies, the Board considers that
such an agreement would be merely one of form rather than substance
and not in the interests of shareholders generally. As a result, the Board
does not propose currently that the Company should enter into such
an agreement with Elpida, and Elpida has not, to date, sought such an
agreement. The Board considers that the Company is acting in accordance
with good governance principles in working with our significant
long-term shareholders towards our common goals and the achievement
of the Company’s strategy, with continued stability at Board level.
Directors’ indemnity
As permitted by the Articles of Association, each of the Directors has
the benefit of an indemnity, which is a qualifying third-party indemnity
as defined by Section 234 of the Companies Act 2006. The indemnity
was in force throughout the tenure of each Director during the last
financial year, and is currently in force. The Company also purchased
and maintained throughout the financial year Directors’ and Officers’
liability insurance in respect of itself and its Directors. No indemnity
is provided for the Company’s auditor.
Articles of Association
The Articles of Association may be amended by special resolution
of the shareholders of the Company.
Conflicts of interest
The Company’s Articles of Association permit the Board to consider
and, if it sees fit, authorise situations where a Director has an interest
that conflicts, or may possibly conflict, with the interests of the
Company (‘Situational Conflicts’). The Board has a formal system
in place for Directors to declare Situational Conflicts to be considered
for authorisation by those Directors who have no interest in the matter
being considered. In deciding whether to authorise a Situational Conflict,
the non-conflicted Directors are required to act in the way they consider
would be most likely to promote the success of the Company for the
benefit of all shareholders, and they may impose limits or conditions
when giving authorisation, or subsequently, if they think this is appropriate.
The Board believes that the systems it has in place for reporting and
considering Situational Conflicts continue to operate effectively.
Annual report and accounts 2018 Mitchells & Butlers plc
51
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Directors’ report continued
Related party transactions
Employment policies
Internal controls are in place to ensure that any related party transactions
involving Directors or their connected persons are carried out on an
arm’s-length basis and are properly recorded.
Change of control provisions
There are no significant agreements which contain provisions entitling
other parties to such agreements to exercise termination or other rights
in the event of a change of control of the Company.
There are no provisions in the Directors’ or employees’ service
agreements providing for compensation for loss of office or employment
occurring because of a takeover.
The trustee of the Company’s SIP will invite participants on whose
behalf it holds shares to direct it how to vote in respect of those shares,
and, if there is an offer for the shares or other transaction which would
lead to a change of control of the Company, participants may direct it to
accept the offer or agree to the transaction. The trustee of the Mitchells &
Butlers Employee Benefit Trust may, having consulted with the Company,
vote or abstain from voting in respect of any shares it holds or accept or
reject an offer relating to shares in any way it sees fit, and it may take all
or any of the following matters into account: the long-term interests of
beneficiaries, the non-financial interests of beneficiaries, the interests
of beneficiaries in their capacity as employees or former employees,
the interests of future beneficiaries and considerations of a local,
moral, ethical, environmental or social nature.
The rules of certain of the Company’s share plans include provisions
which apply in the event of a takeover or reconstruction, as set out below.
The Group employed an average of 44,802 people in FY 2018 (FY 2017
45,891). Through its diversity policy, the Company seeks to ensure that
every employee, without exception, is treated equally and fairly and that
all employees are aware of their responsibilities.
Our policies and procedures fully support our disabled colleagues.
We take active measures to do so via:
• a robust reasonable adjustment policy;
• disability-specific online resources (accessible via the Group’s
online recruitment system); and
• processes to ensure colleagues are fully supported.
The Group is responsive to the needs of its employees. As such, should
any employee of the Group become disabled during their time with us,
we will actively retrain that employee and make reasonable adjustments
to their environment where possible, in order to keep the employee
with the Group. It is the policy of the Group that the training, career
development and promotion of disabled persons should, as far as
possible, be identical to that of other employees.
Employee engagement
Mitchells & Butlers engages with its employees continuously and in
a number of ways to suit their different working patterns. This includes:
• line manager briefings;
• communications forums and roadshows held by functions or brands
across the Company;
Provisions which apply in the event of a takeover
or reconstruction
• a dedicated intranet for the Retail Support Team;
• ‘Mable’, the M&B online learning system;
Share plan
2013 Performance Restricted
Share Plan
2013 Short Term Deferred
Incentive Plan
2013 Sharesave Plan
Share Incentive Plan
Provision in the event of a takeover
Awards vest pro rata to
performance and time elapsed
and lapse six months later
Bonus shares may be released
or exchanged for shares in the
new controlling company
Options may be exercised within
six months of a change of control
Free shares may be released
or exchanged for shares in the
new controlling company
• email news alerts;
• focus groups;
• weekly bulletins – specifically targeted at retail house managers
and mobile workers;
• employee social media groups; and
• a monthly magazine poster, Frontline News, for the retail estate.
Details of the financial and economic factors affecting the performance
of the Company are shared with all employees at the appropriate time
using the methods listed above.
We provide opportunities for employees to give their feedback
to the Company in a number of ways, from team or shift meetings in
restaurants, bars and pubs and engagement surveys for all employees
to the Mitchells & Butlers annual Business Forum. Business Forum
representatives collect questions from employees across the Company
and put them to members of the Executive Committee. The questions
and answers are published in Frontline News and online.
Engagement with Mable (the Mitchells & Butlers learning environment)
has grown significantly since launch in July 2017 driven by our ability
to create and deliver quality online training in-house. In the last year we
have added online training for each brand food menu change and drinks
training for seasonal products is now delivered via Mable’s social pages.
Development programmes for all retail team now incorporate live online
classrooms delivered via interactive webinar with over 46,000 learners
attending one of the 2,400 workshops led by our retail training team.
The STAR skills training programme is a comprehensive learning resource
on Mable for all new retail team. 85% of users return frequently to the site.
52
Mitchells & Butlers plc Annual report and accounts 2018
Mitchells & Butlers operates the Challenge 21 policy in all our businesses
across England and Wales (and a Challenge 25 policy in our Scottish
businesses). The policy requires that any guest attempting to buy alcohol
who appears under the age of 21 (or 25 in Scotland), must provide an
acceptable form of proof of age ID to confirm that they are over 18,
before they can be served. This policy forms part of our regular training
for our employees on their responsibilities for serving alcohol.
Mitchells & Butlers is keen to encourage greater employee involvement
in the Group’s performance through share ownership. It operates two
HMRC approved all-employee plans, which are the 2013 Sharesave
Plan and the Share Incentive Plan (which includes Partnership shares).
The Company also operates two other plans on a selective basis, which
are the 2013 Performance Restricted Share Plan and the 2013 Short Term
Deferred Incentive Plan. Further details on the plans are set out in the
Report on Directors’ remuneration.
During the year, the Company has remained within its headroom limits
for the issue of new shares for share plans as set out in the rules of the
above plans. The Company uses an employee benefit trust to acquire
shares in the market when appropriate to satisfy share awards in order
to manage headroom under the plan rules. No shares in the Company
were purchased by the employee benefit trust during FY 2018.
Political donations
The Company made no political donations during the year and intends
to maintain its policy of not making such payments. It will, however,
as a precautionary measure to avoid inadvertent breach of the law,
seek shareholder authority at its 2019 AGM to make limited donations
or incur limited political expenditure, although it has no intention
of using the authority.
Funding and liquidity risk
In order to ensure that the Group’s long-term funding strategy is aligned
with its strategic objectives, the Treasury Committee regularly assesses
the maturity profile of the Group’s debt, alongside the prevailing financial
projections and three year plan. This enables it to ensure that funding
levels are appropriate to support the Group’s plans.
The current funding arrangements of the Group consist of the securitised
notes issued by Mitchells & Butlers Finance plc (and associated liquidity
facility) and £150m of unsecured committed bank facilities. Further
information regarding these arrangements is included in note 4.2 to the
financial statements on page 126. The terms of the securitisation and the
bank facilities contain a number of financial and operational covenants.
Compliance with these covenants is monitored by Group Treasury.
The Group prepares a rolling daily cash forecast covering a six week period
and an annual cash forecast by period. These forecasts are reviewed and
used to manage the investment and borrowing requirements of the Group.
A combination of cash pooling and zero balancing agreements is in place
to ensure the optimum liquidity position is maintained. Committed
facilities outside of the securitisation are sized to ensure that the Group
can meet its medium-term anticipated cash flow requirements.
Going concern
The financial statements which appear on pages 92 to 147 have been
prepared on a going concern basis. The Directors have reviewed the
Group’s objectives, policies and processes for managing its capital;
its financial risk management objectives; its financial instruments
and hedging activities; and its exposures to credit risk and liquidity risk.
The Group’s financing is based on securitised debt and unsecured bank
facilities and, within this context, a robust review has been undertaken
of projected performance against all financial covenants. As a result
of this review the Directors have a reasonable expectation that the
Group has adequate resources to continue in operational existence for the
foreseeable future. See section 1 of the financial statements on page 105
for the Company’s going concern statement, and page 42 for the
Company’s long-term viability statement.
Annual General Meeting
The notice convening the Annual General Meeting is contained in a
circular sent to shareholders with this report and includes full details
of the resolutions proposed.
Auditor
Deloitte LLP has expressed its willingness to continue in office as auditor
of the Company and its reappointment will be put to shareholders at
the AGM.
Events after the balance sheet date
As set out in note 5.3 to the Group financial statements on page 142, on
26 October 2018 the High Court provided a ruling regarding guaranteed
minimum pensions (GMPs) equalisation. That court case did not involve
the Company or its pension schemes but, unless reversed on appeal
(as to which it is not clear as at the date of this report whether there will
be an appeal) it will apply to the Company and its Group and GMPs
enjoyed by members of the Group’s pension schemes. The court ruled
that pensions provided to members who had contracted-out of their
scheme must be recalculated to ensure payments reflect the equalisation
of state pension ages in the 1990s. The ruling confirmed the method of
equalising GMPs that is to be applied. The court also ruled that trustees
are obliged to make arrears payments to members and simple interest
on the arrears should be paid at 1% above the base rate. More details
of how this ruling may impact the Company are set out in note 5.3
to the financial statements.
There are no other post-balance sheet events to report.
Disclosure of information to auditor
Having made the requisite enquiries, so far as the Directors are aware,
specifically those who are a Director at the date of approval of the Annual
Report, there is no relevant audit information (as defined by Section 418(3)
of the Companies Act 2006) of which the Company’s auditor is unaware
and each Director has taken all steps that ought to have been taken to
make themselves aware of any relevant audit information and to establish
that the Company’s auditor is aware of that information.
Annual report and accounts 2018 Mitchells & Butlers plc
53
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Directors’ report continued
Greenhouse gas (‘GHG’) emissions statement
The Group generates GHG emissions throughout its estate of bars and restaurants for heating, cooling, lighting and catering including the refrigeration
and preparation of food and drink.
GHG emissions per £m turnover were reduced by 10.8% during the 2017/18 tax year in comparison to 2016/17 in response to a continued focus
on engaging staff on energy efficiency and through investment across our business.
Assessment parameters
Assessment year
Consolidation approach
Boundary summary
Scope
Consistency with the financial statements
Exclusions
Emission factor data source
2017/18 tax year.
Financial control.
All bars and restaurants either owned or under operational control during the 2017/18
tax year were included.
General classifications of greenhouse gas emissions scopes based on the GHG protocol
and ISO 14064-1:2006 within the context of the Group’s operations are as follows:
Scope 1 – direct greenhouse gas emissions from sources that are owned or controlled
by the Group, e.g. fuel combustion of varying types, occurs during kitchen activity and
to generate heating and domestic hot water most commonly through natural grid
supplied gas, but also some LPG (Liquefied Petroleum Gas) and oil. Real fires fuelled
by logs or coal are also used to supplement customer comfort and enhance ambience.
Scope 2 – GHG emissions from the generation of purchased electricity used during
kitchen activity and for lighting, heating and cooling.
Scope 3 – indirect emissions as a consequence of the activities of the Group,
but occurring from sources not owned or controlled by the Group.
This assessment focuses on Scope 1 and 2 emissions only (Scope 3 is optional under
the current regulations).
Scope 1 and 2 emissions are reported for the 2017/18 and 2016/17 tax years to retain
consistency with reporting of our carbon emissions under the Carbon Reduction
Commitment (‘CRC’) Energy Efficiency Scheme.
Scope 1 and 2 emissions from sites with ‘landlord supplies’ are not included in the
CRC submission.
Franchise sites are excluded as they are responsible for arranging and paying for their
own energy.
Alex sites in Germany are included. Emissions are based on UK average emissions
multiplied by the number of Alex sites.
Scope 1 – Vehicle fleet emissions are excluded as they have been calculated to account
for <1% total emissions which falls below the materiality threshold.
Scope 1 – Fugitive emissions within refrigeration and cooling equipment are not
included as detailed records are not yet held.
Outside of scope – Logs are ‘outside of scope’ because the Scope 1 impact of these
fuels has been determined to be a net ‘0’. However, the CO2e value of logs has been
calculated to be <1% and would be excluded in any case as this falls below the
materiality threshold.
All carbon emission factors used are consistent with details provided in the respective
Carbon Reduction Commitment submissions.
Assessment methodology
Defra Environmental Guidelines 2013.
Materiality threshold
Intensity threshold
All emission types estimated to contribute >1% of total emissions are included.
Emissions are stated in tonnes CO2e per £m revenue. This intensity ratio puts emissions
into context given the scale of the Group’s activities and enables comparison with prior
year performance.
Target
Emissions during the 2016/17 tax year are provided for comparative purposes.
It should be noted that the 2016/17 emissions have been re-calculated with
electricity transmission and distribution losses removed as these are now classed
as Scope 3 emissions.
54
Mitchells & Butlers plc Annual report and accounts 2018
2016/17
2017/18
Change from previous year
Greenhouse gas emissions source
Scope 1
Scope 2
Statutory total (Scope 1 & 2)*
(tCO2e)
95,993
163,960
259,953
(tCO2e/£m)
45.4
77.6
123.0
(tCO2e)
90,021
149,721
239,742
(tCO2e/£m)
41.2
68.5
109.7
(tCO2e)
(5,972)
(14,239)
(20,211)
(tCO2e/£m)
(4.2)
(9.1)
(13.3)
% movement
in tCO2e/£m
(9.3%)
(11.7%)
(10.8%)
* Statutory carbon reporting disclosures required by Companies Act 2006.
Modern Slavery Act 2015
In accordance with the requirements of the Modern Slavery Act, the Board has approved and the Company has accordingly published its compliance
statement on its website. This can be accessed at www.mbplc.com
By order of the Board
Greg McMahon Company Secretary and General Counsel
21 November 2018
Annual report and accounts 2018 Mitchells & Butlers plc
55
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Directors’ responsibilities statement
The Directors are responsible for preparing the Annual
Report and the financial statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare such financial statements
for each financial year. Under that law the Directors are required to
prepare the Group financial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European
Union and Article 4 of the IAS Regulation and have also chosen to
prepare the parent company financial statements in accordance with
Financial Reporting Standard 101 ‘Reduced Disclosure Framework‘.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Company and of the profit or loss of the
Company for that period.
In preparing the parent company financial statements, the Directors
are required to:
• select suitable accounting policies and then apply them consistently;
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s transactions and
disclose with reasonable accuracy at any time the financial position of
the Company and enable them to ensure that the financial statements
comply with the Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company’s website.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the relevant
financial reporting framework, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole;
• make judgements and accounting estimates that are reasonable
• the Strategic report includes a fair review of the development and
and prudent;
• state whether Financial Reporting Standard 101 Reduced Disclosure
Framework has been followed, subject to any material departures
disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the Company will continue in business.
In preparing the Group financial statements, International Accounting
Standard 1 requires that Directors:
• properly select and apply accounting policies;
performance of the business and the position of the Company and the
undertakings included in the consolidation taken as a whole, together
with a description of the principal risks and uncertainties that they
face; and
• the Annual Report and financial statements, taken as a whole, are fair,
balanced and understandable and provide the information necessary
for shareholders to assess the Company’s position and performance,
business model and strategy.
This responsibility statement was approved by the Board of Directors
on 21 November 2018 and is signed on its behalf by:
• present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
Tim Jones Finance Director
• provide additional disclosures when compliance with the specific
21 November 2018
requirements in IFRSs are insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’s financial position and financial performance; and
• make an assessment of the Company’s ability to continue
as a going concern.
56
Mitchells & Butlers plc Annual report and accounts 2018
Corporate governance statement
The Board is committed to high standards of corporate governance.
I am delighted to be able to report that the Board considers that the
Company has complied throughout the year ended 29 September 2018
with all the provisions and best practice guidance of the Code except
those in respect of Board composition and the constitution of Board
Committees. This corporate governance statement addresses the
small number of areas where, for reasons specific to Mitchells & Butlers,
there are divergences from the Code as described below.
The Audit Committee report and Nomination Committee report which
are set out on pages 64 to 67 and page 60 respectively of the Annual
Report also form part of this corporate governance statement and
they should all be considered together.
The Board recognises the importance of good corporate governance
in creating a sustainable, successful and profitable business and details
are set out in this statement of the Company’s corporate governance
procedures and application of the principles of the Code. There are,
however, a small number of areas where, for reasons specifically related
to the Company, the detailed provisions of the Code were not fully
complied with in FY 2018. These areas are kept under regular review.
A fundamental aspect of the Code is that it contains best practice
recommendations in relation to corporate governance yet acknowledges
that, in individual cases, these will not all necessarily be appropriate for
particular companies. Accordingly, the Code specifically recognises the
concept of ‘Comply or Explain’ in relation to divergences from the Code.
Compliance with the Code
Except for the matters which are explained below (in line with the
‘Comply or Explain’ concept), the Company complied fully with the
principles and provisions of the Code throughout the financial year
in respect of which this statement is prepared (and continues to do
so as at the date of this statement).
Explanation for non-compliance with parts of the Code
During the year, there were three divergences from full compliance
with the Code as set out below by reference to specific paragraphs
in the Code:
B.1.2 (Composition of the Board), C.3.1 and D.2.1 Constitution
of Committees
During the year, Code Provision B.1.2, which requires that at least
half of the Board be made up of independent Non-Executive Directors
(excluding the Chairman), was not complied with. Accordingly,
this had consequential implications on the composition of the Audit
and Remuneration Committees. There were no changes in Board
composition during FY 2018. In September 2018, the Company
announced that Stewart Gilliland had informed the Board of his intention
to step down from the Board and the Board has commenced a process
of identification and recruitment of a replacement.
While the Board does not comply fully with the requirement for at
least half of its members to be independent, it recognises and values
the presence of representatives of its major shareholders on the Board
and welcomes the interest shown by them in the Company as a whole.
The Board will continue to work closely with the representatives of
its major shareholders to further the interests of the Company.
Bob Ivell Chairman
This corporate governance statement
sets out our report to shareholders on
the status of our corporate governance
arrangements.
The Board is responsible for ensuring that the activities of the
Mitchells & Butlers Group and its various businesses are conducted
in compliance with the law, regulatory requirements and rules, good
practices, ethically and with appropriate and proper governance and
standards. This includes reviewing internal controls, ensuring that
there is an appropriate balance of skills and experience represented
on the Board and compliance with the UK Corporate Governance
Code (the ‘Code’), which is issued by the Financial Reporting Council
and which is available at www.frc.org.uk, and for maintaining
appropriate relations with shareholders.
The Company is reporting against the 2016 edition of the Code.
A revised Code was published In July 2018, which will become
effective for accounting periods beginning on or after 1 January 2019.
The key changes between the 2016 and 2018 Codes are:
• enhanced board engagement with the workforce and
wider stakeholders;
• a clear business strategy aligned with a healthy corporate
company culture;
• a high-quality and diverse board composition; and
• proportionate executive remuneration that supports the long-term
success of the business.
The Board will examine current practices in relation to the
requirements of the 2018 Code and will report in relation to them
at the appropriate time.
The latest financial information for Mitchells & Butlers and its group
of companies is included in the 2018 Annual Report and Accounts
(of which this corporate governance statement forms part) and
which is available online at: www.mbplc.com/investors
Annual report and accounts 2018 Mitchells & Butlers plc
57
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Corporate governance statement continued
The possibility of appointing a further independent Non-Executive
Director remains a matter for the Nomination Committee to review
and is considered regularly. Throughout FY 2018, the Company had
(and continues to have) fully functioning Nomination, Audit and
Remuneration Committees as required by the Code. The Audit and
Remuneration Committees are not fully compliant with the relevant
provisions of paragraphs C.3.1 and D.2.1 of the Code in that they include
the presence of representatives of major shareholders. Nevertheless,
the Board values the contribution of those shareholder representatives
on those Committees, does not consider this to be an impediment to
good governance and looks forward to continuing to work with them
on matters affecting the Group and its activities in the future.
The information required by Disclosure Guidance and Transparency Rule
(‘DGTR’) 7.1 is set out in the Audit Committee report on pages 64 to 67.
The information required by DGTR 7.2 is set out in this corporate
governance statement, other than that required under DGTR 7.2.6
which is set out in the Directors’ report on pages 50 to 55.
Board composition
The Board started and ended the year with eleven Directors and
the table opposite lists the composition of the Board during the year.
The Board
The Board is responsible to all stakeholders, including its shareholders,
for the strategic direction, development and control of the Group.
It approves strategic plans and annual capital and revenue budgets.
It reviews significant investment proposals and the performance of
past investments and maintains an overview and control of the Group’s
operating and financial performance. It monitors the Group’s overall
system of internal controls, governance and compliance and ensures
that the necessary financial, technical and human resources are in place
for the Company to meet its objectives. Our website includes a schedule
of matters which have been reserved for the main Board.
During FY 2018 there were ten scheduled Board meetings. There
were also four meetings of the Audit Committee, six meetings of the
Remuneration Committee and two meetings of the Nomination
Committee. The table opposite shows attendance levels at the Board
and Committee meetings held during the year; the numbers in brackets
confirm how many meetings each Director was eligible to attend during
the year.
Full attendance was recorded for all Directors in respect of all Board and
Committee meetings during FY 2018, but where Directors are unable to
attend a meeting (whether of the Board or one of its Committees), they
are provided with all the papers and information relating to that meeting
and are able to discuss issues arising directly with the Chairman of the
Board or Chair of the relevant Committee. In addition, the Board
members meet more informally approximately four times a year and the
Chairman and the Non-Executive Directors meet without the Executive
Directors twice a year.
There are ten Board meetings currently planned for FY 2019.
The Company Secretary’s responsibilities include ensuring good
information flows to the Board and between senior management and
the Non-Executive Directors. The Company Secretary is responsible,
through the Chairman, for advising the Board on all corporate
governance matters and for assisting the Directors with their professional
development. This includes regular corporate governance and business
issues updates, as well as the use of operational site visits and the
provision of external courses where required. The Company Secretary
facilitates a comprehensive induction for newly appointed Directors,
tailored to individual requirements and including guidance on the
requirements of, and Directors’ duties in connection with, the Code and
the Companies Act 2006 as well as other relevant legislation. In FY 2018,
58
Mitchells & Butlers plc Annual report and accounts 2018
the Company Secretary also co-ordinated the externally facilitated
performance evaluation of the Board, details of the output of which
are set out at page 63. The appointment and removal of the Company
Secretary is a matter reserved for the Board.
Attendance levels at Board and Committee meetings
Board
Audit
Committee
Remuneration
Committee
Nomination
Committee
Directors who served during the year
Bob Ivell
Keith Browne
Dave Coplin
Stewart Gilliland
Eddie Irwin
Tim Jones
Josh Levy
Ron Robson
Colin Rutherford
Phil Urban
Imelda Walsh
10 (10)
10 (10)
10 (10)
10 (10)
10 (10)
10 (10)
10 (10)
10 (10)
10 (10)
10 (10)
10 (10)
n/a
n/a
4 (4)
4 (4)
4 (4)
n/a
n/a
4 (4)
4 (4)
n/a
4 (4)
6 (6)
n/a
6 (6)
6 (6)
6 (6)
n/a
6 (6)
n/a
6 (6)
n/a
6 (6)
2 (2)
n/a
2 (2)
2 (2)
2 (2)
n/a
n/a
2 (2)
2 (2)
n/a
2 (2)
Directors
The following were Directors of the Company during the year ended
29 September 2018:
Directors who served during the year
Bob Ivell
Independent Non-
Executive Director1
Interim Chairman1
Executive Chairman
Non-Executive
Chairman
Non-Executive Director
Independent Non-
Executive Director
Independent Non-
Executive Director
Senior Independent
Director
Non-Executive Director
Non-Executive Director
Finance Director
Non-Executive Director
Deputy Chairman
Independent Non-
Executive Director
Chief Executive
Independent Non-
Executive Director
Date
appointed
Date of
change of role
09/05/11
14/07/11
26/10/11
14/07/11
26/10/11
12/11/12
12/11/12
22/09/16
29/02/16
23/05/13
02/02/15
21/03/12
13/11/15
18/10/10
22/01/10
14/07/11
22/04/13
27/09/15
22/04/13
–
–
–
–
–
–
–
–
–
–
–
–
–
Keith Browne2
Dave Coplin
Stewart Gilliland
Eddie Irwin2
Josh Levy3
Tim Jones
Ron Robson3
Colin Rutherford
Phil Urban
Imelda Walsh
1. Independent while in the role specified.
2. Nominated shareholder representative of Elpida Group Limited.
3. Nominated shareholder representative of Piedmont Inc.
At the start and end of the year, the Board was made up of ten male
and one female members. There were no changes to the Board during
the year.
The Executive Directors have service contracts, details of which are
on the Company’s website www.mbplc.com. The Chairman and each
of the Non-Executive Directors have letters of appointment. Copies of the
respective service contracts or letters of appointment of all the members
of the Board are available on the Company’s website. In addition, they
are available for inspection at the registered office of the Company during
normal business hours and at the place of the Annual General Meeting
from at least 15 minutes before and until the end of the meeting.
All the Company’s Directors are required to stand for annual re-election
at the Company’s Annual General Meeting in accordance with the
Company’s Articles of Association. The exception to this is Stewart Gilliland
who plans to step down from the Board by the end of December 2018
and consequently will not be standing for re-election at the AGM in
January 2019. Their biographical details as at 21 November 2018 are
set out on pages 48 and 49, including their main commitments outside
the Company.
The Executive Directors may be permitted to accept one external
Non-Executive Director appointment with the Board’s prior approval
and as long as this is not likely to lead to conflicts of interest. As at the
date of this Annual Report, neither of the Executive Directors held
any such external directorship.
Division of responsibilities between Chairman and Chief Executive
In accordance with provision A.2.1 of the Code, the roles of Chairman
and Chief Executive should not be exercised by the same individual.
The division of responsibilities between the Chairman and the Chief
Executive are clearly established and set out in writing and agreed by
the Board. In particular, it has been agreed in writing that the Chairman
shall be responsible for running the Board and shall provide advice and
assistance to the Chief Executive. He also chairs the Nomination
Committee, is a member of the Remuneration Committee and attends,
by invitation, meetings of the Audit Committee. He also chairs the
Market Disclosure Committee, the Property Committee and the
Pensions Committee.
It is also agreed in writing that the Chief Executive has responsibility for
all aspects of the Group’s overall commercial, operational and strategic
development. He chairs the Executive Committee (details of which
appear on page 61) and attends the Nomination, Remuneration and
Audit Committee by invitation, not necessarily for the entirety of such
meetings depending upon the subject matter. He is also a member of
the Market Disclosure Committee, the Property Committee and the
Pensions Committee.
All other Executive Directors (currently just the Finance Director) and all
other members of the Executive Committee report to the Chief Executive.
Chairman
The UK Corporate Governance Code provides that the Chairman should,
on appointment, meet the independence criteria set out in provision B.1.1
of that Code. Bob Ivell met these independence criteria on appointment.
Bob Ivell was appointed to the role of Executive Chairman on 26 October
2011 on the departure of the then Chief Executive and reverted to the
role of Non-Executive Chairman on 12 November 2012.
The Chairman ensures that appropriate communication is maintained
with shareholders. He ensures that all Directors are fully informed
of matters relevant to their roles.
Chief Executive
Phil Urban was appointed Chief Executive on 27 September 2015.
He has responsibility for implementing the strategy agreed by the Board
and for the executive management of the Group.
Senior Independent Director
Stewart Gilliland was appointed to the role of Senior Independent
Director on 2 February 2015. He will be stepping down from the Board
by the end of December 2018 and will not be submitted for re-election
at the 2019 AGM. The Board has commenced a process of identification
and recruitment of a replacement.
The Senior Independent Director supports the Chairman in the delivery
of the Board’s objectives and ensures that the views of all major
shareholders and stakeholders are conveyed to the Board. Stewart
Gilliland is available to all shareholders should they have any concerns
if the normal channels of Chairman, Chief Executive or Finance Director
have failed to resolve them, or for which such contact is inappropriate.
The Senior Independent Director also meets with Non-Executive
Directors, without the Chairman present, at least annually, and conducts
the annual appraisal of the Chairman’s performance and provides
feedback to the Chairman on the outputs of that appraisal.
Non-Executive Directors
The Company has experienced Non-Executive Directors on its Board.
Bob Ivell was considered to be independent upon his appointment on
9 May 2011 in that he was free from any business or other relationship
with the Company which could materially influence his judgement and
he continues to represent a strong source of advice and independent
challenge. Since his appointment as Chairman on 14 July 2011 the
independence test, as set out in the Code, is no longer applicable
to his current position.
Ron Robson and Josh Levy were appointed to the Board as representatives
of one of the Company’s largest shareholders, Piedmont Inc., and were
therefore not regarded as independent in accordance with the Code.
Eddie Irwin and Keith Browne were appointed to the Board as
representatives of another of the Company’s largest shareholders,
Elpida Group Limited and were therefore not regarded as independent
in accordance with the Code.
There are currently four independent Non-Executive Directors on the
Board: Stewart Gilliland, Colin Rutherford, Imelda Walsh and Dave Coplin.
Other than their fees, and reimbursement of taxable expenses which
are disclosed on page 80, the Non-Executive Directors received no
remuneration from the Company during the year. The base fee for
Non-Executive Directors will increase by 2% to £53,000 per annum and
the fee paid to Non-Executive Directors for chairing a Committee or for
the role of Senior Independent Director will increase to £13,000 per
annum, both changes to take effect from 1 January 2019.
When Non-Executive Directors are considered for appointment,
the Board takes into account their other responsibilities in assessing
whether they can commit sufficient time to their prospective directorship.
On average, the Non-Executive Directors spend two to three days per
month on Company business, but this may be more depending on
the circumstances from time to time.
Annual report and accounts 2018 Mitchells & Butlers plc
59
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Corporate governance statement continued
Board information and training
All Directors are briefed by the use of comprehensive papers circulated
in advance of Board meetings and by presentations at those meetings,
in addition to receiving minutes of previous meetings. Their understanding
of the Group’s business is enhanced by business specific presentations
and operational visits to the Group’s businesses. Separate strategy
meetings and meetings with senior executives and representatives
of specific functions, brands or business units are also held throughout
the year.
The training needs of Directors are formally considered on an annual
basis and are also monitored throughout the year with appropriate
training being provided as required, including corporate social
responsibility and corporate governance as well as the environmental
impacts of the Company’s activities.
Committees
Each Board Committee has written terms of reference approved by
the Board, which are available on the Company’s website. Those terms
of reference are each reviewed annually by the relevant Committee
to ensure they remain appropriate.
Audit Committee
Details of the Audit Committee and its activities during the year
are included in the Audit Committee report on pages 64 to 67 which
is incorporated by reference into this statement.
Remuneration Committee
Details of the Remuneration Committee and its activities during the year
are included in the Report on Directors’ remuneration on pages 68 to 91.
Nomination Committee
The Nomination Committee is responsible for nominating, for the
approval of the Board, candidates for appointment to the Board. It is
also responsible for succession planning for the Board and the Executive
Committee and reviewing the output of the Board effectiveness review.
The Board has agreed to set out a detailed Board succession plan and
that will be considered by the Nomination Committee in FY 2019.
During the year, the Nomination Committee considered the composition
of the Board and, following the year end, has assessed the outcome of
the externally facilitated Board effectiveness review which was carried
out during the financial year now reported on. More details of the
conclusions of that review are on page 63. The Nomination Committee
agrees the importance of having diversity on the Board, including female
representation and individuals with different experiences, skill sets and
expertise, so as to maintain an appropriate balance within the Company
and on the Board.
Diversity and Inclusion Steering Group and Board Diversity Policy
The Company has a Diversity and Inclusion Steering Group which
examines the implementation of diversity within the Group.
The Board has approved a Board Diversity Policy. The key statement
and objectives of that policy are as follows:
Statement:
The Board recognises the benefits of diversity. Diversity of skills,
background, knowledge, international and industry experience, and
gender, amongst many other factors, will be taken into consideration
when seeking to appoint a new Director to the Board. Notwithstanding
the foregoing, all Board appointments will always be made on merit.
Objectives:
• The Board should ensure an appropriate mix of skills and experience
to ensure an optimum Board and efficient stewardship. All Board
appointments will be made on merit while taking into account
individual competence, skills and expertise measured against
identified objective criteria (including consideration of diversity).
• The Board should ensure that it comprises Directors who are
sufficiently experienced and independent of character and judgement.
• The Nomination Committee will discuss and agree measurable
objectives for achieving diversity on the Board with due regard being
given to the recommendations set out in the Davies Report, the
Hampton-Alexander Review and the UK Corporate Governance
Code 2016. These will be reviewed on an annual basis.
Progress against the policy:
The Board continues to monitor progress against this policy. In terms
of Board diversity, the proportion of women on the Board was 9% as at
the year ended 29 September 2018. Any future appointments will always
be made on merit and will continue to take into account diversity, not
only in terms of gender, but also in terms of the appropriate mix of skills
and experience.
Details of the Mitchells & Butlers Diversity Policy, which applies to
diversity in relation to employees of the Mitchells & Butlers Group, can
be found in the corporate social responsibility section on pages 32 to 37.
A detailed description of the duties of the Nomination Committee
is set out within its terms of reference which can be viewed at
www.mbplc.com/investors/businessconduct/boardcommittees/
The following were members of the Nomination Committee during
the year:
Bob Ivell (Chair)
Dave Coplin
Stewart Gilliland
Eddie Irwin
Ron Robson
Colin Rutherford
Imelda Walsh
Appointment
date
11/07/13
29/02/16
11/07/13
11/07/13
11/07/13
11/07/13
11/07/13
Member at
29/09/18
Y
Y
Y
Y
Y
Y
Y
During the year, the Company complied with provision B.2.1 of the Code
as the Nomination Committee comprised a majority of independent
Non-Executive Directors.
60
Mitchells & Butlers plc Annual report and accounts 2018
Market Disclosure Committee
Portfolio Development Committee
The EU Market Abuse Regulation (MAR) which took effect in July 2016,
brought about substantial changes relating to announcements of material
information about the Company and its affairs, and relating to dealings
in shares or other securities by Directors and other senior managers,
including tighter controls on permitted ‘dealings’ during closed periods
and the handling of information relating to the Company. MAR requires
companies to keep a list of people affected and the previous compliance
regime and timeframe were enhanced.
As a result, a formal standing Committee of the Board was established,
called the Market Disclosure Committee, which comprises the Chairman,
the Chief Executive, the Finance Director and an independent
Non-Executive Director, currently Colin Rutherford.
Executive Committee
The Executive Committee, which is chaired by the Chief Executive,
consists of the Executive Directors and certain other senior executives,
namely Gary John (Group Property Director), Susan Martindale
(Group HR Director), Greg McMahon (Company Secretary and
General Counsel), Chris Hopkins (Commercial and Marketing Director) and
Susan Chappell, Nick Crossley and Dennis Deare (all Divisional Directors).
The Executive Committee meets at least every six weeks and has
day-to-day responsibility for the running of the Group’s business.
It develops the Group’s strategy and annual revenue and capital budgets
for Board approval. It reviews and recommends to the Board any
significant investment proposals. This Committee monitors the financial
and operational performance of the Group and allocates resources
within the budgets agreed by the Board. It considers employment issues,
ensures the Group has an appropriate pool of talent and develops senior
management manpower planning and succession plans. A note of
the actions agreed by, and the principal decisions of, the Executive
Committee are supplied to the Board for information in order that
Board members can keep abreast of operational developments.
Phil Urban has ultimate responsibility for employment related issues
and he also oversees matters relating to human rights including the
implementation of the Modern Slavery Act throughout the Group.
General Purposes Committee
The General Purposes Committee comprises any two Executive
Directors or any one Executive Director together with a senior officer
from an agreed and restricted list of senior Executives. It is always
chaired by an Executive Director. It attends to business of a routine
nature and to administrative matters, the principles of which have
been agreed previously by the Board or an appropriate Committee.
Property Committee
The Property Committee reviews property transactions which have
been reviewed and recommended by the Portfolio Development
Committee, without the need for submission of transactions to the full
Board. The Property Committee agrees to the overall strategic direction
for the management of the Group’s property portfolio on a regular basis
and may decide that a particular transaction should be referred to the
Board for consideration or approval. The Property Committee comprises
Bob Ivell (Committee Chair), Phil Urban, Tim Jones, Josh Levy, Keith
Browne, Colin Rutherford, Stewart Gilliland and Gary John.
The executive review of property transactions and capital allocation
to significant property matters such as site remodel and conversion plans
and the Company’s real estate strategy is carried out by the Portfolio
Development Committee. This is not a formal Board Committee but
comprises the Chief Executive, the Finance Director, the Group Property
Director and the Company Secretary and General Counsel. It has
delegated authority to approve certain transactions up to agreed financial
limits and, above those authority levels, it makes recommendations to
the Board or the Property Committee.
Pensions Committee
The Board has established a Pensions Committee to supervise and
manage the Company’s relationship with its various pension schemes
and their trustees.
The Pensions Committee members are Bob Ivell (Committee Chair),
Colin Rutherford, Imelda Walsh, Tim Jones, Phil Urban, Keith Browne
and Josh Levy.
