Whitbread PLC

LSE:WTB

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome to the Whitbread PLC Q3 Trading Update Call. [Operator Instructions]I will now hand over to your host, Alison Brittain, CEO of Whitbread, to begin. Alison, please go ahead.

[Alison J. Brittain, Chief Executive & Director]

Good morning, everyone, and welcome to Whitbread's quarter 3 trading update. I'm Alison Brittain, Chief Executive; and I'm joined here by Nicholas Cadbury, our Finance Director. I hope you've had the chance to read through the Q3 trading statement that was released at 7 a.m. this morning. But nonetheless, I'll take a few minutes to talk through the highlights, and then we'll go straight into Q&A. So let's start first with our third quarter results, that was for the quarter ending the end of November. And as you know, we're operating in a very challenging environment. And as a result, our U.K. accommodation sales were down 55.2% and occupancy was at 49.3%. However, we are relatively well placed with the benefit of a strong brand, direct distribution and a unique operating model. So we've continued to outperform the market in the U.K. with our accommodation sales at 8.9 percentage points ahead of the mid-scale and economy market and our total market share growing from around 7% to 11%. In Germany, we continue to invest in the acceleration of our estate and in building a business of scale. We're also taking the opportunity offered by cheaper-priced assets and completed the acquisition of 13 hotels from the Centro Group in December, taking our total open and committed network to 68 hotels. This is a major step on our path to achieving a nationwide footprint in Germany with representation in most major towns and cities. But still, a lot happened since the end of the quarter, so let's touch on that. Government restrictions have tightened, and the U.K. went into lockdown last week. And as we've said many times since the start of the COVID crisis, we've responded quickly and robustly, and we rapidly adapted our operations to what's required. So I must call out the outstanding efforts of our colleagues as our teams continue to work tirelessly to maintain our very high operating standards, the customer service that we're known for and high levels of health and safety. In line with the guidance, all of our restaurants are now closed, and we don't accept leisure guests, only key workers and those on essential business travel into our hotels. We currently have about 2/3 of our hotels open, all of which have very strict hygiene standards in place. For the 5 weeks to the end of December, U.K. accommodation sales were down 66.4% with occupancy at 31.1%.Restrictions in Germany are similar, where we have also got the majority of our 29 hotels open, albeit also at very low levels of occupancy. We expect these restrictions in the U.K. and Germany to remain until at least the end of the financial year. However, with the vaccination program underway, we're looking forward to the potential gradual relaxation of restrictions in the spring and business and leisure confidence returning and our market recovering over the coming year. We are in a strong position from a balance sheet perspective. Following the rights issue, we have around GBP 800 million of cash on deposit and around GBP 900 million of undrawn facilities and, on top of that, access to GBP 300 million of the treasury CCFF program. That gives us a distinct competitive advantage and make sure that we will be a winner when the market recovers. So as I've said, it's pretty tough out there. But with our balance of business guests and leisure, focus on our domestic customer and operating in the strongest sector and with the strength of our brand and operating model and balance sheet, we think we remain well placed to continue to outperform the increasingly constrained budget branded and independent competitor sets. We expect to see increasing opportunities to develop both in the U.K. and Germany, and our strong balance sheet provides the opportunity to take full advantage of those enhanced structural opportunities that we're already starting to see emerge in the market. That's all I was going to say this morning, so I'm going to hand back to Ruby, who will now coordinate questions for us.

[Operator]

[Operator Instructions] Our first question is from Jamie Rollo of Morgan Stanley.

[Jamie David William Rollo, Managing Director]

Three questions, please. First, that's a very impressive acceleration in market share in the U.K. Could you please talk about how sustainable that might be and whether some of that might just have been a sort of temporary phenomenon with maybe more of your competitors closing and obviously some parts of the market being more sharp than others? Secondly, on Germany, the guidance for losses still in fiscal '23, that seems to be perhaps as much of due to action taken by Whitbread as to COVID perhaps. But I was just sort of wondering if you could talk about what your sort of RevPAR assumption is to drive that or maybe give us what your RevPAR breakeven is for that year. You've only given us the sort of the old target to hit the old returns numbers of GBP 60.And then just finally, just press reports about not paying half the rent in calendar Q4. GBP 25 million is a fairly small savings for the company. But does that not potentially affect the rental yields and your relationship with landlords and maybe remove some of the advantage you faced, particularly against your sort of biggest budget competitor, in signing new hotels?

