Whitbread PLC (WTBCF) CEO Alison Brittain on Q4 2021 Results – Earnings Call Transcript

Whitbread PLC (OTCPK:WTBCF) Q4 2021 Earnings Conference Call April 28, 2022 3:15 AM ET

Company Participants

Alison Brittain – CEO & Executive Director

Hemant Patel – CFO & Director

Conference Call Participants

Alison Brittain

Good morning. I’m Alison Brittain, and I’d like to welcome you to Whitbread’s Financial Year 2022 Preliminary Results Presentation. Joining me this morning is Hemant Patel, our new CFO, and I’d like to welcome him to his first results presentation. As you know, Hemant has been with Whitbread for 3 years and was previously Finance Director of the U.K. business. And so he knows us very well. And indeed, he’s also well known to many of those listening on the call today.

Today’s presentation will take place by remote webcast, followed by a live Q&A session at 9:15 a.m. Details of how to join the call can be found on our website. Turning to our agenda this morning. I’m going to start by taking you through our trading performance for last year and the outlook for the financial year ahead. I’ll then hand over to Hemant, who will present our financial performance, and then I’ll finish by providing a strategic update. Following this, Hemant and I will be delighted to answer your questions.

Financial year ’22 saw a strong recovery in our performance. Premier Inn’s hotel performance in the U.K. was excellent, and we continue to significantly outperform the market. We believe that this outperformance is directly attributable to our investing to win commercial strategy, the strength of our #1 brand, our national scale and direct distribution, along with the ever-increasing appeal of the Premier Inn customer offer to our guests.

Our operational performance throughout the year was outstanding and testament to the hard work and dedication of our employees, adapting a short notice to the implementation of government restrictions, whilst at all times, ensuring the safety of our customers. The summer period in particular saw very high levels of demand in our hotels with many continuously at full occupancy. Our teams really stepped up, and I’m extremely grateful for their commitment and effort during this period.

You’ll recall that COVID restrictions impacted the business in quarter 1, and we reopened more fully towards the end of May 2021. After that, we saw trading rebound strongly in quarter 2. And in half 2, we traded well above pre-COVID levels. Our current hotel trading in the U.K. remains very strong, and our forward booked position in Q1 is encouraging and our recent network planning exercise showed clear evidence of an acceleration in the exit of independence from the market. Combined, these factors mean we are very well placed to continue to gain market share as we move through the first half of the coming year.

Our U.K. restaurants business also bounced back strongly from last year, but still traded behind pre-COVID levels as the recovery in the pub and restaurant value sector like the wider market. Trends improved in the second half of the year, in part driven by a number of our commercial initiatives. Our total food and beverage sales are now only around 5% behind pre-COVID levels in the first 7 weeks of the financial year 2023.

In Germany, government COVID restrictions acted as a headwind in the hotel market throughout last year and into the start of the new financial year. While the majority of restrictions are being removed this month, the market is still some way behind pre-COVID levels and is recovering more slowly than the U.K. market. Despite this, our hotel trading performance has been encouraging. During the COVID pandemic, we’ve transformed the German business and built a significant estate of 37 quality hotels in prime locations that score very highly with guests. We are looking forward to being able to trade them without restrictions for the first time from quarter 2 this year.

Well-publicized sector cost inflation is anticipated to be significantly above historic levels. However, we are well positioned to be able to offset the majority of the inflationary cost pressure that we’re currently experiencing in the market through our long-standing efficiency program, our estate growth and higher pricing levels. We’ve also rolled forward our cost-saving program, and we are targeting savings of around £140 million by 2025, with £40 million already delivered in the last financial year.

Our Force for Good sustainability program underpins everything that we do. During the year, we set further stretching targets, including accelerating our net 0 carbon target to be achieved by 2040 and setting a clear diversity and inclusion commitments. We are making good progress across our ESG agenda and have worked hard to ensure it is fully embedded within the operations of the business.

