Whitbread plc (WTB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Whitbread PLC Full Year '20 Results Question-and-answer Session. My name is Rachel, and I will be coordinating your call today. [Operator Instructions] I will now hand over to Alison Brittain as the host to begin. Alison, please go ahead.

Very good morning, everybody. Thanks very much for dialing in. We've got quite a full hands on the call. Very happy with that. And we're just going to go straight into Q&A because you've had access to the webcast presentation from 8:00 this morning. So hopefully, you've had the chance to see that and to consider it or listen to that, I should say, and to consider it, and you're probably already now with questions. So Rachel, should we just kick straight off into questions?

[Operator Instructions] So we have a question from Jamie Rollo from Morgan Stanley.

Three questions, please. No surprises there. The first is really on the quantum of the raise. Using the massive given on the cash burn, implies you can have about $1 billion of net cash this October, roughly, which seems very conservative. And I appreciate adjusted net debt higher. But I suppose the question is, why choose an adjusted debt target, given cash net debt seems just more relevant in the current situation, leases have no refinancing risk? And did you sort of consider alternative here 20% placing, which is still being GBP 750 million. Secondly -- sorry, that will be 0 net debt on.

Is that already the 3 questions, Jamie? Or is that just question one?

There are all part of the same question really. The second one is thinking about use of proceeds. I mean you mentioned sort of investment opportunities, could you talk about M&A, not just in Germany, but also in the U.K. and clearly, Travelodge is a bit of trouble so could that form part of the plan? And then the final question is just on the cash burn in the second half of the year. Once the furloughing scheme is over, could you talk a bit about what your breakeven occupancy is? And whether you're going to bring down that cost base further?

Okay. Jamie, let me kick off, but we'll get straight into numbers pretty quickly, and I'll hand over to Nicholas to do that detail. So first off, there was a sort of almost an obvious and implied question about placing versus rights issue. So just to give you a sense of the process we went through, we didn't start with what vehicles did we want to use. We started with a pretty thorough analysis of our -- of the quantum that we were going to be looking at here. And you know, whilst there are some defensive elements within the capital raise that we have no liquidity issue. So we've got and have worked very hard to get to a position where we have our waivers for our bank debt -- that's securing our bank debt. We've got the CCFS, and we've used various furlough, et cetera, schemes and other cost-saving measures rapidly and decisively. So -- and so that allows us quite a bit of maneuverability for a long period of closure or no occupancy and a slow return or anything in between. So on the basis that we have time, and we were not doing an emergency capital raise. We worked very hard on what we thought the right answer was. And when we got to the right answer for the business, taking into account lots of elements that have to be in that, not just the current cash burn, but what we think it might look like as we come out and what sort of recovery level there might be, along with what we thought the quality of the opportunities that might become available to us would look like and this need for us to be able to very flexibly invest, just really with confidence and not have to stop and think whether or not if we saw a really great opportunity, we should maybe consider not doing it until we were clearer on cash flow. So we wanted to be in a strong position for investment. And so it's very much an offensive capital raise to get us into that step position, and that looked like the quantum that would sit with the rights issue. And that was good because it allows all shareholders to participate, and actually, we're quite keen on that as a company, but it's not -- it didn't start with what mechanism did we want to use. In terms of the placing and the amount of a placing, we would have considered it, naturally, as an alternative if the amount had been right, but it wasn't. And of course, it's been quite volatile. So depending on which week we've been talking about, that placing could have been anything from the sort of GBP 600-ish million through to probably GBP 750 million. So it wasn't at all the time at a close position either. So just to give you a sense of our thinking and the structured way in which we've gone about this. Nicholas, do you want to say a bit more about the quantum and the cash flow?

Yes. So just -- as I said, this was a front foot, this rights issue, and it was an offensive rights issue overall. So we knew that, and I guess, that to get on front foot, you got to make sure you're in a strong position in the first place because we -- in this market, we know the stronger will get stronger and the weaker will get weaker in this market. And we know that in the first half of the year, we will have GBP 600 million outlet -- of cash outlet, which we've laid out in the RMS, a mixture of operating cash flow, while we start to close or we've got low occupancy or due to committed CapEx and some working capital unwinding as well. So we know that will happen in the first half. So -- and we also expect our scenario is that we will have a slow recovery through to the middle of our next year. And therefore, we also expect some cash outflow in the second half of this year, although to a much lesser extent the -- for that [indiscernible] point of view. What we're trying to do though is we weren't trying to sell for a short-term liquidity issue, we're trying to solve a leverage issue that puts us right on that front foot to get on and really take advantage of our competitive advantage. Having a strong balance sheet has really given us a competitive advantage. It's allowed us to invest and it's also allowed us to get flexible refinancing as well. And we have managed historically to a kind of 3.5x leverage ratio. This is a kind of Fitch investment-grade proxy. And that has really allowed us to get flexibility of funding. It's allowed us to get the rights, really to get our landlords to support us. It has allowed us to get our right sites at the right rates. We've had the best supplier terms in the market place. We've had the best kind of relationship with our kind of pension trustees as well. So overall, it's put us an incredibly strong place. What the rights issue does is it moves us in that direction, that's because it doesn't get to spend immediately. In this scenario, which this gets us there by kind of FY -- our FY '23, so February '23. So it takes time, even if it takes time to get there overall, which is why we kind of come up with the amount that we were talking about overall. And in that time, by the time we get there, we know that we do need to refinance the business. We know in the 18 to 24 months time, we do need to [indiscernible] that -- do the RCF -- renew our RCF at that time. So we need to make sure that we are showing that progress in that direction over time so that we can refinance kind of positively to get on to make sure we stay on that front foot and really take advantage of the weakness in the competition that [indiscernible] strengthen our balance sheet.

