Whitbread plc (WTB) Earnings Call Transcript & Summary

Hello, and welcome to the Whitbread Q1 FY 2025 Trading Update. My name is Elliot, and I will be coordinating your call today. [Operator Instructions] I would now like to hand over to Dominic Paul, Chief Executive Officer. Please go ahead.

Thank you, Elliot. Good morning, everyone, and thank you for joining the call for our Q1 trading update this morning. I'm joined by Hemant Patel, our Group CFO, and we look forward to answering your questions shortly. Hopefully, you've had a chance to review the Q1 release this morning. I'll start with a brief overview for those who haven't seen it, and then we'll open up the call to Q&A. Before I touch on the first quarter's performance, I want to start with a reminder of a number of key strategic initiatives that are going to drive our business over the next few years. We're going to continue to extend our market-leading position in the U.K. through our strong commercial program and accelerating growth plan to optimize our food and beverage offer whilst adding over 3,500 rooms to our U.K. estate at a time when our competitors are unable to do so. Continue our journey towards becoming the #1 hotel brand in Germany, and leverage our upgraded technology stack and deliver our biggest ever cost efficiency program to allow us to become more digitally agile whilst operating a lean cost base. Together, these initiatives are set to deliver a step change in our profits, margins and returns. In the first quarter, which ran to the 30th of May, group total sales grew 1% ahead of last year led by strengthening performance in the U.K. and continued encouraging progress in Germany. As expected, trading performance improved during the quarter, and total U.K. accommodation sales were in line with what was a particularly strong trading period last year. This was still up 55% versus pre-pandemic, reflecting a favorable U.K. supply backlog and the progress we have made over the past few years. The strength of our brand and vertically integrated operating model meant that we continue to outperform the mid-scale and the economy sector, maintaining a healthy RevPAR premium of GBP 5.62. In Germany, we delivered another strong performance with total accommodation sales 15% ahead of last year, led by the increasing maturity of our estate and continued room growth. We're particularly pleased with our cohort of more established hotels, which continue to outperform the market, and we are making good progress towards reaching breakeven on a run rate basis later this year. Whilst our normal booking patterns mean that forward visibility is limited, our forward booked position is positive, and we remain confident in the full-year outlook. This reflects a more encouraging performance in the U.K. as a result of our strong commercial program and increased cost efficiencies as well as our good progress in Germany. With the improved consumer outlook and significant growth potential in both the U.K. and Germany, supported by the structural reduction in supply and our asset-backed balance sheet, our longer-term strategic plan is set to deliver a step change in our performance. I'll now hand back to Elliot to host our Q&A. As you know, we have our AGM today, and so we only have half an hour now this morning given it's only a few weeks since our last update, could I please ask you to limit your questions to 2 per person? Thank you.

[Operator Instructions] Our first question comes from Jamie Rollo with Morgan Stanley.

First question is just really how should we read your outlook, your positive forward booked position? It's sort of a slightly different language to what you used in late April where you were ahead of last year. Did you -- do you sort of feel better or worse, Dominic? And any pointers on sort of RevPAR expectations given Q2 is our toughest comp on a sort of FY '20 basis? And then the other question on the cost guidance, the better end of 3% to 4% looks like it's more about self-help than less cost pressure. How much more is left in the can this year if things do get worse in terms of top line?

Yes. Thanks, Jamie. I would say we feel about the same as we did since. I mean, it was only, I think, 6 weeks -- just about 6 weeks since our last call, we feel about the same. We -- on the call 6 weeks ago, we basically talked about the fact that we felt that the quarter would likely strengthen. We've seen that. Business demand continues to be resilient. Peak leisure demand continues to be resilient. There is a bit of softness around the soft peak leisure that I think that's factored in. So I would say we feel about the same as we did 6 or 7 weeks ago. We are comfortable with the full-year guidance that's out there. We've got a lot of levers at our disposal. We have got this new technical stack, which is enabling us to really pull our commercial levers, the reason for the outperformance in the market. And generally, as we go into a busier peak times, that is where our vertically integrated model performs the best. And then the other side of it, I think, as you say, about the efficiency program, which is Hemant has done a fantastic piece of work over the last 12 to 18 months. We've got well ahead of this early on. We've got a strong efficiency plan, and we've got opportunities to bring some of those efficiencies forward into this year, hence that kind of net inflation discussion. So kind of net-net, we actually feel comfortable about this year moving forward, but I suppose a bigger point for us as well is we feel really confident about the levers we've got to pull in this business over the next few years as well because that accelerating growth program, the continued driving of the efficiency program and our progress in Germany, which I think is really encouraging. So overall, we had only 6 weeks since the last call. But I think overall, we're feeling encouraged.

