Whitbread PLC

LSE:WTB

Earnings Call Transcript 2022-Q3

[Operator]

Hello, everyone, and welcome to the Whitbread plc Q3 Trading Update Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Alison Brittain, CEO of Whitbread, to begin. Please go ahead.

[Alison J. Brittain, Chief Executive & Executive Director]

Good morning, everyone. Thank you very much for joining the call for our Q3 trading update. I'm joined, as usual, but very probably for the last time, I suspect, by Nicholas Cadbury, Group CFO. We've been topping up. We think this may be his 50th appearance on one of these calls. So do make sure you have lots of extra especially tough questions for him today, please. I'm also joined by our U.K. Finance Director, Hemant Patel; and by Paul Tymms, our Head of Investor Relations, both of whom will be well known to you. I hope you've had a chance to review the Q3 release this morning, but it did go out at 7:00 a.m., and so I'll start with a very brief overview just to bring everybody up to speed before we hand over to Q&A when we will all be happy to answer any of your questions. So during this quarter 3, which ran until the 25th of November, we continued to trade very well and significantly ahead of the market in the U.K. Total accommodation sales were 10.6% ahead of full year '20 levels. And just to be clear, that comparator of full year '20 is the year before the COVID crisis. So the like-for-like period would have been Q3 2019. So that accommodation sales being 10.6% ahead of pre-COVID levels, that represented 14.9 percentage point outperformance against the midscale and the economy market. The value pub and restaurant sector in which we operate remains more challenging. And our total food and beverage sales were down 11.1%. That was in line with the segment -- or the subsegment of the market that we're in. But as we moved into quarter 4, which started at the end of November ran through December and to date, U.K. accommodation sales actually remained resilient. And in December, total U.K. sales were 5% ahead of the same period full year '20. Now clearly, the impact of the Omicron COVID variant has resulted in a slight softening of the hotel bookings in recent weeks, but it's a bit too early to assess what impact that's going to have, and I'll come on to a forward look in a moment. We did see, however, a greater impact of that Omicron on our F&B sales, which were down 17% compared to full year '20. But if we look forward into our next financial year, which starts in March, and in the absence of further material COVID restrictions, we are very optimistic about performance and we're maintaining our expectation that Premier Inn UK like-for-like RevPAR run rates will recover to pre-COVID levels during 2022. As you all know, sector cost inflation next year is expected to be above historic average levels, but we expect to be able to use some of our advantages to largely offset these higher levels of inflation. And that by advantages I mean, in this regard, cost efficiencies, estate growth and yield management. Turning to Germany. In Germany, our open hotel estate now stands at 32 hotels with a further 43 hotels in the pipeline. Despite the current restrictions, the German portfolio performed in line with the market in Q3, achieving occupancy levels of nearly 60%, up from 47.5% in Q2. But subsequently, the increased government restrictions have acted as a significant drag on market demand and our occupancy levels have reduced in the last 6 weeks. We are, however, extremely confident in the opportunity for the group to create value in Germany. We think that opportunity continues to be compelling and we will therefore continue to look for opportunities to grow the estate and deliver good long-term returns. So Omicron has proved to be a not unexpected bump in the road. But notwithstanding that, Whitbread remains a very -- in a very significant position of strength. The good performance of the group in the period resulted in an operating cash inflow for the period to the end of December, and we have a very strong balance sheet and liquidity position. And that strong balance sheet is enabling us to invest in our growth strategy through the cycle and during a period when others are constrained. In the U.K., we're going to continue to grow through maximizing our considerable competitive advantages, that's our national scale and our focus on the domestic budget accommodation sector and the fact that we operate the #1 brand in the U.K. with a very broad customer base. That, alongside our direct distribution and best-in-class operating model, are all underpinned by a market-leading sustainability program. These are quite unique attributes and they give us a strong and sustainable platform with a flexible commercial model that allows us to deliver effective pricing, estate growth and cost efficiency ensuring that we're in a stronger position than others to offset inflationary headwinds and return to our pre-COVID margins. Whilst in Germany, the opportunity to replicate this platform and create long-term sustainable value remains compelling. Now I'm just going to hand back to Nadia who's hosting this, so that we can start the Q&A. Now in order to have an efficient call this morning and given it is a quarter 3 trading update only, [Operator Instructions] I know it's a big ask, but we can go around again if there are remaining questions and we haven't run out of time. So let's try that at this time.

[Operator]

[Operator Instructions] And our first question today comes from Jamie Rollo of Morgan Stanley.

[Jamie David William Rollo, Managing Director]

Just two for me, please. Just the first one on pricing. Your third quarter rate around 4% above the November '19 quarter, and it looks like it strengthened during the quarter despite the VAT increase. Could you talk a bit about what's happening out there in terms of sort of consumer acceptance, what your competitors are doing, your sort of confidence in pricing remaining robust? And secondly, the other question is just on the cost guidance. If you could please break down that sort of GBP 100 million into the various buckets. Talk about some of the other discretionary items, some of which were deferred which -- so what the extra cost is there, please? And if there's any upside to that 7% to 8%? Or is that really it, you think.