[Alison J. Brittain, Chief Executive & Director]

Okay. So we will -- Nicholas and I will double-hand this set of issues. So why don't I just kick off in terms of saying, look, in terms of the U.K. market share, of course, it's a very strange market out there at the minute. And certainly, the outperformance versus mid-scale and economy has come from the weaker budget branded operators and the independent sector, but -- and clearly helped in part by top-end hotels, some of them not reopening and some independents, I guess, staying shut as well.So it is quite hard to predict the magnitude of gains going forward. But I would expect us to perform well. And we do know, if we look back to previous dislocations in the market and take, for example, the last economic recession, that we know that structurally, the independent sector came out faster following that dislocation. And the -- a lot of independents can hang on for 12, 18 months at some point and run for cash.But in the longer term, there's little investment that goes in, the product becomes quite hard to sell. And eventually, you get a tailwind in the market with supply coming out over a 2- to 3-year period. And that's what we saw last time, so it's what we'd expect this time. So we are expecting that phenomena to give us a boost over the coming, I guess, 0 to 3 years.Germany, if you want to take Germany.

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

Yes. On Germany, so we're just -- we're not giving any guidance on top line sales, obviously, in this environment. But because we have carried on investing in Germany through this year, which is the right thing to do to grow our sizable platform so we come out of it in a really strong position, we are giving some kind of indications over the next couple of years in a good growth scale.And what we're saying is that we expect losses to increase in FY '22, and that's partly because of the fact that we have done the Centro deal, the 13 hotels, and the fact that we were hoping to refurbish them this year, but actually, we're refurbishing them next year now. So they'll be close for a period of time, which adds about GBP 10 million worth of losses overall. And then we're indicating, just because of COVID, we expect kind of maturity of hotels to be delayed for 18 -- to 18 months, which is not new news. It's what we've been saying over that time. And that kind of pushes losses into 2023 as well as a result of that.So we're not giving kind of sales area, but we have -- what we have done, as I said, is to break even in 2022. Our original assumptions was that RevPAR would be around about GBP 60. That is maybe -- maybe some people may think that's high. But actually, because it is -- the hotels we have got open at the moment are in prime city centers at the moment, so I think that's still probably a good guidance where that is at the moment. The second question was on rent. Yes, I mean just in terms of our landlords, a lot of our stakeholders have helped us -- most of our stakeholders have helped us through to make sure that we're in a strong position to come out of this as well. And so we wanted to kind of have discussions with our landlords as well about that to make sure that we came out of this. We're quite in a different position from most people who have maybe withheld rent. We've got a strong balance sheet. This wasn't about kind of liquidity or about balance sheet. This was about making sure that we have the funds to bounce back out of this and invest in the business when the time is right overall.So we have had discussions with our landlords. It involved not paying 50% of our rent in December. That was well-publicized over that time. As you know, we've got a legal contract with our landlords. So with ongoing negotiations, it's still very early days in that overall. Hopefully, it does lead to some savings. If it doesn't lead to some saving, it might lead to deferment of some rent or might open conversations about regears as well. So it's a way of kind of opening up kind of conversations with our landlords, which we think is the right thing to do. In terms of kind of impacting our yields on our freehold overall, I think kind of we paid our rent 100% right up until this point in time even when our hotels were closed. So we've been a good tenant overall. And we think the kind of the ask that we've done has been a reasonable ask. In fact, most of our landlords have said it's a reasonable ask as well. So we don't expect it to have kind of any impact on our yields at all.

