Whitbread plc (WTB) Earnings Call Transcript

Hello, everyone, and welcome to the Whitbread Third Quarter Trading Update Conference Call. My name is Bruno and I'll be operating your call today. [Operator Instructions] I will now hand over to your host and Chief Executive Officer, Dominic Paul. Please go ahead.

Thank you, Bruno. Good morning, everybody. Thank you very much for joining the call for our quarter 3 trading update. I'm pleased to be joined by Hemant Patel, our Group CFO. Hopefully, you've had a chance to review the Q3 release this morning. I'll start by giving a brief overview for those who haven't seen it before opening up the call for Q&A, when Hemant and I will be happy to take your questions. During the third quarter, which ran to 30th of November 2023, we continue to trade well in the U.K. and have delivered another strong performance with RevPAR up 9% versus last year and 39% ahead of full year 2020. This has come by high occupancy levels and strong pricing across both London and Norwegians. We maintained our outperformance versus the rest of the mid-scale and economy market with a RevPAR premium of GBP 6.06 up from GBP 4.48 last year. Our food and beverage sales continued to perform well in the quarter and were 6% ahead of last year. In Germany, we also traded well in what is an important quarter. Our performance was led by our cohort of 70 more established hotels, which continue to perform in line with the wider mid-scale in the [Colon] market with a RevPAR of EUR 66. We now have 58 hotels open and 34 hotels in the pipeline. Moving on to current trading and starting first with the U.K. We are continuing to see positive trading momentum in the U.K. And in the 5 weeks to the 4th of January 2024, total accommodation sales are up 12% versus last year, and RevPAR is up 10%. Food and beverage sales benefited from a robust Christmas trading period and are up 7% versus last year. And in Germany, current trading has seen total accommodation sales 61% ahead of full year 2023, with total estate RevPAR of EUR 44 and RevPAR for our cohort of more established hotels being EUR 50. Now while there's no cost -- no change to our cost guidance for this year, as we look forward into full year 2025, we expect net cost inflation on our GBP 1.7 billion to GBP 1.8 billion U.K. cost base to be between 3% and 4%, after taking account of operational cost efficiencies of between GBP 40 million to GBP 50 million. Our guidance does reflect an increase in labor costs due to the increase in the national living wage partially offset by lower utilities and food and beverage inflation. So despite persistent inflation, we remain confident in the outlook for the coming year. Our forward booked position in the U.K. is ahead of last year with a favorable supply environment, a clear commercial plan with multiple levers and cost efficiencies, and we remain confident in the full year 2025 outlook. In Germany, we remain on course to break even on a run rate basis in calendar year 2024 and are confident that we are making good progress towards our long-term target of 10% to 14% return on capital. Now we're a customer-focused business and before we move into Q&A, we've taken on board the feedback we received after the H1 results call, where some of you said, felt that the Q&A went on a bit too long. So in the interest of listening to customer feedback, could I please ask you to keep your questions to a maximum of 2 each, and that should ensure that we cover all the key questions. Thank you. And with that summary, I'll now hand back to Bruno to host the Q&A.

[Operator Instructions] We do have our first question registered. It comes from Vicki Stern from Barclays.

So I'll keep it to 2. Just on the cost savings, so the EUR 40 million to EUR 50 million you're announcing for next year. Obviously, that's slightly higher than the -- I think we had EUR 30 million to EUR 35 million per annum in mine previously. So just where are the additional sales coming from? And is that a sort of sensible run rate to have in mind going forward? Or that's just a 1-year thing facing off that higher inflation? And then the second 1 is just on the RevPAR outperformance. Just -- can you sort of break it down to understand the source of that right now? Do you think you're sort of taking more price than the market on sort of catch up from last year or it's Premier Pass affecting the mix, rollout of Opera attribute pricing. I know there's lots of different leads you've got. So just trying to understand what's driving the outperformance? And I guess with that, really how sustainable that might be going into next year?

