Earnings Transcript for WTB.L - Q1 Fiscal Year 2023

Operator: Good morning or good afternoon all, and welcome to the Whitbread plc Q1 Results Call. My name is Adam, and I'll be your operator for today. [Operator Instructions]

I will now hand it over to Alison Brittain to begin. So Alison, please go ahead when you are ready. :

Alison Brittain: Good morning, everyone. Thank you very much for joining the call for our quarter 1 trading update. I'm joined here in the room by Hemant Patel, our Group CFO; and by Peter Reynolds, our Director of Investor Relations; and Sophie and Abi, who are also members of the Investor Relations team.

And I hope you've had a chance to review the Q1 release this morning, but I'll start with a really brief overview for those who haven't seen it, and then we'll hand straight over to Q&A, where we'll answer any of your questions.:

So during this first quarter, which ran until the June 2, we continued to trade exceptionally well in the U.K.. And we are now significantly ahead of pre-COVID sales levels as well as ahead of the market. Total accommodation sales in quarter 1 were 31% ahead of pre-pandemic levels, and our like-for-like accommodation sales for quarter 1 were 21% ahead of the same period. This resulted in an outperformance to the mid-scale and economy market of 27.2 percentage points. :

Given this very strong sales performance and the continued decline of the independent hotel sector, we remain confident about our continued margin recovery in the U.K. And therefore, assuming that consumer demand and occupancy remains strong, we are planning to make some further investments to underpin our market-leading position and to drive future earnings.:

We're planning for around GBP 20 million to GBP 30 million of additional costs due to brought-forward refurbishments and IT spend and some additional costs due to targeted pay increases. Turning away from the hotels, the value pub and restaurant sector remains behind pre-COVID levels, but is recovering and that's resulting in our total food and beverage sales being down about 4% for the quarter versus pre-pandemic levels.:

Turning to Germany, the overall German hotel market recovery has been some way behind the U.K. with the last of the restrictions only being lifted at the end of April this year. However, following the lifting of restrictions just a few weeks ago, the recovery in the German market has been somewhat faster than expected, resulting in an average occupancy in Germany of 65% across the last 4 weeks. With 40 hotels now open, we remain confident about the medium- and long-term value creation opportunity for Premier Inn in Germany. So that's the summary. And with that, I'll now hand back over to Adam, our operator, to host the Q&A.:

As you know, we have our AGM today. And so in order to have an efficient call this morning and given it's only a quarter 1 trading update, could I please ask that you initially limit your questions to 2 per person. So Adam, if you'd like to take some questions that would be great. :

Operator: [Operator Instructions] Our first question today comes from Vicki Stern from Barclays.

Vicki Lee: Just firstly, on Germany. Just a little bit on the outlook there. We've obviously all seen the market data come back faster than expected, but just how are things looking there as you progress into the following few weeks where you've got visibility, I guess, obviously, things are moving quite quickly in that market after it's just reopened. And then secondly, just on the market supply, there are a large number of rooms in the market that just remain temporarily closed. And I think those were excluded from your recent study on attrition. Just do you have any further insights you can share with us on just the likelihood those rooms might reopen? Or could there be a further sort of material reduction in supply that could come from that?

Alison Brittain: Okay. Yes. So I mean, starting on Germany. I guess we're feeling pretty positive about Germany. The market, we thought would come back in line with the U.K., but it has come back faster than we anticipated and faster than we had originally modeled. So we're pleased about that. And then within that performance, I think we are really pleased with the way that our business is now operating, and we expect to see further good performance and particularly for those hotels, which have been opened slightly longer than others, which we showed at the full year results were performing ahead of the market, we're still seeing that trend of performing ahead of the market. So we're pleased with where we've got to. And we, generally speaking, got a very positive buy from that business. Hemant, do you want to add anything to that?

Hemant Patel: Yes. I think the only thing I'd say those are kind of been -- our 18 most mature sites are the ones that we're looking at now and their occupancy has been much stronger over the last 4 weeks. Overall, we did about 65% occupancy for the last 4 weeks, indications going forward is that the market is going to continue to recover. So yes, we're very positive about this as Alison says.

Alison Brittain: And on the other question you asked, Vicki, yes, we're still continuing with our network planning exercise when we reported last time. It was only a few weeks ago when we reported that we were -- we'd scanned about 35% of the market at that time. So as we go through the next few months as we finish that exercise, we will obviously scan more and more and more of the market. And we do check, as you know, to make sure that things are either fully or only temporarily closed. So I don't know the answer at the minute in terms of how much of that temporary closure ends up being permanent versus reopened, but we will keep an eye on that. And when we next report, which is probably at the half year, we'll have a, probably the whole country done and the full exercise completed, and we'll have a real sense of whether there is further attrition coming from those temporarily-closed entities.