[Alison J. Brittain, Chief Executive & Director]

Yes. And Jamie, just in terms of all of our responses during the last 12 months, we've been quite balanced and measured in the way in which we approach everything that we do across all of our stakeholder groups. And it is true that we have historically been a great covenant and a fantastic tenant, and we intend to maintain our position as being a great covenant and a fantastic tenant. So we're not doing things that we think will jeopardize that because we think it is important for the long-term health of the business that, that remains true. However, there was an issue of equitable contribution in a time where we are closed and have a lot of our business closed, and that's what we're working with our landlords on at the moment. And as Nicholas said, to be quite honest, we are not at all un-cognizant of our contractual obligations, but it is helping us open other conversations, which we think will be -- will support the business in the near term. And so we think it's a good exercise. And just back on Germany for one second, I'll just -- not in any detail at all, but it is important that if there are great opportunities in the market and given that we have got a strong balance sheet, that we do take advantage of them and, hence, the first acquisition. So if we see weaker players or an opportunity for -- to make an acquisition at a low price, that's something we couldn't have done actually before the pandemic, then we do think it's the right thing for the shareholders for us to build that business.That does mean, of course, that we end up having more hotels in a weaker position in the short term because they are closed or low occupancy. It means we do have to close them to refurbish them, and it does mean that there's a maturity cycle associated with it. So that will, of course, increase short-term losses, but will provide a much stronger platform and a better business for the future in Germany. And I think we would look back and regret missing those opportunities even though it has a short-term impact on profitability. And as I said a couple of times, Jamie, to you before and to everybody on the call, actually, we will think hard about when we report in April how we start to think about splitting out the immaturity versus the business-as-usual trading activity within the German business so that we can give people a sense of the progress to underlying profitability in trading hotels.

[Jamie David William Rollo, Managing Director]

That would be very helpful. But -- so can I just come back, Nicholas? Did you say, on the GBP 60, did you say that's your breakeven RevPAR?

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

What we've said is we said that the pre-COVID assumptions on RevPAR was GBP 60 in the note, so that's what we're saying. And we were expecting to break even in FY '22, originally.

[Jamie David William Rollo, Managing Director]

Oh, okay. Yes. But that's not what you need to be breakeven? That would be pre-COVID peak target RevPAR to make a decent 10% return.

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

It's probably the same thing in terms of that because, actually, what we're focused on now is that you've got your sites in big cities at the moment, which is why the RevPAR is high for that breakeven at the moment because they're large hotels in large city centers at the moment as well. And then you've got the kind of immaturity holding you back, which is why you need the kind of high RevPAR against that breakeven.

[Operator]

Our next question is from Vicki Stern of Barclays.

[Victoria Jane Lee Stern, MD & Equity Analyst]

Just coming back to the U.K., so you've got 2/3 of the estate open at the moment, which I think is quite impressive given, I guess, you need to be doing sort of high teens or so occupancy to justify opening. Just what sort of business travel is happening now? I think that key worker list is slightly broader than it was previously. So just curious to know what sorts of travel it is you're seeing, obviously, as we think about the fact that there could be further tightening of restrictions to now. There's also been some discussion in the press recently about the government moving potentially some patients to hotels. Just curious if that's something that you're in discussions with them on. And then coming back on Germany, you obviously referenced it there a moment ago, but just kind of update on what you are seeing in terms of opportunities in that market. We're sort of far away from it from knowing in terms of any obvious distress. Have you actually seen any of that over and above the deal you've done already?

[Alison J. Brittain, Chief Executive & Director]

Okay. Yes, there's quite a large permitted list of key worker and essential travel. And I mean, largely speaking, the key is no leisure travel, as you'd expect, although there are exceptions to that. I don't actually call it leisure, but for things like funerals, et cetera, or emergency situations. So there's even a list of what you call personal customers that are allowed to stay.But for the most part, it's business. It's quite a broad list of business travel that's available, not just blue collar. There are some white collar permitted reasons for travel as well. And that's, broadly speaking, what we're seeing. So as you would imagine, our -- the business at low levels of occupancy, and we're lucky that we can actually operate at low levels of occupancy and making cash contribution because we have a large amount of freehold, et cetera.So that puts us in a slightly different position to many others who are not in the same place. And so most of our businesses during the week, in the weekdays and the weekend is exceptionally quiet at the weekends. So that's what we're seeing in terms of U.K. travel. In terms of patients, et cetera, yes, I mean we have always offered to work with the government, and this is all the way through the pandemic on things that they need to operate. That would include, I guess, non-COVID patients that potentially could use hotels. Actually, I don't think there has been a demand for that. We haven't certainly had approaches from government to that end. And I think there are probably a lot of better alternatives, including The Nightingales, that they will go to before they would move to hotel networks. So that's all I'll say on that. But we're very open-minded about it and very open to help should the help be required. And in Germany, yes, I mean a bit like in the U.K., it's hard to know what will reopen when everything is closed. And there have been lots of things that have been closed for a long time, but there are government schemes in place to help people, like the Kurzarbeit scheme, which is the German equivalent of the furlough scheme.And so I think it will -- yes, I mean, clearly, we are seeing sort of evidence of distress in the market, refinancing and other forms of distress. But as yet, I think we can't see the full picture, and I think there will be more of it to come as we get into the spring and summer, and then we'll really see what does reopen and what is funded and has a strong balance sheet to operate.