So just moving on to use of proceeds, so -- and this idea of opportunities, I think I should focus on. Our growth strategy is pretty clear and fairly straightforward. And for those of you who've been with us for a while, you'll know that. We've got opportunities to invest in both the U.K. and Germany. And those are as a result of what we consider to be a structural shift. So very much like when you're talking to retailers and they're talking about the structural shift from high streets to online, we see a structural shift from independents into budget branded operators. And in the U.K., the independent sector still half the market; and in Germany, it's even bigger at 70% of the market. And those independents are declining. And we see that during the course of this crisis, it's very -- it's quite different since 2008 to '12 when there was a RevPAR reduction, double digit, but not a complete closure of businesses and a complete halt to all cash flow and revenue. So we're already seeing distress in some of our larger budget branded competitors. You read what I read, so it's all playing out in the press, people are struggling to pay their rents and other suppliers. And they are, therefore, undoubtedly going to be constrained, and they're going to be constrained in either growth or refurbishment programs and putting more capital into their businesses in the period following this crisis. In addition, we expect the independent sector to accelerate its decline. They will struggle with all sorts of the issues that the budget branded sector struggle with, but providing the high-quality of safety, security, cleanliness and hygiene and the additional costs of social distancing in some of those types of hotels will be incredibly difficult to bring in and to enforce and quite expensive. So -- and with a loss of revenue and a lot of demand, we'll expect that they will hang on for a little while, but they will start to come out of the market. And that's in both Germany and in the U.K. So with those tougher conditions and that weakness, we want to be in a position to be able to grow. And in Germany, that can include acquisition as well as organic options; and in the U.K., we've already got a committed pipeline of 13,000 rooms. That's a 2 or 3, possibly even 4 years growth. We think there may be individual asset opportunities that it would be great if we didn't have to pass up because they'll give brilliant returns. We suspect what you can buy for your pound going forward will be more than you could have bought for your pound a year ago. And we will want to do some of our upgrading like our premier plus rooms, which are relatively capital-light that give great returns. And they've been hugely popular with our business and leisure travelers. So our unique business model, the fact that we're direct with our customers, we don't pay brand fees, we don't pay OTA fees, we don't pay rent in 50% of our estate. We have a -- we'll come on to the breakeven point. We have a lower breakeven and a much stronger financial model and operating model. And it also means -- I mean, we had a real head start with our 39 hotels we've already got open in understanding what it's going to take to reopen and how to do that safely and well and what -- and we are ready to do that and we're ready to go. So we've got a lot of use, I mean, nothing that is outside of what you know about our current strategy. But what you know of our current strategy, we would like to execute against, and we think more opportunity will become available. Now Nicholas, there was a final question, which was on the breakeven.

Yes, yes, yes. It was just about breakeven. So what would our sales have to be to breakeven. So look at-- take next year, for example. So it does depend on how you open it out, where [indiscernible] open your hotel, it is assumed to be in all of our hotels. And we're also assuming that the furlough job retention scheme finishes and then we have to pay our business rates again. And it means at an EBITDA level that your sales could decline by about 25% [ to 30%, overall. ]

Does that cover the 3, Jamie? Got a follow-up?

Just on the second question about M&A. So it sounds like you wouldn't be interested in acquiring Travelodge. And on my last question, are you looking at sort of step changes in your cost structure like other hotel companies are doing to bring down the occupancy breakeven further?

Well, I mean, we've already got -- as you know, we have an efficiency program in place that forms a core part of our strategy, and it will continue to be a core part of our strategy going forward. There's no doubt about it. I mean it is quite interesting running the business when there's no revenue. When you -- at a moment in time, you really do get a very clear sense of what fixed cost looks like and what variable costs look like and how you might manage differently. So of course, we will think through that as the months go on, but we've got a very strong program already and we intend for it to stay absolutely central to our strategy.

And just to be clear, this year already, we've taken out all uncommitted or unnecessary kind of capital spend, we've halved the capital spend from what we intended. We've stopped the discretionary spend, the executive and the Board have taken pay reductions overall. So we've done that, we've put 27,000 people on furloughs. So we've taken the kind of cost base down already to kind of go through this environment, so be [indiscernible].

Yes. And of course, some of that capital we will want to put back in next year. So particularly, making sure the room stock stays high quality, particularly in a world where the competitor set will be relatively less able to keep their room stock at an acceptable level.

So We now have a question from Vicki Stern from Barclays.

Firstly, coming back, going in a little bit deeper on that breakeven comment you gave for next year, could you just flesh out some of the cost savings you would anticipate next year? So I think the table you showed for this year suggests you can mitigate the sort of GBP 60 million headwind in terms of inflation. But how do we think about that? Could you sort of do that again as we look into next year? And does the drop through the 1% of GBP 18 million still apply next year as well? Secondly, your sort of best guess in terms of how you would see CapEx next year in light of the opportunities you described. And then finally, you spoke about the leverage targets a moment ago, just curious of what assumptions are going behind those just in terms of how you see, again, crystal ball, best guess on RevPAR evolution?

