M&C Report takes a closer look at the full-year results for Mitchells & Butlers (M&B) Chief executive search Chairman Bob Ivell said he had received “a lot of interest” in the chief executive’s job. He told M&C Report: “The people that are saying that there has been no interest are well off beam, and that applies to the non-executive roles as well. If you want to run a business in this sector, the best business to run is M&B.” Ivell said the group would take its time to find the right person – “high calibre individuals” – and indicated that some candidates may currently be in a role, which could make the process even longer. He said: “A process was in place before I joined the company and since I have been here I have had three jobs in five months, so I you could say I have been busier with other things and that it is only now that my full attention is on this task." Joe Lewis Ivell said he could understand why the group’s biggest shareholder Joe Lewis might cast a shadow over the process of finding a chief executive. He said: “Good people like challenges and one of those, you could say, is the shareholding situation. I’m not finding that people are running away from that.” Ivell also said that he continued to have the support of all shareholders. He said: “Whoever is coming into the group should take some comfort in that. I for one wouldn’t be doing this job if I didn’t think I had the backing of all the shareholders.” Restructure On the restructuring of the group, which was announced last week, Ivell said that the company’s existing structure “could not work going forward”. He said: “There was still a Bass culture here, which hadn’t changed enough. The group was still being thought of as operating pub restaurants and not restaurant pubs. It also hadn’t restructured after the sale of the 333 wet-led sites to Stonegate.” Ivell said the company had flattened the management structure so that “you are Mr Harvester you are responsible and accountable for that brand”. He said: “There was too many people dipping in and out of each brand and not taking accountability. The restructure was not about bad people but an organisation that was working to its full capabilities.” Ivell said he hoped to make the appointments of the new brand operations directors very quickly. He said: “The one thing the restructure hasn’t touched is the relationship between the area managers and their units. What it will do is cut down the paperwork and bureaucracy to enable them to take greater responsibility.” Ivell said the restructure would ensure shorter communication lines throughout the company. He said: “I don’t see our head office as command control but more like a retail support centre. I did the same things at Scottish & Newcastle and I think it worked well there.” Trading Ivell said that current trading had settled at an underlying growth trend of around 1%, with trading over the eight weeks since the end of the financial year boosted by the good weather at the end of September/start of October. He said: “We say massive growth during that period and goes to show that if the conditions are right consumers are prepared to get out of the house and into pubs.” Ivell said that there was an underlying trend of softening sales at the start of the week but that average spend was up slightly. He said: “There has been a softening on Mondays and Tuesdays but during the rest of the week we are seeing people still coming out and treating themselves. More people are having three courses when they do come out. Similar to previous recessions, the consumer is still looking to get away from it all and have some fun.” Brands Ivell said that ebitda returns on expansionary capital had improved from 19% as at the half year to 21%, with the group’s new openings programme “performing especially well”. He said: “Within this, our investments in leasehold retail and leisure park sites have delivered particularly strong returns of over 30% and we see a good pipeline of opportunities to expand further in this area, alongside our continued investments in new freehold sites.” Ivell highlighted Harvester as one of the company’s star performers. He said: “Harvester has been performing extremely well. The brand has had a great 18 months and we are generating good returns on openings.” Ivell said that the value end of the market was “clearly tougher” and “very competitive” with Greene King’s Hungry Horse, Spirit’s Flaming Grill and M&B Sizzling Pub Co sites battling for market share. He also said the group was pleased with the performance of its Browns estate, which was now being rolled out into “non-traditional” locations for the brand such as Bluewater and the Oracle in Reading. Food Food is the group’s largest selling product having grown by 30% over the last four years and Ivell said this had helped to generate a 16% rise in profits per site over the same period. He said: “As a result, the estate has high average weekly sales and annual profitability per site, at over £22,000 and £180,000 respectively, both well above the average of our major competitors.” Capex Total capital expenditure in the year for M&B was £172m, a significant increase from £138m spent in FY 2010. Ivell said that £82m was invested in expansionary capital and £82m was spent maintaining and enhancing the high level of amenity in our pubs. He said: “A further £8m was spent on infrastructure projects including upgrades to our till systems, updates to the stock & labour scheduling systems and improvements to the energy efficiency of our restaurants and pubs.” In total the business raised £424m through disposals in the year. It plans to invest c.£80m in opening up to 60 new pubs next year. Cashflow/debt The company carried out a Red Book valuation of its freehold and long-leasehold estate had been completed in conjunction with its property valuers in addition to an impairment review on the short leasehold and unlicensed assets. It said that the overall increase of £71m represented “a 2% increase in the estate valuation and is reflected as a £2m charge to the income statement and a £73m increase in reserves”. Ivell said: “We continue to moderate the value of our larger, high profitability sites as there are few comparable industry multiples for these high performing sites.” The group said that the business needs “sustainable” cash flow before it can re-instate dividend payments. After expansionary capital expenditure and proceeds from disposals, net cash flow in the year was £436m. As a result, net debt reduced to £1,870m in the year, consisting of net debt within the securitisation of £2,089m and net cash held outside the securitisation of £219m. The company said that total group net debt is a multiple of 4.7 times retained estate ebitda, down from 5.1 times at the last year end. Analyst reaction Greg Feelhey at Altium Securities said despite recent trading receiving a welcome boost he failed to see a positive near term catalyst for M&B’s shares. He said: “Food continued to be the primary driver of performance up +4.8% LfL over the year whilst drink fared relatively well up +1% lfls However, trading continued to soften over the final 10 weeks of the year with food and drink growth slowing to 0.6% and 0.2% respectively. “Recent trading received a welcome boost from the unseasonal week of good weather in October with lfl sales for the first 8 weeks up 2.0%, driven by a 3% rise in drink sales. We fail to see a positive near term catalyst for the shares and maintain our Hold recommendation. Our preferred stocks in the licensed retail sector remains Spirit and Marston’s given their strong growth opportunity and very attractive yield.” Douglas Jack at Numis said: “We are holding our forecasts which assume 1.5% LFL sales and 25bps margin reduction in 2012E even though the company intends to offset cost increases (10% utilities; 3% food) through initiatives in menu development, better buying/pricing, IT and organisation changes. 2012E will be a 53 week year, which should add £4-5m to PBT, which we will consider adding later in the year if trading remains robust. “Like consensus, we are forecasting 15% self-financed PBT growth in 2012E, implying a 6.4x EV/EBITDA valuation for a high-quality 90% freehold estate (versus a peer group average of 8.1x). At these levels, there should be limited downside; plans for expansion and management recruitment hold the key to unlocking the potential upside.” Simon French at Panmure Leisure said: “In the first eight weeks of FY 2012E, LFL sales are +2.0%, although the underling trend is c1%, slightly ahead of our expectation of broadly flat. We do not expect any change to consensus forecasts and the stock is inexpensive on a CY 2012E P/E of 6.5x and an adj EV/EBITDAR of 6.7x, which is inexpensive although appropriate given the boardroom turmoil. We retain our Hold recommendation and 250p target price.” Nigel Parsons at Evolution Securities said: “Once you cut through the swathe of adjustments, there’s a reasonable result from M&B for FY11 with underlying results just ahead of expectations and with current trading marginally better than expected. “The stock is too cheap but the complicated shareholder situation would deter many potential investors. We retain our Buy recommendation and 350p share price target, but caveat this with a warning that it is for ‘special sit’ investors happy to wait for the current stand-off to resolve itself.”