Mitchells & Butlers : Annual Report 2019

16 December 2019

Mitchells & Butlers plc

LEI no. 213800JHYNDNB1NS2W10

Annual Report 2019

In compliance with Listing Rule 9.6.1, Mitchells & Butlers plc has today submitted copies of the following documents to the National Storage Mechanism:

1.	Company Annual Report and Accounts 2019
2.	Notice of the 2020 Annual General Meeting

These documents will shortly be available for inspection athttp://www.morningstar.co.uk/uk/NSM

The above documents can also be accessed on the Company's website at: www.mbplc.com

The Company's Annual General Meeting will be held at Mitchells & Butlers plc, Retail Support Centre, 27 Fleet Street, Birmingham, B3 1JP on Tuesday 21 January 2020 at 2.00pm.

A condensed set of Mitchells & Butlers plc financial statements and information on important events that have occurred during the year and their impact on the financial statements was included in the Company's Full Year Results announcement on 20 November 2019. That information, together with the information on Risks and Uncertainties given below and the directors' responsibilities statement below, constitutes the requirements of DTR 6.3.5 which is to be communicated via an RIS in unedited full text. This announcement is not a substitute for reading the full Annual Report and financial statements. To view the Full Year Results announcement, visit the Company website: www.mbplc.com/investors/

Risks and Uncertainties

This section highlights the top 12 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.

The processes that are used to identify and manage risks are described in the internal control and risk management statement on page 70 of the Annual Report.

Risk category	Controls/mitigating activities
1.Market risks
A. DECLINING SALES PERFORMANCE 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 combination, 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.	• Right operational and commercial team and structure in place. Brand alignment ensures the right research is 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.
B. COST OF GOODS - PRICE INCREASES Food The cost of goods increases due to changes in demand, food legislation, exchange rates and/or production costs and uncertainty of supply, leading to decreased profits. Drinks The cost 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 cost 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 circa 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 the exit by the UK from the EU. On exit by the UK from the EU, the cost of goods may be impacted by changes in terms of trade and therefore tariffs, additional border controls and fluctuations in the value of sterling.	Overall, cost 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 are carried out on key categories to ensure optimum value is achieved in each category. • A full range review was completed in FY 2019 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, the 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 2019 and mitigating plans continue to be reviewed and developed. Buying ahead to mitigate the increasing risk of a lack of availability of products upon the exit by the UK from the EU.
2. Operational Risks
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 possible 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.	• 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. • A new talent management system has been sourced.
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.	• 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 2019, departmental Business Continuity Plans have been updated. • 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. Further testing is planned for FY 2020.
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.	• In FY 2019 a further review of cyber security was performed in order 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 cyberattacks 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 There is a risk that increased costs associated with further increases to the National Living Wage may adversely impact upon overall operational costs.	• A detailed review of the risks associated with the National Living Wage 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.
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 net cash inflows; or ii. A material change in the valuation of the property portfolio.	• 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 includes 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 of this is included in the long-term viability statement.
F. PENSION FUND DEFICIT The material value of the pension fund deficit remains a risk.	• The Company has made significant additional contributions to reduce the funding deficit. In September 2019, the Company reached agreement on the triennial valuation of the Group pension schemes as at 31 March 2019, with a funding shortfall of £293m (March 2016 valuation £451m shortfall). • The Company will continue to pay cash contributions (of £45m p.a. RPI indexed from 1 April 2016) to 2023, with an additional payment of £13m into escrow in 2024 should such further funding be required at that time. This schedule of contributions is unchanged from that agreed in relation to the 2016 valuations.
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.	• 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 is immediately targeted for improvement. • The Company has Primary Authority Partnerships with Westminster City Council, St Albans City Council and Shared Regulatory Services in Wales, 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 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, however, this is a well managed risk within the Group.	• Mitchells & Butlers has a Safety Assurance team and uses a number 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.
I. HEALTH AND LIFESTYLE CONCERNS Failure to respond to changing consumer expectations in relation to health and lifestyle choices and our responsibility to facilitate those. There is an increasing level of focus from media and Government on health and obesity issues, predominantly impacting the UK. This heightened consumer awareness has increased consumer awareness of the health implications of their eating and drinking choices and it is important that we evolve our offers to facilitate consumers to make informed decisions. Failure to meet these expectations could have both a financial and reputational impact on the business.	• We monitor changing behaviour in relation to health and lifestyle issues and adapt our brands to appeal to changing needs ensuring that the brands remain relevant and competitive. • We have set targets for ongoing sugar and salt reduction. • A plan is in place to provide nutritional information for all brands to allow customers to make informed decisions.
J. ENVIRONMENT AND SUSTAINABILITY Climate change, biodiversity depletion and environmental pollution present a risk to our ability to source products, with food being particularly at risk. The impact of extreme and longer-term shifts in weather patterns, natural resource depletion and other effects of climate change could impact the business both financially and reputationally. It could disrupt our supply chain and the ability to source products due to reduced availability. Regulatory action to manage climate change could result in the introduction of additional taxes or restrictions being imposed. The business also has a responsibility to continually aim to reduce its usage of natural resources and its negative impact on the climate.	• We are completing a greenhouse gas foot printing exercise to understand the current impact of the business and to provide a baseline for future reduction. • We are working with suppliers to understand the impact of our supply chain with a view to reducing the negative impact on the environment. • Participation in industry collaboration to find solutions to environmental issues, ensuring that the areas where the most material benefit can be gained, are being addressed.

Directors' responsibilities statement

The Annual Report contains the following statement regarding responsibility for the financial statements in compliance with DTR 4.1.12. This statement relates solely to the Annual Report and financial statements and is not connected to the extracted information set out in the Full Year Results announcement.

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;

• the Strategic report includes a fair review of the development and 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.

The directors of Mitchells & Butlers plc are listed in the Annual Report and on the Mitchells & Butlers plc website,www.mbplc.com/investors/

For further information, please contact:

Investor Relations

Amy de Marsac

0121 498 6514

Media:

James Murgatroyd (Finsbury)

020 7251 3801