Half-year Results

Tortilla Mexican Grill plc, the largest and most successful fast-casual Mexican restaurant business in the UK, today announces its unaudited interim results for the 26 weeks ended 2 July 2023 ("H1 FY23", "the Period"). All numbers are shown on an IFRS basis unless otherwise stated.

Financial highlights

• Revenue growth of 22% to £32.7m (H1 FY22: £26.9m).
• Like-for-like ("LFL") revenue growth1 of +5.0%, ahead of the industry CGA Peach Coffer Tracker2 benchmark average of 4.6%. LFL revenue growth on a VAT-adjusted basis was 8.4%.
• Adjusted EBITDA (pre-IFRS 16)3 of £1.8m (H1 FY22: £2.5m), trading in-line with market expected financial performance5, noting that the prior year amount benefitted from £1.1m of Government support.
• Loss before tax of £0.6m (H1 FY22: profit before tax £0.3m).
• Strong balance sheet with net debt4 of £1.6m at Period end (H1 FY22: £3.2m net cash), in line with expectations, and a further £7m of liquidity available from the Group's existing debt facilities.

Operational and strategic highlights

• Good progress on UK new store openings with three opened in H1 FY22, including our first site in Northern Ireland, plus a further two sites since. Remain ahead of IPO aim of 45 new sites in 5 years.
• Successful integration of Chilango business and realisation of investment case.
• Growing confidence in the UK and international franchising opportunity with record profits following the return to normalised trading post-Covid.
• Cost pressures easing along with favourable contracts negotiated with key suppliers.
• Successfully implemented two major technology projects - our first kiosk-only site delivering positive early results and a nationwide roll out of delivery order-aggregation software.
• Enhanced promotional calendar - "Tortilla Sunsets" project developed and launched in mid-September to drive evening sales.
• Currently assessing a number of European opportunities through franchising or strategic acquisitions.
• Strengthened Board of Directors with the appointment of Keith Down as NED. Andy Naylor, CFO, promoted to Managing Director.

Current trading and full year outlook

Since the Period end, we have opened a further two sites: Belfast and Bracknell in July and August respectively and both are trading well, with Belfast doubling the opening revenue expectations. A further three sites are expected to open in H2 FY23, taking the total to eight new sites in the year as we continue to deliver our stated roll-out plans.

The summer was unsurprisingly quiet, as seen in the wider market, with an increased demand for overseas holidays, ongoing industrial strike-action on the train network and uninspiring weather. Nonetheless, the Group delivered LFL growth for this period.

We are seeing the benefit of self-help management initiatives, particularly in supply chain, energy and productivity. The benefit of these initiatives fell towards the end of the Period and as such, will collectively drive a further1.3 percentage point improvement in Adjusted EBITDA margin in H2 FY23 (compared to H1 FY23).

We continue to improve our offer through significant menu development, providing a more consistent and higher quality product whilst offering utility cost savings that also support our ESG strategy. We have worked hard to look for ways to drive customer footfall through targeted events and promotions, most notably through the launch of Tortilla Sunsets in September to enhance our evening offer through a great value dine-in experience.

Considering the secured upside from our cost hedging, the exciting initiatives launched to drive evening trade and the resilient trading performance of the Group, we remain confident of being broadly in line with our targeted Adjusted EBITDA for FY23 and we expect to see the full year benefit of these initiatives next year.

Richard Morris, CEO of Tortilla, commented:

"Despite the challenging economic backdrop, during the first half Tortilla demonstrated its resilience and showed consistent progress, with revenue growth of more than 20%. We continued to expand our store estate and have successfully embedded the Chilango acquisition. We have also enhanced our food offer and secured significant improvement in our costs structure while making technology upgrades which will improve and quicken customer service at peak trading times.

We are very excited by the launch of our Tortilla Sunsets initiative earlier this month, which has had a very positive customer response so far. We believe there is a significant opportunity to enhance our evening sales by offering a great-value, dine-in experience including beers and margarita cocktails for just £2.50 as well as a number of delicious new menu additions.

With our outstanding food offer, excellent value for money and great service, alongside our adaptable and resilient business model, we remain well placed to continue expanding our UK network whilst taking the brand into new markets, particularly in Europe."

1 defined as the percentage change in like-for-like sales compared to H1 FY22

2 defined as the average of the data reported for restaurants by CGA Peach for the period.

3 defined as statutory operating profit before interest, tax, depreciation and amortisation (before application of IFRS 16 and excluding exceptional costs) and reflects the underlying trading performance of the Group. The reconciliation to profit from operations is presented in the financial review.

