Whitbread plc (WTB) Earnings Call Transcript & Summary

Hello, everyone, and welcome to Whitbread's FY '27 Interim Results. My name is Lydia, and I will be your operator today. [Operator Instructions] I'll now hand you over to Dominic Paul, Chief Executive Officer, to begin. Please go ahead.

Thank you, Lydia. Good morning, everyone, and thank you for joining the call for our FY '27 interim results. I'm joined by Hemant Patel, our Group CFO, and we look forward to answering your questions shortly. Hopefully, you've been through our release and have had a chance to listen to our results presentation this morning. Before we open up the call for Q&A, I will pull out a few key points. Starting with our first half results. In the U.K., we have delivered a strong trading performance with a combination of sales growth, up 3% versus last year, and we have increased our outperformance versus the market. With the delivery of GBP 39 million of efficiencies and AGP related reductions in our cost base, U.K. operating costs were flat versus last year despite industry-wide inflationary pressures, including the unexpected hike in business rents. As a result, U.K. EBITDA was up 1%, demonstrating the strength of our model. In Germany, we opened 1,800 rooms and delivered double-digit accommodation sales growth that was ahead of the wider market, which was bad versus last year. Despite the majority of the previously guided one-off impact falling in the first half, Germany EBITDA still increased by 10%. Now turning to current trading. First, in the U.K., our strong trading momentum has continued during the first 5 weeks with total the combination sales up 4.5% and RevPAR up 3.2%, and we continued to outperform the market. Food and [indiscernible] sales were down from 37%, in line with our expectations with the closure of remaining branded restaurants in September. And in Germany, we delivered total accommodation sales growth of 31% and RevPAR growth of 10%, we outperformed the market. We are confident in driving a positive second half performance in Germany and remain on course to deliver profitability this year. Alongside our strong trading momentum, we have achieved unlocked in the first half and we are laying the foundation for the delivery of our 5-year plan that will deliver higher margins, cash flow and returns and generate GBP 2 billion of cash flow available for shareholders by full year '31. We have made excellent strategic progress against each of the key initiatives, and our accelerating growth plan is transforming our business. Our dynamic approach to capital allocation is key to the delivery of our plans, ensuring that we will always deliver an attractive spread of return over our cost of capital, and we are targeting at least 15% returns on all of our growth investments. So in summary, when trading strongly with market outperformance in both the U.K. and Germany, and our forward booked position is ahead of last year. We are executing at pace, delivering the tangible results and increasing momentum across all areas of our business. As well, we remain confident in the full year outlook and the delivery of our 5-year plan. Finally, you will have seen today that we have written to all shareholders recommending them to vote against the resolution proposing the election of the Convex nominee to the Whitbread Board. Our position is simple. We've got the right plan, the plan is already in flight and gaining momentum, and our business has a highly experienced and strong board. [indiscernible] agenda will significantly distract us in delivering our plan, and we believe these disruptions will lead to the detriment of shareholders. Now we do have a lot of people on our call today. So before I move to Q&A, in the interest of time, could I ask each of you to keep to a maximum of 2 questions each. With that, I'll now hand back to Lydia to host the Q&A. Thank you, Lydia.

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

First question is just on costs. You generated about 2/3 of the GBP 60 million efficiencies in the first half. You beat in your efficiency targets for each of the last 2 years. Do you think there's upside to that GBP 60 million number? And is there any early stay on FY '28 costs, particularly on the energy side? And then the other question on disposal proceeds. Clearly, you've maintained your target for GBP 450 million to GBP 500 million, which leaves quite a lot of wood to be chopped in the second half of the year. Could you just give us a flavor for where your confidence comes from in meeting that number? I see you've given a couple of sale and leaseback yield examples, but just talk about demand for sale leasebacks given the current [indiscernible] environment and sort of coming off that second half disposal process?