[Victoria Jane Lee Stern, MD & Equity Analyst]

And just to sort of follow on that, I mean you've made a point clearly that now is the right time to take advantage of those opportunities, even if it means a sort of shorter-term step-back in the profitability. As you think about the balance sheet, sort of would you be willing to step outside of previous leverage ranges if the opportunities were significant enough?

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

We've always said that kind of it's a guide, that leverage. We would -- if it's short term, as long as we can see our way getting back into it, yes.

[Alison J. Brittain, Chief Executive & Director]

Yes, we would.

[Operator]

Our next question is from Bilal Aziz of UBS.

[Bilal Aziz, Associate Director and Equity Research Analyst]

First one, just on the new sensitivity guidance in Germany, perhaps just a clarification. And I appreciate you haven't guided for 2022. But is this new sensitivity incremental to the GBP 18 million sensitivity provided for the whole business this year? Or should we be thinking about stripping that out for next year?The next question, just on the independents. In the previous lockdowns, you mentioned a higher level of attrition that you were seeing. As we go through more iterations of lockdowns, have you started to see that trend so far?And lastly, just on, more broadly, pricing from the independents as well. As the crisis lingers on, what's the sort of pricing environment and behavior that you're seeing from your competitive landscape, please?

[Alison J. Brittain, Chief Executive & Director]

Do you want to start, Nicholas, on guidance?

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

Yes. So just in terms of guidance, we're holding the guidance for this year. And as you rightly say, it's the kind of 1% equals GBP 18 million, and that's across the whole of the group. We haven't given guidance for next year in terms of sales or kind of profitability. All we're doing is just breaking out Germany in a little bit more detail because it becomes -- because we've vested through and because we have -- and because it's becoming of size and scale. So it's kind of trying to kind of help encourage the kind of modeling of Germany separately. So we haven't given specific guidance on that.

[Alison J. Brittain, Chief Executive & Director]

On the independents, if I move on to that one, then you can see that during this last year, we have seen our own performance outperform the market, and that's because there are lots of hotels that just haven't reopened at all, and we don't know yet whether they will. It's quite hard on data for independents. It's quite difficult to collate. And we won't -- we do a fairly major survey every 18 to 24 months on it, which is quite labor- and time-consuming for us. And we probably -- there's no point running that right now. That's probably something we do in the summer or autumn of '21.So we will -- and so we believe we will start to see the supply contraction in our trading numbers first and as we come out of the spring. So if you think about what this has been like, we're now in our third lockdown in the U.K. It's a year since the crisis started or, by the time we come out of this lockdown, it will be. The -- there'll be an ending to material government support probably by April and certainly into the spring. The rent buildup for operators hasn't gone away. They haven't had to pay rent because there's a moratorium. But that rent cost hasn't gone away, and there'll be a debt to be paid.And then, of course, 12 months of severely reduced trading and pacing into a slow recovery, I guess, that just makes for a very tough environment. And for businesses that already had high levels of debt or have a different model to us, particularly franchise businesses, where you've got multiple other parts of your value chain that you have to pay away like your booking and your franchise fees and your rent, it just makes for an incredibly difficult period.So we would expect that there to be a -- start to see an exit over the coming 12 months out of the market once we open. And certainly, as I said before, in the last recession, we saw people hobble through for 12 to 18 months and run things for cash. But then we ended up with a sort of tailwind that helped us for the following 3 years as the independents came out faster during the following 3 years. So we are expecting that.And the declines in the independent sector, even only a 1% decline last time, helped fuel Premier Inn's growth over the last 10 years. So it doesn't need to be much more than that to give additional market share gains for us. And on top of that, probably a constrained competitor set who themselves will be growing at a lower pace and investing in their businesses at a lower pace even if they survive. So that's what we're seeing. Although, as I said, data from the independent market isn't readily available, we will do our own research as the year goes on.Do you want to say something about Germany?

