Recovery ahead of expectations and outperforming the market

Throughout this release all percentage growth comparisons are made on a two-year basis, comparing the current year (FY22) performance for the 26 weeks to 26 August 2021 to the same period in FY20 (26 weeks to 29 August 2019), with FY20 being the last financial period before the onset of the COVID-19 crisis

FY22 H1 highlights 

·    Premier Inn's recovery in H1 was ahead of expectations

·   Significant market outperformance in the UK, with Premier Inn total accommodation sales 12.3 pp ahead of the midscale and economy market in H1, and 13.9 pp ahead in Q2

·   Expansion continuing at pace in Germany with the total open and committed pipeline now at 73 hotels, with statutory revenue 197.3% ahead of FY20

Operational update

·  Recovery in UK demand was very strong post 17 May when leisure overnight stays were permitted with total accommodation sales improving from down 60.9% and 9.6% respectively in Q1 and Q2 vs FY20, and up 10.5% in August

·  Leisure demand remains strong in the UK into H2, with business demand improving, resulting in September total accommodation sales up 9.7% vs FY20.

·    Occupancy in Germany grew to 47% in Q2 and over 60% in August and September

·    Better placed than most to deal with the challenging operating and inflationary environment (wages, utilities)

·    Investing in people, marketing and refurbishments capitalising on the recovery and market capacity reduction

·    Remain confident in our ability to execute acquisitions at good returns in Germany

Financial summary

·    H1 FY22 statutory revenues were 39.0% down compared to H1 FY20 as a result of the COVID-19 restrictions that were in place during the first half:

·    COVID-19 restrictions materially impacted the performance of the UK business in the first quarter. Only essential business guests were permitted to stay overnight until 17 May, at which point overnight leisure stays were permitted. Our restaurants were also not permitted to open for indoor service until the same date, with the majority remaining temporarily closed until then. The majority of our hotels and restaurants have operated restriction-free from 19 July. This resulted in UK statutory revenue being down 39.4% compared to H1 FY20

·    Restrictions were in place throughout the half in Germany, the impact of which was offset by the growth in the estate, resulting in statutory revenue 197.3% ahead of H1 FY20 driven by the material growth in the estate

·   The adjusted loss before tax of £56.6m benefitted from £141.6m¹ of COVID-19 related Government support schemes in the UK and Germany, and the statutory loss before tax of £19.3m also benefitted from £37.3m of adjusting items credits (£28.6m profit in property disposals and £8.7m VAT claim)

·   The Group retains a strong balance sheet and liquidity position with a cash inflow before debt repayments of £106.7m in the half, reflecting the improved trading performance compared to the same period last year. Net cash at the end of H1 was £60.2m

Outlook

·   Sales recovery is ahead of expectations, and while a number of uncertainties remain, UK like-for-like RevPAR run rate has the potential to reach full recovery at some point in 2022

·   Confident on the return to pre-pandemic UK profit margins, however we will have to wait to assess speed of recovery once we have greater visibility of longer-term inflation and supply chain pressures

Driving long-term value

·   In the UK, we will continue to grow by leveraging the powerful competitive advantages of our scale, brand, direct distribution, best-in-class operating model, and broad customer reach

·   In Germany, we are expanding at pace, investing in both organic and inorganic growth, and building the Premier Inn brand proposition as we establish a nationwide footprint

·   Whitbread is well-placed to take advantage of the likely accelerated supply contraction in the market and constrained investment amongst independent and budget branded operators in the UK and Germany

·  Our strategy is underpinned by our well-established Force for Good programme, delivering ambitious commitments to operate responsibly and sustainably, and reflecting the positive impact we can make for our employees, customers, suppliers, investors, communities and the environment

H1 Financial Summary

1: £60.0m UK Coronavirus Job Retention Scheme, £28.6m Germany Government COVID-19 grants, £47.7m UK business rates relief and £5.3m other COVID-19 related support grants

2: Includes revenue relating to the Costa disposal transitional service agreement of £0.3m in H1 FY21 and £6.0m in H1 FY20

† signifies an alternative performance measure (APM) - Further information can be found in the glossary and reconciliation of APMs at the end of this document.

Alison Brittain, Whitbread Chief Executive Officer, commented:

"Whitbread traded significantly ahead of the market in the UK during the first half of the year, with our regional hotels trading ahead of pre-COVID-19 levels in the last six weeks of the half. This strong performance has continued into the second half, with sustained high levels of leisure demand and resilient demand from tradespeople. Whilst some uncertainty remains over the speed and timing of the market recovery for office-based and international demand and the evolution of the pandemic in the winter months, we believe that UK like-for-like RevPAR run rates have  the potential to reach full recovery in at some point during 2022.

The operating environment during the summer and into autumn has been challenging largely as a result of our very high occupancy levels, market-wide supply chain issues and a tighter labour supply in the hospitality sector. Although we are not immune from these challenges, we are well placed to respond. Our £100m efficiency programme is well underway and we are "investing to win" in our teams, our hotels and our marketing, in order to continue to grow our market share as demand recovers and as our competitors continue to be under pressure.

In Germany, we are well on the way to building a business of scale with a growing national presence. Our open and committed hotel network now stands at 73 hotels, and we continue to look for opportunities to grow our footprint at pace both organically and through acquisitions. The budget hotel market is recovering ahead of the overall market and we are seeing growing demand and occupancy levels in our open hotels, alongside encouraging customer scores.

Our strong balance sheet enables us to continue investing in hotel growth in both the UK and Germany and in commercial initiatives and refurbishments, strengthening our market position and driving further market share gains. In the UK, our performance is underpinned by our uniquely advantaged and market-leading position, built on our scale, direct distribution, and the strength of the Premier Inn brand. In Germany, we believe the opportunity to create value is significant and our commitment to that market will be substantial, delivering good long-term returns. Our strategy of "investing to win" has driven a strong relative performance through the first half of the year, and we have the market position and platform to continue this level of performance into the second half of this year and beyond."
 