We are keen to recognize the support of our shareholders. Our strong performance and the confidence we have in our outlook means that we’re able to reinstate our dividend payment with a proposed final dividend of 34.7p per share and a total payment of £70 million to be paid in July. This represents about half our pre-COVID dividend levels. And in the future, we’ll grow the dividend as profits increase in line with our policy.

I thought we’d start with a simple slide showing the strength of our recovery from the COVID lows of last year. The slide shows our sales and statutory profits across the last 2 years. For clarity, financial year ’20 is the pre-COVID year ending February 2020, just before the onset of COVID. Financial year ’21 is the year ending February 2021 and so a full 12 months of the first year of COVID and the resultant government restrictions. Financial year ’22 is the last year, ending the 3rd of March 2022, so a year that saw significant restrictions in the U.K. until May and for large parts of the year in Germany.

As we reported at the time, the pandemic resulted in a material reduction in revenues and a statutory loss of just over £1 billion in financial year ’21. As the chart show, we’ve bounced back well in financial year ’22 despite the significant restrictions in quarter 1 in the U.K. and throughout the year in Germany, and this has helped us return to a small profit. This is still behind pre-COVID profitability levels, but it’s a remarkable positive swing from last year’s losses.

We’ve used the next 2 slides in our previous presentations to demonstrate just how strong Premier Inn’s performance has been. This slide shows our occupancy levels and our monthly total hotel sales in the U.K. versus pre-COVID levels. As you can see, we’ve traded well ahead of pre-COVID levels for most of the second half with the exception only of January when occupancy levels dipped as a result of Omicron.

The next slide sets this performance against the market. This slide shows the magnitude of our outperformance in the U.K. We traded consistently ahead of the mid-scale and economy market throughout the year with the performance gap growing to above 20 percentage points as we move through the end of the last financial year and into the new one. And whilst we are outperforming the mid-scale and economy market, the mid-scale and economy market itself continues to materially outperform all of the hotel sectors, as you can see at the bottom of the slide.

Premier Inn’s outperformance is clear and is driven by our scale, strong brand, direct distribution and leading customer proposition, combined with our commercial initiatives, ongoing development of our automated trading and bespoke pricing system and a weakened competitor set.

This slide for Germany really highlights the difference in the market compared to the U.K. with the German market being subject to greater levels of restrictions and for longer periods of time. This has resulted in the overall German hotel market being some way behind the U.K. with restrictions only being lifted at the start of April this year. This is reflected in lower occupancy numbers compared to the U.K.

Despite the weak market, we traded relatively well throughout the year, reaching occupancy levels of 66% in October prior to the Omicron wave with our more mature hotels delivering an encouraging performance as we continue to build the Premier Inn brand, and I’ll come on to talk about that in a bit more detail later. The strong sales growth you see here is driven by our estate growth. Before the pandemic, we had 6 open hotels, and now we have 37.

Let’s now look forward to the first half of our next financial year. On the left-hand side of this slide, we show the customer group categorizations that we used to discuss the demand recovery in the U.K. and Germany. In the U.K., whilst our own trading performance is strong, and we are outperforming, it’s worth remembering that the overall market is still very tough. The overall U.K. market is still behind pre-COVID levels and the mid-scale and economy market has only just recovered to pre-COVID levels.

In Premier Inn, we see a broad-based recovery across all customer groups. Leisure demand levels, which account for around 50% of our revenues remain strong. Trades people business demand, which accounts for 25% of our revenues, has been resilient throughout the crisis, and that continues to be the case.

Office worker business demand, also around 25% of our revenues, is recovering well post Omicron. International inbound levels, which account for 10% of our revenues are increasing and overseas website visits have increased sharply in recent weeks and are now at only around 10% below pre-COVID levels. The value pub and restaurant sector in which we operate has been slower to recover than most of the restaurant sectors, but is now improving.

In Germany, the majority of restrictions were lifted at the beginning of this month, and so the market is still some way behind pre-pandemic levels, but it is improving. Our performance is encouraging, but the slower market and the impact of our maturity profile means that our losses before tax this year are likely to be at a similar level to last year pre the government grants. However, we believe that the market in Germany will follow the U.K. and bounce back and that the budget branded sector will be a sector winner. We expect to see this in the second half of the year and into next year, and so we’re targeting a run rate profit breakeven by the end of the financial year 2024. So we have clear signs of strength across all customer groups in the U.K. and a recovering market in Germany.