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

I was just going to say, Germany, I think, again, the data on Germany is not -- it's probably even less visible in terms of what's happening in the independent market in Germany. But what we do see, we see people that are approaching us, and we have seen a kind of acceleration of that at the moment in terms of the small chains who want to come to market at the moment.

[Alison J. Brittain, Chief Executive & Director]

There was a third question.

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

Yes, third question was about current pricing and kind of what we're seeing in pricing and competition. It's quite varied, really. You're seeing the 4- and 5-star hotels who are remaining open. Those who are open are kind of holding their kind of pricing discipline at the moment.And then it is quite varied. You've got some of the kind of other brands pricing very low in some locations and reasonably in other locations, particularly, I guess, where you're seeing low pricing is in city centers, particularly in London at the moment, which has been quite aggressive from the competition overall. But as you kind of get more into the regions, it's more -- going to be more kind of measured and more rational.

[Operator]

Our next question is from Monique Pollard of Citi.

[Monique Pollard, Director]

Three questions from me, if I can. The first was just coming back on the Centro Germany acquisition. I just wanted to understand, I think you've made the comment that those hotels will be refurbished now in the next financial year rather than this one. I was just wondering on the timing of that given it seems that they are closed at the moment.The second question was on those really excellent market share gains over the period. I was just wondering if you have a sense of how much of that was sort of like-for-like sales outperformance versus more hotels open or some hotel growth versus the competition. Because when I look at your like-for-like RevPAR versus the scale and economy, even on that basis, regionally and in London, it does seem like you're outperforming a bit. So maybe you're getting better occupancy than some of your competitors, for instance.And then the final question was just on the F&B provision right now. Obviously, you made the comment that 2/3 of the hotels are open in the U.K., but the restaurants are all shut up. So are you able to provide some F&B provision that's still sort of keeping some sales coming through that channel as well for the guests, if not through your restaurants?

[Alison J. Brittain, Chief Executive & Director]

Okay. Starting with Centro and, of course, as you might imagine, the best possible outcome would be to refurbish hotels while the government has them closed anyway or whether -- when they're at very low levels of occupancy. Unfortunately, the practical answer to that is you do have to get the building materials and building contracts in place to do the refurb work. So it's not quite as simple as being in your own home and getting the paint and decorate.So the case goods come from various parts of the world and, as you know, it was quite opportunist in nature of that particular acquisition. So it was executed with extreme speed. And so it's likely to be the spring before we will have builders on site, contracted builders on sites with the right materials and even down to having all the surveys done and the building works planned. So it just can't be done instantly. It's not like painting and decorating. It's more substantial than that.

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

It's just harder in this environment as well, so it just takes longer.

[Alison J. Brittain, Chief Executive & Director]

Yes, absolutely. And in terms of outperformance, before I'll get Nicholas to cover a few details, but so in a broad perspective, what I would say is that we are finding the model that we operate an advantaged model in this environment. I mean we've always liked our model. But the fact that we've got direct distribution, the fact that we maintain and manage and run the operating standards of our hotels and the fact that we have a massive brand positive feel within the U.K. and with a favorite hotel business is really -- has really stood us in good stead.And so there is, of course, a combination of factors going into that outperformance. And some of it is undoubtedly what else is open and what other opportunities there are for people to stay. But there's also a strong preference and direct preference for Premier Inn. And of course, we are domestically focused and it's all domestic travel. So we have a sort of an advantaged model, and that advantaged model not only is more attractive to guests, but it is also allowing us to be open more and have a broader network than others.

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

Yes. No, what I was going to add to that is actually, if you -- it's hard to split what's based on the fact that more hotels are closed and what's due to our brand. But as I said, trusted brand has never become more important to the moment. What you can see though is it is actually -- we've got a good market share gain on total sales. But actually, we've got a good gain on RevPAR as well, which kind of doesn't necessarily ignore the space of competition, but probably is kind of a turn kind of what's placed towards us just relating to our brand.