Thanks, Jamie. Let me answer the first part of it, and then I'll hand over to Hemant. I mean on the efficiency numbers, of course, you're absolutely right, GBP 39 million delivered in the first half, full year target of GBP 60 million. We've got a really strong track record of delivering efficiencies. It's one of the key pillars of our plan, GBP 250 million worth of efficiencies over the next 5 years. And we are increasingly confident about our ability to drive material cost efficiencies. And I think we did very well to get ahead of that when we announced our updated efficiency couple of years ago. So as you know, we do have a track record of GBP 250 million efficiency numbers. We're very confident of hitting that GBP 60 million, and we will continue to stay focused on driving continued efficiencies. While I think it's really important is we're making -- this is not on cost cutting. We're making really smart decisions about rewiring and adjusting our business to make as efficient as possible. And technology is also really helping us in that area. So it's going to be one of the key drivers of our plan, we feel very good about the efficiency for we've got moving forward. In terms of sale and leaseback, I mean, the short answer is, we feel confident in our position on getting to the guided number for this year. Hemant, if you could add a bit of color to that.

Yes. I mean, on efficiency, Jamie, you're right. We've built 2/3 of the [indiscernible] year. A lot of that as far the first half [indiscernible] come from initiatives that ended last year. So [indiscernible] food and beverage supply chain, are labor forecasting. The way we support customers in our contact center, et cetera. So we're seeing the benefits we go through. We've got many more initiatives this year, as Dominic talked about including how the checking process front desk digital guests. All that come through we're still expecting GBP 60 million. This isn't easy. It's growth that we're going to have to beat our targets in the past, but it's not something we should say for granted, and we're working hard to get to the GBP 60 million this year. I'm happy with the pacing, the partnership, it's great now to get ahead of it, that GBP 60 million is the still expected target. We're not give guidance on next year yet. We're fully dosed this year on energy, well hedged next year. So I'm happy with where we are. But in January, when we get to our Q3 results, we will give you more detail on inflation next year and our efficiency targets as well. So a much better starting the program and also the contracts that we'll have since. And then just going a little bit more on the disposal proceeds. You're right, there's a lot we still need to deliver. We still actually confident GBP 450 million to GBP 500 million for the full year. We've delivered GBP 20 million in the first half, actually, GBP 30 million since then to the balance sheet date as well as selling 57 restaurants and another hotel as well. The vast majority of our target we are in discussion on -- and well perceived with. So we're feeling very confident. We're obviously very aware of that [indiscernible] rates are elevated and might room -- what we won't do is do a deal where we don't think is the right -- gives the right balance of shareholder value. What we're trying to do here is recycle capital at kind of 4% to 5% cap rates into 15% returning programs like [indiscernible] growth. That's the intention of this. What we might do is do that blindly. We'll be able to manage how gave is proceeds, but also how we are spending capital to it necessary. So we'll watch that. But at the moment, we're still very confident between GBP 450 million to GBP 500 million.

Our next question comes from Leo Carrington with Citi. .

Firstly, can I just ask on the Germany pipeline, It's much reduced partly with the openings in H1. I think this puts your open and pipeline rooms around the 5-year target. Is this where you might stop with growth in Germany? Is this where the the scale could be appropriate? Or do we expect more thereafter? And then secondly, on [indiscernible] activist, A few comments. I guess you've alluded to this, but what is actually wrong about or what element of the Actavis plan would be distracting. Is there something that they're specifically looking for, which you've already taken off the table in arriving at this new 5-year plan?

