Whitbread plc (WTB) Earnings Call Transcript

Good morning, everyone. I'm Dominic Paul, Group CEO, and I'd like to welcome you to Whitbread's 2027 Interim Results Presentation. Today's presentation will take place by remote webcast followed by a live Q&A session at 9:15 a.m. U.K. time; and Hemant Patel our Group CFO, and I will be happy to answer your questions. Details of how to join the call can be found on our website. I'm going to start with a summary of the excellent progress we have made during the first half. I'll then hand over to Hemant, who will take you through our results in more detail. I'll then come back to explain why we are confident that our 5-year plan will transform us into an even stronger, high returning business. Let me remind you of the plan that we laid out in April. Faced with significant external headwinds, we completed a forensic comprehensive business review that considered all options to maximize value for shareholders. The conclusion was that for our business, our integrated model is the right one and with some improvement, it will maximize value creation. Those improvements are embedded within our new 5-year plan that will deliver higher margins, cash flow and returns as highlighted on this slide. Our dynamic approach to capital allocation is key, ensuring that we will always deliver an attractive spread of return over our cost of capital. As part of our business and strategic review, we have reduced and reallocated capital spend to prioritize the highest returning opportunities by the Accelerating growth plan that will see us replace lower returning branded restaurants with a more efficient integrated offering and higher returning extension, further improving the experience for our guests and driving high returns for our shareholders. Despite the upfront investment and impact on short-term earnings, it will drive a step change in margins and returns and complete our transition to a more efficient pure-play hotel business. At the same time, we are continuing to invest in our existing estate and technology to drive RevPARs and cost efficiencies. By recycling a proportion of our freehold property, we can fund all of our high-returning growth investment, which will drive attractive returns for shareholders and significantly reduce our capital intensity. As I will come on to, we are highly disciplined in our execution, which is underpinning our strong operating performance, and we will generate GBP 2 billion of cash flow available for shareholders by full year '31. Today, you're going to hear the following key messages from this presentation. We are trading strongly and have widened our outperformance versus the market in both the U.K. and Germany. This is a critical year for our accelerating growth plan, and we are progressing rapidly with our transformation into a higher-margin pure-play hotel business. We are executing at pace, delivering tangible results and increasing momentum across all areas of our business. As a result, we remain confident in the full year outlook and the delivery of our 5-year plan. Turning to our financial performance in the first half. In the U.K., we've delivered strong accommodation sales growth, both in absolute terms and versus the mid-scale and economy market. And in Germany, we delivered double-digit accommodation sales growth, which is well ahead of the wider market that was back versus last year. The strength of our model and continued focus on driving cost efficiencies meant that our U.K. cost base was in line with last year despite industry-wide inflationary pressures, including the unexpected hike in business rates. This all meant that group EBITDA was up 1% year-on-year and return on capital employed increased by 60 basis points to 10.9%, reflecting our positive trading performance and the fact we've been exiting lower returning sites, including branded restaurants. Whilst the shape of our plan that earnings per share declined by 6%, we are executing well and have declared an interim dividend in line with last year of 36.4p per share, reflecting our confidence that we are on track to deliver as planned. Finally, a few words on the excellent progress we have made in the first half against each element of our 5-year plan. In response to the business rate increase, we have reduced and reallocated capital in the U.K. to the highest returning opportunities, and we are on track to open 1,000 new rooms this year. Our accelerating growth plan is transforming our business. We are progressing rapidly with disposals ahead of plan and the closure of all remaining branded restaurants, which is a fantastic operational achievement. We also remain on track to open 750 new extension rooms this year. As I've mentioned, we are trading strongly in the U.K. and at the same time, continuing to drive material cost efficiencies. We're also making great progress in Germany and remain on track to deliver a second year of profitability this year. Finally, on property and capital allocation, we assess and reassess every investment carefully to ensure we drive the highest returns. In line with our expectations, we have raised over GBP 50 million in property-related disposals in the year-to-date, and we are on course to realize between GBP 450 million and GBP 500 million by the year-end. In summary, we have got increasing momentum. We are trading strongly, and we look forward with confidence. I will now hand over to Hemant, who will take you through our first half performance in more detail.