[Alison J. Brittain, Chief Executive & Director]

Yes. And then, Monique, the last question is a short one because F&B is closed. It is a requirement that it is closed. And so we are not offering any F&B activity in any of our hotels at all, and it wouldn't be allowable. So no, that isn't contributing in any way.

[Operator]

Our next question is from Tim Barrett of Numis.

[Timothy William Barrett, Leisure Analyst]

I had 2 questions on the cost base, please, and the first one actually follows up from the latter point. I guess it's quite unusual that you've got hotels open and no pubs or restaurants. Just directionally, would that mean your guidance for 2021, if that's the case, is slightly lower PBT impact because of the lower drop-through?And then secondly, on government support. I guess, no doubt, you're lobbying behind the scenes. But if the retention scheme, the CGRS and business rates start to come back from April and March, respectively, what would the cost impact in 2022 be?

[Alison J. Brittain, Chief Executive & Director]

Yes. I'll start with the latter question, but I'll hand over to Nicholas for the details. But yes, we're not lobbying just behind the scenes. We're lobbying in front of the scenes as well. We are in front of the stage. So just either for the hospitality industry overall, the business rates relief and the VAT are both incredibly important. And given that hospitality could bounce because we saw in the summer, you saw what happened to leisure and consumer demand when we came out of the last lockdown during the summer period, it bounced amazingly quickly back.And so there is an opportunity for hospitality more broadly to help some economic recovery post pandemic. And there's a lot of pent-up saving in consumers' pockets at the minute that could go towards leisure activity. So helping hospitality with rates relief and VAT, we think, is a good policy for the government and one that would be very welcome for us and for other players. So yes, so from a lobbying perspective, yes, we would be keen to see that.Nicholas, more on the detail.

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

Yes. I mean I just -- just in terms of the kind of -- you're asking specifically about what kind of government support we had. I mean at the half year, we said that we've had further income for the half of GBP 85 million, and there was GBP 20 million expected in the next quarter. And you can see that that's continuing into this quarter currently, but we don't know. We're still working through the detail of what we're going to -- what's happening now. The announcement on restrictions is so new, so that's -- but that's an indication of that. And business rates, we flagged before, was about GBP 120 million worth of saving overall.Just you asked about the kind of just about the restaurants and the flow-through and does that change it. I think the guide -- all we're saying is the guidance for this current year stays as it was despite our F&B being fully closed. So still that kind of 1% equals 18 -- roughly GBP 18 million worth of PBT.

[Timothy William Barrett, Leisure Analyst]

Okay. So just in terms -- the logic of what I was thinking, is that fair, the lower drop-through on pubs and restaurants?

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

Yes, yes, yes.

[Operator]

Our next question is from Leo Carrington of Crédit Suisse.

[Leo Carrington, Research Analyst]

If I might ask on Germany, looking forward or looking into FY '23, aside from the incremental opening costs that you've already discussed, can you remind us of the underlying economics, at what point on an underlying basis you sort of break even in Germany? And then does the current network of 68, once open, potentially allow returns in line with the rest of the group?And second question, I guess, with 2 elements on distribution and network optimization. Firstly, on distribution maximizing direct, is there anything specific you've done during the pandemic to capitalize on guest loyalty? I'm not sure if there's maybe something helping drive your outperformance aside from what you've discussed already.And then secondly, given the pressure, have you postponed any of the network optimization efforts that you highlighted, like closing smaller hotels or introducing the Premier Plus rooms?

[Alison J. Brittain, Chief Executive & Director]

