Whitbread PLC (WTBCF) CEO Alison Brittain on Q4 2019 Results - Earnings Call Transcript

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About: Whitbread PLC (WTBCF)
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Earning Call Audio

Whitbread PLC (OTCPK:WTBCF) Q4 2019 Earnings Conference Call April 30, 2019 3:30 AM ET

Company Participants

Alison Brittain - Chief Executive Officer & Director

Nicholas Cadbury - Group Finance Director

Conference Call Participants

Vicki Stern - Barclays

Jamie Rollo - Morgan Stanley

Richard Clarke - Bernstein

Tim Barrett - Numis

Alex Brignall - Redburn

Julian Easthope - RBC

Stuart Gordon - Berenberg

Joe Quinn - Davy

Alison Brittain

Good morning, everybody. Welcome to Whitbread's Full Year Results and hello to everybody also, who is listening through our webcast. I'm joined as always by Nicholas Cadbury. And in terms of our agenda this morning, I will take you through some of the highlights of the year first.

I'll then hand over to Nicholas who will explain our financial performance in more detail. Nicholas will also take you through the reporting impact of IFRS 16, as well as providing more information on our next steps in terms of returning the proceeds from the Costa sales to our shareholders. And then I'll give you a more detailed update on the strategic progress we've made this year and it has been a very significant year in Whitbread's history.

I'll also talk to you about how our resilient model and plans to continue to invest through the cycle will ensure that we are in a good position to capitalize on long-term opportunities despite the current challenging political and economic backdrop in the U.K.

And then finally, of course, we're delighted to answer your questions -- or three questions each as has become the way we do Q&A now in these forums, three questions with a Part A and Part B to at least two of them I seem to recall.

So, let's begin. Look it's hard to believe this, but it was only a year ago almost to the day at our last full results announcement in April last year that we announced our plans to demerge Costa to create two successful focused independent businesses. So, it really is true. A year is a long time in hospitality. Because undoubtedly the highlights of the year this year was not only announcing that demerge, but agreeing the sale to Coca-Cola of the Costa business in August and then completing the transaction on the 3rd of January this year.

The £3.9 billion transaction price represented a 16.4 times EBITDA multiple which is a credit to the Costa business and a significant premium to market valuations. This has enabled Whitbread to do several things; to delever, to remove the pension deficit, to fund the acquisition of 19 hotels in Germany from Foremost Hospitality, and to commit to return a significant portion of the sale proceeds to shareholders.

Whilst this fantastic transaction gained most of the headlines, I'm really pleased with how our teams have continued to operate Premier Inn during quite challenging trading conditions as well as making good initial progress to separate the Costa business in an efficient manner.

Premier Inn continues to grow its market share in the U.K. with over 76,000 rooms including almost 2,000 hub rooms and a brand-new ZIP hotel. The U.K. pipeline stands at about 13,000 committed rooms with many more in active negotiation as we build the network towards 110,000 rooms.

Alongside the success in the U.K., our progress in Germany has also accelerated. We've opened our second hotel in Hamburg in February and we now have almost 7,000 rooms in the committed pipeline.

To support our ambitious growth in both the U.K. and Germany, we've also maintained our focus on the efficiency program announcing in February our increased ambition to save £220 million over the next three years.

We delivered a resilient financial performance during the year despite the increased level of political and economic uncertainty which impacted domestic demand for short-stay travel, particularly outside of London. This was underpinned by our progress on the efficiency program which has achieved a £190 million of savings over the last three years and will continue to be a significant part of our strategy for the continuing business.

We maintained our strong free cash flow conversion at 83%, which along with a substantial proceeds we've received from the sale of Costa, enables us to increase our investment in the attractive opportunities Premier Inn has to grow in both the U.K. and Germany.

Our performance during the year means that I'm pleased to announce a full year dividend of 99.65 pence. This is a full year payment of £180 million, representing a 2% increase year-on-year on a pro rata basis reflecting the sale of Costa in January 2019.

Premier Inn continues to grow at pace with good revenue and profit growth and strong return on capital at 12.2%. We opened our second hotel in Germany at the end of the year and our hotel in Frankfurt is already trading at market level rate and occupancy with 100% direct bookings and excellent guest scores.

Before I hand over to Nicholas to provide an update on the numbers, I want to thank my team for their hard work to deliver the strategic progress during the year as well as all of them that worked on -- so hard on the Costa transaction. Having a committed and talented team is a significant competitive advantage as we move into the next exciting phase of Whitbread's journey.

I'll now hand over to Nicholas who can take you through the numbers in a bit more detail.

Nicholas Cadbury

Thank you, Alison and good morning everyone. I'm pleased to present our first set of results following the successful completion of the sale of Costa. All of the numbers presented today are for our continuing Premier Inn business unless they're marked otherwise.

Revenues were up 2.1%, and the underlying profit for the continuing business were in line with our expectations at £438 million, up 1.2%. There were £178 million of non-underlying items during the year, a significant part of which relates to the separation of systems and the reorganization of teams, but all accounted for under the continuing business.

We also had profit of £3.5 billion on the sale of Costa, classified under discontinued operations. We continue to have a highly cash-generative model, and converted 83% of our operating profit into discretionary free cash flow.

This enables us to invest in our growth strategy and strengthen our brands, which in turn is delivering strong returns for the continuing group at 12.2%. We are pleased with this result given the level and timing of our new capacity, we've added over the year and the environment we're trading in.

It has been a year of two halves. And trading conditions during the second half of the year have been challenging as most of you will no doubt have seen through the weekly market data.

Our revenue growth comprised of 3.5% increased in hotel accommodation sales driven by a 5% new capacity growth, offset by a small decline in our like-for-like performance.

Our London growth remains strong at 7.3%. And although our regional sales grew ahead of our market at 2.5% for the year, as the market slowed our regional growth was only 0.5% for the second half.

You will all have seen that the fourth quarter in the regions was particularly tough market with our total accommodation sales for the whole business flat for the quarter. This is below the market as a whole as our sales are disproportionately weighted to the regions, and also the business customers where we saw demand weakened the most.