Thanks, Dominic, and good morning, everyone. I'll start with a summary of the group's financial performance before covering the U.K. and Germany in a bit more detail. The group delivered another strong trading performance with positive growth versus the market in both the U.K. and Germany, mitigated by an expected reduction in U.K. food and beverage revenues as a result of the accelerating growth plan. Overall, group revenues were up 2% year-on-year. The delivery of GBP 39 million of efficiencies and AGP-related reductions in our cost base helped offset significant inflationary pressures, including U.K. business rates. As a result, EBITDA increased by 1% to GBP 608 million. Having returned GBP 102 million to shareholders, higher interest and lease costs meant that adjusted profit before tax was GBP 287 million. Adjusting items increased to GBP 178 million, the vast majority of which are noncash and predominantly relate to the AGP and our decision to exit a number of lower returning sites as part of our 5-year plan. As a result, statutory profit before tax was GBP 109 million. Gross CapEx reduced to GBP 280 million, and we received GBP 21 million from disposals in line with our expectations. You'll have seen that since the period end, we've received further proceeds and remain confident in recycling GBP 450 million to GBP 500 million as planned this year. Group ROCE improved to 10.9%, reflecting the exit from lower returning branded restaurants as well as fair value adjustments to assets held for sale. Our balance sheet remains strong, whilst lease adjusted leverage increased slightly to 3.4x, this reflects our investment in the AGP and remains within our investment-grade threshold of 3.5x. I'll now run through the drivers behind our performance, starting with the U.K.. Accommodation sales increased by 3%, reflecting strong trading momentum and a progressive increase in our outperformance versus the market. The decline in food and beverage sales was expected from the impact of AGP with the result that statutory revenue was in line with last year. Operating costs were flat versus last year, which is an excellent result given the significant inflationary pressures we're seeing as an industry. The net result was that U.K. EBITDA increased to GBP 588 million and adjusted profit before tax was GBP 313 million. Our exit from lower returning branded restaurants meant that U.K. ROCE increased to 13% versus just under 12% a year ago. Our U.K. business is trading well. And as I'll come on to, this has continued into the current trading period. Occupancy levels remained high at 81% for the half, stepping up in the second quarter, reflecting good demand over the summer months. The combination of our brand strength and best-in-class trading engine meant that we were able to increase average room rate by 2% to GBP 87 resulting in a 2% increase in RevPAR and a 3% increase in accommodation sales to GBP 1.1 billion. We made excellent progress over the past few years and have extended our outperformance versus the market. In the half, we delivered a RevPAR premium of nearly GBP 8, up from GBP 2 pre-pandemic whilst growing our market share. This demonstrates the power of our vertically integrated model, the strength of our brand and the impact of our best-in-class commercial program. Together, these are giving us real edge in generating sustained outperformance versus the market and increasing our market share. Now on to Germany. We've had another strong trading performance in Germany. Our opening of 10 hotels together with the increased maturity of our estate helped to drive accommodation sales that were up by 18%. In line with our previous guidance, we're expecting GBP 10 million of one-off impacts this year relating primarily to the conversion of recently acquired hotels. Despite the majority of this impact falling in the first half, EBITDA still increased by 10%. The resulting adjusted loss before tax was in line with expectations, and we remain on track to more than offset this loss in half 2 to deliver our second consecutive year of profitability in FY '27. As Dominic will come on to, we've got good momentum, and we're confident in being able to deliver a further step-up in performance into FY '28 in line with our previous guidance. As for German trading performance, whilst the market has picked up in more recent periods, it was back year-on-year in the first half. We opened 1,800 rooms in the period, and so it was pleasing that our RevPAR growth remained in line with last year and 1% ahead of the market. Our cohort of 17 more established hotels delivered 2% RevPAR growth in local currency, ahead of both our total estate and the wider market, reinforcing the point that these hotels are not yet mature and giving us real confidence that their performance can and will grow further. Now on to group cash flow. The power of our vertically integrated model meant that despite inflationary pressures, we delivered adjusted operating cash flow of GBP 389 million. Gross CapEx was GBP 20 million. whilaspser, GBP 450 million to GBP 500 million by the end of the year. And we returned GBP 1 million to a sheet of GBP 6 million and leverage of 3.4x, in line with our exs.d.'deK.manyK accommodation sales were up 4% and RevPAR growth was up 3% versus last year to the market metrics, delivering a healthy RevPAR premium. F&B sales were in line with our exs,osureainnded restaurants in September. In Germany, total accommodation sales and total RevPAR up and well ahead