Whitbread plc (LON:WTB) has announced its preliminary results.
Throughout this release all percentage growth comparisons are made comparing the current year (FY23) performance for the 52 weeks to 2 March 2023 to FY22 (53 weeks to 3 March 2022) that was partially impacted by the pandemic and FY20 (52 weeks to 27 February 2020), with FY20 being the last financial period before the onset of the pandemic.
Overview
• Significant profit uplift to above pre-pandemic levels, driven by Premier Inn UK that continues to outperform the UK midscale and economy (‘M&E’) market
• We are making good progress in Germany, with 51 hotels open, giving us confidence that we can achieve our long-term target of 10-14% return on our £1bn of committed capital
• We see considerable opportunities for growth, both in the UK and Germany, driven by the strength of our operating model and the structural decline in the independent hotel sector
• Current trading remains strong, despite macroeconomic uncertainty, with encouraging lead indicators
• The Board is recommending an increased final dividend of £100m or 49.8p per share
• Confidence in outlook reflected with initial share buy-back of £300m, to be completed during H1 FY24
FY23 Group Financial Summary
| £m | FY23 | FY221 | FY20 | vs FY22 | vs FY20 | ||
| Statutory revenue2 | 2,625 | 1,703 | 2,072 | 54% | 27% | ||
| Adjusted EBITDAR† | 888 | 473 | 753 | 88% | 18% | ||
| Adjusted profit / (loss) before tax† 3 | 413 | (16) | 358 | >1,000% | 15% | ||
| Statutory profit before tax | 375 | 58 | 280 | 544% | 34% | ||
| Statutory profit after tax | 279 | 43 | 218 | 556% | 28% | ||
| Adjusted basic EPS† | 162.9p | (2.5)p | 166.3p | >1,000% | (2)% | ||
| Statutory basic EPS | 138.4p | 21.1p | 125.3p | 556% | 11% | ||
| Dividend per share | 74.2p | 34.7p | 32.7p | 114% | 127% | ||
| Net cash / (debt)† | 171 | 141 | (323) | 31 | 494 | ||
| Net cash / (debt) and lease liabilities† | (3,787) | (3,561) | (2,944) | (6)% | (29)% | ||
Financial highlights
• Premier Inn UK: total UK accommodation sales were 55% ahead of FY22 and 37% ahead of FY20 representing a 25.2pp outperformance versus the M&E market4
• F&B sales were 40% ahead of FY22 and 4% behind pre-pandemic levels with increased spend per head outweighed by a decline in customer volumes
• UK pre-tax margins† increased to 19.6% (FY22: 4.5%) despite sector-wide inflationary pressures, driven by strong revenue growth and our ongoing cost efficiency programme
• UK ROCE† increased to 12.9% up from 11.2% in FY20
• Premier Inn Germany: ongoing expansion meant that adjusted loss before tax was £50m; our cohort of 18 established hotels performed in line with the market5 and was profitable in aggregate6 in FY23; acquisition of six hotels completed on 2 March 2023
• Statutory revenue was 54% ahead of FY22 and 27% ahead of FY20
• Adjusted profit before tax was £413m (FY22: loss of £16m) and statutory profit before tax was £375m (FY22: £58m) after charging £39m of adjusting items (FY22: £74m credit), including £1m of net property impairment credits in the UK and £31m property impairment charges in Germany (FY22: £42m net impairment credit), £14m of technology-related project costs and £4m profit from property disposals (FY22: £33m). The Group recognised £nil government support relating to FY23 (FY22: £171m)
• Strong balance sheet: lease adjusted leverage† reduced to 2.7x (FY22: 4.4x) and net cash increased to £171m (FY22: £141m); pension fund surplus was £325m at the end of the period (FY22: £523m)
Segment highlights
Premier Inn UK
| £m | FY23 | FY22 | FY20 | vs FY22 | vs FY20 | ||
| Statutory revenue | 2,508 | 1,668 | 2,050 | 50% | 22% | ||
| Adjusted profit before tax† | 492 | 75 | 414 | 556% | 19% | ||
| Revenue per available room (£)† | 59.45 | 38.69 | 46.91 | 54% | 27% | ||
Premier Inn Germany
| £m | FY23 | FY22 | FY20 | vs FY22 | vs FY20 | ||
| Statutory revenue | 118 | 35 | 12 | 234% | 896% | ||
| Adjusted (loss) before tax† | (50) | (24) | (14) | (108)% | (265)% | ||
| Revenue per available room (£)† | 37.04 | 16.49 | 40.53 | 125% | (9)% | ||
Current trading (seven weeks to 20 April 2023)
• Our strong trading momentum has continued into Q1 FY24 – we are adding new rooms and filling them at attractive rates
• Premier Inn UK: Total UK accommodation sales up 17% versus FY23, with RevPAR £6.08 ahead of the M&E market7
• Premier Inn UK: forward booked occupancy is in-line with last year but at higher ARRs, providing positive revenue momentum into Q1 FY24
• UK F&B: sales were 10% ahead of FY23, reflecting softer trading in the base year and the benefit of a number of commercial initiatives
• Premier Inn Germany: market demand has rebounded after a soft Q4 FY23 and our cohort of 18 established hotels continue to perform in line with the wider M&E market8
Outlook and guidance for FY24
• Current trading is strong despite macroeconomic uncertainties, and we remain confident in the outlook for FY24