[Alison J. Brittain, Chief Executive & Executive Director]

Great. Thanks, Jamie. I'll split. I'll do the first question on pricing and then I'll hand to Nicholas for the cost detail question. So yes, on pricing, we -- I think we probably talked about this the last time we spoke at the half year results just in terms of thinking ahead to pricing strategy going forward and into next year given that there are, as you know, inflationary headwinds for the entire sector. We are not alone here, this is a sector-wide issue. And given the strength of demand that we saw post coming out of lockdown last year and the summer before, we are pretty comfortable that we will have a pricing lever to be able to pull and that we will see -- of course, all of this is dependent on demand, but what we're expecting to see, if I think holistically then about demand, is leisure has stayed strong. It stayed strong through the Christmas period. I think we had an 80% occupancy rate on New Year's eve, for example. So even though we have London and Edinburgh canceled their New Year's celebrations, I think a lot of people in the north moved south, over the border and into places like Newcastle. And people in the west in Wales moved across the border into Bristol, and we have pretty full areas in those places. So we're expecting leisure demand to be pretty buoyant and to come back first, as it always does. And for B2B, in terms of blue collar, to stay resilient as it has throughout the entire last 2 years. So the swing is the work-from-home order and the white collar workforce, which we had started to see a reasonably good return of actually. And so we -- I would expect that if these restrictions are relatively short term in nature, certainly not expecting to see what we had last year, which was a closure for the whole of January to May, we're expecting to be more opening post the booster program much earlier, then we'd expect that bounce to be better with white collar because people have been used to doing that and going back. So I think the area still where it's really hard to call is Central London, the very center of London in relation to inbound. So we think demand will be good. We will obviously be testing continuously for how much of the independent sector may have decided to call it a day, and therefore, the opportunity that gives us to grow into that space and take share. We think we're still taking market share, by the way. And we think that our pricing, where we expect demand to be good, our pricing will also be strong. And we expect that to be a market phenomenon and our competitors will follow.

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

Yes. I think if you're an independent sector, you've got no option but -- which is 50% of the market, you've got no option but to put your prices up with all that. They're not hedged on there. They're just be -- they've got all the same inflation headwinds that we're seeing across the sector. Just in terms of the cost guidance overall, we talked -- again we've talked about some of these over in the half 1 results overall. I mean, the biggest one overall is our -- biggest cost for us is our labor bill, around about GBP 500 million for -- and we've put our wages up by about 5% at the end of October overall. But we flagged at the time that we think we're going to need to go higher at the moment. Now we're seeing retention has been improving. We're actually finding it a little bit better to recruit people at the moment. But this is the quiet time of year, so this is when we have the kind of lowest number of kind of hours worked. So we are expecting, as you get back into that kind of March, once the market picks back up again, once you get that kind of demand coming through, we expect again to see more pressure on kind of labor inflation overall. So we're assuming that, that goes through as well. We're seeing kind of -- we talked about utilities before, which is about GBP 60 million of our business. We're expecting probably around about 10% inflation -- 10% to 12% inflation coming through for us. We're seeing kind of utility prices have almost doubled for the commodity price of it, but we're fairly -- we're kind of fairly well hedged, which is why we've been able to keep it at such low levels at the moment. And then for the rest, really, laundry is, again, probably one of the other big kind of costs for us as well. It's about GBP 40 million worth of costs for us as well. That's kind of a fairly people-intensive business overall and revolves kind of heavily on transport and drivers as well, which is where we're seeing kind of large inflation as well across the board. But I think kind of in general, just across the kind of other areas like F&B, I think it's been fairly well trailed by all the other kind of -- in the newspapers and the other people have gone out over the last year that you are starting to see that kind of inflation to go through. We haven't seen it so far this year because we've been fairly well contracted, but that will occur. We think that will go up as you go to next year overall. So they're the big buckets.

[Jamie David William Rollo, Managing Director]

Can I just follow up. So just on the discretionary cost point, Nicholas?

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

Yes. Sorry. We plan to spend about GBP 20 million on -- mainly on refurbishment actually this year, a little bit on the kind of -- on the marketing for this quarter as well. Just with Omicron, we just see -- because we've seen a kind of subdued sales, we've gone far with just kind of tempering our advertising spend at the moment and saving that up. And the second thing, just with the kind of refurbishments and the kind of repairs and maintenance spend that we normally have, actually it's just the supply chain because, again, probably because of Omicron, it has just been a bit more tricky actually so we just haven't been able to refurbish as many sites this quarter than we would do normally. So nothing that I'm concerned about at all, but just in terms of the timing issue, really.

[Jamie David William Rollo, Managing Director]

Sorry. The question was really meant for next year, that discretionary cost for 2023?

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

Yes. So we talked about an increase in advertising, but we said at the half 1 that, that additional advertising and refurbishment would be for this year and for next year. So it stays in for next year.

[Operator]

Our next question comes from James Ainley of Citi.

[James Robert Garforth Ainley, Director & European Hotels and Leisure Analyst]

Two questions from me, please. First off, the value pub restaurant sector clearly has been struggling relative to the broader industry. Can you sort of talk about why you think that is and how you might close the gap. And then secondly, can I ask about just industry -- hotel industry supply trends in the U.K. and Germany? Can you just comment on what you see in terms of construction activity and independent exits and I suppose scope for more single-site acquisitions or even portfolio acquisitions, please.