Operator: The next question is from Jamie Rollo from Morgan Stanley.

Jamie Rollo: First question is, could you break down the GBP 20 million to GBP 30 million into the sort of 3 different cost buckets? And also, should we assume that continues into the next financial year? And then secondly, on Germany, again, looks like you've opened sort of about half of your annual target for 2,500 rooms in the first quarter. So wondering whether that target is starting to look a bit cautious?

Hemant Patel: So if I take the question on the investment. So yes, yes, we've taken this opportunity to invest up to GBP 25 million to GBP 30 million, as you say, Jamie, very much linked to the high levels of occupancy and outperformance we've seen. Labor supply is pretty tight across the hotel sector. And assuming that demand continues onwards, we do see the need to make some very targeted pay investments and so very much linked to the high levels of occupancy, but also that tight labor supply.

Of that GBP 25 million to GBP 30 million, about GBP 15 million to GBP 20 million of that approximately. So the half of it is on labor. The remainder is split fairly equally between IT, investment and R&M investment, and those are accelerations of investments that we think are sensible based on the very high level of volumes we're seeing, and improvements in our -- and investments in our reservation system, which will give us a strong commercial payback over the next 2 to 3 years.:

I think you can assume that, that cost will roll into next year. We don't know what's going to happen and whether we're going to continue to need to invest in labor at the same levels next year. It all very much depends on the labor market and the occupancy levels going forward. But for now, I think we're assuming that, that might very well continue. And the accelerated investment will -- because of the high levels of occupancy, I think this will be a bump for us into this year. And again, it will continue into next year. The IT investment is a multiyear program. So we'll bring it to an end, but it's still a couple of years away. :

Alison Brittain: Yes. And the way we do targeted hotspot Pay is we tend to follow what we think will be national living or minimum wage rises of the future. So in the event that the market for labor stabilizes, we're able to unwind them at the point every April essentially as the minimum wage rates change. We can either choose at that point to follow through and have further hotspot pay, or we can unwind it at that level in which case it doesn't flow through. So it will be very much dependent on how we see the labor market at the time, where the pinch points are. Sometimes hotspots move throughout the year. So what is a really -- some of it can be very seasonal, as you'd imagine, like Cornwall, where that's not going to be a winter hotspot, but it's going to be a summer one. So we try and make sure that we're never wedded to it, but we can and may need to keep it going, depending on the labor market.

In Germany, without going through any of the detail, the -- we are opening a good number of hotels in the first half. They'll be quite immature. Brand new openings they are always at the lowest maturity, and we have to build on occupancy before we build on rates, whereas with the more mature hotels we've got in the market now, we think we are definitely building on rate as well as occupancy. So we are very much more optimistic, I think, about this year's performance in Germany as well as the medium- and long-term performance in Germany as a result of what we're seeing at the moment. And so I think your question was our guidance is a little bit harsh the last time we gave it. Probably it was given what we see now. And certainly, we've opened up stronger in this first quarter than we would have expected. :

Hemant Patel: And Jamie, I think it was -- we've added 1,000 -- I think it's 1,192 rooms in the quarter.

Jamie Rollo: Yes. Okay. So the full year guidance is still 2,000 to 2,500 on rooms and your -- and on Vicki's question, the GBP 60 million to GBP 70 million PBT loss, that will be better, but you're not guiding us on that at this stage. Is that right?

Hemant Patel: So yes, I mean just on the first point, we're not changing our overall guidance this year for the number of German room openings. It's just the phasing has been earlier in the year. On the second point, what -- yes, we said the market has opened up 5 to 10 points better. I think you can assume that, that would -- that applies to us as well. And our sensitivity as we talked about in the past is GBP 1.4 million for every percent. So I mean you can do the math.

Alison Brittain: Yes. So yes, definitely, our previous guidance is a little bit conservative. Okay.

Operator: [Operator Instructions] The next question comes from Leo Carrington from Citi.

Leo Carrington: Can I ask a follow-up on Germany. It looks like you signed a further 5 hotels, if I'm correct. Can you give some color on these, are these sort of new build developments or possibly conversions? And then in terms of the -- for the U.K., the mix of business and leisure, obviously, the overall picture is very strong in terms of RevPAR or combination sales, but what trends are you seeing in terms of midweek pricing and occupancy versus 2019? Do you have a sense of where the leisure business mix has now settled versus where the 50-50 it used to be?

