Dominic Paul: Thank you very much for joining the call today for the Q1 trading update. I am joined by Hemant Patel, our Group CFO. Hopefully, you've had a chance to review the Q1 release this morning. I'll start with a brief overview for those who haven't seen it before opening up the call for Q&A, where Hemant and I will be happy to answer your questions.

During this first quarter, which ran to the 1st of June, we continued to trade strongly in the U.K. and have again delivered a fantastic set of results with RevPAR up plus 16% versus last year and plus 40% versus full year 2020. We also maintained a healthy GBP 6 RevPAR premium versus the rest of the midscale and economy market. Food and beverage sales in the quarter were 10% ahead of last year, reflecting a number of the commercial initiatives we put in place in the second half of last year. And turning to Germany, we continue to make good progress and have 56 hotels now open with a further 32 in the committed pipeline.:

Our trading in the quarter was robust with total estate RevPAR of EUR 55. Our cohort of 18 more established hotels are continuing to perform in line with the wider market, achieving a RevPAR of EUR 63. Given the strength of our trading performance in the U.K. and Germany and a healthy forward book position, we remain confident about our performance in the first half and the outlook for the full year. Looking further ahead, it's clear that the structural reduction in supply is going to continue for a number of years, and this will give us a significant tailwind as we strengthen Premier Inn's position in the U.K., unlock our position in Germany and maximize long-term returns for our shareholders. :

With that summary, I'll now hand back over to Lauren to host the Q&A. As you may know, we've got our AGM today. And so in order to have an efficient call this morning and given it only quarter 1 trading update, could I initially ask you to limit your questions to 2 per person, that would be super helpful. Back over to you, Lauren. :

Operator: Thank you, Dominic. [Operator Instructions] Our first question comes from Jamie Rollo from Morgan Stanley.

Jamie Rollo: The first question is if you could add any more flavor on that positive forward booking commentary there. I know visibility is normally not great. But anything you could say for Q2? And also what feeling for whether the very strong U.K. performance can be sustained? And then the other question is on Germany for the mature hotels, your RevPAR getting closer to its pre-COVID targets. Any change in the PBT guidance this year? Do you think is there some upside risk there? And how are you feeling now about that market breaking even could that be a bit sooner?

Dominic Paul: Thank you, Jamie. I'm going to ask Hemant to cover the forward booked side of the question and maybe part of the question on Germany, and then he'll hand back to me and I'll just talk a little bit about the structural situation we're seeing in the U.K. in particular.

Hemant Patel: Yes. Thanks, Dominic. Yes. So just in terms of the forward book position, we've got pretty good visibility into quarter 2. And what we will say is that our occupancy within our forward book position is at a similar level to last year. And if you remember last year, quarter 2 for us, we were very full. We have high occupancies. So we expect to be full again. I think what's different is that the average room revenues are much, much higher. You'll have seen that obviously, it's market and our own numbers, a lot of the growth in the combination of sales has come through pricing. And that looks set to continue over this next quarter. So we've got quite a lot of confidence that this next quarter will continue with the current strong trading momentum.

Clearly, we haven't got as much visibility into the second half of the year, but we feel very well placed to manage any macroeconomic changes with the strength of our brand. In Germany, I think -- or I'd say before I hand back to Dominic is that we're really happy with the trading that we've had. The 18 most established sites are trading in line with the market. The market has come back, start to come in more strongly in Germany. So that's really encouraging because they are not mature sites. They're still partway through the maturity. So it's an encouraging position to be in at this stage. Overall guidance for the year for Germany hasn't changed. GBP 30 million to GBP 40 million loss in Germany, of which GBP 10 million is the refurbishment costs of the 6 sites that we bought at the end of last year. That hasn't changed. We're still within that range. Really happy with the trading performance at this stage, though. :

Dominic Paul: And building on that, Jamie, I get it. And linked to what we talked about at the year-end results. I think we're seeing strong momentum in both markets, which is fantastic to see. And I think that's underpinned by a few things. One, our brand strength in the U.K., as you know, is exceptionally strong. And our mix between business and leisure is really helping us here as we're seeing the business market come back strongly and actually continued strong demand from the leisure market. But this balance between business and leisure gives us a really strong and stable position. And then there's another further underpin in the U.K. in particular, to some degree in Germany, but in the U.K. in particular, which is a supply-side reduction, which is at the year-end, we talked about it probably being not until 2026 that we see supply back to pre-COVID levels. And increasingly, we think that might actually take longer than that. So we've seen a significant reduction in supply in the U.K. market. And that, coupled with our brand strength is giving us really strong momentum as we go through the year.