Yes. So just in terms of -- as a breakeven, as we said earlier, we're assuming that we don't pay -- we don't get the business rates kind of benefit overall. You're assuming that, but it's somewhere between -- we've historically said that the profit flow-through is around about kind of GBP 15 million or 1%. It is slightly worse for two reasons. One is, it includes the restaurants closed or low occupancy or low sales, and also because of low levels of sales, you've got a higher percentage of fixed costs, which will flow through into that as well. So you'd expect that number to gradually improve as you open up through the year. But that's not a bad direction, it's [indiscernible] to you. So we've got a slide in the deck, it's Page 29, which kind of lays those assumptions out overall. Just in terms of kind of inflation, we would also expect that we -- you're still going to see inflation on national living wage, we believe, and also kind of an energy, which we think will soon be relatively high, but we should be able to carry on with our cost initiatives, our efficiency program to offset those in the next year. Just in terms of the CapEx, we're spending GBP 250 million of the CapEx this year, about GBP 200 million of that is precommitted Capex, and that's really sites that we were already on-site building and efforts completing those sites, and about half of that is in Germany. We're also -- we finished -- had to finish the refurbishment of the Foremost hotels that we acquired in the last day of last year. So we just spent out some money on that venture. That's something we've done actually, which has been a major credit to the company that we can actually refurbish hotels in this environment, which has been fantastic. And then this year, sort of [indiscernible] committed, there's about GBP 50 million again, which is kind of just what you need to spend on the [indiscernible] of a state, even if it is closed and kind of making sure our IT, particularly our cybersecurity kind of areas and our networking is done as well. But for next year, we probably got about the same amount of committed, it's probably a little bit more skewed towards the German hotel portfolio, one because we've got more of the Foremost hotels coming, the pipeline coming our way next year overall. So you're committed by about GBP 200 million. We would like to spend more than that next year. So we kind of -- our own internal bottling is more like the GBP 300 million, GBP 350 million next year. And it's a year after, then, that you get back up to where our normal levels of our spend are. And that's purely because it takes time to commit, but also to wait to make sure you're getting the right assets, the right prices in this marketplace.

But what we don't want to be is constrained to take up the good opportunity that emerges. You can't always dictate when the timing and emerging opportunities come. And we don't want to be in a position where we're unable to execute against a fantastic opportunity that gives great returns in the sweet spot of our strategy. And so we've given ourselves the ability to do that, of course, yes.

And then the last question you had was on leverage targets. So what I can say is we're planning on opening our hotels in July. We've already [indiscernible] 30 to 40 hotels open today, and we'll hope [indiscernible]...

Well, yes, so if we go from now, we've got government guidance that says the earliest hotels should open is July. But of course, we are actually already open at hotels. So we've got 40 hotels opened during. The course of June, we'd expect to get that to 100 hotels opened. So by the end of June, we'd expect to be trading at those. And at the moment, that is trading with not just critical key workers anymore, but actually quite a broad range of industries who are allowed to stay in hotels. And that's utilities water companies, energy companies, IT companies, financial services, payments, waste, you name it. There's a lot of critical activity in logistics, food processing, financial services, you guys can all come and stay with us, should you wish you to because you're on the list of acceptable workers that can stay in hotels. So that's giving us business demand. And we would expect, to be honest, we always hope is that by July 4 that, that can be more broadly described as we're open for business. Because that's certainly what Germany did. But we are still cautious as to whether we will be open for leisure. So we're not sure yet that the government will be in a position to say that everybody can have a bucket and stay holiday and can travel throughout the U.K. following the fourth of July and through August. So we're quite cautious in thinking about whether or not that will be possible, but we would expect during July to start getting to more of the majority of our hotels being open and business being much more back in the mix of activities. And of course, it's very hard to open up the U.K. economy without the hotel sector to support it because a lot of businesses do depend on people doing away from their local base and being able to have a place to stay. So it will help the government's plans to open up the economy if we are open. So that -- and so that's the sort of opening profile. And from a RevPAR perspective, therefore, more business RevPAR coming back earlier, leisure, probably taking longer. And we're sort of giving our base scenario, we could have upside to this. Equally, we could have downside. Is that we will see an uptick in RevPAR through the end of the year into the first half of next year. And we don't sort of fully recover to previous norms until half 2 of next year.

Let me also just say because the independent market and the other branded hotel market is going to be a serious stress that we think there will be -- probably in the second half of this year, price will be very important for that. So I think it's quite an aggressive pricing market.

Sorry, one follow-up back on that first question. So just coming back on the [indiscernible], I guess, you could just suggest you can save an additional GBP 60 million-or-so of costs this year. Assuming inflations that are running at a similar level, you're suggesting that could be that sort of cumulative over GBP 100 million of cost savings now?

For the -- yes, yes.

We have a question from Alex Brignall from Redburn.

Am I allowed on the competitive landscape. So you've talked about the independents, but obviously, you've made a big deal of your integrated model. Could you talk a little bit about the pressure that you might see on franchises because that's another source of potential share gains for you. You've obviously already seen it once in Germany. And the second is on the nature of the recovery. We've had booking.com at Expedia in their Q1 results, we'll spend a lot of time talking about the sharpest bounce back in recovery so far coming to alternative accommodation and both talking about the trends for the largest hotels being the weakest. So could you just kind of address some of that? Obviously, it's maybe more health concerns, so hotels that have big lobbies and how that kind of might sit within the recovery. And then the last point is, again, on the kind of independent argument. I totally understand for the large hotels that kind of could be converted, what the strategy could be. But again, the OTAs talked about the very small boutique hotels who, maybe, don't fall into the kind of STR universe that everyone seems to be looking at. Those are kind of not doing anywhere near as badly because they're not kind of as levered up as some of the larger hotels that have the financing. And even if they close, they kind of just reopen under different ownership. So how that might affect because they kind of come into the alternative accommodation bucket that's seeing a lot of share change seen as we come out of this crisis from health reasons. So a lot of things probably on the same topic. You can kind of take it as 1 or 3 questions.