For more information please contact:

Investor Relations -  Whitbread                                                                 [email protected]

Paul Tymms, Director of Investor Relations                                                         [email protected]

Abigail Cammack, Investor Relations Manager                                            [email protected]

Media - Tulchan                                                                                             [email protected]

Sunita Chauhan / Jessica Reid                                                                                      +44 (0) 20 7353 4200

A webcast for investors and analysts will be made available at 8:15am on 26 October 2021 and will be followed by a live Q&A teleconference at 9:15am. Details of both can be found on Whitbread's website (www.whitbread.co.uk/investors).

^†Alternative performance measures

We use a range of measures to monitor the financial performance of the Group. These measures include both statutory measures in accordance with IFRS and alternative performance measures (APMs) which are consistent with the way that the business performance is measured internally. We report adjusted measures because we believe they provide both management and investors with useful additional information about the financial performance of the Group's businesses.

Adjusted measures of profitability represent the equivalent IFRS measures adjusted for specific items that we consider relevant for comparison of the financial performance of the Group's businesses either from one period to another or with other similar businesses.

APMs are not defined by IFRS and therefore may not be directly comparable with similarly titled measures reported by other companies. APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measures. Further information can be found in the glossary and reconciliation of APMs at the end of this document.

Business Overview

Driving long-term value

Whitbread's vertically integrated model, which combines the ownership of property, hotel operations, brand, and inventory distribution has enabled Premier Inn to grow at a faster pace than competitors, delivering a consistently superior customer experience and generating a strong return on capital for shareholders over the last 15 years. Our strategy is executed across three areas: continuing to grow and innovate in the UK and take market share, growing at scale in Germany, and enhancing our capabilities to support long-term growth by ensuring we have financial flexibility, a cost base that appropriately reflects demand levels, and acting responsibly through our Force for Good programme.

We hold a uniquely advantaged position in the UK:

·      The UK's largest hotel chain with over 80k rooms, Premier Inn provides a diverse portfolio of locations where customers want to stay

·      Regularly voted as the UK's favourite hotel brand, synonymous with high quality and good value, with great customer service

·      Best in class operations: ownership of all aspects of our hotel and restaurant operations ensures greater control over the customer experience, resulting in a high-quality offering delivered on a consistent basis throughout the estate

·      Industry-leading digital distribution model: with only 1% of bookings delivered through third party online travel agents (OTAs) our direct distribution model provides complete ownership of the customer relationship driving substantially lower acquisition and retention costs

·      Broad customer reach: our customer base is highly diversified with an approximate 50/25/25 split between leisure / tradespeople  / office workers, and with low levels of group bookings, meaning we are far less exposed to those areas of business travel that may be structurally impaired as a result of changing work habits post COVID-19

The sector and markets in which Premier Inn operates are highly attractive:

·      The budget branded model is structurally advantaged: The budget branded hotel sector is historically the highest growth segment in the hotel market. It has proved more resilient in previous downturns, and is also significantly outperforming the rest of the hotel market during this recovery period

·      Long runway for growth: The Group has a long runway for growth in the UK, with detailed network planning supporting a network target of at least 110,000 rooms. Our current UK estate stands at over 80,000 rooms, with a pipeline of almost 10,000 rooms of which around 3,000 new rooms are opened each year. In the UK we are able to leverage our brand portfolio to ensure the optimal hotel and restaurant offering by location. Our new hotels are larger than the estate average, are more efficient to run, and have a better operating leverage. In Germany we have an estate of nearly 5,000 rooms and a growing committed pipeline of over 8,000 rooms, with the potential to replicate our scale in the UK

·      Enhanced structural opportunities: The independent sector still represents 48% of the UK market and 72% of the German market but are both in long-term decline as customers migrate from independent to budget branded hotels. This migration is expected to accelerate as a result of the COVID-19 crisis and Premier Inn is well-placed to capitalise on the expected contraction in competitor supply and to take market share in both the UK and Germany

Opportunity to replicate our UK success in Germany:

We believe all of the five UK success factors detailed above are either already present in Germany, or, in the case of scale, brand strength and a direct distribution model, a compelling opportunity exists for Premier Inn to develop those characteristics in Germany as the business grows in scale.

We have materially accelerated our growth in Germany since the end of FY20, growing from just over 1,000 open rooms in 6 hotels to our open and committed pipeline of 73 hotels and over 13,500 rooms in H1 FY22. The open and committed pipeline would equate to 1% share of the market in 2019 (compared to 11% in the UK). The market is highly fragmented, and we see an opportunity to grow to at least 60,000 rooms, which would represent a 6% market share, still only half that of Premier Inn in the UK.

Our enlarged estate now provides us with a strong platform from which to grow our brand recognition. We have a growing presence in a number of major towns and cities, meaning the Premier Inn brand can be seen across Germany. As the estate continues to grow, we focus on brand-building, with nationwide marketing campaigns and new business corporate relationships supplementing effective localised brand campaigns. The quality of the hotel and room offering, which is driving very strong customer scores, is also a key component in driving brand awareness.

The Group has the capability to support long term growth:

·      Financial flexibility: The Group's strong balance sheet, with net cash of £60.2m and accessible cash of £1,144.7m at the end of H1, enables the Group to invest in the Premier Inn proposition when others will be constrained and supports our investment grade leverage metrics through this period of uncertainty. We are "investing to win" in new hotels, new room products, our IT platforms and in marketing, helping to provide a platform for sustained growth in both the UK and Germany. The balance sheet also provides the flexibility to execute bolt-on M&A in Germany, further accelerating our growth. At all times, we operate with capital discipline, ensuring the optimal use of capital to drive the best returns.

·      Asset backed balance sheet: The Group owns around 60% of its hotel estate with the remaining 40% operated as leasehold. Hotel freehold ownership provides:

o  control over the initial development of the hotel, and subsequent maintenance and redevelopment

o  a strong financial covenant, resulting in both favourable lease terms with landlords, and financing terms with lenders

o  a reduction in earnings volatility during downturns

o  a flexible source of funding

A flexible approach to freehold or leasehold acquisitions also ensures new sites are in the best locations and have the optimal size and format.