of the wider -- whilst comparators become more challenging in the second half, this strong trading momentum and our positive forward book position give us real confidence in the full year outlook. Turning now to capital allocation. Our disciplined and dynamic approach to capital allocation is central to our strategy. And with an ever-changing environment, it is really important that we remain dynamic and adapt our plans so that we continue to deliver attractive returns across all of our capital programs. At the core of our framework and over the life of the 5-year plan, we're committed to maintaining our investment-grade credit rating and keeping lease adjusted leverage at or below 3.5x. This drives significant commercial and financial benefits for the group. As outlined in April, we materially reduced growth CapEx versus our previous plan and will fund growth CapEx over the 5-year plan by recycling more of our freeholds into attractive high-returning opportunities. When we step up in business rates, we'd increase our hurdle rates with growth investment and are targeting incremental returns at least 15%, thereby ensuring a healthy spread over our weighted average cost of capital. By continuing to manage our non-expansionary CapEx carefully, we ensure that we both protect and extend our market-leading position. Our policy to grow dividends are in line with earnings. However, given our confidence into the plan, we declared an interim dividend of 36.4p in line with last year. We also have a clear track record of returning capital to share buybacks when appropriate and expect to generate GBP 2 billion of free cash flow available for share returns by year '31. This slides expected growth investment and non-expansionary CapEx over the 5-year plan. spend business, we're committing growth capital to areas that are targeted to drive high returns for share by funding this growth capital through the recycling of GBP 1.5 billion of property at attractive cap rates and reinvesting in higher returning projects like the AGP, we are unlocking significant value for shareholders. As I've already mentioned, by continuing to invest in our physical estate as well as technology, we'll continue to drive RevPAR as well as cost efficiencies. By reducing total net CapEx to GBP 200 million to GBP 250 million per annum down from GBP 500 million per annum previously, we'll ensure that more of our operating cash flow is available for shareholder returns. With that, I'll now hand back to Dominic, who will update you on the excellent progress we're making across each element of our 5-year plan.

Thank you, Hemant. As I mentioned earlier, back in April, we announced the outcome of our comprehensive business and strategic review and the steps we are taking to offset significant external headwinds and drive a compelling increase in margins, cash flow and returns. I just want to spend a few moments reminding you of the key conclusions and outcomes of the review. The key driver for the review was that we have been hit by GBP 160 million of incremental costs following the hike in employment costs and an increase in business rates. To give you a sense of the materiality, together, these 2 factors were equivalent to 1/3 of our full year 2025 profit before tax. Our business review was forensic and was led by the Board with extensive advice from 3 of the world's leading investment banks. We consider the short-term and long-term implications as well as the feasibility of making any fundamental change to our business. At every stage, we remain clear about the primary objective, which is to maximize total shareholder returns over the medium and longer term. With a clear set of objectives, the review reassessed all of our capital investment plans, reexamined all areas of our cost base to identify where we might improve margins, considered all potential options Germany, including an exit, quantified the benefits and risks of alternative business models and considered a range of alternative capital structures to see if additional value could be released. Our conclusions and key actions are summarized on the next slide. First, having looked at all alternative models, the vertically integrated model delivers the highest medium and long-term value creation and maximizes return for shareholders. We do recognize that different models can work at different stages of maturity. But for our business, an integrated model maximizes value creation and with some material changes, we can deliver higher returns. Second, in response to a high cost environment, we have raised our hurdle rates and reduced and reallocated capital expenditure to the highest returning opportunities, including accelerating growth plan. As a result, we have rationalized our portfolio by removing current and future assets that no longer meet our increased hurdle rates. Third, we considered a broad range of strategic options for Germany, but none of them were attractive given the scale of potential we see for our business. With fundamental changes to our approach, we are at an inflection point and have a clear plan to accelerate cash flow and returns. Finally, a strong asset-backed balance sheet is a source of competitive advantage and therefore, central to us driving value from our vertically integrated model. However, we can continue to maintain these advantages, but with less real property than we do today. And by recycling more of our assets into high-returning projects, we can and will create additional value for