DUNSTABLE, England—On an earnings report with investors, Whitbread PLC executives touted the company’s strong balance sheet and cash flow during the first six months of the year, and raised the bar for growth in the United Kingdom, particularly for its principal hotel brand, Premier Inn.
Executives said they saw no reason Premier Inn’s U.K. footprint could not surpass the 100,000 rooms mark.
Whitbread does not put much emphasis on revenue per available room, according to Nicholas Cadbury, group finance director. The U.K.-based company’s goal, he said, is to invest in sensible growth across the firm’s entire portfolio—in the hotel industry, Premier Inn and Hub by Premier Inn, but almost equally buoyed by its worldwide Costa Coffee brand.
“We have good revenue and profit growth, combined with a strong return on capital and an overhaul of our strategy for international expansion,” said Chairman Richard Baker.
The company celebrates its 275th anniversary in November, dating to when founder Samuel Whitbread opened a brewery in 1742 in London.
CEO Alison Brittain said in the eighteen months since she started in her role, the Whitbread board has undergone some change, with newcomers this year including Deanna Oppenheimer, whose background includes former directorships at insurance firm AXA and supermarket chain Tesco; David Atkins, former chairman of the European Public Real Estate Association; and Adam Crozier, former CEO at media company ITV, Royal Mail and The Football Association.
For its hotel portfolio, Whitbread executives told analysts it is well-positioned to capitalize on increased demand for its economy brands in its core market of the U.K. and increasingly in Germany, despite some concern that RevPAR across its portfolio, while positive, had not kept up with general hotel-industry RevPAR numbers.
During a Q&A panel, analysts underlined Premier Inn’s underperformance across midscale and economy brands in the U.K., to which Cadbury responded that much of that gap was due to the healthy increase in rooms across its two brands. He said the latest figures showed 2,039 new rooms opened in the U.K. in the six months ending 31 August.
“Between Q1 and Q2, we opened 2,000 rooms in the first half, and in my memory, I cannot remember doing that (before),” Cadbury said.
“Nobody does it better … nobody does it like us,” Brittain said. “They really don’t. We don’t talk much about RevPAR. … What we do focus on is, are we able to fill … (hotels) quickly and grow rate over time?”
Baker pointed out that, despite the scale of recent investment, return on capital increased 30 basis points to 15.4%.
Focus on Germany
The hotel side of the company has its core in the U.K., but the German market is proving tempting, according to executives.
In the U.K., Premier Inn is on track for 85,000 rooms by 2020, with 10,000 opened in the last two years, Brittain said.
“We see scope for Premier Inn to have 100,000 rooms (in the U.K.),” she said.
She added that 95% of bookings are direct, and she expects new initiatives around enhanced booking flows will further increase conversion.
The executives highlighted the company’s increased pipeline in Germany, with nine committed sites comprising approximately 2,000 rooms. Currently, its sole German asset is in Frankfurt, “which continues to do well,” Brittain said.
There has been “£316 million ($417 million) in capital investment in the last two years, with new and extended hotels showing 13% return on capital, with a maturity duration of between one and three years,” Brittain said, adding in Germany that duration will be between three and five years.
Whitbread’s Premier Inn exit from India, Indonesia, Singapore and Thailand, announced in July 2016, will help reduce “profitability drag,” she said.
“The German market is 35% larger than the U.K.’s in terms of rooms, but the budget sector is less mature, with only 6% market share. There is no clear market leader and a high proportion of business travel,” Brittain said.
Headwinds
Cadbury said the company hopes “efficiency programs supporting sustainable profit growth” will help to offset any cost headwinds. The firm’s discretionary free cash flow of £293 million ($386.5 million) should also help, he said.
Brittain said the U.K.’s National Living Wage “changes each year and goes up, but we know what that is. (Business) rates have just been changed, and there is a question mark as to inflation, but that, too, will be within a reasonably tight range … not out of control, and we’re carefully plotting what that trajectory will look like and being sensible to leverage as much of Whitbread’s scale as we can.”
She added that the company “has a clear plan … to grow and innovate in key U.K. markets, to focus on strengths to grow internationally … and build capability to support long-term growth.”
In the period covered by this earnings call, Premier Inn saw revenue grow 6.4% to £1.05 billion ($1.45 billion) and underlying operating profit increase 8.9% to £295 million ($389 million).