Mitchells & Butlers : Annual report and accounts 2020

Annual Report 2020

In compliance with Listing Rule 9.6.1, Mitchells & Butlers plc has today submitted the Company's Annual Report and Accounts 2020 (the Annual Report) to the National Storage Mechanism.

The Annual Report will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism and can also be accessed on the Company's website at: www.mbplc.com/investors/annualreport

The Annual Report is expected to be despatched to shareholders on 21 December 2020.

The Company's Annual General Meeting is due to be held on Wednesday 24 March 2021. The Notice of the Annual General Meeting is expected to be despatched to shareholders in February 2021.

A condensed set of Mitchells & Butlers plc's 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 26 November 2020. That information, together with the information on Risks and Uncertainties given below and the directors' responsibilities statement below, constitutes the satisfaction of the requirements of DTR 6.3.5 in respect of information 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 13 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 pages 68 and 69 of the Annual Report.

Risk category	Controls/mitigating activities
1. Borrowing covenants There are risks that borrowing covenants are breached because of circumstances such as: i. The continuation of disruption due to the Covid-19 pandemic; ii. A change in the economic climate leading to reduced cash net inflows; or iii. A material change in the valuation of the property portfolio. Risk increasing Although the required waivers are in place, this remains a critical risk with an increased focus required given the current economic climate.	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. We have taken measures to protect the financial health of the business whilst operating at reduced capacity and continue to closely manage the cash position of the Group. In June 2020, we agreed the waivers required to ensure we would remain compliant with all covenant requirements through an Extended Case (downside) scenario (in respect of both the securitisation and the unsecured facilities).
2. Material uncertainty Given the very high degree of uncertainty resulting from the Covid-19 pandemic and resulting restrictions placed on trading in the hospitality sector, a material uncertainty therefore exists, which may cast significant doubt over the Group's ability to trade as a going concern. Risk increasing Please refer to the Going Concern disclosures on page 44 of the Annual Report.	Please refer to the Going Concern disclosures on page 44 of the Annual Report.
3. Declining sales performance This risk falls into the below 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 combination, may adversely affect our market share and profitability, reducing headroom against securitisation tests. Increased social distancing measures/requirements put in place may lead to further negative impact in sales/revenues. 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. Consumer behaviour as a result of Covid-19: As pubs and restaurants reopen, consumers may have a different mindset to eating out, with health and safety at the forefront of priorities. Guests may want greater insight into practices, and food supply chain information to feel confident in their eating out experience. Equally some consumers may not heed the measures put in place to restrict the spread of the virus, potentially putting our team members and other guests at risk. Risk increasing Overall risk is increasing due to the decline of sales, as a direct impact of Government restrictions in response to the Covid-19 pandemic.	Right operational and commercial team and structure in place. Brand alignment ensures the right research is done and is acted upon. Daily, weekly and periodic sales reporting, monitoring and scrutiny activity is in place. During the period of disruption caused by the Covid-19 pandemic, a steering committee met at least weekly and more frequently as needed to ensure appropriately diligent supervision, monitoring and management of controls and risks. 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. Our priority is to protect our team members and guests, providing an eating-out experience which can be enjoyed. We have very strong health and safety practices already in place in our businesses, which we will enhance and evolve to tackle the challenges we now face. We will be transparent with guests as to these measures such that they can trust in us and will clearly communicate our expectations of guests to comply with the measures put in place. Measures are in place to ensure that the business responds to guest requirements after the pandemic. Government financial assistance, such as furlough payments in respect of employee costs, business rates suspension and reduction of VAT, assisted to address the decline in revenue.
4. 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. The effects of Covid-19 have been assessed in terms of our overall people planning and development risks. Prior to Covid-19, the external pipeline for high potential talent, particularly in senior roles was tightening due to the rise in opportunity in a growing and competitive marketplace. However, post Covid-19, the external recruitment activity over the prior year has also shown that replacement talent is no more than average in terms of skills, behaviours and cultural fit. However, given the current economic climate and the anticipated high numbers of redundancies across UK employment in general, it is expected that this position may soften. We will therefore keep these new and emerging risks under review. Risk increasing (specifically in London/South East) 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 completes its transition period following the UK's departure from the EU. Restrictions on the 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. In compliance with the furlough scheme, we were able to continue employee training so that staff were fully trained on new ways of working for our reopening.
5. 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 a further disease pandemic might restrict sales or reduce operational effectiveness. Staff have the resources and ability to work remotely rather than rely on access to the Retail Support Centre.	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. Following Covid-19, new ways of working are in place for all Retail Support Centre staff when the office is temporarily closed to employees. Positively, all staff have the appropriate resources available to them in order to work remotely and in an efficient manner. We have assessed risks associated with remote working and cybersecurity and are confident that those areas are suitably controlled.
