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Earnings Transcript for WTB.L - Q3 Fiscal Year 2023

Operator: Hello, and welcome to the Whitbread plc Q3 of fiscal year '23 Trading Update. My name is Harry, and I'll be coordinating your call today. [Operator Instructions] And I'd now like to hand over to Alison Brittain, Chief Executive of Whitbread to begin. Alison, please go ahead.
Alison Brittain: Good morning, everyone, and thank you for joining this call for our quarter 3 trading update, and that covers the 13-week period ending 1st of December 2022. As usual, I'm joined by Hemant Patel, our Group CFO; and Peter and Sofie from our IR team. But I'm also delighted this morning to be joined by Dominic Paul, who will be taking over the reins as CEO with effect from Wednesday, the 18th of January, that's Wednesday. And I will remain, as you know, on the Board until the end of the financial year just to ensure that we have a smooth handover. Now Dominic is with us. Welcome Dominic.
Look, I hope you've had a chance to review the Q3 release this morning. But as always, I will start the call with a brief overview of the announcement before we open up for Q&A, and we'll be happy to answer your questions then. So let me start with the Q3 performance before touching on the current trading and outlook.:
Premier Inn delivered another great quarter, driven by strong revenue performance in the U.K. and very encouraging progress in Germany. Our U.K. hotel performance in the third quarter was excellent with accommodation sales 37% ahead of pre-pandemic level. That robust performance was driven by a combination of increased occupancy, higher average room rate and estate growth with strong performances across both London and the regions and across business and leisure.:
Our outperformance versus the mid-scale and economy market also remained strong, underpinned by our continued program of investments, maintaining our industry-leading reputation for quality and value, and that's enabling us to increase market share. Our U.K. Food & Beverage sales were 8% ahead of last financial year, but remained about 4% behind pre-pandemic level. While the value end of the pub restaurant market remains challenging, our position versus pre-pandemic improved since the second quarter, thanks to a series of sales initiatives, which is encouraging.:
Premier Inn Germany had another solid quarter of performance led by our cohort of 18 more established hotels. In total, we now have 45 quality hotels open in prime locations with 36 more hotels in the pipeline. And we continue to attract excellent guest scores across the portfolio, and we're confident about achieving our long-term target of 10% to 14% return on capital.:
Our strategy and business model are combining to generate strong cash flow. And even with our continued program of investment in both the U.K. and Germany, our balance sheet remains robust with GBP 284 million of net cash as of the 1st of December 2022.:
So moving on to current trading and outlook. We're continuing to see strong trading momentum in the U.K. with accommodation sales up 36% versus pre-pandemic level and a continued strong outperformance versus the market. U.K. Food & Beverage sales remained well ahead of last year but behind full year '20, as was the previous trend. But with further commercial initiatives planned over the coming months, we're working hard to return sales back to those pre-pandemic levels.:
In Germany, our trading performance remains on track, and we remain comfortable with our previous reduced loss guidance of a loss between GBP 40 million and GBP 50 million in the current financial year. And there's no change to our cost guidance for this year. But as we look forward into the next financial year, we expect net cost inflation on our GBP 1.6 billion U.K. cost base to be between 7% and 8%. And that's reflecting increases in labor, utilities, food and beverage, and those are partially offset by lower business rates.:
Despite macro concerns, we have an encouraging forward booked position in the U.K. Our pricing is expected to remain strong. We further expect a growth and an ongoing efficiency program. And with all of that, we remain confident in full year '24 outlook. In short, we're in good shape, and we've got a lot to look forward to. :
Now after 7 terrific years, this will be my last earnings call with Whitbread. It's been an absolute privilege to lead this great company, and I've enjoyed my time enormously having worked with many outstanding colleagues as together, we've continued to develop the U.K. business and build an international platform for long-term growth. We faced some significant challenges in recent years, political, social and economic, but I'm delighted to be handing over to Dominic, the group's incoming CEO at a time when the business is performing strongly and the prospects for the future look very bright. We've got a healthy balance sheet, compelling growth opportunities, both in the U.K. and Germany, and I've got every confidence that Dominic will take Whitbread forward to what will be an exciting and highly profitable future. I wish him and all the people at Whitbread and my team every success, and I'll continue to cheer on that success from the sidelines as a shareholder.:
Now with that thought, let me hand over for questions and answers. So Harry, we're going to open the lines for questions, please. :
Operator: [Operator Instructions] And our first question of the day is coming from the line of Vicki Stern of Barclays.
Vicki Lee: Firstly, wishing you all the very best, Alison, and welcome to you, Dominic. Just wanted to start off with the sort of positive outlook commentary. In the release you're talking quite possibly about pricing expectations for next year. Can you just walk us through your thinking there? Where is that coming from? What sort of demand expectations are you embedding within that? And perhaps any sort of color around what your expectations are on further market supply contraction into next year.