shareholders. These actions are embedded within the 5-year plan with clear targets for full year '31 as outlined on this slide. We have made great progress against each of these elements in the first half, and I'll now take you through each of these in more detail. Starting with the progress we are making to extend our market-leading position in the U.K. supply backdrop remains favorable. There was limited new supply and the structural decline of the independence continues with lower levels of new hotel construction. Our analysis shows that we expect hotel room supply to remain well below pre-pandemic levels until at least 2028. I should also add that our analysis does not yet reflect the impact of business rates and so could prove to be conservative. Having rationalized our pipeline to ensure that we continue to generate a healthy spread of returns above our weighted average cost of capital, we are focused on the highest returning opportunities that will support like-for-like sales, reduce capital intensity and deliver returns of over 15%. The chart on the left shows the makeup of our committed pipeline. As you can see, it is heavily weighted towards large sites in London, a significant number of which will be hub hotels that as I will come on to, are performing strongly and generating high returns. On the right-hand side is a case study of our Paddington catchment where our sites that are not yet mature are already generating double-digit returns and are expected to deliver over 15% return on capital employed at maturity. And we are really excited about our hub brand. It is achieving high levels of occupancy that together with its efficient operating model are driving attractive returns in prime city center locations. focused commercial plan is accelerating our performance, driving strong RevPAR growth and market outperformance in both London and Edinburgh. By full year '31, we expect to have 5,000 rooms open and revenues of over GBP 200 million with further profitable growth potential thereafter. Turning now to our accelerating growth plan, one of the most significant and transformational parts of our 5-year plan that will further improve the experience for our guests and drive higher returns for our shareholders. Having extended the original Accelerating growth plan to include all remaining branded restaurants, this will simplify our supply chain, increase the consistency of our food and beverage offer and add highly profitable extension rooms, which is our most efficient way to deliver high returning growth. The plan will deliver GBP 100 million of incremental profit by February 31, and with expected returns of between 15% and 20%. It is clear why the accelerating growth plan is our #1 priority in terms of capital allocation. And this is a critical year for the Accelerating growth plan, and we have made excellent progress in transitioning effective sites. In September, we closed all remaining branded restaurants and switched over to our more tailored food and beverage menu with no guest disruption, meaning that we have removed all 410 branded restaurants over the past 24 months, which is a fantastic operational achievement. At the same time, we are well ahead of our planned disposals. We have sold over 170 branded restaurants and have received credible offers for the majority of the remaining sites. This leaves only 21 sites that are still being marketed out of the total of the 240 that we started with, and we are confident in exiting these as planned. We're also adding new extension rooms with planning applications and construction underway. With around 850 of these rooms already open, we are on track to have 1/3 of all planned extension rooms open by the end of this financial year. And finally, on the right-hand side of the slide, you can see that our completed sites are performing strongly with a clear uplift in accommodation sales versus pre-AGP. Our guest scores have also increased, reflecting the appeal of the new integrated food and beverage format. Turning now to our commercial program. We are the clear market leader in the U.K. The combination of our key commercial initiatives and high-quality great value proposition underpinning our increased outperformance. I'll now spend a few minutes talking about the initiatives driving our performance and how we plan to unlock even more value. We have market-leading brand awareness of over 90%, and our new media campaign is driving increases in both consideration and purchase intent. By optimizing our business-to-business proposition, we are driving increased revenues, capturing incremental international demand through the selective use of online travel agents. In parallel, we're continuing to harness each stage of the customer journey, providing guests with a more seamless experience and at the same time, driving commercial and operational benefits. Our proprietary trading engine is a key strategic advantage for us, optimizing pricing at scale to maximize revenues, and it is contributing to our market outperformance. But what really excites us is the prospect that we can go even further. Through the use of AI, we will be able to make faster, more granular decisions that will drive growth in room and ancillary revenues. early results of several techn-related tools are positive and will unlock significant potential for revenue growth. Whilst we cannot predict market RevPAR growth, we are confident that through these initiatives, we can drive positive sales momentum and outperform