• We expect UK inflation of between 7-8% in FY24 and are confident in being able to offset the impact on UK profits through like-for-like sales growth, new room expansion and a focus on cost efficiencies
• In Germany, we continue to expect to incur a loss before tax in FY24 of between £20m and £30m, with an additional £10m adverse profit before tax impact relating to the refurbishment of the c.900 rooms acquired at the end of FY23
• In the UK, we have a current pipeline of 7,400 rooms and expect to open 1,500-2,000 rooms in FY24
• In Germany, we have a pipeline of 7,000 rooms and expect to open 1,000-1,500 rooms in FY24, in addition to the refurbishment of c.900 rooms from our latest acquisition
• We expect total capex expenditure in FY24 to be between £400m – £450m
• Reflecting these points, we have updated our year-on-year guidance for FY24 within this release
1: FY22 was a 53-week period, the impact of week 53: £42m total sales and estimated profit before tax of £4m
2: FY20 revenue includes £9m relating to the Costa disposal transitional service agreement
3: FY22 includes £62m received from the UK Coronavirus Job Retention Scheme, £44m of Germany Government COVID-related grants, £56m of UK business rates relief and £8m of other COVID-related support grants
4: STR data, full inventory basis, 4 March 2022 to 2 March 2023, M&E market excludes Premier Inn
5: STR data, standard basis, 4 March 2022 to 2 March 2023, M&E market includes Premier Inn
6: Aggregate adjusted profit before tax excluding administration and overhead costs for hotels that were open and trading for a full 12 months as at 4 March 2022 (see alternative performance measure (‘APM’) in the glossary and reconciliation at the end of this document)
7: STR data, standard basis, 3 March 2023 to 13 April 2023, M&E market excludes Premier Inn
8: STR data, standard basis, 3 March 2023 to 13 April 2023, M&E market includes Premier Inn
† Signifies an alternative performance measure (‘APM’) – further information can be found in the glossary and reconciliation of APMs at the end of this document
Commenting on today’s results, Dominic Paul, Whitbread Chief Executive, said:
“These are a fantastic set of results. Whilst the recovery in market demand in conjunction with a structural decline in the independent sector has provided a helpful backdrop, it is the combination of our own initiatives and our clearly differentiated business model that has sustained our brand strength and delivered such an impressive operational and financial performance.
“These results reflect the strength of our business model and our persistent focus on delivering an excellent and consistent guest experience across all of our hotels and restaurants. That focus is embedded within our business strategy, that my predecessor, Alison Brittain and the whole Executive team executed brilliantly through one of the Group’s most challenging trading periods. It has also created a platform for future growth, both in the UK and in Germany. This sets us apart from our competitors as we continue to invest through the cycle with a clear focus on capital discipline and operational excellence.
“Having spent time out in the business operations, both in the UK and Germany, I am clear that our strategy is the right one and I am hugely excited about the opportunities we now have in front of us. I want us to strengthen further our position as the UK’s leading hotel brand, improve our F&B performance, continue to drive our efficiency programme, complete some important technology projects and replicate our UK model at scale in Germany.
“I am confident that we can deliver on each of these tasks and more. To do so will require the continued dedication and hard work of our Executive team and all of our 40,000 team members, each of whom plays a vital role in driving our success. I am excited to be leading such a great team and I am optimistic about our prospects.”
Chief Executive’s Review
Group Results
Premier Inn UK was the key driver behind the Group’s strong financial performance in FY23. Total statutory revenue increased by 27% versus FY20 to £2,625m and adjusted operating profit increased to £544m, up 12% versus FY20. This performance reflects the strength of our brand and operating model as well as our ability to mitigate inflationary pressures with strong pricing, estate growth and our continued focus on cost efficiency. An interest credit from the pension fund surplus and higher interest receivable on our cash balances, see note 7, resulted in a 15% increase in adjusted profit before tax to £413m (FY22: loss of £16m and FY20: profit of £358m). Adjusting items in the period resulted in a charge of £39m, including net impairment charges of £33m, to deliver statutory profit before tax of £375m (FY22: £58m and FY20: £280m). A tax charge of £96m led to a statutory profit after tax of £279m (FY22: £43m and FY20: £218m) resulted in an adjusted basic earnings per share of 162.9p (FY22: (2.5)p and FY20: 166.3p) and a statutory basic earnings per share of 138.4p (FY22: 21.1p and FY20: 125.3p).