Throughout FY 2018, the work of the Pensions Committee focused
primarily on the discussions with the Trustee of the Mitchells & Butlers
Pension Plan in relation to application of an inflation linked increase to
pensions in October 2018 in the context of the Company’s instruction
to the Trustee to apply a CPI-related increase as set out in note 4.5 of
the Group financial statements, and of the Trustee’s application to court
for rectification of the Trust Deed and Rules of that plan as referred to
at note 4.5 of those financial statements.
Treasury Committee
The treasury operations of the Mitchells & Butlers Group are operated
on a centralised basis under the control of the Group Treasury
department. Although not a formal Board Committee, the Treasury
Committee, which reports to the Finance Director but is subject
to oversight from the Audit Committee and, ultimately, the Board,
has day-to-day responsibility for:
• liquidity management;
• investment of surplus cash;
• funding, cash and banking arrangements;
• interest rate and currency risk management;
• guarantees, bonds, indemnities and any financial encumbrances
including charges on assets; and
• relationships with Banks and other market counterparties such as credit
rating agencies.
The Treasury Committee also works closely with the financial accounting
department to review the impact of changes in relevant accounting
practices and to ensure that treasury activities are disclosed appropriately
in the Company’s accounts.
The Board delegates the monitoring of treasury activity and
compliance to the Treasury Committee. It is responsible for monitoring
the effectiveness of treasury policies and making proposals for any
changes to policies or in respect of the utilisation of new instruments.
The approval of the Board, or a designated committee thereof,
is required for any such proposals.
Annual report and accounts 2018 Mitchells & Butlers plc
61
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Corporate governance statement continued
Independent advice
Internal control and risk management
Members of the Board may take independent professional advice in
the furtherance of their duties and the Board has agreed a formal process
for such advice to be made available. Members of the Board also have
access to the advice and services of the Company Secretary and General
Counsel, the Company’s legal and other professional advisers and its
external auditor. The terms of engagement of the Company’s external
advisers and its external auditor are regularly reviewed by the Company
Secretary and General Counsel.
The Board has overall responsibility for the Group’s system of internal
control and risk management and for reviewing its effectiveness. In order
to discharge that responsibility, the Board has established the procedures
necessary to apply the Code for the year under review and to the date
of approval of the Annual Report. Such procedures are in line with the
Financial Reporting Council’s ‘Guidance on Risk Management, Internal
Control and Related Financial and Business Reporting’ and are regularly
reviewed by the Audit Committee.
Code of Ethics
The Company has implemented business conduct guidelines describing
the standards of behaviour expected from those working for the
Company in the form of a code of ethics (the ‘Ethics Code’). The Ethics
Code was reviewed and re-communicated to all employees in FY 2018
to ensure it was kept clearly in focus. Its aim is to promote honest and
ethical conduct throughout our business. The Ethics Code requires:
• compliance with all applicable rules and regulations that apply to the
Company and its officers including compliance with the requirements
of the Bribery Act 2010;
• the ethical handling of actual or apparent conflicts of interest between
internal and external, personal and professional relationships; and
• that any hospitality from suppliers must be approved in advance
by appropriate senior management, with a presumption against
its acceptance.
The Company takes a zero tolerance approach to bribery and has
developed an extensive Bribery Policy which is included in the Ethics
Code. The Ethics Code requires employees to comply with the
Bribery Policy.
The Company also offers an independently administered, confidential
whistleblowing hotline for any employee wishing to report any concern
that they feel would be inappropriate to raise with their line manager.
All whistleblowing allegations are reported to, and considered by, the
Executive Committee and a summary report (with details of any major
concerns) is supplied to, and considered by, the Audit Committee
at each meeting.
The Board takes regular account of social, environmental and ethical
matters concerning the Company through regular reports to the Board
and presentations to the Board at its strategy meetings. The Company’s
compliance statement in relation to the Modern Slavery Act can be
viewed on the Company’s website www.mbplc.com
Directors’ training includes environmental, social and governance (‘ESG’)
matters and the Company Secretary is responsible for ensuring that
Directors are made aware of and receive regular training in respect
of these important areas. The Chief Executive, Phil Urban, is ultimately
responsible for ESG matters.
The Board is responsible for the Company’s internal risk management
system, in respect of which more details can be found in the ‘Risks
and uncertainties’ section of this report, and in the following section
of this statement.
The key features of the Group’s internal control and risk management
systems include:
• Processes, including monitoring by the Board, in respect of:
i. financial performance within a comprehensive financial planning,
accounting and reporting framework;
ii. strategic plan achievement;
iii. capital investment and asset management performance, with
detailed appraisal, authorisation and post-investment reviews; and
iv. consumer insight data and actions to assess the evolution of
brands and formats to ensure that they continue to be appealing
and relevant to the Group’s guests.
• An overall governance framework including:
i.
clearly defined delegations of authority and reporting lines;
ii. a comprehensive set of policies and procedures that employees
are required to follow; and
iii. the Group’s Ethics Code, in respect of which an annual
confirmation of compliance is sought from all corporate employees.
• The Risk Committee, a sub-committee of the Executive Committee,
which assists the Board, the Audit Committee and the Executive
Committee in managing the processes for identifying, evaluating,
monitoring and mitigating risks. The Risk Committee, which continues
to meet quarterly, is chaired by the Company Secretary and General
Counsel and comprises Executive Committee members and other
members of senior management from a cross-section of functions.
Its primary responsibilities are to:
i.
advise the Executive Committee on the Company’s overall
risk appetite and risk strategy, taking account of the current
and prospective operating, legal, macroeconomic and
financial environments;
ii. advise the Executive Committee on the current and emerging
risk exposures of the Company in the context of the Board’s
overall risk appetite and risk strategy;
iii. promote the management of risk throughout the organisation;
iv. review and monitor the Company’s capability and processes
to identify and manage risks;
v. consider the identified key risks faced by the Company and
new and emerging risks and consider the adequacy of mitigation
plans in respect of such risks; and
vi. where mitigation plans are inadequate, recommend
improvement actions.
The Group’s risks identified by the processes that are managed by the Risk
Committee are described in ‘Risks and uncertainties’ on pages 38 to 42.
More details of the work of the Risk Committee are included in the Audit
Committee report on pages 64 to 67.
• Examination of business processes on a risk basis including reports
from the internal audit function, known as Group Assurance, which
reports directly to the Audit Committee.
62
Mitchells & Butlers plc Annual report and accounts 2018
Board effectiveness evaluation and Chairman’s evaluation
and appraisal
During the year, the Board carried out a Board Effectiveness Review
which was facilitated by Mrs Ffion Hague of Independent Board
Evaluation. Mrs Hague carried out detailed interviews of the Board
members and presented her conclusions to a meeting of the whole
Board. The Board has considered those conclusions carefully and noted,
in particular, that the feedback was that the Board was performing well
with a good mix of skills and experience and that Board meetings allow
for good debate and discussion. The principal Committees of the
Board were also noted to be working well. As regards areas for further
development, the Board has agreed that it will review its composition and
develop a more formal succession plan for both the Board and the senior
leadership group with continued focus on gender and ethnic diversity.
That plan is presently being prepared for formal consideration by the
Nomination Committee and the full Board. The Board has also agreed
to improve the degree of formality around its Pensions Committee and
Nomination Committee so that they are brought more in line with the
Audit Committee and the Remuneration Committee. The Board has
also noted and agreed to review and update its longer-term strategic plan,
building on the outputs of the business improvement activities referred
to in the Chief Executive’s Report on page 14. The final recommendations
relate to clarifying and simplifying some of the Board’s regular reports
and these are being implemented during the current financial year.
The annual appraisal of the Chairman’s performance was conducted by
the Senior Independent Director, Stewart Gilliland, with the independent
Non-Executive Directors (without the Chairman present) and the
conclusions fed back to the Chairman. The principal conclusions of that
review were that Mr Ivell’s performance remains highly constructive and
that the level of Mr Ivell’s involvement was of benefit to the Company
noting that the relationship between the Chairman and CEO is critical.
Annual reviews of the Chairman’s performance will continue to be
conducted as required by the Code. Further, as indicated above, the
Board Effectiveness Review included an assessment of the Chairman
and his fulfilment of his role.
Going concern
The Directors’ statement as to the status of the Company as a going
concern can be found on page 53.
The Group also has in place systems, including policies and procedures,
for exercising control and managing risk in respect of financial reporting
and the preparation of consolidated accounts. These systems, policies
and procedures:
• govern the maintenance of accounting records that, in reasonable
detail, accurately and fairly reflect transactions;
• require reported information to be reviewed and reconciled,
with monitoring by the Audit Committee and the Board; and
• provide reasonable assurance that transactions are recorded as
necessary to permit the preparation of financial statements in
accordance with International Financial Reporting Standards (‘IFRS’)
or UK Generally Accepted Accounting Practice, as appropriate.
In accordance with the Code, during the year the Audit Committee
completed (and reported to the Board its conclusions in respect of) its
annual review of the effectiveness of the Group’s risk management and
internal control systems, including financial, operational and compliance
controls. The system of internal control is designed to manage, rather
than eliminate, the risk of failure to achieve business objectives and, as
such, it can only provide reasonable and not absolute assurance against
material misstatement or loss. In that context, in the opinion of the Audit
Committee, the review did not indicate that the system was ineffective
or unsatisfactory and to the extent that weaknesses in internal controls
were identified, the Audit Committee confirmed that necessary remedial
action plans were in place. The Audit Committee is not aware of any
change to this status up to the date of approval of this Annual Report.
With regard to insurance against risk, it is not practicable to insure against
every risk to the fullest extent. The Group regularly reviews both the
type and amount of external insurance that it buys with guidance from
an external independent broker, bearing in mind the availability of such
cover, its cost and the likelihood and magnitude of the risks involved.
Shareholder relations
The Board recognises that it is accountable to shareholders for the
performance and activities of the Company. The Company regularly
updates the market on its financial performance, at the half year and
full year results in May and November respectively, and by way of other
announcements as required. The content of these updates is available
by webcast on the Company’s website, together with general
information about the Company so as to be available to all shareholders.
The Company has a regular programme of meetings with its larger
shareholders which provides an opportunity to discuss, on the basis
of publicly available information, the progress of the business.
On a more informal basis, the Chairman, Chief Executive and the Finance
Director regularly report to the Board the views of larger shareholders
about the Company, and the other Non-Executive Directors are available
to meet shareholders on request and are offered the opportunity to
attend meetings with larger shareholders. The voting rights of Piedmont
Inc. and Elpida Group Limited are set out in the Directors’ report on
page 51.
The AGM provides a useful interface with shareholders, many of whom
are also guests in our pubs, bars and restaurants. All proxy votes received
in respect of each resolution at the AGM are counted and the balance
for and against, and any votes withheld, are indicated.
Annual report and accounts 2018 Mitchells & Butlers plc
63
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Audit Committee report
Colin Rutherford Chairman of the Audit Committee
Introduction from the
Audit Committee Chairman
I am delighted to present, on behalf
of the Board, the report of its Audit
Committee for the financial year ended
29 September 2018.
Over the past year we continued to have the benefit of spending
valuable time with our Group Risk Director and those key individuals
throughout the Group, who collectively provide an appreciation and
rigorous insight into how our Group functions and reports. These
interactions are extremely valuable and the Committee is grateful
for the instruction they provide. These activities also significantly
assist towards the promotion and efficient execution of the
Committee’s oversight role.
Engagement with auditors and third parties
The Committee continued to engage formally, regularly and at
an appropriate level of detail with our external auditors, internal
auditors (also externally resourced) and other third-party advisers
as necessary. This has enabled the Committee to maintain an
appropriate understanding of how our auditors and third-party
advisers interact with our assurance and risk function. In turn this
enabled these essential reporting authorities to provide
comprehensive coverage over the whole audit process and has
helped augment our Committee’s confidence in their respective
and collective fieldwork conclusions.
It is also important to note our Committee’s role in overseeing
the well-considered provision of adequate resources by the Group,
towards ensuring that any additional non-audit services required
over the year were obtained, where necessary, and in dealing with
the increasing role of the Financial Reporting Council (FRC) and
its evolving reporting requirements.
64
Mitchells & Butlers plc Annual report and accounts 2018
Effectiveness of internal controls and Group assurance
and risk function
The above efforts provided the Committee with a clear and detailed
understanding of the principal operations at all levels over the year.
The Committee continued to focus on challenging the effectiveness
of the Group’s internal controls, the robustness of the Group Assurance
and Risk Management processes and in assessing the importance of,
and acting as required upon, all reported information received from
our external and internal auditors and third-party advisers.
We remain committed to maintaining an open and constructive dialogue
with our shareholders on audit matters. Therefore, if you have any
comments or questions on any element of the report, please email
myself, care of Adrian Brannan, Group Risk Director, at
company.secretariat@mbplc.com
Membership and remit of the Audit Committee
The main purpose of the Audit Committee is to review and maintain
oversight of Mitchells & Butlers’ corporate governance, particularly
with respect to financial reporting, internal control and risk management.
The Audit Committee’s responsibilities also include:
• reviewing the processes for detecting fraud, misconduct and internal
control weaknesses;
• reviewing the effectiveness of the Group Assurance function; and
• overseeing the relationship with the external and internal auditors.
At the date of the Annual Report, the Audit Committee comprises
four independent Non-Executive Directors: Colin Rutherford (Chair),
Imelda Walsh, Stewart Gilliland and Dave Coplin, and two further
Non-Executive Directors nominated by substantial shareholders,
Ron Robson and Eddie Irwin. In accordance with Code provision C.3.1
the Board considers that Colin Rutherford has significant, recent and
relevant financial experience. Biographies of all of the members of the
Audit Committee, including a summary of their respective experience,
appear on pages 48 and 49.
Following the appointment of three Independent Non-Executive
Directors in April and May 2013, Committee members were appointed
with effect from 11 July 2013, and revised terms of reference were
established, in order to comply with Code requirements. Those terms
of reference are reviewed by the Committee annually.
The Audit Committee continued to meet quarterly during FY 2018.
In each case, appropriate papers were distributed to the Committee
members and other invited attendees, including, where and to the
extent appropriate, representatives of the external audit firm and
the internal Group Assurance function.
When appropriate, the Audit Committee augments the skills and
experience of its members with advice from internal and external audit
professionals, for example, on matters such as developments in financial
reporting. Audit Committee meetings are also attended, by invitation, by
other members of the Board including the Chairman, the Chief Executive
and the Finance Director, the Company Secretary and General Counsel,
the Group Risk Director and representatives of the external auditor,
Deloitte LLP. The Audit Committee also meets privately not less than
twice a year, without any member of management present, in relation
to audit matters, with the external auditor.
The remuneration of the members of the Audit Committee is set out
in the Report on Directors’ remuneration on page 80.
Summary terms of reference
A copy of the Audit Committee’s terms of reference is publicly
available within the Investor section of the Company’s website:
www.mbplc.com/pdf/audit_committee_terms.pdf
The Audit Committee’s terms of reference were approved by the
Committee and adopted by the plc Board in 2013. Those terms of
reference specifically provide that they will be reviewed annually.
They have been reviewed and updated as appropriate each year since
and no changes were felt to be needed in FY 2018. At the time of
re-adoption of the Company’s Corporate Governance Compliance
Statement in July 2016, as updated to reflect changes required to give
effect to the introduction of the Market Abuse Regulation (MAR),
any changes to the Company’s governance arrangements to reflect the
requirements of MAR were introduced. Other than those MAR-related
amendments, which related to consequential changes to regulatory
references (e.g. the UKLA’s Disclosure and Transparency Rules are now
known as the Disclosure Guidance and Transparency Rules), there have
been no material changes to these Terms of Reference since the last
review in 2015. Accordingly, in FY 2018 no material changes were made
to the terms of reference of the Audit Committee, and the work of the
Audit Committee is kept under review with the expectation that any
such matters which come to light are included in the review scheduled
for FY 2019.
The Audit Committee is authorised by the Board to review any activity
within the business. It is authorised to seek any information it requires
from, and require the attendance at any of its meetings of, any Director
or member of management, and all employees are expected to
co-operate with any request made by the Audit Committee.
The Audit Committee is authorised by the Board to obtain, at the
Company’s expense, outside legal or other independent professional
advice and secure the attendance of outsiders with relevant experience
and expertise, if it considers this necessary.
The Chair of the Audit Committee reports to the subsequent Board
meeting on the Committee’s work and the Board receives a copy
of the minutes of each meeting.
The role and responsibilities of the Audit Committee are to:
• review the Company’s public statements on internal control,
risk management and corporate governance compliance;
• review the Company’s processes for detecting fraud, misconduct
and control weaknesses and to consider the Company’s response
to any such occurrence;
• review management’s evaluation of any change in internal controls
• oversee the process for dealing with complaints received by the Group
regarding accounting, internal accounting controls or auditing matters
and any confidential, anonymous submission by employees of concerns
regarding questionable accounting or auditing matters; and
• adopt and oversee a specific Code of Ethics for all corporate
employees which is consistent with the Company’s overall statement
of business ethics.
Key activities of the Audit Committee
Audit matters are reviewed at quarterly Audit Committee meetings
throughout the year at which detailed reports are presented for review.
The Audit Committee commissions reports from external advisers,
the Group Risk Director or Company management, either after
consideration of the Company’s major risks or in response to developing
issues. During the year, in order to fulfil the roles and responsibilities of
the Audit Committee, the following matters were considered:
• the suitability of the Group’s accounting policies and practices;
• half year and full year financial results;
• the scope and cost of the external audit;
• the auditor’s half year and full year reports;
• reappointment and evaluation of the performance of the auditor,
including recommendations to the Board, for approval by
shareholders, on the reappointment of the Company’s auditor
and on the approval of fees and terms of engagement;
• non-audit work carried out by the auditor and trends in the non-audit
fees in accordance with the Committee’s policy to ensure the
safeguarding of audit independence;
• the co-ordination of the activities and the work programmes of the
internal and external audit functions;
• the arrangements in respect of Group Assurance including its
resourcing, external support, the scope of the annual internal audit
plan for FY 2018 regarding the level of achievement and the scope
of the annual internal audit plan for FY 2019;
• periodic internal control and assurance reports from Group Assurance;
• the Group’s risk management framework for the identification and
control of major risks, its risk and assurance mitigation plan and the
annual assessment of effectiveness of controls;
• compliance with the Company’s Code of Ethics;
• corporate governance developments;
over financial reporting;
• the status of material litigation involving the Group; and
• review with management and the auditor, Company financial statements
• reports on allegations made via the Group’s whistleblowing
procedures and the effectiveness of these procedures including
a summary of reports received during FY 2018.
required under UK legislation before submission to the Board;
• establish, review and maintain the role and effectiveness of the internal
audit function, known as Group Assurance, whose objective is to
provide independent assurance over the Group’s significant processes
and controls, including those in respect of the Group’s key risks;
• assume direct responsibility for the appointment, compensation,
resignation, dismissal and the overseeing of the auditor, including
review of the external audit, its cost and effectiveness;
• pre-approve non-audit work to be carried out by the external auditor
and the fees to be paid for that work together with the monitoring
of the external auditor’s independence;
Annual report and accounts 2018 Mitchells & Butlers plc
65
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Audit Committee report continued
Disclosure of significant issues considered
The Audit Committee has reviewed the key judgements applied in the
preparation of the consolidated financial statements, which are described
in the relevant accounting policies and detailed notes to the financial
statements on pages 92 to 147.
The Audit Committee’s review included consideration of the following
key accounting judgements:
The principal objectives of the internal audit plan for FY 2018 were,
and remain for FY 2019:
• to provide confidence that existing and emerging key risks are being
managed effectively;
• to confirm that controls over core business functions and processes
are operating as intended (‘core assurance’); and
• to confirm that major projects and significant business change
• Property, plant and equipment valuation – the assumptions used by
programmes are being adequately controlled.
management to value the long leasehold and freehold estate including
estimated fair maintainable trading levels, brand multiples and use of
spot valuations to ensure a consistent valuation methodology is in
place. Short leasehold buildings, unlicensed land and buildings and
fixtures, fittings and equipment are held at cost less depreciation and
impairment. The revaluation methodology is determined by using
management judgement, with advice taken from third-party valuers;
• Valuation of onerous lease provisions – determination of whether
a loss is unavoidable requires areas of judgement which include
consideration of potential future investment decisions, local conditions
which may be impacting on current performance and the opportunity
to surrender a lease back to the landlord;
• Pension deficit – the pension liability is sensitive to the actuarial
assumptions applied in measuring future cash outflows. The use of
assumptions such as the discount rate and inflation which have an
impact on the valuation of the defined benefit pension scheme has
been assessed by the Audit Committee. The most significant criteria
considered for the selection of bonds include the rating of the bonds
and the currency and estimated term of the retirement benefit
liabilities. Management have used judgement to determine the
applicable rate of inflation to apply to pension increases in calculating
the defined benefit obligation;
• Covenants – the headroom on the covenants within the securitised
estate, together with an evaluation of the mitigating options available
to management (to ensure there is reasonable assurance that should
a covenant be close to being breached, management have further
actions that could be undertaken to prevent such a breach occurring),
have been reviewed in detail by management and assessed by the
Audit Committee; and
During FY 2018, 17 audit reports were issued by the Group Assurance
function and reviewed by the Board or the Audit Committee. Internal
audit recommendations are closely monitored through to closure via
a web-based recommendation tracking system, introduced in FY 2013
and updated in FY 2018, which has significantly improved the overall
monitoring of internal audit recommendations to ensure these are
successfully implemented in a timely manner. A summary of the status
of the implementation of internal audit recommendations is made monthly
to the Executive Committee and quarterly to the Audit Committee.
In FY 2018, a comprehensive tender process was undertaken regarding
the co-sourced Group Assurance function. PwC were successfully
re-appointed based upon overall merit and quality of the team, to provide
Group Assurance audit services to M&B for a further two-years.
Risk management framework
As disclosed in the ‘Risk and uncertainties’ section on pages 38 to 42
the Risk Committee continues to meet on a quarterly basis to review
the key risks facing the business. Membership of the Risk Committee,
which includes representation from each of the key business functions,
is detailed below:
• Company Secretary and General Counsel (Chairman)
• Group Finance Director
• Commercial and Marketing Director
• Divisional Director (Operations)
• Group HR Director
• Director of Business Change & Technology
• Separately disclosed items – judgement is used to determine
• Group Risk Director
those items which should be separately disclosed to allow a better
understanding of the adjusted trading performance of the Group.
This judgement includes assessment of whether an item is of sufficient
size or of a nature that is not consistent with normal trading activities.
Effectiveness of internal audit
The Audit Committee is responsible for monitoring and reviewing
the effectiveness of the Company’s internal audit function. The Audit
Committee meets regularly with management and with the Group Risk
Director and the internal auditor, to review the effectiveness of internal
controls and risk management and receives reports from the Group Risk
Director on a quarterly basis.
The annual internal audit plan is approved by the Audit Committee
and kept under review on a monthly basis, by the Group Risk Director,
in order to reflect the changing business needs and to ensure new and
emerging risks are considered. The Audit Committee is informed of any
amendments made to the audit plan on a quarterly basis. The FY 2018
internal audit plan was developed through a review of formal risk
assessments (in conjunction with the Risk Committee and the Group’s
Executive Committee) together with consideration of the Group’s key
business processes and functions that could be subject to audit. A similar
approach has been employed in relation to the FY 2019 internal audit plan.
• Head of Legal
Key risks identified are reviewed and assessed on a quarterly basis in
terms of their likelihood and impact, within the Group’s ‘Key Risk Heat
Map’, in conjunction with associated risk mitigation plans. In addition,
the Risk Committee review includes an assessment of the material
relevance of emerging risks and the continued relevance of previously
identified risks. During FY 2018, Risk Committee meetings continued
to include a cross-functional, detailed review of the Group’s key risks.
This process, which was introduced in FY 2016, continues to prove to be
effective and adds value to the continued development and progression
of the Group’s approach to evaluating new and existing risks, supported
by robust mitigation plans.
Actions arising from Risk Committee meetings are followed up by the
Group Risk Director. The Audit Committee reviews the Risk Committee
minutes, in addition to undertaking a quarterly review of the Group’s
‘Key Risk Heat Map’.
66
Mitchells & Butlers plc Annual report and accounts 2018
Confidential reporting
The Group’s whistleblowing policy enables staff, in confidence, to raise
concerns about possible improprieties in financial and other matters and
to do so without fear of reprisal. Details of the policy are set out in the
Company’s Code of Ethics. The Audit Committee receives quarterly
reports on whistleblowing incidents and remains satisfied that the
procedures in place are satisfactory to enable independent investigation
and follow up action of all matters reported. No major issues have been
reported in FY 2018 (major issues being defined for this purpose as
matters having a financial impact of greater than £100k).
External auditor appointment
Deloitte LLP was appointed as the auditor in 2011, following a formal
tender process. The Audit Committee has considered the guidance
in relation to rotation including the proposed transition rules which will
be considered when recommending the appointment of the auditor in
future years. The most recent audit partner rotation took place in 2016
whereby John Charlton became the lead Audit Partner. The Company
has complied throughout the reporting year with the provisions of
The Statutory Audit Services for Large Companies Market Investigation
(Mandatory Use of Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014. Under the terms of that Order, the
Committee expects to carry out a competitive audit tender by no later
than 2020 in respect of the financial year ending in 2021 to ensure the
continued objectivity, independence and value for money of the
statutory audit. It may choose to do so at an earlier time.
The Audit Committee remains confident that the objectivity and
independence of the auditor are not in any way impaired by reason
of the non-audit services which they provide to the Group.
That policy also includes an extensive list of services which the audit
firm may not provide or may only provide in very limited circumstances
where the Company and the audit firm agree that there would be no
impact on the impartiality of the audit firm. Details of the remuneration
paid to the auditor, and the split between audit and non-audit services,
are set out in note 2.3 of the financial statements on page 112.
External audit annual assessment
The Audit Committee assesses annually the qualification, expertise,
resources and independence of the Group’s auditor and the overall
effectiveness of the audit process. The Finance Director, Company
Secretary and General Counsel, Audit Committee Chairman and Group
Risk Director meet with the auditor to discuss the audit, significant risks
and any key issues included on the Audit Committee’s agenda during
the year.
Fair, balanced and understandable statement
One of the key governance requirements of the Group’s financial
statements is for the report and accounts to be fair, balanced and
understandable. Therefore, upon review of the financial statements,
the Audit Committee and the Board have confirmed that they are
satisfied with the overall fairness, balance and clarity of the Annual
Report, which is underpinned by the following:
The Audit Committee considers that the relationship with the auditor is
working well and is satisfied with its effectiveness and has not considered
it necessary to require Deloitte LLP to re-tender for the external audit
work. There are no contractual obligations restricting the Company’s
choice of auditor.
• formal minutes of the year end working group comprised of relevant
internal functional representatives and appropriate external advisers;
• clear guidance being issued to all contributors to ensure a consistent
approach; and
• formal review processes at all levels to ensure the Annual Report
is factually correct.
Colin Rutherford Chairman of the Audit Committee
21 November 2018
The Going Concern and Long-Term Viability Statements
can be found on pages 105 and 42 respectively.
External auditor’s independence
The external auditor should not provide non-audit services where
it might impair their independence or objectivity to do so. The Audit
Committee has established a policy to safeguard the independence
and objectivity of the Group’s auditor as set out below. That policy
has been reviewed in FY 2018 and a copy of it is appended to the
Audit Committee’s terms of reference and is available on the Company’s
website. Pursuant to that policy the following services have been
pre-approved by the Audit Committee provided that the fees for such
services do not exceed in any year more than 70% of the average audit
fee paid to that audit firm over the past three years:
• audit services, including work related to the annual Group financial
statements, and statutory accounts; and
• certain specified tax services, including tax compliance, tax planning
and tax advice.
Acquisition and vendor due-diligence may only be provided if it is
specifically approved by the Committee on a case by case basis in
advance of the engagement commencing. Any other work for which
management wishes to utilise the external auditor must be approved
as follows:
• services with fees less than £50,000 may be approved by the Finance
Director; and
• engagements with fees over £50,000 fall to be approved by the Audit
Committee or its Chair.
Annual report and accounts 2018 Mitchells & Butlers plc
67
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Report on Directors’ remuneration
Our commercial culture has had a positive impact on mitigating many
of the cost headwinds we face. Consumer expectations, everywhere,
continue to increase and guests are more willing to provide feedback
on their experiences. Immediate access to social media feedback through
Reputation.com allows our managers to see all online reviews for their
business on one platform and to interact directly with guests.
In a fast-moving consumer environment, innovation is something that
guests expect, and technology plays a fundamental role by enabling us
to identify opportunities to improve. All of our brands offer a facility to pay
via an app and the ability to order food and drink at the table is now on
trial in a number of businesses, with encouraging feedback from guests.
Last year, I explained that Phil Urban, our CEO was developing a
programme, Ignite 2, to further improve sales and increase efficiencies
and during 2018 the individual plans which make up the Ignite programme
were developed, resulting in a number of workstreams. Examples of
these include improved sales forecasting, which will support a more
efficient scheduling of employees, the removal of cash expenditure from
the business enabling costs to be better controlled and purchasing power
maximised and, the introduction of software that can identify potentially
fraudulent activity. In addition, our booking platform and processes have
been streamlined to reduce the number of steps needed to complete a
booking and to allow the suggestion of an alternative Mitchells & Butlers
venue when the guest’s first choice is not available.
People are essential to our success and consistently great guest
experiences rely on a team of highly engaged people. Engagement
scores have again improved during 2018 reaching their highest ever level
for the retail team. We have proven strong links between high levels of
engagement, guest satisfaction and, in turn, sales performance and it was
also encouraging that the turnover of retail management employees fell
during the year. However, retail team member turnover increased by
2ppts and this has been predominantly seen in businesses in the South
East and London where there is a higher proportion of employees from
the European Union. The end of freedom of movement, when the UK
leaves the European Union, is likely to have an adverse impact on all
hospitality businesses resulting in a shortage of talent, particularly in
kitchen roles. For this reason, our apprenticeship programme is now
more important than ever and there are now c.1,800 team members
taking part across a range of roles.
Adjusted operating profita of £303m was 1.6% lower than last year
on a 52 week basis. Profitability in the first half was negatively impacted
by snow in particular, resulting in a decline of £8m against last year.
However, in the second half, adjusted operating profita grew by £3m,
despite Easter shifting into the first half, as the momentum from our
strategic initiatives continued to gather pace and the summer heatwave
having a mixed impact across our portfolio of businesses. Trading in the
new financial year has also started strongly with like-for-likea sales growth
of 2.2%.
Imelda Walsh Chair of the Remuneration Committee
Dear fellow shareholder
I am pleased to present the Directors’
remuneration report in respect
of the financial year, which ended
on 29 September 2018.
Background and business context
For the second year in a row, like-for-like salesa have been ahead of
the market with growth of 1.3%, which would have been stronger but
for the impact of several bouts of snow over the winter, the prolonged
hot weather this summer and England’s extended run in the football
World Cup. The wide range of brands and offers that make up the
Mitchells & Butlers portfolio means that when there are unusual or
unexpected events, these can impact both positively and negatively.
For example, the summer heatwave and World Cup were great for
our more drinks-led pubs but not so good for our carvery businesses
(Toby Carvery and Stonehouse).
Our strategic priorities remain unchanged; to build a balanced
business, instil a more commercial culture and drive an innovation
agenda. Around 240 capital investment projects were completed
during the year and once again the main focus of the conversion
programme was Miller & Carter, which now has over 100 sites and
is consistently delivering strong returns. The remodel programme
demonstrates how our brands can continue to evolve and innovate,
in a very competitive consumer environment.
68
Mitchells & Butlers plc Annual report and accounts 2018
2018 remuneration
Annual bonus
For 2018 the annual bonus plan had four elements: Adjusted Operating
Profit (hereafter referred to as Operating Profita), Guest Health, Employee
Engagement and Food Safety. The plan measures reflect the overall
business scorecard aligning all employees from Executive Directors
through to Retail Management employees.
Operating Profit
In determining the Operating Profit target range, the Committee took into
consideration a range of factors including the general and sector outlook,
the continuing significant cost headwinds of c.£60m per annum and
the benefits likely to be realised over the financial year from the Ignite
programme. The target was set broadly in line with the 2017 outturn
(£308m on a 52 week basis) and market consensus. The level of
performance required for a maximum award required a significant level
of performance ahead of the both the Company’s business plan and
market expectations.
The Committee also took the decision to increase the threshold level
of Operating Profit required to trigger the non-financial elements from
95% of target to 97.5% of target.
The Group delivered an Operating Profit of £303m, which was 99%
of the performance required for an on-target award, resulting in a payout
of 28% of salary (out of 70%) for Executive Directors. The Committee
reflected on whether this represented a good performance for the year
and also versus the prior year and concluded that it did, given the
unprecedented cost challenges and our continuing outperformance
versus competitors1.
Non-financial measures – 30% (out of 100%)
Guest Health (0% out of 15%)
For 2018 a new method of measuring Guest Health was introduced
which comprised a combination of three elements, Net Promoter Score
(‘NPS’), a combined social media score and guest complaints.
• The NPS target was set at 61, a further improvement on the 2017
outturn of 59. Good progress has been made across a number of our
brands and the overall score for the year was ahead of target at 62.1.
• The target for the combined social media score (reputation.com)
was set at 4.0. To achieve this the overall average review score across
the business, combining TripAdvisor, Facebook and Google, needed
to average 4.0. Achieving this level of review scores would have
represented an outstanding performance, but the actual result
fell just short of this ambitious target at 3.93.
• The guest complaints metric measures the proportion of complaints
received for every 1,000 meals served. The target for this measure was
set at 0.67, with the overall outcome of 0.70 just missing the required
level of performance, but again an improvement on the prior year.
Despite good progress being made across all three elements of the Guest
Health measure, no bonus was payable in respect of this measure.
Employee engagement (6.3% out of 10%)
A clear correlation has been established between employee engagement
and guest satisfaction, which, in turn, has a positive impact on sales
performance. Two surveys are held each year.
In June, employees are invited to provide feedback through a
comprehensive survey, YourSay, and this is supplemented by a shorter
‘pulse’ survey in February. Overall, around two-thirds of employees
participate providing valuable and robust insight into employee satisfaction.
The engagement target for 2018 was based on a combined score, with
a greater weighting placed on the more comprehensive YourSay survey.
The final outcome was a combined score of 78.9, which represented
the highest ever employee engagement score, above the level of
performance required for an on-target payment, but below that required
for a maximum payment.
As a result, a payout equivalent to 6.3% (out of 10%), was awarded
to Executive Directors under this element.
Food safety (5% out of 5%)
Food safety will always be a priority for the business, which is why a
measure was introduced that is based on the number of businesses that
achieve either a 4 or 5 rating in the independently operated National
Food Hygiene Rating System (‘NFHRS’). The stretching target set for
2018 was for 96.9% of businesses to achieve a score of either 4 or 5 over
the year and the actual result was that 98% of businesses achieved this
level. As a result, Mitchells & Butlers was second in the league table
for large pub and restaurants across the country over 2018.
As an additional check, the Committee has also taken into account
overall workplace safety which again has been strong in all areas.
The structure for this element is such that payout is based entirely
on achieving the target set, therefore a payout equivalent to 5%
was triggered against this element.
Final bonus outcome
In determining the overall final bonus outcome, the Committee considered
the wider performance of the Group as part of an overall quality of
earnings assessment and was satisfied that the outcome was consistent
with our performance over the year and therefore the bonus awarded to
Executive Directors is 39.3% of salary. As a result, payments of £200,034
and £167,283 will be made to Phil Urban and Tim Jones respectively.
In line with our policy, half of the bonus award will be deferred into shares
under the Short Term Deferred Incentive Plan (‘STDIP’), which will be
released in two equal amounts after 12 and 24 months, and shares must
be retained until the relevant shareholding guideline has been met.
1. As measured by the Coffer Peach business tracker, the UK’s leading sales tracker for pubs
and restaurants.
Annual report and accounts 2018 Mitchells & Butlers plc
69
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Report on Directors’ remuneration continued
Performance Restricted Share Plan (‘PRSP’)
The 2016–18 PRSP award had two equally weighted elements: growth
in adjusted earnings per share (‘EPS’a) and total shareholder return (‘TSR’).
Over the performance period EPS growth was (1.5%) p.a. which was
below the threshold level of performance required for vesting of 4% p.a.
TSR performance was below the median threshold required for vesting
and as a result, both elements of the award lapsed.
The Committee believed that the retention of TSR was important,
as it allows shareholders to assess the performance of Mitchells & Butlers
against direct competitors at a time when performance across the
industry is quite polarised. Therefore, Mitchells & Butlers’ performance
for the 2018–20 award will be compared against a subset of Restaurants
& Bars companies comprising EI Group, Greene King, Marston’s,
The Restaurant Group, JD Wetherspoon and Whitbread.
In my statement last year, I outlined the Committee’s intention to take
some time to consider the most appropriate measures and targets for
future PRSP awards, given the uncertain market and the work ongoing
to fully develop the range of Ignite initiatives.
Having considered the challenges the business faces and the importance
the Board places on improving cash generation, the Committee agreed
that a greater focus on cash flow was appropriate. This is an important
area of focus given the significance of two fixed charges on cash flow
which need to be covered before other more discretionary spend;
namely pension deficit contributions under the current triennial
agreement (2016) and mandatory bond amortisation.
The Committee considered a number of options for the measurement of
cash flow and concluded that a definition of ‘Operating Cash Flow before
adjusted items, movements in working capital and additional pension
contributions’ best met our objectives of defining a cash flow measure
that was understood, easy to monitor and communicate, and aligned to
operational delivery. This definition is set out in our cash flow statement
on page 104.
Capital Expenditure, working capital and pension contributions have
been excluded from the definition. The Committee felt that the best way
to take into account these elements was as part of the overall quality of
earnings assessment undertaken at the end of the performance period.