Operator: Our next question comes from Vicki Stern from Barclays.

Vicki Lee: Just firstly, on the pub restaurants business. Obviously, there's been quite a lot of speculation in the press recently coming about a sale of a portion of that business. Just curious if you can comment on whether you are considering divesting some of those assets. And just more broadly, how would you think about the best use of cash whether to be some additional funds from that or from anything else? And then one on costs. So obviously, we're all assuming that the 7% to 8% cost inflation for this year, just starting to try to think about the moving parts into next year. Obviously, labor, which is the biggest element for you is going to remain pretty tight. But other areas like utilities, if you could just remind us how hedged you are at this stage for next year? And if you would agree that if current spot rates continue, whether there could be potentially some tailwind coming on that side. And actually, covering off this year chatting the press again about labor shortages. So just to share, there's no hotspot pay type increase being considered as well.

Dominic Paul: Thanks, Vicki. You good to hear from you. Let me cover the food and beverage question, and I'll probably just touch on the labor shortage question. And then we did put some commentary about the inflation position, but I'll hand over to Hemant to add a little bit more detail around that. From a food and beverage perspective, we're not going to comment on the press speculation that's been out there, and we're not going to say any more than we did at the year-end in that. What I will do is reiterate a couple of things. One, we have got multiple different ways that we deliver food and beverage to our customers.

So we've got our solus offering, which is our restaurant within the physical space of the hotel, and that's about half of our stay, so just over 400 in the U.K. We've got branded restaurants, which are generally buildings adjacent to our hotels, Beefeater, Brewers Fayre, for example, and that's about 400, 450. And then we have a subset of hotels that have got breakfast rooms where we deliver breakfast for our guests. What we said before and I reiterate today is food and beverage is important for our guests, particularly breakfast. And if we look at our brand positioning, once the customer has chosen Premier Inn generally due to location and price, which we know both of those areas, we are exceptionally strong in the marketplace.:

And then 3 key things that differentiate our product. The first thing is the warm and friendly team. The second thing is a fantastic night sleep, great acoustics in the room, best mattress in the hotel business. And the third thing is a great breakfast. So the breakfast is an important part of the offering. What we're looking at doing is how do we optimize the delivery of that food and beverage for our guests. And we're looking at everything through 2 lenses: one, a return lens. So any changes that we do make will be through a return to lens because we think that change will actually increase return over time.

And the second thing is whilst protecting the guest experience. And that's what we're working through at the moment. So nothing specific to add other than reinforcing those 2 points. We'll take a returns lens approach, but we'll also look at protecting the guest experience because I think it's been one of the underpins of our successful performance.:

The other point I'll just touch on before I hand over to Hemant is the labor shortage situation. We're not really seeing hotspots actually. In fact, the labor market has loosened up, particularly compared to 18 months ago. We've done a lot of work in both our recruitment but also our retention and we're seeing our retention continue to improve. We're a market leader employer. We can offer progression. We've got page progression, we can also offer career progression. And that's really supporting our recruitment. So no specific labor hotspots and a significantly better position than 18 months ago. And then I'll hand over to Hemant which I haven't. :

Hemant Patel: Yes. So in terms of the cost for this year, yes, we're not changing guidance at all. 7% to 8% is what we talked about at the full year. We obviously have seen some changes in the inflationary environment. Inflation has been a lot more persistent than I think most expected. But when we forecast our inflation numbers for the year, we gave a range, and that's the reason we go to a range. We're still happy that what we can see at this stage that range still makes sense for us. It's likely into next year, we're not giving specific guidance on next year's cost.