Second one's on Germany. Looking at the industry RevPAR data, that market does seem to have been a bit faster than some others. So curious as to your expectations on why that seems to be the case for the industry. And in that context, I think you talked at Q3 about the breakeven target at some point during next year on the original cohort. Is that -- would that still be your expectation looking into next year?:
And then just finally, on the balance sheet. Curious both whether you're seeing any more signs of life around possible German M&A? And then just more broadly, how we should think about the scope for cash returns to shareholders in coming months, given that I guess you're sitting there with at least a turn of headroom to that 3.75x leverage threshold? :
Alison Brittain: Okay. Well, look, I'll start off with normal, but I will hand over then to Hemant. Just in terms of the outlook, we're quite positive about the outlook at present. We don't have any of our lead indicators showing any weakness at this stage at all. So we haven't got any reason to be anything other than positive in terms of the assets.
We've -- there are a few things sort of sitting behind that, I suspect, in terms of where we sit versus the market. First of all, as you know, there's been a significant decline in market supply and we are a brilliant brand that is taking advantage of that. There's ongoing inflationary pressure. That does push prices up. And I suspect that our competitors, particularly those with leasehold estates and franchise fees to pay, will want that pricing to remain high. But equally, we have not taken quite as much rate as our competitors. And so we have a very high value proposition for our customers. And therefore, we are seeing a lot of demand from that -- on that basis. :
The -- we've had a lot of success with our own commercial initiatives, which we have continued to invest in throughout the cycle, and we see the benefit of that. And we're seeing more demand and stronger demand. Certainly, the full recovery on the commercial -- on the business side of the business, leisure has been strong, as you know, for quite a while. But also, we're now seeing inbound coming back very strongly. In fact, in the way we look at it, which is people who visit our websites from an overseas IP address, and we look at that by country, we now see we are ahead of pre-pandemic in searches for Premier Inn from overseas. So the inbound is very strongly rebounding.:
That's particularly boosting London, as you would expect. And so London, which -- in the first quarter of the last financial year, you remember, was much weaker than the regions. This year, we're expecting that to be a pretty strong position in London as well as very strong in the regions. So I think we have a lot of reasons to be positive as we go into the new year -- into the new financial year. Our forward book position is good, at least as good as it ever has been in terms of pace and forward book, but at much higher rates. So again, that's a positive sign in terms of that.:
And everything we're seeing in some of the economic data is still showing people are not buying large goods, large discretionary purchases but they are protecting their leisure spend, and we're seeing that come through in the booking profile. Does that help with the first question, Vicki? :
Vicki Lee: Yes. Perfect.
Alison Brittain: Thank you. And in terms of Germany, we had a very strong period in the autumn. That is always the peak period, both in the U.K. and in Germany. And so we're really pleased with that. And -- but our 18 hotels that we pull out as a cohort were particularly strong, but the rest of the hotel business in that quarter also traded very well. Quarter 4 is always a weaker quarter, but our performance is still robust and we're in good shape, and the primary 18 hotels that have been opened the longest are continuing to strongly perform.
Hemant Patel: And we expect to remain profitable for this full year.
Vicki Lee: Sorry, just on that one. And with the sort of breakeven at some point for those hotels during next year still stand?
Hemant Patel: So the -- so just to clarify, the 18 hotels we're talking about are the like-for-like hotels, as of the half year results, so the 18 hotels that have been open more than a year. Those at a site level, we expect to be profitable for this financial year.
The overall German business before any additional M&A, we still expect to get to the run rate breakeven through the calendar year 2024, so the year after next is what we've said, and we're still on target to do so. :
Alison Brittain: And Vicki, that is -- I always caveat that with that depends on growth. So that's why we're looking at these cohorts of hotels to see that they are covering their own costs at site level and then making a big enough contribution to the corporate overhead because the more we grow the hotel in the market, then we make losses. So in particular, we make an acquisition, we make the acquisition, we closed the hotels, we refurb. We then go through a maturity cycle or we open a new one that's got a maturity cycle.
So the -- so that is prognosis of -- I mean, we clearly make less loss next year than we've made this year, subject to what the growth position looks like. :
Hemant Patel: I think, Vicki, your final question was on balance sheet returns to shareholders. So we haven't got a lot more to say at this stage. But I'll just remind you that pre-COVID, we've obviously delivered attractive and consistent returns over the last -- probably the last couple of decades, if you take out those pandemic years, particularly in that U.K. core hotel business. And we've got a good history of capital discipline. And again, to remind you, we returned GBP 2.5 billion to shareholders following the sale of Costa in 2019.
The capital allocation framework I laid out at the half year means that we can maintain our financial strength while continuing to invest in the business and delivering those long-term returns. And just to remind you, we want to absolutely, as you mentioned, maintain those investment-grade metrics. And we are, as you say, within the limit 3.7x lease adjusted. :
Alison Brittain: We're well within because we're about 2.8x.
Hemant Patel: 2.8x, 1.5 years. So we're well within that, which is very clear to everyone. We are thoughtful, though, of the level of CapEx, M&A opportunities that might be there. And whether it's additional rooms or maintaining our current state, we're clear we want to continue to invest in the business and get those returns. We've talked about the consistent dividend policy.
