Whitbread PLC

LSE:WTB

Earnings Call Transcript 2020-Q1

[Alison Brittain, Chief Executive & Director]

Good morning, everyone. Thank you very much for dialing into Whitbread's First Quarter Trading Update. And I'm joined as always by Nicholas Cadbury, our Group Finance Director. And it's not actually been that long since we last spoke because the full year results presentation was only at the end of April. So it's been about 6 weeks. In line with what we said back in April in our guidance then, we started the year with a resilient performance but against a backdrop of difficult market conditions. And our strong efficiency program is continuing to offset some of the high cost industry inflation that we're seeing. In line with our previous guidance, we are remaining cautious on the U.K. business environment this year and the impacts that, that can have on the hotel demand, and we are closely monitoring business and leisure confidence as we go into the summer. And as we expected during the first quarter [ summary ] in total sales declined slightly reflecting the weak market with especially soft business demand in the regions where, as you know, more of our hotels are located. Total Midscale & Economy market sales declined by 1.5% in the region, and that reflected, I think, the impact of political and economic uncertainty and the impact of that having on the hotel industry. And for us, as we discussed back in April, we're seeing that decline in short-lead bookings from business customers, which contribute significantly to our revenues as some of the most highly priced room nights.In London, the market's driven to a greater extent by international customers, and we have less exposure to international inbound tourism, most of our customers being domestic leisure and business travelers. During the first quarter, we grew our total sales in London by 1%, reflecting the capacity addition that we made last year. And whilst Premier Inn's superior margin structure makes us more defensive to the impacts of lower demand, particularly with profit line, than many of our peers, we do expect subdued trends to continue through the year. The U.K. hotel market, we are very confident in, in terms of the medium- and long-term attractive opportunity, and we continue to win market share from the independent markets through delivering high-quality new hotels at good value for money. And as we said previously, in April, that leads us to continue to invest even though we're seeing a more subdued and softer environment.In Germany, we're firmly on plan. Our hotel in Frankfurt continues to perform well. Occupancy levels now 70% and maintaining very good guest scores and 100% direct booking.Our second German hotel opened in Hamburg in February, and that's been performing well ahead of our expectations with good levels of occupancy and very good customer scores also. Our committed pipeline in Germany is now nearly 7,000 rooms, and we are continuing to look for opportunities to invest, to accelerate and to extend that pipeline further. We're proactively looking for more freehold and leasehold sites organically, and we're also interested in bolt-on acquisitions. And we've made, as we have discussed before, a considerable investment in our property and construction teams and in M&A head in Germany to facilitate that. We've been investing in Germany ahead of revenue generation again, across aspects such as marketing and setup costs and team costs. And so we are still expecting losses of around GBP 12 million this financial year, that's no change to that which we previously discussed.This year, Premier Inn will open 3,000 to 3,500 rooms in the U.K. and well over 2,000 in Germany. Most of the German room additions are part of the Foremost acquisition, and we will be acquiring those hotels at the end of the financial year at the end of February. And what we'll do with those hotels is we will close them for a period to rebrand and refurbish them as Premier Inn. And they will then open in a standard way because some of them will be closed only for a matter of weeks whilst others for a matter of months. And we will reopen them as Premier Inns, and we will therefore be present in a significant number of German cities during the course of next year at which point revenue will start to flow in. And we continue to build a committed pipeline both in the U.K. and in Germany, and our committed pipeline now stands at 20,000 rooms across the 2 countries. I think that's probably the highest pipeline we've ever had. Our efficiency program and our investment in the capabilities of technology procurement, property and supply chain are ensuring we can deliver our [ great ] plans efficiently, and they are helping us to partly offset the high inflation in our industry. We expect inflation this year to be around GBP 70 million. That's no change to that which we said before, and we expect benefits of our efficiency program to contribute GBP 40 million to GBP 50 million to offset. In addition, we're maintaining our investment in U.K. growth and the increased investment in Germany to take advantage of the long-term opportunities which we think are there.As we discussed in April, we remain cautious on the macroeconomic environment and the continued high inflation in the U.K., but we are still very excited about the medium- and long-term structural growth opportunities, and we're very confident in our ability to access those opportunities. Our unique model and leading market position in the U.K. puts us in a strong position to continue growing both in the U.K. and internationally over the long term. Our opportunities for growth, along with a disciplined approach to capital allocation, means we'll continue to create longer-term value for shareholders.Finally, I'm sure you'll remember, we committed to return up to GBP 2.5 billion of the net cash proceeds from sale of Costa to shareholders. And the first phase of that shareholder return has now been completed with around GBP 480 million returned to shareholders through a share buyback program, which ended the second week in May this year. For the second phase, we now intend to pursue a tender offer to repurchase up to a maximum of GBP 2 billion of shares, and that's subject to sharehold approval, which we'll be seeking at the general meeting later today, which follows immediately on from our AGM also taking place this afternoon. However, important to note that we are interested in ensuring that we maximize the long-term value created by the capital return program rather than maximizing the amount within a very short period of time. And so following the completion of the tender offer towards the end of July, we'll review at that point any surplus capital that then still remains, and we'll plan with our Board what we do for phase 3 of return to shareholders, and we can update you later in the year on what that will look like.And that was all I was going to cover this morning keeping this quite brief. Thank you for listening, and Nicholas and I are now happy to answer any of your questions.