·      Lean and agile cost model: The well documented market-wide inflationary pressures and labour shortages in our sector mean the focus on cost efficiency has never been so important. In April this year, we announced the next phase of our long running efficiency programme, with this phase expected to deliver around £100m of cost efficiencies by the end of FY24. We are making good progress and this target will be achieved through developing our international sourcing capability, investing in our technology platforms to enable both marketing and labour scheduling effectiveness, and optimising the UK estate.

·      Operating responsibly and sustainably: Our long-established Force For Good sustainability programme covers large aspects of our ESG agenda and ensures that doing the right thing is embedded in everything that we do. We have a number of stretching and industry-leading sustainability targets, including an ambition to reach net-zero carbon emissions by 2040.

H1 Review - a strong recovery

The Group's financial performance in the first half of this year was ahead of our expectations with the leisure "bounce" in demand being far stronger than anticipated. The Group traded significantly ahead of the midscale and economy ("M&E") market in the UK during the period, and performance was encouraging in Germany, despite the market-wide COVID-19 restrictions that were in place for the majority of the first quarter in the UK, and throughout the first half in Germany.

In the UK, leisure overnight stays were permitted from 17 May, and subsequent demand was very strong across the majority of the estate. In the UK regions, Q2 total accommodation sales were almost fully recovered to pre COVID levels (0.2% behind the same period in FY20) and were 18.1% ahead of FY20 in August, driven by both the "staycation" leisure bounce, the removal of all COVID-19 restrictions from leisure events, and the new hotels we have opened. The London market has lagged the regions during the COVID-19 crisis, as a result of very low levels of inbound international travel, and subdued business commuting, however trends improved during July and August, helped by the domestic leisure bounce, office reopening and the gradual return of some international demand. London total accommodation sales in Q2 were down 43.5% versus FY20 and down 21.4% in  August versus FY20.

Both Average Room Rates ("ARR") and occupancy rates recovered well in the regions, with high ARRs being achieved in those areas with high demand, while lower ARR was used to successfully drive initial occupancy rates in those areas of weaker demand, such as city centre locations, central London and airports.

Total food and beverage sales were 51.2% behind H1 FY20 reflecting the fact that all restaurants were closed from the start of the half until 12 April, when outdoor service was permitted in England. The remaining estate was largely reopened on 17 May. A revamped menu offering, focusing on traditional favourites and an enhanced Sunday roast selection, alongside an enhanced drink offering has been well received by customers, helping drive Q2 total food and beverage sales to 18.1% behind Q2 FY20.

The sustained periods of very high occupancy in our hotels and the increasing demand in our restaurants during the summer, combined with market-wide supply chain issues and tightening labour supply have made the operating environment challenging. Our flexible operating model has responded well, and alongside some temporary changes to check-in times and menus, has meant disruption to our customers has been minimised.

In Germany, trends were largely similar to that evidenced in the UK, with high levels of domestic leisure demand. However, unlike the UK, capacity limits on business and leisure events, and greater Government restrictions for certain social events and hotel stays remained in place across the half and acted as a market-wide drag on demand. Digital marketing campaigns aimed at growing Premier Inn brand recognition, helped build trading momentum especially in those destinations with a greater leisure exposure, such as Berlin, Freiburg and Hamburg. Overall, our hotels achieved occupancy rates of over 60% in August. Premier Inn Germany Q2 total accommodation sales were over 400% ahead of Q2 FY20, reflecting the larger estate we now have, with occupancy levels of 47.5%.

The Group's flexible balance sheet has enabled a programme of investment in expansion and commercial initiatives that are driving market share gains. The "Rest Easy" above the line multi-channel campaign launched in April is delivering increased customer consideration scores and high volumes to the revamped premierinn.com website. We commenced the roll-out of 1,500 Premier Plus rooms in this financial year and are aiming to accelerate the rollout into FY23. These upgraded rooms are targeted at business customers but have also proved popular with our leisure guests during the summer, and are delivering a good ARR uplift. Refurbishment capex is already at pre-COVID-19 levels, ensuring that our hotel estate remains well-invested, at a time when others will be constrained. An incremental £20m is being invested in marketing and refurbishment P&L spend this year, to ensure our strong growth and market share gains continue. We will also continue to invest in our IT platforms, helping further enhance our digital capability, including a new CRM platform that will be introduced in the next two years.

H1 FY22 statutory revenues were 39.0% down compared to H1 FY20 as a result of the COVID-19 restrictions that were in place during the first half. UK statutory revenue was down 39.4% compared to H1 FY20, while Germany statutory revenue was up 197.3% driven by the material growth in the estate. The Group was operating cash positive during H1, further strengthening our balance sheet flexibility. The statutory loss before tax of £19.3m benefitted from £141.6m of COVID-19 related Government support schemes in the UK and Germany, and £37.3m of adjusting items credits (£28.6m profit from property disposals and an £8.7m historic VAT claim). The Group stopped participating in the Government Coronavirus Job Retention Scheme in May when the restrictions on domestic travel were lifted. 

Current Trading - seven weeks to 14 October

In the current trading period, total UK sales were 1.3% ahead of the same period in FY20, with total accommodation sales 7.9% ahead and occupancy at 81.2%. Total UK accommodation sales were 14.1% ahead of the market. Total UK food and beverage sales were 11.5% down on the same period in FY20. Germany total sales were 318.7% ahead of the same period in FY20, with accommodation sales 260.4% ahead and occupancy at 62.7%, the adverse impact of COVID-19 restrictions offset by the larger estate.

We are about to enter the quieter, lower demand months of the year. The level of bookings into our fourth quarter are always low at this time of year, so it is harder to speculate on expected revenue growth for this quarter. However, we are starting to see demand momentum moving in the right direction, especially within the UK Regions.