[Alison J. Brittain, Chief Executive & Executive Director]

Yes. Well, I'll kick off and Nick will chip in and Hemant might chip in as well on pubs and restaurants. But yes, I mean we talked a little bit about this at the half year trading segment because the bounce of leisure back was very much premium. So there was a lot of wet-led activity. So wet-led pubs saw quite a big bounce back, and then quite a lot of premiumization. So your sort of gastro pub end and seriously upmarket restaurants also, I think, still quite a lot of bounce back. And there is some theory around that around consumer behavior wanting a treat after such a long period of being locked up and people having some savings and therefore spending more on higher and premier activity. So the value pub end was not faring as well and didn't come back as rapidly and we fall into that segment. And you will have heard us talk previously about a number of things that we've been doing to improve marketing, to improve digital marketing and to improve our menus and options and selections, all of which we are working on currently and launching as we go into the new year. So we're not sitting on our hands, but it isn't a part of the -- it isn't part of businesses particularly vibrant at the moment given that we are in a sort of partial -- partial restriction arrangement at the minute. Do you want to add anything, Hemant?

[Hemant Patel]

Yes. I think the only thing I'd say on the -- on why it's taking long for value pubs to come back, there's been a structural change in terms of there's less discounting -- or there might be margin accretive, but less discounting in the sector as well, which means that the top line obviously comes down. Yes, and as Alison said, it's taken longer for value pub customers to come back. They tend to be [indiscernible] reasons why it's taking long for them to come back.

[Alison J. Brittain, Chief Executive & Executive Director]

So yes, I think those are 2 of the very good points, the discounting and the demographic. As I said, very targeted in terms of new menus, high-quality offering and leveraging some of our digital marketing experience and doing some targeted marketing campaigns as we go into the new year or actually probably post this winter period and into the spring more like. On the hotel supply trends, we haven't done any more work than we talked about last time. If you recall last time, we did -- we do a very detailed network plan, which we will plan to do in 2022. Getting the timing right for that is very important so we don't want to do it early in the year, we want to do it at an appropriate moment. But because we have seen such an outperformance in terms of our own performance and that of other budget competitor, Travelodge, we did do a little survey, quite a small sample, I think it was 7 regional areas and 4 in London, where we looked at what has happened to the independent supply. And we could see that there was definitely a sense that a number of independents have not reopened post closure and that there has been a contraction in the independent market if that small sample proves to be typical of a broader phenomenon. And so, I mean, we think we can see some of that signs of distress. And I'm guessing that the emergence of Omicron and the additional restrictions we're now under with the working-from-home order particularly, is not going to help, with particularly relatively minimal government support. So I suspect that, that will, if anything, exacerbate the situation. But we will do a big broad study later in the year, which will give us a much clearer perspective on the speed at which the independents are falling out of the market.

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

Anecdotally, there's very limited new supply coming in both in the U.K. and in Germany.

[Alison J. Brittain, Chief Executive & Executive Director]

Yes. Which again is as you would expect it.

[James Robert Garforth Ainley, Director & European Hotels and Leisure Analyst]

And in terms of acquisition opportunities?

[Alison J. Brittain, Chief Executive & Executive Director]

Yes. If we're turning our attention to Germany, Germany is -- had been significantly worse hit in terms of lockdown and government restrictions, a much more complicated array of very severe restrictions in Germany for much longer during this winter period. And they were already lagging the U.K. in terms of the bounce back in demand. So I would expect Germany to have to be more difficult for more months than the U.K. trajectory that I talked about a minute ago. And that obviously won't help the very large and fragmented independent sector in Germany. The difference being, however, that there is still quite strong government support. That support is in place until the end of March through both grants and [ subsidies ]. And so that is allowing people to prolong, and therefore, we're not seeing as much movement in that market potentially will happen in due course once that support falls away. Equally, we also haven't seen much in the way of changing pricing for property, which remains quite high. So again, acquisition of freehold in Germany is still quite difficult. That may change over time, but we've certainly not seen an early sign of it yet.

[Operator]

And our next question comes from Vicki Stern of Barclays.

[Victoria Jane Lee Stern, MD & Equity Analyst]

Just a follow-on, on Germany. Does anything about the lack of the recovery that we've seen, I suppose the contrast in performance with that market versus, say, the U.K. or the U.S., just make you feel a little bit more hesitant about the medium-term prospects there and sort of how much capital you'd want to deploy in the region? Or you think this is really just short-term, as you say, a few months kind of lag and then back fully on course. And sort of related to that, do you think it's still then feasible that you could see this business break even by 2024? And then just a quick one on real estate. You obviously sort of referenced a few transactions that have taken place last year that sort of seemed to underscore the previous asset value. I'm just wondering if you are planning on sort of getting another broader, bigger revaluation of property done? And if so, sort of when.