Yes, yes. No, that's a pleasure. We'll try and sort of pull all that together in a sensible way. Because you're right. So the -- from a structural perspective, we've got the independent sector. And that independent sector is quite mixed, as you know. But there are an awful lot of, sort of, right -- underinvested, old-fashioned guests as B&B type establishments. And as you might imagine, if you're in a world of shared living space and bathrooms, that's going to be more difficult from a social distancing and safety, cleanliness and hygiene regime perspective and significantly more costly to implement safe trading protocols. And so we do think that the demise of the independent sector will speed up and that we will, therefore, have some space. And I think I mentioned that we think that quite a lot of our competitors will be constrained in filling that space or taking that share. But you're right. The other issue is it does just fall to the franchise model. And the franchise model sort of gets exposed quite hard in this world. We bought a franchise business from Foremost Hospitality in February. And obviously, we've known it for a couple of years because we have to wait for the franchise agreements to come off the Holiday Inn Express hotels before we could rebrand to Premier Inn, which is now done. And so we understand that when you're paying a large amount of money to generate demand, to either the OTAs and on top of that, you're paying brand fees to your brand owner and marketing fees to your marketing owner, and if you're a lease business, you're paying rent to the landlord, your operating profit is actually pretty thin. And the fact is we don't have that issue because we have a model which is integrated across the piece and we own them all. So we do think also, though, the other thing that's quite difficult if you run in the franchise businesses, you've got lots of multiple owners of your franchise hotels and creating certainty in the delivery of either the refurb programs when they've been in a very difficult and constrained position, or the delivery of the clean and hygiene space criticals. That's going to be pretty tough to enforce. Whereas, for us, we can manage our estate across the piece. So I think that's going to cause it quite a difficulty for franchise owners to go into this space or they certainly, the existing ones are going to feel quite a lot of constraint on their own capital programs as we go forward. And that naturally takes people a bit more down market over time. And if we can keep our standards up, we get the clear blue water between them and us in terms of quality standards. And they're not stepping in. I think in terms of the nature of the recovery, you're right. I think travel -- for a little while, at least, we're going to see constrained travel. Whilst there will be a group of people who are having to get back into aeroplanes, there will be a very large number who don't want to be in a small tin can 10,000 feet in the air with 300 other people. So that, I think, is going to lead to more domestic travel. Certainly, all of the questionnaires and the surveys that have been done in other areas that have gone before us in this and in the states, suggest people want to be able to drive to places that they go and visit, see and on holiday. And there's no lack of appetite to go through the recovery and go and do things again, but people are quite cautious about doing them safely. And that, to some extent, would promote more domestic travel. I think the idea that people will be in spas or lounging in big lobbies or using facilities in the same way as they used to is probably also going to be quite constrained for a while. And so the very simple value and quality focused business that we run with domestic focus and direct distribution to our guests. 97% direct, we have a great relationship with our customers. That would -- I think from our perspective, that's going to play out quite well and be a strong proposition for people as we come out of the crisis. I guess, there are other players. There the sort of Airbnb's [ OEO ] was much discussed 6 months ago. I suspect that's quite a tough model to operate. Again, I don't know if you stayed in one, but I just don't see the bounce back for that model, particularly. We know Airbnb are going to focus back on their core business, and they are out of the hotel market. I think they've been quite clear about that. So again, people retrenching really back to what they do best.

Is that right, Alex?

Did we answer all of that?

if I had one -- that's covered it. Fantastic. I have one follow-up, which is, you've been very disciplined and good, but not leaning on the OTAs. It's kind of going in the other direction for a lot of other hotels. But obviously, the kind of dynamics of that shift when occupancy goes down a lot. Is it something that you would reconsider? Or do you think you'll stick to your guns as going to the direct distribution even if that means occupancy stands longer. I guess if other hotels are kind of leaning on it a lot more with the OTAs expect.

I think we are not keen on giving up our direct relationship with our leisure customers to an OTA and not being able to deal with them direct. We know it's actually not even good for customers. Things like refunds and dealing with complaints and managing the customer is much more difficult if gone through a third party, and they make their own decisions. So we're not so very keen on that. It's a bit like a drug. Once you run it, it's quite hard to get off it. So it's best not to go on it in the first place. But where we are very open-minded is on the B2B side. There are segments of the business market that we cannot access because it's not an individual's choice to book. So of course, we've got great relationships with companies, and we get all of their bookings. But equally, there are companies that use travel agents -- business travel agents, and we are actually quite keen to take a bigger share of that market. And that business that would be new to us and would be unable -- we would be unable to access without going through those agencies. And so we don't view that as cannibalization, and we view that as good business sense. So we will expand the distribution capability and business-to-business side.

And just to clear, the OTA is mainly leisure.

Yes The OTA is of the leisure market.

So that's why I think -- we think business-to-business will bit -- probably comes back first and fastest because the economy needs it overall.

Is that helpful?

We now have a question from Richard Clarke from Bernstein.

Three questions, as per standard, if I may. Just the first question on sort of operational changes you might need to put in as a result of coronavirus and any thoughts on the cost of those and what you might need do to remodel any of the rooms of hotels? And the second question, really sort of following on to my actual question there. You talked about the opportunities of vacations, and I agree that, that being an opportunity, but I guess you might say you didn't pick up on that kind of post-Brexit quite as much as others. Is there anything you will do differently, maybe beyond OTAs to try and get that, sort of, vacation in the market picking up? And then the last question on rent. Just maybe just any discussions you're having with your landlords, any expectations? I know you've already paid the rent for the first half, I believe, but any expectations you might get to rent savings in the second half and beyond?