In the UK, our operating profit was up just under 1%. And we had losses in Germany, as expected of £8 million as we get set for the expectations -- expansion ahead of us.

On the left of this slide shows the margin progression, and on the right the strong long-term returns of Premier Inn. Despite the challenging trading conditions and continued high level of inflation in our industry, we held our margins broadly flat at 24.4%.

You can see that cost inflation in red impacted our margins by just under 3 percentage points, which we have then successfully recovered in total through our ongoing efficiency program.

On the right-hand side, you can see that we have consistently maintained a level of site returns at around 13% over the last five years, while at the same time increasing the amount of invested capital in the business by a third. This slide shows our cash generation for our continuing and discontinuing business

We have a highly cash-generative model. Our business enables good working capital efficiency, and we focus on deploying our maintenance capital as effectively as possible.

This has enabled us to convert 83% of our operating profit into £498 million of discretionary free cash flow this year. This cash flow has been used to fund our capital -- growth CapEx of £311 million, our contributions to the pension scheme and the dividend payment, totaling £187 million.

Turning to capital investment, maintenance and product improvement capital, which is vital to ensure Premier Inn's consistent quality, was £151 million in the year. This not only reflects the importance placed on maintaining the high standard of the hotel estate, but also the ongoing investments we are making on our IT transformational program.

We invested £226 million to build and extend hotels in the UK, and £85 million in Germany and the Middle East, as we continue to build out the committed pipeline. These investments contributed to over £600 million invested in growth opportunities over the last two years.

In the UK, this invested capital will deliver the same level of strong site returns we see today at around 12% to 14% after one to four years of maturity.

In Germany, we are building good foundations for the long-term growth. And although returns will be low, in the medium term, due to the high number of hotels in construction as well as a slower maturity as we create a business of scale, we expect our hotels to deliver close to UK returns over the longer term.

We laid out our approach to capital structure at the Capital Market Day in February. A key aspect of our approach is to ensure we retain flexibility to fund opportunities as they arise through access to low cost marginal capital.

You can see from the table on the left that following the sale of Costa, we are in a strong position with £2.5 billion of net cash. I will cover the return of surplus capital shortly, but just to remind you that our target leverage position remains at or below 3.5 times lease-adjusted net debt to funds from operation.

We have progressed back to this level of leverage through the return of surplus capital. But as outlined in February, we will preserve some additional leverage capacity to fund our expansion plans in Germany through a mix of freehold property, new leases and acquisitions.

It is also worth saying that the Costa sale also helped us improve our balance sheet by enabling us to contribute £380 million of cash, to our pension fund across the year-end accelerating the previously agreed future commitments.

Turning to the year ahead. Most of the information here is exactly as we presented at our third quarter trading update in January. However, as I mentioned earlier trading conditions during the last quarter of the year were tough. This has continued into March with the midscale and economy regional market RevPAR where the majority of our business is down by more than – by just more than 4%. I guess, I'm not surprised by this as whilst as the political uncertainty continues it is very difficult for businesses in general to plan. A discretionary hotel spend is one of the first places to rationalize and this is exactly what we are seeing.

Leisure travel has so far remained fairly resilient whilst we are seeing a decline in short-lead business travel and in particular on those high-rate Monday to Thursday business nights. It is still very early in the year, too early to know how the market will evolve. And it is fair to say that a few months ago we had not anticipated this level of decline in the market demand. Therefore, you will need all – we will all need to follow the budget market trends closely over the next few months, particularly in the regions. And as many as you know, if we held all other things constant every one percentage point movement in market RevPAR can be worth £12 million to £15 million of profit to us.

Our view of costs and efficiencies have not changed. We still expect to see around £70 million worth inflationary and investment cost increases this year and around £10 million of operational dis-synergies following the separation of Costa. We will continue to make good progress on our efficiency program and plan to partially offset £40 million to £50 million of this increase as we said in January. As also previously mentioned in January, we also expect start-up losses of around £12 million in Germany.

So, whilst in the near-term, the near term may not be easy with our brand and balance sheet strength we're in a far, far better position than the vast majority of our competition, especially the large declining independent sector. The longer-term opportunities in the U.K. and Germany are still – therefore still highly attractive and we will remain with our investment program of openings and brand standards that will set – we set out in the Capital Market Day.

I will now briefly cover the impact of the new accounting standards that changed the way we account for and recognize lease contracts. We will be adopting IFRS 16 for the current year including our interim reporting in October. The main areas we are affected by is for the long leases on around about 350 of our leasehold hotels. The basics of IFRS 16 are that we are required to recognize on our balance sheet a liability for future lease payments and an asset for the right of use of the property. This then impacts our income statement, which I will walk you through shortly.

However, we must stress that revenues, EBITDAR and cash flow are entirely unaffected by these changes. And in turn, this means our views on unit economics and capital allocation are also entirely unaffected. At this stage, IFRS 16 also does not impact our views on leverage nor the views of our rating agency. We remain with lease leverage at 8x rent.

As you can imagine, we spent some time assessing the reporting impacts of IFRS 16. We're still working through some of the detail, but we are now in a position to share an indicative view of how this standard would have impacted last year's results.

Looking at our balance sheet. At the end of the year, we had net assets of £6.2 billion. We then recognized the discounted present value of committed lease payments, which will be around £2.5 billion. And we recognized the value of rights to use the assets of around £2.1 million. This results in a reduction of net assets by around £400 million to £5.8 billion.

In our income statement, as mentioned our earnings before interest tax, depreciation and amortization and rent is entirely unaffected by this standard. And therefore, the EBITDAR will become an increasingly important operating performance metric. The P&L no longer includes a rental expense, which is currently within the operating profit at £169 million.

The rental expense will be replaced with non-cash depreciation charge against the assets and a notional interest expense attached with a liability. The depreciation charge for the year would have been around about £90 million and recognized with an EBIT. As a result, EBIT would have actually increased by around £80 million. The notional interest charge would have been around £110 million and recognized within the net finance costs below EBIT.