Further detail on the specific approach to the quality of earnings
assessment can be found on page 83.
Threshold vesting for this part of the award will require around 2% p.a.
growth in like-for-like sales and the delivery of further cost efficiencies,
reversing the recent decline in profit and, on an earnings equivalent basis,
resulting in a compound annual growth in Adjusted EPSa of approximately
2.5% p.a. Full vesting can only be achieved if many or most of the new
programme of Ignite initiatives are successfully implemented, resulting
in significant market outperformance and strong year-on-year growth
in Operating Profit including an equivalent compound annual growth
in Adjusted EPSa of approximately 5.5% p.a.
Threshold vesting will require Mitchells & Butlers’ performance to be
equal to the median of the peer group, and maximum vesting will require
an outperformance of the median of 8.5% p.a. with straight-line vesting
between median and maximum. The Committee believes an 8.5% p.a.
outperformance factor for full vesting is stretching.
Following consultation with our major shareholders, an award was made
in July 2018 under the PRSP in respect of the 2018–20 performance
period, with 75% of the award based on Operating Cash Flow and 25%
on relative TSR. Both Operating Cash flow and relative TSR will be
measured over a three year performance period and any shares which
vest will be subject to a further two year holding period.
Full details of the award are set out on page 84.
Remuneration policy and changes to the UK Corporate
Governance Code
Our remuneration policy was approved at the 2018 AGM, with 97% of
shareholders voting in favour of the new policy. No changes are proposed
for this year.
The Committee is cognisant of the forthcoming changes to the Corporate
Governance Code and other reporting regulations and has begun to
prepare for their introduction. For the last two years we have published
our CEO pay ratio and welcome the clarity the new code brings to the
calculation and we will adopt a code-compliant methodology from this
report onwards. We have also taken the opportunity to set out the
impact of a 50% increase in share price on LTIP vesting.
We have also introduced a new section to the report which
demonstrates how executive remuneration links to the overall strategy
and the relationship between executive remuneration and that of other
employees across the Group. We anticipate that this section of the
report will evolve and develop over time and will align to the aims
of the new code.
70
Mitchells & Butlers plc Annual report and accounts 2018
Approach for FY 2019
Salary
With effect from 1 January 2019, Phil Urban’s salary will increase by 2%
to £520,000 and Tim Jones’ salary will also increase by 2% to £435,000.
Phil Urban’s salary has not increased since his appointment in September
2015 and Tim Jones’ salary was last increased in January 2015. These
increases are broadly in line with those applicable to other salaried
employees in the group.
Annual bonus
No changes are proposed to the annual bonus structure for 2019.
Operating Profit (70%)
• Half of the bonus opportunity will be payable for achieving a
demanding Operating Profit target. The threshold at which bonus
will begin to accrue will again be set at 95% of target and full payment
of this element will require very strong performance, above current
market consensus.
The remaining 30% of the annual bonus plan will be allocated against
the business scorecard as follows:
• 15% for Guest Health (NPS; combined social media scores
and guest complaints)
• 10% for Employee Engagement
• 5% for Food Safety
The non-financial elements are only payable if a threshold level of profit
is achieved. For 2019 this will again be set at 97.5% of the Operating
Profit target.
In line with our established practice, the Committee will consider the
overall performance of the Company, not just the outcome of each
individual measure.
.
2019–21 PRSP
A PRSP award is due to be made in respect of the 2019–21 performance
period. The Committee has reviewed the performance condition and
concluded that the performance measures should remain unchanged
from the July 2018 award, with two independent elements, Operating
Cash Flow (75% weighting) and relative TSR (25% weighting).
In setting the target range for 2019–21 the Committee has considered
the ongoing cost headwinds that the business continues to face, along
with the potential benefits flowing from Ignite initiatives in the coming
years. The conclusion of this review is that the Operating Cash Flow
target range will have a threshold set at £1,332m and maximum at
£1,362m, which represents an increase at both threshold and maximum.
The Committee considers this to be a stretching target range in the
circumstances. On an earnings equivalent basis, the adjusted EPS target
range will be between 4.5% and 7%, again, a further progression on the
2018–20 PRSP targets.
The current TSR comparator group comprises six peer companies (EI
Group, Greene King, Marston’s, The Restaurant Group, JD Wetherspoon
and Whitbread). Following the announcement of the forthcoming sale of
Costa Coffee by Whitbread to Coca-Cola, the Committee has further
reviewed the constituents of this group. Once the Costa sale has
concluded the residual Whitbread business will be primarily a hotels
business, and therefore the Committee has decided that, going forward,
Whitbread should not form part of the group. Threshold vesting will
again require Mitchells & Butlers’ performance to be equal to the median
of the peer group, and maximum vesting requires an outperformance
of the median of 8.5% p.a. with straight-line vesting between median
and maximum.
In what has been another busy year for the Committee, I would like
to thank my colleagues for their engagement and commitment and the
efforts of those who have supported the Committee during the past year.
If you have any comments or questions on any element of the report,
please email me, care of Craig Provett, Director of Compensation &
Benefits, at Remco@mbplc.com
Imelda Walsh Chair of the Remuneration Committee
21 November 2018
This report has been prepared on behalf of the Board and has been approved by the Board.
The report has been prepared in accordance with the Companies Act disclosure regulations
(the Large and Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013) (the ‘Regulations’).
a. The Directors use a number of alternative performance measures (APMs) that are
considered critical to aid the understanding of the Group’s performance. Key measures
are explained on pages 148 to 150 of this report.
Annual report and accounts 2018 Mitchells & Butlers plc
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Report on Directors’ remuneration continued
Executive Remuneration
at a glance
This section briefly highlights
performance and remuneration
outcomes for FY 2018, and our
approach for FY 2019. More detail
can be found in the Annual Report
on remuneration on pages 78 to 91.
Full details of the remuneration policy
can be found on the mbplc.com website.
FY 2018 single figure remuneration for Executive Directors
Phil Urban
Tim Jones
Total
Basic
salaries
£000
2018
509
425
934
Taxable
benefits
£000
2018
16
16
32
Short-term
incentives
£000
Pension-related
benefits
£000
Long-term
incentives
£000
2018
200
167
367
2018
89
75
164
2018
–
–
–
Other
£000
2018
5
5
10
Total
remuneration
£000
2018
819
688
1,507
The single figure table sets out payments made to Executive Directors in respect of FY 2018, including base salary, annual bonus earnings, long-term
incentives, payments made in lieu of pension contributions and taxable benefits such as company car and healthcare cover. More detail is provided in
relation to the 2018 annual bonus scheme and long-term incentive scheme outcomes below and a full version of the single figure table for all Directors
can be found on pages 79 and 80.
FY 2018 annual bonus
FY 2018 PRSP vesting
The annual bonus was based on two elements: 70% on Operating Profit
and 30% on non-financial scorecard measures.
Operating Profit
Guest Health
NPS
Social Media
Complaints
Employee Engagement
Safety
Target
306
61
4.0
0.67
78.5
96.9
Actual
303
62.1
3.93
0.70
78.9
98.0
Bonus outcome
(% of salary)
28
0
6.3
5
Bonus payments equivalent to 39.3% of base salary will be made to
Executive Directors (£200,034 in respect of Phil Urban and £167,283 in
respect of Tim Jones). Half of the bonus award will be deferred into shares
which will be released in two equal amounts after 12 and 24 months.
The PRSP awards granted in June 2016 had a performance period ending
on 29 September 2018. 50% of the award was based on relative TSR
performance and 50% on EPS growth.
Target range
Actual
% vesting
Total Shareholder
Return relative to
peer group
Compound annual
adjusted EPS growth 4% to 8% CAGR
Median to
upper quartile
Below median Nil
(1.5%) p.a.
Nil
TSR performance was below median and EPS growth of (1.5%) p.a.
over the period was below the threshold, therefore no part of the
award vested.
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Mitchells & Butlers plc Annual report and accounts 2018
Approach for FY 2019
Components of remuneration
The remuneration package for the Executive Directors
comprises both fixed and variable elements consistent with
our remuneration principles.
Fixed
Salary
+
=
Benefits and pension
Fixed total
Variable
Annual bonus
PRSP and shares
Fixed total
+
=
Fixed components
Salary
On 1 January 2019 Phil Urban’s salary will increase by 2% to £520,000
and Tim Jones’ will also increase by 2% to £435,000. This is the first
increase since Phil Urban’s appointment on 27 September 2015 and
Tim Jones’ last increase was on 1 January 2015.
Benefits and pension
A pension contribution (or cash equivalent) of 20% of salary will
continue to apply.
Phil Urban Chief Executive
£520,000 +2%
Tim Jones Finance Director
£435,000 +2%
Variable components
Annual bonus
No change to potential quantum – 100% of salary.
Measures will be:
Operating Profit
Business scorecard measures
Guest Health
Employee
Engagement
Food
Safety
70%
15%
10%
5%
Half of any bonus payable will be deferred in the form of shares and released in equal parts after 12 and 24 months.
PRSP
Award levels
(unchanged)
Measures
and targets
Phil Urban Chief Executive
200% salary
Tim Jones Finance Director
140% salary
Threshold
Target Range
Maximum
25% of this element vests
100% of this element vests
£1,332m
Operating Cash Flow
£1,362m
Median
Total Shareholder Return
Median +8.5% p.a.
The measures for the 2019–21 cycle are unchanged, with 75% of the award based on Operating Cash Flow and 25% on relative TSR.
A two-year holding period applies for all long-term incentive awards made from 2018 onwards.
Share ownership guidelines
Directors are required to retain all vested
shares (net of tax) until the share ownership
guideline is met. This applies to vested
deferred bonus shares as well as shares
vesting from any long-term incentive plans.
Phil Urban Chief Executive
200% salary
All other Executive Directors
150% salary
Annual report and accounts 2018 Mitchells & Butlers plc
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Report on Directors’ remuneration continued
Remuneration
context
This new section of the report sets out
the broader context for remuneration
explaining how executive reward links
to Mitchells & Butlers’ three strategic
priorities and also between executive
pay and remuneration across the Group.
It is anticipated that this section will evolve
over time, building on best practice and
aligning with the new corporate
governance requirements.
Mitchells & Butlers’
remuneration principles
Shareholder alignment
A high proportion of reward is delivered in the form of equity, ensuring
Executives have strong alignment with shareholders.
Competitive
Providing reward that promotes the long-term success of the business
whilst enabling the attraction, retention and motivation of high-calibre
senior Executives.
Performance-linked
A significant part of an Executive’s reward is linked to performance
with a clear line of sight between business outcomes and the delivery
of shareholder value.
Straightforward
The remuneration structure is simple to understand for participants
and shareholders and is aligned to the strategic priorities of the business.
74
Mitchells & Butlers plc Annual report and accounts 2018
Alignment of Executive pay to strategy
The table below sets out how the three strategic priorities of the business align to Executive remuneration for Executive Directors:
Building a
more balanced
business
Strategic priority
Strong cash flow and operating performance supports
the delivery and sustainability of the capital plan and
estate optimisation.
Link to Executive remuneration
Operating Cash Flow is the main component of the LTIP.
Operating Profit delivery is the main component of the annual
bonus plan.
A more balanced business delivers brands and food
and drink offers in an environment that guests want
to enjoy.
The Guest Health element of the annual bonus plan provides
a strong indicator of the success of each business and there
is a clear correlation between strong Guest Health performance
and sales performance.
High-quality engaged teams are fundamental to the
success of any business.
The engagement element of the annual bonus plan measures how
our teams feel about working for Mitchells & Butlers, and in turn the
service they provide to guests.
Instilling
a more
commercial
culture
A commercial culture improves controls, efficiency,
purchasing and pricing, driving both improved
cash flow and operating performance.
Operating Cash Flow is the main component of the LTIP.
Operating Profit delivery is the main component of the annual
bonus plan.
Commercial decisions must be guest focused
and benefit from the input of customer feedback.
The Guest Health quickly demonstrates where decisions are right
or wrong and Executives are incentivised to react.
Developing and evolving a commercial culture
requires high levels of employee engagement
and business awareness throughout the business.
The employee engagement element of the annual bonus plan
supports and underpins the development of culture.
Driving an
innovation
agenda
Innovation at small and large scale is an engine
for improved sales and therefore cash and
profit generation.
Operating Cash Flow is the main component of the LTIP.
Operating Profit delivery is the main component of the annual
bonus plan.
Guests’ expectations continue to increase, demanding
higher standards of service and digital capability.
The Guest Health element of the annual plan provides valuable
actionable feedback and incentivises action.
Innovation involves change and delivery of change
requires strong employee engagement.
The employee engagement element of the annual bonus plan
incentivises action to maintain and improve employee engagement.
Illustrations of the application of remuneration policy
A key principle of the Group’s remuneration policy is that variable short- and long-term reward should be linked to the financial performance of the
Group. The charts below show the composition of the remuneration of the Chief Executive and Finance Director at minimum, on-target and maximum
levels of performance in FY 2019. The charts also show the impact of a 50% increase in share price on the LTIP outcome.
Chief Executive £000
Finance Director £000
3,000
2,500
2,000
1,500
1,000
500
0
2,705
3,000
2,185
19.2%
2,500
1,400
47.6%
38.5%
2,000
1,500
625
100.0%
37.2%
18.2%
44.6%
23.8%
19.2%
1,000
28.6%
23.1%
500
0
Minimum
On-target
Maximum
Maximum plus
50% Share Price Gain
1,570
1,875
16.3%
1,049
38.8%
32.5%
526
100.0%
29.0%
20.8%
50.2%
27.7%
23.2%
33.5%
28.0%
Minimum
On-target
Maximum
Maximum plus
50% Share Price Gain
Fixed pay
Short-term incentives
Long-term incentives
Share Price Gain
Fixed pay
Short-term incentives
Long-term incentives
Share Price Gain
Annual report and accounts 2018 Mitchells & Butlers plc
75
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Report on Directors’ remuneration continued
The performance scenarios demonstrate the proportion of maximum remuneration which would be payable in respect of each remuneration element
at each of the performance levels. In developing these scenarios, the following assumptions have been made:
Minimum
Only the fixed elements of remuneration are payable. The fixed element consists of base salary, benefits and pension. Base salary is the salary effective
from 1 January 2019. Benefits are based on actual FY 2018 figures and include company car, healthcare and taxable expenses. Pension is the cash
allowance and/or Company pension contribution payable in respect of base salary from 1 January 2019.
On-target
In addition to the minimum, this reflects the amount payable for on-target performance under the short- and long-term incentive plans:
• 50% of maximum (50% of base salary for the Chief Executive and Finance Director) is payable under the short-term incentive plan; and
• 50% of the award (100% of base salary for the Chief Executive and 70% of base salary for the Finance Director) is payable under the long-term
incentive plan.
Maximum
In addition to the minimum, maximum payment is achieved under both the short- and long-term incentive plans such that:
• 100% of base salary is payable under the short-term incentive plan for the Chief Executive and Finance Director; and
• 200% of base salary for the Chief Executive and 140% of base salary for the Finance Director is payable under the long-term incentive plan.
Share Price Gain
This shows the impact a 50% increase in the share price would have on the LTIP outcome.
Remuneration below Executive Director level
The table below demonstrates how the key elements of Executive pay align with the wider workforce:
Executive Directors
Executive
Committee
Senior management
Support Centre
Retail managers
Retail team
members
Base pay
Pay broadly around
mid-market levels.
Overall, increases
(in percentage terms)
consistent across all
salaried employee groups.
Bonus
Bonus schemes for all
schemes align to the
business scorecard.
The majority of bonus
opportunity is linked to
financial performance.
Long-term incentives
Measures and targets
for long-term incentive
plans consistent for
all participants.
All-employee share plans
All employees can
participate in any of
the all-employee share
schemes, subject to
qualifying service,
building a stake in
the business.
Our pay approach is aimed at providing regular and
predictable earnings through competitive base pay for
our retail team members. This is valued more highly than
variable pay elements for retail team members and is in
line with our ‘competitive’ and ‘straightforward’
remuneration principles.
Pay set in line with market
requirements and closely
monitored.
Base pay for many
employees is ahead of
the statutory minimums.
Many employees benefit
from tip and service
charge, and it is Mitchells
& Butlers’ policy to pass
100% of these earnings
on to employees.
76
Mitchells & Butlers plc Annual report and accounts 2018
Pay ratios and gender pay
The table below sets out the CEO pay ratio at the median, 25th and 75th percentiles.
Financial year
2018
More detail in relation to the pay ratio calculation can be found on page 89.
The table below provides a summary of Gender Pay data for the Group.
CEO pay ratio
P25 (lower quartile)
61:1
P50 (median)
58:1
P75 (upper quartile)
52:1
Mean Pay Gap
Median Pay Gap
Mean Bonus Gap
Median Bonus Gap
2018
%
7.4
4.7
38.5
29.2
2017
%
8.1
5.2
27.6
20.6
At a Group level the pay gap has reduced overall on both measures and the median pay gap compares very favourably to the national average of 18.4%.
More detail in relation to Gender Pay can be found as part of CSR section of the report on page 35.
More than just pay
Our employees are fundamental to the delivery of great guest experiences. For over a decade, Mitchells and Butlers has sought the views of
employees through our annual ‘Your Say’ employee engagement survey. What this survey consistently tells us is that whilst pay is a very important
element of the overall employee value proposition, there are other factors that are also important to our employees. Over the past year, the Company
has taken the time to understand in more detail what these other factors are, developing what is known internally as our ‘People Promise’. In developing
our People Promise we have identified that all employees value career progression, fair reward, the need to be challenged and feel safe and secure; this
is the minimum expectation. In addition to these core needs, employees also value the flexibility and convenience that working for Mitchells & Butlers
brings, the sense of family that comes from working in our businesses and the variety and fun that a career in hospitality can provide. We believe that
delivering against these areas for our people will further improve employee engagement and has resulted in a number of initiatives this year. For
example, a new app is on trial that will allow employees to swap shifts with others easily; investment continues in our e-learning system that enables
employees to develop on-job in a convenient and flexible way, and a number of policies have been reviewed to be more flexible and family focused.
Workforce engagement
Whilst not specifically consulted on Executive remuneration, feedback from employees is gathered in a number of ways through the year as shown
in the illustration below:
Remuneration Committee
Employee survey
CEO roadshows
Employee forum
Outcomes reviewed by the
Remuneration Committee
and taken into account when
setting remuneration policy,
if appropriate.
The CEO and FD hold regular
roadshows that allow both
support centre colleagues
and General Managers
the opportunity to engage
with senior leaders and
provide feedback.
Elected representatives
have direct access to the
Executive Committee and for
Executive remuneration
matters, the Remuneration
Committee chair.
Overview of pay and
policy decisions
The Committee is updated
on employee terms and
conditions and made aware
of significant changes
to policies and other pay
related matters.
The Committee is regularly updated throughout the year on pay and conditions applying to Group employees. Where significant changes are
proposed to employment conditions and policies elsewhere in the Group, these are highlighted for the attention of the Committee at an early stage.
The Committee takes into account the base pay review budget applicable to other employees and is cognisant of changes to the National Living Wage
and the National Minimum Wage when considering the pay of Executive Directors. The Committee considers a broad range of reference points when
determining policy and pay levels; these include external market benchmarks as well as internal reference points. Any such reference points are set
in an appropriate context and are not considered in isolation.
As mentioned above, all employees are invited to take part in our annual ‘YourSay’ employee engagement survey in which they have an opportunity
to provide anonymous feedback on a wide range of topics of interest or concern to them. The Committee reviews the results of the survey and
any significant concerns over remuneration would be considered separately by the Committee and, if appropriate, taken into account when determining
the remuneration policy and its implementation. In addition, each year an employee forum is held, which gives the opportunity for employees to ask
questions of senior management, via elected representatives. Going forward, the Remuneration Committee Chair will attend the forum on an annual
basis to respond to any questions raised by employee representatives concerning our approach to Executive pay.
Annual report and accounts 2018 Mitchells & Butlers plc
77
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Report on Directors’ remuneration continued
Annual report
on remuneration
This section details the remuneration
payable to the Executive and
Non-Executive Directors (including the
Chairman) for the financial year ended
29 September 2018 and sets out how
we intend to implement our remuneration
policy for the 2019 financial year.
This report, along with the Chair’s annual
statement, will be subject to a single
advisory vote at the AGM on
22 January 2019.
Committee membership and operation
Committee members and their respective appointment dates are
detailed in the table below.
Name
Imelda Walsh (Chair)*
Colin Rutherford*
Stewart Gilliland*
Bob Ivell
Eddie Irwin
Dave Coplin*
Josh Levy
Date of appointment to the Committee
11 July 2013
11 July 2013
11 July 2013
11 July 2013
11 July 2013
29 Feb 2016
20 July 2017
*
Independent Non-Executive Directors.
Committee activity during the year
The Committee met six times during the year and key agenda items
included the following:
Committee terms of reference
October 2017
• 2018 annual bonus arrangements
• Long Term Incentive Plan review
• Remuneration policy review
• Gender pay
• Employee engagement
November 2017 • Remuneration policy
• 2017 annual bonus outcome
• 2015–17 LTIP outcome
• Confirmation of 2018 bonus targets
• Executive Committee members’ salary review
• Directors’ expenses
• Gender pay
• Update on employment matters across
the Group
• 2018–20 LTIP proposal and timetable
• All-employee share schemes
• 2018–20 LTIP proposal
• Gender pay update
• 2018–20 LTIP – confirmation of targets and
investor consultation timetable
March 2018
April 2018
May 2018
September 2018 • 2019 annual bonus arrangements
• 2019–21 LTIP structure
• Update on employment conditions across
the Group, including employee engagement
• Changes to the UK Corporate Governance Code
The Committee’s terms of reference were last reviewed in 2016 and
are available on our website. They will be reviewed again early in 2019
to take account of the revised Corporate Governance Code.
The Committee’s main responsibilities include:
• determining and making recommendations to the Board on the
Company’s Executive remuneration policy and its cost;
• taking account of all factors necessary when determining the policy,
the objective of which shall be to ensure the remuneration policy
promotes the long-term success of the Company;
• determining the individual remuneration packages of the Executive
Directors and other senior Executives (including all direct reports
to the CEO), and the Company Chairman;
• having regard to the pay and employment conditions across the
Company when setting the remuneration of individuals under the
remit of the Committee; and
• aligning Executive Directors’ interests with those of shareholders by
providing the potential to earn significant rewards where significant
shareholder value has been delivered.
78
Mitchells & Butlers plc Annual report and accounts 2018
Advice to the Committee
The Committee received advice from New Bridge Street (‘NBS’), a trading name of Aon Plc, until June 2018. From June 2018 the Committee received
advice from PwC on an interim basis pending the outcome of a competitive tender process. Both NBS and PwC are signatories to the Remuneration
Consultants Group Code of Conduct and any advice received is governed by that Code. Total fees payable in respect of remuneration advice to
the Committee in the reporting year totalled £75,9621 (NBS £68,762 and PWC £7,200). Aon Plc provided advice on a potential insurance product,
but no fees have been paid in respect of such advice in FY 2018.
Advice was also received from the Company’s legal advisers, Freshfields Bruckhaus Deringer LLP, on the operation of the Company’s employee share
schemes and on corporate governance matters. Clifford Chance LLP also provided advice in relation to pension schemes.
The Committee is satisfied that the advice received from its advisers was objective and independent.
Members of management including Susan Martindale, the Group HR Director and Craig Provett, the Director of Compensation & Benefits, are invited
to attend meetings on remuneration matters where appropriate. They are not present when matters affecting their own remuneration arrangements
are decided. The Company Chairman does not attend Board or Committee meetings when his remuneration is under review. Phil Urban and
Tim Jones were present at meetings where the Company’s long- and short-term incentive arrangements and share schemes were discussed.
However, each declared an interest in the matters under review.
1. Fees are shown net of VAT. 20% VAT was paid on the advisers’ fees shown above.
Statement of voting at AGM
At the last AGM (held on 23 January 2018), the resolution on the Directors’ remuneration policy and the Annual report on remuneration received
the following votes from shareholders:
Directors’ remuneration policy
Annual report on remuneration
Votes cast
368,083,115
366,642,591
Votes fora
357,056,085
365,544,870
%
97.00
99.71
Votes against
11,027,030
1,097,721
%
3.00
0.29
Votes withheldb
244,331
1,702,855
a. The ‘For’ vote includes those giving the Company Chairman discretion.
b. A vote withheld is not a vote in law and is not counted in the calculation of the votes ‘For’ or ‘Against’ the resolution.
Votes ‘For’ and ‘Against’ are expressed as a percentage of votes cast.
Pay outcomes
The tables and related disclosures set out on pages 79 to 86 on Directors’ remuneration, deferred annual bonus share awards (‘STDIP’), PRSP share
options, Share Incentive Plan and pension benefits have been audited by Deloitte LLP.
Directors’ remuneration
The tables below set out the single figure remuneration received by the Executive Directors and the Non-Executive Directors during the reporting year.
Details of performance under the annual bonus plan are set out on pages 80 to 82.
Executive Directors
Phil Urbanc
Tim Jonesc
Sub-total Executive
Directors
Basic salaries
£000
Taxable benefitsa
£000
Short-term
incentives
£000
Pension related
benefitsb
£000
Long-term
incentives
£000
Otherf
£000
2018
509
425
2017
518
434
2018
16
16
2017
11
13
2018
200
167
2017
146
122
2018
89
75
2017
91
76
2018
–
–
2017
–
–
2018
5
5
2017
4
3
Total
remuneration
£000
2018
819
688
2017
(53 wk)
770
648
934
952
32
24
367
268
164
167
–
–
10
7 1,507 1,418
Annual report and accounts 2018 Mitchells & Butlers plc
79
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Report on Directors’ remuneration continued
Non-Executive Directors
Fees
£000
Taxable benefitsd
£000
Short-term
incentives
£000
Pension related
benefitsb
£000
Long-term
incentives
£000
Other
£000
Total
remuneration
£000
2018
284
52
62
52
62
62
52
52
52
2017
290
53
63
53
138e
63
53
53
53
2018
3
0
1
0
2.5
0
0
1
0
2017
4
0
1
0
1
0
1
1
0
2018
–
–
–
–
–
–
–
–
–
2017
–
–
–
–
–
–
–
–
–
2018
–
–
–
–
–
–
–
–
–
2017
–
–
–
–
–
–
–
–
–
730
819
7.5
8
–
–
–
–
1,664 1,771
39.5
32
367
268
164
167
2018
–
–
–
–
–
–
–
–
–
–
–
2017
–
–
–
–
–
–
–
–
–
–
–
2018
–
–
–
–
–
–
–
–
–
2017
–
–
–
–
–
–
–
–
–
2018
287
52
63
52
64.5
62
52
53
52
2017
(53 wk)
294
53
64
53
139
63
54
54
53
–
–
737.5
827
10
7 2,244.5 2,245
Bob Ivell
Ron Robson
Stewart Gilliland
Eddie Irwin
Colin Rutherford
Imelda Walsh
Josh Levy
Dave Coplin
Keith Browne
Sub-total
Non-Executive
Directors
Total Executive
Directors and
Non-Executive
Directors
Note: All 2017 figures are shown on a 53 week basis.
a. Taxable benefits for the year comprised car allowance, healthcare and taxable expenses.
b. Based on the value of supplements paid in lieu of contributions to the Company Scheme.
c. The base salary for Phil Urban is £510,000 and for Tim Jones £426,500. The figures set out are the actual salaries received over the financial year, which had 364 days.
d. Taxable benefits for Non-Executive Directors include cash payments made or accounted for by the Company relating to the reimbursement of expenses (and the value of personal tax
on those expenses).
e. This amount includes the additional fee approved by the Board and paid in respect of the work carried out by Mr Rutherford in leading the Company’s discussions with the trustee of
the Company’s two defined benefit schemes which resulted in the agreement of the 2016 triennial valuations of those schemes as described more fully on page 45 of the Annual Report.
Includes the award of free shares and the value of the discount applied to Sharesave options awarded during the year.
f.
Annual performance bonus and STDIP
The annual bonus and STDIP operate as set out in our remuneration policy which is available on the Company’s website. Details of the measures and
targets applying to the 2018 plan are set out below:
Adjusted Operating Profita
(70%)
Guest Health (15%)
Net Promoter Score (‘NPS’)
Social Media Score
Complaints Ratio
Employee Engagement
(10%)*
Food Safety
(5%)
* Payout is on a straight-line basis between points.
Threshold – 95% of Target
(% of salary payable)
£290.7m
(0%)
Target
(% of salary payable)
£306m
(35%)
Maximum – 103% of Target
(% of salary payable)
£315.2m
(70%)
Target
Calculation of outcome (% of salary payable)
61
4.0
0.67
Each element is scored 1 if better than target,
0 if on target, and -1 if below target.
• If the sum of these scores is +3 than maximum
bonus is paid. (15%)
• If the sum of these scores is +1 or +2 then an
on-target payment would be made. (7.5%)
• If the sum of these scores is 0 then threshold
bonus is paid. (3.75%)
Threshold
(% of salary payable)
77
(2.5%)
Target
(% of salary payable)
78.5
(5%)
Target
(% of salary payable)
96.9%
(5%)
Maximum
(% of salary payable)
80
(10%)
Outcome
(% of salary payable)
£303m
(28%)
Outcome
(% of salary payable)
62.1
(0%)
3.9
(0%)
0.70
(0%)
Outcome
(% of salary payable)
78.9
(6.3%)
Outcome
(% of salary payable)
98.0%
(5%)
80
Mitchells & Butlers plc Annual report and accounts 2018
Operating Profit
In determining the Operating Profit target range the Committee took into consideration a range of factors including the general and sector outlook,
the continuing significant cost headwinds and the overall benefits likely to be realised over the financial year from the range of initiatives put in place as
part of the Ignite programme. These cost headwinds continue to run at c.£60m per year and include further food and drink inflation, labour and energy
costs and the ongoing impact of changes to the way in which business rates are calculated. The target was set broadly in line with the 2017 outturn
(£308m on a 52 week basis) and market consensus. The level of performance required for a maximum award required a significant level of
performance ahead of both the Company’s business plan and market expectations.
Sales in the year were £2,152m and like-for-like sales increased by 1.3%, building on the 1.8% increase seen in 2017, and consistently above the market
overall (as measured by the Coffer Peach business tracker)2. The Operating Profit outcome of £303m represented a resilient and credible performance
over the year, which was impacted by unusual weather conditions. There were several bouts of snow over the winter and the extended period of hot
weather, which combined with England’s extended run in the World Cup, impacted on sales and profit both positively and negatively. For example,
our Pubs division benefited from the good weather and the World Cup, whereas our Carvery businesses lost a number of key trading days to snow
and then were impacted by the hot weather over the summer. Disposals at the end of FY17 also contributed a £4m decline in profits.
The Operating Profit outcome of £303m was 99% of the performance required for an on-target award resulting in a payout equivalent to 28% of salary
(out of 70%) for Executive Directors.
The Committee carefully reflected on whether the proposed level of payout represented a good performance for the year and also the outcome versus
the prior year. The Committee concluded that it did given the unprecedented cost challenges, which are set to continue, and our continuing
outperformance versus competitors as measured independently.
2. The Coffer Peach business tracker is the UK’s leading sales tracker for pubs and restaurants.
Non-financial measures – 30% (out of 100%)
Guest Health (0% out of 15%)
For 2018 a new method of measuring Guest Health was introduced which comprised a combination of three elements, Net Promoter Score (‘NPS’),
a combined social media score and guest complaints. This rounded assessment ensures that Guest Health is measured comprehensively and does not
rely on a single measure.
• The NPS target was set at 61, a further improvement on the 2017 outturn of 59. Good progress was been made across a number of our brands and
the overall score for the year was ahead of target at 62.1.
• The target for the combined social media score (reputation.com) was set at 4.0. To achieve the overall average review score across the business,
combining all reviews from TripAdvisor, Facebook and Google, needed to average 4.0. Achieving this would have represented an outstanding
performance but the actual result fell just short of this ambitious target at 3.93.
• The guest complaints metric measures the proportion of complaints received for every 1,000 meals served. The target for this measure was set at 0.67,
with the overall outcome of 0.70 just missing the required level of performance, but again an improvement on the prior year.
Despite good progress being made across all three elements of the Guest Health measure, no bonus was payable for this part as the overall combined
Guest Health score is below the demanding target set by the Committee.
Employee engagement (6.3% out of 10%)
A clear correlation has been established between employee engagement and guest satisfaction, which in turn has a positive impact on sales
performance. Two surveys are held each year.
In June employees are invited to provide feedback through a comprehensive survey, YourSay, and this is supplemented by a shorter ‘pulse’ survey
in February. Overall around two-thirds of employees contribute providing valuable and robust insight into employee satisfaction.
The engagement target for 2018 was based on a combined score across both surveys, with a greater weighting placed on the more comprehensive
YourSay survey. The overall outcome was a combined score of 78.9, which represented the highest ever employee engagement score, above the level
of performance required for an on-target payment, but below that required for a maximum payment.
As a result, a payout equivalent to 6.3% (out of 10%), was awarded to Executive Directors under this element.
Annual report and accounts 2018 Mitchells & Butlers plc
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Report on Directors’ remuneration continued
Food safety (5% out of 5%)
Food safety will always be a priority for the business, which is why a measure was introduced that is based on the number of businesses that achieve
either a 4 or 5 rating in the independently operated National Food Hygiene Rating System (‘NFHRS’). The stretching target set for 2018 was for 96.9%
of businesses to achieve a score of either 4 or 5 over the year and the actual result was that 98% of businesses achieved this level of performance.
As a result, Mitchells & Butlers was second in the league table for large pub and restaurant groups across the country over 2018.
As an additional check, the Committee has also taken into account overall workplace safety which again has been strong in all areas.
The structure for this element is such that payout is based entirely on achieving the target set, therefore a payout equivalent to 5% was triggered against
this element.
Final bonus outcome
In determining the overall final bonus outcome, the Committee considered the wider performance of the Group as part of an overall quality of earnings
assessment and was satisfied that the outcome was consistent with our performance over the year and therefore the total bonus awarded to Executive
Directors is 39.3% of salary resulting in bonus payments of £200,034 and £167,283 to Phil Urban and Tim Jones respectively.
In line with our policy, half of the bonus award will be deferred into shares under the Short Term Deferred Incentive Plan (‘STDIP’), which will be
released in two equal amounts after 12 and 24 months, and shares must be retained until the relevant shareholding guideline has been met.
Long-term incentives vesting during the year
During FY 2016 share awards were made to Phil Urban and Tim Jones, under the terms of the PRSP to the value of 200% and 140% of their respective
base salaries. The performance condition had two independent elements; compound annual adjusted EPS growth and TSR performance against a
group of sector peers, measured over the three year performance period ending 29 September 2018.
The table below summarises performance against each element of the performance conditions.
2016–18 PRSP – performance conditions
Total Shareholder Return relative to peer group*
(50% weighting)
Compound annual adjusted Earnings Per Share
(‘EPS’) growth (50% weighting)
Threshold (25%) to Maximum (100%) Range**
Actual
% vesting
Median to upper quartile
Below median
4% to 8% CAGR
(1.5%)p.a.
Nil
Nil
* Comprising the constituents of the FTSE All Share Travel and Leisure index. The base point for the TSR calculation was the first three months following the appointment of Phil Urban
as CEO.
** Between threshold and maximum, vesting under each measure is on a straight-line basis. Below threshold the award will lapse.
The 2016–18 PRSP measures performance over a three-year period. Since the award was made, the well documented cost headwinds facing the
business have impacted on earnings. Increases in business rates, labour costs, increasing inputs costs after the referendum results announcement,
combining with an uncertain economic outlook, significantly impacted the ability of the business to grow. In this context the overall result is a resilient
performance but as EPS fell below the threshold level of growth required, and TSR performance fell below the median performance of the comparator
group, the FY 2016 plan awards lapsed in full.
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Mitchells & Butlers plc Annual report and accounts 2018
Long-term incentive awards made in FY 2018
As we explained in last year’s report, during 2018 a full review of the LTIP structure was undertaken. The Committee concluded this review in June
following a consultation with major shareholders. Details of the changes and rationale are set out below.
Operating Cash Flow – 75% of the award
Having considered carefully the challenges the business faces and the importance the Board places on improving cash generation, the Committee
agreed to include a measure that covered cash flow. Cash flow is an important area of focus given the significance of two fixed charges, which need
to be covered before other more discretionary spend, namely pension deficit contributions under the current triennial agreement and mandatory
bond amortisation within the existing securitisation.
Neither of these substantial outflows results in a direct charge to the income statement, but they do significantly influence Group decisions concerning
capital allocation, short-term borrowings and dividends to shareholders, which must be assessed predominantly on a cash rather than on an earnings basis.
The Committee considered a number of options for the measurement of cash flow and concluded that the following definition best meets our
objectives of defining a cash flow measure that is well understood, easy to monitor and communicate, and aligned to operational delivery; ‘Operating
Cash Flow before adjusted items, movements in working capital and additional pension contributions’. This definition is set out in our reported cash
flow statement on page 104.
Working capital and pension contributions were excluded from the definition. Working capital can be volatile as the Company’s year-end date moves
and can therefore be impacted by significant VAT, rent, rates and payroll payments falling either side of this date. The Committee is aware that working
capital actions can also provide a benefit to vesting outcomes. A three year cumulative measure will reduce the likelihood of both positive and negative
impacts but a thorough review of the Group’s working capital position at the end of the performance period will be undertaken as part of the overall
quality of earnings assessment when finalising the vesting outcome. Pension contributions for the third year are uncertain and will depend on the
outcome of the next triennial review.
The Committee also considered how capital expenditure should be treated, given the importance of the capital plan to our strategic aims. Over a three
year period, it may be appropriate to increase or decrease capital expenditure, depending on the circumstances at the time. If capital expenditure was
deducted from cash flow, then discretionary decisions taken in relation to capital expenditure could impact vesting outcomes. The Committee felt that
the best approach was to review the level of capital expenditure and, specifically, the return on expansionary capital (a current KPI) over the period,
again, as a part of the overall quality of earnings assessment.