Great. Thank you very much for the questions. So first of all, yes, operationally, it has been really good that we've had a head start with having hotels open throughout this crisis and trading -- and actually trading in some cases fully, as in being full on some nights. And so that's been enormously helpful in terms of working through in an enormous amount of detail, what is required to trade those hotels in a safe way. And we, therefore, have a refined and revised set of protocols and with social distancing and enhanced hygiene standards. And we've shared quite a lot of that. We've worked, along with others, with the government on setting out protocols for hotels to be opened safely. And so what we would expect is for some of those protocols to become sort of industry standard and the benchmark performance. Now in terms of -- for various people -- for some people, they will be harder to implement pay for and enforce than for us, we suspect. But things that we've measured, the sort of measures we're talking about, screening -- social distancing screening. So for example, if you're queuing at one of our kiosks to check-in, you will have a glass screen between you and other guests so that you can't be coughed on, frankly. And screens in the reception when you're being dealt with a reception member of staff, similarly. Signage, showing how distances, protocols for how people operate the space that we do have safely, health screening potentially, temperature checking, et cetera, correct use internally and regular changing of PPE equipment. And we've, of course, without much guidance, have to determine what PPE equipment we think is going to be required for staff and in the guest's interest. And then enhanced hygiene and cleaning standards. So having gone through all of that, and we've got 40 hotels running, we'd expect to have another 100 opened with these protocols in place in June -- as we go through June. So that -- I mean, it's about as good a test as we're going to get we have got good evidence that what we have put in place is very good. And if you want really [ prime a face ] the evidence of that, we've had the hotels opened for 8 weeks during the crisis. We've -- and we've been serving some of the highest risk groups, the critical care workers, doctors, nurses, et cetera. And we haven't had any case of transfer of virus in the hotels and no members of staff have been sick. So we're really confident that what we've got in place is both workable for us, an operating standard that we can both train in, manage and deliver. And actually, it's not, for us, too much of an additional expense. There's a bit of CapEx on things like the screens. And -- but in the scheme of our CapEx spend, it's relatively small. We already have incredibly tight cleaning protocols, as you know, which is why our room stock is so good. We changed some of the chemicals we use, but because we already were pretty thorough, it's not a huge increase in cleaning time. And there are protocols like cleaners don't go into rooms until guests have been out of them for an hour. But that doesn't cost us more, that just means we have to roster in the most appropriate way and manage the flow-through of guests in a slightly different way. We have -- we did wonder at the start whether or not we have to limit occupancy to a much lower level in hotels to maintain social distancing. And -- but we haven't had to do that. Of course, there will be the odd exception, a hotel that's got a quirky design to it and isn't very standard, where it might be more difficult, and we may have to limit the occupancy. But broadly speaking, across the estate, it doesn't look like that's an action. Of course, this is quite -- I mean hotels are themselves by nature, self-isolating units because you go in your room, and that's it. You don't have to deal with any other -- either members of staff or member of the public while you're there. It's a bit different for restaurants, as you know. And to put social distancing into restaurants and to change the product from buffets to a different delivery mechanism, that is -- it will take us a little bit more time. In our open hotels, at the moment, we've been offering boxed breakfast, for example, and coffee, rather than anything served in the restaurant. So bit of work to do to make sure that's all right. And then I heard landlords...

[indiscernible]

[indiscernible]. Yes. So just in terms of that, I think our marketing will be targeted. Our website is being redesigned. It's got a lovely picture, at the moment, of a beautiful beach, which we think is indicative of people's desire to get out into the fresh air, having been locked down for a long time. So yes, we will make sure that from a marketing perspective, and from a communication with guests perspective, we play to our strength. We do have a lot of very good properties in the areas where people will want to take vacation going forward. So we've got no lack of ability to service that demand. And then your last question was on landlords. We have paid our landlords on time and in full in March, and we expect to do exactly the same in June. We are watching with great interest, as I'm sure is everybody else in the market, what's happening with our competitors who seem to be in negotiations at the moment with landlords on their rent position. We don't want to be left in a position where there isn't a level playing field and where somebody has a competitive advantage. But we have a different attitude towards our landlords. We have a big freehold property base that backs our business, which we think is important. We have great relationships with our landlords. We have been long frustrated by the fact that our yields are not dissimilar enough to our competitors when we have managed with appropriate levels of leverage and with a high-quality stock. And so we would want to hopefully see some move to see our yields being quite tight and others' yields going out as a result of what happens during this crisis. But we're watching carefully to see whether it's appropriate to have any discussions with landlords about level playing fields. And -- but certainly, our intention is, with all of our suppliers, to pay them as their bill becomes due.

Watching closely what they do with...

Watching very closely what they do.

We now have a question from Jarrod Castle from UBS.

I'll stick to 3 as well. You've got roughly a 60-40 split in your estate between freehold and leasehold. So just wondering if you've kind of given any more thought to maybe in this environment doing a bit more sale and leaseback, especially if you are going to see some downward pressure on rentals. And just related to that, I didn't see a value of the property, is there a number that, that's worth giving? Second question. Just in terms of net room openings this year and kind of the estate itself, I thought there was a little bit of a write-down for some of the hotels. How should we maybe just think about that number this year as well as, I guess, for the restaurant offering? And then just relating to kind of adjustments. I mean, they seem to be ad hoc in the past, but is there any adjusting items or exceptionals that we should be aware of for the year-end '21?

Nicholas, do you want to take that question on leasehold?