[Alison J. Brittain, Chief Executive & Executive Director]

Yes. So let's start there. I'll start with Germany and pass the real estate for Nicholas. He might add in a few words on breakeven as well in that respect.We haven't got a diminished sense of excitement about the German market. All the things that made it a great market for us, specifically for us, the fit with our own model into the structural fit within Germany is still excellent. And all of those underpinning reasons for us to be confident about Germany remain plus a bit -- a bit of extra confidence. So it's still a big market. It's still highly fragmented. It's 73% independent. Those independents have started to be in decline. There isn't a dominant player. There's still great opportunity for us to be the #1 player in Germany and to replicate the platform that we operate in the U.K., which is so strong in that other market. So lots of reasons to be very positive. But of course, with some incremental reasons, which is that we have been trading now in Germany, albeit pre-COVID only with a handful of hotels and only 2 for a period, but the brand has gone down very well with the consumers of the product. The product itself is very, very well thought of and our guest scores are absolutely excellent. And we have been trading even with a larger number of hotels that market levels of occupancy. So we do think Germany will just be more problematic to come out of this crisis given where they are and how they manage vaccination, et cetera. But we think it is short term and we're very confident about the medium-term outlook. And in terms of breakeven, it's never really our target here. And I just know it is in terms of how people need to think about valuing the business and wanting to know when they've got a valuation against a cash flow or an operational profit or breakeven. But the more we grow, the more potentially you push back breakeven and we're actually quite keen still to grow if we can. But yes, we could see our way clear to reaching breakeven in the same time frame, as we've previously spoken about, Vicki, which is 2024. But that will depend on what we manage to do in terms of incremental growth. So things can change. What we'll try and do -- and we've talked about this before and it wasn't appropriate for a Q3 trading update, but when we get to the year-end, we'll try and start to be able to articulate the operating profit and the way that the sites are maturing in a more sensible way so that people can think about the way that they value the business as it grows.

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

Sorry, just on the valuation, yes, we talked about in the half 1 results that we had seen some transactions in the marketplace, property transactions of leasehold sites and they were at reasonable yields, fairly similar to the valuation that we did in late 2018 as well. So we were just giving an indication that, that will get big. On that basis, the valuation looks like it was holding up quite well. There's been very few transactions, though, and even less so in the wider hotel market at the moment. Most of the hotels that have been sold have been kind of distressed sales, so you haven't seen those sort of yields being maintained right across the board at the moment. So I think it's probably too early still to kind of do a valuation that I think would be useful overall. So we haven't got one planned at the moment. But as you know, Vicki, we're always open-minded to do it. So I think we'd like to see a little bit more kind of evidence in the marketplace that those are being sustained before we even thought about doing that at the moment. But I think, overall, I think what -- if you stand back looking at our -- the strength of the brand, the strength of our kind of covenant overall, we don't see a big reason why the valuation of our property would have declined significantly.

[Operator]

And our next question comes from Bilal Aziz of UBS.

[Bilal Aziz, Associate Director and Equity Research Analyst]

Just one from my side, please. I think around about this time last year or maybe slightly later actually, you mentioned the step towards a travel management company. So perhaps just a bit of an update there, how you're progressing, what has that done for you so far and expectations, please.

[Alison J. Brittain, Chief Executive & Executive Director]

Yes. Yes, we did talk about travel -- adding travel management companies into our repertoire of distribution. And for those that don't recall it, I know you do because you've asked the question, but those that don't, you'll recall that we view travel management companies being quite different essentially to Booking.com or Expedia or other forms of commission-based travel agency because they reach a consumer we couldn't reach without them. Because if you're using a travel management company because you work for a large corporate particularly, you're not allowed to book directly and you can only use that travel management company. So the idea is that it doesn't cannibalize in the way that using an online travel agent just cannibalizes business, which would otherwise have come to us anyway without the commission. So yes, we were exploring that. And we also thought that if there was going to be some sort of more structural reduction in white collar travel, which is about 25% of our business, that we would be able to offset that with increasing our distribution into a platform of travel management companies that we have not previously participated in. So we've made quite good progress on this in that we have signed up quite a number of travel management companies, and in some cases, linked technology where we have to link technology. And so we've got a pretty good platform. What we're waiting for, however, is for the white collar and international travel to return because that's predominantly where travel management companies are playing. And so we -- because they have been the last of the cohorts that we talk about to return, we haven't really seen yet the upside benefit that we would be expecting once we get a full recovery of business travel and international travel. So we're set up for it, but we haven't yet seen the benefit in the numbers. [ I hope that ] answers the question.

[Operator]

And our next question comes from Tim Barrett of Numis.

[Timothy William Barrett, Leisure Analyst]

Two things, please. Just to come back on that pricing question for the current financial year. Is it the case that you're still targeting -- the main target is occupancy in the lower 80s and that your algorithms are solving for that but you just anticipate they're consistent with higher average run rate? And then secondly, on pub restaurants. Obviously, we talked a bit about the minus 17%. Anecdotes in the market would suggest that was very lumpy at the market, particularly a couple of weeks pre Christmas. I know you don't want to give weekly like-for-likes, but is that your experience as well?