This strong performance generated substantial free cashflow in the period, funding our continued programme of investment. While total capital expenditure of £546m was £285m higher than FY22, reflecting further investments in our estate, infrastructure and product, net cash also increased to £171m (FY22: £141m).
Against this backdrop and with strong current trading and a positive outlook, the Board is recommending a final dividend of £100m, an increase of 43% versus FY22. The final dividend of 49.8p per share will be paid to eligible shareholders on 7July 2023 and further details can be found in note 11.
Having set out the Group’s capital allocation framework at the time of the half year results in October 2022, the Board has also announced a £300m share buy-back to be completed during the first half of FY24. The programme will commence on 25 April 2023 and end no later than 25 October 2023. Further details regarding the Group’s share buy-back can be found in a separate announcement issued today.
Premier Inn UK – Extending our market leading proposition
Having continued to invest in our estate, teams and infrastructure during the pandemic, we were well-placed to capitalise on the uplift in demand once restrictions were lifted. Total accommodation sales rose by 37% versus FY20, driven by increased occupancy, higher average room rate (‘ARR’) and estate growth. Whilst the performance across the year was evenly spread between London and the Regions, London revenue performance lagged the Regions during the first quarter of the year, but quickly recovered thanks to a rebound in office-based business demand and ended the year 40% ahead of FY20 while the Regions were 36% ahead of FY20.
We saw a return to our well-balanced revenue mix of 50% business and 50% leisure. UK leisure demand remained strong throughout the year with our leisure guests continuing to travel for a broad range of reasons including weddings, events and weekend breaks, helping to drive higher average room rates in the peak leisure periods. UK business demand was also strong, with both office-based and tradespeople volumes remaining robust throughout the year, supported by our own efforts to further improve our business proposition and relationships with Travel Management Companies (‘TMCs’).
The strength of our trading performance continues to be driven by our ‘investing to win’ strategy that is enabling us to capitalise on the structural opportunities in the market, increase revenue and continue to deliver annual cost savings. Further details on the individual drivers behind this performance are outlined below:
Structural market opportunities: The accelerated decline in the independent sector during the pandemic contributed to a 4% reduction in total hotel supply in the UK. This supply contraction, in conjunction with strong hotel demand projections, has created an increased opportunity for Premier Inn as we continue to broaden our network coverage and strengthen our customer offer.
Scale and estate optimisation: We opened over 1,700 new rooms across the UK estate in FY23, providing more great quality hotels in locations where our guests want to stay. We continue to optimise our estate, opening bigger more-efficient hotels and closing smaller, less profitable ones, increasing catchment RevPAR and overall levels of return. At the end of FY23 we had a total of 83,576 rooms across 847 hotels confirming our position as the UK’s largest hotel chain.
Integrated trading and pricing engine: Having designed and developed our own proprietary, automated trading engine, we are able to manage our pricing strategies across all of our hotels centrally, thereby providing a clear view of demand and creating further opportunities to maximise revenue. Improvements over the last two years have also meant we can now integrate our pricing with our digital marketing to help maximise yields across every hotel, every night of the week.
Best in class operations: Our focus on operational execution has cemented Premier Inn as the UK’s number one hotel brand, synonymous with high quality and great value. This achievement is thanks to our 39,000 UK team members who work tirelessly to deliver outstanding experiences for our guests every day.
Increased consumer choice: By providing more flexible pricing options, for a modest premium to our standard room rate, our guests can secure the flexibility they might need when staying at one of our hotels. Our latest product innovation, Premier Plus, is proving popular with our guests that are attracted by the additional in-room benefits for a modest premium to our standard room rate. The result is a meaningful uplift to RevPAR versus a standard room in the same hotel and we now have 4,300 Premier Plus rooms across our estate, up from 2,000 at the end of FY22.
Improved business proposition: The increase in business revenue in FY23 is in part down to the investments we have made in our business proposition over the last two years. By establishing more relationships with TMCs and enhancing the appeal of our Business Account and Business Booker portal, we have increased the volume of business guests whilst also driving incremental RevPAR through our business flex rates.
Each of these factors combined during FY23 to deliver a consistent outperformance, with total accommodation sales 25.2pp and RevPAR £9.63 ahead of the M&E market, reinforcing our position as the UK market leader.
F&B remains an important element of the Premier Inn proposition and also helps drive incremental RevPAR in our hotels. Whilst the hotel market has recovered strongly, the UK pub restaurant market remains challenging with the cost-of-living crisis and high inflationary pressures impacting the recovery in demand. Although higher levels of hotel occupancy meant that F&B sales were 40% ahead of FY22, they remained 4% behind FY20. Despite an increase in spend per head, customer volumes at our branded restaurants, that are focused at the value-end of the market, remained below pre-pandemic levels.