Thanks for questions. So let me talk a little bit about the capital allocation plan that we've got. And why are we so confident in it. So if you look at the capital that we are going to spend within the 5-year plan. It's actually focused on 3 key areas, the growth capital. So the significant area is accelerating growth plan. And that is truly transformative for our business, removing the drag of unprofitable or less profitable restaurants, replacing them with high-returning extension rooms is really accretive for our business and it simplifies our business. So back to Jamie's question earlier about efficiencies, having a focused hotel group that is simpler and higher returning becomes a much more efficient and profitable business is one of the pillars of the [indiscernible] plan we've got. The next area is U.K. new room of growth. Now we've already taken a number of sites out U.K. [indiscernible]. We took GBP 500 million worth of growth CapEx out of the U.K. And remember, we'd also slip the pipe back down during COVID. That gives us high confidence that the sites that we're investing moving forward in the 5-year plan north of 50% terms. And we've got data to support them. The hotels that we've opened over the past few years already generating circa 13.5% return. They're not fill mature yet. So we have high confidence on both sites, sites we are investing in and opening in exclusive catchment areas where there isn't cannibalization and are overall very accretive to our both our returns and profitability. The third area then for the growth capital is Germany. And as if you look at Germany, we've taken GBP 500 million growth capital for Germany during this 5 years, which leaves GBP 200 million, GBP 100 million of which will be spent this year. So the remaining full year only spending GBP 100 million worth of growth capital in Germany. The good news is that catalyst is really focused on the higher-returning areas. So all of the lessons that we've learned in being in Germany for the last 10 years and specifically over the past few years. So then we are not with Germany, actually is a business of scale. So as of today, we have in this call, we've got 75 hotels hopefully in Germany. So we are -- we've already created a business of scale. That means we're getting efficiencies. Moving forward, investing in sites where we are supplying confidence will generate accretive returns moving to a somewhat or leasehold. You put all of that together, . Investing in return in sites where we get north of 15%, recycling capital at a significantly lower rate than that. That's one of the drivers for the significant cash flow creation, shareholder returns creation and an increase in margins of returns. So you're right, the Germany pipeline has come down somewhat. We've guided to 18,000 rooms by the end of full year '31, but it's a higher returning, more profitable business and the data points to support the delivery of that are clearly seen in the results today see the momentum from both a sales point of view, but actually results point of view of Germany support. So that's kind of your first question. And the second question was [indiscernible]. So it's really interesting against that. I mean we got hammered in the U.K. budget last year on the back of being hammered on the budget before. So the year before you had a GBP 60-odd million increase in employment costs from actual assurance. Then the budget last year, frankly, the government made mistake and hit in the hotel business rates, particularly hard. That's GBP 160 million worth of costs that came through. In that budget over what now is the next 2 years. We have 2 ways of reacting to that. You kind of continue. With the plan we have and we just up quite dramatically in order to actually more than offset the increased costs and deliver materially higher margin returns over the next 5 years. And obviously, that's exactly what we did. And we spent multiple months, doing a very detailed piece of work literally straight after the bunker last year, supporting and guiding by world-class board and three, in global investment banks. And we came up with what we believe is a very strong plan, which we outlined in April, which will not only more than offset the increase in these costs. It will strengthen our position in both the U.K. and Germany to drive material increases in margins and returns. So we've got very strong to that. The announcement today, you can see we've got real momentum building in the delivery of that plant. We only treat every single area of the 5-year plan in terms of delivery. And we have a world-class book. We've further strengthened our world over the last 12 months with a number of really positive additions to our board. In parallel to that, we have had noise from [indiscernible]. So earlier in the year, they announced that we should do a strategic review. But we always said we would take a strategy review, which we outlined in April. And at a similar time, they said that we should put the company up for sale which is a bit ironic. So we're a public company, obviously, a public company always has to be opened for a sale. And then more recently, Accor has come out and said actually, they don't think we should put the company up sell, but we should do a strategic review and that we should give them a board it. And when we said lastly, we look at the plan we've got, which is going to deliver a material increase in returns to shareholders, the momentum we've got and find we have a world-class board. We cannot see that giving a board seat to enacts investor that appears to be changing their mind, and that a board nominee doesn't prepare to offer any material accretive skill set to our Board. I could be the right thing to do. So our message today is unanimous from the Board, which is we've got the right plan. We've got momentum in delivering the plan.We got a world-class board. In terms of distraction, yes, going back over a business review, which we've already done in enormous detail, following [indiscernible] for one shareholder, not all shareholders Yes, that would be distracted. And that risk to deliver and let's be completely clear, we are here him to deliver the plan, and we're here to deliver significant increases in returns for our shareholders, we're confident being able to do that, and we don't -- distraction.

Our next question is from Jaina Mistry with Barclays.

Congratulations on the results. Two questions. First one, I wanted to ask about your Q2 RevPAR outperformance in the U.K. because I think it's the strongest that it's been in a very long time, 270 bps. What's driving this? Do you see this as a sustainable run rate? I'm just -- I'm conscious that in your current trading, it's narrowed likely to 100 bps. So just walk us through what's driving it and how we should think about H2 there. And then question number two, could you remind us how hedged you are on utilities for FY '27 and FY '28?