And then depending on outlook, then potentially we would return excess capital to shareholders. What we said was that we would come back to this at the full year, and we'll do so and we'll apply that framework and communicate more at that point. :
Vicki Lee: I'm sorry, just within that, it was with German. And any more signs of life there on the German M&A was the last piece?
Alison Brittain: I would be -- I'm a very optimistic prognosis for small bolt-on acquisitions. And [indiscernible] to say anymore.
Operator: Our next question today comes from the line of Jamie Rollo of Morgan Stanley.
Jamie Rollo: Also 3 questions, please. First, on the 7% to 8% cost guidance, just wondering what that figure might be net of mitigation and also the sensitivity to the recent drop in energy costs? I appreciate you're mostly hedged for next year, but just give us a sort of feeling for those boundaries.
Secondly, on the sort of 2024 profit progress, you're obviously confident pricing remains strong. You've given the cost guidance now. I'm wondering how confident, i.e., that PBT can actually make progress in '24 relative to '23?:
And then finally, in terms of the openings in the period, could you just sort of talk about the guidance there, both for the U.K. and Germany. It's like quite a small period for openings in Germany, any sort of construction delays or anything like that we should think about? And also any sort of guidance of openings for 2024? :
Unknown Executive: Okay. Right, cost. Why don't you pick that up? And then I'll pick up the next question.
Hemant Patel: Openings. Okay. So I'll do that and PBT point. So yes, 7% to 8% cost inflation for next year as we said, Jamie. The constituent part of that, just without getting into too much detail at this stage, clearly, we've seen a published increase in national minimum wage, although we aren't seeing anyone at that level. That is the basis on which our labor bill will go up next year..
Energy, and you asked a bit more detail on energy. I talked at half year about the fact we were 75% hedged. With that 75% hedge and with the other 25% market rate, I said that we would probably see about GBP 40 million of cost inflation year-on-year. So GBP 20 million from the hedged amount and GBP 20 million from the floating amount. So that GBP 20 million in floating of -- 25% of unhedged is still potentially with the reduced energy cost at the moment. That's the number we're talking about that we could potentially move. So you can get a view on that. You know roughly what's happened to energy cost. There might be GBP 5 million coming out of that potentially within the numbers we talked about. But it's still -- we're still waiting and we'll talk more about full year and what that looks like into next year as well.:
And your -- the other factors then are obviously, beverage inflation is still at relatively high levels. Offsetting that, we've got a business rate benefit. Probably not give you more detail on that, but that's the overall picture. And that's 7% to 8% inflation. We've got also mitigations on costs. We talked about GBP 100 million of cost mitigations over the next 3 years. If you assume 1/3 of that comes off the 7.5% -- say, 7% to 8%, take the middle of that range, you're talking about net inflation, something like 5.5% year-on-year, net of that the efficiency plans we've got in place. :
In terms of profit progression year-on-year, I mean, it really does depend on the constituent parts and your view, I suppose, of the U.K. economy. What we can see, obviously, we've got a good understanding of what is happening in our German business. And we know that this year, we've given guidance of something like GBP 40 million -- GBP 45 million to GBP 50 million of loss for the German business, and we're still happy that, that is relevant. For next year, we expect -- we can see that consensus at the moment is something like GBP 20 million to GBP 30 million loss in German business as published. That doesn't seem unreasonable to us as a way point towards getting to that breakeven run rate in the year afterwards, notwithstanding, as Alison mentioned, any further acquisitions. So that's 1 moving part. :
What that leaves us with in the U.K., it all depends a 7% to 8% cost inflation. We've got room growth as a moving part. We've got the efficiency plan as mentioned as well. Leaving that then, depending on your view on what we might see in terms of like-for-like U.K. growth. We are certainly -- we don't see any reason why based on the current visibility we have that we wouldn't have a good shot to offset that overall cost inflation. Would need something like 3% to 4% of the U.K. like-for-like.:
Is that possible? Well, we've already talked about the fact that pricing is likely to be strong. It all very much depends on what happens to the U.K. from the U.K. customer going forward and whether there's a hit to demand. But certainly, we are very positive about the fact that from everything we can see, we don't see any slowdown in our looking levels, and we're positive about our revenue prospects into next year. :
Alison Brittain: Just on openings, we're on course to do probably -- well, 1,500 to 2,000 was the guidance for U.K. and 2,000 to 2,500 rooms in Germany. We'll be there or thereabouts. We will certainly be in those ranges. But probably just shy of 2,000 in the U.K. and again, in the right ballpark for Germany as well for this year. So that will be good. But that excludes, of course, any additional M&A or small M&A that we may have between now and the year-end or in the early part of next year. And we haven't yet guided on next year. So Dominic will do that when we get to the year-end results.
Jamie Rollo: Great. And Alison, congrats, on leaving on a high and best of luck in your semi-retirement.
Alison Brittain: Thanks, Jamie. It's definitely semi, isn't it?
Operator: Our next question is from the line of Jarrod Castle of UBS.
Jarrod Castle: And Alison wish you the best. And I'd probably reiterate what Jamie's saying, thanks for what can only be described as a job well done and welcome Dominic.