4 defined as net debt / cash before lease liabilities arising from application of IFRS 16.

5 based off company-compiled consensus: FY23: Adjusted EBITDA: £5.0m.

BUSINESS REVIEW

Growth

Last year was a record year of growth for the Group and we have again made good progress on new site rollouts this year to date. In the first half of the year, we opened new sites in Derby and Greenwich and our franchise partner SSP opened in Manchester Piccadilly railway station. Since then, we have opened our first site in Northern Ireland, in Belfast, and a site in Bracknell. We anticipate a further three new sites opening this year, taking the total to eight.

We remain ahead of our IPO aspiration to open 45 sites over five years but felt that it was right to aim for the lower end of projections in FY23 as we wanted to focus attention on: (1) finishing the refurbishment plans for Chilango and ensuring the conversion was a success; and (2) assessing the full impact of the cost-of-living crisis and the changing dynamics of the UK commercial property rental market to get the best-possible deals.

The FY24 pipeline looks strong, with one site already legally completed, two midway through legals and one further offer submitted. The UK commercial property market remains favourable with rent percentage of revenue improving further. We remain well positioned for expansion opportunities, as our flexible model enables us to take a range of site formats, including former retail units (since we do not need to install expensive cooking-extraction equipment). We therefore expect to continue our UK rollout at a rate of 8-12 company-owned stores per annum from FY24 onwards.

Franchising

The Group's proposition and operating model is perfectly suited to franchising mainly due to: (1) our site format flexibility and simplicity of kitchen setup which allows us to access a wide range of units and (2) our central production food model provides consistency of food quality and enables the franchisees to quickly train employees.

We have a very healthy franchise network with quality franchise partners performing well, including SSP and Compass Group in the UK and Eathos in the Middle East. The travel network of franchise sites has performed incredibly well with sales records achieved in every unit this year and a LFL sales growth in H1 FY23 of greater than 30%. The Middle East business is also very strong, generating LFL sales growth of c.15% and is more profitable than ever before.

We continue to seek quality franchise locations with these existing partners in the UK.

European opportunity

We are by far the largest fast-casual Californian-inspired Mexican business in Europe and we remain firmly committed to exploring European opportunities for the Group. We believe our business model and food-quality is stronger than the competition and are keen to explore opportunities, predominantly via franchising considering the suitability of the brand to this style of rollout. Acquisition opportunities may also exist and considering the success of the conversion of Chilango post-acquisition, we are confident that similar success could be replicated elsewhere.

UK profitability

We have been heavily focused on improving the profitability of UK operations and are delighted to have secured some favourable supply arrangements towards the end of H1 FY23. These will collectively deliver a further 1.3 percentage point improvement in profitability at the Adjusted EBITDA (pre IFRS 16) level in the second half of FY23.

The utility market continues to be volatile, however the Group has hedged utility prices at rates significantly lower than FY22 comparative rates until March 2024 to provide greater certainty in this area. Internal KPIs are in place to ensure usage is monitored, with usage mitigating actions taken where identified. Meanwhile, inflation appears to have plateaued and is now gradually reducing, and we expect that a more normalised cost environment will prevail in the coming months.

Chilango update

In May 2022 the Group made the strategic acquisition of eight Chilango sites. Five were converted to Tortilla branded stores and these have since traded far ahead of expectations, with average weekly sales in H1 FY23 being 32% higher than the pre-conversion average.

At one of these conversions, Croydon BoxPark, we have deployed a 'virtual kitchen' operating under the Chilango brand on delivery platforms only. This has resulted in 35% incremental growth, showing a very positive case for further deployment of virtual kitchens where Chilango brand awareness is high.

We have kept the three remaining sites continuing to trade under the Chilango brand.

Digital strategy

In H1 FY23 we recruited a new management role, Andrew Brook as Head of IT, to drive growth and efficiencies through the use of technology. We have successfully launched a nationwide rollout of delivery order-aggregation software, Deliverect, to simplify the management of multi-platform delivery channels at every store and to maximise the speed and accuracy of delivery order fulfilment.

Post Period-end we launched a trial of our first digital concept site, by refurbishing our London Wall site and installing kiosks. This was designed to maximise customer throughput at peak times, and early signs are encouraging. Our hourly sales record increased by 37%, and the peak-day average lunch period (12-2pm) sales increased from £2,200 to £2,600. This proof-of-concept is promising and indicates the kiosk-only approach may be a viable solution for sites with significant volume demand that cannot currently be fully met.

Food and marketing

We have launched several key product and marketing campaigns, which we believe will drive significant improvements.