[Operator]

[Operator Instructions] We have a question from Richard Clarke from Bernstein.

[Richard J. Clarke, Research Analyst]

Three questions, if I may. The first one is on your comment that you're monitoring business confidence closely. What is the sort of flexibility you'll undertake if you see that take another step down. So why are you monitoring that? What will you change if you see that move against you?

[Alison Brittain, Chief Executive & Director]

We're looking at -- it's interesting. We've historically always correlated hotel performance with GDP. And of course, we've seen a decline in GDP in the U.K., but it is still positive. It's still about 1% or a little over. And quite a lot of the other economic indicators in the U.K. are reasonably strong, so we still got low unemployment and reasonable inflation. So -- but what we saw in our business as we went into the turn of this year was this very marked slowdown in short-lead business booking. So I think, as we said at the year-end, if we look to our forward booked position across business and leisure, it's pretty positive, and leisure generally has been remarkably buoyant. So what we saw as we went into -- at the end of January into February and then as it got closer and closer to the March Brexit deadline was a slowdown in business short-lead booking. And we think that correlates pretty highly with business confidence and then a very acute slowdown in business investments. So if you look at the Bank of England figures on that, you'll see that those business investment numbers are peculiarly low given the rest of the economy is not in what you would term it as any form of recession. And so we're watching very carefully to see how this springs back. And although we could report that things are better than they were in February and March, as we've gone on -- the [ fee retrieve ] has been more positive. We're very cautious about calling any positivity given we've got another deadline in October and there's no reason to propose that we won't have a similar effect in the run-up to that deadline. And at the moment, the uncertainty is sufficiently high on the political agenda, but there isn't any particular route through that we can see to relieve the uncertainty for businesses. And so we're being cautious. We're monitoring the market. We're monitoring where we think business confidence goes. I mean, obviously, we look at all the other entities as well, but the peculiar issue for us is business after short-lead booking.

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

In terms of what kind of -- you say, what actions would you take? And I think we've kind of laid out action in April that we were -- we'd put in our cost efficiency program in place kind of GBP 40 million to GBP 50 million. And that is fairly locked and loaded. We're making really good progress on our plans. But I think, as we said in April, we thought that was an ambitious plan, and so we -- let's not see if we can pull more levers on it. I think we've laid out for the next 2 to 3 years what the plan for efficiencies are overall. And I think, for us, Richard, we're a long-term business. We're investing in the long term. And that is all about decline in the independent sector, which is still significant. Now you might have a business confidence in the U.K. Kind of GDP might suffer in the short term. That put pressure on independent markets more than the rest of the markets, but it takes time for them to come out of the markets. So you do have to take a long-term view. We might slow down some of our kind of extensions, kind of expansions. You see we've got 3,000, 3,500 room openings this year. I think it kind of year-end, we talk more about between kind of 3,000 to 4,000 in the U.K. overall. But actually, it's still for the long-term opportunities come from the decline of the independent market. So it doesn't kind of make this one to kind of hold back our investment either in the refurbishment of our room or the long-term growth of our brand.