Alison Brittain: Thank you very much. That's very kind of you.
Jarrod Castle: Speaks for itself. So, yes. So just in terms of visibility, you said you're seeing some good forward bookings. But is it still very low visibility. And from that, I mean, the booking curve itself. I mean how much bookings are happening in the week of arrival versus, let's say, February? So you can't give any color like January and February.
Secondly, food and bev, I mean that seems to be doing relatively better than the industry. So just a bit of color on maybe what's driving that? Any changes there?:
And then just on pipeline. I mean, you're taking quite a bit about it. But just in terms of site identification, thinking about that going into the next financial year, are you seeing more opportunities? And can that drive an acceleration of the rollout? Or is it other considerations as well? :
Alison Brittain: Right. Okay. So first question is outlook. So on the outlook, well, we are still quite a short lead business, so -- and particularly, I mean that's not new, particularly business customers tend to be shorter lead in terms of their bookings. But we know our performance to date in the quarter. So if we're talking about the quarter, we've given you guidance. We're 37% up, I think, in the quarter to date so far. So that is pretty strong. And obviously, we're now seeing forward bookings into the -- towards the end of this quarter. So I think we are very confident about the finish of the year and the end of this quarter.
As we go into the half 1 next year, quarter 1 and then half 1 next year, we've got good pace in forward bookings. So we aren't down -- we're exactly where we would expect to be in forward-booking based on previous years. So there has been no drop off in people's propensity to forward book. And yes, it's not a huge percentage that you book at this stage into the summer next year or into the -- and into Easter this year. But what is absolutely true is that what is normal for us, even versus pre-pandemic is what we have on the books. And what we have on the book is at a much higher rate. So therefore, our revenue projection is much higher. So that's why we have some confidence when you're asking very specifically about what our forward booking position looks like? That's what it looks like.:
But we have confidence in a number of other areas because structurally, we're not seeing a dip in demand. Structurally, we're seeing inbound being back and that is going to balance demand in London. And we think that, that is not going to go away. We think that, that will get stronger, but we're already ahead of pre-pandemic levels in terms of that inbound demand, which we were not this time last year. So that will be a boost for us.:
We ran at high occupancies last year, but the rate increases that we've seen are sticking. We took less rates than our competitors. So if you look to our competitors, they were flat on occupancy but grew rate last year. We were massively up on occupancy and grew rate less strongly than they did. That gives us more opportunity for rate growth in the year ahead.:
But we've also seen this sort of big structural decline in supply, 10% decline in independence in the last 2 years versus 12% over the whole period of 2010 to 2019. And that isn't coming back. That is a supply that's gone out of the market, and we're not expecting to be a wash with new supply possibly with the exception of ourselves. And so, I think that the combination of those factors -- I can talk a little bit more about the competition who are still struggling with labor. I think our labor position in our business now is very stable and much better. But I think generally, in the industry, there's still a struggle with labor and people would rather have a smaller number of rooms open at a higher rate if they're struggling with labor than the opposite. So overall, that's what gives us our sense of confidence as we move into next year. :
Jarrod Castle: And Alison, just related, you mentioned business travel. On the white collar side, I guess it's 25% of your business. Is that back now, do you think? Or...
Alison Brittain: Yes, it is. Yes, absolutely. We -- in terms of sort of how we've historically been positioned as a business, about 50-50 leisure and business, we're back to that split of and we're at very full occupancy levels, I mean, enormously full occupancy levels. So both sides of that are now doing well.
And if you remember, a year ago, the recovery was stronger in leisure than it was in business, but that is back. And at the same time, this time last year, the recovery in the regions was stronger than London, and London lagged for quite a long time. And now London is also back. So we've got -- all the areas are firing pretty much on good cylinders.:
Yes, pipeline of new supply -- Yes. Added to the decline in supply. As I said, I don't expect a huge amount of new supply coming in with the exception of ourselves. So we'll be continuing to build out our pipeline. :
Jarrod Castle: And for identification, there's more opportunities as you defined it?
Alison Brittain: I mean for the U.K., you probably saw in our half year results, we talked about the network plan exercise we've completed, which gave us the data on the dropout of the independent sector and the reduced supply landscape. That also -- we refreshed at that point what we saw as our long-term trajectory for growth in the U.K., and we extended that runway for growth to 125,000 rooms.
And yes, I think as we move forward, there'll be more opportunity because the supply side has reduced, there'll be more opportunity for Premier Inn growth. And we're a great covenant, just -- if you are a developer and you wanting to deal with people who are financially strong with a great balance sheet and a great covenant, we will be first place positioned for that. :
Hemant Patel: And then you asked a question, Jarrod, on F&B. Yes. Just a reminder that we've got the 2 kind of parts of our F&B business as the internal F&B that we provide for our hotel guests as well as then the pub restaurants, which also provide both that internal F&B for our hotel guests, but also cater for external customers. And in fact, the majority of that -- the trade for those 440 or so pub restaurants comes from external guests.