Threshold vesting for this part of the award will require around a 2% p.a. growth in like-for-like salesa and the delivery of further cost efficiencies,
reversing the recent decline in profits. On an earnings equivalent basis threshold vesting would result in compound annual growth in Adjusted EPSa
of approximately 2.5% p.a. Full vesting of this element can only be achieved if many or most of the new programme of initiatives are successfully
implemented leading to significant market outperformance and strong year-on-year growth in Operating Profit, resulting in an equivalent compound
annual growth in Adjusted EPSa of approximately 5.5% p.a.
Overall, the Committee considered that the range set from threshold to maximum was demanding, given the significant cost headwinds the Company
is faced with.
Annual report and accounts 2018 Mitchells & Butlers plc
83
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Report on Directors’ remuneration continued
Rationale for the retention of TSR as a performance measure
The Committee believed that the retention of TSR as a measure was important as it allows shareholders to assess the performance of Mitchells & Butlers
against direct competitors at a time when performance across the industry is quite polarised.
However, the Committee considered it more appropriate to compare Mitchells & Butlers’ performance against a subset of Restaurants & Bars,
and the Committee identified six peer companies to form the TSR peer group for the 2018–20 award – EI Group, Greene King, Marston’s,
The Restaurant Group, JD Wetherspoon and Whitbread.
Threshold vesting will require Mitchells & Butlers’ performance to be equal to the median of the peer group, and maximum vesting will require
an outperformance of the median of 8.5% p.a., with straight-line vesting between median and maximum. The Committee believes an 8.5% p.a.
outperformance factor for full vesting is stretching. It is equal to the historic average gap between median and upper quartile of the group using
historic three-year returns over the last six years.
The TSR element of the award is also subject to a share price underpin and awards may only be exercised where the Mitchells & Butlers share price
has equalled or exceeded the share price at the date of award within six months of the vesting date. If this condition is not met, then the TSR-related
awards will lapse.
Summary of investor consultation
Prior to making the awards major investors were consulted on the above proposals, covering around 90% of the issued share capital, along with
the major institutional advisers (The Investment Association, ISS and Glass Lewis). Overall, investors were generally supportive of the proposals with
some investors asking further questions in relation to the stretch in the target range for Operating Cash Flow. In the Committee’s view the target range
was more demanding than consensus (using EPS and Operating Profit comparators) at the time the target range was set and, given the significant cost
headwinds which Mitchells & Butlers faced over the performance period and the uncertain consumer backdrop, shareholders generally accepted
that the range looked demanding. We also had a positive reaction to the clarity and assurance we provided in relation to the quality of earnings
assessment that will be undertaken prior to confirming vesting. The Committee has in the past demonstrated a willingness to make adjustments
based on the circumstances at a particular time. For example, in 2016 the PRSP award was adjusted to ensure that there was no potential benefit
to Executive Directors as a result of the fall in the Mitchells & Butlers share price following the outcome of the referendum on the membership
of the European Union.
Following the conclusion of the consultation process, an award was made to the Chief Executive and the Finance Director in July 2018. 75% of the
award is based on Operating Cash Flow and 25% on Relative TSR, with both Operating Cash Flow and Relative TSR measured over a three year
performance period and any shares which vest, subject to a further two year holding period.
1. Operating Cash Flow (75% of the award)
2. Total Shareholder Return (‘TSR’) relative
to a peer group of comparator companies**
(25% of the award)
Threshold vesting target*
£1,306m (25% vests)
25% will vest for matching the median
of the group
Maximum vesting target*
£1,336m (100% vests)
100% will vest for TSR performance
that exceeds the median by 8.5% p.a.
* Between threshold and maximum, vesting under each measure is on a straight-line basis. Below threshold the award will lapse.
** Comprising of EI Group, Greene King, Marston’s, The Restaurant Group, JD Wetherspoon and Whitbread.
Options that vest under the TSR element of the performance condition may only be exercised where the share price has equalled or exceeded
the share price at the date of grant on at least one day within six months following the vesting date. If this condition is not met, then the vested option
will lapse.
The Operating Cash Flow and TSR conditions are measured over three years from the start of the financial year in which they are granted. Full details
of awards made to Executive Directors under the PRSP are set out below:
Nil Cost
Options
awarded
during the
year to
29/09/18
393,517
230,361
623,878
Basis
of award
(% of basic
annual
salary)
Market
price per
share used to
determine the
award
(p)*
Award
date
Actual/
planned
vesting
date
Latest
lapse
date
Face
value**
£
200
140
03/07/18
03/07/18
259.2
259.2
Nov 2020
Nov 2020
Nov 2022
Nov 2022
1,019,996
597,096
Executive Directors
Phil Urban
Tim Jones
Total
* Market price is the MMQ on the day prior to the award being made.
** Face value is the maximum number of shares that would vest (excluding any dividend shares that may accrue) if the performance measure (as described above) is met in full,
multiplied by the middle market quotation of a Mitchells & Butlers share on the day the award was made (259.2p).
The aggregate option price of each award is £1. Performance measurement under the PRSP, which is not re-tested, is reviewed and certified by the
Company’s auditor.
84
Mitchells & Butlers plc Annual report and accounts 2018
All-employee SIP and Sharesave
The tables below show the awards made to Directors under the Sharesave scheme and the free share element of the SIP during the year.
Sharesave
Director
Phil Urban
Tim Jones
Total
SIP
Director
Phil Urban
Tim Jones
Total
Shares
awarded
during
the year
1/10/17 to
29/09/18
7,317
7,317
14,634
Award
date
20/06/18
20/06/18
Shares
awarded
during
the year
1/10/17 to
29/09/18
1,322
1,127
2,449
Award
date
20/06/18
20/06/18
Option
price
(p)
246
246
Earliest
exercise
date
Last
expiry
date
1/10/21
1/10/21
31/3/22
31/3/22
Market price
per share
at award
(p)
Market price
per share
at normal
vesting date
(p)
Normal
vesting
date
262.2
262.2
20/06/21
20/06/21
n/a
n/a
Lapsed
during
period
n/a
n/a
Directors’ entitlements under the Partnership Share element of the SIP are set out as part of the Directors’ interests table on page 86.
PRSP, STDIP and other share awards
The table below sets out details of the Executive Directors’ outstanding awards under the PRSP, STDIP and Sharesave (SAYE).
Name of
Director
Phil Urban
Tim Jones
Scheme
PRSP
2015–17ab
PRSP
2016–18ac
PRSP
2017–19a
PRSP
2018–20d
STDIP 2017
SAYE 2015
SAYE 2018
Total
PRSP
2015–17a
PRSP
2016–18ac
PRSP
2017–19a
PRSP
2018–20d
STDIP 2017
SAYE 2015
SAYE 2018
Total
Number of
shares at
30 September
2017
Granted
during the
period
Date of grant
Lapsed
during the
period
Exercised
during the
period
Number of
shares at
29 September
2018
Date from
which
exercisable
Expiry date
61,738
381,022
397,970
–
–
4,972
–
845,702
161,856
223,048
232,968
–
–
2,486
–
620,358
–
–
–
393,517
28,639
–
7,317
429,473
–
–
230,361
23,950
–
7,317
261,628
Jan 2015
61,738
June 2016
Nov 2016
July 2018
Dec 2017
June 2015
June 2018
–
–
–
–
61,738
Nov 2014
161,856
Jun 2016
Nov 2016
July 2018
Dec 2017
June 2015
June 2018
–
–
–
–
–
161,856
–
–
–
–
Nov 2017
Nov 2019
381,022
Nov 2018
Nov 2020
397,970
Nov 2019
Nov 2021
–
393,517
28,639
4,972
7,317
– 1,213,437
–
Nov 2020
Dec 2018e
Oct 2018
Oct 2021
Nov 2022
Dec 2019
Mar 2019
Mar 2022
–
–
–
–
–
–
–
–
Nov 2017
Nov 2019
223,048
Nov 2018
Nov 2020
232,968
Nov 2019
Nov 2021
230,361
23,950
2,486
7,317
720,130
Nov 2020
Dec 2018e
Oct 2018
Oct 2021
Nov 2022
Dec 2019
Mar 2019
Mar 2022
a. 50% of this PRSP award is subject to a TSR condition and the other 50% is subject to adjusted EPS growth targets.
b. Shares awarded to Phil Urban on joining the Company as Chief Operating Officer in January 2015.
c. The 2016–18 plan will lapse in November 2018.
d. 75% of this PRSP award is subject to an Operating Cash Flow target and the remaining 25% is subject to a TSR condition.
e. Shares released in two equal tranches, 12 and 24 months after grant. Date shown is first release date.
Annual report and accounts 2018 Mitchells & Butlers plc
85
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Report on Directors’ remuneration continued
Update on forecast performance of other PRSP awards
2017–19 PRSP
With one performance year remaining, the position could change but specifically in relation to the EPS measure, the significant additional cost
challenges and a more detailed assessment of the timing and impact of investment, result in a forecast level of vesting below the threshold level.
Directors’ interests
Executive Directors are expected to hold Mitchells & Butlers shares in line with the shareholding guideline set out in the remuneration policy report.
This requires the Chief Executive to accumulate Mitchells & Butlers shares to the value of a minimum of 200% of salary (150% of salary for other
Executive Directors) through the retention of shares arising from share schemes (on a net of tax basis) or through market purchases. Phil Urban’s
shareholding at 29 September 2018 was 48.7% of his basic annual salary (2017, 24.9%) and Tim Jones’ shareholding was 57.6% of his basic annual
salary (2017 45.2%) and as a result the shareholding guideline is not met.
The interests of the Directors in the ordinary shares of the Company as at 29 September 2018 and 30 September 2017 are as set out below:
Wholly owned shares
without performance
conditionsa
Shares with
performance
conditions
Unvested options/
awards without
performance
conditionsb
Unvested options/
awards with
performance
conditionsc
Vested but
unexercised
options
Total
shares/options
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
97,024 53,042
95,944 80,461
Executive
Directors
Phil Urban
Tim Jones
Non-Executive
Directors
12,006 12,006
Bob Ivell
–
–
Ron Robson
Stewart Gilliland 11,000 11,000
31,560 30,974
Eddie Irwin
–
Colin Rutherford
–
7,500
7,500
Imelda Walsh
2,042
2,000
Dave Coplin
–
–
Josh Levy
–
Keith Browne
–
257,076 196,983
Total
–
–
–
–
–
–
–
–
–
–
–
–
– 40,928
– 33,753
4,972 1,172,509 840,730
2,486 686,377 617,872
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 74,681
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,458 1,858,886 1,458,602
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 1,310,461 898,744
816,074 700,819
–
12,006
12,006
–
–
–
–
11,000
11,000
–
31,560
30,974
–
–
–
–
7,500
7,500
–
2,042
2,000
–
–
–
–
–
–
–
– 2,190,643 1,663,043
a. Includes Free Shares and Partnership Shares granted under the SIP.
b. Options granted under the Sharesave as detailed in the table on page 85 and deferred bonus awards granted under the STDIP.
c. Options granted under the PRSP as detailed in the table on page 84.
Directors’ shareholdings (shares without performance conditions) include shares held by persons closely associated.
The above shareholdings are beneficial interests and are inclusive of Directors’ holdings under the Share Incentive Plan (both Free Share and
Partnership Share elements).
Phil Urban acquired 105 shares and Tim Jones acquired 106 shares under the Partnership Share element of the Share Incentive Plan between the end
of the financial year and 21 November 2018. There have been no changes in the holdings of any other Directors since the end of the financial year.
None of the Directors has a beneficial interest in the shares of any subsidiary or in debenture stocks of the Company or any subsidiary.
The market price per share on 29 September 2018 was 264.0p and the range during the year to 29 September 2018 was 231.4p to 283.1p per share.
The Executive Directors as a group beneficially own 0.06% of the Company’s shares.
86
Mitchells & Butlers plc Annual report and accounts 2018
Fees for external directorships
No external non-executive directorships were held by either Executive Director during the year to 29 September 2018.
Payment for loss of office
No payments for loss of office were made in the year ended 29 September 2018.
Payments to past Directors
No payments were made to any past Directors in the year ended 29 September 2018.
TSR performance graph
The Company’s TSR performance for the last nine financial years is shown below against the FTSE 250 index. The FTSE 250 index has been chosen
to show TSR performance as the Company is a member of the FTSE 250.
Total shareholder return from September 2009 to September 2018 (rebased to 100)
300
250
200
150
100
50
0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Mitchells & Butlers plc
FTSE 250
TSR comparator group
Source: Datastream (Thomson Reuters)
This graph shows the value, by 29 September 2018, of £100 invested in Mitchells & Butlers plc on 26 September 2009, compared with the value of £100
invested in the FTSE 250 and the constituents of the 2018–20 TSR comparator group on the same date.
Annual report and accounts 2018 Mitchells & Butlers plc
87
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Report on Directors’ remuneration continued
CEO earnings history
Year ended
Phil Urban
Single figure remuneration (£000)
Annual bonus outcome (% of max)
LTIP vesting outcome (% of max)
Alistair Darby
Single figure remuneration (£000)
Annual bonus outcome (% of max)
LTIP vesting outcome (% of max)
Bob Ivell
Single figure remuneration (£000)
Annual bonus outcome (% of max)
LTIP vesting outcome (% of max)
Jeremy Blood
Single figure remuneration (£000)
Annual bonus outcome (% of max)
LTIP vesting outcome (% of max)
Adam Fowle
Single figure remuneration (£000)
Annual bonus outcome (% of max)
LTIP vesting outcome (% of max)
25/09/10
24/09/11
29/09/12
28/09/13
27/09/14
26/09/15
24/09/16
30/09/17
29/09/18
819
39
–
–
–
–
–
–
–
–
–
–
–
–
1,315
87.6
16.2
–
–
–
–
–
–
–
–
–
397
–d
n/ac
483e
16.0
24.2
–
–
–
–
–
–
557
n/ac
n/ac
50
n/ac
–
–
–
–
–
–
–
982a
71.0
n/a
69b
n/ac
n/ac
–
–
–
–
–
–
–
–
–
642
–
n/a
–
–
–
–
–
–
–
–
–
–
–
–
878
–
19.0
–
–
–
–
–
–
–
–
–
613
–
–
–
–
–
–
–
–
–
–
–
–
–
–
770
28
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
a. Alistair Darby formally took up the position of CEO on 12 November 2012 following a short period of induction and handover. The figure shown reflects the date of his appointment to the
Board (8 October 2012).
b. Figure shown is up to and including 11 November 2012 as Bob Ivell remained Executive Chairman to this date.
c. The Director was not a participant in the plan.
d. Jeremy Blood was not a participant in the short-term incentive plan; at the discretion of the Board a payment of £100,000 was made in respect of his contribution as Interim Chief Executive.
This payment is included in the single remuneration figure (£397,000) above. Earnings exclude the fee payable for the period 26 September 2010 to 14 March 2011 during which Mr Blood
served as a Non-Executive Director.
e. Earnings disclosed are to 15 March 2011 when Mr Fowle stepped down as CEO.
Change in remuneration of the CEO
CEO
Salaried employees
2018
510,000
32,383
Salary (£)
2017
510,000
31,572
Taxable benefits (£)
% Change
0
2.6
2018
15,557
728
2017
15,134
704
% Change
2.8
3.4
2018
200,034
2,449
Bonus (£)
2017
145,546
2,739
% Change
37.4
(10.6)
The change in CEO remuneration is compared to the change in average remuneration of all full-time salaried employees, which includes house
managers, assistant managers and kitchen managers employed in our businesses.
Salaried employees with part-year service in either FY 2017 or FY 2018 have been excluded from the comparison figures. Retail staff employees have
been excluded from the comparator group as they are hourly paid, largely part time and do not participate in any bonus plans. The CEO figures do not
include LTIP awards or pension benefits that are disclosed in the single figure table.
88
Mitchells & Butlers plc Annual report and accounts 2018
CEO pay ratios
For the last two years Mitchells & Butlers has disclosed the pay ratio between the CEO and the median pay of other employees, reflecting emerging
best practice. The Government has now introduced legislation that will require all quoted companies with more than 250 employees to publish the
ratio of their CEO’s pay, using the single figure for total CEO remuneration to that of the median, 25th and 75th percentile total remuneration of full-time
equivalent employees. Whilst this legislation does not require Mitchells & Butlers to comply until the 2020 Annual Report the Committee feels that it
is important to continue to take a lead in this area, as it provides a helpful opportunity to demonstrate the link between CEO pay in the context of overall
workforce remuneration. The table below sets out the CEO pay ratio at the median, 25th and 75th percentile.
Financial year
2018
CEO pay ratio
P25 (lower quartile)
61:1
P50 (median)
58:1
P75 (upper quartile)
52:1
The lower quartile, median and upper quartile employees were calculated based on full-time equivalent base pay data as at 29 September 2018.
This calculation methodology was selected as the data was felt to be the most accurate way of identifying the best equivalents of P25, P50 and P75.
The employee pay data has been reviewed and we are satisfied that it fairly reflects the relevant quartiles given the very large proportion of hourly paid
team members employed by Mitchells & Butlers (c.86% of the total workforce). The three representative employees used to calculate the pay ratios are
hourly paid and the base pay elements were calculated using a full-time equivalent hourly working week of 35 hours. Hourly paid employees do not
participate in the annual bonus plan or long-term incentive plan and in most cases do not have any taxable benefits. Employee pay does not include
earnings from tips and service charge, from which many employees benefit. It is Mitchells & Butlers’ policy to pass all earnings from tips and service
charges to employees.
Pay details for the individuals are set out below:
Salary
Total pay
CEO
508,603
819,045
P25 (lower quartile)
13,432
13,432
P50 (median)
14,177
14,177
P75 (upper quartile)
15,616
15,616
The median pay ratios reported in 2016 and 2017 were completed using a different methodology that calculated actual pay and benefits over the
financial year for all employees who had been employed for the full financial year. This methodology is not compliant with the new regulations, but
overall the median pay ratio is broadly in line with prior years at 63:1 in 2017 and 44:1 in 2016, a year in which no bonus was paid to the CEO.
In assessing our pay ratio versus likely ratios from industry peers, we believe that we are towards the lower end of the range but note that annual and
long-term incentive payments have varied considerably amongst this group. In our case, the CEO single figure comprises fixed pay, taxable benefits,
pension benefits and bonus only, given that no long-term incentive vested in respect of performance in FY 2018, or in any of the prior years. We also
recognise that ratios will be influenced by levels of employee pay, and in the hospitality sector, despite significant increases over the past year,
employee pay will be lower than in many other sectors of the economy.
Relative importance of spend on pay £m
700
600
500
400
300
200
100
0
-0.8%
620
625
-4.2%
160
167
+2.2%
47
46
-0.5%
197
198
-100%
12
Wages and salaries*
Principal taxes**
Pension deficit contributions
Debt service
Cash Dividend and Share Buy Back
FY 2018
FY 2017
* From note 2.3, Accounts, excludes share-based payments.
** Business Rates, Corporation Tax, Employers NI.
Figures shown for wages and salaries consist of all earnings, including bonus. In FY 2018, £2m (0.3%) was paid to Executive and Non-Executive
Directors (2017 £2m (0.3%)).
The fall in wages and salaries and principal taxes are primarily a result of disposals made in 2017.
Annual report and accounts 2018 Mitchells & Butlers plc
89
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Report on Directors’ remuneration continued
Details of service contracts and letters of appointment
Details of the service contracts of Executive Directors are set out below.
Director
Phil Urbana
Tim Jones
Contract start date
27/09/15
18/10/10
Unexpired term
Indefinite
Indefinite
Notice period
from Company
12 months
12 months
Minimum notice
period from Director
6 months
6 months
Compensation on
change of control
No
No
a. Phil Urban became Chief Executive and joined the Board on 27 September 2015. His continuous service date started on 5 January 2015, the date on which he joined the Company
as Chief Operating Officer.
Non-Executive Directors
Non-Executive Directors, including the Company Chairman, do not have service contracts but serve under letters of appointment which provide that
they are initially appointed until the next AGM when they are required to stand for election. In line with the Company’s Articles, all Directors, including
Non-Executive Directors, will stand for re-election at the 2019 AGM (with the exception of Stewart Gilliland who intends to step down from the Board
before then). This is also in line with the recommendations set out in paragraph B.7.1 of the UK Corporate Governance Code. Non-Executive Directors’
appointments are terminable without notice and with no entitlement to compensation. Payment of fees will cease immediately on termination.
Ron Robson and Josh Levy were appointed to the Board pursuant to the terms of the Piedmont Deed of Appointment, information on which is set out
on page 51.
Copies of the individual letters of appointment for Non-Executive Directors and the service contracts for Executive Directors are available
at the Registered Office of the Company during normal business hours and on our website. Copies will also be available to shareholders to view
at the 2019 AGM.
Implementation of remuneration policy in FY 2019
Executive Directors’ salary review
Salary increases take effect from 1 January 2019 and, from this date, Phil Urban’s salary will be increased to £520,000 (2%) and Tim Jones’ salary will
be increased to £435,000 (2%). Phil Urban’s salary has not increased since his appointment in September 2015 and Tim Jones’ salary was last increased
in January 2015. These increases are broadly in line with those applicable to other salaried employees in the Group and follow an extended period
during which Executive Directors’ salaries have not been increased.
Annual performance bonus
The maximum bonus opportunity will remain at 100% of salary for the Chief Executive and Finance Director with 70% of bonus to be based on Operating
Profit and the remaining 30% on non-profit elements linked to the business scorecard.
Operating Profit
Weighting
70%
Guest Health
15%
Details
Bonus will begin to accrue at threshold with half of the bonus payable for on-target performance,
reflecting the demanding nature of the targets set by the Committee. Full payment will require very
strong performance, well in excess of current market consensus.
Guest Health will comprise three measures, each with an equal weighting:
• NPS – a well-established measure of Guest Health, will continue to be assessed in FY 2019.
Employee engagement
10%
Food Safety
5%
• Social media – The monitoring tool enables all social media reviews, including TripAdvisor, Facebook
and Google, to be combined into a single review score.
• Guest complaints – There has been an increased focus on improving the speed at which guest complaints
are resolved, alongside a commitment to reducing the overall number of complaints received.
Combining NPS with an assessment of social media reviews and guest complaints provides a more holistic
review of Guest Health. To achieve a maximum payment, performance will need to exceed target on at least
two elements, and be at target or better, for the third element.
Mitchells & Butlers has measured employee engagement for a number of years, and a clear correlation has
been established between employee engagement and guest satisfaction, which in turn has a positive impact
on sales. For this reason, the Committee has decided to include employee engagement in the bonus scheme.
Food safety will always be a key priority and including a measure based on the proportion of our businesses
that achieve a high National Food Hygiene Rating Scheme score reflects our continued focus on the safe
operation of our businesses. An agreed food safety score must be achieved for this part of the bonus to
payout and, as an additional check, overall workplace safety will also be taken into account when
determining the outcome.
The non-financial elements will only become payable if a certain level of Operating Profit has been achieved. For 2019, this will remain at 97.5%
of target, which is ahead of the threshold required for payment under the Operating Profit measure.
There will also be a change to the method used to calculate NPS. Previously it was calculated on a ‘Business Weighted’ basis where each pub or
restaurant carried the same weight irrespective of business size and the number of responses. Going forward scores will be calculated on a ‘Response
Weighted’ basis where the score treats all responses as equally important, i.e. larger businesses with more responses will have a relatively greater
bearing on the overall score than they do now, therefore providing a better representation of guest satisfaction and performance as each individual
guest response carries the same weighting.
90
Mitchells & Butlers plc Annual report and accounts 2018
The Committee will continue to consider the overall performance of the Company, not just the outcome of each individual measure. All bonus targets
are considered to be commercially sensitive and will not be disclosed in advance. However, retrospective disclosure of targets and performance against
them will be provided in next year’s Directors’ remuneration report.
The bonus structure for all Managers across Mitchells & Butlers is linked to the above business scorecard.
Performance Restricted Share Plan (PRSP) 2019–21
The Committee has concluded that the performance measures should remain unchanged from the July 2018 award, with two independent elements,
Operating Cash Flow (75% weighting) and relative TSR (25% weighting).
In setting the target range for 2019–21, the Committee has considered the ongoing cost headwinds that the business continues to face, the upward
pressure on food and drink inflation, along with the potential benefits flowing from the Ignite initiatives over the coming years. The conclusion of this
review is that the Operating Cash Flow target range will have a threshold set at £1,332m and maximum at £1,362m, which represents an increase at
both threshold and maximum.
On an earnings equivalent basis, the adjusted EPSa target range will be between 4.5% and 7%, again a further progression on the 2018–20 PRSP targets.
The current TSR comparator group comprises six peer companies (EI Group, Greene King, Marston’s, The Restaurant Group, JD Wetherspoon and
Whitbread). Following the announcement of the forthcoming sale of Costa Coffee by Whitbread to Coca-Cola the Committee has further reviewed
the constituents of this group. Once the Costa sale has concluded, the residual Whitbread business will be primarily a hotels business and therefore
the Committee has concluded that, going forward, Whitbread should not form part of the peer group. The removal of Whitbread from the peer group
reduces the number of constituents to five and the Committee has considered carefully if Whitbread could be replaced by an alternative company.
Having taken all factors into account, the Committee has concluded that the most appropriate approach is to continue with the slightly smaller
comparator group, as this results in a well matched group making it more likely that any outperformance will be linked to management and
Company action.
A summary of the performance measures and targets are set out in the table below:
1. Operating Cash Flow (75% of the award)
2. Total Shareholder Return (‘TSR’) relative
to a peer group of comparator companies**
(25% of the award)
Threshold vesting target*
£1,332m (25% vests)
25% will vest for matching the median
of the group
Maximum vesting target*
£1,362m (100% vests)
100% will vest for TSR performance
that exceeds the median by 8.5% p.a.
* Between threshold and maximum, vesting under each measure is on a straight-line basis. Below threshold the award will lapse.
** Comprising EI Group, Greene King, Marston’s, The Restaurant Group and JD Wetherspoon.
Non-Executive Directors’ fee review
The Chairman’s and Non-Executive Director fee were last reviewed in January 2015. The Chairman has indicated that he does not wish to have his
fee increased at this time. As detailed in the corporate governance section of this report, the base fee for Non-Executive Directors will increase by 2%
to £53,000 per annum and the fee paid to Non-Executive Directors for chairing a Committee or for the role of Senior Independent Director will increase
to £13,000 per annum.
Imelda Walsh Chair of the Remuneration Committee
21 November 2018
a. The Directors use a number of alternative performance measures (APMs) that are considered critical to aid the understanding of the Group’s performance. Key measures are explained
on pages 148 to 150 of this report.
Annual report and accounts 2018 Mitchells & Butlers plc
91
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Financial
statements
In this section
93 Independent auditor’s report to the members
of Mitchells & Butlers plc
100 Group income statement
101 Group statement of comprehensive income
102 Group balance sheet
103 Group statement of changes in equity
104 Group cash flow statement
Notes to the financial statements
105 Section 1 – Basis of preparation
109 Section 2 – Results for the year
109 2.1 Segmental analysis
109 2.2 Separately disclosed forms
111 2.3 Revenue and operating costs
113 2.4 Taxation
115 2.5 Earnings per share
116 Section 3 – Operating assets and liabilities
116 3.1 Property, plant and equipment
120 3.2 Working capital
121 3.3 Provisions
122 3.4 Goodwill and other intangible assets
124 3.5 Associates
125 Section 4 – Capital structure and financing costs
125 4.1 Net debt
126 4.2 Borrowings
127 4.3 Finance costs and revenue
128 4.4 Financial instruments
133 4.5 Pensions
137 4.6 Share-based payments
139 4.7 Equity
141 Section 5 – Other notes
141 5.1 Related party transactions
141 5.2 Subsidiaries and associates
142 5.3 Events after the balance sheet date
142 5.4 Five year review
143 Mitchells & Butlers plc Company financial statements
145 Notes to the Mitchells & Butlers plc Company financial statements
92
Mitchells & Butlers plc Annual report and accounts 2018
Independent auditor’s report to the members of Mitchells & Butlers plc
The financial reporting framework that has been applied in the
preparation of the Group financial statements is applicable law and IFRSs
as adopted by the European Union. The financial reporting framework
that has been applied in the preparation of the Company financial
statements is applicable law and United Kingdom Accounting Standards,
including FRS 101 ‘Reduced Disclosure Framework’ (United Kingdom
Generally Accepted Accounting Practice).
Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the auditor’s responsibilities for
the audit of the financial statements section of our report.
We are independent of the Group and the Company in accordance
with the ethical requirements that are relevant to our audit of the financial
statements in the UK, including the Financial Reporting Council’s (the
‘FRC’s’) Ethical Standard as applied to listed public interest entities, and
we have fulfilled our other ethical responsibilities in accordance with these
requirements. We confirm that the non-audit services prohibited by the
FRC’s Ethical Standard were not provided to the Group or the Company.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Report on the audit of the financial statements
Opinion
In our opinion:
• the financial statements of Mitchells & Butlers plc (the ‘Company’)
and its subsidiaries (the ‘Group’) give a true and fair view of the state
of the Group’s and of the Company’s affairs as at 29 September 2018
and of the Group’s profit for the 52 weeks then ended;
• the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union;
• the Company financial statements have been properly prepared
in accordance with United Kingdom Generally Accepted Accounting
Practice, including Financial Reporting Standard 101 ‘Reduced
Disclosure Framework’; and
• the financial statements have been prepared in accordance with the
requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements which comprise:
• the Group income statement;
• the Group statement of comprehensive income;
• the Group and Company balance sheets;
• the Group and Company statements of changes in equity;
• the Group cash flow statement;
• the related notes 1 to 5 of Group financial statements; and
• the related notes 1 to 10 of the Company financial statements
Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
• Valuation of the pub estate
• Onerous lease provisions
• Compliance with debt covenants
Materiality
Scoping
Significant changes in our approach
The materiality that we used for the group financial statements was £8.8m which is approximately
5% of profit before tax before separately disclosed items.
A full scope audit has been performed in respect of the UK business, consistent with 2017.
There has been a new key audit matter identified in relation to compliance with debt covenants.
There have been no other changes in the key audit matters included in our audit report since 2017.
This is consistent with the fact that the operations of the Group are largely unchanged from the
previous year.
Annual report and accounts 2018 Mitchells & Butlers plc
93
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Independent auditor’s report to the members of Mitchells & Butlers plc continued
Conclusions relating to going concern, principal risks and viability statement
Going concern
We have reviewed the Directors’ statement in Section 1 to the financial
statements about whether they considered it appropriate to adopt the
going concern basis of accounting in preparing them and their
identification of any material uncertainties to the Group’s and Company’s
ability to continue to do so over a period of at least twelve months from
the date of approval of the financial statements.
We confirm that we have nothing material to report, add or draw
attention to in respect of these matters.
We confirm that we have nothing material to report, add or draw
attention to in respect of these matters.
We are required to state whether we have anything material to add
or draw attention to in relation to that statement required by Listing Rule
9.8.6R(3) and report if the statement is materially inconsistent with our
knowledge obtained in the audit.
Principal risks and viability statement
Based solely on reading the Directors’ statements and considering
whether they were consistent with the knowledge we obtained in the
course of the audit, including the knowledge obtained in the evaluation
of the Directors’ assessment of the Group’s and the Company’s ability
to continue as a going concern, we are required to state whether we
have anything material to add or draw attention to in relation to:
• the disclosures on pages 38 to 42 that describe the principal risks and
explain how they are being managed or mitigated;
• the Directors’ confirmation on page 39 that they have carried out a
robust assessment of the principal risks facing the Group, including
those that would threaten its business model, future performance,
solvency or liquidity; or
• the Directors’ explanation on page 42 as to how they have assessed the
prospects of the Group, over what period they have done so and why
they consider that period to be appropriate, and their statement as to
whether they have a reasonable expectation that the Group will be able
to continue in operation and meet its liabilities as they fall due over the
period of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
We are also required to report whether the Directors’ statement relating to
the prospects of the Group required by Listing Rule 9.8.6R(3) is materially
inconsistent with our knowledge obtained in the audit.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included
those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.
There has been a new key audit matter identified in the year in respect of compliance with the EBITDA to debt service restricted payment test.
Given the challenges in the industry with high levels of competition and inflationary cost pressures, there remains a risk that the Group does
not achieve the required level of profit to meet the EBITDA to debt service restricted payment test.
94
Mitchells & Butlers plc Annual report and accounts 2018
How the scope of our audit responded to the key audit matter
Key observations
We are in agreement
with the
methodology chosen
and the assumptions
adopted to revalue
the pub estate and
conclude there
appears to be no bias
in the valuation. The
multiples adopted
across the estate are
within a reasonable
range. We concur
that the valuations
are suitable for
inclusion in the
financial statements.
We worked with our property valuation specialists and management’s
external advisers to challenge the methodology and underlying
assumptions used in the freehold and long leasehold pub estate
valuation. This included:
• confirming the appropriateness of the estimated FMT being used
to value the properties;
• obtaining evidence to support the appropriateness of the valuations
of the inspected estate when benchmarked to transaction activity
in the licensed retail property market;
• testing the application of the multiple derived from the valuation
of inspected properties to the rest of the estate;
• completing a retrospective review of the valuation of sites subject
to expansionary capital investment in the prior year to identify
the success of returns on investment;
• reviewing the appropriateness and completeness of any spot
valuations made; and
• obtaining evidence to support the future projected income used
in the impairment reviews for sites which have been impacted
by expansionary capital investment in the preceding 12 months.
Additionally we:
• assessed the design and implementation and tested the operating
effectiveness of controls in relation to the valuation of the freehold
and long leasehold estate.
Key audit matter description
Valuation of the pub estate
As set out in section 3.1 the value of the estate
is £4,230m (2017 £4,230m).
Freehold and long leasehold
The accounting policy adopted and judgements
used are described in section 3.1 to the financial
statements.
This is considered to be a key audit matter due
to the judgements inherent within the valuation
exercise and the range of acceptable judgements.
The total net book value of revalued properties as
at 29 September 2018 is £4,230m (2017 £4,230m).
The revaluation exercise performed in the year has
resulted in a net decrease of £33m versus carrying
value (2017 £23m), which includes an impairment
charge of £28m (2017 £51m) recognised in the
income statement. The Group’s accounting policy
sets out that the market value is determined using
factors such as estimated fair maintainable trading
levels and estimated multiples which are derived
for each of the Group’s trading brands.
Approximately 20% of the freehold and long
leasehold estate has been inspected by the Group’s
external valuers, with the result of the inspection
informing the brand standard multiples which
are then extrapolated across the remainder
of the estate.
In specific circumstances where this approach
does not fairly represent the underlying value
of the property, for example if a site is loss making,
a spot valuation is applied.
Where sites have been impacted by expansionary
capital investment in the preceding 12 months,
the valuation of those properties is held at the
30 September 2017 valuation plus capital
expenditure less depreciation in 2018. Sites that
have been open for more than three periods
(2017 three periods) are reviewed for impairment.
Short leasehold
The accounting policy adopted and judgements
used are described in section 3.1 to the financial
statements.
The total value of short leasehold properties
as at 29 September 2018 is £156m (2017 £170m).
Judgements in relation to expected trading levels,
whether the site has the potential to be turned
around and discount rates are applied when
calculating short leasehold property impairments.
The Group recorded an impairment charge of
£15m (2017 £17m) in the year.
Annual report and accounts 2018 Mitchells & Butlers plc
95
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Independent auditor’s report to the members of Mitchells & Butlers plc continued
Key audit matter description
Valuation of the pub estate continued
Focus areas
Given the amounts capitalised and the risk
associated across the freehold, long leasehold
and short leasehold sites we have focused
our procedures on the assessment made
by management of:
• the appropriateness of the fair maintainable
trading levels and brand multiple assumptions
applied to the freehold and long leasehold
estate on a site by site basis;
• the valuation of freehold and long leasehold sites
impacted by expansionary capital, challenging
the need for any impairment of property, plant
and equipment required at an individual outlet
level; and
• the requirement for any impairment in respect
of the property, plant and equipment held in
the short leasehold estate at an individual
outlet level.
In addition, due to the level of subjective
judgements involved in respect of multiple and
fair maintainable trade assumptions which are
inherently uncertain, we have identified a potential
risk of fraud in this key audit matter.
Onerous Lease Provisions
As set out in section 3.3, property provisions are
£43m (2017 £42m) of which £41.9m (2017 £41.9m)
relates to onerous lease provisions. The accounting
policy for provisions is set out in section 3.3.
Loss-making short leasehold properties are
reviewed by management to determine whether an
onerous lease provision is required. Judgements in
relation to expected trading levels, the appropriate
lease term over which to provide, the potential
opportunity to exit the leases early and the
appropriate discount rate to use are applied when
assessing the level of onerous lease provision
required. Therefore we have identified a potential
risk of fraud in this key audit matter.
Focus areas
Given the size of the leasehold estate there is a risk
that where a site is underperforming the cash flows
may not be adequate to cover future lease
obligations, resulting in the requirement for
an onerous lease provision for the unavoidable
cash flow. We focused on the completeness
of the onerous lease provision by assessing the
judgements used in arriving at the level of the
provision for each site. Furthermore, we also
focused on sites where a turnaround or exit plan
is in place.
How the scope of our audit responded to the key audit matter
Key observations
We challenged the assumptions used by management within the
impairment reviews performed for the short leasehold estate and
freehold and long leasehold sites impacted by expansionary capital.
This included:
• obtaining evidence to support management’s assertion that short
leasehold properties can be successfully turned around where
properties have not been impaired due to management’s
expectation that the performance of the properties will improve.
This included obtaining evidence to support management’s
turnaround plans and performance of a retrospective review
considering the success of historic turnaround plans;
• obtaining evidence to support management’s expected
performance of sites post investment of expansionary capital
and a retrospective review of prior year sites where expansionary
capital was incurred;
• testing the integrity of the information used within the model
by agreeing inputs back to source data including historical results
and lease terms; and
• assessing the appropriateness of the discount rate through
recalculation and performing sensitivity analysis.