All I'll say is we have talked about being 20% hedged on utilities for next year. If all things continue, if these continue as they are, it's likely we'll start to see some upside coming through. But it very much depends on those prices. Interestingly, the fixed element of utility production. There's still quite a lot of inflation there. The commodity side of it has obviously improved over time. So we need to take that into account.:

But we would expect as the spot price remains where it is that things would improve slowly because we'll unwind the hedges we have from last year this year, and then we end up in a slightly better position at that stage. Other cost factors, generally, over the longer term, inflation levels have been something between 3% and 5% for hotel businesses, we would hope that we'd be coming back to those levels in the future. But again, we don't know at this stage. We'll give some more detailed guidance as we get closer to the year. We'll be able to give you something a bit more accurate at that stage. :

Dominic Paul: So Vicki, just as a quick follow-up on it, I didn't actually answer your question about the shareholder return. And we've got a really clear capital allocation policy and framework now, which have unveiled about under a year ago. And we'll always be guided by that capital allocation framework. So investment in our core business, investment in M&A if we see opportunities, both with taking returns lens and then look at shareholder returns, dividends or share buybacks, for example, with the underpin of the leverage ratio. So I think the beauty of having a clear capital allocation framework is we'll continue to use that framework having a very clear focus on shareholder returns overall.

Operator: Our next question comes from Jarrod Castle from UBS.

Jarrod Castle: I just want to come back to Germany. You had a pipeline of 37 hotels. You developed 5, and so the pipeline has come down to 32%. I just want to get some color on how long it takes to identify new sites. And when do they form part of the pipeline and how that's currently looking in Germany? And then U.K. sites and development, no expectation that the range would change that you've given. But are you seeing more opportunities to make bolt-on acquisitions as the interest rate environment goes up, as inflation goes up, can we think of the portfolio being bolstered by this as the year progresses?

Dominic Paul: So I'll take that and Hemant can build if necessary. I guess a couple of overarching points. One, we've done a lot of detailed work on the potential for our business in the U.K., and we feel really good about the long-term potential of 125,000 rooms, and we also feel very good about the long-term potential for growth in Germany. So that's the first point I'd make. The second point I'd make is when we look at new sites, we will always take a returns-led focus. So we won't do growth for growth's sake. We'll do growth based on the expected returns. The third thing I'd say is, I think we're seeing some really interesting things in the market at the moment.

So I talked earlier about the reduction in supply, which we've seen very markedly in the U.K. and less markedly, but there has still been a reduction in supply in Germany. And the tight financial markets that we're in at the moment with rising interest rates means that our competitors have generally got very anemic pipelines and are struggling to rebuild those pipelines because it's actually quite hard to raise money at the moment. We're in a very privileged position. We have a very strong balance sheet, and we've got a great covenant. And so we're seeing every opportunity that comes into the market in both the U.K. and Germany.:

And then we also have the opportunity in the U.K. over time to rebuild our extensions program, for example, to add rooms as well. So we actually feel that the current market tightness, which we think is going to continue for quite a while will give us opportunities to grow faster than our key competitors. But we'll also always take that returns-led approach. So from a hotel cycle point of view, we think this is a really interesting inflection point in the hotel cycle for us. :

Operator: Our next question comes from Jaina Mistry from Jefferies.

Jaina Mistry: I'll stick to 2 as well. If I piece everything together, it sounds like the U.K. trading is still very strong for Q2 was maybe into H2 established cohort in Germany is performing in line with the market. If I look at consensus, which is on PBT of GBP 444 million, are you happy with where consensus is today? Or do you see upside in there? And if so, what are the drivers here? And then second question around Germany. Could you talk a bit about profitability for the established hotels in Germany in Q1?

Hemant Patel: I'll take those questions. So yes, in terms of consensus, the main moving part, you're right. As you say, 444 million at the moment is certainly the published consensus for PBT for the year. The main moving part, I think, there is U.K. accommodation sales. We haven't changed our guidance in terms of costs, as mentioned earlier on, still 7% to 8%. We've not changed our guidance in terms of the range of loss in Germany. We're still happy for that, that stands based on current trading and our forecast. And the consensus number for food and beverage is about 4.5%. I'm not sure that, that will change particularly despite the fact that we've been trading ahead of that, about 10% ahead in the first quarter because we've got tougher comparatives through the rest of the year.