[Alison J. Brittain, Chief Executive & Executive Director]

Okay. We'll do a 1 and 2 bits on this again, pricing. I mean, other company, you know we like to be full and to have good occupancy and not least because actually economically it plays out to help you to be fully occupied and for your brand to be well known. And it plays out in lots of other different ways if people are continuously using you and remain loyal to you. But the pricing, I think, is a lot more sophisticated than that and really has had to be because algorithms don't work in a period where post a dislocation like COVID in the way that they would historically are, they're just not as smooth to operate because they haven't got the same depth and level of previous experiences, which is what an algorithm works off. And so actually, there is quite a lot of intervention required on pricing. And an example of that would be, of course, we want to be occupied -- well occupied. But in some places, we know that we will be full. And although there's been a lot of movement to short-term bookings and less visibility on long-term bookings than there was pre-COVID, and for obvious reasons because the life is uncertain and people don't want to book too far in advance and then have to cancel their plans, so they're generally planning things at shorter time horizons. So where we know that we're going to have a full hotel, we have to hold our nerve. We don't -- we're not starting prices as low and going up very slowly up ladder. We're sort of holding higher prices, opening and waiting for that demand to come in because we've seen that we've got shorter lead term -- shorter leads to deal with. So I mean a good example of this would be I myself attempting to book the Newquay Premier Inn for next summer because my daughter is going to be down there and I thought it might be handy to have a backup plan, she's actually only 17 because she's going to the Boardmasters Festival. I can tell you, I looked at our site in Newquay, it is wonderful. If you're thinking about a Sunday holiday, it's right on the beach, on Fistral Beach. So it's a fantastic location. However, it is maximum priced all the way through. So we're not on the ladder at that site and certainly not for the Boardmasters Festival. So for some things will be that. Where we know, however, that demand is going to be sluggish or low or that we might not fill, I think our job is to make sure we take every penny of the market -- of the available market and leave our competitors with the least amount. And so if that means starting prices lower for -- in areas of weaker demand to maximize the occupancy to make sure we get every bit of that occupancy, then I think that, that's a good strategy for those areas. And we are much more filleting the estate into our assessment of demand and managing pricing in that way. I hope that makes sense, Tim.

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

The pub side, lumpy -- I wouldn't actually call it lumpy, I mean what we saw coming into Christmas as soon as Omicron was kind of getting ahead -- a steam ahead, we saw parties, group parties, office parties, being canceled across the whole of this sector, not just with us. So we saw a falloff quite immediately. It was a good Christmas day. So people felt like people were kind of staying away, locking themselves down. But when it came to actually celebrating the kind of Christmas Day, it was a good day overall. And I think that was not just us again but it's the whole market as well. But I think you're likely to see that until the government really announces the end of Plan B, I think you're going to see kind of quite a suppressed market overall, particularly at the value end where people who eat in the value kind of segment of people probably hit most hardest by the kind of the virus -- the impact of the virus overall.

[Operator]

Our next question comes from Jaafar Mestari of BNP Paribas Exane.

[Jaafar Mestari, Analyst]

Just one for me on the pricing mix, you've just alluded to that. But okay, the net for the group is single-digit positive pricing. But in the October presentation, you showed us some KPIs with 2 types of properties there were areas of high demand like Cornwall where pricing can be up plus 60%. And then there's areas of low demand like Glasgow where pricing this summer was down as much as minus 28%. So beyond the net, I'm just curious how you expect these 2 buckets to trend into full year '23 when you say pricing should be -- should show further improvement? Do you think some of those locations can realistically stay at plus 60%? Or do you expect those to cool off? But then how much do the laggards need to improve to produce that net further positive at the group level if that makes sense.

[Alison J. Brittain, Chief Executive & Executive Director]

Yes. I mean it is a mixed bag. And when I look at how occupancy moved this year through the quarters, regions ran ahead of London, for example. And then I look at some of the occupancy actually out of London was actually quite strong. It really was Central London. So there'll be real mixes, as you said, within the estate. And one of the things that we spent a lot of time on in the last 18 months is making sure we understand the dynamics catchment-by-catchment and type of property-by-type of property so that we can manage to optimize that mix. So we are expecting to see a good ability to price better across on a net basis across the business, albeit you are right, there will be pockets of areas, London -- Central London, for example, never even at quarter 3 where we were sort of high 70% occupancies. But in the regions, we were in the 80s. So very strong both occupancy and room rate growth in the regions and slightly weaker in London. So you're right, there will be pockets. But overall, I think we're pretty positive that we will have some strength in pricing on a net basis for the whole business.

[Jaafar Mestari, Analyst]

So you're saying some of those will price lower, you're comfortable with that?

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

Potentially. I think in places Like Central London, as you say. We haven't seen that pickup lately. But if we see a pickup, we'll react to it.

[Operator]

Our next question comes from Joe Thomas of HSBC.

[Joseph Philip Thomas, Analyst]

Just on the pub and restaurants, can you -- or on the F&B, I should say, could you just perhaps give a bit more granularity on how you've done on the F&B that's attached to the hotels versus the sort of stand-alone site? And then secondly, as you just sort of consider the value food end of the market, are you still strategically convinced that you want to be playing there to the same extent? Or is there any potential perhaps to reconfigure the estate as we are seeing 1 or 2 operators doing right now?