VAT on hospitality products and services increased from 5% to 12.5% on 1 October, with a full return to the pre-COVID-19 level of 20% scheduled for 1 April 2022.

Outlook

In the UK, the very high levels of leisure demand evidenced during the summer, have continued into the second half with demand remaining high in September and into October. Whilst seasonality will reduce levels of "holiday" demand, the absence of virtually all UK COVID-19 restrictions on leisure events, such as weddings, sporting events and eating out, bodes well for ongoing leisure demand, although the VAT increases in October and April may well act as a drag on ARR recovery.

Tradespeople business demand (which normally accounts for around 25% of our sales) remains resilient, as has been the case throughout the COVID-19 crisis, and office-based business demand is improving. International inbound travel, which represents c.10% of Premier Inn UK's sales, has shown some signs of recovery but still remains at very low levels and is not expected to return in earnest until calendar year 2022. While a number of uncertainties remain, UK like-for-like RevPAR run rate has the potential to reach full recovery at some point in 2022.

The operating environment remains challenging, impacted by a number of well publicised market-wide supply chain issues, labour shortages and inflationary pressures. We remain well contracted in FY22 on most goods, although we will see salary inflation into the second half.

Hospitality wide-labour shortages also persist, particularly in tourist locations and in London. Whitbread is in a better position than most due to the action taken last year that resulted in the retention of a greater number of employees than initially anticipated. Despite this, a material number of vacancies still remain unfilled. The resolution of this shortfall may well take time, and we have therefore invested in our pay rates to remain competitive, at an additional cost of c.£12m-13m in FY22. The Group will also pay c.£10m as a one-off summer retention bonus for hotel and restaurant staff in H2 FY22, and we will continue to monitor the market to ensure our pay rates remain competitive.

Despite these actual and potential cost headwinds, we remain confident in the UK business returning to pre COVID-19 profit before tax margins. Our ability to take market share, both through our own growth and the increased pressures faced by competitors, and our wide-ranging investment in commercial initiatives, will drive growth and operating leverage improvements. In addition, our pricing power in an inflationary cycle, the ARR uplift from our refurbishment programme, investment in Premier Plus rooms, the improved operating leverage of new hotels and our long standing cost reduction efficiency programme, combine to give a substantial operating leverage opportunity. However, we will have to wait to get a better assessment on the speed of the margin recovery, once we have greater visibility of how much of the current supply chain and inflationary pressures are transitional or structural.

In Germany, business demand is steadily improving, but is still at low levels, and as in the UK, is dependent on the timing of office workers returning to the office. COVID-19 restrictions remain in place although these are expected to ease in the near future, providing a further catalyst to demand. Leisure and business events are returning, and we are hopeful they will continue to improve throughout 2022.

We anticipate capex spend returning to £350m-£450m in FY23, depending on levels of M&A. In the UK we will grow our estate by around 3,000 rooms per year, building new, larger hotels and improving our operational leverage. In Germany we are pursuing an aggressive growth strategy, both organically and inorganically, as we look to rapidly establish our footprint and are confident of the opportunity to acquire assets at prices that will drive good returns.

The Group will take advantage of the enhanced structural opportunities that will exist in both the UK and Germany. The Government's support schemes have undoubtedly helped the independent sector and weaker budget branded operators navigate the COVID-19 crisis, however with the ending and tapering down of those schemes, we are seeing clear signs of distress in that segment, and we expect to see competitors begin to exit the market as we move through the next 12-36 months. 

Dividend payments are not permitted under the covenant waiver conditions until March 2023, unless the original covenant tests are met during that period. The Board intends to return to paying a dividend at the first available point that it is permitted to do so.
 

FY22 Guidance

FY22 guidance was set out in detail in our FY21 full year results. Sales sensitivities remain unchanged, and cost guidance is updated for the following cost and capacity changes:

·      Investment driving market share gains: additional £20m in marketing and refurbishments spend

·      Hotel and restaurant staff salary investment: c.£12m-£13m (announced 6 October 2021 and accelerated from FY23)

·      Hotel and Restaurant staff summer retention bonus c.£10m (one-off)

·      Utility cost inflation: well hedged for FY22

·      Germany Government COVID-19 grants: £33m credit (one-off) split £28m / £5m H1/H2

·      UK new rooms: c.3,500, (was previously 2-3,000)

Net neutral impact of £20m increase in UK furlough claims to £60m, as additional claims were made against increased salary costs incurred during periods of closure.

A Force for Good

Whitbread's sustainability programme, Force for Good, is well embedded across all business functions, ensuring that being a responsible business is integrated across our operation, which is crucial to our long-term success. It is an ambitious programme, with the overarching objective to enable everyone to live and work well. Following an incredibly difficult year last year and a challenging start to FY22, keeping our Force for Good commitments and ambition central to our response and how we rebuild after the global pandemic has been of critical importance to us.

Following on from an ambitious move to bring our net zero carbon target forward from 2050 to 2040, we have been working hard to embed the changes that need to be made in order to achieve this bold ambition. We know that a large proportion of our carbon emissions are linked to our use of gas, particularly related to cooking, heating, and hot water, so the reduction of gas usage within our estate will be key to unlocking our net zero future. We reported a carbon reduction of 61% at the end of the last financial year (from our 2016 baseline year) but know we have further to go as we move towards a net zero position and are already working hard on this agenda. We have also recently aligned all our carbon targets to the 1.5 degree global warming target, and have set Scope 3 targets, in line with this ambition.

Our carbon strategy was externally recognised at the end of last year as we improved our Carbon Disclosure Project (CDP) Climate Change score from a B to an A-, a result that puts us in the leadership category, granted to those seen to be implementing best practices on sustainability.