You wouldn't be as bold as to suggest that Q2 could inflect positive after the broadly flat RevPAR of your last 6 weeks?

I mean, I just don't think we want to get into that at this stage, Jamie. I mean this is obviously -- there's no -- I mean there's just -- I don't think it's worth speculating on that at this stage. I think the key thing for us is we've got levers to pull to continue to drive that market outperformance that the markets, probably it is down. You can see overall that's really nice on -- in for the hotel market in the U.K., and progress in Germany is really encouraging, and that's why we feel good about the overall guidance for the year.

We now turn to Vicki Stern with Barclays.

Just wanted to hone in a little bit on the RevPAR outlook specifically. So I think consensus has the U.K. at around about 1% for the full year. How are you feeling about that now based on what you see today with regard to the outlook and then following the sort of minus 1.6% in Q1? And then related to that, and I think you touched on it there, Dominic, in terms of the levers that you can pull, but would you still be sitting here today expecting that from a RevPAR perspective, you can start to now outperform the markets again as we go into Q2 and Q3, those stronger demand periods? I think you probably slightly underperformed perhaps on the RevPAR in the last quarter or so.

Yes. Thanks, Vicki. I mean, as we said in the release, of course, forward visibility of bookings is always relatively low at this stage, but we remain booked ahead of where we were same time last year. I think we -- overall, in terms of the guidance overall on RevPAR from the visibility, we can only look at the data that we've got now, we maintain this really strong 55% ahead of full-year 2020, and that's fairly consistent. So that pattern is encouraging. We've got some tailwinds, we think, that the things like business demand, we believe, will hold up. The peak leisure demand is looking good. And I think we are getting better and better at pulling our commercial levers -- pulling our commercial levers as well. So yes, I think it looks achievable. That's what we said. But we also have this efficiency focus, which enables us to kind of pull the efficiency lever as well. And I think we're doing that in a really smart way. We plan this really carefully. That's enabling us to pull some efficiency forward into the year. It all underpins the fact that we have a budget value business having an advantaged cost base. It's going to give us some real competitive advantage moving forward. And then, of course, on top of that, we're going to have the accelerating growth strategy, which I think will deliver a step change in our performance over the next few years. So in terms of the trading week by week, month by month, the cost seemed to revolve around, but you'd expect that in a market. But we've got structural reasons to believe, well, we can continue to outperform our competitors. And actually, we're really excited about the levers. I think that the new digital stack we've got gives us an amazing opportunity over the next 12 to 18 months to really drive our performance in the market, and we're really excited about it. And as I've said to Jamie's question earlier, that Germany's performance is encouraging. And Germany moving from effectively a kind of financial headwind into a tailwind, I think, is going to really help us over the next few years.

And I'll just add to that Vicki as well. I mean if we -- this time last year, we were hugely outperforming the market. Cumulatively, from before COVID, we have significantly outperformed the market in terms of ARR and occupancy over that period of time. As you'd expect, as we analyze against the outperformance, it's getting a bit tougher versus first -- versus the market. Through the rest of the year, we should be in a better position, so naturally we think that sort will help us in absolute terms, but also versus the market along with commercial program that Dominic has outlined.

Our next question comes from Leo Carrington with Citi.

If I could follow up on the demand, the midweek demand, is this pricing and the mix of rate types rather than occupancy growth driving the best performance? Or are there still extra rooms to fill with the new business travel initiatives? And then separately, on food and beverage, was that relationship versus the accommodation than sales as you would have expected? I know it just lagged slightly the company's data, but obviously, it depends on your hotel so any thoughts that would be interesting.

I mean let me begin the answer, and if Hemant has got any, he will edit. Yes, I mean the primary opportunity in business is effectively a rate opportunity. Our occupancy midweek with business customers is really strong. However, the more business customers we get, for example, the flexible tickets when they book later, it actually drives a higher range. So we've got a really good program in place now to accelerate our penetration of the business market, but through a combination of smaller businesses with our in business program, but also larger businesses working with more travel management companies. And we see a nice opportunity there to drive increased revenue through business customers. And effectively attracting more business customers, the net impact of that is the rate impact, so whether that's upgrading to booking first or booking a bit later. We are just having a bit more demand than supply. That will help support us to drive overall rate. So we think that's a really nice opportunity there. And then in terms of the -- your F&B question, I would say it's bang in line with what we expected. We're actually pleased with the progress in performance, so we're bang in line with what we expected. And then in terms of the accelerating growth program, obviously, it's only 6 weeks since we updated, but again, we are bang on plan with our execution of the accelerating growth program as well. So I would say, overall, again, encouraging.