Thanks, Jaina. Yes. I mean we're really pleased. I'm proud of the results that we've announced today because we think it really shows the strength of the plan that we've got and also the execution of that. And of course, the RevPAR performance is one of the key ways of measuring that. And you're a see right in Q2, our outperformance versus a market-wide. I mean this [indiscernible] ebb and flow. And of course, it's -- we're not in control of what our competitors do or in control of what we do. So it's quite hard to call what will happen to that outperformance other than the fact that we're very confident that we will continue to outperform the market. What really drove it in Q2? I think there were a few things going on. So we see a lot of dislocation in the U.K. market at the moment. These cost increases as you've been talking about the business rates and the [indiscernible] insurance. This is an industry wide issue. Of course, this is not just us. Now I think we have been particularly rapid coming up with a plan that more mitigate those cost increases. But frankly, better we're doing that than our competitors. And we're seeing the industry generally going through a period where it's struggling with cost increases. So you can see -- you'll have seen in the SDR that from the independent sector, the numbers are not encouraging for the independent sector. We think that's going to hasten in the independent sector. You can see that creating very beauty supply growth in the U.K. And Travelodge, you'll have seen from their numbers are also going through a tough patch the vote. So I think there are a few things happening. The first thing is with every set of industry challenges it creates opportunity. We grab that -- we've grabbed that opportunity to really solidify our position in the U.K. market, our commercial training engine is doing exceptionally well. The strength of our brand, our revenue management, and it shows that we've got strong pricing power, which is a combination of strengthened brand consistency experience. And we believe the best global revenue match for system. You put those things to get a on way increasing focus on [indiscernible] revenues. And you can see how we can deliver an outperformance. And then behind the scenes, the efficiencies that we're driving, the simplification in our business, the ability to invest in technology that's going to drive competitive market performance. That is fortressing our business versus the competitive set, and we believe sets ourselves exceptionally well deliver very strong performance over the coming years. So it's a mixture of the industry going through fairly tough time. And our performance and the focus on our performance, I think being really, really strong. And then from an inflation point of view, I'll hand it over to Hemant .

Yes. I mean, we're fully hedged this year. And we haven't given any guidance yet, and we'll give some more guidance in January for next year. But this thing, I'll say I'm very comfortable with -- We're well hedged next year. So comfortable with the positioning, obviously, very aware of what's happening with utility, gas and gas and electricity pricing and the long I can leave we'll make sure that we hedge appropriately. .

Our next question is from Tim Barrett with Deutsche Numis.

I just had a question. First question actually also about the RevPAR trend. What wasn't brought out in that answer was London? And it looks like you were close to 5% in Q2, which is kind of the inverse of what we're seeing in the STR data. So just really wondering what's going on in London and sustainability there? Question two, apologies for mentioning the government again. But since -- well spoke, the visitor levy has come out, and I just want to just get to your understanding of that. It feels like it's potentially uncapped. People I talked to think it could be around 5% on average. Do you think you have the pricing power to pass that on in due course?

Thanks, Tim. A couple of things on London. So as I think you know, we under-index in London in terms of size. And then when we look at our kind of national footprint, London is a fantastic market for us. The recent openings that we've done have been particularly strong, give us high confidence of the new site at north of 15%. So when you look at our performance in London, you have to remember where you're indexing there. I also think London is one of those markets where there's always strong underlying demand. I mean you'll see London at the moment -- lots of business travelers, both within the U.K. coming to London, but also coming from overseas. And of course, there's always a strong amount of tourist travel coming into London as well. And you put those things together and the fact that we under index, it means we can strongly outperform the market. The new sites that we've got coming on, this is a great example of the level of detail, obviously, that will be going through on a side-by-side basis. And the new sites that we've got opening up in London, prime locations, in areas where we're under index, so we have some high confidence we can deliver very accretive returns for the group. So that's the fundamental reason for our performance in London. And then when you talk about a sale, of course, we're not in favor of that when we've made that clear to the government [indiscernible] if it comes into effect, it will be 2028, we believe it will be capped, though initially, they said it to cap there was on some rolling [indiscernible] ban We do already have a line a number of areas. Scotland would be one of those things. We work very quick to get ahead of this, so we made system changes to ensure that the price is showed separately to the customer when they come to checkout, which means we pass all of that cost a lot. So if we look at the visitor tax levy, No, we're not in favor of it. It's another tax for U.K. consumers. Yes, we've set our business up to be able to pass on that cost. We also think we've got more pricing power than our competitors. And actually, we'll probably hit them harder overall. But we are already set up to show to customers that is a separate cost.