As you can see on this chart, the total of depreciation and interest on the accounting standard is £200 million and is £30 million higher than the £169 million rental charge we are removing. So, overall profit reduces by around £30 million. We provided some further details on this in Appendix II. But the main point here is over the life of the lease the total P&L charge is much higher than cash rent in the early years and far lower in later years. Given the significant changes to statutory financial reporting, a greater focus on the EBITDAR and cash flow as I just mentioned will be required in the year ahead. I will provide further updates and impact on the key performance when we report in our interim results in October.

I'd now like to provide a short update on the return of surplus capital, we outlined at our Capital Market Day in February. I used this slide back in February and there are no changes to our view on how the £3.9 billion of proceeds from the Costa sale will be used. £100 million of proceeds are to cover separation costs, transaction costs and tax. And as you know, we reached an agreement with the pension trustees and have already paid a contribution of £380 million eliminating the deficit.

You will hear from Alison shortly about our preparation to complete the acquisition of 19 hotels in Germany towards the end of the financial year. We are retaining around £300 million to pay for the acquisition and to fund the conversion of these hotels into the Premier Inn format. We will also retain around £500 million to support short-term deleveraging, which provides us significant capacity for further expansion in Germany. This leaves at least £2.5 billion surplus capital to be returned to shareholders which we are now well-progressed in doing.

We began an initial on-market buyback program in January, which will end on the 10th of May. As of the 26th of April, we had repurchased a total of £383 million worth of shares 4% of the total shares outstanding. Once we complete the initial buyback program, we will then move to the larger part of the capital return being a tender offer to repurchase up to £2 billion of shares. We expect documentation to be available and distributed to shareholders in late May to early June with the offer to then be voted on alongside our AGM on the 19th of June. We're still finalizing the exact dates of the offer period, but expect the offer to close in early July.

Regarding the offer itself, we spent some time looking at a range of different structures. At this stage, we believe a variable price offer will strike the right balance of efficiency and the level of subscription. Given our tender offer, we'll need to be open for 20 business days. We are exploring setting up the price range by reference to the Volume Weighted Average Price -- VWAP of shares at closing of the offer subject to a price cap.

While setting the VWAP range, there is a couple of important trade-offs to consider; firstly, those shareholders who are looking to exit; and secondly, our long-term continuing shareholders who may have inherent conflicting interests. An existing -- an exiting shareholder will want to maximize the price possible while a continuing longer-term shareholder is likely to want the lowest price to maximize the number of shares we repurchase and to avoid giving away value.

Our objective will be to strike the right price and we will be focused on maximizing the long-term value created by the total capital return program rather than maximizing the quantum returned in a short period of time. As we said at the Capital Market Day after the tender offer, we will review any surplus capital and further returns will be considered. Full details of the offer will be available in the tender offer circular to be distributed in due course.

I'll now like to hand back to Alison to provide a strategic update.

Alison Brittain

Thank you, Nicholas. In the light of the significant changes to Whitbread over the last 12-months, I'd like to do a brief recap only a few I promise of the slides we presented at the Capital Markets Day in February. And then I'll take you through the strategic update for the year.

This first slide demonstrates Premier Inn's unique business model, which delivers an unrivaled mix of quality and value to millions of customers and offers a significant competitive advantage in the budget domestic short-stay market. Premier Inn is consistently voted the UK’s favorite hotel in a number of leading third-party studies and many of our sites also win specific awards.

Premier Inn delivers best-in-class operational performance with high occupancy levels. And as far as we can tell at over 97%, our rate of direct distribution is the highest of any scale hotel operator anywhere in the world. We continue to achieve best-in-class operational performance and leading customer satisfaction whilst also delivering strong financial performance. Over the long term, we've grown sales and profits and have converted these profits into cash and delivered a strong return on capital premium over the cost of our capital thereby generating significant value for shareholders. I was wondering if the roof is going to fall in.

The next slide. The chart on the left-hand side of the page highlights the capacity we've added and the market share we've gained in the UK to generate this value. Since 2010, we've increased our market share from 6% to over 10% through network expansion primarily by winning share from the under-invested independent sector. Given the still high proportion of the market being served by independents, we see an attractive ongoing opportunity to continue investing in new capacity and to win further market share. This means, we can continue to grow our total sales ahead of the market and our plans are not contingent on short-term conditions.

Given our scale, we can also find ways to improve our efficiency to offset rising costs, while smaller operators may struggle to offset those headwinds. Consequently, pressure on the independents will continue to grow and that offers us an ongoing structural opportunity, which we're best placed to acquire. We have an exciting opportunity to invest in Germany. The German market is large around 30% larger than the U.K. and it's been growing at a faster rate.

Furthermore, the market is even more fragmented and even more domestic travel-orientated than the U.K. Around 75% of the market is small independent hotels and around 80% of travel in Germany is domestic travel. The total budget-branded sector in Germany is only around 8% of the total market and as a comparison that's 27% in the U.K., whilst we have attractive opportunities to grow and clear plans to deploy capital to strong returning investments, we're not without challenges.

In the fourth quarter, we saw a decline in business and leisure confidence leading to weaker domestic hotel demand. This weakness has increased into March and April particularly in the regional business market and that's coincided with the most acute period of political and economic certainty in the U.K. that I can remember.

At this stage in the new financial year, it's too early to know how that business confidence or its impact on the market is going to evolve. However, it's important to note that, our strong balance sheet, our ongoing efficiency program and the integrated operating model we operate means that we are likely to be more resilient in a weaker market. In addition, our ability and willingness to continue to invest through this period will place us in an advantaged position in the future.

In these more challenging times, it's often the way that businesses close down their investment programs until better times return. In fact in the last difficult economic period in 2008 to 2010 that's just what Premier Inn did. And with hindsight would have preferred to have made more progress during a period where our competitors slowed their own investment and when independents closed.