We now turn to Jaina Mistry with Jefferies.

2 questions from me. Number one is on OpEx inflation, and specifically this year, how should we think about the phasing of OpEx inflation between H1 and H2? And then the phasing of any AGP costs as well? And then my second question is around Germany. Specific -- it's not a question around your expectations, but really, I wanted to ask around the moving parts to becoming profitable in FY '26. And it's what would you need to see -- what conditions would you need to see in order to be profitable in FY '26 in Germany?

To start with your question on gross inflation, Jaina, yes, I mean the phasing -- I mean, it's fairly in terms of the input inflation, will actually improve through the year. So gross inflation -- we have slightly more inflation in the first half of the year, and we expect that we will see how that's going to improve through the year as we see them go slightly lower than expectations in terms of the increase in cost prices kind of coming through the phasing of utilities year-on-year as well, particularly the unwound hedges last year and how that will phase. But similarly, the cost savings as well, in terms of net inflation, a lot of that is loaded into the second half of the year. So we're still very confident, as we said and believe that we're going to be at the higher end of the expectations in terms of the -- in terms of our efficiency program because -- and we've been able to get to higher numbers with the initiatives that we've got in place and we planned, and we could do the plan in detail. We've also accelerated some of that [indiscernible] forward as well. So we would expect to see a significant improvement in the second half of the year versus the first half of the year as we are exposed to those 2 things. AGP costs, the bulk of the costs, the disruption part of that will -- it's in the kind of second half of the year, but it's fairly evenly phased half 1 to half 2 overall. I'll start on -- in terms of just Germany, I mean the only moving part there, I think as you would expect, it's a -- it is the RevPAR increase. It is by far the most important thing -- cost is really important. We're always refining our operating model, our support center model as well. All of these things, we'll be refining over time and growing as a business without obviously allowing those costs to increase significantly. It will help our profitability. But by far, the most important thing is the RevPAR that we are -- that's improving. We need our more mature sites to fully mature. So there's elements of maturing individual sites. The brand maturing as well would be with the brand program that we've got in place that will help with our [indiscernible] marketing and the overall program that we have. And so probably the most important thing is letting those sites mature. We would expect those to actually mature. We've obviously got a very immature set of sites at the moment. Even our most mature sites still haven't fully traded in more than like 2 to 3 years post-COVID. And so we haven't quite -- we don't fully understand where we're going to wind up in terms of maturity in Germany because, obviously, we've not matured the hotel fully in Germany. We know it takes 4 to 5 years in the U.K. So we would expect that those -- most immature sites start maturing over the next couple of years and get to their end position, and therefore, their end maturing targets as well over that time period, but by far the most important thing, as I said before.

And I think, Jaina, just building on a couple of points that Hemant made, I mean we're doing a number of things in Germany now. As we've matured, we've understood the market different to what we were doing 12 months ago. So we trialed widening our distribution, which is actually really encouraging. We're getting better and better at optimizing our pricing and yield management for the German market and managing events. We've got our first brand campaign now live in Germany, and results are really efficiency and really encouraging. And then our scale is also giving us efficiency as well. So I suppose the reason why we found probably more optimistic about Germany as we progressed in the last 12 months is we're testing and trialing different activities and different actions and results are encouraging. So we are feeling good about the progress we are making.

We now turn to Muneeba Kayani with Bank of America.

Just 2 follow-ups, please. Firstly, on the cost guidance. So what exactly are you doing that's made you kind of more confident on the lower end of the net inflation guide for this year? And then secondly, just on the U.K., so then how are you managing your booking process for the peak summer months given the softness in the short leisure demand that you talked about?

Yes, good question. So let me just -- I'm going to give a really brief intro on the efficiency program, and then, I'll hand over to Hemant because he won't do this himself, which is Hemant has stood over a really detailed efficiency program over the last 12 to 18 months where we have literally done [indiscernible] review of all aspects of the business. We've always been a well-run business, and we've got budget and value in the half. But any large business with a lot of moving parts has got opportunity to drive efficiency. We've done a lot of time promotions through our hotels, through our Food and Beverage operations. We've looked at where technology can help us. So we've had a very, very detailed program. And that's one of the key drivers of being able to, one, have confidence and go to announce our largest ever efficiency programs to focus on hotel business, but also giving us confidence on bringing forward some of those efficiency programs.