While increased occupancy in our hotels, growth in our estate and increased inflationary pressures drove an increase in total operating costs, strong revenue growth and high operational gearing resulted in UK pre-tax profit margins increasing substantially to be well-ahead of FY22 and only slightly below FY20 levels, at 19.6% (FY22: 4.5%, FY20: 20.2%). This drove a marked increase in UK ROCE to 12.9% which is above that achieved in FY20 (FY20: 11.2%).
A challenging F&B trading environment, together with an increase in market interest rates and a corresponding increase in the weighted average cost of capital (‘WACC’), impacted 13 standalone restaurants and sites where F&B represent a more significant proportion of total sales. As a result, the Group incurred an impairment charge of £54m. However, this was more than offset by the reversal of £55m of previously recorded impairments in Premier Inn UK following a strong trading performance during FY23. The net result was a net impairment reversal of £1m being recorded by Premier Inn UK.
Premier Inn Germany – Aiming to become the No.1 hotel chain
In Germany, pandemic-related restrictions lasted longer than in the UK and were only lifted during the first quarter of FY23. Once lifted, the market rebounded strongly with an increasing number of leisure events, trade fairs and the return of business travel. This led to a strong trading performance throughout the first half and into the third quarter with our cohort of 18 established hotels (those which had been trading for more than 12 months at the start of FY23) trading in line with the M&E market. Whilst the fourth quarter is traditionally our lowest occupancy quarter, market demand was a little softer than expected.
Having executed an ambitious growth strategy over the last three years, that included two large acquisitions being completed during the pandemic, most of our hotels traded ‘restriction-free’ for the first time in FY23. The pace of our expansion also means that the majority of our hotels are not yet mature and will take some time to reach their full profit potential. We are however encouraged by the performance of our cohort of 18 established hotels, which was profitable in aggregate† in FY23. Given our pace of growth over the last three years, together with inflationary pressures, operating costs increased significantly versus FY20 resulting in an adjusted loss before tax of £50m, which was within our previous guidance.
In order to reach scale as quickly as possible, the Group acquired a number of hotel portfolios, each comprising of hotels with a broad range of financial performance. Following an increase in market discount rates and the pace of our expansion in Germany, it has been necessary to impair the value of a small number of hotels resulting in an impairment charge of £31m which is included within adjusting items.
We added 3,167 rooms during the year and now have over 9,000 rooms open in Germany after completing a bolt-on acquisition of six hotels (900 rooms), including a freehold in Austria, at the end of FY23. The hotels we acquired will be refurbished and rebranded as Premier Inn during FY24. We now have almost 7,000 rooms in the committed pipeline and whilst our brand is not yet well known in Germany, with 51 hotels now open (including the newly acquired hotels) and a growing customer base, we are increasing our brand awareness, leveraging our digital marketing and are starting to drive greater guest volumes through our business channels.
We have a clear plan and having invested and committed £1bn on our open estate and committed pipeline, we are determined to become the largest hotel chain in Germany and remain on-track to achieve our long-term target of between 10-14% return on capital.
Capital allocation and share buy-back
The strength of our balance sheet gives us the confidence to continue to invest and seize opportunities which meet our strict investment criteria. Total capital expenditure was £546m (FY22: £261m) and included three freehold purchases and other expansionary capex totalling £362m. Non-expansionary capex of £184m included the planned replacement of 25,000 new beds across our UK estate, our ongoing refurbishment programme and a number of ongoing IT projects including the upgrade to our hotel management system. Our strong operating cashflow meant that, despite the increased level of investment year-on-year, net cash increased to £171m (FY22: £141m) and cash and cash equivalents were £1,165m. Having added over 4,200 additional leasehold rooms during FY23 across the UK and Germany, lease liabilities increased to £3,958m and our ratio of funds from operations (‘FFO’)† to lease adjusted net debt was 2.7x and within our target leverage threshold of 3.7x.
At the time of our interim results in October 2022 and having reconfirmed our investment grade status, we set out our framework for capital allocation, outlining our key priorities over the next few years, based upon future profit and cash generation under a range of potential scenarios. These priorities include:
· maintaining our investment grade status by operating within our leverage target;
· continuing to fund our ongoing capital expenditure requirements and investing through the cycle;
· selective freehold acquisitions and M&A opportunities that meet our return thresholds;
· growing dividends in line with earnings; and
· returning excess capital to shareholders dependent on outlook and market conditions.
Having applied the framework at the year-end as planned, and underlining our confidence in the outlook, we have announced an initial £300m share buy-back to be completed during the first half of FY24. Future returns will be subject to the Group’s financial performance, outlook and the availability of alternative, more value-enhancing opportunities.