The right-hand side of the slide shows the split of the accommodation sales recovery profile between regions in London to also help demonstrate that the recovery is broad-based geographically. Our regional sales have shown strong sustained performance, but our London sales have lagged the regions. But since the start of the new financial year, our London accommodation sales have now also moved ahead of pre-COVID levels.

Over the last 18 months, we have commented on when we expect our U.K. like-for-like RevPAR recovery to happen. We first stated that recovery would happen in calendar year 2023. And then we accelerated that to be at some point in the calendar year 2022. However, given our strong performance in the second half of the year and into the start of this year, we think it’s hard to argue that this recovery hasn’t already happened. And absent any changes to the COVID outlook, it seems logical to now refer to an environment where our RevPAR has recovered, and we are already trading above pre-pandemic levels.

The next slide demonstrates the strength of our pricing in quarter 1 in the U.K. It shows pricing levels for booked and stage rooms versus pre-COVID financial year 2020, and the broad-based nature of that strength with pricing well ahead of pre-COVID levels across most of our hotel locations and more or less in line in Central London. We’re also seeing similar levels of pricing strength into quarter 2, which is very encouraging. But as a reminder, we’re still only about 20% booked for quarter 2, which obviously means there’s still a long way to go.

The contraction in independent supply that I’ll talk about in the strategic update later, combined with the strengthening demand, builds to an encouraging outlook for Premier Inn this year. However, at this early stage, we have more confidence in the first half, and we’re more cautious on the second half, particularly as the current shortly booking profile means we’ve got limited visibility into half 2. And we’re also mindful of the macroeconomic commentary around a potential customer spend squeeze. And so whilst we have no forward signs of this ourselves, we anticipate that the market may well be tougher.

Building on this positive momentum, we remain confident in the U.K. business returning to pre-COVID profit before tax margins in the near medium term despite the market-wide inflationary headwinds and the supply chain and labor disruptions. Our return to pre-COVID margins will be achieved through a number of areas, most of which are not available to our competitor set. For example, our ability to take market share through the competitive opportunities that exist and which have been enhanced by COVID, our ability to grow at pace, the improved operating leverage of our new hotels, our pricing power in an inflationary cycle, the room rate uplift from our refurbishment program and our investment in Premier Plus rooms, estate optimization and our long-standing cost reduction efficiency program. All of these elements combine to give us a positive outlook and a compelling margin recovery opportunity.

And on that positive note, I’ll now pass over to Hemant to talk through our financial performance.

Hemant Patel

Thank you, Alison, and good morning, everyone. This is my first results update, so I thought it was worth starting with a brief summary of our financial position and our financial strength. As Alison has shown, our recovery from FY ’21 has been significant, with statutory revenues growing by 189% year-on-year, reflecting our strong competitive position and investment in our successful commercial initiatives, all of which have enabled us to move back into a small statutory profit this year.

It’s worth noting that we are a long-term growth business, making investment decisions to drive profitable growth and steady cash generation over a 25- to 30-year time frame. We’re also investing in markets that are themselves exhibiting structural growth over a similar period of time, allowing us to deliver consistent and sustainable returns.

As we move back into profitability, I want to reiterate my confidence in our ability to deliver these sustainable returns both for U.K. and Germany, targeting a return on capital employed of between 10% to 13% for the group. The group retains a strong balance sheet and liquidity position as we move back towards investment-grade leverage metrics, a financial structure that has served us incredibly well over the last decade.

At the end of FY ’22, we are in net cash position with access to £1.1 billion of cash and cash equivalents plus facilities. This level of liquidity and the fact that as we move back to normal trading levels, our operating model will return to significant annual cash generation gives us the confidence to return to more historic levels of CapEx spend in FY ’23 of around £350 million to £400 million as we continue to invest to win through our self-funded growth strategy. This, along with our confidence in the outlook, also backs our decision to pay a £70 million dividend, a dividend per share of 34.7p.