[Alison J. Brittain, Chief Executive & Executive Director]

Okay. Good questions. And the first one is we don't really have any left stand-alone pub restaurants in the estate. So I mean, if we have it, it's a handful, 5 or 6, something like that. So we can't -- we didn't have reason to make that comparison. Every -- pretty much across, and as said, maybe a handful of stand-alones that we -- mostly we've disposed of all of our stand-alone pub restaurants, so the pub restaurants and the Solus restaurants within hotels or a hotel or attached to a hotel and serve a hotel. So I don't know how else to answer question one. If you've got a follow-up then ask me at the end. In terms of -- we spend a lot of time every year considering what the right models are for us to operate. And indeed, we think about what models to operate in individual sites when we refurbish sites and when we build new properties. What we are -- what we do know and even from quite recent data, a recent review of data post COVID, what we do know is F&B is incredibly important to a Premier Inn guest, particularly breakfast. That breakfast more so than dinner, but dinner is still important. And it's a critical part of the proposition, and it distinguishes from other parts of the market that might compete with us and makes us the popular and #1 brand that we are. So it distinguishes us from traditional competitors like Travelodge, who have got less good an F&B offer. And it distinguishes from new entrants like Airbnb, who don't have an F&B offer either. And for quite a large number of people who stay with us, it's important. And we can measure some of that importance in the RevPAR that it produces in the hotel. So -- and we've had lots of trials where we've removed F&B, have different formats for F&B, have breakfast rooms instead of full restaurants, et cetera. And we're able, therefore, to be able to distinguish which formats work for us. And so it's always important to remember when we're thinking about restaurant performance that what it doesn't reflect and what's hard to reflect is the additional revenue occupancy and rates that we obtain in the adjoining hotel by having the F&B offer on-site and supporting it. And so when we're considering what we want to do in the future, and we do often review our strategy on F&B so it's not an infrequent question that we ask ourselves, we always have to remember that the risk you take by not doing F&B and particularly not offering a great breakfast is significant in RevPAR. And that's certainly RevPAR that we don't want to lose. So we're able to look at things, for example, like what's the difference between a colo, where somebody else operates the restaurant for us, and our own performance. And our own performance gives us a significant RevPAR advantage over a colo, so over somebody else operating for us. And I guess you would expect that given that, particularly for breakfast, other operators are not so interested in offering a great breakfast and serving sort of Premier Inn guest breakfasts because it doesn't make the sort of return that they would prefer to see, which they see in wet-led activity and lunch and dinner activity. So yes, I guess the short answer is, yes, we do review it. Yes, we do look at it carefully at least every 1 -- 18 months to 2 years, we have a full review. And I would [ just like to add ] we do look at it in the round in terms of the holdco rather than just on the restaurant side because of the link between the two.

[Operator]

And our next question comes from Alex Brignall of Redburn.

[Alex Brignall, Research Analyst]

I've got two questions, please. The first one is on RevPAR into your FY '22 or calendar 2022 and just the comment about U.K. versus Germany and Germany being a little bit behind. I guess I wonder whether you could give some commentary on the impact of outbound travel restrictions on that because German outbound travel is significantly higher than it is in the U.K. And so I wonder whether if outbound travel restriction loosened in the U.K., then that might have a dragging impact on RevPAR in the U.K. as it most probably had in Germany and maybe sort of exposure to the things that would be affected by that would be hugely helpful.And then the second question, and I think you spoke about this maybe at the last call, was on supply and the lack of competition that you're seeing from new sites. We're seeing that from the other franchise where signing levels are very low. So if you could just give us an update on that and what competition you're seeing for any new sites and the levels of new construction that you're seeing from some people other than yourselves.

[Alison J. Brittain, Chief Executive & Executive Director]

Okay. RevPAR into calendar year '22 was the...

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

Yes. I think the question was German outbound is higher than in the U.K.? I think it's relatively. I'm not -- I wouldn't say that's a big, big impact. We impact -- we are a domestic player mainly, particularly in Germany, where business is higher than it is in the mix in the U.K. So I don't think that's a completely large factor.

[Alison J. Brittain, Chief Executive & Executive Director]

A couple of things, I guess. So as Nicholas just said, for both markets, one of the things we do well is domestic and domestic budget and that's what we are targeting in both markets. So both markets have very large in internal domestic travel markets and those are the markets that we are tap into and play into. So we don't tap in, particularly into inbound. That's -- I mean Central London, obviously, has a drip-down effect from it, but it's probably about 10% of our business in inbound. And that will be true in Germany as well. In terms of Germany being behind the U.K. though, because I think that was sort of core of the question, they've been behind in recovery terms for the whole of the COVID crisis. They always seem to lag a few months behind. And then they sort of go into lockdown at the same time as we do. But -- so they never come quite out of it in the same way that we do. And it's quite complex in Germany. So for those of you who don't know, whilst at the moment our restrictions here are broadly work from home, if you can; wear a mask; and socially distance and express some caution. And I guess, in Scotland, the Wales and Northern Island, some slightly additional things around how many households can meet and et cetera. In Germany, it's a very complex arrangement by federal state and it's much more of a lockdown than the U.K. So that's why we think it will take them longer to come out. They'll probably lag us by 3 months as we think they've lagged us all the way through by 3 months. Their booster and vaccination rates are still nowhere near as high as ours. And they have now split and started to bring in restrictions so that actually, for example, in some states, you cannot travel for leisure at all unless you're fully vaccinated. So they start to bring in restrictions, which do target the unvaccinated population. So it's quite -- it's complex to operate in Germany. It's a complex structure and picture to operate within. But we do still think it will fall into the same category in that this, too, will end, that we will learn to live with COVID as an endemic issue rather than a pandemic issue and that Germany is a strong domestic market that we will play in domestically. I'm not sure whether we've sort of captured the essence of your question, but follow up if we haven't. We move on to supply.