Our teams
Our teams are at the heart of our business. They deliver outstanding experiences for our guests and are key to our excellent operational and financial performance, underpinning our position as the UK’s number one hotel brand. With record levels of occupancy, our teams have been working harder than ever to ensure we continue to deliver a consistent, high-quality experience for our guests.
We remain committed to supporting our people and safeguarding their mental, physical and financial wellbeing in addition to helping them develop their careers. Recognising the impact of the challenging macroeconomic environment and cost-of-living crisis, we continued to invest in team member pay, reward, development and wellbeing, helping to support our teams during this difficult time. In return, we have seen high levels of engagement, an increase in average tenure and a sustained quality experience for our guests. We are delighted to have been recognised as a ‘Top Employer’ from the Top Employers Institute for the thirteenth consecutive year, which is a testament to our efforts and the strength of our business culture.
Business strategy
Our strategy is focused on driving the performance of our hotels and restaurants whist working with our stakeholders to ensure we are driving positive change through our Force for Good sustainability programme. Our vertically integrated business model and strong balance sheet underpin the three pillars of our business strategy:
· continuing to grow and innovate in the UK;
· focus on our strengths to grow in Germany; and
· enhancing our capabilities to support long-term growth.
Excluding the pandemic, we have a strong track record of delivering consistent rates of return for shareholders on our growing capital base, whilst continuing to deliver a high-quality proposition at a great price for our guests. As we look forward into FY24, we plan to continue to execute each of these three strategic pillars as summarised below.
1. Continuing to grow and innovate in the UK
Our UK strategy is focused on growing and strengthening our position as the nation’s number one hotel brand, delivering a consistent, high-quality and great value proposition for our guests whilst maximising returns for shareholders. With an estimated 162m room nights, the UK remains a large and important market for the Group and has significant scope for future growth. The independent hotel sector declined substantially during the pandemic, but still represents approximately 45% of the UK market. We believe that operational challenges created by labour shortages and cost inflation may put further pressures on the independent sector, creating structural growth opportunities for Premier Inn across the UK. The budget branded hotel sector has consistently delivered attractive rates of room growth and has also proven its resilience during economic downturns, as guests trade down to lower cost alternatives.
Our plans for the coming year include the execution of the following initiatives:
· Expand and optimise our estate: We currently have over 83,500 rooms with a further 7,400 in our committed pipeline. The reduction in hotel supply, combined with projected strong demand for hotels has created an opportunity to increase our UK and Ireland footprint from 110,000 to 125,000 rooms. The pace and extent of expansion will be driven by the levels of financial return available, drawing upon our suite of potential development options including new builds, conversions, single-site acquisitions and extensions. We will also continue to optimise our estate by repurposing, selling or exiting underperforming properties.
· Effective marketing and dynamic pricing improvements: With less than 1% of our bookings delivered through third party online travel agents (‘OTAs’), our direct distribution model provides complete ownership of the customer relationship and lowers acquisition and retention costs. Our brand marketing, including our latest ‘Rest Easy’ campaign, is a powerful tool in driving bookings, reducing customer acquisition costs and sustaining our market-leading brand awareness scores. Our automated trading engine benefits from a continuous process of improvement and uses predictive algorithms to accurately forecast and price demand, deploying digital marketing spend only where it can drive incremental volume or higher room rates.
· Increase consumer choice through product and pricing innovation: The latest iteration of our standard Premier Inn room (ID5) is in test and is already achieving higher guest scores than our previous standard room type. It is also expected to deliver operational savings when it is rolled out during FY24. We have launched our ‘bed of the future’ in partnership with Silentnight and are on course to replace 89,000 beds by the end of FY24. We are also introducing more Premier Plus rooms and twin rooms, broadening our appeal and attracting a premium to our standard room rate. We offer a broad range of value and flexibility through our different pricing options that are proving popular with our guests. As we look forward, we believe that each of these exciting innovations will drive higher ARRs and enhance our reputation for choice, quality and value so that we stay ahead of the market.
· Further improve our business proposition: We are determined to attract more business customers who tend to drive higher RevPAR and travel more frequently than leisure guests. Having grown our Business Booker and Business Account programmes substantially over the past few years, we plan to drive revenues further through website improvements and by integrating both programmes into a single offering for the benefit of users. We have established good relationships with a number of TMCs over the past few years and these are continuing to drive incremental booking volumes that represented 8% of accommodation sales in FY23.
· Driving F&B: All of our UK hotels have a bar and restaurant, either within the hotel or located next door. Our F&B offer is central to our overall customer offering, helping drive higher RevPAR in our hotels and generating additional revenue from non-hotel guests. Whilst we have continued to try and improve the revenue performance of F&B over the past couple of years, revenues are not yet back to pre-pandemic levels. We will continue to work on improving our F&B performance to get us back on track. Initiatives include: new menus, brand-led initiatives focusing on key events and further procurement improvements – all driven by market research and customer feedback.