Yes. Okay. So I mean just sort of an overall perspective on Germany is we look at Germany holistically, and we look at individual sites and individual acquisitions. And in that context, we set ourselves the clear outcome of having rates of return on capital at similar levels to the U.K. So it's quite a broad range that we guide to, which is 10% to 14%. And we don't expect that to change.And where you are right in your question, the larger the network we have, the more brand build we can do. When you only have a handful of hotels -- and remember, we started this financial year with only 6 hotels open in Germany, and 3 of those had only opened in the previous weeks to the end of the financial year. And then during this period of lockdown, we've had acquisitions come onstream. So we're going to be ending the year with more like 26, 27, 28 hotels. But they haven't been opened and traded, so we haven't brand-built anything this year.But as you -- as we come out of the crisis, we are going to have a pretty chunky estate. And remember, in Germany, it's so fragmented that probably the most -- the highest sort of brand-aware chain is Motel One, and they have about 55 hotels. And we'll be trading about 30, and we've got a pipeline to 68.So that really allows us then to make more of the network effect and the brand awareness effect for the domestic business and leisure traveler. And that -- what that does is, therefore, improve our maturity profile for new hotels, which, as you might imagine, is more of the 4-year maturity cycle, 4- to 5-year, whereas in the U.K., we have a shorter maturity cycle because our brand is so well known. So there's a combination of factors that go on in Germany, but -- and certainly, the larger the estate, the more opportunity there is to become part of the DNA and fabric of German society and German brand awareness.The -- in terms of opportunities, I'll talk a little bit about our investment in Premier Plus, which we have pulled some of the optimization...

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

Yes. It was just about kind of -- you want some optimize...

[Alison J. Brittain, Chief Executive & Director]

Oh, sorry, Nicholas, there was a sub-question about distribution. Yes, I mean we all find -- we found during the all of the last months that our direct distribution has been a real positive. And we do think that model that is about having a direct relationship with your customer is a really good one. It's meant that we've been able to communicate directly with them. We make decisions on amendments and refunds and booking types and booking arrangements directly with them, and that is just a more seamless process from a brand-build perspective. But it also allows us to run e-mail campaigns and direct communication campaigns.And on the business side, the fact that we have people using our business booking tools means that they have a direct relationship with us, again, and we're able to contact and communicate with them, which I think has been enormously powerful as part of the model that we operate and quite different to the third-party arrangement through an online travel agent.

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

In terms of optimization, there were 2 kind of elements there. It was -- you were asking about closing smaller hotels. We continue to look at opportunities where we can do that and transfer sales to larger hotels. We've done about 6 so far this year. It's probably a little less than we thought we hope we do, but we've been quite choosy in terms of what prices we can sell at the moment. So there is a market there, but we're making sure that we do it at the right prices. And that kind of churn, we hope, will be continued, but it may not pick up until the whole market overall.And then from the other side as well, in terms of how we're trying to drive ARR, is through the Premier Plus rooms. You know we did 500 rooms last year. We were going to do about 2,000. That's been slowed down just because of the kind of situation we find ourselves in. What's been kind of interesting, though, is actually those rooms have continued to outperform. Actually, not just the rooms, but actually the whole hotels, we've got those rooms in, too, have continued to kind of outperform through the pandemic, both leisure and the business guests, actually, interestingly enough.So we'll look to -- when the time is right to get back on to the front foot with that to kind of finish that, going to complete that rollout, that will be one of the areas we'll prioritize when we come out of this.

[Operator]

[Operator Instructions] Our next question is from Joe Thomas of HSBC.

[Joseph Philip Thomas, Analyst]

It's Joe here from HSBC. I just wondered, on market share, if you might give a bit more detail, please. You've spoken a lot, Alison, about the independents exiting the market. But you've also mentioned today and in the past, the branded budget sector. I just wondered if there's any -- if there are any anecdotes or color that you could give us around what might be happening there.And then separately, 2 sort of related questions. One is, when we come to think about any sort of long-term impairment to business travel as a result of this pandemic, what conclusions have you been able to draw so far from the admittedly very limited time that you've been open?And secondly, you have, in the past, talked about doing more on reservation systems, booking systems, corporate travel agents, et cetera. Can you just quantify what you think the opportunity is there now?

[Alison J. Brittain, Chief Executive & Director]