The group has a long track record of capital discipline, targeting strong investment returns and maintaining an efficient balance sheet, and this will remain at the forefront of our considerations. Our outlook into FY ’23 is encouraging, albeit with some uncertainty in the second half. Current trading in the U.K. is strong, and we anticipate a recovery in the German market as we move through the year. I’ll come on to talk in more detail on our FY ’23 guidance in my final slide.

This page shows a summary of our overall financial performance for the year, which closed ahead of our expectations. Note that FY ’22 was a 53-week year with the benefit of the extra week being just over £40 million of revenue and around £4 million of profit. Statutory revenue was 189% ahead of FY ’21, demonstrating a strong post COVID recovery in sales and the significant estate growth we’ve experienced across both the U.K. and Germany. Other income of £114.5 million principally relates to COVID-related government support schemes, including £62 million from the U.K. job retention scheme and £44 million from German government grants. The majority of the support we received in the first half of the year, and we stopped returning further in the U.K. when we had largely reopened our estate in May.

Operating costs were £408 million higher than FY ’21, driven by revenue-related variable costs, estate growth and lower levels of business rates relief. As a result, the adjusted loss before tax was £15.8 million. We benefited from adjusting credits of £74 million compared to £27.5 million profit on the sale and leaseback of the hotel, several property disposals part of our hotel optimization program and £42 million of net property impairment reversals, all of which took our statutory profit before tax to £58.2 million.

As we move towards a return to investment grade leverage metrics in FY ’23, closing net cash was £141 million. As mentioned, we have a strong liquidity position with access to around £1.1 billion of cash and cash equivalents as well as an undrawn revolving credit facility of £850 million. This slide shows separate P&Ls for our U.K. and our German businesses.

In the U.K., the release of most COVID restrictions in Q2 saw a strong rebound in demand with sales recovering to pre-pandemic run rates in the second half. Operating costs of £1.248 billion were in line with expectations and 45% higher than FY ’21, driven by an increase in revenue-related variable costs, primarily food and beverage cost of sales, the impact of estate growth, lower levels of the government business rates benefit, all partly offset by our cost efficiency program.

Right-of-use asset depreciation increased by just over £15 million to £125 million, driven by the increase in our leasehold estate, while non-IFRS 16 depreciation remained constant year-on-year at £169 million. Interest lease liability also increased in line with our leasehold estate growth to £124.7 million, overall resulting in an adjusted profit before tax of £74.9 million, an improvement of more than £600 million on the last year.

In Germany, total strategy revenue was over 200% ahead of FY ’21 levels, primarily driven by our estate growth. On average, we have 30 opened hotels in FY ’21, increased to 35 in FY ’22. Germany loss before taxes of £23.9 million were helped materially by £44.3 million of government-related COVID support.

As for our cash position, despite the headwinds of COVID, our strong trading for the year resulted in material cash generation, allowing us to invest capital for the future. Working from left to right of the waterfall, you can see that over the course of the last year, we’ve achieved an operating cash inflow of £404 million with half 2 improving on the first half in line with the top line recovery. This number did include £171 million of benefit from the U.K. and German government support, the majority of which was received in the first half of the year.

Maintenance capital expenditure was £93 million and expansion capital expenditure was £168 million, resulting in an overall full year spend of £261 million. Total net cash flow before shareholder returns and debt repayments was an inflow of £187 million. During the year, a total of just over £300 million of U.S. private placement debt was repaid, resulting in a net cash outflow for the year of £116.9 million.

For the repayment of the USPPs, we now have £1 billion of gross debt with a £450 million bond due in 2025 and a further £550 million of green bonds repayable in 2 tranches in 2027 and 2031. At the end of the year, we have £1.1 billion of cash available and an undrawn credit facility of £850 million that will step down to £725 million in September 2022.

Turning to our balance sheet and property portfolio. On the left of this slide, you can see our journey towards returning back to our investment-grade metrics. The group has maintained its investment-grade rating throughout the pandemic, reflecting our continued financial strength. We expect to be back at an investment-grade leverage metrics, then our funds from operations will be at less than 3.5x our lease adjusted debt within the ’22/’23 financial year.