Yes. Great. Thanks, Vicki. Two really good questions, of course. I'll answer the first part of the cost savings question, and then I'll hand over to Hemant. I mean I suppose a bit like we talked about at the interims a few months ago. Hemant and I have spent a lot of time over the last 12 months or so really looking in detail at the business. The beauty of our business is we are vertically integrated, which means we control and operate all the elements of the operations. And actually, that gives us access to multiple levers to drive efficiencies. We're a value-focused business. We can see -- our guest scores are at record levels. And actually, our value-for-money scores are at record levels as well. And it's really important that we continue that. One of the ways we continue that value for money focus is by ensuring we're incredibly efficient on how we operate. And both Hemant and I are pleased as we've done this work, we've seen continuing opportunities to drive those efficiencies. And as is often the case, we're running a business really well. It's not 1 silver bullet to drive increased efficiencies. It's multiple, it's kind of multiple levers. And it's taking a really rigorous disciplined approach to running an operationally led business. So we have been able to increase our efficiencies target, and we're really comfortable that we're able to do that in order to drive the value for money proposition with our customers, but also over the medium term, it gives us increased confidence that we'll be able to continue to drive our margins up over time. Hemant will build on that question. But before I get to that, let me just talk about the RevPAR side of things. You're right, we have seen the RevPAR outperformance. I think we're really seeing the benefit of being the #1 brand in the U.K. and back to that vertically integrated business model of benefit of that, the direct distribution. We're really balanced between business and leisure, 50% business, 50% leisure. Again, it's not 1 key lever that we're pulling to drive that RevPAR performance, it's a number of things. One of them is the increased rollout of Premier Plus rooms, as you touched on. One of them is our increased focus on business guests, making it easier for guests to book with us. We're linking up more with GDSs, which makes it a more frictionless experience, business guests generally pay a slightly higher amount. It's also trading the business really well, getting -- building the occupancy in our hotels earlier, which enables us over time to take more price, which isn't as blunt is just increasing our prices. It means that we offer value at that point, but actually that also enables us to take more price. So it's a combination of factors and that kind of all underpinned by the strength of the brand and the strength of the proposition. And we're really focused on continuing to kind of drive that outperformance and continue to profitably take market share. And I think the results that we've been talking about over the last 12 months underlying momentum that we're building and doing that. I'll hand you to Hemant, who can talk a little bit more about the efficiencies, please.

Thanks. Yes, Vicki, I think Dominic's laid out the kind of philosophy we have in terms of cost savings. We -- it's a relentless process. We have a big business with a large cost base. The cost savings that we can see across every year of the business in terms of our operations and leg within the operations, our technology spend procurement as well as our central costs as well. We've looked at every single area of cost in the business and are developing our cost saving plans for the next 3 to 4 years. We're not giving guidance sustainability in terms of the exact numbers. But as you can see, we have indeed increased our efficiency guidance from something like GBP 30 million to GBP 33 million up to between GBP 40 million and GBP 50 million for next year. There's a combination of different processes and the initiatives driving that all the way from process improvements from tech -- introducing technology or automating efficient processes, revisiting contracts. I'd say this is something that we -- even once you've done it once, you need to go back and do it again because we're always reintroducing costs and investing in the business, and there's always more opportunity for efficiencies. So we're very, very confident about this efficiency plan for next year. As we -- when we're ready, we'll talk more about what the next 3 or 4 years look like in terms of efficiency and give some more specific guidance on that. But then as you can tell, we're very serious about continuing with our heightened efficiency program.

Our next question comes from Jamie Rollo from Morgan Stanley.

My first question is just on the RevPAR outlook. After sort of a weaker October, November for the market, we saw a very big pickup in December. I'm just wondering whether there's anything unusual going on there? And also PI's occupancy has been down sort of 2 quarters in a row year-on-year, particularly London. So just sort of talking a bit about the recent data on your confidence on things moving ahead going forward would be helpful. And then on Germany, I think it sort of -- maybe sort of nearly 6 months into those commercial enhancements, any sort of early feedback you can give on that will be helpful. And also, any flavor for the cadence of PBT during FY '25 to get to that breakeven?