[Richard J. Clarke, Research Analyst]

But, if maybe, if I can expand on that, if you're seeing business bookings or you're expecting business bookings to be weak, would you do anything like release more hotel rooms onto OTAs to try and tap what you say is a reasonably resilient leisure market?

[Alison Brittain, Chief Executive & Director]

No, not particularly in that we have -- I mean, we can do all sorts of things. When -- we don't have a problem with long lead business bookings or forward booked. That forward booked position in fact a bit positive. So our issue -- and we won't want to cannibalize bookings we would already have got anyway and pay 15% or 20% commission on them, and what we find with some of the OTAs when we do give them inventory, we're literally cannibalizing our own bookings that we would have because we're every domestic and business leisure based. There are things we can do about single rooms through on a different pricing curve for the last 2 weeks that we added lots of options we have for [ teeming and lading ] our business. But we're watching quite carefully. We have this evolved before making any knee-jerk action. I think the one we probably are clearer that we would be unlikely to take would be opening to OTAs.

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

I think actually right. We illustrate that just the OTAs, just remember, are [indiscernible] kind of measure to have that significant leisure with bookings at the moment, and we're finding our leisure bookings are actually okay. [indiscernible], it's not our issue at the moment to achieve [indiscernible].

[Richard J. Clarke, Research Analyst]

Okay. I probably asked 2, so just 1 more. It looks like the extensions accelerated a little bit compared to last year. I think it's 1.4% extension contribution. How much further is there to go on the extension opportunity? How can we think about that evolving over the next few years?

[Alison Brittain, Chief Executive & Director]

We've got quite a lot, Nicholas, as we open and build and open more hotels, and on the freehold side, we get more and more opportunities as hotels reach maturity, then there are more opportunities then to consider extensions. Extensions is one of the areas where we might be flexible this year. We have a plan for a number of extensions. We may fall back a bit on that plan. The difference between investing -- I mean, I don't need to tell you this, but I'll just spell it out anyway just in case. If we stop investing in new sites and building constructing half-built sites, then they don't open, you don't get the rooms, and it takes years to do one. You're talking about 3 years to build and then 3-year maturity. With extensions, it's much quicker, but for the extensions that we would have been building this year, we already have planning commission, and that can sit on a shelf for 3 or 4 years. It doesn't expire. And doing the extension itself is more like a 6- to 9-month piece of work. So if we're going to slow anything down, it will be extensions and because we could wait for some of the recovery before continuing with those investments and still get them additive to the market as we come back up through the curve, whereas, if we stop investing in new-build hotels in and themselves when we come out and we're coming up through the curve, we will have no supply going into the market at that stage. So we think about them a little bit differently in terms of them being able to be -- we are able to more flexible about how many we do underweight.

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

Yes. And it's 2 benefits of extension. One is when the hotel matures, you can extend it. Secondly, actually, it's a great way of churning kind of unproductive hotels to hotels nearby and extend that hotel nearby as well. Perhaps you would [indiscernible].

[Operator]

We have a question from Jarrod Castle from UBS.

[Jarrod Castle, MD, Head of the Travel & Leisure Sector and Co]

Three as well, if I may. You obviously reduced the buildout in the U.K. by about 500 rooms. Can you give an update on the CapEx spend as you now see it in terms of for the full year? Secondly, you kind of alluded to that maybe 2Q was better than 1Q? Is that a comp impact? Or is it a little bit better because the environment is slightly better? And then lastly, can you just gave a bit of color in terms of the German backdrop and as you start to deliver the pipeline and the acquisition, how you see things over the next 12 months in terms of the current trading backdrop?

[Alison Brittain, Chief Executive & Director]

Okay. Will you start with risk capital?

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

Yes. So just in terms of -- we've probably taken 200 to 400 [indiscernible] extensions by just 400. I think the extension costs you about kind of GBP 65,000 to GBP 75,000. So that's kind of the implications on that label. I think the larger implication -- the larger kind of variability on CapEx actually is around kind of how fast we go on Germany, but that's just -- it's just opportunistic in terms of what we [indiscernible] acquisitions. So it's just [indiscernible]. But the rest of it remained in the guidance we put in the April presentation at the moment. So the second question is about comparables just in terms of -- what was your point on the second question, sorry, Jarrod?