Additionally, we assessed the design and implementation and tested
the operating effectiveness of controls in relation to the short leasehold
impairment review.
We performed the following procedures to respond to the key
audit matter:
• we assessed the appropriateness of the classification of property
provisions provided in the period as a before separately disclosed
item in accordance with IAS 1 Presentation of Financial Statements;
• we checked that all leasehold sites were considered in
management’s process to identify sites which were potentially
subject to onerous leases;
• where onerous lease provisions have not been recognised,
despite historical results indicating that a provision may be required,
we obtained evidence to support management’s assertion that
properties can be successfully turned around. This included
assessing the success of previous actions undertaken by
management to turn around similar sites;
• we tested a sample of loss making short leasehold and unlicensed
properties to create an expectation of the appropriate level of
onerous lease provision for each property within our sample and
compared our expectation with the level of onerous lease provision
for each property;
• we assessed the appropriateness of forecast EBITDAs taking into
consideration the cost saving and sales opportunities identified
by management following a benchmarking exercise;
• we tested the integrity of the information used within the onerous
lease provision calculation by agreeing inputs back to source data
including historical results, and rental commitments; and
• we assessed the appropriateness of the risk free discount rate used
through comparison to appropriate external benchmarks.
Additionally we assessed the design and implementation and tested
the operating effectiveness of controls in relation to the calculation
of the onerous lease provision.
We agree that
the level of onerous
lease provision is
within a reasonable
range and that the
presentation of the
movements in
onerous lease
provision is in
accordance with
IAS 1.
96
Mitchells & Butlers plc Annual report and accounts 2018
Key audit matter description
Compliance with debt covenants
The primary source of borrowings for the Group
are secured loan notes of £1,784m at 29 September
2018. This debt is secured on the majority of the
properties owned by the Group (properties held
within a subsidiary Company Mitchells & Butlers
Retail Limited). The Group also has £150m of
unsecured credit facilities. There are covenants
attached to both the secured loan notes and the
unsecured revolving credit facilities.
Given challenges in the industry with high levels
of competition, inflationary cost pressures and
increasing uncertainties around Britain exiting
from the European Union, we identified that the
forecasting of EBITDA during the long-term
viability period is subject to significant judgements
and estimates.
The key risk identified is the Group’s ability to meet
the forecasted EBITDA over the longer-term viability
period for the financial covenants attached to the
secured loan notes. This test is measured at each
quarter end date for Mitchells & Butlers Retail Limited.
Debt covenants are further disclosed within
Note 4.2 of the Group Financial Statements,
as well as being disclosed in the Long-Term
Viability Statement.
Our application of materiality
How the scope of our audit responded to the key audit matter
Key observations
We performed the following procedures to respond to the key
audit matter:
• assessed the design and implementation of controls in relation
to the management review of Budget and covenants calculations;
• reviewed management’s going concern and longer-term viability
assessment, by challenging management to understand the key
drivers forming the basis of the EBITDA forecasts and challenging
the assumptions used in the base case scenario using industry
forecasts, historical performance and our understanding of
the business;
• challenged the appropriateness of the reasonably possible
sensitivities used in management’s downside scenario over
the longer-term viability period;
• reviewed and challenged management’s key assumptions by
reference to independent industry sources and relevant supporting
evidence and sensitising the impact these have on management’s
assessment of the profitability;
• considered the feasibility of the mitigating actions that management
have at their disposal should the financial covenant test be close to
being breached; and
• reviewed the disclosures on going concern and longer-term viability
to confirm that they are consistent with the knowledge we have
acquired during the course of our audit and to confirm that the
disclosures are consistent with the overall requirement for the
Annual Report to be fair, balanced and understandable.
We have considered
reasonably possible
downside scenarios
and we have identified
that adequate
headroom exists.
Furthermore, we are in
agreement that should
a covenant be close
to being breached,
management have
further actions that
could be undertaken
in order to prevent
such a breach
occurring. Therefore,
we concur with the
management
assumptions made
in relation to going
concern and long-term
viability of the Group
and the resulting
disclosures included
in the long-term
viability statement.
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably
knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results
of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Materiality
Basis for determining
materiality
Group financial statements
£8.8m (2017 £8.75m)
Approximately 5% (2017 5%) of profit before tax adjusted for net profit arising
on property disposals, movements in the valuation of the property portfolio
and short leasehold impairment and separately disclosed pension legal costs.
Adjusted items relate to separately disclosed items in note 2.2 (2017 profit
before tax adjusted for net profit arising on property disposals, movements
in the valuation of the property portfolio and short leasehold impairment
and the separately disclosed onerous lease provision charge).
Company financial statements
£8.5m (2017 £8.7m)
Parent company materiality equates
to 0.4% of net assets, which is capped
at 97% of Group materiality.
Rationale for the
benchmark applied
Profit before tax before separately disclosed items is a key measure used
by the Group in reporting its results to allow a better understanding of the
adjusted trading of the Group and is also a key measure considered by users
of the accounts.
The parent company does not trade
or exist for profit generating purposes
so materiality has been determined
using net assets.
Adjusted PBT £178m
Group
materiality
£9m
Component
materiality range
£8m
Audit Committee
reporting threshold
£0.44m
Annual report and accounts 2018 Mitchells & Butlers plc
97
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Independent auditor’s report to the members of Mitchells & Butlers plc continued
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of £440,000 (2017 £437,500),
as well as differences below that threshold that, in our view, warranted
reporting on qualitative grounds. We also report to the Audit Committee
on disclosure matters that we identified when assessing the overall
presentation of the financial statements.
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the
Group and its environment, including Group-wide controls, and
assessing the risks of material misstatement at the Group level. Based
on that assessment, we performed a full scope audit in respect of the
UK retail operating business which accounts for 99% (2017 99%) of
the Group’s total assets, 96% (2017 97%) of revenue and 96% (2017 98%)
of operating profit. This audit work was performed directly by the Group
audit engagement team, who also tested the consolidation process.
Given the relative size of the German business (‘ALEX’) we consider
the UK business provides sufficient audit assurance over the Group
balances. This approach is consistent with 2017. At the parent entity
level we also tested the consolidation process, as well as the parent
balance sheet to parent company materiality.
In responding to the assessed risks of material misstatement, the audit
engagement team sought to place reliance on the operating effectiveness
of the Group’s controls in relation to revenue, food and drink
expenditure, property, plant and equipment, onerous lease provisions
and valuation of the pub estate.
Our audit work on the UK business was executed at levels of materiality
applicable to each individual entity which were lower than Group
materiality and ranged from £1 to £8.5m (2017 £0.27m to £8.7m).
Revenue
Profit before tax
Net assets
Other information
Full audit
scope
96%
96%
99%
Review at
group level
4%
4%
1%
The Directors are responsible for the other information. The other
information comprises the information included in the Annual Report,
other than the financial statements and our auditor’s report thereon.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated in our
report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility
is to read the other information and, in doing so, consider whether the
other information is materially inconsistent with the financial statements
or our knowledge obtained in the audit or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a material
misstatement in the financial statements or a material misstatement of
the other information. If, based on the work we have performed, we
conclude that there is a material misstatement of this other information,
we are required to report that fact.
In this context, matters that we are specifically required to report to you
as uncorrected material misstatements of the other information include
where we conclude that:
• Fair, balanced and understandable – the statement given by the
Directors that they consider the Annual Report and financial statements
taken as a whole is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group’s position
and performance, business model and strategy, is materially
inconsistent with our knowledge obtained in the audit; or
• Audit Committee reporting – the section describing the work
of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee; or
• Directors’ statement of compliance with the UK Corporate
Governance Code – the parts of the Directors’ statement required
under the Listing Rules relating to the Company’s compliance with
the UK Corporate Governance Code containing provisions specified
for review by the auditor in accordance with Listing Rule 9.8.10R(2)
do not properly disclose a departure from a relevant provision of
the UK Corporate Governance Code.
We have nothing to report in respect of these matters.
Responsibilities of Directors
As explained more fully in the Directors’ responsibilities statement, the
Directors are responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view, and for such
internal control as the Directors determine is necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for
assessing the Group’s and the Company’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and
using the going concern basis of accounting unless the Directors either
intend to liquidate the Group or the Company or to cease operations,
or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit
of the financial statements
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes
our opinion. Reasonable assurance is a high level of assurance, but is not
a guarantee that an audit conducted in accordance with ISAs (UK) will
always detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
Details of the extent to which the audit was considered capable
of detecting irregularities, including fraud are set out below.
A further description of our responsibilities for the audit
of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditor’s report.
Extent to which the audit was considered capable
of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the financial
statements, whether due to fraud or error, and then design and perform
audit procedures responsive to those risks, including obtaining audit
evidence that is sufficient and appropriate to provide a basis for our opinion.
Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect
of irregularities, including fraud and non-compliance with laws and
regulations, our procedures included the following:
• enquiring of management, Group Assurance, in-house legal counsel,
including the Company Secretary and General Counsel, and the
Audit Committee, including obtaining and reviewing supporting
documentation, concerning the Group’s policies and procedures
relating to:
− identifying, evaluating and complying with laws and regulations
and whether they were aware of any instances of non-compliance;
− detecting and responding to the risks of fraud and whether they
have knowledge of any actual, suspected or alleged fraud;
− the internal controls established to mitigate risks related to fraud
or non-compliance with laws and regulations;
98
Mitchells & Butlers plc Annual report and accounts 2018
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
• we have not received all the information and explanations we require
for our audit; or
• adequate accounting records have not been kept by the Company,
or returns adequate for our audit have not been received from
branches not visited by us; or
• the Company financial statements are not in agreement with the
accounting records and returns.
We have nothing to report in respect of these matters.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in
our opinion certain disclosures of Directors’ remuneration have not been
made or the part of the Directors’ remuneration report to be audited is
not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
Other matters
Auditor tenure
Following the recommendation of the Audit Committee, we were
appointed by the Board on 10 February 2011 to audit the financial
statements for the 52 weeks ending 24 September 2011 and subsequent
financial periods. The period of total uninterrupted engagement
including previous renewals and reappointments of the firm is eight years,
covering the years ending 24 September 2011 to 29 September 2018.
Consistency of the audit report with the additional report to the
Audit Committee
Our audit opinion is consistent with the additional report to the Audit
Committee we are required to provide in accordance with ISAs (UK).
Use of our report
This report is made solely to the Company’s members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body,
for our audit work, for this report, or for the opinions we have formed.
John Charlton FCA (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
21 November 2018
• discussing among the engagement team and involving relevant internal
specialists, including tax, pensions, IT and property specialists regarding
how and where fraud might occur in the financial statements and any
potential indicators of fraud. As part of this discussion, we identified
potential for fraud in the following areas: valuation of pub estate,
onerous lease provisions and compliance with debt covenants; and
• obtaining an understanding of the legal and regulatory framework that
the Group operates in, focusing on those laws and regulations that had
a direct effect on the financial statements or that had a fundamental
effect on the operations of the Group. The key laws and regulations
we considered in this context included the UK Companies Act, Listing
Rules, pensions legislation, and tax legislation.
Audit response to risks identified
As a result of performing the above, we identified valuation of the pub
estate, onerous lease provisions and compliance with debt covenants
as key audit matters. The key audit matters section of our report explains
the matters in more detail and also describes the specific procedures
we performed in response to those key audit matters.
In addition to the above, our procedures to respond to risks identified
included the following:
• reviewing the financial statement disclosures and testing to supporting
documentation to assess compliance with relevant laws and
regulations discussed above;
• enquiring of management, the Audit Committee and in-house legal
counsel concerning actual and potential litigation and claims;
• performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material
misstatement due to fraud;
• reading minutes of meetings of those charged with governance and
reviewing Group Assurance reports; and
• in addressing the risk of fraud through management override of
controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making
accounting estimates are indicative of a potential bias; and evaluating
the business rationale of any significant transactions that are unusual
or outside the normal course of business.
We also communicated relevant identified laws and regulations
and potential fraud risks to all engagement team members, including
internal specialists, and remained alert to any indications of fraud
or non-compliance with laws and regulations throughout the audit.
Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the Directors’ remuneration report to be audited
has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the Strategic report and the Directors’ report
for the financial year for which the financial statements are prepared
is consistent with the financial statements; and
• the Strategic report and the Directors’ report have been prepared
in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and of
the Company and their environment obtained in the course of the audit,
we have not identified any material misstatements in the Strategic report
or the Directors’ report.
Annual report and accounts 2018 Mitchells & Butlers plc
99
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Group income statement
For the 52 weeks ended 29 September 2018
Revenue
Operating costs before depreciation,
amortisation and movements in the valuation
of the property portfolio
Net profit arising on property disposals
EBITDAb
Depreciation, amortisation and movements
in the valuation of the property portfolio
Operating profit/(loss)
Finance costs
Finance revenue
Net pensions finance charge
Profit/(loss) before tax
Notes
2.1, 2.3
2.2, 2.3
2.2, 2.3
2.2, 2.3
4.3
4.3
4.3, 4.5
2018
52 weeks
Separately
disclosed
itemsa
£m
–
Before
separately
disclosed
items
£m
2,152
Total
£m
2,152
2017
53 weeks
Separately
disclosed
itemsa
£m
–
Before
separately
disclosed
items
£m
2,180
(1,730)
–
422
(119)
303
(119)
1
(7)
178
(6)
1
(5)
(1,736)
1
417
(1,751)
–
429
(43)
(48)
–
–
–
(48)
(162)
255
(119)
1
(7)
130
(115)
314
(125)
1
(7)
183
(37)
146
(35)
1
(34)
(72)
(106)
–
–
–
(106)
23
(83)
Total
£m
2,180
(1,786)
1
395
(187)
208
(125)
1
(7)
77
(14)
63
15.1p
15.0p
Tax (charge)/credit
2.2, 2.4
(33)
7
(26)
Profit/(loss) for the period
Earnings per ordinary share
– Basic
– Diluted
145
(41)
104
2.5
2.5
34.1p
34.0p
24.5p
24.4p
34.9p
34.8p
a. Separately disclosed items are explained and analysed in note 2.2.
b. Earnings before interest, tax, depreciation, amortisation and movements in the valuation of the property portfolio.
The notes on pages 105 to 142 form an integral part of these financial statements.
All results relate to continuing operations.
100
Mitchells & Butlers plc Annual report and accounts 2018
Group statement of comprehensive income
For the 52 weeks ended 29 September 2018
Profit for the period
Items that will not be reclassified subsequently to profit or loss:
Unrealised (loss)/gain on revaluation of the property portfolio
Remeasurement of pension liability
Tax relating to items not reclassified
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translation of foreign operations
Cash flow hedges:
– Gains arising during the period
– Reclassification adjustments for items included in profit or loss
Tax relating to items that may be reclassified
Other comprehensive income after tax
Total comprehensive income for the period
The notes on pages 105 to 142 form an integral part of these financial statements.
Notes
2018
52 weeks
£m
104
2017
53 weeks
£m
63
3.1
4.5
2.4
4.4
4.4
2.4
(5)
5
–
–
–
16
34
(8)
42
42
146
74
8
(13)
69
1
60
53
(19)
95
164
227
Annual report and accounts 2018 Mitchells & Butlers plc
101
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Group balance sheet
29 September 2018
Assets
Goodwill and other intangible assets
Property, plant and equipment
Lease premiums
Interests in associates
Deferred tax asset
Derivative financial instruments
Total non-current assets
Inventories
Trade and other receivables
Other cash deposits
Cash and cash equivalents
Derivative financial instruments
Assets held for sale
Total current assets
Total assets
Liabilities
Pension liabilities
Trade and other payables
Current tax liabilities
Borrowings
Derivative financial instruments
Total current liabilities
Pension liabilities
Borrowings
Derivative financial instruments
Deferred tax liabilities
Provisions
Total non-current liabilities
Total liabilities
Net assets
Equity
Called up share capital
Share premium account
Capital redemption reserve
Revaluation reserve
Own shares held
Hedging reserve
Translation reserve
Retained earnings
Total equity
The notes on pages 105 to 142 form an integral part of these financial statements.
The financial statements were approved by the Board and authorised for issue on 21 November 2018.
They were signed on its behalf by:
Tim Jones Finance Director
102
Mitchells & Butlers plc Annual report and accounts 2018
Notes
3.4
3.1
3.5
2.4
4.4
3.2
3.2
4.1
4.1
4.4
3.1
4.5
3.2
4.2
4.4
4.5
4.2
4.4
2.4
3.3
4.7
4.7
4.7
4.7
4.7
4.7
4.7
2018
£m
11
4,426
1
5
63
44
4,550
26
56
120
122
4
–
328
4,878
(49)
(302)
(9)
(233)
(37)
(630)
(200)
(1,744)
(207)
(285)
(43)
(2,479)
(3,109)
1,769
37
26
3
1,197
(1)
(202)
14
695
1,769
2017
£m
10
4,429
1
–
110
41
4,591
24
53
120
147
2
1
347
4,938
(47)
(297)
(3)
(235)
(43)
(625)
(245)
(1,827)
(249)
(324)
(42)
(2,687)
(3,312)
1,626
36
26
3
1,202
(1)
(244)
14
590
1,626
Group statement of changes in equity
For the 52 weeks ended 29 September 2018
At 24 September 2016
Profit for the period
Other comprehensive income
Total comprehensive income
Credit in respect of share-based payments
Dividends paid
Revaluation reserve realised on disposal
of properties
Scrip dividend related share issue
Tax on share-based payments taken directly
to equity
At 30 September 2017
Profit for the period
Other comprehensive (expense)/income
Total comprehensive (expense)/
income
Share capital issued
Credit in respect of share-based payments
Dividends paid
Revaluation reserve realised on disposal
of properties
Scrip dividend related share issue
At 29 September 2018
Called
up share
capital
£m
35
–
–
–
–
–
Share
premium
account
£m
27
–
–
–
–
–
Capital
redemption
reserve
£m
3
–
–
–
–
–
Revaluation
reserve
£m
1,142
–
61
61
–
–
–
1
–
36
–
–
–
–
–
–
–
1
37
–
(1)
–
26
–
–
–
1
–
–
–
(1)
26
–
–
–
3
–
–
–
–
–
–
–
–
3
(1)
–
–
1,202
–
(4)
(4)
–
–
–
(1)
–
1,197
Own
shares
held
£m
(1)
–
–
–
–
–
–
–
–
(1)
–
–
–
–
–
–
Hedging
reserve
£m
(338)
–
94
94
–
–
Translation
reserve
£m
13
–
1
1
–
–
Retained
earnings
£m
527
63
8
71
2
(12)
–
–
–
(244)
–
42
42
–
–
–
1
–
1
590
104
4
108
–
3
(7)
–
–
–
14
–
–
–
–
–
–
–
14
–
–
(1)
–
–
(202)
1
–
695
–
–
1,769
Total
equity
£m
1,408
63
164
227
2
(12)
–
–
1
1,626
104
42
146
1
3
(7)
Annual report and accounts 2018 Mitchells & Butlers plc
103
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Group cash flow statement
For the 52 weeks ended 29 September 2018
Cash flow from operations
Operating profit
Add back: adjusted items
Operating profit before adjusted items
Add back:
Depreciation of property, plant and equipment
Amortisation of intangibles
Cost charged in respect of share-based payments
Administrative pension costs
Operating cash flow before adjusted items, movements
in working capital and additional pension contributions
(Increase)/decrease in inventories
Increase in trade and other receivables
Increase in trade and other payables
Decrease in provisions
Additional pension contributions
Cash flow from operations before adjusted items
Cash flow from adjusted items
Interest paid
Interest received
Tax paid
Net cash from operating activities
Investing activities
Purchases of property, plant and equipment
Purchases of intangible assets
Proceeds from sale of property, plant and equipment
Acquisition of investment in associates
Net cash used in investing activities
Financing activities
Issue of ordinary share capital
Dividends paid (net of scrip dividend)
Repayment of principal in respect of securitised debt
Net movement on unsecured revolving credit facilities
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
The notes on pages 105 to 142 form an integral part of these financial statements.
2018
52 weeks
£m
2017
53 weeks
£m
Notes
2.2
2.3
2.3
4.6
4.5
4.5
3.5
4.7
4.1
4.1
4.1
255
48
303
116
3
3
2
427
(1)
(1)
4
–
(48)
381
(2)
(120)
1
(20)
240
(167)
(4)
5
(5)
(171)
1
(7)
(82)
(6)
(94)
(25)
147
122
208
106
314
113
2
2
2
433
1
(20)
7
(2)
(46)
373
–
(122)
1
(26)
226
(166)
(3)
46
–
(123)
–
(12)
(77)
(25)
(114)
(11)
158
147
104
Mitchells & Butlers plc Annual report and accounts 2018
Notes to the financial statements
Section 1 – Basis of preparation
General information
Mitchells & Butlers plc (the Company) is a public limited company limited
by shares and is registered in England and Wales. The Company’s shares
are listed on the London Stock Exchange. The address of the Company’s
registered office is shown on page 142.
The principal activities of the Company and its subsidiaries (the Group)
and the nature of the Group’s operations are set out in the Strategic
report on pages 1 to 45.
Mitchells & Butlers plc, along with its subsidiaries (together ‘the Group’)
is required to prepare its consolidated financial statements in accordance
with International Financial Reporting Standards (IFRSs) as adopted by
the European Union and in accordance with the Companies Act 2006.
The Group’s accounting reference date is 30 September. The Group
draws up its financial statements to the Saturday directly before or
following the accounting reference date, as permitted by section 390 (3)
of the Companies Act 2006. The period ended 29 September 2018
includes 52 trading weeks and the period ended 30 September 2017
includes 53 trading weeks.
The financial statements have been prepared on the historical cost basis
as modified by the revaluation of properties, pension obligations and
financial instruments.
The Group’s accounting policies have been applied consistently.
Basis of consolidation
The consolidated financial statements incorporate the financial
statements of Mitchells & Butlers plc (‘the Company’) and entities
controlled by the Company (its subsidiaries).
Control is achieved when the Company:
• has the power over the investee;
• is exposed, or has rights, to variable return from its involvement
with the investee; and
• has the ability to use its power to affects its returns.
The Company reassesses whether or not it controls an investee if facts
and circumstances indicate that there are changes to one or more of the
three elements of control listed above.
When the Company has less than a majority of voting rights of an
investee, it considers that it has power over the investee when the voting
rights are sufficient to give it the practical ability to direct the relevant
activities of the investee unilaterally. The Company considers all relevant
facts and circumstances in assessing whether or not the Company’s
voting rights in an investee are sufficient to give it power, including:
• the size of the Company’s holding of voting rights relative to the size
and dispersion of holdings of the other vote holders;
• potential voting rights held by the Company, other vote holders
or parties;
• rights arising from other contractual arrangements; and
• any additional facts and circumstances that indicate that the Company
has, or does not have, the current ability to direct the relevant activities
at the time that decisions need to be made, including voting patterns
at the previous shareholders’ meetings.
Consolidation of a subsidiary begins when the Company obtains control
over the subsidiary and ceases when the Company loses control of the
subsidiary. Specifically, the results of the subsidiaries acquired or disposed
of during the year are included in the consolidated income statement
from the date the Company gains control until the date when the
Company ceases to control the subsidiary.
The financial statements of the subsidiaries are prepared for the same
financial reporting period as the Company. Intercompany transactions,
balances and unrealised gains and losses on transactions between Group
companies are eliminated on consolidation.
Going concern
The Group’s business activities, together with the factors likely to affect
its future development, performance and position are set out in the
Strategic report on pages 1 to 45. The financial position of the Group,
its cash flows, liquidity position and borrowing facilities are also
described within the Finance review.
In addition, note 4.4 to the financial statements includes the Group’s
objectives, policies and processes for managing its capital; its financial risk
management objectives; details of its financial instruments and hedging
activities; and its exposures to credit risk and liquidity risk. As highlighted
in note 4.2 to the financial statements, the Group’s financing is based
upon securitised debt and unsecured borrowing facilities.
The Directors have, at the time of approving the financial statements,
a reasonable expectation that the Company and the Group have adequate
resources to continue in operational existence for the foreseeable future.
Thus they continue to adopt the going concern basis of accounting in
preparing the financial statements.
Foreign currencies
Transactions in foreign currencies are recorded at the exchange rates
ruling on the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated into the functional
currency at the relevant rates of exchange ruling at the balance sheet
date. Foreign exchange differences arising on translation are recognised
in the income statement. Non-monetary assets and liabilities are measured
at cost using the exchange rate on the date of the initial transaction.
The consolidated financial statements are presented in pounds sterling
(rounded to the nearest million), being the functional currency of the
primary economic environment in which the parent and most
subsidiaries operate. On consolidation, the assets and liabilities of the
Group’s overseas operations are translated into sterling at the relevant
rates of exchange ruling at the balance sheet date. The results of overseas
operations are translated into sterling at average rates of exchange for the
period. Exchange differences arising from the translation of the results and
the retranslation of opening net assets denominated in foreign currencies
are taken directly to the Group’s translation reserve. When an overseas
operation is sold, such exchange differences are recognised in the
income statement as part of the gain or loss on sale.
The results of overseas operations have been translated into sterling at
the weighted average euro rate of exchange for the period of £1 = €1.13
(2017 £1 = €1.16), where this is a reasonable approximation to the rate
at the dates of the transactions. Euro and US dollar denominated assets
and liabilities have been translated at the relevant rate of exchange at
the balance sheet date of £1 = €1.12 (2017 £1 = €1.13) and £1 = $1.30
(2017 £1 = $1.34) respectively.
Annual report and accounts 2018 Mitchells & Butlers plc
105
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Notes to the financial statements
Section 1 – Basis of preparation continued
Recent accounting developments
The International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee (IFRIC) have issued the following
standards and interpretations which have been adopted by the Group in these financial statements for the first time:
Accounting standard
Amendments to IAS 7:
Disclosure Initiative
Requirement
The Group has adopted the amendments to IAS 7 for
the first time in the current year. The amendments require
an entity to provide disclosures that enable users of the
financial statements to evaluate changes in liabilities arising
from financing activities, including both cash and non-cash
changes. The Group’s liabilities arising from financing
activities consist of borrowings (note 4.2) and certain
derivatives (note 4.4). Reconciliations between the opening
and closing balances of these items are provided in note 4.1
and 4.4 respectively. Consistent with the transition
provisions of the amendments, the Group has not
disclosed comparative information for the prior year.
Impact on financial statements
Apart from the additional disclosures in notes 4.1
and 4.4, the application of these amendments
has had no impact on the Group’s consolidated
financial statements.
Amendments to IAS 12:
Recognition of Deferred Tax
Assets for Unrealised Losses
The Group has adopted the amendments to IAS 12 for the
first time in the current year. The amendments clarify how
an entity should evaluate whether there will be sufficient
future taxable profits against which it can utilise a
deductible temporary difference.
The application of these amendments has had
no impact on the Group’s consolidated financial
statements as the Group already assesses the
sufficiency of future taxable profits in a way that
is consistent with these amendments.
Annual Improvements to
IFRSs: 2014 to 2016 Cycle
The Group has adopted the amendments to IFRS 12
included in the Annual Improvements to IFRSs 2014
to 2016 Cycle for the first time in the current year.
The other amendments included in this package are not
yet mandatorily effective and they have not been early
adopted by the Group. IFRS 12 states that an entity need
not provide summarised financial information for interests
in subsidiaries, associates or joint ventures that are
classified (or included in a disposal group that is classified)
as held for sale.
The amendments had no impact on the Group’s
consolidated financial statements.
The IASB and IFRIC have issued the following standards and interpretations which could impact the Group, with an effective date for financial periods
beginning on or after the dates disclosed below:
Accounting standard
IFRS 15 Revenue from Contracts with Customers
IFRS 9 Financial Instruments
IFRS 2 (amendments) Classification and Measurement
of Share-based Payment Transactions
Effective date
1 January 2018
1 January 2018
1 January 2018
IAS 40 (amendments) Transfer of Investment Property
1 January 2018
Annual Improvements to IFRSs: 2014–2016 Cycle
IFRIC 22 Foreign Currency Transactions and Advanced
Consideration
1 January 2018
1 January 2018
IFRIC 23 Uncertainty over Income Tax Treatments
1 January 2019 (subject to EU approval)
Amendments to IAS 28 Long-term Interest in Associates
and Joint Ventures
1 January 2019 (subject to EU approval)
Annual Improvements to IFRSs 2015-2017 Cycle
1 January 2019 (subject to EU approval)
Amendments to IAS 19 Employee Benefits: Plan Amendment,
Curtailment or Settlement
1 January 2019 (subject to EU approval)
The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Group
in future periods. A review of the impact of IFRS 15 and IFRS 9 has been performed as described below. Beyond this, it is not practicable to provide
a reasonable estimate of the effect of these standards until a detailed review has been completed.
106
Mitchells & Butlers plc Annual report and accounts 2018
Impact of adoption of IFRS 15
IFRS 15 Revenue from Contracts with Customers replaces IAS 18 Revenue and is effective for financial periods beginning on or after 1 January 2018.
It applies to the Group for the 52 weeks ending 28 September 2019. IFRS 15 has been introduced to provide a single, comprehensive framework for
revenue recognition. The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the standard
introduces a five-step approach to revenue recognition:
Step 1: Identify the contract with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognise revenue when the entity satisfies a performance obligation
IFRS 15 is not expected to have a material impact on the Group when it is adopted, as the majority of the Group’s revenue is in relation to the sale
of food and drink within pubs and restaurants, for which the consideration is known and the performance obligations are satisfied at the point of sale.
Impact of adoption of IFRS 9
IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement and is effective for financial periods starting
on or after 1 January 2018. It applies to the Group for the 52 weeks ending 28 September 2019. IFRS 9 has been introduced to address some
of the complexity contained within IAS 39 but also introduces the concept of earlier recognition of credit losses on loans and receivables.
The adoption of IFRS 9 is not expected to have a material impact on any reported balances in the financial statements, as following assessment by
management, there are no financial assets that will require a change in treatment. The Group will be required to update its hedging documentation
to reflect the requirements of IFRS 9. However, there will be no change to the effectiveness of the Group’s cash flow hedges. In addition, there may
be minor amendments to disclosures within the financial statements.
The following standard will have a material impact on the Group when it becomes effective.
Accounting standard
IFRS 16 Leases
Effective date
The standard replaces IAS 17 Leases when it becomes effective for
accounting periods beginning on or after 1 January 2019. The Group
currently expects to adopt IFRS 16 for the 52 week period ending
26 September 2020.
Annual report and accounts 2018 Mitchells & Butlers plc
107
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 1 – Basis of preparation continued
Impact of adoption of IFRS 16
IFRS 16 requires lessees to recognise a right-of-use asset and a corresponding liability for all leases except for low value assets or where the lease term
is 12 months or less.
The right-of-use asset is initially measured at cost and subsequently measured at cost less accumulated depreciation and impairment losses. The lease
liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest
and lease payments, as well as the impact of lease modifications. As a result of this change, the income statement will include depreciation of the
right-of-use asset and interest on the liability, rather than the rental expense recognised under IAS 17. Following transition, any unused onerous lease
provision will transition to become a provision for impairment of right-of-use assets.
Furthermore, the classification of cash flows will also be impacted as operating lease payments under IAS 17 are presented as operating cash flows;
whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and
operating cash flows respectively.
Accounting requirements for lessors is substantially unchanged from IAS 17.
IFRS 16 will be effective for the Group for the year ending September 2020. The Group currently has operating lease commitments of £670m as
disclosed in note 2.3. A preliminary assessment indicates that these arrangements will meet the definition of a lease under IFRS 16 and hence the
Group will recognise a right of use asset and corresponding liabilities, unless they qualify for low value or short-term exemption. The right of use asset
will be depreciated on a straight-line basis over the life of the lease. Interest will be recognised on the lease liability, resulting in a higher interest expense
in the earlier years of the lease term. The total expense recognised in the Income Statement over the life of the lease will be unaffected by the new
standard. There will be no impact on cash flows, although the presentation of the Group cash flow statement will change significantly, with an increase
in cash flows from operating activities being offset by an increase in cash flows from financing activities.
The Group has established a working group to ensure we take all the necessary steps to comply with the requirements of IFRS 16. The working group
includes our outsource partners who manage estate activity as well as key members of our finance and property teams. Work has already commenced
to collate relevant data, review available system solutions and agree relevant accounting policies.
Given the number of leases and historical data requirements to adopt the fully retrospective approach, the Group intends to apply the modified
retrospective approach, with assets equal to liabilities, at transition. This approach will not require restatement of comparative information.
Given the complexities of IFRS 16 and the sensitivity to key assumptions such as discount rates, it is not yet practicable to fully quantify the effect
of IFRS 16 on the financial statements of the Group.
Critical accounting judgements and estimates
The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions in the application
of accounting policies that affect reported amounts of assets, liabilities, income and expense.
Estimates and judgements are periodically evaluated and are based on historical experience and other factors including expectations of future events
that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Details of the Group’s critical accounting
judgements and estimates are described within the relevant accounting policy section in each of the notes to the financial statements.
Critical judgements are described in each section listed below:
• Note 2.2 Separately disclosed items
• Note 3.1 Property, plant and equipment
• Note 3.3 Provisions
• Note 4.5 Pensions
Critical estimates are described in:
• Note 3.1 Property, plant and equipment
• Note 3.3 Provisions
108
Mitchells & Butlers plc Annual report and accounts 2018
Notes to the financial statements
Section 2 – Results for the year
2.1 Segmental analysis
Accounting policies
Operating segments
IFRS 8 Operating Segments requires operating segments to be based on the Group’s internal reporting to its Chief Operating Decision Maker (CODM).
The CODM is regarded as the Chief Executive together with other Board members. The Group trades in one business segment (that of operating
pubs and restaurants) and the Group’s brands meet the aggregation criteria set out in Paragraph 12 of IFRS 8. Economic indicators assessed in
determining that the aggregated operating segments share similar economic characteristics include expected future financial performance;
operating and competitive risks; and return on invested capital.
The disclosure set out in the Annual Report and Accounts for 2017 included segmental information for the retail operating business and property
business, with an internal rent charge being levied against the Group’s retail operating units by the property business. With a stable estate, the
internal rent charge is no longer used by the CODM as an indicator of performance as movements in this charge are insignificant. The business
is focused on delivery of sales growth and control of short-term costs within its trading pubs, in order to maximise return from its existing estate.
The CODM uses EBITDA and profit before interest and adjusted items (operating profit pre-adjustments) as the key measures of the Group’s results
on an aggregated basis.
Geographical segments
Substantially all of the Group’s business is conducted in the United Kingdom. In presenting information by geographical segment, segment revenue
and non-current assets are based on the geographical location of customers and assets.
Geographical segments
Revenue – sales to third parties
Segment non-current assetsa
UK
Germany
Total
2018
52 weeks
£m
2,071
4,428
2017
53 weeks
£m
2,100
4,430
2018
52 weeks
£m
81
10
2017
53 weeks
£m
80
10
2018
52 weeks
£m
2,152
4,438
2017
53 weeks
£m
2,180
4,440
a. Includes balances relating to intangibles, property, plant and equipment and non-current lease premiums.
2.2 Separately disclosed items
Accounting policy
In addition to presenting information on an IFRS basis, the Group also presents adjusted profit and earnings per share information that excludes
separately disclosed items and the impact of any associated tax. Adjusted profitability measures are presented excluding separately disclosed items
as we believe this provides both management and investors with useful additional information about the Group’s performance and supports a more
effective comparison of the Group’s trading performance from one period to the next. Adjusted profit and earnings per share information is used
by management to monitor business performance against both shorter-term budgets and forecasts but also against the Group’s longer-term
strategic plans.
Separately disclosed items are those which are separately identified by virtue of their size or incidence and include movements in the valuation
of the property portfolio as a result of the annual revaluation exercise, impairment review of short leasehold and unlicensed properties, legal costs
associated with the dispute in relation to the defined benefit pension scheme and material movements in the onerous lease provision.
Critical accounting judgements
Judgement is used to determine those items which should be separately disclosed to allow a better understanding of the adjusted trading
performance of the Group. This judgement includes assessment of whether an item is of sufficient size or of a nature that is not consistent
with normal trading activities.
Separately disclosed items are identified as follows:
• One-off legal costs associated with the ongoing court case between the Company and the Trustee of the Defined Benefit Pension scheme
in relation to the rate of inflation applied to pension increases for certain sections of the membership. These costs would prevent year-on-year
comparability of the Group’s trading if not separately disclosed.
• Onerous lease provision – this provision is calculated on a site by site basis, with the majority of the additions for the prior period being disclosed
separately. This prior period increase was the result of a full review of estate strategy and an update to the discount rate applied in calculating the
provision. Due to the size of the resulting increase in the provision, this was disclosed separately.
• Profit/(loss) arising on property disposals – property disposals are disclosed separately as they are not considered to be part of adjusted trade
performance and there is volatility in the size of the profit/(loss) in each accounting period.
• Movement in the valuation of the property portfolio – this is disclosed separately, due to the size and volatility of the movement in property
valuation each period, which can be partly driven by movements in the property market. This movement is also not considered to be part
of the adjusted trade performance of the Group and would prevent year-on-year comparability of the Group’s trading performance if not
separately disclosed.