Muneeba, yes, it is what has given us more confidence as we've gone through the year clearly. I mean, 2 things. One, we've seen what's happened in terms of inflation. So the gross inflation numbers, as I say, are coming in at the bottom end of our guidance. And we've actually seen those numbers move around with renegotiating contracts and the commodity pricing. And then on the -- in terms of the program, clearly, we've done a lot of planning as we are starting to implement and getting closer to implementing the various different initiatives, which as Dominic said, there are lots of initiatives across every area of the business we get more confident. And then we can see the number -- the actual numbers once we have fully found out where to execute. And hence, our confidence grows as we go through the year. I mean we would expect, as we said, to be at the bottom end of that 3% to 4% net inflation guidance because of it was slightly ahead. Clearly, we'll try to do best we can, bring forward as many of our initiatives as possible and [indiscernible] this year.

And then, booking -- U.K. booking.

Yes, then booking, I mean this is kind of our bread and butter in terms of trading. So clearly in an ideal world if everything were the same as last year, it's very easy for the booking engine to predict what is going to happen because it's based on last year's [indiscernible] and we can see where we -- on a particular night, at a particular site, we can see where we [indiscernible] the market. Whether that's because we priced too high, priced too low, we changed prices too early, and so the growth -- the shape of the curve versus starter points is across pricing. Well, at the endpoints, it's pricing. All of those things you can assess if everything behaves exactly same as previous year. Obviously, they have risen. This year, we have seen slightly more [indiscernible] in terms of weekends. We can modify. I think we can reset our strategies and adjust for that as we start to see that, and we can see that coming into. These kinds of things we can react to. Again, we can see our outperformance in the market, so you can see where the opportunities lie. Because of our fully integrated business -- our vertically integrated business because we have the teams of pricing out risks available in quite a unique way across the industry, we're able to analyze those and take advantage of all those opportunities. So hence, our confidence in our ability to price really well on that for the market. We will see how it goes.

Our next question comes from Richard Clarke with Bernstein.

I guess Q2 is shaping up to be quite an event-built quarter. You've got the euros presumably benefiting your SMB and your German business. You've got Taylor Swift in both U.K. and Germany, and then, the U.K. election. Just maybe any comments on what you're seeing and how much of a boost those various events may have to your numbers across Q2?

Yes. I mean -- thanks, Richard, I mean, you're right. For Germany, euros should be a tailwind for our performance in Germany. I think for me the biggest impact though in Germany is the double maturity impact we're beginning to see. So the hotel is maturing and also the brand maturing. And our ability to kind of execute and operate well in Germany maturing as well. So effectively, you've got a combination of things in Germany, which is overall lifting our performance and giving us confidence. I don't think that's surprising. Obviously, if businesses get into markets and they figure out how best to operate, you do get material benefits as the business matures and also how you perform better. In the short term, yes, the euros will help, but actually I suppose what is more encouraged about is, I think, we're really learning how to operate optimally in that market and maintain confidence that the German market is going to be a really good market for us. I think -- in the U.K., I think there were a combination of things out there [indiscernible]. You're right, there's a bit of uncertainty because of the election process. On the other hand, there's some events going on in the euro terms. You could argue that one way or the other. I guess part of our observation over the last few months is the market has got very, very focused in on kind of weekly STR data, weekly market data, and we understand why that is. But weeks will always go up and down. Months will always go up and down to some extent. I suppose what we're reiterating today is, look, as we look overall -- at the overall year and we look at our ability to pull levers, we feel comfortable in the position we're in. And we feel really excited about the next few years as well because we've got strategic shifts which are going to drive significantly increased margins in hotels we have been in over the past few years. Having said all of that, I think we are unique in the sense that we have more levers that we are able to pull to drive our outperformance versus the market. We're very focused on doing that.

Okay. And then maybe just as my second question, it looks like net unit growth in the first quarter reasonably slow, maybe just 1 or 2 hotels opened. Is that full range of 750 to 1,250 rooms still the full range? And does the slower net unit growth impact that inflation guidance at all? Is that being factored in?