[Jarrod Castle, MD, Head of the Travel & Leisure Sector and Co]

I guess, is quarter 2 a little bit better than quarter 1?

[Alison Brittain, Chief Executive & Director]

Yes. For us, [ P1 ] only has just finished. So [indiscernible] has got [ P1 ]. [indiscernible] within that, we'll go down a rabbit hole of defining month-by-month, but we're seeing some improvement, but we're not calling an improvement, and we're not being un-cautious about the fact that it is hard to predict whether or not there will be a further deterioration as we go into the run-up to an October exit from Europe and [indiscernible] as we did and as we saw in the March run-up. And as you know, September and October are quite high hotel occupancy period. That particular period is a strong period in hotel. So we are just being cautious in the way that we are managing ourselves and communicating and we're keeping an eye on it.

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

A few commentators said that you seen June figures get slightly better market [indiscernible]

[Alison Brittain, Chief Executive & Director]

And we have [indiscernible]

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

Looking okay, but it's [indiscernible] period in April -- this year in April actually the Board is looking to okay that as well.

[Alison Brittain, Chief Executive & Director]

Yes. So I think everybody just have to keep following the market and data. And the last one with Germany, so just to give you -- just in terms of the flavor of Germany then, we are -- we've got 7,000 rooms in the past, and we've got a big tranche of hotels coming at the end of February. So we have built this year, as you know, the cost base to pull those hotel launching the Premier Inn brand into Germany, operational teams, marketing teams, HR, legal, et cetera. And also we've been building over the course of about 12 months and into this year an M&A capability for small bolt-on acquisitions and construction and property management capabilities so that we can keep the organic pipeline moving forward and manage the construction and refurbishment of the acquisition hotel. So when we go -- when we get to the end of February, we take possession, our preferred option we're in final plumbing, so there may be small changes around this, but our preferred option is to close the hotel, to not trade them in their current states because they are Premier Inns, and they're not in the right format to be Premier Inns. So we'd like to close them, refurbish, rebrand and reopen. And they will take various amounts of weeks. I think the quickest one is probably about a 3-week closure. The longest one is a couple of months, 2 or 3 months closure where there's substantial work to do. And we'll open them as soon as they're ready and launch them into Premier. So over the course of, I guess, the first 4 months of next year, we'll have -- we'll be opening hotels and launching the brand in earnest in Germany because we'll end up being in about 15 cities, which will be brilliant. And at that point, our revenue will start to mature. And so we'll have all the costs, but only a proportion of the year seeing the start point of the maturity of those hotels, so we will probably be loss-making next year but on a smaller scale than this year. And then we should go through breakeven and into profit the year after as those hotels start to mature out. So that's broadly speaking how it will work. I mean, the background, the teams will be working on further committed pipeline opportunities, both organic and small acquisitions, and we have the firepower for that built into our balance sheet. Is that helpful?

[Jarrod Castle, MD, Head of the Travel & Leisure Sector and Co]

Yes.

[Operator]

We have a question from Vicki Stern from Barclays.

[Victoria Jane Lee Stern, MD & Equity Analyst]

A couple questions. Firstly, just within the RevPAR, so within the sort of negative 6, the occupancy versus rate mix, I think rate's down 3.4%. And obviously, Germany, I think we've seen that the RevPAR declines have been quite skewed towards rate weakness. Maybe here it seems a little bit more balanced. But just Germany, if you could give us some comments on your approach to pricing, price mix, et cetera, through this tricky demand environment and how are you managing that and any implications thereof of the job through to EBIT? And then the second question is just around the openings. Again, obviously, you've got a lot of flexibility. I guess you don't need to take decisions on the extensions till later in the year. You see how things evolve in terms of demand, but just any sense you can give us at this stage how you see that today thinking about with the 3,000 to 3,500 openings is the relevant starting point number to have in mind for next year and the year beyond?

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

Just in terms of the extensions for this year, we're always locked and loaded on that, so with regards to that we'll keep you busy [indiscernible]

[Alison Brittain, Chief Executive & Director]

Yes, it probably will be the outset.