Firstly, we have enhanced our loyalty scheme to provide a more generous offer for the consumer who now gets a free burrito after five purchases. The scheme has seen a 6% increase in adoption since the change, to more than 300,000 customers. Average spend among these customers is also up 12% vs the Group average.

Secondly, in August 2023 we improved our chicken product, the Group's best-seller. The new product, chicken pibil, is more flavoursome and consistent than the prior product. This improvement has additionally reduced labour costs in our sites and enabled us to remove grills from numerous sites, resulting in lower energy usage. Other recent changes include a refreshed Salsa Verde recipe, and the removal of one of the rice options to minimise waste and improve the quality of having a single rice option.

Lastly, in September 2023 we launched a series of "Tortilla Sunsets" promotions. We have adopted a low-price alcohol model to give a very generous "Happy Hour" offering, designed to drive evening sales in student-dense areas. We have also launched exciting new evening menu items with crockery & cutlery provided to give customers more of a "casual dining" feel.

Environmental, Social and Governance ("ESG")

ESG remains a key consideration for the Group, and we are pleased to confirm that we intend to install a renewable energy source at our central production kitchen which should be operational in FY24. The central production kitchen is our single biggest consumer of electricity and so this will bring a significant positive environmental impact.

The new chicken pibil product has also helped us reduce our utility cost expenditure further helping the business to lower its carbon footprint.

We continue to offer a menu containing 70% plant-based ingredients, are a signatory to the Better Chicken Commitment and serve only higher welfare meats. We partner with a business called Too Good To Go, to reduce food waste, with almost 58,000 meals saved in the last twelve months.

Board and people

We have an experienced senior Management team who remain very passionate about the brand and implementing our growth strategy. Post Period end, Keith Down joined as a new Non-Executive Director. Keith brings with him a wealth of experience in the sector and we are very excited to have him strengthen our Board.

Andy Naylor, CFO, has been promoted to Managing Director. Andy has been in the business for six years and in recent years has taken on a broader role, including building the UK franchise partnerships and leading the development of the technology and facilities functions.

FINANCIAL REVIEW

Revenue

Revenue increased by 22% to £32.7m (H1 FY22: £26.9m), driven by additional contribution from new stores as well as the continued LFL sales growth of our existing estate. Our mature stores have continued to trade above the restaurant industry average, with LFL sales growth in H1 FY23 of 5.0% vs an average CGA Peach Coffer benchmark of 4.6%.

After adjusting for the benefit of the lower VAT rate prevailing in Q1 FY22, our LFL sales growth for H1 FY23 was 8.4%.

Gross profit margin

Gross profit margin was consistent at 77.0% in both periods, which is a good result considering that the prior year number benefitted from:

• The lower VAT rate in Q1 FY22 which lifted gross profit margin by 0.7 percentage points; and
• Q1 FY22 benefitted from materially lower food costs, particularly proteins, which rose sharply in late March FY22 following the start of the Ukraine war in February of that year.

This favourable trend was driven by competitive tenders on our supply contracts, and results in our prices being secured on 76% of products until December FY23, with 46% then secured until April FY24.

Across gross profit margin and administrative expenses, we expect to deliver a further 1.3 percentage point improvement in our Adjusted EBITDA (pre-IFRS 16) margin in H2 FY23 compared to H1 FY23 (in addition to the normal seasonality weighting of EBITDA).

Administrative expenses

Administrative expenses increased by 25% to £25.0m (H1 FY22: £20.0m), in line with revenue growth. However as a percentage of revenue, administrative expenses were 76.3% in H1 FY23, improved versus 76.7% in H1 FY22 after adjusting for the Q1 FY22 VAT benefit. Despite the high inflationary environment, costs were well controlled, and savings found. The utilities market has been highly volatile, however we hedged fixed prices at a favourable rate to mitigate this until March FY24.

Adjusted EBITDA (pre-IFRS 16)

Adjusted EBITDA (pre-IFRS 16) is the key performance metric that the Group utilises to assess the underlying trading performance. A reconciliation of this measure compared to profit from operations is as follows:

Adjusted EBITDA (pre-IFRS 16) of £1.8m was generated in H1 FY23 which was £0.7m lower than H1 FY22. The year-on-year decrease is entirely due to a total of £1.1m in Government support which benefitted the prior year number. Of this support, £0.8m related to the lower VAT rate in Q1 FY22 and £0.3m related to business rates support provided as part of the Government's COVID support package.