On the right-hand side of the slide, we show the same analysis of property yields that we showed at half 1, updated for recent transactions. Our freehold properties, around 56% of our estate give us both operational and financial flexibility, including providing a strong covenant to all our stakeholders.

We last valued our property portfolio at the end of 2018, which was presented at our Capital Markets Day in 2019. As a reminder, this value of the property had a range of £4.9 billion to £5.8 billion based on the value we could achieve from careful sale and leasebacks over a period of time.

Difficult to value hotel properties over the last 2 years, owing to a lack of transactions and the volatility in the market. However, recent yields on hotel transactions where Whitbread is the tenant are in line with the yields assumed in the 2018 valuation of around 4.5% to 5%, an indication that property valuations on a like-for-like basis have held up well.

We believe the stability of our property portfolio, supports the strength of our brand and market position, and the discipline we have around capital allocation ensures the best long-term returns for our shareholders.

Moving on to guidance and outlook. In the U.K., our continued investment in commercial initiatives and refurbishments ensures we maintain our standout customer proposition in the budget sector. We previously guided to an additional £20 million of marketing and refurbishment spend at half 1 that we had planned to spend in the second half of last year and that would remain the base into FY ’23.

As factored at our Q3 results, the impact of Omicron and sub-supply chain issues mean that we didn’t incur that spend in half 2, but we do expect to start incurring in ’23. The supply chain issues and the general ebb and flow of our pipeline means that we now expect to have between 1,500 and 2,000 rooms in the U.K. this year, slightly lower than our normal levels. However, our expectation is to return to the 2,000 to 3,000 range in FY ’24 and beyond.

Alison referred earlier to the later removal of COVID restrictions in Germany and the somewhat delayed return to unlimited travel compared to the U.K. Although trading has been encouraging, we expect the market to take longer to recover into FY ’23. And in the absence of any significant German support, we anticipate adjusted losses will be in the £60 million to £70 million range, similar to FY ’22 pre-grant. This reflects the returning market, the delayed maturity of our newly open sites and our larger estate. However, our confidence in the long-term opportunity remains undiminished. And depending on macroeconomic conditions, we still expect to get to a breakeven run rate during 2024. Our guidance for German room growth in FY ’23 is around 2,000 to 2,500 rooms.

In terms of group costs, we expect year-on-year inflation in FY ’23 to be upwards of 8% to 9%, around 1% higher than previously guided at our Q3 results, owing to the impact of the Ukraine conflict primarily on utility and food costs. This equates to around an extra net £15 million of costs in the year. Our extended cost efficiency program now stands at £140 million by FY ’25 with £40 million delivered in FY ’22 and £100 million to go over the next 3 financial years.

CapEx levels will return to around £350 million to £400 million across 3 areas: continued M&A, growing our estate organically with new and larger hotels that improve our operational leverage, and investing in our current estate to ensure our customer proposition is well maintained. As we’ve already mentioned, we’re excited to announce the reinstatement of dividend payments with a final proposed dividend of £70 million or 34.7p per share. We intend to continue to grow future dividends in line with increased earnings returned to governing dividend levels in line with our pre-COVID policy.

Finally, current trading for the 7 weeks to 21st of April is very encouraging. Total U.K. sales were 17.3% ahead of FY ’20 with accommodation sales 29.9% ahead of FY ’20 and occupancy at 81%, despite the increase in VAT on hospitality products and services from 12.5% to 20% on the 1st of April. Total U.K. accommodation sales were over 28% of the market.

Trading during the Easter holiday period was robust with strong domestic leisure demand and increasing levels of inbound international demand. Business demand continues to improve, and our booked position into summer, albeit still at a relatively small proportion of total sales for the period is encouraging.