We are making good progress against our target to cut food waste in half by 2030 which we set last year. We have continued our partnership with FareShare, adding to the half a million meals donated to charity partners in 2020 to support those in need. Our target to eliminate unnecessary single use plastics by 2025 is not going to be easy, as many of our supplies are delivered to us in plastic packaging, but we will be working closely with all of our suppliers to achieve this target. We also continued to fundraise for Great Ormond Street Hospital despite site closures, coming close to raising a total of £19million since our partnership began in 2012.

Recognising the increased risk to worker rights brought about not only by the pandemic itself but also by the pressure on global supply chains we're facing as we emerge, we have bolstered our focus on responsible sourcing. We have been working hard with our partner, Stop the Traffik to reassess our risk and begin deploying an 'enhanced due diligence' tool, responding to new and emerging risks across our lower tier suppliers. As factories open up again, we have been rolling this out across our higher risk supply chains, with a focus on worker engagement and remediation tools.

We have also moved forward with our response to the Taskforce for Climate-related Financial Disclosures (TCFD). We have identified and scored our climate related risks and opportunities within different areas of the business. From those, we have prioritised the key ones to take forward to scenario planning and inclusion with our financial model. We have also carried out a peer review to identify best practice for our planned reporting in line with the next ARA.

We continue to build on improving our diversity and inclusion agenda. In the period, we launched two new networks, dedicated to gender equality and disability inclusion, taking our total number of diversity networks to four. Our Race, Religion and Cultural Heritage colleague network continues to drive change including amplifying the voices of many of our minority groups, celebrating key cultural events and more recently celebrating National Inclusion Week and Black History Month. We also launched our 'The Guide to Kindness' across all our Premier Inn and restaurant sites, promoting inclusive behaviours for both our colleagues and guests, whilst making it clear that we have zero tolerance of any type of discrimination.

In September we celebrated National Inclusion Week for the second time, this year involving both our teams and also on our external social channels, using the theme 'United for Inclusion'.  We used the opportunity for our networks to talk directly to our site teams, as well as promoting upcoming listening activity and launching a new video 'what inclusion means to us in Whitbread', built with our teams, potential employees and guests in mind.

We celebrated key cultural events and religious holidays during the period. As well as being important dates to recognise for many of our under-represented groups, they are also an opportunity for our wider teams to become better informed through greater education. We also launched a new 'religious leave' holiday policy, allowing our support centre teams to trade Christian bank holidays for different religious dates of importance.

2021 Annual General Meeting

At the Annual General Meeting on 17 June 2021, 64.25% of votes were cast in favour of the resolution to approve the 2020/21 Remuneration Report.  We engaged closely with a number of our large investors in the lead up to that vote and also subsequently, and we believe we have a good understanding of investor sentiment regarding the votes cast against. We will continue to engage constructively with investors on this topic throughout the rest of the year.

Business Review | Better than expected recovery - taking market share

Premier Inn UK¹

1: Includes one site in each of: Jersey, Ireland & the Isle of Man

2: Includes Government support - see note 6 of the accompanying financial statements for further details

3: Total and like-for-like on a two-year basis versus FY20

COVID-19 restrictions materially impacted the performance of the UK business in the first quarter. Only essential business guests were permitted to stay overnight until 17 May, at which point overnight leisure stays were permitted. Our restaurants were also not permitted to open for indoor service until the same date, with the majority remaining temporarily closed until then. The majority of our hotels and restaurants have operated restriction-free from 19 July driving a significant increase in Q2 quarter-on-quarter revenues.

As a result of these restrictions, statutory revenue was down 39.4% compared to H1 FY20, total accommodation sales were down 33.1% and total food and beverage sales were down 51.2%.The second quarter saw total accommodation sales improve to 9.6% below Q2 FY20 (Q1 FY22: 60.9% behind).

Leisure demand was very strong post 17 May across the majority of the estate. The high levels of demand in seaside & tourist locations (c.15% of Premier Inn rooms) saw total Q2 accommodation sales 32.9% up on Q2 FY20 in those hotels. The London market, and in particular central London (c.7% of Premier Inn rooms) has lagged the regions during the COVID-19 crisis as a result of the low levels of inbound international travel, however trends improved during July and August as some international demand returned, and to some extent, domestic leisure demand replacing international. Tradespeople business demand remained resilient and there are early signs of a recovery in office-based business demand.

Total food and beverage sales were 51.2% behind H1 FY20 with the vast majority of the estate reopening on 17 May. New menus and an enhanced drinks offering, helped drive an improvement in Q2 total food and beverage sales to 18.1% behind Q2 FY20.

Premier Inn total UK accommodation sales growth was consistently ahead of the M&E market in the first half, driving significant market share gains versus the total market, and demonstrating the strengths of our scale, brand, direct distribution model and our winning customer proposition.

UK outperformance vs M&E market

1: STR data, full inventory basis, 26 February 2021 to 7 October 2021, M&E excludes Premier Inn

2: STR data, revenue share of total UK market, 26 February 2021 to 14 October 2021

Other income of £65.3m reflects a £60.0m benefit from the Coronavirus Job Retention Scheme. The Group ceased claiming under this scheme in May following the full reopening of our hotels and restaurants. Operating costs of £533.2m were in line with guidance and were 15.8% lower than H1 FY20 driven by a reduction in revenue related variable costs (primarily food and beverage costs of sales), and £47.7m benefit from the Government's business rates holiday.

Right-of-use asset depreciation was £59.8m and lease liability interest was £60.4m with cash rent paid of £122.7m. During the half, 19 new hotels were opened, totalling 2,240 rooms and 6 hotels were exited, including 5 disposals, totalling 213 rooms, as the Group continues to take the opportunity to optimise the estate when opportunities arise. At the end of the period, the total estate stood at 830 hotels. The committed pipeline of 9,814 rooms underpins our opportunity to take market share in the UK in the medium to long-term as competitor supply contracts.

Adjusted loss before tax in the UK was £17.8m reflecting the decline in statutory revenues vs H1 FY20 as a result of the COVID-19 restrictions that were in place during the financial year.