Good progress has been made by the Group in FY23 to recover profitability and this collectively contributed a net £0.4m increase in Adjusted EBITDA (pre-IFRS 16) in the first half of the year. These cost improvements were largely weighted towards the end of the Period and will contribute more meaningfully in H2 FY23. We therefore expect H2 FY23 Adjusted EBITDA (pre-IFRS 16) to be 1.3 percentage points higher than H1 FY23 from these improvements alone, on top of the normal seasonality of EBITDA generation.

Share-based payments

Share-based payment expenses of £0.2m were recognised in the Period (H1 FY22: £0.2m) relating to the Group's Long Term Incentive Plan ("LTIP").

Finance expense

Finance expense of £0.9m is comprised of £0.8m of interest charged in relation to Right of Use assets (a consequence of the accounting treatment of leases under IFRS 16) and £0.1m of interest for the debt facility that the Group has in place.

Cash flow and net cash

The Group closed the Period with a net debt position of £1.6m. Drawn debt remains unchanged from the end of the FY22 financial year at £2.9m. A reconciliation of the movement in net debt between the start and end of the period is as follows:

The Group's closing net debt position of £1.6m represents a low level of leverage which is important considering the recent increases in the Bank of England base rate. The Group's efforts to recover profitability this year and going forward will enable the business to get back to the aim of funding expansion capital requirements from operationally generated cash.

Dividend

The Board did not recommend an interim dividend for FY23. In line with the previously stated policy, the Group's capital will be focused on growth over the coming years with the dividend policy subject to re-assessment going forward.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the period ended 2 July 2023

Earnings per share for profit attributable to the owners of the parent during the period

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

General information

Tortilla Mexican Grill plc, the "Company" together with its subsidiaries, "the Group", is a public limited company whose shares are publicly traded on the Alternative Investment Market ("AIM") and is incorporated and domiciled in the United Kingdom and registered in England and Wales.

The registered address of Tortilla Mexican Grill plc and all subsidiaries is 142-144 New Cavendish Street, London, W1W 6YF, United Kingdom.

The Group's principal activity is the operation and management of restaurants trading under the Tortilla brand both within the United Kingdom and the Middle East and under the Chilango brand in the United Kingdom.

Accounting policies

Basis of preparation

The consolidated interim financial information has been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs), as adopted by UK international accounting standards.

The Group's Annual Report and Accounts for the period ended 31 December 2023 are expected to be prepared under IFRS.

The comparative financial information for the period ended 1 January 2023 in this interim report does not constitute statutory accounts for that period under 435 of the Companies Act 2006.

Statutory accounts for the period ended 1 January 2023 have been delivered to the Registrar of Companies.

The auditors' report on the statutory accounts for 1 January 2023 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Significant accounting policies

The consolidated interim financial information has been prepared in accordance with accounting policies that are consistent with the Group's Annual Report and Accounts for the period ended 1 January 2023 which is published on the Tortilla website, located at www.tortillagroup.co.uk. At the date of authorisation of this financial information, certain new standards, amendments and interpretations to existing standards applicable to the Group have been published but are not yet effective and have not been adopted early by the Group. The impact of these standards is not expected to be material.

Based on the Group's cash flow forecasts, the Directors are satisfied that the Group will be able to operate within the level of its current facilities for the foreseeable future, a period of at least twelve months from the date of this report. In making this assessment, the Directors have made a specific analysis of the impact of both the inflationary pressures currently affecting the industry as well as consumers, and the impact of a potential recession.

Accordingly, the Directors consider it appropriate for the Group to adopt the going concern basis in preparing these financial statements.

Other operating income

1 Includes Retail Leisure Hospitality Grants, Local Restriction Support Grants, Restart Grants and Omicron Grants

Profit from operations

Profit from operations is stated after charging:

Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to equity shareholders by the weighted average number of shares outstanding during the period.

Trade debtors primarily relate to sales due from third party delivery providers and these are settled the week immediately following the week in which the sale was recorded. There are also amounts owed by the Group's franchise partners, which are due within 30 days of the end of the period.

Other debtors consists of deposits held by third parties, generally landlords, and amounts accrued but not yet invoiced to third parties. These amounts not invoiced are franchise income and produce from the Group's central kitchen which is sold and bought back to the Group's main food supplier, who provides the distribution across the Group's estate.

Trade and other payables

The carrying value of trade and other payables classified as financial liabilities measured at amortised, which the Directors consider equal to fair value.

IFRS Comparison to UK GAAP

The Group applied IFRS for the first time in the 52-week period ending 2 January 2022. The Group applied IFRS 16 using the modified retrospective approach, with the date of initial application of 1 January 2018 and has restated its results for comparative period as if the Group had always applied the new standard.