Okay. So yes, 3 elements there. So broadly speaking, in the market, we have historically talked about the independents a lot, as you know. But I guess the way that I think about this is across budget branded more generally, there are kind of 2 operating models. There's the operating model that we have and actually, interestingly, Travelodge have, too, which is that we own and operate and manage and have direct relationship with consumers and don't use OTAs. And there are sort of the asset-light operators who don't own the properties and have an operator who run their businesses. And I think that, that is quite -- that model is likely to feel some stress in as much as if you're the operator of a franchised hotel, you have often got the rent to pay. Sometimes you are the land -- you own the freehold, but mostly you're paying rent. You have brand fees to pay to the asset-light provider of the name over the hotel. You have most of your bookings going through online travel agents. And it sort of -- it's quite a different model to the direct distribution and direct customer model.You're also probably quite a lot more reliant on inbound travelers rather than domestic. The brand name for Premier Inn is so strong domestically that it takes a lot of the budget travel within the U.K. And so I suspect actually that we will see some weakness across that other broader set of competitors because even for those that have sort of gone into the pandemic in a -- with sensible gearing and without being over-indebted, it's going to be quite a stressful year and a slow recovery. And probably, inbound is the last thing to come back, I suspect. There'll be other things that will come back earlier.And so there'll be quite a constraint in terms of people's willingness to invest and grow and their ability to invest in the product itself and the refurbishment programs and cycles within their business, depending on the nature of their financial position. So I think it is a broader weakness in the competitor set than just the independents. But of course, the independents are 50% of the market.And I won't talk about Travelodge particularly. I think their issues are well trailed and are in the public domain in terms of the constraint that they may be under, again, for growth and investment more than anything else. They probably got a high gearing and a higher debt rate than they would have wished to have under normal circumstances.In terms of business travel, business travel does fall into several categories. We are well indexed on blue-collar travelers. So we have a lot of large corporates who deal with us where the stayer, they are -- the large corporate is the booker and payer of the stay, but the stayer are people who work in manual jobs on projects around the country in groups. And we also obviously work a lot with small- and medium-sized businesses for white-collar and blue-collar activity. But a lot of that activity can't be done from home. So the phenomena of whether or not people will continue to work from home in the same ways they are during the lockdown in the future, we are more immune to that than some others, I guess, in the market. So -- and we've got a good proportion that fall into that blue-collar workforce.

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

And the last question was, I think it was about kind of travel management companies, just in terms of what -- as you rightly said, we talked about this back, gosh, a year ago, that it was an opportunity, and this is particularly around companies who use -- corporates who use travel management companies to book their travel overall. It's an area that we played in, but were fairly minor to us overall. So we've -- and that could be about 15% of the market overall that we were relatively small as well.Now we've made good progress over the last year. But of course, the corporate travel tends to be more kind of white-collar workers, and that's been the area that's been hit. So it's been relatively quite a small percentage of our sales overall. But actually, we've had good tractions from the companies and good tractions from customers who have used us so far.

[Alison J. Brittain, Chief Executive & Director]

Yes. And it is probably also just the last point I'll make on the sort of combined subject is we, as you know, don't index structurally for conferences and big meetings and internal meetings, again, which are really hard-hit part of the market. That's not an area we play, and we don't have ballrooms and conference facilities and meeting rooms. We run a tight budget-focused operation.

[Operator]

Our next question is from Ivor Jones of Peel Hunt.

[Ivor Griffith Rees Jones, Analyst]

I wanted to ask if you'd allocate capital to buying Premier Inns that you currently lease if it was value-creating in the U.K.And still back on the market share point, I wondered how much you're able to grow market share because you can satisfy the minds you couldn't previously satisfy. I think you've talked about it in the past, but how often in pre-COVID times were Premier Inns simply full?

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

Yes. Buying leases back, not too high on our priority. I mean -- and the reason for that is in the hotels we lease, we make good returns on them. And therefore, you have to look at the incremental return on capital that you can make from buying it back and that the incremental return on capital is -- can be fairly low. But just specifically, and of course, it's your kind of -- particularly in the near term where it hits your cash flow as well. So we're always open to opportunities, and there have been 1 or 2 we've done over the years, but not high on our priorities at the moment.In terms of market share, yes, you're right. If you go back 2 years ago, Tuesday, Wednesday night, we were pretty full. And hence, it's being reopened and carried on with our network growth at the time and overall. So -- and hence, it's also kind of switching on the travel management companies, but kind of more recently to make sure that we keep that kind of Tuesday, Wednesday night to full overall. So we'll have to wait and see if there's kind of opportunities there, but early to say that, really.

[Operator]

We have no further questions registered, so I'll hand back to our host.

[Alison J. Brittain, Chief Executive & Director]

Thanks very much, everybody. Enjoy the rest of your day and the rest of the week. It was good to speak to you all, and thanks for your questions.

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

Thank you.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.