2. Focus on our strengths to grow in Germany
Our ambition is to become the market leader in Germany, replicate our UK model and create substantial value. We have committed £1bn of capital to date and expect to deliver long-term return on capital between 10-14%. The German hotel market today is very similar to where the UK was 15 years ago: it is highly fragmented, with a large independent hotel sector, a relatively small, branded budget hotel segment and high volumes of domestic and inbound travel. The market re-opened fully following the pandemic during the first quarter of FY23 and rebounded strongly during the first three quarters, albeit with a softer market performance during the seasonally quiet fourth quarter.
Our estate now stands at 51 hotels, with over 9,000 rooms open and a further 7,000 rooms in the committed pipeline. With our continued planned expansion, we are determined to become the largest budget hotel brand in Germany. We plan to grow our estate through organic growth and bolt-on M&A, with our latest acquisition of six hotels, including a freehold in Austria, having completed at the end of FY23.
Whilst we are not yet at our target levels of return, we remain on-track with our plan and are making good progress towards becoming a business of scale. As our German network expands, we are raising our brand awareness through digital marketing and other promotional campaigns and channels. With a high number of international trade fairs and a large, short-stay domestic business travel market, we are focused on improving our business proposition and have established a network of local sales managers to help build and secure relationships with corporates whilst also promoting our Business Booker and Business Account programmes. We are continuing to refine our operating model as well as tailor our customer offer for localised preferences such as modified breakfast menus and new payment methods. We are also trialling several new products which have been successful in our UK hotels including Premier Plus, additional pricing options and our new standard room format (ID5) to help drive revenue growth.
The trajectory of our cohort of 18 established hotels underpins our confidence in replicating our UK model. This cohort of hotels was profitable in aggregate† in FY23 and we remain on-course for our entire estate to breakeven on a run-rate basis during calendar year 2024. Having increased the size of our estate rapidly, through both organic growth and acquisitions, we are building a scalable platform in Germany from which we plan to grow further.
3. Enhancing our capabilities to support long term growth
In order to safeguard the execution of the first two pillars of our strategy, we need to continue to invest in our infrastructure and core capabilities. Over many decades, we have developed a lean, financially strong and resilient operating model. Whilst this requires ongoing investment, it also continues to deliver attractive long-term returns. Given our scale and asset-backed balance sheet, we have the financial flexibility to continue to invest in our teams and systems, extract further cost efficiencies and ensure we remain a Force for Good by continuing to conduct business in the right way.
Financial flexibility: The Group’s balance sheet is strong, with net cash of £171m at the end of FY23. This means we can continue to invest with confidence, even during periods of heightened macroeconomic uncertainty. Having reaffirmed our investment grade status during 2022, the strength of our financial covenant makes us a highly attractive partner when being considered for leasehold and other transactions, both in the UK and Germany. Our financial strength and significant cash flow mean we can self-fund our capital expenditure programme that is integral to our ‘investing to win’ strategy. It also means we can grow dividends in line with earnings and return excess capital to shareholders. Having the flexibility to purchase attractive freeholds and execute bolt-on M&A in Germany without the need for external financing is a competitive advantage and underpins our long-term growth plans. Our capital discipline and rigorous investment appraisal process ensures an efficient allocation of capital to drive attractive long-term returns.
Freehold backing: Approximately 54% of the Group’s hotels are freehold with the remaining 46% operated as leaseholds. Whilst this mix of assets differentiates the Group from many of its competitors, such a significant freehold estate also provides us with a number of operational and financial advantages:
· total control over the initial development of the hotel as well as all maintenance and redevelopment;
· access to development profits through sale and leasebacks;
· a strong financial covenant, helping to secure more favourable lease terms with landlords and attractive financing terms with lenders;
· protection from increasing property costs and therefore lower earnings volatility during economic downturns; and
· an additional and flexible source of funding, one that can often be available at more attractive rates than other sources of finance.
Being flexible between freehold or leasehold when approaching new property opportunities improves our prospects of securing the best assets in the best locations. It also means we can optimise the size and format of our assets in order to maximise returns.
Technology: We continue to invest in our IT platforms and infrastructure, enhancing our digital capability, driving additional revenue growth and cost savings opportunities. During the second half of FY24, we will start to roll-out our upgraded hotel management system in both the UK and Germany as well as begin the process of improving our digital networks and HR system. These multi-year projects are ongoing and are expected to release operational and financial benefits in the future.
Lean and agile cost model: We have a long track record of delivering material cost efficiencies. Our teams continue to seek new and alternative ways of working to both improve the service to our guests and drive savings through procurement and process improvements. With heightened inflationary pressures, such initiatives are more important than ever, and we remain on-track to meet our previous commitment to deliver £140m of savings between FY22 and FY25.