The internal F&B, as you'd expect, kind of has gone in line with occupancy, which has been strong for us, but our value -- the value pub restaurants we run a live performed at the low end, I suppose, at the F&B -- sorry, the value pub restaurant sector, which has been behind the rest of the pub restaurant sector. So that's definitely been a drag on our F&B sales for various reasons, including labor shortages and cost of living crisis, higher wages, et cetera, I think have impacted that market.:
Q3 performance is a bit better, as you mentioned. We are working on improving our menus, including putting more plant-based dishes in. We've improved our drinks ranges. And we've invested in sites, and we're targeting promotional activities, all those things ongoing and continue to improve our F&B business, although that is a slow improvement that we're seeing. :
Operator: Our next question today comes from the line of Jaina Mistry of Jefferies.
Jaina Mistry: I've got 3 quick questions. Number one, on your market outperformance, can you give a bit more detail on who you're taking market share from? Is it predominantly independents or also the other larger chains that you compete with?
My second question is on Germany. In Q2, you mentioned that your mature German hotel was profitable. Can you just confirm if that was also the case in Q3?:
And then lastly on pricing. I know we spoke a lot about pricing already. But do you expect to be able to price in line with inflation in FY '24, given that you operate in the value segment of the market? :
Alison Brittain: Okay. Do you want to start with outperformance because we don't -- I mean we don't have all companies in the performance chart -- so it has to be the rest...
Hemant Patel: Yes. So Jaina, it's difficult to say exactly against seeing we're outperforming. But clearly, the market itself, you know the structure of the market. It's kind of low 40s percent independents and the rest, which -- the mid-kind economy market here and the rest is the branded restaurants, of which we're obviously -- sorry, branded hotels at which we're a significant part.
So I think the biggest factor here really is the fact that supply has come down. If you remember back to what we talked about at the half year, we've done this network analysis piece and really understood a lot of detail the supply situation and forecast for the supply situation, and roughly 4% of rooms have come out of the market overall. And that gives us, I think, a strong understanding that actually from the independent sector, there's been an awful lot of leakage towards the branded sector. And that's a big chunk of it. :
In terms of specific other branded competitors, it's difficult for us to say. You can monitor the performance of those branded competitors and you probably have a good idea for the... :
Alison Brittain: But we will be taking share from franchised-based branded business.
Hemant Patel: Very likely...
Alison Brittain: I'm sure. Okay. Yes, on Germany -- on the -- Well, first of all, yes, the short -- you said it was a short question. It will be a very short answer. Yes, we were very much profitable in the 18 in quarter 3. Quarter 3, a strong quarter for us. In fact, it's one of the most vibrant quarters for us in both sides of the business. And the 18 were profitable as was the whole of the German business. That won't continue because in weaker quarters, it will be the 18 that will do the best.
Hemant Patel: And then finally, pricing in line with inflation. I mean, well, as I mentioned earlier on, 7% to 8% cost inflation built in. It really is difficult to say what level of pricing will be for us next year. Alison talked through all the factors that would -- that support our view that there will still be a relatively strong pricing position year-on-year into -- in the market, including that decline in market split we've just talked about. The fact that cost inflation will be pushing all of the hotel market and competition to keep pricing high, the fact that the lab market is quite tight as well until we approach to pricing rather than occupancy.
But of course, we've got a lot of confidence in our own commercial initiatives that we talked about, and Alison mentioned earlier on. And the fact that -- as again, as you mentioned, we've taken a bit less price in the market. All of that gives us confidence that we should be able to maintain a good level of like-for-like pricing. It's difficult to say whether it will fully offset that cost inflation. I mentioned earlier on in terms of the... :
Alison Brittain: So the combination -- I mean, we've got a combination of efficiency savings, estate growth, pricing opportunities, commercial initiatives that are going to here. And we're very confident that, that package of activity, they'll not just offset inflation, but which will give us opportunities for growth.
Operator: Our next question today is from the line of Jaafar Mestari of BNP Paribas.
Jaafar Mestari: I have 2 questions, if that's all right. So firstly, just going back on the '24 inflation assumptions on wages. I'm really interested to hear how many, what sequence and what nature of wage increases and special seasonal bonuses you've budgeted in your guidance? In '22, you've had to do a number of separate moves like that, not just 1 around national living wage. Is that the new normal?
And then on the spread of occupancy and pricing across the estate. Just curious what the highest occupancy and pricing micro market is today and where the lowest micro market is as some of those dislocations narrowed down a bit? U.K. RevPAR is up 25%. What's the spread? Do you still have some micro markets up 60% and some down 25%? If you need to do 3% to 4% next year or this year, do we realistically assume every single property can do plus 2.5%? Or it would be a net of very big moves down and very big improvement in some of those still depressed markets, please? :
Alison Brittain: Okay. Thank you. So first question was about labor. Just to sort of give you a little bit of context for that. You are right. This year, we did quite a number of things for our teams. We invested in ensuring that we have teams being paid broadly above the national living wage and actually, in many cases, of the living wage as well. We gave an investment on the cost of living payment during November and December of this year, which we were going through a particularly difficult cost of living period for people, very worried about the energy bill. We invested about GBP 9 million in that additional award. And we brought all of our teams in the second half of the year to being over [ GBP 10 ], which is essentially a pull forward of where we thought we would be going to anyway in April with the living wage rise.