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

Yes. Supply. As we said earlier, just we're seeing very little new supply coming into the marketplace overall, both from independents, but also from the branded players as well. Travelodge got a little bit opening this year, but we can't see very much opening into next year. That was stuff that were all pre-signed. I think your question was about obviously competition for sites. We don't really see competition for the sites that we want versus other hotels. It's usually for alternative use. So it's either the main competition we have is for office or residential for the sites we're having. So we're not coming across with a hotel change in our markets at the moment so -- which is exactly what we saw the last time there was a downturn. You just get this kind of 3-, 4-year break in new supply coming into the market.

[Alex Brignall, Research Analyst]

I think I asked my first question in a highly convoluted way or at least that how it was interpreted. My real question was does outbound travel not affect domestic demand, so that the pricing we talked about in Newquay might be somewhat lower if everyone is allowed to go to Spain? And I point out here...

[Alison J. Brittain, Chief Executive & Executive Director]

I'm with you. Okay, I understand that question. Thank you for asking again. So yes, of course. I mean, we've had -- I'm sure there's been lots of debate and discussion over the last 2 summers, I guess, about staycation boom. And the question is, was it a staycation boom? And will we get it to continue for next year and the year after? I mean the signs are that overseas travel, of course, will reopen. It's going to be quite expensive. You can already see that from the prices of both the accommodation overseas, holidays overseas and airline travel. And airline capacity is in itself in some ways constrained because there's been a lot of capacity come out of airlines, and so therefore, the prices will be higher. So I suspect there will still be a strong demand, either people who don't want to travel to stay in the U.K. or for whom travel abroad is actually quite expensive to stay in the U.K. So we do -- we are quite positive about it. Bear in mind, however, we don't predicate that all of Premier Inn business are on staycation in that we have probably places that are bucket-and-spade holiday destinations, probably about 15, 1-5, percent of our business. So this is about broad demand returning across the U.K. for lots of different events and leisure. We're mostly a short-term destination, not a 2-week holiday destination hotel group, as you'd imagine. And so what we saw last year and continue to see all the way through quarter 3 and into quarter 4 or even post Omicron were people wanting to travel to see family and friends, go to events and do special things. And we're expecting that sort of leisure behavior to be just as prominent next year as it has been this year.

[Operator]

Our next question comes from Stuart Gordon of Berenberg.

[Stuart John Gordon]

Just to help us a little bit as we move forward. There's been a lot of moving parts in the last few years, obviously. What kind of RevPAR incrementally -- increase on 2020 do you think we need to see to get PBT in the U.K. back to the [ 4 50 ] it was in 2020 because obviously we've had significant moves in terms of some of the cost savings you've done and obviously the inflationary pressures.

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

Yes. Good question, Stuart. But we've given you -- I guess, I feel we've given you quite a good guidance in our cost base now. So if we gave you guidance on our RevPAR, we might as well tell you what we think. So I'm not going to give specifics on that overall, Stuart, because I think it's the -- the Omicron variant, what we don't know, it is bumpy along the way. We've given you kind of guidance that we think for FY -- this coming year coming up that we'll get back to like-for-like positive some time during the year. So that's where we are in terms of where our forward guidance is at the moment.

[Alison J. Brittain, Chief Executive & Executive Director]

Yes. And on margin, which is the other side of that coin, we've purposely shied away from giving new guidance on when we think margin. If you remember, originally, so we get our revenue back to pre-COVID levels by '23 and the margin will come back a year after in '24. So we brought in the guidance for the top line by year into next year. And in fact, we've been trading at some point this year ahead of pre-COVID levels. But we're still being quite cautious about where the inflationary pressure comes and the scope and nature of our pricing and cost efficiency program, and therefore, when essentially, we will get the margin back. So we haven't formally changed our guidance at all, but we're not going to -- probably we'll have a better sense when we get to the full year results in April.

[Operator]

Our next question comes from Paul Ruddy of Goodbody.

[Paul Ruddy, Gaming and Leisure Analyst]

Just it's actually a bit of a follow-up from that question, and you've clarified some of it. But just on that medium-term margin recovery and your kind of continued confidence initially here, which you're kind of saying on timing. But just some of the assumptions in this reiterating that margin -- recovered margin guidance. Is that mostly around your confidence in pricing dynamics and in demand in the medium term? Or is there some assumption around some of the cost inflation that we're seeing being transitory? Just seems like there's an awful lot more inflation in the system now than when you initially made those remarks.

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

Yes. I think -- probably the change from where we made those remarks is probably a bit more confidence in being able to pass some of the price on. But it's a number of things. I guess it's the benefit from the growth of the estate that we've got, some market share benefits we're going to get, we think, from the independent market declining, which gives us more kind of ability to kind of build our occupancy and both our pricing over that period of time. So it's both a combination of those things. Plus kind of the efficiency program, which we announced and is still the same it as we announced it back in October.

[Operator]

[Operator Instructions] And our final question at the moment comes from Ivor Jones of Peel Hunt.