Premier Inn Germany

1: Includes Government support - see note 6 of the accompanying financial statements for further details

2: Total and like-for-like on a two-year basis versus FY20

Total statutory revenue in Germany was up 197.3% compared to H1 FY20 with the impact of COVID-19 restrictions offsetting the material growth in the size of the hotel estate. Germany has been subject to similar restrictions as the UK, albeit in a more complex framework of national and federal guidelines.

Q2 total accommodation sales were 447.4% ahead of Q2 FY20, reflecting the larger estate we now have. At the end of the period, the operational estate stood at 30 hotels of which 27 were open and 3 were temporarily closed due to low demand in those markets. As in the UK, leisure demand was strong in the summer and our hotels in leisure-led locations performed well. Business demand remained low as a result of the COVID-19 work from home directive and the absence of most trade fairs. A digital marketing campaign, aimed at establishing the Premier Inn brand credentials in Germany saw favourable results, with brand recognition scores improving, albeit still at low levels.

Other income reflects £28.0m of COVID-19 grants from the German Government and Kurzabeit income relating to the Job Support Scheme in Germany. Operating costs increased by £19.1m to £28.0m due to the investment in the business and the increased estate size, and right-of-use asset depreciation costs increased by £10.3m to £10.4m, reflecting the fact that the majority of new opened properties are leasehold. Other depreciation and amortisation costs were £3.6m, and lease liability interest costs were £3.8m. The adjusted loss before tax for the period decreased by £1.5m to £4.3m and cash rent paid for the year was £12.1m.

During the half, one hotel was opened in Stuttgart, and two hotels in Aachen and Berlin Airport were added to the pipeline and one site was removed. The open and committed pipeline now stands at 73 hotels and over 13,500 rooms, and we are assessing opportunities to accelerate growth organically and through acquisitions.

Central and other costs

Central operating costs of £14.6m were £0.9m higher than H1 FY20 driven by the impairment of a loan to a joint venture. Net finance costs increased by £15.1m to £18.9m primarily as a result of the H1 FY20 charge being net of interest received on the cash balance held from the proceeds from the sale of the Costa business, and the current year including financing costs for the £550m Green Bonds issued in February 2021.

Financial review

Financial highlights

Statutory Revenue

Statutory revenues were down 39.0% compared to H1 FY20, reflecting the impact on the business of the COVID-19 restrictions that were in place for our hotels and restaurants throughout the period. Adjusted revenue was down 69.8% in Q1 FY22 versus Q1 FY20, improving to down 11.2% in Q2 versus Q2 FY20, as restrictions were largely removed in the UK and the business traded ahead of the market.

Adjusted EBITDAR

Other income of £93.5m includes £60.0m of benefit recognised in respect of the Coronavirus Job Retention Scheme and £28.0m of benefit in relation to German Government grants. Operating costs of £576.8m were 12.3% lower than H1 FY20, driven by the reduction in revenue-related variable costs, primarily food and beverage costs of sale, and the £47.7m benefit from the UK Government's business rates holiday and other COVID-19 related German Government grants. Adjusted EBITDAR of £178.3m was £248.4m down on H1 FY20 as a result of the impact of COVID-19 restrictions on the business throughout the half.

Adjusted operating profit                                          

The leasehold estate grew by net 25 sites in the UK and by 21 sites in Germany compared to the same period in FY20. This resulted in a £19.9m or 39.6% increase in right-of-use depreciation charges to £70.2m. Other depreciation and amortisation charges increased by £5.3m to £85.8m, driven by new hotel openings. The adjusted operating profit of £26.5m compared to a loss of £295.1m in H1 FY21 and a profit of £296.4 in H1 FY20.

Net finance costs

Net finance costs (excluding lease liability interest) were £18.9m compared to £3.8m in H1 FY20. This increase of £15.1m was driven by the H1 FY20 charge being net of interest received on the cash balance held from the proceeds from the sale of the Costa business, and the current year including financing costs for the £550m Green Bonds issued in February 2021.

Lease liability interest of £64.2m was £7.2m above H1 FY20 primarily driven by the opening of net 25 leasehold sites in the UK and 21 leasehold sites in Germany.

Adjusting items

Total adjusting items were £37.3m. On 28 June 2021, the Group disposed of a hotel in Putney, London, as part of a sale and leaseback transaction for gross proceeds of £40.0m. A profit on disposal of £27.5m was recognised on disposal of the property. During the period, the Group has recorded profits on other property disposals of £1.1m.

In August 2021, HMRC confirmed it would not appeal the ruling of the First-tier Tribunal in the case of Rank Group plc that VAT was incorrectly applied to revenues earned from certain gaming machines from 2005 to 2013. The Group has submitted claims which are substantially similar and expects to receive overpaid VAT of £8.7m.

Taxation

The tax credit on the loss before adjusting items of £3.2m (H1 FY21: £62.2m) represents an effective tax rate on the loss before adjusting items of 5.7%. This is lower than the statutory tax rate due to expenditure not deductible for tax purposes, the impact of German tax losses, and adjustments to management's estimate of tax arising in respect of prior years. The statutory tax charge for the period was £18.5m (H1 FY21: £64.2m credit), representing an effective tax rate of negative 95.9% (H1 FY21: 8.9%). The negative effective rate is as a result of the tax charge on adjusting items, including a deferred tax charge of £15.0m relating to the enactment of the increase to the UK corporation tax rate from 19% to 25%, effective from 1 April 2023.

Statutory loss after tax

Statutory loss for the period was £37.8m, compared to a profit of £172.2m in H1 FY20, due to the significant decline in revenue driven by the closure of the majority of the business at the beginning of the period as a result of the COVID-19 crisis.

Earnings per share

1: Restated to include the impact of the Rights Issue completed in June 2020

Adjusted basic loss per share of 26.4p and statutory basic loss per share of 18.7p reflect the adjusted and statutory losses reported in the period. 