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

And there is that, Vicki, if you look about 6 months -- 6 to 9 months ahead on extensions anytime and that kind of gives you that guidance for next year as well, so that's balanced flexibility [indiscernible].

[Alison Brittain, Chief Executive & Director]

The only thing I'd say on that, Vicki, is for development openings, which fall here in the last months of the year in February, some of them sometimes have delays that aren't well within our control. By the time we speak to you in April of [indiscernible], we'd have them open. Whether they flip over the year-end is always the issue. We don't pick like people being spooked by the fact that there's a 1-week trading of 2 hotels and difference between our prediction. And we do have a bit of a backloaded climb in the final quarter, so there could be some slippage, but our 3,000 to 3,500 is what we think we are locked and loaded for this year. And just on an ongoing basis and probably not a dissimilar 3,000 to 3,500 would be my prediction for the couple of years thereafter, given the pipeline that we've got. That's not on unreasonable model.

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

Yes. In terms of occupancy, as you know, we try and prioritize occupancy in terms of just building brand loyalty, keeping our customers. We saw kind of occupancy decline in a quarter, so for us to climb a little bit more [indiscernible] overall, it's quite hard to kind of react within the quarter to those sort of increasing prices [indiscernible] locked and loaded, but we're always try and prioritize the occupancy but not at any cost. And that's what [indiscernible] approach is kind of fine tune, trying to get that balance -- get that balance right. I think you asked about what kind of flow-through do you see. I think what we've said previously and priced, [indiscernible] price, you get about GBP 0.80, GBP 0.90 flow through, in occupancy you get about, I think kind of GBP 0.60 to GBP 0.80 flow-through on that.

[Operator]

We have a question from Tim Barrett from Numis.

[Timothy William Barrett, Leisure Analyst]

Could I talk -- ask about food and beverage sales that minus 2.1 figure. Can you give a bit more color and say if there's a performance gap there between the Solus sites and the pub restaurants. I think the comp was quite easy in Q1? And then, I guess, just a very short-term thing, but second quarter is likely to be more a leisure-centric quarter, is it? And does it naturally mean that it should see some uplift versus Q1?

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

So if you look at it overall, let me just, like a rough flavor, actually, it's not our restaurants business is better than our Premier Inn, and that puts Premier Inn kind of is completely reliant on the occupancy of our hotels, and that was down, so that that's [indiscernible] overall. But I guess, with -- in terms of the restaurants, they're probably trading not far off the pubs and restaurants now outside of the [indiscernible] overall if you do take those 2 to get together overall.

[Timothy William Barrett, Leisure Analyst]

[indiscernible] the restaurant's market, the [indiscernible] market?

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

Correct, correct. Yes, yes, yes. And your second question, sorry, Tim?

[Timothy William Barrett, Leisure Analyst]

It was just around the mix of corporate leisure in Q2. And if the leisure market is more robust, is Q2 more of a leisure quarter?

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

It is overall, yes. So you might get some benefits of that going forward, but again -- and I guess, it's probably been mentioned in our forward-looking, but again, there is [indiscernible] cautious. The better answer is you've seen business confidence more of that leisure confidence [indiscernible]. But we'll see how that goes.

[Timothy William Barrett, Leisure Analyst]

Okay. And just in the first part, I was wondering about the outlook, sorry -- the comp in the second quarter for the restaurants business.

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

What in particular what was it about, sorry?

[Timothy William Barrett, Leisure Analyst]

Just in terms of whether World Cup impacts the pub restaurants.

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

Yes. So it just in the second quarter [indiscernible] I mean, last year it was incredibly hot, and you got the World Cup, which kind of benefits the more drink-led pubs, but then we benefited from as well. So that in theory, you should get easy comparatives in the next quarter for us, yes.

[Operator]

[Operator Instructions] We have no further questions.

[Alison Brittain, Chief Executive & Director]

That's great. Thank you, everybody, for dialing in. It's great to talk to you as always, and we'll speak to you soon. Have a good week.

[Nicholas Theodore Cadbury, Group Finance Director & Executive Director]

Thank you.

[Alison Brittain, Chief Executive & Director]

Thank you. Bye-bye.