The value pub and restaurant sector in which we operate remains behind pre-COVID levels, but improving. Our food and beverage sales improved to be well ahead of FY ’22 and 4.6% behind FY ’20 levels. Germany total sales was 775% ahead of the same period in FY ’22 and 745% ahead of FY ’20. This level of trading gives us real momentum as we move through the first half of this year. However, we are still cautious about half 2 with limited visibility of trading and the uncertainty of the impact of both the war in Ukraine and increased cost of living might have on the economy and guest demand in both the U.K. and Germany.

In conclusion, I want to reiterate that we’re very pleased with our trading and financial management for the last 2 years of COVID-related disruption. We’re encouraged by our current strong trading, although we’re still cautious about potential economic uncertainty through the second half of FY ’23. However, we’re also very confident that we’re well placed strategically in both the U.K. and Germany.

And I’ll now hand you back to Alison who will take you through our strategy in more detail.

Alison Brittain

Thank you, Hemant. We’ve now talked you through our strong performance in financial year ’22 and our good current trading and outlook for the year ahead. This section now sets out the reasons why we are extremely confident in the long-term growth opportunity for Premier Inn in both the U.K. and Germany.

In the U.K., we believe our proposition has strong appeal to customers and is becoming even more relevant to guests post COVID as consumer trends and habits change. By virtue of being by some margin, the largest hotel operator in the U.K., with over 840 hotels, we offer the best choice of locations. We offer value for money. We’re a budget brand and our pre-COVID average room rate was just over £60, making our rooms an affordable option for many.

Our customer journey is simple. The vast majority of bookings are made directly with us online, allowing us to communicate directly with guests. We put our customers at the heart of our business, and we aim to provide them with choice, good value and a high-quality offer. As a result, we have very high guest scores and market-leading brand and value for money ratings. Premier Inn has been voted the U.K.’s favorite hotel brand for the 11th consecutive year.

As we enter the recovery phase of the pandemic, our scale, direct distribution, value and quality scores ensure Premier Inn remains a standout customer proposition in the budget sector — before the onset of the pandemic, the independent sector still represented 48% of the U.K. market, but was in long-term decline as customers migrated from independent to budget-branded hotels. This supply contraction helped provide room for Premier Inn to grow.

Since the start of the pandemic, we’ve highlighted the significant enhanced structural opportunity that we believe will exist as a greater number of independents leave the market. At our interim results in October, we referenced a sample review that we conducted that showed evidence of an acceleration in independent exits.

We’ve subsequently completed a more comprehensive review of around 35% of the total independent supply as part of our network planning exercise. The findings clearly show that the rate of independent exits from the market has accelerated by about 3x, undoubtedly, as a result of the pandemic and the subsequent pressures. We expect that a heightened level of independent exits will continue for the next 18 to 24 months. And Premier Inn is well placed to capitalize on this contraction in competitor supply and to take market share.

We opened over 3,700 rooms in the year, taking our U.K. estate to over 82,000 rooms, and we still have a long way to go before we hit our target of 110,000 rooms, which would represent a growth of over 1/3 compared to today. A weakened competitor set, as evidenced on the previous slide may well provide an opportunity to grow beyond this target in the long term. Our new hotels are in prime locations, they’re larger, more efficient and, therefore, deliver improved operational leverage. The map on this slide shows we are growing in all parts of the U.K.

Our flexible commercial model enables us to successfully deploy different pricing strategies across the estate. In areas of very high demand, for instance, in the Lake District, we priced high and outperformed the market on rate. In areas of lower initial demand such as metropolitan areas, including the example we use here of West London, we implemented an occupancy-led pricing strategy. We priced low initially, helping build demand before increasing prices as booked occupancy built leading to higher occupancy levels and RevPAR than the market. This pricing flexibility allows us to adjust to varying levels of demand, remain competitive and win market share.

Looking forward into the first half of the financial year 2023, we are seeing positive demand indicators. The chart on the right-hand side of this slide shows that this is to the Premier Inn website for stays in the spring are ahead of pre-COVID levels for both business and leisure led destinations. And even further out into summer, our website visits are already slightly ahead of pre-COVID levels. Our commercial flexibility ensures that we’re able to optimize our RevPAR and drive both high occupancy and price. The higher pricing levels both in the market and for Premier Inn are going to help offset inflationary pressures.