Yes. First [ with the -- you're right, ] we've got about 60-40 freehold leasehold. And we had a big discussion, as you'd expect, about the use of our freehold and I think hopefully, everyone is very clear that we've kept a very open mind about our top freeholdings we've done sale leasebacks in the past to help fund the business. And we -- and I'm sure we will do again sometimes. Where we got to, though, is we don't think this is the right time to be increasing fixed leverage in the business. The downside of excessive leverage is, yes, I think you can see in our -- competition is very apparent in this crisis. So adding more fixed leverage, we don't think that's right, even just to put it in kind of terms. In our IFRS 16 leases, we've already got GBP 2.6 billion worth of IFRS 16 leases on our balance sheet. So adding to that, right now, is not the right thing to do. The other bit to that I'll add is, our pipeline is already based towards leasehold. So although we're 60-40. By the time we opened all of our estate, actually we'll be kicking in Germany, actually, we'll be closer to 50-50 overall. And as you know, our freehold has given us huge strength over time. It's kind of -- it's reduced volatility in tough times like this, and it really supports our covenant as well, not to us but to our -- hopefully, to a lot of our investors, investors [indiscernible] but also to our suppliers and also to our other landlords as well. So that's where we got to. I think the other thing I would say is valuing property at this time is quite -- it's difficult. If you look at some of the large property owners, most of the valuations that they've had recently have had to note a material certainty on them. And therefore, if you were going out into the market, now you'll be having to sell those at a significant -- we believe that's sold at a significant discount. And you haven't seen any kind of material transactions going on in the marketplace at that time. So we did not think that would be the right thing to do for our shareholders at the time. And I'll just -- maybe just thinking about some of our nearest and dearest competitors at the moment who did do this. And I'm having very difficult conversations with the [indiscernible] right now. So just in terms of value, you're right, we kind of value our estate in 2018 when we did our Capital Market Day. At that point, I think, we gave a range of kind of GBP 4.9 billion to GBP 5.8 billion at that time. I think open properties aren't selling [indiscernible] in the marketplace. So I think you will have to see discount to that overall. We would though expect it to be fairly resilient over the medium term, though, because it's got a good operating cash flow and a good business. And what this rights issue does is it helps kind of [indiscernible] our covenants, which would help them kind of maintain the kind of whole value, not just for that property, but the whole of the business as well. So just in terms of net rooms, I think before this crisis, we will probably [ open a route to ] kind of 3,000 into the U.K. this year. But actually, what we're seeing is actually because it is harder to get on to sites at the moment, we think we're at about 2,000 rooms this year, but we're kind of watching that carefully overall. And in terms of adjusting items for FY '20, the year we had there were a number of items. So there was a write-off of the property that we had unfortunately due to a fire. And secondly, we've also -- we had to kind of end the -- we have to kind of final [indiscernible] our costs disposing of Costa in there as well as separation costs as well. So we've got nothing. We just finished the year to [indiscernible] in terms of thinking adjusting items that are for the year. We will [indiscernible] through the year. What we put in our accounts, you'll see some -- there is no critical [indiscernible] balance sheet events, which particularly talks about some of the sensitivities [indiscernible] impairments, et cetera, and that is all.

We now have a question from Monique Pollard from Citigroup.

Just 3 from me, please. The first is on the B2B initiative. So you referenced that earlier in the call, and it was -- Nicholas, you talked about it in the presentation and particularly around the opportunities for corporate travel. And you had talked to that at the interim results about working more with the [ GDS. ] Now I know that you'd had your GBP 25 million of investment that you were planning to do in FY '21 that's been preponed. So just wondering, in all those initiatives will continue through FY '21, or we should expect those to really ramp-up in FY '22? Let's...

Yes. So let me answer that quickly because it's a quick one, actually. Yes, we have prioritized distribution and sort of where the capability for direct bookings and distribution strengthening and expanding so that is protected investments in our plans, and we intend to go ahead with it. So we've already started work with [ TMCs ] and GDS. So yes, that -- you can expect that to go ahead. For obvious reasons, in a low demand environment, attracting demand is a high priority. Can't wait.

Excellent. And then the second question was just around the covenants, obviously, based in ways, which is great news. I just wanted to understand because you never provided what the covenants actually are. If you can provide us with what the covenants are, so just so we can track that as we get towards the end of the waivers? And then the final question, actually, I had a slightly different view to Jarrod, obviously, in terms of the freehold, leasehold. I mean, when I'm thinking about it now, clearly, this environment proves the logic and the sensibility of you maintaining that high freehold mix, and it gives you a clear competitive advantage. So I was thinking more, as I'm looking to your pipeline, as you're moving down towards more 53% freehold whether actually, you might be looking -- thinking medium-term about [indiscernible] more like a 60% mark? Or you're happy to go further down to 50% plus?

Yes, yes. I mean just a -- can I start on the last one, i.e. the covenants. So just on that freehold one, I mean we are indifferent at freehold or leasehold. So we have -- as you know, we have higher hurdles that we have to pass internally to get leaseholds on board on a capitalized basis because they are inflationary, et cetera. And [ they can recognize the fixed cost element on top of it ] as well. So we do -- that's how we kind of allocate that lease. What we've seen over the last year, though, is that we've seen kind of freehold of assets just at ridiculously very low yields and kind of [indiscernible] kind of a no real kind of similarity to the kind of what we're getting in the rental market for hotels at the moment. So that's why we kind of tended to go towards leaseholds. So if we see that kind of opportunity coming up in next year, that will be quite exciting for us, if we can do that. But we'll remain open-minded about it. We don't mind going below 50% in freehold. But we do like to be around that level because it kind of it helps us kind of reduce through the company as exactly as you said. So just in terms of the covenants that we have, we've kind of laid it out on one of the pages, I think at Page 29, what the new covenants are. I'm sure that was your question or your other question was, the new covenants are that the fact that we have a excellent net debt, and that is of GBP 2 billion. And to be very clear, that's excluding leases. So we think we've got good headroom to that overall. If you think about our old covenants -- that the old covenants was an EBITDA and EBITDA, and that is on pre-IFRS 16, just to be clear, and it's around that kind of 3.5x.