Alison Brittain: I mean, on Germany, our openings are all leasehold. So we haven't -- I think they are developers in Germany who have developed properties and all have moved from -- very little, but some move from commercial to retail, but all they've done a development site in a specific location. They're all good locations, all of our sites are in really prime locations. They're all really high quality in terms of the build and fabric. And as I said, they're not freeholds, they're all leaseholds. That's the German opening.

Hemant Patel: Yes. And 5 are opened so far this year, which is what I think you alluded to in terms of the number.

Alison Brittain: Yes. So yes, our first 5 for the year. So -- and that's not dissimilar to now that the total stock of 40 hotels, which are similarly largely leasehold, some freehold and are in very prime locations, built with good quality developers and who have built to our specification or where we've refurbished.

In terms of the U.K., and what we're seeing, I mean, we've got -- we've had always from the opening -- each reopening following COVID, a big leisure bounce. And that leisure -- that high leisure performance has continued. And we, if we look at our forward bookings, look set to continue. Certainly, we can see into now the first half, we can see in the second quarter we're about 40% booked for the second quarter. So we are pretty confident that, that is going to be a strong performance.:

On business travel, if you recall, even during the COVID crisis, essential business travelers still traveled and stayed with us. That's about 25%, about half of the 50% of our business, which is business. And what we were looking for was what we call white collar or office-based workers returning, and we've seen a strong return into the midweek that we used to have as a strong business travel, which is why we've got high occupancy levels across the estate and across the week. But we're expecting that just to continue now in quarter 2. We haven't got a huge amount of line of sight into half 2, which starts in September. That's totally normal, by the way. That's not an unusual position. The only thing that's abnormal is we're coming out of a 1- or 2-year period where we haven't had normality at all. :

So normally, whether there's a wait with bated breath for the September return to work, return to school bookings, and then we book up quite quickly in September for the remaining part of the year up till Christmas. So we're pretty positive. And I mean I guess our outperformance and general performance is in 3 parts. We've got room growth, which is helping our performance. We've got pricing increases, which is helping our performance. And we've got occupancy growth, which helps our performance. And all of those 3 things have been evident in quarter 1's results. :

Leo Carrington: Okay. So net, there's maybe the mix is a bit more leisure skewed right now, but there's something...

Alison Brittain: Yes. I think we're not far off being back to how we were, to be honest with you. I think we're pretty much back to where we were.

Hemant Patel: Yes. And we're seeing strong occupancy and pricing across the full weight, so all sectors.

Operator: The next question comes from Tim Barrett from Numis.

Timothy Barrett: I had a 2-part question really on price. And on Premier Inn, I see exactly what you mean around you haven't fully formed your second half expectations. But can you talk around what you're doing with rate ladders or what you expect to do with rate early on? And then similar question on the restaurant side. Just wondered what you've done on price with the new menus, and whether that was sticking, what kind of elasticity you're seeing?

Alison Brittain: Yes. So you're right. We don't -- we haven't got forward. We don't expect to have forward bookings probably about 10% booked post -- for the second half, something like that. So it's slightly less than 10% but -- so it's really not that much. But we certainly expect, based on some leading indicators of people viewing and looking and what have you. We certainly expect the whole of this first half to be strong. We then have maintained some pricing, what I'd call pricing discipline, into the ladders in September. So we would expect still to be taking price as we went into the second half of this year. We would adjust that if we didn't see demand coming through, but our opening hypothesis is that demand will be there and that, that therefore, the pricing will be there and it will stick.

Hemant Patel: Yes. And so as Alison says, I mean, although we don't have that full visibility, obviously, we've got historical views. And remembering that we are setting pricing strategies by site by night. We've got historical views, obviously, what happened in FY '20, but also last year as well. And therefore, we will be setting rate and volume strategies and everything in between, depending on where we think the forecast and the demand is going to come through for each of those nights.

Alison Brittain: So we do still think that we are seeing supply reduction. So again, which gives us more opportunity for growth.

Hemant Patel: Exactly. So we're still, as Alison said, holding rate. On F&B, yes, we're seeing -- obviously, the value end of the pub restaurant market hasn't performed as strongly as the overall pub restaurant market, and is only kind of coming back then to kind of flat levels over the last kind of couple of months. We've taken -- we've seen some inflation coming through menus across the market. Not huge amounts actually based on the level of cost inflation that the market has been seeing. But we've taken price. We're obviously very thoughtful of making sure that we are serving our Premier Inn guests, in particular, remember the F&B. Our F&B offer is there priority to serve our Premier Inn guests. So therefore, we're quite foot pricing, making sure that we're providing that good value, knowing that strong F&B offers drive RevPAR, and that's the primary reason for providing F&B.