During the beginning of the last recession profits did dip, as you can see on the chart leading to a dip in return on capital. However, Premier Inn recovered quickly and as you can see has gone on to double its revenue and profits and increase its return on capital. So although short-term returns are not immune to weak markets, as we're facing now we do bounce back. We operate in a long-term business and invest in assets for 25 to 50 years. Fortunately, our business model is built to be resilient through the inevitable economic cycles that occur over those very long periods.

Given the scale and nature of the structural opportunities to grow that are available to us we intend to continue to invest through these challenging times to build our brand and to deliver a sustainable growth platform for the future. Our unique vertically-integrated model, which I've talked about being resilient is what gives Premier Inn its competitive advantage versus a segregated value chain.

In the domestic budget hotel segment, where there is a lower overall RevPAR there's simply less to be shared out amongst different operators of the chain. In our model, we decide where we would like a hotel maximizing our ability to win customers as well as how to fund and manage its development.

The brand is our own, and we have operational control of our hotels from the cleaning and the maintenance through to serving breakfast and dinner. This means we can control the network-wide experience, so that our customers can get the same high quality in every Premier Inn they visit. By consistently delivering the essentials and by investing in superior digital distribution, we sell over 97% of our rooms directly to customers which means we can deliver the great experience that our customers demand at the right price, whilst also earning a strong return for our shareholders.

Our overriding purpose as a business is to delight our millions of guests with exceptional service and value for money. We're able to do this consistently 365 nights every year in our over 800 hotels by focusing on the six key elements shown on this slide. You've seen these elements in previous presentations, so I'm not going to dwell on them although they do remain key to our success. And scale is also fundamentally important. Delivering a high-quality and consistent experience whilst charging as little as £19 per night and generating a strong return for shareholders would not be possible without the economic advantages that our scale provides.

As well as being focused on remaining a growing and profitable business, we're also committed to being a responsible organization. Our Force for Good program is based on what's important to our teams, our communities and to the environment. We continue to run our successful apprenticeship program as part of our wider job creation program which creates over 1,000 new jobs a year across the U.K. with a focus on broad career progression in the hospitality sector.

We've raised more than £14 million to-date for Great Ormond Street Hospital and we also support communities in which we operate. We've always been committed to treating the environment with respect. And this year we've made significant steps to improve our energy consumption. All of our U.K. hotels are powered by renewable energy and more than 20% have now got electricity-generating solar panels.

Premier Inn is well known for its network strength across the U.K. with over 76,000 rooms and 800 hotels and that's about 30,000 more rooms than the next largest competitor. The most important factor in network planning is securing a hotel of the optimum size in the best possible location. Our catchment analysis goes down to postcode level and this planning expertise coupled with a flexible approach to access land through either freehold or leasehold ensures that we have maintained our superior network presence.

We continue to see more white space for Premier Inn to expand and at present, we're targeting to reach 110,000 rooms in the U.K. Over 70% of our committed pipeline is going into catchments where we have little or no capacity today and the remaining additional will go into high-capacity catchments such as London or city centers where we know there is high customer demand.

The right-hand side of this slide highlights this along with Premier Inn's growth. We've maintained strong unit level economics. This example of a 100-room hotel outside of London illustrates how we achieve a return on capital between 12% and 14%. Our integrated trading engine not only helps us mature our new hotels efficiently, but is also integral to our marketing strategy and how we drive the highest net RevPAR as opposed to a focus on gross RevPAR which is the focus of the weekly market data.

Table on the left-hand side of this slide, highlights some of the different ways we can drive RevPAR. While all the channels increase the gross RevPAR, we prefer the channels at the top of the table which have the lowest acquisition costs and therefore also achieve a higher net RevPAR. As well as maintaining a more direct relationship with our customers, our distribution strategy enhances our financial performance by supporting a superior margin structure that enables us to maintain our consistent brand standards by reinvesting back into the product. Critically, we now achieve over 98% of our distribution without paying third parties any commission.

Our use of commission-based OTAs continues to decline. However, it's worth noting that OTAs are useful for low-occupancy nights in hotels with higher international customer mix where Premier Inn may not be front of mind. A good example of this would be an airport hotel on a weekend or Sunday night. Every day, we have a choice between flattering our growth RevPAR by using more expensive distribution channels or focusing on net RevPAR which is more sustainable and delivers a more profitable outcome.

Critically over time, our direct strategy will keep our costs low and therefore our prices low adding to our brand appeal and supporting our strategy of ongoing network growth. It's been a few years since we announced the launch of Whitbread's first efficiency program which we did in 2016 and we overachieved in the delivery of the initial targets.

Going forward, our ambition with respect to the level of cost savings we can achieve is still high. We believe there's a further £120 million of OpEx and £100 million of CapEx savings to target over the next three years which would be another huge achievement for us given our already best-in-class position. As well as the ongoing efficiency program, we've also made good progress on separating Costa from Whitbread.

We've separated many of the shared services teams and the supplier contracts and the key separation activity now underway is focused on technology. We're confident of delivering each work stream on time and within the cost recovery framework already agreed with Coca-Cola. However, we're expecting as Nicholas explained planned transition costs of around £10 million in the coming year.

Another immediate focus since the cost of transaction was to ensure that we run a lean organizational model, designed to support Premier Inn as a focused business, rather than a group structure as a conglomerate. We have now completed the necessary changes to our structure to move to a single functional model not dissimilar to many other businesses. This new structure ensures that we are both simpler and more agile as we move into the next phase of growth.

As I mentioned earlier, our detailed network planning process ensures that we remain confident about expanding the Premier Inn network in the U.K. The 110,000-room target doesn't include the potential benefit from our latest two innovative formats, hub and ZIP. Many of you are now familiar with our hub concept with its compact high-spec design. This has given us access to high land value catchments, such as London and Edinburgh and still achieve returns in line with the main Premier Inn estate.

However, we now believe there's an additional potential to expand hub into other metropolitan areas cities such as Bath or Manchester. And our extensive customer research tells us that our customers would welcome the concept more broadly across the U.K.

We believe hub can be delivered at good value for money in a number of key cities whilst maintaining good site level returns and we look forward to proving this with some regional trials in the near future.