Thanks, Jamie. Let me take the first half of the questions then. The -- I mean, I think in terms of the RevPAR outlook, I mean, you're right, in -- there were a few weeks in quarter 3, and I think people saw the Travelodge results, which were slightly softer. And at the time, we said we were continue to see outperformance versus the market, which we've continued to drive. Our occupancy has been slightly down, but it's still very high. And when we look at our hotel network, we are full may nights of the week. So once you're at the kind of occupancy levels that we're driving, it means that our hotels have filled a lot of the time, which I suppose underline 1 of the advantages that we've got in an industry, which is supply is slightly down. We are seeing high occupancy levels across the whole industry. And we are, in particular, being very successful at driving this high occupancy levels. Whether it adjusts by a percentage or 2 here or there, the reality is, it is still very strong occupancy levels, which is enabling us to -- which is supporting a really strong pricing environment. So in terms of kind of our outlook moving forward, I mean we feel good about the market overall. We've been very clear about talking about the fact supply is down. We don't think supply is going to get back to pre-pandemic levels for at least 5 years. That's going to support the pricing environment, we believe. We're also very focused on business customers. So at a time where there is some uncertainty about consumer spending, we do see businesses being increasingly value focused, which helps us because we are a value player. And all we can do is look at where we are currently for next year, and we booked slightly ahead of where we were this time last year, for next year and at higher rates. All that said, we're a late booking market. So of course, visibility into next year is relatively limited. But we've got commercial levers at our disposal. We've got a supportive supply side environment. And as Hemant and I have just talked about, we've also got efficiency -- levers like efficiencies for us to pull. So it's not just as simple as looking at RevPAR, it's also about how we continue to drive increased efficiencies over time. And that's when we step back and look at the business and we almost moving away from the quarter-to-quarter outlook, we say we're in a benign supply environment, which we think is going to be really supportive for this business. We've got strong commercial levers for us to pull over the next few years. We've got levers for us to pull from an efficiency point of view. And that gives us confidence in being able to continue to drive our margins and profitability up over the next few years. So I guess our tone has generally been 1 of confidence this year we continued that tone of confidence. Of course, all within the backdrop of we're registering to book for next year because we're in a late booking market. And so our visibility is relatively low as it was this time last year. But the core drivers of our business and the market look good for next year. Then kind of talking about Germany, I mean we're encouraged by the progress that we're making in Germany. We talked at the interims a few months ago about the fact that we were learning a lot about trading in Germany and that we were pulling more levers. We talked about things like increasing our distribution in Germany, starting to build the brand more, getting better at pricing events. And we're seeing those actions taking root. Our more mature hotels are now nicely tracking the market. So we've seen a relative uptick in the performance of those hotels. And that's giving us confidence, and it's 1 of the reasons why we've reiterated our confidence hitting breakeven on a run rate basis next calendar year.

And just to add on your question in terms of the kind of cadence and what that might mean for next year. I think consensus at the moment for [indiscernible] year for Germany is a loss of GBP 10 million. This is in line, we think, with our commitment to get to run rate breakeven during the calendar year. I think we can assume that most of that loss, therefore, will be in the first half of the year. And by the second half of the year, we should be achieving that breakeven run rate at some point through that second half.

Our next question comes from Leo Carrington from Citi.

If I could first follow up on that point about the forward booking position. How close to pre-pandemic levels is your forward booking position? And to what extent is this a factor in driving the outperformance in -- I guess, by filling your hotels earlier at the right ADR? And then secondly, in terms of property valuations. I think since you last reported a couple of Premier Inns and traded as well, obviously, as a portfolio of your competitors' hotels. Can we comment on the valuations there versus your expectations or valuation exercise that was last done pre-pandemic?