Operating responsibly and sustainably: Our scale and national coverage mean we have a significant presence across the UK and a growing presence in Germany. Recognising our responsibilities in those communities where we have a presence, our long-established Force for Good sustainability programme continues to drive our social and environmental agenda. Stretching targets are embedded within our overall business strategy and hold us accountable for the change we seek to implement, whether that is reducing our environmental footprint, supporting our team members or contributing to our communities.
Current Trading – seven weeks to 20 April 2023
UK trading has remained buoyant with strong demand in both London and the Regions. Total UK sales were 17% ahead of the same period last year, with a RevPAR of £60.98 and representing a continued RevPAR outperformance versus the wider M&E market1 of £6.08. Occupancy in the period was 81% and average room rate was £74.94.
Total UK food and beverage sales were up 10% vs the same period in FY23, reflecting softer trading in the base year as well as a number of commercial initiatives put in place since the start of the year.
In Germany, demand has picked up steadily during the first quarter helped by a number of trade fairs and rising business and leisure volumes. Total accommodation sales were 140% ahead of the same period in FY23 and RevPAR was €47.94 with occupancy at 61%. RevPAR for our cohort of 18 established hotels was €56.47, which continues to be in line with the M&E market2.
1: STR data, standard basis, 3 March 2023 to 13 April 2023, M&E market excludes Premier Inn
2: STR data, standard basis, 3 March 2023 to 13 April 2023, M&E market includes Premier Inn
Outlook and FY24 Guidance
Despite ongoing macroeconomic uncertainty, with strong current trading, a healthy balance sheet, significant structural opportunities in both the UK and German M&E hotel markets and an ongoing programme of cost efficiencies, we remain confident in the outlook for FY24.
As FY23 was a full trading period which was largely unaffected by pandemic-related restrictions, we are returning to providing year-on-year guidance. A summary of our guidance for FY24 is detailed below.
UK
· Sales: every 1% change in accommodation sales vs FY23 has a £15m – £16m impact on profit before tax and every 1% change in F&B sales vs FY23 has a £4m impact on profit before tax
· Inflation: year-on-year net inflation is expected to be between 7-8% (no change to our guidance at the time of our Q3 trading update), including labour, F&B and utilities which are now 100% hedged for FY24, mitigated by a positive movement in business rates
· New rooms: 1,500 – 2,000 (c.90% leasehold)
Germany
· Expect a loss before tax in FY24 between £20m and £30m with an additional £10m adverse profit before tax impact relating to the refurbishment of the c.900 rooms acquired at the end of FY23
· New rooms: 1,000 – 1,500 (c.70% leasehold)
Central and other costs
· Interest on cash balances in line with Bank of England rates
Cashflow
· Total capex: £400-£450m – depending on future M&A opportunities and leasehold/freehold mix
A Force for Good
Being a Force for Good is vital to the sustainable and long-term growth of our business. This is why our sustainability programme is embedded across all business functions, ensuring that responsible business practices are integrated into our operations. We have set some stretching targets and while our programme is broad, it is based on robust materiality analysis and focuses on our commitment to enable everyone to live and work well and to look after the environment and resources on which we, and our business depend.
Our Force for Good programme is central to our business culture and provided a strong foundation as we exited the pandemic and moved back into revenue growth. With an ever-increasing focus and more stringent regulatory demands, we are proud to have moved forward on many of our sustainability objectives and to have set new targets to address our material issues.
Last year we committed to obtaining SBTi accreditation and this year both short-term, and long-term, targets for Scopes 1, 2 and 3 have been submitted and are undergoing review. We hope to receive validation early in FY24. In the meantime, we have been making good progress against all of our carbon targets and we will soon publish our first Transition Plan. This is in line with the Transition Plan Taskforce guidance and presents our action plan for how we will get to net zero carbon over the coming years. Trials undertaken over the last year relating to the electrification of our estate have gone well and we are continuing at pace with our first gasless hotel in Swindon. We continue to build new hotels to the BREEAM Excellent standard and have also begun working on our turnkey specification, with the aim that all new hotels will be built to this gasless standard. These are all important steps towards our net zero goal and we will continue our work this year by undertaking site ‘net zero ready’ audits and testing new technology to start to move the existing estate away from gas through refurbishments. We ended the year with a carbon intensity figure of 52.5% against our baseline year of FY17.
Our latest TCFD report, together with the 2023 Annual Report, outlines the most material risks and opportunities for our business in relation to climate change. We have once again worked through the scenario analysis and quantification process, assessing which risks and opportunities have the potential for the highest financial cost or gain. This helps to ensure that climate change is considered in our financial decisions. We are also currently analysing the best approach to setting an internal carbon target to strengthen the linkage between financial planning and climate impact. Our approach to green finance is illustrated by the use of our Green Bond proceeds, with £504m having now been allocated over the last two years on green projects across the business. We plan to allocate the remaining proceeds during the coming financial year.