Right. I know -- I'm quite conscious of time, but we've got time for more questions. And we don't mind running over a little bit because I think there might be a few people coming through. So Rachel, can we move to the next question?

We now have a question from Jaafar Mestari from Exane

Two questions, please. The first one is on development initiatives that you're flagging in the near term, what is your assessment of how much current property asset values and the valuations of hotel operators in your target markets have declined compared to 6 months ago? In other words, these potential development opportunities how do you assess how attractive they will be, so that it's accretive to raise equity at the current share price to redeploy it in those assets or in those businesses? Are they debt discounted? And my second question is on your plan to deleverage. So if I understand correctly, you run your scenarios on medium-term target leverage, and you arrive to the conclusion that there was a GBP 1 billion missing to be at a target 3.5x leverage by February 23. My question is, it looks like you've basically raised that plug why did you not consider monetizing some of the property portfolio, obviously not this morning. And then you've answered that part of the question, why not right now, of course. But for example, could you have raised GBP 500 million today and then committed to a phased asset disposal plan, GBP 200 million each year post-COVID, et cetera? Is that exactly the type of situation where for shareholders, that's one great use of property to limit the dilution? What's not...

Yes. Perfect. Thank you, Jaafar. I'll ask Nicolas to answer the second question. But of course, the issue if you're solving for leverage is that you say the leaseback adds to your problem of leverage not reduces it. But on opportunity values, clearly, we're too early in the crisis to see. We are using our common sense and judgment to project. So if I took Germany as an example, where we have a great appetite to grow. And we have a very, very detailed and thorough assessment of the entire market. And that goes from the top 3 brands there, which are -- which this capital raise is not targeting, which are the Motel One, B&B and Deutsche Hospitality businesses. But there is a huge wave, massive number of smaller companies that own somewhere between 5 and 15 hotels, and they're either like the Foremost Group with their franchise agreement or the independence-owned right. And -- or they have their own brand, they're own quirky brand in the market, but not one often that's established elsewhere. And so -- and of course, we've been at this for some time. And so we know what some of the valuations of those opportunity assets have been. And we are very disciplined. We set a high hurdle for what we expect our capital to do in a returns profile perspective. And of course, there were opportunities that we thought would hit our hurdle rates. However, the crisis has intervened, our full expectation is that the prices of those assets will drop because of the outcome of the situation we've gone through. And so -- and it might not be immediate, it might not be something that we do in September or October. But during the course of the next 12 to 18 months, we would expect more of those opportunities to be available in the first place because people will find it difficult to grow and they're very constrained in terms of their capital positions and also at better prices with higher returns than even the hurdle returns we've been looking at. So without going into any specifics or detail, that's the play as we see it in Germany. There may well be in the U.K., more individual assets, which come on the market. And certainly, as Nicholas said, freehold has been very difficult. Because of its price to acquire, there may be assets -- other types of assets that come out of the industry uses, which will give us an opportunity to get great returns on a site-by-site basis. And again, we'd like the opportunity to be able to do that. We've historically been very good at converting things that haven't been for other use, whether it be industrial or retail use, or office use into hotels. And there may be some great opportunities we expect prices to be dropping, not increasing in this environment. And on the [indiscernible]?

Yes. I mean [indiscernible] just is -- really, we've got GBP 1.5 billion in our lease-adjusted debt, which is the kind of [indiscernible] metrics we put on a 8x leverage. We've already got -- we've already got GBP 1.5 billion of leases on our balance sheet. And as I just said, I don't think this is the right time to be adding increased fixed leverage to that as well. As it just goes back to the first question we had today, we are trying to solve for a leverage. We're trying to put the balance sheet in a strong place. So that we can execute our strategy, but also make sure that we can refinance successfully, flexibly as -- at a good cost for our shareholders going forward. And I think that kind of fixed -- increasing our fixed leverage by the even more sales. We don't think it's the right time to do it. Even over the next year, we think it [ has to discount the properties to get there. ]

We now have a question from Tim Barrett from Numis.

Can we just go back to the GBP 80 million cash burns, just trying to understand that a bit better. It feels like, if I've got it right, about 3/4 of your non-COGS costs, so could you help us understanding what the mitigants in there are other than just the business rates, which you told us a while ago, I think, for GBP 120 million. The second question is how do you get value for doing the right thing. I think you're the only people who are paying people 100% -- of furloughed workers 100%. Can you turn that into a positive more generally? Because certainly some in the sector have got tractions of your cash burn. And then the call option that you've written off on an acquisition, can you just say what that is? Is that Germany or the U.K?

[indiscernible] You've been legalized there, I think...

So just the call option. I mean, just again, just in terms of rating and cash flow, not the line, but just the biggest 2 costs we have in the business are our people. Although we do get the benefit of the job retention scheme, that is up to a -- it's 80 -- up to 80% of GBP 30,000. So it doesn't cover off 80% of our payroll, just to be very clear...

Yes, we are really no way near...

Yes. So that's a large part the kind of cash flow that you still have [indiscernible] as you know, we had a quarterly rent benefit of GBP 50 million a year. So that's the other [indiscernible].