ZIP on the other hand is a significantly different offer to both our traditional Premier Inn and hub formats. The premise is good-quality, small, very simple rooms targeting a large segment of the market that we believe is currently underserved, namely, the extra value-seeking customers who tell us they don't currently stay at Premier Inn and are dissatisfied with their current options.

Those options including staying with under-invested independents, sleeping in their vans, or simply driving a very long distance to get home. We believe we can deliver a similarly good return on capital whilst offering prices as low as £19 per room per night by targeting lower land value areas and engineering the room construction costs to be significantly lower.

The first ZIP by Premier Inn trial hotel opened in Cardiff last month and although it's early days, we're seeing encouraging signs of occupancy in line with our expectations with especially strong occupancy on Saturday nights as well as positive customer feedback.

Let's turn now to our international focus. Our continually growing pipeline of secured sites demonstrates our excitement and commitment to the long-term opportunity in the German market and our confidence in replicating our U.K. success.

This year we opened a new hotel in Hamburg at the end of February which is already showing very encouraging signs of early trading and customer feedback. We've also grown our organic pipeline to 17 hotels maintaining our focus on Tier 1 cities which drive short-stay domestic travel. And we will acquire 19 hotels from the Foremost Hospitality transaction.

Our success in the German market is based in our ability to replicate our strengths in the U.K. that have made us the number one budget branded hotel. We use the same flexible property approach to gain superior site access. We can utilize our buying scale to ensure that we deliver a high-quality experience, whilst at the same time, market-leading value for money.

Crucially, we believe we can achieve the sale -- a same hotel economics we command in the U.K. On the right hand side of the slide, we've laid out an indicative guide to a German Premier Inn's unit economics which will achieve returns between 10% and 14%, slightly higher capital costs compensated for -- by higher hotel profitability.

The next 18 months will be transformational for Premier Inn in Germany with the completion of the Foremost Hospitality acquisition as well as three hotel openings from our organic pipeline.

In order to support a much larger business in Germany, we're investing to build the local team. This has included recruiting more local expertise for our German property development team to accelerate both our organic rollout and our search for potential bolt-on acquisitions as well as investing in marketing and set-up costs for each new hotel.

As a result of these investments, losses in Germany will increase to approximately £12 million in the coming financial year. In addition to building with local teams, we also plan to leverage as many of our U.K. resources and capabilities as possible and these will include the Premier Inn website platform and our dynamic pricing engine.

I'd like to conclude by reminding you of the three priorities that have successfully guided us over the last three years and continued to underpin our long-term strategy for Premier Inn; to grow and innovate in the U.K., to focus on our strengths to grow internationally, and to optimize the capability and infrastructure to support long-term growth.

We'll continue to grow and innovate in our core U.K. market and have clear line of sight to 110,000 rooms in the U.K. and the potential to extend hub and ZIP which could add to this ambition.

Internationally, our current pipeline in Germany contains 36 hotels, but our ambition is to have significantly more than this by accelerating our organic growth and supplementing it with selective bolt-on acquisitions.

We've made tremendous progress in developing the capabilities required to support our long-term growth and we continue to generate further savings through cost-efficiency program. This has become increasingly important as cost structures in our industry remain challenging and we aim to offset a significant amount of the structural inflation that impacts the hospitality sector.

Despite the short-term impact of business confidence and economic uncertainty in the U.K., the disciplined execution of our proven strategy, our strong balance sheet, and the strength of Premier Inn's business model means that we should be resilient in a weaker market.

I remain confident about the long-term growth and the structural opportunity available to us and consequently of our ability to create long-term shareholder value through growth in earnings combined with a strong return on capital.

Thank you very much for your attention this morning through the building work noise as well. And Nicholas and I will be very happy now to take your questions. And a combination of Jaime and Vicki hands up got there first. And then we'll pass over from there.

Question-and-Answer Session

Q - Vicki Stern

Good morning. It's, Vicki Stern from Barclays. Yes, the obligatory three questions. Just firstly, can you talk about forward bookings? I know you obviously don't have great visibility. But just since the Brexit delay, have you seen any shift in terms of the underlying patterns that you can put towards -- on your forward bookings? And secondly, just how can you tell -- how you're reacting to that softer demand environment through price?

I think you mentioned the -- you're seeing it more in weakness around business customers for leisure. So to what extent does lowering price seem to stimulate incremental demand? It seems like the industry data is very much weaker on price than on occupancy. And then just finally back to Q4. Why such a steep underperformance during Q4? And sort of how do we think about your underperformance versus the market going forward? Thanks.

Alison Brittain

Okay. I'll take the first two. You take the last one, the depressing one. The answer to the first two is, yes, from a forward-bookings perspective, the picture is actually pretty positive as we look forward. So -- and that's largely, I suspect because leisure travelers are still planning to travel. And as you know they tend to plan their travel trips earlier in the cycle and get the right benefit of lower prices because the earlier you book, the lower the price for the room. And so from a forward booked perspective, we're pretty comfortable and happy with the prospect.

Where we have seen the issue is in short lead bookings. So your forward booking position looks great. And then the two weeks before the actual stay day, where you have usually a significant amount of your business travelers booking because they obviously don't plan quite so far in advance those are the bookings that have been under pressure and some of that short lead business has been falling away. And of course that is also at the higher prices as you know because it's close to the date of stay.

So that's -- and that we think is directly linked to business confidence and the change in the way that people are thinking about investing in their businesses and sort of reigning in expenditure, which we can see quite a lot and seems to go hand-in-hand with the business confidence indexes that we see, and is impacted as you might imagine by anything that is ambiguous or uncertain for businesses, as they're trying to plan in quite a difficult environment. So that's the overall.

And in terms of pricing we do adjust our pricing. We have made some adjustments at our long lead and through our pricing ladders. It does mean that we are more in the market in terms of performance and we're happy with the impact that that's having on driving business and certainly on long lead.

Nicholas Cadbury

We always -- as you know we always prioritize occupancy over price so we can't just try and keep that loyalty in customer -- loyalty going forward.

Alison Brittain

Yes.