Carbon in our supply chain has also been an area of focus. Having set our Scope 3 reduction target, we have worked with our suppliers to understand where they are on their emission reduction journey. We have started to work on some of the most material categories as a priority, such as F&B and Construction. We recalculated our Scope 3 emissions this year for the first time since the base year of FY19 and results show that we have reduced our carbon emissions intensity by 28.1% since the base year. We will be working on developing specific supply chain strategies for our highest emitting categories in the coming year.
During the past year we have been working on a new target to reduce our environmental impact by setting a water reduction target to both minimise water usage across our estate and to prioritise water management in high-risk areas. This new target is to reduce water usage by 20% per sleeper by 2030. We have also been working through the initial guidelines from the Taskforce on Nature-related Financial Disclosures (‘TNFD’) to begin setting our biodiversity strategy and understand what our company-wide target should be, aligning with a nature positive approach. We plan to provide an update on this during FY24.
Our commitment to cut food waste in half by 2030 and to eliminate single-use plastics by 2025 remain challenging. The impact of the pandemic on our food waste has been material and as we return to more normalised figures post-pandemic, our food waste has reduced by 12% from our baseline year. We have continued our partnership with FareShare to donate food to charity partners and in FY24 we will adopt a renewed focus on strategic food waste reduction with our team members, suppliers and waste service provider to identify potential routes for further waste reduction. With single use plastics, through collaboration and engagement with wider industry groups, it has become clear that elimination targets are difficult to meet. We have been working hard on our target and have further defined our scope to align with the UK Plastics Pact, focusing in on the shared ‘problematic’ plastics and prioritising the elimination of them as we continue to tackle the wider challenge of capturing data for single use plastic across the global value chain.
Having raised nearly £22m for Great Ormond Street Hospital (‘GOSH’) over the past 12 years, we have reset our commitment to continue to fundraise for the charity and set new fundraising targets of £3m per year with an overarching total of £20m. We are excited to start this new phase in our partnership with GOSH as we continue to help them to raise money to support some of the most seriously ill children across the UK.
We also look to support those in need on an ad hoc basis. For example, during a new bedding roll out, we partnered with a charity partner to send over 50,000 duvets and pillows to those displaced by the war in Ukraine. This is in addition to the £688,000 that we raised for DEC (‘Disaster Emergency Committee’) at the beginning of the year.
Having conducted a survey to monitor team member engagement across Operations and Support Centre, we received a 79% positive response to ‘recommend this as a place to work’. We are pleased that so many of our team members feel this way as we strive to ensure they are listened to, developed in their career paths and are part of a diverse and inclusive community.
We continue to make good progress on bringing to life our eight Diversity and Inclusion commitments across Whitbread. We are on-track to meet our female representation target, with 40% of senior leadership positions already held by women and are working towards our target to have 8% ethnic minority representation. Our four inclusion networks, enAble (disability), Gender Equality, GLOW (LGBTQ+) and Race, Religion and Cultural Heritage are now all well-established, and, alongside providing a community for our teams, are taking an active role consulting with our teams on initiatives such as: listening with our Black colleagues to further understand their experience of working for Whitbread; consulting on our new accessible rooms concept (supported by the Business Disability Forum); and launching a new workplace adjustments policy and process.
We celebrated several cultural events during FY23 to support our communities and provide education to our teams. Our Pride celebrations were a particular highlight, where our sites got involved and GLOW participated in the Manchester Pride march in August 2022 with participation from our teams from across the UK and Germany. Representation is important to us and we continue to be guided by our 2023 and 2026 representation targets on gender and ethnicity. Our recently released 2022 Gender and Ethnicity Pay Gap report demonstrates the action we are continuing to take as an organisation on this important issue.
We believe that our sustainability credentials set us apart from many of our peers and so have been working to share more of what we do with our team members, shareholders and customers. We have started to embed ESG messages into our brand and marketing strategies (consumer and B2B), using in-site activations and through our ‘Rest Easy’ marketing campaign. This is an ongoing process and one that we will continue during FY24. We actively engage with our key stakeholders and are pleased to report our sustainability ratings with MSCI (AA) and Sustainalytics (medium risk). We were also placed in the Dow Jones Sustainability Index and in the Corporate Sustainability Assessment Yearbook, a reflection of the work that we are doing in this space and scored B in both the Carbon Disclosure Project’s climate change and water disclosures this year. It is through these activities that we are able to drive meaningful change with the overall aim of enabling people to live and work well.
For further information on our Force for Good programme, please see our most recent ESG Report: https://www.whitbread.co.uk/sustainability/our-strategy-targets/.