So I've got much more to say there in terms of the elasticity specifically. Obviously, we're going to be watching what's happening in the market in terms of -- as menus develop, and new menus come in across competitors. But -- and as we see costs change and the inflation that we talked about. So were quite thoughtful of what the right level of pricing is, but we'll obviously be trying to maximize overall revenue and in turn using a quite detailed level of price elasticity modeling to make sure we optimize that. :

Timothy Barrett: Okay. So the message is still that you think there's scope for the minus 4% to get better in the second half?

Hemant Patel: We think that we're approaching those pre-COVID levels. I think consensus at the moment for the full year for F&B for us is just under flat. We don't think that's ridiculous. So we think that kind of -- we should be getting back to those kind of pre-COVID levels, if not slightly above, but it's really difficult to read that into the second half, yes.

Operator: Our next question comes from Joe Thomas from HSBC.

Joseph Thomas: Just a follow-on from that, if I might, please. I'm just -- if you could just perhaps square the circle on F&B versus accommodation. Obviously, accommodation demand very strong, F&B is still down, presumably, volumes are -- or even considerably worse than the minus 4% in the F&B business. I'm just wondering if you might shed a bit of light on why you think that's the case? And then turning to Germany, where obviously things are doing really well, is any one of you care to sort of any color you'd care to give on leisure versus business or kind of by site? Or is there any particular themes to draw out there?

Alison Brittain: Yes. Let me just start with the second on Germany. I mean, exactly as in the U.K., the German reopening started as every time it reopened, and indeed this time with a leisure bounce. So the first thing that seems to happen is that everybody really wants to get out and see people again and do things. And as you probably read in lots of other types of reports, there's a real sort of behavioral switch from buying things to having experiences and enjoying events. So I think there's a real resurgence there.

And so certainly, at the outset as we've recovered each time in Germany, we've seen initial stronger performance in areas with strong leisure elements. So for example, Hamburg, where we have now a 5 -- possibly even 6 hotels in Hamburg, incredibly strong market. And it has both business and leisure drivers, and it's very, very busy all week across the board. We have some other areas which are more business -- only business focused where the performance is not back at 95% and 100% occupancy levels. And an example of that might be Essen, for example, which is a corporate market, where occupancy levels would be more muted than that. But across the estate, we're seeing good progression on occupancy, and then good progression on rate as well. So it's -- I would say, I think it's coming back quite strongly. And we would expect the business travel to come back as it did in the U.K. We're now pretty much back where we were pre-COVID in the U.K, and I suspect that, that will be the case in Germany over the next few weeks. :

Hemant Patel: Okay. And if I answer your first question on F&B. Yes. I mean in the end, we think look, the behavior of consumers will kind of come back to where it was pre-COVID. We think over the -- over lockdown and under the kind of COVID period, some customers have traded up actually, so the sort of premium end of the pub restaurant market has done what's better, and older customers and those with less disposable income haven't been coming back to pub restaurant as much. There's also been a lot less discounting in the market as well, so that's changed some of the structure of what's happening in the market.

Our investment that we're making and the improvements we're making in menus, really leveraging our PI experience on digital marketing and targeted promotional offers. I think all of those things, we think, will continue to drive F&B. Overall for us, obviously, it's part of our kind of corporate position as part of the PI experience, particularly breakfast. And as I mentioned, we do drive the RevPAR premium by -- with the quality of F&B offering, and for our [ 2 8 ] sites, we're obviously -- we're enjoying a structural advantage of the customers because we're -- we've got the benefit of capturing our demand from local guests as well. I think we're confident in our commercial plan, and we think that, that will continue to steadily improve. Obviously, not at the same rate that the accommodation sale has been moving there. :

Operator: Nothing further in the queue. [Operator Instructions]

Alison Brittain: We'll give it 1 or 2 seconds longer, Adam. And if there aren't any questions, then we will close. We'll just give it a second in case it's a burning question still waiting.

Operator: As we have no further questions. I'll hand back to Alison for any closing remarks.

Alison Brittain: Great. That's great. Just thank you, everybody, for dialing in this morning, and we'll speak to you again at the next set of results. Take care. Have a good week.

Operator: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.