Okay. Yes. So I'll take that. Just in terms of the forward booking position versus pre-pandemic. I mean, yes, customers are behaving slightly differently to how they were pre-pandemic. So I'm not sure it's a relevant comparison. If you look at when we're at this time last year, though, our forward booking positions are actually ahead of that, both in terms of occupancy and rate and clearly into next quarter -- sorry, into the first quarter of next year, and we are very happy with our [forward positions] into this quarter as well on a similar basis. Clearly, we had a very good Q4 this time last year and a very good Q1 as well into the next year we're running again. So we're very pleased that we are positioned is strong, and therefore, we would hope to continue to grow within our U.K. accommodation sales -- into U.K. accommodation sales. So very happy with that position. I don't think there's anything else really to read versus where we were pre-pandemic. I think the customers were behaving slightly differently, then. Where we are in terms of property valuation. Yes, we've seen a couple of transactions and then some competitive transactions as well in the market. I don't think the competitive transactions have that much relevance. Honestly, if I look at the quality of the products that have been on market don't necessarily map to our product and certainly don't map to our [covenant] and the yields that we tend to achieve with kind of on the like-for-like. The couple of transactions you've seen on the market -- the Premier Inn product don't lead me to think that actually the kind of the pre-pandemic valuation that there was even though that would have been '19/'20 that we've seen -- we're going to see anything radically different as and when we're able to value our estate. Clearly, it's a bit difficult to value the state on a evidence basis right now because the level of transactions happen are very low. And the valuation methodology involves assessing each of our individual sites on a market rent basis and applying the market yield to those based on the evidence that there is. Before, we actually saw roughly the hike interest rates last year, we started to see interest rates go up last year -- sorry, previous year. We were actually trading -- where we saw open trading ahead of that valuation. Clearly, with higher interest rates, there's been reduction against that. I think on the whole, we still feel very comfortable with the valuations that were made in 2019. So there's nothing really yet to report on that. Clearly, at a point in time when we have a bit more evidence and where interest rates have stabilized a little bit, I think we would be ready to do another exercise, but we need to wait to we've got that evidence in the market do so.

I guess the only other final point, I'll build on -- I think Hemant's covered it all really well. The only other final point I'll make is we, of course, have bought more hotels in that period. So we've added hotels. We've added freehold properties to that valuation. So I think we feel -- when we trying to look at everything, we feel that we feel good about that valuation and then we have added freehold properties subsequently to the portfolio.

Our next question comes from Jaina Mistry from Jefferies.

Congratulations on a fantastic quarter. 2 questions. My first question is around your rate environment. I guess in the context of current trading your forward book position and perhaps your updated macro view. Has your view or your sentiment on the outlook for pricing over the next 12 months changed [indiscernible]? And then on Germany, did you establish hotels grow RevPAR in Q3 and whether you're profitable in Q3 as well?

Thanks, Jaina. And I think in terms of pricing and then has that outlook changed. I mean I suppose I'd go back to what we spoke about the interims, which is supply being down and supply in the U.K. hotel industry or getting back to pre-pandemic levels for at least 5 years. That should support a good pricing environment. And then we've got levers opening our disposals as well. Of course, we read all the same things in newspapers about leisure consumers, in particular, feeling a bit squeezed, but that has also been the case this year. So I think that's why it's really important to understand how balanced our business is. We've got this big focus on business guests, at least 50% of our revenue comes from business guests. We've actually seen strong demand from leisure customers looking quite far out. Taylor Swift concerts would be a classic example of that. Having said that, it's really important that we take a really segmented approach to our pricing and therefore are able to drive RevPAR up without just doing -- without taking just lumping price rises in its segmenting the pricing in a really smart way. I mean, consensus next year, I think, is for RevPAR to go up 1% to 2%. We would need RevPAR to go up 2% to 3% for PBT to stay flat. So we look at consensus and don't feel that, that is overly challenging. And we think the supply side environment, but also the actions that we're taking ourselves should help support an outperformance versus the market, but also our ability to continue to take price. I think Hemant probably is going to pick up on the Germany.