Overall, though, for U.K. accommodation sales, that 444 number assumes a 7% growth in accommodation sales for the full year versus obviously the 18% we've had in the first quarter and the confidence we've got coming into the second quarter as well. So we expect that to drive. It's likely that will drive full cost upwards, but we don't know. We don't guide specifically on sales going forward. We allow the published market data and our performance against the market, which will be well known to manage the views of our profitability on an ongoing basis. So we don't specifically give that specific guidance. I think one thing I will say is that as a underlying point, we've got a strong position this year. :

Our margins have improved because of the high level of accommodation sales. The current consensus at the moment is assuming actually a dilution in U.K. bottom line profit margin, so PBT margin percent, which we don't believe versus pre-COVID. We don't believe that will be the case. But that's the only underlying point I'd make that we believe we'll be able to be at that number. But specifically, we don't know what half 2 looks like at this stage. We've got some indications and bookings do look good. But clearly, we're not very well booked at this stage. We're relatively shortly for half 2.:

What I will say, though, is just to make that point again made earlier on that because of the strength of the brand and I think Dominic's talked about in terms of how well positioned we are, we think that whatever happens to demand overall, we're still going in a very strong position to take advantage of that. Second question, we haven't given any specific guidance on Germany profitability. I think what you can take from that, we know that the 18 most established hotels were profitable through last year. They've grown in line with the market and the RevPAR at EUR 63 for the quarter.:

And I think you can extrapolate to that, that they will be -- the profitability would have improved. We are still forecasting and expecting to get to a breakeven run rate through calendar year 2024. So through next year at some point, with the current estate that we have before any further additions that might involve some refurbishment or some conversion costs. And we're still very much expecting to get to the longer-term targets, 10% to 14% return on capital for Germany. We're still comfortable if that's achievable. :

Jaina Mistry: Just so I've understood that right, do you say that the 18 established hotels were profitable as well in Q1 this year?

Hemant Patel: Yes, they were profitable last year, there will be positive in Q1 as well because they've grown since then as you'd expect.

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

Timothy Barrett: First question would just be, you take on board that you have a short lead time in the industry for bookings. But in terms of what you're doing with your pricing ladders and your pricing strategy, is there any reason to think that rates shouldn't be up in the second half? And then as a follow-up question on optimizing pub restaurants, absolutely clear that you're looking at returns lens. As a new management team, are you more willing to disaggregate returns between pub restaurants and lodging in a joint site than perhaps previously?

Dominic Paul: Why don't Hemant take the first part of the question and then I can take the second part of the question?

Hemant Patel: Yes. As I mentioned earlier on, in terms of the book position that we can see, we're at the similar levels of occupancy that we had last year, but rates are at a significantly higher level than last year. That applies to all of our footfall, [ but ] position what we can see in half 2, we're at a higher rate. I suppose the moving parts really here, underlying -- I like the base [ issue ] here is about that supply reduction. We think that the supply reduction, as Dominic mentioned, has been significant, and the numbers we published was quite significant with something like 9% to 10% of independent stock coming out of the market versus pre-COVID and roughly 4%, 5% of the market overall. That was our analysis at the beginning of last year. It's quite possible that move on further. And therefore, that supply situation, which, again, as Don mentioned, will be at least 2026 before we'll get back to pre-COVID levels, potentially longer. That will underline whatever happens, and that's a more significant factor in many ways than any potential demand short.