Nicholas Cadbury

Just in terms of the Q4 underperformance kind of question. I mean if you look at our back opening over the last kind of 6, 7 years you see Q4 in terms of RevPAR we always have a dip down versus the marketplace. I think that's because that's when we are continuing to add capacity. And when you add capacity -- and Q4 is the lowest volume -- lowest demand quarter. Though because you added capacity at lowest demand you always have a kind of a dip down versus the market overall. I think this quarter in particular was kind of interesting partly because we were skewed towards the regions more than anyone else. So we've got 80% of our sales in the regions. And actually London's being fairly robust at least in the regions where you've seen customers holding back. So that's one reason.

And the second thing is business-to-business mix. We are quite unusual with the fact that we've got 50% -- just over 50% of our customers are business-to-business versus leisure. And it's in that kind of that Monday to Thursday night where you've seen the whole market has been slower. And because we're just more weighted towards that it means it affects us a little bit more.

Alison Brittain

Jamie?

Nicholas Cadbury

Jamie?

Jamie Rollo

Thanks. Jamie Rollo from Morgan Stanley. Again three please. Just first following on from those questions. How do you disaggregate the impact of greater competition from what's going on in the corporate world? I mean thinking about Travelodge's comments about their business wins is there a bit of sort of underlying market share loss do you think that isn't often trading down? Secondly, on the room openings. You're a little bit light of 4,000 to 4,500 and it was quite skewed to the fourth quarter again. So could you give us a little confidence level in phasing for this year?

And finally, sort of, bringing up a question from the CMD. You've now given us the IFRS 15 -- sorry 16 £2.5 billion lease liability where I think it was £1.3 billion on the rating agencies. I know it's only technical, but isn't it easier just to move your, sort of, ceiling from 3.5 times to 5 times? Because that's about I think about 1.5 times to your adjustments.

Nicholas Cadbury

Due to the leverage you mean? I'm sorry.

Jamie Rollo

The leverage, sorry, yes.

Alison Brittain

On the -- I'll take the first one and if you'll remind me what the second one was. So...

Nicholas Cadbury

The opening program.

Alison Brittain

The opening program. Yes. The Travelodge, I think, have done some interesting things. I'm always for taking what everybody else doesn't take and the best of it and no intention of not fast following from people who have good ideas. I think they've done some interesting things with their super rooms, business rooms and executive rooms whatever they have chosen to call them. And I think that's helped them manage their top-line. And you should expect to see us look at how that might be applicable to Premier Inn and how we might do that going forward.

We probably therefore -- certainly in the fourth quarter probably lost a bit of share to them. And we would be working very hard to get that back and focusing on our occupancy. As you know, in the last period -- weak market period in 2008 to 2010, the focus of the business was much more about maintaining price and less about occupancy. And that was in a world where OTAs didn't have their strength. We only had about 30,000 rooms and Airbnb haven't been thought up. And the world that we're now trading in with our direct distribution capability and our direct relationship that we have with our customers, we think it's enormously important not to lose our customers to other travel agents or hotel groups. And so the focus that we will have will be on occupancy above rate and we will manage our pricing algorithms to put that at the center of our policy going forward, our strategy going forward.

On openings, we always set the year up with openings. We like – as you know we work really hard having been very back end-weighted to get to a more sensible weighting. And some years that works. And some years particularly when we are – have some larger leasehold developments, which we control less than our freehold when it's in our own hands when we target a date we tend to stick to it. We tend to be out only by the odd day or week. We even have Mark Anderson taking the beds into the hotel room to deliver them on time on occasions. But we get that done. When it's a developer that we're working with, it is slightly more out of our control. And sometimes the slippages just have to be managed through the year. So to some extent, it's about mix in terms of uncertainty of delivery.

Nicholas Cadbury

Just in terms of confidence for this year coming there, we've said 4,000 to 5,000 rooms in the U.K. and Germany. At the bottom end very confident about it. At the top end, we take over the – our acquisition of 19 hotels I think almost on the last day of the year. So if that just slips a day that could be up to 2,000 rooms.

Alison Brittain

Yeah. Okay.

Nicholas Cadbury

Sorry – did you ask about IFRS 16?

Alison Brittain

Oh, yes.

Nicholas Cadbury

Sorry, just in terms of leverage Jamie talking to the ratings agencies they are still using the eight times lease adjustment for their debt. So we don't think it impacts our leverage at all for that point of view. So –

Richard Clarke

Thanks. Good morning. Richard Clarke from Bernstein. Three, if I may. The U.K. pipeline is down 12% year-on-year. Is that signaling that U.K. openings will begin to slow a bit in future years? I know you've just given a number for the coming year. But will it slow a bit going forward and you'll see more of a shift into Germany?

And then a couple of questions on ROCE and IFRS 16, obviously with IFRS 16 coming in your ROCE will drop I think below 10%. You're still talking about the 10% to 14% target for the U.K. and Germany. Are those targets going to shift? Or are you still expecting to hit those? And has the fact that you're no longer going to get a ROCE tailwind from sale and leaseback change your attitude to sale and leasebacks at all going forward?

Alison Brittain

I'll take the – if there's anything along IFRS 16, it's going to Nicholas today. But I'll deal with the first one. In terms of our openings, we'll probably this year I suspect – at the year-end of the biggest opening program, we've ever had caveated only by Nicholas' almost 19 hotels opened on the last day of the financial year. So providing, there's no issue then we will have a big program. But it is across the U.K. and Germany.

We've got very clear line of sight in what we think the capacity is. So we're not reaching saturation, if there's an underlying question about that, but we will choose – and one of the reasons we don't have a milestone with the date attached to it for that hotel growth either in the U.K. or Germany. In Germany, we'd like to accelerate. So we'd like to do anything quicker than what we can. And if we can do that through bolt-on acquisitions we will if they make financial sense. And in the U.K., we're very focused on return on the returns profile rather than just speed and just getting through it. So of course, we will have to balance up the use of capital across the two, but we're not seeing constraint in any way at the moment on being able to carry on growing in both.