Annual report and accounts 2018 Mitchells & Butlers plc
109
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 2 – Results for the year continued
2.2 Separately disclosed items continued
The items identified in the current period are as follows:
Adjusted items
Legal costs associated with the defined benefit pension scheme
Onerous lease provision additions
Total adjusted items recognised within operating costs
Net profit arising on property disposals
Movement in the valuation of the property portfolio (see note 3.1):
– Impairment arising from the revaluation
– Impairment of short leasehold and unlicensed properties
– Impairment of assets held for sale
Net movement in the valuation of the property portfolio
Total adjusted items before tax
Tax credit relating to above items
Total adjusted items after tax
2018
52 weeks
£m
2017
53 weeks
£m
Notes
a
b
c
d
e
(6)
–
(6)
1
(28)
(15)
–
(43)
(48)
7
(41)
–
(35)
(35)
1
(51)
(17)
(4)
(72)
(106)
23
(83)
a. There are ongoing legal proceedings between the Company (as principal employer) and Mitchells & Butlers Pensions Limited (as Trustee) for which costs have been incurred both by the
Company and by the Trustee but which the Company has agreed to pay. The legal proceedings are in relation to the Mitchells & Butlers Pension Plan (MABPP), whereby the Trust Deed
and Rules provide that it is a matter for the Company to determine the rate of inflation which should be applied to pension increases for certain sections of the membership in excess
of guaranteed minimum pensions, the Company has instructed the Trustee to apply CPI (subject to certain caps) in respect of such increases. The Trustee believes that this power was
incorrectly vested in the Company in the Trust Deed and Rules of the MABPP in 1996 and, despite it being reflected in further versions of the Trust Deed and Rules, has made an application
to court for those various Trust Deeds and Rules to be rectified. It is the Board’s belief that the Company holds the power to fix such an inflation index and the Company is therefore
contesting that application. The hearing is expected to be held in late 2019.
b. During the prior period, a review of estate strategy in relation to managed leasehold sites was completed, with specific focus on the challenges around loss-making sites and those located
on retail and leisure parks. The losses were considered to be unavoidable for the remaining committed lease term. In addition, the discount rate applied in the calculation was also updated.
As a result, the onerous lease provision increased significantly with the majority of this increase recognised as a separately disclosed item in the prior period. The net movement in the
onerous lease provision in the current period has been included within adjusted profit as it is immaterial. See note 3.3 for further details.
c. Impairment arising from the Group’s revaluation of its pub estate where the carrying values of the properties exceed their recoverable amount. See note 3.1 for further details.
d. Impairment of short leasehold and unlicensed properties where their carrying values exceed their recoverable amount. See note 3.1 for further details.
e. Impairment recognised on reclassification of property, plant and equipment to assets held for sale.
110
Mitchells & Butlers plc Annual report and accounts 2018
2.3 Revenue and operating costs
Accounting policies
Revenue recognition
Revenue is the fair value of goods sold and services rendered to third parties as part of the Group’s trading activities, after deducting sales-based
taxes, coupons and discounts.
Revenue – goods and services
The majority of revenue comprises food and beverages sold in the Group’s businesses. This revenue is recognised at the point of sale to the customer.
Operating leases – Group as lessor
Rental income is received from unlicensed and leased operations. Income from these operating leases is recognised on a straight-line basis over
the term of the lease.
Operating profit
Operating profit is stated after charging adjusted items but before investment income and finance costs.
Supplier incentives
Supplier incentives and rebates are recognised within operating costs as they are earned. The accrued value at the reporting date is included
in other receivables.
Operating leases – Group as lessee
Leases in which substantially all the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made
under operating leases and sub-leases are charged to the income statement on a straight-line basis over the period of the lease. Lease incentives
are recognised as a liability and a subsequent reduction in the rental expense over the lease term on a straight-line basis.
Premiums paid on acquiring a new lease are spread on a straight-line basis over the lease term. Such premiums are classified in the balance sheet
as current or non-current lease premiums, with the current portion being the element which relates to the following period.
The Group’s policy is to account for land held under both long and short leasehold contracts as operating leases, since it has no expectation that
title will pass on expiry of the lease contracts.
Revenue is analysed as follows:
Goods
Services
Revenue from services includes rent receivable from unlicensed properties and leased operations of £9m (2017 £10m).
Operating costs are analysed as follows:
Raw materials and consumables recognised as an expensea
Changes in inventory of finished goods and work in progress
Employee costs
Hire of plant and machinery
Property operating lease costs
Other costs
Operating costs before depreciation, amortisation and movements in the valuation of the property portfolio
Other adjusted items (note 2.2)
Net profit arising on property disposals
Depreciation of property, plant and equipment (note 3.1)
Amortisation of intangible assets (note 3.4)
Net movement in the valuation of the property portfolio (note 3.1)
Depreciation, amortisation and movements in the valuation of the property portfolio
Total operating costs
2018
52 weeks
£m
2,142
10
2,152
2017
53 weeks
£m
2,169
11
2,180
2018
52 weeks
£m
564
(1)
676
23
63
405
1,730
6
1,736
(1)
116
3
43
162
1,897
2017
53 weeks
£m
573
1
682
24
62
409
1,751
35
1,786
(1)
113
2
72
187
1,972
a. Supplier incentives are included as a reduction to the raw materials and consumables expense. These are not disclosed separately as the value is immaterial.
Annual report and accounts 2018 Mitchells & Butlers plc
111
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 2 – Results for the year continued
2.3 Revenue and operating costs continued
Employee costs
Wages and salaries
Share-based payments (note 4.6)
Total wages and salaries
Social security costs
Pensions (note 4.5)
Total employee costs
2018
52 weeks
£m
620
3
623
45
8
676
2017
53 weeks
£m
625
2
627
48
7
682
The average number of employees including part-time employees was 43,777 retail employees (2017 44,893) and 1,025 support employees
(2017 998).
Information regarding key management personnel is included in note 5.1. Detailed information regarding Directors’ emoluments, pensions, long-term
incentive scheme entitlements and their interests in share options is given in the Report on Directors’ remuneration on pages 68 to 91.
Operating leases
Operating lease commitments – Group as lessee
The vast majority of the Group’s leases are industry standard UK pub or commercial property leases which provide for periodic rent reviews to open
market value and enjoy statutory rights to renewal on expiry. Generally they do not contain conditions relating to rent escalation, rights to purchase,
concessions, residual values or other material provisions of an unusual nature.
Total future minimum lease rental payments under non-cancellable operating leases are as follows:
Due within one year
Between one and five years
After five years
2018
£m
55
196
419
670
2017
£m
54
199
440
693
Operating lease receivables – Group as lessor
The Group leases a small proportion of its unlicensed properties to tenants. The majority of lease agreements have terms of 50 years or less and are
classified as operating leases. Where sublet arrangements are in place, future minimum lease payments and receipts are presented gross.
Total future minimum lease rental receipts under non-cancellable operating leases are as follows:
Due within one year
Between one and five years
After five years
Auditor remuneration
Fees payable to the Group’s auditor for the:
– audit of the consolidated Group financial statements
– audit of the Company’s subsidiaries financial statements
Total audit fees
Other fees to auditor:
– audit related assurance services
Total non-audit fees
Auditor’s remuneration of £0.3m (2017 £0.3m) was paid in the UK and £0.1m (2017 £0.1m) was paid in Germany.
2018
£m
8
26
45
79
2017
£m
8
27
45
80
2018
52 weeks
£m
2017
53 weeks
£m
0.1
0.3
0.4
0.1
0.1
0.1
0.3
0.4
0.1
0.1
112
Mitchells & Butlers plc Annual report and accounts 2018
2.4 Taxation
Accounting policies
Current tax
The income tax expense represents both the income tax payable, based on profits for the period, and deferred tax and is calculated using tax
rates enacted or substantively enacted at the balance sheet date. Taxable profit differs from net profit as reported in the income statement because
it excludes items of income or expense which are not taxable. Income tax is recognised in the income statement except when it relates to items that
are charged or credited in other comprehensive income or directly in equity, in which case the income tax is also charged or credited in other
comprehensive income or directly in equity.
Deferred tax
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable profits and is accounted for using the balance sheet liability method.
Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which deductible temporary differences can be utilised.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the
Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable
future. Deferred tax assets arising from deductible temporary differences associate with such investments and interests are only recognised to the
extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are
expected to reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised based on tax laws
and rates that have been substantively enacted at the balance sheet date. The amount of deferred tax recognised is based on the expected manner
of realisation or settlement of the carrying amount of assets and liabilities.
Taxation – income statement
Current tax:
– UK corporation tax
– Amounts over provided in prior periods
Total current tax charge
Deferred tax:
– Origination and reversal of temporary differences
– Adjustments in respect of prior periods
Total deferred tax credit
Total tax charged in the income statement
Further analysed as tax relating to:
Profit before adjusted items
Adjusted items
2018
52 weeks
£m
2017
53 weeks
£m
(28)
2
(26)
–
–
–
(26)
(33)
7
(26)
(20)
3
(17)
7
(4)
3
(14)
(37)
23
(14)
The standard rate of corporation tax applied to the reported profit is 19.0% (2017 19.5%). The applicable rate has changed following the substantive
enactment of the Finance (No.2) Act 2015 on 18 November 2015, which reduced the main rate of corporation tax from 20% to 19% from 1 April 2017.
The tax charge in the income statement for the period is higher (2017 lower) than the standard rate of corporation tax in the UK. The differences are
reconciled below:
Profit before tax
Taxation charge at the UK standard rate of corporation tax of 19.0% (2017 19.5%)
Expenses not deductible
Income not taxable
Adjustments in respect of prior periods
Effect of different tax rates of subsidiaries operating in other jurisdictions
Effect of different rates for deferred tax and corporation tax
Total tax charge in the income statement
Taxation for other jurisdictions is calculated at the rates prevailing in those jurisdictions.
2018
52 weeks
£m
130
(25)
(4)
2
2
(1)
–
(26)
2017
53 weeks
£m
77
(15)
(4)
9
(1)
(1)
(2)
(14)
Annual report and accounts 2018 Mitchells & Butlers plc
113
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 2 – Results for the year continued
2.4 Taxation continued
Deferred tax in the income statement:
Accelerated capital allowances
Retirement benefit obligations
Rolled over and held over gains
Depreciated non-qualifying assets
Unrealised gains on revaluations
Tax losses – UK
Tax losses – overseas
Total deferred tax credit in the income statement
Taxation – other comprehensive income
Deferred tax:
Items that will not be reclassified subsequently to profit or loss:
– Unrealised losses/(gains) due to revaluations – revaluation reserve
– Unrealised gains due to revaluations – retained earnings
– Remeasurement of pension liability
Items that may be reclassified subsequently to profit or loss:
– Cash flow hedges:
– Gains arising during the period
– Reclassification adjustments for items included in profit or loss
Total tax charge recognised in other comprehensive income
Tax relating to items recognised directly in equity
Deferred tax:
– Tax credit related to share-based payments
Taxation – balance sheet
The deferred tax assets and liabilities recognised in the balance sheet are shown below:
Deferred tax asset:
Retirement benefit obligations (note 4.5)
Derivative financial instruments
Tax losses – UK
Tax losses – overseas
Share-based payments
Total deferred tax asset
Deferred tax liability:
Accelerated capital allowances
Rolled over and held over gains
Unrealised gains on revaluations
Depreciated non-qualifying assets
Total deferred tax liability
Total
114
Mitchells & Butlers plc Annual report and accounts 2018
2018
52 weeks
£m
2017
53 weeks
£m
1
(6)
–
1
5
(2)
1
–
5
(6)
4
1
7
(6)
(2)
3
2018
52 weeks
£m
2017
53 weeks
£m
1
–
(1)
–
(3)
(5)
(8)
(8)
(13)
1
(1)
(13)
(10)
(9)
(19)
(32)
2018
52 weeks
£m
2017
53 weeks
£m
–
1
2018
£m
43
42
6
1
2
94
(31)
(112)
(170)
(3)
(316)
(222)
2017
£m
50
50
8
–
2
110
(32)
(112)
(176)
(4)
(324)
(214)
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset income tax assets and income tax liabilities and when
it is the intention to settle the balances on a net basis. Deferred tax assets and liabilities have been offset and disclosed in the balance sheet as follows:
Deferred tax asset
Deferred tax liability
Net deferred tax liability
2018
£m
63
(285)
(222)
2017
£m
110
(324)
(214)
Unrecognised tax allowances
At the balance sheet date the Group had unused tax allowances of £87m in respect of unclaimed capital allowances (2017 £80m) available for offset
against future profits.
A deferred tax asset has not been recognised on tax allowances with a value of £15m (2017 £14m) because it is not certain that future taxable profits
will be available in the company where these tax allowances arose against which the Group can utilise these benefits. These tax credits can be carried
forward indefinitely.
Factors which may affect future tax charges
The Finance Act 2016 was substantively enacted on 15 September 2016 and reduced the main rate of corporation tax from 19% to 17% from 1 April 2020.
The effect of these changes has been reflected in the closing deferred tax balances at 30 September 2017 and 29 September 2018.
2.5 Earnings per share
Basic earnings per share (EPS) has been calculated by dividing the profit or loss for the period by the weighted average number of ordinary shares
in issue during the period, excluding own shares held by employee share trusts.
For diluted earnings per share, the weighted average number of ordinary shares is adjusted to assume conversion of all dilutive potential ordinary shares.
Adjusted earnings per ordinary share amounts are presented before adjusted items (see note 2.2) in order to allow a better understanding of the
adjusted trading performance of the Group.
52 weeks ended 29 September 2018:
Profit/EPS
Adjusted items, net of tax
Adjusted profit/EPSa
53 weeks ended 30 September 2017:
Profit/EPS
Adjusted items, net of tax
Adjusted profit/EPSa
Basic
EPS
pence per
ordinary
share
Diluted
EPS
pence per
ordinary
share
24.5p
9.6p
34.1p
24.4p
9.6p
34.0p
15.1p
19.8p
34.9p
15.0p
19.8p
34.8p
Profit
£m
104
41
145
63
83
146
a. Adjusted profit and adjusted EPS are alternative performance measures (APMs) and are considered critical to aid understanding of the Group’s performance. These measures are explained
on pages 148 to 150 of this report.
The weighted average number of ordinary shares used in the calculations above are as follows:
For basic EPS calculations
Effect of dilutive potential ordinary shares:
– Contingently issuable shares
For diluted EPS calculations
2018
52 weeks
m
425
2
427
2017
53 weeks
m
418
1
419
At 29 September 2018, 2,746,844 (2017 3,124,559) other share options were outstanding that could potentially dilute basic EPS in the future but were
not included in the calculation of diluted EPS as they are anti-dilutive for the periods presented.
Annual report and accounts 2018 Mitchells & Butlers plc
115
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 3 – Operating assets and liabilities
3.1 Property, plant and equipment
Accounting policies
Property, plant and equipment
The majority of the Group’s freehold and long leasehold licensed land and buildings are revalued annually and are therefore held at fair value
less depreciation.
Short leasehold buildings (leases with an unexpired lease term of less than 50 years), unlicensed land and buildings and fixtures, fittings and
equipment are held at cost less depreciation and impairment.
All land and buildings are disclosed as a single class of asset within the property, plant and equipment table, as we do not consider the short
leasehold and unlicensed buildings to be material for separate disclosure.
Non-current assets held for sale are held at their carrying value or their fair value less costs to sell where this is lower.
Depreciation
Depreciation is charged to the income statement on a straight-line basis to write off the cost less residual value over the estimated useful life of
an asset and commences when an asset is ready for its intended use. Expected useful lives and residual values are reviewed each year and adjusted
if appropriate.
Freehold land is not depreciated.
Freehold and long leasehold buildings are depreciated so that the difference between their carrying value and estimated residual value is written
off over 50 years from the date of acquisition. The residual value of freehold and long leasehold buildings is reassessed each year and is estimated
to be equal to the fair value determined in the annual valuation and therefore no depreciation charge is recognised.
Short leasehold buildings, and associated fixtures, fittings and equipment, are depreciated over the shorter of the estimated useful life and the
unexpired term of the lease.
Fixtures, fittings and equipment have the following estimated useful lives:
Information technology equipment
3 to 7 years
Fixtures and fittings
3 to 20 years
At the point of transfer to non-current assets held for sale, depreciation ceases. Should an asset be subsequently reclassified to property, plant and
equipment, the depreciation charge is calculated to reflect the cumulative charge had the asset not been reclassified.
Disposals
Profits and losses on disposal of property, plant and equipment are calculated as the difference between the net sales proceeds and the carrying
amount of the asset at the date of disposal.
Revaluation
The revaluation utilises valuation multiples, which are determined via third-party inspection of 20% of the sites such that all sites are individually
valued approximately every five years; estimates of fair maintainable trade (FMT); and estimated resale value of tenant’s fixtures and fittings.
Properties are valued as fully operational entities, to include fixtures and fittings but excluding stock and personal goodwill. The value of tenant’s
fixtures and fittings is then removed from this valuation via reference to its associated resale value. Where sites have been impacted by expansionary
capital investment in the preceding twelve months, FMT is taken as the lower of the post investment forecast or the prior year FMT, as the current
year trading performance includes a period of closure.
Valuation multiples derived via third-party inspections determine brand standard multiples which are then used to value the remainder of the
non-inspected estate via an extrapolation exercise, with the output of this exercise reviewed at a high level by the Directors and the third-party valuer.
Where the value of land and buildings derived purely from a multiple applied to the fair maintainable trade misrepresents the underlying asset value,
for example, due to low levels of income or location characteristics, a spot valuation is applied.
Surpluses which arise from the revaluation exercise are included within other comprehensive income (in the revaluation reserve) unless they are
reversing a revaluation adjustment which has been recognised in the income statement previously; in which case an amount equal to a maximum
of that recognised in the income statement previously is recognised in income. Where the revaluation exercise gives rise to a deficit, this is reflected
directly within the income statement, unless it is reversing a previous revaluation surplus against the same asset; in which case an amount equal
to the maximum of the revaluation surplus is recognised within other comprehensive income (in the revaluation reserve).
Impairment
Short leasehold and unlicensed properties are reviewed on an outlet basis for impairment if events or changes in circumstances indicate that the
carrying amount may not be recoverable. An impairment loss is recognised whenever the carrying amount of an outlet exceeds its recoverable
amount. The recoverable amount is the higher of an outlet’s fair value less costs to sell and value in use. Any changes in outlet earnings, or cash
flows, the discount rate applied to those cash flows, or the estimate of sales proceeds could give rise to an additional impairment loss.
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount,
but only so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss
been recognised for the asset in prior periods. A reversal of an impairment loss is recognised as income immediately. An impairment reversal is only
recognised where there is a change in the estimates used to determine recoverable amounts, not where it results from the passage of time.
116
Mitchells & Butlers plc Annual report and accounts 2018
Critical accounting judgements
The revaluation methodology is determined using management judgement, with advice from third-party valuers. The application of a valuation
multiple to the fair maintainable trade of each site is considered the most appropriate method for the Group to determine the fair value of licensed
land and buildings. Where sites have been impacted by expansionary capital investment in the preceding twelve months, management judgement
is used to determine the most appropriate FMT. The FMT is taken as the lower of the post investment forecast or the prior year FMT, as the current
year trading performance includes a period of closure.
Critical accounting estimates
The application of the valuation methodology requires two critical accounting estimates; the estimation of valuation multiples, which are
determined via third-party inspections; and an estimate of fair maintainable trade, including reference to historic and future projected income levels.
A sensitivity analysis of changes in valuation multiples and FMT, in relation to the properties to which these estimates apply, is provided on page 118.
The carrying value of properties to which these estimates apply is £4,230m (2017 £4,230m).
When a review for impairment is conducted for short leasehold properties, the recoverable amount is determined based on value in use
calculations. The value in use calculation requires two critical accounting estimates; the estimation of future cash flows, including reference
to historical and future projected income levels; and the selection of an appropriate risk-adjusted discount rate. A sensitivity analysis of changes
in future cash flows and discount rate, in relation to the properties to which these estimates apply, is provided on page 118. The carrying value
of properties to which these estimates apply is £156m (2017 £170m).
Property, plant and equipment
Property, plant and equipment can be analysed as follows:
Cost or valuation
At 24 September 2016
Additions
Disposalsa
Transfers to assets held for sale
Revaluation/(impairment)
At 30 September 2017
Additions
Disposalsa
Revaluation/(impairment)
At 29 September 2018
Accumulated depreciation
At 24 September 2016
Provided during the period
Disposalsa
Transfers to assets held for sale
At 30 September 2017
Provided during the period
Disposalsa
At 29 September 2018
Net book value
At 29 September 2018
At 30 September 2017
At 24 September 2016
Land and
buildings
£m
Fixtures,
fittings and
equipment
£m
3,934
43
(7)
(30)
13
3,953
39
(12)
(41)
3,939
77
6
(5)
–
78
6
(10)
74
3,865
3,875
3,857
1,107
120
(73)
(25)
(11)
1,118
125
(123)
(7)
1,113
541
107
(72)
(12)
564
110
(122)
552
561
554
566
Total
£m
5,041
163
(80)
(55)
2
5,071
164
(135)
(48)
5,052
618
113
(77)
(12)
642
116
(132)
626
4,426
4,429
4,423
a. Includes assets which are fully depreciated and have been removed from the fixed asset register.
Certain assets with a net book value of £43m (2017 £44m) owned by the Group are subject to a fixed charge in respect of liabilities held by the
Mitchells & Butlers Executive Top-Up Scheme (MABETUS).
Included within property, plant and equipment are assets with a net book value of £3,788m (2017 £3,808m), which are pledged as security for the
securitisation debt and over which there are certain restrictions on title.
Cost at 29 September 2018 includes £18m (2017 £10m) of assets in the course of construction.
Annual report and accounts 2018 Mitchells & Butlers plc
117
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 3 – Operating assets and liabilities continued
3.1 Property, plant and equipment continued
Revaluation of freehold and long leasehold properties
The freehold and long leasehold properties have been valued at fair value, as at 29 September 2018 using information provided by CBRE, independent
chartered surveyors. The valuation was carried out in accordance with the RICS Valuation – Global Standards 2017 which incorporate the International
Valuation Standards and the RICS Valuation – Professional Standards UK January 2014 (revised April 2015) (the ‘Red Book’) assuming each asset is sold
as a fully operational trading entity. The fair value has been determined having regard to factors such as current and future projected income levels,
taking account of location, quality of the pub restaurant and recent market transactions in the sector.
Sensitivity analysis
Changes in either the FMT or the multiple could materially impact the valuation of the freehold and long leasehold properties. The average movement
in FMT of revalued properties in recent years is 1.0%. It is estimated that, given the multiplier effect, a 1.0% change in the FMT of the freehold or long
leasehold properties would generate an approximate £37m movement in their valuation.
Multiples are determined at an individual brand level. The average movement in weighted average of all brand multiples in recent years is 0.1.
It is estimated that a 0.1 change in the multiple would generate an approximate £42m movement in valuation.
Impairment review of short leasehold and unlicensed properties
Short leasehold and unlicensed properties (comprising land and buildings and fixtures, fittings and equipment) which are not revalued to fair market
value, are reviewed for impairment by comparing site value in use calculations to their carrying values. The value in use calculation uses forecast trading
performance cash flows, which are discounted by applying a pre-tax discount rate of 7.5% (2017 7.0%). Any resulting impairment relates to sites with
poor trading performance, where the output of the value in use calculation is insufficient to justify their current net book value.
Sensitivity analysis
The Group has performed a sensitivity analysis on the impairment tests for its short leasehold properties using various reasonably possible scenarios.
It is estimated that a 5.0% decline in the EBITDA of the short leasehold properties would generate an approximate £1m increase in the impairment charge.
It is also estimated that 0.5% increase in the discount rate would not result in a significant increase to the impairment charge. The movement of 0.5%
is considered reasonable, given that the discount rate has increased by 0.5% in the current period.
Current year valuations have been incorporated into the financial statements and the resulting revaluation adjustments have been taken to the
revaluation reserve or income statement as appropriate. The impact of the revaluations/impairments described above is as follows:
Income statement
Revaluation loss charged as an impairment
Reversal of past impairments
Total impairment arising from the revaluation
Impairment of short leasehold and unlicensed properties
Impairment of assets held for sale
Revaluation reserve
Unrealised revaluation surplus
Reversal of past revaluation surplus
Net (decrease)/increase in property, plant and equipment
2018
52 weeks
£m
2017
53 weeks
£m
(89)
61
(28)
(15)
–
(43)
171
(176)
(5)
(48)
(109)
58
(51)
(17)
(4)
(72)
210
(136)
74
2
The valuation techniques are consistent with the principles in IFRS 13 and use significant unobservable inputs such that the fair value measurement
of each property within the portfolio has been classified as Level 3 in the fair value hierarchy.
The key inputs to valuation on property, plant and equipment are as follows:
29 September 2018
Freehold properties
Long leasehold properties
Total revalued properties
Short leasehold properties
Unlicensed properties
Other non-pub assets
Assets under construction
Total property, plant and equipment
118
Mitchells & Butlers plc Annual report and accounts 2018
Number
of pubs
1,336
95
1,431
Land and
buildings
£m
3,507
259
3,766
77
14
3
5
3,865
Fixtures,
fittings and
equipment
£m
428
36
464
79
2
3
13
561
Net book
valuea
£m
3,935
295
4,230
156
16
6
18
4,426
30 September 2017
Freehold properties
Long leasehold properties
Total revalued properties
Short leasehold properties
Unlicensed properties
Other non-pub assets
Assets under construction
Total property, plant and equipment
Number
of pubs
1,339
95
1,434
Land and
buildings
£m
3,512
256
3,768
86
14
1
6
3,875
Fixtures,
fittings and
equipment
£m
426
36
462
84
2
2
4
554
Net book
valuea
£m
3,938
292
4,230
170
16
3
10
4,429
a. The carrying value of freehold and long leasehold properties based on their historical cost (or deemed cost at transition to IFRS) is £2,635m and £186m respectively (2017 £2,625m
and £188m).
The tables below show, by class of asset, the number of properties that have been valued within each FMT and multiple banding:
29 September 2018
Number of pubs in each FMT income banding:
< £200k pa
£200k to £360k pa
> £360k pa
30 September 2017
Number of pubs in each FMT income banding:
< £200k pa
£200k to £360k pa
> £360k pa
Valuation multiple applied to FMT
Over 12
times
10 to 12
times
8 to 10
times
6 to 8
times
Under 6
times
48
–
3
51
6
12
54
72
166
311
414
891
170
138
65
373
Valuation multiple applied to FMT
10
15
19
44
Over 12
times
10 to 12
times
8 to 10
times
6 to 8
times
Under 6
times
46
–
2
48
11
11
52
74
153
315
406
874
190
141
59
390
12
13
23
48
Total
400
476
555
1,431
Total
412
480
542
1,434
Year-on-year movements in valuation multiples are the result of changes in property market conditions. The average weighted multiple is 8.6 (2017 8.5).
In addition to the above, premiums paid on acquiring a new lease are classified separately in the balance sheet. At 29 September 2018 an amount of £1m
(2017 £1m) was included in the balance sheet.
Assets held for sale
Properties
2018
£m
–
2017
£m
1
In accordance with IFRS 5, properties categorised as held for sale are held at the lower of book value and fair value less costs to sell.
During 2017, £43m of properties were classified as held for sale. An impairment of £4m was recognised prior to reclassification. Subsequently,
£42m of properties were sold, leaving £1m remaining as held for sale at the balance sheet date.
During 2018, the remaining £1m of properties were sold.
Capital commitments
Contracts placed for expenditure on property, plant and equipment not provided for in the financial statements
2018
£m
24
2017
£m
23
Annual report and accounts 2018 Mitchells & Butlers plc
119
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 3 – Operating assets and liabilities continued
3.2 Working capital
Inventories
Accounting policy
Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method.
Inventories can be analysed as follows:
Goods held for resale
Trade and other receivables
Accounting policy
Trade and other receivables are recognised and carried at original cost less an allowance for any uncollectable amounts.
Trade and other receivables can be analysed as follows:
Trade receivables
Other receivables
Prepayments
Total trade and other receivables
All amounts fall due within one year.
2018
£m
26
2017
£m
24
2018
£m
7
14
35
56
2017
£m
5
15
33
53
Trade and other receivables are non-interest bearing and are classified as loans and receivables and are therefore held at amortised cost. Trade and
other receivables past due and not impaired are immaterial and therefore no further analysis is presented. The Directors consider that the carrying
amount of trade and other receivables approximately equates to their fair value.
Credit risk is considered in note 4.4.
Trade and other payables
Accounting policy
Trade and other payables are recognised at amortised cost.
Trade and other payables can be analysed as follows:
Trade payables
Other taxation and social security
Accrued charges
Other payables
Total trade and other payables
2018
£m
83
64
103
52
302
2017
£m
80
70
102
45
297
Current trade and other payables are non-interest bearing. The Directors consider that the carrying amount of trade and other payables approximately
equates to their fair value.
120
Mitchells & Butlers plc Annual report and accounts 2018
3.3 Provisions
Accounting policy
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that an
outflow of resources will be required to settle the obligation; and the amount can be reliably estimated. Provisions are measured using the Directors’
best estimate of the expenditure required to settle the obligation at the balance sheet date and are discounted to present value where the effect
is material.
Onerous property provisions represent the expected unavoidable losses on onerous and vacant property leases and comprise the lower of the net
rent payable or the operating loss after rental costs. The provision is calculated on a site by site basis with a provision being made for the remaining
committed lease term, where a lease is considered to be onerous. Other contractual dilapidations costs are also recorded as provisions as appropriate.
Critical accounting judgements
Determination of whether a loss is unavoidable requires areas of judgement such as consideration of potential future investment decisions,
local conditions which may be impacting on current performance.
Critical accounting estimates
In relation to onerous property provisions, estimates are required in determining the future EBITDA performance of each site and the potential to
exit leases earlier than the expiry date. A sensitivity analysis of changes in these estimates is provided below. The value of provisions to which these
estimates apply is £43m (2017 £42m).
Provisions
The provision for unavoidable losses on onerous property leases has been set up to cover rental payments of vacant or loss-making properties.
Payments are expected to continue on these properties for periods of 1 to 25 years.
Provisions can be analysed as follows:
At 24 September 2016
Released in the perioda
Provided in the periodb
Unwinding of discount
Utilised in the period
At 30 September 2017
Released in the perioda
Provided in the periodb
Unwinding of discount
Utilised in the period
At 29 September 2018
Property
leases
£m
9
(1)
36
1
(3)
42
(6)
11
1
(5)
43
a. Releases in the prior period primarily related to property disposals. Releases in the current period primarily relate to improvement in performance of managed properties.
b. During the prior period, a full review of estate strategy in relation to managed leasehold properties was completed, with specific focus on the challenges around loss-making sites and
those located on retail and leisure parks. With lower footfall on many of these parks and the continued uncertain economic outlook, alongside increased cost pressures such as living wage,
business rates review, apprenticeship levy, sugar tax and food price inflation, a number of short leasehold sites were considered to be challenged when striving to achieve a break-even
profit performance. As a result, the losses were considered unavoidable for the remaining committed lease term for managed properties. In addition, the discount rate applied in the
calculation was updated. As a result of these changes, a £35m increase in the provision was included as a separately disclosed item (see note 2.2). The remaining increase of £1m was
recognised within adjusted profit, as this represented unavoidable losses on unlicensed properties.
Sensitivity analysis
The Group has performed a sensitivity analysis on the onerous lease provision calculation using various reasonably possible scenarios. It is estimated
that a 5% decline in the future EBITDA performance of the sites included in the provision would generate an additional provision of £1m. It is also
estimated that, should all leases with more than 10 years remaining on the committed lease term be exited two years ahead of expiry, the provision
would reduce by £1m.
Annual report and accounts 2018 Mitchells & Butlers plc
121
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 3 – Operating assets and liabilities continued
3.4 Goodwill and other intangible assets
Accounting policies
Business combinations and goodwill
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each acquisition is measured
at the aggregate of the fair values of assets given and liabilities incurred or assumed by the Group in exchange for control of the acquiree.
Acquisition-related costs are recognised in the income statement as incurred.
At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value at the acquisition date,
except that:
• deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance
with IAS 12 Income Taxes and IAS 19 Employee Benefits (revised) respectively; and
• assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued
Operations are measured in accordance with that standard.
Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the
acquisition date.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the
fair value of the acquirer’s previously held equity interest in the acquiree over the net of the identifiable assets acquired and the liabilities assumed at
the acquisition date. If, after reassessment, the net of the identifiable assets acquired and liabilities assumed at the acquisition date exceeds the sum
of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held
interest in the acquiree, the excess is recognised immediately in the income statement as a bargain purchase.
When the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration
arrangement, the contingent consideration is measured at its acquisition date fair value and included as part of the contingent consideration
transferred in a business combination. Changes in fair value of the contingent consideration that qualify as measurement period adjustments are
adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from
additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and
circumstances that existed at the acquisition date.
The subsequent accounting for changes in the fair value of contingent consideration that do not qualify as measurement period adjustments
depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not re-measured at subsequent
reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability
is re-measured at subsequent reporting dates, at fair value, with the corresponding gain or loss being recognised in the income statement.
When a business combination is achieved in stages, the Group’s previously-held interests in the acquired entity is re-measured to its acquisition
date fair value and the resulting gain or loss, if any, is recognised in the income statement. Amounts arising from interests in the acquiree prior
to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss, where such treatment
would be appropriate if that interest were disposed of.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group
reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement
period, or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the
acquisition date that, if known, would have affected the amounts recognised as of that date.
Goodwill is not amortised, but is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the
carrying value may be impaired. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected
to benefit from the synergies of the combination. The impairment review requires management to consider the recoverable value of the business
to which the goodwill relates, based on either the fair value less costs to sell or the value in use. Value in use calculations require management to
consider the net present value of future cash flows generated by the business to which the goodwill relates. Fair value less costs to sell is based
on management’s estimate of the net proceeds which could be generated through disposing of that business. If the recoverable amount of the
cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill
allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. An impairment
loss is recognised immediately in the income statement and is not subsequently reversed.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Computer software
Computer software and associated development costs, which are not an integral part of a related item of hardware, are capitalised as an intangible
asset and amortised on a straight-line basis over their useful life. The period of amortisation ranges between three and seven years with the
majority being five years.
122
Mitchells & Butlers plc Annual report and accounts 2018
Intangible assets
Intangible assets can be analysed as follows:
Cost
At 24 September 2016
Additions
At 30 September 2017
Additions
Disposals
At 29 September 2018
Accumulated amortisation and impairment
At 24 September 2016
Provided during the period
At 30 September 2017
Provided during the period
Disposals
At 29 September 2018
Net book value
At 29 September 2018
At 30 September 2017
At 24 September 2016
Goodwill
£m
Computer
software
£m
Total
£m
7
–
7
–
–
7
5
–
5
–
–
5
2
2
2
11
3
14
4
(2)
16
4
2
6
3
(2)
7
9
8
7
18
3
21
4
(2)
23
9
2
11
3
(2)
12
11
10
9
There are no intangible assets with indefinite useful lives. All amortisation charges have been expensed through operating costs.
Goodwill has been tested for impairment on a site-by-site basis using forecast cash flows, discounted by applying a pre-tax discount rate of 7.5%
(2017 7.0%). For the purposes of the calculation of the recoverable amount, the cash flow projections beyond the two year period include 0.0%
(2017 2.0%) growth per annum.
Annual report and accounts 2018 Mitchells & Butlers plc
123
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Notes to the financial statements
Section 3 – Operating assets and liabilities continued
3.5 Associates
Accounting policies
An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant
influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
The results, assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting, except when
the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations.
Under the equity method, an investment in an associate is accounted for using the equity method from the date on which the investee becomes
an associate. On acquisition of the investment in an associate, any excess of the cost of the investment over the Group’s share of the net fair value
of the identifiable assets and liabilities of the investee is recognised as goodwill, which is included within the carrying amount of the investment.
If after reassessment the Group’s share of the net fair value of the identifiable assets and liabilities are in excess of the cost of the investment,
this is recognised immediately in profit or loss in the period in which the investment is acquired.
The requirements of IAS 36 Impairment of Assets are applied to determine whether it is necessary to recognise any impairment loss with respect to
the Group’s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment
in accordance with IAS 36 as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs of disposal) with its
carrying amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is
recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases.
The Group discontinues the use of the equity method from the date when the investment ceases to be an associate, or when the investment
is classified as held for sale. When the Group retains an interest in the former associate and the retained interest is a financial asset, the Group
measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with IAS 39.
The difference between the carrying amount of the associate at the date the equity method was discontinued, and the fair value of any retained
interest and any proceeds from disposing of a part interest in the associate is included in the determination of the gain or loss on disposal of the
associate. In addition, the Group accounts for all amounts previously recognised in other comprehensive income in relation to that associate on
the same basis as would be required if that associate had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously
recognised in other comprehensive income by that associate would be reclassified to profit or loss on the disposal of the related assets or liabilities,
the Group reclassifies the gain or loss from equity to profit or loss when the equity method is discontinued.
When the Group reduces its ownership interest in an associate but the Group continues to use the equity method, the Group reclassifies to profit
or loss the proportion of the gain or loss that had previously been recognised in other comprehensive income relating to that reduction in ownership
interest if that gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities.
When a Group entity transacts with an associate of the Group, profits and losses resulting from the transactions with the associate are recognised
in the Group’s consolidated financial statements only to the extent of interests in the associate that are not related to the Group.
The nature of the activities of all of the Group’s associates is trading in pubs and restaurants, which are seen as complementing the Group’s operations
and contributing to the Group’s overall strategy.
Associates can be analysed as follows:
At 24 September 2016 and 30 September 2017
Acquisitions*
At 29 September 2018
£m
–
5
5
* Acquisitions in the period relate to the shares purchased in 3Sixty Restaurants Limited and Fatboy Pub Company Limited. Details of these associates are provided in note 5.2.
During the period, a put and call option agreement was entered into, which allows the Company to acquire the remaining 60% share capital of the
associate, 3Sixty Restaurants Limited, at any point in time after three years from the initial purchase date. The initial 40% investment was purchased
on 1 August 2018 for £4m. The current shareholders also have the option to sell the remaining 60% to the Company, subject to a number of conditions.
124
Mitchells & Butlers plc Annual report and accounts 2018
Notes to the financial statements
Section 4 – Capital structure and financing costs
4.1 Net debt
Accounting policy
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and in hand and other short-term highly liquid deposits with an original maturity at acquisition
of three months or less. Cash held on deposit with an original maturity at acquisition of more than three months is disclosed as other cash deposits.