Yes. Yes. I mean, yes, the range is -- still applies for the year. It's something -- we are really happy that we will have done those rooms in the U.K. We have opened one hotel so far this year. It's a hotel with totally 120 rooms. But just to remind you, we did open just before the year-end. And in the last period of last year, we opened 2 hotels with 650 rooms between them. So you could have quite easily brought it into this year. So we're not worried about the phasing, about what we talked about why [indiscernible] potentially for next year because that was kind of bit hung over. But we're still really happy that we've got -- probably about 7,000 rooms plus the 3,500. Those are the extensions that we do and probably also the AGP program. So there's nothing particularly there to worry about. Inflation, the inflation numbers we're giving on the cost base from last year. So still now, we are not changing the -- we are not changing our urban guidance project. I think it's just how we apply the inflation guidance to the bottom of the expectation.

Our next question comes from Tim Barrett from Deutsche Numis.

Just quickly, I want to just double check. I just want to check I understand the cost guidance. And you're talking about phasing and bringing more into this year. Is that with an increase in the GBP 150 million 3-year target as well? So just some thoughts on that. And then on AGP, I know it's only 2 months since you went public on that, but it was quite high profile. So what kind of interest are you getting in the 126 sale estates? And how many have now transacted, please?

Yes, I will start with the cost side and then have Dominic go through the AGP question then. Yes, I have been always saying at this stage. We only talked about manipulating a few weeks ago. We're still running a 3-year program. I'm still happy that GBP 150 million is very achievable over that time period. Yes, we've been trying to put forward to get into the lower end of -- lower end of assets in terms of net inflation higher than expectation in terms of our efficiency program this year. Clearly, if we can get to a higher number than GBP 150 million over the next 3 years, we'll be informing you of that, but at this stage, we're not changing our cost guidance. We think that in 3 years time [indiscernible] make difference to our profitability and contribute towards offsetting any inflation that we are seeing.

And then, Tim, just on the kind of update -- sorry, did you have a follow-up?

No, no.

Yes. Okay. Just to follow up on the question about the accelerating growth program, and as I said at the beginning, obviously, it's only 6 weeks since we have last updated. As a reminder, we -- when we made our full-year announcement, we said that we had already sold 21 sites at GBP 28 million. I would describe our progress on accelerating growth as bang on to where we would expect and wanted to be at this stage. As you said, there are 126 sites that we are now actively marketing. We have actually had expressions of interest in the majority of the sites. Obviously, these things take time. We've factored that into our planning. And I would say we are exactly where we would expect and want to be at this stage.

Our final question today comes from Joe Thomas from HSBC.

Just 1 question with the election in mind. Can you -- thinking about labor cost inflation further out, can you just remind us where you are versus minimum wage, where you are on sort of banding of the age categories and where you are on things like 0 hours contracts? Just trying to sort of get a sense of the risks and how that might impact the cost saving program going forward.

Yes. Thanks, Joe. I mean there's a couple of things to point out, I suppose. We are above minimum wage. All our people earn above minimum wage. We have no 0 hours contracts. All our people actually earn above -- living wage -- no, national living wage. Sorry, national living wage. So all our people earn about national living wage. We've actually given a strong pay increase to our people this year. Our hourly team members have got just over 9% pay increase, and we've done that to make sure that we maintain a healthy gap to national minimum wage. And there are a couple of things to point out on that. One, we recruit really well. Obviously, we offer a career to our people, so we don't find it challenging to recruit, get a lot of applications. Our turnover is materially lower than our key competitors. And we have -- generally have relative low vacancies. Actually, we have slightly higher vacancies and requirements because we're trying to ensure that the number of actual redundancies for accelerating growth are as low as possible. So I think we're in a really good place on all of those factors. Yes, we are a good employer. We take that seriously. Obviously, there is an unknown factor, which is if there's a government change, what will that be? We've actually seen kind of a big increase in the minimum wage on the conservative government. I think there's been quite a material catch up to that median point, which they are trying to get to. I know it's our standard answer, but it's true. With -- we've been around for 280 years. We've seen quite a few government changes. We're very good -- I think we're very going at rolling with that. And I think the fact that we are generally actually the right size for a lot of these kind of policies and procedures, to be honest, puts us in a strong position versus a lot of our competitors there, I think.

Ladies and gentlemen, this concludes our Q&A. I'll now hand back to Dominic Paul for closing remarks.

Okay. Thanks, Elliot. I appreciate all your time today. Thanks for the good questions. And yes, I appreciate your support. Any follow-up questions, you know where we are, so always happy to answer them. Thank you very much. Appreciate your time. Thank you.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.