Dividend

Whitbread's dividend policy is to grow the dividend broadly in-line with earnings across the cycle. However, dividends cannot be paid during the current covenant waiver period, which lasts until March 2023, as a condition agreed with Whitbread's lenders and pension trustees, or until the original covenant tests are passed. The Board intends to return to paying a dividend at the first available point that it is permitted to do so.

Cashflow

1: H1 FY22 includes £0.8m loans advanced to joint ventures, £0.5m payment of contingent consideration and £1.4m capital contributions to joint ventures (H1 FY21: £1.3m)

Total net cashflow before shareholder returns and debt repayments was an inflow of £106.7m, driven by a recovery in adjusted EBITDAR to £178.3m, which compared to a loss of £153.7m in the same period last year, a working capital inflow of £112.5m and £47.8m property disposal proceeds. The net cashflow also benefitted from the credit of £141.6m COVID-19 Government grants and support schemes.

The £112.5m working capital inflow was primarily driven by an £82.7m increase in customer deposits and a general increase in trade creditors and accruals following the return to more normal levels of activity in the business compared to the start of the financial year. This has resulted in current trade and other payables increasing to £482.9m (FY21: £316.5m). Trade and other receivables has increased to £120.4m (FY21: £74.2m) also as a result of the return to more normal levels of trading, partly offset by a reduction in amounts due from the Government in respect of the Coronavirus Job Retention Scheme, as the Group ceased using the scheme during the period.

Corporation taxes outflow of £0.1m related to Germany. No corporation tax was paid in relation to UK profits as a loss was incurred in the period.

Maintenance capital expenditure was £42.7m and expansionary capital expenditure was £66.4m, with overall capex spend expected to skew to the second half and result in an expected full year spend of c.£350m, still in-line with previous guidance. Lease liability interest and lease repayments increased by £29.4m to £134.8m driven by the higher number of leasehold properties entering the estate, particularly in Germany, and reflect the delayed payment of a proportion of the December 2020 quarter rent payment that would normally have been paid in FY21.

The £23.3m other inflow is driven by an £8.7m VAT claim, £6.3m of share-based payments and £5.0m of other provision movements. Disposal proceeds of £47.8m relate to the sale and leaseback transaction of a hotel in Putney, London, the sale of an unused corporate office and the disposal of five hotels, as the Group continues to take the opportunity to optimise the estate when opportunities arise.

During the period £200m of US private placements were repaid, incurring £21.2m of make-whole fees partly offset by a £0.8m credit relating to foreign exchange movements. Net cash at the end of the period was £60.2m.

Debt funding facilities & liquidity

It still remains the Group's aim to manage to investment grade metrics of lease adjusted debt of <3.5x Net Debt³ over the medium term. Whilst the Group remains loss making, the strong balance sheet cash position and freehold assets support our investment grade rating.

The Group announced in February 2021 that it had extended the final maturity date of its Revolving Credit Facility from September 2022 to September 2023, and that the existing covenant waiver period had been extended by 12 months, meaning the financial covenants will not now be tested until March 2023, at which point new covenant targets will be introduced, being:

·      March 2023: Net Debt³ / EBITDA³ < 5x, EBITDA³ / Interest³ >2.0x

·      August 2023: Net Debt³ / EBITDA³ < 4.5x EBITDA³ / Interest³ >2.0x

The Revolving Credit Facility which is currently £950.0m, will step down to £850.0m at 29 December 2021 and to £725.0m at 7 September 2022.

The additional requirements outlined in the original waivers announced on 21 May 2020, including an obligation to retain £400m liquidity headroom, no more than £2bn of net debt and to not declare or pay dividends, will remain for the duration of the extended waiver period to March 2023. However, these additional waiver period requirements can be removed if the Group demonstrates compliance with the original covenant tests, being Net Debt³  / EBITDA³ < 3.5x and EBITDA³ / Interest³ >3.0x.

£200m 2027 US private placement notes were repaid early on 26 March 2021. Subsequent to the period end on 6 September 2021, £25m of US private placement notes matured and were repaid. The remaining private placement notes (2022: $93.5m) will be repaid on or before their scheduled maturity dates of 26 January 2022.

The Group's strong balance sheet, with access to over £2bn of liquidity, and the potential to access funding through our freehold estate means the Group has financial flexibility, with good headroom to the temporary covenants.

1: Includes impact of hedging using cross currency swaps and excludes unamortised fees associated with debt instrument

2: Repaid 6 September 2021

3: Pre-IFRS 16

Capital investment 

1: H1 FY22 includes £0.8m capital contributions to joint ventures
2: H1 FY22 includes £0.5m payment of contingent consideration and £1.4m capital contributions to joint ventures (H1 FY21: £1.3m)

Total capital expenditure in H1 was £109.1m. Expenditure in H1 included £37.3m on developing new sites and extending existing sites in the UK. Maintenance and product improvement spend was focussed on the scale-up of the FY22 refurbishment programme with the majority of refurbs planned for quieter trading periods in H2. In Germany, spend was driven by the acquisition of a hotel at Berlin Airport and refurbishment of the remaining hotels from the Centro acquisition. Full year capital expenditure is expected to be c.£350m.

Property, plant and equipment of £4,239.7m was in-line with H1 FY21 (£4,228.2m), with capital expenditure largely offset by depreciation charges.

Property backed balance sheet 

1: Open + committed pipeline

The current UK estate is 59% freehold and 41% leasehold, a mix that will change to 55% freehold and 45% leasehold as the existing pipeline is delivered. The higher leasehold mix in Germany reflects the start-up nature of the business, where securing optimal site location, particularly in city centres to help build brand strength, is key.

The new site openings in Germany and continued expansion in the UK has resulted in right-of-use assets increasing to £2,881.1m (H1 FY21: £2,565.0m) and lease liabilities increasing to £3,313.6m (H1 FY21: £2,961.6m).