Our strong and flexible balance sheet enables us to invest in our estate, ensuring that our leading customer proposition remains a competitive advantage as we drive market share. Having initially been targeted as our business guests, our Premier Plus rooms have proved popular with our leisure guests too. This broadens the potential footprint for rollout. And as the map of current Premier Plus location shows, we can target a wide range of locations.

We now have over 2,000 Premier Plus rooms, and we’re seeing very good returns with higher price and higher occupancy levels. We’ll look to add around 1,200 Premier Plus rooms this year. At our full year results last year, we talked through our plans to enhance our business offer by offering improved credit management for business accounts, relaunching our business booker portal to drive higher conversion rates and increasing the number of travel management companies through which we sell our rooms. This gives us access to new customers who previously wouldn’t have been permitted by their employers to book outside their designated travel management company. All of these initiatives are showing good returns and helping drive improving business bookings, and we’ve seen a particularly strong improvement in bookings through our business booker portal.

We’re also investing in our food and beverage strategy. Our food and beverage offer is a core part of our customer proposition. All our hotels have a restaurant, either a pub restaurant located next door or a restaurant within the hotel itself, and this offer is fundamental in achieving high occupancy levels and high RevPAR.

As we’ve already mentioned, the value pub sector we operate in, has been a slower recovery following the easing of restrictions in May. In part, this is due to a slower return to pre-COVID behaviors from some older customers, but also as a result of an element of customers trading up post lockdown.

The chart on the left shows a steady improvement in our food and beverage sales from September, rebounding well following the Omicron dip in December and January, and we’re now closer to recovering to pre-pandemic sales levels. We’re confident that our commercial initiatives will help drive a further improvement in sales, for example, our recent Valentine’s Day and Easter campaigns. We’re also focusing our marketing and investment in our food and beverage offer by leveraging our Premier Inn digital marketing expertise and investing in online booking tools such as TripAdvisor as our guests move to booking more online.

Whitbread has a long-standing track record of material cost savings, helping to offset inflationary pressures. This has become of even greater importance in the current climate. We delivered £40 million of savings last year, and we’ve now extended our program by another year, meaning a further £100 million of savings will be delivered by financial year 2025. We’ve given a couple of examples of savings on the right-hand side of this slide. I won’t go through the details. However, we believe these examples demonstrate that our savings come from all areas of the business through both procurement savings and operational efficiencies. These savings, combined with our hotel estate growth and commercial pricing flexibility mean we are well placed to mitigate a large part of the inflationary pressures that we currently see in the market.

Let’s turn now to Germany. We believe that the opportunity to create value in Germany is significant, and our commitment to the market will deliver good long-term returns. This slide is a reminder of why the market is so appealing and also the strength of our customer offer, which sets us apart from our competitors. The German market is highly attractive, larger than the U.K. with high levels of domestic business and leisure travelers.

Pre-COVID budget-branded RevPAR have been growing at a faster rate than in the U.K. The market is also highly fragmented and dominated by declining independent sector. And we believe that opportunities exist to acquire assets with attractive long-term returns. Our customer offer in Germany is compelling, and it appeals to both leisure and business guests, offering a place to stay in prime locations with great quality and a great value. We’re excited by the opportunities in this market, and we’re confident in our ability to replicate our U.K. success in Germany, particularly as the business grows in scale.

Our estate in Germany has been transformed since the start of 2022. Notwithstanding the disruption of the pandemic, we have grown rapidly with 31 new hotels added to the open estate, taking the open and trading estate to 37 hotels and our open and committed pipeline to 78 hotels. The foundations of a successful business and growth platform are now in place. Our hotel business is high-quality hotels in prime locations appealing to a broad customer base and with great guest scores.

We have a clear runway for growth in Germany. We’ll continue to grow our pipeline and believe we have line of sight to at least 60,000 rooms, which would equate to about 6% market share, which is still only about half that’s achieved by our Premier Inn in the U.K. Our immediate aim is to be the #1 budget operator in Germany, and our rapid growth over the last 2 years means that we’ve made good progress towards achieving this goal.