And the living wage rise have been announced, and that is going to be [ GBP 10.48, so 52 -- GBP 10.52 ] very close, but no cigar for me on the 4P difference. But the -- we -- that is within our projections. Plus, we do pay for progression. We have -- you don't just rise the base pay of your lowest-paid worker. Everybody goes in increments, otherwise, managers are paid less than main staff, et cetera. So all of that has flown through in our predictions for what we think the inflation will look like. :
But important to note, when you say this all a thing of the future where we have to do lots of things. I don't know, there may be further interventions to do next year, but we're in a really good place in terms of our labor position now in the business. We're seeing a lot of stability in the team. Nearly 2/3 of our teams will have been in post for more than a year now. So that's a level of stability in hospitality often does not see. We made in the summer last year, probably 1/3 less new hires we had to make last year because we're in a more stable position, and that we'll be back here again year given the stability and the longer service that we'll have by the summer.:
So we are -- we've been through that particularly acute difficulty on reopening post pandemic with labor, and we've got ourselves into a much stronger position. So I expect that we will have a budgeted for wage rises that we can already predict because we've been given the government steer on it. But of course, if there are shortages in hotspots, then we may, of course, choose to make additional investment. Hemant, would you add anything? Or I've covered it? :
Hemant Patel: No, I think you've covered it. I mean clearly, we'll see what happens through the year and managing it accordingly. But I'm comfortable with the guidance we give an overall should be sensible for the full year.
Alison Brittain: Yes. And the second question you asked about were micro markets. And so just sort of keeping it high level, lots of places are, of course, in different spaces from each other. So there won't be a uniform everybody uplift in the same way. And you asked specifically what is our highest revenue -- the highest rate market. Well, that is consistently always London. London properties have the highest rates because the competition around them have the highest rates. And therefore, we consistently have higher ARR in London.
And if you think about London then as an example, this time last year, London was not recovered at all from the pandemic, and we didn't have any inbound. Still, was very low. And there was quite a low occupancy in London, where it's in our regional areas, we've seen quite a strong rebound in terms of occupancy. So London was a laggard. London has now consistently recovered quarter-on-quarter. And now it's firing on all cylinders again. So as we lap last year, where it was a weaker occupancy area, we'll have much stronger occupancies in London. So that will obviously look like a higher base rate in London, and those are areas also probably where the rates will also be higher. :
So there's this combination of things there. So I single out London as being a special case. Then across the business, though, of course, there are ups and downs in market. But we've had broadly very good occupancy this year. We've -- and we've got rate opportunity still to go because we didn't push our rates quite as hard as the rest of the competition. So hopefully, that gives you enough to go on. :
Jaafar Mestari: If a quick follow-up, okay. Just on wage strategy this year to be super clear. Have you budgeted another summer retention bonus? Or was there really a one-off last year?
And then just on the deltas across micro markets, yes, London is higher I guess, compared to your history, has always been higher is not that far away from the group, 41%. Group, 37%. I'm really more interested in whether there are still some really down compared to their own history, micro markets really up normally high compared to their own history markets. And then when you look at next year, do you think some of those would normalize -- very large amounts? :
Alison Brittain: I think everything has risen during the course of the year. And if you look at our total estate occupancy, our total estate occupancy is probably 85-percent-ish is as high as we've ever been. And that we can't achieve in the statewide occupancy at that level without sort of degree of occupancy. So we're not very comfortable.
And on the wages, the sum of [ occupancy ] payments very much a one-off position for us, and that's why they were built into core pay. So we make decisions on that when we know what our staffing looks like over the summer, we know what our occupancy level for like because of each obviously, in the summer, when you're at peak in some areas you're taking your people [indiscernible]. But at the moment we count that as a one-off, and we're just moving forward on a normalized basis now. :
Operator: Our next question is from the line of Tim Barrett of Numis.
Timothy Barrett: Congratulations all around. Two quick things. Related to that question on occupancy. You're at a record level, over 85%, and that broadly suggests you're full every day apart from Sunday, I guess. And just wondered what your operational confidence in maintaining that in future years would be?
And then secondly, on net cash, it looks like a really record -- sorry, a really strong third quarter at GBP 100 million plus. Would you expect to be at that level of net cash in February? :
Alison Brittain: Yes. So in terms of operationally, yes, much more comfortable, actually. We're managing our current occupancy levels really well. And obviously, they have fluctuated through the year. I mean some -- it's site by site, of course. If you're in U.K. in the summer, you'll have had 100% occupancy, and it would have been families. And families are always more difficult to rationally run because that you need more cleaning time and more management. But we've managed really well this year and stabilized our labor, and the operational standards haven't dropped. If you look at our brand scores, they've been incredibly robust. Our NPS scores have been robust, and our brand scores actually, I think, have improved and are at the highest levels, both for value and quality.