Nicholas Cadbury

We've always said, we're going to make sure we get the excellent returns rather than speed of opening. And as we said at Capital Market Day, we can still see the path to 110,000 rooms. Although, it's kind of tough right now, you've got to remember this 50% of market there is independent. They're having a far tougher time than us right now. So in – and in one of the graphs that Alison puts up, what you see over the two years you see that capacity – new capacity drying up in the marketplace and you see it recovering there. So that's where you could get caught up in the short term. But the longer term kind of growth is still very exciting overall. Just in terms of return on capital.

Return on capital, I mean, lots of different ways of calculating it. We try and kind of use it as a kind of return on cash property for what every £10 you put in what you get back. IFRS 16 rather clouds the kind of cash position in terms of how you look at return on capital. So, we're going to stick with what we've got today in terms of how we calculate today at the moment purely, because if we did under an IFRS 16 your returns fall quite significantly, and then they grow through the life of the – of your leasehold. Because I'm not sure that's necessarily the right way of looking at it overall. So I think you'll kind of distort it. So we're going to use the existing method, but we'll talk about that kind of later on in the half year.

Tim Barrett

Good morning. Tim Barrett from Numis. I had a couple of things please. Just a clarification on what you're saying about market underperformance in Q4 and whether that's continued. Are you saying that in March and April you are worse than the market?

Nicholas Cadbury

No. I'll just – no.

Alison Brittain

No.

Nicholas Cadbury

No. So it was – you saw in Q4, you always see a dip versus the market. And we've seen that come back in March. So kind of we've always said, we're about 1.5% below the marketplace, just because the extension the capacity. So that's more like where we're seeing it. Again, I'll just kind of caveat that. It's early in the year at the moment, but that's what we're seeing.

Alison Brittain

Thanks.

Tim Barrett

Thanks. And one in occupancy, occupancy was down 140 bps this year. Longer term, you've always said 80% is the target. And what might change to inflect and get you back into occupancy growth?

And then, the last question was on cost mitigation. At the Capital Markets Day, you thought the £120 million would be straight line. It feels like you're at £50 million, you're slightly above that. And could you go further still? Thanks.

Alison Brittain

As to any range that you give them Nicholas and they will take the top of that. Total of 3 was the range. So, I don't think -- we probably haven't got anything more to say than we're targeting £40 million to £50 million this year. And we will -- we'd always look, if we can accelerate cost savings to accelerate cost savings, but some of them need to be planned and structured and require investment to get the cost out. And so, it's not as easy as just pulling forward everything off the future.

Nicholas Cadbury

Yeah.

Alison Brittain

So, I don't think a flat-lining is a bad way of looking at it. Although, we will -- around the edges, around the margins, we will always seek to pull forward if we can. And then, we'd always seek to have a bigger target if we can ultimately as well. But that isn't where we are today. Where we are today is a guidance of £40 million to £50 million on this year.

Nicholas Cadbury

I mean -- and that's an ambitious plan today so.

Alison Brittain

Yeah. And we're not expecting anything further from there. You have to remind me Nicholas.

Nicholas Cadbury

The occupancy.

Alison Brittain

Occupancy, we will target 80%. We do think that's the right occupancy level for us. And we will be planning and managing our marketing and our distribution tool and our pricing engines accordingly to aim for that. And we would hope to see some of that loss of 1% last year coming back through the actions that we take.

Nicholas Cadbury

Again, over the longer term -- we're down at the moment. But over the longer term, we feel pretty confident we'll come back.

Alex Brignall

Good morning. Hi, thanks. It's Alex Brignall from Redburn. Just two please. It's a very technical one, but just to try and understand it. Your PBT cut is really a cut for this year. But, if you look at the Appendix II, it kind of rolls itself out. In terms of how we model based on your opening time frame, will it just stay lower for the foreseeable length of our models? And how should we think about the fact that really it should balance itself out in terms of other ways of thinking about it?

The second thing and this kind of comes back to Vicki's point a little. On forward bookings or maybe last minute bookings, since you've seen the delay to Brexit, leisure commentary has been a little bit more positive. Have you seen any of those short and maybe within two-week bookings got better than they were before? And maybe that will be helpful for understanding that. Thank you.

Alison Brittain

I'll take the last one first, and then you do the work with the -- some technical thing on the first one is.

Nicholas Cadbury

Yeah.

Alison Brittain

I mean the short answer is no, but we are talking days and weeks. And whilst, I know it is the moment that we are in, and it's the interesting bit because everybody is trying to forward project, we can't lose sight of the fact, we're not a retailer. We're not a retail business. We aren't a short-term business that manages for short-term economics. We invest for 25 to 50 years when we put down money into one of our hotels. And we have a platform and a model with all of its strength, which is designed to be resilient through what you must see as a cyclical position over the course of 25 to 50 years.

You're going to have three or four at moments where you have lower cyclicality in terms of economics. And our growth isn't necessarily predicated on the economics per se as much as the structure of the two markets we've decided to concentrate in, those structures being very large numbers of independents fragmented without a core key player. And those structures will only get more fragmented. And I suspect, we'll see a higher loss of independents as we go through a downturn in the economics.

So investments we're making today are going into the P&L in three to five years time. We'll -- whatever we spend this year, we're seeing the benefit of that three to five years time. Anyone that's finishing a hotel in a down-cycle will finish it. If this dig is in the ground at the moment and foundation is going in, it will be madness not to finish building it and opening it. So four of our 18 to 24 months in a down environment, you get the flow of supply coming to market and our own.

What you don't do is start a new project though. So lots of competitors then don't start new projects, because they wait for the thing to clear. And so, when you come out of your cyclical downturn, you find that then there's a paucity of supply coming in, because you have to -- you had to have laid foundations two years ago if you wanted to be opening in three years time. That's why we would like to keep investing through this cycle. So that, at that period as you come out, we would come out stronger.

Potentially some of our competitors will have found it enormously difficult to maintain their position during the period, especially the fragmented independents or particularly in the high-cost inflation environment as well as a demand downturn and paying OTAs and all of the other elements.