I think you asked a question about doing the right thing. Do we think that we can get value from doing the right thing? I have got to believe, and all of your ESG colleagues would have to believe, that your brand is enhanced by doing the right thing. And doing the right thing by our people, we have probably the highest staff retention rate in the industry. It's still a high attrition rate, but it's the lowest attrition rate in the industry. And the cost of training and recruiting new people in a churned environment is incredibly high. So the hidden cost of people with a 90% or 100% churn rate in their people staffing. The cost of -- in quality, it's in delivery, in actual recruitment and in training is enormous, which is always a hidden cost because it's an opportunity cost. But we have a low attrition rate by industry standards. And we hope that looking after our people will mean that we can maintain their trust and their willingness to come back to work. And the fact that we have volunteers who instantly volunteered to run our key worker hotels in an environment which was quite high risk, would tell you about some of the loyalty that we have in a brilliant team, and keeping that quality team is something that we're very keen on. And that goes through all the other things we did like giving our telephony to the ambulance service and our food, 350,000 meals from donated food from the restaurants when we closed to the [indiscernible]. All of those things go to maintaining the quality of the brand and the quality of how people consider Premier Inn and Whitbread.

Yes. And I can't stress enough, I think as we go through this, trust -- customer trust is going to be absolutely paramount. And you've seen some of our competitors in the press. I think us keeping the high model ground is so important to keep that customer journey on. And having said that, we're still clearly [indiscernible] on with our efficiency program. So actually, we think getting that right balance and doing it the right way so that kind of makes you get the long-term right structure of the company overall. And then your last question was about -- you get -- you got [ your own ] accounts looking pretty good just by a call option with...

GBP 30 million [indiscernible]

Yes, the GBP 30 million in the [indiscernible]. So that was a great example where we were looking at an acquisition in Germany...

Right at the year-end.

A very attractive one. And it was a nice portfolio of hotels in Germany, which would have given us again a nice booking accelerated rate. But it was just as indications in Germany, not necessarily in the U.K., actually Germany just in terms of what we're opening now around the globe. And therefore, we decided to put it at the last minute, unfortunately.

Yes. There'll be hopefully an opportunity to reengage when the [indiscernible] a bit. Okay . So we take -- does that answer your question, Tim, and can we take the next question.

We now have a question from Paul Ruddy from Goodbody.

Just one question for me, and it's just on payables. I think networking capital is over GBP 400 million at year-end. Just how you see working capital as we go through the peak of this, obviously, the customer [ deposits unwind by GBP 100 million. ] Just a little the line items, but maybe to the extent that you can both [indiscernible] late on payments in the back half of '22 or maybe even beyond '22.

Yes. Kind of HMRC payments are interesting because actually, the -- there's actually -- you can delay them, but there are interest charges with them on miles. So actually, they're not quite as attractive as you would actually think at the moment. So -- and you can delay that for a certain amount of time, not for -- indefinitely, but quite a long way. So it kind of helps you pump the month rather than half-to-half overall. As the kind of the most impactful thing on our working capital has been repaying customer deposits. And again, that was the big decision that we've made just to make sure that our most valuable customers will be there. So we look after and they are the people who will first come back to us. So overall, you'd expect that back working capital to rebuild over time. Of course, it depends on what type of -- it depends on if they pay in advance or they pay later or pay on arrival, so it all depends on how they do that. But you would hope over the kind of next 18 months, that would kind of build back again. Well, I can probably give you [indiscernible] go to line unit to probably pick up in your off-line in.

I think this may be our last question, Rachel. Is that right?

We now have a question from Ivor Jones from Peel Hunt.

You said you expected aggressive pricing in the market, given your new liquidity, should I reasonably expect you to lead that? Are you going to set the yield management system to its kill setting. And second...

We are now setting our pricing system to kill, but it will be killing the competition rather than killing the customer. So yes, we do think that, clearly, people will want to get at the demand, and we think that, that means that there will be some keen pricing in the market. The more aggressive we are in maintaining our value for money as we recover and stay as #1 choice for guests and to get their repeat business. The more pressure it puts on the structural change, and therefore, our ability to win in the long term. So we would anticipate maintaining some tight discipline and good MI on competitor pricing and to make sure that we are very competitive as we come out of the crisis.

Very interesting. And you mentioned [indiscernible] hub of things that you've invested in you didn't mention ZIP. I mean I just wondered, do the investment opportunities you're looking at only include things that could be Premier Inn? Or could we see by different kinds of assets while the opportunity is there and add-on a slightly different type of hotel type.

Yes. I mean, hub's a different type. And ZIP, we don't mention just because it's too early in its development. So we're always quite open-minded. But in terms of being -- what we will be in this period now is very targeted. We will expect a high return on capital. We will be quite disciplined about capital allocation. And so that we would really want to make sure that we had a robust opportunity before we moved on it. We think rather a speculative one. And so for example, with Premier Plus rooms, we know that pre-crisis will have to now test as we reopen, but they were enormously popular. It's not a huge capital outlay. They have good returns, and they're selling out first for both business and travelers. So it's a great opportunity to segment and upgrade and manage the yield in the hotels, particularly when you've already got 800 hotels. And so those things were proven before. We'll make sure they're still proven after, but they're in the sweet spot of opportunities for us.

But the assets you might opportunistically buy would only be suitable for Premier Plus -- sorry, for Premier Inn-type hotels?

Yes, probably, Premier or hub. Premier or hub is more likely. Yes, more likely.

Right. And last one, just to make sure I didn't misunderstand, Nicholas, did you say the expected RevPAR to have recovered by the end of calendar '21? You talked about half year was sort of the company year?

I -- we're expecting it to recover by half -- but with our funding calendar year as FY '22, which is kind of February, so February 20. So that in the second half of that year, so from September next year.

That's brilliant. Thank you. I think that means we're done. So thank you, everybody, for dialing in. Much appreciated. If you've got any follow-up, please do let us know. And Rachel, thank you very much. So that's the end of the call.

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