In the cash flow statement, cash and cash equivalents are shown net of bank overdrafts that are repayable on demand.
Net debt
Cash and bank balances
Cash and cash equivalents
Other cash deposits
Securitised debt (note 4.2)
Liquidity facility (note 4.2)
Revolving credit facilities (note 4.2)
Derivatives hedging securitised debta (note 4.2)
2018
£m
122
122
120
(1,830)
(147)
–
47
(1,688)
2017
£m
147
147
120
(1,909)
(147)
(6)
45
(1,750)
a. Represents the element of the fair value of currency swaps hedging the balance sheet value of the Group’s US$ denominated A3N loan notes. This amount is disclosed separately to remove
the impact of exchange movements which are included in the securitised debt amount.
Movement in net debt
Net decrease in cash and cash equivalents
Add back cash flows in respect of other components of net debt:
Repayment of principal in respect of securitised debt
Net movement on unsecured revolving facilities
Decrease in net debt arising from cash flows
Movement in capitalised debt issue costs net of accrued interest
Decrease in net debt
Opening net debt
Closing net debt
The net debt movement for the 52 weeks ended 29 September 2018 is represented by:
2018
52 weeks
£m
(25)
82
6
63
(1)
62
(1,750)
(1,688)
2017
53 weeks
£m
(11)
77
25
91
(1)
90
(1,840)
(1,750)
Cash and cash equivalents
Other cash deposits
Securitised debt*
Liquidity facility*
Revolving credit facilities*
Derivatives hedging securitised debt*
Net debt
* Liabilities arising from financing activities.
At
30 September
2017
£m
147
120
(1,909)
(147)
(6)
45
(1,750)
Cash flow
movements
in the period
£m
(25)
–
82
–
6
–
63
Non-cash
movements
in the period
£m
–
–
(3)
–
–
–
(3)
Fair value
movements
£m
–
–
–
–
–
2
2
At
29 September
2018
£m
122
120
(1,830)
(147)
–
47
(1,688)
The net debt movement for the 53 weeks ended 30 September 2017 is represented by:
Cash and cash equivalents
Other cash deposits
Securitised debt*
Liquidity facility*
Revolving credit facilities*
Derivatives hedging securitised debt*
Net debt
* Liabilities arising from financing activities.
At
24 September
2016
£m
158
120
(1,995)
(147)
(31)
55
(1,840)
Cash flow
movements
in the period
£m
(11)
–
77
–
25
–
91
Non-cash
movements
in the period
£m
–
–
9
–
–
–
9
Fair value
movements
£m
–
–
–
–
–
(10)
(10)
At
30 September
2017
£m
147
120
(1,909)
(147)
(6)
45
(1,750)
Annual report and accounts 2018 Mitchells & Butlers plc
125
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 4 – Capital structure and financing costs continued
4.2 Borrowings
Accounting policy
Borrowings, which include the Group’s secured loan notes, are stated initially at fair value (normally the amount of the proceeds) net of issue costs.
Thereafter they are stated at amortised cost using an effective interest basis. Finance costs, which are the difference between the net proceeds
and the total amount of payments to be made in respect of the instruments, are allocated over the term of the debt using the effective interest
method. Borrowing costs are not attributed to the acquisition or construction of assets and therefore no costs are capitalised within property,
plant and equipment.
Borrowings can be analysed as follows:
Current
Securitised debta,b
Liquidity facility
Unsecured revolving credit facilities
Total current
Non-current
Securitised debta,b
Total borrowings
a. Further details of the assets pledged as security against the securitised debt are given on page 117.
b. Stated net of deferred issue costs.
Analysis by year of repayment
Due within one year or on demand
Due between one and two years
Due between two and five years
Due after five years
Total borrowings
2018
£m
86
147
–
233
2017
£m
82
147
6
235
1,744
1,977
1,827
2,062
2018
£m
233
142
328
1,274
1,977
2017
£m
235
130
307
1,390
2,062
Securitised debt
On 13 November 2003, the Group refinanced its debt by raising £1,900m through a securitisation of the majority of its UK pubs and restaurants owned
by Mitchells & Butlers Retail Limited (‘MAB Retail’). On 15 September 2006 the Group completed a further debt (‘tap’) issue to borrow an additional
£655m and refinance £450m of existing debt at lower cost.
The loan notes consist of 10 tranches as follows:
Tranche
A1N
A2
A3N
A4
AB
B1
B2
C1
C2
D1
Initial
principal
borrowed
£m
200
550
250
170
325
350
350
200
50
110
2,555
Principal
repayment
period
(all by instalments)
2011 to 2028
2003 to 2028
2011 to 2028
2016 to 2028
2020 to 2032
2003 to 2023
2015 to 2028
2029 to 2030
2033 to 2034
2034 to 2036
Interest
Floating
Fixed–5.57%
Floating
Floating
Floating
Fixed–5.97%
Fixed–6.01%
Fixed–6.47%
Floating
Floating
Principal outstanding
Effective
interest
rate
%
6.21b
6.01
6.29b
5.97b
6.28b
6.12
6.12
6.56
6.47b
6.68b
29 September
2018
£m
131
240
165c
150
325
102
312
200
50
110
1,785
30 September
2017
£m
142
258
177c
159
325
119
327
200
50
110
1,867
Expected
WALa
6 years
6 years
6 years
6 years
10 years
3 years
7 years
11 years
15 years
17 years
a. Expected weighted average life (WAL) assumes no early redemption in respect of any loan notes.
b. After the effect of interest rate swaps.
c. A3N notes are US$ notes which are shown as translated to sterling at the hedged swap rate. Values at the period end spot rate are £212m (2017 £222m). Therefore the exchange difference
on the A3N notes is £47m (2017 £45m).
126
Mitchells & Butlers plc Annual report and accounts 2018
The notes are secured on the majority of the Group’s property and future income streams therefrom. All of the floating rate notes are hedged using
interest rate swaps which fix the interest rate payable.
Interest and margin is payable on the floating rate notes as follows:
Tranche
A1N
A3N
A4
AB
C2
D1
Interest
3 month LIBOR
3 month US$ LIBOR
3 month LIBOR
3 month LIBOR
3 month LIBOR
3 month LIBOR
Margin
0.45%
0.45%
0.58%
0.60%
1.88%
2.13%
The overall cash interest rate payable on the loan notes is 6.2% (2017 6.1%) after taking account of interest rate hedging and the cost of the provision
of a financial guarantee provided by Ambac in respect of the Class A and AB notes.
The securitisation is governed by various covenants, warranties and events of default, many of which apply to Mitchells & Butlers Retail Limited,
the Group’s main operating subsidiary. These include covenants regarding the maintenance and disposal of securitised properties and restrictions
on its ability to move cash, by way of dividends for example, to other Group companies. At 29 September 2018, Mitchells & Butlers Retail Limited had
cash and cash equivalents of £54m (2017 £97m). Of this amount £1m (2017 £1m), representing disposal proceeds, was held on deposit in an account
over which there are a number of restrictions. The use of this cash requires the approval of the securitisation trustee and may only be used for certain
specified purposes such as capital enhancement expenditure and business acquisitions.
The carrying value of the securitised debt in the Group balance sheet is analysed as follows:
Principal outstanding at beginning of period
Principal repaid during the period
Exchange on translation of dollar loan notes
Principal outstanding at end of period
Deferred issue costs
Accrued interest
Carrying value at end of period
2018
£m
1,911
(82)
3
1,832
(5)
3
1,830
2017
£m
1,998
(77)
(10)
1,911
(6)
4
1,909
Liquidity facility
Under the terms of the securitisation, the Group holds a liquidity facility of £295m provided by two counterparties. As a result of the decrease in credit
rating of one of the counterparties, the Group was obliged to draw that counterparty’s portion of the facility during the 52 weeks ended 27 September
2014. The amount drawn at 29 September 2018 is £147m (2017 £147m). These funds are charged under the terms of the securitisation and are not
available for use in the wider Group.
The facility, which is not available for any other purpose, is sized to cover 18 months’ debt service.
Unsecured revolving credit facilities
The Group holds three unsecured committed revolving credit facilities of £50m each, and uncommitted revolving credit facilities of £15m, available
for general corporate purposes. The amount drawn at 29 September 2018 is £nil (2017 £6m). All committed facilities expire on 31 December 2020.
4.3 Finance costs and revenue
Finance costs
Interest on securitised debt
Interest on other borrowings
Unwinding of discount on provisions (note 3.3)
Total finance costs
Finance revenue
Interest receivable – cash
Net pensions finance charge (note 4.5)
2018
52 weeks
£m
2017
53 weeks
£m
(114)
(4)
(1)
(119)
1
(7)
(120)
(4)
(1)
(125)
1
(7)
Annual report and accounts 2018 Mitchells & Butlers plc
127
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 4 – Capital structure and financing costs continued
4.4 Financial instruments
Accounting policies
Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions
of the instrument.
Financial assets
All financial assets are recognised or derecognised on a trade date where the purchase or sale of a financial asset is under a contract whose terms
require delivery of the financial asset within the timeframe established by the market concerned. Financial assets are initially measured at fair value,
plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value.
Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (FVTPL); derivative
instruments in designated hedge accounting relationships; ‘held-to-maturity’ investments; ‘available-for-sale’ (AFS) financial assets; and ‘loans
and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired
where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated
future cash flows of the instrument have been affected.
For certain categories of financial assets, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed
for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of
collecting payments, an increase in the number of delayed payments in the portfolio past the agreed credit period, as well as observable changes
in national or local economic conditions that correlate with default on receivables.
For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present
value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables,
where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectable, it is written
off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account.
Changes in the carrying amount of the allowance account are recognised in profit or loss.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after
the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount
of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not
been recognised.
Financial liabilities
Financial liabilities are classified as either ‘borrowings at amortised cost’ or ‘other financial liabilities’.
The borrowings accounting policy is provided in note 4.2. Other financial liabilities are initially measured at fair value, net of transaction costs.
Derecognition of financial assets and liabilities
The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial
asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group does not retain substantially all the risks and
rewards of ownership but continues to control a transferred asset, the Group recognises its retained interest in the asset and an associated liability
for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group
continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.
The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or expired. The difference
between the carrying amount of the financial liability discharged and the consideration paid and payable is recognised in profit or loss.
Effective interest method
The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating finance charges over the relevant
period. The effective interest rate is the rate that exactly discounts estimated future cash flows (including all fees and points paid or received that
form an integral part of the effective interest rate, transaction costs and other premiums or discounts) over the expected life of the debt instrument,
or where appropriate, a shorter period, to the net carrying amount on initial recognition. Finance charges are recognised on an effective interest
basis for all debt instruments.
Derivative financial instruments and hedge accounting
The Group uses interest rate and currency swap contracts to hedge its exposure to changes in interest rates and exchange rates. These contracts
are designated as cash flow hedges and hedge accounting is applied where the necessary criteria under IAS 39 Financial Instruments: Recognition
and Measurement are met. Derivative financial instruments are not used for trading or speculative purposes.
Derivative financial instruments are initially measured at fair value on the contract date, and are re-measured to fair value at subsequent reporting
dates. Fair value is calculated as the present value of the estimated future cash flows at a rate that reflects the credit risk of various counterparties.
Changes in the fair value of derivative instruments that are designated and effective as hedges of highly probable future cash flows are recognised
in equity. The cumulative gain or loss is transferred from equity and recognised in the income statement at the same time as the hedged transaction
affects profit or loss. The ineffective part of any gain or loss is recognised in the income statement immediately.
128
Mitchells & Butlers plc Annual report and accounts 2018
Movements in the fair value of derivative instruments which do not qualify for hedge accounting are recognised in the income statement immediately.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or no longer qualifies for hedge accounting.
At that point, the cumulative gain or loss in equity remains in equity and is recognised in accordance with the above policy when the transaction
affects profit or loss. If the hedged transaction is no longer expected to occur, the cumulative gain or loss recognised in equity is recognised in
the income statement immediately.
Financial risk management
Financial risk is managed by the Group’s Treasury function. The Group’s Treasury function is governed by a Board Approved Treasury Policy
Statement which details the key objectives and policies for the Group’s treasury management. The Treasury Committee ensures that the Treasury
Policy is adhered to, monitors its operation and agrees appropriate strategies for recommendation to the Board. The Treasury Policy Statement is
reviewed annually, with recommendations for change made to the Board, as appropriate. The Group Treasury function is operated as a cost centre
and is the only area of the business permitted to transact treasury deals. It must also be consulted on other related matters such as the provision
of guarantees or the financial implications of contract terms.
An explanation of the Group’s financial instrument risk management objectives and strategies is set out below.
The main financial risks which impact the Group result from funding and liquidity risk, credit risk, capital risk and market risk, principally as a result
of changes in interest and currency rates. Derivative financial instruments, principally interest rate and foreign currency swaps, are used to manage
market risk. Derivative financial instruments are not used for trading or speculative purposes.
Funding and liquidity risk
In order to ensure that the Group’s long-term funding strategy is aligned with its strategic objectives, the Treasury Committee regularly assesses
the maturity profile of the Group’s debt, alongside the prevailing financial projections. This enables it to ensure that funding levels are appropriate
to support the Group’s plans.
The current funding arrangements of the Group consist of the securitised notes issued by Mitchells & Butlers Finance plc (and associated liquidity
facility) along with three committed unsecured revolving credit facilities of £50m each. The terms of the securitisation and the revolving credit facilities
contain various financial covenants. Compliance with these covenants is monitored by Group Treasury. The Group also has uncommitted revolving
credit facilities of £15m.
The Group prepares a rolling daily cash forecast covering a six week period and an annual cash forecast by period. These forecasts are reviewed
on a daily basis and are used to manage the investment and borrowing requirements of the Group. A combination of cash pooling and zero balancing
agreements are in place to ensure the optimum liquidity position is maintained. The Group maintains sufficient cash balances or committed facilities
outside the securitisation to ensure that it can meet its medium-term anticipated cash flow requirements.
The maturity table below details the contractual undiscounted cash flows (both principal and interest) for the Group’s financial liabilities, after taking
into account the effect of interest rate swaps.
29 September 2018a
Fixed rate: Securitised debtb
Floating rate: Liquidity facility
Trade and other payables
30 September 2017a
Fixed rate: Securitised debtb
Floating rate: Liquidity facility
Trade and other payables
a. Assumes no early redemption in respect of any loan notes.
b. Includes the impact of the cash flow hedges.
Within
one year
£m
One to
two years
£m
Two to
three years
£m
Three to
four years
£m
Four to
five years
£m
More than
five years
£m
Total
£m
(195)
(147)
(302)
(194)
(147)
(297)
(198)
–
–
(193)
–
–
(201)
–
–
(197)
–
–
(201)
–
–
(199)
–
–
(200)
–
–
(1,687)
–
–
(2,682)
(147)
(302)
(199)
–
–
(1,879)
–
–
(2,861)
(147)
(297)
Annual report and accounts 2018 Mitchells & Butlers plc
129
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 4 – Capital structure and financing costs continued
4.4 Financial instruments continued
Credit risk
The Group Treasury function enters into contracts with third parties in respect of derivative financial instruments for risk management purposes and
the investment of surplus funds. These activities expose the Group to credit risk against the counterparties. To mitigate this exposure, Group Treasury
operates policies that restrict the investment of surplus funds and the entering into of derivative transactions to counterparties that have a minimum
credit rating of ‘A’ (long-term) and ‘A1’/‘P1’/‘F1’ (short-term). Counterparties may also be required to post collateral with the Group, where their
credit rating falls below a predetermined level. The amount that can be invested or transacted at various ratings levels is restricted under the policy.
To minimise credit risk exposure against individual counterparties, investments and derivative transactions are entered into with a range of
counterparties. The Group Treasury function reviews credit ratings, as published by Moody’s, Standard & Poor’s and Fitch Ratings, current exposure
levels and the maximum permitted exposure at given credit ratings, for each counterparty on a daily basis. Any exceptions are required to be formally
reported to the Treasury Committee on a four-weekly basis.
Included in other receivables are amounts due from certain Group suppliers. Included in trade and other payables at the period end are amounts
due to some of these suppliers. This reduces the Group’s credit exposure.
The Group’s credit exposure at the balance sheet date was:
Cash and cash equivalents
Other cash deposits
Trade receivables
Other receivables
Derivatives
2018
£m
122
120
7
14
48
2017
£m
147
120
5
15
43
Capital management
The Group’s capital base is comprised of its net debt (analysed in note 4.1) plus total equity (disclosed on the face of the Group balance sheet).
The objective is to maintain a capital base which is sufficiently strong to support the ongoing development of the business as a going concern,
including the amenity, and cash flow generation of the pub estate. By keeping debt and headroom against its debt facilities at an appropriate level,
the Group ensures that it maintains a strong credit position, whilst maximising value for shareholders and adhering to its covenants and other
restrictions associated with its debt (see note 4.2). In managing its capital structure, from time to time the Group may realise value from non-core assets,
buy back or issue new shares, initiate and vary its dividend payments and seek to vary or accelerate debt repayments. The Group’s policy is to ensure
that the maturity of its debt profile supports its strategic objectives. The Board considers the latest covenant compliance, headroom projections and
projected balance sheet positions periodically throughout the year, based on the advice of the Treasury Committee which meets on a four-weekly
basis. The Treasury Committee is chaired by the Group Treasurer and monitors Treasury performance and compliance with Board-approved policies.
The Group Finance Director is also a member of the Committee.
Total capital at the balance sheet date is as follows:
Net debt (note 4.1)
Total equity
Total capital
2018
£m
1,688
1,769
3,457
2017
£m
1,750
1,626
3,376
Market risk
The Group is exposed to the risk that the fair value of future cash flows of its financial instruments will fluctuate because of changes in market prices.
Market risk comprises foreign currency and interest rate risk.
Foreign currency risk
The Group faces currency risk in two main areas:
At issuance of the Class A3N floating rate notes, the Group entered into a cross currency interest rate swap to manage the foreign currency exposure
resulting from both the US$ principal and initial interest elements of the notes. The A3N notes have a carrying value of £212m (2017 £222m) and form
part of the securitised debt (see note 4.2).
Sensitivity analysis
Further to the step-up on the A3N notes on 15 December 2010, the Group has additional foreign currency exposure as a result of the increase in US$
finance costs. A movement of 10% in the US$ exchange rate would have a £nil (2017 £nil) impact on the reported Group profit and a £21m (2017 £22m)
impact on the reported Group net assets.
The Group has no significant profit and loss exposure as a result of retranslating monetary assets and liabilities at different exchange rates. As the Group
is predominantly UK based and acquires the majority of its supplies in sterling, it has no significant direct currency exposure from its operations.
130
Mitchells & Butlers plc Annual report and accounts 2018
Interest rate risk
The Group has a mixture of fixed and floating interest rate debt instruments and manages the variability in cash flows resulting from changes in interest
rates by using derivative financial instruments. Where the necessary criteria are met, the Group minimises the volatility in its financial statements through
the adoption of the hedge accounting provisions permitted under IAS 39. The interest rate exposure resulting from the Group’s £1.9bn securitisation
is largely fixed, either as a result of the notes themselves being issued at fixed interest rates, or through a combination of floating rate notes against
which effective interest rate swaps are held, which are eligible for hedge accounting.
Sensitivity analysis
The sensitivity analysis below has been calculated based on the Group’s exposure to interest rates for both derivative and non-derivative instruments
as at the balance sheet date. A 1% movement is used when reporting interest rate risk internally to key management personnel and represents
management’s assessment of the reasonably possible change in interest rates.
For floating rate liabilities, which are not hedged by derivative instruments, the analysis has been prepared assuming that the liability outstanding
at the balance sheet date was outstanding for the whole period. For interest income the analysis assumes that cash and cash equivalents and other
cash deposits that were held in interest bearing accounts at the balance sheet date were held for the whole period.
The Group’s sensitivity to a 1% movement in interest rates is detailed below:
Interest incomea
Interest expenseb
Profit impact
Derivative financial instruments (fair values)c
Total equity
2018
£m
2
(1)
1
76
77
2017
£m
2
(2)
–
86
86
a. Represents interest income earned on cash and cash equivalents and other cash deposits (these are defined in note 4.1).
b. The element of interest expense which is not matched by payments and receipts under cash flow hedges which would otherwise offset the interest rate exposure of the Group.
c. The impact on total equity from movements in the fair value of cash flow hedges.
Derivative financial instruments
Cash flow hedges
Changes in cash flow hedge fair values are recognised in the hedging reserve in equity to the extent that the hedges are effective. The cash flow
hedges detailed below have been assessed as being highly effective during the period and are expected to remain highly effective over the remaining
contract lives.
During the period a gain of £16m (2017 gain of £60m) on cash flow hedges was recognised in equity. A loss of £34m (2017 loss of £53m) was recycled
from equity and included in the Group income statement for the period.
Cash flow hedges – securitised borrowings
At 29 September 2018, the Group held ten (2017 ten) interest rate swap contracts with a nominal value of £931m (2017 £963m), designated as a hedge of
the cash flow interest rate risk of £931m (2017 £963m) of the Group’s floating rate borrowings, comprising the A1N, A3N, A4, AB, C2 and D1 loan notes.
The cash flows on these contracts occur quarterly, receiving a floating rate of interest based on LIBOR and paying a fixed rate of 4.8483% (2017
4.8558%). The contract maturity dates match those of the hedged item. The ten interest rate swaps are held on the balance sheet at fair market value,
which is a liability of £244m (2017 £292m).
At 29 September 2018 the Group held one (2017 one) cross currency interest rate swap contract, with a nominal value of £165m (2017 £177m),
designated as a hedge of the cash flow interest rate and currency risk of the Group’s A3N floating rate US$276m (2017 US$297m) borrowings.
The cross currency interest rate swap is held on the balance sheet at a fair value asset of £48m (2017 £43m).
The cash flows on this contract occur quarterly, receiving a floating rate of interest based on US$ LIBOR and paying a floating rate of interest at LIBOR
in sterling.
The cash flows arising from interest rate swap positions on the same counterparty may be settled as a net position. The cross currency interest rate
swap is held under a separate agreement and cash movements for this instrument are settled individually.
Annual report and accounts 2018 Mitchells & Butlers plc
131
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 4 – Capital structure and financing costs continued
4.4 Financial instruments continued
Fair values of derivative financial instruments
The fair values of the derivative financial instruments were measured at 29 September 2018 and may be subject to material movements in the period
subsequent to the balance sheet date. The fair values of the derivative financial instruments are reflected on the balance sheet as follows:
Cash flow hedges:
– Interest rate swaps
– Cross currency swap
29 September 2018
30 September 2017
Derivative financial instruments – fair value
Non-current
assets
£m
Current
assets
£m
Current
liabilities
£m
Non-current
liabilities
£m
–
44
44
41
–
4
4
2
(37)
–
(37)
(43)
(207)
–
(207)
(249)
Total
£m
(244)
48
(196)
(249)
Reconciliation of movements in derivative values
The table below details changes in the Group’s derivatives, including both cash and non-cash changes where appropriate. Changes in the Group’s
borrowings are disclosed in the net debt reconciliation in note 4.1.
Cash flow hedges
Total derivatives
At
24 September
2016
£m
(351)
(351)
Fair value
adjustments
£m
102
102
At
30 September
2017
£m
(249)
(249)
Fair value
adjustments
£m
53
53
At
29 September
2018
£m
(196)
(196)
The fair value and carrying value of financial assets and liabilities by category is as follows:
Financial assets:
– Cash and cash equivalents
– Other cash deposits
– Derivative instruments in designated hedge accounting relationships
– Loans and receivables
Financial liabilities:
– Borrowings at amortised cost
– Derivative instruments in designated hedge accounting relationships
– Trading and other payables
2018
2017
Book
value
£m
122
120
48
21
Fair
value
£m
122
120
48
21
(1,977)
(244)
(302)
(2,212)
(1,939)
(244)
(302)
(2,174)
Book
value
£m
147
120
43
20
(2,062)
(292)
(297)
(2,321)
Fair
value
£m
147
120
43
20
(2,076)
(292)
(297)
(2,335)
The various tranches of the securitised debt have been valued using period end quoted offer prices. As the securitised debt is traded on an active
market, the market value represents the fair value of this debt. The fair value of interest rate and currency swaps is the estimated amount which the
Group could expect to pay or receive on termination of the agreements. These amounts are based on quotations from counterparties which approximate
to their fair market value and take into consideration interest and exchange rates prevailing at the balance sheet date. Other financial assets and
liabilities are either short-term in nature or their book values approximate to fair values.
132
Mitchells & Butlers plc Annual report and accounts 2018
Fair value of financial instruments
The fair value of the Group’s derivative financial instruments is calculated by discounting the expected future cash flows of each instrument at an
appropriate discount rate to a ‘mark to market’ position and then adjusting this to reflect any non-performance risk associated with the counterparties
to the instrument.
IFRS 13 Financial Instruments requires the Group’s derivative financial instruments to be disclosed at fair value and categorised in three levels according
to the inputs used in the calculation of their fair value:
• Level 1 instruments use quoted prices as the input to fair value calculations;
• Level 2 instruments use inputs, other than quoted prices, that are observable either directly or indirectly;
• Level 3 instruments use inputs that are unobservable.
The table below sets out the valuation basis of financial instruments held at fair value by the Group:
Fair value at 29 September 2018
Financial assets:
Currency swaps
Financial liabilities:
Interest rate swaps
Fair value at 30 September 2017
Financial assets:
Currency swaps
Financial liabilities:
Interest rate swaps
4.5 Pensions
Level 1
£m
Level 2
£m
Level 3
£m
–
–
–
Level 1
£m
–
–
–
48
(244)
(196)
Level 2
£m
43
(292)
(249)
–
–
–
Level 3
£m
–
–
–
Total
£m
48
(244)
(196)
Total
£m
43
(292)
(249)
Accounting policy
Retirement and death benefits are provided for eligible employees in the United Kingdom principally by the Mitchells & Butlers Pension Plan (MABPP)
and the Mitchells & Butlers Executive Pension Plan (MABEPP). These plans are funded, HMRC approved, occupational pension schemes with
defined contribution and defined benefit sections. The defined benefit section of the plans is now closed to future service accrual. The defined benefit
liability relates to these funded plans, together with an unfunded unapproved pension arrangement (the Executive Top-Up Scheme, or MABETUS)
in respect of certain MABEPP members. The assets of the plans are held in self-administered trust funds separate from the Company’s assets.
In addition, Mitchells & Butlers plc also provides a workplace pension plan in line with the Workplace Pensions Reform Regulations. This automatically
enrols all eligible workers into a Qualifying Workplace Pension Plan.
As the Company do not have an unconditional right to recover any surplus from the pension plans, IFRIC 14 requires the minimum funding liability
to be recognised, where it is in excess of the actuarial liability. As such, the total pension liability recognised in the balance sheet in respect of the
Group’s defined benefit arrangements is the greater of the minimum funding requirements, calculated as the present value of the agreed schedule
of contributions, and the actuarial calculated liability. The actuarial liability is the present value of the defined benefit obligation, less the fair value
of the scheme assets. The cost of providing benefits is determined using the projected unit credit method as determined annually by qualified
actuaries. This is based on a number of financial assumptions and estimates, the determination of which may be significant to the balance sheet
valuation in the event that this reflects a greater deficit than that suggested by the schedule of minimum contributions.
There is no current service cost as all defined benefit schemes are closed to future accrual. The net pension finance charge, calculated by applying
the discount rate to the pension deficit or surplus at the beginning of the period, is shown within finance income or expense. The administration
costs of the scheme are recognised within operating costs in the income statement.
Remeasurement comprising actuarial gains and losses, the effect of minimum funding requirements, and the return on scheme assets are
recognised immediately in the balance sheet with a charge or credit to the statement of comprehensive income in the period in which they occur.
Curtailments and settlements relating to the Group’s defined benefit plan are recognised in the income statement in the period in which the
curtailment or settlement occurs.
For the defined contribution arrangements, the charge against profit is equal to the amount of contributions payable for that period.
Critical accounting judgements
The calculation of the defined benefit liability requires management judgement to select an appropriate high-quality corporate bond to determine
the discount rate. The most significant criteria considered for the selection of bonds include the rating of the bonds and the currency and estimated
term of the retirement benefit liabilities.
In addition, management have used judgement to determine the applicable rate of inflation to apply to pension increases in calculating the defined
benefit obligation. Details of this are given below.
Annual report and accounts 2018 Mitchells & Butlers plc
133
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 4 – Capital structure and financing costs continued
4.5 Pensions continued
Measurement of scheme assets and liabilities
Actuarial valuation
The actuarial valuations used for IAS 19 (revised) purposes are based on the results of the latest full actuarial valuation carried out at 31 March 2016
and updated by the schemes’ independent qualified actuaries to 29 September 2018. Scheme assets are stated at market value at 29 September 2018
and the liabilities of the schemes have been assessed as at the same date using the projected unit method. IAS 19 (revised) requires that the scheme
liabilities are discounted using market yields at the end of the period on high-quality corporate bonds.
In relation to the MABPP, the Trust Deed and Rules provide that it is a matter for the Company to determine the rate of inflation which should be
applied to pension increases for certain sections of the membership in excess of guaranteed minimum pensions and the Company has instructed the
Trustee to apply CPI (subject to certain caps) in respect of such increases. The Trustee believes that this power was incorrectly vested in the Company
in the Trust Deed and Rules of the MABPP in 1996 and, despite it being reflected in further versions, has made an application to court for those various
Trust Deeds and Rules to be rectified. It is the Board’s belief that the Company holds the power to fix such an inflation index and the Company is
therefore contesting that application. The hearing is expected to be held in late 2019. The actuarial surplus as determined under IAS 19 (revised) has
continued to be calculated using RPI, pending final resolution of the matter. The applicable rate of CPI at 29 September 2018 is 2.2%. Leaving all other
principal financial assumptions constant, the impact of this change on the defined benefit obligation as measured under IAS 19 (revised) is estimated to
be £150m. However (under IFRIC 14) an additional liability is recognised such that the total balance sheet position reflects the schedule of contributions
agreed by the Company, extending to 2023. As such should the Company be successful in contesting the application there will be no necessary
movement in the total balance sheet position.
The principal financial assumptions have been updated to reflect changes in market conditions in the period and are as follows:
Discount rate*
Pensions increases – RPI max 5%
Inflation rate – RPI
2018
2017
Main plan
2.9%
3.0%
3.2%
Executive
plan
2.9%
3.0%
3.2%
Main plan
2.7%
3.1%
3.2%
Executive
plan
2.7%
3.1%
3.2%
*
The discount rate is based on a yield curve for AA corporate rated bonds which are consistent with the currency and estimated term of retirement benefit liabilities.
The mortality assumptions were reviewed following the 2016 actuarial valuation. A summary of the average life expectancies assumed is as follows:
Male member aged 65 (current life expectancy)
Male member aged 45 (life expectancy at 65)
Female member aged 65 (current life expectancy)
Female member aged 45 (life expectancy at 65)
2018
2017
Executive
Main plan
years
21.2
23.0
23.6
25.5
plan
years
23.9
25.6
26.0
27.9
Main plan
years
21.2
22.9
23.6
25.4
Executive
plan
years
23.8
25.5
25.9
27.8
Minimum funding requirements
The results of the 2016 actuarial valuation showed a funding deficit of £451m, using a more prudent basis to discount the scheme liabilities than is
required by IAS 19 (revised). The Company has subsequently agreed recovery plans for both the Executive and Main schemes in order to close the
funding deficit in respect of its pension liabilities. The new recovery plans show an unchanged level of cash contributions with no extension to the
agreed payment term (£45m per annum indexed with RPI from 1 April 2016 subject to a minimum increase of 0% and maximum of 5%, until 31 March
2023). Under IFRIC 14, an additional liability is recognised, such that the overall pension liability at the period end reflects the schedule of contributions
in relation to a minimum funding requirement, should this be higher than the actuarial deficit.
The employer contributions expected to be paid during the financial period ending 28 September 2019 amount to £49m.
In 2024, an additional payment of £13m will be made into escrow, should such further funding be required at that time. This is a contingent liability
and is not reflected in the pensions liability as it is not committed.
134
Mitchells & Butlers plc Annual report and accounts 2018
Sensitivity to changes in actuarial assumptions
The sensitivities regarding principal actuarial assumptions, assessed in isolation, that have been used to measure the scheme liabilities are set out below.
0.1% increase in discount rate
0.1% increase in inflation rate
Additional one-year decrease to life expectancy
Increase or (decrease)
in actuarial surplus
Decrease or (increase)
in total pension liability
2018
£m
37
(34)
72
2017
£m
41
(36)
77
2018
£m
1
(1)
1
2017
£m
1
(1)
1
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the
changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated. In presenting the above sensitivity
analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting
period, which is the same as that applied in calculating the defined benefit obligation liability recognised in the statement of financial position.
There have been no changes in the methods and assumptions used in preparing the sensitivity analysis from prior periods.
Principal risks and assumptions
The defined benefit schemes are not exposed to any unusual, entity specific or scheme specific risks but there are general risks:
Inflation – the majority of the plans’ obligations are linked to inflation. Higher inflation will lead to increased liabilities which is partially offset by the plans
holding inflation linked gilts and other inflation linked assets.
Interest rate – The plans’ liabilities are determined using discount rates derived from yields on AA-rated corporate bonds. A decrease in corporate
bond yields will increase plan liabilities though this will be partially offset by an increase in the value of the bonds held by the plans.
Mortality – The majority of the obligations are to provide benefits for the life of the members and their partners, so any increase in life expectancy
will result in an increase in the plans’ liabilities.
Asset returns – Assets held by the pension plans are invested in a diversified portfolio of equities, bonds and other assets. Volatility in asset values
will lead to movements in the net deficit/surplus reported in the consolidated balance sheet for the plans which in addition will also impact the pension
finance charge in the consolidated income statement.
Amounts recognised in respect of defined benefit schemes
The following amounts relating to the Group’s defined benefit and defined contribution arrangements have been recognised in the Group income
statement and Group statement of comprehensive income:
Group income statement
Operating profit:
Employer contributions (defined contribution plans)
Administrative costs (defined benefit plans)
Charge to operating profit before adjusted items
Finance costs:
Net pensions finance income/(charge) on actuarial surplus/(deficit)
Additional pensions finance charge due to minimum funding
Net finance charge in respect of pensions
Total charge
Group statement of comprehensive income
Return on scheme assets and effects of changes in assumptions
Movement in pension liability recognised due to minimum funding
Remeasurement of pension liability
2018
52 weeks
£m
2017
53 weeks
£m
(8)
(2)
(10)
5
(12)
(7)
(17)
(7)
(2)
(9)
(4)
(3)
(7)
(16)
2018
52 weeks
£m
114
(109)
5
2017
53 weeks
£m
337
(329)
8
Annual report and accounts 2018 Mitchells & Butlers plc
135
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 4 – Capital structure and financing costs continued
4.5 Pensions continued
Group balance sheet
Fair value of scheme assets
Present value of scheme liabilities
Actuarial surplus in the schemes
Additional liability recognised due to minimum funding
Total pension liabilitya
Associated deferred tax asset
a. The total pension liability of £249m (2017 £292m) is represented by a £49m current liability (2017 £47m) and a £200m non-current liability (2017 £245m).
The movement in the fair value of the schemes’ assets in the period is as follows:
Fair value of scheme assets at beginning of period
Interest income
Remeasurement gain:
– Return on scheme assets (excluding amounts included in net finance charge)
Additional employer contributions
Benefits paid
Administration costs
At end of period
Changes in the present value of defined benefit obligations are as follows:
Present value of defined benefit obligation at beginning of period
Interest cost
Benefits paid
Remeasurement losses:
– Effect of changes in demographic assumptions
– Effect of changes in financial assumptions
– Effect of experience adjustments
At end of perioda
2018
£m
2,404
(2,068)
336
(585)
(249)
43
Scheme assets
2018
£m
2,390
63
23
48
(118)
(2)
2,404
2017
£m
2,390
(2,219)
171
(463)
(292)
50
2017
£m
2,381
53
3
46
(91)
(2)
2,390
Defined benefit obligation
2018
£m
(2,219)
(58)
118
–
100
(9)
(2,068)
a. The defined benefit obligation comprises £33m (2017 £34m) relating to the MABETUS unfunded plan and £2,035m (2017 £2,185m) relating to the funded plans.
The weighted average duration of the defined benefit obligation is 20 years (2017 20 years).
The major categories and fair values of assets of the MABPP and MABEPP schemes at the end of the reporting period are as follows:
Cash and equivalents
Equity instruments
Debt instruments:
– Bonds
– Real estate debt
– Infrastructure debt
– Secured income debt
– Absolute return bond funds
– Gilt repurchase transactions
Gold
Forward foreign exchange contracts
Fair value of assets
136
Mitchells & Butlers plc Annual report and accounts 2018
2018
£m
111
626
1,513
76
95
80
202
(303)
8
(4)
2,404
2017
£m
(2,587)
(57)
91
139
164
31
(2,219)
2017
£m
18
730
1,512
90
73
–
200
(245)
4
8
2,390
The actual investment return achieved on the scheme assets over the period was 4.3% (2017 2.2%), which represented a gain of £86m (2017 £56m).
Virtually all equity instruments, bonds and gold have quoted prices in active markets and are classified as Level 1 instruments. Absolute return bond
funds, gilt repurchase transactions and forward foreign exchange contracts are classified as Level 2 instruments. Real estate debt and infrastructure
debt are classified as Level 3 instruments.
In the 52 weeks ended 29 September 2018 the Group paid £7m (2017 £7m) in respect of the defined contribution arrangements, with an additional
£2m (2017 £1m) outstanding as at the period end.
At 29 September 2018 the MABPP owed £1m (2017 £2m) to the Group in respect of expenses paid on its behalf. This amount is included in other
receivables in note 3.2.