the market. Turning now to our highly successful efficiency program. Having delivered GBP 39 million of savings in the first half, we remain on track to deliver GBP 60 million of savings in financial year '27. And over the life of our 5-year plan, we will deliver a cumulative GBP 250 million of savings. Technology is a key enabler, unlocking further operational savings across our hotels and support center. We're introducing more real-time and automation tools in housekeeping to increase labor efficiency. And with more AI-driven decision-making, we will further automate tasks for our teams. Now on to Germany. We spent some time back in April explaining how we have fundamentally changed our operation journey. Drawing upon our experience and with several hotels already delivering double-digit returns, we are clear on what works and what doesn't work. By focusing on proven formats, optimizing our estate and reducing capital spend with future expansion through new leaseholds or the recycling of existing freeholds, we will maximize returns. On the right-hand side of this slide, we have set out our planned trajectory to full year '31. We expect to become cash flow positive in full year '29 with our total estate delivering 13% to 15% return on capital employed by financial year '31. Beyond this, total estate returns will continue to increase, creating significant value for the group. Having reassessed our portfolio to focus on proven formats, we have reduced our committed pipeline materially since the year-end. We opened nearly 1,800 rooms in the first half and the performance of these room openings is giving us real confidence that the changes we have made to our strategy are working. By segmenting the estate into smaller cohorts based on year of opening, you can see that this year's openings are delivering higher RevPAR versus the market and more quickly than previous cohorts. And having transformed our commercial strategy over the past few years, we are continuing to grow brand awareness and enhance the customer journey with improvements to our app and the launch of digital keys. We are also driving incremental demand by broadening our distribution. We are confident we can continue to drive further RevPAR growth and outperform the wider market in Germany. Hemant has already taken you through our capital allocation framework, but I wanted to spend a few moments reminding you of our property strategy. There are significant commercial and financial benefits from our flexible property approach that are listed on the left-hand side of the slide. We segment our estate into 5 distinct categories depending on the hotel assets maturity. As a site moves through to further development or yield potential, we look to recycle the asset and reinvest the proceeds to drive even higher returns. And as the exciting growth plan completes, the pool of sites available for recycling will naturally increase. Hemant talked about earlier, freehold recycling is an important enabler of our plans, and we expect to recycle GBP 1.5 billion of property by full year '31 through a combination of disposals and sale and leasebacks. Having already completed sale leasebacks at attractive cap rates over the last 12 months, we are seeing good levels of interest and are confident in recycling GBP 450 million to GBP 500 million of property this financial year. Whilst the group will continue to own a substantial amount of freehold, the execution of our plan will reduce the proportion held from around 50% of sites today to around 40% by full year '31. We will still, therefore, own a significant amount of property and continue to benefit from all of the advantages of freehold ownership. By funding our growth capital through the recycling of GBP 1.5 billion of property and reinvesting in high-returning projects like the Accelerating Growth plan, we are unlocking significant value for shareholders. I'm now going to close with a brief summary. What you've heard today is a set of very clear messages. Our comprehensive business and strategic review considered all options to maximize value for shareholders. We have materially adapted our capital expenditure plans based on higher hurdle rates, and we have a compelling and deliverable plan to drive significant returns. We are executing that plan at pace and are making excellent strategic progress. And our disciplined execution is driving our strong operating performance, and we are focusing on delivering our 5-year plan. As you know, Corvex is asking shareholders for a board seat. But despite myself, Hemant and our Chair, having had a significant number of meetings with them over the past 18 months, Corvex has not been explicit regarding any plan to drive medium and long-term value for shareholders. Our Board believes unanimously that the Corvex nominee will bring no additional or complementary skills or relevant experience that would add value to the workings of the Board. Corvex's agenda will significantly distract us from delivering our plan, and we believe these distractions will be to the detriment of shareholders. We have, therefore, today written to shareholders with more details and recommending them to vote against the resolution proposing the election of the Corvex nominee to the Whitbread Board. Thank you for joining us this morning. Hemant and I will host a Q&A session starting at 9:15 a.m. U.K. time, and we look forward to taking your questions then. You will be able to find the details of how to join the call on our website.