As the estate grows, we can turn our focus to brand building, and we’ll begin to trade our estate largely restriction-free for the first time in over 2 years. By utilizing the same ownership and direct distribution model as the U.K. and leveraging our U.K. capabilities, we are able to deliver a winning customer proposition in a very attractive market.

The German market has been subject to higher levels of government restrictions since the start of the pandemic, and as a result, the market is like the U.K. But despite this market drag, we see some positive signs from our own trading. Our customers are really enjoying our offer, and we continue to see improvements in our already very high customer scores, again, reflecting the quality of our proposition in Germany.

The right-hand side shows a snapshot of trading in 12 of our hotels that in half 1 have been opened for at least 12 months. The charts on this slide show the relative trading performance versus our competitor sets in those locations, and this was very encouraging in a tough market. Our occupancy was ahead of our competitors as was our absolute RevPAR. I stress that this is only a snapshot of 12 hotels and in an unusual trading environment, but it is evidence that we can compete in the German market.

We’ve made a significant commitment to the German market. We know our proposition works, and we look forward confidently to a restriction-free period of trading that will demonstrate the returns our mature hotels can deliver. The platform we’ve built in Germany is already a very valuable asset with great potential on which we can build. We’ve already invested or committed to over £900 million of capital expenditure. We’re confident in our growth opportunities, which will likely drive an annual spend of around £250 million on a lease-adjusted basis. We plan to open around 2,000 to 3,000 rooms every year, delivering mature returns of 10% to 14%, equating to a material value creation opportunity.

Our sustainability program Force for Good is embedded across all of our business functions, ensuring that being a responsible business is integrated across our business, and this is crucial to our long-term success. It’s an ambitious program with the overarching objective to enable everyone to live and work well.

We’ve had some great achievements this year, following on from an ambitious move to bring our net zero carbon target forward from 2050 to 2040. We’ve now aligned our targets to a 1.5-degree increase and signed up to the government’s Race to Zero campaign. We launched 8 commitments to drive greater diversity and to champion inclusivity. We recognize this is an important area for us to develop. Whilst there’s still more to do, we’re encouraged by the start we’ve made, and we’ve already achieved our target of over 40% female representation in our senior management roles and will now extend this target to 45%.

Other highlights include being rated top employer for the 12th consecutive year and being awarded the Stonewall Gold Award for our commitment to LGBTQ inclusion of work. We’ve also continued to fundraise for Great Ormond Street Hospital, now passing over £20 million of donation since the start of our partnership. In response to the Ukraine crisis, for the next 3 months, all money raised across our business will go towards our pledge to support the Disasters Emergency Committee.

Whitbread has a clear long-term strategy to create value. We’ll continue to grow and innovate in the U.K., and we see a clear path to grow by at least 1/3 again. We’re committed to the German market. We have a model that works, an impressive set of hotels in multiple cities, and we’re keen to demonstrate how they trade as restrictions end. We are well set for long-term value creation, and we’ll continue to enhance our capability to support long-term growth.

To conclude, I’ll recap on the points from our first slide. We continue to significantly outperform the market in the U.K., driven by the strength of our brand, our scale, direct distribution and our investing to win commercial strategy and the strong appeal of our customer offer. We have clear evidence of accelerating independent supply contraction in the U.K.

Trading in the last financial year was strong and exceeded pre-pandemic levels in half 2. The outlook looks positive for bookings in the first half, albeit that we have limited visibility into half 2. Restaurant performance is improving. Our trading in Germany is encouraging despite a tough market, and we’ve created the foundation for a successful business and a scalable platform for growth.

We expect to largely offset higher cost inflation through efficiencies, estate growth and higher prices, and we’re extending our long standing cost efficiency program. And lastly, as a reflection of our strong performance and confidence in the outlook, we have reinstated the dividend.

Thank you all for your time today. Hemant and I will now host a question-and-answer session, which will start at 9:15 a.m. U.K. time. You’ll be able to find the details on how to participate on our website.

Question-and-Answer Session

End of Q&A

Source link