So yes, we're pretty confident that we've got a very robust operational system that underpins, is one of the strengths of Premier Inn, along with its brand and value for money promise, our ability to operate and do so consistently across all of our hotels is one of our main strengths. :
Hemant Patel: Okay. And on that cash, Tim, well, I mean, historically, this period has been our lowest revenue period, and therefore, it had a slightly negative impact on net cash over this kind of last quarter in terms of the profile. It really does depend very much on capital phasing across the year-end. It very much depends on what happens with revenue over the next few periods. I don't expect it to be materially different. I think we'll still be in a strong net cash position at the end of the year.
Operator: Our next question is from the line of Richard Clarke of Bernstein.
Richard Clarke: And good luck for the future. Welcome to Dominic. I don't know if I'm allowed to ask him a question, but I'll try and slot one in there for him. But first question, I'll sneak it in at the end. But just a first question. You've mentioned that your record kind of inbound levels is despite the fact that you've come off all of the OTAs for all of your airport and tourism, hotels in the last few years. So just wondering how you're achieving that? Is Germany become a meaningful feeder market? Are you using other channels like Google hotels? Is it just because of a lack of other choice out there? Just maybe just explain how you may be able to achieve that.
Second question was just wanting to break into the F&B a little bit. Obviously, you give the like-for-like components for accommodation, but not for F&B. So is the down number less customers? Is it less hotel guests using it? Is it pricing is much harder to pass on? And maybe just subpart of that, what's profitability looking like in F&B if pricing is harder? :
And then the third question, and this can be answered by everyone and anyone is what's your longer-term ambitions with F&B? When we've asked about the necessity of restaurants in the past, you've always said it's important to the guests. There's been a big decoupling between accommodation revenues and F&B revenues over the last year. You're shifting towards your higher-margin business. So do you have sort of differing ambitions on F&B? Can it be a slightly different model of more accommodation centric business? And Dominic, you come from an F&B background. So is there anything you could add there about looking from the outside of the Whitbread F&B model and how it should look in, say, 5, 10 years' time? :
Alison Brittain: Right, Richard. So if that's Dominic sneaky question at the end, then I won't be inviting him to come on the line to answer it. So I'll make that decision for him. I don't think we can expect him until he takes over as Chief Executive to answer any sort of detailed questions like that, but let us try and attack them.
So first question, because I've got so engrossed in the F&B question. I forgot what the first question was. Inbound -- got it. :
Richard Clarke: [indiscernible] because you've come off the OTAs.
Alison Brittain: We have come off the OTAs, as you know. Now don't -- when I talk about inbound, let's not over-egg it from the perspective of what we book. We still only -- we still have 90% of our business is coming from domestic. And of course, it was 100% when we didn't have any inbound. So we are a domestic business, appealing to domestic business and leisure travel as our priority. But of course, our websites are open and Google Search is open all over the world. And we do track where we get both views to the website and bookings from international IP addresses, and we also are able to track the countries that they come from.
And we have a vast spread of countries not just Europe, certainly not predominantly German, but not even predominantly Europe, either big markets outside obviously, that come through and click on our website to look and then book. And we -- that's why we can see -- if we look at our clicks to our website, you can say, how do you know inbounds back, we track that. When you look at pre-pandemic levels, then the drop through, the pandemic and then the second year came back a little bit, but very little. And now this year, very strong recovery and now ahead of pre-pandemic level. So that's the data that's set that I'm using in terms of it.:
And I think we attract them because we are really good at digital marketing. And we -- we're on platforms where people can search for great accommodation in the U.K., and we come up. And we have great guest reviews, and TripAdvisor scores are very high for us. So if anyone is on TripAdvisor and they're looking at review levels, then they'll see Premier Inn's a great stay and they'll read the reviews. So there's a whole raft of things, a bit not the same in Germany when we only have 1 hotel, I think a lot of it was through things like TripAdvisor where people were looking at the reviews and thinking why that must be a great place to stay. So those are -- that's the combination of activity.:
It clearly shows you that given our occupancy levels, that we don't need to be on the OTAs to max out on our occupancy and get demand into our business. But we did open up, as you know, to TMCs and they are proving now to -- again, as business travel has come back and as inbound travel is moving, those TMC relationships that we built during the period when there wasn't that activity will be bearing some fruit and also bringing in additional people to the business as well the business book or activity we did on the business side. Hemant, do you want to pick up? :
Hemant Patel: Yes. Your question on F&B, should we -- yes, yes, yes. So I mean, the element to the customers, I mentioned a little bit earlier on, but yes, clearly, we've got hotel guests who are using our internal F&Bs, our internal restaurants in hotels as well as using the pub restaurants we have next door as well as using pub restaurants run by other people. We've got a different -- we've got a wide range of different F&B options. And we understand how they all work.
Alison Brittain: And just in terms of all of our research, even latest research, the requirement of hotel guests has for an F&B experience remains quite high, particularly breakfast, as it always has been. No requirement for lunch, big requirement for breakfast, and we have a big 3 per diner ratio for breakfast take-up. And as you know, what we know is that we see the RevPAR increase.