Return on Capital

The Group remains confident in our ability to deliver long-term sustainable returns on incremental investment. We believe our ability to capitalise on the enhanced structural opportunities that are likely to exist, combined with the competitive advantage of our ownership and operating model, and ongoing initiatives including segmentation and site optimisation, will help offset any adverse structural impact as a result of the COVID-19 crisis. Sector-wide cost headwinds can be countered by our long-standing efficiency programme and the benefits of both organic and inorganic growth.

Events after the Balance Sheet date

On 6 September 2021, the Group repaid US Private Placement notes on maturity with a value of £25.0m.

Pension

The Group's defined benefit pension scheme, the Whitbread Group Pension Fund (the "Pension Fund"), had an IAS19 surplus of £275.5m at the end of the period (H1 FY21: £164.8m). The improved funding position was primarily driven by; asset performance being higher than the discount rate, changes to mortality assumptions and membership experience being more favourable than expected. This was partially offset by a decrease in corporate bond yields resulting in a decrease in the discount rate used to value liabilities and an increase in inflation expectations. Annual contributions of approximately £10m are paid to the Pension Fund through the Scottish Partnership arrangements.

The Pension Fund's triennial actuarial valuation as at 31 March 2020 is currently being carried out, with the final agreement due in November this year.

In May 2020, Whitbread announced that it had reached an agreement with the Pension Fund Trustee for a covenant waiver period for the existing EBITDA related covenant which will now not be tested until March 2022. On this testing date, in the event of a breach of the original EBITDA related covenant, a cash payment would be required to improve the funding position to the value of the Secondary Funding Target. If Whitbread did not settle this contribution, the Trustee could realise the equivalent value through the security it holds over £450m of Whitbread's freehold property. New covenants have been introduced during the period of the waiver in-line with those given to Whitbread's lenders described above, including an obligation to retain £400m liquidity headroom, no more than £2bn of net debt and to not declare or pay dividends, for the duration of the extended waiver period to March 2022. An additional £50.0m of security has also been given to the Trustee for the duration of the covenant waiver period.

Other information

Going concern

The directors have concluded that it is appropriate for the consolidated financial statements to be prepared on the going concern basis. Full details are set out in note 1 of the attached financial statements.

Risks and uncertainties  

The directors have reconsidered the principal risks and uncertainties of the Group and have determined that those reported in the Annual Report and Accounts 2020/21 remain relevant for the remaining half of the financial year, when read together with the information provided below. 

The COVID-19 pandemic continues to be the most prominent risk and there is uncertainty as to how future outbreaks, vaccine efficacy and resulting restrictions will impact the hospitality sector specifically. We have considered and broadened the risk relating to structural shifts to recognise the potential change in the labour market. This has resulted in shortages in certain hotel and restaurant roles, inflationary pressures in areas such as utilities, food costs and construction materials, and supply chain disruptions due to increased regulations.

Whitbread looks to recruit and retain talent and has recognised the contribution of its team by increasing pay rates to remain competitive.  We have a well proven efficiency programme and a strong supplier base for critical services with business continuity plans in place.

Premier Inn's brand strength has proved resilient as we have reopened operations and outperformed the market.  The risk of any decline in strength or loss of market share to competitors and emerging disruptors is tracked regularly via net promoter scores and customer satisfaction.

The following summarises the risks and uncertainties set out in the annual report including current emerging themes:

·      Pandemic - impact of reoccurring waves of COVID-19 or any other pandemic on the business

·      Uncertain economic recovery - results in a decline in GDP, consumer and business spending, an increase in inflationary pressure and supply chain disruption impacting trading

·      Cyber and Data Security - reduces the effectiveness of systems or results in loss of data

·      Structural shifts - uncertainty as to the permanency of changes to working practices, international travel and demand led occasions for hotel stays, along with potential increase in cost base inflation

·      Germany growth - the inability to successfully execute our strategy in Germany

·      Change delivery and interdependencies - ability to execute the significant volume of change under time bound pressures, for example, the replacement of our CRM system

·      Leadership, succession and talent hotspots - decline in desirability of careers in the hospitality industry with functional specific challenges, a reduction in our talent pools and low levels of senior diversity

·      Third party arrangements - business interruption as a result of the withdrawal of services below acceptable standards or reputational damage as a result of unethical supplier practices

·      Premier Inn brand - decline in brand strength, loss of market share to competitors and the threat of disruptors

·      Health and safety - death or serious injury as a result of company negligence or a significant incident resulting from food, fire or another safety failure

·      Terrorism - impacts the safety and security of customers or staff and the consequent impact on trading

Environmental and Social risk, of which sustainability is a key area, has been an emerging risk for Whitbread that we have been active in managing such as reducing our carbon emissions, single use plastics and food waste whilst increasing our representation and inclusion in our work force.  We now recognise this as a principal risk and acknowledge the importance of the collective evolving nature of this risk to our wider stakeholder base. 

The detail of our principal risks can be found on pages 64 to 66 of the Annual Report and Accounts 2020/21 which is available on the website www.whitbread.co.uk.

American Depositary Receipts

Whitbread has established a sponsored Level 1 American Depositary Receipt (ADR) programme for which Deutsche Bank perform the role of depositary bank. The Level 1 ADR programme trades on the U.S. over-the-counter (OTC) markets under the symbol WTBDY (it is not listed on a U.S. stock exchange).

Notes

†The Group uses certain APMs to help evaluate the Group's financial performance, position and cash flows, and believes that such measures provide an enhanced understanding of the Group's results and related trends and allow for comparisons of the financial performance of the Group's businesses either from one period to another or with other similar businesses.  However, APMs are not defined by IFRS and therefore may not be directly comparable with similarly titled measures reported by other companies.  APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measures. APMs used in this announcement include adjusted revenue, like-for-like sales, revenue per available room (RevPAR), average room rate, direct bookings/ distribution, adjusted operating (loss)/ profit, adjusted (loss)/ profit before tax, adjusted basic earnings per share, net debt, net debt and lease liabilities, operating cashflow, adjusted EBITDA (pre IFRS 16) and adjusted EBITDAR. Further information can be found in the glossary and reconciliation of APMs at the end of this document.