6. 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. Given the increase in the level and frequency of global cyber-attacks, the likelihood of occurrence is therefore increasing, although current IT controls and monitoring tools are robust. Risk of non-compliance with data protection laws is an increasing risk for the business to ensure full compliance remains up to date. Risk increasing The increased activity, information security and reliance on IT systems continues to be a key focus to ensure critical IT systems are kept secure and tested frequently and any vulnerabilities identified are closed out efficiently.	A detailed external review of cyber security processes is performed on a regular basis in order to highlight any gaps and address any challenges. As a result, a number of further improvements have been made (and continue to be made) to address audit actions and strengthen overall cyber controls. 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 data protection 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 compliance with data protection laws.
7. 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. The overall impact of Covid-19, in relation to our wage cost inflation risk, has been assessed by management. It is unclear at this stage how Covid-19 may affect overall wage costs as we head into FY 2021. Therefore, this review will continue as part of our review of all emerging risks facing the business. Risk increasing Due to further increases set by Government, labour costs could continue to increase.	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.
8. 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. During the period, the Company and the trustees of its defined benefit schemes agreed to a suspension of contributions for the period from April to September 2020, with such contributions being deferred to the end of the respective recovery periods.
9. 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. Social distancing measures: we support the need for social distancing measures to reduce the spread of Covid-19. While social distancing measures are in place the capacity of our businesses will be reduced, impacting the offer to our guests and the financial model of our operations. Given the unknown nature of the virus the duration of distancing measures is uncertain. Risk increasing The overall risk is increasing mainly due to the additional measures enforced as a result of the Covid-19 pandemic. However, robust controls are in place.	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 maintains two food safety Primary Authority relationships. These are held with Luton Borough Council (May 2019) and Shared Regulatory Services (November 2019) and provide assured advice on matters in England and Wales respectively. Westminster City Council continue to provide support on health and safety matters and 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. We have applied a risk assessment to each of our businesses and operate under the new Covid-19 guidelines. We have adapted the format and practices of our sites to ensure that the distancing guidelines provided by the Government can be adhered to, protecting both team members and guests. We continuously review the latest Covid-19 guidelines and continue to adapt our businesses in response.
10. Cost of goods - price increases Food: The cost of food for resale 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 for resale 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 a large amount 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 possibility of delays at ports following the end of the transition period following the UK leaving the EU. At the end of that transition period, 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. Risk increasing The overall risk of price increases is increasing, largely due to the continued uncertainty around Brexit.	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 are in place to mitigate Sugar Tax. Brexit: Brexit risks have remained a key focus and have been subject to continued regular review and development by management during FY 2020. Brexit risks and the mitigating action plans are embedded within each of the key risks, which are regularly reviewed by both 'risk owners' and the Risk Committee. A number of key measures have been taken to mitigate both the known and emerging risks that Brexit may present to the business. For example, we have secured agreements with our key suppliers which include: buying ahead to mitigate the increasing risk of a lack of availability of products, upon the end of the transition period for the UK's departure from the EU. Exploring the option to significantly upweight the existing Cattle Scheme in order to secure more UK beef. Reviewing and update of key contracts to secure the most commercially effective supply of goods and pricing. Identifying contingency markets for the alternative supply of food and drink, should it be required. Strong commercial relationships with key suppliers which have assisted with securing an adequate supply of goods in the event of a disruption. Covid-19 During the Covid-19 pandemic, suppliers have continued to remain very supportive and no material further supply chain associated risks have materialised.
11. 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 cause an increase in cost of goods for resale and reduced sales due to consumer fears and physical harm to guests/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.
12. Health and lifestyle concerns Failure to respond to changing consumer expectations in relation to health and lifestyle choices and our responsibility to facilitate those. Risk increasing 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 continue to 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. Therefore, this risk is increasing.	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.
13. 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. Risk increasing 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. These factors 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. Therefore, this risk continues to increase.	We have set challenging targets in key areas such as greenhouse gas emissions, food waste, recycling and use of plastics (see page 18 of the Annual Report). We have completed an exercise to determine our baseline greenhouse gas emissions from which we have developed a plan to deliver our ambitions of reducing emissions by 25% by 2030, which has been approved by the Board. We are working with the World Resources Institute on their Cool Food Pledge programme to reduce the emissions of food supply chain links, which is a significant contributor to emissions globally. All direct palm oil purchases are now from Rainforest Alliance approved suppliers. We are working with industry collaboration groups to develop a roadmap to sourcing sustainable soy in our supply chain. We are developing initiatives to reduce our consumption of natural resources, with an electricity workstream live in the business, and gas and water in the planning phases.

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 Accounts, 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