So part of our attraction to customers is the fact that we provide a Premier Inn breakfast and it's a hot breakfast and it's a full breakfast and it's a choice. And that's offered through the booking profile. In fact, we just made some improvements to that. So when you say we're sort of -- we're seeing a much higher incidence of hotel and we're sort of pushing on that side, we are. But don't forget that a core part of that proposition is that we offer the breakfast.:
So the fact that we're full and have this great demand and the fact that we're taking share is the full part of our proposition. We're consistent. You get a great night sleep. You got a hot shower, you get a dark curtain bedroom, you get a great bed and you get a good breakfast. And it's hard to disaggregate, but we can see the differences when we provide the breakfast ourselves and others provide it for us. And we know that customers absolutely would not -- would have a much less propensity to book the hotel if they were not being offered breakfast. :
Hemant Patel: Yes. We've got instances where we have not been able to offer F&B customers and we can see the RevPAR impact there.
Alison Brittain: We don't have to offer it. We are always options for new models for how we go about it. But the point is if we thought one of those models should be, we just don't do food and we just do a room-only hotel -- budget hotel offer, that would be a significant drag on RevPAR because we also have some hotels where did offer a food, we closed the restaurant and we saw then what happened to the hotel and the RevPAR of the hotel. I mean you see an almost instant decline, quite dramatic decline when you do that. So we've got a lot of test and learn activity.
But of course, it's wide open for Dominic when he comes in to really think about how this will work going forward. But I suspect that within the parameters of -- the evidence, which is that breakfast is an important -- dinner is also important, but to less people than breakfast. I think that's probably as much as we can say on that subject at this stage. And I'm sorry -- sorry, on... :
Richard Clarke: The middle question again, just pricing within and [indiscernible] F&B.
Hemant Patel: Yes. So I mean, what we're seeing -- I mean, again, there's a difference between what's happening in pub restaurants as a whole and then obviously, the occupancy-driven internal F&B revenue that we're generating. So thinking about those pub restaurants, in particular. There has definitely been you seen in the market day, no doubt but there has been quite a lot of pricing coming into market now enterprising with the level of inflation. And average spend per head is much higher than it was pre-COVID driven by price, but also possibly other factors in terms of the demographic of customers and trading into more starters, desserts, et cetera, drinks, et cetera. But that cover volumes have been lower.
And we see something -- we see the same in our pub restaurants as well. As mentioned, they're at the value end of the pub restaurant market. And compared to that market, we've been at kind of the lower end of performance has to be said. We also -- when we think about the profitability of these sites, as Alison mentioned, we think about the whole site. And the same way we think about hotel profitability, including its internal F&B, we'll think about a hotel and restaurant profitability as a site as well because of that RevPAR benefit. So we need to understand the impact for those in the whole. :
Alison Brittain: Right. We've got time only for 1 more question because we have another thing to do at 10
Operator: Our next question is from the line of Andre Juillard of Deutsche Bank.
Andre Juillard: Congratulations for this strong trading update. Three very short questions. First one is about pricing and sensitivity to GDP growth and inflation. Have you worked about sensitivity and a potential limit to the pricing improvement you are doing on the accommodation, especially?
Second question about CapEx. Considering the inflation on the raw materials, could you consider an upgrade on your CapEx envelope? :
And last question, very short on recruitment. Do you still have some difficulties to find some people? Or is it coming back progressively to normality? :
Alison Brittain: Okay. So well, pricing is always a question of demand and supply. And when demand is higher, we have levers to pull. And when our competitors also move on pricing, we also have additional impetus to it. So there isn't a cap per se. We put caps on our hotels in terms of rate because we think there is a level to which -- beyond which we don't think the brand stretches. But even those caps have moved over time and are entirely flexible and can be removed completely should we choose to. So there's no particular ceiling that I would sort of point out on that.
And if I then pick up labor as well. At the moment, we're very stable position on our labor position. So we're in a very comfortable space. We've got a lot of longer-serving members of staff now. We made significant -- we reduced level of hiring in the summer last year. And I suspect, again, this year, we'll have a significant reduction in the requirements to hire. So yes, we're not in an uncomfortable position. It's not an area that we have great concerns at present. :
Hemant Patel: And Andre, the -- regarding the CapEx envelope, I mean, we talk about over time at GBP 350 million to GBP 450 million CapEx envelope. That will change gradually. It's much more sensitive volume of sites, particularly the level of sites and M&A, we were able to achieve in Germany. Clearly, there has been inflation. Right now, I'm happy that, that very broad envelope is still sensible though.
Alison Brittain: Great. Thank you very much. And just thank you to everybody who's on the call. It's been an absolute pleasure to be dealing with you professionally over the last 7 -- for some people on the line for over 7 years. It's been a delight to be here at Whitbread and I wish you every success for the future as well as wishing the same to Dominic. Thank you for your time this morning.
Hemant Patel: Thanks, everyone.
Dominic Paul: Thank you.
Operator: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.