And so, we would be probably net better off to continue to invest and to be able to ride the wave of the up-cycle thereafter. But yeah -- but we -- you're asking questions about what happened in the last two weeks of trading for a business, that is a 25 to 50 year investment, and so it's hard to give you a really sensible answer on that.

Nicholas Cadbury

Yeah. So I think your first question was about kind of the PBT curve, and it comes back to the same answer that Alison gave. I mean, our business plan has to go out 10 years all the time, because that's where you'll -- that's the minimum you're looking at in terms of investment horizon that we look at. So in terms of that that's why we feel kind of confident about where we're going. Because if you look at where the independent market will go over the 10 years it's got a long way to go. So that gap has got -- it gives us that confidence going forward. I guess in the shorter-term RevPAR tends to follow kind of GDP. And I think I'll kind of leave it to you and your economists in your company to give you a view on where GDP is going.

Alison Brittain

One minute and then I'll come back.

Julian Easthope

Hi. It's Julian Easthope from RBC. Just a sort of quick modeling question if I may. I think you've given us guidance that the synergies will be £10 million. There will be £20 million to £30 million incremental costs and there's an extra sort of £5 or so million in Germany. And with your -- it's like a 5% room increases coming in to partially offset that. It looks like you're sort of £25 million to £30 million down before RevPAR increases. So can we assume therefore that to breakeven on PBT, you'd probably need about a 2% RevPAR increase this year to breakeven?

Nicholas Cadbury

Look when you say break what do you mean by breakeven?

Julian Easthope

I thought -- yes, as a comparison for that PBT on a like-for-like basis last year.

Nicholas Cadbury

It's relatively flat, yes. It's probably not a bad -- not a probably bad direction I'll go.

Julian Easthope

Okay. Thank you.

Alison Brittain

Okay.

Stuart Gordon

Hi. It's Stuart Gordon from Berenberg. A couple of questions please. First, one just on the share buyback program. Could you confirm up to where £383 million is because of -- and whether you expect the full £500 million to be completed by the 10th of May?

And the second question just on the tender offer. I mean, it's subject to shareholder approval and other more value-creating alternatives. We're clearly very close to the tender offer. Can you comment on what other value-creating alternatives are on the table just now? And whether you could keep that some of that tender offer even if they're not completed when you go to shareholders? Thanks.

Nicholas Cadbury

So we've done £383 million of share buybacks and that was in the 26th of April. So that was Friday. I think that kind of works around about kind of £6 million a day I think. So I think if you kind of roll that forward as we go through, we've got about another kind of 10 days worth of purchasing to go on top of that. So you might get close to kind of £400 million £430 million probably where we expect it to be.

Just in terms of the tender offer overall as I mentioned our aim in the tender offer isn't to try -- we said up to £2 billion. Our aim isn't to try and -- at whatever cost get that £2 billion away. It's about actually making sure, we get it away at good value. In terms of making sure we kind of balance that premium versus the quantity, we get -- we give away. And a lot of the feedback we've had from our long-term shareholders is about being careful about leaking too much value away in the tender offer. And come back afterwards if you need that and do more we'll kind of continue more share buybacks afterwards. That's quite a nice thing in this environment as well.

Alison Brittain

Yes. I think it's important that we're not defining success as it's disappeared from the bank account. It's defining success getting the right balance and we will then return it in a different way any proceeds, which are left after we've completed the tender over a period of time.

In terms of your question of other opportunities, we've I think always been pretty open. We'd love to do some more bolt-on acquisitions. We liked the Foremost transaction the size and scale of it was pretty good for us. And they're very hard to come by. We have a very long list of potentials in that sort of small -- actually smaller than that transaction, which is more the tail of activity within Germany.

There are a handful only of potentially larger transactions. You don't control them in any way. And so really we've got nothing more to say on anything larger than our planned small scale bolt-on acquisitions.

Joe Quinn

Okay. Just Joe Quinn here from Davy. Just a question on the supply side. Can you give me a better understanding? You're talking about hopefully that supply will sort of hold back and that you'd be able to benefit from that. Can you give me some thoughts around where you've seen it happening in the regional U.K. market in relation to supply and what you potentially wanted to see in the next couple of years?

Alison Brittain

Yes. We've seen -- we still are the bulk of the supply going to market. So we ourselves are the additional supplier of rooms into the hotel market and have been -- I mean, we've added over the course of the last three or four years the size of whole hotel groups bolted onto -- in terms of our additional room capacity that we've grown.

We have seen increased supply into London particularly our other big cities and some of the -- some of our catchments. And everybody sort of slightly upped their game. Travelodge have done more. They're not in the same realms, as our 3,000, 4,000, 5,000 rooms a year but they have stepped up.

We can only see, what's got planning permission for absolutely sure. We look at every -- when we're doing our network planning, and working out what our catchment analysis is and where -- therefore how much road we have still to go.

We do get into postcode level. We do look at everything we know, about what is happening in the market. We look at people forward statements about, what the retentions look like. And we look at driving some modeling through to what we expect to come through.

And we do that to make sure that we aren't putting in more capacity into catchments, than the catchment can take. And we do it -- as I say we do that at a really granular level, when determining how long our own runway has to go.

Julian Easthope

Sorry. But would it be fair to say, that you haven't seen them pull off then?

Alison Brittain

So at the minute, we've got people who have started building hotels two years ago where that supply is going to come into the market. I mean, it's beyond planning permission. We've got people are -- have quoted their years' growth.

And they know that they will deliver it in the same as we quote it. And then, we will deliver it. And that's likely to carry on for at least 12 months to 18 months. And what we would then expect to see is that they probably will stop starting new projects. And we may see that start to tail off.

Julian Easthope

Thanks.

Alison Brittain

I think that may be all of our questions for today. So, on behalf of Nicholas and the team, and myself thank you very much for your time and attention today. If you've got anything else you need, we'll be here for a few minutes. So do grab us.

Nicholas Cadbury

Thank you.

Alison Brittain

Thank you.