On the established hotels, as you say, Jaina, I mean, we're trading at EUR 66 RevPAR for the quarter. That compares to EUR 58 for Q2, which is obviously part of that is seasonal, but it's also 3% up on where they were this time last year. That's actually there's a headwind there because of the density trade fairs, some big trade fairs in the previous year particularly in Munich. So we're actually very pleased with how those are trading and that they are continuing to mature and in line with our expectations to get into those 10% to 14% return on capital employed when they get to their maturity levels.

Okay. So just to summarize, would you agree if why take on this is you're as confident as you were in the RevPAR outlook since we spoke a few months ago. And then German hotels were profitable in Q3 on the established hotels?

Yes. So just on the last point, we're not saying that necessarily. You can refer from -- in fact, based on past discussions [indiscernible], we're not specifically saying that. Clearly, we -- the most established hotels have been more profitable and they are growing. So you would expect them to be said we haven't gone into the details of that. And then in terms of RevPAR outlook, I mean, as Dominic said, well, we've got a good book position, we've got an awful lot in the locker in terms of our commercial plans and levers that we can control. Clearly, we can't control what might happen to the overall economic environment and demand overall. But from where we stand right now, we're very confident that we'll be able to trade the U.K. business really well and push profitability or at least to where it has been this year, if not further.

Next question comes from Jarrod Castle from UBS.

Just thing off on Germany, but can you give a view on kind of how you see the inflation backdrop just like you gave for the, I guess, the U.K.? And what kind of RevPAR growth do you need to kind of hit this breakeven? Or is it more a question of scale at this point? And then just secondly, I mean, I know you don't generally say that much, but are you still happy at this point with kind of how room count is progressing, both in terms of German and U.K. rollout in terms of the target you previously provided?

Yes, thanks. So let me kind of take those questions, but I think Hemant will also build on it as well. I mean, we haven't been specific in our guidance in Germany of saying what RevPAR increase we would need to see to offset the inflation. I mean, part of that, of course, is because our hotel portfolio in Germany, although we've grown really quickly and are now getting to a good scale. The hotels are still pretty immature. I mean, most of them have only been open for a very short period of time. So the RevPAR increases we're seeing year-over-year are very, very significant and very material kind of as you've seen in the numbers today. So it's slightly less relevant to talk about exactly what we need to offset the inflation because we're going up the maturity curve so quickly. What we have been really specific about is saying that we feel good about our goal to break even on a run rate basis at some point next calendar year. And we're seeing good progress in Germany. I talked about the commercial levers that we're pulling and we're seeing increasing performance from those hotels as they mature, and we're investing in our local team in Germany, which is really helping us to act, I would say, really like a challenger brand in Germany to support our growth aspirations in that market. And then in terms of room count, I mean, we still feel really good about the long-term milestones that we talked about. We talked about 125,000 rooms in the U.K. So remember, we're about 85,000 rooms now for material growth in the U.K. And we've got about 7,000 rooms in our pipeline in Germany. So we've got material growth coming there. We have talked about the fact that our pipeline of growth for the next couple of years is slightly lower than we have seen historically. All of that said, our pipeline of growth is great in all our key competitors put together in the U.K. market. So we are able to access growth much better than our competitors are. The high interest rate environment and the lack of balance sheet strength that most of our competitors have got means that they're really struggling to add capacity. That, of course, will help support a benign pricing environment, but it will also enable us to take profitable market share over the next few years. So we still feel good about that kind of runway of growth that we've got ahead of us, and we feel particularly good that we are going to be growing disproportionately quicker compared to our competitors, and we'll be able to do that and continue over time to grow our margins and our profitability.