[Ivor Griffith Rees Jones, Analyst]

I guess picking up a bit of the last 2 questions really. I've been thinking about the route to 110,000 rooms and the projected return on the capital required to get there. You've talked a lot about what feels like some structural increase in costs, construction costs. it feel like they're up for raw materials for construction, et cetera. Is that plan under review, either in terms of quantum or location of where those new sites are going to be? Or in terms of the projected return on capital of the cost changes offset by your projected revenue changes?

[Alison J. Brittain, Chief Executive & Executive Director]

Okay. Yes, that's a good question. So -- and I'll answer it in a couple of parts. So first, we've talked a little bit before you'll have heard us talk about the network planning that we do every couple of years. So we're due to do a network plan this year. The network -- every time we do a network plan, the landscape's changed. What doesn't generally change too much is where you might need a new hotel, which is in a virgin catchment because, generally, a virgin -- say the virgin catchment, but -- i.e., a place where we haven't currently got a hotel. But what has historically often happened when we do the network planning exercise, and this was pre my time, and my predecessors' time when network planning was done is often the runway is extended. And the runway is often extended because the independent sector have continued to decline and therefore allowed for growth and maybe other competitive elements in the landscape have changed or our brands got better or our performance is better. But we do a network plan to make sure that where we think there will be demand for hotel and where we think supply is there, including removing demand that Airbnb would take from a catchment, that we understand that at a very granular level down to about 4,000 post codes levels, so really granular. And we understand exactly what the supply landscape looks like, which involves actually a big exercise in establishing if independents really have left the market, whether they're still trading or not trading at all and in what quantity and what new build is going in, what new supply has got planning permission or is being purported to be moving into a market. And that gives us the runway. We then give a sense to the market of what we think that -- we derisk that a bit, and then we give a sense to the market what it looks like. We don't tell you the number as it comes out raw because we don't want to put into the market any sort of false expectation. So we do a bit of derisking. So that's where the 110,000 have come from, and we will do a new network plan this year. And it tells us where very specifically we want our new hotels to be. And it is based on us having a really good model. And then when we come to put hotels in, we are very rigorous about the model that we use to assess the returns profile over time and the NPV of the property. That's updated with a huge amount of regularity, at least 6 monthly, but in periods of high inflation more often, so that we are certainly not kidding ourselves on every single site that we sign up to is individually assessed and has to hit a hurdle and that hurdle is akin to our current returns. So what we don't want is to open new hotels and have declining returns profile. So we're not looking to open until we hit WACC, for example. We want to maintain a WACC plus returns profile for investors. The other thing we then do once every 6 months is we review all capital that's been spent over the previous 5 or 6 years, and we make sure that each returns have produced the outcome we thought the first would. And we adjust the models, if they haven't, we understand why and what's happened and we make sure we adjust models so that we don't perpetuate the issue. And then finally, the final point on this one is because of COVID, we scrubbed our entire pipeline and have kits. So we've continued where we signed new pipeline to have a weaker projection on the top line, a later return to demand, so which obviously impacts the NPV. And we've included all inflationary costs in terms of development costs and cost of rent, et cetera, within the models. And we scrubbed our pipeline and removed properties, which no longer hit hurdle when we put in the impact on COVID where we could, which, to a large extent, we could. So we're quite confident that the pipeline we currently have is robust and meet its return hurdles and will be a good pipeline to open over a period of time. And when we do the network plan, we'll then have the future runway, which will be impacted. That runway, for example, would extend if we do see that the independent sector fall that more rapidly than it has been doing at its standard 1% a year, which is what we think possibly will be happening. I don't know whether that answered all your questions quite holistic in terms of all the things that we do in this area.

[Ivor Griffith Rees Jones, Analyst]

That's really helpful setting out the framework. It did make me wonder though if there is to be a structural decline in white collar demand as a result of working from home. Would that affect plans for London more than the provinces? Would we see a change in the geographic skew?

[Alison J. Brittain, Chief Executive & Executive Director]

It's possible. I mean certainly during the pandemic, we had seen the weakness in London and that's about -- it's not just about domestic working from home. Funnily enough, we've seen quite a buoyant amount come back from a domestic perspective. I mean people have changed their working practices. So actually, where some demands fall on the way, some of them rise, as some of you may recognize this. But we do have people who now come into big cities for a couple of days a week and stay with us that would previously have commuted, but they've moved out further away. So they now come in and stay for a couple of days and then they work from home for a couple of days. So actually, we've seen some demand we didn't used to have come back. So I think there's a bit of [indiscernible] in it. But certainly, London is not just about domestic travel actually with that inbound. And the inbound business and leisure travel into London has remained incredibly weak. And how much of that comes back and how fast remains to be seen and could well be a weakness. That will be reflected in the work that we do and certainly in our view. As you know, we have lower market share in London than our general market share. So we're not in any form of overcapacity in London for sure.

[Operator]

Thank you. We currently have no further questions. I'll hand the call back over to you, Alison for any closing remarks.

[Alison J. Brittain, Chief Executive & Executive Director]

Yes. Just want to say a big thank you to everybody for being on the call. If you've got any follow-up calls, of course, we'd be delighted to help, so please do come through to the IR team. And thank you, Nicholas, for helping me choreograph that Q&A session.

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

Always a pleasure.

[Alison J. Brittain, Chief Executive & Executive Director]

Yes. Thanks, everybody. Take care. Have a good day.

[Operator]

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