And also highlight back to what happened after GFC, where we lost about 6% of RevPAR for a year, and we will back up again more than that by the year afterwards. It's a relatively small reduction in RevPAR that we saw there. So when we think about what might happen in the second half of the year, we don't know. But if we were to see the worst case a demand hit in the market, and it was as bad as what happened on GFC, it would still be a relatively small percentage compared to if you think about the cumulative growth we've seen from pre-COVID, where last year, we grew 37% in terms of revenues overall versus pre-COVID in U.K. accommodation sales.:

And then probably this quarter, we've seen another 18% [indiscernible] like that, but it does indicate that actually, we've got a lot of growth that might be impacted going forward. My view would therefore be that it's likely we're going to continue to see pricing growth in the market, particularly if the market continues as it is, then we'll see that going forward. We don't know what will happen. And obviously, it does depend on demand. But again, we're very well positioned to manage that potential chip in demand. And back to Dominic. :

Dominic Paul: Yes. And then, Tim, for the second part of the question about disaggregating results, we have no plans to do that. I think we probably did that many years ago, but we're not planning on going back to disaggregating it.

Timothy Barrett: Sorry, Dom, I just meant in terms of when you're optimizing the F&B business.

Dominic Paul: I see. So what we ourselves, of course, you can imagine, we look at it on a side-by-side basis in a lot of detail. And we optimize effectively 2 things. We look at optimizing the trading. And actually, you've seen that the trading has been encouraging and that's from various pricing and menu changes and menu additions that we've done. And then we are and we'll look at optimizing the actual format per hotel, taking the view that the most important thing is, one, protecting the guest experience and to ensuring that we maximize shareholder returns over the medium term.

Operator: Our next question comes from Andre Juillard from Deutsche Bank.

Andre Juillard: Just a short one about the leverage and your balance sheet. If we look at the expectations looking had for this year, you have almost no debt. Do you have or do you communicate anything on your targeted leverage considering that you repeated several times this morning that you wanted to continue some return to shareholders and to optimize the performance of the shareholders? How could you guide us and help us to have a better visibility on that?

Dominic Paul: Yes, so just to clarify our capital at [indiscernible] which is what I'm going to refer you back to. We're not necessarily saying we are going to continue shareholder returns. We said that actually is part of our allocation framework, and we will apply that framework on a regular basis. So the way I'd be thinking about this, you're right, we're actually in a net. At the end of last year, we were in a net cash position. If you were to extrapolate on trading, you'd expect us to be in a similar position through this year. Despite the shareholder return we have, we've already made the dividend we've paid as well. [indiscernible] trading is very strong. Our leverage target, we're well within that. It's set at 3.7x funds from operations against capital-adjusted net debt, at least just in that debt, rather. We're well within that. And at the end of last year, we had headroom something like GBP 800 million to GBP 900 million against that leverage threshold. And it's our target. It's a range within which we want to work that will allow us to remain investment grade.

Yes, we're nowhere near that. As I said, we will continue to focus on looking for - what our shareholders really want, which is long-term returns and the best possible use of our capital is new room growth, whether that's organic new room growth, whether it's in acquisitions, we'll continue to look for those opportunities because we know that's what we would really like to invest in. We'll continue to invest in the fabric for our state as well. It's well important that we've furnished our state and that we can maintain our IT infrastructure as well. So these are good uses of our capital because that underpins our overall profitability of future growth and therefore, returns.:

And then we will then think about maintaining our dividend policy before we think about whether any other capital returns are appropriate to shareholders, very much based on the situation that we find ourselves in our visibility of the future position at that point as well. I can't really say much more than that, we'll apply that capital allocation framework again, I say, on a regular basis. And if future shareholder returns are appropriate, then we would execute those. I think just the other [indiscernible], we were looking to make maximum returns for our shareholders. And if we can do that from a new room growth, that's what we do. :

Operator: We have no further questions. So I will now hand back over to Dominic Paul for closing remarks.

Dominic Paul: Thank you, Lauren. Yes, just a very brief closing remark for me. These are another fantastic set of results. RevPAR up 16% versus last year and 40% versus full year 2020. And it's clear we've got momentum, and we feel that we're very well placed for the coming years. If some of you have got questions that you didn't ask that you think of later, Peter Reynolds, our Director of IR, is around today. So please feel free to reach out to him. And in the meantime, we really appreciate your time today. Thank you for your interest, and I look forward to speaking to you all soon. Thank you.

Earnings Transcript for WTB.L - Q1 Fiscal Year 2024

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