4.6 Share-based payments
Accounting policy
The Group operates a number of equity-settled share-based compensation plans, whereby, subject to meeting any relevant conditions, employees
are awarded shares or rights over shares. The cost of such awards is measured at fair value, excluding the effect of non market-based vesting
conditions, on the date of grant. The expense is recognised on a straight-line basis over the vesting period and is adjusted for the estimated effect
of non market-based vesting conditions and forfeitures, on the number of shares that will eventually vest due to employees leaving the employment
of the Group. Fair values are calculated using either the Black-Scholes, Binomial or Monte Carlo simulation models depending on the conditions
attached to the particular share scheme.
SAYE share options granted to employees are treated as cancelled when employees cease to contribute to the scheme. This results in an accelerated
recognition of the expense that would have arisen over the remainder of the original vesting period.
Schemes in operation
The net charge recognised for share-based payments in the period was £3m (2017 £2m).
The Group had four equity-settled share schemes (2017 four) in operation during the period; the Performance Restricted Share Plan (PRSP);
Sharesave Plan; Share Incentive Plan (SIP) and Short Term Deferred Incentive Plan (STDIP).
The vesting of all awards or options is generally dependent upon participants remaining in the employment of a participating company during
the vesting period. Further details on each scheme are provided in the Report on Directors’ remuneration on pages 68 to 91.
The following tables set out weighted average information about how the fair value of each option grant was calculated:
Valuation model
Weighted average share price
Exercise pricea
Expected dividend yieldb
Risk-free interest rate
Volatilityc
Expected life (years)d
Weighted average fair value of grants
during the period
2018
Performance
Restricted
Share Plan
Monte Carlo and
Sharesave
Plan
Binomial Black-Scholes
264.2p
246.0p
1.97%
0.86%
31.0%
4.0
259.2p
–
–
0.68%
32.5%
2.4
2017
Performance
Restricted
Share Plan
Monte Carlo and
Binomial
246.1p
–
–
0.34%
32.0%
3.5
Sharesave
Plan
Black-Scholes
231.0p
221.0p
2.94%
0.31%
29.43%
4.10
224.2
61.3
182.4
42.8
a. The exercise price for the Performance Restricted Share Plan is £1 per participating employee.
b. The expected dividend yield for the Sharesave Plan has used historical dividend information. For details on the Group’s current dividend policy refer to the Financial review on page 45.
The expected dividend yield for the Performance Restricted Share Plan options is zero as participants are entitled to Dividend Accrued Shares to the value of ordinary dividends paid
or payable during the vesting period.
c. The expected volatility is determined by calculating the historical volatility of the Company’s share price commensurate with the expected term of the options and share awards.
d. The expected life of the options represents the average length of time between grant date and exercise date.
The fair value of awards under the Short Term Deferred Incentive Plan and the Share Incentive Plan are equal to the share price on the date of award
as there is no price to be paid and employees are entitled to Dividend Accrued Shares to the value of ordinary dividends paid or payable during the
vesting period. The assumptions set out above are therefore not relevant to these schemes. The fair value of options granted under the Share
Incentive Plan during the period was 264.2p (2017 231.0p).
Annual report and accounts 2018 Mitchells & Butlers plc
137
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 4 – Capital structure and financing costs continued
4.6 Share-based payments continued
The tables below summarise the movements in outstanding options during the period.
Sharesave plan
Outstanding at the beginning of the period
Granted
Exercised
Forfeited
Expired
Outstanding at the end of the period
Exercisable at the end of the period
Number of shares
Weighted average
exercise price
2018
m
4.1
1.3
(0.1)
(0.8)
(0.4)
4.1
–
2017
m
3.6
1.8
(0.1)
(0.8)
(0.4)
4.1
0.5
2018
p
264.1
246.0
182.2
257.3
323.5
256.0
–
2017
p
297.0
221.0
249.0
296.8
302.6
264.1
291.1
The outstanding options for the SAYE scheme had an exercise price of between 221.0p and 362.0p (2017 between 182.0p and 362.0p) and
the weighted average remaining contract life was 2.8 years (2017 3.0 years). The number of forfeited shares in the period includes 545,646
(2017 615,998) cancellations.
SAYE options were exercised on a range of dates. The average share price through the period was 258.4p (2017 251.1p).
Share Incentive Plan
Outstanding at the beginning of the period
Granted
Exercised
Forfeited
Outstanding at the end of the period
Exercisable at the end of the period
Number of shares
2018
m
1.7
0.4
(0.2)
(0.1)
1.8
0.8
Options under the Share Incentive Plan are capable of remaining within the SIP trust indefinitely while participants continue to be employed.
Performance Restricted Share Plan
Outstanding at the beginning of the period
Granted
Forfeited
Expired
Outstanding at the end of the period
Exercisable at the end of the period
Number of shares
2018
m
5.2
2.2
(0.2)
(1.1)
6.1
–
2017
m
1.5
0.5
(0.2)
(0.1)
1.7
0.8
2017
m
4.1
2.1
(0.1)
(0.9)
5.2
–
The exercise price for the Performance Restricted Share Plan is £1 per participating employee, therefore the weighted average exercise price for these
options is £nil (2017 £nil).
Options outstanding at 29 September 2018 had an exercise price of £nil and a weighted average remaining contractual life of 3.2 years (2017 3.3 years).
138
Mitchells & Butlers plc Annual report and accounts 2018
4.7 Equity
Accounting policies
Own shares
The cost of own shares held in employee share trusts and in treasury are deducted from shareholders’ equity until the shares are cancelled,
reissued or disposed of. Where such shares are subsequently sold or reissued, the fair value of any consideration received is also included
in shareholders’ equity.
Dividends
Dividends proposed by the Board but unpaid at the period end are not recognised in the financial statements until they have been approved
by shareholders at the Annual General Meeting. Interim dividends are recognised when paid.
Scrip dividends are fully paid up from the share premium account. They are accounted for as an increase in share capital for the nominal value
of the shares issued, and a resulting reduction in share premium.
Called up share capital
Allotted, called up and fully paid
Ordinary shares of 813/24p each
At start of period
Share capital issueda
At end of period
2018
Number of shares
422,548,604
5,762,219
428,310,823
£m
36
1
37
2017
Number of shares
413,624,294
8,924,310
422,548,604
£m
35
1
36
a. Under the terms of the Company’s scrip dividend scheme, shareholders are able to elect to receive ordinary shares in place of both interim and final dividends. This has resulted in the issue
of 5,354,617 new fully paid ordinary shares in relation to the final dividend for the 53 weeks ended 30 September 2017 (2017 8,506,296). There was no interim dividend declared in the
current period. In addition, the Company issued 407,602 (2017 418,014) shares during the period under share option schemes for a consideration of £nil (2017 £nil).
All of the ordinary shares rank equally with respect to voting rights and rights to receive ordinary and special dividends. There are no restrictions
on the rights to transfer shares.
Details of options granted under the Group’s share schemes are contained in note 4.6.
Dividends
Declared and paid in the period
Final dividend of 5.0p per share
– 53 weeks ended 30 September 2017
Interim dividend of 2.5p per share
– 53 weeks ended 30 September 2017
Final dividend of 5.0p per share
– 52 weeks ended 24 September 2016
Cash
dividend
£m
2018
Settled
via scrip
£m
Total
dividend
£m
Cash
dividend
£m
2017
Settled
via scrip
£m
Total
dividend
£m
7
–
–
7
14
–
–
14
21
–
–
21
–
8
4
12
–
3
17
20
–
11
21
32
The final dividend of 5.0p per ordinary share declared in relation to the 53 weeks ended 30 September 2017 was approved at the Annual General
Meeting on 23 January 2018 and was paid to shareholders on 6 February 2018. Shareholders were able to elect to receive ordinary shares credited
as fully paid instead of the cash dividend under the terms of the Company’s scrip dividend scheme. Of the £21m final dividend, £14m was in the form
of the issue of ordinary shares to shareholders opting in to the scrip alternative. The market value per share at the date of payment was 264.4p per share,
resulting in the issue of 5 million new shares, fully paid up from the share premium account. The nominal value of the 5 million shares issued in relation
to the final scrip dividends is £1m.
Annual report and accounts 2018 Mitchells & Butlers plc
139
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Notes to the financial statements
Section 4 – Capital structure and financing costs continued
4.7 Equity continued
Share premium account
The share premium account represents amounts received in excess of the nominal value of shares on issue of new shares. Share premium of £1m
has been recognised on shares issued in the period (2017 £nil).
Capital redemption reserve
The capital redemption reserve movement arose on the repurchase and cancellation by the Company of ordinary shares during prior periods.
Revaluation reserve
The revaluation reserve represents the unrealised gain generated on revaluation of the property estate with effect from 29 September 2007.
It comprises the excess of the fair value of the estate over deemed cost, net of related deferred taxation.
Own shares held
Own shares held by the Group represent the shares in the Company held by the employee share trusts.
During the period, the employee share trusts acquired no shares (2017 nil) and subscribed for 296,144 (2017 353,025) shares at a cost of £nil (2017 £nil)
and released 159,956 (2017 188,586) shares to employees on the exercise of options and other share awards for a total consideration of £nil (2017 £nil).
The 1,885,130 shares held by the trusts at 29 September 2018 had a market value of £5m (30 September 2017 1,748,942 shares held had a market
value of £5m).
The Company has established two employee share trusts:
Share Incentive Plan (SIP) Trust
The SIP Trust was established in 2003 to purchase shares on behalf of employees participating in the Company’s Share Incentive Plan. Under this
scheme, eligible employees are awarded free shares which are normally held in trust for a holding period of at least three years. After five years the
shares may be transferred to or sold by the employee free of income tax and National Insurance contributions. The SIP Trust buys the shares in the
market or subscribes for newly issued shares with funds provided by the Company. During the holding period, dividends are paid directly to the
participating employees. At 29 September 2018, the trustees, Equiniti Share Plan Trustees Limited, held 1,847,623 (2017 1,698,880) shares in the
Company. Of these shares, 583,410 (2017 553,839) shares are unconditionally available to employees, 245,415 (2017 272,341) shares have been
conditionally awarded to employees, 982,143 (2017 842,954) shares have been awarded to employees but are still required to be held within the
SIP Trust and the remaining 36,655 (2017 29,746) shares are unallocated.
Employee Benefit Trust (EBT)
The EBT was established in 2003 in order to satisfy the exercise or vesting of existing and future share options and awards under the Executive Share
Option Plan, Performance Restricted Share Plan, Short Term Deferred Incentive Plan and the Sharesave Plan. The EBT purchases shares in the market
or subscribes for newly issued shares, using funds provided by the Company, based on expectations of future requirements. Dividends are waived
by the EBT. At 29 September 2018, the trustees, Sanne Fiduciary Services Limited, were holding 37,507 (2017 50,062) shares in the Company.
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged
future cash flows.
Translation reserve
The translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries.
Retained earnings
The Group’s main operating subsidiary, Mitchells & Butlers Retail Limited, had retained earnings under FRS 101 of £2,199m at 29 September 2018
(2017 £2,157m). Its ability to distribute these reserves by way of dividends is restricted by the securitisation covenants (see note 4.2).
140
Mitchells & Butlers plc Annual report and accounts 2018
Notes to the financial statements
Section 5 – Other notes
5.1 Related party transactions
Key management personnel
Employees of the Mitchells & Butlers plc Group who are members of the Board of Directors or the Executive Committee of Mitchells & Butlers plc
are deemed to be key management personnel. It is the Board who have responsibility for planning, directing and controlling the activities of the Group.
Compensation of key management personnel of the Group:
Short-term employee benefits
2018
52 weeks
£m
4
2017
53 weeks
£m
4
Movements in share options held by the Directors of Mitchells & Butlers plc are summarised in the Report on Directors’ remuneration.
5.2 Subsidiaries and associates
Subsidiaries
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.
Mitchells & Butlers plc is the beneficial owner of all of the equity share capital, either itself or through subsidiary undertakings, of the following companies:
Name of subsidiary
Principal operating subsidiaries
Mitchells & Butlers Retail Limited
Mitchells & Butlers Retail (No. 2) Limited
Ha Ha Bar & Grill Limited
Orchid Pubs & Dining Limited
ALEX Gaststätten Gesellschaft mbH & Co KG
Midco 1 Limited
Mitchells & Butlers (Property) Limited
Mitchells & Butlers Leisure Retail Limited
Mitchells & Butlers Germany GmbHa
Mitchells & Butlers Finance plc
Standard Commercial Property Developments Limited
Other subsidiaries
Mitchells & Butlers Holdings (No.2) Limiteda
Mitchells & Butlers Holdings Limited
Mitchells & Butlers Leisure Holdings Limited
Mitchells & Butlers Retail Holdings Limited
Old Kentucky Restaurants Limited
Bede Retail Investments Limited
Lastbrew Limited
Mitchells & Butlers (IP) Limited
Mitchells & Butlers Acquisition Company
Mitchells & Butlers Retail Property Limiteda
Mitchells and Butlers Healthcare Trustee Limited
Standard Commercial Property Investments Limited
Standard Commercial Property Securities Limited
Temple Circus Developments Limited
ALEX Gaststätten Immobiliengesellschaft mbH
ALL BAR ONE Gaststätten Betriebsgesellschaft mbH
ALEX Alsterpavillon Immobilien GmbH & Co KG
ALEX Alsterpavillon Management GmbH
ALEX Gaststätten Management GmbH
PLAN-BAR Gastronomie Einrichtungs GmbH
Browns Restaurant (Brighton) Limited
Browns Restaurant (Bristol) Limited
Browns Restaurant (Cambridge) Limited
Browns Restaurant (London) Limited
Browns Restaurant (Oxford) Limited
Country of incorporation
Country of operation
Nature of business
England and Wales
England and Wales
England and Wales
England and Wales
Germany
England and Wales
England and Wales
England and Wales
Germany
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Germany
Germany
Germany
Germany
Germany
Germany
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Germany
United Kingdom
United Kingdom
United Kingdom
Germany
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Germany
Germany
Germany
Germany
Germany
Germany
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Leisure retailing
Leisure retailing
Leisure retailing
Leisure retailing
Leisure retailing
Property leasing company
Property management
Service company
Service company
Finance company
Property development
Holding company
Holding company
Holding company
Holding company
Trademark ownership
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Healthcare trustee
Non-trading
Non-trading
Non-trading
Property management
Leisure retailing
Property management
Management company
Management company
Non-trading
Dormant
Dormant
Dormant
Dormant
Dormant
Annual report and accounts 2018 Mitchells & Butlers plc
141
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Notes to the financial statements
Section 5 – Other notes continued
5.2 Subsidiaries and associates continued
Name of subsidiary
Browns Restaurants Limited
Crownhill Estates (Derriford) Limited
East London Pubs & Restaurants Limited
Mitchells & Butlers Lease Company Limited
Intertain (Dining) Limited
Lander & Cook Limitedb
a. Shares held directly by Mitchells & Butlers plc.
b. Incorporated on 3 January 2018.
Country of incorporation
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Country of operation
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Nature of business
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
The registered office for companies operating in the United Kingdom is 27 Fleet Street, Birmingham, B3 1JP.
The registered office for companies operating in Germany is Adolfstrasse 16, 65185 Wiesbaden.
Associates
Details of the Company’s associates, held indirectly, are as follows. Shares in these associates have been acquired in the period.
Name of associate
3Sixty Restaurants
Limited
Fatboy Pub Company
Limited
Registered office
1st Floor St Georges House,
St Georges Road, Bolton, BL1 2DD
Ampney House, Falcon Close,
Quedgeley, Gloucester, GL2 4LS
5.3 Events after the balance sheet date
Country of
incorporation and
operation
England and
Country of
operation
Nature of
business
Proportion of
ownership
interest %
Proportion of
voting power
interest %
Wales United Kingdom Leisure retailing
England and
Wales United Kingdom Leisure retailing
40
25
40
25
On 26 October 2018 the High Court provided a ruling regarding guaranteed minimum pensions (GMPs) equalisation. The court ruled that pensions
provided to members who had contracted-out of their scheme must be recalculated to ensure payments reflect the equalisation of state pension ages
in the 1990s. The ruling confirmed that there are four methods of equalising GMP that are lawful in principle, but importantly employers can direct
trustees to apply ‘method C’ i.e. provide the better of male or female comparator pensions each year, subject to accumulated offsetting. The court
also ruled that trustees are obliged to make arrears payments to members and simple interest on the arrears should be paid at 1% above the base rate.
This ruling will impact the Group’s actuarial surplus/(deficit), as it will lead to an increase in pension obligations, however it should be noted that due
to the recognition of an additional liability in relation to minimum funding, there will be no change to the reported pension position on the balance sheet.
As the Trustee’s have not previously attempted to equalise GMPs, the ruling is treated as a non-adjusting event.
Given the date of the ruling and complexity of application, it is not currently practical to estimate the impact on the actuarial surplus/(deficit)
and income statement.
5.4 Five year review
Revenue
Operating profit before adjusted items
Adjusted items
Operating profit
Finance costs
Finance revenue
Net pensions finance charge
Profit before taxation
Tax expense
Profit for the period
Earnings per share
Basic
Diluted
Adjusted (Basic)a
2018
52 weeks
£m
2,152
303
(48)
255
(119)
1
(7)
130
(26)
104
24.5p
24.4p
34.1p
2017
53 weeks
£m
2,180
314
(106)
208
(125)
1
(7)
77
(14)
63
15.1p
15.0p
34.9p
2016
52 weeks
£m
2,086
318
(87)
231
(126)
1
(12)
94
(5)
89
21.6p
21.6p
34.9p
2015
52 weeks
£m
2,101
328
(58)
270
(130)
1
(15)
126
(23)
103
25.0p
24.9p
35.7p
2014
52 weeks
£m
1,970
313
(49)
264
(132)
1
(10)
123
(30)
93
22.6p
22.5p
32.6p
a. Adjusted earnings per share is stated after removing the impact of adjusted items as explained in note 2.2.
142
Mitchells & Butlers plc Annual report and accounts 2018
Mitchells & Butlers plc Company financial statements
Company balance sheet
29 September 2018
Non-current assets
Investments in subsidiaries
Deferred tax asset
Current assets
Trade and other receivables
Cash and cash equivalents
Current liabilities
Pension liabilities
Borrowings
Trade and other payables
Non-current liabilities
Pension liabilities
Net assets
Equity
Called up share capital
Share premium account
Capital redemption reserve
Own shares held
Retained earnings
Total equity
Notes
5
9
6
4
8
7
4
10
2018
£m
1,474
48
1,522
739
14
753
(49)
(28)
(288)
(365)
2017
£m
1,474
56
1,530
828
1
829
(47)
(28)
(419)
(494)
(200)
1,710
(245)
1,620
37
26
3
(1)
1,645
1,710
36
26
3
(1)
1,556
1,620
The Company reported profit for the 52 weeks ended 29 September 2018 of £89m (53 weeks ended 30 September 2017 £121m).
The financial statements were approved by the Board and authorised for issue on 21 November 2018.
They were signed on its behalf by:
Tim Jones Finance Director
The accounting policies and the notes on pages 145 to 147 form an integral part of these financial statements.
Registered Number: 04551498
Annual report and accounts 2018 Mitchells & Butlers plc
143
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Company statement of changes in equity
For the 52 weeks ended 29 September 2018
At 24 September 2016
Profit after taxation
Remeasurement of pension liability
Deferred tax on remeasurement of pension liability
Total comprehensive income
Credit in respect of employee share schemes
Dividends paid
Scrip dividend related share issue
At 30 September 2017
Profit after taxation
Remeasurement of pension liability
Deferred tax on remeasurement of pension liability
Total comprehensive income
Share capital issued
Credit in respect of employee share schemes
Dividends paid
Scrip dividend related share issue
At 29 September 2018
Share
capital
£m
35
–
–
–
–
–
–
1
36
–
–
–
–
–
–
–
1
37
Share
premium
£m
27
–
–
–
–
–
–
(1)
26
–
–
–
–
1
–
–
(1)
26
Capital
redemption
reserve
£m
3
–
–
–
–
–
–
–
3
–
–
–
–
–
–
–
–
3
Own
shares
held
£m
(1)
–
–
–
–
–
–
–
(1)
–
–
–
–
–
–
–
–
(1)
Retained
earnings
£m
1,438
121
8
(1)
128
2
(12)
–
1,556
89
5
(1)
93
–
3
(7)
–
1,645
Total
equity
£m
1,502
121
8
(1)
128
2
(12)
–
1,620
89
5
(1)
93
1
3
(7)
–
1,710
The retained earnings account is wholly distributable after the deduction for own shares.
144
Mitchells & Butlers plc Annual report and accounts 2018
Notes to the Mitchells & Butlers plc Company financial statements
1. Basis of preparation
Basis of accounting
These financial statements were prepared in accordance with Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ as issued by the FRC.
As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to share-based
payments, financial instruments, presentation of a cash flow statement, standards not yet effective, impairment of assets and related party transactions.
Where required, equivalent disclosures are given in the consolidated financial statements.
The financial statements have been prepared under the historical cost convention. The Company’s accounting policies have been applied on a
consistent basis to those set out in the relevant notes to the consolidated financial statements. There have been no changes to policies during the
period. The critical judgements and estimates of the Company are considered alongside those of the Group. The key critical judgement of the Company
is related to the selection of the discount rate and inflation rate assumptions used in the calculation of the defined benefit pension liability described
in note 4.5 of the consolidated financial statements. The key critical estimates for the Company are the estimate of future cash flows and the selection
of discount rate in the investment impairment review described in note 5.
Foreign currencies
Transactions in foreign currencies are recorded at the exchange rates ruling on the dates of the transactions. Monetary assets and liabilities denominated
in foreign currencies are translated into sterling at the relevant rates of exchange ruling at the balance sheet date.
2. Profit and loss account
Profit and loss account
The Company has not presented its own profit and loss account, as permitted by Section 408 of the Companies Act 2006.
The Company recorded a profit after tax of £89m (2017 £121m), less dividends of £7m (2017 £12m). Dividends are disclosed in note 4.7
of the consolidated financial statements.
Audit remuneration
Auditor’s remuneration for audit services to the Company was £22,000 (2017 £22,000). This is borne by another Group company, as are any other
costs relating to non-audit services (see note 2.3 to the consolidated financial statements).
3. Employees and Directors
Average number of employees, including part-time employees
2018
52 weeks
2
2017
53 weeks
2
Employees of Mitchells & Butlers plc consist of Executive Directors who are considered to be the key management personnel of the Company.
Details of employee benefits and post-employment benefits, including share-based payments, are included within the Report on Directors’
remuneration on pages 68 to 91. The charge recognised for share-based payments in the period is £nil (2017 £nil).
4. Pensions
Accounting policy
The accounting policy for pensions is disclosed in the consolidated financial statements in note 4.5.
Pension liability
At 29 September 2018 the Company’s pension liability was £249m (2017 £292m). Of this amount, £49m (2017 £47m) is a current liability and £200m
(2017 £245m) is a non-current liability.
The Company is the sponsoring employer of the Group’s pension plans. Information concerning the pension scheme arrangements operated by the
Company and associated current and future contributions is contained within note 4.5 to the consolidated financial statements on pages 133 to 137.
The pension amounts and disclosures included in note 4.5 to the consolidated financial statements are equivalent to those applicable for the Company.
Annual report and accounts 2018 Mitchells & Butlers plc
145
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Notes to the Mitchells & Butlers plc Company financial statements continued
5. Investments in subsidiaries
Accounting policy
The Company’s investments in Group undertakings are held at cost less provision for impairment, except for those amounts designated as being
in a fair value hedge.
Critical accounting estimates
The application of the impairment methodology requires two critical accounting estimates; the forecast of cash flows and the selection of an
appropriate discount rate. A sensitivity analysis of changes in cash flows and the discount rate in relation to the investments to which these estimates
apply, is provided below.
Cost
At 24 September 2016
Exchange differences
Additionsa
At 30 September 2017
Exchange differences
At 29 September 2018
Provision
At 24 September 2016
Impairment
At 30 September 2017
Impairment
At 29 September 2018
Net book value
At 29 September 2018
At 30 September 2017
At 24 September 2016
Shares in
subsidiary
undertakings
£m
3,104
1
248
3,353
–
3,353
1,879
–
1,879
–
1,879
1,474
1,474
1,225
a. Additions in the prior period of £248m relate to a capital contribution, in the form of a loan waiver, provided to a subsidiary company within the Mitchells & Butlers plc Group.
The intercompany loan was tested for impairment prior to the loan waiver, with no impairment required.
Mitchells & Butlers plc is the beneficial owner of all of the equity share capital of companies within the Group, either itself or through subsidiary
undertakings. In addition, the Company has indirect investments in associate companies through subsidiary undertakings. See note 5.2 of the
consolidated financial statements for a full list of subsidiaries and associates.
Investments have been tested for impairment using forecast cash flows, discounted by applying a pre-tax discount rate of 7.7% (2017 7.5%).
For the purposes of the calculation of the recoverable amount, the cash flow projections include 0.0% (2017 0.0%) of growth per annum.
Sensitivity analysis
The Company has performed a sensitivity analysis on the impairment tests for its investments in subsidiaries using various reasonably possible scenarios.
It is estimated that neither a 0.5% increase in the discount rate nor a 5% reduction in future cash flows would generate an impairment charge.
6. Trade and other receivables
Amounts owed by subsidiary undertakings
2018
£m
739
2017
£m
828
Amounts owed by subsidiary undertakings are repayable on demand. Interest is not charged on all balances. Where interest is charged, it is charged
at market rate, based on what can be achieved on corporate deposits.
146
Mitchells & Butlers plc Annual report and accounts 2018
7. Trade and other payables
Amounts owed to subsidiary undertakingsa
Accrued charges
Other payables
2018
£m
283
4
1
288
2017
£m
416
–
3
419
a. Amounts owed to subsidiary undertakings are repayable on demand. Interest is not charged on all balances. Where interest is charged, it is charged at market rate, based on what can be
achieved on corporate deposits.
8. Borrowings
Accounting policy
The accounting policy for borrowings is disclosed in the consolidated financial statements in note 4.2.
Borrowings can be analysed as follows:
Current
Bank overdraft
Total borrowings
Unsecured revolving credit facility
The Company holds uncommitted credit facilities of £15m. The amount drawn at 29 September 2018 is £nil (2017 £nil).
9. Taxation
Accounting policy
The accounting policy for taxation is disclosed in the consolidated financial statements in note 2.4.
Deferred tax asset
Movements in the deferred tax asset can be analysed as follows:
At 24 September 2016
Charged to income statement – pensions
Charged to income statement – tax losses
Charged to other comprehensive income – pensions
At 30 September 2017
Charged to income statement – pensions
Charged to income statement – tax losses
Charged to other comprehensive income – pensions
At 29 September 2018
Analysed as tax timing differences related to:
Pensions
Tax lossesa
2018
£m
28
28
2017
£m
28
28
£m
66
(6)
(3)
(1)
56
(6)
(1)
(1)
48
2017
£m
50
6
56
2018
£m
43
5
48
a. Tax losses arising in 2008 which are now recoverable by offset against other income.
Further information on the changes to tax legislation are provided in note 2.4 to the consolidated financial statements.
10. Equity
Called up share capital
Details of the amount and nominal value of allotted, called up and fully paid share capital are contained in note 4.7 to the consolidated financial statements.
Dividends
Details of the dividends declared and paid by the Company are contained in note 4.7 to the consolidated financial statements.
Annual report and accounts 2018 Mitchells & Butlers plc
147
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Alternative performance measures
The performance of the Group is assessed using a number of Alternative Performance Measures (APMs).
The Group’s results are presented both before and after separately disclosed items. Adjusted profitability measures are presented excluding separately
disclosed items as we believe this provides both management and investors with useful additional information about the Group’s performance and
supports a more effective comparison of the Group’s trading performance from one period to the next. Adjusted profitability measures are reconciled
to unadjusted IFRS results on the face of the income statement with details of separately disclosed items provided in note 2.2.
The Group’s results are also described using other measures that are not defined under IFRS and are therefore considered to be APMs. These APMs
are used by management to monitor business performance against both shorter-term budgets and forecasts but also against the Group’s longer-term
strategic plans.
APMs used to explain and monitor Group performance include:
APM
EBITDA
Adjusted EBITDA
EBITDA before adjusted items
Operating profit
Adjusted operating profit
Like-for-like sales growth
Adjusted earnings per share (EPS)
Net debt: Adjusted EBITDA
Free cash flow
Return on capital
Definition
Earnings before interest, tax, depreciation and amortisation.
Annualised EBITDA on a 52 week basis before separately disclosed items
is used to calculate net debt to EBITDA.
EBITDA before separately disclosed items.
Earnings before interest and tax.
Operating profit before separately disclosed items.
Like-for-like sales growth reflects the sales performance against the comparable
period in the prior year of UK managed pubs, bars and restaurants that were
trading in the two periods being compared, unless marketed for disposal.
Earnings per share using profit before separately disclosed items.
The multiple of net debt as per the balance sheet compared against 52 week
EBITDA before separately disclosed items which is a widely used leverage
measure in the industry.
Calculated as net movement in cash and cash equivalents before
the movement on unsecured revolving credit facilities.
Return generating capital includes investments made in new sites and
investment in existing assets that materially changes the guest offer. Return
on investment is measured by incremental site EBITDA following investment
expressed as a percentage of return generating capital. Return on investment
is measured for four years following investment. Measurement commences
three periods following the opening of the site.
Source
Group income statement
Group income statement
Group income statement
Group income statement
Group income statement
Group income statement
Note 2.5
Note 4.1
Group income statement
Cash flow statement
A. Like-for-like sales
The sales this year compared to the sales in the previous year of all UK managed sites that were trading in the two periods being compared, expressed
as a percentage. This widely used industry measure provides better insight into the trading performance than total revenue which is impacted by
acquisitions and disposals.
Reported revenue
Adjust for 53rd week
Less non like-for-like sales
Like-for-like sales
Drink and food sales growth FY 2018
Drink like-for-like sales
Food like-for-like sales
Other like-for-like sales
Total like-for-like sales
Revenue
Less non like-for-like sales
Like-for-like sales
Source
Income statement
See APM G
Source
Source
148
Mitchells & Butlers plc Annual report and accounts 2018
2018
52 weeks
£m
2,152
–
(187)
1,965
2018
52 weeks
£m
917
999
49
1,965
2019
7 weeks
£m
276.7
(26.5)
250.2
2017
53 weeks
£m
2,180
(39)
(202)
1,939
2017
52 weeks
£m
894
996
49
1,939
2018
7 weeks
£m
268.5
(23.7)
244.8
Year-on-year
%
(1.3)
1.3
Year-on-year
%
2.6
0.3
–
1.3
Year-on-year
%
3.1
2.2
B. Adjusted operating profit
Operating profit before separately disclosed items as set out in the Group Income Statement. Separately disclosed items are those which are separately
identified by virtue of their size or incidence (see note 2.2). Excluding these items allows a better understanding of the trading of the Group.
Operating profit
Add back separately disclosed items
Adjustment for 53rd week
Adjusted operating profit
Reported revenue 52 weeks
Adjusted operating margin
C. Adjusted earnings per share
Source
Income statement
Note 2.2
See APM G
See APM G
2018
52 weeks
£m
255
48
–
303
2,152
14.1%
2017
53 weeks
£m
208
106
(6)
308
2,141
14.4%
Year-on-year
%
22.6
(1.6)
0.5
(0.3)ppts
Earnings per share using profit before separately disclosed items. Separately disclosed items are those which are separately identified by virtue of their
size or incidence. Excluding these items allows a better understanding of the trading of the Group.
Profit for the period
Add back separately disclosed items
Adjustment for 53rd week
Adjusted profit
Weighted average number of shares
Adjusted earnings per share
D. Net debt: Adjusted EBITDA
Source
Income statement
Income statement
See APM G
Note 2.5
2018
52 weeks
£m
104
41
–
145
425
34.1p
2017
53 weeks
£m
63
83
(2)
144
418
34.4p
Year-on-year
%
65.1
0.7
(0.9)
The multiple of net debt as per the balance sheet compared against 52 week EBITDA before separately disclosed items which is a widely used leverage
measure in the industry. Adjusted EBITDA is used for this measure to prevent distortions in performance resulting from separately disclosed items.
Net debt
EBITDA
Less separately disclosed items
Adjusted for 53rd week
Adjusted 52 week EBITDA
Net debt: Adjusted EBITDA
E. Free cash flow
Source
Note 4.1
Income statement
Income statement
See APM G
2018
52 weeks
£m
1,688
417
5
–
422
4.0
2017
53 weeks
£m
1,750
395
34
(8)
421
4.2
Free cash flow excludes the cash movement on unsecured revolving credit facilities and is presented to allow understanding of the cash movements
excluding short-term debt.
Net decrease in cash and cash equivalents
Net movement on unsecured revolving credit facilities
Source
Cash flow statement
Cash flow statement
F. Second half adjusted operating profit
First half adjusted operating profit
Second half adjusted operating profit
Adjusted operating profit
Source
Interim statement
2018
52 weeks
£m
(25)
6
(19)
2017
53 weeks
£m
(11)
25
14
2018
52 weeks
£m
141
162
303
2017
52 weeks
£m
149
159
308
Year-on-year
%
(5.4)
1.9
(1.6)
Annual report and accounts 2018 Mitchells & Butlers plc
149
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152
Alternative performance measures continued
G. FY 2017 52 week reconciliation
FY 2017 was a 53 week period and therefore presentation of a 52 week basis provides better comparability.
Revenue
EBITDA
Adjusted operating profit
Adjusted PBT
Profit for the period
Adjusted EPS
Net finance costs
H. Return on capital
Source
Income statement
Income statement
Income statement
Income statement
Income statement
Income statement
Income statement
2017
52 weeks
£2,141m
£387m
£308m
£180m
£61m
34.4p
£128m
2017
Week 53
£39m
£8m
£6m
£3m
£2m
0.5p
£3m
2017
53 weeks
£2,180m
£395m
£314m
£183m
£63m
34.9p
£131m
Return generating capital includes investments made in new sites and investment in existing assets that materially changes the guest offer. Return on
investment is measured by incremental site EBITDA following investment expressed as a percentage of return generating capital. Return on investment
is measured for four years following investment. Measurement of return commences three periods following the opening of the site.
Return on expansionary capital
Maintenance and infrastructure
Remodel – refurbishment
Non-expansionary capital
Remodel expansionary
Conversions and acquisitions*
Expansionary capital for return calculation
Expansionary capital open < 3 periods pre year end
Total capital
Adjusted EBITDA
Non-incremental EBITDA
Incremental EBITDA
Return on expansionary capital
Source
Cash flow
Income statement
2017
FY 2014–17
£m
333
130
463
27
158
185
12
660
1,714
(1,680)
34
18%
2018
FY 2015–17
£m
216
107
323
27
139
166
9
498
1,292
(1,268)
24
14%
2018
FY 2018
£m
70
63
133
7
27
34
4
171
422
(414)
8
23%
* Conversion and acquisition capital is net of capex incurred for projects which have been open for less than three periods pre year end.
Return on remodel capital
Capital investment
Non-remodel capital investment
Remodel capital investment
Adjusted EBITDA
Non-incremental EBITDA
Incremental EBITDA
ROI
Source
Cash flow
Income statement
2018
Total
£m
286
170
456
34
166
200
13
669
1,714
(1,682)
32
16%
FY 2018
£m
171
(108)
63
422
(405)
17
27%
150
Mitchells & Butlers plc Annual report and accounts 2018
Shareholder information
Contacts
Registered office
27 Fleet Street
Birmingham B3 1JP
Telephone 0121 498 4000
Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
From the UK:
Telephone 0371 384 2065*
From non-UK jurisdictions:
Telephone +44 121 415 7088*
For those with hearing loss, a textphone is available on 0371 384 2255*
for UK callers with compatible equipment.
http://www.mbplc.com/investors/contacts/
*
Lines are open 8.30am to 5.30pm (UK time), Monday to Friday, excluding public holidays
in England & Wales.
Key dates
These dates are indicative only and may be subject to change. For the current status visit
the financial calendar on our website at www.mbplc.com/investors
Annual General Meeting
Announcement of interim results
Pre-close trading update
2019 final results announcement
22 January 2019
May 2019
September 2019
November 2019
Annual report and accounts 2018 Mitchells & Butlers plc
151
STRATEGIC REPORT 1 TO 45GOVERNANCE 46 TO 91FINANCIAL STATEMENTS 92 TO 147OTHER INFORMATION 148 TO 152 Our brands
Mitchells & Butlers online
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To find out more go to www.mbplc.com
All of our popular brands have their own websites, helping our customers
to find the information they need straight away. Latest food and drink
menus, news and offers, email newsletters, online bookings and details
of new openings are all available.
Alex
www.dein-alex.de
All Bar One
www.allbarone.co.uk
@allbarone
Browns
www.browns-restaurants.co.uk
@BrownsBrasserie
Castle
www.mbplc.com/findapub
Ember Inns
www.emberinns.co.uk
@EmberInns
Harvester
www.harvester.co.uk
@HarvesterUK
Innkeeper’s Lodge
www.innkeeperslodge.com
@InnkeepersLodge
Miller & Carter
www.millerandcarter.co.uk
@MillerandCarter
Nicholson’s
www.nicholsonspubs.co.uk
@Nicholsonspubs
O’Neill’s
www.oneills.co.uk
@ONeillsPubs
Premium Country Pubs
www.mbplc.com/findapub
Sizzling Pubs
www.sizzlingpubs.co.uk
@SizzlingPubs
Stonehouse Pizza & Carvery
www.stonehouserestaurants.co.uk
@stonehousepizza
Toby Carvery
www.tobycarvery.co.uk
@tobycarvery
Vintage Inns
www.vintageinn.co.uk
@Vintage_Inns
152
Mitchells & Butlers plc Annual report and accounts 2018
Design and production: Gather
Printed by: CPI Colour
The paper used in this Report is
derived from sustainable sources
Mitchells & Butlers plc
27 Fleet Street
Birmingham B3 1JP
Tel: +44 (0)121 498 4000